Notes to Consolidated Financial Statements
|
|
NOTE 1:
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Description of business
TrueBlue, Inc. (“TrueBlue,” “we,” “us,” and “our”) is a leading provider of specialized workforce solutions and services, helping clients improve growth and performance by providing contingent staffing, recruitment process outsourcing ("RPO") solutions, and management of contingent staffing. Our workforce solutions meet clients’ needs for a reliable, efficient workforce in a wide variety of industries. Through our workforce solutions, we help businesses be more productive and we connect people to work each year. We are headquartered in Tacoma, Washington.
Commencing in the fourth quarter of 2016, we changed our internal reporting structure to better align our operations with customer needs. As a result of this change, our former Staffing Services reportable segment has been separated into two reportable segments, PeopleReady and PeopleManagement. The PeopleReady reportable segment represents our PeopleReady operating segment and the PeopleManagement reportable segment consists of the Staff Management | SMX ("Staff Management"), SIMOS, PlaneTechs, and Centerline operating segments. In addition, our former Managed Services reportable segment has been renamed PeopleScout, which consists of the PeopleScout and PeopleScout Managed Service Provider operating segments.
We operate our workforce solutions through three reportable segments, PeopleReady, PeopleManagement, and PeopleScout. For additional information on our segments see Note 17:
Segment Information.
Basis of presentation
The consolidated financial statements include the accounts of TrueBlue and all of its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The consolidated financial statements include the results of operations and cash flows of the RPO business of Aon Hewitt from the acquisition date to January 1, 2017, and not from any prior periods. For additional information see Note 2:
Acquisitions
.
Reclassifications
Certain reclassifications have been made to prior year balances in order to conform to the current year's presentation, including reclassifications related to our change in reportable segments.
Fiscal period end
During the fourth fiscal quarter of 2016, we changed our week-ending date from Friday to the following Sunday in order to better align our week-ending date with that of our customers. On December 15, 2016, we changed our fiscal period end day from the last Friday to the Sunday closest to the last day of December. Our fiscal quarters will also end on the Sunday closet to the last day in March, June, and September. This change is effective with our fiscal year ended January 1, 2017. In prior years, the consolidated financial statements were presented with the last day of the fiscal year ending on the last Friday of December. The change in fiscal year end and quarter end will not have a material effect on the comparability of the periods presented.
The consolidated financial statements are presented on a
52
/
53
-week fiscal year end basis, with the last day of the fiscal year currently ending on the Sunday closest to the last day of December. In fiscal years consisting of
53
weeks, the final quarter will consist of
14
weeks while in
52
-week years all quarters will consist of
13
weeks. The three most recent years ended on
January 1, 2017
,
December 25, 2015
, and
December 26, 2014
. Our
2016
fiscal year contained
53
weeks, with the
53rd
week falling in our fourth fiscal quarter, while our
2015
and
2014
fiscal years contained
52
weeks.
Revenue recognition
Revenue is recognized at the time the service is provided by the temporary worker. Revenue from permanent placement services is recognized at the time the permanent placement candidate begins full-time employment. Revenue from other staffing fee-based services is recognized when the services are provided. Revenue also includes billable travel and other reimbursable costs. Customer discounts or other incentives are recognized in the period the related revenue is earned. Revenues are reported net of sales, use, or other transaction taxes collected from customers and remitted to taxing authorities.
Notes to Consolidated Financial Statements—(Continued)
We record revenue on a gross basis as a principal versus on a net basis as an agent in the Consolidated Statements of Operations and Comprehensive Income (Loss). We have determined that gross reporting as a principal is the appropriate treatment based upon the following key factors:
|
|
•
|
We maintain the direct contractual relationship with the customer.
|
|
|
•
|
We have discretion in selecting and assigning the temporary worker to a particular job and establishing their billing rate.
|
|
|
•
|
We bear the risk and rewards of the transaction, including credit risk, if the customer fails to pay for services performed.
|
Cost of services
Cost of services refers to costs directly associated with the earning of revenue and primarily includes wages and related payroll taxes and workers’ compensation expenses. Cost of services also includes billable travel as well as other reimbursable and non-reimbursable expenses.
Advertising costs
Advertising costs consist primarily of print and other promotional activities. We expense advertisements as of the first date the advertisements take place. Advertising expenses included in Selling, general and administrative expenses were
$7.8 million
,
$9.1 million
, and
$6.2 million
in
2016
,
2015
, and
2014
, respectively.
Cash, cash equivalents, and marketable securities
We consider all highly liquid instruments purchased with an original maturity of
three months
or less at date of purchase to be cash equivalents. Investments with original maturities greater than
three months
are classified as marketable securities. We do not buy and hold securities principally for the purpose of selling them in the near future. Our investment policy is focused on the preservation of capital, liquidity, and return. From time to time, we may sell certain securities but the objective is generally not to generate profits on short-term differences in price. We manage our cash equivalents and marketable securities as a single portfolio of highly liquid securities.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are recorded at the invoiced amount. We establish an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. The allowance for doubtful accounts is determined based on current collection efforts, historical collection trends, write-off experience, customer credit risk, and current economic data. The allowance for doubtful accounts is reviewed quarterly and represents our best estimate of the amount of probable credit losses. Past due balances are written off when it is probable the receivable will not be collected. Our allowance for doubtful accounts was
$5.2 million
and
$5.9 million
as of
January 1, 2017
and
December 25, 2015
, respectively.
Restricted cash and investments
Cash and investments pledged as collateral and restricted to use for workers' compensation insurance programs are included as Restricted cash and investments on our Consolidated Balance Sheets. Our investments consist of highly rated investment grade debt securities, which are rated A1/P1 or higher for short-term securities and A- or higher for long-term securities, by nationally recognized statistical rating organizations. We have the positive intent and ability to hold all these restricted investments until maturity in accordance with our investment policy and, accordingly, all of our restricted investments are classified as held-to-maturity. In the event that an investment is downgraded, it is replaced with a highly rated investment grade security. We review for impairment on a quarterly basis and do not consider temporary unrealized losses to be an impairment.
We have an agreement with AIG and the Bank of New York Mellon creating a trust ("Trust"), which holds the majority of our collateral obligations under existing workers' compensation insurance policies. Placing the collateral in the Trust allows us to manage the investment of the assets and provides greater protection of those assets.
Fair value of financial instruments and investments
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. For assets and liabilities recorded or disclosed at fair value on a recurring basis, we determine fair value based on the following:
Level 1: The carrying value of cash and cash equivalents and mutual funds approximates fair value because of the short-term nature of these instruments. Inputs are valued using quoted market prices in active markets for identical assets or liabilities.
Notes to Consolidated Financial Statements—(Continued)
Level 2: Inputs other than quoted prices in active markets for identical assets and liabilities. Instead we use quoted prices for similar instruments in active markets or quoted prices or we estimate the fair value using a variety of valuation methodologies, which include observable inputs for comparable instruments and unobservable inputs. Our investments consist of highly rated investment grade debt securities, which are rated A1/P1 or higher for short-term securities and A- or higher for long-term securities, by nationally recognized statistical rating organizations.
Level 3: For assets and liabilities with unobservable inputs, we typically rely on management's estimates of assumptions that market participants would use in pricing the asset or liability.
The carrying value of our cash and cash equivalents and restricted cash approximates fair value because of the short-term maturity of those instruments. There are inherent limitations when estimating the fair value of financial instruments, and the fair values reported are not necessarily indicative of the amounts that would be realized in current market transactions.
The carrying value of our accounts receivable, accounts payable and other accrued expenses, and accrued wages and benefits approximates fair value due to their short-term nature. We also hold certain restricted investments which collateralize workers' compensation programs and are classified as held-to-maturity and carried at amortized cost on our Consolidated Balance Sheets.
Certain items such as goodwill and other intangible assets are recognized or disclosed at fair value on a non-recurring basis. We determine the fair value of these items using Level 3 inputs, as described in the related sections below.
Property and equipment
Property and equipment are recorded at cost. We compute depreciation using the straight-line method over the estimated useful lives of the assets as follows:
|
|
|
|
Years
|
Buildings
|
40
|
Computers and software
|
3 - 10
|
Furniture and equipment
|
3 - 10
|
Leasehold improvements are amortized over the shorter of the related non-cancelable lease term, which is typically
90
days, or their estimated useful lives.
Non-capital expenditures associated with opening new locations are expensed as incurred.
When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss, net of proceeds, is reflected on the Consolidated Statements of Operations and Comprehensive Income (Loss).
Repairs and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated.
Costs associated with the acquisition or development of software for internal use are capitalized and amortized over the expected useful life of the software, from
three
to
ten
years. A subsequent addition, modification, or upgrade to internal-use software is capitalized to the extent that it enhances the software's functionality or extends its useful life. Software maintenance and training costs are expensed in the period incurred.
Leases
We conduct our branch office operations from leased locations. Many leases require payment of real estate taxes, insurance, and common area maintenance, in addition to rent. The terms of our lease agreements generally range from
three
to
five
years with options to cancel, typically within
90
days of notification.
For leases that contain predetermined fixed escalations of the minimum rent, we recognize the related rent expense on a straight-line basis from the date we take possession of the property to the end of the minimum lease term. We record any difference between the straight-line rent amounts and amounts payable under the leases as part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate.
