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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-02-26 · 162 added, 168 removed, 217 unchanged (60% of the section changed)

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This Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to, and should be read in conjunction with, our consolidated financial statements included elsewhere in this report.

In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from management’s expectations.

Please see the sections of this report entitled “Forward-Looking Statements” and “Risk Factors.”

In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks,

uncertainties and assumptions, which could cause actual results to differ materially from management’s expectations.

Please see the sections of this report entitled “Forward-Looking Statements” and “Risk Factors.” This section generally discusses the results of operations for fiscal year 2021 compared to fiscal year 2020.

For discussion related to the results of operations and changes in financial conditions for fiscal year 2020 compared to fiscal year 2019 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2020 as filed SEC on February 26, 2021.

EXECUTIVE SUMMARY

Financial Year in Review - Revenue of $1,104.9 million in 2021 grew $141.0 million, or 14.6%, from revenue of $963.9 million in 2020.

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.

Same-unit revenue increased by $74.3 million, or 7.7%, while acquisitions, net of divestitures, contributed $66.7 million to revenue, or 6.9%.

A detailed discussion of revenue by practice group is included under “Operating Practice Groups.” Income from continuing operations in 2021 decreased $7.4 million, or 9.5%, to $70.9 million from $78.3 million in 2020.

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 $1.42 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.

Earnings per diluted share from continuing operations were $1.32 in 2021, compared to $1.42 in 2020, with a fully diluted weighted average share count of 53.7 million shares in 2021, compared to 55.4 million shares in 2020.

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

We completed the following six acquisitions in 2021:

◦ Effective January 1, 2021, we acquired substantially all the assets of Middle Market Advisory Group (“MMA”).

MMA, based in Englewood, Colorado, 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.

◦ 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.

◦ Effective May 1, 2021, we acquired substantially all of the non-attest assets of Bernston Porter & Company, PLLC ("BP").

BP, based in Bellevue, Washington, is a provider of comprehensive accounting and financial consulting services including tax, forensic, economic and valuation services and transaction services to a wide range of industries with specialties including construction, real estate, hospitality, manufacturing and technology.

◦ Effective June 1, 2021, we acquired all of the issued and outstanding membership interests of Schramm Health Partners, LLC dba Optumas ("Optumas").

Optumas, based in Scottsdale, Arizona, is a provider of actuarial services to state government health care agencies to assist in the administration of Medicaid programs.

◦ Effective September 1, 2021, we acquired all of the non-attest assets of Shea Labagh Dobberstein ("SLD").

SLD, based in San Francisco, California, is a provider of professional accounting, tax and advisory services to privately held businesses, individuals and nonprofit organizations.

◦ Effective December 1, 2021, we acquired substantially all the assets of Kenneth Weiss & Company, P.C.

dba Weiss & Company (“Weiss”).

Weiss, based in San Diego, California, is a provider of tax compliance and consulting services to family groups and individuals.

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

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On February 10, 2022, 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, 2023.

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 SEC rules.

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 SEC rules.

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

Pursuant to previously authorized share repurchase programs, we repurchased 2.3 million shares of our common stock at a total cost of approximately $57.6 million in 2020, 1.2 million shares at a total cost of approximately $25.3 million in 2019 and 0.8 million shares at a total cost of approximately $15.6 million in 2018.

Pursuant to previously authorized share repurchase programs, we repurchased 3.0 million shares of our common stock in the open market at a total cost of approximately $96.4 million in 2021 and 2.3 million shares at a total cost of approximately $57.6 million in 2020.

Refer to Note 13, Common Stock, to the accompanying consolidated financial statements for further discussion on the Share Repurchase Program.

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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.

• 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.

• 2021 America’s Best Midsize Employers by Forbes – This was the fourth time we have received this award.

50,000 Americans working for businesses with at least 1,000 employees were surveyed to rate, on a scale of zero to 10, how likely they would be to recommend their employer to others.

They were also asked to nominate organizations in industries outside their own.

• Top Workplaces USA 2021 - This inaugural award celebrates nationally recognized companies that make the world a better place to work together by prioritizing a people-centered culture and giving employees a voice.

This award is based entirely on feedback from our team members.

• Top Workplaces in the Financial Services Industry 2021 – CBIZ was named a winner among other Financial Services organizations that exceeded award criteria.

• Vault Accounting 50 – CBIZ ranked in the Top 10 based on survey results and feedback from those who are CPAs in Financial Services.

