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EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATIONS - TrueBlue, Inc.tbi10q092515ex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - TrueBlue, Inc.tbi10q092515ex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - TrueBlue, Inc.tbi10q092515ex311.htm

 
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 25, 2015
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14543
____________________________________ 
TrueBlue, Inc.
(Exact name of registrant as specified in its charter)
______________________________________ 
 
Washington
 
91-1287341
(State of incorporation)
 
(IRS Employer Identification No.)
 
 
1015 A Street, Tacoma, Washington
 
98402
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:    (253) 383-9101
______________________________________ 

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
 Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
 
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of October 12, 2015, there were 41,967,937 shares of the registrant’s common stock outstanding.

 



TrueBlue, Inc.
Table of Contents







Page - 2


PART I. FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
TRUEBLUE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)
 
September 25,
2015
 
December 26,
2014
ASSETS
(unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
23,232

 
$
19,666

Marketable securities


1,500

Accounts receivable, net of allowance for doubtful accounts of $6,046 and $7,603
362,016

 
359,903

Prepaid expenses, deposits and other current assets
18,977

 
18,778

Income tax receivable
1,977

 
10,516

Deferred income taxes, net
7,592

 
5,444

Total current assets
413,794

 
415,807

Property and equipment, net
55,995

 
61,392

Restricted cash and investments
181,910

 
168,426

Goodwill
241,855

 
241,855

Intangible assets, net
122,241

 
136,560

Other assets, net
46,117

 
42,631

Total assets
$
1,061,912

 
$
1,066,671

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued expenses
$
66,903

 
$
50,256

Accrued wages and benefits
80,007

 
69,692

Current portion of workers' compensation claims reserve
63,885

 
64,556

Other current liabilities
2,447

 
2,726

Total current liabilities
213,242

 
187,230

Workers’ compensation claims reserve, less current portion
188,978

 
178,283

Long-term debt, less current portion
111,689

 
199,383

Deferred income taxes, net
15,887

 
19,768

Other long-term liabilities
14,834

 
12,673

Total liabilities
544,630

 
597,337

 
 
 
 
Commitments and contingencies (Note 9)

 

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock, $0.131 par value, 20,000 shares authorized; No shares issued and outstanding

 

Common stock, no par value, 100,000 shares authorized; 41,961 and 41,530 shares issued and outstanding
1

 
1

Accumulated other comprehensive income (loss)
(1,116
)
 
871

Retained earnings
518,397

 
468,462

Total shareholders’ equity
517,282

 
469,334

Total liabilities and shareholders’ equity
$
1,061,912

 
$
1,066,671

See accompanying notes to consolidated financial statements


Page - 3


TRUEBLUE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
September 25,
2015
 
September 26,
2014
 
September 25,
2015
 
September 26,
2014
Revenue from services
$
683,918

 
$
633,365

 
$
1,884,947

 
$
1,482,655

Cost of services
515,051

 
473,766

 
1,434,278

 
1,103,914

Gross profit
168,867

 
159,599

 
450,669

 
378,741

Selling, general and administrative expenses
125,117

 
120,318

 
354,569

 
308,654

Depreciation and amortization
10,498

 
9,719

 
31,415

 
20,126

Income from operations
33,252

 
29,562

 
64,685

 
49,961

Interest expense
(933
)
 
(1,140
)
 
(2,980
)
 
(1,725
)
Interest and other income
567

 
731

 
1,878

 
2,110

Interest and other income (expense), net
(366
)
 
(409
)
 
(1,102
)
 
385

Income before tax expense
32,886

 
29,153

 
63,583

 
50,346

Income tax expense
12,796

 
8,243

 
20,504

 
11,696

Net income
$
20,090

 
$
20,910

 
$
43,079

 
$
38,650

 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.49

 
$
0.51

 
$
1.05

 
$
0.95

Diluted
$
0.48

 
$
0.51

 
$
1.04

 
$
0.94

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
41,296

 
40,793

 
41,189

 
40,701

Diluted
41,620

 
41,038

 
41,546

 
40,971

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax
$
(881
)
 
$
(1,087
)
 
$
(1,706
)
 
$
(997
)
Unrealized gain (loss) on investments, net of tax
(835
)
 
(81
)
 
(281
)
 
372

Total other comprehensive loss, net of tax
(1,716
)
 
(1,168
)
 
(1,987
)
 
(625
)
Comprehensive income
$
18,374

 
$
19,742

 
$
41,092

 
$
38,025

See accompanying notes to consolidated financial statements
 


Page - 4


TRUEBLUE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Thirty-nine weeks ended
 
September 25, 2015
 
September 26, 2014
Cash flows from operating activities:
 
 
 
Net income
$
43,079

 
$
38,650

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
31,415

 
20,126

Provision for doubtful accounts
4,483

 
9,619

Stock-based compensation
8,283

 
8,902

Deferred income taxes
(6,029
)
 
6,077

Other operating activities
20

 
(148
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(6,597
)
 
(26,391
)
Income taxes
9,673

 
(3,179
)
Other assets
(3,685
)
 
(6,510
)
Accounts payable and other accrued expenses
17,453

 
(1,687
)
Accrued wages and benefits
10,315

 
11,373

Workers’ compensation claims reserve
10,024

 
532

Other liabilities
1,883

 
2,539

Net cash provided by operating activities
120,317

 
59,903

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(12,590
)
 
(10,213
)
Acquisition of businesses, net of cash acquired

 
(307,972
)
Purchases of marketable securities

 
(25,057
)
Sales and maturities of marketable securities
1,500

 
43,917

Change in restricted cash and cash equivalents
13,070

 
10,020

Purchases of restricted investments
(38,818
)
 
(18,196
)
Maturities of restricted investments
11,047

 
10,588

Net cash used in investing activities
(25,791
)
 
(296,913
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net proceeds from stock option exercises and employee stock purchase plans
1,164

 
1,673

Common stock repurchases for taxes upon vesting of restricted stock
(3,725
)
 
(3,021
)
Net change in revolving credit facility
(85,994
)
 
146,994

Payments on debt and other liabilities
(1,700
)
 
(1,700
)
Other
1,134

 
1,242

Net cash provided by (used in) financing activities
(89,121
)
 
145,188

Effect of exchange rate changes on cash and cash equivalents
(1,839
)
 
(937
)
Net change in cash and cash equivalents
3,566

 
(92,759
)
CASH AND CASH EQUIVALENTS, beginning of period
19,666

 
122,003

CASH AND CASH EQUIVALENTS, end of period
$
23,232

 
$
29,244

See accompanying notes to consolidated financial statements


Page - 5


TRUEBLUE, INC.
Notes to Consolidated Financial Statements

NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statement preparation

The accompanying unaudited consolidated financial statements (“financial statements”) of TrueBlue, Inc. (the "Company," "we," "us," "our," and "TrueBlue") are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") 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 GAAP have been condensed or omitted. The financial statements reflect all adjustments which, in the opinion of management, are necessary to fairly state the financial statements for the interim periods presented. We follow the same accounting policies for preparing both quarterly and annual financial statements.
These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 26, 2014. The results of operations for the thirty-nine weeks ended September 25, 2015 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.

Recently issued accounting pronouncements not yet adopted

In September 2015, the Financial Accounting Standards Board ("FASB") issued a new accounting standard intended to simplify the accounting for measurement period adjustments in a business combination. The standard requires that the acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period when the adjustment is determined. The new standard also requires the acquirer to disclose in the same reporting period the effect on earnings as a result of the change as if the adjustment were made at the acquisition date. This guidance is effective for annual periods beginning after December 15, 2015 (Q1 2016 for TrueBlue). TrueBlue plans to adopt the new standard on the effective date. This standard is not expected to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued a new accounting standard intended to simplify the presentation of debt issuance costs. The standard requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the presentation for debt discounts. The recognition and measurement guidance for debt issuance costs is not affected. This guidance is effective for annual periods beginning after December 15, 2015 (Q1 2016 for TrueBlue), including interim periods within those annual periods, and must be applied on a retrospective basis. TrueBlue plans to adopt the new standard on the effective date. This standard is not expected to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued a new accounting standard designed to assist customers in their determination of whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 (Q1 2016 for TrueBlue). The new standard may be applied retrospectively or prospectively to arrangements entered into, or materially modified, after the effective date. TrueBlue plans to adopt the new standard prospectively on the effective date. This standard is not expected to have a material impact on our consolidated financial statements.

