CBIZ, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited. CBIZ provides financial, employee, medical practice management, and other business services. Interim results are subject to seasonality and are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $183.8m | $177.3m | $593.2m | $570.9m |
| Operating income | $9.0m | $14.9m | $53.6m | $62.0m |
| Net income | $5.3m | $4.7m | $29.9m | $29.2m |
| Diluted continuing-operations EPS | $0.11 | $0.10 | $0.61 | $0.60 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $37.7m | $37.5m |
Q3 gross margin was $16.7m, or 9.1% of revenue, versus $23.0m, or 13.0%, a year earlier. Nine-month gross margin was $79.4m, or 13.4%, versus $86.4m, or 15.1%. Operating expenses rose to $167.1m in Q3 and $513.8m for nine months; management cited higher personnel costs and deferred-compensation-related expense. Nine-month interest expense declined to $12.2m from $13.4m, largely reflecting the 2011 repurchase of $39.3m of convertible notes.
Q3 revenue increased 3.6%; acquisitions net of divestitures contributed $5.1m and same-unit revenue added $1.4m. Nine-month revenue rose 3.9%, with $20.7m from acquired businesses and $1.6m from same-unit growth. Segment performance was mixed: Financial Services and Employee Services grew, while Medical Management Professionals (MMP) same-unit revenue fell 3.9% in Q3 and 4.5% year to date, amid reimbursement, pricing, and client-retention pressures. National Practices grew in Q3 but had lower nine-month revenue, partly due to fewer M&A success fees.
Net income increased despite lower operating income. Other income/expense improved year over year, including deferred-compensation investment gains that are offset by related compensation expense, and Q3 included $0.3m of legal settlement income. Management’s non-GAAP cash earnings per diluted share were $0.26 for Q3 and $1.05 for nine months, compared with $0.24 and $1.02, respectively.
Cash, liquidity, and debt
At September 30, 2012, cash and cash equivalents were $0.5m; restricted cash was $20.7m. Current assets were $293.8m and current liabilities $204.7m, including $86.8m of funds held for clients and $86.3m of corresponding client fund obligations. Net accounts receivable was $166.6m, up $29.6m from year-end; days sales outstanding rose to 84 from 71 at December 31, 2011 and 80 at September 30, 2011.
Nine-month operating cash flow was $37.7m; investing activities used $4.5m and financing activities used $34.3m, leaving cash down $1.2m to $0.5m. Receivables growth was a significant working-capital use. Capital expenditures were $3.1m, and acquisition and contingent-consideration spending was $26.7m net of acquired cash.
Bank debt was $146.0m and convertible notes had a $121.7m net carrying value ($130.0m principal on the 2010 notes, plus $0.75m of 2006 notes). The $275m unsecured credit facility had approximately $63.5m available. The 2010 notes bear 4.875% interest and mature in October 2015. An August 2012 credit agreement amendment temporarily relaxed leverage requirements for 12 months, with step-downs to the original schedule by December 2013. Management stated it was in covenant compliance and believed operating cash and facility availability would meet foreseeable needs.
Acquisitions, outlook, risks, and contingencies
- CBIZ acquired four businesses during the first nine months; preliminary aggregate purchase price was $22.5m, including $6.8m of contingent consideration. It also reported three acquisitions after quarter-end, with combined expected annual revenue of approximately $12.5m.
- No specific full-year financial guidance was provided in the supplied filing text. Management described acquisitions as a strategic priority and cited the amended facility as providing added acquisition flexibility.
- Management identified risks including economic conditions, competition and pricing pressure, seasonality and receivables collection, regulation and tax-law changes, employee retention, growth management, and reliance on information systems.
- CBIZ disclosed litigation connected to Mortgages Ltd. and Medical Capital matters. The company denied wrongdoing and said management did not expect the ultimate resolution to materially affect financial condition, results, or cash flows; outcomes remain uncertain.
- Floating-rate credit-facility debt creates interest-rate exposure: a 100-basis-point rate change was estimated to change annual interest expense by approximately $1.1m. A $40m notional swap partly mitigated exposure.
- Share repurchases totaled approximately 1.0m shares for $5.7m during the nine months. The company reported no goodwill impairment or triggering event requiring an interim goodwill assessment.
Most important facts for investors to verify
- Whether elevated DSO and receivables growth convert to cash, and how bad-debt allowances and collections develop.
- Whether MMP’s pricing, reimbursement, and client losses stabilize, and whether expense reductions offset revenue pressure.
- Whether operating margins recover after the substantial year-over-year Q3 and nine-month declines.
- Acquisition performance, contingent earnout obligations, integration costs, and the effect of acquisitions on leverage and covenant headroom.
- Liquidity and refinancing plans ahead of the $130m 2010 notes’ October 2015 maturity, given low unrestricted cash and floating-rate exposure.
- Developments in the disclosed litigation and any change to management’s assessment of potential financial impact.