• Best Places to Work in Insurance - We were selected and honored for the seventh 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 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.

• 2021 Best and Brightest Companies in the Nation Top 101 - For the sixth 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.

• 2021 Best and Brightness in Wellness – We were honored by NABR, for the fifth consecutive time, as an organization that promotes a culture of wellness.

• Top Workplaces Culture Excellence Awards 2021 for Appreciation, Clue-in Leaders, Employee Value Proposition, Employee Wellbeing, Empowering Employees, Formal Training, Professional Development, Work-Life Flexibility – These first-time awards recognize outstanding organizations across business-relevant culture categories.

Insurance Awards Community Outreach Project of the Year – CBIZ was named a finalist by Business Insurance based on engagement with Dress for Success.

CBIZ is a key corporate partner for Dress for Success through the CBIZ Women’s Advantage program.

RESULTS OF OPERATIONS - CONTINUING OPERATIONS

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Same-unit revenue represents total revenue adjusted to reflect comparable periods of activity for acquisitions and divestitures.

For example, for a business acquired on July 1, 2019, revenue for the period January 1, 2020 through June 30, 2020 would be reported as revenue from acquired businesses;

same-unit revenue would include revenue for the periods July 1 through December 31 of both years.

For example, for a business acquired on July 1, 2020, revenue for the period January 1, 2021 through

June 30, 2021 would be reported as revenue from acquired businesses whereas revenue for the periods from July 1 through December 31 of both years would be reported as same-unit revenue.

Divested operations represent operations that did not meet the criteria for treatment as discontinued operations.

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Year Ended December 31,

2020 Percent 2019 Percent 2018 Percent

(Dollars in thousands)

2021 Percent 2020 Percent

(Amounts in thousands, except percentages)

Financial Services $ 734,026 66.4 % $ 629,778 65.3 %

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A detailed discussion of same-unit revenue by practice group is included under “Operating Practice Groups.”

Non-qualified Deferred Compensation Plan - We sponsor a non-qualified deferred compensation plan, under which a CBIZ employee’s compensation deferral is held in a rabbi trust and invested accordingly as directed by the employee.

Non-qualified Deferred Compensation Plan - We sponsor a non-qualified deferred compensation plan ("NQDCP"), under which a CBIZ employee’s compensation deferral is held in a rabbi trust and invested accordingly as directed by the employee.

Income and expenses related to the deferred compensation plan are included in “Operating expenses,” “Gross margin” and “Corporate General & Administrative expenses” and are directly offset by deferred compensation gains or losses in “Other income (expense), net” in the accompanying Consolidated Statements of Comprehensive Income.

The deferred compensation plan has no impact on “Income from continuing operations before income tax expense” or diluted earnings per share from continuing operations.

Income and expenses related to the deferred compensation plan for the years ended December 31, 2021 and 2020:

Year Ended December 31,

(Amounts in thousands)

Operating expenses $ 17,317 $ 13,806

Corporate general and administrative expenses $ 2,168 $ 1,587

Other income, net $ 19,485 $ 15,393

Excluding the impact of the above-mentioned income and expenses related to the deferred compensation plan, the operating results for the years ended December 31, 2021 and 2020:

Year Ended December 31, Year Ended December 31,

(Amounts in thousands, except percentages)

As Reported NQDCP Adjusted % of Revenue As Reported NQDCP Adjusted % of Revenue

Gross margin $ 159,290 $ 17,317 $ 176,607 16.0 % $ 138,546 $ 13,806 $ 152,352 15.8 %

Operating income 72,672 19,485 92,157 8.3 % 92,480 15,393 107,873 11.2 %

Other income (expense), net 18,241 (19,485) (1,244) (0.1) % 16,500 (15,393) 1,107 0.1 %

Income from continuing operations before income tax expense 93,040 — 93,040 8.4 % 103,488 — 103,488 10.7 %

Operating Expenses

The following table presents our operating expenses for the years ended December 31, 2021 and 2020:

Year Ended December 31,

2020 2019 2018

(Dollars in thousands)

(Amounts in thousands, except percentages)

Operating expenses $ 945,635 $ 825,351

Operating expenses % of revenue 85.6 % 85.6 %

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.

Operating expenses excluding deferred compensation $ 928,318 $ 811,545

Operating expenses excluding deferred compensation % of revenue 84.0 % 84.2 %

Our operating expenses increased by $120.3 million.

Operating expense as a percentage of revenue remained unchanged at 85.6% of revenue in 2021 as compared to 85.6% of revenue for the prior year.

