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CBZ > SEC Filings for CBZ > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for CBIZ, INC.

Form 10-Q for CBIZ, INC.


8-Aug-2014

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 June 30, 2014 and December 31, 2013, results of operations for the three and six months ended June 30, 2014 and 2013, and cash flows for the six months ended June 30, 2014 and 2013, and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with the Company's Annual Report on Form 10-K for the year ended December 31, 2013. This discussion and analysis contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in "Forward-Looking Statements" included elsewhere in this Quarterly Report on Form 10-Q and in "Risk Factors" included in the Annual Report on Form 10-K for the year ended December 31, 2013.

Overview

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

See the Annual Report on Form 10-K for the year ended December 31, 2013 for further discussion of CBIZ's business and strategies, as well as the external relationships and regulatory factors that currently impact the Company's operations.

Executive Summary

Revenue for the three months ended June 30, 2014 increased by 5.0% to $180.9 million from $172.2 million for the comparable period in 2013. Revenue from newly acquired operations contributed $5.0 million, or 2.9%, to the growth in revenue, and same-unit revenue contributed $3.7 million, or 2.1%. Revenue for the six months ended June 30, 2014 increased by 4.4% to $389.8 million from $373.4 million for the comparable period in 2013. Revenue from newly acquired operations, net of divestitures, contributed $9.8 million, or 2.6%, and same-unit revenue contributed $6.6 to the growth in revenue, or 1.8%.

Earnings per share from continuing operations was $0.12 per diluted share for the three months ended June 30, 2014 and $0.11 per diluted share for the comparable period in 2013. For the six months ended June 30, 2014 and 2013, earnings per diluted share from continuing operations were $0.46. Non-GAAP earnings per diluted share were $0.22 and $0.25 for the three months ended June 30, 2014 and 2013, respectively, and $0.68 and $0.75 for the six months ended June 30, 2014 and 2013, respectively. CBIZ believes Non-GAAP earnings per diluted share illustrates the impact of certain non-cash charges and credits to income from continuing operations and is a useful measure for the Company, its analysts and its stockholders. Non-GAAP earnings per diluted share is a measurement prepared on a basis other than generally accepted accounting principles ("GAAP"). As such, the Company has included this data and has provided a reconciliation to the nearest GAAP measurement, "income per diluted share from continuing operations". Reconciliations for the three and six months ended June 30, 2014 and 2013 are provided in the "Results of Operations - Continuing Operations" section that follows.

During the six months ended June 30, 2014, CBIZ acquired substantially all of the assets of four businesses: Clearview National Partners, LLC ("Clearview"), Centric Insurance Agency ("Centric"), Lewis Birch & Richardo, LLC ("LBR"), and the Tegrit Group ("Tegrit"). Clearview is located in Waltham, Massachusetts, and is a specialized employee benefits broker. Centric is an insurance broker located in New Providence, New Jersey, that provides property and casualty insurance, with a specialty in education institutions and public schools. LBR is a professional tax, accounting and consulting service provider located in Tampa, Florida, with significant experience and expertise in family law litigation support, not-for-profit


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entities and healthcare providers. Tegrit is located in Akron, Ohio and is a national provider of actuarial consulting and retirement plan administration. Annual revenues for Clearview, Centric and Tegrit are estimated to be $2.5 million, $1.6 million and $8.5 million, respectively, and will be reported in the Employee Services practice group. Annual revenues for LBR are estimated to be $9.8 million and will be reported in the Financial Services practice group.

Effective July 7, 2014, in a privately negotiated transaction, CBIZ repurchased $17.4 million of its $130 million 4.875% Convertible Senior Subordinated Notes due October 2015. This transaction will result in lower interest expense of approximately $0.7 million annually and a reduction in the diluted share count of approximately 380,000 shares. A non-operating loss of approximately $0.8 million will be recorded in the third quarter of 2014.

Effective July 28, 2014, CBIZ replaced its $275 million unsecured credit facility with a new $400 million unsecured credit facility. The new credit facility, which expires in July 2019, will enable the Company to lower its borrowing costs, provide flexibility to refinance its 2010 Notes due October 1, 2015, and will also allow for the allocation of funds for strategic initiatives, including acquisitions and the repurchase of CBIZ common stock.

CBIZ believes that repurchasing shares of its common stock under the Company's stock purchase plan is a use of cash that provides value to its shareholders. During the six months ended June 30, 2014, CBIZ repurchased approximately 1.3 million of its common shares at a total cost of approximately $10.7 million.

Results of Operations - Continuing Operations

Same-unit revenue represents total revenue adjusted to reflect comparable periods of activity for acquisitions and divestitures. For example, for a business acquired on June 1, 2013, revenue for the month of June would be included in same-unit revenue for both years; revenue for the period January 1, 2014 through May 31, 2014 would be reported as revenue from acquired businesses.

