Edgar Filing: BARRETT BUSINESS SERVICES INC

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

Commission File No. 0-21886

BARRETT BUSINESS SERVICES, INC.

(Exact name of registrant as specified in its charter)


Maryland		52-0812977
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

8100 NE Parkway Drive, Suite 200 Vancouver, Washington		98662
(Address of principal executive offices)		(Zip Code)

(360) 828-0700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Number of shares of common stock, $.01 par value, outstanding at July 31, 2012 was 7,003,931 shares.

BARRETT BUSINESS SERVICES, INC.

INDEX


	Page
Part I—Financial Information

Item 1. Unaudited Interim Consolidated Financial Statements

Consolidated Balance Sheets – June 30, 2012 and December 31, 2011		3

Consolidated Statements of Operations—Three Months Ended June 30, 2012 and 2011		4

Consolidated Statements of Operations—Six Months Ended June 30, 2012 and 2011		5

Consolidated Statements of Comprehensive Income—Three Months Ended June 30, 2012 and 2011		6

Consolidated Statements of Comprehensive Income—Six Months Ended June 30, 2012 and 2011		6

Consolidated Statements of Stockholders’ Equity—Six Months Ended June 30, 2012 and 2011		7

Consolidated Statements of Cash Flows—Six Months Ended June 30, 2012 and 2011		8

Notes to Unaudited Interim Consolidated Financial Statements		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3. Quantitative and Qualitative Disclosures About Market Risk		24

Item 4. Controls and Procedures		25

Part II—Other Information

Item 1A. Risk Factors		26

Item 6. Exhibits		26

Signatures		27

Exhibit Index		28

- 2 -

Part I—Financial Information

Item 1.

Financial Statements

BARRETT BUSINESS SERVICES, INC.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share amounts)


	June 30, 2012		December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	36,358	$	49,571
Marketable securities		14,240		16,878
Trade accounts receivable, net		63,433		46,520
Income taxes receivable		3,432		4,133
Prepaid expenses and other		2,914		5,897
Deferred income taxes		5,931		5,958

Total current assets		126,308		128,957

Marketable securities		17,439		15,395
Property, equipment and software, net		15,832		15,007
Restricted marketable securities and workers’ compensation deposits		9,932		9,923
Other assets		3,035		3,027
Workers’ compensation receivables for insured losses and recoveries		1,601		2,968
Goodwill		47,820		47,820

	$	221,967	$	223,097

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,913	$	1,639
Accrued payroll, payroll taxes and related benefits		68,385		52,340
Income taxes payable		193		0
Other accrued liabilities		350		300
Workers’ compensation claims liabilities		19,670		18,718
Safety incentives liability		7,541		6,321

Total current liabilities		98,052		79,318
Long-term workers’ compensation claims liabilities		35,231		30,596
Long-term workers’ compensation claims liabilities for insured claims		864		1,879
Deferred income taxes		8,152		8,152
Mandatorily redeemable preferred stock, $.01 par value; 50 shares authorized; 35 and 0 shares issued and outstanding		34,800		0
Customer deposits and other long-term liabilities		1,502		1,497

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $.01 par value; 450 shares authorized; no shares issued and outstanding		0		0
Common stock, $.01 par value; 20,500 shares authorized, 7,003 and 9,871 shares issued and outstanding		70		99
Additional paid-in capital		316		20,943
Accumulated other comprehensive income (loss)		9		(34	)
Retained earnings		42,971		80,647

		43,366		101,655

	$	221,967	$	223,097

The accompanying notes are an integral part of these financial statements

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BARRETT BUSINESS SERVICES, INC.

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended June 30,
	2012			2011
Revenues:
Staffing services	$	30,387		$	30,518
Professional employer service fees		65,113			45,495

Total revenues		95,500			76,013

Cost of revenues:
Direct payroll costs		22,843			23,093
Payroll taxes and benefits		39,332			28,886
Workers’ compensation		16,984			10,753

Total cost of revenues		79,159			62,732

Gross margin		16,341			13,281
Selling, general and administrative expenses		10,549			8,871
Depreciation and amortization		357			331

Income from operations		5,435			4,079

Other income:
Investment income, net		205			273
Other		(9	)		(7	)

Other income		196			266

Income before income taxes		5,631			4,345
Provision for income taxes		1,888			896

Net income	$	3,743		$	3,449

Basic earnings per common share	$	.54		$	.34

Weighted average number of basic common shares outstanding		6,995			10,196

Diluted earnings per common share	$	.53		$	.34

Weighted average number of diluted common shares outstanding		7,078			10,245

Dividends declared per common share	$	.11		$	.09

The accompanying notes are an integral part of these financial statements

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BARRETT BUSINESS SERVICES, INC.

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)


	Six Months Ended June 30,
	2012			2011
Revenues:
Staffing services	$	56,598		$	58,850
Professional employer service fees		121,324			85,932

Total revenues		177,922			144,782

Cost of revenues:
Direct payroll costs		42,495			44,541
Payroll taxes and benefits		82,324			60,649
Workers’ compensation		30,205			20,713

Total cost of revenues		155,024			125,903

Gross margin		22,898			18,879
Selling, general and administrative expenses		20,313			17,698
Depreciation and amortization		704			666

Income from operations		1,881			515

Other income:
Life insurance proceeds		0			10,000
Investment income, net		428			628
Other		(16	)		92

Other income		412			10,720

Income before income taxes		2,293			11,235
Provision for income taxes		763			2,240

Net income	$	1,530		$	8,995

Basic earnings per common share	$	.18		$	.88

Weighted average number of basic common shares outstanding		8,435			10,198

Diluted earnings per common share	$	.18		$	.88

Weighted average number of diluted common shares outstanding		8,511			10,246

Dividends declared per common share	$	.22		$	.18

The accompanying notes are an integral part of these financial statements

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BARRETT BUSINESS SERVICES, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)


	Three Months Ended June 30,
	2012		2011
Net income	$	3,743	$	3,449
Unrealized gains on marketable securities, net of tax of $1 and $6 in 2012 and 2011, respectively		2		10

Comprehensive income	$	3,745	$	3,459


	Six Months Ended June 30,
	2012		2011
Net income	$	1,530	$	8,995
Unrealized gains on marketable securities, net of tax of $27 and $22 in 2012 and 2011, respectively		43		35

Comprehensive income	$	1,573	$	9,030

The accompanying notes are an integral part of these financial statements

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BARRETT BUSINESS SERVICES, INC.

Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2012 and 2011

(In thousands)


	Common Stock						Additional Paid-in			Accumulated Other Comprehensive (Loss)			Retained
	Shares			Amount			Capital			Income			Earnings			Total
Balance, December 31, 2010		10,202		$	102		$	25,164		$	(65	)	$	70,164		$	95,365
Common stock issued on exercise of options		3			0			5			0			0			5
Stock option compensation expense, net of tax		0			0			192			0			0			192
Tax benefit of stock option exercises		0			0			13			0			0			13
Repurchase of common stock		(65	)		(1	)		(922	)		0			0			(923	)
Cash dividend on common stock		0			0			0			0			(1,837	)		(1,837	)
Unrealized holding gains on marketable securities, net of tax		0			0			0			35			0			35
Net income		0			0			0			0			8,995			8,995

Balance, June 30, 2011		10,140			101			24,452			(30	)		77,322			101,845

Balance, December 31, 2011		9,871			99			20,943			(34	)		80,647			101,655
Common stock issued on exercise of options		118			1			1,688			0			0			1,689
Stock option compensation expense, net of tax		0			0			285			0			0			285
Tax benefit of stock option exercises		0			0			264			0			0			264
Repurchase of common stock		(2,986	)		(30	)		(22,864	)		0			(37,338	)		(60,232	)
Cash dividend on common stock		0			0			0			0			(1,868	)		(1,868	)
Unrealized holding gains on marketable securities, net of tax		0			0			0			43			0			43
Net income		0			0			0			0			1,530			1,530

Balance, June 30, 2012		7,003			70		$	316		$	9		$	42,971		$	43,366

The accompanying notes are an integral part of these financial statements

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BARRETT BUSINESS SERVICES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Six Months Ended June 30,
	2012			2011
Cash flows from operating activities:
Net income	$	1,530		$	8,995
Reconciliations of net income to net cash provided by operating activities:
Depreciation and amortization		704			666
Gains recognized on marketable securities		0			(100	)
Gain recognized on sale and leaseback		(61	)		(61	)
Deferred income taxes		53			292
Share based compensation		285			192
Changes in certain assets and liabilities:
Trade accounts receivable, net		(16,913	)		(22,142	)
Income taxes receivable		701			0
Prepaid expenses and other		2,983			(628	)
Accounts payable		274			(270	)
Accrued payroll, payroll taxes and related benefits		16,045			22,830
Other accrued liabilities		50			364
Income taxes payable		193			498
Workers’ compensation claims liabilities		5,939			1,810
Safety incentives liability		1,220			33
Customer deposits, long-term liabilities and other assets, net		56			23

Net cash provided by operating activities		13,059			12,502

Cash flows from investing activities:
Purchase of property and equipment		(1,527	)		(445	)
Proceeds from sales and maturities of marketable securities		22,924			18,562
Purchase of marketable securities		(22,313	)		(32,710	)
Proceeds from maturities of restricted marketable securities		4,671			3,360
Purchase of restricted marketable securities		(4,680	)		(3,979	)

Net cash used in investing activities		(925	)		(15,212	)

Cash flows from financing activities:
Proceeds from exercise of stock options		1,689			5
Dividends paid		(1,868	)		(1,837	)
Repurchase of common stock		(25,432	)		(923	)
Tax benefit of stock option exercises		264			13

Net cash used in financing activities		(25,347	)		(2,742	)

Net decrease in cash and cash equivalents		(13,213	)		(5,452	)
Cash and cash equivalents, beginning of period		49,571			30,924

Cash and cash equivalents, end of period	$	36,358		$	25,472

Supplemental schedule of noncash financing activities:
Issuance of mandatorily redeemable preferred stock	$	34,800		$	0

	$	34,800		$	0

The accompanying notes are an integral part of these financial statements

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BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited)

Note 1—Basis of Presentation of Interim Period Statements

The accompanying consolidated financial statements are unaudited and have been prepared by Barrett Business Services, Inc. (“Barrett”, “BBSI”, the “Company”, “our” or “we”), pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures typically included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from such estimates and assumptions. The consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2011 Annual Report on Form 10-K at pages F1 – F28. The results of operations for an interim period are not necessarily indicative of the results of operations for a full year.

Revenue recognition

We recognize revenue as services are rendered by our workforce. Staffing services are engaged by customers to meet short-term and long-term personnel needs. Professional employer organization (“PEO”) services are normally used by organizations to satisfy ongoing human resource management needs and typically involve contracts with a minimum term of one year, which cover all employees at a particular work site. Our PEO contracts are renewable on an annual basis and typically require 30 days’ written notice to cancel or terminate the contract by either party. Our PEO contracts provide for immediate termination upon any default of the client regardless of when notice is given. We report PEO revenues on a net basis because we are not the primary obligor for the services provided by our PEO clients to their customers pursuant to our PEO contracts. Consequently, our PEO service fee revenues represent the gross margin generated from our PEO services after deducting the amounts invoiced to PEO customers for direct payroll expenses such as salaries, wages, health insurance and employee out-of-pocket expenses incurred incidental to employment and safety incentives. These amounts are also excluded from cost of revenues. PEO service fees also include amounts invoiced to our clients for employer payroll-related taxes and workers’ compensation coverage.

