CBIZ, Inc. 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 June 30, 2008
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
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22-2769024 |
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(State or other jurisdiction of incorporation
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(I.R.S. Employer Identification No.) |
or organization) |
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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) |
(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, a
non-accelerated filer or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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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July 31, 2008 |
Common Stock, par value $0.01 per share
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61,677,489 |
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CBIZ, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CBIZ, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
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JUNE 30, |
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DECEMBER 31, |
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2008 |
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2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
11,622 |
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$ |
12,144 |
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Restricted cash |
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18,331 |
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15,402 |
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Accounts receivable, net |
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132,699 |
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115,333 |
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Notes receivable current, net |
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1,934 |
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1,722 |
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Deferred income taxes current |
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6,963 |
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4,682 |
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Other current assets |
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10,308 |
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10,086 |
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Assets of discontinued operations |
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552 |
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2,312 |
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Current assets before funds held for clients |
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182,409 |
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161,681 |
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Funds held for clients current |
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57,320 |
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88,048 |
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Total current assets |
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239,729 |
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249,729 |
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Property and equipment, net |
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25,457 |
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26,279 |
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Notes receivable non-current, net |
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1,275 |
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2,017 |
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Deferred income taxes non-current |
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5,314 |
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5,300 |
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Goodwill and other intangible assets, net |
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281,721 |
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268,388 |
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Assets of deferred compensation plan |
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24,356 |
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22,157 |
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Funds held for clients non-current |
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17,767 |
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Other assets |
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3,963 |
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4,122 |
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Total assets |
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$ |
599,582 |
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$ |
577,992 |
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LIABILITIES |
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Current liabilities: |
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Accounts payable |
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$ |
33,735 |
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$ |
27,293 |
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Income taxes payable current |
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4,267 |
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Accrued personnel costs |
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32,968 |
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40,281 |
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Notes payable current |
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5,746 |
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10,602 |
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Other current liabilities |
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20,370 |
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13,969 |
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Liabilities of discontinued operations |
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3,210 |
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3,777 |
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Current liabilities before client fund obligations |
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100,296 |
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95,922 |
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Client fund obligations |
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76,700 |
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88,048 |
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Total current liabilities |
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176,996 |
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183,970 |
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Convertible notes |
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100,000 |
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100,000 |
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Bank debt |
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60,000 |
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30,000 |
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Income taxes payable non-current |
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7,555 |
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8,029 |
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Deferred compensation plan obligations |
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24,356 |
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22,157 |
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Other non-current liabilities |
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6,817 |
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7,390 |
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Total liabilities |
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375,724 |
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351,546 |
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STOCKHOLDERS EQUITY |
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Common stock |
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1,056 |
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1,041 |
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Additional paid-in capital |
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485,577 |
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477,804 |
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Accumulated deficit |
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(13,347 |
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(37,414 |
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Treasury stock |
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(248,244 |
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(214,883 |
) |
Accumulated other comprehensive loss |
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(1,184 |
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(102 |
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Total stockholders equity |
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223,858 |
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226,446 |
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Total liabilities and stockholders equity |
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$ |
599,582 |
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$ |
577,992 |
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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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SIX MONTHS ENDED |
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JUNE 30, |
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JUNE 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue |
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$ |
175,734 |
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$ |
156,658 |
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$ |
373,086 |
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$ |
335,102 |
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Operating expenses |
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154,883 |
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138,259 |
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313,213 |
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282,297 |
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Gross margin |
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20,851 |
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18,399 |
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59,873 |
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52,805 |
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Corporate general and administrative expense |
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7,791 |
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7,408 |
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15,043 |
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16,090 |
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Operating income |
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13,060 |
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10,991 |
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44,830 |
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36,715 |
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Other income (expense): |
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Interest expense |
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(1,888 |
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(1,694 |
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(3,605 |
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(2,966 |
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Gain on sale of operations, net |
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221 |
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10 |
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241 |
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105 |
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Other income (expense), net |
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335 |
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1,988 |
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(1,012 |
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2,595 |
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Total other income (expense), net |
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(1,332 |
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304 |
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(4,376 |
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(266 |
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Income from continuing operations before
income tax expense |
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11,728 |
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11,295 |
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40,454 |
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36,449 |
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Income tax expense |
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4,255 |
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4,792 |
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15,753 |
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15,100 |
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Income from continuing operations |
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7,473 |
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6,503 |
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24,701 |
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21,349 |
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Loss from discontinued operations,
net of tax |
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(196 |
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(556 |
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(194 |
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(945 |
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Gain (loss) on disposal of discontinued
operations, net of tax |
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9 |
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3,883 |
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(440 |
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3,690 |
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Net income |
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$ |
7,286 |
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$ |
9,830 |
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$ |
24,067 |
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$ |
24,094 |
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Earnings (loss) per share: |
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Basic: |
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Continuing operations |
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$ |
0.12 |
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$ |
0.10 |
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$ |
0.39 |
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$ |
0.32 |
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Discontinued operations |
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0.05 |
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(0.01 |
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0.05 |
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Net income |
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$ |
0.12 |
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$ |
0.15 |
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$ |
0.38 |
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$ |
0.37 |
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Diluted: |
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Continuing operations |
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$ |
0.12 |
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$ |
0.10 |
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$ |
0.39 |
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$ |
0.32 |
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Discontinued operations |
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0.05 |
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(0.01 |
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0.04 |
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Net income |
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$ |
0.12 |
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$ |
0.15 |
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$ |
0.38 |
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$ |
0.36 |
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Basic weighted average shares outstanding |
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61,830 |
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65,142 |
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62,544 |
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65,740 |
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Diluted weighted average shares outstanding |
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62,440 |
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66,459 |
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63,320 |
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67,236 |
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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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SIX MONTHS ENDED |
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JUNE 30, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net income |
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$ |
24,067 |
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$ |
24,094 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Loss from discontinued operations, net of tax |
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194 |
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945 |
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(Gain) loss on disposal of discontinued operations, net
of tax |
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440 |
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(3,690 |
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Gain on sale of operations,
net |
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(241 |
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(105 |
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Bad debt expense, net of recoveries |
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2,306 |
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1,865 |
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Depreciation and amortization expense |
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7,615 |
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6,786 |
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Deferred income taxes |
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(1,813 |
) |
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318 |
|
Excess tax benefits from share based payment
arrangements |
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(1,534 |
) |
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(2,073 |
) |
Employee stock awards |
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1,824 |
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1,086 |
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Changes in assets and liabilities, net of acquisitions and divestitures: |
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Restricted cash |
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(2,929 |
) |
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1,493 |
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Accounts receivable, net |
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(18,920 |
) |
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(21,316 |
) |
Other assets |
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(78 |
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(403 |
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Accounts payable |
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6,059 |
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|
527 |
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Income taxes payable |
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5,697 |
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|
4,058 |
|
Accrued personnel costs |
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(7,456 |
) |
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(6,132 |
) |
Other liabilities |
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5,283 |
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2,094 |
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Net cash provided by continuing operations |
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20,514 |
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|
9,547 |
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Operating cash flows used in discontinued operations |
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(986 |
) |
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(146 |
) |
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Net cash provided by operating activities |
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19,528 |
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9,401 |
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Cash flows from investing activities: |
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Business acquisitions and contingent consideration, net of
cash acquired |
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(20,630 |
) |
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(18,794 |
) |
Acquisition of other intangible assets |
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(808 |
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(1,608 |
) |
Proceeds from sales of divested and discontinued
operations |
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2,253 |
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|
16,811 |
|
Additions to property and equipment, net |
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(2,619 |
) |
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(2,616 |
) |
Additions to notes receivable |
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(170 |
) |
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Payments received on notes receivable |
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|
241 |
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|
92 |
|
Net cash used in discontinued
operations |
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(570 |
) |
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Net cash used in investing activities |
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(21,733 |
) |
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(6,685 |
) |
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Cash flows from financing activities: |
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Proceeds from bank debt |
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135,610 |
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|
153,150 |
|
Payment of bank debt |
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(105,610 |
) |
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(143,150 |
) |
Payment of notes payable and capitalized leases |
|
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(254 |
) |
|
|
(296 |
) |
Payment for acquisition of treasury stock |
|
|
(33,024 |
) |
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|
(24,692 |
) |
Proceeds from exercise of stock options |
|
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3,525 |
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|
2,911 |
|
Excess tax benefit from exercise of stock
awards |
|
|
1,534 |
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|
2,073 |
|
Debt issuance costs |
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(98 |
) |
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Net cash provided by (used in) financing
activities |
|
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1,683 |
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(10,004 |
) |
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Net decrease in cash and cash equivalents |
|
|
(522 |
) |
|
|
(7,288 |
) |
Cash and cash equivalents at beginning of year |
|
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12,144 |
|
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|
12,971 |
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Cash and cash equivalents at end of period |
|
$ |
11,622 |
|
|
$ |
5,683 |
|
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|
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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. |
|
Summary of Significant Accounting Policies |
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The accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the
U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the
information and notes required by GAAP for annual financial statements. |
|
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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 June 30, 2008 and December 31, 2007, the results of their
operations for the three and six months ended June 30, 2008 and 2007, and cash flows for the
six months ended June 30, 2008 and 2007. 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, 2007. |
|
|
|
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. CBIZ does not consolidate variable interest entities as the
impact is not material to the financial condition, results of operations or cash flows of
CBIZ. |
|
|
|
Use of Estimates |
|
|
|
The preparation of consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and the reported amounts of
revenue and expenses. Managements estimates and assumptions include, but are not limited
to, estimates of collectibility of accounts receivable and unbilled revenue, the
realizability of goodwill and other intangible assets, the fair value of certain assets, the
valuation of stock options in determining compensation expense, estimates of accrued
liabilities (such as incentive compensation, self-insurance reserves and legal reserves),
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 2007 consolidated financial statements and disclosures have been
reclassified to conform to the current year presentation to reflect the impact of
discontinued operations. |
|
|
|
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 estimated 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 |
|
|
|
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 |
6
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
they are due are segregated and reported
separately as Funds held for clients in the consolidated balance sheets. 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 are reported as current and non-current assets, as appropriate, based
upon characteristics of the underlying investments, and Client fund obligations are reported
as current liabilities. If the par value of investments held do not approximate fair value,
the balance in Funds held for clients may not be equal to
the balance in Client fund
obligations. The amount of collected but not yet remitted funds may vary significantly
during the year. |
|
|
|
Funds held for clients include cash, overnight investments and Auction Rate Securities
(ARS). ARS are classified as available for sale securities in accordance with FASB Statement
of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS No. 115). See Note 7 for further discussion of ARS. |
|
|
|
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 (SAB) No. 101, Revenue
Recognition in Financial Statements, as amended by SAB No. 104 Revenue Recognition. |
|
|
|
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 included in the Annual Report on Form 10-K for the year ended
December 31, 2007. |
|
|
|
New Accounting Pronouncements |
|
|
|
Effective January 1, 2008, CBIZ adopted Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in accordance with GAAP, and expands
disclosures about fair value measurements. For financial assets and liabilities, this
statement is effective for fiscal periods beginning after November 15, 2007 and does not
require any new fair value measurements, but rather expands the disclosure of fair value
measurements. In February 2008, the FASB issued Staff Position No. 157-2 Effective Date of
FASB Statement No. 157 which delayed the effective date of SFAS No. 157 to fiscal years
ending after November 15, 2008 for non-financial assets and liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Accordingly, CBIZ did not apply the provisions of SFAS No. 157 to
long-lived assets, goodwill and other intangible assets that are measured for impairment
testing purposes. See Note 8 for further discussion of the adoption of SFAS No. 157. |
|
|
|
Effective January 1, 2008, CBIZ adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities including an amendment of FASB Statement No. 115. This
statement permits entities to choose to measure many financial instruments and certain other
items at fair value. This statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007, including interim periods within that fiscal year.
The Company did not elect the fair value option for any of its existing financial
instruments as of June 30, 2008 and the Company has not determined whether or not it will
elect this option for financial instruments it may acquire in the future. |
|
|
|
In December 2007, the FASB issued SFAS No. 141 (revised 2007) Business Combinations (SFAS
No. 141R), which replaces SFAS No. 141, Business Combinations. SFAS No. 141R establishes
principles and requirements for how an acquirer, a) recognizes and measures the assets
acquired, the liabilities assumed, and any non-controlling interest in the acquiree, b)
recognizes and measures the goodwill acquired, and c) determines what information to
disclose. SFAS No. 141R also requires that all acquisition-related costs, including
restructuring, be recognized separately from the acquisition, and that
|
7
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
changes in acquired
tax contingencies, including those existing at the date of adoption, be recognized in
earnings if outside the maximum allocation period (generally one year). SFAS No. 141R
applies prospectively to business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning after December 15, 2008. CBIZ
is currently evaluating the impact of adoption of SFAS No. 141R on the consolidated
financial statements. |
|
|
|
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of Accounting Research Bulletin No. 51 (SFAS No.
160). SFAS 160 establishes requirements for ownership interests in subsidiaries held by
parties other than the Company (sometimes called minority interests) be clearly
identified, presented, and disclosed in the consolidated statement of financial position
within equity, but separate from the parents equity. All changes in the parents ownership
interests are required to be accounted for consistently as equity transactions and any
retained noncontrolling equity investments in deconsolidated subsidiaries must be measured
initially at fair value. This statement is effective for CBIZ beginning January 1, 2009.