In May 2014, the FASB issued a new accounting standard that sets forth a five-step revenue recognition model, which supersedes current revenue recognition guidance, including industry-specific revenue recognition guidance. The underlying principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new standard provides two methods of initial adoption: retrospective for all periods presented, or through a cumulative adjustment in the year of adoption. On July 9, 2015, the FASB approved a one year deferral of the effective date of the standard. The new effective date is for annual periods beginning after December 15, 2017 (Q1 2018 for TrueBlue), including interim periods within those annual


Page - 6

Notes to Consolidated Financial Statements—(Continued)

periods. We have not yet determined which method of adoption will be applied and are currently evaluating the impact that this standard will have on our consolidated financial statements.
NOTE 2:
FAIR VALUE MEASUREMENT
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We apply a fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1 inputs are valued using quoted market prices in active markets for identical assets or liabilities. Our Level 1 assets primarily include cash and cash equivalents and mutual funds.
Level 2 inputs are valued based upon quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active. Our Level 2 assets are marketable securities, which may consist of certificates of deposit ("CDs") and commercial paper, and restricted investments, which consist of municipal debt securities, corporate debt securities, asset-backed securities, and U.S. agency debentures. Our investments consist of highly rated investment grade debt securities, which are rated A1/P1 or higher for short-term securities and A- or higher for long-term securities, by nationally recognized statistical rating organizations. We obtain our inputs from quoted market prices and independent pricing vendors.
Level 3 inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. We have no Level 3 assets or liabilities.
The carrying values of our accounts receivable, accounts payable and other accrued expenses, and accrued wages and benefits approximate fair value due to their short-term nature. We also hold certain restricted investments which collateralize workers' compensation programs and are classified as held-to-maturity and carried at amortized cost on our Consolidated Balance Sheets. We hold long-term debt with variable interest rates that approximate fair value. For additional information, see Note 8: Long-term Debt.
The following tables present the fair value and hierarchy for our financial assets (in thousands):
 
September 25, 2015
 
Carrying Value
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents (1)
$
23,232

 
$
23,232

 
$
23,232

 
$

 
$

Restricted cash and cash equivalents (1)
53,944

 
53,944

 
53,944

 

 

Other restricted assets (2)
11,647

 
11,647

 
11,647

 

 

Restricted investments classified as held-to-maturity
116,319

 
117,519

 

 
117,519

 

 
December 26, 2014
 
Carrying Value
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents (1)
$
19,666

 
$
19,666

 
$
19,666

 
$

 
$

Marketable securities classified as available-for-sale (3)
1,500

 
1,500

 

 
1,500

 

Restricted cash and cash equivalents (1)
68,359

 
68,359

 
68,359

 

 

Other restricted assets (2)
9,972

 
9,972

 
9,972

 

 

Restricted investments classified as held-to-maturity
90,095

 
91,066

 

 
91,066

 


(1)
Cash equivalents and restricted cash equivalents consist of money market funds, deposits, and investments with original maturities of three months or less.
(2)
Other restricted assets primarily consist of deferred compensation plan accounts, which are comprised of mutual funds classified as available-for-sale securities.
(3)
At September 25, 2015, we held no marketable securities. At December 26, 2014, all of our marketable securities, which consisted of CDs, had stated maturities of less than one year.


Page - 7

Notes to Consolidated Financial Statements—(Continued)

NOTE 3:
MARKETABLE SECURITIES
We held no marketable securities as of September 25, 2015. Gross unrealized gains and losses were de minimis for the thirteen and thirty-nine weeks ended September 25, 2015.
As of December 26, 2014, the amortized cost and fair value of our marketable securities, which were all CDs with stated maturities of less than one year, were $1.5 million. Gross unrealized gains and losses were de minimis for the thirteen and thirty-nine weeks ended September 26, 2014.
NOTE 4:
RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments consist principally of collateral that has been provided or pledged to insurance carriers for workers' compensation and state workers' compensation programs. Our insurance carriers and certain state workers' compensation programs require us to collateralize a portion of our workers' compensation obligation. The collateral typically takes the form of cash and cash equivalents and highly rated investment grade securities, primarily in municipal debt securities, corporate debt securities, and asset-backed securities. The majority of our collateral obligations are held in a trust at the Bank of New York Mellon ("Trust"). Our investments have not resulted in any other-than-temporary impairments.
The following is a summary of our restricted cash and investments (in thousands):
 
September 25,
2015
 
December 26,
2014
Cash collateral held by insurance carriers
$
22,717

 
$
22,639

Cash and cash equivalents held in Trust
31,227

 
43,856

Investments held in Trust
116,319

 
90,095

Other (1)
11,647

 
11,836

Total restricted cash and investments
$
181,910

 
$
168,426


(1)
Primarily consists of deferred compensation plan accounts, which are comprised of mutual funds classified as available-for-sale securities.
The following tables present fair value disclosures for our held-to-maturity investments, which are carried at amortized cost (in thousands):
 
September 25, 2015
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
Municipal debt securities
$
62,289

 
$
918

 
$
(19
)
 
$
63,188

Corporate debt securities
44,978

 
284

 
(81
)
 
45,181

Asset-backed securities
9,052

 
107

 
(9
)
 
9,150

 
$
116,319

 
$
1,309

 
$
(109
)
 
$
117,519

 
December 26, 2014
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
Municipal debt securities
$
52,406

 
$
882

 
$
(92
)
 
$
53,196

Corporate debt securities
27,715

 
179

 
(144
)
 
27,750

Asset-backed securities
9,974

 
157

 
(11
)
 
10,120

 
$
90,095

 
$
1,218

 
$
(247
)
 
$
91,066



Page - 8

Notes to Consolidated Financial Statements—(Continued)

The amortized cost and fair value by contractual maturity of our held-to-maturity investments are as follows (in thousands):
 
September 25, 2015
 
Amortized Cost
 
Fair Value
Due in one year or less
$
10,503

 
$
10,577

Due after one year through five years
62,654

 
63,118

Due after five years through ten years
43,162

 
43,824

 
$
116,319

 
$
117,519

Actual maturities may differ from contractual maturities because the issuers of certain debt securities have the right to call or prepay their obligations without penalty. We have no significant concentrations of counterparties in our held-to-maturity investment portfolio.
NOTE 5:
PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost and consist of the following (in thousands):
 
September 25,
2015
 
December 26,
2014
Buildings and land
$
31,558

 
$
30,381

Computers and software
125,074

 
115,419

Furniture and equipment
11,641

 
11,690

Construction in progress
3,622

 
5,415

 
171,895

 
162,905

Less accumulated depreciation
(115,900
)
 
(101,513
)
 
$
55,995

 
$
61,392

Capitalized software costs, net of accumulated depreciation, were $25.3 million and $30.2 million as of September 25, 2015 and December 26, 2014, respectively, excluding amounts in Construction in progress. Construction in progress consists primarily of purchased and internally-developed software.

Depreciation expense of property and equipment totaled $5.9 million and $5.1 million for the thirteen weeks ended September 25, 2015 and September 26, 2014, respectively. Depreciation expense of property and equipment totaled $17.1 million and $12.5 million for the thirty-nine weeks ended September 25, 2015 and September 26, 2014, respectively.
NOTE 6:
GOODWILL AND INTANGIBLE ASSETS
 
Goodwill

The following table reflects goodwill at September 25, 2015 and December 26, 2014 (in thousands):
 
Staffing Services
 
Managed Services
 
Unallocated Goodwill
 
Total Company
Balance at December 26, 2014
 
 
 
 
 
 
 
Goodwill before impairment
$
128,449

 
$

 
$
159,616

 
$
288,065

Accumulated impairment loss
(46,210
)
 

 

 
(46,210
)
Goodwill, net
82,239

 

 
159,616

 
241,855

 
 
 
 
 
 
 
 
Allocated goodwill
42,730

 
116,886

 
(159,616
)
 

 
 
 
 
 
 
 
 
Balance at September 25, 2015
 
 
 
 
 
 
 
Goodwill before impairment
171,179

 
116,886

 

 
288,065

Accumulated impairment loss
(46,210
)
 

 

 
(46,210
)
Goodwill, net
$
124,969

 
$
116,886

 
$

 
$
241,855



Page - 9

Notes to Consolidated Financial Statements—(Continued)


Effective June 30, 2014, we acquired Staffing Solutions Holdings, Inc. ("Seaton"). The goodwill associated with the acquisition has been allocated to our reportable segments. For additional information regarding our segments see Note 16: Segment Information.
Intangible assets
The following table presents our purchased finite-lived intangible assets (in thousands):
 
September 25, 2015
 
December 26, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Finite-lived intangible assets (1):
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
123,940

 
$
(33,121
)
 
$
90,819

 
$
123,940

 
$
(22,195
)
 
$
101,745

Trade names/trademarks
4,422

 
(3,313
)
 
1,109

 
4,422

 
(2,878
)
 
1,544

Non-compete agreements
1,800

 
(1,087
)
 
713

 
1,800

 
(817
)
 
983

Technologies
18,300

 
(4,900
)
 
13,400

 
18,300

 
(2,212
)
 
16,088

Total finite-lived intangible assets
$
148,462

 
$
(42,421
)
 
$
106,041

 
$
148,462

 
$
(28,102
)
 
$
120,360


(1)
Excludes assets that are fully amortized.

Amortization expense of our finite-lived intangible assets was $4.6 million for the thirteen weeks ended September 25, 2015 and September 26, 2014. Amortization expense of our finite-lived intangible assets was $14.3 million and $7.6 million for the thirty-nine weeks ended September 25, 2015 and September 26, 2014, respectively.
The following table provides the estimated future amortization of finite-lived intangible assets as of September 25, 2015 (in thousands):
Remainder of 2015
$
4,593

2016
18,186

2017
16,157

2018
14,638

2019
12,017

Thereafter
40,450

Total future amortization
$
106,041

We also held indefinite-lived trade names/trademarks of $16.2 million as of September 25, 2015 and December 26, 2014.
NOTE 7:WORKERS’ COMPENSATION INSURANCE AND RESERVES
We provide workers’ compensation insurance for our temporary and permanent employees. The majority of our current workers’ compensation insurance policies cover claims for a particular event above a $2.0 million deductible limit, on a “per occurrence” basis. This results in our being substantially self-insured.
For workers’ compensation claims originating in Washington, North Dakota, Ohio, Wyoming, Canada, and Puerto Rico (our “monopolistic jurisdictions”), we pay workers’ compensation insurance premiums and obtain full coverage under government-administered programs (with the exception of our Labor Ready service line in the state of Ohio where we have a self-insured policy). Accordingly, because we are not the primary obligor, our financial statements do not reflect the liability for workers’ compensation claims in these monopolistic jurisdictions. Our workers’ compensation reserve is established using estimates of the future cost of claims and related expenses that have been reported but not settled, as well as those that have been incurred but not reported.
Our workers’ compensation reserve for claims below the deductible limit is discounted to its estimated net present value using discount rates based on average returns of “risk-free” U.S. Treasury instruments available during the year in which the liability was incurred. The weighted average discount rate was 1.6% and 1.7% at September 25, 2015 and December 26, 2014, respectively. Payments made against self-insured claims are made over a weighted average period of approximately 4.5 years at September 25, 2015.


