CBIZ, Inc. 10-Q

Item 1. Financial Statements CBIZ, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) June 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 3,692 $ 4,697 Restricted cash 52,314 28,487 Accounts receivable, net 456,397 334,498 Other current assets 42,411 29,431 Current assets before funds held for clients 554,814 397,113 Funds held for clients 131,374 171,313 Total current assets 686,188 568,426 Non-current assets: Property and equipment, net 50,899 45,184 Goodwill and other intangible assets, net 1,014,673 951,702 Assets of deferred compensation plan 136,463 118,862 Right-of-use assets, net 186,213 184,043 Other non-current assets 14,319 10,907 Total non-current assets 1,402,567 1,310,698 Total assets $ 2,088,755 $ 1,879,124 LIABILITIES Current liabilities: Accounts payable $ 126,372 $ 80,725 Income taxes payable 13,350 1,607 Accrued personnel costs 89,989 130,456 Contingent purchase price liabilities 70,950 63,262 Operating lease liabilities 36,256 36,358 Other current liabilities 30,991 26,532 Current liabilities before client fund obligations 367,908 338,940 Client fund obligations 133,069 173,467 Total current liabilities 500,977 512,407 Non-current liabilities: Bank debt 410,600 265,700 Debt issuance costs ( 1,810 ) ( 2,046 ) Total long-term debt, net 408,790 263,654 Income taxes payable 2,381 2,211 Deferred income taxes, net 29,455 24,763 Deferred compensation plan obligations 136,463 118,862 Contingent purchase price liabilities 59,515 68,748 Lease liabilities 174,608 174,454 Other non-current liabilities 523 573 Total non-current liabilities 811,735 653,265 Total liabilities 1,312,712 1,165,672 STOCKHOLDERS' EQUITY Common stock 1,371 1,363 Additional paid in capital 818,693 799,147 Retained earnings 834,139 734,116 Treasury stock ( 882,088 ) ( 824,778 ) Accumulated other comprehensive income 3,928 3,604 Total stockholders’ equity 776,043 713,452 Total liabilities and stockholders’ equity $ 2,088,755 $ 1,879,124 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenue $ 398,502 $ 361,952 $ 853,108 $ 753,674 Operating expenses 343,987 289,736 684,998 580,035 Gross margin 54,515 72,216 168,110 173,639 Corporate general and administrative expenses 15,793 10,926 31,391 27,235 Operating income 38,722 61,290 136,719 146,404 Other (expense) income: Interest expense ( 5,534 ) ( 1,645 ) ( 9,175 ) ( 2,904 ) Gain on sale of operations, net — 135 99 135 Other income (expense), net 5,421 ( 15,903 ) 10,533 ( 22,310 ) Total other (expense) income, net ( 113 ) ( 17,413 ) 1,457 ( 25,079 ) Income before income tax expense 38,609 43,877 138,176 121,325 Income tax expense 11,746 12,622 38,153 31,943 Net Income 26,863 31,255 100,023 89,382 Earnings per share: Basic $ 0.54 $ 0.60 $ 1.99 $ 1.72 Diluted $ 0.53 $ 0.60 $ 1.98 $ 1.70 Basic weighted average shares outstanding 49,963 51,911 50,164 52,015 Diluted weighted average shares outstanding 50,385 52,531 50,639 52,736 Comprehensive income: Net income $ 26,863 $ 31,255 $ 100,023 $ 89,382 Other comprehensive income, net of tax 1,537 480 324 2,405 Comprehensive income $ 28,400 $ 31,735 $ 100,347 $ 91,787 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 Income Totals March 31, 2023 137,024 86,712 $ 1,370 $ 814,686 $ 807,276 $ ( 853,793 ) $ 2,391 $ 771,930 Net income — — — — 26,863 — — 26,863 Other comprehensive income — — — — — — 1,537 1,537 Share repurchases — 547 — — — ( 27,737 ) — ( 27,737 ) Restricted stock units and awards 21 — — — — — — — Stock options exercised 32 — 1 622 — — — 623 Stock-based compensation — — — 2,788 — — — 2,788 Business acquisitions 4 — — 210 — — — 210 Excise tax on share repurchases — — — 387 — ( 558 ) — ( 171 ) June 30, 2023 137,081 87,259 $ 1,371 $ 818,693 $ 834,139 $ ( 882,088 ) $ 3,928 $ 776,043 Issued Common Shares Treasury Shares Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income Totals March 31, 2022 135,756 83,462 $ 1,358 $ 777,731 $ 686,889 $ ( 707,088 ) $ 958 $ 759,848 Net income — — — — 31,255 — — 31,255 Other comprehensive income — — — — — — 480 480 Share repurchases — 736 — — — ( 29,555 ) — ( 29,555 ) Indirect repurchase of shares for minimum tax withholding — 23 — — — ( 916 ) — ( 916 ) Restricted stock units and awards 27 — — — — — — — Stock options exercised 40 — — 672 — — — 672 Stock-based compensation — — — 2,739 — — — 2,739 June 30, 2022 135,823 84,221 $ 1,358 $ 781,142 $ 718,144 $ ( 737,559 ) $ 1,438 $ 764,523 See the accompanying notes to the unaudited