CBIZ, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing; the fourth-quarter figures below are unaudited. CBIZ provides accounting, tax, advisory, insurance, employee benefits, payroll, and technology and health-care consulting services through Financial Services, Employee Services, and National Practices.
Key financial results
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $719.5 million | $677.2 million |
| Operating income | $55.5 million | $49.4 million |
| Income from continuing operations | $30.4 million | $25.4 million |
| Diluted EPS from continuing operations | $0.59 | $0.52 |
| Net income | $29.8 million | $85.9 million |
| Operating cash flow | $43.9 million | $(1.5) million |
| Adjusted EBITDA (non-GAAP) | $83.7 million | $75.5 million |
- Revenue increased 6.2%, comprising $23.7 million from acquired businesses and $19.1 million, or 2.8%, from same-unit growth. Financial Services revenue rose 5.3%; Employee Services rose 9.8%; National Practices declined 3.5%.
- Operating expenses were 87.5% of revenue versus 87.6%; gross margin was 12.5% versus 12.4%. Corporate G&A declined to 4.8% of revenue from 5.1%.
- Interest expense fell to $13.1 million from $15.4 million, primarily reflecting lower average debt and borrowing rates. The effective tax rate was 39.9%, versus 39.5%.
- Net income fell sharply from 2013 because that year included a $58.3 million after-tax gain on the sale of Medical Management Professionals (MMP). Continuing-operations income and EPS increased year over year.
- Q4 revenue was $157.0 million versus $146.7 million. The company reported a Q4 operating loss of $4.1 million and continuing-operations loss of $1.4 million, compared with losses of $5.5 million and $2.9 million, respectively, in Q4 2013. Diluted continuing-operations EPS was $(0.03) versus $(0.06).
Cash, debt, and liquidity
- Cash and cash equivalents were $1.0 million at year-end; restricted cash was $28.3 million. Current assets exceeded current liabilities by $84.2 million, although these totals include client funds and related obligations.
- Net cash from continuing operations was $43.1 million. Investing activities used $63.9 million, including $46.0 million net cash for acquisitions and $4.8 million of capital expenditures. Financing activities provided $20.2 million. Cash increased by $0.2 million.
- Year-end bank debt was $107.4 million; convertible-note principal was $98.4 million ($97.6 million of 2010 Notes and $0.75 million of 2006 Notes). Total principal debt was approximately $205.8 million; carrying debt was about $204.0 million.
- In July 2014, CBIZ replaced its $275 million unsecured credit facility with a $400 million facility maturing in July 2019. Reported availability at year-end was approximately $185 million, subject to facility terms and covenants. Management said cash from operations and facility availability should cover foreseeable needs.
- The 2010 Notes bear 4.875% interest and mature October 1, 2015. During 2014, CBIZ retired $32.4 million principal using $30.6 million cash and 1.5 million shares. Management intended to retire the remaining notes and 2006 Notes during 2015 using the credit facility. CBIZ reported compliance with debt covenants.
Changes, outlook, and key risks
- CBIZ acquired six businesses and four client lists in 2014. Aggregate consideration for the six businesses was $66.2 million, including $19.4 million of contingent consideration. Goodwill and intangible assets increased; goodwill was $435.2 million, and the annual impairment assessment found no indication of impairment.
- Four businesses were designated for divestiture, including two small Financial Services businesses held for sale at year-end. A Financial Services business sale generated a $1.2 million gain. MMP, sold in 2013 for $201.6 million, is reported as discontinued operations.
- Management’s strategy emphasizes organic growth, cross-selling, acquisitions, operating leverage, and selective share repurchases. No specific numerical 2015 earnings or revenue guidance is provided in the filing. CBIZ repurchased about 3.2 million shares for approximately $26.7 million in 2014; subsequent to year-end it repurchased about 600,000 more shares for $5.0 million. The board renewed authorization for up to 5.0 million shares through March 2016.
- Revenue and earnings are seasonal: more than half of annual EPS has historically been earned in Q1, while fixed short-term costs can amplify revenue declines. Management announced that CEO Steven Gerard planned to retire in March 2016, with President and COO Jerome Grisko identified as successor.
- Key risks include fixed-cost exposure and receivables collection, reliance on key employees, acquisition execution and contingent earnouts, competition, regulatory changes affecting insurance and benefits brokerage, data security and transaction-processing failures, software-provider dependence, errors-and-omissions claims, and debt covenants/refinancing needs.
- Litigation arising from the Mortgages Ltd. bankruptcy remained partly unresolved. The Ninth Circuit affirmed dismissal of the Facciola claims in February 2015; most other cases were settled without CBIZ monetary payments, but two plaintiffs alleging approximately $16 million in damages continued their claims. Management said it could not estimate a potential loss and did not expect a material adverse effect.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether CBIZ refinanced or retired the remaining 2010 Notes by their October 2015 maturity, and the resulting borrowing cost, share dilution, and covenant headroom.
- Whether same-unit growth and margins improve, particularly in Employee Services and the declining National Practices group; assess acquisition contribution separately from organic growth.
- Whether operating cash flow remains adequate through seasonal working-capital swings, while funding acquisitions, earnouts, and repurchases; review unrestricted cash separately from client and restricted funds.
- Whether the remaining litigation, regulatory inquiries, and contingent acquisition liabilities produce material costs or changes in reported earnings.
- How the CEO succession and integration of acquisitions affect execution, retention, and cross-selling.