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CBZ > SEC Filings for CBZ > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for CBIZ, INC.


8-Nov-2013

Quarterly Report


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 September 30, 2013 and December 31, 2012, results of operations for the three and nine months ended September 30, 2013 and 2012, and cash flows for the nine months ended September 30, 2013 and 2012, and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with the Company's Annual Report on Form 10-K for the year ended December 31, 2012. This discussion and analysis contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in "Forward-Looking Statements" included elsewhere in this Quarterly Report on Form 10-Q and in "Risk Factors" included in the Annual Report on Form 10-K for the year ended December 31, 2012.

Overview

CBIZ provides professional business services, products and solutions that help its clients grow and succeed by better managing their finances and employees. These services are provided to businesses of various sizes, as well as individuals, governmental entities and not-for-profit enterprises throughout the United States and parts of Canada. CBIZ delivers its integrated services through three practice groups: Financial Services, Employee Services and National Practices. See Note 14 to the accompanying consolidated financial statements for a general description of services provided by each practice group.

See the Annual Report on Form 10-K for the year ended December 31, 2012 for further discussion of CBIZ's business and strategies, as well as the external relationships and regulatory factors that currently impact the Company's operations.

Executive Summary

On August 30, 2013, CBIZ, through its subsidiary CBIZ Operations, Inc., an Ohio Corporation, completed the sale of all of the issued and outstanding capital stock of each of CBIZ Medical Management Professionals, Inc., an Ohio corporation, and CBIZ Medical Management, Inc., a North Carolina corporation, and substantially all of the stock of their subsidiary companies, collectively consisting of all of CBIZ's Medical Management Professionals ongoing operations and business ("MMP") to Zotec Partners, LLC, an Indiana limited liability company, for a purchase price of $201.6 million, subject to final working capital adjustments. After transaction costs and taxes, CBIZ expects proceeds to be approximately $145 million. The proceeds were used to repurchase shares as discussed below and to pay down outstanding debt on the unsecured credit facility. As a result of the sale, all results of operations for MMP are reflected as discontinued operations in this Form 10-Q.

On August 30, 2013, concurrent with the sale of MMP, CBIZ completed an agreement with Westbury (Bermuda) Ltd., a Bermuda exempted company ("Westbury"), Westbury Trust, a Bermuda trust, and Michael G. DeGroote, the founder of CBIZ, to purchase from Westbury 3.85 million shares of the Company's common stock, which was 50% of Westbury's then current holdings of the Company's common stock at a price of $6.65 per share, which represented the 60-day moving average share price at July 16, 2013.

Revenue for the three months ended September 30, 2013 increased by 12.7% to $168.8 million from $149.8 million for the comparable period in 2012. Revenue from newly acquired operations, net of divestitures, contributed $13.6 million, or 9.1%, to the growth in revenue, and same-unit revenue contributed $5.4 million, or 3.6%. Revenue for the nine months ended September 30, 2013 increased by 10.4% to $542.8 million from $491.6 million for the comparable period in 2012. Revenue from newly acquired operations, net of divestitures, contributed $39.7 million, or 8.1%, and same-unit revenue contributed $11.5 to the growth in revenue, or 2.3%.


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Earnings per share from continuing operations was $0.10 per diluted share for the three months ended September 30, 2013 and $0.06 for the comparable period in 2012. For the nine months ended September 30, 2013 and 2012, earnings per diluted share from continuing operations were $0.55 and $0.49, respectively. Included in the nine months ended September 30, 2012 was a gain of $0.03 per diluted share related to the sale of CBIZ's wealth management business in January 2011. Non-GAAP earnings per diluted share were $0.25 and $0.19 for the three months ended September 30, 2013 and 2012, respectively, and $0.99 and $0.83 for the nine months ended September 30, 2013 and 2012, respectively. CBIZ believes Non-GAAP earnings per diluted share illustrates the impact of certain non-cash charges and credits to income from continuing operations and is a useful measure for the Company and its analysts. Non-GAAP earnings per diluted share is a measurement prepared on a basis other than generally accepted accounting principles ("GAAP"). As such, the Company has included this data and has provided a reconciliation to the nearest GAAP measurement, "income per diluted share from continuing operations". Reconciliations for the three and nine months ended September 30, 2013 and 2012 are provided in the "Results of Operations - Continuing Operations" section that follows.

