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 six months ended June 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 June 30, 2017 and December 31, 2016 were as follows (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Trade accounts receivable
|
|
$
|
153,156
|
|
|
$
|
132,880
|
|
Unbilled revenue, at net realizable value
|
|
|
77,987
|
|
|
|
55,982
|
|
Total accounts receivable
|
|
|
231,143
|
|
|
|
188,862
|
|
Allowance for doubtful accounts
|
|
|
(12,826
|
)
|
|
|
(13,508
|
)
|
Accounts receivable, net
|
|
$
|
218,317
|
|
|
$
|
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 June 30, 2017 and December 31, 2016 were as follows (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Goodwill
|
|
$
|
526,984
|
|
|
$
|
487,484
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Client lists
|
|
|
175,397
|
|
|
|
172,343
|
|
Other intangible assets
|
|
|
8,703
|
|
|
|
7,994
|
|
Total intangible assets
|
|
|
184,100
|
|
|
|
180,337
|
|
Total goodwill and intangibles assets
|
|
|
711,084
|
|
|
|
667,821
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Client lists
|
|
|
(88,754
|
)
|
|
|
(80,560
|
)
|
Other intangible assets
|
|
|
(3,484
|
)
|
|
|
(2,860
|
)
|
Total accumulated amortization
|
|
|
(92,238
|
)
|
|
|
(83,420
|
)
|
Goodwill and other intangible assets, net
|
|
$
|
618,846
|
|
|
$
|
584,401
|
|
Note 4. Depreciation and Amortization
Depreciation and amortization expense for property and equipment and intangible assets for the three and six months ended June 30, 2017 and 2016 was as follows (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Operating expenses
|
|
$
|
5,546
|
|
|
$
|
5,322
|
|
|
$
|
11,089
|
|
|
$
|
10,452
|
|
Corporate general and administrative expenses
|
|
|
92
|
|
|
|
115
|
|
|
|
190
|
|
|
|
230
|
|
Total depreciation and amortization expense
|
|
$
|
5,638
|
|
|
$
|
5,437
|
|
|
$
|
11,279
|
|
|
$
|
10,682
|
|
Note 5. Debt and Financing Arrangements
At June 30, 2017, our primary financing arrangement was the $400 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 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 $210.6 million and $191.4 million at June 30, 2017 and December 31, 2016, respectively.
Interest
rates for the six months ended June 30, 2017 and 2016 were as follows:
|
|
Six Months
Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average rates
|
|
|
2.60%
|
|
|
|
2.38%
|
|
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 $140
million of available funds under the credit facility at June 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 strateg
ic initiatives such as acquisitions and share repurchases. As of June 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 six months ended June 30, 2017 and 2016, we recognized interest expense as follows (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Credit facility (1)
|
|
$
|
1,692
|
|
|
$
|
1,731
|
|
|
$
|
3,209
|
|
|
$
|
3,251
|
|
2006 Notes (2)
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
8
|
|
Total interest expense
|
|
$
|
1,692
|
|
|
$
|
1,733
|
|
|
$
|
3,209
|
|
|
$
|
3,259
|
|
|
(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”) 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 June 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 June 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 Bald
ino Group’s claims, which allege damages of approximately $16 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 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 million and $42.4 million at June 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 July 2017 through May 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 six months ended June 30, 2017 and the twelve months ended December 31, 2016 (in thousands):
|
|
Six Months
Ended
|
|
|
Twelve Months
Ended
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Fair value at beginning of period
|
|
$
|
44,573
|
|
|
$
|
43,142
|
|
Purchases
|
|
|
11,788
|
|
|
|
11,355
|
|
Redemptions
|
|
|
(940
|
)
|
|
|
(2,900
|
)
|
Maturities
|
|
|
(3,435
|
)
|
|
|
(6,878
|
)
|
Increase (decrease) in bond premium
|
|
|
204
|
|
|
|
(106
|
)
|
Fair market value adjustment
|
|
|
251
|
|
|
|
(40
|
)
|
Fair value at end of period
|
|
$
|
52,441
|
|
|
$
|
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.
During the second quarter of 2017, we entered into an additional interest rate swap with a notional value of $20 million at a fixed interest rate of 1.77% maturing in 5 years.
