TRUEBLUE, INC., 10-K filed on 2/21/2013
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 28, 2012
Feb. 8, 2013
Jun. 29, 2012
Entity Information [Line Items]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 28, 2012 
 
 
Document Fiscal Year Focus
2012 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
TBI 
 
 
Entity Registrant Name
TrueBlue, Inc. 
 
 
Entity Central Index Key
0000768899 
 
 
Current Fiscal Year End Date
--12-28 
 
 
Entity Well-Known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Public Float
 
 
$ 610,843,292 
Entity Common Stock, Shares Outstanding
 
40,609,618 
 
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Dec. 28, 2012
Dec. 30, 2011
Current assets:
 
 
Cash and cash equivalents
$ 129,513 
$ 109,311 
Accounts receivable, net of allowance for doubtful accounts
167,292 
153,878 
Prepaid expenses, deposits and other current assets
8,541 
9,252 
Income tax receivable
6,373 
1,874 
Deferred income taxes
5,447 
6,300 
Total current assets
317,166 
280,615 
Property and equipment, net
58,171 
56,239 
Restricted cash and investments
136,259 
130,498 
Deferred income taxes
2,562 
4,818 
Goodwill
48,079 
48,139 
Intangible assets, net
16,554 
19,433 
Other assets, net
22,952 
21,027 
Total assets
601,743 
560,769 
Current liabilities:
 
 
Accounts payable and other accrued expenses
27,292 
25,862 
Accrued wages and benefits
35,102 
35,271 
Current portion of workers' compensation claims reserve
44,652 
43,554 
Other current liabilities
6,510 
7,602 
Total current liabilities
113,556 
112,289 
Workers’ compensation claims reserve, less current portion
150,937 
148,289 
Other long-term liabilities
3,576 
6,612 
Total liabilities
268,069 
267,190 
Commitments and contingencies
   
   
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; 40,220 and 39,933 shares issued and outstanding
Accumulated other comprehensive income
2,818 
2,643 
Retained earnings
330,855 
290,935 
Total shareholders’ equity
333,674 
293,579 
Total liabilities and shareholders’ equity
$ 601,743 
$ 560,769 
CONSOLIDATED BALANCE SHEETS (Parentheticals) (USD $)
Dec. 28, 2012
Dec. 30, 2011
Preferred stock, par value
$ 0.131 
$ 0.131 
Preferred stock, shares authorized
20,000,000 
20,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0 
$ 0 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
40,220,000 
39,933,000 
Common stock, shares outstanding
40,220,000 
39,933,000 
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 28, 2012
Dec. 30, 2011
Dec. 31, 2010
Revenue from services
$ 1,389,530 
$ 1,316,013 
$ 1,149,367 
Cost of services
1,017,145 
968,967 
845,916 
Gross profit
372,385 
347,046 
303,451 
Selling, general and administrative expenses
300,459 
282,828 
258,722 
Depreciation and amortization
18,890 
16,384 
16,468 
Income from operations
53,036 
47,834 
28,261 
Interest expense
(1,131)
(1,207)
(1,515)
Interest and other income
2,700 
2,697 
2,416 
Interest and other income, net
1,569 
1,490 
901 
Income before tax expense
54,605 
49,324 
29,162 
Income tax expense
20,976 
18,533 
9,323 
Net income
33,629 
30,791 
19,839 
Net income per common share:
 
 
 
Basic (in dollars per share)
$ 0.85 
$ 0.73 
$ 0.46 
Diluted (in dollars per share)
$ 0.84 
$ 0.73 
$ 0.46 
Weighted average shares outstanding:
 
 
 
Basic (in shares)
39,548 
41,961 
43,224 
Diluted (in shares)
39,862 
42,322 
43,540 
Total other comprehensive income, net of tax:
 
 
 
Foreign currency translation
175 
(263)
631 
Comprehensive income
$ 33,804 
$ 30,528 
$ 20,470 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $)
In Thousands, unless otherwise specified
Total
Common stock
Retained earnings
Accumulated other comprehensive income
Beginning Balances at Dec. 25, 2009
$ 285,432 
$ 1 
$ 283,156 
$ 2,275 
Beginning Balances (in shares) at Dec. 25, 2009
 
43,833 
 
 
Increase (Decrease) in Shareholders' Equity [Roll Forward]
 
 
 
 
Net income
19,839 
 
19,839 
 
Foreign currency translation, net of tax
631 
 
 
631 
Issuances under equity plans, including tax benefits
(354)
 
(354)
 
Issuances under equity plans, including tax benefits (in shares)
 
253 
 
 
Stock-based compensation
7,159 
 
7,159 
 
Ending Balances at Dec. 31, 2010
312,707 
309,800 
2,906 
Ending Balances (in shares) at Dec. 31, 2010
 
44,086 
 
 
Increase (Decrease) in Shareholders' Equity [Roll Forward]
 
 
 
 
Net income
30,791 
 
30,791 
 
Foreign currency translation, net of tax
(263)
 
 
(263)
Purchases and retirement of common stock
(56,932)
 
(56,932)
 
Purchases and retirement of common stock (in shares)
 
(4,455)
 
 
Issuances under equity plans, including tax benefits
(156)
 
(156)
 
Issuances under equity plans, including tax benefits (in shares)
 
302 
 
 
Stock-based compensation
7,432 
 
7,432 
 
Ending Balances at Dec. 30, 2011
293,579 
290,935 
2,643 
Ending Balances (in shares) at Dec. 30, 2011
39,933 
39,933 
 
 
Increase (Decrease) in Shareholders' Equity [Roll Forward]
 
 
 
 
Net income
33,629 
 
33,629 
 
Foreign currency translation, net of tax
175 
 
 
175 
Purchases and retirement of common stock
(4,386)
 
(4,386)
 
Purchases and retirement of common stock (in shares)
 
(306)
 
 
Issuances under equity plans, including tax benefits
2,760 
 
2,760 
 
Issuances under equity plans, including tax benefits (in shares)
 
593 
 
 
Stock-based compensation
7,917 
 
7,917 
 
Ending Balances at Dec. 28, 2012
$ 333,674 
$ 1 
$ 330,855 
$ 2,818 
Ending Balances (in shares) at Dec. 28, 2012
40,220 
40,220 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 28, 2012
Dec. 30, 2011
Dec. 31, 2010
Cash flows from operating activities:
 
 
 
Net income
$ 33,629 
$ 30,791 
$ 19,839 
Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
18,890 
16,384 
16,468 
Provision for doubtful accounts
6,994 
6,638 
8,158 
Stock-based compensation
7,917 
7,432 
7,159 
Deferred income taxes
3,091 
(1,910)
5,322 
Other operating activities
1,946 
(473)
(202)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(20,408)
(51,824)
(11,604)
Income taxes
(3,748)
3,513 
(3,338)
Other assets
(1,214)
(1,244)
(727)
Accounts payable and other accrued expenses
1,524 
5,423 
747 
Accrued wages and benefits
(182)
10,793 
2,752 
Workers’ compensation claims reserve
3,746 
4,537 
(2,195)
Other liabilities
138 
529 
(406)
Net cash provided by operating activities
52,323 
30,589 
41,973 
Cash flows from investing activities:
 
 
 
Capital expenditures
(17,826)
(9,707)
(7,050)
Change in restricted cash and cash equivalents
7,587 
68,504 
3,945 
Purchases of restricted investments
(33,778)
(88,173)
Maturities of restricted investments
18,116 
9,238 
Other
(250)
(6,800)
(298)
Net cash used in investing activities
(26,151)
(26,938)
(3,403)
Cash flows from financing activities:
 
 
 
