TrueBlue, Inc. — Q2 2014 Form 10-Q
Reporting period: The 13 and 26 weeks ended June 27, 2014. Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding 2013 periods unless stated otherwise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $453.2 | $422.3 | $849.3 | $768.8 |
| Revenue growth | 7.3% | 19.2% | 10.5% | 15.5% |
| Gross profit / margin | $119.6 / 26.4% | $111.9 / 26.5% | $219.1 / 25.8% | $198.5 / 25.8% |
| Operating income / margin | $18.0 / 4.0% | $17.3 / 4.1% | $20.4 / 2.4% | $10.4 / 1.4% |
| Net income | $16.1 | $12.5 | $17.7 | $11.5 |
| Diluted EPS | $0.39 | $0.31 | $0.43 | $0.28 |
Q2 revenue rose 7.3%; management attributed growth to organic gains across most geographies and industries, as well as the TWC acquisition. The company said activity rebounded after severe weather slowed demand in Q1, with strong growth in June. Gross margin was broadly stable: disciplined bill-rate management offset lower margins at acquired TWC. Q2 SG&A was $96.4 million, or 21.3% of revenue, versus $89.3 million, or 21.2%.
First-half operating income increased substantially while operating margin rose to 2.4% from 1.4%; SG&A as a share of revenue declined to 22.2% from 23.1%. First-half net income also benefited from tax credits, so reported earnings growth does not solely reflect operating improvement.
Cash flow, balance sheet and debt
- Operating cash flow: $28.9 million in the first half, compared with $24.1 million. Capital expenditures were $6.1 million; operating cash flow less capital expenditures was approximately $22.8 million.
- Cash and marketable securities: $172.3 million at June 27, versus $142.7 million at December 27, 2013. This excludes $145.9 million of restricted cash and investments, principally collateral for workers’ compensation obligations.
- Liquidity: Current assets were $394.6 million and current liabilities $125.3 million. The June 27 revolving facility had $74.0 million available after letters of credit; the company reported total facility-defined liquidity of $242.0 million and compliance with covenants.
- Debt: The Synovus term loan balance was $30.8 million, including $2.3 million current and $28.5 million long term. No borrowing under the pre-acquisition revolving facility was reported; $6.0 million was used for standby letters of credit.
- Workers’ compensation: The discounted reserve was $214.0 million. Collateral commitments totaled $159.8 million. These estimates and collateral requirements are significant to liquidity.
Acquisition, outlook and notable items
- On June 30, 2014, after quarter-end, TrueBlue acquired Staffing Solutions Holdings (Seaton) for $310 million, including estimated working capital of approximately $50 million, subject to adjustment. It borrowed $187 million under a new $300 million secured revolving facility to fund part of the purchase price and used cash for the remainder. The purchase-price allocation was still in progress.
- Management expected Seaton to add approximately $730 million–$750 million of revenue during its first 12 months of ownership. The acquisition expands the company into workforce outsourcing, including recruitment, managed services and outsourced workforce management.
- Management’s 2014 priorities included organic revenue and gross-profit growth, cost leverage, technology-enabled recruiting and branch consolidation. It had consolidated 38 branches year to date and targeted 60 cumulatively by year-end.
- Management expected ACA-related health coverage for eligible temporary workers to add an estimated 0.4%–0.8% of revenue in costs beginning in 2015. It intended to seek customer rate increases but said full recovery was not assured.
- Work Opportunity Tax Credit benefits included approximately $5.0 million of additional credits from prior-year wages, reducing the first-half effective tax rate to 16.3% from an expected 39.9%. The credit program had not been renewed for 2014 new hires. The prior-year comparison was also affected by retroactive WOTC restoration.
- Workers’ compensation expense increased to $33.5 million for the first half from $29.7 million. Management cautioned that favorable reserve adjustments could diminish as safety and claims improvements become harder to sustain.
- Severe weather affected first-quarter demand; staffing demand is seasonal, typically stronger in Q2 and Q3. The company is substantially self-insured for workers’ compensation and relies on collateral and insurance recoveries; some former insurers are in liquidation, and a $4.9 million valuation allowance was recorded against related receivables.
- The company reported no material expected effect from ordinary-course legal proceedings and no impairment in its 2014 goodwill assessment. A prior-period classification error involving $19.9 million of variable-rate demand notes was reclassified in comparative statements; management said it was not material and did not affect operating or financing cash flows.
Key facts for investors to verify
- Whether Seaton achieves the stated first-year revenue contribution and integration benefits, and how the acquisition affects margins, cash generation and leverage.
- Post-acquisition debt, borrowing availability, covenant headroom and interest expense under the new credit facility.
- Underlying organic growth and operating profitability apart from acquisitions, seasonal recovery and discrete tax-credit benefits.
- Workers’ compensation reserve development, insurance recoverability and collateral needs as the business grows.
- Actual ACA-related costs and the extent to which customer rate increases offset them.