TrueBlue, Inc. — Q2 2013 Form 10-Q
Reporting period: The 13 and 26 weeks ended June 28, 2013; comparisons are to the periods ended June 29, 2012. TrueBlue provides temporary blue-collar staffing through multiple service lines and operated 737 branches at quarter-end.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $422.3 million | $354.3 million | $768.8 million | $665.4 million |
| Revenue growth | 19.2% | 10.6% | 15.5% | 11.9% |
| Gross profit | $111.9 million | $93.5 million | $198.5 million | $172.8 million |
| Gross margin | 26.5% | 26.4% | 25.8% | 26.0% |
| Operating income | $17.3 million | $17.3 million | $10.4 million | $19.7 million |
| Net income | $12.5 million | $10.3 million | $11.5 million | $11.9 million |
| Diluted EPS | $0.31 | $0.26 | $0.28 | $0.30 |
| Operating cash flow | — | $24.1 million | $27.8 million |
Q2 SG&A was $89.3 million, or 21.2% of revenue, versus $71.5 million, or 20.2%, a year earlier. First-half SG&A was $177.8 million, or 23.1% of revenue, versus $143.6 million, or 21.6%. First-half operating income declined despite higher revenue. The first-half tax benefit of $0.3 million (effective rate of -3.0%) largely reflected retroactive restoration of the federal Work Opportunity Tax Credit (WOTC); Q2 tax expense was $5.1 million.
Liquidity, debt and cash flow
Cash and cash equivalents were $136.0 million at June 28, 2013, up from $129.5 million at year-end 2012. Restricted cash and investments were $134.1 million, primarily collateral for workers’ compensation. The company reported $33.1 million outstanding on its variable-rate term loan, including $2.3 million current; it did not draw on its revolving facility. The $80 million facility had $73.9 million unused after letters of credit, and reported total covenant liquidity of $208.6 million. The company was in compliance with loan covenants.
First-half investing cash outflow was $54.3 million, including $54.9 million for acquisitions, while financing cash inflow was $37.2 million, mainly from $34.0 million of term-loan proceeds. Capital expenditures were $7.2 million. Accounts receivable and the provision for doubtful accounts rose; management cited probable credit losses on several larger customers.
Material changes and unusual items
- TrueBlue acquired substantially all of MDT Personnel’s assets and assumed certain liabilities on February 4 for $53.4 million. MDT was integrated into existing operations, including consolidation of 65 branches; management said it could not reliably separate MDT revenue from organic growth. Q2 and first-half results therefore include the acquisition for only part of the reporting periods.
- The company incurred MDT acquisition and integration costs of $1.8 million in Q2 and $6.0 million in the first half. MDT carried lower gross margins than TrueBlue’s blended average.
- Revenue growth also reflected stronger demand across most geographies and industries, particularly construction. Excluding a large aviation customer, revenue grew 25% in Q2 and 22% in the first half.
- Workers’ compensation reserves were $206.6 million, up from $195.6 million at year-end. The company is substantially self-insured, and certain former insurers in liquidation have not paid excess claims; a $5.9 million valuation allowance was recorded against related receivables.
Outlook, commentary and risks
Management’s stated priorities were revenue growth, cost leverage, specialized sales and customer service investment, and further acquisitions. It expected increasing profitability in the remainder of 2013, citing the end of MDT integration costs, a diminishing aviation-project decline, and operating leverage. It did not provide numerical earnings or revenue guidance. Management estimated revenue from the large aviation customer at $30–$35 million for 2013, versus approximately $76 million in 2012, and said the project was nearing completion. New mobile dispatch technology was deployed in Q2; early results were described as promising.
Key risks include economic sensitivity and customer demand, staffing competition and worker availability, acquisition integration and realization of synergies, workers’ compensation claims and collateral requirements, customer credit losses, and regulatory and employment-related claims. Management said operating cash flow and capital resources should meet requirements for the next 12 months and foreseeable future, while warning that economic deterioration could impair results and require additional financing. Demand is seasonal, typically stronger in the second and third quarters.
Important facts for investors to verify
- How much reported growth reflects MDT versus organic demand, given that management could not separate the acquired business’s revenue.
- Whether MDT integration delivers expected cost synergies and the anticipated reduction in SG&A burden.
- How the aviation customer’s project wind-down affects revenue and fixed-cost absorption relative to management’s 2013 estimate.
- Credit quality and collections, including the larger-customer losses underlying the increased doubtful-account provision.
- Workers’ compensation reserve adequacy, future collateral needs, and recovery prospects from insurers in liquidation.
- The sustainability of first-half earnings, which benefited from WOTC-related tax credits, and the effect of variable-rate debt.