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| Three Months Ended June 30, |
| 2022 | | 2021 |
| (Amounts in thousands, except percentages) |
| As Reported | | Deferred Compensation Plan | | Adjusted | | % of Revenue | | As Reported | | Deferred Compensation Plan | | Adjusted | | % of Revenue |
| Gross margin | $ | 72,216 | | | $ | (13,338) | | | $ | 58,878 | | | 16.3 | % | | $ | 41,714 | | | $ | 6,761 | | | $ | 48,475 | | | 17.4 | % |
| Operating income (expense) | 61,290 | | | (15,149) | | | 46,141 | | | 12.7 | % | | (2,570) | | | 7,611 | | | 5,041 | | | 1.8 | % |
| Other (expense) income, net | (15,898) | | | 15,149 | | | (749) | | | (0.2) | % | | 8,373 | | | (7,611) | | | 762 | | | 0.3 | % |
| Income from continuing operations before income tax expense | 43,882 | | | — | | | 43,882 | | | 12.1 | % | | 11,229 | | | — | | | 11,229 | | | 4.0 | % |
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| Six Months Ended June 30, |
| 2022 | | 2021 |
| (Amounts in thousands, except percentages) |
| As Reported | | Deferred Compensation Plan | | Adjusted | | % of Revenue | | As Reported | | Deferred Compensation Plan | | Adjusted | | % of Revenue |
| Gross margin | $ | 173,639 | | | $ | (19,005) | | | $ | 154,634 | | | 20.5 | % | | $ | 118,473 | | | $ | 11,377 | | | $ | 129,850 | | | 22.4 | % |
| Operating income (expense) | 146,404 | | | (21,627) | | | 124,777 | | | 16.6 | % | | 59,706 | | | 12,723 | | | 72,429 | | | 12.5 | % |
| Other (expense) income, net | (22,301) | | | 21,627 | | | (674) | | | (0.1) | % | | 13,162 | | | (12,723) | | | 439 | | | 0.1 | % |
| Income from continuing operations before income tax expense | 121,334 | | | — | | | 121,334 | | | 16.1 | % | | 77,417 | | | — | | | 77,417 | | | 13.4 | % |
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| Three Months Ended June 30, | |
| 2022 | | 2021 | | $
Change | | %
Change | |
| (Amounts in thousands, except percentages) | |
| Operating expenses (income) by segment: | | | | | | | | |
| Financial Services | $ | 209,643 | | $ | 150,920 | | $ | 58,723 | | 38.9 | % | |
| Benefits and Insurance Services | 75,020 | | 67,776 | | 7,244 | | 10.7 | % | |
| National Practices | 9,899 | | 8,487 | | 1,412 | | 16.6 | % | |
| Corporate and Other | (4,826) | | 9,751 | | (14,577) | | (149.5) | % | |
| Total Operating expenses | $ | 289,736 | | $ | 236,934 | | $ | 52,802 | | 22.3 | % | |
| Operating expenses % of revenue | 80.0 | % | | 85.0 | % | | | | | |
| Operating expenses excluding deferred compensation | $ | 303,074 | | $ | 230,173 | | $ | 72,901 | | 31.7 | % | |
Operating expenses excluding deferred
compensation % of revenue | 83.7 | % | | 82.6 | % | | | | | |
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| Six Months Ended June 30, | |
| 2022 | | 2021 | | $
Change | | %
Change | |
| (Amounts in thousands, except percentages) | |
| Operating expenses (income) by segment: | | | | | | | | |
| Financial Services | $ | 419,443 | | $ | 292,666 | | $ | 126,777 | | 43.3 | % | |
| Benefits and Insurance Services | 147,677 | | 134,709 | | 12,968 | | 9.6 | % | |
| National Practices | 19,475 | | 17,028 | | 2,447 | | 14.4 | % | |
| Corporate and Other | (6,560) | | 16,502 | | (23,062) | | (139.8) | % | |
| Total Operating expenses | $ | 580,035 | | $ | 460,905 | | $ | 119,130 | | 25.8 | % | |
| Operating expenses % of revenue | 77.0 | % | | 79.6 | % | | | | | |
| Operating expenses excluding deferred compensation | $ | 599,040 | | | $ | 449,528 | | | $ | 149,512 | | | 33.3 | % | |
Operating expenses excluding deferred
compensation % of revenue | 79.5 | % | | 77.6 | % | | | | | |
Three months ended June 30, 2022 compared to June 30, 2021. Total operating expenses for the three months ended June 30, 2022 increased by $52.8 million, or 22.3%, to $289.7 million as compared to $236.9 million in the same period of 2021. The non-qualified deferred compensation plan decreased operating expenses by $13.3 million for the three months ended June 30, 2022, and increased operating expense by $6.8 million during the same period in 2021. Excluding the non-qualified deferred compensation expenses, which was recorded in "Corporate and Other" for segment reporting purposes, operating expenses would have been $303.1 million and $230.2 million, or 83.7% and 82.6% of revenue, for the three months ended June 30, 2022 and 2021, respectively. In addition, operating expense for the three months ended June 30, 2022 included approximately $1.8 million non-recurring integration and retention costs related to the Marks Paneth acquisition.
