TRUEBLUE, INC.
COMMENT ON FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q, other than purely historical information,
including estimates, projections, statements relating to our business plans,
objectives and expected operating results, the impact of and our ongoing
response to COVID-19, and the assumptions upon which those statements are based,
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
involve risks and uncertainties, and future events and circumstances could
differ significantly from those anticipated in the forward-looking statements.
These forward-looking statements generally are identified by the words
"believe," "project," "expect," "anticipate," "estimate," "intend," "strategy,"
"future," "opportunity," "goal," "plan," "may," "should," "will," "would," "will
be," "will continue," "will likely result," and similar expressions.
Forward-looking statements are based on current expectations and assumptions
that are subject to risks and uncertainties, which may cause actual results to
differ materially from those expressed or implied in our forward-looking
statements, including the risks and uncertainties described in "Management's
Discussion and Analysis" (Part I, Item 2 of this Form 10-Q),"Quantitative and
Qualitative Disclosures about Market Risk" (Part I, Item 3 of this Form 10-Q),
and "Risk Factors" (Part II, Item 1A of this Form 10-Q). We undertake no duty to
update or revise publicly any of the forward-looking statements after the date
of this report or to conform such statements to actual results or to changes in
our expectations, whether because of new information, future events, or
otherwise.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide the reader of our accompanying
unaudited consolidated financial statements ("financial statements") with a
narrative from the perspective of management on our financial condition, results
of operations, liquidity and certain other factors that may affect future
results. MD&A is provided as a supplement to, and should be read in conjunction
with, our Annual Report on Form 10-K for the fiscal year ended December 29,
2019 , and our financial statements and the accompanying notes to our financial
statements.
OVERVIEW
TrueBlue, Inc. (the "company," "TrueBlue," "we," "us" and "our") is a leading
provider of specialized workforce solutions that help clients achieve business
growth and improve productivity. In 2019, we connected approximately 724,000
people with work and served approximately 139,000 clients. We report our
business as three reportable segments: PeopleReady , PeopleManagement and
PeopleScout . See Note 11: Segment Information, to our consolidated financial
statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional
details on our operating segments and reportable segments. Our PeopleReady
segment offers on-demand, industrial staffing; our PeopleManagement segment
offers contingent, on-site industrial staffing and commercial driver services;
and our PeopleScout segment offers recruitment process outsourcing ("RPO") and
managed service provider ("MSP") solutions to a wide variety of industries.
The global economy and our business have been dramatically affected by COVID-19.
There are no reliable estimates of how long the pandemic will last or how many
people will be affected by it. For that reason, it is difficult to predict the
short- and long-term impacts of the pandemic on our business at this time. Most
states, counties and municipalities are monitoring overall COVID-19 testing
volume and changes in the percent of positive tests in relation to hospital
capacity and supplies to care for COVID-19 patients and other patients needing
urgent care, and are reopening their respective economies in phases. The process
of reopening has slowed due to increases in testing volumes and percent of
positive test results. The preventative measures taken to help curb the spread
of COVID-19 continues to have a severe adverse impact on client demand for our
services and our business results. Throughout the pandemic, our business has
remained open and we continue to provide key services to essential businesses.
Our first priority, with regard to COVID-19, continues to be the safety, health
and hygiene of our associates, employees, clients, suppliers and others with
whom we partner in our business activities to continue our business operations
in this unprecedented business environment. We implemented comprehensive
measures across our businesses to keep our workers and clients healthy and safe,
including adherence to guidance from the Centers for Disease Control and
Prevention , World Health Organization , Occupational Safety and Health
Administration and other key authorities.
In response to these rapidly changing market conditions, commencing in March
2020 , we have taken appropriate actions to reduce our operating expenses by
between $90 million and $100 million in fiscal 2020, while preserving the key
strengths of our business, to ensure we are prepared when business conditions
improve. Additionally, we amended our revolving credit agreement in June 2020 to
further enhance our liquidity position and are taking steps to improve positive
cash flow.
