Business context and reporting period
BG Staffing, Inc. provides temporary staffing in Real Estate, Professional (IT and finance/accounting), and Light Industrial markets. This unaudited Form 10-Q covers the 13 and 26 weeks ended June 30, 2019, compared with periods ended July 1, 2018.
Financial performance
- Second quarter: Revenue was $73.86 million, up 4.1%. Gross profit rose 8.7% to $20.86 million, and gross margin improved to 28.2% from 27.1%. Operating income declined 17.6% to $5.42 million; net income fell 26.5% to $3.80 million. Diluted EPS was $0.37 versus $0.54.
- First half: Revenue was $142.63 million, up 3.5%; gross profit was $39.30 million, up 7.7%, with gross margin of 27.6% versus 26.5%. Operating income fell to $9.01 million from $10.61 million, and net income declined to $6.30 million from $7.64 million. Diluted EPS was $0.61 versus $0.82.
- Segments, second quarter: Real Estate revenue increased 14.6% to $24.40 million; Professional rose 3.9% to $31.32 million; Light Industrial declined 7.0% to $18.14 million. Management attributed Real Estate growth to expansion and existing-office growth, and Professional growth mainly to higher bill rates and permanent placements. Light Industrial revenue weakness reflected fewer billed hours.
- Cash flow and liquidity: First-half operating cash flow was $9.16 million versus $4.10 million. Investing used $0.67 million and financing used $8.49 million; ending cash was zero. Current assets were $40.15 million and current liabilities $16.31 million. Management said operating cash generation and borrowing availability should meet normal working-capital needs and planned branch investment for at least 12 months.
- Debt and distributions: At June 30, $18.42 million was outstanding on the prior revolving facility; no term debt remained. Balance-sheet line-of-credit debt, net of financing fees, was $17.86 million. First-half cash dividends paid were $6.14 million. The Board later declared a $0.30-per-share dividend, payable August 19, 2019.
- Adjusted EBITDA: Second-quarter Adjusted EBITDA was $6.85 million versus $6.98 million; first-half Adjusted EBITDA was $12.01 million versus $12.45 million. This is a non-GAAP measure and should not be viewed as a substitute for net income or operating cash flow.
Material changes and unusual items
- SG&A increased 13.6% in the quarter and 13.7% year to date, principally from compensation, commissions, bonuses, software, and costs associated with growth and geographic expansion. This offset stronger gross profit.
- The prior-year comparison included a $1.17 million gain on contingent consideration, which did not recur. The 2018 tax rate also benefited from the tax deduction related to the former CEO option cancellation agreement; the 2019 effective tax rate was 22.8%.
- On July 16, 2019, after quarter-end, the company entered a five-year BMO Harris credit agreement with a $35 million revolver and up to $30 million in term loans, with potential term-loan increases subject to conditions. It borrowed $20 million under the revolver to repay the prior facility and recorded an approximately $0.5 million debt-extinguishment loss in the third quarter. The new facility is secured by substantially all company and subsidiary assets and includes leverage and fixed-charge-coverage covenants.
- Operating lease accounting resulted in recognition of a $4.00 million right-of-use asset and $5.04 million lease liability at quarter-end. The filing reports no material litigation, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Outlook, commentary and risks
No specific revenue or earnings guidance was provided. Management noted seasonal demand patterns: Real Estate demand typically strengthens in the second quarter and peaks in the third, while Light Industrial demand generally increases in the third quarter and peaks in the fourth. Risks highlighted include economic and client-demand changes, ability to recruit qualified field talent, labor and employment regulation, workers’ compensation insurance availability and cost, competition, acquisition integration, litigation, and indebtedness. Variable-rate borrowing exposes results and cash flows to interest-rate increases. Management reported disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether revenue growth and improved gross margins continue, especially in Real Estate and Professional, and whether Light Industrial billed hours stabilize.
- Whether SG&A growth moderates enough to support operating-income and net-income recovery.
- Borrowings, unused availability, interest costs, and covenant headroom under the BMO facility following the refinancing.
- Cash conversion and working-capital needs as receivables and payroll obligations fluctuate with growth.
- The sustainability of dividends alongside debt service, expansion plans, and seasonal cash requirements.