CBIZ, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to “we”, “us”, “our”, "CBIZ" or the "Company" shall mean CBIZ, Inc., a Delaware corporation, and its operating subsidiaries. The following discussion is intended to assist in the understanding of our financial position at September 30, 2023 and December 31, 2022, results of operations for the three and nine months ended September 30, 2023 and 2022, and cash flows for the nine months ended September 30, 2023 and 2022, and should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2022. This discussion and analysis contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q and in “Item 1A. Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2022. OVERVIEW We provide professional business services, products and solutions that help our clients grow and succeed by better managing their finances and employees. These services are provided to businesses of various sizes, as well as individuals, governmental entities and not-for-profit enterprises throughout the United States and parts of Canada. We deliver integrated services through three practice groups: Financial Services, Benefits and Insurance Services, and National Practices. Refer to Note 12, Segment Disclosures, to the accompanying unaudited condensed consolidated financial statements for a general description of services provided by each practice group. Refer to the Annual Report on Form 10-K for the year ended December 31, 2022 for further discussion of our business and strategies, as well as the external relationships and regulatory factors that currently impact our operations. EXECUTIVE SUMMARY Revenue for the three months ended September 30, 2023 increased by $47.3 million, or 13.0%, to $410.5 million from $363.3 million for the same period in 2022. Same-unit revenue increased by approximately $30.2 million, or 8.3%, as compared to the same period in 2022. Revenue from newly acquired operations, net of divestitures, contributed $17.1 million, or 4.7%, of incremental revenue for the three months ended September 30, 2023 as compared to the same period in 2022. Revenue for the nine months ended September 30, 2023 increased by $146.7 million, or 13.1%, to $1,263.6 million from $1,116.9 million for the same period in 2022. Same-unit revenue increased by approximately $84.1 million, or 7.5%, as compared to the same period in 2022. Revenue from newly acquired operations, net of divestitures, contributed $62.6 million, or 5.6%, of incremental revenue for the nine months ended September 30, 2023 as compared to the same period in 2022. A detailed discussion of revenue by practice group is included under "Operating Practice Groups". Net income was $33.7 million, or $0.67 per diluted share, in the third quarter of 2023, compared to $27.5 million, or $0.53 per diluted share, in the third quarter of 2022. For the nine months ended September 30, 2023, net income was $133.7 million, or $2.64 per diluted share, compared to $116.9 million, or $2.22 per diluted share, for the same period in 2022. Refer to “Results of Operations" for a detailed discussion of the components of net income. Strategic Use of Capital Our first priority for use of capital is to make strategic acquisitions. We also have the financing flexibility and the capacity to actively repurchase shares of our common stock. We believe that repurchasing shares of our common stock can be a prudent use of our financial resources, and that investing in our stock is an attractive use of capital and an efficient means to provide value to our stockholders. During the nine months ended September 30, 2023, we completed five acquisitions for $53.0 million in cash. We also repurchased 1.3 million shares of our common stock on open market as well as for tax withholding purposes at a total cost of approximately $66.4 million in the nine months ended September 30, 2023. Refer to Note 11, Business Combinations, to the accompanying unaudited condensed consolidated financial statements for further discussion on acquisitions. During the first quarter of 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 23 suspended or discontinued at any time and expires on April 1, 2024. The shares may be purchased in the open market, in privately negotiated transactions, and pursuant to Rule 10b5-1 trading plans, which may include purchases from our employees, officers and directors, in accordance with the Securities and Exchange Commission (the “SEC”) rules. CBIZ management will determine the timing and amount of the transactions based on its evaluation of market conditions and other factors. RESULTS OF OPERATIONS Revenue The following tables summarize total revenue for the three and nine months ended September 30, 2023 and 2022: Three Months Ended September 30, 2023 % of Total 2022 % of Total $ Change % Change (Amounts in thousands, except percentages) Financial Services $ 298,372 72.7 % $ 259,998 71.6 % $ 38,374 14.8 % Benefits and Insurance Services 100,287 24.4 % 92,067 25.3 % 8,220 8.9 % National Practices 11,880 2.9 % 11,197 3.1 % 683 6.1 % Total CBIZ $ 410,539 100.0 % $ 363,262 100.0 % $ 47,277 13.0 % Nine Months Ended September 30, 2023 % of Total 2022 % of Total $ Change % Change (Amounts in thousands, except percentages) Financial Services $ 932,388 73.8 % $ 808,052 72.3 % $ 124,336 15.4 % Benefits and Insurance Services 296,179 23.4 % 276,261 24.7 % 19,918 7.2 % National Practices 35,080 2.8 % 32,623 3.0 % 2,457 7.5 % Total CBIZ $ 1,263,647 100.0 % $ 1,116,936 100.0 % $ 146,711 13.1 % A detailed discussion of same-unit revenue by practice group is included under “Operating Practice Groups.” Non-qualified Deferred Compensation Plan We sponsor a non-qualified deferred compensation plan, under which a CBIZ employee’s compensation deferral is held in a rabbi trust and invested accordingly as directed by the employee. Income and expenses related to the non-qualified deferred compensation plan, which are recorded in "Corporate and Other" for segment reporting purposes, are included in “Operating expenses”, “Gross margin” and “Corporate general and administrative expenses” and are directly offset by deferred compensation gains or losses in “Other income (expense), net” in the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income. The non-qualified deferred compensation plan has no impact on “Income before income tax expense” or diluted earnings per share. Income and expenses related to the deferred compensation plan for the three and nine months ended September 30, 2023 and 