10-Q 1 cbz-10q_20170930.htm 10-Q cbz-10q_20170930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from________ to ________

Commission File Number 1-32961

 

CBIZ, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

22-2769024

(State or other jurisdiction of incorporation

or organization)

(I.R.S. Employer

Identification No.)

 

 

6050 Oak Tree Boulevard, South, Suite 500, Cleveland, Ohio

44131

(Address of principal executive offices)

(Zip Code)

 

(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     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     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 

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 October 31, 2017

Common Stock, par value $0.01 per share

54,850,933

 

 

 


CBIZ, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION:

Page

 

 

 

Item 1.

Condensed Financial Statements (Unaudited)

3

 

 

 

 

 

 

Consolidated Balance Sheets – September 30, 2017 and December 31, 2016

3

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2017 and 2016

4

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity – Nine Months Ended September 30, 2017 

5

 

 

 

 

 

 

Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2017 and 2016

6

 

 

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

7

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

32

 

 

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

 

PART II.

OTHER INFORMATION:

 

 

 

 

 

 

Item 1.

Legal Proceedings

34

 

 

 

 

 

Item 1A.

Risk Factors

34

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

35

 

 

 

 

 

Item 4.

Mine Safety Disclosures

35

 

 

 

 

 

Item 5.

Other Information

35

 

 

 

 

 

Item 6.

Exhibits

36

 

 

 

 

 

Signature

37

 

 

2


PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

CBIZ, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,278

 

 

$

3,494

 

Restricted cash

 

 

32,104

 

 

 

27,880

 

Accounts receivable, net

 

 

213,418

 

 

 

175,354

 

Other current assets

 

 

23,004

 

 

 

21,407

 

Current assets before funds held for clients

 

 

269,804

 

 

 

228,135

 

Funds held for clients

 

 

134,051

 

 

 

213,457

 

Total current assets

 

 

403,855

 

 

 

441,592

 

Non-current assets:

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

24,446

 

 

 

19,450

 

Goodwill and other intangible assets, net

 

 

615,316

 

 

 

584,401

 

Assets of deferred compensation plan

 

 

81,720

 

 

 

69,912

 

Notes receivable

 

 

1,185

 

 

 

1,227

 

Other non-current assets

 

 

2,166

 

 

 

2,006

 

Total non-current assets

 

 

724,833

 

 

 

676,996

 

Total assets

 

$

1,128,688

 

 

$

1,118,588

 

LIABILITIES

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

47,576

 

 

$

45,772

 

Income taxes payable

 

 

10,470

 

 

 

1,048

 

Accrued personnel costs

 

 

38,495

 

 

 

45,221

 

Notes payable

 

 

1,628

 

 

 

1,060

 

Contingent purchase price liability

 

 

15,237

 

 

 

16,322

 

Other current liabilities

 

 

14,937

 

 

 

16,169

 

Current liabilities before client fund obligations

 

 

128,343

 

 

 

125,592

 

Client fund obligations

 

 

134,119

 

 

 

213,855

 

Total current liabilities

 

 

262,462

 

 

 

339,447

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Bank debt

 

 

206,000

 

 

 

191,400

 

Debt issuance costs

 

 

(959

)

 

 

(1,351

)

Total long-term debt

 

 

205,041

 

 

 

190,049

 

Notes payable

 

 

1,797

 

 

 

1,721

 

Income taxes payable

 

 

4,628

 

 

 

4,426

 

Deferred income taxes, net

 

 

2,189

 

 

 

3,545

 

Deferred compensation plan obligations

 

 

81,720

 

 

 

69,912

 

Contingent purchase price liability

 

 

24,133

 

 

 

17,387

 

Other non-current liabilities

 

 

16,232

 

 

 

12,080

 

Total non-current liabilities

 

 

335,740

 

 

 

299,120

 

Total liabilities

 

 

598,202

 

 

 

638,567

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock

 

 

1,297

 

 

 

1,282

 

Additional paid in capital

 

 

670,577

 

 

 

655,629

 

Retained earnings

 

 

340,455

 

 

 

294,925

 

Treasury stock

 

 

(481,572

)

 

 

(471,311

)

Accumulated other comprehensive loss

 

 

(271

)

 

 

(504

)

Total stockholders’ equity

 

 

530,486

 

 

 

480,021

 

Total liabilities and stockholders’ equity

 

$

1,128,688

 

 

$

1,118,588

 

 

 

 

 

 

 

 

 

 

 

See the accompanying notes to the consolidated financial statements

3


CBIZ, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

$

207,723

 

