Item 7. Management’s Discussion and Analysis
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
BUSINESS OVERVIEW
TrueBlue, Inc. (the “company,” “TrueBlue,” “we,” “us” and “our”) is a leading provider of specialized workforce solutions that help our clients improve productivity and grow their businesses. Client demand for contingent workforce solutions and outsourced recruiting services is cyclical and dependent on the overall strength of the economy and labor market, as well as trends in workforce flexibility. During periods of rising economic uncertainty, clients reduce their contingent labor in response to lower volumes and reduced appetite for expanding production or inventory, which reduces the demand for our services. That environment also reduces demand for permanent placement recruiting, whether outsourced or in-house. 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 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: PeopleReady, PeopleScout and PeopleManagement. For additional discussion on our business and strategy, refer to Business , found in Part I, Item 1 of this Annual Report on Form 10-K.
Fiscal 2023 highlights
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.
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RESULTS OF OPERATIONS
Total company results
The following table presents selected financial data:
(in thousands, except percentages and per share data) 2023 % of revenue 2022 % of revenue
Revenue from services $ 1,906,243 $ 2,254,184
Gross profit 506,059 26.5 % 602,144 26.7 %
Selling, general and administrative expense 494,603 25.9 500,686 22.2
Depreciation and amortization 25,821 1.4 29,273 1.3
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
(in thousands, except percentages) 2023 Growth
% Segment % of total 2022 Segment % of total
Revenue from services:
PeopleReady $ 1,096,318 (13.9) % 57.5 % $ 1,272,852 56.5 %
PeopleScout 229,334 (27.8) % 12.0 317,518 14.1
PeopleManagement 580,591 (12.5) % 30.5 663,814 29.4
Total company $ 1,906,243 (15.4) % 100.0 % $ 2,254,184 100.0 %
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
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
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.
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PeopleManagement
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.
Gross profit
(in thousands, except percentages) 2023 2022
Gross profit $ 506,059 $ 602,144
Percentage of revenue 26.5 % 26.7 %
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
(in thousands, except percentages) 2023 2022
Selling, general and administrative expense $ 494,603 $ 500,686
Percentage of revenue 25.9 % 22.2 %
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
(in thousands, except percentages) 2023 2022
Depreciation and amortization $ 25,821 $ 29,273
Percentage of revenue 1.4 % 1.3 %
Depreciation and amortization decreased primarily due to certain assets becoming fully depreciated and amortized during fiscal 2022.
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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
Goodwill
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. See Note 5: 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.
Income taxes
The income tax expense (benefit) and the effective income tax rate were as follows:
(in thousands, except percentages) 2023 2022
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 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.
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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 (benefit) based on statutory rate
$ (4,335) 21.0 % $ 15,417 21.0 %
Increase (decrease) resulting from:
State income taxes, net of federal benefit (1,384) 6.7 3,008 4.1
Hiring tax credits, net (4,997) 24.2 (7,911) (10.8)
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 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 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.
See Note 1: Summary of Significant Accounting Policies and Note 12: 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 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 costs and benefits not considered to be ongoing. See Note 14: 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 (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.
PeopleReady segment performance was as follows:
(in thousands, except percentages) 2023 2022
Revenue from services $ 1,096,318 $ 1,272,852
Segment profit $ 26,606 $ 87,743
Percentage of revenue 2.4 % 6.9 %
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.
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PeopleScout segment performance was as follows:
(in thousands, except percentages) 2023 2022
Revenue from services $ 229,334 $ 317,518
Segment profit $ 26,922 $ 44,771
Percentage of revenue 11.7 % 14.1 %
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:
(in thousands, except percentages) 2023 2022
Revenue from services $ 580,591 $ 663,814
Segment profit $ 6,963 $ 15,811
Percentage of revenue 1.2 % 2.4 %
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
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 ended December 25, 2022 for discussion of fiscal 2022 compared to fiscal 2021.
FUTURE OUTLOOK
The following highlights represent our operating outlook. These expectations are subject to revision as our business changes with the overall economy.
Operating outlook
• 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.
• 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 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 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.
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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 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. See Note 7: 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. Our principal ongoing cash needs are to finance working capital, fund capital expenditures, repay outstanding Revolving Credit Facility balances, and execute share repurchases. We manage working capital through timely collection of accounts receivable, which we achieve through focused collection efforts and tightly monitoring trends in days sales outstanding. While client payment terms are generally 90 days or less, we pay our associates weekly, so additional financing through the use of our Revolving Credit Facility is sometimes necessary to support revenue growth. We also manage working capital through efficient cost management and strategically timing payments of accounts payable.
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. In addition, we continue to transition our back-office technology from on-premise software platforms to cloud-based software solutions, to increase automation and the efficiency of running our business.