2022 are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (Amounts in thousands) Operating (income) expenses $ (3,009) $ (3,995) $ 6,853 $ (23,000) Corporate general and administrative (income) expenses (452) (697) 821 (3,319) Other (expense) income, net (3,461) (4,692) 7,674 (26,319) Excluding the impact of the above-mentioned income and expenses related to the deferred compensation plan, the operating results for the three and nine months ended September 30, 2023 and 2022 are as follows: 24 Three Months Ended September 30, 2023 2022 (Amounts in thousands, except percentages) As Reported Deferred Compensation Plan Adjusted % of Revenue As Reported Deferred Compensation Plan Adjusted % of Revenue Gross margin $ 68,391 $ (3,009) $ 65,382 15.9 % $ 57,245 $ (3,995) $ 53,250 14.7 % Operating income 55,255 (3,461) 51,794 12.6 % 41,352 (4,692) 36,660 10.1 % Other (expense) income, net (2,288) 3,461 1,173 0.3 % (2,622) 4,692 2,070 0.6 % Income before income tax expense 47,196 — 47,196 11.5 % 36,601 — 36,601 10.1 % Nine Months Ended September 30, 2023 2022 (Amounts in thousands, except percentages) As Reported Deferred Compensation Plan Adjusted % of Revenue As Reported Deferred Compensation Plan Adjusted % of Revenue Gross margin $ 236,501 $ 6,853 $ 243,354 19.3 % $ 230,884 $ (23,000) $ 207,884 18.6 % Operating income 191,974 7,674 199,648 15.8 % 187,756 (26,319) 161,437 14.5 % Other income (expense), net 8,245 (7,674) 571 — % (24,932) 26,319 1,387 0.1 % Income before income tax expense 185,372 — 185,372 14.7 % 157,926 — 157,926 14.1 % Operating Expenses Three Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) Operating expenses by segment: Financial Services $ 249,680 $ 220,337 $ 29,343 13.3 % Benefits and Insurance Services 79,636 73,321 6,315 8.6 % National Practices 10,667 9,743 924 9.5 % Corporate and Other 2,165 2,616 (451) (17.2) % Total Operating expenses $ 342,148 $ 306,017 $ 36,131 11.8 % Operating expenses % of revenue 83.3 % 84.2 % Operating expenses excluding deferred compensation $ 345,157 $ 310,012 $ 35,145 11.3 % Operating expenses excluding deferred compensation % of revenue 84.1 % 85.3 % Nine Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) Operating expenses (income) by segment: Financial Services $ 737,568 $ 639,780 $ 97,788 15.3 % Benefits and Insurance Services 234,933 220,998 13,935 6.3 % National Practices 31,795 29,218 2,577 8.8 % Corporate and Other 22,850 (3,944) 26,794 N/M Total Operating expenses $ 1,027,146 $ 886,052 $ 141,094 15.9 % Operating expenses % of revenue 81.3 % 79.3 % Operating expenses excluding deferred compensation $ 1,020,293 $ 909,052 $ 111,241 12.2 % Operating expenses excluding deferred compensation % of revenue 80.7 % 81.4 % 25 Three months ended September 30, 2023 compared to September 30, 2022. Total operating expenses for the three months ended September 30, 2023 increased by $36.1 million, or 11.8%, to $342.1 million as compared to $306.0 million in the same period of 2022. The non-qualified deferred compensation plan decreased operating expenses by $3.0 million for the three months ended September 30, 2023, and by $4.0 million during the same period in 2022. Excluding the non-qualified deferred compensation expenses, which were recorded in "Corporate and Other" for segment reporting purposes, operating expenses would have been $345.2 million and $310.0 million, or 84.1% and 85.3% of revenue, for the three months ended September 30, 2023 and 2022, respectively. In addition, operating expenses for the three months ended September 30, 2023 included approximately $0.6 million non-recurring integration costs associated with the Somerset acquisition, and operating expenses for the three months ended September 30, 2022 included $1.3 million non-recurring integration and retention costs associated with the Marks Paneth acquisition. The majority of our operating expenses relate to personnel costs, which include (i) salaries and benefits, (ii) commissions paid to producers, (iii) incentive compensation, and (iv) stock-based compensation. Excluding the impact of deferred compensation, which was recorded in "Corporate and Other" for segment reporting purposes, operating expenses increased by approximately $35.1 million during the three months ended September 30, 2023 as compared to the same period in 2022, driven by $28.0 million higher personnel costs (of which $12.2 million was the result of acquisitions), $2.2 million higher travel and entertainment costs, $1.8 million higher technology related costs, $1.4 million higher facility costs, $0.9 million higher depreciation and amortization expense, and $0.7 million higher marketing expense, as well as $0.1 million higher discretionary spending to support business growth. Personnel costs are discussed in further detail under “Operating Practice Groups”. Nine months ended September 30, 2023 compared to September 30, 2022 . Total operating expenses for the nine months ended September 30, 2023 increased by $141.1 million, or 15.9%, to $1,027.1 million as compared to $886.1 million in the same period of 2022. The non-qualified deferred compensation plan increased operating expenses by $6.9 million for the nine months ended September 30, 2023, but decreased operating expenses by $23.0 million during the same period in 2022. Excluding the impact of deferred compensation, which was recorded in "Corporate and Other" for segment reporting purposes, operating expenses would have been $1,020.3 million and $909.1 million, or 80.7% and 81.4% of revenue, for the nine months ended September 30, 2023 and 2022, respectively, an increase of $111.2 million as compared to the same period in 2022. In addition, operating expense for the nine months ended September 30, 2023 included approximately $1.5 million non-recurring integration costs related to the Somerset acquisition, and operating expenses for the nine months ended September 30, 2022 included $8.0 million non-recurring integration and retention costs associated with the Marks Paneth acquisition. The increase in operating expense was driven by personnel costs increase of $92.8 million (of which $38.3 million was the result of acquisitions), $7.2 million higher travel and entertainment costs, $3.8 million higher technology related costs, $2.8 million higher facility costs, $2.4 million higher depreciation and amortization expense, and $1.8 million higher marketing costs, as well as $0.4 million increase in other discretionary spending to support business growth. Personnel costs are