What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-25 · 101 added, 104 removed, 275 unchanged (43% of the section changed)

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Same-unit revenue increased by $119.9 million, or 10.9%, while acquisitions, net of divestitures, contributed $187.2 million to revenue, or 16.9%.

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.

A detailed discussion of revenue by practice group is included under “Operating Practice Groups.” Income from continuing operations in 2022 increased $34.5 million, or 48.7%, to $105.4 million from $70.9 million in 2021.

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

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

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.

We completed the following two acquisitions in 2022:

◦ 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, with whom we maintain an ASA, acquired the attest assets from Marks Paneth in a separate transaction.

Operating results are reported in the Financial Services practice group.

◦ Effective July 1, 2022, we acquired substantially all the assets of Stinnett & Associates, LLC ("Stinnett").

Stinnett, located in Tulsa, Oklahoma, is a professional advisory firm and certified Women's Business Enterprise providing internal audit, Sarbanes-Oxley compliance, cybersecurity reviews, business continuity and disaster recovery, and fraud investigations to businesses of all sizes including Fortune 1000 organizations in a variety of industries.

Operating results are reported in the Financial Services practice group.

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

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On February 7, 2023, 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, 2024.

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.

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A sample of the awards won include:

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

• 2022 America’s Best Midsize Employers by Forbes – This was the fifth 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.

• 2022 Top Workplaces USA by Energage – This 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.

• Best Places to Work in Insurance – We were selected and honored for the eighth 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.

• 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.

• 2022 Best and Brightest Companies in the Nation Top 101 – For the seventh 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.

• 2022 Best and Brightness in Wellness – We were honored by NABR, for the sixth consecutive time, as an organization that promotes a culture of wellness.

• 2022 Top Workplaces Culture Excellence Awards for Appreciation, Clue-in Leaders, Employee Value Proposition, Employee Wellbeing, Empowering Employees, Formal Training, Professional Development, Work-Life Flexibility by Energage – These second-time awards recognize outstanding organizations across business-relevant culture categories.

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, 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.

For example, for a business acquired on July 1, 2021, revenue for the period January 1, 2022 through June 30, 2022 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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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.

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 (expense) income, 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.

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(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

Operating (income) expenses $ (17,252) $ 17,317

Corporate general and administrative (income) expenses $ (2,393) $ 2,168

Other (expense) income, net $ (19,645) $ 19,485

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, 2022 and 2021:

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Operating income 168,344 (19,645) 148,699 10.5 % 72,672 19,485 92,157 8.3 %

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

Other (expense) income, net (19,225) 19,645 420 — % 18,241 (19,485) (1,244) (0.1) %

Income from continuing operations before income tax expense 141,493 — 141,493 10.0 % 93,040 — 93,040 8.4 %

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Our operating expenses increased by $243.0 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.

Operating expense as a percentage of revenue improved to 84.2% of revenue in 2022 as compared to 85.6% of revenue for the prior year.

The non-qualified deferred compensation plan decreased operating expenses by $17.3 million in 2022, but increased operating expense by $17.3 million in 2021.

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 $1,205.9 million, or 85.4% of revenue, in 2022 compared to $928.3 million, or 84.0% of revenue, in 2021.

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.

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.

Operating expense for the year ended December 31, 2022 included approximately $9.2 million non-recurring integration and retention costs related to the Marks Paneth acquisition.

The increase in operating costs was driven by $224.9 million higher personnel cost (of which acquisitions contributed approximately $139.5 million), $12.2 million higher travel and entertainment costs, $12.1 million higher facility costs, $9.3 million higher computer and technology related costs, $5.6 million higher depreciation and amortization expense, $4.9 million higher professional fees, as well as $2.0 million higher marketing expense.

Other discretionary spending increased by approximately $6.5 million to support the growth in business activities.

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G&A expenses excluding deferred compensation % of revenue 4.1 % 4.9 %

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.

Our G&A expenses decreased by approximately $1.1 million, or 2.0%, in 2022 compared to 2021, and decreased to 3.9% of revenue from 5.1% of revenue for the prior year.

