CBIZ 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-25890
CBIZ, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation
or organization)
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22-2769024
(I.R.S. Employer Identification No.) |
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6050 Oak Tree Boulevard, South, Suite 500, Cleveland, Ohio
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44131 |
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(Address of principal executive offices)
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(Zip Code)
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(Registrants telephone number, including area code) 216-447-9000
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o Accelerated filer þ
Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date:
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Outstanding at |
Class of Common Stock |
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April 30, 2006 |
Common Stock, par value $0.01 per share |
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76,287,199 |
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CBIZ, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
2
PART
I FINANCIAL INFORMATION
Item 1. Financial Statements
CBIZ, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
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MARCH 31, |
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DECEMBER 31, |
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2006 |
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2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
2,919 |
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$ |
8,909 |
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Restricted cash |
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12,115 |
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9,873 |
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Accounts receivable, net |
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127,192 |
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98,390 |
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Notes
receivable current |
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7,369 |
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6,042 |
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Deferred income taxes current |
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3,185 |
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3,241 |
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Other current assets |
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9,587 |
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9,490 |
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Assets of discontinued operations |
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4,772 |
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8,485 |
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Current assets before funds held for clients |
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167,139 |
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144,430 |
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Funds held for clients |
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70,250 |
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65,669 |
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Total current assets |
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237,389 |
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210,099 |
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Property and equipment, net |
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32,445 |
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33,403 |
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Notes
receivable non-current |
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2,993 |
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3,575 |
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Deferred
income taxes non-current |
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8,951 |
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9,199 |
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Goodwill and other intangible assets, net |
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201,593 |
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184,673 |
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Assets of deferred compensation plan |
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13,929 |
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9,803 |
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Other assets |
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3,744 |
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3,832 |
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Total assets |
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$ |
501,044 |
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$ |
454,584 |
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LIABILITIES |
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Current liabilities: |
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Accounts payable |
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$ |
24,390 |
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$ |
26,427 |
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Income taxes payable |
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8,854 |
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1,115 |
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Accrued personnel costs |
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20,395 |
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35,920 |
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Other current liabilities |
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17,207 |
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18,332 |
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Liabilities of discontinued operations |
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3,919 |
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5,991 |
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Current liabilities before client fund
obligations |
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74,765 |
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87,785 |
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Client fund obligations |
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70,250 |
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65,669 |
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Total current liabilities |
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145,015 |
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153,454 |
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Bank debt |
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61,200 |
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32,200 |
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Deferred compensation plan obligations |
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13,929 |
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9,803 |
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Other non-current liabilities |
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6,298 |
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4,466 |
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Total liabilities |
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226,442 |
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199,923 |
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STOCKHOLDERS EQUITY |
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Common stock |
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1,005 |
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984 |
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Additional paid-in capital |
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458,641 |
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450,734 |
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Accumulated deficit |
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(82,696 |
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(94,714 |
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Treasury stock |
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(102,317 |
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(102,317 |
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Accumulated other comprehensive loss |
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(31 |
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(26 |
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Total stockholders equity |
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274,602 |
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254,661 |
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Total liabilities and stockholders
equity |
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$ |
501,044 |
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$ |
454,584 |
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See the accompanying notes to the consolidated financial statements.
3
CBIZ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
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THREE MONTHS ENDED |
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MARCH 31, |
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2006 |
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2005 |
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Revenue |
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$ |
171,061 |
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$ |
155,156 |
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Operating expenses |
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138,731 |
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127,015 |
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Gross margin |
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32,330 |
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28,141 |
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Corporate general and administrative expense |
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6,732 |
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6,421 |
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Depreciation and amortization expense |
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4,071 |
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3,894 |
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Operating income |
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21,527 |
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17,826 |
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Other income (expense): |
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Interest expense |
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(792 |
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(781 |
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Other income, net |
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1,289 |
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388 |
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Total other income (expense), net |
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497 |
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(393 |
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Income from continuing operations before
income tax expense |
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22,024 |
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17,433 |
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Income tax expense |
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8,788 |
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7,225 |
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Income from continuing operations |
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13,236 |
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10,208 |
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Loss from operations of discontinued operations,
net of tax |
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(1,385 |
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(1,962 |
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Gain (loss) on disposal of discontinued operations, net of
tax |
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167 |
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(109 |
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Net income |
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$ |
12,018 |
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$ |
8,137 |
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Earnings per share: |
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Basic: |
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Continuing operations |
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$ |
0.18 |
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$ |
0.13 |
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Discontinued operations |
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(0.02 |
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(0.02 |
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Net income |
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$ |
0.16 |
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$ |
0.11 |
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Diluted: |
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Continuing operations |
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$ |
0.17 |
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$ |
0.13 |
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Discontinued operations |
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(0.01 |
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(0.03 |
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Net income |
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$ |
0.16 |
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$ |
0.10 |
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Basic weighted average shares outstanding |
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74,849 |
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75,738 |
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Diluted weighted average shares outstanding |
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77,354 |
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77,718 |
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See the accompanying notes to the consolidated financial statements.
4
CBIZ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
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THREE MONTHS ENDED |
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MARCH 31, |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net income |
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$ |
12,018 |
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$ |
8,137 |
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Adjustments to reconcile net income to net cash used in operating activities: |
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Loss from
operations of discontinued operations, net of tax |
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1,385 |
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1,962 |
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(Gain) loss on disposal of discontinued operations, net of
tax |
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(167 |
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109 |
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Bad debt expense, net of recoveries |
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850 |
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1,101 |
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Depreciation and amortization expense |
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4,071 |
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3,894 |
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Deferred income taxes |
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(538 |
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(762 |
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Stock-based compensation expense |
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564 |
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38 |
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Changes in assets and liabilities, net of acquisitions and dispositions: |
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Restricted cash |
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(2,124 |
) |
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(651 |
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Accounts receivable, net |
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(28,111 |
) |
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(26,915 |
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Other assets |
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(4,478 |
) |
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(3,578 |
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Accounts payable |
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(2,631 |
) |
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(3,216 |
) |
Income taxes |
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7,134 |
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14,434 |
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Accrued personnel costs |
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(15,525 |
) |
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(6,333 |
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Other liabilities |
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4,883 |
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5,130 |
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Net cash used in continuing operations |
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(22,669 |
) |
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(6,650 |
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Operating cash flows provided by discontinued
operations |
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79 |
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441 |
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Net cash used in operating activities |
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(22,590 |
) |
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(6,209 |
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Cash flows from investing activities: |
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Business acquisitions, net of cash acquired and
contingent consideration earned |
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(13,915 |
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(7,595 |
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Acquisition of other intangible assets |
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(2,411 |
) |
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Additions to property and equipment, net |
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(1,488 |
) |
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(1,671 |
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Payments received on notes receivable |
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200 |
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212 |
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Investing cash flows used by discontinued operations |
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(3 |
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(115 |
) |
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Net cash used in investing activities |
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(17,617 |
) |
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(9,169 |
) |
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Cash flows from financing activities: |
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Proceeds from bank debt |
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70,400 |
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87,000 |
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Proceeds from notes payable |
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98 |
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Payment of bank debt |
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(41,400 |
) |
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(73,400 |
) |
Payment of notes payable and capitalized leases |
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(169 |
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(189 |
) |
Payment for acquisition of treasury stock |
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(370 |
) |
Proceeds from exercise of stock options |
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3,936 |
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|
286 |
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Excess tax benefit from exercise of stock options |
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1,450 |
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Net cash provided by financing activities |
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34,217 |
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13,425 |
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Net decrease in cash and cash equivalents |
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(5,990 |
) |
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(1,953 |
) |
Cash and cash equivalents at beginning of year |
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8,909 |
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5,291 |
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Cash and cash equivalents at end of period |
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$ |
2,919 |
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$ |
3,338 |
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See the accompanying notes to the consolidated financial statements
5
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. |
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Summary of Significant Accounting Policies |
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The accompanying unaudited consolidated financial statements have been prepared in
accordance with 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. Accordingly, they do not include all of the
information and notes required by GAAP for annual financial statements. |
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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, 2006, and December 31, 2005, and the results of their
operations and cash flows for the three months ended March 31, 2006 and 2005. 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, 2005. |
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Organization |
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CBIZ is a diversified services company which, acting through its subsidiaries, provides
professional business services primarily to small and medium-sized businesses, as well as
individuals, governmental entities, and not-for-profit enterprises throughout the United
States and Toronto, Canada. During the first quarter of 2006, CBIZ
realigned its operations into four client-centric practice groups:
Financial Services, Employee Service, Medical Management
Professionals, and National Practices. A further description of
changes made during the first quarter of 2006, as well as products
and services offered by each of the practice groups, is provided in
Note 10. |
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Principles of Consolidation |
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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
further discussion under Variable Interest Entities below. |
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Use of Estimates |
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The preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States 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
collectibility of accounts receivable and unbilled revenue, the realizability of goodwill
and other intangible assets, accrued liabilities (such as incentive compensation), income
taxes 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. |
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Reclassifications |
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Certain amounts in the 2005 consolidated financial statements have been reclassified to
conform to the current year presentation. Reclassifications include: interest income earned
by our payroll unit previously reported as other income which is now reported as revenue;
and certain expenses reimbursable to CBIZ by its clients previously netted against revenue
which are now reported as operating expenses. These reclassifications did not impact CBIZs
reported income from continuing operations. |
6
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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Prior period financial statements and disclosures have been restated to reflect discontinued
operations.
In addition, in the first quarter of 2006 CBIZ has separately disclosed the operating and
investing portions of the cash flows attributable to its discontinued operations, which were
combined and reported as a
single amount in the comparable period of 2005. Prior periods have been revised to conform to
the current year presentation. There were no financing activities attributable to the
operations of discontinued operations during the three months ended March 31, 2006 or 2005. |
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Revenue Recognition and Valuation of Unbilled Revenues |
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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, our fee to the
client is fixed or determinable, and collectibility is reasonably assured. These criteria
are in accordance with GAAP and SEC Staff Accounting Bulletin No. 104 (SAB 104). 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, as it relates to those
groups, is provided below. |
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Financial Services Revenue consists primarily of fees for accounting services, preparation
of tax returns, consulting services including Sarbanes-Oxley consulting and compliance
projects, and valuation services including fairness opinions, business plans, litigation
support, purchase price allocations and derivative valuations. Revenues are recorded in the
period in which services are provided and meet revenue recognition criteria in accordance
with SAB 104. CBIZ bills clients based upon a predetermined agreed-upon fixed fee or based
on actual hours incurred on client projects at expected net realizable rates per hour, plus
agreed upon out-of-pocket expenses. The cumulative impact on any subsequent revision in the
estimated realizable value of unbilled fees for a particular client project is reflected in
the period in which the change becomes known. |
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Through one of its Financial Services units, CBIZ provides flexible benefits administration
services to clients, grants access of its proprietary software to third parties, and
provides hosting to these parties. Revenue associated with set up and license fees related
to our flexible benefits services are deferred and recognized pro rata over the life of the
contract. |
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|
Employee Services Revenue consists primarily of brokerage and agency commissions, payroll
service fees, interest on client funds, and fee income for administering health and
retirement plans. A description of the revenue recognition, based on the service provided,
insurance product sold, and billing arrangement, is described below. |
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|
Commissions relating to brokerage and agency activities whereby CBIZ has primary
responsibility for the collection of premiums from insureds (agency or indirect
billing) are recognized as of the latter of the effective date of the insurance
policy or the date billed to the customer; commissions to be received directly from
insurance companies (direct billing) are recognized when the policy becomes
effective; and life insurance commissions are recognized when the policy becomes
effective. Commission revenue is reported net of sub-broker commissions, and
reserves for estimated policy cancellations and terminations. The cancellation and
termination reserve is based upon estimates and assumptions using historical
cancellation and termination experience and other current factors to project future
experience. CBIZ periodically reviews the adequacy of the reserve and makes
adjustments as necessary. The use of different estimates or assumptions could
produce different results. |
|
|
|
|
Commissions which are based upon certain performance targets are recognized at
the earlier of written notification that the target has been achieved, or cash
collection. |
|
|
|
|
Fee income is recognized in the period in which services are provided, and may be
based on actual hours incurred on an hourly fee basis, fixed fee arrangements, or
asset-based fees. |
|
|
|
|
Payroll Revenue is recognized when the actual payroll processing occurs. |
7
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
Medical Management Professionals Fees for services are primarily based on a percentage of
net collections on our clients patient accounts receivable. As such, revenue is
determinable, earned, and recognized, when payments are received by our clients on their
patient accounts. |
|
|
|
National Practices The business units that comprise this practice group offer a variety of
services. A description of revenue recognition associated with the primary services is
provided below. |
|
|
|
Technology Consulting Revenue associated with hardware and software sales is
recognized upon delivery and acceptance of the product. Revenue associated with
installation is recognized as services are performed, and revenue associated with
service agreements is recognized on a straight-line basis over the period of the
agreement. Consulting revenue is recognized on an hourly or per diem fee basis as
services are performed. |
|
|
|
|
Health Care Consulting CBIZ bills clients based upon a predetermined agreed-upon
fixed fee or based on actual hours incurred on client projects at expected net
realizable rates per hour, plus agreed upon out-of-pocket expenses, or as a percentage of
savings after contingencies have been resolved and verified by a third party. |
|
|
|
|
Mergers & Acquisitions and Capital Advisory Revenue associated with
non-refundable retainers is recognized on a pro rata basis over the life of the
engagement. Revenue associated with success fee transactions is recognized when the
transaction is completed. |
|
|
Certain of our client arrangements encompass multiple deliverables. CBIZ accounts for
these arrangements in accordance with Emerging Issues Task Force No. 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables (EITF 00-21). If the deliverables meet the
criteria in EITF 00-21, the deliverables are divided into separate units of accounting and
revenue is allocated to the deliverables based on their relative fair values. Revenue for
each unit is recognized separately in accordance with CBIZs revenue recognition policy for
each unit. For those arrangements where the deliverables do not qualify as a separate unit
of accounting, revenue from all deliverables are treated as one accounting unit and
evaluated for appropriate accounting treatment based upon the underlying facts and
circumstances. |
|
|
|
Operating Expenses |
|
|
|
Operating expenses represent costs of service, as well as other costs incurred to operate
our business units. These costs are primarily personnel related expenses, occupancy
expenses, and consolidation and integration related expenses. Personnel costs include base
compensation, commissions, payroll taxes, income or losses earned on assets of the deferred
compensation plan, and benefits, which are recognized as expense as they are incurred.