Purchases and retirement of common stock
(4,386)
(56,932)
Net proceeds from stock option exercises and employee stock purchase plans
4,164 
1,131 
1,054 
Common stock repurchases for taxes upon vesting of restricted stock
(2,154)
(1,776)
(1,568)
Payments on other liabilities
(4,548)
(302)
(382)
Other
751 
664 
129 
Net cash used in financing activities
(6,173)
(57,215)
(767)
Effect of exchange rates on cash
203 
(278)
973 
Net change in cash and cash equivalents
20,202 
(53,842)
38,776 
CASH AND CASH EQUIVALENTS, beginning of period
109,311 
163,153 
124,377 
CASH AND CASH EQUIVALENTS, end of period
$ 129,513 
$ 109,311 
$ 163,153 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
TrueBlue, Inc. (“TrueBlue,” “we,” “us,” “our”) is the leader in temporary blue-collar staffing services. We provide a wide range of specialized blue-collar staffing services. We operate as: Labor Ready for general labor, Spartan Staffing for light industrial services, CLP Resources for skilled trades, PlaneTechs for aviation and diesel mechanics and technicians, and Centerline Drivers for dedicated and temporary drivers. We have a network of 691 branches in all 50 states, Puerto Rico and Canada, customer on-site locations generally dedicated to one customer, and national service centers which supply our customers with temporary workers.
We began operations in 1989 under the name Labor Ready, Inc. providing on-demand, general labor staffing services. We became a public company in 1995. In 2004 we began acquiring additional brands to expand our service offerings to customers in the blue-collar staffing market. Effective December 18, 2007, Labor Ready, Inc. changed its name to TrueBlue, Inc. We are headquartered in Tacoma, Washington.
Basis of presentation
The consolidated financial statements include the accounts of TrueBlue, Inc. and all of its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
TrueBlue operations are one reportable segment. Our operations are all in the blue-collar staffing market of the temporary staffing industry and focus on supplying customers with temporary workers. All our brands have the following similar characteristics:
They provide blue-collar temporary labor services;
They serve customers who have a need for temporary staff to perform tasks which do not require a permanent employee;
They each build a temporary workforce through recruiting, screening and hiring. Temporary workers are dispatched to customers where they work under the supervision of our customers;
They each drive profitability by managing the bill rates to our customers and the pay rates to our workers. Profitable growth is also driven by leveraging our cost structure across all brands.
Our long-term financial performance expectations of all our brands are similar as are the underlying financial and economic metrics used to manage those brands.
Our international operations are not significant to our total operations for segment reporting purposes. Total revenues from our international operations were 3.5%, 3.8% and 3.8% of our total revenue for fiscal years ended 2012, 2011 and 2010, respectively.
Fiscal year end
Our fiscal year ends on the last Friday of December. Fiscal 2010 included 53 weeks; the final quarter consisted of 14 weeks.
Use of estimates
Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Examples include, but are not limited to, allowance for doubtful accounts, estimates for asset and goodwill impairments, stock-based performance awards, assumptions underlying self-insurance reserves, and the potential outcome of future tax consequences of events that have been recognized in the financial statements. Actual results and outcomes may differ from these estimates and assumptions.
Revenue recognition
Revenue from temporary staffing services is recognized at the time the service is provided and is net of adjustments related to customer credits. Revenue also includes cash dispensing machine fees, billable travel, and other reimbursable costs. Customer discounts or other incentives are recognized in the period the related revenue is earned. We discontinued the use of all domestic cash dispensing machines in fiscal 2012. Revenues are reported net of sales, use or other transaction taxes collected from customers and remitted to taxing authorities.
We record revenue on a gross basis as a principal versus on a net basis as an agent in the consolidated statement of operations. We have determined that gross reporting as a principal is the appropriate treatment based upon the following key factors:
We maintain the direct contractual relationship with the customer.
We have discretion in selecting and assigning the temporary workers to particular jobs and establishing their billing rate.
We bear the risk and rewards of the transaction including credit risk if the customer fails to pay for services performed.
Cost of services
Cost of services primarily includes wages of temporary workers and related payroll taxes and workers’ compensation expenses. Cost of services also includes billable travel and other reimbursable costs.
Advertising costs
Advertising costs consist primarily of print and other promotional activities. We expense advertisements as of the first date the advertisements take place. Advertising expenses included in selling, general and administrative expenses were $3.7 million, $3.6 million and $3.3 million in 2012, 2011 and 2010, respectively.
Cash and cash equivalents
We consider all highly liquid instruments purchased with an original maturity of three months or less at date of purchase to be cash equivalents.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are recorded at the invoiced amount together with interest for certain past due accounts. We establish an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. The allowance for doubtful accounts is determined based on current collection efforts, historical collection trends, write-off experience, customer credit risk, and current economic data. The allowance for doubtful accounts is reviewed quarterly and represents our best estimate of the amount of probable credit losses. Past due balances are written-off when it is probable the receivable will not be collected. Our allowance for doubtful accounts was $5.0 million and $5.8 million as of December 28, 2012 and December 30, 2011, respectively.

Restricted cash and investments
Cash and investments pledged as collateral and restricted to use for workers' compensation insurance programs are included as restricted cash and investments in our Consolidated Balance Sheets. Our investments consist of highly rated investment grade debt securities which are rated A or higher by Nationally Recognized Statistical Rating Organizations. We have the positive intent and ability to hold all these investments until maturity and accordingly all of our investments are classified as held-to-maturity. In the event that an investment is downgraded, it is replaced with a highly rated investment grade security. We review for impairment on a quarterly basis and do not consider temporary unrealized losses to be impaired.
On March 11, 2011, we entered into an agreement with The Bank of New York Mellon as escrow agent and National Union Fire Insurance Company of Pittsburgh, PA on behalf of itself and its insurance company affiliates including but not limited to AIG, formerly known as Chartis Casualty Company (Chartis). The agreement creates a trust (the "Trust") at The Bank of New York Mellon which holds the majority of our collateral obligations under existing workers' compensation insurance policies that were previously held directly by AIG. Placing the collateral in the Trust allows us to manage the investment of the assets and provides greater protection of those assets.

Fair value of financial instruments and investments
The carrying value of cash and cash equivalents and restricted cash approximates fair value because of the short-term maturity of those instruments. The fair value of our restricted investments is based upon the quoted market price on the last business day of the fiscal reporting period. Where an observable quoted market price for a security does not exist, we estimate fair value using a variety of valuation methodologies, which include observable inputs for comparable instruments and unobservable inputs. There are inherent limitations when estimating the fair value of financial instruments and the fair values reported are not necessarily indicative of the amounts that would be realized in current market transactions.
Property and equipment
Property and equipment are recorded at cost. We compute depreciation using the straight-line method over the estimated useful lives of the assets.
 
Years  
Buildings
40
Computers and software
3 - 10    
Furniture and equipment
3 - 10    
Leasehold improvements are amortized over the shorter of the related non-cancelable lease term, which is typically 90 days, or their estimated useful lives.
Non-capital expenditures associated with opening new branch locations are expensed as incurred.
When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the Consolidated Statements of Operations & Comprehensive Income.
Repairs and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated.

