TRUEBLUE, INC., 10-Q filed on 10/31/2011
Quarterly Report
DOCUMENT AND ENTITY INFORMATION
9 Months Ended
Sep. 30, 2011
Oct. 21, 2011
Document and Entity Information
 
 
Document Type
10-Q 
 
Amendment Flag
FALSE 
 
Document Period End Date
Sep. 30, 2011 
 
Document Fiscal Year Focus
2011 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
TBI 
 
Entity Registrant Name
TrueBlue, Inc. 
 
Entity Central Index Key
0000768899 
 
Current Fiscal Year End Date
--12-30 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
40,093,279 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $)
In Thousands
Sep. 30, 2011
Dec. 31, 2010
Current assets:
 
 
Cash and cash equivalents
$ 99,050 
$ 163,153 
Accounts receivable, net of allowance for doubtful accounts of $6,287 and $6,427
174,384 
108,692 
Prepaid expenses, deposits and other current assets
8,254 
9,981 
Income tax receivable
4,898 
Deferred income taxes
4,678 
6,776 
Total current assets
286,366 
293,500 
Property and equipment, net
54,733 
53,958 
Restricted cash and investments
136,538 
120,067 
Deferred income taxes
3,597 
2,400 
Goodwill
48,139 
36,960 
Intangible assets, net
20,207 
20,526 
Other assets, net
19,061 
19,055 
Total assets
568,641 
546,466 
Current liabilities:
 
 
Accounts payable and other accrued expenses
38,410 
18,776 
Accrued wages and benefits
36,502 
24,464 
Income tax payable
1,555 
Current portion of workers' compensation claims reserve
41,768 
42,379 
Other current liabilities
7,602 
304 
Total current liabilities
125,837 
85,923 
Workers’ compensation claims reserve, less current portion
146,273 
144,927 
Other long-term liabilities
5,942 
2,909 
Total liabilities
278,052 
233,759 
Commitments and contingencies (Note 7)
 
 
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; 40,483 and 44,086 shares issued and outstanding
Accumulated other comprehensive income
2,442 
2,906 
Retained earnings
288,146 
309,800 
Total shareholders' equity
290,589 
312,707 
Total liabilities and shareholders' equity
$ 568,641 
$ 546,466 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) (USD $)
In Thousands, except Per Share data
Sep. 30, 2011
Dec. 31, 2010
Accounts receivable, allowance for doubtful accounts
$ 6,287 
$ 6,427 
Preferred stock, par value
$ 0.131 
$ 0.131 
Preferred stock, shares authorized
20,000 
20,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0 
$ 0 
Common stock, shares authorized
100,000 
100,000 
Common stock, shares issued
40,483 
44,086 
Common stock, shares outstanding
40,483 
44,086 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (USD $)
In Thousands, except Per Share data
3 Months Ended
Sep. 30, 2011
3 Months Ended
Sep. 24, 2010
9 Months Ended
Sep. 30, 2011
9 Months Ended
Sep. 24, 2010
Revenue from services
$ 371,379 
$ 312,769 
$ 965,857 
$ 837,424 
Cost of services
271,528 
228,181 
710,644 
615,882 
Gross profit
99,851 
84,588 
255,213 
221,542 
Selling, general and administrative expenses
73,235 
64,442 
206,071 
186,926 
Depreciation and amortization
4,205 
3,874 
11,989 
11,888 
Income from operations
22,411 
16,272 
37,153 
22,728 
Interest expense
(371)
(439)
(1,059)
(1,169)
Interest and other Income
694 
583 
1,857 
1,832 
Interest and other income, net
323 
144 
798 
663 
Income before tax expense
22,734 
16,416 
37,951 
23,391 
Income tax expense
8,821 
6,197 
14,724 
7,511 
Net income
$ 13,913 
$ 10,219 
$ 23,227 
$ 15,880 
Net income per common share:
 
 
 
 
Basic
$ 0.33 
$ 0.24 
$ 0.54 
$ 0.37 
Diluted
$ 0.33 
$ 0.23 
$ 0.54 
$ 0.37 
Weighted average shares outstanding:
 
 
 
 
Basic
41,612 
43,269 
42,813 
43,196 
Diluted
41,958 
43,509 
43,176 
43,456 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $)
In Thousands
9 Months Ended
Sep. 30, 2011
9 Months Ended
Sep. 24, 2010
Cash flows from operating activities:
 
