BGSF, INC. annual report, FY2019

Full document

Business context and reporting period

BGSF, Inc. (NYSE: BGSF), a U.S. workforce-solutions provider, filed this Form 10-K for the 52-week fiscal year ended December 29, 2019. It operates in Real Estate, Professional, and Light Industrial staffing. The requested fourth quarter is included below; annual results provide the main comparable-period context.

Financial performance

  • Fiscal 2019 revenue: $294.3 million, up 2.6% from $286.9 million. Gross profit was $80.7 million, up 5.3%; gross margin rose to 27.4% from 26.7%.
  • Profitability: Operating income was $19.7 million, down from $24.3 million; net income was $13.2 million versus $17.5 million. Diluted EPS was $1.28 versus $1.79. Adjusted EBITDA, a non-GAAP measure, was $26.6 million versus $27.1 million.
  • Fiscal Q4: Revenue was $72.3 million versus $72.0 million in Q4 2018; gross profit was $19.2 million. Income before taxes was $3.9 million and net income was $2.7 million, compared with $6.0 million and $4.9 million, respectively, in the prior-year quarter. Diluted EPS was $0.26 versus $0.47.
  • Segment revenue: Real Estate $96.4 million, up 11.0%; Professional $123.3 million, up 3.4%; Light Industrial $74.5 million, down 7.6%.
  • Cash flow: Operating cash flow was $18.0 million versus $18.4 million. Investing activities used $9.7 million, including $7.5 million for LJK and $2.2 million in capital expenditures. Financing activities used $8.2 million. The cash flow statement reports no change in cash and cash equivalents and shows a zero ending balance.
  • Liquidity and debt: Working capital was $27.0 million, up from $20.6 million. Total borrowings, net of deferred financing fees, were $27.5 million versus $20.1 million. The company reported $40.7 million of current assets and $13.7 million of current liabilities. Its new BMO facility provides a $35 million revolver and up to $30 million in term loans, matures July 2024, and is secured by substantially all company assets. BGSF reported covenant compliance at year-end.
  • Shareholder returns: Fiscal 2019 dividends declared were $1.20 per share, with $12.3 million paid. The board declared a further $0.30-per-share dividend in January 2020.

Material changes versus the prior comparable period

  • Real Estate growth reflected higher billed hours, bill rates, and geographic expansion. Professional revenue grew despite lower billed hours, supported by higher average bill rates. Light Industrial revenue fell primarily due to a 10.8% decline in billed hours.
  • SG&A rose 10.1% to $56.2 million, including higher compensation, software costs, and $0.7 million of IT-roadmap expense. SG&A increased to 19.1% of revenue from 17.8%.
  • Operating income declined in part because 2018 included a $3.8 million gain on contingent consideration that did not recur. Fiscal 2019 also included a $0.5 million loss on extinguishment of debt. Net interest expense declined to $1.6 million from $2.9 million.
  • In December 2019, BGSF acquired L.J. Kushner & Associates for cash, shares, a holdback, and contingent consideration; the acquisition contributed only two weeks of operations to the year. In February 2020, it acquired EdgeRock for $21.6 million cash, funded in part with an $18.5 million term-loan draw.

Outlook, commentary, risks, and unusual items

Management described the 2019 U.S. economic and labor-market backdrop as positive and said it believed BGSF was well positioned. It provided no specific 2020 financial guidance. The filing cautions that the Coronavirus outbreak, which had no material effect on 2019 results, could disrupt operations and reduce hours worked, hiring, and demand; management could not yet determine the financial impact.

Key risks include economic cyclicality, intense price competition, short-notice client cancellations, working-capital needs from paying field talent before collecting receivables, client credit risk, variable-rate debt and covenant limits, workers’ compensation collateral and coverage, labor and employment regulation, cybersecurity and data privacy, and acquisition integration. Texas accounted for 28% of 2019 revenue, Tennessee 15%, and Maryland 11%. The company authorized up to $10 million over three years for technology infrastructure improvements. It reported no material adverse effect expected from existing legal matters and no off-balance-sheet arrangements.

Important facts for investors to verify

  • Reconcile the reported zero cash balance and zero annual cash change with the company’s liquidity disclosures and debt movements.
  • Assess the causes and durability of weaker operating income, net income, and diluted EPS, including the absence of the prior-year contingent-consideration gain and higher SG&A and tax expense.
  • Review available borrowing capacity, covenant headroom, variable-rate exposure, and the effect of the EdgeRock acquisition and related debt on leverage and liquidity.
  • Track billed hours, pricing, and margins by segment, particularly Light Industrial’s declining hours and Real Estate’s growth.
  • Monitor the Coronavirus-related demand and operating impact, LJK and EdgeRock integration and performance, and the contingent payments and goodwill/intangible-asset valuations associated with acquisitions.

The audited financial statements received an unqualified opinion, and management and the auditor reported effective internal control over financial reporting as of December 29, 2019.