COMMENT ON FORWARD LOOKING STATEMENTS Certain statements in this Form 10-Q, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, the impact of and our ongoing response to COVID-19, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "future," "opportunity," "goal," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from those expressed or implied in our forward-looking statements, including the risks and uncertainties described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" (Part I, Item 2 of this Form 10-Q),"Quantitative and Qualitative Disclosures about Market Risk" (Part I, Item 3 of this Form 10-Q), and "Risk Factors" (Part II, Item 1A of this Form 10-Q). We undertake no duty to update or revise publicly any of the forward-looking statements after the date of this report or to conform such statements to actual results or to changes in our expectations, whether because of new information, future events, or otherwise. OVERVIEWTrueBlue, Inc. (the "company," "TrueBlue," "we," "us" and "our") is a leading provider of specialized workforce solutions that help our clients improve productivity and grow their businesses. Our operations are managed as three business segments:PeopleReady , PeopleManagement and PeopleScout. OurPeopleReady 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. See Note 10: Segment Information, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional details on our operating segments and reportable segments. The COVID-19 pandemic Beginning in early 2020, the coronavirus ("COVID-19") pandemic has led to a series of significant economic disruptions globally. Throughout the pandemic, our business has remained open and we have continued to provide key services to essential businesses and other businesses as COVID-19 restrictions have lifted. Currently in our two largest markets,the United States of America ("U.S.") andCanada , vaccinations continue to be a top priority and are being supported by governmental programs. As ofOctober 18, 2021 , approximately 57% of theU.S. and 73% of the Canadian populations have been fully vaccinated. While the vaccination programs have helped to reopen these markets, we continue to monitor the pandemic's evolution closely. Despite an uneven recovery in certain markets and industries, we are seeing growth in new client wins and higher existing client volumes, particularly in those markets and industries hit hardest by COVID-19. In addition, our continued focus on efficiently managing costs while investing in digital strategies and sales resources has allowed us to accelerate our strategic priorities and emerge stronger as the economy recovers. For additional discussion on the uncertainties and business risks associated with COVID-19, refer to "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q. Third quarter of 2021 highlights Revenue from services Total company revenue grew 21.6% to$577.0 million for the thirteen weeks endedSeptember 26, 2021 , compared to the same period in the prior year. The increase was due to the recovery of client demand for our services, which experienced a significant drop in the prior year due to the negative impact of the COVID-19 pandemic. This increase is primarily driven by improving volumes from existing clients, including clients in industries that were disproportionately impacted by COVID-19, as well as new client wins. Page - 15
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS •PeopleReady, our largest segment by revenue, experienced revenue growth of 18.9% to$349.1 million for the thirteen weeks endedSeptember 26, 2021 , compared to the same period in the prior year.PeopleReady provides a wide range of staffing solutions for on-demand contingent general and skilled labor.PeopleReady has seen a continued recovery across most geographies and industries, especially those in industries that were hit the hardest by COVID-19, such as construction, transportation, manufacturing, retail and hospitality. The growth in demand was partially offset by a shortage in the supply of workers in certain markets that we believe has been temporarily impacted by government responses to COVID-19, which have included stimulus checks, elevated federal unemployment benefits, accelerated payments of the child tax credit, and other direct payments to individuals. Even as workers have exited federal and state unemployment programs late in the third quarter of 2021, we believe workers have been slow to return to the workforce for many reasons including health or childcare concerns, and instead are relying on personal savings or other means to supplement their income until they choose to return to work. As compared to our other segments,PeopleReady experienced the most pressure on the available supply of workers, primarily due to a lower average wage, the temporary nature of the positions, and the shorter notice period we receive to fill open positions. •PeopleManagement, our second largest segment by revenue, experienced revenue growth of 7.2% to$157.8 million for the thirteen weeks endedSeptember 26, 2021 , compared to the same period in the prior year. PeopleManagement supplies an outsourced workforce that involves multi-year, multi-million