Cash or lease incentives received upon entering into certain leases ("tenant allowances") are recognized on a straight-line basis as a reduction to rent from the date we take possession of the property through the end of the initial lease term. We record the unamortized portion of tenant allowances as a part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate.
Notes to Consolidated Financial Statements—(Continued)
Finite-lived intangible assets
Intangible assets primarily consist of identifiable finite-lived intangible assets acquired through acquisitions and include trade names/trademarks, customer relationships, non-compete agreements, and acquired technology. We amortize intangible assets using the straight-line method over their useful lives. We amortize non-compete covenants using the straight-line method over the lives of the related agreements.
Goodwill
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. If necessary, we reassign goodwill using a relative fair value allocation approach. We test for goodwill impairment at the reporting unit level. We consider our service lines to be our reporting units for goodwill impairment testing. At the time of our annual impairment test, our service lines were Labor Ready, Spartan Staffing, CLP Resources, PlaneTechs, Centerline, Staff Management, SIMOS, PeopleScout, hrX, and PeopleScout MSP. The impairment test 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 carrying value, we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure possible goodwill impairment loss. The second step includes hypothetically valuing the tangible and intangible assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. The implied fair value of the reporting unit’s goodwill is compared to the carrying value of that goodwill. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions to evaluate the impact of operating and macroeconomic changes on each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology. This analysis requires significant 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 identify similar publicly traded companies and develop a correlation, referred to as a multiple, to apply to the operating results of the reporting units. The primary market multiples we compare to are revenue and earnings before interest, taxes, depreciation, and amortization. These combined fair values are then reconciled to our aggregate market value of our shares of common stock on the date of valuation, while considering a reasonable control premium.
We consider a reporting unit’s fair value to be substantially in excess of its carrying value at
20%
or greater. 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 performed our annual goodwill impairment analysis and recorded a goodwill impairment charge of
$65.9 million
in fiscal
2016
with respect to the Staff Management, PlaneTechs, and hrX reporting units. Refer to Note 6:
Goodwill and Intangible Assets
for further details.
There were no goodwill impairment charges recorded during fiscal
2015
or
2014
.
Long-lived asset impairment
Long-lived assets include property and equipment and indefinite-lived intangible assets. Property and equipment are tested for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We have determined that no triggering events have occurred during the period that would require us to perform an impairment test over property and equipment. We have indefinite-lived intangible assets related to our Staff Management and PeopleScout trade names. We test our trade names annually for impairment, and when indications of potential impairment exist. We utilize the relief from royalty method to determine the fair value of each of our trade names. If the carrying value exceeds the fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. Management uses considerable judgment to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates. We performed our annual indefinite-lived intangible asset impairment test as the first day of our second fiscal quarter and determined that the estimated fair values exceeded the carrying amounts of the PeopleScout reporting unit indefinite-lived trade name and accordingly no impairment loss was recognized.
During fiscal 2016, we recognized an impairment loss on long-lived assets of
$37.7 million
due to a change in scope of services by Staff Management for our largest customer, as well as a change to the organizational and reporting structure of our Labor Ready,
Notes to Consolidated Financial Statements—(Continued)
Spartan Staffing, and CLP Resources service lines, which were combined and re-branded as PeopleReady. Refer to Note 6:
Goodwill and Intangible Assets
for further details.
There were
no
long-lived asset impairment charges recorded during fiscal
2015
or
2014
.
Business combinations
We account for our business acquisitions using the purchase method of accounting in accordance with ASC 805,
Business Combinations
. The fair value of the net assets acquired and the results of the acquired business are included in the financial statements from the acquisition date forward. We are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and results of operations during the reporting period. Estimates are used in accounting for, among other things, the fair value of acquired net operating assets, property and equipment, intangible assets, useful lives of property and equipment, and amortizable lives for acquired intangible assets. Any excess of the purchase consideration over the identified fair value of the assets and liabilities acquired is recognized as goodwill. Goodwill acquired in business combinations is assigned to the reporting unit(s) expected to benefit from the combination as of the acquisition date. We estimate the fair value of acquired assets and liabilities as of the date of the acquisition based on information available at that time. The valuation of these tangible and identifiable intangible assets and liabilities is subject to further management review and may change between the preliminary allocation and the final allocation. Any changes to these estimates may have a material impact on our operating results or financial condition.
All acquisition-related costs are expensed as incurred and recorded in Selling, general and administrative expense on the Consolidated Statements of Operations and Comprehensive Income (Loss). Additionally, we recognize liabilities for anticipated restructuring costs that will be necessary due to the elimination of excess capacity, redundant assets, or unnecessary functions and record them as Selling, general, and administrative expense.
Workers’ compensation claims reserves
We maintain reserves for workers’ compensation 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, 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 exceeds the amounts estimated, additional reserves may be required. Changes in reserve estimates are reflected in 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 claims above our self-insured limits (“excess claims”) and a corresponding receivable for the insurance coverage on excess claims based on the contractual policy agreements we have with insurance companies. We discount the liability and its corresponding receivable to its estimated net present value using the “risk-free” rates associated with the actuarially determined weighted average lives of our excess claims. When appropriate, based on our best estimate, we record a valuation allowance against the insurance receivable to reflect amounts that may not be realized.
Legal contingency reserves and regulatory liabilities
From time to time we are subject to compliance audits by federal, state and local authorities relating to a variety of regulations including wage and hour laws, taxes, workers’ compensation, immigration, and safety. In addition, we are subject to legal proceedings in the ordinary course of our operations. We establish reserves for contingent legal and regulatory liabilities 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 is contractually obligated to reimburse us for a liability, we record a receivable for the amount of the probable reimbursement. We evaluate our reserve 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 allowance
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. Future tax law changes, such as changes to the federal and state corporate tax rates and the mix of states and their taxable income, could have a material impact on our financial condition or results of operations. When appropriate, we record
Notes to Consolidated Financial Statements—(Continued)
a valuation allowance against deferred tax assets to offset future tax benefits that may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based in part upon management’s judgments regarding future events and past operating results. Based on that analysis, we have determined that a valuation allowance is appropriate for certain net operating losses and tax credits that we expect will not be utilized within the permitted carry forward periods as of
January 1, 2017
and
December 25, 2015
.
Stock-based compensation
Under various plans, officers, employees, and non-employee directors have received or may receive grants of stock, restricted stock awards, performance share units, or options to purchase common stock. We also have an employee stock purchase plan.
Compensation expense for restricted stock awards and performance share units is generally recognized on a straight-line basis over the vesting period, based on the stock’s fair market value on the grant date. For restricted stock and performance share unit grants issued with performance conditions, compensation expense is recognized over each vesting period based on assessment of the likelihood of meeting these conditions. We recognize compensation expense for only the portion of restricted stock and performance share units that is expected to vest, rather than record forfeitures when they occur. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in the future periods. We determine the fair value of options to purchase common stock using the Black-Scholes valuation model, which requires the input of subjective assumptions. We recognize expense over the service period for options that are expected to vest and record adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.
Foreign currency
Our consolidated financial statements are reported in U.S. dollars. Assets and liabilities of international subsidiaries with non-U.S. dollar functional currencies are translated to U.S. dollars at the exchange rates in effect on the balance sheet date. Revenues and expenses for each subsidiary are translated to U.S. dollars using a weighted average rate for the relevant reporting period. Translation adjustments resulting from this process are included, net of tax, in other comprehensive income ("OCI") where applicable. Currency gains and losses on intercompany loans intended to be a permanent investments in international subsidiaries are included, net of tax, in OCI.
Purchases and retirement of our common stock
We may purchase our common stock under a program authorized by our Board of Directors. Under applicable Washington State law, shares purchased are not displayed separately as treasury stock on the Consolidated Balance Sheets and are treated as authorized but unissued shares. It is our accounting policy to first record these purchases as a reduction to our common stock account. Once the common stock account has been reduced to a nominal balance, remaining purchases are recorded as a reduction to our Retained earnings. Furthermore, activity in our common stock account related to stock-based compensation is also recorded to Retained earnings until such time as the reduction to Retained earnings due to stock repurchases has been recovered.
Net income (loss) per share
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and potential common shares outstanding during the period. Potential common shares include the dilutive effects of vested and non-vested restricted stock, performance share units, and shares issued under the employee stock purchase plan, except where their inclusion would be anti-dilutive.
Anti-dilutive shares primarily include non-vested restricted stock, and performance share units for which the sum of the assumed proceeds, including unrecognized compensation expense, exceeds the average stock price during the periods presented. Anti-dilutive shares associated with our stock options relate to those stock options with an exercise price higher than the average market value of our stock during the periods presented.
Use of estimates
Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Estimates in our financial statements include, but are not limited to, purchase accounting, allowance for doubtful accounts, estimates for asset and goodwill impairments, stock-based performance awards, assumptions underlying self-insurance reserves, contingent legal and regulatory liabilities, and the potential outcome of future tax consequences of events that have been recognized in the financial statements. Actual results and outcomes may differ from these estimates and assumptions.
