CBIZ, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise stated. Amounts below are in U.S. dollars. CBIZ provides financial, benefits and insurance, and national professional services.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $241.5 million | $224.2 million | +7.7% |
| Gross margin | $48.7 million (20.2%) | $46.1 million (20.6%) | +5.6% |
| Operating income | $39.9 million (16.5%) | $35.9 million (16.0%) | +11.3% |
| Income from continuing operations | $25.0 million | $21.8 million | +14.8% |
| Net income | $24.9 million | $21.8 million | +14.3% |
| Diluted EPS from continuing operations | $0.45 | $0.41 | +9.8% |
| Net cash used in operating activities | $13.3 million | $17.2 million | $3.9 million less used |
Revenue growth included $12.5 million from acquired operations, net of divestitures, and $4.7 million of same-unit growth. Financial Services revenue rose 4.2%, including 3.3% same-unit growth. Benefits and Insurance Services revenue increased 16.8%, largely from acquisitions, while same-unit revenue declined 0.5%. National Practices revenue was nearly flat. Benefits and Insurance Services gross margin improved to 20.0% from 16.6%; Financial Services gross margin declined to 24.7% from 25.4%.
Operating expenses increased 8.2%, slightly faster than revenue, and rose to 79.8% of revenue from 79.4%. Corporate general and administrative expense declined 14.4% to $8.8 million. The effective tax rate decreased to 39.2% from 40.4%; adoption of share-based compensation accounting guidance generated an approximately $0.6 million tax benefit and added about 0.5 million diluted shares. Diluted weighted-average shares increased to 55.2 million from 52.7 million.
Balance sheet, debt and liquidity
- At March 31, 2017, cash and cash equivalents were $2.4 million; total assets were $1.11 billion and stockholders’ equity was $507.3 million.
- Bank debt was $212.7 million, up from $191.4 million at December 31, 2016. The company had a $400 million unsecured credit facility maturing in July 2019, with approximately $122 million available after outstanding letters of credit. CBIZ reported compliance with its debt covenants.
- The facility’s weighted-average interest rate was 2.52% in Q1 2017 versus 2.25% in Q1 2016. Of the debt outstanding, $152.7 million was exposed to rate changes; a 100-basis-point rate movement was estimated to change annual interest expense by approximately $1.5 million. Swaps hedge portions of floating-rate exposure.
- Operating cash use reflected seasonal working-capital needs in the accounting and tax business. DSO was 92 days at March 31, compared with 92 days a year earlier and 76 days at December 31, 2016. Management said cash generation typically strengthens after the first-quarter seasonal period.
- Investing activities provided $48.8 million and financing activities used $36.7 million. These totals were significantly affected by client-fund movements: funds held for clients and related obligations are not equivalent to unrestricted corporate cash.
Changes, outlook and notable items
- CBIZ acquired Pacific Coastal Pension and Insurance Services in February 2017 for approximately $0.6 million cash and $1.7 million contingent consideration; estimated annualized revenue was $1.4 million. The company also reported $11.1 million of acquired revenue in Benefits and Insurance Services from acquisitions completed in prior periods.
- The board authorized a new repurchase program of up to 5.0 million shares, effective April 1, 2017 and expiring one year later. During Q1, the company repurchased 175,000 shares for approximately $2.2 million at an average $12.94 per share.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management cautioned that quarterly results are not necessarily indicative of full-year results. It expects some quarterly timing shifts in property and casualty revenue under the forthcoming revenue-recognition standard, but does not expect a significant change in annual revenue from that timing effect.
- Other income included gains on investments held for the non-qualified deferred compensation plan, offset by corresponding compensation expense; management said the plan does not affect pretax continuing income or diluted EPS. Changes in contingent acquisition consideration also affected other income.
- Two significant legal matters remain unresolved: a stayed Arizona claim alleging approximately $16 million in damages, with no trial date; and a Pennsylvania lawsuit seeking at least $142 million related to actuarial services. CBIZ said it cannot predict outcomes or estimate potential losses and intends to defend the cases.
- Risks identified include seasonal revenue and receivable collection, competitive pricing, economic and regulatory changes, reliance on key personnel and systems, professional-liability claims, and the ability to manage growth. A National Practices contract with one client accounts for approximately 70% of that practice group’s revenue.
Key investor verification points
- Review the composition and collectability of receivables: net receivables rose to $220.9 million, including $93.8 million of unbilled revenue, and DSO increased from year-end.
- Assess acquisition-driven growth and margins separately from same-unit performance, particularly in Benefits and Insurance Services.
- Confirm debt capacity, covenant headroom, variable-rate exposure and the effects of seasonal cash requirements; distinguish client funds from unrestricted liquidity.
- Monitor the two disclosed lawsuits, especially the $142 million Pennsylvania demand, for developments, reserves or changes in management’s loss assessment.
- Check subsequent filings for repurchase activity, acquisition contingent payments, revenue-recognition implementation, and any updated outlook or risk disclosures.