TrueBlue, Inc. — Q1 2013 Form 10-Q Summary
Reporting period: Thirteen weeks ended March 29, 2013; comparisons are with the thirteen weeks ended March 30, 2012. TrueBlue provides temporary blue-collar staffing through multiple service lines and operated 733 branches at quarter-end.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $346.5 million | $311.2 million |
| Gross profit | $86.6 million | $79.2 million |
| Gross margin | 25.0% | 25.5% |
| SG&A | $88.4 million | $72.1 million |
| SG&A as a percentage of revenue | 25.5% | 23.2% |
| Operating income (loss) | $(7.0) million | $2.4 million |
| Net income (loss) | $(1.1) million | $1.5 million |
| Diluted EPS | $(0.03) | $0.04 |
| Cash from operations | $6.1 million | $17.7 million |
Revenue increased 11.3%, mainly reflecting the MDT acquisition and stronger demand across most geographies and industries, including construction. Excluding growth from a large customer project, revenue grew 19%, according to management. MDT’s lower gross margin contributed to the 0.5 percentage-point gross-margin decline. SG&A included $4.2 million of acquisition, integration, restructuring, and shutdown costs, as well as MDT’s ongoing operating expenses and other growth-related spending.
The reported net loss included a $3.2 million tax benefit from the retroactive restoration of the Work Opportunity Tax Credit. The resulting effective tax rate was 83.4%; management cited an expected 2013 rate of 34.2% excluding that benefit.
Financial position, liquidity, and debt
- Cash and cash equivalents were $110.8 million at March 29, 2013, down from $129.5 million at December 28, 2012. Total assets were $654.0 million and total liabilities were $318.1 million.
- Restricted cash and investments were $144.4 million, primarily collateral for workers’ compensation obligations. The workers’ compensation reserve was $205.9 million, compared with $195.6 million at year-end.
- Investing cash outflow was $58.9 million, including $53.2 million for MDT. Financing cash inflow was $34.3 million, principally from a new term loan.
- The MDT-related Synovus term loan was $33.7 million outstanding, with a five-year maturity, monthly principal payments totaling $2.3 million annually, and interest at one-month LIBOR plus 1.50%. The reported weighted-average rate for the quarter was 1.7%.
- The $80 million revolving facility had $73.3 million of unused availability after letters of credit. Management reported total facility-defined liquidity of $183.9 million and compliance with facility and term-loan covenants. No revolving-facility borrowings were outstanding during the quarter.
Material changes and acquisition
On February 4, 2013, TrueBlue acquired substantially all assets and certain liabilities of MDT Personnel for $53.2 million in cash. MDT operated 105 branches in 25 states. TrueBlue consolidated 65 branches and integrated MDT principally into Labor Ready during the quarter; remaining administrative integration was expected in Q2 2013. The preliminary purchase-price allocation included $22.5 million of goodwill and $10.2 million of identifiable intangible assets. Management said the valuation remained preliminary and could change. MDT’s standalone contribution to reported results could not be reasonably separated after integration.
Management attributed lower operating results to acquisition-related costs and operating expenses, while describing demand as steady or improving in most markets. Cash from operations fell from $17.7 million to $6.1 million year over year. The filing cites seasonal patterns, timing of customer payments, and increased operating needs as relevant cash-flow factors.
Outlook, risks, and contingencies
- Management’s priorities were to grow revenue, leverage costs, invest in sales and customer service, pursue acquisitions, and expand through shared locations and centralized recruitment. Mobile staffing technology was under development, with deployment expected during 2013 and potential efficiencies in the second half; the extent of benefits remained uncertain.
- Revenue from a large customer project was expected to decline as projects mature: management estimated approximately $25 million in 2013 versus approximately $76 million in 2012. The company expected continued, but reduced, revenue from that customer.
- Management said cash and available borrowing capacity should fund working capital and planned growth over the next twelve months and foreseeable future, but warned that economic deterioration could hurt results and require additional financing, which might not be available on acceptable terms.
- Key risks include economic sensitivity and customer payment capacity; staffing competition and worker availability; employment-related claims and regulation, including potential healthcare costs beginning in 2014; acquisition integration and realization of synergies; information-system disruption; and the availability and cost of workers’ compensation insurance and collateral.
- Workers’ compensation reserves and recoveries depend on estimates and actuarial assumptions. Certain former insurers are in liquidation and have not paid some excess claims; TrueBlue maintained a $6.2 million valuation allowance against related receivables.
- Routine legal proceedings were not expected by management to materially affect results or financial condition. Disclosure controls were reported effective; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Track MDT integration costs, final purchase accounting, acquired-business performance, and whether anticipated synergies and margin benefits materialize.
- Monitor revenue exposure to the large customer project and whether growth in other customers and markets offsets its expected decline.
- Assess gross-margin and SG&A trends, including the effects of MDT’s lower margins and ongoing integration and technology initiatives.
- Review operating cash generation, receivable collection timing, term-loan amortization, and revolver availability against seasonal working-capital needs.
- Evaluate workers’ compensation reserve development, required collateral, and recoverability of claims involving insurers in liquidation.
- Confirm the effective impact of the restored tax credit and monitor potential healthcare-related costs and other regulatory changes.