The non-qualified deferred compensation plan increased operating expenses by $17.3 million and $13.8 million in 2021 and 2020, respectively.

Excluding the impact of the non-qualified deferred compensation plan, which was recorded in "Corporate and Other" for segment reporting purposes, operating expenses would have been $928.3 million, or 84.0% of revenue, in 2021 compared to $811.5 million, or 84.2% of revenue, in 2020.

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 $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.

Excluding the impact of non-qualified deferred compensation plan, which was recorded in "Corporate and Other" for segment reporting purposes, operating expense increased by approximately $116.8 million in 2021 as compared to 2020, primarily driven by $100.2 million higher personnel cost, of which acquisitions contributed approximately $48.0 million to personnel costs increases, $4.0 million higher computer and facility related costs, $3.9 million higher depreciation and amortization expense, $2.0 million higher marketing expense, as well as $1.0 million higher professional fees, offset by $1.4 million lower bad debt expense.

Other discretionary spending increased by approximately $7.1 million to support the growth in business activities.

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

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.

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

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Year Ended December 31,

2020 2019 2018

(Dollars in thousands, except percentages)

(Amounts in thousands, except percentages)

G&A expenses $ 56,150 $ 46,066

G&A expenses % of revenue 5.1 % 4.8 %

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 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, 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

The following table presents our Other income (expense), net for the years ended December 31, 2020, 2019 and 2018:

G&A expenses excluding deferred compensation $ 53,982 $ 44,479

G&A expenses excluding deferred compensation % of revenue 4.9 % 4.6 %

Our G&A expenses increased by approximately $10.1 million, or 21.9%, in 2021 compared to 2020, and increased to 5.1% of revenue from 4.8% of revenue for the prior year.

The non-qualified deferred compensation plan increased G&A expenses by $2.2 million in 2021, and by $1.6 million in 2020.

Excluding the impact of the deferred compensation plan, which was recorded in "Corporate and Other" for segment reporting purposes, G&A expenses would have been $54.0 million, or 4.9% of revenue, in 2021 compared to $44.5 million, or 4.6% of revenue, in 2020.

Excluding the impact of the non-qualified deferred compensation plan, which was recorded in "Corporate and Other" for segment purposes, G&A expense increased by $9.5 million in 2021 as compared to prior year, primarily attributable to $4.6 million higher personnel costs and $3.8 million higher professional fees in 2021 as compared to 2020.

Legal Settlement, net

On June 24, 2021, we reached a settlement agreement with University of Pittsburgh Medical Center pertaining a lawsuit filed in the U.S.

District Court for the Western District of Pennsylvania.

Under the terms of the settlement agreement, we paid a total settlement amount of $41.5 million and recorded a settlement loss of $30.5 million for the twelve months ended December 31, 2021.

Other Income, net

The following table presents our Other income, net for the years ended December 31, 2021 and 2020:

Year Ended December 31,

2020 2019 2018

(Dollars in thousands)

(Amounts in thousands)

Interest expense $ (3,868) $ (4,983)

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

Other income (expense), net (1)

Gain (loss) on sale of operations, net 5,995 (509)

Other income, net (1)

18,241 16,500

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

(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.

Total other income, net $ 20,368 $ 11,008

(1) Other income, net includes a net gain of $19.5 million in 2021 and a net gain of $15.4 million in 2020, associated with the value of investments held in a rabbi trust related to the deferred compensation plan, which was recorded in "Corporate and Other" for segment reporting purposes.

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.

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Our average debt balance and weighted average interest rate was $161.0 million and 1.88%, respectively, in 2021, compared to $152.3 million and 2.45%, respectively, in 2020.

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 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.

Gain (loss) on Sale of Operations, net – We sold a small book of business and a business unit in the Benefit and Insurance practice group during the twelve months ended December 31, 2021.

Total proceeds from the sales were $9.7 million.

Net gain from the sales were approximately $6.0 million.

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.

The proceeds and net gain from such sales were immaterial.

Other Income, net - The majority of “Other income, net” consists of net gains and losses associated with the value of the non-qualified 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 $18.2 million in 2021 included a $19.5 million net gain related to the deferred compensation plan, partially offset by $2.4 million net increase to the fair value of the contingent purchase price liability due to $1.8 million net present value adjustment and $0.5 million stock price adjustment.

Other income of $16.5 million in 2020 consisted of a net gain of $15.4 million related to the deferred compensation plan as well as a $0.6 million net decrease to the fair value of the contingent purchase price liability.