Marketable securities

As of June 30, 2012, the Company’s marketable securities consisted of tax-exempt municipal securities, corporate bonds and U.S. treasuries. The Company classifies municipal securities, U.S. treasuries, and certain of its corporate bonds as available for sale; they are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive income (loss) in stockholders’ equity. In the event a loss is determined to be other-than-temporary, the loss will be recognized in the statement of operations. Certain of the Company’s corporate bonds are classified as held-to-maturity and are reported at amortized cost.

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BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

Note 1—Basis of Presentation of Interim Period Statements (Continued)

Allowance for doubtful accounts

The Company had an allowance for doubtful accounts of $366,000 and $452,000 at June 30, 2012 and December 31, 2011, respectively. The Company must make estimates of the collectibility of accounts receivable. Management analyzes historical bad debts, customer concentrations, customer creditworthiness, current economic conditions and changes in customers’ payment trends when evaluating the adequacy of the allowance for doubtful accounts. The Company deems an account balance uncollectible only after it has pursued all available assets of the customer and, where applicable, the assets of the personal guarantor.

Workers’ compensation claims

The Company is a self-insured employer with respect to workers’ compensation coverage for all of its employees (including employees subject to PEO contracts) working in California, Oregon, Maryland, Delaware and Colorado. In the state of Washington, state law allows only the Company’s staffing services and internal management employees to be covered under the Company’s self-insured workers’ compensation program. Additionally, the Company operates a wholly-owned fully licensed insurance company, Ecole Insurance Company (“Ecole”), in Arizona to provide workers’ compensation coverage to our employees in Arizona.

To manage our financial exposure, in the event of catastrophic injuries or fatalities, the Company maintains excess workers’ compensation insurance through our wholly owned captive insurance company, Associated Insurance Company for Excess (“AICE”), with a per occurrence retention of $5.0 million, except in Maryland and Colorado, where our per occurrence retention is $1.0 million and $500,000, respectively. AICE maintains excess workers’ compensation insurance coverage with Chartis, formerly known as American Insurance Group, Inc., between $5.0 million and $15.0 million per occurrence, except in Maryland, where coverage with Chartis is between $1.0 million and $25.0 million per occurrence, and in Colorado, where the coverage with Chartis is between $500,000 and statutory limits per occurrence. The Company continues to evaluate the financial capacity of our insurers to assess the recoverability of the related insurer receivables.

The Company has provided a total of $55.8 million and $51.2 million at June 30, 2012 and December 31, 2011, respectively, as an estimated future liability for unsettled workers’ compensation claims liabilities. Included in the foregoing liabilities are insured claims that will be paid by the Company’s former excess workers’ compensation insurer and for which the Company has reported a receivable from the insurer for the insured claims liability. These insured claims totaled $864,000 at June 30, 2012 and $1.9 million at December 31, 2011. The estimated liability for unsettled workers’ compensation claims represents management’s best estimate based upon an actuarial valuation provided by a third party actuary. Included in the claims liabilities are case reserve estimates for reported losses, plus additional amounts based on projections for incurred but not reported claims and anticipated increases in case reserve estimates. Also included in these estimates are amounts for unallocated loss adjustment expenses, including legal costs. These estimates are continually reviewed and adjustments to liabilities are reflected in current operating results as they become known.

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BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

Note 1—Basis of Presentation of Interim Period Statements (Continued)

Safety incentives liability

Safety incentives represent cash incentives paid to certain PEO client companies for maintaining safe-work practices in order to minimize workplace injuries, thereby meeting agreed-upon loss objectives. The Company has provided $7.5 million at June 30, 2012 and $6.3 million at December 31, 2011 as an estimate of the liability for unpaid safety incentives. The incentive is based on a percentage of annual payroll and is paid annually to customers who meet predetermined workers’ compensation claims cost objectives. Safety incentive payments are made only after closure of all workers’ compensation claims incurred during the customer’s contract period. The liability is estimated and accrued each month based upon the incentive earned less the then-current amount of the customer’s estimated workers’ compensation claims reserves as established by the Company’s internal and third-party claims administrators, and the expected payout as determined by historical incentive payment trends. Safety incentive expense is netted against PEO services revenue in our consolidated statements of operations.

Note 2 – Stock Repurchase

Effective March 28, 2012, the Company repurchased 2,485,929 shares of the Company’s common stock held by the Estate of William W. Sherertz and 500,000 common shares held by Nancy Sherertz. Mr. Sherertz, a founder and former president and CEO of the Company, died January 20, 2011. Nancy Sherertz is also a founder of the Company. The common shares were repurchased at a price of $20 per share, representing total consideration of $59.7 million. The Company used a combination of $24.9 million in cash and issued 34,800 shares of Series A Nonconvertible, Non-Voting Redeemable Preferred Stock with a liquidation preference of $1,000 per share. Additionally, the Company incurred professional and legal fees totaling $514,000 related to the transaction. The preferred stock is entitled to receive cumulative preferential dividends at the rate of 5% per annum based upon the $1,000 liquidation preference with such rate increasing by 2% on each April 1 beginning April 1, 2013, until all of the outstanding preferred stock has been redeemed. The Company may pay the dividends in cash or in additional shares of preferred stock at its option. The Company may redeem all or a portion of the preferred stock at its option at any time at a price of $1,000 per share. The preferred stock is subject to mandatory redemption five years from the original issue date. Due to the mandatory redemption provision the preferred stock is classified as a liability on the Company’s consolidated balance sheet.