The non-qualified deferred compensation plan decreased G&A expenses by $2.4 million in 2022, and increased G&A expenses by $2.2 million in 2021.

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 $57.4 million, or 4.1% of revenue, in 2022 compared to $54.0 million, or 4.9% of revenue, in 2021.

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.

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 $3.4 million in 2022 as compared to prior year, attributable to $3.0 million higher personnel costs, a $1.3 million non-recurring transaction and integration costs related to the Marks Paneth acquisition, $0.8 million higher travel and entertainment costs, $0.5 million higher marketing expense, offset by $2.2 million lower legal costs as compared to 2021.

Legal Settlement, net

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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:

Other (Expense) Income, net

The following table presents our Other (expense) income, net for the years ended December 31, 2022 and 2021:

Year Ended December 31,

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Interest expense $ (8,039) $ (3,868)

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

Other income, net (1)

Gain on sale of operations, net 413 5,995

Other (expense) income, net (1)

(19,225) 18,241

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.

Total other (expense) income, net $ (26,851) $ 20,368

(1) Other (expense) income, net includes a net loss of $19.6 million in 2022 and a net gain of $19.5 million in 2021, 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 debt is further discussed in Note 9, Debt and Financing Arrangements, to the accompanying consolidated financial statements.

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.

Gain on Sale of Operations, net - During the twelve months ended December 31, 2022, we recorded approximately $0.4 million additional gain related to a previously sold business as additional contingent proceeds were received.

During the same period in 2021, we sold a small book of business and a business unit in the Benefit and Insurance practice group during 2021.

Total proceeds from the sales were $9.7 million and net gain from such sales were approximately $6.0 million.

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

Other expense of $19.2 million in 2022 included a $19.6 million net loss related to the deferred compensation plan and $2.4 million net increase to the fair value of the contingent purchase price liability, partially offset by a $2.4 million gain related to the sale of a book of business as well as $0.4 million other miscellaneous income.

Other income of $18.2 million in 2021 consisted of a net gain of $19.5 million 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 $3.1 million net present value adjustment and $0.6 million stock price adjustment.

Income Tax Expense

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Effective tax rate 25.5 % 23.8 %

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.

The increase in income tax expense from 2021 to 2022 was primarily driven by higher pre-tax income.

The increase in the effective tax rate from 2021 to 2022 was primarily due to a higher state effective tax rate and higher non-deductible expenses in 2022 compared to 2021.

GAAP RECONCILIATION

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Income tax expense 36,121 22,129

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

Gain on sale of operations, net (413) (5,995)

Gain on sale of assets, net (2,391) —

Legal settlement, net — 30,468

Transaction costs related to Marks Paneth (2)

Integration and retention costs related to Marks Paneth (2)

Depreciation 11,231 10,781

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

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

Adjusted EBITDA is commonly used by us, our shareholders, and debt holders to evaluate, assess, and benchmark our operating results and to provide an additional

measure with respect to our ability to meet future debt obligations.

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

(2) These costs include, but are not limited to, certain consulting, technology, personnel, as well as other first year operating and general administrative costs that are non-recurring in nature.

Operating Practice Groups

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Acquired businesses 188,959 — 188,959

Divested operation — 2,278 (2,278)

Total revenue 1,010,068 734,026 276,042 37.6 %

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Gross margin / Operating income $ 160,030 $ 125,788 $ 34,242 27.2 %

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

Total other income (expense), net 682 (26) $ 708 N/M

Income from continuing operations before income tax expense $ 160,712 $ 125,762 $ 34,950 27.8 %

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The Financial Services practice group revenue in 2022 grew by 37.6% to $1,010.1 million from $734.0 million in 2021.

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.

Same-unit revenue grew by $87.1 million, or 11.9%, across all service lines, driven by a $50.4 million increase from those units that provide traditional accounting and tax-related services, a $20.7 million increase in government healthcare compliance business, as well as a $16.0 million increase from those units that provide project-oriented advisory services.

