CBZ

CBIZ, Inc. 10-Q Summary: Period Ended September 30, 2008

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, 2008. CBIZ operates through four practice groups: Financial Services, Employee Services, Medical Management Professionals (MMP), and National Practices. The company provides accounting, tax, financial advisory, insurance, payroll, and IT consulting services primarily to small and medium-sized businesses.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 11.3% year-over-year for the nine months ended September 30, 2008, driven by same-unit revenue growth of 5.4% and $29.1 million in revenue from acquired businesses.
• Profitability: Net income rose slightly to $29.0 million (from $28.7 million in the prior year period), despite a $1.4 million impairment charge on Auction Rate Securities (ARS).
• Segment Performance:
  • Financial Services: Revenue up 7.9% due to increased consulting hours and price increases.
  • Employee Services: Revenue up 6.8%, aided by acquisitions in payroll and insurance brokerage.
  • MMP: Revenue surged 31.7% due to acquisitions in emergency medicine and anesthesia billing.
  • National Practices: Revenue declined 4.6% due to delays in client capital projects and non-renewal of service agreements.
• Debt Structure: Bank debt increased to $60.0 million from $30.0 million at year-end 2007 to fund acquisitions and share repurchases. The credit facility commitment was increased to $150.0 million in April 2008.

Guidance, Outlook, Risks, and Unusual Items

• Auction Rate Securities (ARS): Due to liquidity issues in credit markets, CBIZ recorded a $1.4 million other-than-temporary impairment charge on one ARS investment. Two other ARS investments showed temporary declines in fair value totaling $0.2 million. Management intends to hold these until recovery but notes that principal may not be accessible until successful auctions occur or maturity.
• Share Repurchases: The company repurchased approximately 4.3 million shares for $37.8 million during the nine-month period. As of September 30, 2008, approximately 3.0 million shares remained available under the current authorization.
• Regulatory Risks: 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 plan to a self-funded program, impacting cash flow timing and creating new liability estimates for claims.
• Accounting Changes: The company is evaluating the impact of new accounting standards (SFAS 141R, 160, 161) and FSP APB 14-1 regarding convertible debt, which may result in additional non-cash interest expense in future periods.

Investor Verification Checklist

• ARS Liquidity: Verify the status of the remaining $13.4 million in ARS investments (par value) and the likelihood of recovery given the credit market freeze.
• Bad Debt Trends: Monitor the allowance for doubtful accounts, which increased to $6.9 million, as bad debt expense rose to 2.0% of revenue in Q3 due to client cash flow pressures in the housing/construction sectors.
• Regulatory Outcomes: Track the resolution of insurance brokerage compensation inquiries to assess potential revenue adjustments.
• Debt Covenants: Confirm continued compliance with leverage and fixed charge coverage ratios under the amended $150 million credit facility.
• Acquisition Integration: Assess the margin contribution of recent acquisitions, particularly in the MMP and Employee Services groups, to ensure they offset the lower margins of new business.