CBIZ, Inc. 10-Q

Item 1. Financial Statements CBIZ, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) March 31, 2021 December 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 6,778 $ 4,652 Restricted cash 27,618 23,951 Accounts receivable, net 270,610 216,175 Other current assets 25,695 24,213 Current assets before funds held for clients 330,701 268,991 Funds held for clients 140,774 167,440 Total current assets 471,475 436,431 Non-current assets: Property and equipment, net 39,910 41,346 Goodwill and other intangible assets, net 756,684 756,750 Assets of deferred compensation plan 133,478 127,332 Operating lease right-of-use assets, net 146,786 147,843 Other non-current assets 3,510 4,052 Total non-current assets 1,080,368 1,077,323 Total assets $ 1,551,843 $ 1,513,754 LIABILITIES Current liabilities: Accounts payable $ 60,216 $ 64,119 Income taxes payable 15,028 2,788 Accrued personnel costs 50,223 79,978 Contingent purchase price liabilities 22,767 20,288 Operating lease liabilities 30,638 30,483 Other current liabilities 14,312 13,629 Current liabilities before client fund obligations 193,184 211,285 Client fund obligations 140,490 166,989 Total current liabilities 333,674 378,274 Non-current liabilities: Bank debt 162,000 108,000 Debt issuance costs ( 718 ) ( 808 ) Total long-term debt 161,282 107,192 Income taxes payable 1,339 1,775 Deferred income taxes, net 12,371 8,752 Deferred compensation plan obligations 133,478 127,332 Contingent purchase price liabilities 31,463 34,103 Operating lease liabilities 140,150 142,020 Other non-current liabilities 10,303 11,686 Total non-current liabilities 490,386 432,860 Total liabilities 824,060 811,134 STOCKHOLDERS' EQUITY Common stock 1,346 1,341 Additional paid in capital 749,207 740,970 Retained earnings 608,084 557,875 Treasury stock ( 629,439 ) ( 595,297 ) Accumulated other comprehensive loss ( 1,415 ) ( 2,269 ) Total stockholders’ equity 727,783 702,620 Total liabilities and stockholders’ equity $ 1,551,843 $ 1,513,754 See the accompanying notes to the condensed consolidated financial statements 3 CBIZ, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands, except per share data) Three Months Ended March 31, 2021 2020 Revenue $ 300,730 $ 277,455 Operating expenses 223,971 199,827 Gross margin 76,759 77,628 Corporate general and administrative expenses 14,483 10,489 Operating income 62,276 67,139 Other income (expense): Interest expense ( 877 ) ( 1,119 ) Gain on sale of operations, net — 95 Other income (expense), net 4,789 ( 15,800 ) Total other income (expense), net 3,912 ( 16,824 ) Income from continuing operations before income tax expense 66,188 50,315 Income tax expense 15,972 13,453 Income from continuing operations 50,216 36,862 Loss from discontinued operations, net of tax ( 7 ) ( 14 ) Net income $ 50,209 $ 36,848 Earnings per share: Basic: Continuing operations $ 0.94 $ 0.68 Discontinued operations — — Net income $ 0.94 $ 0.68 Diluted: Continuing operations $ 0.92 $ 0.66 Discontinued operations — — Net income $ 0.92 $ 0.66 Basic weighted average shares outstanding 53,366 54,571 Diluted weighted average shares outstanding 54,436 55,945 Comprehensive income: Net income $ 50,209 $ 36,848 Other comprehensive income (loss), net of tax 854 ( 1,252 ) Comprehensive income $ 51,063 $ 35,596 See the accompanying notes to the condensed consolidated financial statements 4 CBIZ, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (In thousands) Issued Common Shares Treasury Shares Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Totals December 31, 2020 134,144 80,045 $ 1,341 $ 740,970 $ 557,875 $ ( 595,297 ) $ ( 2,269 ) $ 702,620 Net income — — — — 50,209 — — 50,209 Other comprehensive income — — — — — — 854 854 Share repurchases — 1,164 — — — ( 34,142 ) — ( 34,142 ) Restricted stock units and awards 46 — 1 ( 1 ) — — — — Stock options exercised 397 — 4 4,404 — — — 4,408 Stock-based compensation — — — 2,855 — — — 2,855 Business acquisitions 38 — — 979 — — — 979 March 31, 2021 134,625 81,209 $ 1,346 $ 749,207 $ 608,084 $ ( 629,439 ) $ ( 1,415 ) $ 727,783 Issued Common Shares Treasury Shares Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Totals December 31, 2019 133,056 77,637 $ 1,331 $ 714,704 $ 479,576 $ ( 535,693 ) $ ( 680 ) $ 659,238 Net income — — — — 36,848 — — 36,848 Other comprehensive loss — — — — — — ( 1,252 ) ( 1,252 ) Share repurchases — 1,174 — — — ( 29,487 ) — ( 29,487 ) Stock options exercised 116 — 1 1,012 — — — 1,013 Stock-based compensation — — — 2,023 — — — 2,023 Business acquisitions 69 — — 1,877 — — — 1,877 March 31, 2020 133,241 78,811 $ 1,332 $ 719,616 $ 516,424 $ ( 565,180 ) $ ( 1,932 ) $ 670,260 See the accompanying notes to the condensed consolidated financial statements 5 CBIZ, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended March 31, 2021 2020 Cash flows from operating activities: Net income $ 50,209 $ 36,848 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization expense 6,252 5,704 Bad debt expense, net of recoveries 58 2,289 Adjustment to contingent earnout liability 660 ( 684 ) Stock-based compensation expense 2,855 2,023 Excess tax benefits from share based payment arrangements ( 2,179 ) ( 501 ) Deferred income taxes 3,348 170 Other, net 96 20 Changes in assets and liabilities, net of acquisitions and divestitures: Accounts receivable, net ( 54,651 ) ( 42,566 ) Other assets ( 997 ) ( 1,237 ) Accounts payable ( 4,873 ) ( 6,336 ) Income taxes payable 13,984 13,665 Accrued personnel costs ( 29,755 ) ( 30,201 ) Other