News Column

CBIZ, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 9, 2014

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to "we", "our", "CBIZ", or the "Company" shall mean CBIZ, Inc., a Delaware corporation, and its operating subsidiaries.

The following discussion is intended to assist in the understanding of CBIZ's financial position at March 31, 2014 and December 31, 2013, and results of operations and cash flows for the three months ended March 31, 2014 and 2013, and should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2013. 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 "Risk Factors" included in the Annual Report on Form 10-K for the year ended December 31, 2013. Overview CBIZ provides professional business services, products and solutions that help its clients grow and succeed by better managing their finances and employees. These services are provided to businesses of various sizes, as well as individuals, governmental entities and not-for-profit enterprises throughout the United States and parts of Canada. CBIZ delivers its integrated services through three practice groups: Financial Services, Employee Services, and National Practices. See Note 14 to the accompanying consolidated financial statements for a general description of services provided by each practice group.



See the Annual Report on Form 10-K for the year ended December 31, 2013 for further discussion of CBIZ's business and strategies, as well as the external relationships and regulatory factors that currently impact the Company's operations.

Executive Summary

Revenue for the first quarter of 2014 was $208.9 million compared to $201.2 million for the same period last year, an increase of 3.8%. Same-unit revenue increased by 1.4%, or $2.9 million in the first quarter compared to the first quarter last year. Revenue from newly acquired operations contributed $4.8 million, or 2.4% of revenue growth, compared to the same period a year ago. Income from continuing operations increased 5% to $18.0 million for the first quarter of 2014 compared to $17.1 million for the same period a year ago. Earnings per diluted share from continuing operations were $0.34 for the first quarters of 2014 and 2013. Earnings per diluted share for the first quarter of 2014 was negatively impacted by $0.02 due to an increase in the common stock equivalents to the dilutive share count primarily related to the 4.875% Convertible Senior Subordinated Notes issued in 2010. Additionally, the Financial Services practice group was negatively impacted in the first quarter of 2014 by severe weather conditions and scope changes in certain government consulting contracts. Non-GAAP earnings per diluted share were $0.46 and $0.50 for the first quarters of 2014 and 2013, respectively. CBIZ believes Non-GAAP earnings per diluted share illustrates the impact of certain non-cash charges or credits to income from continuing operations and is a useful performance measure for the Company, its analysts and its stockholders. Non-GAAP earnings per diluted share is a measurement prepared on a basis other than generally accepted accounting principles ("GAAP"), otherwise known as a Non-GAAP measure. As such, the Company has included this data and has provided a reconciliation to the nearest GAAP measurement, "income per diluted share from continuing operations." Reconciliations for the three months ended March 31, 2014 and 2013 are provided in the "Results of Operations - Continuing Operations" section that follows. During the first quarter of 2014, CBIZ acquired three business: Clearview National Partners, L.L.C. ("Clearview"), Centric Insurance Agency ("Centric"), and Lewis, Birch & Ricardo, L.L.C. ("LBR"). Clearview is located in Waltham, Massachusetts, and is a specialized employee benefits broker. Centric is an insurance broker located in New Providence, New Jersey, that provides property and casualty insurance, with a specialty in education institutions and public schools. LBR is a professional tax, accounting and consulting service provider located in Tampa, Florida, with significant experience and expertise in family 21



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law litigation support, not-for-profit entities and healthcare providers. Annual revenues for Clearview and Centric are estimated to be $2.5 million and $1.6 million, respectively, and will be reported in the Employee Services practice group. Annual revenues for LBR are estimated to be $9.8 million and will be reported in the Financial Services practice group. On February 13, 2014, CBIZ's Board of Directors authorized the purchase of up to 5.0 million shares of CBIZ outstanding common stock in the open market or in privately negotiated purchases through March 31, 2015. During the first quarter of 2014, CBIZ purchased approximately 0.5 million shares of its common stock at a total cost of $3.9 million.



Results of Operations - Continuing Operations

Same-unit revenue represents total revenue adjusted to reflect comparable periods of activity for acquisitions and divestitures. For example, for a business acquired on March 1, 2013, revenue for the month of March would be included in same-unit revenue for the first quarter of both years; revenue for the period January 1, 2014 through February 28, 2014 would be reported as revenue from acquired businesses.

Three Months Ended March 31, 2014 and 2013

Revenue

The following table summarizes total revenue for the three months ended March 31, 2014 and 2013 (in thousands, except percentages).

THREE MONTHS ENDED MARCH 31, % of % of $ % 2014 Total 2013 Total Change Change Same-unit revenue Financial Services $ 142,625 68.3 % $ 140,925 70.1 % $ 1,700 1.2 % Employee Services 54,086 25.9 % 52,778 26.2 % 1,308 2.5 % National Practices 7,379 3.5 % 7,486 3.7 % (107 ) (1.4 )% Total same-unit revenue 204,090 97.7 % 201,189 100 % 2,901 1.4 % Acquired businesses 4,818 2.3 % - - 4,818 Total revenue $ 208,908 100.0 % $ 201,189 100.0 % $ 7,719 3.8 %



A detailed discussion of revenue by practice group is included under "Operating Practice Groups."