 
Net income
$ 23,227 
$ 15,880 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
11,989 
11,888 
Provision for doubtful accounts
4,424 
5,828 
Stock-based compensation
5,583 
5,412 
Deferred income taxes
899 
1,986 
Other operating activities
(471)
(141)
Changes in operating assets and liabilities:
 
 
Accounts receivable
(70,116)
(34,357)
Income taxes
6,950 
1,345 
Other assets
1,720 
253 
Accounts payable and other accrued expenses
19,634 
1,489 
Accrued wages and benefits
12,033 
4,560 
Workers' compensation claims reserve
735 
83 
Other liabilities
(144)
123 
Net cash provided by operating activities
16,463 
14,349 
Cash flows from investing activities:
 
 
Capital expenditures
(6,251)
(5,256)
Change in restricted cash and cash equivalents
65,104 
6,358 
Purchases of restricted investments
(87,768)
Maturities of restricted investments
6,193 
Other
(6,800)
(297)
Net cash (used in) provided by investing activities
(29,522)
805 
Cash flows from financing activities:
 
 
Purchases and retirement of common stock
(50,143)
Net proceeds from sale of stock through options and employee benefit plans
874 
755 
Common stock repurchases for taxes upon vesting of restricted stock
(1,692)
(1,467)
Payments on debt
(302)
(282)
Other
674 
48 
Net cash used in financing activities
(50,589)
(946)
Effect of exchange rates on cash
(455)
396 
Net change in cash and cash equivalents
(64,103)
14,604 
CASH AND CASH EQUIVALENTS, beginning of period
163,153 
124,377 
CASH AND CASH EQUIVALENTS, end of period
99,050 
138,981 
Supplemental disclosure of cash flow information:
 
 
Interest
719 
861 
Income taxes
$ 6,870 
$ 3,525 
ACCOUNTING PRINCIPLES AND PRACTICES
SIGNIFICANT ACCOUNTING POLICIES
NOTE 1:
ACCOUNTING PRINCIPLES AND PRACTICES

The accompanying unaudited condensed consolidated financial statements (“financial statements”) are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures usually found in financial statements prepared in accordance with GAAP have been condensed or omitted. The unaudited financial statements reflect all adjustments which, in the opinion of management, are necessary to fairly state the financial position, results of operations and cash flows for the interim periods presented. We follow the same accounting policies for preparing both quarterly and annual financial information. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Our 2011 fiscal year will include 52 weeks and our 2010 fiscal year included 53 weeks, with the 53rd week falling in our fourth fiscal quarter.

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, 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 Chartis. Placing the collateral in the Trust allows us to manage the investment of the assets. In conjunction with the creation of the Trust, we expanded our accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2010 to include the following. Our quarterly financial information was prepared in accordance with these accounting policies.

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. All of our investments are classified as held-to-maturity.
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. The specific methodologies include comparing the security with similar publicly traded securities and estimating discounted cash flows.
Recent Accounting Pronouncements

In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or two separate but consecutive statements. The new guidance will be effective for years beginning after December 15, 2011.

In September 2011, the FASB issued guidance on testing goodwill 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 a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit, if any. If an entity determines that the fair value of a reporting unit is less than its carrying amount, the two-step goodwill impairment test is not required. The new guidance will be effective for us beginning December 31, 2011; early adoption is permitted.

Subsequent Events
We evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the day these financial statements were issued.

As of September 30, 2011, $46 million remained available for repurchase of common stock under the current authorized stock repurchase program, which has no expiration date. Subsequent to September 30, 2011, we repurchased 0.4 million shares of our common stock for approximately $4.6 million, resulting in approximately $42 million remaining under our existing stock repurchase program.

FAIR VALUE MEASUREMENT
FAIR VALUE MEASUREMENT
NOTE 2:
FAIR VALUE MEASUREMENT

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We apply a fair value hierarchy which prioritizes the inputs used to measure fair value:

Level 1: Investments valued using quoted market prices in active markets for identical assets or liabilities
Level 2: Investments valued using other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Investments with no observable inputs and, therefore, are valued using significant management judgment

The carrying value of our cash and cash equivalents, restricted cash, and accounts receivable approximates fair value due to their short term nature. Cash equivalents consist of money market funds and investments with original maturities of three months or less and are classified within Level 1 of the fair value hierarchy. Our cash equivalents included money market funds totaling $63 million and $133 million for September 30, 2011 and December 31, 2010, respectively.