Notes to Consolidated Financial Statements—(Continued)
Recently adopted accounting standards
Effective December 26, 2015, we early adopted the accounting standard that simplified the balance sheet disclosure of deferred income taxes retrospectively to all periods presented. This guidance requires deferred tax liabilities and assets to be classified as non-current on the Consolidated Balance Sheets. The guidance is effective for annual periods beginning after December 15, 2016, and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The adoption of this standard did not have a material impact to our financial statements.
Recently issued accounting pronouncements not yet adopted
In January 2017, the Financial Accounting Standards Board ("FASB") issued guidance to simplify the subsequent measurement of goodwill by eliminating the requirement to perform a Step 2 impairment test to compute the implied fair value of goodwill. Instead, companies will only compare the fair value of a reporting unit to its carrying value (Step 1) and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized may not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This amended guidance is effective for fiscal years and interim periods beginning after December 15, 2019 (Q1 2020 for TrueBlue), with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We plan to early adopt this guidance for our annual impairment test as of the first day of our fiscal second quarter of 2017. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued guidance to amend the presentation of restricted cash and restricted cash equivalents on the statement of cash flows. The standard requires restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This amended guidance is effective for fiscal years and interim periods beginning after December 15, 2017 (Q1 2018 for TrueBlue), with early adoption permitted. We plan to adopt this guidance on the effective date. Changes in restricted cash and cash equivalents recorded in cash flows from investing were
$19.8 million
,
$18.4 million
, and
$9.3 million
for fiscal 2016, 2015, and 2014, respectively.
In October 2016, FASB issued guidance on the accounting for income tax effects of intercompany sales or transfers of assets other than inventory. The guidance requires entities to recognize the income tax impact of an intra-entity sale or transfer of an asset other than inventory when the sale or transfer occurs, rather than when the assets has been sold to an outside party. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017 (Q1 2018 for TrueBlue), with early adoption permitted. The guidance will require a modified retrospective application with a cumulative catch-up adjustment to opening retained earnings. We plan to adopt this guidance on the effective date and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued an accounting standards update relating to how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. The update is intended to reduce the existing diversity in practice. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (Q1 2018 for TrueBlue), with early adoption permitted, including adoption in an interim period. The adoption of the amendment should be applied using the retrospective transition method, if practicable. We plan to adopt this amendment on the effective date and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In June 2016, the FASB issued guidance on accounting for credit losses on financial instruments. This guidance sets forth a current expected credit loss model which requires measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and some off-balance sheet exposures, as well as trade account receivables. This guidance is effective for fiscal years beginning after December 15, 2019 (Q1 2020 for TrueBlue) with early adoption permitted no sooner than Q1 2019. A modified retrospective approach is required for all investments, except debt securities for which an other-than-temporary impairment had been recognized prior to the effective date, which will require a prospective transition approach. We plan to adopt this guidance on the effective date and are currently assessing the impact of the adoption of this guidance on our consolidated financial statements.
In March 2016, the
FASB
issued guidance to improve employee share-based payment accounting. The simplifications include income tax consequences, classification of awards as equity or liabilities, and classification within the statement of cash flows. This guidance is effective for fiscal years and interim periods beginning after December 15, 2016 (Q1 2017 for TrueBlue), and
Notes to Consolidated Financial Statements—(Continued)
early adoption is permitted.
We plan to adopt the guidance on the effective date. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2016, the
FASB
issued guidance on lease accounting.
The new guidance will continue to classify leases as either finance or operating and will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet, with classification affecting the pattern of expense recognition in the statement of income. This guidance is effective for annual and
interim periods beginning after December 15, 2018 (Q1 2019 for TrueBlue), and early adoption is permitted. A modified retrospective approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements.
We plan to adopt the guidance on the effective date.
We are currently evaluating the impact of this guidance on our consolidated financial statements and expect that a majority of our operating lease commitments will be recognized on our Consolidated Balance Sheets as operating lease liabilities and right-of-use assets upon adoption.
We do not expect the adoption of this guidance to have a material impact on the pattern of expense recognition in our
Consolidated Statements of Operations and Comprehensive Income (Loss).
In January 2016, the FASB issued guidance on the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The guidance is effective for annual and interim periods beginning after December 15, 2017 (Q1 2018 for TrueBlue). Early adoption of the amendments in the guidance is not permitted, with limited exceptions, and should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We plan to adopt the guidance on the effective date. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued guidance outlining a single comprehensive model for accounting for revenue arising from contracts with customers which supersedes the current revenue recognition guidance. This guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments as well as assets recognized from costs incurred to obtain or fulfill a contract. The guidance provides two methods of initial adoption: retrospective for all periods presented (full retrospective), or through a cumulative adjustment in the year of adoption (modified retrospective). Since the issuance of the original standard, the FASB has issued several other subsequent updates including the following: 1) clarification of the implementation guidance on principal versus agent considerations; 2) further guidance on identifying performance obligations in a contract as well as clarifications on the licensing implementation guidance; and 3) additional guidance and practical expedients in response to identified implementation issues. The effective date is for annual and interim periods beginning after December 15, 2017 (Q1 2018 for TrueBlue), and we expect to adopt the guidance using the modified retrospective approach.
We established a cross-functional implementation team consisting of representatives from across our business segments and various departments. We are utilizing a bottoms-up approach to analyze the impact of the standard on our various revenue streams by reviewing our current contracts with customers, accounting policies, and business practices to identify potential differences that would result from applying the requirements of the new standard. We are in the process of identifying appropriate changes to our business processes, systems, and controls to support recognition and disclosure under the new standard.
We have been closely monitoring FASB activity related to the new standard to conclude on specific interpretive issues. During 2016, we made significant progress toward completing our evaluation of the potential impact that adopting the new standard will have on our consolidated financial statements. Revenue on the majority of our contracts with customers will continue to be recognized over time as services are rendered. The impact of adopting this new guidance primarily relates to deferring contract costs and estimating variable consideration when the estimation will not result in the reversal of that revenue in subsequent periods. Therefore, we do not anticipate this will have a material impact on our financial reporting other than expanded disclosures. However, the full extent of the impact is subject to the completion of our assessment.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
Notes to Consolidated Financial Statements—(Continued)
NOTE 2: ACQUISITIONS
2016 Acquisition
Effective January 4, 2016, we acquired certain assets and assumed certain liabilities of the recruitment process outsourcing ("RPO") business of Aon Hewitt for a cash purchase price of
$72.5 million
, net of the final working capital adjustment. We amended our existing credit facility to temporarily increase the borrowing capacity by
$30.0 million
, which was used to fund the acquisition. The RPO business of Aon Hewitt broadens our PeopleScout RPO services and has been fully integrated into our PeopleScout service line, which is part of our PeopleScout reportable segment.
We incurred acquisition and integration-related costs of
$6.6 million
in connection with the acquisition of the RPO business of Aon Hewitt, which are included in Selling, general and administrative expense on the Consolidated Statements of Operations and Comprehensive Income (Loss) and Cash flows from operating activities on the Consolidated Statements of Cash Flows for the year ended
January 1, 2017
.
The following table reflects our final allocation of the purchase price (
in thousands)
:
|
|
|
|
|
|
Purchase Price Allocation
|
Cash purchase price, net of working capital adjustment (1)
|
$
|
72,476
|
|
|
|
Purchase price allocated as follows:
|
|
Accounts receivable
|
$
|
12,272
|
|
Prepaid expenses, deposits and other current assets (1)
|
894
|
|
Customer relationships
|
34,900
|
|
Technologies
|
400
|
|
Total assets acquired
|
48,466
|
|
|
|
Accrued wages and benefits
|
1,025
|
|
Other long-term liabilities
|
456
|
|
Total liabilities assumed
|
1,481
|
|
|
|
Net identifiable assets acquired
|
46,985
|
|
Goodwill (2)
|
25,491
|
|
Total consideration allocated (1)
|
$
|
72,476
|
|
|
|
(1)
|
The final purchase price allocation was adjusted for the final working capital adjustment.
|
|
|
(2)
|
Goodwill represents the expected synergies with our existing business, the acquired assembled workforce, potential new customers, and future cash flows after the acquisition of the RPO business of Aon Hewitt. Goodwill is deductible for income tax purposes over
15
years as of January 4, 2016.
|
Intangible assets include identifiable intangible assets for customer relationships and developed technologies. We estimated the fair value of the acquired identifiable intangible assets, which are subject to amortization, using the income approach for customer relationships and the cost approach for developed technologies. No residual value is estimated for any of the intangible assets.
The following table sets forth the components of identifiable intangible assets and their estimated useful lives as of January 4, 2016 (
in thousands, except for estimated useful lives, in years)
:
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
Estimated Useful Lives in Years
|
Customer relationships
|
$
|
34,900
|
|
|
9.0
|
Technologies
|
400
|
|
|
3.0
|
Total acquired identifiable intangible assets
|
$
|
35,300
|
|
|
|
Notes to Consolidated Financial Statements—(Continued)
The acquired assets and assumed liabilities of the RPO business of Aon Hewitt are included on our Consolidated Balance Sheets as of
January 1, 2017
, and the results of its operations and cash flows are reported on our Consolidated Statements of Operations and Comprehensive Income (Loss) and Consolidated Statements of Cash Flows for the period from January 4, 2016 to
January 1, 2017
.
