|
|
|
Item 1.
|
CONSOLIDATED FINANCIAL STATEMENTS
|
TRUEBLUE, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
|
|
|
|
|
|
|
|
(in thousands, except par value data)
|
March 31,
2019
|
December 30,
2018
|
ASSETS
|
|
|
Current assets:
|
|
|
Cash and cash equivalents
|
$
|
26,328
|
|
$
|
46,988
|
|
Accounts receivable, net of allowance for doubtful accounts of $4,832 and $5,026
|
327,038
|
|
355,373
|
|
Prepaid expenses, deposits and other current assets
|
24,291
|
|
22,141
|
|
Income tax receivable
|
8,329
|
|
5,325
|
|
Total current assets
|
385,986
|
|
429,827
|
|
Property and equipment, net
|
57,898
|
|
57,671
|
|
Restricted cash and investments
|
229,743
|
|
235,443
|
|
Deferred income taxes, net
|
1,177
|
|
4,388
|
|
Goodwill
|
238,006
|
|
237,287
|
|
Intangible assets, net
|
86,541
|
|
91,408
|
|
Operating lease right-of-use assets
|
38,717
|
|
—
|
|
Workers’ compensation claims receivable, net
|
45,694
|
|
44,915
|
|
Other assets, net
|
16,254
|
|
13,905
|
|
Total assets
|
$
|
1,100,016
|
|
$
|
1,114,844
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
Current liabilities:
|
|
|
Accounts payable and other accrued expenses
|
$
|
51,420
|
|
$
|
62,045
|
|
Accrued wages and benefits
|
66,832
|
|
77,098
|
|
Current portion of workers’ compensation claims reserve
|
74,073
|
|
76,421
|
|
Operating lease current liabilities
|
14,638
|
|
—
|
|
Other current liabilities
|
8,358
|
|
9,962
|
|
Total current liabilities
|
215,321
|
|
225,526
|
|
Workers’ compensation claims reserve, less current portion
|
187,993
|
|
190,025
|
|
Long-term debt, less current portion
|
42,200
|
|
80,000
|
|
Long-term deferred compensation liabilities
|
25,023
|
|
21,747
|
|
Operating lease long-term liabilities
|
26,723
|
|
—
|
|
Other long-term liabilities
|
4,469
|
|
6,107
|
|
Total liabilities
|
501,729
|
|
523,405
|
|
|
|
|
Commitments and contingencies (Note 5)
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
Preferred stock, $0.131 par value, 20,000 shares authorized;
No shares issued and outstanding
|
—
|
|
—
|
|
Common stock, no par value, 100,000 shares authorized;
40,152 and 40,054 shares issued and outstanding
|
1
|
|
1
|
|
Accumulated other comprehensive loss
|
(13,323
|
)
|
(14,649
|
)
|
Retained earnings
|
611,609
|
|
606,087
|
|
Total shareholders’ equity
|
598,287
|
|
591,439
|
|
Total liabilities and shareholders’ equity
|
$
|
1,100,016
|
|
$
|
1,114,844
|
|
See accompanying notes to consolidated financial statements
TRUEBLUE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited)
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands, except per share data)
|
March 31,
2019
|
April 1,
2018
|
Revenue from services
|
$
|
552,352
|
|
$
|
554,388
|
|
Cost of services
|
403,976
|
|
411,120
|
|
Gross profit
|
148,376
|
|
143,268
|
|
Selling, general and administrative expense
|
129,661
|
|
125,763
|
|
Depreciation and amortization
|
9,952
|
|
10,090
|
|
Income from operations
|
8,763
|
|
7,415
|
|
Interest expense
|
(722
|
)
|
(890
|
)
|
Interest and other income
|
1,275
|
|
3,094
|
|
Interest and other income (expense), net
|
553
|
|
2,204
|
|
Income before tax expense
|
9,316
|
|
9,619
|
|
Income tax expense
|
1,040
|
|
864
|
|
Net income
|
$
|
8,276
|
|
$
|
8,755
|
|
|
|
|
Net income per common share:
|
|
|
Basic
|
$
|
0.21
|
|
$
|
0.22
|
|
Diluted
|
$
|
0.21
|
|
$
|
0.22
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
Basic
|
39,366
|
|
40,443
|
|
Diluted
|
39,735
|
|
40,694
|
|
|
|
|
Other comprehensive income:
|
|
|
Foreign currency translation adjustment
|
$
|
1,326
|
|
$
|
(1,384
|
)
|
Comprehensive income
|
$
|
9,602
|
|
$
|
7,371
|
|
See accompanying notes to consolidated financial statements
TRUEBLUE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands)
|
March 31,
2019
|
April 1,
2018
|
Cash flows from operating activities:
|
|
|
Net income
|
$
|
8,276
|
|
$
|
8,755
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
Depreciation and amortization
|
9,952
|
|
10,090
|
|
Provision for doubtful accounts
|
1,778
|
|
2,209
|
|
Stock-based compensation
|
3,606
|
|
3,409
|
|
Deferred income taxes
|
3,209
|
|
1,370
|
|
Non-cash lease expense
|
3,565
|
|
—
|
|
Other operating activities
|
(1,841
|
)
|
(572
|
)
|
Changes in operating assets and liabilities:
|
|
|
Accounts receivable
|
26,558
|
|
42,679
|
|
Income tax receivable
|
(3,645
|
)
|
(2,842
|
)
|
Other assets
|
(5,274
|
)
|
(1,964
|
)
|
Accounts payable and other accrued expenses
|
(9,878
|
)
|
(5,232
|
)
|
Accrued wages and benefits
|
(10,266
|
)
|
(10,125
|
)
|
Workers’ compensation claims reserve
|
(4,380
|
)
|
(4,579
|
)
|
Operating lease liabilities
|
(3,414
|
)
|
—
|
|
Other liabilities
|
3,268
|
|
1,637
|
|
Net cash provided by operating activities
|
21,514
|
|
44,835
|
|
Cash flows from investing activities:
|
|
|
Capital expenditures
|
(5,862
|
)
|
(1,911
|
)
|
Divestiture of business
|
—
|
|
8,500
|
|
Purchases of restricted investments
|
(3,070
|
)
|
(3,299
|
)
|
Maturities of restricted investments
|
10,337
|
|
6,417
|
|
Net cash provided by investing activities
|
1,405
|
|
9,707
|
|
Cash flows from financing activities:
|
|
|
Purchases and retirement of common stock
|
(5,303
|
)
|
—
|
|
Net proceeds from employee stock purchase plans
|
380
|
|
395
|
|
Common stock repurchases for taxes upon vesting of restricted stock
|
(1,438
|
)
|
(2,086
|
)
|
Net change in revolving credit facility
|
(37,800
|
)
|
(46,301
|
)
|
Payments on debt
|
—
|
|
(567
|
)
|
Other
|
(69
|
)
|
—
|
|
Net cash used in financing activities
|
(44,230
|
)
|
(48,559
|
)
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
314
|
|
(760
|
)
|
Net change in cash, cash equivalents and restricted cash
|
(20,997
|
)
|
5,223
|
|
Cash, cash equivalents and restricted cash, beginning of period
|
102,450
|
|
73,831
|
|
Cash, cash equivalents and restricted cash, end of period
|
$
|
81,453
|
|
$
|
79,054
|
|
Supplemental disclosure of cash flow information:
|
|
|
Cash paid during the period for:
|
|
|
Interest
|
$
|
667
|
|
$
|
827
|
|
Income taxes
|
1,448
|
|
2,342
|
|
Operating lease liabilities
|
4,344
|
|
—
|
|
Non-cash transactions:
|
|
|
Property and equipment purchased but not yet paid
|
807
|
|
581
|
|
Divestiture non-cash consideration
|
—
|
|
1,957
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
4,698
|
|
—
|
|
See accompanying notes to consolidated financial statements
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statement preparation
The accompanying unaudited consolidated financial statements (“financial statements”) of TrueBlue, Inc. (the “company,” “TrueBlue,” “we,” “us,” and “our”) are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, certain information and footnote disclosures usually found in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The financial statements reflect all adjustments which, in the opinion of management, are necessary to fairly state the financial statements for the interim periods presented. We follow the same accounting policies for preparing both quarterly and annual financial statements.
These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended
December 30, 2018
. The results of operations for the
thirteen weeks ended
March 31, 2019
, are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.
Reclassifications
Certain immaterial prior year amounts have been reclassified within current liabilities on our Consolidated Balance Sheets and Consolidated Statements of Cash Flows to conform to current year presentation.
Leases
We conduct our branch office operations from leased locations. We also lease office spaces for our centralized support functions, vehicles and equipment. Many leases require variable payments of property taxes, insurance, and common area maintenance, in addition to base rent. The variable portion of these lease payments is not included in our right-of-use assets or lease liabilities. Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expense in selling, general and administrative expense on our Consolidated Statements of Operations and Comprehensive Income. The terms of our lease agreements generally range from three to five years, some containing options to renew or cancel. We determine if an arrangement meets the definition of a lease at inception, at which time we also perform an analysis to determine whether the lease qualifies as operating or financing.
