UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2015
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, 2015
Common Stock, par value $0.01 per share
CBIZ, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Consolidated Balance Sheets –
June 30, 2015 and December 31, 2014
Consolidated Statements of Comprehensive Income –
Three and Six Months Ended June 30, 2015 and 2014
Consolidated Statements of Cash Flows –
Six Months Ended June 30, 2015 and 2014
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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, net
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
Notes receivable – non-current
Other assets
Total assets
Current liabilities:
Accounts payable
Income taxes payable – current
Accrued personnel costs
Notes payable – 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 income taxes – non-current, net
Deferred compensation plan obligations
Contingent purchase price liability – non-current
Other non-current liabilities
Total non-current liabilities
Total liabilities
Common stock
Additional paid-in capital
Retained earnings
Treasury stock
Accumulated other comprehensive loss (“AOCL”)
Total stockholders’ equity
Total liabilities and stockholders’ equity
See the accompanying notes to the consolidated financial statements
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands, except per share data)
Revenue
Operating expenses
Gross margin
Corporate general and administrative expenses
Operating income
Other (expense) income:
Interest expense
Gain on sale of operations, net
Other (expense) income, net
Total other (expense) income, net
Income from continuing operations before income tax expense
Income tax expense
Income from continuing operations
Loss from discontinued operations, net of tax
Gain (loss) 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 (loss) income, 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 on early extinguishment of convertible debt
Depreciation and amortization expense
Amortization of discount on notes and deferred financing costs
Amortization of discount on contingent earnout liability
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
Other liabilities
Operating cash flows provided by continuing operations
Operating cash flows used in discontinued operations
Net cash provided by operating activities
Cash flows from investing activities:
Business acquisitions and purchases of client lists, net of cash acquired
Purchases of client fund investments
Proceeds from the sales and maturities of client fund investments
Proceeds (payments) from sales of divested and discontinued operations
Increase in funds held for clients
Additions to property and equipment, net
Collection of notes receivable
Investing cash flows provided by continuing operations
Investing cash flows provided by discontinued operations
Net cash provided by investing activities
Cash flows from financing activities:
Proceeds from bank debt
Payment of bank debt
Payment on early extinguishment of convertible debt
Payment for acquisition of treasury stock
Decrease in client funds obligations
Proceeds from exercise of stock options
Payment of contingent consideration of acquisitions
Excess tax benefit from exercise of stock awards
Payment of notes payable
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
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The accompanying unaudited consolidated financial statements of CBIZ, Inc. and its subsidiaries (“CBIZ,” the “Company,” “we,” “us,” or “our”) have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by the accounting principles generally accepted in the United States (“GAAP”) for complete financial statements.
All intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited 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.
These interim unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015.
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. 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. Changes in circumstances could cause actual results to differ materially from those estimates.
A description of revenue recognition policies is included in the Annual Report on Form 10-K for the year ended December 31, 2014.
Accounts receivable, net balances at June 30, 2015 and December 31, 2014 were as follows (in thousands):
Trade accounts receivable
Unbilled revenue
Total accounts receivable
Allowance for doubtful accounts
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The components of goodwill and other intangible assets, net at June 30, 2015 and December 31, 2014 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, 2015 and 2014 was as follows (in thousands):
Total depreciation and amortization expense
CBIZ had two primary financing arrangements and one additional financing arrangement at June 30, 2015 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 Notes and the credit facility are the Company’s two primary financing arrangements.
On April 10, 2015, CBIZ entered into an Amendment to the Credit Agreement that governs the credit facility dated as of July 28, 2014, by and among the Company and Bank of America, N.A., as administrative agent and bank, and other participating banks, to remove certain events from the definition of Change of Control contained therein. This amendment had no impact on the terms of the Credit Agreement (other than as described above), the accompanying Consolidated Balance Sheets, Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows.
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In addition to the discussion below, refer to the Annual Report on Form 10-K for the year ended December 31, 2014 for additional details of CBIZ’s debt and financing arrangements.
2010 Notes
The 2010 Notes mature on October 1, 2015. At June 30, 2015 and December 31, 2014, the 2010 Notes were classified as a non-current liability due to management’s intention to retire the 2010 Notes during the year ended December 31, 2015 with the funds available under the credit facility.
During the three months ended June 30, 2015 the Company paid cash of $17.2 million and issued 5.1 million shares of CBIZ common stock valued at approximately $48.0 million in exchange for retiring $49.3 million of its outstanding 2010 Notes in two privately negotiated transactions. These transactions will result in lower interest expense of approximately $3.2 million on an annualized basis. A non-operating charge of approximately $0.8 million was recorded in the second quarter of 2015 related to the two privately negotiated transactions and is included in “Other income (expense), net” in the accompanying Consolidated Statements of Comprehensive Income. Notes repurchased are deemed to be extinguished. The Company may repurchase additional 2010 Notes in privately negotiated transactions before the maturity date, but there can be no assurance that additional transactions will be completed or on what terms.
The carrying amount of the 2010 Notes at June 30, 2015 and December 31, 2014 were as follows (in thousands):
Principal amount of notes
Unamortized discount
Net carrying amount
The discount on the liability component of the 2010 Notes is being amortized using the effective interest method based upon an annual effective rate of 7.5%, which represented the market rate for similar debt without a conversion option at the issuance date. The discount is being amortized over the term of the 2010 Notes which is five years from the date of issuance. At June 30, 2015, the unamortized discount had a remaining amortization period of approximately three months.
Bank Debt
CBIZ has a $400.0 million unsecured credit facility with Bank of America as agent for a group of eight participating banks that matures in July 2019. The balance outstanding under the credit facility was $153.0 million and $107.4 million at June 30, 2015 and December 31, 2014, respectively. Rates for the six months ended June 30, 2015 and 2014 (with respect to the Company’s prior credit facility which was terminated on July 28, 2014) were as follows:
Weighted average rates
Range of effective rates
CBIZ had approximately $139.5 million of available funds under the credit facility at June 30, 2015, net of outstanding letters of credit and performance guarantees of $4.2 million. The credit facility provides CBIZ with operating flexibility and funding to support seasonal working capital needs and other strategic initiatives such as acquisitions and share repurchases. CBIZ is in compliance with its debt covenants at June 30, 2015.
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2006 Notes
At June 30, 2015, CBIZ had $750,000 aggregate principal amount outstanding of its 2006 Notes. The 2006 Notes mature on June 1, 2026 unless earlier redeemed, repurchased or converted.