The amount of revenue from the RPO business of Aon Hewitt included in our Consolidated Statements of Operations and Comprehensive Income (Loss) was
$66.5 million
for the period from the acquisition date to
January 1, 2017
. The acquired operations have been fully integrated with our existing PeopleScout operations. The nature of the customers and the services provided by PeopleScout and the former RPO business of Aon Hewitt are now the same. Accordingly, subsequent to merging our operations, it is not possible to segregate and to reasonably estimate the operating expenses related exclusively to the former RPO business of Aon Hewitt.
The acquisition of the RPO business of Aon Hewitt was not material to our consolidated results of operations and as such, pro forma financial information was not required.
2015 Acquisition
Effective December 1, 2015, we acquired SIMOS Insourcing Solutions Corporation ("SIMOS"), an Atlanta-based provider of on-premise workforce management solutions for a cash purchase price of
$66.6 million
, net of the final working capital adjustment, which was funded by our existing credit facility. An additional cash payment between
zero
and
$22.5 million
of contingent consideration is payable in mid-2017, depending on SIMOS achieving a fiscal 2016 earnings before interest, taxes, depreciation and amortization target ("EBITDA target"). Actual results must be in excess of
87.5%
of the EBITDA target before any amount is earned. The final undiscounted fair value of the contingent consideration as of the acquisition date was determined to be
$21.1 million
. Using a risk adjusted weighted average cost of capital of
10.0%
, the present value of the contingent consideration was estimated to be
$18.3 million
, as of the acquisition date. The contingent consideration liability was based on a probability weighted fair value measurement using unobservable inputs (Level 3) which rely on management's estimates of assumptions that market participants would use in pricing the liability. The valuation is judgmental in nature and involves the use of significant estimates and assumptions in forecasting fiscal 2016 results. SIMOS broadens our on-premise contingent staffing solution, which is part of our PeopleManagement reportable segment. As of
January 1, 2017
, the fair value of the contingent consideration payable is
$21.6 million
. Refer to Note 3:
Fair Value Measurement
for further details regarding the contingent consideration payable.
Notes to Consolidated Financial Statements—(Continued)
The following table reflects our final allocation of the purchase price (
in thousands)
:
|
|
|
|
|
|
Purchase Price Allocation
|
Purchase price:
|
|
Cash purchase price, net of working capital adjustment
|
$
|
66,603
|
|
Contingent consideration
|
18,300
|
|
Total consideration
|
$
|
84,903
|
|
|
|
Purchase price allocated as follows:
|
|
Accounts receivable (1)
|
$
|
19,207
|
|
Prepaid expenses, deposits and other current assets
|
461
|
|
Property and equipment
|
464
|
|
Customer relationships
|
39,000
|
|
Trade name/trademarks
|
800
|
|
Technologies
|
100
|
|
Restricted cash
|
4,277
|
|
Other non-current assets
|
2,439
|
|
Total assets acquired
|
66,748
|
|
|
|
Accounts payable and other accrued expenses
|
3,741
|
|
Accrued wages and benefits
|
4,075
|
|
Workers' compensation liability
|
8,520
|
|
Total liabilities assumed
|
16,336
|
|
|
|
Net identifiable assets acquired
|
50,412
|
|
Goodwill (2)
|
34,491
|
|
Total consideration allocated
|
$
|
84,903
|
|
|
|
(1)
|
The gross contractual amount of accounts receivable was
$19.3 million
of which
$0.1 million
was estimated to be uncollectible.
|
|
|
(2)
|
Goodwill represents the expected synergies with our existing business, the acquired assembled workforce, potential new customers, and future cash flows after the acquisition of SIMOS. Goodwill is deductible for income tax purposes over
15
years as of December 1, 2015.
|
Intangible assets include identifiable intangible assets for customer relationships, trade name/trademarks, and developed technologies. We estimated the fair value of the acquired identifiable intangible assets, which are subject to amortization, using the income approach for customer relationships and trade name/trademarks, and the cost approach for developed technologies. The following table sets forth the components of identifiable intangible assets and their estimated useful lives as of December 1, 2015 (
in thousands, except for estimated useful lives, in years
):
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
Estimated Useful Lives in Years
|
Customer relationships
|
$
|
39,000
|
|
|
9.0
|
Trade name/trademarks
|
800
|
|
|
3.0
|
Technologies
|
100
|
|
|
2.0
|
Total acquired identifiable intangible assets
|
$
|
39,900
|
|
|
|
2014 Acquisition
Effective June 30, 2014, we completed the acquisition of all of the outstanding equity interests of Seaton, a Chicago-based corporation, for a cash purchase price of approximately
$305.9 million
, net of cash acquired. The Seaton acquisition added a full
Notes to Consolidated Financial Statements—(Continued)
service line of on-premise blue-collar staffing, complementary service offerings in recruitment process outsourcing, and managed services provider solutions. We have continued to manage and support Seaton's operations from Chicago.
Effective June 30, 2014, we entered into a Second Amended and Restated Revolving Credit Agreement for a secured revolving credit facility ("Revolving Credit Facility") of up to a maximum of
$300.0 million
, of which
$187.0 million
was used to fund a portion of the Seaton acquisition price. See Note 8:
Long-term
Debt
, for details of our Revolving Credit Facility.
We incurred acquisition and integration-related costs of
$3.8 million
and
$5.2 million
during the years ended December 25, 2015 and December 26, 2014, respectively. These costs are included in Selling, general and administrative expense in the Consolidated Statements of Operations and Comprehensive Income (Loss) and cash flows from operating activities in the Consolidated Statements of Cash Flows.
Purchase price allocation
We have completed the allocation of the purchase price, net of cash acquired, to the assets acquired and liabilities assumed based on fair value assessments. The following information reflects our allocation of the purchase price (
in thousands)
:
|
|
|
|
|
|
Purchase Price Allocation
|
Accounts receivable (1)
|
$
|
94,571
|
|
Prepaid expenses, deposits and other current assets
|
7,111
|
|
Property and equipment
|
6,957
|
|
Other non-current assets
|
7,848
|
|
Restricted cash
|
1,227
|
|
Intangible assets
|
117,100
|
|
Total assets acquired
|
234,814
|
|
|
|
Accounts payable and other accrued expenses
|
28,916
|
|
Accrued wages and benefits
|
18,528
|
|
Workers' compensation claims reserve
|
26,433
|
|
Deferred tax liability
|
13,514
|
|
Other long-term liabilities
|
1,163
|
|
Total liabilities assumed
|
88,554
|
|
|
|
Net identifiable assets acquired
|
146,260
|
|
Goodwill (2)
|
159,616
|
|
Net assets acquired
|
$
|
305,876
|
|
|
|
(1)
|
The gross contractual amount of accounts receivable was
$96.7 million
of which
$2.1 million
was estimated to be uncollectible.
|
|
|
(2)
|
Goodwill is attributable to the acquired workforce, the expected synergies, and future cash flows after the acquisition of Seaton. Synergies consist primarily of increasing service capacity through acquiring workforce and facilities, increasing market share and economies of scale, increasing operational efficiency and expertise, and leveraging technology investments.
|
Intangible assets include identifiable intangible assets for customer relationships and trade name/trademarks. We estimated the fair value of the acquired identifiable intangible assets, which are subject to amortization using the income approach. The following table sets forth the components of identifiable intangible assets and their estimated useful lives as of June 30, 2014 (
in thousands, except for estimated useful lives, in years
):
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
Weighted Average Estimated Useful Lives in Years
|
Trade name/trademarks
|
$
|
10,500
|
|
|
Indefinite
|
Trade name/trademarks
|
300
|
|
|
4.0
|
Technologies
|
18,300
|
|
|
4.6
|
Customer relationships
|
88,000
|
|
|
9.7
|
Total intangible assets
|
$
|
117,100
|
|
|
|
Notes to Consolidated Financial Statements—(Continued)
The acquired assets and liabilities assumed of Seaton are included in our Consolidated Balance Sheets as of December 26, 2014 and the results of its operations and cash flows are reported in our Consolidated Statements of Operations and Comprehensive Income (Loss) and Consolidated Statements of Cash Flows for the period from June 30, 2014 to December 26, 2014.
