CBZ

Business Context and Reporting Period

Company: Century Business Services, Inc. (CBIZ, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2004
Business Overview: CBIZ provides outsourced professional business services through three practice groups: Accounting, Tax and Advisory (ATA); Benefits and Insurance; and National Practices (including Medical Practice Management). The company operates in the U.S. and Canada.

Key Financial Metrics

Liquidity: Current assets of $207.1 million exceeded current liabilities of $110.2 million by $96.9 million. The company maintains a $73.0 million revolving credit facility.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 2.2% ($3.2 million) year-over-year. This was driven by a 4.2% increase in same-unit revenue, partially offset by a $5.1 million decrease due to divestitures and a $2.5 million increase from acquisitions.
• Profitability: Net income rose 15.8% to $11.6 million. Operating income increased 4.3% to $19.3 million.
• Cash Flow: Net cash used in operating activities was $7.7 million in Q1 2004, compared to $2.1 million provided in Q1 2003. The shift was primarily due to changes in net working capital, specifically a $24.2 million increase in accounts receivable due to seasonal tax revenue.
• Debt: Bank debt increased by $9.4 million to $23.4 million, primarily to fund incentive compensation payments. Interest expense decreased 25.7% due to lower weighted average interest rates (3.36% vs 4.39%).
• Segment Performance:
  • ATA: Revenue up 2.5% to $70.7 million; gross margin slightly declined to 30.2%.
  • Benefits & Insurance: Revenue down 4.6% to $38.0 million due to prior divestitures; gross margin declined to 15.6% due to increased personnel costs.
  • National Practices: Revenue up 9.2% to $39.2 million, driven by 16.9% growth in Medical Practice Management.

Guidance, Outlook, and Risks

• Share Repurchase: In April 2004 (subsequent to period end), CBIZ concluded a tender offer purchasing 7.5 million shares at $5.00 per share ($37.5 million total), funded by the credit facility. The Board authorized up to 8.5 million shares.
• Seasonality: Management notes that a disproportionately large amount of revenue occurs in the first half of the year, particularly Q1, due to tax services seasonality.
• Legal Proceedings: A consolidated stockholder class-action lawsuit regarding goodwill amortization and operating results was dismissed with prejudice by the Sixth Circuit Court of Appeals on March 30, 2004. Management expects this to end proceedings.
• Acquisitions and Divestitures: The company continues to acquire businesses to strengthen market share and divest underperforming or non-core operations. Q1 2004 included the acquisition of a benefits firm and the sale of an ATA operation.
• Risks: Key risks include dependence on key employees, competitive pricing pressures, and the ability to manage growth. The company is subject to interest rate risk on its floating-rate debt.

Investor Verification Checklist

• Working Capital Trends: Verify the sustainability of the $24.2 million increase in accounts receivable and the resulting cash burn in operating activities.
• Debt Covenants: Confirm continued compliance with the credit facility covenants (minimum net worth, leverage ratio, fixed charge coverage) following the increase in bank debt.
• Share Repurchase Impact: Assess the impact of the $37.5 million share repurchase on future liquidity and the remaining $46.6 million credit availability.
• Segment Margins: Monitor the decline in gross margins for the Benefits & Insurance segment and the ATA segment to ensure cost controls are effective.
• Legal Finality: Confirm that the dismissal of the securities litigation is final and that no further appeals are pursued by plaintiffs.