GEE Group Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2022. Amounts below are in millions unless noted. Financial statements are unaudited.
Business context and performance
GEE Group provides professional and industrial temporary staffing and permanent placement services through 28 offices in 11 states, with additional remote-market coverage. Results improved as demand recovered, particularly in professional staffing and direct hire placements; industrial staffing remained more affected by COVID-19 disruptions.
| Metric | Three months ended Mar. 31, 2022 | Six months ended Mar. 31, 2022 | Comparable 2021 period |
|---|---|---|---|
| Revenue | $39.6; up 14% | $82.5; up 19% | $34.7 quarterly; $69.4 six months |
| Gross profit / margin | $14.5 / 36.6% | $30.1 / 36.5% | $10.9 / 31.4% quarterly; $23.5 / 33.9% six months |
| Operating income | $1.2 | $1.2 | $0.6 quarterly; $2.6 six months |
| Net income (loss) | $1.1 | $17.8 | $(1.7) quarterly; $(2.1) six months |
| Diluted EPS | $0.01 | $0.15 | $(0.10) quarterly; $(0.12) six months |
Financial condition and cash flow
- At March 31, cash was $14.2, total current assets $36.2, current liabilities $13.3, and working capital $22.4. Working capital was $2.5 at September 30, 2021, mainly reflecting forgiveness of PPP loans previously classified as current liabilities.
- Six-month operating cash flow was $4.4, versus $0.2 in 2021; investing cash outflow was $0.2, primarily equipment purchases. Cash increased $4.2 to $14.2. Financing cash flow was nil.
- No borrowings were outstanding under the $20 million CIT revolving facility; reported borrowing availability was $14.1. The facility is secured by company assets and matures May 2026. Operating lease liabilities totaled $4.1, including $1.6 current.
- Shareholders’ equity was $98.8. Common shares outstanding were 114.1 million at March 31 and May 13, 2022.
Material changes and unusual items
- Quarterly revenue growth reflected professional contract services up 11% and direct hire up 61%; industrial contract revenue fell 7%. For the six months, professional contract revenue increased 18%, direct hire increased 71%, and industrial revenue declined 14%.
- Combined gross margin improved, helped by a larger direct-hire revenue mix and improved professional contract margins. Professional contract margin was 26.9% for the quarter versus 25.5%; industrial margin was 14.7% versus 8.8%, with the prior-year comparison affected by workers’ compensation premium adjustments. Six-month industrial margin was 15.0% versus 29.3%, largely reflecting lower premium refunds; excluding those effects, margins were approximately 14.5% and 14.9%.
- Six-month net income included a $16.8 gain from forgiveness of the remaining PPP loans. The loans were forgiven in December 2021, but the SBA may audit them; reinstatement could require repayment. The company states the affiliated loans exceeded the SBA’s audit threshold.
- A $2.2 non-cash goodwill impairment was recorded in the December 2021 quarter. No further impairment was recorded in the March quarter.
- SG&A rose to $12.2 in the quarter and $24.6 for six months. The company cited business growth and compensation, a $0.4 increase in bad debt expense tied to a light-industrial customer, a $1.0 legal settlement, and a $0.5 severance charge for the six-month period.
- On March 23, 2022, the company settled two related lawsuits for approximately $1.2, of which its share was $0.975 and insurance covered the balance. The company’s portion was expensed in the March quarter and paid by April 8; neither party admitted wrongdoing.
Outlook, commentary and risks
The company does not provide forecasts. Management said it believes cash, working capital and expected liquidity are adequate for obligations for at least one year after issuance of the statements. It intends to pursue organic and acquisition growth, emphasizing professional contract staffing and direct hire, while managing costs. Management described recovery as significant but uncertain; COVID-19 effects persisted most in industrial and certain finance, accounting and office markets.
- A February 1, 2022 cyber incident involved unauthorized network access, system encryption and a ransom demand. The investigation found that a relatively small amount of data, including some personal information, was acquired. Affected individuals were being notified. Operations were minimally affected, costs to date were described as immaterial, and management did not expect a material financial effect; cyber insurance is subject to limits and deductibles.
- Other risks include staffing demand and competition, attracting and retaining qualified personnel, client credit and collections, potential COVID-19 disruption, and possible legal or employee-related liabilities. Management reported disclosure controls effective and no material control changes during the quarter.
- The company had $1.8 of deferred payroll taxes remaining, due by December 31, 2022. It reported no significant pending legal proceedings expected by management to materially affect its financial position.
Important facts for investors to verify
- How much of the six-month $17.8 net income and $0.15 diluted EPS is attributable to the non-recurring $16.8 PPP forgiveness gain.
- Whether the SBA audits or challenges any forgiven PPP loans, and the potential repayment exposure.
- Whether professional and direct-hire growth continues and industrial staffing recovers, including the sustainability of reported margins.
- Collections and credit exposure related to the light-industrial customer and the rise in doubtful-account allowances to $0.8 from $0.3 at September 30, 2021.
- Any subsequent costs, claims or operational effects from the cyber incident, and the adequacy of insurance coverage.
- Liquidity under the CIT facility, including borrowing-base availability, covenants and fees; reported availability was $14.1 despite a $20 million facility limit.