Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide the reader of our accompanying consolidated financial statements ("financial statements") with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect future results. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to our financial statements. 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 2020, we connected approximately 490,000 people with work and served approximately 99,000 clients. Our operations are managed as three business segments:PeopleReady , PeopleManagement and PeopleScout. See Note 15: Segment Information, to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K for additional details on our operating segments and reportable segments. OurPeopleReady segment offers on-demand, industrial staffing; our PeopleManagement segment offers contingent, on-site industrial staffing and commercial driver services; and our PeopleScout segment offers recruitment process outsourcing ("RPO") and managed service provider ("MSP") solutions. COVID-19 Beginning inMarch 2020 , jurisdictions across the countries we serve began implementing restrictions to protect public health as the impact of COVID-19 set in. Many of our clients temporarily halted or reduced operations which had a significant impact on our revenue. However, throughout the pandemic, our business has remained open and provided key services to essential businesses and other businesses as COVID-19 restrictions were lifted. Nevertheless, the preventative measures and individual precautions taken to help curb the spread of COVID-19, and the resulting negative impact on the economy, continue to have an adverse impact on client demand for our services and our business results. Our first priority continues to be the health and safety of our associates, employees, clients, suppliers and others with whom we partner in our business activities. We implemented comprehensive measures across our businesses to keep our associates, employees and clients healthy and safe, including adherence to guidance from theCenters for Disease Control and Prevention ,World Health Organization ,Occupational Safety and Health Administration and other key authorities. In response to the rapidly changing market conditions as a result of COVID-19, commencing inApril 2020 , we took actions to reduce our operating expenses while preserving the key strengths of our business to ensure we were prepared as business conditions improved. Our cost management strategies are on track and continue to improve our operating results and preserve our liquidity. At this time, we have ample liquidity to satisfy our cash needs. However, the long-term impacts of the pandemic are difficult to predict. Accordingly, we will continue to evaluate the nature and extent of the impact of COVID-19 on our business, consolidated results of operations, financial condition, and liquidity. We continue to monitor this evolving situation and guidance from domestic and international authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. There may be developments outside our control requiring us to adjust our operating plan. As such, it is difficult to estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. For additional discussion on the uncertainties and business risks associated with COVID-19, refer to Risk Factors in Part I, Item 1A of this Annual Report on Form 10-K. OnMarch 27, 2020 ,the United States ("U.S.") government enacted the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), which among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 outbreak and options to defer payroll tax payments for a limited period. Based on our evaluation of the CARES Act, we qualify for certain employer payroll tax credits as well as the deferral of payroll tax payments into the future. Additionally, the Canadian government enacted theCanada Emergency Wage Subsidy and the Australian government enacted the JobKeeper subsidy to help employers offset a portion of their employee wages for a limited period of time. For the year endedDecember 27, 2020 , we recognized$9.9 million in government subsidies and delayed payments of$57.1 million for the employer portion of social security taxes. Page - 22
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS Revenue from services Total company revenue declined 22.1% to$1.8 billion for the year endedDecember 27, 2020 , compared to the prior year. The decline was due to a drop in client demand associated with government and societal actions taken to address COVID-19, which had severe adverse impacts on our operations and business results. Many of our clients have been severely impacted by COVID-19, which has resulted in reduced demand for our services. We saw steady improvements in our year-over-year revenue trends since the second quarter of 2020. Revenue declined 39.0% in the second quarter, 25.5% in the third quarter and 12.3% in the fourth quarter. These improvements were broad-based across most of the industries and geographies we serve.PeopleReady , our largest segment, experienced a revenue decline of 25.4%, compared to the prior year.PeopleReady's clients have been severely impacted by COVID-19, which has resulted in reduced demand for our services. The impact of COVID-19 onPeopleReady's clients has moderated in the third and fourth quarters of 2020. PeopleManagement, our lowest margin segment, experienced a revenue decline of 8.6%, compared to prior year. PeopleManagement supplies an outsourced workforce that involves multi-year, multi-million dollar on-site or driver relationships. These types of client engagements are often more resilient in an economic downturn. PeopleScout, our highest margin segment, experienced revenue decline of 36.6%, compared to the prior year. PeopleScout has a large number of clients in the travel and leisure industries which continue to be disproportionately impacted by COVID-19. Gross profit Total company gross profit as a percentage of revenue for the year endedDecember 27, 2020 was 23.9%, compared to 26.2% for the prior year. Our staffing businesses contributed approximately 140 basis points of the decline due to approximately 100 basis points from pressure on our bill and pay rates caused by higher pay rates to entice associates to take work assignments given COVID-19 health concerns and the availability of additional federal unemployment benefits. As with prior recessions, our ability to pass through higher costs plus a markup in our bill rates was hampered due to a variety of economic factors negatively impacting our clients. This decline was partially offset by a benefit of 30 basis points from a reduction in estimated costs to comply with the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively the "ACA"), which were accrued in prior fiscal years. Our PeopleScout business contributed approximately 90 basis points to the decline due to client mix and lower volume driven by the rapid revenue decline, which outpaced the reductions to our service delivery team, and severance of approximately 20 basis points. Selling, general and administrative ("SG&A") expense Total company SG&A expense decreased by$108.0 million to$408.3 million , or 22.1% of revenue for the year endedDecember 27, 2020 , compared to$516.2 million , or 21.8% of revenue for the prior year. The decrease in SG&A expense was primarily due to comprehensive actions we put in place beginning inApril 2020 to dramatically reduce costs in response to rapidly changing market conditions due to COVID-19. These actions reduced SG&A expense by 20.9% for the year endedDecember 27, 2020 , compared to the prior year. We believe we have taken the right actions to reduce SG&A expense, while still investing in technology and preserving the key strengths of our business to ensure we are prepared as business conditions improve. The decrease in SG&A expense benefited from$8.6 million of employee retention subsidies made available under theCanada Emergency Wage Subsidy and the Australian JobKeeper subsidy, as well as aU.S. payroll tax credit in accordance with the provisions of the CARES Act. These reductions were partially offset by a$2.8 million one-time discretionary bonus rewarding our employees for their efforts in 2020, and$8.9 million in workforce reduction costs recorded in the year endedDecember 27, 2020 , compared to$3.3 million in workforce reduction costs recorded in the prior year. Loss from operations Total company loss from operations was$174.9 million for the year endedDecember 27, 2020 , compared to income from operations of$66.2 million for the prior year. The decrease in income from operations was primarily due to a goodwill and intangible asset impairment charge of$175.2 million in the first quarter of 2020 and the significant decline in client demand associated with government and societal actions taken to address COVID-19. The significant drop in demand, increased price sensitivity, increased associate wages, and preventive measures taken to help curb the spread of COVID-19, had severe adverse impacts on our operations and business results. The declines were partially offset by the decisive and comprehensive cuts to SG&A expense in line with management's plans to preserve the key strengths of our business. Page - 23
