TrueBlue, Inc. — Q3 2015 Form 10-Q
Business and period. TrueBlue provides temporary staffing, recruitment process outsourcing and managed workforce services. This unaudited report covers the 13 and 39 weeks ended September 25, 2015; comparisons are with the periods ended September 26, 2014. Unless otherwise noted, amounts are in millions.
Financial performance
| Metric | Q3 2015 | Q3 2014 | 39 weeks 2015 | 39 weeks 2014 |
|---|---|---|---|---|
| Revenue | $683.9 | $633.4 | $1,884.9 | $1,482.7 |
| Gross profit | $168.9 | $159.6 | $450.7 | $378.7 |
| Gross margin | 24.7% | 25.2% | 23.9% | 25.5% |
| SG&A | $125.1 | $120.3 | $354.6 | $308.7 |
| Operating income | $33.3 | $29.6 | $64.7 | $50.0 |
| Operating margin | 4.9% | 4.7% | 3.4% | 3.4% |
| Net income | $20.1 | $20.9 | $43.1 | $38.7 |
| Diluted EPS | $0.48 | $0.51 | $1.04 | $0.94 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $120.3 | $59.9 |
Q3 revenue rose 8.0%, with management attributing growth to broad improvement across most service lines, geographies and industries. Reported 39-week revenue growth of 27.1% was substantially affected by the Seaton acquisition; excluding Seaton, management reported growth of 2.4%. Organic revenue growth improved to 8.0% in Q3, from 0.4% and 1.4% in Q1 and Q2, respectively.
Balance sheet and liquidity
- At September 25, 2015, cash and cash equivalents were $23.2; restricted cash and investments were $181.9, principally collateral for workers’ compensation obligations.
- Total debt was $114.0, down from $201.7 at December 26, 2014, following $86.0 of net revolving-credit-facility repayments during the 39-week period. The company reported $201.0 of additional borrowing availability and compliance with credit-facility covenants.
- Total assets were $1,061.9 and shareholders’ equity was $517.3. Workers’ compensation reserves were $252.9, net of discount.
- Net cash from operations was $120.3; investing activities used $25.8 and financing activities used $89.1. Capital expenditures were $12.6. Cash increased $3.6 to $23.2.
Changes, outlook and risks
- Margins and earnings: Q3 gross margin declined 0.5 percentage points, primarily from revenue mix and unfavorable workers’ compensation and payroll-cost trends. Operating income increased 12.5%, but net income and diluted EPS declined, mainly because the Q3 effective tax rate rose to 38.9% from 28.3%. For 39 weeks, the effective tax rate was 32.2%, including $3.7 of hiring-credit benefits from prior-year hires; the federal WOTC and California credit programs had expired and did not apply to 2015 new hires.
- Acquisition comparability: Seaton was acquired effective June 30, 2014, so the 2014 39-week comparison includes only 13 weeks of Seaton results, versus a full period in 2015. Seaton-related intangible amortization contributed to higher year-to-date depreciation and amortization.
- Management outlook: No numerical earnings or revenue guidance was provided. Management’s priorities are organic revenue and gross-profit growth, operating leverage, technology investment and growth in staffing and outsourced recruitment services. It expects investments in start-up costs for new on-site and recruitment-process-outsourcing customers to benefit results in 2016, and expects current operating trends to continue into fiscal 2016, subject to economic conditions. Management expects to apply excess cash to revolver debt and believes cash flow and capital resources will cover foreseeable requirements.
- Key risks and estimates: Staffing demand is sensitive to economic cycles, industry conditions and customer credit. The company is substantially self-insured for workers’ compensation, and collateral requirements may rise with business growth or changing claims. Favorable prior-period claims adjustments are diminishing. Several acquired Seaton reporting units had limited goodwill valuation headroom: hrX was approximately 7% above carrying value, PeopleScout 11%, and MSP 15%; adverse changes in forecasts or discount rates could trigger impairment testing and charges. Certain former workers’ compensation insurers are in liquidation; receivables from them are fully reserved.
- Other matters: Routine legal proceedings were not expected to have a material effect. Management reported effective disclosure controls; integration of Seaton’s controls and systems was ongoing. No material changes to contractual obligations outside the ordinary course were reported.
Investor verification priorities
- Confirm the sources and sustainability of improving organic growth, particularly the reported Q3 8.0% rate, and separate organic performance from Seaton acquisition effects.
- Track gross-margin drivers, workers’ compensation costs and the pace of declining favorable reserve adjustments.
- Assess whether higher tax rates after prior-year hiring credits affect future net income and EPS.
- Monitor workers’ compensation reserves, collateral commitments, insurer recoverables and liquidity available after restricted cash is excluded.
- Review performance and impairment headroom for hrX, PeopleScout and MSP, and progress integrating Seaton’s controls and systems.