Business Context and Reporting Period
Company: Labor Ready, Inc. (Note: Input metadata referenced "Trueblue, Inc.", but the filing text identifies the registrant as Labor Ready, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 28, 2002
Business Overview: Labor Ready provides temporary manual labor services to industries including freight handling, warehousing, construction, and retail. The company operates 753 dispatch offices across the U.S., Canada, the U.K., and Puerto Rico. The business is seasonal, with higher demand in spring and summer.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended June 28, 2002 |
26 Weeks Ended June 28, 2002 |
26 Weeks Ended June 29, 2001 |
|---|---|---|---|
| Revenues from Services | $219,100 | $389,208 | $442,740 |
| Cost of Services | $156,141 | $277,487 | $310,917 |
| Gross Profit | $62,959 | $111,721 | $131,823 |
| Operating Income (Loss) | $5,940 | $301 | $(736) |
| Net Income (Loss) | $3,450 | $(146) | $(132) |
| Cash and Cash Equivalents | $102,507 | $102,507 | $34,780 |
| Restricted Cash | $46,534 | $46,534 | $33,357 |
| Total Debt (Long-term + Current) | $71,657 | $71,657 | $6,843 |
| Workers' Comp Reserve | $72,414 | $72,414 | $63,792 |
Liquidity: As of June 28, 2002, the company had $18.4 million available for future borrowing under its Accounts Receivable Facility after committing $68.8 million for letters of credit. The company also holds $1.6 million in marketable securities.
Material Changes vs. Prior Period
- Revenue Decline: Revenues for the 26 weeks ended June 28, 2002, decreased 12.1% to $389.2 million compared to $442.7 million in the prior year. This was driven by a 7% reduction in operating offices (from 812 to 753) and a 5% decrease in average revenue per office.
- Profitability: The company reported a net loss of $146,000 for the 26-week period, compared to a net loss of $132,000 in the prior year. However, the 13-week quarter ended June 28, 2002, showed a net income of $3.45 million, up from $2.87 million in the prior year quarter.
- Cost Structure: Cost of services as a percentage of revenue increased to 71.3% from 70.2% in the prior year, primarily due to a 1.5% increase in workers' compensation costs relative to revenue. Selling, General, and Administrative (SG&A) expenses decreased 16.9% year-over-year due to office closures and reduced bad debt and advertising costs.
- Debt Issuance: In June 2002, the company issued $65 million in 6.25% Convertible Subordinated Notes due 2007. Subsequent to the quarter-end, an additional $5 million was issued via over-allotment. This significantly increased total debt from $6.8 million at year-end 2001 to $71.7 million.
- Cash Flow: Net cash provided by operating activities decreased to $5.6 million from $14.0 million in the prior year period. Investing activities used $16.5 million, largely due to an increase in restricted cash required for collateral.
Guidance, Outlook, Risks, and Unusual Items
- Capital Expenditures: The company anticipates capital expenditures of approximately $1.1 million for the remainder of 2002.
- Collateral Requirements: The company expects collateral requirements for workers' compensation obligations to increase throughout 2002. It plans to provide an additional $5.0 million in letters of credit by year-end. Some surety bond providers have indicated they may cancel bonds unless additional collateral is provided.
- Legal Proceedings:
- Class Actions: Courts certified classes of plaintiffs in the "Ramirez Litigation" (waiting/travel time claims) and "Wilkerson Litigation" (cash dispensing machine fees).
- Regulatory Action: The Arizona Attorney General filed a suit alleging violations of "check cashers" statutes regarding CDM fees.
- State Audits: The Washington Department of Labor and Industries issued assessments for unpaid workers' compensation premiums for 1998 and 1999, which the company is appealing.
- Insurance Risks: The company dropped "aggregate stop loss" coverage for the 2002 plan year to manage costs, increasing its exposure to large aggregate losses. Additionally, some primary insurance carriers are in financial distress.
- Auditor Change: The company dismissed Arthur Andersen LLP in May 2002 and retained PricewaterhouseCoopers LLP. There is a risk that the inability of the former auditor to provide representations could impair timely SEC filings.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial covenants (earnings, net worth, fixed charge coverage) under the Accounts Receivable Facility and the new Convertible Notes indenture.
- Workers' Compensation Reserves: Assess the adequacy of the $72.4 million reserve given the removal of aggregate stop-loss coverage and the financial instability of some insurance carriers.
- Collateral Liquidity: Monitor the impact of increasing collateral requirements (letters of credit and restricted cash) on available working capital.
- Legal Exposure: Track the status of the Arizona Attorney General suit and the certified class actions regarding CDM fees and wage claims.
- Auditor Transition: Confirm that the transition to PricewaterhouseCoopers does not delay future financial reporting or audit opinions.