BGSF, Inc. (BG Staffing, Inc.) — Q2 2020 Form 10-Q
Business context and period: National workforce-solutions provider operating in Real Estate, Professional, and Light Industrial staffing. The unaudited quarter ended June 28, 2020 (13 weeks); year-to-date comparisons cover 26 weeks against periods ended June 30, 2019. Results reflect the COVID-19 disruption and the February 2020 EdgeRock acquisition.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $62.6m | $73.9m | $136.7m | $142.6m |
| Gross profit / margin | $16.9m / 27.0% | $20.9m / 28.2% | $37.2m / 27.2% | $39.3m / 27.6% |
| Operating income (loss) | $(6.1)m | $5.4m | $(3.4)m | $9.0m |
| Net income (loss) | $(4.8)m | $3.8m | $(3.3)m | $6.3m |
| Adjusted EBITDA (non-GAAP) | $3.3m | $6.9m | $8.5m | $12.0m |
| Operating cash flow | Not separately provided | Not separately provided | $15.1m | $9.2m |
Balance sheet and liquidity at June 28: Current assets were $40.1m and current liabilities $18.5m, including $37.8m of net receivables; working capital was approximately $21.6m. Cash was zero. Debt principal was approximately $39.9m ($10.3m revolver and $29.7m term loan); balance-sheet debt carrying amounts are lower due to financing fees. The $35m revolving facility had approximately $24.6m of nominal capacity before other usage, including a $0.1m letter of credit. The company reported compliance with its debt covenants. Management said operating cash flow and revolver availability should cover normal needs for at least 12 months, while noting uncertainty.
Material changes and unusual items
- Quarterly revenue fell 15.2%; first-half revenue fell 4.2%. COVID-19-driven demand declines were pronounced in Real Estate and Light Industrial. Professional revenue rose, primarily because of LJK and EdgeRock; excluding the acquisitions, Professional revenue declined.
- Q2 operating results included $7.2m of impairment charges in Professional: a $3.7m trade-name write-down and a $3.5m client-partner-list write-down. The charge followed changed business developments and long-term projections; no goodwill impairment was recorded.
- EdgeRock was acquired for $21.7m cash in February. The first half included $16.3m of EdgeRock revenue and $0.6m of operating income. The acquisition was funded with term-loan borrowings; the company borrowed $22.5m under the term loan during the half.
- First-half operating cash flow increased to $15.1m, supported in part by $8.3m of cash from lower receivables and noncash impairment add-backs. Investing cash outflow was $23.6m, mainly the EdgeRock purchase; financing provided $8.5m, including new term debt and lower revolver borrowings.
- A $25m interest-rate swap became effective June 3, fixing the rate component on that portion of term debt through June 2023. Its $0.2m unrealized loss was recorded in other comprehensive loss.
- Dividends declared were $0.05 per share in Q2 and $0.35 per share in the first half, versus $0.30 and $0.60 in the comparable periods. A further $0.05-per-share dividend was declared August 4, payable August 25, 2020.
Outlook, risks, and controls
Management provided no specific quantitative earnings or revenue guidance. It expected COVID-19 effects to continue, citing client operating restrictions, project reductions or terminations, hiring freezes, lower demand, and possible delayed or uncollectible customer payments. The company was pursuing cost containment and liquidity measures and said further actions may be taken. Staffing demand is seasonal, with typical Real Estate strength in Q2–Q3 and Light Industrial strength in Q3–Q4.
Key risks include the pandemic and economic conditions, customer credit and collections, availability and cost of qualified field talent and insurance, debt and covenant constraints, acquisition integration, and labor-law compliance. The company reported a material weakness in internal controls concerning the technical accounting controls over goodwill and intangible-asset impairment testing. Management reported no resulting identified misstatement or restatement and described remediation steps, but could not estimate when remediation would be complete. Legal proceedings were unchanged from the prior annual report; no specific loss estimate was provided in this filing.
Important facts for investors to verify
- Whether revenue and staffing demand stabilize, particularly in Real Estate and Light Industrial, and how much Professional performance depends on acquired businesses.
- Receivables quality and customer payment timing, since cash was zero and staffing operations require paying talent before collecting client receivables.
- Debt availability, covenant headroom, and the effects of variable rates despite the interest-rate swap.
- Impairment assumptions and whether the impairment-related material weakness is remediated and controls operate effectively.
- Whether cost actions and liquidity prove sufficient if COVID-19 impacts persist or worsen.