What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-26 · 120 added, 110 removed, 265 unchanged (46% of the section changed)

5 unchanged sentences

Financial Year in Review - Revenue of $963.9 million in 2020 grew $15.5 million, or 1.6%, from revenue of $948.4 million in 2019.

Same-unit revenue improved by $18.2 million, or 2.0%, while acquisitions, net of divestitures, contributed $8.2 million to revenue, or 0.9%.

Same-unit revenue decreased by $3.5 million, or 0.4%, while acquisitions, net of divestitures, contributed $18.9 million to revenue, or 2.0%.

A detailed discussion of revenue by practice group is included under “Operating Practice Groups.” Income from continuing operations in 2020 increased $7.3 million, or 10.3%, to $78.3 million from $71.0 million in 2019.

Refer to “Results of Operations - Continuing Operations” for a detailed discussion of the components of income from continuing operations.

Earnings per diluted share from continuing operations were $1.27 in 2019, compared to $1.09 in 2018, with a fully diluted weighted average share count of 55.9 million shares in 2019, compared to 56.5 million shares in 2018.

Earnings per diluted share from continuing operations

were $1.42 in 2020, compared to $1.27 in 2019, with a fully diluted weighted average share count of 55.4 million shares in 2020, compared to 55.9 million shares in 2019.

Strategic Use of Capital - Our first priority for the use of capital is to make strategic acquisitions.

We completed the following six acquisitions in 2019:

Effective January 1, 2019, we acquired substantially all of the assets of Wenner Group, LLC (“Wenner”), located in Denver, Colorado.

Wenner is a full service accounting, tax, compliance and financial consulting firm.

Wenner is included as a component of our Financial Services practice group.

Effective July 1, 2019, we acquired substantially all of the assets of Paydayta, Inc.

Paytime) (“Paytime”), an Ohio-based payroll service provider.

Paytime is included as a component of our Benefit and Insurance Services practice group.

Effective July 1, 2019, we acquired substantially all of the assets of Gavion, LLC (“Gavion”), a registered investment advisor based in Memphis, Tennessee.

Gavion provides investment consulting services to a diverse base of institutional clients.

Gavion is included as a component of our Benefit and Insurance Services practice group.

Effective August 1, 2019, we acquired substantially all of the assets of QBA Benefits, LLC.

(“QBA”), an employee benefits agency based in Cleveland, Ohio.

QBA provides employee benefits related services to small and mid-sized clients across multiple industries such as services, technology, energy, and manufacturing.

QBA is included as a component of our Benefit and Insurance Services practice group.

Effective August 1, 2019, we acquired substantially all of the assets of Ericson CPAs (“Ericson”), an accounting firm based in San Luis Obispo, California.

Ericson provides tax compliance, consulting, and planning services to a diverse base of clients.

Ericson is included as a component of our Financial Services practice group.

Effective September 1, 2019, we acquired substantially all of the assets of Brinig Taylor Zimmer, Inc.

(“BTZ”), a specialized financial consulting firm based in San Diego, California.

BTZ provides forensic accounting, litigation consulting and business valuation services to a wide range of clients from individual to small business and large public traded entities.

BTZ is included as a component of our Financial Services practice group.

Refer to Note 18, Acquisitions, to the accompanying consolidated financial statements for further discussion on acquisitions.

We completed the following seven acquisitions in 2020:

• Effective February 1, 2020, we acquired substantially all the assets of Alliance Insurance Services, Inc., a provider of insurance and advisory services based in Washington DC.

• Effective February 1, 2020, we acquired substantially all the assets of Pension Dynamics, LLC, a full service retirement and benefits plan advisor based in Pleasant Hill, California.

• Effective February 1, 2020, we acquired substantially all the assets of Sunshine Systems, a payroll solutions provider based in Massachusetts.

• Effective July 1, 2020, we acquired substantially all the assets of Prince-Wood Insurance, L.L.C., a provider of financial insurance and advisory services based in Woodbridge, Virginia.

• Effective September 1, 2020, we acquired substantially all the assets of ARC Consulting LLC and ARC Placement Group LLC (collectively "ARC").

ARC is a provider of financial, insurance and advisory services based in San Francisco, California.

• Effective December 1, 2020, we acquired substantially all the assets of BeyondPay, a full service human capital management and payroll service provider based in Clinton, New Jersey.

• Effective December 31, 2020, we acquired substantially all the assets of Borden Perlman Insurance Agency, Inc., a leading provider of financial, insurance and advisory services located in Ewing, New Jersey.

Refer to Note 18, Business Combinations, to the accompanying consolidated financial statements for further discussion on acquisitions.

We also have the financing flexibility and the capacity to actively repurchase shares of our common stock.

We believe that repurchasing shares of our common stock is a prudent use of our financial resources, and that investing in our stock is an attractive use of capital and an efficient means to provide value to our shareholders.

On February 6, 2020, the CBIZ Board of Directors authorized the purchase of up to 5.0 million shares of our common stock under our Share Repurchase Program (the “Share Repurchase Program”), which may be suspended or discontinued at any time and expires on April 1, 2021.

