UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from________ to ________
Commission File Number 1-32961
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation
or organization)
(Address of principal executive offices)
(I.R.S. Employer
Identification No.)
(Zip Code)
(216 ) 447-9000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| Class of Common Stock | Outstanding at October 24, 2022 | ||||
| Common Stock, par value $0.01 per share | |||||
CBIZ, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
| Page | |||||||||||
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CBIZ, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
| September 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Accounts receivable, net | |||||||||||
| Other current assets | |||||||||||
| Current assets before funds held for clients | |||||||||||
| Funds held for clients | |||||||||||
| Total current assets | |||||||||||
| Non-current assets: | |||||||||||
| Property and equipment, net | |||||||||||
| Goodwill and other intangible assets, net | |||||||||||
| Assets of deferred compensation plan | |||||||||||
| Operating lease right-of-use assets, net | |||||||||||
| Other non-current assets | |||||||||||
| Total non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Income taxes payable | |||||||||||
| Accrued personnel costs | |||||||||||
| Contingent purchase price liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Other current liabilities | |||||||||||
| Current liabilities before client fund obligations | |||||||||||
| Client fund obligations | |||||||||||
| Total current liabilities | |||||||||||
| Non-current liabilities: | |||||||||||
| Bank debt | |||||||||||
| Debt issuance costs | ( | ( | |||||||||
| Total long-term debt, net | |||||||||||
| Income taxes payable | |||||||||||
| Deferred income taxes, net | |||||||||||
| Deferred compensation plan obligations | |||||||||||
| Contingent purchase price liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Other non-current liabilities | |||||||||||
| Total non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| STOCKHOLDERS' EQUITY | |||||||||||
| Common stock | |||||||||||
| Additional paid in capital | |||||||||||
| Retained earnings | |||||||||||
| Treasury stock | ( | ( | |||||||||
| Accumulated other comprehensive income (loss) | ( | ||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See the accompanying notes to the unaudited condensed consolidated financial statements
3
CBIZ, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands, except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Gross margin | |||||||||||||||||||||||
| Corporate general and administrative expenses | |||||||||||||||||||||||
| Legal settlement, net | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Gain on sale of operations, net | |||||||||||||||||||||||
| Other (expense) income, net | ( | ( | ( | ||||||||||||||||||||
| Total other (expense) income, net | ( | ( | ( | ||||||||||||||||||||
| Income from continuing operations before income tax expense | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Income from continuing operations | |||||||||||||||||||||||
| Loss from discontinued operations, net of tax | ( | ( | ( | ( | |||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||
| Continuing operations | $ | $ | $ | $ | |||||||||||||||||||
| Discontinued operations | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Diluted: | |||||||||||||||||||||||
| Continuing operations | $ | $ | $ | $ | |||||||||||||||||||
| Discontinued operations | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Basic weighted average shares outstanding | |||||||||||||||||||||||
| Diluted weighted average shares outstanding | |||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income, net of tax | |||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See the accompanying notes to the unaudited condensed consolidated financial statements
4
CBIZ, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(In thousands)
| Issued Common Shares | Treasury Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Totals | |||||||||||||||||||||||||||||||||||||||||||
| June 30, 2022 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Share repurchases | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units and awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Business acquisitions | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Issued Common Shares | Treasury Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Totals | |||||||||||||||||||||||||||||||||||||||||||
| June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Share repurchases | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Business acquisitions | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
5
CBIZ, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(In thousands)
| Issued Common Shares | Treasury Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Totals | |||||||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Share repurchases | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Indirect repurchase of shares for minimum tax withholding | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units and awards | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Performance share units | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Business acquisitions | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Issued Common Shares | Treasury Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Totals | |||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Share repurchases | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Indirect repurchase of shares for minimum tax withholding | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units and awards | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Business acquisitions | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