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 by approximately $72.9 million during the three months ended June 30, 2022 as compared to the same period in 2021, primarily driven by $56.8 million higher personnel costs (of which $32.3 million was the result of acquisitions), $3.7 million higher travel and entertainment costs, $2.9 million higher technology related costs, $2.8 million higher facility costs, $1.6 million higher depreciation and amortization expense, and $1.5 million higher professional services costs, as well as $3.7 million higher other discretionary spending to support business growth. Personnel costs are discussed in further detail under “Operating Practice Groups”.
Six months ended June 30, 2022 compared to June 30, 2021. Total operating expenses for the six months ended June 30, 2022 increased by $119.1 million, or 25.8%, to $580.0 million as compared to $460.9 million in the same period of 2021. The non-qualified deferred compensation plan decreased operating expenses by $19.0 million for the six months ended June 30, 2022, and increased operating expenses by $11.4 million during the same period in 2021. Excluding the impact of deferred compensation, which was recorded in "Corporate and Other" for segment reporting purposes, operating expenses increased by $149.5 million during the six months ended June 30, 2022 as compared to the same period in 2021. Operating expense for the six months ended June 30, 2022 included approximately $6.2 million non-recurring integration and retention costs related to the Marks Paneth acquisition. The increase in operating expense was primarily driven by personnel costs increase of $118.3 million (of which $69.6 million was the result of acquisitions), $6.4 million higher travel and entertainment costs, $6.3 million higher facility costs, $4.6 million higher technology related costs, $3.5 million higher depreciation and amortization expense, and $2.5 million higher professional services costs, as well as $7.9 million higher other discretionary spending to support business growth.
Corporate General & Administrative (“G&A”) Expenses
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| | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 | | $
Change | | %
Change |
| (Amounts in thousands, except percentages) |
| G&A expenses | $ | 10,926 | | | $ | 13,816 | | | $ | (2,890) | | | (20.9) | % |
| G&A expenses % of revenue | 3.0 | % | | 5.0 | % | | | | |
| G&A expenses excluding deferred compensation | $ | 12,737 | | | $ | 12,966 | | | $ | (229) | | | (1.8) | % |
| G&A expenses excluding deferred compensation % of revenue | 3.5 | % | | 4.7 | % | | | | |
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| Six Months Ended June 30, |
| 2022 | | 2021 | | $
Change | | %
Change |
| (Amounts in thousands, except percentages) |
| G&A expenses | $ | 27,235 | | | $ | 28,299 | | | $ | (1,064) | | | (3.8) | % |
| G&A expenses % of revenue | 3.6 | % | | 4.9 | % | | | | |
| G&A expenses excluding deferred compensation | $ | 29,857 | | | $ | 26,953 | | | $ | 2,904 | | | 10.8 | % |
| G&A expenses excluding deferred compensation % of revenue | 4.0 | % | | 4.7 | % | | | | |
Three months ended June 30, 2022 compared to June 30, 2021. The deferred compensation plan decreased G&A expenses by $1.8 million for the three months ended June 30, 2022, but increased G&A expenses by $0.9 million during the same period in 2021. G&A expenses, excluding the impact of the deferred compensation plan, would have been $12.7 million, or 3.5% of revenue, for the three months ended June 30, 2022, compared to $13.0 million, or 4.7% of revenue, for the same period in 2021.
