CBIZ, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. CBIZ provides professional business services through Financial Services, Benefits and Insurance Services, and National Practices. Amounts below are rounded; financial statements are unaudited.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $363.3 million | $282.7 million | $1,116.9 million | $862.1 million |
| Gross margin | $57.2 million | $44.4 million | $230.9 million | $162.9 million |
| Operating income | $41.4 million | $31.4 million | $187.8 million | $91.1 million |
| Income from continuing operations | $27.5 million | $21.7 million | $116.9 million | $80.5 million |
| Diluted EPS from continuing operations | $0.53 | $0.41 | $2.22 | $1.50 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $60.1 million | $80.9 million |
- Q3 revenue increased 28.5%; management attributed $34.8 million, or 12.3%, to same-unit growth and $45.7 million to acquired operations net of divestitures. Nine-month revenue increased 29.6%, including 11.1% same-unit growth and $159.5 million from acquired operations net of divestitures.
- Financial Services drove most of the growth: Q3 revenue rose 38.9% to $260.0 million, while Benefits and Insurance Services grew 7.3% to $92.1 million and National Practices grew 15.6% to $11.2 million.
- Reported gross margin was 15.8% of revenue in Q3 and 20.7% for the nine months. CBIZ says deferred compensation plan results offset between operating expenses and other income or expense and do not affect pretax income or diluted EPS. Excluding those plan effects, gross margin was 14.7% in Q3 2022 versus 15.6% a year earlier, and 18.6% for the nine months versus 20.2%.
- Nine-month net income included volatile deferred-compensation investment results: a $26.3 million loss in other expense in 2022 versus a $12.4 million gain in 2021, offset by related compensation expense adjustments. Prior-year nine-month results also included a $30.5 million legal settlement loss; 2022 did not.
Cash, debt and liquidity
- For the first nine months, operating cash flow was $60.1 million, investing cash outflow $95.6 million, and financing cash inflow $6.0 million. Operating cash flow fell from $80.9 million as working-capital use increased to $100.0 million, including higher receivables.
- Accounts receivable, net, was $399.0 million at September 30, 2022, up from $242.2 million at year-end 2021. Days sales outstanding was 93 days, versus 88 days at September 30, 2021 and 71 days at December 31, 2021.
- Bank debt was $271.1 million, compared with $155.3 million at December 31, 2021. The May 2022 amended credit facility increased capacity to $600 million, extended maturity to 2027, and had approximately $310.9 million available at quarter-end after letters of credit. CBIZ reported compliance with its financial covenants.
- The nine-month weighted-average effective borrowing rate was 2.29%, up from 1.89%. Of quarter-end debt, $156.1 million was subject to rate risk; management estimated a 100-basis-point rate change would alter annual interest expense by approximately $1.6 million.
- Balance-sheet cash and cash equivalents were $2.0 million; restricted cash was $39.6 million. These balances exclude cash equivalents included in funds held for clients. Management stated that operating cash flow and available credit should be sufficient for expected cash requirements.
Material changes and capital allocation
- CBIZ acquired Marks Paneth and Stinnett in 2022. The acquisitions were expected to add approximately $154.5 million in annualized revenue. Nine-month acquisition and purchase-of-client-list spending was $79.3 million; recorded purchase price, including contingent consideration and stock, was $155.0 million.
- Marks Paneth generated approximately $9.3 million in non-recurring transaction, retention, and integration costs during the first nine months; $8.0 million was included in operating expenses and $1.9 million in G&A, as separately described in management’s discussion.
- CBIZ repurchased approximately 1.8 million shares during the first nine months at a total cost of about $75.3 million. From October 1 through October 26, it repurchased about 0.4 million additional shares for approximately $18.0 million. The repurchase authorization covered up to 5.0 million shares and was set to expire April 1, 2023.
- Operating lease right-of-use assets rose to $191.7 million from $151.1 million at year-end 2021. Contingent purchase price liabilities increased to $141.2 million from $79.1 million, reflecting acquisitions and related estimates.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings, or EPS guidance. Management said remaining 2022 cash needs would include acquisitions, interest, seasonal working capital, contingent acquisition payments, share repurchases, and capital expenditures, and expected available cash generation and credit capacity to cover them.
- Management cited risks including economic and business conditions, competition and pricing pressure, dependence on outsourcing trends and key employees, regulation and tax-law changes, COVID-19 effects on CBIZ and clients, and the ability to manage growth. Acquisition integration and higher interest rates are also relevant given recent transactions and floating-rate debt.
- In the Zotec litigation, the jury found for CBIZ on the fraud, contract, and other claims tried in October 2021. Zotec’s remaining Indiana statutory securities-fraud claim and CBIZ’s counterclaim remained for the trial judge. Zotec sought damages of up to $177 million; the ultimate outcome was not determined in the filing.
- CBIZ reported letters of credit of $5.7 million and license bonds of $2.3 million. It stated that it was unaware of material payment obligations under its indemnification agreements. Its disclosure controls were assessed as effective at a reasonable assurance level; Marks Paneth was still being integrated into internal controls.
Important facts for investors to verify
- How much of ongoing revenue and earnings growth is organic versus acquisition-related, and whether recent acquisitions deliver expected performance and synergies.
- Whether receivables and DSO normalize after the increase, and how working-capital demands affect future operating cash conversion.
- Debt levels, borrowing costs, covenant headroom, and sensitivity to higher rates after the credit-facility expansion.
- The outcome and potential financial exposure of the unresolved Zotec claim, as well as any further material litigation developments.
- The effect of share repurchases and contingent acquisition payments on liquidity and leverage, alongside the reported cash and credit availability.