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CBZ > SEC Filings for CBZ > Form 10-K on 14-Mar-2014All Recent SEC Filings

Show all filings for CBIZ, INC.

Form 10-K for CBIZ, INC.


14-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion is intended to assist in the understanding of CBIZ's financial position at December 31, 2013 and 2012, and results of operations and cash flows for each of the years ended December 31, 2013, 2012 and 2011. This discussion should be read in conjunction with CBIZ's consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. 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" and "Item 1A. Risk Factors" in this Annual Report on Form 10-K.

Executive Summary

Revenue for the year ended December 31, 2013 increased by 10.5% to $692.0 million from $626.5 million for 2012. The increase in revenue was due to a combination of newly acquired operations, which resulted in an increase of $50.2 million, or 8.0%, and an increase in same unit revenue of $15.3 million, or 2.5%.

Earnings per share from continuing operations were $0.51 per diluted share for the year ended December 31, 2013 compared to $0.46 per diluted share for the year ended December 31, 2012. Earnings per share for the year ended December 31, 2012 included a gain of approximately $0.03 related to the divestiture of CBIZ's wealth management business that occurred in January of 2011, as well as $0.02 resulting from proceeds from a legal settlement which are included in other income, net.

Non-GAAP earnings per diluted share were $1.08 and $0.92 for the years ended December 31, 2013 and 2012, respectively. CBIZ believes Non-GAAP earnings per diluted share illustrates the impact of certain non-cash charges on income from continuing operations and is a useful performance measure for the Company, its analysts and its stockholders. Non-GAAP earnings per diluted share is a measurement prepared on a basis other than generally accepted accounting principles ("GAAP"). As such, the Company has included this data and has provided a reconciliation to the nearest GAAP measurement, "income per diluted share from continuing operations". Reconciliations for the years ended December 31, 2013, 2012 and 2011 are provided in the "Results of Operations-Continuing Operations" section that follows.

During the year ended December 31, 2013, CBIZ acquired two businesses:
Associated Insurance Agents ("AIA"), located in Minneapolis, Minnesota, an insurance brokerage agency specializing in property and casualty insurance, personal lines and health and benefit insurance; and Knight Field Fabry, LLP ("Knight"), primarily located in Denver, Colorado, an accounting service company providing traditional accounting, tax, litigation support and valuation services. Revenues from these business acquisitions are estimated to exceed $5.3 million for the year ending December 31, 2014. The operating results of AIA and Knight are reported in the Employee Services and Financial Services practice groups, respectively. In addition to the business acquisitions, CBIZ acquired three client lists, two of which are reported in the Employee Services practice group and the third being reported in the Financial Services practice group. For more details regarding CBIZ's acquisitions, refer to Note 19 of the accompanying consolidated financial statements.

On August 30, 2013, CBIZ sold all of the issued and outstanding capital stock of CBIZ Medical Management Professionals, Inc. and CBIZ Medical Management, Inc. and substantially all of the stock of their subsidiary companies, collectively consisting of all of CBIZ's MMP's ongoing operations and business for a purchase price of $201.6 million, subject to final working capital adjustments pursuant to a Stock Purchase Agreement among CBIZ Operations, Inc. and Zotec Partners, LLC dated July 26, 2013. After transaction costs and taxes, proceeds from the transaction were approximately $145 million. The proceeds were used to repurchase shares from Westbury as discussed below and to pay down outstanding debt on the unsecured credit facility. The results of operations for MMP for the years ended December 31, 2013, 2012 and 2011 are included in "Income for discontinued operations, net of tax" and the gain on the sale of MMP of approximately $58.3 million is recorded in "Gain on disposal of discontinued operations, net of tax" on the consolidated statements of comprehensive income. The assets and liabilities of MMP have been consolidated and are included in "Assets of discontinued


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operations" and "Liabilities of discontinued operations" on the consolidated balance sheets as of December 31, 2012. Following the closing of the MMP transaction, the Company operates in three operating practice groups.

