CBIZ, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. CBIZ provides financial, benefits and insurance, and national practice services, primarily to small and midsized businesses. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $266.1 | $241.5 | +10.2% |
| Gross margin | $61.3; 23.1% of revenue | $48.7; 20.2% | +26.0% |
| Operating income | $51.3 | $39.9 | +28.5% |
| Continuing-operations income | $35.8 | $25.0 | +43.1% |
| Net income | $35.9 | $24.9 | +44.1% |
| Diluted EPS | $0.64 | $0.45 | +$0.19 |
| Operating cash flow | $(20.5) | $(14.5) | Greater cash use |
Revenue grew $24.6 million: $14.0 million from same-unit growth and $10.6 million from acquired businesses, net of divestitures. Financial Services revenue rose 13.8% to $180.6 million, Benefits and Insurance Services rose 2.9% to $77.3 million, and National Practices rose 6.5% to $8.2 million. Financial Services generated most of the revenue increase.
Operating expenses were 76.9% of revenue versus 79.8% a year earlier; corporate general and administrative expense was 3.8% versus 3.7%. The effective tax rate fell to 26.9% from 39.2%, primarily reflecting the Tax Act’s reduction of the federal corporate tax rate. Management estimated the tax change lowered the 2018 effective rate by 12 percentage points and added $0.10 to diluted continuing-operations EPS.
Cash flow, debt and liquidity
- Operating cash use was $20.5 million, versus $14.5 million. Management attributed the higher use mainly to working capital: accounts receivable increased with seasonal first-quarter revenue, much of which is billed and collected later. The company notes first-quarter cash use is historically seasonal.
- Investing activities provided $37.5 million, including net activity in client funds, partly offset by $15.6 million of acquisition spending. Financing activities used $20.3 million, including a $54.9 million decrease in client-fund obligations, partly offset by $36.2 million of net credit-facility borrowings.
- At March 31, unrestricted cash was $0.3 million and restricted cash was $29.8 million. Cash, cash equivalents and restricted cash totaled $30.1 million, down $3.3 million from year-end.
- Bank debt was $214.7 million, up from $178.5 million at December 31, 2017; approximately $175 million remained available under the revolving facility, net of letters of credit. CBIZ reported compliance with its debt covenants.
- On April 3, 2018, after quarter-end, CBIZ amended and restated its $400 million unsecured revolving facility, extending maturity from 2019 to 2023 and improving borrowing margins and flexibility in certain covenant baskets.
- Debt was floating-rate; $144.7 million was exposed to interest-rate changes at quarter-end. Management estimated a 100-basis-point rate change would change annual interest expense by approximately $1.4 million. Interest-rate swaps partly mitigate exposure.
- Days sales outstanding was 92 days, up from 72 days at December 31, 2017 and compared with 91 days at March 31, 2017.
Material changes, transactions and accounting
- CBIZ acquired Laurus Transaction Advisors effective February 1, 2018, for approximately $15.5 million cash plus up to $8.3 million contingent consideration. Estimated annualized revenue was $5.6 million; $22.9 million of goodwill was recorded.
- CBIZ adopted Topic 606 revenue guidance on January 1, 2018 using the modified retrospective method. Opening retained earnings increased $1.6 million. The standard changed timing for certain insurance commissions and retirement-plan setup fees; reported Q1 revenue was $0.5 million lower than it would have been without adoption, and net income was $0.3 million lower. The 2017 comparative period was not restated.
- Other items affecting comparability included a $0.7 million gain on sale of a Benefits and Insurance book of business, $0.6 million of Hurricane Irma business-interruption insurance proceeds, and a net loss of $0.1 million on deferred-compensation-plan investments, compared with a $3.3 million net gain on those investments in Q1 2017. Fair-value adjustments to contingent acquisition liabilities were also higher year over year.
- CBIZ authorized a new 5 million-share repurchase program effective April 1, 2018, expiring one year later. It repurchased approximately 31,000 shares for $0.6 million in Q1 2018.
Outlook, risks and contingencies
The filing provides no numerical full-year revenue, earnings or cash-flow guidance. Management described acquisition activity as its first capital-allocation priority and stated it has capacity for acquisitions and opportunistic share repurchases. It cautioned that interim results are not necessarily indicative of full-year results.
- CBIZ cited approximately $200 million of future minimum operating-lease cash commitments. It expected adoption of the new lease standard in 2019 to materially affect the balance sheet, but not materially affect earnings, liquidity or current debt-covenant compliance.
- Two significant legal matters remain unresolved: a stayed Arizona claim alleging approximately $16 million in damages, and a Pennsylvania lawsuit seeking at least $142 million relating to actuarial services. CBIZ said it could not predict outcomes or estimate possible losses and intended to defend the cases.
- National Practices revenue was substantially concentrated: about 70% of that practice group’s revenue came from a single client. CBIZ also identified ordinary business risks, including working-capital collection timing, acquisition performance, floating-rate debt and litigation; the filing refers investors to the 2017 Form 10-K for fuller risk-factor disclosure.
Important facts for investors to verify
- Whether the higher receivables and 92-day DSO convert to cash after the seasonal tax-services period.
- Acquisition performance and earnout assumptions, including Laurus’s contribution and the growth in goodwill and contingent purchase-price liabilities.
- Current debt availability, borrowing costs, covenant headroom and the effect of interest-rate movements under the amended facility.
- Developments in the Arizona and Pennsylvania lawsuits, for which the company disclosed no estimable loss range.
- The durability of revenue growth and margins, particularly the modest Benefits and Insurance Services same-unit growth and National Practices’ reliance on one client.
- How much of the EPS improvement reflects sustainable operating performance versus the lower tax rate and other period-specific items.