BGSF, Inc. — Q1 2017 Form 10-Q
Business context and period: BG Staffing provides temporary staffing through Multifamily, Professional, and Commercial segments, with 57 branches and 17 on-site locations across 26 states. The unaudited quarter covered 13 weeks ended March 26, 2017; comparisons are with the 13 weeks ended March 27, 2016. Results are subject to staffing demand seasonality, including typically weaker Commercial activity in the first quarter.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $56.84 million | $59.55 million |
| Gross profit / margin | $13.67 million / 24.1% | $13.35 million / 22.4% |
| Operating income / margin | $2.69 million / 4.7% | $2.66 million / 4.5% |
| Net income | $1.30 million | $0.83 million |
| Diluted EPS | $0.15 | $0.11 |
| Adjusted EBITDA (non-GAAP) | $4.14 million | $4.51 million |
| Operating cash flow | $6.47 million | $4.84 million |
Revenue declined about 4.5%, while gross profit rose about 2.4% and net income increased. The gross margin improvement reflected a higher share of revenue from Multifamily and Professional. Lower net interest expense and amortization also supported earnings. SG&A rose about 7.9% to $9.61 million, primarily due to Multifamily expansion. Adjusted EBITDA declined about 8.2%.
Segment trends
- Multifamily: Revenue rose 21.9% to $13.09 million, attributed to expansion outside Texas, higher billed hours and bill rates. Segment operating income increased to $1.70 million from $1.46 million.
- Professional: Revenue fell 6.5% to $25.83 million, mainly from lower IT billed hours; higher average bill rates partly offset the decline. Segment operating income increased to $1.81 million from $1.59 million.
- Commercial: Revenue fell 15.4% to $17.92 million, primarily from lower billed hours, especially in Texas. Segment operating income declined to $0.85 million from $1.28 million.
Cash, liquidity and debt
Operating cash flow was $6.47 million; capital expenditures were $0.33 million and financing cash outflow was $6.14 million, including $3.98 million of line-of-credit paydown and $2.17 million of dividends. Reported cash and cash equivalents were zero at both quarter-end and the prior year-end. Current assets were $32.58 million and current liabilities $17.08 million at March 26, 2017.
At quarter-end, approximately $19.9 million was drawn on the revolving facility (reported net of deferred financing fees as $19.67 million). The company said it was compliant with its credit covenants. Management believed operating cash flow and revolving-facility availability would cover normal working capital and planned branch expansion needs for at least 12 months. Variable-rate borrowing exposes earnings and cash flows to interest-rate changes.
Material developments, outlook and risks
- Acquisition after quarter-end: On April 3, 2017, BGSF acquired substantially all Zycron assets and assumed certain liabilities for $18.5 million cash and $1.0 million in stock; $0.5 million was held back, and earn-out payments may reach $3.0 million. Purchase accounting was incomplete when the filing was issued. Zycron was assigned to Professional.
- Financing after quarter-end: In connection with the acquisition, the company entered into an amended credit agreement with a $35 million revolving commitment and a $20 million term loan, both maturing April 3, 2022. It borrowed the $20 million term loan and used loan proceeds to repay the existing revolving-facility debt. The amended agreement includes leverage and fixed-charge coverage tests that tighten over time.
- Dividend: The company paid $0.25 per share during the quarter. On April 18, the board declared another $0.25-per-share dividend, payable May 8 to holders of record May 1.
- Outlook: The filing provides no specific earnings or revenue guidance. Management cited seasonal demand, expansion plans and financing availability; actual results may vary with economic conditions and other factors.
- Risks and contingencies: Key risks include availability and cost of qualified workers and workers’ compensation coverage, labor-law compliance, competition, economic conditions, integration of acquisitions, debt and covenant requirements, and litigation. The company reported no current material litigation and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Post-acquisition debt outstanding, borrowing availability, interest costs and covenant headroom under the amended credit agreement.
- Zycron’s purchase-price allocation, contribution to Professional results, integration progress and likelihood of earn-out payments.
- Whether Multifamily growth can continue to offset lower Professional and Commercial revenue, particularly the Commercial billed-hour decline.
- Cash conversion and working-capital needs, given zero reported cash and the timing gap between paying temporary workers and collecting receivables.
- Capacity to sustain dividends while funding acquisition-related obligations, expansion and tighter future leverage limits.