TBI

TrueBlue, Inc. 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for TrueBlue, Inc., an international provider of temporary blue-collar staffing services. The report covers the thirteen and twenty-six week periods ended June 27, 2008. As of July 25, 2008, there were 43,391,294 shares of common stock outstanding.

Key Financial Metrics

Note: The company maintains a $80 million revolving credit facility with $39.5 million available for future borrowings as of June 27, 2008. No principal debt was outstanding.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 5.6% for the quarter and 8.3% year-to-date compared to the prior year. This growth was driven primarily by acquisitions (17.8% contribution in Q2), which offset a significant decline in same-branch revenue (-10.9% in Q2).
• Profitability: Net income decreased 10.9% for the quarter and 12.3% year-to-date. Gross profit margins compressed from 31.9% to 29.8% (Q2) due to pay rates for temporary employees increasing faster than bill rates and the inclusion of lower-margin acquired businesses.
• Operational Changes: The company closed 18 branches in the second quarter and opened none. Total branch count stood at 927.
• Acquisitions: On April 28, 2008, TrueBlue acquired Personnel Management, Inc. (PMI) for $17.1 million, expanding its light industrial staffing presence.
• Share Repurchases: The company repurchased and retired 0.88 million shares for $11.5 million during the 26-week period.

Guidance, Outlook, and Risks

• Management Commentary: Management noted that same-branch revenue trends have been negative, with declines accelerating from -8.2% in April to -12.6% in June 2008. They attribute this to a slowing economy and a decrease in residential construction mix.
• Interest Rate Risk: Approximately 53% of restricted cash is subject to an annual interest rate reset on July 1, 2008. The rate is expected to drop from 5.2% to 2.6%, reducing interest income.
• Workers' Compensation: The company is substantially self-insured for workers' compensation claims. Reserves totaled $204.9 million (discounted). Collateral commitments (cash and letters of credit) totaled $171.9 million. Management anticipates collateral obligations will continue to grow.
• Legal Contingencies: A significant tax dispute with the New Jersey Division of Taxation regarding $8.1 million in alleged delinquent sales taxes is in the discovery phase. A hearing on a motion for summary judgment was scheduled for September 17, 2008. The company has established reserves for contingent legal liabilities of $4.5 million.
• Tax Benefit: The effective tax rate decreased to 29.2% (Q2) due to a $2.4 million nonrecurring tax benefit from settling prior-year state tax matters.

Investor Verification Checklist

• Same-Branch Revenue Trend: Verify the sustainability of the -10.9% same-branch revenue decline and its impact on future organic growth.
• Workers' Compensation Reserves: Review the adequacy of the $204.9 million reserve and the potential for future adjustments given the self-insured nature of the business.
• Interest Income Impact: Assess the financial impact of the anticipated drop in interest rates on restricted cash (from 5.2% to 2.6%) on future net income.
• New Jersey Tax Litigation: Monitor the outcome of the New Jersey Tax Court proceedings regarding the $8.1 million assessment.
• Acquisition Integration: Evaluate the performance of recent acquisitions (PMI, TLC Drivers, PlaneTechs) and their contribution to revenue versus their impact on gross margins.