TRUEBLUE, INC.
COMMENT ON FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q, other than purely historical information,
including estimates, projections, statements relating to our business plans,
objectives and expected operating results, the impact of and our ongoing
response to COVID-19, and the assumptions upon which those statements are based,
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
involve risks and uncertainties, and future events and circumstances could
differ significantly from those anticipated in the forward-looking statements.
These forward-looking statements generally are identified by the words
"believe," "project," "expect," "anticipate," "estimate," "intend," "strategy,"
"future," "opportunity," "goal," "plan," "may," "should," "will," "would," "will
be," "will continue," "will likely result," and similar expressions.
Forward-looking statements are based on current expectations and assumptions
that are subject to risks and uncertainties, which may cause actual results to
differ materially from those expressed or implied in our forward-looking
statements, including the risks and uncertainties described in "Management's
Discussion and Analysis" (Part I, Item 2 of this Form 10-Q),"Quantitative and
Qualitative Disclosures about Market Risk" (Part I, Item 3 of this Form 10-Q),
and "Risk Factors" (Part II, Item 1A of this Form 10-Q). We undertake no duty to
update or revise publicly any of the forward-looking statements after the date
of this report or to conform such statements to actual results or to changes in
our expectations, whether because of new information, future events, or
otherwise.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide the reader of our accompanying
unaudited consolidated financial statements ("financial statements") with a
narrative from the perspective of management on our financial condition, results
of operations, liquidity and certain other factors that may affect future
results. MD&A is provided as a supplement to, and should be read in conjunction
with, our Annual Report on Form 10-K for the fiscal year ended December 29,
2019 , and our financial statements and the accompanying notes to our financial
statements.
OVERVIEW
TrueBlue, Inc. (the "company," "TrueBlue," "we," "us" and "our") is a leading
provider of specialized workforce solutions that help clients achieve business
growth and improve productivity. In 2019, we connected approximately 724,000
people with work and served approximately 139,000 clients. We report our
business as three reportable segments: PeopleReady , PeopleManagement and
PeopleScout . See Note 11: Segment Information, to our consolidated financial
statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional
details on our operating segments and reportable segments. Our PeopleReady
segment offers on-demand, industrial staffing; our PeopleManagement segment
offers contingent, on-site industrial staffing and commercial driver services;
and our PeopleScout segment offers recruitment process outsourcing ("RPO") and
managed service provider ("MSP") solutions to a wide variety of industries.
The global economy and our business have been dramatically affected by the
COVID-19 pandemic. We continue to monitor its impact on all aspects of our
business. Throughout the pandemic, our business has remained open and we have
continued to provide key services to essential businesses. However, the
preventative measures and individual precautions taken to help curb the spread
of COVID-19, and the resulting negative impact on the economy, continue to have
a severe adverse impact on client demand for our services and our business
results.
Our first priority, with regard to COVID-19, continues to be the safety, health
and hygiene of our associates, employees, clients, suppliers and others with
whom we partner in our business activities to continue our operations in this
unprecedented environment. We implemented comprehensive measures across our
businesses to keep our workers and clients healthy and safe, including adherence
to guidance from the Centers for Disease Control and Prevention , World Health
Organization , Occupational Safety and Health Administration and other key
authorities.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
In response to the rapidly changing market conditions as a result of COVID-19,
commencing in March 2020 , we have taken actions to reduce our operating expenses
while preserving the key strengths of our business to ensure we are prepared
when business conditions improve. Additionally, in June 2020 , we amended our
credit agreement to further enhance our liquidity position and we have
implemented initiatives to improve cash flow. Our cost management strategies are
on track and continue to preserve our operating results and liquidity. At this
time, we have ample liquidity to satisfy our cash needs. However, the long-term
impacts of the pandemic are difficult to predict. Accordingly, we will continue
to evaluate the nature and extent of the impact of COVID-19 on our business,
consolidated results of operations, financial condition, and liquidity.
We continue to monitor this rapidly evolving situation and guidance from
domestic and international authorities, including federal, state and local
public health authorities, and may take additional actions based on their
recommendations. There may be developments outside our control requiring us to
adjust our operating plan. As such, given the dynamic nature of this situation,
it is difficult to estimate the impacts of COVID-19 on our financial condition,
results of operations or cash flows in the future. For additional discussion on
the uncertainties and business risks associated with COVID-19, refer to "Risk
Factors" in Part II, Item 1A of this Form 10-Q.
Third quarter of 2020 highlights
Revenue from services
Total company revenue declined 25.5% to $474.5 million for the thirteen weeks
ended September 27, 2020 , compared to the same period in the prior year. The
decline was due to a significant drop in client demand associated with
government and societal actions taken to address COVID-19. In particular, the
preventive measures and individual precautions taken to help curb the spread of
COVID-19 had severe adverse impacts on our operations and business results. Many
of our clients have been severely impacted by COVID-19 and have reduced their
need for our staffing services, which has resulted in lower revenue. During the
third quarter, we saw improving trends when compared to the second quarter of
2020 with year-over-year revenue declines of 25.5% compared to 39.0% in the
second quarter. This steady improvement in the third quarter was broad-based
across most of the industries and geographies we serve.
PeopleReady , our largest segment, experienced a revenue decline of 28.9%.
PeopleManagement, our lowest margin segment, experienced a revenue decline of
7.6%. PeopleManagement supplies an outsourced workforce that involves multiyear,
multi-million dollar on-site or driver relationships. These types of client
engagements are often more resilient in an economic downturn. PeopleScout , our
highest margin segment, experienced a revenue decline of 47.6%. PeopleScout has
a large number of clients in the travel and leisure sectors which continue to be
significantly impacted by COVID-19.
Gross profit margin
Total company gross profit as a percentage of revenue for the thirteen weeks
ended September 27, 2020 , decreased by 300 basis points to 23.3%, compared to
26.3% for the same period in the prior year. Our staffing businesses contributed
230 basis points of the decline due to 180 basis points from pressure on our
bill and pay rates and the remainder primarily due to client mix. The bill and
pay rate pressure was caused by higher pay rates to entice associates to take
work assignments given COVID-19 health concerns and additional federal
unemployment benefits. As with prior recessions, our ability to pass through
higher costs plus our standard markup in our bill rates was hampered due to a
variety of economic factors negatively impacting our client's businesses. Our
PeopleScout business contributed approximately 70 basis points to the decline
primarily due to client mix and reduced volumes.
Selling, general and administrative expense ("SG&A")
Total company SG&A expense decreased by $40.0 million to $90.1 million , or 19.0%
of revenue for the thirteen weeks ended September 27, 2020 , compared to $129.8
million , or 20.4% of revenue for the same period in the prior year. The decrease
in SG&A expense is primarily due to comprehensive actions we put in place
beginning in March 2020 to dramatically reduce costs in response to rapidly
changing market conditions due to COVID-19. The actions we took reduced SG&A
expense by 30.6% for the thirteen weeks ended September 27, 2020 , compared to
the same period in the prior year. We have taken steps to reduce SG&A expense
while preserving the key strengths of our business to ensure we are prepared
when business conditions improve. The decrease in SG&A expense benefited from
$4.1 million of employee retention credits made available under the Canada
Emergency Wage Subsidy for Canadian employees and the Australian JobKeeper
subsidy for Australian employees during the thirteen weeks ended September 27,
2020 . We will continue to monitor and manage our SG&A expense in line with our
cost reduction plans.
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Income from operations
Total company income from operations was $12.7 million for the thirteen weeks
ended September 27, 2020 , compared to $29.2 million for the same period in the
prior year. The decrease in income from operations was primarily due to the
significant drop in client demand associated with government and societal
actions taken to address COVID-19. The significant drop in demand, increased
price sensitivity, increased contingent worker wages and preventive measures
taken to help curb the spread of COVID-19 had severe adverse impacts on our
operations and business results. The declines were partially offset by the
decisive and comprehensive cuts to SG&A expense in line with management's plans
to preserve the key strengths of our business.
Net income
Net income was $8.8 million , or $0.25 per diluted share for the thirteen weeks
ended September 27, 2020 , compared to $26.7 million , or $0.68 per diluted share
for the same period in the prior year. Net income includes income tax expense of
$3.7 million resulting from an effective tax rate of 29.9%, compared to 10.1%
for the same period in the prior year. Our effective tax rate was lower in the
prior year as a result of a greater benefit from the federal Work Opportunity
Tax Credit ("WOTC"). WOTC is designed to encourage employers to hire workers
from certain targeted groups with higher than average unemployment rates.
Additional highlights
We are focused on capital management as a top priority. In response to the
rapidly changing market conditions as a result of COVID-19, we have taken swift
action to reduce operating costs and other cash outflows to preserve capital to
fund working capital needs. Additionally, on March 16, 2020 , we amended our
credit agreement which extended the maturity of the revolving credit facility
established thereunder ("Revolving Credit Facility") to March 16, 2025 . On June
24, 2020 , we further amended our revolving credit agreement, which modified
terms of our financial covenants as well as certain other provisions. Under the
amended credit agreement, we have the option, subject to lender approval, to
increase the Revolving Credit Facility to $450.0 million . As of September 27,
2020 , we are in a strong financial position with cash and cash equivalents of
$28.2 million , total debt outstanding of $1.5 million and $138.5 million
available under the most restrictive covenant of our Revolving Credit Facility
at this time for total liquidity of $167.0 million .