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BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

Note 3—Basic and Diluted Earnings Per Share

Basic earnings per share are computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per common share reflect the potential effects of the exercise of outstanding stock options. Basic and diluted common shares outstanding are summarized as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Weighted average number of basic common shares outstanding		6,995,066		10,195,989		8,434,962		10,198,440

Assumed exercise of stock options, net of shares assumed repurchased at average market price during the period using proceeds received upon exercise of options		83,010		48,725		76,313		47,805

Weighted average number of diluted common shares outstanding		7,078,076		10,244,714		8,511,275		10,246,245

Note 4 – Stock Incentive Plans and Stock-Based Compensation

The following table summarizes stock option activity in 2012 under the Company’s 2009 Stock Incentive Plan:


	Number of Options			Weighted Average Exercise Price
Outstanding at December 31, 2011		671,294		$	14.48

Options granted		7,500		$	17.55
Options exercised		(118,472	)	$	14.26
Options cancelled or expired		0

Outstanding at June 30, 2012		560,322		$	14.57

Exercisable at June 30, 2012		252,797		$	13.49

Available for grant at June 30, 2012		626,300

During 2012, the Company granted 7,500 options at a fair value of $9.08 per share as determined under the Black-Scholes option-pricing model.

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BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

Note 4 – Stock Incentive Plans and Stock-Based Compensation (Continued)

The following table presents information on stock options outstanding for the periods shown:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
($ in thousands, except per share data)	2012		2011		2012		2011
Intrinsic value of options exercised in the period	$	91	$	0	$	680	$	34


	As of June 30,
	2012		2011
Stock options:
Aggregate intrinsic value	$	1,934	$	415
Weighted average contractual term of options		7.07 years		7.41 years

The aggregate intrinsic value of stock options represents the difference between the Company’s closing stock price at the end of the period and the relevant exercise price multiplied by the number of options outstanding at the end of the period at each such price.

Note 5—Workers’ Compensation

The following table summarizes the aggregate workers’ compensation reserve activity (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Beginning balance
Workers’ compensation claims liabilities	$	52,794	$	39,783	$	51,193	$	39,301

Add: claims expense accrual:
Current period		8,170		5,279		16,333		9,985
Prior periods		3,110		286		3,110		522

Total expense accrual		11,280		5,565		19,443		10,507

Less: claim payments related to:
Current period		1,304		962		1,583		1,219
Prior periods		7,005		3,390		13,288		7,593

Total paid		8,309		4,352		14,871		8,812

Ending balance
Workers' compensation claims liabilities	$	55,765	$	40,996	$	55,765	$	40,996

Incurred but not reported (IBNR)	$	41,000	$	29,738	$	41,000	$	29,738

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BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

Note 5—Workers’ Compensation (Continued)

During the three months ended June 30, 2012, the Company recorded $3.1 million of additional workers’ compensation expense related to increases in estimated costs to close prior year claims.

Note 6—Fair Value Measurement

Marketable securities consist of the following investments (in thousands):


	June 30, 2012						December 31, 2011
	Cost		Gross Unrealized Gains		Recorded Basis		Cost		Gross Unrealized Gains (Losses)			Recorded Basis		Fair Value Category
Current:
Available-for-sale:
Municipal bonds	$	3,374	$	4	$	3,378	$	5,804	$	8		$	5,812		2
Corporate bonds		10,853		9		10,862		11,070		(4	)		11,066		2

	$	14,227	$	13	$	14,240	$	16,874	$	4		$	16,878

Long term:
Available-for-sale:
Municipal bonds	$	299	$	0	$	299	$	0	$	0		$	0		2
Corporate bonds		15,100		18		15,118		14,971		(33	)		14,938		2
U.S. treasuries		1,558		2		1,560		0		0			0		1
Held-to-maturity:
Corporate bonds		462		0		462		457		0			457		2

	$	17,419	$	20	$	17,439	$	15,428	$	(33	)	$	15,395

The Company’s restricted marketable securities component of restricted marketable securities and workers’ compensation deposits consists of the following (in thousands):


	June 30, 2012							December 31, 2011
	Cost		Gross Unrealized Gains (Losses)			Recorded Basis		Cost		Gross Unrealized Gains (Losses)			Recorded Basis		Fair Value Category
Available-for-sale:
Municipal bonds	$	5,190	$	20		$	5,210	$	5,580	$	17		$	5,597		2
Corporate bonds		927		(1	)		926		148		(1	)		147		2
U.S. treasuries		1,567		0			1,567		1,567		0			1,567		1

	$	7,684	$	19		$	7,703	$	7,295	$	16		$	7,311

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Barrett Business Services, Inc. (“Barrett”, the “Company,” “our” or “we”), a Maryland corporation, offers a comprehensive range of human resource management services to help small and medium-sized businesses manage the increasing costs and complexities of a broad array of employment-related issues. The Company’s principal services, professional employer organization (“PEO”) services and staffing services, assist its clients in leveraging their investment in human capital. The Company believes that the combination of these two principal services enables it to provide clients with a unique blend of services not offered by the Company’s competition. Barrett’s platform of outsourced human resource management services is built upon expertise in payroll processing, employee benefits and administration, workers’ compensation coverage, effective risk management and workplace safety programs, and human resource administration.

To provide PEO services to a client, the Company enters into a contract to become a co-employer of the client’s existing workforce and Barrett assumes responsibility for some or all of the client’s human resource management responsibilities. PEO services are normally used by organizations to satisfy ongoing human resource management needs and typically involve contracts with a minimum term of one year, renewable annually, which cover all employees at a particular work site. Staffing services include on-demand or short-term staffing assignments, long-term or indefinite-term contract staffing and comprehensive on-site management. The Company’s staffing services also include direct placement services, which involve fee-based search efforts for specific employee candidates at the request of PEO clients, staffing customers or other businesses.

