CBIZ, Inc. 10-K

ITEM 1. BUSINESS Overview CBIZ, Inc. is a leading provider of financial, insurance and advisory services tailored to help our clients and their businesses grow and succeed. As a trusted advisor to businesses of varying size in numerous industries across the United States, our comprehensive approach enables our clients to achieve their most important goals and pursue opportunities for growth while navigating an increasingly complex business environment. With more than 100 offices in 31 states and the District of Columbia, we are one of the largest accounting, insurance brokerage and related financial services providers in the nation. Shares of our common stock are traded on the New York Stock Exchange (“NYSE”) under the symbol “CBZ.” Business Strategy Since our founding in 1996, CBIZ's vision was to provide our clients with a breadth of services and depth of expertise that is unmatched in our industries. CBIZ pursued this vision by acquiring the most highly regarded, best in class financial, insurance, and advisory firms that demonstrated a shared commitment to exceptional client service and strong cultural fit. We also continue to make strategic investment to support organic growth including the attraction, retention and development of high-performing producers and the implementation of systems and tools that respond to our clients' needs. At CBIZ, we strive to be our clients’ preferred partner for their financial, insurance and advisory needs. While many of our competitors tend to be mono-line in their offerings, we offer multi-disciplinary, holistic solutions that are comprehensive and provide higher value to our clients while eliminating the need for coordination between multiple service providers. We are also embedded in local and regional markets and build meaningful relationships to foster deeper understanding of our clients’ business and industry. We believe this approach enables CBIZ to “out local the nationals, and out national the locals” that ultimately creates a differentiated experience for the clients we serve. Available Information - Our principal executive office is located at 6050 Oak Tree Boulevard, South, Suite 500, Cleveland, Ohio 44131, and our telephone number is (216) 447-9000. Our website is located at https://www.cbiz.com . We make available, free of charge on our website, through our investor relations page, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after we file (or furnish) such reports with the SEC. In addition, the SEC maintains an Internet Website that contains reports, proxy and information statements and other information about us at https://www.sec.gov . Our corporate code of conduct and ethics and the charters of the Audit Committee, the Compensation and Human Capital Committee and the Nominating and Governance Committee of the Board of Directors are available on the investor relations page of our website, referenced above, and in print to any shareholder who requests them. Business Services - We deliver our integrated services through the following three practice groups: Financial Services, Benefits and Insurance Services, and National Practices. A general description of the services provided by each practice group is presented in the table below. Financial Services Benefits and Insurance Services National Practices Accounting and Tax Group Health Benefits Consulting Managed Networking and Hardware Services Government Healthcare Consulting Payroll Healthcare Consulting Financial Advisory Property and Casualty Valuation Retirement Plan Services Risk & Advisory Services 5 Table of Contents Financial Services Financial Services is comprised of core accounting service including traditional accounting, tax compliance, advisory, and specialty services, like transaction and risk advisory services, litigation support, valuation, and federal and state government health care compliance. Financial Services reports to the President of Financial Services. Restrictions imposed by independence requirements and state accountancy laws and regulations preclude us from rendering audit and attest services (other than internal audit services). As such, we maintain joint-referral relationships and administrative service agreements (“ASAs”) with independent licensed Certified Public Accounting (“CPA”) firms (the “CPA firms”) under which audit and attest services may be provided to our clients by such CPA firms. At December 31, 2020, we maintained ASAs with four CPA firms. Most of the members and/or stockholders of those CPA firms are also our employees, and we render services to the CPA firms as an independent contractor. One of our ASAs is with Mayer Hoffman McCann, P.C. (“Mayer Hoffman”), an independent national CPA firm headquartered in Kansas City, Missouri. Mayer Hoffman has 145 stockholders, the vast majority of whom are also our employees. Mayer Hoffman maintains an eight member board of directors. There are no board members of Mayer Hoffman who hold senior officer positions at CBIZ. Our association with Mayer Hoffman offers clients access to the multi-state resources and expertise of a national CPA firm. We also have an ASA with Myers and Stauffer LC (“MSLC”), an independent national governmental health care consulting firm headquartered in Kansas City, Missouri. MSLC has eleven equity members, all of whom are also our employees. MSLC maintains a five member executive committee, none of whom hold senior officer positions at CBIZ. Although the ASAs do not constitute control, we are one of the beneficiaries of the agreements and may bear certain economic risks. As such, the CPA firms with which we maintain ASAs qualify as variable interest entities. The ASAs have terms ranging up to nineteen years, are renewable upon agreement by both parties, and have certain rights of extension and termination. Under these ASAs, we provide a range of services to the CPA firms, including (but not limited to): administrative functions such as office management, bookkeeping and accounting; preparing marketing and promotional materials; providing office space, computer equipment, systems support and administrative and professional staff. Services are performed in exchange for a fee. Fees earned by us under the ASAs are recorded as revenue in the accompanying Consolidated Statements of Comprehensive Income and totaled approximately $159.4 million, $157.6 million and $154.0 million for the years ended December 31, 2020, 2019 and 2018, respectively, a majority of which is related to services rendered to privately-held clients and governmental agencies. In the event that accounts receivable and unbilled work in process become uncollectible by the CPA firms, the service fee due to us is typically reduced on a proportional basis. Refer to Note 1, Basis of Presentation and Significant Accounting Policies, to the accompanying consolidated financial statements for further discussion. Benefits and Insurance Services Benefits and Insurance Services provides brokerage and consulting for group health benefits and property and casualty in addition to retirement plan advisory services, payroll, human capital management, and other related services. The leader for each service line reports to the President of Benefits and Insurance Services. The Benefits and Insurance Services practice group maintains relationships with many different insurance carriers. We do not assume underwriting risk. Some of these carriers have compensation arrangements with us whereby some portion of payments due to the Company may be contingent upon meeting certain performance goals, or upon our providing client services that would otherwise be provided by the carriers. These compensation arrangements are provided to us as a result of our performance and expertise, and may result in enhancing our ability to access certain insurance markets and services on behalf of our clients. The aggregate compensation related to these arrangements received during the years ended December 31, 2020, 2019 and 2018 was less than 2% of consolidated CBIZ revenue for the respective periods. National Practices Our National Practices group provides two services: healthcare consulting and information technology. The healthcare consulting business, with expertise in revenue management, reimbursement optimization and managed care contracting, serves hospitals and other healthcare providers. The information technology business has been serving one client in the United States and Canada for more than 15 years. 6 Table of Contents Revenue Revenue by practice group for the years ended December 31, 2020, 2019 and 2018 is provided in the table below (in thousands) along with a discussion of certain external relationships and regulatory factors that currently impact those segments. Year End December 31, 2020 2019 2018 Financial Services $ 629,778 65.3 % $ 616,567 65.0 % $ 600,926 65.2 % Benefits and Insurance Services 297,758 30.9 % 296,228 31.2 % 288,437 31.3 % National Practices 36,361 3.8 % 35,629 3.8 % 32,640 3.5 % Total CBIZ revenue $ 963,897 100.0 % $ 948,424 100.0 % $ 922,003 100.0 % Our revenue growth model includes three components; internal organic growth, cross-serving additional services to our existing clients, and strategic acquisitions. Each of these components is critical to our long-term growth strategy. • We capitalize on organic growth opportunities by offering our clients a high-touch, tailored service experience that is backed by national resources. This approach enables our clients to access a breadth and depth of services and expertise typically not available through smaller, regional professional services providers but with a better client experience than what is delivered by many national firms. Our ability to coordinate services and offer more comprehensive solutions eliminates the need to work with multiple service providers and creates opportunities to increase both value and efficiency. • Cross-serving provides us with the opportunity to offer and deliver multiple services to our existing clients. Cross-serving opportunities are identified by our professionals as they provide services to our existing clients. Being our clients’ preferred partner allows us the opportunity to respond to our clients’ needs with diverse and integrated services and solutions. • We seek to acquire businesses that strengthen our existing service offerings, enhance our expertise or introduce new specialties to better serve our clients and enter or expand in desirable geographies and growing markets. When evaluating acquisition opportunities, we prioritize positive market reputation, shared values and alignment of culture, commitment to exceptional client service, and strong leadership. In 2020, we completed seven business acquisitions and purchased four client lists. From time to time, we divest, through sale or closure, business operations that do not contribute to our long-term objectives for growth or are not critical to our service offerings or markets. For further discussion regarding acquisitions and divestitures, refer to Note 18, Business Combinations and Note 19, Divestitures, to the accompanying consolidated financial statements. Clients We provide multi-disciplinary and comprehensive solutions and professional services to over 82,000 clients. Our client base is made up of approximately 48,000 business clients and 34,000 individual clients. Our business client base is geographically dispersed across the country and represents over 25 different industries. Our clients include small, middle market, and large businesses and organizations ranging from less than 10 to more than 1,000 employees. Our largest client comprised approximately 2.7% of our consolidated revenue in 2020 and is included in the National Practices group. Management believes that the diversity