CBIZ, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. CBIZ provides financial, benefits and insurance, and national-practice services to businesses and other clients. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial results and liquidity
- Q2 revenue: $236.9 million, up 0.6% from $235.5 million. Acquisitions, net of divestitures, added $4.6 million; same-unit revenue declined $3.2 million.
- Q2 earnings: Operating income was $16.8 million versus $26.8 million; net income was $21.5 million versus $16.6 million. Diluted EPS was $0.39 versus $0.30. Gross margin was 11.8% versus 15.9%; operating margin was 7.1% versus 11.4%.
- First-half revenue and earnings: Revenue was $514.4 million, up 1.8%. Operating income was $83.9 million versus $69.6 million; net income was $58.3 million versus $54.1 million. Diluted EPS was $1.05 versus $0.97. Gross margin was 20.5% versus 18.2%; operating margin was 16.3% versus 13.8%.
- Cash flow: First-half operating cash flow was $55.5 million, compared with $19.6 million. Investing activities provided $12.8 million, versus using $10.9 million; financing activities used $70.6 million, versus $42.1 million. Cash, cash equivalents and restricted cash totaled $144.3 million at period-end, including $9.6 million unrestricted cash, $42.4 million restricted cash and $92.2 million of cash equivalents in client funds.
- Debt and liquidity: Bank debt was $120.0 million, up from $105.5 million at December 31, 2019; approximately $270.4 million remained available under the $400 million credit facility. The company said it was in covenant compliance. It drew and repaid $210 million during the first half as a precaution amid pandemic uncertainty. The $20 million payroll-related line had no balance at quarter-end and was scheduled to terminate August 6, 2020.
- Working capital and capital allocation: Net accounts receivable was $267.2 million, including a $16.4 million allowance for doubtful accounts. DSO was 87 days, versus 90 days a year earlier and 75 days at year-end 2019. CBIZ repurchased 1.2 million shares for $31.1 million in the first half, then suspended further repurchases in mid-March.
Changes and operating drivers
- Q2 revenue was nearly flat overall. Financial Services revenue declined 0.2%, with same-unit revenue down 1.0%; Benefits and Insurance Services rose 2.5%, despite lower same-unit revenue; National Practices revenue declined 0.9%.
- For the first half, Financial Services revenue rose 1.0%, Benefits and Insurance Services rose 3.5%, and National Practices rose 2.2%. Acquisition contributions supported growth, while same-unit revenue declined in Benefits and Insurance Services.
- Management attributed Q2 expense pressure in part to deferred-compensation-plan valuation movements. The related investment gains and compensation expense are substantially offset, and the company stated the plan does not affect pretax income or diluted EPS. Excluding deferred compensation, Q2 operating expenses fell 2.2%, including lower travel and discretionary spending, partly offset by higher personnel costs.
- First-half bad-debt expense increased, including $2.2 million attributed to COVID-19. Management considered pandemic-related economic conditions and client circumstances in estimating credit losses.
Outlook, risks and unusual items
- CBIZ provided no specific financial guidance. Management said the pandemic’s future effects could not be estimated reliably and could materially affect results, financial condition and liquidity depending on its duration, severity, government response, client demand and clients’ ability to pay.
- Management reported no material adverse impact on results through Q2, citing the recurring and essential nature of many services. Tax-filing deadline extensions were expected to defer some compliance work into Q3; higher unemployment could reduce volumes and demand for certain services.
- COVID-19 response measures included remote work, travel restrictions and cost controls. Acquisition activity slowed amid uncertainty. Three businesses were acquired in the first half; a further acquisition, Prince-Wood Insurance, closed July 1, with estimated annualized revenue of $1.2 million.
- Two significant legal matters remain unresolved. One group of plaintiffs alleges approximately $16 million in damages. UPMC seeks $124 million to $266 million in compensatory damages plus punitive damages; trial was set for March 2021. CBIZ said it could not predict outcomes or estimate possible losses and intended to defend the matters vigorously.
- The company disclosed a new cloud-based accounting and reporting system launched July 1, 2020; related internal controls were to be tested for effectiveness in Q3. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether COVID-19-related client payment delays, bad debts and demand changes worsen beyond the first-half experience.
- Whether same-unit revenue trends and margins improve, especially in project-based Financial Services work and Benefits and Insurance Services.
- How much of reported earnings and expense movement reflects deferred-compensation-plan valuation offsets, and whether operating performance excluding those offsets is sustained.
- Developments in the UPMC and Arizona litigation, including any change in estimated exposure, trial timing or recorded contingencies.
- Credit-facility availability, covenant compliance, and the status of the separate $20 million line scheduled to terminate in August 2020.