UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2013
OR
For the transition period from to
Commission File Number 1-32961
CBIZ, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
(Registrant’s telephone number, including area code) 216-447-9000
(Former name, former address and former fiscal year, if changed since last report)
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 x
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 July 31, 2013
50,971,562
CBIZ, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets – June 30, 2013 and December 31, 2012
Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2013 and 2012
Consolidated Statements of Cash Flows – Six Months Ended June 30, 2013 and 2012
Notes to the Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Signature
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PART I – FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Deferred income taxes – current
Other current assets
Assets of discontinued operations
Current assets before funds held for clients
Funds held for clients
Total current assets
Property and equipment, net
Goodwill and other intangible assets, net
Assets of deferred compensation plan
Deferred income taxes – non-current, net
Other assets
Total assets
Current liabilities:
Accounts payable
Income taxes payable – current
Accrued personnel costs
Notes payable – current
Contingent purchase price liability
Other current liabilities
Liabilities of discontinued operations
Current liabilities before client fund obligations
Client fund obligations
Total current liabilities
Convertible notes, net
Bank debt
Income taxes payable – non-current
Deferred compensation plan obligations
Other non-current liabilities
Total liabilities
Common stock
Additional paid-in capital
Retained earnings
Treasury stock
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See the accompanying notes to the consolidated financial statements
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands, except per share data)
Revenue
Operating expenses
Gross margin
Corporate general and administrative expenses
Operating income
Other income (expense):
Interest expense
Gain on sale of operations, net
Other income (expense), net
Total other expense, net
Income from continuing operations before income tax expense
Income tax expense
Income from continuing operations after income tax expense
Income from discontinued operations, net of tax
Gain on disposal of discontinued operations, net of tax
Net income
Earnings per share:
Basic:
Continuing operations
Discontinued operations
Diluted:
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
Comprehensive Income:
Other comprehensive loss, net of tax
Comprehensive income
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense
Amortization of discount on notes and deferred financing costs
Bad debt expense, net of recoveries
Adjustment to contingent earnout liability
Deferred income taxes
Employee stock awards
Excess tax benefits from share based payment arrangements
Changes in assets and liabilities, net of acquisitions and divestitures:
Income taxes payable/refundable
Accrued personnel costs and other liabilities
Net cash provided by continuing operations
Operating cash flows provided by discontinued operations
Net cash provided by operating activities
Cash flows from investing activities:
Business acquisitions and contingent consideration, net of cash acquired
Purchases of client fund investments
Proceeds from the sales and maturities of client fund investments
Proceeds from sales of divested and discontinued operations
Net decrease in funds held for clients
Additions to property and equipment, net
Other
Net cash flows provided by continuing operations
Investing cash flows used in discontinued operations
Net cash provided by investing activities
Cash flows from financing activities:
Proceeds from bank debt
Payment of bank debt
Payment for acquisition of treasury stock
Net decrease in client funds obligations
Proceeds from exercise of stock options
Payment of contingent consideration of acquisitions
Excess tax benefit from exercise of stock awards
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of period
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements.
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting solely of normal recurring adjustments) considered necessary to present fairly the financial position of CBIZ, Inc. and its consolidated subsidiaries (“CBIZ” or the “Company”) as of June 30, 2013 and December 31, 2012, the consolidated results of their operations for the three and six months ended June 30, 2013 and 2012, and the cash flows for the six months ended June 30, 2013 and 2012. Due to seasonality, potential changes in economic conditions, interest rate fluctuations and other factors, the results of operations for such interim periods are not necessarily indicative of the results for the full year. For further information, refer to the consolidated financial statements and notes thereto included in CBIZ’s Annual Report on Form 10-K for the year ended December 31, 2012.
Divestiture of Medical Management Professionals
On July 26, 2013, CBIZ, through its subsidiary CBIZ Operations, Inc., an Ohio Corporation, entered into an agreement with Zotec Partners, LLC, an Indiana limited liability company, to sell all of the issued and outstanding capital stock of each of CBIZ Medical Management Professionals, Inc., an Ohio corporation, and CBIZ Medical Management, Inc., a North Carolina corporation, and substantially all of the stock of their subsidiary companies, collectively consisting of all of CBIZ’s Medical Management Professionals ongoing operations and business (“MMP”) for a purchase price of approximately $200 million, which amount is subject to adjustment. Subject to customary closing conditions and regulatory approvals, the transaction is expected to close on September 1, 2013. After transaction costs and taxes, CBIZ expects proceeds to be approximately $145 million. As a result of the sale agreement, the assets and liabilities as well as the operations of MMP are reflected as discontinued operations in this Form 10-Q. See Note 13 for further discussion of discontinued operations and divestitures.
Principles of Consolidation
The accompanying consolidated financial statements reflect the operations of CBIZ, Inc. and all of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. 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. See CBIZ’s Annual Report on Form 10-K for the year ended December 31, 2012 for further discussion.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect: the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses. Management’s estimates and assumptions include, but are not limited to, estimates of collectability of accounts receivable and unbilled revenue, the realizability of goodwill and other intangible assets, the fair value of certain assets, the valuation of stock options in determining compensation expense, estimates of accrued liabilities (such as incentive compensation, self-funded health insurance accruals, legal reserves, income tax uncertainties, contingent purchase price obligations, and consolidation and integration reserves), the provision for income taxes, the realizability of deferred tax assets, and other factors. Management’s estimates and assumptions are derived from and are continually evaluated based upon available information, judgment and experience. Actual results could differ from those estimates.
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Revenue Recognition and Valuation of Unbilled Revenues
Revenue is recognized only when all of the following are present: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee to the client is fixed or determinable, and collectability is reasonably assured.
CBIZ offers a vast array of products and business services to its clients. Those services are delivered through three practice groups. A description of revenue recognition policies is included in the Annual Report on Form 10-K for the year ended December 31, 2012.
Accounts receivable balances at June 30, 2013 and December 31, 2012 were as follows (in thousands):
Trade accounts receivable
Unbilled revenue
Total accounts receivable
Allowance for doubtful accounts
The components of goodwill and other intangible assets, net at June 30, 2013 and December 31, 2012 were as follows (in thousands):
Goodwill
Intangible assets:
Client lists
Other intangible assets
Total intangible assets
Total goodwill and intangibles assets
Accumulated amortization:
Total accumulated amortization
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Depreciation and amortization expense for property and equipment and intangible assets for the three and six months ended June 30, 2013 and 2012 was as follows (in thousands):
Total depreciation and amortization expense
CBIZ had two primary debt arrangements at June 30, 2013 that provided the Company with the capital necessary to meet its working capital needs as well as the flexibility to continue with its strategic initiatives, including business acquisitions and share repurchases: the 2010 Convertible Senior Subordinated Notes (“2010 Notes”) totaling $130 million and a $275 million unsecured credit facility. In addition to the discussion below, refer to the Annual Report on Form 10-K for the year ended December 31, 2012 for additional details of CBIZ’s borrowing arrangements.
2010 Convertible Senior Subordinated Notes
On September 27, 2010, CBIZ issued $130.0 million of 2010 Notes to qualified institutional buyers. The 2010 Notes are direct, unsecured, senior subordinated obligations of CBIZ. The 2010 Notes bear interest at a rate of 4.875% per annum, payable in cash semi-annually in arrears on April 1 and October 1. The 2010 Notes mature on October 1, 2015 unless earlier redeemed, repurchased or converted.
CBIZ separately accounts for the debt and equity components of the 2010 Notes. The carrying amount of the debt and equity components at June 30, 2013 and December 31, 2012 were as follows (in thousands):
Principal amount of notes
Unamortized discount
Net carrying amount
Additional paid-in-capital, net of tax
The discount is being amortized at an annual effective rate of 7.5% over the term of the 2010 Notes, which is five years from the date of issuance. At June 30, 2013, the unamortized discount had a remaining amortization period of approximately 27 months.
2006 Convertible Senior Subordinated Notes
At June 30, 2013, CBIZ had $750,000 outstanding of its 3.125% Convertible Senior Subordinated Notes that were issued in 2006 (“2006 Notes”). These 2006 Notes are direct, unsecured, senior subordinated obligations of CBIZ. The 2006 Notes bear interest at a rate of 3.125% per annum, payable in cash semi-annually in arrears on each June 1 and December 1. The 2006 Notes mature on June 1, 2026 unless earlier redeemed, repurchased or converted.
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CBIZ separately accounts for the debt and equity components of the 2006 Notes. The carrying amount of the debt and equity components at June 30, 2013 and December 31, 2012 were as follow (in thousands):
During the three and six months ended June 30, 2013 and 2012, CBIZ recognized interest expense on the 2010 Notes and 2006 Notes as follows (in thousands):
Contractual coupon interest
Amortization of discount
Amortization of deferred financing costs
Total interest expense
Bank Debt
CBIZ maintains a $275 million unsecured credit facility (“credit facility”) with Bank of America as agent for a group of seven participating banks. The balance outstanding under the credit facility was $204.0 million and $208.9 million at June 30, 2013 and December 31, 2012, respectively. Rates for the six months ended June 30, 2013 and 2012 were as follows:
Weighted average rates
Range of effective rates
CBIZ had approximately $60.4 million of available funds under the credit facility at June 30, 2013, net of outstanding letters of credit and performance guarantees of $4.4 million. The credit facility provides CBIZ operating flexibility and funding to support seasonal working capital needs and other strategic initiatives such as acquisitions and share repurchases. The maturity date of the credit facility is June 2015. CBIZ believes it is in compliance with its debt covenants at June 30, 2013.