discussed in further detail under “Operating Practice Groups”. Corporate General & Administrative (“G&A”) Expenses Three Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) G&A expenses $ 13,136 $ 15,893 $ (2,757) (17.3) % G&A expenses % of revenue 3.2 % 4.4 % G&A expenses excluding deferred compensation $ 13,588 $ 16,590 $ (3,002) (18.1) % G&A expenses excluding deferred compensation % of revenue 3.3 % 4.6 % 26 Nine Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) G&A expenses $ 44,527 $ 43,128 $ 1,399 3.2 % G&A expenses % of revenue 3.5 % 3.9 % G&A expenses excluding deferred compensation $ 43,706 $ 46,447 $ (2,741) (5.9) % G&A expenses excluding deferred compensation % of revenue 3.5 % 4.2 % Three months ended September 30, 2023 compared to September 30, 2022. The deferred compensation plan decreased G&A expenses by $0.5 million for the three months ended September 30, 2023, and decreased G&A expenses by $0.7 million during the same period in 2022. G&A expenses, excluding the impact of the deferred compensation plan, would have been $13.6 million, or 3.3% of revenue, for the three months ended September 30, 2023, compared to $16.6 million, or 4.6% of revenue, for the same period in 2022, a decrease of approximately $3.0 million. The decrease was primarily driven by $4.0 million lower personnel costs offset by $0.8 million higher legal and other professional related costs as well as $0.2 million other discretionary costs. G&A expense for the three months ended September 30, 2022 included approximately $3.9 million cumulative adjustments to a certain performance-based compensation program, which did not recur in 2023. Nine months ended September 30, 2023 compared to September 30, 2022. The deferred compensation plan increased G&A expense by $0.8 million for the nine months ended September 30, 2023, but decreased G&A expenses by $3.3 million during the same period in 2022. G&A expenses, excluding the impact of the deferred compensation plan, would have been $43.7 million, or 3.5% of revenue, for the nine months ended September 30, 2023, compared to $46.4 million, or 4.2% of revenue, for the same period in 2022, a decrease of approximately $2.7 million. The decrease was primarily driven by $3.2 million lower personnel costs offset by $0.5 million higher legal and other professional related costs. G&A expense for the nine months ended September 30, 2022 included approximately $3.9 million cumulative adjustments to a certain performance-based compensation program, which did not recur in 2023. In addition, G&A expense for the nine months ended September 30, 2023 included a $1.5 million non-recurring transaction and integration costs related to the Somerset acquisition. G&A expense for the nine months ended September 30, 2022 included a $1.9 million non-recurring transaction and integration costs related to the Marks Paneth acquisition. 27 Other Income (Expense), Net Three Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) Interest expense $ (5,848) $ (2,305) $ (3,543) 153.7 % Gain on sale of operations, net 77 176 (99) (56.3) % Other expense, net (1) (2,288) (2,622) 334 (12.7) % Total other expense, net $ (8,059) $ (4,751) $ (3,308) 69.6 % Nine Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) Interest expense $ (15,023) $ (5,209) $ (9,814) 188.4 % Gain on sale of operations, net 176 311 (135) (43.4) % Other income (expense), net (2) 8,245 (24,932) 33,177 (133.1) % Total other expense, net $ (6,602) $ (29,830) $ 23,228 (77.9) % (1) Other expense, net includes a net loss of $3.5 million during the three months ended September 30, 2023, and a net loss of $4.7 million for the same period in 2022, associated with the value of investments held in a rabbi trust related to the deferred compensation plan, which were 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.” The deferred compensation plan has no impact on “Income before income tax expense” or diluted earnings per share. In addition, included in Other expense, net for the three months ended September 30, 2023 and 2022, is expense of $0.6 million and $0.4 million respectively, related to net changes in the fair value of contingent consideration related to prior acquisitions. (2) Other income (expense), net includes a net gain of $7.7 million during the nine months ended September 30, 2023, compared to a net loss of $26.3 million for the same period in 2022, associated with the value of investments held in a rabbi trust related to the deferred compensation plan, which were 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.” The deferred compensation plan has no impact on “Income before income tax expense” or diluted earnings per share. In addition, included in Other income (expense), net for the nine months ended September 30, 2023 and 2022, is expense of $2.1 million and $1.9 million, respectively, related to net changes in the fair value of contingent consideration related to prior acquisitions. Interest Expense Three and nine months ended September 30, 2023 compared with September 30, 2022. Our primary financing arrangement is the credit facility which was amended and restated in May 2022. During the three months ended September 30, 2023, our average debt balance and weighted average effective interest rate was $398.3 million and 5.53%, compared to $273.2 million and 2.97% for the same period of 2022. The increase in interest expense for the three months ended September 30, 2023 as compared to the same period in 2022 was primarily driven by a higher average debt balance as well as a higher weighted average effective interest rate. During the nine months ended September 30, 2023, our average debt balance and interest rate was $368.2 million and 5.16% compared to $267.2 million and 2.29% for the same period of 2022. The increase in interest expense for the nine months ended September 30, 2023 as compared to the same period in 2022 was primarily driven by a higher average debt balance as well as a higher weighted average effective interest rate. Our indebtedness is further discussed in Note 4, Debt and Financing Arrangements, to the accompanying unaudited condensed consolidated financial statements. 