UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 28, 2001

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____ to ____

 

Commission File Number 0-23828

 

Labor Ready, Inc.
(Exact Name of Registrant as specified in its charter)

 

(253) 383-9101
(Registrant’s Telephone Number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý         No    o

 

 

 

 

As of November 5, 2001, the Registrant had 40,516,936 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:  None.

LABOR READY, INC.

 

INDEX

 

 

 

Part I.	Financial Information
	Item 1.	Consolidated Balance Sheets
		September 28, 2001 and December 31, 2000
		Consolidated Statements of Income
		Thirteen and Thirty-Nine Weeks Ended
		September 28, 2001 and September 29, 2000
		Consolidated Statements of Cash Flows
		Thirty-Nine Weeks Ended
		September 28, 2001 and September 29, 2000
		Condensed Consolidated Statement of Shareholders’ Equity
		September 28, 2001
		Notes to Consolidated Financial Statements
	Item 2.	Management’s Discussion and Analysis of
		Financial Condition and Results of Operations
	Item 3.	Qualitative and Quantitative Disclosures
		About Market Risk
Part II.	Other Information
	Item 6.	Exhibits and Reports on Form 8-K
	Signatures

 

 

Part I.

Financial Information

 

LABOR READY, INC.

CONSOLIDATED BALANCE SHEETS

In Thousands

 

ASSETS

 

 

		(Unaudited)
		September 28, 2001			December 31, 2000
CURRENT ASSETS:
Cash and cash equivalents		$	43,201		$	36,048
Accounts receivable		5,729			100,678
Accounts receivable pledged under securitization agreement		101,285			--
Allowance for doubtful accounts		(7,714		)	(7,661		)
Workers’ compensation deposits and credits		3,868			4,497
Prepaid expenses and other		8,101			6,878
Income tax receivable		-			195
Deferred income taxes		11,080			9,771
Total current assets		165,550			150,406
PROPERTY AND EQUIPMENT:
Buildings and land		17,954			7,057
Computers and software		31,513			29,912
Cash dispensing machines		13,473			13,790
Furniture and equipment		1,671			1,620
Construction in progress		--			8,850
		64,611			61,229
Less accumulated depreciation		23,517			17,827
Property and equipment, net		41,094			43,402
OTHER ASSETS:
Restricted cash		2,953			1,696
Deferred income taxes		11,189			9,521
Other assets		1,022			398
Total other assets		15,164			11,615
Total assets		$	221,808		$	205,423

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

		(Unaudited) September 28, 2001			December 31, 2000
CURRENT LIABILITIES:
Accounts payable		$	17,507		$	18,683
Accrued wages and benefits		14,110			10,201
Current portion of workers’ compensation claims reserve		24,424			19,452
Income taxes payable		4,350			--
Current maturities of long-term debt		1,813			7,911
Total current liabilities		62,204			56,247
LONG-TERM LIABILITIES:
Long-term debt, less current maturities		5,469			6,843
Workers’ compensation claims reserve		36,135			30,229
Total long-term liabilities		41,604			37,072
Total liabilities		103,808			93,319
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Common stock, no par value, 100,000 shares authorized; 40,493 and 40,941 shares issued and outstanding		50,326			52,074
Cumulative foreign currency translation adjustment		(353		)	(250		)
Retained earnings		68,027			60,280
Total shareholders’ equity		118,000			112,104
Total liabilities and shareholders’ equity		$	221,808		$	205,423

 

 

 

 

 

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME

In Thousands (Except Per Share Amounts)

(Unaudited)

 

 