Interest Expense
During the three and six months ended June 30, 2015 and 2014, CBIZ recognized interest expense as follows (in thousands):
2010 Notes (1)
Credit facility (2)
Total interest expense
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 $2.3 million at both June 30, 2015 and December 31, 2014. In addition, CBIZ provides license bonds to various state agencies to meet certain licensing requirements. The amount of license bonds outstanding at June 30, 2015 and December 31, 2014 totaled $1.8 million and $1.9 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 both June 30, 2015 and December 31, 2014. 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 Jeffrey C. Stone v. Greenberg Traurig LLP, et al.
These lawsuits arose out of the bankruptcy of Mortgages Ltd., a mortgage lender to developers in the Phoenix, Arizona area. Various other professional firms and individuals not related to the Company were also named defendants in these lawsuits.
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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 asserted claims against Mayer Hoffman for, among others things, violations of the Arizona Securities Act, common law fraud, and negligent misrepresentation, and sought 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.
With the exception of claims being pursued by two plaintiffs from the Ashkenazi lawsuit (“Baldino Group”), all other matters have been dismissed or settled without payment by the CBIZ Parties. The Baldino Group’s claims, which allege damages of approximately $16.0 million, are proceeding. At this time, the case is proceeding and no trial date has been set.
The CBIZ Parties deny all allegations of wrongdoing made against them 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.
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 $37.0 million and $36.4 million at June 30, 2015 and December 31, 2014, respectively. All bonds are investment grade and are classified as available-for-sale. These bonds have maturity or callable dates ranging from July 2015 through November 2019, and are included in “Funds held for clients - current” in the accompanying 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, 2015 and the twelve months ended December 31, 2014 (in thousands):
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Fair value at beginning of period
Purchases
Sales
Maturities and calls
Increase 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, 2014 for further discussion on CBIZ’s interest rate swaps.
CBIZ’s interest rate swap agreement expired in June 2015. At December 31, 2014, the interest rate swap was classified as a liability derivative. The following table summarizes CBIZ’s outstanding interest rate swap and its classification in the accompanying Consolidated Balance Sheets at December 31, 2014 (in thousands).
Amount
Interest rate swap (1)
The following table summarizes the effects of the interest rate swap on CBIZ’s accompanying Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2014 (in thousands):
Interest rate swap
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The following table summarizes CBIZ’s assets and liabilities at June 30, 2015 and December 31, 2014 that are measured at fair value on a recurring basis subsequent to initial recognition and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):
Deferred compensation plan assets
Corporate bonds
Contingent purchase price liabilities
During the six months ended June 30, 2015 and 2014, 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, 2015 and 2014 (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 accompanying 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.
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The following table presents financial instruments that are not carried at fair value but which require fair value disclosure as of June 30, 2015 and December 31, 2014 (in thousands):
2006 Convertible Notes
2010 Convertible Notes
The fair value of CBIZ’s 2006 Notes and 2010 Notes including the conversion feature was determined based upon their most recent quoted market price and as such, is considered to be a Level 1 fair value measurement. The 2006 Notes and the 2010 Notes are carried at face value less any unamortized debt discount. See Note 5 for further discussion of CBIZ’s debt instruments.
In addition, the carrying amounts of CBIZ’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments, and the carrying value of bank debt approximates fair value as the interest rate on the bank debt is variable and approximates current market rates. As a result, the fair value measurement of CBIZ’s bank debt is considered to be Level 2.
The following table is a summary of other comprehensive (loss) income and discloses the tax impact of each component of other comprehensive (loss) income for the three and six months ended June 30, 2015 and 2014 (in thousands):
Net unrealized (loss) gain 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 (loss) income
AOCL net of tax, was approximately $0.6 million and $0.7 million at June 30, 2015 and December 31, 2014, respectively. AOCL consisted of adjustments, net of tax, to unrealized gains and losses on available-for-sale securities and interest rate swaps, and foreign currency translation.
Effective May 15, 2014, CBIZ shareholders approved a new plan, the CBIZ, Inc. 2014 Stock Incentive Plan (“2014 Plan”). The 2014 Plan is in addition to the 2002 Amended and Restated CBIZ, Inc. Stock Incentive Plan (“2002 Plan”), pursuant to which CBIZ has granted various stock-based awards through the year ended December 31, 2014. The terms and vesting schedules for stock-based awards vary by type and date of grant.
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Beginning in 2015, the 2014 Plan replaces and, for future grants, supersedes the 2002 Plan. The operating terms of the 2014 Plan are substantially similar to those of the 2002 Plan. Under the 2014 Plan, which expires in 2024, a maximum of 9.6 million stock options, shares of restricted stock or other stock-based compensation awards may be granted. Shares subject to award under the 2014 Plan may be either authorized but unissued shares of CBIZ common stock or treasury shares. Compensation expense for stock-based awards recognized during the three and six months ended June 30, 2015 and 2014 was as follows (in thousands):
Stock options
Restricted stock awards
Total stock-based compensation expense
Stock award activity during the second quarter of 2015 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, 2015
Exercisable at June 30, 2015
CBIZ utilized the Black-Scholes-Merton options-pricing model to determine the fair value of stock options on the date of grant. The fair value of stock options granted during the second quarter of 2015 was $2.34. The following weighted average assumptions were utilized:
Expected volatility (1)
Expected option life (years) (2)
Risk-free interest rate (3)
Expected dividend yield (4)
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, 2015 and 2014 (in thousands, except per share data).
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Numerator:
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
The cost of an acquisition is measured at the fair value of the consideration transferred, including contingent consideration. Acquisition-related costs are recognized as an expense in the period in which they are incurred. The identifiable assets acquired, liabilities assumed and contingent consideration are measured at their fair values at the date of acquisition. Goodwill is measured as the excess of the aggregate of the consideration transferred over the net of the amounts of identifiable assets acquired and liabilities assumed. A significant portion of the goodwill is deductible for income tax purposes. The operating results of acquired businesses are included in the accompanying consolidated financial statements beginning on the date of acquisition.
First quarter 2015
During the first quarter of 2015, CBIZ completed one acquisition described below for approximately $5.5 million aggregate net cash consideration and $4.2 million in contingent consideration. Pro forma results of operations have not been presented because the effect of the acquisition was insignificant to the Company’s income from continuing operations. CBIZ also purchased two client lists, which are reported in the Employee Services practice group. Total consideration for these client lists was $0.1 million cash paid at closing and $0.3 million in guaranteed future consideration.
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Second quarter 2015
During the second quarter of 2015, CBIZ purchased one client list, which is reported in the Employee Services practice group. Total consideration for this client list is $3.0 million in future consideration. No acquisitions were completed in the second quarter of 2015.
First quarter 2014
During the first quarter of 2014, CBIZ completed three acquisitions for approximately $16.5 million aggregate net cash consideration, $1.9 million in CBIZ common stock and $10.2 million in contingent consideration.
Second quarter 2014
During the second quarter of 2014, CBIZ completed one acquisition for approximately $8.1 million aggregate net cash consideration, $0.9 million in CBIZ common stock and $2.1 million in contingent consideration.
