CBIZ, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; comparisons are with the same 2018 periods. CBIZ provides financial, benefits and insurance, and national-practice services, primarily to small and midsize organizations. Dollar amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $235.5 | $232.6 | $505.5 | $498.7 |
| Operating income | $26.8 | $17.5 | $69.6 | $68.9 |
| Continuing-operations income | $16.6 | $13.1 | $54.2 | $48.9 |
| Net income | $16.6 | $13.1 | $54.1 | $49.0 |
| Diluted EPS | $0.30 | $0.23 | $0.97 | $0.87 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $19.6 | $41.1 |
- Revenue increased 1.2% in Q2 and 1.4% in the first half. Management attributed first-half growth chiefly to same-unit revenue (+1.2%), with acquisitions net of divestitures adding 0.2%.
- Calculated gross margin was approximately 15.9% in Q2 versus 11.8% a year earlier, and 18.2% in the first half versus 17.8%. Calculated operating margin was approximately 11.4% versus 7.5% in Q2, and 13.8% versus 13.8% for the first half.
- Q2 revenue by practice group: Financial Services +1.7%, Benefits and Insurance Services -0.9%, National Practices +10.4%. First-half changes were +2.2%, -1.1%, and +7.9%, respectively. Benefits and Insurance weakness reflected lower non-recurring transactional revenue and, for the half year, lower core revenue.
- First-half operating cash flow fell to $19.6 million from $41.1 million. The filing attributes the 2019 result largely to $50.1 million used for working capital, including higher receivables and lower accrued personnel costs. Investing used $10.9 million and financing used $42.1 million; cash, cash equivalents and restricted cash decreased $33.4 million.
- At June 30, cash and cash equivalents were $2.6 million, restricted cash $30.1 million, and funds held for clients $127.4 million, with client fund obligations of $127.1 million. Accounts receivable, net, was $271.8 million. Days sales outstanding rose to 90 from 87 at June 30, 2018 (70 at December 31, 2018).
- Bank debt was $159.0 million, up from $135.5 million at year-end. The company reported $229.2 million available under its $400 million credit facility and compliance with debt covenants. The weighted-average first-half borrowing rate was 3.20%. A separate $20 million payroll-funding line had no balance and was due to terminate August 16, 2019; CBIZ was negotiating an extension.
Changes, outlook and notable matters
- Q2 operating expenses declined 3.4%, helping lift operating income; management cited operating efficiencies and deferred-compensation-plan accounting effects. Those plan-related gains or losses offset through other income/expense and compensation costs and, according to the filing, do not affect pretax income or diluted EPS. First-half operating expenses increased 0.9%.
- First-half other income included a $5.7 million gain associated with deferred-compensation-plan investments, while the comparable 2018 period included a $1.9 million loss. Q2 other expense included a $3.4 million deferred-compensation investment loss. These volatile items are substantially offset in operating expenses. First-half 2018 also included $0.6 million of Hurricane Irma business-interruption insurance proceeds.
- No numerical full-year guidance is provided in the supplied filing text. Management identifies strategic acquisitions as its first capital priority, with share repurchases also an option. CBIZ repurchased approximately 1.0 million shares for about $19.9 million in the first half; the current program authorizes up to 5.0 million shares and expires April 1, 2020. The company describes seasonal working-capital needs, particularly around first-quarter tax-season receivables, and says future debt service and strategic investment depend on generating cash.
- CBIZ adopted the lease standard on January 1, 2019, recording operating lease right-of-use assets and liabilities. At June 30, lease liabilities totaled $166.1 million; management said adoption did not significantly affect earnings, liquidity, or debt-covenant compliance. The standard materially increased reported assets and liabilities.
- One acquisition, Wenner Group, closed in January 2019. Subsequent to quarter-end, CBIZ acquired Paytime and Gavion, each reported to have approximately $4 million in annual revenue; Gavion managed more than $27 billion in client assets.
- Two significant pending matters remain: an Arizona lawsuit involving two plaintiffs alleging approximately $16 million in damages, and a Pennsylvania UPMC lawsuit seeking at least $142 million related to actuarial services. CBIZ said it cannot predict outcomes or estimate possible losses and intends to defend the matters.
- National Practices revenue depends substantially on a single client under a cost-plus contract renewed through December 31, 2023; that client represented about 75% of the group’s revenue.
- The filing notes an immaterial correction to the prior-year cash flow presentation involving client-fund cash equivalents. Disclosure controls were considered effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether receivables and DSO normalize after the seasonal increase, and whether operating cash conversion improves.
- Extension or replacement of the $20 million payroll-funding line, and ongoing covenant headroom as debt and acquisition activity change.
- Resolution, potential exposure, and any updated loss estimates for the UPMC and Arizona litigation.
- Organic growth and margins in Benefits and Insurance Services, and the sustainability of Financial Services’ margin improvement.
- Reliance on the single National Practices client, and integration and performance of recent and post-quarter acquisitions.
- Effects of lease commitments, interest-rate movements, and deferred-compensation valuation changes on reported results and cash needs.