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS Net loss Net loss was$141.8 million , or$4.01 per diluted share for the year endedDecember 27, 2020 , compared to net income of$63.1 million , or$1.61 per diluted share for the prior year. The net loss includes an income tax benefit of$31.4 million ,$23.3 million of which was due to the goodwill and intangible asset impairment, resulting in an effective tax rate of 18.1%, compared to 10.0% in the prior year. Our effective tax rate was lower in the prior year as a result of the federal Work Opportunity Tax Credit ("WOTC") reducing the tax expense, while increasing the tax benefit in 2020. WOTC is designed to encourage employers to hire associates from certain targeted groups with higher than average unemployment rates. Additional highlights We are focused on cash management as a top priority. In response to the rapidly changing market conditions as a result of COVID-19, we have taken swift actions to reduce operating costs and other cash outflows to preserve working capital. Additionally, 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 ofDecember 27, 2020 , we had cash and cash equivalents of$62.5 million and no outstanding debt resulting in an unused credit facility. We also returned excess capital to shareholders by repurchasing$52.4 million or 9.2% of our common stock. These purchases were initiated prior to the medical community's acknowledgment of the expected severity of the impact of COVID-19. RESULTS OF OPERATIONS COVID-19 The global economy and our business have been dramatically affected by the COVID-19 pandemic. We continue to monitor its impact on all aspects of our business. Throughout the pandemic, our businesses have remained open. We provided key services to essential businesses and other businesses as COVID-19 restrictions were lifted. However, the preventative measures and precautions taken to help curb the spread of COVID-19 and the resulting negative impact on the economy, continue to have a severe adverse impact on client demand for our services and our business results. Our first priority, with regard to COVID-19, has been to ensure the health and safety of our associates, employees, clients, suppliers and others with whom we partner in our business activities to continue our operations in this unprecedented environment. We implemented comprehensive measures across our businesses to keep our associates, employees and clients healthy and safe, including adherence to guidance from 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 impact of COVID-19. In addition to posting TrueBlue's action plan on our external websites, we are actively sharing information on how companies and workers can protect themselves via ongoing emails, social outreach, webinars and other digital communications.PeopleReady is fully leveraging our JobStackTM app to help companies and associates connect safely through a digital environment, and are rolling out a new virtual onboarding capability to minimize in-person branch visits. PeopleScout is also leveraging our AffinixTM technology to enable companies to connect with permanent talent through virtual hiring and sourcing. Working closely with clients to enforce safety standards, we are supporting efforts in providing masks and hand sanitizer for associates, disinfecting workplaces, encouraging social distancing, and providing infrared temperature checks. We instruct our associates and employees to stay home if they are not feeling well or have been exposed to COVID-19. Immediate notification and self-quarantine protocols are in place if an employee, associate or client's employee is exposed to COVID-19, and ourField Safety Specialists closely evaluate any assignments related to clean-up of potentially infectious job sites. To ensure business continuity and support for clients who need associates for essential services, we established a Centralized Branch Support Center and are ready to implement Regional Command Centers as needed to serve as backup for our 600+ branches. Our branches follow strict sanitation and social distancing guidelines. In addition, across the TrueBlue organization, we suspended all international travel and restricted nonessential domestic travel for our employees and are providing remote work capabilities for our Tacoma andChicago support centers as well as other locations. In response to the rapidly changing market conditions as a result of COVID-19, we have taken steps to reduce SG&A expense and other cash outflows. We continue to monitor this evolving situation and guidance from domestic and international authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. For additional discussion on the uncertainties and business risks associated with COVID-19, refer to Risk Factors in Part I, Item 1A of this Annual Report on Form 10-K. Page - 24
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS Total company results The following table presents selected financial data: (in thousands, except percentages and per share data) 2020 % of revenue 2019 % of revenue Revenue from services$ 1,846,360 $ 2,368,779 Gross profit 440,645 23.9 % 619,948 26.2 % Selling, general and administrative expense 408,307 22.1 % 516,220 21.8 % Depreciation and amortization 32,031 1.7 % 37,549 1.6 % Goodwill and intangible asset impairment charge 175,189 - Income (loss) from operations (174,882) (9.5) % 66,179 2.8 % Interest expense and other income, net 1,620 3,865 Income (loss) before tax expense (benefit) (173,262) 70,044 Income tax expense (benefit) (31,421) 6,971 Net income (loss)$ (141,841) (7.7) %$ 63,073 2.7 % Net income (loss) per diluted share$ (4.01) $ 1.61 Revenue from services Revenue from services by reportable segment was as follows: Decline Segment % of Segment % of (in thousands, except percentages) 2020 % total 2019 total Revenue from services: PeopleReady$ 1,099,462 (25.4) % 59.5 %$ 1,474,062 62.2 % PeopleManagement 586,822 (8.6) 31.8 642,233 27.1 PeopleScout 160,076 (36.6) 8.7 252,484 10.7 Total company$ 1,846,360 (22.1) % 100.0 %$ 2,368,779 100.0 % The workforce solutions industry is dependent on the overall strength of the labor market. Clients tend to use a contingent workforce to supplement their existing workforce and generally hire permanent employees when long-term demand is expected to increase. As a consequence, our revenue from services tends to increase when the economy begins to grow. Conversely, our revenue declines when the economy begins to weaken and thus contingent staff positions are eliminated, permanent hiring is frozen and turnover replacement diminishes. Total company revenue declined to$1.8 billion for the year endedDecember 27, 2020 , a 22.1% decrease compared to the prior year. The decline was due to a drop in client demand associated with government and societal actions taken to address COVID-19, which had severe adverse impacts on our operations and business results. Many of our clients have been severely impacted by COVID-19, which has resulted in reduced demand for our services. However, we saw steady improvement in our year-over-year revenue trends since the second quarter of 2020. Revenue declined 39.0% in the second quarter, 25.5% in the third quarter and 12.3% in the fourth quarter. These improvements were broad-based across most of the industries and geographies we serve. Page - 25
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS We report our business as three reportable segments described below and in Note 15: Segment Information, to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K.PeopleReady PeopleReady revenue declined to$1.1 billion for the year endedDecember 27, 2020 , a 25.4% decrease compared to the prior year. The decline was due to a drop in client demand associated with government and societal actions taken to address the impact of COVID-19. In particular, the outbreak and preventive measures taken to help curb the spread of COVID-19 had severe adverse impacts on our operations and business results. Many of the clients we serve have been severely impacted by COVID-19, which has resulted in reduced demand for our services. We experienced steady improvements in our year-over-year revenue trends since the second quarter of 2020, which declined 43.4%. Revenue in the third quarter of 2020 declined 28.9%, and the fourth quarter of 2020 declined 18.5%. These improvements were broad-based across most geographies and industries, driven primarily by the retail, manufacturing, services and transportation industries. We believe the year-over-year decline was moderated by the use of our industry-leading JobStack mobile app that digitally connects associates with jobs. During fiscal 2020,PeopleReady achieved a digital fill rate of 53.0%, compared to 48.0% in the prior year. As ofDecember 27, 2020 , JobStack had more than 26,000 client users, an increase of 23.5% compared to the prior year. We are focused on driving clients to become JobStack heavy users, which we define as clients with 50 or more touches on JobStack per month. Heavy client users have consistently posted better year-over-year growth rates compared to otherPeopleReady clients. We more than doubled our heavy client user mix from 11.0% in 2019 to 24.0% in 2020. Also during 2020, we introduced new digital onboarding features in JobStack that cut application time in half. This has led to a significant increase in the ratio of associates put to work compared to all applicants. JobStack is helping us safely connect people with work during this time of crisis. PeopleManagement PeopleManagement revenue declined to$586.8 million for the year endedDecember 27, 2020 , an 8.6% decrease compared to the prior year. Many of the clients we serve have been impacted by COVID-19 and have reduced their need for our services, which has resulted in lower revenue. PeopleManagement has experienced improving revenue trends during the third and fourth quarters of 2020, compared to the second quarter of 2020, primarily driven by the fact that PeopleManagement supplies an outsourced workforce that involves multi-year, multi-million dollar on-site or driver relationships. These types of client engagements are often more resilient in an economic downturn. Year-over-year, revenue declined 22.7% in the second quarter of 2020, declined 7.6% in the third quarter of 2020, and grew 4.6% in the fourth quarter of 2020. These improvements were broad-based across most of the geographies and industries we serve. PeopleScout PeopleScout revenue declined to$160.1 million for the year endedDecember 27, 2020 , a 36.6% decrease compared to the prior year. The revenue decline was primarily due to less demand from existing clients resulting from the economic disruption caused by the impact of COVID-19. PeopleScout clients in the travel and leisure industries were especially impacted. These clients, which represented approximately 29% of the client mix for the year endedDecember 29, 2019 , were disproportionately impacted and experienced a 61.0% decrease in revenue compared to prior year. Year-over-year, revenue declined 52.7% in the second quarter of 2020, 47.6% in the third quarter of 2020, and 23.8% in the fourth quarter of 2020. Gross profit Gross profit was as follows: (in thousands, except percentages) 2020 2019 Gross profit$ 440,645 $ 619,948 Percentage of revenue 23.9 % 26.2 %