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Aggregate purchase price
The estimated fair values of the assets acquired and the liabilities assumed during the six months ended June 30, 2015 and 2014, respectively, are as follows (in thousands):
Cash
Work in process, net
Identifiable intangible assets
Current liabilities
Total identifiable net assets
The goodwill of $6.9 million arising from the acquisition in the first half of 2015 consists largely of expected future earnings and cash flow from the existing management team, as well as the synergies created by the integration of the new business within the CBIZ organization, including cross-selling opportunities expected with the Company’s Employee Services and Financial Services practice groups, to help strengthen the Company’s existing service offerings and expand market position. All of the goodwill recognized is deductible for income tax purposes.
The goodwill of $6.9 million arising from the acquisition in the first half of 2015 is reported under the Employee Services operating segment. Of the $26.3 million of goodwill arising from acquisitions closed during the first half of 2014, $9.2 million is reported under the Financial Services operating segment and $17.1 million is reported under the Employee Services operating segment.
Contingent purchase price liability
Under the terms of each of the Model acquisition agreement, a portion of the purchase price is contingent on future performance of the business acquired. Utilizing a probability weighted income approach, CBIZ determined that the fair value of the contingent consideration arrangement was $4.2 million, of which $1.6 million was recorded in “Contingent purchase price liability – current” and $2.6 million was recorded in “Contingent purchase price liability – non-current” in the accompanying Consolidated Balance Sheets at June 30, 2015.
Change in contingent purchase price liability related to prior acquisitions
During the three and six months ended June 30, 2015, CBIZ reduced the fair value of the contingent purchase price liability related to prior acquisitions by $0.0 million and $1.5 million, respectively, due to lower than originally projected future results of the acquired businesses. During the same periods in 2014, CBIZ reduced the fair value of the contingent purchase price liability related to prior acquisitions by 2.1 million and $3.0 million, respectively, due to lower than originally projected future results of the acquired businesses. These reductions are included in “Other income (expense), net” in the accompanying Consolidated Statements of Comprehensive Income.
Contingent amounts related to prior acquisitions
During the three months ended June 30, 2015, CBIZ paid $1.5 million in cash and issued approximately 32,000 shares of CBIZ common stock valued at approximately $0.3 million as contingent earn outs for previous acquisitions. During the six
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months ended June 30, 2015, CBIZ paid $4.8 million in cash and issued approximately 91,000 shares of CBIZ common stock valued at approximately $0.8 million as contingent earn outs for previous acquisitions. During the three and six months ended June 30, 2014, CBIZ paid $0 and $1.5 million, respectively, in cash as contingent earn outs for previous acquisitions.
CBIZ has divested, 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 Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of an Entity (Topic 360)” which was effective January 1, 2015. Discontinued operations through December 31, 2014 followed the criteria in FASB Accounting Standards Codification 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 from operations of discontinued operations, net of tax” in the accompanying Consolidated Statements of Comprehensive Income. For the six months ended June 30, 2015, the loss on operations of discontinued operations represents the results from the operations of two small businesses under the Financial Services segment that were discontinued in December 2014, one of which was sold on June 1, 2015. For the six months ended June 30, 2014, the loss on operations of discontinued operations represents the results from operations of the two businesses mentioned above as well as the Company’s property tax business located in Leawood, Kansas that was discontinued in December 2013 and subsequently sold on June 1, 2014.
Revenue and results from operations of discontinued operations for the three and six months ended June 30, 2015 and 2014 were as follows (in thousands):
Loss from discontinued operations before income tax
Income tax benefit
Losses from the sale of discontinued operations are recorded as “(Loss) 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) on disposal of discontinued operations, net of tax” in the period they are earned.
During the three and six months ended June 30, 2015, CBIZ sold a small business within the Financial Services segment that was discontinued in December 2014. 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 Medical Management Professionals.
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For the three and six months ended June 30, 2015 and 2014, gain (loss) on the disposal of discontinued operations was as follows (in thousands):
Gain (loss) on disposal of discontinued operations, before income tax
Income tax (benefit) expense
At June 30, 2015 and December 31, 2014, the assets and liabilities of businesses classified as discontinued operations were reported separately in the accompanying consolidated financial statements and consisted of the following (in thousands):
Assets:
Liabilities:
Accrued personnel
Accrued expenses
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 accompanying 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 table below.
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Financial Services
Employee Services
National Practices
• Accounting
• Tax
• Government Health Care Consulting
• Financial Advisory
• Valuation
• Litigation Support
• Risk Advisory Services
• Real Estate Advisory
• Employee Benefits
• Property & Casualty
• Retirement Plan Services
• Payroll Services
• Life Insurance
• Human Capital Services
• Compensation Consulting
• Executive Recruiting
• Actuarial Services
• Managed Networking and Hardware Services
• Health Care Consulting
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 certain health care costs, gains or losses attributable to assets held in the Company’s deferred compensation plan, share-based compensation, 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, 2014. Upon consolidation, 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 “Corporate and Other.”
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Segment information for the three months ended June 30, 2015 and 2014 was as follows (in thousands):
Corporate general & admin
Operating income (loss)
Other income (expense):
Other income (expense), net
Total other income (expense)
Income (loss) from continuing operations before income tax expense
Total other (expense) income
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Segment information for the six months ended June 30, 2015 and 2014 was as follows (in thousands):
Other income, net
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of 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. In applying the new guidance, an entity will (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with
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customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. On July 9, 2015, the FASB agreed to delay the effective date of ASU 2014-09 by one year. In accordance with the delay, the new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies. Early adoption is permitted but not before annual periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. CBIZ is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements nor decided upon the method of adoption.
In April 2015, the FASB issued “Interest—Imputation of Interest”, (“ASU No. 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance of debt issuance costs are not affected by the amendments in this update. ASU 2015-03 will be effective for the Company beginning in the first quarter of 2016 and requires the Company to apply the new guidance on a retrospective basis on adoption. At June 30, 2015, the Company had $0.3 million of unamortized debt issue costs classified within other assets.
Subsequent to June 30, 2015 up to July 31, 2015, CBIZ repurchased approximately 630,000 shares of its common stock in the open market at a total cost of approximately $6.1 million. Between January 1, 2015 and July 31, 2015, CBIZ repurchased approximately 2.5 million shares of its common stock in the open market at a total cost of approximately $23.3 million.
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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, 2015 and December 31, 2014, results of operations for the three and six months ended June 30, 2015 and 2014, and cash flows for the six months ended June 30, 2015 and 2014, 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, 2014. 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, 2014.