The shares may be purchased (i) in the open market, (ii) in privately negotiated transactions, or (iii) under Rule 10b5-1 trading plans, which may include purchases from our employees, officers and directors, in accordance with the Securities and Exchange Commission (the “SEC”) rules.

On February 11, 2021, the CBIZ Board of Directors authorized the purchase of up to 5.0 million shares of our common stock under our Share Repurchase Program (the “Share Repurchase Program”), which may be suspended or discontinued at any time and expires on March 31, 2022.

CBIZ management will determine the timing and amount of the transaction based on its evaluation of market conditions and other factors.

4 unchanged sentences

A sample of the awards won include:

America’s Best Mid-Size Employer - We were named one of “2019 America’s Best Mid-Size Employers” by Forbes magazine.

Best Workplace in Consulting and Professional Services - We were named one of the “2019 Best Workplaces in Consulting and Professional Services” by Great Place to Work and Fortune magazine.

• Best Workplace in Consulting and Professional Services - We were named one of the “2020 Best Workplaces in Consulting and Professional Services” by Great Place to Work.

• Alliance for Workplace Excellence - We were recognized for three awards in 2020 by the Alliance for Workplace Excellence;

(i) Workplace Excellence Seal of Approval, (ii) Health & Wellness Seal of Approval and (iii) Certificate of Recognition – Best Practices for Supporting Works 50+.

Best Places to Work - We were selected and honored for the fifth consecutive year as a “Best Places to Work in Insurance” by Business Insurance magazine based on our commitment to attracting, developing and retaining great talent through employee benefits and other programs.

• Best Places to Work - We were selected and honored for the sixth consecutive year as a “Best Places to Work in Insurance” by Business Insurance magazine based on our commitment to attracting, developing and retaining great talent through employee benefits and other programs.

We were recognized for this award based on core focus areas such as leadership and planning, corporate culture, communications, work environment and overall engagement.

1 unchanged sentence

Culture and Leadership Commitment, Foundational Components, Strategic Planning, Marketing and Communications, Programming and Interventions, and Reporting and Analytics.

We were honored to be named one of the top 100 winners for a second time.

Best and Brightest Companies in the Nation Top 101 - For the fourth year in a row, we were honored as a “Best and Brightest Company” by National Association of Business Resources (NABR) based on our commitment to human resource practices and employee enrichment.

Best and Brightness in Wellness – We were again honored by NABR as an organization that promotes a culture of wellness.

We were honored to be named one of the top 100 winners for the third time.

• 2020 Best and Brightest Companies in the Nation Top 101 - For the fifth year in a row, we were honored as a “Best and Brightest Company” by NABR based on our commitment to human resource practices and employee enrichment.

• 2020 Best and Brightness in Wellness – We were honored by NABR, for the fourth consecutive time, as an organization that promotes a culture of wellness.

RESULTS OF OPERATIONS - CONTINUING OPERATIONS

10 unchanged sentences

Year Ended December 31,

2020 Percent 2019 Percent 2018 Percent

(Dollars in thousands)

10 unchanged sentences

Year Ended December 31,

2020 2019 2018

(Dollars in thousands)

1 unchanged sentence

Operating expenses % of revenue 85.6 % 86.8 % 85.7 %

2019 compared to 2018 - Our operating expenses increased by $33.2 million, and increased to 86.8% of revenue from 85.7% of revenue for the prior year.

The deferred compensation plan increased operating expenses by $17.2 million in 2019, but decreased operating expenses by $4.5 million in 2018.

2020 compared to 2019 - Our operating expenses increased by $1.9 million.

Operating expense as a percentage of revenue decreased to 85.6% of revenue from 86.8% of revenue for the prior year.

The deferred compensation plan increased operating expenses by $13.8 million and $17.2 million in 2020 and 2019, respectively.

Excluding the impact of the deferred compensation plan, operating expenses would have been $811.5 million, or 84.2% of revenue, in 2020 compared to $806.3 million, or 85.0% of revenue, in 2019.

The majority of our operating expenses relate to personnel costs, which includes (i) salaries and benefits, (ii) commissions paid to producers (iii) incentive compensation and (iv) share-based compensation.

Personnel costs increased $11.1 million, or 1.8%, to support our growth in revenue, with acquisitions contributing approximately $5.7 million to personnel costs.

Personnel costs increased $24.2 million, or 3.8%.

Acquisitions contributed approximately $12.1 million to personnel costs.

The increase in personnel costs was offset by approximately $20.1 million lower travel and entertainment and other discretionary spending in 2020 due to COVID-19.

Personnel costs and other operating expenses are discussed in further detail under “Operating Practice Groups.”

2018 compared to 2017 - Our operating expenses increased by $34.7 million, or 4.6%, in 2018 compared to 2017, and decreased to 85.7% of revenue from 88.3% of revenue for the prior year.

