CBIZ, Inc. 10-Q Summary: Period Ended June 30, 2007
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2007, for CBIZ, Inc., a diversified professional services company. 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 U.S. and Canada.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 |
Six Months Ended June 30, 2007 |
|---|---|---|
| Revenue | $156.9 million | $335.9 million |
| Net Income | $9.8 million | $24.1 million |
| Diluted EPS | $0.15 | $0.36 |
| Operating Income | $10.6 million | $36.2 million |
| Gross Margin | 13.5% | 17.3% |
| Cash & Equivalents | $5.7 million | $5.7 million (Balance) |
| Operating Cash Flow | N/A | $9.4 million |
| Total Debt | $110.0 million | $110.0 million (Balance) |
Note: Total debt includes $100.0 million in convertible notes and $10.0 million in bank debt.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 7.3% year-over-year for the quarter and 8.7% for the six-month period, driven by same-unit revenue growth in Financial Services and Employee Services.
- Profitability: Net income rose significantly (88% for the quarter, 39.7% for six months) largely due to a $3.9 million gain on the disposal of discontinued operations in the second quarter of 2007.
- Margin Compression: Gross margin declined to 13.5% (from 15.3% in Q2 2006) due to the impact of the Deficit Reduction Act on the MMP segment and the absence of two large M&A transactions completed in Q2 2006.
- Discontinued Operations: The company divested two business units (one Financial Services, one Employee Services) in the first half of 2007, resulting in a net gain of $3.7 million.
Outlook, Risks, and Management Commentary
- Regulatory Impact: The Deficit Reduction Act of 2005 is adversely affecting reimbursement rates for the Medical Management Professionals segment, reducing revenue and margins. Management expects this to continue impacting the segment.
- Acquisitions & Divestitures: CBIZ continues to acquire businesses to expand market position (e.g., accounting firm in Phoenix, medical billing in Alabama) while divesting non-core units. Two additional Financial Services units were classified as discontinued operations in Q2 2007.
- Share Repurchases: The company repurchased approximately 3.5 million shares for $24.6 million during the first six months of 2007 to create shareholder value.
- Liquidity: CBIZ maintains a $100 million credit facility with approximately $82 million available. The company is in compliance with all financial covenants.
- Tax Contingencies: The company is under IRS audit for tax years 2003 and 2004, with potential payments estimated between $2.0 million and $2.6 million.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by excluding the one-time $3.9 million gain from discontinued operations.
- DSO Trends: Monitor Days Sales Outstanding, which increased to 73 days (from 71 days in June 2006), indicating potential collection delays.
- MMP Segment Margins: Assess the long-term impact of the Deficit Reduction Act on the Medical Management Professionals segment's profitability.
- Convertible Notes: Review the terms of the $100 million convertible notes (3.125% interest, convertible at $10.63/share) and their potential dilution if stock price rises.
- IRS Audit Resolution: Track the outcome of the ongoing IRS audit for tax years 2003-2004 regarding the estimated $2.0-$2.6 million liability.