Operating leases are included in operating lease right-of-use assets and operating lease current and long-term liabilities on our Consolidated Balance Sheets. Lease expense for operating leases is recognized on a straight-line basis over the lease term, and is included in selling, general and administrative expense on our Consolidated Statements of Operations and Comprehensive Income.
Financing leases are included in property and equipment, net, other current liabilities, and other long-term liabilities on our Consolidated Balance Sheets. Lease expense for financing leases is recognized as depreciation of the right-of-use asset and interest expense.
Lease right-of-use assets and lease liabilities are measured using the present value of future minimum lease payments over the lease term at commencement date. The right-of-use asset also includes any lease payments made on or before the commencement date of the lease, less any lease incentives received. As the rate implicit in the lease is not readily determinable in our leases, we use our incremental borrowing rates based on the information available at the lease commencement date in determining the present value of lease payments. The incremental borrowing rates used are estimated based on what we would be required to pay for a collateralized loan over a similar term. We have lease agreements with lease and non-lease components, which are accounted for as a single lease component.
For leases with an initial non-cancelable lease term of less than one year and no option to purchase, we have elected not to recognize the lease on our Consolidated Balance Sheets and instead recognize rent payments on a straight-line basis over the lease term in selling, general and administrative expense on our Consolidated Statements of Operations and Comprehensive Income. In addition, for those leases where the right to cancel the lease is available to both TrueBlue (as the lessee) and the lessor, the lease term is the initial non-cancelable period plus the notice period, which is typically 90 days, and not greater than one year.
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Recently adopted accounting standards
Intangibles-goodwill and other-internal-use software
In August 2018, the Financial Accounting Standards Board (“FASB”) issued new guidance on accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Previously, we expensed the cost of internal development labor as incurred.
The new guidance now requires these costs be capitalized with the related amortization recorded in selling, general and administrative expense. In addition, capitalized development costs are required to be recorded as a prepaid asset rather than a fixed asset, and license fees incurred during the development period are expensed as incurred.
The standard is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. We elected to early adopt this new standard prospectively as of the first day of our fiscal first quarter in 2019. There was no impact on our consolidated financial statements upon adoption.
Leases
In February 2016, the FASB issued guidance on lease accounting. The new guidance continues to classify leases as either finance or operating, but results in the lessee recognizing most operating leases on the balance sheet as right-of-use assets and lease liabilities. This guidance was effective for annual and interim periods beginning after December 15, 2018 (Q1 2019 for TrueBlue), with early adoption permitted. In July 2018, the FASB amended the standard to provide transition relief for comparative reporting, allowing companies to adopt the provisions of the new standard using a modified retrospective transition method on the adoption date, with a cumulative-effect adjustment to retained earnings recorded on the date of adoption. We have elected to adopt the standard using the transition relief provided in the July amendment. In preparation for adoption of the standard, we have implemented internal controls and key system functionality to enable the preparation of financial information.
We have elected the three practical expedients allowed for implementation of the new standard, but have not utilized the hindsight practical expedient. Accordingly, we did not reassess: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; 3) initial direct costs for any existing leases. We have also elected the practical expedient to not separate non-lease components from the lease components to which they relate, and instead account for each as a single lease component, for all underlying asset classes. Accordingly, all expenses associated with a lease contract are accounted for as lease expenses.
Adoption of the new standard resulted in the recording of operating right-of-use assets and lease liabilities of
$39 million
and
$41 million
, respectively, as of the first day of our fiscal first quarter of 2019. The difference between the right-of-use assets and lease liabilities relates to the deferred rent liability balance as of the end of fiscal 2018 associated with the leases capitalized. The deferred rent liability, which was the difference between the straight-line lease expense and cash paid, reduced the right-of-use asset upon adoption. Our accounting for finance leases remained substantially unchanged. The standard did not materially impact our Consolidated Statements of Operations and Comprehensive Income or our Consolidated Statements of Cash Flows.
Recently issued accounting pronouncements not yet adopted
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 guidance replaces the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. 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 evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, systems, and internal controls.
Other accounting standards that have been issued 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 financial statements upon adoption.
NOTE 2: FAIR VALUE MEASUREMENT
Our assets measured at fair value on a recurring basis consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
(in thousands)
|
Total fair value
|
Quoted prices in active markets for identical assets (level 1)
|
Significant other observable inputs (level 2)
|
Significant unobservable inputs (level 3)
|
Cash and cash equivalents
|
$
|
26,328
|
|
$
|
26,328
|
|
$
|
—
|
|
$
|
—
|
|
Restricted cash and cash equivalents
|
55,125
|
|
55,125
|
|
—
|
|
—
|
|
Cash, cash equivalents and restricted cash (1)
|
$
|
81,453
|
|
$
|
81,453
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
Municipal debt securities
|
$
|
75,794
|
|
$
|
—
|
|
$
|
75,794
|
|
$
|
—
|
|
Corporate debt securities
|
69,777
|
|
—
|
|
69,777
|
|
—
|
|
Agency mortgage-backed securities
|
2,235
|
|
—
|
|
2,235
|
|
—
|
|
U.S. government and agency securities
|
1,012
|
|
—
|
|
1,012
|
|
—
|
|
Restricted investments classified as held-to-maturity
|
$
|
148,818
|
|
$
|
—
|
|
$
|
148,818
|
|
$
|
—
|
|
|
|
|
|
|
Deferred compensation mutual funds classified as available-for-sale
|
$
|
26,969
|
|
$
|
26,969
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2018
|
(in thousands)
|
Total fair value
|
Quoted prices in active markets for identical assets (level 1)
|
Significant other observable inputs (level 2)
|
Significant unobservable inputs (level 3)
|
Cash and cash equivalents
|
$
|
46,988
|
|
$
|
46,988
|
|
$
|
—
|
|
$
|
—
|
|
Restricted cash and cash equivalents
|
55,462
|
|
55,462
|
|
—
|
|
—
|
|
Cash, cash equivalents and restricted cash (1)
|
$
|
102,450
|
|
$
|
102,450
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
Municipal debt securities
|
$
|
76,690
|
|
$
|
—
|
|
$
|
76,690
|
|
$
|
—
|
|
Corporate debt securities
|
75,432
|
|
—
|
|
75,432
|
|
—
|
|
Agency mortgage-backed securities
|
2,531
|
|
—
|
|
2,531
|
|
—
|
|
U.S. government and agency securities
|
988
|
|
—
|
|
988
|
|
—
|
|
Restricted investments classified as held-to-maturity
|
$
|
155,641
|
|
$
|
—
|
|
$
|
155,641
|
|
$
|
—
|
|
|
|
|
|
|
Deferred compensation mutual funds classified as available-for-sale
|
$
|
23,363
|
|
$
|
23,363
|
|
$
|
—
|
|
$
|
—
|
|
|
|
(1)
|
Cash, cash equivalents and restricted cash consist of money market funds, deposits and investments with original maturities of three months or less.
|
There were no material transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy during the
thirteen weeks ended
March 31, 2019
nor
April 1, 2018
.
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 3: RESTRICTED CASH AND INVESTMENTS
The following is a summary of the carrying value of our restricted cash and investments:
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2019
|
December 30,
2018
|
Cash collateral held by insurance carriers
|
$
|
24,366
|
|
$
|
24,182
|
|
Cash and cash equivalents held in Trust
|
30,354
|
|
28,021
|
|
Investments held in Trust
|
147,649
|
|
156,618
|
|
Deferred compensation mutual funds
|
26,969
|
|
23,363
|
|
Other restricted cash and cash equivalents
|
405
|
|
3,259
|
|
Total restricted cash and investments
|
$
|
229,743
|
|
$
|
235,443
|
|
Held-to-maturity
Restricted cash and investments include 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 debt and asset-backed securities. The majority of our collateral obligations are held in a trust at the Bank of New York Mellon (“Trust”).
