BGSF, Inc. — Q2 2014 Form 10-Q Summary
Business context and reporting period
BGSF provides temporary staffing through Light Industrial, Multifamily and IT Staffing segments. This unaudited filing covers the 13- and 26-week periods ended June 29, 2014, compared with the periods ended June 30, 2013. The 2013 comparison includes a different business mix following the May 2013 InStaff acquisition; the company also became a C corporation for tax purposes in November 2013.
Key financial metrics
| Metric | 13 weeks ended June 29, 2014 | 13 weeks ended June 30, 2013 | 26 weeks ended June 29, 2014 | 26 weeks ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $42.8 million | $35.2 million | $81.9 million | $60.0 million |
| Gross profit / margin | $8.5 million / 19.8% | $6.6 million / 18.9% | $16.2 million / 19.8% | $11.5 million / 19.2% |
| Operating income / margin | $1.6 million / 3.8% | $1.1 million / 3.1% | $1.5 million / 1.8% | $1.2 million / 2.0% |
| Net income (loss) | $0.25 million | $0.25 million | $(1.28) million | $(0.32) million |
| Adjusted EBITDA | $2.95 million | $2.52 million | $5.07 million | $3.90 million |
| Cash from operations | — | $2.75 million | $0.88 million |
- Q2 revenue increased about 21.6%; first-half revenue increased about 36.4%. First-half growth included $25.1 million of InStaff revenue.
- Q2 net income was nearly unchanged year over year despite higher operating income, reflecting higher income tax expense and a $239,000 noncash expense from revaluing the put option. First-half loss included a $987,000 loss on extinguishment of related-party debt and $1.03 million of stock-based compensation.
- At June 29, total assets were $57.0 million, current assets $25.2 million, and current liabilities $16.3 million. Working capital was approximately $9.0 million. The balance sheet reported no cash.
- Debt totaled $32.8 million: $14.5 million drawn on the revolver and $18.3 million of term loans. The company reported covenant compliance. The revolver commitment is $20 million, but borrowing is limited by a receivables-based borrowing base; reported availability of $3.7 million was as of March 30, 2014, not June 29.
Changes versus the prior comparable periods
- Light Industrial revenue rose 34.5% in Q2 and 67.0% year to date, primarily reflecting InStaff; management also reported declines in the remaining branches of $2.4 million for Q2 and $4.3 million year to date.
- Multifamily revenue grew 45.5% in Q2 and 48.5% year to date, attributed to higher bill rates and volume. IT Staffing was flat in Q2 and up 6.6% year to date.
- Company gross margin improved to 19.8% from 18.9% in Q2 and to 19.8% from 19.2% year to date. Management cited InStaff’s higher Light Industrial margins. First-half SG&A rose 48.8%, faster than revenue, including about $1.0 million of stock-based compensation.
- Interest expense was lower, which management attributed to refinancing higher-rate subordinated debt. The January 2014 credit facility replaced the approximately $14.6 million related-party subordinated loans; the refinancing generated the first-half extinguishment loss.
Outlook, risks and unusual items
- Management said operating cash flow and credit-facility availability should cover normal working-capital needs and planned branch openings for at least the next 12 months, while noting that additional growth could require financing. Planned remaining-2014 capital expenditures were approximately $0.3 million.
- No formal revenue or earnings guidance was provided. The company did not intend to pay cash dividends.
- The credit facility matures January 29, 2018, is secured by company assets, and includes financial tests, including minimum debt-service coverage and Adjusted EBITDA requirements. A one-percentage-point rise in LIBOR was estimated to increase annual interest expense by approximately $0.9 million.
- In May 2014, the company changed the useful life of certain IT trade names to indefinite, ending their amortization. This reduced amortization by $66,000 in Q2 and first-half basic and diluted loss per share by approximately $0.01. The trade names’ remaining carrying value was $2.54 million; impairment testing remains relevant.
- The company reported no pending legal matters expected to have a material effect. Disclosed risks include workers’ compensation insurance availability and cost, staffing qualified workers, labor-law compliance, competition, customer and economic conditions, indebtedness, acquisition integration and litigation outcomes. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much revenue growth reflects InStaff and other acquired operations versus organic performance, particularly the continuing declines in legacy Light Industrial branches.
- Current revolver borrowing-base availability and headroom under debt covenants; the $3.7 million availability figure is dated March 30, 2014.
- Whether operating cash flow can sustain payroll and working-capital needs, given zero reported cash and the staffing business’s receivables exposure; the doubtful-account allowance rose to $519,000 from $440,000 at year-end.
- The effect of stock compensation, refinancing costs, put-option remeasurement and the trade-name useful-life change on reported earnings and future expenses.
- Potential dilution from 566,363 outstanding options and 224,205 warrants, and the company’s ability to meet debt maturities and pursue planned growth.