TrueBlue, Inc. — Q3 2017 Form 10-Q
Business and period: TrueBlue provides staffing and workforce solutions through PeopleReady, PeopleManagement and PeopleScout. The 13-week quarter ended October 1, 2017; year-to-date figures cover 39 weeks and are compared with the corresponding 2016 periods. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Revenue | $660.8m | $697.1m | $1,839.1m | $2,015.7m |
| Gross profit / margin | $172.0m / 26.0% | $178.4m / 25.6% | $466.7m / 25.4% | $498.8m / 24.7% |
| Operating income (loss) | $29.3m | $27.8m | $53.9m | $(40.5)m |
| Net income (loss) | $21.2m | $23.4m | $39.0m | $(33.3)m |
| Diluted EPS | $0.51 | $0.56 | $0.94 | $(0.80) |
| Operating cash flow | — | $80.6m | $213.2m |
- Q3 revenue fell 5.2% year over year; excluding the former largest customer, management reported a 2.4% decline. Year-to-date revenue fell 8.8%, or 3.6% excluding that customer.
- Q3 gross margin rose 0.4 percentage points, primarily from a more favorable customer mix and PeopleScout recruiting efficiencies. Operating margin was 4.4%, versus 4.0%; excluding the prior-year impairment, it was 4.4% versus 4.6%.
- Q3 net income declined despite higher operating income, principally reflecting a 27.0% effective tax rate versus 12.9% in the prior-year quarter. Year-to-date tax rates were 27.6% and 22.9%, respectively.
- Year-to-date operating cash flow fell to $80.6m from $213.2m. Accounts receivable used $34.2m of cash, compared with a $102.7m source in the prior-year period; the prior year also included substantial noncash impairment and deferred-tax adjustments.
- At October 1, cash was $35.1m and additional revolver availability was $118m, for reported total liquidity of $153m. The $300m asset-backed revolving facility matures June 30, 2019; the company reported compliance with its covenants. Debt totaled $134.8m, including $23.4m current and $111.4m long-term.
- Restricted cash and investments were $244.2m, primarily collateral for workers’ compensation. The net workers’ compensation reserve was $279.3m. Total collateral commitments, including letters of credit and surety bonds, were $249.6m.
Material changes and segment performance
- PeopleReady: Q3 revenue declined 4.8% to $415.0m; segment EBITDA was $28.6m (6.9% of revenue), down from $34.1m (7.8%). Weakness in residential construction and manufacturing was partly offset by hurricane-related demand and improvement in service, hospitality and retail work.
- PeopleManagement: Q3 revenue declined 9.2% to $196.8m, largely reflecting the former largest customer’s insourcing of staffing. That customer’s revenue fell $20m, or 64.3%, to $11m; excluding it, segment revenue grew 0.3%. Segment EBITDA increased to $6.9m from $3.5m.
- PeopleScout: Q3 revenue grew 10.0% to $49.0m, driven by new clients and expanded work with existing clients. Segment EBITDA rose to $10.3m from $8.4m.
- Year-to-date net income returned to profit from a prior-year loss that included $103.5m of goodwill and intangible impairment charges. No impairment charge was recorded in the current period; the company’s 2017 annual tests found reporting-unit and trade-name fair values above carrying values.
- Shares outstanding declined to 41.339m from 42.171m at January 1, 2017. The company completed its prior $75m repurchase program, repurchasing 4.8m shares at an average $15.52, and authorized a new $100m program on September 15; no purchases under the new program were reported through quarter-end.
Outlook, commentary and risks
- Management reported improving monthly revenue trends: the year-over-year decline narrowed to 2.5% in September from 8.7% in June, with improvement across segments. It cautioned that visibility into future demand is limited and provided no numeric revenue or earnings guidance.
- Management expects productivity-based PeopleManagement solutions and PeopleScout to support growth, and described ongoing cross-selling, technology investment and JobStack app rollout. Worker functionality was live in about 450 PeopleReady branches, approximately 70% of the network.
- Accelerating wage growth and minimum-wage increases require higher bill rates; management said its pricing approach supports long-term returns but affects near-term revenue trends. PeopleReady results also remained affected by temporary disruption from consolidating legacy brands.
- Key risks include economic and customer-demand volatility, reduced business from major customers, difficulty attracting workers and passing through labor costs, competition and pricing pressure, and technology, cybersecurity and execution risks. Workers’ compensation exposure is substantial: the company is largely self-insured below a $2m per-occurrence deductible, and collateral needs can rise independently of recorded reserves.
- Some former workers’ compensation insurers are in liquidation; the company has valuation allowances against substantially all related insurance receivables. Favorable reserve adjustments may diminish, and ultimate claims costs depend on actuarial estimates and claim trends.
- Management said ordinary-course legal proceedings were not expected to materially affect results or financial condition. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether improving monthly revenue trends continued, particularly in PeopleReady and after excluding the former largest customer.
- Customer concentration and the pace and profitability of PeopleManagement replacement business following customer insourcing.
- Whether wage inflation can be passed through to customers without further pressure on revenue, margins or staffing volumes.
- Receivables, days-sales-outstanding and operating cash flow trends, alongside the company’s seasonal working-capital pattern.
- Workers’ compensation reserve adequacy, collateral requirements, insurer collectability and the potential for less favorable claims development.
- Revolver borrowing availability and covenant compliance, and whether the new repurchase authorization is used while liquidity and collateral needs remain significant.
- Execution and adoption of the PeopleReady consolidation, JobStack rollout, cross-selling initiatives and PeopleScout growth plans.