CBIZ, Inc.: Form 10-Q for the period ended Jun 30, 2023

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 June 30, 2023 and December 31, 2022, results of operations for the three and six months ended June 30, 2023 and 2022, and cash flows for the six months ended June 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 June 30, 2023 increased by $36.6 million, or 10.1%, to $398.5 million from $362.0 million for the same period in 2022. Same-unit revenue increased by approximately $15.0 million, or 4.1%, as compared to the same period in 2022. Revenue from newly acquired operations, net of divestitures, contributed $21.6 million, or 6.0%, of incremental revenue for the three months ended June 30, 2023 as compared to the same period in 2022.

Revenue for the six months ended June 30, 2023 increased by $99.4 million, or 13.2%, to $853.1 million from $753.7 million for the same period in 2022. Same-unit revenue increased by approximately $53.9 million, or 7.2%, as compared to the same period in 2022. Revenue from newly acquired operations, net of divestitures, contributed $45.5 million, or 6.0%, of incremental revenue for the six months ended June 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 $26.9 million, or $0.53 per diluted share, in the second quarter of 2023, compared to $31.3 million, or $0.60 per diluted share, in the second quarter of 2022. For the six months ended June 30, 2023, net income was $100.0 million, or $1.98 per diluted share, compared to $89.4 million, or $1.70 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 six months ended June 30, 2023, we completed four acquisitions for $48.5 million in cash. We also repurchased 1.1 million shares of our common stock on open market as well as for tax withholding purposes at a total cost of approximately $56.8 million in the six months ended June 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 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 six months ended June 30, 2023 and 2022:

(Amounts in thousands, except percentages)

(Amounts in thousands, except percentages)

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 six months ended June 30, 2023 and 2022 are as follows:

(Amounts in thousands)

Excluding the impact of the above-mentioned income and expenses related to the deferred compensation plan, the operating results for the three and six months ended June 30, 2023 and 2022 are as follows:

(Amounts in thousands, except percentages)

(Amounts in thousands, except percentages)

Operating Expenses

(Amounts in thousands, except percentages)

(Amounts in thousands, except percentages)

25

Three months ended June 30, 2023 compared to June 30, 2022. Total operating expenses for the three months ended June 30, 2023 increased by $54.3 million, or 18.7%, to $344.0 million as compared to $289.7 million in the same period of 2022. The non-qualified deferred compensation plan increased operating expenses by $5.1 million for the three months ended June 30, 2023, but decreased operating expenses by $13.3 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 $338.9 million and $303.1 million, or 85.0% and 83.7% of revenue, for the three months ended June 30, 2023 and 2022, respectively. In addition, operating expenses for the three months ended June 30, 2023 included approximately $0.6 million non-recurring integration costs associated with the Somerset acquisition, and operating expenses for the three months ended June 30, 2022 included $1.8 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 $35.8 million during the three months ended June 30, 2023 as compared to the same period in 2022, driven by $30.9 million higher personnel costs (of which $14.5 million was the result of acquisitions), $2.1 million higher travel and entertainment costs, $1.2 million higher facility costs, $1.0 million higher marketing costs, $1.0 million higher depreciation and amortization expense, $0.6 million higher technology related costs, offset by approximately $1.0 decrease in other discretionary spending. Personnel costs are discussed in further detail under “Operating Practice Groups”.

Six months ended June 30, 2023 compared to June 30, 2022. Total operating expenses for the six months ended June 30, 2023 increased by $105.0 million, or 18.1%, to $685.0 million as compared to $580.0 million in the same period of 2022. The non-qualified deferred compensation plan increased operating expenses by $9.9 million for the six months ended June 30, 2023, but decreased operating expenses by $19.0 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 $675.1 million and $599.0 million, or 79.1% and 79.5% of revenue, for the six months ended June 30, 2023 and 2022, respectively, an increase of $76.1 million as compared to the same period in 2022. In addition, operating expense for the six months ended June 30, 2023 included approximately $1.0 million non-recurring integration costs related to the Somerset acquisition, and operating expenses for the six months ended June 30, 2022 included $6.2 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 $64.9 million (of which $26.0 million was the result of acquisitions), $4.9 million higher travel and entertainment costs, $2.1 million higher technology related costs, $1.4 million higher facility costs, $1.4 million higher depreciation and amortization expense, and $1.1 million higher marketing costs, as well as $0.3 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