RESTRICTED CASH AND INVESTMENTS
RESTRICTED CASH AND INVESTMENTS
NOTE 3:
RESTRICTED CASH AND INVESTMENTS

Restricted cash, accrued interest, and investments consist primarily of collateral that has been provided or pledged to insurance carriers 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, highly rated investment grade debt securities, and cash-backed instruments.

Prior to March 11, 2011, Chartis held the majority of the restricted cash collateralizing our self-insured workers' compensation policies. As of March 11, 2011, we entered into an agreement with Chartis and the Bank of New York Mellon creating a trust at the Bank of New York Mellon which holds the majority of our collateral obligations. The majority of funds in the Trust have been invested in highly rated investment grade U.S. Treasury Securities, U.S. Agency Debentures, U.S. Agency Mortgages, Corporate Securities, and Municipal Securities.
 
The following is a summary of restricted cash and investments (in millions):
 
 
September 30,
2011
 
December 31,
2010
Cash collateral held by insurance carriers
$
21.3

 
$
108.7

Cash and cash equivalents held in Trust (1)
28.3

 

Investments held in Trust
80.9

 

Cash collateral backing letters of credit
4.1

 
4.1

Cash collateral backing surety bonds

 
3.0

Other
1.9

 
4.3

Total Restricted cash and investments
$
136.5

 
$
120.1

__________________
(1)Included in this amount is $0.8 million of accrued interest at September 30, 2011.

The following is a summary of held-to-maturity investments (in millions):
 
September 30, 2011
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
Municipal securities
$
42.5

 
$
0.7

 
$
(0.1
)
 
$
43.1

Corporate bonds
17.1

 
0.1

 

 
17.2

Asset backed bonds
14.3

 
0.1

 

 
14.4

State government and agency securities
4.5

 

 

 
4.5

United States Treasury securities
2.5

 

 

 
2.5

 
$
80.9

 
$
0.9

 
$
(0.1
)
 
$
81.7



The amortized cost and fair value by maturity of investments are as follows (in millions):

 
September 30, 2011
 
Amortized Cost
 
Fair Value
Due in one year or less
$
13.5

 
$
13.5

Due after one year through five years
39.6

 
40.0

Due after five years through ten years
27.8

 
28.2

 
$
80.9

 
$
81.7


PROPERTY AND EQUIPMENT, NET
PROPERTY AND EQUIPMENT, NET
NOTE 4:
PROPERTY AND EQUIPMENT, NET

Property and equipment are stated at cost and consist of the following (in millions):
 
 
September 30,
2011
 
December 31,
2010
Buildings and land
$
23.8

 
$
23.5

Computers and software
80.6

 
71.2

Cash dispensing machines
4.5

 
11.4

Furniture and equipment
8.6

 
8.6

Construction in progress
2.4

 
2.7


119.9

 
117.4

Less accumulated depreciation and amortization
(65.2
)
 
(63.4
)
 
$
54.7

 
$
54.0


Capitalized software costs, net of accumulated amortization, were $35.5 million and $32.8 million as of September 30, 2011 and December 31, 2010, respectively, excluding amounts in Construction in progress. Construction in progress consists primarily of leasehold improvements and internally developed software.

Depreciation and amortization of property and equipment totaled $3.4 million and $3.2 million for the thirteen weeks ended September 30, 2011 and September 24, 2010, respectively. Depreciation and amortization of Property and equipment totaled $9.9 million for each of the thirty-nine weeks ended September 30, 2011 and September 24, 2010.

GOODWILL AND INTANGIBLE ASSETS
INTANGIBLE ASSETS
NOTE 5:
GOODWILL AND INTANGIBLE ASSETS

We completed two acquisitions during the thirty-nine weeks ended September 30, 2011 for a total purchase price of $17.4 million of which $10.6 million will be paid in the future. 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. 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.

