Business context and reporting period
BG Staffing, Inc. (NYSE MKT: BGSF) filed this Form 10-K for the 52-week fiscal year ended December 25, 2016. It provides temporary staffing in Multifamily, Professional, and Commercial markets, with 52 branch offices and 17 on-site locations across 22 states. The filing’s fourth-quarter figures are unaudited.
Financial performance and liquidity
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Revenue | $253.9 million | $217.5 million |
| Gross profit / margin | $60.1 million / 23.7% | $47.9 million / 22.0% |
| Operating income / margin | $15.5 million / 6.1% | $12.0 million / 5.5% |
| Net income | $6.9 million | $5.3 million |
| Diluted EPS | $0.82 | $0.73 |
| Adjusted EBITDA (non-GAAP) | $22.6 million | $17.9 million |
| Cash from operating activities | $9.5 million | $11.8 million |
Revenue rose 16.7%, operating income 29.8%, and net income 28.7% year over year. Fiscal 2016 net margin was 2.7%, versus 2.5% in 2015. Adjusted EBITDA is a non-GAAP measure; the company cautions it is not a substitute for net income or cash flow.
Fourth-quarter revenue was $64.3 million, compared with $66.7 million a year earlier; gross profit was $15.1 million versus $14.8 million. Net income increased to $2.3 million from $1.5 million, and diluted EPS was $0.26 versus $0.20.
- Segment revenue: Multifamily $58.0 million, up 34.3%; Professional $107.0 million, up 23.4%; Commercial $88.8 million, up 1.4%.
- Working capital was $19.2 million, versus $10.0 million. Cash and cash equivalents were reported as zero at year-end.
- Net borrowings were $23.6 million, down from $30.6 million. The revolving facility commitment was increased to $35 million; availability is also limited by the eligible-receivables borrowing base.
- Operating cash flow declined to $9.5 million, principally reflecting timing of receivables and accrued payroll and expenses. Investing cash outflow was $0.9 million; financing cash outflow was $8.6 million.
Material changes versus the prior period
- Growth reflected Multifamily expansion outside Texas and the fuller-year contribution of the 2015 VTS acquisition; Professional also included Donovan & Watkins, acquired in 2015. Commercial growth was modest, with lower billed hours partly offset by higher bill rates.
- Company gross margin increased from 22.0% to 23.7%. Management cited segment mix and improved gross profit percentages, including Multifamily and Professional.
- In June 2016, the company issued 1.19 million shares for gross proceeds of $16.7 million and net proceeds of $15.3 million, which were used to repay the senior subordinated debt. The offering increased shares outstanding and diluted existing holders.
- Cash dividends paid totaled $8.0 million in 2016, or $1.00 per share. The board subsequently declared another $0.25-per-share dividend for February 2017, subject to credit-agreement restrictions.
Outlook, risks, and unusual items
- No formal revenue or earnings guidance is provided. Management stated that operating cash generation and revolving-facility availability were expected to meet normal working-capital needs for at least the next 12 months, including planned branch openings; additional growth opportunities could require financing.
- Staffing demand is cyclical and seasonal. Weekly worker payroll generally precedes customer collections by 30–60 days, creating significant working-capital needs. Customer agreements are generally terminable on little or no notice.
- Risks include intense price competition, customer payment and credit exposure, concentration of revenue in Texas (32% in 2016), workers’ compensation coverage and collateral needs, labor and employment regulation, and dependence on recruiting qualified workers. The company also cites acquisition integration and goodwill/intangible-asset impairment risks.
- At year-end, contingent consideration had a net carrying value of $5.2 million, with estimated cash payments of $4.25 million in 2017 and $2.25 million in 2018 before discounts. The company recorded a $0.4 million loss on extinguishment of debt in 2016 and paid $7.6 million of acquisition-related contingent consideration.
- The annual audit opinion was unqualified. Management reported effective disclosure controls and internal control over financial reporting. The company reported no material litigation and no off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the filing’s VTS revenue contribution disclosures: MD&A describes a different contribution than the acquisition note.
- Review actual revolving-credit availability under the borrowing base, covenant headroom, and the effect of variable interest rates; the $35 million commitment is not necessarily fully drawable.
- Assess the cash required for contingent consideration, workers’ compensation collateral, dividends, and weekly payroll, particularly given zero reported year-end cash.
- Separate organic growth from acquisition-driven growth and evaluate the ongoing performance of Professional and Commercial operations.
- Consider dilution from the 2016 share offering and outstanding options and warrants, and confirm the credit agreement permits future dividends.