TrueBlue, Inc. — Q3 2014 Form 10-Q
Reporting period: Thirteen weeks ended September 26, 2014; year-to-date period covers 39 weeks ended September 26, 2014. Financial statements are unaudited. Comparisons are affected by acquisitions, particularly Seaton, consolidated from June 30, 2014.
Business context
TrueBlue provides temporary staffing and workforce solutions. The June 30 acquisition of Seaton for approximately $308.0 million net of cash acquired expanded the business into recruitment process outsourcing, outsourced workforce management, and managed service provider offerings. Seaton contributed $148.6 million of Q3 revenue and $2.1 million of operating income. The company was integrating Seaton and evaluating future segment reporting.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Revenue | $633.4m | $451.2m | $1,482.7m | $1,220.0m |
| Gross profit | $159.6m | $123.5m | $378.7m | $322.0m |
| Gross margin | 25.2% | 27.4% | 25.5% | 26.4% |
| Operating income | $29.6m | $28.0m | $50.0m | $38.4m |
| Operating margin | 4.7% | 6.2% | 3.4% | 3.1% |
| Net income | $20.9m | $19.0m | $38.7m | $30.4m |
| Diluted EPS | $0.51 | $0.47 | $0.94 | $0.75 |
| Operating cash flow | — | $59.9m | $45.3m |
Q3 revenue rose 40.4%; management attributed most of the increase to Seaton and reported approximately 2% organic growth, or 5% excluding the energy practice. Gross margin fell mainly because Seaton and TWC had lower gross margins than the legacy business; management said disciplined pricing and labor-cost management improved margins in the organic business. Q3 SG&A was $120.3m, or 19.0% of revenue, versus $90.8m, or 20.1%. Depreciation and amortization rose to $9.7m from $4.8m, primarily reflecting acquired assets.
For the 39-week period, operating income increased despite lower gross margin, while net income also benefited from tax credits. The effective tax rate was 23.2%, including approximately $8m of additional Work Opportunity Tax Credit (WOTC) benefits from prior-year hires; WOTC had expired and had not been renewed for 2014 new hires.
Financial position, debt and liquidity
- At September 26, cash and cash equivalents were $29.2m and marketable securities were $1.7m, compared with $122.0m and $14.7m, respectively, at December 27, 2013. Management attributed the decrease primarily to the Seaton purchase.
- Total debt was $177.2m, including $147.0m drawn on the revolving facility and a $30.2m term loan. The company had $87.3m of additional borrowing availability and reported total covenant liquidity of $111.6m, above the $37.5m requirement; it was in compliance with covenants.
- The $300m secured revolving facility matures June 30, 2019. Its reported interest rate was 2.00% at September 26, 2014. Management expected to maintain approximately $30m in cash and use excess cash to reduce revolver borrowings.
- Restricted cash and investments were $152.3m, principally collateral for workers’ compensation. The workers’ compensation reserve was $233.9m, net of discount.
- Year-to-date investing cash outflow was $296.9m, including the $308.0m Seaton acquisition; financing cash inflow was $145.2m. Capital expenditures were $10.2m.
Outlook, commentary and risks
- Management expected energy-sector project completions to exceed new projects through Q1 2015, reducing quarterly revenue by an estimated $5m–$15m versus comparable prior-year periods. It anticipated potential improvement in warmer-weather months beginning Q2 2015.
- Seaton integration was expected to be substantially completed by the end of Q2 2015. The company reported $2.3m of Seaton acquisition and integration costs in Q3 and $4.3m year to date.
- For 2015, the company planned to offer health coverage to eligible temporary workers under the ACA. Estimated costs were 0.1%–0.4% of estimated 2015 revenue; management intended to seek customer rate increases but cautioned that full recovery was not assured.
- Management emphasized organic revenue and gross-profit growth, operating-cost leverage, technology investment, and branch consolidation. It consolidated 14 branches in Q3 and 52 year to date, with further consolidation planned.
- Key risks include economic and customer-demand volatility, energy-sector weakness, acquisition integration and acquired-intangible impairment, competitive pricing, temporary-worker availability and labor costs, ACA compliance costs, and workers’ compensation claims, reserves, and collateral requirements. The company is substantially self-insured for workers’ compensation; reserve estimates depend on actuarial assumptions and claim trends.
- The filing reported no legal proceedings expected to materially affect results or financial condition, and no other material subsequent events. Management concluded disclosure controls were effective as of September 26, 2014.
Important facts for investors to verify
- How much of subsequent revenue and earnings growth is organic versus acquired, and whether Seaton achieves expected performance and integration benefits.
- Whether energy-sector weakness, including the stated $5m–$15m quarterly revenue impact through Q1 2015, develops as management expected.
- Whether gross margins stabilize as the mix of Seaton, TWC, and legacy operations changes, and whether branch consolidation delivers expected cost leverage.
- Whether WOTC benefits recur: the filing identifies significant 2014 benefits from prior-year hires but says the credit was not renewed for 2014 new hires.
- Whether the company can recover ACA-related costs from customers and meet workers’ compensation collateral needs while managing debt and revolver availability.