RESULTS OF OPERATIONS
Total company results
The global economy and our business have been dramatically affected by the
COVID-19 pandemic. We continue to monitor its impact on all aspects of our
business. Throughout the pandemic, our business has remained open and we have
continued to provide key services to essential businesses. However, the
preventative measures and individual precautions taken to help curb the spread
of COVID-19 and the resulting negative impact on the economy, continue to have a
severe adverse impact on client demand for our services and our business
results.
Our first priority, with regard to COVID-19, has been to ensure the safety,
health and hygiene of our associates, employees, clients, suppliers and others
with whom we partner in our business activities to continue our operations in
this unprecedented environment. We implemented comprehensive measures across our
businesses to keep our workers and clients healthy and safe, including adherence
to guidance from the Centers for Disease Control and Prevention , World Health
Organization , Occupational Safety and Health Administration and other key
authorities. We formed a specialized task force tracking the most up-to-date
developments and safety standards, and created an internal information hub with
safety protocols, dashboards, FAQs, and daily reporting by location on the
COVID-19 impact. In addition to posting TrueBlue's action plan on our external
websites, we are actively sharing information on how companies and workers can
protect themselves via ongoing emails, social outreach, webinars and other
digital communications. We are fully leveraging our JobStackTM app to help
companies and workers connect safely through a digital environment, and are
rolling out a new virtual onboarding capability to minimize in-person branch
visits. We are also leveraging our AffinixTM technology to enable companies to
connect with permanent talent through virtual hiring and sourcing. Working
closely with clients to enforce safety standards, we are supporting efforts in
providing masks for associates, hand sanitizer, workplace disinfecting, social
distancing, and infrared temperature checks. We instruct our workers to stay
home if they are not feeling well or have been exposed to COVID-19. Immediate
notification and self-quarantine protocols are in place if a staff member,
associate or client's employee is exposed to COVID-19, and our Field Safety
Specialists closely evaluate any assignments related to clean-up of potentially
infectious job sites. To ensure business continuity and support for clients who
need workers for essential services, we established a Centralized Branch Support
Center and are ready to implement Regional Command Centers as needed to serve as
backup for our 600+ branches. Our branches follow strict sanitation and social
distancing guidelines. In addition, across the TrueBlue organization, we
suspended all
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international travel and restricted nonessential domestic travel for our
employees and are providing remote work capabilities for our Tacoma and
In response to the rapidly changing market conditions as a result of COVID-19,
we have taken steps to reduce SG&A expense and other cash outflows. We continue
to monitor this evolving situation and guidance from domestic and international
authorities, including federal, state and local public health authorities, and
may take additional actions based on their recommendations. There may be
developments outside our control requiring us to adjust our operating plan. As
such, given the dynamic nature of this situation, it is difficult to estimate
the impacts of COVID-19 on our financial condition, results of operations or
cash flows in the future. However, we do expect that it will continue to have a
material adverse impact on our future revenue, overall profitability and
liquidity. For additional discussion on the uncertainties and business risks
associated with COVID-19, refer to "Risk Factors" in Part II, Item 1A of this
Quarterly Report on Form 10-Q.
The following table presents selected financial data:
Thirteen weeks ended Thirty-nine weeks ended
(in thousands, except percentages Sep 27, Sep 29, Sep 27, Sep 29,
and per share data) 2020 % of revenue 2019 % of revenue 2020 % of revenue 2019 % of revenue Revenue from services$ 474,530 $ 636,793 $ 1,327,726 $
1,777,739
Total revenue growth (decline) % (25.5) % (6.4) % (25.3) % (3.9) % Gross profit$ 110,464 23.3 %$ 167,735 26.3 %$ 319,848 24.1 %$ 471,113 26.5 % Selling, general and administrative 90,100 19.0 % 129,800 20.4 % 304,681 22.9 % 383,745 21.6 %
expense
Depreciation and amortization 7,652 1.6 % 8,749 1.4 % 24,002 1.8 % 28,528 1.6 % Goodwill and intangible asset - - 175,189
-
impairment charge Income (loss) from operations 12,712 2.7 % 29,186 4.6 % (184,024) (13.9) % 58,840 3.3 % Interest and other income (expense), (174)
471
net (323)
1,851
Income (loss) before tax expense 12,538
29,657
(benefit) (184,347)
60,691
Income tax expense (benefit) 3,743 2,981 (34,480) 6,333 Net income (loss)$ 8,795 1.9 %$ 26,676 4.2 %$ (149,867) (11.3) %$ 54,358 3.1 % Net income (loss) per diluted share$ 0.25 $ 0.68 $ (4.20) $
1.38
We report our business as three reportable segments described below and in Note 11: Segment Information, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q. •PeopleReady provides access to reliable workers inthe United States ,Canada andPuerto Rico through a wide range of staffing solutions for on-demand contingent general and skilled labor.PeopleReady connects people to work in a broad range of industries that include construction, manufacturing and logistics, warehousing and distribution, waste and recycling, energy, retail, hospitality, and others. As ofDecember 29, 2019 , we had a network of 614 branches across all 50 states,Canada andPuerto Rico . Complementing our branch network is our mobile application, JobStack, which connects workers with jobs, creates a virtual exchange between our workers and clients, and allows our branch resources to expand their recruiting and sales efforts and service delivery. JobStack is helping to competitively differentiate our services, expand our reach into new demographics, and improve both service delivery and work order fill rates as we lead our business into a digital future. •PeopleManagement predominantly provides a wide range of on-site contingent staffing and workforce management solutions to larger multi-site manufacturing, distribution and fulfillment clients. In comparison withPeopleReady , services are larger in scale, longer in duration, and dedicated service teams are located at the client's facility. EffectiveDecember 30, 2019 (first day of our 2020 fiscal year), we combined our two on-site contingent industrial workforce operating segments, Staff Management | SMX andSIMOS Insourcing Solutions ("SIMOS") into one operating segment titled "On-Site," which continues to be reported under PeopleManagement. On-Site includes our branded service offerings for hourly (Staff Management | SMX) and productivity-based (SIMOS) industrial staffing solutions serving the same industries and similar clients. PeopleManagement also includes Centerline Drivers ("Centerline"), which specializes in dedicated and contingent commercial truck drivers to the transportation and distribution industries. Despite the recession, year-to-date new client wins exceeded new client wins in the comparable prior-year period primarily due to increased investment in sales. We will continue making investments in sales resources to expand into under-penetrated geographic markets as well as programs to support client and associate care and retention. Page - 22
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•PeopleScout provides recruitment process outsourcing of end-to-end talent
acquisition services from candidate sourcing and engagement through the
onboarding of employees as well as employer branding services. Our solution is
highly scalable and flexible, which allows for the outsourcing of all or a
subset of skill categories across a series of recruitment, hiring and onboarding
steps. Our solution delivers improved talent quality and candidate experience,
faster hiring, increased scalability, lower cost of recruitment, greater
flexibility, and increased compliance. Our clients outsource the recruitment
process to PeopleScout in all major industries and jobs. We leverage our
proprietary technology platform (Affinix) for sourcing, screening and delivering
a permanent workforce, along with dedicated service delivery teams to work as an
integrated partner with our clients. Affinix uses artificial intelligence and
machine learning to search the web and source candidates, which means we can
create the first slate of candidates for a job posting within minutes rather
than days.
Our PeopleScout reportable segment also includes a managed service provider
business, which provides clients with improved quality and cost management of
their contingent labor vendors.
Revenue from services
Revenue from services by reportable segment was as follows:
Thirteen weeks ended Thirty-nine weeks ended
(in thousands, except Sep 27, Growth (decline) Segment % of Sep 29, Segment % of Sep 27, Growth (decline) Segment % of Sep 29,
percentages) 2020 % total 2019 total 2020 % total 2019 Segment % of total
Revenue from services:
PeopleReady $ 293,546 (28.9) % 61.9 % $ 413,132 64.9 % $ 801,991 (27.7) % 60.4 % $ 1,109,261 62.4 %
PeopleManagement 147,241 (7.6) 31.0 159,315 25.0 407,516 (13.5) 30.7 470,889 26.5
PeopleScout 33,743 (47.6) 7.1 64,346 10.1 118,219 (40.2) 8.9 197,589 11.1
Total company $ 474,530 (25.5) % 100.0 % $ 636,793 100.0 % $ 1,327,726 (25.3) % 100.0 % $ 1,777,739 100.0 %
The workforce solutions business is dependent on the overall strength of the
labor market. Clients tend to use contingent workers to supplement their
existing workforce and generally hire permanent workers when long-term demand is
expected to increase. As a consequence, our revenue from services tends to
increase quickly when the economy begins to grow. Conversely, our revenue
decreases quickly when the economy begins to weaken and thus contingent staff
positions are eliminated, permanent hiring is frozen and turnover replacement
diminishes.
