BGSF, Inc. — Q3 2023 Form 10-Q
Reporting period: 13 and 39 weeks ended October 1, 2023; comparisons are to the corresponding periods ended September 25, 2022. Dollar amounts below are in millions unless stated otherwise. BGSF provides professional workforce, consulting and managed services, and property-management staffing.
Financial results
| Metric | Q3 2023 | Q3 2022 | 39 weeks 2023 | 39 weeks 2022 |
|---|---|---|---|---|
| Revenue | $83.5 | $78.5 | $239.6 | $221.1 |
| Gross profit / margin | $30.0 / 35.9% | $28.0 / 35.7% | $86.3 / 36.0% | $76.5 / 34.6% |
| Operating income (loss) | $5.3 | $6.5 | $(10.4) | $13.5 |
| Income (loss) from continuing operations | $2.6 | $4.7 | $(11.2) | $9.8 |
| Net income (loss) | $2.6 | $4.7 | $(11.2) | $23.6 |
| Adjusted EBITDA from continuing operations (non-GAAP) | $7.9 | $8.0 | $19.6 | $17.4 |
Q3 Adjusted EBITDA margin was 9.4%, versus 10.2%; for the 39-week period it was 8.2%, versus 7.9%. Q3 diluted EPS was $0.24, versus $0.44; 39-week diluted EPS was $(1.04), versus $2.25. The prior-year 39-week result included a $17.3 million gain on the InStaff sale, which was reported in discontinued operations.
- Cash flow: Continuing operating activities provided $15.1 million in the 39 weeks, compared with $5.6 million used in the prior-year period. Investing activities used $8.8 million, including $6.7 million for Arroyo Consulting; financing activities used $6.3 million. Cash was zero at period end.
- Liquidity and debt: Working capital was negative $14.6 million at October 1, versus positive $48.0 million at January 1. The balance sheet showed $26.7 million of current revolving debt and $35.0 million of current long-term debt; the company also had a $4.4 million convertible note. Revolver borrowings were $26.8 million against a $41 million facility. The bank debt matures July 16, 2024 and was classified as current.
- Dividends: $0.15 per share was declared in each quarter, or $0.45 per share for the 39 weeks. A further $0.15 dividend was declared November 8, payable November 28, 2023.
Material changes and drivers
- Q3 revenue increased 6.3%. Property Management revenue rose 8.2%, primarily due to higher billing rates. Professional revenue rose 5.0%, but the acquired businesses contributed $11.6 million; the remaining Professional business declined $9.4 million, or 20.7%.
- For the 39 weeks, revenue increased 8.3%. Property Management growth reflected higher average bill rates, partly offset by fewer billed hours. Professional revenue included $28.9 million from Horn Solutions and Arroyo Consulting; the rest of the segment declined $16.8 million, or 12.7%, primarily due to lower billing hours.
- Gross margin improved year over year for the 39 weeks, with improvement in both segments. Q3 SG&A rose $2.3 million, while net interest expense increased $1.3 million, primarily due to acquisition-related borrowing and higher rates.
- The 39-week operating loss includes a $22.5 million non-cash impairment of trade names following the approved rebranding to BGSF. The related impairment contributed to a $3.6 million income-tax benefit for the period.
Outlook, risks and contingencies
- No specific financial guidance is provided. Management said operating cash generation and available revolver capacity are expected to support normal working-capital needs and planned investments for at least the next 12 months, while noting that liquidity depends on operating and financing conditions.
- Management reported active, advanced lender discussions to refinance the debt with an extended maturity, with an intended close in Q4 2023. Completion and terms are not assured; failure to refinance, or unfavorable terms, could materially affect the company.
- The company reported compliance with credit covenants at October 1, 2023. Borrowings carry variable rates; higher rates could increase interest expense and reduce earnings and cash flow.
- Management cited inflation and interest rates as potential pressures on workforce demand, project activity, and early terminations. Other disclosed risks include availability and cost of qualified talent and workers’ compensation insurance, employment-law compliance, competition, acquisition integration, economic conditions, and litigation.
- Contingent consideration liabilities were $7.1 million, including $3.8 million current, and depend on acquisition performance estimates. The filing describes ordinary-course legal matters but reports no material change from the prior annual filing. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Progress, completion, pricing, and covenant implications of the planned debt refinancing, given the July 2024 maturity and current classification of bank debt.
- Whether underlying Professional-segment demand and billing hours stabilize, separating acquired-company contributions from legacy-business performance.
- Cash generation and working-capital needs, including the timing of customer collections and payroll obligations; reported cash was zero.
- Whether the improvement in gross margin and Adjusted EBITDA is sustained after considering acquisition costs, amortization, interest expense, and other excluded items.
- Performance-based contingent consideration and the assumptions supporting acquisition valuations and deferred tax assets.