CBIZ, INC. Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to "we", "us", "our", "CBIZ" or the "Company" shall meanCBIZ, Inc. , aDelaware corporation, and its operating subsidiaries. The following discussion is intended to assist in the understanding of our financial position atSeptember 30, 2021 andDecember 31, 2020 , results of operations for the three and nine months endedSeptember 30, 2021 and 2020, and cash flows for the nine months endedSeptember 30, 2021 and 2020, and should be read in conjunction with the 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 endedDecember 31, 2020 . 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 endedDecember 31, 2020 . 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 throughoutthe United States and parts ofCanada . 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 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 endedDecember 31, 2020 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 endedSeptember 30, 2021 increased by$44.3 million , or 18.6%, to$282.7 million from$238.4 million for the same period in 2020. Same-unit revenue increased by approximately$19.8 million million, or 8.3% as compared to the same period in 2020. Revenue from newly acquired operations, net of divestitures, contributed$24.6 million , or 10.3%, of incremental revenue for the three months endedSeptember 30, 2021 as compared to the same period in 2020. Revenue for the nine months endedSeptember 30, 2021 increased by$109.3 million , or 14.5%, to$862.1 million from$752.8 million for the same period in 2020. Same-unit revenue increased by approximately$54.5 million , or 7.3% as compared to the same period in 2020. Revenue from newly acquired operations, net of divestitures, contributed$54.8 million , or 7.3%, of incremental revenue for the nine months endedSeptember 30, 2021 as compared to the same period in 2020. A detailed discussion of revenue by practice group is included under "Operating Practice Groups". Income from continuing operations was$21.7 million , or$0.41 per diluted share, in the third quarter of 2021, compared to$20.1 million , or$0.36 per diluted share, in the third quarter of 2020. For the nine months endedSeptember 30, 2021 , income from continuing operations was$80.5 million , or$1.50 per diluted share, compared to$78.4 million , or$1.41 per diluted share, for the same period in 2020. Refer to "Results of Operations - Continuing Operations" for a detailed discussion of the components of income from continuing operations. 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. We have completed five acquisitions for$66.1 million in cash and$6.9 million in our common stock. We also repurchased 2.8 million shares of our common stock at a total cost of approximately$87.9 million in the nine months endedSeptember 30, 2021 . Refer to Note 11, Business Combinations, to the accompanying condensed consolidated financial statements for further discussion on acquisitions. 23 -------------------------------------------------------------------------------- During the first quarter of 2021, 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 onApril 1, 2022 . The shares may be purchased in the open market, in privately negotiated transactions, or pursuant to Rule 10b5-1 trading plans, which may include purchases from our employees, officers and directors, in accordance with theSecurities 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 - CONTINUING OPERATIONS Revenue The following tables summarize total revenue for the three and nine months endedSeptember 30, 2021 and 2020 (in thousands except percentages).
Three Months Ended
% of % of $ %
2021 Total 2020 Total Change Change
Financial Services $ 187,232 66.2 % $ 155,499 65.2 % $ 31,733 20.4 %
Benefits and Insurance
Services 85,797 30.3 % 73,881 31.0 % 11,916 16.1 %
National Practices 9,690 3.5 % 9,009 3.8 % 681 7.6 %
Total CBIZ $ 282,719 100.0 % $ 238,389 100.0 % $ 44,330 18.6 %
Nine Months Ended
% of % of $ %
2021 Total 2020 Total Change Change
Financial Services $ 577,970 67.0 % $ 498,359 66.2 % $ 79,611 16.0 %
Benefits and Insurance
Services 255,656 29.7 % 227,433 30.2 % 28,223 12.4 %
National Practices 28,471 3.3 % 26,995 3.6 % 1,476 5.5 %
Total CBIZ $ 862,097 100.0 % $ 752,787 100 % $ 109,310 14.5 %
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 Condensed Consolidated Statements of
Comprehensive Income. The non-qualified 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 for the three and
nine months end September 30, 2021 and 2020 are as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(In thousands)
Operating (income) expenses $ (212) $ 5,364 $ 11,165 $ 2,796
Corporate general and administrative
expenses (86) 672 1,260 343
Other income (expense), net (298) 6,036 12,425 3,139