CBIZ is currently evaluating the potential impact of the adoption of SFAS No. 160 on its
consolidated financial statements. |
|
|
|
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS No. 161) as an amendment to SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 161 applies to all derivative
instruments and related hedged items accounted for under SFAS No. 133. It requires entities
to provide greater transparency about a) how and why an entity uses derivative instruments,
b) how derivative instruments and related hedged items are accounted for under SFAS No. 133
and its related interpretations, and c) how derivative and related hedged items affect an
entitys financial position, results of operations, and cash flow. SFAS No. 161 is effective
for CBIZ beginning January 1, 2009. The Company is currently evaluating the impact of the
adoption of SFAS No. 161 on its consolidated financial statements. |
|
|
|
On May 9, 2008, the FASB issued FASB Staff Position No. APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) (FSP APB 14-1). FSP APB 14-1 requires issuers of convertible debt that
may be settled wholly or partly in cash when converted, to account for the debt and equity
components separately. FSP APB 14-1 is effective for fiscal years beginning after December
15, 2008 and must be applied retrospectively to all periods presented. This standard will
have an impact on the Companys consolidated financial statements and the Company is
currently evaluating the amount of the impact. |
|
2. |
|
Accounts Receivable, Net |
|
|
|
Accounts receivable balances at June 30, 2008 and December 31, 2007 were as follows (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Trade accounts receivable |
|
$ |
109,807 |
|
|
$ |
98,881 |
|
Unbilled revenue |
|
|
28,815 |
|
|
|
21,572 |
|
Other accounts receivable |
|
|
559 |
|
|
|
712 |
|
|
|
|
|
|
|
|
Total accounts receivable |
|
|
139,181 |
|
|
|
121,165 |
|
Allowance for doubtful accounts |
|
|
(6,482 |
) |
|
|
(5,832 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
132,699 |
|
|
$ |
115,333 |
|
|
|
|
|
|
|
|
8
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
3. |
|
Goodwill and Other Intangible Assets, Net |
|
|
|
The components of goodwill and other intangible assets, net at June 30, 2008 and December 31,
2007 were as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Goodwill |
|
$ |
224,956 |
|
|
$ |
213,511 |
|
Intangibles: |
|
|
|
|
|
|
|
|
Client lists |
|
|
68,272 |
|
|
|
63,234 |
|
Intangible assets other |
|
|
7,842 |
|
|
|
8,125 |
|
|
|
|
|
|
|
|
Total intangibles |
|
|
76,114 |
|
|
|
71,359 |
|
|
|
|
|
|
|
|
Total goodwill and other intangibles assets |
|
|
301,070 |
|
|
|
284,870 |
|
Accumulated amortization |
|
|
(19,349 |
) |
|
|
(16,482 |
) |
|
|
|
|
|
|
|
Goodwill and other intangible assets, net |
|
$ |
281,721 |
|
|
$ |
268,388 |
|
|
|
|
|
|
|
|
|
|
Client lists are amortized over their expected periods of benefit not to exceed ten years.
Other intangible assets, 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 $2.0 million and $1.5 million for the
three months ended and $3.9 million and $2.7 million for the six months ended June 30, 2008
and 2007, respectively. |
|
4. |
|
Depreciation and Amortization Expense |
|
|
|
Depreciation and amortization expense for property, equipment and intangible assets is
reported in operating expenses or general and administrative expense in the accompanying
consolidated statements of operations. Depreciation and amortization expense for the three
and six months ended June 30, 2008 and 2007 was as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
SIX MONTHS ENDED |
|
|
|
JUNE 30, |
|
|
JUNE 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Operating expenses |
|
$ |
3,497 |
|
|
$ |
2,822 |
|
|
$ |
6,937 |
|
|
$ |
5,386 |
|
Corporate general and administrative
expense |
|
|
301 |
|
|
|
592 |
|
|
|
678 |
|
|
|
1,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
expense |
|
$ |
3,798 |
|
|
$ |
3,414 |
|
|
$ |
7,615 |
|
|
$ |
6,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. |
|
Borrowing Arrangements |
|
|
|
Convertible Senior Subordinated Notes |
|
|
|
CBIZ had $100.0 million of convertible senior subordinated notes (Notes) outstanding at
June 30, 2008. The Notes are direct, unsecured, senior subordinated obligations of CBIZ and
rank (i) junior in right of payment to all of CBIZs existing and future senior
indebtedness, (ii) equal in right of payment with any other future senior subordinated
indebtedness, and (iii) senior in right of payment to all subordinated indebtedness. The
terms of the Notes are governed by the Indenture dated as of May 30, 2006, with U.S. Bank
National Association as trustee. The Notes and Indenture are further described in CBIZs
Annual Report on Form 10-K for the year ended December 31, 2007. |
|
|
|
The Notes bear interest at a rate of 3.125% per annum, payable in cash semi-annually in
arrears on each June 1 and December 1. The Notes mature on June 1, 2026 and may be redeemed
by CBIZ in whole or in part anytime after June 6, 2011. The Notes are convertible into CBIZ
common stock at a rate equal to 94.1035 shares per $1,000 principal amount of the Notes
(equal to an initial conversion price of approximately $10.63 per share), subject to
adjustment as described in the Indenture. Upon conversion,
|
9
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
CBIZ will deliver for each $1,000
principal amount of Notes, an amount consisting of cash equal to the lesser of $1,000 or the
conversion value (as defined in the Indenture) and, to the extent that the conversion value
exceeds $1,000, at CBIZs election, cash or shares of CBIZ common stock in respect of the
remainder. |
|
|
|
Bank Debt |
|
|
|
CBIZ maintains an unsecured credit facility (facility) with Bank of America as agent bank
for a group of five participating banks. CBIZ had $60.0 million and $30.0 million of
outstanding borrowings under the facility at June 30, 2008 and December 31, 2007,
respectively. Rates for the six months ended June 30, 2008 and for the year ended December
31, 2007 were as follows: |
|
|
|
|
|
|
|
2008 |
|
2007 |
Weighted average rates |
|
4.87% |
|
7.05% |
|
|
|
|
|
|
Range of effective rates |
|
3.60% - 7.25% |
|
6.09% - 8.25% |
|
|
|
|
|
|
|
|
CBIZ had approximately $77.3 million of available funds under the facility at June 30, 2008.
Available funds under the facility are reduced by letters of credit and obligations
determined to be other indebtedness in accordance with the terms of the facility. The
facility expires November 2012 and was amended effective April 3, 2008 to increase the
commitment from $100.0 million to $150.0 million. |
|
|
|
The 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 LIBOR
plus an applicable margin. Additionally, a commitment fee 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 facility also places restrictions on CBIZs ability
to create liens or other encumbrances, to make certain payments, investments, loans and
guarantees and to sell or otherwise dispose of a substantial portion of assets, or to merge
or consolidate with an unaffiliated entity. According to the terms of the facility, CBIZ is
not permitted to declare or make any dividend payments, other than dividend payments made by
one of its wholly owned subsidiaries to the parent company. The facility contains a
provision that, in the event of a defined change in control, the facility may be terminated. |
|
|
|
There are no limitations on CBIZs ability to acquire businesses or repurchase CBIZ common
stock provided that the Leverage Ratio is less than 2.0. The Leverage Ratio is calculated as
total debt (excluding the convertible senior subordinated notes) compared to EBITDA as
defined by the facility. |
|
6. |
|
Commitments and Contingencies |
|
|
|
Acquisitions |
|
|
|
The purchase price that CBIZ pays for businesses and client lists generally consists 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. Shares of CBIZ common stock
that are issued in connection with acquisitions may be contractually restricted from sale
for periods up to two years. Acquisitions are further discussed in Note 12. |
10
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
Indemnifications |
|
|
|
CBIZ has various agreements in which we may be obligated to indemnify the other party with
respect to certain matters. Generally, these indemnification clauses are included in
contracts arising in the normal course of business under which we customarily agree to hold
the other party harmless against losses arising from a breach of representations,
warranties, covenants or agreements, related to matters such as title to assets sold and
certain tax matters. Payment by CBIZ under such indemnification clauses are generally
conditioned upon the other party making a claim. Such claims are typically subject to
challenge by CBIZ and to dispute resolution procedures specified in the particular contract.
Further, CBIZs obligations under these agreements may be limited in terms of time and/or
amount and, in some instances, CBIZ may have recourse against third parties for certain
payments made by CBIZ. It is not possible to predict the maximum potential amount of future
payments under these indemnification agreements due to the conditional nature of CBIZs
obligations and the unique facts of each particular agreement. Historically, CBIZ has not
made any payments under these agreements that have been material individually or in the
aggregate. As of June 30, 2008, CBIZ was not aware of any material obligations arising under
indemnification agreements that would require payments. |
|
|
|
Employment Agreements |
|
|
|
CBIZ maintains severance and employment agreements with certain of its executive officers,
whereby such officers may be entitled to payment in the event of termination of their
employment. CBIZ also has arrangements with certain non-executive employees which may
include severance and other employment provisions. CBIZ accrues for amounts payable under
these contracts and arrangements as triggering events occur and obligations become known.
During the six months ended June 30, 2008 and 2007, payments regarding such contracts and
arrangements were not material. |
|
|
|
Letters of Credit and Guarantees |
|
|
|
CBIZ provides letters of credit to landlords (lessors) of its leased premises in lieu of
cash security deposits which totaled $3.7 million as of June 30, 2008 and December 31, 2007.
In addition, CBIZ provides license bonds to various state agencies to meet certain licensing
requirements. The amount of license bonds outstanding at June 30, 2008 and December 31, 2007
was $1.6 million and $1.4 million, respectively. |
|
|
|
CBIZ acted as guarantor on various letters of credit for a CPA firm with which it has an
affiliation, which totaled $1.4 million as of June 30, 2008 and December 31, 2007. 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. |
|
|
|
Self-Funded Health Insurance |
|
|
|
Effective January 1, 2008, CBIZ converted its comprehensive health benefit plan from a
fully-insured plan to a self-funded program. Total expenses under this program are limited
by stop-loss coverages on individually large claims as well as an overall aggregate amount
of claims. A third party administrator processes claims and payments, but does not assume
liability for benefits payable under this plan. CBIZ
assumes responsibility for funding the plan benefits out of general assets, however,
employees contribute to the costs of covered benefits through premium charges, deductibles
and co-pays.
The Companys policy is to accrue a liability for both known claims and for estimated claims
that have been incurred but not reported, as of each reporting date. The third party
administrator provides the Company with reports and other information which provides a basis
for the estimate of the liability at the end of each reporting period. Although management
believes that it uses the best available information to determine the amount of the
liability, unforeseen health claims could result in adjustments to the
|
11
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
estimated expense if
circumstances differ from the assumptions used in estimating the liability. CBIZs net
healthcare costs include health claims expenses, premiums for the stop-loss coverages and
administration fees to the third-party administrator. |
|
|
|
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. |
|
7. |
|
Financial Instruments |
|
|
|
Auction Rate Securities |
|
|
|
At December 31, 2007, the fair value of our investments in Auction Rate Securities (ARS)
approximated face value and totaled $22.5 million. These ARS were recorded as Funds held
for clients current in the consolidated balance sheets. There were no impairment charges
recorded for our investments in ARS during the year ended December 31, 2007. |
|
|
|
As a result of recent liquidity issues experienced in the credit and capital markets, CBIZs
ARS have experienced failed auctions during the first six months of 2008 and one of the
investments was downgraded below the minimum rating required by the Companys investment
policy. While CBIZ continues to earn and receive interest on these investments at the
contractual rates, the estimated fair value of our investments in ARS no longer approximates
their face value. |
|
|
|
CBIZ determined the declines in fair value to be
temporary and recorded the declines as unrealized losses in accumulated other comprehensive
loss. As of June 30, 2008, CBIZ recorded unrealized losses totaling $1.6 million compared to
$2.1 million at March 31, 2008. The fair value of ARS outstanding at
June 30, 2008 was 91.7% of face value compared to 90.3% at March 31, 2008. During the three
months ended June 30, 2008, two ARS were redeemed at face value. |
|
|
|
CBIZ reclassified $17.8 million ARS with maturity dates beyond June 30, 2009, from current
assets (Funds held for clients current) to non-current assets
(Funds held for clients non-current), as CBIZ intends and has the ability to hold these investments until
anticipated recovery in value occurs. |
|
|
|
Interest Rate Swap |
|
|
|
In December 2007, effective January 3, 2008, CBIZ entered into a two-year, zero-cost
interest rate swap (swap) for the purpose of managing cash flow and interest rate
variability on a portion of outstanding borrowings under the credit facility. CBIZ does not
enter into derivative instruments for trading or speculative purposes. |
|
|
|
Under the terms of the swap agreement, CBIZ pays interest at a fixed rate of 3.9% plus
applicable margin under the credit agreement, and receives interest payments that are
variable with one-month
LIBOR. Interest is calculated by reference to the $10.0 million notional amount of the swap
and payments are exchanged each month. During the three months and six months ended June 30,
2008, CBIZ recorded additional interest expense of approximately $31,000 and $37,000,
respectively, related to the swap agreement. |
|
|
|
CBIZ designated the swap as a cash flow hedge and accounts for the swap in accordance with
the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities and related
|
12
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
amendments and interpretations. Accordingly, the interest rate swap
is recorded as either an asset or liability in the consolidated balance sheets at fair
value. Changes in fair value are recorded as a component of accumulated other comprehensive
income in stockholders equity, net of tax, to the extent the swap is effective. Amounts
recorded to accumulated other comprehensive income are reclassified to interest expense as
interest on the hedged borrowings is recognized. Net amounts due related to the swap are
recorded as adjustments to interest expense when earned or payable. Any ineffective portion
of the swap is recorded to interest expense. |
|
|
|
The fair value of the swap is included in other non-current liabilities on the
consolidated balance sheets and was $0.1 million at June 30, 2008. Fair value represents the
amount that CBIZ would have to pay to terminate the swap agreement at the reporting date.
Over the next 12 months, CBIZ expects to reclassify approximately $0.1 million of deferred
losses from accumulated other comprehensive loss to interest expense as related interest
payments that are being hedged are recognized.
