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MarketScreener Homepage  >  Equities  >  Nyse  >  TrueBlue, Inc.    TBI

TRUEBLUE, INC.

(TBI)
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TRUEBLUE : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

02/22/2021 | 04:47pm EST
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide the reader of our accompanying
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
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 2020, we connected approximately 490,000
people with work and served approximately 99,000 clients. Our operations are
managed as three business segments: PeopleReady, PeopleManagement and
PeopleScout. See Note 15: Segment Information, to our consolidated financial
statements found in Item 8 of this Annual Report on Form 10-K 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.
COVID-19
Beginning in March 2020, jurisdictions across the countries we serve began
implementing restrictions to protect public health as the impact of COVID-19 set
in. Many of our clients temporarily halted or reduced operations which had a
significant impact on our revenue. However, throughout the pandemic, our
business has remained open and provided key services to essential businesses and
other businesses as COVID-19 restrictions were lifted. Nevertheless, 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
an adverse impact on client demand for our services and our business results.
Our first priority continues to be the health and safety of our associates,
employees, clients, suppliers and others with whom we partner in our business
activities. We implemented comprehensive measures across our businesses to keep
our associates, employees 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.
In response to the rapidly changing market conditions as a result of COVID-19,
commencing in April 2020, we took actions to reduce our operating expenses while
preserving the key strengths of our business to ensure we were prepared as
business conditions improved. Our cost management strategies are on track and
continue to improve our operating results and preserve our 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 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, 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 I, Item 1A of this Annual Report on Form
10-K.
On March 27, 2020, the United States ("U.S.") government enacted the Coronavirus
Aid, Relief and Economic Security Act ("CARES Act"), which among other things,
provides employer payroll tax credits for wages paid to employees who are unable
to work during the COVID-19 outbreak and options to defer payroll tax payments
for a limited period. Based on our evaluation of the CARES Act, we qualify for
certain employer payroll tax credits as well as the deferral of payroll tax
payments into the future. Additionally, the Canadian government enacted the
Canada Emergency Wage Subsidy and the Australian government enacted the
JobKeeper subsidy to help employers offset a portion of their employee wages for
a limited period of time. For the year ended December 27, 2020, we recognized
$9.9 million in government subsidies and delayed payments of $57.1 million for
the employer portion of social security taxes.


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                      MANAGEMENT'S DISCUSSION AND ANALYSIS




Revenue from services
Total company revenue declined 22.1% to $1.8 billion for the year ended
December 27, 2020, compared to the prior year. The decline was due to a drop in
client demand associated with government and societal actions taken to address
COVID-19, which had severe adverse impacts on our operations and business
results. Many of our clients have been severely impacted by COVID-19, which has
resulted in reduced demand for our services. We saw steady improvements in our
year-over-year revenue trends since the second quarter of 2020. Revenue declined
39.0% in the second quarter, 25.5% in the third quarter and 12.3% in the fourth
quarter. These improvements were broad-based across most of the industries and
geographies we serve.
PeopleReady, our largest segment, experienced a revenue decline of 25.4%,
compared to the prior year. PeopleReady's clients have been severely impacted by
COVID-19, which has resulted in reduced demand for our services. The impact of
COVID-19 on PeopleReady's clients has moderated in the third and fourth quarters
of 2020. PeopleManagement, our lowest margin segment, experienced a revenue
decline of 8.6%, compared to prior year. PeopleManagement supplies an outsourced
workforce that involves multi-year, 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 revenue
decline of 36.6%, compared to the prior year. PeopleScout has a large number of
clients in the travel and leisure industries which continue to be
disproportionately impacted by COVID-19.
Gross profit
Total company gross profit as a percentage of revenue for the year ended
December 27, 2020 was 23.9%, compared to 26.2% for the prior year. Our staffing
businesses contributed approximately 140 basis points of the decline due to
approximately 100 basis points from pressure on our bill and pay rates caused by
higher pay rates to entice associates to take work assignments given COVID-19
health concerns and the availability of additional federal unemployment
benefits. As with prior recessions, our ability to pass through higher costs
plus a markup in our bill rates was hampered due to a variety of economic
factors negatively impacting our clients. This decline was partially offset by a
benefit of 30 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 (collectively the "ACA"), which were accrued in prior
fiscal years. Our PeopleScout business contributed approximately 90 basis points
to the decline due to client mix and lower volume driven by the rapid revenue
decline, which outpaced the reductions to our service delivery team, and
severance of approximately 20 basis points.
Selling, general and administrative ("SG&A") expense
Total company SG&A expense decreased by $108.0 million to $408.3 million, or
22.1% of revenue for the year ended December 27, 2020, compared to $516.2
million, or 21.8% of revenue for the prior year. The decrease in SG&A expense
was primarily due to comprehensive actions we put in place beginning in April
2020 to dramatically reduce costs in response to rapidly changing market
conditions due to COVID-19. These actions reduced SG&A expense by 20.9% for the
year ended December 27, 2020, compared to the prior year. We believe we have
taken the right actions to reduce SG&A expense, while still investing in
technology and preserving the key strengths of our business to ensure we are
prepared as business conditions improve. The decrease in SG&A expense benefited
from $8.6 million of employee retention subsidies made available under the
Canada Emergency Wage Subsidy and the Australian JobKeeper subsidy, as well as a
U.S. payroll tax credit in accordance with the provisions of the CARES Act.
These reductions were partially offset by a $2.8 million one-time discretionary
bonus rewarding our employees for their efforts in 2020, and $8.9 million in
workforce reduction costs recorded in the year ended December 27, 2020, compared
to $3.3 million in workforce reduction costs recorded in the prior year.
Loss from operations
Total company loss from operations was $174.9 million for the year ended
December 27, 2020, compared to income from operations of $66.2 million for the
prior year. The decrease in income from operations was primarily due to a
goodwill and intangible asset impairment charge of $175.2 million in the first
quarter of 2020 and the significant decline in client demand associated with
government and societal actions taken to address COVID-19. The significant drop
in demand, increased price sensitivity, increased associate 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.