Gross profit as a percentage of revenue declined 230 basis points to 23.9% for
the year ended
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS •Our staffing businesses contributed approximately 140 basis points of the decline due to approximately 100 basis points from pressure on our bill and pay rates caused by higher pay rates to entice associates to take work assignments given COVID-19 health concerns and the availability of additional federal unemployment benefits. As with prior recessions, our ability to pass through higher costs plus a markup in our bill rates was hampered due to a variety of economic factors negatively impacting our clients' businesses. This decline was partially offset by a benefit of 30 basis points from a reduction in estimated costs to comply with the ACA, which were accrued in prior fiscal years. •Our PeopleScout business contributed approximately 90 basis points to the decline due to client mix and lower volume due to the rapid revenue decline, which outpaced the reductions to our service delivery team, and severance of approximately 20 basis points. We continue to actively manage workers' compensation cost by improving the safety of our associates with our safety programs, and actively controlling the cost of health care. We had favorable adjustments to our prior year workers' compensation self-insurance reserves of$19.2 million or 1.0% of revenue for the year endedDecember 27, 2020 , compared to$21.7 million , or 0.9% of revenue for the prior year. Continued favorable adjustments to our prior year workers' compensation liabilities are dependent on our ability to continue to lower accident rates and claim costs. For additional discussion regarding our workers' compensation liability, see the "Workers' compensation insurance, collateral and claims reserves" section within Liquidity and Capital Resources. Selling, general and administrative expense SG&A expense was as follows: (in thousands, except percentages) 2020 2019
Selling, general and administrative expense
22.1 % 21.8 % Total company SG&A expense decreased by$108.0 million to$408.3 million , or 22.1% of revenue for the year endedDecember 27, 2020 , compared to$516.2 million , or 21.8% of revenue for the prior year. The decrease in SG&A expense was primarily due to comprehensive actions we put in place beginning inApril 2020 to dramatically reduce costs in response to rapidly changing market conditions due to COVID-19. These actions reduced SG&A expense by 20.9% for the year endedDecember 27, 2020 , compared to the prior year. We believe we have taken the right actions to reduce SG&A expense, while still investing in technology and preserving the key strengths of our business to ensure we are prepared as business conditions improve. The decrease in SG&A expense benefited from$8.6 million in employee retention subsidies made available under theCanada Emergency Wage Subsidy and Australian JobKeeper subsidy, as well as aU.S. payroll tax credit in accordance with the provisions of the CARES Act. These reductions were partially offset by a$2.8 million one-time discretionary bonus rewarding our employees for their efforts in 2020, and$8.9 million in workforce reduction costs recorded in the year endedDecember 27, 2020 , compared to$3.3 million in workforce reduction costs recorded in the prior year. Depreciation and amortization Depreciation and amortization was as follows: (in thousands, except percentages) 2020 2019 Depreciation and amortization$ 32,031 $ 37,549 Percentage of revenue 1.7 % 1.6 % Depreciation and amortization decreased primarily due to the impairment to our acquired client relationships intangible assets of$34.7 million in the first quarter of 2020 and several intangible assets that were fully amortized in the second half of 2019, which resulted in a decline in amortization expense for the year endedDecember 27, 2020 . Page - 27
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSISGoodwill and intangible asset impairment charge A summary of the goodwill and intangible asset impairment charge for the year endedDecember 27, 2020 by reportable segment is as follows: (in thousands) PeopleManagement PeopleScout Total company Goodwill $ 45,901$ 94,588 $ 140,489 Client relationships 9,700 25,000 34,700 Total $ 55,601$ 119,588 $ 175,189 We experienced a significant decline in our stock price during the first quarter of 2020. As a result of the decline in stock price, our market capitalization fell significantly below the recorded value of our consolidated net assets. The reduced market capitalization reflected the expected continued weakness in pricing and demand for our services in an uncertain economic climate that was further impacted 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 revenue and corresponding operating results due to weakness in pricing and demand for our services during the severe economic downturn. While demand is expected to recover in the future, the rate of recovery will vary by geography and industry depending on the economic impact caused by COVID-19 and the availability and efficacy of the COVID-19 vaccines. As a result of our interim impairment test in the first quarter of 2020, we concluded that the carrying amounts of goodwill for PeopleScout RPO, PeopleScout MSP and PeopleManagement On-Site reporting units exceeded their implied fair values and we recorded a non-cash impairment charge of$140.5 million . The total goodwill carrying value of$45.9 million for PeopleManagement On-Site reporting unit was fully impaired. The goodwill impairment charge for PeopleScout RPO and PeopleScout MSP was$92.2 million and$2.4 million , respectively. The remaining goodwill balances for PeopleScout RPO and PeopleScout MSP were$23.6 million and$9.7 million , respectively, as ofDecember 27, 2020 . With the decrease in demand for our services due to the economic impact caused by COVID-19, we lowered our future expectations, which was the primary trigger of an impairment to our acquired client relationships intangible assets for our PeopleScout RPO and PeopleManagement On-Site reporting units of$34.7 million in the first quarter of 2020. The remaining client relationship intangible asset balances related to assets impaired for PeopleScout RPO and PeopleManagement On-Site were$5.1 million and$7.2 million , respectively, as ofDecember 27, 2020 . Income taxes The income tax expense (benefit) and the effective income tax rate were as follows: (in thousands, except percentages) 2020 2019 Income tax expense (benefit)$ (31,421) $ 6,971 Effective income tax rate 18.1 % 10.0 % Our tax provision and our effective tax rate are subject to variation due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss by jurisdiction, tax credits, government audit developments, changes in laws, regulations and administrative practices, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of tax credits and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower. Page - 28
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS Our effective tax rate for the year endedDecember 27, 2020 was 18.1% compared to 10.0% for the prior year. Significant fluctuations in our effective rate are primarily due to the non-deductible goodwill and intangible asset impairment charge, the CARES Act and WOTC. Other differences between the statutory federal income tax rate result from state and foreign income taxes, certain other non-deductible and non-taxable items, tax exempt interest, and the tax effects of stock-based compensation. Changes to our effective tax rate are as follows: (in thousands, except percentages) 2020 % 2019 % Income tax expense (benefit) based on statutory rate$ (36,385) 21.0 %$ 14,709 21.0 % Increase (decrease) resulting from: State income taxes, net of federal benefit (6,631) 3.8 3,666 5.3 Job and other tax credits, net (7,719) 4.5 (13,627) (19.4) Benefit from the CARES Act (2,939) 1.7 - - Non-deductible goodwill impairment charge 21,849 (12.6) - - Non-deductible and non-taxable items 124 (0.1) 1,559 2.2 Foreign taxes (977) 0.5 282 0.4 Other, net 1,257 (0.7) 382 0.5 Total tax expense (benefit)$ (31,421) 18.1 %$ 6,971 10.0 % The non-cash goodwill and intangible asset impairment charge of$175.2 million , recorded in the first quarter of 2020, includes$84.7 million (tax effect of$21.8 million ) related to reporting units from stock acquisitions and accordingly are not deductible for tax purposes. The remaining impairment charge of$90.5 million (tax effect of$23.3 million ) is related to reporting units from asset acquisitions and accordingly is deductible for tax purposes. OnMarch 27, 2020 , the CARES Act was enacted in theU.S. The CARES Act is an emergency economic aid package to help mitigate the impact of COVID-19. Among other things, the CARES Act provides certain changes to tax laws, including the ability to carry back current year losses to obtain refunds related to prior year tax returns with a higher federal tax rate of 35%. WOTC is designed to encourage employers to hire workers from certain targeted groups with higher than average unemployment rates. WOTC is generally calculated as a percentage of wages over a twelve-month period up to worker maximums by targeted groups. Based on historical results and business trends, we estimate the amount of WOTC we expect to earn related to wages of the current year. However, the estimate is subject to variation because 1) a small percentage of our associates qualify for one or more of the many targeted groups; 2) the targeted groups are subject to different incentive credit rates and limitations; 3) credits fluctuate depending on economic conditions and qualified worker retention periods; and 4) state and federal offices can delay their credit certification processing and have inconsistent certification rates. We adjust prior year hiring credits if it becomes clear that our estimates need revision.Congress extended the WOTC program throughDecember 31, 2025 as a result of the Consolidated Appropriations Act of 2021. See Note 13: Income Taxes, to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for additional information. Segment performance We evaluate performance based on segment revenue and segment profit. Segment profit includes revenue, related cost of services, and ongoing operating expenses directly attributable to the reportable segment. Segment profit excludes goodwill and intangible asset impairment charges, depreciation and amortization expense, unallocated corporate general and administrative expense, interest expense, other income and expense, income taxes, and other adjustments not considered to be ongoing. See Note 15: Segment Information, to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for additional details on our reportable segments, as well as a reconciliation of segment profit to income before tax expense. Segment profit should not be considered a measure of financial performance in isolation or as an alternative to net income (loss) in the Consolidated Statements of Operations and Comprehensive Income (Loss) in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP") and may not be comparable to similarly titled measures of other companies. Page - 29