The swap is assessed for effectiveness and continued qualification for hedge accounting on a
quarterly basis, and if the swap were to be de-designated as a hedge it would be accounted
for as a financial instrument used for trading. There was no ineffectiveness for the first
six months of 2008. |
|
8. |
|
Fair Value Measurements |
|
|
|
As discussed in Note 1, SFAS No. 157 was adopted for measuring and reporting financial
assets and liabilities in the Companys financial statements beginning January 1, 2008. SFAS
No. 157 establishes a three-level valuation hierarchy for disclosure of fair value
measurements. The valuation hierarchy categorizes assets and liabilities measured at fair
value into one of three different levels depending on the observability of the inputs
employed in the measurement. The three levels are defined as follows: |
|
|
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets. |
|
|
|
|
Level 2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full term
of the financial instrument. |
|
|
|
|
Level 3 inputs to the valuation methodology are unobservable and are
significant to the fair value measurement. |
|
|
A financial instruments categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement. The Companys
assessment of the significance of a particular input to the fair value measurement in its
entirety requires judgment and considers factors specific to the asset or liability. The
following table summarizes CBIZs assets and liabilities at June 30, 2008 that are measured
at fair value on a recurring basis subsequent to initial recognition, and indicates the fair
value hierarchy of the valuation techniques utilized by the Company to determine such fair
value (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2008 with |
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
Portion of |
|
in Active |
|
Significant |
|
|
|
|
Carrying Value |
|
Markets for |
|
Other |
|
Significant |
|
|
Measured at |
|
Identical |
|
Observable |
|
Unobservable |
|
|
Fair Value |
|
Assets |
|
Inputs |
|
Inputs |
|
|
June 30, 2008 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Assets of deferred
compensation plan |
|
$ |
24,356 |
|
|
$ |
24,356 |
|
|
$ |
|
|
|
$ |
|
|
Auction rate
securities |
|
$ |
19,380 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,767 |
|
Interest rate swap |
|
$ |
(125 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(125 |
) |
13
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
The following table summarizes the change in fair values of the Companys assets and
liabilities identified as Level 3 for the six months ended June 30, 2008 (pre-tax basis) (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
Auction Rate |
|
|
Interest Rate |
|
|
|
Securities |
|
|
Swap |
|
Beginning balance January 1, 2008 |
|
$ |
|
|
|
$ |
|
|
Transfers into Level 3 |
|
|
21,420 |
|
|
|
|
|
Redemption of securities |
|
|
(2,040 |
) |
|
|
|
|
Unrealized losses included in accumulated other
comprehensive loss |
|
|
(1,613 |
) |
|
|
(125 |
) |
|
|
|
|
|
|
|
Ending balance June 30, 2008 |
|
$ |
17,767 |
|
|
$ |
(125 |
) |
|
|
|
|
|
|
|
|
|
Due to the liquidity issues described in Note 7 and because quoted prices from
broker-dealers were unavailable for CBIZs ARS, the majority of the investments in ARS were
transferred from Level 2 to Level 3 during the first six months of 2008. Accordingly, a fair
value assessment of these securities was performed in accordance with SFAS No. 157. The
assessment was performed on each security based on a discounted cash flow model utilizing
various assumptions that included maximum interest rates for each issue, probabilities of
successful auctions, failed auctions or default, the timing of cash flows, the quality and
level of collateral of the securities, and the rate of recovery from bond insurers in the
event of default. According to the fair value analysis, fair value of the ARS were 91.7% of
face value, resulting in a $1.6 million temporary impairment at June 30, 2008. |
|
|
|
CBIZ has determined that the impairment is temporary due to the recent dislocation in the
credit markets, the quality of the investments and their underlying collateral, and the
probability of a passed auction or redemption in the future, considering the issuers
ability to refinance if necessary. In addition, CBIZ has sufficient liquidity in its client
fund assets to fund client obligations and the Company does not anticipate that the current
lack of liquidity of these investments will affect its ability to conduct business.
Therefore, CBIZ has the ability and intent to hold the ARS until anticipated recovery in
value occurs. The decline in fair value has been recorded as an unrealized loss in
accumulated other comprehensive loss, net of income taxes. |
|
9. |
|
Other Comprehensive Income |
|
|
|
Other comprehensive income is reflected as an increase to stockholders equity and is not
reflected in CBIZs results of operations. Other comprehensive income for the three and six
months ended June 30, 2008 and 2007 was as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
SIX MONTHS ENDED |
|
|
|
JUNE 30, |
|
|
JUNE 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
7,286 |
|
|
$ |
9,830 |
|
|
$ |
24,067 |
|
|
$ |
24,094 |
|
Net
unrealized gains (losses) on available-for-sale securities, net of income tax |
|
|
277 |
|
|
|
|
|
|
|
(975 |
) |
|
|
6 |
|
Net unrealized gain (loss) on interest rate
swap, net of income tax |
|
|
106 |
|
|
|
|
|
|
|
(79 |
) |
|
|
|
|
Foreign currency translation |
|
|
(12 |
) |
|
|
(4 |
) |
|
|
(28 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
$ |
7,657 |
|
|
$ |
9,826 |
|
|
$ |
22,985 |
|
|
$ |
24,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, net of tax, was approximately $1.2 million and $0.1
million at June 30, 2008 and December 31, 2007, respectively. Accumulated other
comprehensive loss consisted of adjustments, net of tax, to: unrealized gains and losses on
available-for-sale securities, the interest rate swap, and foreign currency translation.
|
14
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
10. |
|
Employer Share Plans |
|
|
|
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 CBIZs Annual Report on
Form 10-K for the year ended December 31, 2007. The terms and vesting schedules for
stock-based awards vary by type and date of grant. In accordance with SFAS No. 123 (revised
2004), Share-Based Payment, compensation expense for stock-based awards recognized during
the three and six months ended June 30, 2008 and 2007 was as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
SIX MONTHS ENDED |
|
|
|
JUNE 30, |
|
|
JUNE 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Stock options |
|
$ |
751 |
|
|
$ |
400 |
|
|
$ |
1,160 |
|
|
$ |
790 |
|
Restricted stock awards |
|
|
402 |
|
|
|
189 |
|
|
|
664 |
|
|
|
296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense |
|
$ |
1,153 |
|
|
$ |
589 |
|
|
$ |
1,824 |
|
|
$ |
1,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock award activity during the six months ended June 30, 2008 was as follows (in thousands,
except per share data): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
Restricted Stock |
|
|
Options |
|
Awards |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
Average |
|
|
Number |
|
Exercise |
|
Number |
|
Grant-Date |
|
|
of |
|
Price Per |
|
of |
|
Fair |
|
|
Options |
|
Share |
|
Shares |
|
Value (1) |
Outstanding at beginning of year |
|
|
3,638 |
|
|
$ |
5.43 |
|
|
|
516 |
|
|
$ |
6.28 |
|
Granted |
|
|
1,274 |
|
|
$ |
8.24 |
|
|
|
327 |
|
|
$ |
8.33 |
|
Exercised |
|
|
(980 |
) |
|
$ |
3.61 |
|
|
|
|
|
|
$ |
|
|
Released |
|
|
|
|
|
$ |
|
|
|
|
(203 |
) |
|
$ |
6.06 |
|
Expired or canceled |
|
|
(59 |
) |
|
$ |
6.30 |
|
|
|
(7 |
) |
|
$ |
8.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30,
2008 |
|
|
3,873 |
|
|
$ |
6.79 |
|
|
|
633 |
|
|
$ |
7.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2008 |
|
|
1,419 |
|
|
$ |
5.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents weighted average market value of the shares; awards are granted at
no cost to the recipients. |
|
|
CBIZ had approximately 8.4 million shares available for future grant under the stock option
plans at June 30, 2008. |
15
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
11. |
|
Earnings Per Share |
|
|
|
The following table sets forth the computation of basic and diluted earnings per share for
the three and six months ended June 30, 2008 and 2007 (in thousands, except per share
data). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
SIX MONTHS ENDED |
|
|
|
JUNE 30, |
|
|
JUNE 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations after income
tax expense |
|
$ |
7,473 |
|
|
$ |
6,503 |
|
|
$ |
24,701 |
|
|
$ |
21,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares |
|
|
61,830 |
|
|
|
65,142 |
|
|
|
62,544 |
|
|
|
65,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options (1) |
|
|
484 |
|
|
|
1,033 |
|
|
|
609 |
|
|
|
1,196 |
|
Restricted stock awards |
|
|
120 |
|
|
|
112 |
|
|
|
163 |
|
|
|
121 |
|
Contingent shares (2) |
|
|
6 |
|
|
|
172 |
|
|
|
4 |
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted weighted average
common shares |
|
|
62,440 |
|
|
|
66,459 |
|
|
|
63,320 |
|
|
|
67,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing
operations |
|
$ |
0.12 |
|
|
$ |
0.10 |
|
|
$ |
0.39 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing
operations |
|
$ |
0.12 |
|
|
$ |
0.10 |
|
|
$ |
0.39 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A total of 2.2 million and 1.6 million options were excluded from the
calculation of diluted earnings per share for the three and six months ended June 30,
2008, respectively, and a total of 1.6 million options were excluded from the
calculation of diluted earnings per share for the three and six months ended June 30,
2007, respectively, as their exercise prices would render them anti-dilutive. |
|
(2) |
|
Contingent shares represent additional shares to be issued for purchase price
earned by former owners of businesses acquired by CBIZ once future conditions have
been met. |
12. |
|
Acquisitions |
|
|
|
During the six months ended June 30, 2008, CBIZ acquired a payroll business, an insurance
agency and a national executive search firm, all three of which are reported in the
Employee Services practice group. The payroll business is located in Palm Desert,
California and provides payroll processing services to a large number of clients primarily
in California and Arizona. The insurance business is located in Frederick, Maryland and is
a broker of innkeepers insurance programs. The national executive search firm is
headquartered in Overland Park, Kansas and provides services to commercial and industrial
companies, development-stage organizations and non-profit organizations. In addition, CBIZ
acquired two client lists during the six months ended June 30, 2008, one of which is
reported in the Financial Services practice group and the other is reported in the Employee
Services practice group. Aggregate consideration for these acquisitions consisted of
approximately $9.5 million in cash and approximately 23,600 shares of common stock paid at
closing, and up to an additional $7.9 million
in cash and approximately 25,900 shares of common stock which is contingent upon future
financial performance of the acquired businesses and client lists. In addition, CBIZ paid
approximately $11.1 million in cash and issued approximately 80,500 shares of common stock
during the first six months of 2008 as contingent proceeds for previous acquisitions. |
|
|
|
During the six months ended June 30, 2007, CBIZ acquired an accounting firm and a medical
billing service company. The accounting firm is located in Phoenix, Arizona and is reported
in the Financial |
16
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
Services practice group. The medical billing services company is based in
Montgomery, Alabama and is reported in the Medical Management Professionals practice group.
In addition, CBIZ acquired three client lists during the six months ended June 30, 2007,
two of which are reported in the Financial Services practice group and the other is
reported in the Employee Services practice group. Aggregate consideration for the
acquisitions consisted of approximately $10.4 million in cash and 62,400 shares of common
stock paid at closing, and up to an additional $8.8 million (payable in cash and common
stock) which is contingent on certain future revenue and earnings targets. In addition,
CBIZ paid approximately $8.4 million in cash and issued approximately 21,800 shares of
common stock during the first half of 2007 as contingent proceeds for previous
acquisitions. |
|
|
|
The operating results of these businesses are included in the accompanying consolidated
financial statements since the dates of acquisition. Client lists and non-compete agreements
are recorded at fair value at the time of acquisition. The excess of purchase price over the
fair value of net assets acquired, (including client lists and non-compete agreements) are
allocated to goodwill. |
|
|
|
Additions to goodwill, client lists and other intangible assets resulting from acquisitions
and contingent consideration earned during the six months ended June 30, 2008 and 2007 were
as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Goodwill |
|
$ |
11,445 |
|
|
$ |
2,535 |
|
|
|
|
|
|
|
|
Client lists |
|
$ |
5,702 |
|
|
$ |
10,400 |
|
|
|
|
|
|
|
|
Other intangible assets |
|
$ |
114 |
|
|
$ |
274 |
|
|
|
|
|
|
|
|
13. |
|
Discontinued Operations and Divestitures |
|
|
|
From time to time, CBIZ divests (through sale or closure) business operations that do not
contribute to the Companys long-term objectives for growth, or that are not complementary
to its target service offerings and markets. Divestitures are classified as discontinued
operations provided they meet the criteria as provided in SFAS No. 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. |
|
|
|
Discontinued Operations |
|
|
|
Gains or losses from the sale of discontinued operations are recorded as gain (loss) on
disposal of discontinued operations, net of tax, in the accompanying consolidated
statements of operations. Proceeds that are contingent upon a divested operations actual
future performance are recorded as gain on sale of discontinued operations in the period
they are earned. |
|
|
|
During the six months ended June 30, 2008, CBIZ sold an operation from the Financial
Services practice group, closed an operation from National Practice group and received
contingent proceeds from a Financial Services operation that was sold in the third quarter
of 2007. CBIZ received cash proceeds totaling $1.6 million and recognized pre-tax losses
totaling $0.4 million as the result of these divestitures. |
|
|
|
During the six months ended June 30, 2007, CBIZ sold two operations which were previously
reported in the Financial Services and Employee Services practice groups. CBIZ received
proceeds of $14.7 million cash and $0.6 million in notes receivable, and recognized pre-tax
gains of $8.6 million as a result of these sales. |
17
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
For those businesses that qualified for treatment as discontinued operations, the assets,
liabilities and results of operations are reported separately in the accompanying
consolidated financial statements.