dollar on-site and driver relationships. PeopleManagement continued to see revenue growth during the fiscal third quarter of 2021 compared to the same period in the prior year due to significant new client wins. Estimated annualized revenue from new client wins during the thirty-nine weeks endedSeptember 26, 2021 was$86 million , as compared to the average of the prior three years of approximately$60 million . However, the pace of revenue recovery slowed due to worker supply and supply chain related production slow-downs in key industries, such as automotive, manufacturing and retail. •PeopleScout, our smallest segment by revenue, experienced revenue growth of 108.0% to$70.2 million for the thirteen weeks endedSeptember 26, 2021 , compared to the same period in the prior year. PeopleScout offers RPO and MSP solutions. PeopleScout has seen a strong recovery in volume from existing clients, especially those in industries that were hit hardest by COVID-19, such as travel and leisure, as well as new client wins. New client wins contributed$5.4 million of revenue for the thirteen weeks endedSeptember 26, 2021 within a variety of industries including retail, health care and transportation. Estimated annualized revenue from new client wins during the thirty-nine weeks endedSeptember 26, 2021 was$38 million , as compared to the average of the prior three years of approximately$9 million . Gross profit Total company gross profit as a percentage of revenue for the thirteen weeks endedSeptember 26, 2021 increased by 210 basis points to 25.4%, compared to 23.3% for the same period in the prior year. Our staffing businesses contributed 110 basis points of improvement, primarily attributable to a benefit of 70 basis points due to lower workers' compensation expense as a result of a reduction to prior year reserves associated with favorable patterns in claim development, and the remaining 40 basis points due to increased sales mix from ourPeopleReady segment, which has a higher gross margin profile than PeopleManagement, our other staffing segment. Our PeopleScout business contributed the remaining 100 basis points of expansion from improved recruiter utilization on increasing volumes. Selling, general and administrative ("SG&A") expense Total company SG&A expense increased by$28.6 million to$118.7 million , or 20.6% of revenue for the thirteen weeks endedSeptember 26, 2021 , compared to$90.1 million , or 19.0% of revenue for the same period in the prior year, an increase of 160 basis points. The prior period included a$4.0 million reduction to SG&A due to government employment subsidies which did not recur in the current period, driving an increase of 80 basis points. The remaining 80 basis point increase was due to the temporary cost saving actions from 2020 which were discontinued as revenue trends improved. We have continued to balance cost discipline with preserving our operational strengths, which has positioned us well for growth as economic conditions continue to improve. Income from operations Total company income from operations was$21.3 million , or 3.7% of revenue for the thirteen weeks endedSeptember 26, 2021 , compared to$12.7 million , or 2.7% of revenue for the same period in the prior year. The increase in income from operations was due to improving revenue trends led by recovering industry performance, including those disproportionately impacted by COVID-19, a series of new client wins, and expanding gross margin, which collectively increased income from operations margin by 100 basis points. Page - 16
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS Net income Net income was$18.6 million , or$0.53 per diluted share for the thirteen weeks endedSeptember 26, 2021 , compared to$8.8 million , or$0.25 per diluted share for the same period in the prior year. Net income for the thirteen weeks endedSeptember 26, 2021 includes income tax expense of$3.3 million resulting in an effective tax rate of 14.9%, compared to an expense of$3.7 million and an effective tax rate of 29.9% for the same period in the prior year. The higher effective tax rate in the prior year was due to lower benefits from hiring credits, primarily the federal Work Opportunity Tax Credit ("WOTC"), and the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). The difference between our statutory tax rate of 21% and our effective income tax rate results primarily from hiring credits, including WOTC, and the CARES Act. WOTC is designed to encourage employers to hire workers from certain targeted groups with higher than average unemployment rates. 