News Column

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

August 8, 2014

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to "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 June 30, 2014 and December 31, 2013, results of operations for the three and six months ended June 30, 2014 and 2013, and cash flows for the six months ended June 30, 2014 and 2013, and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with the Company's 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 three months ended June 30, 2014 increased by 5.0% to $180.9 million from $172.2 million for the comparable period in 2013. Revenue from newly acquired operations contributed $5.0 million, or 2.9%, to the growth in revenue, and same-unit revenue contributed $3.7 million, or 2.1%. Revenue for the six months ended June 30, 2014 increased by 4.4% to $389.8 million from $373.4 million for the comparable period in 2013. Revenue from newly acquired operations, net of divestitures, contributed $9.8 million, or 2.6%, and same-unit revenue contributed $6.6 to the growth in revenue, or 1.8%. Earnings per share from continuing operations was $0.12 per diluted share for the three months ended June 30, 2014 and $0.11 per diluted share for the comparable period in 2013. For the six months ended June 30, 2014 and 2013, earnings per diluted share from continuing operations were $0.46. Non-GAAP earnings per diluted share were $0.22 and $0.25 for the three months ended June 30, 2014 and 2013, respectively, and $0.68 and $0.75 for the six months ended June 30, 2014 and 2013, respectively. CBIZ believes Non-GAAP earnings per diluted share illustrates the impact of certain non-cash charges and credits to income from continuing operations and is a useful 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"). 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 and six months ended June 30, 2014 and 2013 are provided in the "Results of Operations - Continuing Operations" section that follows. During the six months ended June 30, 2014, CBIZ acquired substantially all of the assets of four businesses: Clearview National Partners, LLC ("Clearview"), Centric Insurance Agency ("Centric"), Lewis Birch & Richardo, LLC ("LBR"), and the Tegrit Group ("Tegrit"). 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 law litigation support, not-for-profit 23



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entities and healthcare providers. Tegrit is located in Akron, Ohio and is a national provider of actuarial consulting and retirement plan administration. Annual revenues for Clearview, Centric and Tegrit are estimated to be $2.5 million, $1.6 million and $8.5 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. Effective July 7, 2014, in a privately negotiated transaction, CBIZ repurchased $17.4 million of its $130 million 4.875% Convertible Senior Subordinated Notes due October 2015. This transaction will result in lower interest expense of approximately $0.7 million annually and a reduction in the diluted share count of approximately 380,000 shares. A non-operating loss of approximately $0.8 million will be recorded in the third quarter of 2014. Effective July 28, 2014, CBIZ replaced its $275 million unsecured credit facility with a new $400 million unsecured credit facility. The new credit facility, which expires in July 2019, will enable the Company to lower its borrowing costs, provide flexibility to refinance its 2010 Notes due October 1, 2015, and will also allow for the allocation of funds for strategic initiatives, including acquisitions and the repurchase of CBIZ common stock. CBIZ believes that repurchasing shares of its common stock under the Company's stock purchase plan is a use of cash that provides value to its shareholders. During the six months ended June 30, 2014, CBIZ repurchased approximately 1.3 million of its common shares at a total cost of approximately $10.7 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 June 1, 2013, revenue for the month of June would be included in same-unit revenue for both years; revenue for the period January 1, 2014 through May 31, 2014 would be reported as revenue from acquired businesses.

Three Months Ended June 30, 2014 and 2013

Revenue - The following table summarizes total revenue for the three months ended June 30, 2014 and 2013 (in thousands, except percentages).

Three Months Ended June 30, % of % of $ % 2014 Total 2013 Total Change Change

Same-unit revenue Financial Services $ 116,367 64.3 % $ 113,527 65.9 % $ 2,840 2.5 % Employee Services 52,209 28.9 % 51,488 29.9 % 721 1.4 % National Practices 7,324 4.0 % 7,214 4.2 % 110 1.5 % Total same-unit revenue 175,900 97.2 % 172,229 100.0 % 3,671 2.1 % Acquired businesses 4,985 2.8 % - - 4,985 Total revenue $ 180,885 100.0 % $ 172,229 100.0 % $ 8,656 5.0 %



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

Gross margin and operating expenses - Operating expenses increased by $11.2 million to $162.3 million for the three months ended June 30, 2014 from $151.1 million for the comparable period of 2013, and increased as a percentage of revenue to 89.7% for the three months ended June 30, 2014 from 87.7% for the comparable period of 2013. 24



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The primary components of operating expenses for the three months ended June 30, 2014 and 2013 are included in the following table:

Three Months Ended June 30, 2014 2013 % of % of Change in Operating % of Operating % of % of Expense Revenue Expense Revenue Revenue Personnel costs 76.3 % 68.4 % 76.6 % 67.2 % 1.2 % Occupancy costs 6.0 % 5.4 % 6.2 % 5.5 % (0.1 )% Depreciation and amortization 3.0 % 2.7 % 3.1 % 2.7 % - Travel and related costs 4.0 % 3.6 % 4.1 % 3.6 % - Professional fees 1.1 % 1.0 % 1.6 % 1.4 % (0.4 )% Other (1) 8.6 % 7.7 % 8.3 % 7.2 % 0.5 % Subtotal 99.0 % 88.8 % 99.9 % 87.6 % 1.2 % Deferred compensation costs 1.0 % 0.9 % 0.1 % 0.1 % 0.8 % Total operating expenses 100.0 % 89.7 % 100.0 % 87.7 % 2.0 % Gross margin 10.3 % 12.3 % (2.0 )%



