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| CBZ > SEC Filings for CBZ > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
Financial Services Employee Services MMP National Practices
• Accounting • Group Health • Coding and • Managed
Billing Networking and
• Tax • Property & Casualty • Accounts Hardware
Receivable Services
• Financial • COBRA / Flex Management • Technical
Security
Advisory • Retirement Planning • Full Solutions
Practice
• Litigation Support • Wealth Management Management • Technology
Services Consulting
• Valuation • Life Insurance • Project
Management
• Internal Audit • Human Capital • Software
Solutions
• Fraud Detection Management • Health Care
Consulting
• Real Estate • Payroll Services • Mergers &
Acquisitions
Advisory • Actuarial Services
• Recruiting
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See the Annual Report on Form 10-K for the year ended December 31, 2008 for
further discussion of external relationships and regulatory factors that
currently impact CBIZ's operations.
Executive Summary
Revenue for the nine months ended September 30, 2009 grew by $47.6 million, or
8.8%, versus the comparable period in 2008. Revenue from newly acquired
operations, net of divestitures, contributed $72.1 million, or 13.3% to the
growth in revenue, while same-unit revenue declined by 4.6%, or $24.5 million.
Earnings per share from continuing operations increased 6.7% to $0.48 per
diluted share for the nine months ended September 30, 2009 from $0.45 per
diluted share for the comparable period in 2008.
Pre-tax margin for the nine months ended September 30, 2009 was 8.3%, versus
8.4% for the comparable period in 2008. For the three months ending
September 30, 2009 pre-tax margin was 4.3% versus 4.0% for the comparable period
in 2008. The Company focuses on pre tax margins due to the accounting impact
that investment gains or losses in the deferred compensation plan have on both
gross margin and operating income margin. There is no impact on pre-tax margin,
however, investment gains on the deferred compensation plan assets are recorded
as other income and result in an increase to compensation expense in operating
and G&A expense, while losses are recorded as other expense and result in a
decrease to compensation expense included in operating expense and G&A expense.
For the three and nine months ended September 30, 2009, CBIZ acquired two
businesses that are reported in the Employee Services practice group. EAO
Consultants, LLC, a New Jersey based employee benefits firm, was acquired on
July 1, 2009 and MeyersDining, LLC and MeyersDining Property and Casualty, LLC,
a Boulder, Colorado insurance agency, was acquired on September 30, 2009. The
acquisitions will provide a stronger presence and range of services in both the
New York/New Jersey and Colorado markets.
CBIZ believes that repurchasing shares of its common stock under the Company's
stock purchase plan is a use of cash that provides value to its shareholders
and, accordingly, CBIZ purchased approximately 1.7 million shares of its common
stock under this plan at a total cost of $12.7 million during the nine months
ended September 30, 2009.
Effective January 1, 2009, CBIZ adopted the provisions of FASB ASC 470-20, which
impacted the accounting associated with CBIZ's $100.0 million convertible senior
subordinated notes ("Notes"). The 2008 results have been restated to reflect
this change. The impact to CBIZ of adopting FASB ASC 470-20 is described in
Notes 1 and 5 to the accompanying consolidated financial statements.
CBIZ acquired Mahoney Cohen & Company and Tofias PC on December 31, 2008. While
these units have not been immune to the economic pressures facing all
professional services firms, their performance is generally in line with
management's expectations.
The Company has instituted several programs to control and reduce expenses.
These programs include appropriately matching staffing resources to expected
changes in revenue. During the nine months ended September 30, 2009, the Company
incurred $1.6 million of severance related costs as it has adjusted its
workforce, which represents an increase of $1.4 million from the comparable
period in 2008.
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 September 1, 2008, revenue for the month of September would
be included in same-unit revenue for both years; revenue for the period
January 1, 2009 through August 31, 2009 would be reported as revenue from
acquired businesses. Divested operations represents operations that were sold or
closed and did not meet the criteria for treatment as discontinued operations.
Three Months Ended September 30, 2009 and 2008
Revenue - The following table summarizes total revenue for the three months
ended September 30, 2009 and 2008 (in thousands, except percentages).
Three Months Ended September 30,
% of % of $ %
2009 Total 2008 Total Change Change
Same-unit revenue
Financial Services $ 64,582 36.1 % $ 70,404 41.9 % $ (5,822 ) (8.3 )%
Employee Services 40,629 22.7 % 44,180 26.3 % (3,551 ) (8.0 )%
MMP 40,724 22.7 % 41,345 24.6 % (621 ) (1.5 )%
National Practices 10,060 5.6 % 11,897 7.0 % (1,837 ) (15.4 )%
Total same-unit revenue 155,995 87.1 % 167,826 99.8 % (11,831 ) (7.0 )%
Acquired businesses 23,028 12.9 % - - 23,028
Divested operations - - 333 0.2 % (333 )
Total revenue $ 179,023 100.0 % $ 168,159 100.0 % $ 10,864 6.5 %
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A detailed discussion of revenue by practice group is included under "Operating Practice Groups".
Gross margin and operating expenses - Operating expenses for the three months ended September 30, 2009 increased by $15.1 million versus the comparable period in 2008. As a result of the December 31, 2008 acquisitions of Mahoney Cohen & Company and Tofias PC, CBIZ incurred additional operating expenses of $18.9 million. Additionally, gains on investments in the Company's deferred compensation plan resulted in additional compensation expense of $4.1 million compared to the three months ended September 30, 2008.The primary components of operating expenses for the three months ended September 30, 2009 and 2008 are illustrated in the following table:
2009 2008
% of % of Change in
Operating % of Operating % of % of
Expense Revenue Expense Revenue Revenue
Personnel costs 74.2 % 67.8 % 72.2 % 63.9 % 3.9 %
Occupancy costs 7.1 % 6.5 % 6.8 % 6.0 % 0.5 %
Depreciation and amortization 3.0 % 2.8 % 2.4 % 2.1 % 0.7 %
Other (1) 15.7 % 14.4 % 18.6 % 16.4 % (2.0 )%
Total operating expenses 91.5 % 88.4 % 3.1 %
Gross margin 8.5 % 11.6 % (3.1 )%
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(1) Other operating expenses include office expenses, travel and related expenses, equipment costs, professional fees, bad debt and other expenses, none of which are individually significant as a percentage of total operating expenses.
The increase in personnel costs as a percentage of revenue consisted of a 2.5% increase related to salaries and benefits, primarily due to the impact of the previously mentioned December 31, 2008 acquisitions and severance costs, and a 2.4% increase related to gains on assets held in CBIZ's deferred compensation plan during the third quarter of 2009. These increases were offset by a reduction in same-store compensation as a result of reduced staffing levels at certain locations. The increase in occupancy costs and depreciation and amortization expense as a percentage of revenue was the result of the previously mentioned acquisitions. The decline in other operating expenses as a percentage of revenue for the three months ended September 30, 2009 versus the comparable period in 2008 occurred as a result of the Company's cost-control efforts, and primarily related to declines in travel, marketing and recruiting fees. Gross margin for the three months ended September 30, 2009 and 2008 was 8.5% and 11.6%, respectively, which included $2.5 million of compensation expense related to gains in the deferred compensation plan for the three months ended September 30, 2009, and a $1.6 million reduction of compensation expense related to losses in the deferred compensation plan for the three months ended September 30, 2008. Eliminating the impact of the deferred compensation plan would have resulted in a gross margin of 9.9% and 10.6% for the three months ended September 30, 2009 and 2008, respectively. Personnel and other operating expenses are discussed in further detail under "Operating Practice Groups". Corporate general and administrative expenses - Corporate general and administrative ("G&A") expenses increased by $1.2 million to $8.5 million for the three months ended September 30, 2009, from $7.3 million for the comparable period of 2008, and increased as a percentage of revenue. G&A expenses as a percentage of revenue were 4.7% and 4.3% for the three months ended September 30, 2009 and 2008, respectively, which included $0.4 million of compensation expense from gains in the deferred compensation plan for the three months ended September 30, 2009, and a $0.3 million reduction in compensation expense related to losses in the deferred compensation plan for the three months ended September 30, 2008. Eliminating the impact of the deferred compensation plan, G&A expenses as a percentage of revenue would have been 4.5% for the three months ended September 30, 2009 and 2008. The primary components of G&A expenses for the three months ended September 30, 2009 and 2008 are illustrated in the following table:
2009 2008
% of % of Change in
G&A G&A % of
Expense % of Revenue Expense % of Revenue Revenue
Personnel costs 50.5 % 2.4 % 44.3 % 1.9 % 0.5 %
Depreciation and amortization 1.9 % 0.1 % 2.9 % 0.1 % -
Professional services 19.3 % 0.9 % 20.9 % 0.9 % -
Other (1) 28.3 % 1.3 % 31.9 % 1.4 % (0.1 )%
Total G&A expenses 4.7 % 4.3 % 0.4 %
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(1) Other G&A expenses include occupancy costs, office expenses, equipment and computer costs, insurance expense and other expenses, none of which are individually significant as a percentage of total G&A expenses.
Interest expense - Interest expense increased by $0.5 million to $3.2 million
for the three months ended September 30, 2009 from $2.7 million for the
comparable period in 2008. The increase in interest expense relates to higher
average debt outstanding under the credit facility for the three months ended
September 30, 2009 versus the comparable period in 2008, partially offset by a
decrease in average interest rates. Average debt outstanding under the facility
was $116.9 million and $62.6 million and weighted average interest rates were
3.5% and 4.6% for the three months ended September 30, 2009 and 2008,
respectively. The increase in average debt for the three months ended
September 30, 2009 versus the comparable period in 2008 was largely attributable
to the December 31, 2008 acquisitions of Mahoney Cohen & Company and Tofias PC
which were financed through CBIZ's credit facility.
Although CBIZ's $100 million Convertible Notes ("Notes") carry a 3.125% coupon
payment rate, interest expense for the three months ended September 30, 2009
increased by approximately $0.1 million versus the three months ended
September 30, 2008. CBIZ accounts for the liability and equity components of the
Notes in a manner that reflects the convertible debt borrowing rate, absent the
conversion feature, when interest expense is recognized over subsequent periods.
The effective interest rate on the Notes is 7.8%, and interest expense above the
3.125% coupon rate represents a non-cash charge. CBIZ's Notes are further
disclosed in Notes 1 and 5 of the accompanying consolidated financial
statements.
Other income (expense), net - Other income (expense), net is primarily comprised
of interest income and adjustments to the fair value of investments held in a
rabbi trust related to the deferred compensation plan. Adjustments to the fair
value of investments related to the deferred compensation plan contributed
$4.8 million to the increase in other income (expense), net for the three months
ended September 30, 2009 versus the comparable period in 2008. These adjustments
did not impact CBIZ's net income as they were offset by the corresponding
increase to compensation expense which was recorded as operating and G&A
expenses in the consolidated statements of operations. The remaining increase in
other income (expense), net primarily relates to impairment charges of
$1.4 million which were recognized on the Company' investment in ARS during the
three months ended September 30, 2008. There were no impairment charges on the
Company's investment in ARS during the three months ended September 30, 2009.
Income tax expense - CBIZ recorded income tax expense from continuing operations
of $2.5 million and $2.3 million for the three months ended September 30, 2009
and 2008, respectively. The effective tax rate for the three months ended
September 30, 2009 was 33.4%, compared to an effective tax rate of 35.2% for the
comparable period in 2008. The decrease in the effective tax rate primarily
relates to deductions for interest expense on a previously settled IRS audit,
the reversal of certain estimated tax reserves, and state tax credits earned
during the quarter.
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.
Financial Services
Three Months Ended September 30,
$ %
2009 2008 Change Change
(In thousands, except percentages)
Revenue
Same-unit $ 64,582 $ 70,404 $ (5,822 ) (8.3 )%
Acquired businesses 22,272 - 22,272
Total revenue $ 86,854 $ 70,404 $ 16,450 23.4 %
Operating expenses 78,888 64,236 14,652 22.8 %
Gross margin $ 7,966 $ 6,168 $ 1,798 29.2 %
Gross margin percent 9.2 % 8.8 %
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The increase in total revenue was primarily attributable to the acquisitions of
Mahoney Cohen & Company and Tofias PC on December 31, 2008. These firms offer
accounting, tax and financial advisory services to privately-held and public
companies as well as high net worth individuals. Although the Financial Services
group modestly increased the rates realized for services, same-unit revenue for
the three months ended September 30, 2009 declined versus the comparable period
in 2008 due to a reduction in client demand which resulted in a decrease in
aggregate hours charged to clients.
CBIZ provides a range of services to affiliated CPA firms under joint referral
and administrative service agreements ("ASAs"), including, but not limited to:
leasing administrative and professional staff; administrative functions such as
office management, bookkeeping, and accounting; preparing marketing and
promotion materials; providing office space, computer equipment, and systems
support. 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 $18.7 million and $18.8 million for the three
months ended September 30, 2009, and 2008, respectively, a majority of which is
related to services rendered to privately-held clients. Typically, 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.
The largest components of operating expenses for the Financial Services group
are personnel costs, occupancy costs, and travel related expenses which
represented 88.0% and 89.0% of total operating expenses for the three months
ended September 30, 2009 and 2008, respectively. Personnel costs declined as a
percentage of revenue to 70.8% from 71.9%, but increased $10.8 million for the
three months ended September 30, 2009 compared to the same period in the prior
year. The overall increase was driven by a $13.6 million increase in costs
associated with the December 31, 2008 acquisitions, and was partially offset by
same-unit personnel costs which declined $2.8 million. This decline was due to
personnel cost reduction initiatives which included reductions in both staffing
levels and temporary furlough programs in some locations that experienced
reduced client demands. Occupancy costs increased by $1.7 million to 7.0% of
revenue for the three months ended September 30, 2009 versus 6.2% of revenue for
the comparable period in 2008. The increase in occupancy costs related to the
acquired businesses and several office relocations which were completed
subsequent to the third quarter of 2008. Travel related expenses decreased to
2.1% of revenue for the three months ended September 30, 2009 from 3.1% of
revenue for the comparable period of 2008, primarily as a result of CBIZ's
initiatives to control costs.
The increase in gross margin percentage was primarily attributable to personnel
cost reduction initiatives that occurred in the second and third quarter of 2009
and cost containment measures, partially offset by an
increase in amortization expense related to intangible assets associated with the December 31, 2008 acquisitions of Mahoney Cohen & Company and Tofias PC.
Employee Services
Three Months Ended September 30,
$ %
2009 2008 Change Change
(In thousands, except percentages)
Revenue
Same-unit $ 40,629 $ 44,180 $ (3,551 ) (8.0 )%
Acquired businesses 756 - 756
Divested operations - 333 (333 )
Total revenue $ 41,385 $ 44,513 $ (3,128 ) (7.0 )%
Operating expenses 35,068 36,975 (1,907 ) (5.2 )%
Gross margin $ 6,317 $ 7,538 $ (1,221 ) (16.2 )%
Gross margin percent 15.3 % 16.9 %
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The decrease in same-unit revenue was primarily caused by three factors:
(1) reductions in revenue of approximately $0.9 million in the retirement and
advisory businesses whose revenues are aligned with the underlying asset
valuations; (2) a decrease of approximately $0.3 million in same-unit payroll
revenue primarily as a result of the decline in interest rates which negatively
affected the investment income earned on payroll funds held on behalf of
clients; and (3) a decrease of approximately $0.8 million in same-unit human
resources revenue due to lower client demand for recruiting and other consulting
services. In addition, group health and property and casualty same-unit revenues
declined for the three months ended September 30, 2009. Group health revenue for
the three months ended September 30, 2009 declined approximately 4.6% versus the
comparable period in 2008. Property and casualty revenue decreased 4.8% for the
three months ended September 30, 2009 versus the comparable period in 2008 due
to soft market conditions in pricing. The increase in revenue from acquired
businesses relates to the purchase of a New Jersey based employee benefits
operation, which occurred in the third quarter of 2009. The decline in revenue
from divested businesses relates to the sale of a specialty retirement
investment advisory operation in Atlanta, Georgia which occurred in the third
quarter of 2008.
The largest components of operating expenses for the Employee Services group are
personnel costs, including commissions paid to third party brokers, and
occupancy costs, representing 83.9% and 82.2% of total operating expenses for
the third quarter of 2009 and 2008, respectively. Personnel costs decreased
$0.9 million, but increased as a percentage of revenue to 65.3% for the third
quarter of 2009 from 62.8% for the comparable period in 2008. The increase in
personnel costs as a percentage of revenue was primarily attributable to annual
merit increases coupled with a decline in revenues at the aforementioned
businesses which have a predominantly fixed compensation structure.
The decline in gross margin was primarily attributable to lower asset values and
interest rates which resulted in the previously mentioned revenue decline.
Asset-based and investment revenues do not have related direct costs, thus
changes in those revenue sources can have a significant impact on gross margin.
Medical Management Professionals
Three Months Ended September 30,
$ %
2009 2008 Change Change
(In thousands, except percentages)
Same-unit revenue $ 40,724 $ 41,345 $ (621 ) (1.5 )%
Operating expenses 35,141 35,784 (643 ) (1.8 )%
Gross margin $ 5,583 $ 5,561 $ 22 0.4 %
Gross margin percent 13.7 % 13.5 %
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Same-unit revenue decreased 1.5% for the third quarter of 2009 versus the comparable period in 2008 due to an approximate 3.0% decline attributable to client terminations, net of new business sold, offset by a 1.5% increase from existing clients. Revenue from existing clients grew by approximately 5.1% as a result of an increase in volume, mix of medical specialties and reimbursement rates. The growth was offset by a decline in pricing on existing clients of approximately 3.0% resulting in a net increase in existing client revenue of approximately 2.1%. The decline in revenue from new business sold, net of client terminations, relates to an increase in lost business attributable to various . . .
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