CBIZ, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023, compared with the three months ended March 31, 2022. CBIZ provides professional business services through Financial Services, Benefits and Insurance Services, and National Practices.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $454.6 million | $391.7 million | +16.1% |
| Operating income | $98.0 million | $85.1 million | +15.1% |
| Net income | $73.2 million | $58.1 million | +25.9% |
| Diluted EPS | $1.44 | $1.10 | +30.9% |
| Operating cash flow | $(44.5) million | $(50.9) million | Cash use decreased |
| Investing cash flow | $(45.9) million | $(81.5) million | Cash use decreased |
| Financing cash flow | $61.8 million | $170.4 million | Lower net inflow |
Reported gross margin was $113.6 million, or about 25.0% of revenue, versus $101.4 million, or about 25.9%, in Q1 2022. Results include gains and expenses tied to the non-qualified deferred compensation plan, which management says offset in pretax income and diluted EPS. Excluding that plan’s effects, gross margin was $118.4 million, or 26.0% of revenue, versus $95.8 million, or 24.4%. Operating expenses rose 17.5% to $341.0 million; excluding deferred compensation effects, they were 74.0% of revenue versus 75.6%. Interest expense increased to $3.6 million from $1.3 million. The effective tax rate was 26.5%, compared with 24.9%.
Revenue by practice group: Financial Services $343.1 million (+18.8%); Benefits and Insurance Services $100.1 million (+8.2%); National Practices $11.5 million (+9.3%). Same-unit revenue increased approximately 10.0% overall; acquired operations, net of divestitures, contributed $23.6 million of incremental revenue.
Balance sheet, liquidity and capital
- At March 31, 2023, cash and cash equivalents were $2.3 million; restricted cash was $25.1 million. Funds held for clients were $148.2 million, with corresponding client fund obligations of $150.2 million.
- Accounts receivable, net, was $442.8 million, up from $334.5 million at year-end, including higher unbilled revenue. Days sales outstanding was 94 days, unchanged from a year earlier.
- Bank debt was $403.7 million, versus $265.7 million at December 31, 2022. The average effective borrowing rate was 4.54%, compared with 1.79% a year earlier. Approximately $190 million was available under the credit facility, net of letters of credit; CBIZ reported compliance with covenants.
- Operating cash use is described as seasonal, reflecting the accounting and tax-services cycle and incentive payments; receivables from first-quarter activity are substantially billed and collected in later quarters. Management said operating cash flow and available credit were expected to be sufficient for 2023 requirements.
- Q1 cash spending included $39.1 million for acquisitions, $3.6 million for capital expenditures, about $29 million for share repurchases and $28.6 million for contingent acquisition consideration. The company repurchased about 0.6 million shares during the quarter. Through April 26, it repurchased a further approximately 0.2 million shares for $10.6 million.
Material changes, outlook and notable items
- Q1 2023 included two acquisitions, Danenhauer and Danenhauer and Somerset, expected to add approximately $56.1 million in annualized 2023 revenue. The company recorded about $1.6 million of Somerset transaction, retention and integration costs. Purchase-price allocations remained provisional.
- Management’s capital priorities include strategic acquisitions and share repurchases. Expected cash requirements for the rest of 2023 include acquisitions, debt interest, seasonal working capital, contingent purchase payments, repurchases and capital expenditures. The filing provides no specific revenue, earnings or EPS guidance.
- Floating-rate debt creates interest-rate exposure: management estimated that a 100-basis-point rate change would change annual interest expense by approximately $2.6 million. Five interest-rate swaps were outstanding at quarter-end.
- In the Zotec litigation, the trial court ruled for CBIZ on the claims described in the filing, including Zotec’s statutory securities-fraud claim, and ruled for CBIZ on its contractual indemnification counterclaim. Further proceedings were expected to determine damages owed to CBIZ. CBIZ also notes that ordinary-course claims may arise and their outcomes may be uncertain.
- Other stated risks include economic conditions, competition and pricing, dependence on outsourcing trends and key personnel, growth management, COVID-19 impacts, and regulatory or tax-law changes. The National Practices group relies substantially on a single-client cost-plus contract, renewed through December 31, 2023; that client represents about 75% of the group’s revenue.
Key facts for investors to verify
- Whether subsequent-quarter collections reduce the elevated receivables and seasonal working-capital cash use.
- Acquisition performance, integration costs, provisional purchase accounting and contingent-payment obligations.
- Debt balances, borrowing rates, facility availability, covenant compliance and interest-rate sensitivity.
- Share repurchases and remaining authorization, alongside acquisition and liquidity needs.
- Developments in the Zotec damages proceedings and the renewal or status of the National Practices group’s major client contract.