Gross margin and operating expenses - Operating expenses increased by $6.8 million to $166.2 million for the first quarter of 2014 from $159.4 million for the comparable period of 2013, and increased as a percentage of revenue to 79.6% for the first quarter of 2014 from 79.2% for the first quarter of 2013. The primary components of operating expenses for the first quarters of 2014 and 2013 are illustrated in the following table: 22



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Table of Contents THREE MONTHS ENDED MARCH 31, 2014 2013 % of % of Change in Operating % of Operating % of % of Expense Revenue Expense Revenue Revenue Personnel costs 78.0 % 62.0 % 76.6 % 60.7 % 1.3 % Occupancy costs 5.9 % 4.7 % 6.0 % 4.7 % - Depreciation and amortization 2.8 % 2.3 % 2.9 % 2.3 % - Travel and related costs 3.8 % 3.0 % 3.7 % 3.0 % - Professional fees 0.9 % 0.7 % 1.2 % 1.0 % (0.3 )% Other (1) 8.2 % 6.6 % 8.2 % 6.4 % 0.2 % Subtotal 99.6 % 79.3 % 98.6 % 78.1 % 1.2 % Deferred compensation 0.4 % 0.3 % 1.4 % 1.1 % (0.8 )% Total operating expenses 100.0 % 79.6 % 100.0 % 79.2 % 0.4 % Gross margin 20.4 % 20.8 % (0.4 )%



(1) Other operating expenses include office expenses, equipment costs,

restructuring charges, bad debt and other expenses, none of which are

individually significant as a percentage of total operating expenses.

The increase in operating expenses as a percentage of revenue attributable to personnel costs was primarily due to investments in personnel to support business development, as well as staff merit increases. In addition, increases in personnel costs in the federal and state governmental health care consulting business were a result of an increase in headcount to support the business rather than using third-party consultants, which resulted in a decrease in professional fees. The increase or decrease in personnel costs as a percentage of revenue experienced by the individual practice groups is discussed in further detail under "Operating Practice Groups." Corporate general and administrative expenses - Corporate general and administrative ("G&A") expenses increased by $0.3 million to $10.3 million for the first quarter of 2014 from $10.0 million for the comparable period of 2013, but decreased as a percentage of revenue to 4.9% for the first quarter of 2014 from 5.0% for the first quarter of 2013. The primary components of G&A expenses for the first quarters of 2014 and 2013 are illustrated in the following table: THREE MONTHS ENDED MARCH 31, 2014 2013 % of % of Change G&A % of G&A % of in % of Expense Revenue Expense Revenue Revenue Personnel costs 61.8 % 3.0 % 61.3 % 3.0 % - Professional services 13.8 % 0.7 % 13.0 % 0.6 % 0.1 % Computer costs 4.9 % 0.2 % 5.4 % 0.3 % (0.1 )% Occupancy costs 2.1 % 0.1 % 2.0 % 0.1 % - Travel and related costs 2.8 % 0.1 % 2.4 % 0.1 % - Depreciation and amortization 1.1 % 0.1 % 0.7 % - 0.1 % Other (1) 12.5 % 0.7 % 12.4 % 0.8 % (0.1 )% Subtotal 99.0 % 4.9 % 97.2 % 4.9 % - Deferred compensation costs 1.0 % - 2.8 % 0.1 % (0.1 )% Total G&A expenses 100.0 % 4.9 % 100.0 % 5.0 % (0.1 )%



(1) Other G&A expenses include office expenses, equipment costs, insurance

expense and other expenses, none of which are individually significant as a

percentage of total G&A expenses.

Interest expense - Interest expense decreased by $0.7 million to $3.4 million for the first quarter of 2014 from $4.1 million for the comparable period in 2013. The decrease in interest expense was primarily due to a decrease in the average debt balance outstanding under the credit facility to $74.2 million for the first quarter of 2014 compared to $210.6 million for the first quarter of 2013 as well as a decrease in the weighted average interest rate to 2.7% for the first quarter of 2014 compared to 3.0% for the first quarter of 2013. 23



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Other income, net - Other income, net was $2.0 million and $1.7 million for the first quarters of 2014 and 2013, respectively. Adjustments to the investments held in a rabbi trust related to the deferred compensation plan do not impact CBIZ's net income as they are offset by the corresponding increase to compensation expense which is recorded as operating and G&A expenses in the consolidated statements of comprehensive income. The primary components of other income, net for the first quarters of 2014 and 2013 are illustrated in the following table: THREE MONTHS ENDED MARCH 31, $ 2014 2013 Change (In thousands, except percentages)