Six months ended June 30, 2022 compared to June 30, 2021. The deferred compensation plan decreased G&A expense by $2.6 million for the six months ended June 30, 2022, but increased G&A expenses by $1.3 million during the same period in 2021. G&A expenses, excluding the impact of the deferred compensation plan, would have been $29.9 million, or 4.0% of revenue, for the six months ended June 30, 2022, compared to $27.0 million, or 4.7% of revenue, for the same period in 2021. The increase in G&A expenses was primarily due to approximately $1.9 million non-recurring transaction and integration costs related to the Marks Paneth acquisition, as well as higher legal and other professional services costs.
Legal Settlement, net
Three and six months ended June 30, 2022 compared with June 30, 2021. During the three and six months ended June 30, 2021, we reached a settlement agreement with University of Pittsburgh Medical Center ("UPMC") pertaining a lawsuit filed in the U.S. District Court for the Western District of Pennsylvania. As a result of the settlement, we recorded a settlement loss of $30.5 million for the three and six months ended June 30, 2021.
Other (Expense) Income, Net
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| | | | | | | | |
| Three Months Ended June 30, | |
| 2022 | | 2021 | | $
Change | | %
Change | |
| (Amounts in thousands, except percentages) | |
| Interest expense | $ | (1,645) | | | $ | (959) | | | $ | (686) | | | 71.5 | % | |
| Gain on sale of operations, net | 135 | | | 6,385 | | | (6,250) | | | N/M | |
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Other (expense) income, net (1) | (15,898) | | | 8,373 | | | (24,271) | | | N/M | |
| Total other (expense) income, net | $ | (17,408) | | | $ | 13,799 | | | $ | (31,207) | | | N/M | |
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| Six Months Ended June 30, | |
| 2022 | | 2021 | | $
Change | | %
Change | |
| (Amounts in thousands, except percentages) | |
| Interest expense | $ | (2,904) | | | $ | (1,836) | | | $ | (1,068) | | | 58.2 | % | |
| Gain on sale of operations, net | 135 | | | 6,385 | | | (6,250) | | | N/M | |
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Other (expense) income, net (2) | (22,301) | | | 13,162 | | | (35,463) | | | N/M | |
| Total other (expense) income, net | $ | (25,070) | | | $ | 17,711 | | | $ | (42,781) | | | N/M | |
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(1) Other (expense) income, net includes a net loss of $15.1 million during the three months ended June 30, 2022, compared to a net gain of $7.6 million for the same period in 2021, 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 ended June 30, 2022 and 2021, 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 (expense) income, net includes a net loss of $21.6 million during the six months ended June 30, 2022, compared to a net gain of $12.7 million for the same period in 2021, 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 six months ended June 30, 2022 and 2021, is expense of $1.5 million and $0.8 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, 2022 compared with June 30, 2021. Our primary financing arrangement is the credit facility which was amended and restated in May of 2022. During the three months ended June 30, 2022, our average debt balance and weighted average effective interest rate was $283.6 million and 2.04%, compared to $164.6 million and 1.84% for the same period of 2021. The increase in interest expense for the three months ended June 30, 2022 as compared to the same period in 2021 was primarily driven by higher average debt balance as well as higher weighted average effective interest rate. During the six months ended June 30, 2022, our average debt balance and interest rate was $264.2 million and 1.93% compared to $146.5 million and 1.95% for the same period of 2021. The increase in interest expense for the six months ended June 30, 2022 as compared to the same period in 2021 was primarily driven by higher average debt balance. Our indebtedness is further discussed in Note 4, Debt and Financing Arrangements, to the accompanying unaudited condensed consolidated financial statements.
Gain on Sale of Operations, Net
Three and six months ended June 30, 2022 compared with June 30, 2021. During the three and six months ended June 30, 2021, we sold a small book of business and a business unit in the Benefits and Insurance practice group. Total proceeds from the sales were $9.8 million. As a result, we recorded a net gain of $6.4 million from the sales for the three and six months ended in June 30, 2021.
Other (Expense) Income, Net
Three and six months ended June 30, 2022 compared with June 30, 2021. For the three months ended June 30, 2022, other expense, net includes a net loss of $15.1 million associated with the non-qualified deferred compensation plan. For the same period in 2021, other income, net, includes a net gain of $7.6 million associated with the non-qualified deferred compensation plan. Excluding the impact of the deferred compensation plan, other (expense) income increased by $1.5 million in 2022 as compared to 2021 due to $0.8 million higher adjustment to the fair value of the contingent purchase price liability. In addition, other expense, net for the same period in 2021 included a $0.7 million gain on the sale of certain assets which did not recur in 2022.
