þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 22-2769024 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
6050 Oak Tree Boulevard, South, Suite 500, Cleveland, Ohio | 44131 | |
(Address of principal executive offices) | (Zip Code) |
(Registrants telephone number, including area code) | 216-447-9000 | |
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Class of Common Stock | Outstanding at April 30, 2010 | |
Common Stock, par value $0.01 per share | 62,437,499 |
2
Item 1. | Financial Statements |
MARCH 31, | DECEMBER 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 5,360 | $ | 9,257 | ||||
Restricted cash |
11,449 | 15,432 | ||||||
Accounts receivable, net |
169,507 | 128,766 | ||||||
Notes receivable current, net |
1,124 | 1,766 | ||||||
Income taxes refundable |
| 3,391 | ||||||
Deferred income taxes current |
9,013 | 7,579 | ||||||
Other current assets |
11,122 | 10,701 | ||||||
Assets of discontinued operations |
2,075 | 4,109 | ||||||
Current assets before funds held for clients |
209,650 | 181,001 | ||||||
Funds held for clients current |
65,002 | 87,925 | ||||||
Total current assets |
274,652 | 268,926 | ||||||
Property and equipment, net |
27,266 | 26,833 | ||||||
Notes receivable non-current, net |
997 | 1,041 | ||||||
Deferred income taxes non-current, net |
176 | 237 | ||||||
Goodwill and other intangible assets, net |
396,538 | 375,211 | ||||||
Assets of deferred compensation plan |
29,327 | 27,457 | ||||||
Funds held for clients non-current |
10,361 | 10,545 | ||||||
Other assets |
2,370 | 2,847 | ||||||
Total assets |
$ | 741,687 | $ | 713,097 | ||||
LIABILITIES |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 22,496 | $ | 25,707 | ||||
Income taxes payable current |
8,139 | | ||||||
Accrued personnel costs |
26,696 | 34,249 | ||||||
Notes payable current |
3,153 | 13,410 | ||||||
Other current liabilities |
21,927 | 13,883 | ||||||
Liabilities of discontinued operations |
991 | 2,281 | ||||||
Current liabilities before client fund obligations |
83,402 | 89,530 | ||||||
Client fund obligations |
78,296 | 101,279 | ||||||
Total current liabilities |
161,698 | 190,809 | ||||||
Convertible notes, net |
94,890 | 93,848 | ||||||
Bank debt |
139,450 | 110,000 | ||||||
Income taxes payable non-current |
6,810 | 6,686 | ||||||
Deferred compensation plan obligations |
29,327 | 27,457 | ||||||
Other non-current liabilities |
19,186 | 13,679 | ||||||
Total liabilities |
451,361 | 442,479 | ||||||
STOCKHOLDERS EQUITY |
||||||||
Common stock |
1,085 | 1,081 | ||||||
Additional paid-in capital |
522,470 | 518,637 | ||||||
Retained earnings (accumulated deficit) |
37,448 | 21,464 | ||||||
Treasury stock |
(269,670 | ) | (269,642 | ) | ||||
Accumulated other comprehensive loss |
(1,007 | ) | (922 | ) | ||||
Total stockholders equity |
290,326 | 270,618 | ||||||
Total liabilities and stockholders equity |
$ | 741,687 | $ | 713,097 | ||||
3
THREE MONTHS ENDED | ||||||||
MARCH 31, | ||||||||
2010 | 2009 | |||||||
Revenue |
$ | 210,235 | $ | 216,478 | ||||
Operating expenses |
172,291 | 173,987 | ||||||
Gross margin |
37,944 | 42,491 | ||||||
Corporate general and administrative expenses |
8,984 | 7,709 | ||||||
Operating income |
28,960 | 34,782 | ||||||
Other income (expense): |
||||||||
Interest expense |
(3,168 | ) | (3,503 | ) | ||||
Gain on sale of operations, net |
374 | 80 | ||||||
Other income (expense), net |
2,173 | (591 | ) | |||||
Total other expense, net |
(621 | ) | (4,014 | ) | ||||
Income from continuing operations before
income tax expense |
28,339 | 30,768 | ||||||
Income tax expense |
11,475 | 12,365 | ||||||
Income from continuing operations after income tax
expense |
16,864 | 18,403 | ||||||
Income from operations of discontinued operations,
net of tax |
(444 | ) | (229 | ) | ||||
(Loss) gain on disposal of discontinued operations,
net of tax |
(436 | ) | 7 | |||||
Net income |
$ | 15,984 | $ | 18,181 | ||||
Earnings (loss) per share: |
||||||||
Basic: |
||||||||
Continuing operations |
$ | 0.27 | $ | 0.30 | ||||
Discontinued operations |
(0.01 | ) | | |||||
Net income |
$ | 0.26 | $ | 0.30 | ||||
Diluted: |
||||||||
Continuing operations |
$ | 0.27 | $ | 0.30 | ||||
Discontinued operations |
(0.01 | ) | (0.01 | ) | ||||
Net income |
$ | 0.26 | $ | 0.29 | ||||
Basic weighted average shares outstanding |
61,509 | 61,295 | ||||||
Diluted weighted average shares outstanding |
62,065 | 61,950 | ||||||
4
THREE MONTHS ENDED | ||||||||
MARCH 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 15,984 | $ | 18,181 | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
Loss from operations of discontinued operations, net of tax |
444 | 229 | ||||||
Loss (gain) on disposal of discontinued operations, net of tax |
436 | (7 | ) | |||||
Gain on sale of operations, net |
(374 | ) | (80 | ) | ||||
Amortization of discount on convertible notes |
1,042 | 965 | ||||||
Bad debt expense, net of recoveries |
1,078 | 1,837 | ||||||
Depreciation and amortization expense |
5,125 | 5,044 | ||||||
Adjustment to contingent earnout liability |
(721 | ) | | |||||
Deferred income taxes |
(1,326 | ) | (224 | ) | ||||
Excess tax benefits from share based payment arrangements |
(49 | ) | (102 | ) | ||||
Employee stock awards |
1,294 | 945 | ||||||
Changes in assets and liabilities, net of acquisitions and divestitures: |
||||||||
Restricted cash |
3,984 | 3,677 | ||||||
Accounts receivable, net |
(42,224 | ) | (43,673 | ) | ||||
Other assets |
1,300 | (678 | ) | |||||
Accounts payable |
(3,138 | ) | (3,928 | ) | ||||
Income taxes payable |
12,156 | 11,917 | ||||||
Accrued personnel costs |
(7,658 | ) | (11,886 | ) | ||||
Other liabilities and other |
5,393 | (679 | ) | |||||
Net cash used in continuing operations |
(7,254 | ) | (18,462 | ) | ||||
Operating cash flows (used in) provided by
discontinued operations |
(658 | ) | 702 | |||||
Net cash used in operating activities |
(7,912 | ) | (17,760 | ) | ||||
Cash flows from investing activities: |
||||||||
Business acquisitions and contingent consideration, net of
cash acquired |
(26,039 | ) | (424 | ) | ||||
Proceeds from sales of divested and discontinued operations |
874 | 275 | ||||||
Additions to property and equipment, net |
(886 | ) | (1,442 | ) | ||||
Additions to notes receivable |
(129 | ) | | |||||
Payments received on notes receivable |
122 | 684 | ||||||
Investing cash flows used in discontinued operations |
| (5 | ) | |||||
Net cash used in investing activities |
(26,058 | ) | (912 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from bank debt |
137,875 | 130,025 | ||||||
Payment of bank debt |
(108,425 | ) | (105,025 | ) | ||||
Payment of notes payable and capitalized leases |
(41 | ) | (59 | ) | ||||
Payment for acquisition of treasury stock |
(29 | ) | (6,698 | ) | ||||
Proceeds from exercise of stock options |
645 | 255 | ||||||
Excess tax benefit from exercise of stock awards |
49 | 102 | ||||||
Debt issuance costs |
(1 | ) | (32 | ) | ||||
Net cash provided by financing activities |
30,073 | 18,568 | ||||||
Net decrease in cash and cash equivalents |
(3,897 | ) | (104 | ) | ||||
Cash and cash equivalents at beginning of year |
9,257 | 9,672 | ||||||
Cash and cash equivalents at end of period |
$ | 5,360 | $ | 9,568 | ||||
5
1. | Summary of Significant Accounting Policies | |
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. | ||
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting solely of normal recurring adjustments) considered necessary to present fairly the financial position of CBIZ, Inc. and its consolidated subsidiaries (CBIZ) as of March 31, 2010 and December 31, 2009, and the consolidated results of their operations and cash flows for the three months ended March 31, 2010 and 2009. Due to seasonality, potential changes in economic conditions, interest rate fluctuations and other factors, the results of operations for such interim periods are not necessarily indicative of the results for the full year. For further information, refer to the consolidated financial statements and notes thereto included in CBIZs Annual Report on Form 10-K for the year ended December 31, 2009. | ||