		Thirteen Weeks Ended						Thirty-Nine Weeks Ended
		September 28, 2001			September 29, 2000			September 28, 2001			September 29, 2000
Revenues from services		$	259,928		$	283,025		$	702,668		$	718,555
Cost of services		180,328			199,012			491,245			501,468
Gross profit		79,600			84,013			211,423			217,087
Selling, general and administrative expenses		64,903			68,668			193,266			198,363
Depreciation and amortization		2,004			1,952			6,200			5,528
Income from operations		12,693			13,393			11,957			13,196
Interest and other income (expense), net		(64		)	(399		)	540			(569		)
Income before taxes		12,629			12,994			12,497			12,627
Taxes on income		4,750			4,873			4,750			4,654
Net income		$	7,879		$	8,121		$	7,747		$	7,973
Basic net income per common share		$	0.19		$	0.19		$	0.19		$	0.19
Diluted net income per common share		0.19			0.19			0.19			0.19
Weighted average shares outstanding:
Basic		40,509			41,995			40,586			42,531
Diluted		40,786			42,066			40,676			42,794

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

In Thousands

(Unaudited)

 

		Thirty-Nine Weeks Ended
		September 28, 2001			September 29, 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	7,747		$	7,973
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,200			5,528
Provision for doubtful accounts		13,144			10,681
Deferred income taxes		(2,987		)	(2,110		)
Loss on disposal of property and equipment		152			--
Changes in operating assets and liabilities
Accounts receivable		(19,546		)	(28,689		)
Workers’ compensation deposits and credits		629			458
Prepaid expenses and other		(1,216		)	2,478
Accounts payable		(654		)	2,631
Accrued wages and benefits		3,920			3,303
Income taxes		4,527			6,080
Workers’ compensation claims reserve		10,885			9,119
Net cash provided by operating activities		22,801			17,452
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(5,891		)	(13,674		)
Restricted cash		(1,257		)	366
Intangible assets and other		(636		)	(370		)
Proceeds from sale of property and equipment		1,809			--
Net cash used in investing activities		(5,975		)	(13,678		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on short term borrowing		(515		)	2,846
Proceeds from options and warrants exercised		210			659
Proceeds from sale of stock through employee benefit plans		1,015			1,110
Purchase and retirement of common stock		(2,973		)	(7,202		)
Purchase and retirement of preferred stock		--			(854		)
Proceeds (payments) on long-term debt		(7,471		)	5,231
Preferred stock dividends paid		--			(65		)
Net cash provided by (used in) financing activities		(9,734		)	1,725
Effect of exchange rates on cash		61			(140		)
Net increase in cash and cash equivalents		7,153			5,359
CASH AND CASH EQUIVALENTS, beginning of period		36,048			16,845
CASH AND CASH EQUIVALENTS, end of period		$	43,201		$	22,204

 

 

 

See accompanying notes to consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In Thousands)

(Unaudited)

 

Common stock
Balance at December 31, 2000		52,074
Common stock issued on the exercise of options and warrants		210
Common stock issued through employee benefit plans		1,015
Common stock repurchased		(2,973		)
Balance at September 28, 2001		50,326
Cumulative translation adjustment
Balance at December 31, 2000		(250		)
Foreign currency translation		(103		)
Balance at September 28, 2001		(353		)
Retained earnings
Balance at December 31, 2000		60,280
Net income		7,747
Balance at September 28, 2001		68,027
Total shareholders’ equity		$	118,000

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

Item 1.    Notes to Consolidated Financial Statements

 

SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and rules and regulations of the Securities and Exchange Commission.  Accordingly, certain information and footnote disclosures usually found in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  These financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 2000 annual report on Form 10-K.  Certain amounts in the consolidated balance sheet at December 31, 2000 have been reclassified to conform to the 2001 presentation.  The accompanying consolidated financial statements reflect all adjustments, including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented.  Operating results for the thirty-nine week period ended September 28, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001.

 

NEW ACCOUNTING STANDARDS

 

In June 2001, the Financial Accounting Standards Board (“FASB”) approved Statement of Financial Accounting Standard (“SFAS”) No. 141, "Business Combinations" (“SFAS 141”), and SFAS No. 142, "Goodwill and Other Intangible Assets" (“SFAS 142”).  SFAS 141 prospectively prohibits the pooling of interest method of accounting for business combinations initiated after June 30, 2001. SFAS 142 requires companies to cease amortizing goodwill that existed at June 30, 2001. The amortization of existing goodwill will cease on December 31, 2001.  Any goodwill resulting from acquisitions completed after June 30, 2001 will not be amortized. SFAS 142 also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value.  We are in the process of evaluating the financial statement impact of adoption of SFAS 142.