(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 that was attributable to personnel costs was primarily due to an increase in salaries and wages and the related benefits and payroll taxes resulting from certain 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 growth in business and also to replace third-party consultants, resulting in a decrease in professional fees. The increase in deferred compensation costs as a percentage of revenue was due to gains of $1.7 million in the value of the assets held in relation to CBIZ's deferred compensation plan, which resulted in a significant impact to gross margin for the three months ended June 30, 2014, compared to modest gains of $0.2 million in the value of assets for the comparable period in 2013. Personnel and other operating expenses are discussed in further detail under "Operating Practice Groups". Corporate general and administrative expenses - Corporate general and administrative ("G&A") expenses increased by $0.7 million to $8.3 million for the three months ended June 30, 2014 from $7.6 million for the three months ended June 30, 2013, and increased as a percentage of revenue to 4.6% for the three months ended June 30, 2014 from 4.5% for the comparable period of 2013. The primary components of G&A expenses for the three months ended June 30, 2014 and 2013 are included in the following table: Three Months Ended June 30, 2014 2013 % of % of Change in G&A % of G&A % of % of Expense Revenue Expense Revenue Revenue Personnel costs 47.3 % 2.2 % 56.2 % 2.5 % (0.3 )% Professional services 24.1 % 1.1 % 15.3 % 0.7 % 0.4 % Computer costs 6.6 % 0.3 % 6.5 % 0.3 % - Travel and related costs 3.6 % 0.2 % 4.2 % 0.2 % - Depreciation and amortization 1.4 % 0.1 % 1.0 % - 0.1 % Other (1) 14.1 % 0.6 % 17.4 % 0.8 % (0.2 )% Subtotal 97.1 % 4.5 % 100.6 % 4.5 % - Deferred compensation costs 2.9 % 0.1 % (0.6 )% - 0.1 % Total G&A expenses 100.0 % 4.6 % 100.0 % 4.5 % 0.1 %



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

insurance expense and other expenses, none of which are individually significant as a percentage of total G&A expenses. 25



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The decrease in G&A expenses as a percentage of revenue attributable to personnel costs is primarily due to a decrease in incentive based compensation accrued during the three months ended June 30, 2014 compared to the same period in 2013. The increase in professional fees was primarily related to an increase in legal expenses during the three months ended June 30, 2014 compared to the same period last year related to the claims against CBIZ as described in Note 6 of the accompanying consolidated financial statements. Interest expense - Interest expense decreased by $0.5 million to $3.6 million for the three months ended June 30, 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 $88.6 million for the three months ended June 30, 2014 compared to $180.4 million for the three months ended June 30, 2013, as well as a decrease in the weighted average interest rate to 2.70% for the three months ended June 30, 2014 compared to 2.95% for the same period in 2013. The decrease in the average debt balance is primarily due to the application of a portion of the proceeds received from the sale CBIZ'sMedical Management Professionals business on August 30, 2013. See Note 5 of the accompanying consolidated financial statements for further discussion of CBIZ's debt arrangements. Other income, net - For the three months ended June 30, 2014 and 2013, other income, net is primarily comprised of gains and losses in the fair value of investments held in a rabbi trust related to the deferred compensation plan and adjustments to contingent purchase price liabilities related to prior acquisitions. For the three months ended June 30, 2014 and 2013, gains in the fair value of investments related to the deferred compensation plan were $1.9 million and $0.1 million, respectively. These adjustments do not impact CBIZ's net income as they are offset by a corresponding increase to compensation expense, which is recorded as operating and G&A expenses in the consolidated statements of comprehensive income. For the three months ended June 30, 2014, adjustments to the fair value of the Company's contingent purchase price liability related to prior acquisitions resulted in other income of $2.0 million. The adjustments to these contingent purchase price liabilities for the same period in 2013 were nominal. Income tax expense - CBIZ recorded income tax expense from continuing operations of $4.5 million and $4.3 million for the three months ended June 30, 2014 and 2013, respectively. The effective tax rate for the three months ended June 30, 2014 was 41.7%, compared to an effective tax rate of 43.3% for the comparable period in 2013. The decrease in the effective tax rate primarily relates to a higher level of pre-tax income and a lower state effective tax rate in 2014. Earnings per share and Non-GAAP earnings per share- Earnings per share from continuing operations were $0.12 and $0.11 per diluted share for the three months ended June 30, 2014 and 2013, respectively, and Non-GAAP earnings per share were $0.22 and $0.25 per diluted share for the three months ended June 30, 2014 and 2013, respectively. 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. 26



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The following is a reconciliation of income from continuing operations to Non-GAAP earnings from operations and diluted earnings per share from continuing operations to Non-GAAP earnings per share for the three months ended June 30, 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 June 30, 2014 Per Share 2013 Per Share (In thousands, except per share data) Income from continuing operations $ 6,240$ 0.12$ 5,620$ 0.11 Selected non-cash charges: Amortization 3,683 0.07 3,586 0.07 Depreciation 1,281 0.02 1,163 0.02 Non-cash interest on convertible notes 764 0.02 710 0.02 Stock-based compensation 1,598 0.03 1,488 0.03 Adjustment to contingent earnouts (2,026 ) (0.04 ) 17 - Non-cash charges $ 5,300$ 0.10$ 6,964$ 0.14