Three Months Ended June 30, 2014 and 2013

Revenue - The following table summarizes total revenue for the three months
ended June 30, 2014 and 2013 (in thousands, except percentages).



                                                 Three Months Ended June 30,
                                         % of                       % of           $           %
                            2014         Total         2013         Total       Change       Change
Same-unit revenue
Financial Services        $ 116,367        64.3 %    $ 113,527        65.9 %    $ 2,840          2.5 %
Employee Services            52,209        28.9 %       51,488        29.9 %        721          1.4 %
National Practices            7,324         4.0 %        7,214         4.2 %        110          1.5 %

Total same-unit revenue     175,900        97.2 %      172,229       100.0 %      3,671          2.1 %
Acquired businesses           4,985         2.8 %           -           -         4,985

Total revenue             $ 180,885       100.0 %    $ 172,229       100.0 %    $ 8,656          5.0 %

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

Gross margin and operating expenses - Operating expenses increased by $11.2 million to $162.3 million for the three months ended June 30, 2014 from $151.1 million for the comparable period of 2013, and increased as a percentage of revenue to 89.7% for the three months ended June 30, 2014 from 87.7% for the comparable period of 2013.


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The primary components of operating expenses for the three months ended June 30, 2014 and 2013 are included in the following table:

                                                                 Three Months Ended June 30,
                                                  2014                              2013
                                          % of                              % of                            Change in
                                        Operating          % of           Operating          % of             % of
                                         Expense          Revenue          Expense          Revenue          Revenue
Personnel costs                               76.3 %          68.4 %            76.6 %          67.2 %             1.2 %
Occupancy costs                                6.0 %           5.4 %             6.2 %           5.5 %            (0.1 )%
Depreciation and amortization                  3.0 %           2.7 %             3.1 %           2.7 %              -
Travel and related costs                       4.0 %           3.6 %             4.1 %           3.6 %              -
Professional fees                              1.1 %           1.0 %             1.6 %           1.4 %            (0.4 )%
Other (1)                                      8.6 %           7.7 %             8.3 %           7.2 %             0.5 %

Subtotal                                      99.0 %          88.8 %            99.9 %          87.6 %             1.2 %
Deferred compensation costs                    1.0 %           0.9 %             0.1 %           0.1 %             0.8 %

Total operating expenses                     100.0 %          89.7 %           100.0 %          87.7 %             2.0 %


Gross margin                                                  10.3 %                            12.3 %            (2.0 )%

(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.

The increase in operating expenses as a percentage of revenue that was attributable to personnel costs was primarily due to an increase in salaries and wages and the related benefits and payroll taxes resulting from certain investments in personnel to support business development as well as staff merit increases. In addition, increases in personnel costs in the federal and state governmental health care consulting business were a result of an increase in headcount to support the growth in business and also to replace third-party consultants, resulting in a decrease in professional fees. The increase in deferred compensation costs as a percentage of revenue was due to gains of $1.7 million in the value of the assets held in relation to CBIZ's deferred compensation plan, which resulted in a significant impact to gross margin for the three months ended June 30, 2014, compared to modest gains of $0.2 million in the value of assets for the comparable period in 2013. Personnel and other operating expenses are discussed in further detail under "Operating Practice Groups".

Corporate general and administrative expenses - Corporate general and administrative ("G&A") expenses increased by $0.7 million to $8.3 million for the three months ended June 30, 2014 from $7.6 million for the three months ended June 30, 2013, and increased as a percentage of revenue to 4.6% for the three months ended June 30, 2014 from 4.5% for the comparable period of 2013. The primary components of G&A expenses for the three months ended June 30, 2014 and 2013 are included in the following table:

                                                                Three Months Ended June 30,
                                                 2014                              2013
                                         % of                             % of                             Change in
                                         G&A             % of             G&A              % of              % of
                                       Expense          Revenue         Expense           Revenue           Revenue
Personnel costs                            47.3 %            2.2 %          56.2 %             2.5 %             (0.3 )%
Professional services                      24.1 %            1.1 %          15.3 %             0.7 %              0.4 %
Computer costs                              6.6 %            0.3 %           6.5 %             0.3 %               -
Travel and related costs                    3.6 %            0.2 %           4.2 %             0.2 %               -
Depreciation and amortization               1.4 %            0.1 %           1.0 %              -                 0.1 %
Other (1)                                  14.1 %            0.6 %          17.4 %             0.8 %             (0.2 )%

Subtotal                                   97.1 %            4.5 %         100.6 %             4.5 %               -
Deferred compensation costs                 2.9 %            0.1 %          (0.6 )%             -                 0.1 %

Total G&A expenses                        100.0 %            4.6 %         100.0 %             4.5 %              0.1 %

(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 decrease in G&A expenses as a percentage of revenue attributable to personnel costs is primarily due to a decrease in incentive based compensation accrued during the three months ended June 30, 2014 compared to the same period in 2013. The increase in professional fees was primarily related to an increase in legal expenses during the three months ended June 30, 2014 compared to the same period last year related to the claims against CBIZ as described in Note 6 of the accompanying consolidated financial statements.