 

In August 2001, FASB approved SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”), which will be effective beginning fiscal year 2003.  SFAS 143 addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  In October 2001, FASB approved SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (“SFAS 121”) and the accounting and reporting provisions of APB No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for the disposal of a segment of a business.  SFAS 144 retains many of the fundamental provisions of SFAS 121, but resolves certain implementation issues associated with that Statement.  SFAS 144 will be effective for fiscal year 2002.  We are in the process of evaluating the financial statement impact of adoption of SFAS 143 and SFAS 144.

 

WORKERS’ COMPENSATION

 

We provide workers’ compensation insurance to our temporary workers and regular employees.  For workers’ compensation claims originating in the majority of states, we have purchased a deductible insurance policy.  Under terms of the policy, our workers’ compensation exposure is limited to a $350,000 deductible amount per occurrence and a maximum aggregate stop-loss limit.  Should any single occurrence exceed the deductible amount per occurrence, all losses and expenses beyond the deductible amount are to be paid by independent insurance companies unrelated to us.  Similarly, should the total of paid losses related to any one year period exceed the maximum aggregate stop-loss limit for that year, all losses beyond the maximum aggregate stop-loss limit are paid by independent insurance companies unrelated to us.

 

We establish a reserve for workers’ compensation claims using actuarial estimates of the future cost of claims and related expenses that have been reported but not settled, and that have been incurred but not reported.  Adjustments to the claims reserve are charged or credited to expense in the periods in which they occur.  Included in the accompanying consolidated balance sheets as of September 28, 2001 and December 31, 2000 are workers’ compensation claims reserves of $60.6 million and $49.7 million.  The claims reserves were computed using a discount rate of 6.0%.

 

Workers’ compensation expense totaling $16.5 million and $16.5 million was recorded as a component of cost of services in each of the thirteen weeks ended September 28, 2001 and September 29, 2000.  Workers’ compensation expense totaling $44.5 million and $38.8 million was recorded as a component of cost of services in each of the thirty-nine weeks ended September 28, 2001 and September 29, 2000.

 

For workers’ compensation claims originating in Washington, Ohio, West Virginia, Canada and Puerto Rico, we pay workers’ compensation insurance premiums as required by government administered programs.  The insurance premiums are established by each jurisdiction, generally based upon the job classification of the insured workers and our previous claims experience.

 

For workers’ compensation claims originating in the United Kingdom, we have purchased an employers’ liability insurance policy.  This policy carries a 10 million GBP limit.

 

LONG-TERM DEBT

 

In February of 2001, we paid the $6.2 million outstanding balance, as of December 31, 2000, on the secured credit facility from U.S. Bank for our new corporate headquarters and administrative offices.

 

EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing net income, less preferred stock dividends, by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is computed by dividing net income, less preferred stock dividends, by the weighted average number of common shares and common share equivalents outstanding during the period.  Common share equivalents include the dilutive effect of outstanding options, except where their inclusion would be anti-dilutive.  We had 2.7 million anti-dilutive options outstanding for both the thirteen and thirty-nine weeks ended September 28, 2001.  For the thirteen and thirty-nine weeks ended September 29, 2000, we had 4.0 million and 3.5 million anti-dilutive options outstanding .

