CBIZ, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. CBIZ provides professional business services through Financial Services, Benefits and Insurance Services, and National Practices. Financial figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | $211.0 | $197.0 | $452.5 | $421.3 |
| Operating income | $13.7 | $14.7 | $53.6 | $50.5 |
| Income from continuing operations | $11.4 | $8.4 | $36.4 | $30.2 |
| Net income | $11.0 | $8.1 | $35.9 | $29.9 |
| Diluted EPS from continuing operations | $0.20 | $0.16 | $0.66 | $0.57 |
| Operating cash flow | Not separately stated for quarter | $17.2 | $22.3 |
- Q2 revenue increased 7.1%; management attributed $7.5 million to same-unit growth and $6.5 million to acquired operations. H1 revenue rose 7.4%, with $12.2 million from same-unit growth and $19.0 million from acquisitions.
- Q2 gross margin was $22.9 million, or 10.9% of revenue, versus $23.0 million, or 11.7%, a year earlier. Operating expenses grew 8.1%, faster than revenue; personnel costs were the principal driver. H1 gross margin was $71.6 million, or 15.8%, compared with $69.1 million, or 16.4%.
- Q2 operating income declined 6.9% year over year, while H1 operating income rose 6.0%. Q2 earnings also reflected a lower effective tax rate: 27.6% versus 38.7%, including a $2.2 million tax benefit from share-based compensation accounting. H1 effective tax rates were 36.0% and 40.0%, respectively.
- Other income was $3.8 million in Q2 and $6.5 million in H1. It included gains on investments held for the deferred compensation plan, offset by compensation expense; management says these plan effects do not affect pretax continuing income or diluted EPS. Fair-value adjustments to prior acquisition contingencies also contributed income.
- At June 30, cash and cash equivalents were $1.2 million; restricted cash was $34.9 million, and funds held for clients were $148.7 million, largely matched by $148.8 million of client-fund obligations. Accounts receivable, net, was $218.3 million. Days sales outstanding was 88, versus 83 at June 30, 2016 and 76 at December 31, 2016.
- Bank debt was $210.6 million, up from $191.4 million at year-end. The $400 million unsecured credit facility had approximately $140 million available, net of letters of credit. The facility matures in July 2019; CBIZ reported covenant compliance. Its weighted-average borrowing rate for H1 was 2.60%.
Changes, capital allocation and outlook
- Financial Services revenue grew 7.9% in Q2, including 5.5% same-unit growth. Benefits and Insurance Services revenue grew 6.1%, but same-unit growth was 0.9%; acquisitions accounted for most of the increase. National Practices revenue grew 2.5%, while its gross margin declined.
- CBIZ acquired CMF Associates, Slaton Insurance and Pacific Coastal in H1. Aggregate consideration was approximately $23.7 million cash, $2.0 million in stock and $17.5 million contingent consideration. The acquisitions added an estimated $23.2 million of annualized revenue in total; acquisition accounting included $39.5 million of goodwill.
- H1 investing cash flow was positive $31.8 million, principally reflecting client-fund activity, while financing cash flow was negative $51.3 million, including a $65.0 million decrease in client-fund obligations. These timing-sensitive client balances materially affect reported cash flows. Operating cash flow fell $5.1 million year over year, which management attributed mainly to working-capital use.
- CBIZ repurchased approximately 0.3 million shares for $4.3 million in H1 under a program authorizing up to 5 million shares through April 1, 2018. After quarter-end, it repurchased approximately 0.3 million shares for $3.9 million. The credit agreement restricts dividend payments.
- No specific full-year revenue or earnings guidance is provided in the filing. Management describes seasonal working-capital needs, with cash use typically concentrated in Q1, and states that acquisitions remain its first capital-allocation priority, alongside opportunistic repurchases. The company expects adoption of the new revenue standard in 2018; revenue recognition is expected to be mostly consistent overall, though commission timing in property-and-casualty insurance will change.
Risks, contingencies and unusual items
- CBIZ disclosed two significant legal matters: claims by a plaintiff group alleging approximately $16 million in damages, currently stayed as to CBIZ, and a Pennsylvania lawsuit seeking at least $142 million related to actuarial services. The company says it cannot predict outcomes or estimate possible losses and intends to defend the matters.
- Other risks cited include managing growth, retaining key personnel, competitive pricing, economic and regulatory changes, revenue seasonality and receivable collectability, professional liability, information-system dependence and stock-price volatility.
- Floating-rate debt exposes CBIZ to interest-rate changes. At June 30, $130.6 million of facility borrowings was subject to rate risk; a 100-basis-point change would affect annual interest expense by approximately $1.3 million. Swaps hedge portions of the exposure.
- Management cautions that interim results are not necessarily indicative of full-year results. Disclosure controls were assessed as effective at the reasonable-assurance level, with no material change in internal control over financial reporting reported for the quarter.
Key facts for investors to verify
- Whether same-unit growth, particularly in Benefits and Insurance Services, improves and whether expense growth moderates enough to support margins.
- Receivables, DSO and operating cash conversion, separating ordinary seasonality from client-fund timing effects.
- Acquisition performance against expectations, integration progress and potential contingent-consideration payments.
- Developments in the Arizona and Pennsylvania litigation, given the stated claim amounts and the company’s inability to estimate potential loss.
- The sustainability of reported earnings growth after accounting for the share-based-compensation tax benefit and deferred-compensation investment gains and offsets.
- Debt levels, covenant headroom, floating-rate exposure and capital allocation, including post-quarter share repurchases.