TrueBlue, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 30, 2011 (52 weeks). The comparable FY2010 had 53 weeks, including a 14-week fourth quarter. TrueBlue provides temporary blue-collar staffing through five brands, operating 712 branches across the United States, Puerto Rico, and Canada.
Key financial results
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $1,316.0 million | $1,149.4 million |
| Gross profit / margin | $347.0 million / 26.4% | $303.5 million / 26.4% |
| Operating income / margin | $47.8 million / 3.6% | $28.3 million / 2.5% |
| Net income | $30.8 million | $19.8 million |
| Diluted earnings per share | $0.73 | $0.46 |
| Operating cash flow | $30.6 million | $42.0 million |
| Cash and cash equivalents at year-end | $109.3 million | $163.2 million |
| Working capital at year-end | $168.3 million | $207.6 million |
Revenue grew 14.5% reported, or 17.1% on a comparable 52-week basis. Cost of services was $969.0 million. The effective tax rate was 37.6%, versus 32.0% in FY2010. Accounts receivable rose to $153.9 million from $108.7 million; management attributed the increase to growth and higher days sales outstanding, partly reflecting a greater mix of large customers with longer payment terms.
Liquidity, capital and balance sheet
- Cash flow from operations declined to $30.6 million, principally as accounts receivable absorbed $51.8 million, compared with $11.6 million in FY2010.
- Cash used in investing activities was $26.9 million, including $9.7 million of capital expenditures. Cash used in financing was $57.2 million, primarily reflecting $56.9 million spent repurchasing and retiring 4.5 million shares.
- The company reported $130.5 million of restricted cash and investments, primarily collateral for workers’ compensation obligations. Approximately two-thirds of the workers’ compensation reserve was covered by restricted cash.
- A secured revolving credit facility of up to $80 million was extended to September 2016. At year-end, $11 million of letters of credit were issued, leaving $69 million available. Reported liquidity for covenant purposes was $179 million; the facility requires liquidity above $12 million. The company said it was in compliance with covenants. The filing text does not clearly state a year-end drawn borrowing balance.
- Total liabilities were $267.2 million. The workers’ compensation reserve was $191.8 million, including $43.6 million current and $148.3 million long-term.
- The board authorized a further $75 million share repurchase program in July 2011; $40 million remained available at year-end. No cash dividends had been declared.
Changes and operating trends
- Net income increased 55.2% year over year. Operating margin improved by 1.1 percentage points as revenue growth leveraged the cost base and SG&A declined to 21.5% of revenue from 22.5%.
- Gross margin was flat at 26.4%. Management said disciplined pricing and higher billing rates improved margin by 0.2 percentage points relative to FY2010 after excluding the prior-year net benefit from HIRE Act credits. Workers’ compensation expense increased to $51.2 million from $43.3 million.
- Growth was broad across major industries and geographies; construction demand benefited from renewable-energy projects, while residential construction remained weak. The anticipated decline in work for the largest customer partly offset growth.
- Customer concentration eased: the ten largest customers generated 19.1% of revenue versus 18.6% in FY2010 and 21.3% in FY2009; the largest customer represented 7.7%, down from 9.4%.
- Branches declined to 712 from 721. Two acquisitions were completed for $17.4 million total consideration, including $10.6 million payable in the future; $11.2 million of goodwill was recorded.
Outlook, risks and notable items
- Management expected continued FY2012 revenue growth assuming economic conditions similar to FY2011, while cautioning that growth percentages would moderate against tougher comparisons. It highlighted limited visibility due to short staffing assignments and economic sensitivity.
- Management estimated that 2012 minimum-wage and unemployment-tax increases could reduce gross margin by 0.4–0.6 percentage points of revenue absent mitigation; programs were in place to pass costs to customers, but customers could resist price increases.
- Key risks include economic cyclicality, competition and pricing pressure, worker recruitment and retention, employment-related claims, regulation, and the cost or availability of workers’ compensation insurance and collateral. The company’s self-insured workers’ compensation reserve depends on actuarial estimates; a 10% increase in incurred claim costs would add an estimated $5.2 million of expense.
- Two former workers’ compensation insurers were in liquidation and had not paid certain excess claims; a $7.3 million valuation allowance was recorded against related receivables at year-end.
- The company was implementing a replacement proprietary branch point-of-sale system and disclosed prior functionality issues and implementation delays. It expected implementation to continue over the following 12 months. Management and Deloitte reported effective internal control over financial reporting at year-end; Deloitte issued an unqualified audit opinion.
- The company cited the 2014 employer-coverage provisions of federal health-care reform as a potential future cost risk. Legal proceedings in the ordinary course were not expected by management to materially affect results or financial condition.
Investor verification priorities
- Assess cash conversion and collections: receivables rose sharply while operating cash flow fell; verify subsequent days sales outstanding, customer payment behavior, and bad-debt trends.
- Review workers’ compensation reserve development, actuarial assumptions, collateral requirements, and recoverability of amounts due from former insurers.
- Track whether wage and unemployment-tax cost increases were passed through to customers without impairing volumes or gross margins.
- Monitor execution, cost, and control impacts of the new point-of-sale system implementation.
- Compare FY2012 revenue and margin performance with management’s economic assumptions and account for the 53rd week in FY2010 when making comparisons.
- Verify subsequent share repurchases, acquisition payments, and actual use of revolving-credit availability.