 

Basic and diluted earnings per share were calculated as follows (amounts in thousands, except per share amounts):

 

 

		Thirteen Weeks Ended						Thirty-Nine Weeks Ended
		September 28, 2001			September 29, 2000			September 28, 2001			September 29, 2000
Basic:
Net income		$	7,879		$	8,121		$	7,747		$	7,973
Less preferred stock dividends		--			(2		)	--			(22		)
Income allocable to common shareholders		7,879			8,119			7,747			7,951
Weighted average shares outstanding		40,509			41,995			40,586			42,531
Net income per share		$	0.19		$	0.19		$	0.19		$	0.19
Diluted:
Income allocable to common shareholders		$	7,879		$	8,119		$	7,747		$	7,951
Weighted average shares outstanding		40,509			41,995			40,586			42,531
Plus options to purchase common stock outstanding at end of period		5,446			4,585			5,446			4,585
Less shares assumed repurchased		(5,169		)	(4,514		)	(5,356		)	(4,322		)
Weighted average shares outstanding, including dilutive effect of options		40,786			42,066			40,676			42,794
Net income per share		$	0.19		$	0.19		$	0.19		$	0.19

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

		(Amounts in Thousands)
		Thirty-Nine Weeks Ended
		September 28, 2001			September 29, 2000
Cash paid during the period for:
Interest		$	1,255		$	962
Income taxes		$	3,182		$	722
Non-cash investing and financing activities:
Tax benefits related to stock options		$	--		$	439
Assets acquired with capital lease obligations		$	--		$	2,161

 

INTEREST AND OTHER INCOME (EXPENSE)

 

In June of 2001, we sold certain real property in Tacoma, Washington, which resulted in a realized pretax gain of $0.8 million.  This gain was partially offset by interest expense.

 

ACCOUNTS RECEIVABLE SECURITIZATION

 

In March 2001, we entered into a letter of credit facility and an accounts receivable securitization facility with certain unaffiliated financial institutions (the “Creditors”).  Subject to certain availability requirements, these facilities provide a maximum combined borrowing capacity of $100 million, all of which may be utilized as a revolving line of credit and up to $80 million of which may be used to obtain letters of credit (but any usage for letters of credit will reduce the amount available for use as loans).  Interest on advances under the line of credit facility is generally based upon the Creditor’s commercial paper rate, and fees for the letter of credit portion of the facility are based upon the Creditor’s cost of issuance.  The line of credit facility is secured by eligible accounts receivable of Labor Ready, Inc. and certain of its subsidiaries, which are transferred by them to Labor Ready Funding Corporation (“LRF”), a wholly owned, special purpose, bankruptcy remote subsidiary of Labor Ready, Inc. and pledged to the Creditors on an ongoing basis.  The letter of credit facility is secured by Labor Ready, Inc.’s pledge of all of the outstanding capital stock of LRF.  Additionally, Labor Ready, Inc. acts as a servicer for LRF in the collection and administration of the pledged accounts receivable.

 

At September 28, 2001, $80.4 million was available under this facility, of which we have committed $54.9 million for letters of credit to our insurance carriers, leaving $25.5 million available for future borrowing.

 

Item 2.    Management's Discussion And Analysis Of Financial Condition And Results of Operations

 

Certain matters discussed in this Form 10-Q, including statements about our revenue growth, the demand for temporary labor and our plans for opening new offices, are forward-looking statements within the meaning of the Private Litigation Reform Act of 1995.  As such, these forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements by us to be different from any future results, performance or achievements expressed or implied by such forward-looking statements.  These factors include, but are not limited to (1) national and global economic conditions; (2) our ability to continue to attract and retain customers and maintain profit margins in the face of new and existing competition; (3) our ability to attract and retain competent employees in key positions; and (4) other risks as set forth in our filings with the Securities and Exchange Commission including our Form 10-K for the year ended December 31, 2000.  Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained.

 

 

Overview

 

Labor Ready is the nation’s leading provider of temporary manual labor.  Our customers are primarily in the freight handling, warehousing, landscaping, construction, light manufacturing, and other light industrial businesses.  We have grown from eight dispatch offices in 1991 to 811 dispatch offices at September 28, 2001.  Substantially all of the growth in dispatch offices was achieved by opening Company-owned locations rather than through acquisitions or franchising.  Our annual revenues have grown from approximately $6 million in 1991 to $977 million in 2000, and were $703 million for the thirty-nine weeks ended September 28, 2001.  This revenue growth has been generated by opening new dispatch offices in markets throughout the U.S., Canada, United Kingdom and Puerto Rico.

