Business context and reporting period
BG Staffing, Inc. provides temporary staffing services through Multifamily, Professional, and Commercial segments. This unaudited Form 10-Q covers the 13- and 39-week periods ended September 25, 2016, compared with the periods ended September 27, 2015. The company’s fiscal year is 52 or 53 weeks.
Financial performance
| Metric | 13 weeks 2016 | 13 weeks 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Revenue | $67.4 million | $60.2 million | $189.6 million | $150.8 million |
| Gross profit / margin | $16.4 million / 24.4% | $13.9 million / 23.0% | $45.0 million / 23.7% | $33.1 million / 21.9% |
| Operating income / margin | $4.5 million / 6.6% | $4.9 million / 8.1% | $11.1 million / 5.9% | $8.4 million / 5.6% |
| Net income | $2.35 million | $2.21 million | $4.58 million | $3.84 million |
| Diluted EPS | $0.26 | $0.29 | $0.56 | $0.53 |
| Adjusted EBITDA | $6.25 million | $6.20 million | $16.55 million | $12.37 million |
Third-quarter revenue rose 12.0% year over year and nine-month revenue rose 25.7%. Gross margin improved, but quarterly operating income fell about 8% as SG&A and depreciation and amortization grew faster than gross profit. Nine-month net income increased about 19%.
- Segment trends: Third-quarter Multifamily revenue grew 34.2%, Professional grew 16.5%, and Commercial declined 5.1%. The company attributed Professional growth largely to the VTS acquisition; excluding VTS, Professional revenue declined, including lower billed hours in parts of the business. Multifamily growth reflected expansion outside Texas and higher billed hours and rates.
- Costs and margins: Quarterly SG&A rose 33.6%, attributed to VTS, increased headcount, commissions, bonuses, and growth-related costs. Quarterly gross margin improved to 24.4%, while operating margin declined to 6.6% from 8.1%.
- Interest and unusual items: Nine-month net interest expense increased 87.2%, primarily from amortization of contingent-consideration discounts and costs associated with repayment of subordinated debt. The company recorded a $404,000 debt-extinguishment loss in the first half; there was no such charge in the 2016 third quarter. The put-option fair-value item recorded in 2015 did not recur.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $7.1 million, up from $5.9 million. Management attributed the increase primarily to timing of receivables and accrued-payroll payments.
- Investing activities used $0.6 million, principally for capital expenditures; the prior-year period included $8.8 million for the D&W acquisition. Financing activities used $6.5 million, including $5.9 million of dividends and $3.5 million of contingent-consideration payments.
- Cash was zero at September 25, 2016. Current assets were $36.2 million and current liabilities were $19.6 million, implying working capital of approximately $16.6 million.
- Outstanding revolving borrowings were $19.3 million. The lender’s commitment increased from $25 million to $35 million in September 2016, subject to a borrowing base of 85% of eligible receivables. The revolver matures August 21, 2019, is secured by company assets, and bears variable interest. The company had no long-term debt outstanding at quarter-end.
- Contingent consideration totaled $9.0 million net of discount, including $4.1 million classified as current and estimated cash payments of $4.25 million in December 2016. The company reported compliance with its financial covenants at quarter-end.
- In June, the company issued 1.19 million shares at $14.00 per share, receiving $15.1 million net of offering costs, and used the proceeds to repay subordinated debt. The share count increased to 8.67 million from 7.39 million at December 2015. A $0.25-per-share dividend was declared in October for payment in November.
Outlook, risks, and other notable disclosures
Management stated that operating cash flow and revolver availability should cover normal working-capital needs for at least the next 12 months, including planned branch openings. No quantified revenue or earnings guidance was provided. Management cautioned that additional growth opportunities could require financing and that acceptable financing may not be available. Staffing working capital is sensitive to the timing gap between paying workers and collecting customer receivables.
Disclosed risks include availability and cost of workers’ compensation insurance, recruiting qualified temporary workers, labor and employment-law compliance, competition, acquisition integration, economic weakness in served markets, variable interest rates, and the effect of debt on funding and financing access. No material litigation was reported, and the filing stated there were no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective at a reasonable-assurance level, with no reported material change in internal control over financial reporting.
Important facts for investors to verify
- How much of revenue and earnings growth reflects acquired VTS operations versus organic growth, particularly in Professional.
- Whether Commercial’s quarterly revenue and billed-hour declines persist, and whether Multifamily expansion and margin gains continue.
- Receivables collection, working-capital needs, and available revolver capacity under the borrowing-base limit; cash was zero at quarter-end.
- Cash requirements and performance assumptions behind the $9.0 million contingent-consideration balance and near-term payment schedule.
- The sustainability of dividends and growth plans given debt service, variable-rate exposure, and potential need for additional financing.