UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2014
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, 2014
CBIZ, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I.
Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2014 and 2013
Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II.
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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
Convertible notes, net – current
Contingent purchase price liability – current
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
Contingent purchase price liability
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
3
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, net
Total other income (expense), net
Income from continuing operations before income tax expense
Income tax expense
Income from continuing operations after income tax expense
(Loss) income from discontinued operations, net of tax
(Loss) gain on disposal of discontinued operations, net of tax
Net income
Earnings (loss) per share:
Basic:
Continuing operations
Discontinued operations
Diluted:
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
Comprehensive Income:
Other comprehensive income (loss), net of tax
Comprehensive income
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (income) from discontinued operations, net of tax
Loss (gain) on disposal of discontinued operations, net of tax
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
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
(Payments) proceeds from sales of divested and discontinued operations
Net decrease in funds held for clients
Additions to property and equipment, net
Payments on notes receivable
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 guaranteed and contingent consideration of acquisitions
Excess tax benefit from exercise of stock awards
Payment of acquired debt
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
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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, 2014 and December 31, 2013, the consolidated results of their operations for the three and six months ended June 30, 2014 and 2013, and the cash flows for the six months ended June 30, 2014 and 2013. 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, 2013.
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, 2013 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.
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, 2013.
New Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11 (“ASU 2013-11”) “Income Taxes (Topic 740): Presentation of an Unrecognized
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. ASU 2013-11 states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward. The exception to this treatment is as follows: to the extent an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date or if the entity is not required to use and does not intend to use the deferred tax asset, then the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 does not require any additional recurring disclosures. Effective January 1, 2014, CBIZ adopted ASU 2013-11 and as a result reclassified approximately $1.2 million of unrecognized tax benefits to reduce the company’s deferred tax assets. There was no impact to the consolidated statements of comprehensive income as a result of the adoption of ASU 2013-11.
In April 2014, the FASB issued ASU No. 2014-08 (“ASU 2014-08”), “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of an Entity.” The amendments in ASU 2014-08 change the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The update is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014.
In May 2014, the FASB issued ASU No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. ASU 2014-09 will require entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 31, 2016, including interim periods. CBIZ will have the option to apply the provisions of ASU 2014-09 either retrospectively to each reporting period presented, or retrospectively with the cumulative effect of applying this standard at the date of initial application. Early adoption is not permitted. CBIZ is currently evaluating the method and impact of the adoption of ASU 2014-09 will have on CBIZ’s consolidated financial statements.
Accounts receivable balances at June 30, 2014 and December 31, 2013 were as follows (in thousands):
Trade accounts receivable
Unbilled revenue
Total accounts receivable
Allowance for doubtful accounts
7
The components of goodwill and other intangible assets, net at June 30, 2014 and December 31, 2013 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
Depreciation and amortization expense for property and equipment and intangible assets for the three and six months ended June 30, 2014 and 2013 was as follows (in thousands):
Total depreciation and amortization expense
CBIZ had two primary debt arrangements at June 30, 2014 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, 2013 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. The holders of the 2010 Notes may convert their 2010 Notes beginning July 1, 2015, or earlier, if the market price per share of CBIZ common stock exceeds 135% of the initial conversion price of $7.41 for at least 20 days during the period of 30 consecutive trading days ending on the final trading day of the preceding quarter.
8
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, 2014 and December 31, 2013 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, 2014, the unamortized discount had a remaining amortization period of approximately 15 months.
2006 Convertible Senior Subordinated Notes
At June 30, 2014, 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.
During the three and six months ended June 30, 2014 and 2013, 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 $81.2 million and $48.5 million at June 30, 2014 and December 31, 2013, respectively. Rates for the six months ended June 30, 2014 and 2013 were as follows:
Weighted average rates
Range of effective rates
CBIZ had approximately $58.6 million of available funds under the credit facility at June 30, 2014, 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 is in compliance with its debt covenants at June 30, 2014.
9
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 at June 30, 2014 and December 31, 2013. In addition, CBIZ provides license bonds to various state agencies to meet certain licensing requirements. The amount of license bonds outstanding at June 30, 2014 and December 31, 2013 was $1.8 million and $2.4 million, respectively.
CBIZ acted as guarantor on various letters of credit for a CPA firm with which it has an affiliation, which totaled $1.9 million at June 30, 2014 and December 31, 2013. CBIZ has recognized a liability for the fair value of the obligations undertaken in issuing these guarantees, 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.
10
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.
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. Discovery is proceeding in the remaining matters (except Facciola, which is on appeal) and no trial dates have been set.
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 in 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.
In November 2013, the Court granted the CBIZ Parties motion for summary judgment and the CBIZ Parties were dismissed from the lawsuit. 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 matter.
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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.
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 $33.5 million and $29.0 million at June 30, 2014 and December 31, 2013, respectively. All bonds are investment grade and are classified as available-for-sale. These bonds have maturity or callable dates ranging from August 2014 through November 2019, 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, 2014 and the twelve months ended December 31, 2013 (in thousands):
Fair value at beginning of period
Purchases
Sales
Maturities and calls
Increase (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, 2013 for further discussion on CBIZ’s interest rate swaps.
12
At June 30, 2014 and December 31, 2013, 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, 2014 and December 31, 2013 (in thousands).
Balance Sheet
Location
Interest rate swap (1)
The swap was deemed to be effective for the three and six months ended June 30, 2014 and 2013. 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, 2014 and 2013 (in thousands):
Interest rate swap
The following table summarizes CBIZ’s assets and liabilities at June 30, 2014 and December 31, 2013 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
13
During the six months ended June 30, 2014 and 2013, 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, 2014 and 2013 (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 term of three to six years. 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, 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. 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, 2014 and December 31, 2013 (in thousands):
2006 Convertible Notes
2010 Convertible Notes
The fair value of CBIZ’s 2006 Notes and 2010 Notes 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.
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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, 2014 and 2013 (in thousands):
Net unrealized gain (loss) on available-for-sale securities, net of income taxes (1)
Net unrealized gain on interest rate swaps, net of income taxes (2)
Foreign currency translation
Total other comprehensive income (loss)
Accumulated other comprehensive loss, net of tax, was approximately $0.6 million and $0.7 million at June 30, 2014 and December 31, 2013, respectively. 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.
