TrueBlue, Inc. — Q3 2010 Form 10-Q Summary
Business context and reporting period
TrueBlue provides blue-collar staffing through multiple brands. This unaudited filing covers the 13 and 39 weeks ended September 24, 2010, compared with periods ended September 25, 2009. Fiscal 2010 has 53 weeks, with the extra week in Q4; management cautions that seasonality makes interim results not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q3 2010 | Q3 2009 | 39 weeks 2010 | 39 weeks 2009 |
|---|---|---|---|---|
| Revenue | $312.8 million | $284.8 million | $837.4 million | $756.3 million |
| Gross profit | $84.6 million | $82.6 million | $221.5 million | $218.1 million |
| Gross margin | 27.0% | 29.0% | 26.5% | 28.8% |
| Operating income | $16.3 million | $13.4 million | $22.7 million | $8.8 million |
| Net income | $10.2 million | $8.2 million | $15.9 million | $6.7 million |
| Diluted EPS | $0.23 | $0.19 | $0.37 | $0.16 |
Q3 revenue grew 9.8%; year-to-date revenue grew 10.7%. Operating margin was 5.2% in Q3 versus 4.7%, and 2.7% year to date versus 1.2%. SG&A was $64.4 million in Q3 and $186.9 million year to date, down from $65.0 million and $196.6 million, respectively. Gross margin declined as a result of business mix, higher temporary-worker costs (including unemployment taxes), and higher workers’ compensation expense. Q3 workers’ compensation expense was $12.7 million versus $8.4 million.
Cash from operating activities for the 39 weeks was $14.3 million, versus $4.7 million; capital expenditures were $5.3 million versus $10.5 million. Cash and cash equivalents were $139.0 million at September 24, 2010, and restricted cash was $117.7 million. Total assets were $544.9 million and total liabilities $238.7 million. Workers’ compensation reserves totaled $189.6 million. The filing reports $66.3 million available under the $80 million revolving facility after letters of credit; together with $141.3 million of cash under lender control agreements, reported covenant liquidity was $207.6 million, above the $30 million minimum. The filing does not provide a clear value for any drawn revolver balance. The facility expires June 2012; the company reported covenant compliance.
Material changes and notable items
- Q3 same-branch revenue grew 11.1%; excluding Boeing, same-branch revenue grew 22.6%. Boeing revenue fell to approximately $23 million from its Q3 2009 peak, weighing on reported growth.
- Workers’ compensation expense increased, while management said actual claim settlement costs remained below prior estimates; reductions in prior-year estimates were smaller than in Q3 2009.
- Management recorded $1.2 million of HIRE Act payroll-tax credits in Q3. The 39-week effective tax rate was 32.1% versus 39.2%, including a $1.3 million benefit from favorable development of a prior-period tax matter.
- Two former insurers are in liquidation and have not paid certain excess claims. A $7.7 million valuation allowance was recorded against receivables from troubled insurers, up from $6.8 million at year-end 2009.
Outlook, commentary, and risks
Management expected continued 2010 revenue growth and strong demand into Q4, citing improving trends across most industries and geographies. It forecast Boeing revenue of approximately $20 million in Q4. The extra fiscal week was expected to add about 1% to full-year revenue and 4% to Q4 revenue versus prior-year periods, with limited profitability impact because it is a low-revenue week. Management’s stated priority was same-branch growth and a 20% incremental operating margin on additional same-branch revenue. It expected approximately $8 million of capital expenditures for 2010 and said available liquidity was sufficient for operations and anticipated expansion plans.
Key risks include economic recovery and customer demand, customer concentration and Boeing-related revenue declines, pressure to pass through labor and unemployment-tax increases, workers’ compensation reserve estimation and collateral needs, insurer and banking-partner exposure, competition and pricing constraints, and potential costs from health-care reform beginning in 2014. Staffing availability, regulation, regional concentration, seasonality, and execution of expansion or acquisitions are also cited risks.
Important facts for investors to verify
- Whether same-branch growth can persist as Boeing revenue declines, and how Q4 revenue compares with management’s outlook.
- Workers’ compensation claim development, reserve assumptions, required collateral, and recoveries from troubled insurers.
- Whether wage, unemployment-tax, and other cost increases can be passed through without further margin erosion.
- Cash conversion and working-capital needs, including the distinction between unrestricted, restricted, and lender-controlled cash.
- Potential effects of health-care reform and other regulatory changes on staffing costs and customer pricing.