For the six months ended June 30, 2022, other expense, net includes a net loss of $21.6 million associated with the non-qualified deferred compensation plan. For the same period in 2021, other income, net includes a net gain of $12.7 million associated with the non-qualified deferred compensation plan. Excluding the impact of the deferred compensation plan, other (expense) income increased by $1.1 million in 2022 as compared to 2021 due to $0.7 million higher adjustment to the fair value of the contingent purchase price liability. In addition, other expense, net for the same period in 2021 included a $0.6 million gain on the sale of certain assets which did not recur in 2022. The increase in other expense was offset by $0.3 million higher miscellaneous income.
Income Tax Expense
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| Three Months Ended June 30, |
| 2022 | | 2021 | | $
Change | | %
Change |
| (Amounts in thousands, except percentages) |
| Income tax expense | $ | 12,622 | | | $ | 2,616 | | | $ | 10,006 | | | 382.5 | % |
| Effective tax rate | 28.8 | % | | 23.3 | % | | | | |
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| Six Months Ended June 30, |
| 2022 | | 2021 | | $
Change | | %
Change |
| (Amounts in thousands, except percentages) |
| Income tax expense | $ | 31,943 | | | $ | 18,588 | | | $ | 13,355 | | | 71.8 | % |
| Effective tax rate | 26.3 | % | | 24.0 | % | | | | |
Three and six months ended June 30, 2022 compared with June 30, 2021. The effective tax rate for the three months ended June 30, 2022 was 28.8%, compared to an effective tax rate of 23.3% for the comparable period in 2021. The increase in the effective tax rate year over year was primarily due to a lower tax benefit recognized related to stock-based compensation expense which adversely affected the effective tax rate as related to pre-tax income. In addition, we incurred higher non-deductible expenses during the second quarter of 2022 as compared to the same period in 2021 which also contributed to the increase in the effective tax rate.
The effective tax rate for the six months ended June 30, 2022 was 26.3%, compared to an effective tax rate of 24.0% for the same period in 2021. 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 during the six months ended June 30, 2022 as compared to the same period in 2021 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
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | |
| 2022 | | 2021 | | $
Change | | %
Change | |
| (Amounts in thousands, except percentages) | |
| Revenue | | | | | | | | |
| Same-unit | $ | 207,247 | | | $ | 186,589 | | | $ | 20,658 | | | 11.1 | % | |
| Acquired businesses | 52,061 | | | — | | | 52,061 | | | | |
| | | | | | | | |
| Total revenue | $ | 259,308 | | | $ | 186,589 | | | $ | 72,719 | | | 39.0 | % | |
| Operating expenses | 209,643 | | | 150,920 | | | 58,723 | | | 38.9 | % | |
| Gross margin / Operating income | $ | 49,665 | | | $ | 35,669 | | | $ | 13,996 | | | 39.2 | % | |
| Total other income, net | 220 | | | 194 | | | 26 | | | 13.4 | % | |
| Income from continuing operations before income tax expense | 49,885 | | | 35,863 | | | 14,022 | | | 39.1 | % | |
| Gross margin percent | 19.2 | % | | 19.1 | % | | | | | |
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| Six Months Ended June 30, | |
| 2022 | | 2021 | | $
Change | | %
Change | |
| (Amounts in thousands, except percentages) | |
| Revenue | | | | | | | | |
| Same-unit | $ | 433,079 | | | $ | 390,738 | | | $ | 42,341 | | | 10.8 | % | |
| Acquired businesses | 114,975 | | | — | | | 114,975 | | | | |
| | | | | | | | |
| Total revenue | $ | 548,054 | | | $ | 390,738 | | | $ | 157,316 | | | 40.3 | % | |
| Operating expenses | 419,443 | | | 292,666 | | | 126,777 | | | 43.3 | % | |
| Gross margin / Operating income | $ | 128,611 | | | $ | 98,072 | | | $ | 30,539 | | | 31.1 | % | |
| Total other income, net | 306 | | | 292 | | | 14 | | | 4.8 | % | |
| Income from continuing operations before income tax expenses | 128,917 | | | 98,364 | | | 30,553 | | | 31.1 | % | |
| Gross margin percent | 23.5 | % | | 25.1 | % | | | | | |
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Three months ended June 30, 2022 compared to June 30, 2021
Revenue
The Financial Services practice group revenue for the three months ended June 30, 2022 grew by 39.0% to $259.3 million from $186.6 million during the same period in 2021. Same-unit revenue grew by $20.7 million, or 11.1%, across all service lines, primarily driven by those units that provide traditional accounting and tax-related services, which increased $11.5 million, those units that provide project-oriented advisory services, which increased by $4.5 million, and an increase of $4.3 million in government healthcare compliance business. The impact of acquired
businesses contributed $52.1 million, or 20.1% of 2022 revenue, of which Marks Paneth contributed $37.6 million, or 14.5% of 2022 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 $61.0 million and $45.2 million for the three months ended June 30, 2022 and 2021, respectively.
