CBIZ, Inc. — FY2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017, with comparisons to FY2016 and FY2015. CBIZ provides financial, benefits and insurance, and national professional services, primarily to small and midsized businesses. Results are highly seasonal: accounting and tax activity concentrates in the first four months of the year.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $855.3 million | $799.8 million | +6.9% |
| Operating income | $66.5 million | $65.8 million | +1.0% |
| Income from continuing operations | $51.0 million | $40.6 million | +25.7% |
| Net income | $50.4 million | $40.1 million | +25.8% |
| Diluted EPS from continuing operations | $0.92 | $0.76 | +$0.16 |
| Adjusted EBITDA | $104.0 million | $94.8 million | +9.7% |
| Cash from continuing operating activities | $72.6 million | $70.7 million | +$1.9 million |
Operating income was 7.8% of revenue, compared with 8.2% in 2016; reported gross margin was $99.8 million (11.7% of revenue), versus $102.1 million (12.8%). Operating expenses rose 8.3%, faster than revenue, and increased to 88.3% of revenue from 87.2%. Corporate G&A declined to $33.3 million from $36.3 million. FY2017 net income included a $655,000 loss from discontinued operations.
Revenue growth included $38.0 million from acquisitions and $17.5 million (2.2%) from same-unit growth. Financial Services revenue rose 7.8% to $540.3 million, including 3.7% same-unit growth. Benefits and Insurance Services revenue rose 6.1% to $283.9 million, but same-unit revenue declined 0.4%. National Practices revenue increased 0.6% to $31.1 million; approximately 70% came from one client.
Cash from operating activities was $71.9 million including discontinued operations. Investing activities used $29.4 million, including $28.1 million for acquisitions and client lists and $11.9 million for capital expenditures, partly offset by client-fund activity. Financing activities used $45.6 million, including share repurchases and net debt repayment. Cash and cash equivalents were $0.4 million at year-end; the company historically maintains low cash balances and uses available cash to reduce debt.
At December 31, 2017, bank debt was $178.5 million under a $400 million unsecured revolving credit facility maturing in July 2019. Approximately $175 million was available, and the company reported compliance with debt covenants. Interest expense was $6.7 million; the weighted-average facility rate was 2.72%. A 100-basis-point rate change was estimated to change annual interest expense by approximately $1.1 million. The company had $204.2 million of gross future operating lease commitments and $37.6 million in contingent purchase-price liabilities. Total assets were $1.18 billion and stockholders’ equity was $530.9 million.
Material changes, outlook and risks
- FY2017 income tax expense was $23.3 million and the effective tax rate was 31.3%, compared with 39.4% in 2016. Adoption of share-based compensation accounting produced a $3.8 million tax benefit; the Tax Cuts and Jobs Act produced a $2.5 million deferred-tax remeasurement benefit. Together these lowered the 2017 effective rate by 8.5 percentage points and increased diluted continuing-operations EPS by $0.10. The federal corporate rate was reduced to 21% beginning in 2018.
- CBIZ completed four acquisitions and purchased two client lists in 2017. Acquisition consideration for the four businesses included $24.2 million cash, $2.0 million in stock and $19.3 million contingent consideration. It acquired Laurus Transaction Advisors on February 1, 2018.
- Management said operating cash flow and available credit were expected to cover 2018 cash requirements and the next 12 months, including seasonal working capital, acquisitions, earnouts, repurchases and capital expenditures. The filing provides no specific revenue or earnings guidance.
- Major risks include fixed short-term personnel and occupancy costs, collection and bad-debt exposure, reliance on key staff, acquisition integration and contingent earnouts, regulation and CPA independence restrictions, competition, and cyber, data-security and transaction-processing risks. Goodwill and other intangible assets were substantial; no goodwill impairment was recorded for 2017.
- Two significant legal matters remain unresolved: an Arizona matter involving a plaintiff group alleging approximately $16 million in damages, currently stayed as to CBIZ and an affiliated CPA firm; and a Pennsylvania lawsuit seeking at least $142 million related to actuarial services. CBIZ said it could not predict outcomes or estimate possible losses and intends to defend the cases.
- Other items to note: 2017 other income included $12.1 million of deferred-compensation investment gains, offset by compensation expense, and a $1.5 million gain from remeasurement of contingent acquisition liabilities. The fourth quarter reported an operating loss of $2.1 million and continuing-operations income of $4.7 million; seasonality affects quarterly comparisons.
Most important facts for investors to verify
- How much earnings growth is repeatable after the $6.3 million combined tax benefits and the deferred-compensation gains and offsetting expenses.
- Whether same-unit growth—particularly the 0.4% decline in Benefits and Insurance Services—improves, and how much future growth depends on acquisitions.
- Credit-facility refinancing or renewal ahead of its July 2019 maturity, covenant headroom, interest-rate exposure and the company’s ability to fund acquisitions and other capital uses.
- Collections, receivables and seasonal working-capital needs; year-end accounts receivable, net, was $188.3 million and DSO was 75 days.
- Developments in the two disclosed lawsuits, acquisition earnout liabilities, and the eventual balance-sheet effect of adopting lease accounting in 2019.
- Results under the new revenue-recognition standard, which CBIZ expected to increase opening 2018 retained earnings by approximately $1.5–$2.0 million.
Filing quality: KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2017.