Total company revenue declined 25.5% to $474.5 million and 25.3% to $1,327.7
million for the thirteen and thirty-nine weeks ended September 27, 2020 ,
compared to the same periods in the prior years, respectively. The decline was
due to a significant drop in client demand associated with government and
societal actions taken to address COVID-19. In particular, the outbreak and
preventive measures taken to help curb the spread of COVID-19 had severe adverse
impacts on our operations and business results. Many of our clients have been
severely impacted by COVID-19 and have reduced their need for our staffing
services, which has resulted in lower revenue. During the third quarter, we saw
improving trends when compared to the second quarter of 2020 with year-over-year
revenue declines of 25.5% compared to 39.0% in the second quarter. This
improvement in the third quarter was broad-based across most of the industries
and geographies we serve.
PeopleReady
PeopleReady revenue declined to $293.5 million for the thirteen weeks ended
September 27, 2020 , a 28.9% decrease compared to the same period in the prior
year, and declined to $802.0 million for the thirty-nine weeks ended
September 27, 2020 , a 27.7% decrease compared to the same period in the prior
year. The decline was due to a significant drop in client demand associated with
government and societal actions taken to address the impact of COVID-19. In
particular, the outbreak and preventive measures taken to help curb the spread
of COVID-19 had severe adverse impacts on our operations and business results.
Many of the clients we serve have been severely impacted by COVID-19 and have
reduced their need for our staffing services, which has resulted in lower
revenue. PeopleReady has experienced a moderate improvement in revenue trends in
the third quarter of 2020, compared to the second quarter of 2020 with
year-over-year revenue declines in the third quarter of 28.9% compared to 43.4%
in the second quarter. The improvement was broad-based across most geographies
and industries, driven primarily by the construction, manufacturing, services
and transportation industries.
We believe the year-over-year decline was moderated by the use of our
industry-leading JobStack mobile application that digitally connects workers
with jobs. During the third quarter of 2020, PeopleReady dispatched
approximately 726,000 shifts via JobStack and achieved a digital fill rate of
51%. JobStack has approximately 26,100 client users as of the third quarter of
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2020, or an increase of 37% compared to the same period in the prior year.
JobStack is helping us safely connect people with work during this time of
crisis.
PeopleManagement
PeopleManagement revenue declined to $147.2 million for the thirteen weeks ended
September 27, 2020 , a 7.6% decrease compared to the same period in the prior
year, and declined to $407.5 million for the thirty-nine weeks ended
September 27, 2020 , a 13.5% decrease compared to the same period in the prior
year. Many of the clients we serve have been impacted by COVID-19 and have
reduced their need for our staffing services, which has resulted in lower
revenue. PeopleManagement has experienced improving revenue trends during the
third quarter of 2020, compared to the second quarter of 2020, primarily driven
by the fact that PeopleManagement supplies an outsourced workforce that involves
multiyear, multi-million dollar on-site or driver relationships. These types of
client engagements are often more resilient in an economic downturn.
Year-over-year, revenue declined 7.6% in the third quarter of 2020 compared to
22.7% in the second quarter of 2020.
PeopleScout
PeopleScout revenue declined to $33.7 million for the thirteen weeks ended
September 27, 2020 , a 47.6% decrease compared to the same period in the prior
year, and declined to $118.2 million for the thirty-nine weeks ended
September 27, 2020 , a 40.2% decrease compared to the same period in the prior
year. The revenue decline was primarily due to less demand from existing clients
resulting from the economic disruption caused by the impact of COVID-19.
PeopleScout clients in the travel and leisure industries were especially
impacted. These clients, which represented approximately 25% and 30% of the
client mix for the thirteen and thirty-nine weeks ended September 29, 2019 ,
respectively, were disproportionately impacted which resulted in a 74% and 63%
decrease in revenue, respectively, compared to the same periods in the prior
year. The revenue decline also includes the impact of reduced project-based
recruiting volumes at a large industrial client, which declined throughout 2019
due to the client's adverse business conditions resulting in no order volume
after the third quarter of 2019.
Gross profit
Gross profit was as follows:
Thirty-nine weeks
Thirteen weeks ended ended
(in thousands, except percentages) Sep 27, 2020 Sep 29, 2019 Sep 27, 2020 Sep 29, 2019
Gross profit $ 110,464 $ 167,735 $ 319,848 $ 471,113
Percentage of revenue 23.3 % 26.3 % 24.1 % 26.5 %
Gross profit as a percentage of revenue declined to 23.3%, or 300 basis points
for the thirteen weeks ended September 27, 2020 , compared to 26.3% for the same
period in the prior year. Our staffing businesses contributed 230 basis points
to the decline due to 180 basis points from pressure on our bill and pay rates
and the remainder primarily due to client mix. The bill and pay rate pressure
was caused by higher pay rates to entice associates to take work assignments
given COVID-19 health concerns and additional federal unemployment benefits. As
with prior recessions, our ability to pass through higher costs plus our
standard markup in our bill rates was hampered due to a variety of economic
factors negatively impacting our clients' businesses. Our PeopleScout business
contributed approximately 70 basis points to the decline primarily due to client
mix and reduced volumes.
Gross profit as a percentage of revenue declined to 24.1%, or 240 basis points
for the thirty-nine weeks ended September 27, 2020 , compared to 26.5% for the
same period in the prior year.
•Our PeopleScout business contributed approximately 130 basis points to the
decline partially due to 30 basis points of severance and the remaining decline
from the continued impact of lower volume due to the rapid revenue decline
caused by the disruption of COVID-19, which outpaced the reductions to our
service delivery team and client mix.
•Our staffing businesses contributed 110 basis points to the decline primarily
due to 130 basis points resulting from bill and pay rate pressure caused by
higher pay rates to entice associates to take work assignments given COVID-19
health concerns and additional federal unemployment benefits. As with prior
recessions, our ability to pass through higher costs plus our standard markup in
our bill rates was hampered due to a variety of economic factors negatively
impacting our clients' businesses. The decline from our staffing business also
includes a decline of 30 basis points due to additional insurance coverage
associated with former workers' compensation carriers in liquidation in the
prior year. These declines were partially offset by a benefit of 50 basis points
from a reduction in estimated costs to comply with the Patient Protection and
Affordable Care Act and the Health Care and Education Reconciliation Act of
2010, which were accrued in prior fiscal years. We do not expect the benefit
from lower affordable health care costs to reoccur.
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We continue to actively manage workers' compensation cost through the safety of
our contingent workers with our safety programs, and actively control costs with
our network of service providers. We had favorable adjustments to our workers'
compensation liabilities of $5.4 million or 1.1% of revenue for the thirteen
weeks ended September 27, 2020 , compared to $7.9 million , or 1.2% of revenue for
the same period in the prior year. Continued favorable adjustments to our
workers' compensation liabilities are dependent on our ability to continue to
lower accident rates and claim costs. For additional discussion regarding our
workers' compensation liability, see the "Workers' compensation insurance,
collateral and claims reserves" section within Liquidity and Capital Resources.
Selling, general and administrative expense
SG&A expense was as follows:
Thirty-nine weeks
Thirteen weeks ended ended
(in thousands, except percentages) Sep 27, 2020 Sep 29, 2019 Sep 27, 2020 Sep 29, 2019
Selling, general and administrative expense $ 90,100 $ 129,800 $ 304,681 $ 383,745
Percentage of revenue 19.0 % 20.4 % 22.9 % 21.6 %
Total company SG&A expense decreased by $39.7 million , or 30.6% and $79.1
million , or 20.6% for the thirteen and thirty-nine weeks ended September 27,
2020 , compared to the same periods in the prior year, respectively. The decrease
in SG&A expense was primarily due to comprehensive actions we put in place in
March 2020 to dramatically reduce costs in response to rapidly changing market
conditions due to COVID-19. We believe we have taken steps to reduce SG&A
expense while preserving the key strengths of our business to ensure we are
prepared for the time when business conditions improve. The decrease in SG&A
expense included $4.1 million and $7.2 million in employee retention credits
made available under the Canada Emergency Wage Subsidy for Canadian employees
and the Australian JobKeeper subsidy for Australian employees during
the thirteen and thirty-nine weeks ended September 27, 2020 , respectively. These
reductions were partially offset by $8.9 million in workforce reduction costs
recorded in the thirty-nine weeks ended September 27, 2020 , compared to $0.5
million for the same period in the prior year. We will continue to monitor and
manage our SG&A expense in line with our cost reduction plans.
