What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-02-15 · 170 added, 125 removed, 264 unchanged (53% of the section changed)

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However, as the economy emerges from periods of uncertainty, contingent labor providers are uniquely positioned to respond quickly to increasing demand for labor and rapidly fill new or temporary positions, replace absent employees, and convert fixed labor costs to variable costs.

Similarly, companies often reduce their in-house recruiting teams during economic downturns, and turn to hybrid or fully outsourced recruiting models during periods of rapid re-hiring and high employee turnover.

In order to competitively differentiate our services in these highly fragmented industries, we are committed to executing our digital strategies, combined with a focus on improving operational efficiencies in order to gain market share.

Similarly, companies turn to hybrid or fully outsourced recruiting models during periods of rapid re-hiring and high employee turnover.

Our business strategy is focused on growth in each of our business segments by investing in innovative technology and initiatives that drive organic growth and improve the client and candidate experience.

We have implemented these core strategies for each of our business segments:

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Fiscal 2023 highlights

Total company revenue grew 3.7% to $2.3 billion for the fiscal year ended December 25, 2022, compared to the prior year.

Overall growth was driven by increased demand for our services during the first half of the year, partially offset by a decrease in demand during the second half of the year as economic uncertainty grew.

Revenue at PeopleReady, our largest segment by revenue, remained relatively unchanged as growth from higher client bill rates and improved worker supply trends were offset by lower client demand due to economic uncertainty.

Revenue at PeopleScout, our smallest segment by revenue but largest by segment profit as a percentage of revenue, grew 20.8% driven by higher volumes at existing clients and project work for new clients who were utilizing our services to fulfill short-term hiring needs.

Revenue at PeopleManagement, our second largest segment by revenue, grew 3.8%, fueled by demand for commercial trucking services.

Total company gross profit as a percentage of revenue for the fiscal year ended December 25, 2022 improved 90 basis points to 26.7%, compared to 25.8% for the prior year.

This increase was primarily driven by the higher rates we bill our clients in our staffing businesses, which have increased ahead of the rates we pay our associates, and lower workers’ compensation costs.

Total company selling, general and administrative (“SG&A”) expense increased 7.8% to $500.7 million for the fiscal year ended December 25, 2022, compared to the prior year.

A portion of the increase in SG&A expense was to support revenue growth of 3.7%, with the remaining increase primarily related to costs incurred for investments in technology and the absence of benefits from government incentive programs related to the coronavirus pandemic (“COVID-19”) received in the prior year.

Revenue growth, along with an improvement in gross profit as a percentage of revenue, was offset by additional SG&A expense, which resulted in net income remaining relatively unchanged at $62.3 million for the fiscal year ended December 25, 2022, compared to the prior year.

As of December 25, 2022, we are in a strong financial position with cash and cash equivalents of $72.1 million, no outstanding debt, and $292.8 million available under our revolving credit agreement (“Revolving Credit Facility”), for total liquidity of $364.9 million.

Our 2023 fiscal year contained 53 weeks, with the 53rd week falling in the fiscal fourth quarter, while our 2022 and 2021 fiscal years contained 52 weeks.

Total company revenue declined 15.4% to $1.9 billion for the fiscal year ended December 31, 2023, compared to the prior year.

The 53rd week contributed an additional $20.3 million in revenue.

The decline was primarily driven by continued economic uncertainty impacting demand trends across all three segments.

Our contingent staffing clients are focused on employee retention and cost reduction, causing them to become increasingly selective in the positions they fill using outsourced labor providers.

The decline in demand has impacted most industries and markets, especially retail, hospitality and services.

Total company gross profit as a percentage of revenue for the fiscal year ended December 31, 2023 declined 20 basis points to 26.5%, compared to 26.7% for the prior year.

This decrease was primarily driven by changes in revenue mix favoring our lower margin staffing businesses.

Total company selling, general and administrative (“SG&A”) expense decreased 1.2% to $494.6 million for the fiscal year ended December 31, 2023, compared to the prior year.

The 53rd week added an additional $6.6 million of expense.

During the year, cost management actions were taken to adjust our operating cost structure to better align with reduced client demand.

The resulting cost savings exceeded both the cost to execute these actions and inflation of certain employee costs, most notably medical benefits.

We remain focused on managing costs to enhance profitability, while maintaining our operational strengths to prepare for demand recovery.

We recorded a goodwill and intangible asset impairment charge of $9.5 million ($9.3 million net of tax), for the fiscal year ended December 31, 2023, primarily within our PeopleScout MSP reporting unit.

The items described above contributed to our net loss of $14.2 million for the fiscal year ended December 31, 2023, compared to net income of $62.3 million in the prior year.

