CBIZ, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated results; amounts below are in millions except per-share data.
Business context and financial performance
CBIZ provides financial, employee benefits and insurance, and national practice services. Results reflect its seasonal accounting and tax business, acquisitions, and working-capital movements.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $207.7 | $199.8 | $660.2 | $621.0 |
| Gross margin | $23.0 | $25.7 | $94.6 | $94.9 |
| Operating income | $15.0 | $17.0 | $68.6 | $67.6 |
| Income from continuing operations | $9.9 | $11.0 | $46.3 | $41.2 |
| Net income | $9.7 | $10.9 | $45.5 | $40.8 |
| Diluted continuing-operations EPS | $0.18 | $0.20 | $0.83 | $0.77 |
Q3 revenue rose 4.0%; newly acquired operations added $9.6 million while same-unit revenue fell $1.7 million. Nine-month revenue increased 6.3%, comprising $28.6 million from acquisitions and $10.6 million of same-unit growth. Q3 operating expenses increased 6.1% and rose to 88.9% of revenue from 87.1%; for nine months, they increased 7.5% and rose to 85.7% from 84.7%. Nine-month operating income improved modestly despite a slightly lower gross margin, alongside lower corporate G&A.
Q3 performance was pressured by lower same-unit revenue in Financial Services and Benefits and Insurance, and higher expenses. Financial Services cited weather-related disruption in Florida tax services; Benefits and Insurance cited softness in transaction-related businesses. For the first nine months, Benefits and Insurance gross margin improved, while National Practices gross margin declined. Diluted weighted-average shares increased to 55.8 million from 53.8 million in Q3 and to 55.6 million from 53.3 million year to date.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $33.6 million, versus $34.9 million; cash provided by continuing operations was $34.4 million in both periods.
- Investing cash flow was positive $43.5 million, substantially reflecting a $79.7 million net cash inflow from client-fund activity; financing cash flow was negative $79.3 million, including a $79.7 million decrease in client-fund obligations.
- Cash and cash equivalents were $1.3 million at September 30, 2017. Restricted cash was $32.1 million. Funds held for clients of $134.1 million were substantially matched by client-fund obligations of $134.1 million.
- Bank debt was $206.0 million, up from $191.4 million at year-end 2016. The $400 million credit facility matures in July 2019; approximately $142.5 million was available, net of letters of credit. CBIZ reported compliance with its debt covenants.
- The nine-month weighted-average borrowing rate was 2.67%, versus 2.43%. Of $206 million outstanding, $126 million was exposed to rate risk; a 100-basis-point rate change would affect annual interest expense by approximately $1.3 million.
- Days sales outstanding rose to 89 days from 86 days at September 30, 2016 and 76 days at December 31, 2016.
Acquisitions, capital allocation, and other developments
CBIZ completed three business acquisitions and two client-list purchases in the first nine months. The businesses acquired were CMF Associates, Slaton Insurance, and Pacific Coastal Pension and Insurance Services. Aggregate consideration was approximately $43.2 million, including $23.7 million cash, $2.0 million in CBIZ shares, and $17.5 million contingent consideration. The acquisitions added $28.6 million of revenue in the period, according to management’s year-to-date revenue bridge.
The company repurchased approximately 0.6 million shares for $8.8 million under a program authorizing up to 5.0 million shares through April 2018; employee tax-related share withholdings were additional. The credit facility restricts dividend payments. Adoption of share-based compensation accounting guidance generated an approximately $2.9 million year-to-date tax benefit and increased diluted shares by approximately 0.5 million.
Outlook, risks, and contingencies
The filing provides no specific revenue, earnings, or cash-flow guidance. Management cautions that interim results are not necessarily indicative of full-year results. It expects adoption of the new revenue-recognition standard on January 1, 2018, using the modified retrospective method; management did not expect a significant consolidated annual revenue impact, though certain Benefits and Insurance policies will change. CBIZ also expected to early-adopt the revised goodwill impairment guidance in Q4 2017.
Risks highlighted include growth management, retention of key employees, pricing competition, economic and regulatory changes, seasonality and receivable collection, professional liability, insurance-industry regulatory inquiries, systems dependence, and stock-price volatility. The National Practices group relies substantially on a single client, responsible for about 70% of that group’s revenue.
Two significant lawsuits remain unresolved: a stayed Arizona matter alleging approximately $16 million in damages and a Pennsylvania professional-services suit seeking at least $142 million. CBIZ said it could not predict outcomes or estimate possible losses and intends to defend the cases. The filing reports no subsequent events.
Important facts for investors to verify
- Whether same-unit revenue trends and operating-cost growth improve, particularly in Financial Services and Benefits and Insurance.
- Receivable collection and DSO, which rose to 89 days, and the seasonal working-capital demands of the business.
- Acquisition integration, performance against contingent consideration assumptions, and the related goodwill balance.
- Available borrowing capacity, covenant compliance, and the effect of floating rates despite interest-rate swaps.
- Developments in the Arizona and Pennsylvania litigation, for which potential losses were not estimable in the filing.
- The effects of the 2018 revenue-recognition adoption and continuing volatility in tax expense from share-based compensation.