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Item 7. Management’s Discussion and Analysis

2024-02-23 compared with 2023-02-24 · 120 added, 147 removed, 229 unchanged (54% of the section changed)

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

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

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

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

Please see the sections of this report entitled “Forward-Looking Statements” and “Risk Factors.” This section generally discusses the results of operations for fiscal year 2023 compared to fiscal year 2022.

For discussion related to the results of operations and changes in financial conditions for fiscal year 2021 compared to fiscal year 2020 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2021 as filed SEC on February 25, 2022.

For discussion related to the results of operations and changes in financial conditions for fiscal year 2022 compared to fiscal year 2021 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on February 24, 2023.

EXECUTIVE SUMMARY

Financial Year in Review - Revenue of $1,591.2 million in 2023 grew $179.2 million, or 12.7%, from revenue of $1,412.0 million in 2022.

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

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

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

Earnings per diluted share from continuing operations were $2.01 in 2022, compared to $1.32 in 2021, with a fully diluted weighted average share count of 52.4 million shares in 2022, compared to 53.7 million shares in 2021.

Same-unit revenue, as defined below in the "Results of Operations" section, increased by $104.0 million, or 7.4%, while acquisitions, net of divestitures, contributed $75.2 million to revenue, or 5.3%.

A detailed discussion of revenue by practice group is included under “Operating Practice Groups.” Net income in 2023 increased $15.6 million, or 14.8%, to $121.0 million from $105.4 million in 2022.

Refer to “Results of Operations” for a detailed discussion of the components of net income.

Earnings per diluted share were $2.39 in 2023, compared to $2.01 in 2022, with a fully diluted weighted average share count of 50.6 million shares in 2023, compared to 52.4 million shares in 2022.

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

We completed the following two acquisitions in 2022:

◦ Effective January 1, 2022, we acquired all of the non-attest assets of Marks Paneth LLP ("Marks Paneth").

Marks Paneth, based in New York City, is a provider of a full range of accounting, tax and consulting services to a wide range of industries.

Marks Paneth is included as a component of our Financial Services practice group.

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

Operating results are reported in the Financial Services practice group.

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

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

Operating results are reported in the Financial Services practice group.

We completed the following five acquisitions in 2023:

• 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.

• Effective July 1, 2023, we acquired all of the assets of American Pension Advisors, Ltd.

APA, based in Indianapolis, Indiana, is a provider of full-service retirement plan consulting and administration assisting more than 1,200 clients in the design, implementation, and administration of all types of retirement plans including 401(k), 403(b), 457(b), defined benefit and cash balance.

Operating results for APA are reported in the Benefits and Insurance Services practice group.

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

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

We believe that repurchasing shares of our common stock is a prudent use of our financial resources, and that investing in our stock is an attractive use of capital and an efficient means to provide value to our shareholders.

On February 7, 2023, the CBIZ Board of Directors authorized the purchase of up to 5.0 million shares of our common stock under our Share Repurchase Program (the “Share Repurchase Program”), which may be suspended or discontinued at any time and expires on March 31, 2024.

On February 7, 2024, the CBIZ Board of Directors authorized the purchase of up to 5.0 million shares of our common stock under our Share Repurchase Program (the “Share Repurchase Program”), which may be suspended or discontinued at

any time and expires on March 31, 2025.

The shares may be purchased (i) in the open market, (ii) in privately negotiated transactions, or (iii) under Rule 10b5-1 trading plans, which may include purchases from our employees, officers and directors, in accordance with SEC rules.

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

Recent Accomplishments and Other Events

Workplace Awards - In 2022, we were honored and recognized for 84 various national and local market awards.

A sample of the awards won include:

• 2022 America’s Best Midsize Employers by Forbes – This was the fifth time we have received this award.

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

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

• 2022 Top Workplaces USA by Energage – This award celebrates nationally recognized companies that make the world a better place to work together by prioritizing a people-centered culture and giving employees a voice.

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

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

• Best Places to Work in Insurance – We were selected and honored for the eighth consecutive year as a “Best Places to Work in Insurance” by Business Insurance magazine based on our commitment to attracting, developing and retaining great talent through employee benefits and other programs.

We were recognized for this award based on core focus areas such as leadership and planning, corporate culture, communications, work environment and overall engagement.

