BGSF, Inc. — Q1 2023 Form 10-Q
Reporting period: Thirteen weeks ended April 2, 2023; comparison is the thirteen weeks ended March 27, 2022. Unless noted, amounts are in U.S. dollars. The 2022 period includes InStaff results as discontinued operations, so continuing-operations comparisons are most useful.
Business context and results
BGSF provides workforce solutions, consulting and managed services through its Real Estate and Professional segments. The Professional segment includes IT, Managed Services, and Finance and Accounting. The company sold substantially all of its InStaff light-industrial business in March 2022. Horn Solutions, acquired in December 2022, contributed to current-period Professional results.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Continuing-operations revenue | $75.3 million | $68.5 million |
| Gross profit / margin | $26.8 million / 35.6% | $23.4 million / 34.2% |
| SG&A | $23.2 million | $19.7 million |
| Operating income (loss) | $(20.7) million | $2.8 million |
| Net income (loss) from continuing operations | $(16.5) million | $2.0 million |
| Adjusted EBITDA from continuing operations | $4.3 million (5.6% of revenue) | $3.9 million (5.7%) |
| Cash provided by continuing operations | $3.9 million | Cash used: $1.1 million |
Revenue increased 9.9% year over year. Real Estate revenue rose 9.6% to $28.4 million; Professional revenue rose 10.1% to $46.9 million. Horn Solutions contributed $6.8 million in Professional revenue and $3.0 million in gross profit, while the remaining Professional business declined 5.9% in revenue and 7.3% in gross profit. Real Estate revenue growth reflected a 13.0% higher average bill rate, partly offset by 3.0% fewer billed hours. Gross margin improved in both segments.
Material changes, liquidity and debt
- The company recorded a $22.5 million impairment of trade names after approving a rebrand to BGSF. This drove the GAAP operating and net losses; the filing identifies the charge as an impairment and adds it back in Adjusted EBITDA. The company also recorded a $5.5 million income tax benefit, primarily related to the impairment.
- SG&A increased $3.5 million, including higher selling costs and $2.2 million of selling expenses related to Horn Solutions. Depreciation and amortization rose $0.9 million, primarily from acquisition-related intangible assets. Net interest expense increased $0.9 million, reflecting acquisition debt, higher rates and a higher average revolver balance.
- At April 2, cash was $0.1 million, working capital was $47.4 million, and total assets were $171.9 million. Total liabilities were $88.7 million. Balance-sheet debt consisted of a $21.7 million revolving credit balance, $39.0 million term debt and a $4.4 million convertible note; amounts shown reflect balance-sheet presentation. The revolving facility limit is $35 million and matures July 2024.
- Revolver borrowings were approximately $21.9 million, with disclosed rates of 8.75% on base-rate borrowings and 6.66% on SOFR borrowings; term debt bore 6.72% interest. The company repaid $1.0 million of term debt and reduced revolver borrowings by $0.6 million during the quarter. Debt is secured by substantially all company and subsidiary assets. The company reported compliance with its leverage and fixed-charge-coverage covenants at quarter-end.
- Operating cash flow improved year over year, chiefly due to accounts-receivable collections and comparison with prior-year CARES Act payroll-tax payments. Investing cash use was $0.7 million, mainly capital expenditures; financing cash use was $3.1 million, including $1.6 million of dividends.
Outlook, risks and subsequent events
- No numerical earnings or revenue guidance is provided. Management said operating cash generation and borrowing availability were expected to meet normal working-capital needs for at least the next 12 months, while noting that growth opportunities could require additional financing.
- Management cited inflation and higher interest rates as risks to demand, early contract terminations, project activity and borrowing costs. The business is seasonal: Real Estate demand typically rises in Q2 and peaks in Q3; Q1 can be affected by winter weather and payroll-tax resets.
- Other disclosed risks include availability of qualified talent and workers’ compensation coverage, labor-law compliance, competition, acquisition integration, economic weakness, litigation, and risks from international operations and foreign exchange. The company noted particular exposure to variable interest rates.
- On April 24, 2023, after quarter-end, BGSF acquired Arroyo Consulting, an IT and software-development workforce firm with U.S., Colombia and India operations. Initial consideration was $8.0 million cash, with earn-outs of up to $8.5 million based on two-year performance targets. The filing states the acquisition accounting was not yet complete. A related credit amendment was also executed.
- The board declared a $0.15-per-share dividend payable May 22, 2023. The filing reports no change in legal proceedings from the prior annual report and no material change in internal controls.
Important facts for investors to verify
- How much of Professional-segment growth and profitability is attributable to Horn Solutions, and whether the legacy Professional business stabilizes after its reported decline.
- The nonrecurring impairment’s effect on reported losses, the basis for the trade-name valuation, and the sustainability of margins and Adjusted EBITDA.
- Debt and liquidity after the Arroyo acquisition, including revolver availability, variable-rate interest expense, covenant headroom and the potential earn-out obligation.
- Arroyo’s integration, performance against acquisition targets, and completion of the purchase-price allocation.
- Seasonal demand, billed hours, client collections and labor-market conditions, which can affect revenue and working-capital needs.