þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware or organization) |
22-2769024 |
6050 Oak Tree Boulevard, South, Suite 500, Cleveland, Ohio
|
44131 | |||
(Address of principal executive offices)
|
(Zip Code) |
Outstanding at | ||||
Class of Common Stock | April 30, 2006 | |||
Common Stock, par value $0.01 per share |
76,287,199 |
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EX-31.1 302 CERTIFICATION CEO | ||||||||
EX-31.2 302 CERTIFICATION CFO | ||||||||
EX-32.1 906 CERTIFICATION CEO | ||||||||
EX-32.2 906 CERTIFICATION CFO |
2
MARCH 31, | DECEMBER 31, | |||||||
2006 | 2005 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 2,919 | $ | 8,909 | ||||
Restricted cash |
12,115 | 9,873 | ||||||
Accounts receivable, net |
127,192 | 98,390 | ||||||
Notes
receivable current |
7,369 | 6,042 | ||||||
Deferred income taxes current |
3,185 | 3,241 | ||||||
Other current assets |
9,587 | 9,490 | ||||||
Assets of discontinued operations |
4,772 | 8,485 | ||||||
Current assets before funds held for clients |
167,139 | 144,430 | ||||||
Funds held for clients |
70,250 | 65,669 | ||||||
Total current assets |
237,389 | 210,099 | ||||||
Property and equipment, net |
32,445 | 33,403 | ||||||
Notes
receivable non-current |
2,993 | 3,575 | ||||||
Deferred
income taxes non-current |
8,951 | 9,199 | ||||||
Goodwill and other intangible assets, net |
201,593 | 184,673 | ||||||
Assets of deferred compensation plan |
13,929 | 9,803 | ||||||
Other assets |
3,744 | 3,832 | ||||||
Total assets |
$ | 501,044 | $ | 454,584 | ||||
LIABILITIES |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 24,390 | $ | 26,427 | ||||
Income taxes payable |
8,854 | 1,115 | ||||||
Accrued personnel costs |
20,395 | 35,920 | ||||||
Other current liabilities |
17,207 | 18,332 | ||||||
Liabilities of discontinued operations |
3,919 | 5,991 | ||||||
Current liabilities before client fund
obligations |
74,765 | 87,785 | ||||||
Client fund obligations |
70,250 | 65,669 | ||||||
Total current liabilities |
145,015 | 153,454 | ||||||
Bank debt |
61,200 | 32,200 | ||||||
Deferred compensation plan obligations |
13,929 | 9,803 | ||||||
Other non-current liabilities |
6,298 | 4,466 | ||||||
Total liabilities |
226,442 | 199,923 | ||||||
STOCKHOLDERS EQUITY |
||||||||
Common stock |
1,005 | 984 | ||||||
Additional paid-in capital |
458,641 | 450,734 | ||||||
Accumulated deficit |
(82,696 | ) | (94,714 | ) | ||||
Treasury stock |
(102,317 | ) | (102,317 | ) | ||||
Accumulated other comprehensive loss |
(31 | ) | (26 | ) | ||||
Total stockholders equity |
274,602 | 254,661 | ||||||
Total liabilities and stockholders
equity |
$ | 501,044 | $ | 454,584 | ||||
3
THREE MONTHS ENDED | ||||||||
MARCH 31, | ||||||||
2006 | 2005 | |||||||
Revenue |
$ | 171,061 | $ | 155,156 | ||||
Operating expenses |
138,731 | 127,015 | ||||||
Gross margin |
32,330 | 28,141 | ||||||
Corporate general and administrative expense |
6,732 | 6,421 | ||||||
Depreciation and amortization expense |
4,071 | 3,894 | ||||||
Operating income |
21,527 | 17,826 | ||||||
Other income (expense): |
||||||||
Interest expense |
(792 | ) | (781 | ) | ||||
Other income, net |
1,289 | 388 | ||||||
Total other income (expense), net |
497 | (393 | ) | |||||
Income from continuing operations before
income tax expense |
22,024 | 17,433 | ||||||
Income tax expense |
8,788 | 7,225 | ||||||
Income from continuing operations |
13,236 | 10,208 | ||||||
Loss from operations of discontinued operations,
net of tax |
(1,385 | ) | (1,962 | ) | ||||
Gain (loss) on disposal of discontinued operations, net of
tax |
167 | (109 | ) | |||||
Net income |
$ | 12,018 | $ | 8,137 | ||||
Earnings per share: |
||||||||
Basic: |
||||||||
Continuing operations |
$ | 0.18 | $ | 0.13 | ||||
Discontinued operations |
(0.02 | ) | (0.02 | ) | ||||
Net income |
$ | 0.16 | $ | 0.11 | ||||
Diluted: |
||||||||
Continuing operations |
$ | 0.17 | $ | 0.13 | ||||
Discontinued operations |
(0.01 | ) | (0.03 | ) | ||||
Net income |
$ | 0.16 | $ | 0.10 | ||||
Basic weighted average shares outstanding |
74,849 | 75,738 | ||||||
Diluted weighted average shares outstanding |
77,354 | 77,718 | ||||||
4
THREE MONTHS ENDED | ||||||||
MARCH 31, | ||||||||
2006 | 2005 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 12,018 | $ | 8,137 | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
Loss from
operations of discontinued operations, net of tax |
1,385 | 1,962 | ||||||
(Gain) loss on disposal of discontinued operations, net of
tax |
(167 | ) | 109 | |||||
Bad debt expense, net of recoveries |
850 | 1,101 | ||||||
Depreciation and amortization expense |
4,071 | 3,894 | ||||||
Deferred income taxes |
(538 | ) | (762 | ) | ||||
Stock-based compensation expense |
564 | 38 | ||||||
Changes in assets and liabilities, net of acquisitions and dispositions: |
||||||||
Restricted cash |
(2,124 | ) | (651 | ) | ||||
Accounts receivable, net |
(28,111 | ) | (26,915 | ) | ||||
Other assets |
(4,478 | ) | (3,578 | ) | ||||
Accounts payable |
(2,631 | ) | (3,216 | ) | ||||
Income taxes |
7,134 | 14,434 | ||||||
Accrued personnel costs |
(15,525 | ) | (6,333 | ) | ||||
Other liabilities |
4,883 | 5,130 | ||||||
Net cash used in continuing operations |
(22,669 | ) | (6,650 | ) | ||||
Operating cash flows provided by discontinued
operations |
79 | 441 | ||||||
Net cash used in operating activities |
(22,590 | ) | (6,209 | ) | ||||
Cash flows from investing activities: |
||||||||
Business acquisitions, net of cash acquired and
contingent consideration earned |
(13,915 | ) | (7,595 | ) | ||||
Acquisition of other intangible assets |
(2,411 | ) | | |||||
Additions to property and equipment, net |