• 2022 Best and Brightest Companies in the Nation Top 101 – For the seventh year in a row, we were honored as a “Best and Brightest Company” by NABR based on our commitment to human resource practices and employee enrichment.

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

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

RESULTS OF OPERATIONS - CONTINUING OPERATIONS

RESULTS OF OPERATIONS

We provide professional business services that help clients manage their finances and employees.

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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.

Same-unit revenue, also known internally as "Organic revenue", represents total revenue adjusted to reflect comparable periods of activity for acquisitions and divestitures.

For example, for a business acquired on July 1, 2022, revenue for the period January 1, 2023 through June 30, 2023 would be reported as revenue from acquired businesses whereas revenue for the periods from July 1 through December 31 of both years would be reported as same-unit revenue.

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

Those businesses that have met the requirements to be treated as a discontinued operation are eliminated from continuing operations for all periods presented below.

The following table summarizes total revenue for the years ended December 31, 2023 and 2022:

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

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

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

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

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

Income and expenses related to the deferred compensation plan for the years ended December 31, 2023 and 2022:

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(Amounts in thousands)

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

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

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

Operating expenses (income) $ 17,192 $ (17,252)

Corporate general and administrative expenses (income) $ 2,296 $ (2,393)

Other income (expense), net $ 19,488 $ (19,645)

Excluding the impact of the above-mentioned income and expenses related to the deferred compensation plan, the operating results for the years ended December 31, 2023 and 2022:

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Operating income 165,239 19,488 184,727 11.6 % 168,344 (19,645) 148,699 10.5 %

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

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

Other income (expense), net 21,019 (19,488) 1,531 0.1 % (19,243) 19,645 402 — %

Income before income tax expense 166,303 — 166,303 10.5 % 141,475 — 141,475 10.0 %

Operating Expenses

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Our operating expenses increased by $179.4 million.

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

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

Excluding the impact of the non-qualified deferred compensation plan, which was recorded in "Corporate and Other" for segment reporting purposes, operating expenses would have been $1,205.9 million, or 85.4% of revenue, in 2022 compared to $928.3 million, or 84.0% of revenue, in 2021.

Operating expense as a percentage of revenue increased to 86.0% of revenue in 2023 as compared to 84.2% of revenue for the prior year.

The non-qualified deferred compensation plan increased operating expenses by $17.2 million in 2023, but decreased operating expense by $17.3 million in 2022.

Excluding the impact of the non-qualified deferred compensation plan, which was recorded in "Corporate and Other" for segment reporting purposes, operating expenses would have been $1,350.8 million, or 84.9% of revenue, in 2023 as compared to $1,205.9 million, or 85.4% of revenue, in 2022.

The majority of our operating expenses relate to personnel costs, which includes (i) salaries and benefits, (ii) commissions paid to producers, (iii) incentive compensation and (iv) share-based compensation.

Excluding the impact of non-qualified deferred compensation plan, which was recorded in "Corporate and Other" for segment reporting purposes, operating expense increased by approximately $277.5 million in 2022 as compared to 2021.

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

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

Excluding the impact of non-qualified deferred compensation plan, which was recorded in "Corporate and Other" for segment reporting purposes, operating expenses increased by approximately $144.9 million in 2023 as compared to 2022.

Operating expenses for the year ended December 31, 2023 included approximately $1.9 million non-recurring integration and retention costs related to the Somerset acquisition, and operating expenses for the year ended December 31, 2022 included approximately $8.6 million non-recurring integration and retention costs related to the acquisition of the non-attest assets of Marks Paneth LLP ("Marks Paneth").

The increase in operating costs was driven by $121.6 million higher personnel cost (of which acquisitions contributed approximately $50.3 million), $9.0 million higher travel and entertainment costs, $3.4 million higher facility costs, $4.9 million higher computer and technology related costs, $3.4 million higher depreciation and amortization expense, as well as $1.7 million higher marketing expense.

Other discretionary spending increased by approximately $0.9 million to support the growth in business activities.

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G&A expenses excluding deferred compensation % of revenue 3.5 % 4.1 %

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

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

Excluding the impact of the deferred compensation plan, which was recorded in "Corporate and Other" for segment reporting purposes, G&A expenses would have been $57.4 million, or 4.1% of revenue, in 2022 compared to $54.0 million, or 4.9% of revenue, in 2021.