During the nine months ended September 30, 2013, CBIZ acquired Associated Insurance Agents ("AIA") of Minneapolis, Minnesota. AIA is an insurance brokerage agency specializing in property and casualty insurance, personal lines, and health and benefit insurance. Annual revenues for AIA are expected to be approximately $3.8 million and will be reported in the Employee Services practice group.

Effective November 1, 2013, CBIZ acquired Knight Field Fabry, LLP ("Knight"). Located in Denver, Colorado, Knight provides accounting, tax, litigation support and valuation services to small and mid-size clients in the Denver, Colorado market. Annualized revenue from this acquisition is expected to be approximately $1.5 million and will be reported in the Financial Services practice group.

Effective October 15, 2013, CBIZ entered into an agreement with its largest client, Edward D. Jones & Co., L.P. ("Edward Jones"), to extend the current contract for an additional five years, or until December 31, 2018. CBIZ provides consulting and networking and hardware services under this cost-plus contract arrangement.

Results of Operations - Continuing Operations

Same-unit revenue represents total revenue adjusted to reflect comparable periods of activity for acquisitions and divestitures. For example, for a business acquired on September 1, 2012, revenue for the month of September would be included in same-unit revenue for both years; revenue for the period January 1, 2013 through August 31, 2013 would be reported as revenue from acquired businesses.

Three Months Ended September 30, 2013 and 2012

Revenue - The following table summarizes total revenue for the three months
ended September 30, 2013 and 2012 (in thousands, except percentages).



                                                             Three Months Ended September 30,
                                                       % of                       % of           $             %
                                          2013         Total         2012         Total        Change       Change
Same-unit revenue
Financial Services                      $ 101,510        60.1 %    $  95,976        64.1 %    $  5,534          5.8 %
Employee Services                          45,945        27.2 %       45,762        30.5 %         183          0.4 %
National Practices                          7,812         4.7 %        8,103         5.4 %        (291 )       (3.6 )%

Total same-unit revenue                   155,267        92.0 %      149,841       100.0 %       5,426          3.6 %
Acquired businesses                        13,572         8.0 %           -           -         13,572

Total revenue                           $ 168,839       100.0 %    $ 149,841       100.0 %    $ 18,998         12.7 %

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

Gross margin and operating expenses - Operating expenses increased by $13.7 million to $150.9 million for the three months ended September 30, 2013 from $137.2 million for the comparable period of 2012, but decreased as a percentage of revenue to 89.4% for the three months ended September 30, 2013 from 91.6% for the comparable period of 2012.


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The primary components of operating expenses for the three months ended September 30, 2013 and 2012 are included in the following table:

                                                              Three Months Ended September 30,
                                                  2013                              2012
                                          % of                              % of                            Change in
                                        Operating          % of           Operating          % of             % of
                                         Expense          Revenue          Expense          Revenue          Revenue
Personnel costs                               75.9 %          67.9 %            75.7 %          69.3 %            (1.4 )%
Occupancy costs                                6.2 %           5.5 %             6.7 %           6.2 %            (0.7 )%
Depreciation and amortization                  3.1 %           2.8 %             3.0 %           2.8 %              -
Travel and related costs                       3.7 %           3.3 %             3.5 %           3.2 %             0.1 %
Other (1)                                      9.6 %           8.6 %            10.0 %           9.1 %            (0.5 )%

Subtotal                                      98.5 %          88.1 %            98.9 %          90.6 %            (2.5 )%
Deferred compensation costs                    1.5 %           1.3 %             1.1 %           1.0 %             0.3 %

Total operating expenses                     100.0 %          89.4 %           100.0 %          91.6 %            (2.2 )%

Gross margin                                                  10.6 %                             8.4 %             2.2 %

(1) Other operating expenses include office expenses, equipment costs, professional fees, restructuring charges, bad debt and other expenses, none of which are individually significant as a percentage of total operating expenses.