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, 2014 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, 2015 increased $7.6 million, or 4.3%, to $185.0 million from $177.5 million for the same period in 2014. The increase in revenue was attributable to an increase in newly acquired operations, net of divestitures, of $4.0 million, or 2.3%, and same-unit revenue of $3.6 million, or 2.0%. Excluding revenue of $1.5 million from the divestiture of a Financial Services business sold in the fourth quarter of 2014, revenue for the three months ended June 30, 2015 increased $9.1 million, or 5.1%, to $185.0 million from $176.0 million.
Revenue for the six months ended June 30, 2015 increased $16.7 million, or 4.4%, to $398.9 million from $382.2 million for the same period in 2014. Same-unit revenue contributed $8.4 million, or 2.2%, and revenue from newly acquired operations, net of divestitures, contributed $8.3 million, or 2.2%. Excluding revenue of $3.4 million from the divestiture of a Financial Services business sold in the fourth quarter of 2014, revenue for the six months ended June 30, 2015 increased $20.1 million, or 5.3%, to $398.9 million from $378.8 million.
Income from continuing operations increased $0.3 million, or 3.7%, to $6.7 million during the three months ended June 30, 2015 compared to $6.4 million in the comparable period in 2014. Income from continuing operations increased $1.7 million, or 7.0%, to $26.2 million during the six months ended June 30, 2015 compared to $24.5 million in the comparable period in 2014.
Earnings per diluted share from continuing operations were $0.13 and $0.12 for the three months ended June 30, 2015 and 2014, respectively. The fully diluted weighted average share count decreased by approximately 28,000 shares to 52.0 million shares for the three months ended June 30, 2015 from 52.1 million shares for the same period in 2014. Excluding the impact of the common stock equivalents related to the 4.875% Convertible Senior Subordinated Notes (“2010 Notes”), fully diluted earnings per share from continuing operations would have been $0.13 for both three months ended June 30, 2015 and 2014, respectively.
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Earnings per diluted share from continuing operations were $0.51 and $0.47 for the six months ended June 30, 2015 and 2014, respectively. The fully diluted weighted average share count decreased by approximately 1.2 million shares to 51.2 million shares for the six months ended June 30, 2015 from 52.4 million shares for the same period in 2014 primarily due to a decrease in the common stock equivalents related to the 2010 Notes. Excluding the impact of the common stock equivalents related to the 2010 Notes, fully diluted earnings per share from continuing operations would have been $0.52 and $0.49 for the six months ended June 30, 2015 and 2014, respectively.
The common stock equivalents are impacted by the par value of the 2010 Notes and the average share price of the CBIZ common stock.
The 2010 Notes are scheduled to mature on October 1, 2015. During the three months ended June 30, 2015, in two privately negotiated transactions, CBIZ paid cash of approximately $17.2 million and issued approximately 5.1 million shares valued at approximately $48.0 million of CBIZ common stock in exchange for $49.3 million of the Company’s 2010 Notes. These transactions will result in lower interest expense of approximately $3.2 million on an annualized basis. A non-operating charge of approximately $0.8 million was recorded in the second quarter of 2015 related to these transactions and is included in “Other income (expense), net” in the accompanying Consolidated Statements of Comprehensive Income. As of June 30, 2015, the par value of the 2010 Notes was $48.4 million. The Company may repurchase additional 2010 Notes in privately negotiated transactions before the maturity date, but there can be no assurance that additional transactions will be completed or on what terms. At its option, the Company may use a combination of cash and shares to retire the 2010 Notes, however, it is expected that funds available under the $400.0 million unsecured credit facility (the “credit facility”) will be sufficient to retire the 2010 Notes at maturity. For further discussion regarding debt and financing arrangements, see Note 5 to the accompanying consolidated financial statements.
CBIZ believes that repurchasing shares of its common stock under the Company’s Share Repurchase Program is a prudent use of the Company’s financial resources, and that investing in its shares is an attractive use of capital and an efficient means to provide value to CBIZ shareholders. During the six months ended June 30, 2015, CBIZ repurchased approximately 1.9 million shares of its common stock at a total cost of approximately $17.2 million. On February 11, 2015, CBIZ’s Board of Directors authorized the purchase of up to 5.0 million shares of CBIZ common stock. The repurchase program may be suspended or discontinued at any time and expires on April 1, 2016. The shares may be purchased in open market, privately negotiated transactions or Rule 10b5-1 trading plan purchases in accordance with Securities and Exchange Commission (“SEC”) rules. The Company’s management will determine the timing and amount of the transactions based on its evaluation of market conditions and other factors. Subsequent to June 30, 2015 up to July 31, 2015, CBIZ repurchased approximately 630,000 shares of its common stock in the open market at a total cost of approximately $6.1 million. Between January 1, 2015 and July 31, 2015, CBIZ repurchased approximately 2.5 million shares of its common stock in the open market at a total cost of approximately $23.3 million.
Non-GAAP earnings per diluted share were $0.26 and $0.22 for the three months ended June 30, 2015 and 2014, respectively, and $0.76 and $0.68 for the six months ended June 30, 2015 and 2014, 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, “Earnings per diluted share from continuing operations.” Reconciliations for the three and six months ended June 30, 2015 and 2014 are provided in the “Results of Operations – Continuing Operations” section that follows.
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During the six months ended June 30, 2015, CBIZ completed one acquisition and purchased three client lists. The three client lists are reported in the Employee Services practice group.
For further discussion regarding acquisitions, see Note 12 to the accompanying consolidated financial statements.
During the six months ended June 30, 2015, CBIZ entered into an Amendment to the Credit Agreement that governs the credit facility, dated July 28, 2014, by and among the Company and Bank of America, N.A., as administrative agent and bank, and other participating banks, to remove certain events from the definition of Change of Control. This amendment had no impact on the terms of the Credit Agreement (other than as described above), the accompanying Consolidated Balance Sheets, Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows. For further discussion regarding debt and financing arrangements, see Note 5 to the accompanying consolidated financial statements.
Results of Operations – Continuing Operations
The following tables summarize total revenue for the three and six months ended June 30, 2015 and 2014 (in thousands except percentages).
Same-unit revenue
Total same-unit revenue
Acquired businesses
Divested operations
Total revenue
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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, 2014, revenue for the month of June would be included in same-unit revenue for both years; revenue for the period January 1, 2015 through May 31, 2015 would be reported as revenue from acquired businesses. A detailed discussion of revenue by practice group is included under “Operating Practice Groups.”
Operating expenses % of revenue
Three months ended June 30, 2015 compared to June 30, 2014. The increase in operating expenses in the second quarter of 2015 compared to the second quarter of 2014 was primarily due to higher expenses related to personnel costs and occupancy costs. Personnel costs increased $4.2 million, or 3.5%, primarily due to an increase in salaries and wages and the related benefits as well as increases in commissions paid. Acquisitions contributed approximately $3.3 million to personnel costs. Occupancy costs contributed an increase of approximately $1.2 million, or 12.6%, primarily due to acquisitions and additional costs related to the relocation of the Kansas City office. The remaining fluctuation consists of other operating expenses of which none are individually significant. The increase in personnel costs and occupancy costs by the individual practice groups is discussed in further detail under “Operating Practice Groups.”
