CBIZ(CBZ) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents unaudited financial statements, including balance sheets, income, equity, and cash flows Condensed Consolidated Balance Sheets – March 31, 2021 and December 31, 2020 Balance Sheet Summary | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total Assets | $1,551,843 | $1,513,754 | | Total Liabilities | $824,060 | $811,134 | | Total Stockholders' Equity | $727,783 | $702,620 | | Current Assets | $471,475 | $436,431 | | Current Liabilities | $333,674 | $378,274 | Condensed Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2021 and 2020 Income Statement Summary | Metric | Three Months Ended March 31, 2021 (in thousands, except per share data) | Three Months Ended March 31, 2020 (in thousands, except per share data) | | :--- | :--- | :--- | | Revenue | $300,730 | $277,455 | | Operating Income | $62,276 | $67,139 | | Net Income | $50,209 | $36,848 | | Basic EPS | $0.94 | $0.68 | | Diluted EPS | $0.92 | $0.66 | | Comprehensive Income | $51,063 | $35,596 | Condensed Consolidated Statements of Stockholders' Equity – Three Months Ended March 31, 2021 and 2020 Stockholders' Equity Changes | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total Stockholders' Equity | $727,783 | $702,620 | | Net Income | $50,209 | $50,209 | | Share Repurchases | $(34,142) | $(34,142) | | Stock Options Exercised | $4,408 | $4,408 | Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2021 and 2020 Cash Flow Summary | Cash Flow Activity | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | $(14,827) | $(18,647) | | Net cash provided by investing activities | $229 | $4,355 | | Net cash (used in) provided by financing activities | $(2,960) | $207,772 | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(17,558) | $193,480 | Notes to the Condensed Consolidated Financial Statements NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CBIZ, Inc provides professional business services to small and medium-sized businesses, individuals, and governmental and not-for-profit entities[18] - The company reports its operations across three practice groups: Financial Services, Benefits and Insurance Services, and National Practices[18] - The financial statements are prepared in accordance with GAAP and SEC rules for interim financial reporting, reflecting all normal recurring adjustments[18] NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS - The FASB issued ASU No 2020-04 and ASU No 2021-01, Reference Rate Reform (Topic 848), providing optional expedients for transactions affected by the transition from LIBOR[21] - The company is evaluating the effect of these new standards and has not adopted any transition relief as of March 31, 2021[21] NOTE 3. ACCOUNTS RECEIVABLE, NET Accounts Receivable Breakdown | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :--- | :--- | :--- | | Trade accounts receivable | $177,104 | $167,575 | | Unbilled revenue | $106,662 | $63,494 | | Total accounts receivable | $283,766 | $231,069 | | Allowance for doubtful accounts | $(13,156) | $(14,894) | | Accounts receivable, net | $270,610 | $216,175 | Allowance for Doubtful Accounts Activity | Allowance for Doubtful Accounts Activity | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | | Balance at beginning of period | $(14,894) | | Provision | $(390) | | Charge-offs, net of recoveries | $2,128 | | Allowance for doubtful accounts | $(13,156) | NOTE 4. DEBT AND FINANCING ARRANGEMENTS - The outstanding balance under the $400 million unsecured 2018 credit facility increased to $162.0 million at March 31, 2021, from $108.0 million at December 31, 2020[26] - Available funds under the credit facility were approximately $228.7 million at March 31, 2021, net of outstanding letters of credit[26] Interest Rate and Expense | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Weighted average interest rates | 2.10% | 2.50% | | Interest expense (in thousands) | $877 | $1,119 | NOTE 5. COMMITMENTS AND CONTINGENCIES - The company is a defendant in several legal proceedings, with claims ranging from ~$16.0 million to potentially $177.0 million[29] - The outcome of these legal matters cannot be predicted, and the company intends to vigorously defend these cases[29] Commitments | Commitment | March 31, 2021 (in millions) | December 31, 2020 (in millions) | | :--- | :--- | :--- | | Letters of Credit | $3.0 | $1.7 | | License Bonds | $2.3 | $2.2 | NOTE 6. FINANCIAL INSTRUMENTS - The company invests client funds in available-for-sale debt securities with a fair value of $22.393 million at March 31, 2021[30][32] - Interest rate swaps are utilized to manage interest rate risk, with three swaps outstanding having a total notional value of $85.0 million[32] Gains/Losses in AOCL | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :--- | :--- | :--- | | Gain (Loss) Recognized in AOCL, net of tax | $961 | $(653) | NOTE 7. FAIR VALUE MEASUREMENTS - Contingent purchase price liabilities, measured at Level 3 fair value, are estimated using a probability-weighted discounted cash flow model[34] Fair Value of Assets and Liabilities | Asset/Liability | Level | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :--- | :--- | :--- | :--- | | Deferred compensation plan assets | 1 | $133,478 | $127,332 | | Available-for-sale debt securities | 1 | $22,393 | $25,708 | | Deferred compensation plan liabilities | 1 | $(133,478) | $(127,332) | | Interest rate swaps | 2 | $(1,299) | $(2,565) | | Contingent purchase price liabilities | 3 | $(54,230) | $(54,391) | NOTE 8. OTHER COMPREHENSIVE INCOME (LOSS) Components of Other Comprehensive Income (Loss) | Component | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :--- | :--- | :--- | | Net unrealized loss on available-for-sale securities, net of income taxes | $(103) | $(587) | | Net unrealized gain (loss) on interest rate swaps, net of income taxes | $961 | $(653) | | Foreign currency translation | $(4) | $(12) | | Total other comprehensive income (loss) | $854 | $(1,252) | NOTE 9. EMPLOYEE STOCK PLANS Stock-Based Compensation Expense | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :--- | :--- | :--- | | Stock options compensation expense | $301 | $421 | | Restricted stock units and awards compensation expense | $1,381 | $1,171 | | Performance share units compensation expense | $1,173 | $431 | | Total stock-based compensation expense | $2,855 | $2,023 | Stock Options Activity | Stock Options Activity (in thousands, except per share data) | Number of Stock Options | Weighted Average Exercise Price Per Share | | :--- | :--- | :--- | | Outstanding at beginning of year | 1,820 | $15.02 | | Exercised or released | (397) | $11.10 | | Outstanding at March 31, 2021 | 1,423 | $16.12 | Performance Share Units Activity | Performance Share Units Activity (in thousands, except per share data) | Performance Share Units | Weighted Average Grant-Date Fair Value Per Unit | | :--- | :--- | :--- | | Outstanding at beginning of year | 307 | $22.18 | | Granted | 140 | $27.56 | | Outstanding at March 31, 2021 | 447 | $23.86 | NOTE 10. EARNINGS PER SHARE - A total of 447 thousand and 332 thousand performance share units were excluded from diluted EPS calculation for Q1 2021 and Q1 2020, respectively[42] Earnings Per Share Calculation | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Income from continuing operations (in thousands) | $50,216 | $36,862 | | Basic earnings per share from continuing operations | $0.94 | $0.68 | | Diluted earnings per share from continuing operations | $0.92 | $0.66 | | Weighted average common shares outstanding (Basic) (in thousands) | 53,366 | 54,571 | | Diluted weighted average common shares outstanding (in thousands) | 54,436 | 55,945 | NOTE 11. BUSINESS COMBINATIONS - The company's acquisition strategy focuses on businesses with strong culture, client service, and cross-serving potential[45] - In Q1 2021, CBIZ acquired Middle Market Advisory Group (MMA) for approximately $3.5 million, adding an estimated $3.6 million in annualized revenue[46] - In Q1 2020, CBIZ completed three acquisitions for approximately $15.1 million, adding an estimated $6.1 million in annualized revenue[46][48] - Goodwill arising from acquisitions was $1.5 million in Q1 2021 and $11.2 million in Q1 2020[48] NOTE 12. SEGMENT DISCLOSURES - The company's business units are aggregated into three practice groups: Financial Services, Benefits and Insurance Services, and National Practices[49] Revenue by Segment | Segment | Three Months Ended March 31, 2021 Revenue (in thousands) | Three Months Ended March 31, 2020 Revenue (in thousands) | | :--- | :--- | :--- | | Financial