condensed consolidated financial statement 5 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 Income Totals December 31, 2022 136,295 86,115 $ 1,363 $ 799,147 $ 734,116 $ ( 824,778 ) $ 3,604 $ 713,452 Net income — — — — 100,023 — — 100,023 Other comprehensive income — — — — — — 324 324 Share repurchases — 975 — — — ( 48,528 ) — ( 48,528 ) Indirect repurchase of shares for minimum tax withholding — 169 — — — ( 8,224 ) — ( 8,224 ) Restricted stock units and awards 144 — 1 ( 1 ) — — — — Performance share units 244 — 2 ( 2 ) — — — — Stock options exercised 221 — 3 4,249 — — — 4,252 Stock-based compensation — — — 6,619 — — — 6,619 Business acquisitions 177 — 2 8,294 — — — 8,296 Excise tax on share repurchases — — — 387 — ( 558 ) — ( 171 ) June 30, 2023 137,081 87,259 $ 1,371 $ 818,693 $ 834,139 $ ( 882,088 ) $ 3,928 $ 776,043 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 — — — — 89,382 — — 89,382 Other comprehensive income — — — — — — 2,405 2,405 Share repurchases — 884 — — — ( 35,554 ) — ( 35,554 ) Indirect repurchase of shares for minimum tax withholding — 188 — — — ( 7,289 ) — ( 7,289 ) Restricted stock units and awards 119 — 1 ( 1 ) — — — — Performance share units 211 — 2 ( 2 ) — — — — Stock options exercised 287 — 3 3,893 — — — 3,896 Stock-based compensation — — — 6,428 — — — 6,428 Business acquisitions 19 — — 707 — — — 707 June 30, 2022 135,823 84,221 $ 1,358 $ 781,142 $ 718,144 $ ( 737,559 ) $ 1,438 $ 764,523 See the accompanying notes to the unaudited condensed consolidated financial statements 6 CBIZ, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended June 30, 2023 2022 Cash flows from operating activities: Net income $ 100,023 $ 89,382 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 17,831 16,465 Gain on sale of operations, net ( 99 ) ( 135 ) Bad debt expense, net of recoveries 805 1,263 Adjustment to contingent earnout liability 1,445 1,478 Stock-based compensation expense 6,619 6,428 Deferred income taxes 4,571 4,688 Other, net 100 202 Changes in assets and liabilities, net of acquisitions and divestitures: Accounts receivable, net ( 111,792 ) ( 138,658 ) Other assets ( 11,594 ) ( 1,696 ) Accounts payable 45,350 57,837 Income taxes payable 11,913 11,252 Accrued personnel costs ( 40,893 ) ( 11,176 ) Other liabilities 5,450 ( 8,822 ) Net cash provided by operating activities 29,729 28,508 Cash flows from investing activities: Business acquisitions and purchases of client lists, net of cash acquired ( 48,630 ) ( 72,469 ) Purchases of client fund investments — ( 18,271 ) Proceeds from the sales and maturities of client fund investments 3,190 8,505 Proceeds from sales of divested operations 245 190 Change in funds held for clients 305 ( 2,468 ) Additions to property and equipment ( 11,726 ) ( 3,640 ) Other, net ( 9,001 ) ( 1,603 ) Net cash used in investing activities ( 65,617 ) ( 89,756 ) Cash flows from financing activities: Proceeds from bank debt 661,800 447,300 Payment of bank debt ( 516,900 ) ( 336,600 ) Payment for acquisition of treasury stock ( 48,764 ) ( 34,354 ) Indirect repurchase of shares for minimum tax withholding ( 8,224 ) ( 7,289 ) Changes in client funds obligations ( 40,398 ) 29,014 Proceeds from exercise of stock options 4,252 3,896 Payment of contingent consideration for acquisitions and client lists ( 29,973 ) ( 8,240 ) Other, net — ( 2,072 ) Net cash provided by financing activities 21,793 91,655 Net (decrease) increase in cash, cash equivalents and restricted cash ( 14,095 ) 30,407 Cash, cash equivalents and restricted cash at beginning of year 160,145 150,474 Cash, cash equivalents and restricted cash at end of period $ 146,050 $ 180,881 Reconciliation of cash, cash equivalents and restricted cash to the Condensed Consolidated Balance Sheets: Cash and cash equivalents $ 3,692 $ 3,881 Restricted cash 52,314 42,188 Cash equivalents included in funds held for clients 90,044 134,812 Total cash, cash equivalents and restricted cash $ 146,050 $ 180,881 See the accompanying notes to the unaudited condensed consolidated financial statements 7 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 SOFR – Secured Overnight Financing Rate 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. Effective April 1, 2023, CBIZ formed Rockside Insurance Company, Inc. ("Rockside"), a captive insurance company licensed in Vermont. Rockside, wholly owned by CBIZ, provides insurance coverages for a portion of the retention deductibles from CBIZ's certain insurance programs with third party insurers. 