Operating expenses in the second quarter of 2015 and 2014 include a benefit and expense of $0.2 million and $1.7 million, respectively, related to the Company’s deferred compensation plan. Excluding these items, operating expenses would have been $163.3 million and $156.6 million, or 88.3% and 88.3% of revenue for the three months ended June 30, 2015 and 2014, respectively. Expenses and benefits related to the Company’s deferred compensation plan are directly offset by “Other income, net” and have no impact on “Income from continuing operations before income tax expense.”
Six months ended June 30, 2015 compared to June 30, 2014. The increase in operating expenses during the six months ended June 30, 2015 compared to the same period in 2014 was primarily due to higher expenses related to personnel costs and occupancy costs. Personnel costs increased $9.7 million, or 3.9%, and are attributable to the same factors as discussed above in the three month period. Acquisitions contributed approximately $6.9 million to personnel costs. Occupancy costs contributed an increase of approximately $2.0 million, or 10.5%, and are attributable to the same factors as discussed above in the three month period. The remaining fluctuation consists of other operating expenses of which none are individually significant. The increase or decrease in personnel costs and occupancy costs by the individual practice groups is discussed in further detail under “Operating Practice Groups.”
Operating expenses for the six months ended June 30, 2015 and 2014 include expenses of $0.9 million and $2.3 million, respectively, related to the Company’s deferred compensation plan. Excluding these items, operating expenses would have been $333,095 and $317,962, or 83.5% and 83.2% of revenue for the six months ended June 30, 2015 and 2014, respectively. Expenses and benefits related to the Company’s deferred compensation plan are directly offset by “Other income, net” and have no impact on “Income from continuing operations before income tax expense.”
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Gross margin % of revenue
Three months ended June 30, 2015 compared to June 30, 2014. Gross margin increased $2.8 million, or 14.5%, to $21.9 million for the three months ended June 30, 2015 from $19.1 million for the same period in 2014 and increased as a percentage of revenue to 11.8% for the three months ended June 30, 2015 from 10.8% for the comparable period in 2014. Gross margin includes benefits and expenses related to the Company’s deferred compensation plan. Excluding these items, gross margin would be $21,694 and $20,828, or 11.7% and 11.7%, for the three months ended June 30, 2015 and 2014, respectively. The impact on gross margin by the individual practice groups is discussed in further detail under “Operating Practice Groups.”
Six months ended June 30, 2015 compared to June 30, 2014. Gross margin increased $3.0 million, or 4.8%, to $64.9 million for the six months ended June 30, 2015 from $61.9 million for the same period in 2015, but remained flat as a percentage of revenue at 16.3% and 16.2% for the six months ended June 30, 2015 and 2014, respectively. Gross margin includes expenses related to the Company’s deferred compensation plan. Excluding these items, gross margin would be $65,813 and $64,230, or 16.5% and 16.8%, for the six months ended June 30, 2015 and 2014, respectively. The impact on gross margin by the individual practice groups is discussed in further detail under “Operating Practice Groups.”
Corporate general and administrative (“G&A”) expenses
G&A expenses
G&A expenses % of revenue
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Three months ended June 30, 2015 compared to June 30, 2014. The decrease in G&A expenses in the second quarter of 2015 compared to the second quarter of 2014 was primarily due to a decrease in professional fees of $1.2 million. This decrease in professional fees was primarily attributable to a decrease in legal expenses related to case dismissals and settlements. For further discussion regarding legal proceedings, see Note 6 to the accompanying consolidated financial statements. Also contributing to the decrease in G&A expenses was a decrease in personnel costs of $0.3 million which was primarily due to a decrease in incentive based compensation.
G&A expenses in the second quarter of 2015 and 2014 include a benefit and expense of $0.1 million and $0.2 million, respectively, related to the Company’s deferred compensation plan. Excluding these items, G&A expenses would have been $6.7 million and $8.1 million, or 3.6% and 4.5% of revenue for the three months ended June 30, 2015 and 2014, respectively. Expenses and benefits related to the Company’s deferred compensation plan are directly offset by “Other income, net” and have no impact on “Income from continuing operations before income tax expense.”
Six months ended June 30, 2015 compared to June 30, 2014. The decrease in G&A expenses for the six months ended June 30, 2015 compared to the same period in 2014 was primarily due to a decrease in professional fees of $1.3 million and personnel costs of $0.4 million, which are attributable to the same factors as discussed above for the three month period.
G&A expenses for the six months ended June 30, 2015 and 2014 include an expense of $0.1 million and $0.3 million, respectively, related to the Company’s deferred compensation plan. Excluding these items, G&A expenses would have been $16.4 million and $18.2 million, or 4.1% and 4.8% of revenue for the six months ended June 30, 2015 and 2014, respectively. Expenses and benefits related to the Company’s deferred compensation plan are directly offset by “Other income, net” and have no impact on “Income from continuing operations before income tax expense.”
Other (expense) income
Total other expense, net
Three months ended June 30, 2015 compared to June 30, 2014. Interest expense decreased $0.8 million, or 20.4%, to $2.8 million for the second quarter of 2015 from $3.6 million for the comparable period in 2014. The decrease in interest expense was primarily due to the retirement of $49.3 million of the outstanding 2010 Notes at an interest rate of 7.50% with $17.2 million cash from the credit facility at a weighted average interest rate of 2.14%.
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The average debt balance outstanding under the 2010 Notes decreased to $83.2 million for the second quarter of 2015 compared to $123.8 million for the second quarter of 2014. The average debt balance outstanding under the credit facility increased to $150.4 million for the second quarter of 2015 compared to $88.6 million for the second quarter of 2014 (with respect to the Company’s prior credit facility which was terminated on July 28, 2014). The weighted average interest rate related to the credit facility decreased to 2.14% for the second quarter of 2015 compared to 2.70% for the same period in 2014. For further discussion regarding debt and financing arrangements, see Note 5 to the accompanying consolidated financial statements.
Other (expense) income, net decreased compared to the second quarter of 2014 primarily due to adjustments to the fair value of the Company’s contingent purchase price liability related to prior acquisitions and losses in the value of the investments held in a rabbi trust related to the deferred compensation plan.
Six months ended June 30, 2015 compared to June 30, 2014.Interest expense decreased $1.2 million, or 16.9%, to $5.8 million for the six months ended 2015 from $7.0 million for the comparable period in 2014. The decrease in interest expense was primarily due to the same factors as discussed above in the three month period.