The amount of revenue and income from operations of Seaton included in our Consolidated Statements of Operations and Comprehensive Income (Loss) were
$394.4 million
and
$13.6 million
, respectively, for the period from the acquisition date to December 26, 2014. Income from operations for the period from the acquisition date to December 26, 2014 includes amortization expense of
$6.3 million
for acquired finite-lived intangible assets and developed technology.
|
|
NOTE 3:
|
FAIR VALUE MEASUREMENT
|
Assets and liabilities measured at fair value on a recurring basis
Our assets and liabilities measured at fair value on a recurring basis consisted of the following (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2017
|
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
Financial assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents (1)
|
$
|
34,970
|
|
|
$
|
34,970
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash and cash equivalents (1)
|
67,751
|
|
|
67,751
|
|
|
—
|
|
|
—
|
|
Other restricted assets (2)
|
16,925
|
|
|
16,925
|
|
|
—
|
|
|
—
|
|
Restricted investments classified as held-to-maturity
|
145,953
|
|
|
—
|
|
|
145,953
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Contingent consideration (3)
|
21,600
|
|
|
—
|
|
|
—
|
|
|
21,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2015
|
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
Financial assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents (1)
|
$
|
29,781
|
|
|
$
|
29,781
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash and cash equivalents (1)
|
49,680
|
|
|
49,680
|
|
|
—
|
|
|
—
|
|
Other restricted assets (2)
|
11,944
|
|
|
11,944
|
|
|
—
|
|
|
—
|
|
Restricted investments classified as held to maturity
|
128,245
|
|
|
—
|
|
|
128,245
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Contingent consideration (3)
|
19,300
|
|
|
—
|
|
|
—
|
|
|
19,300
|
|
|
|
(1)
|
Cash equivalents and restricted cash equivalents consist of money market funds, deposits, and investments with original maturities of three months or less.
|
|
|
(2)
|
Other restricted assets primarily consist of deferred compensation plan accounts, which are comprised of mutual funds classified as available-for-sale securities.
|
|
|
(3)
|
The estimated fair value of the contingent consideration associated with the acquisition of SIMOS, which was estimated using a probability-adjusted discounted cash flow model. Refer to Note 2:
Acquisitions
for further details regarding the SIMOS acquisition.
|
Notes to Consolidated Financial Statements—(Continued)
The following table presents the change in the estimated fair value of our liability for contingent consideration measured using significant unobservable inputs (Level 3) for the year ended
January 1, 2017
, as follows (
in thousands)
:
|
|
|
|
|
|
Fair value measurement at beginning of period
|
|
$
|
19,300
|
|
Contingent consideration liability adjustment recorded for final purchase price valuation
|
|
(1,000
|
)
|
Final purchase price valuation
|
|
18,300
|
|
Adjustment to fair value measurement
|
|
1,300
|
|
Accretion on contingent consideration
|
|
2,000
|
|
Fair value measurement at end of period
|
|
$
|
21,600
|
|
Our liability for contingent consideration represents the future payment of additional consideration for the acquisition of SIMOS. We recognized an increase in the fair value of our contingent liability of
$1.3 million
due to the preliminary achievement of the defined performance milestone as of the fourth quarter of 2016. The final determination is subject to a verification period through the payout date in June 2017. Changes in the fair value of the contingent consideration are recorded in Selling, general and administrative expense on the Consolidated Statements of Operations and Comprehensive Income (Loss). Amortization of the present value discount is recorded in Interest expense on the Consolidated Statements of Operations and Comprehensive Income (Loss). The contingent consideration liability is payable in June 2017 and therefore classified as current on the accompanying Consolidated Balance Sheets. As of
December 25, 2015
, the contingent consideration liability was included in Other long-term liabilities.
There were no material transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the year ended
December 25, 2015
.
Assets measured at fair value on a nonrecurring basis
We measure certain non-financial assets on a non-recurring basis, including goodwill and certain intangible assets. As a result of those measurements, we recognized impairment charges of
$103.5 million
during the
years ended
January 1, 2017
, as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2017
|
|
|
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Total Impairment Loss
|
Goodwill
|
$
|
42,629
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42,629
|
|
|
$
|
(65,869
|
)
|
Customer relationships
|
11,100
|
|
|
—
|
|
|
—
|
|
|
11,100
|
|
|
(28,900
|
)
|
Trade names/trademarks
|
3,600
|
|
|
—
|
|
|
—
|
|
|
3,600
|
|
|
(8,775
|
)
|
Total
|
$
|
57,329
|
|
|
|
|
|
|
|
|
$
|
(103,544
|
)
|
Goodwill, finite-lived customer relationships and trade names/trademarks intangible assets, and indefinite-lived intangible trade names/trademarks intangible assets with a total carrying value of
$160.8 million
were written down to their fair value of
$57.3 million
, resulting in an impairment charge of
$103.5 million
, which was recorded in earnings for the year ended
January 1, 2017
. Refer to Note 6:
Goodwill and Intangible Assets
for additional details on the impairment charges and valuation methodologies.
|
|
NOTE 4:
|
RESTRICTED CASH AND INVESTMENTS
|
Restricted cash and investments consist principally of collateral that has been provided or pledged to insurance carriers for workers' compensation and state workers' compensation programs. Our insurance carriers and certain state workers' compensation programs require us to collateralize a portion of our workers' compensation obligation. The collateral typically takes the form of cash and cash equivalents and highly rated investment grade securities, primarily in municipal debt securities, corporate debt securities, and asset-backed securities. The majority of our collateral obligations are held in a trust at the Bank of New York Mellon ("Trust"). Our investments have not resulted in any other-than-temporary impairments.
Notes to Consolidated Financial Statements—(Continued)
The following is a summary of our restricted cash and investments (
in thousands
):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
December 25,
2015
|
Cash collateral held by insurance carriers
|
$
|
34,910
|
|
|
$
|
23,634
|
|
Cash and cash equivalents held in Trust
|
32,841
|
|
|
26,046
|
|
Investments held in Trust
|
146,517
|
|
|
126,788
|
|
Other (1)
|
16,925
|
|
|
11,944
|
|
Total restricted cash and investments
|
$
|
231,193
|
|
|
$
|
188,412
|
|
|
|
(1)
|
Primarily consists of deferred compensation plan accounts, which are comprised of mutual funds classified as available-for-sale securities.
|
The following tables present fair value disclosures for our held-to-maturity investments, which are carried at amortized cost (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2017
|
|
Amortized Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized Loss
|
|
Fair Value
|
Municipal debt securities
|
$
|
71,618
|
|
|
$
|
443
|
|
|
$
|
(865
|
)
|
|
$
|
71,196
|
|
Corporate debt securities
|
68,934
|
|
|
212
|
|
|
(352
|
)
|
|
68,794
|
|
Agency mortgage-backed securities
|
5,965
|
|
|
30
|
|
|
(32
|
)
|
|
5,963
|
|
|
$
|
146,517
|
|
|
$
|
685
|
|
|
$
|
(1,249
|
)
|
|
$
|
145,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2015
|
|
Amortized Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized Loss
|
|
Fair Value
|
Municipal debt securities
|
$
|
67,948
|
|
|
$
|
1,345
|
|
|
$
|
(4
|
)
|
|
$
|
69,289
|
|
Corporate debt securities
|
50,462
|
|
|
226
|
|
|
(152
|
)
|
|
50,536
|
|
Agency mortgage-backed securities
|
8,378
|
|
|
73
|
|
|
(31
|
)
|
|
8,420
|
|
|
$
|
126,788
|
|
|
$
|
1,644
|
|
|
$
|
(187
|
)
|
|
$
|
128,245
|
|
The amortized cost and fair value by contractual maturity of our held-to-maturity investments are as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
January 1, 2017
|
|
Amortized Cost
|
|
Fair Value
|
Due in one year or less
|
$
|
15,640
|
|
|
$
|
15,666
|
|
Due after one year through five years
|
73,973
|
|
|
73,941
|
|
Due after five years through ten years
|
56,904
|
|
|
56,346
|
|
|
$
|
146,517
|
|
|
$
|
145,953
|
|
Actual maturities may differ from contractual maturities because the issuers of certain debt securities have the right to call or prepay their obligations without penalty. We have no significant concentrations of counterparties in our held-to-maturity investment portfolio.
Notes to Consolidated Financial Statements—(Continued)
|
|
NOTE 5:
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment are stated at cost and consist of the following (
in thousands
):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
December 25,
2015
|
Buildings and land
|
$
|
35,514
|
|
|
$
|
32,258
|
|
Computers and software
|
130,317
|
|
|
126,003
|
|
Furniture and equipment
|
12,262
|
|
|
12,362
|
|
Construction in progress
|
12,073
|
|
|
4,757
|
|
Gross property and equipment
|
190,166
|
|
|
175,380
|
|
Less accumulated depreciation
|
(126,168
|
)
|
|
(117,850
|
)
|
Property and equipment, net
|
$
|
63,998
|
|
|
$
|
57,530
|
|
Capitalized software costs, net of accumulated depreciation, were
$19.2 million
and
$24.6 million
as of
January 1, 2017
and
December 25, 2015
, respectively, excluding amounts in Construction in progress. Construction in progress consists primarily of purchased and internally-developed software.