Page - 10

Notes to Consolidated Financial Statements—(Continued)

The table below presents a reconciliation of the undiscounted workers’ compensation claims reserve to the discounted workers' compensation reserve for the periods presented as follows (in thousands):
 
September 25,
2015
 
December 26,
2014
Undiscounted workers’ compensation reserve
$
267,251

 
$
256,220

Less discount on workers' compensation reserve
14,388

 
13,381

Workers' compensation reserve, net of discount
252,863

 
242,839

Less current portion
63,885

 
64,556

Long-term portion
$
188,978

 
$
178,283

Payments made against self-insured claims were $51.8 million and $44.8 million for the thirty-nine weeks ended September 25, 2015 and September 26, 2014, respectively.
Our workers’ compensation reserve includes estimated expenses related to claims above our self-insured limits (“excess claims”), and we record a corresponding receivable for the insurance coverage on excess claims based on the contractual policy agreements we have with insurance carriers. We discount this reserve and corresponding receivable to its estimated net present value using the discount rates based on average returns of “risk-free” U.S. Treasury instruments available during the year in which the liability was incurred. The claim payments are made and the corresponding reimbursements from our insurance carriers are received over an estimated weighted average period of approximately 15 years. The discounted workers’ compensation reserve for excess claims was $46.7 million and $42.6 million as of September 25, 2015 and December 26, 2014, respectively. The discounted receivables from insurance companies, net of valuation allowance, were $42.8 million and $38.7 million as of September 25, 2015 and December 26, 2014, respectively, and are included in Other assets, net on the accompanying Consolidated Balance Sheets.
Management evaluates the adequacy of the workers’ compensation reserves in conjunction with an independent quarterly actuarial assessment. Factors considered in establishing and adjusting these reserves include, among other things:
changes in medical and time loss (“indemnity”) costs;
changes in mix between medical only and indemnity claims;
regulatory and legislative developments impacting benefits and settlement requirements;
type and location of work performed;
impact of safety initiatives; and
positive or adverse development of claims.
Workers’ compensation expense consists primarily of changes in self-insurance reserves net of changes in discount, monopolistic jurisdictions’ premiums, insurance premiums, and other miscellaneous expenses. Workers’ compensation expense of $24.7 million and $21.6 million was recorded in Cost of services for the thirteen weeks ended September 25, 2015 and September 26, 2014, respectively. Workers’ compensation expense of $69.1 million and $55.1 million was recorded in Cost of services for the thirty-nine weeks ended September 25, 2015 and September 26, 2014, respectively.
NOTE 8:
LONG-TERM DEBT

The components of our borrowings were as follows (in thousands):
 
 
September 25,
2015
 
December 26, 2014
Revolving Credit Facility
 
$
86,000

 
$
171,994

Term Loan
 
27,956

 
29,656

Total debt
 
113,956

 
201,650

Less current portion
 
2,267

 
2,267

Long-term debt, less current portion
 
$
111,689

 
$
199,383


Second amended and restated credit agreement

Effective June 30, 2014, we entered into a Second Amended and Restated Revolving Credit Agreement for a secured revolving credit facility of $300.0 million with Bank of America, N.A., Wells Fargo Bank, National Association, HSBC and PNC Capital


Page - 11

Notes to Consolidated Financial Statements—(Continued)

Markets LLC ("Revolving Credit Facility") in connection with our acquisition of Seaton. The Revolving Credit Facility, which matures June 30, 2019, amended and restated our previous credit facility, and replaced the Seaton credit facility.

The maximum amount we can borrow under the Revolving Credit Facility is subject to certain borrowing limits. Specifically, we are limited to the sum of 90% of our eligible billed accounts receivable, plus 85% of our eligible unbilled accounts receivable limited to 15% of all our eligible receivables, plus the value of our Tacoma headquarters office building. The real estate lending limit is $17.4 million, and is reduced quarterly by $0.4 million. As of September 25, 2015, the Tacoma headquarters office building liquidation value totaled $15.7 million. The borrowing limit is further reduced by the sum of a reserve in an amount equal to the payroll and payroll taxes for our temporary employees for one payroll cycle and other reserves, if deemed applicable. Each borrowing has a stated maturity of 90 days or less. At September 25, 2015, $291.5 million was available under the Revolving Credit Facility, $86.0 million was utilized as a draw on the facility, and $4.5 million was utilized by outstanding standby letters of credit, leaving $201.0 million available for additional borrowings. The letters of credit collateralize a portion of our workers' compensation obligation.

The Revolving Credit Facility requires that we maintain an excess liquidity of $37.5 million. Excess liquidity is an amount equal to the unused borrowing capacity under the Revolving Credit Facility plus certain unrestricted cash, cash equivalents, and marketable securities. We are required to satisfy a fixed charge coverage ratio in the event we do not meet that requirement. The additional amount available to borrow at September 25, 2015 was $201.0 million and the amount of cash and cash equivalents under control agreements was $24.6 million, for a total of $225.6 million, which is well in excess of the liquidity requirement. We are currently in compliance with all covenants related to the Revolving Credit Facility.

Under the terms of the Revolving Credit Facility, we pay a variable rate of interest on funds borrowed that is based on London Interbank Offered Rate (LIBOR) plus an applicable spread between 1.25% and 2.00%. Alternatively, at our option, we may pay interest based upon a base rate plus an applicable spread between 0.25% and 1.00%. The applicable spread is determined by certain liquidity to debt ratios. The base rate is the greater of the prime rate (as announced by Bank of America), the federal funds rate plus 0.50%, or the one-month LIBOR rate plus 1.00%. At September 25, 2015, the applicable spread on LIBOR was 1.50% and the applicable spread on the base rate was 0.5%. As of September 25, 2015, the weighted average interest rate on outstanding borrowings was 1.79%.

A fee of 0.375% is applied against the Revolving Credit Facility's unused borrowing capacity when utilization is less than 25%, or 0.25% when utilization is greater than or equal to 25%. Letters of credit are priced at the margin in effect for LIBOR loans, plus a fronting fee of 0.125%.

Obligations under the Revolving Credit Facility are guaranteed by TrueBlue and material U.S. domestic subsidiaries, and are secured by a pledge of substantially all of the assets of TrueBlue and material U.S. domestic subsidiaries. The Revolving Credit Facility has variable rate interest and approximates fair value as of September 25, 2015 and December 26, 2014.
Term loan agreement
On February 4, 2013, we entered into an unsecured Term Loan Agreement (“Term Loan”) with Synovus Bank in the principal amount of $34.0 million. The Term Loan has a five-year maturity with fixed monthly principal payments, which total $2.3 million annually based on a loan amortization term of 15 years. Interest accrues at the one-month LIBOR index rate plus an applicable spread of 1.50%, which is paid in addition to the principal payments. At our discretion, we may elect to extend the term of the Term Loan by five consecutive one-year extensions. At September 25, 2015, the interest rate for the Term Loan was 1.70%.
At September 25, 2015 and December 26, 2014, the remaining balance of the Term Loan was $28.0 million and $29.7 million, respectively, of which $2.3 million is current and is included in Other current liabilities on our Consolidated Balance Sheets. The Term Loan has variable rate interest and approximates fair value as of September 25, 2015 and December 26, 2014.
Our obligations under the Term Loan may be accelerated upon the occurrence of an event of default under the Term Loan, which includes customary events of default, as well as cross-defaults related to indebtedness under our Revolving Credit Facility and other Term Loan specific defaults. The Term Loan contains customary negative covenants applicable to the Company and our subsidiaries such as indebtedness, certain dispositions of property, the imposition of restrictions on payments under the Term Loan, and other Term Loan specific covenants. We are currently in compliance with all covenants related to the Term Loan.


Page - 12

Notes to Consolidated Financial Statements—(Continued)

NOTE 9:
COMMITMENTS AND CONTINGENCIES
Workers’ compensation commitments
Our insurance carriers and certain state workers’ compensation programs require us to collateralize a portion of our workers’ compensation obligation, for which they become responsible should we become insolvent. The collateral typically takes the form of cash and cash equivalents, highly rated investment grade debt securities, letters of credit, and/or surety bonds. On a regular basis these entities assess the amount of collateral they will require from us relative to our workers' compensation obligation. The majority of our collateral obligations are held in the Trust.
We have provided our insurance carriers and certain states with commitments in the form and amounts listed below (in thousands):
 
September 25,
2015
 
December 26,
2014
Cash collateral held by insurance carriers
$
22,217

 
$
22,639

Cash and cash equivalents held in Trust
31,227

 
43,856

Investments held in Trust
116,319

 
90,095

Letters of credit (1)
4,240

 
6,513

Surety bonds (2)
16,971

 
16,861

Total collateral commitments
$
190,974

 
$
179,964


(1)
We have agreements with certain financial institutions to issue letters of credit as collateral.
(2)
Our surety bonds are issued by independent insurance companies on our behalf and bear annual fees based on a percentage of the bond, which are determined by each independent surety carrier. These fees do not exceed 2.0% of the bond amount, subject to a minimum charge. The terms of these bonds are subject to review and renewal every one to four years and most bonds can be canceled by the sureties with as little as 60 days' notice.
Legal contingencies and developments
We are involved in various proceedings arising in the normal course of conducting business. We believe the liabilities included in our financial statements reflect the probable loss that can be reasonably estimated. The resolution of those proceedings is not expected to have a material effect on our results of operations or financial condition.
NOTE 10:
STOCK-BASED COMPENSATION
We record stock-based compensation expense for restricted and unrestricted stock awards, performance share units, stock options, and shares purchased under an employee stock purchase plan.
Our 2005 Long-Term Equity Incentive Plan, as amended and restated effective May 2013 ("Incentive Plan"), provides for the issuance or delivery of up to 7.95 million shares of our common stock over the full term of the Incentive Plan.