Letters of Credit and Guarantees
CBIZ provides letters of credit to landlords (lessors) of its leased premises in lieu of cash security deposits, which totaled $2.5 million as of June 30, 2013 and December 31, 2012. In addition, CBIZ provides license bonds to various state agencies to meet certain licensing requirements. The amount of license bonds outstanding at June 30, 2013 and December 31, 2012 was $2.0 million and $2.7 million, respectively.
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CBIZ acted as guarantor on various letters of credit for a CPA firm with which it has an affiliation, which totaled $1.9 million as of June 30, 2013 and December 31, 2012. CBIZ has recognized a liability for the fair value of the obligations undertaken in issuing these guarantees, which is recorded as other current liabilities in the accompanying consolidated balance sheets. Management does not expect any material changes to result from these instruments as performance under the guarantees is not expected to be required.
Legal Proceedings
In 2010, CBIZ, Inc. and its subsidiary, CBIZ MHM, LLC (fka CBIZ Accounting, Tax & Advisory Services, LLC) (the “CBIZ Parties”), were named as defendants in lawsuits filed in the U.S. District Court for the District of Arizona and the Superior Court for Maricopa County, Arizona. The federal court case is captioned Robert Facciola, et al v. Greenberg Traurig LLP, et al, and the state court cases are captioned Victims Recovery, LLC v. Greenberg Traurig LLP, et al, Roger Ashkenazi, et al v. Greenberg Traurig LLP, et al, Mary Marsh, et al v. Greenberg Traurig LLP, et al; and ML Liquidating Trust v. Mayer Hoffman McCann PC, et al. Prior to these suits CBIZ MHM, LLC was named as a defendant in Jeffery C. Stone v. Greenberg Traurig LLP, et al. The Stone case was subsequently voluntarily dismissed by the plaintiff.
These lawsuits arose out of the bankruptcy of Mortgages Ltd., a mortgage lender to developers in the Phoenix, Arizona area. Various other professional firms not related to the Company were also named defendants in these lawsuits.
Mortgages Ltd. had been audited by Mayer Hoffman McCann PC (“Mayer Hoffman”), a CPA firm that has an administrative services agreement with CBIZ. The lawsuits assert claims against Mayer Hoffman for, among others things, violations of the Arizona Securities Act, common law fraud, and negligent misrepresentation, and seek to hold the CBIZ Parties vicariously liable for Mayer Hoffman’s conduct as either a statutory control person under the Arizona Securities Act or a joint venturer under Arizona common law. CBIZ is not a CPA firm, does not provide audits, and did not audit any of the entities at issue in these lawsuits, nor is CBIZ a control person of, or a joint venture with, Mayer Hoffman.
In June 2011, the Facciola court, in which the plaintiffs were seeking to certify a class of all Mortgages Ltd. investors, granted the motions to dismiss filed by the CBIZ Parties and Mayer Hoffman. After that dismissal order, the plaintiffs moved the court to amend their complaint in an attempt to state a claim against the CBIZ Parties and Mayer Hoffman. In November 2011, the Facciola court denied the plaintiffs’ request to amend the complaint as to the CBIZ Parties and Mayer Hoffman. In June 2012, the remaining defendants in the Facciola case reached a class action settlement, which the court approved in October 2012. Eighteen class members, however, opted out of the settlement before it was finalized and, in September 2012, filed a new case against all of the defendants in the Facciola case, including the CBIZ Parties (Rader et al v. Greenberg Traurig, LLC, et al). In December 2012, the Facciola plaintiffs filed an appeal to the U.S. Court of Appeals for the Ninth Circuit of the dismissal of their case against the CBIZ Parties and Mayer Hoffman. That appeal is currently pending.
The plaintiffs, except for the ML Liquidating Trust, are all alleged to have directly or indirectly invested in real estate mortgages through Mortgages Ltd. The Victims Recovery, Ashkenazi and Marsh plaintiffs seek monetary damages equivalent to their alleged losses on those investments. The ML Liquidating Trust asserts errors and omissions and breach of contract claims and is seeking monetary damages. The Ashkenazi complaint alleges damages of approximately $92 million; the Victims Recovery complaint alleges damages of approximately $53 million; the Marsh, Facciola, Rader, and ML Liquidating Trust complaints allege damages in excess of approximately $200 million. The plaintiffs in these suits also seek pre- and post-judgment interest, punitive damages and attorneys’ fees.
The CBIZ Parties filed motions to dismiss in all remaining cases. On March 11, 2013, the court issued a ruling dismissing the securities fraud and aiding and abetting securities fraud claims against the CBIZ Parties and Mayer Hoffman in the Marsh, Victims Recovery and Ashkenazi lawsuits, and also dismissed certain other claims in the Ashkenazi and Victims Recovery cases.
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On April 12, 2013, the court denied the CBIZ Parties’ motion to dismiss the remaining claims in the Ashkenazi lawsuit. On May 7, 2013, the court in the ML Liquidating Trust lawsuit issued a ruling dismissing claims for deepening insolvency damages, negligence and breach of contract and holding that any claims related to the 2004 and 2005 Mayer Hoffman audits were barred by the statute of limitations. The court denied the motion as to the negligent misrepresentation claim. On June 14, 2013, the court dismissed the RICO, fraud, and consumer fraud claims in the Marsh lawsuit, and denied the CBIZ Parties’ motion as to the negligent misrepresentation and aiding and abetting breaches of fiduciary duty claims.
The CBIZ Parties and Mayer Hoffman, without admitting any liability, have reached settlements in the Victims Recovery, Ashkenazi and Rader lawsuits. In addition, the CBIZ Parties and Mayer Hoffman, without admitting any liability, reached a settlement with a single plaintiff from the Marsh lawsuit. The CBIZ Parties did not pay any monetary amounts as part of these settlements. The Victims Recovery complaint had alleged damages of approximately $53 million, the Ashkenazi complaint had alleged damages of approximately $92 million and the Rader complaint alleged damages in excess of $15 million.
The CBIZ Parties deny all allegations of wrongdoing made against them in these actions and are vigorously defending the remaining proceedings. In particular, the CBIZ Parties are not control persons under the Arizona Securities Act of, or a joint venture with, Mayer Hoffman. The CBIZ Parties do not have, in any respects, the legal right to control Mayer Hoffman’s audits or any say in how the audits are conducted. The Company has been advised by Mayer Hoffman that it denies all allegations of wrongdoing made against it and that it intends to continue vigorously defending the matters.
In January 2012, the CBIZ Parties were added as defendants to a lawsuit filed in the Superior Court of California for Orange County (Signature Financial Group, Inc., et al, (“Signature”) v. Mayer Hoffman McCann, P.C., et al). This lawsuit arises out of a review of the financial statements of Medical Capital Holdings, Inc. (“Medical Capital”) by Mayer Hoffman. In June 2009, Medical Capital was sued by the SEC and a receiver was appointed to liquidate Medical Capital. The plaintiffs in the Signature lawsuit are financial advisors that sold Medical Capital investments to their clients. Those plaintiffs were sued by their clients for losses related to Medical Capital and now seek to recover damages from the CBIZ Parties and Mayer Hoffman of approximately $87 million for the losses and expenses they incurred in litigation with their respective clients and for lost profits. The Signature lawsuit seeks to impose auditor-type liabilities upon the CBIZ Parties for attest services they did not conduct. Specific claims asserted and relief requested included fraud, intentional misrepresentation and concealment; negligent misrepresentation; equitable indemnity; declaratory relief and respondeat superior.
The CBIZ Parties deny all allegations of wrongdoing made against them in the Signature lawsuit and are vigorously defending the proceeding. The Company has been advised by Mayer Hoffman that it denies all allegations of wrongdoing made against it and that it intends to continue vigorously defending the matters.
The Company cannot predict the outcome of the above matters or estimate the possible loss or range of loss, if any. Although the proceedings are subject to uncertainties inherent in the litigation process and the ultimate disposition of these proceedings is not presently determinable, management believes that the allegations are without merit and that the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial condition, results of operations or cash flows of the Company.
In addition to those items disclosed above, the Company is, from time to time, subject to claims and suits arising in the ordinary course of business. Although the ultimate disposition of such proceedings is not presently determinable, management does not believe that the ultimate resolution of these matters will have a material adverse effect on the consolidated financial condition, results of operations or cash flows of the Company.
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Bonds
In connection with CBIZ’s payroll business and the collection of client funds, CBIZ invests a portion of these funds in corporate and municipal bonds. CBIZ held corporate and municipal bonds with par values totaling $29.3 million and $28.2 million at June 30, 2013 and December 31, 2012, respectively. All bonds are investment grade and are classified as available-for-sale. These bonds have maturity or callable dates ranging from July 2013 through April 2018, and are included in “Funds held for clients” on the consolidated balance sheets based on the intent and ability of the Company to sell these investments at any time under favorable conditions. The following table summarizes CBIZ’s bond activity for the six months ended June 30, 2013 and the twelve months ended December 31, 2012 (in thousands):
Fair value at beginning of period
Purchases
Sales
Maturities and calls
Decrease in bond premium
Fair market value adjustment
Fair value at end of period
Interest Rate Swaps
CBIZ uses interest rate swaps to manage interest rate risk exposure primarily through converting portions of 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. CBIZ does not enter into derivative instruments for trading or speculative purposes. See the Annual Report on Form 10-K for the year ended December 31, 2012 for further discussion on CBIZ’s interest rate swaps.
