CBIZ, Inc. 10-Q

Item 1. Financial Statements CBIZ, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) March 31, 2022 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 558 $ 1,997 Restricted cash 33,394 30,383 Accounts receivable, net 365,758 242,168 Other current assets 12,784 19,217 Current assets before funds held for clients 412,494 293,765 Funds held for clients 199,065 157,909 Total current assets 611,559 451,674 Non-current assets: Property and equipment, net 43,184 43,423 Goodwill and other intangible assets, net 951,902 840,783 Assets of deferred compensation plan 132,284 136,321 Operating lease right-of-use assets, net 195,591 151,145 Other non-current assets 7,924 4,588 Total non-current assets 1,330,885 1,176,260 Total assets $ 1,942,444 $ 1,627,934 LIABILITIES Current liabilities: Accounts payable $ 70,431 $ 65,757 Income taxes payable 17,678 1,671 Accrued personnel costs 66,696 114,032 Contingent purchase price liabilities 49,976 34,373 Operating lease liabilities 34,910 30,586 Other current liabilities 18,070 18,755 Current liabilities before client fund obligations 257,761 265,174 Client fund obligations 200,614 158,115 Total current liabilities 458,375 423,289 Non-current liabilities: Bank debt 298,900 155,300 Debt issuance costs ( 359 ) ( 449 ) Total long-term debt 298,541 154,851 Income taxes payable 1,820 1,727 Deferred income taxes, net 18,960 15,440 Deferred compensation plan obligations 132,284 136,321 Contingent purchase price liabilities 86,558 44,766 Operating lease liabilities 185,122 145,808 Other non-current liabilities 936 1,184 Total non-current liabilities 724,221 500,097 Total liabilities 1,182,596 923,386 STOCKHOLDERS' EQUITY Common stock 1,358 1,352 Additional paid in capital 777,731 770,117 Retained earnings 686,889 628,762 Treasury stock ( 707,088 ) ( 694,716 ) Accumulated other comprehensive income (loss) 958 ( 967 ) Total stockholders’ equity 759,848 704,548 Total liabilities and stockholders’ equity $ 1,942,444 $ 1,627,934 See the accompanying notes to the unaudited 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, 2022 2021 Revenue $ 391,722 $ 300,730 Operating expenses 290,299 223,971 Gross margin 101,423 76,759 Corporate general and administrative expenses 16,309 14,483 Operating income 85,114 62,276 Other income (expense): Interest expense ( 1,259 ) ( 877 ) Other (expense) income, net ( 6,403 ) 4,789 Total other (expense) income, net ( 7,662 ) 3,912 Income from continuing operations before income tax expense 77,452 66,188 Income tax expense 19,321 15,972 Income from continuing operations 58,131 50,216 Loss from discontinued operations, net of tax ( 4 ) ( 7 ) Net income $ 58,127 $ 50,209 Earnings per share: Basic: Continuing operations $ 1.12 $ 0.94 Discontinued operations — — Net income $ 1.12 $ 0.94 Diluted: Continuing operations $ 1.10 $ 0.92 Discontinued operations — — Net income $ 1.10 $ 0.92 Basic weighted average shares outstanding 52,119 53,366 Diluted weighted average shares outstanding 52,955 54,436 Comprehensive income: Net income $ 58,127 $ 50,209 Other comprehensive income, net of tax 1,925 854 Comprehensive income $ 60,052 $ 51,063 See the accompanying notes to the unaudited 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) Income Totals December 31, 2021 135,187 83,149 $ 1,352 $ 770,117 $ 628,762 $ ( 694,716 ) $ ( 967 ) $ 704,548 Net income — — — — 58,127 — — 58,127 Other comprehensive income — — — — — — 1,925 1,925 Share repurchases — 148 — — — ( 5,999 ) — ( 5,999 ) Indirect repurchase of shares for minimum tax withholding — 165 — — — ( 6,373 ) — ( 6,373 ) Restricted stock units and awards 92 — 1 ( 1 ) — — — — Performance share units 211 — 2 ( 2 ) — — — — Stock options exercised 247 — 3 3,221 — — — 3,224 Stock-based compensation — — — 3,689 — — — 3,689 Business acquisitions 19 — — 707 — — — 707 March 31, 2022 135,756 83,462 $ 1,358 $ 777,731 $ 686,889 $ ( 707,088 ) $ 958 $ 759,848 Issued Common Shares Treasury Shares Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive (Loss) Income 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 — 1,117 — — — ( 32,678 ) — ( 32,678 ) Indirect repurchase of shares for minimum tax withholding — 47 — — — ( 1,464 ) — ( 1,464 ) 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 See