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