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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1:
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Description of business
TrueBlue, Inc. (the “company,” “TrueBlue,” “we,” “us” and “our”) is a leading provider of specialized workforce solutions that help clients achieve business growth and improve productivity. We serve clients in a wide variety of industries through our PeopleReady segment which offers on-demand, industrial staffing, our PeopleManagement segment which offers contingent, on-site industrial staffing and commercial driver services, and our PeopleScout segment which offers recruitment process outsourcing (“RPO”) and managed service provider (“MSP”) solutions to a wide variety of industries. We are headquartered in Tacoma, Washington.
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”).
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.
Fiscal period end
The consolidated financial statements are presented on a 52/53-week fiscal year-end basis, with the last day of the fiscal year 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 fiscal years consisting of 52 weeks, all quarters will consist of 13 weeks. All years presented include 52 weeks.
Revenue recognition
We account for a contract when both parties to the contract have approved the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. Revenues are recognized over time using an output measure, as the control of the promised services is transferred to the client, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. The majority of our contracts are short-term in nature as they are filling the contingent staffing needs of our clients, or include termination clauses that allow either party to cancel within a short notice period, without cause. Revenue includes billable travel and other reimbursable costs and are reported net of sales, use or other transaction taxes collected from clients and remitted to taxing authorities. Payment terms vary by client and the services offered, however we do not extend payment terms beyond one year. Substantially all of our contracts include payment terms of 90 days or less.
We primarily record revenue on a gross basis as a principal versus on a net basis as an agent on the Consolidated Statements of Operations and Comprehensive Income. We have determined that gross reporting as a principal is the appropriate treatment based upon the following key factors:
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•
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We maintain the direct contractual relationship with the client and are responsible for fulfilling the service promised to the client.
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•
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We demonstrate control over the services provided to our clients by being the employer of record for the individuals performing the service.
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•
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We establish our worker’s billing rate.
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Contingent staffing
We recognize revenue for our PeopleReady and PeopleManagement contingent staffing services over time as services are performed in an amount that reflects the consideration we expect to be entitled to collect in exchange for our services, which is generally calculated as hours worked multiplied by the agreed-upon hourly bill rate. The client simultaneously receives and consumes the benefits of the services as they are provided. We do not incur costs to obtain our contingent staffing contracts. Costs are incurred to fulfill some contingent staffing contracts, however these costs are not material and are expensed as incurred.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Human resource outsourcing
We primarily recognize revenue for our PeopleScout outsourced recruitment of permanent employees over time in an amount that reflects the consideration we expect to be entitled to in exchange for our services. The client simultaneously receives and consumes the benefits of the services as they are provided. We do not incur costs to obtain our outsourced recruitment of permanent employee contracts. The costs to fulfill these contracts are not material and are expensed as incurred.
Unsatisfied performance obligations
As a practical expedient, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an expected original duration of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice 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 (“SG&A”) expense were $6.8 million, $8.1 million and $7.3 million in fiscal 2019, 2018 and 2017, 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 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 clients to make required payments. The allowance for doubtful accounts is determined based on current collection efforts, historical collection trends, write-off experience, client 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.
Restricted cash and investments
Cash and investments pledged as collateral and restricted for use in 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 at the time of purchase, were rated A1/P1 or higher for short-term securities and A or higher for long-term securities, by nationally recognized rating organizations. We have the positive intent and ability to hold our 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 American International Group, Inc. and the Bank of New York Mellon Corporation 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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:
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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.
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•
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Level 2: Inputs other than quoted prices in active markets for identical assets and liabilities are used. We use quoted prices for similar instruments in active markets or we estimate the fair value using a variety of valuation methodologies, which include observable inputs for comparable instruments and unobservable inputs.
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•
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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.
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The carrying value of our cash and cash equivalents and restricted cash approximates fair value because of the short-term maturity of those instruments. We hold mutual funds and money market funds to support our deferred compensation liability, which are carried at fair value based on quoted market prices in active markets for identical assets. 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. In addition to mutual funds and money market funds, we also have company owned life insurance policies that support our deferred compensation liability. Company owned life insurance policies are carried at cash surrender value, which approximates fair value. 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.
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:
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Years
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Buildings
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40
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Software
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3 - 8
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Computers, furniture and equipment
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3 - 10
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Leasehold improvements are amortized over the shorter of the related non-cancelable lease term 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.
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 eight 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. We also lease office spaces for our centralized support functions, office equipment, and machinery for use at client sites. Many leases require variable payments of property taxes, insurance, and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 SG&A 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 SG&A 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 within SG&A 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.
Goodwill and indefinite-lived intangible assets
We evaluate goodwill for impairment on an annual basis as of the first day of our fiscal second quarter, and whenever events or circumstances make it more likely than not that an impairment may have occurred. These events or circumstances could include a significant change in the business climate, operating performance indicators, competition, client engagement, legal factors, or sale or disposition of a significant portion of a reporting unit. We monitor the existence of potential impairment indicators throughout the fiscal year. We test for goodwill impairment at the reporting unit level. We consider our operating segments to be our reporting units for goodwill impairment testing. Our operating segments are PeopleReady, Centerline Drivers (“Centerline”), Staff Management | SMX (“Staff Management”), SIMOS Insourcing Solutions (“SIMOS”), PeopleScout, 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 the carrying value, we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value of the goodwill.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions to evaluate the impact of operational and macroeconomic changes on each reporting unit. The fair value of each reporting unit is a weighted average of the income and market valuation approaches. The income approach applies a fair value methodology based on discounted cash flows. This analysis requires significant estimates and judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital, which is risk-adjusted to reflect the specific risk profile of the reporting unit being tested. We also apply a market approach, which identifies similar publicly traded companies and develops a correlation, referred to as a multiple, to apply to the operating results of the reporting units. The primary market multiples to which we compare are revenue and earnings before interest, taxes, depreciation, and amortization. The income and market approaches were equally weighted in our most recent annual impairment test. 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 consider a reporting unit’s fair value to be substantially in excess of its carrying value at a 20% premium or greater.