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 losses to obtain refunds related to prior year tax returns where the federal tax rate was 35%. Additional highlights As ofSeptember 26, 2021 , we were in a strong financial position with cash and cash equivalents of$49.2 million , no outstanding debt and$293.8 million available under our revolving credit agreement ("Revolving Credit Facility"), for total liquidity of$343.0 million . RESULTS OF OPERATIONS We report our business as three reportable segments described below and in Note 10: Segment Information, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q. •PeopleReady provides access to qualified associates through a wide range of staffing solutions for on-demand contingent general and skilled labor.PeopleReady connects people with work in a broad range of industries that include construction, manufacturing and logistics, warehousing and distribution, retail, waste and recycling, energy, hospitality and general labor. As ofDecember 27, 2020 , we had a network of 629 branches across all 50 states,Canada andPuerto Rico . Complementing our branch network is our industry-leading mobile app, JobStackTM, which connects people with work 24 hours a day, seven days a week. This creates a virtual exchange between our associates and clients, and allows our branch resources to expand their recruiting, sales and service delivery efforts. JobStack is competitively differentiating our services, expanding our reach into new demographics, and improving our service delivery and work order fill rates, as we embrace a digital future. •PeopleManagement provides recruitment and on-site management of a facility's contingent industrial workforce throughout theU.S. ,Canada andPuerto Rico . In comparison withPeopleReady , services are larger in scale and longer in duration, and dedicated service teams are located at the client's facility. We provide scalable solutions to meet the volume requirements of labor-intensive manufacturing, warehouse and distribution facilities. Our dedicated service teams work closely with on-site management as an integral part of the production and logistics process, managing all or a subset of the contingent labor for a facility or operational function. Our on-site staffing solutions provide large-scale sourcing, screening, recruiting and management of the contingent workforce at a client's facility in order to achieve faster hiring, lower total workforce cost, increase safety and compliance, improve retention, create greater volume flexibility, and enhance strategic decision-making through robust reporting and analytics. Our On-Site operating segment includes our Staff Management | SMX andSIMOS Insourcing Solutions branded service offerings, which provide hourly and productivity-based (cost per unit) pricing options for industrial staffing solutions. Client contracts are generally multi-year in duration. The productivity-based pricing leverages a strategically engineered on-site solution to incentivize performance improvements in cost, quality and on-time delivery using a fixed price-per-unit approach. Both hourly and productivity-based pricing are impacted by factors such as geography, volume, job type, and degree of recruiting difficulty. PeopleManagement also provides dedicated and contingent commercial truck drivers to the transportation and distribution industries through our Centerline Drivers ("Centerline") brand. Centerline delivers drivers specifically matched to each client's needs, allowing them to improve productivity, control costs, ensure compliance, and deliver improved service. Page - 17
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS •PeopleScout offers RPO and MSP solutions to a wide variety of industries and geographies, primarily in theU.S. ,Canada , theUnited Kingdom andAustralia . PeopleScout provides RPO services that manage talent solutions spanning the global economy and talent advisory capabilities supporting total workforce needs. We are recognized as an industry leader for RPO services. Our solution is highly scalable and flexible, which allows for outsourcing of all or a subset of skill categories across a series of recruitment, hiring and onboarding steps. Our solution delivers improved talent quality and candidate experience, faster hiring, increased scalability, lower cost of recruitment, greater flexibility, and increased compliance. Our clients outsource the recruitment process to PeopleScout in all major industries and jobs. We leverage our proprietary technology platform (AffinixTM) for sourcing, screening and delivering a permanent workforce, along with dedicated service delivery teams to work as an integrated partner with our clients. Affinix uses artificial intelligence and machine learning to search the web and source candidates, which means we can create the first slate of candidates for a job posting within minutes rather than days. Client contracts are generally multi-year in duration and pricing is typically composed of a fee for each hire and talent consulting fees. Pricing is impacted by factors such as geography, volume, job type, degree of recruiting difficulty, and the scope of outsourced recruitment and employer branding services included. PeopleScout also includes our MSP business, which manages our clients' contingent labor programs including vendor selection, performance management, compliance monitoring and risk management. As the client's exclusive MSP, we have dedicated service delivery teams which work as an integrated partner with our clients to increase the productivity of their contingent workforce program. Total company results
The following table presents selected financial data:
