Barrett Business Services, Inc.

12 branches we consider developing with run rates up to $30 million. Our business units totaled 100 and incorporates the new opening and consolidations previously mentioned. We also continued our migration into a revised structure of the 16-member business unit, which allows us to service more clients with less management employees and increases our return on management payroll. Moving to our client and worksite employee stack, our client retention continues to be stronger than pre-pandemic levels. I like to attribute that to the work we do with our clients and the value our teams bring in this ever-changing and complex economic environment. Regarding our referral channel distribution, leads and prospects in the quarter were greater than the previous quarter and exceeded our internal Q3 forecast. We are still behind pre-pandemic levels but we are optimistic as we continue to see a gradual recovery as economies open. Our closing ratio continues to be in line with historical levels. Last quarter, we discussed our longer-term initiatives where we intend to increase the top of the funnel by focusing on lead generation via an omnichannel digital campaign where we target both client and new referral partners in different markets. We are only four to five months into the various trials, but I am excited about what we are seeing, and I'd like to provide some statistics since the last earnings call. We've signed up 82 new referral partners, and we set up 74 new meetings with interested potential clients. We are testing and refining our various sales initiatives by market, measuring the return on investment, and will transport the most successful method to our other markets. We continue to package our new technology with our nationwide offering, and we continue to see larger opportunities. So to summarize all these efforts, our client retention is better than historical. We are seeing more opportunities than we forecasted. We continue to see larger opportunities, and we are closing at the same levels as historical. These positive trends resulted in the company adding 3,200 new worksite employees from net new customer ads over the past 12 months. To put a finer point on this accomplishment, this is the most net new worksite employees from net new customer additions we had added over the past four years. This is just a fabulous result and a testament of our value proposition, as well as the focus of the organization. Next, I'm going to provide some updates on other initiatives. We discussed last quarter a new strategy that we are coining as asset light markets. We have taken lessons learned in a COVID environment for how to operate remotely, coupled with our digital initiatives, and we will hire and train a professional in a new market and have them sell into that market. We will serve as this client out of an adjacent branch or at corporate and invest behind them in infrastructure as they build up their client base. It is still early, but we hired four new folks in the quarter that are currently going through our training and immersion program. Shifting to IT, our internally built client portal, MyBVSI, continues to perform well and is being received favorably by our clients. We are committed to quarterly enhancements that will add new features or improve existing functionality. Our vision is to bring on additional products and services and deliver these through the portal and we have a dedicated team working on this. So in summary, we are in the people business, and people have never been more relevant to the business owner than they are today. We are executing to our strategic initiatives, and we are realizing positive results and seeing future positive trends which result in our increased outlook for the remainder of the year. Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary, and hello, everyone. I am pleased to report that our Q3 performance continued to build on the momentum we reported last quarter, with results that were once again stronger than expected. PEO growth billings increased 12% over the prior year quarter and 5% sequentially from Q2 to $1.66 billion. Staffing revenues increased 2% over the prior year to $29 million. As Gary noted, Our increase in PEO growth billings was driven by stronger than expected growth from net new clients in the quarter, as well as stronger than expected hiring within our customer base. Our average WSEs increased 8% year over year, which is 1% higher than our expectations. We also continue to see higher average billing per WSE, which is up 3% in Q3 over prior year, and continues to trend ahead of expectations. PEO growth buildings growth by region versus the prior year third quarter were as follows. Mountain states grew 35%, East Coast grew 16%, the Pacific Northwest grew 14%, Northern California grew 13%, and Southern California grew 6%. While Southern California continues to grow steadily, our customers in the region are expanding more slowly than in other regions. and the effect is generally consistent across industries. For example, our construction industry clients in Northern California have grown 10% on average year to date compared to only 3% for those clients in Southern California. Workers' compensation expense continues to trend favorably in the quarter and included an actuarially determined reduction of prior year estimated liability of $800,000 in the third quarter. Our claims performance is also remaining favorable, with relative claim frequency 6% lower than the third quarter of 2019. We announced last quarter our new insurance program that became effective July 1st. This new program greatly reduces the workers' compensation risk that BBSI now retains. As a reminder, we will now describe our workers' compensation coverage for clients as being under either our insured program or our self-insured programs. Approximately 82% of our workers' compensation exposure, including all California clients, are covered by our insured program. All claims incurred in these states after July 1 are now covered 100% by the insurance market with zero claim costs retained by BBSI. This is a significant change from our previous structure, which included $3 million of retention per occurrence. Because of this move to our fully insured program, our workers' compensation liabilities no longer increased in the quarter, but instead decreased by nearly $19 million as remaining historical claims were paid. Looking at our margin and pricing, we continue to hold our billing rates effectively flat on renewal when compared to the prior year. The workers' compensation market is firming, but it's still competitive in certain geographies and industries for new business. However, our strong client retention is an indication of the value we are creating for our clients, even in this competitive market. Looking at operating expenses, SG&A continues to trend in line with expectations. Although employee expenses are up relative to the prior year, the variance reflects prior year reductions implemented during the COVID-19 pandemic that have since been reversed, increased employee travel and marketing costs, and higher profit share and incentive pay in the current year due to stronger than expected results. Through Q3, management headcount levels and non-IT operating costs both remain below 2019 levels. Our investment portfolios earned 1.8 million in the third quarter compared to 1.6 million in the prior year. Our investments continue to be managed conservatively and have an average duration of 4.1 years average quality of investment at AA, and average book yield of 1.8%. Going forward, investment balances will begin to decline as our collateral funding requirements diminish under our new fully insured workers' comp program. Turning to the balance sheet, we had $116 million of unrestricted cash investments at September 30th compared to $110 million at June 30th. We continue to be debt-free except for our $4 million mortgage on our corporate headquarters. We remain committed to our capital allocation strategy and return capital to shareholders in the quarter through $2.3 million in dividends and $4.2 million of stock repurchases at an average price of $75.54. At quarter end, there's approximately $31 million remaining on the Board's approved $50 million share repurchase program. Turning to the outlook for the year, given the stronger than expected results in the quarter, We now expect gross billings to increase between 9% and 10%, up from 6% to 8% previously, and we expect average WSEs to increase between 3% and 5%, up from 2% to 4% previously. We continue to expect gross margin as a percent of gross billings to be between 3.0% and 3.1%, and we expect our effective annual tax rate to be between 22% and 24%. I will now turn the call back to Gary for closing remarks.

Thanks, Anthony. In conclusion, we had a great quarter as we executed our short and long-term strategies. We continue to always think of the client first and to advocate for the success of the business owner. We've been working on the right things, and I think we're in a great position for future growth. Now I'd like to turn the call over to the operator for questions.