At June 30, 2013 and December 31, 2012, the interest rate swap was classified as a liability derivative. The following table summarizes CBIZ’s outstanding interest rate swap and its classification on the consolidated balance sheets at June 30, 2013 and December 31, 2012 (in thousands).
Location
Interest rate swap (1)
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The swap was deemed to be effective for the three and six months ended June 30, 2013 and 2012. The following table summarizes the effects of the interest rate swap on CBIZ’s consolidated statements of comprehensive income for the three and six months ended June 30, 2013 and 2012 (in thousands):
Interest rate swap
The following table summarizes CBIZ’s assets and liabilities at June 30, 2013 and December 31, 2012 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 the Company to determine such fair value (in thousands):
Deferred compensation plan assets
Corporate bonds
Contingent purchase price liabilities
During the six months ended June 30, 2013 and 2012, there were no transfers between the valuation hierarchy Levels 1, 2 and 3. The following table summarizes the change in Level 3 fair values of the Company’s contingent purchase price liability for the six months ended June 30, 2013 and 2012 (pre-tax basis) (in thousands):
Beginning balance – January 1
Additions from business acquisitions
Payment of contingent purchase price liabilities
Change in fair value of contingencies
Change in net present value of contingencies
Ending balance – June 30
Contingent Purchase Price Liabilities—Contingent purchase price liabilities arise from business acquisitions and are classified as Level 3 due to the utilization of a probability weighted discounted cash flow approach to determine the fair value of the contingency. A contingent liability is established for each acquisition that has a contingent purchase price component and normally extends over a three year term. The significant unobservable input used in the fair value measurement of the contingent purchase price liabilities is the future performance of the acquired business. The future performance of the acquired business directly impacts the contingent purchase price that is paid to the seller; thus,
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performance that exceeds target could result in a higher payout, and a performance under target could result in a lower payout. Changes in the expected amount of potential payouts are recorded as adjustments to the initial contingent purchase price liability, with the same amount being recorded in the consolidated statements of comprehensive income. These liabilities are reviewed quarterly and adjusted if necessary. The risk of a large adjustment in any one reporting period is mitigated by the regular reviews of the performance of the acquired businesses and their respective contingent purchase price liability. The contingent purchase price liabilities are included in “Contingent purchase price liability” in the current and non-current sections of the consolidated balance sheets, depending on the expected settlement date. See Note 12 for further discussion of contingent purchase price liabilities.
The following table presents financial instruments that are not carried at fair value but which require fair value disclosure as of June 30, 2013 and December 31, 2012 (in thousands):
2006 Convertible Notes
2010 Convertible Notes
Although the trading of CBIZ’s 2006 Notes and 2010 Notes is limited, the fair value was determined based upon their most recent quoted market price and as such, is considered to be a Level 1 fair value measurement. The 2006 Notes and the 2010 Notes are carried at face value less any unamortized debt discount. See Note 5 for further discussion of CBIZ’s debt instruments.
In addition, the carrying amounts of CBIZ’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments, and the carrying value of bank debt approximates fair value as the interest rate on the bank debt is variable and approximates current market rates. As a result, the fair value measurement of CBIZ’s bank debt is considered to be Level 2.
The following table is a summary of other comprehensive income (loss) and discloses the tax impact of each component of other comprehensive income (loss) for the three and six months ended June 30, 2013 and 2012 (in thousands):
Net unrealized (loss) gain on available-for-sale securities, net of income taxes (1)
Net unrealized gain (loss) on interest rate swaps, net of income taxes (2)
Foreign currency translation
Total other comprehensive loss
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Accumulated other comprehensive loss, net of tax, was approximately $0.8 million at June 30, 2013 and December 31, 2012. Accumulated other comprehensive loss consisted of adjustments, net of tax, to unrealized gains and losses on available-for-sale securities and an interest rate swap, and adjustments for foreign currency translation.
CBIZ has granted various stock-based awards under its 2002 Amended and Restated CBIZ, Inc. Stock Incentive Plan, which is described in further detail in CBIZ’s Annual Report on Form 10-K for the year ended December 31, 2012. The terms and vesting schedules for stock-based awards vary by type and date of grant. Compensation expense for stock-based awards recognized during the three and six months ended June 30, 2013 and 2012 was as follows (in thousands):
Stock options
Restricted stock awards
Total stock-based compensation expense
Stock award activity during the six months ended June 30, 2013 was as follows (in thousands, except per share data):
Outstanding at beginning of year
Granted
Exercised or released
Expired or canceled
Outstanding at June 30, 2013
Exercisable at June 30, 2013
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The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the three and six months ended June 30, 2013 and 2012 (in thousands, except per share data).
Numerator:
Income from continuing operations
Denominator:
Basic
Weighted average common shares outstanding
Diluted
Stock options (1)
Contingent shares (2)
Diluted weighted average common shares outstanding
Basic earnings per share from continuing operations
Diluted earnings per share from continuing operations
During the six months ended June 30, 2013, CBIZ acquired Associated Insurance Agents (“AIA”). AIA, located in Minneapolis, Minnesota, is an insurance brokerage agency specializing in property and casualty insurance, personal lines and health and benefit insurance. The operating results of AIA are reported in the Employee Services practice group. Aggregate consideration for this acquisition consisted of approximately $3.7 million in cash, $0.4 million in guaranteed future consideration, and $4.6 million in contingent consideration.
The aggregate purchase price for this acquisition was preliminarily allocated as follows (in thousands):
Recognized amounts of identifiable assets acquired and liabilities assumed:
Current assets
Identifiable intangible assets
Accrued liabilities
Deferred tax liability – non-current
Total identifiable net assets
Aggregate purchase price
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Under the terms of the acquisition agreement, a portion of the purchase price is contingent on future performance of the business acquired. The maximum potential undiscounted amount of all future payments that CBIZ could be required to make under the contingent arrangement is $5.2 million. CBIZ is required to record the fair value of this obligation at the acquisition date. CBIZ determined, utilizing a probability weighted income approach, that the fair value of the contingent consideration arrangement was $4.6 million, which was recorded in the consolidated balance sheet at June 30, 2013. The goodwill of $7.9 million arising from the acquisition in the current year consists largely of expected future earnings and cash flow from the existing management team, as well as the synergies created by the integration of the new business within the CBIZ organization, including cross-selling opportunities expected with the Company’s Employee Services group, to help strengthen the Company’s existing service offerings and expand the Company’s market position. Goodwill recognized is not deductible for income tax purposes.
CBIZ also purchased one client list, which is reported in the Employee Services practice group. Total consideration for this client list was $0.3 million cash paid at closing and an additional $0.2 million in cash, which is contingent upon future financial performance of the client list.
In addition, CBIZ paid $1.0 million in cash and issued approximately 136,000 shares of common stock during the six months ended June 30, 2013 as contingent earnouts for previous acquisitions. During the six months ended June 30, 2013, CBIZ also increased the fair value of the contingent purchase price liability related to CBIZ’s prior acquisitions by $0.9 million due to greater than originally projected future results of the acquired businesses. This increase is included in “Other income (expense), net” in the consolidated statements of comprehensive income. Refer to Note 8 for further discussion of contingent purchase price liabilities.
During the six months ended June 30, 2012, CBIZ acquired substantially all of the assets of two companies, Meridian Insurance Group, LLC (“Meridian”) and Primarily Care, Inc. (“PCI”). Meridian, with offices in Boca Raton, Florida and Atlanta, Georgia, is an insurance brokerage specializing in multiple insurance products and services including property and casualty, bonding, personal lines and employee benefits. PCI, located in Cranston, Rhode Island, is an employee benefits brokerage firm that offers long-term healthcare cost reduction strategies through a unique system comprised of technology, innovative plan design, educational tools and tangible financial health incentives. The operating results of Meridian and PCI are reported in the Employee Services practice group. Aggregate consideration for these acquisitions consisted of approximately $6.8 million in cash, $0.8 million in CBIZ common stock, $1.7 million in guaranteed future consideration, and $2.5 million in contingent consideration. CBIZ also purchased two client lists, one of which is reported in the Employee Services practice group and the other is reported in the Financial Services practice group. Aggregate consideration for these client lists consisted of $0.4 million cash paid at closing and up to an additional $2.5 million in cash which is contingent upon future financial performance of the client lists.
In addition, CBIZ paid $15.7 million in cash and issued approximately 263,000 shares of common stock during the six months ended June 30, 2012 as contingent earnouts for previous acquisitions, which includes approximately 251,100 shares of common stock that were earned in 2011 and issued in 2012. During the six months ended June 30, 2012, CBIZ also reduced the fair value of the contingent purchase price liability related to CBIZ’s prior acquisitions by $0.1 million due to lower than originally projected future results of the acquired businesses. This reduction of $0.1 million is included in “Other income (expense), net” in the consolidated statements of comprehensive income. Refer to Note 8 for further discussion of contingent purchase price liabilities.
The operating results of acquired businesses are included in the accompanying consolidated financial statements since the dates of acquisition. Client lists and non-compete agreements are recorded at fair value at the time of acquisition. The excess of purchase price over the fair value of net assets acquired (including client lists and non-compete agreements) is allocated to goodwill.
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Additions to goodwill, client lists and other intangible assets resulting from acquisitions and contingent consideration earned on prior period acquisitions during the six months ended June 30, 2013 and 2012, respectively, were as follows (in thousands):
As a result of CBIZ’s acquisition activities during 2012, the following tables provide pro forma financial information as if all the acquisitions were acquired on January 1, 2012. See CBIZ’s Annual Report on Form 10-K for the year ended December 31, 2012 for a detailed description of the businesses that were acquired during 2012. The pro forma financial information includes the effect of certain adjustments to normalize such expenses as interest, amortization, benefits and incentive compensation. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been obtained had these businesses actually been acquired at January 1, 2012, nor are they intended to be a projection of future results of operations. The “Consolidated As Reported” column also includes the impact of treating MMP as discontinued operations.