Personnel costs also include stock-based and incentive compensation costs, which are
estimated and accrued on a monthly basis. The ultimate determination of incentive
compensation is made after year-end results are finalized, and therefore estimates are
subject to change. Total personnel costs were $103.9 million and $93.7 million for the
three months ended March 31, 2006 and 2005, respectively. |
|
|
|
The largest components of occupancy costs are rent expense and utilities. Base rent expense
is recognized over respective lease terms, while utilities and common area maintenance charges
are recognized as incurred. Total occupancy costs were $9.4 million and $8.7 million for
the three months ended March 31, 2006 and 2005, respectively. |
|
|
|
Consolidation and integration charges are accounted for in accordance with SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. Accordingly, CBIZ
recognizes a liability for non-cancelable lease obligations based upon the net present value
of remaining lease payments, net of estimated sublease payments. The liability is
determined and recognized as of the cease-use date and adjustments to the liability are made
for changes in estimates in the period in which a change becomes known. |
8
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
Accounts Receivable and Allowance for Doubtful Accounts |
|
|
|
CBIZ carries accounts receivable at their face amount less allowances for doubtful accounts,
and carries unbilled revenues at net realizable value. Assessing the collectibility of
receivables (billed and unbilled) requires management judgment. When evaluating the
adequacy of the allowance for doubtful accounts and the overall collectibility of
receivables, CBIZ analyzes historical bad debts, client credit-worthiness, the age of
accounts receivable and current economic trends and conditions. |
|
|
|
Funds Held for Clients and Client Fund Obligations |
|
|
|
Payroll services provided by CBIZ include the preparation of payroll checks, federal, state,
and local payroll tax returns, and flexible spending account administration. In relation to
these services, CBIZ collects funds from its clients accounts in advance of paying these
client obligations. Funds that are collected before they are due are segregated and
reported separately as funds held for clients in the consolidated balance sheets, and may
include cash, cash equivalents and short-term investments. Other than certain federal and state regulations pertaining to flexible spending account
administration, there are no regulatory or other contractual restrictions placed on these
funds. Funds held for clients and the related client fund obligations are included in the
consolidated balance sheets as current assets and current liabilities, respectively. The amount of collected but not yet remitted funds may
vary significantly during the year. |
|
|
|
One of the business units classified as a discontinued operation collects funds from
clients accounts in advance of paying the related client obligations. These funds and
related liabilities are reported as assets of discontinued operations and liabilities of
discontinued operations, respectively, in the accompanying consolidated balance sheets. |
|
|
|
Stock- Based Awards |
|
|
|
On January 1, 2006, CBIZ adopted Statement of Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payment (SFAS 123R), which requires the measurement and
recognition of compensation cost for all share-based payment awards made to employees and
directors based on estimated fair values. SFAS 123R also amends FASB Statement No. 95,
Statement of Cash Flows, to require that excess tax benefits, as defined, realized from
the exercise of stock options be reported as a financing cash inflow rather than as a
reduction of taxes paid in cash flows from operations. In March 2005, the Securities and
Exchanges Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 107, which summarizes
the SECs views regarding the interaction between SFAS 123R and certain SEC rules and
regulations, as well as the SECs views regarding the valuation of share-based payment
arrangements. CBIZ applied the provisions of SAB 107 in its adoption of SFAS 123R. |
|
|
|
Prior to the adoption of SFAS 123R, CBIZ accounted for its stock-based compensation related
to stock options under the intrinsic value recognition and measurement principles of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and
the disclosure alternative prescribed by SFAS No. 123 Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation
Transition and Disclosure. Accordingly, CBIZ presented pro forma information for the
periods prior to the adoption of SFAS No. 123R and no compensation cost was recognized for
stock options granted prior to January 1, 2006. |
|
|
|
CBIZ adopted SFAS 123R using the modified prospective transition method. Accordingly, CBIZ
has recorded stock compensation expense for all awards granted after the adoption date
(January 1, 2006) and for the unvested portion of previously granted awards outstanding with
unrecognized expense as of the adoption date. Expense recognized for the unvested portion
of awards granted prior to January 1, 2006, are based on the estimated grant date fair value
as determined under the original provisions of SFAS No. 123. CBIZs consolidated financial
statements for prior periods have not been restated to reflect, and do not include, the
impact of SFAS 123R. |
9
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
CBIZ recognizes stock-based compensation costs for only those shares expected to vest, on a
straight-line basis over the requisite service period of the award, which is generally the
option vesting term of up to five years. The impact of forfeitures that may occur prior to
vesting is also estimated and considered in the amount of expense recognized. Forfeiture
estimates will be revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In CBIZs pro forma information required under SFAS 123 for periods
prior to adoption of SFAS 123R, CBIZ accounted for forfeitures as they occurred.
Stock-based compensation expense is recorded in operating expenses or corporate general and
administrative expenses depending on where the respective individuals compensation is
recorded. |
|
|
|
CBIZ utilizes the Black-Scholes option-pricing model to determine the fair value of stock
options on the date of grant. No stock options were granted during the first quarters ended
March 31, 2006 or 2005. |
|
|
|
CBIZ has granted various stock-based awards under its 1996 Employee Stock Option Plan and
2002 Stock Incentive Plan, which are described in further detail in our 2005 Annual Report
on Form 10-K. The terms and vesting schedules for stock-based awards vary by type and date of grant.
Compensation cost recognized in the consolidated statements of operations for these awards
during the three months ended March 31, 2006 and 2005 was as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Stock options |
|
$ |
303 |
|
|
$ |
|
|
Restricted stock awards |
|
|
75 |
|
|
|
38 |
|
Restricted performance awards |
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
564 |
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
At March 31, 2006, CBIZ had unrecognized compensation costs for non-vested stock awards as
follows: $2.0 million for stock options; $0.9 million for restricted stock awards; and $3.9
million for restricted performance awards, to be recognized over weighted average periods of
approximately 2.5 years, 3.0 years and 1.8 years, respectively. |
|
|
|
Stock options are generally subject to a 20% incremental vesting schedule over a five-year
period commencing from the date of grant. Stock options are awarded at a price not less
than fair market value at the time of the award and expire six years from the date of grant. |
|
|
|
Restricted stock awards are independent of option grants, and are granted at no cost to the
recipients. Recipients of restricted stock awards are entitled to the same dividend and
voting rights as holders of other CBIZ common stock. Shares granted under the plan cannot
be sold, pledged, transferred or assigned during the vesting period (generally two to five
years from the grant date), and awards are subject to forfeiture if employment terminates
prior to the release of restrictions. Restricted stock awards are considered to be issued
and outstanding shares of common stock from the date of grant. The market value of shares
awarded is recorded as a contra-equity item representing the unearned compensation, and is
expensed ratably over the period which the restrictions lapse. |
|
|
|
Restricted performance awards were granted in the first quarter of 2006, and will only vest and become exercisable provided that CBIZ meets a pre-determined
earnings per share target for the year ending December 31, 2007.
The market value of shares awarded is being expensed ratably over the performance period. If it becomes
improbable that the earnings per share target will be achieved, previously recognized
expense will be reversed. |
10
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
Stock award activity during the three months ended March 31, 2006 was as follows (in
thousands, except per share data): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Restricted Stock |
|
|
Restricted Performance |
|
|
|
Options |
|
|
Awards |
|
|
Awards |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
|
|
of |
|
|
Price Per |
|
|
of |
|
|
Price Per |
|
|
of |
|
|
Price Per |
|
|
|
Options |
|
|
Share |
|
|
Shares |
|
|
Share |
|
|
Shares |
|
|
Share |
|
Outstanding at beginning of year |
|
|
6,803 |
|
|
$ |
2.72 |
|
|
|
236 |
|
|
$ |
3.91 |
|
|
|
|
|
|
$ |
|
|
Granted |
|
|
|
|
|
$ |
|
|
|
|
49 |
|
|
$ |
5.85 |
|
|
|
627 |
|
|
$ |
6.54 |
|
Exercised |
|
|
(1,754 |
) |
|
$ |
2.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
Vested and released from
restriction |
|
|
|
|
|
|
|
|
|
|
(21 |
) |
|
$ |
4.35 |
|
|
|
|
|
|
|
|
|
Expired or canceled |
|
|
(116 |
) |
|
$ |
4.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
4,933 |
|
|
$ |
2.83 |
|
|
|
264 |
|
|
$ |
4.24 |
|
|
|
627 |
|
|
$ |
6.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
3,081 |
|
|
$ |
2.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below provides information about stock options outstanding and exercisable at March 31,
2006 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Remaining |
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Number of |
|
|
Contractual |
|
|
Price Per |
|
|
Number of |
|
|
Price Per |
|
Range of Exercise Price |
|
Options |
|
|
Life (Years) |
|
|
Share |
|
|
Options |
|
|
Share |
|
$3.00 - $4.45 |
|
|
2,814 |
|
|
|
2.7 |
|
|
$ |
3.61 |
|
|
|
1,143 |
|
|
$ |
3.57 |
|
$1.52 - $2.99 |
|
|
2,119 |
|
|
|
1.4 |
|
|
$ |
1.80 |
|
|
|
1,938 |
|
|
$ |
1.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,933 |
|
|
|
2.2 |
|
|
$ |
2.83 |
|
|
|
3,081 |
|
|
$ |
2.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CBIZ had approximately 4.7 million shares available for future grant under the stock option
plans at March 31, 2006. |
11
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
The following table illustrates the effect on net income and earnings per share if CBIZ had
applied the fair value recognition provisions of SFAS 123 during the three months ended
March 31, 2005 (in thousands, except per share data): |
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
March 31, 2005 |
|
Net income as reported |
|
$ |
8,137 |
|
|
Add: Stock-based employee compensation expense included
in net income |
|
|
38 |
|
|
Fair value of stock-based compensation,
net of tax (1) |
|
|
(357 |
) |
|
|
|
|
|
Pro forma net income |
|
$ |
7,818 |
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
Basic as reported |
|
$ |
0.11 |
|
|
|
|
|
|
Basic pro forma |
|
$ |
0.10 |
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.10 |
|
|
|
|
|
|
Diluted pro forma |
|
$ |
0.10 |
|
|
|
|
|
|
|
|
(1) |
|
A tax rate of 40.0% was applied to the fair value of options in determining pro
forma net income for the quarter ended March 31, 2005. |
|
|
Variable Interest Entities |
|
|
|
In accordance with the provisions of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51 (FIN 46), as amended, CBIZ has
determined that its relationship with certain Certified Public Accounting (CPA) firms with
whom we maintain administrative service agreements (ASAs) qualify as variable interest
entities. The accompanying financial statements do not reflect the consolidation of the
variable interest entities, as the impact is not material to the financial condition,
results of operations or cash flows of CBIZ. |
|
|
|
The CPA firms with which CBIZ maintains administrative service agreements operate as
limited liability companies, limited liability partnerships or professional corporations.
The firms are separate legal entities with separate governing bodies and officers. CBIZ
has no ownership interest in any of these CPA firms, and neither the existence of the ASAs
nor the providing of services thereunder is intended to constitute control of the CPA firms
by CBIZ. CBIZ and the CPA firms maintain their own respective liability and risk of loss
in connection with performance of each of its respective services, and CBIZ does not
believe that its arrangements with these CPA firms result in additional risk of loss. |
|
|
|
Fees earned by CBIZ under the ASAs are recorded as revenue (at net realizable value) in the
consolidated statements of operations. In the event that accounts receivable and unbilled
work in process become uncollectible by the CPA firms, the service fee due to CBIZ is
reduced on a pro-rata basis. Although the administrative service agreements do not
constitute control, CBIZ is one of the beneficiaries of the agreements and may bear certain
economic risks. |
|
|
|
New Accounting Pronouncements |
|
|
|
In May 2005, the FASB issued SFAS No. 154, Accounting for Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires
retrospective application to prior periods financial statements of changes in accounting
principle, unless it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS No. 154 requires that retrospective application of a
change in accounting principle be limited to the direct effects of the change; indirect
effects of a change in accounting principle should be recognized in the |
12
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
period of the accounting change. CBIZ adopted the provisions of SFAS No. 154 on January 1,
2006; adoption did not have an impact on the financial position, results of operations or
cash flows of CBIZ. |
|
|
|
In October 2005, the FASB issued FSP No. FAS 13-1, Accounting for Rental Costs Incurred
during a Construction Period. FSP No. FAS 13-1 clarifies that there is no distinction
between the right to use a leased asset during the construction period and after the
construction period, and therefore rental costs associated with ground or building operating
leases that are incurred during a construction period shall be recognized as rental expense.