 

We opened 31 dispatch offices during the first thirty-nine weeks of 2001 and closed 36 offices.  The average cost of opening each new dispatch office in 2001 decreased to approximately $30,000 as compared to approximately $45,000 in 2000, due primarily to our redistribution of previously purchased Cash Dispensing Machines (“CDM”) from our closed branches.  Approximately $13,000 of this cost is for salaries, recruiting, testing, training, lease and related expensed costs, and the remaining $17,000 is for property and equipment including leasehold improvements, computer systems and other equipment and installation.

 

Further, once open, we invest additional cash into the operations of new dispatch offices until they begin to generate sufficient revenue to cover their operating costs, generally within one year.  We pay our temporary workers on a daily basis, and bill our customers weekly.  Consequently, we may experience significant negative cash flow from operations and investment activities during periods of high growth and may require additional sources of working capital in order to continue to grow.

 

Approximately 30% of our customers are construction and landscaping businesses, which are significantly affected by the weather.  Construction and landscaping businesses and, to a lesser degree, other customer businesses typically increase activity in spring, summer and early fall months and decrease activity in late fall and winter months.  Further, inclement weather can slow construction and landscaping activities in such periods.  As a result, we have generally experienced an increase in temporary labor demand in the spring, summer and early fall months, and lower demand in the late fall and winter months.

 

From time to time, during peak periods, we experience shortages of available temporary workers.  We provide temporary workers with the option of receiving cash payment instead of a payroll check.  We believe this additional feature is unique among our direct competitors and should increase our ability to attract available temporary workers.

 

Revenue from services includes revenues earned on services provided by our temporary workers and fees generated by the CDMs.

 

Cost of services includes the wages and related payroll taxes of temporary workers, workers’ compensation expense, unemployment compensation insurance and transportation.  Cost of services as a percentage of revenues has historically been affected by numerous factors, including the use of lower introductory rates to attract new customers at new dispatch offices, the use of higher pay rates to attract more skilled workers, changes in the workers’ compensation reserve rates and the changing geographic mix of new and established, more mature markets.  Although we have implemented policies and procedures to prevent unplanned increases in pay rates, significant continuing fluctuations in cost of services may be experienced.

 

Selling, general and administrative expenses include the salaries and wages of our operations and administrative personnel, dispatch office operating expenses, corporate office operating expenses and the costs of the CDM program.

 

Labor Ready pays employee-related expenses of its temporary workers, including workers' compensation coverage, unemployment compensation insurance, and Social Security and Medicare taxes.  We do not provide health, dental, disability or life insurance to the temporary workers.  We bill our customers for the hours worked by our temporary workers assigned to the customer.  Because we pay our temporary workers only for the hours actually worked, wages for the temporary workers are a variable cost that increases or decreases directly in proportion to revenue.  We have one franchisee, which operates five dispatch offices.  We currently have no plans to grant additional franchises.  Royalty revenues from the franchised dispatch offices are not material during any period presented herein.

 

Results of Operations

 

Thirteen Weeks Ended September 28, 2001 Compared to Thirteen Weeks Ended September 29, 2000

 

The following table compares the operating results for the thirteen weeks ended September 28, 2001 and September 29, 2000 (in thousands):

 

		Thirteen Weeks Ended
		September 28, 2001			Percent Change		September 29, 2000
Revenues from services		$	259,928		(8.2	)	$	283,025
Cost of services		180,328			(9.4	)	199,012
Selling, general and administrative expenses		64,903			(5.5	)	68,668
Depreciation and amortization		2,004			2.7		1,952
Interest and other expense, net		64			(84.0	)	399
Income before taxes		12,629			(2.8	)	12,994
Net income		$	7,879		(3.0	)	$	8,121

 

 

Dispatch Offices

The number of offices decreased to 811 at September 28, 2001 from 812 locations at June 29, 2001, a net decrease of 1 dispatch office, or (0.1)%.  The number of offices grew to 852 for the thirteen weeks ended September 29, 2000 from 839 locations at June 30, 2000, a net increase of 13 dispatch offices, or 1.5%.