The deferred compensation plan decreased operating expenses by $4.5 million in 2018, but increased operating expenses by $10.9 million in 2017.

2019 compared to 2018 - Our operating expenses increased by $33.2 million in 2019 as compared to 2018, and increased to 86.8% of revenue in 2019 from 85.7% of revenue for the prior year.

The deferred compensation plan increased operating expenses by $17.2 million in 2019, but decreased operating expenses by $4.5 million in 2018.

Excluding the impact of the deferred compensation plan, operating expenses would have been $806.3 million, or 85.0% of revenue, in 2019 compared to $794.7 million, or 86.2% of revenue, in 2018.

Personnel costs increased $44.8 million, or 7.7%, to support our growth in revenue, with acquisitions contributing approximately $15.0 million to personnel costs.

Personal costs increased $11.1 million, or 1.8%, in 2019 to support our growth in revenue, with acquisitions contributing approximately $5.7 million to personnel costs.

Corporate General & Administrative Expenses

1 unchanged sentence

Year Ended December 31,

2020 2019 2018

(Dollars in thousands, except percentages)

G&A expenses $ 46,066 $ 44,406 $ 39,173

G&A expenses % of revenue 4.8 % 4.7 % 4.2 %

201 9 compared to 201 8 - Our G&A expenses increased by approximately $5.2 million, or 1 3.4 %, in 201 9 compared to 201 8 , and increased to 4.

7 % of revenue from 4 .

2 % of revenue for the prior yea r.

The deferred compensation plan increased G&A expenses by $ 2.0 million in 2019, but decreased G&A expenses by $0.4 million in 2018.

Excluding the impact of the deferred compensation plan, G&A expenses would have been $42.4 million, or 4.5% of revenue, in 2019 compared to $39.6 million, or 4.3% of revenue , in 2018.

Personnel costs, including stock-based compensation, increased $ 1 .

1 million, or 5.1 % .

2020 compared to 2019 - Our G&A expenses increased by approximately $1.7 million, or 3.7%, in 2020 compared to 2019, and increased to 4.8% of revenue from 4.7% of revenue for the prior year.

The deferred compensation plan reduced G&A expenses by $0.4 million in 2018, but increased G&A expenses by $1.2 million in 2017.

The deferred compensation plan increased G&A expenses by $1.6 million in 2020, and by $2.0 million in 2019.

Excluding the impact of the deferred compensation plan, G&A expenses would have been $44.5 million, or 4.6% of revenue, in 2020 compared to $42.4 million, or 4.5% of revenue, in 2019.

Personnel costs increased $3.7 million, or 20.5%, mainly due to an increase in incentive-based compensation.

An increase in marketing expenses of approximately $1.6 million, mostly attributable to the national marketing campaign, also contributed to the increase in G&A expenses.

Personnel costs, including stock-based compensation, increased by $1.3 million, or 5.7% in 2020 as compared to 2019.

2019 compared to 2018 - Our G&A expenses increased by approximately $5.2 million, or 13.4%, in 2019 compared to 2018, and increased to 4.7% of revenue in 2019 from 4.2% of revenue for the prior year.

The deferred compensation plan decreased G&A expenses by $2.0 million in 2019, but decreased G&A expenses by $0.4 million in 2018.

Excluding the impact of the deferred compensation plan, G&A expenses would have been $42.4 million, or 4.5% of revenue, in 2019 compared to $39.6 million, or 4.3% of revenue, in 2018.

Personnel costs, including stock-based compensation, increased $1.1 million, or 5.1%.

Other Income (Expense), net

1 unchanged sentence

Year Ended December 31,

2020 2019 2018

(Dollars in thousands)

Interest expense (4,983) (5,765) (6,645)

Gain on sale of operations, net

(Loss) gain on sale of operations, net (509) 417 1,025

Other income (expense), net (1)

16,500 17,715 (7,087)

Total other income (expense), net $ 11,008 $ 12,367 $ (12,707)

Other income (expense), net includes a net gain of $19.2 million in 2019, compared to net loss of $4.9 million in 2018 and net gain of $12.1 in 2017, associated with the value of investments held in a rabbi trust related to the deferred compensation plan.

(1) Other income (expense), net includes a net gain of $15.4 million in 2020 , a net gain of $19.2 million in 2019, and a net loss of $4.9 million in 2018, associated with the value of investments held in a rabbi trust related to the deferred compensation plan.

The adjustments to the investments held in a rabbi trust related to the deferred compensation plan are offset by a corresponding increase or decrease to compensation expense, which is recorded as “Operating expenses” and “G&A expenses” in the accompanying Consolidated Statements of Comprehensive Income.

2 unchanged sentences

Interest expense was $5.0 million in 2020, compared to $5.8 million in 2019.

Our average debt balance and interest rate was $158.3 million and 3.09%, respectively, in 2019 compared to $182.3 million and 3.08%, respectively, in 2018.

Our average debt balance and weighted average interest rate was $152.3 million and 2.45%, respectively, in 2020, compared to $158.3 million and 3.09%, respectively, in 2019.