Operating Expenses
Operating expenses increased by $58.7 million, or 38.9%, as compared to the same period last year. Personnel costs increased by $43.3 million, or 28.7%, with acquisitions contributing approximately $34.8 million to the increase. Compared to the same period in 2021, facility costs, depreciation and amortization costs, technology costs, professional and consulting services, as well as marketing and recruiting costs increased by approximately $3.2 million, $1.9 million, $1.6 million, $1.1 million, and $0.9 million, respectively, primarily due to the Marks Paneth acquisition. In addition, travel and entertainment costs increase by approximately $2.3 million and other discretionary costs increased by approximately $4.4 million to support the business growth. Operating expense as a percentage of revenue decreased to 80.8% for the three months ended June 30, 2022 from 80.9% of revenue for the prior year quarter.
Six months ended June 30, 2022 compared to June 30, 2021
Revenue
Revenue for the six months ended June 30, 2022 grew by 40.3% to $548.1 million from $390.7 million during the same period in 2021. Same-unit revenue grew by $42.3 million, or 10.8%, across all service lines, primarily driven by those units that provide traditional accounting and tax-related services, which increased $23.5 million, those units that provide project-oriented advisory services, which increased by $10.6 million, and an increase of $8.2 million in government healthcare compliance business. The impact of acquired businesses contributed $115.0 million, or 21.0% of 2022 revenue, of which Marks Paneth contributed $79.2 million, or 14.4% of 2022 revenue.
Fees earned under the ASAs, as described above, were approximately $137.0 million and $100.0 million for the six months ended June 30, 2022 and 2021, respectively.
Operating Expenses
Operating expenses increased by $126.8 million, or 43.3%, as compared to the same period last year. Personnel costs increased by $95.5 million, or 32.6%, with acquisitions contributing approximately $76.0 million to the increase. Compared to the same period in 2021, facility costs, depreciation and amortization costs, technology costs, professional and consulting services, as well as marketing and recruiting costs increased by approximately $6.6 million, $4.1 million, $2.8 million, $2.2 million, and $2.1 million, respectively, primarily due to the Marks Paneth acquisition. In addition, travel and entertainment costs increased by approximately $4.0 million and other discretionary costs increased by approximately $9.5 million to support the business growth. Operating expense as a percentage of revenue increased to 76.5% during the six months ended June 30, 2022 from 74.9% of revenue during the same period in 2021.
Benefits and Insurance Services
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| Three Months Ended June 30, |
| 2022 | | 2021 | | $
Change | | %
Change |
| (Amounts in thousands, except percentages) |
| Revenue | | | | | | | |
| Same-unit | $ | 91,708 | | | $ | 82,186 | | | $ | 9,522 | | | 11.6 | % |
| | | | | | | |
| Divested operations | — | | | 434 | | | (434) | | | |
| Total revenue | $ | 91,708 | | | $ | 82,620 | | | $ | 9,088 | | | 11.0 | % |
| Operating expenses | 75,020 | | | 67,776 | | | 7,244 | | | 10.7 | % |
| Gross margin / Operating income | $ | 16,688 | | | $ | 14,844 | | | $ | 1,844 | | | 12.4 | % |
| Total other (expense) income, net | (13) | | | 7,083 | | | (7,096) | | | (100.2) | % |
| Income from continuing operations before income tax expense | 16,675 | | | 21,927 | | | (5,252) | | | (24.0) | % |
| Gross margin percent | 18.2 | % | | 18.0 | % | | | | |
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| | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | $
Change | | %
Change |
| (Amounts in thousands, except percentages) |
| Revenue | | | | | | | |
| Same-unit | $ | 184,194 | | | $ | 168,664 | | | $ | 15,530 | | | 9.2 | % |
| | | | | | | |
| Divested operations | — | | | 1,195 | | | (1,195) | | | |
| Total revenue | $ | 184,194 | | | $ | 169,859 | | | $ | 14,335 | | | 8.4 | % |
| Operating expenses | 147,677 | | | 134,709 | | | 12,968 | | | 9.6 | % |
| Gross margin | $ | 36,517 | | | $ | 35,150 | | | $ | 1,367 | | | 3.9 | % |
| Total other (expense) income, net | (37) | | | 7,257 | | | (7,294) | | | (100.5) | % |
| Income from continuing operations before income tax expenses | 36,480 | | | 42,407 | | | (5,927) | | | (14.0) | % |
| Gross margin percent | 19.8 | % | | 20.7 | % | | | | |
| | | | | | | |
Three months ended June 30, 2022 compared to June 30, 2021
Revenue
The Benefits and Insurance Services practice group revenue increased by $9.1 million, or 11.0%, to $91.7 million during the three months ended June 30, 2022 compared to $82.6 million for the same period in 2021. Same-unit revenue increased by $9.5 million, or 11.6% when compared to the same period in 2021. The increase was across all service lines, primarily driven by $4.8 million increase in the property and casualty services, $2.7 million increase in employee benefit and retirement benefit services lines, as well as growth in our other project based services. Impact of divested businesses was not material.