The following is a summary of the changes in carrying amount of Goodwill for the thirty-nine weeks ended September 30, 2011 (in millions):
 
Carrying Amount
Goodwill as of December 31, 2010
$
36.9

Acquisitions
11.2

Goodwill as of September 30, 2011
$
48.1


The following table presents our purchased intangible assets other than Goodwill (in millions):
 
 
September 30, 2011
 
December 31, 2010
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizable intangible assets (1):
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
19.1

 
$
(7.7
)
 
$
11.4

 
$
18.0

 
$
(6.2
)
 
$
11.8

Trade name/trademarks
3.3

 
(1.2
)
 
2.1

 
3.0

 
(0.9
)
 
2.1

Non-compete agreements
2.5

 
(1.6
)
 
0.9

 
2.1

 
(1.3
)
 
0.8

 
$
24.9

 
$
(10.5
)
 
$
14.4

 
$
23.1

 
$
(8.4
)
 
$
14.7

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
     Trade name/trademarks
$
5.8

 
$

 
$
5.8

 
$
5.8

 
$

 
$
5.8

____________________
(1)Excludes intangible assets that are fully amortized or written off due to impairment.

Total amortization expense was $0.8 million and $0.7 million for the thirteen weeks ended September 30, 2011 and September 24, 2010, respectively. Amortization expense was $2.1 million and $2.0 million for each of the thirty-nine weeks ended September 30, 2011 and September 24, 2010, respectively.

Amortization expense of intangible assets for the next five years and thereafter is as follows (in millions):
 
Remainder of 2011
$
0.8

2012
3.1

2013
2.7

2014
2.6

2015
2.6

Thereafter
2.6

 
$
14.4

 
We did not perform an interim impairment test of our goodwill and indefinite-lived intangibles assets during the thirty-nine weeks ended September 30, 2011 as we noted no significant indicators of impairment.

WORKERS' COMPENSATION INSURANCE AND RESERVES
WORKERS COMPENSATION INSURANCE AND RESERVES
NOTE 6:
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. Our workers’ compensation insurance policies are renewed annually. We renewed our coverage with Chartis effective July 1, 2011 for the period July 2011 through June 2012. For all prior periods, we had coverage with Chartis and 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.

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. Management evaluates the adequacy of the workers’ compensation reserves in conjunction with an independent quarterly actuarial assessment. Changes in the self-insurance reserve estimates are reflected in the income statement in the period when the changes in estimates are made.

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 September 30, 2011, the weighted average rate was 3.0%. The claim payments are made over an estimated weighted average period of approximately 5.5 years.

Our workers’ compensation reserves include estimated expenses related to claims above our deductible limits (“excess claims”) and 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 September 30, 2011, the weighted average rate was 4.9%. The claim payments are made and the corresponding reimbursements from our insurance carriers are received over an estimated weighted average period of approximately 19.4 years. The discounted workers’ compensation reserve for excess claims and the corresponding receivable for the insurance on excess claims were $25.9 million and $25.8 million as of September 30, 2011 and December 31, 2010, 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. These excess claims have been presented to the state guaranty funds of the states in which the claims originated. Certain of these excess claims have been rejected by the state guaranty funds due to statutory eligibility limitations. We have recorded a valuation allowance of $7.3 million against all of the Troubled Insurance Companies insurance receivables as of September 30, 2011 and substantially all of the Troubled Insurance Companies insurance receivables as of December 31, 2010. The receivable for the insurance on excess claims, net of the valuation allowance, is included in Other assets, net in the accompanying Consolidated Balance Sheets.

Our total discounted workers’ compensation claims reserves were $188.0 million and $187.3 million as of September 30, 2011 and December 31, 2010, respectively. Workers’ compensation expense totaling $14.8 million and $12.7 million was recorded for the thirteen weeks ended September 30, 2011 and September 24, 2010, respectively. Workers’ compensation expense totaling $37.4 million and $31.0 million was recorded for the thirty-nine weeks ended September 30, 2011 and September 24, 2010, respectively.

COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
NOTE 7:
COMMITMENTS AND CONTINGENCIES

Revolving credit facility

On September 30, 2011, we entered into an Amended and Restated 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, which expires September 2016, amends and restates our existing $80 million revolving credit facility with Wells Fargo Capital Finance, LLC and Bank of America, N.A., which was set to expire in June of 2012.
The maximum amount we can borrow under the Revolving Credit Facility of $80 million is subject to certain borrowing limits (the "Borrowing Base"). We are limited to the sum of 85% of our eligible accounts receivable, and 75% of the liquidation value of our Tacoma headquarters office building not to exceed $15 million. The amount is then 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 September 30, 2011, the maximum $80 million was available under the Revolving Credit Facility and letters of credit in the amount of $11 million had been issued against the facility, leaving an unused portion of $69 million.
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 September 30, 2011 was $69 million and the amount of cash and cash equivalents under control agreements was $105 million for a total of $174 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%
Equal to or greater than $20 million to equal to or less than $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 would become responsible if we became 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. Prior to March 11, 2011, Chartis held the majority of the restricted cash collateralizing our self-insured workers' compensation policies. As of March 11, 2011, we entered into an agreement with Chartis and the Bank of New York Mellon creating a trust at the Bank of New York Mellon which holds the majority of our collateral obligations.
 
Our surety bonds are issued by independent insurance companies on our behalf. 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.

At September 30, 2011 and December 31, 2010, we had provided our insurance carriers and certain states with commitments in the form and amounts listed below (in millions):
 
 
September 30,
2011
 
December 31,
2010
Cash collateral held by insurance carriers
$
21.3

 
$
108.7

Cash and cash equivalents held in Trust (1)(2)
28.3

 

Investments held in Trust (1)
80.9

 

Letters of credit (3)
15.0

 
15.1

Surety bonds (4)
16.7

 
16.8

Total collateral commitments
$
162.2

 
$
140.6

____________________
(1)
During the first quarter of 2011, we entered into an agreement with Chartis and the Bank of New York Mellon creating a trust at the Bank of New York Mellon which holds the majority of our collateral obligations. 
(2)
Included in this amount is $0.8 million of accrued interest at September 30, 2011.
(3)
We had $4.1 million of restricted cash collateralizing our letters of credit at both September 30, 2011 and December 31, 2010.
(4)
We had $3.0 million of restricted cash collateralizing our surety bonds at December 31, 2010. During the second quarter of 2011, our obligation to collateralize these surety bonds was released.

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.

STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION
NOTE 8:
STOCK-BASED COMPENSATION

Stock-based compensation includes expense charges for all stock-based awards to employees and directors. Such awards include restricted stock awards, performance share units, stock options, and shares purchased under an employee stock purchase plan (“ESPP”).

Total stock-based compensation expense was (in millions):
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
September 30,
2011
 
September 24,
2010
 
September 30,
2011
 
September 24,
2010
Restricted stock and performance share units expense
$
1.3

 
$
1.2

 
$
5.1

 
$
4.4

Stock option expense
0.1

 
0.2

 
0.3

 
0.8

ESPP expense
0.1

 
0.1

 
0.2

 
0.2

Total stock-based compensation
$
1.5

 
$
1.5

 
$
5.6

 
$
5.4


Restricted stock and performance share units

Stock-based awards are issued under our 2005 Long-Term Equity Incentive Plan. Restricted stock is granted to officers and key employees and vests over periods ranging from three to four years. Stock granted to our directors vested immediately. Restricted stock-based compensation expense is calculated based on the grant-date market value. We recognize stock-based compensation expense on a straight-line basis over the vesting period for the awards that are expected to vest.

Performance share units have been granted to executives since 2010. Vesting of the performance share units is contingent upon the achievement of certain financial 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 stock and performance share units activity was (shares in thousands):
 
 
Thirty-nine weeks ended
 
September 30, 2011
 
Shares
 
Price (1)
Nonvested at beginning of period
882

 
$
13.14

Granted
759

 
$
14.76

Vested
(355
)
 
$
13.86

Forfeited
(17
)
 
$
12.90

Nonvested at the end of the period
1,269

 
$
13.92

_____________________
(1)
Weighted average market price on grant-date.

As of September 30, 2011, total unrecognized stock-based compensation expense related to non-vested restricted stock was approximately $7.3 million, of which $6.6 million is currently estimated to be recognized over a weighted average period of 1.6 years through 2015. As of September 30, 2011, total unrecognized stock-based compensation expense related to performance share units assuming achievement of maximum financial goals was approximately $6.2 million, of which $2.0 million is currently estimated to be recognized over a weighted average period of 2 years through 2014.

Stock options

Our 2005 Long-Term Equity Incentive Plan provides for both nonqualified stock options and incentive stock options (collectively, “stock options”) for directors, officers, and certain employees.