Interest expense was $6.6 million in 2018 with an average debt balance and interest rate of $182.3 million and 3.08%, respectively.

Our debt is further discussed in Note 9, Debt and Financing Arrangements, to the accompanying consolidated financial statements.

Gain on Sale of Operations, net – We sold a small office in the Financial Services practice group during 2019.

We sold a small office in the Financial Services practice group, along with two small books of business, both in the Benefits and Insurance practice group in 2018 and sold one small book of business in the Financial Services practice group in 2017.

Other Income (Expense), net - The majority of “Other income (expense), net” consists of net gains and losses associated with the value of the deferred compensation plan as discussed above in Note 1, Basis of Presentation and Significant Accounting Policies, as well as net adjustments to the fair value of our contingent purchase price liability related to prior acquisitions.

Other income of $17.7 million in 2019 consisted of a $19.2 million net gain related to the deferred compensation plan, partially offset by a $1.6 million net adjustment increase to the fair value of our contingent purchase price liability.

Other expense of $7.1 million in 2018 consisted of a net loss of $4.9 million related to the deferred compensation plan and a $2.6 million net adjustment increase to the fair value of our contingent purchase price liability.

Other income of $14.5 million in 2017 consisted of a net gain of $12.1 million related to the deferred compensation plan, as well as a $1.5 million net adjustment decrease to the fair value of our contingent purchase price liability.

Gain on Sale of Operations, net – We sold a small book of business in the Benefit and Insurance practice group and two small accounting firms in the Financial Services practice group during 2020.

We sold a small office in the Financial Services practice group during 2019, and we sold a small office in the Financial Services practice group, along with two small books of business, both in the Benefits and Insurance practice group in 2018.

Other Income (Expense), net - The majority of “Other income (expense), net” consists of net gains and losses associated with the value of the deferred compensation plan as discussed above, as well as net adjustments to the fair value of our contingent purchase price liability related to prior acquisitions.

Other income of $16.5 million in 2020 included a $15.4 million net gain related to the deferred compensation plan and a $0.6 million net decrease adjustment to the fair value of our contingent purchase price liability.

Other income of $17.7 million in 2019 consisted of a net gain of $19.2 million related to the deferred compensation plan, partially offset by a $1.6 million net adjustment increase to the fair value of our contingent purchase price liability.

Other expense of $7.1 million in 2018 consisted of a net loss of $4.9 million related to the deferred compensation plan, as well as a $2.6 million net adjustment increase to the fair value of our contingent purchase price liability.

Income Tax Expense

1 unchanged sentence

Year Ended December 31,

2020 2019 2018

(Dollars in thousands, except percentages)

2 unchanged sentences

The increase in income tax expense from 2019 to 2020 was primarily driven by higher pre-tax income.

The increase in the effective tax rate from 2019 to 2020 was primarily attributable to a reduction in the tax benefit recognized in 2020 compared to 2019 related to stock-based compensation, which was partially offset by a larger reversal in 2020 compared to 2019 of estimated tax reserves due to the expiration of certain statutes of limitation.

The increase in income tax expense from 2018 to 2019 was primarily driven by higher pre-tax income.

The increase in the effective tax rate from 2018 to 2019 was primarily attributable to a larger reversal of estimated tax reserves due to the expiration of certain statutes of limitation in 2018 compared to 2019.

The decrease in income tax expense and effective tax rate from 2017 to 2018 was primarily due to the Tax Cuts and Jobs Act of 2017.

Refer to Note 8 , Income Taxes , for additional information on our provision for income taxes.

GAAP RECONCILIATION

1 unchanged sentence

Year Ended December 31,

2020 2019 2018 2017 2016

(Dollars in thousands)

3 unchanged sentences

Gain on sale of operations, net 509 (417) (1,025) (45) (855)

Depreciation 9,568 8,283 6,140 5,274 5,378

Amortization 13,571 14,062 17,535 17,787 16,720

Adjusted EBITDA $ 132,119 $ 120,582 $ 109,135 $ 104,011 $ 94,842

1 unchanged sentence

This table reconciles Adjusted EBITDA, a Non-GAAP financial measure to the nearest GAAP financial measure, “Income from continuing operations.” Adjusted EBITDA is not defined by GAAP, is not based on any comprehensive set of accounting rules or principles, and should not be considered in isolation from, or regarded as an alternative or replacement to, any measurement of performance or cash flow under GAAP.

Adjusted EBITDA is commonly used by us, our shareholders, and debt holders to evaluate, assess, and benchmark our operating results and to provide an additional measure with respect to our ability to meet future debt obligations.

Because of these limitations, Adjusted EBITDA should be considered alongside our financial results presented in accordance with GAAP.