Deferred compensation costs $ 717$ 2,503$ (1,786 ) Adjustments to contingent liabilities 959 (887 ) 1,846 Other 299 112 187 Total other income, net $ 1,975$ 1,728$ 247 Income tax expense - CBIZ recorded income tax expense from continuing operations of $13.0 million and $12.4 million for the first quarters of 2014 and 2013, respectively. The effective tax rate for each of the first quarters of 2014 and 2013 was 42.0%. Earnings per share and Non-GAAP earnings per share - Earnings per diluted share from continuing operations were $0.34 for each of the three months ended March 31, 2014 and 2013, and Non-GAAP earnings per diluted share were $0.46 and $0.50 for the three months ended March 31, 2014 and 2013, respectively. Earnings per diluted share for the first quarter of 2014 was negatively impacted by $0.02 due to an increase in the common stock equivalents to the dilutive share count primarily related to the 4.875% Convertible Senior Subordinated Notes issued in 2010. The Company believes Non-GAAP earnings and Non-GAAP earnings per diluted share illustrate the impact of certain non-cash charges and credits to income from continuing operations and are a useful performance measure for the Company, its analysts and its stockholders. Management uses these performance measures to evaluate CBIZ's business, including ongoing performance and the allocation of resources. Non-GAAP earnings and Non-GAAP earnings per diluted share are provided in addition to the presentation of GAAP measures and should not be regarded as a replacement or alternative of performance under GAAP. The following is a reconciliation of income from continuing operations to Non-GAAP earnings from operations and earnings per diluted share from continuing operations to Non-GAAP earnings per diluted share for the three months ended March 31, 2014 and 2013. NON-GAAP EARNINGS AND PER SHARE DATA Reconciliation of Income from Continuing Operations to Non-GAAP Earnings from Continuing Operations THREE MONTHS ENDED MARCH 31, 2014 Per Share 2013 Per Share (In thousands, except per share data) Income from continuing operations $ 17,982$ 0.34$ 17,121$ 0.34 Selected non-cash charges: Amortization 3,591 0.07 3,456 0.07 Depreciation (1) 1,257 0.02 1,169 0.02 Non-cash interest on convertible notes 736 0.02 684 0.02 Stock-based compensation 1,390 0.03 1,436 0.03 Adjustment to contingent earnouts (959 ) (0.02 ) 887 0.02 Non-cash charges $ 6,015$ 0.12$ 7,632$ 0.16



Non-GAAP earnings - continuing operations $ 23,997$ 0.46

$ 24,753$ 0.50



(1) Capital spending was $1.6 million for both of the three month periods ended

March 31, 2014 and 2013. 24



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Operating Practice Groups

CBIZ delivers its integrated services through three practice groups: Financial Services, Employee Services, and National Practices. A brief description of these groups' operating results and factors affecting their businesses is provided below. Financial Services THREE MONTHS ENDED MARCH 31, $ % 2014 2013 Change Change (In thousands, except percentages) Revenue Same-unit $ 142,625$ 140,925$ 1,700 1.2 % Acquired businesses 2,795 - 2,795 Total revenue $ 145,420$ 140,925$ 4,495 3.2 % Operating expenses 110,022 104,882 5,140 4.9 % Gross margin $ 35,398$ 36,043$ (645 ) (1.8 )% Gross margin percent 24.3 % 25.6 % The increase in same-unit revenue was primarily the result of stronger performance in the core accounting units, which increased 1.3%, and to a lesser degree due to the units that provide national services, which increased 0.9%. While growth in the accounting units was primarily due to non-attest work, it was slower than anticipated due to weather-related office closures in 2014, which impacted revenue by approximately $1.0 million. Growth in the national units was primarily due to increased project work in the federal and state governmental health care compliance business.



The growth in revenue from acquisitions was provided by:

Knight Field Fabry, LLP, located in Denver, Colorado, that was acquired in

the fourth quarter of 2013. Lewis Birch and Ricardo, LLC located in Tampa, Florida, that was acquired



in the first quarter of 2014.

CBIZ provides a range of services to affiliated CPA firms under joint referral and administrative service agreements ("ASAs"). Fees earned by CBIZ under the ASAs are recorded as revenue in the accompanying consolidated statements of comprehensive income and were approximately $45.4 million and $45.1 million for the quarters ended March 31, 2014 and 2013, respectively. The largest components of operating expenses for the Financial Services practice group are personnel costs, occupancy costs, and travel and related costs. Personnel costs increased $5.1 million during the first quarter of 2014 compared to the same period in 2013, and represented 80.8% and 79.9% of total operating expenses and 61.1% and 59.5% of revenue for the first quarters of 2014 and 2013, respectively. Approximately $3.9 million of the increase pertained to same-unit personnel costs related to staff compensation increases and investments in headcount to support business development in the federal and state governmental health care compliance business in lieu of utilizing third-party consultants. The remaining increase of $1.5 million was associated with the acquisitions. Occupancy costs are relatively fixed in nature and were $6.5 million, or 4.5% and 4.6% of revenue, for the first quarters of 2014 and 2013, respectively. Travel and related costs were $3.6 million for the first quarters of 2014 and 2013, or 2.6% of total revenue in both of the comparable quarters. 25



