TrueBlue, Inc. — Q1 2017 Form 10-Q
Business and period. TrueBlue provides temporary staffing, on-premise workforce management, and permanent recruitment outsourcing through PeopleReady, PeopleManagement, and PeopleScout. The unaudited quarter comprised 13 weeks ended April 2, 2017; comparisons are with the 13 weeks ended March 25, 2016, except balance-sheet comparisons, which are with January 1, 2017. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2017 | Prior comparable period |
|---|---|---|
| Revenue | $568.2 million | $646.0 million |
| Gross profit / margin | $139.4 million / 24.5% | $150.5 million / 23.3% |
| SG&A / revenue | $121.8 million / 21.4% | $130.6 million / 20.2% |
| Operating income / margin | $6.4 million / 1.1% | $8.6 million / 1.3% |
| Net income | $4.7 million | $7.0 million |
| Diluted EPS | $0.11 | $0.17 |
| Operating cash flow | $54.0 million | $160.5 million |
| Capital expenditures | $6.2 million | $3.9 million |
- Revenue fell 12.0%; excluding the former largest customer, revenue declined 3.4%. That customer’s revenue fell $58 million (84.8%) to $10 million after it insourced staffing operations.
- Gross margin improved 1.2 percentage points, reflecting customer mix, disciplined pricing, and PeopleScout recruiting efficiencies. SG&A declined by about $9 million, but rose as a share of revenue because sales fell faster than costs.
- Income tax expense was $1.8 million and the effective tax rate was 27.9%, versus 8.1% a year earlier; management attributed the higher rate primarily to a smaller benefit from Work Opportunity Tax Credits.
- Cash and cash equivalents were $26.1 million at quarter-end, down from $35.0 million at January 1. Total debt was approximately $79.7 million, versus $137.6 million; the balance sheet shows $24.6 million current and $55.1 million long-term. The company repaid $57.4 million net under its revolving facility during the quarter.
- Management reported $140 million available under its revolving credit facility and total liquidity of $166 million, including cash. Restricted cash and investments of $228.1 million primarily collateralize workers’ compensation obligations and are not ordinary operating liquidity.
- Operating cash flow was lower year over year, in part because the prior-year quarter benefited from a much larger seasonal accounts-receivable reduction. Financing cash use was $59.8 million, primarily revolving-credit repayments; investing cash use was $2.7 million, versus $87.5 million in the prior year, which included the Aon Hewitt RPO acquisition.
Segments and material changes
- PeopleReady: revenue declined 6.6% to $332.6 million; Segment EBITDA was $9.7 million, or 2.9% of revenue, versus $11.6 million, or 3.2%. Construction and hospitality growth was offset by declines in several other industries; lower volume also reduced branch-cost leverage.
- PeopleManagement: revenue declined 22.2% to $191.7 million, primarily due to the former largest customer. Excluding that customer, revenue increased 1.8%. Segment EBITDA was $5.5 million, substantially unchanged, and margin improved to 2.9% from 2.6%.
- PeopleScout: revenue increased 0.9% to $43.9 million. Segment EBITDA rose to $8.7 million, or 19.7% of revenue, from $8.0 million, or 18.4%, with productivity gains and modest growth.
- Workers’ compensation expense decreased to $19.8 million from $24.1 million. The reserve, net of discount, was $275.4 million at April 2. Favorable reserve adjustments supported results, but management expects those benefits to diminish.
- In April 2017, after quarter-end, TrueBlue paid $22.5 million of additional SIMOS acquisition consideration; the quarter-end contingent-consideration liability was $22.1 million.
Outlook, risks, and contingencies
- Management gave no numerical revenue or earnings guidance and cautioned that visibility into demand is limited. Its priorities are revenue and gross-profit growth, cost control, and improving operating income as a share of revenue.
- Management expected continued pressure on revenue trends and gross margins as customers adjust to higher bill rates and seek cost reductions. Minimum-wage increases, payroll burdens, and tight labor markets are raising staffing costs; passing these costs through may affect short-term demand.
- Management cited SIMOS’s productivity-based model, PeopleScout’s RPO growth opportunity, and continued technology investment as strategic opportunities. It also said cost-reduction programs were producing benefits.
- Key disclosed risks include economic and labor-market weakness, loss or reduced demand from major customers, competition and pricing pressure, worker recruitment and retention, employment regulation and claims, workers’ compensation costs and collateral needs, debt covenants and borrowing-base availability, cyber and technology disruptions, acquisition integration, taxes, and possible impairment of goodwill or intangibles.
- Workers’ compensation reserves depend on actuarial estimates and claim experience; collateral commitments were $237.0 million. The filing also notes former insurers in liquidation and a valuation allowance against related insurance receivables. Ordinary-course legal matters were not expected to materially affect results or financial condition.
- Management said cash from operations and available capital resources should meet foreseeable requirements. The $300 million asset-backed revolving facility expires June 30, 2019; availability depends in part on eligible receivables and other borrowing-base terms.
Important facts for investors to verify
- Whether revenue declines stabilize, particularly in PeopleReady and PeopleManagement, and whether PeopleScout growth continues.
- Whether pricing can recover wage and payroll-cost increases without further weakening customer demand or margins.
- Whether cost actions can offset lower revenue and preserve operating profitability.
- Whether workers’ compensation claims, reserve estimates, insurer recoveries, and collateral requirements develop as expected.
- Whether reported liquidity remains available under the revolving facility’s borrowing-base and covenant requirements; distinguish unrestricted cash from restricted collateral.
- Whether the SIMOS contingent-consideration payout and post-quarter payment are reflected appropriately in subsequent-period reporting.
- Whether the effective tax rate and Work Opportunity Tax Credit benefits vary materially in future quarters.