Non-GAAP earnings - continuing operations $ 11,540$ 0.22

$ 12,584$ 0.25

Operating Practice Groups

CBIZ delivers its integrated services through three practice groups: Financial Services, Employee Services and National Practices. A description of these groups' operating results and factors affecting their businesses is provided below. Financial Services Three Months Ended June 30, $ % 2014 2013 Change Change (In thousands, except percentages) Revenue Same-unit $ 116,367$ 113,527$ 2,840 2.5 % Acquired businesses 2,715 - 2,715 Total revenue $ 119,082$ 113,527$ 5,555 4.9 % Operating expenses 104,591 98,721 5,870 5.9 % Gross margin $ 14,491$ 14,806$ (315 ) (2.1 )% Gross margin percent 12.2 % 13.0 % The growth in same-unit revenue resulted from the stronger performance in several of the units that provide national services, specifically the federal and state governmental health care compliance industry and to a lesser extent, valuation services. Revenue associated with these national services increased 10.6% for the three months ended June 30, 2014 compared to the same period last year. With respect to the accounting units, same-unit revenue declined slightly.



The growth in revenue from acquisitions was provided by:

Knight Field Fabry, LLP, located in Denver, Colorado, acquired in the

fourth quarter of 2013, and



Lewis Birch and Ricardo, LLC, located in Tampa, Florida, 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 $35.2 million and $35.9 million for the three months ended June 30, 2014 and 2013, respectively. 27



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The largest components of operating expenses for the Financial Services practice group are personnel costs, occupancy costs, and travel and related costs, which represented 89.5% and 88.8% of total operating expenses and 78.6% and 77.2% of total revenue for the three months ended June 30, 2014 and 2013, respectively. Personnel costs increased $5.4 million during the three months ended June 30, 2014 compared to the same period in 2013, and represented 69.4% and 68.1% of revenue for the three months ended June 30, 2014 and 2013, respectively. This increase is comprised of an increase in same-unit personnel of $3.0 million as a result of staff compensation increases and an increase in headcount, particularly at the units offering national services, and an increase of $2.4 million associated with the acquisitions of Knight and LBR. The increase in headcount primarily occurred at the units offering federal and state governmental health care consulting services to help support the business growth as well as to replace third-party consultants. Occupancy costs are relatively fixed from period to period and were $6.6 million and $6.3 million for the three months ended June 30, 2014 and 2013, respectively, and flat as a percentage of operating expenses and revenue. Travel and related costs were $4.3 million and $4.0 million for the three months ended June 30, 2014 and 2013, respectively, and were flat as a percentage of operating expenses and revenue. Employee Services Three Months Ended June 30, $ % 2014 2013 Change Change (In thousands, except percentages) Revenue Same-unit $ 52,209$ 51,488$ 721 1.4 % Acquired businesses 2,270 - 2,270



Total revenue $ 54,479$ 51,488$ 2,991

5.8 %

Operating expenses 45,936 42,868 3,068

7.2 % Gross margin $ 8,543$ 8,620$ (77 ) (0.9 )% Gross margin percent 15.7 % 16.7 % The increase in same-unit revenue was primarily attributable to increases in the Company's employee benefits, property and casualty, payroll, and life insurance, offset by a slight decrease in the retirement plan services group. The employee benefits business increased $0.5 million, or 2.0%, due to strong client retention and growth from new clients in the three months ended June 30, 2014 as well as an increase in volume-based carrier bonus payments. Property and casualty revenues increased $0.5 million, or 5.5%, primarily due to strong performance within the specialty program businesses. The payroll business revenues increased $0.2 million, or 3.5%, due to higher pricing coupled with an increase in processing volume for payroll and related services. These increases were partially offset by the decrease in retirement consulting revenues of $0.2 million, or 2.2%, due to lower actuarial fee based revenues during the three months ended June 30, 2014.



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, Massachusetts, that was acquired in the first quarter of 2014. Centric Insurance Agency, a property and casualty firm located in New Providence, New Jersey, that was acquired in the first quarter of 2014. Tegrit Group, LLC, a retirement plan services business located in Akron,

Ohio, that was acquired in the second quarter of 2014. 28



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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 82.0% and 82.4% of total operating expenses for the three months ended June 30, 2014 and 2013, respectively. Excluding costs related to the acquired businesses of $1.0 million, personnel costs increased approximately $1.2 million, primarily due to higher commissions paid out to producers relating to the new revenue growth in employee benefits, property and casualty, payroll, and life businesses. Occupancy costs are relatively fixed in nature and were $2.9 million and $2.8 million for the three months ended June 30, 2014 and 2013, respectively. The increase in occupancy costs was primarily due to business acquisitions. National Practices Three Months Ended June 30, $ % 2014 2013 Change Change (In thousands, except percentages) Same-unit revenue $ 7,324$ 7,214$ 110 1.5 % Operating expenses 6,685 6,875 (190 ) (2.8 )% Gross margin $ 639$ 339$ 300 88.5 % Gross margin percent 8.7 % 4.7 % The slight increase in same-unit revenue was primarily attributable to services provided to CBIZ's largest client, Edward Jones, under its cost-plus contract. Costs related to the merger and acquisitions business that was sold December 31, 2013 have not been incurred in 2014, thus the decrease in operating expenses and the increase in gross margin for the National Practices operating segment.