Depreciation expense of property and equipment totaled
$21.6 million
,
$21.9 million
, and
$17.4 million
for the
years ended
January 1, 2017
,
December 25, 2015
, and
December 26, 2014
, respectively.
|
|
NOTE 6:
|
GOODWILL AND INTANGIBLE ASSETS
|
Goodwill
The following table reflects changes in the carrying amount of goodwill
by our new reportable segments
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PeopleReady
|
|
PeopleManagement
|
|
PeopleScout
|
|
Total Company
|
Balance at December 26, 2014
|
|
|
|
|
|
|
|
Goodwill before impairment
|
$
|
106,304
|
|
|
$
|
64,875
|
|
|
$
|
116,886
|
|
|
$
|
288,065
|
|
Accumulated impairment loss
|
(46,210
|
)
|
|
—
|
|
|
—
|
|
|
(46,210
|
)
|
Goodwill, net
|
60,094
|
|
|
64,875
|
|
|
116,886
|
|
|
241,855
|
|
|
|
|
|
|
|
|
|
Acquired goodwill
|
—
|
|
|
39,102
|
|
|
—
|
|
|
39,102
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
(12,462
|
)
|
|
(12,462
|
)
|
|
|
|
|
|
|
|
|
Balance at December 25, 2015
|
|
|
|
|
|
|
|
Goodwill before impairment
|
106,304
|
|
|
103,977
|
|
|
104,424
|
|
|
314,705
|
|
Accumulated impairment loss
|
(46,210
|
)
|
|
—
|
|
|
—
|
|
|
(46,210
|
)
|
Goodwill, net
|
60,094
|
|
|
103,977
|
|
|
104,424
|
|
|
268,495
|
|
|
|
|
|
|
|
|
|
|
Acquired goodwill and other (1)
|
—
|
|
|
(3,831
|
)
|
|
25,491
|
|
|
21,660
|
|
Impairment loss
|
—
|
|
|
(50,700
|
)
|
|
(15,169
|
)
|
|
(65,869
|
)
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
(63
|
)
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
|
|
|
|
|
|
Goodwill before impairment
|
106,304
|
|
|
100,146
|
|
|
129,852
|
|
|
336,302
|
|
Accumulated impairment loss
|
(46,210
|
)
|
|
(50,700
|
)
|
|
(15,169
|
)
|
|
(112,079
|
)
|
Goodwill, net
|
$
|
60,094
|
|
|
$
|
49,446
|
|
|
$
|
114,683
|
|
|
$
|
224,223
|
|
(1)
Effective January 4, 2016, we acquired the RPO business of Aon Hewitt, which has been integrated into our PeopleScout service line, and is part of our PeopleScout reportable segment. Accordingly, the goodwill associated with the acquisition has been assigned to our PeopleScout
Notes to Consolidated Financial Statements—(Continued)
reportable segment based on our preliminary purchase price allocation. For additional information see Note 2:
Acquisitions
. Effective December 1, 2015, we acquired SIMOS, which is part of our PeopleManagement reportable segment. The amount presented includes year-to-date adjustments to the preliminary SIMOS purchase accounting for goodwill.
Refer to Note 17:
Segment Information
for further details regarding our change in reportable segments during fiscal 2016.
Intangible assets
Finite-lived intangibles
The following table presents our purchased finite-lived intangible assets (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2017
|
|
December 25, 2015
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Finite-lived intangible assets (1):
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (2)
|
$
|
165,725
|
|
|
$
|
(54,676
|
)
|
|
$
|
111,049
|
|
|
$
|
161,376
|
|
|
$
|
(36,846
|
)
|
|
$
|
124,530
|
|
Trade names/trademarks (3)
|
4,378
|
|
|
(3,385
|
)
|
|
993
|
|
|
5,179
|
|
|
(3,447
|
)
|
|
1,732
|
|
Non-compete agreements
|
1,400
|
|
|
(1,097
|
)
|
|
303
|
|
|
1,800
|
|
|
(1,177
|
)
|
|
623
|
|
Technologies
|
17,009
|
|
|
(9,683
|
)
|
|
7,326
|
|
|
17,310
|
|
|
(6,536
|
)
|
|
10,774
|
|
Total finite-lived intangible assets
|
$
|
188,512
|
|
|
$
|
(68,841
|
)
|
|
$
|
119,671
|
|
|
$
|
185,665
|
|
|
$
|
(48,006
|
)
|
|
$
|
137,659
|
|
|
|
(1)
|
Excludes assets that are fully amortized.
|
|
|
(2)
|
Balance at
January 1, 2017
, is net of impairment loss of
$28.9 million
.
|
|
|
(3)
|
Balance at
January 1, 2017
, is net of impairment loss of
$4.3 million
.
|
Finite-lived intangible assets include customer relationships and technologies of
$34.9 million
and
$0.4 million
, respectively, based on our preliminary purchase price allocation relating to our acquisition of the RPO business of Aon Hewitt. Refer to Note 2:
Acquisitions
, for additional information regarding this acquisition.
Amortization expense of our finite-lived intangible assets was
$25.1 million
,
$19.9 million
, and
$12.0 million
for the
years ended
January 1, 2017
,
December 25, 2015
, and
December 26, 2014
, respectively.
The following table provides the estimated future amortization of finite-lived intangible assets as of
January 1, 2017
(
in thousands
):
|
|
|
|
|
2017
|
$
|
19,939
|
|
2018
|
19,339
|
|
2019
|
18,058
|
|
2020
|
16,156
|
|
2021
|
12,842
|
|
Thereafter
|
33,337
|
|
Total future amortization
|
$
|
119,671
|
|
Indefinite-lived intangibles
We also held indefinite-lived trade names/trademarks of
$6.0 million
and
$16.2 million
as of
January 1, 2017
and
December 25, 2015
, respectively. We began amortizing
$5.7 million
of previously indefinite-lived trade names over their remaining estimated useful lives of
three
years, which commenced as of December 26, 2015. In addition, we recorded an impairment charge of
$4.5 million
, which is discussed in detail below.
Impairments
We evaluate goodwill annually for impairment at the reporting unit level and whenever circumstances occur indicating that goodwill might be impaired. These events or circumstances could include a significant change in the business climate, operating performance
Notes to Consolidated Financial Statements—(Continued)
indicators, competition, loss of customers, or sale or disposition of a significant portion of a reporting unit. We monitor the existence of potential impairment indicators throughout the fiscal year.
Annual impairment test
The impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. We consider our service lines to be our reporting units for goodwill impairment testing. Our service lines are Labor Ready, Spartan Staffing, CLP Resources, PlaneTechs, Centerline, Staff Management, SIMOS, PeopleScout, hrX, and Staff Management (MSP). Fair value reflects the price that a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds carrying value, we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure the possible goodwill impairment loss. The second step includes hypothetically valuing the tangible and intangible assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. The implied fair value of the reporting unit's goodwill is compared to the carrying value of that goodwill. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions to evaluate the impact of operating and macroeconomic changes on each reporting unit. The fair value of each reporting unit is estimated using a combination of a discounted cash flow methodology and the market valuation approach using publicly traded company multiples in similar businesses. This analysis required significant judgments, including estimation of future cash flows, which 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. The weighted average cost of capital used in our most recent annual impairment test was risk-adjusted to reflect the specific risk profile of the reporting units and ranged from
12%
to
17%
. 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, while considering a reasonable control premium.
We performed our annual goodwill impairment analysis as of the first day of our fiscal second quarter of 2016 and recorded a goodwill impairment charge of
$65.9 million
for the thirteen weeks ended June 24, 2016 with respect to the Staff Management, PlaneTechs, and hrX reporting units as follows:
|
|
•
|
Staff Management
(
Exclusive recruitment and on-premise management of a facility's contingent industrial workforce
) - As reported in our first quarter Form 10-Q for fiscal year 2016, in April 2016, we were notified by our largest customer, Amazon of its plans to reduce the use of contingent labor and realign its contingent labor vendors for warehousing. Our largest customer announced it would be reducing the use of our services for its warehouse fulfillment centers in the United States and focusing our services on its planned expansion of distribution service sites to a national network for delivery direct to the customer. Our largest customer represented approximately
$354 million
, or
13.1%
, of total company revenues for the fiscal year ended December 25, 2015, and
$106 million
, or
8.0%
, of total company revenues for the
twenty-six weeks ended June 24, 2016
, and
$125 million
, or
10.4%
, for the comparable period in the prior year. We estimated that the change in scope of our services would decrease revenues for the second half of 2016 by approximately
$125 million
, compared to the prior year. As a result, we lowered our future expectations, which resulted in a goodwill impairment of
$33.7 million
.
|
|
|
•
|
PlaneTechs (
Skilled mechanics and technicians to the aviation and transportation industries)
- Year-to-date revenues have declined in excess of
30%
compared to the prior year as significant projects have been completed for a major aviation customer and its supply chain and anticipated projects did not occur to the extent expected. PlaneTechs has been diversifying from providing services to one primary customer without offsetting growth in the broader aviation and transportation marketplace. As a result of significantly underperforming against current year expectations and increased future uncertainty, we lowered our future expectations, which resulted in a goodwill impairment of
$17.0 million
.
|
|
|
•
|
hrX (
Outsourced recruitment of permanent employees on behalf of clients
) - Sales of this service line include our internally developed applicant tracking software (“ATS”). Actual stand-alone ATS sales and service were
$3.4 million
for fiscal 2015 and have recently declined. ATS sales and prospects have underperformed against our expectations. As a result of underperforming against our current year expectations and increased future uncertainty in customer demand, we lowered our future expectations, which resulted in a goodwill impairment of
$15.2 million
.
|
We generally record acquired intangible assets that have finite useful lives, such as customer relationships, in connection with business combinations. We review intangible assets that have finite useful lives and other long-lived assets whenever an event or change in circumstances indicates that the carrying value of the asset may not be recoverable. Factors considered important that
Notes to Consolidated Financial Statements—(Continued)
could result in an impairment review include, but are not limited to, significant underperformance relative to historical or planned operating results, or significant changes in business strategies. We estimate the recoverability of these assets by comparing the carrying amount of the asset to the future undiscounted cash flows that we expect the asset to generate. An impairment loss is recognized when the estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value based on discounted cash flow analysis or other valuation techniques. With the change in scope of services by Staff Management to our largest customer, we lowered our future expectations, which was the primary trigger of an impairment to our acquired customer relationships intangible asset of
$28.9 million
. Considerable management judgment was necessary to determine key assumptions, including projected revenue and an appropriate discount rate of
13%
. Actual future results could vary from our estimates.
