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TBI > SEC Filings for TBI > Form 10-Q on 29-Oct-2012All Recent SEC Filings

Show all filings for TRUEBLUE, INC.

Form 10-Q for TRUEBLUE, INC.


29-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the Notes included in Item 1 of Part I in this Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements and Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the most recently filed Annual Report on Form 10-K for the fiscal year ended December 30, 2011. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Item 1A, Risk Factors."

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect future results. Our MD&A is presented in six sections:

Overview

Results of Operations

Liquidity and Capital Resources

Contractual Obligations and Commitments

Summary of Critical Accounting Policies and Estimates

New Accounting Standards

Overview

TrueBlue, Inc. ("TrueBlue," "we," "us," "our") is a leading provider of temporary blue-collar staffing. We provide a wide range of specialized blue-collar staffing services. We have a network of 692 branches in all 50 states, Puerto Rico and Canada which supply our customers with temporary workers. In 2011, we connected approximately 325,000 people to work through the following blue-collar staffing brands: Labor Ready for general labor, Spartan Staffing for light industrial services, CLP Resources for skilled trades, PlaneTechs for aviation and diesel mechanics and technicians, and Centerline Drivers for dedicated and temporary drivers. Headquartered in Tacoma, Washington, we serve approximately 175,000 businesses primarily in the services, construction, transportation, manufacturing, retail and wholesale industries.

Revenue grew to $379.5 million, a 2.2% increase compared to the third quarter of 2011. Revenue growth slowed in the third quarter of 2012 due to lower revenue from our top customer, a decline in manufacturing and softening growth trends across the business. Services for our top customer are project-based and have been declining throughout the year as projects mature and our customer makes workforce adjustments. Excluding revenue from this customer, revenue grew 6.7%. The growth is driven primarily by our continued success in renewable energy construction projects. However, we have observed growing uncertainty in the economy. Revenue growth slowed during the third quarter of 2012 across most industries and geographies we serve.

Gross profit as a percent of revenue for the third quarter of 2012 of 27.7% improved by 0.8% from the comparable quarter in 2011 due to increased bill rates which more than offset increases for minimum wages and unemployment taxes in 2012, customer mix and payroll tax benefits. Our team continues to leverage our specialized approach in the blue-collar market along with disciplined pricing to drive higher gross margin.

SG&A as a percentage of revenue for the third quarter of 2012 of 20.5% increased by 0.8% from the comparable quarter in 2011 primarily due to the decline in revenue from our top customer in combination with the fixed costs of delivering services to this customer.

Net income grew by 3.1% to $14.3 million, or $0.36 per diluted share, compared to a net income of $13.9 million, or $0.33 per diluted share, for the third quarter of 2011.

We are in a strong financial position to fund working capital needs for planned growth and expansion opportunities. We have cash and cash equivalents of $119 million at September 28, 2012. As of September 28, 2012, $73 million was available under the Revolving Credit Facility.


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Customer demand for blue-collar staffing services is dependent on the overall strength of the labor market and trends towards greater workforce flexibility within the blue-collar markets in which we operate. Softening economic conditions typically result in decreasing demand for labor, resulting in less demand for our staffing services. During periods of decreasing demand, it is progressively more challenging to produce incremental operating margins with our fixed cost structure. Future results will be dependent on whether the underlying economic uncertainty continues, trends in customer preference towards a more flexible workforce continue, and our ability to more effectively and efficiently serve customer needs.

Due to the seasonal nature of our business, interim results are not necessarily indicative of the results that may be expected for the entire fiscal year. Demand for our staffing services is generally higher during the second and third quarters of the year with demand peaking in the third quarter and lower during the first and fourth quarters, in part due to limitations to outside work during the winter months.

Results of Operations

The following table presents selected financial data (in millions, except per
share amounts):
                                                Thirteen weeks ended                 Thirty-nine weeks ended
                                          September 28,       September 30,      September 28,       September 30,
                                              2012                2011               2012                2011
Revenue from services                   $        379.5       $       371.4     $      1,044.9       $       965.9
Total revenue growth %                             2.2 %              18.7 %              8.2 %              15.3 %

Gross profit as a % of revenue                    27.7 %              26.9 %             26.6 %              26.4 %

Selling, general and administrative
expenses                                $         77.6       $        73.2     $        221.2       $       206.1
Selling, general and administrative
expenses as a % of revenue                        20.5 %              19.7 %             21.2 %              21.3 %