Excluding the impact of the non-qualified deferred compensation plan, which was recorded in "Corporate and Other" for segment purposes, G&A expense increased by $3.4 million in 2022 as compared to prior year, attributable to $3.0 million higher personnel costs, a $1.3 million non-recurring transaction and integration costs related to the Marks Paneth acquisition, $0.8 million higher travel and entertainment costs, $0.5 million higher marketing expense, offset by $2.2 million lower legal costs as compared to 2021.

Legal Settlement, net

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

District Court for the Western District of Pennsylvania.

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

Other (Expense) Income, net

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

Our G&A expenses increased by approximately $2.9 million, or 5.3%, in 2023 as compared to 2022, and decreased to 3.6% of revenue from 3.9% of revenue for the prior year.

The non-qualified deferred compensation plan increased G&A expenses by $2.3 million in 2023, and decreased G&A expenses by $2.4 million in 2022.

Excluding the impact of the deferred compensation plan, which was recorded in "Corporate and Other" for segment reporting purposes, G&A expenses would have been $55.7 million, or 3.5% of revenue, in 2023 as compared to $57.4 million, or 4.1% of revenue, in 2022, a decrease of $1.7 million in 2023 as compared to prior year.

The decrease was primarily driven by $2.4 million lower personnel costs, offset by $0.7 million higher legal and other professional related costs as compared to 2022.

Personnel costs in 2022 included approximately $3.9 million cumulative adjustments to certain performance-based compensation programs, which did not recur in 2023.

In addition, G&A expenses for the year ended December 31, 2023 included a $1.5 million non-recurring transaction and integration costs related to the Somerset acquisition.

G&A expenses for the year ended December 31, 2022 included a $1.3 million non-recurring transaction and integration costs related to the Marks Paneth acquisition.

Other Income (Expense), net

The following table presents the components of Other income (expense), net for the years ended December 31, 2023 and 2022:

Year Ended December 31,

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Gain on sale of operations, net 176 413

Other (expense) income, net (1)

Other income (expense), net (1)

21,019 (19,243)

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

(1) Other (expense) income, net includes a net loss of $19.6 million in 2022 and a net gain of $19.5 million in 2021, associated with the value of investments held in a rabbi trust related to the deferred compensation plan, which was recorded in "Corporate and Other" for segment reporting purposes.

Total other income (expense), net $ 1,064 $ (26,869)

(1) Other income (expense), net includes a net gain of $19.5 million in 2023 and a net loss of $19.6 million in 2022, associated with the value of investments held in a rabbi trust related to the deferred compensation plan, which was recorded in "Corporate and Other" for segment reporting purposes.

The adjustments to the investments held in a rabbi trust related to the deferred compensation plan are offset by a corresponding increase or decrease to compensation expense, which is recorded as “Operating expenses” and “G&A expenses” in the accompanying Consolidated Statements of Comprehensive Income.

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

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

Interest Expense - Our primary financing arrangement is the 2022 credit facility.

Interest expense was $20.1 million in 2023, compared to $8.0 million in 2022.

Our average debt balance and weighted average interest rate was $267.0 million and 2.67%, respectively, in 2022, compared to $161.0 million and 1.88%, respectively, in 2021.

Our average debt balance and weighted average interest rate was $364.1 million and 5.23%, respectively, in 2023, as compared to $267.0 million and 2.67%, respectively, in 2022.

The increase in interest expense in 2023 as compared to 2022 was driven by a higher average debt balance as well as higher weighted average effective interest rate.

Our debt is further discussed in Note 9, Debt and Financing Arrangements, to the accompanying consolidated financial statements.

Gain on Sale of Operations, net - During the twelve months ended December 31, 2023, we recorded approximately $0.2 million additional gain related to a previously sold business as additional contingent proceeds were received.

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

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

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

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

Other income of $18.2 million in 2021 consisted of a net gain of $19.5 million related to the deferred compensation plan, partially offset by $2.4 million net increase to the fair value of the contingent purchase price liability due to $3.1 million net present value adjustment and $0.6 million stock price adjustment.

During the same period in 2022, we recorded approximately $0.4 million additional gain related to a previously sold business as additional contingent proceeds were received.

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

to the sale of assets.