Thirteen weeks ended Thirty-nine weeks ended (in thousands, except percentages Sep 26, Sep 27, Sep 26, Sep 27, and per share data) 2021 % of revenue 2020 % of revenue 2021 % of revenue 2020 % of revenue Revenue from services$ 577,031 $ 474,530 $ 1,551,692 $ 1,327,726 Gross profit$ 146,502 25.4 %$ 110,464 23.3 %$ 393,544 25.4 %$ 319,848 24.1 % Selling, general and 118,748 20.6 90,100 19.0 326,657 21.1 304,681 22.9 administrative expense Depreciation and amortization 6,426 1.1 7,652 1.6 20,405 1.3 24,002 1.8 Goodwill and intangible asset - - - - - - 175,189 13.3 impairment charge Income (loss) from operations 21,328 3.7 % 12,712 2.7 % 46,482 3.0 % (184,024) (13.9) % Interest expense and other 581 (174) 1,880
(323)
income, net Income (loss) before tax expense 21,909 12,538 48,362 (184,347) (benefit) Income tax expense (benefit) 3,267 3,743 6,938 (34,480) Net income (loss)$ 18,642 3.2 %$ 8,795 1.9 %$ 41,424 2.7 %$ (149,867) (11.3) % Net income (loss) per diluted$ 0.53 $ 0.25 share$ 1.17 $ (4.20) Page - 18
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS Revenue from services Revenue from services by reportable segment was as follows: Thirteen weeks ended Thirty-nine weeks
ended
(in thousands, except Sep 26, Segment % of Sep 27, Segment % of Sep 26, Growth Segment % of Sep 27, Segment % of percentages) 2021 Growth % total 2020 total 2021 % total 2020 total Revenue from services: PeopleReady$ 349,056 18.9 % 60.5 %$ 293,546 61.9 %$ 908,764 13.3 % 58.5 %$ 801,991 60.4 % PeopleManagement 157,789 7.2 % 27.3 147,241 31.0 461,899 13.3 % 29.8 407,516 30.7 PeopleScout 70,186 108.0 % 12.2 33,743 7.1 181,029 53.1 % 11.7 118,219 8.9 Total company$ 577,031 21.6 % 100.0 % $
474,530 100.0 %
OurPeopleReady and PeopleManagement segments supply contingent workforce solutions to minimize the cost and effort of hiring and managing permanent employees. This allows for a rapid response to uncertain business conditions through the ability to replace absent employees, fill new positions, and convert fixed or permanent labor costs to variable costs. Our PeopleScout segment transitions our clients' internal human resources and labor procurement functions to PeopleScout on a permanent or project basis. Human resource departments are faced with increasingly complex operational and regulatory requirements, increased candidate expectations, an expanding talent technology landscape, and pressure to achieve efficiencies, which increase the need to migrate non-core functions to outsourced providers like PeopleScout. PeopleScout can more effectively find and engage high-quality talent, leverage talent acquisition technology, and scale their talent acquisition function to keep pace with changing business needs. As a result of the factors above, client demand for contingent workforce solutions and outsourced recruiting services are dependent on the overall strength of the economy and labor market, and trends in workforce flexibility. Total company revenue grew 21.6% to$577.0 million for the thirteen weeks endedSeptember 26, 2021 , and grew 16.9% to$1,551.7 million for the thirty-nine weeks endedSeptember 26, 2021 , compared to the same periods in the prior year, respectively. The increase was due to the recovery of client demand for our services, which experienced a significant drop in the prior year due to the negative impact of the COVID-19 pandemic. This increase was primarily driven by improving volumes from existing clients, including clients in industries that were disproportionately impacted by COVID-19, as well as new client wins.PeopleReady PeopleReady revenue grew to$349.1 million for the thirteen weeks endedSeptember 26, 2021 , an 18.9% increase compared to the same period in the prior year, and grew to$908.8 million for the thirty-nine weeks endedSeptember 26, 2021 , a 13.3% increase compared to the same period in the prior year.PeopleReady has seen improved revenue trends across most geographies and industries, especially those in industries that were hit the hardest by COVID-19, such as construction, transportation, manufacturing, retail and hospitality. The growth in demand was partially offset by a shortage in the supply of workers in certain markets that we believe has been temporarily impacted by government responses to COVID-19, which have included stimulus checks, elevated federal unemployment benefits, accelerated payments of the child tax credit, and other direct payments to individuals. Even as workers have exited federal and state unemployment programs late in the third quarter of 2021, we believe workers have been slow to return to the workforce for many reasons including health or childcare concerns, and instead are relying on personal savings or other means to supplement their income until they choose to return to work. As compared to our other segments,PeopleReady experienced the most pressure on the available supply of workers, primarily due to a lower average wage, the temporary nature of the positions, and the shorter notice period we receive to fill open positions. We believe the revenue growth has been supported by the use of our industry-leading JobStack mobile app that digitally connects workers with jobs. During the third quarter of 2021,PeopleReady dispatched approximately 940,000 shifts via JobStack and achieved a digital fill rate of 58%, an improvement of seven percentage points compared to the same period in the prior year. Page - 19