Restricted and unrestricted stock awards and performance share units
Under the Incentive Plan, restricted stock awards are granted to executive officers and key employees and vest annually over three or four years. Unrestricted stock awards granted to our Board of Directors vest immediately. Restricted and unrestricted stock-based compensation expense is calculated based on the grant-date market value. We recognize compensation expense on a straight-line basis over the vesting period, net of estimated forfeitures.
Performance share units have been granted to executive officers and certain key employees. Vesting of the performance share units is contingent upon the achievement of revenue and profitability growth goals at the end of each three-year performance period. Each performance share unit is equivalent to one share of common stock. Compensation expense is calculated based on the grant-date market value of our stock and is recognized ratably over the performance period for the performance share units which are expected to vest. Our estimate of the performance units expected to vest is reviewed and adjusted as appropriate each quarter.


Page - 13

Notes to Consolidated Financial Statements—(Continued)

Restricted and unrestricted stock awards and performance share units activity for the thirty-nine weeks ended September 25, 2015, was as follows (shares in thousands):
 
Shares
 
Weighted- average grant-date price
Non-vested at beginning of period
1,547

 
$
20.03

Granted
498

 
$
22.25

Vested
(582
)
 
$
18.06

Forfeited
(274
)
 
$
15.17

Non-vested at the end of the period
1,189

 
$
22.32

As of September 25, 2015, total unrecognized stock-based compensation expense related to non-vested restricted stock was approximately $11.0 million, which is estimated to be recognized over a weighted average period of 1.69 years. As of September 25, 2015, total unrecognized stock-based compensation expense related to performance share units was approximately $3.8 million, which is estimated to be recognized over a weighted average period of 1.72 years.
Stock options
Our Incentive Plan provides for both nonqualified stock options and incentive stock options (collectively, “stock options”) for directors, officers, and certain employees. We issue new shares of common stock upon exercise of stock options. All of our stock options are vested and expire if not exercised within seven years from the date of grant. Stock option activity was de minimis for the thirty-nine weeks ended September 25, 2015.
Employee stock purchase plan

Our Employee Stock Purchase Plan (“ESPP”) reserves for purchase 1.0 million shares of common stock. The plan allows eligible employees to contribute up to 10% of their earnings toward the monthly purchase of the Company's common stock. The employee's purchase price is 85% of the lesser of the fair market value of shares on either the first day or the last day of each month. We consider our ESPP to be a component of our stock-based compensation and accordingly we recognize compensation expense over the requisite service period for stock purchases made under the plan. The requisite service period begins on the enrollment date and ends on the purchase date, the duration of which is one month.

During the thirty-nine weeks ended September 25, 2015 and September 26, 2014, participants purchased approximately 49,000 and 45,000 shares from the plan, respectively, for cash proceeds of $1.0 million each period.
Stock-based compensation expense
Total stock-based compensation expense, which is included in Selling, general and administrative expenses on our Consolidated Statements of Operations and Comprehensive Income, was $2.5 million and $3.9 million for the thirteen weeks ended September 25, 2015 and September 26, 2014, respectively, and $8.3 million and $8.9 million for the thirty-nine weeks ended September 25, 2015 and September 26, 2014, respectively.
NOTE 11:
DEFINED CONTRIBUTION PLANS

We offer both qualified and non-qualified defined contribution plans to eligible employees. Participating employees may elect to defer and contribute a portion of their eligible compensation. The plans offer discretionary matching contributions. The liability for the non-qualified plans was $12.2 million and $10.1 million as of September 25, 2015 and December 26, 2014, respectively. The current and non-current portion of the deferred compensation liability is included in Other current liabilities and Other long-term liabilities, respectively, on our Consolidated Balance Sheets, and is largely offset by restricted investments recorded in Restricted cash and investments on our Consolidated Balance Sheets.


Page - 14

Notes to Consolidated Financial Statements—(Continued)

NOTE 12:
INCOME TAXES

Our tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment. Our quarterly tax provision and our quarterly estimate of our annual effective tax rate are subject to variation due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, audit developments, changes in law, regulations and administrative practices, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of discrete items, tax credits, and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower. Except as required under U.S. tax law, we do not provide for U.S. taxes on undistributed earnings of our foreign subsidiaries since we consider those earnings to be permanently invested outside of the U.S.

Our effective tax rate on earnings for the thirty-nine weeks ended September 25, 2015 was 32.2%. The principal difference between the statutory federal income tax rate of 35.0% and our effective income tax rate of 32.2% results from federal and state job credits earned in 2015 for prior year hires. These job credits include the federal Work Opportunity Tax Credit ("WOTC") and the California Enterprise Zone Tax Credit. We generated substantially more prior year credits in 2015 because the federal WOTC application due date was extended to April 30, 2015 for 2014 hires, and more workers with higher credits were certified than expected. These factors generated additional tax benefits of approximately $3.7 million, which were recognized as of September 25, 2015. This tax credit benefit decreased our effective tax rate on income for the thirty-nine weeks ended September 25, 2015 from our expected 2015 rate of 38.1% to 32.2%. WOTC expired and has not been renewed by Congress for 2015 new hires. Other differences between the statutory federal income tax rate of 35.0% and our effective tax rate of 32.2% result from state and foreign income taxes and certain non-deductible expenses.

Our effective tax rate on earnings for the thirty-nine weeks ended September 26, 2014, was 23.2%. The principal difference between the statutory federal income tax rate of 35.0% and our effective income tax rate of 23.2%, results from the Work Opportunity Tax Credit ("WOTC") earned in 2014 for prior year hires. We generated substantially more prior year credits because more veterans with higher credits were certified than expected, our qualified workers worked longer, generating more credits than expected, and many states processed a backlog of credit applications with higher than expected certification rates. These factors generated additional WOTC benefits of approximately $8 million, which were recognized as of September 26, 2014. This tax credit benefit decreased our effective tax rate on income for the thirty-nine weeks ended September 26, 2014 from our expected 2014 rate of 38.9% to 23.2%. Other differences between the statutory federal income tax rate of 35.0% result from state and foreign income taxes and certain non-deductible expenses.
As of September 25, 2015 and December 26, 2014, we had gross unrecognized tax benefits of $2.1 million and $2.0 million, respectively, recorded in accordance with current accounting guidance on uncertain tax positions.
NOTE 13:
NET INCOME PER SHARE
Diluted common shares were calculated as follows (in thousands, except per share amounts):
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
September 25,
2015

September 26,
2014
 
September 25,
2015
 
September 26,
2014
Net income
$
20,090

 
$
20,910

 
$
43,079

 
$
38,650

 
 
 
 
 
 
 
 
Weighted average number of common shares used in basic net income per common share
41,296

 
40,793

 
41,189

 
40,701

Dilutive effect of outstanding stock options and non-vested restricted stock
324

 
245

 
357

 
270

Weighted average number of common shares used in diluted net income per common share
41,620

 
41,038

 
41,546

 
40,971

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.49

 
$
0.51

 
$
1.05

 
$
0.95

Diluted
$
0.48

 
$
0.51

 
$
1.04

 
$
0.94

 
 
 
 
 
 
 
 
Anti-dilutive shares
91

 
97

 
227

 
35



Page - 15

Notes to Consolidated Financial Statements—(Continued)

Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average number of common shares and potential common shares outstanding during the period. Potential common shares include the dilutive effects of outstanding stock options, vested and non-vested restricted stock, performance share units, and shares issued under the employee stock purchase plan, except where their inclusion would be anti-dilutive.
Anti-dilutive shares include non-vested restricted stock, performance share units, and outstanding stock options for which the sum of the assumed proceeds, including unrecognized compensation expense, exceeds the average stock price during the periods presented. Anti-dilutive shares associated with our stock options relate to those stock options with an exercise price higher than the average market value of our stock during the periods presented.
NOTE 14:
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive loss is reflected as a net decrease to shareholders’ equity. Changes in the balance of each component of accumulated other comprehensive income (loss) during the thirty-nine weeks ended September 25, 2015 were as follows (in thousands):
 
Foreign currency translation adjustment
 
Unrealized gain (loss) on investments (1)
 
Total other comprehensive income (loss), net of tax
Balance at beginning of period
$
848

 
$
23

 
$
871

Current-period other comprehensive loss (2)
(1,706
)
 
(281
)
 
(1,987
)
Balance at end of period
$
(858
)
 
$
(258
)
 
$
(1,116
)

(1)
Consists of deferred compensation plan accounts, which are comprised of mutual funds classified as available-for-sale securities.
(2)
The tax impact on foreign currency translation adjustment and unrealized gain on marketable securities was de minimis for the period ended September 25, 2015.