liabilities 172 2,175 Operating cash flows used in continuing operations ( 14,821 ) ( 18,631 ) Operating cash flows used in discontinued operations ( 6 ) ( 16 ) Net cash used in operating activities ( 14,827 ) ( 18,647 ) Cash flows from investing activities: Business acquisitions and purchases of client lists, net of cash acquired ( 2,012 ) ( 7,848 ) Purchases of client fund investments — ( 3,447 ) Proceeds from the sales and maturities of client fund investments 3,090 17,118 Increase in funds held for clients 83 822 Additions to property and equipment ( 1,146 ) ( 2,641 ) Other 214 351 Net cash provided by investing activities 229 4,355 Cash flows from financing activities: Proceeds from bank debt 235,700 379,754 Payment of bank debt ( 181,700 ) ( 102,254 ) Payment for acquisition of treasury stock ( 33,142 ) ( 29,487 ) Decrease in client funds obligations ( 26,499 ) ( 38,517 ) Proceeds from exercise of stock options 4,408 1,013 Payment of contingent consideration for acquisitions ( 1,670 ) ( 2,624 ) Other, net ( 57 ) ( 113 ) Net cash (used in) provided by financing activities ( 2,960 ) 207,772 Net (decrease) increase in cash, cash equivalents and restricted cash ( 17,558 ) 193,480 Cash, cash equivalents and restricted cash at beginning of year 170,335 146,505 Cash, cash equivalents and restricted cash at end of period $ 152,777 $ 339,985 Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets: Cash and cash equivalents $ 6,778 $ 216,942 Restricted cash 27,618 28,927 Cash equivalents included in funds held for clients 118,381 94,116 Total cash, cash equivalents and restricted cash $ 152,777 $ 339,985 See the accompanying notes to the condensed consolidated financial statements 6 CBIZ, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Selected Terms Used in Notes to the Condensed Consolidated Financial Statements ASA – Administrative Service Agreement ASC – Accounting Standards Codification ASU – Accounting Standards Update CECL– Current expected credit losses CPA firm – Certified Public Accounting firm FASB – The Financial Accounting Standards Board GAAP – United States Generally Accepted Accounting Principles LIBOR – London Interbank Offered Rate SEC – United States Securities and Exchange Commission Description of Business: CBIZ, Inc. is a diversified services company which, acting through its subsidiaries, has been providing professional business services since 1996, primarily to small and medium-sized businesses, as well as individuals, governmental entities, and not-for-profit enterprises throughout the United States and parts of Canada. CBIZ, Inc. manages and reports its operations along three practice groups: Financial Services, Benefits and Insurance Services and National Practices. A further description of products and services offered by each of the practice groups is provided in Note 12. Segment Disclosures, to the accompanying condensed consolidated financial statements. Basis of Consolidation: The accompanying unaudited condensed consolidated financial statements include the operations of CBIZ, Inc. and all of its wholly-owned subsidiaries (“CBIZ”, the “Company”, “we”, “us”, or “our”), after elimination of all intercompany balances and transactions. These condensed consolidated financial statements do not reflect the operations or accounts of variable interest entities as the impact is not material to the financial condition, results of operations or cash flows of CBIZ. Unaudited Interim Financial Statements: The condensed consolidated financial statements have been prepared in accordance with GAAP and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. In the opinion of CBIZ management, the accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial condition, results of operations, and cash flows for the interim periods presented, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2021. Use of Estimates: The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Changes in circumstances could cause actual results to differ materially from these estimates. Changes in Accounting Policies: We have consistently applied the accounting policies for the periods presented as described in Note 1, Basis of Presentation and Significant Accounting Policies, to the consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS The FASB ASC is the sole source of authoritative GAAP other than the SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an accounting standard to 7 communicate changes to the FASB codification. We assess and review the impact of all accounting standards. Any accounting standards not listed below were reviewed and determined to be either not applicable or are not expected to have a material impact on the consolidated financial statements of the Company. Accounting Standards Issued But Not Yet Adopted Reference Rate Reform : In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU are effective for all entities through December 31, 2022. We are currently evaluating the effect of this new standard on our consolidated financial statements and have not adopted any of the transition relief available under the new guidance as of March 31, 2021. Subsequently, in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope , which provides optional temporary guidance for entities transitioning away from the LIBOR and other interbank offered rates to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic848. This ASU clarifies that the derivative instruments affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions provided in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments provided in this ASU do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. We are currently evaluating the effect of this new standard on our consolidated financial statements and have not adopted any of the transition relief available under the new guidance as of March 31, 2021. NOTE 3. ACCOUNTS RECEIVABLE, NET Accounts receivable, less allowance for doubtful accounts, reflects the net realizable value of receivables and approximates fair value. Unbilled revenues are recorded at estimated net realizable value. Assessing the collectability of the receivables (billed and unbilled) requires management judgment based on a combination of factors, including but not limited to, an evaluation of our historical incurred loss experience, credit-worthiness of our clients, age of the trade receivable balance, current economic conditions that may affect a client’s ability to pay, and reasonable and supportable forecasts. Receivables are charged-off against the allowance when the balance is deemed uncollectible. Accounts receivable, net, at March 31, 2021 and December 31, 2020 were as follows (in thousands): March 31, 2021 December 31, 2020 Trade accounts receivable $ 177,104 $ 167,575 Unbilled revenue, at net realizable value 106,662 63,494 Total accounts receivable 283,766 231,069 Allowance for doubtful accounts ( 13,156 ) ( 14,894 ) Accounts receivable, net $ 270,610 $ 216,175 8 Changes to the allowance for doubtful accounts for the three months ended March 31, 2021 and twelve months ended December 31, 2020 are as follows (in thousands): March 31, 2021 December 31, 2020 Balance at beginning of period $ ( 14,894 ) $ ( 14,379 ) Provision ( 390 ) ( 9,323 ) Charge-offs, net of recoveries 2,128 8,808 Allowance for doubtful accounts $ ( 13,156 ) $ ( 14,894 ) NOTE 4. DEBT AND FINANCING ARRANGEMENTS 2018 Credit Facility - Our primary financing arrangement is the $ 400 million unsecured credit facility (the “2018 credit facility” or the “credit facility”), which provides us with the capital necessary to meet our working capital needs as well as the flexibility to continue with our strategic initiatives, including business acquisitions and share repurchases. The 2018 credit facility matures in 2023. The balance outstanding under the 2018 credit facility was $ 162.0 million and $ 108.0 million at March 31, 2021 and December 31, 2020, respectively. Effective interest rates, including the impact of interest rate swaps associated with the 2018 credit facility, were as follows: Three Months Ended March 31, 2021 2020 Weighted average rates 2.10 % 2.50 % Range of effective rates 1.08 % - 3.64 % 1.61 % - 4.75 % We had approximately $ 228.7 million of available funds under the credit facility at March 31, 2021, net of outstanding letters of credit of $ 3.0 million. As of March 31, 2021, we were in compliance with our debt covenants. Other Line of Credit - We have an unsecured $ 20.0 million line of credit by and among CBIZ Benefits and Insurance, Inc. and Huntington National Bank. We utilize this line to support our short-term funding requirements of payroll client fund obligations due to the investment of client funds, rather than liquidating client funds that have already been invested in available-for-sale securities. The line of credit, which was renewed on August 6, 2020 and will terminate on August 5, 2021, did no t have a balance outstanding at March 31, 2021. Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for additional details of our debt and financing arrangements. Interest Expense - Interest expense, including amortization of deferred financing costs, commitment fees, line of credit fees, and other applicable bank charges, was as follows (in thousands): Three Months Ended March 31, 2021 2020 2018 credit facility $ 871 $ 1,101 Other line of credit — 1 Other 6 17 Total $ 877 $ 1,119 NOTE 5. COMMITMENTS AND CONTINGENCIES Letters of Credit and Guarantees - We provide letters of credit to landlords (lessors) of our leased premises in lieu of cash security deposits, which totaled $ 3.0 million and $ 1.7 million at March 31, 2021 and December 31, 2020, respectively. In addition, we provide license bonds to various state agencies to meet certain licensing requirements. The amount of license bonds outstanding was $ 2.3 million and $ 2.2 million at March 31, 2021 and December 31, 2020, respectively. 9 Legal Proceedings - In 2010, CBIZ, Inc. and its subsidiary, CBIZ MHM, LLC (fka CBIZ Accounting, Tax & Advisory Services, LLC) (the “CBIZ Parties”), were named as defendants in lawsuits filed in the U.S. District Court for the District of Arizona and the Superior Court for Maricopa County, Arizona. The federal court case is captioned Robert Facciola, et al v. Greenberg Traurig LLP, et al, and the state court cases are captioned Victims Recovery, LLC v. Greenberg Traurig LLP, et al, Roger Ashkenazi, et al v. Greenberg Traurig LLP, et al, Mary Marsh, et al v. Greenberg Traurig LLP, et al; and ML Liquidating Trust v. Mayer Hoffman McCann, P.C. (“Mayer Hoffman”), et al. Prior to these suits CBIZ MHM, LLC was named as a defendant in Jeffrey C. Stone v. Greenberg Traurig LLP, et al. These lawsuits arose out of the bankruptcy of Mortgages Ltd., a mortgage lender to developers in the Phoenix, Arizona area. Various other professional firms and individuals not related to the Company were also named defendants in these lawsuits. The lawsuits asserted claims for, among others things, violations