CBIZ adopted the provisions of FSP No. FAS 13-1 on January 1, 2006. Adoption did
not have a material impact on the financial position, results of operations or cash flows of
CBIZ. |
|
|
|
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP
addresses the determination as to when an investment is considered impaired, whether the
impairment is other than temporary and the measurement of an impairment loss. FSP FAS 115-1
and 124-1 specifically nullifies the requirements of paragraphs 10-18 of EITF 03-1 and
references existing other-than-temporary impairment guidance. CBIZ adopted the guidance of this FSP on January 1, 2006. The adoption of FSP FAS 115-1 and
124-1 did not have a material impact on the financial position, results of operations or
cash flows of CBIZ. |
|
2. |
|
Accounts Receivable, Net |
|
|
|
Accounts receivable balances at March 31, 2006 and December 31, 2005 were as follows (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Trade accounts receivable |
|
$ |
89,508 |
|
|
$ |
83,122 |
|
Unbilled revenue |
|
|
42,522 |
|
|
|
19,263 |
|
Other accounts receivable |
|
|
1,084 |
|
|
|
1,717 |
|
|
|
|
|
|
|
|
Total accounts receivable |
|
|
133,114 |
|
|
|
104,102 |
|
Allowance for doubtful accounts |
|
|
(5,922 |
) |
|
|
(5,712 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
127,192 |
|
|
$ |
98,390 |
|
|
|
|
|
|
|
|
3. |
|
Goodwill and Other Intangible Assets, Net |
|
|
|
The components of goodwill and other intangible assets, net at March 31, 2006 and December
31, 2005 were as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Goodwill |
|
$ |
170,590 |
|
|
$ |
168,040 |
|
Intangibles: |
|
|
|
|
|
|
|
|
Client lists |
|
|
32,885 |
|
|
|
23,498 |
|
Intangible assets - other |
|
|
7,501 |
|
|
|
1,493 |
|
|
|
|
|
|
|
|
Total intangibles |
|
|
40,386 |
|
|
|
24,991 |
|
|
|
|
|
|
|
|
Total goodwill and other intangibles assets |
|
|
210,976 |
|
|
|
193,031 |
|
Accumulated amortization |
|
|
(9,383 |
) |
|
|
(8,358 |
) |
|
|
|
|
|
|
|
Goodwill and other intangible assets, net |
|
$ |
201,593 |
|
|
$ |
184,673 |
|
|
|
|
|
|
|
|
|
|
Client lists are amortized over periods not exceeding ten years. Other intangibles, which
consist primarily of non-compete agreements and trade-names, are amortized over periods
ranging from two to ten years. Amortization expense for client lists and other intangible
assets was approximately $1.0 million and $0.6 million for the three months ended March 31,
2006 and 2005, respectively. |
13
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
During the first quarter of 2006, CBIZ acquired the trade name of a nationally recognized
practice which complements our Financial Services practice group. The trade name is
recorded as intangible assets other and is being amortized over
ten years. The use of the trade name is currently licensed to Mayer Hoffman McCann P.C. through January 1, 2016. |
|
4. |
|
Bank Debt |
|
|
|
Bank debt balances at March 31, 2006 and December 31, 2005 were as follows (in thousands,
except percentages): |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Revolving credit facility |
|
$ |
61,200 |
|
|
$ |
32,200 |
|
|
|
|
|
|
|
|
Weighted average rates(1) |
|
|
6.27 |
% |
|
|
5.39 |
% |
|
|
|
|
|
|
|
Range of effective rates(1) |
|
|
5.40% -7.75 |
% |
|
|
3.94% -7.25 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Rates are provided for the three months ended March 31, 2006, and the twelve months
ended December 31,
2005, respectively. |
|
|
CBIZ maintains a $100.0 million unsecured credit facility with Bank of America as agent
bank for a group of five participating banks. The facility has a five year term expiring
February 2011, and an option to increase the commitment to $150.0 million. Management
believes that the carrying amount of bank debt approximates its fair value, and CBIZ had
approximately $25.9 million of available funds under the facility at March 31, 2006. |
|
|
|
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 facility, loans are charged an interest rate consisting of a base
rate or Eurodollar rate plus an applicable margin. Additionally, a commitment fee of 22.5
to 37.5 basis points is charged on the unused portion of the facility. |
|
|
|
The 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 bank agreement 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 agreement,
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 agreement contains a
provision that, in the event of a defined change in control, the agreement may be
terminated. |
|
|
|
There are no limitations on CBIZs ability to acquire businesses or repurchase CBIZ common
stock provided that the leverage ratio (total debt compared to EBITDA as defined by the
facility) is less than 2.0. |
|
5. |
|
Commitments and Contingencies |
|
|
|
Acquisitions |
|
|
|
The purchase price that CBIZ pays for businesses and client lists generally consist 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. Non-contingent purchase
price is recorded at the date of acquisition and contingent purchase price is recorded as it
is earned. Acquisitions are further discussed in Note 8. |
|
|
|
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 $2.0 million as of March 31, 2006 and December 31,
2005. In addition, CBIZ |
14
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
provides bonds to various state agencies to meet certain licensing requirements. The amount
of bonds outstanding at March 31, 2006 and December 31, 2005 was $1.5 million and $1.2
million, respectively. |
|
|
|
CBIZ acted as guarantor on various letters of credit for a CPA firm with which it has an
affiliation, which totaled $2.4 million as of March 31, 2006 and December 31, 2005. In
accordance with FASB Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, as
amended, 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. |
|
|
|
Indemnifications |
|
|
|
CBIZ has various agreements under 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, 2006, CBIZ was not aware of any obligations arising under
indemnification agreements that would require material 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, 2006 and 2005, payments regarding such contracts and
arrangements were not material. |
|
|
|
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 financial condition, results of operations or cash
flows of CBIZ. |
|
6. |
|
Consolidation and Integration Reserve |
|
|
|
Consolidation and integration charges are comprised of expenses associated with CBIZs
on-going efforts to consolidate operations and locations in fragmented markets to promote
and strengthen cross-serving between various practice groups. These expenses result from
individual actions in several markets and are not part of one company-wide program. |
|
|
|
Consolidation and integration charges include costs for moving facilities, non-cancelable
lease obligations, adjustments to lease accruals based on changes in sublease assumptions,
severance obligations, and other related expenses. There were no significant consolidation and
integration programs initiated during the first quarter of 2006. Significant consolidation
and integration initiatives during the first quarter of 2005 included the consolidation of
offices in the Denver market and the
|
15
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
continuation of consolidation activities in the Chicago market, resulting in $0.5 million
and $1.3 million in consolidation and integration charges during the first quarter of 2005,
respectively. |
|
|
|
The consolidation and integration reserve balance as of December 31, 2005, and activity
during the three months ended March 31, 2006, was as follows (in thousands): |
|
|
|
|
|
|
|
Consolidation and |
|
|
|
Integration |
|
|
|
Reserve |
|
Reserve balance at December 31, 2005 |
|
$ |
3,103 |
|
Adjustments against income(1)
|
|
|
316 |
|
Payments(2) |
|
|
(854 |
) |
|
|
|
|
Reserve balance at March 31, 2006 |
|
$ |
2,565 |
|
|
|
|
|
|
|
|
(1) |
|
Adjustments against income are included in operating expenses in the accompanying
consolidated statements of
operations. |
|
(2) |
|
Payments are net of sub-lease payments received. |
|
|
Consolidation and integration charges incurred during the three months ended March 31, 2006
and 2005, and recorded as operating expenses in the accompanying consolidated statements of
operations and totaled $0.3 million and $2.0 million for the three months ended March 31,
2006 and 2005, respectively. Consolidation charges incurred during the three months ended
March 31, 2006 were primarily adjustments to lease accruals established in prior years, for
changes in net present value and other assumptions. |
|
7. |
|
Earnings Per Share |
|
|
|
The following table sets forth the computation of basic and diluted earnings per share for
the three months ended March 31, 2006 and 2005 (in thousands, except per share data). |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,018 |
|
|
$ |
8,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
Weighted average common shares |
|
|
74,849 |
|
|
|
75,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
Options(1) |
|
|
2,277 |
|
|
|
1,949 |
|
Restricted stock awards |
|
|
97 |
|
|
|
24 |
|
Contingent shares (2) |
|
|
131 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted weighted average
common shares |
|
|
77,354 |
|
|
|
77,718 |
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.16 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.16 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the three months ended March 31, 2005, a total of 643 thousand options were
excluded from the calculation of diluted earnings per share as their exercise price
would render them anti-dilutive. There were no anti-dilutive shares for the three
months ended March 31, 2006. |
|
(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. |
16
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
8. |
|
Acquisitions |
|
|
|
During the first quarter of 2006, CBIZ acquired a medical billing services company based in
Flint, Michigan which was merged into the Medical Management Professionals practice group,
a property and casualty insurance broker located in San Jose, California, and a client
list which complement the Employee Services practice group. Aggregate consideration for
the acquisitions consisted of approximately $9.6 million in cash (net of cash acquired) and
173,400 shares of restricted common stock (estimated stock value of $1.1 million at
acquisition) paid at closing, and up to an additional $6.0 million (payable in cash and
stock) which is contingent on the businesses meeting certain future revenue and earnings
targets. In addition, CBIZ paid approximately $4.3 million in cash and issued
approximately 159,000 shares of common stock during the first quarter of 2006,
as contingent proceeds for previous acquisitions. |
|
|
|
During the first quarter of 2005, CBIZ completed acquisitions of an accounting and
consulting practice in San Diego, California and a valuation business in Milwaukee,
Wisconsin which are reported as part of the Financial Services practice group, and a
registered investment firm in Cleveland, Ohio which is reported as part of the Employee
Services practice group. Aggregate consideration for the acquisitions consisted of
approximately $6.1 million in cash (net of cash acquired) and 45,000 shares of restricted
common stock (estimated stock value of $0.2 million at acquisition) paid at closing, and up
to an additional $12.4 million (payable in cash and stock) which is contingent on the
businesses meeting certain future revenue and earnings targets. In addition, CBIZ paid
approximately $1.5 million in cash during the first quarter of 2005, as contingent proceeds
for previous acquisitions. |
|
|
|
The operating results of these businesses have been included in the accompanying
consolidated financial statements since the dates of acquisition. Client lists and
non-compete agreements were 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) was allocated to goodwill. |
|
|
|
Additions to goodwill, client lists and other intangible assets resulting from acquisitions
and contingent consideration earned during the three months ended March 31, 2006 and 2005
were as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Goodwill |
|
$ |
2,550 |
|
|
$ |
912 |
|
|
|
|
|
|
|
|
Client lists |
|
$ |
9,387 |
|
|
$ |
4,265 |
|
|
|
|
|
|
|
|
Other intangible assets |
|
$ |
379 |
|
|
$ |
486 |
|
|
|
|
|
|
|
|
9. |
|
Discontinued Operations and Divestitures |
|
|
|
From time to time, CBIZ will divest (through sale or closure) business operations that are
underperforming, located in secondary markets, or do not provide the level of synergistic
cross-serving opportunities with other CBIZ businesses that is desired. Divestitures are
classified as discontinued operations provided they meet the criteria as provided in SFAS
144, Accounting for the Impairment or Disposal of Long-Lived Assets and EITF No. 03-13,
Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets in Determining Whether to Report Discontinued
Operations. |
|
|
|
In April 2006, CBIZ sold an operation from the Financial Services practice group which is
classified as available for sale at March 31, 2006. During the first quarter of 2006, the
unit was written-down to its fair value, resulting in a pre-tax loss of approximately $0.2
million which is recorded as gain (loss) on disposal of discontinued operations, net of tax,
in the accompanying consolidated statements of operations. |
|
|
|
During 2005, CBIZ closed an operation from the Financial Services practice group, sold an
operation from the Employee Services practice group, and committed to the divestiture of a
business unit in the National Practices group. These operations qualified for
treatment as discontinued operations and are
|
17
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
classified as such in the accompanying consolidated financial statements. The Employee
Services operation was sold during the third quarter of 2005, for proceeds that included
contingent payments which are determined based upon the divested operations actual future
performance. Contingent proceeds are recorded as gain
(loss) on disposal of discontinued
operations, net of tax as they are earned, and totaled approximately $1.0 million (pretax)
during the first quarter of 2006. |
|
|
|
CBIZ may earn additional proceeds on the sale of certain client lists (sold in previous
years), which are contingent upon future revenue generated by the client lists. CBIZ records
these proceeds as other income when they are earned. |
|
|
|
For those businesses that qualified for treatment as discontinued operations, the net
assets, liabilities and results of operations are reported separately in the accompanying
consolidated financial statements. Revenue and loss from operations of discontinued
operations for the quarters ended March 31, 2006 and 2005, were as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Revenue |
|
$ |
85 |
|
|
$ |
2,500 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued operations,
before income tax benefit |
|
$ |
(2,198 |
) |
|
$ |
(3,014 |
) |
Income tax benefit |
|
|
813 |
|
|
|
1,052 |
|
|
|
|
|
|
|
|
Loss from operations of discontinued
operations, net of tax |
|
$ |
(1,385 |
) |
|
$ |
(1,962 |
) |
|
|
|
|
|
|
|
Gain (loss) on the disposal of discontinued operations for the three months ended March 31,
2006 and 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006(1) |
|
|
2005 |
|
Gain (loss) on disposal of discontinued operations,
before income tax expense (benefit) |
|
$ |
772 |
|
|
$ |
(167 |
) |
Income tax expense (benefit) |
|
|
605 |
|
|
|
(58 |
) |
|
|
|
|
|
|
|
Gain (loss) on disposal of discontinued operations,
net of tax |
|
$ |
167 |
|
|
$ |
(109 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes contingent proceeds in the amount of $1.0 million (pretax), for the
Employee Services operation that was sold in the third quarter of 2005. |
|
|
At March 31, 2006 and December 31, 2005, the assets and liabilities of businesses
classified as discontinued operations consisted of the following (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, |
|
|
DECEMBER 31, |
|
|
|
2006 |
|
|
2005 |
|
Assets: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
2,149 |
|
|
$ |
2,113 |
|
Due from others |
|
|
285 |
|
|
|
1,513 |
|
Funds held for clients |
|
|
1,102 |
|
|
|
3,392 |
|
Property and equipment, net |
|
|
455 |
|
|
|
498 |
|
Goodwill and other intangible assets, net |
|
|
682 |
|
|
|
862 |
|
Other assets |
|
|
99 |
|
|
|
107 |
|
|
|
|
|
|
|
|
Assets of discontinued operations |
|
$ |
4,772 |
|
|
$ |
8,485 |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
165 |
|
|
$ |
326 |
|
Accrued personnel costs |
|
|
94 |
|
|
|
86 |
|
Client fund obligations |
|
|
1,102 |
|
|
|
3,392 |
|
Other liabilities |
|
|
2,494 |
|
|
|
2,117 |
|
Deferred income taxes |
|
|
64 |
|
|
|
70 |
|
|
|
|
|
|
|
|
Liabilities of discontinued operations |
|
$ |
3,919 |
|
|
$ |
5,991 |
|
|
|
|
|
|
|
|
18
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
10. |
|
Segment Disclosures |
|
|
|
CBIZs business units have been aggregated into four practice groups: Financial Services;
Employee Services; Medical Management Professionals; 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; and similarity of
economic conditions affecting long-term performance. The business units are managed along
these segment lines. |
|
|
|
During the first quarter of 2006, CBIZ realigned its operations into four client-centric
practice groups, and changed the names of those practice groups to encompass the comprehensive range of services offered by each of the respective groups.