Principles of Consolidation | ||
The accompanying consolidated financial statements reflect the operations of CBIZ and all of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying consolidated financial statements do not reflect the operations or accounts of variable interest entities as the impact is not material to the financial condition, results of operations or cash flows of CBIZ. See CBIZs Annual Report on Form 10-K for the year ended December 31, 2009 for further discussion. | ||
Use of Estimates | ||
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect: the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses. Managements estimates and assumptions include, but are not limited to, estimates of collectability of accounts receivable and unbilled revenue, the realizability of goodwill and other intangible assets, the fair value of certain assets, the valuation of stock options in determining compensation expense, estimates of accrued liabilities (such as incentive compensation, self-funded health insurance accruals, legal reserves, future contingent purchase price obligations, and consolidation and integration reserves), the provision for income taxes, the realizability of deferred tax assets, and other factors. Managements estimates and assumptions are derived from and are continually evaluated based upon available information, judgment and experience. Actual results could differ from those estimates. | ||
Reclassifications | ||
Certain amounts in the 2009 consolidated financial statements and disclosures have been reclassified to conform to the current year presentation. | ||
Revenue Recognition and Valuation of Unbilled Revenues | ||
Revenue is recognized only when all of the following are present: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee to the client is fixed or determinable, and collectability is reasonably assured. | ||
CBIZ offers a vast array of products and business services to its clients. Those services are delivered through four practice groups. A description of revenue recognition policies is included in the Annual Report on Form 10-K for the year ended December 31, 2009. |
6
New Accounting Pronouncements | ||
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU 2010-06), which adds disclosure requirements about transfers in and out of Levels 1 and 2, for activity relating to Level 3 measurements, and clarifies input and valuation techniques. ASU 2010-06 is effective for the first reporting period beginning after December 15, 2009, except as it pertains to the requirement to provide the Level 3 activity for purchases, sales, issuances and settlements on a gross basis. This Level 3 requirement will be effective for fiscal years beginning after December 15, 2010. CBIZ adopted the provisions of the accounting guidance for the interim reporting period ended March 31, 2010. The adoption did not have a material impact on CBIZs consolidated financial statements. | ||
In December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (ASU 2009-17). ASU 2009-17 clarifies and improves financial reporting by entities involved with variable interest entities. ASU 2009-17 is effective as of the beginning of the annual period beginning after November 15, 2009. CBIZ adopted the provisions of this accounting guidance for the interim period ended March 31, 2010. The adoption did not have a material impact on CBIZs consolidated financial statements. |
2. | Accounts Receivable, Net | |
Accounts receivable balances at March 31, 2010 and December 31, 2009 were as follows (in thousands): |
2010 | 2009 | |||||||
Trade accounts receivable |
$ | 124,038 | $ | 109,665 | ||||
Unbilled revenue |
54,500 | 27,611 | ||||||
Total accounts receivable |
178,538 | 137,276 | ||||||
Allowance for doubtful accounts |
(9,031 | ) | (8,510 | ) | ||||
Accounts receivable, net |
$ | 169,507 | $ | 128,766 | ||||
3. | Goodwill and Other Intangible Assets, Net | |
The components of goodwill and other intangible assets, net at March 31, 2010 and December 31, 2009 were as follows (in thousands): |
2010 | 2009 | |||||||
Goodwill |
$ | 309,871 | $ | 291,120 | ||||
Intangible assets: |
||||||||
Client lists |
111,998 | 108,615 | ||||||
Other intangible assets |
9,212 | 9,394 | ||||||
Total intangible assets |
121,210 | 118,009 | ||||||
Total goodwill and intangibles assets |
431,081 | 409,129 | ||||||
Accumulated amortization: |
||||||||
Client lists |
(30,605 | ) | (29,918 | ) | ||||
Other intangible assets |
(3,938 | ) | (4,000 | ) | ||||
Total accumulated amortization |
(34,543 | ) | (33,918 | ) | ||||
Goodwill and other intangible assets, net |
$ | 396,538 | $ | 375,211 | ||||
7
4. | Depreciation and Amortization | |
Depreciation and amortization expense for property and equipment and intangible assets for the three months ended March 31, 2010 and 2009 was as follows (in thousands): |
2010 | 2009 | |||||||
Operating expenses |
$ | 5,016 | $ | 4,860 | ||||
Corporate general and administrative expenses |
109 | 184 | ||||||
Total depreciation and amortization expense |
$ | 5,125 | $ | 5,044 | ||||
5. | Borrowing Arrangements | |
Convertible Senior Subordinated Notes | ||
On May 30, 2006, CBIZ sold and issued $100.0 million in senior subordinated notes (Notes). The Notes are direct, unsecured, senior subordinated obligations of CBIZ and rank (i) junior in right of payment to all of CBIZs existing and future senior indebtedness, (ii) equal in right of payment with any other future senior subordinated indebtedness, and (iii) senior in right of payment to all subordinated indebtedness. The terms of the Notes are governed by the Indenture dated as of May 30, 2006, with U.S. Bank National Association as trustee (Indenture). The Notes and Indenture are further described in CBIZs Annual Report on Form 10-K for the year ended December 31, 2009. | ||
The Notes bear interest at a rate of 3.125% per annum, payable in cash semi-annually in arrears on each June 1 and December 1. The Notes mature on June 1, 2026 and may be redeemed by CBIZ in whole or in part anytime after June 6, 2011. The Notes are convertible into CBIZ common stock at a rate equal to 94.1035 shares per $1,000 principal amount of the Notes (equal to an initial conversion price of approximately $10.63 per share), subject to adjustment as described in the Indenture. Upon conversion, CBIZ will deliver for each $1,000 principal amount of Notes, an amount consisting of cash equal to the lesser of $1,000 or the conversion value (as defined in the Indenture) and, to the extent that the conversion value exceeds $1,000, at CBIZs election, cash or shares of CBIZ common stock in respect of the remainder. | ||
CBIZ separately accounts for the debt and equity components of the Notes. The carrying amount of the debt and equity components at March 31, 2010 and December 31, 2009 were as follows (in thousands): |
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Principal amount of notes |
$ | 100,000 | $ | 100,000 | ||||
Unamortized discount |
(5,110 | ) | (6,152 | ) | ||||
Net carrying amount |
$ | 94,890 | $ | 93,848 | ||||
Additional paid-in-capital |
$ | 11,425 | $ | 11,425 | ||||
The discount on the liability component of the Notes is being amortized using the effective interest method based upon an annual effective rate of 7.80%, which represents the market rate for similar debt without a conversion option at the issuance date. The discount is being amortized over five years from the date of issuance, which coincides with the first date that holders can require CBIZ to repurchase the Notes. At March 31, 2010, the unamortized discount had a remaining amortization period of approximately 14 months. |
8
During the three months ended March 31, 2010 and 2009, CBIZ recognized interest expense on the Notes as follows (in thousands): |
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Contractual coupon interest |
$ | 781 | $ | 781 | ||||
Amortization of discount |
1,042 | 965 | ||||||
