CBZ

CBIZ, Inc. Q1 2006 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2006. CBIZ, Inc. is a diversified professional services company serving small and medium-sized businesses, individuals, and governmental entities. During the quarter, the company realigned its operations into four client-centric practice groups: Financial Services, Employee Services, Medical Management Professionals, and National Practices. The company also adopted SFAS No. 123(R) regarding share-based payments on January 1, 2006.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 10.3% year-over-year, driven by a 7.9% increase in same-unit revenue and $3.7 million from acquired businesses.
• Profitability: Net income rose 47.7% to $12.0 million. Gross margin percentage improved to 18.9% from 18.1% due to revenue growth outpacing fixed cost increases.
• Segment Performance:
  • Financial Services: Revenue up 6.7% (same-unit up 6.4%).
  • Employee Services: Revenue up 10.9% (same-unit up 9.7%); gross margin improved significantly to 20.1%.
  • Medical Management Professionals: Revenue up 21.8% (same-unit up 8.8%); gross margin declined to 12.5% due to personnel investments.
  • National Practices: Revenue up 10.7%; gross margin improved to 6.3%.
• Debt Levels: Bank debt increased by $29.0 million to $61.2 million, primarily due to seasonal working capital needs and funding for acquisitions.
• Acquisitions: The company acquired a medical billing firm (The TriMed Group), an insurance broker (Valley Global), and a client list, totaling approximately $9.6 million in cash and stock consideration at closing, with up to $6.0 million in contingent consideration.

Outlook, Risks, and Unusual Items

• Guidance & Outlook: Management expects revenue growth to continue in 2006. Gross margins in Financial Services and Employee Services are expected to remain stable or improve, while Medical Management margins are expected to decline slightly due to ongoing system upgrades and personnel investments.
• Seasonality: The company typically experiences a net use of cash from operations in the first quarter due to the timing of tax and accounting service billings, followed by strong cash inflows in subsequent quarters.
• Regulatory Risks: CBIZ is cooperating with inquiries from state insurance regulators and Attorneys General regarding compensation arrangements within the insurance brokerage industry. Management believes these arrangements are lawful but notes that future regulatory action could impact revenue.
• Discontinued Operations: The company recorded a net loss of $1.4 million from discontinued operations, offset by a $0.2 million gain on disposal. An accounting and tax practice was sold in April 2006.
• Stock Repurchase: The Board authorized a $5.0 million share repurchase program in February 2006; no shares were repurchased in Q1.

Investor Verification Checklist

• Days Sales Outstanding (DSO): Verify the increase in DSO to 81 days (from 65 days at year-end) and its impact on future cash collections.
• Contingent Consideration: Review the $6.0 million potential future payout for Q1 acquisitions and the criteria for earning these amounts.
• Regulatory Inquiries: Monitor the status of insurance brokerage compensation inquiries and potential impacts on commission structures.
• Debt Covenants: Confirm continued compliance with the credit facility covenants (leverage ratio, fixed charge coverage) given the increased debt balance.
• Medical Management Margins: Track the execution of system upgrades and whether the expected margin decline stabilizes in subsequent quarters.