CBIZ, Inc. — Q3 2019 Form 10-Q
Business context and period. CBIZ provides accounting, tax, advisory, benefits, insurance, payroll and other professional services, primarily to small and midsize businesses. This filing covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $239.8 | $224.2 | $745.3 | $723.0 |
| Gross margin | $30.6 | $25.6 | $122.5 | $114.5 |
| Operating income | $19.0 | $15.4 | $88.6 | $84.2 |
| Income from continuing operations | $18.0 | $13.6 | $72.2 | $62.5 |
| Net income | $17.8 | $13.6 | $71.9 | $62.5 |
| Diluted EPS from continuing operations | $0.32 | $0.24 | $1.29 | $1.11 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $49.4 | $63.3 |
- Q3 revenue rose 6.9%; nine-month revenue rose 3.1%. Management attributed most growth to same-unit revenue: $12.4 million in Q3 and $18.0 million year to date. Acquisitions, net of divestitures, added $3.1 million and $4.3 million, respectively.
- Q3 gross margin was 12.8% of revenue versus 11.4% a year earlier; nine-month gross margin was 16.4% versus 15.8%. Operating income margin was 7.9% in Q3 and 11.9% year to date.
- Q3 segment revenue growth was 5.2% in Financial Services, 9.8% in Benefits and Insurance Services, and 12.5% in National Practices. Year-to-date growth was 3.1%, 2.4%, and 9.4%, respectively. Benefits and Insurance Services’ year-to-date same-unit revenue was nearly flat, up 0.2%.
- Nine-month operating cash flow declined to $49.4 million from $63.3 million, primarily reflecting $47.7 million used for receivables and other working capital, compared with $27.0 million of working-capital use in 2018. Investing used $24.7 million and financing used $56.5 million. Cash, cash equivalents and restricted cash totaled $98.8 million at period end; unrestricted cash and cash equivalents were $2.7 million.
- At September 30, bank debt was $160.0 million, up from $135.5 million at year-end 2018. Approximately $233.6 million remained available under the $400 million credit facility, net of letters of credit. The company reported compliance with its debt covenants; the weighted-average borrowing rate for the first nine months was 3.16%.
- Liquidity includes substantial client funds and matching obligations, which fluctuate with payroll collections and payments. Accounts receivable, net, was $261.0 million; days sales outstanding was 93 days, compared with 87 days at September 2018 and 70 days at December 2018.
Material changes and unusual items
- CBIZ acquired six businesses in 2019 for aggregate consideration of approximately $32.6 million, including contingent consideration; their estimated annualized revenue was $17.4 million. Acquisitions contributed to goodwill, which reached $588.2 million.
- The company repurchased approximately 1.1 million shares for about $22.8 million in the first nine months. The repurchase authorization covered up to 5.0 million shares and was scheduled to expire April 1, 2020; the program could be suspended or discontinued.
- Operating lease accounting adopted January 1, 2019 added a $148.9 million right-of-use asset and corresponding lease liabilities at adoption. At September 30, total operating lease liabilities were $169.3 million. The company said adoption did not materially affect results, liquidity or debt covenant compliance.
- Q3 results included gains on investments held in the deferred compensation plan, offset by related compensation expense. A disclosed immaterial prior-period error correction increased both expense and other income by $6.7 million in Q3 and did not affect pretax continuing income or diluted EPS.
- Nine-month income tax expense was $25.0 million, with a 25.7% effective tax rate, versus $19.7 million and 24.0% in 2018. Management cited lower tax benefits from share-based compensation and a tax-reserve reversal in Q3 2018.
Outlook, risks and contingencies
- The filing provides no specific full-year 2019 revenue or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results. Its stated capital priorities were strategic acquisitions and opportunistic share repurchases.
- Management highlighted seasonal working-capital needs: receivables rise during the first-quarter accounting and tax season, with collections generally occurring in later quarters. Floating-rate debt exposes the company to interest-rate changes; a 100-basis-point move was estimated to change annual interest expense by approximately $0.9 million. Interest-rate swaps covered $70 million of notional debt.
- Two significant lawsuits remain pending. One group of plaintiffs alleges approximately $16 million in damages; a separate UPMC matter seeks at least $142 million. CBIZ said it could not predict outcomes or estimate a possible loss or range of loss and intends to defend the cases.
- National Practices revenue is concentrated: approximately 75% of that group’s revenue came from one client under a cost-plus contract renewed through December 31, 2023.
- The filing refers investors to the risk factors in the 2018 Form 10-K and notes that forward-looking statements are subject to risks and uncertainties. Disclosure controls were reported effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether the higher DSO and working-capital use unwind through collections in subsequent quarters.
- How much future growth and margin improvement comes from same-unit operations versus acquisitions, and the integration and contingent-payment outcomes for acquired businesses.
- The status and potential financial exposure of the two lawsuits; the filing does not provide a clear estimate of possible loss.
- The sustainability of earnings growth excluding deferred-compensation investment gains and other acquisition-related or nonrecurring items.
- Debt capacity and lease commitments alongside planned acquisitions and repurchases, including the remaining authorization and covenant headroom.