Business Context and Reporting Period
Company: Labor Ready, Inc. (Note: Metadata lists "Trueblue, Inc.", but the filing text identifies the registrant as Labor Ready, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Thirteen and thirty-nine weeks ended October 2, 1998.
Business Overview: Labor Ready is a national provider of temporary manual labor workers, primarily serving construction, freight handling, warehousing, and light manufacturing industries. The company operates 485 dispatch offices as of October 2, 1998, having grown from 312 offices in the prior year. The company utilizes Cash Dispensing Machines (CDMs) to pay workers daily.
Key Financial Metrics
| Metric (in thousands) | 39 Weeks Ended Oct 2, 1998 | 39 Weeks Ended Sep 26, 1997 | 13 Weeks Ended Oct 2, 1998 | 13 Weeks Ended Sep 26, 1997 |
|---|---|---|---|---|
| Revenues from Services | $428,879 | $231,047 | $191,851 | $101,713 |
| Cost of Services | $300,750 | $162,713 | $134,466 | $72,544 |
| Gross Profit | $128,129 | $68,334 | $57,385 | $29,169 |
| Gross Margin % | 29.9% | 29.6% | 29.9% | 28.7% |
| Net Income | $12,035 | $4,486 | $8,542 | $3,901 |
| Diluted EPS | $0.42 | $0.16 | $0.30 | $0.14 |
| Cash and Equivalents (End Period) | $25,583 | $980 | $25,583 | $980 |
| Line of Credit Outstanding | $21,125 | $0 | $21,125 | $0 |
| Workers' Comp Reserve | $22,874 | $13,571 | $22,874 | $13,571 |
Note: Cash and cash equivalents include approximately $17.9 million held in CDMs for payroll.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 85.6% for the 39-week period and 88.6% for the 13-week period compared to the prior year, driven by the opening of 169 new dispatch offices and increased sales at mature locations.
- Profitability: Net income surged 168.3% (39 weeks) and 119.0% (13 weeks). Net income margin improved to 2.8% (39 weeks) and 4.5% (13 weeks) from 1.9% and 3.8% respectively in the prior year.
- Cost Structure: Cost of services as a percentage of revenue decreased slightly (70.1% vs 70.4% for 39 weeks) due to improved workers' compensation claims experience. Selling, general, and administrative (SG&A) expenses increased 80.1% (39 weeks) but decreased as a percentage of revenue (24.1% vs 24.8%) due to economies of scale.
- Liquidity and Debt: The company utilized a new $40 million line of credit, with $21.1 million outstanding as of October 2, 1998, compared to zero in the prior year. This was necessary to fund working capital needs, specifically accounts receivable growth and CDM cash deposits.
- Cash Flow: Net cash used in operating activities was $10.3 million (39 weeks), an increase from $9.7 million in the prior year, primarily due to a $44.9 million increase in accounts receivable.
Guidance, Outlook, and Risks
- Expansion Plans: Management expects to open at least 200 additional dispatch offices in 1999. The estimated cost per new office is approximately $50,000 ($37,000 capital, $13,000 pre-opening).
- Seasonality: The business is seasonal, with higher demand in spring, summer, and early fall due to construction and landscaping activity. Demand typically decreases in late fall and winter.
- Accounting Change (SOP 98-5): The company will adopt Statement of Position 98-5 in Q1 1999, requiring the expensing of start-up costs rather than capitalization. This is expected to result in a non-operating expense of approximately $1.2 million (net of tax) in 1999.
- Workers' Compensation Risk: The company self-insures up to a deductible limit ($350,000 per occurrence) and an aggregate stop-loss limit ($20.5 million for 1998). The maximum additional exposure net of tax before stop-loss limits are met is $2.0 million.
- Year 2000 Compliance: Management believes its internal systems are substantially Year 2000 compliant but is still assessing third-party vendors and customers.
- Capital Needs: The company may experience negative cash flows from operations and investing during periods of rapid growth and may require additional equity or debt financing.
Investor Verification Checklist
- Accounts Receivable Turnover: Verify the collection efficiency given the $44.9 million increase in receivables and the reliance on the line of credit to fund this growth.
- Workers' Compensation Reserves: Monitor the adequacy of the $22.9 million reserve and the impact of the $2.0 million potential exposure above the stop-loss limit.
- CDM Cash Holdings: Confirm that the $17.9 million held in CDMs is accurately classified and not available for general corporate use.
- Debt Covenants: Review compliance with the new line of credit covenants regarding minimum net worth and working capital ratios.
- 1999 Accounting Impact: Assess the impact of the SOP 98-5 adoption on 1999 earnings, specifically the $1.2 million write-off of capitalized pre-opening costs.