Services | $204,149 | $188,777 | | Benefits and Insurance Services | $87,239 | $79,612 | | National Practices | $9,342 | $9,066 | | Total Revenue | $300,730 | $277,455 | Operating Income by Segment | Segment | Three Months Ended March 31, 2021 Operating Income (in thousands) | Three Months Ended March 31, 2020 Operating Income (in thousands) | | :--- | :--- | :--- | | Financial Services | $62,403 | $50,179 | | Benefits and Insurance Services | $20,306 | $14,389 | | National Practices | $801 | $783 | NOTE 13. SUBSEQUENT EVENTS - Subsequent to March 31, 2021, the company repurchased approximately 0.3 million shares of common stock for $9.0 million[55] - Effective April 1, 2021, CBIZ acquired Wright Retirement Services, LLC, adding an estimated $1.2 million in annualized revenue[55] - Effective May 1, 2021, CBIZ acquired the non-attest assets of Berntson Porter & Company, PLLC, adding an estimated $26.0 million in annualized revenue[55] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, condition, and cash flows for Q1 2021 compared to the prior year OVERVIEW - CBIZ provides professional business services, products, and solutions to help clients manage finances and employees[59] - Services are delivered through three practice groups: Financial Services, Benefits and Insurance Services, and National Practices[59] EXECUTIVE SUMMARY - The company's first priority for capital use is strategic acquisitions, followed by share repurchases[62] - In Q1 2021, CBIZ completed one acquisition for approximately $3.5 million and repurchased 1.2 million shares for $34.1 million[62] - The Board authorized a new Share Repurchase Program for up to 5.0 million shares, effective April 1, 2021[63] Financial Highlights | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue (in millions) | $300.7 | $277.5 | $23.2 | 8.4% | | Same-unit revenue growth (in millions) | ~$10.0 | N/A | N/A | 3.6% | | Acquired operations revenue contribution (in millions) | $13.3 | N/A | N/A | 4.8% | | Income from continuing operations (in millions) | $50.2 | $36.9 | $13.3 | 36.0% | | Diluted EPS | $0.92 | $0.66 | $0.26 | 39.4% | RESULTS OF OPERATIONS – CONTINUING OPERATIONS Revenue Revenue by Segment | Segment | 2021 Revenue (in thousands) | % of Total 2021 | 2020 Revenue (in thousands) | % of Total 2020 | $ Change (YoY) | % Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Financial Services | $204,149 | 67.9% | $188,777 | 68.0% | $15,372 | 8.1% | | Benefits and Insurance Services | $87,239 | 29.0% | $79,612 | 28.7% | $7,627 | 9.6% | | National Practices | $9,342 | 3.1% | $9,066 | 3.3% | $276 | 3.0% | | Total CBIZ | $300,730 | 100.0% | $277,455 | 100.0% | $23,275 | 8.4% | Non-qualified Deferred Compensation Plan - The company sponsors a non-qualified deferred compensation plan where employee deferrals are held in a rabbi trust[67] - Income and expenses related to the plan are offset, resulting in no impact on pre-tax income or diluted EPS[67] Operating Expenses - The increase in operating expenses was primarily driven by $13.6 million higher personnel costs, offset by lower travel, bad debt, and discretionary spending[69] Operating Expense Analysis | Metric | 2021 (in thousands) | 2020 (in thousands) | $ Change (YoY) | % Change (YoY) | | :--- | :--- | :--- | :--- | :--- | | Operating expenses | $223,971 | $199,827 | $24,144 | 12.1% | | Operating expenses % of revenue | 74.5% | 72.0% | N/A | N/A | | Operating expenses excluding deferred compensation | $219,355 | $214,627 | $4,728 | 2.2% | Corporate General & Administrative ("G&A") Expenses - The increase in G&A expenses was primarily due to $1.2 million higher personnel costs and $0.5 million higher other costs to support business growth[71] G&A Expense Analysis | Metric | 2021 (in thousands) | 2020 (in thousands) | $ Change (YoY) | % Change (YoY) | | :--- | :--- | :--- | :--- | :--- | | G&A expenses | $14,483 | $10,489 | $3,994 | 38.1% | | G&A expenses % of revenue | 4.8% | 3.8% | N/A | N/A | | G&A expenses excluding deferred compensation | $13,987 | $12,293 | $1,694 | 13.8% | Other Income (Expense), Net - Other income for Q1 2021 includes a net gain of $5.1 million from the non-qualified deferred compensation plan[74] - For Q1 2020, other expense included a net loss of $16.6 million from the non-qualified deferred