Six Months Ended June 30, 2014 and 2013

Revenue - The following table summarizes total revenue for the six months ended June 30, 2014 and 2013 (in thousands, except percentages).

Six Months Ended June 30, % of % of $ % 2014 Total 2013 Total Change Change Same-unit revenue Financial Services $ 258,991 66.4 % $ 254,452 68.2 % $ 4,539 1.8 % Employee Services 106,294 27.3 % 104,266 27.9 % 2,028 2.0 % National Practices 14,703 3.8 % 14,700 3.9 % 3 - Total same-unit revenue 379,988 97.5 % 373,418 100.0 % 6,570 1.8 % Acquired businesses 9,805 2.5 % - - 9,805 Total revenue $ 389,793 100.0 % $



373,418 100.0 % $ 16,375 4.4 %

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

Gross margin and operating expenses - Operating expenses increased $18.0 million to $328.5 million for the six months ended June 30, 2014 from $310.5 million for the comparable period of 2013, and increased as a percentage of revenue to 84.3% for the six months ended June 30, 2014 from 83.1% for the comparable period of 2013. 29



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The primary components of operating expenses for the six months ended June 30, 2014 and 2013 are included in the following table:

Six Months Ended June 30, 2014 2013 % of % of Change in Operating % of Operating % of % of Expense Revenue Expense Revenue Revenue Personnel costs 77.1 % 65.0 % 76.6 % 63.7 % 1.3 % Occupancy costs 5.9 % 5.0 % 6.1 % 5.1 % (0.1 )% Depreciation and amortization 2.9 % 2.5 % 3.0 % 2.5 % - Travel and related costs 3.9 % 3.3 % 3.9 % 3.2 % 0.1 % Professional fees 1.0 % 0.8 % 1.4 % 1.2 % (0.4 )% Other (1) 8.5 % 7.1 % 8.2 % 6.8 % 0.3 % Subtotal 99.3 % 83.7 % 99.2 % 82.5 % 1.2 % Deferred compensation costs 0.7 % 0.6 % 0.8 % 0.6 % - Total operating expenses 100.0 % 84.3 % 100.0 % 83.1 % 1.2 % Gross margin 15.7 % 16.9 % (1.2 )%



(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 that was attributable to personnel costs was primarily due to an increase in salaries and wages and the related benefits and payroll taxes resulting from certain 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, resulting in a decrease in professional fees. Personnel and other operating expenses are discussed in further detail under "Operating Practice Groups". Corporate general and administrative expenses - Corporate G&A expenses increased by $1.0 million to $18.6 million for the six months ended June 30, 2014 from $17.6 million for the comparable period of 2013, but decreased as a percentage of revenue to 4.7% for the six months ended June 30, 2014 from 4.8% for the comparable period of 2013. The primary components of G&A expenses for the six months ended June 30, 2014 and 2013 are included in the following table: Six Months Ended June 30, 2014 2013 % of % of Change in G&A % of G&A % of % of Expense Revenue Expense Revenue Revenue Personnel costs 55.3 % 2.6 % 59.1 % 2.8 % (0.2 )% Professional services 18.4 % 0.9 % 14.0 % 0.7 % 0.2 % Computer costs 5.7 % 0.3 % 5.9 % 0.3 % - Travel and related costs 3.1 % 0.1 % 3.2 % 0.2 % (0.1 )% Depreciation and amortization 1.2 % 0.1 % 0.8 % - 0.1 % Other (1) 14.4 % 0.6 % 15.6 % 0.7 % (0.1 )% Subtotal 98.1 % 4.6 % 98.6 % 4.7 % (0.1 )% Deferred compensation costs 1.9 % 0.1 % 1.4 % 0.1 % - Total G&A expenses 100.0 % 4.7 % 100.0 % 4.8 % (0.1 )%



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

insurance expense and other expenses, none of which are individually

significant as a percentage of total G&A expenses.

The decrease in G&A expenses as a percentage of revenue attributable to personnel costs is primarily due to a decrease in incentive based compensation accrued during the six months ended June 30, 2014 compared to the same period last year. The increase in professional fees was primarily related to an 30