Effective May 15, 2014, CBIZ shareholders approved a new plan, the CBIZ, Inc. 2014 Stock Incentive Plan (“2014 Plan”). Under the 2014 Plan, a maximum of 9.6 million stock options, restricted stock awards or other stock-based compensation awards may be granted. The 2014 Plan is in addition to the 2002 Amended and Restated CBIZ, Inc. Stock Incentive Plan (“2002 Plan”), of which CBIZ has granted various stock-based awards through June 30, 2014. 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, 2014 and 2013 was as follows (in thousands):
Stock options
Restricted stock awards
Total stock-based compensation expense
15
Stock award activity during the six months ended June 30, 2014 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, 2014
Exercisable at June 30, 2014
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, 2014 and 2013 (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)
Convertible senior subordinated notes (3)
Diluted weighted average common shares outstanding
Basic earnings per share from continuing operations
Diluted earnings per share from continuing operations
16
During the six months ended June 30, 2014, CBIZ acquired substantially all of the assets of four businesses. Centric Insurance Agency (“Centric”), located in New Providence, New Jersey, is an insurance broker providing property and casualty insurance, with a specialty in education and public schools. Clearview National Partners, LLC (“Clearview”), located in Waltham, Massachusetts, is a specialized employee benefits broker focused on providing employee benefit solutions to clients with more than 100 employees. Lewis Birch & Richardo, LLC (“LBR”), located in Tampa Bay, Florida, is a professional tax, accounting and consulting service provider with significant experience and expertise in matrimonial and family law litigation support, not-for-profit entities and healthcare provider services. Tegrit Group (“Tegrit”), based in Akron, Ohio, is a national provider of actuarial consulting and retirement plan administration. The operating results of Centric, Clearview and Tegrit are reported in the Employee Services practice group and the operating results of LBR are reported in the Financial Services practice group. Aggregate consideration for these acquisitions consisted of approximately $24.6 million in cash, $2.9 million in CBIZ common stock, and $12.0 million in contingent consideration.
The aggregate purchase price for these acquisitions was allocated as follows (in thousands):
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash
Accounts receivable
Work in process
Identifiable intangible assets
Current liabilities
Total identifiable net assets
Aggregate purchase price
Under the terms of each of the acquisition agreements, 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 arrangements is $13.5 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 arrangements was $12.0 million, which was recorded in the consolidated balance sheet at June 30, 2014. The goodwill of $26.3 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 businesses within the CBIZ organization, including cross-selling opportunities expected with the Company’s Employee Services and Financial Services practice groups, to help strengthen the Company’s existing service offerings and expand market position. Goodwill recognized is deductible for income tax purposes.
In addition, CBIZ paid $0 and $1.5 million in cash during the three and six months ended June 30, 2014 as contingent earnouts for previous acquisitions. During the three and six months ended June 30, 2014, CBIZ also reduced the fair value of the contingent purchase price liability related to CBIZ’s prior acquisitions by $2.1 million and $3.0 million due to lower than originally projected future results of the acquired businesses. These reductions are included in “Other income, net” in the consolidated statements of comprehensive income.
During the six months ended June 30, 2013, CBIZ acquired Associated Insurance Agents (“AIA”) AIA, located in Minneapolis, Minnesota, 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. 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.
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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, 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.
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, 2014 and 2013, respectively, were as follows (in thousands):
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.”
Discontinued Operations
Revenue and results from operations of discontinued operations are separately reported as “(Loss) income from operations of discontinued operations, net of tax” in the consolidated statements of comprehensive income. For the six months ended June 30, 2014, the loss on operations of discontinued operations represents the results from the Company’s property tax business located in Leawood, Kansas that was discontinued in December of 2013 and subsequently sold on June 1, 2014. For the six months ended June 30, 2013, the income from operations of discontinued operations relates to the results of CBIZ’s Medical Management Professionals’ practice group (“MMP”) that was discontinued and sold in August of 2013, as well as the results of the Leawood, Kansas property tax business.
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Revenue and results from operations of discontinued operations for the three and six months ended June 30, 2014 and 2013 were as follows (in thousands):
(Loss) income from discontinued operations before income tax
Income tax (benefit) expense
Losses and gains from the sale of discontinued operations are recorded as “(Loss) 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 “(Loss) gain on disposal of discontinued operations, net of tax” in the period they are earned. During the six months ended June 30, 2014, CBIZ sold its property tax business located in Leawood, Kansas. In addition, a loss was recorded representing the finalization of the working capital adjustment related to the August 2013 sale of MMP. The gains recorded in the six months ended June 30, 2013 related to contingent proceeds on sales of discontinued operations that occurred in prior periods, and for the three and six months ended June 30, 2013, a deferred tax benefit of $1.9 million was recorded for the estimated difference between the book and tax basis related to the sale of MMP.
For the three and six months ended June 30, 2014 and 2013, losses and gains on the disposal of discontinued operations were as follows (in thousands):
(Loss) gain on disposal of discontinued operations, before income tax
Income tax expense (benefit)
At June 30, 2014 and December 31, 2013, 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
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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.
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.
•
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, 2013. 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.
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Segment information for the three and six months ended June 30, 2014 and 2013 was as follows (in thousands):
Corporate general & admin
Operating income (loss)
Other (expense) income, net
Total other (expense) income
Income (loss) from continuing operations before income tax expense
Other income (expense), net
Total other income (expense)
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On July 7, 2014, CBIZ repurchased $17.4 million principal amount of its outstanding 2010 Notes for cash in a privately negotiated transaction. This transaction was settled on July 10, 2014, resulting in a non-operating loss of approximately $0.8 million to be recorded in the third quarter of 2014. As a result of this repurchase, interest expense for the year ended December 31, 2014 is expected to decrease approximately $0.4 million and the fully diluted share count is expected to decrease by approximately 380,000 shares.
Effective July 28, 2014, CBIZ replaced its $275 million unsecured credit facility with a new $400 million unsecured credit facility with Bank of America as agent for a group of eight participating banks. The new credit facility, which expires in July 2019, will enable the Company to lower its borrowing costs and simplify its capital structure. The new credit facility will provide CBIZ the flexibility to refinance its 2010 Notes due October 1, 2015, and will also allow for the allocation of funds for strategic initiatives, including acquisitions and the repurchase of CBIZ common stock.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to “CBIZ” or the “Company” shall mean CBIZ, Inc., a Delaware corporation, and its operating subsidiaries.
The following discussion is intended to assist in the understanding of CBIZ’s financial position at June 30, 2014 and December 31, 2013, results of operations for the three and six months ended June 30, 2014 and 2013, and cash flows for the six months ended June 30, 2014 and 2013, and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. This discussion and analysis contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q and in “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2013.
Overview
CBIZ provides professional business services, products and solutions that help its clients grow and succeed by better managing their finances and employees. These services are provided to businesses of various sizes, as well as individuals, governmental entities and not-for-profit enterprises throughout the United States and parts of Canada. CBIZ delivers its integrated services through three practice groups: Financial Services, Employee Services, and National Practices. See Note 14 to the accompanying consolidated financial statements for a general description of services provided by each practice group.
See the Annual Report on Form 10-K for the year ended December 31, 2013 for further discussion of CBIZ’s business and strategies, as well as the external relationships and regulatory factors that currently impact the Company’s operations.
Executive Summary
Revenue for the three months ended June 30, 2014 increased by 5.0% to $180.9 million from $172.2 million for the comparable period in 2013. Revenue from newly acquired operations contributed $5.0 million, or 2.9%, to the growth in revenue, and same-unit revenue contributed $3.7 million, or 2.1%. Revenue for the six months ended June 30, 2014 increased by 4.4% to $389.8 million from $373.4 million for the comparable period in 2013. Revenue from newly acquired operations, net of divestitures, contributed $9.8 million, or 2.6%, and same-unit revenue contributed $6.6 to the growth in revenue, or 1.8%.
