TBI

Business Context and Reporting Period

Company: Labor Ready, Inc. (Note: 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 29, 2007 (13 and 26 weeks)
Business Overview: An international provider of temporary employees for manual labor, light industrial, and skilled construction trades. As of June 29, 2007, the company operated 932 branches across the U.S., Canada, Puerto Rico, and the U.K.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 3.3% for the quarter and 0.7% for the year-to-date period. Growth was driven by the acquisition of Skilled Services Corporation (SSC) in April 2007 and organic growth in established branches, offset by a decline in demand related to the slowing residential construction market.
• Profitability: Net income increased 0.8% for the quarter but decreased 3.2% year-to-date. Gross margins remained relatively stable (31.9%) despite rising temporary worker wages due to minimum wage increases in 19 U.S. states and 5 Canadian provinces. Management noted an inability to fully pass these costs to customers due to price sensitivity.
• Share Count: Weighted average shares outstanding decreased significantly due to an aggressive share repurchase program, which contributed to higher earnings per share despite flat or declining net income in the year-to-date period.
• Acquisition: The company acquired SSC for approximately $26.4 million (net of cash), recognizing $15.3 million in goodwill.

Guidance, Outlook, Risks, and Contingencies

• Capital Allocation: The company repurchased and retired 5.0 million shares for $94.8 million during the 26-week period. As of June 29, 2007, $93.0 million remained available for future repurchases.
• Liquidity: The company maintains an $80.0 million revolving credit facility with $41.8 million available for borrowing. Significant cash ($142.7 million) is restricted as collateral for workers' compensation obligations.
• Legal Contingencies:
  • New Jersey Tax Dispute: The New Jersey Division of Taxation assessed $8.1 million in delinquent sales taxes, penalties, and interest. The company has filed a complaint with the Tax Court of New Jersey; a trial is set for October 10, 2007. No reserve has been recorded as the outcome is uncertain.
  • Class Action Litigation: Several pending class actions regarding overtime pay and gender discrimination exist. A settlement regarding gender discrimination was preliminarily approved by the court. Reserves for contingent legal liabilities totaled $5.7 million.
• Workers' Compensation Risk: The company is substantially self-insured with a $2.0 million deductible per occurrence. Two former insurance carriers are in liquidation, and the company has recorded a $5.4 million valuation allowance against receivables from these "Troubled Insurance Companies."

Investor Verification Checklist

• Margin Compression: Verify the extent to which minimum wage increases are impacting gross margins and the company's ability to pass costs to customers in a slowing economy.
• Legal Exposure: Monitor the outcome of the New Jersey tax court trial (October 2007) and the status of the gender discrimination settlement approval.
• Workers' Comp Reserves: Review the adequacy of the $192.3 million reserve and the potential for further losses related to the two insolvent insurance carriers.
• Share Repurchases: Assess the impact of the $94.8 million in share buybacks on long-term liquidity and capital flexibility.
• Acquisition Integration: Evaluate the revenue contribution and integration progress of the Skilled Services Corporation (SSC) acquisition.