The decrease in operating expenses as a percentage of revenue that was attributable to personnel costs and occupancy costs was primarily due to the leveraging of these costs in relation to the increase in revenues. The decrease in personnel costs were slightly offset by an increase in bonus accruals at certain locations that exceeded profitability targets. The increase in deferred compensation costs as a percentage of revenue was due to an increase in the gains in the value of the assets held in relation to CBIZ's deferred compensation plan for the three months ended September 30, 2013 compared to the same period last year. These adjustments do not impact CBIZ's net income as they are offset by the corresponding decrease or increase to other income, net. Personnel and other operating expenses are discussed in further detail under "Operating Practice Groups".

Corporate general and administrative expenses - Corporate general and administrative ("G&A") expenses increased $1.4 million to $8.9 million for the three months ended September 30, 2013 from $7.5 million for the comparable period in 2012, and increased as a percentage of revenue to 5.3% for the three months ended September 30, 2013 from 5.0% for the comparable period of 2012. The primary components of G&A expenses for the three months ended September 30, 2013 and 2012 are included in the following table:

                                                             Three Months Ended September 30,
                                                   2013                           2012
                                           % of                           % of                          Change in
                                           G&A            % of            G&A            % of             % of
                                         Expense         Revenue        Expense         Revenue          Revenue
Personnel costs                              48.2 %           2.6 %         47.0 %           2.3 %             0.3 %
Professional services                        25.7 %           1.4 %         16.0 %           0.8 %             0.6 %
Computer costs                                5.6 %           0.3 %          6.5 %           0.3 %              -
Travel and related costs                      3.6 %           0.2 %          5.0 %           0.2 %              -
Depreciation and amortization                 0.9 %            -             1.1 %           0.1 %            (0.1 )%
Other (1)                                    13.4 %           0.7 %         21.6 %           1.2 %            (0.5 )%

Subtotal                                     97.4 %           5.2 %         97.2 %           4.9 %             0.3 %
Deferred compensation costs                   2.6 %           0.1 %          2.8 %           0.1 %              -

Total G&A expenses                          100.0 %           5.3 %        100.0 %           5.0 %             0.3 %

(1) Other G&A expenses include office expenses, equipment costs, occupancy costs, insurance expense and other expenses, none of which are individually significant as a percentage of total G&A expenses.


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The increase in G&A expenses as a percentage of revenue attributable to personnel costs is primarily due to an increase in incentive based compensation accrued during the three months ended September 30, 2013 compared to the same period in 2012. The increase in professional fees was primarily related to an increase in legal expenses during the three months ended September 30, 2013 compared to the same period last year related to the claims against CBIZ as described in Note 6 of the accompanying consolidated financial statements.

Interest expense - Interest expense increased by $0.2 million to $3.8 million for the three months ended September 30, 2013 from $3.6 million for the comparable period in 2012. The average debt balance outstanding under the credit facility was $141.8 million and $155.3 million for the three months ended September 30, 2013 and 2012, respectively, and the weighted average interest rate was 2.97% and 3.07% for the three months ended September 30, 2013 and 2012, respectively. See Note 5 of the accompanying consolidated financial statements for further discussion of CBIZ's debt arrangements.

Other income, net - For the three months ended September 30, 2013 and 2012, other income, net is primarily comprised of gains and losses in the fair value of investments held in a rabbi trust related to the deferred compensation plan. For the three months ended September 30, 2013 and 2012, gains in the fair value of investments related to the deferred compensation plan were $2.4 million and $1.7 million, respectively. These adjustments do not impact CBIZ's net income as they are offset by the corresponding decrease or increase to compensation expense, which is recorded as operating and G&A expenses in the consolidated statements of comprehensive income.

Income tax expense - CBIZ recorded income tax expense from continuing operations of $2.4 million and $1.1 million for the three months ended September 30, 2013 and 2012, respectively. The effective tax rate for the three months ended September 30, 2013 was 32.5%, compared to an effective tax rate of 25.7% for the comparable period in 2012. The increase in the effective tax rate primarily relates to a decreased effect of favorable discrete tax items for the three months ended September 30, 2013 due to higher pre-tax income.