The impact of the acquired businesses, net of divestitures, contributed $189.0 million or 18.7%, of 2022 revenue.

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Fees earned under the ASAs are recorded as revenue in the accompanying Consolidated Statements of Comprehensive Income and were $235.4 million and $174.8 million in 2022 and 2021, respectively.

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.

Operating expenses increased by $241.8 million in 2022 as compared to 2021, primarily as a result of $183.1 million, or 35.6%, in higher personnel costs, of which acquisitions contributed approximately $139.5 million to the increase.

Compared to the same period in 2021, facility costs, depreciation and amortization expenses, computer and technology related costs, professional services, recruiting, as well as marketing costs increased by $12.6 million, $6.7 million, $6.3 million, $4.9 million, $2.4 million, and $1.1 million, respectively, primarily due to the Marks Paneth acquisition.

In addition, travel and entertainment costs increased by $8.0 million and other discretionary costs increased by approximately $16.7 million to support the business growth as well as the operation activities returning to the pre-pandemic level.

Operating expense as a percentage of revenue increased to 84.2% in 2022 from 82.9% in 2021 primarily due to higher depreciation and amortization expenses and other fixed costs as a result of the Marks Paneth acquisition.

Benefits and Insurance Services

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Same-unit $ 358,007 $ 330,580 $ 27,427 8.3 %

Acquired businesses 22,686 — 22,686

Divested operation — 1,743 (1,743)

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Gross margin percentage 18.9 % 18.3 %

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.

The Benefits and Insurance Services practice group revenue in 2022 grew by 7.7% to $358.0 million from $332.3 million in 2021.

Same-unit revenue increased by $27.4 million, or 8.3% in 2022 when compared to the same period in 2021.

The increase was across all service lines, particularly driven by $10.4 million increase in employee benefit and retirement benefit services lines, $10.1 million increase in property and casualty services, $2.8 million in payroll related services, as well as $4.5 million increase in other project-based services.

Operating expenses increased by $18.7 million in 2022 as compared to 2021, primarily driven by $16.1 million, or 7.7%, higher personnel costs, such as the timing and amount of annual merit increases, bonus accruals, and investment in new sales producers.

Compared to 2021, travel and entertainment costs, computer and technology related costs, marketing and recruiting related costs, as well as direct costs increased by approximately $2.0 million, $0.9 million, $0.8 million, and $0.6 million respectively.

In addition, other discretionary operating costs increased by approximately $1.1 million to support the business growth.

The increase was offset by approximately $2.8 million decrease in bad debt expense primarily attributed to a $2.1 million direct write-off of certain commission receivables deemed uncollectible in 2021 which did not recur in 2022.

Operating expense as a percentage of revenue decreased to 81.1% in 2022 from 81.7% in 2021.

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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.

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.

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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.

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,

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Operating loss $ (64,009) $ (117,871) $ 53,862 (45.7) %

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.

Total other (expense) income, net (29,929) 13,280 $ (43,209) N/M

Loss from continuing operations before income taxes $ (93,938) $ (104,591) $ 10,653 (10.2) %

Total operating expenses decreased by $22.3 million, or 71.2% in 2022 as compared to 2021.

The non-qualified deferred compensation plan decreased operating expenses by $17.3 million in 2022, and increased operating expenses by $17.3 million in 2021.

Excluding the non-qualified deferred compensation expenses, operating expense increased by approximately $12.3 million, driven by $10.4 million higher personnel costs due to increased healthcare costs and the headcount impact from the Marks Paneth acquisition.

In addition, other operating costs, such as facility cost and marketing cost, increased by approximately $1.9 million to support business growth.

Total corporate general and administrative expenses decreased by $1.1 million, or 2.0% in 2022, as compared to 2021.

The non-qualified deferred compensation plan increased corporate general and administrative expenses by $2.4 million in 2022, but decreased corporate general and administrative expenses by $2.2 million in 2021.