 

Revenues from Services

The decrease in revenues is due primarily to a 4% decrease in the number of offices in operation and the fact that the average office produced 4% less revenue during the thirteen week period ending September 28, 2001 as compared to the same period in 2000.  Included in revenues from services for the thirteen weeks ended September 28, 2001 and September 29, 2000 are CDM fees of $2.1 million and $2.4 million.

 

Cost of Services

The decrease in cost of services is directly related to the corresponding decrease in revenues.  Cost of services was 69.4% of revenue for the thirteen weeks ended September 28, 2001 compared to 70.3% of revenue for the same period in 2000, a decrease of 0.9%.

 

Selling, General and Administrative Expenses

The thirteen week comparative decrease in selling, general and administrative expenses is largely due to the decrease in the number of offices and their respective administrative costs partially offset by approximately $2 million of accrued costs associated with the decision to close additional offices and other non-recurring items.  Selling, general and administrative expenses were 25.0% of revenues for the third quarter of 2001 as compared to 24.3% of revenues in the third quarter of 2000.

 

We expect that selling, general and administrative expenses as a percentage of revenues may fluctuate in future periods as we may adjust our staffing at the dispatch offices as well as our operating and administrative capabilities.

 

Depreciation and Amortization Expense

The increase in quarterly depreciation and amortization expense is primarily the result of the net addition of $7.2 million of property and equipment since the third quarter of 2000.  These additions primarily include building, computer equipment, software, and other equipment.

 

Interest and Other Expense, Net

The decrease in net interest and other expense was the result of the decreased balance outstanding on the line of credit over the period.

 

We expect to incur less interest expense during the balance of 2001, as the collection of receivables from our busiest time of the year should allow us to maintain a positive cash flow and to increase our short-term investment income.  However, cash balances held in the CDMs for payment of temporary worker payrolls will continue to limit cash available for investing.

 

Taxes on Income

The decrease in taxes for the quarter is commensurate with the decrease in income from operations for each thirteen week period and a decrease in the impact of the foreign losses.  Our effective tax rate was 37.6% in the third quarter of 2001 as compared to 37.5% for the same period in 2000.  The principal difference between the statutory federal income tax rate and our effective income tax rate results from state income taxes, certain non-deductible expenses and the valuation allowance discussed below.

 

We had a net deferred tax asset of approximately $22.3 million at September 28, 2001, resulting primarily from workers' compensation deposits, credits and reserves and the allowance for doubtful accounts.  Due to the uncertainty of the realization of certain tax planning measures, we have established a valuation allowance against this net deferred tax asset in the amount of $1.3 million.

 

Net Income

As a percentage of revenues from services, net income was 3.0% for the third quarter of 2001 compared to 2.9% for the third quarter of 2000, an increase of 0.1%.  This increase in net income as a percentage of revenue was related to the decrease in  costs of services and interest and other expense as a percentage of revenue for the same period.

 

Thirty-Nine Weeks Ended September 28, 2001 Compared to Thirty-Nine Weeks Ended September 29, 2000

 

The following table compares the operating results for the thirty-nine weeks ended September 28, 2001 and September 29, 2000 (in thousands):

 

		Thirty-Nine Weeks Ended
		September 28, 2001			Percent Change		September 29, 2000
Revenues from services		$	702,668		(2.2	)	$	718,555
Cost of services		491,245			(2.0	)	501,468
Selling, general and administrative expenses		193,266			(2.6	)	198,363
Depreciation and amortization		6,200			12.2		5,528
Interest and other income (expense), net		540			194.9		(569		)
Income before taxes		12,497			(1.0	)	12,627
Net income		$	7,747		(2.8	)	$	7,973

 

 

Dispatch Offices

We opened 31 and closed 36 dispatch offices for a net closure of 5 dispatch offices during the thirty-nine weeks ended September 28, 2001 as compared to 165 openings during the same period of the prior year.  The total number of offices decreased to 811 at September 28, 2001 from 852 locations at September 29, 2000, a net decrease of 41 dispatch offices, or (4.8)%.  We expect to close approximately 50 additional offices during the balance of the year, while continuing to serve customers from neighboring offices.