 

$

199,794

 

 

$

660,198

 

 

$

621,047

 

Operating expenses

 

 

184,723

 

 

 

174,069

 

 

 

565,609

 

 

 

526,182

 

Gross margin

 

 

23,000

 

 

 

25,725

 

 

 

94,589

 

 

 

94,865

 

Corporate general and administrative expenses

 

 

7,979

 

 

 

8,679

 

 

 

25,979

 

 

 

27,270

 

Operating income

 

 

15,021

 

 

 

17,046

 

 

 

68,610

 

 

 

67,595

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,777

)

 

 

(1,760

)

 

 

(4,986

)

 

 

(5,019

)

Gain on sale of operations, net

 

 

 

 

 

329

 

 

 

45

 

 

 

480

 

Other income, net

 

 

2,792

 

 

 

2,632

 

 

 

9,293

 

 

 

5,482

 

Total other income, net

 

 

1,015

 

 

 

1,201

 

 

 

4,352

 

 

 

943

 

Income from continuing operations before income tax

   expense

 

 

16,036

 

 

 

18,247

 

 

 

72,962

 

 

 

68,538

 

Income tax expense

 

 

6,172

 

 

 

7,260

 

 

 

26,656

 

 

 

27,366

 

Income from continuing operations

 

 

9,864

 

 

 

10,987

 

 

 

46,306

 

 

 

41,172

 

Loss from discontinued operations, net of tax

 

 

(206

)

 

 

(133

)

 

 

(776

)

 

 

(421

)

Net income

 

$

9,658

 

 

$

10,854

 

 

$

45,530

 

 

$

40,751

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.18

 

 

$

0.21

 

 

$

0.86

 

 

$

0.79

 

Discontinued operations

 

 

 

 

 

 

 

 

(0.01

)

 

 

(0.01

)

Net income

 

$

0.18

 

 

$

0.21

 

 

$

0.85

 

 

$

0.78

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.18

 

 

$

0.20

 

 

$

0.83

 

 

$

0.77

 

Discontinued operations

 

 

 

 

 

 

 

 

(0.01

)

 

 

(0.01

)

Net income

 

$

0.18

 

 

$

0.20

 

 

$

0.82

 

 

$

0.76

 

Basic weighted average shares outstanding

 

 

54,142

 

 

 

52,648

 

 

 

53,804

 

 

 

52,086

 

Diluted weighted average shares outstanding

 

 

55,827

 

 

 

53,846

 

 

 

55,641

 

 

 

53,320

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

9,658

 

 

$

10,854

 

 

$

45,530

 

 

$

40,751

 

Other comprehensive income (loss), net of tax

 

 

16

 

 

 

150

 

 

 

233

 

 

 

(291

)

Comprehensive income

 

$

9,674

 

 

$

11,004

 

 

$

45,763

 

 

$

40,460

 

 

See the accompanying notes to the consolidated financial statements

 

4


CBIZ, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Issued

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common

 

 

Treasury

 

 

 

Common

 

 

Paid-In

 

 

Retained

 

 

Treasury

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Shares

 

 

 

Stock

 

 

Capital

 

 

Earnings

 

 

Stock

 

 

Loss

 

 

Totals

 

December 31, 2016

 

 

128,191

 

 

 

74,147

 

 

 

$

1,282

 

 

$

655,629

 

 

$

294,925

 

 

$

(471,311

)

 

$

(504

)

 

$

480,021

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45,530

 

 

 

 

 

 

 

 

 

45,530

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

233

 

 

 

233

 

Share repurchases

 

 

 

 

 

708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock

 

 

292

 

 

 

 

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

(10,261

)

 

 

 

 

 

(10,261

)

Stock options

   exercised

 

 

889

 

 

 

 

 

 

 

9

 

 

 

6,218

 

 

 

 

 

 

 

 

 

 

 

 

6,227

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

4,247

 

 

 

 

 

 

 

 

 

 

 

 

4,247

 

Business acquisitions

 

 

312

 

 

 

 

 

 

 

3

 

 

 

4,486

 

 

 

 

 

 

 

 

 

 

 

 

4,489

 

September 30, 2017

 

 

129,684

 

 

 

74,855

 

 

 

$

1,297

 

 

$

670,577

 

 

$

340,455

 

 

$

(481,572

)

 

$

(271

)

 

$

530,486

 

 

See the accompanying notes to the consolidated financial statements

 

5


CBIZ, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

45,530

 

 

$

40,751

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

 

776

 

 

 

421

 

