TrueBlue, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. TrueBlue provides temporary staffing, recruitment process outsourcing (RPO), and managed workforce solutions. This unaudited quarterly report covers the 13 weeks ended September 23, 2016, and year-to-date results for the 39 weeks ended that date; comparisons are with the corresponding 2015 periods. Fiscal 2016 includes a 53rd week, with year-end expected January 1, 2017.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Revenue | $697.1 million | $683.9 million | $2,015.7 million | $1,884.9 million |
| Gross profit / margin | $178.4 million / 25.6% | $168.9 million / 24.7% | $498.8 million / 24.7% | $450.7 million / 23.9% |
| Operating income (loss) | $27.8 million | $33.3 million | $(40.5) million | $64.7 million |
| Net income (loss) | $23.4 million | $20.1 million | $(33.3) million | $43.1 million |
| Diluted EPS | $0.56 | $0.48 | $(0.80) | $1.04 |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $213.2 million | $120.3 million |
- Q3 operating margin was 4.0%, versus 4.9% a year earlier; net margin was 3.4%, versus 2.9%. Q3 operating income included a $4.3 million non-cash trade-name impairment charge.
- The year-to-date operating loss included $103.5 million of non-cash goodwill and intangible impairment charges. Excluding the impairment, management reported year-to-date net income of $48.9 million.
- Year-to-date operating cash flow increased by $92.9 million year over year. The company attributed the accounts-receivable cash benefit in part to slower seasonal growth and improved collections; cash flow also included substantial non-cash impairment and other adjustments.
- At September 23, cash and cash equivalents were $24.8 million; restricted cash and investments were $213.0 million, principally workers’ compensation collateral. Total debt was $139.4 million, down from $245.7 million at December 25, 2015. The revolver had $154.6 million available; the company reported covenant compliance and $174.3 million of excess liquidity, including cash under control agreements.
Material changes versus comparable periods
- Q3 revenue rose 1.9%, but organic revenue declined approximately 6.2%; excluding Amazon, organic revenue declined 3.0%. For the 39-week period, revenue rose 6.9%, while organic revenue declined approximately 1.7%; excluding Amazon, organic revenue grew approximately 0.7%.
- Acquisitions supported reported growth. SIMOS contributed $39.6 million of Q3 revenue and $112.5 million year to date; the Aon Hewitt RPO business contributed $15.9 million and $49.4 million, respectively.
- Q3 gross margin improved 0.9 percentage points, reflecting acquired businesses and favorable mix. SG&A rose to 19.3% of revenue from 18.3%, while management said cost controls were implemented as organic revenue weakened.
- Staffing Services Q3 revenue declined 0.6% and operating income fell to $38.7 million from $50.3 million. Managed Services revenue grew 62.9%, largely from the RPO acquisition; organic growth was 4.8%.
Outlook, commentary, and risks
- Management cited softening demand, particularly from larger national customers, and declines in retail, transportation, manufacturing, and service-based industries. It expects continued pressure on organic revenue and gross margins into fiscal 2017, and plans to continue cost controls and disciplined pricing.
- Amazon, TrueBlue’s largest customer, reduced its use of TrueBlue’s U.S. warehouse contingent-labor services and notified the company it would no longer use its services to expand delivery stations. Management expected minimal, if any, delivery-station revenue in Q4 2016 and beyond; it planned to continue serving Amazon’s Canadian fulfillment centers. The filing estimated approximately $30 million of Amazon revenue for the remainder of 2016 and approximately $30 million for 2017 in its impairment assumptions.
- The company recorded year-to-date impairments tied chiefly to reduced Amazon business, weaker PlaneTechs outlook, and underperformance in hrX; Q3 also included a $4.3 million brand impairment related to consolidating staffing brands as PeopleReady. The Q3 Staff Management | SMX impairment test showed estimated fair value 20% above carrying value, but management identified continued impairment sensitivity.
- Workers’ compensation reserves were $278.2 million, net of discount, and collateral commitments totaled $220.3 million. Reserves depend on actuarial estimates, claims experience, medical costs, and other assumptions; management noted that favorable reserve adjustments were diminishing. The company also disclosed that some former insurers in liquidation had not paid excess claims and that receivables from them were fully reserved.
- Management said ordinary-course legal proceedings were not expected to materially affect results or financial condition. The filing identifies economic cyclicality, customer concentration, wage and regulatory costs, workers’ compensation, liquidity and covenant risks, competition, acquisition integration, and technology and cybersecurity as material risks.
Most important facts for investors to verify
- Whether Amazon-related revenue declines and the expected remaining customer revenue track management’s estimates, and whether further customer reductions affect impairment tests.
- Whether organic revenue stabilizes and cost controls and pricing can protect margins amid weak demand and wage pressure.
- Whether workers’ compensation reserve development, collateral needs, and insurer recoveries differ materially from current estimates.
- Whether cash generation, borrowing-base availability, and covenant compliance remain adequate as operating trends and receivables change.
- Whether SIMOS and Aon Hewitt RPO meet expectations, including final acquisition accounting and the SIMOS contingent payment, currently valued at $19.8 million and dependent on performance goals.