Earnings per share from continuing operations was $0.12 per diluted share for the three months ended June 30, 2014 and $0.11 per diluted share for the comparable period in 2013. For the six months ended June 30, 2014 and 2013, earnings per diluted share from continuing operations were $0.46. Non-GAAP earnings per diluted share were $0.22 and $0.25 for the three months ended June 30, 2014 and 2013, respectively, and $0.68 and $0.75 for the six months ended June 30, 2014 and 2013, respectively. CBIZ believes Non-GAAP earnings per diluted share illustrates the impact of certain non-cash charges and credits to income from continuing operations and is a useful measure for the Company, its analysts and its stockholders. Non-GAAP earnings per diluted share is a measurement prepared on a basis other than generally accepted accounting principles (“GAAP”). As such, the Company has included this data and has provided a reconciliation to the nearest GAAP measurement, “income per diluted share from continuing operations”. Reconciliations for the three and six months ended June 30, 2014 and 2013 are provided in the “Results of Operations – Continuing Operations” section that follows.
During the six months ended June 30, 2014, CBIZ acquired substantially all of the assets of four businesses: Clearview National Partners, LLC (“Clearview”), Centric Insurance Agency (“Centric”), Lewis Birch & Richardo, LLC (“LBR”), and the Tegrit Group (“Tegrit”). Clearview is located in Waltham, Massachusetts, and is a specialized employee benefits broker. Centric is an insurance broker located in New Providence, New Jersey, that provides property and casualty insurance, with a specialty in education institutions and public schools. LBR is a professional tax, accounting and consulting service provider located in Tampa, Florida, with significant experience and expertise in family law litigation support, not-for-profit
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entities and healthcare providers. Tegrit is located in Akron, Ohio and is a national provider of actuarial consulting and retirement plan administration. Annual revenues for Clearview, Centric and Tegrit are estimated to be $2.5 million, $1.6 million and $8.5 million, respectively, and will be reported in the Employee Services practice group. Annual revenues for LBR are estimated to be $9.8 million and will be reported in the Financial Services practice group.
Effective July 7, 2014, in a privately negotiated transaction, CBIZ repurchased $17.4 million of its $130 million 4.875% Convertible Senior Subordinated Notes due October 2015. This transaction will result in lower interest expense of approximately $0.7 million annually and a reduction in the diluted share count of approximately 380,000 shares. A non-operating loss of approximately $0.8 million will be recorded in the third quarter of 2014.
Effective July 28, 2014, CBIZ replaced its $275 million unsecured credit facility with a new $400 million unsecured credit facility. The new credit facility, which expires in July 2019, will enable the Company to lower its borrowing costs, provide flexibility to refinance its 2010 Notes due October 1, 2015, and will also allow for the allocation of funds for strategic initiatives, including acquisitions and the repurchase of CBIZ common stock.
CBIZ believes that repurchasing shares of its common stock under the Company’s stock purchase plan is a use of cash that provides value to its shareholders. During the six months ended June 30, 2014, CBIZ repurchased approximately 1.3 million of its common shares at a total cost of approximately $10.7 million.
Results of Operations – Continuing Operations
Same-unit revenue represents total revenue adjusted to reflect comparable periods of activity for acquisitions and divestitures. For example, for a business acquired on June 1, 2013, revenue for the month of June would be included in same-unit revenue for both years; revenue for the period January 1, 2014 through May 31, 2014 would be reported as revenue from acquired businesses.
Three Months Ended June 30, 2014 and 2013
Revenue – The following table summarizes total revenue for the three months ended June 30, 2014 and 2013 (in thousands, except percentages).
Same-unit revenue
Financial Services
Employee Services
National Practices
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 $11.2 million to $162.3 million for the three months ended June 30, 2014 from $151.1 million for the comparable period of 2013, and increased as a percentage of revenue to 89.7% for the three months ended June 30, 2014 from 87.7% for the comparable period of 2013.
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The primary components of operating expenses for the three months ended June 30, 2014 and 2013 are included in the following table:
Personnel costs
Occupancy costs
Depreciation and amortization
Travel and related costs
Professional fees
Other (1)
Subtotal
Deferred compensation costs
Total operating expenses
The increase in operating expenses as a percentage of revenue that was attributable to personnel costs was primarily due to an increase in salaries and wages and the related benefits and payroll taxes resulting from certain investments in personnel to support business development as well as staff merit increases. In addition, increases in personnel costs in the federal and state governmental health care consulting business were a result of an increase in headcount to support the growth in business and also to replace third-party consultants, resulting in a decrease in professional fees. The increase in deferred compensation costs as a percentage of revenue was due to gains of $1.7 million in the value of the assets held in relation to CBIZ’s deferred compensation plan, which resulted in a significant impact to gross margin for the three months ended June 30, 2014, compared to modest gains of $0.2 million in the value of assets for the comparable period in 2013. Personnel and other operating expenses are discussed in further detail under “Operating Practice Groups”.
Corporate general and administrative expenses – Corporate general and administrative (“G&A”) expenses increased by $0.7 million to $8.3 million for the three months ended June 30, 2014 from $7.6 million for the three months ended June 30, 2013, and increased as a percentage of revenue to 4.6% for the three months ended June 30, 2014 from 4.5% for the comparable period of 2013. The primary components of G&A expenses for the three months ended June 30, 2014 and 2013 are included in the following table:
Professional services
Computer costs
Total G&A expenses
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The decrease in G&A expenses as a percentage of revenue attributable to personnel costs is primarily due to a decrease in incentive based compensation accrued during the three months ended June 30, 2014 compared to the same period in 2013. The increase in professional fees was primarily related to an increase in legal expenses during the three months ended June 30, 2014 compared to the same period last year related to the claims against CBIZ as described in Note 6 of the accompanying consolidated financial statements.
Interest expense – Interest expense decreased by $0.5 million to $3.6 million for the three months ended June 30, 2014 from $4.1 million for the comparable period in 2013. The decrease in interest expense was primarily due to a decrease in the average debt balance outstanding under the credit facility to $88.6 million for the three months ended June 30, 2014 compared to $180.4 million for the three months ended June 30, 2013, as well as a decrease in the weighted average interest rate to 2.70% for the three months ended June 30, 2014 compared to 2.95% for the same period in 2013. The decrease in the average debt balance is primarily due to the application of a portion of the proceeds received from the sale CBIZ’s Medical Management Professionals business on August 30, 2013. See Note 5 of the accompanying consolidated financial statements for further discussion of CBIZ’s debt arrangements.
Other income, net – For the three months ended June 30, 2014 and 2013, other income, net is primarily comprised of gains and losses in the fair value of investments held in a rabbi trust related to the deferred compensation plan and adjustments to contingent purchase price liabilities related to prior acquisitions. For the three months ended June 30, 2014 and 2013, gains in the fair value of investments related to the deferred compensation plan were $1.9 million and $0.1 million, respectively. These adjustments do not impact CBIZ’s net income as they are offset by a corresponding increase to compensation expense, which is recorded as operating and G&A expenses in the consolidated statements of comprehensive income. For the three months ended June 30, 2014, adjustments to the fair value of the Company’s contingent purchase price liability related to prior acquisitions resulted in other income of $2.0 million. The adjustments to these contingent purchase price liabilities for the same period in 2013 were nominal.