Stock option activity follows (shares in thousands):
 
 
Thirty-nine weeks ended
 
September 30, 2011
 
Shares
 
Price (1)
Outstanding, December 31, 2010
1,119

 
$
15.62

Granted

 
$

Exercised
(8
)
 
$
13.20

Expired/Forfeited

 
$

Outstanding, September 30, 2011
1,111

 
$
15.64


 
 
 
Exercisable, September 30, 2011
813

 
$
18.03

Options expected to vest, September 30, 2011
298

 
$
9.14

____________________
(1)
Weighted average exercise price.

There were no stock options granted during the period ending September 30, 2011. A summary of the weighted average assumptions and results for stock options granted during the period ending September 24, 2010 is as follows:
 
 
Thirty-nine weeks ended
 
September 30,
2011
 
September 24,
2010
Expected life (in years)

 
3.36

Expected volatility
%
 
59.6
%
Risk-free interest rate
%
 
1.3
%
Expected dividend yield
%
 
0.0
%
Weighted average fair value of options granted during the period
$

 
$
6.24


As of September 30, 2011, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $0.1 million, which is currently estimated to be recognized over a weighted average period of 0.5 years through 2013.

Employee stock purchase plan

Our 2010 Employee Stock Purchase Plan (“2010 ESPP”) became effective on July 1, 2010, replacing our 1996 Employee Stock Purchase Plan, which expired on June 30, 2010. We have reserved for purchase under the 2010 ESPP 1.0 million shares of common stock. During the thirty-nine weeks ended September 30, 2011 and September 24, 2010, participants purchased 57,000 and 62,000 shares, respectively, from the plans for cash proceeds of $0.7 million for each period.

STOCK REPURCHASES
STOCK REPURCHASES
NOTE 9:
STOCK REPURCHASES

Under our authorized stock repurchase programs, we repurchased and retired 3.0 million shares of our common stock during the thirteen weeks ended September 30, 2011 and 3.9 million shares of our common stock during the thirty-nine weeks ended September 30, 2011, for a total amount of $37 million and $50 million including commissions, respectively. On July 25, 2011, our Board of Directors approved a new program to repurchase an additional $75 million of our outstanding common stock. As of September 30, 2011, $46 million remained available for repurchase of common stock under the current authorization, which has no expiration date. We did not repurchase any common stock during 2010.

Subsequent to September 30, 2011, we repurchased 0.4 million shares of our common stock for approximately $4.6 million resulting in approximately $42 million remaining under our existing stock repurchase program.

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.
INCOME TAXES
INCOME TAXES
NOTE 10:
INCOME TAXES

The effective tax rate was 38.8% for both thirteen and thirty-nine weeks ended September 30, 2011. The principal difference between the statutory federal income tax rate of 35% and our effective income tax rate results from state and foreign income taxes, federal tax credits, and certain non-deductible expenses. As of September 30, 2011 and December 31, 2010, we had unrecognized tax benefits of $1.6 million recorded in accordance with current accounting guidance on uncertain tax positions. Our uncertain tax position accrual was related to various tax jurisdictions.

NET INCOME PER SHARE
NET INCOME PER SHARE
NOTE 11:
NET INCOME PER SHARE

Adjusted net income and diluted common shares were calculated as follows (in millions except per share amounts):
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
September 30,
2011
 
September 24,
2010
 
September 30,
2011
 
September 24,
2010
   Net income
$
13.9

 
$
10.2

 
$
23.2

 
$
15.9

 
 
 
 
 
 
 
 
Weighted average number of common shares used in basic net income per common share
41.6

 
43.3

 
42.8

 
43.2

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

 
0.2

 
0.4

 
0.3

Weighted average number of common shares used in diluted net income per common share
42.0

 
43.5

 
43.2

 
43.5

   Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.33

 
$
0.24

 
$
0.54

 
$
0.37

Diluted
$
0.33

 
$
0.23

 
$
0.54

 
$
0.37

 
 
 
 
 
 
 
 
Antidilutive stock options and other
1.1

 
1.1

 
0.7

 
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 and non-vested restricted stock except where their inclusion would be antidilutive.

Antidilutive 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. Antidilutive shares also include in-the-money options and non-vested restricted stock for which the sum of the assumed proceeds, including unrecognized compensation expense, exceeds the average stock price during the periods presented.