The Company’s ability to offer clients a broad mix of services allows Barrett to effectively become the human resource department and a strategic business partner for its clients. The Company believes its approach to human resource management services is designed to positively affect its clients’ business results by:

•

allowing clients to focus on core business activities instead of human resource matters;

•

increasing clients’ productivity by improving employee satisfaction and generating greater employee retention;

•

reducing overall payroll expenses due to lower workers’ compensation and health insurance costs; and

•

assisting clients in complying with complex and evolving human resource-related regulatory and tax issues.

The Company serves a growing and diverse client base of small and medium-sized businesses in a wide variety of industries through a network of branch offices in California, Oregon, Washington, Idaho, Arizona, Utah, Colorado, Maryland, Delaware and North Carolina. Barrett also has several smaller recruiting offices in its general market areas, which are under the direction of a branch office.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations

The following table sets forth percentages of total revenues represented by selected items in the Company’s Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011.


	Percentage of Total Revenues						Percentage of Total Revenues
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Revenues:
Staffing services		31.8	%		40.1	%		31.8	%		40.6	%
Professional employer service fees		68.2			59.9			68.2			59.4

Total revenues		100.0			100.0			100.0			100.0

Cost of revenues:
Direct payroll costs		23.9			30.4			23.9			30.8
Payroll taxes and benefits		41.2			38.0			46.2			41.9
Workers’ compensation		17.8			14.1			17.0			14.3

Total cost of revenues		82.9			82.5			87.1			87.0

Gross margin		17.1			17.5			12.9			13.0
Selling, general and administrative expenses		11.0			11.7			11.4			12.2
Depreciation and amortization		0.4			0.4			0.4			0.4

Income from operations		5.7			5.4			1.1			0.4
Other income		0.2			0.3			0.2			7.4

Income before income taxes		5.9			5.7			1.3			7.8
Provision for income taxes		2.0			1.2			0.4			1.6

Net income		3.9	%		4.5	%		0.9	%		6.2	%

We report PEO revenues on a net basis because we are not the primary obligor for the services provided by our PEO clients to their customers pursuant to our PEO contracts. The presentation of revenues on a net basis and the relative contributions of staffing and PEO revenues can create volatility in our gross margin percentage. The general impact of fluctuations in our revenue mix is described below.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)

•

A relative increase in staffing revenues will typically result in a lower gross margin percentage. Staffing revenues are presented at gross with the related direct costs reported in cost of sales. While staffing relationships typically have higher margins than PEO relationships, an increase in staffing revenues and related costs presented at gross dilutes the impact of the net PEO revenue on gross margin percentage.

•

A relative increase in PEO revenue will result in a higher gross margin percentage. Improvement in gross margin percentage occurs because incremental PEO revenue dollars are reported as revenue net of all related direct costs.

We present for comparison purposes the gross revenues and cost of revenues information set forth in the table below. Although not in accordance with GAAP, management believes this information is more informative as to the level of our business activity and more illustrative of how we manage our operations, including the preparation of our internal operating forecasts, because it presents our PEO services on a basis comparable to our staffing services.


	Unaudited				Unaudited
	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2012		2011		2012		2011
Revenues:
Staffing services	$	30,387	$	30,518	$	56,598	$	58,850
Professional employer services		463,671		336,380		869,521		639,114

Total revenues		494,058		366,898		926,119		697,964

Cost of revenues:
Direct payroll costs		418,594		312,385		785,527		595,027
Payroll taxes and benefits		39,332		28,886		82,324		60,649
Workers’ compensation		19,791		12,346		35,370		23,409

Total cost of revenues		477,717		353,617		903,221		679,085

Gross margin	$	16,341	$	13,281	$	22,898	$	18,879

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)

A reconciliation of non-GAAP gross PEO revenues to net PEO revenues is as follows:


	Unaudited
	Three Months Ended June 30,
	Gross Revenue										Net Revenue
	Reporting Method				Reclassification						Reporting Method
(in thousands)	2012		2011		2012			2011			2012		2011
Revenues:
Staffing services	$	30,387	$	30,518	$	0		$	0		$	30,387	$	30,518
Professional employer services		463,671		336,380		(398,558	)		(290,885	)		65,113		45,495

Total revenues	$	494,058	$	366,898	$	(398,558	)	$	(290,885	)	$	95,500	$	76,013

Cost of revenues	$	477,717	$	353,617	$	(398,558	)	$	(290,885	)	$	79,159	$	62,732


	Unaudited
	Six Months Ended June 30,
	Gross Revenue										Net Revenue
	Reporting Method				Reclassification						Reporting Method
(in thousands)	2012		2011		2012			2011			2012		2011
Revenues:
Staffing services	$	56,598	$	58,850	$	0		$	0		$	56,598	$	58,850
Professional employer services		869,521		639,114		(748,197	)		(553,182	)		121,324		85,932

Total revenues	$	926,119	$	697,964	$	(748,197	)	$	(553,182	)	$	177,922	$	144,782

Cost of revenues	$	903,221	$	679,085	$	(748,197	)	$	(553,182	)	$	155,024	$	125,903

The amount of the reclassification is comprised of direct payroll costs and safety incentives attributable to our PEO client companies.

Three months ended June 30, 2012 and 2011

Net income for the second quarter of 2012 amounted to $3.7 million, as compared to net income of $3.4 million for the second quarter of 2011. The increase in net income for the 2012 second quarter was primarily due to a 25.6% increase in revenues. The second quarter of 2011 included the benefit of a lower annual effective income tax rate as a result of the effect of the receipt of $10.0 million of key man life insurance proceeds. Diluted income per share for the second quarter of 2012 was $.53 compared to diluted income per share of $.34 for the comparable 2011 period.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)

Three months ended June 30, 2012 and 2011 (Continued)

Revenues for the second quarter of 2012 totaled $95.5 million, an increase of approximately $19.5 million or 25.6%, which reflects an increase in the Company’s PEO service fee revenue of $19.6 million or 43.1% and a small decline in staffing services revenue of $130,000 or 0.4%.