(Amounts in thousands, except percentages)

26

(Amounts in thousands, except percentages)

Three months ended June 30, 2023 compared to June 30, 2022. The deferred compensation plan increased G&A expenses by $0.6 million for the three months ended June 30, 2023, but decreased G&A expenses by $1.8 million during the same period in 2022. G&A expenses, excluding the impact of the deferred compensation plan, would have been $15.2 million, or 3.8% of revenue, for the three months ended June 30, 2023, compared to $12.7 million, or 3.5% of revenue, for the same period in 2022, an increase of approximately $2.4 million. The increase was primarily driven by $1.0 million higher personnel costs as well as a $1.5 million higher legal and other professional related costs. In addition, G&A expense for the three months ended June 30, 2023 included approximately $0.3 million non-recurring transaction and integration costs associated with the Somerset acquisition. G&A expense for the three months ended June 30, 2022 included $0.3 million non-recurring transaction and integration costs associated with the Marks Paneth acquisition.

Six months ended June 30, 2023 compared to June 30, 2022. The deferred compensation plan increased G&A expense by $1.3 million for the six months ended June 30, 2023, but decreased G&A expenses by $2.6 million during the same period in 2022. G&A expenses, excluding the impact of the deferred compensation plan, would have been $30.1 million, or 3.5% of revenue, for the six months ended June 30, 2023, compared to $29.9 million, or 4.0% of revenue, for the same period in 2022. The increase in G&A expenses was primarily due to approximately $0.8 million higher personnel costs, offset by $0.5 million lower net discretionary spending and other miscellaneous costs. In addition, G&A expense for the six months ended June 30, 2023 included a $1.5 million non-recurring transaction and integration costs related to the Somerset acquisition. G&A expense for the six months ended June 30, 2022 included a $1.9 million non-recurring transaction and integration costs related to the Marks Paneth acquisition.

Other Income (Expense), Net

(Amounts in thousands, except percentages)

(Amounts in thousands, except percentages)

(1) Other income (expense), net includes a net gain of $5.7 million during the three months ended June 30, 2023, compared to a net loss of $15.1 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 three months ended June 30, 2023 and 2022, is expense of $0.8 million and $0.8 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 $11.1 million during the six months ended June 30, 2023, compared to a net loss of $(21.6) 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 six months ended June 30, 2023 and 2022, is expense of $1.4 million and $1.5 million, respectively, related to net changes in the fair value of contingent consideration related to prior acquisitions.

Interest Expense

Three and six months ended June 30, 2023 compared with June 30, 2022. Our primary financing arrangement is the credit facility which was amended and restated in May 2022. During the three months ended June 30, 2023, our average debt balance and weighted average effective interest rate was $403.1 million and 5.24%, compared to $283.6 million and 2.04% for the same period of 2022. The increase in interest expense for the three months ended June 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 six months ended June 30, 2023, our average debt balance and interest rate was $352.9 million and 4.94% compared to $264.2 million and 1.93% for the same period of 2022. The increase in interest expense for the six months ended June 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.

Other Income (Expense), Net

Three and six months ended June 30, 2023 compared with June 30, 2022. For the three months ended June 30, 2023, other income (expense), net includes a net gain of $5.7 million associated with the non-qualified deferred compensation plan. For the same period in 2022, other (expense) income, net includes a net loss of $15.1 million associated with the non-qualified deferred compensation plan. Excluding the impact of the deferred compensation plan, other income (expense), net increased by $0.4 million in 2023 as compared to 2022 primarily due to a $0.2 million higher miscellaneous income in 2023.

For the six months ended June 30, 2023, other income (expense), net includes a net gain of $11.1 million associated with the non-qualified deferred compensation plan. For the same period in 2022, other (expense) income, net includes a net loss of $21.6 million associated with the non-qualified deferred compensation plan. Excluding the impact of the deferred compensation plan, other (expense) income, net decreased by $0.1 million in 2023 as compared to 2022.

Income Tax Expense

(Amounts in thousands, except percentages)

Three and six months ended June 30, 2023 compared with June 30, 2022. The effective tax rate for the three months ended June 30, 2023 was 30.4%, compared to an effective tax rate of 28.8% 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 June 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 second quarter of 2023 as compared to the same period in 2022.

