CBIZ, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. CBIZ provides Financial Services, Employee Services and National Practices. Unless otherwise indicated, amounts below are in millions.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $213.9 | $204.7 | +4.5% |
| Operating income | $33.1 | $32.6 | +1.7% |
| Income from continuing operations | $19.5 | $18.0 | +8.3% |
| Net income | $19.2 | $17.3 | +10.9% |
| Diluted EPS, continuing operations | $0.38 | $0.34 | +$0.04 |
| Net cash used in operating activities | $(24.3) | $(21.2) | More cash used |
- Gross margin was $43.0 million, or 20.1% of revenue, versus $42.8 million, or 20.9%, a decline of 80 basis points. Operating expenses rose 5.5% to $170.9 million; corporate G&A fell 3.3% to $9.9 million.
- Interest expense declined to $3.0 million from $3.4 million. Effective tax rate was 41.0%, down from 42.1%. Management also reported non-GAAP diluted EPS of $0.49 versus $0.45; this measure adds selected non-cash charges and credits and is not a GAAP substitute.
- At March 31, total assets were $991.0 million, current assets $366.4 million, current liabilities $233.6 million, and stockholders’ equity $418.3 million. Cash and cash equivalents were only $0.1 million; restricted cash was $25.6 million. Management reported working capital of $132.8 million.
- Bank debt was $146.8 million and convertible notes had a net carrying value of approximately $97.2 million, including $96.4 million for the 2010 Notes and $0.8 million for the 2006 Notes. The $400 million credit facility had about $150.3 million available, net of letters of credit and guarantees. The company reported compliance with its debt covenants.
- Operating cash use reflected seasonal receivables growth: accounts receivable rose $45.5 million from year-end, and DSO was 90 days versus 92 days a year earlier. Investing activities provided $48.6 million, mainly reflecting client-fund movements; financing activities used $25.1 million. Cash decreased $0.9 million during the quarter.
Changes versus prior comparable period
- Revenue increased $9.1 million: $4.6 million from same-unit growth and $4.6 million from acquired businesses, partly offset by $1.9 million of prior-year revenue from a divested operation. Excluding that divested revenue, reported revenue growth was 5.5%.
- Financial Services same-unit revenue grew 2.7%, supported by national services and government healthcare compliance work. Employee Services same-unit revenue grew 1.5%; acquisitions lifted total segment revenue 11.7%, while segment gross margin percentage decreased to 17.8% from 18.5%. National Practices revenue was essentially flat.
- Operating cash use increased by $3.1 million year over year, primarily due to greater working-capital use. The 2015 quarter included $6.0 million of acquisition and client-list spending, compared with $15.2 million in Q1 2014.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said seasonal operating cash use is typical in Q1, with stronger operating cash flow generally expected in Q2 and Q3 as Financial Services receivables are collected. Management believes operating cash generation plus credit-facility availability will fund foreseeable business needs.
- The $97.7 million principal amount of 4.875% 2010 Notes matures October 1, 2015. Management intended to retire the notes during 2015 using credit-facility funds; additional private repurchases were possible but not assured. The facility matures in 2019. A credit agreement amendment entered into April 10, 2015 revised the definition of Change of Control.
- CBIZ acquired Model Consulting, an employee-benefits consultancy, effective March 1, 2015, for approximately $5.5 million net cash plus $4.2 million contingent consideration; annualized revenue was estimated at $4.2 million. The company also repurchased about 593,000 shares for $5.0 million during Q1 and reported buying about 113,000 additional shares for approximately $1.0 million after quarter-end.
- Other income included a $1.5 million reduction in contingent acquisition earnout liabilities, reflecting lower projected results at acquired businesses. Deferred-compensation investment gains were offset by compensation expense and did not affect net income.
- A remaining Arizona lawsuit group alleges approximately $16 million in damages. CBIZ denies wrongdoing; management said it could not predict the outcome or estimate a potential loss, but did not expect a material adverse effect. The filing also identifies risks including growth management, key-person dependence, pricing competition, economic conditions, regulation, seasonality and receivable collection, professional liability, systems reliance and stock-price volatility.
- CBIZ was evaluating the impact and adoption method for the new revenue-recognition standard. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the October 2015 2010 Notes maturity was ultimately funded and its effect on borrowing, interest expense and covenant headroom.
- Whether seasonal receivables converted to cash as expected; review subsequent DSO, operating cash flow and collections.
- Whether revenue growth and margins persisted, especially in Employee Services and Financial Services, and how acquired businesses performed.
- Developments in the Arizona litigation, including any change in the company’s ability to estimate potential exposure.
- Share-repurchase pace and total capital deployment relative to debt reduction, acquisitions and liquidity needs.