28 Other Income (Expense), Net Three and nine months ended September 30, 2023 compared with September 30, 2022. For the three months ended September 30, 2023, other expense, net includes a net loss of $3.5 million associated with the non-qualified deferred compensation plan. For the same period in 2022, other expense, net includes a net loss of $4.7 million associated with the non-qualified deferred compensation plan. Excluding the impact of the deferred compensation plan, the three months ended September 30, 2023 and 2022 would have resulted in a net income position of $1.2 million and $2.1 million, respectively, primarily due to gains of $1.4 million and $2.4 million related to the sale of certain assets during the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023, other income (expense), net includes a net gain of $7.7 million associated with the non-qualified deferred compensation plan. For the same period in 2022, other (expense) income, net includes a net loss of $26.3 million associated with the non-qualified deferred compensation plan. Excluding the impact of the deferred compensation plan, the nine months ended September 30, 2023 and 2022 would have resulted in a net income position of $0.6 million and $1.4 million, respectively, primarily due to gains of $1.5 million and $2.4 million related to the sale of certain assets during the nine months ended September 30, 2023 and 2022, respectively. Our gain from sale of assets is further discussed in Note 11, Business Combinations, to the accompanying unaudited condensed consolidated financial statements. Income Tax Expense Three Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) Income tax expense $ 13,514 $ 9,131 $ 4,383 48.0 % Effective tax rate 28.6 % 24.9 % Nine Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) Income tax expense $ 51,667 $ 41,074 $ 10,593 25.8 % Effective tax rate 27.9 % 26.0 % Three and nine months ended September 30, 2023 compared with September 30, 2022. The effective tax rate for the three months ended September 30, 2023 was 28.6%, compared to an effective tax rate of 24.9% for the comparable period in 2022. The increase in the effective tax rate was primarily due to a smaller proportional tax benefit as compared to pre-tax income related to stock-based compensation expense during the three months ended September 30, 2023 as compared to the same quarter in 2022. The effective tax rate further increased due to the tax effect of higher non-deductible expenses and higher state tax expense during the third quarter of 2023 as compared to the same period in 2022. The effective tax rate for the nine months ended September 30, 2023 was 27.9%, compared to an effective tax rate of 26.0% for the same period in 2022. The increase in the effective tax rate year over year was primarily due to the effect of higher pre-tax income on our tax benefit related to stock-based compensation. In addition, we incurred higher non-deductible expenses and higher state tax expense during the nine months ended September 30, 2023 as compared to the same period in 2022 which also contributed to the increase in the effective tax rate. Operating Practice Groups We deliver our integrated services through three practice groups: Financial Services, Benefits and Insurance Services, and National Practices. A description of these groups' operating results and factors affecting their businesses is provided below. Same-unit revenue represents total revenue adjusted to reflect comparable periods of activity for acquisitions and divestitures. Divested operations represent operations that did not meet the criteria for treatment as discontinued operations. 29 Financial Services Three Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) Revenue Same-unit $ 281,923 $ 259,998 $ 21,925 8.4 % Acquired businesses 16,449 — 16,449 N/M Total revenue $ 298,372 $ 259,998 $ 38,374 14.8 % Operating expenses 249,680 220,337 29,343 13.3 % Gross margin / Operating income $ 48,692 $ 39,661 $ 9,031 22.8 % Total other income, net 1,574 279 1,295 N/M Income before income tax expense 50,266 39,940 10,326 25.9 % Gross margin percent 16.3 % 15.3 % Nine Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) Revenue Same-unit $ 870,442 $ 808,052 $ 62,390 7.7 % Acquired businesses 61,946 — 61,946 N/M Total revenue $ 932,388 $ 808,052 $ 124,336 15.4 % Operating expenses 737,568 639,780 97,788 15.3 % Gross margin / Operating income $ 194,820 $ 168,272 $ 26,548 15.8 % Total other income, net 2,163 585 1,578 N/M Income before income tax expenses 196,983 168,857 28,126 16.7 % Gross margin percent 20.9 % 20.8 % Three months ended September 30, 2023 compared to September 30, 2022 Revenue The Financial Services practice group revenue for the three months ended September 30, 2023 grew by 14.8% to $298.4 million from $260.0 million during the same period in 2022. Same-unit revenue grew by $21.9 million, or 8.4%, across all product lines, primarily driven by those units that provide traditional accounting and tax-related services, which increased $12.0 million, an increase of approximately $6.3 million in those units that provide project-oriented advisory services, and an increase of approximately $3.6 million in government healthcare compliance business. The impact of acquired businesses contributed $16.4 million, or 5.5% of 2023 revenue, of which Somerset contributed $14.2 million, or 4.8% of the Financial Services practice group's revenue for the three months ended September 30, 2023. We provide a range of services to affiliated CPA firms under joint referral and administrative service agreements (“ASAs”). Fees earned under the ASAs are recorded as revenue in the accompanying Condensed Consolidated Statements of Comprehensive Income and were approximately $60.5 million and $54.1 million for the three months ended September 30, 2023 and 2022, respectively. Operating Expenses Operating expenses increased by $29.3 million, or 13.3%, as compared to the same period last year. Personnel costs increased by $22.4 million, of which acquisitions contributed approximately $11.8 million to the increase. Compared to the same period in 2022, travel and entertainment costs, technology costs, corporate allocated costs, depreciation and amortization costs, facility costs, marketing costs, and direct costs increased by approximately $1.6 million, $1.6 million, $1.5 million, $1.0 million, $0.9 million, $0.5 million, and $0.3 million respectively. Other discretionary costs, net decreased by approximately $0.5 million, primarily driven by lower professional fees and 30 recruiting costs. Operating expenses as a percentage of revenue increased to 83.7% for the three months ended September 30, 2023 from 84.7% of revenue for the prior year quarter. Nine months ended September 30, 2023 compared to September 30, 2022 Revenue Revenue for the nine months ended September 30, 2023 