Earnings per share from continuing operations:
Weighted average common shares outstanding:
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CBIZ will divest (through sale or closure) business operations that do not contribute to the Company’s long-term objectives for growth or that are not complementary to its target service offerings and markets. Divestitures are classified as discontinued operations provided they meet the criteria as provided in FASB ASC 205 “Presentation of Financial Statements – Discontinued Operations – Other Presentation Matters.”
On July 26, 2013, CBIZ, through its subsidiary CBIZ Operations, Inc., entered into an agreement with Zotec Partners, LLC to sell all of the issued and outstanding capital stock of each of CBIZ Medical Management Professionals, Inc. and CBIZ Medical Management, Inc. and substantially all of the stock of their subsidiary companies, collectively consisting of all of CBIZ’s Medical Management Professionals ongoing operations and business (“MMP”) for a purchase price of approximately $200 million, which amount is subject to adjustment. Subject to customary closing conditions and regulatory approvals, the transaction is expected to close on September 1, 2013. After transaction costs and taxes, CBIZ expects proceeds to be approximately $145 million.
Discontinued Operations
As a result of the agreement to sell MMP, the results of operations of MMP are included in “Income from discontinued operations, net of tax” on the consolidated statements of comprehensive income for the three and six months ended June 30, 2013 and 2012. Additionally, the assets and liabilities of MMP have been consolidated and are included in “Assets of discontinued operations” and “Liabilities of discontinued operations” on the consolidated balance sheets as of June 30, 2013 and December 31, 2012. Certain adjustments were determined to be necessary to correctly reflect the operating results and financial position of MMP. These adjustments include an allocation for interest expense and tax expense, as well as an allocation of deferred tax accounts that specifically relate to MMP. The interest charges were based on the assumption that $40.0 million of the credit facility debt was related to MMP, thus the interest related to the $40.0 million was charged to MMP at the respective annual rate of interest for the credit facility. Tax expense was allocated to MMP at its respective individual tax rate.
During the six months ended June 30, 2012, CBIZ did not discontinue the operations of any of its businesses and did not sell any operations.
Revenue and results from operations of discontinued operations for the three and six months ended June 30, 2013 and 2012 primarily relate to the discontinued operations of MMP and were as follows (in thousands):
Income from discontinued operations, before income tax
Gains from the sale of discontinued operations are recorded as “Gain on disposal of discontinued operations, net of tax”, in the accompanying consolidated statements of comprehensive income. In addition, proceeds that are contingent upon a divested operation’s actual future performance are recorded as “gain on disposal of discontinued operations, net of tax” in the period they are earned. During the three months ended June 30, 2013, CBIZ recorded a deferred tax benefit of $1.9 million for the estimated outside basis differences between the book and tax basis related to the expected future sale of its MMP operations.
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Gain on the disposal of discontinued operations for the three and six months ended June 30, 2013 and 2012 were as follows (in thousands):
Gain on disposal of discontinued operations, before income tax
Income tax (benefit) expense
At June 30, 2013 and December 31, 2012, the assets and liabilities of businesses classified as discontinued operations are reported separately in the accompanying consolidated financial statements and consisted of the following (in thousands):
Assets:
Liabilities:
Accrued personnel
Accrued expenses—current
Other liabilities
Divestitures
Gains and losses from divested operations and assets that do not qualify for treatment as discontinued operations are recorded as “Gain on sale of operations, net” in the consolidated statements of comprehensive income. During the six months ended June 30, 2012, CBIZ recognized a contingent gain of $2.5 million from the 2011 sale of its individual wealth management business. Cash proceeds from the sale totaled approximately $0.9 million.
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CBIZ’s business units have been aggregated into three practice groups: Financial Services, Employee Services and National Practices. The business units have been aggregated based on the following factors: similarity of the products and services provided to clients; similarity of the regulatory environment in which they operate; and similarity of economic conditions affecting long-term performance. The business units are managed along these segment lines. A general description of services provided by each practice group is provided in the following table.
Financial Services
Employee Services
National Practices
• Accounting
• Tax
• Financial Advisory
• Valuation
• Litigation Support
• Government Health Care Consulting
• Risk Advisory Services
• Real Estate Advisory
• Employee Benefits
• Property & Casualty
• Retirement Plan Services
• Payroll Services
• Life Insurance
• Human Capital Services
• Compensation Consulting
• Recruiting
• Actuarial Services
• Managed Networking and Hardware Services
• Health Care Consulting
• Mergers & Acquisitions
Corporate and Other. Included in Corporate and Other are operating expenses that are not directly allocated to the individual business units. These expenses are primarily comprised of gains or losses attributable to assets held in the Company’s deferred compensation plan, stock-based compensation, certain health care costs, consolidation and integration charges, certain professional fees, certain advertising costs and other various expenses.
Accounting policies of the practice groups are the same as those described in Note 1 to the Annual Report on Form 10-K for the year ended December 31, 2012. Upon consolidation, all intercompany accounts and transactions are eliminated; thus inter-segment revenue is not included in the measure of profit or loss for the practice groups. Performance of the practice groups is evaluated on operating income excluding those costs listed above, which are reported in the “Corporate and Other” segment.
Segment information for the three and six months ended June 30, 2013 and 2012 was as follows (in thousands):
Corporate general & admin
Operating income (loss)
Other income, net
Total other income (expense)
Income (loss) from continuing operations before income tax expense
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On July 26, 2013, CBIZ, through its subsidiary CBIZ Operations, Inc., entered into an agreement with Zotec Partners, LLC to sell all of the issued and outstanding capital stock of each of CBIZ Medical Management Professionals, Inc. and CBIZ Medical Management, Inc. and substantially all of the stock of their subsidiary companies, collectively consisting of all of CBIZ’s Medical Management Professionals ongoing operations and business (“MMP”) for a purchase price of approximately $200 million, which amount is subject to adjustment. Subject to customary closing conditions and regulatory approvals, the transaction is expected to close on September 1, 2013. After transaction costs and taxes, CBIZ expects proceeds to be approximately $145 million. As a result of the sale agreement, the assets and liabilities as well as the operations of MMP are reflected as discontinued operations in this Form 10-Q.
On July 26, 2013, CBIZ also entered into a stock purchase agreement with Westbury (Bermuda) Ltd., a Bermuda exempted company (“Westbury”), to purchase from Westbury approximately 3.858 million shares of the Company’s common stock, which is 50% of Westbury’s current holdings of the Company’s common stock, at a price of $6.65 per share, which represents the 60-day moving average share price at July 16, 2013. This agreement is contingent on the close of the sale of MMP and will occur immediately after the close. The original option agreement dated September 14, 2010 to purchase CBIZ common stock from Westbury at a price of $7.25 per share is still in effect and will expire on September 30, 2013.
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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, 2013 and December 31, 2012, results of operations for the three and six months ended June 30, 2013 and 2012, and cash flows for the six months ended June 30, 2013 and 2012, 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, 2012. 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, 2012.
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, 2012 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
On July 26, 2013, CBIZ, through its subsidiary CBIZ Operations, Inc., an Ohio Corporation, entered into an agreement with Zotec Partners, LLC, an Indiana limited liability company, to sell all of the issued and outstanding capital stock of each of CBIZ Medical Management Professionals, Inc., an Ohio corporation, and CBIZ Medical Management, Inc., a North Carolina corporation, and substantially all of the stock of their subsidiary companies, collectively consisting of all of CBIZ’s Medical Management Professionals ongoing operations and business (“MMP”) for a purchase price of approximately $200 million, which amount is subject to adjustment. Subject to customary closing conditions and regulatory approvals, the transaction is expected to close on September 1, 2013. After transaction costs and taxes, CBIZ expects proceeds to be approximately $145 million, which will be used to repurchase shares as discussed below and to pay down outstanding debt on the unsecured credit facility. As a result of the sale agreement, the assets and liabilities as well as the operations of MMP are reflected as discontinued operations in this Form 10-Q.
On July 26, 2013, CBIZ also entered into an agreement with Westbury (Bermuda) Ltd., a Bermuda exempted company (“Westbury”), to purchase from Westbury 3.858 million shares of the Company’s common stock, which is 50% of Westbury’s current holdings of the Company’s common stock, at a price of $6.65 per share which represented the 60-day moving average share price at July 16, 2013. This agreement is contingent on the close of the sale of MMP and will occur immediately after the close.
Revenue for the three months ended June 30, 2013 increased by 11.9% to $172.5 million from $154.2 million for the comparable period in 2012. Revenue from newly acquired operations, net of divestitures, contributed $13.0 million, or 8.4%, to the growth in revenue, and same-unit revenue contributed $5.3 million, or 3.5%. Revenue for the six months ended June 30, 2013 increased by 9.4% to $373.9 million from $341.8 million for the comparable period in 2012. Revenue from newly acquired operations, net of divestitures, contributed $26.1 million, or 7.6%, and same-unit revenue contributed $6.0 to the growth in revenue, or 1.8%.
