TrueBlue, Inc. — Q3 2012 Form 10-Q
Business context and period: TrueBlue provides temporary blue-collar staffing through multiple brands and a network of 692 branches. This unaudited report covers the 13 and 39 weeks ended September 28, 2012; comparisons are with the periods ended September 30, 2011.
Financial performance
| Metric | Q3 2012 | Q3 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Revenue | $379.5m | $371.4m | $1,044.9m | $965.9m |
| Gross profit | $105.2m | $99.9m | $278.0m | $255.2m |
| Gross margin | 27.7% | 26.9% | 26.6% | 26.4% |
| SG&A | $77.6m | $73.2m | $221.2m | $206.1m |
| Operating income | $22.9m | $22.4m | $42.6m | $37.2m |
| Net income | $14.3m | $13.9m | $26.2m | $23.2m |
| Diluted EPS | $0.36 | $0.33 | $0.66 | $0.54 |
Q3 revenue increased 2.2% and net income increased 3.1%. Q3 operating margin was 6.0%, unchanged year over year; SG&A was 20.5% of revenue, up from 19.7%. Gross margin improved 0.8 percentage points, including a 0.2-point payroll-tax benefit; excluding that benefit, the improvement was 0.6 points. For the 39-week period, revenue grew 8.2%, versus 15.3% in the prior-year period.
Cash flow and balance sheet: For 39 weeks, operating cash flow was $33.0m, versus $16.5m; capital expenditures were $13.9m, versus $6.2m. Investing cash use was $17.4m and financing cash use was $5.9m. Cash increased $10.0m to $119.3m. At September 28, total assets were $598.6m, total liabilities $274.1m, and shareholders’ equity $324.5m. Workers’ compensation reserves totaled $197.8m, including current and long-term portions.
The filing reports no outstanding borrowings under the $80m revolving credit facility; $73m remained unused after letters of credit. Cash plus borrowing availability and cash under lender control agreements yielded reported liquidity of $195.2m, well above the $12m covenant threshold. Restricted cash and investments totaled $132.1m, principally collateral for workers’ compensation obligations.
Material changes and management commentary
- Management attributed slowing growth to lower project revenue from its top customer, declining manufacturing activity, and softer trends across industries and geographies. The top customer’s revenue was $13m in Q3; revenue excluding that customer grew 6.7%. Manufacturing revenue declined approximately 3% year over year.
- Monthly revenue growth slowed from 8% in June to a 1% decline in September; excluding the top customer, growth slowed from 10% to 4% over those months.
- Disciplined pricing and higher billing rates offset minimum-wage and unemployment-tax increases. The top customer’s lower-margin mix also supported the reported margin improvement.
- Workers’ compensation expense was $14.8m in Q3, unchanged year over year, and $40.1m for 39 weeks versus $37.4m. Claims reserves rely on actuarial estimates; certain former insurers in liquidation have not paid claims, and related receivables are substantially reserved.
Outlook, risks, and contingencies
- Management expected economic uncertainty to pressure Q4 2012 revenue and continue into 2013; it cited limited visibility given short-term staffing assignments and economic sensitivity.
- Management expected top-customer revenue of $5m in Q4 as projects mature and the customer adjusts its workforce. It also identified renewable-energy construction as an ongoing opportunity.
- Priorities include restoring growth, maintaining pricing discipline, and improving delivery efficiency. Mobile technologies were under development for deployment in the first half of 2013, with expected efficiencies beginning in the second half. Management anticipated approximately $16m in 2012 capital expenditures.
- Key risks include economic and customer demand weakness, competition and pricing pressure, worker availability and employment-related claims, workers’ compensation insurance and collateral requirements, regulatory costs including health-care reform, and dependence on management information systems. The filing notes possible functionality and implementation issues with a key system replacement.
- Routine legal proceedings were not expected to materially affect results or financial condition. Management stated it had no significant impairment indicators for goodwill or indefinite-lived intangibles and performed no interim impairment test. The company was in compliance with credit covenants; no subsequent events requiring disclosure were identified.
Important facts for investors to verify
- Whether the top customer’s expected Q4 revenue decline and broader slowing demand affect revenue and utilization as anticipated.
- Whether margin gains from pricing persist after the Q3 payroll-tax benefit and amid wage, tax, and customer-mix changes.
- Developments in workers’ compensation claim estimates, collateral demands, and recoveries from insurers in liquidation.
- Actual spending and implementation results for the technology program, including the expected timing of efficiency benefits.
- Cash generation, capital expenditures, and continued compliance with revolving-facility covenants as business conditions change.