of the Arizona Securities Act, common law fraud, and negligent misrepresentation, and sought to hold the CBIZ Parties vicariously liable for Mayer Hoffman’s conduct as Mortgage Ltd.’s auditor, as either a statutory control person under the Arizona Securities Act or a joint venturer under Arizona common law. With the exception of claims being pursued by two plaintiffs from the Ashkenazi lawsuit (“Baldino Group”), all other related matters have been dismissed or settled without payment by the CBIZ Parties. The Baldino Group’s claims, which allege damages of approximately $ 16.0 million, are currently pending, though no trial date has been set. On September 16, 2016, CBIZ, Inc. and its subsidiary CBIZ Benefits & Insurance Services, Inc. (“CBIZ Benefits”) were named as defendants in a lawsuit filed in the U.S. District Court for the Western District of Pennsylvania. The federal court case is brought by UPMC, d/b/a University of Pittsburgh Medical Center, and a health system it acquired, UPMC Altoona (formerly, Altoona Regional Health System). The lawsuit asserts professional negligence, breach of contract, and negligent misrepresentation claims against CBIZ, CBIZ Benefits and a former employee of CBIZ Benefits in connection with actuarial services provided by CBIZ Benefits to Altoona Regional Health System. The plaintiff now seeks compensatory damages of between $ 124.0 million and $ 266.0 million, plus punitive damages. The Court denied CBIZ Benefits’ motion for a summary judgment and trial is set for June 2021. On December 19, 2016, CBIZ Operations, Inc. (“CBIZ Operations”) was named as a defendant in a lawsuit filed by Zotec Partners, LLC (“Zotec”) in the Marion County Indiana Superior Court. After various amendments, the lawsuit asserts claims under Indiana law for securities, statutory and common law fraud or deception, unjust enrichment, breach of contract, and vicarious liability against CBIZ Operations and a former employee of CBIZ MMP in connection with the sale of the CBIZ MMP medical billing practice to Zotec. The plaintiff claims that CBIZ Operations had a duty to disclose the fact, unknown to employees of CBIZ Operations at the time of the transaction, that the former employee had a financial arrangement with a Zotec vendor at the time CBIZ Operations sold CBIZ MMP to Zotec. The plaintiff is now seeking damages of up to $ 177.0 million out of the $ 200.0 million transaction price. Trial is scheduled for October 2021. We cannot predict the outcome of the above matters or estimate the possible loss or range of possible loss, if any. Although the proceedings are subject to uncertainties inherent in the litigation process and the ultimate disposition of these proceedings is not presently determinable, we intend to vigorously defend these cases. In addition to those items disclosed above, we are, from time to time, subject to claims and lawsuits arising in the ordinary course of business. NOTE 6. FINANCIAL INSTRUMENTS Available-For-Sale Debt Securities - In connection with certain services provided by our payroll operations, we collect funds from our clients’ accounts in advance of paying client obligations. These funds held for clients are segregated and invested in accordance with our investment policy, which requires all investments carry an investment grade rating at the time of initial investment. These investments, primarily consisting of corporate and municipal bonds, are classified as available-for-sale and are included in the “Funds held for clients” line item on the accompanying Condensed Consolidated Balance Sheets. The par value of these investments totaled $ 21.8 million and $ 24.9 million at March 31, 2021 and December 31, 2020, respectively, and had maturity or callable dates ranging from April 2021 through November 2024. 10 At March 31, 2021, unrealized losses on the securities were not material and have not been recognized as a credit loss because the bonds are investment grade quality and management is not required or does not intend to sell prior to an expected recovery in value. The bond issuers continue to make timely principal and interest payments. The following table summarizes activities related to these investments for the three months ended March 31, 2021 and the twelve months ended December 31, 2020 (in thousands): Three Months Ended March 31, 2021 Twelve Months Ended December 31, 2020 Fair value at beginning of period $ 25,708 $ 60,659 Purchases — 3,447 Sales ( 1,490 ) ( 22,078 ) Maturities and calls ( 1,600 ) ( 15,409 ) Change in bond premium ( 83 ) ( 857 ) Fair market value adjustment ( 142 ) ( 54 ) Fair value at end of period $ 22,393 $ 25,708 Interest Rate Swaps - We utilize interest rate swaps to manage interest rate risk exposure associated with our floating-rate debt under the 2018 credit facility, or the forecasted acquisition of such liability. We do not purchase or hold any derivative instruments for trading or speculative purposes. Refer to the Annual Report on Form 10-K for the year ended December 31, 2020 for further discussion on our interest rate swaps. During the first quarter of 2021, one interest rate swap expired with a notional value of $ 10.0 million. As of March 31, 2021, we have three interest rate swaps outstanding. Under the terms of the interest rate swaps, we pay interest at a fixed rate of interest plus applicable margin as stated in the agreement, and receive interest that varies with the one-month LIBOR. The notional value, fixed rate of interest and expiration date