As of December 31, 2023, we had cash and cash equivalents of $61.9 million, no outstanding debt, and $85.9 million available under the most restrictive covenant of our revolving credit agreement (“Revolving Credit Facility”), for total liquidity of $147.8 million.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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Depreciation and amortization 25,821 1.4 29,273 1.3

Income from operations 72,185 3.2 % 68,442 3.1 %

Interest expense and other income, net 1,231 5,408

Income before tax expense 73,416 73,850

Income tax expense 11,143 12,216

Net income $ 62,273 2.8 % $ 61,634 2.8 %

Net income per diluted share $ 1.86 $ 1.74

Goodwill and intangible asset impairment charge 9,485 0.5 — —

Income (loss) from operations

(23,850) (1.3) % 72,185 3.2 %

Interest and other income (expense), net 3,205 1,231

Income (loss) before tax expense (benefit)

(20,645) 73,416

Income tax expense (benefit)

(6,472) 11,143

Net income (loss)

$ (14,173) (0.7) % $ 62,273 2.8 %

Net income (loss) per diluted share

$ (0.45) $ 1.86

Revenue from services

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Total company $ 1,906,243 (15.4) % 100.0 % $ 2,254,184 100.0 %

Total company revenue grew 3.7% to $2.3 billion for the fiscal year ended December 25, 2022, compared to the prior year.

Overall growth was driven by higher client bill rates and improved worker supply trends within our staffing businesses, which includes our PeopleReady and PeopleManagement segments, as well as increased demand for our services during the first half of the year.

This growth was partially offset by a decrease in demand for our services during the second half of the year as economic uncertainty grew.

PeopleReady revenue was relatively unchanged at $1.3 billion for the fiscal year ended December 25, 2022, compared to the prior year.

PeopleReady experienced improving client demand across most geographies during the first half of the year, and benefited from improvements in worker supply trends, job order fill rates, and client bill rates.

These improvements were offset by a decline in demand during the second half of the year, as some clients reduced volumes or paused the use of variable labor to supplement their core workforce as economic uncertainty grew.

We believe our revenue results have been supported by the use of our JobStack TM mobile app that digitally connects associates with work.

During fiscal 2022, PeopleReady associates completed approximately 3.4 million shifts that were dispatched via JobStack, which represented 64% of all completed shifts.

During fiscal 2021, 58% of completed shifts were dispatched via JobStack.

PeopleScout revenue grew 20.8% to $317.5 million for the fiscal year ended December 25, 2022, compared to the prior year.

Revenue growth was stimulated by historically high client employee turnover rates during the first half of the year, creating increased demand at existing clients and project work for new clients who utilized our services to fulfill short-term hiring needs.

During the second half of the year, many clients reduced hiring as a result of uncertainty in the economic environment.

Total company revenue declined 15.4% to $1.9 billion for the fiscal year ended December 31, 2023, compared to the prior year.

The 53rd week contributed an additional $20.3 million in revenue.

The decline was primarily driven by continued economic uncertainty impacting demand trends across all three segments.

Our contingent staffing clients are focused on employee retention and cost reduction, causing them to become increasingly selective in the positions they fill using outsourced labor providers.

Our PeopleScout clients continue to face uncertain future workforce needs, and have reduced volumes in an attempt to manage costs.

PeopleReady revenue declined 13.9% to $1.1 billion for the fiscal year ended December 31, 2023, compared to the prior year.

The 53rd week contributed an additional $11.9 million in revenue.

Revenue declined as a result of continued economic uncertainty, leading our clients to reduce their dependence on variable labor in order to manage their costs.

Our clients are focused on employee retention, causing them to become increasingly selective in the positions they fill using outsourced labor providers.

The decline in demand has impacted clients across most industries, especially within retail, hospitality and services, partially offset by growth in the renewable energy industry which continues to gain momentum.

PeopleScout revenue declined 27.8% to $229.3 million for the fiscal year ended December 31, 2023, compared to the prior year.

The 53rd week contributed an additional $0.8 million in revenue.

Revenue declined as clients continued to respond to economic uncertainty and unknown future workforce needs by reducing hiring volumes, sourcing candidates with internal resources, and initiating hiring freezes to control costs.

MANAGEMENT’S DISCUSSION AND ANALYSIS

PeopleManagement

PeopleManagement revenue grew 3.8% to $663.8 million for the fiscal year ended December 25, 2022, compared to the prior year.

PeopleManagement’s revenue growth was driven by demand for commercial driving services, as well as existing client growth despite challenges in the global supply chain during the first half of the year.

PeopleManagement revenue declined 12.5% to $580.6 million for the fiscal year ended December 31, 2023, compared to the prior year.

The 53rd week contributed an additional $7.6 million in revenue.

Revenue declined as clients in our on-site business continued to respond to economic uncertainty by reducing dependence on variable labor to supplement their core workforce.

The decline in demand has impacted clients across most industries, especially within retail and transportation.