Interest expense - Interest expense decreased by $0.5 million to $3.6 million for the three months ended June 30, 2014 from $4.1 million for the comparable period in 2013. The decrease in interest expense was primarily due to a decrease in the average debt balance outstanding under the credit facility to $88.6 million for the three months ended June 30, 2014 compared to $180.4 million for the three months ended June 30, 2013, as well as a decrease in the weighted average interest rate to 2.70% for the three months ended June 30, 2014 compared to 2.95% for the same period in 2013. The decrease in the average debt balance is primarily due to the application of a portion of the proceeds received from the sale CBIZ's Medical Management Professionals business on August 30, 2013. See Note 5 of the accompanying consolidated financial statements for further discussion of CBIZ's debt arrangements.

Other income, net - For the three months ended June 30, 2014 and 2013, other income, net is primarily comprised of gains and losses in the fair value of investments held in a rabbi trust related to the deferred compensation plan and adjustments to contingent purchase price liabilities related to prior acquisitions. For the three months ended June 30, 2014 and 2013, gains in the fair value of investments related to the deferred compensation plan were $1.9 million and $0.1 million, respectively. These adjustments do not impact CBIZ's net income as they are offset by a corresponding increase to compensation expense, which is recorded as operating and G&A expenses in the consolidated statements of comprehensive income. For the three months ended June 30, 2014, adjustments to the fair value of the Company's contingent purchase price liability related to prior acquisitions resulted in other income of $2.0 million. The adjustments to these contingent purchase price liabilities for the same period in 2013 were nominal.

Income tax expense - CBIZ recorded income tax expense from continuing operations of $4.5 million and $4.3 million for the three months ended June 30, 2014 and 2013, respectively. The effective tax rate for the three months ended June 30, 2014 was 41.7%, compared to an effective tax rate of 43.3% for the comparable period in 2013. The decrease in the effective tax rate primarily relates to a higher level of pre-tax income and a lower state effective tax rate in 2014.

Earnings per share and Non-GAAP earnings per share- Earnings per share from continuing operations were $0.12 and $0.11 per diluted share for the three months ended June 30, 2014 and 2013, respectively, and Non-GAAP earnings per share were $0.22 and $0.25 per diluted share for the three months ended June 30, 2014 and 2013, respectively. The Company believes Non-GAAP earnings and Non-GAAP earnings per diluted share illustrate the impact of certain non-cash charges and credits to income from continuing operations and are a useful performance measure for the Company, its analysts and its stockholders. Management uses these performance measures to evaluate CBIZ's business, including ongoing performance and the allocation of resources. Non-GAAP earnings and Non-GAAP earnings per diluted share are provided in addition to the presentation of GAAP measures and should not be regarded as a replacement or alternative of performance under GAAP.


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The following is a reconciliation of income from continuing operations to Non-GAAP earnings from operations and diluted earnings per share from continuing operations to Non-GAAP earnings per share for the three months ended June 30, 2014 and 2013.

                      NON-GAAP EARNINGS AND PER SHARE DATA

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



                                                            Three Months Ended June 30,
                                               2014          Per Share          2013         Per Share
                                                       (In thousands, except per share data)

Income from continuing operations            $  6,240       $      0.12       $  5,620      $      0.11

Selected non-cash charges:
Amortization                                    3,683              0.07          3,586             0.07
Depreciation                                    1,281              0.02          1,163             0.02
Non-cash interest on convertible notes            764              0.02            710             0.02
Stock-based compensation                        1,598              0.03          1,488             0.03
Adjustment to contingent earnouts              (2,026 )           (0.04 )           17               -

Non-cash charges                             $  5,300       $      0.10       $  6,964      $      0.14

Non-GAAP earnings - continuing operations    $ 11,540       $      0.22       $ 12,584      $      0.25

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 June 30,
                                                                 $            %
                                  2014           2013         Change       Change
                                        (In thousands, except percentages)
         Revenue
         Same-unit              $ 116,367      $ 113,527      $ 2,840          2.5 %
         Acquired businesses        2,715             -         2,715

         Total revenue          $ 119,082      $ 113,527      $ 5,555          4.9 %

         Operating expenses       104,591         98,721        5,870          5.9 %

         Gross margin           $  14,491      $  14,806      $  (315 )       (2.1 )%


         Gross margin percent        12.2 %         13.0 %

The growth in same-unit revenue resulted from the stronger performance in several of the units that provide national services, specifically the federal and state governmental health care compliance industry and to a lesser extent, valuation services. Revenue associated with these national services increased 10.6% for the three months ended June 30, 2014 compared to the same period last year. With respect to the accounting units, same-unit revenue declined slightly.