Other income of $21.0 million in 2023 included a $19.5 million net gain related to the deferred compensation plan, $2.8 million gain related to the sale of certain assets, $0.7 million interest income from non-operating investments, as well as $0.7 miscellaneous income, offset by $2.7 million expense due to the net increase to the fair value of the contingent purchase price liability.

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

Income Tax Expense

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The increase in income tax expense from 2022 to 2023 was primarily driven by higher pre-tax income.

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

GAAP RECONCILIATION

Income from Continuing Operations to Non-GAAP Financial Measure (1)

Year Ended December 31,

(Amounts in thousands)

Income from continuing operations $ 105,372 $ 70,911

Interest expense 8,039 3,868

Income tax expense 36,121 22,129

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

Gain on sale of assets, net (2,391) —

Legal settlement, net — 30,468

Transaction costs related to Marks Paneth (2)

Integration and retention costs related to Marks Paneth (2)

Depreciation 11,231 10,781

Amortization 21,664 16,297

Adjusted EBITDA $ 190,143 $ 148,459

(1) We report our financial results in accordance with GAAP.

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

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

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

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

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

The increase in the effective tax rate from 2022 to 2023 was primarily due to higher non-deductible expense in 2023 compared to 2022.

In addition, the effect of higher pre-tax income on our tax benefit related to stock-based compensation also contributed to the increase in the effective tax rate.

Operating Practice Groups

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Total other income (expense), net $ 2,218 $ 682 $ 1,536 N/M

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

Income before income tax expense $ 187,828 $ 160,712 $ 27,116 16.9 %

Gross margin percentage 16.0 % 15.8 %

The Financial Services practice group revenue in 2023 grew by 14.9% to $1,160.7 million from $1,010.1 million in 2022.

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

Same-unit revenue grew by $76.8 million, or 7.6%, across all service lines, primarily driven by a $52.6 million increase from those units that provide traditional accounting and tax-related services, a $16.1 million increase from those units that provide project-oriented advisory services, and an $8.1 million increase in government healthcare compliance business.

The impact of the acquired businesses, net of divestitures, contributed $73.8 million or 6.4%, of 2023 revenue.

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Fees earned under the ASAs are recorded as revenue in the accompanying Consolidated Statements of Comprehensive Income and were $259.6 million and $235.4 million in 2023 and 2022, respectively.

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

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

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

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

Operating expenses increased by $125.0 million in 2023 as compared to 2022, primarily as a result of $102.2 million, or 14.6%, in higher personnel costs, of which acquisitions contributed approximately $49.5 million to the increase primarily driven by the Somerset acquisition in 2023 and the wrap around effect of the Stinnett acquisition

Compared to the same period in 2022, corporate allocated costs, travel and entertainment costs, depreciation and amortization costs, technology costs, direct costs, facility costs, and marketing costs increased by $6.2 million, $5.6 million, $3.4 million, $3.1 million, $2.3 million, $1.8 million, and $1.0 million, respectively, to support business growth.

In addition, bad debt expense increased by $0.6 million.

The increase was partially offset by $0.8 million lower recruiting and other employee costs as well as $0.2 million lower other discretionary costs.

Operating expense as a percentage of revenue remained relatively unchanged at 84.0% in 2023 and 84.2% in 2022.

Benefits and Insurance Services

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Same-unit $ 381,200 $ 358,007 $ 23,193 6.5 %

Divested operation — 1,743 (1,743)

Acquired businesses 1,405 — 1,405

Total revenue 382,605 358,007 24,598 6.9 %

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Gross margin / Operating income $ 72,095 $ 67,620 $ 4,475 6.6 %

Total other income, net $ 2,386 $ 7,111 $ (4,725) N/M

Income from continuing operations before income tax expenses $ 70,006 $ 67,784 $ 2,222 3.3 %

Total other income, net $ 2,058 $ 2,386 $ (328) (13.7) %

Income before income tax expenses $ 74,153 $ 70,006 $ 4,147 5.9 %

Gross margin percentage 18.8 % 18.9 %

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Same-unit revenue increased by $23.2 million, or 6.5%, in 2023 when compared to the same period in 2022.

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

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

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

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

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

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

The increase was across all service lines, particularly driven by an $11.1 million increase in employee benefit and retirement benefit services lines, $6.6 million increase in property and casualty services, $4.4 million in payroll related services, as well as a $1.1 million increase in other project-based services.