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Earnings per share from continuing operations was $0.11 per diluted share for the three months ended June 30, 2013 and $0.08 for the comparable period in 2012. For the six months ended June 30, 2013 and 2012, earnings per diluted share from continuing operations were $0.45 and $0.42, respectively. Included in the six months ended June 30, 2012 was a gain of $0.03 per diluted share related to the sale of CBIZ’s wealth management business in January 2011. Non-GAAP earnings per diluted share were $0.25 and $0.20 for the three months ended June 30, 2013 and 2012, respectively, and $0.74 and $0.64 for the six months ended June 30, 2013 and 2012, 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 and its analysts. 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, 2013 and 2012 are provided in the “Results of Operations – Continuing Operations” section that follows.
During the six months ended June 30, 2013, CBIZ acquired Associated Insurance Agents (“AIA”) of Minneapolis, Minnesota. AIA is an insurance brokerage agency specializing in property and casualty insurance, personal lines, and health and benefit insurance. Annual revenues for AIA are expected to be approximately $3.8 million and will be reported in the Employee Services practice group.
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, 2012, revenue for the month of June would be included in same-unit revenue for both years; revenue for the period January 1, 2013 through May 31, 2013 would be reported as revenue from acquired businesses.
Three Months Ended June 30, 2013 and 2012
Revenue – The following table summarizes total revenue for the three months ended June 30, 2013 and 2012 (in thousands, except percentages).
Total same-unit revenue
Acquired businesses
Total revenue
A detailed discussion of revenue by practice group is included under “Operating Practice Groups”.
Gross margin and operating expenses – Operating expenses increased by $15.6 million to $151.6 million for the three months ended June 30, 2013 from $136.0 million for the comparable period of 2012, but decreased as a percentage of revenue to 87.9% for the three months ended June 30, 2013 from 88.2% for the comparable period of 2012.
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The primary components of operating expenses for the three months ended June 30, 2013 and 2012 are included in the following table:
Personnel costs
Occupancy costs
Depreciation and amortization
Travel and related costs
Other (1)
Subtotal
Deferred compensation costs
Total operating expenses
The decrease in operating expenses as a percentage of revenue that was attributable to personnel costs was primarily due to a decrease in salaries and wages as a percentage of revenue, slightly offset by an increase in bonus accruals at those locations that exceeded profitability targets. The increase in deferred compensation costs as a percentage of revenue was due to modest gains in the value of the assets held in relation to CBIZ’s deferred compensation plan, which resulted in a slight impact to gross margin for the three months ended June 30, 2013, compared to losses of $0.9 million in the value of assets resulting in a favorable impact to gross margin for the comparable period in 2012. The increase in travel and related costs as a percentage of revenue was primarily due to increased client development efforts. 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 were flat for the three months ended June 30, 2013 compared to the same period last year, but decreased as a percentage of revenue to 4.4% for the three months ended June 30, 2013 from 4.9% for the comparable period of 2012. The primary components of G&A expenses for the three months ended June 30, 2013 and 2012 are included in the following table:
Professional services
Computer costs
Total G&A expenses
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The increase in G&A expenses as a percentage of revenue attributable to personnel costs is primarily due to an increase in incentive based compensation accrued during the three months ended June 30, 2013 compared to the same period in 2012. The decrease in professional fees was primarily related to a decrease in legal expenses during the three months ended June 30, 2013 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 increased by $0.3 million to $4.1 million for the three months ended June 30, 2013 from $3.8 million for the comparable period in 2012. The increase in interest expense was primarily due to an increase in the average debt balance outstanding under the credit facility to $180.4 million for the three months ended June 30, 2013 compared to $132.0 million for the three months ended June 30, 2012, partially offset by a decrease in the weighted average interest rate to 2.95% for the three months ended June 30, 2013 compared to 3.14% for the same period in 2012. See Note 5 of the accompanying consolidated financial statements for further discussion of CBIZ’s debt arrangements.
Other income (expense), net – For the three months ended June 30, 2013 and 2012, other income (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. For the three months ended June 30, 2013, modest gains in the fair value of investments related to the deferred compensation plan were $0.1 million compared to losses of $0.9 million for the three months ended June 30, 2012. These adjustments do not impact CBIZ’s net income as they are offset by the corresponding decrease or increase to compensation expense, which is recorded as operating and G&A expenses in the consolidated statements of comprehensive income.
Income tax expense – CBIZ recorded income tax expense from continuing operations of $4.2 million and $2.2 million for the three months ended June 30, 2013 and 2012, respectively. The effective tax rate for the three months ended June 30, 2013 was 43.5%, compared to an effective tax rate of 36.9% for the comparable period in 2012. The increase in the effective tax rate primarily relates to the release of a valuation allowance on a state income tax credit carryforward during the second quarter of 2012.
Earnings per share and Non-GAAP earnings per share – Earnings per share from continuing operations were $0.11 and $0.08 per diluted share for the three months ended June 30, 2013 and 2012, respectively, and Non-GAAP earnings per share were $0.25 and $0.20 per diluted share for the three months ended June 30, 2013 and 2012, 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. 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, 2013 and 2012.
NON-GAAP EARNINGS AND PER SHARE DATA
Reconciliation of Income from Continuing Operations to Non-GAAP Earnings from Continuing Operations
Selected non-cash charges:
Amortization
Depreciation
Non-cash interest on convertible notes
Stock-based compensation
Adjustment to contingent earnouts
Non-cash charges
Non-GAAP earnings – continuing operations
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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.
Same-unit
Gross margin percent
The growth in same-unit revenue was approximately 55% attributable to stronger performance in the units that provide certain national services and 45% attributable to the traditional accounting and tax services. Growth in the national units was primarily due to increased project work in valuation services as well as in the federal and state governmental health care compliance industry. The traditional accounting and tax services realized a 1.7% increase in hours and a 1.6% increase in revenue per hour for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. Revenue from acquired businesses was the result of the acquisition of PHBV Partners, L.L.P. (“PHBV”), which occurred on December 31, 2012.
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 $35.9 million and $28.7 million for the three months ended June 30, 2013 and 2012, respectively. The increase in ASA fees was primarily the result of the PHBV acquisition.
The largest components of operating expenses for the Financial Services practice group are personnel costs, occupancy costs, and travel and related costs, which represented 88.8% and 88.7% of total operating expenses for the three months ended June 30, 2013 and 2012, respectively. Personnel costs increased $7.6 million during the three months ended June 30, 2013 compared to the same period in 2012, and was comprised of an increase in same-unit personnel costs of $3.0 million related to staff compensation increases and an increase of $4.6 million associated with the acquisition of PHBV. Personnel costs represented 68.3% and 69.3% of revenue for the three months ended June 30, 2013 and 2012, respectively. Occupancy costs are relatively fixed in nature and were $6.3 million and $5.9 million, or 5.6% and 5.9% of revenue, for the three months ended June 30, 2013 and 2012, respectively. Travel and related costs were $4.0 million for the three months ended June 30, 2013 compared to $2.9 million for the same period in 2012, and were 3.5% and 2.9% of total revenue for the three months ended June 30, 2013 and 2012, respectively. The increase in travel and related costs was due to increased cost incurred for clients (which is billed to clients), client development, professional staff training efforts and from the impact of acquisitions. In addition to the expenses discussed above, professional service costs were $2.0 million for the three months ended June 30, 2013 compared to $0.8 million for the same period in 2012, and were 1.7% and 0.8% of total revenue for the three months ended June 30, 2013 and 2012, respectively. The increase in professional service costs was associated with outside services related to client engagements for our federal and state governmental health care contracts.
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The increase in same-unit revenue was attributable to several offsetting factors. Property and casualty revenues increased $0.6 million due to better pricing throughout the industry as well as strong performance within the specialty program business. Payroll business revenues increased $0.5 million primarily due to pricing increases for core services. Retirement consulting revenues increased $0.4 million due to favorable equity market conditions as advisory fees are typically earned on plan asset balances, which have increased over the prior year. These increases in revenue were partially offset by a decline in the life insurance business of $0.8 million due to fewer policies placed.
The growth in revenue from acquisitions was provided by:
Primarily Care, Inc., an employee benefits business located in Cranston, Rhode Island that was acquired in the second quarter of 2012;
Stoltz and Company, LTD., L.L.P., a property and casualty insurance and employee benefits business headquartered in Midland, Texas that was acquired in the third quarter of 2012;
Trinity Risk Advisors, Inc., a property and casualty insurance business located in Atlanta, Georgia that was acquired in the third quarter of 2012;
Strategic Employee Benefit Services – The Pruett Group, Inc., an employee benefits business headquartered in Nashville, Tennessee that was acquired in the fourth quarter of 2012;
the employee benefit division of Leavitt Pacific Insurance Brokers, Inc., an employee benefits business in the San Jose, California market that was acquired in the fourth quarter of 2012;
Diversified Industries, Inc. d/b/a Payroll Control Systems, a payroll business in Minneapolis, Minnesota that was acquired in the fourth quarter of 2012; and
Associated Insurance Agents, Inc., a property and casualty and employee benefits business located in Minneapolis, Minnesota, that was acquired in the second quarter of 2013.
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 82.4% and 83.2% of total operating expenses for the three months ended June 30, 2013 and 2012, respectively. Excluding costs related to the acquired businesses of $3.0 million, personnel costs decreased approximately $0.1 million, primarily due to lower external sales commissions related to the decline in life insurance revenues discussed above. Occupancy costs are relatively fixed and were $2.6 million for the three months ended June 30, 2013 and 2012, excluding the costs of the acquired businesses of $0.2 million in 2013.
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Same-unit revenue
Revenue for the three months ended June 30, 2013 and 2012 was relatively flat. The slight increase in revenue related to services provided under a contractual relationship with Edward Jones was offset by a decrease in revenues in the Company’s healthcare consulting business.
