CBIZ, Inc. — Q1 2022 Form 10-Q
Business context and reporting period: CBIZ provides professional business services through Financial Services, Benefits and Insurance Services, and National Practices. This unaudited filing covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2021.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $391.7 million | $300.7 million; up 30.3% |
| Gross margin | $101.4 million; 25.9% of revenue | $76.8 million; 25.5% of revenue |
| Operating income | $85.1 million; 21.7% of revenue | $62.3 million; 20.7% of revenue |
| Income from continuing operations | $58.1 million | $50.2 million |
| Net income | $58.1 million | $50.2 million |
| Diluted EPS | $1.10 | $0.92 |
| Cash from operating activities | $(50.9) million | $(14.8) million |
| Cash from investing activities | $(81.5) million | $0.2 million provided |
| Cash from financing activities | $170.4 million provided | $(3.0) million used |
Reported Q1 gross and operating margins include deferred-compensation plan effects that are offset in other income or expense and do not affect pretax continuing income or diluted EPS. Excluding those effects, gross margin was 24.4% versus 27.1%, and operating income was 20.1% versus 22.4% of revenue. Adjusted operating expenses excluding deferred compensation rose to 75.6% of revenue from 72.9%.
At March 31, cash and cash equivalents were $0.6 million; restricted cash was $33.4 million. The company had $298.9 million outstanding on its $400 million credit facility and approximately $94.8 million available, net of letters of credit. It was in compliance with debt covenants. Accounts receivable, net, was $365.8 million, including $155.2 million in unbilled revenue. Days sales outstanding was 94 days, compared with 91 days a year earlier and 71 days at year-end 2021. Current assets and liabilities include client funds and related obligations, which fluctuate with timing of collections and payments.
Material changes versus the prior period
- Same-unit revenue increased approximately $28.8 million, or 9.6%; acquired operations, net of divestitures, contributed $62.2 million of incremental revenue.
- Financial Services revenue rose 41.4% to $288.7 million, including $62.9 million from acquired businesses. Benefits and Insurance Services revenue increased 6.0% to $92.5 million, while National Practices revenue increased 12.3% to $10.5 million.
- Operating expenses increased 29.6% to $290.3 million. Excluding deferred compensation effects, the increase reflected higher personnel, facility, travel, technology, and other costs; Q1 2022 also included Marks Paneth-related integration, retention, and transaction costs.
- Other expense was $7.7 million, versus other income of $3.9 million a year earlier, largely reflecting a $6.5 million deferred-compensation investment loss in Q1 2022 versus a $5.1 million gain in Q1 2021. Corresponding compensation expense effects offset these investment movements.
- Operating cash use increased, primarily due to seasonal working-capital needs, including receivables growth and payment of accrued personnel costs. Investing cash use primarily reflected the Marks Paneth acquisition.
Outlook, management commentary, and risks
- CBIZ acquired Marks Paneth’s non-attest assets effective January 1, 2022, for $72.5 million in cash, with total recorded consideration of $137.1 million including contingent consideration. Management expected the acquisition to add approximately $138 million of 2022 revenue. Q1 included approximately $6 million of related non-recurring transaction, retention, and integration costs.
- Management said cash from operations and available credit were expected to be sufficient for 2022 cash requirements, including seasonal working capital, acquisitions, debt interest, contingent payments, repurchases, and capital expenditures. No specific full-year earnings or revenue guidance was provided.
- On April 12, 2022, CBIZ began efforts to amend and extend its credit facility, targeting $600 million of availability and maturity through April 2027. As of April 26, it had received commitments above the target, subject to final documentation; closing was expected in early May.
- Floating-rate debt creates interest-rate exposure: a 100-basis-point rate change was estimated to affect annual interest expense by approximately $1.8 million. Interest-rate swaps hedge portions of exposure.
- National Practices relies primarily on a cost-plus contract with one client, which generated approximately 75% of that group’s revenue; the contract was renewed through December 31, 2023.
- In the Zotec litigation, a jury found for CBIZ on the fraud, contract, and other claims tried in October 2021. A remaining statutory securities-fraud claim and CBIZ’s counterclaim were still for the judge to address. Zotec had sought damages of up to $177 million; the filing does not state a probable loss estimate.
- Management cited risks including COVID-19 effects, ability to manage growth, outsourcing demand, dependence on key employees, competitive pricing, economic conditions, and regulatory or tax-law changes.
Important facts for investors to verify
- Whether the credit-facility amendment closed on the expected terms, and subsequent borrowing, interest-rate, and covenant capacity.
- Marks Paneth’s realized revenue contribution, integration costs, and performance relative to the stated 2022 revenue expectation; purchase-price allocations remained provisional.
- Receivables collection and unbilled-revenue trends, given higher DSO and the significant seasonal operating cash outflow.
- Developments in the remaining Zotec claim and any change in the company’s assessment of potential exposure.
- Continued dependence on the National Practices group’s single major client and the status of its contract beyond the current renewal term.
- Share repurchases: CBIZ repurchased approximately 0.3 million shares for about $12.4 million in Q1 and approximately 0.2 million additional shares for about $7.2 million through April 27, 2022.