CBIZ, Inc. — Form 10-Q Summary
Business context and reporting period. CBIZ provides financial, employee and national professional services to businesses, individuals and other organizations. This unaudited filing covers the three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless noted. Dollar amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $199.8 | $187.1 | $621.0 | $586.0 |
| Gross margin | $25.7 (12.9%) | $28.6 (15.3%) | $94.9 (15.3%) | $93.5 (16.0%) |
| Operating income | $17.0 | $20.6 | $67.6 | $69.0 |
| Continuing-operations income | $11.0 | $9.6 | $41.2 | $35.8 |
| Net income | $10.9 | $10.2 | $40.8 | $36.0 |
| Diluted EPS, continuing operations | $0.20 | $0.18 | $0.77 | $0.68 |
| Diluted EPS, net income | $0.20 | $0.19 | $0.76 | $0.69 |
- Revenue and margins: Revenue grew 6.8% in Q3 and 6.0% year to date. Acquisitions, net of divestitures, contributed $10.9 million of Q3 growth and $20.3 million for the nine-month period; same-unit growth was 1.0% and 2.5%, respectively. Q3 gross margin fell 10.1% as operating expenses rose faster than revenue. Nine-month gross margin increased 1.4% in dollars but declined as a share of revenue.
- Profit drivers: Operating income declined in both comparison periods despite higher revenue. Continuing-operations income and EPS increased, aided by lower interest expense year to date, higher other income and lower effective tax rates. Other income included gains and losses on deferred-compensation plan investments and contingent acquisition liabilities.
- Practice groups: Nine-month Financial Services revenue rose 5.1%, with gross margin increasing to $72.0 million from $66.3 million. Employee Services revenue rose 8.0% including acquisitions, but same-unit revenue declined 2.8%; its gross margin percentage fell to 16.1% from 17.0%. National Practices revenue increased 4.3% year to date.
- Cash flow: Nine-month operating cash flow was $34.9 million, versus $25.8 million. Investing activities provided $35.2 million, substantially reflecting lower funds held for clients, while acquisitions and client lists used $38.2 million. Financing activities used $70.4 million. Cash and cash equivalents were $0.5 million at September 30, down from $0.9 million at year-end; restricted cash was $33.0 million.
- Liquidity and debt: Bank debt was $219.6 million, up from $205.8 million at December 31, 2015. The $400 million unsecured credit facility had approximately $99 million available after letters of credit and performance guarantees. CBIZ reported compliance with its covenants. The company maintains low cash balances and faces seasonal working-capital needs.
- Other balance-sheet metrics: Net accounts receivable was $194.4 million, up $40.8 million from year-end. Days sales outstanding increased to 86 from 72 at year-end and was 85 a year earlier. Goodwill and intangible assets, net, totaled $575.9 million. Contingent purchase-price liabilities totaled $33.9 million.
Changes, outlook, risks and unusual items
- CBIZ completed four business acquisitions and purchased six client lists during the first nine months of 2016. Aggregate consideration for the four acquisitions was $56.1 million, including $17.8 million of contingent consideration. Management cited expansion of service offerings and cross-selling opportunities as acquisition objectives.
- Employee Services same-unit revenue weakness reflected lower employee-benefit carrier bonuses and retention, fewer nonrecurring retirement-plan projects and fewer recruiting projects. Financial Services growth included national services, government health-care compliance, real-estate advisory and traditional accounting and tax work.
- No quantified full-year guidance is provided in the supplied filing text. Management cautions that interim results are not necessarily indicative of full-year results. It describes acquisitions and share repurchases as strategic capital uses; the board authorized repurchases of up to 5.0 million shares under a plan expiring April 1, 2017. About 0.7 million shares were repurchased for approximately $6.7 million in the first nine months.
- Interest-rate exposure is material: $219.6 million of debt was outstanding, with $60.0 million covered by swaps. Management estimated that a 100-basis-point rate change would alter annual interest expense by approximately $1.6 million. The swaps are not held for trading or speculation.
- Litigation: A Pennsylvania lawsuit filed in September 2016 alleges professional negligence, breach of contract and negligent misrepresentation relating to actuarial services and seeks at least $142 million. A separate Arizona matter includes stayed claims alleging approximately $16 million in damages. CBIZ says it cannot predict outcomes or estimate possible losses and intends to defend the cases.
- Other notable factors include a $0.9 million reduction in prior-acquisition contingent liabilities due to lower projected performance, state payroll-tax incentives associated with an office relocation, and 2016 gains/losses related to deferred compensation investments. The company reported no material change in internal controls and concluded disclosure controls were effective at a reasonable-assurance level.
- Management identifies risks including growth execution, key-person dependence, competitive pricing, economic and regulatory changes, seasonality and receivable collection, professional liability, regulatory inquiries, information systems and stock-price volatility.
Important facts for investors to verify
- Whether the Q3 gross-margin decline and Employee Services same-unit revenue contraction persist, and how much reported growth depends on acquisitions.
- Receivable collection trends, including the increase in DSO and unbilled revenue, and the implications for seasonal liquidity.
- Credit-facility capacity, covenant headroom, floating-rate exposure and the impact of future borrowing for acquisitions or repurchases.
- Developments in the Pennsylvania and Arizona litigation, for which the company has not estimated potential losses.
- Acquisition performance against expectations, contingent purchase-price obligations and the effect of deferred-compensation and other non-operating items on earnings.