Income tax expense – CBIZ recorded income tax expense from continuing operations of $4.5 million and $4.3 million for the three months ended June 30, 2014 and 2013, respectively. The effective tax rate for the three months ended June 30, 2014 was 41.7%, compared to an effective tax rate of 43.3% for the comparable period in 2013. The decrease in the effective tax rate primarily relates to a higher level of pre-tax income and a lower state effective tax rate in 2014.
Earnings per share and Non-GAAP earnings per share– Earnings per share from continuing operations were $0.12 and $0.11 per diluted share for the three months ended June 30, 2014 and 2013, respectively, and Non-GAAP earnings per share were $0.22 and $0.25 per diluted share for the three months ended June 30, 2014 and 2013, respectively. The Company believes Non-GAAP earnings and Non-GAAP earnings per diluted share illustrate the impact of certain non-cash charges and credits to income from continuing operations and are a useful performance measure for the Company, its analysts and its stockholders. Management uses these performance measures to evaluate CBIZ’s business, including ongoing performance and the allocation of resources. Non-GAAP earnings and Non-GAAP earnings per diluted share are provided in addition to the presentation of GAAP measures and should not be regarded as a replacement or alternative of performance under GAAP.
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The following is a reconciliation of income from continuing operations to Non-GAAP earnings from operations and diluted earnings per share from continuing operations to Non-GAAP earnings per share for the three months ended June 30, 2014 and 2013.
NON-GAAP EARNINGS AND PER SHARE DATA
Reconciliation of Income from Continuing Operations to Non-GAAP Earnings from Continuing Operations
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
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 resulted from the stronger performance in several of the units that provide national services, specifically the federal and state governmental health care compliance industry and to a lesser extent, valuation services. Revenue associated with these national services increased 10.6% for the three months ended June 30, 2014 compared to the same period last year. With respect to the accounting units, same-unit revenue declined slightly.
The growth in revenue from acquisitions was provided by:
CBIZ provides a range of services to affiliated CPA firms under joint referral and administrative service agreements (“ASAs”). Fees earned by CBIZ under the ASAs are recorded as revenue in the accompanying consolidated statements of comprehensive income and were approximately $35.2 million and $35.9 million for the three months ended June 30, 2014 and 2013, respectively.
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The largest components of operating expenses for the Financial Services practice group are personnel costs, occupancy costs, and travel and related costs, which represented 89.5% and 88.8% of total operating expenses and 78.6% and 77.2% of total revenue for the three months ended June 30, 2014 and 2013, respectively. Personnel costs increased $5.4 million during the three months ended June 30, 2014 compared to the same period in 2013, and represented 69.4% and 68.1% of revenue for the three months ended June 30, 2014 and 2013, respectively. This increase is comprised of an increase in same-unit personnel of $3.0 million as a result of staff compensation increases and an increase in headcount, particularly at the units offering national services, and an increase of $2.4 million associated with the acquisitions of Knight and LBR. The increase in headcount primarily occurred at the units offering federal and state governmental health care consulting services to help support the business growth as well as to replace third-party consultants. Occupancy costs are relatively fixed from period to period and were $6.6 million and $6.3 million for the three months ended June 30, 2014 and 2013, respectively, and flat as a percentage of operating expenses and revenue. Travel and related costs were $4.3 million and $4.0 million for the three months ended June 30, 2014 and 2013, respectively, and were flat as a percentage of operating expenses and revenue.
The increase in same-unit revenue was primarily attributable to increases in the Company’s employee benefits, property and casualty, payroll, and life insurance, offset by a slight decrease in the retirement plan services group. The employee benefits business increased $0.5 million, or 2.0%, due to strong client retention and growth from new clients in the three months ended June 30, 2014 as well as an increase in volume-based carrier bonus payments. Property and casualty revenues increased $0.5 million, or 5.5%, primarily due to strong performance within the specialty program businesses. The payroll business revenues increased $0.2 million, or 3.5%, due to higher pricing coupled with an increase in processing volume for payroll and related services. These increases were partially offset by the decrease in retirement consulting revenues of $0.2 million, or 2.2%, due to lower actuarial fee based revenues during the three months ended June 30, 2014.
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The largest components of operating expenses for the Employee Services group are personnel costs, including commissions paid to third party brokers, and occupancy costs, representing 82.0% and 82.4% of total operating expenses for the three months ended June 30, 2014 and 2013, respectively. Excluding costs related to the acquired businesses of $1.0 million, personnel costs increased approximately $1.2 million, primarily due to higher commissions paid out to producers relating to the new revenue growth in employee benefits, property and casualty, payroll, and life businesses. Occupancy costs are relatively fixed in nature and were $2.9 million and $2.8 million for the three months ended June 30, 2014 and 2013, respectively. The increase in occupancy costs was primarily due to business acquisitions.
The slight increase in same-unit revenue was primarily attributable to services provided to CBIZ’s largest client, Edward Jones, under its cost-plus contract. Costs related to the merger and acquisitions business that was sold December 31, 2013 have not been incurred in 2014, thus the decrease in operating expenses and the increase in gross margin for the National Practices operating segment.
Six Months Ended June 30, 2014 and 2013
Revenue – The following table summarizes total revenue for the six months ended June 30, 2014 and 2013 (in thousands, except percentages).
Gross margin and operating expenses – Operating expenses increased $18.0 million to $328.5 million for the six months ended June 30, 2014 from $310.5 million for the comparable period of 2013, and increased as a percentage of revenue to 84.3% for the six months ended June 30, 2014 from 83.1% for the comparable period of 2013.
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The primary components of operating expenses for the six months ended June 30, 2014 and 2013 are included in the following table:
The increase in operating expenses as a percentage of revenue that was attributable to personnel costs was primarily due to an increase in salaries and wages and the related benefits and payroll taxes resulting from certain investments in personnel to support business development as well as staff merit increases. In addition, increases in personnel costs in the federal and state governmental health care consulting business were a result of an increase in headcount to support the business rather than using third-party consultants, resulting in a decrease in professional fees. Personnel and other operating expenses are discussed in further detail under “Operating Practice Groups”.
Corporate general and administrative expenses – Corporate G&A expenses increased by $1.0 million to $18.6 million for the six months ended June 30, 2014 from $17.6 million for the comparable period of 2013, but decreased as a percentage of revenue to 4.7% for the six months ended June 30, 2014 from 4.8% for the comparable period of 2013. The primary components of G&A expenses for the six months ended June 30, 2014 and 2013 are included in the following table:
The decrease in G&A expenses as a percentage of revenue attributable to personnel costs is primarily due to a decrease in incentive based compensation accrued during the six months ended June 30, 2014 compared to the same period last year. The increase in professional fees was primarily related to an
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increase in legal expenses during the six months ended June 30, 2014 compared to the same period last year related to the claims against CBIZ as described in Note 6 of the accompanying consolidated financial statements.
