TrueBlue, Inc. — Q2 2010 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 25, 2010; unaudited. TrueBlue provides blue-collar staffing services. The fiscal year ending December 31, 2010 includes 53 weeks.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $284.8M | $247.0M | $524.7M | $471.4M |
| Gross profit | $75.8M | $72.8M | $137.0M | $135.5M |
| Gross margin | 26.6% | 29.5% | 26.1% | 28.7% |
| Operating income (loss) | $10.6M | $5.2M | $6.5M | $(4.6)M |
| Net income (loss) | $7.9M | $3.7M | $5.7M | $(1.6)M |
| Diluted EPS | $0.18 | $0.09 | $0.13 | $(0.04) |
- Q2 revenue increased 15.3%; same-branch revenue rose 17.1%, or 23.1% excluding Boeing. First-half revenue increased 11.3%; same-branch revenue rose 14.5%.
- Q2 SG&A was $61.3M, down 3.3% year over year, and 21.5% of revenue versus 25.7%. First-half SG&A fell 7.0% to $122.5M.
- Management attributed lower gross margin to higher state unemployment taxes, a shift toward lower-margin work, a price reduction for Boeing, and higher workers’ compensation expense. Q2 workers’ compensation expense was $10.4M versus $6.8M a year earlier. Gross margin improved from 25.5% in Q1 2010, which management attributed to disciplined pricing.
- Q2 effective tax rate was 26.9%; first-half rate was 18.8%. Q2 results included a $1.3M tax benefit from favorable development of a prior-period tax matter.
Cash, liquidity and obligations
- First-half operating cash flow was $10.5M versus $7.7M in 2009. Cash and cash equivalents increased to $140.9M from $124.4M at fiscal year-end. Restricted cash was $114.5M, primarily collateral for workers’ compensation obligations.
- Capital expenditures were $2.5M versus $7.3M in the prior-year half; management expected approximately $8.0M for full-year 2010.
- The $80M revolving facility expires June 2012. After $13.7M of letters of credit, $66.3M remained available. Reported covenant liquidity was $209.1M against a $30M minimum; the company reported compliance. No material borrowing balance is stated in the provided filing text.
- Workers’ compensation reserves totaled $187.0M, including current and long-term portions. Total collateral commitments were $141.3M. The company is substantially self-insured above a $2.0M per-occurrence deductible.
Outlook, risks and notable items
- Management expected 2010 revenue performance to improve versus 2009, while noting continued competitive pricing pressure and weaker construction demand. It targeted a 20% incremental operating margin on additional same-branch revenue and said cost control would remain a focus.
- Boeing revenue was $28M in Q2; management expected approximately $20M in Q3 and did not expect later-quarter revenue to exceed that estimate. The company said Boeing declines would partly offset broader recovery.
- The extra fiscal week was expected to add approximately 1% to annual revenue, with no significant effect on profitability. Management believed liquidity was sufficient to fund operations and planned initiatives, subject to economic conditions.
- Material risks include economic recovery and customer demand, customer concentration and Boeing exposure, staffing-industry price competition, workers’ compensation reserve estimates and collateral needs, and financial distress of former insurers. Two former insurers were in liquidation; a $7.3M valuation allowance was recorded against related receivables. Most restricted cash collateral was held by Chartis, an AIG subsidiary.
- Federal health-care reform could raise employee benefit costs or penalties beginning in 2014 if coverage requirements apply and costs cannot be passed through. Ordinary-course legal proceedings were not expected by management to materially affect results or financial condition.
- Eight net branches were closed during Q2; 739 branches remained at quarter-end. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Track Boeing revenue against management’s Q3 estimate and assess the profitability impact of customer concentration.
- Monitor gross-margin recovery, pricing, business mix, unemployment taxes, and workers’ compensation expense.
- Review workers’ compensation reserve assumptions, collateral requirements, and recoveries from insolvent former insurers.
- Confirm operating cash conversion, availability under the asset-based revolver, and compliance with liquidity covenants.
- Assess whether the stated revenue outlook, 20% incremental-margin target, and $8.0M capital-expenditure expectation remain achievable.