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Net loss
Net loss was $141.8 million, or $4.01 per diluted share for the year ended
December 27, 2020, compared to net income of $63.1 million, or $1.61 per diluted
share for the prior year. The net loss includes an income tax benefit of $31.4
million, $23.3 million of which was due to the goodwill and intangible asset
impairment, resulting in an effective tax rate of 18.1%, compared to 10.0% in
the prior year. Our effective tax rate was lower in the prior year as a result
of the federal Work Opportunity Tax Credit ("WOTC") reducing the tax expense,
while increasing the tax benefit in 2020. WOTC is designed to encourage
employers to hire associates from certain targeted groups with higher than
average unemployment rates.
Additional highlights
We are focused on cash management as a top priority. In response to the rapidly
changing market conditions as a result of COVID-19, we have taken swift actions
to reduce operating costs and other cash outflows to preserve working capital.
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 December 27, 2020, we had cash and cash
equivalents of $62.5 million and no outstanding debt resulting in an unused
credit facility. We also returned excess capital to shareholders by repurchasing
$52.4 million or 9.2% of our common stock. These purchases were initiated prior
to the medical community's acknowledgment of the expected severity of the impact
of COVID-19.
RESULTS OF OPERATIONS
COVID-19

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 businesses have remained open. We
provided key services to essential businesses and other businesses as COVID-19
restrictions were lifted. However, the preventative measures and 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 health and
safety 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 associates, employees 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 impact of COVID-19. 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. PeopleReady
is fully leveraging our JobStackTM app to help companies and associates connect
safely through a digital environment, and are rolling out a new virtual
onboarding capability to minimize in-person branch visits. PeopleScout is 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 and hand sanitizer for associates, disinfecting workplaces, encouraging
social distancing, and providing infrared temperature checks. We instruct our
associates and employees 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 an employee, 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 associates 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 international travel and restricted
nonessential domestic travel for our employees and are providing remote work
capabilities for our Tacoma and Chicago support centers as well as other
locations.

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. For additional
discussion on the uncertainties and business risks associated with COVID-19,
refer to Risk Factors in Part I, Item 1A of this Annual Report on Form 10-K.


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Total company results
The following table presents selected financial data:
(in thousands, except percentages and per share data)         2020         % of revenue         2019         % of revenue
Revenue from services                                    $ 1,846,360$ 2,368,779

Gross profit                                                 440,645               23.9  %     619,948               26.2  %
Selling, general and administrative expense                  408,307               22.1  %     516,220               21.8  %
Depreciation and amortization                                 32,031                1.7  %      37,549                1.6  %
Goodwill and intangible asset impairment charge              175,189                                 -
Income (loss) from operations                               (174,882)              (9.5) %      66,179                2.8  %
Interest expense and other income, net                         1,620                             3,865
Income (loss) before tax expense (benefit)                  (173,262)                           70,044
Income tax expense (benefit)                                 (31,421)                            6,971
Net income (loss)                                        $  (141,841)              (7.7) % $    63,073                2.7  %

Net income (loss) per diluted share                      $     (4.01)$      1.61


Revenue from services
Revenue from services by reportable segment was as follows:
                                                                   Decline      Segment % of                  Segment % of
(in thousands, except percentages)                    2020            %            total           2019          total
Revenue from services:
PeopleReady                                      $ 1,099,462          (25.4) %        59.5  % $ 1,474,062           62.2  %
PeopleManagement                                     586,822           (8.6)          31.8        642,233           27.1
PeopleScout                                          160,076          (36.6)           8.7        252,484           10.7
Total company                                    $ 1,846,360          (22.1) %       100.0  % $ 2,368,779          100.0  %


The workforce solutions industry is dependent on the overall strength of the
labor market. Clients tend to use a contingent workforce to supplement their
existing workforce and generally hire permanent employees when long-term demand
is expected to increase. As a consequence, our revenue from services tends to
increase when the economy begins to grow. Conversely, our revenue declines 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 to $1.8 billion for the year ended December 27,
2020, a 22.1% decrease compared to the prior year. The decline was due to a drop
in client demand associated with government and societal actions taken to
address COVID-19, which had severe adverse impacts on our operations and
business results. Many of our clients have been severely impacted by COVID-19,
which has resulted in reduced demand for our services. However, we saw steady
improvement in our year-over-year revenue trends since the second quarter of
2020. Revenue declined 39.0% in the second quarter, 25.5% in the third quarter
and 12.3% in the fourth quarter. These improvements were broad-based across most
of the industries and geographies we serve.


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                      MANAGEMENT'S DISCUSSION AND ANALYSIS