The amortized cost and estimated fair value of our held-to-maturity investments held in Trust, aggregated by investment category as of
March 31, 2019
and
December 30, 2018
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
(in thousands)
|
Amortized cost
|
Gross unrealized gains
|
Gross unrealized losses
|
Fair value
|
Municipal debt securities
|
$
|
74,657
|
|
$
|
1,261
|
|
$
|
(124
|
)
|
$
|
75,794
|
|
Corporate debt securities
|
69,756
|
|
305
|
|
(284
|
)
|
69,777
|
|
Agency mortgage-backed securities
|
2,237
|
|
14
|
|
(16
|
)
|
2,235
|
|
U.S. government and agency securities
|
999
|
|
13
|
|
—
|
|
1,012
|
|
Total held-to-maturity investments
|
$
|
147,649
|
|
$
|
1,593
|
|
$
|
(424
|
)
|
$
|
148,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2018
|
(in thousands)
|
Amortized cost
|
Gross unrealized gains
|
Gross unrealized losses
|
Fair value
|
Municipal debt securities
|
$
|
76,750
|
|
$
|
456
|
|
$
|
(516
|
)
|
$
|
76,690
|
|
Corporate debt securities
|
76,310
|
|
30
|
|
(908
|
)
|
75,432
|
|
Agency mortgage-backed securities
|
2,559
|
|
5
|
|
(33
|
)
|
2,531
|
|
U.S. government and agency securities
|
999
|
|
—
|
|
(11
|
)
|
988
|
|
Total held-to-maturity investments
|
$
|
156,618
|
|
$
|
491
|
|
$
|
(1,468
|
)
|
$
|
155,641
|
|
The estimated fair value and gross unrealized losses of all investments classified as held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of
March 31, 2019
and
December 30, 2018
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
(in thousands)
|
Estimated fair value
|
Unrealized losses
|
|
Estimated fair value
|
Unrealized losses
|
|
Estimated fair value
|
Unrealized losses
|
Municipal debt securities
|
$
|
—
|
|
$
|
—
|
|
|
$
|
14,255
|
|
$
|
(124
|
)
|
|
$
|
14,255
|
|
$
|
(124
|
)
|
Corporate debt securities
|
2,015
|
|
(2
|
)
|
|
40,689
|
|
(282
|
)
|
|
42,704
|
|
(284
|
)
|
Agency mortgage-backed securities
|
—
|
|
—
|
|
|
1,237
|
|
(16
|
)
|
|
1,237
|
|
(16
|
)
|
Total held-to-maturity investments
|
$
|
2,015
|
|
$
|
(2
|
)
|
|
$
|
56,181
|
|
$
|
(422
|
)
|
|
$
|
58,196
|
|
$
|
(424
|
)
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2018
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
(in thousands)
|
Estimated fair value
|
Unrealized losses
|
|
Estimated fair value
|
Unrealized losses
|
|
Estimated fair value
|
Unrealized losses
|
Municipal debt securities
|
$
|
12,803
|
|
$
|
(74
|
)
|
|
$
|
22,638
|
|
$
|
(442
|
)
|
|
$
|
35,441
|
|
$
|
(516
|
)
|
Corporate debt securities
|
22,567
|
|
(277
|
)
|
|
44,463
|
|
(631
|
)
|
|
67,030
|
|
(908
|
)
|
Agency mortgage-backed securities
|
385
|
|
—
|
|
|
1,375
|
|
(33
|
)
|
|
1,760
|
|
(33
|
)
|
U.S. government and agency securities
|
988
|
|
(11
|
)
|
|
—
|
|
—
|
|
|
988
|
|
(11
|
)
|
Total held-to-maturity investments
|
$
|
36,743
|
|
$
|
(362
|
)
|
|
$
|
68,476
|
|
$
|
(1,106
|
)
|
|
$
|
105,219
|
|
$
|
(1,468
|
)
|
The total number of held-to-maturity securities in an unrealized loss position as of
March 31, 2019
and
December 30, 2018
were
54
and
93
, respectively. The unrealized losses were the result of interest rate increases. Since the decline in estimated fair value is attributable to changes in interest rates and not credit quality, and the company has the intent and ability to hold these debt securities until recovery of amortized cost or until maturity, we do not consider these investments other than temporarily impaired.
The amortized cost and fair value by contractual maturity of our held-to-maturity investments are as follows:
|
|
|
|
|
|
|
|
|
March 31, 2019
|
(in thousands)
|
Amortized cost
|
Fair value
|
Due in one year or less
|
$
|
18,964
|
|
$
|
18,912
|
|
Due after one year through five years
|
86,051
|
|
86,524
|
|
Due after five years through ten years
|
42,634
|
|
43,382
|
|
Total held-to-maturity investments
|
$
|
147,649
|
|
$
|
148,818
|
|
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.
Available-for-sale
We hold mutual funds classified as available-for-sale to support our deferred compensation liability. Unrealized gains and losses related to equity investments still held at
March 31, 2019
and
April 1, 2018
, were a
$2.4 million
gain, and a
$0.1 million
loss, for the thirteen weeks then ended respectively, and are included in selling, general and administrative expense on the Consolidated Statements of Operations and Comprehensive Income.
NOTE 4: 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.
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
2.1%
and
2.0%
at
March 31, 2019
and
December 30, 2018
, respectively. Payments made against self-insured claims are made over a weighted average period of approximately
4.5 years
as of
March 31, 2019
.
The following table presents a reconciliation of the undiscounted workers’ compensation reserve to the discounted workers’ compensation reserve for the periods presented:
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2019
|
December 30,
2018
|
Undiscounted workers’ compensation reserve
|
$
|
280,385
|
|
$
|
284,625
|
|
Less discount on workers’ compensation reserve
|
18,319
|
|
18,179
|
|
Workers’ compensation reserve, net of discount
|
262,066
|
|
266,446
|
|
Less current portion
|
74,073
|
|
76,421
|
|
Long-term portion
|
$
|
187,993
|
|
$
|
190,025
|
|
Payments made against self-insured claims were
$15.3 million
and
$17.2 million
for the
thirteen weeks ended
March 31, 2019
and
April 1, 2018
, 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. At
March 31, 2019
and
December 30, 2018
, the weighted average rate was
3.0%
and
2.9%
, respectively. The claim payments are made and the corresponding reimbursements from our insurance carriers are received over an estimated weighted average period of approximately
16 years
. The discounted workers’ compensation reserve for excess claims was
$46.6 million
and
$48.2 million
as of
March 31, 2019
and
December 30, 2018
, respectively. The discounted receivables from insurance companies, net of valuation allowance, were
$45.7 million
and
$44.9 million
as of
March 31, 2019
and
December 30, 2018
, respectively.
Workers’ compensation expense of
$11.9 million
and
$16.6 million
was recorded in cost of services on our Consolidated Statements of Operations and Comprehensive Income for the
thirteen weeks ended
March 31, 2019
and
April 1, 2018
, respectively.
NOTE 5: COMMITMENTS AND CONTINGENCIES
Workers’ compensation commitments
We have provided our insurance carriers and certain states with commitments in the form and amounts listed below:
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2019
|
December 30,
2018
|
Cash collateral held by workers’ compensation insurance carriers
|
$
|
22,800
|
|
$
|
22,264
|
|
Cash and cash equivalents held in Trust
|
30,354
|
|
28,021
|
|
Investments held in Trust
|
147,649
|
|
156,618
|
|
Letters of credit (1)
|
6,677
|
|
6,691
|
|
Surety bonds (2)
|
21,881
|
|
21,881
|
|
Total collateral commitments
|
$
|
229,361
|
|
$
|
235,475
|
|
|
|
(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.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
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.
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.
Operating leases
We have contractual commitments in the form of operating leases related to office space, vehicles and equipment. Our leases have remaining terms of up to
14 years
. Most leases include one or more options to renew, which can extend the lease term up to
10 years
. The exercise of lease renewal options are at our sole discretion. Typically, at the commencement of a lease, we are not reasonably certain we will exercise renewal options, and accordingly they are not considered in determining the initial lease term. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We rent or sublease real estate to third parties in limited circumstances.
Operating lease costs were comprised of the following:
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands)
|
March 31, 2019
|
Operating lease costs
|
$
|
4,272
|
|
Short-term lease costs
|
1,890
|
|
Other lease costs (1)
|
1,486
|
|
Total lease costs
|
$
|
7,648
|
|
|
|
(1)
|
Other lease costs include immaterial variable lease costs and sublease income.
|
Other information related to our operating leases was as follows:
|
|
|
|
Thirteen weeks ended
|
|
March 31, 2019
|
Weighted average remaining lease term in years
|
3.5
|
Weighted average discount rate
|
5.1%
|
Future non-cancelable minimum lease payments under our operating lease commitments as of
March 31, 2019
, are as follows for each of the next five years and thereafter:
|
|
|
|
|
(in thousands)
|
|
Remainder of 2019
|
$
|
12,680
|
|
2020
|
14,209
|
|
2021
|
10,045
|
|
2022
|
5,298
|
|
2023
|
3,045
|
|
2024
|
853
|
|
Thereafter
|
1,374
|
|
Total undiscounted future non-cancelable minimum lease payments (1)
|
47,504
|
|
Less: Imputed interest (2)
|
6,143
|
|
Present value of lease liabilities
|
$
|
41,361
|
|
|
|
(1)
|
Operating lease payments exclude approximately
$2 million
of legally binding minimum lease payments for leases signed but not yet commenced.
|
|
|
(2)
|
Amount necessary to reduce net minimum lease payments to present value calculated using our incremental borrowing rates, which are consistent with the lease terms at adoption date (for those leases in existence as of the adoption date of the new lease standard) or lease inception (for those leases entered into after the adoption date).
