Business context and reporting period
This is Command Center, Inc.’s Form 10-K for the 52 weeks ended December 28, 2018—not a standalone fourth-quarter report. The company provided on-demand temporary labor through 67 branches in 22 states, employing approximately 32,000 field team members during 2018. It served about 3,600 customers across industrial/manufacturing/warehousing, construction, hospitality, transportation, retail, and other sectors. The filing was signed April 9, 2019.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $97.4 million | $98.1 million |
| Gross profit / gross margin | $24.9 million / 25.6% | $25.4 million / 25.9% |
| Operating income / margin | $1.2 million / 1.2% | $3.7 million / 3.8% |
| Net income / net margin | $974,000 / 1.0% | $1.7 million / 1.7% |
| Adjusted EBITDA (non-GAAP) | $4.1 million / 4.2% | $4.2 million / 4.3% |
| Cash from operating activities | $2.6 million | $4.7 million |
- Revenue declined 0.7%; basic and diluted earnings per share were $0.20, down from $0.33.
- Cost of staffing services was 74.4% of revenue, versus 74.1%; gross margin narrowed 0.3 percentage points. Management cited competitive wage pressure in a tightening labor market, minimum-wage increases, and workers’ compensation costs.
- Cash and restricted cash totaled $8.0 million at year-end; current assets were $17.6 million and current liabilities $3.7 million, leaving approximately $14.0 million of working capital. Total liabilities were $4.5 million, including $1.9 million of workers’ compensation claims liabilities.
- The Wells Fargo account-purchase facility had a $14.0 million maximum, but a $6.2 million letter of credit reduced availability; reported availability at year-end was approximately $2,000. The facility balance was $399,000, at an effective rate of 5.02%, and the agreement ran through April 7, 2020.
- Cash used in investing was $117,000 and cash used in financing was $2.3 million, principally reflecting $1.8 million of share repurchases and a $455,000 reduction in the account-purchase facility.
Changes versus the prior comparable period
- SG&A increased by about $2.1 million to $23.4 million, while revenue and gross profit declined slightly. Operating income fell about 68% and net income about 42%.
- Management attributed much of the SG&A increase to approximately $2.4 million of unusual expenses: a $1.5 million impairment of the Freestone workers’ compensation deposit, approximately $565,000 of executive severance, a $100,000 proxy-contest settlement, and approximately $167,000 of other legal and professional fees. Other increases included recruiting, medical benefits, stock compensation, and payroll-related costs.
- Adjusted EBITDA decreased modestly, to $4.1 million from $4.2 million. The reconciliation adds back non-cash compensation and specified non-recurring charges; it is a non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
- Industrial/manufacturing/warehousing and transportation revenue increased, while construction and hospitality revenue decreased. The 10 largest customers represented approximately 25% of 2018 revenue, versus 23% in 2017; one customer accounted for 12.9% of year-end receivables.
Outlook, risks, contingencies, and unusual items
- Management said operating cash flow, working capital, and access to the receivables facility were expected to fund anticipated operations through March 2020. Its 2019 strategy emphasized sales growth in existing branches, careful expansion, possible acquisitions, margin improvement, cost containment, and customer service. No revenue or earnings guidance was provided.
- On April 7, 2019, after year-end, Command Center agreed to acquire Hire Quest Holdings, LLC. Subject to conditions and shareholder approval, Hire Quest owners would receive shares representing 68% of the company immediately after closing and before a proposed self-tender for up to 1.5 million shares at $6.00 each. Hire Quest was required to have at least $14 million in net tangible assets at closing. The filing described the transaction as pending, not completed.
- The company’s $1.8 million of collateral placed with insolvent Freestone Insurance Company remained subject to liquidation proceedings. The company carried the deposit at $260,000, estimating potential recovery at no more than approximately 20% of the $1.8 million. A materially lower recovery could adversely affect financial statements.
- Workers’ compensation exposure is substantial: under its current large-deductible policy, the company bears covered losses up to $500,000 per incident. The $6.2 million letter of credit supporting collateral requirements constrains liquidity.
- Other principal risks include economic and seasonal demand swings, customer concentration and short-termination contracts, labor availability and wage inflation, competitive pricing, employment-law compliance, workers’ compensation claims, and dependence on the receivables facility. The filing also cited management turnover: a new CEO took office April 1, 2018.
- Year-end goodwill was $3.8 million; the company reported no goodwill impairment for 2018. It expected adoption of new lease-accounting rules to recognize approximately $2.1 million of right-of-use assets and lease liabilities, without a material impact on expense recognition.
Important facts for investors to verify
- Whether the Hire Quest transaction and proposed $6.00-per-share tender were approved and completed, and the resulting ownership, share count, and financing requirements.
- Actual availability and terms of receivables financing, particularly the impact of the $6.2 million letter of credit and the facility’s April 2020 expiration.
- Freestone liquidation developments and whether the $260,000 carrying value remains supportable.
- Whether wage, workers’ compensation, and other direct labor-cost pressures can be offset through pricing or productivity, given the lower 2018 gross and operating margins.
- Customer concentration, field-worker availability, and performance against the company’s stated branch-growth and profitability priorities.