TrueBlue, Inc. — Q2 2011 Form 10-Q
Business and period. TrueBlue provides temporary blue-collar staffing through brands serving general labor, light industrial, skilled trades, aviation and commercial driving markets. This report covers the 13 and 26 weeks ended July 1, 2011; comparisons are with periods ended June 25, 2010.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $320.2 million | $284.8 million | $594.5 million | $524.7 million |
| Gross profit / margin | $85.3 million / 26.7% | $75.8 million / 26.6% | $155.4 million / 26.1% | $137.0 million / 26.1% |
| Operating income / margin | $13.8 million / 4.3% | $10.6 million / 3.7% | $14.7 million / 2.5% | $6.5 million / 1.2% |
| Net income | $8.5 million | $7.9 million | $9.3 million | $5.7 million |
| Diluted EPS | $0.20 | $0.18 | $0.21 | $0.13 |
Cash flow and balance sheet. First-half operating cash flow was $1.1 million, down from $10.5 million, primarily reflecting a $36.4 million cash use from accounts receivable as revenue grew. Investing cash flow was negative $9.2 million, including $3.7 million of capital expenditures and increased restricted investments; financing cash flow was negative $13.4 million, mainly from $12.9 million of share repurchases. Cash and equivalents were $142.0 million at July 1, versus $163.2 million at year-end 2010. Total assets were $560.4 million and liabilities $247.3 million. Restricted cash and investments were $122.8 million.
Debt and liquidity. The company reported an $80 million secured revolving credit facility expiring June 2012, with $69 million unused after letters of credit. Cash under lender control agreements plus available borrowing totaled $216.4 million, versus a $30 million minimum liquidity requirement; the company reported covenant compliance. The filing does not provide a clear total funded-debt balance. Workers’ compensation reserves were $186.0 million, and collateral commitments were $148.1 million.
Changes and management commentary
- Q2 revenue increased 12.4%; management attributed growth to broad demand across most industries and geographies, including growth in 19 of its top 20 states. Monthly growth accelerated from 13.5% in April to 17.0% in June; May growth was 6.0%, or approximately 13% excluding a large prior-year project.
- Q2 operating income rose 29.6%, with management citing revenue growth and operating-cost leverage. SG&A declined to 21.1% of revenue from 21.5%; the company also invested in sales and recruiting staff.
- Reported Q2 gross margin was 26.7%, but included a 0.5 percentage-point benefit from resolving a payroll-tax matter. Excluding that benefit, margin was 26.2%, down 0.4 percentage points year over year, reflecting customer and business mix, workers’ compensation expense and competitive pricing.
- Q2 workers’ compensation expense was 3.9% of revenue versus 3.7% a year earlier. First-half expense increased to $22.6 million from $18.3 million.
- The effective tax rate was 38.8% in Q2 versus 26.9% a year earlier; the prior-year rate benefited from a $1.3 million favorable tax resolution.
- TrueBlue acquired A-1 Staffing on June 6, expanding light-industrial staffing in eight locations. Management said the acquisition’s effect on consolidated results was not material.
- The company transferred workers’ compensation collateral into a trust and invested primarily in investment-grade securities. It renewed its Chartis coverage for July 2011 through June 2012.
Outlook, risks and contingencies
- Management expected continued revenue growth across most major industries and geographies, while anticipating slower percentage growth as comparisons become more challenging. It expected further operating-margin improvement as revenue grows and fixed costs are leveraged.
- Management expected Boeing-related revenue of approximately $20–$25 million per quarter during 2011, and workers’ compensation expense at about 4% of revenue for the rest of the year. Expected 2011 capital expenditures were $8–$10 million.
- Management said gross margin had stabilized but identified continued pricing pressure and a mix shift toward lower-margin large customers. State unemployment-tax costs could rise further and may not be fully passed through to customers.
- Principal risks include economic sensitivity of staffing demand, workers’ compensation insurance and collateral requirements, insurance recoverability, competition and pricing, availability of qualified employees and temporary workers, regulation and health-care costs, and information-system reliability. The company noted implementation issues and possible delays with a key system replacement.
- Two former workers’ compensation insurers are in liquidation; some excess claims were rejected by state guaranty funds. A $7.4 million valuation allowance was recorded against related receivables. Management said ordinary-course legal proceedings were not expected to materially affect results or financial condition.
- After quarter-end, TrueBlue repurchased 0.2 million shares for approximately $3.4 million. On July 25, the board authorized an additional $75 million repurchase program, bringing authorization available to approximately $80 million.
Important facts for investors to verify
- Whether revenue growth converts into cash: first-half operating cash flow fell to $1.1 million, with receivables absorbing substantial cash.
- Underlying gross-margin trend excluding the one-time 0.5-point payroll-tax benefit, and the impact of pricing, customer mix and workers’ compensation costs.
- Adequacy of workers’ compensation reserves and collateral, including collection prospects for claims involving insurers in liquidation and the potential for additional collateral calls.
- Progress and remaining risks in the key management-information-system replacement project.
- Use of cash for the expanded share repurchase program relative to working-capital needs, acquisitions and other investment opportunities.
- Comparability of annual results: fiscal 2011 has 52 weeks, while fiscal 2010 had 53 weeks; management said the extra week added about $14 million of 2010 revenue.