Gain on sale of operations, net

 

 

(45

)

 

 

(480

)

Depreciation and amortization expense

 

 

17,167

 

 

 

16,359

 

Amortization of discount on notes and deferred financing costs

 

 

392

 

 

 

393

 

Amortization of discount on contingent earnout liability

 

 

430

 

 

 

223

 

Bad debt expense, net of recoveries

 

 

4,265

 

 

 

3,291

 

Adjustment to contingent earnout liability

 

 

(651

)

 

 

(936

)

Deferred income taxes

 

 

(1,512

)

 

 

1,830

 

Employee stock awards

 

 

4,247

 

 

 

4,332

 

Excess tax benefits from share based payment arrangements

 

 

(2,884

)

 

 

(859

)

Changes in assets and liabilities, net of acquisitions and divestitures:

 

 

 

 

 

 

 

 

Restricted cash

 

 

(4,224

)

 

 

(8,154

)

Accounts receivable, net

 

 

(38,095

)

 

 

(38,666

)

Other assets

 

 

2,293

 

 

 

(6,339

)

Accounts payable

 

 

(61

)

 

 

6,971

 

Income taxes payable

 

 

12,509

 

 

 

10,250

 

Accrued personnel costs

 

 

(7,368

)

 

 

(175

)

Other liabilities

 

 

1,606

 

 

 

5,178

 

Operating cash flows provided by continuing operations

 

 

34,375

 

 

 

34,390

 

Operating cash flows (used in) provided by discontinued operations

 

 

(748

)

 

 

507

 

Net cash provided by operating activities

 

 

33,627

 

 

 

34,897

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Business acquisitions and purchases of client lists, net of cash acquired

 

 

(27,406

)

 

 

(38,238

)

Purchases of client fund investments

 

 

(14,046

)

 

 

(7,300

)

Proceeds from the sales and maturities of client fund investments

 

 

6,495

 

 

 

7,132

 

Proceeds from sales of divested operations

 

 

45

 

 

 

425

 

Increase in funds held for clients

 

 

87,224

 

 

 

75,632

 

Additions to property and equipment

 

 

(8,870

)

 

 

(2,843

)

Collection of notes receivable

 

 

21

 

 

 

356

 

Net cash provided by investing activities

 

 

43,463

 

 

 

35,164

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from bank debt

 

 

425,400

 

 

 

355,200

 

Payment of bank debt

 

 

(410,800

)

 

 

(341,400

)

Payment on early extinguishment of convertible debt

 

 

 

 

 

(760

)

Payment for acquisition of treasury stock

 

 

(10,261

)

 

 

(7,957

)

Decrease in client funds obligations

 

 

(79,736

)

 

 

(75,540

)

Proceeds from exercise of stock options

 

 

6,227

 

 

 

5,258

 

Payment of contingent consideration for acquisitions and client list purchases

 

 

(9,827

)

 

 

(5,807

)

Excess tax benefit from exercise of stock awards

 

 

 

 

 

859

 

Payment of notes payable

 

 

(309

)

 

 

(244

)

Deferred financing costs

 

 

 

 

 

(6

)

Net cash used in financing activities

 

 

(79,306

)

 

 

(70,397

)

Net decrease in cash and cash equivalents

 

 

(2,216

)

 

 

(336

)

Cash and cash equivalents at beginning of year

 

 

3,494

 

 

 

850

 

Cash and cash equivalents at end of period

 

$

1,278

 

 

$

514

 

 

See the accompanying notes to the consolidated financial statements

 

 

6


CBIZ, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 1. Basis of Presentation

The accompanying unaudited condensed 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 condensed 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, 2016. 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 nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017.

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 and contingent purchase price obligations), the provision for income taxes and the realizability of deferred tax assets. 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.

Refer to Note 1, Organization and Summary of Significant Accounting Policies, in our Annual Report on Form 10-K for the year ended December 31, 2016 for a description of revenue recognition policies.