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 June 30, 2017 and December 31, 2016 (in thousands):
|
|
June 30, 2017
|
|
|
Notional
|
|
|
Fair
|
|
|
|
|
|
Amount
|
|
|
Value (1)
|
|
|
Balance Sheet Location
|
Interest rate swaps (2)
|
|
$
|
70,000
|
|
|
$
|
629
|
|
|
Other non-current assets
|
Interest rate swaps (2)
|
|
$
|
10,000
|
|
|
$
|
13
|
|
|
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 million – 0.885% - November 2017, (ii) $15 million – 1.155% - November 2018, (iii) $25 million – 1.300% - October 2020, (iv) $10 million – 1.120% - February 2021 and (v) $20 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 six months ended June 30, 2017 and 2016 (in thousands):
|
|
(Loss) Gain Recognized
in AOCL, net of tax
|
|
|
Gain (Loss) Reclassified
from AOCL into Expense
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Interest rate swap
|
|
$
|
(22
|
)
|
|
$
|
(231
|
)
|
|
$
|
42
|
|
|
$
|
(110
|
)
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Interest rate swap
|
|
$
|
71
|
|
|
$
|
(763
|
)
|
|
$
|
100
|
|
|
$
|
215
|
|
Note 8. Fair Value Measurements
The following table summarizes our assets and liabilities at June 30, 2017 and December 31, 2016 that are measured at fair value on a recurring basis subsequent to initial recognition and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value (in thousands):
|
|
Level
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Deferred compensation plan assets
|
|
1
|
|
$
|
76,251
|
|
|
$
|
69,912
|
|
Corporate and municipal bonds
|
|
1
|
|
$
|
52,441
|
|
|
$
|
44,573
|
|
Interest rate swaps
|
|
2
|
|
$
|
642
|
|
|
$
|
529
|
|
Contingent purchase price liabilities
|
|
3
|
|
$
|
(43,226
|
)
|
|
$
|
(33,709
|
)
|
The carrying amounts of our cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments. The carrying value of bank debt approximates fair value as the interest rate on the bank debt is variable and approximates current market rates. As a result, the fair value measurement of our bank debt is considered to be Level 2.
11
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
During the six months ended June 30, 2017 and 2016, there were no
transfers between the valuation hierarchy Levels 1, 2 and 3. The following table summarizes the change in Level 3 fair values of our contingent purchase price liabilities for the six months ended June 30, 2017 and 2016 (pre-tax basis) (in thousands):
|
|
2017
|
|
|
2016
|
|
Beginning balance – January 1
|
|
$
|
(33,709
|
)
|
|
$
|
(24,817
|
)
|
Additions from business acquisitions
|
|
|
(17,526
|
)
|
|
|
(15,088
|
)
|
Settlement of contingent purchase price liabilities
|
|
|
7,253
|
|
|
|
6,349
|
|
Change in fair value of contingencies
|
|
|
1,032
|
|
|
|
714
|
|
Change in net present value of contingencies
|
|
|
(276
|
)
|
|
|
(106
|
)
|
Ending balance – June 30
|
|
$
|
(43,226
|
)
|
|
$
|
(32,948
|
)
|
Contingent Purchase Price Liabilities
Contingent purchase price liabilities arise from business acquisitions and are classified as Level 3 due to the utilization of a probability weighted discounted cash flow approach to determine the fair value of the contingency.
A contingent liability is established (“Additions from business acquisitions” in the table above) for each acquisition that has a contingent purchase price component extending over a term of two to six years. These liabilities are reviewed quarterly and adjusted if necessary. Refer to Note 12,
Acquisitions
, for further discussion of contingent purchase price liabilities.
|
•
|
The significant unobservable input used in the fair value measurement of the contingent purchase price liabilities is the future performance of the acquired business.
|
|
o
|
The future performance of the acquired business directly impacts the contingent purchase price that is paid to the seller; thus, performance that exceeds estimates may result in a higher payout, and a performance under estimates may result in a lower payout (“Settlement of contingent purchase price liabilities” in the table above).
|
|
o
|
Changes in the expected amount of potential payouts are recorded as adjustments to the initial contingent purchase price liability, with the same amount being recorded in the accompanying Consolidated Statements of Comprehensive Income (“Change in fair value of contingencies” and “Change in net present value of contingencies” in the table above). The change in fair value of contingencies also includes an adjustment for the change in share price of CBIZ common stock for the portion of future contingent consideration to be settled in stock.
|
Note 9. Other Comprehensive Income (Loss)
The following table is a summary of other comprehensive income (loss) and discloses the tax impact of each component of other comprehensive income (loss) for the three and six months ended June 30, 2017 and 2016 (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net unrealized gain on available-for-sale
securities, net of income taxes (1)
|
|
$
|
62
|
|
|
$
|
112
|
|
|
$
|
151
|
|
|
$
|
343
|
|
Net unrealized (loss) gain on interest rate swaps, net
of income taxes (2)
|
|
|
(22
|
)
|
|
|
(231
|
)
|
|
|
71
|
|
|
|
(763
|
)
|
Foreign currency translation
|
|
|
(3
|
)
|
|
|
(11
|
)
|
|
|
(5
|
)
|
|
|
(21
|
)
|
Total other comprehensive income (loss)
|
|
$
|
37
|
|
|
$
|
(130
|
)
|
|
$
|
217
|
|
|
$
|
(441
|
)
|
|
(1)
|
Net of income tax expense of $41 and $75 for the three months ended June 30, 2017 and 2016, respectively, and net of income tax expense of $100 and $167 for the six months ended June 30, 2017 and 2016, respectively.
|
|
(2)
|
Net of income tax benefit of $13 and $136 for the three months ended June 30, 2017 and 2016, respectively, and net of income tax expense (benefit) of $42 and ($448) for the six months ended June 30, 2017 and 2016, respectively.
|
12
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Accumulated other comprehensive loss, net of tax, was approximately $0.3 million and $0.5 million at June 30, 2017 and December 31, 2016, respectively. Accumulated other comprehensive loss consisted of adjustments, net of tax,
for unrealized gains and losses on available-for-sale securities and interest rate swaps, and foreign currency translation.