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Future non-cancelable minimum lease payments under our operating lease commitments as of
December 30, 2018
were as follows for each of the next five years and thereafter:
|
|
|
|
|
(in thousands)
|
|
2019
|
$
|
8,337
|
|
2020
|
7,192
|
|
2021
|
4,990
|
|
2022
|
2,442
|
|
2023
|
1,324
|
|
Thereafter
|
699
|
|
Total future non-cancelable minimum lease payments
|
$
|
24,984
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 6: SHAREHOLDERS’ EQUITY
Changes in shareholders’ equity
Changes in the balance of each component of shareholders’ equity during the reporting periods were as follows:
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands)
|
March 31,
2019
|
April 1,
2018
|
|
|
|
Common stock shares
|
|
|
Beginning balance
|
40,054
|
|
41,098
|
|
Purchases and retirement of common stock
|
(234
|
)
|
—
|
|
Issuances under equity plans, including tax benefits
|
308
|
|
218
|
|
Stock-based compensation
|
24
|
|
18
|
|
Ending balance
|
40,152
|
|
41,334
|
|
|
|
|
Common stock amount
|
|
|
Beginning balance
|
$
|
1
|
|
$
|
1
|
|
Current period activity
|
—
|
|
—
|
|
Ending balance
|
1
|
|
1
|
|
|
|
|
Retained earnings
|
|
|
Beginning balance
|
606,087
|
|
561,650
|
|
Net income
|
8,276
|
|
8,755
|
|
Purchases and retirement of common stock (1)
|
(5,303
|
)
|
—
|
|
Issuances under equity plans, including tax benefits
|
(1,057
|
)
|
(1,691
|
)
|
Stock-based compensation
|
3,606
|
|
3,409
|
|
Change in accounting standard cumulative-effect adjustment (2)
|
—
|
|
1,525
|
|
Ending balance
|
611,609
|
|
573,648
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
Beginning balance, net of tax
|
(14,649
|
)
|
(6,804
|
)
|
Foreign currency translation adjustment
|
1,326
|
|
(1,384
|
)
|
Change in accounting standard cumulative-effect adjustment (2)
|
—
|
|
(1,525
|
)
|
Ending balance, net of tax
|
(13,323
|
)
|
(9,713
|
)
|
|
|
|
Total shareholders’ equity ending balance
|
$
|
598,287
|
|
$
|
563,936
|
|
|
|
(1)
|
Under applicable Washington State law, shares purchased are not displayed separately as treasury stock on our 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.
|
|
|
(2)
|
As a result of our adoption of the accounting standard for equity investments issued by the FASB in January 2016,
$1.5 million
in unrealized gains, net of tax on available-for-sale equity securities were reclassified from accumulated other comprehensive loss to retained earnings as of the beginning of fiscal 2018. There were no material reclassifications out of accumulated other comprehensive loss during the
thirteen weeks ended
March 31, 2019
.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Our income tax provision or benefit for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes we make a cumulative adjustment. Our quarterly tax provision and quarterly estimate of our annual effective tax rate are subject to variation due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss by jurisdiction, tax credits, government audit developments, changes in laws, regulations and administrative practices, and relative changes in expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of discrete items, tax credits, and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.
Our effective tax rate for the
thirteen weeks ended
March 31, 2019
was
11.2%
. The difference between the statutory federal income tax rate of
21.0%
and our effective income tax rate results primarily from the federal Work Opportunity Tax Credit. This tax credit is designed to encourage employers to hire workers from certain targeted groups with higher than average unemployment rates. Other differences between the statutory federal income tax rate of
21.0%
and our effective tax rate result from state and foreign income taxes, certain non-deductible expenses, tax exempt interest, and tax effects of share based compensation.
|
|
NOTE 8:
|
NET INCOME PER SHARE
|
Diluted common shares were calculated as follows:
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands, except per share data)
|
March 31,
2019
|
April 1,
2018
|
Net income
|
$
|
8,276
|
|
$
|
8,755
|
|
|
|
|
Weighted average number of common shares used in basic net income per common share
|
39,366
|
|
40,443
|
|
Dilutive effect of non-vested restricted stock
|
369
|
|
251
|
|
Weighted average number of common shares used in diluted net income per common share
|
39,735
|
|
40,694
|
|
Net income per common share:
|
|
|
Basic
|
$
|
0.21
|
|
$
|
0.22
|
|
Diluted
|
$
|
0.21
|
|
$
|
0.22
|
|
|
|
|
Anti-dilutive shares
|
336
|
|
548
|
|
NOTE 9: SEGMENT INFORMATION
Our operating segments are based on the organizational structure for which financial results are regularly reviewed by our chief operating decision-maker, our Chief Executive Officer, to determine resource allocation and assess performance. Our operating segments, also referred to as service lines, and reportable segments are described below:
Our
PeopleReady
reportable segment provides blue-collar, contingent staffing through the PeopleReady operating segment. PeopleReady provides on-demand and skilled labor in a broad range of industries that include construction, manufacturing and logistics, warehousing and distribution, waste and recycling, hospitality, general labor and others.
Our
PeopleManagement
reportable segment provides contingent labor and outsourced industrial workforce solutions, primarily on-premise at the client’s facility, through the following operating segments, which we have aggregated into one reportable segment in accordance with U.S. GAAP:
|
|
•
|
Staff Management | SMX
: Exclusive recruitment and on-premise management of a facility’s contingent industrial workforce;
|
|
|
•
|
SIMOS Insourcing Solutions
: On-premise management and recruitment of warehouse/distribution operations; and
|
|
|
•
|
Centerline Drivers
: Recruitment and management of temporary and dedicated drivers to the transportation and distribution industries.
|
Effective March 12, 2018
, we divested the PlaneTechs business within our PeopleManagement reportable segment.
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Our
PeopleScout
reportable segment provides high-volume, permanent employee recruitment process outsourcing, and management of outsourced labor service providers through the following operating segments, which we have aggregated into one reportable segment in accordance with U.S. GAAP:
|
|
•
|
PeopleScout
: Outsourced recruitment of permanent employees on behalf of clients; and
|
|
|
•
|
PeopleScout MSP
: Management of multiple third party staffing vendors on behalf of clients.
|
Effective June 12, 2018, we
acquired TMP Holdings LTD (“TMP”) through PeopleScout. Accordingly, the results associated with the acquisition are included in our PeopleScout operating segment. TMP is a mid-sized recruitment process outsourcing (“RPO”) and employer branding service provider operating in the United Kingdom which is the second largest RPO market in the world. This acquisition increases our ability to win multi-continent engagements by adding a physical presence in Europe, referenceable clients and employer branding capabilities.
We evaluate performance based on segment revenue and segment profit. Inter-segment revenue is minimal. Segment profit includes revenue, related cost of services, and ongoing operating expenses directly attributable to the reportable segment. Segment profit excludes goodwill and intangible impairment charges, depreciation and amortization expense, unallocated corporate general and administrative expense, interest, other income and expense, income taxes, and costs not considered to be ongoing costs of the segment.
The following table presents a reconciliation of segment revenue from services to total company revenue:
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands)
|
March 31,
2019
|
April 1,
2018
|
Revenue from services:
|
|
|
PeopleReady
|
$
|
326,868
|
|
$
|
316,835
|
|
PeopleManagement
|
158,044
|
|
183,892
|
|
PeopleScout
|
67,440
|
|
53,661
|
|
Total company
|
$
|
552,352
|
|
$
|
554,388
|
|
The following table presents a reconciliation of Segment profit to income before tax expense:
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands)
|
March 31,
2019
|
April 1,
2018
|
Segment profit:
|
|
|
PeopleReady
|
$
|
11,470
|
|
$
|
9,525
|
|
PeopleManagement
|
2,306
|
|
5,649
|
|
PeopleScout
|
10,427
|
|
11,905
|
|
|
24,203
|
|
27,079
|
|
Corporate unallocated
|
(7,277
|
)
|
(7,664
|
)
|
Work Opportunity Tax Credit processing fees
|
(240
|
)
|
(195
|
)
|
Acquisition/integration costs
|
(577
|
)
|
—
|
|
Other benefits (costs)
|
2,606
|
|
(1,715
|
)
|
Depreciation and amortization
|
(9,952
|
)
|
(10,090
|
)
|
Income from operations
|
8,763
|
|
7,415
|
|
Interest and other income (expense), net
|
553
|
|
2,204
|
|
Income before tax expense
|
$
|
9,316
|
|
$
|
9,619
|
|
Asset information by reportable segment is not presented since we do not manage our segments on a balance sheet basis.
