Trueblue, Inc. annual report, FY2015

TrueBlue, Inc. — FY 2015 Form 10-K Summary

Reporting period: Fiscal year ended December 25, 2015 (52 weeks). TrueBlue provides blue-collar staffing, on-premise workforce management, recruitment process outsourcing (RPO), and managed service provider (MSP) solutions. Its reportable segments are Staffing Services and Managed Services.

Financial performance and liquidity

Metric	FY 2015	FY 2014
Revenue	$2,695.7 million	$2,174.0 million
Gross profit / gross margin	$635.7 million / 23.6%	$537.0 million / 24.7%
Operating income / operating margin	$97.8 million / 3.6%	$81.7 million / 3.8%
Net income	$71.2 million	$65.7 million
Diluted earnings per share	$1.71	$1.59
Cash provided by operating activities	$72.1 million	$47.5 million

• Revenue grew 24.0%; management reported organic growth of 7.2%. Seaton contributed a full year of results in 2015 versus six months in 2014, and SIMOS contributed $22.2 million after its December acquisition.
• Gross margin declined 1.1 percentage points, principally because Seaton had lower gross margins than the combined company. SG&A fell to 18.4% of revenue from 19.6%, aided by Seaton’s lower operating-cost ratio. Operating margin eased 0.2 percentage points.
• Fourth-quarter revenue was $810.7 million and net income was $28.2 million; corresponding 2014 figures were $691.4 million and $27.0 million. Organic revenue growth accelerated to 14.1% for the quarter, though it slowed near quarter-end.
• At year-end, cash and cash equivalents were $29.8 million, working capital was $322.4 million, and available revolving-credit capacity was $77.3 million. Total debt was $245.7 million ($218.1 million revolving facility and $27.6 million term loan). The company reported compliance with debt covenants.
• Investing cash outflow was $105.0 million, including $67.5 million for SIMOS; capital expenditures were $18.4 million. Restricted cash and investments totaled $188.4 million, primarily supporting workers’ compensation obligations.

Material changes and notable items

• TrueBlue acquired SIMOS on December 1, 2015, for $67.5 million cash, with up to $22.5 million additional contingent consideration dependent on fiscal 2016 results. Preliminary acquisition accounting recorded a $19.3 million contingent-consideration liability.
• On January 4, 2016, after fiscal year-end, TrueBlue acquired Aon Hewitt’s RPO business for $71.7 million. It also obtained a temporary $30 million increase to its revolving facility, raising the limit from $300 million to $330 million; the increase was scheduled to expire in stages during 2016.
• The top ten customers represented 25.5% of 2015 revenue, up from 19.4% in 2014. Amazon alone represented 13.1% of company revenue. Two customers each represented more than 10% of Managed Services revenue.
• Workers’ compensation reserves were $266.3 million, up from $242.8 million. Management said favorable reserve adjustments were diminishing; a 5% change in the cost of claims incurred would change workers’ compensation expense by approximately $5 million.
• The company disclosed a foreign-currency translation error in unaudited interim 2015 statements that overstated goodwill and intangible assets and understated accumulated other comprehensive loss. It deemed the error immaterial; year-end audited statements corrected it, and net income was unaffected. No goodwill or long-lived-asset impairment charges were recorded in 2015.
• The effective tax rate rose to 26.1% from 19.8%, mainly due to lower hiring-credit benefits. Legislation signed in December 2015 retroactively restored the Work Opportunity Tax Credit for 2015 through 2019.

Outlook, risks, and contingencies

• Management expected approximately 16% revenue growth and 8% organic revenue growth in fiscal 2016, with operating income of approximately $133 million (4.2% of revenue). The forecast included about $7 million of estimated integration costs and $7 million of incremental intangible amortization related to SIMOS and Aon Hewitt RPO.
• Management expected SIMOS to generate approximately $185 million in fiscal 2016 revenue and $9 million in operating income; the acquired Aon Hewitt RPO business was expected to generate approximately $65 million in revenue and $10 million in operating income. These are management estimates, not guarantees.
• Management cited strong demand in construction, online-commerce-related warehousing and distribution, and transportation, but continued manufacturing weakness. The company cautioned that demand is cyclical and difficult to forecast; growth had slowed among national customers and in retail near year-end and into January 2016.
• Key risks include economic and customer-demand volatility, pricing pressure and wage/benefit cost increases, customer concentration, worker availability, employment and regulatory claims, workers’ compensation costs and collateral needs, debt covenants and borrowing-base availability, acquisition integration and contingent payments, goodwill impairment, cybersecurity and systems disruption, and foreign-exchange exposure.
• SIMOS contingent consideration may be payable in 2017 if its fiscal 2016 earnings target is met. The company stated that ordinary-course legal proceedings were not expected to materially affect results or financial condition. Its financial statements received an unqualified audit opinion, and management and the auditor reported effective internal controls over financial reporting.

Investor verification priorities

1. Compare reported growth with organic growth, including acquisition contributions, and assess whether the 2016 revenue and operating-income outlook was achieved.
2. Track gross-margin trends, wage and benefit cost pass-through, and whether planned sales, recruiting, and integration investments produced expected returns.
3. Monitor Amazon and other major-customer exposure, customer retention, and concentration in Managed Services.
4. Review debt utilization, borrowing-base capacity, covenant headroom, and workers’ compensation collateral and reserve development.
5. Check SIMOS and Aon Hewitt RPO integration progress, performance against management forecasts, and the SIMOS contingent-consideration outcome.
6. Follow impairment headroom for acquired PeopleScout, hrX, and MSP reporting units, and developments in workers’ compensation, employment claims, and tax-credit estimates.