CBIZ, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016; unaudited. CBIZ provides financial, employee, and national business services.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $197.0 million | $185.0 million | $421.3 million | $398.9 million |
| Gross margin | $23.0 million | $21.9 million | $69.1 million | $64.9 million |
| Gross margin rate | 11.7% | 11.8% | 16.4% | 16.3% |
| Operating income | $14.7 million | $15.3 million | $50.5 million | $48.4 million |
| Income from continuing operations | $8.4 million | $6.7 million | $30.2 million | $26.2 million |
| Net income | $8.1 million | $6.6 million | $29.9 million | $25.8 million |
| Diluted EPS from continuing operations | $0.16 | $0.13 | $0.57 | $0.51 |
- Revenue increased 6.5% in Q2 and 5.6% in the first half. Same-unit revenue grew 2.7% and 3.2%, respectively; acquisitions contributed $7.5 million in Q2 and $10.9 million in the first half.
- Q2 operating income declined despite higher revenue, as operating expenses rose 6.7% and corporate G&A increased 26.2%. First-half operating income rose 4.3%.
- Q2 continuing-operations earnings improved in part because interest expense fell to $1.7 million from $2.8 million and other income was $0.7 million versus $1.1 million of expense in the prior-year quarter. The lower interest burden reflects, in part, the prior-year 2010 Notes, which matured in 2015.
- First-half operating cash flow was $22.3 million, versus $4.3 million a year earlier. Investing used $32.2 million, principally reflecting acquisitions; financing provided $17.6 million. Cash and cash equivalents ended at $8.5 million.
Financial position and liquidity
- At June 30, 2016, total assets were $1.123 billion and stockholders’ equity was $460.4 million. Cash was $8.5 million; restricted cash was $31.9 million.
- Accounts receivable, net, was $193.2 million, up from $153.6 million at year-end 2015. Days sales outstanding was 83 days, versus 72 days at year-end and 84 days a year earlier.
- Bank debt was $235.5 million, up from $205.8 million at December 31, 2015. The $400 million credit facility matures in July 2019; approximately $84.5 million was available after letters of credit and performance guarantees. CBIZ reported compliance with its debt covenants.
- The company’s floating-rate exposure was partly hedged by $60 million of interest-rate swaps. Management estimated a 100-basis-point rate change would change annual interest expense by approximately $1.8 million.
- Funds held for clients and client-fund obligations were $205.9 million and $205.1 million, respectively; these balances primarily relate to payroll services and fluctuate with collection and payment timing.
Material changes and management commentary
- Financial Services same-unit revenue increased 5.1% in Q2 and 5.6% in the first half. Employee Services same-unit revenue declined 2.3% and 1.8%, respectively, with weakness in retirement plan services and human capital services partly offset by growth in other areas.
- CBIZ acquired Millimaki Eggert, Savitz, and Flex-Pay during the first half, for estimated annualized revenue of approximately $2.4 million, $20 million, and $10 million, respectively. Aggregate acquisition consideration was approximately $49.7 million, including $15.1 million of contingent consideration. A further acquisition, EJ&A, closed July 1, with estimated annualized revenue of $2.1 million.
- CBIZ repurchased approximately 0.7 million shares for $6.5 million during the first half. A February 2016 authorization permits repurchases of up to 5 million shares and expires April 1, 2017.
- A state payroll-tax incentive associated with an office relocation reduced operating expenses by $0.8 million in Q2 and $1.5 million in the first half. The company also recorded a $0.7 million reduction in the fair value of contingent consideration for prior acquisitions, reflecting lower-than-projected acquired-business results.
- No quantified full-year guidance or specific forecast is provided. Management notes that results are seasonal: the first-quarter tax and accounting cycle uses working capital, with collections generally following in later quarters.
Risks, contingencies, and unusual items
- Remaining Arizona litigation includes claims by the Baldino Group alleging approximately $16 million in damages. The claims are stayed as to CBIZ and an affiliated CPA firm; no trial date is set. CBIZ denies wrongdoing, and management says it cannot estimate a possible loss or range of loss, while believing resolution will not materially adversely affect the company.
- Key stated risks include growth management, dependence on key personnel, pricing competition, economic conditions, regulatory and tax changes, revenue seasonality and receivables collectability, professional-liability claims, information systems, and stock-price volatility.
- CBIZ identified adoption of the new lease accounting standard as expected to have a material financial-statement impact; it was still evaluating the effect. The filing reports no material change in internal control over financial reporting and concludes disclosure controls were effective at a reasonable-assurance level.
Investor verification priorities
- Assess whether the rise in receivables and DSO is seasonal or signals slower collections, and monitor bad-debt expense.
- Track Employee Services same-unit revenue and margins, and determine whether the acquired businesses deliver expected growth and integration benefits.
- Review acquisition-related contingent consideration, cash needs, leverage, credit-facility availability, and covenant headroom.
- Separate recurring earnings and cash flow from deferred-compensation volatility, the payroll-tax incentive, and acquisition fair-value adjustments.
- Monitor the stayed Arizona litigation and any change in the company’s ability to estimate potential exposure.