CBZ

Business Context and Reporting Period

Company: Century Business Services, Inc. (CBIZ, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001
Business Overview: CBIZ provides professional outsourced business services (accounting, tax, benefits, insurance, payroll, consulting) to small and medium-sized companies, government entities, and individuals.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 11.1% ($14.7 million) for the quarter and 7.8% ($35.0 million) for the nine-month period compared to 2000. Drivers included divestitures ($8.9 million and $21.3 million impact respectively), weak economic conditions, and a decline in asset-based investment advisory fees due to equity market drops.
• Profitability Volatility: The company reported a net loss of $9.2 million for the quarter, contrasting with a net loss of $2.9 million in the prior year quarter. For the nine-month period, the company returned to profitability with $2.2 million net income, compared to a net loss of $13.7 million in the prior year (which included a $11.9 million cumulative effect of an accounting change).
• Expense Management: Operating expenses decreased 3.0% for the quarter and 5.0% for the nine-month period. Excluding consolidation charges, operating expenses as a percentage of revenue were 84.3% in 2001 versus 83.0% in 2000.
• Debt Reduction: Bank debt was reduced by $49.5 million during the nine-month period, from $117.5 million to $68.0 million, utilizing cash from operations and divestitures.
• Interest Expense: Interest expense dropped significantly (53.4% for the quarter, 37.1% for nine months) due to lower average outstanding debt and lower interest rates.

Guidance, Outlook, Risks, and Unusual Items

• Credit Facility Amendment: Subsequent to the reporting period, CBIZ amended its credit facility. The amendment waived defaults related to interest coverage and leverage ratios for the period ended September 30, 2001. The loan commitment was reduced from $140 million to $100 million, with planned reductions to $80 million by June 30, 2002. Interest rate margins were increased, and stock repurchases were restricted.
• Strategic Transactions:
  • Acquired a business solutions firm for $0.3 million in Q2 2001.
  • Sold multiple non-core business units throughout the year, resulting in a net pretax loss of $1.2 million for the nine-month period.
  • Entered an exclusive agreement with HarborView Partners (Oct 2001) to provide internal audit professionals, with a $2.5 million working capital commitment.
• Accounting Changes: The company adopted SAB 101 in 2000, which reduced revenue and expenses in prior periods. The company plans to adopt SFAS 142 (Goodwill) in 2002, which will stop goodwill amortization but require annual impairment testing. Unamortized goodwill is approximately $256 million.
• Risks: Key risks include dependence on key employees, competitive pricing pressures, general economic conditions, and the ability to meet debt covenants. The company is currently in compliance with amended covenants.

Investor Verification Checklist

• Debt Covenant Compliance: Verify the specific terms of the amended credit facility and the company's ability to meet the reset EBITDA targets and leverage ratios for 2002.
• Revenue Quality: Assess the sustainability of revenue growth excluding the impact of divestitures and the volatility of asset-based advisory fees tied to market performance.
• Goodwill Impairment Risk: Monitor the impact of the upcoming adoption of SFAS 142 on the $256 million goodwill balance and potential future impairment charges.
• Cash Flow vs. Debt Service: Confirm that operating cash flows remain sufficient to service the remaining $68 million debt and fund the $2.5 million commitment to HarborView Partners.
• Segment Performance: Review the specific performance of the "National Practices" segment, which generated the highest pre-tax income ($10.2 million for 9 months) but also faced significant corporate overhead allocation.