CBIZ, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; unaudited consolidated results. CBIZ provides financial, employee, and national business services. Unless stated otherwise, amounts below are in millions.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $183.8 | $168.8 | $573.6 | $542.2 |
| Operating income | $15.9 | $9.6 | $58.6 | $54.9 |
| Income from continuing operations | $7.3 | $5.5 | $31.5 | $28.2 |
| Net income | $7.7 | $62.4 | $31.1 | $89.8 |
| Diluted EPS from continuing operations | $0.14 | $0.11 | $0.61 | $0.57 |
| Non-GAAP diluted EPS from continuing operations | $0.28 | $0.26 | $0.97 | $1.01 |
- Q3 revenue rose 8.9%; 5.0% came from same-unit growth and 3.9% from acquired businesses. Nine-month revenue rose 5.8%, comprising 2.8% same-unit growth and 2.9% acquisition contribution.
- Gross margin was 13.5% in Q3 versus 11.0% a year earlier; operating margin was approximately 8.6% versus 5.7%. For the nine-month period, gross margin was 15.0% in both years.
- Financial Services and Employee Services drove growth. Q3 same-unit revenue increased 5.5% and 5.4%, respectively; National Practices revenue declined 4.7%. Nine-month same-unit growth was 2.9% in Financial Services and 3.1% in Employee Services, while National Practices declined 1.6%.
- Net income comparisons are heavily affected by discontinued operations: 2013 included a $56.3 million after-tax disposal gain in Q3 and $58.2 million for the nine-month period. The corresponding 2014 disposal gains were $0.6 million and $0.1 million. Continuing-operations results provide a clearer operating comparison.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $22.8 million, up from $10.6 million. Working-capital changes used $34.5 million, mainly reflecting higher receivables as revenue and days sales outstanding increased. DSO was 87 days at September 30, 2014, compared with 85 days a year earlier and 74 days at year-end 2013.
- Investing cash flow was $18.9 million, including a $61.4 million net decrease in funds held for clients, and $33.0 million of acquisition and contingent-consideration outflows. Financing cash flow used $42.1 million. Cash and cash equivalents ended at just $0.4 million; restricted cash was $24.8 million.
- At September 30, bank debt was $108.0 million and convertible notes had a $96.0 million carrying value (about $98.4 million principal, including $97.65 million of 2010 Notes). Total carrying debt was approximately $204.0 million. The 2010 Notes mature October 1, 2015.
- CBIZ replaced its $275 million credit facility with a $400 million unsecured facility maturing July 2019. The filing reports $172.6 million of available funds, net of $4.4 million in letters of credit and performance guarantees; the company said it was in compliance with debt covenants.
- Current assets exceeded current liabilities by approximately $108 million, but these totals include substantial client funds and corresponding obligations. Client funds held and obligations were each about $110 million at quarter-end.
Material developments, outlook, and risks
- CBIZ acquired five businesses during the first nine months for aggregate consideration of approximately $44.4 million, including $14.0 million of contingent consideration. Acquisition-related goodwill was $31.9 million. A further insurance brokerage acquisition, Weekes and Callaway, closed November 1, 2014; expected annual revenue was $9.0 million.
- During Q3, CBIZ retired $32.4 million principal amount of 2010 Notes using $30.6 million cash and 1.5 million shares. The transaction generated a roughly $1.5 million non-operating loss; management estimated annual interest savings of $1.2 million. The company also repurchased 2.2 million shares during the first nine months for approximately $19.0 million.
- Management said cash from operations and credit-facility availability should support foreseeable business requirements, including working capital, capital expenditures, acquisitions, and repurchases. The filing provides no specific revenue or earnings guidance. Results are seasonal and interim results are not necessarily indicative of full-year performance.
- Risks highlighted include seasonal revenue and receivables collection, economic and pricing pressures, regulatory and tax changes, key-employee dependence, errors-and-omissions exposure, and reliance on information systems. A 100-basis-point change in market rates was estimated to change annual interest expense by about $0.8 million, before considering hedging effects.
- Litigation includes remaining Arizona investor-related claims and the ML Liquidating Trust matter; CBIZ denied wrongdoing and said it could not estimate any possible loss or range. Management did not expect resolution to materially affect the company, but outcomes remain uncertain. Several related cases were settled without monetary payments by CBIZ, and a separate Signature matter was settled after CBIZ’s dismissal on summary judgment.
- The CEO announced plans to retire in March 2016; the board indicated that current President and COO Jerome P. Grisko, Jr. would succeed him. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether receivables and unbilled revenue convert to cash as expected, given DSO rose to 87 days and receivables increased $36.7 million from year-end.
- How CBIZ plans to refinance or repay the $97.65 million of 2010 Notes due October 2015, and whether reported credit availability remains sufficient.
- Acquisition integration, acquired-business performance, and potential contingent purchase-price payments; the filing identifies future acquired-business performance as a key valuation input.
- The basis and exclusions in non-GAAP EPS, which was higher year over year in Q3 but lower for the nine-month period; compare it with GAAP continuing-operations results.
- Developments and potential exposure in the remaining litigation, for which the company could not estimate a loss range.