CBIZ(CBZ) - 2019 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls for the period Item 1. Financial Statements The unaudited condensed consolidated financial statements for Q1 2019 report a 1.5% revenue increase to $270.0 million, net income growth to $37.5 million, and a significant balance sheet expansion to $1.38 billion due to new lease accounting standards, with a seasonal cash outflow from operations Consolidated Balance Sheets The balance sheet reflects a substantial increase in total assets and liabilities primarily due to the adoption of the new lease accounting standard Consolidated Balance Sheet Highlights (Unaudited) | Metric | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Total Assets | 1,377,319 | 1,183,031 | | Total Current Assets | 457,861 | 423,538 | | Goodwill & Intangibles, net | 635,881 | 637,009 | | Operating Lease ROU Asset, net | 145,574 | — | | Total Liabilities | 753,832 | 589,368 | | Bank Debt | 182,000 | 135,500 | | Operating Lease Liability | 167,020 | — | | Total Stockholders' Equity | 623,487 | 593,663 | - The significant increase in Total Assets and Total Liabilities is primarily due to the adoption of the new lease accounting standard, which required recording operating lease right-of-use (ROU) assets and corresponding lease liabilities on the balance sheet for the first time[8][24] Consolidated Statements of Comprehensive Income Despite a 1.5% revenue increase, operating income declined due to higher expenses, though net income grew by 4.5% driven by other income Statement of Comprehensive Income Summary (Unaudited) | Metric | Three Months Ended March 31, 2019 ($ thousands) | Three Months Ended March 31, 2018 ($ thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Revenue | 269,998 | 266,090 | +1.5% | | Gross Margin | 54,502 | 61,340 | -11.1% | | Operating Income | 42,822 | 51,312 | -16.5% | | Net Income | 37,469 | 35,851 | +4.5% | | Diluted EPS | $0.67 | $0.64 | +4.7% | - Despite a 1.5% increase in revenue, operating income decreased significantly, primarily due to a $10.7 million increase in operating expenses. However, net income grew by 4.5% due to a substantial increase in 'Other income (expense), net', which rose to $8.4 million from a loss of $2.3 million in the prior year[10][81] Consolidated Statements of Cash Flows The company experienced a typical seasonal cash outflow from operations, with lower investing activities and cash provided by financing due to bank debt proceeds Cash Flow Summary (Unaudited) | Cash Flow Activity | Three Months Ended March 31, 2019 ($ thousands) | Three Months Ended March 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | (24,753) | (20,500) | | Net cash used in investing activities | (9,736) | (19,756) | | Net cash provided by (used in) financing activities | 10,025 | (20,296) | | Net decrease in cash, cash equivalents and restricted cash | (24,464) | (60,552) | - The company experienced a typical seasonal cash outflow from operations in the first quarter. Investing activities were lower than the prior year, which included a $15.6 million acquisition. Financing activities provided cash in Q1 2019, driven by net proceeds from bank debt of $46.5 million, which was partially used for $11.6 million in share repurchases[16][93][95] Notes to the Consolidated Financial Statements Key notes detail the adoption of the new lease standard, the disaggregation of revenue by segment with Financial Services as the largest contributor, and segment operating income trends - Effective January 1, 2019, the company adopted the New Lease Standard (ASU 2016-12), resulting in the initial recognition of $148.9 million in operating lease right-of-use assets and corresponding liabilities on the balance sheet[24][25] Revenue by Segment (Q1 2019 vs Q1 2018) | Segment | Q1 2019 Revenue ($ thousands) | Q1 2018 Revenue ($ thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Financial Services | 185,144 | 180,603 | +2.5% | | Benefits & Insurance Services | 76,255 | 77,330 | -1.4% | | National Practices | 8,599 | 8,157 | +5.4% | | Total Revenue | 269,998 | 266,090 | +1.5% | - In Q1 2019, the company acquired Wenner Group, LLC for aggregate consideration of $3.1 million, including $1.3 million in cash and $1.8 million in contingent consideration. This compares to the Q1 2018 acquisition of Laurus Transaction Advisors for $23.9 million[60] Operating Income by Segment (Q1 2019 vs Q1 2018) | Segment | Q1 2019 Operating Income ($ thousands) | Q1 2018 Operating Income ($ thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Financial Services | 50,686 | 47,570 | +6.6% | | Benefits & Insurance Services | 14,884 | 16,197 | -8.1% | | National Practices | 599 | 882 | -32.1% | | Corporate and Other | (23,347) | (13,337) | -75.1% | | Total Operating Income | 42,822 | 51,312 | -16.5% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 1.5% revenue increase to $270.0 million driven by same-unit growth, an increase in operating expenses offset by other income, and strategic capital allocation towards acquisitions and share repurchases Executive Summary The executive summary highlights a 1.5% revenue increase, 4.9% growth in income from continuing operations, and strategic capital deployment for acquisitions and share repurchases - Q1 2019 revenue increased 1.5% to $270.0 million, driven by same-unit revenue growth of 1.0% ($2.7 million)[77] - Income from continuing operations grew 4.9% to $37.6 million compared to $35.8 million in Q1 2018[77] - Strategic capital use included one acquisition (The Wenner Group) and the repurchase of 0.6 million shares for $11.6 million[77] Results of Operations Operating expenses increased due to a deferred compensation plan, which was offset by a significant increase in other income, while the effective tax rate remained stable - Operating expenses increased by $10.7 million (5.2%), largely due to an $8.2 million expense from the non-qualified deferred compensation plan, which had a negligible impact in the prior year. Excluding this, operating expenses were 76.8% of revenue, consistent with 76.9% in Q1 2018[81] - Corporate G&A expenses increased 16.5% to $11.7 million, also impacted by the deferred compensation plan. Excluding this, G&A was 4.0% of revenue, up slightly from 3.8% in Q1 2018[82] - Total other income was $8.4 million, a significant swing from a $2.3 million expense in the prior year. This was primarily driven by a $9.1 million gain related to the deferred compensation plan investments, which directly offsets the increased operating and G&A expenses[84] - The effective tax rate for Q1 2019 was 26.6%, slightly lower than the 26.9% rate in Q1 2018[85] Operating Practice Groups Financial Services revenue grew driven by same-unit growth, while Benefits and Insurance Services saw a decline, and National Practices revenue increased due to a cost-plus contract Financial Services Revenue Breakdown (Q1 2019) | Component | Revenue ($ thousands) | YoY Change (%) | | :--- | :--- | :--- | | Same-unit | 183,539 | +2.7% | | Acquired businesses | 1,605 | N/A | | Total Revenue | 185,144 | +2.5% | - Financial Services' same-unit growth was driven by a $3.0 million (2.5%) increase in traditional accounting and tax services and a $1.7 million (2.8%) increase in national services[88] Benefits and Insurance Services Revenue Breakdown (Q1 2019) | Component | Revenue ($ thousands) | YoY Change (%) | | :--- | :--- | :--- | | Same-unit | 74,814 | -3.3% | | Acquired businesses | 1,441 | N/A | | Total Revenue | 76,255 | -1.4% | - The revenue decrease in Benefits and Insurance Services was due to a decline in same-unit revenue from core services and a decrease in non-recurring transactional revenue[91] - National Practices revenue grew 5.4% to $8.6 million. This group is primarily driven by a single cost-plus contract that accounts for nearly 75% of its revenue[92] Liquidity and Capital Resources The company experiences seasonal cash outflows, maintains sufficient credit facility availability, and prioritizes strategic acquisitions and opportunistic share repurchases for capital deployment - The company experiences a seasonal use of cash in the first quarter due to the Financial Services practice group's business cycle. Days sales outstanding (DSO) was 91 days at March 31, 2019, compared to 92 days at March 31, 2018[93] - At March 31, 2019, the company had $182.0 million outstanding on its credit facility, with approximately $210 million of available funds. The company was in compliance with all debt covenants[96] - The company's first priority for capital use is strategic acquisitions, followed by opportunistic share repurchases. In Q1 2019, $11.6 million was spent to repurchase 0.6 million shares[96] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk on its floating-rate debt, with $112.0 million exposed, and it uses interest rate swaps to mitigate this exposure - The company's primary market risk is interest rate risk on its floating-rate debt. At March 31, 2019, $112.0 million of the $182.0 million credit facility balance was subject to floating rates[103] - A hypothetical 100 basis point (1%) change in interest rates would result in an approximate $1.8 million annual change in interest expense[103] - CBIZ utilizes interest rate swaps to mitigate this risk. As of March 31, 2019, four swaps were in place with a total notional value of $70.0 million, effectively fixing the interest rate on that portion of the debt[105] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report (March 31, 2019)[106] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls. This includes the implementation of controls for the new lease accounting standard[107] PART II – OTHER INFORMATION This section provides details on legal proceedings, risk factors, equity security sales, and required exhibits Item 1. Legal Proceedings The company is involved in ongoing legal proceedings, including claims related to Mortgages Ltd. bankruptcy and a professional negligence claim from UPMC seeking substantial damages - The company is a defendant in lawsuits related to the bankruptcy of Mortgages Ltd., with remaining claims from one plaintiff group alleging damages of approximately $16.0 million[46] - CBIZ is also a defendant in a lawsuit brought by UPMC alleging professional negligence related to actuarial services, with the complaint seeking damages of no less than $142.0 million[46] Item 1A. Risk Factors There are no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - The report refers investors to the 'Risk Factors' section of the company's Annual Report on Form 10-K for the year ended December 31, 2018, for a detailed discussion of potential risks[111] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2019, the company repurchased 580,000 shares for $11.6 million under its share repurchase program, with a new 5 million share program authorized Issuer Purchases of Equity Securities (Q1 2019) | Period | Total Shares Purchased (thousands) | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | Jan 1 - Jan 31, 2019 | 242 | 19.86 | | Feb 1 - Feb 28, 2019 | 115 | 20.13 | | Mar 1 - Mar 31, 2019 | 223 | 19.89 | | First Quarter Total | 580 | 19.93 | - The Board of Directors authorized the continuation of the Share Repurchase Program, resetting the amount to 5 million shares available for purchase effective April 1, 2019[112] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL interactive data files - Exhibits filed include CEO and CFO certifications as required by the Sarbanes-Oxley Act (Sections 302 and 906)[119][120][121][122] - The filing also includes financial statements and notes formatted in XBRL (eXtensible Business Reporting Language)[123]