The effective tax rate for the six months ended June 30, 2023 was 27.6%, compared to an effective tax rate of 26.3% 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 six months ended June 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.

Financial Services

(Amounts in thousands, except percentages)

Three months ended June 30, 2023 compared to June 30, 2022

Revenue

The Financial Services practice group revenue for the three months ended June 30, 2023 grew by 12.2% to $290.9 million from $259.3 million during the same period in 2022. Same-unit revenue grew by $10.0 million, or 3.9%, primarily driven by those units that provide traditional accounting and tax-related services, which increased $8.5 million and an increase of approximately $3.8 million in those units that provide project-oriented advisory services. The increase was offset by a decrease of approximately $2.3 million in government healthcare compliance business due to project delays. The impact of acquired businesses contributed $21.6 million, or 7.4% of 2023 revenue, of which Somerset and Stinnett & Associates, LLC ("Stinnett"), which was acquired on July 1, 2022, contributed a total of $20.7 million, or 7.2% of the Financial Services practice group's revenue for the three months ended June 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 $65.9 million and $61.0 million for the three months ended June 30, 2023 and 2022, respectively.

Operating Expenses

Operating expenses increased by $33.8 million, or 16.1%, as compared to the same period last year. Personnel costs increased by $28.4 million, of which acquisitions contributed approximately $14.5 million to the increase. Compared to the same period in 2022, corporate allocated costs, travel and entertainment costs, depreciation and amortization costs, technology costs, facility costs, direct costs, and marketing costs increased by approximately $1.7 million, $1.3 million, $1.0 million, $0.7 million, $0.7 million, $0.5 million, and $0.3 million respectively. Other discretionary costs, net decreased by approximately $0.8 million, primarily driven by lower professional fees and recruiting costs. Operating expenses as a percentage of revenue increased to 83.7% for the three months ended June 30, 2023 from 80.8% of revenue for the prior year quarter.

Six months ended June 30, 2023 compared to June 30, 2022

Revenue

Revenue for the six months ended June 30, 2023 grew by 15.7% to $634.0 million from $548.1 million during the same period in 2022. Same-unit revenue grew by $40.5 million, or 7.4%, across almost all service lines, primarily driven by those units that provide traditional accounting and tax-related services, which increased $33.3 million and an increase of approximately $7.6 million in those units that provide project-oriented advisory services. The increase was offset by approximately $0.5 million decrease in government healthcare compliance business due to project delays. The impact of acquired businesses contributed $45.5 million, or 7.2% of 2022 revenue, of which Somerset and Stinnett contributed a total of $44.3 million, or 7.0% of Financial Services practice group's revenue for the six months ended June 30, 2023.

Fees earned under the ASAs, as described above, were approximately $150.7 million and $137.0 million for the six months ended June 30, 2023 and 2022, respectively.

Operating Expenses

Operating expenses increased by $68.4 million, or 16.3%, as compared to the same period last year. Personnel costs increased by $56.6 million, of which acquisitions contributed approximately $26.0 million to the increase. Compared to the same period in 2022, corporate allocated costs, travel and entertainment costs, technology costs, depreciation and amortization costs, direct costs, facility costs, and marketing costs increased by approximately $3.3 million, $3.2 million, $1.5 million, $1.5 million, $0.9 million, $0.8 million, and $0.5 million respectively. Other discretionary costs, net increased by approximately $0.1 million. Operating expense as a percentage of revenue increased to 77.0% during the six months ended June 30, 2023 from 76.5% of revenue during the same period in 2022.

Benefits and Insurance Services

(Amounts in thousands, except percentages)

31

(Amounts in thousands, except percentages)

Three months ended June 30, 2023 compared to June 30, 2022

Revenue

The Benefits and Insurance Services practice group revenue increased by $4.1 million, or 4.5%, to $95.8 million during the three months ended June 30, 2023 compared to $91.7 million for the same period in 2022. The increase was across almost all of the major service lines, primarily driven by $2.2 million increase in employee benefit and retirement benefit services lines, $1.2 million in payroll related services, and $0.3 million in property and casualty services. In addition, revenue from other project based services increased by approximately $0.4 million.

