BGSF, Inc. — Q1 2016 Form 10-Q
Reporting period: Unaudited results for the 13 weeks ended March 27, 2016, compared with the 13 weeks ended March 29, 2015. BGSF provides temporary staffing through Multifamily, Professional, and Commercial segments. The year-over-year comparison includes the effects of acquisitions, notably D&W and VTS; it is not a like-for-like organic comparison.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Revenue | $59.55 million | $40.88 million | Up 45.7% |
| Gross profit / margin | $13.35 million / 22.4% | $8.34 million / 20.4% | Margin increased 2.0 percentage points |
| Operating income / margin | $2.66 million / 4.5% | $0.86 million / 2.1% | Higher operating income |
| Net income | $0.83 million | $0.16 million | Diluted EPS was $0.11 versus $0.02 |
| Adjusted EBITDA | $4.51 million | $2.05 million | Non-GAAP measure |
| Operating cash flow | $4.84 million | $2.22 million | Increase attributed to higher operating earnings and receivables timing |
| Investing cash flow | $(0.23) million | $(8.70) million | 2015 included $8.5 million for D&W |
| Financing cash flow | $(4.61) million | $6.48 million | 2016 included dividends, contingent consideration, and revolving-credit paydown |
Balance sheet and liquidity
- At March 27, 2016, total assets were $81.12 million and stockholders’ equity was $24.99 million.
- Current assets were $31.20 million versus current liabilities of $21.74 million, implying working capital of approximately $9.45 million. Cash and cash equivalents were zero at both period-end dates reported.
- Revolver borrowings were $15.07 million; long-term debt was reported at $14.75 million net of deferred financing fees. The company also had $9.97 million of net contingent consideration, including $5.55 million current.
- The $25 million revolving facility is limited by an 85% borrowing base on eligible receivables and matures in August 2019. Subordinated term debt matures in February 2020 and bears 10% cash interest plus 3% compounded deferred interest. The company reported compliance with its debt covenants.
- Management said operating cash flow and available revolver capacity should meet normal working-capital needs for at least 12 months, including planned branch openings.
Material changes and management commentary
- Professional revenue rose 91.2% to $27.64 million, primarily due to D&W and VTS, which contributed approximately $2.9 million and $8.5 million, respectively. Billed hours increased, while the average bill rate declined.
- Multifamily revenue increased 37.2% to $10.74 million, reflecting expansion outside Texas, higher billed hours, and higher average bill rates. Commercial revenue increased 13.8% to $21.17 million, with growth partly offset by declines in Illinois and Wisconsin.
- Gross margin improvement reflected higher revenues from Multifamily and Professional and improved segment spreads. SG&A rose 40.2%, including acquisition-related costs, higher commissions and bonuses, and other growth costs.
- Net interest expense increased 131.7% to $1.28 million, primarily due to acquisition earn-out discount amortization and higher subordinated borrowing costs. Depreciation and amortization also increased, largely due to acquired Professional-segment intangibles.
- Cash dividends of $1.85 million were paid in the quarter. On April 28, the board declared a further $0.25-per-share dividend, payable May 16 to shareholders of record May 9.
- No numerical financial guidance was provided. Management noted potential needs for additional financing if pursuing further growth opportunities; no off-balance-sheet arrangements were reported.
Risks, contingencies, and other notable items
- Key risks cited include access to workers’ compensation insurance at reasonable terms, availability of qualified temporary workers, employment-law compliance, competition, acquisition integration, economic conditions, and the effect of debt on financing flexibility.
- Variable-rate revolving debt exposes the company to interest-rate risk. The company also faces covenant restrictions, including limits affecting dividends and other transactions.
- Earn-out liabilities depend on acquired businesses meeting future performance goals and are based on valuation estimates. The filing reports no material litigation currently pending and no material changes to previously disclosed risk factors.
- Management reported disclosure controls and procedures were effective at a reasonable-assurance level and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported revenue and profit growth reflects acquisitions versus underlying organic growth, especially in Professional.
- Available borrowing capacity under the receivables-based revolver, given the zero cash balance, working-capital needs, and variable interest rates.
- Timing, performance assumptions, and cash demands associated with the approximately $9.97 million net contingent-consideration liability.
- Whether dividend payments and planned expansion remain supportable alongside debt service and future earn-out payments.
- The sustainability of improved gross margins and the effects of lower Professional average bill rates and regional Commercial declines.