BGSF, Inc. (formerly BG Staffing, Inc.) — 2013 Form 10-K
Reporting period: Fiscal year ended December 29, 2013 (52 weeks); comparison year ended December 30, 2012 was 53 weeks. Amounts below are in U.S. dollars. The company provides temporary staffing in Light Industrial, Multifamily, and IT Staffing.
Business context and reporting period
BGSF operated 28 branches in 10 states and served U.S. customers. Growth in 2013 was substantially acquisition-driven: InStaff was acquired in May 2013, while American Partners (API), acquired in December 2012, contributed a full year of results. InStaff contributed approximately $35.4 million of 2013 revenue. The company reorganized and converted from an LLC/partnership structure to a Delaware C corporation in November 2013.
Financial performance
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $151.7 million | $76.8 million |
| Gross profit / margin | $29.1 million / 19.2% | $15.6 million / 20.3% |
| Operating income / margin | $5.1 million / 3.4% | $0.5 million / 0.6% |
| Interest expense, net | $4.1 million | $2.2 million |
| Income before taxes | $0.8 million | Loss of $1.7 million |
| Income tax benefit (expense) | $7.5 million benefit | $0.03 million expense |
| Net income (loss) | $8.3 million | Loss of $1.7 million |
| Adjusted EBITDA (non-GAAP) | $10.8 million | $5.5 million |
| Cash from operations | $2.3 million | $3.0 million |
The reported 2013 net profit includes a $7.5 million tax benefit, primarily from deferred tax effects of conversion to C-corporation status. On a pro forma C-corporation basis, 2013 net income was approximately $0.3 million, or $0.06 basic earnings per share ($0.05 diluted). Adjusted EBITDA is a company-defined non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
Segments and material changes
- Light Industrial: Revenue of $71.6 million, up 82.3%; segment gross margin was 12.0% versus 12.2%. Growth primarily reflects InStaff.
- Multifamily: Revenue of $23.8 million, up 30.6%; segment gross margin improved to 33.2% from 31.9%, reflecting volume, new branches, and market pricing.
- IT Staffing: Revenue of $56.3 million, up 192.2%; segment gross margin fell to 22.3% from 25.7%, mainly because API had lower margins than Extrinsic.
Consolidated revenue nearly doubled, but the comparison is affected by acquisitions and the extra week in fiscal 2012. Gross margin declined 1.1 percentage points, partly due to business mix and statutory unemployment and workers’ compensation costs. SG&A increased with the acquired businesses and new branches. Interest expense rose with higher debt balances, including InStaff acquisition financing.
Cash flow, debt, and liquidity
Cash from operations was $2.3 million, below reported net income; accounts receivable increased by approximately $8.0 million and was a major use of operating cash. Investing used $10.8 million, largely for acquisitions and contingent consideration; financing provided $8.6 million. Reported cash and cash equivalents were zero at year-end. Working capital was $8.4 million.
Year-end borrowings totaled approximately $32.4 million: $13.0 million drawn on the revolver, $4.8 million of term debt, and $14.6 million of related-party subordinated loans. The subordinated loans carried 14% interest. The company reported covenant compliance and management believed operating cash flow and available borrowing capacity would cover normal needs for at least 12 months. Availability is described inconsistently: approximately $4.0 million in MD&A versus approximately $3.2 million in the debt note.
On January 29, 2014, the company amended and restated its credit arrangements, extending maturity to January 2018 and setting a $20 million revolving commitment, an approximately $11.3 million Term Loan A, and an $8 million fixed-rate Term Loan B at 11%. The prior subordinated loans were repaid using refinancing proceeds; the company recorded a $1.0 million extinguishment loss in first-quarter 2014. The new agreement imposes leverage, debt-service, minimum Adjusted EBITDA, and capital-expenditure covenants.
Outlook, risks, and unusual items
- No quantified revenue or earnings guidance is provided. Management stated it expected liquidity to support normal working-capital needs and planned branch expansion, while noting additional growth opportunities could require financing.
- Staffing demand is cyclical and seasonal; revenue can fall quickly in downturns, while worker payroll typically precedes customer collections and growth increases working-capital needs.
- Key risks include intense competition and pricing pressure, recruiting and retaining temporary workers, employment and wage-hour claims, workers’ compensation coverage and costs, health-care reform costs, customer payment delays, acquisition integration, and substantial debt and covenant restrictions.
- Interest-rate exposure is material: management estimated a one-percentage-point increase in LIBOR would add about $0.6 million in annual interest expense on senior borrowings.
- Legal proceedings arising in the ordinary course were not expected by management to have a material effect. Goodwill impairment was not recorded for 2013. The company reported no off-balance-sheet arrangements.
- The common stock had no reported OTC Bulletin Board sales as of March 31, 2014; liquidity and resale-market risks are significant. No cash dividends were anticipated.
Most important facts for investors to verify
- Reconcile the reported $8.3 million GAAP net income with the $7.5 million tax benefit and the $0.3 million pro forma C-corporation net income.
- Confirm sustainable post-acquisition segment margins, especially the lower IT Staffing margin and Light Industrial statutory cost pressures.
- Review receivables, collections, and cash conversion: operating cash flow declined despite sharply higher revenue and reported profit.
- Confirm post-refinancing debt balances, borrowing availability, interest costs, and covenant headroom; the filing gives differing year-end availability estimates.
- Assess acquisition earnouts and contingent obligations, including the InStaff earnout of up to $1.0 million and other earnout payments disclosed through 2016.
- Consider the limited trading liquidity and the absence of an auditor attestation on internal controls. The financial statement audit opinion was unqualified; management reported disclosure controls effective.