grew by 15.4% to $932.4 million from $808.1 million during the same period in 2022. Same-unit revenue grew by $62.4 million, or 7.7%, across all service lines, primarily driven by those units that provide traditional accounting and tax-related services, which increased $45.3 million, an increase of approximately $14.0 million in those units that provide project-oriented advisory services, and an increase of approximately $3.1 million in government healthcare compliance business. The impact of acquired businesses contributed $61.9 million, or 6.6% of 2023 revenue, of which Somerset and Stinnett contributed a total of $58.5 million, or 6.3% of Financial Services practice group's revenue for the nine months ended September 30, 2023. Fees earned under the ASAs, as described above, were approximately $211.2 million and $191.1 million for the nine months ended September 30, 2023 and 2022, respectively. Operating Expenses Operating expenses increased by $97.8 million, or 15.3%, as compared to the same period last year. Personnel costs increased by $79.0 million, of which acquisitions contributed approximately $37.9 million to the increase. Compared to the same period in 2022, corporate allocated costs, travel and entertainment costs, technology costs, depreciation and amortization costs, facility costs, direct costs, and marketing costs increased by approximately $4.8 million, $4.8 million, $3.1 million, $2.5 million, $1.7 million, $1.2 million, and $1.0 million, respectively. Other discretionary costs, net, decreased by approximately $0.3 million primarily due to lower recruiting and other professional services costs. Operating expense as a percentage of revenue increased to 79.1% during the nine months ended September 30, 2023 from 79.2% of revenue during the same period in 2022. Benefits and Insurance Services Three Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) Revenue Same-unit $ 99,613 $ 92,067 $ 7,546 8.2 % Acquired businesses 674 — 674 Total revenue $ 100,287 $ 92,067 $ 8,220 8.9 % Operating expenses 79,636 73,321 6,315 8.6 % Gross margin / Operating income $ 20,651 $ 18,746 $ 1,905 10.2 % Total other income (expense), net 267 2,398 (2,131) (88.9) % Income before income tax expense 20,918 21,144 (226) (1.1) % Gross margin percent 20.6 % 20.4 % 31 Nine Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) Revenue Same-unit $ 295,505 $ 276,261 $ 19,244 7.0 % Acquired businesses 674 — 674 Total revenue $ 296,179 $ 276,261 $ 19,918 7.2 % Operating expenses 234,933 220,998 13,935 6.3 % Gross margin/ Operating income $ 61,246 $ 55,263 $ 5,983 10.8 % Total other income (expense), net 596 2,361 (1,765) (74.8) % Income before income tax expenses 61,842 57,624 4,218 7.3 % Gross margin percent 20.7 % 20.0 % Three months ended September 30, 2023 compared to September 30, 2022 Revenue The Benefits and Insurance Services practice group revenue increased by $8.2 million, or 8.9%, to $100.3 million during the three months ended September 30, 2023 compared to $92.1 million for the same period in 2022. Same-unit revenue grew by $7.5 million, or 8.2%, across almost all of the major service lines, primarily driven by $3.4 million increase in employee benefit and retirement benefit services lines, $2.3 million in property and casualty services, and $1.0 million from other project-based services. In addition, revenue from payroll-related services increased by approximately $0.9 million. Operating Expenses Operating expenses increased by $6.3 million, or 8.6%, when compared to the same period last year. Personnel costs increased by $5.6 million primarily due to timing of annual merit increases as well as investment in producers. Compared to the same period in 2022, corporate allocated costs, travel and entertainment cost, technology costs, as well as marketing costs increased by approximately $0.6 million, $0.3 million, $0.2 million, and $0.1 million, respectively. The increase in operating expenses was offset by $0.3 million lower bad debt expense, $0.3 million lower depreciation and amortization costs as well as $0.1 million lower facility costs as compared to the same period in 2022. In addition, other miscellaneous discretionary costs increased by approximately $0.2 million to support business growth. Operating expenses as a percentage of revenue slightly decreased to 79.4% for the quarter ended September 30, 2023 from 79.6% of revenue for the same period in 2022. Nine months ended September 30, 2023 compared to September 30, 2022 Revenue The Benefits and Insurance Services practice group revenue increased by $19.9 million, or 7.2%, to $296.2 million during the nine months ended September 30, 2023 compared to $276.3 million for the same period in 2022. Same-unit revenue grew by $19.2 million, or 7.0%, across almost all of the major service lines, primarily driven by $9.5 million increase in employee benefit and retirement benefit services lines, $5.1 million increase in the property and casualty services, and $3.7 million increase in payroll-related services. In addition, revenue from other project-based services increased by approximately $0.9 million. Operating Expenses Operating expenses increased by $13.9 million, or 6.3%, when compared to the same period last year, primarily driven by approximately a $12.2 million increase in personnel costs due to timing of annual merit increases, bonus accrual, as well as investment in producers. Compared to the same period in 2022, corporate allocated costs, travel and entertainment cost, technology costs, marketing costs, as well as direct costs increased by approximately $1.7 million, $1.3 million, $0.4 million, $0.3 million, and $0.2 million, respectively. The increase in operating expenses was offset by $0.9 million lower depreciation and amortization costs, $0.9 million lower bad debt expense as well as $0.6 million lower facility costs, as compared to the same period in 2022. In addition, other miscellaneous discretionary costs increased by approximately $0.2 million to support business growth. Operating expense as a 32 percentage of revenue slightly improved to 79.3% during the nine months ended September 30, 2023 from 80.0% of revenue for the same period in 2022. National Practices Three Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) Same-unit revenue $ 11,880 $ 11,197 $ 683 6.1 % Operating expenses 10,667 9,743 924 9.5 % Gross margin / Operating income $ 1,213 $ 1,454 $ (241) (16.6) % Total other income, net — 8 (8) N/M Income before income tax expense 1,213 1,462 (249) (17.0) % Gross margin percent 10.2 % 13.0 % Nine Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) Same-unit revenue $ 35,080 $ 32,623 $ 2,457 7.5 % Operating expenses 31,795 29,218 2,577 8.8 % Gross margin / Operating income $ 3,285 $ 3,405 $ (120) (3.5) % Total other income, net 1 9 (8) N/M Income before income tax expenses 3,286 3,414 (128) (3.7) % Gross margin percent 9.4 % 10.4 % Three and nine months ended September 30, 2023 compared with September 30, 2022 Revenue and Operating Expenses The National Practices group is primarily driven by a 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 Company is in the process of renewing the contract. Revenues from this single client accounted for approximately 75% of the National Practice group’s revenue. During the three and nine months ended September 30, 2023, revenue increased by $0.7 million, or 6.1%, and $2.5 million, or 7.5%, respectively, while operating expenses increased by $0.9 million, or 9.5%, and $2.6 million, or 8.8%, respectively. 33 Corporate and Other Corporate and Other are operating expenses that are not directly allocated to the individual business units. These expenses primarily consist of certain health care costs, gains or losses attributable to assets held in our non-qualified deferred compensation plan, stock-based compensation, consolidation and integration charges, certain professional fees, certain advertising costs and other various expenses. Three Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) Operating expenses (income) $ 2,165 $ 2,616 (451) (17.2) % Corporate general and administrative expenses 13,136 15,893 (2,757) (17.3) % Operating loss (15,301) (18,509) 3,208 (17.3) % Total other expense, net (9,900) (7,436) (2,464) 33.1 % Loss before income tax expense (25,201) (25,945) 744 (2.9) % Nine Months Ended September 30, 2023 2022 $ Change % Change (Amounts in thousands, except percentages) Operating expenses (income) $ 22,850 $ (3,944) 26,794 N/M Corporate general and administrative expenses 44,527 43,128 1,399 3.2 % Operating loss (67,377) (39,184) (28,193) 72.0 % Total other expense, net (9,362) (32,785) 23,423 (71.4) % Loss before income tax expenses (76,739) (71,969) (4,770) 6.6 % Three months ended September 30, 2023 compared to September 30, 2022 Total operating expenses decreased by $0.5 million during the three months ended September 30, 2023, as compared to the same period in 2022. The non-qualified deferred compensation plan decreased operating expenses by $3.0 million for the three months ended September 30, 2023 and by $4.0 million during the same period in 2022. Excluding the non-qualified deferred compensation expenses, operating expenses decreased by $1.4 million during the three months ended September 30, 2023, as compared to the same period in 2022. The decrease was primarily driven by lower personnel costs. Total corporate general and administrative expenses decreased by $2.8 million, or 17.3%, during the three months ended September 30, 2023, as compared to the same period in 2022. The non-qualified deferred compensation plan decreased corporate general and administrative expenses by $0.5 million for the three months ended September 30, 2023 and by $0.7 million during the same period in 2022. Excluding the non-qualified deferred compensation expenses, corporate general and administrative expense decreased by approximately $3.0 million. The decrease was primarily driven by $4.0 million lower personnel costs offset by $0.8 million higher legal and other professional related costs as well as $0.2 million other discretionary costs. G&A expense for the three months ended September 30, 2022 included approximately $3.9 million cumulative adjustments to certain performance-based compensation program, which did not recur in 2023. Total other expense, net increased by $2.5 million during the three months ended September 30, 2023, as compared to the same period in 2022. For the three months ended September 30, 2023, total other expense, net includes a net loss of $3.5 million associated with the non-qualified deferred compensation plan. For the same period in 2022, other expense, net includes a net loss of $4.7 million associated with the non-qualified deferred compensation plan. Excluding the impact of the non-qualified deferred compensation plan, total other expense, net would have been $6.4 million in 2023 and $2.7 million in 2022, a change of $3.7 million primarily attributed to $3.5 million higher interest expense in 2023 as compared to 2022 as well as $0.2 million higher net changes in the fair value of contingent consideration related to prior acquisitions. 34 Nine months ended September 30, 2023 compared to September 30, 2022 Total operating expenses increased by $26.8 million during the nine months ended September 30, 2023, as compared to the same period in 2022. The non-qualified deferred compensation plan increased operating expenses by $6.9 million for the nine months ended September 30, 2023, but decreased operating expenses by $23.0 million during the same period in 2022. Excluding the non-qualified deferred compensation expenses, operating expenses decreased by approximately $3.1 million, primarily driven by lower personnel costs. Total G&A expenses increased by $1.4 million, or 3.2%, during the nine months ended September 30, 2023, as compared to the same period in 2022. The non-qualified deferred compensation plan increased G&A expenses by $0.8 million for the nine months ended September 30, 2023, but decreased G&A expense by $3.3 million during the same period in 2022. Excluding the non-qualified deferred compensation expenses, G&A expense decreased by $2.7 million. The decrease was primarily driven by $3.2 million lower personnel costs offset by $0.5 million higher legal and other professional related costs. G&A expense for the nine months ended September 30, 2022 included approximately $3.9 million cumulative adjustments to certain performance-based compensation program, which did not recur in 2023. In addition, G&A expense for the nine months ended September 30, 2023 included a $1.5 million non-recurring transaction and integration costs related to the Somerset acquisition. G&A expense for the nine months ended September 30, 2022 included a $1.9 million non-recurring transaction and integration costs related to the Marks Paneth acquisition. Total other expense, net decreased by $23.4 million during the nine months ended September 30, 2023, as compared to the same period in 2022. Total other