Total interest expense |
$ | 1,823 | $ | 1,746 | ||||
Bank Debt | ||
CBIZ maintains a $214.0 million unsecured credit facility (credit facility) with Bank of America as agent bank for a group of six participating banks. The credit facility has a letter of credit sub-facility and matures in November 2012. CBIZ had $139.5 million and $110.0 million of outstanding borrowings under its credit facility at March 31, 2010 and December 31, 2009, respectively. Rates for the three months ended March 31, 2010 and 2009 were as follows: |
2010 | 2009 | |||
Weighted average rates |
3.09% | 4.15% | ||
Range of effective rates |
2.71% - 6.40% | 2.09% - 6.40% | ||
Available funds under the credit facility are reduced by letters of credit and the outstanding balance of the credit facility. At March 31, 2010, CBIZ had approximately $37.4 million available under the credit facility. | ||
The credit facility provides CBIZ operating flexibility and funding to support seasonal working capital needs and other strategic initiatives such as acquisitions and share repurchases. Under the credit facility, loans are charged an interest rate consisting of a base rate or Eurodollar rate plus an applicable margin, letters of credit are charged based on the same applicable margin, and a commitment fee of 40.0 to 50.0 basis points is charged on the unused portion of the credit facility. | ||
The credit facility is subject to certain financial covenants that may limit CBIZs ability to borrow up to the total commitment amount. Covenants require CBIZ to meet certain requirements with respect to (i) minimum net worth; (ii) maximum leverage ratio; and (iii) a minimum fixed charge coverage ratio. The credit facility also places restrictions on CBIZs ability to create liens or other encumbrances, to make certain payments, investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of assets, or to merge or consolidate with an unaffiliated entity. According to the terms of the credit facility, CBIZ is not permitted to declare or make any dividend payments, other than dividend payments made by one of its wholly owned subsidiaries to the parent company. The credit facility contains a provision that, in the event of a defined change in control, the credit facility may be terminated. | ||
There are no limitations on CBIZs ability to acquire businesses or repurchase CBIZ common stock provided that the Leverage Ratio is less than 2.0. The Leverage Ratio is calculated as total debt (excluding the convertible senior subordinated notes) compared to EBITDA as defined by the credit facility. The Leverage Ratio at March 31, 2010 was 1.85, which represents a seasonally high ratio based on the Companys need to draw on its credit facility to fund its working capital requirements. This ratio has historically decreased as cash is collected and payments are made on the credit facility during the second and third quarters. |
9
6. | Commitments and Contingencies | |
Acquisitions | ||
The purchase price that CBIZ pays for businesses and client lists has historically consisted of two components: an up-front, non-contingent portion, and a portion which is contingent upon the acquired businesses or client lists actual future performance. For acquisitions completed prior to January 1, 2009, the portion of purchase price contingent on future performance is recorded when earned. For acquisitions completed January 1, 2009 and after, the fair value of the contingent purchase price is recorded at the date of acquisition and remeasured each reporting period until the liability is settled. Shares of CBIZ common stock that are issued in connection with acquisitions may be contractually restricted from sale for periods up to two years. Acquisitions are further discussed in Note 12. | ||
Indemnifications | ||
CBIZ has various agreements in which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification clauses are included in contracts arising in the normal course of business under which we customarily agree to hold the other party harmless against losses arising from a breach of representations, warranties, covenants or agreements, related to matters such as title to assets sold and certain tax matters. Payment by CBIZ under such indemnification clauses are generally conditioned upon the other party making a claim. Such claims are typically subject to challenge by CBIZ and to dispute resolution procedures specified in the particular contract. Further, CBIZs obligations under these agreements may be limited in terms of time and/or amount and, in some instances, CBIZ may have recourse against third parties for certain payments made by CBIZ. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of CBIZs obligations and the unique facts of each particular agreement. Historically, CBIZ has not made any payments under these agreements that have been material individually or in the aggregate. As of March 31, 2010, CBIZ was not aware of any material obligations arising under indemnification agreements that would require payments. | ||
Employment Agreements | ||
CBIZ maintains severance and employment agreements with certain of its executive officers, whereby such officers may be entitled to payment in the event of termination of their employment. CBIZ also has arrangements with certain non-executive employees which may include severance and other employment provisions. CBIZ accrues for amounts payable under these contracts and arrangements as triggering events occur and obligations become known. During the three months ended March 31, 2010 and 2009, payments regarding such contracts and arrangements were not material. | ||
Letters of Credit and Guarantees | ||
CBIZ provides letters of credit to landlords (lessors) of its leased premises in lieu of cash security deposits which totaled $3.0 million and $3.5 million as of March 31, 2010 and December 31, 2009, respectively. In addition, CBIZ provides license bonds to various state agencies to meet certain licensing requirements. The amount of license bonds outstanding at March 31, 2010 and December 31, 2009 was $1.4 million and $1.5 million, respectively. | ||
CBIZ acted as guarantor on various letters of credit for a CPA firm with which it has an affiliation, which totaled $3.1 million and $2.6 million as of March 31, 2010 and December 31, 2009, respectively. CBIZ has recognized a liability for the fair value of the obligations undertaken in issuing these guarantees, which is recorded as other current liabilities in the accompanying consolidated balance sheets. Management does not expect any material changes to result from these instruments as performance under the guarantees is not expected to be required. |
10
Self-Funded Health Insurance | ||
CBIZ maintains a self-funded comprehensive health benefit plan. Total expenses under this program are limited by stop-loss coverages on individually large claims. A third party administrator processes claims and payments, but does not assume liability for benefits payable under this plan. CBIZ assumes responsibility for funding the plan benefits out of general assets, however, employees contribute to the costs of covered benefits through premium charges, deductibles and co-pays. | ||
The third party administrator provides the Company with reports and other information which provides a basis for the estimate of the liability at the end of each reporting period. Although management believes that it uses the best available information to determine the amount of the liability, unforeseen health claims could result in adjustments and higher costs incurred if circumstances differ from the assumptions used in estimating the liability. The liability for the self-funded health insurance plan is included in other current liabilities in the consolidated balance sheets and was $4.3 million and $3.5 million at March 31, 2010 and December 31, 2009, respectively. CBIZs net healthcare costs include health claims, administration fees to the third-party administrators and premiums for stop-loss coverage. | ||