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Table of Contents Employee Services THREE MONTHS ENDED MARCH 31, $ % 2014 2013 Change Change (In thousands, except percentages) Revenue Same-unit $ 54,086$ 52,778$ 1,308 2.5 % Acquired businesses 2,023 - 2,023 Total revenue $ 56,109$ 52,778$ 3,331 6.3 % Operating expenses 45,735 42,622 3,113 7.3 % Gross margin $ 10,374$ 10,156$ 218 2.1 % Gross margin percent 18.5 % 19.2 % The increase in same-unit revenue was primarily attributable to increases in the Company's employee benefits, property and casualty, payroll, and retirement plan consulting businesses, offset by a decrease in the life insurance business. The employee benefits business increased 2.9% due to strong client retention and growth from new clients in the fourth quarter of 2013 and the first quarter of 2014. Property and casualty revenues increased 2.7% primarily due to strong performance within the specialty program businesses and an increase in volume-based carrier bonus payments. The payroll business revenues increased 2.8% due to higher pricing coupled with an increase in processing volume for payroll and related services. Retirement consulting revenues increased 9.0% due to favorable equity market conditions as advisory fees are typically earned on plan asset balances, which have grown over the prior year and an increase in demand for actuarial consulting services. These increases were partially offset by a decline in the life insurance business of $0.4 million due to the inconsistent nature in the demand for life insurance plans.



The growth in revenue from acquisitions was provided by:

Associated Insurance Agents, a property and casualty and employee benefits

business located in Minneapolis, Minnesota, that was acquired in the second quarter of 2013.



Clearview National Partners, Inc., an employee benefits broker located in

Waltham, MA, that was acquired in the first quarter of 2014. Centric Insurance Agency, a property and casualty firm located in New



Providence, NJ, that was acquired in the first quarter of 2014.

The largest components of operating expenses for the Employee Services group are personnel costs, including commissions paid to third party brokers, and occupancy costs, representing 81.7% and 82.4% of total operating expenses for the quarters ended March 31, 2014 and 2013, respectively. Excluding costs related to the acquired businesses of $0.9 million, personnel costs increased approximately $1.3 million, primarily due to commissions paid out to producers relating to the increased revenue in employee benefits, payroll, and retirement services businesses. Occupancy costs are relatively fixed in nature and were $2.9 million and $2.8 million for the quarters ended March 31, 2014 and 2013, respectively. The increase in occupancy costs was primarily due to business acquisitions. National Practices THREE MONTHS ENDED MARCH 31, $ % 2014 2013 Change Change (In thousands, except percentages) Same-unit revenue $ 7,379$ 7,486$ (107 ) (1.4 )% Operating expenses 6,633 6,950 (317 ) (4.6 )% Gross margin $ 746$ 536$ 210 39.2 % Gross margin percent 10.1 % 7.2 % 26



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The decrease in revenue during the first quarter of 2014 compared to 2013 was primarily attributable to a decrease in CBIZ's healthcare consulting services as a result of decrease of service renewals in the Medicaid eligibility business. Operating expenses for the National Practices group primarily consist of personnel costs, occupancy costs, and travel and related costs, which represent 96.4% and 95.1% of total operating expenses for the three months ended March 31, 2014 and 2013, respectively. The sale of CBIZ's mergers and acquisitions business on December 31, 2013 resulted in a $0.2 million decrease in operating expenses while the remaining decrease of $0.1 million was due to a reduction in headcount in reaction to the decrease in Medicaid eligibility renewals. The sale of the mergers and acquisitions business had no impact on revenue as the mergers and acquisitions business had no revenue for the first quarter of 2013.



Financial Condition

Total assets were $932.4 million at March 31, 2014, an increase of $35.0 million versus December 31, 2013. Current assets of $360.2 million exceeded current liabilities of $226.8 million by $133.4 million.