(in thousands, except percentages) 2023 2022

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Percentage of revenue 26.5 % 26.7 %

Gross profit as a percentage of revenue expanded 90 basis points to 26.7% for the fiscal year ended December 25, 2022, compared to 25.8% for the prior year.

Our staffing businesses contributed 100 basis points of expansion, of which 60 basis points were attributable to higher client bill rates, which have increased ahead of associate pay rates.

An additional 50 basis points were attributable to lower workers’ compensation costs from a combination of favorable development on prior year reserves and fewer workplace injuries.

This expansion was partially offset by a contraction of 10 basis points, due to an unfavorable revenue shift toward our lower margin staffing businesses.

Our PeopleScout business contributed the remaining 10 basis points of contraction due to unfavorable changes in client mix.

Gross profit as a percentage of revenue contracted 20 basis points to 26.5% for the fiscal year ended December 31, 2023, compared to 26.7% for the prior year.

Unfavorable revenue shifts towards our lower margin staffing businesses caused a contraction of 100 basis points;

specifically revenue growth in the renewable energy industry within PeopleReady, which has lower margins than average PeopleReady margins, and revenue declines in PeopleScout.

The contraction was partially offset by an expansion of 40 basis points from lower workers’ compensation costs and 40 basis points from higher bill rates in our staffing businesses, which have increased ahead of pay rates.

Selling, general and administrative expense

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Percentage of revenue 25.9 % 22.2 %

Total company SG&A expense increased by $36.4 million or 7.8% for the fiscal year ended December 25, 2022, compared to the prior year.

Employee compensation and other variable costs incurred to support revenue growth of 3.7%, represented approximately $21 million of the increase.

SG&A expense in the current year included $7.9 million of expense related to investments to upgrade our PeopleReady technology platform to better support our digital strategy, while the prior year included $1.3 million.

Also included in the current year were $4.2 million in accelerated costs related to exiting non-critical software contracts .

These increases were partially offset by the reversal of $3.3 million in accrued compensation costs related to the resignation of our former Chief Executive Officer.

In the prior year, SG&A expense included benefits of $3.9 million for Canadian subsidies we received related to COVID-19 relief and a realized gain of $2.9 million related to the final conversion of available-for-sale investments to company-owned life insurance policies to fund our deferred compensation plan.

Total company SG&A expense decreased by $6.1 million or 1.2% for the fiscal year ended December 31, 2023, compared to the prior year.

Cost reduction efforts were taken in fiscal 2023 to promote a return to profitability, while maintaining our operational strengths and readiness to increase market share when demand rebounds.

These efforts resulted in savings of approximately $31 million during the fiscal year ended December 31, 2023, partially offset by $3.2 million in workforce reduction costs.

Operating cost savings were also offset by inflation of certain employee costs, most notably for employee medical benefits, which have been rising nation-wide, and $5.8 million of accelerated compensation costs related to transitions in our executive leadership.

The 53rd week added an additional $6.6 million of expense.

SG&A expense in the prior year included a benefit of $3.3 million for the reversal of accrued compensation related to the resignation of a former Chief Executive Officer.

Depreciation and amortization

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Percentage of revenue 1.4 % 1.3 %

Depreciation and amortization increased primarily due to certain assets placed into service during fiscal 2022 and 2021, partially offset by other assets becoming fully amortized during those years.

The income tax expense and the effective income tax rate were as follows:

Depreciation and amortization decreased primarily due to certain assets becoming fully depreciated and amortized during fiscal 2022.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Goodwill and intangible asset impairment charge

A summary of the goodwill and intangible asset impairment charge for the fiscal year ended December 31, 2023, by reportable segment, is as follows:

(in thousands) PeopleScout PeopleManagement Total company

Goodwill $ 8,885 $ — $ 8,885

Trade names/trademark — 600 600

Total $ 8,885 $ 600 $ 9,485

We performed our annual impairment test as of the first day of our fiscal second quarter of 2023.

As a result of this impairment test, we concluded that the carrying amount of our PeopleScout MSP reporting unit exceeded its fair value and we recorded a non-cash goodwill impairment charge of $8.9 million, which was included in goodwill and intangible asset impairment charge on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the fiscal year ended December 31, 2023.

The PeopleScout MSP goodwill impairment was related to our revised internal revenue projections, which anticipated the current year declining trends would continue into future periods.

These projections were updated based on our then-current outlook and recent industry analysis, which indicated that our business would underperform due to a strategic lack of investment in technology within an increasingly competitive market.

No further impairment loss was recognized during the fiscal year ended December 31, 2023.

The remaining goodwill balance for PeopleScout MSP was $0.8 million as of December 31, 2023.

Goodwill and Intangible Assets , to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for additional details.

Indefinite-lived intangible assets

We performed our annual impairment test as of the first day of our fiscal second quarter of 2023.