We report our business as three reportable segments described below and in Note
15: Segment Information, to our consolidated financial statements found in
Item 8 of this Annual Report on Form 10-K.
PeopleReadyPeopleReady revenue declined to $1.1 billion for the year ended December 27,
2020, a 25.4% decrease compared to the prior year. The decline was due to a 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, which has resulted in reduced demand for our
services. We experienced steady improvements in our year-over-year revenue
trends since the second quarter of 2020, which declined 43.4%. Revenue in the
third quarter of 2020 declined 28.9%, and the fourth quarter of 2020 declined
18.5%. These improvements were broad-based across most geographies and
industries, driven primarily by the retail, manufacturing, services and
transportation industries.
We believe the year-over-year decline was moderated by the use of our
industry-leading JobStack mobile app that digitally connects associates with
jobs. During fiscal 2020, PeopleReady achieved a digital fill rate of 53.0%,
compared to 48.0% in the prior year. As of December 27, 2020, JobStack had more
than 26,000 client users, an increase of 23.5% compared to the prior year. We
are focused on driving clients to become JobStack heavy users, which we define
as clients with 50 or more touches on JobStack per month. Heavy client users
have consistently posted better year-over-year growth rates compared to other
PeopleReady clients. We more than doubled our heavy client user mix from 11.0%
in 2019 to 24.0% in 2020. Also during 2020, we introduced new digital onboarding
features in JobStack that cut application time in half. This has led to a
significant increase in the ratio of associates put to work compared to all
applicants. JobStack is helping us safely connect people with work during this
time of crisis.
PeopleManagement
PeopleManagement revenue declined to $586.8 million for the year ended
December 27, 2020, an 8.6% decrease compared to the prior year. Many of the
clients we serve have been impacted by COVID-19 and have reduced their need for
our services, which has resulted in lower revenue. PeopleManagement has
experienced improving revenue trends during the third and fourth quarters of
2020, compared to the second quarter of 2020, primarily driven by the fact that
PeopleManagement supplies an outsourced workforce that involves multi-year,
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 22.7% in the second quarter of 2020, declined 7.6% in the third
quarter of 2020, and grew 4.6% in the fourth quarter of 2020. These improvements
were broad-based across most of the geographies and industries we serve.
PeopleScout
PeopleScout revenue declined to $160.1 million for the year ended December 27,
2020, a 36.6% decrease compared to 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 29% of the client mix for the year ended December 29,
2019, were disproportionately impacted and experienced a 61.0% decrease in
revenue compared to prior year. Year-over-year, revenue declined 52.7% in the
second quarter of 2020, 47.6% in the third quarter of 2020, and 23.8% in the
fourth quarter of 2020.
Gross profit
Gross profit was as follows:
(in thousands, except percentages)         2020         2019
Gross profit                           $ 440,645$ 619,948
Percentage of revenue                       23.9  %      26.2  %


Gross profit as a percentage of revenue declined 230 basis points to 23.9% for the year ended December 27, 2020, compared to 26.2% for the prior year.

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•Our staffing businesses contributed approximately 140 basis points of the
decline due to approximately 100 basis points from pressure on our bill and pay
rates caused by higher pay rates to entice associates to take work assignments
given COVID-19 health concerns and the availability of additional federal
unemployment benefits. As with prior recessions, our ability to pass through
higher costs plus a markup in our bill rates was hampered due to a variety of
economic factors negatively impacting our clients' businesses. This decline was
partially offset by a benefit of 30 basis points from a reduction in estimated
costs to comply with the ACA, which were accrued in prior fiscal years.
•Our PeopleScout business contributed approximately 90 basis points to the
decline due to client mix and lower volume due to the rapid revenue decline,
which outpaced the reductions to our service delivery team, and severance of
approximately 20 basis points.
We continue to actively manage workers' compensation cost by improving the
safety of our associates with our safety programs, and actively controlling the
cost of health care. We had favorable adjustments to our prior year workers'
compensation self-insurance reserves of $19.2 million or 1.0% of revenue for the
year ended December 27, 2020, compared to $21.7 million, or 0.9% of revenue for
the prior year. Continued favorable adjustments to our prior year 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:
(in thousands, except percentages)                  2020         2019

Selling, general and administrative expense $ 408,307$ 516,220 Percentage of revenue

                                22.1  %      21.8  %


Total company SG&A expense decreased by $108.0 million to $408.3 million, or
22.1% of revenue for the year ended December 27, 2020, compared to $516.2
million, or 21.8% of revenue for the prior year. The decrease in SG&A expense
was primarily due to comprehensive actions we put in place beginning in April
2020 to dramatically reduce costs in response to rapidly changing market
conditions due to COVID-19. These actions reduced SG&A expense by 20.9% for the
year ended December 27, 2020, compared to the prior year. We believe we have
taken the right actions to reduce SG&A expense, while still investing in
technology and preserving the key strengths of our business to ensure we are
prepared as business conditions improve. The decrease in SG&A expense benefited
from $8.6 million in employee retention subsidies made available under the
Canada Emergency Wage Subsidy and Australian JobKeeper subsidy, as well as a
U.S. payroll tax credit in accordance with the provisions of the CARES Act.
These reductions were partially offset by a $2.8 million one-time discretionary
bonus rewarding our employees for their efforts in 2020, and $8.9 million in
workforce reduction costs recorded in the year ended December 27, 2020, compared
to $3.3 million in workforce reduction costs recorded in the prior year.
Depreciation and amortization
Depreciation and amortization was as follows:
(in thousands, except percentages)        2020        2019
Depreciation and amortization          $ 32,031$ 37,549
Percentage of revenue                       1.7  %      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
year ended December 27, 2020.


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Goodwill and intangible asset impairment charge
A summary of the goodwill and intangible asset impairment charge for the year
ended December 27, 2020 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 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
revenue 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
availability and efficacy of the COVID-19 vaccines.
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 charge 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 $23.6 million and
$9.7 million, respectively, as of December 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 remaining client relationship intangible asset
balances related to assets impaired for PeopleScout RPO and PeopleManagement
On-Site were $5.1 million and $7.2 million, respectively, as of December 27,
2020.
Income taxes
The income tax expense (benefit) and the effective income tax rate were as
follows:
(in thousands, except percentages)         2020        2019
Income tax expense (benefit)           $ (31,421)$ 6,971
Effective income tax rate                   18.1  %    10.0  %


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. For example, the impact of tax credits
and non-deductible expenses on our effective tax rate is greater when our
pre-tax income is lower.


