TrueBlue, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. TrueBlue provides temporary blue-collar staffing through several service lines. This unaudited filing covers the 13 weeks ended September 27, 2013, and year-to-date results for the 39 weeks ended that date. The company reported 725 branches at quarter-end. Results are seasonal, with demand typically peaking in the second and third quarters.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | 39 weeks 2013 | 39 weeks 2012 |
|---|---|---|---|---|
| Revenue | $451.2 million | $379.5 million | $1,220.0 million | $1,044.9 million |
| Gross profit / margin | $123.5 million / 27.4% | $105.2 million / 27.7% | $322.0 million / 26.4% | $278.0 million / 26.6% |
| Operating income / margin | $28.0 million / 6.2% | $22.9 million / 6.0% | $38.4 million / 3.1% | $42.6 million / 4.1% |
| Net income | $19.0 million | $14.3 million | $30.4 million | $26.2 million |
| Diluted EPS | $0.47 | $0.36 | $0.75 | $0.66 |
- Cash flow: Year-to-date operating cash flow was $45.3 million, versus $33.0 million. Investing used $97.5 million, principally for acquisitions and securities purchases; financing provided $32.7 million. Cash and cash equivalents ended at $109.5 million, down from $129.5 million at year-end 2012.
- Liquidity: Cash, cash equivalents and marketable securities totaled $144.6 million. The revolving facility had $73.9 million available after letters of credit; reported facility liquidity was $186.1 million, above its $12 million minimum. The company said it was in compliance with covenants.
- Debt: The Synovus term loan had a $32.5 million balance, including $2.3 million current. It is variable-rate, with a five-year maturity and 1.50% spread over one-month LIBOR. No revolving-facility borrowings were outstanding during the year-to-date period.
- Workers’ compensation: Discounted claims reserves were $207.8 million, versus $195.6 million at December 28, 2012. Restricted cash and investments were $138.5 million; total collateral commitments, including letters of credit and surety bonds, were $154.9 million.
Material changes versus the prior comparable period
- Q3 revenue increased 18.9%; year-to-date revenue increased 16.8%. Growth primarily reflected the MDT acquisition, as well as stronger demand across most geographies and industries, particularly construction. Management said it could not reliably separate MDT revenue from organic growth.
- MDT’s lower-margin business mix contributed to modest gross-margin declines. Q3 SG&A fell to 20.1% of revenue from 20.5%, reflecting operating leverage; year-to-date SG&A rose to 22.0% from 21.2%, affected by acquisition/integration costs and lower revenue from a large aviation project.
- Q3 operating income and net income rose year over year, but year-to-date operating income declined. Year-to-date net income increased partly because the effective tax rate fell to 23.1% from 40.0%, mainly reflecting the restored Work Opportunity Tax Credit (WOTC), including retroactive 2012 benefits.
- Cash and marketable securities were higher in aggregate than at year-end, but cash and cash equivalents alone declined. The company funded acquisitions in part with a $34.0 million term loan.
Outlook, commentary, risks and unusual items
- Management expected increasing profitability for the remainder of 2013, citing operating leverage, no expected further MDT integration costs, and the diminishing impact of the aviation project decline. It prioritized revenue growth, cost leverage, specialized sales and customer service, and expansion through acquisitions and shared branch locations.
- The company completed the $53.4 million MDT acquisition in February, integrated its operations, and consolidated 65 branches. MDT integration costs were $6.0 million year to date; the filing also reports $2.8 million of restructuring costs specifically related to integration activities.
- Effective October 1, 2013, TrueBlue acquired The Work Connection for a $19.9 million base cash price, with up to $3.6 million of working-capital adjustments. Management expected approximately $90 million in annual go-forward revenue; the acquisition was subsequent to quarter-end.
- A large aviation customer project was winding down. Revenue from that customer was approximately $76 million in 2012 and was estimated at about $30 million in 2013. Management cited ongoing project-completion risk.
- Other material risks include economic sensitivity, competition and pricing pressure, temporary-worker availability, extensive employment and workplace regulation, workers’ compensation costs and collateral needs, acquisition integration, and technology, privacy and cybersecurity risks. Management warned that economic deterioration could adversely affect results and potentially require additional financing.
- Workers’ compensation receivables from insurers in liquidation remained subject to a valuation allowance of $5.7 million. The filing states that ordinary-course legal proceedings were not expected to materially affect results or financial condition.
- The prior-quarter filing had misclassified $19.9 million of variable-rate demand notes as cash rather than marketable securities, also affecting investing cash flow presentation. The company corrected the classification in this filing and said the prior-period error was not material and did not affect earnings.
- Disclosure controls were deemed effective as of September 27, 2013; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- How much of reported revenue growth reflects underlying demand versus acquired revenue, and how MDT integration affects margins and operating costs.
- Whether the projected improvement in operating margin materialized, particularly as the aviation project winds down and seasonal demand changes.
- The timing and final impact of WOTC tax benefits; year-to-date earnings benefited from a substantially lower effective tax rate.
- Workers’ compensation reserve adequacy, collateral requirements, and recoverability of claims from troubled insurers.
- Cash conversion and working-capital trends, including the increase in doubtful-account provision associated predominantly with one customer.
- The cost, integration progress and realized contribution of the TWC acquisition, completed after quarter-end.