Cash and cash equivalents increased by $3.6 million to $4.4 million at March 31, 2014 from $0.8 million at December 31, 2013. Restricted cash was $22.2 million at March 31, 2014, an increase of $0.1 million from the December 31, 2013 balance of $22.1 million. Restricted cash represents those funds held in connection with CBIZ'sFinancial Industry Regulatory Authority businesses and funds held in connection with the pass through of insurance premiums to various carriers. Cash and restricted cash fluctuate during the year based on the timing of cash receipts and payments. Accounts receivable, net, were $184.5 million at March 31, 2014, an increase of $41.3 million from December 31, 2013 due to the cyclical nature of CBIZ's Financial Services business. Days sales outstanding ("DSO") from continuing operations was 93 days, 74 days and 89 days at March 31, 2014, December 31, 2013 and March 31, 2013, respectively. DSO represents accounts receivable (before the allowance for doubtful accounts) and unbilled revenue (net of realization adjustments) at the end of the period, divided by trailing twelve month daily revenue. CBIZ provides DSO data because such data is commonly used as a performance measure by analysts and investors and as a measure of the Company's ability to collect on receivables in a timely manner. Other current assets were $14.8 million and $14.4 million at March 31, 2014 and December 31, 2013, respectively. Other current assets are primarily comprised of prepaid assets. Balances may fluctuate during the year based upon the timing of cash payments and amortization of prepaid expenses. Funds held for clients and the corresponding client fund obligations primarily relate to CBIZ's payroll services business. The balances in these accounts fluctuate with the timing of cash receipts from clients and the subsequent cash payments. Client fund obligations can differ from funds held for clients due to changes in the market value of the underlying investments. The nature of these accounts is further described in Note 1 to the consolidated financial statements included in CBIZ's Annual Report on Form 10-K for the year ended December 31, 2013.



Property and equipment, net, increased by $0.3 million to $19.5 million at March 31, 2014 from $19.2 million at December 31, 2013. The increase is primarily the result of capital expenditures of $1.6 million offset by depreciation and amortization expense of $1.3 million during the first quarter of 2014. CBIZ's property and equipment is primarily comprised of software, hardware, furniture and leasehold improvements.

Goodwill and other intangible assets, net, increased by $22.8 million at March 31, 2014 from December 31, 2013. The increase was comprised of $26.4 million of additions to goodwill and intangible assets resulting from acquisitions during the first quarter of 2014, partially offset by $3.6 million of amortization expense.

Assets of the deferred compensation plan represent participant deferral accounts and are directly offset by deferred compensation plan obligations. Assets of the deferred compensation plan were $55.0 million and $52.0 million at March 31, 2014 and December 31, 2013, respectively. The increase in assets of the deferred compensation plan of $3.0 million consisted of net participant contributions of $2.3 million and an increase in the fair value of the investments of $0.7 million for the three months ended March 31, 2014. The plan is described in further detail in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. 27



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The accounts payable balances of $34.7 million and $37.5 million at March 31, 2014 and December 31, 2013, respectively, reflect amounts due to suppliers and vendors. Accounts payable balances fluctuate during the year based on the timing of cash payments. Accrued personnel costs were $22.5 million and $38.6 million at March 31, 2014 and December 31, 2013, respectively, and represent amounts due for payroll, payroll taxes, employee benefits and incentive compensation. Balances fluctuate during the year based on the timing of payments and adjustments to the estimate of incentive compensation costs. Notes payable - current decreased by $0.8 million to $0.8 million at March 31, 2014 from $1.6 million at December 31, 2013. Notes payable balances and activity are primarily attributable to notes and guaranteed payments related to business acquisitions. During the three months ended March 31, 2014, payments of $0.8 million were made on these notes. Contingent purchase price liabilities (current and non-current) are comprised of purchase price liabilities that result from business acquisitions. Contingent purchase price liabilities (current and non-current) increased by $7.8 million at March 31, 2014 from December 31, 2013. The increase in the contingent liability was due to additions of $10.2 million from current year acquisitions partially offset by payments of $1.5 million and adjustments to the fair value of the liability of $1.0 million. Other liabilities (current and non-current) increased by $3.5 million to $27.0 million at March 31, 2014 from $23.5 million at December 31, 2013. The increase was primarily attributable to an increase of $1.6 million in accrued interest on CBIZ's debt instruments due to timing of payments, an increase of $1.3 million related to the self-funded health insurance plan resulting from the timing of claim payments, and an increase of $0.3 million in accrued lease costs resulting from new lease agreements. Income taxes payable - current was $12.2 million and $25 thousand at March 31, 2014 and December 31, 2013, respectively. Income taxes payable - current primarily represents the provision for current income taxes less estimated tax payments. Income taxes payable - non-current at March 31, 2014 and December 31, 2013 was $5.1 million and $6.2 million, respectively, and represents the accrual for uncertain tax positions. CBIZ's convertible notes are carried at face value less any unamortized discount. The $0.7 million increase in the carrying value of the convertible notes at March 31, 2014 versus December 31, 2013 represents amortization of the discount which is recognized as non-cash interest expense in the consolidated statements of comprehensive income. The convertible notes are further disclosed in Note 5 of the accompanying consolidated financial statements. Bank debt for amounts due on CBIZ's credit facility increased $42.9 million to $91.4 million at March 31, 2014 from $48.5 million at December 31, 2013. This increase was primarily attributable to the seasonal use of cash that typically occurs in CBIZ's first fiscal quarter related to the Financial Services practice group. Stockholders' equity increased by $22.6 million to $397.0 million at March 31, 2014 from $374.4 million at December 31, 2013. The increase was primarily attributable to net income of $17.3 million, CBIZ's stock award programs which contributed $7.1 million, and the issuance of $2.1 million in common shares related to business acquisitions. These increases were offset by open market share repurchase activity of approximately $3.9 million.