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Our effective tax rate for the year ended December 27, 2020 was 18.1% compared
to 10.0% for the prior year. Significant fluctuations in our effective rate are
primarily due to the non-deductible goodwill and intangible asset impairment
charge, the CARES Act and WOTC. Other differences between the statutory federal
income tax rate result from state and foreign income taxes, certain other
non-deductible and non-taxable items, tax exempt interest, and the tax effects
of stock-based compensation. Changes to our effective tax rate are as follows:
(in thousands, except percentages)                      2020           %            2019           %
Income tax expense (benefit) based on statutory
rate                                                $ (36,385)          21.0  % $  14,709           21.0  %
Increase (decrease) resulting from:
State income taxes, net of federal benefit             (6,631)           3.8        3,666            5.3
Job and other tax credits, net                         (7,719)           4.5      (13,627)         (19.4)
Benefit from the CARES Act                             (2,939)           1.7            -              -
Non-deductible goodwill impairment charge              21,849          (12.6)           -              -
Non-deductible and non-taxable items                      124           (0.1)       1,559            2.2
Foreign taxes                                            (977)           0.5          282            0.4
Other, net                                              1,257           (0.7)         382            0.5
Total tax expense (benefit)                         $ (31,421)          18.1  % $   6,971           10.0  %


The non-cash goodwill and intangible asset impairment charge of $175.2 million,
recorded in the first quarter of 2020, includes $84.7 million (tax effect of
$21.8 million) related to reporting units from stock acquisitions and
accordingly are not deductible for tax purposes. The remaining impairment charge
of $90.5 million (tax effect of $23.3 million) is related to reporting units
from asset acquisitions and accordingly is deductible for tax purposes.

On March 27, 2020, the CARES Act was enacted in the U.S. 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%.
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 associates 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 adjust
prior year hiring credits if it becomes clear that our estimates need revision.
Congress extended the WOTC program through December 31, 2025 as a result of the
Consolidated Appropriations Act of 2021.
See Note 13: Income Taxes, to our consolidated financial statements found in
Item 8 of this Annual Report on Form 10-K, for additional information.
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 asset impairment charges, depreciation and
amortization expense, unallocated corporate general and administrative expense,
interest expense, other income and expense, income taxes, and other adjustments
not considered to be ongoing. See Note 15: Segment Information, to our
consolidated financial statements found in Item 8 of this Annual Report on
Form 10-K, for additional details on our reportable segments, as well as a
reconciliation of segment profit to income before tax expense.
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 in the United States of America ("U.S.
GAAP") and may not be comparable to similarly titled measures of other
companies.


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PeopleReady segment performance was as follows:
(in thousands, except percentages)          2020           2019
Revenue from services                  $ 1,099,462$ 1,474,062
Segment profit                         $    43,200$    82,106
Percentage of revenue                          3.9  %         5.6  %


PeopleReady segment profit declined $38.9 million for the year ended
December 27, 2020, compared to the prior year. The revenue decline was primarily
due to the decrease in client demand associated with government and societal
actions taken to address COVID-19. The decline in demand, as well as increased
price sensitivity, increased associate wages, 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 segment
profit 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.
We believe our revenue decline was partially offset by the use of our
industry-leading JobStack mobile app that digitally connects associates with
jobs. JobStack is helping us safely connect people with work during this time of
crisis.
PeopleManagement segment performance was as follows:
(in thousands, except percentages)         2020         2019
Revenue from services                  $ 586,822$ 642,233
Segment profit                         $  11,717$  12,593
Percentage of revenue                        2.0  %       2.0  %


PeopleManagement segment profit declined $0.9 million for the year ended
December 27, 2020, compared to the prior year. The revenue decline was primarily
due to the decrease in demand from our clients associated with government and
societal actions taken to address COVID-19. The decline 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 adverse impacts on our segment
profit. The decline in segment profit 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:
(in thousands, except percentages)         2020         2019
Revenue from services                  $ 160,076$ 252,484
Segment profit                         $   4,525$  37,831
Percentage of revenue                        2.8  %      15.0  %


PeopleScout segment profit declined $33.3 million for the year ended
December 27, 2020, compared to the prior year. The decline in segment profit was
primarily due to a decline in demand from our clients associated with government
and societal actions taken to address COVID-19. PeopleScout clients in the
travel and leisure industries were especially impacted. These clients, which
represented approximately 29% of the client mix for the year ended December 29,
2019, were disproportionately impacted and experienced a 61.0% decrease in
revenue compared to 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
segment profit was partially offset by our cost reduction programs, which have
reduced SG&A expense in line with our plans.
FISCAL 2019 AS COMPARED TO FISCAL 2018
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, found in Part II of the Annual Report on Form 10-K for
the fiscal year ended December 29, 2019 for discussion of fiscal 2019 compared
to fiscal 2018.


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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,
how people will be affected by it, or how rapidly people are vaccinated. 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 and cash flows in the
future. However, we are providing the following future outlook for fiscal 2021.

