BGSF, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. BGSF provides workforce solutions in Real Estate, Professional, and Light Industrial markets. The quarter was the 13 weeks ended September 27, 2020; year-to-date figures cover 39 weeks. Comparisons are with the corresponding 2019 periods. The company reported that COVID-19 materially affected demand across its business.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 39 weeks 2020 | 39 weeks 2019 |
|---|---|---|---|---|
| Revenue | $71.5M | $79.4M | $208.2M | $222.0M |
| Gross profit / margin | $19.7M / 27.6% | $22.2M / 27.9% | $56.9M / 27.3% | $61.5M / 27.7% |
| Operating income (loss) | $3.6M | $6.5M | $0.2M | $15.5M |
| Net income (loss) | $2.6M | $4.2M | ($0.8M) | $10.5M |
| Diluted EPS | $0.25 | $0.41 | ($0.07) | $1.01 |
| Adjusted EBITDA (non-GAAP) | $5.5M | $8.3M | $14.0M | $20.3M |
Q3 revenue fell about 9.9% year over year; net income fell about 39%. Year-to-date revenue declined about 6.2%, and the company moved from net income to a net loss. Year-to-date operating income included $7.2M of impairment losses. Adjusted EBITDA is a company-defined non-GAAP measure and should not be viewed as a substitute for GAAP earnings or cash flow.
Segments and drivers
- Real Estate: Q3 revenue declined 35.0% to $19.2M, principally as billed hours fell 37.7%; the average bill rate rose 4.2%. For 39 weeks, revenue fell 30.2% to $51.0M.
- Professional: Q3 revenue increased 8.0% to $34.0M, with LJK and EdgeRock acquisitions contributing $9.5M; the rest of the group declined. For 39 weeks, revenue rose 14.6% to $107.0M, including $26.2M from those acquisitions. The segment recorded $7.2M of intangible-asset impairment losses year to date.
- Light Industrial: Q3 revenue was nearly flat at $18.3M, while 39-week revenue declined 9.6% to $50.2M, reflecting lower billed hours partly offset by higher bill rates.
Cash flow, balance sheet, and liquidity
- Year-to-date operating cash flow was $18.3M, compared with $14.0M in 2019. Investing activities used $23.6M, including $21.7M for EdgeRock and $2.0M of capital expenditures. Financing activities provided $5.3M. Cash and cash equivalents were reported as zero at both period-end and the beginning of the year.
- At September 27, 2020, current assets were $42.8M and current liabilities $17.8M; working capital was approximately $24.9M. Accounts receivable was $41.8M.
- Gross borrowings were approximately $37.3M: $8.0M drawn on the revolving facility and $29.3M of term debt. The revolver has a $35M commitment and matures in July 2024. A $25M interest-rate swap, effective through June 2023, hedges variable-rate term-loan exposure. The company said it complied with debt covenants at quarter-end.
- Other liquidity obligations include $7.1M of operating lease liabilities and $5.0M of deferred employer FICA taxes under the CARES Act, payable in halves by December 2021 and December 2022. A $0.1M standby letter of credit uses revolver capacity.
Changes, outlook, and risks
- COVID-19-related restrictions, project reductions, hiring freezes, and client uncertainty reduced demand and billed hours, particularly in Real Estate. Management expects the business, results, and financial condition to continue to be negatively affected; the filing gives no numerical earnings or revenue guidance.
- Management stated that operating cash flow and revolver availability should cover normal working-capital needs for at least the next 12 months, while noting uncertainty around client payments and possible financing needs for additional growth.
- EdgeRock was acquired in February 2020 for $21.7M in cash and added $9.2M of Q3 revenue and $0.5M of Q3 operating income. LJK was acquired in December 2019. Acquisition-related costs were $0.6M year to date.
- The board declared a Q3 dividend of $0.05 per share, versus $0.30 a year earlier; year-to-date dividends were $0.40 per share versus $0.90. After quarter-end, the board declared a $0.10-per-share dividend payable November 23, 2020.
- Disclosure controls were reported ineffective due to a material weakness in controls over the technical accounting assessment of goodwill and intangible-asset impairment. Management said the weakness had not caused identified misstatements or restatements and was pursuing remediation, but could not estimate when it would be complete.
- Other risks include client credit and collections, labor availability and employment-law compliance, workers’ compensation coverage, debt obligations and interest rates, acquisition integration, and economic conditions. The company reported no material change in legal proceedings from its prior annual report.
Investor verification points
- Assess whether post-quarter demand, billed hours, and client payment trends support management’s stated liquidity outlook amid continuing COVID-19 uncertainty.
- Review the impairment assumptions and the performance of the Professional finance-and-accounting business, which drove the $7.2M charge.
- Track debt balances, revolver availability, covenant compliance, and the deferred FICA repayment schedule.
- Monitor progress in remediating the material weakness in impairment controls.
- Reconcile Adjusted EBITDA to GAAP results and operating cash flow, including the effect of excluded impairment, transaction, and IT-roadmap costs.