BGSF, Inc. — Q3 2022 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 25, 2022; comparisons are to the corresponding periods ended September 26, 2021. BGSF provides professional and real estate workforce solutions. InStaff’s Light Industrial business was sold in March 2022 and is reported as discontinued operations.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 39 weeks 2022 | 39 weeks 2021 |
|---|---|---|---|---|
| Continuing-operations revenue | $78.5M | $64.2M | $221.1M | $171.3M |
| Gross profit / margin | $28.0M / 35.7% | $22.0M / 34.3% | $76.5M / 34.6% | $57.5M / 33.6% |
| Operating income | $6.5M | $5.0M | $13.5M | $8.4M |
| Income from continuing operations | $4.7M | $3.7M | $9.8M | $6.0M |
| Net income | $4.7M | $4.6M | $23.6M | $8.8M |
| Adjusted EBITDA from continuing operations | $8.0M | $5.4M | $17.4M | $9.9M |
Q3 revenue rose 22.3%; Real Estate revenue increased 34.1% and Professional revenue 14.9%. For the 39-week period, revenue rose 29.1%, with growth in both segments. Management attributed the gains to increased billed hours and bill rates, with Professional growth driven particularly by IT. Gross margin improved in both periods. Q3 diluted EPS was $0.44, versus $0.45; 39-week diluted EPS was $2.25, versus $0.85, including the sale gain.
Cash flow and liquidity: Cash used in continuing operating activities was $5.6M for the 39 weeks, compared with $2.7M used a year earlier; total operating cash flow was negative $7.8M. Continuing investing cash flow was positive $25.6M, primarily reflecting $30.3M in InStaff sale proceeds, partly offset by $4.7M of capital expenditures. Cash was zero at period-end. Working capital from continuing operations was $47.0M.
Debt: The company had $27.1M outstanding on its revolving facility at September 25, compared with $12.8M at December 26, 2021; the term loan had been repaid. In August, BGSF temporarily increased revolving capacity from $35M to $60M for 90 days and transitioned the rate reference from LIBOR to SOFR. The company reported compliance with its debt covenants.
Material changes, outlook and risks
- InStaff was sold for approximately $30.3M cash, with an additional $2.0M deferred consideration due one year after closing. The sale generated a $17.3M pretax gain and a $4.7M tax expense in the 39-week results. The working-capital adjustment of $0.6M was received in October 2022.
- Management reported increased days sales outstanding after implementation of the final stage of its IT systems roadmap; it temporarily raised revolving capacity as a precaution. Accounts receivable was $64.3M at quarter-end.
- Management said higher pricing had helped moderate inflation’s effects, but inflation and interest-rate increases could weaken demand, increase early terminations or reduce projects, and raise borrowing costs. Other cited risks include staffing availability, labor regulation, competition, litigation, acquisition integration and economic volatility.
- The company said operating cash flow and borrowing availability should cover normal working-capital needs and planned market openings for at least 12 months, while noting that additional growth could require financing. No numerical earnings or revenue guidance was provided.
- The board declared a $0.15-per-share dividend on November 2, payable November 21 to shareholders of record November 14. Disclosure controls were assessed as effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Track DSO, collections and receivable balances following the systems implementation, and assess whether the temporary increase in credit capacity was sufficient and whether it was extended.
- Review the $2.0M deferred InStaff consideration, the received working-capital adjustment and the sale-related tax impact.
- Monitor revolving debt, variable-rate interest exposure, covenant headroom and the effects of rising rates.
- Separate recurring operating results and cash generation from the InStaff disposal gain and other non-GAAP Adjusted EBITDA adjustments.
- Assess whether segment growth, improved margins and dividend payments are sustainable amid labor-market and economic risks.