TBI

Business Context and Reporting Period

Company: Labor Ready, Inc. (Note: Request metadata listed "Trueblue, Inc.", but the filing text identifies the registrant as Labor Ready, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 1, 1999 (Thirteen and Thirty-Nine Weeks)
Business Overview: The nation's leading provider of temporary manual labor, serving freight handling, warehousing, landscaping, construction, and light manufacturing sectors. The company operates 687 dispatch offices as of the period end, primarily company-owned.

Key Financial Metrics

Margins (39 Weeks 1999 vs 1998):
- Gross Margin: 31.1% (1999) vs 28.7% (1998)
- Net Income Margin: 3.3% (1999) vs 2.8% (1998)

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 43.7% year-over-year for the 39-week period, driven by the opening of 201 new dispatch offices (totaling 687) and increased sales at mature locations.
• Profitability: Net income increased 71.0% to $20.6 million. This was aided by a decline in workers' compensation expense and improved gross margins, partially offset by a one-time accounting charge.
• Cash Flow: Net cash used in operating activities increased to $23.5 million (from $10.3 million prior year) due to significant growth in accounts receivable and prepaid expenses required to fund rapid expansion.
• Debt and Liquidity: The company utilized a $60 million line of credit, with $20.1 million outstanding as of October 1, 1999. Cash balances decreased from $25.9 million to $14.4 million.
• Accounting Change: Adoption of SOP 98-5 resulted in a one-time cumulative effect charge of $1.5 million (net of tax), reducing net income by $0.03 per share.

Guidance, Outlook, and Risks

• Expansion Plans: Management expects to open approximately 200 additional dispatch offices in 2000. The average cost to open a new office in 1999 was approximately $45,000.
• 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.
• Liquidity Needs: Due to the cash cycle (paying workers daily, billing customers weekly), the company experiences negative operating cash flow during high-growth periods and relies on its line of credit and equity financing.
• Workers' Compensation Risk: The company self-insures up to a deductible limit ($350,000 per occurrence) and maintains significant reserves ($32.1 million total). Collateral requirements (letters of credit and surety bonds) tie up significant credit capacity.
• Year 2000 Compliance: Management believes systems will be compliant by year-end 1999. Approximately $1.6 million has been spent on remediation, with an additional $0.2 million anticipated.

Investor Verification Checklist

• Accounts Receivable Growth: Verify the sustainability of the $50 million increase in receivables and the adequacy of the allowance for doubtful accounts ($6.9 million).
• Workers' Compensation Reserves: Assess the actuarial assumptions and the impact of the $32.1 million reserve on future earnings volatility.
• Debt Covenants: Confirm continued compliance with the $60 million line of credit covenants regarding net worth and working capital ratios.
• Office Economics: Validate the $45,000 average cost per new office and the timeline for new offices to reach profitability (typically six months).
• CDM Program: Review the performance of the Cash Dispensing Machine program, including the $2.6 million capital lease obligation and associated fees.