CBIZ, Inc. 10-Q Summary: Period Ended September 30, 2010
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for CBIZ, Inc., a provider of professional business services including accounting, tax, financial advisory, and employee benefits. The report covers the three and nine months ended September 30, 2010. CBIZ operates through four practice groups: Financial Services, Employee Services, Medical Management Professionals (MMP), and National Practices.
Key Financial Metrics
Revenue and Profitability (Nine Months Ended Sept 30, 2010):
- Total Revenue: $567.6 million (down 1.7% from $577.4 million in 2009).
- Operating Income: $55.4 million (up 2.4% from $54.1 million in 2009).
- Net Income: $26.2 million (down 12.8% from $30.1 million in 2009).
- Diluted EPS (Continuing Operations): $0.48 (down from $0.50 in 2009).
- Gross Margin: 13.7% of revenue (up from 13.5% in 2009).
Liquidity and Balance Sheet:
- Cash and Cash Equivalents: $0.7 million (down from $9.3 million at year-end 2009).
- Restricted Cash: $12.4 million.
- Total Debt: Approximately $289 million (including $119 million bank debt and $170 million convertible notes).
- Available Credit Facility: $103.6 million remaining on a $275 million facility.
Cash Flow (Nine Months Ended Sept 30, 2010):
- Operating Cash Flow: $39.6 million provided.
- Investing Cash Flow: $36.1 million used (primarily for acquisitions).
- Financing Cash Flow: $12.0 million used (primarily for share repurchases and debt refinancing).
Material Changes vs. Prior Period
- Revenue Decline: Same-unit revenue declined 4.4% year-over-year, driven by decreased client demand in the Financial Services and MMP segments, partially offset by $15.6 million in revenue from new acquisitions.
- Cost Management: Operating expenses decreased 2.0% to $489.6 million, improving the expense ratio to 86.3% of revenue. This was achieved through staff reductions and lower bad debt expense ($3.4 million vs. $6.2 million in 2009).
- Debt Restructuring: In September 2010, CBIZ issued $130 million in new 2010 Convertible Notes (4.875% interest, maturing 2015). Proceeds were used to repurchase $60 million of 2006 Convertible Notes, repurchase 4.6 million shares of common stock, and pay down the credit facility.
- Share Repurchases: The company repurchased approximately 13.4 million shares of common stock during the nine-month period at a total cost of $86.1 million, including a significant transaction with its largest shareholder, Westbury (Bermuda) Ltd.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted that while same-unit revenue declined due to economic conditions and client terminations (particularly in MMP), the company successfully managed costs to maintain operating income growth. The company continues to pursue strategic acquisitions to offset organic declines.
Risks and Contingencies:
- Legal Proceedings: CBIZ is named as a defendant in multiple lawsuits in Arizona related to the bankruptcy of Mortgages Ltd. Plaintiffs seek damages for alleged securities fraud and negligence. Management believes the allegations are without merit and does not expect a material adverse effect.
- Auction Rate Securities (ARS): CBIZ holds $13.4 million par value of ARS with a fair value of $10.1 million. Due to failed auctions, these are classified as non-current. The company recorded a $0.3 million other-than-temporary impairment charge.
- Debt Covenants: The company must maintain specific leverage ratios and fixed charge coverage ratios under its credit facility. Management believes it is in compliance as of September 30, 2010.
Investor Verification Checklist
- Verify the impact of the $130 million convertible note issuance on future interest expense and potential dilution.
- Monitor the resolution of the Arizona litigation regarding Mortgages Ltd. for potential liability exposure.
- Assess the liquidity risk associated with the $10.1 million investment in illiquid Auction Rate Securities.
- Review the Days Sales Outstanding (DSO) metric, which increased to 81 days from 66 days at year-end 2009, indicating slower collections.
- Confirm the company's ability to meet debt covenants given the decline in same-unit revenue.