Costs associated with the acquisition or development of software for internal use are capitalized and amortized over the expected useful life of the software, from three to ten years. A subsequent addition, modification or upgrade to internal-use software is capitalized to the extent that it enhances the software's functionality or extends its useful life. Software maintenance and training costs are expensed in the period incurred.
Property under capital lease is comprised of software used in our operations and corporate support functions. The related amortization for capital lease assets is included in amortization expense in the Consolidated Statements of Operations & Comprehensive Income.
Leases
We conduct our branch office operations from leased locations. The leases require payment of real estate taxes, insurance and common area maintenance, in addition to rent. The terms of our lease agreements generally range from three to five years with options to cancel with 90 day notification. Most of the leases contain renewal options and escalation clauses.
For leases that contain predetermined fixed escalations of the minimum rent, we recognize the related rent expense on a straight-line basis from the date we take possession of the property to the end of the minimum lease term. We record any difference between the straight-line rent amounts and amounts payable under the leases as part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate.
Cash or lease incentives received upon entering into certain branch leases ("tenant allowances") are recognized on a straight-line basis as a reduction to rent from the date we take possession of the property through the end of the initial lease term. We record the unamortized portion of tenant allowances as a part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate.
We also lease certain equipment and software under non-cancelable operating and capital leases. Assets acquired under capital leases are depreciated and amortized over the shorter of the useful life of the asset or the lease term, including renewal periods, if reasonably assured.
Goodwill and intangible assets
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. We allocated goodwill to reporting units based on the reporting units that are expected to benefit from the business combination. We do not amortize goodwill but test it for impairment annually as of the last day of our fiscal third quarter, or when indications of potential impairment exist. We monitor the existence of potential impairment indicators throughout the fiscal year.
We test for goodwill impairment at the reporting unit level. We consider our brands Labor Ready, Spartan Staffing, CLP Resources, PlaneTechs and Centerline to be reporting units for goodwill impairment testing. In fiscal 2012, 2011 and 2010, there were no changes to our reporting units. The impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds carrying value, then we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure possible goodwill impairment loss. The second step includes hypothetically valuing the tangible and intangible assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit's goodwill is compared to the carrying value of that goodwill. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. We determine the fair value of each reporting unit using a discounted cash flow model.
Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes on each reporting unit. Critical assumptions include projected revenue growth, gross profit rates, selling, general and administrative expense rates, working capital fluctuations, capital expenditures and terminal growth rates, as well as an appropriate risk adjusted discount rate. Discount rates are determined using the capital asset pricing model.
The blue-collar staffing market is subject to volatility based on overall economic conditions. As a consequence, our revenues tend to increase quickly when the economy begins to grow, as occurred during 2011. Conversely, our revenues also decrease quickly when the economy begins to weaken, as occurred during the most recent recession. If actual results were to significantly deviate from management's estimates and assumptions of future performance, we could experience a material impairment to our goodwill.
We also use comparable market earnings multiple data and our company's market capitalization to corroborate our reporting unit valuations. We base fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
We have indefinite-lived intangible assets related to our CLP Resources and Spartan Staffing trade names. We test our indefinite-lived intangible assets annually for impairment, or when indications of potential impairment exist. We utilize the relief from royalty method to determine the fair value of each of our trade names. If the carrying value exceeds the fair value, we recognize an impairment loss in an amount equal to the excess. Considerable management judgment is necessary to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates.
Long-lived asset impairment
Long-lived assets include property and equipment and definite-lived intangible assets. Definite-lived intangible assets consist of customer relationships, trade names and non-compete agreements. Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Factors considered important that could result in an impairment review include, but are not limited to, significant underperformance relative to historical or planned operating results, significant changes in the manner of use of the assets or significant changes in our business strategies. Long-lived assets are grouped at the lowest level at which identifiable cash flows are largely independent when assessing impairment. Our branch assets, including property and equipment, and customer relationship intangibles, are grouped and evaluated at the individual branch level. All other property and equipment and definite-lived intangibles are grouped at either the brand or corporate level as appropriate based on the identifiable cash flows. An impairment loss is recognized when the estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment loss is recognized the carrying amount of the asset is reduced to its estimated fair value based on quoted market prices or other valuation techniques (e.g., discounted cash flow analysis). Considerable management judgment is necessary to estimate future after-tax cash flows, including cash flows from continuing use and terminal value. Accordingly, actual future results could vary from our estimates.
Branch closures and exit costs
We routinely evaluate our branch network and close under-performing branches. We classify closed branches in discontinued operations when the operations and cash flows of the branch have been or will be eliminated from ongoing operations. To determine if cash flows have been or will be eliminated from ongoing operations, we evaluate a number of qualitative and quantitative factors, including, but not limited to, proximity to remaining open branches and estimates of revenue migration from the closed branch to any branch remaining open. The estimated revenue migration is based on historical estimates of our revenue migration upon opening or closing a branch in a similar market. Branch closings meeting the criteria for discontinued operations were not material individually or cumulatively for any reporting year presented. Assets related to planned branch closures or other exit activities are evaluated for impairment in accordance with our impairment policy, giving consideration to revised estimates of future cash flows.
Workers’ compensation reserves
We maintain reserves for workers’ compensation claims using actuarial estimates of the future cost of claims and related expenses. These estimates include claims that have been reported but not settled and claims that have been incurred but not reported. These reserves, which reflect potential liabilities to be paid in future periods based on estimated payment patterns, are discounted to estimated net present value using discount rates based on average returns of “risk-free” U.S. Treasury instruments, which are evaluated on a quarterly basis. We evaluate the reserves regularly throughout the year and make adjustments accordingly. If the actual cost of such claims and related expenses exceed the amounts estimated, additional reserves may be required. Changes in reserve estimates are reflected in the Consolidated Statements of Operations & Comprehensive Income in the period when the changes in estimates are made.
Our workers’ compensation reserves include estimated expenses related to claims above our self-insured limits (“excess claims”) and a corresponding receivable for the insurance coverage on excess claims based on the contractual policy agreements we have with insurance companies. We discount the liability and its corresponding receivable to its estimated net present value using the “risk-free” rates associated with the actuarially determined weighted average lives of our excess claims. When appropriate, based on our best estimate, we record a valuation allowance against the insurance receivable to reflect amounts that may not be realized.
Reserves for contingent legal and regulatory liabilities
From time to time we are subject to compliance audits by federal, state and local authorities relating to a variety of regulations including wage and hour laws, taxes, workers’ compensation, immigration and safety. From time to time we are also subject to legal proceedings in the ordinary course of our operations. We establish reserves for contingent legal and regulatory liabilities when our management judges that it is probable that a legal claim will result in an adverse outcome and the amount of liability can be reasonably estimated. To the extent that an insurance company is contractually obligated to reimburse us for a liability, we record a receivable for the amount of the probable reimbursement. We evaluate our reserve regularly throughout the year and make adjustments as needed. If the actual outcome of these matters is different than expected, an adjustment is charged or credited to expense in the period the outcome occurs or the period in which the estimate changes.
Income taxes and related valuation allowance
We account for income taxes by recording taxes payable or receivable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. These expected future tax consequences are measured based on provisions of tax law as currently enacted; the effects of future changes in tax laws are not anticipated. Future tax law changes, such as changes to the federal and state corporate tax rates and the mix of states and their taxable income, could have a material impact on our financial condition or results of operations. When appropriate, we record a valuation allowance against deferred tax assets to offset future tax benefits that may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based in part upon management’s judgments regarding future events and past operating results. Based on that analysis, we have determined that a valuation allowance is appropriate for certain foreign net operating losses that we expect will not be utilized within the permitted carry forward periods as of December 28, 2012 and December 30, 2011. See Note 11 for further discussion.
Stock-based compensation
Under various plans, officers, employees and non-employee directors have received or may receive grants of stock, restricted stock awards, performance share units or options to purchase common stock. We also have an employee stock purchase plan (“ESPP”).
Compensation expense for restricted stock and stock units is generally recognized on a straight-line basis over the vesting period, based on the stock’s fair market value on the grant date. For restricted stock grants issued with performance conditions, compensation expense is recognized over each vesting tranche. We recognize compensation expense for only the portion of restricted stock and stock units that is expected to vest, rather than record forfeitures when they occur. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in the future periods. We determine the fair value of options to purchase common stock using the Black-Scholes valuation model, which requires the input of subjective assumptions. We recognize expense over the service period for options that are expected to vest and record adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.
Foreign currency
Cumulative foreign currency translation adjustments relate to our consolidated foreign subsidiary. Assets and liabilities recorded in foreign currencies are translated at the applicable exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year.
Purchases and retirement of our common stock
Purchases of our common stock are not displayed separately as treasury stock on the Consolidated Balance Sheets in accordance with the Washington Business Corporation Act, which requires the retirement of purchased shares. As a result, shares of our common stock that we purchase are retired immediately. It is our accounting policy to first record these purchases as a reduction to our Common stock account. Once the Common stock account has been reduced to a nominal balance, remaining purchases are recorded as a reduction to our Retained earnings account. Furthermore, activity in our common stock account related to stock-based compensation is also recorded to Retained earnings until such time as the reduction to Retained earnings due to stock repurchases has been recovered. See Note 9 and Note 10 for further discussion of share purchases and stock-based compensation, respectively.
Shares outstanding
Shares outstanding include shares of unvested restricted stock. Unvested restricted stock included in reportable shares outstanding was 0.6 million and 0.7 million shares as of December 28, 2012 and December 30, 2011, respectively. Shares of unvested restricted stock are excluded from our calculation of basic weighted average shares outstanding, but their dilutive impact is added back in the calculation of diluted weighted average shares outstanding.
Recently Adopted Accounting Standards
During the first quarter of 2012, we adopted the accounting standard regarding the presentation of comprehensive income. This standard was issued to increase the prominence of items reported in other comprehensive income. We have presented all non owner changes in shareholders' equity in a single, continuous statement in our financial statements as “Consolidated Statements of Operations & Comprehensive Income.” The standard does not change the following: items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income, the requirement to disclose the tax effect for each component of other comprehensive income or how earnings per share is calculated or presented. Our comprehensive income includes primarily foreign currency translation. The adoption of this standard in the first quarter of 2012 impacted our financial statement presentation only.
Recent Accounting Guidance not yet Effective
In July 2012, the Financial Accounting Standards Board issued guidance on testing indefinite-lived intangibles for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of its indefinite-lived intangible assets are less than their carrying amounts. If an entity determines that it is more likely than not that the fair value of each asset exceeds its carrying amount, it would not need to calculate the fair value of the asset in that year. If the entity concludes otherwise, it is required to perform an impairment test comparing the carrying value of the intangible asset with its fair value and recognize an impairment loss if necessary. The new guidance will be effective for us beginning in our fiscal year 2013 and early adoption is permitted.
FAIR VALUE MEASUREMENT
FAIR VALUE MEASUREMENT
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, mutual funds and United States Treasury Securities.
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 restricted investments which primarily consist of Municipal Securities, Corporate Securities, U.S. Agency Mortgages and U.S. Agency Debentures. 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 currently have no Level 3 assets or liabilities.
The carrying value of our cash and cash equivalents, restricted cash and accounts receivable approximates 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. There are inherent limitations when estimating the fair value of financial instruments and the fair values reported are not necessarily indicative of the amounts that would be realized in current market transactions.
The following table presents the fair value and hierarchy for our cash equivalents and restricted investments (in millions):
 
December 28,
2012
 
December 30,
2011
Level 1:
 
 
 
Cash equivalents (1)
$
94.6

 
$
55.5

Restricted cash equivalents (1)
26.8

 
31.2

Restricted investments classified as held-to-maturity (2)

 
1.0

Other restricted investments (3)
3.5

 
2.2

Level 2:
 
 
 
Restricted investments classified as held-to-maturity (4)
92.7

 
78.0

____________________
(1)
Cash equivalents and restricted cash equivalents consist of money market funds, deposits and investments with original maturities of three months or less.
(2)
Level 1 restricted investments classified as held-to-maturity consist of United States Treasury Securities.
(3)
Level 1 other restricted investments consist of deferred compensation investments which are comprised of mutual funds. We have an equal and offsetting accrued liability related to the deferred compensation plan.
(4)
Level 2 restricted investments classified as held-to-maturity consist of Municipal Securities, Corporate Securities, U.S. Agency Mortgages and U.S. Agency Debentures.
RESTRICTED CASH AND INVESTMENTS
RESTRICTED CASH AND INVESTMENTS
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 U.S. Treasury Securities, U.S. Agency Debentures, U.S. Agency Mortgages, Corporate Securities and Municipal Securities. The majority of our collateral obligations are held in a trust ("Trust") at the Bank of New York Mellon.
The following is a summary of restricted cash and investments (in millions):
 
December 28,
2012
 
December 30,
2011
Cash collateral held by insurance carriers
$
21.5

 
$
21.3

Cash and cash equivalents held in Trust (1)
14.8

 
19.2

Investments held in Trust
91.2

 
78.0

Cash collateral backing letters of credit
1.8

 
5.9

Other (2)
7.0

 
6.1

Total restricted cash and investments
$
136.3

 
$
130.5

__________________
(1)
Included in this amount is $0.9 million and $0.8 million of accrued interest at December 28, 2012 and December 30, 2011, respectively.
(2)
Primarily consists of restricted cash in money market accounts and deferred compensation plan accounts which are comprised of mutual funds.
The following tables present fair value disclosures for our held-to-maturity investments which are carried at amortized cost (in millions):
 
December 28, 2012
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
Municipal securities
$
57.3

 
$
1.0

 
$
(0.1
)
 
$
58.2

Corporate bonds
17.9

 
0.3

 

 
18.2

Asset backed bonds
16.0

 
0.3

 

 
16.3

 
$
91.2

 
$
1.6

 
$
(0.1
)
 
$
92.7


 
December 30, 2011
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
Municipal securities
$
42.8

 
$
0.8

 
$
(0.1
)
 
$
43.5

Corporate bonds
16.1

 
0.2

 

 
16.3

Asset backed bonds
13.6

 
0.1

 

 
13.7

State government and agency securities
4.5

 

 

 
4.5

United States Treasury securities
1.0

 

 

 
1.0

 
$
78.0

 
$
1.1

 
$
(0.1
)
 
$
79.0


The amortized cost and fair value by contractual maturity of our held-to-maturity investments are as follows (in millions):
 
December 28, 2012
 
Amortized Cost
 
Fair Value
Due in one year or less
$
11.8

 
$
11.8

Due after one year through five years
43.3

 
44.1

Due after five years through ten years
36.1

 
36.8

 
$
91.2

 
$
92.7


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.
PROPERTY AND EQUIPMENT, NET
PROPERTY AND EQUIPMENT, NET
PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost and consist of the following (in millions):
 