compensation plan[74] Other Income (Expense) Breakdown | Metric | 2021 (in thousands) | 2020 (in thousands) | $ Change (YoY) | % Change (YoY) | | :--- | :--- | :--- | :--- | :--- | | Interest expense | $(877) | $(1,119) | $242 | (21.6)% | | Gain on sale of operations, net | — | $95 | $(95) | (100.0)% | | Other income (expense), net | $4,789 | $(15,800) | $20,589 | (130.3)% | | Total other income, net | $3,912 | $(16,824) | $20,736 | (123.3)% | Income Tax Expense Income Tax Analysis | Metric | 2021 (in thousands) | 2020 (in thousands) | $ Change (YoY) | % Change (YoY) | | :--- | :--- | :--- | :--- | :--- | | Income tax expense | $15,972 | $13,453 | $2,519 | 18.7% | | Effective tax rate | 24.1% | 26.7% | N/A | N/A | Operating Practice Groups Financial Services - Same-unit revenue growth was primarily driven by traditional accounting and tax-related services ($7.9 million increase)[79] - Operating expense as a percentage of revenue decreased to 69.4% for Q1 2021 from 73.4% for Q1 2020[79] Financial Services Performance | Metric | 2021 (in thousands) | 2020 (in thousands) | $ Change (YoY) | % Change (YoY) | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $204,149 | $188,777 | $15,372 | 8.1% | | Same-unit revenue | $195,999 | $187,520 | $8,479 | 4.5% | | Acquired businesses | $8,150 | — | $8,150 | N/A | | Operating expenses | $141,746 | $138,598 | $3,148 | 2.3% | | Gross margin | $62,403 | $50,179 | $12,224 | 24.4% | | Gross margin percent | 30.6% | 26.6% | N/A | N/A | Benefits and Insurance Services - The increase in revenue was primarily driven by acquired businesses, which contributed $6.4 million in incremental revenue[81] - Operating expense as a percentage of revenue decreased to 76.7% for Q1 2021 from 81.9% for Q1 2020[81] Benefits and Insurance Services Performance | Metric | 2021 (in thousands) | 2020 (in thousands) | $ Change (YoY) | % Change (YoY) | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $87,239 | $79,612 | $7,627 | 9.6% | | Same-unit revenue | $80,676 | $79,433 | $1,243 | 1.6% | | Acquired businesses | $6,563 | — | $6,563 | N/A | | Operating expenses | $66,933 | $65,223 | $1,710 | 2.6% | | Gross margin | $20,306 | $14,389 | $5,917 | 41.1% | | Gross margin percent | 23.3% | 18.1% | N/A | N/A | National Practices - The National Practices group's revenue is primarily driven by a cost-plus contract with a single client, accounting for approximately 75% of the group's revenue[82] National Practices Performance | Metric | 2021 (in thousands) | 2020 (in thousands) | $ Change (YoY) | % Change (YoY) | | :--- | :--- | :--- | :--- | :--- | | Same-unit revenue | $9,342 | $9,066 | $276 | 3.0% | | Operating expenses | $8,541 | $8,283 | $258 | 3.1% | | Gross margin | $801 | $783 | $18 | 2.3% | | Gross margin percent | 8.6% | 8.6% | N/A | N/A | LIQUIDITY - Principal sources of liquidity are cash generated from operating and financing activities[83] - The company historically experiences a use of cash in Q1 due to seasonal accounting and tax services[84] - Days Sales Outstanding (DSO) improved to 91 days at March 31, 2021, from 94 days at March 31, 2020[86] Cash Flow Summary | Cash Flow Activity | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | $(14,827) | $(18,647) | | Net cash provided by investing activities | $229 | $4,355 | | Net cash (used in) provided by financing activities | $(2,960) | $207,772 | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(17,558) | $193,480 | CAPITAL RESOURCES - At March 31, 2021, the company had $162.0 million outstanding under its 2018 credit facility and approximately $228.7 million in available funds[91] - The weighted average interest rate under the 2018 credit facility was 2.10% in Q1 2021, down from 2.50% in Q1 2020[91] - The company was in compliance with all debt covenants as of March 31, 2021[94] - Capital allocation priorities are strategic acquisitions and share repurchases; 1.2 million shares were repurchased for $34.1 million in Q1 2021[95] OFF-BALANCE SHEET ARRANGEMENTS - The company maintains administrative service agreements with independent CPA firms (variable interest entities), which are not material to its financial condition[96] - The company has various indemnification agreements but historically has not made any material payments under these agreements[98] Off-Balance Sheet