TrueBlue, Inc. — Q3 2011 Form 10-Q
Business and period. TrueBlue provides temporary blue-collar staffing through Labor Ready, Spartan Staffing, CLP Resources, PlaneTechs and Centerline. The quarter ended September 30, 2011 and covered 13 weeks; year-to-date results cover 39 weeks. Comparisons are to the periods ended September 24, 2010. Fiscal 2011 has 52 weeks versus 53 weeks in fiscal 2010.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 39 weeks 2011 | 39 weeks 2010 |
|---|---|---|---|---|
| Revenue | $371.4 million | $312.8 million | $965.9 million | $837.4 million |
| Gross profit | $99.9 million | $84.6 million | $255.2 million | $221.5 million |
| Operating income | $22.4 million | $16.3 million | $37.2 million | $22.7 million |
| Net income | $13.9 million | $10.2 million | $23.2 million | $15.9 million |
| Diluted EPS | $0.33 | $0.23 | $0.54 | $0.37 |
| Operating margin | 6.0% | 5.2% | 3.8% | 2.7% |
Q3 revenue grew 18.7%; operating income rose 37.7%. Gross margin was 26.9%, versus 27.0% reported in the prior-year quarter; excluding the prior-year 0.4%-of-revenue HIRE Act credits, management said gross margin improved 0.3 percentage points. SG&A declined to 19.7% of revenue from 20.6%, reflecting scale benefits, despite higher spending on sales and recruiting staff. Workers’ compensation expense was 4.0% of revenue in both quarters. The effective tax rate was 38.8% in Q3, compared with 37.7%.
Cash, liquidity and capital
- Cash and cash equivalents were $99.1 million at September 30, 2011, versus $163.2 million at December 31, 2010. Restricted cash and investments were $136.5 million, principally collateral for workers’ compensation obligations.
- For the 39 weeks, operating cash flow was $16.5 million, compared with $14.3 million. A $70.1 million increase in accounts receivable, primarily tied to revenue growth and seasonal Q3 activity, was a significant use of cash.
- Investing activities used $29.5 million, including $6.3 million of capital expenditures and purchases of restricted investments. Financing activities used $50.6 million, principally for $50.1 million of share repurchases. Management expected full-year 2011 capital expenditures of about $10 million.
- The company reported $188.0 million of discounted workers’ compensation reserves. Total collateral commitments were $162.2 million, up from $140.6 million at year-end; $15.8 million related to a reimbursement timing difference with its insurance provider, which management expected to resolve in Q4.
- A secured revolving credit facility of up to $80 million was amended and extended to September 2016. At quarter-end, $69 million was available after letters of credit; covenant-defined liquidity was $174 million, above the $12 million minimum. The filing does not provide a clear quarter-end drawn debt balance; it reports $0.3 million of debt payments year to date.
Changes, outlook and risks
Revenue growth was broad across most industries and geographies; management attributed about one-third of Q3 revenue growth to energy-related construction projects. Two acquisitions were completed year to date for a total purchase price of $17.4 million, including $10.6 million payable in the future; $11.2 million was recorded as goodwill. The company repurchased 3.9 million shares for $50.1 million year to date, including 3.0 million shares for $37 million in Q3. After quarter-end it repurchased another 0.4 million shares for about $4.6 million.
Management expected strong Q4 revenue growth and continued positive gross-margin trends, and projected continued operating-margin improvement as revenue leveraged the cost structure. It estimated approximately 9% reported revenue growth for a 13-week Q4 2011 versus the prior 14-week quarter, or approximately 18% on a comparable-week basis. The calendar shift and absence of a seasonally higher-volume week reduce reported growth by about 9 percentage points. Prior-year Q4 also included nonrecurring HIRE Act and payroll-tax benefits of about 0.2% of revenue. Management cautioned that revenue growth percentages would diminish in later quarters against more difficult comparisons and noted uncertainty in the economic recovery.
Key risks include economic sensitivity of staffing demand; workers’ compensation claims, collateral requirements and insurer collectability; competition and worker availability; employment and regulatory obligations, including prospective health-care costs; and potential disruption or added costs from management-information-system replacement and third-party vendors. Two former insurers are in liquidation; the company has a $7.3 million valuation allowance against receivables from them. Management said ordinary-course legal matters were not expected to materially affect results or financial condition. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether Q4 revenue and margin trends met management’s outlook, accounting for the 14-week comparison and prior-year tax-credit benefits.
- Collection and reimbursement of the $15.8 million insurance timing item, and any resulting changes in restricted cash and collateral needs.
- Workers’ compensation reserve adequacy, collateral requirements and recovery prospects for claims involving liquidated insurers.
- Working-capital and operating cash-flow conversion as receivables rise with revenue.
- Use of remaining repurchase authorization and effects of acquisitions, staffing investments and information-system implementation on returns and liquidity.