As a result of this impairment test, we concluded that a trade name/trademark related to our PeopleManagement segment exceeded its estimated fair value and we recorded a non-cash impairment charge of $0.6 million, which was included in goodwill and intangible asset impairment charge on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the fiscal year ended December 31, 2023.

The charge was primarily the result of an increase in the discount rate, as well as lower projected revenues given our then-current outlook.

No further impairment loss was recognized during the fiscal year ended December 31, 2023.

The remaining balance for this trade name/trademark was $3.3 million as of December 31, 2023.

The income tax expense (benefit) and the effective income tax rate were as follows:

(in thousands, except percentages) 2023 2022

Income tax expense $ 11,143 $ 12,216

Income tax expense (benefit)

$ (6,472) $ 11,143

Effective income tax rate 31.3 % 15.2 %

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.

Our tax provision and our effective tax rate are subject to variation due to several factors, including variability in 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 our 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.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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

The items creating differences 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:

(in thousands, except percentages) 2023 % 2022 %

Income tax expense based on statutory rate $ 15,417 21.0 % $ 15,508 21.0 %

Income tax expense (benefit) based on statutory rate

$ (4,335) 21.0 % $ 15,417 21.0 %

Increase (decrease) resulting from:

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Hiring tax credits, net (4,997) 24.2 (7,911) (10.8)

CARES Act (1) — — (468) (0.6)

Uncertain tax positions (206) 1.0 (1,336) (1.8)

Non-deductible goodwill impairment charge

2,287 (11.1) — —

Non-deductible and non-taxable items

1,178 (5.7) 1,377 1.9

Foreign taxes 587 (2.9) 654 0.9

Other, net 398 (1.9) (66) (0.1)

Total tax expense $ 11,143 15.2 % $ 12,216 16.5 %

(1) The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") enacted in the U.S.

on March 27, 2020.

Total income tax expense (benefit)

$ (6,472) 31.3 % $ 11,143 15.2 %

Our effective tax rate for the fiscal year ended December 31, 2023 was 31.3% compared to 15.2% for the prior year.

The lower effective tax rate in the current year was primarily due to changes in uncertain tax positions.

Other differences between the statutory federal income tax rate of 21.0% and our effective tax rate include benefits of hiring tax credits, partially offset by state and foreign income taxes, and certain non-deductible market losses related to company-owned life insurance policies.

The higher effective tax rate in the current year was primarily due to benefits of hiring tax credits, partially offset by certain non-deductible and non-taxable items and foreign income taxes.

Because of the loss before tax benefit for the fiscal year ended December 31, 2023, hiring tax credits add to the income tax benefit and rate and non-deductible items subtract from the income tax benefit and rate.

Summary of Significant Accounting Policies and Note 12:

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Segment performance

We evaluate performance based on segment revenue and segment profit.

We evaluate segment 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.

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 (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 in the Consolidated Statements of Operations and Comprehensive Income (Loss) in accordance with accounting principles generally accepted in the United States of America (“U.S.

Segment profit should not be considered a measure of financial performance in isolation or as an alternative to net income (loss) in the Consolidated Statements of Operations and Comprehensive Income (Loss) in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) and may not be comparable to similarly titled measures of other companies.

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Percentage of revenue 2.4 % 6.9 %

PeopleReady segment profit grew 6.5% or $5.3 million and improved as a percentage of revenue for the fiscal year ended December 25, 2022, compared to the prior year.

PeopleReady segment profit benefited from higher client bill rates, which have increased ahead of associate pay rates, lower workers’ compensation costs from a combination of favorable development on prior year reserves and fewer workplace injuries, partially offset by investments we made to attract and retain employees.

PeopleReady segment profit declined 69.7% or $61.1 million and declined as a percentage of revenue for the fiscal year ended December 31, 2023, compared to the prior year.

The decline was primarily due to the decline in revenue and the relatively high ratio of fixed to variable costs within SG&A expense, as well as changes in revenue mix towards lower margin renewable energy projects.

The decline was partially mitigated through disciplined pricing, with bill rates increasing ahead of pay rates.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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Percentage of revenue 11.7 % 14.1 %

PeopleScout segment profit grew 23.8% or $8.6 million and improved as a percentage of revenue for the fiscal year ended December 25, 2022, compared to the prior year.

Historically high client employee turnover rates at existing clients during the first half of the year drove higher volumes and operating leverage due to improved recruiter utilization, but was offset by operational deleveraging as volumes and revenue declined towards the end of the year.

PeopleScout segment profit declined 39.9% or $17.8 million and declined as a percentage of revenue for the fiscal year ended December 31, 2023, compared to the prior year.

The decline was a result of the decline in revenue, the effects of which were softened by workforce reductions during each quarter of 2023 to manage our operating cost structure.

PeopleManagement segment performance was as follows:

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Percentage of revenue 1.2 % 2.4 %

PeopleManagement segment profit grew 19.8% or $2.6 million and improved as a percentage of revenue for the fiscal year ended December 25, 2022, compared to the prior year.