Operating Expenses
Operating expenses increased by $7.2 million, or 10.7%, when compared to the same period last year. Personnel costs increased by $5.4 million, or 8.0%, primarily due to timing of annual merit increases as well as investment in producers. Travel and entertainment cost increased by $0.6 million. Bad debt expense increased by $0.3 million. In addition, other operating expenses, including marketing, recruiting, professional services, technology, and other direct costs increased by approximately $0.5 million to support increased business activities. Operating expense as a percentage of revenue slightly decreased to 81.8% for the quarter ended June 30, 2022 from 82.0% of revenue for the same period in 2021.
Total Other (Expense) Income, Net
We sold a business unit during the three months ended June 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 three months ended June 30, 2021, of which we recorded a gain of $0.7 million.
Six months ended June 30, 2022 compared to June 30, 2021
Revenue
The Benefits and Insurance Services practice group revenue increased by $14.3 million, or 8.4%, to $184.2 million during the six months ended June 30, 2022 compared to $169.9 million for the same period in 2021. Same-unit revenue increased by $15.5 million, or 9.2% when compared to the same period in 2021. The increase was across all service lines, primarily driven by $7.4 million increase in the property and casualty services, $4.8 million increase in employee benefit and retirement benefit services lines, as well as growth in our other project based services.
Operating Expenses
Operating expenses increased by $13.0 million, or 9.6%, when compared to the same period last year. Personnel cost increased by $8.8 million, or 6.6%, primarily due to timing of annual merit increases, bonus accrual, as well as investment in producers. Travel and entertainment cost increased by $1.1 million. Bad debt expense increased by $0.6 million. In addition, other operating expenses, including marketing, recruiting, professional services, technology, and other direct costs increased by approximately $1.1 million to support increased business activities. Operating expense as a percentage of revenue increased to 80.2% during the six months ended June 30, 2022 from 79.3% of revenue for the same period in 2021.
Total Other Income, Net
We sold a business unit during the six months ended June 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 six months ended June 30, 2021, of which we recorded a gain of $0.7 million.
