CBIZ, Inc. — Q3 2011 Form 10-Q
Business context and reporting period
CBIZ provides professional business services through Financial Services, Employee Services, Medical Management Professionals (MMP), and National Practices. This unaudited filing covers the quarter and nine months ended September 30, 2011, with comparisons to 2010. Management cautions that seasonality and other factors make interim results not necessarily indicative of full-year results.
Financial performance and position
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Revenue | $177.1 million, up 0.7% | $570.1 million, up 0.8% |
| Operating income | $14.9 million vs. $11.8 million | $62.1 million vs. $55.9 million |
| Gross margin | $23.1 million; 13.0% of revenue, vs. $18.6 million; 10.6% | $86.7 million; 15.2% of revenue, vs. $78.4 million; 13.9% |
| Income from continuing operations | $4.8 million vs. $5.5 million | $29.8 million vs. $29.4 million |
| Net income | $4.7 million vs. $4.8 million | $29.2 million vs. $26.2 million |
| Diluted EPS from continuing operations | $0.10 vs. $0.09 | $0.60 vs. $0.48 |
Operating income margin was approximately 8.4% for Q3 versus 6.7% in 2010, and 10.9% for the nine months versus 9.9%. Nine-month EPS included an approximately $0.02-per-share gain related to the wealth management divestiture; 2010 included a $0.02-per-share lease restructuring charge and a $0.02-per-share convertible-note redemption charge. Management also reports non-GAAP cash earnings per diluted share of $0.24 for Q3 in both years and $1.02 for nine months 2011 versus $0.87 in 2010.
- Cash flow: Nine-month operating cash flow was $37.6 million, down from $41.5 million. Investing used $21.2 million and financing used $16.6 million; cash and cash equivalents decreased $0.2 million to $0.5 million. Receivables and higher days sales outstanding (80 days, versus 72 at year-end 2010) were significant working-capital factors.
- Liquidity: Current assets were $275.7 million and current liabilities $177.6 million, a reported $98.1 million excess. These totals include client funds and related obligations. Restricted cash was $20.5 million.
- Debt: Bank debt was $159.6 million, up from $118.9 million at year-end 2010. Convertible notes had a carrying value of approximately $119.1 million, including $130 million principal of 2010 notes due October 2015 and $0.75 million remaining principal of 2006 notes. The $275 million credit facility had approximately $41.8 million available; management said the company was covenant-compliant.
Material changes versus the prior comparable period
- Revenue growth was supported by acquisitions, while same-unit revenue declined 2.1% in Q3 and 1.0% for the nine months. Acquired businesses, net of divestitures, contributed $4.8 million of Q3 growth and $10.1 million of nine-month growth.
- Q3 operating expenses fell $3.3 million, and nine-month operating expenses fell $3.6 million; gross margin improved in both periods. Corporate G&A rose to $8.2 million for Q3 and $24.7 million for nine months.
- Q3 continuing-operations income declined despite stronger operating income, largely amid a $4.5 million other expense versus $1.0 million other income in Q3 2010. This included a $4.4 million loss on deferred-compensation-plan investments, offset by corresponding compensation-expense effects. The Q3 effective tax rate fell to 25.0% from 39.3%, partly due to reserve releases and state tax valuation-allowance changes.
- For the nine months, interest expense increased to $13.4 million from $10.3 million, while the effective tax rate rose to 40.5% from 37.7%. The 2011 period included a $2.8 million net gain on sale of operations, primarily the wealth management business.
- Financial Services same-unit revenue decreased 1.1% for nine months, reflecting lower client hours and demand. MMP same-unit revenue declined 3.9%, while expense reductions lifted its gross margin percentage to 11.8% from 10.1%. National Practices revenue increased 13.0%; Employee Services same-unit revenue was down 0.3%.
Outlook, risks, contingencies, and unusual items
- CBIZ acquired Thompson Dunavant and Multiple Benefit Services on August 1, 2011, for preliminary aggregate consideration of $27.2 million, including $11.7 million contingent consideration. Acquired annual revenues had historically approximated $15.7 million and $3.5 million, respectively.
- No numerical company-wide earnings or revenue guidance is provided. Management expected MMP same-store revenue to remain below 2010 levels for the rest of 2011 because of continued pricing and reimbursement pressure, while it did not expect recent client losses to represent a continuing trend.
- Management cited risks including weak business conditions and demand, competitive pricing, receivable collection and seasonality, regulation and tax-law changes, key-person dependence, errors-and-omissions exposure, and reliance on information systems. A 100-basis-point change in market rates was estimated to change annual interest expense by approximately $1.2 million; a $40 million interest-rate swap partially mitigates rate exposure.
- CBIZ and its subsidiary face Arizona litigation related to Mortgages Ltd. Management denies wrongdoing and believes the cases will not materially adversely affect the company, but outcomes are uncertain. The Stone case was voluntarily dismissed. Guarantees for an affiliated CPA firm totaled $5.2 million; management did not expect payment to be required.
- Unusual items include the sale of all auction-rate securities during the period, with an approximately $0.1 million realized loss, and $2.8 million in gains on operations sales. Goodwill impairment was not recorded for the nine months; management determined an interim impairment test was not required.
Important facts for investors to verify
- Whether same-unit revenue and demand trends, especially in Financial Services and MMP, improve or continue to pressure results.
- Receivables, unbilled revenue, and DSO, alongside seasonal working-capital and cash-flow patterns.
- Debt levels, credit-facility availability, covenant compliance, and the timing and value of acquisition earnouts and other obligations.
- The sustainability of earnings growth after considering the wealth-management sale gain, tax-reserve effects, and management’s non-GAAP cash-earnings adjustments.
- Developments in the Arizona litigation and the contingent consideration associated with the 2011 acquisitions.