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increase in legal expenses during the six months ended June 30, 2014 compared to the same period last year related to the claims against CBIZ as described in Note 6 of the accompanying consolidated financial statements. Interest expense - Interest expense decreased by $1.2 million to $7.0 million for the six months ended June 30, 2014 from $8.2 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 $81.5 million for the six months ended June 30, 2014 compared to $175.5 million for the six months ended June 30, 2013, as well as a decrease in the weighted average interest rate to 2.70% for the six months ended June 30, 2014 compared to 2.96% for the same period in 2013. The decrease in the average debt balance is primarily due to the application of a portion of the proceeds received from the sale CBIZ'sMedical Management Professionals business on August 30, 2013. Other expense, net - Other expense, net is primarily comprised of gains and losses in the fair value of investments held in a rabbi trust related to the deferred compensation plan and adjustments to contingent purchase price liabilities related to previous acquisitions. Gains in the fair value of investments related to the deferred compensation were $2.6 million for the six months ended June 30, 2014 and 2013. These adjustments 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. In addition, adjustments to contingent purchase price liabilities resulted in income of $3.0 million and expense of $0.9 million for the six months ended June 30, 2014 and 2013, respectively. Income tax expense - CBIZ recorded income tax expense from continuing operations of $17.5 million and $16.7 million for the six months ended June 30, 2014 and 2013, respectively. The effective tax rate for the six months ended June 30, 2014 was 41.9%, compared to an effective tax rate of 42.3% for the same period in 2013. The decrease in the effective tax rate primarily relates to a higher level of pre-tax income and a lower state effective tax rate in 2014. Earnings per share and Non-GAAP earnings per share -Earnings per share from continuing operations were $0.46 per diluted share for the six months ended June 30, 2014 and 2013, and Non-GAAP earnings per share were $0.68 and $0.75 per diluted share for the six months ended June 30, 2014 and 2013, respectively. 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. 31



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The following is a reconciliation of income from continuing operations to Non-GAAP earnings from operations and diluted earnings per share from continuing operations to Non-GAAP earnings per diluted share for the six months ended June 30, 2014 and 2013.

NON-GAAP EARNINGS AND PER SHARE DATA Reconciliation of Income from Continuing Operations to Non-GAAP Earnings from Continuing Operations Six Months Ended June 30, 2014 Per Share 2013 Per Share (In thousands, except per share data) Income from continuing operations $ 24,222$ 0.46$ 22,741$ 0.46 Selected non-cash charges: Amortization 7,274 0.14 7,042 0.14 Depreciation 2,538 0.05 2,332 0.05 Non-cash interest on convertible note 1,500 0.03 1,394 0.03 Stock-based compensation 2,987 0.06 2,924 0.06 Adjustments to contingent earnouts (2,985 ) (0.06 ) 904 0.01 Non-cash charges $ 11,314$ 0.22$ 14,596$ 0.29



Non-GAAP earnings - continuing operations $ 35,536$ 0.68

$ 37,337$ 0.75

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 Six Months Ended June 30, $ % 2014 2013 Change Change (In thousands, except percentages) Revenue Same-unit $ 258,991$ 254,452$ 4,539 1.8 % Acquired businesses 5,511 - 5,511 Total revenue $ 264,502$ 254,452$ 10,050 3.9 % Operating expenses 214,613 203,603 11,010 5.4 % Gross margin $ 49,889$ 50,849$ (960 ) (1.9 )% Gross margin percent 18.9 % 20.0 % The growth in same-unit revenue was approximately 85% attributable to stronger performance in the units that provide certain national services and 15% attributable to the traditional accounting and tax services. Growth in the national units was primarily due to an 8.4% increase in revenue related to the federal and state governmental health care compliance industry. The growth in the traditional accounting and tax services was due to a 1.9% increase in billable hours for the six months ended June 30, 2014 compared to the six months ended June 30, 2013.



The growth in revenue from acquisitions was provided by:

Knight Field Fabry, LLP, located in Denver, Colorado, acquired in the

fourth quarter of 2013, and



Lewis Birch and Ricardo, LLC, located in Tampa, Florida, acquired in the

first quarter of 2014. 32



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CBIZ provides a range of services to affiliated CPA firms under joint referral and ASAs. Fees earned by CBIZ under the ASAs are recorded as revenue in the accompanying consolidated statements of comprehensive income and were approximately $80.6 million and $81.0 million for the six months ended June 30, 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 which represented 89.8% and 89.1% of total operating expenses and 72.8% and 71.3% of total revenue for the six months ended June 30, 2014 and 2013, respectively. Personnel costs increased $10.5 million and represented 64.9% and 63.3% of revenue for the six months ended June 30, 2014 and 2013, respectively. The increase was comprised of an increase in same-unit personnel costs of $6.6 million due to staff compensation increases and an increase in headcount, particularly at the units offering national services, and $3.9 million due to the acquisitions of Knight and LBR. The increase in headcount primarily occurred at the units offering federal and state governmental health care consulting services to help support the growth in the business as well as to replace third-party consultants. Occupancy costs are relatively fixed from period to period and were $13.1 million and $12.8 million for the six months ended June 30, 2014 and 2013, respectively, and relatively flat as a percentage of operating expenses and revenue. Travel and related costs were $8.0 million and $7.6 million for the six months ended June 30, 2014 and 2013, respectively, and were flat as a percentage of operating expenses and revenue. Employee Services Six Months Ended June 30, $ % 2014 2013 Change Change (In thousands, except percentages) Revenue Same-unit $ 106,294$ 104,266$ 2,028 1.9 % Acquired businesses 4,294 - 4,294 Total revenue $ 110,588$ 104,266$ 6,322 6.1 % Operating expenses 91,671 85,490 6,181 7.2 % Gross margin $ 18,917$ 18,776$ 141 0.8 % Gross margin percent 17.1 % 18.0 % 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. Employee benefit revenues increased $1.1 million, or 2.4%, due to strong client retention and growth from new clients in 2014 as well as an increase in volume-based carrier bonus payments. Property and casualty revenues increased $0.4 million, or 2.4%, primarily due to strong performance within the specialty program businesses and an increase in volume-based carrier bonus payments. Payroll business revenues increased $0.5 million, or 3.1%, mainly due to pricing increases for core services, coupled with an increase in processing volume for payroll and related services. Retirement consulting revenues increased $0.5 million, or 3.3%, due to favorable equity market conditions as advisory fees are typically earned on plan asset balances, which have grown over the prior year. These increases were partially offset by a decline in the life insurance business of $0.2 million, or 8.0%, due to the decline in average case size written.



