The bay area's silent giant

Epix Holdings may be the biggest Tampa Bay area company you've never heard of. It has 53,000 employees and $1.3-billion in annual revenue. And the privately held company is the fifth-largest professional employer organization.

By KRIS HUNDLEY, Times Staff Writer
© St. Petersburg Times
published January 28, 2002

TAMPA -- Joe Gonzalez runs a family plumbing company here with 30 employees and a customer base that includes local fast-food restaurants, hotels and light industrial plants.

While he focuses on the business of fixing leaks and keeping his customers happy, Gonzalez leaves the hassles of processing paychecks and handling worker's comp claims to a company across town: Epix Holdings Inc.

Epix may be the biggest Tampa Bay area company you've never heard of. The company has 53,000 employees, far more than better known local outfits such as Jabil Circuit Inc. and TECO Energy Inc. It has $1.3-billion a year in revenues, more than Sykes Enterprises Inc. or Lincare Holdings Inc.

There are some good reasons for the low profile. Unlike public companies that must reveal their finances and prospects, Epix is privately held by four investment groups, including one headed by Texas billionaire Robert Bass.

And its business -- handling mundane personnel matters -- is done behind the scenes, largely unnoticed even by its employees. Epix is a professional employer organization, or PEO, handling payroll, benefits and human resources for thousands of small to medium-size companies in 49 states. It offers an entire HR department in one package.

And despite Epix's billion-dollar revenue stream, much of that money passes right through the company's hands, coming from more than 3,400 clients and funneling back to employees at the client's workplace in the form of payroll and benefits.

Invisible though it may be locally, Epix carries weight in the highly competitive world of PEOs. It is the fifth largest, based on revenues. (No. 2 in the industry, Gevity HR, formerly Staff Leasing Inc., is just down I-75 in Bradenton.)

PEOs, which have been around since the early 1980s, negotiate better insurance rates, take on the risk of worker's compensation and handle the administrative burden of running a work force.

Targeting companies with anywhere from five to 200 employees, they charge a per-employee fee or a percent of payroll for its services. Industrywide, the average fee is 2 to 4 percent of payroll or $500 to $1,500 a year per head, depending on the services chosen.

"Ninety percent of the time, we can save the employer money," said Tom Taylor, president and chief executive at Epix. "We take away the necessary evil of employee administration and give employers the ability to focus on their business."

Boring as processing paychecks may be, it has one big attraction to savvy investors such as Bass: its potential to grow into a trillion-dollar business.

In a recent report, Mercedes Sanchez, an analyst with Raymond James and Associates, estimated that the PEO industry has penetrated less than 5 percent of the available market, generating revenues in 2000 of about $37.5-billion. Considering the potential market to be all U.S. companies with fewer than 500 employees, Sanchez estimates market size to be $1.3-trillion. She projects growth of about 15 percent a year over the next several years.

Taylor said Epix grew at about 40 percent for the past two years, but he intends to slow that down this year.

"We're going to change the focus from one of growth to one of service and retention and focus a little more on the bottom line than on the top line," he said. "That's a more sustainable business model, especially in slower economic times."

Epix was formed in 1998 through the merger of Tampa's Payroll Transfers Inc. and Employee Management Inc. of Woodbridge, N.J. The company is privately owned by Bass-run Keystone Inc. and three other private investment groups. The investors had acquired Payroll Transfers from its three local owners in 1996.

Bass may be remembered locally for his purchase in 1988 of a minority stake in Times Publishing Co., parent of the St. Petersburg Times; by 1995, those shares had been bought back by the newspaper. Though Bass is not personally involved in Epix, Oak Hill Securities, another Bass affiliate, holds several seats on its board.

The 43-year-old Taylor started his career as an audit manager with Price Waterhouse, then moved to executive positions with food companies, including Kraft Foods. He spent two years as chief financial officer for Colorado Prime Corp., the mail-order steak company, positioning it for sale. Four years ago, he was recruited to Payroll Transfers, which was headquartered in an office park off I-4.

Taylor joined the company just before its merger with Employee Management. For nearly four years, Taylor shared the top jobs with Steve A. Rosenthal, founder of Employee Management. In October, Rosenthal resigned, leaving Taylor in full control.

Despite speculation in the Wall Street Journal in December that a competitor might acquire Epix, Taylor rejects the suggestion that he is a CFO-for-hire or that he's preparing Epix for acquisition any time soon.

"I don't plan on going anywhere," said Taylor, who divides his time between an apartment in Tampa and a home near the company's Woodbridge, N.J., office. "We get calls all the time about being acquired, but we're not interested at this time. We believe there's value in the business over the longer term."

Epix has been profitable since 1999, Taylor said, with $4-million in net income in 2000. But running a PEO is a tricky business with razor-thin margins. Profits are tied to the PEO's ability to minimize worker's compensation claims and keep tight control on its own administrative costs. Smaller PEOs have had trouble making their margins and either closed or been acquired. But being bigger is no guarantee of success.

One of the keys is picking and choosing your clients.

