TrueBlue, Inc. — Q3 2018 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 30, 2018; comparable periods ended October 1, 2017. TrueBlue provides workforce solutions through PeopleReady, PeopleManagement and PeopleScout. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Revenue | $680.4 | $660.8 | $1,849.1 | $1,839.1 |
| Gross profit / margin | $184.3 / 27.1% | $172.0 / 26.0% | $493.2 / 26.7% | $466.7 / 25.4% |
| SG&A | $145.4 | $131.6 | $405.4 | $378.2 |
| Operating income / margin | $28.4 / 4.2% | $29.3 / 4.4% | $57.0 / 3.1% | $53.9 / 2.9% |
| Net income | $24.4 | $21.2 | $50.9 | $39.0 |
| Diluted EPS | $0.61 | $0.51 | $1.26 | $0.94 |
| Operating cash flow | Not separately provided | Not separately provided | $68.6 | $80.8 |
Q3 revenue rose 3.0%; net income increased about 15% and diluted EPS about 20%, while operating income edged down. For the 39-week period, revenue was up 0.5%, operating income up about 6%, and net income up about 30%. Higher gross margin reflected lower workers’ compensation costs and a greater contribution from higher-margin PeopleScout; increased SG&A absorbed much of the improvement. Q3 SG&A included TMP operating and integration costs, cloud-system investment, and accelerated CEO-transition stock compensation.
Segment trends
- PeopleReady: Q3 revenue $428.7 million, up 3.3%; segment profit $31.2 million, or 7.3% of revenue. Broad-based growth and lower workers’ compensation costs supported performance.
- PeopleManagement: Q3 revenue $181.2 million, down 7.9%; segment profit $6.2 million, down 11.1%. The PlaneTechs divestiture and loss of Amazon’s Canadian business were key factors.
- PeopleScout: Q3 revenue $70.5 million, up 44.0%; segment profit $12.5 million. TMP contributed materially to revenue growth; its pass-through media costs lowered segment margin.
Financial position and liquidity
- At September 30, 2018, cash and cash equivalents were $34.7 million; restricted cash and investments were $240.6 million, primarily collateral for workers’ compensation obligations.
- Total debt was $107.9 million, all drawn under the revolving credit facility. The company reported $185.2 million of remaining availability, or approximately $220 million of total liquidity including cash. It was in compliance with facility covenants.
- Current assets were $453.1 million and current liabilities $223.7 million. Accounts receivable, net, was $384.9 million; its doubtful-account allowance was $8.1 million, versus $4.3 million at year-end 2017.
- Operating cash flow for the first 39 weeks fell to $68.6 million from $80.8 million, despite higher net income. Investing cash use was $17.4 million and financing cash use was $37.1 million. Cash flow included $22.7 million net cash paid for TMP, $10.4 million proceeds from the PlaneTechs divestiture, and $24.8 million of share repurchases.
- Workers’ compensation claims reserves totaled $265.9 million, net of discount. The company is substantially self-insured below a typical $2 million per-occurrence deductible and collateral commitments totaled $241.8 million.
Material changes, outlook and risks
- TrueBlue acquired UK-based recruitment process outsourcing provider TMP on June 12 for $22.7 million net of acquired cash. TMP contributed $17.9 million of revenue through September 30. PlaneTechs was sold effective March 12; the company recorded a preliminary $0.7 million pretax gain.
- Management expected Q4 2018 revenue to decline approximately 2%–4% year over year, reflecting the absence of prior-year energy and Hurricane Irma cleanup work and Amazon Canada revenue. No specific earnings or EPS guidance was provided.
- Management cited limited visibility into demand, economic sensitivity, tight labor markets and wage pressure. It expects to pass higher wages and payroll costs through to clients, while prioritizing organic growth, margin improvement, cost management and investment in Jobstack and Affinix technology. Management expects PeopleScout growth to outpace other segments.
- Workers’ compensation results benefited from favorable reserve adjustments; management warned these benefits may diminish and depend on continued reductions in accident rates and claim costs. Collateral needs may grow with the business.
- Other significant risks include client concentration and contract flexibility, including the Amazon Canada loss; competition and candidate shortages; regulatory, employment and tax exposures; technology and cybersecurity risks; and economic volatility. The company reported no material expected effect from ordinary-course legal proceedings.
- The company adopted revenue-recognition guidance in 2018 with no material financial-statement impact. It expected the lease-accounting standard, effective in Q1 2019, to materially increase balance-sheet assets and liabilities through recognition of operating lease right-of-use assets and liabilities.
Investor verification priorities
- Track whether Q4 revenue falls within management’s 2%–4% decline outlook and separate underlying trends from prior-year comparison effects.
- Assess PeopleManagement performance after the PlaneTechs sale and Amazon Canada loss, and PeopleScout’s organic growth and TMP integration results.
- Verify whether gross-margin improvement persists as favorable workers’ compensation reserve adjustments diminish, and whether higher labor costs can be passed through.
- Monitor operating cash conversion, receivables and credit-loss allowance, workers’ compensation reserves and collateral demands, and revolver usage and covenant headroom.
- Review share repurchases against liquidity and investment needs; approximately $67.8 million remained under the authorization at quarter-end.