Income Tax Expense

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Year Ended December 31,

2020 2019 2018

(Dollars in thousands, except percentages)

(Amounts in thousands, except percentages)

Income tax expense $ 22,129 $ 25,141

Effective tax rate 23.8 % 24.3 %

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 from 2020 to 2021 was primarily driven by lower pre-tax income.

The decrease in the effective tax rate from 2020 to 2021 was primarily attributable to an increase in the tax benefit recognized in 2021 compared to 2020 related to stock-based compensation.

GAAP RECONCILIATION

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Year Ended December 31,

2020 2019 2018 2017 2016

(Dollars in thousands)

(Amounts in thousands)

Income from continuing operations $ 70,911 $ 78,347

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Income tax expense 22,129 25,141

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

(Gain) loss on sale of operations, net (5,995) 509

Legal settlement, net 30,468 —

Depreciation 10,781 9,568

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2021 2020 $ Change % Change

(Dollars in thousands)

(Amounts in thousands, except percentages)

Same-unit $ 685,920 $ 627,500 $ 58,420 9.3 %

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Operating expenses 608,238 525,209 83,029 15.8 %

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

Gross margin / Operating income $ 125,788 $ 104,569 $ 21,219 20.3 %

Total other expense, net (26) (350) $ 324 (92.6) %

Income from continuing operations before income tax expense $ 125,762 $ 104,219 $ 21,543 20.7 %

Gross margin percentage 17.1 % 16.6 %

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.

The Financial Services practice group revenue in 2021 grew by 16.6% to $734.0 million from $629.8 million in 2020.

Same-unit revenue grew by $58.4 million, or 9.3%, across all service lines, primarily driven by a $34.3 million increase from those units that provide traditional accounting and tax-related services, and $20.0 million increase from those units that provide project-oriented advisory services, as well as $3.7 million increase in government healthcare compliance business.

The impact of the acquired businesses, net of divestitures, contributed $45.8 million or 6.2%, of 2021 revenue.

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

Fees earned under the ASAs are recorded as revenue in the accompanying Consolidated Statements of Comprehensive Income and were $174.8 million and $159.4 million in 2021 and 2020, respectively.

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 expenses increased by $83.0 million in 2021 as compared to 2020, primarily as a result of $75.5 million, or 17.1%, higher personnel costs, of which acquisitions contributed approximately $35.4 million to the increase.

In addition, other operating expenses, including marketing, recruiting, professional services, technology, facilities, travel and entertainment, depreciation and amortization expenses increased by $7.9 million to support the business growth.

The increase in personnel costs and other operating expenses was partially offset by approximately $3.4 million lower bad debt expense.

In the first half of 2020, due to the COVID-19 pandemic, we recorded bad debt expense of $2.2 million, which did not recur in 2021.

Operating expense as a percentage of revenue remained relatively flat at 82.9% in 2021 and 83.4% in 2020.

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

Divested operation — 4,377 (4,377)

Total revenue 616,567 600,926 15,641 2.6 %

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 %

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.

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

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

Fees earned under the ASAs are recorded as revenue in the accompanying Consolidated Statements of Comprehensive Income and were $157.6 million and $154.0 million in 2019 and 2018, respectively.

Operating expenses increased by $6.6 million in 2019, but decreased to 83.6% of revenue from 84.6% 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 2019.

Benefits and Insurance Services

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2021 2020 $ Change % Change

(Dollars in thousands)

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

Acquired businesses 11,080 — 11,080

Divested operation — 698 (698)

Total revenue 297,758 296,228 1,530 0.5 %

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 %

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)

(Amounts in thousands, except percentages)

Same-unit $ 309,637 $ 295,965 $ 13,672 4.6 %

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Operating expenses 271,650 248,357 23,293 9.4 %

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

Gross margin / Operating income $ 60,673 $ 49,401 $ 11,272 22.8 %

Total other income, net $ 7,111 $ 265 $ 6,846 N/M

Income from continuing operations before income tax expenses $ 67,784 $ 49,666 $ 18,118 36.5 %

Gross margin percentage 18.3 % 16.6 %

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.

The Benefits and Insurance Services practice group revenue in 2021 grew by 11.6% to $332.3 million from $297.8 million in 2020, primarily driven by $20.9 million of incremental revenue from the acquisition of businesses, net of divestitures.

Same-unit revenue increased by $13.7 million, or 4.6% in 2021 across almost all service lines, particularly in property and casualty services, employee benefit services, retirement services, and other project based services.