National Practices
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 | | $
Change | | %
Change |
| (Amounts in thousands, except percentages) |
| Same-unit revenue | $ | 10,936 | | | $ | 9,439 | | | $ | 1,497 | | | 15.9 | % |
| Operating expenses | 9,899 | | | 8,487 | | | 1,412 | | | 16.6 | % |
| Gross margin / Operating Income | $ | 1,037 | | | $ | 952 | | | $ | 85 | | | 8.9 | % |
| Total other income, net | 1 | | | — | | | 1 | | | NM |
| Income from continuing operations before income tax expense | 1,038 | | | 952 | | | 86 | | | 9.0 | % |
| Gross margin percent | 9.5 | % | | 10.1 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | $
Change | | %
Change |
| (Amounts in thousands, except percentages) |
| Same-unit revenue | $ | 21,426 | | | $ | 18,781 | | | $ | 2,645 | | | 14.1 | % |
| Operating expenses | 19,475 | | | 17,028 | | | 2,447 | | | 14.4 | % |
| Gross margin / Operating Income | $ | 1,951 | | | $ | 1,753 | | | $ | 198 | | | 11.3 | % |
| Total other income, net | 1 | | | — | | | 1 | | | NM |
| Income from continuing operations before income tax expenses | 1,952 | | | 1,753 | | | 199 | | | 11.4 | % |
| Gross margin percent | 9.1 | % | | 9.3 | % | | | | |
| | | | | | | |
Three and six months ended June 30, 2022 compared with June 30, 2021
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 six months ended June 30, 2022, revenue increased by $1.5 million, or 15.9%, and $2.6 million, or
14.1%, respectively, while operating expenses increased by $1.4 million, or 16.6%, and $2.4 million, or 14.4%, 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 | | $
Change | | %
Change |
| (Amounts in thousands, except percentages) |
| Operating (income) expenses | $ | (4,826) | | | $ | 9,751 | | | (14,577) | | | (149.5) | % |
| Corporate general and administrative expenses | 10,926 | | | 13,816 | | | (2,890) | | | (20.9) | % |
| Legal settlement, net | — | | | 30,468 | | | (30,468) | | | (100.0) | % |
| Operating loss | (6,100) | | | (54,035) | | | 47,935 | | | (88.7) | % |
| Total other (expense) income, net | (17,616) | | | 6,522 | | | (24,138) | | | (370.1) | % |
| Loss from continuing operations before income tax expense | (23,716) | | | (47,513) | | | 23,797 | | | (50.1) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | $
Change | | %
Change |
| (Amounts in thousands, except percentages) |
| Operating (income) expenses | $ | (6,560) | | | $ | 16,502 | | | (23,062) | | | (139.8) | % |
| Corporate general and administrative expenses | 27,235 | | | 28,299 | | | (1,064) | | | (3.8) | % |
| Legal settlement, net | — | | | 30,468 | | | (30,468) | | | (100.0) | % |
| Operating loss | (20,675) | | | (75,269) | | | 54,594 | | | (72.5) | % |
| Total other (expense) income, net | (25,340) | | | 10,162 | | | (35,502) | | | (349.4) | % |
| Loss from continuing operations before income tax expenses | (46,015) | | | (65,107) | | | 19,092 | | | (29.3) | % |
| | | | | | | |
Three months ended June 30, 2022 compared to June 30, 2021
Total operating expenses decreased by $14.6 million, or 149.5%, during the three months ended June 30, 2022, as compared to the same period in 2021. The non-qualified deferred compensation plan decreased operating expenses by $13.3 million for the three months ended June 30, 2022 and increased operating expenses by $6.8 million during the same period in 2021. Excluding the non-qualified deferred compensation expenses, operating expense increased by approximately $5.5 million, primarily driven by higher personnel and facility costs to support business growth.
Total corporate general and administrative expenses decreased by $2.9 million, or 20.9%, during the three months ended June 30, 2022, as compared to the same period in 2021. The non-qualified deferred compensation plan decreased corporate general and administrative expenses by $1.8 million for the three months ended June 30, 2022, and increased by $0.9 million during the same period in 2021. Excluding the non-qualified deferred compensation expenses, corporate general and administrative expense decreased by approximately $0.2 million, primarily driven by $0.6 million lower personnel costs, offset by $0.3 million transaction and integration related professional services costs associated with the Marks Paneth acquisition in 2022.
During the three months ended June 30, 2021, we reached a settlement agreement with UPMC pertaining a lawsuit filed in the U.S. District Court for the Western District of Pennsylvania. As a result of the settlement, we recorded a settlement loss of $30.5 million for the three months ended June 30, 2021.
Total other (expense) income, net increased by $24.1 million during the three months ended June 30, 2022, as compared to the same period in 2021. For the three months ended June 30, 2022, total other expense, net includes a net loss of $15.1 million associated with the non-qualified deferred compensation plan. For the same period in 2021, other income, net includes a net gain of $7.6 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 $2.5 million in 2022 and $1.1 million in 2021, a change of $1.4 million primarily attributed to $0.7 million higher interest expense and $0.8 million higher fair value adjustments to the contingent purchase price.
Six months ended June 30, 2022 compared to June 30, 2021
Total operating expenses increased by $23.1 million, or 139.8%, during the six months ended June 30, 2022, as compared to the same period in 2021. The non-qualified deferred compensation plan decreased operating expenses by $19.0 million for the six months ended June 30, 2022, and increased operating expense by $11.4 million during the same period in 2021. Excluding the non-qualified deferred compensation expenses, operating expense increased by approximately $7.3 million, primarily driven by higher personnel costs and facility costs to support business growth.
