CBIZ, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context
CBIZ provides accounting, tax, advisory, employee benefits, insurance, payroll, retirement-plan and related services, primarily to small and midsized businesses. Its three practice groups are Financial Services, Benefits and Insurance Services, and National Practices.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $922.0 million | $855.3 million |
| Operating income | $92.5 million | $66.5 million |
| Income from continuing operations | $61.6 million | $51.0 million |
| Net income | $61.6 million | $50.4 million |
| Diluted EPS, continuing operations | $1.09 | $0.92 |
| Adjusted EBITDA | $109.1 million | $104.0 million |
| Operating cash flow | $105.2 million | $77.0 million |
| Debt outstanding at year-end | $135.5 million | $178.5 million |
Revenue grew 7.8%; management attributed $40.2 million, or 4.7%, to same-unit growth and $26.5 million, or 3.1%, to acquisitions. Gross margin was $131.7 million, approximately 14.3% of revenue, versus $99.8 million, approximately 11.7%, in 2017. Operating margin was approximately 10.0%, versus 7.8%. The effective tax rate fell to 22.9% from 31.3%, reflecting the lower federal corporate rate under the Tax Act and share-based compensation tax benefits.
Cash provided by operations increased by $28.2 million. Investing activities used $47.6 million, primarily for acquisitions and capital expenditures; financing activities used $109.4 million, including debt repayments, share repurchases, client-fund obligation changes and acquisition earnout payments. Unrestricted cash and cash equivalents were $0.6 million at year-end; restricted cash was $27.5 million, and funds held for clients were $161.3 million. These client-related balances are distinct from cash available for general corporate purposes.
The amended $400 million unsecured revolving credit facility matures in 2023. CBIZ reported $255.5 million of available capacity at year-end and compliance with its financial covenants. The weighted-average borrowing rate was 3.08%. Interest-rate swaps covered $70 million of debt; management estimated a 100-basis-point rate move would change annual interest expense by approximately $0.7 million on the $65.5 million exposed balance.
Material changes and fourth-quarter results
- Financial Services revenue increased 11.2% to $600.9 million, including 7.1% same-unit growth. Benefits and Insurance Services revenue increased 1.6% to $288.4 million, with only 0.2% same-unit growth. National Practices revenue rose to $32.6 million, but gross margin declined to $2.6 million from $2.7 million.
- Operating expenses increased in dollars but declined to 85.7% of revenue from 88.3%, supporting improved operating income. Corporate G&A increased 17.7% to $39.2 million, partly due to incentive compensation and the national marketing campaign.
- Fourth-quarter revenue was $199.0 million, compared with $195.1 million a year earlier. CBIZ recorded a fourth-quarter continuing-operations loss of $1.0 million, versus income of $4.7 million in Q4 2017. The quarter included $9.6 million of other expense, versus $5.2 million of other income in Q4 2017; annual results identify deferred-compensation investment fluctuations and contingent-consideration remeasurement as significant components of other income or expense. Fourth-quarter diluted EPS was a loss of $0.02, compared with earnings of $0.08.
- CBIZ completed three acquisitions and purchased a client list in 2018. The acquisitions had estimated annualized revenue of approximately $11.0 million. It also sold a small Financial Services office and two small Benefits and Insurance books of business.
Outlook, risks and unusual items
CBIZ provided no specific numerical earnings or revenue guidance. Management said operating cash flow and available credit were expected to cover cash requirements for the next 12 months, including acquisitions, seasonal working capital, debt service, earnouts, repurchases and capital expenditures. Its stated growth strategy emphasizes organic growth, cross-selling and selective acquisitions. The company expected its national marketing campaign to resume in spring and fall 2019.
Revenue and earnings are seasonal: accounting and tax work is concentrated in the first four months, and management reported that nearly half of annual EPS had historically been earned in the first quarter. Short-term operating costs are largely fixed, increasing sensitivity to revenue declines. Other disclosed risks include collection delays, competition and technology changes, employee retention, cyber and data-security events, regulatory changes, interest rates and the phase-out of LIBOR.
Goodwill was $564.3 million and net other intangible assets were approximately $72.7 million at year-end. No goodwill impairment was recorded. The adoption of Topic 606 reduced reported 2018 revenue by approximately $1.0 million and net income by approximately $0.7 million compared with the amounts that would have been reported without adoption; comparative periods were not restated. The new lease standard, effective in 2019, was expected to materially increase reported assets and liabilities, without material effects on results, liquidity or debt-covenant compliance.
Two significant lawsuits remain pending: one group of plaintiffs alleges approximately $16 million in damages in litigation related to Mortgages Ltd.; UPMC and UPMC Altoona seek at least $142 million in an actuarial-services dispute. CBIZ said it intended to defend the matters and could not predict their outcomes or estimate a possible loss range.
Most important facts for investors to verify
- Whether same-unit growth, especially the weak Benefits and Insurance performance, continues and whether acquisitions deliver expected earnings and cross-selling benefits.
- What drove the Q4 other expense and loss, including the effects of deferred-compensation investments and contingent consideration, and how much is likely to recur.
- Cash conversion, receivables and client-fund movements; reported unrestricted cash was low despite substantial revolving-credit availability.
- Future debt costs, covenant headroom, swap coverage and the implications of replacing LIBOR in the credit facility and swaps.
- Developments in the two lawsuits, potential exposure, and the adequacy of insurance or other protections.
- Goodwill and intangible-asset recoverability, contingent earnout payments, and the balance-sheet impact of lease accounting adoption.