 

 

Note 2. Accounts Receivable, Net

Accounts receivable, net, at September 30, 2017 and December 31, 2016 were as follows (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Trade accounts receivable

 

$

139,447

 

 

$

132,880

 

Unbilled revenue, at net realizable value

 

 

87,606

 

 

 

55,982

 

Total accounts receivable

 

 

227,053

 

 

 

188,862

 

Allowance for doubtful accounts

 

 

(13,635

)

 

 

(13,508

)

Accounts receivable, net

 

$

213,418

 

 

$

175,354

 

 

 

7


CBIZ, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

Note 3. Goodwill and Other Intangible Assets, Net

The components of goodwill and other intangible assets, net, at September 30, 2017 and December 31, 2016 were as follows (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Goodwill

 

$

527,171

 

 

$

487,484

 

Intangible assets:

 

 

 

 

 

 

 

 

Client lists

 

 

176,161

 

 

 

172,343

 

Other intangible assets

 

 

8,708

 

 

 

7,994

 

Total intangible assets

 

 

184,869

 

 

 

180,337

 

Total goodwill and intangibles assets

 

 

712,040

 

 

 

667,821

 

Accumulated amortization:

 

 

 

 

 

 

 

 

Client lists

 

 

(92,900

)

 

 

(80,560

)

Other intangible assets

 

 

(3,824

)

 

 

(2,860

)

Total accumulated amortization

 

 

(96,724

)

 

 

(83,420

)

Goodwill and other intangible assets, net

 

$

615,316

 

 

$

584,401

 

 

 

Note 4. Depreciation and Amortization

Depreciation and amortization expense for property and equipment and intangible assets for the three and nine months ended September 30, 2017 and 2016 was as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months

Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Operating expenses

 

$

5,796

 

 

$

5,569

 

 

$

16,885

 

 

$

16,021

 

Corporate general and administrative expenses

 

 

92

 

 

 

108

 

 

 

282

 

 

 

338

 

Total depreciation and amortization expense

 

$

5,888

 

 

$

5,677

 

 

$

17,167

 

 

$

16,359

 

 

 

Note 5. Debt and Financing Arrangements

At September 30, 2017, our primary financing arrangement was the $400.0 million unsecured credit facility discussed below, which provides us with the capital necessary to meet our working capital needs as well as the flexibility to continue with our strategic initiatives, including business acquisitions and share repurchases. In addition to the discussion below, refer to our Annual Report on Form 10-K for the year ended December 31, 2016 for additional details of our debt and financing arrangements.

Bank Debt

We have 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 $206.0 million and $191.4 million at September 30, 2017 and December 31, 2016, respectively.  

Interest rates for the nine months ended September 30, 2017 and 2016 were as follows:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Weighted average rates

 

 

2.67%

 

 

 

2.43%

 

Range of effective rates

 

2.19% - 4.75%

 

 

1.82% - 3.50%

 

 

8


CBIZ, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

We have approximately $142.5 million of available funds under the credit facility at September 30, 2017, net of outstanding letters of credit of $2.3 million. The credit facility provides us with operating flexibility and funding to support seasonal working capital needs and other strategic initiatives such as acquisitions and share repurchases. As of September 30, 2017, we were in compliance with our debt covenants.

 

Available funds under the credit facility are based on a multiple of earnings before interest, taxes, depreciation and amortization as defined in the credit facility, and are reduced by letters of credit, license bonds, other indebtedness and outstanding borrowings under the credit facility.

 

Under the credit facility, loans are charged an interest rate consisting of a base rate or Eurodollar rate plus an applicable margin, letters of credit are charged based on the same applicable margin, and a commitment fee is charged on the unused portion of the credit facility.

Interest Expense

During the three and nine months ended September 30, 2017 and 2016, we recognized interest expense as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Credit facility (1)

 

$

1,777

 

 

$

1,760

 

 

$

4,986

 

 

$

5,011

 

2006 Notes (2)

 

 

 

 

 

 

 

 

 

 

 

8

 

Total interest expense

 

$

1,777

 

 

$

1,760

 

 

$

4,986

 

 

$

5,019

 

 

 

(1)

Components of interest expense related to the credit facility include amortization of deferred financing costs, commitment fees and line of credit fees.

 

(2)

During the second quarter of 2016, we redeemed the remaining 3.125% Convertible Senior Subordinated Notes (the “2006 Notes”) then remaining outstanding for $750 thousand in cash plus accrued interest under an optional early redemption provision.

 

 

Note 6. Commitments and Contingencies

Letters of Credit and Guarantees

We provide letters of credit to landlords (lessors) of our leased premises in lieu of cash security deposits, which totaled $2.3 million at both September 30, 2017 and December 31, 2016. In addition, we provide license bonds to various state agencies to meet certain licensing requirements. The amount of license bonds outstanding was $2.5 million and $2.3 million at September 30, 2017 and December 31, 2016, respectively.

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. The lawsuits asserted claims 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 Mortgage Ltd.’s auditor, as either a statutory control person under the Arizona Securities Act or a joint venturer under Arizona common law.

