CBIZ, Inc. annual report, FY2013

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CBIZ, Inc. — 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013. CBIZ provides accounting, tax, advisory, employee benefits, insurance, payroll, technology and healthcare consulting services. Following the sale of its Medical Management Professionals (MMP) business, it reported three practice groups: Financial Services, Employee Services and National Practices.

Financial performance and key metrics

  • Revenue: $692.0 million, up 10.5% from $626.5 million in 2012. Acquisitions contributed $50.2 million; same-unit revenue increased 2.5% to $641.4 million.
  • Practice groups: Financial Services revenue was $456.6 million, up 11.3% (same-unit growth 3.3%); Employee Services was $204.9 million, up 10.0% (same-unit growth 0.7%); National Practices was $30.5 million, up 1.3% (same-unit growth 2.2%).
  • Profit and margins: Operating income was $48.9 million versus $40.8 million; operating margin was approximately 7.1% versus 6.5%. Gross margin was $83.3 million, or 12.0% of revenue, compared with $71.1 million, or 11.3%. Continuing-operations income was $25.0 million versus $22.8 million; diluted continuing-operations EPS was $0.51 versus $0.46.
  • Reported net income: $85.9 million versus $31.1 million, including a $58.3 million after-tax gain on the MMP sale. Diluted EPS was $1.75 versus $0.63. Management-reported non-GAAP diluted EPS was $1.08 versus $0.92; this measure adds back specified non-cash items and is not GAAP.
  • Adjusted EBITDA: $75.6 million versus $65.8 million, as defined by the company.
  • Cash flow: Continuing-operations operating cash flow was $41.5 million versus $39.5 million. Total operating cash flow was negative $1.5 million, principally reflecting $47.5 million of taxes paid on the MMP sale and discontinued-operation cash use. Investing cash flow was positive $175.0 million, mainly from divestiture proceeds; financing cash flow was negative $173.6 million, primarily from credit-facility repayments and share repurchases. Cash and cash equivalents ended at $0.8 million.
  • Debt and liquidity: Credit-facility borrowings fell to $48.5 million from $208.9 million; convertible-note principal was $130.75 million. Current assets were $350.5 million and current liabilities $267.4 million, including substantial matched client funds and obligations. Credit-facility availability was approximately $99.8 million, subject to borrowing terms and covenants. The company reported covenant compliance at year-end.
  • Other: Total assets were $897.5 million, stockholders’ equity $374.4 million, and DSO 74 days versus 76 days. The effective tax rate on continuing operations was 39.7% versus 38.2%.

Material changes versus 2012

  • Revenue growth reflected both acquisitions and 2.5% same-unit growth. Financial Services and Employee Services gross margins improved; National Practices gross margin declined to $2.9 million from $3.4 million, and its margin rate fell to 9.6% from 11.3%.
  • The August 2013 MMP sale generated $201.6 million in stated purchase price and approximately $145 million of proceeds after transaction costs and taxes. CBIZ used proceeds to repurchase 3.85 million shares from Westbury for $25.7 million and reduce credit-facility debt.
  • Total reported net income rose sharply because of the MMP disposal gain, while continuing-operations income and diluted EPS increased more modestly.
  • CBIZ classified its Leawood property-tax business as held for sale and discontinued operations after citing declining growth and profitability. It also sold its mergers and acquisitions business at year-end for no gain or loss.
  • Assets declined to $897.5 million from $970.2 million, while equity increased to $374.4 million from $295.2 million, principally reflecting net income and stock awards, partly offset by repurchases.

Outlook, risks and unusual items

  • No specific company-wide revenue or earnings guidance is stated. Management says operating cash generation and available credit are expected to meet foreseeable business needs, including working capital, capital expenditures and planned acquisition activity. Growth strategy emphasizes organic growth, cross-selling and acquisitions.
  • 2013 acquisitions were estimated to contribute more than $5.3 million in 2014 revenue. The filing also reports 2014 acquisitions with estimated annualized revenue of approximately $13.9 million in total.
  • Seasonality is significant: Financial Services generates more than 40% of its revenue in the first four months, and the company has historically earned more than half of annual EPS in the first quarter. Fixed near-term costs can magnify the effect of revenue declines.
  • The $130 million 4.875% convertible notes mature October 1, 2015; the $275 million credit facility matures June 2015. Near-term refinancing or repayment needs, covenant limits, and acquisition funding are relevant considerations. The company had $40 million of interest-rate swaps, with expirations in June 2014 and June 2015.
  • Key disclosed risks include receivables collection, retention of key employees, competitive pricing, acquisition execution, regulatory changes affecting insurance and healthcare benefits, professional-liability claims, cybersecurity and systems disruptions, and reliance on third-party software. Carrier compensation arrangements were less than 2% of consolidated revenue in each of 2011–2013.
  • Litigation related to audits by an affiliated independent CPA firm remained unresolved in Arizona; the company says it cannot estimate potential loss. Certain suits were settled without CBIZ monetary payments, and another lawsuit was dismissed as to CBIZ on summary judgment. Management did not expect the matters to materially affect the company, but outcomes remain uncertain.
  • The MMP sale gain and related tax payment were unusual and materially affected net income and cash flows. Deferred-compensation investment gains were offset by compensation expense and did not affect net income. KPMG issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.

Investor verification priorities

  1. Reconcile reported net income and EPS to continuing-operations results, separating the MMP gain and discontinued-operation earnings.
  2. Verify the MMP sale’s final working-capital adjustment, after-tax proceeds, and use of proceeds, and assess the remaining property-tax business disposition.
  3. Review 2015 debt maturities, credit-facility renewal or refinancing plans, borrowing availability, covenants and seasonal liquidity needs.
  4. Assess the quality and sustainability of same-unit growth, especially modest Employee Services growth and the National Practices margin decline, and confirm acquisition contributions.
  5. Track receivables and collections, outstanding acquisition earnouts, contingent liabilities, and the estimated $152.6 million of net operating-lease commitments.
  6. Monitor unresolved litigation, CPA-firm independence requirements, insurance-broker compensation regulation, and cybersecurity and service-continuity controls.