TrueBlue, Inc. — Q2 2019 Form 10-Q
Reporting period: Fiscal second quarter and first half ended June 30, 2019; comparisons are to the periods ended July 1, 2018. TrueBlue provides contingent staffing, on-premise workforce management, recruitment process outsourcing and managed-service-provider services through PeopleReady, PeopleManagement and PeopleScout.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $588.6 million | $614.3 million | $1,140.9 million | $1,168.7 million |
| Gross profit / margin | $158.3 million / 26.9% | $165.6 million / 27.0% | $306.7 million / 26.9% | $308.9 million / 26.4% |
| Operating income / margin | $20.9 million / 3.5% | $21.3 million / 3.5% | $29.7 million / 2.6% | $28.7 million / 2.5% |
| Net income | $19.4 million | $17.7 million | $27.7 million | $26.5 million |
| Diluted EPS | $0.49 | $0.44 | $0.70 | $0.65 |
| Operating cash flow | Not separately presented for the quarter | $37.0 million | $49.4 million |
- Q2 revenue declined 4.2%; first-half revenue declined 2.4%. Q2 net income and diluted EPS rose despite lower revenue, helped in part by reduced interest expense following debt reduction.
- Q2 SG&A fell to $127.6 million from $134.2 million; it was 21.7% of revenue versus 21.8%. First-half SG&A was $257.3 million, or 22.5% of revenue, compared with $260.0 million, or 22.2%.
- Q2 segment revenue: PeopleReady $369.3 million, down 2.2%; PeopleManagement $153.5 million, down 14.2%; PeopleScout $65.8 million, up 13.4%. PeopleScout’s growth reflected TMP acquisition contributions; its reported revenue growth included 17.0% from TMP.
- First-half effective tax rate was 10.8% versus 11.5%; the 2019 rate included $0.9 million of discrete benefits from prior-year hiring credits. The Work Opportunity Tax Credit is a material factor in the low effective rate.
Balance sheet, debt and liquidity
- At June 30, 2019, cash and cash equivalents were $23.1 million, total assets $1.095 billion, and shareholders’ equity $615.0 million. Cash was down from $47.0 million at December 30, 2018.
- Long-term debt was $24.7 million, down from $80.0 million at year-end. Management reported $268 million available under its $300 million revolving credit facility and total liquidity of $291 million. The facility has a five-year term and an option, subject to lender approval, to increase capacity to $450 million.
- First-half operating cash flow was $37.0 million; investing cash use was $2.7 million and financing cash use was $65.4 million. Financing use primarily reflected $55.3 million of net revolver repayments and $9.1 million of share repurchases. Operating cash flow was lower year over year, including due to payment timing and changes in working capital.
- Restricted cash and investments totaled $222.6 million, principally supporting workers’ compensation obligations; these funds are not equivalent to unrestricted cash available for general liquidity. Total workers’ compensation collateral commitments were $221.0 million.
- The company repurchased $9.1 million of shares in the first half. Approximately $48.8 million remained under the authorization at quarter-end.
Material changes and management outlook
- Management attributed weaker staffing revenue primarily to reduced client volumes. PeopleManagement was additionally affected by the loss of Amazon’s Canadian business, the PlaneTechs divestiture, and lower volume and price at an existing client. PeopleReady revenue was broadly flat in the first half but declined in Q2.
- Gross margin increased 0.5 percentage points for the first half, mainly from lower workers’ compensation costs and claim-related benefits, partly offset by lower PeopleScout margins. Q2 gross margin edged down 0.1 percentage points, with TMP’s pass-through media costs and client mix contributing.
- Management expected further revenue pressure in Q3 2019, citing broad lower same-client demand across geographies and industries. It noted PeopleReady’s June declines were greater than its Q2 average and demand was lower in July. No specific earnings or revenue guidance figures were provided.
- Priorities include disciplined pricing to pass through higher wages, payroll taxes and benefits; cost control; organic growth; and investment in JobStack and PeopleScout’s Affinix technology. Management stated that cash generation and capital resources should be adequate for foreseeable cash requirements.
- Workers’ compensation claims are a key estimate and risk: the company is substantially self-insured, and management expects favorable reserve adjustments to diminish as opportunities to reduce accident frequency and severity decline. Loss of major clients or sites could also pressure business results and, in the case of SIMOS, potentially trigger goodwill impairment. SIMOS fair value exceeded carrying value by only about 10% in the annual test; specified adverse changes in assumptions could eliminate that cushion.
Other notable items and risks
- Adoption of the lease accounting standard added operating lease right-of-use assets and liabilities of approximately $39 million and $41 million, respectively, at the start of fiscal 2019. Quarter-end operating lease liabilities were $40.4 million. The filing states the standard did not materially affect reported operations or cash flows.
- Management said ordinary-course legal proceedings were not expected to materially affect results or financial condition. No goodwill or indefinite-lived trade-name impairment was recorded in the first half.
- Key risks include economic and labor-market sensitivity, client concentration and reduced client demand, worker availability and rising labor costs, workers’ compensation claims and collateral requirements, competition and technology disruption, regulatory and employment-related claims, cybersecurity and IT disruption, and international operations including UK/EU uncertainty.
- Disclosure controls were concluded effective as of June 30, 2019. The company noted its transition to a new ERP system and related updates to control processes.
Important facts for investors to verify
- Whether weaker same-client demand persisted after Q2, particularly the July trends and Q3 revenue performance.
- PeopleManagement’s client losses and pricing/volume pressures, and PeopleScout’s client concentration, TMP margins and ability to sustain growth.
- Workers’ compensation reserve development, collateral needs and the expected reduction in favorable reserve adjustments.
- SIMOS reporting-unit performance and goodwill impairment sensitivity, given the disclosed 10% valuation cushion.
- Cash conversion and working-capital trends, revolver availability and covenants, and the distinction between unrestricted cash and restricted workers’ compensation assets.
- The sustainability of low effective taxes, including hiring-credit estimates and the Work Opportunity Tax Credit’s scheduled authorization through December 31, 2019.