CBIZ, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter report. CBIZ provides financial, employee, medical-practice management and national professional services, primarily in the United States.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $766.1 million | $733.8 million |
| Operating income | $55.5 million | $58.0 million |
| Income from continuing operations | $31.1 million | $28.6 million |
| Net income | $31.1 million | $28.0 million |
| Diluted EPS, continuing operations | $0.63 | $0.58 |
| Operating cash flow | $54.0 million | $58.2 million |
| Adjusted EBITDA | $85.3 million | $81.7 million |
- Revenue increased 4.4%, comprising $26.6 million from acquired businesses and $5.7 million, or 0.8%, in same-unit growth. Operating expenses rose faster than revenue: gross margin declined to $85.9 million (11.2% of revenue) from $89.5 million (12.2%), and operating income decreased 4.3%.
- Reported diluted EPS increased to $0.63 from $0.58; management also reported non-GAAP diluted EPS of $1.22 versus $1.10. These non-GAAP figures add selected non-cash charges and are not GAAP substitutes.
- Cash provided by operations was $54.0 million. Investing used $104.3 million, largely for acquisitions and contingent payments; financing provided $49.6 million, primarily from net credit-facility borrowing. Cash and cash equivalents ended at $0.9 million; CBIZ says it generally applies available cash to debt.
- At year-end, bank debt was $208.9 million and convertible-note principal was $130.75 million ($122.4 million carrying value). The $275 million revolving credit facility had approximately $61.7 million available; CBIZ reported compliance with its covenants. Current assets exceeded current liabilities by $80.3 million, including substantial client funds and matching obligations.
- Accounts receivable, net, was $155.0 million; days sales outstanding rose to 74 days from 71. Total assets were $970.2 million, including $551.2 million of goodwill and other intangible assets.
Material changes and operating developments
- CBIZ acquired nine businesses in 2012. Consideration was approximately $108.1 million, including $79.3 million cash and $17.6 million contingent consideration; acquired operations contributed $26.6 million of 2012 revenue. Management estimated these businesses would generate more than $50 million of revenue in 2013.
- Financial Services revenue rose 5.2% overall, with same-unit growth of 2.6%, but its gross margin percentage fell to 12.8% from 13.8%, primarily due to personnel investment and costs.
- Employee Services revenue grew 8.8%, largely from acquisitions; same-unit revenue was nearly flat. MMP revenue declined 2.1% and its gross margin percentage fell to 10.7% from 11.5%, reflecting reimbursement and pricing pressure, client losses and competition. National Practices revenue decreased 0.6% and margin percentage fell to 11.3% from 13.5%, partly due to fewer transaction success fees.
- CBIZ repurchased 1.0 million shares for $5.7 million. Its board authorized a further plan for up to 5.0 million shares, effective April 2013 through March 2014. The credit facility bars ordinary cash dividends.
- In the fourth quarter, revenue was $172.9 million, operating income $1.9 million, net income $1.2 million and diluted EPS $0.02. Results are seasonal: the company says more than half of annual EPS has historically been earned in the first quarter.
Outlook, risks and unusual items
- No numeric company-wide earnings or revenue guidance is provided. Management’s stated strategy emphasizes organic growth, cross-selling, acquisitions and operating leverage; the 2013 acquired-business revenue estimate is not a formal earnings forecast.
- 2012 reported earnings included a $2.5 million gain related to the prior sale of the wealth-management business, $1.9 million of legal-settlement proceeds in the fourth quarter, and favorable changes in contingent acquisition consideration. Deferred-compensation investment gains and losses are offset by compensation expense and do not affect net income.
- Material risks include fixed near-term costs amid seasonal and fluctuating revenue; receivable collection; dependence on key professionals; acquisition integration and contingent earnouts; healthcare reimbursement and insurance-broker compensation regulation; errors-and-omissions exposure; cybersecurity, transaction-processing and third-party software risks; and goodwill impairment.
- CBIZ disclosed multiple lawsuits tied to audits performed by an affiliated independent CPA firm, including claims alleging large damages. The company denies wrongdoing, says it cannot estimate a possible loss or range, and believes resolution will not materially harm its financial condition or results. In March 2013, certain securities-fraud claims in three cases were dismissed; other claims and proceedings remained pending.
- The 2012 credit amendment temporarily relaxed leverage limits to support acquisitions, with ratios scheduled to step down. A 100-basis-point interest-rate move was estimated to affect annual interest expense by about $1.7 million before considering hedges; $40 million of debt was covered by swaps.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded the internal controls of two businesses acquired on December 31, 2012, representing $105.7 million of consolidated assets, from their control assessments.
Investor verification priorities
- Review the acquisition contribution, integration progress and contingent-payment assumptions against subsequent results.
- Track same-unit revenue, margins and client retention, particularly in MMP and Employee Services.
- Reconcile debt, facility availability, covenant headroom and cash generation after acquisition spending; monitor 2015 convertible-note maturity and conversion terms.
- Assess receivable aging and the increase in DSO from 71 to 74 days.
- Follow the litigation docket and any developments affecting the company’s ability to estimate potential exposure.
- Distinguish GAAP EPS from management’s non-GAAP measure and identify the effect of settlement, divestiture and contingent-consideration items.