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSISPeopleReady segment performance was as follows: (in thousands, except percentages) 2020 2019 Revenue from services$ 1,099,462 $ 1,474,062 Segment profit$ 43,200 $ 82,106 Percentage of revenue 3.9 % 5.6 %PeopleReady segment profit declined$38.9 million for the year endedDecember 27, 2020 , compared to the prior year. The revenue decline was primarily due to the decrease in client demand associated with government and societal actions taken to address COVID-19. The decline in demand, as well as increased price sensitivity, increased associate wages, and preventive measures taken to help curb the spread of COVID-19 had severe adverse impacts on our segment profit and our segment profit as a percent of revenue. The decline in segment profit was partially offset by the decisive and comprehensive cuts to SG&A expense in line with management's plans to preserve the key strengths of our business. We believe our revenue decline was partially offset by the use of our industry-leading JobStack mobile app that digitally connects associates with jobs. JobStack is helping us safely connect people with work during this time of crisis. PeopleManagement segment performance was as follows: (in thousands, except percentages) 2020 2019 Revenue from services$ 586,822 $ 642,233 Segment profit$ 11,717 $ 12,593 Percentage of revenue 2.0 % 2.0 % PeopleManagement segment profit declined$0.9 million for the year endedDecember 27, 2020 , compared to the prior year. The revenue decline was primarily due to the decrease in demand from our clients associated with government and societal actions taken to address COVID-19. The decline in demand, as well as increased price sensitivity, higher pay rates necessary to attract employees given the availability of federal unemployment benefits, and preventive measures taken to help curb the spread of COVID-19 had adverse impacts on our segment profit. The decline in segment profit was partially offset by the decisive and comprehensive cuts to SG&A expense in line with management's plans to preserve the key strengths of our business. PeopleScout segment performance was as follows: (in thousands, except percentages) 2020 2019 Revenue from services$ 160,076 $ 252,484 Segment profit$ 4,525 $ 37,831 Percentage of revenue 2.8 % 15.0 % PeopleScout segment profit declined$33.3 million for the year endedDecember 27, 2020 , compared to the prior year. The decline in segment profit was primarily due to a decline in demand from our clients associated with government and societal actions taken to address COVID-19. PeopleScout clients in the travel and leisure industries were especially impacted. These clients, which represented approximately 29% of the client mix for the year endedDecember 29, 2019 , were disproportionately impacted and experienced a 61.0% decrease in revenue compared to the prior year. Due to the decline in revenue, we took actions to reduce the cost of our service delivery which lagged the rapid revenue decline caused by the disruption of COVID-19 and negatively impacted our segment profit and our segment profit as a percent of revenue. The decline in segment profit was partially offset by our cost reduction programs, which have reduced SG&A expense in line with our plans. FISCAL 2019 AS COMPARED TO FISCAL 2018 See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, found in Part II of the Annual Report on Form 10-K for the fiscal year endedDecember 29, 2019 for discussion of fiscal 2019 compared to fiscal 2018. Page - 30
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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, how people will be affected by it, or how rapidly people are vaccinated. For that reason, it is difficult to predict the short- and long-term impacts of the pandemic on our business at this time. Due to the uncertainty surrounding COVID-19 and its impact on the business environment, we have limited visibility into our financial condition, results of operations and cash flows in the future. However, we are providing the following future outlook for fiscal 2021. Operating outlook •We anticipate gross margin to decline between 290 and 250 basis points in the first quarter of 2021, compared to the same period in the prior year. This decline includes a 130 basis point benefit we received in the first quarter of 2020 (30 basis points annualized) from a reduction in estimated health care benefits costs, which was accrued in prior fiscal years. The remaining decline is primarily due to bill and pay rate pressures. For fiscal 2021, we anticipate gross margin to decline between 50 and 10 basis points, compared to the same period in the prior year. This is primarily due to bill and pay rate pressure which we expect to moderate over the course of 2021 and the reduction in estimated health care benefits costs previously mentioned, partially offset by improving PeopleScout volumes. •InApril 2020 , we took steps to reduce our operating cost structure and other cash outflows to preserve cash to fund working capital needs. We expect these actions will have the effect of reducing our operating expenses by$13 million to$17 million in the first quarter of 2021, compared to the same period in the prior year, while preserving the key strengths of our business to ensure we are prepared when business conditions improve. As the demand environment begins to improve, we will slowly and thoughtfully bring back spending that is critical for the long-term health and sustainability of our business. •We expect an effective income tax rate for full year 2021, before job tax credits, of 23% to 27%. We expect job tax credits of$8 million to$10 million . Our effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of tax credits and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower. Liquidity outlook •Capital expenditures for the first quarter of 2021 will be approximately$16 million . This includes$8 million of build out costs planned for ourChicago support center, of which$6 million will be reimbursed by our landlord and reflected in our operating cash flows. Capital expenditures for fiscal 2021 are expected to be between$37 million and$41 million . This includes$10 million of build out costs planned for ourChicago support center, of which$7 million will be reimbursed by our landlord and reflected in our operating cash flows. We remain committed to technological innovation to transform our business for a digital future. We continue to make investments in online and mobile apps to improve access to associates and candidates, as well as improve the speed and ease of connecting our clients and associates for our staffing businesses, and candidates for our RPO business. We expect these investments will increase the competitive differentiation of our services over the long-term, improve the efficiency of our service delivery, and reducePeopleReady's dependence on local branches to find associates and connect them with work. Examples includePeopleReady's JobStack mobile app and PeopleScout's Affinix talent acquisition technology. •We expect our Revolving Credit Facility and strong financial position to provide ample liquidity. AtDecember 27, 2020 , we had cash and cash equivalents of$63 million and no outstanding balance drawn on our Revolving Credit Facility, resulting in$161 million available for future borrowings based on our most restrictive covenant. We have an option to increase the total line of credit amount from$300 million to$450 million , subject to bank approval. •During fiscal 2020, we generated a cash flow benefit from delayed payroll tax payments under the CARES Act of$57 million . We plan to take advantage of favorable net operating loss carryback provisions in the CARES Act by repaying this benefit in the third quarter of 2021. •We had a significant reduction in our accounts receivable balance of$57 million for fiscal 2020 primarily due to lower revenue caused from a decline in demand for our services from COVID-19, as well as a 7% decrease in days sales outstanding due to focused collection efforts. These efforts resulted in a substantial source of cash in 2020, but will become a cash use as revenue recovers in future periods and we fund increasing accounts receivable. Page - 31
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY (in thousands) 2020 2019 Net income (loss)$ (141,841) $ 63,073 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 32,031 37,549 Goodwill and intangible asset impairment charge 175,189 - Provision for doubtful accounts 6,300 7,661 Stock-based compensation 9,113 9,769 Deferred income taxes (26,791) 1,263 Non-cash lease expense, net of changes in operating lease liabilities 633 (355) Other operating activities
(686) (1,589) Changes in operating assets and liabilities, net of amounts divested: Accounts receivable