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 Securities and Exchange Commission (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, 2022. 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, 2023. 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 8 consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Reclassifications: Certain prior period amounts have been reclassified to conform to current year's presentation. 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 ASU to communicate changes to the FASB ASC. We assess and review the impact of all issued ASUs. During the six months ended June 30, 2023, we have implemented all new ASUs that are in effect and that may impact our consolidated financial statements. 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. Accounts receivable, net, at June 30, 2023 and December 31, 2022 was as follows (in thousands): June 30, 2023 December 31, 2022 Trade accounts receivable $ 336,566 $ 267,409 Unbilled revenue, at net realizable value 143,234 87,890 Total accounts receivable 479,800 355,299 Allowance for doubtful accounts ( 23,403 ) ( 20,801 ) Accounts receivable, net $ 456,397 $ 334,498 Changes to the allowance for doubtful accounts for the six months ended June 30, 2023 and twelve months ended December 31, 2022 were as follows (in thousands): June 30, 2023 December 31, 2022 Balance at beginning of period $ ( 20,801 ) $ ( 16,158 ) Provision ( 5,507 ) ( 13,545 ) Charge-offs, net of recoveries 2,905 8,902 Allowance for doubtful accounts $ ( 23,403 ) $ ( 20,801 ) NOTE 4. DEBT AND FINANCING ARRANGEMENTS On May 4, 2022, we entered into a credit facility (the "2022 credit facility" or the "credit facility"), which amended and restated the 2018 credit facility. The 2022 credit facility increased our borrowing capacity from $ 400 million to $ 600 million, providing 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. Other important key terms of the 2022 credit facility included: (i) an accordion feature that permits lenders to extend an additional $ 200 million at later date; (ii) no change in pricing from the 2018 credit facility; (iii) upsizing of baskets and various sublimits to reflect the increased size of the Company's business; (iv) a swing line facility increase from $ 25 million to $ 50 million, providing for same-day funds to cover daily liquidity needs; and (v) base interest rate amended from LIBOR to Term SOFR. 9 The 2022 credit facility matures on May 4, 2027. The balance outstanding under the 2022 credit facility was $ 410.6 million and $ 265.7 million at June 30, 2023 and December 31, 2022, respectively. The combined effective interest rates under the 2018 and 2022 credit facilities, including the impact of interest rate swaps associated with those credit facilities, for the six months ended June 30, 2023 and 2022 were as follows: Six Months Ended June 30, 2023 2022 Weighted average rates 4.94 % 1.93 % Range of effective rates 1.93 % - 8.00 % 1.08 % - 3.67 % We had approximately $ 177.5 million of available funds under the 2022 credit facility at June 30, 2023, net of outstanding letters of credit of $ 4.4 million. Available funds under the credit facility are based on a multiple of earnings before interest, taxes, depreciation and amortization as defined in the credit facility, and are reduced by letters of credit, other indebtedness and outstanding borrowings under the credit facility. Under the 2022 credit facility, loans are charged an interest rate consisting of a base rate or Term SOFR rate plus an applicable margin, letters of credit are charged based on the same applicable margin, and a commitment fee is charged on the unused portion of the credit facility. The 2022 credit facility contains certain restrictive covenants customary for facilities of this type, including restrictions on indebtedness, liens or other encumbrances, making certain payments, investments, or to sell or otherwise dispose of a substantial portion of assets, or to merge or consolidate with an unaffiliated entity. The 2022 credit facility also limits our ability to make dividend payments. Historically, we have not paid cash dividends on our common stock. Our Board of Directors has discretion over the payment and level of dividends on common stock, subject to the limitations of the credit facility and applicable law. The credit facility contains a