CBZ

CBIZ, Inc. 10-Q Summary: Period Ended June 30, 2009

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2009, for CBIZ, Inc., a Delaware corporation providing professional business services (accounting, tax, financial advisory, employee services, medical management, and technology consulting). The company operates through four practice groups: Financial Services, Employee Services, Medical Management Professionals (MMP), and National Practices. The financial statements are unaudited and reflect the adoption of new accounting standards, including FSP APB 14-1 regarding convertible debt, which required retrospective adjustments to 2008 figures.

Key Financial Metrics

Note: Debt figures include $116.3 million in bank debt and $91.8 million in convertible notes (net of discount) as of June 30, 2009.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 9.8% year-over-year, driven primarily by acquisitions (Mahoney Cohen & Company and Tofias PC acquired in late 2008) which contributed $49.4 million. However, same-unit revenue declined 3.4% due to reduced client demand and economic pressures.
• Profitability: Net income rose 8.6% to $25.0 million. Diluted earnings per share from continuing operations increased 8.1% to $0.40.
• Expense Management: Operating expenses increased 11.3% to $347.9 million, largely due to the integration of new acquisitions. The company incurred $1.2 million in severance costs to align staffing with revenue expectations.
• Segment Performance:
  • Financial Services: Revenue up 25.7% due to acquisitions; same-unit revenue down 3.7%.
  • Employee Services: Revenue down 7.0% due to lower asset valuations, interest rates, and reduced demand for recruiting services.
  • MMP: Revenue flat (-1.1%); gross margin improved to 13.8% via cost controls and offshore processing.
  • National Practices: Revenue down 2.3%; gross margin declined to 2.5% due to a shift toward lower-margin product sales.
• Accounting Changes: Adoption of FSP APB 14-1 increased interest expense and reduced net income for the comparable 2008 period, requiring restatement of prior year data.

Outlook, Risks, and Contingencies

• Liquidity: The company maintains a $214.0 million credit facility with $67.8 million available as of June 30, 2009. Management believes cash from operations and available credit are sufficient for foreseeable needs.
• Investment Risks: CBIZ holds $13.4 million in par value of Auction Rate Securities (ARS). Due to market dislocation, these are classified as non-current. While interest is being paid, liquidity is impaired. One ARS investment was deemed other-than-temporarily impaired (OTTI), with credit losses recognized in earnings.
• Goodwill Impairment: Management reviewed goodwill for impairment triggers due to economic uncertainty and a decline in market capitalization. No impairment was recorded in the first half of 2009, but future deterioration could result in charges.
• Forward-Looking Statements: The company warns that results may differ due to economic conditions, competitive pricing, regulatory changes, and the collectibility of receivables.

Investor Verification Checklist

• Acquisition Integration: Verify the revenue contribution and expense absorption of the Mahoney Cohen & Company and Tofias PC acquisitions.
• ARS Liquidity: Monitor the status of the $13.4 million in Auction Rate Securities and potential further impairment charges.
• Same-Unit Trends: Assess the sustainability of the 3.4% decline in same-unit revenue and the effectiveness of cost-cutting measures.
• Debt Covenants: Confirm continued compliance with the credit facility's leverage ratio (1.46 as of June 30, 2009) and fixed charge coverage requirements.
• Deferred Compensation Plan: Review the volatility of the deferred compensation plan assets ($23.5 million) and its impact on operating expenses.