There were no material reclassifications out of accumulated other comprehensive loss during the fiscal period presented.
NOTE 15:
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information (in thousands):
 
Thirty-nine weeks ended
 
September 25, 2015
 
September 26, 2014
Cash paid during the period for:
 
 
 
Interest
$
2,651

 
$
951

Income taxes
$
16,401

 
$
10,653

As of September 25, 2015 and September 26, 2014 we had acquired $0.2 million and $1.0 million, respectively, of property, plant and equipment on account that was not yet paid. These are considered non-cash investing items.
NOTE 16:
SEGMENT INFORMATION

Our operating segments are based on the organizational structure for which financial results are regularly evaluated by the chief operating decision maker, our Chief Executive Officer, to determine resource allocation and assess performance. Our service lines are our operating segments. Our reportable segments are described below:

Our Staffing Services segment provides temporary staffing through the following service lines:
Labor Ready: On-demand general labor;
Spartan Staffing: Skilled manufacturing and logistics labor;
CLP Resources: Skilled trades for commercial, industrial, and energy construction as well as building and plant maintenance;
PlaneTechs: Skilled mechanics and technicians to the aviation and transportation industries;
Centerline Drivers: Temporary and dedicated drivers to the transportation and distribution industries; and


Page - 16

Notes to Consolidated Financial Statements—(Continued)

Staff Management On-premise Staffing: Exclusive recruitment and on-premise management of a facility's contingent industrial workforce.

Our Managed Services segment provides high-volume permanent employee recruitment process outsourcing and management of outsourced labor service providers through the following service lines:
PeopleScout and hrX: Outsourced recruitment of permanent employees on behalf of clients; and
Staff Management: Management of multiple third party staffing vendors on behalf of clients.

We have two measures of segment performance: revenue from services and income from operations. Income from operations for each segment includes net sales to third parties, related cost of sales, and operating expenses directly attributable to the segment. Costs excluded from segment income from operations include various corporate general and administrative expenses, depreciation and amortization expense, interest and other income (expense), and income taxes. Asset information by reportable segment is not presented, since we do not manage our segments on a balance sheet basis. There are no material internal revenue transactions between our reporting segments.

Revenue from services and income from operations associated with our segments were as follows (in thousands):
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Revenue from services
 
 
 
 
 
 
 
Staffing Services
$
656,619

 
$
608,543

 
$
1,807,434

 
$
1,457,833

Managed Services
27,299

 
24,822

 
77,513

 
24,822

Total Company
$
683,918

 
$
633,365

 
$
1,884,947

 
$
1,482,655

 
 
 
 
 
 
 
 
Income from operations
 
 
 
 
 
 
 
Staffing Services
$
50,290

 
$
45,698

 
$
113,353

 
$
93,438

Managed Services
3,175

 
3,723

 
10,979

 
3,723

Depreciation and amortization
(10,498
)
 
(9,719
)
 
(31,415
)
 
(20,126
)
Corporate unallocated
(9,715
)
 
(10,140
)
 
(28,232
)
 
(27,074
)
Total Company
33,252

 
29,562

 
64,685

 
49,961

Interest and other income (expense), net
(366
)
 
(409
)
 
(1,102
)
 
385

Income before tax expense
$
32,886

 
$
29,153

 
$
63,583

 
$
50,346


Our segment revenue and income from operations for the thirty-nine weeks ended September 26, 2014 include Seaton's results from the acquisition date of June 30, 2014, the first business day of our third quarter, through September 26, 2014. As a result, our segment results for the thirty-nine weeks ended September 25, 2015 are not comparative to the prior period amounts.
NOTE 17:
SUBSEQUENT EVENTS

We evaluated events and transactions occurring after the balance sheet date through the date the financial statements were issued, and noted no other events that were subject to recognition or disclosure.


Page - 17


Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMENT ON FORWARD LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: “Management’s Discussion and Analysis,” and “Risk Factors.” Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. Actual events or results may differ materially. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. We describe risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements in “Risk Factors” (Part II, Item 1A of this Form 10-Q), “Quantitative and Qualitative Disclosures about Market Risk” (Part I, Item 3), and “Management’s Discussion and Analysis” (Part I, Item 2). We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of TrueBlue. Our MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the fiscal year ended December 26, 2014, and our subsequently filed Quarterly Reports on Form 10-Q. The MD&A is designed to provide the reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect future results. Our MD&A is presented in the following sections:
Overview
Results of Operations
Liquidity and Capital Resources
Contractual Obligations and Commitments
Summary of Critical Accounting Estimates
New Accounting Standards

OVERVIEW

TrueBlue, Inc. (“TrueBlue,” “we,” “us,” “our”) is a leading provider of specialized workforce solutions helping clients improve
growth and performance by providing staffing, recruitment process outsourcing, and managed service provider solutions. Our workforce solutions meet clients’ needs for a reliable, efficient workforce in a wide variety of industries. Through our workforce solutions, we help over 135,000 businesses be more productive and we connect as many as 750,000 people to work each year. We are headquartered in Tacoma, Washington.
Our year over year quarterly trends include the acquisition of Seaton which was completed effective June 30, 2014, the first business day of the third quarter in 2014. The acquisition of Seaton added full service lines for on-premise temporary staffing for large scale exclusive sourcing, screening, recruitment, and management of a customer's on-premise contingent labor workforce, recruitment process outsourcing for high-volume sourcing, screening, and recruiting of permanent employees for all major industries and jobs, and managed service provider solution which provides customers with improved quality and spend management of their contingent labor vendors. The Seaton acquisition added new services and capabilities to better meet our objective of providing our customers with the talent and flexible workforce solutions they need to enhance their business performance. The performance of the Seaton acquisition in the first year of operations has delivered on our expectations for revenue and income from operations and continues to deliver organic revenue growth.
Revenue grew to $683.9 million for the thirteen weeks ended September 25, 2015, an 8.0% increase compared to the same period in the prior year. The increase in revenue was driven by widespread improvement across most of our service lines, geographies, and the industries we serve. The manufacturing industry continues to face a challenging export market. The construction industry saw considerable growth driven by improving momentum in both residential and commercial construction as well as green energy projects. The widespread improvement to our revenue growth trends was fueled by improving trends with small to medium sized


Page - 18


customers and continued growth with our national customers. The demand for our specialized workforce solutions remains strong as labor markets continue to tighten and our customers need our specialized solutions to find talent.
Gross profit as a percentage of revenue for the thirteen weeks ended September 25, 2015 was 24.7% compared to 25.2% for the same period in the prior year. The decrease in gross margin was primarily due to revenue mix changes together with unfavorable trends for workers' compensation and other payroll related costs of approximately 0.2%.

Selling, general and administrative ("SG&A") increased by $4.8 million to $125.1 million for the thirteen weeks ended September 25, 2015 compared to the same period in 2014. The prior year included $2.3 million of costs for the integration of Seaton. Excluding those non-recurring integration costs, SG&A increased by $7.1 million. The increase is primarily related to variable costs related to organic revenue growth and investments made in start-up costs for on-site customers and new recruitment process outsourcing customers. The benefit of those investments will be fully realized in 2016.
SG&A expenses as a percentage of revenue decreased to 18.3% for the thirteen weeks ended September 25, 2015 from 19.0% for the same period in 2014. The decline was driven by disciplined cost management and operating leverage.
Income from operations grew to $33.3 million for the thirteen weeks ended September 25, 2015, or an increase of 12.5%, compared to $29.6 million for the same period in 2014. The improved performance reflects solid revenue growth, disciplined pricing, effective cost control, and operating leverage.
Net income decreased to $20.1 million, or $0.48 per diluted share, for the thirteen weeks ended September 25, 2015, compared to $20.9 million, or $0.51 per diluted share, for the same period in 2014. The decline is in large part due to changes to our income taxes. Our effective tax rate on earnings for the thirteen weeks ended September 25, 2015 was 38.9%, compared to 28.3% for the same period in 2014 due primarily to the fact that the Work Opportunity Tax Credit ("WOTC") program has not been renewed for 2015 new hires.
We believe we are in a strong financial position to fund working capital needs for growth opportunities. As of September 25, 2015, we had cash and cash equivalents of $23.2 million and $201.0 million available under the Revolving Credit Facility.
RESULTS OF OPERATIONS
Total company results
The following table presents selected financial data (in thousands, except percentages and per share amounts):
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
September 25,
2015
 
September 26,
2014
 
September 25,
2015
 
September 26,
2014
Revenue from services
$
683,918

 
$
633,365

 
$
1,884,947

 
$
1,482,655

Total revenue growth %
8.0
%
 
40.4
%
 
27.1
%
 
21.5
%
 
 
 
 
 
 
 
 
Gross profit
$
168,867

 
$
159,599

 
$
450,669

 
$
378,741

Gross profit as a % of revenue
24.7
%
 
25.2
%
 
23.9
%
 
25.5
%
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
$
125,117

 
$
120,318

 
$
354,569

 
$
308,654

Selling, general and administrative expenses as a % of revenue
18.3
%
 
19.0
%
 
18.8
%
 
20.8
%
 
 
 
 
 
 
 
 
Depreciation and amortization
$
10,498

 
$
9,719

 
$
31,415

 
$
20,126

Depreciation and amortization as a % of revenue
1.5
%
 
1.5
%
 
1.7
%
 
1.4
%
 
 
 
 
 
 
 
 
Income from operations
$
33,252

 
$
29,562

 
$
64,685

 
$
49,961

Income from operations as a % of revenue
4.9
%
 
4.7
%
 
3.4
%
 
3.4
%
 
 
 
 
 
 
 
 
Interest and other income (expense), net
$
(366
)
 
$
(409
)
 
$
(1,102
)
 
$
385

 
 
 
 
 
 
 
 