Segment profit growth was due to favorable business mix towards commercial driving services, favorable client mix within our On-Site operating segment toward our higher margin, productivity-based (cost-per-unit) pricing option, and lower recruiting and candidate marketing costs as the labor market improved.

PeopleManagement segment profit declined 56.0% or $8.8 million and declined as a percentage of revenue for the fiscal year ended December 31, 2023, compared to the prior year.

The decline was primarily due to the decline in revenue and the associated impact from lower operating leverage.

We took actions during each quarter of 2023 to reduce operating costs to better align with demand.

FISCAL 2022 AS COMPARED TO FISCAL 2021

Management’s Discussion and Analysis of Financial Condition and Results of Operations , found in Part II of the Annual Report on Form 10-K for the fiscal year ended December 25, 2022 for discussion of fiscal 2022 compared to fiscal 2021.

MANAGEMENT’S DISCUSSION AND ANALYSIS

FUTURE OUTLOOK

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Operating outlook

• We expect revenue for the fiscal first quarter of 2023 to decline between 18% and 13% as compared to the same period in the prior year, due to the continuation of lower demand for our services as we experienced during the last half of fiscal 2022.

Higher revenue in the first quarter of 2022 within our PeopleReady segment was driven by a high volume of retail project work and above average results in our existing client base as businesses found themselves in desperate need of labor during the peak of the post-COVID recovery.

The absence of this demand surge during the fiscal first quarter of 2023 is expected to account for approximately 7% of the total company revenue decline compared to the prior year.

• We anticipate gross margin expansion to be between 70 and 110 basis points for the fiscal first quarter of 2023, compared to the same period in prior year, driven by lower workers’ compensation costs and continued favorable spreads between client bill rates and associate pay rates within our contingent staffing businesses.

We anticipate gross margin to hold relatively steady for fiscal 2023, between a contraction of 30 and an expansion of 30 basis points.

• We expect revenue for the fiscal first quarter of 2024 to decline between 16% and 10% as compared to the same period in the prior year, primarily due to our clients’ continued response to macroeconomic uncertainty.

• We anticipate gross profit as a percentage of revenue to decline between 210 and 170 basis points for the fiscal first quarter of 2024, compared to the same period in the prior year, primarily due to the change in business mix and higher workers’ compensation expense.

• For the fiscal first quarter of 2024, we anticipate SG&A expense to be between $109 million and $113 million.

For fiscal 2023, we anticipate SG&A expense to be between $499 million and $505 million.

We will continue to make investments in sales resources and innovative technology to drive profitable revenue growth.

• We expect basic weighted average shares outstanding to be approximately 31 million for the fiscal first quarter of 2024.

This expectation does not include the impact of potential share repurchases.

• We expect our effective income tax rate for fiscal 2023 to be between 10% and 14%.

• Fiscal 2023 will include a 53rd week, which we expect will add between $22 million and $27 million in revenue, but is not expected to contribute significant net income due to it falling during a low point between the Christmas and New Year holidays.

• We expect our statutory income tax rate for fiscal 2024 to be between 24% and 28%.

For fiscal 2024, we also expect an income tax benefit related to our hiring tax credits of between $5 million and $9 million.

Liquidity outlook

• Capital expenditures and spending for software as a service assets for the fiscal first quarter of 2023 are expected to be approximately $11 million, and between $36 million and $40 million for fiscal 2023.

We remain committed to technological innovation to transform our business for a digital future.

We continue to make investments in online and mobile apps to improve access to associates and candidates, as well as improve the speed and ease of connecting them with our clients.

We expect these investments will increase the competitive differentiation of our services over the long term and improve the efficiency of our service delivery.

Examples include PeopleReady’s JobStack mobile app and PeopleScout’s Affinix TM talent acquisition technology.

• Capital expenditures and spending for software as a service assets are expected to be between $23 million and $27 million for fiscal 2024, with approximately $4 million of this amount relating to spending for software as a service assets for fiscal 2024.

MANAGEMENT’S DISCUSSION AND ANALYSIS

LIQUIDITY AND CAPITAL RESOURCES

We believe we have a strong financial position and sufficient sources of funding to meet our short and long term obligations.

As of December 25, 2022, we had $72.1 million in cash and cash equivalents.

We also had $292.8 million available under our $300 million Revolving Credit Facility, as $7.2 million was utilized by outstanding standby letters of credit.

We have an option to increase the total line of credit amount from $300 million to $450 million, subject to bank approval.

As of December 31, 2023, we had $61.9 million in cash and cash equivalents and no debt outstanding.

Under the Revolving Credit Facility, $6.2 million was utilized by outstanding standby letters of credit, leaving $293.8 million unused , which is constrained by our most restrictive covenant making $85.9 million available for additional borrowing.

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.