of each interest rate swap as of March 31, 2021 was (i) $ 20.0 million – 1.770 % - May 2022, (ii) $ 15.0 million – 2.640 % - June 2023 and (iii) $ 50.0 million - 0.885 % - April 2025. Refer to Note 7. Fair Value Measurements, for additional disclosures regarding fair value measurements. The following table summarizes our outstanding interest rate swaps and their classification in the accompanying Condensed Consolidated Balance Sheets at March 31, 2021 and December 31, 2020 (in thousands): March 31, 2021 Notional Amount Fair Value Balance Sheet Location Interest rate swaps $ 85,000 $ ( 1,299 ) Other non-current liabilities December 31, 2020 Notional Amount Fair Value Balance Sheet Location Interest rate swap $ 10,000 $ ( 13 ) Other current liability Interest rate swaps $ 85,000 $ ( 2,552 ) Other non-current liabilities The following table summarizes the effects of the interest rate swaps on the accompanying Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020 (in thousands): Gain (Loss) Recognized in AOCL, net of tax Loss Reclassified from AOCL into Expense Three Months Ended March 31, Three Months Ended March 31, 2021 2020 2021 2020 Interest rate swap $ 961 $ ( 653 ) $ ( 285 ) $ ( 34 ) 11 NOTE 7. FAIR VALUE MEASUREMENTS The following table summarizes our assets and (liabilities) at March 31, 2021 and December 31, 2020, respectively, that are measured at fair value on a recurring basis subsequent to initial recognition and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value (in thousands): Level March 31, 2021 December 31, 2020 Deferred compensation plan assets 1 $ 133,478 $ 127,332 Available-for-sale debt securities 1 22,393 25,708 Deferred compensation plan liabilities 1 ( 133,478 ) ( 127,332 ) Interest rate swaps 2 ( 1,299 ) ( 2,565 ) Contingent purchase price liabilities 3 ( 54,230 ) ( 54,391 ) During the three months ended March 31, 2021 and 2020, there were no transfers between the valuation hierarchy Levels 1, 2 and 3. The following table summarizes the change in Level 3 fair values of our contingent purchase price liabilities for the three months ended March 31, 2021 and 2020 (pre-tax basis) (in thousands): 2021 2020 Beginning balance – January 1 $ ( 54,391 ) $ ( 32,089 ) Additions from business acquisitions ( 1,622 ) ( 4,670 ) Settlement of contingent purchase price liabilities 2,443 3,394 Change in fair value of contingencies ( 279 ) 875 Change in net present value of contingencies ( 381 ) ( 191 ) Ending balance – March 31 $ ( 54,230 ) $ ( 32,681 ) Contingent purchase price liabilities result from our business acquisitions and are recorded at fair value at the time of acquisition and are presented as “Contingent purchase price liability — current” and “Contingent purchase price liability — non-current” in the accompanying Condensed Consolidated Balance Sheets. We estimate the fair value of our contingent purchase price liabilities using a probability-weighted discounted cash flow model. This fair value measure is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Fair value measurements characterized within Level 3 of the fair value hierarchy are measured based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value. We probability weight risk-adjusted estimates of future performance of acquired businesses, then calculate the contingent purchase price based on the estimates and discount them to present value representing management’s best estimate of fair value. The fair value of the contingent purchase price liabilities are reassessed quarterly based on assumptions provided by practice group leaders and business unit controllers together with our corporate finance department. Any change in the fair value estimate is recorded in the earnings of that period. Refer to Note 11. Business Combinations, for further discussion of our acquisitions and contingent purchase price liabilities. The carrying amounts of our cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments, and the carrying value of bank debt approximates fair value as the interest rate on the bank debt is variable and approximates current market rates. As a result, the fair value measurement of our bank debt is considered to be Level 2. NOTE 8. OTHER COMPREHENSIVE INCOME (LOSS) The following table is a summary of other comprehensive income (loss) and discloses the tax impact of each component of other comprehensive income (loss) for the three months ended March 31, 2021 and 2020 (in thousands): 12 Three Months Ended March 31, 2021 2020 Net unrealized loss on available-for-sale securities, net of income taxes (1) $ ( 103 ) $ ( 587 ) Net unrealized gain (loss) on interest rate swaps, net of income taxes (2) 961 ( 653 ) Foreign currency translation ( 4 ) ( 12 ) Total other comprehensive income (loss) $ 854 $ ( 1,252 ) (1) Net of income tax benefit of $ 39 and $ 210 for the three months ended March 31, 2021 and 2020, respectively. (2) Net of income tax expense of $ 310 and income tax benefit of $ 210 for the three months ended March 31, 2021 and 2020, respectively. NOTE 9. EMPLOYEE STOCK PLANS The 2019 Stock Omnibus Incentive Plan (the “2019 Plan”), which expires in 2029, permits the grant of various forms of stock-based awards. The terms and vesting schedules for the stock-based awards vary by type and date of grant. A maximum of 3.1 million stock options, restricted stock or other stock-based compensation awards may be granted. Shares subject to award under the 2019 Plan may be either authorized but unissued shares of our common stock or treasury