See the accompanying notes to the unaudited condensed consolidated financial statements
6
CBIZ, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization expense | |||||||||||
| Gain on sale of operations, net | ( | ( | |||||||||
| Bad debt expense, net of recoveries | |||||||||||
| Adjustment to contingent earnout liability | |||||||||||
| Stock-based compensation expense | |||||||||||
| Deferred income taxes | |||||||||||
| Other, net | ( | ( | |||||||||
| Changes in assets and liabilities, net of acquisitions and divestitures: | |||||||||||
| Accounts receivable, net | ( | ( | |||||||||
| Other assets | ( | ||||||||||
| Accounts payable | |||||||||||
| Income taxes payable | |||||||||||
| Accrued personnel costs | |||||||||||
| Other liabilities | ( | ||||||||||
| Operating cash flows provided by continuing operations | |||||||||||
| Operating cash flows used in discontinued operations | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Business acquisitions and purchases of client lists, net of cash acquired | ( | ( | |||||||||
| Purchases of client fund investments | ( | ( | |||||||||
| Proceeds from the sales and maturities of client fund investments | |||||||||||
| Proceeds from sales of divested operations | |||||||||||
| Change in funds held for clients | ( | ( | |||||||||
| Additions to property and equipment | ( | ( | |||||||||
| Other, net | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from bank debt | |||||||||||
| Payment of bank debt | ( | ( | |||||||||
| Payment for acquisition of treasury stock | ( | ( | |||||||||
| Indirect repurchase of shares for minimum tax withholding | ( | ( | |||||||||
| Changes in client funds obligations | ( | ||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Payment of contingent consideration for acquisitions | ( | ( | |||||||||
| Other, net | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of year | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Reconciliation of cash, cash equivalents and restricted cash to the Condensed Consolidated Balance Sheets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Cash equivalents included in funds held for clients | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
See the accompanying notes to the unaudited condensed consolidated financial statements
7
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Selected Terms Used in Notes to the Condensed Consolidated Financial Statements
ASA – Administrative Service Agreement
ASC – Accounting Standards Codification
ASU – Accounting Standards Update
CPA firm – Certified Public Accounting firm
FASB – The Financial Accounting Standards Board
GAAP – United States Generally Accepted Accounting Principles
SOFR – Secured Overnight Financing Rate
LIBOR – London Interbank Offered Rate
SEC – United States Securities and Exchange Commission
Unaudited Interim Financial Statements: The unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
In the opinion of CBIZ management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial condition, results of operations, and cash flows for the interim periods presented, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2022.
Changes in Accounting Policies: We have consistently applied the accounting policies for the periods presented as described in Note 1, Basis of Presentation and Significant Accounting Policies, to the consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
In 2021, CBIZ formed a grantor trust (the “Trust”) with Wilmington Savings Funds Society, FSB, a Federal savings bank, serving as trustee. The Trust holds the majority of the funds provided by CBIZ’s clients for payroll processing pending remittance to employees of those clients, tax authorities, and
8
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
The FASB ASC is the sole source of authoritative GAAP other than the SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an accounting standard to communicate changes to the FASB codification. We assess and review the impact of all accounting standards. Any accounting standards not listed below were reviewed and determined to be either not applicable or are not expected to have a material impact on the consolidated financial statements of the Company.
Accounting Standards Adopted in 2022
Reference Rate Reform: In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU are effective for all entities through December 31, 2022.
Subsequently, in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, which provides optional temporary guidance for entities transitioning away from the LIBOR and other interbank offered rates to new reference rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. This ASU clarifies that the derivative instruments affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions provided in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments provided in this ASU do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship.
NOTE 3. ACCOUNTS RECEIVABLE, NET
9
conditions that may affect a client’s ability to pay, and reasonable and supportable forecasts. Receivables are charged-off against the allowance when the balance is deemed uncollectible.