Operating outlook
•We anticipate gross margin to decline between 290 and 250 basis points in the
first quarter of 2021, compared to the same period in the prior year. This
decline includes a 130 basis point benefit we received in the first quarter of
2020 (30 basis points annualized) from a reduction in estimated health care
benefits costs, which was accrued in prior fiscal years. The remaining decline
is primarily due to bill and pay rate pressures. For fiscal 2021, we anticipate
gross margin to decline between 50 and 10 basis points, compared to the same
period in the prior year. This is primarily due to bill and pay rate pressure
which we expect to moderate over the course of 2021 and the reduction in
estimated health care benefits costs previously mentioned, partially offset by
improving PeopleScout volumes.
•In April 2020, we took steps to reduce our operating cost structure and other
cash outflows to preserve cash to fund working capital needs. We expect these
actions will have the effect of reducing our operating expenses by $13 million
to $17 million in the first quarter of 2021, compared to the same period 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 slowly and thoughtfully bring back spending that is critical
for the long-term health and sustainability of our business.
•We expect an effective income tax rate for full year 2021, before job tax
credits, of 23% to 27%. We expect job tax credits of $8 million to $10 million.
Our effective tax rate can be more or less volatile based on the amount of
pre-tax income. For example, the impact of tax credits and non-deductible
expenses on our effective tax rate is greater when our pre-tax income is lower.
Liquidity outlook
•Capital expenditures for the first quarter of 2021 will be approximately $16
million. This includes $8 million of build out costs planned for our Chicago
support center, of which $6 million will be reimbursed by our landlord and
reflected in our operating cash flows. Capital expenditures for fiscal 2021 are
expected to be between $37 million and $41 million. This includes $10 million of
build out costs planned for our Chicago support center, of which $7 million will
be reimbursed by our landlord and reflected in our operating cash flows. We
remain committed to technological innovation to transform our business for a
digital future. We continue to make investments in online and mobile apps to
improve access to associates and candidates, as well as improve the speed and
ease of connecting our clients and associates for our staffing businesses, and
candidates for our RPO 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 associates and connect them with work. Examples include
PeopleReady's JobStack mobile app and PeopleScout's Affinix talent acquisition
technology.
•We expect our Revolving Credit Facility and strong financial position to
provide ample liquidity. At December 27, 2020, we had cash and cash equivalents
of $63 million and no outstanding balance drawn on our Revolving Credit
Facility, resulting in $161 million available for future borrowings based on our
most restrictive covenant. We have an option to increase the total line of
credit amount from $300 million to $450 million, subject to bank approval.
•During fiscal 2020, we generated a cash flow benefit from delayed payroll tax
payments under the CARES Act of $57 million. We plan to take advantage of
favorable net operating loss carryback provisions in the CARES Act by repaying
this benefit in the third quarter of 2021.
•We had a significant reduction in our accounts receivable balance of $57
million for fiscal 2020 primarily due to lower revenue caused from a decline in
demand for our services from COVID-19, as well as a 7% decrease in days sales
outstanding due to focused collection efforts. These efforts resulted in 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.


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LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
(in thousands)                                                             2020         2019
Net income (loss)                                                      $ (141,841)$ 63,073
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization                                              32,031      37,549
Goodwill and intangible asset impairment charge                           175,189           -
Provision for doubtful accounts                                             6,300       7,661
Stock-based compensation                                                    9,113       9,769
Deferred income taxes                                                     (26,791)      1,263
Non-cash lease expense, net of changes in operating lease liabilities         633        (355)
Other operating activities                                                  

(686) (1,589) Changes in operating assets and liabilities, net of amounts divested: Accounts receivable

                                                        57,146       5,450
Income tax receivable                                                      (1,122)     (6,480)
Accounts payable and other accrued expenses                                (6,561)      6,921
Accrued wages and benefits                                                 55,053      (9,494)
Workers' compensation claims reserve                                         (125)    (10,828)
Other assets and liabilities                                               (5,808)     (9,409)
Net cash provided by operating activities                              $  

152,531 $ 93,531



Cash flows from operating activities
Net cash provided by operating activities increased to $152.5 million for the
year ended December 27, 2020, compared to $93.5 million for the prior year.
Changes to adjustments to reconcile net income (loss) to net cash provided by
operating activities 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 became fully amortized in 2019.
•Net loss for the year ended December 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.
•Deferred tax assets increased primarily due to $23.3 million of discrete tax
benefit resulting from goodwill and intangible asset impairment charges.
Impairment charges related to goodwill and intangible assets acquired in an
asset acquisition are deductible for tax purposes.
Changes to operating assets and liabilities were primarily due to:
•Cash provided by accounts receivable of $57.1 million was due to lower revenue
from a decline in demand for our services, as well as a 7% decrease in days
sales outstanding due to focused collection efforts.
•Cash used for accounts payable and accrued expenses of $6.6 million was
primarily due to cost control programs, a decline in customer rebates and timing
of payments. The cost control programs were implemented in response to the
economic impact of COVID-19. Customer rebates have declined significantly due to
clients not meeting rebate volume thresholds as a result of the impact of
COVID-19 on their businesses.
•Cash provided by accrued wages and benefits of $55.1 million was primarily due
to delayed payments for the employer portion of social security taxes incurred
between March 27, 2020 and December 31, 2020, for both our temporary associates
and permanent employees, which is allowed under the CARES Act. We plan to pay
the deferred amount by September 15, 2021.


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•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 prior periods. Continued favorable adjustments to our prior year workers'
compensation liabilities are dependent on our ability to continue to lower
accident rates and claim costs.
Cash flows from investing activities
  (in thousands)                                                 2020       

2019

  Capital expenditures                                        $ (27,066)  $ 

(28,119)

  Acquisition of business, net of divestiture of business             -         215
  Purchases and sales of restricted investments, net             (7,345)      6,273
  Net cash used in investing activities                       $ (34,411)  $

(21,631)



Net cash used in investing activities was $34.4 million for the year ended
December 27, 2020, compared to $21.6 million for the prior year.
Capital expenditures are primarily due to our continued 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 apps to improve access to associates and
candidates, as well as improve the speed and ease of connecting our clients and
associates for our staffing businesses, and candidates for our RPO 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 associates and connect
them with work. Examples include PeopleReady's JobStack mobile app and
PeopleScout's Affinix talent acquisition technology.