Operating expenses increased by $23.3 million in 2021 primarily due to $16.5 million, or 8.5%, in higher personnel costs as result of acquisitions, which contributed approximately $12.6 million to the increase in 2021 as well as investment in new sales producers.

Bad debt expense increased by $2.1 million as a result of direct write-off of certain commission receivables deemed uncollectible.

In addition to the increases in personnel cost and bad debt expense, other operating expenses, including marketing, commission, technology, depreciation and amortization increased by approximately $4.5 million to support the increased business activities.

Operating expense as a percentage of revenue decreased to 81.7% in 2021 from 83.4% in 2020.

National Practices

Year Ended December 31,

2020 2019 2018

(Dollars in thousands)

(Amounts in thousands, except percentages)

Same-unit $ 38,576 $ 36,361

Operating expenses 34,494 32,637

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

Gross margin / Operating income $ 4,082 $ 3,724

Total other income, net $ 3 $ 1

Income from continuing operations before income tax expenses $ 4,085 $ 3,725

Gross margin percentage 10.6 % 10.2 %

Revenue growth in this practice group was primarily driven by our cost-plus contract with a single client, which has existed since 1999.

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 more than 70% of the National Practice group’s revenue.

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 approximately 75% of the National Practice group’s revenue.

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

Corporate and Other

Corporate and Other are operating expenses that are not directly allocated to the individual business units.

These expenses primarily consist 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.

Year Ended December 31,

2021 2020 $ Change % Change

(Amounts in thousands, except percentages)

Operating expenses $ 31,253 $ 19,148 $ 12,105 63.2 %

Corporate general and administrative expenses 56,150 46,066 $ 10,084 21.9 %

Legal settlement, net 30,468 — $ 30,468 N/M

Operating loss $ (117,871) $ (65,214) $ (52,657) 80.7 %

Total other income, net 13,280 11,092 $ 2,188 19.7 %

Loss from continuing operations before income tax expenses $ (104,591) $ (54,122) $ (50,469) 93.3 %

Total operating expenses increased by $12.1 million, or 63.2% in 2021 as compared to 2020.

The non-qualified deferred compensation plan increased operating expenses by $17.3 million in 2021, and by $13.8 million in 2020.

Excluding the non-qualified deferred compensation expenses, operating expense increased by approximately $8.6 million, primarily driven by $7.7 million higher personnel costs and $1.2 million higher marketing costs to support business growth.

Total corporate general and administrative expenses increased by $10.1 million, or 21.9% in 2021, as compared to 2020.

The non-qualified deferred compensation plan increased corporate general and administrative expenses by $2.2 million in 2021, and by $1.6 million in 2020.

Excluding the non-qualified deferred compensation expenses, corporate general and administrative expense increased by approximately $9.5 million, primarily driven by higher personnel costs of $4.6 million and $3.3 million higher expenses for professional services incurred to support merger and acquisition activities.

In addition, technology and other corporate general and administrative expenses increased by approximately $1.4 million compared to 2020 to support the business growth.

On June 24, 2021, we reached a settlement agreement with University of Pittsburgh Medical Center pertaining a lawsuit filed in the U.S.

District Court for the Western District of Pennsylvania.

Under the terms of the settlement agreement, we paid a total settlement amount of $41.5 million and recorded a settlement loss of $30.5 million in 2021.

Total other income, net increased by $2.2 million, or 19.7% in 2021, as compared to 2020.

Total other income, net includes a net gain of $19.5 million and $15.4 million associated with the non-qualified deferred compensation plan in 2021 and 2020, respectively.

Excluding the impact of the non-qualified deferred compensation plan, total other income, net would have been an expense of $6.2 million in 2021 and an expense of $4.3 million in 2020, an net increase in expense of approximately $1.9 million, primarily due to $3.0 million higher fair value adjustment related to the contingent purchase price considerations, offset by $1.1 million lower interest expense due to lower weighted average interest rates during 2021 as compared to 2020.

LIQUIDITY AND CAPITAL RESOURCES

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Year Ended December 31,

2020 2019 2018

Net cash provided by operating activities $ 131,154 $ 146,845

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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 of $9.1 million.

2021 compared to 2020 - Cash provided by operating activities was $131.2 million during 2021, primarily contributed to net income of $70.9 million and certain non-cash items, such as depreciation and amortization expense of $27.1 million, share-based compensation expense of $11.4 million, deferred income tax of $9.2 million, bad debt expense of $3.1 million, adjustment to the fair value of contingent purchase consideration of $2.4 million, as well as $13.3 million of cash generated from working capital management.