December 28,
2012
 
December 30,
2011
Buildings and land
$
25.9

 
$
24.5

Computers and software
91.7

 
80.5

Cash dispensing machines
1.0

 
4.5

Furniture and equipment
8.9

 
8.7

Construction in progress
7.7

 
3.6


135.2

 
121.8

Less accumulated depreciation and amortization
(77.0
)
 
(65.6
)
 
$
58.2

 
$
56.2


Capitalized software costs, net of accumulated amortization, were $30.9 million and $34.5 million as of December 28, 2012 and December 30, 2011, respectively, excluding amounts in Construction in progress. Construction in progress consists primarily of purchased and internally developed software.
Depreciation and amortization of property and equipment totaled $15.8 million, $13.5 million and $13.8 million for 2012, 2011 and 2010, respectively.
GOODWILL AND INTANGIBLE ASSETS
GOODWILL AND INTANGIBLE ASSETS
GOODWILL AND INTANGIBLE ASSETS
There have been no significant changes in the carrying amount of goodwill for the fiscal year ended December 28, 2012. We completed two acquisitions during 2011 for a total purchase price of $17.4 million of which $6.4 million remains to be paid in the future and $4.6 million was paid in 2012. The assets acquired and liabilities assumed were recorded at the date of acquisition at their respective estimated fair values. Assets acquired included finite-lived intangible assets of $1.8 million with an estimated weighted average useful life of 4.6 years. The excess of the purchase price over the estimated fair values of the net assets acquired in the amount of $11.2 million was recorded as goodwill, is entirely deductible for tax purposes, and is primarily due to synergies with our existing business and also the assembled workforce, future technologies and potential new customers. These acquisitions were not individually or in the aggregate material to our consolidated results of operations and as such, pro forma financial statements were not required.
Changes in the carrying amount of goodwill were as follows (in millions):
 
December 28, 2012
 
December 30, 2011
Goodwill prior to impairment
$
94.3

 
$
83.1

Accumulated impairment losses
(46.2
)
 
(46.1
)
Beginning Balance - net
48.1

 
37.0

Goodwill acquired during the year

 
11.2

Ending balance - net
$
48.1

 
$
48.2


Intangible assets other than goodwill are broken out separately on our Consolidated Balance Sheets for 2012 and 2011. The following table presents our purchased intangible assets other than goodwill (in millions):
 
December 28, 2012
 
December 30, 2011
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizable intangible assets (1):
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
19.1

 
$
(10.5
)
 
$
8.6

 
$
19.1

 
$
(8.3
)
 
$
10.8

Trade name/trademarks
3.5

 
(1.6
)
 
1.9

 
3.3

 
(1.3
)
 
2.0

Non-compete agreements
1.8

 
(1.4
)
 
0.4

 
2.5

 
(1.7
)
 
0.8

 
$
24.4

 
$
(13.5
)
 
$
10.9

 
$
24.9

 
$
(11.3
)
 
$
13.6

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trade name/trademarks
 
 
 
 
$
5.7

 
 
 
 
 
$
5.8

____________________
(1)Excludes assets that are fully amortized.

Intangible assets are amortized using the straight-line method over their estimated useful lives. Amortization of our definite-lived intangible assets was $3.1 million, $2.9 million and $2.7 million for 2012, 2011 and 2010, respectively.
The following table provides the estimated future amortization of definite-lived intangible assets at December 28, 2012 (in millions):
2013
$
2.7

2014
2.7

2015
2.7

2016
2.3

Thereafter
0.5

 
$
10.9


Goodwill and indefinite-lived intangible assets are reviewed for impairment annually or when triggering events indicate impairment is more likely than not. Long-lived intangible assets are reviewed for impairment whenever events and circumstances indicate the carrying value may not be recoverable. In fiscal 2012, 2011 and 2010 we identified no material impairments of goodwill or long-lived intangible assets.
WORKERS' COMPENSATION INSURANCE AND RESERVES
WORKERS' COMPENSATION INSURANCE AND RESERVES
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 policy years beginning in July 2003 and after, AIG, formerly known as Chartis, has been our workers' compensation carrier. The policy year is effective July 1 to June 30 and is subject to annual renewal. We completed our renewal with AIG for the 2012 - 2013 policy year in June. For years prior to 2003, we had coverage with other insurance providers. Furthermore, we have full liability for all further payments on claims that originated between January 2001 and June 2003, without recourse to any third party insurer as the result of a novation agreement we entered into with Kemper Insurance Company in December 2004.
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 brand 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. At December 28, 2012, the weighted average rate was 2.4%. The claim payments are made over an estimated weighted average period of approximately 5.5 years. As of December 28, 2012 and December 30, 2011, the discounted workers’ compensation claims reserves were $195.6 million and $191.8 million, respectively.
Our workers’ compensation reserve includes estimated expenses related to claims above our deductible 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. At December 28, 2012, the weighted average rate was 4.4%. The claim payments are made and the corresponding reimbursements from our insurance carriers are received over an estimated weighted average period of approximately 19.7 years. The discounted workers’ compensation reserve for excess claims and the corresponding receivable for the insurance on excess claims were $27.1 million and $27.4 million as of December 28, 2012 and December 30, 2011, respectively.
Two of the workers’ compensation insurance companies (“Troubled Insurance Companies”) with which we formerly did business are in liquidation and have failed to pay a number of excess claims to date. These excess claims have been presented to the state guaranty funds of the states in which the claims originated. Some of these excess claims have been rejected by the state guaranty funds due to statutory eligibility limitations. We have recorded a valuation allowance of $5.6 million and $7.3 million against all receivables from Troubled Insurance Companies as of December 28, 2012 and December 30, 2011, respectively. Total discounted receivables from insurance companies, net of the valuation allowance, as of December 28, 2012 and December 30, 2011 were $21.4 million and $20.1 million, respectively and were included in Other assets, net in 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;
Mix changes between medical only and indemnity claims;
Regulatory and legislative developments that have increased benefits and settlement requirements;
Type and location of work performed;
The impact of safety initiatives; and
Positive or adverse development of claim reserves.
Workers’ compensation expense totaling $52.3 million, $51.2 million and $43.3 million was recorded for 2012 and 2011, 2010 respectively. Workers’ compensation expense consists of: self-insurance reserves net of changes in discount; monopolistic jurisdictions’ premiums; insurance premiums; changes in the valuation allowance related to receivables from the Troubled Insurance Companies as described above; and other miscellaneous expenses.
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
Revolving credit facility
We have a credit agreement with Bank of America, N.A. and Wells Fargo Capital Finance, LLC for a secured revolving credit facility of up to a maximum of $80 million (the “Revolving Credit Facility”). The Revolving Credit Facility expires in September 2016.
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 85% of our eligible accounts receivable and the liquidation value of our Tacoma headquarters office building not to exceed $15 million, which is reduced quarterly by $0.4 million. As of December 28, 2012, the Tacoma headquarters office building liquidation value totaled $13.5 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. As of December 28, 2012, the maximum $80 million was available and letters of credit in the amount of $7.2 million had been issued against the facility, leaving an unused portion of $72.8 million. The letters of credit collateralize a portion of our workers' compensation obligation.
The Revolving Credit Facility requires that we maintain liquidity in excess of $12 million. We are required to satisfy a fixed charge coverage ratio in the event we do not meet that requirement. Liquidity is defined as the amount we are entitled to borrow as advances under the Revolving Credit Facility plus the amount of cash and cash equivalents held in accounts subject to a control agreement benefiting the lenders. The amount we were entitled to borrow at December 28, 2012 was $72.8 million and the amount of cash and cash equivalents under control agreements was $128.3 million for a total of $201.1 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 LIBOR or the Prime Rate, at our option, plus an applicable spread based on excess liquidity as set forth below:
Excess Liquidity
 
Prime Rate Loans
 
LIBOR Rate Loans
Greater than $40 million
 
0.50%
 
1.50%
Between $20 million and $40 million
 
0.75%
 
1.75%
Less than $20 million
 
1.00%
 
2.00%

A fee on borrowing availability of 0.25% is also applied against the unused portion of the Revolving Credit Facility. 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 secured by substantially all of our domestic personal property and our headquarters located in Tacoma, Washington.
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 at the Bank of New York Mellon.
We have provided our insurance carriers and certain states with commitments in the form and amounts listed below (in millions):
 
December 28,
2012
 
December 30,
2011
Cash collateral held by insurance carriers
$
21.5

 
$
21.3

Cash and cash equivalents held in Trust (1)
14.8

 
19.2

Investments held in Trust
91.2

 
78.0

Letters of credit (2)
9.0

 
16.7

Surety bonds (3)
16.2

 
16.2

Total collateral commitments
$
152.7

 
$
151.4

____________________
(1)
Included in this amount is $0.9 million and $0.8 million of accrued interest at December 28, 2012 and December 30, 2011, respectively.
(2)
We have agreements with certain financial institutions to issue letters of credit as collateral. We had $1.8 million and $5.9 million of restricted cash collateralizing our letters of credit at December 28, 2012 and December 30, 2011, respectively.
(3)
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, but 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.
Capital leases
We have property held under non-cancelable capital leases reported in Property and equipment, net on the Consolidated Balance Sheets totaling $0.1 million and $0.2 million, net of accumulated depreciation at December 28, 2012 and December 30, 2011, respectively. Our capital lease obligations are reported in Other current liabilities in the Consolidated Balance Sheets. Future minimum lease payments under these non-cancelable capital leases as of December 28, 2012 are $0.1 million for 2013.
Operating leases
We have contractual commitments in the form of operating leases related to branch offices and equipment. Future non-cancelable minimum lease payments under our operating lease commitments as of December 28, 2012 are as follows for each of the next five years and thereafter (in millions):
2013
$
6.6