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, Massachusetts, that was acquired in the first quarter of 2014. 33



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Centric Insurance Agency, a property and casualty firm located in New

Providence, New Jersey, that was acquired in the first quarter of 2014. Tegrit Group, LLC, a retirement plan services business located in Akron,



Ohio, that was acquired in the second 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 81.9% and 82.4% of total operating expenses for the six months ended June 30, 2014 and 2013, respectively. Excluding costs related to the acquired businesses of $1.4 million, personnel costs increased approximately $3.0 million, primarily due to higher commissions paid out to producers relating to new revenue growth in employee benefits, property and casualty, payroll, and retirement plan services. Occupancy costs are relatively fixed and were $5.6 million for the six months ended June 30, 2014 and 2013, excluding the costs of the acquired businesses of $0.2 million in 2014. National Practices Six Months Ended June 30, $ % 2014 2013 Change Change (In thousands, except percentages) Same-unit revenue $ 14,703$ 14,700$ 3 - Operating expenses 13,318 13,825 (507 ) (3.7 )% Gross margin $ 1,385$ 875$ 510 58.3 % Gross margin percent 9.4 % 6.0 % Same-unit revenue for the six months ended June 30, 2014 and 2013 was flat. Revenue increased slightly from services provided to CBIZ's largest client, Edward Jones, under its cost-plus contract, but was offset by a slight decline in revenues in the health consulting business. Costs related to the merger and acquisitions business that was sold December 31, 2013 have not been incurred in 2014, thus the decrease in operating expenses and the increase in gross margin for the National Practices operating segment.



Financial Condition

Total assets were $910.9 million at June 30, 2014, an increase of $13.4 million versus December 31, 2013. Current assets of $328.4 million exceeded current liabilities of $225.8 million by $102.6 million at June 30, 2014.

Cash and cash equivalents increased by $3.2 million to $3.9 million at June 30, 2014 from December 31, 2013. Restricted cash was $23.2 million at June 30, 2014, an increase of $1.1 million from December 31, 2013. Restricted cash represents those funds held in connection with CBIZ'sFinancial Industry Regulatory Authority regulated business 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 related payments. Accounts receivable, net, were $179.1 million at June 30, 2014, an increase of $36.0 million from December 31, 2013, and days sales outstanding ("DSO") from continuing operations was 86 days, 74 days and 80 days at June 30, 2014, December 31, 2013 and June 30, 2013, respectively. DSO represents accounts receivable, net 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. 34



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Other current assets were $14.2 million and $14.4 million at June 30, 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 (current and non-current) and the corresponding client fund obligations relate to CBIZ's payroll services business. The balances in these accounts fluctuate with the timing of cash receipts and the related cash payments. Client fund obligations can differ from funds held for clients due to changes in the market values 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, decreased by $0.2 million to $19.0 million at June 30, 2014 from $19.2 million at December 31, 2013. The decrease is primarily the result of depreciation expense of $2.5 million, partially offset by net additions of $2.3 million. CBIZ's property and equipment is primarily comprised of software, hardware, furniture and leasehold improvements. Goodwill and other intangible assets, net, increased by $29.9 million at June 30, 2014 from December 31, 2013. This increase is comprised of additions to goodwill of $26.5 million and additions to intangible assets of $11.3 million resulting from acquisitions and contingent purchase price adjustments, partially offset by $7.3 million of amortization expense and the write-off of $0.6 million of goodwill resulting from the sale of a discontinued operation. 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 $57.8 million and $52.0 million at June 30, 2014 and December 31, 2013, respectively. The increase in assets of the deferred compensation plan of $5.8 million consisted of net participant contributions of $3.2 million and an increase in the fair value of the investments of $2.6 million for the six months ended June 30, 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. The accounts payable balances of $44.5 million and $37.5 million at June 30, 2014 and December 31, 2013, respectively, reflect amounts due to suppliers and vendors. Balances fluctuate during the year based on the timing of cash payments. Accrued personnel costs were $30.5 million and $38.6 million at June 30, 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 $1.2 million to $0.4 million at June 30, 2014 from $1.6 million at December 31, 2013 as a result of guaranteed purchase price payments during the six months ended June 30, 2014 totaling $1.2 million. Contingent purchase price liabilities (current and non-current) relate to performance-based contingent purchase price liabilities that result from business acquisitions. Contingent purchase price liabilities (current and non-current) increased by $7.6 million at June 30, 2014 from December 31, 2013 due to an increase of $12.0 million from current year business acquisitions and $0.1 million in net present value adjustments to the liabilities. These increases were partially offset by adjustments of $3.0 million to the fair value of the contingency purchase price liabilities and payments of $1.5 million. Other liabilities (current and non-current) decreased by $0.4 million to $23.1 million at June 30, 2014 from $23.5 million at December 31, 2013. The decrease was primarily attributable to a decrease in legal accruals of $0.9 million due to the payment of claims, partially offset by an increase of $0.4 million related to the accrued lease liability resulting from business acquisitions and new lease agreements at certain locations, and various other minor changes to certain liability accounts that net to an insignificant change. Income taxes payable - current was $5.0 million and $25 thousand at June 30, 2014 and December 31, 2013, respectively. Income taxes payable - current at June 30, 2014 and December 31, 2013 primarily represents the provision for current income taxes less estimated tax payments. Income taxes payable - non-current at June 30, 2014 and December 31, 2013 was $4.9 million and $6.2 million, respectively, and represents the accrual for uncertain tax positions. 35



