TrueBlue, Inc. — Q2 2020 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 28, 2020; year-over-year comparisons are to the corresponding 2019 periods. TrueBlue provides contingent staffing, on-site workforce solutions, and recruitment outsourcing through PeopleReady, PeopleManagement, and PeopleScout. The filing was signed July 27, 2020.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $358.9m | $588.6m | $853.2m | $1,140.9m |
| Gross profit / margin | $83.2m / 23.2% | $156.7m / 26.6% | $209.4m / 24.5% | $303.4m / 26.6% |
| Operating income (loss) | $(21.2)m | $20.9m | $(196.7)m | $29.7m |
| Net income (loss) | $(8.2)m | $19.4m | $(158.7)m | $27.7m |
| Diluted EPS | $(0.23) | $0.49 | $(4.39) | $0.70 |
| Operating cash flow | — | — | $103.5m | $37.0m |
Second-quarter revenue fell 39.0% year over year. Segment revenue declines were PeopleReady 43.4% to $209.2m, PeopleManagement 22.7% to $118.7m, and PeopleScout 52.7% to $31.1m. PeopleScout reported a segment loss of $2.8m, compared with $11.2m segment profit a year earlier; PeopleReady and PeopleManagement remained slightly profitable at the segment level.
Q2 gross margin contracted 340 basis points. Management attributed the decline principally to lower volume and severance in PeopleScout, and higher staffing wages needed to attract workers amid federal unemployment benefits. SG&A declined to $97.2m from $126.0m, but increased to 27.1% of revenue from 21.4% as revenue fell sharply. Q2 included $8.0m of workforce reduction costs and about $3.1m of Canadian and Australian wage-subsidy credits.
Cash, debt, and liquidity
- At June 28, cash and cash equivalents were $92.1m, total debt was $45.0m, and current liabilities were $220.0m. Restricted cash and investments of $217.8m were largely associated with workers’ compensation collateral and should not be treated as freely available operating cash.
- First-half operating cash flow was $103.5m, versus $37.0m in 2019; the cash-flow statement shows $6.1m used in investing and $47.2m used in financing. Lower accounts receivable contributed $111.8m of operating cash, while DSO increased 4.1 days.
- The revolving facility was amended in June and matures March 16, 2025. It provides commitments of up to $300m, with an option to increase to $450m subject to lender approval. The company had drawn $45m and had $6.2m of letters of credit outstanding. Availability was $248.8m before covenant constraints; the most restrictive covenant limited additional borrowing to $125m.
- The filing reports covenant-defined liquidity of $340.8m, calculated using aggregate facility availability, and separately describes approximately $217m of liquidity using the $125m covenant-constrained availability plus cash. The company reported compliance with then-effective covenants and an asset coverage ratio of 14.7.
Material changes and unusual items
- First-half results included a non-cash $175.2m impairment charge: $140.5m for goodwill and $34.7m for client-relationship intangible assets, recorded in Q1. The charge reflected reduced expected cash flows amid COVID-19 and the economic downturn; it reduced reported first-half operating results but did not use cash.
- Goodwill fell from $237.5m at year-end 2019 to $94.0m at June 28. PeopleManagement On-site goodwill was fully impaired; remaining PeopleScout RPO and MSP goodwill was $22.7m and $9.7m, respectively. Management warned further deterioration could cause additional impairment.
- First-half share repurchases used $52.3m, including a $40m accelerated repurchase initiated in February. The ASR settled July 2, with 2,777,486 total shares delivered at a $14.40 weighted-average price. The credit amendment prohibits further repurchases until July 1, 2021.
- The CARES Act supported tax benefits and deferred employer payroll taxes; $15.7m of employer payroll taxes had been deferred at quarter-end. The first-half effective tax rate was 19.4%, affected by impairment tax treatment, CARES Act provisions, and hiring tax credits.
Outlook, management commentary, and risks
Management said COVID-19-related restrictions and weaker client demand were expected to continue materially harming revenue, profitability, and liquidity. Revenue declines moderated during Q2, from 42.3% in April to 34.6% in June, but management emphasized limited visibility and uncertainty about the pandemic and recovery. No specific revenue or earnings forecast was provided.
- Management expected Q2 gross-margin headwinds of 340 basis points to improve, forecasting year-over-year headwinds of 210–150 basis points in Q3 and 200–140 basis points for fiscal 2020, primarily from lower volume and client mix.
- Cost actions were expected to reduce fiscal 2020 operating expenses by $90m–$100m, including $28m–$33m in Q3 versus the comparable prior-year period. Planned 2020 capital expenditures were reduced to approximately $22m, net of $4m of landlord-reimbursed headquarters build-out costs; Q3 capex was expected to be about $7m.
- Management expected to fund the next 12 months through operating cash flow and the revolving facility, while warning a longer downturn could require additional, potentially less favorable, debt or equity financing. It also cited risks from client payment delays and credit losses, worker availability and wage costs, workers’ compensation collateral requirements, covenant compliance, and further goodwill or intangible impairments.
- Workers’ compensation reserves were $250.0m, net of discount, with $214.5m in related collateral commitments. The company is substantially self-insured below policy deductibles; increases in claims or required collateral could pressure liquidity.
- Management reported effective disclosure controls and procedures as of June 28, 2020. The filing states ordinary-course legal proceedings were not expected to have a material effect.
Important facts for investors to verify
- Whether the pace of revenue recovery and client demand—particularly in travel and leisure, PeopleScout, and PeopleReady—matches management’s assumptions.
- Whether the stated margin and cost-reduction outlook is achieved, and how much of the savings is offset by severance, wage pressure, or other costs.
- The distinction between reported covenant-defined liquidity of $340.8m and approximately $217m using covenant-constrained borrowing availability, and how facility terms or cash restrictions affect usable liquidity.
- Whether deferred payroll taxes, receivable collections, bad-debt provisions, and workers’ compensation collateral requirements create additional cash needs.
- Whether further operating weakness triggers additional asset impairments or affects compliance with financial covenants that become effective in 2021.