Legal Proceedings | ||
CBIZ is from time to time subject to claims and suits arising in the ordinary course of business. Although the ultimate disposition of such proceedings is not presently determinable, management does not believe that the ultimate resolution of these matters will have a material adverse effect on the consolidated financial condition, results of operations or cash flows of CBIZ. |
7. | Financial Instruments | |
Concentrations of Credit Risk | ||
Financial instruments that may subject CBIZ to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. CBIZ places its cash and cash equivalents with highly-rated financial institutions, limiting the amount of credit exposure with any one financial institution. CBIZs client base consists of large numbers of geographically diverse customers dispersed throughout the United States; thus, concentration of credit risk with respect to accounts receivable is not considered significant. | ||
Corporate Bonds | ||
CBIZ holds four corporate bonds with par values totaling $9.5 million at March 31, 2010. All bonds are investment grade and are classified as available-for-sale. These bonds have maturity dates ranging from October, 2010 through November, 2036, and are included in Funds held for clients current on the consolidated balance sheets as these investments are highly liquid and are expected to be held for less than one year. CBIZ recorded an unrealized gain on these bonds of $57,000 during the three months ended March 31, 2010, which is recorded as other comprehensive income. No gain or loss was recorded for the three months ended March 31, 2009 as these corporate bonds were purchased subsequent to March 31, 2009. | ||
Auction Rate Securities (ARS) | ||
At March 31, 2010, CBIZ held three investments in ARS with par values totaling $13.4 million and fair values totaling $10.4 million. The difference between par value and fair value for two of the ARS are currently considered to be temporary and changes in the fair value of these investments are recorded as unrealized losses in accumulated other comprehensive loss, net of tax benefit. The decline in fair value of the remaining ARS was previously determined to be other-than-temporary, with the losses associated with this ARS primarily attributed to credit loss. See Note 8 for further discussion regarding the ARS and related fair values. |
11
Due to the failed auctions and the uncertainty regarding the liquidity of these securities, CBIZ classifies its investments in auction-rate securities as funds held for clients non-current in the consolidated balance sheets. The maturity dates for these ARS investments range from October 2037 through February 2042. | ||
CBIZ has sufficient liquidity in its client fund assets to fund client obligations and the Company does not anticipate that the current lack of liquidity of these investments will affect its ability to conduct business. CBIZ does not intend to sell the two ARS investments that are temporarily impaired until an anticipated recovery in value occurs. | ||
Interest Rate Swaps | ||
CBIZ uses interest rate swaps to manage interest rate risk exposure. Our interest rate swaps effectively mitigate our exposure to interest rate risk, primarily through converting portions of our floating rate debt under the credit facility to a fixed rate basis. These agreements involve the receipt or payment of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal amounts. CBIZ does not enter into derivative instruments for trading or speculative purposes. | ||
Each of CBIZs interest rate swaps have been designated as cash flow hedges. Accordingly, the interest rate swaps are recorded as either assets or liabilities in the consolidated balance sheets at fair value. Changes in fair value are recorded as a component of accumulated other comprehensive loss (AOCL) in stockholders equity, net of tax, to the extent the swaps are effective. Amounts recorded to AOCL are reclassified to interest expense as interest on the underlying debt is recognized. Net amounts due related to the swaps are recorded as adjustments to interest expense when earned or payable. | ||
At inception, the critical terms of the interest rate swaps matched the underlying risks being hedged, and as such the interest rate swaps are expected to be highly effective in offsetting fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. The interest rate swaps are assessed for effectiveness and continued qualification for hedge accounting on a quarterly basis. If CBIZ determines that a cash flow hedge is no longer highly effective, the hedge ineffectiveness is recognized in current period earnings and hedge accounting is discontinued with respect to that cash flow hedge. | ||
As a result of the use of derivative instruments, CBIZ is exposed to risk that the counterparties will fail to meet their contractual obligations. To mitigate the counterparty credit risk, CBIZ only enters into contracts with selected major financial institutions based upon their credit ratings and other factors, and continually assesses the creditworthiness of counterparties. At March 31, 2010, all of the counterparties to CBIZs interest rate swaps had investment grade ratings. To date, all counterparties have performed in accordance with their contractual obligations. There are no credit risk-related contingent features in CBIZs interest rate swaps nor do the swaps contain provisions under which the Company has, or would be required, to post collateral. |
12
At March 31, 2010, each of the interest rate swaps was classified as a liability derivative. The following table summarizes CBIZs outstanding interest rate swaps and their classification on the consolidated balance sheets at March 31, 2010 and December 31, 2009 (in thousands). |
March 31, 2010 | ||||||||||||
Notional | Fair | Balance Sheet | ||||||||||
Amount | Value (c) | Location | ||||||||||
Interest rate swaps (a) |
$ | 20,000 | $ | 183 | Other current liabilities | |||||||
Total interest rate swaps |
$ | 20,000 | $ | 183 | ||||||||
December 31, 2009 | ||||||||||||
Notional | Fair | Balance Sheet | ||||||||||
Amount | Value (c) | Location | ||||||||||
Interest rate swap (b) |
$ | 10,000 | $ | 4 | Other current liabilities | |||||||
Interest rate swaps (a) |
20,000 | 186 | Other non-current liabilities | |||||||||
Total interest rate swaps |
$ | 30,000 | $ | 190 | ||||||||
(a) | Represents two interest rate swaps, each with a notional value of $10.0 million and terms of two years expiring in January, 2011. Under the terms of the interest rate swaps, CBIZ pays interest at a fixed rate of 1.55% and 1.59%, respectively, plus applicable margin under the credit agreement, and receives or pays interest that varies with three-month LIBOR. Interest is calculated by reference to the respective $10.0 million notional amount of the interest rate swap and payments are exchanged every three months. | |
(b) | Represents one interest rate swap with an initial term of two years that expired in January, 2010. Under the terms of the interest rate swap, CBIZ paid interest at a fixed rate of 3.9% plus applicable margin under the credit agreement, and received or paid interest that varied with one-month LIBOR. Interest was calculated by reference to the $10.0 million notional amount of the interest rate swap and payments were exchanged each month. | |
(c) | See additional disclosures regarding fair value measurements in Note 8. |
The following table summarizes the effects of interest rate swaps on CBIZs consolidated statements of operations for the three months ended March 31, 2010 and 2009 (in thousands). All swaps were deemed to be effective for the first quarters of 2010 and 2009. |
Gain (Loss) | Gain (Loss) Reclassified | |||||||||||||||||||
Recognized in AOCL | from AOCL into Income | |||||||||||||||||||
(Effective Portion) | (Effective Portion) | |||||||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||||||
March 31, | March 31, | |||||||||||||||||||
2010 | 2009 | 2010 | 2009 | Location | ||||||||||||||||