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We continue to monitor this rapidly evolving situation and guidance from domestic and international authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. There may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, it is difficult to estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. However, we do expect that it will continue to have a material adverse impact on our future revenue, overall profitability and liquidity. For additional discussion on the uncertainties and business risks associated with COVID-19, refer to "Risk Factors" in Part II, Item 1A of this Form 10-Q. Second quarter of 2020 highlights Revenue from services Total company revenue declined 39% to$359 million for the thirteen weeks endedJune 28, 2020 , compared to the same period in the prior year. The decline was due to a significant drop in client demand associated with government and societal actions to address COVID-19. In particular, the outbreak and preventive measures taken to help curb the spread of COVID-19 had severe adverse impacts on our operations and business results. Many of the clients we serve have been severely impacted by COVID-19 and have stopped or significantly reduced their need for our staffing services, which has resulted in lower than expected revenue. Declines were broad-based across multiple geographies and industries.PeopleReady , our largest segment, experienced a revenue decline of 43%. PeopleManagement, our lowest margin segment, experienced a revenue decline of 23%.PeopleScout , our highest margin segment, experienced a revenue decline of 53%.PeopleScout has a large number of clients in the travel and leisure sectors which have been impacted significantly by COVID-19. Gross profit Total company gross profit as a percentage of revenue for the thirteen weeks endedJune 28, 2020 , decreased by 340 basis points to 23.2%, compared to 26.6% for the same period in the prior year. OurPeopleScout business contributed approximately 240 basis points to the decline, partially due to 80 basis points of severance and the remaining decline from the continued impact of lower volume due to the rapid revenue decline caused by COVID-19, which outpaced the reductions to our service delivery team. Our staffing businesses contributed 100 basis points to the decline primarily due to health concerns and higher pay rates necessary to attract employees given the availability of federal unemployment benefits. Selling, general and administrative expense Total company SG&A expense decreased by$29 million to$97 million , or 27.1% of revenue for the thirteen weeks endedJune 28, 2020 , compared to$126 million , or 21.4% of revenue for the same period in the prior year. The decrease in SG&A expense is primarily due to comprehensive actions we put in place inMarch 2020 to dramatically reduce costs in response to rapidly changing market conditions due to COVID-19. We have taken appropriate steps to reduce SG&A expense while preserving the key strengths of our business to ensure we are prepared when business conditions improve. The decrease in SG&A expense also included$3 million in employee retention credits made available under theCanada Emergency Wage Subsidy for Canadian employees and the Australian JobKeeper subsidy for Australian employees during the thirteen weeks endedJune 28, 2020 . These reductions were partially offset by$8 million in workforce reduction costs recorded in the thirteen weeks endedJune 28, 2020 , compared to$1 million for the same period in the prior year. We will continue to monitor and manage our SG&A expense in the current environment. Loss from operations Total company loss from operations was$21 million for the thirteen weeks endedJune 28, 2020 , compared to operating income of$21 million for the same period in the prior year. We experienced a loss from operations primarily due to the significant drop in client demand associated with government and societal actions to address COVID-19. The significant drop in demand, increased price sensitivity, increased contingent worker wages and preventive measures taken to help curb the spread of COVID-19 had severe adverse impacts on our operations and business results. The declines were partially offset by the decisive and comprehensive cuts to SG&A expense in line with management's plans to preserve the key strengths of our business. Page - 21
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Net loss Net loss was$8 million , or$0.23 per diluted share for the thirteen weeks endedJune 28, 2020 , compared to net income of$19 million , or$0.49 per diluted share for the same period in the prior year. This loss from operations was partially offset by the income tax benefit of$13 million . The difference between the statutory federal income tax rate of 21% and our effective income tax rate results primarily from the federal Work Opportunity Tax Credit ("WOTC") and the Coronavirus Aid, Relief and Economic Security Act ("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 We are focused on capital preservation as a top priority. In response to the rapidly changing market conditions, we have taken swift action to reduce operating costs and other cash outflows to preserve capital to fund working capital needs. OnMarch 16, 2020 , we amended our revolving credit agreement which extended the maturity of the revolving credit facility established thereunder ("Revolving Credit Facility") toMarch 16, 2025 . OnJune 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 