Liquidity and Capital Resources

CBIZ's principal source of net operating cash is derived from the collection of fees and commissions for professional services and products rendered to its clients. CBIZ supplements net operating cash with a $275 million unsecured credit facility and $130 million in 2010 Notes.

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CBIZ maintains a $275 million unsecured credit facility with Bank of America as agent bank for a group of seven participating banks. At March 31, 2014, CBIZ had $91.4 million outstanding under its credit facility and had letters of credit and performance guarantees totaling $4.4 million. Available funds under the credit facility, based on the terms of the commitment, were approximately $62.1 million at March 31, 2014. Management believes that cash generated from operations, combined with the available funds from the credit facility, provides CBIZ the financial resources needed to meet business requirements for the foreseeable future, including working capital requirements and capital expenditures. The credit facility also allows for the allocation of funds for strategic initiatives, including acquisitions and the repurchase of CBIZ common stock. Under the credit facility, CBIZ is required to meet certain financial covenants with respect to (i) minimum net worth; (ii) maximum total and senior leverage ratios; and (iii) a minimum fixed charge coverage ratio. CBIZ believes it is in compliance with its covenants as of March 31, 2014. CBIZ's ability to service its debt and to fund strategic initiatives will depend upon its ability to generate cash in the future. In addition to the debt instruments previously mentioned, CBIZ may obtain, at a future date, additional funding by offering securities or debt through public or private markets. Sources and Uses of Cash The following table summarizes CBIZ's cash flows from operating, investing and financing activities for the three months ended March 31, 2014 and 2013 (in thousands): Three Months Ended March 31, 2014 2013



Total cash provided by (used in):

Operating activities $ (21,191 )$ (12,128 ) Investing activities 20,731 8,895 Financing activities 4,096 2,538



(Decrease) increase in cash and cash equivalents $ 3,636$ (695 )

Operating Activities Cash flows from operating activities represent net income adjusted for certain non-cash items and changes in assets and liabilities. CBIZ typically experiences a net use of cash from operations during the first quarter of its fiscal year, as accounts receivable balances grow in response to the seasonal increase in first quarter revenue generated by the Financial Services practice group (primarily for accounting and tax services). This net use of cash has historically been followed by strong operating cash flow during the second and third quarters, as a significant amount of revenue generated by the Financial Services practice group during the first four months of the year are billed and collected in subsequent quarters. Non-cash adjustments to net income mentioned below mainly consist of depreciation of fixed assets, amortization of intangible assets including client lists and non-compete agreements, amortization of the discount on convertible notes and deferred financing fees, provision for bad debts, adjustments to contingent purchase price liabilities, deferred income tax expense and stock-based compensation expense. For the first quarter of 2014, cash used by operating activities was $21.2 million and was primarily due to changes in working capital of $44.4 million. The use of working capital cash was primarily a result of increased accounts receivable and the timing of payments on payables and personnel costs, offset partially by the increase in the tax liability based on the quarterly earnings. Offsetting these uses of cash for the first quarter of 2014 were net income of $17.3 million, a net loss on the sale of discontinued operations transactions of $0.7 million and non-cash adjustments to net income of approximately $5.3 million. The loss on the discontinued operations transactions was primarily the final working capital adjustment related to the sale of MMP. For the first quarter of 2013, cash used by operating activities was $12.1 million and was primarily due to changes in working capital of $37.7 million and a net gain on the sale of operations and discontinued operations transactions of $1.2 million, which primarily related to the operating activities of MMP and the property tax business located in Leawood, Kansas, both of which were recorded as discontinued operations in 2013. The use of working capital cash was primarily a result of increased accounts receivable and the timing of payments on payables and personnel costs, offset partially by the increase in the tax liability based on the quarterly earnings. Offsetting these uses of cash for the first quarter of 2013 were net income of $18.3 million and non-cash adjustments to net income of approximately $6.9 million. Cash provided by discontinued operations was $1.6 million. 29



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Investing Activities

CBIZ's investing activities typically consist of: payments for business acquisitions and client lists, purchases of capital equipment, net activity related to funds held for clients, and proceeds received from sales of divestitures and discontinued operations. Capital expenditures consisted of investments in technology, leasehold improvements and purchases of furniture and equipment.

Investing sources of cash during the first quarter of 2014 consisted of $37.6 million in net activity related to funds held for clients, partially offset by $15.2 million of net cash used for business acquisitions and contingent payments on prior acquisitions, $1.6 million for capital expenditures and $0.5 million of payments made related to discontinued operations transactions. Investing sources of cash during the first quarter of 2013 consisted of $10.5 million in net activity related to funds held for clients, which was partially offset by $1.6 million for capital expenditures.