Changes made to CBIZs practice groups during the first quarter of 2006 were as follows: |
|
|
|
Financial Services: The Financial Services practice group was formerly referred to as
Accounting, Tax and Advisory Services. In addition, CBIZ Valuation Group was
transferred from National Practices into Financial Services during the first quarter of 2006. |
|
|
|
|
Employee Services: The Employee Services practice group was formerly referred to as
Benefits and Insurance Services. In addition, CBIZ Payroll Services was transferred
from National Practices into Employee Services during the
first quarter of 2006. |
|
|
|
|
Medical Management Professionals: Medical Management Professionals (CBIZ MMP) is an
individual practice group. Historically, CBIZ MMP was reported and managed within National Practices. |
|
|
|
|
National Practices: The National Practices group is primarily comprised of business
units offering technology services to clients, as well as other units whose individual
size do not meet quantitative thresholds as provided by SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. During the first quarter of
2006, CBIZ Valuation Group and CBIZ Payroll Services were transferred
out of National Practices into Financial Services and Employee Services, respectively. |
|
|
Prior period financial statements have been restated to reflect these changes in segment
reporting. Although financial results for the individual practice groups have changed,
there was no impact to CBIZs consolidated financial statements as a result of these
restatements. A detailed description of services offered by each of the practice groups,
are provided in the paragraphs below. |
|
|
|
Financial Services. The Financial Services practice group offers services in the following
areas: general accounting services, cash flow management; strategic planning; consulting;
record-keeping; federal, state and local tax return preparation; tax planning based on
financial and investment alternatives; tax structuring of business transactions such as
mergers and acquisitions; quarterly and year-end payroll tax reporting; corporate,
partnership and fiduciary tax planning and return preparation; financial staffing services
including chief financial officer services; financial investment analysis; succession,
retirement, and estate planning; profitability, operational and efficiency enhancement
consulting to a number of specialized industries; litigation support services; internal
audit services; Sarbanes-Oxley consulting and compliance services; and valuations of
commercial, tangible, and intangible assets and financial securities. |
|
|
|
Employee Services. The Employee Services practice group offers services in the following
areas: employee benefits, brokerage, consulting, and administration, including the design,
implementation and administration of qualified plans, such as 401(k) plans, profit-sharing
plans, defined benefit plans, and money purchase plans; actuarial services; health and
welfare benefits consulting, including group health insurance plans; dental and vision care
programs; group life insurance programs; accidental death and dismemberment and disability
programs; COBRA administration and voluntary insurance programs; health care and dependent
care spending accounts; premium reimbursement plans; communications services to inform and
educate employees about their benefit programs; executive benefits consulting on
non-qualified retirement plans and business continuation plans; human capital advisory
services; specialty high-risk life insurance; and wealth management services, including
Registered Investment Advisory
|
19
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
Services, Investment Policy Statements, also known as IPS, mutual fund selection based on
IPS; ongoing mutual fund monitoring; and payroll processing and administration. |
|
|
|
Medical Management Professionals. CBIZ MMP offers services to hospital-based physicians in
the following areas: billing and accounts receivable management; coding and claims filing;
comprehensive delinquent claims follow up and collections; compliance plans to meet
government and other third party regulations; local office management; and comprehensive
statistical and operational reporting; financial reporting, accounts payable, payroll,
general ledger processing; design and implementation of managed care contracts with focus on
negotiation strategies, pricing, cost containment and utilization tracking; review and
negotiation of hospital contracts; evaluation of other strategic business partners;
identification and coordination of practice manager and integration opportunities;
coordination of practice expansion efforts; statement mailing operation; and turn-key
billing system sales and support. |
|
|
|
National Practices. The National Practices group offers services in the following areas:
mergers and acquisitions; capital advisory services; health care consulting; government
relations; and technology consulting, including strategic technology planning, project
management, development, network design and implementation and software selection and
implementation. |
|
|
|
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 incentive compensation, infrastructure costs (as described above) and consolidation and
integration charges. |
|
|
|
Accounting policies of the practice groups are the same as those described in Note 1,
Summary of Significant Accounting Policies. Upon consolidation, all intercompany accounts
and transactions are eliminated; thus inter-segment revenue is not included in the measure
of profit or loss for the practice groups. Performance of the practice groups is evaluated
on operating income excluding the costs of infrastructure functions (such as information
systems, finance and accounting, human resources, legal and marketing), which are reported
as operating expenses in the Corporate and Other segment. |
|
|
|
Segment information for the quarters ended March 31, 2006 and 2005 was as follows (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED MARCH 31, 2006 |
|
|
|
Financial |
|
|
Employee |
|
|
CBIZ |
|
|
National |
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
MMP |
|
|
Practices |
|
|
and Other |
|
|
Total |
|
Revenue |
|
$ |
89,448 |
|
|
$ |
41,951 |
|
|
$ |
28,222 |
|
|
$ |
11,440 |
|
|
$ |
|
|
|
$ |
171,061 |
|
Operating expenses |
|
|
63,853 |
|
|
|
33,510 |
|
|
|
24,684 |
|
|
|
10,724 |
|
|
|
5,960 |
|
|
|
138,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
25,595 |
|
|
|
8,441 |
|
|
|
3,538 |
|
|
|
716 |
|
|
|
(5,960 |
) |
|
|
32,330 |
|
Corporate general &
admin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,732 |
|
|
|
6,732 |
|
Depreciation & amortization |
|
|
1,035 |
|
|
|
780 |
|
|
|
849 |
|
|
|
62 |
|
|
|
1,345 |
|
|
|
4,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
24,560 |
|
|
|
7,661 |
|
|
|
2,689 |
|
|
|
654 |
|
|
|
(14,037 |
) |
|
|
21,527 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(26 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(765 |
) |
|
|
(792 |
) |
Other income (expense), net |
|
|
50 |
|
|
|
255 |
|
|
|
(9 |
) |
|
|
15 |
|
|
|
978 |
|
|
|
1,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
(expense) |
|
|
24 |
|
|
|
254 |
|
|
|
(9 |
) |
|
|
15 |
|
|
|
213 |
|
|
|
497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income
tax expense |
|
$ |
24,584 |
|
|
$ |
7,915 |
|
|
$ |
2,680 |
|
|
$ |
669 |
|
|
$ |
(13,824 |
) |
|
$ |
22,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED MARCH 31, 2005 |
|
|
Financial |
|
|
Employee |
|
|
CBIZ |
|
|
National |
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
MMP |
|
|
Practices |
|
|
and Other |
|
|
Total |
|
Revenue |
|
$ |
83,822 |
|
|
$ |
37,828 |
|
|
$ |
23,174 |
|
|
$ |
10,332 |
|
|
$ |
|
|
|
$ |
155,156 |
|
Operating expenses |
|
|
59,503 |
|
|
|
31,431 |
|
|
|
19,628 |
|
|
|
10,228 |
|
|
|
6,225 |
|
|
|
127,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
24,319 |
|
|
|
6,397 |
|
|
|
3,546 |
|
|
|
104 |
|
|
|
(6,225 |
) |
|
|
28,141 |
|
Corporate general & admin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,421 |
|
|
|
6,421 |
|
Depreciation & amortization |
|
|
950 |
|
|
|
820 |
|
|
|
708 |
|
|
|
103 |
|
|
|
1,313 |
|
|
|
3,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
23,369 |
|
|
|
5,577 |
|
|
|
2,838 |
|
|
|
1 |
|
|
|
(13,959 |
) |
|
|
17,826 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(28 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(752 |
) |
|
|
(781 |
) |
Other income (expense), net |
|
|
104 |
|
|
|
173 |
|
|
|
(1 |
) |
|
|
23 |
|
|
|
89 |
|
|
|
388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
(expense) |
|
|
76 |
|
|
|
172 |
|
|
|
(1 |
) |
|
|
23 |
|
|
|
(663 |
) |
|
|
(393 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income
tax expense |
|
$ |
23,445 |
|
|
$ |
5,749 |
|
|
$ |
2,837 |
|
|
$ |
24 |
|
|
$ |
(14,622 |
) |
|
$ |
17,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. |
|
Subsequent Events |
|
|
|
In April 2006, CBIZ sold an accounting and tax business from the Financial Services practice
group. The business was classified as a discontinued operation during the first quarter of
2006. |
|
|
|
In April 2006, CBIZ acquired Burnham, Colman, Kaelin & Walker (BCK&W) of St. Joseph,
Missouri. BCK&W is an insurance agency offering property and casualty, commercial bonds and
employee benefits, and specializes in the agriculture, construction and printing industries. |
21
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, references in this Form 10-Q to we, our, CBIZ, or the
Company shall mean CBIZ, Inc., a Delaware corporation, and its operating subsidiaries.
The following discussion is intended to assist in the understanding of CBIZs financial position at
March 31, 2006 and December 31, 2005, and results of operations and cash flows for the three months
ended March 31, 2006 and 2005, and should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in
conjunction with our Annual Report on Form 10-K for the year ended December 31, 2005.
Executive Summary
CBIZ is a diversified services company which, acting through its subsidiaries, provides
professional business services to businesses of various sizes, as well as individuals, governmental
entities and not-for-profit enterprises throughout the United States and Toronto, Canada. CBIZ
provides solutions that enable our clients to better manage their finances, employees and
technology. CBIZ delivers its integrated services through the following four practice groups:
Financial Services, Employee Services, Medical Management Professionals, and National Practices.
These practice groups were realigned during the first quarter of 2006, reinforcing CBIZs
client-centric model. Changes made to realign the practice groups are discussed in further detail
under Business Services Operating Practice Groups below.
CBIZs business strategy is to grow in the professional business services industry by:
|
|
|
offering a wide array of infrastructure support services; |
|
|
|
|
cross-serving these services to our existing client base; |
|
|
|
|
attracting new clients with our diverse business services offerings; and |
|
|
|
|
developing our core service offerings in target markets through internal growth and selective acquisitions. |
CBIZ seeks to strengthen its operations and customer service capabilities by selectively acquiring
businesses that are complementary in building out our service offerings in our target markets.
During the three months ended March 31, 2006, CBIZ acquired The TriMed Group and Valley Global
Insurance Brokers. The TriMed Group is based in Flint, Michigan and provides medical billing
services and in-house computer systems primarily to hospital-based physician practices in Michigan,
Ohio and Indiana. Valley Global Insurance Brokers is a property and casualty insurance broker
located in San Jose, California.
In January 2006, CBIZ and Mayer Hoffman McCann P.C. extended the term of their administrative
service agreement through 2019. The expiration date is subject to further extension upon
agreement by both parties.
Administrative service agreements are described in further detail under Business Services Financial
Services below.
In January 2006, CBIZ acquired the trade name of a nationally recognized practice which complements
our Financial Services practice group. The use of the trade name is currently licensed to Mayer
Hoffman McCann P.C. through January 1, 2016.
CBIZ continually evaluates its business operations, and may from time to time sell or close
operations that are underperforming, located in secondary markets, or do not provide the level of
synergistic cross-serving opportunities with other CBIZ businesses that is desired. In April 2006,
CBIZ sold an accounting and tax practice from the Financial Services practice group, which is
classified as a discontinued operation in the first quarter of 2006.
On January 1, 2006, CBIZ adopted Statement of Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payment (SFAS 123R), which requires the measurement and recognition
of compensation cost for all share-based payment awards made to employees and directors based on
estimated fair values. CBIZ adopted SFAS 123R using the modified prospective transition method,
and accordingly our consolidated financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123R. The impact to CBIZ of the adoption of SFAS
123R is discussed in further detail in Note 1 of the consolidated financial statements included
herewith.
22
Effective February 21, 2006, CBIZs Board of Directors granted 627,000 restricted performance
awards pursuant to the 2002 Stock Incentive Plan. Performance awards will only vest and become exercisable
provided that CBIZ meets a pre-determined earnings per share target for the year ending December
31, 2007.
Effective February 13, 2006, CBIZ entered into a new $100 million unsecured credit facility, with
an option to increase the commitment to $150 million. The credit facility is maintained by Bank of
America, N.A. as agent bank for a group of five participating banks and has a five year term
expiring February 2011. The new facility provides CBIZ with lower borrowing costs and greater
flexibility with regards to corporate initiatives such as acquisitions and share repurchases.
CBIZ believes that repurchasing shares of its common stock is a use of cash that provides value to
stockholders.
On February 9, 2006, CBIZs Board of Directors authorized the purchase of up to 5.0 million shares
of CBIZ common stock through March 31, 2007. The shares may be repurchased in the open market or
through privately negotiated purchases. There were no shares repurchased during the first quarter
of 2006.