Note 10. Employee Share Plans
Under our stock incentive plan, which expires in 2024, a maximum of 9.6 million stock options, shares of restricted stock or other stock-based compensation awards may be granted. Shares subject to award under this plan may be either authorized but unissued shares of CBIZ common stock or treasury shares. Compensation expense for stock-based awards recognized during the three and six months ended June 30, 2017 and 2016 was as follows (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock options
|
|
$
|
524
|
|
|
$
|
564
|
|
|
$
|
1,050
|
|
|
$
|
1,143
|
|
Restricted stock awards
|
|
|
891
|
|
|
|
869
|
|
|
|
1,740
|
|
|
|
1,699
|
|
Total stock-based compensation expense
|
|
$
|
1,415
|
|
|
$
|
1,433
|
|
|
$
|
2,790
|
|
|
$
|
2,842
|
|
Stock award activity during the six months ended June 30, 2017 was as follows (in thousands, except per share data):
|
|
Stock Options
|
|
|
Restricted Stock Awards
|
|
|
|
Number of
Options
|
|
|
Weighted Average Exercise
Price
Per Share
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant-Date
Fair Value (1)
|
|
Outstanding at beginning of year
|
|
|
4,376
|
|
|
$
|
8.02
|
|
|
|
827
|
|
|
$
|
9.14
|
|
Granted
|
|
|
654
|
|
|
$
|
15.54
|
|
|
|
295
|
|
|
$
|
14.90
|
|
Exercised or released
|
|
|
(805
|
)
|
|
$
|
7.02
|
|
|
|
(393
|
)
|
|
$
|
8.61
|
|
Expired or canceled
|
|
|
(6
|
)
|
|
$
|
7.44
|
|
|
|
(1
|
)
|
|
$
|
8.36
|
|
Outstanding at June 30, 2017
|
|
|
4,219
|
|
|
$
|
9.38
|
|
|
|
727
|
|
|
$
|
11.76
|
|
Exercisable at June 30, 2017
|
|
|
2,370
|
|
|
$
|
7.61
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents weighted average market value of the shares; awards are granted at no cost to the recipients.
|
We utilized the Black-Scholes-Merton options-pricing model to determine the fair value of stock options on the date of grant. The fair value of stock options granted during the second quarter of 2017 was $3.49. The following weighted average assumptions were utilized:
|
|
Six Months Ended
June 30,
|
|
Expected volatility (1)
|
|
|
22.22
|
%
|
Expected option life (years) (2)
|
|
|
4.61
|
|
Risk-free interest rate (3)
|
|
|
1.85
|
%
|
Expected dividend yield (4)
|
|
|
0.00
|
%
|
|
(1)
|
The expected volatility assumption was determined based upon the historical volatility of our stock price, using daily price intervals.
|
|
(2)
|
The expected option life was determined based upon our historical data using a midpoint scenario, which assumes all options are exercised halfway between the expiration date and the weighted average time for the option to vest.
|
13
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
(3)
|
The risk-free interest rate
assumption was based upon zero-coupon U.S. Treasury bonds with a term approximating the expected life of the respective options.
|
|
(4)
|
The expected dividend yield assumption was determined in view of our historical and estimated dividend payouts. We do not expect to change our dividend payout policy in the foreseeable future.
|
Note 11. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the three and six months ended June 30, 2017 and 2016 (in thousands, except per share data).
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
11,416
|
|
|
$
|
8,387
|
|
|
$
|
36,442
|
|
|
$
|
30,185
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
53,968
|
|
|
|
52,031
|
|
|
|
53,632
|
|
|
|
51,802
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options (1)
|
|
|
1,544
|
|
|
|
814
|
|
|
|
1,524
|
|
|
|
811
|
|
Restricted stock awards (1)
|
|
|
319
|
|
|
|
229
|
|
|
|
374
|
|
|
|
283
|
|
Contingent shares (2)
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
Diluted weighted average common shares
outstanding
|
|
|
55,831
|
|
|
|
53,079
|
|
|
|
55,530
|
|
|
|
52,901
|
|
Basic earnings per share from continuing operations
|
|
$
|
0.21
|
|
|
$
|
0.16
|
|
|
$
|
0.68
|
|
|
$
|
0.58
|
|
Diluted earnings per share from continuing operations
|
|
$
|
0.20
|
|
|
$
|
0.16
|
|
|
$
|
0.66
|
|
|
$
|
0.57
|
|
|
(1)
|
A total of 0.5 million and 0.2 million share based awards were excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2017, respectively, and a total of 1.7 million and 1.5 million share based awards were excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2016, respectively, as their effect would be anti-dilutive.
|
|
(2)
|
Contingent shares represent additional shares to be issued for purchase price earned by former owners of businesses acquired by us once future considerations have been met. Refer to Note 12,
Acquisitions
, for further details.
|
Note 12. Acquisitions
2017
During the first half of 2017, we acquired substantially all of the assets of three businesses; CMF Associates, LLC (“CMF”), Slaton Insurance (“Slaton”) and Pacific Coastal Pension and Insurance Services, Inc. (“Pacific Coastal”). Aggregate consideration for these acquisitions consisted of approximately $23.7 million in cash consideration, $2 million in CBIZ common stock and $17.5 million in contingent consideration.