provision that, in the event of a defined change in control, the credit facility may be terminated. In addition, the 2022 credit facility contains financial covenants that require us to meet certain requirements with respect to (i) a total leverage ratio and (ii) minimum interest coverage ratio which may limit our ability to borrow up to the total commitment amount. As of June 30, 2023, we are in compliance with all 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 1, 2022 and will terminate on August 3, 2023, did no t have a balance outstanding at June 30, 2023. We intend to renew this line of credit. Interest Expense - Interest expense, including amortization of deferred financing costs, commitment fees, line of credit fees, and other applicable bank charges, for the three and six months ended June 30, 2023 and 2022 was as follows (in thousands): Three Months Ended June 30, 2023 2022 Credit facilities $ 5,498 $ 1,644 Other line of credit — 1 Other 36 — Total $ 5,534 $ 1,645 Six Months Ended June 30, 2023 2022 Credit facilities $ 9,138 $ 2,903 Other line of credit — 1 Other 37 — Total $ 9,175 $ 2,904 NOTE 5. COMMITMENTS AND CONTINGENCIES 10 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 $ 4.4 million and $ 5.0 million at June 30, 2023 and December 31, 2022, 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 June 30, 2023 and December 31, 2022, 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 asserted 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 claimed 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 sought 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. On November 14, 2022, the trial court ruled in favor of CBIZ and against Zotec’s claim for statutory securities fraud. The court also ruled in favor of CBIZ on its counterclaim for indemnification under contract. The trial court is expected to set further proceedings to determine the amount of damages owed by Zotec to CBIZ. 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 unaudited Condensed Consolidated Balance Sheets. The par value of these investments totaled $ 41.2 million and $ 44.4 million at June 30, 2023 and December 31, 2022, respectively, and had maturity or callable dates ranging from July 2023 through November 2025. At June 30, 2023, 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 six months ended June 30, 2023 and the twelve months ended December 31, 2022 (in thousands): Six Months Ended June 30, 2023 Twelve Months Ended December 31, 2022 Fair value at beginning of period $ 43,485 $ 38,670 Purchases — 19,771 Redemptions ( 2,310 ) ( 5,630 ) Maturities ( 880 ) ( 6,770 ) Change in bond premium ( 385 ) ( 645 ) Fair market value adjustment 473 ( 1,911 ) Fair value at end of period $ 40,383 $ 43,485 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 $ 0.9 million at June 30, 2023 and December 31, 2022, respectively. Those depository assets are classified as Level 1 in the fair value hierarchy. 11 Interest Rate Swaps - We utilize interest rate swaps to manage interest rate risk exposure associated with our floating-rate debt under the 2022 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, 2022 for further discussion on our interest rate swaps. During the first quarter of 2023, we entered into a new 5-year interest rate swap with a notional value of $ 25.0 million and fixed rate of 3.669 %. During the second quarter of 2023, one interest rate swap expired with a notional value of $ 15.0 million. As of June 30, 2023, 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 amended agreements, and receive interest that varies with the one-month Term SOFR. The following table summarizes our outstanding interest rate swaps and their classification in the accompanying unaudited Condensed Consolidated Balance Sheets at June 30, 2023 and December 31, 2022 (amounts in thousands): June 30, 2023 Notional Amount Fixed Rate Expiration Fair Value Balance Sheet Location Interest rate swap $ 50,000 0.834 % 4/14/2025 $ 3,427 Other non-current asset Interest rate swap $ 30,000 1.186 % 12/14/2026 $ 2,875 Other non-current asset Interest rate swap $ 20,000 2.450 % 8/14/2027 $ 1,193 Other non-current asset Interest rate swap $ 25,000 3.669 % 4/14/2028 $ 259 Other non-current asset December 31, 2022 Notional Amount Fixed Rate Expiration Fair Value Balance Sheet Location Interest rate swap $ 15,000 2.571 % 6/1/2023 $ 133 Other current asset Interest rate swap $ 50,000 0.834 % 