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS PeopleManagement PeopleManagement revenue grew to$157.8 million for the thirteen weeks endedSeptember 26, 2021 , a 7.2% increase compared to the same period in the prior year, and grew to$461.9 million for the thirty-nine weeks endedSeptember 26, 2021 , a 13.3% increase compared to the same period in the prior year. PeopleManagement continued to see revenue growth due to significant new client wins. Estimated annualized revenue from new client wins during the thirty-nine weeks endedSeptember 26, 2021 was$86 million , as compared to the average of the prior three years of approximately$60 million . However, the pace of revenue recovery slowed due to worker supply and supply chain related production slow-downs in key industries, such as automotive, manufacturing and retail. PeopleScout PeopleScout revenue grew to$70.2 million for the thirteen weeks endedSeptember 26, 2021 , a 108.0% increase compared to the same period in the prior year, and grew to$181.0 million for the thirty-nine weeks endedSeptember 26, 2021 , a 53.1% increase compared to the same period in the prior year. PeopleScout has seen a strong recovery in volume from existing clients, especially those in industries that were hit the hardest by COVID-19, such as travel and leisure, as well as new client wins. New client wins contributed$5.4 million of revenue for the thirteen weeks endedSeptember 26, 2021 within a variety of industries including retail, health care and transportation. Estimated annualized revenue from new client wins during the thirty-nine weeks endedSeptember 26, 2021 was$38 million , as compared to the average of the prior three years of approximately$9 million . Gross profit Gross profit was as follows: Thirteen weeks ended Thirty-nine weeks ended (in thousands, except percentages) Sep 26, 2021 Sep 27, 2020 Sep 26, 2021 Sep 27, 2020 Gross profit$ 146,502 $ 110,464 $ 393,544 $ 319,848 Percentage of revenue 25.4 % 23.3 % 25.4 % 24.1 % Gross profit as a percentage of revenue grew 210 basis points to 25.4% for the thirteen weeks endedSeptember 26, 2021 , compared to 23.3% for the same period in the prior year. Our staffing businesses contributed 110 basis points of improvement, primarily attributable to a benefit of 70 basis points due to lower workers' compensation expense as a result of a reduction to prior year reserves associated with favorable patterns in claim development, and the remaining 40 basis points due to increased sales mix from ourPeopleReady segment, which has a higher gross margin profile than PeopleManagement, our other staffing segment. Our PeopleScout business contributed the remaining 100 basis points of expansion from improved recruiter utilization on increasing volumes. Gross profit as a percentage of revenue grew 130 basis points to 25.4% for the thirty-nine weeks endedSeptember 26, 2021 , compared to 24.1% for the same period in the prior year. Our staffing businesses contributed 10 basis points of improvement, primarily attributable to a benefit of 60 basis points due to lower workers compensation expense as a result of a reduction to prior year reserves largely associated with favorable patterns in claim development, offset by 50 basis points of compression from a non-recurring benefit in the prior year related to a reduction in expected costs to comply with the Affordable Care Act. Our PeopleScout business contributed the remaining 120 basis points of expansion, with 30 basis points due to workforce reduction costs incurred in the prior year and 90 basis points from improved recruiter utilization on increasing volumes. SG&A expense SG&A expense was as follows: Thirteen weeks ended Thirty-nine weeks ended (in thousands, except percentages) Sep 26, 2021 Sep 27, 2020 Sep 26, 2021 Sep 27, 2020 Selling, general and administrative expense$ 118,748 $ 90,100 $ 326,657 $ 304,681 Percentage of revenue 20.6 % 19.0 % 21.1 % 22.9 % Page - 20
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS Total company SG&A expense increased by$28.6 million to$118.7 million , or 20.6% of revenue for the thirteen weeks endedSeptember 26, 2021 , compared to$90.1 million , or 19.0% of revenue for the same period in the prior year. As a percentage of revenue, SG&A increased 160 basis points. The prior period included a$4.0 million reduction to SG&A due to government employment subsidies which did not recur in the current period, driving an increase of 80 basis points. We took steps during fiscal 2020 to reduce SG&A expense while preserving our operational strengths, to ensure the business was well-positioned for growth as economic conditions improved. Our focus on efficiently managing costs while ensuring we continue to invest in sales resources and digital strategies has allowed us to accelerate our strategic priorities and emerge stronger as the economy continues to recover. The remaining 80 basis point increase was due to the temporary cost saving actions from 2020 which were discontinued as revenue trends improved. Total