Under the terms of these acquisition agreements, a portion of the purchase price is contingent on future performance of the business acquired. We have preliminarily determined that the fair value of the contingent consideration arrangements for these acquisitions was $17.5 million, of which $5.9 million was recorded in “Contingent purchase price liability – current” and $11.6 million was recorded in “Contingent purchase price liability – non-current” in the accompanying Consolidated Balance Sheets at June 30, 2017.
Annualized revenue attributable to CMF, Slaton and Pacific Coastal is estimated to be approximately $19.2 million, $2.6 million, and $1.4 million, respectively. Pro forma results of operations for these acquisitions have not been presented because the effects of the acquisitions were not significant to our results.
14
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The acquisitio
n of CMF, located in Philadelphia, Pennsylvania, was effective June 1, 2017. CMF provides various financial consulting, executive search and deal origination services. Operating results of CMF are reported in the Financial Services practice group. The acqu
isition of Slaton, located in West Palm Beach, Florida, was effective June 1, 2017. Slaton is a full service insurance brokerage firm offering clients a complete line of services including commercial lines, risk management and employee benefits. The acquis
ition of Pacific Coastal, located in Morgan Hill, California, was effective February 1, 2017. Pacific Coastal provides defined contribution third party administrative and consulting services. Operating results for both Slaton and Pacific Coastal are report
ed in the Benefits and Insurance practice group.
The preliminary estimated fair values of the assets acquired and the liabilities assumed during the six months ended June 30, 2017 are as follows (in thousands):
|
|
Six Months
Ended
|
|
|
|
June 30,
2017
|
|
Cash
|
|
$
|
843
|
|
Accounts receivable, net
|
|
|
4,338
|
|
Property and equipment, net
|
|
|
24
|
|
Other assets
|
|
|
151
|
|
Identifiable intangible assets
|
|
|
3,115
|
|
Current liabilities
|
|
|
(4,716
|
)
|
Total identifiable net assets
|
|
$
|
3,755
|
|
Goodwill
|
|
|
39,460
|
|
Aggregate purchase price
|
|
$
|
43,215
|
|
The goodwill of $39.5 million arising from the acquisitions in the first half of 2017 primarily results from expected future earnings and cash flows from the existing management team, as well as the synergies created by the integration of the new business within the CBIZ organization, including cross-selling opportunities expected with our Financial Services and Benefits and Insurance practice groups, to help strengthen our existing service offerings and expand our market position.
2016
During the first half of 2016, we acquired substantially all of the non-attest assets of three businesses; Flex-Pay Business Services, Inc., (“Flex-Pay”), The Savitz Organization (“Savitz”) and Millimaki Eggert, L.L.P., (“Millimaki”). Aggregate consideration for these acquisitions consisted of approximately $33 million in cash consideration, $1.6 million in CBIZ common stock and $15.1 million in contingent consideration.
Under the terms of these acquisition agreements, a portion of the purchase price is contingent on future performance of the business acquired. Utilizing a probability weighted income approach, we determined that the fair value of the contingent consideration arrangement for these acquisitions was $15.1 million, of which $4.4 million was recorded in “Contingent purchase price liability – current” and $10.7 million was recorded in “Contingent purchase price liability – non-current” in the Consolidated Balance Sheets at June 30, 2016.
Annualized revenue attributable to Flex-Pay, Savitz and Millimaki is estimated to be approximately $10 million, $20 million, and $2.4 million, respectively. Pro forma results of operations for these acquisitions have not been presented because the effects of the acquisitions were not significant to our results.
The acquisition of Flex-Pay, located in Winston-Salem, North Carolina, was effective June 1, 2016. Flex-Pay provides payroll processing, Affordable Care Act fulfillment and human resource solutions to more than 3,600 clients primarily in the Southeast. The acquisition of Savitz, headquartered in Philadelphia, Pennsylvania, with offices in Atlanta, Georgia, and Newton, Massachusetts, was effective April 1, 2016. Savitz is an employee retirement and health and welfare benefits firm that provides actuarial, consulting and administration outsourcing services. Operating results for both Flex-Pay and Savitz are reported in the Benefits and Insurance practice group. The acquisition of Millimaki, located in San Diego, California, was effective January 1, 2016. Millimaki provides professional tax, accounting, and financial services, with a specialty niche practice in the real estate sector, to closely held businesses, their owners, and mid-to-high net worth individuals. Operating results are reported in the Financial Services practice group.