CBIZ made the decision to divest the operations of its property tax business located in Leawood, Kansas, as a result of declining growth and profitability. This business is being held for sale at December 31, 2013, with the results of operations being included in "Income for discontinued operations, net of tax" on the consolidated statements of comprehensive income. This business was previously reported in the Financial Services practice group.

On December 31, 2013, CBIZ sold its mergers and acquisition business. The results of operations for the years ended 2013, 2012 and 2011 are included in continuing operations and are reported in the National Practices practice group. No gain or loss was recorded as a result of the sale.

During the years ended December 31, 2012 and 2011, CBIZ recognized gains of $2.5 million and $2.3 million, respectively, from the sale of its individual wealth management business that occurred in January 2011. The gains are recorded in "Gain on sale of operations, net" on the consolidated statements of comprehensive income.

CBIZ believes that repurchasing shares of its common stock provides value to its stockholders. CBIZ purchased approximately 3.85 million shares of its common stock pursuant to a Stock Purchase Agreement entered into on July 26, 2013 with Westbury. CBIZ paid approximately $25.7 million for the shares, which represented a price per share of $6.65. No other shares were repurchased on the open market during 2013. On February 13, 2014, CBIZ's Board of Directors authorized the purchase of up to 5.0 million shares of CBIZ common stock through March 31, 2015. The shares may be repurchased in the open market or through privately negotiated purchases in accordance with SEC rules.

Subsequent to December 31, 2013 up to the date of this filing, CBIZ repurchased 456,603 shares at a total cost of approximately $3.9 million under the Rule 10b5-1 trading plan, which allows CBIZ to repurchase shares below a predetermined price per share.

Results of Operations - Continuing Operations

CBIZ provides professional business services that help clients manage their finances and employees. CBIZ delivers its integrated services through the following 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 revenue represents total revenue adjusted to reflect comparable periods of activity for acquisitions and divestitures. For example, for a business acquired on July 1, 2012, revenue for the period January 1, 2013 through June 30, 2013 would be reported as revenue from acquired businesses; same-unit revenue would include revenue for the periods July 1 through December 31 of both years. Divested operations represent operations that did not meet the criteria for treatment as discontinued operations. Those businesses that have met the requirements to be treated as a discontinued operation are eliminated from all periods presented below.


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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Revenue

The following table summarizes total revenue for the years ended December 31,
2013 and 2012 (in thousands, except percentages):



                                                Year Ended December 31,
                                                                  $             %
                                     2013          2012         Change       Change
         Same-unit revenue
         Financial Services        $ 423,926     $ 410,195     $ 13,731          3.3 %
         Employee Services           187,431       186,217        1,214          0.7 %
         National Practices           30,074        29,434          640          2.2 %

         Total same-unit revenue     641,431       625,846       15,585          2.5 %
         Acquired businesses          50,155             -       50,155
         Divested operations             447           692         (245 )

         Total revenue             $ 692,033     $ 626,538     $ 65,495         10.5 %

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

Gross margin and operating expenses - Operating expenses increased to $608.7 million for the year ended December 31, 2013 from $555.5 million in 2012, but decreased as a percentage of revenue to 88.0% for the year ended December 31, 2013 from 88.7% for 2012. Excluding the impact of the Company's deferred compensation plan, operating expenses as a percentage of revenue decreased by 1.2%. The primary components of operating expenses for the years ended December 31, 2013 and 2012 are illustrated in the following table:

                                               2013                                  2012
                                      % of                                  % of                                Change in
                                    Operating            % of             Operating            % of               % of
                                     Expense            Revenue            Expense            Revenue            Revenue
Personnel costs                           76.2 %            67.0 %              76.6 %            67.9 %              (0.9 )%
Occupancy costs                            6.1 %             5.4 %               6.5 %             5.8 %              (0.4 )%
Depreciation and amortization              3.0 %             2.7 %               3.0 %             2.6 %               0.1 %
Travel and related costs                   3.9 %             3.4 %               3.5 %             3.1 %               0.3 %
Professional fees                          1.3 %             1.2 %               0.9 %             0.8 %               0.4 %
Other(1)                                   8.3 %             7.2 %               8.8 %             7.9 %              (0.7 )%