2014
4.5

2015
3.5

2016
2.3

2017
0.7

Thereafter
0.2

 
$
17.8


The majority of operating leases pertaining to our branch offices provide for renewal options ranging from three to five years. Operating leases are generally renewed in the normal course of business, and most of the options are negotiated at the time of renewal. However, for the majority of our leases, both parties to the lease have the right to cancel the lease with 90 days notice. Accordingly, we have not included the leases with 90 day cancellation provisions in our disclosure of future minimum lease payments. Total branch office rent expense for 2012, 2011 and 2010 was $22.0 million, $22.1 million and $22.6 million, respectively.
Purchase Obligations
Purchase obligations include agreements to purchase goods and services in the ordinary course of business that are enforceable, legally binding and specify all significant terms. Purchase obligations do not include agreements that are cancelable without significant penalty. We had $7.5 million of purchase obligations as of December 28, 2012 of which, $6.9 million are expected to be paid in 2013.
Legal contingencies and developments
We are involved in various proceedings arising in the normal course of conducting business. We believe the amounts provided in our financial statements are adequate in consideration of the probable and estimable liabilities. The resolution of those proceedings is not expected to have a material effect on our results of operations or financial condition.
PREFERRED STOCK
PREFERRED STOCK
PREFERRED STOCK
We have authorized 20 million shares of blank check preferred stock. The blank check preferred stock is issuable in one or more series, each with such designations, preferences, rights, qualifications, limitations and restrictions as our Board of Directors may determine and set forth in supplemental resolutions at the time of issuance, without further shareholder action.
The initial series of blank check preferred stock authorized by the Board of Directors was designated as Series A Preferred Stock. We had no outstanding shares of preferred stock in any of the years presented.
COMMON STOCK
COMMON STOCK
COMMON STOCK
In July 2011, our Board of Directors approved a program to repurchase $75 million of our outstanding common stock. As of December 28, 2012, $35.2 million remained available for repurchase of common stock under the current authorization, which has no expiration date.
Under our authorized stock repurchase program, we repurchased and retired 0.3 million shares of our common stock during 2012 for a total amount of $4.4 million including commissions. We repurchased and retired 4.5 million shares of our common stock during 2011 for a total amount of $56.9 million including commissions.
Purchases of our common stock are not displayed separately as treasury stock on the Consolidated Balance Sheets in accordance with the Washington Business Corporation Act, which requires the retirement of purchased shares. As a result, shares of our common stock that we purchase are retired immediately. It is our policy to first record these purchases as a reduction to our Common stock account. Once the Common stock account has been reduced to a nominal balance, remaining purchases are recorded as a reduction to our Retained earnings account.
STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION
Stock-based compensation includes expense charges for all stock-based awards to employees and directors. Such awards include restricted and unrestricted stock awards, performance share units, stock options, and shares purchased under an employee stock purchase plan (“ESPP”).
Stock-based compensation expense was as follows (in millions):
 
2012
 
2011
 
2010
Restricted and unrestricted stock and performance share units expense
$
7.5

 
$
6.7

 
$
5.9

Stock option expense
0.1

 
0.4

 
1.0

ESPP expense
0.3

 
0.3

 
0.3

Total stock-based compensation expense
$
7.9

 
$
7.4

 
$
7.2

 
 
 
 
 
 
Total related tax benefit recognized
$
2.9

 
$
2.8

 
$
2.3


No capitalized stock-based compensation was included in Property and equipment, net on the Consolidated Balance Sheets for 2012, 2011 or 2010.
Restricted and unrestricted stock and performance share units
Stock-based awards are issued under our 2005 Amended Long-Term Equity Incentive Plan. Restricted stock is granted to executive officers and key employees and vests annually over periods ranging from three to four years. Unrestricted stock granted to our directors vests 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 since 2010. 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 a 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.
Restricted, unrestricted stock and performance share units activity for the year ended December 28, 2012 was as follows (shares in thousands):
 
Shares
 
Price (1)
Non-vested at beginning of period
1,266

 
$
13.92

Granted
653

 
$
16.72

Vested
(382
)
 
$
13.79

Forfeited
(102
)
 
$
13.86

Non-vested at the end of the period
1,435

 
$
15.23

_____________________
(1)
Weighted average market price on grant-date.
As of December 28, 2012, total unrecognized stock-based compensation expense related to non-vested restricted stock was approximately $7.0 million, of which $6.3 million is estimated to be recognized over a weighted average period of 1.6 years through 2016. As of December 28, 2012, total unrecognized stock-based compensation expense related to performance share units, assuming achievement of maximum financial goals was approximately $7.0 million, of which $2.8 million is currently estimated to be recognized over a weighted average period of 1.9 years through 2015. The total fair value of restricted shares vesting during 2012, 2011 and 2010 was $5.3 million, $5.2 million and $5.4 million, respectively.
Stock options
Our 2005 Amended Long-Term Equity 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. The majority of our unvested stock options “cliff vest” in three years from the date of grant and expire if not exercised within seven years from the date of grant. The maximum contractual term for our outstanding awards is ten years.
The fair value of each stock option granted is estimated on the grant date using the Black-Scholes valuation model, and the resulting expense is recognized over the requisite service period for each separately vesting portion of the award. The assumptions used to calculate the fair value of options granted reflect market conditions and our experience. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated based on our historical experience and future expectations.
There were no stock options granted during 2012 and 2011. A summary of the weighted average assumptions and results for options granted during 2010 is as follows:
 
 
2010
Expected life (in years)
 
3.36

Expected volatility
 
59.6
%
Risk-free interest rate
 
1.3
%
Expected dividend yield
 
%
Weighted average fair value of options granted during the period
 
$
6.24


Stock option activity was as follows (shares in thousands):
 
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life
 
Aggregate Intrinsic Value (in millions)
Outstanding, December 30, 2011
1,110

 
$
15.64

 
 
 
 
Granted

 
$

 
 
 
 
Exercised
(262
)
 
$
9.67

 
 
 
 
Expired/Forfeited
(209
)
 
$
19.22

 
 
 
 
Outstanding, December 28, 2012
639

 
$
16.91

 
1.4
 
$
0.6


 
 
 
 
 
 
 
Exercisable, December 28, 2012
634

 
$
16.97

 
1.4
 
$
0.6

Options expected to vest, December 28, 2012
5

 
$
9.08

 
1.1
 
$

The aggregate intrinsic value in the table above is the amount by which the market value of the underlying stock exceeded the exercise price of outstanding options, before applicable income taxes and represents the amount optionees would have realized if all in-the-money options had been exercised on the last business day of the period indicated. The closing per share market value of the Company’s stock on December 28, 2012 was $15.54.
Total unrecognized stock-based compensation expense related to non-vested stock options was de minimis as of December 28, 2012. The total intrinsic value of options exercised during 2012 was $1.9 million, was de minimis in 2011 and was $0.2 million in 2010, determined as of the date of exercise.
Cash received from option exercises, net of tax withholdings, during 2012, 2011 and 2010 was $2.5 million, $0.1 million and $0.2 million, respectively. The actual tax benefit realized for the deduction from option exercises during 2012 was $0.6 million and was de minimis for 2011 and 2010.
Employee stock purchase plan
Our Employee Stock Purchase Plan (“ESPP”) 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 the lesser of 85% of the fair market value of shares on either the first day or the last day of each month. Under our ESPP we have reserved for purchase 1.0 million shares of common stock, of which 0.2 million shares have been purchased as of December 28, 2012. 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.
The following table summarizes transactions under our ESPP from fiscal year 2010 through 2012 (shares in thousands):
 
Shares    
 
Average Price Per    
Share
Issued during fiscal year 2012
95

 
$
12.41

Issued during fiscal year 2011
83

 
$
11.95

Issued during fiscal year 2010
81

 
$
10.75

INCOME TAXES
INCOME TAXES
INCOME TAXES
The provision for income taxes is comprised of the following (in millions):
 
2012
 
2011
 
2010
Current taxes:
 
 
 
 
 
Federal
$
14.9

 
$
16.3

 
$
2.0

State
2.7

 
2.9

 
1.6

Foreign
0.3

 
0.4

 
0.4

Total current taxes
17.9

 
19.6

 
4.0

Deferred taxes:
 
 
 
 
 
Federal
2.7

 
(1.3
)
 
3.9

State
0.4

 
0.1

 
1.4

Foreign

 
0.1

 

Total deferred taxes
3.1

 
(1.1
)
 
5.3

Provision for income taxes
$
21.0

 
$
18.5

 
$
9.3


The items accounting for the difference between income taxes computed at the statutory federal income tax rate and income taxes reported in the Consolidated Statements of Operations & Comprehensive Income are as follows (in millions except percentages):
 
2012
 
%
 
2011
 
%
 
2010
 
%
Income tax expense based on statutory rate
$
19.1

 
35.0
 %
 
$
17.2

 
35.0
 %
 
$
10.2

 
35.0
 %
Increase (decrease) resulting from:
 
 
 
 
 
 
 
 
 
 
 
State income taxes, net of federal benefit
1.8

 
3.3
 %
 
1.9

 
3.9
 %
 
1.9

 
7.0
 %
Tax credits, net
(1.9
)
 
(3.5
)%
 
(3.5
)
 
(7.2
)%
 
(4.6
)
 
(16.0
)%
Nondeductible/nontaxable Items
2.3

 
4.2
 %
 
2.9

 
5.8
 %
 
2.3

 
8.0
 %
Other, net
(0.3
)
 
(0.6
)%
 

 
0.1
 %
 
(0.5
)
 
(2.0
)%
Total taxes on income
$
21.0

 
38.4
 %
 
$
18.5

 
37.6
 %
 
$
9.3

 
32.0
 %

Our effective tax rate on earnings for 2012 was 38.4% compared to 37.6% for the same period in 2011 and 32.0% in 2010. The increase in the effective income tax rate is due primarily to federal Work Opportunity Tax Credits which largely expired at the end of 2011. This income tax credit was designed to encourage employers to hire workers from certain targeted groups with higher-than-average unemployment rates. The principal difference between the statutory federal income tax rate of 35.0% and our 2012 effective income tax rate results from state income taxes, federal tax credits, and certain non-deductible expenses. The lower effective tax rate in 2010 was primarily due to the favorable resolution of certain tax matters.
The components of deferred tax assets and liabilities were as follows (in millions):
 