24-------------------------------------------------------------------------------- Excluding the impact of the above-mentioned Income and expenses related to the deferred compensation plan, the operating results for the three and nine months endSeptember 30, 2021 and 2020 are as follows (in thousands except percentages): Three Months Ended September 30, 2021 2020 Deferred Deferred As Reported Compensation Plan Adjusted % of Revenue As Reported Compensation Plan Adjusted % of Revenue Gross margin$ 44,391 $ (212)$ 44,179 15.6 %$ 33,629 $ 5,364$ 38,993 16.4 % Operating (loss) income 31,356 (298) 31,058 11.0 % 22,290 6,036 28,326 11.9 % Other income (expense), net (1,133) 298 (835) (0.3) % 5,914 (6,036) (122) (0.1) % Income from continuing operations before income tax expense 29,207 - 29,207 10.3 % 27,156 - 27,156 11.4 % Nine Months Ended September 30, 2021 2020 Deferred Deferred As Reported Compensation Plan Adjusted % of Revenue As Reported Compensation Plan Adjusted % of Revenue Gross margin$ 162,864 $ 11,165 $ 174,029 20.2 %$ 139,184 $ 2,796$ 141,980 18.9 % Operating income 91,062 12,425 103,487 12.0 % 106,196 3,139 109,335 14.5 % Other income (expense), net 12,029 (12,425) (396) - % 3,450 (3,139) 311 - % Income from continuing operations before income tax expense 106,624 - 106,624 12.4 % 105,557 - 105,557 14.0 % Operating Expenses
Three Months Ended
$ %
2021 2020 Change Change
(Inthousands, except percentages)
Total Operating expenses $ 238,328$ 204,760 $ 33,568 16.4 % Operating expenses % of revenue 84.3 % 85.9 % Operating expenses excluding deferred compensation $ 238,540$ 199,396 $ 39,144 19.6 %
Operating expenses excluding deferred
compensation % of revenue 84.4 %
83.6 %
Nine
Months Ended
$ %
2021 2020 Change Change
(Inthousands, except percentages)
Total Operating expenses$ 699,233 $ 613,603 $ 85,630 14.0 % Operating expenses % of revenue 81.1 % 81.5 % Operating expenses excluding deferred compensation$ 688,068 $ 610,807 $ 77,261 12.6 %
Operating expenses excluding deferred
compensation % of revenue 79.8 % 81.1 % Three months endedSeptember 30, 2021 compared toSeptember 30, 2020 . Total operating expenses for the three months endedSeptember 30, 2021 increased by$33.6 million , or 16.4%, to$238.3 million as compared to$204.8 million in the same period of 2020. The non-qualified deferred compensation plan decreased operating expenses by$0.2 million for the three months endedSeptember 30, 2021 , and increased operating expense by$5.4 million during the same period in 2020. Excluding the non-qualified deferred compensation expenses, which was recorded in "Corporate and Other" for segment reporting purposes, operating expenses would have been$238.5 million and$199.4 million , or 84.4% and 83.6% of revenue, for the three months endedSeptember 30, 2021 and 2020, respectively. 25 -------------------------------------------------------------------------------- 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) stock-based compensation. Excluding the impact of deferred compensation, which was recorded in "Corporate and Other" for segment reporting purposes, operating expenses increased during the three months endedSeptember 30, 2021 as compared to the same period in 2020, primarily driven by$29.4 million higher personnel costs,$1.8 million higher travel and entertainment costs,$1.1 million higher marketing expenses,$2.6 million higher computer and facility related costs,$1.2 higher depreciation and amortization expense, as well as$3.0 million higher other discretionary spending. Personnel costs are discussed in further detail under "Operating Practice Groups". Nine months endedSeptember 30, 2021 compared toSeptember 30, 2020 . Total operating expenses for the nine months endedSeptember 30, 2021 increased by$85.6 million , or 14.0%, to$699.2 million as compared to$613.6 million in the same period of 2020. The non-qualified deferred compensation plan added$11.2 million of expenses for the nine months endedSeptember 30, 2021 , and increased operating expenses by$2.8 million during the same period in 2020. Excluding the impact of deferred compensation, which was recorded in "Corporate and Other" for segment reporting purposes, the operating expense increase was primarily attributed to personnel costs increase of$70.5 million ,$3.0 million higher computer and facility related costs,$1.7 million higher marketing expense, as well as$2.5 million higher depreciation and amortization expense. These increases in operating expense were offset by$2.3 million lower travel and entertainment costs and$2.6 million lower bad debt expense. Other discretionary spending increased approximately$4.5 million to support business activities. Corporate General & Administrative ("G&A") Expenses Three Months Ended September 30, $ % 2021 2020 Change Change (In thousands, except percentages) G&A expenses$ 13,035 $ 11,339 $ 1,696 15.0 % G&A expenses % of revenue 4.6 % 4.8 % G&A expenses excluding deferred compensation$ 13,121 $ 10,666 $ 2,455 23.0 % G&A expenses excluding deferred compensation % of revenue 4.6 % 4.5 % Nine Months Ended September 30, $ % 2021 2020 Change Change (In thousands, except percentages) G&A expenses$ 41,334 $ 32,988 $ 8,346 25.3 % G&A expenses % of revenue 4.8 % 4.4 % G&A expenses excluding deferred compensation$ 40,074 $ 32,645 $ 7,429 22.8 % G&A expenses excluding deferred compensation % of revenue 4.6 % 4.3 %
Three months ended
Nine months ended
26
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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 nine months ended September 30, 2021 .
