CBZ

CBIZ, Inc. 10-Q Summary: Period Ended June 30, 2006

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2006, for CBIZ, Inc., a diversified professional business services company. The company serves small and medium-sized businesses, individuals, and governmental entities through four practice groups: Financial Services, Employee Services, Medical Management Professionals, and National Practices. During the first quarter of 2006, CBIZ realigned its operations into these four client-centric groups. The company is an accelerated filer and is not a shell company.

Key Financial Metrics

Note: All figures in millions unless otherwise noted. Net income includes losses from discontinued operations.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 9.4% ($13.1 million) for the three months ended June 30, 2006, compared to the same period in 2005. For the six-month period, revenue grew 9.8% ($29.0 million). Growth was driven by same-unit revenue increases across all practice groups and contributions from recent acquisitions.
• Profitability: Net income rose 57.1% to $5.2 million for the quarter and 50.4% to $17.2 million for the six-month period compared to 2005. Operating income increased 40.7% for the quarter and 26.6% for the six-month period.
• Debt Restructuring: On May 30, 2006, CBIZ issued $100.0 million in convertible senior subordinated notes. Proceeds were used to repay the entire $32.2 million balance of its unsecured credit facility and to fund share repurchases. Consequently, bank debt is now zero, replaced by the new convertible notes.
• Share Repurchases: The company repurchased 7.2 million shares of common stock at a cost of $56.8 million during the six months ended June 30, 2006, utilizing proceeds from the convertible note offering.
• Discontinued Operations: The company recorded losses from discontinued operations of $0.5 million (quarter) and $1.9 million (six months), primarily due to the sale of underperforming units and write-downs.

Guidance, Outlook, and Risks

• Outlook: Management expects revenue growth to continue throughout 2006, particularly in Financial Services and Employee Services. Gross margins are expected to remain stable or improve slightly, though Medical Management Professionals may see a modest decline due to higher postage costs from a recent acquisition.
• Liquidity: The company maintains a $100.0 million credit facility with approximately $88.1 million available. Management believes cash from operations and available credit are sufficient to meet requirements for the next 12 months.
• Regulatory Risks: CBIZ is cooperating with inquiries from state insurance departments and attorneys general regarding compensation arrangements within the insurance brokerage industry. While management believes current arrangements are lawful, future regulatory action could limit revenue from these sources.
• Accounting Changes: The company adopted SFAS 123(R) on January 1, 2006, requiring fair value measurement of stock-based compensation, which increased personnel costs.

Investor Verification Checklist

• Convertible Note Terms: Verify the conversion price ($10.63 per share) and the contingent interest provisions of the $100 million notes issued in May 2006.
• Acquisition Integration: Assess the performance of recent acquisitions (TriMed Group, Valley Global, BCKW) and the impact of contingent consideration on future earnings.
• Regulatory Inquiries: Monitor the status of investigations into insurance brokerage compensation arrangements by the NY, CT, and OH authorities.
• Discontinued Operations: Review the final settlement of contingent proceeds from the divested Employee Services operation sold in 2005.
• Stock-Based Compensation: Evaluate the impact of the new SFAS 123(R) adoption on future operating expenses and net income.