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Disaggregated revenue
The following tables present our revenue disaggregated by major source and segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
March 31, 2019
|
(in thousands)
|
PeopleReady
|
PeopleManagement
|
PeopleScout
|
Consolidated
|
Revenue from services:
|
|
|
|
|
Contingent staffing
|
$
|
326,868
|
|
$
|
158,044
|
|
$
|
—
|
|
$
|
484,912
|
|
Human resource outsourcing
|
—
|
|
—
|
|
67,440
|
|
67,440
|
|
Total company
|
$
|
326,868
|
|
$
|
158,044
|
|
$
|
67,440
|
|
$
|
552,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
April 1, 2018
|
(in thousands)
|
PeopleReady
|
PeopleManagement
|
PeopleScout
|
Consolidated
|
Revenue from services:
|
|
|
|
|
Contingent staffing
|
$
|
316,835
|
|
$
|
183,892
|
|
$
|
—
|
|
$
|
500,727
|
|
Human resource outsourcing
|
—
|
|
—
|
|
53,661
|
|
53,661
|
|
Total company
|
$
|
316,835
|
|
$
|
183,892
|
|
$
|
53,661
|
|
$
|
554,388
|
|
|
|
|
|
Item 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
|
COMMENT ON FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “goal,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from those expressed or implied in our forward-looking statements, including the risks and uncertainties described in “Risk Factors” (Part II, Item 1A of this Form 10-Q), “Quantitative and Qualitative Disclosures about Market Risk” (Part I, Item 3 of this Form 10-Q), and “Management’s Discussion and Analysis” (Part I, Item 2 of this Form 10-Q). We undertake no duty to update or revise publicly any of the forward-looking statements after the date of this report or to conform such statements to actual results or to changes in our expectations, whether because of new information, future events, or otherwise.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide the reader of our accompanying unaudited consolidated financial statements (“financial statements”) with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect future results. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the fiscal year ended
December 30, 2018
, and our financial statements and the accompanying notes to our financial statements.
We report our business as three distinct segments: PeopleReady, PeopleManagement and PeopleScout. See Note 9:
Segment information
, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional details of our operating segments and reportable segments.
OVERVIEW
Global employment trends are reshaping and redefining traditional employment models, sourcing strategies and human resource capability requirements. In response, the industry has accelerated its evolution from commercial into specialized staffing, and has expanded into outsourced solutions. Client demand for contingent staffing services is dependent on the overall strength of the labor market and trends toward greater workforce flexibility. Improving economic growth typically results in increasing demand for labor, resulting in greater demand for our staffing services. This may create volatility based on overall economic conditions.
TrueBlue, Inc. (the “company,” “TrueBlue,” “we,” “us” and “our”) is a leading provider of specialized workforce solutions that help clients achieve growth and improve productivity. We connected approximately
730,000
people with work during fiscal
2018
, and served approximately
151,000
clients in a wide variety of industries through our PeopleReady segment which offers industrial staffing services, our PeopleManagement segment which offers contingent and productivity-based on-site industrial staffing and distribution services, and our PeopleScout segment which offers recruitment process outsourcing (“RPO”) and managed service provider (“MSP”) services.
Fiscal
first
quarter of
2019
highlights
Revenue from services
Total company revenue remained relatively flat at
$552 million
for the
thirteen weeks ended
March 31, 2019
, compared to the same period in the prior year. PeopleReady, our largest segment, experienced revenue
growth
of
3.2%
. PeopleScout, our highest margin segment, delivered
25.7%
revenue
growth
. During the second quarter of 2018, we acquired TMP Holdings LTD (“TMP”), increasing PeopleScout’s ability to compete for more multi-continent business. TMP represented a 26.6% increase in PeopleScout’s revenue compared to the prior year. PeopleManagement, our lowest margin segment,
declined
primarily due to the loss of a significant customer and the divestiture of PlaneTechs in mid-March 2018, which further concentrated our focus on more profitable, higher-growth markets.
|
|
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
Gross profit
Total company gross profit as a percentage of revenue for the
thirteen weeks ended
March 31, 2019
was
26.9%
, compared to
25.8%
for the same period in the prior year. Gross margin improved primarily due to lower workers’ compensation costs of 0.7% from additional insurance coverage in our staffing business associated with former workers’ compensation carriers that are in liquidation. Due to improvements in their balance sheets, these carriers are now covering a larger proportion of outstanding claims. Our focus on lowering cost of services helped produce our thirteenth consecutive quarter of gross margin expansion.
Selling, general and administrative (“SG&A”) expense
Total company SG&A expense
increased
by
$4 million
to
$130 million
, or
23.5%
as a percent of revenue for the
thirteen weeks ended
March 31, 2019
, compared to
$126 million
, or
22.7%
as a percent of revenue for the same period in the prior year. The increase in SG&A expense is primarily due to $2 million of net operating costs added by the acquisition of TMP, partially offset by costs eliminated with the PlaneTechs divestiture, together with transaction and associated costs of the integration and divestiture. Additionally, the increased SG&A expense included continued investment in strategic initiatives to support continued growth in the business.
Income from operations
Total company
income from operations
grew
to
$9 million
, or
1.6%
as a percent of revenue, for the
thirteen weeks ended
March 31, 2019
, compared to
$7 million
, or
1.3%
as a percent of revenue for the same period in the prior year. The growth in income from operations was driven by the increase in gross profit, which was partially offset by the increase in SG&A expense.
Net income
Net income
was
$8 million
, or
$0.21
per diluted share for the
thirteen weeks ended
March 31, 2019
, compared to
$9 million
, or
$0.22
per diluted share for the same period in the prior year. The
decline
to net income was primarily due to the gain on divestiture of PlaneTechs of $1 million, net of tax, in mid-March 2018.
Additional highlights
We believe we are taking the right steps to expand our operating margin and produce long-term growth for shareholders. We also believe we are in a strong financial position to fund working capital needs for growth opportunities. As of
March 31, 2019
, we had cash and cash equivalents of
$26 million
and
$251 million
available under our revolving credit agreement (“Revolving Credit Facility”) for total liquidity of
$277 million
.
We continue to return cash to shareholders through our stock buyback program. On September 15, 2017, our Board of Directors authorized a $100 million share repurchase program of our outstanding common stock. We repurchased an additional
$5 million
of common stock during the
thirteen weeks ended
March 31, 2019
. As of
March 31, 2019
,
$53 million
remains available for repurchase of common stock under the current authorization.
|
|
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
RESULTS OF OPERATIONS
Total company results
The following table presents selected financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands, except percentages and per share data)
|
March 31,
2019
|
% of revenue
|
April 1,
2018
|
% of revenue
|
Revenue from services
|
$
|
552,352
|
|
|
$
|
554,388
|
|
|
Total revenue decline %
|
(0.4
|
)%
|
|
(2.4
|
)%
|
|
|
|
|
|
|
Gross profit
|
$
|
148,376
|
|
26.9
|
%
|
$
|
143,268
|
|
25.8
|
%
|
Selling, general and administrative expense
|
129,661
|
|
23.5
|
%
|
125,763
|
|
22.7
|
%
|
Depreciation and amortization
|
9,952
|
|
1.8
|
%
|
10,090
|
|
1.8
|
%
|
Income from operations
|
8,763
|
|
1.6
|
%
|
7,415
|
|
1.3
|
%
|
Interest and other income (expense), net
|
553
|
|
|
2,204
|
|
|
Income before tax expense
|
9,316
|
|
|
9,619
|
|
|
Income tax expense
|
1,040
|
|
|
864
|
|
|
Net income
|
$
|
8,276
|
|
1.5
|
%
|
$
|
8,755
|
|
1.6
|
%
|
|
|
|
|
|
Net income per diluted share
|
$
|
0.21
|
|
|
$
|
0.22
|
|
|
Our year-over-year trends are significantly impacted by the following acquisition and divestiture:
|
|
•
|
Effective
June 12, 2018, we
acquired TMP, a mid-sized RPO and employer branding services provider operating in the United Kingdom which is the second largest RPO market in the world. This acquisition increases our ability to win multi-continent engagements by adding a physical presence in Europe, referenceable clients and employer branding capabilities. The acquired operations expand and complement our PeopleScout services and will be fully integrated into this service line.
|
|
|
•
|
Effective March 12, 2018
, we divested the PlaneTechs business from our PeopleManagement reportable segment.
|
We report our business as three distinct segments: PeopleReady, PeopleManagement and PeopleScout. See Note 9:
Segment information
, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional details on our service lines and reportable segments.
|
|
•
|
PeopleReady
provides access to reliable workers in the United States, Canada and Puerto Rico through a wide range of staffing solutions for on-demand contingent general and skilled labor. PeopleReady connects people to work in a broad range of industries that include construction, manufacturing and logistics, warehousing and distribution, waste and recycling, energy, retail, hospitality, general labor, and others. As of December 30, 2018, we had a network of
620
branches across all 50 states, Canada and Puerto Rico. Complementing our branch network is our mobile application, JobStack
TM
, which connects workers with jobs, creates a virtual exchange between our workers and clients, and allows our branch resources to expand their recruiting and sales efforts and service delivery. JobStack is helping to competitively differentiate our services, expanding our reach into new demographics, and improving both service delivery and work order fill rates as we lead our business into a digital future.
