CBIZ, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011; filed March 15, 2012. This is an annual report, not a standalone fourth-quarter filing. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions unless noted.
Business context and reporting period
CBIZ provides accounting, tax, employee benefits, payroll, medical billing and practice-management, health-care consulting, technology and other professional business services, primarily to small and mid-sized organizations. Its four practice groups are Financial Services, Employee Services, Medical Management Professionals (MMP), and National Practices. The company reported approximately 5,100 employees and served more than 90,000 clients.
Results are seasonal: accounting and tax activity concentrates in the first four months, and CBIZ says more than half of annual EPS has historically been earned in the first quarter. The company acquired four businesses and a client list in 2011, and sold its individual wealth-management business effective January 1, 2011.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Revenue | $733.8 million | $730.4 million | Up 0.5%; acquisitions added $19.7 million, while same-unit revenue fell 1.3% ($9.7 million). |
| Gross margin | $89.9 million; 12.3% | $86.1 million; 11.8% | Margin improved 0.5 percentage points. |
| Operating income | $58.0 million; 7.9% of revenue | $56.5 million; 7.7% | Up 2.6%. |
| Income from continuing operations | $28.6 million | $28.2 million | Diluted EPS was $0.58 versus $0.48. |
| Net income | $28.0 million | $24.5 million | Diluted net EPS was $0.56 versus $0.42. |
| Interest expense | $17.4 million | $15.3 million | Higher mainly due to the 2010 convertible notes, partly offset by retirement of 2006 notes. |
| Cash from operating activities | $58.3 million | $53.3 million | Investing used $55.6 million; financing used $1.8 million. Cash and cash equivalents ended at $1.6 million. |
| Current assets / current liabilities | $292.3 million / $226.2 million | $253.5 million / $229.3 million | Year-end working-capital excess was $66.1 million; includes client funds and matching obligations. |
| Debt | $145.0 million credit facility debt; $130.8 million principal on convertible notes | $118.9 million credit facility debt; 2006 notes also outstanding | Approximately $53.5 million of credit-facility capacity was available at year-end, after borrowing-base and other limits. |
Accounts receivable, net, was $137.1 million; days sales outstanding improved to 71 from 72. Total assets were $812.4 million and stockholders’ equity was $260.2 million. The company reported $81.7 million of adjusted EBITDA, a non-GAAP measure; it should not be treated as a substitute for GAAP earnings or cash flow.
Material changes versus the prior comparable period
- Same-unit revenue decreased 1.3% overall. Financial Services declined 1.4%, MMP declined 5.0%, Employee Services rose 0.3%, and National Practices rose 9.3%.
- MMP revenue fell $7.4 million as procedure volumes, reimbursement/pricing and client relationships weakened. Cost reductions limited the gross-margin decline, and MMP gross margin percentage improved to 11.5% from 11.1%.
- Employee Services’ total revenue declined 1.7%, reflecting the wealth-management sale; same-unit revenue was slightly higher. Lower carrier bonus payments and weakness in benefits and property-and-casualty lines weighed on margins.
- Financial Services revenue rose 2.9% including acquisitions, but same-unit revenue declined. Client hours fell about 5%, partly offset by higher effective rates.
- Operating expenses were nearly flat at $643.9 million, and fell to 87.7% of revenue from 88.2%. Corporate G&A increased $2.4 million to $32.0 million, including higher legal settlement costs and incentive compensation.
- Net income increased despite lower income from continuing operations in 2009–2011 comparisons being affected by changing discontinued-operation results. The 2011 comparison with 2010 also reflects a smaller share count after substantial 2010 repurchases.
Outlook, commentary, risks and unusual items
- Management’s strategy is to grow through organic expansion, cross-selling and selective acquisitions, while seeking operating leverage and using capital for acquisitions and, when appropriate, share repurchases. The filing provides no quantified 2012 earnings or revenue guidance.
- CBIZ expected an additional approximately $2.5 million gain in first-quarter 2012 from the wealth-management sale, contingent on the retained client list’s value. A January 2012 acquisition, Meridian Insurance Group, was expected to contribute approximately $4.4 million of 2012 revenue.
- 2011 diluted continuing-operations EPS included approximately $0.02 per share from the wealth-management divestiture and $0.04 from favorable reductions in estimated acquisition earnout liabilities. These contingent-liability remeasurements are non-cash and subject to future estimates. Cash earnings per diluted share, a company-defined non-GAAP measure, was $1.10 versus $1.03.
- The April 2011 credit-facility amendment extended maturity to June 2015, reduced borrowing and unused-commitment costs, and adjusted leverage limits. CBIZ stated it was in covenant compliance at year-end and believed operating cash and available facility capacity would meet foreseeable needs. The facility restricts dividends and imposes financial and operating covenants.
- Interest-rate exposure remains: $145 million was outstanding under the floating-rate facility, with $40 million notional amount of swaps. Management estimated a 100-basis-point rate change would alter annual interest expense by approximately $1.1 million.
- Goodwill was $377.3 million, including $59.8 million allocated to MMP. Management concluded no reporting unit was more likely than not impaired in its 2011 qualitative assessment, but warned that further MMP deterioration could result in impairment.
- Material risks include economic and competitive pressure, fixed short-term costs, slower or uncollectible receivables, reliance on key professionals, regulatory changes to insurance compensation and health-care reimbursement, data-security and processing failures, software-license dependence, acquisition execution, and debt/covenant constraints.
- CBIZ and its subsidiary face Arizona litigation relating to Mortgages Ltd. and were added in January 2012 as defendants in a California case relating to Medical Capital. The company denies wrongdoing and says it does not believe resolution will materially harm its financial condition, results or cash flows; outcomes remain uncertain.
- Quarterly results show a fourth-quarter 2011 loss from continuing operations of $1.2 million and diluted continuing-operations EPS of negative $0.02, compared with a fourth-quarter 2010 loss of $1.2 million and negative $0.02 per diluted share. Annual earnings are seasonally concentrated, and quarter-to-quarter items include contingent earnout adjustments.
Most important facts for investors to verify
- Whether same-unit revenue stabilizes or improves, especially in Financial Services and MMP, and whether acquisition contributions translate into sustainable growth.
- How much of reported EPS improvement reflects ongoing operations versus the divestiture gain, contingent earnout adjustments, reduced share count and other non-GAAP adjustments.
- MMP’s operating trajectory and the assumptions supporting the $59.8 million goodwill balance.
- Revolver availability, debt maturities, covenant headroom, interest-rate exposure and the effect of seasonal working-capital needs.
- Receivables quality, bad-debt expense and collections; also distinguish operating cash generation from movements in client funds.
- Developments in the Arizona and California lawsuits, insurance-broker compensation regulation, and health-care reimbursement changes.