Interest rate swaps |
$ | 5 | $ | (4 | ) | $ | 68 | $ | 99 | Interest expense |
13
8. | Fair Value Measurements | |
The valuation hierarchy under GAAP categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows: |
| Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | ||
| Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | ||
| Level 3 inputs to the valuation methodology are unobservable and are significant to the fair value measurement. |
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. | ||
The following table summarizes CBIZs assets and liabilities at March 31, 2010 and December 31, 2009 that are measured at fair value on a recurring basis subsequent to initial recognition, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands): |
Level | March 31, 2010 | December 31, 2009 | ||||||||
Deferred compensation plan assets |
1 | $ | 29,327 | $ | 27,457 | |||||
Auction rate securities |
3 | $ | 10,361 | $ | 10,545 | |||||
Corporate bonds |
1 | $ | 9,739 | $ | 9,764 | |||||
Contingent purchase price liabilities |
3 | $ | (14,859 | ) | $ | (5,575 | ) | |||
Interest rate swaps |
2 | $ | (183 | ) | $ | (190 | ) |
For the three months ended March 31, 2010 and 2009, there were no transfers between the valuation hierarchy Levels 1, 2 or 3. The following table summarizes the change in fair values of the Companys assets and liabilities identified as Level 3 for the three months ended March 31, 2010 (pre-tax basis) (in thousands): |
Auction Rate | Contingent Purchase | |||||||
Securities | Price Liabilities | |||||||
Balance December 31, 2009 |
$ | 10,545 | $ | (5,575 | ) | |||
Transfers into Level 3 |
| | ||||||
Additions from business acquisitions |
| (9,960 | ) | |||||
Unrealized losses included in accumulated other
comprehensive loss |
(187 | ) | | |||||
Change in fair value of contingency |
| 721 | ||||||
Change in net present value of contingency |
| (45 | ) | |||||
Increase in expected cash flows of OTTI investment |
3 | | ||||||
Ending balance March 31, 2010 |
$ | 10,361 | $ | (14,859 | ) | |||
14
Auction Rate Securities CBIZs investments in ARS were classified as Level 3 as a result of liquidity issues in the ARS market, an inactive trading market of the securities, and the lack of quoted prices from broker-dealers. Accordingly, a fair value assessment of these securities was performed on each security based on a discounted cash flow model utilizing various assumptions that included maximum interest rates for each issue, probabilities of successful auctions, failed auctions or default, the timing of cash flows, the quality and level of collateral of the securities, and the rate of recovery from bond insurers in the event of default. | ||
At March 31, 2010, CBIZ held three investments in ARS with par values totaling $13.4 million. For two of the ARS, the declines in fair values are currently considered to be temporary. The par value of these two ARS was $8.4 million at March 31, 2010 and December 31, 2009, respectively, and the fair values were $7.6 million and $7.8 million at March 31, 2010 and December 31, 2009, respectively. The decrease in fair value of $0.2 million during the three months ended March 31, 2010 was recorded as unrealized losses in accumulated other comprehensive loss, net of tax. For both of these ARS issues, CBIZ has determined that the impairment is temporary due to dislocation in the credit markets, the quality of the investments and their underlying collateral, and the probability of a passed auction or redemption in the future, considering the issuers ability to refinance if necessary. These two ARS with temporary declines in fair value are classified as Funds held for clients non-current, as CBIZ does not intend to sell these investments until an anticipated recovery of par value occurs. | ||
The par value of the remaining ARS is $5.0 million and the carrying value was $2.8 million at both March 31, 2010 and December 31, 2009. The decline in fair value for this ARS was determined to be other-than-temporary and accordingly, CBIZ bifurcated the loss into credit loss and other market loss and recorded an impairment charge in Other income (expense), net for the year ended December 31, 2008. During the three months ended March 31, 2010, there were no additional impairment charges related to this ARS. The fair value of this ARS is recorded in Funds held for clients non-current in the consolidated balance sheets. | ||
Contingent Purchase Price Liabilities Contingent purchase price liabilities resulted from business acquisitions made after January 1, 2009, and are classified as Level 3 due to the utilization of a probability weighted discounted cash flow approach to determine the fair value of the contingency. The contingent purchase price liabilities are included in Other current liabilities and Accrued expenses non-current, depending on the expected settlement date. During the three months ended March 31, 2010, the addition of $10.0 million to the liability resulted from CBIZs acquisitions of two businesses with contingent earnout provisions, and was offset by $0.7 million as a result of a change in the estimate of future contingent liabilities related to prior year acquisitions. See Note 12 for further discussion of contingent purchase price liabilities. | ||
The following table provides additional information with regards to the ARS with temporary impairments, aggregated by the length of time that the securities have been in a continuous unrealized loss position (in thousands): |
March 31, 2010 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Description of Security | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
Auction rate securities |
$ | | $ | | $ | 7,602 | $ | 778 | $ | 7,602 | $ | 778 |
December 31, 2009 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Description of Security | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
Auction rate securities |
$ | | $ | | $ | 7,784 | $ | 596 | $ | 7,784 | $ | 596 |
15
The following table presents financial instruments that are not carried at fair value but which require fair value disclosure as of March 31, 2010 and December 31, 2009 (in thousands): |
March 31, 2010 | December 31, 2009 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Convertible notes |
$ | 94,890 | $ | 94,890 | $ | 93,848 | $ | 94,800 |
Although the trading of CBIZs convertible notes is limited, the fair value of the convertible notes was determined based upon their most recent quoted market price. The convertible notes are carried at face value less any unamortized debt discount. | ||
The carrying value of CBIZs cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments. The carrying value of bank debt approximates fair value, as the interest rate on the bank debt is variable and approximates current market rates. |
9. | Other Comprehensive Income | |
Other comprehensive income is reflected as an increase to stockholders equity and is not reflected in CBIZs results of operations. Other comprehensive income for the three months ended March 31, 2010 and 2009, net of tax, was as follows (in thousands): |
2010 | 2009 | |||||||
Net income |
$ | 15,984 | $ | 18,181 | ||||
Other comprehensive income (loss): |
||||||||
Net unrealized (loss) gain on available-for-sale securities,
net of income tax benefit (expense) of $50 and $(28),
respectively |
(75 | ) | 41 | |||||
Net unrealized gain (loss) on interest rate swaps, net of
income tax (expense) benefit of $(3) and $2,
respectively |
4 | (4 | ) | |||||
Foreign currency translation |
(15 | ) | (22 | ) | ||||
Total other comprehensive (loss) income |
(86 | ) | 15 | |||||
Comprehensive income |
$ | 15,898 | $ | 18,196 | ||||
Accumulated other comprehensive loss, net of tax, was approximately $1.0 million and $0.9 million at March 31, 2010 and December 31, 2009, respectively. Accumulated other comprehensive loss consisted of adjustments, net of tax, to unrealized gains and losses on available-for-sale securities and interest rate swaps, and foreign currency translation. |
10. | Employer Share Plans | |