Revenue and losses from discontinued operations for the three and six months ended June 30,
2008 and 2007 were as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS |
|
|
SIX MONTHS |
|
|
|
ENDED JUNE 30, |
|
|
ENDED JUNE 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenue |
|
$ |
118 |
|
|
$ |
6,226 |
|
|
$ |
505 |
|
|
$ |
14,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations,
before income tax benefit |
|
$ |
(310 |
) |
|
$ |
(879 |
) |
|
$ |
(304 |
) |
|
$ |
(1,479 |
) |
Income tax benefit |
|
|
114 |
|
|
|
323 |
|
|
|
110 |
|
|
|
534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
net of tax |
|
$ |
(196 |
) |
|
$ |
(556 |
) |
|
$ |
(194 |
) |
|
$ |
(945 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on the disposal of discontinued operations for the three and six months ended
June 30, 2008 and 2007 were as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS |
|
|
SIX MONTHS |
|
|
|
ENDED JUNE 30, |
|
|
ENDED JUNE 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Gain (loss) on disposal of discontinued
operations, before income tax expense |
|
$ |
13 |
|
|
$ |
8,620 |
|
|
$ |
(365 |
) |
|
$ |
8,579 |
|
Income tax expense |
|
|
4 |
|
|
|
4,737 |
|
|
|
75 |
|
|
|
4,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal of discontinued
operations, net of tax |
|
$ |
9 |
|
|
$ |
3,883 |
|
|
$ |
(440 |
) |
|
$ |
3,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008 and December 31, 2007, the assets and liabilities of businesses classified
as discontinued operations consisted of the following (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
JUNE 30, |
|
|
DECEMBER 31, |
|
|
|
2008 |
|
|
2007 |
|
Assets: |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
520 |
|
|
$ |
1,705 |
|
Goodwill and other intangible assets, net |
|
|
|
|
|
|
569 |
|
Other assets |
|
|
32 |
|
|
|
38 |
|
|
|
|
|
|
|
|
Assets of discontinued operations |
|
$ |
552 |
|
|
$ |
2,312 |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
864 |
|
|
$ |
1,078 |
|
Other liabilities |
|
|
2,346 |
|
|
|
2,699 |
|
|
|
|
|
|
|
|
Liabilities of discontinued operations |
|
$ |
3,210 |
|
|
$ |
3,777 |
|
|
|
|
|
|
|
|
|
|
Divestitures |
|
|
|
Gains or losses from divested operations and assets that do not qualify for treatment as
discontinued operations are recorded as gain on sale of operations, net in the
consolidated statements of operations. |
|
|
|
During each of the six-month periods ended June 30, 2008 and 2007, CBIZ sold two client
lists, and recognized gains related to client lists that were sold in previous years. Gain
on sale of operations, net totaled $0.2 million and $0.1 million, for the six months ended
June 30, 2008 and 2007, respectively. Proceeds for the six months ended June 30, 2008
consisted of cash and notes, each totaling $0.1 million, and proceeds for the six months
ended June 30, 2007 consisted of cash and notes totaling $0.2 million and $0.1 million
respectively. |
18
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
In addition to the cash proceeds described under discontinued operations and
divestitures above, CBIZ received cash payments totaling $0.6 million and $1.9 million
during the six months ended June 30, 2008 and 2007, respectively, on outstanding notes
receivable related to divestitures made in previous years. The gains and losses related to
these divestitures were recorded in previous years. |
14. |
|
Segment Disclosures |
|
|
|
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 Canada. CBIZ delivers its integrated services through the following four practice
groups: Financial Services, Employee Services, Medical Management Professionals (MMP), and
National Practices. The business units have been aggregated based on the following factors:
similarity of the products and services provided to clients; similarity of the regulatory
environment; and similarity of economic conditions affecting long-term performance. The
business units are managed along these segment lines. A general description of services
provided by practice group is listed in the table below. |
Financial
Services
|
|
Accounting |
|
|
|
Tax |
|
|
|
Financial Advisory |
|
|
|
Litigation Support |
|
|
|
Valuation |
|
|
|
Internal Audit |
|
|
|
Fraud Detection |
|
|
|
Real Estate Advisory |
Employee Services
|
|
Group Health |
|
|
|
Property & Casualty |
|
|
|
COBRA / Flex |
|
|
|
Retirement Planning |
|
|
|
Wealth Management |
|
|
|
Life Insurance |
|
|
|
Human Capital Management |
|
|
|
Payroll Services |
|
|
|
Actuarial Services |
MMP
|
|
Coding and Billing |
|
|
|
Accounts Receivable Management |
|
|
|
Full Practice Management Services |
National Practices
|
|
Managed Networking and Hardware Services |
|
|
|
IT Consulting |
|
|
|
Project Management |
|
|
|
Software Solutions |
|
|
|
Mergers & Acquisitions |
|
|
|
Health Care Consulting |
|
|
Corporate and Other. Included in Corporate and Other are operating expenses that are not
directly allocated to the individual business units. These costs include items such as
incentive compensation, gains or losses attributable to assets held in the Companys
deferred compensation plan, stock based compensation, and certain advertising expenses. |
|
|
|
Accounting policies for the practice groups are the same as those described in Note 1 to the
Annual Report on Form 10-K for the year ended December 31, 2007. 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 expenses reported in the
Corporate and Other segment. |
19
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
Segment information for the three and six months ended June 30, 2008 and 2007 was as follows
(in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JUNE 30, 2008 |
|
|
|
Financial |
|
|
Employee |
|
|
|
|
|
|
National |
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
MMP |
|
|
Practices |
|
|
and Other |
|
|
Total |
|
Revenue |
|
$ |
74,955 |
|
|
$ |
47,307 |
|
|
$ |
41,899 |
|
|
$ |
11,573 |
|
|
$ |
|
|
|
$ |
175,734 |
|
Operating expenses |
|
|
65,438 |
|
|
|
38,802 |
|
|
|
36,318 |
|
|
|
10,800 |
|
|
|
3,525 |
|
|
|
154,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
9,517 |
|
|
|
8,505 |
|
|
|
5,581 |
|
|
|
773 |
|
|
|
(3,525 |
) |
|
|
20,851 |
|
Corporate general & admin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,791 |
|
|
|
7,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
9,517 |
|
|
|
8,505 |
|
|
|
5,581 |
|
|
|
773 |
|
|
|
(11,316 |
) |
|
|
13,060 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(2 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(1,880 |
) |
|
|
(1,888 |
) |
Gain on sale of operations, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221 |
|
|
|
221 |
|
Other income (expense), net |
|
|
82 |
|
|
|
354 |
|
|
|
53 |
|
|
|
2 |
|
|
|
(156 |
) |
|
|
335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
80 |
|
|
|
348 |
|
|
|
53 |
|
|
|
2 |
|
|
|
(1,815 |
) |
|
|
(1,332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income
tax expense |
|
$ |
9,597 |
|
|
$ |
8,853 |
|
|
$ |
5,634 |
|
|
$ |
775 |
|
|
$ |
(13,131 |
) |
|
$ |
11,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JUNE 30, 2007 |
|
|
|
Financial |
|
|
Employee |
|
|
|
|
|
|
National |
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
MMP |
|
|
Practices |
|
|
and Other |
|
|
Total |
|
Revenue |
|
$ |
69,112 |
|
|
$ |
42,837 |
|
|
$ |
32,116 |
|
|
$ |
12,593 |
|
|
$ |
|
|
|
$ |
156,658 |
|
Operating expenses |
|
|
59,814 |
|
|
|
34,774 |
|
|
|
27,595 |
|
|
|
10,975 |
|
|
|
5,101 |
|
|
|
138,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
9,298 |
|
|
|
8,063 |
|
|
|
4,521 |
|
|
|
1,618 |
|
|
|
(5,101 |
) |
|
|
18,399 |
|
Corporate general & admin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,408 |
|
|
|
7,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
9,298 |
|
|
|
8,063 |
|
|
|
4,521 |
|
|
|
1,618 |
|
|
|
(12,509 |
) |
|
|
10,991 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(12 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(1,674 |
) |
|
|
(1,694 |
) |
Gain on sale of operations, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
10 |
|
Other income, net |
|
|
85 |
|
|
|
466 |
|
|
|
47 |
|
|
|
3 |
|
|
|
1,387 |
|
|
|
1,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
73 |
|
|
|
458 |
|
|
|
47 |
|
|
|
3 |
|
|
|
(277 |
) |
|
|
304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income
tax expense |
|
$ |
9,371 |
|
|
$ |
8,521 |
|
|
$ |
4,568 |
|
|
$ |
1,621 |
|
|
$ |
(12,786 |
) |
|
$ |
11,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED JUNE 30, 2008 |
|
|
|
Financial |
|
|
Employee |
|
|
|
|
|
|
National |
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
MMP |
|
|
Practices |
|
|
and Other |
|
|
Total |
|
Revenue |
|
$ |
173,760 |
|
|
$ |
94,562 |
|
|
$ |
82,665 |
|
|
$ |
22,099 |
|
|
$ |
|
|
|
$ |
373,086 |
|
Operating expenses |
|
|
136,150 |
|
|
|
77,243 |
|
|
|
72,410 |
|
|
|
21,179 |
|
|
|
6,231 |
|
|
|
313,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
37,610 |
|
|
|
17,319 |
|
|
|
10,255 |
|
|
|
920 |
|
|
|
(6,231 |
) |
|
|
59,873 |
|
Corporate general & admin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,043 |
|
|
|
15,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
37,610 |
|
|
|
17,319 |
|
|
|
10,255 |
|
|
|
920 |
|
|
|
(21,274 |
) |
|
|
44,830 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(8 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
(3,584 |
) |
|
|
(3,605 |
) |
Gain on sale of operations, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241 |
|
|
|
241 |
|
Other income (expense), net |
|
|
178 |
|
|
|
808 |
|
|
|
136 |
|
|
|
15 |
|
|
|
(2,149 |
) |
|
|
(1,012 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
170 |
|
|
|
795 |
|
|
|
136 |
|
|
|
15 |
|
|
|
(5,492 |
) |
|
|
(4,376 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income
tax expense |
|
$ |
37,780 |
|
|
$ |
18,114 |
|
|
$ |
10,391 |
|
|
$ |
935 |
|
|
$ |
(26,766 |
) |
|
$ |
40,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED JUNE 30, 2007 |
|
|
|
Financial |
|
|
Employee |
|
|
|
|
|
|
National |
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
MMP |
|
|
Practices |
|
|
and Other |
|
|
Total |
|
Revenue |
|
$ |
161,144 |
|
|
$ |
87,874 |
|
|
$ |
61,724 |
|
|
$ |
24,360 |
|
|
$ |
|
|
|
$ |
335,102 |
|
Operating expenses |
|
|
125,595 |
|
|
|
70,006 |
|
|
|
54,261 |
|
|
|
21,923 |
|
|
|
10,512 |
|
|
|
282,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
35,549 |
|
|
|
17,868 |
|
|
|
7,463 |
|
|
|
2,437 |
|
|
|
(10,512 |
) |
|
|
52,805 |
|
Corporate general & admin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,090 |
|
|
|
16,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
35,549 |
|
|
|
17,868 |
|
|
|
7,463 |
|
|
|
2,437 |
|
|
|
(26,602 |
) |
|
|
36,715 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(30 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(2,928 |
) |
|
|
(2,966 |
) |
Gain on sale of operations, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105 |
|
|
|
105 |
|
Other income, net |
|
|
179 |
|
|
|
914 |
|
|
|
93 |
|
|
|
16 |
|
|
|
1,393 |
|
|
|
2,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
149 |
|
|
|
906 |
|
|
|
93 |
|
|
|
16 |
|
|
|
(1,430 |
) |
|
|
(266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income
tax expense |
|
$ |
35,698 |
|
|
$ |
18,774 |
|
|
$ |
7,556 |
|
|
$ |
2,453 |
|
|
$ |
(28,032 |
) |
|
$ |
36,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, references in this Quarterly Report on 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
June 30, 2008 and December 31, 2007, results of operations for the three and six months ended June
30, 2008 and 2007, and cash flows for the six months ended June 30, 2008 and 2007, 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 with our Annual Report on Form 10-K for the year ended
December 31, 2007.
Overview
CBIZ provides professional business services that help clients manage their finances, employees and
technology. These services are provided to businesses of various sizes, as well as individuals,
governmental entities and not-for-profit enterprises throughout the United States and Canada. CBIZ
delivers its integrated services through four practice groups. A general description of services
provided by practice group is listed in the table below.
Financial Services
|
|
Accounting |
|
|
|
Tax |
|
|
|
Financial Advisory |
|
|
|
Litigation Support |
|
|
|
Valuation |
|
|
|
Internal Audit |
|
|
|
Fraud Detection |
|
|
|
Real Estate Advisory |
Employee Services
|
|
Group Health |
|
|
|
Property & Casualty |
|
|
|
COBRA / Flex |
|
|
|
Retirement Planning |
|
|
|
Wealth Management |
|
|
|
Life Insurance |
|
|
|
Human Capital Management |
|
|
|
Payroll Services |
|
|
|
Actuarial Services |
MMP
|
|
Coding and Billing |
|
|
|
Accounts Receivable Management |
|
|
|
Full Practice Management Services |
National Practices
|
|
Managed Networking and Hardware Services |
|
|
|
IT Consulting |
|
|
|
Project Management |
|
|
|
Software Solutions |
|
|
|
Mergers & Acquisitions |
|
|
|
Health Care Consulting |
Certain external relationships, regulatory factors and economic conditions currently impacting
CBIZs operations are provided in the discussion below.
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 were approximately $20.9 million and $19.8 million for the three
months and $51.2 million and $48.0 million for the six months ended June 30, 2008 and 2007,
respectively. The majority of these fees 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 have terms ranging up
to eighteen years, are renewable upon agreement by both parties, and have 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
22
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 may 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
their 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, reviews, compilations, or other attest
services, does not contract to perform them and does not provide audit, review, compilation, or
other attest 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,
Consolidation of Variable Interest Entities (FIN 46), as amended. See further discussion in Note
1 of the consolidated financial statements included in the Annual Report on Form 10-K for the year
ended December 31, 2007.
Employee Services
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. Total revenue recognized under
these arrangements during the three and six months ended June 30, 2008 and 2007 were approximately
2% 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.
23
Medical Management Professionals
Changes in some managed care plans and federal Medicare and Medicaid physician and practice expense
reimbursement rules and rates have impacted revenues and margins in our existing physician and
medical billing and accounts receivable management business. The Deficit Reduction Act of 2005
(DRA) also provides for a reduction and cap that began in 2007 of reimbursement for certain fees
and charges related to imaging services and facilities of offices, imaging centers and independent
diagnostic testing facilities. In addition, certain managed care payors may impose precertification
and other management programs which could limit or control the use of, and reimbursement for,
imaging and diagnostic services. Certain managed care payors may institute pay for performance
and quality initiative programs that could limit or control physician, office and facility, and
practice services and procedures, as well as reimbursement costs, and replace volume-based payment
methods. Since a majority of our physician and medical billing and accounts receivable management
business is typically paid a portion of the revenue collected on behalf of our clients, any
reduction in the volume of services or reimbursement rates for such services or expenses for which
our clients are eligible to be paid may adversely affect our ability to generate revenue and
maintain margins. As part of the Companys efforts to maintain margins in this business, two
acquisitions were made during 2007. The acquired businesses were not impacted by the DRA changes in
the same magnitude as the traditional MMP operation, as the acquired businesses provide services to
physician groups specializing in emergency medicine and anesthesiology. CBIZ continuously monitors
the regulatory factors that impact the Medical Management business.
Auction Rate Securities (ARS)
As a result of the recent liquidity issues experienced in the credit and capital markets, CBIZs
ARS have experienced failed auctions during the first six months of 2008 and one of the investments
was downgraded below the minimum rating required by the Companys investment policy. While CBIZ
continues to earn and receive interest on these investments at the contractual rates, the estimated
fair value of our investments in ARS no longer approximates face value.
CBIZ
determined the declines in fair value to be temporary
and recorded the declines as unrealized losses in accumulated other
comprehensive loss. As of June 30, 2008, CBIZ recorded unrealized losses totaling $1.6 million compared to $2.1 million at March 31, 2008. The fair value of ARS outstanding at June 30, 2008 was
91.7% of face value compared to 90.3% at March 31, 2008. During the three months ended June 30,
2008, two ARS were redeemed at face value.