Financing Activities

CBIZ's financing cash flows typically consist of net borrowing and payment activity from the credit facility, the issuance and repayment of debt instruments, repurchases of CBIZ common stock, payments of contingent consideration on business acquisitions, net change in client fund obligations, and proceeds from the exercise of stock options.

Net cash provided by financing activities during the first quarter of 2014 was primarily from net borrowings from the credit facility of $42.9 million and $6.0 million in proceeds from the exercise of stock options. These sources of cash were partially offset by $37.6 million in net activity related to client fund obligations, $3.9 million used to repurchase shares of CBIZ common stock, $2.2 million in payments for contingent consideration and guaranteed payments related to business acquisitions and $1.2 million for repayment of debt that was acquired from business acquisitions. Net cash provided by financing activities during the first quarter of 2013 was primarily from net borrowings from the credit facility of $14.1 million. Partially offsetting this source of cash was $10.5 million in net activity related to client fund obligations and $1.0 million in payments for contingent consideration related to business acquisitions. 30



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Obligations and Commitments

CBIZ's aggregate amount of future obligations at March 31, 2014 for the next five years and thereafter is set forth below (in thousands):

Total 2014 (1) 2015 2016 2017 2018 Thereafter Convertible notes(2) $ 130,750 $ - $ 130,000



$ 750 $ - $ - $ - Interest on convertible notes

12,736 6,362 6,362 12 - - - Credit facility(3) 91,400 - 91,400 - - - - Income taxes payable(4) 17,284 12,161 5,123 - - - - Notes payable 754 754 - - - - - Contingent purchase price liabilities(5) 32,953 11,205 12,016 8,287 1,445 - - Restructuring lease obligations(6) 4,233 901 1,239 1,135 451 467 40 Non-cancelable operating lease obligations(6) 149,361 23,880 30,174 28,016 22,389 17,438 27,464 Letters of credit in lieu of cash security deposits 2,516 250 - 834 - 1,387 45 Performance guarantees for non-consolidated affiliates 1,934 1,934 - - - - - License bonds and other letters of credit 2,277 1,482 777 8 10 - - Total $ 446,198$ 58,929$ 277,091$ 39,042$ 24,295$ 19,292$ 27,549



(1) Represents contractual obligations from April 1, 2014 to December 31, 2014.

(2) Represents $130 million par value of 2010 Notes which mature on October 1,

2015, and $750 thousand par value of 2006 Notes which mature on June 1, 2026.

The 2006 Notes may be putable by the holders of the convertible notes on

June 1, 2016 and can be redeemed by the Company at anytime.

(3) Interest on the credit facility is not included as the amount is not

determinable due to the revolving nature of the credit facility and the

variability of the related interest rate.

(4) Does not reflect $5.6 million of unrecognized tax benefits, which the Company

has accrued for uncertain tax positions, as CBIZ is unable to determine a reasonably reliable estimate of the timing of the future payments.



(5) Represents contingent earnout liability that is expected to be paid over the

next six years resulting from business acquisitions.

(6) Excludes cash expected to be received under subleases.

Off-Balance Sheet Arrangements

CBIZ maintains administrative service agreements with independent CPA firms (as described more fully in the Annual Report on Form 10-K for the year ended December 31, 2013), which qualify as variable interest entities. The accompanying consolidated financial statements do not reflect the operations or accounts of variable interest entities as the impact to CBIZ is not material to the financial condition, results of operations, or cash flows of CBIZ. CBIZ provides guarantees of performance obligations for a CPA firm with which CBIZ maintains an administrative service agreement. Potential obligations under the guarantees totaled $1.9 million at March 31, 2014 and December 31, 2013. CBIZ has recognized a liability for the fair value of the obligations undertaken in issuing these guarantees. The liability is recorded as other current liabilities in the accompanying consolidated balance sheets. CBIZ does not expect it will be required to make payments under these guarantees. CBIZ provides letters of credit to landlords (lessors) of its leased premises in lieu of cash security deposits, which totaled $2.5 million at March 31, 2014 and December 31, 2013. In addition, CBIZ provides license bonds to various state agencies to meet certain licensing requirements. The amount of license bonds outstanding at March 31, 2014 and December 31, 2013 totaled $2.3 million and $2.4 million, respectively. CBIZ has various agreements under which it 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 CBIZ under such indemnification clauses are 31