expense, net for the nine months ended September 30, 2023 includes a net gain of $7.7 million associated with the non-qualified deferred compensation plan. For the same period in 2022, total other expense, net includes a net loss of $26.3 million associated with the non-qualified deferred compensation plan. Excluding the impact of the non-qualified deferred compensation plan, total other expense, net would have been $17.0 million in 2023 and $6.5 million in 2022, an increase of $10.5 million, primarily due to $9.8 million higher interest expense due to higher average outstanding balance and interest rates during 2023 as compared to 2022 as well as $0.7 million increase in miscellaneous expenses. LIQUIDITY Our principal sources of liquidity are cash generated from operating activities and financing activities. Our cash flows from operating activities are driven primarily by our operating results and changes in our working capital requirements while our cash flows from financing activities are dependent upon our ability to access credit or other capital. We historically maintain low cash levels and apply any available cash to pay down the outstanding debt balance. We historically experience a use of cash to fund working capital requirements during the first quarter of each fiscal year. This is primarily due to the seasonal accounting and tax services period under the Financial Services practice group, as well as payment of accrued employees' incentives programs. Upon completion of the seasonal accounting and tax services period, cash provided by operations during the remaining three quarters of the fiscal year substantially exceeds the use of cash in the first quarter of the fiscal year. Accounts receivable balances increase in response to the first nine months' revenue generated by the Financial Services practice group. A significant amount of this revenue is billed and collected in subsequent quarters. Days sales outstanding (“DSO”) represent accounts receivable and unbilled revenue (net of realization adjustments) at the end of the period, divided by trailing twelve months' daily revenue. We provide DSO data because such data is commonly used as a performance measure by analysts and investors and as a measure of our ability to collect on receivables in a timely manner. DSO was 96 days and 93 days at September 30, 2023 and 2022. DSO at December 31, 2022 was 74 days. The following table presents selected cash flow information. For additional details, refer to the accompanying Condensed Consolidated Statements of Cash Flows. 35 Nine Months Ended September 30, 2023 2022 (Amounts in thousands) Net cash provided by operating activities $ 57,254 $ 60,059 Net cash used in investing activities (76,630) (95,550) Net cash (used in) provided by financing activities (18,442) 6,025 Net decrease in cash, cash equivalents and restricted cash $ (37,818) $ (29,466) Operating Activities - Cash provided by operating activities was $57.3 million during the nine months ended September 30, 2023, primarily consisted of net income of $133.7 million and certain non-cash items, such as depreciation and amortization expense of $27.0 million, deferred income tax of $6.7 million, and stock-based compensation expense of $9.7 million. The cash inflow was offset by working capital use of $121.6 million. Cash provided by operating activities was $60.1 million during the nine months ended September 30, 2022 and primarily consisted of net income of $116.9 million and certain non-cash items, such as depreciation and amortization expense of $24.7 million, deferred income tax of $5.7 million, and stock-based compensation expense of $12.0 million. The cash inflow was offset by working capital use of $100.0 million. Investing Activities - Cash used in investing activities during the nine months ended September 30, 2023 was $76.6 million and consisted primarily of $53.1 million used for business acquisitions, $19.0 million in capital expenditures, and $11.4 million in other investing activities primarily related to working capital payments and notes receivable. The use of cash was offset by $5.2 million net cash inflow related to funds held for clients, $1.5 million related to the sale of one technology asset and $0.2 million in other cash payments related to certain prior divestitures. Cash used in investing activities during the nine months ended September 30, 2022 was $95.6 million and consisted primarily of $79.3 million used for business acquisitions, $6.0 million in capital expenditures, $8.4 million net activity related to funds held for clients, and $4.7 million in other activities related to working capital payments and notes receivable. The use of cash was offset by $2.9 million cash inflow primarily related to $2.5 million proceeds from the sale of a small book of business as well as receipts of cash payments related to certain prior divestitures. The balances in funds held for clients and client fund obligations can fluctuate with the timing of cash receipts and the related cash payments. The nature of these accounts is further described in Note 1, Basis of Presentation and Significant Accounting Policies, to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022. Financing Activities - Cash used in financing activities during the nine months ended September 30, 2023 was $18.4 million and primarily consisted of $66.2 million in share repurchases, a $49.6 million net decrease in client fund obligations and $40.1 million in contingent consideration payments related to prior acquisitions. The use of cash was partially offset by $129.0 million in net proceeds from the credit facility and $8.4 million proceeds from exercise of stock options. Cash provided by financing activities during the nine months ended September 30, 2022 was $6.0 million and primarily consisted of $115.8 million in net proceeds from the credit facility and $8.0 million proceeds from exercise of stock options, partially offset by $73.3 million in share repurchases, $30.0 million net decrease in client fund obligations, $12.4 million in contingent consideration payments related to prior acquisitions and $2.1 million paid as deferred financing costs related to the 2022 credit facility. CAPITAL RESOURCES Credit Facility - At September 30, 2023, we had $394.7 million outstanding under the 2022 credit facility as well as $4.4 million outstanding letters of credit. Available funds under the 2022 credit facility, based on the terms of the commitment, were approximately $195.0 million at September 30, 2023. The weighted average interest rate under the credit facility was 5.16% during the nine months ended September 30, 2023, compared to 2.29% for the same period in 2022. 