Interest expense – Interest expense decreased by $1.2 million to $7.0 million for the six months ended June 30, 2014 from $8.2 million for the comparable period in 2013. The decrease in interest expense was primarily due to a decrease in the average debt balance outstanding under the credit facility to $81.5 million for the six months ended June 30, 2014 compared to $175.5 million for the six months ended June 30, 2013, as well as a decrease in the weighted average interest rate to 2.70% for the six months ended June 30, 2014 compared to 2.96% for the same period in 2013. The decrease in the average debt balance is primarily due to the application of a portion of the proceeds received from the sale CBIZ’s Medical Management Professionals business on August 30, 2013.
Other expense, net – Other expense, net is primarily comprised of gains and losses in the fair value of investments held in a rabbi trust related to the deferred compensation plan and adjustments to contingent purchase price liabilities related to previous acquisitions. Gains in the fair value of investments related to the deferred compensation were $2.6 million for the six months ended June 30, 2014 and 2013. These adjustments do not impact CBIZ’s net income as they are offset by the corresponding increase to compensation expense, which is recorded as operating and G&A expenses in the consolidated statements of comprehensive income. In addition, adjustments to contingent purchase price liabilities resulted in income of $3.0 million and expense of $0.9 million for the six months ended June 30, 2014 and 2013, respectively.
Income tax expense – CBIZ recorded income tax expense from continuing operations of $17.5 million and $16.7 million for the six months ended June 30, 2014 and 2013, respectively. The effective tax rate for the six months ended June 30, 2014 was 41.9%, compared to an effective tax rate of 42.3% for the same period in 2013. The decrease in the effective tax rate primarily relates to a higher level of pre-tax income and a lower state effective tax rate in 2014.
Earnings per share and Non-GAAP earnings per share –Earnings per share from continuing operations were $0.46 per diluted share for the six months ended June 30, 2014 and 2013, and Non-GAAP earnings per share were $0.68 and $0.75 per diluted share for the six months ended June 30, 2014 and 2013, respectively. The Company believes Non-GAAP earnings and Non-GAAP earnings per diluted share illustrate the impact of certain non-cash charges and credits to income from continuing operations and are a useful performance measure for the Company, its analysts and its stockholders. Management uses these performance measures to evaluate CBIZ’s business, including ongoing performance and the allocation of resources. Non-GAAP earnings and Non-GAAP earnings per diluted share are provided in addition to the presentation of GAAP measures and should not be regarded as a replacement or alternative of performance under GAAP.
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The following is a reconciliation of income from continuing operations to Non-GAAP earnings from operations and diluted earnings per share from continuing operations to Non-GAAP earnings per diluted share for the six months ended June 30, 2014 and 2013.
Non-cash interest on convertible note
Adjustments to contingent earnouts
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 85% attributable to stronger performance in the units that provide certain national services and 15% attributable to the traditional accounting and tax services. Growth in the national units was primarily due to an 8.4% increase in revenue related to the federal and state governmental health care compliance industry. The growth in the traditional accounting and tax services was due to a 1.9% increase in billable hours for the six months ended June 30, 2014 compared to the six months ended June 30, 2013.
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CBIZ provides a range of services to affiliated CPA firms under joint referral and ASAs. Fees earned by CBIZ under the ASAs are recorded as revenue in the accompanying consolidated statements of comprehensive income and were approximately $80.6 million and $81.0 million for the six months ended June 30, 2014 and 2013, respectively.
The largest components of operating expenses for the Financial Services practice group are personnel costs, occupancy costs, and travel and related costs which represented 89.8% and 89.1% of total operating expenses and 72.8% and 71.3% of total revenue for the six months ended June 30, 2014 and 2013, respectively. Personnel costs increased $10.5 million and represented 64.9% and 63.3% of revenue for the six months ended June 30, 2014 and 2013, respectively. The increase was comprised of an increase in same-unit personnel costs of $6.6 million due to staff compensation increases and an increase in headcount, particularly at the units offering national services, and $3.9 million due to the acquisitions of Knight and LBR. The increase in headcount primarily occurred at the units offering federal and state governmental health care consulting services to help support the growth in the business as well as to replace third-party consultants. Occupancy costs are relatively fixed from period to period and were $13.1 million and $12.8 million for the six months ended June 30, 2014 and 2013, respectively, and relatively flat as a percentage of operating expenses and revenue. Travel and related costs were $8.0 million and $7.6 million for the six months ended June 30, 2014 and 2013, respectively, and were flat as a percentage of operating expenses and revenue.
The increase in same-unit revenue was primarily attributable to increases in the Company’s employee benefits, property and casualty, payroll, and retirement plan consulting businesses, offset by a decrease in the life insurance business. Employee benefit revenues increased $1.1 million, or 2.4%, due to strong client retention and growth from new clients in 2014 as well as an increase in volume-based carrier bonus payments. Property and casualty revenues increased $0.4 million, or 2.4%, primarily due to strong performance within the specialty program businesses and an increase in volume-based carrier bonus payments. Payroll business revenues increased $0.5 million, or 3.1%, mainly due to pricing increases for core services, coupled with an increase in processing volume for payroll and related services. Retirement consulting revenues increased $0.5 million, or 3.3%, due to favorable equity market conditions as advisory fees are typically earned on plan asset balances, which have grown over the prior year. These increases were partially offset by a decline in the life insurance business of $0.2 million, or 8.0%, due to the decline in average case size written.
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The largest components of operating expenses for the Employee Services group are personnel costs, including commissions paid to third party brokers, and occupancy costs, representing 81.9% and 82.4% of total operating expenses for the six months ended June 30, 2014 and 2013, respectively. Excluding costs related to the acquired businesses of $1.4 million, personnel costs increased approximately $3.0 million, primarily due to higher commissions paid out to producers relating to new revenue growth in employee benefits, property and casualty, payroll, and retirement plan services. Occupancy costs are relatively fixed and were $5.6 million for the six months ended June 30, 2014 and 2013, excluding the costs of the acquired businesses of $0.2 million in 2014.
Same-unit revenue for the six months ended June 30, 2014 and 2013 was flat. Revenue increased slightly from services provided to CBIZ’s largest client, Edward Jones, under its cost-plus contract, but was offset by a slight decline in revenues in the health consulting business. Costs related to the merger and acquisitions business that was sold December 31, 2013 have not been incurred in 2014, thus the decrease in operating expenses and the increase in gross margin for the National Practices operating segment.
Financial Condition
Total assets were $910.9 million at June 30, 2014, an increase of $13.4 million versus December 31, 2013. Current assets of $328.4 million exceeded current liabilities of $225.8 million by $102.6 million at June 30, 2014.
Cash and cash equivalents increased by $3.2 million to $3.9 million at June 30, 2014 from December 31, 2013. Restricted cash was $23.2 million at June 30, 2014, an increase of $1.1 million from December 31, 2013. Restricted cash represents those funds held in connection with CBIZ’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 $179.1 million at June 30, 2014, an increase of $36.0 million from December 31, 2013, and days sales outstanding (“DSO”) from continuing operations was 86 days, 74 days and 80 days at June 30, 2014, December 31, 2013 and June 30, 2013, respectively. DSO represents accounts receivable, net and unbilled revenue (net of realization adjustments) at the end of the period, divided by trailing twelve month daily revenue. CBIZ provides DSO data because such data is commonly used as a performance measure by analysts and investors and as a measure of the Company’s ability to collect on receivables in a timely manner.
