TrueBlue, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 26, 2014 (52 weeks). The filing also reports unaudited fourth-quarter results. TrueBlue provides blue-collar staffing, on-premise staffing, recruitment process outsourcing (RPO), and managed service provider (MSP) solutions.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $2,174.0 million | $1,668.9 million |
| Gross profit / margin | $537.0 million / 24.7% | $442.3 million / 26.5% |
| Operating income / margin | $81.7 million / 3.8% | $59.6 million / 3.6% |
| Net income | $65.7 million | $44.9 million |
| Diluted EPS | $1.59 | $1.11 |
| Cash from operating activities | $47.5 million | $86.1 million |
FY2014 fourth quarter: Revenue was $691.4 million, operating income $31.8 million, and net income $27.0 million ($0.65 diluted EPS), versus $449.0 million, $21.2 million, and $14.5 million ($0.36 diluted EPS), respectively, in Q4 2013.
Year-end financial position: Cash, cash equivalents and marketable securities totaled $21.2 million; working capital was $228.6 million; total assets were $1,066.7 million and total liabilities $597.3 million. Debt was $201.7 million: $172.0 million drawn on the revolving facility and $29.7 million under the term loan. Revolver availability was $101.3 million. Restricted cash and investments, primarily workers’ compensation collateral, totaled $168.4 million.
Material changes versus prior year
- Revenue increased 30.3%, principally from acquisitions. Seaton, acquired June 30, contributed $394.4 million of revenue in the second half; prior-year MDT and The Work Connection acquisitions also contributed. Organic revenue growth was approximately 2.0%, or 4.2% excluding green-energy services, which declined.
- Gross margin fell to 24.7% from 26.5%, largely because acquired businesses had lower gross margins. Management said organic-business gross margin improved with pricing discipline and management of wage and payroll-tax costs.
- SG&A rose $63.5 million to $425.8 million, but declined to 19.6% of revenue from 21.7%, primarily reflecting Seaton’s more centralized, lower-cost operating model. Depreciation and amortization increased $9.0 million, largely from acquired intangible assets.
- Net income rose, while operating cash flow declined to $47.5 million, reflecting, among other factors, a $77.6 million increase in accounts receivable and acquisition-related growth.
- The effective tax rate declined to 19.8% from 26.3%, mainly due to the retroactively restored Work Opportunity Tax Credit (WOTC) and additional prior-year credits. Management reported approximately $8.7 million of WOTC benefit from prior-year wages in 2014.
Outlook, risks and unusual items
- Management’s 2015 priorities were organic revenue and gross-profit growth, operating-cost leverage, broader cross-selling, continued technology investment, and acquisitions. The filing provides no specific revenue or earnings guidance.
- Management estimated ACA healthcare coverage would add approximately 0.1%–0.4% of estimated 2015 revenue in costs; customer rate increases were intended to offset the expense, but full recovery was not assured.
- Seaton cost $305.9 million net of cash acquired, funded partly by a $187.0 million revolver draw and $118.9 million of existing cash. FY2014 included $5.2 million of acquisition and integration costs; integration was substantially complete, with completion expected by mid-2015.
- Workers’ compensation is a significant estimate and liquidity exposure. The reserve was $242.8 million; management said a 5% change in cost of claims incurred would change expense by approximately $4.4 million. Collateral commitments were $180.0 million, and certain former insurers in liquidation had failed to pay excess claims; the related insurance receivables were subject to a valuation allowance.
- Key risks include economic cyclicality, pricing and wage pressure, regulatory and employment-related claims, workers’ compensation collateral requirements, customer concentration, integration and goodwill impairment, and information-system and data-security risks. PlaneTechs was identified as relatively more exposed to impairment if forecast revenue growth fell 10% or gross margin declined 2%.
- Routine legal proceedings were not expected to materially affect results or financial condition. Deloitte issued unqualified opinions on the financial statements and internal controls; however, Seaton’s internal controls were excluded from the year-end control assessment while integration was underway. No impairment was recorded in the annual goodwill test.
Important facts for investors to verify
- Whether Seaton delivers sustained organic growth and expected integration, cross-selling, and cost-synergy benefits.
- Whether margins recover as acquired operations are integrated, and whether reported growth remains dependent on acquisitions.
- Cash conversion and receivables collection, given the sharp decline in operating cash flow and higher year-end receivables.
- Debt paydown, revolver availability, covenant headroom, and the ability to fund workers’ compensation collateral and growth.
- Workers’ compensation reserve development, collateral demands, and recoverability of balances due from insurers in liquidation.
- The durability of WOTC-related tax benefits and actual ACA-related costs and customer rate recovery in 2015.
- Progress integrating Seaton’s controls and systems, and the performance and impairment sensitivity of the PlaneTechs reporting unit.