Operating Expenses

Operating expenses increased by $3.4 million, or 4.5%, when compared to the same period last year. Personnel costs increased by $3.1 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, direct costs, as well as marketing costs increased by approximately $0.6 million, $0.4 million, $0.2 million, and $0.1 million, respectively. The increase in operating expenses was offset by $0.4 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. Operating expenses as a percentage of revenue remained unchanged at 81.8% for the quarter ended June 30, 2023 from 81.8% of revenue for the same period in 2022.

Six months ended June 30, 2023 compared to June 30, 2022

Revenue

The Benefits and Insurance Services practice group revenue increased by $11.7 million, or 6.4%, to $195.9 million during the six months ended June 30, 2023 compared to $184.2 million for the same period in 2022. The increase was across almost all of the major service lines, primarily driven by $6.1 million increase in employee benefit and retirement benefit services lines, $2.8 million increase in payroll related services, and $2.5 million increase in the property and casualty services. In addition, revenue from other project based services increased by approximately $0.3 million.

Operating Expenses

Operating expenses increased by $7.6 million, or 5.2%, when compared to the same period last year. Personnel cost increased by $6.6 million primarily 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, direct costs, as well as marketing costs increased by approximately $1.1 million, $0.9 million, $0.2 million, $0.2 million, and $0.2 million, respectively. The increase in operating expenses was offset by $0.6 million lower depreciation and amortization costs, $0.6 million lower bad debt expense as well as $0.5 million lower facility costs as compared to the same period in 2022. Operating expense as a percentage of revenue slightly improved to 79.3% during the six months ended June 30, 2023 from 80.2% of revenue for the same period in 2022.

National Practices

(Amounts in thousands, except percentages)

(Amounts in thousands, except percentages)

Three and six months ended June 30, 2023 compared with June 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 six months ended June 30, 2023, revenue increased by $0.8 million, or 7.3%, and $1.8 million, or 8.3%, respectively, while operating expenses increased by $0.6 million, or 6.5%, and $1.7 million, or 8.5%, respectively.

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.

(Amounts in thousands, except percentages)

(Amounts in thousands, except percentages)

Three months ended June 30, 2023 compared to June 30, 2022

Total operating expenses increased by $16.4 million during the three months ended June 30, 2023, as compared to the same period in 2022. The non-qualified deferred compensation plan increased operating expenses by $5.1 million for the three months ended June 30, 2023 and decreased operating expenses by $13.3 million during the same period in 2022. Excluding the non-qualified deferred compensation expenses, operating expenses decreased by $1.7 million during the three months ended June 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 $4.9 million, or 44.5%, during the three months ended June 30, 2023, as compared to the same period in 2022. The non-qualified deferred compensation plan increased corporate general and administrative expenses by $0.6 million for the three months ended June 30, 2023, but decreased by $1.8 million during the same period in 2022. Excluding the non-qualified deferred compensation expenses, corporate general and administrative expense decreased by approximately $2.4 million, primarily driven by $1.0 million higher personnel costs as well as a $1.5 million higher legal and other professional related costs.

Total other income (expense), net increased by $17.1 million during the three months ended June 30, 2023, as compared to the same period in 2022. For the three months ended June 30, 2023, total other income, net includes a net gain of $5.7 million associated with the non-qualified deferred compensation plan. For the same period in 2022, other expense, net includes a net loss of $15.1 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 $6.2 million in 2023 and $2.5 million in 2022, a change of $3.7 million primarily attributed to $3.9 million higher interest expense in 2023 as compared to 2022, offset by $0.2 million higher income from sale of miscellaneous assets.

Six months ended June 30, 2023 compared to June 30, 2022

Total operating expenses increased by $27.2 million, or 118.7%, during the six months ended June 30, 2023, as compared to the same period in 2022. The non-qualified deferred compensation plan increased operating expenses by $9.9 million for the six months ended June 30, 2023, and decreased operating expense by $19.0 million during the same period in 2022. Excluding the non-qualified deferred compensation expenses, operating expense decreased by approximately $1.6 million, primarily driven by lower personnel costs.