Our growth in PEO revenues continues to be primarily attributable to new customers as PEO business from new customers during the second quarter of 2012 more than tripled our lost PEO business from former customers. PEO revenues from continuing customers reflected a 7.1% increase compared to the second quarter of 2011 primarily resulting from increases in employee headcount and hours worked. Staffing revenues remained at a similar level as lost business from former customers was nearly offset by business from new and continuing customers.

Gross margin for the second quarter of 2012 totaled approximately $16.3 million or an increase of 23.0% over the second quarter of 2011, primarily due to the 25.6% increase in revenues and a decline in direct payroll costs, partially offset by higher payroll taxes and benefits and workers’ compensation expense, as a percentage of revenues.

The decrease in direct payroll costs, as a percentage of revenues, from 30.4% for the second quarter of 2011 to 23.9% for the second quarter of 2012 was primarily due to the increase in our mix of PEO services in the Company’s customer base over the second quarter of 2011 and the effect of each customer’s unique mark-up percent.

Payroll taxes and benefits, as a percentage of revenues, for the second quarter of 2012 was 41.2% compared to 38.0% for the second quarter of 2011. The percentage rate increase was largely due to the effect of significant growth in PEO services, where payroll taxes and benefits are presented at gross cost whereas the related direct payroll costs are netted against PEO services revenue, and to slightly higher effective state unemployment tax rates in various states in which the Company operates as compared to the second quarter of 2011. Management expects the trend in payroll taxes and benefits, as a percentage of revenues, to continue to increase as a result of continued growth in PEO services on a quarter over quarter basis.

Workers’ compensation expense, in terms of dollars and as a percentage of revenues, increased from $10.8 million or 14.1% in the second quarter of 2011 to $17.0 million or 17.8% in the second quarter of 2012. The percentage rate increase was primarily due to an increase in the provision for claim costs related to current year claims and increases in estimated costs to close prior year claims and higher insurance broker commissions as a result of increased worker’s compensation insurance rates.

Selling, general and administrative (“SG&A”) expenses for the second quarter of 2012 totaled approximately $10.5 million, an increase of $1.7 million or 18.9% over the second quarter of 2011. The increase was primarily attributable to increases in management payroll and profit sharing based on increased branch performance as well as the variable expense components within SG&A to support the business growth.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)

Three months ended June 30, 2012 and 2011 (Continued)

Other income for the second quarter of 2012 was $196,000 compared to other income of $266,000 for the second quarter of 2011. Other income for the 2012 second quarter was primarily attributable to investment income earned on the Company’s cash and marketable securities.

The income tax rate for the 2012 second quarter was 33.5%. We expect the effective income tax rate for the balance of 2012 to remain at a similar rate to the 2012 second quarter income tax rate. The income tax rate for the 2011 second quarter was 20.6% which included a favorable benefit from the effect of a much lower annual effective tax rate attributable to the non-taxable $10.0 million life insurance proceeds.

Six months ended June 30, 2012 and 2011

Net income for the six months ended June 30, 2012 amounted to $1.5 million, as compared to net income of $9.0 million for the first six months of 2011. The first six months of 2011 included $10.0 million of key man life insurance proceeds received following the passing of the Company’s former president and CEO and the related benefit of a lower annual effective income tax rate. Diluted income per share for the first six months ended June 30, 2012 was $.18 compared to diluted income per share of $.88 for the comparable 2011 period.

Revenues for the six months ended June 30, 2012 totaled $177.9 million, an increase of approximately $33.1 million or 22.9%, compared to the similar period in 2011 which reflects an increase in the Company’s PEO service fee revenue of $35.4 million or 41.2% and a small decline in staffing services revenue of $2.3 million or 3.8%. Our growth in PEO revenues was primarily attributable to the addition of new customers as PEO business from new customers during the first six months of 2012 more than tripled our lost PEO business from former customers. PEO revenues from continuing customers reflected a 8.4% increase compared to the first six months of 2011 primarily resulting from an increase in employee headcount and a slight increase in hours worked. Staffing revenues decreased because lost business from former customers exceeded the business from new and continuing customers.

Gross margin for the six months ended June 30, 2012 totaled approximately $22.9 million or an increase of $4.0 million over the comparable period of 2011, primarily due to the 22.9% increase in revenues and a decline in direct payroll costs, partially offset by higher payroll taxes and benefits and workers’ compensation expense, as a percentage of revenues.

The decrease in direct payroll costs, as a percentage of revenues, from 30.8% for the second quarter of 2011 to 23.9% for the first six months of 2012 was primarily due to the increase in our mix of PEO services in the Company’s customer base compared to the first six months of 2011 and the effect of each customer’s unique mark-up percent.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)

Six months ended June 30, 2012 and 2011 (Continued)

Payroll taxes and benefits, as a percentage of revenues, for the first six months ended June 30, 2012 was 46.2% compared to 41.9% for the comparable period of 2011. The percentage rate increase was largely due to the effect of significant growth in PEO services and to higher effective state unemployment tax rates in various states in which the Company operates as compared to the same period of 2011.

Workers’ compensation expense, in terms of dollars and as a percentage of revenues, increased from $20.7 million or 14.3% in the first six months of 2011 to $30.2 million or 17.0% in the first six months of 2012. The percentage rate increase was primarily due to an increase in the provision for current year claim costs as well as increases in estimated costs to close prior year claims and higher insurance broker commissions as a result of increased worker’s compensation insurance rates.

SG&A expenses for the first six months of 2012 totaled approximately $20.3 million, an increase of $2.6 million or 14.7% over the first six moths of 2011. The increase was primarily attributable to increases in management payroll and profit sharing based on increased branch performance and to higher legal expenses.

