CBIZ, Inc. — Q3 2020 Form 10-Q
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2020. CBIZ provides professional business services primarily to small and midsize organizations through Financial Services, Benefits and Insurance Services, and National Practices.
Financial performance and position
- Q3 revenue: $238.4 million, down 0.6% from $239.8 million. Operating income was $22.3 million versus $19.0 million; net income was $20.1 million versus $17.8 million. Diluted EPS was $0.36 versus $0.32.
- Nine-month revenue: $752.8 million, up 1.0% from $745.3 million. Operating income was $106.2 million versus $88.6 million; net income was $78.4 million versus $71.9 million. Diluted EPS was $1.41 versus $1.28.
- Margins: Gross margin was 14.1% in Q3 versus 12.8% a year earlier, and 18.5% for the first nine months versus 16.4%. Operating margin was 9.4% in Q3 versus 7.9%, and 14.1% year to date versus 11.9%.
- Cash flow: Nine-month operating cash flow was $81.8 million, up from $49.4 million. Investing activities used $9.5 million; financing activities used $94.1 million. Cash, cash equivalents and restricted cash totaled $124.8 million at period-end, including client-related balances.
- Debt and liquidity: Bank debt was $110.0 million, compared with $105.5 million at December 31, 2019. The company reported $284.0 million of available capacity under its $400 million credit facility, was in covenant compliance, and held $6.1 million of unrestricted cash. The facility matures in 2023.
- Balance sheet: Total assets were $1.425 billion and stockholders’ equity was $718.0 million. Net accounts receivable was $248.9 million; DSO was 87 days, down from 94 days a year earlier.
Material changes versus prior comparable period
- Q3 same-unit revenue decreased 2.0%; acquired businesses net of divestitures contributed 1.4% incremental revenue. For the first nine months, same-unit revenue decreased 0.8%, while acquisitions net of divestitures contributed 1.8% growth.
- Q3 Benefits and Insurance Services revenue fell 4.0%, with same-unit revenue down 6.0%, led by payroll, property and casualty, and retirement plan services. Financial Services revenue grew 1.1%, largely from acquisitions; National Practices revenue was nearly flat.
- Lower operating costs improved reported margins. Excluding deferred compensation expense, operating expenses were 83.6% of Q3 revenue versus 84.5% a year earlier, and 81.1% for nine months versus 82.0%.
- Interest expense declined to $1.0 million in Q3 from $1.5 million, and to $4.2 million year to date from $4.5 million, mainly reflecting lower interest rates and, in Q3, lower average debt.
- Year-to-date other income fell to $3.5 million from $12.7 million, largely because gains associated with investments in the deferred compensation rabbi trust were lower. Related gains and compensation costs offset and, per the company, do not affect pretax income or diluted EPS.
Outlook, commentary, risks and unusual items
- Management provided no specific financial guidance. It said the recurring and essential nature of most services had supported results through Q3, with no material adverse impact to date, but it could not reliably estimate the future effect of COVID-19. Higher unemployment among clients could reduce service volumes and demand, and financial distress could impair collections.
- CBIZ borrowed $210 million in March 2020 as a precaution and repaid it in May. It temporarily paused share repurchases during Q2 and part of Q3, then resumed; nine-month repurchases totaled 1.4 million shares at approximately $34.8 million. Acquisition activity slowed amid uncertainty.
- The company recorded $2.2 million of COVID-related bad-debt expense in the first nine months, with none in Q3. The allowance for doubtful accounts was $14.9 million at September 30.
- Five acquisitions were completed during the nine-month period. Aggregate purchase price was $55.3 million, including contingent consideration; acquired businesses had estimated annualized revenue of $24.6 million.
- Significant litigation remains unresolved. UPMC seeks $124 million to $266 million plus punitive damages, with trial set for March 2021. Zotec seeks up to $177 million, with trial also set for March 2021. A separate Arizona matter includes approximately $16 million of claimed damages. CBIZ said it cannot predict outcomes or estimate possible losses and intends to defend the cases.
- Other risks include continuing COVID-19 effects, client payment capacity, economic conditions, competition, key-person dependence, and regulatory or tax changes. The company implemented a new cloud-based accounting and reporting system in July and continued testing related controls; management reported disclosure controls effective and no material internal-control impact to date.
Investor facts to verify
- Whether client demand, employment trends, and collections recover or deteriorate, including future bad-debt provisions and DSO.
- Whether same-unit revenue and Benefits and Insurance Services margins improve, and how much growth depends on acquisitions.
- Available borrowing capacity, covenant compliance, debt levels, and cash generation after acquisitions, repurchases, and contingent payments.
- Developments, potential exposure, and insurance coverage related to the UPMC, Zotec, and Arizona litigation; the filing does not provide a clear estimate of potential losses.
- Whether the new financial reporting system’s controls remain effective as testing continues.