Total G&A expenses decreased by $1.1 million, or 3.8%, during the six months ended June 30, 2022, as compared to the same period in 2021. The non-qualified deferred compensation plan decreased G&A expenses by $2.6 million for the six months ended June 30, 2022, and increased G&A expense by $1.3 million during the same period in 2021. Excluding the non-qualified deferred compensation expenses, G&A expense increased by approximately $2.9 million, primarily driven by $1.9 million higher transaction and integration related professional services costs associated with the Marks Paneth acquisition, $0.4 million higher travel and entertainment costs, and $0.6 million higher other discretionary costs to support the business growth.
During the six months ended June 30, 2021, we reached a settlement agreement with UPMC pertaining a lawsuit filed in the U.S. District Court for the Western District of Pennsylvania. As a result of the settlement, we recorded a settlement loss of $30.5 million for the six months ended June 30, 2021.
Total other income (expense), net increased by $35.5 million, or 349.4%, during the six months ended June 30, 2022, as compared to the same period in 2020. Total other income (expense), net for the six months ended June 30, 2022 includes a net loss of $21.6 million associated with the non-qualified deferred compensation plan. For the same period in 2021, other income, net includes a net gain of $12.7 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 $1.2 million, primarily due to $1.1 million higher interest expense due to higher average outstanding balance and interest rates during 2022 as compared to 2021.
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”) 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 84 days at June 30, 2022 and 2021, respectively. DSO at December 31, 2021 was 71 days.
The following table presents selected cash flow information. For additional details, refer to the accompanying Condensed Consolidated Statements of Cash Flows.
| | | | | | | | | | | | |
| Six Months Ended June 30, | |
| 2022 | | 2021 | |
| (Amounts in thousands) | |
| Net cash provided by operating activities | $ | 28,508 | | | $ | 66,294 | | |
| Net cash used in investing activities | (89,756) | | | (40,137) | | |
| Net cash provided by (used in) financing activities | 91,655 | | | (42,582) | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 30,407 | | | $ | (16,425) | | |
Operating Activities - Cash provided by operating activities was $28.5 million during the six months ended June 30, 2022 and primarily due to 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. Cash provided by operating activities was $66.3 million during the six months ended June 30, 2021 and primarily due to net income of $58.8 million and certain non-cash items, such as depreciation and amortization expense of $12.9 million, deferred income tax of $5.4 million, and stock-based compensation expense of $5.5 million. The cash inflow was offset by working capital use of $10.4 million.
Investing 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. Cash used in investing activities during the six months ended June 30, 2021 was $40.1 million and consisted primarily of $43.2 million used for business acquisitions, $3.3 million in capital expenditures, and $4.0 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.
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, 2021.
Financing Activities - 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. Cash used in financing activities during the six months ended June 30, 2021 was $42.6 million and primarily consisted of $64.5 million in share repurchases, $27.8 million net decrease in client fund obligations, and $7.9 million in contingent consideration payments related to prior acquisitions. The use of cash was partially offset by $55.3 million in net proceeds from additional borrowings under our credit facilities and $5.4 million proceeds from exercise of stock options during the six months ended June 30, 2021.
CAPITAL RESOURCES
Credit Facility - At June 30, 2022, we had $266.0 million outstanding under the 2022 credit facility as well as $5.7 million outstanding letters of credit. Available funds under the 2022 credit facility, based on the terms of the commitment, were approximately $323.2 million at June 30, 2022. The weighted average interest rate under the credit facility was 1.93% during the six months ended June 30, 2022, compared to 1.95% for the same period in 2021. 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) interest charge coverage ratio. We are in compliance with our financial covenants as of June 30, 2022. 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 first quarter of 2022, we completed the acquisition of Marks Paneth for $72.5 million in cash. We also repurchased 1.1 million shares of our common stock at a total cost of approximately $42.8 million during the six months ended June 30, 2022. Refer to Note 11, Business Combinations, to the accompanying unaudited condensed consolidated financial statements for further discussion on acquisitions.
Cash Requirements for 2022 - Cash requirements for the remainder of 2022 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, 2021), 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 $5.7 million and $3.4 million at June 30, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, 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, 2022, 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, 2021.
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 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, 2021. 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.