Income from operations                  $         22.9       $        22.4     $         42.6       $        37.2
Income from operations as a % of
revenue                                            6.0 %               6.0 %              4.1 %               3.8 %

Net Income                              $         14.3       $        13.9     $         26.2       $        23.2
Net Income per diluted share            $         0.36       $        0.33     $         0.66       $        0.54

Revenue

Revenue from services in comparison with the same period in the prior year was
as follows (in millions):
                                               Thirteen weeks ended                 Thirty-nine weeks ended
                                         September 28,       September 30,      September 28,       September 30,
                                             2012                2011               2012                2011
Revenue from services                  $        379.5       $       371.4     $      1,044.9       $       965.9
Total revenue growth %                            2.2 %              18.7 %              8.2 %              15.3 %

Revenue grew to $379.5 million, a 2.2% increase compared to the third quarter of 2011. Revenue growth slowed in the third quarter of 2012 due to lower revenue from our top customer, decline in manufacturing and softening growth trends across the business. Services for our top customer are project-based and have been declining throughout the year as projects mature and our customer makes workforce adjustments. Excluding revenue from this customer, revenue grew 6.7%. The growth is driven primarily by our continued success in renewable energy construction projects. Our manufacturing business declined by approximately 3% compared to the third quarter of 2011. This is the first decline in this category since 2009. We have observed growing uncertainty in the economy. Revenue growth slowed during the third quarter of 2012 across most industries and geographies we serve. Monthly growth rates for the third quarter of 2012 as compared to the prior year, slowed from 8% for June 2012 to a 1% decline in September 2012. Excluding our top customer, monthly growth rates slowed from 10% for June 2012 to 4% for September 2012.


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Our dedicated sales leaders continue to focus on our vertical market sales and service strategy. They have expertise in the specific industries we serve and actively pursue opportunities in vertical markets. This is particularly important in an uncertain economic environment where each industry and geography is experiencing economic uncertainty differently. These dedicated industry sales leaders partner with our national sales and service teams to meet the specific project needs of our national customers. Likewise, they provide our branches with best practice industry knowledge, including sales and service methods for each industry and capture opportunities in this uncertain economy. Our services remain relevant to customers who are turning to us as they manage their business through this uncertain environment.

Gross profit

Gross profit in comparison with the same period in the prior year was as follows (in millions):

                                                Thirteen weeks ended                  Thirty-nine weeks ended
                                          September 28,       September 30,      September 28,       September 30,
                                              2012                2011               2012                 2011
Gross profit                            $        105.2       $        99.9     $        278.0       $        255.2
Gross profit as a % of revenue                    27.7 %              26.9 %             26.6 %               26.4 %

Gross profit represents revenues from services less direct costs of services, which consist of payroll, payroll taxes, workers' compensation insurance costs, and reimbursable costs. Gross profit for the third quarter of 2012 includes a payroll tax benefit of 0.2%. Excluding this benefit, gross profit as a percent of revenue for the third quarter of 2012 improved 0.6% from the comparable quarter in 2011. The improvement was due to continued success of our disciplined pricing and increased billing rates which more than offset increases to minimum wage and unemployment taxes and customer mix. The customer mix improvement was largely due to less revenue from our top customer which carries a lower gross margin than our blended average gross margin. We continue to leverage our vertical market sales strategy to deliver specialized and differentiated services in the blue-collar market to drive higher gross profit as a percent of revenue.

Workers' compensation expense decreased to 3.9% of revenue for the third quarter of 2012 as compared to 4.0% for the comparable quarter in 2011. We continue to actively manage the safety of our temporary workers with our risk management programs and work together with our network of service providers to control costs.

Selling, general and administrative expenses

Selling, general and administrative ("SG&A") expenses were as follows (in millions):

                                                     Thirteen weeks ended                  Thirty-nine weeks ended
                                              September 28,       September 30,       September 28,       September 30,
                                                   2012                2011               2012                 2011
Selling, general and administrative expenses $        77.6       $         73.2     $        221.2       $        206.1
Percentage of revenue                                 20.5 %               19.7 %             21.2 %               21.3 %

The increase in SG&A spending for the third quarter of 2012 of $4.4 million is primarily due to the variable selling and other operating expenses associated with increased revenue over the same period a year ago of $23.1 million for the third quarter excluding the revenue decline from our top customer. Third quarter SG&A as a percentage of revenue increased by 0.8% in comparison with the third quarter in 2011 primarily due to the decline in revenue from our top customer in combination with the fixed costs of delivering services to this customer. Our top customer is serviced by a centralized delivery model with a largely fixed cost structure which remains in place to leverage across the business. We have continued to invest in our vertical market sales and service strategy and projects to further improve our efficiency and effectiveness in recruiting and retaining our temporary workers and attracting and retaining our customers. We completed a major investment in the operating system of our largest brand during the current quarter. We are seeing the benefits of improved operating efficiency.


