CBIZ, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
CBIZ provides professional business services, primarily to small and medium-sized businesses, individuals, government entities and nonprofits in the U.S. and parts of Canada. It reports three practice groups: Financial Services, Benefits and Insurance Services, and National Practices. This unaudited filing covers the quarter and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $398.5m | $362.0m | $853.1m | $753.7m |
| Operating income | $38.7m | $61.3m | $136.7m | $146.4m |
| Net income | $26.9m | $31.3m | $100.0m | $89.4m |
| Diluted EPS | $0.53 | $0.60 | $1.98 | $1.70 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $29.7m | $28.5m |
- Q2 revenue rose 10.1%; management attributed $15.0m, or 4.1%, to same-unit growth and $21.6m, or 6.0%, to acquired operations net of divestitures. Six-month revenue rose 13.2%, comprising 7.2% same-unit growth and 6.0% acquired operations net of divestitures.
- Q2 gross margin was $54.5m, or 13.7% of revenue, versus $72.2m, or 20.0%, a year earlier. Excluding deferred compensation plan effects, the filing reports adjusted gross margin of $59.6m (15.0%) versus $58.9m (16.3%). For the first half, reported gross margin was $168.1m (19.7%) versus $173.6m (23.0%); adjusted for deferred compensation, it was $178.0m (20.9%) versus $154.6m (20.5%).
- Q2 net income and diluted EPS declined despite revenue growth; first-half net income and EPS increased. First-half operating income decreased 6.6% year over year.
- Six-month cash flow from operations was $29.7m; investing used $65.6m and financing provided $21.8m. Working capital used $101.6m of operating cash, principally reflecting receivables growth and accrued personnel-cost changes.
- At June 30, cash and cash equivalents were $3.7m, restricted cash $52.3m, and funds held for clients $131.4m. The latter client-related balances are distinct from freely available corporate cash.
- Bank debt was $410.6m, up from $265.7m at year-end 2022. The company reported approximately $177.5m available under its $600m credit facility, net of letters of credit and subject to facility terms. Six-month weighted-average effective borrowing rates were 4.94% versus 1.93% in 2022. CBIZ was in compliance with debt covenants.
- Total assets were $2.09bn and total liabilities $1.31bn at June 30, 2023. DSO was 89 days, compared with 88 days at June 30, 2022 and 74 days at December 31, 2022.
Material changes and operating drivers
- Financial Services revenue increased 12.2% in Q2 and 15.7% for the first half. Q2 same-unit growth was 3.9%; acquisition revenue contributed $21.6m. Higher personnel costs and acquisition-related expenses weighed on Q2 group margin, which fell to 16.3% from 19.2%.
- Benefits and Insurance Services revenue grew 4.5% in Q2 and 6.4% for the first half. Six-month group margin improved to 20.7% from 19.8%.
- National Practices revenue grew 7.3% in Q2 and 8.3% in the first half. About 75% of this group’s revenue came from one client under a cost-plus contract; the contract ran through December 31, 2023, and the company said it was pursuing renewal.
- CBIZ completed four acquisitions in the first half, with aggregate recorded purchase price of $83.7m, including cash, stock and contingent consideration. The acquired businesses were expected to add approximately $64.4m in annualized 2023 revenue. The company also repurchased 1.1m shares, including shares for tax withholding, at a total cost of approximately $56.8m.
- Interest expense rose to $5.5m in Q2 from $1.6m and to $9.2m in the first half from $2.9m, reflecting higher average debt and rates. A 100-basis-point rate move was estimated to change annual interest expense by approximately $2.9m, based on debt exposed to rate risk at June 30.
Outlook, commentary, risks and unusual items
- The filing gives no numerical earnings or revenue guidance. Management said operating cash flow and available credit were expected to be sufficient for remaining 2023 cash requirements, including acquisitions, debt interest, seasonal working capital, contingent acquisition payments, repurchases and capital expenditures.
- Deferred compensation plan investment gains and losses materially affected reported operating expenses and other income between periods. The corresponding expense and income effects offset and, according to CBIZ, did not affect pretax income or diluted EPS.
- First-half results included approximately $2.5m of non-recurring transaction, retention and integration costs related to Somerset. The filing also identifies acquisition-related integration costs in operating and G&A expenses.
- CBIZ formed a wholly owned captive insurer, Rockside Insurance Company, effective April 1, 2023, to provide coverage for part of the retention deductibles on certain insurance programs.
- Risks highlighted include cybersecurity incidents affecting CBIZ or third parties, competition and pricing pressure, economic and regulatory changes, dependence on key employees and outsourcing trends, ability to manage growth, and floating-rate debt exposure. The National Practices client contract renewal is also a concentration risk.
- In the Zotec litigation, the trial court ruled in CBIZ’s favor on the claims described and on its contractual indemnification counterclaim; further proceedings were expected to determine damages owed to CBIZ. The filing says the outcomes of other ordinary-course claims cannot be predicted.
- Management assessed disclosure controls as effective at a reasonable-assurance level. Integration of Somerset into internal control over financial reporting was ongoing.
Important facts for investors to verify
- Whether same-unit growth, especially in Financial Services, sustains as acquisition contributions and seasonal activity normalize.
- Whether margins recover and personnel-cost growth remains aligned with revenue growth; also separate deferred compensation effects from underlying trends.
- Receivables collection, DSO, working-capital needs and the distinction between corporate cash and client or restricted funds.
- Debt levels, interest-rate exposure, facility availability, covenant headroom and the company’s planned balance between acquisitions and share repurchases.
- Renewal terms and continued concentration associated with the National Practices group’s principal client.
- Final acquisition purchase-price allocations and contingent consideration, the outcome of the Zotec damages proceedings, and any material cybersecurity or other legal developments.