shares. Refer to the Annual Report on Form 10-K for the year ended December 31, 2020 for further discussion on the 2019 Plan. Compensation expense for stock-based awards recognized during the three months ended March 31, 2021 and 2020 was as follows (in thousands): Three Months Ended March 31, 2021 2020 Stock options $ 301 $ 421 Restricted stock units and awards 1,381 1,171 Performance share units 1,173 431 Total stock-based compensation expense $ 2,855 $ 2,023 Stock Options and Restricted Stock Units and Awards – The following table presents our stock options and restricted stock units and awards activity during the three months ended March 31, 2021 (in thousands, except per share data): Stock Options Restricted Stock Units and Awards Number of Options Weighted Average Exercise Price Per Share Number of Shares Weighted Average Grant-Date Fair Value (1) Outstanding at beginning of year 1,820 $ 15.02 461 $ 21.03 Granted — $ — 140 $ 27.56 Exercised or released ( 397 ) $ 11.10 ( 99 ) $ 22.38 Expired or canceled — $ — — $ — Outstanding at March 31, 2021 1,423 $ 16.12 502 $ 22.58 Exercisable at March 31, 2021 978 $ 15.19 (1) Represents weighted average market value of the shares; awards are granted at no cost to the recipients. 13 Performance Share Units (“PSUs”) – PSUs are earned based on our financial performance over a contractual term of three years and the associated expense is recognized over that period based on the fair value of the award. A three-year cliff vesting schedule of the PSUs is dependent upon the Company’s performance relative to pre-established goals based on an earnings per share target (weighted 70 %) and total growth in revenue (weighted 30 %). The fair value of PSUs is calculated using the market value of a share of our common stock on the date of grant. For performance achieved above specified levels, the recipient may earn additional shares of stock, not to exceed 200 % of the number of PSUs initially granted. The following table presents our PSU award activity during the three months ended March 31, 2021 (in thousands, except per share data): Performance Share Units Weighted Average Grant-Date Fair Value Per Unit Outstanding at beginning of year 307 $ 22.18 Granted 140 $ 27.56 Vested — $ — Adjustments for performance results — $ — Canceled — $ — Outstanding at March 31, 2021 447 $ 23.86 NOTE 10. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the three months ended March 31, 2021 and 2020 (in thousands, except per share data). Three Months Ended March 31, 2021 2020 Numerator: Income from continuing operations $ 50,216 $ 36,862 Denominator: Basic Weighted average common shares outstanding 53,366 54,571 Diluted Stock options (1) 776 993 Restricted stock awards (1) 257 296 Contingent shares (2) 37 85 Diluted weighted average common shares outstanding (3) 54,436 55,945 Basic earnings per share from continuing operations $ 0.94 $ 0.68 Diluted earnings per share from continuing operations $ 0.92 $ 0.66 (1) A total of 1 thousand and 33 thousand stock-based awards were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2021 and 2020. respectively, as their effect would be anti-dilutive. (2) Contingent shares represent additional shares to be issued for purchase price earned by former owners of businesses acquired by us once future considerations have been met. Refer to Note 11. Business Combinations, for further details. (3) The denominator used in calculating diluted earnings per share did not include 447 thousand and 332 thousand performance share units for the three months ended March 31, 2021 and 2020, respectively. The performance conditions associated with these performance share 14 units were not met and consequently none of these performance share units were considered as issuable for the three months ended March 31, 2021 and 2020. NOTE 11. BUSINESS COMBINATIONS Our acquisition strategy focuses on businesses with a leadership team that is committed to best in class culture, extraordinary client service and cross-serving potential. CBIZ has a long history of acquiring businesses that share common cultural values with us and provide value-added services to the small and midsize business market. The valuation of any business is a subjective process and includes industry, geography, profit margins, expected cash flows, client retention, nature of recurring or non-recurring project-based work, growth rate assumptions and competitive market conditions. During the three months ended March 31, 2021, we completed the following acquisition: • Effective January 1, 2021, we acquired substantially all the assets of Middle Market Advisory Group (“MMA”). MMA, based in Englewood, CO, is a provider of tax compliance and consulting services to middle market companies and family groups in the real estate, automotive, technology and SAAS, construction, and manufacturing industries. Operating results will be reported in the Financial Services practice group. Aggregate consideration for the acquisition consisted of approximately $ 1.9 million in cash and $ 1.6 million in contingent consideration. Under the terms of the acquisition agreement, a portion of the purchase price is contingent on future performance of the business acquired. The maximum potential undiscounted amount of all future payments for the 2021 acquisition that we could be required to make under the contingent arrangements is $ 1.7 million. As of March 31, 2021, the aggregated fair value of contingent consideration related to this acquisition was $ 1.6 