Epix targets small to mid-size companies in a variety of industries, including manufacturing, transportation, hospitality, child care, health care and professional services. "Our philosophy is to seek more white- and gray-collar clients," Taylor said. "We stay away from heavy construction and jobs with higher worker's comp codes and we have a pretty strong risk management group."

For the same reason, Gevity HR is trying to shift from handling higher-injury construction workers to a more white-collar client base. The publicly held company had a loss in the most recent quarter, ended Sept. 30, of $14.5-million or 70 cents per share, compared with earnings of $660,000, or 3 cents a share, a year ago. The company, which has the highest number of work site employees in the industry, said it expects to be profitable in 2002 because of revised pricing and cost cutting.

With more than 2,000 companies in the field, PEOs have been locked in rate-cutting competition for clients.

"The PEO industry has become too commoditized and clients were buying solely on price," analyst Sanchez said. "That's a no-win game and we've seen lots of failures in the space. They have to become much more intimate with the client and offer ancillary benefits and services."

That's the direction Taylor said he's heading at Epix.

"We're targeting companies that are not just interested in buying cheaper health insurance, but are interested in the aggregated value of our services," he said.

Among the services that Epix hopes will distinguish it from the competition are access to better technology and expanded human resource assistance.

The company is rolling out a Web-based payroll and information system with round-the-clock access for clients and their employees. Among the benefits: The system allows clients to file their payrolls online, eliminating faxed paper reports that have to be keyed into Epix's system.

"This is a way for our clients to get access to much better software than they could afford on their own," Taylor said. "They can go to our Web site and get access to all kinds of data based on their security level."

Epix also is beefing up its role as the off-site human resources department for its clients, offering recruiting, pre-employment testing, online training and an employee assistance program.

"We're trying to help our clients recruit, train and retain their employees," Taylor said. "Labor Department statistics show the average turnover is 12 percent and it costs 30 percent to replace an employee. Through our fee, our intent is to reduce the cost of that turnover."

Tied as it is to general employment levels, the PEO industry is not immune to economic downturns. Taylor said Epix has lost some work site employees when clients, who have all control over hiring and firing, laid off staff.

Epix's administrative staff also was cut by about 30 positions in the fall, because of the new administration and the decline in work site employees. The company now has about 200 people at its headquarters in Tampa, 100 in New Jersey and another 100 at nine sales offices.

"We've done some right-sizing," said Taylor, who was unable to say whether Epix would have further cutbacks. "January is prime time for us and I'm analyzing now how many new clients were brought in and forecasting the year. But I like what I see."

Taylor argues that although PEOs aren't recession resistant, they can continue to operate effectively in a downturn because they're a good value to employers.

Sanchez of Raymond James tends to agree.

"The PEO industry has only gone through one downturn, in the early 1990s, and then it was in its infancy," she said. "This go-round, we've gotten a much better indication of how it will fare."

At Henry Gonzalez Plumbing Co. in Tampa, Joe Gonzalez is a believer.

About 20 years ago, his father signed on with a PEO after his company downsized to about 15 workers. The company had a frustrating experience outsourcing its HR duties with a string of PEOs until about three years ago when it hired Epix.

"They came in on a cold call, promised the world and came back with good numbers," said Gonzalez, who pays Epix a percent of payroll. "They have filled and exceeded our needs."

Gonzalez, who has not yet switched to the new Web-based system, faxes his weekly payroll to Epix by 9 a.m. Thursday and checks are in his hand by 8 the next morning.

Epix has provided training to Gonzalez's forklift operators at no extra cost. It has provided the company, which now has 30 employees, with safety training and employee handbooks, detailing everything down to paid holidays.

Gonzalez has taken management training classes sponsored by Epix and received safety and operations manuals from the PEO. Epix's safety officer does random inspections of the company's operations and provides Gonzalez with weekly safety updates.

"There was a time when we had three guys injured in accidents and Epix came in here with sirens blaring, trying to figure out what went wrong," said Gonzalez, who appreciated the PEO's concern. "It's very much to their advantage to keep worker's comp claims down, but some PEOs just don't seem to care."

The relationship hasn't been problem-free. Gonzalez said there are occasional hassles over health insurance matters.

"Epix told us to call the insurance company first, document our call and then give it to their compliance department," he said. "Within 48 hours, they had it taken care of."

Even Epix's buying power wasn't great enough to keep a lid on employees' health premiums this year: They went up about 20 percent. But Gonzalez thinks he'd do worse as a small business looking for coverage.

"I'd probably still be paying at least 25 percent more if I were in the market on my own," he said. "Plus, it would kill us to deal with all that. We'd have to hire another employee and that would not be cost effective."

Gonzalez, whose grandfather founded the business in 1929, said he's never felt his control as a boss is undermined by the PEO arrangement.

"I do all the hiring and firing," he said. "It actually feels like I have more control because I know we're hitting all the points we have to hit legally. It makes it nicer to be a boss."

-- Kris Hundley can be reached at hundley@sptimes.com or (727) 892-2996.

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