The $15.7 million decrease in cash provided by operating activities in 2021 as compared to 2020 was primarily due to a net decrease of $19.3 million in cash generated from working capital of which approximately $23.8 million was attributable to the increase in accounts receivable as a result of higher revenue, $10.6 million was attributable decrease in other liabilities as a result of payment of deferred FICA taxes, offset by approximately $16.8 million increase in accounts payable and accrued personnel costs.

In addition, the decrease in cash provided by operating activities in 2021 as compared to 2020 was partially attributable to $7.4 million lower net income as a result, among other items, $30.5 million legal settlement loss.

Investing Activities

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2021 - Net cash used in investing activities in 2021 consisted primarily of $66.7 million related to business acquisitions and $9.0 million in capital expenditures, offset by $12.1 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 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.

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.

Financing Activities

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2021 - Net cash used in financing activities in 2021 consisted primarily of $100.5 million of share repurchases, a net decrease of $8.9 million in client fund obligations, and $14.1 million of contingent consideration payments for prior acquisitions, partially offset by $7.3 million in proceeds from the exercise of stock options and $47.3 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.

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, partially offset by $6.3 million in proceeds from the exercise of stock options.

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.

CAPITAL RESOURCES

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

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

We completed six business acquisitions and one client list acquisition in 2021.

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

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.

We repurchased 2.4 million shares of our common stock at a total cost of approximately $59.6 million in 2020, 1.3 million shares at a total cost of approximately $27.2 million in 2019 and 0.9 million shares at a total cost of approximately $17.5 million in 2018.

We repurchased 3.0 million shares of our common stock in the open market at a total cost of approximately $96.4 million in 2021 and 2.3 million shares at a total cost of approximately $57.6 million in 2020.

Refer to Note 13, Common Stock, to the accompanying consolidated financial statements for further discussion on the Share Repurchase Program.

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OBLIGATIONS AND COMMITMENTS

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.

Interest on the credit facility is not determinable due to the revolving nature of the credit facility and the variability of the related interest rate.

Dollar amounts are estimates based on applying the 2.45% weighted average rate of the credit facility at December 31, 2020 to the $108.0 million outstanding balance of the credit facility at December 31, 2020.

(2) Operating leases include the minimum rent commitments under non-cancelable operating leases.

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

(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.

For further discussion regarding commitments and contingencies, refer to Note 11, Commitments and Contingencies, to the accompanying consolidated financial statements.

The liability for unrecognized tax benefits of $1.5 million under FASB ASC Topic 740, Income Taxes, is excluded, since we are unable to reasonably estimate the timing of cash settlements with the respective tax authorities.

Off-Balance Sheet Arrangements - We maintain ASAs with independent CPA firms (as described more fully under “Business - Financial Services” and in Note 1, Basis of Presentation and Significant Accounting Policies, to the accompanying consolidated financial statements), which qualify as variable interest entities.

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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, 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.

As of December 31, 2021, the notional value of all of our interest rate swaps was $115.0 million, with maturity dates ranging from May, 2022 to December, 2026.

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

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Refer to Note 6, Financial Instruments, and Note 9, Debt and Financing Arrangements, to the accompanying consolidated financial statements for further discussion regarding investments and our debt and financing arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

CRITICAL ACCOUNTING ESTIMATES

The preparation of our consolidated financial statements in accordance with GAAP is based on the selection and application of accounting policies that require us to make significant estimates and assumptions that in certain circumstances affect amounts reported in the accompanying consolidated financial statements.

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Any such impairment charge would reduce earnings and could be material.

After considering changes to assumptions used in our most recent quantitative testing for each reporting unit, including the capital market environment, economic and market conditions, industry competition and trends, our weighted average cost of capital, changes in management and key personnel, the price of our common stock, changes in our results of operations, the magnitude of the excess of fair value over the carrying amount of each reporting unit as determined in our most recent quantitative testing, and other factors, we concluded that it was more likely than not that the fair values of each of our reporting units were more than their respective carrying values and, therefore, did not perform a quantitative impairment analysis.

more likely than not that the fair values of each of our reporting units were more than their respective carrying values and, therefore, did not perform a quantitative impairment analysis.

For further information regarding our goodwill balances, refer to Note 5, Goodwill and Other Intangible Assets, net, to the accompanying consolidated financial statements.

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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