Depreciation and amortization
Depreciation and amortization was as follows:
Thirty-nine weeks
Thirteen weeks ended ended
(in thousands, except percentages) Sep 27, 2020 Sep 29, 2019 Sep 27, 2020 Sep 29, 2019
Depreciation and amortization $ 7,652 $ 8,749 $ 24,002 $ 28,528
Percentage of revenue 1.6 % 1.4 % 1.8 % 1.6 %
Depreciation and amortization decreased primarily due to the impairment to our
acquired client relationships intangible assets of $34.7 million in the first
quarter of 2020 and several intangible assets that were fully amortized in the
second half of 2019, which resulted in a decline in amortization expense for the
thirteen and thirty-nine weeks ended September 27, 2020 .
Goodwill and intangible asset impairment charge
Goodwill and intangible asset impairment charge were as follows:
Thirty-nine weeks
Thirteen weeks ended ended
(in thousands, except percentages) Sep 27, 2020 Sep 29, 2019 Sep 27, 2020 Sep 29, 2019
Goodwill and intangible asset impairment
charge $ - $ - $ 175,189 $ -
A summary of the goodwill and intangible asset impairment charge by reportable
segment is as follows:
(in thousands) PeopleManagement PeopleScout Total company
Goodwill $ 45,901 $ 94,588 $ 140,489
Client relationships 9,700 25,000 34,700
Total $ 55,601 $ 119,588 $ 175,189
We experienced a significant decline in our stock price during the first quarter
of 2020. As a result of the decline in stock price, our market capitalization
fell significantly below the recorded value of our consolidated net assets. The
reduced market
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capitalization reflected the expected continued weakness in pricing and demand
for our services in an uncertain economic climate that was further impacted in
March 2020 by COVID-19, which created a sudden global economic shock. Most
industries we serve were impacted by a significant decrease in demand for their
products and services and, as a result, we experienced a significant drop in
client demand associated with government and societal actions taken to address
COVID-19. We experienced significant decreases to our revenues and corresponding
operating results due to weakness in pricing and demand for our services during
the severe economic downturn. While demand is expected to recover in the future,
the rate of recovery will vary by geography and industry depending on the
economic impact caused by COVID-19 and the rate at which infections decline to a
contained level.
As a result of our interim impairment test in the first quarter of 2020, we
concluded that the carrying amounts of goodwill for PeopleScout RPO, PeopleScout
MSP and PeopleManagement On-Site reporting units exceeded their implied fair
values and we recorded a non-cash impairment loss of $140.5 million . The total
goodwill carrying value of $45.9 million for PeopleManagement On-Site reporting
unit was fully impaired. The goodwill impairment charge for PeopleScout RPO and
PeopleScout MSP was $92.2 million and $2.4 million , respectively. The remaining
goodwill balances for PeopleScout RPO and PeopleScout MSP were $22.9 million and
$9.7 million , respectively, as of September 27, 2020 .
With the decrease in demand for our services due to the economic impact caused
by COVID-19, we lowered our future expectations, which was the primary trigger
of an impairment to our acquired client relationships intangible assets for our
PeopleScout RPO and PeopleManagement On-Site reporting units of $34.7 million in
the first quarter of 2020. The impairment charge for PeopleScout RPO and
PeopleManagement On-Site reporting units was $25.0 million and $9.7 million ,
respectively. The remaining client relationship intangible asset balances
related to assets impaired for PeopleScout RPO and PeopleManagement On-Site were
$5.5 million and $7.6 million , respectively, as of September 27, 2020 .
Income taxes
The income tax expense and the effective income tax rate were as follows:
Thirty-nine weeks
Thirteen weeks ended ended
(in thousands, except percentages) Sep 27, 2020 Sep 29, 2019 Sep 27, 2020 Sep 29, 2019
Income tax expense (benefit) $ 3,743 $ 2,981 $ (34,480) $ 6,333
Effective income tax rate 29.9 % 10.1 % 18.7 % 10.4 %
Our tax provision and our effective tax rate are subject to variation due to
several factors, including variability in accurately predicting our pre-tax and
taxable income and loss by jurisdiction, tax credits, government audit
developments, changes in laws, regulations and administrative practices, and
relative changes of expenses or losses for which tax benefits are not
recognized.
Additionally, our effective tax rate can be more or less volatile based on the
amount of pre-tax income and loss. For example, the impact of discrete items,
tax credits and non-deductible expenses on our effective tax rate is greater
when our pre-tax income or loss is lower.
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The items accounting for the difference between income taxes computed at the
statutory federal income tax rate and income taxes reported on the Consolidated
Statements of Operations and Comprehensive Income (Loss) are as follows:
Thirteen weeks ended
Thirty-nine weeks ended
(in thousands, except percentages)
Sep 27, 2020 % Sep 29, 2019 %
Income (loss) before tax expense
(benefit) $ 12,538 $ 29,657 $ (184,347) $ 60,691
Federal income tax expense (benefit) at
statutory rate $ 2,633 21.0% $ 6,230 21.0% $ (38,713) 21.0% $ 12,747 21.0%
Increase (decrease) resulting from: State income taxes, net of federal benefit 631 5.0 1,428 4.8 (9,321) 5.1 2,922
4.8
Goodwill and intangible asset impairment impact - - - - 21,849 (11.9) - - CARES Act impact 657 5.2 - - (5,041) 2.7 - - Hiring credits, net (866) (6.9) (4,792) (16.2) (4,848) 2.6 (10,298) (17.0) Other non-deductible/non-taxable items 688 5.6 115 0.5 1,594 (0.8) 962 1.6 Income tax expense (benefit)$ 3,743 29.9%$ 2,981 10.1%$ (34,480) 18.7%$ 6,333 10.4% Significant fluctuations in our effective rate are primarily due to the non-deductible goodwill and intangible asset impairment charge, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and the WOTC hiring credits. Other differences between the statutory federal income tax rate result from state and foreign income taxes and certain other non-deductible and non-taxable items. The non-cash impairment loss of$175.2 million , recorded in the first quarter of 2020, includes$84.7 million (tax effected$21.8 million ) related to reporting units from stock acquisitions and accordingly are not deductible for tax purposes. The remaining impairment loss of$90.5 million (tax effected$23.3 million ) related to reporting units from asset acquisitions and accordingly are deductible for tax purposes. OnMarch 27, 2020 , the CARES Act was enacted inthe United States . The CARES Act is an emergency economic aid package to help mitigate the impact of COVID-19. Among other things, the CARES Act provides certain changes to tax laws, including the ability to carry back current year losses to obtain refunds related to prior year tax returns with a higher federal tax rate of 35%. The net operating loss carry back benefit will vary depending on estimated results for the current fiscal year. WOTC is designed to encourage employers to hire workers from certain targeted groups with higher than average unemployment rates. WOTC is generally calculated as a percentage of wages over a twelve-month period up to worker maximums by targeted groups. Based on historical results and business trends, we estimate the amount of WOTC we expect to earn related to wages of the current year. However, the estimate is subject to variation because 1) a small percentage of our workers qualify for one or more of the many targeted groups; 2) the targeted groups are subject to different incentive credit rates and limitations; 3) credits fluctuate depending on economic conditions and qualified worker retention periods; and 4) state and federal offices can delay their credit certification processing and have inconsistent certification rates. We recognize additional prior year hiring credits if credits in excess of original estimates have been certified by government offices. WOTC is due to expire at the end of 2020. Segment performance We evaluate performance based on segment revenue and segment profit. Segment profit includes revenue, related cost of services, and ongoing operating expenses directly attributable to the reportable segment. Segment profit excludes goodwill and intangible impairment charges, depreciation and amortization expense, unallocated corporate general and administrative expense, interest, other income and expense, income taxes, and other adjustments not considered to be ongoing. See Note 11: Segment Information, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional details on our reportable segments, as well as a reconciliation of segment profit to income (loss) before tax expense (benefit). Segment profit should not be considered a measure of financial performance in isolation or as an alternative to net income (loss) in the Consolidated Statements of Operations and Comprehensive Income (Loss) in accordance with accounting principles generally accepted inthe United States of America , and may not be comparable to similarly titled measures of other companies. Page - 27
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Thirty-nine weeks
Thirteen weeks ended ended
(in thousands, except percentages) Sep 27, 2020 Sep 29, 2019 Sep 27, 2020 Sep 29, 2019
Revenue from services $ 293,546 $ 413,132 $ 801,991 $ 1,109,261
Segment profit 18,714 30,878 27,002 64,143
Percentage of revenue 6.4 % 7.5 % 3.4 % 5.8 %
PeopleReady segment profit declined $12.2 million and $37.1 million for the
thirteen and thirty-nine weeks ended September 27, 2020 , compared to the same
periods in the prior year, respectively. PeopleReady experienced a segment
profit decline primarily due to the significant drop in client demand associated
with government and societal actions taken to address COVID-19. The significant
drop in demand, as well as increased price sensitivity, increased contingent
worker wages and preventive measures taken to help curb the spread of COVID-19
had severe adverse impacts on our operations and business results. The declines
were partially offset by the decisive and comprehensive cuts to SG&A expense in
line with management's plans to preserve the key strengths of our business.
We believe these declines were also partially offset by the strategic use of our
industry-leading JobStack mobile application that digitally connects workers
with jobs. JobStack is helping us safely connect people with work during this
time of crisis.