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 required by our primary
insurance provider for the year ended December 27, 2020.
Cash flows from financing activities
(in thousands)                                                             2020         2019
Purchases and retirement of common stock                               $ (52,346)$ (38,826)
Net proceeds from employee stock purchase plans                              922        1,329
Common stock repurchases for taxes upon vesting of restricted stock       (2,438)      (2,222)
Net change in revolving credit facility                                  

(37,100) (42,900)


Other                                                                     (1,540)        (296)
Net cash used in financing activities                                  $ 

(92,502) $ (82,915)



Net cash used in financing activities was $92.5 million for the year ended
December 27, 2020, compared to $82.9 million for the prior year.
During the year ended December 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, or 9.2% of our common stock under existing authorizations. These
purchases were initiated prior to the medical community's acknowledgment of the
expected severity of the impact of COVID-19. As of December 27, 2020, $66.7
million remains available for repurchase under existing authorizations. We have
historically returned capital to shareholders through share repurchases. Share
repurchases are an important part of our capital allocation priorities, however,
the second amendment to our credit agreement (the "Second Amendment") prohibits
us from repurchasing shares until July 1, 2021. See Note 10: Shareholders'
Equity, to our consolidated financial statements found in Item 8 of this Annual
Report on Form 10-K, for additional details on our share repurchase program.
FISCAL 2019 AS COMPARED TO FISCAL 2018
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, found in Part II of the Annual Report on Form 10-K for
the fiscal year ended December 29, 2019 for discussion of fiscal 2019 compared
to fiscal 2018.


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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 to March 16, 2025 and modified certain
other terms. On June 24, 2020, we entered into the Second Amendment, which
modified terms of our financial covenants as well as certain other provisions of
the Revolving Credit Facility. On January 28, 2021, we entered into a third
amendment (the "Third Amendment"), which clarified the definition of the Asset
Coverage Ratio financial covenant of the Revolving Credit Facility. The Third
Amendment was effective as of December 27, 2020 (refer to Note 16: Subsequent
Event, to our consolidated financial statements found in Item 8 of this Annual
Report on Form 10-K, for details of the Third Amendment). Subject to lender
approval, we have the ability to increase our Revolving Credit Facility from
$300.0 million 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.
See Note 8: Long-term Debt, to our consolidated financial statements found in
Item 8 of this Annual Report on Form 10-K, for details on our Revolving Credit
Facility.
Workers' compensation insurance, collateral and reserves
Workers' compensation insurance
We provide workers' compensation insurance for our associates 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 and restricted cash and investments
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 a trust at the Bank of New York Mellon
("Trust").
Our total collateral commitments were made up of the following components for
the fiscal period end dates presented:
                                                                     December 27,    December 29,
(in thousands)                                                           2020            2019

Cash collateral held by workers' compensation insurance carriers $ 22,253$ 22,256 Cash and cash equivalents held in Trust

29,410           23,681
Investments held in Trust                                               152,247          149,373
Letters of credit                                                         6,095            6,202
Surety bonds (1)                                                         20,616           20,731
Total collateral commitments                                        $   230,621$     222,243


(1)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.


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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 December 27, 2020, we had restricted cash and investments totaling $240.5
million. 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. 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. The majority of our collateral obligations
are held in a Trust. See Note 4: Restricted Cash and Investments, to our
consolidated financial statements found in Item 8 of this Annual Report on
Form 10-K, 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 reserve
The following table provides a reconciliation of our collateral commitments to
our workers' compensation reserve as of the fiscal period end dates presented:
                                                                      December 27,  December 29,
(in thousands)                                                            2020          2019
Total workers' compensation reserve                                   $  255,493$  255,618
Add back discount on workers' compensation reserve (1)                    18,009        19,316
Less excess claims reserve (2)                                           (54,019)      (45,253)
Reimbursable payments to insurance provider (3)                            6,373         8,121
Other (4)                                                                  4,765       (15,559)
Total collateral commitments                                          $  230,621$  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, which considers the potential impact
of COVID-19.


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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 December 27, 2020, the weighted average
discount rate was 1.8%. 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 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 December 27,
2020, the weighted average rate was 1.3%. The claim payments are made and the
corresponding reimbursements from our insurance carriers are received over an
estimated weighted average period of approximately 17 years. The discounted
workers' compensation reserve for excess claims was $54.0 million and $45.3
million as of December 27, 2020 and December 29, 2019, respectively. The
discounted receivables from insurance companies, net of valuation allowance,
were $52.9 million and $44.6 million as of December 27, 2020 and December 29,
2019, respectively.
The following table provides an analysis of changes in our workers' compensation
claims reserves:
(in thousands)                                                           2020          2019
Beginning balance                                                    $  255,618$  266,446
Self-insurance reserve expenses related to current year, net             61,264        78,367
Payments related to current year claims                                 (12,594)      (14,997)
Payments related to claims from prior years                             (40,236)      (48,177)
Changes to prior years' self-insurance reserve, net                     (19,205)      (21,748)
Amortization of prior years' discount (1)                                 1,880        (1,393)
Net change in excess claims reserve (2)                                   8,766        (2,880)

Ending balance                                                          255,493       255,618
Less current portion                                                     66,007        73,020
Long-term portion                                                    $  189,486$  182,598


(1)The discount is amortized over the estimated weighted average life. In
addition, any changes to the estimated weighted average lives and corresponding
discount rates for actual payments made are reflected in cost of services on the
Consolidated Statement of Operations and Comprehensive Income in the period when
the changes in estimates are made.
(2)Changes to our excess claims are discounted to its estimated net present
value using the risk-free rates associated with the actuarially determined
weighted average lives of our excess claims. Certain workers' compensation
insurance companies with which we formerly did business are in liquidation and
have failed to pay a number of excess claims to date. We have recorded a
valuation allowance against all of the insurance receivables from the insurance
companies in liquidation.
We continue to actively manage workers' compensation cost through the safety of
our associates 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 prior
periods. Continued favorable adjustments to our prior year 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.
Future outlook
We are focused on cash management 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 December 27, 2020, we are in a strong financial position with
cash and cash equivalents of $62.5 million, no debt outstanding and total
liquidity of $160.9 million under the most restrictive covenants of our
Revolving Credit Facility.
We expect approximately $16 million of capital expenditures in the first quarter
of 2021 and $37 million to $41 million in fiscal 2021. These capital
expenditures include build-out costs for our Chicago support center of
approximately $8 million in the first