the accompanying notes to the unaudited condensed consolidated financial statements 5 CBIZ, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended March 31, 2022 2021 Cash flows from operating activities: Net income $ 58,127 $ 50,209 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization expense 8,173 6,252 Bad debt expense, net of recoveries 549 58 Adjustment to contingent earnout liability 642 660 Stock-based compensation expense 3,689 2,855 Deferred income taxes 2,944 3,348 Other, net 52 96 Changes in assets and liabilities, net of acquisitions and divestitures: Accounts receivable, net ( 93,222 ) ( 54,651 ) Other assets ( 2,441 ) ( 997 ) Accounts payable 3,370 ( 4,873 ) Income taxes payable 16,100 11,805 Accrued personnel costs ( 39,243 ) ( 29,755 ) Other liabilities ( 9,626 ) 172 Operating cash flows used in continuing operations ( 50,886 ) ( 14,821 ) Operating cash flows used in discontinued operations ( 4 ) ( 6 ) Net cash used in operating activities ( 50,890 ) ( 14,827 ) Cash flows from investing activities: Business acquisitions and purchases of client lists, net of cash acquired ( 72,469 ) ( 2,012 ) Purchases of client fund investments ( 8,450 ) — Proceeds from the sales and maturities of client fund investments 2,370 3,090 Proceeds from sales of divested operations 55 — Change in funds held for clients 85 83 Additions to property and equipment ( 833 ) ( 1,146 ) Other, net ( 2,289 ) 214 Net cash (used in) provided by investing activities ( 81,531 ) 229 Cash flows from financing activities: Proceeds from bank debt 268,000 235,700 Payment of bank debt ( 124,400 ) ( 181,700 ) Payment for acquisition of treasury stock ( 5,199 ) ( 31,678 ) Indirect repurchase of shares for minimum tax withholding ( 6,373 ) ( 1,464 ) Changes in client funds obligations 42,499 ( 26,499 ) Proceeds from exercise of stock options 3,224 4,408 Payment of contingent consideration for acquisitions ( 7,305 ) ( 1,670 ) Other, net — ( 57 ) Net cash provided by (used in) financing activities 170,446 ( 2,960 ) Net increase (decrease) in cash, cash equivalents and restricted cash 38,025 ( 17,558 ) Cash, cash equivalents and restricted cash at beginning of year 150,474 170,335 Cash, cash equivalents and restricted cash at end of period $ 188,499 $ 152,777 Reconciliation of cash, cash equivalents and restricted cash to the Condensed Consolidated Balance Sheets: Cash and cash equivalents $ 558 $ 6,778 Restricted cash 33,394 27,618 Cash equivalents included in funds held for clients 154,547 118,381 Total cash, cash equivalents and restricted cash $ 188,499 $ 152,777 See the accompanying notes to the unaudited 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 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 unaudited 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 unaudited 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 unaudited 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, 2021. In the opinion of CBIZ management, the accompanying unaudited 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, 2022. Use of Estimates: The preparation of unaudited 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, 2021. In 2021, CBIZ formed a grantor trust (the “Trust”) with Wilmington Savings Funds Society, FSB, a Federal savings bank, serving as trustee. The Trust holds the majority of the funds provided by CBIZ’s clients for payroll processing pending remittance to employees of those clients, tax authorities, and other payees. CBIZ is the sole beneficial owner of the Trust. The Trust is considered a variable interest 7 entity in accordance with Accounting Standards Codification 810, Consolidation. CBIZ has both the power to direct the activities that most significantly impact the economic performance of the Trust (including the power to make all investment decisions for the Trust) and the right to receive benefits that could potentially be significant to the Trust (in the form of investment returns). As a result, CBIZ consolidates the Trust in its unaudited condensed consolidated financial statements. 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 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, 2022. 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 reference rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. 