Business context and reporting period
BG Staffing, Inc. (NYSE MKT: BGSF) provides temporary staffing across Light Industrial, Multifamily and IT Staffing. This Form 10-K covers the 52-week fiscal year ended December 28, 2014; figures below are annual unless noted. The company operated 32 offices and assigned approximately 24,000 temporary workers during the year.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $172.8 million | $151.7 million |
| Gross profit / margin | $34.5 million / 20.0% | $29.1 million / 19.2% |
| Operating income / margin | $5.8 million / 3.4% | $5.1 million / 3.4% |
| Net income (loss) | $(0.4) million | $8.3 million |
| Adjusted EBITDA (non-GAAP) | $11.6 million | $10.7 million |
| Cash from operations | $5.7 million | $2.3 million |
| Cash used in investing / financing | $(0.3) million / $(5.4) million | $(9.8) million / $7.5 million |
Revenue increased 13.9%. Reported gross margin improved, while operating margin was unchanged. FY2014 ended with working capital of $8.6 million, total assets of $53.8 million and stockholders’ equity of $16.4 million. Cash and cash equivalents were reported as zero. Total borrowings were approximately $22.1 million, down from $32.4 million; this comprised $4.9 million drawn on the revolver and $17.2 million in term loans. The $20 million revolver and term loans mature in January 2018. The company reported compliance with its debt covenants.
Changes versus prior period and unusual items
- Light Industrial revenue rose 14.4% to $81.9 million, primarily reflecting InStaff, acquired in May 2013; management said remaining branches declined $9.7 million.
- Multifamily revenue increased 44.1% to $34.3 million, including growth outside Texas. IT Staffing revenue was nearly flat at $56.6 million; segment gross profit declined 4.0% amid customer mix.
- SG&A increased to $24.1 million from $19.0 million, including higher selling costs and $1.2 million of corporate stock-based compensation. Interest expense declined to $2.7 million from $4.1 million after refinancing and repayment of higher-rate subordinated loans.
- FY2014 included a $1.0 million loss on extinguishment of related-party debt, $1.2 million of expense from the change in fair value of a put option, and $1.2 million of stock-based compensation. Income tax expense was $1.4 million versus a $7.5 million benefit in FY2013, which included a substantial benefit associated with the conversion from partnership to C-corporation tax status. These items contributed to the year-over-year shift from reported profit to loss.
- In May 2014, the company reclassified certain IT Staffing trade names as indefinite-lived, ending their amortization. The filing reports a $529,000 reduction in amortization expense and also states the change increased net loss per share by approximately $0.09; investors should verify this stated EPS effect.
- Fourth-quarter 2014 revenue was $42.9 million, gross profit $8.4 million and net income $0.5 million. Fourth-quarter 2013 net income was $7.2 million, substantially affected by the tax benefit described above.
Liquidity, outlook, risks and contingencies
Management said operating cash flow and availability under the senior credit facility should cover normal working capital needs and planned branch openings for at least 12 months, while noting that additional growth opportunities could require financing. Staffing growth increases working-capital needs because payroll is paid before customer receivables are collected. The credit agreement includes financial tests and limits, including a minimum debt-service coverage ratio, leverage limits and a $500,000 annual capital-expenditure cap. Term Loan B carries 11% interest; revolver and Term Loan A rates float with LIBOR. A one-percentage-point rate increase was estimated to add about $0.4 million in annual interest expense.
Key risks include economic cyclicality, intense competition, recruiting and retaining workers, employment and wage-hour claims, workers’ compensation coverage, regulatory changes and customer payment delays. Employer health-coverage penalties under healthcare reform were expected to begin in 2015 and could raise costs if not passed through to customers. The company reported no pending legal proceedings expected to materially affect its financial position or results and no off-balance-sheet arrangements. The auditor issued an unqualified opinion; management assessed internal control over financial reporting as effective, but the auditor did not provide an internal-control attestation.
After year-end, the company acquired D&W Talent on February 23, 2015 for $8.5 million cash, subject to working-capital adjustment, plus contingent consideration of up to $3.5 million; the purchase was funded through the revolver. In December 2014, it sold 963,750 shares for approximately $9.4 million gross proceeds (about $8.5 million net), using the proceeds to repay revolver borrowings. A $0.15-per-share dividend was declared in December and paid in January 2015; future dividends are subject to credit-agreement restrictions and board discretion. The filing gives no numerical earnings or revenue guidance.
Important facts for investors to verify
- Confirm the drivers of the FY2014 net loss, especially the tax comparison with FY2013 and the accounting treatment and EPS effect of the trade-name useful-life change.
- Review current revolver availability, borrowing-base calculations, covenant headroom and debt repayment requirements, including the 11% Term Loan B.
- Assess whether segment growth is sustainable: Light Industrial revenue excluding acquired InStaff declined in the remaining branches, and IT Staffing gross profit weakened.
- Monitor receivable quality and working-capital needs; the allowance for doubtful accounts rose to $748,000 from $440,000.
- Evaluate the cost, integration and financing impact of the post-year-end D&W acquisition, along with potential dilution from shares, options and warrants.