Other Income (Expense), Net
Three Months Ended September 30,
$ %
2021 2020 Change Change
(In thousands, except percentages)
Interest expense $ (1,016) $ (974) $ (42) 4.3 %
Loss on sale of operations, net - (74) 74 N/M
Other (expense) income, net (1) (1,133) 5,914 (7,047) (119.2) %
Total other (expense) income, net$ (2,149) $ 4,866 $ (7,015) N/M Nine Months Ended September 30, $ % 2021 2020 Change Change (In thousands, except percentages) Interest expense$ (2,852) $ (4,167) $ 1,315 (31.6) % Gain on sale of operations, net 6,385 78 6,307 N/M Other income, net (2) 12,029 3,450 8,579 N/M Total other income (expense), net$ 15,562 $ (639) $ 16,201 N/M (1) Other (expense) income, net includes a net loss of$0.3 million during the three months endedSeptember 30, 2021 , compared to a net gain of$6.0 million for the same period in 2020, 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 from continuing operations before income tax expense" or diluted earnings per share from continuing operations. In addition, included in Other (expense) income, net for the three months endedSeptember 30, 2021 and 2020, is expense of$0.8 million and$0.1 million , respectively, related to net changes in the fair value of contingent consideration related to prior acquisitions. (2) Other income, net includes a net gain of$12.4 million during the nine months endedSeptember 30, 2021 , compared to a net gain of$3.1 million for the same period in 2020, 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 from continuing operations before income tax expense" or diluted earnings per share from continuing operations. In addition, included in Other income, net for the nine months endedSeptember 30, 2021 and 2020, is expense of$1.6 million and income of$0.1 million , respectively, related to net changes in the fair value of contingent consideration related to prior acquisitions. Interest Expense Three and nine months endedSeptember 30, 2021 compared withSeptember 30, 2020 . Our primary financing arrangement is the 2018 credit facility. During the three months endedSeptember 30, 2021 , our average debt balance and interest rate was$176.5 million and 1.80%, compared to$106.2 million and 2.60% for the same period of 2020. During the nine months endedSeptember 30, 2021 , our average debt balance and interest rate was$156.6 million and 1.89% compared to$170.5 million and 2.46% for the same period of 2020. The increase in interest expense for the three months endedSeptember 30, 2021 as compared to the same period in 2020 was primarily driven by higher average debt balance, and the decrease in interest expense for the nine months endedSeptember 30, 2021 as compared to the same period in 2020 was primarily driven by lower average debt balance 27 -------------------------------------------------------------------------------- as well as lower interest rates. Our indebtedness is further discussed in Note 4, Debt and Financing Arrangements, to the accompanying condensed consolidated financial statements. Gain on Sale of Operations,Net Three and nine months endedSeptember 30, 2021 compared withSeptember 30, 2020 . We sold a small book of business and a business unit in the Benefits and Insurance practice group during the nine months endedSeptember 30, 2021 . Total proceeds from the sales were$9.8 million . Net gain from the sales were approximately$6.4 million . During the nine months endedSeptember 30, 2020 , we sold a small book of business in the Benefits and Insurance practice group and a small accounting firm in the Financial Services practice group for a net gain of$0.1 million . Other Income (Expense), Net Three and nine months endedSeptember 30, 2021 compared withSeptember 30, 2020 . For the three months endedSeptember 30, 2021 , other expense, net includes a net loss of$0.3 million associated with the non-qualified deferred compensation plan. For the same period in 2020, other income, net, includes a net gain of$6.0 million associated with the non-qualified deferred compensation plan. For the nine months endedSeptember 30, 2021 , other income, net includes a net gain of$12.4 million associated with the non-qualified deferred compensation plan. For the same period in 2020, other income, net includes a net gain of$3.1 million associated with the non-qualified deferred compensation plan. Income Tax Expense Three Months Ended September 30, $ % 2021 2020 Change Change (In thousands, except percentages) Income tax expense$ 7,512 $ 7,060 $ 452 6.4 % Effective tax rate 25.7 % 26.0 % Nine Months Ended September 30, $ % 2021 2020 Change Change (In thousands, except percentages)
Income tax expense $ 26,100 $ 27,120 $ (1,020) (3.8) %
Effective tax rate 24.5 % 25.7 %
Three and nine months ended September 30, 2021 compared with September 30, 2020 .
