Business context and reporting period
BG Staffing, Inc. provides temporary staffing in Light Industrial, Multifamily and IT Staffing. This unaudited Form 10-Q covers the 13 weeks and 39 weeks ended September 28, 2014; comparisons are to periods ended September 29, 2013. The company completed its conversion from an LLC taxed as a partnership to a C corporation in November 2013, affecting tax and earnings comparability.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Revenue | $48.0m | $47.9m | $129.9m | $107.9m |
| Gross profit / margin | $10.0m / 20.8% | $9.1m / 19.0% | $26.2m / 20.1% | $20.6m / 19.1% |
| Operating income / margin | $2.7m / 5.6% | $2.6m / 5.4% | $4.2m / 3.2% | $3.8m / 3.5% |
| Net income (loss) | $0.4m | $1.4m | $(0.9)m | $1.1m |
| Operating cash flow | — | $3.3m | $0.7m |
Q3 diluted EPS was $0.06; YTD diluted loss per share was $0.16. The filing presents 2013 pro forma C-corporation EPS of $0.15 diluted for Q3 and $0.11 for the 39-week period, rather than directly comparable reported EPS.
- Segment trends: Q3 Multifamily revenue increased 46.8% to $11.6m, while Light Industrial fell 12.7% to $21.4m and IT Staffing fell 3.2% to $15.0m. YTD revenue rose in all segments: Light Industrial 26.1%, Multifamily 48.0%, and IT Staffing 2.8%.
- Costs and margins: Q3 gross margin improved mainly from a higher Multifamily revenue mix. SG&A rose 17.0% to $6.2m. YTD SG&A was $18.4m, up 36.3%, including higher Multifamily costs, InStaff-related costs and stock-based compensation.
- Non-GAAP measure: Adjusted EBITDA was $3.9m in Q3 versus $3.8m, and $8.9m YTD versus $7.6m. The company cautions that this measure is not a substitute for GAAP income or cash flow.
- Liquidity and debt: At September 28, current assets were $28.8m and current liabilities $17.8m. Cash was reported as zero. The company had $14.6m outstanding on its $20.0m revolving facility and $17.75m of term loans, or $32.35m of revolver and term debt in total. Debt maturities were concentrated in 2018. The company reported compliance with its financial covenants.
- Cash generation: YTD operating cash flow of $3.3m was offset by $0.3m of capital expenditures and $3.1m of net financing outflow. Accounts receivable increased; the doubtful-account allowance was $0.63m, compared with $0.44m at year-end 2013.
Material changes and unusual items
- InStaff, acquired in May 2013, contributed approximately $39.7m of revenue in the 2014 YTD period and materially affects year-over-year comparisons.
- In January 2014, the company refinanced related-party subordinated debt using its amended bank facility. The refinancing included an $8.0m Term Loan B bearing 11% interest and resulted in a $0.99m debt-extinguishment loss. Lower interest costs subsequently benefited results.
- A non-cash $0.95m Q3 and $1.18m YTD expense from revaluing the InStaff put option reduced reported earnings. Its fair value was $2.49m at September 28, 2014.
- In May 2014, the company changed the useful life of certain IT Staffing trade names to indefinite and stopped amortizing them. This reduced amortization expense by $0.20m in Q3 and $0.33m YTD. The company reported no impairment indicators.
- Income tax expense was $0.76m in Q3 and $0.87m YTD, reflecting C-corporation taxation; prior-year periods largely preceded the conversion.
Outlook, risks and contingencies
Management provided no quantitative revenue or earnings guidance. It said operating cash flow and borrowing availability should meet normal working-capital needs and planned branch openings for at least 12 months, while noting that additional growth opportunities may require financing. The company planned approximately $0.2m of remaining-year capital spending and did not intend to pay cash dividends.
Key disclosed risks include availability and cost of qualified temporary workers and workers’ compensation insurance, labor-law compliance, competition, economic conditions, acquisition integration, litigation, and indebtedness. Floating-rate borrowings expose the company to rate changes; management estimated that a 1-percentage-point LIBOR increase would raise annual interest expense by approximately $0.9m. The company reported no pending legal proceeding expected to materially affect its financial position, results or cash flow, and no off-balance-sheet arrangements. Its stock had traded on NYSE MKT only since October 27, 2014, with low trading volume. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Reconcile the reported YTD net loss with positive operating income, focusing on the put-option revaluation, refinancing charge, interest and C-corporation taxes.
- Assess the sustainability of Multifamily growth and margin improvement against declines in Q3 Light Industrial and IT Staffing revenue.
- Review receivables, collection experience and allowance adequacy, given receivables’ role in operating cash flow and the revolving borrowing base.
- Check debt-service and leverage covenant headroom, debt maturities and borrowing availability under the receivables-based revolver.
- Evaluate assumptions underlying the Level 3 put-option valuation and the indefinite-lived trade-name classification and impairment assessment.