The largest components of operating expenses for the National Practices group are personnel costs, occupancy costs, and travel and related costs representing 92.9% and 94.5% of total operating expenses for the three months ended June 30, 2013 and 2012, respectively. Personnel costs for the three months ended June 30, 2013 increased slightly due to merit increases to existing employees supporting the Edward Jones business. Occupancy costs and travel and related costs were relatively flat for the three months ended June 30, 2013 and 2012.
Six Months Ended June 30, 2013 and 2012
Revenue – The following table summarizes total revenue for the six months ended June 30, 2013 and 2012 (in thousands, except percentages).
Gross margin and operating expenses – Operating expenses increased to $311.6 million for the six months ended June 30, 2013 from $285.6 million for the comparable period of 2012, but decreased as a percentage of revenue to 83.3% for the six months ended June 30, 2013 from 83.6% for the comparable period of 2012.
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The primary components of operating expenses for the six months ended June 30, 2013 and 2012 are included in the following table:
The decrease in operating expenses as a percentage of revenue that was attributable to personnel costs was primarily due to a decrease in accrued incentive compensation at certain locations that did not meet profitability targets, as well as a decrease in salaries and wages as a percentage of revenue. The increase in travel and related costs as a percentage of revenue was primarily due to increased client development efforts. Personnel and other operating expenses are discussed in further detail under “Operating Practice Groups”.
Corporate general and administrative expenses – Corporate G&A expenses decreased by $0.5 million to $17.6 million for the six months ended June 30, 2013 from $18.1 million for the comparable period of 2012, and decreased as a percentage of revenue to 4.7% for the six months ended June 30, 2013 from 5.3% for the comparable period of 2012. The primary components of G&A expenses for the six months ended June 30, 2013 and 2012 are included in the following table:
The decrease in G&A expenses as a percentage of revenue attributable to personnel costs is primarily due to the increase in revenue for the six months ended June 30, 2013 compared to the same period last year. The decrease in professional fees was primarily related to a decrease in legal activities and expenses during the six months ended June 30, 2013 compared to the same period last year related to the claims against CBIZ as described in Note 6 of the accompanying consolidated financial statements.
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Interest expense – Interest expense increased by $0.6 million to $8.2 million for the six months ended June 30, 2013 from $7.6 million for the comparable period in 2012. The increase in interest expense was primarily due to an increase in the average debt balance outstanding under the credit facility to $175.5 million for the six months ended June 30, 2013 compared to $126.7 million for the six months ended June 30, 2012, partially offset by a decrease in the weighted average interest rate to 2.96% for the six months ended June 30, 2013 compared to 3.22% for the same period in 2012.
Other (expense) income, net – Other (expense) 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 liabilities related to previous acquisitions. Gains in the fair value of investments related to the deferred compensation were $2.6 million and $2.1 million for the six months ended June 30, 2013 and 2012, respectively. 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 liabilities resulted in expense of $0.9 million and income of $0.1 million for the six months ended June 30, 2013 and 2012, respectively.
Income tax expense – CBIZ recorded income tax expense from continuing operations of $16.4 million and $14.6 million for the six months ended June 30, 2013 and 2012, respectively. The effective tax rate for the six months ended June 30, 2013 was 42.4%, compared to an effective tax rate of 41.1% for the same period in 2012. The increase in the effective tax rate primarily relates to the release of a valuation allowance on a state income tax carryforward during the six months ended June 30, 2012.
Earnings per share and Non-GAAP earnings per share – Earnings per share from continuing operations were $0.45 and $0.42 per diluted share for the six months ended June 30, 2013 and 2012, respectively, and Non-GAAP earnings per share were $0.74 and $0.64 per diluted share for the six months ended June 30, 2013 and 2012, respectively. For the six months ended June 30, 2012, the after tax gain related to the gain on sale of the Company’s wealth management business that was sold in 2011 has been excluded from Non-GAAP earnings. The Company believes Non-GAAP earnings and Non-GAAP earnings per diluted share illustrate the impact of certain non-cash charges and credits to income from continuing operations and are a useful performance measure for the Company, its analysts and its stockholders. Management uses these performance measures to evaluate CBIZ’s business, including ongoing performance and the allocation of resources. Non-GAAP earnings and Non-GAAP earnings per diluted share are provided in addition to the presentation of GAAP measures and should not be regarded as a replacement or alternative of performance under GAAP. The following is a reconciliation of income from continuing operations to Non-GAAP earnings from operations and diluted earnings per share from continuing operations to Non-GAAP earnings per diluted share for the six months ended June 30, 2013 and 2012.
Adjustment for gain on sale of operations
Non-cash interest on convertible note
Adjustments to contingent earnouts
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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.
The growth in same-unit revenue was approximately 90% attributable stronger performance in the units that provide certain national services and 10% attributable to the traditional accounting and tax services. Growth in the national units was primarily due to increased project work in valuation services as well as in the federal and state governmental health care compliance industry. The growth in the traditional accounting and tax services was due to a 1.2% increase in revenue per hour for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. Revenue from acquired businesses was the result of the acquisition of PHBV, which occurred on December 31, 2012.
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 $81.0 million and $69.7 million for the six months ended June 30, 2013 and 2012, respectively. The increase in ASA fees was the result of acquisitions and same unit improvements from groups performing national services.
The largest components of operating expenses for the Financial Services practice group are personnel costs, occupancy costs, and travel and related costs which represented 89.1% and 89.4% of total operating expenses for the six months ended June 30, 2013 and 2012, respectively. Personnel costs increased $13.0 million during the six months ended June 30, 2013 compared to the same period in 2012, and represented 63.5% and 63.8% of revenue for the six months ended June 30, 2013 and 2012, respectively. The increase was comprised of an increase in same-unit personnel costs of $3.5 million due to increased headcount, particularly at the National Units and, to a lesser extent, an increase in incentive compensation costs due to improved overall profitability, as well as an increase of $9.5 million associated with the acquisition of PHBV. Occupancy costs are relatively fixed in nature and were $12.8 million and $12.1 million, or 5.0% and 5.2% of revenue, for the six months ended June 30, 2013 and 2012, respectively. Travel and related costs were $7.7 million and $5.5 million, or 3.0% and 2.4% of total revenue, for the six months ended June 30, 2013 and 2012, respectively. The increase in travel and related costs was due to increased cost incurred for clients (which is billed to clients), client development, professional staff training efforts and from the impact of acquisitions. In addition to the expenses discussed above, professional service costs were $3.6 million and $1.5 million, or 1.4% and 0.6% of total revenue, for the six months ended June 30, 2013 and 2012, respectively. The increase in professional service costs was associated with outside services related to client engagements for our federal and state governmental health care contracts.
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The increase in same-unit revenue was attributable to several offsetting factors. Property and casualty revenues increased $0.6 million due to better pricing throughout the industry as well as strong performance within the specialty program businesses. Payroll business revenues increased $0.6 million primarily due to pricing increases for core services. Retirement consulting revenues increased $0.5 million 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 $1.6 million due to several large policies that were placed in the first half of 2012 that did not reoccur in 2013.
Strategic Employee Benefit Services, an employee benefits client list in the Chicago, Illinois market that was acquired in the first quarter of 2012;
Associated Insurance Agents, a property and casualty and employee benefits business located in Minneapolis, Minnesota, that was acquired in the second quarter of 2013.
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 82.4% and 83.2% of total operating expenses for the six months ended June 30, 2013 and 2012, respectively. Excluding costs related to the acquired businesses of $5.8 million, personnel costs decreased approximately $0.8 million, primarily due to lower external sales commissions related to the decline in life insurance revenues discussed above, as well as certain severance costs incurred in the first quarter of 2012 that did not reoccur. Occupancy costs are relatively fixed and were $5.1 million for the six months ended June 30, 2013 and 2012, excluding the costs of the acquired businesses of $0.5 million in 2013.
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The increase in same-unit revenue was primarily attributable to services provided to CBIZ’s largest client, Edward Jones, under its cost-plus contract. The increase in revenue of approximately $0.4 was a result of wage increases issued during the past year. This increase in revenue was partially offset by a decrease in revenue in the health consulting business.
The largest components of operating expenses for the National Practices group are personnel costs, occupancy costs, and travel and related costs representing 94.0% and 94.5% of total operating expenses for the six months ended June 30, 2013 and 2012, respectively. Personnel costs for the six months ended June 30, 2012 increased by $0.3 million compared to the same period a year ago, primarily due to merit increases for current employees supporting the Edward Jones business. Occupancy costs and travel and related costs were flat for the six months ended June 30, 2013 and 2012.
Financial Condition
Total assets were $980.2 million at June 30, 2013, an increase of $9.3 million versus December 31, 2012. Current assets of $434.4 million exceeded current liabilities of $246.6 million by $187.8 million at June 30, 2013.
Cash and cash equivalents increased by $0.3 million to $1.2 million at June 30, 2013 from December 31, 2012. Restricted cash was $28.2 million at June 30, 2013, an increase of $8.6 million from December 31, 2012. Restricted cash represents those funds held in connection with CBIZ’s Financial 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 $161.4 million at June 30, 2013, an increase of $24.3 million from December 31, 2012, and days sales outstanding (“DSO”) from continuing operations was 83 days, 77 days and 83 days at June 30, 2013, December 31, 2012 and June 30, 2012, 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.
Other current assets were $13.0 million and $10.7 million at June 30, 2013 and December 31, 2012, 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, 2012.
