CBIZ, Inc. — Q3 2018 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. CBIZ provides professional business services through Financial Services, Benefits and Insurance Services, and National Practices.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $224.2 | $207.7 | $723.0 | $660.2 |
| Operating income | $15.4 | $15.0 | $84.2 | $68.6 |
| Net income | $13.6 | $9.7 | $62.5 | $45.5 |
| Diluted EPS | $0.24 | $0.18 | $1.11 | $0.82 |
| Operating margin | 6.9% | 7.2% | 11.6% | 10.4% |
| Effective tax rate | 19.5% | 38.5% | 24.0% | 36.5% |
- Q3 revenue grew 8.0%; management attributed the increase to 6.3% same-unit growth and 1.7% acquired operations. Nine-month revenue grew 9.5%, comprising 6.0% same-unit growth and 3.5% acquisitions.
- Financial Services was the principal growth driver: revenue increased 12.2% in Q3 and 13.5% for the nine-month period. Benefits and Insurance Services revenue increased 0.6% and 2.2%, respectively; National Practices revenue increased 3.6% and 4.6%.
- Operating expenses increased 7.5% in Q3 and 7.6% year to date, slower than revenue growth. Corporate general and administrative expenses rose 28.8% in Q3 and 16.6% year to date, including higher incentive compensation and marketing costs.
- Income from continuing operations increased to $13.6 million in Q3 and $62.5 million year to date. Lower tax expense materially supported the improvement; the company estimated the Tax Act increased diluted continuing-operations EPS by $0.04 in Q3 and $0.17 for the first nine months.
- Operating cash flow was $63.3 million for the first nine months, compared with $37.9 million a year earlier. Investing activities provided $42.2 million and financing activities used $102.8 million; cash, cash equivalents and restricted cash increased $2.6 million to $36.0 million. Investing and financing cash flows were substantially affected by client-fund movements.
- At September 30, cash and cash equivalents were $3.5 million and restricted cash was $32.6 million. Accounts receivable, net, was $234.9 million; days sales outstanding was 81 days, versus 84 days at September 30, 2017.
- Bank debt was $167.1 million, down from $178.5 million at December 31, 2017. The $400 million revolving facility had a 2023 maturity; approximately $226 million was available after letters of credit. The company reported covenant compliance. A separate $20 million line of credit for payroll-related client-fund needs had no balance outstanding.
Material changes and unusual items
- CBIZ adopted revenue-recognition Topic 606 on January 1, 2018 using the modified retrospective method, adding $1.6 million to opening retained earnings. Reported 2018 nine-month revenue and net income were $1.7 million and $1.3 million higher, respectively, than they would have been without adoption; 2017 comparative results were not restated.
- The company’s 2018 acquisitions of InR Advisory Services and Laurus Transaction Advisors had aggregate consideration of approximately $36.6 million, including contingent consideration. Acquisitions contributed to revenue and goodwill growth.
- Nine-month other income was lower year over year, principally because of lower gains associated with the non-qualified deferred compensation plan and a $3.3 million expense from remeasurement of contingent acquisition consideration. A $0.7 million gain on sale of a business and $0.6 million of Hurricane Irma business-interruption insurance proceeds were also recorded.
- Bank-debt interest rates were higher year over year: the nine-month weighted average was 3.07%, compared with 2.67%. The company stated that a 100-basis-point rate change would affect annual interest expense by approximately $0.8 million on its rate-sensitive debt.
Outlook, risks and contingencies
- The filing provides no quantified revenue, earnings, or cash-flow guidance. Management described acquisition capacity and share repurchases as capital-allocation priorities. It launched a national marketing campaign scheduled to continue through 2018 and recur in spring and fall 2019.
- CBIZ expected adoption of the new lease standard in 2019 to add approximately $200 million of lease-related assets and liabilities to the balance sheet, discounted to fair value, with no equity impact. It did not expect a material effect on operating results, liquidity, or debt-covenant compliance.
- Two significant legal matters remain unresolved. A Pennsylvania lawsuit seeks damages of at least $142 million; a stayed Arizona matter includes claims alleging approximately $16 million in damages. CBIZ said it could not predict outcomes or estimate possible losses and intends to defend the cases.
- Other risks include collection and working-capital variability, interest-rate exposure, acquisition performance and contingent consideration, and reliance in National Practices on a single client for approximately 75% of that group’s revenue. The filing refers investors to the company’s 2017 Form 10-K risk factors.
- Management stated that disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the 81-day DSO and elevated receivables convert to cash as expected, and how much unrestricted liquidity is available apart from client and restricted funds.
- Whether Financial Services growth continues and whether Benefits and Insurance Services’ modest same-unit growth improves.
- The potential financial exposure and status of the Pennsylvania and Arizona litigation; losses, if any, are not estimable from the filing.
- The effects of Topic 606 on comparisons, and the eventual balance-sheet impact of lease-standard adoption.
- Debt capacity, interest-rate sensitivity, contingent acquisition payments, and the returns from acquisitions and share repurchases.