15
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The estimated
fair values of the assets acquired and the liabilities assumed during the six months ended June 30, 2016 are as follows (in thousands):
|
|
Six Months
Ended
|
|
|
|
June 30, 2016
|
|
Cash
|
|
$
|
6
|
|
Accounts receivable, net
|
|
|
5,313
|
|
Funds held for clients
|
|
|
37,230
|
|
Property and equipment, net
|
|
|
383
|
|
Other assets
|
|
|
172
|
|
Identifiable intangible assets
|
|
|
17,755
|
|
Current liabilities
|
|
|
(378
|
)
|
Client fund obligations
|
|
|
(37,230
|
)
|
Total identifiable net assets
|
|
$
|
23,251
|
|
Goodwill
|
|
|
26,471
|
|
Aggregate purchase price
|
|
$
|
49,722
|
|
The goodwill of $26.5 million arising from the acquisitions in the first half of 2016 primarily results from the same reasons as discussed above in the 2017 section.
Client Lists
During the six months ended June 30, 2017, we purchased one client list which is reported in the Benefits and Insurance practice group for $0.7 million of contingent consideration. During the same period in 2016, we purchased three clients lists, two of which are reported in the Benefits and Insurance practice group, and one in the Financial Services practice group. Total consideration for these client lists was $0.2 million in cash consideration, $1 million of guaranteed future consideration and $0.7 million of contingent consideration.
Change in Contingent Purchase Price Liability for Previous Acquisitions
During the first half of 2017 and 2016, we decreased the fair value of the contingent purchase price liability related to prior acquisitions by $0.8 million and $0.7 million, respectively. These changes in fair value are attributable to subsequent measurement adjustments based on projected future results of the acquired businesses, net present value adjustments and changes in the CBIZ common stock price. These adjustments are included in “Other income, net” in the accompanying Consolidated Statements of Comprehensive Income.
Contingent Payments for Previous Acquisitions and Client Lists
We paid $4.8 million in cash and issued approximately 177,000 shares of CBIZ common stock during the six months ended June 30, 2017 for previous acquisitions. For the first half of 2017, we also paid approximately $0.4 million in cash for previous client list purchases. For the same period in 2016, we paid $4.1 million in cash and issued approximately 220,000 shares of CBIZ common for previous acquisitions.
Note 13. Discontinued Operations and Divestitures
We will divest (through sale or closure) business operations that do not contribute to our long-term objectives for growth, or that are not complementary to our target service offerings and markets. Divestitures are classified as discontinued operations provided they meet the criteria as provided in FASB ASC Topic 205
“Presentation of Financial Statements — Discontinued Operations — Other Presentation Matters”
.
Discontinued Operations
Revenue and results from operations of discontinued operations are separately reported as “Loss from discontinued operations, net of tax” in the accompanying Consolidated Statements of Comprehensive Income. During the first half of both 2017 and 2016, we did not discontinue the operations of any of our businesses.
16
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Revenue and results from operations of discontinued operations for the three and six months ended June 30, 2017 and 2
016 were as follows (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Loss from discontinued operations before income tax
|
|
$
|
(705
|
)
|
|
$
|
(437
|
)
|
|
$
|
(958
|
)
|
|
$
|
(488
|
)
|
Income tax benefit
|
|
|
(287
|
)
|
|
|
(179
|
)
|
|
|
(388
|
)
|
|
|
(200
|
)
|
Loss from discontinued operations, net of tax
|
|
$
|
(418
|
)
|
|
$
|
(258
|
)
|
|
$
|
(570
|
)
|
|
$
|
(288
|
)
|
Divestitures
Gains or losses from divested operations and assets that do not qualify for treatment as discontinued operations are recorded as “Gain on sale of operations, net” in the accompanying Consolidated Statements of Comprehensive Income. During the first half of 2017 and 2016, we did not sell any operations. Gains recorded during the three and six months ended June 30, 2017 and 2016, respectively, relate to contingent consideration earned on sales made in previous periods.
Note 14. Segment Disclosures
Our business units have been aggregated into three practice groups: Financial Services, Benefits and Insurance Services and National Practices. The business units have been aggregated based on the following factors: similarity of the products and services provided to clients; similarity of the regulatory environment in which they operate; and similarity of economic conditions affecting long-term performance. The business units are managed along these segment lines. A general description of services provided by each practice group is provided in the table below.
Financial Services
|
Benefits and Insurance Services
|
National Practices
|
•
Accounting and Tax
•
Government Healthcare Consulting
•
Financial Advisory
•
Valuation
•
Risk & Advisory Services
|
•
Group Health Benefits Consulting
•
Payroll
•
Property & Casualty
•
Retirement Plan Services
|
•
Managed Networking and Hardware Services
•
Healthcare Consulting
|
Corporate and Other
. Included in “Corporate and Other” are operating expenses that are not directly allocated to the individual business units. These expenses are primarily comprised of certain health care costs, gains or losses attributable to assets held in the Company’s non-qualified deferred compensation plan, share-based compensation, consolidation and integration charges, certain professional fees, certain advertising costs and other various expenses.
Accounting policies of the practice groups are the same as those described in Note 1,
Organization and Summary of Significant Accounting Policies
, to the Annual Report on Form 10-K for the year ended December 31, 2016. Upon consolidation, intercompany accounts and transactions are eliminated, thus inter-segment revenue is not included in the measure of profit or loss for the practice groups. Performance of the practice groups is evaluated on operating income excluding those costs listed above, which are reported in the “Corporate and Other” segment.
17
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Segment information for th
e three months ended June 30, 2017 and 2016 was as follows (in thousands):
|
|
Three Months Ended June 30, 2017
|
|
|
|
Financial
Services
|
|
|
Benefits and Insurance Services
|
|
|
National
Practices
|
|
|
Corporate
and
Other
|
|
|
Total
|
|
Revenue
|
|
$
|
132,591
|
|
|
$
|
70,559
|
|
|
$
|
7,866
|
|
|
$
|
—
|
|
|
$
|
211,016
|
|
Operating expenses
|
|
|
115,851
|
|
|
|
59,877
|
|
|
|
7,235
|
|
|
|
5,157
|
|
|
|
188,120
|
|
Gross margin
|
|
|
16,740
|
|
|
|
10,682
|
|
|
|
631
|
|
|
|
(5,157
|
)
|
|
|
22,896
|
|
Corporate general & admin
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,232
|
|
|
|
9,232
|
|
Operating income (loss)
|
|
|
16,740
|
|
|
|
10,682
|
|
|
|
631
|
|
|
|
(14,389
|
)
|
|
|
13,664
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
(1,683
|
)
|
|
|
(1,692
|
)
|
Gain on sale of operations, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23
|
|
|
|
23
|
|
Other income (expense), net
|
|
|
28
|
|
|
|
120
|
|
|
|
(9
|
)
|
|
|
3,625
|
|
|
|
3,764
|
|
Total other income (expense)
|
|
|
28
|
|
|
|
111
|
|
|
|
(9
|
)
|
|
|
1,965
|
|
|
|
2,095
|
|
Income (loss) from continuing operations before
income tax expense
|
|
$
|
16,768
|
|
|
$
|
10,793
|
|
|
$
|
622
|
|
|
$
|
(12,424
|
)
|
|
$
|
15,759
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
|
Financial
Services
|
|
|
Benefits and Insurance Services
|
|
|
National
Practices
|
|
|
Corporate
and
Other
|
|
|
Total
|
|
Revenue
|
|
$
|
122,856
|
|
|
$
|
66,484
|
|
|
$
|
7,675
|
|
|
$
|
—
|
|
|
$
|
197,015
|
|
Operating expenses
|
|
|
106,987
|
|
|
|
56,344
|
|
|
|
7,005
|
|
|
|
3,660
|
|
|
|
173,996
|
|
Gross margin
|
|
|
15,869
|
|
|
|
10,140
|
|
|
|
670
|
|
|
|
(3,660
|
)
|
|
|
23,019
|
|
Corporate general & admin
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,346
|
|
|
|
8,346
|
|
Operating income (loss)
|
|
|
15,869
|
|
|
|
10,140
|
|
|
|
670
|
|
|
|
(12,006
|
)
|
|
|
14,673
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
(1,723
|
)
|
|
|
(1,733
|
)
|
Gain on sale of operations, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
50
|
|
Other (expense) income, net
|
|
|
(27
|
)
|
|
|
84
|
|
|
|
1
|
|
|
|
645
|
|
|
|
703
|
|
Total other (expense) income
|
|
|
(27
|
)
|
|
|
74
|
|
|
|
1
|
|
|
|
(1,028
|
)
|
|
|
(980
|
)
|
Income (loss) from continuing operations before
income tax expense
|
|
$
|
15,842
|
|
|
$
|
10,214
|
|
|
$
|
671
|
|
|
$
|
(13,034
|
)
|
|
$
|
13,693
|
|
18
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Segment information for the six months ended June 30, 2017 and 2016 was as follows (in
thousands):
|
|
Six Months Ended June 30, 2017
|
|
|
|
Financial
Services
|
|
|
Benefits and Insurance Services
|
|
|
National
Practices
|
|
|
Corporate
and
Other
|
|
|
Total
|
|
Revenue
|
|
$
|
291,224
|
|
|
$
|
145,723
|
|
|
$
|
15,528
|
|
|
$
|
—
|
|
|
$
|
452,475
|
|
Operating expenses
|
|
|
235,240
|
|
|
|
120,019
|
|
|
|
14,242
|
|
|
|
11,385
|
|
|
|
380,886
|
|
Gross margin
|
|
|
55,984
|
|
|
|
25,704
|
|
|
|
1,286
|
|
|
|
(11,385
|
)
|
|
|
71,589
|
|
Corporate general & admin
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,000
|
|
|
|
18,000
|
|
Operating income (loss)
|
|
|
55,984
|
|
|
|
25,704
|
|
|
|
1,286
|
|
|
|
(29,385
|
)
|
|
|
53,589
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
—
|
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(3,189
|
)
|
|
|
(3,209
|
)
|
Gain on sale of operations, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45
|
|
|
|
45
|
|
Other income (expense), net
|
|
|
43
|
|
|
|
216
|
|
|
|
(9
|
)
|
|
|
6,251
|
|
|
|
6,501
|
|
Total other income (expense)
|
|
|
43
|
|
|
|
196
|
|
|
|
(9
|
)
|
|
|
3,107
|
|
|
|
3,337
|
|
Income (loss) from continuing operations before
income tax expense
|
|
$
|
56,027
|
|
|
$
|
25,900
|
|
|
$
|
1,277
|
|
|
$
|
(26,278
|
)
|
|
$
|
56,926
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
Financial
Services
|
|
|
Benefits and Insurance Services
|
|
|
National
Practices
|
|
|
Corporate
and
Other
|
|
|
Total
|
|
Revenue
|
|
$
|
275,063
|
|
|
$
|
130,811
|
|
|
$
|
15,379
|
|
|
$
|
—
|
|
|
$
|
421,253
|
|
Operating expenses
|