CBIZ reclassified $17.8 million of ARS with maturity dates beyond June 30, 2009 from current assets
(Funds held for clients current) to non-current assets (Funds held for clients non-current), as
CBIZ intends and has the ability to hold these investments until anticipated recovery in value
occurs.
CBIZ continues to monitor the market for ARS and consider its impact on the fair value of its
investments. If the current market conditions deteriorate further, or the anticipated recovery in
fair values does not occur, CBIZ may be required to record additional unrealized losses in other
comprehensive income or impairment charges which would be recorded against net income in future
periods. The principal associated with failed auctions will not be accessible until successful
auctions occur, a buyer is found outside of the auction process, the issuers establish a different
form of financing to replace these securities, issuers repay principal over time from cash flows
prior to final maturity, or final payments come due according to contractual maturities ranging
from 20 to 40 years. We understand that issuers and financial markets are working on alternatives
that may improve liquidity, although it is not yet clear when or if such efforts will be
successful. We expect that over time we will recover our investment associated with these ARS
through one of the means described above.
24
Executive Summary
CBIZ acquired three businesses during the first six months of 2008. One business is located in Palm
Desert, California and offers payroll processing services. The second business is located in
Frederick, Maryland and provides insurance programs to the innkeepers industry. The third business
is headquartered in Overland Park, Kansas and provides executive search services to various
companies and organizations. All three businesses are reported in the Employee Services practice
group.
During the first six months of 2008, CBIZ committed to the divestiture of two businesses and
classified them as discontinued operations. These businesses were formerly reported in the
Financial Services and National Practices groups. See Note 13 to the accompanying consolidated
financial statements for further disclosure.
CBIZ believes that repurchasing shares of its common stock is a use of cash that provides value to
its shareholders and, accordingly, CBIZ purchased approximately 3.8 million shares of its common
stock at a total cost of $33.0 million during the six months ended June 30, 2008.
Effective April 3, 2008, CBIZ entered into an agreement to amend its credit facility with Bank of
America, N.A. and other participating banks. The amendment serves to increase the commitment from
$100.0 million to $150.0 million.
Effective January 1, 2008, CBIZ converted its comprehensive health benefit plan from a
fully-insured plan to a self-funded program. The financial statements reflect accrued liabilities
and expenses for this plan, with the liability based on estimates of costs to settle known claims
as well as incurred but not reported claims. CBIZ maintains stop-loss coverage with third-party
insurers to limit the exposure for both individually significant claims and the overall aggregate
amount of claims made under the self-funded plan.
In July 2008, the Internal Revenue Service completed its examination of the Companys federal
income tax returns for the years 2003 through 2006. The Company paid $0.1 million in May 2008 and
$0.8 million in July 2008 to settle the audits. The May
settlement was less than the Company estimated in its previous tax
provisions and therefore reduced the second quarter tax expense. The
July settlement will reduce tax expense in the third quarter.
On May 15, 2008, CBIZ announced the appointment of Ms. Benaree Pratt Wiley as a director of the
Company. The appointment brings the total number of directors on CBIZs board to nine, eight of
whom are independent directors.
Results of Operations Continuing Operations
Same-unit revenue represents total revenue adjusted to reflect comparable periods of activity for
acquisitions and divestitures. For example, for a business acquired on June 1, 2007, revenue for
the month of June would be included in same-unit revenue for both years; revenue for the period
January 1, 2008 through May 31, 2008 would be reported as revenue from acquired businesses. Revenue
from divested operations represents operations that were sold or closed and did not meet the
criteria for treatment as discontinued operations.
25
Three Months Ended June 30, 2008 and 2007
Revenue
The following table summarizes total revenue for the three months ended June 30, 2008 and 2007 (in
thousands, except percentages).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
$ |
|
|
% |
|
|
|
2008 |
|
|
Total |
|
|
2007 |
|
|
Total |
|
|
Change |
|
|
Change |
|
Same-unit revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services |
|
$ |
74,955 |
|
|
|
42.7 |
% |
|
$ |
69,112 |
|
|
|
44.1 |
% |
|
$ |
5,843 |
|
|
|
8.5 |
% |
Employee
Services |
|
|
44,962 |
|
|
|
25.6 |
% |
|
|
42,837 |
|
|
|
27.4 |
% |
|
|
2,125 |
|
|
|
5.0 |
% |
MMP |
|
|
34,190 |
|
|
|
19.4 |
% |
|
|
32,116 |
|
|
|
20.5 |
% |
|
|
2,074 |
|
|
|
6.5 |
% |
National Practices |
|
|
11,573 |
|
|
|
6.6 |
% |
|
|
12,593 |
|
|
|
8.0 |
% |
|
|
(1,020 |
) |
|
|
(8.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total same-unit
revenue |
|
|
165,680 |
|
|
|
94.3 |
% |
|
|
156,658 |
|
|
|
100.0 |
% |
|
|
9,022 |
|
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
businesses |
|
|
10,054 |
|
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
10,054 |
|
|
|
|
|
Divested
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue |
|
$ |
175,734 |
|
|
|
100.0 |
% |
|
$ |
156,658 |
|
|
|
100.0 |
% |
|
$ |
19,076 |
|
|
|
12.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A detailed discussion of revenue by practice group is included under Operating Practice Groups
below.
Gross margin and operating expenses The majority of CBIZs operating expenses are relatively
fixed in the short term, thus gross margin as a percentage of revenue generally improves with
revenue growth. The primary components of operating expenses for the three months ended June 30,
2008 and 2007 are illustrated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
Change in |
|
|
|
Operating |
|
|
% of |
|
|
Operating |
|
|
% of |
|
|
% of |
|
|
|
Expense |
|
|
Revenue |
|
|
Expense |
|
|
Revenue |
|
|
Revenue |
|
Personnel costs |
|
|
72.5 |
% |
|
|
63.9 |
% |
|
|
73.5 |
% |
|
|
64.9 |
% |
|
|
(1.0 |
)% |
Occupancy costs |
|
|
6.5 |
% |
|
|
5.7 |
% |
|
|
6.5 |
% |
|
|
5.7 |
% |
|
|
|
|
Other (1) |
|
|
21.0 |
% |
|
|
18.5 |
% |
|
|
20.0 |
% |
|
|
17.7 |
% |
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
88.1 |
% |
|
|
|
|
|
|
88.3 |
% |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
|
|
|
|
11.9 |
% |
|
|
|
|
|
|
11.7 |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other operating expenses include office expense, depreciation and amortization
expense, equipment costs, professional fees and other expenses, none of which are
individually significant as a percentage of total operating expenses. |
Personnel costs as a percentage of revenue declined 1.0% to 63.9% for the three months ended June
30, 2008 compared to the same period in 2007. The decline in personnel costs was primarily the
result of adjustments to the fair value of investments held in relation to the deferred
compensation plan which are recorded as compensation expense. These adjustments are offset by the
same adjustments to other income (expense), and thus do not have an impact on net income. Although
these adjustments are recorded as operating expenses, they are not allocated to the individual
practice groups. The increase or decrease in personnel costs as a percentage of revenue experienced
by the individual practice groups is discussed in further detail under Operating Practice Groups
below.
Corporate general and administrative expense Corporate general and administrative (G&A)
expenses increased by $0.4 million to $7.8 million for the three months ended June 30, 2008, from
$7.4 million for the comparable period of 2007. The primary components of corporate general and
administrative expenses for the three months ended June 30, 2008 and 2007 are illustrated below:
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
Change in |
|
|
|
G&A |
|
|
% of |
|
|
G&A |
|
|
% of |
|
|
% of |
|
|
|
Expense |
|
|
Revenue |
|
|
Expense |
|
|
Revenue |
|
|
Revenue |
|
Personnel costs |
|
|
53.3 |
% |
|
|
2.4 |
% |
|
|
49.9 |
% |
|
|
2.4 |
% |
|
|
|
|
Depreciation and amortization |
|
|
3.9 |
% |
|
|
0.2 |
% |
|
|
8.0 |
% |
|
|
0.4 |
% |
|
|
(0.2 |
)% |
Professional services |
|
|
20.0 |
% |
|
|
0.9 |
% |
|
|
10.9 |
% |
|
|
0.5 |
% |
|
|
0.4 |
% |
Other (1) |
|
|
22.8 |
% |
|
|
0.9 |
% |
|
|
31.2 |
% |
|
|
1.4 |
% |
|
|
(0.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate general and
administrative expenses |
|
|
|
|
|
|
4.4 |
% |
|
|
|
|
|
|
4.7 |
% |
|
|
(0.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other corporate general and administrative expenses include office expense,
equipment and computer expenses, insurance expense and other expenses, none of which
are individually significant as a percentage of total corporate general and
administrative expenses. |
The increase in professional services primarily related to legal fees and were offset by a similar
decrease in legal settlements which are included in other G&A expense.
Interest expense Interest expense was $1.9 million and $1.7 million for the three months ended
June 30, 2008 and 2007, respectively. Average debt was $171.2 million for the three months ended
June 30, 2008, compared to $132.9 million for the comparable period in 2007, and weighted-average
interest rates were 3.8% and 4.2% during the three months ended June 30, 2008 and 2007,
respectively.
Other income (expense), net Other income (expense), net is comprised of interest income,
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. CBIZ recognized a loss on the investments in its deferred
compensation plan of $0.1 million for the second quarter of 2008 versus a gain of $1.2 million for
the comparable period in 2007. These adjustments do not impact CBIZs net income as they are offset
by the same adjustments to compensation expense which is recorded as operating and corporate
general administrative expenses in the consolidated statements of operations.
Income tax expense CBIZ recorded income tax expense from continuing operations of $4.3 million
and $4.8 million for the three months ended June 30, 2008 and 2007, respectively. The effective tax
rate for the three months ended June 30, 2008 was 36.3%, compared to an effective rate of 42.4% for
the comparable period in 2007. The decrease in the effective tax rate for the second quarter of
2008 versus the comparable period in 2007 was primarily attributable to a favorable settlement of a
portion of the IRS audit during the second quarter of 2008.
Operating Practice Groups
CBIZ delivers its integrated services through four practice groups: Financial Services, Employee
Services, Medical Management Professionals (MMP) and National Practices. A brief description of
these groups operating results and factors affecting their businesses is provided below.
27
Financial Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands, except percentages) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-unit |
|
$ |
74,955 |
|
|
$ |
69,112 |
|
|
$ |
5,843 |
|
|
|
8.5 |
% |
Acquired businesses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divested operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
74,955 |
|
|
$ |
69,112 |
|
|
$ |
5,843 |
|
|
|
8.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
65,438 |
|
|
|
59,814 |
|
|
|
5,624 |
|
|
|
9.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
9,517 |
|
|
$ |
9,298 |
|
|
$ |
219 |
|
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percent |
|
|
12.7 |
% |
|
|
13.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 60% of the growth in same-unit revenue was attributable to an increase in the
aggregate number of hours charged to clients for consulting, valuation and litigation support
services, and 40% was attributable to price increases for traditional accounting and tax services.
The largest components of operating expenses for the Financial Services practice group are
personnel costs, occupancy costs and travel related expenses, representing 89.5% and 89.1% of total
operating expenses for the second quarters of 2008 and 2007, respectively. Personnel costs
increased $4.8 million to 69.0% of revenue for the second quarter of 2008 from 67.9% for the
comparable period in 2007. The increase in personnel costs was primarily related to annual merit
increases to existing employees and salaries and benefits for new employees as CBIZ expanded its
professional workforce to accommodate revenue growth. Travel related expenses increased $0.4
million to 3.6% of revenue for the second quarter of 2008 from 3.3% for the comparable period in
2007 primarily due to the timing of training classes for CBIZ professionals that have historically
been held in the second half of the year. Occupancy costs are relatively fixed in nature and were
5.6% and 5.9% of revenue for second quarters of 2008 and 2007, respectively.
Gross margin as a percentage of revenue decreased 0.8% for the three months ended June 30, 2008
from the comparable period in 2007 primarily as a result of the increase in personnel costs.
Employee Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands, except percentages) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-unit |
|
$ |
44,962 |
|
|
$ |
42,837 |
|
|
$ |
2,125 |
|
|
|
5.0 |
% |
Acquired businesses |
|
|
2,345 |
|
|
|
|
|
|
|
2,345 |
|
|
|
|
|
Divested operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
47,307 |
|
|
$ |
42,837 |
|
|
$ |
4,470 |
|
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
38,802 |
|
|
|
34,774 |
|
|
|
4,028 |
|
|
|
11.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
8,505 |
|
|
$ |
8,063 |
|
|
$ |
442 |
|
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percent |
|
|
18.0 |
% |
|
|
18.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in same-unit revenue was primarily attributable to growth in the Companys payroll
service and specialty life insurance businesses. Retail growth slowed in the second quarter of 2008
primarily due to the impact of soft market conditions in pricing for property and casualty
insurance and a decline in asset values which impacted revenues from the Companys retirement
investment advisory services. Same-unit payroll service revenue increased approximately 9%
primarily as a result of an increase in number of clients served and related volume increases. The
specialty life business closed several new cases resulting
28
in an approximate 38% increase in
revenue over the comparable period in 2007. The specialty life business is more volatile than the
Companys core retail businesses, and as such, quarterly revenue in any given period can vary
significantly. The growth in revenue from acquired businesses was provided by a property and
casualty business in Frederick, Maryland, a payroll services business in Palm Desert, California,
and a specialty recruiting business headquartered in Overland Park, Kansas, all of which were
acquired during the first six months of 2008.
The largest components of operating expenses for the Employee Services practice group are personnel
costs, including commissions paid to third party brokers, and occupancy costs, representing 82.3%
and 82.9% of total operating expenses for the second quarters of 2008 and 2007, respectively.
Personnel costs increased $2.8 million to 62.2% of revenue for the second quarter of 2008 from
62.0% for the comparable period in 2007. Acquired businesses contributed $1.2 million of the
increase in personnel costs, and sales-based compensation, which is variable in nature, increased
by approximately $0.6 million which is proportionate to the increase in commissionable revenues.
The increase in personnel costs as a percentage of revenue was primarily related to merit increases
and investments in additional personnel to support growth of the business. Occupancy costs
increased $0.3 million due to the acquired businesses.