57,146 5,450 Income tax receivable (1,122) (6,480) Accounts payable and other accrued expenses (6,561) 6,921 Accrued wages and benefits 55,053 (9,494) Workers' compensation claims reserve (125) (10,828) Other assets and liabilities (5,808) (9,409) Net cash provided by operating activities $
152,531
Cash flows from operating activities Net cash provided by operating activities increased to$152.5 million for the year endedDecember 27, 2020 , compared to$93.5 million for the prior year. Changes to adjustments to reconcile net income (loss) to net cash provided by operating activities were primarily due to: •Depreciation and amortization decreased primarily due to the impairment to our acquired client relationships intangible assets for our PeopleScout RPO and PeopleManagement On-Site reporting units of$34.7 million in the first quarter of 2020, and several intangible assets that became fully amortized in 2019. •Net loss for the year endedDecember 27, 2020 includes a non-cash goodwill and intangible asset impairment charge of$175.2 million ($151.9 million after tax). The charge was a result of the adverse impact on expected future cash flows related to the current state of the economy and the impact of COVID-19. The charge does not impact the company's current cash, liquidity, or banking covenants. •Deferred tax assets increased primarily due to$23.3 million of discrete tax benefit resulting from goodwill and intangible asset impairment charges. Impairment charges related to goodwill and intangible assets acquired in an asset acquisition are deductible for tax purposes. Changes to operating assets and liabilities were primarily due to: •Cash provided by accounts receivable of$57.1 million was due to lower revenue from a decline in demand for our services, as well as a 7% decrease in days sales outstanding due to focused collection efforts. •Cash used for accounts payable and accrued expenses of$6.6 million was primarily due to cost control programs, a decline in customer rebates and timing of payments. The cost control programs were implemented in response to the economic impact of COVID-19. Customer rebates have declined significantly due to clients not meeting rebate volume thresholds as a result of the impact of COVID-19 on their businesses. •Cash provided by accrued wages and benefits of$55.1 million was primarily due to delayed payments for the employer portion of social security taxes incurred betweenMarch 27, 2020 andDecember 31, 2020 , for both our temporary associates and permanent employees, which is allowed under the CARES Act. We plan to pay the deferred amount bySeptember 15, 2021 . Page - 32
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS •Generally, our workers' compensation claims reserve for estimated claims decreases as contingent labor services decline, as is the case in the current and prior year. Our worker safety programs have had a positive impact and have created favorable adjustments to our workers' compensation liabilities recorded in prior periods. Continued favorable adjustments to our prior year workers' compensation liabilities are dependent on our ability to continue to lower accident rates and claim costs. Cash flows from investing activities (in thousands) 2020
2019
Capital expenditures$ (27,066) $
(28,119)
Acquisition of business, net of divestiture of business - 215 Purchases and sales of restricted investments, net (7,345) 6,273 Net cash used in investing activities$ (34,411) $
(21,631)
Net cash used in investing activities was$34.4 million for the year endedDecember 27, 2020 , compared to$21.6 million for the prior year. Capital expenditures are primarily due to our continued investment in software technology. We remain committed to technological innovation to transform our business for a digital future that makes it easier for our clients to do business with us and easier to connect people to work. We continue making investments in online and mobile apps to improve access to associates and candidates, as well as improve the speed and ease of connecting our clients and associates for our staffing businesses, and candidates for our RPO business. We expect these investments will increase the competitive differentiation of our services over the long-term, improve the efficiency of our service delivery, and reducePeopleReady's dependence on local branches to find associates and connect them with work. Examples includePeopleReady's JobStack mobile app and PeopleScout's Affinix talent acquisition technology. Restricted investments consist of collateral that has been provided or pledged to insurance carriers and state workers' compensation programs, as well as collateral to support the deferred compensation plan. Lower collateral requirements from our workers' compensation insurance providers were more than offset by an acceleration of collateral funding required by our primary insurance provider for the year endedDecember 27, 2020 . Cash flows from financing activities (in thousands) 2020 2019 Purchases and retirement of common stock$ (52,346) $ (38,826) Net proceeds from employee stock purchase plans 922 1,329 Common stock repurchases for taxes upon vesting of restricted stock (2,438) (2,222) Net change in revolving credit facility
(37,100) (42,900)
Other (1,540) (296) Net cash used in financing activities $
(92,502)
Net cash used in financing activities was$92.5 million for the year endedDecember 27, 2020 , compared to$82.9 million for the prior year. During the year endedDecember 27, 2020 , we repurchased$40.0 million of our common stock under an accelerated share repurchase program and$12.4 million of our common stock in the open market, including commissions, for a total of$52.4 million , or 9.2% of our common stock under existing authorizations. These purchases were initiated prior to the medical community's acknowledgment of the expected severity of the impact of COVID-19. As ofDecember 27, 2020 ,$66.7 million remains available for repurchase under existing authorizations. We have historically returned capital to shareholders through share repurchases. Share repurchases are an important part of our capital allocation priorities, however, the second amendment to our credit agreement (the "Second Amendment") prohibits us from repurchasing shares untilJuly 1, 2021 . See Note 10: Shareholders' Equity, to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for additional details on our share repurchase program. FISCAL 2019 AS COMPARED TO FISCAL 2018 See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, found in Part II of the Annual Report on Form 10-K for the fiscal year endedDecember 29, 2019 for discussion of fiscal 2019 compared to fiscal 2018. Page - 33
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS 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 toMarch 16, 2025 and modified certain other terms. OnJune 24, 2020 , we entered into the Second Amendment, which modified terms of our financial covenants as well as certain other provisions of the Revolving Credit Facility. OnJanuary 28, 2021 , we entered into a third amendment (the "Third Amendment"), which clarified the definition of the Asset Coverage Ratio financial covenant of the Revolving Credit Facility. The Third Amendment was effective as ofDecember 27, 2020 (refer to Note 16: Subsequent Event, to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for details of the Third Amendment). Subject to lender approval, we have the ability to increase our Revolving Credit Facility from$300.0 million up to$450.0 million . Obligations under the Revolving Credit Facility are guaranteed by TrueBlue and 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. See Note 8: Long-term Debt, to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for details on our Revolving Credit Facility. Workers' compensation insurance, collateral and reserves Workers' compensation insurance We provide workers' compensation insurance for our associates and permanent employees. The majority of our current workers' compensation insurance policies cover claims for a particular event above a$2.0 million deductible limit, on a "per occurrence" basis and accordingly, we are substantially self-insured. For workers' compensation claims originating 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 and restricted cash and investments Our insurance carriers and certain state workers' compensation programs require us to collateralize a portion of our workers' compensation obligation, for which they become responsible should we become insolvent. The collateral typically takes the form of cash and cash-backed instruments, highly rated investment grade securities, letters of credit, and surety bonds. On a regular basis, these entities assess the amount of collateral they will require from us relative to our workers' compensation obligation. Such amounts can increase or decrease independent of our assessments and reserves. We generally anticipate that our collateral commitments will continue to grow as we grow our business. We pay our premiums and deposit our collateral in installments. The majority of the restricted cash and investments collateralizing our self-insured workers' compensation policies are held in a trust at the Bank of New York Mellon ("Trust"). Our total collateral commitments were made up of the following components for the fiscal period end dates presented: December 27, December 29, (in thousands) 2020 2019
Cash collateral held by workers' compensation insurance carriers
29,410 23,681 Investments held in Trust 152,247 149,373 Letters of credit 6,095 6,202 Surety bonds (1) 20,616 20,731 Total collateral commitments$ 230,621 $ 222,243 (1)Our surety bonds are issued by independent insurance companies on our behalf and bear annual fees based on a percentage of the bond, which is determined by each independent surety carrier. These fees do not exceed 2.0% of the bond amount, subject to a minimum charge. Page - 34
