CBIZ, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. CBIZ provides professional business services through Financial Services, Employee Services, Medical Management Professionals (MMP), and National Practices. Results are unaudited, and the company cautions that seasonality makes quarterly results not necessarily indicative of full-year performance. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $220.8 | $210.1; up 5.1% |
| Same-unit revenue | $212.0 | $210.1; up 0.9% |
| Gross margin | $40.8; 18.5% of revenue | $40.3; 19.2% |
| Operating income | $30.3; 13.7% of revenue | $30.8; 14.7% |
| Income from continuing operations | $18.8 | $18.1 |
| Net income | $18.8 | $17.9 |
| Diluted EPS from continuing operations | $0.38 | $0.36 |
| Cash earnings per diluted share, non-GAAP | $0.52 | $0.49 |
| Net cash used in operating activities | $(11.3) | $(3.8) |
Operating cash use reflected seasonal growth in receivables and timing of payments; accounts receivable rose to $179.8 million from $137.1 million at year-end. DSO was 90 days, compared with 71 days at December 31, 2011 and 87 days at March 31, 2011. Cash and cash equivalents were $3.2 million; restricted cash was $18.0 million.
At March 31, current assets were $327.8 million and current liabilities were $211.9 million. These totals include funds held for clients and corresponding client fund obligations, which were $105.7 million and $105.4 million, respectively. Bank debt was $178.4 million, up from $145.0 million at year-end; convertible notes had a $120.4 million carrying value. The $275 million credit facility had approximately $14.6 million available, and management stated it believed the company was in covenant compliance. The quarter’s weighted-average credit-facility rate was 3.31%.
Material changes versus Q1 2011
- Revenue grew $10.8 million, including $8.8 million from acquired businesses; same-unit growth was modest at 0.9%.
- Financial Services same-unit revenue increased 3.5%, and Employee Services increased 0.9%. MMP revenue fell 6.0%, with lower pricing and reimbursement, procedure mix, client losses, and competitive pressures cited. National Practices revenue declined 7.6%, partly because a prior-year M&A success fee did not recur.
- Gross margin dollars rose slightly, but gross margin rate declined 0.7 percentage point. Operating expenses increased faster than revenue, particularly personnel costs, including incentive compensation and self-insured health costs.
- Interest expense declined $0.8 million, principally following the 2011 repurchase of part of the 2006 convertible notes. Operating cash use increased $7.5 million, while investing cash use decreased to $13.7 million from $40.5 million.
Outlook, commentary, risks and unusual items
- No formal company-wide earnings or revenue guidance is provided. Management said Meridian was expected to contribute approximately $4.4 million of 2012 revenue.
- CBIZ acquired Meridian Insurance Group and an employee-benefits client list during the quarter. The preliminary aggregate purchase price was $8.5 million, including cash, shares, guaranteed and contingent consideration. The company also recorded a $2.5 million contingent gain related to the prior sale of its individual wealth management business.
- Net income included gains on sale of operations of $2.6 million and $3.4 million of other income, which included deferred-compensation investment gains offset by compensation expense and adjustments to acquisition-related contingent liabilities. These items affect comparability of reported results.
- CBIZ authorized a share repurchase plan for up to 5.0 million shares beginning April 1, 2012; it repurchased 0.1 million shares for $0.6 million during Q1 under the prior plan.
- Management identified risks including seasonality and receivable collectability, economic conditions, pricing competition, regulation and tax changes, reliance on key personnel and information systems, and potential professional-liability claims. A 100-basis-point change in market rates was estimated to change annual interest expense by approximately $1.4 million.
- CBIZ disclosed ongoing Mortgages Ltd.-related litigation and a California lawsuit added in January 2012. The company denies wrongdoing and stated it does not expect the matters to have a material adverse effect; ultimate outcomes remain uncertain. Letters of credit and guarantees include approximately $5.2 million supporting an affiliated CPA firm; management did not expect payment under the guarantees.
Important facts for investors to verify
- Whether MMP’s revenue and margin decline continues, and whether acquired-business growth translates into sustainable same-unit growth.
- Receivables, unbilled revenue, DSO and subsequent collections, given the quarter’s increase in accounts receivable and operating cash use.
- Credit-facility availability, covenant headroom, seasonal borrowing needs and exposure to floating interest rates.
- The contribution and integration of Meridian and other acquisitions, including contingent earnout obligations and valuation assumptions.
- Developments in the disclosed litigation and whether legal costs, liabilities or outcomes change management’s assessment.
- The composition and recurrence of reported gains and other income, and the reconciliation of non-GAAP cash earnings to GAAP results.