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 2022 credit facility. Debt Covenant Compliance - Under the 2022 credit facility, we are required to meet certain financial covenants with respect to (i) total leverage ratio and (ii) minimum interest charge coverage ratio. We are in compliance with our financial covenants as of September 30, 2023. 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 2022 credit facility 36 and debt, refer to Note 4, Debt and Financing Arrangements, to the accompanying unaudited condensed consolidated financial statements. Use of Capital - Our first priority for use of capital is to make strategic acquisitions. We also have the financing flexibility and the capacity to actively repurchase shares of our common stock. We believe that repurchasing shares of our common stock can be a prudent use of our financial resources, and that investing in our stock is an attractive use of capital and an efficient means to provide value to our stockholders. During the nine months ended September 30, 2023, we completed five acquisitions for $53.0 million in cash. We also repurchased 1.3 million shares of our common stock at a total cost of approximately $66.4 million during the nine months ended September 30, 2023. Refer to Note 11, Business Combinations, to the accompanying unaudited condensed consolidated financial statements for further discussion on acquisitions. Cash Requirements for 2023 - Cash requirements for the remainder of 2023 will include acquisitions, interest payments on debt, seasonal working capital requirements, contingent purchase price 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. OFF-BALANCE SHEET ARRANGEMENTS We maintain administrative service agreements with independent CPA firms (as described more fully under “Business – Financial Services” and in Note 1, Basis of Presentation and Significant Accounting Policies, to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022), which qualify as variable interest entities. The accompanying 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. 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 September 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 September 30, 2023 and December 31, 2022, respectively. We have various agreements under which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification clauses are included in contracts arising in the normal course of business under which we customarily agree to hold the other party harmless against losses arising from a breach of representations, warranties, covenants or agreements, related to matters such as title to assets sold and certain tax matters. Payment by us under such indemnification clauses is generally conditioned upon the other party making a claim. Such claims are typically subject to challenge by us and to dispute resolution procedures specified in the particular contract. Further, our obligations under these agreements may be limited in terms of time and/or amount and, in some instances, we may have recourse against third parties for certain payments made by us. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically, we have not made any payments under these agreements that have been material individually or in the aggregate. As of September 30, 2023, we are not aware of any material obligations arising under indemnification agreements that would require payment. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The SEC defines critical accounting policies as those that are most important to the portrayal of a company’s financial condition and results and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our discussion and analysis of our results of operations, financial condition and liquidity are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements. As more information becomes known, these estimates and assumptions could change, which would have an impact on actual results that may differ materially from these estimates and judgments under different assumptions. We have 37 not made any changes to our critical accounting policies and estimates as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. NEW ACCOUNTING PRONOUNCEMENTS Refer to Note 2, New Accounting Pronouncements, to the accompanying unaudited condensed consolidated financial statements for a discussion of recently issued accounting pronouncements. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact included in this Quarterly Report, including without limitation, "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding our financial position, business strategy and plans and objectives for future performance are forward-looking statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are commonly identified by the use of such terms and phrases as "intends", "believes", "estimates", "expects", "projects", "anticipates", "foreseeable future", "seeks", and words or phrases of similar import in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated services, sales efforts, expenses, and financial results. From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q and in any other public statements that we make, are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, the impact of COVID-19 on the Company’s business and operations and those of our clients; the Company’s ability to adequately manage and sustain its growth; the Company’s dependence on the current trend of outsourcing business services; the Company’s dependence on the services of its CEO and other key employees; competitive pricing pressures; general business and economic conditions; and changes in governmental regulation and tax laws affecting the Company’s insurance business or its business service operations. Such forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Should one or more of these risks materialize, or should the underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Consequently, no forward-looking statement can be guaranteed. A more detailed description of risk factors may be found in “Item 1A, Risk Factors” of this Quarterly Report and in “Item 1A, Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022. Except as required by the federal securities laws, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our filings with the SEC, such as quarterly, periodic and annual reports. 38