CBIZ, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. CBIZ provides financial, benefits and insurance, and advisory services, primarily to small and midsize businesses. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless noted.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $277.5 million | $270.0 million | Up 2.8% |
| Operating income | $67.1 million | $42.8 million | Up $24.3 million |
| Income from continuing operations | $36.9 million | $37.6 million | Down 1.9% |
| Net income | $36.8 million | $37.5 million | Down $0.6 million |
| Diluted EPS | $0.66 | $0.67 | Down $0.01 |
| Cash used in operating activities | $18.6 million | $24.8 million | Use decreased $6.1 million |
Reported gross margin was $77.6 million, or 28.0% of revenue, versus $54.5 million, or 20.2%, a year earlier. Reported operating income was 24.2% of revenue versus 15.9%. These comparisons are heavily affected by the deferred compensation plan: investment-related losses in Q1 2020 were offset by lower compensation expenses, while gains in Q1 2019 were offset by higher expenses. Excluding the plan’s effects, operating expenses were $214.6 million, or 77.3% of revenue, compared with $207.3 million, or 76.8%, in Q1 2019.
Cash, cash equivalents and restricted cash totaled $340.0 million at quarter-end, including $216.9 million of unrestricted cash and $28.9 million of restricted cash; the remainder included cash equivalents held for clients. CBIZ drew substantially on its credit facility as a precaution amid COVID-19 uncertainty. Bank debt was $383.0 million, compared with $105.5 million at December 31, 2019; approximately $10.0 million remained available under the facility, net of letters of credit. The company was in compliance with its debt covenants. The facility matures in 2023. Operating cash flow was negative largely because of seasonal working-capital needs, including receivables and accrued personnel costs.
Accounts receivable, net, was $263.2 million, up from $222.0 million at year-end; days sales outstanding were 94 days, versus 97 days at March 31, 2019 and 75 days at December 31, 2019. The company recorded $2.0 million of bad-debt expense attributed to COVID-19. Its effective tax rate was 26.7%, compared with 26.6%.
Changes versus the prior comparable period
- Revenue increased $7.5 million, comprising $5.2 million from acquired businesses and $2.3 million of same-unit growth.
- Financial Services revenue rose 2.0%; same-unit growth was 1.2%. Benefits and Insurance Services revenue increased 4.4%, driven by acquisitions, while same-unit revenue declined 0.6%. National Practices revenue rose 5.4%.
- Income from continuing operations and diluted EPS declined modestly despite higher revenue. Excluding deferred compensation plan effects, operating expenses rose, reflecting personnel costs, professional fees and COVID-related bad-debt expense.
- Financing cash flows included $277.5 million of net credit-facility proceeds. CBIZ repurchased 1.2 million shares for approximately $29.5 million before suspending further repurchases in mid-March.
Outlook, risks and other notable items
Management said there had been no material adverse impact on financial results through Q1, but warned that tax-filing deadline extensions under the CARES Act would shift tax-compliance work into Q2 or Q3. Higher unemployment, delayed client project decisions and broader economic disruption were expected to result in lower Q2 2020 revenue than in Q2 2019. The company said the duration and severity of COVID-19 made its future effects on operations, financial position and liquidity impossible to estimate reliably; no quantitative full-year guidance was provided.
Management described liquidity and financial condition as strong at March 31, while noting the pandemic could materially adversely affect results, financial condition and liquidity. It reported moving employees to remote work, suspending travel and taking cost-control measures. Acquisition activity was temporarily paused for reassessment. A 100-basis-point change in market rates was estimated to change annual interest expense by approximately $3.1 million on debt exposed to rate changes.
During Q1, CBIZ completed three acquisitions for aggregate consideration of approximately $15.1 million, including contingent consideration; the acquired businesses had estimated annualized revenue of $6.1 million. The company also purchased two client lists for $0.5 million. The first-quarter share repurchase program authorization was for up to 5.0 million shares and may be suspended or discontinued.
Two significant lawsuits remain pending. The Baldino Group asserts approximately $16 million in damages in litigation arising from the Mortgages Ltd. bankruptcy. UPMC seeks $124 million to $266 million in compensatory damages, plus punitive damages, in a case involving actuarial services; trial was set for September 2020. CBIZ said it could not predict outcomes or estimate possible losses and intended to defend the cases vigorously.
Key facts for investors to verify
- How COVID-19 affected Q2 and subsequent revenue, client collections, bad-debt provisions and demand for services.
- Cash generation after the seasonal first-quarter working-capital outflow, and the company’s ability to manage its substantially higher debt balance and limited remaining facility availability.
- Underlying operating expense and margin trends after separating deferred compensation plan effects.
- Developments in the UPMC and Baldino Group litigation, including any change in potential exposure or trial schedule.
- Whether suspended share repurchases and acquisition activity resume, and how capital is allocated under changing economic conditions.