Net income
$
20,090

 
$
20,910

 
$
43,079

 
$
38,650

Net income per diluted share
$
0.48

 
$
0.51

 
$
1.04

 
$
0.94



Page - 19



Our year-over-year trends for the thirty-nine weeks ended September 25, 2015 compared to the same period in the prior year are significantly impacted by the acquisition of Seaton. Seaton was acquired effective the first day of our fiscal third quarter in 2014 and accordingly is included in only thirteen of the thirty-nine weeks ended September 26, 2014, as compared to the entire thirty-nine weeks ended September 25, 2015. The Seaton acquisition added new services and capabilities to better meet our objective of providing our customers with the talent and flexible workforce solutions they need to enhance their business performance. These service lines have dedicated customer on-site and virtual teams which leverage highly centralized support services for recruiting and delivering services to meet the specialized needs of each customer. These service lines do not operate a branch network and accordingly operate more flexible service lines. The performance of the Seaton acquisition in the first year of operations has delivered on our expectations for revenue and income from operations and continues to deliver organic revenue growth.
Revenue from services
Revenue from services was as follows (in thousands, except percentages): 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
September 25,
2015
 
September 26,
2014
 
September 25,
2015

September 26,
2014
Revenue from services
$
683,918

 
$
633,365

 
$
1,884,947

 
$
1,482,655

Total revenue growth %
8.0
%
 
40.4
%
 
27.1
%
 
21.5
%
Revenue grew to $683.9 million for the thirteen weeks ended September 25, 2015, an 8.0% increase compared to the same period in the prior year. The increase in revenue was driven by widespread improvement across most of our service lines, geographies and the industries we serve. The domestic manufacturing industry continues to face challenges from foreign competition. The construction industry saw considerable growth driven by improving momentum in both residential and commercial construction as well as green energy projects. The broad-based improvement was fueled by improving trends with small to medium sized customers and continued growth with our national customers. The demand for our specialized workforce solutions remains strong as labor markets continue to tighten and our customers need our specialized solutions to find talent.
Organic revenue growth has progressively improved during the course of the current year and significantly increased during the thirteen weeks ended September 25, 2015. Year-over-year organic growth for the first, second and third quarters of fiscal 2015 were 0.4%, 1.4%, and 8.0%, respectively. We are seeing success with our focus on generating strong organic growth by making it easier for our customers to access reliable workers and for our workers to access work opportunities. Additionally, we are improving the productivity of our customers with temporary workforce solutions which are specialized and tailored to their needs. Furthermore, we continue to make substantial investments in technology solutions that will improve both the customer and worker experience as well as our business efficiency.
Revenue grew to $1,884.9 million for the thirty-nine weeks ended September 25, 2015, a 27.1% increase compared to the same period in the prior year. The increase was primarily due to the acquisition of Seaton, which accounted for 24.7% of the increase. Seaton was acquired effective the first day of our fiscal third quarter in 2014 and accordingly is included in only thirteen of the thirty-nine weeks ended September 26, 2014, as compared to the entire thirty-nine weeks ended September 25, 2015. Excluding Seaton, revenue grew 2.4% compared to the same period in the prior year.
Gross profit
Gross profit was as follows (in thousands, except percentages):
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
September 25,
2015
 
September 26,
2014
 
September 25,
2015
 
September 26,
2014
Gross profit
$
168,867

 
$
159,599

 
$
450,669

 
$
378,741

Percentage of revenue
24.7
%
 
25.2
%
 
23.9
%
 
25.5
%

Gross profit represents revenue from services less direct costs of services, which consist of payroll, payroll taxes, workers' compensation costs, and reimbursable costs.
Gross profit as a percentage of revenue for the thirteen weeks ended September 25, 2015 was 24.7% compared to 25.2% for the same period in the prior year, or a decline of 0.5%. The decrease in gross margin was primarily due to revenue mix changes together with unfavorable trends for workers' compensation and other payroll related costs of approximately 0.2%.


Page - 20


Gross profit as a percentage of revenue for the thirty-nine weeks ended September 25, 2015 was 23.9% compared to 25.5% for the same period in the prior year for a decline of 1.6 percentage points of revenue. The impact of Seaton on our blended rate is a decline of approximately 1.2 percentage points of revenue. The remaining decline was due to revenue mix changes together with unfavorable trends for workers' compensation and other payroll related costs.
Workers’ compensation expense as a percentage of revenue was 3.6% and 3.7% for the thirteen and thirty-nine weeks ended September 25, 2015, respectively, compared to 3.4%, and 3.7% for the same periods in the prior year. We actively manage the safety of our temporary workers with our safety programs and control increasing costs with our network of workers' compensation service providers. These activities have had a positive impact of creating favorable adjustments to workers’ compensation liabilities recorded in prior periods. Continued favorable adjustments to our workers' compensation liabilities are dependent on our ability to continue to lower accident rates and costs of our claims. However, in line with our expectations we are experiencing diminishing favorable adjustments to our workers' compensation liabilities as the opportunity for significant reduction to frequency and severity of accident rates diminishes.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses were as follows (in thousands, except percentages):
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
September 25,
2015
 
September 26,
2014
 
September 25,
2015
 
September 26,
2014
Selling, general and administrative expenses
$
125,117

 
$
120,318

 
$
354,569

 
$
308,654

Percentage of revenue
18.3
%
 
19.0
%
 
18.8
%
 
20.8
%

SG&A spending increased by $4.8 million to $125.1 million for the thirteen weeks ended September 25, 2015 compared to the same period in 2014. The prior year included $2.3 million of non-recurring costs for the integration of Seaton. Excluding those non-recurring integration costs, SG&A increased by $7.1 million.The increase is primarily related to variable costs related to organic revenue growth and investments made in start-up costs for on-site customers and new recruitment process outsourcing customers. The benefit of those investments will be fully realized in 2016.
SG&A expenses as a percentage of revenue decreased to 18.3% for the thirteen weeks ended September 25, 2015 from 19.0% for the same period in 2014. The decline was driven by disciplined cost management and operating leverage.
SG&A spending increased by $45.9 million to $354.6 million for the thirty-nine weeks ended September 25, 2015 compared to the same period in 2014. The increase is primarily related to the acquired operations of Seaton, which accounted for approximately $47.4 million. Seaton was acquired effective the first day of our fiscal third quarter in 2014 and accordingly is included in only thirteen of the thirty-nine weeks ended September 26, 2014, as compared to the entire thirty-nine weeks ended September 25, 2015. SG&A expenses as a percentage of revenue decreased to 18.8% for the thirty-nine weeks ended September 25, 2015 from 20.8% for the same period in 2014 primarily due to Seaton's lower cost of doing business as a percent of sales. The acquired service lines offer workforce solutions as an integrated partner with our customers, which are delivered through highly centralized operations in Chicago, Illinois with support from on-site and virtual employee teams. We do not operate a branch network to service these customers, and accordingly these services utilize a more flexible centralized support structure resulting in lower SG&A as a percent of sales. The decline was also due to a decrease within the legacy TrueBlue operations driven by disciplined cost management and operating leverage.
Depreciation and amortization
Depreciation and amortization were as follows (in thousands, except percentages):
 
Thirteen weeks ended
Thirty-nine weeks ended
 
September 25,
2015
 
September 26,
2014
September 25,
2015
 
September 26,
2014
Depreciation and amortization
$
10,498

 
$
9,719

$
31,415

 
$
20,126

Percentage of revenue
1.5
%
 
1.5
%
1.7
%
 
1.4
%
Depreciation and amortization expense was flat for the thirteen weeks ended September 25, 2015 compared to the same period in 2014. For the thirty-nine weeks ended September 25, 2015, depreciation and amortization expense increased $11.3 million primarily due to the amortization of intangible assets acquired in connection with the Seaton acquisition of $10.5 million and the depreciation


Page - 21


of the fair value of acquired tangible assets. We continue to make significant investments in projects that are designed to further improve our efficiency and effectiveness in recruiting, retaining our temporary workers, and attracting and retaining our customers.
Interest and other income (expense), net
Interest and other income (expense), net was as follows (in thousands):
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
September 25,
2015
 
September 26,
2014
 
September 25,
2015
 
September 26,
2014
Interest and other income (expense), net
$
(366
)
 
$
(409
)
 
$
(1,102
)
 
$
385

Net interest expense for the thirteen weeks ended September 25, 2015 slightly decreased over the same period in 2014 primarily due to a decrease in our Revolving Credit Facility to $86.0 million at September 25, 2015 compared to $147.0 million at September 24, 2014. Net interest expense for the thirty-nine weeks ended September 25, 2015 was $1.1 million compared to net interest income of $0.4 million over the same period in 2014. The increase in interest expense is primarily due to the use of our Revolving Credit Facility to acquire Seaton at the beginning of the third quarter in 2014.
Income taxes
The income tax expense and the effective income tax rate were as follows (in thousands, except percentages):
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
September 25,
2015
 
September 26,
2014
 
September 25,
2015
 
September 26,
2014
Income tax expense
$
12,796

 
$
8,243

 
$
20,504

 
$
11,696

Effective income tax rate
38.9
%
 
28.3
%
 
32.2
%
 
23.2
%

Our tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment. Our quarterly tax provision and our quarterly estimate of our annual effective tax rate are subject to variation due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, audit developments, changes in law, regulations and administrative practices, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of discrete items, tax credits and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower. Except as required under U.S. tax law, we do not provide for U.S. taxes on undistributed earnings of our foreign subsidiaries since we consider those earnings to be permanently invested outside of the U.S.

Our effective tax rate on earnings for the thirteen and thirty-nine weeks ended September 25, 2015 was 38.9% and 32.2%, respectively, compared to 28.3% and 23.2%, for the same periods in 2014, respectively. During the thirty-nine weeks ended September 25, 2015 we recognized $3.7 million of discrete tax benefits from prior year federal and state hiring credits. These hiring credits include the federal Work Opportunity Tax Credit ("WOTC") and the California Enterprise Zone Tax Credit (“EZTC”). Both the federal WOTC and the California EZTC have expired and do not apply to 2015 hires. However, both have generated trailing credits related to 2015 wages of certified workers hired prior to 2015.