The average debt balance outstanding under the 2010 Notes decreased to $89.1 million for six months ended June 30, 2015 compared to $124.5 million for the same period in 2014. The average debt balance outstanding under the credit facility increased to $138.4 million for the six months ended 2015 compared to $81.5 million for the same period in 2014 (with respect to the Company’s prior credit facility which was terminated on July 28, 2014). The weighted average interest rate related to the credit facility decreased to 2.17% for the six months ended 2015 compared to 2.70% for the same period in 2014.
Other income, net for the six months ended June 30, 2015 decreased compared to the same period in 2014 primarily due to losses in the value of the investments held in a rabbi trust related to the deferred compensation plan and adjustments to the fair value of the Company’s contingent purchase price liability related to prior acquisitions.
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Effective tax rate
Three months ended June 30, 2015 compared to June 30, 2014. Income tax expense from continuing operations for the three months ended June 30, 2015 decreased to $4.7 million from $4.8 million for the second quarter of 2014. The effective tax rate for the second quarter of 2015 was 41.3%, compared to an effective tax rate of 42.8% for the comparable period in 2014. The decrease in the effective tax rate primarily relates to adjustments to the value of deferred tax assets and deferred tax liabilities as a result of tax law changes in the second quarter of 2015.
Six months ended June 30, 2015 compared to June 30, 2014. Income tax expense from continuing operations for the six months ended June 30, 2015 increased to $18.3 million from $17.9 million for the six months ended June 30, 2014. The effective tax rate for the six months ended June 30, 2015 was to 41.1%, compared to an effective tax rate of 42.3% for the comparable period in 2014, which is attributable to the same factors as discussed above in the three month period.
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Earnings per share and Non-GAAP earnings per share
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 and six months ended June 30, 2015 and 2014.
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
Three months ended June 30, 2015 compared to June 30, 2014. Earnings from continuing operations were $0.13 and $0.12 per diluted share for the three months ended June 30, 2015 and 2014, respectively, and Non-GAAP earnings were $0.26 and $0.22 per diluted share for the three months ended June 30, 2015 and 2014, 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
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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.
Six months ended June 30, 2015 compared to June 30, 2014. Earnings from continuing operations were $0.51 and $0.47 per diluted share for the six months ended June 30, 2015 and 2014, respectively, and Non-GAAP earnings were $0.76 and $0.68 per diluted share for the six months ended June 30, 2015 and 2014, 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.
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
Divested businesses
Gross margin percent
Three months ended June 30, 2015 compared to June 30, 2014. The increase in same-unit revenue was primarily the result of stronger performance in the units that provide national services, which increased approximately $2.3 million, or 6.2%. This was primarily due to increased project work and growth in the federal and state governmental healthcare compliance business and in CBIZ’s risk and advisory practice. With respect to the accounting units, same-unit revenue declined slightly.
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The revenue from divestitures for the three months ended June 30, 2014 was from a Financial Services business located in Miami which was sold on November 1, 2014.
CBIZ provides a range of services to affiliated CPA firms under joint referral and administrative service agreements (“ASAs”). Fees earned by CBIZ under the ASAs are recorded as revenue in the accompanying Consolidated Statements of Comprehensive Income and were approximately $33.2 million and $33.8 million for the three months ended June 30, 2015 and 2014, respectively.
The largest components of operating expenses for the Financial Services practice group are personnel costs, occupancy costs, and travel and related costs, which represent 89.6% and 89.7% of total operating expenses and 78.6% and 78.1% of total revenue for the three months ended June 30, 2015 and 2014, respectively. Personnel costs increased $1.0 million during the second quarter of 2015 compared to the same period in 2014, and were 69.4% and 69.2% of revenue for the second quarter of 2015 and 2014, respectively. The increase is a result of staff compensation increases and benefit cost increases partially offset by a 1.7% reduction in headcount. Occupancy costs were $6.9 million and $6.3 million, or 5.9% and 5.4% of revenue, for the second quarter of 2015 and 2014, respectively. The increase relates to the incremental cost incurred in Tampa as a result of the acquisition of Lewis, Birch and Ricardo, LLC and additional costs related to the relocation of the Kansas City office. Travel and related costs were $3.9 million and $4.1 million, or 3.3% and 3.5% of revenue, for the second quarter of 2015 and 2014, respectively. The decrease in the second quarter is a result of the increase that occurred in the first quarter of 2015 related to the timing of staff training and conference costs.
Six months ended June 30, 2015 compared to June 30, 2014. The increase in same-unit revenue was primarily the result of stronger performance in the units that provide national services, which increased approximately $5.7 million, or 8.2%, which was attributable to the same factors as discussed above in the three month period. With respect to the accounting units, same-unit revenue declined slightly.
The growth in revenue from acquisitions was provided by Lewis Birch and Ricardo, LLC located in Tampa, Florida, that was acquired in the first quarter of 2014. The revenue from divestitures was from a Financial Services business as discussed above in the three month period.
CBIZ provides a range of services to affiliated CPA firms under ASAs. Fees earned by CBIZ under the ASAs are recorded as revenue in the accompanying Consolidated Statements of Comprehensive Income and were approximately $76.3 million and $77.5 million for the six months ended June 30, 2015 and 2014, respectively.
The largest components of operating expenses for the Financial Services practice group are personnel costs, occupancy costs, and travel and related costs, which represent 72.6% and 72.3% of operating expenses and 89.7% and 90.0% of total revenue for the six months ended June 30, 2015 and 2104, respectively. Personnel costs increased $2.3 million during the six months ended June 30, 2015 compared to the same period in 2014, but were 64.6% of revenue for each of the six month periods ended June 30, 2015 and 2014. The increase is a result of staff compensation increases and benefit cost increases partially offset by a 1.0% reduction in headcount. Occupancy costs increased to $13.5 million, or 5.2% of revenue, for the six months ended June 30, 2015 from $12.5 million, or 4.9% of revenue for the same period in 2014 due to the same factors discussed above in the three month period. Travel and related costs were $7.4 million, or 2.9% of revenue, for both six month periods ended June 30, 2015 and 2014.
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Three months ended June 30, 2015 compared to June 30, 2014. The increase in same-unit revenue was primarily attributable to increases in the Company’s property and casualty, payroll, and human capital services groups, offset by a decrease in the life insurance business. Property and casualty revenues increased $1.3 million, or 13.2%, primarily due to a strong performance within the specialty program businesses and an increase in carrier bonus payments. The payroll business revenues increased $0.2 million, or 2.9%, due to higher pricing coupled with an increase in processing volume for payroll and related services. The human capital services group revenues increased $0.2 million, or 8.7%, due to higher billings attributed to new consultants hired in 2014. These increases were partially offset by a decline in the life insurance business of ($0.6) million, or 37.6%, due to the inconsistent nature in the demand for life insurance plans.