Excluding the impact of the non-qualified deferred compensation plan, corporate general and administrative expenses increased by $3.4 million in 2022 as compared to the prior year, attributable to $3.0 million higher personnel costs, a $1.3 million non-recurring transaction and integration costs related to the Marks Paneth acquisition, $0.8 million higher travel and entertainment costs, $0.5 million higher marketing expense, offset by $2.2 million lower legal costs as compared to 2021.

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

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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.

Total other (expense) income, net increased by $43.2 million to $29.9 million of expense from a net income of $13.3 million in 2021.

Total other (expense) income, net includes a net loss of $19.6 million and a net gain of $19.5 million associated with the non-qualified deferred compensation plan in 2022 and 2021, respectively.

Excluding the impact of the non-qualified deferred compensation plan, total other income, net would have been an expense of $10.3 million in 2022 and an expense of $6.2 million in 2021, a net increase in expense of approximately $4.1 million.

The increase was driven by $4.2 million higher interest expense due to higher average debt balance as well as higher weighted average effective interest rate experienced in 2022 as compared to 2021, offset by $0.1 million decrease in other miscellaneous expenses.

LIQUIDITY AND CAPITAL RESOURCES

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We generate strong cash flows from operations and have access to a $600.0 million credit facility, which enables us to fund investments and operating projects that are designed to optimize shareholder return.

Cash flows from operations and available capital resources allow us to make strategic acquisitions, repurchase shares of our common stock when accretive to shareholders, meet working capital needs, and service our debt.

Cash flows from

operations and available capital resources allow us to make strategic acquisitions, repurchase shares of our common stock when accretive to shareholders, meet working capital needs, and service our debt.

Generally, we maintain low levels of cash and apply any available cash to pay down our outstanding debt balance.

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Cash Provided by Operating Activities

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.

2022 compared to 2021 - Cash provided by operating activities was $126.1 million during 2022, contributed to net income of $105.4 million and certain non-cash items, such as depreciation and amortization expense of $32.9 million, share-based compensation expense of $14.7 million, deferred income tax of $13.9 million, bad debt expense of $1.2 million, adjustment to the fair value of contingent purchase consideration of $2.4 million, as well as $42.0 million of cash generated from working capital management.

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 $5.0 million decrease in cash provided by operating activities in 2022 as compared to 2021 was primarily due to a net decrease of $55.3 million in cash generated from working capital of which approximately $44.1 million was attributable to the increase in use of cash to fund accounts receivable as a result of higher revenue, $20.3 million was attributable the change in other assets and other liabilities primarily due to $15.5 million cash used to make deferred FICA taxes payments and payment for other prepaid assets to support business activities, offset by approximately $11.1 million increase in cash generated from operating activities attributable to higher accounts payable to support growing business activities.

The $55.3 million decrease in cash generated from operating activities was offset by approximately $50.3 million inflow of cash primarily driven by $34.5 million higher net income as well as $15.8 million cash inflow from non-cash items such as higher depreciation and amortization costs, higher deferred tax expenses, higher stock-based compensation costs, as well as lower gain on sale of operations and assets.

Investing Activities

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

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.

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.

2022 - Net cash used in investing activities in 2022 consisted of $79.1 million related to business acquisitions, $8.6 million in capital expenditures, $7.4 million net purchase of client funds, $7.0 million payments of working capital adjustments related to previously completed acquisitions, offset by $3.0 million proceeds received from the sale of a small book of business in the Benefit and Insurance practice group.

2021 - Net cash used in investing activities in 2021 consisted primarily of $66.7 million related to business acquisitions, $12.1 million net purchase of client funds, and $9.0 million in capital expenditures, offset by $9.7 million proceeds from the sale of one book of business in the Benefit and Insurance practice group.

Financing Activities

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Refer to Note 9, Debt and Financing Arrangements, and Note 13, Common Stock, to the accompanying consolidated financial statements for further discussion on our 2022 credit facility and Share Repurchase Program.

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.

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.