CBIZ has granted various stock-based awards under its 2002 Stock Incentive Plan, which is described in further detail in CBIZs Annual Report on Form 10-K for the year ended December 31, 2009. The terms and vesting schedules for stock-based awards vary by type and date of grant. Compensation expense for stock-based awards recognized during the three months ended March 31, 2010 and 2009 was as follows (in thousands): |
2010 | 2009 | |||||||
Stock options |
$ | 760 | $ | 567 | ||||
Restricted stock awards |
534 | 378 | ||||||
Total stock-based compensation expense |
$ | 1,294 | $ | 945 | ||||
16
Stock award activity during the three months ended March 31, 2010 was as follows (in thousands, except per share data): |
Stock | ||||||||||||||||
Options | Restricted Stock Awards | |||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||
Exercise Price Per | Grant-Date Fair | |||||||||||||||
Number of Options | Share | Number of Shares | Value (1) | |||||||||||||
Outstanding at beginning of year |
4,636 | $ | 7.41 | 753 | $ | 7.65 | ||||||||||
Granted |
| $ | | 56 | $ | 6.95 | ||||||||||
Exercised or released |
(156 | ) | $ | 4.14 | (67 | ) | $ | 7.72 | ||||||||
Expired or canceled |
(22 | ) | $ | 7.77 | | $ | | |||||||||
Outstanding at March 31, 2010 |
4,458 | $ | 7.53 | 742 | $ | 7.59 | ||||||||||
Exercisable at March 31, 2010 |
1,584 | $ | 7.12 | |||||||||||||
(1) | Represents weighted average market value of the shares; awards are granted at no cost to the recipients. |
11. | Earnings Per Share | |
The following table sets forth the computation of basic and diluted earnings per share for continuing operations for the three months ended March 31, 2010 and 2009 (in thousands, except per share data). |
2010 | 2009 | |||||||
Numerator: |
||||||||
Income from continuing operations after income tax expense |
$ | 16,864 | $ | 18,403 | ||||
Denominator: |
||||||||
Basic |
||||||||
Weighted average common shares outstanding |
61,509 | 61,295 | ||||||
Diluted |
||||||||
Stock options (1) |
164 | 348 | ||||||
Restricted stock awards (1) |
226 | 208 | ||||||
Contingent shares (2) |
166 | 99 | ||||||
Diluted weighted average common shares outstanding |
62,065 | 61,950 | ||||||
Basic earnings per share from continuing operations |
$ | 0.27 | $ | 0.30 | ||||
Diluted earnings per share from continuing operations |
$ | 0.27 | $ | 0.30 | ||||
(1) | A total of 4.5 million and 2.6 million stock based awards were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2010 and 2009, respectively, as their effect would be anti-dilutive. | |
(2) | Contingent shares represent additional shares to be issued for purchase price earned by former owners of businesses acquired by CBIZ once future conditions have been met. |
12. | Acquisitions | |
During the first quarter of 2010, CBIZ acquired substantially all of the assets of two companies, Goldstein Lewin & Company and National Benefit Alliance. Goldstein Lewin & Company, an accounting and financial services company located in Boca Raton, Florida, provides accounting services and financial advisory services, tax planning and compliance, wealth preservation and estate planning, business valuation and litigation support. The operating results of Goldstein Lewin & Company are |
17
reported in the Financial Services practice group. National Benefit Alliance, an employee benefits company located in Midvale, Utah, designs, implements and administers employee benefit plans for government contractors as well as commercial clients. The operating results of National Benefit Alliance are reported in the Employee Services practice group. | ||
Aggregate consideration for these acquisitions is expected to be approximately $25.3 million, which consists of $13.2 million in cash and $1.8 million in CBIZ common stock that was paid at closing, $0.3 million in guaranteed future consideration, and $10.0 million in contingent consideration to be settled primarily in cash and a portion in common stock, subject to the acquired operations achieving certain performance targets. | ||
The preliminary aggregate purchase price for these acquisitions was allocated as follows (in thousands): |
Recognized amounts of identifiable assets acquired and liabilities assumed: |
||||
Work in process, net |
$ | 538 | ||
Prepaid expenses and other current assets |
1,230 | |||
Fixed assets |
1,436 | |||
Identifiable intangible assets |
5,806 | |||
Accrued liabilities |
(113 | ) | ||
Total identifiable net assets |
$ | 8,897 | ||
Goodwill |
16,441 | |||
Aggregate purchase price |
$ | 25,338 | ||
Under the terms of the acquisition agreements, a portion of the purchase price is contingent on future performance of the businesses acquired. The potential undiscounted amount of all future payments that CBIZ could be required to make under the contingent arrangements is between $0 and $10.5 million. CBIZ is required to record the fair value of these obligations at the acquisition date. CBIZ determined, utilizing a probability weighted income approach, that the fair value of the contingent consideration arrangements was $10.0 million, of which $3.9 million was recorded in Other current liabilities and $6.1 million was recorded in Accrued expenses non-current in the consolidated balance sheets at March 31, 2010. | ||
The goodwill of $16.4 million arising from the acquisitions in the current period consists largely of expected future earnings and cash flow from the existing management team, as well as the synergies created by the integration of the new businesses within the CBIZ organization, including cross selling opportunities expected with our Financial Services group and the Employee Services group to help strengthen our existing service offerings and expand our market position. The goodwill recognized is deductible for income tax purposes. | ||
During the first quarter of 2010, CBIZ adjusted the fair value of the contingent consideration arrangements related to CBIZs prior acquisitions from $5.6 million to $4.9 million due to lower than originally projected future results of the acquired businesses. | ||
In addition, CBIZ paid $12.8 million in cash and approximately 13,100 shares of common stock became issuable during the first quarter of 2010 as contingent proceeds for previous acquisitions. | ||
CBIZ did not acquire any businesses during the first quarter of 2009. CBIZ did purchase two client lists, one of which is reported in the Financial Services practice group and the other is reported in the Employee Services practice group. Aggregate consideration for these client lists consisted of $0.1 million cash paid at closing and up to an additional $0.4 million in cash which is contingent upon future financial performance of the client lists. In addition, CBIZ paid $0.3 million in cash and issued approximately 26,300 shares of common stock during the first quarter of 2009 as contingent proceeds for previous acquisitions. |
18
The operating results of these businesses are included in the accompanying consolidated financial statements since the dates of acquisition. Client lists and non-compete agreements are recorded at fair value at the time of acquisition. The excess of purchase price over the fair value of net assets acquired, (including client lists and non-compete agreements) is allocated to goodwill. | ||
Additions to goodwill, client lists and other intangible assets resulting from acquisitions in the first quarter of 2010 and contingent consideration earned on prior period acquisitions during the three months ended March 31, 2010 and 2009 were as follows (in thousands): |
2010 | 2009 | |||||||
Goodwill |
$ | 18,751 | $ | 2,031 | ||||
Client lists |
$ | 5,560 | $ | 407 | ||||
Other intangible assets |
$ | 246 | $ | | ||||
13. | Discontinued Operations and Divestitures | |
CBIZ will divest (through sale or closure) business operations that do not contribute to the Companys long-term objectives for growth, or that are not complementary to its target service offerings and markets. Divestitures are classified as discontinued operations provided they meet the criteria as provided in FASB ASC 205 Presentation of Financial Statements Discontinued Operations Other Presentation Matters. | ||
