Business context and reporting period
BG Staffing, Inc. provides temporary staffing services through Multifamily, Professional, and Commercial segments, with 65 branch offices and 15 on-site locations across 26 states. This unaudited Form 10-Q covers the 13 weeks ended April 1, 2018; comparisons are with the 13 weeks ended March 26, 2017.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $66.9 million | $56.8 million |
| Gross profit / margin | $17.3 million / 25.9% | $13.7 million / 24.1% |
| Operating income / margin | $4.0 million / 6.0% | $2.7 million / 4.7% |
| Net income | $2.5 million | $1.3 million |
| Diluted EPS | $0.27 | $0.15 |
| Adjusted EBITDA | $5.4 million | $4.1 million |
| Operating cash flow | $3.6 million | $6.5 million |
Revenue increased 17.6% and net income increased 89.4%. Gross margin improved 1.8 percentage points; operating margin improved 1.3 points. Net interest expense rose to $0.9 million from $0.6 million. Income tax expense fell to $0.7 million from $0.8 million, with the company citing the lower federal tax rate under the 2017 Tax Cuts and Jobs Act, partly offset by higher pretax income.
Segment revenue was $18.0 million in Multifamily, $31.1 million in Professional, and $17.7 million in Commercial. Multifamily revenue grew 37.7%, Professional grew 20.4%, and Commercial declined 1.0%. Professional growth included revenue from the 2017 Zycron and Smart acquisitions; the company also reported declines in its legacy IT and finance and accounting groups.
At April 1, 2018, total assets were $102.7 million and stockholders’ equity was $39.5 million. Current assets of $37.0 million exceeded current liabilities of $20.7 million, implying working capital of about $16.3 million and a current ratio of about 1.8. The balance sheet and cash flow statement report no cash and cash equivalents. Debt carrying amounts were approximately $43.0 million, net of deferred financing fees; underlying revolving-facility and term-loan principal totaled approximately $44.0 million. Contingent consideration was $6.7 million. The company paid $2.2 million in dividends during the quarter. Operating cash flow declined $2.9 million, primarily due to timing of accounts payable and accrued payroll payments; investing outflows were $0.2 million and financing outflows were $3.4 million.
Material changes, outlook and risks
- Management said operating cash flow, together with availability under its revolving facility, should meet normal working-capital needs and planned branch expansion for at least the next 12 months. It gave no numerical earnings or revenue guidance and noted that additional growth opportunities could require financing.
- Management attributed gross-margin improvement mainly to the revenue mix shift toward Multifamily and Professional. First-quarter results are seasonally affected by Commercial customer shutdowns and winter weather, while payroll-tax resets typically raise first-quarter service costs; Multifamily demand generally peaks in Q3 and Commercial demand in Q3-Q4.
- The company was compliant with its credit agreement covenants at quarter-end. Debt bears variable interest rates, exposing earnings and cash flows to rate increases. The credit facility is secured by substantially all company and subsidiary assets.
- In May 2018, the company estimated the first-year Zycron earn-out at $0.1 million of a potential $1.5 million; a further $1.4 million may be earned in the second year. A $0.30-per-share dividend was declared after quarter-end, payable May 29, 2018.
- The company reported no material litigation and no material changes to risk factors from its 2017 Form 10-K. Identified risks include workers’ compensation insurance availability, recruiting qualified workers, labor-law compliance, acquisition integration, competition, economic conditions, debt financing, and litigation. The company noted geographic revenue concentration in Texas (28% in Q1 2018), Tennessee (14%), and Maryland (12%).
- Revenue recognition guidance adopted in Q1 2018 had no material impact. The company was evaluating the effect of the new lease accounting standard, which it expected to place right-of-use assets and lease liabilities on its balance sheet.
Important facts for investors to verify
- Why reported cash and cash equivalents were zero despite $3.6 million of operating cash flow, and the company’s actual borrowing availability under the receivables-based facility.
- Whether revenue and margin gains are sustainable apart from Zycron and Smart, including trends in legacy Professional staffing and average bill rates and spreads.
- Future earn-out payments and assumptions underlying the $6.7 million contingent-consideration valuation.
- Debt-service capacity and covenant headroom under variable interest rates, especially alongside dividends, expansion spending, and contingent payments.
- The implications of customer demand seasonality and geographic revenue concentration for subsequent-quarter results.