The growth in revenue from acquisitions was provided by:
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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 68.2% and 69.1% of revenue for the second quarter of 2015 and 2014, respectively. Excluding costs related to the acquired businesses of $3.3 million, personnel costs increased approximately $0.2 million, primarily due to commissions paid to producers relating to the increased revenue in the property and casualty, payroll and human capital services businesses as well as investments in the employee benefits business. Occupancy costs were $3.3 million, or 5.5% of revenue and $2.9 million, or 5.3% of revenue, for the second quarter of 2015 and 2014, respectively. The increase in occupancy costs was primarily due to business acquisitions.
Six months ended June 30, 2015 compared to June 30, 2014. The increase in same-unit revenue was primarily attributable to increases in the Company’s property and casualty, payroll, and human capital services groups, offset by a decrease in the life insurance business and a slight decrease in the retirement plan services group. Property and casualty revenues increased $2.5 million, or 12.1%, the payroll business revenues increased $0.5 million, or 3.2%, the human capital services group revenues increased $0.4 million or 10.9%, all due to the same factors discussed above in the three month period. These increases were partially offset by a decline in the life insurance business of ($1.0) million, or 37.1%, due to the inconsistent nature in the demand for life insurance plans and a decrease in retirement consulting revenues of ($0.2) million or 1.2%, due to lower actuarial fee based revenues.
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 67.7% and 67.9% of revenue for the six months ended June 30, 2015 and 2014, respectively. Excluding costs related to the acquired businesses of $6.9 million, personnel costs increased approximately $0.9 million, primarily due to the same factors as discussed above in the three month period. Occupancy costs increased to $6.6 million, or 5.4% of revenue for the six months ended June 30, 2015 from $5.8 million, or 5.2% of revenue, for the same period in 2014 due to the same factors as discussed above in the three month period.
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National Practice results for the three and six months ended June 30, 2015 and 2014 remained flat.
Financial Condition
Total assets were $974.5 million at June 30, 2015, a decrease of $16.7 million versus December 31, 2014. Current assets of $352.1 million exceeded current liabilities of $229.9 million by $122.2 million at June 30, 2015.
Cash and cash equivalents increased by $1.3 million to $2.3 million at June 30, 2015 from December 31, 2014. Restricted cash was $34.7 million at June 30, 2015, an increase of $6.4 million from December 31, 2014. Restricted cash represents those funds held in connection with CBIZ’s Financial Industry Regulatory Authority (“FINRA”) 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 $177.2 million at June 30, 2015, an increase of $34.2 million from December 31, 2014, and days sales outstanding (“DSO”) from continuing operations was 84 days, 70 days and 85 days at June 30, 2015, December 31, 2014 and June 30, 2014, respectively. DSO represents accounts receivable, net and unbilled revenue (net of realization adjustments) at the end of the period, divided by trailing twelve month daily revenue. CBIZ provides DSO data because such data is commonly used as a performance measure by analysts and investors and as a measure of the Company’s ability to collect on receivables in a timely manner.
Other current assets were $14.5 million and $15.3 million at June 30, 2015 and December 31, 2014, 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
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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, 2014.
Property and equipment, net, increased by $2.4 million to $20.9 million at June 30, 2015 from $18.5 million at December 31, 2014. The increase is the result of additions of $5.3 million, partially offset by depreciation of $2.9 million. The majority of the additions were in connection with an office move in our Kansas City market that involved approximately 100,000 square feet of office space and approximately 450 employees. CBIZ’s property and equipment is primarily comprised of software, hardware, furniture and leasehold improvements.
Goodwill and other intangible assets, net, increased by $3.9 million at June 30, 2015 from December 31, 2014. This increase is comprised of additions to goodwill of $7.4 million and additions to intangible assets of $3.7 million resulting from the acquisition, partially offset by $7.2 million of amortization.
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 $64.4 million and $60.3 million at June 30, 2015 and December 31, 2014, respectively. The increase in assets of the deferred compensation plan of $4.1 million consisted of net participant contributions of $3.1 million and an increase in the fair value of the investments of $1.0 million for the six months ended June 30, 2015. The plan is described in further detail in the Company’s Annual Report on Form10-K for the year ended December 31, 2014.
The accounts payable balances of $48.6 million and $36.8 million at June 30, 2015 and December 31, 2014, respectively, reflect amounts due to suppliers and vendors. Balances fluctuate during the year based on the timing of cash payments. Accrued personnel costs were $30.1 million and $39.9 million at June 30, 2015 and December 31, 2014, respectively, and represent amounts due for payroll, payroll taxes, employee benefits and incentive compensation. Balances fluctuate during the year based on the timing of payments and adjustments to the estimate of incentive compensation costs.
Notes payable – current decreased by $0.8 million from December 31, 2014 as a result of guaranteed purchase price payments during the six months ended June 30, 2015.
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) decreased by $2.7 million at June 30, 2015 from December 31, 2014 due to settlements of $5.6 million and adjustments of $1.3 million to the fair value of the contingency purchase price liabilities. These decreases were partially offset by an increase of $4.2 million from the current year business acquisition.
Other liabilities (current and non-current) decreased by $1.3 million to $20.4 million at June 30, 2015 from $21.7 million at December 31, 2014. The decrease was primarily attributable to a decrease in various accruals of $1.0 million, a decrease of $0.6 million in accrued interest on CBIZ’s debt instruments due to timing of payments and a decrease in legal reserves of $0.6 million due to the payment of claims. These decreases were partially offset by an increase of $0.7 million related to the self-funded health insurance plan and an increase in unearned revenue of $0.2 million.
CBIZ’s 2006 Notes and 2010 Notes are carried at face value less unamortized discount. The $47.8 million decrease in the aggregate carrying value of the 2006 Notes and 2010 Notes at June 30, 2015 versus December 31, 2014 represents the retirement of $47.8 million par value of the 2010 Notes. The 2006 Notes and 2010 Notes are further discussed in Note 5 of the accompanying consolidated financial statements.
Bank debt amounts due on CBIZ’s credit facility increased $45.6 million to $153.0 million at June 30, 2015 from $107.4 million at December 31, 2014. This increase was primarily attributable to additional borrowings for use in convertible note repurchases.
Income taxes payable – current was $7.0 million at June 30, 2015 and $2.4 million at December 31, 2014 and primarily represents timing differences between current income tax expense and related tax payments. Income taxes payable – non-current at June 30, 2015 and December 31, 2014 was $4.5 million and $4.2 million, respectively, and represents the accrual for uncertain tax positions.