(1,488 | ) | (1,671 | ) | ||||
Payments received on notes receivable |
200 | 212 | ||||||
Investing cash flows used by discontinued operations |
(3 | ) | (115 | ) | ||||
Net cash used in investing activities |
(17,617 | ) | (9,169 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from bank debt |
70,400 | 87,000 | ||||||
Proceeds from notes payable |
| 98 | ||||||
Payment of bank debt |
(41,400 | ) | (73,400 | ) | ||||
Payment of notes payable and capitalized leases |
(169 | ) | (189 | ) | ||||
Payment for acquisition of treasury stock |
| (370 | ) | |||||
Proceeds from exercise of stock options |
3,936 | 286 | ||||||
Excess tax benefit from exercise of stock options |
1,450 | | ||||||
Net cash provided by financing activities |
34,217 | 13,425 | ||||||
Net decrease in cash and cash equivalents |
(5,990 | ) | (1,953 | ) | ||||
Cash and cash equivalents at beginning of year |
8,909 | 5,291 | ||||||
Cash and cash equivalents at end of period |
$ | 2,919 | $ | 3,338 | ||||
5
1. | Summary of Significant Accounting Policies | |
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. | ||
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. | ||
Organization | ||
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. | ||
Principles of Consolidation | ||
The accompanying consolidated financial statements reflect the operations of CBIZ and all of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying consolidated financial statements do not reflect the operations or accounts of variable interest entities as the impact is not material to the financial condition, results of operations or cash flows of CBIZ. See further discussion under Variable Interest Entities below. | ||
Use of Estimates | ||
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. | ||
Reclassifications | ||
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
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. | ||
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 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. | ||
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. |
| 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
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
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 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
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 | |||||||||||||||||||||
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
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 |
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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. |
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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 |
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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 |
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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. |
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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
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 | ) | ||
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 | ||||
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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 |
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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 | |||||||||||
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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. |
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| 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. |
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| 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. |
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25
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 | % | ||||||||||||||||
26
27
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 | %) |
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
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 | %) |
29
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 | % |
30
31
32
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. |
33
34
| 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. |
| 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. |
35
36
37
38
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
39
CBIZ, Inc. (Registrant) |
||||||
Date: May 9, 2006
|
By: | /s/ Ware H. Grove | ||||
Ware H. Grove | ||||||
Chief Financial Officer |
40
1. | I have reviewed this report on Form 10-Q of CBIZ, Inc.; | ||
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 9, 2006
|
/s/ Steven L. Gerard
|
|||
Chief Executive Officer |
1. | I have reviewed this report on Form 10-Q of CBIZ, Inc.; | ||
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 9, 2006
|
/s/ Ware H. Grove
|
|||
Chief Financial Officer |
(i) | the Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and | ||
(ii) | the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer. |
Date: May 9, 2006
|
/s/ Steven L. Gerard
|
|||
Chief Executive Officer |
Subscribed and sworn to before me this 9th day of May, 2006. |
/s/ Michael W. Gleespen
|
||
Title: Notary Public & Attorney-At-Law |
||
Registered in Franklin County, Ohio |
||
No Expiration Date |
(i) | the Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and | ||
(ii) | the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer. |
Date: May 9, 2006
|
/s/ Ware H. Grove
|
|||
Chief Financial Officer |
/s/ Michael W. Gleespen
|
||
Title: Notary Public & Attorney-At-Law |
||
Registered in Franklin County, Ohio |
||
No Expiration Date |