million . As ofJune 28, 2020 , we are in a strong financial position with cash and cash equivalents of$92 million and$125 million available under the most restrictive covenant of our Revolving Credit Facility for total liquidity of$217 million . RESULTS OF OPERATIONS Total company results The global economy and our business have been dramatically affected by COVID-19. To date, COVID-19 has surfaced all around the world and resulted in country-level quarantines, global travel restrictions and broad-based economic slowdowns. There are no reliable estimates of how long the pandemic will last or how many people will be affected by it. For that reason, it is difficult to predict the short- and long-term impacts of the pandemic on our business at this time. Our first priority, with regard to COVID-19, has been to ensure the safety, health and hygiene of our associates, employees, clients, suppliers and others with whom we partner in our business activities to continue our business operations in this unprecedented business environment. We implemented comprehensive measures across our businesses to keep our workers and clients healthy and safe, including adherence to guidance from theCenters for Disease Control and Prevention ,World Health Organization ,Occupational Safety and Health Administration and other key authorities. We formed a specialized task force tracking the most up-to-date developments and safety standards, and created an internal information hub with safety protocols, dashboards, FAQs, and daily reporting by location on the COVID-19 impact. In addition to posting TrueBlue's action plan on our external websites, we are actively sharing information on how companies and workers can protect themselves via ongoing emails, social outreach, webinars and other digital communications. We are fully leveraging our JobStackTM app to help companies and workers connect safely through a digital environment, and are rolling out a new virtual onboarding capability to minimize in-person branch visits. We are also leveraging our AffinixTM technology to enable companies to connect with permanent talent through virtual hiring and sourcing. Working closely with clients to enforce safety standards, we are supporting efforts in providing masks for associates, hand sanitizer, workplace disinfecting, social distancing, and infrared temperature checks. We instruct all our workers to stay home if they are not feeling well or have been exposed to COVID-19. Immediate notification and self-quarantine protocols are in place if a staff member, associate or client's employee is exposed to COVID-19, and ourField Safety Specialists closely evaluate any assignments related to clean-up of potentially infectious job sites. To ensure business continuity and support for clientswho need workers for essential services, we established a Centralized Branch Support Center and are ready to implement Regional Command Centers as needed to serve as backup for our 600+ branches. Our branches follow strict sanitation and social distancing guidelines. In addition, across the TrueBlue organization, we suspended all international travel and restricted nonessential domestic travel for our employees and are providing remote work capabilities for our Tacoma andChicago support centers as well as other locations. In response to these rapidly changing market conditions, we are taking all appropriate steps to reduce SG&A expense and other cash outflows. We continue to monitor this rapidly evolving situation and guidance from domestic and international authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. There may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, it is difficult to estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. However, we do expect that it will continue to have a material adverse impact on our future revenue, overall profitability Page - 22
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and liquidity. For additional discussion on the uncertainties and business risks
associated with COVID-19, refer to "Risk Factors" in Part II, Item 1A of this
Quarterly Report on Form 10-Q.
The following table presents selected financial data:
Thirteen weeks ended Twenty-six weeks ended
(in thousands, except
percentages and per share June 28, June 30, June 28, June 30,
data) 2020 % of revenue 2019 % of revenue 2020 % of revenue 2019 % of revenue
Revenue from services $ 358,944 $ 588,594 $ 853,196 $ 1,140,946
Total revenue growth (decline) (39.0 )% (4.2 )%
% (25.2 )% (2.4 )%
Gross profit $ 83,225 23.2 % $ 156,683 26.6 % $ 209,384 24.5 % $ 303,378 26.6 %
Selling, general and 97,200 27.1 % 125,965 21.4 % 214,581 25.2 % 253,945 22.3 % administrative expense Depreciation and amortization 7,256 2.0 % 9,827
1.7 % 16,350 1.9 % 19,779 1.7 %
Goodwill and intangible asset - - 175,189 -
impairment charge
Income (loss) from operations (21,231 ) (5.9 )% 20,891 3.5 % (196,736 ) (23.1 )% 29,654 2.6 %
Interest and other income (412 ) 827
(expense), net (149 ) 1,380
Income (loss) before tax (21,643 ) 21,718
expense (benefit) (196,885 ) 31,034
Income tax expense (benefit) (13,475 ) 2,312 (38,223 ) 3,352
Net income (loss) $ (8,168 ) (2.3 )% $ 19,406 3.3 % $ (158,662 ) (18.6 )% $ 27,682 2.4 %
Net income (loss) per diluted $ (0.23 ) $ 0.49
share $ (4.39 ) $ 0.70
We report our business as three reportable segments described below and in Note
11: Segment Information, to our consolidated financial statements found in
Item 1 of this Quarterly Report on Form 10-Q.
