TrueBlue, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended January 1, 2017. This was a 53-week year; FY2015 had 52 weeks. The filing is an annual report, not a standalone fourth-quarter report. TrueBlue provides contingent staffing, on-site workforce management and recruitment process outsourcing (RPO). In 2016, it connected more than 815,000 people with work for approximately 124,000 businesses and reorganized reporting into PeopleReady, PeopleManagement and PeopleScout.
Key financial results
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $2.751 billion | $2.696 billion |
| Gross profit / margin | $679.7 million / 24.7% | $635.7 million / 23.6% |
| SG&A | $546.5 million / 19.9% of revenue | $496.0 million / 18.4% |
| Operating income (loss) | $(17.0) million | $97.8 million |
| Net income (loss) | $(15.3) million; $(0.37) diluted EPS | $71.2 million; $1.71 diluted EPS |
| Cash from operations | $261.8 million | $72.1 million |
| Cash and cash equivalents at year-end | $35.0 million | $29.8 million |
| Total debt at year-end | $137.6 million | $245.7 million |
| Working capital | $176.7 million | $315.0 million |
FY2016 included a $103.5 million non-cash goodwill and intangible-asset impairment charge. Excluding that charge, management reported operating income of approximately $87 million and estimated net income of $67 million. Operating cash flow benefited substantially from a $112.8 million reduction in accounts receivable; the filing attributes this primarily to lower revenue from the largest customer and improved collections. Capital expenditures were $29.0 million, and cash used in investing activities was $143.2 million.
Liquidity included $35 million of cash and approximately $135.6 million of additional revolving-credit availability (about $171 million combined, as presented by management). Restricted cash and investments of $231.2 million principally collateralize workers’ compensation obligations and are not ordinary available cash. The revolver matures in 2019; the company reported compliance with its covenants.
Material changes versus FY2015
- Revenue rose 2.0%, but organic revenue declined approximately 5.8%. The extra fiscal week contributed $34 million of revenue; excluding the largest customer and that week, organic revenue was essentially unchanged.
- The largest customer, Amazon, substantially brought warehouse contingent-labor recruitment and management in-house. Its revenue fell $183 million, or 51.7%, year over year, and represented 6.2% of FY2016 company revenue versus 13.1% in FY2015.
- Acquisitions partly offset the customer decline: SIMOS contributed $145 million in revenue through its first anniversary, and the Aon Hewitt RPO business contributed about $67 million. PeopleScout revenue rose 72.9%, largely reflecting the Aon acquisition; PeopleReady revenue was nearly flat, while PeopleManagement revenue fell 2.6%.
- Gross margin improved 1.1 percentage points, primarily from higher-margin acquisitions and a more favorable revenue mix as the largest customer’s lower-margin business declined. SG&A rose 10.2% and increased as a share of revenue, despite cost-control actions.
- The impairment charge drove the reported operating and net losses. It reflected reduced customer-related outlook as well as weaker expectations for PlaneTechs and hrX; additional trade-name impairment related to consolidation under the PeopleReady brand.
- Total debt declined to $137.6 million from $245.7 million, mainly reflecting net repayments on the revolving facility. Working capital also decreased materially.
Outlook, risks and other notable items
- FY2017 outlook: Management cited limited visibility and expected possible further pressure on organic revenue and gross margin amid tepid economic conditions and customer cost-reduction demands. Priorities were organic revenue and gross-profit growth, disciplined pricing, and operating-cost leverage. Management expected the full benefit of 2016 cost reductions in 2017.
- Management said SIMOS and the Aon Hewitt RPO acquisition were performing above initial expectations and anticipated continued RPO growth. It also planned continued investment in online and mobile technology.
- Principal risks include economic and seasonal demand volatility, customer concentration and contract termination or volume reductions, wage and benefit inflation and pricing pressure, difficulty recruiting workers, regulation and employment-related claims, and competition. The company is substantially self-insured for workers’ compensation and depends on insurance and collateral capacity; claim estimates and required collateral may change.
- Workers’ compensation reserves were $277.4 million, with total collateral commitments of $235.8 million. Management cautioned that favorable reserve adjustments had been diminishing. Some former insurers in liquidation had not paid excess claims; the company recorded valuation allowances against related insurance receivables.
- SIMOS contingent consideration had a year-end fair value of $21.6 million and was payable in June 2017; contractual disclosure described up to $22.5 million. Total contractual cash obligations were $436.4 million, including workers’ compensation claims and debt.
- The company declared no cash dividends. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the decline in Amazon-related work has stabilized, and how much of the lost volume can be replaced by other customers and services.
- Whether reported revenue growth converts into sustained organic growth, particularly after accounting for acquisitions and the 53rd week.
- Whether gross-margin improvement persists despite wage, benefit and workers’ compensation costs and customers’ resistance to price increases.
- Whether FY2017 cost savings offset lower revenue and support operating margins, especially in PeopleManagement.
- Whether cash generation remains strong after the FY2016 accounts-receivable release, and whether liquidity remains adequate as workers’ compensation collateral requirements rise.
- Whether SIMOS and PeopleScout meet expectations and avoid further impairment, given the limited fair-value cushion disclosed for those reporting units.
- The final SIMOS contingent-consideration payment and the development of workers’ compensation reserves, insurance recoverables and legal or regulatory exposures.