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, 2022. NOTE 3. ACCOUNTS RECEIVABLE, NET Accounts receivable, less allowance for doubtful accounts, reflects the net realizable value of receivables and approximates fair value. Unbilled revenue is 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. 8 Accounts receivable, net, at March 31, 2022 and December 31, 2021 was as follows (in thousands): March 31, 2022 December 31, 2021 Trade accounts receivable $ 226,704 $ 190,710 Unbilled revenue, at net realizable value 155,176 67,616 Total accounts receivable 381,880 258,326 Allowance for doubtful accounts ( 16,122 ) ( 16,158 ) Accounts receivable, net $ 365,758 $ 242,168 Changes to the allowance for doubtful accounts for the three months ended March 31, 2022 and twelve months ended December 31, 2021 are as follows (in thousands): March 31, 2022 December 31, 2021 Balance at beginning of period $ ( 16,158 ) $ ( 14,894 ) Provision ( 1,270 ) ( 9,422 ) Charge-offs, net of recoveries 1,306 8,158 Allowance for doubtful accounts $ ( 16,122 ) $ ( 16,158 ) 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 $ 298.9 million and $ 155.3 million at March 31, 2022 and December 31, 2021, 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, 2022 2021 Weighted average rates 1.79 % 2.10 % Range of effective rates 1.08 % - 3.64 % 1.08 % - 3.64 % We had approximately $ 94.8 million of available funds under the credit facility at March 31, 2022, net of outstanding letters of credit of $ 5.7 million. As of March 31, 2022, we were in compliance with our financial 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 5, 2021 and will terminate on August 4, 2022, did no t have a balance outstanding at March 31, 2022. Refer to our Annual Report on Form 10-K for the year ended December 31, 2021 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, 2022 2021 2018 credit facility $ 1,259 $ 871 Other — 6 Total $ 1,259 $ 877 9 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 $ 5.7 million and $ 3.4 million at March 31, 2022 and December 31, 2021, 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 $ 2.3 million at March 31, 2022 and December 31, 2021, respectively. Legal Proceedings - 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 seeking damages of up to $ 177.0 million out of the $ 200.0 million transaction price. Trial was held in October 2021. The jury found in favor of CBIZ on all fraud, contract and other claims before it. Zotec’s remaining claim for Indiana statutory securities fraud and CBIZ’s counterclaim for breach of contract against Zotec will be addressed by the trial Judge at a later date. In addition to the item disclosed above, the Company is, from time to time, subject to claims and lawsuits arising in the ordinary course of business. We cannot predict the outcome of all such matters or estimate the possible loss, if any. Although the proceedings are subject to uncertainties in the litigation process and the ultimate disposition of these proceedings is not presently determinable, we intend to vigorously defend these matters. 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 $ 43.1 million and $ 37.0 million at March 31, 2022 and December 31, 2021, respectively, and had maturity or callable dates ranging from April 2022 through November 2025. At March 31, 2022, 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, 2022 and the twelve months ended December 31, 2021 (in thousands): Three Months Ended March 31, 2022 Twelve Months Ended December 31, 2021 Fair value at beginning of period $ 38,670 $ 25,708 Purchases 8,450 26,980 Redemptions ( 400 ) ( 6,530 ) Maturities ( 1,970 ) ( 8,347 ) Change in bond premium 206 1,517 Fair market value adjustment ( 1,291 ) ( 658 ) Fair value at end of period $ 43,665 $ 38,670 In addition to the available-for-sale debt securities discussed above, we also held other depository assets in the amount of $ 0.9 million and $ 1.1 million at March 31, 2022 and December 31, 2021, respectively. Those depository assets are classified as Level 1 in the fair value hierarchy. 