Other income for the first six months of 2012 was $412,000 compared to other income of $10.7 million for the first six months of 2011. Other income for the first six months of 2012 was primarily attributable to investment income earned on the Company’s cash and marketable securities. The first six months of 2011 included the $10.0 million of key man life insurance proceeds.

The income tax rate for the first six months of 2012 was 33.3%. The income tax rate for the first six months of 2011 was 19.9% which included a favorable benefit from the effect of a much lower annual effective tax rate attributable to the non-taxable $10.0 million life insurance proceeds.

Factors Affecting Quarterly Results

The Company has historically experienced significant fluctuations in its quarterly operating results and expects such fluctuations to continue in the future. The Company’s operating results may fluctuate due to a number of factors such as seasonality, wage limits on statutory payroll taxes, claims experience for workers’ compensation, demand and competition for the Company’s services and the effect of acquisitions. The Company’s revenue levels may fluctuate from quarter to quarter primarily due to the impact of seasonality on its staffing services business and on certain of its PEO clients in the agriculture, food processing and construction-related industries. As a result, the Company may have greater revenues and net income in the third quarter of its fiscal year. Revenue levels in the fourth quarter may be affected by many customers’ practice of operating on holiday-shortened schedules. Payroll

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Factors Affecting Quarterly Results (Continued)

taxes and benefits fluctuate with the level of direct payroll costs, but tend to represent a smaller percentage of revenues and direct payroll later in the Company’s fiscal year as federal and state statutory wage limits for unemployment and social security taxes are exceeded on a per employee basis. Workers’ compensation expense varies with both the frequency and severity of workplace injury claims reported during a quarter and the estimated future costs of such claims. Adverse loss development of prior period claims during a subsequent quarter may also contribute to the volatility in the Company’s estimated workers’ compensation expense.

Liquidity and Capital Resources

The Company’s cash position for the six months ended June 30, 2012 decreased $13.2 million from December 31, 2011, which compares to a decrease of $5.5 million for the comparable period in 2011. The decrease in cash at June 30, 2012 as compared to December 31, 2011, was primarily due to $25.4 million used to repurchase common stock, offset in part by the net income of $1.5 million, a $5.9 million increase in workers’ compensation claims liabilities and a decrease in prepaid expenses and other of $3.0 million.

Net cash provided by operating activities for the six months ended June 30, 2012 amounted to $13.1 million compared to $12.5 million for the comparable 2011 period. For the six months ended June 30, 2012, cash flow was principally provided by net income of $1.5 million, coupled with a $16.0 million increase in accrued payroll and payroll taxes, a $5.9 million increase in workers’ compensation claims liabilities, and a $3.0 million decrease in prepaid expense and other, offset in part by a $16.9 million increase in accounts receivable.

Net cash used in investing activities for the six months ended June 30, 2012 was $925,000 as compared to $15.2 million of net cash used in investing activities for the similar 2011 period. For the 2012 period, cash from investing activities was used in the purchase of marketable securities totaling $22.3 million, the purchase of restricted marketable securities of $4.7 million and the purchase of property and equipment of $1.5 million, partially offset by the proceeds from the sales and maturities of marketable securities of $22.9 million and $4.7 million from the proceeds of restricted marketable securities. The transactions related to restricted marketable securities were scheduled maturities and the replacement of such securities held for workers’ compensation surety deposit purposes. The Company presently has no material long-term capital commitments.

Net cash used in financing activities for the six months ended June 30, 2012 was $25.3 million as compared to $2.7 million for the similar 2011 period. For the 2012 period, the primary uses of cash for financing activities were the repurchases of the Company’s common stock totaling $25.4 million which included $514,000 of professional and legal fees and the payment of regular quarterly cash dividends totaling $1.9 million to holders of the Company’s common stock, partially offset by $1.7 million proceeds from the exercise of stock options.

The Company’s business strategy continues to focus on growth through the expansion of operations at existing offices, together with the selective acquisition of additional personnel-related businesses, both in its existing markets and other strategic geographic markets. The Company periodically evaluates proposals for various acquisition opportunities, but there can be no assurance that any additional transactions will be consummated.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Liquidity and Capital Resources (Continued)

The Company is a party to a Standby Letter of Credit Agreement dated as of June 30, 2009 (the “Credit Agreement”) with its principal bank. The Credit Agreement provides for standby letters of credit as to which there was $6.7 million outstanding at June 30, 2012 in connection with various surety deposit requirements for workers’ compensation purposes. Effective July 11, 2012, the outstanding standby letters of credit were increased by $17.2 million related to an increase in the California self insured workers’ compensation surety deposit requirement applicable to the Company in lieu of payment of assessment fees to the state of California.

Pursuant to the Credit Agreement, the Company is required to maintain compliance with the following covenants: (1) to maintain net income after taxes not less than $1.00 (one dollar) on an annual basis, determined as of each fiscal year end; (2) to maintain liquid assets (defined as unencumbered cash, cash equivalents, and publicly traded and quoted marketable securities) having an aggregate fair market value at all times not less than $10.0 million, determined as of the end of each fiscal quarter; and (3) to not borrow or permit to exist indebtedness (other than from or to the bank), or mortgage, pledge, grant, or permit to exist a security interest in, or a lien upon, all or any portion of the Company’s assets now owned or hereafter acquired, except for purchase money indebtedness (and related security interests) which does not at any time exceed $500,000. The Company was in compliance with all financial covenants at June 30, 2012.

