CBIZ, Inc. — Q1 2016 Form 10-Q
Business context and period: CBIZ provides financial, employee and national professional services. This unaudited filing covers the three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Results are seasonal and the company cautions that the quarter is not necessarily indicative of full-year results.
Key financial metrics
Amounts are in millions, except per-share data and percentages.
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Revenue | $224.2 | $213.9 |
| Gross margin | $46.1; 20.6% | $43.0; 20.1% |
| Operating income | $35.9 | $33.1 |
| Continuing-operations income | $21.8 | $19.5 |
| Net income | $21.8 | $19.2 |
| Diluted EPS, continuing operations | $0.41 | $0.38 |
| Operating cash flow | $(17.2) | $(24.3) |
| Cash and cash equivalents | $1.6 | $0.9 at Dec. 31, 2015 |
| Current assets / current liabilities | $392.8 / $250.9 | $372.5 / $271.1 at Dec. 31, 2015 |
| Total debt | $234.7 | $206.6 at Dec. 31, 2015 |
Q1 2016 operating cash use reflects seasonal working-capital needs, especially the timing of receivables and tax-service collections. Investing activities provided $17.9 million and financing activities used $0.04 million. The company reported working capital of $141.9 million, but cash was low and funds held for clients and corresponding client-fund obligations are primarily payroll-related balances.
Material changes versus prior period
- Revenue increased 4.8% ($10.4 million), from $213.9 million. Same-unit revenue rose 3.7%; acquired businesses contributed $3.5 million and divestitures reduced revenue by about $1.1 million.
- Financial Services same-unit revenue grew 5.9%, supported by national-service projects and traditional accounting and tax work. Employee Services same-unit revenue declined 1.3%, with weakness in property and casualty, retirement-plan services and human-capital services partly offset by employee benefits and payroll growth. National Practices revenue increased 4.3%.
- Gross margin increased 7.3%, and operating expenses as a share of revenue improved by 50 basis points to 79.4%. A $0.7 million state payroll-tax incentive related to an office relocation benefited Q1 2016 expenses.
- Continuing-operations income rose 11.8%. Interest expense fell 48.7% to $1.5 million, principally because the 2010 convertible notes matured in 2015 and were replaced with lower-cost credit-facility borrowings. Diluted weighted-average shares increased to 52.7 million from 51.4 million.
- Accounts receivable increased to $197.2 million from $153.6 million at year-end, including higher unbilled revenue. DSO was 92 days versus 90 days at March 31, 2015.
- Bank debt increased $28.1 million from year-end, reflecting acquisition funding, seasonal working capital and share repurchases. The company repurchased approximately 0.6 million shares for $6.1 million.
Outlook, management commentary, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management describes cash use in Q1 as seasonal, with operating cash generation generally stronger during the remaining quarters as seasonal receivables are collected.
- On April 1, 2016, after quarter-end, CBIZ acquired The Savitz Organization, an employee-benefits and actuarial services firm with estimated annualized revenue of approximately $20 million. Millimaki Eggert, acquired January 1, 2016, had estimated annualized revenue of approximately $2.4 million.
- The $400 million credit facility matures in July 2019. At quarter-end, $233.9 million was drawn, approximately $65.6 million was available after letters of credit and guarantees, and CBIZ was in compliance with debt covenants. Floating-rate exposure remains: a 100-basis-point rate change was estimated to affect annual interest expense by approximately $1.7 million. Swaps covered $60 million of debt.
- A stayed Arizona lawsuit involving two plaintiffs alleges approximately $16 million in damages. CBIZ denies wrongdoing; the company says it cannot predict the outcome or estimate a possible loss, while management believes resolution will not materially adversely affect the company.
- Other notable items included a $1.3 million reduction in acquisition contingent-purchase-price liabilities, recorded as other income, and a $0.5 million after-tax loss from discontinued operations. No businesses were discontinued in Q1 2016.
- CBIZ expects adoption of the new lease accounting standard to have a material financial-statement impact; it was still evaluating the impact of the new revenue-recognition standard. Management reported effective disclosure controls at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
- Risks identified include growth management, key-person dependence, pricing and economic conditions, regulatory and tax-law changes, service seasonality and receivables collection, professional-liability exposure, information systems and share-price volatility.
Important facts for investors to verify
- Whether receivables, unbilled revenue and DSO trends support timely collection as seasonal work converts to cash.
- Debt utilization, covenant headroom, interest-rate exposure and the effect of acquisitions and repurchases on leverage and liquidity.
- Whether Employee Services same-unit weakness and margin pressure persist, and whether the Savitz acquisition delivers expected growth.
- The status and potential financial exposure of the Arizona litigation, for which the filing gives no estimable loss range.
- How management’s non-GAAP EPS measure reconciles to GAAP results; Q1 non-GAAP diluted EPS was $0.52 versus GAAP continuing-operations diluted EPS of $0.41.