TrueBlue, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017 (52 weeks), compared with fiscal 2016 (53 weeks). The nine fewer days in 2017 affected year-over-year comparisons. The filing is an annual report; it also provides unaudited fourth-quarter results.
Business context and financial performance
TrueBlue provides contingent staffing, on-site workforce management, recruitment process outsourcing (RPO) and managed service provider solutions through PeopleReady, PeopleManagement and PeopleScout. In 2017, it connected approximately 740,000 people with work and served approximately 108,000 customers.
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $2,508.8 million | $2,750.6 million |
| Gross profit / margin | $634.5 million / 25.3% | $679.7 million / 24.7% |
| SG&A expense / revenue | $510.8 million / 20.4% | $546.5 million / 19.9% |
| Operating income (loss) / margin | $77.6 million / 3.1% | $(17.0) million / (0.6)% |
| Net income (loss) | $55.5 million | $(15.3) million |
| Diluted EPS | $1.34 | $(0.37) |
| Cash from operations | $99.9 million | $261.8 million |
| Capital expenditures | $22.0 million | $29.0 million |
FY2016 included a $103.5 million goodwill and intangible-asset impairment charge. Excluding that charge, FY2016 operating income was $86.5 million and net income was approximately $67 million; therefore, the return to reported profitability in 2017 overstates the improvement in underlying operations. FY2017 revenue fell 8.8%; operating income was also lower than FY2016 operating income excluding impairment.
| Segment revenue | FY2017 | Year-over-year change |
|---|---|---|
| PeopleReady | $1,511.4 million | (7.2)% |
| PeopleManagement | $807.3 million | (14.2)% |
| PeopleScout | $190.1 million | 5.2% |
Fourth-quarter FY2017 revenue was $669.6 million and net income was $16.4 million, compared with $735.0 million and $18.1 million, respectively, in fourth-quarter FY2016.
Liquidity, debt and capital
- Cash and cash equivalents were $28.8 million; working capital was $215.9 million.
- Total debt was $118.8 million: $95.9 million drawn on the revolving facility and $22.9 million on the term loan. The revolving facility had $117.4 million available at year-end and matures June 2019. The company reported compliance with facility and term-loan covenants.
- Management reported total liquidity of approximately $146 million, comprising cash and available revolver capacity. Separately, $239.2 million of restricted cash and investments principally collateralized workers’ compensation obligations and is not ordinary operating cash.
- Operating cash flow declined to $99.9 million from $261.8 million, including a $28.5 million cash use from increased accounts receivable. Investing cash outflow was $30.9 million; financing cash outflow was $75.3 million.
- FY2017 share repurchases totaled $36.7 million, including completion of the prior program and $7.3 million under a new $100 million authorization. No cash dividend had been declared.
Changes, outlook and risks
- Revenue drivers: PeopleManagement revenue from former largest customer Amazon fell $118 million (68.8%) to $53 million as Amazon insourced contingent-labor functions. The remaining company revenue decline was primarily lower PeopleReady volume, partly offset by PeopleScout growth. Amazon represented 2.2% of total revenue in 2017; the ten largest customers represented 17.6%.
- Margins and costs: Gross margin improved on a more favorable mix, including less lower-margin Amazon business, and PeopleScout recruiting efficiencies. SG&A fell by $36 million, reflecting fewer fiscal days, prior-year integration and realignment costs, and cost controls; SG&A as a share of revenue nevertheless rose as revenue declined faster than expenses. PeopleReady EBITDA margin decreased to 5.2% from 6.2%; PeopleManagement returned to positive segment EBITDA, while PeopleScout EBITDA margin rose to 20.6%.
- Management outlook: For FY2018, priorities include organic revenue and gross-profit growth, disciplined pricing to pass through higher wages and payroll costs, cost leverage and technology investment. Management expects PeopleScout revenue growth to exceed that of the other segments. It estimated an effective tax rate of approximately 16% in FY2018 and FY2019 under the Tax Act; the rate could return to approximately 28% if the Work Opportunity Tax Credit is not extended beyond 2019. Management cautioned that demand visibility is limited.
- Key risks and contingencies: Demand is cyclical and sensitive to economic conditions, customer project needs and seasonal patterns. Other material risks include worker shortages and wage inflation, intense price competition, employment-law and regulatory exposure, workers’ compensation claims and collateral needs, customer reductions, cybersecurity and systems disruption, and debt/covenant and refinancing risk. Workers’ compensation reserves were $274.3 million; a 5% change in key reserve assumptions could change expense by approximately $4 million. The company stated that ordinary-course legal proceedings were not expected to materially affect results or financial condition.
- Unusual and control matters: The Tax Act resulted in $2.5 million of additional tax expense in 2017; the company noted possible adjustments after completing its 2017 tax return. A material weakness involving investigation, communication and escalation of certain employee hotline reports was identified and remediated during 2017. Management and Deloitte concluded internal control over financial reporting was effective at year-end; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether revenue and margins continue improving after the Amazon insourcing impact and the 2017 52-week comparison effect.
- Whether PeopleReady demand, especially in manufacturing and retail, recovers and PeopleScout growth converts into sustained profit and cash generation.
- Whether receivables, collections and operating cash flow normalize after the 2017 increase in days sales outstanding.
- Whether workers’ compensation claims, collateral requirements and insurance recoveries remain manageable, given substantial self-insurance exposure.
- Whether the projected lower tax rate is sustained and the WOTC and Tax Act estimates require adjustment.
- Whether liquidity, covenant compliance and refinancing plans remain adequate ahead of the revolving facility’s June 2019 maturity.