million, of which $ 0.6 million was recorded in Contingent purchase price liability – current and $ 1.0 million was recorded in Contingent purchase price liability – non-current in the accompanying Condensed Consolidated Balance Sheets at March 31, 2021. Refer to Note 7. Fair Value Measurements, for additional information regarding contingent purchase price liability fair value and fair value adjustments. Annualized revenue from the acquired business is estimated to be approximately $ 3.6 million. Pro forma results of operations for this acquisition has not been presented because the effects of the acquisitions were not significant to our Income from continuing operations before income taxes. During the three months ended March 31, 2020, we have acquired substantially all of the assets of the following businesses: • 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. Operating results will be reported in the Benefits and Insurance Services practice group. • Effective February 1, 2020, we acquired substantially all the assets of Pension Dynamics Company, LLC, a full-service retirement and benefits plan advisor based in Pleasant Hill, California. Operating results will be reported in the Benefits and Insurance Services practice group. • Effective February 1, 2020, we acquired substantially all the assets of Sunshine Systems, a payroll solutions provider based in Massachusetts. Operating results will be reported in the Benefits and Insurance Services practice group. Aggregated consideration for these acquisitions consisted of approximately $ 9.4 million in cash, $ 0.9 million in our common stock, and $ 4.8 million in contingent considerations. Under the terms of the acquisition agreements, a portion of the purchase price is contingent on future performance of the business acquired. The maximum potential undiscounted amount of all future payments that we could be required to make under the contingent arrangements is $ 6.2 million. As of March 31, 2020, the aggregated fair value of the contingent considerations related to these acquisitions was $ 4.7 million, of which $ 2.0 million was recorded in "Contingent purchase price liability – current" and $ 2.7 million was recorded in "Contingent purchase price liability – non-current" in the accompanying Condensed Consolidated Balance Sheets at March 31, 2020. Refer to Note 7. Fair Value Measurements, for additional information regarding contingent purchase price liability fair value and fair value adjustments. 15 Annualized revenue from the acquired businesses is estimated to be approximately $ 6.1 million. Pro forma results of operations for these acquisitions have not been presented because the effects of these acquisitions were not material to our "Income from continuing operations before income taxes." The goodwill of $ 1.5 million and $ 11.2 million arising from the acquisitions for the three months ended March 31, 2021 and 2020, respectively, primarily results from expected future earnings and cash flows from the existing management team, as well as the synergies created by the integration of the new business within our organization, including cross-selling opportunities expected with our Financial Services practice group and the Benefits and Insurance Services practice group, to help strengthen our existing service offerings and expand our market position. All of the goodwill is deductible for income tax purposes. Acquisition of Client Lists - During the three months ended March 31, 2021, we purchased one client list reported in the Benefits and Insurance Services practice group for $ 0.2 million, of which $ 0.1 million is contingent. During the three months ended March 31, 2020, we purchased two client lists, reported in the Benefits and Insurance Services practice group, for total consideration of $ 0.5 million, of which $ 0.3 million is contingent. Change in Contingent Purchase Price Liability for Previous Acquisitions - During the three months ended March 31, 2021 and 2020, the fair value of the contingent purchase price liability related to prior acquisitions increased by $ 0.7 million and decreased by $ 0.7 million, respectively. The change in fair value during the three months ended March 31, 2021 is mostly attributable to the change in stock price related to the mark-to-market adjustment of future common stock issuances and net present value adjustments. The change in fair value during the three months ended March 31, 2020 is due to the change in stock price related to the mark-to-market adjustment of future common stock issuances offset by net present value adjustments. These adjustments are included in "Other income (expense), net" in the accompanying Condensed Consolidated Statements of Comprehensive Income. Contingent Payments for Previous Business Acquisitions and Client Lists - We paid $ 1.5 million in cash and issued approximately 0.1 million shares of our common stock during the three months ended March 31, 2021 for previous acquisitions. For the same period in 2020, we paid $ 2.4 million in cash and issued approximately 0.1 million shares of our common stock for previous acquisitions. During the three months ended March 31, 2021 and 2020, we paid approximately $ 0.1 million and $ 0.3 million, respectively, in cash for previous client list purchases. NOTE 12. SEGMENT DISCLOSURES Our business units have been aggregated into three practice groups: Financial Services, Benefits and Insurance Services and National Practices. The business units have been aggregated based