We have indefinite-lived intangible assets related to our Staff Management and PeopleScout trade names. We test our trade names/trademarks annually for impairment and when indications of potential impairment exist. We utilize the relief from royalty method to determine the fair value of our trade names. If the carrying value exceeds the fair value, we recognize an impairment loss in an amount equal to the excess. We used a royalty rate of
10%
and a discount rate of
17%
in our valuation. Considerable management judgment is necessary to determine key assumptions, including projected revenue, royalty rates, and appropriate discount rates. With the change in scope of services to our largest customer, we have lowered our future expectations, which was the primary trigger of an impairment to the acquired trade name of Staff Management of
$4.5 million
.
Interim impairment test
In August 2016, we were notified by our largest customer that they will no longer be using our contingent labor services to help expand their delivery stations to distribute and deliver their products directly to their customers. As a result, we expected minimal, if any, revenue activity in Q4 2016 and beyond for our largest customer's delivery stations business. We plan to continue to service their Canadian fulfillment centers. The loss of providing contingent labor services to expand our largest customer's delivery stations was deemed to be a triggering event for purposes of assessing goodwill and the customer relationship definite-lived intangible asset for impairment during the third quarter of 2016. Accordingly, we performed a goodwill impairment test for our Staff Management reporting unit using a blended income and market approach. Considerable management judgment was necessary to determine key assumptions, including estimated future revenues and discount rate. We estimated future revenues from our largest customer of approximately
$30 million
for 2017 and modest growth rates thereafter. We used a higher discount rate of
25%
for Amazon due to the uncertainties associated with this customer, which resulted in a blended discount rate of
15%
for Staff Management.
Determining the fair value of our Staff Management reporting unit is judgmental in nature and involves the use of significant estimates and assumptions to evaluate the impact of recent changes. The fair value of this reporting unit is estimated using a combination of a discounted cash flow methodology and the market valuation approach using publicly traded company multiples in similar businesses. This analysis required significant 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 this reporting unit.
The estimated fair value of our Staff Management reporting unit was in excess of its carrying value by
20%
. This reporting unit also continues to include limited services to our largest customer. As such, we believe this reporting unit carries more risk of future impairment when compared to our other reporting units. Should our largest customer discontinue the use of our services entirely and the rest of Staff Management continues to perform in line with management's current expectations and valuation assumptions, this would not result in a goodwill impairment; however, it would reduce the excess estimated fair value of this reporting unit over its carrying value to less than
20%
. The Staff Management reporting unit has goodwill of
$10.6 million
as of September 23, 2016 and January 1, 2017. We will continue to closely monitor the operational performance of the Staff Management reporting unit as it relates to goodwill impairment.
Spartan and CLP Resources:
In the third quarter of fiscal 2016, we finalized the changes to the organizational and reporting structure of our Labor Ready, Spartan Staffing, and CLP Resources service lines. The combined service lines were re-branded as PeopleReady. As a result, we have combined these service lines into one and have recognized an impairment charge of
$4.3 million
for the remaining net book value of the Spartan and CLP Resources trade name/trademarks intangible assets as of September 23, 2016.
There were no goodwill or intangible asset impairment charges recorded during fiscal
2015
or
2014
.
Notes to Consolidated Financial Statements—(Continued)
NOTE 7:
WORKERS’ COMPENSATION INSURANCE AND RESERVES
We provide workers’ compensation insurance for our temporary and permanent employees. The majority of our current workers’ compensation insurance policies cover claims for a particular event above a
$2.0 million
deductible limit, on a “per occurrence” basis. This results in our being substantially self-insured.
For workers’ compensation claims originating in Washington, North Dakota, Ohio, Wyoming, Canada, and Puerto Rico (our “monopolistic jurisdictions”), we pay workers’ compensation insurance premiums and obtain full coverage under government-administered programs (with the exception of our PeopleReady service lines in the state of Ohio where we have a self-insured policy). Accordingly, because we are not the primary obligor, our financial statements do not reflect the liability for workers’ compensation claims in these monopolistic jurisdictions. Our workers’ compensation reserve is established using estimates of the future cost of claims and related expenses that have been reported but not settled, as well as those that have been incurred but not reported.
Our workers’ compensation reserve for claims below the deductible limit is discounted to its 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. The weighted average discount rate was
1.6%
and
1.8%
at
January 1, 2017
and
December 25, 2015
, respectively. Payments made against self-insured claims are made over a weighted average period of approximately
4.5
years at
January 1, 2017
.
The table below presents a reconciliation of the undiscounted workers’ compensation reserve to the discounted workers' compensation reserve for the periods presented as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
December 25,
2015
|
Undiscounted workers’ compensation reserve
|
$
|
292,169
|
|
|
$
|
284,306
|
|
Less discount on workers' compensation reserve
|
14,818
|
|
|
18,026
|
|
Workers' compensation reserve, net of discount
|
277,351
|
|
|
266,280
|
|
Less current portion
|
79,126
|
|
|
69,308
|
|
Long-term portion
|
$
|
198,225
|
|
|
$
|
196,972
|
|
Payments made against self-insured claims were
$73.6 million
,
$70.7 million
, and
$60.6 million
for the
years ended
January 1, 2017
,
December 25, 2015
, and
December 26, 2014
, respectively.
Our workers’ compensation reserve includes estimated expenses related to claims above our self-insured limits (“excess claims”), and we record a corresponding receivable for the insurance coverage on excess claims based on the contractual policy agreements we have with insurance carriers. We discount this reserve and corresponding receivable to its estimated net present value using the discount rates based on average returns of “risk-free” U.S. Treasury instruments available during the year in which the liability was incurred. The claim payments are made and the corresponding reimbursements from our insurance carriers are received over an estimated weighted average period of approximately
15
years. The discounted workers’ compensation reserve for excess claims was
$52.9 million
and
$49.0 million
as of
January 1, 2017
and
December 25, 2015
, respectively. The discounted receivables from insurance companies, net of valuation allowance, were
$48.9 million
and
$45.2 million
as of
January 1, 2017
and
December 25, 2015
, respectively, and are included in Other assets, net on the accompanying Consolidated Balance Sheets.
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.
|
Notes to Consolidated Financial Statements—(Continued)
The table below presents the estimated future payout of our discounted workers' compensation claims reserve for the next five years and thereafter as of
January 1, 2017
(
in thousands
):
|
|
|
|
|
2017
|
$
|
79,126
|
|
2018
|
43,882
|
|
2019
|
25,220
|
|
2020
|
15,464
|
|
2021
|
9,979
|
|
Thereafter
|
50,750
|
|
Sub-total
|
224,421
|
|
Excess claims (1)
|
52,930
|
|
Total
|
$
|
277,351
|
|
|
|
(1)
|
Estimated expenses related to claims above our self-insured limits for which we have a corresponding receivable for the insurance coverage based on contractual policy agreements.
|
Workers’ compensation expense consists primarily of changes in self-insurance reserves net of changes in discount, monopolistic jurisdictions’ premiums, insurance premiums, and other miscellaneous expenses. Workers’ compensation expense of
$94.0 million
,
$98.2 million
, and
$77.5 million
was recorded in Cost of services for the
years ended
January 1, 2017
,
December 25, 2015
, and
December 26, 2014
, respectively.
The components of our borrowings were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
December 25,
2015
|
Revolving Credit Facility
|
|
$
|
112,507
|
|
|
$
|
218,086
|
|
Term Loan
|
|
25,122
|
|
|
27,578
|
|
Total debt
|
|
137,629
|
|
|
245,664
|
|
Less current portion
|
|
2,267
|
|
|
2,267
|
|
Long-term debt, less current portion
|
|
$
|
135,362
|
|
|
$
|
243,397
|
|
Revolving Credit Facility
Effective June 30, 2014, we entered into a Second Amended and Restated Revolving Credit Agreement for a secured revolving credit facility of
$300.0 million
with Bank of America, N.A., Wells Fargo Bank, National Association, HSBC and PNC Capital Markets LLC ("Revolving Credit Facility"). The Revolving Credit Facility, which matures June 30, 2019, amended and restated our previous credit facility.
The maximum amount we can borrow under the Revolving Credit Facility is subject to certain borrowing limits. Specifically, we are limited to the sum of
90%
of our eligible billed accounts receivable, plus
85%
of our eligible unbilled accounts receivable limited to
15%
of all our eligible receivables, plus the value of our Tacoma headquarters office building. The real estate lending limit is
$17.4 million
, and is reduced by
$0.4 million
on the first day of each calendar quarter. As of
January 1, 2017
, the Tacoma headquarters office building liquidation value totaled
$13.1 million
. The borrowing limit is further reduced by the sum of a reserve in an amount equal to the payroll and payroll taxes for our temporary employees for one payroll cycle and certain other reserves, if deemed applicable. Each borrowing has a stated maturity of 90 days or less. At
January 1, 2017
,
$256.4 million
was available under the Revolving Credit Facility,
$112.5 million
was utilized as a draw on the facility, and
$8.3 million
was utilized by outstanding standby letters of credit, leaving
$135.6 million
available for additional borrowings. The letters of credit are primarily used to collateralize a portion of our workers' compensation obligation.