4/14/2025 $ 3,726 Other non-current asset Interest rate swap $ 30,000 1.186 % 12/14/2026 $ 2,871 Other non-current asset Interest rate swap $ 20,000 2.450 % 8/14/2027 $ 1,079 Other non-current asset Refer to Note 7, Fair Value Measurements, for additional disclosures regarding fair value measurements. The following table summarizes the effects of the interest rate swaps on the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2023 and 2022 (in thousands): Gain Recognized in AOCI, net of tax Gain (Loss) Reclassified from AOCI into Expense Three Months Ended June 30, Three Months Ended June 30, 2023 2022 2023 2022 Interest rate swaps $ 2,187 $ 587 $ 1,073 $ ( 155 ) Six Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Interest rate swaps $ 1,472 $ 3,194 $ 1,970 $ ( 498 ) NOTE 7. FAIR VALUE MEASUREMENTS The following table summarizes our assets and (liabilities) at June 30, 2023 and December 31, 2022, 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): 12 Level June 30, 2023 December 31, 2022 Deferred compensation plan assets 1 $ 136,463 $ 118,862 Available-for-sale debt securities 1 40,383 43,485 Other depository assets 1 947 868 Deferred compensation plan liabilities 1 ( 136,463 ) ( 118,862 ) Interest rate swaps 2 7,754 7,809 Contingent purchase price liabilities 3 ( 130,465 ) ( 132,010 ) During the six months ended June 30, 2023 and 2022, there were no transfers between the valuation hierarchy Levels 1, 2 and 3. The following table summarizes the change in Level 3 fair values of our contingent purchase price liabilities for the six months ended June 30, 2023 and 2022 (pre-tax basis) (in thousands): 2023 2022 Beginning balance – December 31 $ ( 132,010 ) $ ( 79,139 ) Additions from business acquisitions ( 30,317 ) ( 64,648 ) Settlement of contingent purchase price liabilities 33,307 8,830 Change in fair value of contingencies ( 15 ) 117 Change in net present value of contingencies ( 1,430 ) ( 1,595 ) Ending balance – June 30 $ ( 130,465 ) $ ( 136,435 ) 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 unaudited 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. 13 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 and six months ended June 30, 2023 and 2022 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net unrealized gain (loss) on available-for-sale securities, net of income taxes (1) $ 159 $ ( 218 ) $ 338 $ ( 1,157 ) Net unrealized gain (loss) on interest rate swaps, net of income taxes (2) 1,383 705 ( 5 ) 3,571 Foreign currency translation ( 5 ) ( 7 ) ( 9 ) ( 9 ) Total other comprehensive income $ 1,537 $ 480 $ 324 $ 2,405 (1) Net of income tax expense of $ 64 and income tax benefit of $ 81 for the three months ended June 30, 2023 and 2022, respectively, and net of income tax expense of $ 135 and income tax benefit of $ 433 for the six months ended June 30, 2023 and 2022, respectively. (2) Net of income tax expense of $ 449 and income tax expense of $ 250 for the three months ended June 30, 2023 and 2022, respectively, and net of income tax benefit of $ 14 and income tax expense of $ 1,178 for the six months ended June 30, 2023 and 2022, respectively. 14 NOTE 9. EMPLOYEE STOCK PLANS On May 10, 2023, the shareholders of the Company approved an amendment to the 2019 Stock Omnibus Incentive Plan (the “2019 Plan”). The amendment added 1.5 million shares to the total number of shares that may be issued under the 2019 Plan. All other respects of the Plan remain unchanged. The 2019 Plan, which expires in 2029, permits the grant of various forms of stock-based awards. A maximum of 4.6 million stock options, restricted stock or other stock-based compensation awards may be granted. The terms and vesting schedules for the stock-based awards vary by type and date of grant. 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, 2022 for further discussion on the 2019 Plan. Compensation expense for stock-based awards recognized during the three and six months ended June 30, 2023 and 2022 was as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Stock options $ — $ 75 $ 768 $ 248 Restricted stock units and awards 1,355 1,334 2,614 2,827 Performance share units 1,433 1,330 3,237 3,353 Total stock-based compensation expense $ 2,788 $ 2,739 $ 6,619 $ 6,428 Stock Options and Restricted Stock Units and Awards – The following table presents our stock options and restricted stock units and awards activity during the six months ended June 30, 2023 (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 553 $ 21.03 277 $ 32.62 Granted 50 $ 48.40 109 $ 48.64 Exercised or released ( 221 ) $ 19.24 ( 154 ) $ 31.25 Outstanding at June 30, 2023 382 $ 25.64 232 $ 41.09 Exercisable at June 30, 2023 382 $ 25.64 (1) Represents weighted average market value of the shares; awards are granted at no cost to the recipients. CBIZ utilized the Black-Scholes-Merton options pricing model to determine the fair value of stock options on the date of grant. The per-share fair value of stock options granted on February 8, 2023 was $ 15.35 . The following weighted average assumptions were utilized: Six Months Ended June 30, 2023 Expected volatility (1) 28.57 % Expected option life (years) (2) 4.74 Risk-free interest rate (3) 3.89 % Expected dividend yield (4) — % (1) The expected volatility assumption was determined based upon the historical volatility of CBIZ's stock price using daily price intervals. (2) The expected option life was determined based upon CBIZ's historical data using a midpoint scenario, which assumes all options are exercised halfway between the expiration date and the weighted average time it takes the option to vest. 15 (3) The risk-free interest rate assumption was based upon zero-coupon U.S. treasury bonds with a term approximating the expected life of the respective options. (4) The expected dividend yield assumption was determined in view of CBIZ's historical and estimated dividend payouts. 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 PSUs activity during the six months ended June 30, 2023 (in thousands, except per share data): Performance Share Units Weighted Average Grant-Date Fair Value Per Unit (1) Outstanding at beginning of year 482 $ 28.84 Granted 88 $ 48.40 Vested ( 244 ) $ 25.75 Outstanding at June 30, 2023 326 $ 36.46 (1) Represents weighted average market value of the performance share units; PSUs are granted at no cost to the recipients. NOTE 10. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2023 and 2022 (in thousands, except per share data): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Numerator: Net Income $ 26,863 $ 31,255 $ 100,023 $ 89,382 Denominator: Basic Weighted average common shares outstanding 49,963 51,911 50,164 52,015 Diluted Stock options (1) 198 508 235 564 Restricted stock units and awards (1) 79 112 95 157 Performance share units 106 — 106 — Contingent shares (2) 39 — 39 — Diluted weighted average common shares outstanding (3) 50,385 52,531 50,639 52,736 Basic earnings per share $ 0.54 $ 0.60 $ 1.99 $ 1.72 Diluted earnings per share $ 0.53 $ 0.60 $ 1.98 $ 1.70 (1) A total of 12 thousand and 53 thousand shares of stock-based awards were excluded from the calculation of diluted earnings per share for three and six months ended June 30, 2023, respectively, as their effect would be anti-dilutive. A total of 17 thousand and 86 thousand shares of stock-based awards were excluded from the calculation of diluted earnings per share for three and six months ended June 30, 2022, respectively, as their effect would be anti-dilutive. 16 (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 220 thousand PSUs for both the three and six months ended June 30, 2023, and the denominator used in calculating diluted earnings per share did not include 360 thousand PSUs for both the three and six months ended June 30, 2022. The performance conditions associated with these performance share units were not met and consequently none of these PSUs were considered as issuable for the three and six months ended June 30, 2023 and 2022. NOTE 11. BUSINESS COMBINATIONS Business Combinations During the six months ended June 30, 2023, we completed the following acquisitions: • Effective January 1, 2023, we acquired all of the assets of Danenhauer and Danenhauer, Inc ("Danenhauer and Danenhauer"). Danenhauer and Danenhauer, based in California, is a provider of forensic accounting, business valuation, expert witness testimony, and other services for businesses and individuals. Operating results for Danenhauer and Danenhauer are reported in the Financial Services practice group. • Effective February 1, 2023, we acquired the non-attest assets of Somerset CPAs and Advisors ("Somerset"). Somerset, based in Indianapolis, Indiana, is a provider of a full range of accounting, tax, and financial advisory services to clients in a wide array of industries. Operating results for Somerset are reported in the Financial Services