Changes to our effective tax rate as a result of hiring credits were as follows:
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
September 25,
2015
 
September 26,
2014
 
September 25,
2015
 
September 26,
2014
Effective income tax rate without hiring credits
40.9
 %
 
40.5
 %
 
40.1
 %
 
41.2
 %
Hiring credits estimate from current year wages 
(2.0
)
 
(2.3
)
 
(2.0
)
 
(2.3
)
Effective income tax rate before prior year adjustments
38.9

 
38.2

 
38.1

 
38.9

Additional hiring credits from prior year wages

 
(9.9
)
 
(5.9
)
 
(15.7
)
Effective income tax rate with hiring credits
38.9
 %
 
28.3
 %
 
32.2
 %
 
23.2
 %

Segment results


Page - 22



In the fourth quarter of 2014, we changed our organizational structure as a result of our acquisition of Seaton on June 30, 2014. Legacy TrueBlue operated within the overall staffing industry providing contingent, industrial labor to customers, which we aggregated into one reportable segment in accordance with U.S. GAAP. The acquisition of Seaton added a full service line providing contingent, industrial labor through an on-premise operation located at the customer's place of business. On-premise staffing is large scale exclusive sourcing, screening, recruitment, and management of a contingent labor workforce. This service line is an operating segment which is aggregated with the Legacy TrueBlue operations and reported as Staffing Services.

The acquisition of Seaton also added complementary outsourced service offerings in recruitment process outsourcing and managed service provider solutions. Recruitment process outsourcing is high-volume sourcing, screening and recruitment of permanent employees for all major industries and jobs. Managed service provider solutions provide customers with improved quality and spend management of their contingent labor vendors. The complementary service lines are operating segments which are aggregated and reported as Managed Services.



Page - 23


Revenue from services and income from operations associated with our segments were as follows (in thousands, except percentages):
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Revenue from services
 
 
Revenue growth %
 
 
 
Revenue growth %
 
 
 
Revenue growth %
 
(1)
 
Revenue growth %
Staffing Services
$
656,619

 
7.9%
 
$
608,543

 
34.9%
 
$
1,807,434

 
24.0%
 
$
1,457,833

 
19.5%
Managed Services
27,299

 
10.0%
 
24,822

 
 
 
77,513

 
212.3%
 
24,822

 
 
Total Company
$
683,918

 
8.0%
 
$
633,365

 
40.4%
 
$
1,884,947

 
27.1%
 
$
1,482,655

 
21.5%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from operations
 
 
% of revenue
 
 
 
% of revenue
 
 
 
% of revenue
 
 
 
% of revenue
Staffing Services
$
50,290

 
7.7%
 
$
45,698

 
7.5%
 
$
113,353

 
6.3%
 
$
93,438

 
6.4%
Managed Services
3,175

 
11.6%
 
3,723

 
15.0%
 
10,979

 
14.2%
 
3,723

 
15.0%
Depreciation and amortization
(10,498
)
 
 
 
(9,719
)
 
 
 
(31,415
)
 
 
 
(20,126
)
 
 
Corporate unallocated
(9,715
)
 
 
 
(10,140
)
 
 
 
(28,232
)
 
 
 
(27,074
)
 
 
Total Company
33,252

 
4.9%
 
29,562

 
4.7%
 
64,685

 
3.4%
 
49,961

 
3.4%
Interest and other income (expense), net
(366
)
 
 
 
(409
)
 
 
 
(1,102
)
 
 
 
385

 
 
Income before tax expense
$
32,886

 
 
 
$
29,153

 
 
 
$
63,583

 
 
 
$
50,346

 
 
(1)
Our segment revenue and income from operations for the thirty-nine weeks ended September 26, 2014 include Seaton's results from the acquisition date of June 30, 2014, the first business day of our third quarter, through September 26, 2014. As a result, our segment results for the thirty-nine weeks ended September 25, 2015 are not comparative to the prior period amounts.
Revenue from services
Staffing Services revenue grew to $656.6 million, a 7.9% increase, and Managed Services revenue grew to $27.3 million, a 10.0% increase, for the thirteen weeks ended September 25, 2015, compared to the same period in the prior year. The increase in Staffing Services revenue was driven by widespread improvement across most of our service lines, geographies and the industries we serve. The manufacturing industry continues to face a challenging export market. The construction industry saw considerable growth driven by improving momentum in both residential and commercial construction as well as green energy projects. The widespread improvement was fueled by improving trends with small to medium sized customers and continued growth with our national customers. The demand for our specialized workforce solutions remains strong as labor markets continue to tighten and our customers need our specialized solutions to find talent. The Managed Services revenue growth was driven by increased demand for our services in a tightening labor market and serving our customers to acquire new talent. Additionally, we are winning new customers from our pipeline of opportunities which remains strong.
Income from operations
For the thirteen weeks ended September 25, 2015, Staffing Services income from operations was $50.3 million or 7.7% of revenue, up 200 basis points compared to the same period in prior year. The improved performance reflects solid revenue growth, disciplined pricing, effective cost control, and operating leverage.
Managed Services income from operations was $3.2 million or 11.6% of revenue compared to $3.7 million or 15.0% of revenue for the same period in the prior year. The decrease was primarily due to investments made in start-up costs for new recruitment process outsourcing customers.


Page - 24



Future outlook
The following highlights represent our expectations regarding operating trends for the remainder of fiscal year 2015. These trends are expected to continue in fiscal year 2016. These expectations are subject to revision as our business changes with the overall economy.
Our top priority remains to produce strong organic revenue and gross profit growth, and leverage our cost structure to generate increasing operating income as a percentage of revenue. The acquisition of Seaton provided new opportunities to leverage technology and best practice processes in centralized, high-volume, and rapid recruitment of quality workers which are deployed to customers with multi-location demand for temporary staffing. These centralized capabilities when combined with our local presence will continue to provide opportunities to accelerate staffing services growth.
The acquisition of Seaton added new services and capabilities to better meet our objective of providing customers with talent and flexible workforce solutions they need to enhance business performance. PeopleScout is a recognized industry leader of recruitment process outsourcing services, which are in the early stages of their adoption cycles. We expect continued growth with a differentiated service that leverages innovative technology for high-volume scalable sourcing and dedicated client service teams for connecting the best talent to work opportunity, reducing the cost of hiring, and delivering a better outcome for the customer.
Acquisitions are a key element of our growth strategy. We have a proven track record of successfully acquiring and integrating companies and believe we have a strong business competence to continue to do so.
We are committed to technology innovation that makes it easier for our customers to do business with us and easier to connect people to work. We are making significant investments in online and mobile applications to improve access, speed, and ease of connecting our customers and workers. We will continue to invest in technology which increases our sustainability, scalability, and agility. These investments improve the efficiency and effectiveness of delivering our service and are reducing our dependence on local branches to process workers. Additionally, these investments advance our ability to centralize high-volume activities, which have increased the reliability of our service delivery and allowed our field personnel to focus on matching the customer's needs with the best solution to enhance their performance.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights our cash flow activities for the thirty-nine weeks ended September 25, 2015 and September 26, 2014.
Cash flows from operating activities
Our cash flows from operating activities were as follows (in thousands):
 
Thirty-nine weeks ended
 
September 25,
2015
 
September 26,
2014
Net income
$
43,079

 
$
38,650

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
31,415

 
20,126

Provision for doubtful accounts
4,483

 
9,619

Stock-based compensation
8,283

 
8,902

Deferred income taxes
(6,029
)
 
6,077

Other operating activities
20

 
(148
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(6,597
)
 
(26,391
)
Income taxes
9,673

 
(3,179
)
Accounts payable and other accrued expenses
17,453

 
(1,687
)
Accrued wages and benefits
10,315

 
11,373

Workers' compensation claims reserve
10,024

 
532

Other assets and liabilities
(1,802
)
 
(3,971
)
Net cash provided by operating activities
$
120,317

 
$
59,903



Page - 25


Net cash provided by operating activities was $120.3 million for the thirty-nine weeks ended September 25, 2015, compared to $59.9 million for the same period in 2014.  As a result of the Seaton acquisition, cash provided by operating activities increased $29.1 million in the thirty-nine weeks ended September 25, 2015 compared with the same period in 2014. 
Net income of $43.1 million increased over 2014 due to a combination of the acquisition of Seaton and improved profitability of the legacy TrueBlue business.
Depreciation and amortization increased over 2014 by $11.3 million primarily due to the amortization of acquired finite-lived intangible assets in connection with the acquisition of Seaton on the first day of our third quarter in 2014.
The provision for doubtful accounts decreased due to sustained improvements to collections and continued stability of the economy and customer performance.
The change in accounts receivable for the thirty-nine weeks ended September 25, 2015 is significantly less than that of the comparable period for the prior year due to a change in the seasonal peak of accounts receivable with the acquisition of Seaton. Historically, legacy TrueBlue accounts receivable peaked in the third quarter and de-leveraged in the fourth quarter, and accordingly we experienced a significant use of cash for the thirty-nine weeks ended September 26, 2014. Subsequent to the acquisition of Seaton and its significant seasonal peak in the fourth quarter, the seasonal de-leveraging of accounts receivable now occurs in the first quarter, and accordingly the change to accounts receivable was significantly less for the thirty-nine weeks ended September 25, 2015.
Income tax receivable declined due primarily to additional WOTC refunds realized.
Accounts payable and other accrued expenses increased primarily due to volume of activity from normal seasonal patterns and timing of payments.
Generally, our workers' compensation claims reserve for estimated claims increases as temporary labor services increase and decreases as temporary labor services decline. During the thirty-nine weeks ended September 25, 2015, our workers' compensation claims reserve increased as the delivery of temporary labor services increased, which was partially offset by claim payments.
Cash flows from investing activities
Our cash flows from investing activities were as follows (in thousands):
 