December 28, 2012
 
December 30, 2011
Deferred tax assets:
 
 
 
Allowance for doubtful accounts
$
2.0

 
$
2.4

Workers’ compensation claims reserve
10.1

 
9.7

Accounts payable and other accrued expenses
2.4

 
3.5

Net operating loss carry-forwards
0.6

 
0.5

Accrued wages and benefits
5.9

 
4.3

Deferred compensation
1.5

 
1.1

Other
0.5

 
0.8

Total
23.0

 
22.3

Valuation allowance
(0.6
)
 
(0.5
)
Total deferred tax asset, net of valuation allowance
22.4

 
21.8

Deferred tax liabilities:
 
 
 
Prepaid expenses, deposits and other current assets
(1.6
)
 
(1.1
)
Depreciation and amortization
(11.9
)
 
(8.8
)
Other
(0.9
)
 
(0.8
)
Total deferred tax liabilities
(14.4
)
 
(10.7
)
Net deferred tax asset, end of year
8.0

 
11.1

Net deferred tax asset, current
5.4

 
6.3

Net deferred tax asset, non-current
$
2.6

 
$
4.8


At December 28, 2012, Spartan Staffing Puerto Rico, LLC had net operating loss carry-forwards of approximately $2.8 million expiring in 2015 through 2022. A valuation allowance has been established against our carry-forward tax benefits based on our history of past losses.
Deferred taxes related to our foreign currency translation were de minimis for 2012 and 2011 and was $0.1 million for 2010.
As of December 28, 2012 our liability for unrecognized tax benefits was $1.9 million, if recognized, $1.2 million would impact our effective tax rate. We do not believe the amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the year ended December 28, 2012. This liability is recorded in Other non-current liabilities in our Consolidated Balance Sheets. In general, the tax years 2009 through 2011 remain open to examination by the major taxing jurisdictions where we conduct business.
The following table summarizes the activity related to our unrecognized tax benefits (in millions):
 
2012
 
2011
 
2010
Balance, beginning of fiscal year
$
1.7

 
$
1.6

 
$
1.8

Decreases related to settlements

 

 
(0.5
)
Increases for tax positions related to the current year
0.5

 
0.3

 
0.2

Increases for tax positions related to prior years

 

 
0.1

Decreases for tax positions related to prior years

 

 

Reductions due to lapsed statute of limitations
(0.3
)
 
(0.2
)
 

Balance, end of fiscal year
$
1.9

 
$
1.7

 
$
1.6


We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Statements of Operations & Comprehensive Income. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheets. Related to the unrecognized tax benefits noted above, we accrued $0.1 million for interest and de minimis amounts for penalties during 2012 and in total, as of December 28, 2012, have recognized a liability for penalties of $0.2 million and interest of $0.7 million.
NET INCOME PER SHARE
NET INCOME PER SHARE
NET INCOME PER SHARE
Adjusted net income and diluted common shares were calculated as follows (in millions, except per share amounts):
 
2012
 
2011
 
2010
   Net income
$
33.6

 
$
30.8

 
$
19.8

 
 
 
 
 
 
Weighted average number of common shares used in basic net income per common share
39.5

 
42.0

 
43.2

Dilutive effect of outstanding stock options and non-vested restricted stock
0.4

 
0.3

 
0.3

Weighted average number of common shares used in diluted net income per common share
39.9

 
42.3

 
43.5

   Net income per common share:
 
 
 
 
 
Basic
$
0.85

 
$
0.73

 
$
0.46

Diluted
$
0.84

 
$
0.73

 
$
0.46

 
 
 
 
 
 
Anti-dilutive shares
0.7

 
1.0

 
1.0


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 options, non-vested restricted stock and performance share units except where their inclusion would be anti-dilutive.
Anti-dilutive shares include unvested restricted stock, performance share units and in-the-money 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.
SUPPLEMENTAL CASH FLOW INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information (in millions):

2012
 
2011
 
2010
Cash paid during the period for:
 
 
 
 
 
Interest
$
0.7

 
$
0.8

 
$
1.1

Income taxes
$
21.3

 
$
16.1

 
$
6.7


As of December 28, 2012 and December 30, 2011, we had acquired $1.6 million and $1.7 million, respectively, of property, plant and equipment on account that was not yet paid. During 2012, we paid $1.7 million for capital expenditures acquired on account as of December 30, 2011. Amounts for 2010 have not been presented as they were de minimis. These are considered non-cash investing items.
SUBSEQUENT EVENTS
SUBSEQUENT EVENTS
SUBSEQUENT EVENTS
On February 4, 2013, we entered into an Asset Purchase Agreement with MDT Personnel, LLC wherein we acquired substantially all of the assets of MDT, a temporary staffing provider with 105 branch locations and more than 15 on-site locations in 25 states. The base purchase price was $48 million with $12 million paid in cash and $36 million in a note payable and assumed debt. An additional amount was paid to reimburse the seller for excess working capital. We are in the process of performing a purchase price allocation for the acquired assets and liabilities.
The American Taxpayer Relief Act of 2012 ("the Act") was signed into law on January 2, 2013. The Act retroactively restored the Work Opportunity Tax Credit. Because a change in tax law is accounted for in the period of enactment, the retroactive effect of the Act on the Company's U.S. federal taxes for 2012, a benefit of approximately $3.2 million, will be recognized in 2013. In addition, we expect the Act's extension of these provisions through the end of 2013 will reduce our estimated annual effective tax rate for 2013 as compared to 2012.
We evaluated other events and transactions occurring after the balance sheet date through the date that the financial statements were issued, and noted no other events that were subject to recognition or disclosure.
QUARTERLY FINANCIAL DATA (UNAUDITED)
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
IN MILLIONS (EXCEPT PER SHARE DATA)

 
First
 
Second
 
Third
 
Fourth
2012
 
 
 
 
 
 
 
Revenue from services
$
311.2

 
$
354.2

 
$
379.4

 
$
344.6

Cost of services
232.0

 
260.7

 
274.2

 
250.2

Gross profit
79.2

 
93.5

 
105.2

 
94.4

Selling, general and administrative expenses
72.1

 
71.5

 
77.6

 
79.2

Depreciation and amortization
4.8

 
4.7

 
4.7

 
4.7

Income from operations
2.3

 
17.3

 
22.9

 
10.5

Interest expense
(0.4
)
 
(0.3
)
 
(0.3
)
 
(0.3
)
Interest and other income
0.7

 
0.7

 
0.7

 
0.7

Interest and other income, net
0.3

 
0.4

 
0.4

 
0.4

Income before tax expense
2.6

 
17.7

 
23.3

 
10.9

Income tax expense
1.1

 
7.4

 
9.0

 
3.5

Net income
$
1.5

 
$
10.3

 
$
14.3

 
$
7.4

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.04

 
$
0.26

 
$
0.36

 
$
0.19

Diluted
$
0.04

 
$
0.26

 
$
0.36

 
$
0.19

2011
 
 
 
 
 
 
 
Revenue from services
$
274.3

 
$
320.2

 
$
371.4

 
$
350.2

Cost of services
204.3

 
234.9

 
271.6

 
258.3

Gross profit
70.0

 
85.3

 
99.8

 
91.9

Selling, general and administrative expenses
65.1

 
67.7

 
73.2

 
76.8

Depreciation and amortization
3.9

 
3.8

 
4.2

 
4.4

Income from operations
1.0

 
13.8

 
22.4

 
10.7

Interest expense
(0.3
)
 
(0.4
)
 
(0.4
)
 
(0.1
)
Interest and other income
0.6

 
0.6

 
0.7

 
0.8

Interest and other income, net
0.3

 
0.2

 
0.3

 
0.7

Income before tax expense
1.3

 
14.0

 
22.7

 
11.4

Income tax expense
0.5

 
5.4

 
8.8

 
3.8

Net income
$
0.8

 
$
8.6

 
$
13.9

 
$
7.6

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.02

 
$
0.20

 
$
0.33

 
$
0.19

Diluted
$
0.02

 
$
0.20

 
$
0.33

 
$
0.19

FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
Schedule II, Valuation and Qualifying Accounts (in millions)
Allowance for doubtful accounts activity was as follows:
 
 
2012
 
2011
 
2010
Balance, beginning of the year
$
5.8

 
$
6.4

 
$
6.6

Charged to expense
7.0

 
6.6

 
8.2

Write-offs
(7.8
)
 
(7.2
)
 
(8.4
)
Balance, end of year
$
5.0

 
$
5.8

 
$
6.4

Insurance receivable valuation allowance activity was as follows:
 
 
2012
 
2011
 
2010
Balance, beginning of the year
$
7.3

 
$
7.6

 
$
6.8

Charged to expense
(1.7
)
 
(0.3
)
 
0.8

Balance, end of year
$
5.6

 
$
7.3

 
$
7.6

Income tax valuation allowance additions (reductions) were as follows:
 
 
2012
 
2011
 
2010
Balance, beginning of the year
$
0.5

 
$
0.7

 
$
0.6

Charged to expense
0.1

 
(0.2
)
 