Operating expenses increased by $20.1 million in 2023 as compared to 2022, primarily driven by $16.5 million, or 7.3%, higher personnel costs, attributable primarily to the amount of annual merit increases, bonus accruals, and investment in new sales producers.

Compared to 2022, corporate allocated costs, travel and entertainment costs, technology costs, marketing costs, and direct costs increased by $2.2 million, $1.3 million, $0.5 million, $0.4 million, and $0.3 million, respectively.

The increase in operating costs was offset by $1.0 million lower depreciation and amortization costs, $0.6 million lower facility costs, and $0.2 million lower bad debt expense.

In addition, other miscellaneous discretionary costs increased by approximately $0.6 million, primarily driven by higher recruiting and other employee costs to support business growth.

Operating expense as a percentage of revenue remained relatively unchanged at 81.2% in 2023 and 81.1% in 2022.

National Practices

Year Ended December 31,

2023 2022 $ Change % Change

(Amounts in thousands, except percentages)

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Total other income, net $ 1 $ 10 $ (9) (90.0) %

Income from continuing operations before income tax expenses $ 4,713 $ 4,085

Income before income tax expenses $ 4,844 $ 4,713 $ 131 2.8 %

Gross margin percentage 10.1 % 10.7 %

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

The cost-plus contract is a five-year contract with the most recent renewal through December 31, 2023.

The cost-plus contract is a five-year contract with the most recent renewal through

December 31, 2028.

Revenues from this single client accounted for approximately 75% of the National Practice group’s revenue.

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

Operating expenses have increased mainly due to increases in salaries and benefits costs.

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.

These expenses primarily consist of certain health care costs, gains or losses attributable to assets held in our non-qualified deferred compensation plan, stock-based compensation, consolidation and integration charges, certain professional fees, certain advertising costs and other various expenses.

Year Ended December 31,

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(Amounts in thousands, except percentages)

Operating expenses $ 8,986 $ 31,253 $ (22,267) (71.2) %

Operating expenses $ 39,344 $ 8,986 $ 30,358 N/M

Corporate general and administrative expenses 57,965 55,023 $ 2,942 5.3 %

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

Operating loss $ (97,309) $ (64,009) $ (33,300) 52.0 %

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

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

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

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

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

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

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

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

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

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

District Court for the Western District of Pennsylvania.

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

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

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

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

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

Total other expense, net (3,213) (29,947) $ 26,734 N/M

Loss before income taxes $ (100,522) $ (93,956) $ (6,566) 7.0 %

Total operating expenses increased by $30.4 million in 2023 as compared to 2022.

The non-qualified deferred compensation plan increased operating expenses by $17.2 million in 2023, but decreased operating expenses by $17.3 million in 2022.

Excluding the non-qualified deferred compensation expenses, operating expense decreased by approximately $4.1 million, primarily driven by $1.6 million lower personnel costs and $8.3 million higher allocation costs to other operating units.

The decrease in operating costs was offset by $2.2 million higher facility costs, $1.3 million higher technology costs, $1.0 million higher depreciation costs, $0.5 million higher professional fees, as well as $0.8 million higher other miscellaneous discretionary costs to support business growth.

Total G&A expenses increased by $2.9 million, or 5.3%, in 2023, as compared to 2022.

The non-qualified deferred compensation plan increased G&A expenses by $2.3 million in 2023, but decreased G&A expenses by $2.4 million in 2022.

Excluding the impact of the non-qualified deferred compensation plan, G&A expenses decreased by $1.7 million in 2023 as compared to the prior year, attributable to $2.4 million lower personnel costs, offset by $0.7 million higher legal and other professional related costs as compared to 2022.

Personnel costs in 2022 included approximately $3.9 million cumulative adjustments to certain performance-based compensation programs, which did not recur in 2023.

In addition, G&A expenses for the year ended December 31, 2023 included a $1.9 million nonrecurring transaction and integration costs related to the Somerset acquisition.

G&A expenses for the year ended December 31, 2022 included a $1.3 million non-recurring transaction and integration costs related to the Marks Paneth acquisition.

Total other expense, net decreased by $26.7 million to $3.2 million from $29.9 million in 2022.

Total other expense, net includes a net gain of $19.5 million and a net loss of $19.6 million associated with the non-qualified deferred compensation plan in 2023 and 2022, respectively.