Subtotal                                  98.8 %            86.9 %              99.3 %            88.1 %              (1.2 )%
Deferred compensation costs                1.2 %             1.1 %               0.7 %             0.6 %               0.5 %

Total operating expenses                 100.0 %            88.0 %             100.0 %            88.7 %              (0.7 )%

Gross margin                                                12.0 %                                11.3 %               0.7 %

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

Personnel costs as a percentage of revenue decreased 0.9% to 67.0% for the year ended December 31, 2013 compared to 2012 due to the leveraging of labor costs in relation to the increase in revenues. Personnel costs as a percentage of revenue experienced by the individual practice groups is discussed in further detail under "Operating Practice Groups". The decrease in occupancy costs of 0.4% of revenue was a result of the fixed nature of occupancy costs. The increase in professional fees primarily relates to the increase in the use of third party consultants in CBIZ's expanded governmental audit practice where outside professional services are needed. The increase in travel and related costs relates to continued client development efforts. The increase in


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deferred compensation costs of 0.5% resulted from adjustments to the fair value of investments held in the deferred compensation plan. The adjustments to the fair value of investments held in relation to the deferred compensation plan totaled a gain of $7.4 million and $3.8 million for the years ended December 31, 2013 and 2012, respectively. These adjustments are recorded as compensation expense and are offset by the same adjustments to "other income, net", and thus do not have an impact on net income. Although these adjustments are recorded as operating expenses, they are not allocated to the individual practice groups.

Corporate general and administrative expenses - Corporate general and administrative ("G&A") expenses increased by $4.2 million to $34.4 million for the year ended December 31, 2013, from $30.2 million for 2012, and increased as a percent of revenue by 0.1% to 4.9% for the year ended December 31, 2013.

The primary components of corporate general and administrative expenses for the years ended December 31, 2013 and 2012 are illustrated in the following table:

                                            2013                               2012
                                   % of                               % of                              Change in
                                   G&A              % of              G&A              % of               % of
                                 Expense           Revenue          Expense           Revenue            Revenue
Personnel costs                      50.8 %             2.5 %           56.4 %             2.7 %              (0.2 )%
Professional fees                    19.7 %             1.0 %           11.0 %             0.5 %               0.5 %
Legal settlement costs                1.8 %             0.1 %            3.5 %             0.2 %              (0.1 )%
Computer costs                        6.0 %             0.3 %            6.5 %             0.3 %                 -
Travel and related costs              3.4 %             0.2 %            4.1 %             0.2 %                 -
Occupancy costs                       2.4 %             0.1 %            2.9 %             0.1 %                 -
Depreciation and
amortization                          1.0 %               -              1.1 %             0.1 %              (0.1 )%
Other(1)                             12.6 %             0.6 %           12.7 %             0.6 %                 -

Subtotal                             97.7 %             4.8 %           98.2 %             4.7 %               0.1 %
Deferred compensation
costs                                 2.3 %             0.1 %            1.8 %             0.1 %                 -

Total corporate general
and administrative
expenses                            100.0 %             4.9 %          100.0 %             4.8 %               0.1 %

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

The increase in G&A expenses as a percentage of revenue is primarily attributable to the increase of 0.5% in professional fees. This increase is a result of CBIZ recording a recovery of legal fees in the fourth quarter of 2012 that was attributable to reimbursement of incurred legal expenses.

Interest expense - Interest expense increased by $0.4 million to $15.4 million for the year ended December 31, 2013 from $15.0 million for 2012. The increase is primarily due to an increase in amortization of the discount related to the 2010 Notes as well as amortization of deferred debt costs related to the credit facility. Debt is further discussed under "Liquidity and Capital Resources" and in Note 8 of the accompanying consolidated financial statements.