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Other current assets were $14.2 million and $14.4 million at June 30, 2014 and December 31, 2013, respectively. Other current assets are primarily comprised of prepaid assets. Balances may fluctuate during the year based upon the timing of cash payments and amortization of prepaid expenses.
Funds held for clients (current and non-current) and the corresponding client fund obligations relate to CBIZ’s payroll services business. The balances in these accounts fluctuate with the timing of cash receipts and the related cash payments. Client fund obligations can differ from funds held for clients due to changes in the market values of the underlying investments. The nature of these accounts is further described in Note 1 to the consolidated financial statements included in CBIZ’s Annual Report on Form 10-K for the year ended December 31, 2013.
Property and equipment, net, decreased by $0.2 million to $19.0 million at June 30, 2014 from $19.2 million at December 31, 2013. The decrease is primarily the result of depreciation expense of $2.5 million, partially offset by net additions of $2.3 million. CBIZ’s property and equipment is primarily comprised of software, hardware, furniture and leasehold improvements.
Goodwill and other intangible assets, net, increased by $29.9 million at June 30, 2014 from December 31, 2013. This increase is comprised of additions to goodwill of $26.5 million and additions to intangible assets of $11.3 million resulting from acquisitions and contingent purchase price adjustments, partially offset by $7.3 million of amortization expense and the write-off of $0.6 million of goodwill resulting from the sale of a discontinued operation.
Assets of the deferred compensation plan represent participant deferral accounts and are directly offset by deferred compensation plan obligations. Assets of the deferred compensation plan were $57.8 million and $52.0 million at June 30, 2014 and December 31, 2013, respectively. The increase in assets of the deferred compensation plan of $5.8 million consisted of net participant contributions of $3.2 million and an increase in the fair value of the investments of $2.6 million for the six months ended June 30, 2014. The plan is described in further detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
The accounts payable balances of $44.5 million and $37.5 million at June 30, 2014 and December 31, 2013, respectively, reflect amounts due to suppliers and vendors. Balances fluctuate during the year based on the timing of cash payments. Accrued personnel costs were $30.5 million and $38.6 million at June 30, 2014 and December 31, 2013, respectively, and represent amounts due for payroll, payroll taxes, employee benefits and incentive compensation. Balances fluctuate during the year based on the timing of payments and adjustments to the estimate of incentive compensation costs.
Notes payable – current decreased by $1.2 million to $0.4 million at June 30, 2014 from $1.6 million at December 31, 2013 as a result of guaranteed purchase price payments during the six months ended June 30, 2014 totaling $1.2 million.
Contingent purchase price liabilities (current and non-current) relate to performance-based contingent purchase price liabilities that result from business acquisitions. Contingent purchase price liabilities (current and non-current) increased by $7.6 million at June 30, 2014 from December 31, 2013 due to an increase of $12.0 million from current year business acquisitions and $0.1 million in net present value adjustments to the liabilities. These increases were partially offset by adjustments of $3.0 million to the fair value of the contingency purchase price liabilities and payments of $1.5 million.
Other liabilities (current and non-current) decreased by $0.4 million to $23.1 million at June 30, 2014 from $23.5 million at December 31, 2013. The decrease was primarily attributable to a decrease in legal accruals of $0.9 million due to the payment of claims, partially offset by an increase of $0.4 million related to the accrued lease liability resulting from business acquisitions and new lease agreements at certain locations, and various other minor changes to certain liability accounts that net to an insignificant change.
Income taxes payable - current was $5.0 million and $25 thousand at June 30, 2014 and December 31, 2013, respectively. Income taxes payable - current at June 30, 2014 and December 31, 2013 primarily represents the provision for current income taxes less estimated tax payments. Income taxes payable – non-current at June 30, 2014 and December 31, 2013 was $4.9 million and $6.2 million, respectively, and represents the accrual for uncertain tax positions.
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CBIZ’s 2006 Notes and 2010 Notes are carried at face value less unamortized discount. The $1.5 million increase in the carrying value of the convertible notes at June 30, 2014 compared to December 31, 2013 represents amortization of the discount, which is recognized as non-cash interest expense in the consolidated statements of comprehensive income. The convertible notes are further disclosed in Note 5 of the accompanying consolidated financial statements.
Bank debt for amounts due on CBIZ’s credit facility increased $32.7 million to $81.2 million at June 30, 2014 from $48.5 million at December 31, 2013. This increase was primarily attributable to approximately $28.6 million used related to acquisitions and earnouts, $11.8 million for the repurchase of approximately 1.4 million of CBIZ common stock, and $2.3 million for capital expenditures. Partially offsetting these increases was cash provided by operating activities of $5.2 million for the six months ended June 30, 2014.
Stockholders’ equity increased by $24.7 million to $399.1 million at June 30, 2014 from $374.4 million at December 31, 2013. The increase was primarily attributable to net income of $23.4 million, CBIZ’s stock award programs, which contributed $10.0 million, the issuance of $3.0 million in common shares related to business acquisitions and contingent payments related to prior acquisitions, and $0.1 million to adjust the fair value of CBIZ’s investments in corporate and municipal bonds which is included in accumulated other comprehensive loss. These increases were partially offset by $11.8 million related to the repurchase of 1.4 million shares of CBIZ common stock, which includes open market share repurchase activity of 1.3 million shares at a cost of $10.7 million and shares repurchased in conjunction with the settlement of restricted stock transactions of 0.1 million shares at a cost of $1.1 million.
Liquidity and Capital Resources
CBIZ’s principal source of net operating cash is derived from the collection of fees and commissions for professional services and products rendered to its clients. CBIZ supplements net operating cash with a $400 million unsecured credit facility.
Under the $275 million credit facility that existed at June 30, 2014, CBIZ was required to meet certain financial covenants with respect to (i) minimum net worth; (ii) maximum total and senior leverage ratios; and (iii) a minimum fixed charge coverage ratio. CBIZ believes it was in compliance with its covenants as of June 30, 2014. At June 30, 2014, CBIZ had $81.2 million outstanding under its credit facility and had letters of credit and performance guarantees totaling $4.4 million. Available funds under the credit facility, based on the terms of the commitment, were approximately $58.6 million at June 30, 2014.
Effective July 7, 2014, CBIZ repurchased $17.4 million of its 2010 Notes in a privately negotiated transaction. This transaction will result in a decrease of approximately $0.4 million in interest expense for the remainder of 2014 and a non-operating charge of approximately $0.8 million in the third quarter of 2014 representing the loss on the transaction.
Management believes that cash generated from operations, combined with the available funds from the credit facility, provides CBIZ the financial resources needed to meet business requirements for the foreseeable future, including capital expenditures and working capital requirements.
