TrueBlue, Inc. — Q2 2017 Form 10-Q
Reporting period: 13 weeks ended July 2, 2017; first-half results cover 26 weeks. Comparisons are with the corresponding 2016 periods. TrueBlue provides workforce solutions through PeopleReady, PeopleManagement, and PeopleScout.
Financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $610.1m | $672.6m | $1,178.4m | $1,318.6m |
| Gross profit / margin | $155.3m / 25.5% | $169.9m / 25.3% | $294.7m / 25.0% | $320.4m / 24.3% |
| Operating income (loss) | $18.2m | $(76.8)m | $24.7m | $(68.2)m |
| Net income (loss) | $13.1m | $(63.7)m | $17.8m | $(56.8)m |
| Diluted EPS | $0.31 | $(1.53) | $0.43 | $(1.36) |
- Q2 operating and net margins were approximately 3.0% and 2.2%; first-half margins were approximately 2.1% and 1.5%.
- Q2 SG&A was $124.8m, or 20.4% of revenue, versus $135.8m, or 20.2%, a year earlier. First-half SG&A was $246.6m, or 20.9%, versus $266.4m, or 20.2%.
- Operating cash flow was $64.1m in the first half, compared with $184.3m in 2016. Capital expenditures were $9.1m; operating cash flow less capex was approximately $54.9m. Cash and cash equivalents ended at $29.1m, down from $35.0m at year-end.
- Debt totaled approximately $111.2m ($24.0m current and $87.2m long-term), compared with $137.6m at January 1, 2017. The company reported $128m available under its revolving facility, for stated total liquidity of $157m. Restricted cash and investments of $229.9m primarily secure workers’ compensation obligations and are not equivalent to unrestricted liquidity.
Changes and segment performance
- Revenue declined 9.3% in Q2 and 10.6% in the first half. Excluding the former largest customer, management reported declines of 5.2% and 4.3%, respectively. That customer’s insourcing of warehouse staffing continued to weigh on results.
- Q2 segment revenue: PeopleReady $370.7m, down 8.8%; PeopleManagement $192.9m, down 12.1%; and PeopleScout $46.5m, down 1.0%. PeopleManagement revenue excluding the former largest customer grew 1.8%.
- Q2 Segment EBITDA was $19.2m for PeopleReady (5.2% margin), $6.3m for PeopleManagement (3.3%), and $10.1m for PeopleScout (21.8%). PeopleReady profitability weakened as lower volume reduced leverage over branch fixed costs.
- Gross margin improved year over year, reflecting disciplined pricing and a more favorable revenue mix. Management also cited cost reductions; however, SG&A declined less rapidly than revenue.
- Reported comparisons are materially affected by the prior-year $99.3m non-cash goodwill and intangible impairment charge. Excluding it, prior-year Q2 operating income was about $22m and net income about $16m ($0.38 per diluted share), above this quarter’s $18.2m and $13.1m ($0.31).
Outlook, risks, and unusual items
- Management provided no numeric revenue or earnings guidance and said visibility into demand is limited. It expects operating trends for the remainder of fiscal 2017 to remain dependent on the economy and labor conditions.
- Management emphasized pricing discipline, continued cost control, growth opportunities in e-commerce and PeopleScout recruitment outsourcing, and investment in online tools and its JobStack mobile application.
- Accelerating wage and minimum-wage costs may pressure near-term revenue and margins as customers adjust pricing or productivity. Staffing demand is sensitive to economic cycles, industry conditions, and customer workforce needs.
- Workers’ compensation remains a significant exposure: reserves were $278.1m, with $229.9m in restricted cash and investments and total collateral commitments of $237.8m. Claims estimates, collateral requirements, and the ability of insurers to pay can affect liquidity and results. The company noted that favorable reserve adjustments may diminish.
- The company paid $22.5m of SIMOS contingent consideration in Q2 and repurchased $15.5m of common stock in the first half. No material legal proceeding impact was expected. The annual impairment tests found no impairment in 2017; all reporting units’ fair values were described as substantially above carrying values.
- The revolving credit facility, with a maximum capacity of $300m, expires June 30, 2019. Availability depends on its borrowing base and is subject to credit-agreement conditions and covenants.
Important facts for investors to verify
- Whether revenue stabilizes, particularly in PeopleReady, and whether growth excluding the former largest customer continues.
- Whether pricing and cost controls can offset wage inflation and lower staffing volumes without further margin deterioration.
- The quality and sustainability of operating cash flow, and the amount of borrowing-base availability under the revolving facility.
- Workers’ compensation reserve development, collateral demands, and recoverability of insurance receivables.
- Assumptions underlying management’s limited-visibility outlook and the sensitivity of goodwill valuations to operating performance and customer changes.