Gain on sale of operations, net - The gain on sale of operations, net was $0.1 million and $2.8 million for the years ended December 31, 2013 and 2012, respectively. The net gain in 2012 was primarily comprised of the $2.5 million gain recognized from the 2011 sale of the Company's individual wealth management business.

Other income, net - Other income, net is primarily comprised of adjustments to the fair value of investments held in a rabbi trust related to the deferred compensation plan, adjustments to contingent purchase price liabilities related to previous acquisitions, gains and losses on sales of assets, and other miscellaneous income and expenses such as contingent royalties from previous divestitures, proceeds from legal settlements and interest income. Adjustments to the fair value of investments related to the deferred compensation plan do not impact CBIZ's net


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income as they are offset by the same adjustments to compensation expense (recorded as operating or corporate general and administrative expenses in the consolidated statements of comprehensive income). Other income, net for the year ended December 31, 2013 primarily consisted of an $8.2 gain in the fair value of investments related to the deferred compensation plan and interest income of $0.5 million, offset by adjustments to the fair value of the Company's contingent purchase price liability related to prior acquisitions which resulted in other expense of $0.9 million. Other income, net for the year ended December 31, 2012 primarily consisted of a $4.3 million gain in the fair value of investments related to the deferred compensation plan, proceeds from various legal settlements of $2.5 million, adjustments to the fair value of the Company's contingent purchase price liability related to prior acquisitions which resulted in other income of $1.0 million, and interest income of $0.3 million.

Income Taxes - CBIZ recorded income tax expense from continuing operations of $16.4 million and $14.1 million for the years ended December 31, 2013 and 2012, respectively. The effective tax rate for the years ended December 31, 2013 and 2012 was 39.7% and 38.2%, respectively. The increase in the effective tax rate is primarily due to an increase in state taxes driven by a release of a valuation allowance in 2012 with respect to a state tax credit carryforward as well as a lower amount of valuations allowances released in 2013 compared to 2012 with respect to state net operating losses. For further discussion regarding income tax expense, see Note 7 to the accompanying consolidated financial statements.

Earnings per share and Non-GAAP earnings per share - Earnings per share from continuing operations were $0.51 and $0.46 per diluted share for the years ended December 31, 2013 and 2012, respectively. Earnings per share for the year ended December 31, 2012 included a gain of approximately $0.02 per diluted share related to a legal settlement recovery that was recorded in other income and a gain of approximately $0.03 per diluted share related to the divestiture of the wealth management business that occurred in the first quarter of 2011.

Non-GAAP earnings per share were $1.08 and $0.92 per diluted share for the years ended December 31, 2013 and 2012, respectively. The Company believes Non-GAAP earnings and Non-GAAP earnings per diluted share, which are both non-GAAP measures, illustrate the impact of certain non-cash charges 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 earnings per diluted share from continuing operations to Non-GAAP earnings per diluted share for the years ended December 31, 2013 and 2012.

                      NON-GAAP EARNINGS AND PER SHARE DATA

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



                                                                Year Ended December 31,
                                                2013          Per Share          2012           Per Share
                                                         (In thousands, except per share data)
Income from continuing operations             $ 24,989       $      0.51       $ 22,752        $      0.46
Adjustment for gain on sale of operations            -                 -         (1,547 )            (0.03 )
Selected non-cash charges:
Amortization expense                            14,056              0.29         11,983               0.24
Depreciation expense                             4,828              0.10          4,751               0.10
Non-cash interest on convertible notes           2,840              0.06          2,638               0.05
Stock-based compensation                         5,655              0.12          5,888               0.12
Adjustment to contingent earnouts                  865              0.02           (953 )            (0.02 )

Non-cash charges                              $ 28,244       $      0.57       $ 24,307        $      0.49