As disclosed in Note 3 to the Consolidated Financial Statements in this report, effective March 28, 2012, the Company repurchased 2,485,929 shares of the Company’s common stock held by the Estate of William W. Sherertz and 500,000 common shares held by Nancy Sherertz. Mr. Sherertz, a founder and former president and CEO of the Company, died January 20, 2011. Nancy Sherertz is also a founder of the Company. The common shares were repurchased at a price of $20 per share, representing total consideration of $59.7 million. The Company used a combination of $24.9 million in cash and issued 34,800 shares of Series A Nonconvertible, Non-Voting Redeemable Preferred Stock with a liquidation preference of $1,000 per share. Additionally, the Company incurred professional and legal fees totaling $514,000 related to the transaction. The preferred stock is entitled to receive cumulative preferential dividends at the rate of 5% per annum based upon the $1,000 liquidation preference with such rate increasing by 2% on each April 1 beginning April 1, 2013, until all of the outstanding preferred stock has been redeemed. The Company may pay the dividends in cash or in additional shares of preferred stock at its option. The Company may redeem all or a portion of the preferred stock at its option at any time at a price of $1,000 per share. The preferred stock is subject to mandatory redemption five years from the original issue date. Due to the mandatory redemption provision the preferred stock is classified as a liability on the Company’s consolidated balance sheet. Although no assurances can be given, the Company anticipates borrowing funds through a bank line of credit to redeem the preferred stock in full before September 28, 2012, in which event no dividend would be payable.

Management expects that current liquid assets and the funds anticipated to be generated from operations will be sufficient in the aggregate to fund the Company’s working capital needs for the next twelve months.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Inflation

Inflation generally has not been a significant factor in the Company’s operations during the periods discussed above. The Company has taken into account the impact of escalating medical and other costs in establishing reserves for future expenses for self-insured workers’ compensation claims.

Forward-Looking Information

Statements in this report which are not historical in nature, including discussion of economic conditions in the Company’s market areas and effect on revenue levels, the potential for and effect of past and future acquisitions, the effect of changes in the Company’s mix of services on gross margin, the adequacy of the Company’s workers’ compensation reserves and the effect of changes in estimate of its claims liabilities, the adequacy of the Company’s allowance for doubtful accounts, the effect of the Company’s formation and operation of two wholly owned, fully licensed captive insurance subsidiaries and becoming self-insured for certain business risks, the financial viability of the Company’s excess insurance carriers, the effectiveness of the Company’s management information systems, payment of future dividends, redemption of the Company’s preferred stock, and the availability of financing and working capital to meet the Company’s funding requirements, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors with respect to the Company include the ability to retain current clients and attract new clients, the availability of financing or other sources of capital, including the impact of such availability on the Company’s plans to redeem its preferred stock, difficulties associated with integrating acquired businesses and clients into the Company’s operations, economic trends in the Company’s service areas, material deviations from expected future workers’ compensation claims experience, the effect of changes in the workers’ compensation regulatory environment in one or more of the Company’s primary markets, collectibility of accounts receivable, the carrying values of deferred income tax assets and goodwill, which may be affected by the Company’s future operating results and the availability of capital or letters of credit necessary to meet state-mandated surety deposit requirements for maintaining the Company’s status as a qualified self-insured employer for workers’ compensation coverage, among others. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The Company’s exposure to market risk for changes in interest rates primarily relates to its investment portfolio of liquid assets. As of June 30, 2012, the Company’s investment portfolio consisted principally of approximately $27.4 million in corporate bonds, $12.0 million in tax-exempt money market funds, $8.9 million in tax-exempt municipal bonds and $3.1 million in U.S. treasuries. Based on the Company’s overall interest exposure at June 30, 2012, a 100

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk (Continued)

basis point increase in market interest rates would not have a material effect on the fair value of the Company’s investment portfolio of liquid assets or its results of operations because of the predominantly short maturities of the securities within the investment portfolio.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2012 the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’ disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II – Other Information

Item 1A.

Risk Factors

In addition to the risk factors disclosed in Item 1A of our 2011 Annual Report on Form 10-K, the following risk factor should be considered in connection with our issuance of 34,800 shares of Series A Nonconvertible, Non-Voting Redeemable Preferred Stock (the “Series A Preferred Stock”) on March 28, 2012.

We may be unable to refinance the Series A Preferred Stock as planned.

The Series A Preferred Stock issued on March 28, 2012, has a liquidation preference of $1,000 per share, or a total of $34,800,000. Holders of the Series A Preferred Stock are entitled to receive cumulative preferential dividends at the rate of 5% per annum based upon the $1,000 liquidation preference, with such rate scheduled to increase by 2% on each April 1 beginning April 1, 2013. To the extent the Series A Preferred Stock is redeemed before September 28, 2012, no dividend will be payable. The Series A Preferred Stock is subject to mandatory redemption five years after issuance. Although the Company currently anticipates borrowing funds through a bank line of credit to fund a full redemption of the Series A Preferred Stock before September 28, 2012, there is no assurance that such financing will be available on terms acceptable to the Company or at all.

Item 6.

Exhibits

The exhibits filed with this report are listed in the Exhibit Index following the signature page of this report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		BARRETT BUSINESS SERVICES, INC. (Registrant)

Date: August 8, 2012		/s/ James D. Miller
		James D. Miller
		Vice President-Finance, Treasurer and Secretary
		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX


Exhibit

10.1		Summary of Annual Cash Incentive Compensation Plan for Executives of the Registrant.

31.1		Certification of the Chief Executive Officer under Rule 13a-14(a).

31.2		Certification of the Chief Financial Officer under Rule 13a-14(a).

32		Certification pursuant to 18 U.S.C. Section 1350.

99.1		Description of Capital Stock of the Registrant.

101.		INS XBRL Instance Document *

101.		SCH XBRL Taxonomy Extension Schema Document *

101.		CAL XBRL Taxonomy Extension Calculation Linkbase Document *

101.		LAB XBRL Taxonomy Extension Label Linkbase Document *

101.		PRE XBRL Taxonomy Extension Presentation Linkbase Document *

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended and, otherwise are not subject to liability under those sections.

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Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company