on the following factors: similarity of the products and services provided to clients; similarity of the regulatory environment in which they operate; and similarity of economic conditions affecting long-term performance. The business units are managed along these segment lines. A general description of services provided by each practice group is provided 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 Corporate and Other . Included in “Corporate and Other” are operating expenses that are not directly allocated to the individual business units. These expenses are primarily comprised of certain health care costs, gains or losses attributable to assets held in our non-qualified deferred compensation plan, stock-based compensation, consolidation and integration charges, certain professional fees, certain advertising costs and other various expenses. 16 Accounting policies of the practice groups are the same as those described in Note 1. Basis of Presentation and Significant Accounting Policies, to the Annual Report on Form 10-K for the year ended December 31, 2020. Upon consolidation, intercompany accounts and transactions are eliminated, thus inter-segment revenue is not included in the measure of profit or loss for the practice groups. Performance of the practice groups is evaluated on operating income excluding those costs listed above, which are reported in the “Corporate and Other” segment. Segment information for the three months ended March 31, 2021 and 2020 is presented below. We do not manage our assets on a segment basis, therefore segment assets are not presented below. The following table disaggregates our revenue by source (in thousands): Three Months Ended March 31, 2021 Financial Services Benefits & Insurance National Practices Consolidated Accounting, tax, advisory and consulting $ 204,149 — — $ 204,149 Core benefits and insurance services — 84,070 — 84,070 Non-core benefits and insurance services — 3,169 — 3,169 Managed networking, hardware services — — 6,895 6,895 National practices consulting — — 2,447 2,447 Total revenue $ 204,149 $ 87,239 $ 9,342 $ 300,730 Three Months Ended March 31, 2020 Financial Services Benefits & Insurance National Practices Consolidated Accounting, tax, advisory and consulting $ 188,777 — — $ 188,777 Core benefits and insurance services — 76,472 — 76,472 Non-core benefits and insurance services — 3,140 — 3,140 Managed networking, hardware services — — 6,575 6,575 National practices consulting — — 2,491 2,491 Total revenue $ 188,777 $ 79,612 $ 9,066 $ 277,455 Segment information for the three months ended March 31, 2021 and 2020 was as follows (in thousands): Three Months Ended March 31, 2021 Financial Services Benefits and Insurance Services National Practices Corporate and Other Total Revenue $ 204,149 $ 87,239 $ 9,342 $ — $ 300,730 Operating expenses 141,746 66,933 8,541 6,751 223,971 Gross margin 62,403 20,306 801 ( 6,751 ) 76,759 Corporate general and administrative expenses — — — 14,483 14,483 Operating income (loss) 62,403 20,306 801 ( 21,234 ) 62,276 Other income (expense): Interest expense — — — ( 877 ) ( 877 ) Other income, net 98 174 — 4,517 4,789 Total other income (expense), net 98 174 — 3,640 3,912 Income (loss) from continuing operations before income tax expense $ 62,501 $ 20,480 $ 801 $ ( 17,594 ) $ 66,188 17 Three Months Ended March 31, 2020 Financial Services Benefits and Insurance Services National Practices Corporate and Other Total Revenue $ 188,777 $ 79,612 $ 9,066 $ — $ 277,455 Operating expenses 138,598 65,223 8,283 ( 12,277 ) 199,827 Gross margin 50,179 14,389 783 12,277 77,628 Corporate general and administrative expenses — — — 10,489 10,489 Operating income (loss) 50,179 14,389 783 1,788 67,139 Other income (expense): Interest expense — ( 11 ) — ( 1,108 ) ( 1,119 ) Gain on sale of operations, net 40 55 — — 95 Other income (expense), net 19 96 1 ( 15,916 ) ( 15,800 ) Total other income (expense), net 59 140 1 ( 17,024 ) ( 16,824 ) Income (loss) from continuing operations before income tax expense $ 50,238 $ 14,529 $ 784 $ ( 15,236 ) $ 50,315 NOTE 13. SUBSEQUENT EVENTS Subsequent to March 31, 2021 up to April 27, 2021, we repurchased approximately 0.3 million shares of our common stock in the open market at a total cost of approximately $ 9.0 million. Effective April 1, 2021, we acquired substantially all the assets of Wright Retirement Services, LLC ("Wright"). Wright, located in Valdosta, Georgia, specializes in third party administration services for retirement plan sponsors. Annualized revenue is estimated to be approximately $ 1.2 million. Wright will be included as a component of our Benefits and Insurance practice group. On April 29, 2021, we announced the acquisition of the non-attest assets of Berntson Porter & Company, PLLC ("BP"). The acquisition is effective on May 1, 2021. Concurrent with this transaction, Mayer Hoffman McCann P.C., a national independent CPA firm with whom we maintain joint-referral relationship and administrative service agreement, acquires the attest assets of BP. Located in Bellevue, Washington, BP provides comprehensive accounting and financial consulting services including tax, forensic, economic and valuation services and transaction services. BP serves a wide range of industries with specialities including construction, real estate, hospitality, manufacturing and technology. Annualized revenue is estimated to be approximately $ 26.0 million. BP will be included as a component of our Financial Services practice group. 18