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CBIZ's 2006 Notes and 2010 Notes are carried at face value less unamortized discount. The $1.5 million increase in the carrying value of the convertible notes at June 30, 2014 compared to 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 $32.7 million to $81.2 million at June 30, 2014 from $48.5 million at December 31, 2013. This increase was primarily attributable to approximately $28.6 million used related to acquisitions and earnouts, $11.8 million for the repurchase of approximately 1.4 million of CBIZ common stock, and $2.3 million for capital expenditures. Partially offsetting these increases was cash provided by operating activities of $5.2 million for the six months ended June 30, 2014. Stockholders' equity increased by $24.7 million to $399.1 million at June 30, 2014 from $374.4 million at December 31, 2013. The increase was primarily attributable to net income of $23.4 million, CBIZ's stock award programs, which contributed $10.0 million, the issuance of $3.0 million in common shares related to business acquisitions and contingent payments related to prior acquisitions, and $0.1 million to adjust the fair value of CBIZ's investments in corporate and municipal bonds which is included in accumulated other comprehensive loss. These increases were partially offset by $11.8 million related to the repurchase of 1.4 million shares of CBIZ common stock, which includes open market share repurchase activity of 1.3 million shares at a cost of $10.7 million and shares repurchased in conjunction with the settlement of restricted stock transactions of 0.1 million shares at a cost of $1.1 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 $400 million unsecured credit facility.

Effective July 28, 2014, CBIZ replaced its $275 million unsecured credit facility with a new $400 million unsecured credit facility with Bank of America as agent for a group of eight participating banks. The new credit facility, which expires in July 2019, will enable the Company to lower its borrowing costs and simplify its capital structure. The new credit facility will provide CBIZ the flexibility to refinance its 2010 Notes due October 1, 2015, and will also allow for the allocation of funds for strategic initiatives, including acquisitions and the repurchase of CBIZ common stock. Under the $275 million credit facility that existed at June 30, 2014, CBIZ was 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 was in compliance with its covenants as of June 30, 2014. At June 30, 2014, CBIZ had $81.2 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 $58.6 million at June 30, 2014. Effective July 7, 2014, CBIZ repurchased $17.4 million of its 2010 Notes in a privately negotiated transaction. This transaction will result in a decrease of approximately $0.4 million in interest expense for the remainder of 2014 and a non-operating charge of approximately $0.8 million in the third quarter of 2014 representing the loss on the transaction.



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 capital expenditures and working capital requirements.

In addition to the debt instruments previously mentioned, CBIZ may obtain, at a future date, additional funding by offering equity securities or debt through public or private markets. CBIZ's ability to service its debt and to fund strategic initiatives will depend upon its ability to generate cash in the future. 36



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Sources and Uses of Cash

The following table summarizes CBIZ's cash flows from operating, investing and financing activities for the six months ended June 30, 2014 and 2013 (in thousands):

2014 2013 Total cash provided by (used in): Operating activities $ 5,154$ 13,883 Investing activities 36,243 30,902 Financing activities (38,220 ) (44,497 ) Increase in cash and cash equivalents $ 3,177$ 288



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 is 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. For the six months ended June 30, 2014, net cash provided by operating activities was $5.2 million and primarily consisted of net income of $23.4 million, non-cash adjustments to net income of $14.0 million and a net loss on the sale of operations and discontinued operations transactions of $0.7 million. Partially offsetting these sources of cash were changes in working capital items of $33.5 million. The non-cash adjustments to net income primarily consist of depreciation and amortization expense, amortization of the discount on convertible notes and deferred financing fees, stock based compensation expense, deferred income tax expense, and adjustments to contingent purchase price liabilities. Net changes in working capital were primarily due to an increase in accounts receivable due to an increase in revenues and days sales outstanding and an increase in accrued personnel costs due to the timing of payments. These were partially offset by an increase in accounts payable due to the Company's efforts to manage payables, and income taxes payable resulting from the timing of payments. Cash provided by discontinued operations was $0.6 million. For the six months ended June 30, 2013, net cash provided by operating activities was $13.9 million and primarily consisted of net income of $27.5 million and non-cash adjustments to net income of $14.2 million. Partially offsetting these sources of cash were changes in working capital items of $26.3 million and a net gain on the sale of operations and discontinued operations transactions of $4.8 million. The non-cash adjustments to net income primarily consist of depreciation and amortization expense, amortization of the discount on convertible notes and deferred financing fees, stock based compensation expense, deferred income tax expense, and adjustments to contingent purchase price liabilities. Net changes in working capital were primarily due to an increase in accounts receivable due to an increase in revenues and days sales outstanding, partially offset by an increase in income taxes payable resulting from the timing of payments. Cash provided by discontinued operations was $3.3 million. Investing Activities CBIZ's investing activities typically consist of: payments for business acquisitions and client lists, contingent payments associated with business acquired prior to 2009, 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. Cash provided by investing activities during the six months ended June 30, 2014 primarily consisted of net activity related to funds held for clients of $62.7 million and proceeds from the receipt of payments on notes receivable of $0.9 million. These sources of cash were partially offset by $24.7 million of net cash used for acquisitions and contingent payments on prior acquisitions, capital expenditures of $2.3 million and payments resulting from adjustments to the sale of discontinued operations of $0.3 million. 37