company SG&A expense increased by$22.0 million to$326.7 million , or 21.1% of revenue for the thirty-nine weeks endedSeptember 26, 2021 , compared to$304.7 million , or 22.9% of revenue for the same period in the prior year. As a percentage of revenue, SG&A decreased 180 basis points. The prior period included workforce reduction costs of$8.9 million incurred as a result of COVID-19, a decrease of 70 basis points. This was partially offset by a reduction in government employment subsidies received in the current year of$3.4 million as compared to the same period in the prior year, an increase of 30 basis points. The remaining 140 basis point decrease was due to lower operating costs in the first half of 2021 due to steps we took during fiscal 2020 to reduce SG&A expense while preserving our operational strengths, to ensure the business was well-positioned for growth as economic conditions improved. Our focus on efficiently managing costs while ensuring we continue to invest in sales resources and digital strategies has allowed us to accelerate our strategic priorities and emerge stronger as the economy continues to recover. Depreciation and amortization Depreciation and amortization was as follows: Thirteen weeks ended Thirty-nine weeks ended (in thousands, except percentages) Sep 26, 2021 Sep 27, 2020 Sep 26, 2021 Sep 27, 2020 Depreciation and amortization$ 6,426 $ 7,652 $ 20,405 $ 24,002 Percentage of revenue 1.1 % 1.6 % 1.3 % 1.8 % Depreciation and amortization decreased for the thirteen and thirty-nine weeks endedSeptember 26, 2021 compared to the same period in the prior year, respectively, due to assets becoming fully depreciated and amortized during 2021. Additionally, the impairment to our acquired client relationships intangible assets of$34.7 million in the fiscal first quarter of 2020, resulted in a decline in amortization expense for the thirty-nine weeks endedSeptember 26, 2021 .Goodwill and intangible asset impairment chargeGoodwill and intangible asset impairment charge was as follows: Thirteen weeks ended Thirty-nine weeks ended (in thousands) Sep 26, 2021 Sep 27, 2020 Sep 26, 2021 Sep 27, 2020Goodwill and intangible asset impairment charge $ - $ -
$ -
As a result of the decrease in demand for our services primarily due to the economic impact caused by COVID-19, we lowered our future expectations, which was the primary trigger of an impairment of our goodwill and acquired client relationships intangible assets recorded in the thirty-nine weeks endedSeptember 27, 2020 . As a result of our interim impairment test in the fiscal first quarter of 2020, we concluded that the carrying amounts of goodwill for PeopleScout RPO, PeopleScout MSP and PeopleManagement On-Site reporting units exceeded their implied fair values and we recorded a non-cash impairment loss of$140.5 million . The total goodwill carrying value of$45.9 million for PeopleManagement On-Site reporting unit was fully impaired. The goodwill impairment charge for PeopleScout RPO and PeopleScout MSP was$92.2 million and$2.4 million , respectively. The impairment to our acquired client relationships intangible assets was$34.7 million . The impairment charge for PeopleScout RPO and PeopleManagement On-Site client relationship intangible assets was$25.0 million and$9.7 million , respectively. Page - 21
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS Income taxes The income tax expense and the effective income tax rate were as follows: Thirteen weeks ended Thirty-nine weeks ended (in thousands, except percentages) Sep 26, 2021 Sep 27, 2020 Sep 26, 2021 Sep 27, 2020 Income tax expense (benefit)$ 3,267 $ 3,743 $ 6,938 $ (34,480) Effective income tax rate 14.9 % 29.9 % 14.3 % 18.7 % Our tax provision and our effective tax rate are subject to variation due to several factors, including variability in accurately predicting our full year pre-tax income and loss by jurisdiction, tax credits, government audit developments, changes in laws, regulations and administrative practices, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income and loss. For example, the impact of discrete items, tax credits and non-deductible expenses on our effective tax rate is greater when our pre-tax income or loss is lower. The items creating a difference between income taxes computed at the statutory federal income tax rate and income taxes reported on the Consolidated Statements of Operations and Comprehensive Income (Loss) are as follows: Thirteen weeks ended Thirty-nine weeks ended
(in thousands, except percentages)
Sep 26, 2021 % Sep 27, 2020
%
Income (loss) before tax expense (benefit)$ 21,909 $ 12,538 $ 48,362 $ (184,347) Federal income tax expense (benefit) at statutory rate$ 4,601 21.0%$ 2,633 21.0%$ 10,156 21.0%$ (38,713) 21.0% Increase (decrease) resulting from: State income taxes, net of federal benefit 1,176 5.4 631 5.0 2,455 5.1 (9,321)
5.1
Non-deductible goodwill impairment charge - - - - - - 21,849 (11.9) CARES Act - - 657 5.2 (438) (0.9) (5,041) 2.7 Hiring tax credits, net (2,935) (13.4) (866) (6.9) (6,341) (13.1) (4,848) 2.6 Non-deductible and non-taxable items 436 1.9 300 2.4 747 1.5 (32) 0.1 Stock-based compensation (117) (0.5) 237 1.9 149 0.3 1,121 (0.6) Foreign taxes and other, net 106 0.5 151 1.3 210 0.4 505