Discontinued Operations | ||
Gains or losses from the sale of discontinued operations are recorded as (Loss) gain on disposal of discontinued operations, net of tax, in the accompanying consolidated statements of operations. Additionally, proceeds that are contingent upon a divested operations actual future performance are recorded as gain on sale of discontinued operations in the period they are earned. During the first quarter of 2010, CBIZ sold two businesses from the National Practices group. Proceeds from these sales consisted of $0.2 million in cash and resulted in a pre-tax loss of approximately $0.8 million. During the first quarter of 2009, CBIZ did not sell any operations. | ||
For those businesses that qualified for treatment as discontinued operations, the assets, liabilities and results of operations are reported separately in the accompanying consolidated financial statements. Revenue and results from operations of discontinued operations for the three months ended March 31, 2010 and 2009 are separately reported as Income from operations of discontinued operations, net of tax in the consolidated statements of operations and were as follows (in thousands): |
2010 | 2009 | |||||||
Revenue |
$ | 2,260 | $ | 3,595 | ||||
Loss from operations of discontinued
operations, before income tax expense |
$ | (740 | ) | $ | (393 | ) | ||
Income tax benefit |
296 | 164 | ||||||
Loss from operations of discontinued
operations, net of tax |
$ | (444 | ) | $ | (229 | ) | ||
For the three months ended March 31, 2010 and 2009, (loss) gain on the disposal of discontinued operations were as follows (in thousands): |
2010 | 2009 | |||||||
(Loss) gain on disposal of discontinued operations,
before income tax (benefit) expense |
$ | (890 | ) | $ | 11 | |||
Income tax (benefit) expense |
(454 | ) | 4 | |||||
(Loss) gain on disposal of discontinued operations,
net of tax |
$ | (436 | ) | $ | 7 | |||
19
At March 31, 2010 and December 31, 2009, the assets and liabilities of businesses classified as discontinued operations consisted of the following (in thousands): |
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Assets: |
||||||||
Accounts receivable, net |
$ | 1,164 | $ | 1,945 | ||||
Goodwill and other intangible assets, net |
315 | 1,436 | ||||||
Property and equipment, net |
96 | 131 | ||||||
Other current assets |
500 | 597 | ||||||
Assets of discontinued operations |
$ | 2,075 | $ | 4,109 | ||||
Liabilities: |
||||||||
Accounts payable |
$ | 217 | $ | 892 | ||||
Accrued personnel costs |
203 | 191 | ||||||
Other current liabilities |
571 | 1,198 | ||||||
Liabilities of discontinued operations |
$ | 991 | $ | 2,281 | ||||
Divestitures | ||
Gains and losses from divested operations and assets that do not qualify for treatment as discontinued operations are recorded as Gain on sale of operations, net in the consolidated statements of operations. During the first quarter of 2010, CBIZ recognized a gain of $0.4 million from the sale of a client list. Cash proceeds from this sale were $0.4 million. During the first quarter of 2009, there were no sales of operations or assets. |
14. | Segment Disclosures | |
CBIZs business units have been aggregated into four practice groups: Financial Services, Employee Services, Medical Management Professionals (MMP), and National Practices. The business units have been aggregated based on the following factors: similarity of the products and services provided to clients; similarity of the regulatory environment in which they operate; and similarity of economic conditions affecting long-term performance. The business units are managed along these segment lines. A general description of services provided by practice group is provided in the following table. |
Financial Services | Employee Services | MMP | National Practices | |||
Accounting
|
Group Health | Coding and Billing | Managed Networking and | |||
Tax
|
Property & Casualty | Accounts Receivable | Hardware Services | |||
Financial Advisory
|
COBRA / Flex | Management | Health Care Consulting | |||
Litigation Support
|
Retirement Planning | Full Practice | Mergers & Acquisitions | |||
Valuation
|
Wealth Management | Management Services | ||||
Internal Audit
|
Life Insurance | |||||
Fraud Detection
|
Human Capital | |||||
Real Estate Advisory
|
Management | |||||
Payroll Services | ||||||
Actuarial Services | ||||||
Recruiting |
Corporate and Other. Included in Corporate and Other are operating expenses that are not directly allocated to the individual business units. These expenses are primarily comprised of gains or losses |
20
THREE MONTHS ENDED MARCH 31, 2010 | ||||||||||||||||||||||||
Corporate | ||||||||||||||||||||||||
Financial | Employee | National | and | |||||||||||||||||||||
Services | Services | MMP | Practices | Other | Total | |||||||||||||||||||
Revenue |
$ | 121,423 | $ | 46,788 | $ | 35,318 | $ | 6,706 | $ | | $ | 210,235 | ||||||||||||
Operating expenses |
89,100 | 37,149 | 34,090 | 6,490 | 5,462 | 172,291 | ||||||||||||||||||
Gross margin |
32,323 | 9,639 | 1,228 | 216 | (5,462 | ) | 37,944 | |||||||||||||||||
Corporate general & admin |
| | | | 8,984 | 8,984 | ||||||||||||||||||
Operating income (loss) |
32,323 | 9,639 | 1,228 | 216 | (14,446 | ) | 28,960 | |||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Interest expense |
(3 | ) | (6 | ) | | | (3,159 | ) | (3,168 | ) | ||||||||||||||
Gain on sale of operations, net |
| | | | 374 | 374 | ||||||||||||||||||
Other income (expense), net |
75 | 138 | 89 | | 1,871 | 2,173 | ||||||||||||||||||
Total other income (expense) |
72 | 132 | 89 | | (914 | ) | (621 | ) | ||||||||||||||||
Income (loss) from continuing
operations before income
tax expense |
$ | 32,395 | $ | 9,771 | $ | 1,317 | $ | 216 | $ | (15,360 | ) | $ | 28,339 | |||||||||||
THREE MONTHS ENDED MARCH 31, 2009 | ||||||||||||||||||||||||
Corporate | ||||||||||||||||||||||||
Financial | Employee | National | And | |||||||||||||||||||||
Services | Services | MMP | Practices | Other | Total | |||||||||||||||||||
Revenue |
$ | 124,693 | $ | 45,390 | $ | 39,848 | $ | 6,547 | $ | | $ | 216,478 | ||||||||||||
Operating expenses |
93,138 | 37,353 | 35,136 | 6,174 | 2,186 | 173,987 | ||||||||||||||||||
Gross margin |
31,555 | 8,037 | 4,712 | 373 | (2,186 | ) | 42,491 | |||||||||||||||||
Corporate general & admin |
| | | | 7,709 | 7,709 | ||||||||||||||||||
Operating income (loss) |
31,555 | 8,037 | 4,712 | 373 | (9,895 | ) | 34,782 | |||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Interest expense |
(8 | ) | (7 | ) | | | (3,488 | ) | (3,503 | ) | ||||||||||||||
Gain on sale of operations, net |
| | | | 80 | 80 | ||||||||||||||||||
Other income (expense), net |
78 | 225 | 74 | | (968 | ) | (591 | ) | ||||||||||||||||
Total other income (expense) |
70 | 218 | 74 | | (4,376 | ) | (4,014 | ) | ||||||||||||||||
Income (loss) from continuing
operations before income
tax expense |
$ | 31,625 | $ | 8,255 | $ | 4,786 | $ | 373 | $ | (14,271 | ) | $ | 30,768 | |||||||||||
21
Financial Services | Employee Services | MMP | National Practices | |||
Accounting
|
Group Health
|
Coding and Billing
|
Managed Networking and Hardware Services |
|||
Tax
|
Property & Casualty
|
Accounts Receivable Management
|
Health Care Consulting |
|||
Financial Advisory
|
COBRA / Flex
|
Full Practice Management Services
|
Mergers & Acquisitions |
|||
Litigation Support
|
Retirement Planning |
|||||
Valuation
|
Wealth Management |
|||||
Internal Audit
|
Life Insurance |
|||||
Fraud Detection
|
Human Capital Management |
|||||
Real Estate Advisory
|
Payroll Services |
|||||
Actuarial Services |
||||||
Recruiting |
22
THREE MONTHS ENDED MARCH 31, | ||||||||||||||||||||||||
%of | %of | $ | % | |||||||||||||||||||||
2010 | Total | 2009 | Total | Change | Change | |||||||||||||||||||
Same-unit revenue
|
||||||||||||||||||||||||
Financial Services |