2022 - Net cash used in financing activities in 2022 consisted of $129.8 million of share repurchases, $21.2 million of contingent consideration payments for prior acquisitions and $2.1 million paid as deferred financing costs related to the 2022 credit facility, partially offset by a net increase of $15.4 million in client fund obligations, $10.0 million in proceeds from the exercise of stock options and $110.4 million net proceeds from borrowings under our 2022 credit facility.

2021 - Net cash used in financing activities in 2021 consisted 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.

CAPITAL RESOURCES

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and Bank of America, N.A., as administrative agent and bank, and other participating banks, 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, and matures in 2027.

At December 31, 2021, we had $155.3 million outstanding under the credit facility, as well as letters of credit and performance guarantees totaling $5.6 million.

At December 31, 2022, we had $265.7 million outstanding under the credit facility, as well as letters of credit and license bonds totaling $7.3 million.

Available funds under the credit facility, based on the terms of the commitment, were approximately $319.9 million at December 31, 2022.

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The credit facility allows for the allocation of funds for future strategic initiatives, including acquisitions and the repurchase of our common stock, subject to the terms and conditions of the credit facility.

Debt Covenant Compliance - We are required to meet certain financial covenants with respect to (i) total leverage ratio and (ii) a minimum fixed charge coverage ratio.

Debt Covenant Compliance - We are required to meet certain financial covenants with respect to (i) total leverage ratio and (ii) interest coverage ratio.

We were in compliance with our covenants as of December 31, 2022.

Our ability to service our debt and to fund future strategic initiatives will depend upon our ability to generate cash in the future.

For further discussion regarding our credit facility, refer to Note 9, Debt and Financing Arrangements, to the accompanying consolidated financial statements.

For further discussion regarding the 2022 credit facility, refer to Note 9, Debt and Financing Arrangements, to the accompanying consolidated financial statements.

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

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

We completed two business acquisitions in 2022.

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

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Cash Requirements for 2023 - Cash requirements for 2023 will include acquisitions, interest payments on debt, seasonal working capital requirements, contingent earnout payments for previous acquisitions, share repurchases and capital expenditures.

We believe that cash provided by operations, as well as available funds under our credit facility will be sufficient to meet cash requirements for the next 12 months.

We believe that cash provided by operations, as well as available funds under the 2022 credit facility will be sufficient to meet cash requirements for the next 12 months.

OBLIGATIONS AND COMMITMENTS

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In addition, we provide license bonds to various state agencies to meet certain licensing requirements.

The amount of license bonds outstanding was $2.3 million and $2.2 million at December 31, 2021 and 2020, respectively.

The amount of license bonds outstanding was $2.3 million at December 31, 2022 and 2021.

We have various agreements under which we may be obligated to indemnify the other party with respect to certain matters.

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We utilize interest rate swaps to manage interest rate risk exposure associated with our floating-rate debt under the credit facility.

Under these interest rate swap contracts, we receive cash flows from counterparties at variable rates based on the London Interbank Offered Rate (“LIBOR”) and pay the counterparties a fixed rate.

Under these interest rate swap contracts, we receive cash flows from counterparties at variable rates based on the Secured Overnight Financing Rate (“SOFR”) and pay the counterparties a fixed rate.

To mitigate counterparty credit risk, we only enter into contracts with selected major financial institutions with investment grade ratings and continually assess their creditworthiness.

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, 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.

As of December 31, 2022, the notional value of all of our interest rate swaps was $115.0 million, with maturity dates ranging from June, 2023 to August, 2027.

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

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These funds held for clients are segregated and invested in accordance with our investment policy, which requires that all investments carry an investment grade rating at the time of initial investment.

The interest income on these investments mitigates the interest rate risk for the borrowing costs of our credit facility, as the rates on both the investments and the outstanding borrowings against the credit facility are based on market conditions.

The interest income on these investments mitigates the interest rate risk for the borrowing costs of the 2022 credit facility, as the rates on both the investments and the outstanding borrowings against the credit facility are based on market conditions.

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.

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

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

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

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

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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