BGSF, Inc. — Q2 2018 Form 10-Q Summary
Business and period: BGSF provides temporary staffing through Real Estate, Professional, and Light Industrial segments, operating across 26 states. This unaudited report covers the 13 weeks ended July 1, 2018, and the first 26 weeks of fiscal 2018; comparisons are with periods ended June 25, 2017.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $70.9 million | $68.8 million | $137.8 million | $125.6 million |
| Gross profit / margin | $19.2 million / 27.1% | $17.2 million / 25.0% | $36.5 million / 26.5% | $30.9 million / 24.6% |
| Operating income / margin | $6.6 million / 9.3% | $4.6 million / 6.7% | $10.6 million / 7.7% | $7.3 million / 5.8% |
| Net income / margin | $5.2 million / 7.3% | $2.3 million / 3.3% | $7.6 million / 5.5% | $3.6 million / 2.9% |
| Diluted EPS | $0.54 | $0.25 | $0.82 | $0.40 |
| Adjusted EBITDA | $7.9 million | $6.6 million | $13.3 million | $10.8 million |
Cash flow and liquidity: First-half operating cash flow was $4.1 million, down from $6.8 million, primarily reflecting timing of receivables, payroll-related payments, and contingent consideration. Capital expenditures were $0.5 million; investing cash outflow was also $0.5 million. Cash was reported as zero at both the beginning and end of the period. The company said operating cash generation and borrowing availability should fund normal working capital needs and planned branch investments for at least 12 months.
Debt: Balance-sheet debt carrying amounts were approximately $27.6 million at July 1, 2018, versus $44.1 million at December 31, 2017. The revolving credit facility showed $17.3 million outstanding; term-loan principal was $11.0 million. May offering proceeds funded debt reduction, including $10.7 million of term-loan repayment and a $7.5 million reduction in the revolver. The credit facility is secured, has variable interest rates, and includes leverage and coverage covenants; BGSF reported compliance at quarter-end. Revolver availability is limited by the borrowing base, and the filing does not state a clear available borrowing amount.
Material changes and segment trends
- Q2 revenue rose 3.2% year over year; first-half revenue increased 9.7%. Net income rose substantially in both periods, alongside improved gross margins and lower depreciation and amortization.
- Real Estate revenue grew 28.4% in Q2 and 32.5% in the first half, with management citing geographic expansion, more billed hours, and higher average bill rates. Its gross margin was 38.1% in both Q2 comparison periods.
- Professional revenue fell 11.9% in Q2, as a decline in IT more than offset finance and accounting growth. First-half segment revenue rose 2.0%, including Zycron and Smart acquisition contributions, while management reported lower average bill rates and declines in the legacy IT and finance and accounting businesses.
- Light Industrial revenue increased 8.5% in Q2 and 3.7% for the first half. Management cited higher average bill rates and, in Q2, more billed hours.
- The company issued 1,293,750 shares in a May registered offering for $23.3 million gross proceeds and $21.4 million net proceeds. The new shares were approximately 14.7% of pre-offering shares outstanding.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management noted normal seasonality: Real Estate demand is strongest in the third quarter, while Light Industrial demand generally rises in the third quarter and peaks in the fourth.
- Management stated that liquidity is expected to meet normal needs and planned branch expansion for at least 12 months, but additional growth opportunities could require further debt or equity financing.
- Key disclosed risks include worker availability, workers’ compensation insurance cost and availability, labor-law compliance, economic and industry conditions, acquisition integration, competition, litigation, and the effect of indebtedness. Variable-rate debt exposes the company to higher interest costs.
- A $1.2 million gain in SG&A reflected a reduction in the estimated Zycron earn-out. The company also paid CEO L. Allen Baker $3.3 million to cancel 284,888 vested in-the-money options; the agreement had tax-deductible treatment noted by the company.
- First-half cash dividends paid were $4.8 million. After quarter-end, the board declared a $0.30-per-share dividend payable August 13, 2018.
- The company reported no material litigation, no material changes to its previously disclosed risk factors, and effective disclosure controls. It identified no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether Real Estate growth and margin performance can continue, and whether Professional segment weakness—particularly legacy IT activity and average bill rates—persists.
- Actual borrowing availability under the receivables-based revolver, debt repayment pace, covenant headroom, and sensitivity to variable interest rates.
- Cash conversion and working-capital requirements as receivables grow; operating cash flow declined despite higher earnings.
- How much reported earnings benefited from the Zycron contingent-consideration gain and lower amortization, and the longer-term impact of acquisition-related obligations.
- The impact of share issuance and the CEO option cancellation on per-share results, and the company’s capacity to sustain dividends while funding growth and debt service.