CBZ

CBIZ, Inc. 2005 Annual Report (10-K) Summary

Business Context and Reporting Period

Company: CBIZ, Inc. (formerly Century Business Services, Inc., name changed August 1, 2005)
Reporting Period: Fiscal year ended December 31, 2005
Business Overview: CBIZ is a diversified professional services firm operating through three primary practice groups: Accounting, Tax and Advisory (ATA); Benefits and Insurance; and National Practices (which includes the Medical Management Professionals unit). The company serves businesses, individuals, and governmental entities across the U.S. and Toronto, Canada. Growth strategies include internal expansion, cross-selling services, and selective acquisitions.

Key Financial Metrics (Year Ended Dec 31, 2005)

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 10.8% year-over-year. Same-unit revenue grew 6.2%, driven by internal growth and acquisitions. Acquired businesses contributed $23.7 million in revenue.
• Profitability: Operating income rose 28.5% to $33.9 million. Net income increased 16.3% to $18.7 million.
• Segment Performance:
  • Accounting, Tax & Advisory: Revenue $245.5 million (43.9% of total); Gross margin improved to 15.2%.
  • Benefits & Insurance: Revenue $146.2 million (26.1% of total); Gross margin improved to 20.6%.
  • National Practices: Revenue $167.6 million (30.0% of total). The Medical Management Professionals (MMP) unit grew 11.8% to $97.6 million.
• Debt Reduction: Bank debt decreased by $21.7 million (40%) due to cash generated from operations used to pay down the credit facility.
• Share Repurchases: The company repurchased 3.8 million shares for $16.7 million during 2005.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects continued revenue growth in 2006, particularly in the ATA practice due to industry trends. Gross margins are expected to see modest improvements in ATA but may decline slightly in MMP due to planned system upgrade investments.
• Acquisitions: In January 2006, CBIZ acquired The TriMed Group (medical billing) and Valley Global Insurance Brokers. The company intends to continue selective acquisitions.
• Regulatory Risks: State insurance regulators and Attorneys General (NY, CT, OH) have issued subpoenas/inquiries regarding CBIZ's insurance brokerage compensation arrangements. Management believes arrangements are lawful but notes future regulatory action could limit revenue enhancement.
• Discontinued Operations: The company recorded a $3.6 million net gain on the disposal of discontinued operations in 2005, primarily from contingent proceeds on a sold Benefits and Insurance unit. Losses from discontinued operations were $6.5 million.
• Seasonality: Revenue is heavily weighted in the first half of the year (approx. 42% of ATA revenue occurs in the first four months), leading to higher operating margins in Q1 and Q2.

Key Facts for Investor Verification

• Revenue Concentration: No single client represents more than 3.0% of total revenue; the largest client (Edward Jones) contributed 2.6%.
• CPA Firm Relationships: CBIZ maintains Administrative Service Agreements (ASAs) with independent CPA firms (qualifying as Variable Interest Entities). Fees from these ASAs totaled $69.0 million in 2005. Investors should monitor independence rules and potential consolidation risks.
• Insurance Compensation Inquiries: Verify the status of ongoing regulatory inquiries regarding insurance brokerage compensation, as this could impact future revenue models.
• Debt Covenants: The company entered a new $100 million unsecured credit facility in February 2006 with a leverage ratio covenant of less than 2.0. Verify compliance with these covenants in subsequent filings.
• Discontinued Operations: A business unit in National Practices is committed for divestiture in 2006; monitor the timing and financial impact of this closure/sale.