Outside of ongoing cash needed to support core operations, 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. 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 continue to have risk that these collateral requirements may be increased by our insurers due to our loss history and market dynamics. 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 collateral typically takes the form of cash and cash-backed instruments, highly rated investment grade securities, letters of credit, and surety bonds. Restricted cash and investments supporting our self-insured workers’ compensation obligation are held in a trust at the Bank of New York Mellon (“Trust”), and are used to pay workers’ compensation claims as they are filed. See Note 6: Workers' Compensation Insurance and Reserves , and Note 3: 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 workers’ compensation program as well as the restricted cash and investments held in Trust.
We have 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 include U.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:
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S&P Moody’s Fitch
Short-term rating A-1/SP-1 P-1/MIG-1 F-1
Long-term rating A A2 A
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. See Note 8: 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. We continue to actively manage workers’ compensation cost by focusing on improving our associates’ safety programs, and actively control costs with our network of service providers. These actions have had a positive impact creating favorable adjustments to workers’ compensation liabilities recorded in the 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 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. Our non-qualified deferred compensation plan is managed by a third-party service provider, and the investments backing the company-owned life insurance policies align with the amount and timing of payments based on employee elections.
A summary of our cash flows for each period are as follows:
Fiscal year ended
(in thousands) Dec 31, 2023 Dec 25, 2022
Net cash provided by operating activities $ 34,754 $ 120,503
Net cash used in investing activities (32,322) (20,945)
Net cash used in financing activities (37,583) (64,692)
Change in cash, cash equivalents and restricted cash reclassified to assets held-for-sale
(300) —
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
Cash flows from operating activities
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 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.
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.
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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 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
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 ended December 25, 2022 for discussion of fiscal 2022 compared to fiscal 2021.
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 with U.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. 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 estimated expenses related to claims above our self-insured limits (“excess claims”), 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 of “risk-free” U.S. Treasury instruments available during the year in which the liability was incurred, 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 (Loss) 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 this reserve and corresponding receivable to its estimated net present value using the discount rates based on average returns on “risk-free” U.S. Treasury instruments available during the year in which the liability was incurred. 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. For fiscal 2023 claims, a 5% change in one or more of the above factors would result in a change to workers’ compensation cost of approximately $2 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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;
• impact of safety initiatives; and
• positive or adverse development of claims.
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.
• PeopleManagement On-Site has a smaller number of clients and follows a contractual billing schedule. The invoice amounts are higher than that of PeopleReady 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 and represents our best estimate of the amount of expected credit losses. 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 (Loss). 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Goodwill 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, or 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 general economic conditions, deterioration in industry environment, changes in cost factors, declining operating performance indicators, legal factors, competition, client engagement, changes in the carrying amount of net assets, sale or disposition of a significant portion of a reporting unit, or a sustained decrease in share price. 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. Our operating segments with remaining goodwill are PeopleReady, PeopleManagement Centerline, PeopleScout RPO and PeopleScout MSP.
When evaluating goodwill for impairment, we may first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount. 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 reporting unit is greater than its carrying amount, the quantitative impairment test is unnecessary.
The quantitative impairment test, if necessary, 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 loss in an amount equal to the excess, not to exceed the carrying value of the goodwill. We consider a reporting unit’s fair value to be substantially in excess of its carrying value at a 20% premium or greater.
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 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 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.
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. 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. 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%.
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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. 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. 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. See Note 5: 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
We have indefinite-lived intangible assets related to our Staff Management and PeopleScout trade names. We evaluate our indefinite-lived intangible assets for impairment on an annual basis as of the first day of our fiscal second quarter, or whenever events or circumstances make it more likely than not that an impairment may have occurred. These events or circumstances could include significant change in general economic conditions, deterioration in industry environment, changes in cost factors, declining operating performance indicators, legal factors, competition, client engagement, or sale or disposition of a significant portion of the business. We monitor the existence of potential impairment indicators throughout the fiscal year.
When evaluating indefinite-lived intangible assets for impairment, we may first assess qualitative factors to determine whether it is more likely than not the fair value of the indefinite-lived intangible is less than its carrying amount. 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 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. If the carrying value exceeds the fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. Management uses considerable judgment to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates.
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. See Note 5: 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.
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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. Important factors 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.
No impairment charge was recorded during fiscal 2023, 2022 or 2021.
Estimated contingent legal and regulatory liabilities
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 receivable 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. These expected future tax consequences are measured based on provisions of tax law as currently enacted; the effects of future changes in tax laws are not anticipated. We recognize deferred tax assets to the extent we believe it is more likely than not the asset will be realized. We consider available positive and negative evidence when making such determination, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted, and results of recent operations. 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 that we expect will not be utilized within the permitted carryforward periods as of December 31, 2023 and December 25, 2022. See Note 12: 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.
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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