0.1

Balance, end of year
$
0.6

 
$
0.5

 
$
0.7

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
Basis of presentation
The consolidated financial statements include the accounts of TrueBlue, Inc. and all of its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
TrueBlue operations are one reportable segment. Our operations are all in the blue-collar staffing market of the temporary staffing industry and focus on supplying customers with temporary workers. All our brands have the following similar characteristics:
They provide blue-collar temporary labor services;
They serve customers who have a need for temporary staff to perform tasks which do not require a permanent employee;
They each build a temporary workforce through recruiting, screening and hiring. Temporary workers are dispatched to customers where they work under the supervision of our customers;
They each drive profitability by managing the bill rates to our customers and the pay rates to our workers. Profitable growth is also driven by leveraging our cost structure across all brands.
Our long-term financial performance expectations of all our brands are similar as are the underlying financial and economic metrics used to manage those brands.
Fiscal year end
Our fiscal year ends on the last Friday of December. Fiscal 2010 included 53 weeks; the final quarter consisted of 14 weeks.
Use of estimates
Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Examples include, but are not limited to, allowance for doubtful accounts, estimates for asset and goodwill impairments, stock-based performance awards, assumptions underlying self-insurance reserves, and the potential outcome of future tax consequences of events that have been recognized in the financial statements. Actual results and outcomes may differ from these estimates and assumptions.
Revenue recognition
Revenue from temporary staffing services is recognized at the time the service is provided and is net of adjustments related to customer credits. Revenue also includes cash dispensing machine fees, billable travel, and other reimbursable costs. Customer discounts or other incentives are recognized in the period the related revenue is earned. We discontinued the use of all domestic cash dispensing machines in fiscal 2012. Revenues are reported net of sales, use or other transaction taxes collected from customers and remitted to taxing authorities.
We record revenue on a gross basis as a principal versus on a net basis as an agent in the consolidated statement of operations. We have determined that gross reporting as a principal is the appropriate treatment based upon the following key factors:
We maintain the direct contractual relationship with the customer.
We have discretion in selecting and assigning the temporary workers to particular jobs and establishing their billing rate.
We bear the risk and rewards of the transaction including credit risk if the customer fails to pay for services performed.
Cost of services
Cost of services primarily includes wages of temporary workers and related payroll taxes and workers’ compensation expenses. Cost of services also includes billable travel and other reimbursable costs.
Advertising costs
Advertising costs consist primarily of print and other promotional activities. We expense advertisements as of the first date the advertisements take place.
Cash and cash equivalents
We consider all highly liquid instruments purchased with an original maturity of three months or less at date of purchase to be cash equivalents.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are recorded at the invoiced amount together with interest for certain past due accounts. We establish an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. The allowance for doubtful accounts is determined based on current collection efforts, historical collection trends, write-off experience, customer credit risk, and current economic data. The allowance for doubtful accounts is reviewed quarterly and represents our best estimate of the amount of probable credit losses. Past due balances are written-off when it is probable the receivable will not be collected.
Restricted cash and investments
Cash and investments pledged as collateral and restricted to use for workers' compensation insurance programs are included as restricted cash and investments in our Consolidated Balance Sheets. Our investments consist of highly rated investment grade debt securities which are rated A or higher by Nationally Recognized Statistical Rating Organizations. We have the positive intent and ability to hold all these investments until maturity and accordingly all of our investments are classified as held-to-maturity. In the event that an investment is downgraded, it is replaced with a highly rated investment grade security. We review for impairment on a quarterly basis and do not consider temporary unrealized losses to be impaired.
On March 11, 2011, we entered into an agreement with The Bank of New York Mellon as escrow agent and National Union Fire Insurance Company of Pittsburgh, PA on behalf of itself and its insurance company affiliates including but not limited to AIG, formerly known as Chartis Casualty Company (Chartis). The agreement creates a trust (the "Trust") at The Bank of New York Mellon which holds the majority of our collateral obligations under existing workers' compensation insurance policies that were previously held directly by AIG. Placing the collateral in the Trust allows us to manage the investment of the assets and provides greater protection of those assets.
Fair value of financial instruments and investments
The carrying value of cash and cash equivalents and restricted cash approximates fair value because of the short-term maturity of those instruments. The fair value of our restricted investments is based upon the quoted market price on the last business day of the fiscal reporting period. Where an observable quoted market price for a security does not exist, we estimate fair value using a variety of valuation methodologies, which include observable inputs for comparable instruments and unobservable inputs. There are inherent limitations when estimating the fair value of financial instruments and the fair values reported are not necessarily indicative of the amounts that would be realized in current market transactions.
Property and equipment
Property and equipment are recorded at cost. We compute depreciation using the straight-line method over the estimated useful lives of the assets.
 
Years  
Buildings
40
Computers and software
3 - 10    
Furniture and equipment
3 - 10    
Leasehold improvements are amortized over the shorter of the related non-cancelable lease term, which is typically 90 days, or their estimated useful lives.
Non-capital expenditures associated with opening new branch locations are expensed as incurred.
When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the Consolidated Statements of Operations & Comprehensive Income.
Repairs and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated.

Costs associated with the acquisition or development of software for internal use are capitalized and amortized over the expected useful life of the software, from three to ten years. A subsequent addition, modification or upgrade to internal-use software is capitalized to the extent that it enhances the software's functionality or extends its useful life. Software maintenance and training costs are expensed in the period incurred.
Property under capital lease is comprised of software used in our operations and corporate support functions. The related amortization for capital lease assets is included in amortization expense in the Consolidated Statements of Operations & Comprehensive Income.
Leases
We conduct our branch office operations from leased locations. The leases require payment of real estate taxes, insurance and common area maintenance, in addition to rent. The terms of our lease agreements generally range from three to five years with options to cancel with 90 day notification. Most of the leases contain renewal options and escalation clauses.
For leases that contain predetermined fixed escalations of the minimum rent, we recognize the related rent expense on a straight-line basis from the date we take possession of the property to the end of the minimum lease term. We record any difference between the straight-line rent amounts and amounts payable under the leases as part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate.
Cash or lease incentives received upon entering into certain branch leases ("tenant allowances") are recognized on a straight-line basis as a reduction to rent from the date we take possession of the property through the end of the initial lease term. We record the unamortized portion of tenant allowances as a part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate.
We also lease certain equipment and software under non-cancelable operating and capital leases. Assets acquired under capital leases are depreciated and amortized over the shorter of the useful life of the asset or the lease term, including renewal periods, if reasonably assured.
Goodwill and intangible assets
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. We allocated goodwill to reporting units based on the reporting units that are expected to benefit from the business combination. We do not amortize goodwill but test it for impairment annually as of the last day of our fiscal third quarter, or when indications of potential impairment exist. We monitor the existence of potential impairment indicators throughout the fiscal year.
We test for goodwill impairment at the reporting unit level. We consider our brands Labor Ready, Spartan Staffing, CLP Resources, PlaneTechs and Centerline to be reporting units for goodwill impairment testing. In fiscal 2012, 2011 and 2010, there were no changes to our reporting units. The impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds carrying value, then we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure possible goodwill impairment loss. The second step includes hypothetically valuing the tangible and intangible assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit's goodwill is compared to the carrying value of that goodwill. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. We determine the fair value of each reporting unit using a discounted cash flow model.
Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes on each reporting unit. Critical assumptions include projected revenue growth, gross profit rates, selling, general and administrative expense rates, working capital fluctuations, capital expenditures and terminal growth rates, as well as an appropriate risk adjusted discount rate. Discount rates are determined using the capital asset pricing model.
The blue-collar staffing market is subject to volatility based on overall economic conditions. As a consequence, our revenues tend to increase quickly when the economy begins to grow, as occurred during 2011. Conversely, our revenues also decrease quickly when the economy begins to weaken, as occurred during the most recent recession. If actual results were to significantly deviate from management's estimates and assumptions of future performance, we could experience a material impairment to our goodwill.
We also use comparable market earnings multiple data and our company's market capitalization to corroborate our reporting unit valuations. We base fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
We have indefinite-lived intangible assets related to our CLP Resources and Spartan Staffing trade names. We test our indefinite-lived intangible assets annually for impairment, or when indications of potential impairment exist. We utilize the relief from royalty method to determine the fair value of each of our trade names. If the carrying value exceeds the fair value, we recognize an impairment loss in an amount equal to the excess. Considerable management judgment is necessary to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates.
Long-lived asset impairment
Long-lived assets include property and equipment and definite-lived intangible assets. Definite-lived intangible assets consist of customer relationships, trade names and non-compete agreements. Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Factors considered important that could result in an impairment review include, but are not limited to, significant underperformance relative to historical or planned operating results, significant changes in the manner of use of the assets or significant changes in our business strategies. Long-lived assets are grouped at the lowest level at which identifiable cash flows are largely independent when assessing impairment. Our branch assets, including property and equipment, and customer relationship intangibles, are grouped and evaluated at the individual branch level. All other property and equipment and definite-lived intangibles are grouped at either the brand or corporate level as appropriate based on the identifiable cash flows. An impairment loss is recognized when the estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment loss is recognized the carrying amount of the asset is reduced to its estimated fair value based on quoted market prices or other valuation techniques (e.g., discounted cash flow analysis). Considerable management judgment is necessary to estimate future after-tax cash flows, including cash flows from continuing use and terminal value. Accordingly, actual future results could vary from our estimates.
Branch closures and exit costs
We routinely evaluate our branch network and close under-performing branches. We classify closed branches in discontinued operations when the operations and cash flows of the branch have been or will be eliminated from ongoing operations. To determine if cash flows have been or will be eliminated from ongoing operations, we evaluate a number of qualitative and quantitative factors, including, but not limited to, proximity to remaining open branches and estimates of revenue migration from the closed branch to any branch remaining open. The estimated revenue migration is based on historical estimates of our revenue migration upon opening or closing a branch in a similar market. Branch closings meeting the criteria for discontinued operations were not material individually or cumulatively for any reporting year presented. Assets related to planned branch closures or other exit activities are evaluated for impairment in accordance with our impairment policy, giving consideration to revised estimates of future cash flows.
Workers’ compensation reserves
We maintain reserves for workers’ compensation claims using actuarial estimates of the future cost of claims and related expenses. These estimates include claims that have been reported but not settled and claims that have been incurred but not reported. These reserves, which reflect potential liabilities to be paid in future periods based on estimated payment patterns, are discounted to estimated net present value using discount rates based on average returns of “risk-free” U.S. Treasury instruments, which are evaluated on a quarterly basis. We evaluate the reserves regularly throughout the year and make adjustments accordingly. If the actual cost of such claims and related expenses exceed the amounts estimated, additional reserves may be required. Changes in reserve estimates are reflected in the Consolidated Statements of Operations & Comprehensive Income in the period when the changes in estimates are made.
Our workers’ compensation reserves include estimated expenses related to claims above our self-insured limits (“excess claims”) and a corresponding receivable for the insurance coverage on excess claims based on the contractual policy agreements we have with insurance companies. We discount the liability and its corresponding receivable to its estimated net present value using the “risk-free” rates associated with the actuarially determined weighted average lives of our excess claims. When appropriate, based on our best estimate, we record a valuation allowance against the insurance receivable to reflect amounts that may not be realized.
Reserves for contingent legal and regulatory liabilities
From time to time we are subject to compliance audits by federal, state and local authorities relating to a variety of regulations including wage and hour laws, taxes, workers’ compensation, immigration and safety. From time to time we are also subject to legal proceedings in the ordinary course of our operations. We establish reserves for contingent legal and regulatory liabilities when our management judges that it is probable that a legal claim will result in an adverse outcome and the amount of liability can be reasonably estimated. To the extent that an insurance company is contractually obligated to reimburse us for a liability, we record a receivable for the amount of the probable reimbursement. We evaluate our reserve regularly throughout the year and make adjustments as needed. If the actual outcome of these matters is different than expected, an adjustment is charged or credited to expense in the period the outcome occurs or the period in which the estimate changes.
Income taxes and related valuation allowance
We account for income taxes by recording taxes payable or receivable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. These expected future tax consequences are measured based on provisions of tax law as currently enacted; the effects of future changes in tax laws are not anticipated. Future tax law changes, such as changes to the federal and state corporate tax rates and the mix of states and their taxable income, could have a material impact on our financial condition or results of operations. When appropriate, we record a valuation allowance against deferred tax assets to offset future tax benefits that may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based in part upon management’s judgments regarding future events and past operating results. Based on that analysis, we have determined that a valuation allowance is appropriate for certain foreign net operating losses that we expect will not be utilized within the permitted carry forward periods as of December 28, 2012 and December 30, 2011. See Note 11 for further discussion.
Stock-based compensation
Under various plans, officers, employees and non-employee directors have received or may receive grants of stock, restricted stock awards, performance share units or options to purchase common stock. We also have an employee stock purchase plan (“ESPP”).
Compensation expense for restricted stock and stock units is generally recognized on a straight-line basis over the vesting period, based on the stock’s fair market value on the grant date. For restricted stock grants issued with performance conditions, compensation expense is recognized over each vesting tranche. We recognize compensation expense for only the portion of restricted stock and stock units that is expected to vest, rather than record forfeitures when they occur. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in the future periods. We determine the fair value of options to purchase common stock using the Black-Scholes valuation model, which requires the input of subjective assumptions. We recognize expense over the service period for options that are expected to vest and record adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.
Foreign currency
Cumulative foreign currency translation adjustments relate to our consolidated foreign subsidiary. Assets and liabilities recorded in foreign currencies are translated at the applicable exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year.
Purchases and retirement of our common stock
Purchases of our common stock are not displayed separately as treasury stock on the Consolidated Balance Sheets in accordance with the Washington Business Corporation Act, which requires the retirement of purchased shares. As a result, shares of our common stock that we purchase are retired immediately. It is our accounting policy to first record these purchases as a reduction to our Common stock account. Once the Common stock account has been reduced to a nominal balance, remaining purchases are recorded as a reduction to our Retained earnings account. Furthermore, activity in our common stock account related to stock-based compensation is also recorded to Retained earnings until such time as the reduction to Retained earnings due to stock repurchases has been recovered. See Note 9 and Note 10 for further discussion of share purchases and stock-based compensation, respectively.
Shares outstanding
Shares outstanding include shares of unvested restricted stock. Unvested restricted stock included in reportable shares outstanding was 0.6 million and 0.7 million shares as of December 28, 2012 and December 30, 2011, respectively. Shares of unvested restricted stock are excluded from our calculation of basic weighted average shares outstanding, but their dilutive impact is added back in the calculation of diluted weighted average shares outstanding.
Recently Adopted Accounting Standards
During the first quarter of 2012, we adopted the accounting standard regarding the presentation of comprehensive income. This standard was issued to increase the prominence of items reported in other comprehensive income. We have presented all non owner changes in shareholders' equity in a single, continuous statement in our financial statements as “Consolidated Statements of Operations & Comprehensive Income.” The standard does not change the following: items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income, the requirement to disclose the tax effect for each component of other comprehensive income or how earnings per share is calculated or presented. Our comprehensive income includes primarily foreign currency translation. The adoption of this standard in the first quarter of 2012 impacted our financial statement presentation only.
Recent Accounting Guidance not yet Effective
In July 2012, the Financial Accounting Standards Board issued guidance on testing indefinite-lived intangibles for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of its indefinite-lived intangible assets are less than their carrying amounts. If an entity determines that it is more likely than not that the fair value of each asset exceeds its carrying amount, it would not need to calculate the fair value of the asset in that year. If the entity concludes otherwise, it is required to perform an impairment test comparing the carrying value of the intangible asset with its fair value and recognize an impairment loss if necessary. The new guidance will be effective for us beginning in our fiscal year 2013 and early adoption is permitted.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)
Schedule of estimated useful lives of property and equipment
Property and equipment are recorded at cost. We compute depreciation using the straight-line method over the estimated useful lives of the assets.
 