5 unchanged sentences

Year Ended December 31,

2020 2019 $ Change % Change

(Dollars in thousands)

Same-unit $ 620,188 $ 615,537 $ 4,651 0.8 %

Acquired businesses 9,590 — 9,590

2 unchanged sentences

Operating expenses 525,209 515,240 9,969 1.9 %

Gross margin $ 104,569 $ 101,327 $ 3,242 3.2 %

Gross margin percentage 16.6 % 16.4 %

2019 compared to 2018 - The Financial Services practice group revenue in 2019 grew by 2.6% to $616.6 million from $600.9 million in 2018, reflecting same-unit growth of $15.0 million, or 2.5%, driven by those units that provide traditional accounting and tax-related services, which increased by $15.1 million, or 4.3%.

Traditional accounting and tax-related services growth was attributable to favorable pricing and an increase in billable hours.

Same-unit revenue also benefited from moderate growth in government healthcare compliance business and project work.

2020 compared to 2019 - The Financial Services practice group revenue in 2020 grew by 2.1% to $629.8 million from $616.6 million in 2019, reflecting same-unit growth of $4.7 million, or 0.8%, driven by those units that provide traditional accounting and tax-related services, which increased by $6.8 million, or 1.9% as compared to 2019.

Traditional accounting and tax-related services growth was primarily attributable to favorable pricing and moderate increase in services to large clients.

Same-unit revenue also benefited from $4.3 million, or 2.9%, increase in government healthcare compliance business.

The same-unit revenue growth in traditional accounting and tax-related services and government healthcare compliance business lines was offset by approximately $6.4 million net decrease in project work and other service lines that are discretionary in nature.

The acquisition of businesses provided incremental revenue of $9.6 million.

1 unchanged sentence

Fees earned under the ASAs are recorded as revenue in the accompanying Consolidated Statements of Comprehensive Income and were $159.4 million and $157.6 million in 2020 and 2019, respectively.

Operating expenses increased by $ 6 .6 million in 201 9 , but decreased to 8 3 .6% of revenue from 8 4 .6% of revenue for the prior year, primarily due to leveraging personnel costs and other operating expenses with the increase in revenue.

Personnel costs increased by $ 6.9 million, or 1.7 %, with acquisitions contributing approximately $ 3 .

1 million to personnel costs in 201 9 .

Operating expenses increased by $10.0 million in 2020 as compared to 2019, primarily as a result of $20.9 million, or 5.0%, higher personnel costs, of which acquisitions contributed approximately $6.0 million.

The increase in personnel costs was partially offset by approximately $11.0 million reduction in travel and entertainment and other

discretionary spending primarily due to the impact of the COVID-19 pandemic.

Operating expense as a percentage of revenue remained relatively flat at 83.4% in 2020 and 83.6% in 2019.

Year Ended December 31,

2019 2018 $ Change % Change

(Dollars in thousands)

Same-unit $ 611,539 $ 596,549 $ 14,990 2.5 %

Acquired businesses 5,028 — 5,028

2 unchanged sentences

Operating expenses 515,240 508,653 6,587 1.3 %

Gross margin $ 101,327 $ 92,273 $ 9,054 9.8 %

Gross margin percentage 16.4 % 15.4 %

2018 compared to 2017 - The Financial Services practice group revenue in 2018 grew by 11.2% to $600.9 million from $540.3 million in 2017, reflecting same-unit growth of $38.2 million, or 7.1%, driven by those units that provide traditional accounting and tax-related services, which increased by $19.5 million, or 5.6%, as well as those units that provide consulting services, which increased by $18.7 million, or 9.2%.

Traditional accounting and tax-related services growth was attributable to favorable pricing and an increase in billable hours.

Business units that provide consulting services benefited from both project work and growth in the governmental health care compliance business, as well as growth in the advisory business.

The acquisition of CMF Associates, L.L.C.

(“CMF”), Laurus, and McKay & Carnahan, Inc.

(“McKay”) provided incremental revenue of $22.6 million.

Same-unit revenue also benefited from moderate growth in government healthcare compliance business and project work.

The acquisition of businesses provided incremental revenue of $5.0 million.

We provide a range of services to affiliated CPA firms under ASAs.

2 unchanged sentences

Personnel costs increased by $6.9 million, or 1.7%, with acquisitions contributing approximately $3.1 million to personnel costs in 2019.

Travel costs attributable to the growth in our advisory business also contributed to the increase in operating expenses.

Travel-related costs increased by $3.2 million, or 17.7%.

Benefits and Insurance Services

Year Ended December 31,

2020 2019 $ Change % Change

(Dollars in thousands)

Same-unit $ 286,678 $ 295,530 $ (8,852) (3.0) %

Acquired businesses 11,080 — 11,080

2 unchanged sentences

Operating expenses 248,357 246,245 2,112 0.9 %

Gross margin $ 49,401 $ 49,983 $ (582) (1.2) %

Gross margin percentage 16.6 % 16.9 %

2 019 compared to 2018 - The Benefits and Insurance Services practice group revenue in 201 9 g rew by 2.

7 % to $2 96.2 million from $288.

4 million in 2018 , primarily driven by $ 7 .

8 million of incremental revenue from the acquisition of businesses .