10 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, 2021 for further discussion on our interest rate swaps. As of March 31, 2022, we have four 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 agreements, 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, 2022 is (i) $ 20.0 million – 1.770 % - May 2022, (ii) $ 15.0 million – 2.640 % - June 2023, (iii) $ 50.0 million - 0.885 % - April 2025 and (iv) $ 30.0 million - 1.249 % - December, 2026. 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, 2022 and December 31, 2021 (in thousands): March 31, 2022 Notional Amount Fair Value Balance Sheet Location Interest rate swap $ 20,000 $ ( 32 ) Other current liability Interest rate swap $ 15,000 $ ( 128 ) Other non-current liability Interest rate swaps $ 80,000 $ 3,738 Other non-current assets December 31, 2021 Notional Amount Fair Value Balance Sheet Location Interest rate swap $ 20,000 $ ( 120 ) Other current liability Interest rate swaps $ 45,000 $ ( 496 ) Other non-current liabilities Interest rate swap $ 50,000 $ 405 Other non-current asset 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, 2022 and 2021 (in thousands): Gain Recognized in AOCI, net of tax Loss Reclassified from AOCL into Expense Three Months Ended March 31, Three Months Ended March 31, 2022 2021 2022 2021 Interest rate swaps $ 2,607 $ 961 $ ( 343 ) $ ( 285 ) NOTE 7. FAIR VALUE MEASUREMENTS The following table summarizes our assets and (liabilities) at March 31, 2022 and December 31, 2021, 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, 2022 December 31, 2021 Deferred compensation plan assets 1 $ 132,284 $ 136,321 Available-for-sale debt securities 1 43,665 38,670 Other depository assets 1 853 1,144 Deferred compensation plan liabilities 1 ( 132,284 ) ( 136,321 ) Interest rate swaps 2 3,578 ( 211 ) Contingent purchase price liabilities 3 ( 136,534 ) ( 79,139 ) During the three months ended March 31, 2022 and 2021, there were no transfers between the valuation hierarchy Levels 1, 2 and 3. The following table summarizes the change in Level 3 fair values 11 of our contingent purchase price liabilities for the three months ended March 31, 2022 and 2021 (pre-tax basis) (in thousands): 2022 2021 Beginning balance – January 1 $ ( 79,139 ) $ ( 54,391 ) Additions from business acquisitions ( 64,648 ) ( 1,622 ) Settlement of contingent purchase price liabilities 7,895 2,443 Change in fair value of contingencies 80 ( 279 ) Change in net present value of contingencies ( 722 ) ( 381 ) Ending balance – March 31 $ ( 136,534 ) $ ( 54,230 ) 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 liabilities — current” and “Contingent purchase price liabilities — 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 is 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 under the fair value hierarchy. NOTE 8. OTHER COMPREHENSIVE INCOME The following table is a summary of other comprehensive income and discloses the tax impact of each component of other comprehensive income for the three months ended March 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Net unrealized loss on available-for-sale securities, net of income taxes (1) $ ( 939 ) $ ( 103 ) Net unrealized gain on interest rate swaps, net of income taxes (2) 2,866 961 Foreign currency translation ( 2 ) ( 4 ) Total other comprehensive income $ 1,925 $ 854 (1) Net of income tax benefit of $ 352 and income tax benefit of $ 39 for the three months ended March 31, 2022 and 2021, respectively. (2) Net of income tax expense of $ 928 and income tax expense of $ 310 for the three months ended March 31, 2022 and 2021, 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- 12 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, 2021 for further discussion on the 2019 Plan. Compensation expense for stock-based awards recognized during the three months ended March 31, 2022 and 2021 was as follows (in thousands): Three Months Ended March 31, 2022 2021 Stock options $ 173 $ 301 Restricted stock units and awards 1,493 1,381 Performance share units 2,023 1,173 Total stock-based compensation expense $ 3,689 $ 2,855 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, 2022 (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 1,223 $ 17.71 389 $ 25.07 Granted — $ — 101 $ 38.12 Exercised or released ( 247 ) $ 13.05 ( 146 ) $ 24.04 Outstanding at March 31, 2022 976 $ 18.89 344 $ 29.34 Exercisable at March 31, 2022 828 $ 18.79 (1) Represents weighted average market value of the shares; awards are granted at no cost to the recipients. 