practice group. • Effective June 1, 2023, we acquired all of the assets of Pivot Point Security ("PPS"). PPS, based in Hamilton, New Jersey, is a provider of cyber and information security, and compliance services for small and middle market businesses. Operating results for PPS are reported in the Financial Services practice group. • Effective June 1, 2023, we acquired all of the assets of Ickovic and Co. PC ("Ickovic and Co."). Ickovic and Co., based in Denver, Colorado, is a provider of bespoke services and solutions for high-net-worth individuals, business owners and executives. Operating results for Ickovic and Co. are reported in the Financial Services practice group. During the six months ended June 30, 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. Operating results are reported in the Financial Services practice group. The acquisitions of Danenhauer and Danenhauer, Somerset, PPS and Ickovic and Co. (together, the “2023 Acquisitions”) are expected to add approximately $ 64.4 million annualized revenue in 2023. For the six months ended June 30, 2023, we recorded approximately $ 2.5 million in non-recurring transaction, retention and integration related costs associated with the Somerset acquisition. Pro forma results of operations for these acquisitions have not been presented because the effects of these acquisitions were not material, either individually or in aggregate, to our total revenue and net income for the three and six months ended June 30, 2023 and 2022, respectively. 17 The following table summarizes the consideration and purchase price allocation for the acquisitions completed during the six months ended June 30, 2023 and 2022, respectively (in thousands): 2023 2022 Common stock issued (number) 102 — Common stock value $ 4,796 $ — Cash paid 48,547 72,469 Recorded contingent consideration 30,317 64,648 Total recorded purchase price $ 83,660 $ 137,117 Accounts receivable acquired 8,304 18,230 Fixed assets acquired 1,108 1,793 Identifiable intangible assets acquired 33,505 49,000 Operating lease right-of-use asset acquired 14,598 49,291 Other assets acquired 1,157 1,497 Operating lease liability acquired - current ( 1,012 ) ( 5,860 ) Other current liabilities acquired ( 1,445 ) ( 909 ) Operating lease liability acquired - non-current ( 13,586 ) ( 43,431 ) Goodwill 41,031 67,506 Total net assets acquired $ 83,660 $ 137,117 Maximum potential contingent consideration $ 31,925 $ 67,115 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 2023 Acquisitions were provisional as of June 30, 2023, 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 six months ended June 30, 2023 and 2022, respectively (in thousands): Six Months Ended June 30, 2023 2022 Financial Services Benefits and Insurance Services Financial Services Benefits and Insurance Services Goodwill $ 41,031 $ — $ 67,506 $ — Client list 33,487 — 49,000 — Other intangibles 18 — — — Total $ 74,536 $ — $ 116,506 $ — 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 from the aforementioned acquisitions have an expected life up to 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 model based on management estimates of future cash flows from such assets. 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 and six months ended June 30, 2023 and 2022, respectively (in thousands): 18 Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net expense $ 815 $ 836 $ 1,445 $ 1,478 Cash settlement paid $ 1,373 $ 1,045 $ 29,808 $ 8,122 Shares issued (number) 4 — 75 19 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, 2022. 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) before income tax expense (benefit) excluding those costs listed above, which are reported in the “Corporate and Other”. Segment information for the three and six months ended June 30, 2023 and 2022 is presented below. We do not manage our assets on a segment basis, therefore segment assets are not presented below. The following table disaggregates our revenue by source (in thousands): Three Months Ended June 30, 2023 Financial Services Benefits and Insurance Services National Practices Consolidated Accounting, tax, advisory and consulting $ 290,930 — — $ 290,930 Core benefits and insurance services — 91,031 — 91,031 Non-core benefits and insurance services — 4,807 — 4,807 Managed networking, hardware services — — 9,067 9,067 National practices consulting — — 2,667 2,667 Total revenue $ 290,930 $ 95,838 $ 11,734 $ 398,502 19 Three Months Ended June 30, 2022 Financial Services Benefits and Insurance Services National Practices Consolidated Accounting, tax, advisory and consulting $ 259,308 — — $ 259,308 Core benefits and insurance services — 87,366 — 87,366 Non-core benefits and insurance services — 4,342 — 4,342 Managed networking, hardware services — — 8,333 8,333 National practices consulting — — 2,603 2,603 Total revenue $ 259,308 $ 91,708 $ 10,936 $ 361,952 Six Months Ended June 30, 2023 Financial Services Benefits and Insurance Services National Practices Consolidated Accounting, tax, advisory and consulting $ 634,016 — — $ 634,016 Core benefits and insurance services — 187,648 — 187,648 Non-core benefits and insurance services — 8,244 — 8,244 Managed networking, hardware services — — 18,021 18,021 National practices consulting — — 5,179 5,179 Total revenue $ 634,016 $ 195,892 $ 23,200 $ 853,108 Six Months Ended June 30, 2022 Financial Services Benefits and Insurance Services National Practices Consolidated Accounting, tax, advisory and consulting $ 548,054 — — $ 548,054 Core benefits and insurance services — 176,302 — 176,302 Non-core benefits and insurance services — 7,892 — 7,892 Managed networking, hardware services — — 16,254 16,254 National practices consulting — — 5,172 5,172 Total revenue $ 548,054 $ 184,194 $ 21,426 $ 753,674 Segment information for the three months ended June 30, 2023 and 2022 was as follows (in thousands): Three Months Ended June 30, 2023 Financial Services Benefits and Insurance Services National Practices Corporate and Other Total Revenue $ 290,930 $ 95,838 $ 11,734 $ — $ 398,502 Operating expenses 243,445 78,374 10,545 11,623 343,987 Gross margin 47,485 17,464 1,189 ( 11,623 ) 54,515 Corporate general and administrative expenses — — — 15,793 15,793 Operating income (loss) 47,485 17,464 1,189 ( 27,416 ) 38,722 Other income (expense): Interest expense — — — ( 5,534 ) ( 5,534 ) Other income, net 235 153 1 5,032 5,421 Total other income (expense), net 235 153 1 ( 502 ) ( 113 ) Income (loss) before income tax expense $ 47,720 $ 17,617 $ 1,190 $ ( 27,918 ) $ 38,609 20 Three Months Ended June 30, 2022 Financial Services Benefits and Insurance Services National Practices Corporate and Other Total Revenue $ 259,308 $ 91,708 $ 10,936 $ — $ 361,952 Operating expenses 209,643 75,020 9,899 ( 4,826 ) 289,736 Gross margin 49,665 16,688 1,037 4,826 72,216 Corporate general and administrative expenses — — — 10,926 10,926 Operating income (loss) 49,665 16,688 1,037 ( 6,100 ) 61,290 Other income (expense): Interest expense — ( 1 ) — ( 1,644 ) ( 1,645 ) Gain on sale of operations, net 135 — — — 135 Other income (expense), net 85 ( 12 ) 1 ( 15,977 ) ( 15,903 ) Total other income (expense), net 220 ( 13 ) 1 ( 17,621 ) ( 17,413 ) Income (loss) before income tax expense $ 49,885 $ 16,675 $ 1,038 $ ( 23,721 ) $ 43,877 Segment information for the six months ended June 30, 2023 and 2022 was as follows (in thousands): Six Months Ended June 30, 2023 Financial Services Benefits and Insurance Services National Practices Corporate and Other Total Revenue $ 634,016 $ 195,892 $ 23,200 $ — $ 853,108 Operating expenses 487,888 155,297 21,128 20,685 684,998 Gross margin 146,128 40,595 2,072 ( 20,685 ) 168,110 Corporate general and administrative expenses — — — 31,391 31,391 Operating income (loss) 146,128 40,595 2,072 ( 52,076 ) 136,719 Other income (expense): Interest expense — ( 1 ) — ( 9,174 ) ( 9,175 ) Gain on sale of operations, net 99 — — — 99 Other income, net 490 330 1 9,712 10,533 Total other income, net 589 329 1 538 1,457 Income (loss) before income tax expense $ 146,717 $ 40,924 $ 2,073 $ ( 51,538 ) $ 138,176 21 Six Months Ended June 30, 2022 Financial Services Benefits and Insurance Services National Practices Corporate and Other Total Revenue $ 548,054 $ 184,194 $ 21,426 $ — $ 753,674 Operating expenses (income) 419,443 147,677 19,475 ( 6,560 ) 580,035 Gross margin 128,611 36,517 1,951 6,560 173,639 Corporate general and administrative expenses — — — 27,235 27,235 Operating income (loss) 128,611 36,517 1,951 ( 20,675 ) 146,404 Other income (expense): Interest expense — ( 1 ) — ( 2,903 ) ( 2,904 ) Gain on sale of operations, net 135 — — — 135 Other income (expense), net 171 ( 36 ) 1 ( 22,446 ) ( 22,310 ) Total other income (expense), net 306 ( 37 ) 1 ( 25,349 ) ( 25,079 ) Income (loss) before income tax expense $ 128,917 $ 36,480 $ 1,952 $ ( 46,024 ) $ 121,325 22