PeopleManagement segment performance was as follows:
Thirty-nine weeks
Thirteen weeks ended ended
(in thousands, except percentages) Sep 27, 2020 Sep 29, 2019 Sep 27, 2020 Sep 29, 2019
Revenue from services $ 147,241 $ 159,315 $ 407,516 $ 470,889
Segment profit 4,574 3,381 6,063 9,815
Percentage of revenue 3.1 % 2.1 % 1.5 % 2.1 %
PeopleManagement segment profit grew $1.2 million for the thirteen weeks ended
September 27, 2020 , compared to the same period in the prior year. The growth
was primarily due to cost reductions outpacing revenue declines primarily due to
less demand from existing clients resulting from economic disruption caused by
COVID-19.
PeopleManagement segment profit declined $3.8 million for the thirty-nine weeks
ended September 27, 2020 , compared to the same period in the prior year. The
decline was primarily due to a significant drop in demand from our clients
associated with government and societal actions taken to address COVID-19. The
drop in demand, as well as increased price sensitivity, higher pay rates
necessary to attract employees given the availability of federal unemployment
benefits, and preventive measures taken to help curb the spread of COVID-19 had
severe adverse impacts on our segment profit and our segment profit as a percent
of revenue. The decline in revenue was partially offset by the decisive and
comprehensive cuts to SG&A expense in line with management's plans to preserve
the key strengths of our business.
PeopleScout segment performance was as follows:
Thirty-nine weeks
Thirteen weeks ended ended
(in thousands, except percentages) Sep 27, 2020 Sep 29, 2019 Sep 27, 2020 Sep 29, 2019
Revenue from services $ 33,743 $ 64,346 $ 118,219 $ 197,589
Segment profit 349 10,774 75 32,424
Percentage of revenue 1.0 % 16.7 % 0.1 % 16.4 %
PeopleScout segment profit declined $10.4 million and $32.3 million for the
thirteen and thirty-nine weeks ended September 27, 2020 , compared to the same
periods in the prior year, respectively. The decline in segment profit was
primarily due to a decline in demand. The decline in demand was primarily due to
less demand from existing clients resulting from the economic disruption caused
by COVID-19. PeopleScout clients in the travel and leisure industries were
especially impacted. These clients, which represented approximately 25% and 30%
of the client mix for the thirteen and thirty-nine weeks ended September 29,
2019 , respectively, were adversely impacted which resulted in a 74% and 63%
decrease in revenue, respectively, compared to the same periods in the prior
year. Due to the decline in revenue, we took actions to reduce the cost of our
service delivery which lagged the rapid revenue decline caused by the disruption
of COVID-19 and negatively impacted our segment profit and our segment profit as
a percent of revenue. The decline in revenue was partially offset by our cost
reduction programs, which have reduced our SG&A expense in line with our plans.
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FUTURE OUTLOOK
The global economy and our business have been dramatically affected by COVID-19.
To date, COVID-19 has surfaced all around the world and resulted in
country-level quarantines, global travel restrictions and broad-based economic
slowdowns. There are no reliable estimates of how long the pandemic will last or
how many people will be affected by it. For that reason, it is difficult to
predict the short- and long-term impacts of the pandemic on our business at this
time. Due to the uncertainty surrounding COVID-19 and its impact on the business
environment, we have limited visibility into our financial condition, results of
operations or cash flows in the future. However, we are providing the following
future outlook for the fourth quarter.
Operating outlook
•We anticipate gross margin to decline between 250 to 190 basis points in the
fourth quarter of 2020 and 270 to 210 basis points for fiscal 2020, compared to
the same periods in the prior year. This improvement from a decline of 300 basis
points in the third quarter of 2020, compared to the same period in the prior
year, is primarily due to improving volume and client mix. The improvement is
expected to be driven by the anniversary in the third quarter of the loss of a
highly profitable PeopleScout industrial client, which declined throughout 2019
with no order volume in the fourth quarter of 2019, and less recruiting staff in
our PeopleScout business given current revenue volume.
•We have taken steps to reduce our operating cost structure and other cash
outflows to preserve capital to fund working capital needs. These actions will
have the effect of reducing our operating expenses by $23 million to $27 million
in the fourth quarter of 2020 and $102 million to $106 million for fiscal 2020,
compared to the same periods in the prior year, while preserving the key
strengths of our business to ensure we are prepared when business conditions
improve. As the demand environment begins to improve, we will begin to slowly
and thoughtfully bring back some spending that will be critical for the
long-term health and sustainability of our business.
Liquidity outlook
•Capital expenditures for the fourth quarter of 2020 will be approximately $11
million . This includes $4 million of build out costs planned for our Chicago
headquarters that will be reimbursed by our landlord. We remain committed to
technological innovation to transform our business for a digital future. We
continue to make investments in online and mobile applications to improve access
to workers and candidates, as well as improve the speed and ease of connecting
our clients and workers for our staffing businesses, and candidates for our
recruitment process outsourcing business. We expect these investments will
increase the competitive differentiation of our services over the long-term,
improve the efficiency of our service delivery, and reduce PeopleReady's
dependence on local branches to find contingent workers and connect them with
work. Examples include our JobStack mobile application in our PeopleReady
business and our Affinix talent acquisition technology in our PeopleScout
business.
•We expect our Revolving Credit Facility and strong financial position to
provide ample liquidity. At September 27, 2020 , $1.5 million was drawn on the
Revolving Credit Facility leaving $292.4 million unused under the Revolving
Credit Facility, which is constrained by our most restrictive covenant at this
time making $138.5 million available for additional borrowings. We have an
option to increase the total line of credit amount to $450.0 million , subject to
bank approval. As of September 27, 2020 , we had cash and cash equivalents of
$28.2 million and total debt of $1.5 million due to strong capital management
practices.
•We had a significant reduction in our accounts receivable balance of $55.4
million for the thirty-nine weeks ended September 29, 2019 due to lower revenue
caused from a decline in demand for our services from COVID-19. This has been a
substantial source of cash in 2020, but will become a cash use as revenue
recovers in future periods and we fund increasing accounts receivable.
•Under the CARES Act, we are allowed to delay payments for the employer portion
of social security taxes (6.2% of taxable wages) incurred during March 27, 2020
to December 31, 2020 , for both our temporary associates and permanent employees.
Half of the deferred amount is due by December 31, 2021 , and the remaining
amount by December 31, 2022 . As of September 27, 2020 , we deferred $36.3 million
of our employer portion of social security taxes. We expect to defer $18 million
to $20 million of employer payroll taxes in the fourth quarter of 2020.
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LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Thirty-nine weeks ended
(in thousands) Sep 27, 2020 Sep 29, 2019
Net income (loss) $ (149,867) $ 54,358
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 24,002 28,528
Goodwill and intangible asset impairment charge 175,189 -
Provision for doubtful accounts 6,582 5,997
Non-cash lease expense, net of changes in operating lease liabilities
(295) (210)
Stock-based compensation 6,762 8,119
Deferred income taxes (25,955) 1,058
Other operating activities 1,944 (1,701)
Changes in operating assets and liabilities:
Accounts receivable 55,408 (17,616)
Accounts payable and other accrued expenses (12,723) (6,970)
Accrued wages and benefits (7,395) (141)
Income tax receivable (4,928) (3,982)
Other assets (2,646) (9,449)
Workers' compensation claims reserve (824) (7,176)
Deferred employer payroll taxes 36,312 -
Other liabilities (2,798) 1,723
Net cash provided by operating activities $
98,768
Cash flows from operating activities Net cash provided by operating activities increased to$98.8 million for the thirty-nine weeks endedSeptember 27, 2020 , compared to$52.5 million for the same period in the prior year. Changes to adjustments to reconcile net loss to net cash provided by operating activities for the thirty-nine weeks endedSeptember 27, 2020 were primarily due to: •Depreciation and amortization decreased primarily due to the impairment to our acquired client relationships intangible assets for our PeopleScout RPO and PeopleManagement On-Site reporting units of$34.7 million in the first quarter of 2020, and several intangible assets that were fully amortized in the second half of 2019. •Net loss for the thirty-nine weeks endedSeptember 27, 2020 includes a non-cash goodwill and intangible asset impairment charge of$175.2 million ($151.9 million after tax). The charge was a result of the adverse impact on expected future cash flows related to the current state of the economy and the impact of COVID-19. The charge does not impact the company's current cash, liquidity, or banking covenants. •The provision for doubtful accounts increased primarily due to specific reserves for clients significantly impacted by the COVID-19 pandemic. Bad debt expense as a percent of revenue increased to 0.5% for the thirty-nine weeks endedSeptember 27, 2020 , from 0.3% for the same period in the prior year. •Deferred tax assets increased primarily due to$23.3 million of discrete tax benefit resulting from goodwill and intangible asset impairments. Impairment losses related to goodwill and intangible assets acquired in an asset acquisition are deductible for tax purposes. •Other operating activities increased primarily due to$0.3 million in unrealized losses on deferred compensation assets due to overall declines in global equity investments for the thirty-nine weeks endedSeptember 27, 2020 , as compared to a$3.1 million gain for the same period in the prior year as equity markets strengthened. Changes to operating assets and liabilities for the thirty-nine weeks endedSeptember 27, 2020 were primarily due to: •Cash provided by accounts receivable of$55.4 million was due to lower revenue from a decline in demand for our services and a seasonal revenue decline from the fourth quarter of 2019, resulting in a significant decrease in accounts Page - 30
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receivable. This decrease was partially offset by an increase in our days sales
outstanding by 1.0 day during the thirty-nine weeks ended September 27, 2020 ,
caused by a mix of clients with longer payment terms and payment delays from
certain clients that have been negatively impacted by COVID-19.