Total G&A expenses increased by $4.2 million, or 15.3%, during the six months ended June 30, 2023, as compared to the same period in 2022. The non-qualified deferred compensation plan decreased G&A expenses by $1.3 million for the six months ended June 30, 2023, and increased G&A expense by $2.6 million during the same period in 2022. Excluding the non-qualified deferred compensation expenses, G&A expense increased slightly by approximately $0.3 million, primarily due to approximately $0.8 million higher personnel costs, offset by $0.5 million lower net discretionary spending and other miscellaneous costs

Total other (expense) income, net increased by $25.9 million during the six months ended June 30, 2023, as compared to the same period in 2022. Total other income (expense), net for the six months ended June 30, 2023 includes a net gain of $11.1 million associated with the non-qualified deferred compensation plan. For the same period in 2022, total other expense, net includes a net loss of $21.6 million associated with the non-qualified deferred compensation plan. Excluding the impact of the non-qualified deferred compensation plan, total other (expense) income, net increased by $6.9 million, primarily due to $6.3 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 six 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 89 days and 88 days at June 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.

(Amounts in thousands)

Operating Activities - Cash provided by operating activities was $29.7 million during the six months ended June 30, 2023, primarily consisted of net income of $100.0 million and certain non-cash items, such as depreciation and amortization expense of $17.8 million, deferred income tax of $4.6 million, and stock-based compensation expense of $6.6 million The cash flow was offset by working capital use of $101.6 million. Cash provided by operating activities was $28.5 million during the six months ended June 30, 2022, primarily consisted of net income of $89.4 million and certain non-cash items, such as depreciation and amortization expense of $16.5 million, deferred income tax of $4.7 million, and stock-based compensation expense of $6.4 million. The cash inflow was offset by working capital use of $91.3 million.

Investing Activities - Cash used in investing activities during the six months ended June 30, 2023 was $65.6 million and consisted primarily of $48.6 million used for business acquisitions, $11.7 million in capital expenditures, and $9.0 million in other investing activities primarily related to working capital payments and notes receivable. The use of cash was offset by $3.7 million net cash inflow related to funds held for clients and other activities. Cash used in investing activities during the six months ended June 30, 2022 was $89.8 million and consisted primarily of $72.5 million used for business acquisition, $3.6 million in capital expenditures, $12.2 million net activity related to funds held for clients, and $1.6 million in other activities related to working capital payments and notes receivable.

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 provided by financing activities during the six months ended June 30, 2023 was $21.8 million and primarily consisted of $144.9 million in net proceeds from the credit facility and $4.3 million proceeds from exercise of stock options, partially offset by $57.0 million in share repurchases, $40.4 million net decrease in client fund obligations and $30.0 million in contingent consideration payments related to prior acquisitions. Cash provided by financing activities during the six months ended June 30, 2022 was $91.7 million and primarily consisted of $110.7 million in net proceeds from the credit facility, $29.0 million net increase in client fund obligations and $3.9 million proceeds from exercise of stock options, partially offset by $41.6 million in share repurchases and $8.2 million in contingent consideration payments related to prior acquisitions.

CAPITAL RESOURCES

Credit Facility - At June 30, 2023, we had $410.6 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 $177.5 million at June 30, 2023. The weighted average interest rate under the credit facility was 4.94% during the six months ended June 30, 2023, compared to 1.93% 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 June 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 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 six months ended June 30, 2023, we completed four acquisitions for $48.5 million in cash. We also repurchased 1.1 million shares of our common stock at a total cost of approximately $56.8 million during the six months ended June 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 June 30, 2023 and December 31, 2022, respectively. In addition, we provide license bonds to various state agencies to meet certain licensing requirements. The amount of license bonds outstanding was $2.3 million and $2.3 million at June 30, 2023 and December 31, 2022, respectively.

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 June 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 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.

Our floating rate debt under the 2022 credit facility exposes us to interest rate risk. Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. A change in the Federal Funds Rate, or the reference rate set by Bank of America, N.A., would affect the rate at which we could borrow funds under the credit facility. The balance outstanding under our credit facility at June 30, 2023 was $410.6 million, of which $285.6 million is subject to rate risk. If market rates were to increase or decrease 100 basis points from the levels at June 30, 2023, interest expense would increase or decrease approximately $2.9 million annually.

We do not engage in trading market risk sensitive instruments. We periodically use interest rate swaps to manage interest rate risk exposure. The interest rate swaps effectively modify our exposure to interest rate risk, primarily through converting portions of our floating rate debt under the credit facility to a fixed rate basis. These agreements involve the receipt or payment of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal amounts.