Business Services
Operating Practice Groups
During the first quarter of 2006, CBIZ realigned its operations into four client-centric practice
groups, and changed the names of those practice groups to encompass the comprehensive
range of services offered by each of the respective groups. Changes made to CBIZs
practice groups during the first quarter of 2006 were as follows:
|
|
|
Financial Services: The Financial Services practice group was formerly referred to as
Accounting, Tax and Advisory Services. In addition, CBIZ Valuation Group was
transferred from National Practices into Financial Services during the first quarter of 2006. |
|
|
|
|
Employee Services: The Employee Services practice group was formerly referred to as
Benefits and Insurance Services. In addition, CBIZ Payroll Services was transferred
from National Practices into Employee Services during the
first quarter of 2006. |
|
|
|
|
Medical Management Professionals: Medical Management Professionals (CBIZ MMP) is an
individual practice group. Historically, CBIZ MMP was reported and managed within National Practices. |
|
|
|
|
National Practices: The National Practices group is primarily comprised of business
units offering technology services to clients, as well as other units whose individual
size do not meet quantitative thresholds as provided by SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. During the first quarter of
2006, CBIZ Valuation Group and CBIZ Payroll Services were transferred out of National Practices
into Financial Services and Employee Services, respectively. |
Prior period financial statements have been restated to reflect these changes in segment reporting.
Although financial results for the individual practice groups have changed, there was no impact to
CBIZs consolidated financial statements as a result of these restatements. A detailed description
of services offered by each of the practice groups, as well as certain external relationships and
regulatory factors currently impacting CBIZ are provided in the paragraphs below.
Financial Services
The business units that comprise CBIZs Financial Services practice group offer services in the
following areas: federal, state and local tax return preparation, planning and consulting for
individuals, corporations, partnerships, estates and trusts; strategic planning; consulting;
record-keeping and financial statement preparation; tax planning based on financial and investment
alternatives; tax structuring of business transactions such as mergers and acquisitions; quarterly
and year-end payroll tax reporting; financial staffing services including chief financial officer
services; financial investment analysis; succession, retirement, and estate planning; cash flow
management; profitability, operational and efficiency enhancement consulting to a number of
specialized industries; litigation support services; internal audit services; Sarbanes-Oxley
consulting and compliance services; and valuation services including financial valuations, tangible
and intangible asset valuations.
23
The Financial Services practice is divided into three regions, representing the East, Midwest, and
West regions of the United States, and a national service division consisting of those units that
provide their services nationwide. Each of these regions is headed by a designated regional
director, each of whom report to the Senior Vice President, Financial Services.
Restrictions imposed by independence requirements and state accountancy laws and regulations
preclude CBIZ from rendering audit and attest services (other than internal audit services). As
such, CBIZ and its subsidiaries maintain joint-referral relationships and administrative service
agreements (ASAs) with independent licensed Certified Public Accounting (CPA) firms under which
audit and attest services may be provided to CBIZs clients by such CPA firms. These firms are
owned by licensed CPAs, a vast majority of whom are also employed by CBIZ subsidiaries.
Under these ASAs, CBIZ provides a range of services to the CPA firms, including (but not limited
to): administrative functions such as office management, bookkeeping, and accounting; preparing
marketing and promotion materials; providing office space, computer equipment, and systems support;
and leasing administrative and professional staff. Services are performed in exchange for a fee.
Fees earned by CBIZ under the ASAs are recorded as revenue in the accompanying consolidated
statements of operations and amounted to approximately $20.0 million, and $18.6 million for the
three months ended March 31, 2006 and 2005, respectively, a majority of which is related to
services rendered to privately-held clients. In the event that accounts receivable and unbilled
work in process become uncollectible by the CPA firms, the service fee due to CBIZ is reduced on a
pro-rata basis. The ASAs typically have terms ranging up to ten years, and are renewable upon
agreement by both parties. In January 2006, the ASA between CBIZ and Mayer Hoffman McCann P.C.,
the largest firm associated with CBIZ, was extended for an additional eighteen years, with certain
rights of extension and termination.
With respect to CPA firm clients that are required to file audited financial statements with the
SEC, the SEC staff views CBIZ and the CPA firms with which we have contractual relationships as a
single entity in applying independence rules established by the accountancy regulators and the SEC.
Accordingly, we do not hold any financial interest in an SEC-reporting attest client of an
associated CPA firm, enter into any business relationship with an SEC-reporting attest client that
the CPA firm performing an audit could not maintain, or sell any non-audit services to an
SEC-reporting attest client that the CPA firm performing an audit could not maintain, under the
auditor independence limitations set out in the Sarbanes-Oxley Act of 2002 and other professional
accountancy independence standards. Applicable professional standards
generally permit the Financial Services
practice group to provide additional services to privately-held companies, in addition to those
services which may be provided to SEC-reporting attest clients of an associated CPA firm. CBIZ and
the CPA firms with which we are associated have implemented policies and procedures designed to
enable us to maintain independence and freedom from conflicts of interest in accordance with
applicable standards. Given the pre-existing limits set by CBIZ on its relationships with
SEC-reporting attest clients of associated CPA firms, and the limited number and size of such
clients, the imposition of Sarbanes-Oxley Act independence limitations did not and is not expected
to materially affect CBIZ revenues.
The CPA firms with which CBIZ maintains ASAs operate as limited liability companies, limited
liability partnerships or professional corporations. The firms are separate legal entities with
separate governing bodies and officers. Neither the existence of the ASAs nor the providing of
services thereunder is intended to constitute control of the CPA firms by CBIZ. CBIZ and the CPA
firms maintain their own respective liability and risk of loss in connection with performance of
its respective services. Attest services can not be performed by any individual or entity which is
not licensed to do so. CBIZ can not perform audits or reviews, does not contract to perform them
and does not provide audit or review reports. Given this legal prohibition and course of conduct,
CBIZ does not believe it is likely that we would bear the risk of litigation losses related to
attest services provided by the CPA firms.
Although the ASAs do not constitute control, CBIZ is one of the beneficiaries of the agreements and
may bear certain economic risks. As such, the CPA firms with which CBIZ maintains administrative
service agreements qualify as variable interest entities under FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, as amended. See further discussion in Note 1 of the
accompanying consolidated financial statements.
24
Employee Services
The business units that comprise CBIZs Employee Services group are organized between
Retail and National Services. CBIZs Employee Services group operates under one Senior Vice
President, who oversees the practice group, along with a senior management team which supports the
practice group leader along: functional; product; and unit oversight
lines. Each of the Retail
offices provides a broad range of primarily commercial employee benefit and property and casualty
insurance services within their geographic area. Specific services provided by the Retail group
include: consulting and brokerage of group health and welfare plans (group health, dental, vision,
life and disability programs); the design, implementation and administration of qualified
retirement plans, such as profit-sharing plans (including 401-k plans), defined benefit plans, and
money purchase plans; actuarial services for health and welfare plans and qualified retirement
plans; communications services to educate employees about their benefit programs; executive
benefits consulting on non-qualified retirement plans; business continuation plans; and wealth
management services, including registered investment advisory services, investment policy
statements, mutual fund selections, and ongoing mutual fund monitoring. In addition, the Retail
group provides some personal lines brokerage for property and casualty and individual life and
health insurance. The National Services group is comprised of several specialty operations that provide unique
services on a national scale. Specific services provided by the National Services group include:
brokerage services for specialty high-risk life insurance and clinical
underwriting; wholesale insurance brokerage services; bank-owned executive life insurance; COBRA
and Section 125 plan administration programs for employees; human capital advisory services;
wealth management services, including registered investment advisory services, investment policy
statements, mutual fund selections, and ongoing mutual fund monitoring; and payroll processing and
administration.
CBIZs Employee Services group maintains relationships with many different insurance carriers. Some
of these carriers have compensation arrangements with CBIZ whereby some portion of payments due may
be contingent upon meeting certain performance goals, or upon CBIZ providing client services that
would otherwise be provided by the carriers. These compensation arrangements are provided to CBIZ
as a result of our performance and expertise, and may result in enhancing CBIZs ability to access
certain insurance markets and services on behalf of CBIZ clients. The aggregate of these payments
received during the three months ended March 31, 2006 and 2005 was less than 2.5% of consolidated
CBIZ revenue for the respective periods.
State insurance regulators have conducted inquiries to clarify the nature of compensation
arrangements within the insurance brokerage industry. To date, CBIZ, along with other major
insurance brokerage companies, has received requests for information regarding our compensation
arrangements related to these practices from such authorities. In addition to inquiries from
various states insurance departments, CBIZ has received subpoenas from the New York Attorney
General, the Connecticut Attorney General, and the Ohio Department of Insurance regarding its
insurance brokerage compensation arrangements. CBIZ is cooperating fully in each inquiry. CBIZ has
discussed the nature of these inquires and compensation arrangements with each of the major
insurance carriers with whom we have established these arrangements. We believe that our
arrangements are lawful and consistent with industry practice, and we expect that any changes to
compensation arrangements in the future will have a minimal impact on CBIZ, barring future
regulatory action. Future regulatory action may limit or eliminate our ability to enhance revenue
through all current compensation arrangements, and may result in a diminution of future revenue
from these sources.
Medical Management Professionals
CBIZ Medical Management Professionals (CBIZ MMP) reports to CBIZs Chief Executive Officer. CBIZ
MMP provides coding and billing as well as full-practice management services for hospital-based
physicians practicing anesthesiology, pathology, radiology, emergency medicine, and other areas.
CBIZ MMPs billing services include: billing and accounts receivable management; claims processing
and collection; comprehensive delinquent claims follow up; compliance programming to meet
government regulations; and comprehensive statistical and operational reporting. The practice
management services provided by CBIZ MMP include: financial reporting, accounts payable, payroll,
and general ledger processing; design of physician employment, stock and compensation arrangements;
and comprehensive budgeting, forecasting, and financial analysis. Additionally, CBIZ MMP conducts
analyses of managed care contracts with a focus on negotiation strategies, pricing, cost
containment and utilization tracking; reviews and negotiates contracts with hospitals and other
entities; identifies and coordinates practice merger and integration opportunities; and coordinates
practice expansion efforts.
25
National Practices
The business units that comprise CBIZs National Practices group offer services in the following
areas: mergers and acquisitions services; health care consulting; government relations; and
information technology consulting, including strategic technology planning, project management,
development, network design and implementation, software selection and implementation, and voice
over internet protocol consulting and implementation. The majority of the units within the
National Practices group report to CBIZs President and Chief Operating Officer, with one unit
reporting to CBIZs Chief Executive Officer.
Results
of Operations Continuing Operations
CBIZ delivers products and services through four practice groups. A brief description of these
groups operating results and factors affecting their businesses is provided below.
Same-unit revenue represents total revenue adjusted to reflect comparable periods of activity for
acquisitions and divestitures. For example, for a business acquired on March 1, 2005, revenue
for the month of March would be included in same-unit revenue for first quarter of both years; revenue
for the period January 1, 2006 through February 28, 2006 would be reported as revenue from acquired
businesses.
Three months ended March 31, 2006 and 2005
Revenue
The following table summarizes total revenue for the three months ended March 31, 2006 and 2005 (in
thousands, except percentages).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED MARCH 31, |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
$ |
|
|
% |
|
|
|
2006 |
|
|
Total |
|
|
2005 |
|
|
Total |
|
|
Change |
|
|
Change |
|
Same-unit revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services |
|
$ |
89,190 |
|
|
|
52.1 |
% |
|
$ |
83,822 |
|
|
|
54.0 |
% |
|
$ |
5,368 |
|
|
|
6.4 |
% |
Employee Services |
|
|
41,506 |
|
|
|
24.3 |
% |
|
|
37,828 |
|
|
|
24.4 |
% |
|
|
3,678 |
|
|
|
9.7 |
% |
CBIZ MMP |
|
|
25,220 |
|
|
|
14.7 |
% |
|
|
23,174 |
|
|
|
14.9 |
% |
|
|
2,046 |
|
|
|
8.8 |
% |
National Practices |
|
|
11,440 |
|
|
|
6.7 |
% |
|
|
10,332 |
|
|
|
6.7 |
% |
|
|
1,108 |
|
|
|
10.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total same-unit revenue |
|
|
167,356 |
|
|
|
97.8 |
% |
|
|
155,156 |
|
|
|
100.0 |
% |
|
|
12,200 |
|
|
|
7.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired businesses |
|
|
3,705 |
|
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
3,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
171,061 |
|
|
|
|
|
|
$ |
155,156 |
|
|
|
|
|
|
$ |
15,905 |
|
|
|
10.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A detailed discussion of revenue by practice group is included under Operating Practice Groups
below.
Operating Expenses
Operating expenses increased to $138.7 million for the three months ended March 31, 2006, from
$127.0 million for the comparable period in 2005, an increase of $11.7 million or 9.2%. As a
percent of revenue, operating expenses (excluding consolidation and integration charges) were 80.9%
and 80.6% for the three months ended March 31, 2006 and 2005, respectively. The primary components
of operating expenses are personnel costs and occupancy expense, representing 81.6% and 80.7% of
total operating expenses and 66.2% and 66.0% of revenue for the three months ended March 31, 2006
and 2005, respectively. As a percent of revenue, gross margin improved to 18.9% from 18.1% for the
three months ended March 31, 2006 and 2005, respectively. As the majority of our operating costs
are relatively fixed in the short term, gross margin as a percentage of revenue generally improves
with revenue growth. A more comprehensive analysis of operating expenses (excluding consolidation
and integration charges) and their impact on gross margin is discussed by operating practice group
below.
Consolidation and integration charges are reported as operating expenses in the accompanying
consolidated statements of operations, and were 0.2% and 1.3% of revenue for the three months ended
March 31, 2006 and 2005, respectively. There were no significant consolidation and integration
charges during the first quarter of
26
2006. Significant consolidation and integration initiatives during the first quarter of 2005
included the consolidation of offices in the Denver market and the continuation of consolidation
activities in the Chicago market, resulting in $0.5 million and
$1.3 million in consolidation and
integration charges, respectively.