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Property and equipment, net, increased by $0.4 million to $18.2 million at June 30, 2012 from $17.8 million at December 31, 2012. The increase is primarily the result of capital expenditures of $2.8 million, partially offset by depreciation and amortization expense 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 $4.0 million at June 30, 2013 from December 31, 2012. This increase for the six months ended June 30, 2013 is comprised of additions to goodwill of $7.4 million and additions to intangible assets of $3.6 million resulting from acquisitions and contingent purchase price adjustments, partially offset by $7.0 million of amortization expense.
Assets of the deferred compensation plan represent participant deferral accounts and are directly offset by deferred compensation plan obligations. Assets of the deferred compensation plan were $45.0 million and $39.8 million at June 30, 2013 and December 31, 2012, respectively. The increase in assets of the deferred compensation plan of $5.2 million consisted of net participant contributions of $2.6 million and an increase in the fair value of the investments of $2.6 million for the six months ended June 30, 2013. The plan is described in further detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
The accounts payable balances of $40.8 million and $35.4 million at June 30, 2013 and December 31, 2012, respectively, reflect amounts due to suppliers and vendors; balances fluctuate during the year based on the timing of cash payments. Accrued personnel costs were $30.2 million and $34.9 million at June 30, 2013 and December 31, 2012, 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 $1.3 million to $4.9 million at June 30, 2013 from $6.2 million at December 31, 2012. Notes payable balances and activity are primarily guaranteed purchase price payments and contingent proceeds earned by previously acquired businesses. During the six months ended June 30, 2013, payments on guaranteed purchase price and notes attributable to contingent proceeds relating to previously acquired businesses were approximately $0.6 million. In addition, a purchase price adjustment related to a prior acquisition was made, which reduced notes payable by $0.7 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 $4.2 million at June 30, 2013 from December 31, 2012 due to an increase of $4.6 million from current year business acquisitions, adjustments of $0.9 million to the fair value of the contingency purchase price liabilities and $0.1 million in net present value adjustments to the liabilities. These increases were partially offset by payments of $1.3 million.
Other liabilities (current and non-current) increased by $6.6 million to $31.1 million at June 30, 2013 from $24.5 million at December 31, 2012. The increase was primarily attributable to an increase of $2.2 million related to the self-funded health insurance plan due to seasonality of claims experience, an increase of $1.5 million related to the accrued lease liability resulting from business acquisitions and new lease agreements at certain locations and additions to the legal and consulting accruals of $0.9 million for legal proceedings as described in Note 6 to the accompanying consolidated financial statements. These increases were partially offset by a reduction in unearned revenues of $0.4 million and payments made that reduced the restructuring accrual of $0.2 million.
Income taxes payable—current was $8.6 million and $1.4 million at June 30, 2013 and December 31, 2012, respectively. Income taxes payable—current at June 30, 2013 and December 31, 2012 primarily represents the provision for current income taxes less estimated tax payments. Income taxes payable – non-current at June 30, 2013 and December 31, 2012 was $4.3 million and $4.0 million, respectively, and represents the accrual for uncertain tax positions.
CBIZ’s 2006 Notes and 2010 Notes are carried at face value less unamortized discount. The $1.4 million increase in the carrying value of the convertible notes at June 30, 2013 compared to December 31, 2012 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.
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Bank debt for amounts due on CBIZ’s credit facility decreased $4.9 million to $204.0 million at June 30, 2013 from $208.9 million at December 31, 2012. This decrease was primarily attributable to funds provided by operating activities of $13.9 million for the six months ended June 30, 2013, partially offset by payments of $5.2 million related to acquisitions and earnouts and $2.7 million of capital expenditures.
Stockholders’ equity increased by $29.5 million to $324.7 million at June 30, 2013 from $295.2 million at December 31, 2012. The increase was primarily attributable to net income of $27.5 million, CBIZ’s stock award programs, which contributed $2.0 million, and the issuance of $0.9 million in common shares related to business acquisitions and contingent payments related to prior acquisitions. These increases were partially offset by $0.8 million related to the repurchase of 0.1 million shares of CBIZ common stock in conjunction with the settlement of restricted stock transactions and $0.1 million of expense to adjust the fair value of CBIZ’s investments in corporate and municipal bonds which is included in accumulated other comprehensive loss.
Liquidity and Capital Resources
CBIZ’s principal source of net operating cash is derived from the collection of fees and commissions for professional services and products rendered to its clients. CBIZ supplements net operating cash with a $275 million unsecured credit facility and $130 million in 2010 Notes.
CBIZ maintains a $275 million unsecured credit facility with Bank of America as agent bank for a group of seven participating banks. At June 30, 2013, CBIZ had $204.0 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 $60.4 million at June 30, 2013. 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.
The credit facility also allows for the allocation of funds for strategic initiatives, including acquisitions and the repurchase of CBIZ common stock. Under the credit facility, CBIZ is required to meet certain financial covenants with respect to (i) minimum net worth; (ii) maximum total and senior leverage ratios; and (iii) a minimum fixed charge coverage ratio. CBIZ believes it is in compliance with its covenants as of June 30, 2013. CBIZ’s ability to service its debt and to fund strategic initiatives will depend upon its ability to generate cash in the future.
Subject to the closing of the sale of MMP, the estimated proceeds of $145 million will be used to fund the repurchase of approximately 3.8 million shares from Westbury as well as pay down the outstanding debt on the unsecured credit facility.
In addition to the debt instruments previously mentioned, CBIZ may obtain, at a future date, additional funding by offering securities or debt through public or private markets.
Sources and Uses of Cash
The following table summarizes CBIZ’s cash flows from operating, investing and financing activities for the six months ended June 30, 2013 and 2012 (in thousands):
Total cash provided by (used in):
Operating activities
Investing activities
Financing activities
Increase in cash and cash equivalents
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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, 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 $14.3 million. Partially offsetting these sources of cash were changes in working capital items of $24.8 million and a net gain on the sale of operations and discontinued operations transactions of $5.2 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 $2.1 million.
For the six months ended June 30, 2012, net cash provided by operating activities was $25.6 million and primarily consisted of net income of $24.6 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 $13.6 million and a net gain on the sale of operations and discontinued operations transactions of $6.3 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 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 $6.6 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.
During the six months ended June 30, 2013, investing sources of cash primarily consisted of net activities related to funds held for clients of $37.8 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.
Cash provided by investing activities during the six months ended June 30, 2012 primarily consisted of net activity related to funds held for clients of $26.6 million and proceeds from the sale of divested and discontinued operations of $1.1 million. These sources of cash were partially offset by $21.1 million of net cash used for acquisitions and contingent payments on prior acquisitions and capital expenditures of $0.6 million. Cash used by discontinued operations was $1.4 million.
Financing Activities
CBIZ’s financing cash flows typically consist of net borrowing and payment activity from the credit facility, the issuance and repayment of debt instruments, repurchases of CBIZ common stock, 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, 2013 was primarily due to net activities related to 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.
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Net cash used in financing activities during the six months ended June 30, 2012 was primarily due to net activities related to client fund obligations of $26.5 million, $4.5 million used to repurchase shares of CBIZ common stock, $1.8 million in payments for contingent consideration included as part of the initial measurement of prior business acquisitions, and payment on notes payable of $0.2 million. These uses of cash were partially offset by $4.2 million in net borrowings from the credit facility.
Obligations and Commitments
CBIZ’s aggregate amount of future obligations at June 30, 2013 for the next five years and thereafter is set forth below (in thousands):
Convertible notes (2)
Interest on convertible notes
Credit facility (3)
Income taxes payable (4)
Notes payable
Contingent purchase price liabilities(5)
Restructuring lease obligations (6)
Non-cancelable operating lease obligations (6)
Letters of credit in lieu of cash security deposits
Performance guarantees for non-consolidated affiliates
License bonds and other letters of credit
Total
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, 2012), 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, 2013 and December 31, 2012. 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.
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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, 2013 and December 31, 2012. In addition, CBIZ provides license bonds to various state agencies to meet certain licensing requirements. The amount of license bonds outstanding at June 30, 2013 and December 31, 2012 totaled $2.0 million and $2.7 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, 2013, 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 and 2012, CBIZ had an interest rate swap with a $40.0 million notional amount, of which $15 million will expire in June 2014 and the remaining $25 million will expire in June 2015. Management will continue to evaluate the potential use of interest rate swaps as it deems appropriate under certain operating and market conditions. CBIZ does not enter into derivative instruments for trading or speculative purposes.
CBIZ carries $130.0 million in 2010 Notes bearing a fixed interest rate of 4.875% that mature on October 1, 2015 and may not be converted before July 31, 2015. CBIZ believes the fixed nature of these borrowings mitigates its interest rate risk.
In connection with payroll services provided to clients, CBIZ collects funds from its clients’ accounts in advance of paying these client obligations. These funds held for clients are segregated and invested in accordance with the Company’s investment policy, which requires all investments carry an investment grade rating at the time of initial investment. The interest income on these investments mitigates the interest rate risk for the borrowing costs of CBIZ’s credit facility, as the rates on both the investments and the outstanding borrowings against the credit facility are based on market conditions.
Critical Accounting Policies
The SEC defines critical accounting policies as those that are most important to the portrayal of a company’s financial condition and results and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. There have been no material changes to CBIZ’s critical accounting policies from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading Critical Accounting Policies in the Annual Report on Form 10-K for the year ended December 31, 2012.
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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, 2012. There was no goodwill impairment during the year ended December 31, 2012 or during the six months ended June 30, 2013.
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, 2013.