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS 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. AtDecember 27, 2020 , we had restricted cash and investments totaling$240.5 million . Restricted cash and investments consist principally of collateral that has been provided or pledged to insurance carriers for workers' compensation and state workers' compensation programs. We have agreements with certain financial institutions that allow us to restrict cash and cash equivalents and investments for the purpose of providing collateral instruments to our insurance carriers to satisfy workers' compensation claims. The majority of our collateral obligations are held in a Trust. See Note 4: Restricted Cash and Investments, to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for details on our restricted cash and investments. We established investment policy directives for the Trust with the first priority to preserve capital, second to ensure sufficient liquidity to pay workers' compensation claims, third to diversify the investment portfolio and fourth to maximize after-tax returns. Trust investments must meet minimum acceptable quality standards. The primary investments includeU.S. Treasury securities,U.S. agency debentures,U.S. agency mortgages, corporate securities and municipal securities. For those investments rated by nationally recognized statistical rating organizations the minimum ratings at time of purchase are: S&P Moody's Fitch Short-term rating A-1/SP-1 P-1/MIG-1 F-1 Long-term rating A A2 A Workers' compensation reserve The following table provides a reconciliation of our collateral commitments to our workers' compensation reserve as of the fiscal period end dates presented: December 27, December 29, (in thousands) 2020 2019 Total workers' compensation reserve$ 255,493 $ 255,618 Add back discount on workers' compensation reserve (1) 18,009 19,316 Less excess claims reserve (2) (54,019) (45,253) Reimbursable payments to insurance provider (3) 6,373 8,121 Other (4) 4,765 (15,559) Total collateral commitments$ 230,621 $ 222,243 (1)Our workers' compensation reserves are discounted to their estimated net present value while our collateral commitments are based on the gross, undiscounted reserve. (2)Excess claims reserve includes the estimated obligation for claims above our deductible limits. These are the responsibility of the insurance carriers against which there are no collateral requirements. (3)This amount is included in restricted cash and represents a timing difference between claim payments made by our insurance carrier and the reimbursement from cash held in the Trust. When claims are paid by our carrier, the amount is removed from the workers' compensation reserve but not removed from collateral until reimbursed to the carrier. (4)Represents the difference between the self-insured reserves and collateral commitments. Our workers' compensation reserve is established using estimates of the future cost of claims and related expenses, which are discounted to their estimated net present value. We discount our workers' compensation liability as we believe the estimated future cash outflows are readily determinable. Our workers' compensation reserve for deductible and self-insured claims is established using estimates of the future cost of claims and related expenses that have been reported but not settled, as well as those that have been incurred but not reported. Reserves are estimated for claims incurred in the current year, as well as claims incurred during prior years. Management evaluates the adequacy of the workers' compensation reserves in conjunction with an independent quarterly actuarial assessment. Factors considered in establishing and adjusting these reserves include, among other things: •changes in medical and time loss ("indemnity") costs; •changes in mix between medical only and indemnity claims; •regulatory and legislative developments impacting benefits and settlement requirements; •type and location of work performed; •the impact of safety initiatives; and •positive or adverse development of claims, which considers the potential impact of COVID-19. Page - 35
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS 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. AtDecember 27, 2020 , the weighted average discount rate was 1.8%. The claim payments are made over an estimated weighted average period of approximately 5.5 years. Our workers' compensation reserves include estimated expenses related to claims above our self-insured limits ("excess claims"), and a corresponding receivable for the insurance coverage on excess claims based on the contractual policy agreements we have with insurance carriers. We discount this reserve and corresponding receivable to its estimated net present value using the discount rates based on average returns of "risk-free"U.S. Treasury instruments available during the year in which the liability was incurred. AtDecember 27, 2020 , the weighted average rate was 1.3%. The claim payments are made and the corresponding reimbursements from our insurance carriers are received over an estimated weighted average period of approximately 17 years. The discounted workers' compensation reserve for excess claims was$54.0 million and$45.3 million as ofDecember 27, 2020 andDecember 29, 2019 , respectively. The discounted receivables from insurance companies, net of valuation allowance, were$52.9 million and$44.6 million as ofDecember 27, 2020 andDecember 29, 2019 , respectively. The following table provides an analysis of changes in our workers' compensation claims reserves: (in thousands) 2020 2019 Beginning balance$ 255,618 $ 266,446 Self-insurance reserve expenses related to current year, net 61,264 78,367 Payments related to current year claims (12,594) (14,997) Payments related to claims from prior years (40,236) (48,177) Changes to prior years' self-insurance reserve, net (19,205) (21,748) Amortization of prior years' discount (1) 1,880 (1,393) Net change in excess claims reserve (2) 8,766 (2,880) Ending balance 255,493 255,618 Less current portion 66,007 73,020 Long-term portion$ 189,486 $ 182,598 (1)The discount is amortized over the estimated weighted average life. In addition, any changes to the estimated weighted average lives and corresponding discount rates for actual payments made are reflected in cost of services on the Consolidated Statement of Operations and Comprehensive Income in the period when the changes in estimates are made. (2)Changes to our excess claims are discounted to its estimated net present value using the risk-free rates associated with the actuarially determined weighted average lives of our excess claims. Certain workers' compensation insurance companies with which we formerly did business are in liquidation and have failed to pay a number of excess claims to date. We have recorded a valuation allowance against all of the insurance receivables from the insurance companies in liquidation. We continue to actively manage workers' compensation cost through the safety of our associates with our safety programs and actively control costs with our network of service providers. These actions have had a positive impact creating favorable adjustments to workers' compensation liabilities recorded in prior periods. Continued favorable adjustments to our prior year workers' compensation liabilities are dependent on our ability to continue to aggressively lower accident rates and costs of our claims. We expect diminishing favorable adjustments to our workers' compensation liabilities as the opportunity for significant reduction to frequency and severity of accident rates diminishes. Future outlook We are focused on cash management as a top priority. In response to the rapidly changing market conditions due to COVID-19, we have reduced operating costs and other cash outflows to preserve capital to fund working capital needs. Our Revolving Credit Facility provides for a revolving line of credit of up to$300.0 million with an option, subject to lender approval, to increase the amount to$450.0 million . 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 ofDecember 27, 2020 , we are in a strong financial position with cash and cash equivalents of$62.5 million , no debt outstanding and total liquidity of$160.9 million under the most restrictive covenants of our Revolving Credit Facility. We expect approximately$16 million of capital expenditures in the first quarter of 2021 and$37 million to$41 million in fiscal 2021. These capital expenditures include build-out costs for ourChicago support center of approximately$8 million in the first Page - 36
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS quarter of 2021 and$10 million in fiscal 2021, of which approximately$6 million and$7 million , respectively, will be reimbursed by our landlord. These reimbursements will be reflected in our operating cash flows. The CARES Act included employer payroll tax credits for wages paid to employees who were unable to work during the COVID-19 outbreak. Under the Act, we were allowed to delay payments for our portion of social security taxes (6.2% of taxable wages) incurred betweenMarch 27, 2020 andDecember 31, 2020 , for both our associates and permanent employees. We anticipate the deferred amount of$57.1 million will be paid bySeptember 15, 2021 . Our insurance carriers and certain state workers' compensation programs require us to collateralize a portion of our workers' compensation obligation, for which they become responsible should we become insolvent. The collateral typically takes the form of cash and cash-backed instruments, highly-rated investment grade securities, letters of credit, and surety bonds. We continue to have risk that these collateral requirements may be increased by our insurers due to our loss history and market dynamics, including from the impact of COVID-19. We have contractual commitments in the form of operating leases related to office space, vehicles and equipment. Our leases have remaining terms of up to 16 years. See Note 9: Commitments and Contingencies, to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for details on our operating lease contractual commitments. We have purchase obligation agreements to purchase goods and services in the ordinary course of business that are enforceable, legally binding and specify all significant terms. See Note 9: Commitments and Contingencies, to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for details on our