Accounts receivable, net, at September 30, 2022 and December 31, 2021 was as follows (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Trade accounts receivable | $ | $ | |||||||||
| Unbilled revenue, at net realizable value | |||||||||||
| Total accounts receivable | |||||||||||
| Allowance for doubtful accounts | ( | ( | |||||||||
| Accounts receivable, net | $ | $ | |||||||||
Changes to the allowance for doubtful accounts for the nine months ended September 30, 2022 and twelve months ended December 31, 2021 are as follows (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Balance at beginning of period | $ | ( | $ | ( | |||||||
| Provision | ( | ( | |||||||||
| Charge-offs, net of recoveries | |||||||||||
| Allowance for doubtful accounts | $ | ( | $ | ( | |||||||
NOTE 4. DEBT AND FINANCING ARRANGEMENTS
On May 4, 2022, we entered into the 2022 credit facility, which amends the 2018 credit facility.
The 2022 credit facility increased our borrowing capacity from $400 million to $600 million, which provides us with the capital necessary to meet our working capital needs as well as the flexibility to continue with our strategic initiatives, including business acquisitions and share repurchases. Other important key terms of the 2022 credit facility include: (i) an accordion feature that permits lenders to extend an additional $200 million at later date; (ii) no change in pricing from the 2018 credit facility; (iii) upsizing of baskets and various sublimits to reflect the increased size of the Company's business; (iv) a swing line facility increase from $25 million to $50 million, which provides for same-day funds to cover daily liquidity needs; and (v) base interest rate amended from LIBOR to Term SOFR. The 2022 credit facility extends the maturity date from 2023 to 2027.
In connection with our 2022 credit facility, we incurred approximately $2.1 million of financing costs during the second quarter of 2022. The financing costs are deferred and reported as a reduction of debt on the accompanying unaudited Condensed Consolidated Balance Sheets, are included as a component of cash flow from financing activities on the accompanying unaudited Condensed Consolidated Statements of Cash Flows, and are being amortized as interest expense over the term of the 2022 credit facility. In addition, we wrote-off approximately $41 thousand of unamortized deferred cost associated with the 2018 credit facility as additional interest expense in the second quarter of 2022.
The balance outstanding under the 2022 credit facility was $271.1 million at September 30, 2022. The balance outstanding under the 2018 credit facility was $155.3 million at December 31, 2021. The combined effective interest rates under the 2018 and 2022 credit facilities, including the impact of interest rate swaps associated with those credit facilities, were as follows:
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Weighted average rates | |||||||||||
| Range of effective rates | |||||||||||
10
We had approximately $310.9 million of available funds under the 2022 credit facility at September 30, 2022, net of outstanding letters of credit of $5.7 million. Available funds under the credit facility are based on a multiple of earnings before interest, taxes, depreciation and amortization as defined in the credit facility, and are reduced by letters of credit, other indebtedness and outstanding borrowings under the credit facility. Under the 2022 credit facility, loans are charged an interest rate consisting of a base rate or Term SOFR rate plus an applicable margin, letters of credit are charged based on the same applicable margin, and a commitment fee is charged on the unused portion of the credit facility.
The 2022 credit facility contains certain restrictive covenants customary for facilities of this type, including restrictions on indebtedness, liens or other encumbrances, making certain payments, investments, or to sell or otherwise dispose of a substantial portion of assets, or to merge or consolidate with an unaffiliated entity. The 2022 credit facility also limits our ability to make dividend payments. Historically, we have not paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. Our Board of Directors has discretion over the payment and level of dividends on common stock, subject to the limitations of the credit facility and applicable law. The credit facility contains a provision that, in the event of a defined change in control, the credit facility may be terminated. In addition, the 2022 credit facility contains financial covenants that require us to meet certain requirements with respect to (i) a total leverage ratio and (ii) minimum interest coverage ratio which may limit our ability to borrow up to the total commitment amount. As of September 30, 2022, we are in compliance with all covenants.