•Cash used for accounts payable and accrued expenses of $12.7 million was
primarily due to cost control programs, decline in customer rebates, seasonal
patterns and timing of payments. The cost control programs were implemented in
response to the economic impact of COVID-19. Customer rebate accruals have
declined significantly due to clients not meeting rebate volume thresholds as a
result of the impact COVID-19 has had on their businesses. The decline was also
due to seasonal patterns, as our business experiences seasonal fluctuations for
contingent staffing services.
•Cash used for accrued wages and benefits of $7.4 million was primarily due to
our actions to reduce our operating cost structure by initiating salary and
selected benefit cuts in April 2020 in response to the economic impact of
COVID-19.
•Generally, our workers' compensation claims reserve for estimated claims
decreases as contingent labor services decline, as is the case in the current
and prior year. Our worker safety programs have had a positive impact and have
created favorable adjustments to our workers' compensation liabilities recorded
in each period. Continued favorable adjustments to our workers' compensation
liabilities are dependent on our ability to continue to lower accident rates and
claim costs.
•Deferred employer payroll taxes represent employer payroll tax payments that
were deferred as of September 27, 2020 , as allowed under the CARES Act. The
CARES Act allows employers to defer the payment of the employer share of Social
Security tax that would otherwise be due on or after March 27, 2020 , and before
January 1, 2021 . Half of the deferred amount is due by December 31, 2021 , and
the remaining amount by December 31, 2022 .
Cash flows from investing activities
Thirty-nine weeks ended
(in thousands) Sep 27, 2020 Sep 29, 2019
Capital expenditures $ (16,244) $ (18,297)
Purchases and sales of restricted investments (7,235) 6,379
Net cash used in investing activities$ (23,479) $
(11,703)
Net cash used in investing activities was$23.5 million for the thirty-nine weeks endedSeptember 27, 2020 , compared to$11.7 million for the same period in the prior year. Capital expenditures are primarily due to our increased investment in software technology. We remain committed to technological innovation to transform our business for a digital future that makes it easier for our clients to do business with us and easier to connect people to work. We continue making investments in online and mobile applications to improve access to workers and candidates, as well as improve the speed and ease of connecting our clients and workers for our staffing businesses, and candidates for our recruitment process outsourcing business. We expect these investments will increase the competitive differentiation of our services over the long-term, improve the efficiency of our service delivery, and reducePeopleReady's dependence on local branches to find contingent workers and connect them with work. Examples include our JobStack mobile application in ourPeopleReady business and our Affinix talent acquisition technology in ourPeopleScout business. Restricted investments consist of collateral that has been provided or pledged to insurance carriers and state workers' compensation programs, as well as collateral to support the deferred compensation plan. Lower collateral requirements from our workers' compensation insurance providers were more than offset by an acceleration of collateral funding for the thirty-nine weeks endedSeptember 27, 2020 . Cash flows from financing activities Thirty-nine weeks ended (in thousands) Sep 27, 2020 Sep 29, 2019 Purchases and retirement of common stock$ (52,346) $ (31,316) Net proceeds from employee stock purchase plans 734 1,023
Common stock repurchases for taxes upon vesting of restricted stock
(2,331) (1,934) Net change in revolving credit facility (35,600) (36,200) Other (1,436) (203) Net cash used in financing activities$ (90,979) $ (68,630) Page - 31
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Net cash used in financing activities was $91.0 million for the thirty-nine
weeks ended September 27, 2020 , compared to $68.6 million for the same period in
the prior year.
During the thirty-nine weeks ended September 27, 2020 , we repurchased $40.0
million of our common stock under an accelerated share repurchase program and
$12.4 million of our common stock in the open market, including commissions, for
a total of $52.4 million of common stock. These transactions were initiated
prior to the medical community's acknowledgment of the expected severity of the
impact COVID-19 would have on the United States . As of September 27, 2020 , $66.7
million remains available for repurchase of common stock under existing
authorizations. The second amendment to our credit agreement prohibits us from
repurchasing shares until July 1, 2021 . See Note 8: Shareholders' Equity, to our
consolidated financial statements found in Item 1 of this Quarterly Report on
Form 10-Q, for additional details on our share repurchase program.
CAPITAL RESOURCES
Revolving credit facility
On March 16, 2020 , we entered into a first amendment to our credit agreement
with Bank of America, N.A ., Wells Fargo Bank, N.A ., PNC Bank, N.A. , KeyBank,
N.A. and HSBC Bank USA, N.A. dated as of July 13, 2018 , which extended the
maturity of the revolving credit facility established thereunder (the "Revolving
Credit Facility") to March 16, 2025 and modified certain other terms. On June
24, 2020 , we entered into a second amendment to our credit agreement (the
"Second Amendment"), which modified terms of our financial covenants as well as
certain other provisions of the Revolving Credit Facility. Subject to lender
approval, we have the ability to increase our Revolving Credit Facility up to
$450.0 million .
Obligations under the Revolving Credit Facility are guaranteed by TrueBlue and
material U.S. domestic subsidiaries, and are secured by substantially all of the
assets of TrueBlue and material U.S. domestic subsidiaries. The amended credit
agreement contains customary representations and warranties, events of default,
and affirmative and negative covenants, including, among others, financial
covenants.
The following financial covenants, as defined in the Second Amendment, are
currently in effect through the second quarter of 2021:
•Asset Coverage Ratio of greater than 1.00, defined as the ratio of 60% of
accounts receivable to the difference of total debt outstanding and unrestricted
cash in excess of $50 million . As of September 27, 2020 , our asset coverage
ratio was 22.1.
•Liquidity greater than $150 million , defined as the sum of unrestricted cash
and availability under the aggregate revolving commitments. As of September 27,
2020 , our liquidity was $320.6 million .
The following financial covenant, as defined in the Second Amendment, will be in
effect for the first and second quarter of 2021:
•EBITDA, as defined in the amended credit agreement, greater than $12 million
for the trailing three quarters ending Q1 2021 and greater than $15 million for
the trailing four quarters ending Q2 2021. As of September 27, 2020 , EBITDA for
the trailing three and four quarters was $24.8 million and $46.1 million ,
respectively.
The following financial covenants, as defined in the Second Amendment, will be
in effect starting the third quarter of 2021 and thereafter:
•Consolidated leverage ratio greater than 4.00 for the third and fourth quarters
of 2021 and greater than 3.00 thereafter, defined as our funded indebtedness
divided by trailing twelve months consolidated EBITDA, as defined in the amended
credit agreement.
•Consolidated fixed charge coverage ratio greater than 1.25, defined as the
trailing twelve months bank-adjusted cash flow divided by cash interest expense.
See Note 6: Long-Term Debt, to our consolidated financial statements found in
Item 1 of this Quarterly Report on Form 10-Q, for additional details on our
Revolving Credit Facility.
Restricted cash and investments
Restricted cash and investments consist principally of collateral that has been
provided or pledged to insurance carriers for workers' compensation and state
workers' compensation programs. Our insurance carriers and certain state
workers'
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compensation programs require us to collateralize a portion of our workers'
compensation obligation. We have agreements with certain financial institutions
that allow us to restrict cash and cash equivalents and investments for the
purpose of providing collateral instruments to our insurance carriers to satisfy
workers' compensation claims. At September 27, 2020 , we had restricted cash and
investments totaling $229.8 million . The majority of our collateral obligations
are held in a trust at the Bank of New York Mellon ("Trust"). See Note 3:
Restricted Cash and Investments, to our consolidated financial statements found
in Item 1 of this Quarterly Report on Form 10-Q, for details on our restricted
cash and investments.
We established investment policy directives for the Trust with the first
priority to preserve capital, second to ensure sufficient liquidity to pay
workers' compensation claims, third to diversify the investment portfolio, and
fourth to maximize after-tax returns. Trust investments must meet minimum
acceptable quality standards. The primary investments include U.S. Treasury
securities, U.S. agency debentures, U.S. agency mortgages, corporate securities
and municipal securities. For those investments rated by nationally recognized
statistical rating organizations the minimum ratings at time of purchase are:
S&P Moody's Fitch
Short-term rating A-1/SP-1 P-1/MIG-1 F-1
Long-term rating A A2 A
Workers' compensation insurance, collateral and claims reserves
Workers' compensation insurance
We provide workers' compensation insurance for our contingent 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 and, accordingly, we are substantially self-insured.
