TBI

TrueBlue, Inc. 10-Q Summary: Period Ended June 29, 2012

Business Context and Reporting Period

This report covers the quarterly period ended June 29, 2012 (Q2 2012) and the twenty-six weeks ended June 29, 2012 (YTD 2012). TrueBlue, Inc. is a leading provider of temporary blue-collar staffing services operating through brands such as Labor Ready, Spartan Staffing, and CLP Resources. The company operates approximately 700 branches across the U.S., Puerto Rico, and Canada.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 10.6% in Q2 2012 and 11.9% YTD compared to the prior year. Growth was driven by non-residential construction and renewable energy projects, while the residential construction market remained weak.
• Profitability: Net income grew 20.9% in Q2 2012. Operating margin improved to 4.9% in Q2 2012 from 4.3% in Q2 2011, aided by disciplined pricing that offset increases in minimum wage and unemployment taxes.
• Cash Flow: Net cash provided by operating activities surged to $27.8 million YTD 2012 from $1.1 million YTD 2011. The prior year's low cash flow was partly due to a low beginning accounts receivable balance from large customer payments in late 2010.
• Capital Expenditures: Capital spending increased to $9.5 million YTD 2012 from $3.7 million YTD 2011, primarily due to the completion of a new operating system and technology investments.
• Stock Repurchases: The company repurchased and retired 0.3 million shares for $4.0 million YTD 2012, compared to 0.9 million shares for $12.9 million in the prior year period.

Guidance, Outlook, and Risks

• Outlook: Management expects continued revenue growth in 2012 assuming stable economic conditions, though the rate of growth may diminish due to challenging prior-year comparisons. The company plans to invest in sales programs and evaluate strategic acquisitions.
• Cost Pressures: Minimum wage and unemployment tax increases in 2012 have been passed on to customers via higher billing rates. Management notes that customers may resist further price increases until state unemployment funds are replenished.
• Customer Concentration: The company's largest customer accounted for 6.4% of Q2 2012 revenue ($22.8 million). Revenue from this customer is project-based and subject to completion timelines.
• Workers' Compensation: The company is substantially self-insured with a $2.0 million deductible per occurrence. Total collateral commitments for workers' compensation obligations were $145.1 million as of June 29, 2012. Two former insurance carriers are in liquidation, and a valuation allowance of $7.2 million has been recorded against receivables from them.
• Risk Factors: Key risks include sensitivity to general economic conditions, regulatory changes (including the Affordable Care Act), potential shortages of qualified temporary workers, and the adequacy of insurance coverage for workplace claims.

Investor Verification Checklist

• Workers' Compensation Reserves: Verify the adequacy of the $192.7 million discounted reserve and the $7.2 million valuation allowance related to insolvent insurers.
• Collateral Requirements: Monitor the $145.1 million in collateral commitments and the impact of potential increases as the business grows.
• Customer Concentration: Track the status of projects with the largest customer (6.4% of Q2 revenue) to assess revenue stability.
• Unemployment Tax Trends: Assess the sustainability of billing rate increases required to cover rising state unemployment taxes.
• Technology ROI: Evaluate the return on the increased capital expenditures ($9.5 million YTD) for the new operating system.