CBIZ, Inc. 2006 Annual Report (10-K) Summary
Business Context and Reporting Period
This filing covers the fiscal year ended December 31, 2006. CBIZ, Inc. is a diversified professional services firm providing financial, employee, medical management, and technology services to businesses, individuals, and governmental entities. In 2006, the company realigned its operations into four client-centric practice groups: Financial Services, Employee Services, Medical Management Professionals (CBIZ MMP), and National Practices. The company also transferred its stock listing from NASDAQ to the New York Stock Exchange (NYSE) under the symbol "CBZ" in August 2006.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Total Revenue | $601.1 million | $550.7 million |
| Operating Income | $40.8 million | $35.2 million |
| Net Income | $24.4 million | $18.7 million |
| Diluted EPS | $0.33 | $0.24 |
| Gross Margin | 13.6% | 13.6% |
| Operating Cash Flow | $28.2 million | $54.3 million |
| Long-Term Debt | $102.2 million | $33.4 million |
| Total Assets | $518.3 million | $454.5 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 9.2% to $601.1 million, driven by 5.9% same-unit growth and $18.2 million from acquired businesses.
- Profitability: Net income rose 30.8% to $24.4 million. Operating income increased 16.0% to $40.8 million.
- Capital Structure: In May 2006, CBIZ issued $100.0 million in convertible senior subordinated notes (3.125% interest, due 2026). Proceeds were used to repay the entire $100.0 million credit facility balance and to repurchase 6.6 million shares of common stock.
- Share Repurchases: The company repurchased 9.7 million shares for a total cost of $74.5 million during 2006.
- Discontinued Operations: The company sold two business operations (accounting/tax and property tax services) and committed to divest two additional operations in Q4 2006. These resulted in a net loss from discontinued operations of $1.2 million for the year.
- Accounting Changes: Adoption of SAB 108 resulted in a $2.6 million charge to retained earnings. Adoption of SFAS 123(R) added approximately $1.6 million in stock-based compensation expense.
Guidance, Outlook, and Risks
Outlook: Management expects growth to continue through internal organic growth, cross-serving existing clients, and targeted acquisitions. The company maintains a share repurchase program authorized through March 31, 2007, and a new program authorized in February 2007 for up to 5.0 million shares through March 31, 2008.
Risks and Contingencies:
- Regulatory Inquiries: CBIZ is cooperating with inquiries from state insurance regulators and attorneys general regarding compensation arrangements in the insurance brokerage industry. Future regulatory action could limit revenue from these sources.
- Medical Reimbursement: Changes in Medicare/Medicaid reimbursement rules and managed care plans (e.g., Deficit Reduction Act of 2005) pose risks to the Medical Management Professionals segment.
- Outsourcing Trends: A reversal in the trend toward outsourcing business services could materially adversely affect the business.
- Liquidity: While the company has $83.7 million available under its credit facility and strong operating cash flow, it is subject to financial covenants regarding leverage and fixed charge coverage.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the leverage ratio and fixed charge coverage covenants under the $100 million credit facility and the indenture for the convertible notes.
- Regulatory Status: Monitor the outcome of state insurance regulator inquiries regarding compensation arrangements and potential impacts on the Employee Services segment.
- Discontinued Operations: Track the completion of the two divestitures committed in Q4 2006 and the associated proceeds.
- Convertible Notes: Assess the dilution risk associated with the $100 million convertible notes (conversion price approx. $10.63) if the stock price rises significantly.
- Medical Segment Margins: Review the impact of changing reimbursement rates on the margins of the CBIZ MMP segment.