For workers' compensation claims originating in Washington , North Dakota , Ohio ,
Wyoming , Canada and Puerto Rico (our "monopolistic jurisdictions"), we pay
workers' compensation insurance premiums and obtain full coverage under
government-administered programs (with the exception of PeopleReady in Ohio
where we have a self-insured policy). Accordingly, because we are not the
primary obligor, our financial statements do not reflect the liability for
workers' compensation claims in these monopolistic jurisdictions.
Workers' compensation collateral
Our insurance carriers and certain state workers' compensation programs require
us to collateralize a portion of our workers' compensation obligation, for which
they become responsible should we become insolvent. The collateral typically
takes the form of cash and cash-backed instruments, highly rated investment
grade securities, letters of credit, and surety bonds. On a regular basis, these
entities assess the amount of collateral they will require from us relative to
our workers' compensation obligation. Such amounts can increase or decrease
independent of our assessments and reserves. We generally anticipate that our
collateral commitments will continue to grow as we grow our business. We pay our
premiums and deposit our collateral in installments. The majority of the
restricted cash and investments collateralizing our self-insured workers'
compensation policies are held in the Trust.
Our total collateral commitments were made up of the following components for
the fiscal period end dates presented:
(in thousands) Sep 27, 2020 Dec 29, 2019
Cash collateral held by workers' compensation insurance carriers $ 22,076 $ 22,256
Cash and cash equivalents held in Trust 18,543 23,681
Investments held in Trust 156,030 149,373
Letters of credit (1) 6,109 6,202
Surety bonds (2) 20,616 20,731
Total collateral commitments $ 223,374 $ 222,243
(1)We have agreements with certain financial institutions to issue letters of
credit as collateral.
(2)Our surety bonds are issued by independent insurance companies on our behalf
and bear annual fees based on a percentage of the bond, which is determined by
each independent surety carrier. These fees do not exceed 2.0% of the bond
amount, subject to a minimum charge. The terms of these bonds are subject to
review and renewal every one to four years and most bonds can be canceled by the
sureties with as little as 60 days' notice.
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Workers' compensation reserve
The following table provides a reconciliation of our collateral commitments to
our workers' compensation reserve as of the fiscal period end dates presented:
(in thousands) Sep 27, 2020 Dec 29, 2019
Total workers' compensation reserve $ 254,794 $ 255,618
Add back discount on workers' compensation reserve (1) 17,673 19,316
Less excess claims reserve (2) (53,053) (45,253)
Reimbursable payments to insurance provider (3) 3,581 8,121
Other (4) 379 (15,559)
Total collateral commitments $ 223,374 $ 222,243
(1)Our workers' compensation reserves are discounted to their estimated net
present value while our collateral commitments are based on the gross,
undiscounted reserve.
(2)Excess claims reserve includes the estimated obligation for claims above our
deductible limits. These are the responsibility of the insurance carriers
against which there are no collateral requirements.
(3)This amount is included in restricted cash and represents a timing difference
between claim payments made by our insurance carrier and the reimbursement from
cash held in the Trust. When claims are paid by our carrier, the amount is
removed from the workers' compensation reserve but not removed from collateral
until reimbursed to the carrier.
(4)Represents the difference between the self-insured reserves and collateral
commitments.
Our workers' compensation reserve is established using estimates of the future
cost of claims and related expenses, which are discounted to their estimated net
present value. We discount our workers' compensation liability as we believe the
estimated future cash outflows are readily determinable.
Our workers' compensation reserve for deductible and self-insured claims is
established using estimates of the future cost of claims and related expenses
that have been reported but not settled, as well as those that have been
incurred but not reported. Reserves are estimated for claims incurred in the
current year, as well as claims incurred during prior years.
Management evaluates the adequacy of the workers' compensation reserves in
conjunction with an independent quarterly actuarial assessment. Factors
considered in establishing and adjusting these reserves include, among other
things:
•changes in medical and time loss ("indemnity") costs;
•changes in mix between medical only and indemnity claims;
•regulatory and legislative developments impacting benefits and settlement
requirements;
•type and location of work performed;
•the impact of safety initiatives; and
•positive or adverse development of claims.
Our workers' compensation claims reserves are discounted to their estimated net
present value using discount rates based on returns of "risk-free" U.S. Treasury
instruments with maturities comparable to the weighted average lives of our
workers' compensation claims. At September 27, 2020 , the weighted average
discount rate was 1.8%. The claim payments are made over an estimated weighted
average period of approximately 5 years.
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 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 27,
2020 , the weighted average rate was 1.5%. The claim payments are made and the
corresponding reimbursements from our insurance carriers are received over an
estimated weighted average period of approximately 16 years. The discounted
workers' compensation reserve for excess claims was $53.1 million and $45.3
million , and the corresponding gross receivable for the insurance on excess
claims was $52.1 million and $45.3 million as of September 27, 2020 and
December 29, 2019 , respectively.
We continue to actively manage workers' compensation cost through the safety of
our contingent workers with our safety programs, and actively control costs with
our network of service providers. These actions have had a positive impact
creating favorable adjustments to workers' compensation liabilities recorded in
the current and prior periods. Continued favorable adjustments to our workers'
compensation liabilities are dependent on our ability to continue to
aggressively lower accident rates and costs of our claims. We expect diminishing
favorable adjustments to our workers' compensation liabilities as the
opportunity for significant reduction to frequency and severity of accident
rates diminishes.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Future outlook
We are focused on capital preservation as a top priority. In response to the
rapidly changing market conditions due to COVID-19, we have reduced operating
costs and other cash outflows to preserve capital to fund working capital needs.
Our Revolving Credit Facility provides for a revolving line of credit of up to
$300.0 million with an option, subject to lender approval, to increase the
amount to $450.0 million . On March 16, 2020 , we extended the maturity of the
Revolving Credit Facility to March 16, 2025 . Although we were in compliance with
our covenants, we felt it was prudent to negotiate more favorable covenants
given the level of economic uncertainty. On June 24, 2020 , we further amended
our revolving credit agreement, which included modifications to our financial
covenants. As of September 27, 2020 , we are in a strong financial position with
cash and cash equivalents of $28.2 million , total debt outstanding of $1.5
million and $138.5 million available under the most restrictive covenant of our
Revolving Credit Facility at this time for total liquidity of $166.7 million . As
our revenue growth continues, our outstanding debt will increase to fund the
related growth in accounts receivables.
Our insurance carriers and certain state workers' compensation programs require
us to collateralize a portion of our workers' compensation obligation, for which
they become responsible should we become insolvent. The collateral typically
takes the form of cash and cash-backed instruments, highly rated investment
grade securities, letters of credit, and surety bonds. We continue to have risk
that these collateral requirements may be increased by our insurers due to our
loss history and market dynamics, including from the impact of COVID-19.
Under the CARES Act, we are allowed to delay payments for the employer portion
of social security taxes (6.2% of taxable wages) incurred during March 27, 2020
to December 31, 2020 , for both our temporary associates and permanent employees.
As of September 27, 2020 , we deferred $36.3 million of our employer portion of
social security taxes. We expect to defer $18 million to $20 million of employer
payroll taxes in the fourth quarter of 2020.
In February 2020 , as part of the existing share repurchase plan, we entered into
an accelerated share repurchase agreement with a third-party financial
institution to repurchase $40.0 million of our common stock, and we also
repurchased $12.4 million , including commissions, in the open market. These
transactions were initiated prior to the medical community's acknowledgment of
the expected severity of the impact COVID-19 would have on the United States . We
did not initiate any repurchases of our common stock during the thirteen weeks
ended September 27, 2020 . As of September 27, 2020 , $66.7 million remains
available for repurchase of common stock under existing authorizations. We have
historically returned capital to shareholders through stock repurchases. We
anticipate repurchasing additional shares when economic conditions improve.
However, the second amendment to our credit agreement prohibits us from
repurchasing shares until July 1, 2021 .
We believe that cash provided from operations and our capital resources will be
adequate to meet our cash requirements for the next 12 months. If the business
interruptions caused by COVID-19 last longer than we expect, we may need to seek
other sources of liquidity by accessing the capital markets to raise additional
debt or equity.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
There have been no material changes during the period covered by this Quarterly
Report on Form 10-Q, outside of the ordinary course of business, to the
contractual obligations specified in the table of contractual obligations found
in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of our Annual Report on Form 10-K for the fiscal year
ended December 29, 2019 .
SUMMARY OF CRITICAL ACCOUNTING ESTIMATES
Our critical accounting estimates are consistent with those discussed in Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations; Summary of Critical Accounting Estimates" in our Annual
Report on Form 10-K for the fiscal year ended December 29, 2019 , other than the
adoption of the current expected credit loss model for accounts receivable as
discussed in Note 1: Summary of Significant Accounting Policies, to our
consolidated financial statements found in Item 1 of this Quarterly Report on
Form 10-Q, as well as the following updates as of September 27, 2020 .