Same -unit re venue increased slightly by $0.2 million , or 0.1 %, in 2019 driven by growth in our property and casualty and retirement service groups , offset by year over year declines non-recurring project based revenue which is transactional in nature .

Operating expenses increased by $ 6.6 million in 201 9 due to personnel costs which increased by $ 5.1 million, or 2 .

8 %, primarily due to acquisitions , as well as an increase in the hiring of sales production staff .

2020 compared to 2019 - The Benefits and Insurance Services practice group revenue in 2020 grew by 0.5% to $297.8 million from $296.2 million in 2019, primarily driven by $11.1 million of incremental revenue from the acquisition of businesses.

Same-unit revenue decreased by $8.9 million, or 3.0% in 2020, primarily driven by decreased revenue from payroll services, property and casualty insurance, and retirement plan services businesses that were impacted by COVID-19 related factors.

Operating expenses increased by $2.1 million in 2020 primarily due to $7.2 million, or 3.9%, in higher personnel costs as result of acquisitions, which contributed approximately $6.2 million to the e increase in 2020 as well as an increase in the hiring of sales production staff.

The increase in personnel costs was partially offset by approximately $4.4 million savings from decreased travel and other discretionary spending in 2020 as compared to 2019 primarily due to the impact of COVID-19 pandemic.

Year Ended December 31,

2019 2018 $ Change % Change

(Dollars in thousands)

Same-unit $ 288,447 $ 288,243 $ 204 0.1 %

Acquired businesses 7,781 — 7,781

Divested operation — 194 (194)

Total revenue 296,228 288,437 7,791 2.7 %

Operating expenses 246,245 239,646 6,599 2.8 %

Gross margin $ 49,983 $ 48,791 $ 1,192 2.4 %

Gross margin percentage 16.9 % 16.9 %

2018 compared to 2017 - The Benefits and Insurance Services practice group revenue in 2018 grew by 1.6% to $288.4 million from $283.9 million in 2017, primarily driven by $4.1 million of incremental revenue from the acquisition of InR, Slaton Insurance (“Slaton”), Sequoia, and Pacific Coastal Pension and Insurance Services, Inc.

(“Pacific Coastal”).

Same-unit revenue increased slightly by $0.5 million, or 0.2%, in 2018 driven by growth in our property and casualty group, slightly offset by declines in our employee benefits group and retirement plan services.

The property and casualty group also benefited by nearly $1.0 million from the adoption of Topic 606.

Revenue within this business unit is recognized on the effective date of the insurance policy under Topic 606, compared to the legacy standard in which revenue was recognized as of (i) the later of the effective date of the insurance policy or the date billed to the customer (agency billing arrangements) and (ii) when the data necessary from the carriers was available (direct billing arrangements).

Topic 606 is discussed in further detail in Note 1, Basis of Presentation and Significant Accounting Policies, and Note 2, Revenue, to the accompanying consolidated financial statements.

2019 compared to 2018 - The Benefits and Insurance Services practice group revenue in 2019 grew by 2.7% to $296.2 million from $288.4 million in 2018, primarily driven by $7.8 million of incremental revenue from the acquisition of businesses.

Same-unit revenue increased slightly by $0.2 million, or 0.1%, in 2019 driven by growth in property and casualty insurance and retirement plan services, offset by year over year declines in non-recurring project based revenue, which is transactional in nature.

Operating expenses increased by $6.6 million in 2019 due to personnel costs, which increased by $5.1 million, or 2.8%, primarily due to acquisitions, as well as an increase in the hiring of sales production staff.

1 unchanged sentence

Year Ended December 31,

2020 2019 2018

(Dollars in thousands)

Same-unit $ 36,361 $ 35,629 $ 32,640

Operating expenses 32,637 32,474 30,003

Gross margin $ 3,724 $ 3,155 $ 2,637

Gross margin percentage 10.2 % 8.9 % 8.1 %

1 unchanged sentence

The cost-plus contract is a five year contract with the most recent renewal through December 31, 2023.

Revenues from this single client accounted for nearly 75% of the National Practice group’s revenue.

Revenues from this single client accounted for more than 70% of the National Practice group’s revenue.

Operating expenses have increased mainly due to an increase in salaries and benefits.

2 unchanged sentences

Year Ended December 31,

Net cash flows provided by operating activities

2020 2019 2018

Net cash provided by operating activities $ 146,845 $ 98,185 $ 105,248

Net cash used in investing activities (46,406) (27,685) (47,576)

Net cash flows used in financing activities

Net cash used in financing activities (76,609) (54,549) (109,380)

We generate strong cash flows from operations and have access to a $400.0 million credit facility, which enables us to fund investments and operating projects that are designed to optimize shareholder return.

8 unchanged sentences

Days sales outstanding (“DSO”) from continuing operations represent accounts receivable and unbilled revenue (net of realization adjustments) at the end of the period, divided by trailing twelve months daily revenue.

DSO was 75 days as of both December 31, 2019 and 2018.