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During the six months ended June 30, 2013, cash provided by investing activities primarily consisted of net activities related to funds held for clients of $37.8 million, proceeds from the sale of divested and discontinued operations of $0.1 million and proceeds from the receipt of payments on notes receivable of $0.1 million. These sources of cash were partially offset by cash used related to business acquisitions and contingent payments on prior acquisitions of $4.0 million and capital expenditures of $2.8 million. Cash used by discontinued operations was $0.3 million.



Financing Activities

CBIZ's financing cash flows typically consist of net borrowing and payment activity from the credit facility, payments of contingent consideration included as part of the initial measurement of businesses acquired, the issuance and repayment of debt instruments, repurchases of CBIZ common stock, net change in client fund obligations, and proceeds from the exercise of stock options. Net cash used in financing activities during the six months ended June 30, 2014 was primarily due to a decrease in client fund obligations of $62.7 million, $11.8 million used to repurchase shares of CBIZ common stock, $2.6 million in guaranteed and contingent payments included as part of the initial measurement of prior business acquisitions, and payment on debt acquired from acquisitions of $1.2 million. These uses of cash were partially offset by $32.7 million in net borrowings from the credit facility and $7.4 million in proceeds from the exercise of stock options, including the related tax benefits. Net cash used in financing activities during the six months ended June 30, 2013 was primarily due to a decrease in client fund obligations of $37.8 million, net payments on the credit facility of $4.9 million, payments for contingent consideration included as part of the initial measurement of prior business acquisitions of $1.1 million, and $0.8 million used to repurchase shares of CBIZ common stock. Obligations and Commitments



CBIZ's aggregate amount of future obligations at June 30, 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$ 17,350$ 112,650$ 750 $ - $ - $ - Interest on convertible notes 8,285 2,758 5,515 12 - - - Credit facility (3) 81,200 - - - - - 81,200 Income taxes payable (4) 9,816 4,951 4,865 - - - - Notes payable 374 374 - - - - - Contingent purchase price liabilities (5) 32,796 9,165 12,409 8,680 2,542 - - Restructuring lease obligations (6) 3,933 601 1,239 1,135 451 467 40 Non-cancelable operating lease obligations (6) 144,009 16,033 30,362 28,190 22,654 17,811 28,959 Letters of credit in lieu of cash security deposits 2,516 250 - 835 - 1,386 45 Performance guarantees for non-consolidated affiliates 1,934 - 1,934 - - - - License bonds and other letters of credit 1,761 354 1,379 8 10 10 - Total $ 417,374$ 51,836$ 170,353$ 39,610$ 25,657$ 19,674$ 110,244



(1) Represents contractual obligations from July 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 such notes on June 1, 2016

and can be redeemed by the Company at anytime. On July 7, 2014, CBIZ repurchased $17.4 million of its 2010 Notes, thus reducing the total outstanding 2010 Notes balance that are due in 2015 to $112.6 million.



(3) On July 28, 2014, CBIZ entered into a new credit facility agreement which

will extend the maturity date to 2019. 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. 38



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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 four 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 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 June 30, 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 June 30, 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 June 30, 2014 and December 31, 2013 totaled $1.8 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 the Company customarily agrees 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 is 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 June 30, 2014, CBIZ was not aware of any material obligations arising under indemnification agreements that would require payment.



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 June 30, 2013, CBIZ had an interest rate swap with a notional amount of $40.0 million, of which $15.0 million expired in June 2014, resulting in a notional amount of $25.0 million at June 30, 2014, which 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. At June 30, 2014, CBIZ had $130.0 million in 2010 Notes, before discount, bearing a fixed interest rate of 4.875% that will mature on October 1, 2015 and may not be converted before July 31, 2015. On July 7, CBIZ repurchased $17.4 million of its 2010 Notes, leaving a balance of $112.6 million outstanding after the transaction. This transaction was settled on July 10, 2014. CBIZ believes the fixed nature of these borrowings mitigates its interest rate risk. 39



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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 six months ended June 30, 2014. 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 six months ended June 30, 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 40



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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. In May 2014, the FASB issued ASU No. 2014-09 ("ASU 2014-09"), "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. ASU 2014-09 will require entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 31, 2016, including interim periods. CBIZ will have the option to apply the provisions of ASU 2014-09 either retrospectively to each reporting period presented, or retrospectively with the cumulative effect of applying this standard at the date of initial application. Early adoption is not permitted. CBIZ is currently evaluating the method and impact of the adoption of ASU 2014-09 will have on the CBIZ's consolidated financial statements.



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 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. 41



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