Years  
Buildings
40
Computers and software
3 - 10    
Furniture and equipment
3 - 10    
Property and equipment are stated at cost and consist of the following (in millions):
 
December 28,
2012
 
December 30,
2011
Buildings and land
$
25.9

 
$
24.5

Computers and software
91.7

 
80.5

Cash dispensing machines
1.0

 
4.5

Furniture and equipment
8.9

 
8.7

Construction in progress
7.7

 
3.6


135.2

 
121.8

Less accumulated depreciation and amortization
(77.0
)
 
(65.6
)
 
$
58.2

 
$
56.2

FAIR VALUE MEASUREMENT (Tables)
Schedule of fair value hierarchy for cash equivalents and restricted investments
The following table presents the fair value and hierarchy for our cash equivalents and restricted investments (in millions):
 
December 28,
2012
 
December 30,
2011
Level 1:
 
 
 
Cash equivalents (1)
$
94.6

 
$
55.5

Restricted cash equivalents (1)
26.8

 
31.2

Restricted investments classified as held-to-maturity (2)

 
1.0

Other restricted investments (3)
3.5

 
2.2

Level 2:
 
 
 
Restricted investments classified as held-to-maturity (4)
92.7

 
78.0

____________________
(1)
Cash equivalents and restricted cash equivalents consist of money market funds, deposits and investments with original maturities of three months or less.
(2)
Level 1 restricted investments classified as held-to-maturity consist of United States Treasury Securities.
(3)
Level 1 other restricted investments consist of deferred compensation investments which are comprised of mutual funds. We have an equal and offsetting accrued liability related to the deferred compensation plan.
(4)
Level 2 restricted investments classified as held-to-maturity consist of Municipal Securities, Corporate Securities, U.S. Agency Mortgages and U.S. Agency Debentures.
RESTRICTED CASH AND INVESTMENTS (Tables)
The following is a summary of restricted cash and investments (in millions):
 
December 28,
2012
 
December 30,
2011
Cash collateral held by insurance carriers
$
21.5

 
$
21.3

Cash and cash equivalents held in Trust (1)
14.8

 
19.2

Investments held in Trust
91.2

 
78.0

Cash collateral backing letters of credit
1.8

 
5.9

Other (2)
7.0

 
6.1

Total restricted cash and investments
$
136.3

 
$
130.5

__________________
(1)
Included in this amount is $0.9 million and $0.8 million of accrued interest at December 28, 2012 and December 30, 2011, respectively.
(2)
Primarily consists of restricted cash in money market accounts and deferred compensation plan accounts which are comprised of mutual funds.
The following tables present fair value disclosures for our held-to-maturity investments which are carried at amortized cost (in millions):
 
December 28, 2012
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
Municipal securities
$
57.3

 
$
1.0

 
$
(0.1
)
 
$
58.2

Corporate bonds
17.9

 
0.3

 

 
18.2

Asset backed bonds
16.0

 
0.3

 

 
16.3

 
$
91.2

 
$
1.6

 
$
(0.1
)
 
$
92.7


 
December 30, 2011
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
Municipal securities
$
42.8

 
$
0.8

 
$
(0.1
)
 
$
43.5

Corporate bonds
16.1

 
0.2

 

 
16.3

Asset backed bonds
13.6

 
0.1

 

 
13.7

State government and agency securities
4.5

 

 

 
4.5

United States Treasury securities
1.0

 

 

 
1.0

 
$
78.0

 
$
1.1

 
$
(0.1
)
 
$
79.0

The amortized cost and fair value by contractual maturity of our held-to-maturity investments are as follows (in millions):
 
December 28, 2012
 
Amortized Cost
 
Fair Value
Due in one year or less
$
11.8

 
$
11.8

Due after one year through five years
43.3

 
44.1

Due after five years through ten years
36.1

 
36.8

 
$
91.2

 
$
92.7

PROPERTY AND EQUIPMENT, NET (Tables)
Schedule of property and equipment
Property and equipment are recorded at cost. We compute depreciation using the straight-line method over the estimated useful lives of the assets.
 
Years  
Buildings
40
Computers and software
3 - 10    
Furniture and equipment
3 - 10    
Property and equipment are stated at cost and consist of the following (in millions):
 
December 28,
2012
 
December 30,
2011
Buildings and land
$
25.9

 
$
24.5

Computers and software
91.7

 
80.5

Cash dispensing machines
1.0

 
4.5

Furniture and equipment
8.9

 
8.7

Construction in progress
7.7

 
3.6


135.2

 
121.8

Less accumulated depreciation and amortization
(77.0
)
 
(65.6
)
 
$
58.2

 
$
56.2