TrueBlue, Inc. — Q2 2016 Form 10-Q
Reporting period: Thirteen weeks ended June 24, 2016; year-to-date comparisons cover the twenty-six weeks ended June 24, 2016. Amounts below are in U.S. dollars.
Business context
TrueBlue provides temporary staffing, recruitment process outsourcing (RPO), and managed-service solutions. It acquired Aon Hewitt’s RPO business on January 4, 2016, for approximately $71.9 million; the business contributed $17.5 million of Q2 revenue and $33.5 million year to date. SIMOS, acquired in December 2015, contributed $36.8 million of Q2 revenue and $72.9 million year to date.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $672.6 million | $627.7 million | $1,318.6 million | $1,201.0 million |
| Gross profit / margin | $169.9 million / 25.3% | $152.0 million / 24.2% | $320.4 million / 24.3% | $281.8 million / 23.5% |
| Operating income (loss) | $(76.8) million | $23.7 million | $(68.2) million | $31.4 million |
| Net income (loss) | $(63.7) million | $17.3 million | $(56.8) million | $23.0 million |
| Diluted EPS | $(1.53) | $0.42 | $(1.36) | $0.55 |
- Q2 revenue grew 7.2%; first-half revenue grew 9.8%, primarily reflecting acquisitions. Q2 organic revenue declined approximately 1.5% company-wide; first-half organic revenue increased approximately 0.9%.
- Q2 gross margin improved by 1.1 percentage points, helped by acquired businesses and revenue mix. Management also cited pricing pressure from higher worker wages and minimum wages, partly offset by disciplined pricing.
- Reported results include a non-cash $99.3 million goodwill and intangible-asset impairment charge. Excluding that charge, management reported Q2 operating income of $22.4 million (3.3% of revenue) and net income of $15.9 million, or $0.38 per diluted share, versus $23.7 million operating income and $17.3 million net income in Q2 2015.
- Q2 SG&A rose to $135.8 million from $117.9 million; SG&A was 20.2% of revenue versus 18.8%. First-half SG&A was $266.4 million versus $229.5 million. Acquisitions and prior-year staffing/recruiting investments contributed to the increase; the company said it had curtailed investments and was managing costs.
- First-half operating cash flow was $184.3 million, versus $106.7 million. The filing attributes the increase in part to seasonal accounts-receivable reductions and improved collections; cash flow also reflects the non-cash impairment add-back. Investing cash outflow was $97.2 million, including the $71.9 million Aon RPO acquisition. Financing cash outflow was $96.8 million, mainly reflecting $94.2 million of net revolving-credit repayments.
- At June 24, cash was $21.8 million, total debt was $150.3 million (down from $245.7 million at December 25, 2015), and $126.0 million was available under the revolving facility. Management reported $148.1 million of additional liquidity including qualifying cash, against a $37.5 million minimum excess-liquidity requirement; the company said it was in compliance with covenants.
- Restricted cash and investments were $204.4 million, principally workers’ compensation collateral, and are not equivalent to unrestricted operating cash. Workers’ compensation reserves totaled $274.1 million. Current contingent consideration related to SIMOS was $19.3 million.
Material changes, outlook, and risks
- Largest customer: Amazon notified TrueBlue in April that it would reduce contingent labor at U.S. warehouse fulfillment centers and realign vendors. TrueBlue estimated this change would reduce revenue by approximately $125 million for the remainder of 2016 versus the prior year. Amazon remained a customer, including for delivery-station expansion.
- The Amazon change was the principal driver of $67.1 million of impairment charges for Staff Management | SMX, including goodwill, customer relationships, and trade name. Further impairment charges of $17.0 million for PlaneTechs and $15.2 million for hrX brought the total to $99.3 million. PlaneTechs revenue had fallen more than 30% year to date; hrX’s standalone applicant-tracking software sales and prospects had weakened.
- Management expected continued pressure on organic revenue and gross margin amid sluggish economic conditions, while prioritizing organic growth, pricing discipline, and cost control. It highlighted growth opportunities in SIMOS and PeopleScout, continued technology investment, and a strong PeopleScout/RPO opportunity pipeline. No specific consolidated full-year revenue or EPS guidance is provided in the supplied filing text.
- Other significant risks include customer concentration, economic and industry demand changes, wage and regulatory cost increases, workers’ compensation claims and collateral requirements, acquisition integration and impairment risk, debt and borrowing-base availability, competition, and technology/cybersecurity interruptions. The company noted that favorable workers’ compensation reserve adjustments were diminishing.
- Legal proceedings arising in the ordinary course were not expected by management to materially affect results or financial condition. The filing reported no material changes to contractual obligations outside the ordinary course, and no material subsequent events.
Key facts for investors to verify
- Amazon’s expected revenue reduction of approximately $125 million for the rest of 2016, and the customer’s evolving scope of work and share of revenue. The filing gives differing Amazon revenue/concentration figures in different sections, including $106 million and 8.0% or 8.7% of first-half revenue; reconcile these disclosures.
- Whether operating performance excluding the impairment is sustainable: Q2 adjusted operating income and net income were below the prior-year reported amounts, while acquisitions contributed materially to revenue and gross margin.
- Further impairment sensitivity: SIMOS and PeopleScout fair values exceeded carrying values by only approximately 9% and 12%, respectively; the filing identifies modest adverse changes in discount rates, growth, or margins that could trigger impairment testing.
- Availability and cost of liquidity, including the asset-based borrowing limits, covenant headroom, and workers’ compensation collateral demands; distinguish restricted collateral from cash available for general use.
- Integration and final purchase accounting for the Aon Hewitt RPO acquisition, and the potential SIMOS contingent payment of up to $22.5 million depending on fiscal 2016 performance.