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, 2022 (in thousands, except per share data): Performance Share Units Weighted Average Grant-Date Fair Value Per Unit (1) Outstanding at beginning of year 473 $ 23.64 Granted 101 $ 38.12 Vested ( 211 ) $ 19.82 Outstanding at March 31, 2022 363 $ 29.89 (1) Represents weighted average market value of the performance share units; PSUs are granted at no cost to the recipients. 13 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, 2022 and 2021 (in thousands, except per share data): Three Months Ended March 31, 2022 2021 Numerator: Income from continuing operations $ 58,131 $ 50,216 Denominator: Basic Weighted average common shares outstanding 52,119 53,366 Diluted Stock options (1) 619 776 Restricted stock units and awards (1) 217 257 Contingent shares (2) — 37 Diluted weighted average common shares outstanding (3) 52,955 54,436 Basic earnings per share from continuing operations $ 1.12 $ 0.94 Diluted earnings per share from continuing operations $ 1.10 $ 0.92 (1) A total of 55 thousand and 1 thousand shares of stock-based awards were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2022 and 2021 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 363 thousand and 447 thousand performance share units for the three months ended March 31, 2022 and 2021, respectively. The performance conditions associated with these performance share units were not met and consequently none of these performance share units were considered as issuable for the three months ended March 31, 2022 and 2021. NOTE 11. BUSINESS COMBINATIONS Business Combinations During the three months ended March 31, 2022, we completed the following acquisition: • Effective January 1, 2022, we acquired all of the non-attest assets of Marks Paneth LLP ("Marks Paneth"). Marks Paneth, based in New York City, is a provider of a full range of accounting, tax and consulting services to a wide range of industries. Marks Paneth is included as a component of our Financial Services practice group. Mayer Hoffman, an unrelated party, acquired the attest assets from Marks Paneth in a separate transaction. Operating results are reported in the Financial Services practice group. 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, 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. Operating results are reported in the Financial Services practice group. The acquisition of Marks Paneth is expected to add approximately $ 138.0 million revenue in 2022. For the three months ended March 31, 2022, we recorded approximately $ 6.0 million non-recurring transaction, retention and integration related costs associated with this acquisition. Pro forma results of operations for these acquisitions have not been presented because the effects of these acquisitions 14 were not material, either individually or in aggregate, to our total revenue, income from continuing operations, and net income for the three months ended March 31, 2022 and 2021, respectively. The following table summarizes the consideration and preliminary purchase price allocation for the acquisitions completed during the three months ended March 31, 2022 and 2021, respectively (in thousands): 2022 2021 Cash paid 72,469 1,900 Recorded contingent consideration 64,648 1,622 Total recorded purchase price $ 137,117 $ 3,522 Accounts receivable acquired 18,230 — Fixed assets acquired 1,793 — Identifiable intangible assets acquired 48,000 2,069 Operating lease right-of-use asset acquired 49,291 — Other assets acquired 1,497 — Operating lease liability acquired - current ( 5,860 ) — Other current liabilities acquired ( 909 ) — Operating lease liability acquired - noncurrent ( 43,431 ) — Goodwill 68,506 1,453 Total net assets acquired $ 137,117 $ 3,522 Maximum potential contingent consideration $ 67,115 $ 1,700 Provisional estimates of fair value are established at the time of each acquisition and are subsequently reviewed within the first year of operations subsequent to the acquisition date to determine the necessity for adjustments. Fair value estimates of the Marks Paneth acquisition were provisional as of March 31, 2022, primarily related to the value