At June 30, 2023, we had four interest rate swaps with notional values, fixed rates of interest and expiration dates of (i) $50.0 million - 0.834% - April, 2025, (ii) $30.0 million - 1.186% - December, 2026, (iii) $20.0 million - 2.450% - August, 2027 and (iv) $25.0 million - 3.669% - April, 2028, respectively. Management will continue to evaluate the potential use of interest rate swaps as we deem appropriate under certain operating and market conditions. We do not enter into derivative instruments for trading or speculative purposes.

In connection with the services provided by our payroll operations, funds collected from our clients’ accounts in advance are segregated and may be invested in short-term investments, such as corporate and municipal bonds. In accordance with our investment policy, all investments carry an investment grade rating at the time of the initial acquisition, and are classified as available-for-sale securities. At each respective balance sheet date, these investments are adjusted to fair value with fair value adjustments being recorded to other comprehensive income or loss and reflected in the accompanying Condensed Consolidated Statements of Comprehensive Income for the respective period. If an investment is deemed to be other-than-temporarily impaired due to credit loss, then the adjustment is recorded to "Other income (expense), net" in the accompanying Condensed Consolidated Statements of Comprehensive Income. Refer to Note 6, Financial Instruments, and Note 7, Fair Value Measurements, to the accompanying unaudited condensed consolidated financial statements for further discussion regarding these investments and the related fair value assessments.

(a) Disclosure Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management has evaluated the effectiveness of our disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this report. This evaluation (“Controls Evaluation”) was done with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Disclosure Controls are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure Controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to management, including the CEO and CFO as appropriate, to allow timely decisions regarding required disclosure.

Limitations on the Effectiveness of Controls

Management, including our CEO and CFO, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent all errors and all fraud. Although our Disclosure Controls are designed to provide reasonable assurance of achieving their objective, a control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within CBIZ have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of a control. A design of a control system is also based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

Conclusions

Our Disclosure Controls are designed to provide reasonable assurance of achieving their objectives and, based upon the Controls Evaluation, our CEO and CFO have concluded that as of the end of the period covered by this report, CBIZ’s Disclosure Controls were effective at that reasonable assurance level.

(b) Internal Control over Financial Reporting

On February 1, 2023, we completed the Somerset acquisition. We are in the process of integrating Somerset into our system of internal control over financial reporting. Except for the Somerset acquisition, there have been no changes to our internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC. These risks could materially and adversely affect the business, financial condition and results of operations of CBIZ.

Cyber-attacks or other security breaches involving our computer systems or the systems of one or more of our vendors could materially and adversely affect our business.

Our systems, like others in the industries we serve, are vulnerable to cyber security risks, and we are subject to potential disruption caused by such activities. Corporations such as ours are subject to frequent attacks on their systems, such as computer hacking, phishing attempts, cyber-attacks, malware and ransomware attacks. The attacks may have various goals, from seeking confidential information to causing operational disruption. If a ransomware attack or other cybersecurity breach occurs, either internally or at our information technology vendors, it is possible we could be prevented from accessing our data, cause us to incur remediation costs or requires us to pay ransom to the attackers. Although to date such activities have not resulted in material disruptions to our operations or, to our knowledge, a material breach of any security or confidential information, no assurance can be provided that such material disruptions or a material breach will not occur in the future. Any significant violations of data privacy could result in the loss of business, litigation, regulatory investigations, penalties, ransom payments, ongoing expenses related to client credit monitoring and support, and other expenses, any of which could damage our reputation and adversely affect the growth of our business. While we have deployed resources that are responsible for maintaining appropriate levels of cyber security, and while we utilize third-party technology products and services to help identify, protect, and remediate our information technology systems and infrastructure against security breaches and cyber-incidents, our responsive and precautionary measures may not be adequate or effective to prevent, identify, or mitigate attacks by hackers, foreign governments, or other actors or breaches caused by employee error, malfeasance, or other disruptions. We are also dependent on security measures that some of our third-party vendors and customers are taking to protect their own systems and infrastructures. If our third-party vendors do not maintain adequate security measures, do not require their subcontractors to maintain adequate security measures, do not perform as anticipated and in accordance with contractual requirements, or become targets of cyber-attacks, we may experience operational difficulties and increased costs, which could materially and adversely affect our business.