Business Context and Reporting Period
Company: Century Business Services, Inc. (CBIZ, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: CBIZ provides professional services through three primary practice groups: Accounting, Tax and Advisory (ATA); Benefits and Insurance; and National Practices (including Medical Practice Management). The company operates as a service provider for payroll, insurance brokerage, tax preparation, and business advisory services.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2002 |
|---|---|---|---|
| Revenue | $119,488 | $390,109 | $380,479 |
| Gross Margin | $9,892 (8.3%) | $51,754 (13.3%) | $48,097 (12.6%) |
| Operating Income | $1,208 | $24,440 | $17,930 |
| Net Income (Loss) | $(238) | $13,010 | $(75,679) |
| Diluted EPS | $0.00 | $0.14 | $(0.78) |
| Cash from Operations (9mo) | $30,424 | ||
| Bank Debt Outstanding | $23,000 | ||
| Available Credit Facility | ~$33.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 3.6% ($4.2 million) for the quarter and 2.5% ($9.6 million) for the nine months compared to the prior year. Growth was driven by acquisitions and same-unit revenue increases in the Benefits and Insurance and Medical Practice Management segments, partially offset by divestitures and a weak business environment in the ATA segment.
- Profitability: Operating income improved significantly to $24.4 million for the nine months ended September 30, 2003, compared to $17.9 million in 2002. This contrasts with the prior year's nine-month period, which included a massive $80.0 million non-cash impairment charge related to a change in accounting principle (SFAS 142) for goodwill.
- Expense Management: Operating expenses as a percentage of revenue decreased to 86.7% for the nine months in 2003 from 87.4% in 2002. Consolidation and integration charges decreased to $1.6 million in 2003 from $3.4 million in 2002.
- Debt and Liquidity: Bank debt increased to $23.0 million from $17.5 million at year-end 2002, primarily due to borrowings used to fund a $33.5 million share repurchase program. Cash and cash equivalents decreased to $4.4 million from $6.4 million.
Guidance, Outlook, and Risks
- Management Commentary: Management notes that the weak business environment continues to hamper growth in the ATA segment, particularly in consulting and special projects. Conversely, the Benefits and Insurance segment benefits from rising premium rates, and the Medical Practice Management unit continues to expand into new markets.
- Capital Allocation: The company amended its credit facility to allow for increased stock repurchases. In July 2003, CBIZ completed a modified Dutch Auction tender offer, repurchasing approximately 9.9 million shares for $33.2 million.
- Risks and Contingencies:
- Legal Proceedings: CBIZ is subject to ordinary course claims and suits. Management does not believe the ultimate resolution will have a material adverse effect, though legal costs fluctuate based on active litigation.
- Investment Valuation: The company holds investments in privately held start-up companies which are inherently risky and subject to impairment if market conditions deteriorate.
- Interest Rate Risk: CBIZ has floating rate debt. An interest rate swap previously held to mitigate this risk was unwound in the second quarter of 2003 as debt levels were reduced.
- Discontinued Operations: Five operations remain classified as held for sale or discontinued, with assets of $13.7 million and liabilities of $6.6 million as of September 30, 2003.
Investor Verification Checklist
- Share Repurchase Impact: Verify the dilution effect of the 9.9 million shares repurchased versus the remaining 86.3 million shares outstanding.
- ATA Segment Performance: Monitor the Accounting, Tax and Advisory segment for continued weakness in consulting revenue and margin compression due to fixed cost structures.
- Debt Covenants: Confirm continued compliance with the credit facility covenants, specifically the minimum net worth and leverage ratios, given the recent increase in debt to fund buybacks.
- Discontinued Operations: Track the timeline and proceeds for the sale of the five remaining discontinued operations to assess potential one-time gains or losses.
- Impairment Risks: Review the valuation of the $0.6 million investment in private start-ups and the $167.2 million goodwill balance for potential future impairment charges.