|
|
220,484
|
|
|
|
110,024
|
|
|
|
13,882
|
|
|
|
7,723
|
|
|
|
352,113
|
|
Gross margin
|
|
|
54,579
|
|
|
|
20,787
|
|
|
|
1,497
|
|
|
|
(7,723
|
)
|
|
|
69,140
|
|
Corporate general & admin
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,591
|
|
|
|
18,591
|
|
Operating income (loss)
|
|
|
54,579
|
|
|
|
20,787
|
|
|
|
1,497
|
|
|
|
(26,314
|
)
|
|
|
50,549
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
—
|
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(3,239
|
)
|
|
|
(3,259
|
)
|
Gain on sale of operations, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
151
|
|
|
|
151
|
|
Other income, net
|
|
|
227
|
|
|
|
158
|
|
|
|
1
|
|
|
|
2,464
|
|
|
|
2,850
|
|
Total other income (expense)
|
|
|
227
|
|
|
|
138
|
|
|
|
1
|
|
|
|
(624
|
)
|
|
|
(258
|
)
|
Income (loss) from continuing operations before
income tax expense
|
|
$
|
54,806
|
|
|
$
|
20,925
|
|
|
$
|
1,498
|
|
|
$
|
(26,938
|
)
|
|
$
|
50,291
|
|
Note 15. New Accounting Pronouncements
The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) is the sole source of authoritative GAAP other than the Securities and Exchange Commission (“SEC”) issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standards Update (“ASU”) to communicate changes to the FASB codification. We assess and review the impact of all changes to the FASB codification. ASU's not listed below were reviewed and determined to be either not applicable or are not expected to have a material impact on our consolidated financial statements.
Accounting Standards Adopted in 2017
Share-Based Compensation:
In March 2016, the FASB issued ASU No. 2016-09,
“Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting”
(“ASU 2016-09”), which requires the tax effects related to share-based payments to be recorded through the income statement and simplifies the accounting requirements for forfeitures and employers' tax withholding requirements. We elected prospective treatment in regards to ASU 2016-09 beginning January 1, 2017. For the second quarter of 2017, the adoption of ASU 2016-09 resulted in an increase of approximately 0.6 million diluted shares and a realized tax benefit of approximately $2.2 million. For the first half of 2017, the adoption of this ASU resulted in an increase of approximately 0.6 million diluted shares and a realized tax benefit of approximately $2.8 million. This tax benefit,
19
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
which would have previously been recorded in additional paid-in capital
in our Consolidated Balance Sheets, is now recorded directly to income tax expense in our Consolidated Statements of Comprehensive Income. We elected to classify excess tax benefits as an operating activity in the Consolidated Statements of Cash Flows ins
tead of as a financing activity on a prospective basis and did not retrospectively adjust prior periods, as permitted. We also elected to continue our current policy of estimating forfeitures of share-based compensation awards at the time of grant and revi
sing in subsequent periods to reflect actual forfeitures. Going forward, we anticipate moderate volatility in our effective tax rate adjustments related to our share-based compensation incentives which will be recorded directly into our results of operatio
ns.
Accounting Standards Not Yet Adopted
Modification Accounting for Share-Based Payment Awards:
In May 2017, the FASB issued ASU No. 2017-09,
“Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting”
(“ASU 2017-09”), clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. This new accounting standard requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for us on a prospective basis beginning on January 1, 2018, with early adoption permitted. We typically do not change either the terms or conditions of share-based payment awards once they are granted, therefore; this new guidance is not expected to have a material impact on our consolidated financial statements.
Subsequent Measurement of Goodwill:
In January 2017, the FASB issued ASU No. 2017-04,
"Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment"
("ASU 2017-04"), which removes step two of the goodwill impairment test. Goodwill impairment will be based upon the results of step one of the impairment test, which is defined as the excess of the carrying amount of a reporting unit over its fair value, not to exceed the carrying amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for us on a prospective basis beginning on January 1, 2020, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The impact of this new guidance will depend upon the performance of the reporting units and the market conditions impacting the fair value of each reporting unit going forward.
