CBIZ, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited results compared with the same 2014 periods. CBIZ provides professional financial, employee and national-practice services.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $185.0m | $177.5m | $398.9m | $382.2m |
| Operating income | $15.3m | $10.8m | $48.4m | $43.4m |
| Income from continuing operations | $6.7m | $6.4m | $26.2m | $24.5m |
| Net income | $6.6m | $6.1m | $25.8m | $23.4m |
| Diluted EPS from continuing operations | $0.13 | $0.12 | $0.51 | $0.47 |
| Gross margin / revenue | 11.8% | 10.8% | 16.3% | 16.2% |
- Revenue rose 4.3% in Q2 and 4.4% year to date. Same-unit revenue grew 2.0% and 2.2%, respectively; acquisitions net of divestitures contributed the balance of reported growth.
- Q2 operating expenses increased 3.0%, slower than revenue growth; corporate G&A fell 20.4%, primarily on lower professional and legal fees. For the first half, operating expenses rose 4.3%.
- Q2 results included a $0.8m non-operating charge related to retiring convertible notes. Other income/expense also swung from $3.9m income in Q2 2014 to $1.1m expense in Q2 2015, partly reflecting smaller acquisition earnout gains and losses on deferred-compensation investments.
- Non-GAAP diluted EPS was $0.26 in Q2 and $0.76 for the first half, versus $0.22 and $0.68, respectively, in 2014. These company-defined measures exclude selected charges and credits and are not GAAP substitutes.
Cash flow, balance sheet and debt
- First-half operating cash flow was $4.3m, down from $5.2m. Investing activities provided $57.7m, including a $70.7m increase in funds held for clients; financing activities used $60.7m. Cash and cash equivalents ended at $2.3m.
- At June 30, current assets were $352.1m and current liabilities $229.9m, a reported difference of $122.2m. These totals include substantial matched client-fund balances: $112.9m of funds held and $113.0m of obligations. Restricted cash was $34.7m.
- Net receivables were $177.2m, up $34.2m from year-end; days sales outstanding was 84, versus 70 at December 31, 2014 and 85 a year earlier.
- Bank debt was $153.0m; convertible notes, net, were reported at $48.8m. The $400m unsecured credit facility matures in July 2019, with approximately $139.5m available after letters of credit and guarantees. CBIZ reported compliance with debt covenants.
- The 2010 Notes mature October 1, 2015. In Q2, CBIZ retired $49.3m principal through $17.2m cash and 5.1m common shares valued at approximately $48.0m, reducing annualized interest expense by an estimated $3.2m. Management expected available credit-facility funds to be sufficient to retire the remaining notes.
Outlook, commentary and risks
- The filing provides no specific revenue, earnings or cash-flow guidance. Management said operating cash generation and available credit were expected to meet foreseeable business needs, including working capital and capital expenditures.
- CBIZ repurchased approximately 1.9m shares for $17.2m during the first half. Through July 31, 2015, it had repurchased approximately 2.5m shares for $23.3m under a plan authorizing up to 5.0m shares.
- Growth varied by practice group: Employee Services revenue increased 12.0% in Q2, driven substantially by acquisitions; Financial Services grew 0.9% reported, while same-unit revenue increased 2.2%. National Practices revenue was nearly unchanged.
- Seasonality is significant: the company typically uses cash in Q1 as receivables build, followed by stronger operating cash flow in Q2 and Q3. A 100-basis-point change in rates was estimated to change annual interest expense by approximately $1.5m on floating-rate debt.
- Litigation arising from the Mortgages Ltd. bankruptcy remains against CBIZ parties for claims by a plaintiff group alleging approximately $16.0m in damages. The company denies wrongdoing, cannot estimate a possible loss or range, and believes resolution will not materially affect its financial condition, results or cash flows.
- Other stated risks include growth management, key-person dependence, pricing competition, economic conditions, regulation and tax-law changes, receivables collection, professional liability, regulatory inquiries, systems reliance and share-price volatility. Management reported disclosure controls were effective at a reasonable-assurance level and no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- How the remaining 2010 Notes were retired at or before their October 2015 maturity, and the resulting debt, interest expense and dilution.
- Whether receivable growth and the 84-day DSO convert into collections and stronger operating cash flow, given low unrestricted cash.
- How much reported revenue and profit growth is organic versus acquisition-related, and whether segment margins remain stable.
- Progress and potential exposure in the Arizona litigation; the filing gives no estimable loss range despite the stated damages allegation.
- Capital allocation after share repurchases, including available credit-facility capacity, contingent acquisition payments and covenant headroom.