DSO was 72 days as of December 31, 2020 and 75 days as of December 31, 2019.

We provide DSO data because such data is commonly used as a performance measure by analysts and investors and as a measure of our ability to collect on receivables in a timely manner.

Cash Provided by Operating Activities

2020 compared to 2019 - Operating activities generated cash of $146.8 million during 2020 and consisted of net income of $78.3 million, adjusted for certain non-cash items, such as depreciation and amortization expense of $23.1 million, share-based compensation expense of $8.9 million, bad debt expense of $4.4 million, as well as $35.0 million of cash generated from working capital management.

The $48.7 million increase in cash provided by operating activities in 2020 as compared to 2019 was primarily due to a net increase of $46.4 million in cash generated from working capital of which approximately $16.3 million related to the deferral of payroll tax deposit and payment, as well as an increase of $7.6 million in net income, offset by $5.3 million decrease in non-cash items.

2019 compared to 2018 - Cash flow from operating activities generated cash of $98.2 million during 2019 and consisted of net income of $70.7 million, adjusted for certain non-cash items, such as depreciation and amortization expense of $22.3 million, deferred income taxes of $9.7 million, and share-based compensation expense of $7.3 million, as well as a working capital use of cash of $11.4 million.

The $7.1 million decrease in cash provided by operating activities in 2019 compared to 2018 was primarily due to a net decrease in cash from working capital of $16.5 million, which was offset by the increase in net income $9.1 million.

2018 compared to 2017 - Cash flow from operating activities generated cash of $105.2 million during 2018 and consisted of net income of $61.6 million, adjusted for certain non-cash items, such as depreciation and amortization expense of $23.7 million and share-based compensation expense of $6.9 million, as well as a working capital source of cash of $5.1 million.

The $28.2 million increase in cash provided by operating activities in 2018 compared to 2017 was primarily due to an increase in net income of $11.2 million, a net increase in cash from working capital of $11.2 million and a net increase in the adjustment to the contingent earnout liability of $4.1 million.

Investing Activities

The majority of our investing activities relate to acquisitions, capital expenditures and net activity related to funds held for clients.

Refer to Note 1, Basis of Presentation and Significant Accounting Policies, and Note 18, Acquisitions, to the accompanying consolidated financial statements for further discussion on our acquisitions and a further description of funds held for clients and client fund obligations.

Refer to Note 1, Basis of Presentation and Significant Accounting Policies, and Note 18, Business Combinations, to the accompanying consolidated financial statements for further discussion on our acquisitions and a further description of funds held for clients and client fund obligations.

2020 - Net cash used in investing activities in 2020 consisted primarily of $71.4 million related to business acquisitions and $11.6 million in capital expenditures, offset by $34.0 million net proceeds from sales and maturities of client funds.

2019 - Net cash used in investing activities in 2019 consisted primarily of $11.7 million related to business acquisitions, as well as $13.9 million in capital expenditures.

Net activity related to funds held for clients also contributed $3.3 million to cash used in investing activities.

2018 - Net cash used in investing activities in 2018 consisted primarily of $29.1 million related to the acquisitions of Laurus, InR and Sequoia, as well as $14.6 million in capital expenditures.

Net activity related to funds held for clients also contributed $6.2 million to cash used in investing activities

2017 - Net cash used in investing activities in 2017 consisted primarily of $28.1 million related to the acquisition of CMF and Slaton and working capital adjustments related to the Savitz acquisition, as well as $11.9 million of capital expenditures.

2018 - Net cash used in investing activities in 2018 consisted primarily of $29.1 million related to the business acquisitions, as well as $14.6 million of capital expenditures.

Net activity related to funds held for clients of $6.2 million also contributed to cash used in investing activities.

Financing Activities

The majority of our financing activities relates to our 2018 credit facility, share repurchases, net client fund obligation activity, as well as contingent consideration payments for prior acquisitions.

The majority of our financing activities relate to our 2018 credit facility, share repurchases, net client fund obligation activity, as well as contingent consideration payments for prior acquisitions.

Refer to Note 9, Debt and Financing Arrangements, and Note 13, Common Stock, to the accompanying consolidated financial statements for further discussion on our 2018 credit facility and Share Repurchase Program.

2019 - Net cash used in financing activities in 2019 consisted primarily of net payments on our 2018 credit facility of $30.0 million, a net increase of $10.1 million in client fund obligations, $10.6 million in proceeds from the exercise of stock options, $27.2 million of share repurchases, and $17.5 million of contingent consideration payments for prior acquisitions.

2018 - Net cash used in financing activities in 2018 consisted primarily of net payments on our 2018 credit facility of $43.0 million, a net decrease of $41.5 million in client fund obligations, $17.5 million of share repurchases, and $11.8 million of contingent consideration payments for prior acquisitions.

2017 - Net cash used in financing activities in 2017 consisted primarily of $19.7 million of share repurchases, net payments on our credit facility of $12.9 million, as well as $10.5 million of contingent consideration payments for prior acquisitions.