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Stockholders’ equity increased by $48.9 million to $448.7 million at June 30, 2015 from $399.8 million at December 31, 2014. The increase was primarily attributable to net income of $25.8 million, CBIZ’s stock award programs, which contributed $7.8 million, the issuance of $0.8 million in common shares related to business acquisitions and contingent payments related to prior acquisitions, and the $32.9 million net impact in common shares related to the retirement of $49.3 million of its outstanding 2010 Notes. These increases were partially offset by $18.4 million related to the repurchase of 2.0 million shares of CBIZ common stock, which includes Share Repurchase Plan activity of approximately 1.9 million shares repurchased at a total cost of approximately $17.2 million and 0.1 million shares repurchased at a total cost of approximately $1.2 million in conjunction with the settlement of restricted stock transactions.
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 the credit facility and 2010 Notes.
Under the credit facility, CBIZ is required to meet certain financial covenants with respect to (i) total leverage ratio and (ii) a minimum fixed charge coverage ratio. CBIZ was in compliance with its covenants as of June 30, 2015. Under its credit facility, the Company had $153.0 million outstanding and approximately $139.5 million available, net of outstanding letters of credit and performance guarantees of $4.2 million, at June 30, 2015.
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.
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, 2015 and 2014 (in thousands):
Net cash provided by operating activities - continuing operations
Net cash used in operating activities - discontinued operations
Net cash used in operating activities
Net cash provided by investing activities - continuing operations
Net cash provided by investing activities - discontinued operations
Net cash used in provided by financing activities
Cash and cash equivalents increased $1.3 million from $1.0 million at December 31, 2014, to $2.3 million at June 30, 2015.
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Operating Activities
Cash flows from operating activities represent net income adjusted for certain non-cash items and changes in assets and liabilities. CBIZ 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.
Net cash provided by operating activities was $4.3 million and $5.2 million, respectively, for the six months ended June 30, 2015 and 2014. This $0.9 million net decrease in cash provided by operating activities was primarily due to a $4.6 million net increase in working capital used, partially offset by a $2.4 million increase in net income and a $1.3 million net increase in non-cash adjustments to net income.
Investing Activities
CBIZ’s investing activities generally consist of payments for business acquisitions and client lists, purchases of capital equipment, net activity related to funds held for clients and proceeds received from sales of divestitures and discontinued operations. Capital expenditures consisted of investments in technology, leasehold improvements and purchases of furniture and equipment.
Net cash provided by investing activities was $57.7 million and $36.2 million, respectively, for the six months ended June 30, 2015 and 2014. This $21.5 million increase was primarily attributable to a $17.5 million decrease in cash used for business acquisitions. In addition, net activity related to funds held for clients increased by $3.4 million to $70.7 million for the first half of 2015 from $67.2 million for the same period in 2014.
Financing Activities
CBIZ’s financing cash flows typically consist of net borrowing and payment activity from the credit facility, payments on contingent consideration on businesses acquisitions, 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 was $60.7 million during the six months ended June 30, 2015, as compared to net cash used by financing activities of $38.2 million for the same period in 2014. This $22.5 million increase in net cash used in financing activities was primarily due to a $17.2 million payment related to the early extinguishment of the 2010 Notes, as well as an $8.2 million net increase in client fund obligations as a result of timing of cash receipts and related payments and a $6.7 million increase in cash used to acquire treasury stock. Borrowings, net of repayments on the credit facility increased by $12.9 million to $45.6 million for the six months ended June 30, 2015 from $32.7 million for the same period in 2014 which slightly offset the increase in cash used in financing activities.
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Obligations and Commitments
CBIZ’s aggregate amount of future obligations at June 30, 2015 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)
Contingent purchase price liabilities (5)
Restructuring lease obligations (6)
Non-cancelable operating lease obligations (6)
Letters of credit in lieu of cash security deposits
Performance guarantees for non-consolidated affiliates
License bonds and other letters of credit
Total
Off-Balance Sheet Arrangements
CBIZ maintains administrative service agreements with independent CPA firms (as described more fully in the Annual Report on Form 10-K for the year ended December 31, 2014), 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.
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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, 2015 and December 31, 2014. 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 $2.3 million at June 30, 2015 and December 31, 2014. In addition, CBIZ provides license bonds to various state agencies to meet certain licensing requirements. The amount of license bonds outstanding at June 30, 2015 and December 31, 2014 totaled $1.8 million and $1.9 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, 2015, CBIZ was not aware of any material obligations arising under indemnification agreements that would require payment.
Critical Accounting Policies
The Securities and Exchange Commission (“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, 2014.
New Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of 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. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. On July 9, 2015, the FASB agreed to delay the effective date of ASU 2014-09 by one year. In accordance with the delay, the new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies. Early adoption is permitted but not before annual periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. CBIZ is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements nor decided upon the method of adoption.
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In April 2015, the FASB issued ASU No. 2015-03, “Interest—Imputation of Interest” (“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance of debt issuance costs are not affected by the amendments in this update. ASU 2015-03 will be effective for the Company beginning in the first quarter of 2016 and requires the Company to apply the new guidance on a retrospective basis on adoption. At June 30, 2015, the Company had $0.3 million of unamortized debt issue costs classified within other assets.
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:
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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, 2014. 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.
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, 2015 was $153.0 million. If market rates were to increase or decrease 100 basis points from the levels at June 30, 2015, interest expense would increase or decrease approximately $1.5 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. 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, 2015, CBIZ had $48.4 million in 2010 Notes, before discount, bearing a fixed interest rate of 4.875% that will mature on October 1, 2015. CBIZ believes the fixed nature of these borrowings mitigates its interest rate risk.
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 in the accompanying 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” in the accompanying 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.
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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 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, 2015 that has materially affected, or is reasonably likely to materially affect, CBIZ’s Internal Controls.
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, 2014 as filed with the SEC. These risks could materially and adversely affect the business, financial condition and results of operations CBIZ.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer purchases of equity securities
Periodically, CBIZ’s Board of Directors authorizes a Share Repurchase Plan, which allows the Company to purchase shares of its common stock in the open market or in a privately negotiated transaction according to SEC rules. On February 11, 2015, 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 to be obtained in open market, privately negotiated transactions, or Rule 10b5-1 trading plan purchases. The Share Repurchase Plan was effective beginning April 1, 2015 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, 2015 (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, 2015
May 1 – May 31, 2015
June 1 – June 30, 2015
Second quarter purchases
According to the terms of CBIZ’s new credit facility, CBIZ is not permitted to declare or make any dividend payments, other than dividend payments made by one of its wholly owned subsidiaries to the parent company. See Note 8 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2014 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
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Item 6. Exhibits
10.1
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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.
CBIZ, Inc.
(Registrant)
/s/ Ware H. Grove
Duly Authorized Officer and
Principal Financial Officer
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