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generally conditioned upon the other party making a claim. Such claims are typically subject to challenge by CBIZ and to dispute resolution procedures specified in the particular contract. Further, CBIZ's obligations under these agreements may be limited in terms of time and/or amount and, in some instances, CBIZ may have recourse against third parties for certain payments made by CBIZ. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of CBIZ's obligations and the unique facts of each particular agreement. Historically, CBIZ has not made any payments under these agreements that have been material individually or in the aggregate. As of March 31, 2014, CBIZ was not aware of any material obligations arising under indemnification agreements that would require payments. Interest Rate Risk Management CBIZ periodically uses interest rate swaps to manage interest rate risk exposure. The interest rate swaps effectively mitigate CBIZ's exposure to interest rate risk, primarily through converting portions of the floating rate debt under the credit facility, to a fixed rate basis. These agreements involve the receipt or payment of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal amounts. At March 31, 2014 and December 31, 2013, CBIZ had an interest rate swap with a $40.0 million notional amount, of which $15.0 million will expire in June 2014 and the remaining $25.0 million will expire in June 2015. Management will continue to evaluate the potential use of interest rate swaps as it deems appropriate under certain operating and market conditions. CBIZ does not enter into derivative instruments for trading or speculative purposes. CBIZ carries $130.0 million in 2010 Notes bearing a fixed interest rate of 4.875%. The 2010 Notes mature on October 1, 2015 and may be converted beginning July 31, 2015, or earlier if the market price per share of CBIZ common stock exceeds 135% of the conversion price for at least 20 days during the period of 30 consecutive trading days ending on the final trading day of the preceding quarter. CBIZ believes the fixed nature of these borrowings mitigate its interest rate risk. In connection with payroll services provided to clients, CBIZ collects funds from its clients' accounts in advance of paying these client obligations. These funds held for clients are segregated and invested in accordance with the Company's investment policy, which requires all investments carry an investment grade rating at the time of initial investment. The interest income on these investments mitigates the interest rate risk for the borrowing costs of CBIZ's credit facility, as the rates on both the investments and the outstanding borrowings against the credit facility are based on market conditions.



Critical Accounting Policies

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. There have been no material changes to CBIZ's critical accounting policies from the information provided in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading Critical Accounting Policies in the Annual Report on Form 10-K for the year ended December 31, 2013.



Valuation of Goodwill

Goodwill impairment testing between annual testing dates may be required if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. A further description of assumptions used in the Company's annual impairment testing are provided in CBIZ's Annual Report on Form 10-K for the year ended December 31, 2013. There was no goodwill impairment during the year ended December 31, 2013 or during the three months ended March 31, 2014. 32



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CBIZ reviewed the significant assumptions that it used in its goodwill impairment analysis to determine if it was more likely than not that the fair value of each reporting unit was less than its carrying value. The analyses focused on management's current expectations of future cash flows, as well as current market conditions and other qualitative factors that impact various economic indicators that are utilized in assessing fair value. Based on these analyses and the lack of any other evidence or significant event, it was determined that the Company did not have any triggering events requiring it to perform a goodwill assessment during the three months ended March 31, 2014.



New Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-11 ("ASU 2013-11") "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists". ASU 2013-11 states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss ("NOL") carryforward, a similar tax loss, or a tax credit carryforward. The exception to this treatment is as follows: to the extent an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date or if the entity is not required to use and does not intend to use the deferred tax asset, then the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 does not require any additional recurring disclosures. Effective January 1, 2014, CBIZ adopted ASU 2013-11 and as a result reclassified approximately $1.2 million of unrecognized tax benefits to reduce the company's deferred tax assets. There was no impact to the consolidated statements of comprehensive income as a result of the adoption of ASU 2013-11. In April 2014, the FASB issued ASU No. 2014-08 ("ASU 2014-08"), "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of an Entity." The amendments in ASU 2014-08 change the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. The update is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014.



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 CBIZ's 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, the Company also may provide oral or written forward-looking statements in other materials the Company releases to the public. Any or all of the Company's forward-looking statements in this Quarterly Report on Form 10-Q and in any other public statements that the Company makes, are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Such forward-looking statements can be affected by inaccurate assumptions the Company might make or by known or unknown risks and uncertainties. Should one or more of these risks or assumptions materialize, or should the underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Such risks and uncertainties include, but are not limited to: CBIZ's ability to adequately manage its growth; CBIZ's dependence on the services of its CEO and other key employees; competitive pricing pressures; general business and economic conditions; changes in governmental regulation and tax laws affecting its operations; reversal or decline in the current trend of outsourcing business services; revenue seasonality or 33



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fluctuations in and collectability of receivables; liability for errors and omissions of the Company's businesses; regulatory investigations and future regulatory activity (including, without limitation, inquiries into compensation arrangements within the insurance brokerage industry); and reliance on information processing systems and availability of software licenses. Consequently, no forward-looking statement can be guaranteed.

A more detailed description of risk factors may be found in CBIZ's Annual Report on Form 10-K for the year ended December 31, 2013. Except as required by the federal securities laws, CBIZ undertakes 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 the Company makes on related subjects in its filings with the SEC, such as quarterly, periodic and annual reports.


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