In addition to the debt instruments previously mentioned, CBIZ may obtain, at a future date, additional funding by offering equity securities or debt through public or private markets. CBIZ’s ability to service its debt and to fund strategic initiatives will depend upon its ability to generate cash in the future.
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Sources and Uses of Cash
The following table summarizes CBIZ’s cash flows from operating, investing and financing activities for the six months ended June 30, 2014 and 2013 (in thousands):
Total cash provided by (used in):
Operating activities
Investing activities
Financing activities
Increase in cash and cash equivalents
Operating Activities
Cash flows from operating activities represent net income adjusted for certain non-cash items and changes in assets and liabilities. CBIZ typically experiences a net use of cash from operations during the first quarter of its fiscal year, as accounts receivable balances grow in response to the seasonal increase in first quarter revenue generated by the Financial Services practice group (primarily for accounting and tax services). This net use of cash is followed by strong operating cash flow during the second and third quarters, as a significant amount of revenue generated by the Financial Services practice group during the first four months of the year are billed and collected in subsequent quarters.
For the six months ended June 30, 2014, net cash provided by operating activities was $5.2 million and primarily consisted of net income of $23.4 million, non-cash adjustments to net income of $14.0 million and a net loss on the sale of operations and discontinued operations transactions of $0.7 million. Partially offsetting these sources of cash were changes in working capital items of $33.5 million. The non-cash adjustments to net income primarily consist of depreciation and amortization expense, amortization of the discount on convertible notes and deferred financing fees, stock based compensation expense, deferred income tax expense, and adjustments to contingent purchase price liabilities. Net changes in working capital were primarily due to an increase in accounts receivable due to an increase in revenues and days sales outstanding and an increase in accrued personnel costs due to the timing of payments. These were partially offset by an increase in accounts payable due to the Company’s efforts to manage payables, and income taxes payable resulting from the timing of payments. Cash provided by discontinued operations was $0.6 million.
For the six months ended June 30, 2013, net cash provided by operating activities was $13.9 million and primarily consisted of net income of $27.5 million and non-cash adjustments to net income of $14.2 million. Partially offsetting these sources of cash were changes in working capital items of $26.3 million and a net gain on the sale of operations and discontinued operations transactions of $4.8 million. The non-cash adjustments to net income primarily consist of depreciation and amortization expense, amortization of the discount on convertible notes and deferred financing fees, stock based compensation expense, deferred income tax expense, and adjustments to contingent purchase price liabilities. Net changes in working capital were primarily due to an increase in accounts receivable due to an increase in revenues and days sales outstanding, partially offset by an increase in income taxes payable resulting from the timing of payments. Cash provided by discontinued operations was $3.3 million.
Investing Activities
CBIZ’s investing activities typically consist of: payments for business acquisitions and client lists, contingent payments associated with business acquired prior to 2009, purchases of capital equipment, net activity related to funds held for clients, and proceeds received from sales of divestitures and discontinued operations. Capital expenditures consisted of investments in technology, leasehold improvements and purchases of furniture and equipment.
Cash provided by investing activities during the six months ended June 30, 2014 primarily consisted of net activity related to funds held for clients of $62.7 million and proceeds from the receipt of payments on notes receivable of $0.9 million. These sources of cash were partially offset by $24.7 million of net cash used for acquisitions and contingent payments on prior acquisitions, capital expenditures of $2.3 million and payments resulting from adjustments to the sale of discontinued operations of $0.3 million.
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During the six months ended June 30, 2013, cash provided by investing activities primarily consisted of net activities related to funds held for clients of $37.8 million, proceeds from the sale of divested and discontinued operations of $0.1 million and proceeds from the receipt of payments on notes receivable of $0.1 million. These sources of cash were partially offset by cash used related to business acquisitions and contingent payments on prior acquisitions of $4.0 million and capital expenditures of $2.8 million. Cash used by discontinued operations was $0.3 million.
Financing Activities
CBIZ’s financing cash flows typically consist of net borrowing and payment activity from the credit facility, payments of contingent consideration included as part of the initial measurement of businesses acquired, the issuance and repayment of debt instruments, repurchases of CBIZ common stock, net change in client fund obligations, and proceeds from the exercise of stock options.
Net cash used in financing activities during the six months ended June 30, 2014 was primarily due to a decrease in client fund obligations of $62.7 million, $11.8 million used to repurchase shares of CBIZ common stock, $2.6 million in guaranteed and contingent payments included as part of the initial measurement of prior business acquisitions, and payment on debt acquired from acquisitions of $1.2 million. These uses of cash were partially offset by $32.7 million in net borrowings from the credit facility and $7.4 million in proceeds from the exercise of stock options, including the related tax benefits.
Net cash used in financing activities during the six months ended June 30, 2013 was primarily due to a decrease in client fund obligations of $37.8 million, net payments on the credit facility of $4.9 million, payments for contingent consideration included as part of the initial measurement of prior business acquisitions of $1.1 million, and $0.8 million used to repurchase shares of CBIZ common stock.
Obligations and Commitments
CBIZ’s aggregate amount of future obligations at June 30, 2014 for the next five years and thereafter is set forth below (in thousands):
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
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Off-Balance Sheet Arrangements
CBIZ maintains administrative service agreements with independent CPA firms (as described more fully in the Annual Report on Form 10-K for the year ended December 31, 2013), which qualify as variable interest entities. The accompanying consolidated financial statements do not reflect the operations or accounts of variable interest entities as the impact is not material to the financial condition, results of operations, or cash flows of CBIZ.
CBIZ provides guarantees of performance obligations for a CPA firm with which CBIZ maintains an administrative service agreement. Potential obligations under the guarantees totaled $1.9 million at June 30, 2014 and December 31, 2013. CBIZ has recognized a liability for the fair value of the obligations undertaken in issuing these guarantees. The liability is recorded as other current liabilities in the accompanying consolidated balance sheets. CBIZ does not expect it will be required to make payments under these guarantees.
CBIZ provides letters of credit to landlords (lessors) of its leased premises in lieu of cash security deposits, which totaled $2.5 million at June 30, 2014 and December 31, 2013. In addition, CBIZ provides license bonds to various state agencies to meet certain licensing requirements. The amount of license bonds outstanding at June 30, 2014 and December 31, 2013 totaled $1.8 million and $2.4 million, respectively.
CBIZ has various agreements under which it may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification clauses are included in contracts arising in the normal course of business under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations, warranties, covenants or agreements, related to matters such as title to assets sold and certain tax matters. Payment by CBIZ under such indemnification clauses is generally conditioned upon the other party making a claim. Such claims are typically subject to challenge by CBIZ and to dispute resolution procedures specified in the particular contract. Further, CBIZ’s obligations under these agreements may be limited in terms of time and/or amount and, in some instances, CBIZ may have recourse against third parties for certain payments made by CBIZ. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of CBIZ’s obligations and the unique facts of each particular agreement. Historically, CBIZ has not made any payments under these agreements that have been material individually or in the aggregate. As of June 30, 2014, CBIZ was not aware of any material obligations arising under indemnification agreements that would require payment.