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quarter of 2021 and $10 million in fiscal 2021, of which approximately $6
million and $7 million, respectively, will be reimbursed by our landlord. These
reimbursements will be reflected in our operating cash flows.
The CARES Act included employer payroll tax credits for wages paid to employees
who were unable to work during the COVID-19 outbreak. Under the Act, we were
allowed to delay payments for our portion of social security taxes (6.2% of
taxable wages) incurred between March 27, 2020 and December 31, 2020, for both
our associates and permanent employees. We anticipate the deferred amount of
$57.1 million will be paid by September 15, 2021.
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.
We have contractual commitments in the form of operating leases related to
office space, vehicles and equipment. Our leases have remaining terms of up to
16 years. See Note 9: Commitments and Contingencies, to our consolidated
financial statements found in Item 8 of this Annual Report on Form 10-K, for
details on our operating lease contractual commitments.
We have purchase obligation agreements to purchase goods and services in the
ordinary course of business that are enforceable, legally binding and specify
all significant terms. See Note 9: Commitments and Contingencies, to our
consolidated financial statements found in Item 8 of this Annual Report on
Form 10-K, for details on our purchase obligations.
We believe that cash provided from operations and our capital resources will be
adequate to meet our cash requirements for the next 12 months.
SUMMARY OF CRITICAL ACCOUNTING ESTIMATES
Management's discussion and analysis of financial condition and results of
operations discusses our financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. On an ongoing basis,
management evaluates its estimates and judgments. Management bases its estimates
and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Management believes that the following accounting estimates are the most
critical to understand and evaluate our reported financial results, and they
require management's most subjective or complex judgments, resulting from the
need to make estimates about the effect of matters that are inherently
uncertain.
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.
Workers' compensation reserve
We maintain reserves for workers' compensation claims, including the excess
claims portion above our deductible, using actuarial estimates of the future
cost of claims and related expenses. These estimates include claims that have
been reported but not settled and claims that have been incurred but not
reported. These reserves, which reflect potential liabilities to be paid in
future periods based on estimated payment patterns, are discounted to estimated
net present value using discount rates based on average returns on "risk-free"
U.S.Treasury instruments, which are evaluated on a quarterly basis. We evaluate
the reserves regularly throughout the year and make adjustments accordingly. If
the actual cost of such claims and related expenses exceed the amount estimated,
additional reserves may be required. Changes in reserve estimates are reflected
in cost of services on the Consolidated Statements of Operations and
Comprehensive Income in the period when the changes in estimates are made.
Our workers' compensation reserves include estimated expenses related to excess
claims and a corresponding receivable for the insurance coverage on excess
claims based on the contractual policy agreements we have with insurance
companies. We discount the reserve and its corresponding receivable to their
estimated net present values using the risk-free rates associated


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with the actuarially determined weighted average lives of our excess claims.
When appropriate, we record a valuation allowance against the insurance
receivable to reflect amounts that may not be realized.
There are two main factors that impact workers' compensation cost: the number of
claims and the cost per claim. The number of claims is driven by the volume of
hours worked, the business mix which reflects the type of work performed, and
the safety of the environment where the work is performed. The cost per claim is
driven primarily by the severity of the injury, the state in which the injury
occurs, related medical costs, and lost-time wage costs. A 5.0% change in one or
more of the above factors would result in a change to workers' compensation cost
of approximately $3 million. Our reserve balances have been positively impacted
primarily by the success of our accident prevention programs. In the event that
we are not able to further reduce our accident rates, the positive impacts to
our reserve balance will diminish.
Accounts receivable allowance for credit losses
We establish an estimate for the allowance for credit losses resulting from the
failure of our clients to make required payments by applying an aging schedule
to pools of assets with similar risk characteristics. Based on an analysis of
the risk characteristics of our clients and associated receivables, we have
concluded our pools are as follows:
•PeopleReady and Centerline Drivers ("Centerline") have a large, diverse set of
clients, generally with frequent, low dollar invoices due to the daily nature of
the work we perform. This results in high turnover in accounts receivable and
lower rates of non-payment.
•PeopleManagement On-Site has a smaller number of clients, and follows a
contractual billing schedule. The invoice amounts are higher than that of
PeopleReady and Centerline, with longer payment terms.
•PeopleScout has a smaller number of clients, and generally sends invoices on a
consolidated basis for a client. Invoice amounts are generally higher for
PeopleScout than for PeopleManagement On-Site, with similar payment terms.
When specific clients are identified as no longer sharing the same risk profile
as their current pool, they are removed from the pool and evaluated separately.
The credit loss rates applied to each aging category by pool are based on
current collection efforts, historical collection trends, write-off experience,
client credit risk, current economic data and forecasted information. The
allowance for credit loss is reviewed monthly and represents our best estimate
of the amount of expected credit losses. Each month, past due or delinquent
balances are identified based upon a review of aged receivables performed by
collections and operations. Past due balances are written off when it is
probable the receivable will not be collected. Changes in the allowance for
credit losses are recorded in SG&A expense on the Consolidated Statements of
Operations and Comprehensive Income (Loss).
Business combinations
We account for our business acquisitions using the acquisition method of
accounting. The purchase price of an acquisition is allocated to the underlying
assets acquired and liabilities assumed based upon their estimated fair values
at the date of acquisition. We determine the estimated fair values after review
and consideration of relevant information including discounted cash flows,
quoted market prices and estimates made by management. Determining the fair
value of an acquired company is judgmental in nature and involves the use of
significant estimates and assumptions. The significant judgments include
estimation of future cash flows, which is dependent on forecasts; estimation of
the long-term rate of growth; estimation of the useful life over which cash
flows will occur; and determination of a weighted average cost of capital, which
is risk-adjusted to reflect the specific risk profile of the business being
purchased. Intangible assets that arise from contractual/legal rights, or are
capable of being separated, are measured and recorded at fair value and
amortized over the estimated useful life. If practicable, assets acquired and
liabilities assumed arising from contingencies are measured and recorded at fair
value. If not practicable, such assets and liabilities are measured and recorded
when it is probable that a gain or loss has occurred and the amount can be
reasonably estimated. The residual balance of the purchase price, after fair
value allocations to all identified assets and liabilities, represents goodwill.
Goodwill acquired in business combinations is assigned to the reporting unit(s)
expected to benefit from the combination as of the acquisition date.
Acquisition-related costs are expensed as incurred. Our acquisitions may include
contingent consideration, which require us to recognize the fair value of the
estimated liability at the time of the acquisition. Subsequent changes in the
estimate of the amount to be paid under the contingent consideration arrangement
are recognized on the Consolidated Statements of Operations and Comprehensive
Income. Cash payments for contingent or deferred consideration are classified
within cash flows from investing activities for the purchase price fair value of
the contingent consideration while amounts paid in excess are classified within
cash flows from operating activities on the Consolidated Statements of Cash
Flows.


