BGSF, Inc. — Q2 2023 Form 10-Q
Business context and period. BGSF provides workforce solutions through Real Estate and Professional segments. This unaudited report covers the 13 and 26 weeks ended July 2, 2023; comparisons are to periods ended June 26, 2022. The company sold its Light Industrial (InStaff) business in March 2022, so prior-year results include discontinued operations and a sale gain. BGSF acquired Horn Solutions in December 2022 and Arroyo Consulting in April 2023.
Financial performance
| Metric | Q2 2023 | First half 2023 |
|---|---|---|
| Revenue | $80.8 million, up 9.1% | $156.1 million, up 9.5% |
| Gross profit / margin | $29.6 million / 36.6%, versus $25.1 million / 33.8% | $56.4 million / 36.1%, versus $48.5 million / 34.0% |
| Operating income (loss) | $5.1 million, versus $4.2 million | $(15.7) million, including a $22.5 million impairment; prior year $7.1 million |
| Net income (loss) from continuing operations | $2.6 million, versus $3.2 million | $(13.9) million, versus $5.2 million |
| Adjusted EBITDA from continuing operations | $7.5 million; 9.3% of revenue, versus $5.4 million; 7.3% | $11.8 million; 7.5% of revenue, versus $9.3 million; 6.5% |
Q2 basic and diluted EPS were $0.24, versus $0.30. First-half EPS was $(1.29), versus $0.50 from continuing operations in the prior year. Prior-year total net income of $19.0 million included discontinued-operation income and a $17.3 million gain on sale. Q2 dividends declared were $0.15 per share; first-half declarations totaled $0.30 per share.
Segments and drivers. Q2 Real Estate revenue rose 3.6% to $31.1 million, primarily on higher average billing rates; Professional revenue rose 12.7% to $49.7 million. The acquired businesses contributed $10.5 million of Q2 Professional revenue, while the remaining Professional business declined $4.9 million (11.0%). First-half revenue increased in both segments, but acquired businesses contributed $17.3 million of Professional revenue while core Professional revenue declined $7.4 million. Gross margin improved in both segments in Q2 and the first half.
Cash flow, balance sheet, and liquidity
- First-half cash provided by continuing operating activities was $12.5 million, versus $1.2 million; the filing attributes the increase mainly to receivable collections and receipt of $2.0 million of deferred sale consideration, partly offset by lower accrued payroll and expenses.
- First-half investing cash outflow was $8.2 million, including $6.8 million for Arroyo Consulting and $1.5 million of capital expenditures. Financing cash outflow was $3.7 million, including $3.2 million of dividends and $2.0 million of term-loan principal payments, partly offset by $2.4 million of revolver borrowings. Ending cash was $0.7 million.
- Working capital was $40.8 million at July 2, down from $48.0 million at January 1. Current assets were $69.4 million and current liabilities $28.7 million.
- Debt included $25.0 million outstanding on the revolver, $38.0 million of term debt, and a $4.4 million convertible note. The revolver commitment was increased to $41.0 million in May 2023 and matures July 16, 2024. The debt bears variable-rate interest; disclosed borrowing rates were approximately 7.45%–7.50% at quarter-end. Q2 net interest expense was $1.5 million, versus $0.1 million.
- The company said it was in compliance with credit covenants at July 2 and believed operating cash flow plus revolver availability would meet normal working-capital needs for at least 12 months. It also noted that additional growth opportunities could require financing.
Material changes, outlook, and risks
- A February 2023 rebranding decision led to a $22.5 million write-off of trade names in the first quarter. This noncash impairment drove the first-half operating and net loss; the associated tax benefit contributed to a $4.5 million first-half income-tax benefit.
- Acquisitions increased revenue and gross profit, but also contributed to higher SG&A, amortization, debt, and interest expense. Q2 SG&A rose $2.7 million year over year; acquisition-related selling expense and transaction fees contributed to the increase.
- Management described inflation and higher interest rates as adverse economic factors that could reduce demand, increase early terminations, or diminish projects, and could increase borrowing costs. Variable-rate debt exposes future earnings and cash flows to rate increases. Other stated risks include labor availability, workers’ compensation insurance, employment-law compliance, competition, litigation, and acquisition integration.
- No specific revenue or earnings guidance was provided. Real Estate demand is typically seasonal, with the strongest period in the third quarter. The board declared a further $0.15-per-share dividend on August 9, payable August 28, 2023 to shareholders of record August 21.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether core Professional demand stabilizes, given declines that were partly masked by acquired revenue.
- Integration performance and returns from Horn Solutions and Arroyo Consulting, including Arroyo’s contingent consideration of up to $8.5 million.
- Debt service capacity, variable-rate exposure, covenant headroom, and refinancing plans before the July 2024 revolver maturity.
- Cash-flow sustainability and the company’s ability to fund dividends, acquisitions, and working-capital needs with only $0.7 million of cash at quarter-end.
- Assumptions behind the trade-name impairment, deferred tax assets, and acquisition-related contingent consideration valuations.