On February 9, 2024, we entered into an amended and restated revolving credit agreement (the “2024 Revolving Credit Facility”), which matures on February 9, 2029.

The 2024 Revolving Credit Facility provides for a revolving line of credit of up to $255.0 million, with an option to increase the amount to $405.0 million, subject to lender approval.

The following financial covenants, as defined in the 2024 Revolving Credit Facility, will be in effect beginning the fiscal first quarter of 2024:

• Consolidated fixed charge coverage ratio greater than 1.25, defined as the trailing twelve months bank-adjusted cash flow divided by cash interest expense.

• Asset coverage ratio of greater than 1.00, defined as the ratio of (a) 60% of accounts receivable to (b) total debt outstanding less unrestricted cash in excess of $50.0 million, subject to certain minimums.

Under this covenant we are limited to $25.0 million in aggregate share repurchases in any 12 month period.

The following financial covenant, as defined in the 2024 Revolving Credit Facility, will replace the asset coverage ratio beginning the fiscal first quarter of 2026, or earlier at our discretion, subject to the terms of the agreement:

• Consolidated leverage ratio less than 3.00, defined as our funded indebtedness divided by trailing twelve months consolidated EBITDA, as defined in the 2024 Revolving Credit Facility.

Cash generated through our core operations is our primary source of liquidity.

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We also manage working capital through efficient cost management and strategically timing payments of accounts payable.

MANAGEMENT’S DISCUSSION AND ANALYSIS

We continue to make investments in online and mobile apps to increase the competitive differentiation of our services over the long term and improve the efficiency of our service delivery model.

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For those investments rated by nationally recognized statistical rating organizations the minimum ratings at time of purchase are:

MANAGEMENT’S DISCUSSION AND ANALYSIS

S&P Moody’s Fitch

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Long-term rating A A2 A

Total collateral commitments decreased $3.1 million during the fiscal year ended December 25, 2022 primarily due to lower collateral requirements from our insurance carriers and the use of collateral to satisfy workers’ compensation claims.

Total collateral commitments decreased $25.2 million during the fiscal year ended December 31, 2023 primarily due to a decrease in collateral levels required by our insurance carriers, as well as the use of collateral to satisfy workers’ compensation claims.

Commitments and Contingencies , to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for additional details on our workers’ compensation commitments.

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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 the frequency and severity of accident rates diminishes.

We expect diminishing favorable adjustments to our workers’ compensation liabilities as the opportunity for significant reduction to the frequency and severity of accident rates has diminished.

Restricted cash and investments also includes collateral to support our non-qualified deferred compensation plan in the form of company-owned life insurance policies.

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A summary of our cash flows for each period are as follows:

Fifty-two weeks ended

Fiscal year ended

(in thousands) Dec 31, 2023 Dec 25, 2022

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Net cash used in financing activities (37,583) (64,692)

Change in cash, cash equivalents and restricted cash reclassified to assets held-for-sale

Effect of exchange rate changes on cash, cash equivalents and restricted cash (874) (2,420)

Net change in cash, cash equivalents and restricted cash $ (36,325) $ 32,446

MANAGEMENT’S DISCUSSION AND ANALYSIS

Cash flows from operating activities

Cash provided by operating activities consists of net income adjusted for non-cash benefits and expenses, and changes in operating assets and liabilities.

As client demand for our services declines, as was the case during the second half of fiscal 2022 as economic uncertainty rose, the result is a deleveraging of accounts receivable and accounts payable.

Cash provided by operating activities consists of net income (loss) adjusted for non-cash benefits and expenses, and changes in operating assets and liabilities.

As client demand for our services declines, the result is a deleveraging of accounts receivable and accounts payable.

Accrued wages and benefits can fluctuate based on whether the period end requires the accrual of one or two weeks of payroll, the amount and timing of bonus payments, and timing of payroll tax payments.

Net cash provided by accounts receivable collections through deleveraging during fiscal year ended December 25, 2022 was the primary driver in the increase in net cash provided by operating activities.

This was partially offset by net cash used for payments on accounts payable and accrued expenses, as well as net cash used for payments of accrued wages and benefits primarily due to the timing and amount of annual bonus payments to employees and COVID-19 government assistance.

For the fiscal year ended December 26, 2021, higher revenue during the peak of the post-COVID recovery, as well as an increase in our days sales outstanding of 3.6 days compared to the prior year-end, resulted in net cash used by accounts receivable.

During the same period, net cash was used to repay deferred employer payroll taxes as allowed by the CARES Act.

Net cash provided by accounts receivable collections through deleveraging during the fiscal year ended December 31, 2023 was partially offset by net cash used for payments on accounts payable and accrued expenses.

Net cash used for payments on accrued wages and benefits was primarily due to lower annual employee bonuses.

In addition, our workers’ compensation claims reserve for estimated claims decreases as contingent labor services decline, as was the case in fiscal 2023.