• PeopleReady provides access to reliable workers in the United States ,
on-demand contingent general and skilled labor.
people to work in a broad range of industries that include construction,
manufacturing and logistics, warehousing and distribution, waste and
recycling, energy, retail, hospitality, and others. As of December 29,
2019 , we had a network of 614 branches across all 50 states, Canada andJobStackTM, which connects workers with jobs, creates a virtual exchange
between our workers and clients, and allows our branch resources to expand
their recruiting and sales efforts and service delivery. JobStack is
helping to competitively differentiate our services, expand our reach into
new demographics, and improve both service delivery and work order fill
rates as we lead our business into a digital future.
• PeopleManagement predominantly provides a wide range of on-site contingent
staffing and workforce management solutions to larger multi-site
manufacturing, distribution and fulfillment clients. In comparison with
PeopleReady , services are larger in scale, longer in duration, anddedicated service teams are located at the client's facility. Effective
on-site contingent industrial workforce operating segments, Staff
Management | SMX and SIMOS Insourcing Solutions ("SIMOS") into one
operating segment titled "On-site," which continues to be reported under
PeopleManagement. On-site includes our branded service offerings forhourly (Staff Management | SMX) and productivity-based (SIMOS) industrial
staffing solutions serving the same industries and similar clients.
PeopleManagement also includes Centerline Drivers ("Centerline"), which
specializes in dedicated and contingent commercial truck drivers to the
transportation and distribution industries.
•
acquisition services from candidate sourcing and engagement through the
onboarding of employees as well as employer branding services. Our
solution is highly scalable and flexible, which allows for the outsourcing
of all or a subset of skill categories across a series of recruitment,
hiring and onboarding steps. Our solution delivers improved talent quality
and candidate experience, faster hiring, increased scalability, lower cost
of recruitment, greater flexibility, and increased compliance. Our clients
outsource the recruitment process to
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.
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OurPeopleScout reportable segment also includes a managed service provider business, which provides clients with improved quality and cost management of their contingent labor vendors. Revenue from services Revenue from services by reportable segment was as follows: Thirteen weeks ended Twenty-six weeks ended (in thousands, except June 28, Growth Segment % June 30, Segment % June 28, Growth Segment % June 30, Segment % percentages) 2020 (decline) % of total 2019 of total 2020 (decline) % of total 2019 of total Revenue from services: PeopleReady$ 209,151 (43.4 )% 58.2$ 369,261 62.7 %$ 508,445 (27.0 )% 59.6 %$ 696,129 61.0 % PeopleManagement 118,661 (22.7 ) 33.1 153,530 26.1 260,275 (16.5 ) 30.5 311,574 27.3 PeopleScout 31,132 (52.7 ) 8.7 65,803 11.2 84,476 (36.6 ) 9.9 133,243 11.7 Total company$ 358,944 (39.0 )% 100.0 %$ 588,594 100.0 %$ 853,196 (25.2 )% 100.0 %$ 1,140,946 100.0 % The workforce solutions business is dependent on the overall strength of the labor market. Clients tend to use contingent workers to supplement their existing workforce and generally hire permanent workers when long-term demand is expected to increase. As a consequence, our revenue from services tends to increase quickly when the economy begins to grow. Conversely, our revenue decreases quickly when the economy begins to weaken and thus contingent staff positions are eliminated, permanent hiring is frozen and turnover replacement diminishes. Total company revenue declined 39.0% to$358.9 million for the thirteen weeks endedJune 28, 2020 , compared to the same period in the prior year. During the quarter, revenue declined 42.3% inApril 2020 , then moderated to a decline of 34.6% inJune 2020 , compared to the same periods in the prior year. The decline was due to a significant drop in client demand associated with government and societal actions to address COVID-19. In particular, the outbreak and preventive measures taken to help curb the spread of COVID-19 had severe adverse impacts on our operations and business results. Many of the clients we serve have been severely impacted by COVID-19 and have stopped or significantly reduced their need for our staffing services, which has resulted in lower than expected revenue. Declines were broad-based across multiple geographies and industries. Our business remained open as we continued to provide key services to essential businesses. We expect significant adverse impact on our future revenue as well as our overall profitability and liquidity for as long as the negative economic impacts of COVID-19 are being experienced.PeopleReady PeopleReady revenue declined to$209.2 