Gross margin as a percentage of revenue decreased by 0.8% for the second quarter of 2008 from the
comparable period in 2007. The decline in gross margin was primarily due to the revenue challenges
caused by property and casualty market conditions, declines in asset-based income, and the
investments in personnel.
Medical Management Professionals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands, except percentages) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-unit |
|
$ |
34,190 |
|
|
$ |
32,116 |
|
|
$ |
2,074 |
|
|
|
6.5 |
% |
Acquired businesses |
|
|
7,709 |
|
|
|
|
|
|
|
7,709 |
|
|
|
|
|
Divested operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
41,899 |
|
|
$ |
32,116 |
|
|
$ |
9,783 |
|
|
|
30.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
36,318 |
|
|
|
27,595 |
|
|
|
8,723 |
|
|
|
31.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
5,581 |
|
|
$ |
4,521 |
|
|
$ |
1,060 |
|
|
|
23.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percent |
|
|
13.3 |
% |
|
|
14.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The growth in same-unit revenue relates to new business, and revenue from existing clients for the
second quarter of 2008 was consistent with the second quarter of 2007. Growth in revenue from
acquired businesses was primarily provided by a business headquartered in Ponte Vedra Beach,
Florida which provides coding, billing and accounts receivable management services for emergency
medicine physician practices along the east coast of the United States. This business was acquired
in the fourth quarter of 2007.
The largest components of operating expenses for MMP are personnel costs, occupancy costs and
office expenses (primarily postage related to statement mailing
services provided to clients), representing 81.7% and
85.2% of total operating expenses for the second quarters of 2008 and 2007, respectively. Personnel
costs increased $4.6 million, but declined as a percentage of revenue to 55.8% for the second
quarter of 2008 from 58.6% for the comparable period in 2007. Acquired businesses contributed $3.5
million of the increase in personnel costs with the remainder being attributable to annual merit
increases to existing employees and salaries and benefits for new employees. MMP added client
service personnel to support the growth in same-unit revenue, and added internal support personnel
to position the unit for continued growth. The improvement in personnel costs as a percentage of
revenue relates to the business that was acquired in the fourth quarter of 2007 as this business
utilizes off-shore resources in a greater capacity than the traditional MMP operation.
29
Occupancy costs and office expenses each increased by approximately $0.8 million for the second
quarter of 2008 versus the comparable period in 2007, primarily as the result of acquired
businesses. Occupancy costs also increased as MMP opened additional office locations subsequent to
June 30, 2007 in order to support new business.
The decline in gross margin for the second quarter of 2008 versus the comparable period in 2007 was
primarily attributable to costs associated with the transition to off-shoring in MMPs traditional
operations. The transition to off-shoring resulted in a duplication of costs as an increase in
third party processing fees was not offset by a simultaneous reduction in internal resources and
related costs. The duplication of costs is not expected to continue after the transition period
and the utilization of off-shore resources is expected to result in margin improvement over time.
National Practices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands, except percentages) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-unit |
|
$ |
11,573 |
|
|
$ |
12,593 |
|
|
$ |
(1,020 |
) |
|
|
(8.1 |
)% |
Acquired businesses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divested operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
11,573 |
|
|
$ |
12,593 |
|
|
$ |
(1,020 |
) |
|
|
(8.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
10,800 |
|
|
|
10,975 |
|
|
|
(175 |
) |
|
|
(1.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
773 |
|
|
$ |
1,618 |
|
|
$ |
(845 |
) |
|
|
(52.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percent |
|
|
6.7 |
% |
|
|
12.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in revenue was primarily attributable to the technology businesses and consisted of
declines in product, service agreement and consulting revenue of $0.2 million, $0.2 million and
$0.3 million, respectively. The decline in product and consulting revenue relates to delays in
larger capital projects as clients are deferring investment decisions in response to the current
economic environment.
The largest components of operating expenses for the National Practices group are personnel costs,
direct costs and occupancy costs, representing 93.0% and 92.6% of total operating expenses for the
second quarters of 2008 and 2007, respectively. Personnel costs increased $0.3 million to 67.9% of
revenue for the second quarter of 2008 from 60.1% of revenue for the comparable period in 2007. The
increase in personnel costs primarily relates to annual merit increases and an overall increase in
headcount in the technology businesses. Direct costs decreased $0.4 million to 16.0% of revenue for
the second quarter of 2008 from 18.0% of revenue for the comparable period in 2007, and primarily
related to product costs, sales commissions and third party labor. Product costs and sales
commissions are variable with product sales and thus decreased as the result of the decline in
product sales. Occupancy costs are relatively fixed in nature and were $0.3 million for the second
quarters of 2008 and 2007.
The decline in gross margin was due to the overall decline in revenue. As personnel and facilities
costs are relatively fixed in the short-term, margins generally improve with revenue growth and
deteriorate when revenue declines.
30
Six Months Ended June 30, 2008 and 2007
Revenue
The following table summarizes total revenue for the six months ended June 30, 2008 and 2007 (in
thousands, except percentages).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
$ |
|
|
% |
|
|
|
2008 |
|
|
Total |
|
|
2007 |
|
|
Total |
|
|
Change |
|
|
Change |
|
Same-unit revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services |
|
$ |
173,760 |
|
|
|
46.6 |
% |
|
$ |
161,144 |
|
|
|
48.1 |
% |
|
$ |
12,616 |
|
|
|
7.8 |
% |
Employee
Services |
|
|
91,146 |
|
|
|
24.4 |
% |
|
|
87,874 |
|
|
|
26.2 |
% |
|
|
3,272 |
|
|
|
3.7 |
% |
MMP |
|
|
66,031 |
|
|
|
17.7 |
% |
|
|
61,724 |
|
|
|
18.4 |
% |
|
|
4,307 |
|
|
|
7.0 |
% |
National Practices |
|
|
22,099 |
|
|
|
5.9 |
% |
|
|
24,360 |
|
|
|
7.3 |
% |
|
|
(2,261 |
) |
|
|
(9.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total same-unit
revenue |
|
|
353,036 |
|
|
|
94.6 |
% |
|
|
335,102 |
|
|
|
100.0 |
% |
|
|
17,934 |
|
|
|
5.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
businesses |
|
|
20,050 |
|
|
|
5.4 |
% |
|
|
|
|
|
|
|
|
|
|
20,050 |
|
|
|
|
|
Divested
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue |
|
$ |
373,086 |
|
|
|
100.0 |
% |
|
$ |
335,102 |
|
|
|
100.0 |
% |
|
$ |
37,984 |
|
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A detailed discussion of revenue by practice group is included under Operating Practice Groups
below.
Gross margin and operating expenses The majority of CBIZs operating expenses are relatively
fixed in the short term, thus gross margin as a percentage of revenue generally improves with
revenue growth. The primary components of operating expenses for the six months ended June 30, 2008
and 2007 are illustrated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
Change in |
|
|
|
Operating |
|
|
% of |
|
|
Operating |
|
|
% of |
|
|
% of |
|
|
|
Expense |
|
|
Revenue |
|
|
Expense |
|
|
Revenue |
|
|
Revenue |
|
Personnel costs |
|
|
73.1 |
% |
|
|
61.4 |
% |
|
|
73.6 |
% |
|
|
62.0 |
% |
|
|
(0.6 |
)% |
Occupancy costs |
|
|
6.4 |
% |
|
|
5.4 |
% |
|
|
6.4 |
% |
|
|
5.4 |
% |
|
|
|
|
Other (1) |
|
|
20.5 |
% |
|
|
17.2 |
% |
|
|
20.0 |
% |
|
|
16.8 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
84.0 |
% |
|
|
|
|
|
|
84.2 |
% |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
|
|
|
|
16.0 |
% |
|
|
|
|
|
|
15.8 |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other operating expenses include office expense, depreciation and amortization
expense, equipment costs, professional fees and other expenses, none of which are
individually significant as a percentage of total operating expenses. |
Personnel costs as a percentage of revenue declined 0.6% to 61.4% for the six months ended June 30,
2008 compared to the same period in 2007. The decline in personnel costs was primarily the result
of adjustments to the fair value of investments held in relation to the deferred compensation plan
which are recorded as compensation expense. These adjustments are offset by the same adjustments to
other income (expense), and thus do not have an impact on net income. Although these adjustments
are recorded as operating expenses, they are not allocated to the individual practice groups. The
increase or decrease in personnel costs as a percentage of revenue experienced by the individual
practice groups is discussed in further detail under Operating Practice Groups below.
Corporate general and administrative expense Corporate G&A expenses decreased by $1.1 million to
$15.0 million for the six months ended June 30, 2008, from $16.1 million for the comparable period
of 2007. The primary components of corporate G&A expenses for the six months ended June 30, 2008
and 2007 are illustrated below:
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
Change in |
|
|
G&A |
|
% of |
|
G&A |
|
% of |
|
% of |
|
|
Expense |
|
Revenue |
|
Expense |
|
Revenue |
|
Revenue |
Personnel costs |
|
|
57.0 |
% |
|
|
2.3 |
% |
|
|
51.1 |
% |
|
|
2.5 |
% |
|
|
(0.2 |
)% |
Depreciation and amortization |
|
|
4.5 |
% |
|
|
0.2 |
% |
|
|
8.7 |
% |
|
|
0.4 |
% |
|
|
(0.2 |
)% |
Professional services |
|
|
16.2 |
% |
|
|
0.7 |
% |
|
|
12.2 |
% |
|
|
0.6 |
% |
|
|
0.1 |
% |
Other (1) |
|
|
22.3 |
% |
|
|
0.8 |
% |
|
|
28.0 |
% |
|
|
1.3 |
% |
|
|
(0.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate general and
administrative expenses |
|
|
|
|
|
|
4.0 |
% |
|
|
|
|
|
|
4.8 |
% |
|
|
(0.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other corporate general and administrative expenses include office expense, equipment
and computer costs, insurance expense and other expenses, none of which are individually
significant as a percentage of total corporate general and administrative expenses. |
The decrease in G&A expense was primarily attributable to legal-related expenses, compensation
expense as it relates to the deferred compensation plan, and depreciation and amortization expense.
Legal-related expenses decreased $0.8 million in the six months ended June 30, 2008 versus the
comparable period of 2007. Legal-related expenses are inherently
unpredictable and therefore the decline for the six months ended
June 30, 2008 versus the comparable period of 2007 may not be sustainable
for the remainder of the year. Adjustments to the fair
value of investments held in relation to the deferred compensation plan are recorded as
compensation expense and contributed $0.5 million to the decline in G&A expenses. These adjustments
are offset by the same adjustment to other income (expense), and thus do not have an impact on net
income. Depreciation and amortization expense decreased by $0.7 million primarily due to certain
capitalized software that became fully depreciated during 2007.
Interest expense Interest expense was $3.6 million and $3.0 million for the six months ended June
30, 2008 and 2007, respectively. Average debt was $161.3 million for the six months ended June 30,
2008, compared to $120.6 million for the comparable period in 2007, and weighted-average interest
rates were 3.8% and 3.9% during the six months ended June 30, 2008 and 2007, respectively.
Other income (expense), net Other income (expense), net is comprised of interest income,
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. CBIZ recognized a loss on the investments in its deferred
compensation plan of $1.9 million for the six months ended June 30, 2008 versus a gain $1.5 million
for the comparable period in 2007. These adjustments do not impact CBIZs net income as they are
offset by the same adjustments to compensation expense which is recorded as operating and corporate
general administrative expenses in the consolidated statements of operations.
Income tax expense CBIZ recorded income tax expense from continuing operations of $15.8 million
and $15.1 million for the six months ended June 30, 2008 and 2007, respectively. The effective tax
rate for the six months ended June 30, 2008 was 38.9%, compared to an effective rate of 41.4% for
the comparable period in 2007. The decrease in the effective tax rate for the six months ended June
30, 2008 from the comparable period in 2007 was primarily attributable to a favorable settlement of
a portion of the IRS audit during the second quarter of 2008.
32
Operating Practice Groups
Financial Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands, except percentages) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-unit |
|
$ |
173,760 |
|
|
$ |
161,144 |
|
|
$ |
12,616 |
|
|
|
7.8 |
% |
Acquired businesses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divested operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
173,760 |
|
|
$ |
161,144 |
|
|
$ |
12,616 |
|
|
|
7.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
136,150 |
|
|
|
125,595 |
|
|
|
10,555 |
|
|
|
8.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
37,610 |
|
|
$ |
35,549 |
|
|
$ |
2,061 |
|
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percent |
|
|
21.6 |
% |
|
|
22.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 60% of the growth in same-unit revenue was attributable to an increase in the
aggregate number of hours charged to clients for consulting, valuation and litigation support
services, and 40% was attributable to price increases for traditional accounting and tax services.
The largest components of operating expenses for the Financial Services practice group are
personnel costs, occupancy costs and travel related expenses, representing 89.1% of total operating
expenses for each of the six months ended June 30, 2008 and 2007. Personnel costs increased $8.9
million to 62.3% of revenue for the six months ended June 30, 2008 from 61.6% for the comparable
period in 2007. The increase in personnel costs was primarily related to annual merit increases to
existing employees and salaries and benefits for new employees as CBIZ expanded its professional
workforce to accommodate revenue growth. Travel related expenses increased $0.4 million for the six
months ended June 30, 2008 from the comparable period in 2007 and was 2.7% of revenue for each
period. Occupancy costs are relatively fixed in nature and were 4.8% and 5.1% of revenue for six
months ended June 30, 2008 and 2007, respectively.
Gross margin as a percentage of revenue decreased for the six months ended June 30, 2008 from the
comparable period in 2007 primarily as a result of the increase in personnel costs.
Employee Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands, except percentages) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-unit |
|
$ |
91,146 |
|
|
$ |
87,874 |
|
|
$ |
3,272 |
|
|
|
3.7 |
% |
Acquired businesses |
|
|
3,416 |
|
|
|
|
|
|
|
3,416 |
|
|
|
|
|
Divested operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
94,562 |
|
|
$ |
87,874 |
|
|
$ |
6,688 |
|
|
|
7.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses |
|
|
77,243 |
|
|
|
70,006 |
|
|
|
7,237 |
|
|
|
10.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
17,319 |
|
|
$ |
17,868 |
|
|
$ |
(549 |
) |
|
|
(3.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percent |
|
|
18.3 |
% |
|
|
20.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in same-unit revenue was primarily attributable to growth in the Companys retail and
payroll service businesses. The retail growth was due primarily to an approximate 4% increase in
the revenue from group health products, but was impacted by soft market conditions in pricing for
property and casualty insurance and a decline in asset values which impacted revenues from the
Companys retirement
33
investment advisory services. Same-unit payroll service revenue increased
approximately 8% primarily as a result of an increase in number of clients served and related
volume increases. The growth in revenue from acquired businesses was provided by a property and
casualty business in Frederick, Maryland, a payroll services business in Palm Desert, California,
and a specialty recruiting business headquartered in Overland Park, Kansas, all of which were
acquired during the six months ended June 30, 2008.
The largest components of operating expenses for the Employee Services practice group are personnel
costs, including commissions paid to third party brokers, and occupancy costs, representing 82.6%
and 83.1% of total operating expenses for the six months ended June 30, 2008 and 2007,
respectively. Personnel costs increased $5.2 million to 62.2% of revenue for the six months ended
June 30, 2008 from 61.1% for the comparable period in 2007. Acquired businesses contributed $1.7
million of the increase in personnel costs and sales-based compensation, which is variable in
nature, increased by approximately $1.1 million proportionate with the increase in commissionable
revenues. The increase in personnel costs as a percentage of revenue was primarily related to merit
increases and investments in additional personnel to support growth of the business. Occupancy
costs increased $0.4 million due to the acquired businesses.
Gross margin as a percentage of revenue decreased by 2.0% for the six months ended June 30, 2008
from the comparable period in 2007. The decline in gross margin was primarily attributable to the
revenue shortfalls caused by the soft property and casualty market, declines in asset-based
revenue, and the investments in personnel.
Medical Management Professionals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands, except percentages) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-unit |
|
$ |
66,031 |
|
|
$ |
61,724 |
|
|
$ |
4,307 |
|
|
|
7.0 |
% |
Acquired businesses |
|
|
16,634 |
|
|
|
|
|
|
|
16,634 |
|
|
|
|
|
Divested operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
82,665 |
|
|
$ |
61,724 |
|
|
$ |
20,941 |
|
|
|
33.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
72,410 |
|
|
|
54,261 |
|
|
|
18,149 |
|
|
|
33.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
10,255 |
|
|
$ |
7,463 |
|
|
$ |
2,792 |
|
|
|
37.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percent |
|
|
12.4 |
% |
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-unit revenue consists of revenue from existing clients and net new business sold. Revenue from
existing clients increased by approximately 2.0% in the first half of 2008 versus the comparable
period in 2007. Growth from existing clients was provided by an increase in volume of 3.0%, offset
by certain reductions in Medicare reimbursement rates, declines in the pricing of MMPs services,
and the mix of medical specialties which collectively totaled 1.0%. Revenue from new business sold
contributed approximately 5.0% of the increase in same-unit revenue. Growth in revenue from
acquired businesses was provided by a business located in Montgomery, Alabama which provides
billing services, practice management and consulting services to anesthesia and pain management
providers primarily in the southern United States, and a business headquartered in Ponte Vedra
Beach, Florida which provides coding, billing and accounts receivable management services for
emergency medicine physician practices along the east coast of the United States. These businesses
were acquired in the second and fourth quarters of 2007, respectively.
The largest components of operating expenses for MMP are personnel costs, occupancy costs and
office expenses (primarily postage related to statement mailing
services provided to clients), representing 82.0% and
85.3% of total operating expenses for the first six months of 2008 and 2007, respectively.
Personnel costs increased $10.1 million, but declined as a percentage of revenue to 57.0% for the
six months ended June 30, 2008 from 60.0% for the comparable period in 2007. Acquired businesses
contributed $7.6 million of the increase in personnel costs with the remainder being attributable
to annual merit increases to existing
34
employees and salaries and benefits for new employees. MMP
added client service personnel to support the growth in same-unit revenue, and added internal
support personnel to position the unit for continued growth. The improvement in personnel costs as
a percentage of revenue relates to the business that was acquired in the fourth quarter of 2007 as
this business utilizes off-shore resources in a greater capacity than the traditional MMP
operation.
Occupancy costs increased by $1.4 million and office expenses increased by $1.6 million for the six
months ended June 30, 2008 versus the comparable period of 2007, primarily as the result of
acquired businesses. Occupancy costs also increased as MMP opened additional office locations
subsequent to June 30, 2007 in order to support new business.
The improvement in gross margin for the first half of 2008 versus the comparable period in 2007 was
primarily attributable to the acquired businesses. These businesses service anesthesia and
emergency medicine practices, whereas MMPs same-unit revenue is primarily attributable to services
provided to radiology practices. Services rendered to anesthesia and emergency medicine practices
typically provide higher margins than services rendered to radiology practices. Additionally, the
business that was acquired during the fourth quarter of 2007 has a greater ability to utilize
off-shore resources than the traditional MMP operation. The size of this acquired company combined
with its higher margin business model resulted in a favorable impact on total MMP gross margin.
National Practices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands, except percentages) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-unit |
|
$ |
22,099 |
|
|
$ |
24,360 |
|
|
$ |
(2,261 |
) |
|
|
(9.3 |
)% |
Acquired businesses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divested operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
22,099 |
|
|
$ |
24,360 |
|
|
$ |
(2,261 |
) |
|
|
(9.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
21,179 |
|
|
|
21,923 |
|
|
|
(744 |
) |
|
|
(3.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
920 |
|
|
$ |
2,437 |
|
|
$ |
(1,517 |
) |
|
|
(62.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percent |
|
|
4.2 |
% |
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in revenue was attributable to the technology businesses and consisted of declines in
product, service agreement and consulting revenue of $1.2 million, $0.6 million and $0.3 million,
respectively. The decline in product and consulting revenue primarily relates to delays in larger
capital projects as clients are deferring investment decisions in response to the current economic
environment. The decline in service agreement revenue relates to certain clients not renewing
their annual service agreements.
The largest components of operating expenses for the National Practices group are personnel costs,
direct costs and occupancy costs, representing 92.7% and 93.1% of total operating expenses for the
six months ended June 30, 2008 and 2007, respectively. Personnel costs increased $0.5 million to
70.3% of revenue for the first half of 2008 from 61.6% of revenue for the comparable period in
2007. The increase in personnel costs primarily relates to annual merit increases and an overall
increase in headcount in the technology businesses. Direct costs decreased $1.3 million to 15.4% of
revenue for the first half of 2008 from 19.5% of revenue for the comparable period in 2007, and
primarily related to product costs, sales commissions and third party labor. Product costs and
sales commissions are variable with product sales and thus decreased as the result of the decline
in product sales. Occupancy costs are relatively fixed in nature and were $0.7 million for the six
months ended June 30, 2008 and 2007.
The decline in gross margin was due to the overall decline in revenue. As personnel and facilities
costs are relatively fixed in the short-term, margins generally improve with revenue growth and
deteriorate when revenue declines.
35
Financial Condition
Cash and cash equivalents decreased by $0.5 million to $11.6 million at June 30, 2008 from
December 31, 2007. Restricted cash was $18.3 million at June 30, 2008, an increase of $2.9 million
from December 31, 2007. 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 $132.7 million at June 30, 2008, an increase of $17.4 million from
December 31, 2007. 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 from continuing operations was
69 days, 64 days and 72 days at June 30, 2008, December 31, 2007 and June 30, 2007, respectively.
Other current assets were $10.3 million and $10.1 million at June 30, 2008 and December 31, 2007,
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 (current and non-current) 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, net (current and non-current) decreased by $0.5 million at June 30, 2008 versus
December 31, 2007. Notes receivable decreased as the result of payments received during the first
six months of 2008, primarily from notes that were issued in relation to businesses that were sold
in previous years.
Goodwill and other intangible assets, net of accumulated amortization, increased by $13.3 million
at June 30, 2008 from December 31, 2007. Acquisitions, including contingent consideration earned,
resulted in a $17.2 million increase in goodwill and intangible assets during the six months ended
June 30, 2008. Intangible assets decreased by $3.9 million due to amortization expense.
Assets of the deferred compensation plan represent participant deferral accounts, and totaled $24.4
million and $22.2 million at June 30, 2008 and December 31, 2007, respectively. The assets are held
in a rabbi trust and are directly offset by deferred compensation plan obligations representing
amounts 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, 2007.
The accounts payable balance of $33.7 million at June 30, 2008 reflects amounts due to suppliers
and vendors; balances fluctuate during the year based on the timing of cash payments. Accrued
personnel costs were $33.0 million at June 30, 2008 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.
Notes payable relate primarily to contingent proceeds earned by acquired businesses. Notes payable
- current decreased by $4.9 million to $5.7 million at June 30, 2008 from $10.6 million at December
31, 2007 due to the payment of contingent proceeds related to acquired businesses of approximately
$11.0 million offset by an increase in contingent proceeds earned by acquired businesses of
approximately $6.2 million.
Other liabilities (current and non-current) increased by $5.8 million at June 30, 2008 from
December 31, 2007. This increase is attributable to a $5.9 million liability related to CBIZs
self-funded health benefit plan.
CBIZ converted its comprehensive health benefit plan from a fully-insured plan to a self-funded
program in January 2008. See further discussion of this plan in Note 6 of the accompanying
consolidated financial statements.
36
Income taxes payable (current and non-current) increased by $3.8 million from $8.0 million at
December 31, 2007 to $11.8 million at June 30, 2008. This increase was primarily due to the
provision for current income taxes and interest expense on estimated tax reserves less estimated
tax payments and tax benefits related to the exercise of stock options.
Bank debt for amounts due on CBIZs credit facility increased by $30.0 million at June 30, 2008
from December 31, 2007. Cash provided from operations supplemented with additional borrowings under
the credit facility was used to fund various strategic initiatives, including acquisitions and
share repurchases. During the six months ended June 30, 2008, cash payments for acquisitions and
share repurchases totaled $21.4 million and $33.0 million, respectively.
Stockholders equity decreased by $2.5 million to $223.9 million at June 30, 2008 from $226.4
million at December 31, 2007. The decrease in stockholders equity was primarily attributable to
open market share repurchases totaling $33.0 million (3.8 million shares), offset by net income of
$24.1 million and the exercise of stock options which contributed $4.8 million. In addition, CBIZ
recorded an additional $1.1 million in accumulated other comprehensive losses in the first six
months of 2008, primarily related to ARS and the interest rate swap. See further discussion of
these losses in Note 7 of the accompanying consolidated financial statements.
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. CBIZ supplements net
operating cash with an unsecured credit facility.
The unsecured credit facility expires November 16, 2012 and was amended effective April 3, 2008 to
increase the commitment from $100.0 million to $150.0 million. At June 30, 2008, CBIZ had
outstanding borrowings of $60.0 million under its credit facility, and had letters of credit and
performance guarantees totaling $5.1 million. Available funds under the facility based on the terms
of the commitment were approximately $77.3 million at June 30, 2008. Management believes that 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 foreseeable future,
including capital expenditures, working capital requirements, and strategic investments.
The facility allows for the allocation of funds for strategic initiatives, including acquisitions
and the repurchase of CBIZ common stock. 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 is in compliance with its covenants
at June 30, 2008.
CBIZ may also obtain funding by offering equity or debt securities, through public or private
markets. CBIZ currently has an effective shelf registration statement under which it can offer such
securities to the public. See Note 12 to the Annual Report on Form 10-K for the year ended December
31, 2007 for a description of the shelf registration statement. CBIZ issued $100 million of
convertible senior subordinated notes (Notes) on May 30, 2006. The Notes mature on June 1, 2026
and may be redeemed by CBIZ in whole or in part anytime after June 6, 2011.
Sources and Uses of Cash
The following table summarizes our cash flows from operating, investing and financing activities
for the six months ended June 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
Total cash provided by (used in): |
|
2008 |
|
|
2007 |
|
Operating activities |
|
$ |
19,528 |
|
|
$ |
9,401 |
|
Investing activities |
|
|
(21,733 |
) |
|
|
(6,685 |
) |
Financing activities |
|
|
1,683 |
|
|
|
(10,004 |
) |
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
$ |
(522 |
) |
|
$ |
(7,288 |
) |
|
|
|
|
|
|
|
37
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. Net cash provided by operating activities increased $10.1 million to $19.5
million for the six months ended June 30, 2008 from $9.4 million for the comparable period in 2007.
Approximately $5.5 million of the increase in cash provided by operating activities relates to a
change in the timing of health benefit payments as CBIZ converted its comprehensive health benefit
plan from a fully-insured plan to a self-funded program effective January 1, 2008. Approximately
$2.4 million of the increase in cash provided by operating
activities is attributable to accounts receivable. DSO improved from 72 days at June 30,
2007 to 69 days at June 30, 2008.
Cash flows from investing activities include payments toward capital expenditures and business
acquisitions, proceeds from divested and discontinued operations and the collection of notes
receivable. CBIZ used $21.7 million in net cash for investing activities during the six months
ended June 30, 2008, compared to $6.7 million during the comparable period in 2007. Investing uses
of cash during the six months ended June 30, 2008 primarily consisted of $20.6 million of net cash
used towards business acquisitions, $0.8 million for the acquisition of other intangible assets and
$2.6 million for capital expenditures (net), offset by $2.3 million in proceeds received from the
sale of divested and discontinued operations and $0.2 million in payments received on notes
receivable. Investing uses of cash during the first six months of 2007 primarily consisted of $18.8
million of net cash used towards business acquisitions, $1.6 million for the acquisition of other
intangible assets and $2.6 million for capital expenditures (net), offset by $16.8 million in
proceeds received from the sale of divested and discontinued operations and $0.1 million in
payments received on notes receivable. Capital expenditures primarily consisted of investments in
technology, leasehold improvements and purchases of furniture and equipment.
Cash flows from financing activities include net borrowing and payment activity from the credit
facility, repurchases of CBIZ common stock, and proceeds from the exercise of stock options. Net
cash provided by financing activities during the six months ended June 30, 2008 was $1.7 million
compared to net cash used in financing activities of $10.0 million for the comparable period in
2007. Financing sources of cash during the six months ended June 30, 2008 included $30.0 million in
net proceeds from the credit facility and $5.1 million in proceeds from the exercise of stock
options (including tax benefits), offset by $33.0 million in cash used to repurchase shares of CBIZ
common stock. Net cash used in financing activities during the six months ended June 30, 2007
included $24.7 million in cash used to repurchase shares of CBIZ common stock, offset by $10.0
million in net proceeds from the credit facility and $5.0 million in proceeds from the exercise of
stock options (including tax benefits).