Cash flows from investing activities

Investing cash flows consist of capital expenditures and purchases, sales and maturities of restricted investments, which are managed in line with our workers’ compensation collateral funding requirements and timing of claim payments.

Net cash used in investing activities increased during the fiscal year ended December 25, 2022, as compared to the fiscal year ended December 26, 2021, as the prior year included a net cash inflow of $4.1 million related to the final conversion of available-for-sale investments to company-owned life insurance policies to fund our deferred compensation plan.

Capital expenditures for the fiscal year ended December 31, 2023 were higher compared to the fiscal year ended December 25, 2022, due in part to the continued investments we are making to upgrade our PeopleReady technology platform.

For the fiscal year ended December 31, 2023, maturities of restricted investments were reinvested by the Trust resulting in only a small impact to cash used in investing activities.

In the prior period, cash provided by maturities of restricted investments was not immediately reinvested by the Trust, and partially offset capital expenditures.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Cash flows from financing activities

Financing cash flows consist primarily of repurchases of common stock as part of our publicly announced share repurchase program, amounts to satisfy employee tax withholding obligations upon the vesting of restricted stock, the net change in our Revolving Credit Facility, and proceeds from the sale of common stock through our employee stock purchase plans.

Net cash used in financing activities during the fiscal year ended December 25, 2022 was primarily due to the repurchase of $60.9 million of our common stock in the open market.

During the fiscal year ended December 26, 2021, we repurchased $16.7 million of our common stock in the open market.

As of December 25, 2022, $89.0 million remains available for repurchase under existing authorizations.

Net cash used in financing activities during the fiscal year ended December 31, 2023 was primarily due to use of $34.2 million to repurchase our common stock in the open market.

During the fiscal year ended December 25, 2022, we used $60.9 million to repurchase our common stock in the open market.

As of December 31, 2023, $55.1 million remains available for repurchase under existing authorization.

FISCAL 2022 AS COMPARED TO FISCAL 2021

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Such estimates and assumptions are subject to inherent uncertainties, which may result in actual future amounts differing from reported estimated amounts.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Workers’ compensation reserve

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In the event that we are not able to further reduce our accident rates, the positive impacts to our reserve balance will diminish.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Management evaluates the adequacy of the workers’ compensation reserves in conjunction with an independent quarterly actuarial assessment.

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Changes in the allowance for credit losses are recorded in SG&A expense on the Consolidated Statements of Operations and Comprehensive Income (Loss).

MANAGEMENT’S DISCUSSION AND ANALYSIS

Business combinations

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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.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Goodwill and indefinite-lived intangible assets

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Determining the fair value of a reporting unit when performing a quantitative impairment test involves the use of significant estimates and assumptions to evaluate the impact of operational and macroeconomic changes on each reporting unit.

We estimate the fair value of each reporting unit using a weighted average of the income and market valuation approaches.

We estimate the fair value of each reporting unit using a weighting of the income and market valuation approaches.

The income approach applies a fair value methodology to each reporting unit based on discounted cash flows.

This analysis requires significant estimates and judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will 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.

We also apply a market approach, which compares TrueBlue, Inc.

to comparable publicly traded companies

MANAGEMENT’S DISCUSSION AND ANALYSIS

and develops a correlation, referred to as a multiple, to apply to the operating results of the reporting units.

This analysis requires significant estimates and judgments, including estimation of future cash flows, which is dependent on internally-developed forecasts of revenue and profitability, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will 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.

We also apply a market approach, which develops a value correlation based on the market capitalization of similar publicly traded companies, 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.

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We confirm the reasonableness of the valuation conclusions by comparing the indicated values of all the reporting units to the overall company value indicated by the stock price and outstanding shares as of the valuation date, or market capitalization.

Annual impairment test

We performed our annual goodwill impairment test as of the first day of our fiscal second quarter of 2023.

Based on our assessment of qualitative factors, we concluded it was more likely than not that the fair value of each reporting unit exceeded its carrying value, and the goodwill associated with each reporting unit was not impaired.

As such, it was not necessary to perform a quantitative impairment analysis.

Additionally, we did not identify any events or conditions that make it more likely than not that an impairment may have occurred during the period from March 28, 2022 to December 25, 2022.

Accordingly, no impairment loss was recognized during fiscal 2022.

There was no goodwill impairment charge recorded during fiscal 2021.

During fiscal 2020, we recorded an impairment charge of $140.5 million with respect to our PeopleScout RPO, PeopleScout MSP and PeopleManagement On-Site reporting units.

Goodwill and Intangible Assets , to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for additional details on the 2020 goodwill impairments.

The weighted average cost of capital used in our most recent impairment test was risk-adjusted to reflect the specific risk profile of the reporting units and ranged from 13.0% to 13.5%.

The combined fair values for all reporting units were then reconciled to our aggregate market value of our shares of common stock on the date of valuation, resulting in a control premium of 27.9%.