Corporate general and administrative expenses increased to $6.7 million for the three months ended
March 31, 2006, from $6.4 million for the comparable period in 2005. As a percentage of revenue,
corporate general and administrative expenses decreased to 3.9% from 4.1% for the three months
ended March 31, 2006 and 2005, respectively. The increase in corporate general and administrative
expenses was primarily attributable to compensation and benefits, including stock-based
compensation and expenses related to our incentive compensation plan. Incentive compensation costs
are estimated and accrued on a monthly basis. The final determination of incentive compensation is
not made until after year-end results are finalized, therefore the estimates are subject to change.
The incentive compensation plan is further discussed under Incentive Compensation below. The increase in compensation and benefits during the
first quarter of 2006 was partially offset by a decrease in legal fees. During the first quarter
of 2005, CBIZ incurred $1.1 million in expenses related to the settlement of a litigation matter;
fees of that magnitude did not recur in the first quarter of 2006.
Depreciation and amortization expense was $4.1 million and 2.4% of revenue for the three months
ended March 31, 2006, compared to $3.9 million and 2.5% of revenue for the comparable period in
2005. The increase in depreciation and amortization expense was primarily due to an increase in
the amortization of intangible assets in the first quarter of 2006 from the first quarter of 2005,
as the result of businesses and client lists that were acquired after March 31, 2005.
Interest expense was $0.8 million for each of the three-month periods ended March 31, 2006 and
2005. Average debt was $48.0 million for the three months ended March 31, 2006, compared to $60.9
million for the comparable period in 2005, and average interest rates were 6.3% and 4.6% during the
three months ended March 31, 2006 and 2005, respectively. Lower average debt in the first quarter
of 2006 compared to the first quarter of 2005, was primarily the result of CBIZ reducing the amount
of outstanding debt under the credit facility throughout 2005, to $32.2 million at December 31,
2005 from $53.9 million at December 31, 2004. Cash to reduce the bank debt balance was provided by
CBIZ operations. Debt is further discussed under Liquidity and Capital Resources.
Other income, net was $1.3 million for the three months ended March 31, 2006, and $0.4 million for
the comparable period in 2005, an increase of $0.9 million. Other income (expense), net is
comprised primarily of adjustments to the fair value of investments held in a rabbi trust related
to the deferred compensation plan, gains and losses on sales of assets, and miscellaneous income
such as contingent royalties from previous divestitures. Adjustments to the fair value of
investments related to the deferred compensation plan are offset by adjustments to compensation
costs which are recorded as operating or corporate general and administrative expenses in the
consolidated statements of operations, and thus do not have on impact on CBIZs net income. The
increase in other income during the first quarter of 2006 from the comparable period in 2005 was
primarily the result of an increase in the fair value of investments related to the deferred
compensation plan, and higher contingent royalties received from previous divestitures.
CBIZ recorded income tax expense from continuing operations of $8.8 million and $7.2 million for
the three months ended March 31, 2006 and 2005, respectively. The effective tax rate for the three
months ended March 31, 2006 was 39.9%, compared to an effective rate of 41.4% for the comparable
period in 2005.
27
Operating Practice Groups
Financial Services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED MARCH 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Same-unit |
|
$ |
89,190 |
|
|
$ |
83,822 |
|
|
$ |
5,368 |
|
Acquired businesses |
|
|
258 |
|
|
|
|
|
|
|
258 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
89,448 |
|
|
$ |
83,822 |
|
|
$ |
5,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
63,853 |
|
|
|
59,503 |
|
|
|
4,350 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
25,595 |
|
|
$ |
24,319 |
|
|
$ |
1,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percent |
|
|
28.6 |
% |
|
|
29.0 |
% |
|
|
(0.4 |
%) |
Same-unit revenue for the three months ended March 31, 2006 increased by $5.4 million or 6.4% from
the three months ended March 31, 2005. The growth in same-unit revenue was primarily due to an
increase in the aggregate number of hours charged to clients for consulting, valuation and
litigation support services, and price increases for traditional accounting and tax services. The
growth in revenue from acquired businesses was provided by a valuation business in Milwaukee,
Wisconsin which was acquired during the first quarter of 2005.
The largest components of operating expenses for the Financial Services practice group are
personnel costs, occupancy costs and professional service fees paid to third parties, representing
88.1% and 87.0% of total operating expenses for the three months ended March 31, 2006 and 2005,
respectively. Personnel costs increased $4.5 million to 57.3% of revenue for the three months
ended March 31, 2006 from 55.7% of revenue for the comparable period in 2005. The increase in
personnel costs was primarily due to additional salary costs incurred for new employees, annual
merit increases, and an increase in benefit costs. CBIZ continues to add personnel in the
Financial Services practice group in order to accommodate revenue growth. Occupancy costs are
relatively fixed in nature but increased $0.1 million for the three months ended March 31, 2006
from the comparable period in 2005, primarily due to additional space required in certain
facilities to accommodate growth. As a percentage of revenue, occupancy costs decreased to 4.8%
for the three months ended March 31, 2006 from 5.0% for the comparable period in 2005, as a result
of the increase in revenue previously discussed. Professional service fees paid to third parties
decreased $0.2 million to 0.8% of revenue for the three months ended March 31, 2006 from 1.1% for
the comparable period in 2005. Professional service fees paid to third parties are primarily the
result of our utilization of third-party professionals to provide certain accounting services to our
clients.
Gross margin as a percent of revenue decreased by 0.4% for the three months ended March 31, 2006
from the comparable period in 2005, primarily due to the increase in personnel costs attributable
to new employees and annual merit increases. CBIZ expects revenue growth for the Financial
Services group to continue throughout 2006. Revenue growth is expected to be accompanied by modest
improvements in gross margin over 2005 levels.
Employee Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED MARCH 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Same-unit |
|
$ |
41,506 |
|
|
$ |
37,828 |
|
|
$ |
3,678 |
|
Acquired businesses |
|
|
445 |
|
|
|
|
|
|
|
445 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
41,951 |
|
|
$ |
37,828 |
|
|
$ |
4,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
33,510 |
|
|
|
31,431 |
|
|
|
2,079 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
8,441 |
|
|
$ |
6,397 |
|
|
$ |
2,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percent |
|
|
20.1 |
% |
|
|
16.9 |
% |
|
|
3.2 |
% |
28
Same-unit revenue for the three months ended March 31, 2006 increased by $3.7 million or 9.7% from
the three months ended March 31, 2005. The increase in same-unit revenue was primarily
attributable to growth in our payroll services and human capital advisory businesses, and the
timing of policies sold by our specialty life insurance business. The growth in revenue from
acquired businesses was provided by a property and casualty business
in San Jose, California which was acquired during the first quarter
of 2006.
The largest components of operating expenses for the Employee Services practice group are personnel
costs, commissions paid to third party brokers, and occupancy costs, representing 87.0% and 87.1%
of total operating expenses for the three months ended March 31, 2006 and 2005, respectively.
Personnel costs increased $1.7 million, but decreased as a percentage of revenue, to 59.1% for the
first quarter of 2006 from 61.1% for the comparable period in 2005. Acquired businesses
contributed $0.2 million of the increase in personnel costs; the remainder of the increase was
primarily the result of the growth in revenue, as the sales force is typically compensated on a
variable basis. Commissions paid to third party brokers decreased as a percentage of revenue to
4.7% for the three months ended March 31, 2006 from 5.7% for the three months ended March 31, 2005,
due to the termination of relationships with certain brokers. Occupancy costs increased $0.2
million, and was 5.7% of revenue for the first quarters of 2006 and 2005. The increase in
occupancy costs in the first quarter of 2006 from the comparable period in 2005 was primarily due
to new facilities and the acquired business previously discussed.
Gross margin as a percent of revenue increased by 3.2% for the three months ended March 31, 2006
from the comparable period in 2005, primarily due to the growth in revenue combined with expense
management efforts. The Employee Services group has improved gross margin in recent quarters, and
expects margins to remain at similar levels throughout 2006.
CBIZ Medical Management Professionals (CBIZ MMP).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED MARCH 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Same-unit |
|
$ |
25,220 |
|
|
$ |
23,174 |
|
|
$ |
2,046 |
|
Acquired businesses |
|
|
3,002 |
|
|
|
|
|
|
|
3,002 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
28,222 |
|
|
$ |
23,174 |
|
|
$ |
5,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
24,684 |
|
|
|
19,628 |
|
|
|
5,056 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
3,538 |
|
|
$ |
3,546 |
|
|
$ |
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percent |
|
|
12.5 |
% |
|
|
15.3 |
% |
|
|
(2.8 |
%) |
Same-unit revenue increased by $2.0 million or 8.8% for the three months ended March 31, 2006 from
the three months ended March 31, 2005. Growth was attributable to new clients obtained in 2006,
the maturation of clients obtained in 2005, and growth in revenue from existing clients. The
growth in revenue from acquired businesses was provided by a medical billing business based in
Flint, Michigan which was acquired during the first quarter of 2006.
The largest components of operating expenses for CBIZ MMP are personnel costs, occupancy costs and
office expenses (primarily postage), representing 89.1% and 88.1% of total operating expenses for
the three months ended March 31, 2006 and 2005, respectively. Personnel costs increased by $3.3
million to 60.9% of revenue for the three months ended March 31, 2006, from 60.0% of revenue for
the comparable period in 2005. Acquired businesses contributed $1.6 million of the increase in
personnel costs; the remainder of the increase was due to an increase in the number of client
service staff employed by CBIZ MMP during 2006 compared to 2005, as required to support the growth
in revenue. The increase in personnel costs as a percent of revenue was the result of investments
made in personnel to accommodate for future growth at CBIZ MMP client sites. Occupancy costs
increased $0.3 million, and remained consistent as a percentage of revenue at 7.2% for the three
months ended March 31, 2006 and 2005. The increase in occupancy costs was primarily due to
additional space required and expenses incurred to accommodate overall growth of the unit. Office
expenses for the three months ended March 31, 2006 increased $1.1 million to 9.9% of revenue for
the three months ended March 31, 2006 from 7.5% of revenue for the comparable period in 2005,
primarily due to the medical billing business that was acquired during the first quarter of 2006.
In addition to medical billing services, the acquired business provides statement printing and
mailing services to their clients, and thus incurs higher postage costs as a percentage of revenue
than the typical CBIZ MMP billing office.
29
Gross margin as a percentage of revenue decreased 2.8% for the three months ended March 31, 2006
from the comparable period in 2005, and was related to same-unit revenue. The decline in gross
margin resulted from investments made in personnel as previously discussed. CBIZ MMP expects
revenue growth to continue throughout the remainder of 2006. In addition, operating expenses are
expected to continue to increase over 2005 in order to support the growth in revenue, and as the
result of significant investments to upgrade CBIZ MMPs operating systems. As a result of these
investments, gross margin for the remainder of 2006 is expected to remain consistent with 2005;
however, gross margin as a percentage of revenue is expected to decline.
National Practices.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED MARCH 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Same-unit |
|
$ |
11,440 |
|
|
$ |
10,332 |
|
|
$ |
1,108 |
|
Acquired businesses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
11,440 |
|
|
$ |
10,332 |
|
|
$ |
1,108 |
|
|
|
|
Operating expenses |
|
|
10,724 |
|
|
|
10,228 |
|
|
|
496 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
716 |
|
|
$ |
104 |
|
|
$ |
612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percent |
|
|
6.3 |
% |
|
|
1.0 |
% |
|
|
5.3 |
% |
Same-unit revenue increased $1.1 million or 10.7% for the three months ended March 31, 2006 from
the comparable period in 2005, attributable primarily to our technology businesses. Growth in
revenue experienced by our technology business was largely the result of product sales and services
to new clients.
The largest components of operating expenses for the National Practices group are personnel costs,
direct costs and occupancy costs, representing 91.3% and 91.2% of total operating expenses for the
three months ended March 31, 2006 and 2005, respectively. Personnel costs decreased by $0.1
million for the three months ended March 31, 2006 from the comparable period in 2005, primarily due
to a reduction in the use of outside labor. As a percentage of revenue, personnel costs decreased
to 62.6% for the three months ended March 31, 2006, from 70.4% for the three months ended March 31,
2005. Direct costs (which consist primarily of product costs associated with hardware sales in the
technology businesses) increased $0.6 million to 19.6% of revenue for the three months ended March
31, 2006, from 15.7% of revenue for the three months ended March 31, 2005. Direct costs increased
as a percentage of revenue and personnel costs decreased as a percentage of revenue, as a larger
portion of revenue was derived from product sales during the three months ended March 31, 2006 than
in the comparable period of 2005. Occupancy costs are relatively fixed in nature and remained
consistent for the three months ended March 31, 2006 and 2005. Occupancy costs decreased as a
percentage of revenue to 3.4% in the first quarter of 2006 from 4.1% in the first quarter of 2005
as a result of the growth in revenue.
Gross margin as a percentage of revenue increased 5.3% for the three months ended March 31, 2006
from the comparable period in 2005, primarily as a result of the mix of product sales and services
that occurred in the technology businesses. CBIZ expects gross margin for the remainder of 2006 to
be in line with 2005 levels.
Results
of Operations Discontinued Operations
In April 2006, CBIZ sold an operation from the Financial Services practice group which is
classified as available for sale at March 31, 2006. During the first quarter of 2006, the unit was
written down to its fair value, resulting in a pre-tax loss of approximately $0.2 million which is
recorded as gain (loss) on disposal of discontinued operations, net of tax, in the accompanying
consolidated statements of operations.
During 2005, CBIZ closed an operation from the Financial Services practice group, sold an operation
from the Employee Services practice group, and committed to the divestiture of a business unit in
the National Practices practice group. The Employee Services operation was sold during the third
quarter of 2005 for proceeds that included contingent payments which are determined based upon the
divested operations actual future performance. Contingent
proceeds are recorded as gain on disposal
of discontinued operations as they are earned, and totaled approximately $1.0 million (pretax)
during the first quarter of 2006.