of our client base helps insulate us from a downturn in a particular industry or geographic market. Nevertheless, economic conditions among select clients and groups of clients may have an impact on the demand for the services that we provide. Regulation Our operations are subject to regulation by federal, state, local and professional governing bodies. Accordingly, our business services may be impacted by legislative changes by these bodies, particularly with respect to provisions relating to payroll, benefits administration and insurance services, pension plan administration and tax and accounting. We remain abreast of regulatory changes affecting our business, as these changes often affect clients’ activities with respect to employment, taxation, benefits, and accounting. For instance, changes in income, estate, 7 Table of Contents or property tax laws may require additional consultation with clients subject to these changes to assist these clients to comply with revised regulations. We are subject to industry regulation and changes, including changes in laws, regulations, and codes of ethics governing our accounting, insurance, valuation, registered investment advisory and broker-dealer operations, as well as in other industries, the interpretation of which may impact our operations. We are subject to certain privacy and information security laws and regulations, including, but not limited to those under the Health Insurance Portability and Accountability Act of 1996, Financial Modernization Act of 1999 (the Gramm-Leach-Bliley Act), the Health Information Technology for Economic and Clinical Health Act, and other provisions of federal and state laws which may restrict our operations and give rise to expenses related to compliance. As a public company, we are subject to the provisions of the Sarbanes-Oxley Act of 2002 to reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. With respect to CPA firm clients that are required to file audited financial statements with the SEC, the SEC staff views us and the CPA firms with which we have contractual relationships as a single entity in applying independence rules established by the accountancy regulators and the SEC. Accordingly, we do not hold any financial interest in an SEC-reporting attest client of an associated CPA firm, enter into any business relationship with an SEC-reporting attest client that the CPA firm performing an audit could not maintain, or sell any non-audit services to an SEC-reporting attest client that the CPA firm performing an audit could not sell, under the auditor independence limitations set out in the Sarbanes-Oxley Act of 2002 and other professional accountancy independence standards. Applicable professional standards generally permit us to provide additional services to privately-held companies in addition to those services which may be provided to SEC-reporting attest clients of an associated CPA firm. We and the CPA firms with which we are associated have implemented policies and procedures designed to enable us and the CPA firms to maintain independence and freedom from conflicts of interest in accordance with applicable standards. Given the policies set by us on our relationships with SEC-reporting attest clients of associated CPA firms, and the limited number and size of such clients, the Sarbanes-Oxley Act of 2002 independence limitations do not, and are not expected to, materially affect our revenues. The CPA firms with which we maintain ASAs may operate as limited liability companies, limited liability partnerships or professional corporations. The firms are separate legal entities with separate governing bodies and officers. Neither the existence of the ASAs nor the providing of services thereunder constitutes control of the CPA firms by us. The Company and the CPA firms maintain their own respective liability and risk of loss in connection with the performance of their respective services. Attest services are not permitted to be performed by any individual or entity that is not licensed to do so. We are not permitted to perform audits, reviews, compilations, or other attest services, do not contract to perform them and do not provide the associated attest reports. Given this legal prohibition and course of conduct, we do not believe it is likely that we would bear the risk of litigation losses related to attest services provided by the CPA firms. Although the ASAs do not constitute control, we are one of the beneficiaries of the agreements and may bear certain economic risks. As such, the CPA firms with which we maintain ASAs qualify as variable interest entities. Refer to Note 1, Basis of Presentation and Significant Accounting Policies, to the accompanying consolidated financial statements for further discussion. As of December 31, 2020, we are in compliance with all governmental and professional organizations regulations relevant to the services we provide. Liability Insurance We carry insurance policies, including those for commercial general liability, automobile liability, property, crime, professional liability, directors’ and officers’ liability, fiduciary liability, employment practices liability and workers' compensation, subject to prescribed state mandates. Excess liability coverage is carried over the underlying limits provided by the commercial general liability, directors’ and officers’ liability, professional liability and automobile liability policies. Seasonality 8 Table of Contents Core financial services (traditional tax and accounting services) are impacted by seasonality given the nature of tax season due to a heavier volume of activity during the first four months of the year. Seasonality is most evident in the quarterly earnings per share (EPS) as most of the annual EPS is earned during the first half of the year. Like most professional service companies, a large portion of our operating costs are relatively fixed in the short term, which generally results in higher operating margins in the first half of the year. Competition The professional business services industry is highly fragmented and competitive. We compete with national, regional and local professional services firms including accounting and tax firms, insurance brokers, payroll advisors and consulting firms. The majority of industry participants offers only a limited number of services. We differentiate ourselves from competitors through the quality and diversity of our service offerings. We believe that our strong client relationships, high quality of professional services, range of service offerings, industry expertise, geographic proximity, as well as our ability to provide national expertise on a local level give us a competitive advantage. Human Capital At CBIZ, our value proposition to our clients is the breadth and depth of our services including our unique ability to provide multi-disciplinary, coordinated solutions that respond to the complexity and uncertainty of today’s business environment. CBIZ brings value because of the talent, expertise and commitment of approximately 4,800 professionals that make up our team nationwide. Throughout 2020 in our ongoing response to the COVID-19 pandemic, we prioritized the health and safety of our team members and clients. Our efforts included the implementation of a multitude of health and safety measures to protect our work environments, a data-driven approach to remote work and rigorous protocols for ongoing reporting and contact tracing. Our ability to maintain operations with minimal disruption to our clients over the last year is a direct reflection of the determination, resilience and commitment of our team. We are diligent in our efforts to attract, retain and develop talent and all recruitment is managed through a national team of experts based on a process that consistently and fairly utilizes best practices and various recruiting tools to source top talent. CBIZ recruiters build relationships through personal connections, and are full life-cycle recruiters who stay with their candidates from first contact through their first 60 days as a CBIZ associate. These professionals are focused on building outreach networks with community agencies, websites and social media networks, as well as schools, universities and institutions with a special emphasis on those entities that attract a diverse population. CBIZ is an equal opportunity employer and does not discriminate in hiring or employment in accordance with the requirements of all applicable state and federal laws, including race, religion, national origin, ancestry, age, gender identity, marital status, military status, sexual orientation, disability, or medical condition. The CBIZ Human Rights Policy demonstrates our commitment to respecting human rights throughout CBIZ. We believe the protection of human rights is fundamental to conducting great business, and believe we have both the ability and responsibility to drive positive change through our culture and business practices. CBIZ is proud of its efforts to be a learning organization that provides opportunities for education, technical training, professional development, leadership development, and coaching and awareness at every step in an associate’s career. These opportunities are offered in both in-person and on-demand virtual programs. Most recently, CBIZ expanded and enhanced our diversity and inclusion training and education for all associates and continues to introduce additional resources as we accelerate our own efforts in this area. At CBIZ, our values-based culture is central in our approach to employee experience and engagement. We measure employee engagement on an ongoing basis to gather feedback and identify opportunities to strengthen our culture and improve our work environments. CBIZ continues to be recognized for our intentional efforts to enhance employee engagement and to position CBIZ as our team’s employer of choice. In 2020, CBIZ was awarded 68 workplace awards including seven national awards and four national health and wellness awards. A sample of the awards won include: • 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. 9 Table of Contents • 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 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. • 2020 Healthiest 100 Workplaces in America – Springbuk evaluated over 1,000 applicants across six key categories: 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 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 National Association of Business Resources ("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. At CBIZ, we believe Diversity and Inclusion is a business imperative and we are working together toward making it an essential and valued part of our culture. We strive to create an environment that welcomes, values, respects, leverages and develops our individual differences and similarities and this commitment includes identifying and actively combating racism and discrimination in any form. In 2020, CBIZ renewed our commitment to improving diversity and inclusion across the company and in the industries and communities where we work. We are in the process of accelerating our efforts with a focus on actionable steps in the short-term to engage our team members and build momentum. These short-term actions combined with CBIZ’s existing efforts and assets will form the foundation of a more comprehensive and long-term diversity and inclusion strategy. In the last year, CBIZ joined CEO Action for Diversity and Inclusion, the largest CEO-driven business commitment to advance diversity and inclusion within the workplace. Jerry Grisko signed onto to the CEO Action Pledge and joined leaders from more than 1,000 of the world’s most well recognized companies and organizations representing over 85 industries.