Commitments | Arrangement | March 31, 2021 (in millions) | December 31, 2020 (in millions) | | :--- | :--- | :--- | | Letters of Credit | $3.0 | $1.7 | | License Bonds | $2.3 | $2.2 | CRITICAL ACCOUNTING POLICIES - The financial statements are prepared in accordance with U.S. GAAP, requiring management to make estimates and judgments[100] - No significant changes in estimates or judgments have been made since the Annual Report on Form 10-K for the fiscal year ended December 31, 2020[102] NEW ACCOUNTING PRONOUNCEMENTS - For a discussion of recently issued accounting pronouncements, refer to Note 2 of the accompanying condensed consolidated financial statements[103] FORWARD-LOOKING STATEMENTS - This report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from projections[104] - Readers are advised to consult 'Item 1A Risk Factors' in the Annual Report on Form 10-K for the year ended December 31, 2020[105] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to interest rate risk from its floating-rate debt, which it manages through swaps - The company's floating rate debt exposes it to interest rate risk, with $77.0 million subject to rate risk at March 31, 2021[107] - A 100 basis point change in market rates would affect interest expense by approximately $0.8 million annually[107] - Interest rate swaps are used to convert floating rate debt to a fixed rate basis; three swaps with notional values totaling $85.0 million were outstanding[108][109] - Client funds are invested in available-for-sale debt securities which are adjusted to fair value through other comprehensive income or loss[109] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2021 - Management, with the participation of the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2021[110] - It was concluded that CBIZ's disclosure controls were effective at a reasonable assurance level as of the end of the reporting period[114] - No material changes to internal control over financial reporting occurred during Q1 2021[115] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section incorporates information on legal proceedings from Note 5 in the financial statements - Information regarding legal proceedings is incorporated by reference from Note 5, Commitments and Contingencies, to the financial statements[119] Item 1A. Risk Factors This section advises readers to consider risk factors outlined in the company's Annual Report on Form 10-K - Readers should carefully consider the risk factors discussed under 'Risk Factors' in the company's Annual Report on Form 10-K for the year ended December 31, 2020[120] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the issuance of unregistered equity securities and the company's share repurchase program - During Q1 2021, approximately 38 thousand shares of common stock were issued as payment for contingent consideration for previous acquisitions[121] - The Board of Directors authorized the continuation of the Share Repurchase Program to purchase up to 5.0 million shares[122] - The 2018 credit facility prohibits dividend payments, other than intercompany dividends[124] Share Repurchases | Period | Total Number of Shares Purchased (in thousands) | Average Price Paid Per Share | | :--- | :--- | :--- | | January 1 – January 31, 2021 | 380 | $26.91 | | February 1 – February 28, 2021 | 386 | $28.42 | | March 1 – March 31, 2021 | 398 | $32.54 | | First quarter purchases (Total) | 1,164 | $29.33 | Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period - This item is marked as 'Not applicable'[126] Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - This item is marked as 'Not applicable'[126] Item 5. Other Information This item is not applicable to the company for the reporting period - This item is marked as 'Not applicable'[126] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and XBRL documents - Exhibits include certifications from the President and CEO, and Chief Financial Officer, pursuant to the Sarbanes-Oxley Act of 2002[128] - XBRL-related documents, such as the Instance Document and various linkbases, are also filed[128] Signature The report is officially signed on behalf of CBIZ, Inc by the Chief Financial Officer on April 30, 2021 - The report was signed by Ware H Grove, Chief Financial Officer of CBIZ, Inc, on April 30, 2021[132]