|
|
|
•
|
PeopleManagement
predominantly encompasses our on-site placement and management services and provides a wide range of workforce management solutions for blue-collar, contingent, on-premise staffing and management of a facility’s workforce. We use distinct brands to market our PeopleManagement contingent workforce solutions and operate as Staff Management | SMX (“Staff Management”), SIMOS Insourcing Solutions (“SIMOS”), and Centerline Drivers (“Centerline”). Staff Management specializes in exclusive recruitment and on-premise management of a facility’s contingent industrial workforce. SIMOS specializes in exclusive recruitment and on-premise management of warehouse/distribution operations to meet the growing demand for e-commerce and scalable supply chain solutions. Centerline specializes in dedicated and temporary truck drivers to the transportation and distribution industries.
|
|
|
•
|
PeopleScout
provides permanent employee RPO for our clients for all major industries and jobs. Our RPO solution delivers improved talent quality, faster hiring, increased scalability, reduced turnover, lower cost of recruitment, greater flexibility, and increased compliance. We leverage our proprietary candidate applicant tracking system, along with dedicated service delivery teams to work as an integrated partner with our clients in providing end-to-end talent acquisition services from sourcing candidates through onboarding employees. The solution is highly scalable and flexible, allowing for outsourcing of all or a
|
|
|
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
subset of skill categories across a series of recruitment processes and onboarding steps. Our PeopleScout segment also includes a managed service provider business, which provides clients with improved quality and spend management of their contingent labor vendors. Market interest in our new talent acquisition technology, Affinix
TM
remains high. Affinix
is PeopleScout's proprietary talent acquisition technology for sourcing, screening and delivering a permanent workforce, bringing together talent acquisition technology into a single, integrated platform. Affinix uses artificial intelligence and machine learning to search the web and source candidates, which means we can create the first slate of candidates for a job posting within minutes rather than days. We have already seen evidence of higher candidate conversion rates, reduced time to fill positions, and increased client satisfaction as we lead our business into a digital future.
Revenue from services
Revenue from services by reportable segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands, except percentages)
|
March 31,
2019
|
Growth (decline) %
|
Segment % of total
|
April 1,
2018
|
Segment % of total
|
Revenue from services:
|
|
|
|
|
|
PeopleReady
|
$
|
326,868
|
|
3.2
|
%
|
59.2
|
%
|
$
|
316,835
|
|
57.2
|
%
|
PeopleManagement
|
158,044
|
|
(14.1
|
)
|
28.6
|
|
183,892
|
|
33.2
|
|
PeopleScout
|
67,440
|
|
25.7
|
|
12.2
|
|
53,661
|
|
9.7
|
|
Total company
|
$
|
552,352
|
|
(0.4
|
)%
|
100.0
|
%
|
$
|
554,388
|
|
100.0
|
%
|
PeopleReady
PeopleReady revenue
grew
to
$327 million
for the
thirteen weeks ended
March 31, 2019
, a
3.2%
increase
compared to the same period in the prior year. The revenue growth was broad-based across most industries and geographies primarily driven by improvements to local business development activities and the strength of our service offering and our strategic use of technology. Our industry-leading JobStack mobile app that connects workers with jobs is leading our business into a digital future. During the quarter, PeopleReady dispatched more than 800,000 shifts via JobStack and achieved a digital fill rate of more than 40%. The mobile app is used by 15,000 customers with 80% worker adoption.
Wage growth has accelerated due to various minimum wage increases and a need for higher wages to attract talent in tight labor markets. We have increased bill rates for the higher wages, payroll burdens and our traditional mark-ups. While we believe our pricing strategy is the right long-term decision, these actions can have an impact on our revenue trends in the near term.
PeopleManagement
PeopleManagement
revenue
declined
to
$158 million
for the
thirteen weeks ended
March 31, 2019
, a
14.1%
decrease
compared to the same period in the prior year. The decline was primarily due to the divestiture of our PlaneTechs business in mid-March 2018, which accounted for a 4.4% decline and the loss of Amazon's Canadian business in the second half of fiscal 2018 when they insourced the recruitment and management of contingent labor for their warehouse fulfillment centers, which accounted for a 6.4% decline compared to the same period in the prior year. The remaining decline of 3.3% was primarily due to lower volume and price reductions with an existing client.
PeopleScout
PeopleScout
revenue
grew
to
$67 million
for the
thirteen weeks ended
March 31, 2019
, a
25.7%
increase
compared to the same period in the prior year. During the second quarter of 2018, PeopleScout purchased TMP, which represented a 26.6% increase in PeopleScout’s revenue for the
thirteen weeks ended
March 31, 2019
, compared to the same period in the prior year. Revenue growth for the first quarter of 2019 was constrained by loss of one client that was acquired by a strategic buyer in the prior year and lower volumes on a large account that was re-priced to reflect a multi-year arrangement. Market interest in our RPO services remains strong and has been accentuated by our new talent acquisition technology, Affinix. Affinix
is PeopleScout’s proprietary talent acquisition technology, which we believe has been well received by both current and prospective clients.
|
|
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
Gross profit
Gross profit was as follows:
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands, except percentages)
|
March 31, 2019
|
April 1, 2018
|
Gross profit
|
$
|
148,376
|
|
$
|
143,268
|
|
Percentage of revenue
|
26.9
|
%
|
25.8
|
%
|
Total company gross profit as a percentage of revenue for the
thirteen weeks ended
March 31, 2019
was
26.9%
, compared to
25.8%
for the same period in the prior year. Our focus on lowering cost of services helped produce our thirteenth consecutive quarter of gross margin expansion. Gross margin improved primarily due to lower workers’ compensation costs of 0.7% from additional insurance coverage in our staffing business associated with former workers’ compensation carriers that are in liquidation. Due to improvements in their balance sheets, these carriers are now covering a larger proportion of outstanding claims. Gross margin further improved in our staffing business as a result of our continued efforts to manage the cost of claims and reduce workplace accidents. Continued favorable adjustments to our workers’ compensation liabilities are dependent on our ability to continue to lower accident rates and claim costs. Improvements to the gross margin of our staffing businesses were partially offset by declines to the PeopleScout gross margin due to client mix and TMP. Client mix margins were impacted by lower margins on a large client that was re-priced to reflect a multi-year arrangement and TMP margins which are lower than those of PeopleScout due to the pass through nature of media-related purchases on behalf of certain clients.
Selling, general and administrative expense
SG&A expense was as follows:
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands, except percentages)
|
March 31, 2019
|
April 1, 2018
|
Selling, general and administrative expense
|
$
|
129,661
|
|
$
|
125,763
|
|
Percentage of revenue
|
23.5
|
%
|
22.7
|
%
|
Total company SG&A expense
increased
by
$4 million
to
$130 million
, or
23.5%
as a percent of revenue for the
thirteen weeks ended
March 31, 2019
, compared to
$126 million
, or
22.7%
as a percent of revenue for the same period in the prior year. The increase in SG&A expense is primarily due to $2 million of net operating costs added by the acquisition of TMP, partially offset by costs eliminated with the PlaneTechs divestiture, together with transaction and associated costs of the integration and divestiture. Additionally, the increased SG&A expense included continued investment in strategic initiatives to support continued growth in the business.
|
|
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
Income taxes
The income tax expense and the effective income tax rate were as follows:
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands, except percentages)
|
March 31, 2019
|
April 1, 2018
|
Income tax expense
|
$
|
1,040
|
|
$
|
864
|
|
Effective income tax rate
|
11.2
|
%
|
9.0
|
%
|
Our effective tax rate for the
thirteen weeks ended
March 31, 2019
and
April 1, 2018
was
11.2%
and
9.0%
, respectively. For the
thirteen weeks ended
March 31, 2019
we recognized
$0.3 million
of discrete tax benefits from prior year hiring credits.
Our tax provision and our effective tax rate are subject to variation due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss by jurisdiction, tax credits, government audit developments, changes in laws, regulations and administrative practices, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of tax credits and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.
A significant driver of fluctuations in our effective income tax rate is the Work Opportunity Tax Credit (“WOTC”). WOTC is designed to encourage hiring of workers from certain disadvantaged targeted categories, and is generally calculated as a percentage of wages over a twelve month period up to worker maximums by targeted category. Based on historical results and business trends, we estimate the amount of WOTC we expect to earn related to wages of the current year. However, the estimate is subject to variation because 1) a small percentage of our workers qualify for one or more of the many targeted categories; 2) the targeted categories are subject to different incentive credit rates and limitations; 3) credits fluctuate depending on economic conditions and qualified worker retention periods; and 4) state and federal offices can delay their credit certification processing and have inconsistent certification rates. We recognize additional prior year hiring credits if credits in excess of original estimates have been certified by government offices. WOTC was restored through December 31, 2019, as a result of the Protecting Americans from Tax Hikes Act of 2015.
