TrueBlue, Inc. — Q2 2015 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 26, 2015. Dollar amounts below are in millions, except per-share data. TrueBlue provides staffing, recruitment-process outsourcing and managed workforce services. The year-over-year comparison is significantly affected by the June 2014 acquisition of Staffing Solutions Holdings (Seaton); the prior-year second quarter did not include Seaton.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $627.7 | $453.2 | $1,201.0 | $849.3 |
| Gross profit | $152.0 | $119.6 | $281.8 | $219.1 |
| Gross margin | 24.2% | 26.4% | 23.5% | 25.8% |
| SG&A | $117.9 | $96.4 | $229.5 | $188.3 |
| Operating income | $23.7 | $18.0 | $31.4 | $20.4 |
| Net income | $17.3 | $16.1 | $23.0 | $17.7 |
| Diluted EPS | $0.42 | $0.39 | $0.55 | $0.43 |
| Operating cash flow | — | — | $106.7 | $28.9 |
- Q2 revenue rose 38.5%; first-half revenue rose 41.4%. Seaton contributed $168.0 million of Q2 revenue and $343.8 million in the first half. Legacy TrueBlue organic revenue growth was 1.4% in Q2, or 2.6% excluding the green-energy business decline.
- Q2 operating income increased 31.9%, while operating margin eased to 3.8% from 4.0%. First-half operating margin improved to 2.6% from 2.4%.
- Management attributed lower gross margin primarily to Seaton’s lower-margin mix, partly offset by legacy business margin improvement from disciplined pricing and cost management. SG&A as a share of revenue declined, reflecting Seaton’s more centralized, lower-cost model and legacy cost control.
- First-half net income included approximately $3.7 million of additional prior-year hiring-credit benefits. Effective tax rates were 25.1% for the first half of 2015 and 16.3% for the comparable 2014 period.
Financial position and cash flow
- At June 26, cash and cash equivalents were $21.3 million; restricted cash and investments were $164.7 million, principally collateral for workers’ compensation. Total assets were $1,008.0 million, versus $1,066.7 million at fiscal year-end 2014.
- Total debt was $102.0 million, down from $201.7 million at December 26, 2014, mainly reflecting $98.5 million of net revolving-credit-facility repayments. The facility had $183.2 million available for additional borrowing; the company reported compliance with its covenants and liquidity requirements.
- First-half operating cash flow was $106.7 million, compared with $28.9 million a year earlier. Management cited higher earnings and favorable working-capital movements, including a $31.9 million accounts-receivable cash source; seasonal timing changed following the Seaton acquisition.
- First-half capital expenditures were $7.5 million. Investing activities used $3.2 million and financing activities used $101.0 million. Management said excess cash would continue to be applied to revolving debt.
- The workers’ compensation reserve was $247.3 million, net of discount, compared with $242.8 million at year-end. First-half workers’ compensation expense rose to $44.4 million from $33.5 million.
Outlook, risks and notable items
- No numeric revenue or earnings guidance was provided. Management’s priorities for the rest of 2015 are organic revenue and gross-profit growth, operating leverage, technology investment, and leveraging Seaton’s recruitment and centralized-service capabilities. Management described Seaton’s integration as complete and its first-year performance as meeting expectations.
- The federal Work Opportunity Tax Credit and California Enterprise Zone Tax Credit were not available for 2015 new hires, although trailing benefits from prior-year hires continued. The filing cautions that interim results do not necessarily indicate full-year results.
- Annual goodwill testing found no impairment. However, PeopleScout, MSP and hrX had limited fair-value cushions over carrying value; hrX’s post-acquisition results had not met acquisition forecasts. The filing identifies sensitivity to weaker growth or margins and higher discount rates. PlaneTechs was also identified as having comparatively greater impairment risk.
- Key risks include economic and customer-demand volatility, pricing and labor-cost pressure, workers’ compensation claim and collateral requirements, insurance availability, regulation and employment claims, customer concentration, competition, acquisition and integration risks, and technology and data-security disruptions. Management said ordinary-course legal proceedings were not expected to materially affect results or financial condition.
Important facts for investors to verify
- How much future growth and profitability are organic versus attributable to Seaton, and whether legacy growth accelerates.
- Whether gross-margin pressure from Seaton’s business mix is offset by pricing, productivity and cost control.
- The sustainability of elevated operating cash flow, including the effect of seasonal receivables and workers’ compensation collateral needs.
- Workers’ compensation reserve development, collateral demands and insurance recoveries, including exposure to insurers in liquidation.
- Performance and impairment headroom for hrX, PeopleScout, MSP and PlaneTechs, and the effect of changes in forecasts or valuation assumptions.
- Tax-rate effects as prior-year hiring-credit benefits run off; the filing provides no numeric full-year earnings guidance.