Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1999, for Century Business Services, Inc. (also referred to as CBIZ, Inc. in the request metadata). The company provides professional outsourced business services, including accounting, tax, valuation, benefits administration, and information technology. The reporting period reflects significant strategic activity, including the acquisition of thirteen complementary companies and the planned divestiture of its specialty insurance segment, which is now classified as a discontinued operation.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 1999 | Nine Months Ended Sep 30, 1999 |
|---|---|---|
| Revenue | $138.1 million | $408.7 million |
| Net Income | $11.7 million | $42.2 million |
| Diluted EPS | $0.12 | $0.46 |
| EBITDA | $26.0 million | $82.2 million |
| Cash and Cash Equivalents | $44.6 million | $44.6 million (Ending Balance) |
| Bank Debt | $115.0 million | $115.0 million (Outstanding) |
| Total Assets | $750.5 million | $750.5 million |
| Total Liabilities | $232.8 million | $232.8 million |
Operating Margins: Total expenses represented 85.0% of revenue for the three-month period and 83.3% for the nine-month period. Excluding merger-related expenses, these ratios were 83.1% and 82.0%, respectively.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 51.6% year-over-year for the quarter and 65.2% for the nine-month period. This growth was driven primarily by acquisitions ($30.4 million for the quarter; $60.0 million for the nine months) and internal growth rates of 17.5% (quarter) and 15.6% (nine months).
- Profitability: Net income from continuing operations rose to $13.1 million for the quarter and $42.7 million for the nine months, compared to $9.2 million and $25.5 million in the prior year periods.
- Expense Structure: Operating expenses increased due to acquisitions and staff build-up. Compensation expense as a percentage of revenue rose to 52.0% (quarter) and 51.0% (nine months) from 49.0% and 46.0% in 1998.
- Balance Sheet: Total assets grew by $172.6 million since December 31, 1998, driven by increases in goodwill ($62.1 million), accounts receivable ($62.0 million), and restricted cash ($20.9 million). Bank debt increased by $71.0 million to fund growth and acquisitions.
- Discontinued Operations: The company recorded a loss of $1.4 million from discontinued operations for the quarter and $0.5 million for the nine months, related to the divestiture of its specialty insurance segment.
Guidance, Outlook, and Risks
- Strategic Alternatives: On October 5, 1999, the company retained Merrill Lynch & Co. to explore alternatives to enhance shareholder value, including alliances, mergers, or a sale of the company.
- Acquisition Program: The company continues its aggressive acquisition strategy. Post-period, two additional firms were acquired for approximately $4.9 million. The revolving credit facility was increased from $100 million to $250 million to support this growth.
- Divestitures: The company plans to divest four or five smaller, underperforming non-core operations in the fourth quarter of 1999. The divestiture of the specialty insurance segment is expected to be finalized by December 31, 1999.
- Legal Proceedings: Three lawsuits were filed in September and October 1999 alleging false statements regarding acquisition costs and revenue. Management believes these are without merit and expects no material adverse effect.
- Year 2000 (Y2K): The company reports achieving Y2K compliance with limited exceptions. It expects to incur $3 to $4 million in capital expenditures in 1999 for system upgrades. Risks remain regarding third-party vendors and service providers.
- Impaired Notes: Notes receivable from a 1997 divestiture totaling approximately $12.2 million (principal and interest) became past due in the third quarter. While impaired, no reserve has been recorded as collection is reasonably expected.
Investor Verification Checklist
- Verify the status and potential financial impact of the three pending securities class-action lawsuits filed in late 1999.
- Confirm the timeline and terms of the planned divestiture of the specialty insurance segment and the four to five non-core operations.
- Assess the progress of the strategic review with Merrill Lynch & Co. regarding potential mergers or sales.
- Monitor the collection status of the $12.2 million in past-due notes receivable from the 1997 Environmental Services divestiture.
- Review the integration costs and revenue realization of the thirteen companies acquired in the third quarter of 1999.