GEE Group Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018; comparisons are with the fiscal year ended September 30, 2017. The company provides professional and industrial staffing and placement services. Revenue growth included a full year of SNI acquisition activity in FY2018, so it should not be read as purely organic growth.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $165.3 million | $135.0 million |
| Gross profit / combined gross margin | $58.9 million / 35.7% | $45.0 million / 33.3% |
| Operating income (loss) | $2.5 million | $(1.4) million |
| Interest expense | $11.5 million | $6.0 million |
| Net loss | $(7.6) million | $(2.4) million |
| Operating cash flow | $1.5 million | $0.2 million |
- Professional contract revenue was $120.6 million, up 26.4%; industrial contract revenue was $21.6 million, down 12.9%; direct-hire revenue was $23.1 million, up 56.5%.
- Professional contract gross margin declined to 26.5% from 27.4%; industrial contract margin improved to 17.9% from 16.5%. Direct-hire placements are reported at a 100% gross margin because related costs are recorded in SG&A.
- SG&A excluding depreciation, amortization, and acquisition/integration/restructuring costs was 28.7% of revenue, compared with 29.3%. Acquisition, integration, and restructuring costs were $3.1 million. Amortization increased to $5.6 million.
- Cash at year-end was $3.2 million, versus $2.8 million. Working capital was $13.1 million, versus $9.5 million. Investing activities used $0.3 million; financing activities used $0.8 million.
- At September 30, 2018, the revolver balance was $11.9 million, with approximately $2.3 million available. Term-loan principal was $44.5 million ($42.6 million net of discount); subordinated debt totaled $17.8 million. Revolver rates on portions of the balance were approximately 17.34% and 19.25%.
- Reported total assets were $133.6 million, including $76.6 million of goodwill and $29.5 million of net intangible assets. Total shareholders’ equity was $21.1 million; Series B preferred stock was classified as mezzanine equity.
Material changes versus FY2017
- Revenue increased 22.5%, principally due to the SNI acquisition; management also cited cost reductions, office consolidations, and workforce changes. Industrial staffing revenue decreased.
- Operating results improved by $3.9 million, moving from an operating loss to operating income, but net loss widened as interest expense increased $5.5 million and depreciation and amortization increased about $2.0 million.
- Operating cash flow increased to $1.5 million. Cash increased by $0.4 million, while accounts receivable declined to $20.8 million from $23.2 million.
- A $0.6 million adjustment to the SNI working-capital reserve generated a $0.6 million gain. FY2017 included a $1.0 million loss on extinguishment of debt; FY2018 did not.
- Common shares outstanding rose to 10.783 million at fiscal year-end from 9.879 million. During FY2018, the company issued shares for interest on subordinated notes and converted Series B preferred shares.
Outlook, risks, and unusual items
- Management said operating cash flow combined with revolver availability was expected to provide sufficient liquidity for the next 12 months. It also said it was pursuing replacement financing to reduce borrowing costs. No quantified revenue or earnings guidance was provided.
- The company failed financial covenants at September 30, 2018 and at earlier 2018 quarter-ends. A December 27, 2018 amendment and waiver, after fiscal year-end, waived the September breach and revised covenants and remaining scheduled principal payments. Management expected compliance under amended terms but cautioned that projections are uncertain and future waivers are not assured.
- Scheduled term-loan principal payments were approximately $3.1 million in FY2019, $8.3 million in FY2020, and $33.1 million in FY2021; the loan matures March 31, 2021. The filing reports minimum lease payments of $2.2 million for the 12 months after September 30, 2018.
- Risks include recurring losses, high borrowing costs and refinancing needs, covenant compliance, dependence on staffing demand and qualified candidates, competition, acquisition integration and impairment, and potential restrictions on use of tax attributes. The company had not completed a Section 382 ownership-change study.
- FY2018 tax benefit was approximately $0.9 million, including effects of the Tax Cuts and Jobs Act. Goodwill and intangible assets were substantial; no goodwill or long-lived-asset impairment was recorded in FY2018 or FY2017.
- Series B preferred stock carried a $4.86-per-share liquidation preference and was convertible into common stock. The company paid no dividends and did not anticipate cash dividends in the near future.
- The independent auditor gave an unmodified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Review the December 2018 credit amendment, covenant definitions and tests, remaining principal schedule, borrowing availability, and the company’s subsequent compliance.
- Assess whether operating cash flow can cover interest, scheduled principal, leases, and staffing working-capital needs, particularly given the reported borrowing rates.
- Separate SNI-related and other acquisition-driven revenue from organic growth, and track professional and industrial staffing margins and revenue trends.
- Evaluate the potential dilution and senior claims associated with preferred stock, convertible subordinated notes, stock-based awards, and interest paid in shares.
- Monitor goodwill and intangible-asset recoverability, tax-attribute limitations, and the assumptions underlying management’s 12-month liquidity expectation.