The effective tax rate for the three months ended September 30, 2021 was 25.7%,
compared to an effective tax rate of 26.0% for the comparable period in 2020.
The effective tax rate for the nine months ended September 30, 2021 was 24.5%,
compared to an effective tax rate of 25.7% for the same period in 2020. The
decrease in the effective tax rate year over year was primarily due to a larger
tax benefit recognized in the current year related to stock-based compensation.
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.
28
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Financial Services
Three Months Ended September 30,
$ %
2021 2020 Change Change
(In thousands, except percentages)
Revenue
Same-unit $ 169,407 $ 155,159 $ 14,248 9.2 %
Acquired businesses 17,825 - 17,825
Divested operations - 340 (340)
Total revenue $ 187,232 $ 155,499 $ 31,733 20.4 %
Operating expenses 156,178 129,922 26,256 20.2 %
Gross margin / Operating income $ 31,054 $ 25,577 $ 5,477 21.4 %
Total other income (expense), net 18 (90) 108 (120.0) %
Income from continuing operations before
income tax expenses 31,072 25,487 5,585 21.9 %
Gross margin percent 16.6 % 16.4 %
Nine Months Ended September 30,
$ %
2021 2020 Change Change
(In thousands, except percentages)
Revenue
Same-unit $ 539,161 $ 496,081 $ 43,080 8.7 %
Acquired businesses 38,809 - 38,809
Divested operations - 2,278 (2,278)
Total revenue $ 577,970 $ 498,359 $ 79,611 16.0 %
Operating expenses 448,844 395,937 52,907 13.4 %
Gross margin / Operating income $ 129,126 $ 102,422 $ 26,704 26.1 %
Total other income, net 310 7 303 NM
Income from continuing operations before
income tax expenses 129,436 102,429 27,007 26.4 %
Gross margin percent 22.3 % 20.6 %
Three months ended September 30, 2021 compared to September 30, 2020
Revenue
The Financial Services practice group revenue for the three months ended
September 30, 2021 grew by 20.4% to $187.2 million from $155.5 million during
the same period in 2020. Same-unit revenue grew by $14.2 million , or 9.2%,
across all service lines, primarily driven by those units that provide
traditional accounting and tax-related services, which increased $6.3 million ,
and those units that provide project-oriented advisory services, which increased
by $7.1 million , as well as an increase of $0.7 million in government healthcare
compliance business. The impact of acquired businesses, net of divestitures,
contributed $17.5 million , or 9.3% of 2021 revenue.
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 $39.7 million and $35.0 million for
the three months ended September 30, 2021 and 2020, respectively.
Operating Expenses
Operating expenses increased by $26.3 million , or 20.2%, as compared to the same
period last year. Personnel costs increased by $20.2 million , or 15.5%, with
acquisitions contributing approximately $11.2 million to the increase, as well
as $1.1 million higher travel and entertainment costs. In addition, other
operating expenses, including marketing, recruiting, professional services,
technology, facilities, and depreciation and amortization expenses increased by
approximately $3.3 million to support the business growth. Operating expense as
a
29
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percentage of revenue decreased to 83.4% for the quarter ended September 30,
2021 from 83.6% of revenue for the prior year quarter.
