CBIZ, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed March 8, 2016. CBIZ provides financial, employee, and national business services. The filing reports full-year results; Q4 figures are noted separately below.
Financial performance and condition
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $750.4 million | $719.5 million | +4.3% |
| Operating income | $63.9 million | $55.5 million | +15.1% |
| Income from continuing operations | $35.0 million | $30.4 million | +15.1% |
| Net income | $34.1 million | $29.8 million | +14.6% |
| Diluted EPS from continuing operations | $0.66 | $0.59 | +11.9% |
| Adjusted EBITDA | $87.0 million | $82.2 million | +5.9% |
| Net cash from operating activities | $47.4 million | $43.9 million | +$3.5 million |
- Gross margin was $96.5 million, or 12.9% of revenue, compared with $89.7 million, or 12.5%, in 2014. Operating expenses were 87.1% of revenue, versus 87.5%.
- Same-unit revenue rose 2.5%; acquired businesses contributed $13.4 million of the year-over-year revenue increase, net of divestitures.
- Revenue by practice group: Financial Services $476.4 million (+2.4%); Employee Services $244.5 million (+8.7%, including acquisitions); National Practices $29.5 million (approximately flat).
- Cash and cash equivalents were $0.9 million. Current assets exceeded current liabilities by $101.4 million, including client funds and corresponding obligations. Receivables were $153.6 million and days sales outstanding increased to 72 from 70.
- Total debt was $206.6 million, primarily $205.8 million drawn on the $400 million revolving credit facility. Approximately $88.0 million remained available, net of letters of credit and guarantees. The company was compliant with debt covenants at year-end; the facility matures in July 2019.
- Interest expense fell to $8.9 million from $13.1 million, largely reflecting replacement of higher-cost convertible-note debt with lower-cost credit-facility borrowings.
- Q4 revenue was $164.4 million, compared with $157.0 million in Q4 2014. Q4 income from continuing operations was a loss of $0.8 million (diluted loss per share of $0.02), versus a loss of $1.4 million in the prior-year quarter. The filing describes significant seasonality, with accounting and tax activity concentrated in the first half.
Material changes and notable items
- CBIZ acquired three Employee Services businesses and six client lists during 2015. The three business acquisitions had aggregate consideration of approximately $20.4 million, including $8.5 million of contingent consideration; their estimated annualized revenue totaled approximately $12.1 million.
- The 2010 convertible notes matured in October 2015. CBIZ settled the remaining notes’ $71.8 million conversion value in cash using credit-facility funds. Before maturity, it exchanged $49.3 million principal for 5.1 million shares plus cash.
- CBIZ repurchased 3.8 million shares for approximately $35.2 million in 2015. After year-end and through the filing date, it repurchased approximately 0.6 million additional shares for $6.1 million. The board renewed authorization for up to 5.0 million shares through March 31, 2017.
- Net income includes discontinued-operation losses of $2.3 million, partly offset by a $1.4 million after-tax disposal gain. The 2014 and 2013 comparisons also include discontinued operations; 2013 net income was materially elevated by the MMP sale gain.
- Other income included a $2.9 million benefit from reductions in estimated acquisition earnouts and $1.6 million of office-relocation incentives. These items, along with deferred-compensation plan adjustments, affect comparability; deferred-compensation investment changes are offset by compensation expense.
Outlook, risks, and contingencies
- Management provided no specific revenue or EPS guidance in the supplied filing text. It expects operating cash flow and available credit to cover cash requirements for the next 12 months, including seasonal working capital, interest, acquisitions, repurchases, and capital expenditures.
- Strategy emphasizes organic growth, cross-selling, selective acquisitions, productivity, and cost management. Management identified Jerome Grisko, Jr. as successor CEO in March 2016; Steven Gerard was to remain non-executive Chairman.
- Key risks include seasonality and relatively fixed costs, receivables collection, retaining key employees, acquisition execution and financing, competition, regulatory changes affecting insurance and benefits compensation, professional liability, cyber and data-security incidents, and reliance on third-party software.
- Interest-rate swaps hedged $50 million of floating-rate debt at year-end. Management estimated a 100-basis-point rate movement would change annual interest expense by approximately $1.6 million on the unhedged balance.
- Arizona litigation includes stayed claims by two plaintiffs alleging approximately $16 million in damages related to audits performed by an affiliated independent CPA firm. CBIZ denies liability; management could not estimate a loss range but did not expect a material adverse effect.
- Goodwill was $447.7 million, a substantial portion of assets. No impairment was identified in the 2015 annual test. The company also reported $24.8 million in contingent purchase-price liabilities and $164.9 million in gross future operating-lease commitments.
- Management reported effective disclosure controls and internal control over financial reporting; KPMG issued unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- Whether organic and same-unit growth can improve, particularly in Employee Services, where 2015 same-unit revenue grew only 0.7% while total segment growth relied heavily on acquisitions.
- Receivable quality and collections: DSO rose to 72 days, and the allowance for doubtful accounts was $12.7 million.
- Debt capacity and covenant headroom after refinancing the convertible notes, funding repurchases, and pursuing acquisitions; also monitor floating-rate exposure.
- The sustainability of earnings after considering acquisition-related earnout adjustments, relocation incentives, share-based compensation, and the difference between GAAP diluted EPS of $0.66 and non-GAAP EPS of $1.14.
- Developments in the stayed Arizona litigation, insurance-broker compensation regulation, and the CEO transition.