million for the thirteen weeks endedJune 28, 2020 , a 43.4% decrease compared to the same period in the prior year, and declined to$508.4 million for the twenty-six weeks endedJune 28, 2020 , a 27.0% decrease compared to the same period in the prior year. The decline was due to a significant drop in client demand associated with government and societal actions to address COVID-19. In particular, the outbreak and preventive measures taken to help curb the spread of COVID-19 had severe adverse impacts on our operations and business results. Many of the clients we serve have been severely impacted by COVID-19 and have stopped or significantly reduced their need for our staffing services, which has resulted in lower than expected revenue. Declines were broad-based across multiple geographies and industries and most significant during the month ofApril 2020 , when revenue declined 46.2% compared to the prior year. Demand partially recovered to a decline of 39.3% inJune 2020 . We believe the decline was partially offset by the use of our industry-leading JobStack mobile application that digitally connects workers with jobs. During the second quarter of 2020,PeopleReady dispatched approximately 0.6 million shifts via JobStack and achieved an all-time high digital fill rate of 53%. JobStack has an 88% worker adoption rate and 24,300 client users as of the second quarter of 2020, or an increase of 38% compared to the same period in the prior year. JobStack is helping us safely connect people with work during this time of crisis. PeopleManagement PeopleManagement revenue declined to$118.7 million for the thirteen weeks endedJune 28, 2020 , a 22.7% decrease compared to the same period in the prior year, and declined to$260.3 million for the twenty-six weeks endedJune 28, 2020 , a 16.5% decrease compared to the same period in the prior year. Many of the clients we serve have been severely impacted by COVID-19 and have stopped or significantly reduced their need for our staffing services, which has resulted in lower than expected revenue. Declines were broad-based across multiple industries and the most significant during the month ofApril 2020 , when revenue declined 29.9% compared to the prior year. Demand partially recovered to a decline of 15.5% inJune 2020 , as compared to the prior year driven by manufacturers reopening (including food processors and auto manufacturing suppliers) and strength in e-commerce. Page - 24
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PeopleScout PeopleScout revenue declined to$31.1 million for the thirteen weeks endedJune 28, 2020 , a 52.7% decrease compared to the same period in the prior year, and declined to$84.5 million for the twenty-six weeks endedJune 28, 2020 , a 36.6% decrease compared to the same period in the prior year. The revenue decline was partially due to the impact of reduced project-based recruiting volumes at a large industrial client, which declined throughout 2019 due to the client's adverse business conditions resulting in no order volume in the fourth quarter of 2019. Revenue declined further due to less demand from existing clients resulting from the economic disruption caused by COVID-19. Our clients in the travel and leisure industries were hit especially hard. Gross profit Gross profit was as follows: Thirteen weeks ended Twenty-six weeks ended (in thousands, except percentages) June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Gross profit$ 83,225 $ 156,683 $ 209,384 $ 303,378 Percentage of revenue 23.2 % 26.6 % 24.5 % 26.6 % Gross profit as a percentage of revenue declined to 23.2%, or 340 basis points for the thirteen weeks endedJune 28, 2020 , compared to 26.6% for the same period in the prior year. OurPeopleScout business contributed approximately 240 basis points to the decline partially due to 80 basis points of severance and the remaining decline from the continued impact of lower volume due to the rapid revenue decline caused by the disruption of COVID-19, which outpaced the reductions to our service delivery team. Our staffing businesses contributed 100 basis points to the decline primarily due to health concerns and higher pay rates necessary to attract employees given the availability of federal unemployment benefits. Gross profit as a percentage of revenue declined to 24.5%, or 210 basis points for the twenty-six weeks endedJune 28, 2020 , compared to 26.6% for the same period in the prior year. OurPeopleScout business contributed approximately 160 basis points to the decline partially due to 40 basis points of severance and the remaining decline from the continued impact of lower volume due to the rapid revenue decline caused by the disruption of COVID-19, which outpaced the reductions to our service delivery team. Our staffing businesses contributed 50 basis points to the decline primarily due to health concerns and higher pay rates necessary to attract employees given the availability of federal unemployment benefits, partially offset by a benefit from a reduction in estimated costs to comply with