CBZ

CBIZ, Inc. 10-Q Summary: Quarter Ended September 30, 2007

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for CBIZ, Inc., a diversified professional services company, for the period ended September 30, 2007. CBIZ operates through four practice groups: Financial Services, Employee Services, Medical Management Professionals (MMP), and National Practices. The company serves small and medium-sized businesses, individuals, and governmental entities across the United States and Canada.

Key Financial Metrics

Note: Total debt includes $100.0 million in Convertible Senior Subordinated Notes and $12.0 million in Bank Debt.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 10.6% year-over-year for the quarter and 9.3% for the nine-month period. Same-unit revenue grew 9.3% for the quarter, driven by Financial Services and Employee Services.
• Profitability: Net income rose 12.7% for the quarter and 34.5% for the nine-month period compared to 2006.
• Margin Pressure: Gross margin percentage declined slightly for the nine-month period (15.4% vs. 15.5% in 2006). This was attributed to reduced Medicare reimbursement rates affecting the MMP segment and a lack of M&A transactions in the National Practices segment compared to the prior year.
• Discontinued Operations: The company recorded a net gain of $4.7 million from the disposal of discontinued operations for the nine months ended September 30, 2007, compared to $0.5 million in the prior year.

Outlook, Risks, and Management Commentary

• Acquisitions and Divestitures: CBIZ continues to acquire businesses to strengthen market position (e.g., an accounting firm in Phoenix and a medical billing firm in Alabama). Conversely, the company divested three business units in the first nine months of 2007 to rationalize its portfolio.
• Share Repurchases: Management repurchased approximately 4.4 million shares for $30.7 million during the nine-month period to create shareholder value.
• Regulatory Risks: The MMP segment faces headwinds from the Deficit Reduction Act of 2005, which caps reimbursement rates for imaging services. Additionally, state insurance regulators and Attorneys General have issued inquiries regarding compensation arrangements in the Employee Services group, though management believes these are consistent with industry practice.
• Tax Contingencies: The company is under IRS audit for tax years 2003 and 2004, with potential payments estimated between $2.2 million and $2.8 million. Adoption of FIN 48 resulted in a $0.7 million adjustment to accumulated deficit.
• Liquidity: The company maintains a $100 million credit facility with approximately $80.3 million available as of September 30, 2007. Management believes cash flow and available credit are sufficient for foreseeable needs.

Investor Verification Checklist

• Medicare Reimbursement Impact: Verify the extent to which the Deficit Reduction Act continues to compress margins in the Medical Management Professionals segment.
• Regulatory Inquiries: Monitor the status of inquiries from state insurance departments and Attorneys General regarding compensation arrangements in the Employee Services group.
• Discontinued Operations: Confirm the final proceeds and tax implications of the divestitures classified as discontinued operations, particularly the contingent future proceeds.
• IRS Audit Resolution: Track the outcome of the IRS audit for tax years 2003 and 2004 to assess potential cash outflows.
• Convertible Notes: Review the conversion price ($10.63) relative to the current market price to assess potential dilution if the stock price rises significantly.