CBIZ, Inc. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. Financial amounts are in U.S. dollars.
Business context
CBIZ provides accounting, tax, advisory, benefits, insurance, payroll, retirement and healthcare consulting services, primarily to small and midsized businesses, individuals and public-sector and nonprofit clients in the United States and parts of Canada. Its three practice groups are Financial Services, Benefits and Insurance Services, and National Practices. The company reported more than 90,000 clients and approximately 4,600 employees.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $799.8 million | $750.4 million |
| Operating income | $65.8 million | $65.5 million |
| Income from continuing operations | $40.6 million | $35.0 million |
| Net income | $40.1 million | $34.1 million |
| Diluted EPS from continuing operations | $0.76 | $0.66 |
| Adjusted EBITDA | $94.8 million | $87.0 million |
| Cash provided by operating activities | $71.0 million | $47.4 million |
| Debt outstanding | $191.4 million | $206.6 million |
Revenue increased 6.6%; acquisitions contributed $29.9 million and same-unit growth contributed $19.5 million. Operating expenses rose 6.9%, slightly faster than revenue, to 87.2% of revenue from 86.9%. Gross margin was $102.1 million, or 12.8% of revenue; operating margin was approximately 8.2%. The effective tax rate was 39.4%.
Financial Services revenue grew 5.2% to $501.3 million, including 5.1% same-unit growth. Benefits and Insurance Services revenue rose 9.5% to $267.6 million, primarily from acquisitions; same-unit revenue declined 2.5%, and the group’s gross margin percentage fell to 16.5% from 17.3%. National Practices revenue increased 4.7% to $30.9 million; one client generated approximately 70% of that group’s revenue.
Investing activities used $50.0 million, including $42.9 million for acquisitions and client lists and $4.1 million for property and equipment. Financing activities used $18.4 million. Year-end cash and cash equivalents were $3.5 million; this is separate from restricted cash and funds held for clients. The $400 million unsecured revolving credit facility had $191.4 million drawn and approximately $137.5 million available at year-end; it matures in July 2019. CBIZ reported compliance with its financial covenants. DSO increased to 76 days from 72, mainly due to acquisitions.
Material changes versus prior year
- Revenue increased $49.4 million, while income from continuing operations rose 16.0% and diluted continuing-operations EPS increased from $0.66 to $0.76.
- Operating income was nearly flat despite revenue growth. Operating expenses as a share of revenue increased, and corporate G&A rose 11.7%, including higher incentive compensation and legal fees.
- Interest expense declined to $6.6 million from $8.9 million, reflecting lower borrowing costs after refinancing the 7.50% convertible notes, partly offset by a higher average debt balance.
- Operating cash flow increased by $23.7 million, driven by higher net income and working-capital changes, including the timing of payables and accrued liabilities.
- CBIZ completed six acquisitions and purchased seven client lists. Acquisition consideration included $40.0 million in cash, $21.1 million in contingent consideration and $2.1 million in stock.
- Share repurchases declined to approximately 0.8 million shares for $7.8 million, compared with 3.8 million shares for $35.2 million in 2015. The company authorized a new program of up to 5.0 million shares in February 2017.
Outlook, risks and unusual items
- Outlook: The filing provides no quantified revenue, earnings or EPS guidance. Management expects operating cash and available credit to meet cash requirements over the next 12 months, including seasonal working capital, interest, acquisitions, repurchases and capital expenditures. Acquisitions remain the highest capital-allocation priority.
- Seasonality: Accounting and tax activity concentrates revenue in the first half, especially the first four months. Management says more than 50% of annual EPS was earned in the first quarter in each of the prior five years. Fourth-quarter 2016 revenue was $178.8 million and the company recorded a $0.6 million continuing-operations loss; fourth-quarter results should be viewed in this seasonal context.
- Litigation: A Pennsylvania lawsuit filed in 2016 alleges professional negligence and related claims concerning actuarial services and seeks at least $142 million. A separate Arizona matter includes stayed claims alleging approximately $16 million in damages. CBIZ intends to defend the cases but says it cannot predict outcomes or estimate possible losses.
- Other risks: Key exposures include receivable collection, fixed short-term costs, competition, regulation of insurance compensation and healthcare benefits, errors and omissions claims, cyber and data-security incidents, reliance on third-party software, interest-rate changes and the ability to retain employees and integrate acquisitions.
- Unusual items: Other income included a $5.3 million gain on investments held for the nonqualified deferred compensation plan, offset by corresponding compensation expense and with no stated effect on pretax continuing income or diluted EPS. Fair-value changes in acquisition earnout liabilities generated $1.3 million of income. No goodwill impairment was recorded; goodwill was $487.5 million at year-end.
Important facts for investors to verify
- Whether same-unit growth, particularly the 2.5% decline in Benefits and Insurance Services, improves and how much future growth depends on acquisitions.
- Collection trends and the 76-day DSO, alongside acquisition-related working-capital effects and seasonal cash needs.
- Credit-facility availability, covenant headroom, floating-rate exposure and the effect of planned acquisitions and repurchases on leverage.
- Developments in the $142 million Pennsylvania claim and the stayed Arizona claims; the filing does not provide a clear estimate of potential loss.
- Whether key client concentration in National Practices and contingent acquisition payments create material revenue, earnings or cash-flow volatility.
- The filing reports unqualified auditor opinions on the financial statements and internal controls; review subsequent filings for any changes or new disclosures.