Earnings per share and Non-GAAP earnings per share - Earnings per share from continuing operations were $0.10 and $0.06 per diluted share for the three months ended September 30, 2013 and 2012, respectively, and Non-GAAP earnings per share were $0.25 and $0.19 per diluted share for the three months ended September 30, 2013 and 2012, respectively. The Company believes Non-GAAP earnings and Non-GAAP earnings per diluted share illustrate the impact of certain non-cash charges and credits to income from continuing operations and are a useful performance measure for the Company, its analysts and its stockholders. Management uses these performance measures to evaluate CBIZ's business, including ongoing performance and the allocation of resources. Non-GAAP earnings and Non-GAAP earnings per diluted share are provided in addition to the presentation of GAAP measures and should not be regarded as a replacement or alternative of performance under GAAP. The following is a reconciliation of income from continuing operations to Non-GAAP earnings from operations and diluted earnings per share from continuing operations to Non-GAAP earnings per share for the three months ended September 30, 2013 and 2012.

                      NON-GAAP EARNINGS AND PER SHARE DATA

 Reconciliation of Income from Continuing Operations to Non-GAAP Earnings from
                             Continuing Operations



                                                           Three Months Ended September 30,
                                                 2013          Per Share        2012          Per Share
                                                        (In thousands, except per share data)
Income from continuing operations             $    5,081      $      0.10      $ 3,082       $      0.06
Selected non-cash charges:
Amortization                                       3,520             0.07        3,032              0.06
Depreciation                                       1,250             0.03        1,180              0.03
Non-cash interest on convertible notes               710             0.02          659              0.01
Stock-based compensation                           1,350             0.03        1,508              0.03
Adjustment to contingent earnouts                    186               -          (200 )              -

Non-cash charges                              $    7,016      $      0.15      $ 6,179       $      0.13

Non-GAAP earnings - continuing operations     $   12,097      $      0.25      $ 9,261       $      0.19


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Operating Practice Groups

CBIZ delivers its integrated services through three practice groups: Financial Services, Employee Services and National Practices. A description of these groups' operating results and factors affecting their businesses is provided below.

Financial Services



                                         Three Months Ended September 30,
                                                                 $            %
                                   2013           2012         Change      Change
                                        (In thousands, except percentages)
          Revenue
          Same-unit              $ 101,510      $ 95,976      $  5,534         5.8 %
          Acquired businesses        9,103            -          9,103

          Total revenue          $ 110,613      $ 95,976      $ 14,637        15.3 %
          Operating expenses        97,653        87,259        10,394        11.9 %

          Gross margin           $  12,960      $  8,717      $  4,243        48.7 %

          Gross margin percent        11.7 %         9.1 %

The growth in same-unit revenue was approximately 70% attributable to an increase in volume in the traditional accounting and tax services and 30% attributable to stronger performance in the units that provide certain national services. The traditional accounting and tax services realized a 5.4% increase in hours billed for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Growth in the national units was primarily due to increased project work in the federal and state governmental health care compliance industry. Revenue from acquired businesses was the result of the acquisition of PHBV Partners, L.L.P. ("PHBV"), which occurred on December 31, 2012.

CBIZ provides a range of services to affiliated CPA firms under joint referral and administrative service agreements ("ASAs"). Fees earned by CBIZ under the ASAs are recorded as revenue in the accompanying consolidated statements of comprehensive income and were approximately $31.8 million and $23.8 million for the three months ended September 30, 2013 and 2012, respectively. The increase in ASA fees was primarily the result of the PHBV acquisition.