Changes to our effective tax rate as a result of hiring credits were as follows:
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
March 31, 2019
|
April 1, 2018
|
Effective income tax rate without adjustments below
|
27.3
|
%
|
25.9
|
%
|
Hiring credits estimate from current year wages
|
(12.4
|
)
|
(13.8
|
)
|
Additional hiring credits from prior year wages
|
(3.7
|
)
|
(3.1
|
)
|
Effective income tax rate
|
11.2
|
%
|
9.0
|
%
|
Segment performance
We evaluate performance based on segment revenue and segment profit. Segment profit includes revenue, related cost of services, and ongoing operating expenses directly attributable to the reportable segment. Segment profit excludes goodwill and intangible impairment charges, depreciation and amortization expense, unallocated corporate general and administrative expense, interest, other income and expense, income taxes, and costs not considered to be ongoing costs of the segment. See Note 9:
Segment information
, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional details of our reportable segments, as well as a reconciliation of segment profit to income before tax expense.
Segment profit should not be considered a measure of financial performance in isolation or as an alternative to net income in the Consolidated Statements of Operations and Comprehensive Income in accordance with accounting principles generally accepted in the United States of America, and may not be comparable to similarly titled measures of other companies.
PeopleReady
segment performance was as follows:
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands, except for percentages)
|
March 31, 2019
|
April 1, 2018
|
Revenue from services
|
$
|
326,868
|
|
$
|
316,835
|
|
Segment profit
|
11,470
|
|
9,525
|
|
Percentage of revenue
|
3.5
|
%
|
3.0
|
%
|
PeopleReady segment profit
grew
to
$11 million
, or
3.5%
of revenue for the
thirteen weeks ended
March 31, 2019
, compared to
$10 million
, or
3.0%
of revenue for the same period in the prior year. This was primarily due to broad-based revenue growth across most industries and geographies and lower workers’ compensation costs as a result of our continued efforts to manage the cost of claims and reduce workplace accidents.
PeopleManagement
segment performance was as follows:
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands, except for percentages)
|
March 31, 2019
|
April 1, 2018
|
Revenue from services
|
$
|
158,044
|
|
$
|
183,892
|
|
Segment profit
|
2,306
|
|
5,649
|
|
Percentage of revenue
|
1.5
|
%
|
3.1
|
%
|
PeopleManagement segment profit
decreased
59.2%
to
$2 million
, or
1.5%
of revenue for the
thirteen weeks ended
March 31, 2019
, compared to
$6 million
, or
3.1%
of revenue for the same period in the prior year. The decline in segment profit and related margin was primarily due to the loss of Amazon's Canadian business in the second half of fiscal 2018 and volume and price reductions at another industrial workforce client. We continue to focus on our programs to reduce the cost of services and control SG&A expense in connection with declining revenues while also investing in growth initiatives.
PeopleScout
segment performance was as follows:
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands, except for percentages)
|
March 31, 2019
|
April 1, 2018
|
Revenue from services
|
$
|
67,440
|
|
$
|
53,661
|
|
Segment profit
|
10,427
|
|
11,905
|
|
Percentage of revenue
|
15.5
|
%
|
22.2
|
%
|
PeopleScout segment profit
decreased
to
$10 million
, or
15.5%
of revenue for the
thirteen weeks ended
March 31, 2019
, compared to
$12 million
, or
22.2%
of revenue for the same period in the prior year. The segment profit decline was driven primarily by client mix and TMP. Client mix margins were impacted by less volume and lower margins on a large client that was re-priced to reflect a multi-year arrangement and loss of a higher margin client which was acquired by a strategic buyer in late 2018. TMP margins
|
|
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
are lower than those of PeopleScout due to the pass through nature of media-related purchases on behalf of certain clients, which is partially offset by continued efficiency gains in sourcing and recruiting activities.
FUTURE OUTLOOK
We have limited visibility into future demand for our services. However, we believe there is value in providing highlights of our expectations for future financial performance. The following highlights represent our expectations regarding operating trends for fiscal
2019
. These expectations are subject to revision as our business changes with the overall economy.
|
|
•
|
We expect revenue growth for the second quarter of 2019 to range between negative one percent to positive one percent, compared to the same period in the prior year, due to certain prior year events which are absent from our outlook. Prior year PeopleManagement results included Amazon's Canadian staffing business. In September 2018, we lost the Amazon Canadian business when they insourced the recruitment and management of contingent labor for their warehouse fulfillment centers. Prior year PeopleScout results included a long-term RPO customer which was acquired by a strategic buyer in late 2018.
|
|
|
•
|
Our top priority continues to be the production of solid organic revenue and gross profit growth while leveraging our cost structure to increase income from operations as a percentage of revenue. Through disciplined pricing and management of increasing minimum wages, taxes and benefits, we expect to pass through the higher cost of our temporary workers. Likewise, cost management programs to lower the cost of services and control operating expenses are key priorities in the short-term and to position the business for strong operating leverage and profitable long-term growth in the future.
|
|
|
•
|
We are committed to technological innovation to transform our business for a digital future that makes it easier for our clients to do business with us and easier to connect people to work. We continue making investments in online and mobile applications to improve access, speed and ease of connecting our clients and workers for our staffing businesses and candidates for our recruitment process outsourcing business. We expect these investments will increase the competitive differentiation of our services over the long-term, improve the efficiency of our service delivery, and reduce our PeopleReady dependence on local branches to find temporary workers and connect them with work. Examples include our new JobStack mobile application in the PeopleReady business and our new Affinix talent acquisition technology in the PeopleScout business.
|
|
|
•
|
PeopleScout is a recognized industry leader of RPO services, which is in the early stages of that industry’s adoption cycle. Due to the industry growth rate for RPO services, our market leading position, and our advances in technology, we expect the revenue growth of this business to continue to exceed the growth of our other segments. We expect our acquisition of TMP to increase our ability to win multi-continent engagements by adding a physical presence in Europe, referenceable clients and employer branding capabilities.
|
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
(in thousands)
|
March 31,
2019
|
April 1,
2018
|
Net income
|
$
|
8,276
|
|
$
|
8,755
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
Changes in operating assets and liabilities
|
(7,031
|
)
|
19,574
|
|
All other changes
|
20,269
|
|
16,506
|
|
Net cash provided by operating activities
|
$
|
21,514
|
|
$
|
44,835
|
|
|
|
|
Net cash provided by investing activities
|
$
|
1,405
|
|
$
|
9,707
|
|
|
|
|
Net cash used in financing activities
|
$
|
(44,230
|
)
|
$
|
(48,559
|
)
|
Cash flows from operating activities
Net cash provided by operating activities was
$22 million
for the
thirteen weeks ended
March 31, 2019
, compared to
$45 million
for the same period in the prior year.
The change in operating assets and liabilities for the
thirteen weeks ended
March 31, 2019
was primarily due to cash provided by accounts receivable of
$27 million
due to normal seasonal deleveraging which occurs in our fiscal first quarter. This decrease was partially offset by an increase in our days sales outstanding due to mix of business with longer payment terms. Net cash provided
|
|
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
by accounts receivable for the first quarter of the prior year was
$43 million
due to normal seasonal deleveraging and declining staffing business revenues. This was partially offset by an increase in days sales outstanding due to growth in our PeopleScout business, which has longer payment terms.
Cash provided by accounts receivable for the
thirteen weeks ended
March 31, 2019
was more than offset by additional changes in operating assets and liabilities. The largest of these changes were due to the declines in accrued expenses of
$10 million
and accrued payroll and benefits of
$10 million
associated with cost control programs, normal seasonal patterns, and timing of payments.
The increase in all other changes is primarily due to new guidance on accounting for leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use assets and lease liabilities on the balance sheet. Amortization of the right-of-use asset of
$4 million
for the first quarter of 2019 has been included as a non-cash adjustment to net income. The reduction to the lease liability of
$3 million
for the first quarter of 2019 has been included in changes in operating assets and liabilities.
Cash flows from investing activities
Net cash provided by investing activities was
$1 million
for the
thirteen weeks ended
March 31, 2019
, compared to
$10 million
for the same period in the prior year.
Effective March 12, 2018, the company divested substantially all the assets and certain liabilities of its PlaneTechs business for a purchase price of $11 million, of which $9 million was paid in cash during that same quarter.
Cash flows from financing activities
Net cash used in financing activities was
$44 million
for the
thirteen weeks ended
March 31, 2019
, compared to
$49 million
for the same period in the prior year.
Net cash used in financing activities was primarily due to net repayments on our Revolving Credit Facility of
$38 million
for the first quarter of 2019 and
$46 million
for the comparable quarter in the prior year. We also repurchased
$5 million
of common stock during the
thirteen weeks ended
March 31, 2019
. As of
March 31, 2019
,
$53 million
remains available for repurchase of common stock under the current authorization.