(0.3)
Income tax expense (benefit)
14.3%$ (34,480)
18.7%
For the thirteen weeks endedSeptember 26, 2021 we incurred income tax expense of$3.3 million and had an effective tax rate of 14.9%, compared to an expense of$3.7 million and an effective tax rate of 29.9% for the same period in the prior year. The higher effective tax rate in the prior year was due to lower benefits from hiring credits, primarily WOTC, and the CARES Act. The difference between the statutory federal income tax rate of 21% and our effective tax rate of 14.3% for the thirty-nine weeks endedSeptember 26, 2021 was primarily due to hiring credits, including WOTC, offset by state income taxes. The tax benefit of$34.5 million for the thirty-nine weeks endedSeptember 27, 2020 was primarily the result of the pre-tax loss, benefits from the CARES Act, and hiring tax credits, partially offset by a non-deductible goodwill and intangible asset impairment charge, as described below. The higher effective tax rate in the prior year was due to lower benefits from hiring credits, primarily WOTC, and the CARES Act. The CARES Act was enacted in theU.S. onMarch 27, 2020 . The CARES Act is an emergency economic aid package to help mitigate the impact of COVID-19. Among other things, the CARES Act provides certain changes to tax laws, including the ability to carry back current year losses to obtain refunds related to prior year tax returns with a higher federal tax rate of 35%. The net operating loss carry back benefit will vary depending on estimated results for the year. Page - 22
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS WOTC is designed to encourage employers to hire workers from certain targeted groups with higher than average unemployment rates. WOTC is generally calculated as a percentage of wages over a twelve-month period up to worker maximums by targeted groups. Based on historical results and business trends, we estimate the amount of WOTC we expect to earn related to wages of the current year. However, the estimate is subject to variation because 1) a small percentage of our workers qualify for one or more of the many targeted groups; 2) the targeted groups are subject to different incentive credit rates and limitations; 3) credits fluctuate depending on economic conditions and qualified worker retention periods; and 4) state and federal offices can delay their credit certification processing and have inconsistent certification rates. We recognize an adjustment to prior year hiring credits if credits certified by government offices differ from original estimates. WOTC has been approved through the end of 2025. The non-deductible goodwill and intangible asset impairment charge relates to an impairment of the carrying amounts of goodwill and other intangible assets of$175.2 million in the fiscal first quarter of 2020. Of the total impairment loss,$84.7 million (tax-effected$21.8 million ) related to reporting units from stock acquisitions and accordingly were not deductible for tax purposes. The remaining impairment loss of$90.5 million (tax-effected$23.3 million ) related to reporting units from asset acquisitions and accordingly were deductible for tax purposes. Segment performance We evaluate performance based on segment revenue and segment profit. Segment profit includes revenue, related cost of services, and ongoing operating expenses directly attributable to the reportable segment. Segment profit excludes goodwill and intangible impairment charges, depreciation and amortization expense, unallocated corporate general and administrative expense, interest expense, other income and expense, income taxes, and other adjustments not considered to be ongoing. See Note 10: Segment Information, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional details on our reportable segments, as well as a reconciliation of segment profit to income (loss) before tax expense (benefit). Segment profit should not be considered a measure of financial performance in isolation nor as an alternative to net income (loss) on the Consolidated Statements of Operations and Comprehensive Income (Loss) in accordance with accounting principles generally accepted inthe United States of America , and may not be comparable to similarly titled measures of other companies.PeopleReady segment performance was as follows: Thirteen weeks ended Thirty-nine weeks ended (in thousands, except percentages) Sep 26, 2021 Sep 27, 2020 Sep 26, 2021 Sep 27, 2020 Revenue from services$ 349,056 $ 293,546 $ 908,764 $ 801,991 Segment profit 24,690 18,714 54,987 27,002 Percentage of revenue 7.1 % 6.4 % 6.1 % 3.4 %PeopleReady segment profit grew$6.0 million and$28.0 million for the thirteen and thirty-nine weeks endedSeptember 26, 2021 , compared to the same period in the prior year, respectively.PeopleReady has seen improved revenue trends across most geographies and industries, especially those in industries that were hit the hardest by COVID-19, such as construction, transportation, manufacturing, retail and hospitality. Segment profit margin improvements benefited from lower workers' compensation costs due to