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Depreciation and amortization and interest

Depreciation and amortization and interest were as follows (in millions):

                                                Thirteen weeks ended                   Thirty-nine weeks ended
                                          September 28,       September 30,       September 28,       September 30,
                                              2012                2011                2012                2011
Depreciation and amortization           $           4.7     $           4.2     $          14.2     $          12.0
Interest and other income, net          $           0.4     $           0.3     $           1.1     $           0.8

Depreciation and amortization for the third quarter of 2012 increased over the prior year by $0.5 million primarily from increased capital spending focused on enterprise technology improvement projects. These projects are designed to further improve our efficiency and effectiveness in recruiting and retaining our temporary workers and attracting and retaining our customers. During the third quarter of 2012 we completed a major upgrade to our proprietary branch operating system for our largest brand.

Income taxes

The effective income tax rate was as follows (in millions):

                                               Thirteen weeks ended                  Thirty-nine weeks ended
                                        September 28,        September 30,      September 28,       September 30,
                                             2012                2011                2012                2011
Income tax expense                     $        9.0        $         8.8       $        17.5       $         14.7
Effective income tax rate                      38.5 %               38.8 %              40.0 %               38.8 %

Our effective tax rate on earnings for the third quarter of 2012 was 38.5% compared to 38.8% for the same period in 2011. The increase in the effective income tax rate for the thirty-nine weeks ended September 28, 2012 to 40.0% from 38.8% for the same period in 2011 is primarily due to the federal Work Opportunity Tax Credits that largely expired at the end of 2011. This income tax credit was designed to encourage employers to hire workers from certain targeted groups with higher than average unemployment rates. The principal difference between the statutory federal income tax rate of 35% and our effective income tax rate results from state income taxes, federal tax credits and certain non-deductible expenses.

Future outlook for results of operations

The following highlights represent our expectations in regard to operating trends for the remainder of fiscal year 2012. These expectations are subject to revision as our business changes with the overall economy:

Due to our industry's sensitivity to economic factors, the inherent difficulty in forecasting the direction and strength of the economy and the short term nature of staffing assignments, our visibility for future demand is limited. As a result, we monitor a number of economic indicators as well as certain trends to estimate future revenue. Based on these anticipated trends, we expect the growing uncertainty in the economy to increase pressure on revenue in the fourth quarter of 2012 which we expect to continue into 2013.

Our top priorities for the fourth quarter of 2012 and 2013 are as follows:

1. First, restoring revenue growth by adjusting our sales strategies to capitalize on current industry, geographic, and customer opportunities. Our blue collar specialization and vertical market focus are the foundations of our sales and service strategy.

2. Second, continued focus on disciplined pricing of our services to maintain strong gross margins.

3. Third, increasing the efficiency of delivering our services. We have experienced success with centralized service delivery models in placing skilled mechanics, technicians, drivers and trades people on renewable energy projects. We are evaluating opportunities to expand this across other skilled positions. We have also been investing in mobile technology solutions. We see compelling opportunities to improve the speed in assigning candidates to jobs and increase the productivity of our branch employees resulting in the consolidation of branches and other benefits to our cost structure. These technologies are currently under development and we expect to deploy them during the first half of 2013. We believe this will position us to begin generating efficiencies during the back half of 2013. The extent of additional efficiencies will be understood after our deployment and evaluation in 2013.


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Services for our top customer are project-based and have been declining throughout the year as projects are completed and our customer makes workforce adjustments. While we expect continued revenue from this customer, our work is project based and the completion of certain projects will continue to impact our revenue trends. Revenue from this customer was $13 million in the third quarter of 2012 and we expect $5 million in the fourth quarter of 2012.

We actively pursue large project opportunities in vertical markets with growth opportunities. One of our largest successes is in the construction of renewable energy projects. While our growth rates have diminished due to more challenging prior year comparisons, renewable energy projects remain an attractive opportunity.

Where possible, we plan to expand the presence of our brands by sharing existing locations to achieve cost synergies. We plan to build on our success with centralized recruitment and dispatch of our temporary workers to locations without physical branches and expand our geographic reach. We also continue to evaluate strategic acquisitions in the blue-collar staffing market that can produce strong returns on investment. Our focus is on acquisitions that can accelerate the building of a national presence for a particular brand or that provide an opportunity to serve a new, but sizable portion of the blue-collar staffing market.

Liquidity and Capital Resources

Our principal source of liquidity is operating cash flows. Our net income and,
consequently, our cash provided from operations are impacted by sales volume,
timing of collections, seasonal sales patterns and profit margins.

Cash flows from operating activities

Our cash flows from operating activities were as follows (in millions):
                                                                 Thirty-nine weeks ended
                                                            September 28,       September 30,
                                                                 2012                2011
Net income                                                 $        26.2       $         23.2
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization                                       14.2                 12.0
Provision for doubtful accounts                                      4.3                  4.4
Stock-based compensation                                             6.3                  5.6
Deferred income taxes                                                1.2                  0.9
Other operating activities                                           1.2                 (0.5 )
Changes in operating assets and liabilities:
Accounts receivable                                                (33.5 )              (70.1 )
Income taxes                                                         2.2                  7.0
Accounts payable and other accrued expenses                         (2.9 )               19.6
Accrued wages and benefits                                           8.2                 12.1
Workers' compensation claims reserve                                 5.9                  0.7
Other assets and liabilities                                        (0.3 )                1.6
Net cash provided by operating activities                  $        33.0       $         16.5

Net cash provided by operating activities was $33.0 million for the thirty-nine weeks ended September 28, 2012 as compared to net cash provided by operating activities of $16.5 million for the same period in 2011:

The increase in cash from operating activities is primarily due to continued revenue and corresponding net income growth.

The increase in net cash provided by operating activities is partially offset by the use of cash to fund the increased accounts receivable due to continued revenue growth and the normal seasonal peak of our revenue and corresponding accounts receivable growth during the third quarter.


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The increase in accounts payable and accrued expenses in the comparable prior period is primarily due to the timing of $15.8 million due to our insurance provider. This amount is included in accrued liabilities and represents a timing difference between claim payments made by our insurance carrier and the reimbursement from cash held in the Trust. When claims are paid by our carrier, the amount is removed from the workers' compensation reserve but not removed from collateral until reimbursed to the carrier. This was remedied in the fourth quarter of 2011 and had an offsetting impact to restricted cash.

The increase in accrued wages and benefits is primarily due to timing of payments for payroll and payroll taxes.

Generally our workers' compensation reserve for estimated claims increases as temporary labor services increase and decreases as temporary labor services decline. During the current year, our workers' compensation reserve increased as we increased the delivery of temporary labor services, partially offset by the timing of claim payments.

Cash flows from investing activities

Our cash flows from investing activities were as follows (in millions):

                                                     Thirty-nine weeks ended
                                                September 28,      September 30,
                                                    2012                2011
Capital expenditures                           $      (13.9 )     $         (6.2 )
Change in restricted cash and cash equivalents          0.5                 65.1
Purchase of restricted investments                    (18.2 )              (87.8 )
Maturities of restricted investments                   14.4                  6.2
Other                                                  (0.2 )               (6.8 )
Net cash used in investing activities          $      (17.4 )     $        (29.5 )

Capital expenditures were primarily related to investments made to upgrade our proprietary information systems and invest in enterprise technology improvement projects. These projects are designed to further improve our efficiency and effectiveness in recruiting, dispatching and retaining our workers as well as leveraging our centralized service delivery and making it easier for the customer to do business. Capital expenditures were higher in 2012 due to the completion of a new operating system and other technology investments. We anticipate that total capital expenditures will be approximately $16 million in 2012.

Restricted cash and investments consist primarily of collateral that has been provided or pledged to insurance carriers and state workers' compensation programs. The net change in restricted cash and cash equivalents when combined with purchases of restricted investments net of maturities of restricted investments was $3.3 million for the period ended September 28, 2012. Restricted cash increased in 2012 primarily due to an increase in the collateral requirements by our workers' compensation insurance providers related to growth in operations.

The change in restricted cash and cash equivalents when combined with purchases of restricted investments net of maturities of restricted investments increased by $16.5 million for the thirty-nine weeks ended September 30, 2011. This increase is primarily due to the timing of $15.8 million due to our insurance carrier. This amount is included in accrued liabilities and represents the timing difference between claim payments made by our insurance carrier and the reimbursement from cash held in the Trust. When claims are paid by our carrier, the amount is removed from the workers' compensation reserve but not removed from collateral until reimbursed to the carrier. This was remedied in the fourth . . .

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