CAPITAL RESOURCES
Revolving credit facility
On July 13, 2018, we entered into a credit agreement with Bank of America, N.A., Wells Fargo Bank, N.A., PNC Bank, N.A., KeyBank, N.A. and HSBC Bank USA, N.A. The agreement provides for a revolving line of credit of up to
$300 million
with an option, subject to lender approval, to increase the amount to
$450 million
, and matures in five years.
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. We have agreements with certain financial institutions that allow us to restrict cash and cash equivalents and investments for the purpose of providing collateral instruments to our insurance carriers to satisfy workers’ compensation claims. At
March 31, 2019
, we had restricted cash and investments totaling
$230 million
. The majority of our collateral obligations are held in a trust at the Bank of New York Mellon (“Trust”). See Note 3:
Restricted cash and investments
, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q, for details of our restricted cash and investments.
We established investment policy directives for the Trust with the first priority to preserve capital, second to ensure sufficient liquidity to pay workers’ compensation claims, third to diversify the investment portfolio, and fourth to maximize after-tax returns. Trust investments must meet minimum acceptable quality standards. The primary investments include U.S. Treasury securities, U.S. agency debentures, U.S. agency mortgages, corporate securities, and municipal securities. For those investments rated by nationally recognized statistical rating organizations the minimum ratings at time of purchase are:
|
|
|
|
|
|
S&P
|
Moody’s
|
Fitch
|
Short-term rating
|
A-1/SP-1
|
P-1/MIG-1
|
F-1
|
Long-term rating
|
A
|
A2
|
A
|
Workers’ compensation insurance, collateral and claims reserves
Workers’ compensation insurance
We provide workers’ compensation insurance for our temporary and permanent employees. The majority of our current workers’ compensation insurance policies cover claims for a particular event above a
$2 million
deductible limit, on a “per occurrence” basis and accordingly, we are 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 PeopleReady in 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.
Workers’ compensation collateral
Our insurance carriers and certain state workers’ compensation programs require us to collateralize a portion of our workers’ compensation obligation, for which they become responsible should we become insolvent. The collateral typically takes the form of cash and cash-backed instruments, highly rated investment grade securities, letters of credit, and/or surety bonds. On a regular basis, these entities assess the amount of collateral they will require from us relative to our workers’ compensation obligation. Such amounts can increase or decrease independent of our assessments and reserves. We generally anticipate that our collateral commitments will continue to grow as we grow our business. We pay our premiums and deposit our collateral in installments. The majority of the restricted cash and investments collateralizing our self-insured workers’ compensation policies are held in the Trust.
|
|
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
Our total collateral commitments were made up of the following components for the fiscal period end dates presented:
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2019
|
December 30, 2018
|
Cash collateral held by workers’ compensation insurance carriers
|
$
|
22,800
|
|
$
|
22,264
|
|
Cash and cash equivalents held in Trust
|
30,354
|
|
28,021
|
|
Investments held in Trust
|
147,649
|
|
156,618
|
|
Letters of credit (1)
|
6,677
|
|
6,691
|
|
Surety bonds (2)
|
21,881
|
|
21,881
|
|
Total collateral commitments
|
$
|
229,361
|
|
$
|
235,475
|
|
|
|
(1)
|
We have agreements with certain financial institutions to issue letters of credit as collateral.
|
|
|
(2)
|
Our surety bonds are issued by independent insurance companies on our behalf and bear annual fees based on a percentage of the bond, which is determined by each independent surety carrier. These fees do not exceed
2.0%
of the bond amount, subject to a minimum charge. The terms of these bonds are subject to review and renewal every
one
to
four
years and most bonds can be canceled by the sureties with as little as
60
days’ notice.
|
Workers’ compensation reserve
The following table provides a reconciliation of our collateral commitments to our workers’ compensation reserve as of the fiscal period end dates presented:
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2019
|
December 30, 2018
|
Total workers’ compensation reserve
|
$
|
262,066
|
|
$
|
266,446
|
|
Add back discount on workers’ compensation reserve (1)
|
18,319
|
|
18,179
|
|
Less excess claims reserve (2)
|
(46,574
|
)
|
(48,229
|
)
|
Reimbursable payments to insurance provider (3)
|
5,062
|
|
7,866
|
|
Other (4)
|
(9,512
|
)
|
(8,787
|
)
|
Total collateral commitments
|
$
|
229,361
|
|
$
|
235,475
|
|
|
|
(1)
|
Our workers’ compensation reserves are discounted to their estimated net present value while our collateral commitments are based on the gross, undiscounted reserve.
|
|
|
(2)
|
Excess claims reserve includes the estimated obligation for claims above our deductible limits. These are the responsibility of the insurance carriers against which there are no collateral requirements.
|
|
|
(3)
|
This amount is included in restricted cash and represents a timing difference between claim payments made by our insurance carrier and the reimbursement from cash held in the Trust. When claims are paid by our carrier, the amount is removed from the workers’ compensation reserve but not removed from collateral until reimbursed to the carrier.
|
|
|
(4)
|
Represents the difference between the self-insured reserves and collateral commitments.
|
Our workers’ compensation reserve is established using estimates of the future cost of claims and related expenses, which are discounted to their estimated net present value. We discount our workers’ compensation liability as we believe the estimated future cash outflows are readily determinable.
Our workers’ compensation reserve for deductible and self-insured claims is established using estimates of the future cost of claims and related expenses that have been reported but not settled, as well as those that have been incurred but not reported. Reserves are estimated for claims incurred in the current year, as well as claims incurred during prior years.
Management evaluates the adequacy of the workers’ compensation reserves in conjunction with an independent quarterly actuarial assessment. Factors considered in establishing and adjusting these reserves include, among other things:
|
|
•
|
changes in medical and time loss (“indemnity”) costs;
|
|
|
•
|
changes in mix between medical only and indemnity claims;
|
|
|
•
|
regulatory and legislative developments impacting benefits and settlement requirements;
|
|
|
•
|
type and location of work performed;
|
|
|
•
|
the impact of safety initiatives; and
|
|
|
•
|
positive or adverse development of claims.
|
|
|
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
Our workers’ compensation claims reserves are discounted to their estimated net present value using discount rates based on returns of “risk-free” U.S. Treasury instruments with maturities comparable to the weighted average lives of our workers’ compensation claims. At
March 31, 2019
, the weighted average discount rate was
2.1%
. The claim payments are made over an estimated weighted average period of approximately
4.5 years
.
Our workers’ compensation reserves include estimated expenses related to claims above our self-insured limits (“excess claims”), and a corresponding receivable for the insurance coverage on excess claims based on the contractual policy agreements we have with insurance carriers. We discount this reserve and corresponding receivable to its estimated net present value using the discount rates based on average returns of “risk-free” U.S. Treasury instruments available during the year in which the liability was incurred. At
March 31, 2019
, the weighted average rate was
3.0%
. The claim payments are made and the corresponding reimbursements from our insurance carriers are received over an estimated weighted average period of approximately
16
years. The discounted workers’ compensation reserve for excess claims and the corresponding receivable for the insurance on excess claims were
$47 million
and
$48 million
as of
March 31, 2019
and
December 30, 2018
, respectively.
We continue to actively manage workers’ compensation expense through the safety of our temporary workers with our safety programs, and actively control costs with our network of service providers. These actions have had a positive impact creating favorable adjustments to workers’ compensation liabilities recorded in prior periods. Continued favorable adjustments to our workers’ compensation liabilities are dependent on our ability to continue to aggressively lower accident rates and costs of our claims. We expect diminishing favorable adjustments to our workers’ compensation liabilities as the opportunity for significant reduction to frequency and severity of accident rates diminishes.
Future outlook
We believe we are taking the right steps to expand our operating margin and produce long-term growth for shareholders. We also believe we are in a strong financial position to fund working capital needs for growth opportunities. As of
March 31, 2019
, we had cash and cash equivalents of
$26 million
and
$251 million
available under our Revolving Credit Facility for total liquidity of
$277 million
.
We continue to return cash to shareholders through our stock buyback program. During the
thirteen weeks ended
March 31, 2019
, we repurchased
$5 million
of common stock. As of
March 31, 2019
,
$53 million
remains available for repurchase under the current authorization.
We believe that cash provided from operations and our capital resources will be adequate to meet our cash requirements for the foreseeable future.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
There have been no material changes during the period covered by this Quarterly Report on Form 10-Q, outside of the ordinary course of business, to the contractual obligations specified in the table of contractual obligations found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended
December 30, 2018
.
SUMMARY OF CRITICAL ACCOUNTING ESTIMATES
Our critical accounting estimates are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations; Summary of Critical Accounting Estimates” in our Annual Report on Form 10-K for the fiscal year ended
December 30, 2018
.
NEW ACCOUNTING STANDARDS
See Note 1:
Summary of significant accounting policies,
to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q.