a reduction to prior year reserves largely associated with favorable patterns in claim development, higher bill rates compared to pay rates, and disciplined cost management. PeopleManagement segment performance was as follows: Thirteen weeks ended Thirty-nine weeks ended (in thousands, except percentages) Sep 26, 2021 Sep 27, 2020 Sep 26, 2021 Sep 27, 2020 Revenue from services$ 157,789 $ 147,241 $ 461,899 $ 407,516 Segment profit 2,360 4,574 8,697 6,063 Percentage of revenue 1.5 % 3.1 % 1.9 % 1.5 % PeopleManagement segment profit declined$2.2 million and grew$2.6 million for the thirteen and thirty-nine weeks endedSeptember 26, 2021 , compared to the same period in the prior year, respectively. Segment profit declined for the thirteen weeks endedSeptember 26, 2021 primarily due to the discontinuation of temporary cost reductions taken in 2020, as well as higher variable expense tied to new business growth, including recruiting costs which have increased to counteract worker supply Page - 23
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS challenges. Segment profit growth for the thirty-nine weeks endedSeptember 26, 2021 was primarily due to improving client volume and new client wins creating operating leverage in the current year. PeopleScout segment performance was as follows: Thirteen weeks ended Thirty-nine weeks ended (in thousands, except percentages) Sep 26, 2021 Sep 27, 2020 Sep 26, 2021 Sep 27, 2020 Revenue from services$ 70,186 $ 33,743 $ 181,029 $ 118,219 Segment profit 9,778 349 24,672 75 Percentage of revenue 13.9 % 1.0 % 13.6 % 0.1 % PeopleScout segment profit grew$9.4 million and$24.6 million for the thirteen and thirty-nine weeks endedSeptember 26, 2021 , compared to the same period in the prior year, respectively. Segment profit improved as the result of operating leverage and increased utilization of recruiting staff as volumes recovered within existing clients, especially those in industries hit the hardest by COVID-19, such as travel and leisure, as well as new client wins. FUTURE OUTLOOK Due to the uncertainty surrounding COVID-19 and its impact on the business environment, we have limited visibility into our future financial condition, results of operations or cash flows. However, we believe there is value in providing highlights of our expectations for future financial performance. The following highlights represent our operating outlook for the fiscal fourth quarter of 2021. These expectations are subject to revision as our business changes with the overall economy. •We are not providing customary revenue guidance for the fiscal fourth quarter of 2021. However, our historical fourth quarter revenue has been consistent with our fiscal third quarter revenue over the prior four years, excluding the fiscal fourth quarter of 2020. •We anticipate gross margin expansion to be between 140 and 180 basis points for the fiscal fourth quarter of 2021 compared to the same period in the prior year. This improvement is expected to be driven by improving revenue mix from PeopleScout, our highest margin segment, and customer mix. •For the fiscal fourth quarter of 2021, we anticipate SG&A expense to be between$126 million and$130 million . We will continue to exercise disciplined cost management while making investments in sales resources and digital strategies to drive profitable revenue growth. We are also implementing pilot projects to further reduce the costs of ourPeopleReady branch network through a greater use of technology, centralizing work activities, and repurposing of job roles, while maintaining the strength of our geographic footprint. These pilots will occur through 2021 and, if successful, could lead to additional efficiencies in the future. •We expect our effective income tax rate for the fiscal fourth quarter of 2021 to be between 12% and 16%. •Capital expenditures for the fiscal fourth quarter of 2021 will be approximately$10 million . 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 them with our clients. We expect these investments will increase the competitive differentiation of our services over the long term, improve the efficiency of our service delivery, and reducePeopleReady's dependence on local branches to find associates and connect them with work. Examples includePeopleReady's JobStack mobile app and PeopleScout's Affinix talent acquisition technology. •We are actively monitoring theOccupational Safety and Health Administration's potential vaccine and testing mandate. The impact on our results could have a wide range of outcomes and is mainly contingent on the definition of a qualified employee and who is responsible for paying for the testing of unvaccinated workers. We are actively communicating with national officials to understand the logistics behind the policy. •We believe the additional government spending on infrastructure projects in the American Jobs Plan, as proposed by the current administration, may generate additional demand for industrial staffing businesses especially within the construction, energy and transportation industries. Page - 24
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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