 

Revenues from Services

The decrease in revenues is due primarily to the continued decrease in the number of offices in operation and same office sales declines.  This is a result of weak demand among manufacturing and retail service customers, which is only partially offset by growth in construction.  Included in revenues from services for the thirty-nine weeks ended September 28, 2001 and September 29, 2000 are CDM fees of $5.8 million and $6.2 million.

 

Cost of Services

The decrease in cost of services is primarily due to the corresponding decrease in revenues.  Cost of services was 69.9% of revenue for the thirty-nine weeks ended September 28, 2001 compared to 69.8% of revenue for the same period in 2000, an increase of 0.1%.

 

Selling, General and Administrative Expenses

The decrease in selling, general and administrative expenses is largely due to the opening of fewer offices in 2001 and reductions in other overhead expenses from 2000 to 2001.  Selling, general and administrative expenses were 27.5% of revenues for the first thirty-nine weeks of 2001 as compared to 27.6% of revenues in the first thirty-nine weeks of 2000.

 

 We expect that selling, general and administrative expenses as a percentage of revenues may fluctuate in future periods as we may adjust our staffing at the dispatch offices as well as our operating and administrative capabilities.

 

Depreciation and Amortization Expense

The increase in depreciation and amortization expense is primarily the result of the net addition of $7.2 million of property and equipment since the third quarter of 2000.  These additions primarily include building, computer equipment, software, and other equipment.

 

Interest and Other Income (Expense), Net

The increase in net interest and other income was the result of the pretax realized gain of $0.8 million for the sale of real estate.  Additionally, we had cash balances of approximately $15.8 million held in the CDMs at September 28, 2001 compared to $17.4 million at September 29, 2000.

 

We expect to incur less interest expense during the balance of 2001, as the collection of receivables from our busiest time of the year should allow us to maintain a positive cash flow and to increase our short-term investment income.  However, cash balances held in the CDMs for payment of temporary worker payrolls will continue to limit cash available for investing.

 

Taxes on Income

The increase in taxes on income is a result of the decrease in the impact of the foreign losses.  The Company’s effective tax rate was 38.0% for the first three quarters of 2001 as compared to 36.9% for the first three quarters of 2000.  The principal difference between the statutory federal income tax rate and our effective income tax rate results from state income taxes, certain non-deductible expenses and the valuation allowance as discussed below.

 

We had a net deferred tax asset of approximately $22.3 million at September 28, 2001, resulting primarily from workers' compensation deposits, credits and reserves and the allowance for doubtful accounts.  Due to the uncertainty of the realization of certain tax planning measures, we have established a valuation allowance against this net deferred tax asset in the amount of $1.3 million.

 

Net Income

The net income for the thirty-nine week period ended September 28, 2001 decreased by 2.8% as compared to 2000.  This decrease was related to the decrease in income from operations as a percentage of service revenue and the increase in the effective tax rate partially offset by the increase in interest and other income, including the $0.8 million realized pretax gain on the sale of real estate.

 

Liquidity and Capital Resources

Net cash provided by operating activities was $22.8 million for the thirty-nine week period ended September 28, 2001 compared to $17.5 million for the same period ended September 29, 2000.  This increase is largely due to the decrease in accounts receivable and an increase in workers’ compensation reserves, which were partially offset by the increase in prepaid expenses.

