TrueBlue, Inc. — Q2 2018 Form 10-Q
Business context and period. TrueBlue provides contingent staffing, on-premise workforce solutions and recruitment process outsourcing through PeopleReady, PeopleManagement and PeopleScout. The quarter was the 13 weeks ended July 1, 2018; first-half comparisons cover 26 weeks. Amounts below are in millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $614.3 | $610.1 | $1,168.7 | $1,178.4 |
| Gross profit / margin | $165.6 / 27.0% | $155.3 / 25.5% | $308.9 / 26.4% | $294.7 / 25.0% |
| SG&A / revenue | $134.2 / 21.8% | $124.8 / 20.4% | $260.0 / 22.2% | $246.6 / 20.9% |
| Operating income / margin | $21.3 / 3.5% | $18.2 / 3.0% | $28.7 / 2.5% | $24.7 / 2.1% |
| Net income | $17.7 | $13.1 | $26.5 | $17.8 |
| Diluted EPS | $0.44 | $0.31 | $0.65 | $0.43 |
- Q2 interest expense was $1.4 million; interest and other income was $0.4 million. First-half interest expense was $2.2 million and interest and other income was $3.5 million.
- First-half operating cash flow was $49.4 million, down from $64.2 million. Investing used $18.1 million, including the TMP acquisition; financing used $22.3 million. Capital expenditures were $6.5 million.
- At July 1, cash and cash equivalents were $33.4 million; restricted cash and investments were $239.4 million, principally collateral for workers’ compensation. Debt was $117.2 million, all classified as long-term. The company prepaid its approximately $22 million term loan during Q2 and borrowed under its revolver.
- Total assets were $1.124 billion and shareholders’ equity was $563.3 million. The workers’ compensation reserve was $265.1 million, net of discount.
Material changes and notable items
- Q2 revenue increased 0.7% year over year, while first-half revenue declined 0.8%. Q2 gross margin rose 1.5 percentage points and operating margin rose 0.5 points; SG&A as a share of revenue increased 1.4 points.
- Q2 segment revenue: PeopleReady $377.5 million, up 1.8%; PeopleManagement $178.8 million, down 7.3%; PeopleScout $58.0 million, up 24.7%. PeopleManagement’s decline reflected the PlaneTechs divestiture and lower volumes with certain clients. PeopleScout growth reflected client wins and expanded services, with TMP contributing 6.1% of its year-over-year growth.
- Profitability improved on higher gross profit, lower depreciation and a lower tax rate. The Q2 effective tax rate was 12.7% versus 28.6%; the first-half rate was 11.5% versus 28.4%, reflecting the lower federal tax rate and hiring-credit benefits.
- TrueBlue acquired UK-based TMP Holdings on June 12 for $22.7 million net of cash acquired; preliminary goodwill recorded was $16.6 million. TMP contributed $2.9 million of revenue through quarter-end. PlaneTechs was sold effective March 12 for a stated purchase price of $11.4 million; a preliminary $1.1 million pretax gain was recorded.
- Share repurchases totaled $19.1 million in the first half; the company reported $73.5 million remaining under its authorization at July 1.
Outlook, risks and management commentary
- Management cited limited visibility into demand and did not provide numerical companywide guidance. It prioritized organic revenue and gross-profit growth, disciplined pricing, cost control and investment in technology. It expects PeopleScout growth to outpace the other segments and views TMP as expanding its reach in multi-continent RPO opportunities.
- PeopleManagement was notified that Amazon plans to take over its Canadian fulfillment-center workforce needs and discontinue TrueBlue’s services on September 1, 2018. Amazon generated $52 million of revenue and $5.9 million of segment profit over the prior four quarters.
- Management said higher minimum wages and tight labor markets are raising worker costs; passing these costs through to clients may affect near-term revenue trends. PeopleReady also cited first-quarter weakness, sales staff turnover in the Southeast and project delays associated with tariffs on imported solar panels.
- Workers’ compensation cost reductions supported margins, but management cautioned that favorable reserve adjustments may diminish and depend on continued reductions in accident frequency and claim costs. Collateral commitments were $243.4 million; insurance carrier or surety requirements may change.
- On July 13, after quarter-end, TrueBlue replaced its prior revolving facility with a five-year $300 million facility, with a potential increase to $450 million subject to lender approval. It carries variable-rate pricing and financial covenants. Management stated that operating cash flow and capital resources should meet foreseeable cash requirements.
- The company announced a CEO transition effective September 1: Patrick Beharelle was named CEO, succeeding Steven Cooper, who was to become Executive Chairman. Management reported effective disclosure controls and no material expected effect from ordinary-course legal proceedings.
Key facts for investors to verify
- Whether PeopleReady’s Q2 revenue recovery continues, and whether PeopleManagement volume declines persist after the PlaneTechs sale.
- Amazon’s expected service termination, revenue and profit exposure, and the company’s ability to replace that business.
- TMP integration, realized growth and costs, including whether its expected international and employer-branding benefits materialize.
- Workers’ compensation reserve development, insurance recoverability and collateral needs, alongside the sustainability of recent margin improvement.
- Use and cost of the new revolving facility, covenant headroom, cash available apart from restricted balances, and continued share repurchases.
- How tax rates evolve as hiring credits and other tax benefits vary; the filing notes that tax estimates and the effective rate can fluctuate.