Excluding the impact of the non-qualified deferred compensation plan, total other expense, net would have been $22.7 million in 2023 and $10.3 million in 2022, a net increase in expense of approximately $12.4 million.

The increase was driven by $12.1 million higher interest expense due to higher average debt balance as well as higher weighted average effective interest rate experienced in 2023 as compared to 2022, and $0.3 million higher other miscellaneous expenses.

LIQUIDITY AND CAPITAL RESOURCES

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Net cash used in financing activities (77,111) (17,343)

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

Cash flows from

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

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

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

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A significant amount of this revenue is billed and collected in subsequent quarters.

Days sales outstanding (“DSO”) from continuing operations represent accounts receivable and unbilled revenue (net of realization adjustments) at the end of the period, divided by trailing twelve months' daily revenue.

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.

DSO was 78 days as of December 31, 2023 and 74 days as of December 31, 2022.

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Cash Provided by Operating Activities

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

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

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

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

2023 compared to 2022 - Cash provided by operating activities was $153.5 million during 2023, consisting of net income of $121.0 million and certain non-cash items, such as depreciation and amortization expense of $36.3 million, share-based compensation expense of $12.3 million, deferred income tax of $11.3 million, bad debt expense of $1.6 million, and adjustment to the fair value of contingent purchase consideration of $2.7 million, offset by $29.0 million use of cash from working capital management.

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

Investing Activities

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

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

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

2023 - Net cash used in investing activities in 2023 consisted primarily of $53.1 million cash paid for business acquisitions, $23.1 million in capital expenditures, and $10.3 million payments of working capital adjustments related to previously completed acquisitions, partially offset by $4.3 million net proceeds received from the sale of client funds investments, and $3.0 million proceeds received from the sale of certain assets.

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

Financing Activities

The majority of our financing activities relate to our 2022 credit facility, share repurchases, net client fund obligation activity, as well as contingent consideration payments for prior acquisitions.

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

Refer to Note 9, Debt and Financing

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

2023 - Net cash used in financing activities in 2023 consisted of $73.8 million of share repurchases, $45.2 million of contingent consideration payments for prior acquisitions, and a net decrease of $13.6 million in client fund obligations, partially offset by $8.8 million in proceeds from the exercise of stock options and $46.7 million net proceeds from borrowings under our 2022 credit facility.

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

2021 - Net cash used in financing activities in 2021 consisted of $100.5 million of share repurchases, a net decrease of $8.9 million in client fund obligations, and $14.1 million of contingent consideration payments for prior acquisitions, partially offset by $7.3 million in proceeds from the exercise of stock options and $47.3 million net proceeds from borrowings under our 2018 credit facility.

CAPITAL RESOURCES

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

We completed two business acquisitions in 2022.

We completed five business acquisitions in 2023.

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

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

We repurchased 1.3 million shares of our common stock in the open market at a total cost of approximately $65.1 million in 2023 and 2.8 million shares at a total cost of approximately $122.8 million in 2022.

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

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

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

Cash Requirements - Cash requirements for 2024 and beyond will generally include acquisitions, interest payments on debt, seasonal working capital requirements, contingent earnout payments for previous acquisitions, share repurchases, income tax payments, and capital expenditures.

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

OBLIGATIONS AND COMMITMENTS

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We provide letters of credit for insurance needs as well as to landlords (lessors) of our leased premises in lieu of cash security deposits.

Letters of credit totaled $5.0 million and $3.4 million at December 31, 2022 and 2021.

Letters of credit totaled $3.5 million and $5.0 million at December 31, 2023 and 2022, respectively.

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

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There are no credit risk-related contingent features in our interest rate swaps nor do the swaps contain provisions under which we would be required to post collateral.

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

As of December 31, 2023, the notional value of all of our interest rate swaps was $150.0 million, with maturity dates ranging from April, 2025 to October, 2028.

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

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A significant portion of our assets in the accompanying Consolidated Balance Sheets is goodwill.

At December 31, 2022, the carrying value of goodwill totaled $819.9 million, compared to total assets of $1.9 billion and total shareholders’ equity of $713.5 million.

At December 31, 2023, the carrying value of goodwill totaled $865.2 million, compared to total assets of $2.0 billion and total stockholders’ equity of $791.6 million.

Intangible assets consist of identifiable intangibles other than goodwill.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis