CBZ

CBIZ, Inc. 10-Q Summary: Period Ended June 30, 2010

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for CBIZ, Inc., a provider of professional business services including accounting, tax, financial advisory, employee benefits, and medical management services. The report covers the three and six-month periods ended June 30, 2010. The company operates through four practice groups: Financial Services, Employee Services, Medical Management Professionals (MMP), and National Practices.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 2.6% year-over-year for the six months ended June 30, 2010. This was driven by a 5.4% decline in same-unit revenue, partially offset by $11.1 million in revenue from newly acquired operations.
• Segment Performance:
  • Financial Services: Revenue down 2.4% due to decreased client demand and improved engagement efficiencies.
  • Employee Services: Revenue up 3.3%, driven by acquisitions and growth in retirement advisory/wealth management, offset by declines in specialty life insurance and property/casualty.
  • MMP: Revenue down 10.2% due to client terminations and pricing pressures in the healthcare sector.
  • National Practices: Revenue flat (up 1.4%), with growth from Edward Jones services offset by declines in healthcare consulting.
• Profitability: Operating income from continuing operations decreased to $44.0 million from $46.9 million. Gross margin percentage declined slightly to 15.2% from 15.5%.
• Acquisitions: The company acquired Goldstein Lewin & Company and National Benefit Alliance for an aggregate consideration of approximately $25.3 million, including $10.0 million in contingent consideration.
• Discontinued Operations: The company recorded a net loss of $1.3 million from discontinued operations, including losses on the disposal of two businesses and the closure of one office.

Guidance, Outlook, and Risks

• Debt Refinancing: The $100 million Convertible Senior Subordinated Notes are classified as a current liability because holders have the right to require repurchase on June 1, 2011. Management is actively reviewing refinancing options and expects completion prior to December 31, 2010.
• Credit Facility: On June 4, 2010, CBIZ entered a new $275 million unsecured credit facility, replacing the prior $214 million agreement. As of June 30, 2010, $115 million was outstanding with approximately $113.5 million available.
• Share Repurchases: The company repurchased approximately 1.1 million shares of common stock for $7.1 million during the six-month period.
• Legal Proceedings: CBIZ and a subsidiary were named as defendants in three lawsuits in Arizona related to the bankruptcy of Mortgages Ltd. Management believes the allegations are without merit and does not expect a material adverse effect on financial condition.
• Liquidity: Cash and cash equivalents decreased significantly to $0.4 million due to acquisition payments and share repurchases. However, management believes operating cash flow and the credit facility provide sufficient liquidity.

Investor Verification Checklist

• Verify the status and terms of the refinancing for the $100 million Convertible Notes due for potential repurchase in June 2011.
• Monitor the resolution of the Arizona litigation regarding Mortgages Ltd. and potential auditor-type liability claims.
• Assess the sustainability of revenue declines in the MMP segment due to healthcare pricing pressures and client terminations.
• Review the performance of recent acquisitions (Goldstein Lewin & Company, National Benefit Alliance) against contingent earnout targets.
• Track the company's ability to maintain compliance with credit facility covenants, specifically the leverage ratio (currently 1.57).