2020 - Net cash used in financing activities in 2020 consisted primarily of $58.5 million of share repurchases, a net decrease of $13.7 million in client fund obligations, and $12.9 million of contingent consideration payments for prior acquisitions, partially offset by $6.5 million in proceeds from the exercise of stock options and $2.5 million net proceeds from borrowings under our 2018 credit facility.

2019 - Net cash used in financing activities in 2019 consisted primarily of net payments on our 2018 credit facility of $30.0 million, $27.2 million of share repurchases, and $17.5 million of contingent consideration payments for prior acquisitions, offset partially by a net increase of $10.1 million in client fund obligations and $10.6 million in proceeds from the exercise of stock options.

CAPITAL RESOURCES

The following table presents our capital structure (in thousands):

Bank debt $ 108,000 $ 105,500

Stockholders' equity 702,620 659,238

11 unchanged sentences

Use of Capital - Our first priority for the use of capital is to make strategic acquisitions.

We completed six acquisitions in 2019:

Wenner, Paytime, Gavion, QBA, Ericson and BTZ, as well as one client list.

Refer to Note 18, Acquisitions, to the accompanying consolidated financial statements for further discussion on acquisitions.

We also have the financing flexibility and the capacity actively repurchase shares of our common stock.

We completed seven business acquisitions and four client list acquisitions in 2020.

Refer to Note 18, Business Combinations, to the accompanying consolidated financial statements for further discussion on acquisitions.

We also have the financing flexibility and the capacity to actively repurchase shares of our common stock.

5 unchanged sentences

Our aggregate amount of future obligations for the next five years and thereafter is set forth below (in thousands):

Total 2021 2022-2023 2024-2025 2026 and

Credit facility (1)

$ 113,954 $ 2,646 $ 111,308 $ — $ —

Operating leases (2)

193,828 36,270 58,063 47,063 52,432

Contingent purchase price liabilities (3)

57,381 14,027 27,805 15,549 —

Other liabilities (4)

7,681 5,574 358 1,153 596

Total $ 372,844 $ 58,517 $ 197,534 $ 63,765 $ 53,028

(1) Our credit facility matures on April 3, 2023.

3 unchanged sentences

Amount excludes cash expected to be received under subleases and impact of future renewals.

Represents the contingent earnout liability that is expected to be paid over the next three years resulting from business acquisitions.

For the years ended December 31, 2020, 2021 and 2022 the cash portions of the contingent earnout liability are $13.0 million, $8.8 million and $5.8 million, respectively, with the remaining balance representing the stock portions.

(3) Represents the contingent purchase price liability that is expected to be paid over the next five years resulting from business acquisitions.

For the years ended December 31, 2021, 2022, 2023, 2024, and 2025, the cash portions of the contingent purchase price liability are $12.2 million, $15.4 million, $9.0 million, $13.0 million, and $0.8 million, respectively, with the remaining balance representing the stock portions.

(4) Other liabilities include letters of credit and license bonds, contingencies related to the purchase of client lists and federal and state income taxes.

20 unchanged sentences

There are no credit risk-related contingent features in our interest rate swaps nor do the swaps contain provisions under which we would be required to post collateral.

As of December 31, 2019, the notional value of all of our interest rate swaps was $70.0 million, with maturity dates ranging from October 2020 to June 2023.

As of December 31, 2020, the notional value of all of our interest rate swaps was $95.0 million, with maturity dates ranging from February, 2021 to April, 2025.

For further details on our interest rate swaps, refer to Note 6, Financial Instruments, to the accompanying consolidated financial statements.

9 unchanged sentences

Significant accounting policies, including Revenue Recognition, are described more fully in Note 1, Basis of Presentation and Significant Accounting Policies, to the accompanying consolidated financial statements.

Accounts Receivable and Notes Receivable - We determine the valuation of accounts receivable (including unbilled accounts receivable) and notes receivable, and the adequacy of the allowance for doubtful accounts based on estimates of losses related to the respective receivable balance.

We analyze historical bad debts, client credit-worthiness, the age of accounts receivable and current economic trends and conditions when evaluating the adequacy of the allowance for doubtful accounts and the collectability of notes receivable.

Accounts Receivable and Notes Receivable - We determine the net amount expected to be collected on our accounts receivable, both billed and unbilled, and notes receivable, based on a combination of factors, including but not limited to our historical incurred loss experience, credit-worthiness of our clients, the age of accounts receivable balance, current economic conditions that may affect a client's ability to pay, and reasonable and supportable forecasts.

Significant management judgments and estimates must be made and used in connection with establishing the allowance for doubtful accounts for each accounting period.

21 unchanged sentences

We may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment.

Und er the qualitative assessment, we are not required to calculate the fair value of a reporting unit unless we determine that it is more likely than not that its fair value is less than its carrying amount.

Under the qualitative assessment, we are not required to calculate the fair value of a reporting unit unless we determine that it is more likely than not that its fair value is less than its carrying amount.

If under the quantitative assessment the fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, must be measured.

10 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis