TrueBlue, Inc. — Q1 2016 Form 10-Q
Reporting period: Thirteen weeks ended March 25, 2016; compared with the thirteen weeks ended March 27, 2015. TrueBlue provides staffing, recruitment process outsourcing (RPO), and managed workforce services. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q1 2016 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $646.0 million | $573.3 million | +12.7% |
| Gross profit / margin | $150.5 million / 23.3% | $129.8 million / 22.6% | Margin +0.7 percentage points |
| SG&A | $130.6 million / 20.2% of revenue | $111.6 million / 19.5% | Expense +$19.0 million |
| Operating income / margin | $8.6 million / 1.3% | $7.7 million / 1.3% | +11.3% |
| Net income | $7.0 million | $5.7 million | +21.9% |
| Diluted EPS | $0.17 | $0.14 | +$0.03 |
| Operating cash flow | $160.5 million | $95.8 million | +$64.7 million |
Net income benefited substantially from a lower effective tax rate: 8.1%, versus 20.5%, reflecting restored Work Opportunity Tax Credits and $1.8 million of prior-year credit benefits. Interest and other expense, net, increased to $1.0 million from $0.5 million.
Operating cash flow included significant seasonal working-capital releases, notably $147.1 million from accounts receivable and $14.7 million from income tax receivable. Investing used $87.5 million, including the $72.0 million Aon Hewitt RPO acquisition; financing used $81.3 million, largely reflecting $79.0 million of revolving-credit repayments. Cash declined to $21.9 million from $29.8 million at year-end.
At March 25, total debt was $165.9 million ($139.1 million revolver and $26.8 million term loan), down from $245.7 million at December 25, 2015. The company reported $91.6 million of additional revolver availability and $115.3 million of excess liquidity under the applicable $10.0 million minimum requirement; it stated it was in compliance with debt covenants. Restricted cash and investments were $202.7 million, principally workers’ compensation collateral and not equivalent to unrestricted liquidity. Total workers’ compensation reserves were $270.0 million.
Material changes and business drivers
- Revenue growth included $36.1 million from the December 2015 SIMOS acquisition and $16.0 million from the January 2016 Aon Hewitt RPO acquisition. Management reported approximately 3.6% organic growth overall.
- Staffing Services revenue rose 9.6% to $602.5 million, but segment operating income fell 20.7% to $19.2 million; margin declined to 3.2% from 4.4%. Organic growth slowed, with weaker trends among large national and retail customers, while smaller businesses and construction were stronger.
- Managed Services revenue rose 84.4% to $43.5 million, including the acquired RPO business; organic growth was 16.5%. Segment operating income increased to $8.8 million from $3.5 million.
- Gross margin improved partly because acquisitions and revenue mix added approximately 1.2 percentage points. This was partly offset by difficulty passing through higher worker wages, minimum wages, and benefit costs to customers.
- SG&A rose due to acquired operations, growth-related variable costs, recruiting and selling investments, and customer start-up costs. As growth slowed, management said it curtailed investments and began cost-control programs.
Outlook, risks, and unusual items
- Management’s fiscal 2016 outlook at filing date was approximately 6% revenue growth versus fiscal 2015, including acquisitions, and an expected 2% organic revenue decline. Management anticipated slower growth and continued gross-margin pressure and noted limited visibility into demand.
- Amazon customer change: In April, Amazon notified TrueBlue that it intended to reduce contingent labor at U.S. warehouse fulfillment centers and realign vendors. Amazon represented 11% of Q1 2016 revenue and 13% of fiscal 2015 revenue. Management estimated approximately $150 million lower revenue for the remainder of 2016 versus the prior year. Amazon remained a customer in unaffected areas.
- Management was evaluating the Amazon change’s full effects and planned to assess related goodwill and intangible assets. Staff Management | SMX carried approximately $42.7 million of goodwill and $53.9 million of other intangible assets; a potentially material second-quarter impairment charge was possible. The fiscal outlook did not include an impairment charge.
- Workers’ compensation estimates are significant and depend on actuarial assumptions, claim frequency and severity, medical costs, and legal or regulatory developments. Management expected favorable reserve adjustments to diminish. Some former insurers in liquidation had not paid excess claims; receivables from those insurers were fully reserved.
- Other principal risks include cyclical and hard-to-forecast staffing demand, customer concentration, wage and pricing pressure, worker availability, regulation and employment-related claims, collateral needs, variable-rate debt and covenant constraints, acquisition integration and impairment, and technology or cybersecurity disruption. The filing stated that ordinary-course legal matters were not expected to materially affect results or financial condition.
Important facts for investors to verify
- Whether the expected Amazon-related revenue reduction materializes, and its effect on Staffing Services profitability, cash flow, and future customer concentration.
- Results of the second-quarter impairment assessment for Staff Management | SMX goodwill and intangible assets, including any charge.
- Whether fiscal 2016 guidance remains achievable given the expected organic revenue decline, slowing demand, and margin pressure.
- Whether acquisition integration, especially SIMOS and Aon Hewitt RPO, delivers sustainable operating income and cash returns.
- Trends in workers’ compensation reserves, collateral requirements, claim costs, and the collectibility of insurer receivables.
- Revolver availability and covenant compliance as borrowing-base capacity, customer receivables, and seasonal working-capital needs change.