CBIZ, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. CBIZ provides professional business services through Financial Services, Benefits and Insurance Services, and National Practices, primarily to businesses and individuals in the U.S. and parts of Canada. Financial statements are unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $410.5 million | $363.3 million | $1,263.6 million | $1,116.9 million |
| Operating income | $55.3 million | $41.4 million | $192.0 million | $187.8 million |
| Net income | $33.7 million | $27.5 million | $133.7 million | $116.9 million |
| Diluted EPS | $0.67 | $0.53 | $2.64 | $2.22 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $57.3 million | $60.1 million |
- Q3 revenue rose 13.0%; management attributed $30.2 million, or 8.3%, to same-unit growth and $17.1 million, or 4.7%, to acquired businesses net of divestitures. Nine-month revenue increased 13.1%, with same-unit growth of 7.5% and acquired businesses net of divestitures contributing 5.6%.
- Q3 net income increased 22.6% and diluted EPS increased 26.4%. Nine-month net income increased 14.4% and diluted EPS increased 18.9%.
- Q3 gross margin was $68.4 million, versus $57.2 million. Nine-month gross margin was $236.5 million, versus $230.9 million; reported comparisons were affected by deferred-compensation plan fluctuations. Excluding that plan, nine-month gross margin was $243.4 million, or 19.3% of revenue, versus $207.9 million, or 18.6%.
- Financial Services revenue rose 14.8% in Q3 and 15.4% year to date; Benefits and Insurance Services grew 8.9% and 7.2%, respectively. National Practices revenue increased 6.1% and 7.5%, while its operating income declined in both comparisons.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $1.4 million; restricted cash was $38.2 million. Total cash, cash equivalents and restricted cash, including $82.7 million of cash equivalents held for clients, were $122.3 million.
- Nine-month operating cash flow was $57.3 million, down from $60.1 million, as working capital used $121.6 million. Investing activities used $76.6 million, including $53.1 million for acquisitions and $19.0 million for capital expenditures. Financing activities used $18.4 million.
- Bank debt was $394.7 million, up from $265.7 million at year-end 2022. CBIZ reported approximately $195.0 million of available capacity under its $600 million credit facility, net of letters of credit. The facility matures in May 2027; the company was in compliance with its financial covenants.
- The nine-month weighted-average effective interest rate was 5.16%, versus 2.29%. Management estimated that a 100-basis-point rate change would affect annual interest expense by approximately $2.7 million, based on debt exposed to rate risk at quarter-end.
Material changes, outlook and risks
- CBIZ completed five acquisitions during the first nine months, with approximately $67.3 million in expected annualized revenue. Cash consideration was $53.0 million; reported purchase price including stock and contingent consideration was $90.0 million. The company incurred approximately $3.1 million of non-recurring Somerset transaction, retention and integration costs.
- CBIZ repurchased approximately 1.3 million shares during the first nine months for about $66.4 million, including shares acquired for tax withholding. Its repurchase authorization covered up to five million shares and was scheduled to expire April 1, 2024. After quarter-end, it repurchased about 0.1 million shares for $4.3 million through October 24.
- Management said operating cash 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. The filing provides no numerical earnings or revenue guidance and cautions interim results may not indicate full-year results.
- Interest expense rose substantially with higher average debt and rates. Other year-to-date comparisons were also affected by deferred-compensation plan investment gains and losses, which management says offset related compensation expenses and do not affect pretax income or diluted EPS.
- National Practices depends primarily on a cost-plus contract with one client, representing about 75% of that group’s revenue. The contract was renewed through December 31, 2023, and CBIZ was pursuing renewal.
- A lawsuit brought by Zotec sought damages of up to $177 million. The jury and trial court ruled in CBIZ’s favor on the claims described in the filing; a hearing to consider damages owed to CBIZ on its counterclaim was scheduled for November 2, 2023. The ultimate outcome remained subject to litigation uncertainty.
- Other disclosed risks include dependence on key employees and outsourcing trends, competitive pricing, economic conditions, regulation and tax-law changes, and the ability to manage growth. The filing refers investors to its prior annual and quarterly reports for additional risk factors.
Important facts for investors to verify
- Whether the National Practices client contract was renewed and on what terms.
- Subsequent debt, interest-rate exposure, credit-facility availability and covenant compliance.
- Acquisition performance, integration costs, contingent consideration and cash conversion, particularly receivables and working capital.
- Share repurchases after September 30 and remaining authorization; the company also disclosed a new $25 million interest-rate swap effective October 16, 2023, at a fixed rate of 4.488%.
- Developments in the Zotec counterclaim and any other material litigation or contingencies.