Clarifying the Definition of a Business:
In January 2017, the FASB issued ASU 2017-01,
“Business Combinations (Topic 805): Clarifying the Definition of a Business,”
(“ASU 2017-01”), which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard will be effective for us beginning on January 1, 2018, with early adoption permitted. We are currently evaluating the impact of this new guidance on our consolidated financial statements.
Restricted Cash - Statement of Cash Flows:
In November 2016, the FASB issued ASU No. 2016-18,
“Statement of Cash Flows (Topic 230)”
(“ASU 2016-18”), which applies to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows. This new accounting standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and the amounts generally described as restricted cash or restricted cash equivalents when reconciling beginning-of-period and end-of-period total amounts show on the statement of cash flows. ASU 2016-18 also requires the disclosure of information about the nature of the restriction. ASU 2016-18 is effective retrospectively for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted. We are currently assessing the impact of this new guidance on our consolidated financial statements.
Statement of Cash Flows:
In August 2016, the FASB issued ASU No. 2016-15,
“Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments”
(“ASU 2016-15”), which clarifies how certain cash receipts and payments are to be presented in the statement of cash flows. This new guidance will be effective for us beginning on January 1, 2018, with early adoption permitted, and is not expected to have a material impact on our consolidated financial statements.
20
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Leases:
In February 2016, the FASB issued ASU No. 2016-02,
“Leases (T
opic 842)”
(“ASU 2016-02”) which supersedes
Topic 840, “Leases.”
This new accounting standard is intended to increase transparency and comparability among organizations relating to leases and will require enhanced disclosures about our leasing arrangements
. Under the new guidance, lessees will be required to recognize a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. The FASB retained a dual model for lease classification, requ
iring leases to be classified as either operating or finance leases to determine recognition in the income statement and statements of cash flows; however, substantially all leases will be required to be recognized on the balance sheet. Operating leases wi
ll result in straight-line expense while finance leases will result in a front-loaded expense pattern.
ASU 2016-02 is effective for us beginning on January 1, 2019, with early adoption permitted. The new standard requires a “modified retrospective” adoption, meaning the standard is applied to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We do not believe this new guidance will have a significant impact on our liquidity or our debt covenant compliance under our current credit agreements. We are currently assessing the impact of this new guidance on our consolidated financial statements.
Revenue from Contracts with Customers:
In August 2015, the FASB issued ASU No. 2015-14,
“Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date”
(“ASU 2015-14”). ASU 2015-14 defers the effective date of ASU No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)”
(“ASU 2014-09”), which was issued in May 2014, by one year for all entities. This new accounting standard provides a comprehensive revenue recognition model for all contracts with customers and supersedes current revenue recognition guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of promised goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new standard also includes enhanced disclosures. In March, April and May 2016, the FASB issued additional ASUs clarifying certain aspects of ASU 2014-09. The core principle of ASU 2014-09 was not changed by the additional guidance.
We have organized a team and have developed a project plan to guide the implementation. The project plan includes working sessions to review, evaluate and document the arrangements with customers under our various reporting units to identify potential differences that would result from applying the requirements of the new standard. We are currently in the process of developing an updated accounting policy, evaluating new disclosure requirements and identifying and implementing appropriate changes to business processes, systems and controls to support recognition and disclosure under the new standard. Based on our evaluation of our current contracts and revenue streams, revenue recognition will mostly be consistent under both the current and new standard. However, we expect the guidance in certain areas, particularly in our Benefits and Insurance Services practice group, to impact our current revenue recognition policies. We expect that disclosures in our notes to the consolidated financial statements related to revenue recognition will be significantly expanded under the new standard.
In our property and casualty business unit, the current accounting policy under agency billing arrangements is to recognize commission revenue as of the later of the effective date of the insurance policy or the date billed to the customer. Following adoption, we will recognize commission revenue on the effective date of the insurance policy. Also in our property and casualty business unit, the current accounting policy under direct billing arrangements is to recognize commission revenue when the data necessary from the carriers is available. Following adoption, we will recognize commission revenue on the effective date of the insurance policy. Since the majority of our property and casualty arrangements involve contracts that are annual in term, on a year over year basis we do not believe there will be a significant change to the amount of revenue recognized in an annual period.
The effective date of this new accounting pronouncement is for interim and annual periods beginning on or after December 15, 2017. The guidance permits the use of either a full retrospective or modified retrospective transition method. We will adopt the requirements of the new standard effective January 1, 2018 and expect to use the modified retrospective transition method with the cumulative effect to the opening balance of retained earnings recognized as of the date of initial adoption. As we finalize our evaluation in upcoming quarters of 2017 we will provide updates on our progress in future filings.
Note 16. Subsequent Events
Subsequent to June 30, 2017, up to the date of this filing, we repurchased approximately 0.3 million shares in the open market at a total cost of $3.9 million under our current Rule 10b5-1 trading plan, which allows us to repurchase shares below a predetermined price per share.
21