CBIZ, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Financial statements are unaudited; amounts below are in millions except per-share data. CBIZ provides professional business services through Financial Services, Employee Services, Medical Management Professionals (MMP), and National Practices.
Financial performance
- Second quarter: Revenue rose 2.8% to $188.6 million from $183.5 million. Acquisitions net of divestitures contributed $6.9 million; same-unit revenue declined 1.0% ($1.8 million).
- Operating expenses increased to $166.7 million from $160.4 million. Gross margin was $21.9 million, or 11.6% of revenue, versus $23.1 million, or 12.6%. Operating income fell to $14.3 million from $16.3 million; net income was $5.8 million versus $6.6 million. Diluted continuing-operations EPS was $0.12 versus $0.14. Company-defined non-GAAP cash EPS was $0.27 versus $0.29.
- First six months: Revenue increased 4.0% to $409.4 million from $393.5 million. Acquisitions net of divestitures contributed $15.8 million; same-unit revenue increased $0.1 million. Operating income was $44.6 million versus $47.1 million; net income was $24.6 million versus $24.5 million. Diluted continuing-operations EPS was $0.50 in both periods; non-GAAP cash EPS was $0.79 versus $0.78.
- First-half gross margin was $62.7 million, or 15.3% of revenue, compared with $63.4 million, or 16.1%. First-half interest expense declined to $8.3 million from $9.3 million. The effective tax rate was 40.8% versus 42.8%, mainly reflecting release of a valuation allowance on a state tax credit carryforward.
Segments and material changes
- For Q2, same-unit revenue increased 1.3% in Financial Services but declined 2.3% in Employee Services, 3.5% in MMP, and 9.3% in National Practices. Acquisition revenue lifted reported totals in Financial and Employee Services.
- For the first half, same-unit revenue increased 2.5% in Financial Services and declined 0.7% in Employee Services, 4.8% in MMP, and 8.5% in National Practices. MMP faced pricing and reimbursement pressure, lower revenue per procedure, and client losses. National Practices revenue was affected by the absence of prior-year mergers-and-acquisitions success fees.
- CBIZ acquired Meridian Insurance Group and Primarily Care during the first half. On July 1, 2012, it acquired Stoltz and Company, which had expected annual revenue of $3.2 million. First-half acquisition cash spending, net of cash acquired and including contingent consideration, was $21.1 million.
Cash flow, balance sheet, debt, and liquidity
- First-half operating cash flow was $25.6 million versus $22.9 million. Investing activities provided $4.6 million, largely reflecting a decrease in funds held for clients, while financing activities used $28.8 million. Cash and cash equivalents ended at $3.1 million, up from $1.6 million at year-end.
- At June 30, current assets were $293.6 million and current liabilities $200.3 million; these totals include client funds and matching obligations. Net accounts receivable rose to $164.1 million from $137.1 million at year-end. Days sales outstanding was 81 days, compared with 71 at year-end and 80 a year earlier.
- Bank debt was $149.2 million; convertible notes had a net carrying value of $121.1 million. The $275 million unsecured credit facility had approximately $8.8 million available and matures in June 2015. Management said it believed the company was covenant-compliant and that operating cash flow plus facility availability would meet foreseeable business needs. The 2010 notes have $130 million principal and mature in October 2015.
- A 100-basis-point change in market rates was estimated to change annual interest expense by approximately $1.1 million. A $40 million interest-rate swap partially mitigates floating-rate exposure.
- CBIZ repurchased 0.7 million shares for $4.5 million during the first half; 0.5 million shares were purchased in Q2 at an average $5.92 per share. A repurchase plan authorized up to 5.0 million shares.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management emphasized seasonality: first-quarter working-capital use is typically followed by stronger operating cash flow in the second and third quarters. Results for interim periods may not indicate full-year performance.
- Management cited growth management, key-person dependence, competitive pricing, economic conditions, regulation and tax-law changes, outsourcing trends, revenue seasonality, receivable collection, professional liability, regulatory inquiries, and information systems as risks.
- CBIZ is defending litigation related to Mortgages Ltd. and a separate Medical Capital-related case. The company denies wrongdoing and management did not expect the matters to have a material adverse effect, while noting that outcomes are uncertain. Legal activity increased corporate professional fees.
- First-half results included a $2.6 million gain on sale of operations, primarily a contingent gain from the prior sale of the individual wealth management business. CBIZ reported no goodwill impairment in the period. Acquisition contingent purchase-price liabilities totaled $25.9 million at June 30.
Important facts for investors to verify
- Whether elevated receivables and DSO are seasonal or signal slower collections, and the adequacy of the doubtful-account allowance.
- Whether same-unit trends and margins stabilize, particularly in MMP, National Practices, and Financial Services.
- Available borrowing capacity, covenant headroom, refinancing plans for 2015 maturities, and exposure to higher floating rates.
- How much reported earnings and cash generation depend on acquisitions, contingent sale proceeds, and other nonrecurring items; assess the company’s non-GAAP cash EPS reconciliation.
- Developments in the disclosed litigation and the potential cash cost of contingent acquisition obligations and other commitments.