Other Line of Credit - We have an unsecured $20.0 million line of credit by and among CBIZ Benefits and Insurance, Inc. and Huntington National Bank. We utilize this line to support our short-term funding requirements of payroll client fund obligations due to the investment of client funds, rather than liquidating client funds that have already been invested in available-for-sale securities. The line of credit, which was renewed on August 1, 2022 and will terminate on August 3, 2023, did no t have a balance outstanding at September 30, 2022.
Interest Expense - Interest expense, including amortization of deferred financing costs, commitment fees, line of credit fees, and other applicable bank charges, was as follows (in thousands):
| Three Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Credit facilities | $ | $ | |||||||||
| Other line of credit | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Credit facilities | $ | $ | |||||||||
| Other line of credit | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
NOTE 5. COMMITMENTS AND CONTINGENCIES
Letters of Credit and Guarantees - We provide letters of credit to landlords (lessors) of our leased premises in lieu of cash security deposits, which totaled $5.7 million and $3.4 million at September 30, 2022 and December 31, 2021, respectively. In addition, we provide license bonds to various state agencies to meet certain licensing requirements. The amount of license bonds outstanding was $2.3 million and $2.3 million at September 30, 2022 and December 31, 2021, respectively.
Legal Proceedings - On December 19, 2016, CBIZ Operations was named as a defendant in a lawsuit filed by Zotec Partners, LLC (“Zotec”) in the Marion County Indiana Superior Court. After various amendments, the lawsuit asserts claims under Indiana law for securities, statutory and common law fraud or deception, unjust enrichment, breach of contract, and vicarious liability against CBIZ Operations and a former employee of CBIZ MMP in connection with the sale of the CBIZ MMP medical billing practice to Zotec. The plaintiff claims that CBIZ Operations had a duty to disclose the fact,
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NOTE 6. FINANCIAL INSTRUMENTS
Available-For-Sale Debt Securities - In connection with certain services provided by our payroll operations, we collect funds from our clients’ accounts in advance of paying client obligations. These funds held for clients are segregated and invested in accordance with our investment policy, which requires all investments carry an investment grade rating at the time of initial investment. These investments, primarily consisting of corporate and municipal bonds, are classified as available-for-sale and are included in the “Funds held for clients” line item on the accompanying unaudited Condensed Consolidated Balance Sheets. The par value of these investments totaled $45.3 million and $37.0 million at September 30, 2022 and December 31, 2021, respectively, and had maturity or callable dates ranging from October 2022 through November 2025.
At September 30, 2022, unrealized losses on the securities were not material and have not been recognized as a credit loss because the bonds are investment grade quality and management is not required or does not intend to sell prior to an expected recovery in value. The bond issuers continue to make timely principal and interest payments.
The following table summarizes activities related to these investments for the nine months ended September 30, 2022 and the twelve months ended December 31, 2021 (in thousands):
| Nine Months Ended September 30, 2022 | Twelve Months Ended December 31, 2021 | ||||||||||
| Fair value at beginning of period | $ | $ | |||||||||
| Purchases | |||||||||||
| Redemptions | ( | ( | |||||||||
| Maturities | ( | ( | |||||||||
| Change in bond premium | ( | ||||||||||
| Fair market value adjustment | ( | ( | |||||||||
| Fair value at end of period | $ | $ | |||||||||
In addition to the available-for-sale debt securities discussed above, we also held other depository assets in the amount of $1.7 million and $1.1 million at September 30, 2022 and December 31, 2021, respectively. Those depository assets are classified as Level 1 in the fair value hierarchy.
Interest Rate Swaps - We utilize interest rate swaps to manage interest rate risk exposure associated with our floating-rate debt under our credit facility, or the forecasted acquisition of such liability. We do not purchase or hold any derivative instruments for trading or speculative purposes. Refer to the Annual Report on Form 10-K for the year ended December 31, 2021 for further discussion on our interest rate swaps.
As a result of the 2022 credit facility, CBIZ amended the interest rate swap agreements with respect to the existing swaps. Effective May 16, 2022, the scheduled reset date, the interest rate of the swaps are set to one-month Term SOFR to align the swaps to Term SOFR in the 2022 credit facility as a result of reference rate reform. No other terms under the swap agreements were amended.
During the third quarter of 2022, we entered into a new 5-year interest rate swap with a notional value of $20 million and fixed rate of 2.45 %
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Under the terms of the interest rate swaps, we pay interest at a fixed rate of interest plus applicable margin as stated in the amended agreements, and receive interest that varies with the one-month Term SOFR.
The following table summarizes our outstanding interest rate swaps and their classification in the accompanying unaudited Condensed Consolidated Balance Sheets at September 30, 2022 and December 31, 2021 (amounts in thousands):
| September 30, 2022 | |||||||||||||||||||||||||||||
| Notional Amount | Fixed Rate | Expiration | Fair Value | Balance Sheet Location | |||||||||||||||||||||||||
| Interest rate swap | $ | % | 6/1/2023 | $ | Other current asset | ||||||||||||||||||||||||
| Interest rate swap | $ | % | 4/14/2025 | $ | Other non-current asset | ||||||||||||||||||||||||
| Interest rate swap | $ | % | 12/14/2026 | $ | Other non-current asset | ||||||||||||||||||||||||
| Interest rate swap | $ | % | 8/14/2027 | $ | Other non-current asset | ||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| Notional Amount | Fixed Rate | Expiration | Fair Value | Balance Sheet Location | |||||||||||||||||||||||||
| Interest rate swap | $ | % | 5/14/2022 | $ | ( | Other current liability | |||||||||||||||||||||||
| Interest rate swap | $ | % | 6/1/2023 | $ | ( | Other non-current liability | |||||||||||||||||||||||
| Interest rate swap | $ | % | 4/14/2025 | $ | Other non-current asset | ||||||||||||||||||||||||
| Interest rate swap | $ | % | 12/14/2026 | $ | ( | Other non-current liability | |||||||||||||||||||||||
Refer to Note 7, Fair Value Measurements, for additional disclosures regarding fair value measurements.
The following table summarizes the effects of the interest rate swaps on the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| Gain Recognized in AOCI, net of tax | Gain (Loss) Reclassified from AOCL into Expense | ||||||||||||||||||||||
| Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | ( | ||||||||||||||||||
| Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Interest rate swaps | $ | $ | $ | ( | $ | ( | |||||||||||||||||
NOTE 7. FAIR VALUE MEASUREMENTS
The following table summarizes our assets and (liabilities) at September 30, 2022 and December 31, 2021, respectively, that are measured at fair value on a recurring basis subsequent to initial recognition and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value (in thousands):
| Level | September 30, 2022 | December 31, 2021 | |||||||||||||||
| Deferred compensation plan assets | 1 | $ | $ | ||||||||||||||
| Available-for-sale debt securities | 1 | ||||||||||||||||
| Other depository assets | 1 | ||||||||||||||||
| Deferred compensation plan liabilities | 1 | ( | ( | ||||||||||||||
| Interest rate swaps | 2 | ( | |||||||||||||||
| Contingent purchase price liabilities | 3 | ( | ( | ||||||||||||||
During the nine months ended September 30, 2022 and 2021, there were no The following table summarizes the change in Level 3 fair values
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of our contingent purchase price liabilities for the nine months ended September 30, 2022 and 2021 (pre-tax basis) (in thousands):
| 2022 | 2021 | ||||||||||
| Beginning balance – January 1 | $ | ( | $ | ( | |||||||
| Additions from business acquisitions | ( | ( | |||||||||
| Settlement of contingent purchase price liabilities | |||||||||||
| Change in fair value of contingencies | ( | ||||||||||
| Change in net present value of contingencies | ( | ( | |||||||||
| Ending balance – September 30 | $ | ( | $ | ( | |||||||
Contingent purchase price liabilities result from our business acquisitions and are recorded at fair value at the time of acquisition and are pr