Considerations related to COVID-19
We have considered COVID-19 related impacts to our estimates, as appropriate,
within our financial statements and there may be changes to those estimates in
future periods. However, we believe that the accounting estimates used are
appropriate after considering the increased uncertainties surrounding the
severity and duration of COVID-19. Such estimates and assumptions are subject to
inherent uncertainties, which may result in actual future amounts differing from
reported estimated amounts.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Goodwill and indefinite-lived intangible assets
We evaluate goodwill and indefinite-lived intangible assets for impairment on an
annual basis as of the first day of our fiscal second quarter, and whenever
events or circumstances make it more likely than not that an impairment may have
occurred. These events or circumstances could include a significant change in
the business climate, legal factors, operating performance indicators,
competition, client engagement, or sale or disposition of a significant portion
of a reporting unit. We monitor the existence of potential impairment indicators
throughout the fiscal year.
Goodwill
We test for goodwill impairment at the reporting unit level. We consider our
operating segments to be our reporting units for goodwill impairment testing. As
of September 27, 2020 , our operating segments were PeopleReady , PeopleManagement
Centerline, PeopleManagement On-Site, PeopleScout RPO, and PeopleScout MSP.
Interim impairment test
During the first quarter of 2020, we experienced a significant decline in our
stock price. As a result of the decline in stock price, our market
capitalization fell significantly below the recorded value of our consolidated
net assets. The reduced market capitalization reflected the expected continued
weakness in pricing and demand for our staffing services in a volatile economic
climate. This was further impacted in March 2020 by COVID-19, which created a
sudden global economic shock. We experienced a significant drop in client demand
associated with government and societal actions taken to address COVID-19. We
expected significant decreases to our revenues and corresponding operating
results to continue due to weakness in pricing and demand for our services
during this severe economic downturn. While demand was expected to recover in
the future, the rate of recovery was expected to vary by geography and industry
depending on the economic impact caused by COVID-19 and the rate at which
infections would decline to a contained level. Accordingly, we performed an
interim impairment test of our goodwill.
The interim impairment test involved 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 the carrying value, we conclude that no goodwill
impairment has occurred. If the carrying value of the reporting unit exceeds its
fair value, we recognize an impairment loss in an amount equal to the excess,
not to exceed the carrying value of the goodwill. Determining the fair value of
a reporting unit is judgmental in nature and involves the use of significant
estimates and assumptions to evaluate the impact of operating and macroeconomic
changes on each reporting unit. The fair value of each reporting unit was
estimated using a combination of a discounted cash flow methodology and the
market valuation approach using publicly traded company multiples in similar
businesses. This analysis required significant judgments, including estimation
of future cash flows, which was dependent on internally developed forecasts,
estimation of the long-term rate of growth for our business, estimation of the
useful life over which cash flows would occur, and determination of our weighted
average cost of capital, which was risk-adjusted to reflect the specific risk
profile of the reporting unit being tested. The weighted average cost of capital
used in our interim impairment test ranged from 11.5% to 12.0%. Our control
premium was approximately 12%, which management has determined to be reasonable.
We carefully considered the economic impact of COVID-19, together with the
estimated decreases to our revenues and corresponding operating results as we
continued to experience weakness in pricing and demand for our services during
the economic downturn. Our estimates were based on our experience with prior
recessions, as well as our experience with plans and actions to adjust and adapt
to recessions. We base fair value estimates on assumptions we believe to be
reasonable but that are difficult to predict. Given the uncertain nature of the
economic impact of COVID-19, and the recovery pattern of the broader economy and
its impact on our business, actual results could differ significantly from our
estimates.
As a result of our Q1 2020 interim impairment test, we concluded that the
carrying amounts of goodwill for our PeopleScout RPO, PeopleScout MSP and
PeopleManagement On-Site reporting units exceeded their implied fair values and
we recorded a non-cash impairment loss of $140.5 million , which was included in
goodwill and intangible asset impairment charge on the Consolidated Statements
of Operations and Comprehensive Income (Loss). The goodwill carrying value of
$45.9 million for our PeopleManagement On-Site reporting unit was fully
impaired. The goodwill impairment charge for PeopleScout RPO and PeopleScout MSP
was $92.2 million and $2.4 million , respectively. Based on our interim goodwill
impairment test, the fair values of our PeopleReady and PeopleManagement
Centerline reporting units were in excess of their carrying value by
approximately 60% and 195%, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual impairment test
Given the proximity of our interim impairment measurement date (last day of our
fiscal first quarter - March 29, 2020 ) to our annual goodwill impairment
measurement date (first day of our fiscal second quarter - March 30, 2020 ), we
performed a qualitative assessment to determine whether it was more likely than
not that the fair value of any of our reporting units is less than the carrying
value. We considered the current and expected future economic and market
conditions surrounding COVID-19 and concluded that it was not more likely than
not that the goodwill associated with our reporting units were impaired as of
the first day of our fiscal second quarter. Therefore, a quantitative assessment
was not performed as of March 30, 2020 .
Additionally, we did not identify any events or conditions that make it more
likely than not that an impairment may have occurred during the period from
March 30, 2020 to September 27, 2020 . The remaining goodwill balances for
PeopleScout RPO and PeopleScout MSP were $22.9 million and $9.7 million ,
respectively, as of September 27, 2020 . The loss of a key client, a significant
further decline to the economy, or a delayed recovery in key industries we
serve, including travel and leisure, could give rise to an additional
impairment. Should any one of these events occur, we will need to record an
impairment loss to goodwill for the amount by which the carrying value exceeds
the reporting unit's fair value, not to exceed the total amount of goodwill. We
will continue to closely monitor the operational performance of these reporting
units as it relates to goodwill impairment.
Indefinite-lived intangible assets
We have indefinite-lived intangible assets related to our Staff Management and
PeopleScout trade names. We test our trade names annually for impairment, and
when indicators 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, not to exceed the carrying value. Management uses
considerable judgment to determine key assumptions, including projected revenue,
royalty rates and appropriate discount rates.
Interim impairment test
We performed an interim impairment test as of the last day of our first fiscal
quarter for 2020 and determined that the estimated fair values exceeded the
carrying amounts for our indefinite-lived trade names. Accordingly, no
impairment loss was recognized.
Annual impairment test
Given the proximity of our interim impairment measurement date (last day of our
fiscal first quarter - March 29, 2020 ) to our annual indefinite-lived trade
names impairment measurement date (first day of our fiscal second quarter -
March 30, 2020 ), we performed a qualitative assessment to determine whether it
was more likely than not that the fair value of any of our indefinite-lived
trade names is less than the carrying value. We concluded that it was not more
likely than not that the indefinite-lived intangible assets associated with our
Staff Management and PeopleScout trade names were impaired as of the first day
of our fiscal second quarter. Therefore, a quantitative assessment was not
performed as of March 30, 2020 .
Additionally, we did not identify any events or conditions that make it more
likely than not that an impairment may have occurred during the period from
March 30, 2020 to September 27, 2020 .
Finite-lived intangible assets and other long-lived assets
We review intangible assets that have finite useful lives and other long-lived
assets whenever an event or change in circumstances indicates that the carrying
value of the asset 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, or significant changes in business strategies. We estimate the
recoverability of these assets by comparing the carrying amount of the asset to
the future undiscounted cash flows that we expect the asset to generate.
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 discounted cash flow analysis or
other valuation techniques.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Interim impairment test
With the estimated decrease in demand for our services due to the economic
impact of COVID-19, we lowered our future expectations, which was the primary
trigger of an impairment test as of the last day of our fiscal first quarter for
certain of our acquired client relationships intangible assets. As a result of
this impairment test, we recorded a non-cash impairment loss for our PeopleScout
RPO and PeopleManagement On-Site client relationship intangible assets of $34.7
million , which was included in goodwill and intangible asset impairment charge
on our Consolidated Statements of Operations and Comprehensive Income (Loss) for
the thirty-nine weeks ended September 27, 2020 . The impairment charge for
PeopleScout RPO and PeopleManagement On-Site client relationship intangible
assets was $25.0 million and $9.7 million , respectively. Considerable management
judgment was necessary to determine key assumptions, including estimated revenue
of acquired clients and an appropriate discount rate of 12.0%.
Additionally, we did not identify any events or conditions that make it more
likely than not that an impairment may have occurred during the period from
March 30, 2020 to September 27, 2020 . The remaining client relationship
intangible asset balances related to assets impaired for PeopleScout RPO and
PeopleManagement On-Site were $5.5 million and $7.6 million , respectively, as of
September 27, 2020 . Should actual results decline further or longer than we have
currently estimated, the remaining intangible asset balances may become further
impaired. We will continue to closely monitor the revenue generated from
acquired clients as it relates to client relationship asset impairment.
NEW ACCOUNTING STANDARDS
See Note 1: Summary of Significant Accounting Policies, to our consolidated
financial statements found in Item 1 of this Quarterly Report on Form 10-Q.
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