The growth in revenue from acquisitions was provided by:

Knight Field Fabry, LLP, located in Denver, Colorado, acquired in the fourth quarter of 2013, and

Lewis Birch and Ricardo, LLC, located in Tampa, Florida, acquired in the first quarter of 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 $35.2 million and $35.9 million for the three months ended June 30, 2014 and 2013, respectively.


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The largest components of operating expenses for the Financial Services practice group are personnel costs, occupancy costs, and travel and related costs, which represented 89.5% and 88.8% of total operating expenses and 78.6% and 77.2% of total revenue for the three months ended June 30, 2014 and 2013, respectively. Personnel costs increased $5.4 million during the three months ended June 30, 2014 compared to the same period in 2013, and represented 69.4% and 68.1% of revenue for the three months ended June 30, 2014 and 2013, respectively. This increase is comprised of an increase in same-unit personnel of $3.0 million as a result of staff compensation increases and an increase in headcount, particularly at the units offering national services, and an increase of $2.4 million associated with the acquisitions of Knight and LBR. The increase in headcount primarily occurred at the units offering federal and state governmental health care consulting services to help support the business growth as well as to replace third-party consultants. Occupancy costs are relatively fixed from period to period and were $6.6 million and $6.3 million for the three months ended June 30, 2014 and 2013, respectively, and flat as a percentage of operating expenses and revenue. Travel and related costs were $4.3 million and $4.0 million for the three months ended June 30, 2014 and 2013, respectively, and were flat as a percentage of operating expenses and revenue.

Employee Services



                                           Three Months Ended June 30,
                                                                $            %
                                   2014          2013        Change       Change
                                        (In thousands, except percentages)
          Revenue
          Same-unit              $ 52,209      $ 51,488      $   721          1.4 %
          Acquired businesses       2,270            -         2,270

          Total revenue          $ 54,479      $ 51,488      $ 2,991          5.8 %

          Operating expenses       45,936        42,868        3,068          7.2 %

          Gross margin           $  8,543      $  8,620      $   (77 )       (0.9 )%


          Gross margin percent       15.7 %        16.7 %

The increase in same-unit revenue was primarily attributable to increases in the Company's employee benefits, property and casualty, payroll, and life insurance, offset by a slight decrease in the retirement plan services group. The employee benefits business increased $0.5 million, or 2.0%, due to strong client retention and growth from new clients in the three months ended June 30, 2014 as well as an increase in volume-based carrier bonus payments. Property and casualty revenues increased $0.5 million, or 5.5%, primarily due to strong performance within the specialty program businesses. The payroll business revenues increased $0.2 million, or 3.5%, due to higher pricing coupled with an increase in processing volume for payroll and related services. These increases were partially offset by the decrease in retirement consulting revenues of $0.2 million, or 2.2%, due to lower actuarial fee based revenues during the three months ended June 30, 2014.

The growth in revenue from acquisitions was provided by:

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

Clearview National Partners, Inc., an employee benefits broker located in Waltham, Massachusetts, that was acquired in the first quarter of 2014.

Centric Insurance Agency, a property and casualty firm located in New Providence, New Jersey, that was acquired in the first quarter of 2014.

Tegrit Group, LLC, a retirement plan services business located in Akron, Ohio, that was acquired in the second quarter of 2014.


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The largest components of operating expenses for the Employee Services group are personnel costs, including commissions paid to third party brokers, and occupancy costs, representing 82.0% and 82.4% of total operating expenses for the three months ended June 30, 2014 and 2013, respectively. Excluding costs related to the acquired businesses of $1.0 million, personnel costs increased approximately $1.2 million, primarily due to higher commissions paid out to producers relating to the new revenue growth in employee benefits, property and casualty, payroll, and life businesses. Occupancy costs are relatively fixed in nature and were $2.9 million and $2.8 million for the three months ended June 30, 2014 and 2013, respectively. The increase in occupancy costs was primarily due to business acquisitions.

National Practices



                                            Three Months Ended June 30,
                                                                $            %
                                    2014         2013        Change       Change
                                        (In thousands, except percentages)

           Same-unit revenue      $  7,324      $ 7,214      $   110          1.5 %

           Operating expenses        6,685        6,875         (190 )       (2.8 )%

           Gross margin           $    639      $   339      $   300         88.5 %


           Gross margin percent        8.7 %        4.7 %

The slight increase in same-unit revenue was primarily attributable to services provided to CBIZ's largest client, Edward Jones, under its cost-plus contract. Costs related to the merger and acquisitions business that was sold December 31, 2013 have not been incurred in 2014, thus the decrease in operating expenses and the increase in gross margin for the National Practices operating segment.

Six Months Ended June 30, 2014 and 2013
. . .
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