CBIZ, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. CBIZ provides professional business services through Financial Services, Benefits and Insurance Services, and National Practices.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $270.0 million | $266.1 million | Up 1.5% |
| Gross margin | $54.5 million; 20.2% of revenue | $61.3 million; 23.1% | Down $6.8 million |
| Operating income | $42.8 million | $51.3 million | Down $8.5 million |
| Continuing-operations income | $37.6 million | $35.8 million | Up 4.9% |
| Net income | $37.5 million | $35.9 million | Up 4.5% |
| Diluted EPS | $0.67 | $0.64 | Up $0.03 |
| Operating cash flow | $(24.8) million | $(20.5) million | Greater cash use |
- Revenue growth was led by Financial Services, up 2.5%, and National Practices, up 5.4%. Benefits and Insurance Services revenue declined 1.4%.
- Financial Services gross margin rose to 27.4% from 26.3%. Benefits and Insurance Services gross margin fell to 19.5% from 20.9%; National Practices margin fell to 7.0% from 10.8%.
- Operating expenses rose 5.2% to $215.5 million, faster than revenue. Management said Q1 cash use reflects seasonal working-capital needs, with accounting and tax revenue collected substantially in later quarters.
Liquidity, debt and balance sheet
- At March 31, cash and cash equivalents were $2.1 million; restricted cash was $27.7 million. Funds held for clients were $138.8 million, largely matched by $138.9 million of client fund obligations.
- Bank debt was $182.0 million, up from $135.5 million at December 31, 2018. Approximately $210 million remained available under the credit facility, net of letters of credit. CBIZ reported compliance with debt covenants.
- Operating lease liabilities totaled $167.0 million. Adoption of the lease standard on January 1, 2019 added lease assets and liabilities to the balance sheet; the filing says adoption did not significantly affect results, liquidity, or covenant compliance.
- DSO was 91 days, versus 92 days at March 31, 2018 and 70 days at December 31, 2018.
- Operating cash flow included substantial working-capital use, particularly from receivables and lower accrued personnel costs. Cash used in investing was $9.7 million; financing provided $10.0 million, including $46.5 million of net credit-facility borrowings and $11.6 million of share repurchases.
Material changes and unusual items
- Revenue increased $3.9 million, including $2.7 million of same-unit growth. Financial Services same-unit growth was 2.7%; Benefits and Insurance Services same-unit revenue declined 3.3%.
- Other income included a $9.1 million gain on investments held in the deferred compensation plan. Related compensation expense increased operating and G&A expenses; CBIZ states the plan had no impact on pretax income or diluted EPS. This offset makes reported expense and other-income comparisons less representative of underlying operations.
- Operating expenses also reflected the newly recognized deferred compensation plan movements. Excluding the plan’s effects, operating expenses were 76.8% of revenue versus 76.9% in Q1 2018, while G&A was 4.0% versus 3.8%.
- Interest expense decreased to $1.4 million from $1.8 million. The weighted-average borrowing rate increased to 3.18% from 2.98%; four interest-rate swaps covered $70 million of notional debt.
- CBIZ acquired Wenner Group for approximately $1.3 million in cash plus contingent consideration; annualized revenue was estimated at $2.4 million. Q1 2018 included the larger Laurus acquisition, contributing to the year-over-year comparison.
- CBIZ repurchased 580,000 shares for approximately $11.6 million in Q1 and reported additional repurchases of 179,000 shares for $3.5 million through April 30, 2019. The board renewed authorization for up to 5 million shares effective April 1, 2019.
Outlook, risks and contingencies
- The filing provides no specific numerical earnings or revenue guidance. Management describes strategic acquisitions as its first capital priority and says it may repurchase shares opportunistically.
- Management cautions that Q1 results are seasonal and not necessarily indicative of full-year results. Cash generation historically improves after the first-quarter tax and accounting season.
- Floating-rate debt creates interest-rate exposure: management estimated a 100-basis-point rate change would affect annual interest expense by approximately $1.8 million.
- Two significant legal matters remain unresolved: a pending claim alleging approximately $16 million in damages and a separate lawsuit seeking at least $142 million. CBIZ says it cannot predict outcomes or estimate a possible loss or range of loss and intends to defend the cases.
- National Practices revenue is concentrated: one client accounted for nearly 75% of that practice group’s revenue. Its cost-plus contract was renewed through December 31, 2023.
- Management reported effective disclosure controls as of quarter-end and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether same-unit revenue trends, particularly the decline in Benefits and Insurance Services, improve in subsequent quarters.
- Receivables, unbilled revenue, DSO and collections after the seasonal Q1 increase in working capital.
- How operating margins and earnings develop excluding offsetting deferred-compensation plan gains and expenses.
- Debt levels, interest costs, covenant headroom, and the pace of share repurchases and acquisitions.
- Developments in the pending lawsuits, for which the filing provides no estimable loss range, and the continued dependence of National Practices on one customer.