the Affordable Care Act, which were recorded in prior fiscal years, net of additional insurance coverage associated with former workers' compensation carriers in liquidation in the prior year. We do not expect the benefit from lower affordable health care costs to reoccur. Selling, general and administrative expense SG&A expense was as follows: Thirteen weeks ended Twenty-six weeks ended (in thousands, except percentages) June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Selling, general and administrative expense$ 97,200 $ 125,965 $ 214,581 $ 253,945 Percentage of revenue 27.1 % 21.4 % 25.2 % 22.3 % Total company SG&A expense decreased by$28.8 million and$39.4 million for the thirteen and twenty-six weeks endedJune 28, 2020 , compared to the same periods in the prior year, respectively. The decrease in SG&A expense was primarily due to comprehensive actions we put in place inMarch 2020 to dramatically reduce costs in response to rapidly changing market conditions due to COVID-19. We have taken appropriate steps to reduce SG&A expense while preserving the key strengths of our business to ensure we are prepared for the time when business conditions improve. The decrease in SG&A expense included$3.1 million in employee retention credits made available under theCanada Emergency Wage Subsidy for Canadian employees and the Australian JobKeeper subsidy for Australian employees during the thirteen weeks endedJune 28, 2020 . These reductions were partially offset by$8.0 million and$8.8 million in workforce reduction costs recorded in the thirteen and twenty-six weeks endedJune 28, 2020 , respectively, compared to$0.5 million for the same periods in the prior year. We will continue to monitor and manage our SG&A expense in the current environment. Page - 25
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Depreciation and amortization
Depreciation and amortization was as follows:
Thirteen weeks ended Twenty-six weeks ended
(in thousands, except percentages) June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019
Depreciation and amortization $ 7,256 $ 9,827 $ 16,350 $ 19,779
Percentage of revenue 2.0 % 1.7 % 1.9 % 1.7 %
Depreciation and amortization decreased primarily due to the impairment to our
acquired client relationships intangible assets of $34.7 million in the first
quarter of 2020 and several intangible assets that were fully amortized in the
second half of 2019, which resulted in a decline in amortization expense for the
thirteen and twenty-six weeks ended June 28, 2020 .
Goodwill and intangible asset impairment charge
Goodwill and intangible asset impairment charge were as follows:
Thirteen weeks ended Twenty-six weeks ended
(in thousands, except percentages) June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019
Goodwill and intangible asset
impairment charge $ - $ - $ 175,189 $ -
A summary of the goodwill and intangible asset impairment charge by reportable
segment is as follows:
(in thousands) PeopleManagement PeopleScout Total company
Goodwill $ 45,901 $ 94,588 $ 140,489
Client relationships 9,700 25,000 34,700
Total $ 55,601 $ 119,588 $ 175,189
We evaluate goodwill 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,
operating performance indicators, competition, client engagement, legal factors,
or sale or disposition of a significant portion of a reporting unit. We monitor
the existence of potential impairment indicators throughout the fiscal year.
During the first quarter of 2020, the following events made it more likely than
not that an impairment had occurred and accordingly, we performed an interim
impairment test as of the last day of our fiscal first quarter of 2020.
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. This was
further impacted in March 2020 by COVID-19, which created a sudden global
economic shock. Most industries we serve have been 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 to address COVID-19. We have experienced and expect to continue
to experience significant decreases to our revenues and corresponding operating
results due to weakness in pricing and demand for our services during this
severe economic downturn. While demand is expected to recover in the future, the
rate of recovery will vary by geography and industry depending on the economic
impact caused by COVID-19 and the rate at which infections decline to a
contained level.
As a result of our interim impairment test in the first quarter of 2020, we
concluded that the carrying amounts of goodwill for PeopleScout RPO, PeopleScout
MSP and PeopleManagement On-Site reporting units exceeded their implied fair
values and we recorded a non-cash impairment loss of $140.5 million . The total
goodwill carrying value of $45.9 million for PeopleManagement On-site reporting
unit was fully impaired. The goodwill impairment charge for PeopleScout RPO and
PeopleScout MSP was $92.2 million and $2.4 million , respectively. The remaining
goodwill balances for PeopleScout RPO and PeopleScout MSP were $22.7 million and
$9.7 million , respectively, as of June 28, 2020 .