9


CBIZ, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

With the exception of claims being pursued by two plaintiffs from the Ashkenazi lawsuit (“Baldino Group”), all other related 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 currently stayed as to the CBIZ Parties and Mayer Hoffman, and no trial date has been set.

On September 16, 2016, CBIZ, Inc. and its subsidiary CBIZ Benefits & Insurance Services, Inc. (“CBIZ Benefits”) were named as defendants in a lawsuit filed in the U.S. District Court for the Western District of Pennsylvania. The federal court case is brought by UPMC, d/b/a University of Pittsburgh Medical Center, and a health system it acquired, UPMC Altoona (formerly, Altoona Regional Health System).  The lawsuit asserts professional negligence, breach of contract, and negligent misrepresentation claims against CBIZ, CBIZ Benefits and a former employee of CBIZ Benefits in connection with actuarial services provided by CBIZ Benefits to Altoona Regional Health System. The complaint seeks damages in an amount of no less than $142.0 million.  

We cannot predict the outcome of the above matters or estimate the possible loss or range of possible 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, we intend to vigorously defend these cases.

In addition to those items disclosed above, we are, from time to time, subject to claims and suits arising in the ordinary course of business.

 

 

Note 7. Financial Instruments

Bonds

We held corporate and municipal bonds with par values totaling $50.2 million and $42.4 million at September 30, 2017 and December 31, 2016, respectively. All bonds are investment grade and are classified as available-for-sale. These bonds have maturity or callable dates ranging from November 2017 through December 2022, and are included in “Funds held for clients – current” in the accompanying Consolidated Balance Sheets based on our intent and ability to sell these investments at any time under favorable conditions. The following table summarizes our bond activity for the nine months ended September 30, 2017 and the twelve months ended December 31, 2016 (in thousands):

 

 

 

Nine Months Ended

 

 

Twelve Months Ended

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Fair value at beginning of period

 

$

44,573

 

 

$

43,142

 

Purchases

 

 

14,046

 

 

 

11,355

 

Redemptions

 

 

(940

)

 

 

(2,900

)

Maturities

 

 

(5,555

)

 

 

(6,878

)

Increase (decrease) in bond premium

 

 

67

 

 

 

(106

)

Fair market value adjustment

 

 

267

 

 

 

(40

)

Fair value at end of period

 

$

52,458

 

 

$

44,573

 

 

Interest Rate Swaps

We do not purchase or hold any derivative instruments for trading or speculative purposes. We utilize interest rate swaps to manage interest rate risk exposure associated with our floating-rate debt under the credit facility. Under these interest rate swap contracts, we receive cash flows from counterparties at variable rates based on the London Interbank Offered Rate (“LIBOR”) and pay the counterparties a fixed rate. See our Annual Report on Form 10-K for the year ended December 31, 2016 for further discussion on our interest rate swaps.

10


CBIZ, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

The following table summarizes our outstanding interest rate swaps and their classification in the accompanying Consolidated Balance Sheets at September 30, 2017 and December 31, 2016 (in thousands):

 

 

 

September 30,

2017

 

 

Notional

 

 

Fair

 

 

 

 

 

Amount

 

 

Value (1)

 

 

Balance Sheet Location

Interest rate swaps (2)

 

$

70,000

 

 

$

655

 

 

Other non-current assets

Interest rate swaps (2)

 

$

10,000

 

 

$

4

 

 

Other current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

2016

 

 

Notional

 

 

Fair

 

 

 

 

 

Amount

 

 

Value (1)

 

 

Balance Sheet Location

Interest rate swaps (2)

 

$

50,000

 

 

$

525

 

 

Other non-current assets

Interest rate swaps (2)

 

$

10,000

 

 

$

4

 

 

Other current assets

 

 

(1)

Refer to Note 8, Fair Value Measurements, for additional disclosures regarding fair value measurements.

 

(2)

Under the terms of the interest rate swaps, we pay interest at a fixed rate of interest plus applicable margin as stated in the agreement, and receive interest that varies with the one-month LIBOR. The notional value, fixed rate of interest and maturity date of each interest rate swap is (i) $10.0 million – 0.885% - November 2017, (ii) $15.0 million – 1.155% - November 2018, (iii) $25.0 million – 1.300% - October 2020, (iv) $10.0 million – 1.120% - February 2021 and (v) $20.0 million – 1.770% - May 2022.

 

 

The following table summarizes the effects of the interest rate swaps on the accompanying Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (in thousands):

 

 

 

Gain (Loss) Recognized

in AOCL, net of tax

 

 

Gain Reclassified

from AOCL into Expense

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017