CBIZ, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated results; dollar amounts below are in millions unless noted. CBIZ provides Financial Services, Employee Services and National Practices to businesses and other clients.
Financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $187.1 | $180.3 | $586.0 | $562.5 |
| Gross margin | $27.9; 14.9% | $25.0; 13.9% | $92.9; 15.8% | $87.0; 15.5% |
| Operating income | $19.9 | $16.1 | $68.3 | $59.6 |
| Income from continuing operations | $9.6 | $7.3 | $35.8 | $31.8 |
| Net income | $10.2 | $7.7 | $36.0 | $31.1 |
| Diluted EPS, continuing operations | $0.18 | $0.14 | $0.68 | $0.62 |
| Diluted EPS, net income | $0.19 | $0.15 | $0.69 | $0.60 |
For the nine months, operating cash flow was $25.8 million, investing cash flow was $60.2 million, and financing cash outflow was $85.1 million; cash increased $0.9 million to $1.8 million. Investing cash flow included a $76.5 million source from changes in funds held for clients, which are related to payroll operations and should not be viewed as ordinary excess cash generation.
At September 30, current assets were $336.2 million and current liabilities were $219.3 million, including client funds and matching obligations. Cash was $1.8 million, restricted cash $25.6 million, and funds held for clients $110.0 million. Net accounts receivable was $175.8 million; DSO was 85 days versus 70 days at year-end 2014 and 86 days a year earlier.
Debt included $151.0 million drawn on the $400 million unsecured credit facility and $48.4 million principal outstanding on the 2010 convertible notes. Total reported liabilities were $506.5 million; equity was $445.6 million. Credit-facility availability was approximately $144 million, net of letters of credit and performance guarantees. The company reported covenant compliance.
Changes versus prior comparable periods
- Q3 revenue rose 3.8%; same-unit revenue increased 2.8%, while acquisitions contributed $3.3 million and divested operations reduced the comparison by $1.6 million. Excluding the divestiture, reported revenue growth was 4.7%.
- Nine-month revenue rose 4.2%; same-unit revenue grew 2.3%. Acquisitions contributed $15.7 million and divestitures reduced the comparison by $5.0 million. Excluding the divestiture, revenue growth was 5.1%.
- Q3 continuing-operations income increased 31.0%; nine-month income increased 12.5%. Nine-month diluted continuing-operations EPS rose to $0.68 from $0.62, despite a higher diluted weighted-average share count (52.3 million versus 51.5 million).
- Q3 operating expenses increased 2.5%, slower than revenue growth, and corporate G&A fell 9.5%. Nine-month operating expenses increased 3.7%; G&A fell 10.5%, partly reflecting lower legal and professional fees. Gross margin improved year over year in both periods.
- Interest expense declined 41.1% in Q3 and 24.4% for nine months, primarily following the second-quarter retirement of $49.3 million of 2010 Notes. Other income fell from $4.5 million to $0.1 million for nine months, reflecting deferred-compensation investment losses and other items; these investment changes are offset in compensation expense and do not affect continuing-operations pretax income.
Outlook, commentary and risks
- The filing provides no formal revenue or earnings guidance. Management said operating results for the interim periods are not necessarily indicative of full-year results and believes operating cash generation plus credit-facility availability should fund foreseeable needs, including working capital, capital expenditures, acquisitions and repurchases.
- The $48.4 million 2010 Notes matured October 1, 2015. CBIZ expected to pay holders in cash on November 4, including the conversion-value premium; the disclosed conversion value was approximately $71.8 million, funded through the credit facility. The notes’ diluted-share impact was expected to diminish after maturity.
- CBIZ repurchased approximately 3.8 million shares for about $35.2 million in the first nine months of 2015; the board authorized up to 5.0 million shares under a program expiring April 1, 2016. Repurchases are discretionary.
- Subsequent to quarter-end, CBIZ acquired Pension Resource Group effective October 1 for about $2.0 million cash plus contingent consideration; annualized revenue was estimated at $4.8 million.
- A stayed Arizona lawsuit involving the company and its affiliated CPA firm includes remaining claims by two plaintiffs alleging about $16.0 million in damages. CBIZ denies wrongdoing; it said it cannot predict the outcome or estimate a possible loss, but does not expect a material adverse effect.
- Key disclosed risks include competition and pricing, economic conditions, seasonality and receivable collection, regulatory or tax-law changes, professional liability, dependence on key personnel, growth management, systems reliance and stock-price volatility. Floating-rate credit-facility debt creates rate exposure: a 100-basis-point change would alter annual interest expense by approximately $1.5 million at the quarter-end balance.
- Non-GAAP diluted EPS from continuing operations was $0.27 in Q3 2015 versus $0.28 in Q3 2014, and $1.03 for nine months versus $0.97. These are management-defined measures, not substitutes for GAAP results.
Most important facts for investors to verify
- Confirm the actual cash settlement amount and funding impact of the matured 2010 Notes, including the conversion premium, and the resulting credit-facility balance.
- Track receivables, unbilled revenue and DSO, given the increase in net receivables and DSO from year-end.
- Assess recurring, same-unit growth and margin trends by practice group, especially Financial Services margin pressure and mixed Employee Services performance.
- Separate ordinary cash generation from client-fund timing when evaluating cash flow and liquidity.
- Monitor the stayed litigation and contingent acquisition earnouts; the filing does not provide a clear estimate of possible litigation loss.
- Review share repurchases, dilution and post-maturity EPS effects, as well as interest-rate sensitivity and covenant headroom.