TrueBlue, Inc. — Q1 2020 Form 10-Q
Business context and period. TrueBlue provides contingent staffing, on-site workforce solutions, commercial driver staffing and recruitment outsourcing through PeopleReady, PeopleManagement and PeopleScout. This report covers the 13 weeks ended March 29, 2020; comparisons are with the 13 weeks ended March 31, 2019. The quarter was sharply affected by COVID-19, particularly in March.
Financial results and liquidity
| Metric | Q1 2020 | Prior year |
|---|---|---|
| Revenue | $494.3 million | $552.4 million |
| Gross profit / margin | $126.2 million / 25.5% | $146.7 million / 26.6% |
| SG&A expense | $117.4 million (23.7% of revenue) | $128.0 million (23.2%) |
| Operating income (loss) | $(175.5) million | $8.8 million |
| Net income (loss) | $(150.5) million; $(4.04) per diluted share | $8.3 million; $0.21 per diluted share |
| Operating cash flow | $27.6 million | $21.5 million |
- The operating loss included a $175.2 million noncash goodwill and intangible-asset impairment charge: $140.5 million for goodwill and $34.7 million for client relationships. The charge did not affect current cash or banking covenants. After tax, the impairment reduced earnings by approximately $152 million.
- Cash and cash equivalents were $265.3 million at quarter-end, versus $37.6 million at December 29, 2019. Long-term debt rose to $293.5 million from $37.1 million, principally after drawing $256.4 million net on the revolving facility. Cash less debt was approximately $28 million; $218.9 million of restricted cash and investments was separately reported.
- The $300 million revolver had $293.5 million drawn and approximately $0.3 million available after letters of credit. Its maturity was extended to March 16, 2025; an increase to $450 million requires lender approval. The company reported compliance at quarter-end, with leverage coverage of 2.7 against a maximum below 3.0 and fixed-charge coverage of 40.8 against a minimum of 1.25.
- Financing cash flow was $202.1 million, including the revolver draw and $52.3 million of share repurchases. Investing cash flow was $(0.7) million, including $7.0 million of capital expenditures.
Changes versus the prior year
- Revenue fell 10.5%. PeopleReady revenue declined 8.4% to $299.3 million; PeopleManagement declined 10.4% to $141.6 million; and PeopleScout declined 20.9% to $53.3 million. In the final week of the quarter, PeopleReady and PeopleManagement revenue were down 32% and 30% year over year, respectively.
- Gross margin decreased 110 basis points. Management cited lower volume and unfavorable client mix, including weakness in higher-margin PeopleScout work, partly offset by lower estimated health-care costs and other items.
- Segment profit weakened across all three businesses: PeopleReady was $7.7 million versus $11.5 million; PeopleManagement recorded a $0.3 million loss versus $2.3 million profit; and PeopleScout earned $2.5 million versus $10.4 million.
- Accounts receivable fell to $293.0 million from $342.3 million, and the allowance for doubtful accounts rose to $6.4 million from $4.3 million. Bad-debt expense was 0.6% of revenue versus 0.2%.
- Shareholders’ equity declined to $415.9 million from $626.0 million, reflecting the net loss, repurchases and foreign-currency translation losses.
Outlook, risks and unusual items
- Management expects COVID-19 and economic weakness to materially pressure revenue, profitability, cash flows and liquidity, but says visibility is limited and provides no specific revenue or earnings forecast. It estimates revenue would decline about 9% with flat GDP and by roughly seven additional percentage points for each additional percentage-point decline in year-over-year GDP.
- Management plans $95–$105 million of operating expense reductions in fiscal 2020 and to cut planned cash capital expenditures by about $10 million from $32 million. It suspended further share repurchases. On April 6, after quarter-end, the company announced 645 employee terminations and about 100 furloughs, expecting approximately $8 million of severance charges in Q2.
- The company expects it may fail one or more revolver financial covenants within the next 12 months if significant revenue declines continue. It is seeking a lender amendment or waiver. If unsuccessful, management plans further cost reductions, elimination of nonessential capital spending, working-capital actions and asset sales. Management states that adequate cash flow depends on executing those plans; failure to obtain covenant relief could trigger default and accelerated repayment. The statements nevertheless use the going-concern basis.
- The company estimates that CARES Act deferral of employer Social Security taxes could defer approximately $50 million of cash payments, with repayment scheduled in 2021 and 2022. This is a deferral, not a permanent saving.
- Workers’ compensation reserves were $253.5 million, with $218.7 million of collateral commitments. The company warns collateral requirements could rise. Its business is substantially self-insured below a typical $2 million per-occurrence threshold.
- Management cited further impairment risk if demand or results deteriorate beyond its assumptions. The quarter’s impairment depended on judgmental forecasts and valuation assumptions, including discount rates of approximately 11.5%–12.0% for goodwill and 12.0% for client relationships.
- Other stated risks include client payment delays, higher days sales outstanding, customer concentration within some operating segments, and the uncertain duration and severity of the pandemic. Management reported no legal proceedings expected to have a material effect and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether lenders granted covenant amendments or waivers, and the company’s subsequent covenant headroom, borrowing availability and liquidity.
- Actual revenue, margins, client demand and collections after quarter-end, especially for PeopleScout and COVID-19-affected clients.
- Delivery and timing of the $95–$105 million cost-reduction plan, the Q2 workforce-reduction charge and the expected capital-expenditure cuts.
- Whether the $50 million payroll-tax deferral estimate was realized and how repayment obligations affect later cash flows.
- Any further goodwill or intangible impairment, and changes in workers’ compensation reserves or collateral requirements.
- Final settlement of the $40 million accelerated share repurchase agreement, which was scheduled to conclude no later than July 2, 2020.