CBIZ, Inc. — Q1 2014 Form 10-Q
Business context and period. CBIZ provides financial, employee, and national professional services. This unaudited report covers the three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. Management cautions that seasonality makes quarterly results not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2014 | Q1 2013 / comparator |
|---|---|---|
| Revenue | $208.9 million | $201.2 million; up 3.8% |
| Same-unit revenue | $204.1 million; up 1.4% | $201.2 million |
| Gross margin | $42.7 million; 20.4% of revenue | $41.8 million; 20.8% |
| Operating income | $32.5 million | $31.8 million |
| Continuing-operations income after tax | $18.0 million | $17.1 million |
| Net income | $17.3 million | $18.3 million |
| Diluted EPS | $0.33 total; $0.34 continuing operations | $0.37 total; $0.34 continuing operations |
| Non-GAAP diluted EPS from continuing operations | $0.46 | $0.50 |
| Cash from operating activities | Used $21.2 million | Used $12.1 million |
| Cash and cash equivalents | $4.4 million | $0.8 million at Dec. 31, 2013 |
Operating expenses rose 4.3% to $166.2 million and increased to 79.6% of revenue from 79.2%; personnel costs were the primary pressure. The effective tax rate was 42.0% in both quarters. Interest expense declined to $3.4 million from $4.1 million.
Financial position and liquidity
- Total assets were $932.4 million and total liabilities $535.4 million at March 31, 2014. Current assets exceeded current liabilities by $133.4 million; these totals include substantial client funds and matching obligations.
- Net accounts receivable rose $41.3 million from year-end to $184.5 million, reflecting seasonality. DSO was 93 days, versus 74 days at year-end and 89 days a year earlier.
- Bank debt was $91.4 million, up from $48.5 million at year-end, primarily due to seasonal working-capital needs. The company also had $130 million principal outstanding on 4.875% convertible notes due October 2015, plus $0.75 million of older notes.
- The $275 million unsecured credit facility matures June 2015. Available funds were approximately $62.1 million after letters of credit and performance guarantees; CBIZ reported compliance with debt covenants.
- Q1 investing cash provided $20.7 million, substantially reflecting a $41.3 million net decrease in funds held for clients, offset by acquisition spending and capital expenditures. Financing cash provided $4.1 million. Management says first-quarter operating cash use is typical and historically followed by stronger operating cash flow in Q2 and Q3.
Changes, acquisitions, and unusual items
- Three businesses were acquired in Q1: Centric Insurance Agency, Clearview National Partners, and Lewis Birch & Richardo. Aggregate purchase price was $28.6 million, including $10.2 million of contingent consideration; acquired businesses contributed $4.8 million of Q1 revenue.
- Same-unit revenue grew 1.4%. Financial Services same-unit revenue rose 1.2%, with weather-related closures reducing revenue by approximately $1.0 million; management also cited scope changes in some government consulting contracts. Employee Services same-unit revenue rose 2.5%; National Practices revenue declined 1.4%.
- Continuing-operations income increased, but total net income and total diluted EPS declined, reflecting discontinued-operation losses. Q1 2014 discontinued operations included a $0.2 million after-tax operating loss and a $0.5 million after-tax disposal loss; Q1 2013 included after-tax discontinued-operation income of $1.2 million and a $0.02 disposal gain per share.
- CBIZ recorded a $1.0 million reduction in contingent acquisition liabilities due to lower projected results of prior acquisitions, recognized in other income. Q1 2013 had a $0.9 million increase in those liabilities.
- The 2010 convertible notes increased diluted shares; management estimated a $0.02 adverse effect on Q1 2014 diluted EPS. The company repurchased approximately 457,000 shares in Q1 for $3.9 million. A new authorization permits repurchase of up to 5.0 million shares from April 1, 2014 through March 31, 2015.
Outlook, risks, and contingencies
The filing provides no specific full-year financial guidance. Management believes operating cash generation and available credit are sufficient for foreseeable business requirements, including working capital, capital expenditures, acquisitions, and repurchases. It expects seasonal operating cash use in Q1 to be followed historically by stronger cash generation in later quarters.
- Disclosed risks include economic and competitive pressures, growth management, employee retention, regulatory and tax-law changes, outsourcing trends, seasonality and receivables collectability, professional-liability exposure, and reliance on information systems.
- CBIZ is a defendant in remaining Arizona litigation related to the Mortgages Ltd. bankruptcy. Certain claims have been dismissed and some cases settled without CBIZ monetary payments; other proceedings remain pending. Plaintiffs allege substantial damages, but the company says it cannot predict outcomes or estimate possible loss and does not expect a material adverse effect.
- CBIZ was dismissed from the Signature Financial lawsuit after summary judgment in November 2013. Management says it does not expect material payments under its guarantees, letters of credit, or license bonds.
- A 100-basis-point change in market rates would change annual interest expense by approximately $0.5 million at the reported debt level. Interest-rate swaps covered $40 million notional, with portions expiring in June 2014 and June 2015.
Important facts for investors to verify
- Whether receivables, unbilled revenue, and DSO convert to cash as expected after the seasonal first quarter.
- Progress on revenue growth and margins, particularly in Financial Services and government healthcare consulting, and the impact of personnel investments and weather.
- Acquisition performance against earnout targets, integration results, and the growing contingent purchase-price liability.
- Debt refinancing or repayment plans ahead of the June 2015 credit-facility maturity and October 2015 convertible-note maturity; confirm continued covenant compliance and available borrowing capacity.
- Developments in the remaining litigation and any change in management’s assessment of potential losses.
- The company’s non-GAAP EPS adjustments and the effect of convertible-note dilution when comparing reported performance.