On January 4, 2016, in connection with the acquisition of the RPO business of Aon Hewitt, we entered into a Third Amendment ("Amendment") to our Second Amended and Restated Credit Agreement dated June 30, 2014. The Amendment provided for a temporary
$30.0 million
increase to our existing
$300.0 million
revolving line of credit, for a total of
$330.0 million
. The temporary increase expired in
$10.0 million
increments on April 1, May 1, and June 1 of 2016.
Notes to Consolidated Financial Statements—(Continued)
The Amendment also reduced the minimum excess liquidity requirement from
$37.5 million
to
$10.0 million
, which increased to
$19.3 million
,
$28.6 million
, and
$37.5 million
on April 1, May 1, and June 1 of 2016, respectively. Excess liquidity is an amount equal to the unused borrowing capacity under the Revolving Credit Facility plus certain unrestricted cash, cash equivalents, and marketable securities. We are required to satisfy a fixed charge coverage ratio in the event we do not meet the excess liquidity requirement. The additional amount available to borrow at
January 1, 2017
was
$135.6 million
and the amount of cash and cash equivalents under control agreements was
$27.9 million
, for a total of
$163.5 million
, which was well in excess of the
$37.5 million
liquidity requirement in effect on
January 1, 2017
. We are currently in compliance with all covenants related to the Revolving Credit Facility.
Under the terms of the Revolving Credit Facility, we pay a variable rate of interest on funds borrowed that is based on London Interbank Offered Rate (LIBOR) plus an applicable spread between
1.25%
and
2.00%
. Alternatively, at our option, we may pay interest based upon a base rate plus an applicable spread between
0.25%
and
1.00%
. The applicable spread is determined by certain liquidity to debt ratios. The base rate is the greater of the prime rate (as announced by Bank of America), the federal funds rate plus
0.50%
, or the
one-month
LIBOR rate plus
1.00%
. At
January 1, 2017
, the applicable spread on LIBOR was
1.50%
and the applicable spread on the base rate was
0.625%
. As of
January 1, 2017
, the weighted average interest rate on outstanding borrowings was
2.13%
.
A fee of
0.375%
is applied against the Revolving Credit Facility's unused borrowing capacity when utilization is less than
25%
, or
0.25%
when utilization is greater than or equal to
25%
. Letters of credit are priced at the margin in effect for LIBOR loans, plus a fronting fee of
0.125%
.
Obligations under the Revolving Credit Facility are guaranteed by TrueBlue and material U.S. domestic subsidiaries, and are secured by a pledge of substantially all of the assets of TrueBlue and material U.S. domestic subsidiaries. The Revolving Credit Facility has variable rate interest and approximates fair value as of
January 1, 2017
and
December 25, 2015
.
Term loan agreement
On February 4, 2013, we entered into an unsecured Term Loan Agreement (“Term Loan”) with Synovus Bank in the principal amount of
$34.0 million
. The Term Loan has a
five
-year maturity with fixed monthly principal payments, which total
$2.3 million
annually based on a loan amortization term of
15
years. Interest accrues at the
one-month
LIBOR index rate plus an applicable spread of
1.50%
, which is paid in addition to the principal payments. At our discretion, we may elect to extend the term of the Term Loan by
five
consecutive
one
-year extensions. At
January 1, 2017
, the interest rate for the Term Loan was
2.70%
.
At
January 1, 2017
and
December 25, 2015
, the remaining balance of the Term Loan was
$25.1 million
and
$27.6 million
, respectively, of which
$2.3 million
is current and is included in Other current liabilities on our Consolidated Balance Sheets. The Term Loan has variable rate interest and approximates fair value as of
January 1, 2017
and
December 25, 2015
.
The scheduled principal payments for debt are as follows (
in thousands
):
|
|
|
|
|
2017
|
$
|
2,267
|
|
2018
|
22,855
|
|
Total
|
$
|
25,122
|
|
Our obligations under the Term Loan may be accelerated upon the occurrence of an event of default under the Term Loan, which includes customary events of default, as well as cross-defaults related to indebtedness under our Revolving Credit Facility and other Term Loan specific defaults. The Term Loan contains customary negative covenants applicable to the Company and our subsidiaries such as indebtedness, certain dispositions of property, the imposition of restrictions on payments under the Term Loan, and other Term Loan specific covenants. We are currently in compliance with all covenants related to the Term Loan.
|
|
NOTE 9:
|
COMMITMENTS AND CONTINGENCIES
|
Workers’ compensation commitments
Our insurance carriers and certain state workers’ compensation programs require us to collateralize a portion of our workers’ compensation obligation, for which they become responsible should we become insolvent. The collateral typically takes the form of cash and cash equivalents, highly rated investment grade debt securities, letters of credit, and/or surety bonds. On a regular
Notes to Consolidated Financial Statements—(Continued)
basis these entities assess the amount of collateral they will require from us relative to our workers' compensation obligation. The majority of our collateral obligations are held in the Trust.
We have provided our insurance carriers and certain states with commitments in the form and amounts listed below (
in thousands
):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
December 25,
2015
|
Cash collateral held by workers' compensation insurance carriers
|
$
|
28,066
|
|
|
$
|
23,133
|
|
Cash and cash equivalents held in Trust
|
32,841
|
|
|
26,046
|
|
Investments held in Trust
|
146,517
|
|
|
126,788
|
|
Letters of credit (1)
|
7,982
|
|
|
4,520
|
|
Surety bonds (2)
|
20,440
|
|
|
17,946
|
|
Total collateral commitments
|
$
|
235,846
|
|
|
$
|
198,433
|
|
|
|
(1)
|
We have agreements with certain financial institutions to issue letters of credit as collateral.
|
|
|
(2)
|
Our surety bonds are issued by independent insurance companies on our behalf and bear annual fees based on a percentage of the bond, which are determined by each independent surety carrier. These fees do not exceed
2.0%
of the bond amount, subject to a minimum charge. The terms of these bonds are subject to review and renewal every
one
to
four
years and most bonds can be canceled by the sureties with as little as
60
days' notice.
|
Operating leases
We have contractual commitments in the form of operating leases related to office space and equipment. Future non-cancelable minimum lease payments under our operating lease commitments as of
January 1, 2017
are as follows for each of the next five years and thereafter (
in thousands
):
|
|
|
|
|
2017
|
$
|
6,729
|
|
2018
|
6,056
|
|
2019
|
5,365
|
|
2020
|
4,593
|
|
2021
|
2,787
|
|
Thereafter
|
602
|
|
Total future non-cancelable minimum lease payments
|
$
|
26,132
|
|
Operating leases are generally renewed in the normal course of business, and most of the options are negotiated at the time of renewal. However, for the majority of our office space leases, we have the right to cancel the lease, typically within
90
days of notification. Accordingly, we have not included the leases with these cancellation provisions in our disclosure of future minimum lease payments. Total rent expense for
2016
,
2015
, and
2014
was
$26.5 million
,
$23.1 million
, and
$23.0 million
, respectively.
Purchase obligations
Purchase obligations include agreements to purchase goods and services in the ordinary course of business that are enforceable, legally binding, and specify all significant terms. Purchase obligations do not include agreements that are cancelable without significant penalty. We had
$11.6 million
of purchase obligations as of
January 1, 2017
, of which
$7.6 million
are expected to be paid in 2017.
Legal contingencies and developments
We are involved in various proceedings arising in the normal course of conducting business. We believe the liabilities included in our financial statements reflect the probable loss that can be reasonably estimated. The resolution of those proceedings is not expected to have a material effect on our results of operations or financial condition.
|
|
NOTE 10:
|
STOCKHOLDERS' EQUITY
|
Common stock
In July 2011, our Board of Directors approved a program to repurchase
$75.0 million
of our outstanding common stock. As of
January 1, 2017
,
$29.4 million
remained available for repurchase of common stock under the current authorization, which has no expiration date.
Notes to Consolidated Financial Statements—(Continued)
Under our authorized stock repurchase program, we repurchased
0.3 million
shares of our common stock during
2016
for a total amount of
$5.8 million
including commissions. During
2015
we did not repurchase any shares of our common stock under our authorized stock repurchase program.
Shares of common stock outstanding include shares of unvested restricted stock. Unvested restricted stock included in reportable shares outstanding was
0.7 million
shares as of
January 1, 2017
and
December 25, 2015
.
Preferred stock
We have authorized
20 million
shares of blank check preferred stock. The blank check preferred stock is issuable in one or more series, each with such designations, preferences, rights, qualifications, limitations and restrictions as our Board of Directors may determine and set forth in supplemental resolutions at the time of issuance, without further shareholder action. The initial series of blank check preferred stock authorized by the Board of Directors was designated as Series A Preferred Stock. We had no outstanding shares of preferred stock in any of the years presented.