CBIZ, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; balance-sheet amounts are as of June 30, 2013, compared with December 31, 2012. Unaudited. Unless noted otherwise, financial amounts below are in millions of dollars. CBIZ provides professional business services through Financial Services, Employee Services, and National Practices.
Financial performance
| Metric | Q2 2013 | Q2 2012 | H1 2013 | H1 2012 |
|---|---|---|---|---|
| Revenue | $172.5 | $154.2 | $373.9 | $341.8 |
| Gross margin | $20.9 | $18.2 | $62.3 | $56.2 |
| Operating income | $13.2 | $10.6 | $44.7 | $38.1 |
| Continuing-operations income | $5.5 | $3.8 | $22.4 | $20.9 |
| Net income | $9.1 | $5.8 | $27.5 | $24.6 |
| Diluted EPS, continuing operations | $0.11 | $0.08 | $0.45 | $0.42 |
| Diluted EPS, total | $0.18 | $0.12 | $0.55 | $0.50 |
- Gross margin was 12.1% of revenue in Q2 and 16.7% for H1, versus 11.8% and 16.4%, respectively, in 2012. Operating income was up 24.6% in Q2 and 17.4% for H1.
- Revenue increased 11.9% in Q2 and 9.4% for H1. Acquisitions contributed $13.0 million and $26.1 million, respectively; same-unit revenue grew 3.4% in Q2 and 1.8% for H1.
- Q2 same-unit growth was led by Financial Services (+4.8%); Employee Services rose 1.0%, while National Practices declined 0.6%. For H1, same-unit growth was 2.5% in Financial Services, 0.1% in Employee Services, and 0.7% in National Practices.
- Q2 continuing-operations income benefited from lower corporate professional fees and improved operating performance; the effective tax rate was 43.5%, compared with 36.9%. H1 effective tax rate was 42.4%, versus 41.1%.
- Net income includes discontinued operations. Q2 included $1.8 million of after-tax income from discontinued operations and a $1.9 million after-tax disposal gain; the latter principally reflects a deferred tax benefit associated with the planned MMP sale, not sale proceeds. H1 discontinued-operations income was $3.2 million and the after-tax disposal gain was $1.9 million.
- Management also reported non-GAAP diluted EPS of $0.25 for Q2 and $0.74 for H1, versus $0.20 and $0.64 in 2012. These measures exclude selected non-cash items and are not substitutes for GAAP results.
Cash flow, debt and liquidity
- For H1 2013, operating cash flow was $13.9 million, down from $25.6 million; continuing-operations operating cash flow was $11.8 million, compared with $19.0 million. Management cited working-capital use, including higher receivables, and lower operating cash from discontinued operations.
- Investing cash flow was $30.9 million, including a $38.8 million net decrease in funds held for clients; financing cash flow was a $44.5 million use, including a $37.8 million decrease in client fund obligations and $4.9 million of net bank-debt repayment. Cash and cash equivalents increased by $0.3 million to $1.2 million.
- At June 30, current assets were $434.4 million and current liabilities $246.6 million; these include client funds and corresponding obligations. Restricted cash was $28.2 million. Accounts receivable, net, was $161.4 million; continuing-operations DSO was 83 days, up from 77 days at year-end 2012 and equal to June 2012.
- Bank debt was $204.0 million, down from $208.9 million at year-end. The $275 million unsecured credit facility had $60.4 million available after letters of credit and performance guarantees; it matures in June 2015. Convertible notes had $130.75 million principal outstanding, principally $130 million of 4.875% notes due October 2015. Management said CBIZ was in covenant compliance and believed operating cash and available credit would meet foreseeable needs.
- A 100-basis-point change in market rates would change annual interest expense by approximately $1.6 million, before considering hedging effects. A $40 million interest-rate swap partially mitigates floating-rate exposure.
Material developments, outlook and risks
- On July 26, 2013, after quarter-end, CBIZ agreed to sell its Medical Management Professionals (MMP) business for approximately $200 million, subject to adjustment, customary closing conditions and regulatory approvals. Closing was expected September 1, 2013; estimated net proceeds after transaction costs and taxes were approximately $145 million. MMP was classified as discontinued operations in this filing.
- CBIZ planned to use the proceeds to repurchase approximately 3.858 million shares from Westbury at $6.65 per share (approximately $25.7 million) and repay credit-facility debt. The repurchase agreement depends on the MMP sale closing; failure to complete either transaction could affect the business, results and share price. The filing provides no formal earnings or revenue guidance.
- CBIZ acquired Associated Insurance Agents in H1 for an aggregate preliminary purchase price of $8.6 million, including $4.6 million of contingent consideration; management expected annual revenue of approximately $3.8 million.
- Litigation includes Arizona cases related to Mortgages Ltd. and a California case related to Medical Capital. Some claims were dismissed and certain settlements were reached without monetary payments, but other claims remain. Plaintiffs allege substantial damages; CBIZ said it cannot estimate a possible loss or range, denies wrongdoing, and believes resolution will not materially adversely affect the company.
- Other risks identified include seasonality and receivable collection, economic and competitive conditions, regulatory and tax changes, key-person dependence, systems reliability, and the conditions and expected benefits of the MMP sale and Westbury share purchase. Management reported no goodwill impairment trigger in H1 and said disclosure controls were effective at a reasonable-assurance level.
Most important facts for investors to verify
- Whether the MMP sale closed, final proceeds after adjustments, taxes and transaction costs, and how proceeds were applied to debt and the Westbury repurchase.
- Whether the announced share purchase was completed and its impact on share count, liquidity and leverage.
- Whether same-unit revenue growth and margin improvement continue, particularly given modest H1 same-unit growth in Employee Services and National Practices.
- Receivables, DSO and operating cash conversion, including the effects of seasonal working capital and client-fund movements.
- Developments in the remaining litigation, contingent acquisition liabilities, and refinancing or repayment of the credit facility and convertible notes.