Interest Rate Risk Management
CBIZ periodically uses interest rate swaps to manage interest rate risk exposure. The interest rate swaps effectively mitigate CBIZ’s exposure to interest rate risk, primarily through converting portions of the floating rate debt under the credit facility to a fixed rate basis. These agreements involve the receipt or payment of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal amounts. At June 30, 2013, CBIZ had an interest rate swap with a notional amount of $40.0 million, of which $15.0 million expired in June 2014, resulting in a notional amount of $25.0 million at June 30, 2014, which will expire in June 2015. Management will continue to evaluate the potential use of interest rate swaps as it deems appropriate under certain operating and market conditions. CBIZ does not enter into derivative instruments for trading or speculative purposes.
At June 30, 2014, CBIZ had $130.0 million in 2010 Notes, before discount, bearing a fixed interest rate of 4.875% that will mature on October 1, 2015 and may not be converted before July 31, 2015. On July 7, CBIZ repurchased $17.4 million of its 2010 Notes, leaving a balance of $112.6 million outstanding after the transaction. This transaction was settled on July 10, 2014. CBIZ believes the fixed nature of these borrowings mitigates its interest rate risk.
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In connection with payroll services provided to clients, CBIZ collects funds from its clients’ accounts in advance of paying these client obligations. These funds held for clients are segregated and invested in accordance with the Company’s investment policy, which requires all investments carry an investment grade rating at the time of initial investment. The interest income on these investments mitigates the interest rate risk for the borrowing costs of CBIZ’s credit facility, as the rates on both the investments and the outstanding borrowings against the credit facility are based on market conditions.
Critical Accounting Policies
The SEC defines critical accounting policies as those that are most important to the portrayal of a company’s financial condition and results and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. There have been no material changes to CBIZ’s critical accounting policies from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading Critical Accounting Policies in the Annual Report on Form 10-K for the year ended December 31, 2013.
Valuation of Goodwill
Goodwill impairment testing between annual testing dates may be required if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. A further description of assumptions used in the Company’s annual impairment testing are provided in CBIZ’s Annual Report on Form 10-K for the year ended December 31, 2013. There was no goodwill impairment during the year ended December 31, 2013 or during the six months ended June 30, 2014.
CBIZ reviewed the significant assumptions that it used in its goodwill impairment analysis to determine if it was more likely than not that the fair value of each reporting unit was less than its carrying value. The analyses focused on management’s current expectations of future cash flows, as well as current market conditions and other qualitative factors that impact various economic indicators that are utilized in assessing fair value. Based on these analyses and the lack of any other evidence or significant event, it was determined that the Company did not have any triggering events requiring it to perform a goodwill assessment during the six months ended June 30, 2014.
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11 (“ASU 2013-11”) “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. ASU 2013-11 states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward. The exception to this treatment is as follows: to the extent an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date or if the entity is not required to use and does not intend to use the deferred tax asset, then the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 does not require any additional recurring disclosures. Effective January 1, 2014, CBIZ adopted ASU 2013-11 and as a result reclassified approximately $1.2 million of unrecognized tax benefits to reduce the company’s deferred tax assets. There was no impact to the consolidated statements of comprehensive income as a result of the adoption of ASU 2013-11.
In April 2014, the FASB issued ASU No. 2014-08 (“ASU 2014-08”), “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of an Entity.” The amendments in ASU 2014-08 change the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity
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or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The update is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014.
In May 2014, the FASB issued ASU No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. ASU 2014-09 will require entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 31, 2016, including interim periods. CBIZ will have the option to apply the provisions of ASU 2014-09 either retrospectively to each reporting period presented, or retrospectively with the cumulative effect of applying this standard at the date of initial application. Early adoption is not permitted. CBIZ is currently evaluating the method and impact of the adoption of ASU 2014-09 will have on the CBIZ’s consolidated financial statements.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact included in this Quarterly Report, including without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding CBIZ’s financial position, business strategy and plans and objectives for future performance are forward-looking statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are commonly identified by the use of such terms and phrases as “intends,” “believes,” “estimates,” “expects,” “projects,” “anticipates,” “foreseeable future,” “seeks,” and words or phrases of similar import in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated services, sales efforts, expenses, and financial results. From time to time, the Company also may provide oral or written forward-looking statements in other materials the Company releases to the public. Any or all of the Company’s forward-looking statements in this Quarterly Report on Form 10-Q and in any other public statements that the Company makes, are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Such forward-looking statements can be affected by inaccurate assumptions the Company might make or by known or unknown risks and uncertainties. Should one or more of these risks or assumptions materialize, or should the underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Such risks and uncertainties include, but are not limited to: CBIZ’s ability to adequately manage its growth; CBIZ’s dependence on the services of its CEO and other key employees; competitive pricing pressures; general business and economic conditions; changes in governmental regulation and tax laws affecting its operations; reversal or decline in the current trend of outsourcing business services; revenue seasonality or fluctuations in and collectability of receivables; liability for errors and omissions of the Company’s businesses; regulatory investigations and future regulatory activity (including without limitation inquiries into compensation arrangements within the insurance brokerage industry); and reliance on information processing systems and availability of software licenses. Consequently, no forward-looking statement can be guaranteed.
A more detailed description of risk factors may be found in CBIZ’s Annual Report on Form 10-K for the year ended December 31, 2013. Except as required by the federal securities laws, CBIZ undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures the Company makes on related subjects in its filings with the SEC, such as quarterly, periodic and annual reports.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
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, 2014 was $81.2 million. If market rates were to increase or decrease 100 basis points from the levels at June 30, 2014, interest expense would increase or decrease approximately $0.6 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, 2014, CBIZ had an interest rate swap with a $25.0 million notional amount, which will expire in June 2015. Management will continue to evaluate the potential use of interest rate swaps as it deems appropriate under certain operating and market conditions.
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.
Item 4. Controls and Procedures
(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 include the realities that judgments in decision-making can be faulty and that breakdowns can occur
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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, 2014 that has materially affected, or is reasonably likely to materially affect, CBIZ’s Internal Controls.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
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.
Item 1A. Risk Factors
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, 2013 as filed with the SEC. These risks could materially and adversely affect the business, financial condition and results of operations CBIZ.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On June 30, 2014, in connection with the acquisition of Tegrit, CBIZ paid cash and issued 105,288 shares of common stock to acquire substantially all of the assets of the company. The above referenced shares were issued in transactions not involving a public offering in reliance on the exemption from registration afforded by Section 4(a)(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 registration requirements of the Securities Act. See Note 12 of the accompanying consolidated financial statements for more information regarding acquisitions.
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 13, 2014, 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, 2014 and expires one year from the effective date. The Share Repurchase Plan does not obligate CBIZ to acquire any specific number of shares and may be suspended at any time.
Shares repurchased during the three months ended June 30, 2014 (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, 2014
May 1 – May 31, 2014
June 1 – June 30, 2014
Total second quarter purchases
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According to the terms of CBIZ’s old and new credit facilities, 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, 2013 for a description of working capital restrictions and limitations on the payment of dividends.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
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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.
August 8, 2014
/s/ Ware H. Grove
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