 

We used net cash in investing activities of $6.0 million in the first thirty-nine weeks of 2001, compared to $13.7 million in the first thirty-nine weeks of 2000.  The decrease in cash used in investing activities in 2001 as compared to 2000 is due primarily to the proceeds received from the sale of property and equipment and decreased capital expenditures.

 

Net cash provided by (used in) financing activities was ($9.7 million) for the period ended September 28, 2001 and $1.7 million for the period ended September 29, 2000.  The increase in cash used in financing activities in 2001 as compared to 2000 is due mainly to the $7.5 million of payments on long term debt, which includes our new corporate headquarters and capital leases.  We also purchased and retired approximately 0.8 million shares of common stock at an aggregate purchase price of approximately $3.0 million.

 

In March 2001, we entered into an accounts receivable securitization facility with certain unaffiliated financial institutions, which replaced our previous financing agreement with U.S. Bank.  Subject to certain availability requirements, these facilities allow us to borrow a maximum of $100 million, up to $80 million of which may be used to obtain letters of credit.  At September 28, 2001, $80.4 million was available, of which we have committed $54.9 million for letters of credit to our insurance carriers, leaving $25.5 available for future borrowing.

 

Included in cash and cash equivalents at September 28, 2001 is approximately $15.8 million, as compared to $17.4 million at September 29, 2000, of cash which is located in the CDMs for payment of temporary worker payrolls.

 

Historically, we have experienced cash flow deficits from time to time due to seasonal sales fluctuations and expansion of operations.  Management expects cash flow deficits to be financed by profitable operations and the use of the credit facility, and we may also consider other equity or debt financings as necessary or appropriate.  We analyze acquisition opportunities from time to time and may pursue acquisitions in certain circumstances.  Any acquisitions we enter into may require additional equity or debt financing.

 

 

Item 3.    Qualitative and Quantitative Disclosures About Market Risk

 

We are exposed to market risk related to changes in interest rates, and to a minor extent, foreign currency exchange rates, each of which could adversely affect the value of our investments.  We do not currently use derivative financial instruments.  At September 28, 2001, our purchased investments have maturities of less than 90 days.  As such, an increase in interest rates immediately and uniformly by 10% from levels at September 28, 2001 would not have a material effect upon our cash and cash equivalent balances.  Because of the relative short maturities of the investments we hold, we do not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates on our cash and cash equivalents portfolio.

 

We have a minor amount of assets and liabilities denominated in certain foreign currencies related to our international operations.  We have not hedged our translation risk on these currencies and we have the ability to hold our foreign-currency denominated assets indefinitely and do not expect that a sudden or significant change in foreign exchange rates will have a material impact on future net income or cash flows.

 

Part II.

Other Information

 

Item 6.

Exhibits and Reports on Form 8-K

 

(a)		Exhibits:
		The following exhibits are being filed as a part of this Report:
		Exhibit No.	Description
		10.1	Separation Agreement between Labor Ready, Inc. and Richard King dated  October 9, 2001.
		10.2	Consulting Agreement between Labor Ready, Inc. and Richard King dated October 9, 2001.
		10.3	Employment Agreement between Labor Ready, Inc. and Joseph P. Sambataro, Jr. dated October 2, 2001.
		10.4	Third Amendment to Securitization Agreements between Labor Ready Funding Corporation, Redwood Receivables Corporation, Labor Ready, Inc. and General Electric Capital Corporation dated November 8, 2001.

 

(b)		Reports on Form 8-K
		We filed the following reports on Form 8-K during the quarter covered by this Form 10-Q:
		On September 25, 2001, we filed a Form 8-K reporting the resignation of Richard L. King as President and Chief Executive Officer and from our Board of Directors and the appointment of Joseph P. Sambataro, Jr. as new President and Chief Executive Officer.

 

SIGNATURES

 

 

                Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 9th day of November 2001.

 

 

LABOR READY, INC.

 

/s/ Joseph P. Sambataro, Jr.
Chief Executive Officer and President
/s/ Steven C. Cooper
Chief Financial Officer and Executive Vice President