CBIZ, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. CBIZ provides accounting, tax, advisory, benefits, insurance, payroll and related services, primarily to small and midsize organizations. This unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $232.6 million | $211.0 million | $498.7 million | $452.5 million |
| Operating income | $17.5 million | $13.7 million | $68.9 million | $53.6 million |
| Income from continuing operations | $13.1 million | $11.4 million | $48.9 million | $36.4 million |
| Net income | $13.1 million | $11.0 million | $49.0 million | $35.9 million |
| Diluted EPS from continuing operations | $0.23 | $0.20 | $0.87 | $0.66 |
| Operating cash flow | Not separately reported for quarter | $41.1 million | $24.2 million |
- Revenue increased 10.2% in both comparison periods. Management attributed growth to same-unit revenue growth of 5.9% in Q2 and 5.8% in the first half, plus acquired operations.
- Operating margin was approximately 7.5% in Q2 versus 6.5% in 2017, and 13.8% for the first half versus 11.8%. Operating expenses declined as a share of revenue in both periods.
- Financial Services drove most growth: revenue rose 14.4% in Q2 and 14.1% for the first half. Benefits and Insurance Services revenue rose 3.1% and 3.0%, respectively; National Practices revenue rose 3.6% and 5.0%.
- First-half investing cash flow was $42.5 million and financing cash flow was a use of $75.5 million. Cash flow was significantly affected by movements in client funds and corresponding obligations. Operating cash flow increased $16.9 million year over year, which management primarily attributed to higher net income and noncash adjustments.
- At June 30, cash and cash equivalents were $1.9 million and restricted cash was $39.5 million. Bank debt was $180.2 million; approximately $200 million remained available under the revolving facility, net of letters of credit. CBIZ reported compliance with its debt covenants.
- Accounts receivable, net, was $245.6 million. Days sales outstanding was 82 days, compared with 83 days at June 30, 2017 and 72 days at December 31, 2017. Current assets and liabilities include substantial client funds and related obligations.
Changes, outlook and notable matters
- Revenue growth reflected both organic expansion and acquisitions. InR Advisory Services and Laurus Transaction Advisors were acquired in the first half; acquisition consideration included $12.4 million of contingent consideration. The company also recorded $32.3 million of goodwill from first-half 2018 acquisitions.
- The effective tax rate was 25.1% for the first half, down from 36.0% in 2017, primarily reflecting the Tax Cuts and Jobs Act and excess tax benefits from share-based compensation. Management estimated the tax law increased diluted continuing-operations EPS by $0.03 in Q2 and $0.14 in the first half.
- CBIZ amended and restated its $400 million unsecured credit facility in April, extending maturity from 2019 to 2023 and improving borrowing margins and certain covenant provisions. Interest expense increased year over year as borrowing rates rose. A 100-basis-point rate change was estimated to affect annual interest expense by about $1 million; swaps partially hedge floating-rate exposure.
- CBIZ adopted the new revenue recognition standard using the modified retrospective method. It increased opening retained earnings by $1.6 million. The 2018 reported figures were modestly lower than they would have been under the former standard; 2017 comparisons were not restated.
- The company expects adoption of the new lease standard in 2019 to add approximately $200 million of lease-related assets and liabilities to the balance sheet. Management did not expect a material effect on earnings, liquidity or debt covenant compliance.
- No specific financial guidance or quantified full-year outlook is provided in the supplied filing text. Management describes acquisitions as its first capital-allocation priority and share repurchases as an opportunistic use of capital. It repurchased approximately 129,000 shares for $2.7 million in the first half.
- Unresolved litigation includes a claim alleging approximately $142 million in damages related to actuarial services and a stayed claim alleging approximately $16 million in damages related to the Mortgages Ltd. bankruptcy. CBIZ said it could not predict outcomes or estimate possible losses and intends to defend the cases.
- National Practices derives approximately 75% of its revenue from a single client. CBIZ also disclosed contingent acquisition liabilities, ordinary-course claims, and interest-rate exposure. The filing reports a $0.7 million first-half gain on sale of a small business and $0.6 million of Hurricane Irma business-interruption insurance proceeds.
Important facts for investors to verify
- Assess the sustainability of same-unit growth, particularly the strong Financial Services performance, and the contribution and integration of acquisitions.
- Review receivables and collections: DSO rose to 82 days from 72 days at year-end, while first-half operating cash flow remained subject to seasonal working-capital and client-fund timing.
- Evaluate the potential financial exposure and status of the two significant legal matters; management provides no estimate of possible losses.
- Confirm the effect of the expected lease-standard adoption and ongoing interest-rate exposure, including the coverage and maturities of interest-rate swaps.
- Reconcile share repurchase disclosures: the narrative says approximately 94,000 open-market shares were repurchased in Q2, while the issuer-purchases table totals approximately 188,000 shares; the filing separately notes approximately 94,000 shares withheld for employee tax obligations.