Thirty-nine weeks ended
 
September 25,
2015
 
September 26,
2014
Capital expenditures
$
(12,590
)
 
$
(10,213
)
Acquisition of businesses, net of cash acquired

 
(307,972
)
Purchases of marketable securities

 
(25,057
)
Sales and maturities of marketable securities
1,500

 
43,917

Change in restricted cash and cash equivalents
13,070

 
10,020

Purchases of restricted investments
(38,818
)
 
(18,196
)
Maturities of restricted investments
11,047

 
10,588

Net cash used in investing activities
$
(25,791
)
 
$
(296,913
)
Cash flows used in investing activities were $25.8 million for the thirty-nine weeks ended September 25, 2015 compared to cash flows used in investing activities of $296.9 million for the same period in 2014.
During the thirty-nine weeks ended September 25, 2015, we did not purchase marketable securities. We used excess cash to pay down debt on the Revolving Credit Facility.
When combining the change in restricted cash and cash equivalents with purchases and maturities of restricted investments, restricted cash and investments increased by $14.7 million for the thirty-nine weeks ended September 25, 2015. This increase was primarily due to an increase in collateral requirements paid to our workers' compensation insurance providers due to growth in operations.
In the prior year, cash flows used in investing activities increased primarily due to the acquisition of Seaton. We sold all of our marketable securities to fund our acquisition of Seaton.


Page - 26


Cash flows from financing activities
Our cash flows from financing activities were as follows (in thousands):
 
Thirty-nine weeks ended
 
September 25,
2015
 
September 26,
2014
Net proceeds from stock option exercises and employee stock purchase plans
$
1,164

 
$
1,673

Common stock repurchases for taxes upon vesting of restricted stock
(3,725
)
 
(3,021
)
Net change in revolving credit facility
(85,994
)
 
146,994

Payments on debt and other liabilities
(1,700
)
 
(1,700
)
Other
1,134

 
1,242

Net cash provided by (used in) financing activities
$
(89,121
)
 
$
145,188

The increase to net cash used in financing activities was primarily due to repayments on our Revolving Credit Facility. See Note 8: Long-term Debt, to our Consolidated Financial Statements found in Item 1 of this Quarterly Report on Form 10-Q, for details of our Revolving Credit Facility.

The increase to net cash provided by financing activities in the prior year was primarily due to financing a portion of the Seaton acquisition with the Revolving Credit Facility in the amount of $187.0 million, net of repayments.
Future outlook
Our cash-generating capability provides us with financial flexibility in meeting our operating and investing needs. Our current financial position is highlighted as follows:
Our Revolving Credit Facility of up to a maximum of $300.0 million expires on June 30, 2019. The Revolving Credit Facility is an asset backed facility which is secured by a pledge of substantially all of the assets of TrueBlue, Inc. and material U.S. domestic subsidiaries. The additional amount available to borrow at September 25, 2015 was $201.0 million. We believe the Revolving Credit Facility provides adequate borrowing availability.
We had cash and cash equivalents of $23.2 million at September 25, 2015. We expect to continue to apply excess cash towards the outstanding balance on our Revolving Credit Facility.
The majority of our workers’ compensation payments are made from restricted cash rather than cash from operations. At September 25, 2015, we had restricted cash and investments totaling $181.9 million.
We believe that cash provided from operations and our capital resources will be adequate to meet our cash requirements for the foreseeable future.
Capital resources
Revolving Credit Facility
See Note 8: Long-term Debt, to our Consolidated Financial Statements found in Item 1 of this Quarterly Report on Form 10-Q, for details of our Revolving Credit Facility.
Restricted Cash and Investments
Restricted cash and investments consist principally of collateral that has been provided or pledged to insurance carriers for workers' compensation and state workers' compensation programs. Our insurance carriers and certain state workers' compensation programs require us to collateralize a portion of our workers' compensation obligation. We have agreements with certain financial institutions that allow us to restrict cash and cash equivalents and investments for the purpose of providing collateral instruments to our insurance carriers to satisfy workers' compensation claims. At September 25, 2015, we had restricted cash and investments totaling $181.9 million. The majority of our collateral obligations are held in a trust at the Bank of New York Mellon ("Trust").
We established investment policy directives for the Trust with the first priority to ensure sufficient liquidity to pay workers' compensation claims, second to maintain and ensure a high degree of liquidity, and third to maximize after-tax returns. Trust investments must meet minimum acceptable quality standards. The primary investments include U.S. Treasury securities, U.S.


Page - 27


agency debentures, U.S. agency mortgages, corporate securities, and municipal securities. For those investments rated by nationally recognized statistical rating organizations the minimum ratings are:
 
 
S&P
 
Moody's
 
Fitch
Short-term rating
 
A-1/SP-1
 
P-1/MIG-1
 
F-1
Long-term rating
 
A-
 
A3
 
A-
Workers’ compensation insurance, collateral and claims reserves
Workers' compensation insurance
We provide workers’ compensation insurance for our temporary and permanent employees. The majority of our current workers’ compensation insurance policies cover claims for a particular event above a $2.0 million deductible limit, on a “per occurrence” basis. This results in our being substantially self-insured.
For workers’ compensation claims originating in Washington, North Dakota, Ohio, Wyoming, Canada and Puerto Rico (our “monopolistic jurisdictions”), we pay workers’ compensation insurance premiums and obtain full coverage under government-administered programs (with the exception of our Labor Ready service line in the state of Ohio where we have a self-insured policy). Accordingly, because we are not the primary obligor, our financial statements do not reflect the liability for workers’ compensation claims in these monopolistic jurisdictions.
Workers' compensation collateral
Our insurance carriers and certain state workers’ compensation programs require us to collateralize a portion of our workers’ compensation obligation, for which they become responsible should we become insolvent. The collateral typically takes the form of cash and cash-backed instruments, highly rated investment grade securities, letters of credit, and/or surety bonds. On a regular basis, these entities assess the amount of collateral they will require from us relative to our workers’ compensation obligation. Such amounts can increase or decrease independent of our assessments and reserves. We generally anticipate that our collateral commitments will continue to grow as we grow our business. We pay our premiums and deposit our collateral in installments. The majority of the restricted cash and investments collateralizing our self-insured workers' compensation policies are held in the Trust.
Our total collateral commitments were made up of the following components for the fiscal period end dates presented (in thousands):
 
September 25, 2015
 
December 26, 2014
Cash collateral held by insurance carriers
$
22,217

 
$
22,639

Cash and cash equivalents held in Trust
31,227

 
43,856

Investments held in Trust
116,319

 
90,095

Letters of credit (1)
4,240

 
6,513

Surety bonds (2)
16,971

 
16,861

Total collateral commitments
$
190,974

 
$
179,964

(1)
We have agreements with certain financial institutions to issue letters of credit as collateral.
(2)
Our surety bonds are issued by independent insurance companies on our behalf and bear annual fees based on a percentage of the bond, which is determined by each independent surety carrier. These fees do not exceed 2.0% of the bond amount, subject to a minimum charge. The terms of these bonds are subject to review and renewal every one to four years and most bonds can be canceled by the sureties with as little as 60 days' notice.


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Workers' compensation reserve
The following table provides a reconciliation of our collateral commitments to our workers’ compensation reserve as of the fiscal period end dates presented (in thousands):
 
September 25, 2015
 
December 26, 2014
Total workers’ compensation reserve
$
252,863

 
$
242,839

Add back discount on workers' compensation reserve (1)
14,388

 
13,381

Less excess claims reserve (2)
(46,720
)
 
(42,612
)
Reimbursable payments to insurance provider (3)
14,149

 
8,336

Less portion of workers' compensation not requiring collateral (4)
(43,706
)
 
(41,980
)
Total collateral commitments
$
190,974

 
$
179,964

(1)
Our workers’ compensation reserves are discounted to their estimated net present value while our collateral commitments are based on the gross, undiscounted reserve.
(2)
Excess claims reserve includes the estimated obligation for claims above our deductible limits. These are the responsibility of the insurance carriers against which there are no collateral requirements.
(3)
This amount is included in restricted cash and represents a timing difference between claim payments made by our insurance carrier and the reimbursement from cash held in the Trust. When claims are paid by our carrier, the amount is removed from the workers' compensation reserve but not removed from collateral until reimbursed to the carrier.
(4)
Represents deductible and self-insured reserves where collateral is not required.
Our workers’ compensation reserve is established using estimates of the future cost of claims and related expenses, which are discounted to their estimated net present value. We discount our workers' compensation liability as we believe the estimated future cash outflows are readily determinable. The discounted workers’ compensation claims reserve was $252.9 million at September 25, 2015.
Our workers' compensation reserve for deductible and self-insured claims is established using estimates of the future cost of claims and related expenses that have been reported but not settled, as well as those that have been incurred but not reported. Reserves are estimated for claims incurred in the current year, as well as claims incurred during prior years.
Management evaluates the adequacy of the workers’ compensation reserves in conjunction with an independent quarterly actuarial assessment. Factors considered in establishing and adjusting these reserves include, among other things:
changes in medical and time loss (“indemnity”) costs;
changes in mix between medical only and indemnity claims;
regulatory and legislative developments impacting benefits and settlement requirements;