38
Obligations and Commitments
CBIZs aggregate amount of future obligations at June 30, 2008 for the next five years and
thereafter is set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2008(1) |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
Thereafter |
|
Convertible notes |
|
$ |
100,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
100,000 |
|
Interest on convertible notes |
|
|
56,251 |
|
|
|
1,563 |
|
|
|
3,125 |
|
|
|
3,125 |
|
|
|
3,125 |
|
|
|
3,125 |
|
|
|
42,188 |
|
Credit facility |
|
|
60,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000 |
|
|
|
|
|
Income taxes payable (2) |
|
|
4,267 |
|
|
|
4,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable |
|
|
5,746 |
|
|
|
4,241 |
|
|
|
1,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized leases |
|
|
245 |
|
|
|
171 |
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring lease
obligations(3) |
|
|
17,873 |
|
|
|
2,002 |
|
|
|
3,616 |
|
|
|
3,204 |
|
|
|
2,930 |
|
|
|
2,611 |
|
|
|
3,510 |
|
Non-cancelable operating
lease obligations (3) |
|
|
152,783 |
|
|
|
16,804 |
|
|
|
29,674 |
|
|
|
25,246 |
|
|
|
20,971 |
|
|
|
18,278 |
|
|
|
41,810 |
|
Letters of credit in lieu of cash
security deposits |
|
|
3,699 |
|
|
|
|
|
|
|
2,386 |
|
|
|
535 |
|
|
|
200 |
|
|
|
|
|
|
|
578 |
|
Performance guarantees for
non-consolidated affiliates |
|
|
1,383 |
|
|
|
342 |
|
|
|
1,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License bonds and other letters
of credit |
|
|
1,644 |
|
|
|
449 |
|
|
|
1,180 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
403,891 |
|
|
$ |
29,839 |
|
|
$ |
42,601 |
|
|
$ |
32,110 |
|
|
$ |
27,241 |
|
|
$ |
84,014 |
|
|
$ |
188,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents contractual obligations from July 1, 2008 to December 31, 2008. |
|
(2) |
|
Excludes unrecognized tax benefits of approximately $7.6 million as the Company is unable to
determine a reasonably reliable estimate of the timing of the future payments. |
|
(3) |
|
Excludes cash expected to be received under subleases. |
Off-Balance Sheet Arrangements
CBIZ maintains administrative service agreements with independent CPA firms (as described more
fully under Overview Financial Services), 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 Annual Report on Form
10-K for the year ended December 31, 2007.
CBIZ provides guarantees of performance obligations for a CPA firm with which CBIZ maintains an
administrative service agreement. Potential obligations under the guarantees totaled $1.4 million
at June 30, 2008 and December 31, 2007. 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. 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 $3.7 million at June 30, 2008 and December 31, 2007. In addition,
CBIZ provides license bonds to various state agencies to meet certain licensing requirements. The
amount of license bonds outstanding at June 30, 2008 and December 31, 2007 totaled $1.6 million and
$1.4 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. Payment by CBIZ under such indemnification
clauses are generally conditioned upon the other party making a claim. Such claims are typically
subject to challenge
39
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 June 30, 2008, CBIZ was
not aware of any material obligations arising under indemnification agreements that would require
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. In December 2007, CBIZ entered into an arrangement effective
in January 2008 to swap $10.0 million of its floating rate debt into fixed rate debt for two years
to mitigate our interest rate risk. Management will continue to evaluate the potential use of
interest rate swaps as it deems appropriate under certain operating and market conditions.
CBIZ carries $100.0 million in convertible senior subordinated notes (Notes) bearing a fixed
interest rate of 3.125%. The Notes mature on June 1, 2026 and have call protection such that they
may not be redeemed until June 6, 2011; we believe this low cost of borrowing mitigates our
interest rate risk.
In connection with payroll services provided to clients, CBIZ collects funds from its clients
accounts in advance of paying these client obligations. These funds held for clients are segregated
and invested in short-term investments and ARS, which have historically been highly liquid. In
accordance with our investment policy, all investments carry an investment grade rating at the time
of initial investment. See Item 3, Quantitative and Qualitative Disclosures about Market Risk,
for further discussion of ARS. Investments of client funds are generally variable in nature and,
therefore, the income earned on these investments fluctuates based upon the changes in short-term
rates. The interest income on these short-term investments mitigates the interest rate risk for the
borrowing costs of CBIZs credit facility, as the rates on both the investments and the unhedged
outstanding borrowings against the credit facility float based on market conditions.
Critical Accounting Policies
The SEC defines critical accounting policies as those that are most important to the portrayal of a
companys financial condition and results and that require managements most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the effect of matters
that are inherently uncertain.
There have been no material changes to CBIZs critical accounting policies from the information
provided in Part II, Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations, under the heading Critical Accounting Policies in the Annual Report on
Form 10-K for the year ended December 31, 2007.
New Accounting Pronouncements
Effective January 1, 2008, CBIZ adopted Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with GAAP, and expands disclosures about fair
value
measurements. For financial assets and liabilities, this statement is effective for fiscal periods
beginning after November 15, 2007 and does not require any new fair value measurements, but rather
expands the disclosure of fair value measurements. In February 2008, the FASB issued Staff Position
No. 157-2
40
Effective Date of FASB Statement No. 157 which delayed the effective date of SFAS
No. 157 to fiscal years ending after November 15, 2008 for non-financial assets and liabilities,
except for items that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). See Note 8 to these consolidated financial statements for
further discussion of the adoption of SFAS No. 157.
Effective January 1, 2008, CBIZ adopted SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities including an amendment of FASB Statement No. 115. This statement
permits entities to choose to measure many financial instruments and certain other items at fair
value. This statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007, including interim periods within that fiscal year. The Company did not elect the
fair value option for any of its existing financial instruments as of June 30, 2008 and the Company
has not determined whether or not it will elect this option for financial instruments it may
acquire in the future.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) Business Combinations (SFAS No.
141R), which replaces SFAS No. 141, Business Combinations. SFAS No. 141R establishes principles
and requirements for how an acquirer, a) recognizes and measures the assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree, b) recognizes and measures
the goodwill acquired, and c) determines what information to disclose. SFAS No. 141R also requires
that all acquisition-related costs, including restructuring, be recognized separately from the
acquisition, and that changes in acquired tax contingencies, including those existing at the date
of adoption, be recognized in earnings if outside the maximum allocation period (generally one
year). SFAS No. 141R applies prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning after December 15,
2008. CBIZ is currently evaluating the impact of adoption of SFAS No. 141R on the consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research Bulletin No. 51 (SFAS No. 160). SFAS 160
establishes requirements for ownership interests in subsidiaries held by parties other than the
Company (sometimes called minority interests) be clearly identified, presented, and disclosed in
the consolidated statement of financial position within equity, but separate from the parents
equity. All changes in the parents ownership interests are required to be accounted for
consistently as equity transactions and any noncontrolling equity investments in deconsolidated
subsidiaries must be measured initially at fair value. This statement is effective for CBIZ
beginning January 1, 2009. CBIZ is currently evaluating the potential impact of the adoption of
SFAS No. 160 on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS No. 161) as an amendment to SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 161 requires that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting designation. SFAS No. 161 is
effective for CBIZ beginning January 1, 2009. The Company is currently evaluating the impact of the
adoption of SFAS No. 161 on its consolidated financial statements.
On May 9, 2008, the FASB issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP
APB 14-1). FSP APB 14-1 requires issuers of convertible debt that may be settled wholly or partly
in cash when converted, to account for the debt and equity components separately. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 and must be applied retrospectively to
all periods presented. This standard will have an impact on the Companys consolidated financial
statements and the Company is currently evaluating the amount of the impact.
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
41
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, 2007. 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 LIBOR, or the reference rate set by Bank of
America, N.A., would affect the rate at which CBIZ could borrow funds under its credit facility.
The balance outstanding under the credit facility at June 30, 2008 was $60.0 million. If market
rates were to increase or decrease 100 basis points from the levels at June 30, 2008, interest
expense would increase or decrease approximately $0.6 million annually.
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. In December 2007, CBIZ entered into an arrangement effective in January 2008 to swap
$10.0 million of its floating rate debt into fixed rate debt for two years to mitigate the
Companys interest rate risk. Management will continue to evaluate the potential use of interest
rate swaps as it deems appropriate under certain operating and market conditions.
In connection with CBIZs payroll business, funds held for clients are segregated and invested in
short-term investments and ARS. ARS are variable debt instruments with longer stated maturities
whose interest rates are reset at pre-determined short-term intervals through a Dutch auction
system. CBIZ invested a portion of funds held for clients in ARS as they typically generated higher
rates of return than money market
investment alternatives. In accordance with our investment policy, all investments carry an
investment grade rating at the time of the initial investment.
As a result of the recent liquidity issues experienced in the credit and capital markets, CBIZs
ARS have experienced failed auctions during the first six months of 2008 and one of the investments
was
42
downgraded below the minimum rating required by the Companys investment policy. While CBIZ
continues to earn and receive interest on these investments at the contractual rates, the estimated
fair value of our investments in ARS no longer approximates their face value. At June 30, 2008, the
face value of ARS held by CBIZ totaled $19.4 million. During the six months ended June 30, 2008,
CBIZ reduced the carrying amount of the ARS by $1.6 million, to $17.8 million. CBIZ determined this
decline in fair market value to be temporary, and recorded the decline as an unrealized loss in
accumulated other comprehensive loss. The impact to accumulated other comprehensive loss was $1.0
million, net of income taxes. In addition, CBIZ reclassified $17.8 million of ARS, with maturity
dates beyond June 30, 2009, from current assets (Funds held for clients current) to non-current
assets (Funds held for clients non-current), as CBIZ intends and has the ability to hold these
investments until anticipated recovery in value occurs.
CBIZ continues to monitor the market for ARS and consider its impact on the fair value of its
investments. If the current market conditions deteriorate further, or the anticipated recovery in
fair values does not occur, CBIZ may be required to record additional unrealized losses in other
comprehensive income or impairment charges in future periods.
Although we have experienced failed auctions with regards to ARS, CBIZ believes it has adequate
liquidity to operate and settle client obligations as the majority of CBIZs client funds are
invested in highly-liquid short-term money market funds.
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 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.
43
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 June 30, 2008
that have materially affected, or are reasonably likely to materially affect, our Internal
Controls.
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 Form 10-K for the year ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) On April 1, 2008, in connection with the acquisition of EFL Associates, Inc., CBIZ paid cash
and issued approximately 23,600 shares of common stock in exchange for all issued and outstanding
capital stock of the company.
On April 30, 2008, approximately 62,400 shares of common stock became issuable as contingent
consideration earned by the former owner of a business that was acquired on May 1, 2007.
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 7, 2008, CBIZs Board of Directors authorized the purchase of up to 5.0 million
shares of CBIZ common stock through March 31, 2009. The shares may be repurchased in the open
market or in privately negotiated transactions according to SEC rules.
The repurchase plans do not obligate CBIZ to acquire any specific number of shares and may be
suspended at any time. Stock repurchase activity during the three months ended June 30, 2008
(reported on a trade-date basis) is summarized in the table below (in thousands, except per share
data).
44
Issuer Purchases of Equity Securities
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Maximum |
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Total Number |
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Number of |
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of Shares |
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Shares That |
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Total |
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Average |
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Purchased as |
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May Yet Be |
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Number of |
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Price Paid |
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Part of Publicly |
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Purchased |
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Shares |
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Per |
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Announced |
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Under the |
Period |
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Purchased |
|
Share (1) |
|
Plans |
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Plans |
April 1 - April 30,
2008
(2) |
|
|
890 |
|
|
$ |
8.24 |
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|
|
890 |
|
|
|
3,945 |
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May 1 - May 31, 2008
(2) |
|
|
242 |
|
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$ |
8.48 |
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|
242 |
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3,703 |
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June 1 - June 30, 2008
(2) |
|
|
109 |
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$ |
8.01 |
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109 |
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3,594 |
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Total second quarter
purchases (3) |
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1,241 |
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$ |
8.27 |
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1,241 |
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(1) |
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Average price paid per share includes fees and commissions. |
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(2) |
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Open market purchases. |
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(3) |
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The Company utilized, and may utilize in the future, a Rule 10b5-1 trading plan to allow for
repurchases by the Company during periods when it would not normally be active in the trading
market due to regulatory restrictions. Under the Rule 10b5-1 trading plan, a broker is granted
discretion to repurchase shares on the Companys behalf, and the broker is unable to repurchase
shares above a pre-determined price per share. Additionally, the maximum number of shares that may
be purchased by the Company each day is governed by Rule 10b-18. |
According to the terms of CBIZs credit facility, CBIZ is not permitted to declare or make any
dividend payments, other than dividend payments made by one of its wholly owned subsidiaries to the
parent company. See Note 5 to the accompanying consolidated financial statements for a description
of working capital restrictions and limitations upon the payment of dividends.
Item 4. Submission of Matters to a Vote of Security Holders
Listed below are the results of matters that were submitted to vote at the Annual Meeting of
Stockholders held on May 15, 2008:
1) |
|
Election of the following individuals to the Board of Directors to serve until the 2011
Annual Meeting of Stockholders: |
|
|
|
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Authority Granted |
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Authority Withheld |
Joseph S. DiMartino |
|
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54,541,299 |
|
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1,745,269 |
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Richard C. Rochon |
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54,478,140 |
|
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1,808,428 |
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Donald V. Weir |
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55,366,537 |
|
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|
920,031 |
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The terms of office as directors of each of Michael H. DeGroote, Harve A. Ferrill, Todd J. Slotkin,
Rick L. Burdick and Steven L. Gerard continued following the Annual Meeting.
2) |
|
Ratification of KPMG LLP as the Companys independent registered public accounting firm for
the fiscal year ending December 31, 2008: |
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For |
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54,758,058 |
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Against |
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1,514,590 |
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Abstain |
|
|
13,920 |
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45
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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* |
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Indicates documents filed herewith. |
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: August 11, 2008 |
By: |
/s/ Ware H. Grove
|
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Ware H. Grove |
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Chief Financial Officer |
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46