CBIZ, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Amounts below are in millions of dollars, except per-share data. The filing is unaudited.
Business context and material developments
CBIZ provides business, financial, employee and consulting services through its Financial Services, Employee Services and National Practices groups. On August 30, 2013, it sold its Medical Management Professionals (MMP) business for $201.6 million, subject to working-capital adjustments. MMP is presented as discontinued operations; comparisons of continuing operations exclude it.
From the sale proceeds, CBIZ repurchased approximately 3.86 million shares from Westbury for $25.7 million and paid down its revolving credit facility. The company also acquired Associated Insurance Agents in 2013. Subsequent to quarter-end, CBIZ extended its largest client Edward Jones’ contract through December 31, 2018, and acquired Knight Field Fabry, with expected annualized revenue of approximately $1.5 million.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Continuing-operations revenue | $168.8 | $149.8 | $542.8 | $491.6 |
| Operating income | $9.0 | $5.2 | $53.6 | $43.2 |
| Income from continuing operations | $5.1 | $3.1 | $27.4 | $24.0 |
| Continuing-operations diluted EPS | $0.10 | $0.06 | $0.55 | $0.49 |
| Net income | $62.4 | $5.3 | $89.8 | $29.9 |
Revenue increased 12.7% in Q3 and 10.4% year to date. Acquisitions contributed $13.6 million and $39.7 million, respectively; same-unit growth was 3.6% and 2.3%. Financial Services led organic growth. Employee Services same-unit revenue was nearly flat year to date, while National Practices revenue declined 0.8%.
Gross margin was 10.6% in Q3 versus 8.4% and 14.8% for the first nine months versus 14.0%. Operating income rose 73.6% in Q3 and 24.1% year to date. Non-GAAP diluted EPS, as defined and reconciled by the company, was $0.25 for Q3 and $0.99 year to date, compared with $0.19 and $0.83.
Reported net income includes the after-tax MMP disposal gain of $56.3 million in Q3 and $58.2 million year to date. MMP contributed $23.5 million of revenue and $1.0 million of after-tax operating income in Q3 before its sale; year-to-date discontinued-operations income was $4.1 million after tax.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $10.6 million, down from $37.7 million. Continuing operations provided $5.4 million; discontinued operations provided $5.2 million. Management cited working-capital uses, including higher receivables, and the exclusion of disposal gains from operating cash flow.
- Investing activities provided $242.0 million, primarily reflecting $200.9 million in proceeds from divestitures and discontinued operations and a $51.4 million net decrease in funds held for clients. Financing activities used $249.9 million, including $168.9 million of net bank-debt repayment, $50.6 million of net client-fund obligation reductions and the $26.5 million share repurchase.
- Cash and cash equivalents were $3.6 million; restricted cash was $25.0 million. Current assets were $314.2 million and current liabilities $250.7 million, including substantial, largely offsetting client funds and obligations.
- At September 30, bank debt was $40.0 million, down from $208.9 million at year-end 2012. Convertible notes had a $130.0 million principal balance and $124.5 million net carrying value. The $275 million unsecured credit facility matures in June 2015; reported availability was approximately $138.8 million, net of letters of credit and performance guarantees. CBIZ said it was in compliance with covenants.
- Interest expense was $12.0 million for nine months, up from $11.2 million. A $40.0 million notional interest-rate swap hedged part of floating-rate exposure.
Management commentary, outlook and risks
Management attributed margin improvement primarily to leveraging personnel and occupancy costs against higher revenue. Financial Services benefited from accounting and tax activity and government healthcare-compliance projects; Employee Services growth included property-and-casualty, payroll and retirement consulting, partly offset by weaker life-insurance revenue. Management cautioned that interim results are not necessarily indicative of full-year results because of seasonality, economic conditions and interest-rate fluctuations. The filing provides no specific full-year earnings or revenue guidance.
CBIZ said cash generation and available credit were expected to meet foreseeable operating, capital and working-capital needs, including strategic initiatives. Risks highlighted include growth management, key-person dependence, pricing competition, economic and regulatory changes, seasonality and receivables collection, professional-liability claims, insurance-industry regulatory scrutiny, and reliance on information systems.
Litigation includes Arizona matters arising from the Mortgages Ltd. bankruptcy and a California lawsuit seeking approximately $87 million. Some Arizona cases were settled without monetary payments by CBIZ; other claims and an appeal remained. The company said it could not predict outcomes or estimate possible loss, but management believed resolution would not materially adversely affect the company. The company also reported $30.9 million of contingent acquisition consideration liabilities and substantial lease commitments.
Important facts for investors to verify
- Final MMP working-capital adjustment and the realized after-tax net proceeds; reported disposal gains make GAAP net income materially higher than continuing-operations earnings.
- Whether organic growth and margin gains persist, particularly given modest same-unit growth in Employee Services and declines in National Practices.
- Cash conversion, receivables and DSO, which was 84 days at September 30, versus 77 days at December 31, 2012.
- Actual revolver availability, covenant headroom and refinancing plans ahead of the credit facility’s June 2015 maturity and the $130 million notes’ October 2015 maturity.
- Developments in pending litigation, potential exposure, and the renewal and economics of the Edward Jones contract.