CBZ

CBIZ, Inc. 10-Q Summary: Quarter Ended June 30, 2008

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2008. CBIZ, Inc. is a diversified services company providing professional business services through four practice groups: Financial Services, Employee Services, Medical Management Professionals (MMP), and National Practices. The company operates primarily in the United States and Canada.

Key Financial Metrics

Note: Debt consists of $100.0 million in Convertible Notes and $60.0 million in Bank Debt. Gross margin for the six months ended June 30, 2008, was 16.0% of revenue.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 12.2% year-over-year for the quarter and 11.3% for the six-month period. Same-unit revenue grew 5.8% (quarter) and 5.4% (six months), driven by Financial Services and Employee Services.
• Profitability: Net income for the quarter decreased to $7.3 million from $9.8 million in the prior year, largely due to the absence of a $3.9 million gain on disposal of discontinued operations recorded in 2007. However, income from continuing operations increased to $7.5 million from $6.5 million.
• Segment Performance:
  • Financial Services: Revenue up 8.5% (quarter) and 7.8% (six months).
  • Employee Services: Revenue up 10.4% (quarter) and 7.6% (six months), aided by acquisitions.
  • MMP: Revenue up 30.5% (quarter) and 33.9% (six months), significantly boosted by acquisitions.
  • National Practices: Revenue declined 8.1% (quarter) and 9.3% (six months) due to client deferrals in technology projects.
• Debt & Liquidity: Bank debt increased by $30.0 million to $60.0 million to fund acquisitions and share repurchases. The credit facility was amended to increase the commitment from $100.0 million to $150.0 million.

Outlook, Risks, and Unusual Items

• Auction Rate Securities (ARS): Due to liquidity issues in credit markets, CBIZ's ARS investments experienced failed auctions. The fair value of ARS was 91.7% of face value at June 30, 2008. CBIZ recorded a temporary unrealized loss of $1.6 million in accumulated other comprehensive loss (not net income). $17.8 million of ARS were reclassified to non-current assets.
• Discontinued Operations: The company divested two businesses in the first half of 2008, resulting in a net loss of $0.4 million on disposal, compared to a $3.7 million gain in the prior year.
• Regulatory Environment: CBIZ is cooperating with inquiries from state insurance regulators and attorneys general regarding compensation arrangements in the insurance brokerage industry. Management believes these arrangements are lawful but notes potential future revenue impacts if regulations change.
• Health Plan Conversion: Effective January 1, 2008, the company converted its health benefit plan to a self-funded program, impacting cash flow timing and creating a new liability for claims.
• Share Repurchases: The company repurchased 3.8 million shares for $33.0 million during the six-month period.

Investor Verification Checklist

• ARS Liquidity Risk: Verify the status of the $19.4 million face value of Auction Rate Securities and the potential for further impairment if market conditions do not improve.
• Regulatory Inquiries: Monitor the outcome of state insurance regulator inquiries regarding compensation arrangements and potential fines or operational changes.
• Debt Covenants: Confirm continued compliance with the credit facility covenants (leverage ratio, fixed charge coverage) given the increased bank debt.
• Acquisition Integration: Assess the performance of the three businesses acquired in the first half of 2008 (payroll, insurance, executive search) to ensure they meet projected revenue targets.
• Technology Segment Decline: Investigate the causes of the 9.3% revenue decline in the National Practices segment and the outlook for client capital project spending.