Nine months ended September 30, 2021 compared to September 30, 2020
Revenue
Revenue for the nine months ended September 30, 2021 grew by 16.0% to $578.0
million from $498.4 million during the same period in 2020. Same-unit revenue
grew by $43.1 million , or 8.7%, across all service lines, primarily driven by
those units that provide traditional accounting and tax-related services, which
increased $24.5 million , and those units that provide project-oriented advisory
services, which increased by $14.1 million , as well as an increase of $4.0
million in government healthcare compliance business. The impact of acquired
businesses, net of divestitures, contributed $36.5 million , or 6.3% of 2021
revenue.
Fees earned under the ASAs, as described above, were approximately $139.7
million and $127.4 million for the nine months ended September 30, 2021 and
2020, respectively.
Operating Expenses
Operating expenses increased by $52.9 million , or 13.4%, as compared to the same
period last year. Personnel costs increased by $51.2 million , or 12.9%, with
acquisitions contributing approximately $24.3 million to the increase. In
addition, other operating expenses, including marketing, recruiting,
professional services, technology, facilities, and depreciation and amortization
expenses increased by approximately $4.3 million to support the business growth.
The increase in operating expenses was offset by $0.9 million lower travel and
entertainment spending and $2.7 million lower bad debt expense. In the first
half of 2020, due to the COVID-19 pandemic, we recorded bad debt expense of $2.2
million , which did not recur in 2021. Operating expense as a percentage of
revenue decreased to 77.7% during the nine months ended September 30, 2021 from
79.4% of revenue during the same period in 2020.
Benefits and Insurance Services
Three Months Ended September 30,
$ %
2021 2020 Change Change
(In thousands, except percentages)
Revenue
Same-unit $ 78,038 $ 73,201 $ 4,837 6.6 %
Acquired businesses 7,759 - 7,759
Divested operations - 680 (680)
Total revenue $ 85,797 $ 73,881 $ 11,916 16.1 %
Operating expenses 69,039 62,013 7,026 11.3 %
Gross margin / Operating income $ 16,758 $ 11,868 $ 4,890 41.2 %
Total other expense, net (9) (44) 35 (79.5) %
Income from continuing operations before
income tax expenses 16,749 11,824 4,925 41.7 %
Gross margin percent 19.5 % 16.1 %
30--------------------------------------------------------------------------------
Nine Months Ended September 30,
$ %
2021 2020 Change Change
(In thousands, except percentages)
Revenue
Same-unit $ 236,287 $ 226,311 $ 9,976 4.4 %
Acquired businesses 19,369 - 19,369
Divested operations - 1,122 (1,122)
Total revenue $ 255,656 $ 227,433 $ 28,223 12.4 %
Operating expenses 203,748 188,519 15,229 8.1 %
Gross margin $ 51,908 $ 38,914 $ 12,994 33.4 %
Total other income, net 7,248 263 6,985 NM
Income from continuing operations before
income tax expenses 59,156 39,177 19,979 51.0 %
Gross margin percent 20.3 % 17.1 %
Three months ended September 30, 2021 compared to September 30, 2020
Revenue
The Benefits and Insurance Services practice group revenue increased by $11.9
million , or 16.1%, to $85.8 million during the three months ended September 30,
2021 compared to $73.9 million for the same period in 2020. The increase was
primarily driven by the property and casualty and retirement benefit services
lines as well as growth in our other project based services. Acquired
businesses, net of divestitures, contributed $7.1 million in incremental revenue
for the three months ended September 30, 2021 . Same-unit revenue increased by
$4.8 million , or 6.6% when compared to the same period in 2020.
Operating Expenses
Operating expenses increased by $7.0 million , or 11.3%, when compared to the
same period last year. Personnel costs increased by $5.1 million , or 8.3%,
primarily related to $3.6 million contributed by acquired businesses. In
addition, other operating expenses, including marketing, recruiting,
professional services, technology, depreciation and amortization expenses, and
other direct costs increased by approximately $1.1 million to support increased
business activities. Travel and entertainment cost increased by $0.4 million .
Operating expense as a percentage of revenue decreased to 80.5% for the quarter
ended September 30, 2021 from 83.9% of revenue for the same period in 2020.
Nine months ended September 30, 2021 compared to September 30, 2020
Revenue
The Benefits and Insurance Services practice group revenue increased by $28.2
million , or 12.4%, to $255.7 million during the nine months ended September 30,
2021 compared to $227.4 million for the same period in 2020, primarily driven by
acquired businesses, net of divestitures, which contributed $18.2 million in
incremental revenue. Same-unit revenue increased by $10.0 million , or 4.4% when
compared to the same period in 2020, primarily driven by growth in property and
casualty, employee benefits, retirement benefit services, and human capital
management service lines as well as other project based services.
