CBIZ, Inc. — Form 10-Q Summary
Business context and reporting period. CBIZ provides accounting, tax, employee benefits, insurance, payroll, consulting, and related professional services through Financial Services, Employee Services, and National Practices. This unaudited report covers the quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $180.9 million | $172.2 million | $389.8 million | $373.4 million |
| Operating income | $10.3 million | $13.5 million | $42.7 million | $45.3 million |
| Income from continuing operations | $6.2 million | $5.6 million | $24.2 million | $22.7 million |
| Net income | $6.1 million | $9.1 million | $23.4 million | $27.5 million |
| Diluted continuing-operations EPS | $0.12 | $0.11 | $0.46 | $0.46 |
- Revenue rose 5.0% in Q2 and 4.4% year to date. Acquisitions contributed $5.0 million and $9.8 million, respectively; same-unit revenue grew 2.1% and 1.8%.
- Gross margin was $18.6 million in Q2 and $61.3 million year to date, versus $21.1 million and $62.9 million in 2013. Gross margin as a share of revenue fell to 10.3% from 12.3% in Q2 and to 15.7% from 16.9% year to date. Higher personnel costs and investment in staffing weighed on margins.
- Q2 operating income declined despite revenue growth; year-to-date operating income also decreased. Continuing-operations income improved, supported by lower interest expense and other income, including reductions in acquisition earnout liabilities.
- Net income fell year over year, mainly reflecting discontinued-operations results: 2013 included income and disposal gains, while 2014 included losses. Non-GAAP diluted EPS was $0.22 versus $0.25 in Q2 and $0.68 versus $0.75 year to date; these are company-defined measures, not GAAP results.
- Cash from operating activities was $5.2 million for the six months, down from $13.9 million. Continuing-operations operating cash flow was $4.6 million versus $10.6 million. Working-capital use, particularly higher receivables, was a significant factor. Investing cash flow was $36.2 million, including a $67.2 million net decrease in funds held for clients; financing cash flow was a $38.2 million use. Cash and cash equivalents ended at $3.9 million.
- At June 30, current assets were $328.4 million and current liabilities $225.8 million; these totals include client funds and matching obligations. Restricted cash was $23.2 million, and net receivables were $179.1 million. Days sales outstanding increased to 86 from 74 at year-end 2013 and 80 a year earlier.
- Bank debt was $81.2 million, up from $48.5 million at year-end; convertible notes had a $126.0 million net carrying amount, including $130 million principal on the 2010 notes and $0.75 million on the 2006 notes. The $275 million credit facility had $58.6 million available after letters of credit and guarantees; CBIZ reported covenant compliance.
Material changes, outlook, and risks
- CBIZ acquired four businesses in the first half for aggregate consideration of about $39.5 million, including $12.0 million of contingent consideration. These acquisitions added goodwill and expand Financial and Employee Services offerings.
- After quarter-end, CBIZ repurchased $17.4 million principal of its 2010 notes, recording an expected $0.8 million non-operating loss in Q3. The filing cites lower interest costs and an expected diluted-share reduction. On July 28, it replaced the $275 million facility with a $400 million facility expiring in July 2019, providing capacity to refinance notes due in October 2015 and support acquisitions and repurchases.
- CBIZ repurchased approximately 1.3 million shares in the first half for $10.7 million. A new 2014 stock incentive plan authorizes up to 9.6 million awards.
- Management gave no specific earnings or revenue guidance. It said results are subject to seasonality and are not necessarily indicative of full-year performance, and believes operating cash generation and credit availability should meet foreseeable needs. Risks include collection and seasonality of receivables, competition and pricing, economic and regulatory changes, key-person dependence, and information systems reliance.
- Litigation includes Arizona cases related to the Mortgages Ltd. bankruptcy; some claims were dismissed and certain cases settled without CBIZ monetary payments, while remaining matters continued. A separate California case against CBIZ was dismissed on summary judgment. Management said it cannot estimate possible losses, but believes resolution will not materially adversely affect the company.
- Unusual items include a $3.0 million first-half reduction in acquisition contingent liabilities recorded as other income, and losses from discontinued operations and disposal activity. Deferred-compensation investment gains are offset by compensation expense. The company reported no goodwill impairment trigger in the first half.
Key facts for investors to verify
- Whether revenue growth converts into improved operating margins, particularly as personnel costs rise.
- Receivables, unbilled revenue, DSO, and seasonal operating cash flow conversion.
- Execution and integration of the four acquisitions, and the eventual cash cost of contingent earnouts.
- Refinancing and repayment plans for the remaining 2010 notes, and borrowing capacity and covenants under the new facility.
- Developments in the unresolved litigation and the timing or amount of any potential exposure.
- How non-GAAP earnings reconcile to GAAP results and how discontinued-operation comparisons affect reported net income.