30
The operations described above qualified for treatment as discontinued operations, and have been
classified as such in accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly, the net assets,
liabilities, and results of operations of these businesses are reported separately in the
consolidated financial statements included herewith. Based upon the sales proceeds and costs of
closure, CBIZ recorded a gain on disposal of discontinued operations, net of tax, of $0.2 million
for the three months ended March 31, 2006, and a loss on disposal of discontinued operations, net
of tax of $0.1 million for the three months ended March 31, 2005. Revenue associated with
discontinued operations was $0.1 million, and $2.5 million for the three months ended March 31, 2006
and 2005, respectively. The loss from operations of these discontinued operations, net of tax, was
$1.4 million and $2.0 million for the three months ended March 31, 2006 and 2005, respectively.
Financial Condition
Total
assets were $501.0 million, total liabilities were
$226.4 million and shareholders equity was
$274.6 million as of March 31, 2006. Current assets of $237.4 million exceeded current liabilities
of $145.0 million by $92.4 million.
Cash and cash equivalents decreased by $6.0 million to $2.9 million at March 31, 2006 from December
31, 2005. Restricted cash was $12.1 million at March 31, 2006, an increase of $2.2 million from
December 31, 2005. Restricted cash represents those funds held in connection with CBIZs NASD
regulated operations and funds held in connection with the pass through of insurance premiums to
various carriers. Cash and restricted cash fluctuate during the year based on the timing of cash
receipts and related payments.
Accounts receivable, net were $127.2 million at March 31, 2006, an increase of $28.8 million from
December 31, 2005. Days sales outstanding (DSO) represents accounts receivable (before the
allowance for doubtful accounts) and unbilled revenue (net of realization adjustments) at the end
of the period, divided by trailing twelve month daily revenue. CBIZ provides DSO data because such
data is commonly used as a performance measure by analysts and investors and as a measure of the
Companys ability to collect on receivables in a timely manner. DSO was 81 days, 65 days and 88
days at March 31, 2006, December 31, 2005 and March 31, 2005, respectively.
Other current assets were $9.6 million and $9.5 million at March 31, 2006 and December 31, 2005,
respectively. Other current assets are primarily comprised of prepaid assets. Balances may
fluctuate during the year based upon the timing of cash payments and amortization of prepaid
expenses.
Funds held for clients are directly offset by client fund obligations. Funds held for clients
fluctuate during the year based on the timing of cash receipts and related payments, and are
further described in Note 1 to the accompanying consolidated financial statements.
Notes receivable (current and non-current) increased by $0.7 million at March 31, 2006 from
December 31, 2005. The increase in notes receivable relates primarily to contingent proceeds
earned on the Employee Services business that was sold in the third quarter of 2005 (and further
discussed under Results of
Operations Discontinued Operations above), offset by
payments received during the first quarter of 2006.
Goodwill and other intangible assets, net of accumulated amortization, increased by $16.9 million
at March 31, 2006 from December 31, 2005. Acquisitions, including contingent consideration earned,
resulted in a $12.3 million increase in intangible assets during the three months ended March 31,
2006. Additionally, CBIZ acquired the trade name of a nationally recognized practice which is
recorded as an other intangible asset. Intangible assets decreased by $1.0 million as a
result of amortization expense.
Assets of the deferred compensation plan represent participant deferral accounts. The assets are
held in a rabbi trust and are directly offset by obligations of the plan, representing obligations
due to the participants. Although the assets of the plan are specifically designated as available
to CBIZ solely for the purpose of paying benefits under the deferred compensation plan, in the
event that CBIZ became insolvent, the assets would be available to all unsecured general creditors.
The plan is described in further detail in our Annual Report on Form 10-K for the year ended
December 31, 2005.
The accounts payable balance of $24.4 million at March 31, 2006 reflects amounts due to suppliers
and vendors; balances fluctuate during the year based on the timing of cash payments. Accrued
personnel costs were $20.4
31
million at March 31, 2006 and represent amounts due for payroll, payroll taxes, employee benefits
and incentive compensation; balances fluctuate during the year based on the timing of payments and
our estimate of incentive compensation costs. Incentive compensation is described more fully under
Incentive Compensation below.
Other liabilities (current and non-current) increased by $0.7 million at March
31, 2006 from December 31, 2005, primarily as a result of acquisitions, and differences between
cash payments required under various operating leases versus rent expense which is recognized on a
straight-line basis. These increases were offset by a decrease in notes payable, as the result of
payments made during the first quarter of 2006.
Income taxes payable of $8.9 million at March 31, 2006 and $1.1 million at December 31, 2005
represents our estimate of taxes due on current year income. The increase in income taxes payable
at March 31, 2006 from December 31, 2005 was primarily due to the provision for income taxes in the
first quarter of 2006, offset by tax benefits related to the exercise of stock options which
totaled approximately $1.4 million.
Bank debt for amounts due on CBIZs credit facility increased by $29.0 million to $61.2 million at
March 31, 2006 from December 31, 2005. This increase was driven primarily by the seasonal use of
cash that typically occurs in CBIZs first fiscal quarter, as described under Sources and Uses of
Cash below. The increase in bank debt was also the result of acquisitions made during the first
quarter of 2006.
Stockholders equity increased $19.9 million to $274.6 million at March 31, 2006 from $254.7
million at December 31, 2005. The increase in stockholders equity was primarily due to net income
of $12.0 million, the exercise of stock options and related tax
benefits which contributed $5.4 million, and the issuance of
$2.0 million in common shares in relation to business acquisitions.
Liquidity and Capital Resources
CBIZs principal source of net operating cash is derived from the collection of fees and
commissions for professional services and products rendered to its clients. In addition, CBIZ
supplements net operating cash with an unsecured credit facility. The $100.0 million facility
carries an option to increase the commitment to $150.0 million, and allows for the allocation of
funds for strategic initiatives, including acquisitions and the repurchase of CBIZ common stock.
The facility has a five year term with an expiration date of February 2011.
At March 31, 2006, CBIZ had $61.2 million outstanding under its credit facility, as well as letters
of credit and guarantees totaling $4.4 million. Available funds under the facility based on the
terms of the commitment were approximately $25.9 million at March 31, 2006. Management believes
cash generated from operations, combined with the available funds from the credit facility,
provides CBIZ the financial resources needed to meet business requirements for the next twelve
months, including capital expenditures, working capital requirements, and strategic investments.
Under the credit facility, CBIZ is required to meet certain financial covenants with respect to (i)
minimum net worth; (ii) maximum leverage ratio; and (iii) a minimum fixed charge coverage ratio.
CBIZ believes it was in compliance with its covenants as of March 31, 2006 and projects that it
will remain in compliance for the remainder of 2006.
CBIZ may also obtain funding by offering securities or debt, through public or private markets.
CBIZ currently has a shelf registration under which it can offer such securities.
See our Annual Report on Form 10-K for the year ended December 31, 2005 for a description of the
shelf registration statement.
Sources and Uses of Cash
Cash flows from operating activities represent net income adjusted for certain non-cash items and
changes in assets and liabilities. CBIZ typically experiences a net use of cash from operations
during the first quarter of its fiscal year, as accounts receivable balances grow in response to
the seasonal increase in first quarter revenue generated by the Financial Services practice group
(primarily for accounting and tax services). This net use of cash is followed by strong operating
cash flow during the second and third quarters, as a significant amount of revenue generated by the
Financial Services practice group during the first four months of the year are billed and collected
in subsequent quarters. During the three months ended March 31, 2006, net cash used in operating
activities was $22.6 million, compared to $6.2 million for the comparable period in 2005. The
increase of $16.4
32
million in net cash used in operating activities was primarily due to a decrease in the change in
income taxes of $7.3 million, and an increase in the change in accrued personnel costs of $9.2
million.
Cash flows from investing activities consist primarily of payments toward capital expenditures and
business acquisitions, proceeds from divested operations and the collection of notes receivable.
CBIZ used $17.6 million in net cash for investing activities during the three months ended March
31, 2006, compared to $9.2 million during the comparable period in 2005. Investing uses of cash
during the first quarter of 2006 primarily consisted of $13.9 million of net cash used towards
business acquisitions, $2.4 million for the acquisition of other intangible assets and $1.5 million
for capital expenditures (net), offset by $0.2 million in net collections on notes receivable.
Investing uses of cash during the first quarter of 2005 primarily consisted of $7.6 million of net
cash used toward business acquisitions and $1.7 million for capital expenditures (net), offset by
$0.2 million in net collections on notes receivable. Capital expenditures primarily consisted of
technology investments, as well as leasehold improvements and equipment purchased in connection
with the consolidation of certain offices.
Cash flows from financing activities consist primarily of net borrowing and payment activity from
the credit facility, repurchases of CBIZ common stock, net borrowing and payment activity toward
notes payable and capitalized leases, and proceeds from the exercise of stock options. Net cash
provided by financing activities during the three months ended March 31, 2006 was $34.2 million
compared to $13.4 million for the comparable period in 2005. Financing sources of cash during the
first quarter of 2006 included $29.0 million in net proceeds from the credit facility, and $5.4
million in proceeds from the exercise of stock options (including tax benefits), offset by $0.2
million in net payments towards notes payable and capitalized leases. During the first quarter of
2005, financing sources of cash included $13.6 million in net proceeds from the credit facility and
$0.3 million in proceeds from the exercise of stock options, offset by $0.4 million in cash used to
repurchase shares of CBIZ common stock, and $0.1 million in net payments towards notes payable and
capitalized leases.
Obligations and Commitments
CBIZs contractual obligations for future payments as of March 31, 2006 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Thereafter |
|
On-Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank debt |
|
$ |
61,200 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
61,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable |
|
|
5,439 |
|
|
|
1,977 |
|
|
|
1,668 |
|
|
|
1,094 |
|
|
|
700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized leases |
|
|
1,489 |
|
|
|
465 |
|
|
|
535 |
|
|
|
417 |
|
|
|
72 |
|
|
|
|
|
|
|
|
|
Restructuring lease
obligations(1) |
|
|
10,078 |
|
|
|
2,355 |
|
|
|
2,632 |
|
|
|
1,949 |
|
|
|
1,213 |
|
|
|
789 |
|
|
|
1,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable operating
lease obligations |
|
|
190,747 |
|
|
|
27,246 |
|
|
|
30,795 |
|
|
|
26,811 |
|
|
|
21,639 |
|
|
|
19,055 |
|
|
|
65,201 |
|
Letters of credit in lieu of cash
security deposits |
|
|
1,999 |
|
|
|
1,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
578 |
|
Performance guarantees for
non-consolidated affiliates |
|
|
2,398 |
|
|
|
937 |
|
|
|
1,025 |
|
|
|
436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
License bonds and other letters
of credit |
|
|
1,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
274,885 |
|
|
$ |
34,366 |
|
|
$ |
36,655 |
|
|
$ |
30,707 |
|
|
$ |
23,624 |
|
|
$ |
19,879 |
|
|
$ |
129,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes cash received under subleases. |
Off-Balance Sheet Arrangements
CBIZ maintains administrative service agreements with independent CPA firms (as described more
fully under Business Services Financial Services above), which qualify as variable interest
entities under FASB Interpretation No. 46, Consolidation of Variable Interest Entities, as
amended. The impact to CBIZ of this accounting pronouncement is not material to the financial
condition, results of operations, or cash flows of CBIZ, and is further discussed in Note 1 to the
consolidated financial statements included herewith.
CBIZ provides guarantees of performance obligations for a CPA firm with which CBIZ maintains an
administrative service agreement. Potential obligations under the guarantees totaled $2.4 million
at March 31, 2006 and December 31, 2005. In accordance with FASB Interpretation No. 45,
Guarantors Accounting and Disclosure
33
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, as amended,
CBIZ has recognized a liability for the fair value of the obligations undertaken in issuing these
guarantees. The liability is recorded as other current liabilities in the accompanying consolidated
balance sheets. CBIZ does not expect it will be required to make payments under these guarantees.
CBIZ provides letters of credit to landlords (lessors) of its leased premises in lieu of cash
security deposits, which totaled $2.0 million at March 31, 2006 and December 31, 2005. In addition,
CBIZ provides bonds to various state agencies to meet certain licensing requirements. The amount
of bonds outstanding at March 31, 2006 and December 31, 2005 were $1.5 million and $1.2 million,
respectively.
CBIZ has various agreements under 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. It is not
possible to predict the maximum potential amount of future payments under these indemnification
agreements due to the conditional nature of our obligations and the unique facts of each particular
agreement. Historically, payments made by us under these agreements have not been material. As of
March 31, 2006, we were not aware of any indemnification agreements that would require material
payments.
Interest Rate Risk Management
CBIZ has used interest rate swaps to manage the interest rate mix of its credit facility and
related overall cost of borrowing. Interest rate swaps involve the exchange of floating for fixed
rate interest payments to effectively convert floating rate debt into fixed rate debt based on a
one, three, or six-month U.S. dollar LIBOR. Interest rate swaps allow CBIZ to maintain a target
range of fixed to floating rate debt. During the three months ended March 31, 2006 and the twelve
months ended December 31, 2005, management did not utilize interest rate swaps. Management will
continue to evaluate the potential use of interest rate swaps as it deems appropriate under certain
operating and market conditions.
CBIZ invests funds held for clients in short-term investment grade instruments with a maturity of
twelve months or less from the date of purchase. The interest income on these short-term
investments mitigate the interest rate risk for the borrowing costs of CBIZs credit facility, as
the rates float based on market conditions and the average balances of the respective investments
and debt are comparable in size.
Critical Accounting Policies
The policies discussed below are considered by management to be critical to the understanding of
CBIZs consolidated financial statements because their application places significant demand on
managements judgment, with financial reporting results relying on estimation about the effects of
matters that are inherently uncertain. Specific risks for these critical accounting policies are
described in the following paragraphs. For all of these policies, management cautions that
estimates may require adjustment if future events develop differently than expected.
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, our fee to the client is
fixed or determinable, and collectibility is reasonably assured. These criteria are in accordance
with Generally Accepted Accounting Principles (GAAP) and SEC Staff Accounting Bulletin No. 104 (SAB
104). 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, as it relates to
those groups, is provided below.