Operating Expenses
Operating expenses increased by $15.2 million , or 8.1%, when compared to the
same period last year. Personnel cost increased by $12.3 million , or 6.5%,
primarily related to $10.2 million contributed by acqauired business. In
addition, other operating expenses, including marketing, recruiting,
professional services, technology, depreciation and amortization expenses, and
other direct costs increased by approximately $3.6 million to support increased
business activities. The increase in operating expense was offset by $0.6
million lower travel and entertainment spending. Operating expense as a
percentage of revenue decreased to 79.7% during the nine months ended
September 30, 2021 from 82.9% of revenue for the same period in 2020.
Total Other Income, Net
31
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We sold a business unit during the nine months ended September 30, 2021 for
total proceeds of $9.8 million . Net gain from the sale was approximately $6.4
million . We also sold a small book of business during the nine months ended
September 30, 2021 , of which we recorded a gain of $0.7 million .
National Practices
Three Months Ended September 30,
$ %
2021 2020 Change Change
(In thousands, except percentages)
Same-unit revenue $ 9,690 $ 9,009 $ 681 7.6 %
Operating expenses 8,514 8,070 444 5.5 %
Gross margin / Operating Income $ 1,176 $ 939 $ 237 25.2 %
Total other income, net 1 - 1 NM
Income from continuing operations before
income tax expenses 1,177 939 238 25.3 %
Gross margin percent 12.1 % 10.4 %
Nine Months Ended September 30,
$ %
2021 2020 Change Change
(In thousands, except percentages)
Same-unit revenue $ 28,471 $ 26,995 $ 1,476 5.5 %
Operating expenses 25,542 24,343 1,199 4.9 %
Gross margin / Operating Income $ 2,929 $ 2,652 $ 277 10.4 %
Total other income, net 1 1 - - %
Income from continuing operations before
income tax expenses 2,930 2,653 277 10.4 %
Gross margin percent 10.3 % 9.8 %
Three and nine months ended September 30, 2021 compared with September 30, 2020
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 .
Revenues from this single client accounted for approximately 75% of the National
Practice group's revenue. During the three and nine months ended September 30,
2021 , revenue increased by $0.7 million , or 7.6%, and $1.5 million , or 5.5%,
respectively, while operating expenses increased by $0.4 million , or 5.5%, and
$1.2 million , or 4.9%, respectively.
32
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Corporate and Other
Corporate and Other are operating expenses that are not directly allocated to
the individual business units. These expenses primarily consist of certain
health care costs, gains or losses attributable to assets held in our
non-qualified deferred compensation plan, stock-based compensation,
consolidation and integration charges, certain professional fees, certain
advertising costs and other various expenses.
Three Months Ended
$ %
2021 2020 Change Change
(In thousands, except percentages)
Operating expenses $ 4,597 $ 4,755 (158) (3.3) %
Corporate general and administrative
expenses 13,035 11,339 1,696 15.0 %
Operating loss (17,632) (16,094) (1,538) 9.6 %
Total other (expense) income, net (2,159) 5,000 (7,159) (143.2) %
Loss from continuing operations before
income tax expenses (19,791) (11,094) (8,697) 78.4 %
Nine Months Ended September 30,
$ %
2021 2020 Change Change
(In thousands, except percentages)
Operating expenses $ 21,099 $ 4,804 16,295 339.2 %
Corporate general and administrative
expenses 41,334 32,988 8,346 25.3 %
Legal settlement, net 30,468 - 30,468 NM
Operating loss (92,901) (37,792) (55,109) 145.8 %
Total other income (expense), net 8,003 (910) 8,913 (979.5) %
Loss from continuing operations before
income tax expenses (84,898) (38,702) (46,196) 119.4 %
Three months ended September 30, 2021 compared to September 30, 2020
Total operating expenses decreased by $0.2 million , or 3.3%, during the three
months ended September 30, 2021 , as compared to the same period in 2020. The
non-qualified deferred compensation plan decreased operating expenses by $0.2
million for the three months ended September 30, 2021 and increased operating
expenses by $5.4 million during the same period in 2020. Excluding the
non-qualified deferred compensation expenses, operating expense increased by
approximately $5.4 million , primarily driven by $4.3 million higher personnel
costs and $1.0 million higher computer and technology costs to support business
growth.