purchase obligations. We believe that cash provided from operations and our capital resources will be adequate to meet our cash requirements for the next 12 months. SUMMARY OF CRITICAL ACCOUNTING ESTIMATES Management's discussion and analysis of financial condition and results of operations discusses our financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the following accounting estimates are the most critical to understand and evaluate our reported financial results, and they require management's most subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Considerations related to COVID-19 We have considered COVID-19 related impacts to our estimates, as appropriate, within our financial statements and there may be changes to those estimates in future periods. However, we believe that the accounting estimates used are appropriate after considering the increased uncertainties surrounding the severity and duration of COVID-19. Such estimates and assumptions are subject to inherent uncertainties, which may result in actual future amounts differing from reported estimated amounts. Workers' compensation reserve We maintain reserves for workers' compensation claims, including the excess claims portion above our deductible, using actuarial estimates of the future cost of claims and related expenses. These estimates include claims that have been reported but not settled and claims that have been incurred but not reported. These reserves, which reflect potential liabilities to be paid in future periods based on estimated payment patterns, are discounted to estimated net present value using discount rates based on average returns on "risk-free"U.S. Treasury instruments, which are evaluated on a quarterly basis. We evaluate the reserves regularly throughout the year and make adjustments accordingly. If the actual cost of such claims and related expenses exceed the amount estimated, additional reserves may be required. Changes in reserve estimates are reflected in cost of services on the Consolidated Statements of Operations and Comprehensive Income in the period when the changes in estimates are made. Our workers' compensation reserves include estimated expenses related to excess claims and a corresponding receivable for the insurance coverage on excess claims based on the contractual policy agreements we have with insurance companies. We discount the reserve and its corresponding receivable to their estimated net present values using the risk-free rates associated Page - 37
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS with the actuarially determined weighted average lives of our excess claims. When appropriate, we record a valuation allowance against the insurance receivable to reflect amounts that may not be realized. There are two main factors that impact workers' compensation cost: the number of claims and the cost per claim. The number of claims is driven by the volume of hours worked, the business mix which reflects the type of work performed, and the safety of the environment where the work is performed. The cost per claim is driven primarily by the severity of the injury, the state in which the injury occurs, related medical costs, and lost-time wage costs. A 5.0% change in one or more of the above factors would result in a change to workers' compensation cost of approximately$3 million . Our reserve balances have been positively impacted primarily by the success of our accident prevention programs. In the event that we are not able to further reduce our accident rates, the positive impacts to our reserve balance will diminish. Accounts receivable allowance for credit losses We establish an estimate for the allowance for credit losses resulting from the failure of our clients to make required payments by applying an aging schedule to pools of assets with similar risk characteristics. Based on an analysis of the risk characteristics of our clients and associated receivables, we have concluded our pools are as follows: •PeopleReady and Centerline Drivers ("Centerline") have a large, diverse set of clients, generally with frequent, low dollar invoices due to the daily nature of the work we perform. This results in high turnover in accounts receivable and lower rates of non-payment. •PeopleManagement On-Site has a smaller number of clients, and follows a contractual billing schedule. The invoice amounts are higher than that ofPeopleReady and Centerline, with longer payment terms. •PeopleScout has a smaller number of clients, and generally sends invoices on a consolidated basis for a client. Invoice amounts are generally higher for PeopleScout than for PeopleManagement On-Site, with similar payment terms. When specific clients are identified as no longer sharing the same risk profile as their current pool, they are removed from the pool and evaluated separately. The credit loss rates applied to each aging category by pool are based on current collection efforts, historical collection trends, write-off experience, client credit risk, current economic data and forecasted information. The allowance for credit loss is reviewed monthly and represents our best estimate of the amount of expected credit losses. Each month, past due or delinquent balances are identified based upon a review of aged receivables performed by collections and operations. Past due balances are written off when it is probable the receivable will not be collected. Changes in the allowance for credit losses are recorded in SG&A expense on the Consolidated Statements of Operations and Comprehensive Income (Loss). Business combinations We account for our business acquisitions using the acquisition method of accounting. The purchase price of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We determine the estimated fair values after review and consideration of relevant information including discounted cash flows, quoted market prices and estimates made by management. Determining the fair value of an acquired company is judgmental in nature and involves the use of significant estimates and assumptions. The significant judgments include estimation of future cash flows, which is dependent on forecasts; estimation of the long-term rate of growth; estimation of the useful life over which cash flows will occur; and determination of a weighted average cost of capital, which is risk-adjusted to reflect the specific risk profile of the business being purchased. Intangible assets that arise from contractual/legal rights, or are capable of being separated, are measured and recorded at fair value and amortized over the estimated useful life. If practicable, assets acquired and liabilities assumed arising from contingencies are measured and recorded at fair value. If not practicable, such assets and liabilities are measured and recorded when it is probable that a gain or loss has occurred and the amount can be reasonably estimated. The residual balance of the purchase price, after fair value allocations to all identified assets and liabilities, represents goodwill.Goodwill acquired in business combinations is assigned to the reporting unit(s) expected to benefit from the combination as of the acquisition date. Acquisition-related costs are expensed as incurred. Our acquisitions may include contingent consideration, which require us to recognize the fair value of the estimated liability at the time of the acquisition. Subsequent changes in the estimate of the amount to be paid under the contingent consideration arrangement are recognized on the Consolidated Statements of Operations and Comprehensive Income. Cash payments for contingent or deferred consideration are classified within cash flows from investing activities for the purchase price fair value of the contingent consideration while amounts paid in excess are classified within cash flows from operating activities on the Consolidated Statements of Cash Flows. Page - 38
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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 ofDecember 27, 2020 , our operating segments werePeopleReady , PeopleManagement Centerline, PeopleManagement On-Site, PeopleScout RPO, and PeopleScout MSP. Testing for impairment involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds the carrying value, we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, we recognize an impairment charge in an amount equal to the excess, not to exceed the carrying value of the goodwill. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions to evaluate the impact of operating and macroeconomic changes on each reporting unit. We base fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The fair value of each reporting unit is estimated using a combination of a discounted cash flow methodology and the market valuation approach using publicly traded company multiples in similar businesses. The discounted cash flow methodology required significant judgments, including estimation of future cash flows, which is dependent on internally developed forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows would occur, and determination of our weighted average cost of capital, which is risk-adjusted to reflect the specific risk profile of the reporting unit being tested. The market approach identifies similar publicly traded companies and develops a correlation, referred to as a multiple, to apply to the operating results of the reporting units. The primary market multiples to which we compare are revenue and earnings before interest, taxes, depreciation, and amortization. The income and market approaches are equally weighted. These combined fair values are reconciled to our aggregate market value of our shares of common stock outstanding on the date of valuation. We consider a reporting unit's fair value to be substantially in excess of its carrying value at a 20% premium or greater. Interim impairment test During the first quarter of 2020, we experienced a significant decline in our stock price. As a result of the decline in stock price, our market capitalization fell significantly below the recorded value of our consolidated net assets. The reduced market capitalization reflected the expected continued