Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1998, for Century Business Services, Inc. (CBIZ). The company operates as a leading provider of outsourced business services, including accounting, tax, employee benefits, and specialty insurance, primarily to small and medium-sized enterprises. The reporting period reflects significant growth driven by an aggressive acquisition strategy, with 16 complementary businesses acquired in the second quarter of 1998 alone.
Key Financial Metrics
| Metric | Three Months Ended June 30, 1998 | Six Months Ended June 30, 1998 | Six Months Ended June 30, 1997 |
|---|---|---|---|
| Total Revenues | $69.7 million | $134.1 million | $47.2 million |
| Net Income | $7.9 million | $14.9 million | $4.5 million |
| Diluted EPS | $0.12 | $0.23 | $0.09 |
| Cash and Equivalents | $49.2 million (Balance Sheet) | Increased $25.8 million during the six-month period | |
| Total Debt | $38.8 million (Notes payable, bank debt, leases) | Up from $20.7 million at Dec 31, 1997 | |
| Operating Cash Flow | Used $0.8 million (Six months 1998) vs. Provided $10.9 million (Six months 1997) |
Material Changes vs. Prior Period
- Revenue Surge: Total revenues increased 169% for the six months ended June 30, 1998, compared to the prior year. This was primarily driven by business service fees and commissions, which rose from $26.0 million to $108.1 million.
- Profitability Growth: Net income for the six-month period more than tripled to $14.9 million from $4.5 million in the prior year. Income from continuing operations before tax rose to $23.4 million from $7.3 million.
- Expense Expansion: Total expenses increased to $111.3 million (six months 1998) from $40.4 million (six months 1997). This reflects the integration of acquired entities and increased corporate staff. However, total expenses as a percentage of revenue improved to 83.0% from 85.7%.
- Balance Sheet Growth: Total assets grew from $296.4 million to $455.5 million, largely due to a $78.0 million increase in goodwill from acquisitions. Shareholders' equity increased to $264.6 million, bolstered by stock issuances.
Outlook, Risks, and Management Commentary
- Acquisition Strategy: Management continues to pursue a strategic acquisition program. In Q2 1998, 16 companies were acquired. Subsequent to June 30, 1998, the company closed four additional acquisitions and announced 12 more, with a combined cost of approximately $87 million in cash and stock.
- Liquidity and Financing: The company increased its revolving credit facility from $50 million to $100 million in August 1998. Cash provided by financing activities ($70.2 million) significantly exceeded cash used in investing activities ($43.7 million) and operating activities ($0.8 million).
- Year 2000 Compliance: The company is modifying information systems for Year 2000 compliance, with project completion planned for the end of 1998. Estimated costs are not expected to exceed $2.0 million.
- Risks: Key risks include the ability to finance and integrate acquisitions, manage rapid growth, attract personnel, and manage insurance pricing and loss reserves. The company also notes exposure to interest rate risk regarding its credit facility.
Investor Verification Checklist
- Acquisition Integration: Verify the successful integration of the 16 Q2 acquisitions and the 16 subsequent deals to ensure projected synergies are realized.
- Goodwill Amortization: Monitor the impact of the $78 million increase in goodwill on future depreciation and amortization expenses.
- Operating Cash Flow: Investigate the shift from positive operating cash flow in 1997 to negative operating cash flow in the first half of 1998, despite revenue growth.
- Debt Levels: Assess the sustainability of the increased debt load ($38.8 million) relative to cash flow generation as the company funds further acquisitions.
- Insurance Reserves: Review the adequacy of loss reserves given the expansion in specialty insurance services and the associated risk of under-reserving.