Total Corporate general and administrative expenses increased by $1.7 million ,
or 15.0%, during the three months ended September 30, 2021 , as compared to the
same period in 2020. The non-qualified deferred compensation plan increased G&A
expenses by $1.3 million for the three months ended September 30, 2021 , and by
$0.3 million during the same period in 2020. Excluding the non-qualified
deferred compensation expenses, G&A expense increased by approximately $7.4
million , primarily driven by higher personnel costs of $5.0 million and $2.1
million higher expense for professional services.
Total other (expense) income, net increased by $7.2 million , or 143.2%, during
the three months ended September 30, 2021 , as compared to the same period in
2020. Total other (expense) income, net for the three months ended September 30,
2021 includes a net loss of $0.3 million associated with the non-qualified
deferred compensation plan. For the same period in 2020, other income, net
includes a net gain of $6.0 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 $0.8 million ,
primarily due to higher fair value adjustment related to the contingent purchase
price considerations.
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Nine months ended
Total operating expenses increased by$16.3 million , or 339.2%, during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020. The non-qualified deferred compensation plan increased operating expenses by$11.2 million for the nine months endedSeptember 30, 2021 , and by$2.8 million during the same period in 2020. Excluding the non-qualified deferred compensation expenses, operating expense increased by approximately$7.9 million , primarily driven by$6.7 million higher personnel costs and$1.1 million higher marketing costs to support business growth. Total G&A expenses increased by$8.3 million , or 25.3%, during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020. The non-qualified deferred compensation plan decreased G&A expenses by$0.1 million for the nine months endedSeptember 30, 2021 , and increased G&A expense by$0.7 million during the same period in 2020. Excluding the non-qualified deferred compensation expenses, G&A expense increased by approximately$2.5 million , primarily driven by higher personnel costs of$1.3 million and$1.1 million higher expense for professional services. OnJune 24, 2021 , we reached a settlement agreement withUniversity of Pittsburgh Medical Center pertaining a lawsuit filed in theU.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 nine months endedSeptember 30, 2021 . Total other income (expense), net increased by$8.9 million , or 979.5%, during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020. Total other income (expense), net for the nine months endedSeptember 30, 2021 includes a net gain of$12.4 million associated with the non-qualified deferred compensation plan. For the same period in 2020, other income, net includes a net gain of$3.1 million associated with the non-qualified deferred compensation plan. Excluding the impact of the non-qualified deferred compensation plan, total other income (expense), net decreased by$0.4 million , primarily due to$1.7 million higher fair value adjustment related to the contingent purchase price considerations, offset by$1.3 million lower interest expense due to lower average outstanding balance and interest rates during 2021 as compared to 2020. LIQUIDITY Our principal sources of liquidity are cash generated from operating activities and financing activities. Our cash flows from operating activities are driven primarily by our operating results and changes in our working capital requirements while our cash flows from financing activities are dependent upon our ability to access credit or other capital. We historically maintain low cash levels and apply any available cash to pay down the outstanding debt balance. We historically experience a use of cash to fund working capital requirements during the first quarter of each fiscal year. This is primarily due to the seasonal accounting and tax services period under the Financial Services practice group, as well as payment of accrued employees' incentives programs. Upon completion of the seasonal accounting and tax services period, cash provided by operations during the remaining three quarters of the fiscal year substantially exceeds the use of cash in the first quarter of the fiscal year. Accounts receivable balances increase in response to the first nine months revenue generated by the Financial Services practice group. A significant amount of this revenue is billed and collected in subsequent quarters. Days sales outstanding ("DSO") 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. 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 88 days and 87 days atSeptember 30, 2021 and 2020, respectively. DSO atDecember 31, 2020 was 72 days. The following table presents selected cash flow information (in thousands). For additional details, refer to the accompanying Condensed Consolidated Statements of Cash Flows. 34 -------------------------------------------------------------------------------- Nine
Months Ended
2021 2020
Net cash provided by operating activities $ 80,946 $ 81,796
Net cash used in investing activities (70,728) (9,491)
Net cash provided by (used in) financing activities 1,678 (94,058)
Net increase (decrease) in cash, cash equivalents and
restricted cash $ 11,896 $ (21,753)
Operating Activities - Cash provided by operating activities was $80.9 million
during the nine months ended September 30, 2021 , primarily due to net income of
$80.5 million and certain non-cash items, such as depreciation and amortization
expense of $19.9 million , deferred income tax of $7.1 million , and stock-based
compensation expense of $8.4 million . The cash inflow was offset by working
capital use of $26.3 million . Cash provided by operating activities was $81.8
million during the nine months ended September 30, 2020 , primarily due to $78.4
million of net income and certain non-cash items, such as depreciation and
amortization expense, totaling $24.0 million . This cash inflow was offset by
$20.6 million cash used to fund working capital needs.