Financial Services Revenue consists primarily of fees for accounting services, preparation of tax
returns, consulting services including Sarbanes-Oxley consulting and compliance projects, and
valuation services including fairness opinions, business plans, litigation support, purchase price
allocations and derivative valuations. Revenues are recorded in the period in which services are
provided and meet revenue recognition criteria in accordance with SAB 104. CBIZ bills clients based
upon a predetermined agreed-upon fixed fee or based on actual hours incurred on client projects at
expected net realizable rates per hour, plus agreed upon out-of-pocket expenses. The cumulative impact on
any subsequent revision in the estimated realizable value of unbilled fees for a particular client
project is reflected in the period in which the change becomes known.
34
Through one of its Financial Services units, CBIZ provides flexible benefits administration
services to clients, grants access of its proprietary software to third parties, and provides
hosting to these parties. Revenue associated with set up and license fees related to our flexible
benefits services are deferred and recognized pro rata over the life of the contract.
Employee Services Revenue consists primarily of brokerage and agency commissions, payroll service
fees, interest on client funds, and fee income for administering health and retirement plans. A
description of the revenue recognition, based on the service provided, insurance product sold, and
billing arrangement, is described below.
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|
|
Commissions relating to brokerage and agency activities whereby CBIZ has primary
responsibility for the collection of premiums from insureds (agency or indirect
billing) are recognized as of the latter of the effective date of the insurance
policy or the date billed to the customer; commissions to be received directly from
insurance companies (direct billing) are recognized when the policy becomes
effective; and life insurance commissions are recognized when the policy becomes
effective. Commission revenue is reported net of sub-broker commissions, and
reserves for estimated policy cancellations and terminations. The cancellation and
termination reserve is based upon estimates and assumptions using historical
cancellation and termination experience and other current factors to project future
experience. CBIZ periodically reviews the adequacy of the reserve and makes
adjustments as necessary. The use of different estimates or assumptions could
produce different results. |
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|
|
|
Commissions which are based upon certain performance targets are recognized at
the earlier of written notification that the target has been achieved, or cash
collection. |
|
|
|
|
Fee income is recognized in the period in which services are provided, and may be
based on actual hours incurred on an hourly fee basis, fixed fee arrangements, or
asset-based fees. |
|
|
|
|
Payroll Revenue is recognized when the actual payroll processing occurs. |
Medical Management Professionals Fees for services are primarily based on a percentage of net
collections on our clients patient accounts receivable. As such, revenue is determinable, earned,
and recognized, when payments are received by our clients on their patient accounts.
National Practices Services The business units that comprise this practice group offer a variety
of services. A description of revenue recognition associated with the primary services is provided
below.
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|
|
Technology Consulting Revenue associated with hardware and software sales is
recognized upon delivery and acceptance of the product. Revenue associated with
installation is recognized as services are performed, and revenue associated with
service agreements is recognized on a straight-line basis over the period of the
agreement. Consulting revenue is recognized on an hourly or per diem fee basis as
services are performed. |
|
|
|
|
Health Care Consulting CBIZ bills clients based upon a predetermined agreed-upon
fixed fee or based on actual hours incurred on client projects at expected net
realizable rates per hour, plus agreed upon out-of-pocket expenses, or as a percentage of
savings after contingencies have been resolved and verified by a third party. |
|
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|
|
Mergers & Acquisitions and Capital Advisory Revenue associated with
non-refundable retainers is recognized on a pro rata basis over the life of the
engagement. Revenue associated with success fee transactions is recognized when the
transaction is completed. |
Certain of our client arrangements encompass multiple deliverables. CBIZ accounts for these
arrangements in accordance with Emerging Issues Task Force No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables (EITF 00-21). If the deliverables meet the criteria in
EITF 00-21, the deliverables are divided into separate units of accounting and revenue is allocated
to the deliverables based on their relative fair values. Revenue for each unit is recognized
separately in accordance with CBIZs revenue recognition policy for each unit. For those
arrangements where the deliverables do not qualify as a separate unit of accounting, revenue
35
from all deliverables are treated as one accounting unit and evaluated for appropriate accounting
treatment based upon the underlying facts and circumstances.
Valuation of Accounts Receivable and Notes Receivable
The preparation of consolidated financial statements requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Specifically, management must make estimates of the
collectibility of accounts receivable, including unbilled accounts receivable, related to current
period service revenue. Management analyzes historical bad debts, client credit-worthiness, the age
of accounts receivable and current economic trends and conditions when evaluating the adequacy of
the allowance for doubtful accounts and the collectibility of notes receivable. Significant
management judgments and estimates must be made and used in connection with establishing the
allowance for doubtful accounts in any accounting period. Material differences may result if
management made different judgments or utilized different estimates.
Valuation of Goodwill
CBIZ utilizes the purchase method of accounting for all business combinations in accordance with
Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations. Intangible
assets, which include client lists and non-compete agreements, are amortized principally by the
straight-line method over their expected period of benefit, not to exceed ten years.
In accordance with the provisions of SFAS 142, Goodwill and Other Intangible Assets, goodwill is
not amortized. Goodwill is tested for impairment annually during the fourth quarter of each year,
and between annual tests if an event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying value. There was no goodwill
impairment during the three months ended March 31, 2006 or 2005.
Loss Contingencies
Loss contingencies, including litigation claims, are recorded as liabilities when it is probable
that a liability has been incurred and the amount of the loss is reasonably estimable. Contingent
liabilities are often resolved over long time periods. Estimating probable losses requires analysis
that often depends on judgment about potential actions by third parties.
Incentive Compensation
Determining the amount of expense to recognize for incentive compensation at interim and annual
reporting dates involves management judgment. Expenses accrued for incentive compensation are
based upon expected financial results for the year, and the ultimate determination of incentive
compensation can not be made until after year-end results are finalized. Thus, amounts accrued are
subject to change in future interim periods if actual future financial results are higher or lower
than expected. In arriving at the amount of expense to recognize, management believes it makes
reasonable judgments using all significant information available.
Income Taxes
Determining the consolidated provision for income tax expense, income tax liabilities and deferred
tax assets and liabilities involves management judgment. Management estimates an annual effective
tax rate (which takes into consideration expected full-year results), which is applied to our
quarterly operating results to determine the provision for income tax expense. In the event there
is a significant, unusual or infrequent item recognized in our quarterly operating results, the tax
attributable to that item is recorded in the interim period in which it occurs. Circumstances that
could cause our estimates of effective income tax rates to change include the impact of information
that subsequently becomes available as we prepare our corporate income tax returns; the level of
actual pre-tax income; revisions to tax positions taken as a result of further analysis and
consultation; the receipt and expected utilization of federal and state income tax credits; and
changes mandated as a result of audits by taxing authorities. Management believes it makes
reasonable judgments using all significant information available when estimating income taxes.
36
Other Significant Policies
Other significant accounting policies not involving the same level of measurement uncertainties as
those discussed above are nevertheless important to understanding the consolidated financial
statements. Those policies are described in Note 1 to the consolidated financial statements
contained in our Annual Report on Form 10-K for the year ended December 31, 2005.
New Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 155 (SFAS 155), Accounting for Certain Hybrid Financial Instruments an
amendment of FASB Statements No. 133 and 140. SFAS 155 allows financial instruments that have
embedded derivatives to be accounted for as a whole, eliminating the need to separate the
derivative from its host, if the holder elects to account for the whole instrument on a fair value
basis. The provisions of SFAS 155 are effective January 1, 2007. The adoption of SFAS 155 is not
expected to have a material impact on the financial position, results of operations or cash flows
of CBIZ.
Uncertainty of Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
All statements other than statements of historical fact included in this Quarterly Report,
including without limitation, Managements Discussion and Analysis of Financial Condition and
Results of Operations regarding CBIZs financial position, business strategy and plans and
objectives for future performance are forward-looking statements. You can identify these statements
by the fact that they do not relate strictly to historical or current facts. Forward-looking
statements are commonly identified by the use of such terms and phrases as intends, believes,
estimates, expects, projects, anticipates, foreseeable future, seeks, and words or
phrases of similar import in connection with any discussion of future operating or financial
performance. In particular, these include statements relating to future actions, future performance
or results of current and anticipated services, sales efforts, expenses, and financial results.
From time to time, we also may provide oral or written forward-looking statements in other
materials we release to the public. Any or all of our forward-looking statements in this Quarterly
Report on Form 10-Q and in any other public statements that we make, are subject to certain risks
and uncertainties that could cause actual results to differ materially from those projected. Such
forward-looking statements can be affected by inaccurate assumptions we might make or by known or
unknown risks and uncertainties. Should one or more of these risks or assumptions materialize, or
should the underlying assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Such risks and uncertainties include, but are not limited to:
CBIZs ability to adequately manage its growth; CBIZs dependence on the services of its CEO and
other key employees; competitive pricing pressures; general business and economic conditions;
changes in governmental regulation and tax laws affecting its operations; reversal or decline in
the current trend of outsourcing business services; revenue seasonality or fluctuations in and
collectibility of receivables; liability for errors and omissions of our businesses; regulatory
investigations and future regulatory activity (including without limitation inquiries into
compensation arrangements within the insurance brokerage industry); and reliance on information
processing systems and availability of software licenses. Consequently, no forward-looking
statement can be guaranteed.
A more detailed description of risk factors may be found in CBIZs Annual Report on Form 10-K for
the year ended December 31, 2005. CBIZ undertakes no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or otherwise. You are advised,
however, to consult any further disclosures we make on related subjects in the quarterly, periodic
and annual reports we file with the SEC. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
CBIZs floating rate debt under its credit facility exposes the Company to interest rate risk.
Interest rate risk results when the maturity or repricing intervals of interest-earning assets and
interest-bearing liabilities are different. A change in the Federal Funds Rate, or the Reference
Rate set by the Bank of America, would affect the rate at which CBIZ could borrow funds under its
credit facility. If market interest rates were to increase or decrease immediately and uniformly by
100 basis points from the levels at March 31, 2006, interest expense would increase or decrease by
approximately $0.6 million annually.
37
CBIZ does not engage in trading market risk sensitive instruments. CBIZ has used interest rate
swaps to manage the interest rate mix of its credit facility and related overall cost of borrowing.
Interest rate swaps involve the exchange of floating for fixed rate interest payments to
effectively convert floating rate debt into fixed rate debt based on a one, three, or six-month
U.S. dollar LIBOR. Interest rate swaps allow CBIZ to maintain a target range of fixed to floating
rate debt. Management will continue to evaluate the potential use of interest rate swaps as it
deems appropriate under certain operating and market conditions.
Item 4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We evaluated the effectiveness of our disclosure controls and procedures (Disclosure Controls) as
of the end of the period covered by this report. This evaluation (Controls Evaluation) was done
with the participation of our Chairman and Chief Executive Officer (CEO) and Chief Financial
Officer (CFO).
Disclosure Controls are controls and other procedures that are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the Securities Exchange
Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. Disclosure Controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by
us in the reports that we file under the Exchange Act is accumulated and communicated to our
management, including our CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our Disclosure Controls or our
internal controls over financial reporting (Internal Controls) will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide only reasonable,
but not absolute, assurance that the objectives of a control system are met. Further, any control
system reflects limitations on resources, and the benefits of a control system must be considered
relative to its costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any,
within CBIZ have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of a control. A design of a control system is also
based upon certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur and may not be
detected.
Conclusions
Based upon the Controls Evaluation, our CEO and CFO have concluded that, subject to the limitations
noted above, the Disclosure Controls are effective in providing reasonable assurance that material
information required to be disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms.
There were no changes in our Internal Controls that occurred during the quarter ended March 31,
2006 that have materially affected, or are reasonably likely to materially affect, our Internal
Controls.
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PART
II OTHER INFORMATION
Item 1. 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 financial condition, results of operations or cash flows of CBIZ.
Item 1A. Risk Factors
Factors that may affect CBIZs actual operating and financial results are described in Item 1A.
Risk Factors of CBIZs Annual Report on 10-K for the year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) On January 1, 2006, in connection with the acquisition of The TriMed Group, CBIZ paid cash and
issued 161,385 shares of common stock in exchange for substantially all of the assets of the
company.
On January 12, 2006, in connection with the acquisition of Valley Global Insurance Brokers, CBIZ
paid cash and issued 12,032 shares of common stock in exchange for substantially all of the assets
of the company.
CBIZ paid cash and issued 33,650 shares of common stock as contingent consideration earned by the
former owners of a business that was acquired on January 1, 2005. The shares were issued on
February 23, 2006.
CBIZ paid cash and issued 119,625 shares of common stock as contingent consideration earned by the
former owners of a business that was acquired on January 1, 2005. The shares were issued on March
30, 2006.
CBIZ paid cash and issued 5,719 shares of common stock as contingent consideration earned by the
former owner of a business that was acquired on January 1, 2004. The shares were issued on March
30, 2006.
The above referenced shares were issued in transactions not involving a public offering in reliance
on the exemption from registration afforded by Section 4(2) of the Securities Act of 1933. The
persons to whom the shares were issued had access to full information about CBIZ and represented
that they acquired the shares for their own account and not for the purpose of distribution. The
certificates for the shares contain a restrictive legend advising that the shares may not be
offered for sale, sold, or otherwise transferred without having first been registered under the
Securities Act or pursuant to an exemption from the Securities Act.
(c) On February 9, 2006, CBIZs Board of Directors authorized the share repurchase of up to 5.0
million shares of CBIZ common stock. The plan expires March 31, 2007, and CBIZ does not intend to
terminate the plan prior to its expiration. There were no share repurchases made during the first
quarter of 2006.
According to the terms of CBIZs credit facility with Bank of America, 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.
Item 6. Exhibits
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31.1 |
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Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CBIZ, Inc.
(Registrant)
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Date: May 9, 2006
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By:
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/s/ Ware H. Grove |
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Ware H. Grove |
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Chief Financial Officer |
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