established for certain identifiable intangible assets and contingent purchase price consideration. The following table summarizes the goodwill and intangible asset amounts resulting from those acquisitions for the three months ended March 31, 2022 and 2021, respectively (in thousands): Three Months Ended March 31, 2022 2021 Financial Services Financial Services Goodwill $ 68,506 $ 1,453 Client list 48,000 1,980 Other intangibles — 89 Total $ 116,506 $ 3,522 Goodwill is calculated as the difference between the aggregated purchase price and the fair value of the net assets acquired. Goodwill represents the value of expected future earnings and cash flows, as well as the synergies created by the integration of the new businesses 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. Goodwill related to these acquisitions is deductible for tax purposes. Client lists have an expected life of 10 years, and other intangibles, primarily non-compete agreements, have an expected life of 3 years. Client lists and non-compete agreements are valued using a discounted cash flow technique based on management estimates of future cash flows from such assets. 15 The following table summarizes the changes in contingent purchase price consideration for previous acquisitions and contingent payments made for previous business acquisitions in the three months ended March 31, 2022 and 2021, respectively (in thousands): Three Months Ended March 31, 2022 2021 Net expense $ 642 $ 660 Cash settlement paid $ 7,077 $ 1,463 Shares issued (number) 19 38 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 Employee Benefits Consulting Information Technology Managed Networking and Hardware Services Financial Advisory Payroll / Human Capital Management Healthcare Consulting Valuation Property and Casualty Insurance Risk and Advisory Services Retirement and Investment Services Government Healthcare Consulting Corporate and Other - Included in 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. 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, 2021. 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 income (loss) from continuing operations before income tax expense (benefit) excluding those costs listed above, which are reported in the “Corporate and Other”. Segment information for the three months ended March 31, 2022 and 2021 is presented below. We do not manage our assets on a segment basis, therefore segment assets are not presented below. 16 The following table disaggregates our revenue by source (in thousands): Three Months Ended March 31, 2022 Financial Services Benefits and Insurance Services National Practices Consolidated Accounting, tax, advisory and consulting $ 288,746 — — $ 288,746 Core benefits and insurance services — 88,936 — 88,936 Non-core benefits and insurance services — 3,550 — 3,550 Managed networking, hardware services — — 7,921 7,921 National practices consulting — — 2,569 2,569 Total revenue $ 288,746 $ 92,486 $ 10,490 $ 391,722 Three Months Ended March 31, 2021 Financial Services Benefits and Insurance Services 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 Segment information for the three months ended March 31, 2022 and 2021 was as follows (in thousands): Three Months Ended March 31, 2022 Financial Services Benefits and Insurance Services National Practices Corporate and Other Total Revenue $ 288,746 $ 92,486 $ 10,490 $ — $ 391,722 Operating expenses (income) 209,800 72,657 9,576 ( 1,734 ) 290,299 Gross margin 78,946 19,829 914 1,734 101,423 Corporate general and administrative expenses — — — 16,309 16,309 Operating income (loss) 78,946 19,829 914 ( 14,575 ) 85,114 Other income (expense): Interest expense — — — ( 1,259 ) ( 1,259 ) Other income (expense), net 86 ( 24 ) — ( 6,465 ) ( 6,403 ) Total other income (expense), net 86 ( 24 ) — ( 7,724 ) ( 7,662 ) Income (loss) from continuing operations before income tax expense $ 79,032 $ 19,805 $ 914 $ ( 22,299 ) $ 77,452 17 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, 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 NOTE 13. SUBSEQUENT EVENTS Subsequent to March 31, 2022 and up to April 27, 2022, we repurchased approximately 0.2 million shares of our common stock in the open market at a total cost of approximately $ 7.2 million. 18