Investing Activities - Cash used in investing activities during the nine months
ended September 30, 2021 was $70.7 million and consisted primarily of $66.2
million used for business acquisitions, $6.5 million in capital expenditures,
and $8.0 million net activity related to funds held for clients. The use of cash
was offset by other investing activities, such as proceeds from sales of
divested operations of $9.8 million . Cash used in investing activities during
the nine months ended September 30, 2020 consisted primarily of $33.8 million
net cash used for acquisitions, $9.5 million capital expenditures, offset by
proceeds from sales and maturities of client fund investments of $33.0 million .
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, Organization and Summary of
Significant Accounting Policies, to the consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2020 .
Financing Activities - Cash provided by financing activities during the nine
months ended September 30, 2021 was $1.7 million and primarily consisted of
$82.2 million in net proceeds from the credit facility, $8.4 million net
increase in client fund obligations and $7.1 million proceeds from exercise of
stock options, partially offset by $88.0 million in share repurchases and $7.9
million in contingent consideration payments related to prior acquisitions. Cash
used in financing activities during the nine months ended September 30, 2020
primarily consisted of $57.5 million net decrease in client fund obligations,
$34.1 million used to repurchase our common stock, as well as $11.2 million in
contingent consideration payments related to prior acquisitions, partially
offset by $4.5 million in net borrowings under our 2018 credit facility.
CAPITAL RESOURCES
Credit Facility - At September 30, 2021 , we had $190.2 million outstanding under
the 2018 credit facility as well as $3.4 million letters of credit. Available
funds under the 2018 credit facility, based on the terms of the commitment, were
approximately $201.6 million at September 30, 2021 . The weighted average
interest rate under the 2018 credit facility was 1.89% in the first nine months
of 2021, compared to 2.46% for the same period in 2020. The 2018 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 2018 credit facility.
Debt Covenant Compliance - We are required to meet certain financial covenants
with respect to (i) total leverage ratio and (ii) a minimum fixed charge
coverage ratio. We are in compliance with our financial covenants as of
September 30, 2021 . 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 2018 credit facility and debt, refer to Note 4,
Debt and Financing Arrangements, to the accompanying 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
35
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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. We have completed five acquisitions for $66.1
million in cash and $6.9 million in our common stock. We also repurchased 2.8
million shares of our common stock at a total cost of approximately $87.9
million during the nine months ended September 30, 2021 . Refer to Note 11,
Business Combinations, to the accompanying condensed consolidated financial
statements for further discussion on acquisitions.
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, 2020 ), which qualify as variable interest entities. The
accompanying 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 $3.4 million and $1.7 million at
September 30, 2021 and December 31, 2020 , 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 $2.2 million at
September 30, 2021 and December 31, 2020 , respectively.
We have various agreements under which we may be obligated to indemnify the
other party with respect to certain matters. Generally, these indemnification
clauses are included in contracts arising in the normal course of business under
which we customarily agree to hold the other party harmless against losses
arising from a breach of representations, warranties, covenants or agreements,
related to matters such as title to assets sold and certain tax matters. Payment
by us under such indemnification clauses is generally conditioned upon the other
party making a claim. Such claims are typically subject to challenge by us and
to dispute resolution procedures specified in the particular contract. Further,
our obligations under these agreements may be limited in terms of time and/or
amount and, in some instances, we may have recourse against third parties for
certain payments made by us. It is not possible to predict the maximum potential
amount of future payments under these indemnification agreements due to the
conditional nature of our obligations and the unique facts of each particular
agreement. Historically, we have not made any payments under these agreements
that have been material individually or in the aggregate. As of September 30,
2021 , 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 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 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, 2020 .
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 2, New Accounting Pronouncements, to the accompanying condensed
consolidated financial statements for a discussion of recently issued accounting
pronouncements.
FORWARD-LOOKING STATEMENTS
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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 also may 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 our
Annual Report on Form 10-K for the year ended December 31, 2020 . 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.
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