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 close the sale of its Medical Management Professionals business to Zotec Partners, LLC, including the satisfaction of customary closing conditions and regulatory approvals; CBIZ’s ability to close the Westbury stock purchase agreement; the impact of the disposition and stock purchase on CBIZ’s stock price; the anticipated benefits of the disposition and stock purchase on CBIZ’s financial results, business performance, and/or product offerings; 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, 2012, and in Part II, Item 1A of this Quarterly Report on Form 10-Q under the heading “Risk Factors.” Except as required by the federal securities laws, CBIZ undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures the Company makes on related subjects in its filings with the SEC, such as quarterly, periodic and annual reports.
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CBIZ’s floating rate debt under its credit facility exposes the Company to interest rate risk. Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. A change in the Federal Funds Rate, or the reference rate set by Bank of America, N.A., would affect the rate at which CBIZ could borrow funds under its credit facility. CBIZ’s balance outstanding under its credit facility at June 30, 2013 was $204.0 million. If market rates were to increase or decrease 100 basis points from the levels at June 30, 2013, interest expense would increase or decrease approximately $1.6 million annually.
CBIZ does not engage in trading market risk sensitive instruments. CBIZ periodically uses interest rate swaps to manage interest rate risk exposure. The interest rate swaps effectively modify the Company’s exposure to interest rate risk, primarily through converting portions of its 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 $40.0 million notional amount, of which $15 million will expire in June 2014 and the remaining $25 million will expire in June 2015. Management will continue to evaluate the potential use of interest rate swaps as it deems appropriate under certain operating and market conditions.
In connection with CBIZ’s payroll business, funds held for clients are segregated and invested in short-term investments, such as corporate and municipal bonds. In accordance with the Company’s investment policy, all investments carry an investment grade rating at the time of the initial investment. At each respective balance sheet date, these investments are adjusted to fair value with fair value adjustments being recorded to other comprehensive income or loss and reflected on the consolidated statements of comprehensive income for the respective period. If an adjustment is deemed to be other-than-temporarily impaired due to credit loss, then the adjustment is recorded to “Other income (expense), net” on the consolidated statements of comprehensive income. See Notes 7 and 8 to the accompanying consolidated financial statements for further discussion regarding these investments and the related fair value assessments.
(a) Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management has evaluated the effectiveness of the Company’s disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this report. This evaluation (“Controls Evaluation”) was done with the participation of CBIZ’s Chairman and Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Disclosure Controls are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the Company in the reports that CBIZ files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed by CBIZ in the reports that it files under the Exchange Act is accumulated and communicated to management, including the CEO and CFO as appropriate, to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Controls
Management, including the Company’s CEO and CFO, does not expect that its Disclosure Controls or its internal control over financial reporting (“Internal Controls”) will prevent all error and all fraud. Although CBIZ’s Disclosure Controls are designed to provide reasonable assurance of achieving their objective, a control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within CBIZ have been detected. These inherent limitations
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include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of a control. A design of a control system is also based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Conclusions
The Company’s Disclosure Controls are designed to provide reasonable assurance of achieving their objectives and, based upon the Controls Evaluation, the Company’s CEO and CFO have concluded that as of the end of the period covered by this report, CBIZ’s Disclosure Controls were effective at that reasonable assurance level.
(b) Internal Control over Financial Reporting
There was no change in the Company’s Internal Controls that occurred during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, CBIZ’s Internal Controls.
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PART II – OTHER INFORMATION
Information regarding certain legal proceedings in which CBIZ is involved is incorporated by reference from Note 6 – Commitments and Contingencies, Notes to the Company’s Consolidated Financial Statements in Part I, Item I of this Form 10-Q.
In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the SEC and the additional risk factors below. These risks could materially and adversely affect the consolidated financial condition, results of operations and cash flows of CBIZ.
The proposed disposition of our Medical Management Professionals business is subject to closing conditions that may not be satisfied.
On July 26, 2013, the Company, through its subsidiary CBIZ Operations, Inc., an Ohio Corporation (“CBIZ Operations”), entered into a stock purchase agreement with Zotec Partners, LLC, an Indiana limited liability company, to sell all of the issued and outstanding capital stock of each of CBIZ Medical Management Professionals, Inc., an Ohio corporation, and CBIZ Medical Management, Inc., a North Carolina corporation, and substantially all of the stock of their subsidiary companies, collectively consisting of all of the Company’s Medical Management Professionals ongoing operations and business (“MMP”). The transaction is subject to a number of conditions that must be satisfied before it can be completed, and if those conditions are not satisfied or waived, the sale may not be completed.
The proposed purchase of shares of our common stock from Westbury (Bermuda) Ltd. is subject to closing conditions that may not be satisfied, including the prior close of the disposition of our MMP business, which may not occur.
On July 26, 2013, the Company entered into a stock purchase agreement (the “Purchase Agreement”) with Westbury (Bermuda) Ltd., a Bermuda exempted company (“Westbury”), to purchase from Westbury 3,858,334.5 shares of the Company’s common stock. The transaction is subject to a number of conditions that must be satisfied before it can be completed, including the prior close of the disposition of our MMP business, and if those conditions are not satisfied or waived, the purchase may not be completed. The Purchase Agreement may be terminated if the disposition of our MMP business is not completed on or prior to November 1, 2013.
Failure to complete the disposition of our MMP business and the purchase of shares of our common stock from Westbury could negatively impact our stock price and the future business and financial results of MMP.
If the sale of our MMP business and/or the purchase of shares of our common stock from Westbury are not completed, our ongoing business and financial results of MMP may be adversely affected and we will be subject to a number of risks, including the following:
we may incur certain costs relating to the transactions, whether or not the transactions are completed;
matters relating the transactions may require substantial commitments of time and resources by our management, which could otherwise have been devoted to other opportunities that may have been beneficial to us; and
any failure to complete the transactions could subject us to litigation.
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If the disposition of our MMP business and/or the purchase of our common stock from Westbury are not completed, these risks may materialize and may adversely affect our business, financial results and stock price.
(a) Recent sales of unregistered shares
During the second quarter of 2013, approximately 37,000 shares of CBIZ common stock were issued to former owners of businesses that were acquired by CBIZ prior to 2013. The above referenced shares were issued in transactions not involving a public offering in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act. The persons to whom the shares were issued had access to full information about distribution. The certificates for the shares contain a restrictive legend advising that the shares may not be offered for sale, sold, or otherwise transferred without having first been registered under the Securities Act or pursuant to an exemption from the Securities Act. See Note 12 of the accompanying consolidated financial statements for more information regarding acquisitions.
(c) Issuer purchases of equity securities
Periodically, CBIZ’s Board of Directors authorizes a Share Repurchase Plan, which allows the Company to purchase shares of its common stock in the open market or in a privately negotiated transaction according to SEC rules. On February 22, 2012, CBIZ’s Board of Directors authorized a Share Repurchase Plan that authorized the purchase of up to 5.0 million shares of CBIZ common stock. The Share Repurchase Plan was effective beginning April 1, 2012 and expired one year from the effective date. Effective April 1, 2013, CBIZ’s Board of Directors re-authorized the Share Repurchase Plan authorizing the purchase of up to 5.0 million shares of CBIZ common stock. The repurchase plan does not obligate CBIZ to acquire any specific number of shares and may be suspended at any time.
In addition, pursuant to an agreement (the “Westbury Agreement”) entered into on September 14, 2010 by CBIZ with its largest shareholder, Westbury (Bermuda) Ltd. (“Westbury”), a company organized by CBIZ founder Michael G. DeGroote, CBIZ purchased an option for $5.0 million, which expires on September 30, 2013, to purchase up to approximately 7.7 million shares of CBIZ’s common stock at a price of $7.25 per share (the “Option”), which constitutes the remaining shares of CBIZ’s common stock held by Westbury.
On July 26, 2013, CBIZ entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Westbury, pursuant to which CBIZ agreed to purchase from Westbury 3,858,334.5 shares of CBIZ’s common stock (the “Purchased Shares”), pursuant to the Westbury Agreement. Following the completion of the purchase of the Purchased Shares under the Purchase Agreement, the remaining shares subject to the Westbury Agreement (the “Remaining Shares”), in the amount of 3,858,334.5 shares, will remain subject to the Westbury Agreement for the remainder of its term. CBIZ agreed to pay Westbury $25,657,924 for the Purchased Shares, which represents a price per share of $6.65. The transaction is subject to a number of conditions that must be satisfied before it can be completed, including the prior close of the disposition of CBIZ’s Medical Management Professionals business, which is currently expected to occur on September 1, 2013. The Purchase Agreement may be terminated if the disposition of CBIZ’s Medical Management Professionals business is not completed on or prior to November 1, 2013.
The Option on the Remaining Shares will continue until its expiration on September 30, 2013 and may be exercised, in whole or in part, at any time on or before the expiration date. The Remaining Shares will continue to be held in a custody account subject to a custody agreement previously established pursuant to the Westbury Agreement, until the expiration of the Option.
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Shares repurchased during the three months ended June 30, 2013 (reported on a trade-date basis) are summarized in the table below (in thousands, except per share data).
Second Quarter Purchases (1)
April 1 – April 30, 2013
May 1 – May 31, 2013
June 1 – June 30, 2013
Total second quarter purchases
According to the terms of CBIZ’s credit facility, CBIZ is not permitted to declare or make any dividend payments, other than dividend payments made by one of its wholly owned subsidiaries to the parent company. See Note 8 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2012 for a description of working capital restrictions and limitations upon the payment of dividends.
Not applicable.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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