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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 December 27, 2020, our operating segments were PeopleReady, PeopleManagement
Centerline, PeopleManagement On-Site, PeopleScout RPO, and PeopleScout MSP.
Testing for impairment involves comparing the fair value of each reporting unit
to its carrying value, including goodwill. Fair value reflects the price a
market participant would be willing to pay in a potential sale of the reporting
unit. If the fair value exceeds 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 charge 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. We base fair value estimates on assumptions we
believe to be reasonable but that are unpredictable and inherently uncertain.
Actual future results may differ from those estimates.
The fair value of each reporting unit is estimated using a combination of a
discounted cash flow methodology and the market valuation approach using
publicly traded company multiples in similar businesses. The discounted cash
flow methodology required significant judgments, including estimation of future
cash flows, which is 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 is risk-adjusted to reflect the specific risk profile of
the reporting unit being tested. The market approach identifies similar publicly
traded companies and develops a correlation, referred to as a multiple, to apply
to the operating results of the reporting units. The primary market multiples to
which we compare are revenue and earnings before interest, taxes, depreciation,
and amortization. The income and market approaches are equally weighted. These
combined fair values are reconciled to our aggregate market value of our shares
of common stock outstanding on the date of valuation. We consider a reporting
unit's fair value to be substantially in excess of its carrying value at a 20%
premium or greater.
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 revenue 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 on the last day of our fiscal first
quarter (March 29, 2020).
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 revenue 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. 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 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 charge of $140.5 million, which was included
in goodwill and intangible asset impairment charge on the


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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
substantially in excess of their carrying value at approximately 60% and 195%,
respectively.
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 was 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 December 27, 2020. The remaining goodwill balances for
PeopleScout RPO and PeopleScout MSP were $23.6 million and $9.7 million,
respectively, as of December 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 would need to record an
impairment charge 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 our reporting
units as it relates to goodwill impairment.
Based on our 2019 and 2018 annual impairment tests, all reporting units' fair
values were substantially in excess of their respective carrying values.
Accordingly, there was no impairment charge recognized for the years ended
December 29, 2019 or December 30, 2018.
Indefinite-lived intangible assets
We have indefinite-lived intangible assets related to our Staff Management | SMX
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 charge 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 fiscal first
quarter for 2020 (March 29, 2020) and determined that the estimated fair values
exceeded the carrying amounts for our indefinite-lived trade names. Accordingly,
no impairment charge 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 was 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 | SMX 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 December 27, 2020.

Based on our our 2019 and 2018 annual indefinite-lived intangible asset impairment tests, the estimated fair values exceeded their carrying values. Accordingly, no impairment charge was recognized for the years ended December 29, 2019 or December 30, 2018.

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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 charge 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 charge 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.
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 charge 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 year ended December 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 December 27, 2020. The remaining client relationship
intangible asset balances related to assets impaired for PeopleScout RPO and
PeopleManagement On-Site were $5.1 million and $7.2 million, respectively, as of
December 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.
No impairment charge was recognized for the years ended December 29, 2019 or
December 30, 2018.
Estimated contingent legal and regulatory liabilities
From time to time we are subject to compliance audits by federal, state, local
and foreign authorities relating to a variety of regulations including wage and
hour laws, taxes, workers' compensation, immigration, and safety. We are also
subject to legal proceedings in the ordinary course of our operations. We have
established reserves for contingent legal and regulatory liabilities. We record
a liability when management determines that it is probable that a legal claim
will result in an adverse outcome and the amount of liability can be reasonably
estimated. To the extent that an insurance company or other third party is
legally obligated to reimburse us for a liability, we record a receivable for
the amount of the probable reimbursement. We evaluate our estimated liability
regularly throughout the year and make adjustments as needed. If the actual
outcome of these matters is different than expected, an adjustment is charged or
credited to expense in the period the outcome occurs or the period in which the
estimate changes.
Income taxes and related valuation allowances
We account for income taxes by recording taxes payable or refundable for the
current year and deferred tax assets and liabilities for the future tax
consequences of events that have been recognized in our financial statements or
tax returns. We measure these expected future tax consequences based upon the
provisions of tax law as currently enacted; the effects of future changes in tax
laws are not anticipated. Future tax law changes, such as changes to federal and
state corporate tax rates and the mix of states and their taxable income, could
have a material impact on our financial condition or results of operations. When
appropriate, we record a valuation allowance against deferred tax assets to
offset future tax benefits that may not be realized. In determining whether a
valuation allowance is appropriate, we consider whether it is more likely than
not that all or some portion of our deferred tax assets will not be realized,
based in part upon management's judgments regarding future events and past
operating results.


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NEW ACCOUNTING STANDARDS See Note 1: Summary of Significant Accounting Policies, to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

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