weakness in pricing and demand for our staffing services in a volatile economic climate. This was further impacted 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 revenue and corresponding operating results to continue due to weakness in pricing and demand for our services during this severe economic downturn. While demand was expected to recover in the future, the rate of recovery was expected to vary by geography and industry depending on the economic impact caused by COVID-19 and the rate at which infections would decline to a contained level. Accordingly, we performed an interim impairment test of our goodwill on the last day of our fiscal first quarter (March 29, 2020 ). The weighted average cost of capital used in our interim impairment test ranged from 11.5% to 12.0%. Our control premium was approximately 12%, which management has determined to be reasonable. We carefully considered the economic impact of COVID-19, together with the estimated decreases to our revenue and corresponding operating results as we continued to experience weakness in pricing and demand for our services during the economic downturn. Our estimates were based on our experience with prior recessions, as well as our experience with plans and actions to adjust and adapt to recessions. Given the uncertain nature of the economic impact of COVID-19, and the recovery pattern of the broader economy and its impact on our business, actual results could differ significantly from our estimates. As a result of our interim impairment test, we concluded that the carrying amounts of goodwill for our PeopleScout RPO, PeopleScout MSP and PeopleManagement On-Site reporting units exceeded their implied fair values and we recorded a non-cash impairment charge of$140.5 million , which was included in goodwill and intangible asset impairment charge on the Page - 39
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS 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 substantially in excess of their carrying value at approximately 60% and 195%, respectively. Annual impairment test Given the proximity of our interim impairment measurement date (last day of our fiscal first quarter -March 29, 2020 ) to our annual goodwill impairment measurement date (first day of our fiscal second quarter -March 30, 2020 ), we performed a qualitative assessment to determine whether it was more likely than not that the fair value of any of our reporting units was less than the carrying value. We considered the current and expected future economic and market conditions surrounding COVID-19 and concluded that it was not more likely than not that the goodwill associated with our reporting units were impaired as of the first day of our fiscal second quarter. Therefore, a quantitative assessment was not performed as 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 toDecember 27, 2020 . The remaining goodwill balances for PeopleScout RPO and PeopleScout MSP were$23.6 million and$9.7 million , respectively, as ofDecember 27, 2020 . The loss of a key client, a significant further decline to the economy, or a delayed recovery in key industries we serve, including travel and leisure, could give rise to an additional impairment. Should any one of these events occur, we would need to record an impairment charge to goodwill for the amount by which the carrying value exceeds the reporting unit's fair value, not to exceed the total amount of goodwill. We will continue to closely monitor the operational performance of our reporting units as it relates to goodwill impairment. Based on our 2019 and 2018 annual impairment tests, all reporting units' fair values were substantially in excess of their respective carrying values. Accordingly, there was no impairment charge recognized for the years endedDecember 29, 2019 orDecember 30, 2018 . Indefinite-lived intangible assets We have indefinite-lived intangible assets related to our Staff Management | SMX and PeopleScout trade names. We test our trade names annually for impairment, and when indicators of potential impairment exist. We utilize the relief from royalty method to determine the fair value of each of our trade names. If the carrying value exceeds the fair value, we recognize an impairment charge in an amount equal to the excess, not to exceed the carrying value. Management uses considerable judgment to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates. Interim impairment test We performed an interim impairment test as of the last day of our fiscal first quarter for 2020 (March 29, 2020 ) and determined that the estimated fair values exceeded the carrying amounts for our indefinite-lived trade names. Accordingly, no impairment charge was recognized. Annual impairment test Given the proximity of our interim impairment measurement date (last day of our fiscal first quarter -March 29, 2020 ) to our annual indefinite-lived trade names impairment measurement date (first day of our fiscal second quarter -March 30, 2020 ), we performed a qualitative assessment to determine whether it was more likely than not that the fair value of any of our indefinite-lived trade names was less than the carrying value. We concluded that it was not more likely than not that the indefinite-lived intangible assets associated with our Staff Management | SMX and PeopleScout trade names were impaired as of the first day of our fiscal second quarter. Therefore, a quantitative assessment was not performed as 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 toDecember 27, 2020 .
Based on our our 2019 and 2018 annual indefinite-lived intangible asset
impairment tests, the estimated fair values exceeded their carrying values.
Accordingly, no impairment charge was recognized for the years ended
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS Finite-lived intangible assets and other long-lived assets We review intangible assets that have finite useful lives and other long-lived assets whenever an event or change in circumstances indicates that the carrying value of the asset may not be recoverable. Factors considered important that could result in an impairment review include, but are not limited to, significant underperformance relative to historical or planned operating results, or significant changes in business strategies. We estimate the recoverability of these assets by comparing the carrying amount of the asset to the future undiscounted cash flows that we expect the asset to generate. An impairment charge is recognized when the estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment charge is recognized, the carrying amount of the asset is reduced to its estimated fair value based on discounted cash flow analysis or other valuation techniques. Interim impairment test With the estimated decrease in demand for our services due to the economic impact of COVID-19, we lowered our future expectations, which was the primary trigger of an impairment test as of the last day of our fiscal first quarter for certain of our acquired client relationships intangible assets. As a result of this impairment test, we recorded a non-cash impairment charge for our PeopleScout RPO and PeopleManagement On-Site client relationship intangible assets of$34.7 million , which was included in goodwill and intangible asset impairment charge on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the year endedDecember 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 toDecember 27, 2020 . The remaining client relationship intangible asset balances related to assets impaired for PeopleScout RPO and PeopleManagement On-Site were$5.1 million and$7.2 million , respectively, as ofDecember 27, 2020 . Should actual results decline further or longer than we have currently estimated, the remaining intangible asset balances may become further impaired. We will continue to closely monitor the revenue generated from acquired clients as it relates to client relationship asset impairment. No impairment charge was recognized for the years endedDecember 29, 2019 orDecember 30, 2018 . Estimated contingent legal and regulatory liabilities From time to time we are subject to compliance audits by federal, state, local and foreign authorities relating to a variety of regulations including wage and hour laws, taxes, workers' compensation, immigration, and safety. We are also subject to legal proceedings in the ordinary course of our operations. We have established reserves for contingent legal and regulatory liabilities. We record a liability when management determines that it is probable that a legal claim will result in an adverse outcome and the amount of liability can be reasonably estimated. To the extent that an insurance company or other third party is legally obligated to reimburse us for a liability, we record a receivable for the amount of the probable reimbursement. We evaluate our estimated liability regularly throughout the year and make adjustments as needed. If the actual outcome of these matters is different than expected, an adjustment is charged or credited to expense in the period the outcome occurs or the period in which the estimate changes. Income taxes and related valuation allowances We account for income taxes by recording taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. We measure these expected future tax consequences based upon the provisions of tax law as currently enacted; the effects of future changes in tax laws are not anticipated. Future tax law changes, such as changes to federal and state corporate tax rates and the mix of states and their taxable income, could have a material impact on our financial condition or results of operations. When appropriate, we record a valuation allowance against deferred tax assets to offset future tax benefits that may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based in part upon management's judgments regarding future events and past operating results. Page - 41
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS
NEW ACCOUNTING STANDARDS See Note 1: Summary of Significant Accounting Policies, to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
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