MANAGEMENT’S DISCUSSION AND ANALYSIS

As a result of our annual impairment test, we concluded that the carrying amount of the PeopleScout MSP reporting unit exceeded its fair value and we recorded a non-cash goodwill impairment charge of $8.9 million, which was included in goodwill and intangible asset impairment charge on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the fiscal year ended December 31, 2023.

The PeopleScout MSP goodwill impairment was related to our revised internal revenue projections, which anticipated the current year declining trends would continue into future periods.

The remaining goodwill balance for PeopleScout MSP was $0.8 million as of December 31, 2023.

Any further declines in PeopleScout MSP revenue, in excess of our projections used in the annual impairment test, could give rise to an additional impairment.

Based on our annual impairment test, we concluded the fair value of all other reporting units were substantially in excess of their carrying value, and the goodwill associated with those reporting units was not impaired.

Operating results have declined compared to our expectations as of the date of the annual impairment test;

however, we did not identify any events or conditions that make it more likely than not that an additional impairment may have occurred during the fiscal year ended December 31, 2023.

Further declines in our projected operating performance, or a sustained decrease in our stock price, could give rise to a future impairment.

Goodwill and Intangible Assets , to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for additional details on the 2023 goodwill impairment.

There were no goodwill impairment charges recorded during fiscal 2022 or 2021.

Indefinite-lived intangible assets

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Qualitative factors include macroeconomic conditions, industry and market conditions and overall company financial performance.

If, after assessing the totality of events and circumstances, we determine that it is more likely than not the fair value of the indefinite-lived intangible is greater than its carrying amount, the quantitative impairment test is unnecessary.

If, after assessing the totality of events and circumstances, we determine that it is more likely than not the fair value of the indefinite-lived intangible asset is greater than its carrying amount, the quantitative impairment test is unnecessary.

The quantitative impairment test, if necessary, utilizes the relief from royalty method to determine the fair value of each of our trade names.

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Management uses considerable judgment to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates.

We performed our annual impairment test as of the first day of our fiscal second quarter of 2022.

Based on our assessment of qualitative factors, we concluded it was more likely than not that the fair value of our indefinite-lived intangible assets exceeded their carrying value and were not impaired.

As such, it was not necessary to perform a quantitative impairment analysis.

Additionally, we did not identify any events or conditions that make it more likely than not that an impairment may have occurred during the period from March 28, 2022 to December 25, 2022.

Accordingly, no impairment loss was recognized during fiscal 2022.

No impairment charge was recorded during fiscal 2021 or 2020.

Annual impairment test

We performed our annual indefinite-lived intangible asset impairment test as of the first day of our fiscal second quarter of 2023.

As a result of this impairment test, we concluded that a trade name/trademark related to the PeopleManagement segment exceeded its estimated fair value and we recorded a non-cash impairment charge of $0.6 million, which was included in goodwill and intangible asset impairment charge on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the fiscal year ended December 31, 2023.

The charge was primarily the result of an increase in the discount rate, as well as lower projected revenues given our then-current outlook.

The remaining balance for this trade name/trademark was $3.3 million as of December 31, 2023.

Goodwill and Intangible Assets , to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for additional details on the 2023 indefinite-lived intangible asset impairment.

The fair value of the trade name/trademark related to the PeopleScout segment was substantially in excess of its carrying value of $2.1 million, and therefore did not result in an impairment.

Additionally, following performance of the annual impairment test, we did not identify any events or conditions that make it more likely than not that an additional impairment may have occurred during the fiscal year ended December 31, 2023.

No impairment charge was recorded during fiscal 2022 nor 2021.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Finite-lived intangible assets and other long-lived assets

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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.

MANAGEMENT’S DISCUSSION AND ANALYSIS

No impairment charge was recorded during fiscal 2023, 2022 or 2021.

During fiscal 2020, we recorded a non-cash impairment charge for our PeopleScout RPO and PeopleManagement On-Site client relationship intangible assets of $34.7 million.

Goodwill and Intangible Assets , to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for additional details on the 2020 intangible asset impairments.

Estimated contingent legal and regulatory liabilities

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When appropriate, we record a valuation allowance against deferred tax assets to reduce deferred tax assets to the amount that is more likely than not to be realized.

Based on our deferred tax asset realizability analysis, we have determined that a valuation allowance is appropriate for certain tax credits and net operating losses (“NOLs”) that we expect will not be utilized within the permitted carryforward periods as of December 25, 2022 and December 26, 2021.

Based on our deferred tax asset realizability analysis, we have determined that a valuation allowance is appropriate for certain tax credits and net operating losses that we expect will not be utilized within the permitted carryforward periods as of December 31, 2023 and December 25, 2022.

Income Taxes , to our consolidated financial statements found in Item 8 of this Annual Report on Form 10-K, for details on our current valuation allowance.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis