TBI

TrueBlue, Inc. 2007 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 28, 2007. TrueBlue, Inc. (formerly Labor Ready, Inc., renamed December 18, 2007) is an international provider of temporary blue-collar staffing. The company operates four primary brands: Labor Ready (general labor), Spartan Staffing (light industrial), CLP Resources (skilled construction trades), and PlaneTechs (skilled aircraft maintenance). The company serves over 300,000 customers annually, placing approximately 600,000 temporary workers.

Key Financial Metrics

Liquidity & Debt: The company maintains an $80.0 million revolving credit facility expiring in November 2008. As of year-end 2007, $34.5 million was utilized for letters of credit, leaving $45.5 million available. The company holds $57.0 million in cash and cash equivalents and $10.9 million in marketable securities. However, $132.5 million of cash is restricted as collateral for workers' compensation obligations.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 2.7% to $1.39 billion, driven primarily by acquisitions (SSC and PlaneTechs). However, same-store branch revenue declined 0.2% due to slower economic conditions and pricing pressure.
• Profitability Decline: Net income decreased 13.4% to $66.2 million. Gross margin compressed slightly (31.9% vs 32.1%) as wage increases (driven by statutory minimum wage hikes) outpaced bill rate increases. SG&A expenses rose to 24.3% of revenue due to branch closure costs and acquisition integration expenses.
• Branch Network: Total branches decreased to 894 from 912. The company closed 58 underperforming branches and opened 22 new ones during 2007.
• Share Repurchases: The company aggressively reduced share count, purchasing and retiring 7.6 million shares for $150.3 million in 2007.

Outlook, Risks, and Contingencies

Management Commentary & Strategy: Management plans to open only three new branches in 2008, focusing on the CLP brand in robust markets. The strategy emphasizes service leadership and operating leverage. Capital expenditures for 2008 are anticipated to be approximately $18.0 million.

Key Risks:

• Workers' Compensation: The company is substantially self-insured with a $2.0 million deductible per occurrence. Reserves are actuarially estimated and subject to volatility. Two former insurers (Legion and Reliance) are in liquidation, creating uncertainty regarding reimbursement for excess claims.
• Collateral Requirements: Significant cash ($126.4 million) is restricted to collateralize workers' compensation obligations. Increases in these requirements could strain liquidity.
• Competition & Pricing: Intense competition limits the ability to pass cost increases to customers, pressuring margins.
• Seasonality: More than 60% of net earnings are generated in the second and third fiscal quarters (spring/summer).

Legal Contingencies: The company is involved in a New Jersey tax dispute regarding sales tax assessments totaling approximately $8.1 million (plus interest). Reserves for contingent legal liabilities were $4.8 million at year-end.

Investor Verification Checklist

• Workers' Comp Reserve Adequacy: Verify the actuarial assumptions and the status of claims against insolvent insurers (Legion/Reliance) to assess potential future expense charges.
• Liquidity Constraints: Confirm the impact of restricted cash ($132.5 million) on the company's ability to fund operations and growth without drawing on the credit facility.
• Same-Store Revenue Trends: Monitor the 0.2% decline in same-store revenue to determine if pricing pressure and economic slowdowns are accelerating.
• Branch Closure Costs: Review the run-rate of SG&A expenses to ensure branch closure costs do not become a recurring drag on profitability.
• Acquisition Integration: Assess the performance of the 2007 acquisitions (SSC and PlaneTechs) to ensure they meet projected returns.