The largest components of operating expenses for the Financial Services practice group are personnel costs, occupancy costs, and travel and related costs, which represented 89.6% and 89.2% of total operating expenses for the three months ended September 30, 2013 and 2012, respectively. Personnel costs increased $8.7 million during the three months ended September 30, 2013 compared to the same period in 2012, primarily due to an increase of $6.1 million associated with the acquisition of PHBV as well as an increase in same-unit personnel costs related to staff compensation increases. Personnel costs represented 70.1% and 71.6% of revenue for the three months ended September 30, 2013 and 2012, respectively. Occupancy costs are relatively fixed in nature and were $6.5 million and $6.1 million, or 5.8% and 6.4% of revenue, for the three months ended September 30, 2013 and 2012, respectively. Travel and related costs were $3.6 million for the three months ended September 30, 2013 compared to $3.0 million for the same period in 2012, and were 3.2% and 3.1% of total revenue for the three months ended September 30, 2013 and 2012, respectively. The increase in travel and related costs was due to increased cost incurred for clients (which are billed to clients) and professional staff training efforts, as well as the impact of the PHBV acquisition. In addition to the expenses discussed above, professional service costs were $1.6 million for the three months ended September 30, 2013 compared to $1.0 million for the same period in 2012, and were 1.4% and 1.1% of total revenue for the three months ended September 30, 2013 and 2012, respectively. The increase in professional service costs was associated with outside services related to client engagements for our federal and state governmental health care contracts.


Table of Contents

Employee Services



                                         Three Months Ended September 30,
                                                                 $           %
                                    2013          2012        Change      Change
                                        (In thousands, except percentages)
           Revenue
           Same-unit              $ 45,945      $ 45,762      $   183         0.4 %
           Acquired businesses       4,469            -         4,469

           Total revenue          $ 50,414      $ 45,762      $ 4,652        10.2 %
           Operating expenses       42,055        38,593        3,462         9.0 %

           Gross margin           $  8,359      $  7,169      $ 1,190        16.6 %

           Gross margin percent       16.6 %        15.7 %

The increase in same-unit revenue was attributable to several factors. Property and casualty revenues increased 5.3% due to better pricing throughout the industry as well as strong performance within the specialty program business. Payroll business revenues increased 3.4% primarily due to pricing increases for core services. Retirement consulting revenues increased 5.6% due to favorable equity market conditions as advisory fees are typically earned on plan asset balances, which have increased over the prior year. Employee benefits revenues increased 1.0% primarily due to strong client retention and favorable renewal pricing trends. These increases in revenue were partially offset by a decline in the life insurance business of $1.0 million due to fewer policies placed. Excluding the impact of the life insurance business, same-unit revenue increased 2.8% for the three months ended September 30, 2013 compared to the same period last year.

The growth in revenue from acquisitions was provided by:

Trinity Risk Advisors, Inc., a property and casualty insurance business located in Atlanta, Georgia that was acquired in the third quarter of 2012;

Strategic Employee Benefit Services - The Pruett Group, Inc., an employee benefits business headquartered in Nashville, Tennessee that was acquired in the fourth quarter of 2012;

The employee benefit division of Leavitt Pacific Insurance Brokers, Inc., an employee benefits business in the San Jose, California market that was acquired in the fourth quarter of 2012;

Diversified Industries, Inc. d/b/a Payroll Control Systems, a payroll business in Minneapolis, Minnesota that was acquired in the fourth quarter of 2012; and

Associated Insurance Agents, Inc., a property and casualty and employee benefits business located in Minneapolis, Minnesota, that was acquired in the second quarter of 2013.

The largest components of operating expenses for the Employee Services group are personnel costs, including commissions paid to third party brokers, and occupancy costs, representing 81.9% and 82.2% of total operating expenses for the three months ended September 30, 2013 and 2012, respectively. Personnel costs increased approximately $2.8 million, primarily as a result of the acquired businesses. Occupancy costs are relatively fixed and were $2.8 million for the three months ended September 30, 2013 and 2012.


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National Practices



                                         Three Months Ended September 30,
                                                                $            %
                                    2013         2012        Change       Change
                                        (In thousands, except percentages)
           Same-unit revenue      $  7,812      $ 8,103      $  (291 )       (3.6 )%
           Operating expenses        6,617        6,844         (227 )       (3.3 )%

           Gross margin           $  1,195      $ 1,259      $   (64 )       (5.1 )%

           Gross margin percent       15.3 %       15.5 %

The decrease in same-unit revenue was primarily due to decreases of $0.3 million in CBIZ's healthcare consulting and $0.2 million in the mergers and acquisitions businesses, slightly offset by an increase of $0.2 million in consulting services provided to CBIZ's largest client, Edward Jones. The decrease in healthcare consulting was due to a lost client in CBIZ's Medicaid eligibility . . .

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