Non-GAAP earnings - continuing operations     $ 53,233       $      1.08       $ 45,512        $      0.92


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Operating Practice Groups

Financial Services



                                              Year Ended December 31,
                                                                  $            %
                                   2013           2012          Change      Change
                                         (In thousands, except percentages)
          Revenue
          Same-unit              $ 423,926      $ 410,195      $ 13,731         3.3 %
          Acquired businesses       32,723              -        32,723
          Divested operations            -              -             -

          Total revenue            456,649        410,195        46,454        11.3 %
          Operating expenses       395,976        357,378        38,598        10.8 %

          Gross margin           $  60,673      $  52,817      $  7,856        14.9 %

          Gross margin percent        13.3 %         12.9 %

The growth in same-unit revenue was approximately 65% attributable to stronger performance in the units that provide certain national services and 35% attributable to the traditional accounting and tax services. Growth in the national units was primarily due to increased project work in the federal and state governmental health care compliance industry as well as in risk and advisory services. The growth in the traditional accounting and tax services was due to a 0.7% increase in billable hours and a 1.3% increase in revenue per hour for the year ended December 31, 2013 compared to the same period a year ago. 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 ASAs. Fees earned by CBIZ under the ASAs are recorded as revenue in the accompanying consolidated statements of comprehensive income and were approximately $140.2 million and $116.1 million for the years ended December 31, 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 89.3% and 89.1% of total operating expenses for the years ended December 31, 2013 and 2012, respectively. Personnel costs increased $30.9 million during the year ended December 31, 2013 compared to the same period in 2012, and represented 68.7% and 68.9% of revenue for the years ended December 31, 2013 and 2012, respectively. The increase was largely attributable to the acquisition of PHBV, comprising $23.0 million of the variance, as well as a same-unit increase of $7.1 million due to increased headcount. Occupancy costs are relatively fixed in nature and were $25.2 million and $24.3 million, or 5.5% and 5.9% of revenue, for the years ended December 31, 2013 and 2012, respectively. The increase in occupancy costs is related primarily to the PHBV acquisition. Travel and related costs were $14.8 million and $11.4 million, or 3.2% and 2.8% of total revenue, for the years ended December 31, 2013 and 2012, respectively. The increase in travel and related costs was due to a higher volume of engagement-related costs (which are billed to clients) and professional staff training efforts, as well as from the impact of the PHBV acquisition. In addition to the expenses discussed above, professional service costs were $6.2 million and $3.3 million, or 1.4% and 0.8% of total revenue, for the years ended December 31, 2013 and 2012, respectively. The increase in professional service costs was associated with outside services related to client engagements for our federal and state governmental health care contracts.


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Employee Services



                                              Year Ended December 31,
                                                                  $            %
                                   2013           2012          Change      Change
                                         (In thousands, except percentages)
          Revenue
          Same-unit              $ 187,431      $ 186,217      $  1,214         0.7 %
          Acquired businesses       17,432              -        17,432
          Divested operations            -              -             -

          Total revenue            204,863        186,217        18,646        10.0 %
          Operating expenses       168,696        155,311        13,385         8.6 %

          Gross margin           $  36,167      $  30,906      $  5,261        17.0 %

          Gross margin percent        17.7 %         16.6 %

The increase in same-unit revenue was attributable to several factors. Property and casualty revenues increased 5.1% due to better pricing throughout the industry as well as strong performance within the specialty program businesses. Payroll business revenues increased 5.0% primarily due to an increase in volume resulting from new clients coupled with pricing increases for core services. Retirement consulting revenues increased 4.3% due to net growth in assets resulting from client contributions and favorable equity market conditions. These increases were partially offset by a decline in the life insurance business of $2.5 million due to several large non-recurring policies that were placed in 2012. Excluding the impact of the life insurance business, same-unit revenue increased 2.1% for the year ended December 31, 2013 compared to the year ended December 31, 2012.

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