$ | 117,544 | 55.9 | % | $ | 124,693 | 57.6 | % | $ | (7,149 | ) | (5.7 | )% | |||||||||||
Employee Services |
44,685 | 21.3 | % | 45,390 | 21.0 | % | (705 | ) | (1.6 | )% | ||||||||||||||
MMP |
35,318 | 16.8 | % | 39,848 | 18.4 | % | (4,530 | ) | (11.4 | )% | ||||||||||||||
National Practices |
6,706 | 3.2 | % | 6,547 | 3.0 | % | 159 | 2.4 | % | |||||||||||||||
Total same-unit revenue |
204,253 | 97.2 | % | 216,478 | 100.0 | % | (12,225 | ) | (5.6 | )% | ||||||||||||||
Acquired businesses |
5,982 | 2.8 | % | | | 5,982 | ||||||||||||||||||
Divested operations |
| | | | ||||||||||||||||||||
Total revenue |
$ | 210,235 | 100.0 | % | $ | 216,478 | 100.0 | % | $ | (6,243 | ) | (2.9 | )% | |||||||||||
2010 | 2009 | |||||||||||||||||||
% of | % of | Change in | ||||||||||||||||||
Operating | % | Operating | % of | % of | ||||||||||||||||
Expense | of Revenue | Expense | Revenue | Revenue | ||||||||||||||||
Personnel costs |
75.3 | % | 61.7 | % | 75.3 | % | 60.5 | % | 1.2 | % | ||||||||||
Occupancy costs |
6.7 | % | 5.5 | % | 6.8 | % | 5.4 | % | 0.1 | % | ||||||||||
Depreciation and amortization |
2.9 | % | 2.4 | % | 2.8 | % | 2.2 | % | 0.2 | % | ||||||||||
Travel and related costs |
2.6 | % | 2.1 | % | 2.5 | % | 2.0 | % | 0.1 | % | ||||||||||
Other (1) |
12.5 | % | 10.3 | % | 12.6 | % | 10.3 | % | | |||||||||||
Total operating expenses |
82.0 | % | 80.4 | % | 1.6 | % | ||||||||||||||
Gross margin |
18.0 | % | 19.6 | % | (1.6 | )% | ||||||||||||||
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(1) | Other operating expenses include office expenses, equipment costs, professional fees, restructuring charges, bad debt and other expenses, none of which are individually significant as a percentage of total operating expenses. |
2010 | 2009 | |||||||||||||||||||
% of | % of | Change in | ||||||||||||||||||
G&A | % of | G&A | % of | % of | ||||||||||||||||
Expense | Revenue | Expense | Revenue | Revenue | ||||||||||||||||
Personnel costs |
56.4 | % | 2.4 | % | 63.0 | % | 2.2 | % | 0.2 | % | ||||||||||
Professional services |
19.5 | % | 0.8 | % | 10.8 | % | 0.4 | % | 0.4 | % | ||||||||||
Computer costs |
4.2 | % | 0.2 | % | 5.5 | % | 0.2 | % | | |||||||||||
Occupancy costs |
3.2 | % | 0.1 | % | 4.6 | % | 0.2 | % | (0.1 | )% | ||||||||||
Depreciation and amortization |
1.2 | % | | 2.3 | % | 0.1 | % | (0.1 | )% | |||||||||||
Other (1) |
15.5 | % | 0.7 | % | 13.8 | % | 0.4 | % | 0.3 | % | ||||||||||
Total G&A expenses |
4.2 | % | 3.5 | % | 0.7 | % | ||||||||||||||
(1) | Other G&A expenses include office expenses, equipment costs, insurance expense and other expenses, none of which are individually significant as a percentage of total G&A expenses. |
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THREE MONTHS ENDED MARCH 31, | ||||||||||||||||
$ | % | |||||||||||||||
2010 | 2009 | Change | Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Revenue |
||||||||||||||||
Same-unit |
$ | 117,544 | $ | 124,693 | $ | (7,149 | ) | (5.7 | )% | |||||||
Acquired businesses |
3,879 | | 3,879 | |||||||||||||
Divested operations |
| | | |||||||||||||
Total revenue |
$ | 121,423 | $ | 124,693 | $ | (3,270 | ) | (2.6 | )% | |||||||
Operating expenses |
89,100 | 93,138 | (4,038 | ) | (4.3 | )% | ||||||||||
Gross margin |
$ | 32,323 | $ | 31,555 | $ | 768 | 2.4 | % | ||||||||
Gross margin percent |
26.6 | % | 25.3 | % | ||||||||||||
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THREE MONTHS ENDED MARCH 31, | ||||||||||||||||
$ | % | |||||||||||||||
2010 | 2009 | Change | Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Revenue |
||||||||||||||||
Same-unit |
$ | 44,685 | $ | 45,390 | $ | (705 | ) | (1.6 | )% | |||||||
Acquired businesses |
2,103 | | 2,103 | |||||||||||||
Divested operations |
| | | |||||||||||||
Total revenue |
$ | 46,788 | $ | 45,390 | $ | 1,398 | 3.1 | % | ||||||||
Operating expenses |
37,149 | 37,353 | (204 | ) | (0.5 | )% | ||||||||||
Gross margin |
$ | 9,639 | $ | 8,037 | $ | 1,602 | 19.9 | % | ||||||||
Gross margin percent |
20.6 | % | 17.7 | % | ||||||||||||
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THREE MONTHS ENDED MARCH 31, | ||||||||||||||||
$ | % | |||||||||||||||
2010 | 2009 | Change | Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Same-unit revenue |
$ | 35,318 | $ | 39,848 | $ | (4,530 | ) | (11.4 | )% | |||||||
Operating expenses |
34,090 | 35,136 | (1,046 | ) | (3.0 | )% | ||||||||||
Gross margin |
$ | 1,228 | $ | 4,712 | $ | (3,484 | ) | (73.9 | )% | |||||||
Gross margin percent |
3.5 | % | 11.8 | % | ||||||||||||
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THREE MONTHS ENDED MARCH 31, | ||||||||||||||||
$ | % | |||||||||||||||
2010 | 2009 | Change | Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Same-unit revenue |
$ | 6,706 | $ | 6,547 | $ | 159 | 2.4 | % | ||||||||
Operating expenses |
6,490 | 6,174 | 316 | 5.1 | % | |||||||||||
Gross margin |
$ | 216 | $ | 373 | $ | (157 | ) | (42.1 | )% | |||||||
Gross margin percent |
3.2 | % | 5.7 | % | ||||||||||||
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2010 | 2009 | |||||||
Total cash provided by (used in): |
||||||||
Operating activities |
$ | (7,912 | ) | $ | (17,760 | ) | ||
Investing activities |
(26,058 | ) | (912 | ) | ||||
Financing activities |
30,073 | 18,568 | ||||||
Decrease in cash and cash equivalents |
$ | (3,897 | ) | $ | (104 | ) | ||
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Total | 2010(1) | 2011 | 2012 | 2013 | 2014 | Thereafter | ||||||||||||||||||||||
Convertible notes (2) |
$ | 100,000 | $ | | $ | | $ | | $ | | $ | | $ | 100,000 | ||||||||||||||
Interest on convertible notes |
51,563 | 3,125 | 3,125 | 3,125 | 3,125 | 3,125 | 35,938 | |||||||||||||||||||||
Credit facility (3) |
139,450 | | | 139,450 | | | | |||||||||||||||||||||
Income taxes payable (4) |
8,139 | 8,139 | | | | | | |||||||||||||||||||||
Notes payable |
3,339 | 2,898 | 255 | 186 | | | | |||||||||||||||||||||
Contingent purchase price
liabilities |
14,859 | | 3,922 | 7,294 | 3,643 | | | |||||||||||||||||||||
Capitalized leases |
113 | 113 | | | | | | |||||||||||||||||||||
Restructuring lease
obligations (5) |
12,191 | 1,644 | 2,240 | 2,181 | 1,592 | 1,201 | 3,333 | |||||||||||||||||||||
Non-cancelable operating
lease obligations (5) |
171,821 | 26,672 | 32,088 | 27,666 | 22,066 | 16,404 | 46,925 | |||||||||||||||||||||
Letters of credit in lieu of cash
security deposits |
3,016 | 1,386 | 200 | | 45 | 250 | 1,135 | |||||||||||||||||||||
Performance guarantees for
non-consolidated affiliates |
3,070 | 2,570 | 500 | | | | | |||||||||||||||||||||
License bonds and other letters
of credit |
1,363 | 773 | 590 | | | | ||||||||||||||||||||||
Total |
$ | 508,924 | $ | 47,320 | $ | 42,920 | $ | 179,902 | $ | 30,471 | $ | 20,980 | $ | 187,331 | ||||||||||||||
(1) | Represents contractual obligations from April 1, 2010 to December 31, 2010. | |
(2) | Convertible notes mature on June 1, 2026, but may be redeemed anytime after June 6, 2011. | |
(3) | Interest on the credit facility is not included as the amount is not determinable due to the revolving nature of the credit facility and the variability of the related interest rate. | |
(4) | Does not reflect $6.2 million of unrecognized tax benefits, which the Company has accrued for uncertain tax positions, as CBIZ is unable to determine a reasonably reliable estimate of the timing of the future payments. | |
(5) | Excludes cash expected to be received under subleases. |
32
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31.1 *
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. | |
31.2 *
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 *
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 *
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Indicates documents filed herewith. |
37
CBIZ, Inc. (Registrant) |
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Date: May 10, 2010 | By: | /s/ Ware H. Grove | ||
Ware H. Grove | ||||
Chief Financial Officer Duly Authorized Officer and Principal Financial Officer |
||||
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