Business context and reporting period
BG Staffing, Inc. provides temporary staffing services through Real Estate, Professional, and Light Industrial segments, operating 71 branches and 18 on-site locations across 26 states. This unaudited Form 10-Q covers the 13 weeks ended September 30, 2018, and the 39 weeks ended September 30, 2018; comparatives are the periods ended September 24, 2017.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Revenue | $77.1M | $71.3M | $214.9M | $196.9M |
| Gross profit / margin | $21.4M / 27.7% | $18.2M / 25.6% | $57.9M / 26.9% | $49.1M / 25.0% |
| Operating income | $7.1M | $5.6M | $17.7M | $12.9M |
| Net income | $5.1M | $3.1M | $12.7M | $6.7M |
| Diluted EPS | $0.49 | $0.35 | $1.32 | $0.75 |
| Adjusted EBITDA (non-GAAP) | $8.1M | $7.2M | $20.2M | $17.9M |
- Q3 revenue rose about 8%; year-to-date revenue rose about 9%. Gross margin improved in both comparisons. Year-to-date SG&A increased 15% to $36.4M, while depreciation and amortization declined 19% to $3.8M.
- Segment revenue for Q3: Real Estate $26.5M (+21.9%), Professional $29.2M (-8.1%), and Light Industrial $21.4M (+20.1%). For the first 39 weeks, revenue was $65.9M (+28.0%), $90.4M (-1.5%), and $58.6M (+9.1%), respectively.
- Year-to-date operating cash flow was $11.4M, versus $12.0M; capital expenditures were $0.7M. Cash was reported as zero at both period end and the beginning of the period.
- September 30 balance sheet: current assets $41.7M and current liabilities $20.3M. Debt carrying values were approximately $24.0M, down from $44.1M at December 31, 2017; this comprises a $13.1M revolving facility and $10.9M long-term debt, including the current portion.
- Year-to-date cash dividends paid were $7.9M; dividends declared were $0.85 per share. A further $0.30 per-share dividend was declared October 26, payable November 13, 2018.
Material changes versus the prior comparable period
- Q3 growth was led by Real Estate and Light Industrial; Professional revenue fell, primarily reflecting lower IT revenue and a lower average bill rate. Management cited increased billed hours and permanent placements as offsets in Professional.
- For the 39-week period, Real Estate expansion and higher billed hours drove growth. Professional revenue was slightly lower despite Zycron and Smart acquisition contributions, as lower average bill rates offset increased hours and placements.
- The May 2018 registered stock offering raised $23.3M gross ($21.3M net). Proceeds helped repay $10.7M of term debt and reduce revolving borrowings by $7.5M. Shares outstanding increased to 10,157,877 from 8,759,376 at year-end 2017.
- Interest expense was lower in Q3 but approximately flat year to date. Effective tax rates fell to 21.3% for Q3 and 17.7% year to date, versus 34.0% and 36.8%, respectively, in 2017; the company attributed the change mainly to tax law changes and other tax items.
Outlook, commentary, risks and unusual items
- Management provided no specific earnings or revenue guidance. It said operating cash generation and available revolving-credit capacity should meet normal working-capital needs and planned branch expansion for at least the next 12 months; additional growth could require financing.
- Staffing operations are seasonal: Real Estate demand is typically highest in Q3; Light Industrial demand rises in Q3 and peaks in Q4. Working-capital needs can rise with growth because worker payments precede customer receipts.
- In September, the company recognized a $1.0M gain in SG&A after determining no first-year Smart acquisition contingent-consideration payout was due. Total contingent consideration was $4.5M net, including $3.6M current. Year-to-date contingent-consideration adjustments reduced expense by $2.2M.
- In May, the company paid its former CEO $3.3M to cancel 284,888 vested in-the-money options. Q3 share-based compensation expense was $0.8M.
- The company was in compliance with its credit covenants and reported no material litigation or material change in risk factors. Its variable-rate debt exposes earnings and cash flows to higher interest rates. Other stated risks include availability of qualified workers and workers’ compensation coverage, labor-law compliance, competition, economic conditions, and acquisition integration.
- The company is evaluating the effects of the new lease accounting standard, effective for it in 2019; it expects recognition of lease liabilities and right-of-use assets but had not quantified the impact.
Important facts for investors to verify
- Reconcile the reported zero cash balance with operating cash flow, borrowing availability, and the company’s short-term liquidity needs.
- Review the sustainability of margin improvement, particularly Professional segment bill rates and IT revenue, against growth in Real Estate and Light Industrial.
- Assess debt repayment, variable interest-rate exposure, covenant headroom, and capacity under the revolving facility.
- Examine the impact of equity issuance and increased share count on per-share results, dividends, and future dilution from outstanding awards and warrants.
- Track contingent consideration estimates and the unusual Smart acquisition gain, which rely partly on management forecasts of sales and EBITDA.
- Confirm actual cash conversion, receivable collection trends, dividend affordability, and the eventual balance-sheet impact of lease-standard adoption.