We generally record acquired intangible assets that have finite useful lives,
such as client relationships, in connection with business combinations. 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. With the decrease in demand for
our services due to the economic impact caused
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by COVID-19, we have lowered our future expectations, which was the primary trigger of an impairment to our acquired client relationships intangible assets for our PeopleScout RPO and PeopleManagement On-Site reporting units of$34.7 million in the first quarter of 2020. The impairment charge for PeopleScout RPO and PeopleManagement On-site reporting units was$25.0 million and$9.7 million , respectively. The remaining client relationship intangible asset balances related to assets impaired for PeopleScout RPO and PeopleScout MSP were$5.8 million and$8.1 million , respectively, as ofJune 28, 2020 . Income taxes The income tax expense and the effective income tax rate were as follows: Thirteen weeks ended Twenty-six weeks ended (in thousands, except percentages) June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Income tax expense (benefit)$ (13,475 ) $ 2,312 $ (38,223 ) $ 3,352 Effective income tax rate 62.3 % 10.6 % 19.4 % 10.8 % Our tax provision and our effective tax rate are subject to variation due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss by jurisdiction, tax credits, government audit developments, changes in laws, regulations and administrative practices, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income and loss. For example, the impact of the following 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 semi-fixed nature of discrete items, tax credits and non-deductible expenses is magnified on our effective tax rate due to lower pre-tax income or loss. The items accounting for the difference between income taxes computed at the statutory federal income tax rate and income taxes reported on the Consolidated Statements of Operations and Comprehensive Income (Loss) are as follows: Thirteen weeks ended Twenty-six weeks ended June 28, 2020 % June 30, 2019
%
$ (21,643 ) $ 21,718
Federal income tax expense (benefit) at statutory rate$ (4,545 ) 21.0 %$ 4,561 21.0 %$ (41,346 ) 21.0 %$ 6,517 21.0 % Increase (decrease) resulting from: State income taxes, net of federal benefit (1,644 ) 7.6 1,062 4.9 (9,952 ) 5.1 1,517 4.9Goodwill and intangible asset impairment impact - - - - 21,849 (11.1 ) - - Benefit from the CARES Act (3,595 ) 16.6 - - (5,698 ) 2.9 - - Job tax credits, net (3,905 ) 18.0 (3,464 ) (16.0 ) (3,982 ) 2.0 (5,065 ) (16.3 ) Other non-deductible/non-taxable items 214 (0.9 ) 153 0.7 906 (0.5 ) 383 1.2
Income tax expense (benefit)
Significant fluctuations in our effective rate are primarily due to the
non-deductible goodwill and intangible asset impairment charge, the CARES Act
and the WOTC hiring credits. Other differences between the statutory federal
income tax rate result from state and foreign income taxes and certain other
non-deductible and non-taxable items.
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS
As a result of our interim impairment test, we concluded that the carrying amounts of goodwill and other intangible assets for selected reporting units exceeded their implied fair values and we recorded a non-cash impairment loss of$175.2 million . Of the total impairment loss,$84.7 million (tax effected$21.8 million ) related to reporting units from stock acquisitions and accordingly are not deductible for tax purposes. The remaining impairment loss of$90.5 million (tax effected$23.3 million ) related to reporting units from asset acquisitions and accordingly are deductible for tax purposes. OnMarch 27, 2020 the CARES Act was enacted inthe United States . The CARES Act is an emergency economic aid package to help mitigate the impact of COVID-19. Among other things, the CARES Act provides certain changes to tax laws, including the ability to carry back current year losses to obtain refunds related to prior year tax returns with a higher federal tax rate of 35%. The net operating loss carry back benefit will vary depending on estimated results for the year. WOTC is designed to encourage employers to hire workers from certain targeted groups with higher than average unemployment rates. WOTC is generally calculated as a percentage of wages over a twelve month period up to worker maximums by targeted group. Based on historical results and business trends, we estimate the amount of WOTC we expect to earn related to wages of the current year. However, the estimate is subject to variation because 1) a small percentage of our workers qualify for one or more of the many targeted groups; 2) the targeted groups are subject to different incentive credit rates and limitations; 3) credits fluctuate depending on economic conditions and qualified worker retention periods; and 4) state and federal offices can delay their credit certification processing and have inconsistent certification rates. We recognize additional prior year hiring credits if credits in excess of original estimates have been certified by government offices. WOTC is due to expire at the end of 2020. Segment performance We evaluate performance based on segment revenue and segment profit (loss). Segment profit (loss) includes revenue, related cost of services, and ongoing operating expenses directly attributable to the reportable segment. Segment profit (loss) excludes goodwill and intangible impairment charges, depreciation and amortization expense, unallocated corporate general and administrative expense, interest, other income and expense, income taxes, and other adjustments not considered to be ongoing. See Note 11: Segment Information, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional details on our reportable segments, as well as a reconciliation of segment profit to income (loss) before tax expense (benefit). Segment profit (loss) should not be considered a measure of financial performance in isolation or as an alternative to net income (loss) in the Consolidated Statements of Operations and Comprehensive Income (Loss) in accordance with accounting principles generally accepted inthe United States of America , and may not be comparable to similarly titled measures of other companies.PeopleReady segment performance was as follows:
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