We performed our goodwill impairment tests for 2019, 2018 and 2017, and determined that the estimated fair values exceeded the carrying amounts for our reporting units. Accordingly, no impairment loss was recognized for the years ended December 29, 2019, December 30, 2018 or December 31, 2017.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 performed our annual indefinite-lived intangible asset impairment test for 2019, 2018 and 2017, and determined that the estimated fair values exceeded the carrying amounts for our indefinite-lived trade names. Accordingly, no impairment loss was recognized for the years ended December 29, 2019, December 30, 2018 or December 31, 2017.
Other long-lived assets
Other long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Other long-lived assets include property and equipment, lease right-of-use assets, finite-lived intangible assets and capitalized implementation costs for cloud computing arrangements that are service contracts.
We have finite-lived intangible assets related to acquired company customers, trade names/trademarks, and technology, as well as purchased trade names/trademarks.
We capitalize implementation costs incurred in a cloud computing arrangement that is a service contract. Capitalized implementation costs are recorded as a prepaid asset in other assets, net on our Consolidated Balance Sheets, with the related amortization recorded in SG&A expense on our Consolidated Statements of Operations and Comprehensive Income on a straight-line basis over the fixed, non-cancelable term of the associated arrangement plus any reasonably certain renewal periods. Software license fees incurred during the development period are expensed as incurred.
Business combinations
We account for our business acquisitions using the acquisition method of accounting. 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 initial 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.
All acquisition-related costs are expensed as incurred and recorded in SG&A expense on the Consolidated Statements of Operations and Comprehensive Income. 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 SG&A expense on the Consolidated Statements of Operations and Comprehensive Income.
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 cost of services on the Consolidated Statements of Operations and Comprehensive Income in the period when the changes 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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proceedings in the ordinary course of our operations. We establish accruals 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. 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 consolidated 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 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 carryforward periods as of December 29, 2019 and December 30, 2018.
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 maximum 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.
Deferred compensation plan
We offer a non-qualified defined contribution plan (the “Plan”) to eligible employees. Participating employees may elect to defer and contribute a portion of their eligible compensation. The Plan allows participants to direct their account based on the investment options determined by TrueBlue and offers discretionary matching contributions.
The current portion of the deferred compensation liability is included in other current liabilities on our Consolidated Balance Sheets. The total deferred compensation liability is largely offset by deferred compensation mutual funds, money market funds and company owned life insurance policies recorded in restricted cash and investments on our Consolidated Balance Sheets. The mutual funds and money market funds are measured at fair value, with unrealized gains and losses recognized in SG&A expense, while realized gains and losses are recorded in other income on our Consolidated Statements of Operations and Comprehensive Income. The carrying value of company owned life insurance policies is based on the cash surrender value of the policies and, accordingly, approximates fair value. Changes in the cash surrender value of the insurance policies are recorded in SG&A expense on our Consolidated Statements of Operations and Comprehensive Income.
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 (“ESPP”).
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 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.
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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, when applicable.
Purchases and retirement of our common stock
We 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 per share
Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income 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 ESPP, 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 consolidated 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 consolidated financial statements. Actual results and outcomes may differ from these estimates and assumptions.
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 requires these costs be capitalized with the related amortization recorded in SG&A 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 elected to adopt the standard
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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using the transition relief provided in the July amendment. We implemented internal controls and key system functionality to enable the reporting of financial information.
We elected the three practical expedients allowed for implementation of the new standard but did not utilize 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 also elected the practical expedient to not separate non-lease components from the lease components to which they relate, and instead account for them as a single lease component. Accordingly, all fixed 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 the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model, which is a new impairment model based on expected losses. Under this model, an entity recognizes an allowance for expected credit losses based on historical experience, current conditions and forecasted information rather than the current methodology of delaying recognition of credit losses until it is probable a loss has been incurred. This guidance is effective for fiscal years beginning after December 15, 2019 (Q1 2020 for TrueBlue) with early adoption permitted. We plan to adopt the new guidance in Q1 2020 related to our trade accounts receivables, held-to-maturity debt securities, and insurance receivable, and expect the total impact upon adoption to be immaterial.
No other new accounting pronouncement issued or effective during the fiscal year had, or is expected to have, a significant impact on our consolidated financial statements and related disclosures.
NOTE 2: ACQUISITION AND DIVESTITURE
2018 acquisition
Effective June 12, 2018, we acquired all of the outstanding equity interests of TMP Holdings LTD (“TMP”), through its subsidiary PeopleScout, Inc. for a cash purchase price of $22.7 million, net of cash acquired of $7.0 million. TMP is a mid-sized RPO and employer branding service provider operating in the United Kingdom. This acquisition increases our ability to win multi-continent engagements by adding a physical presence in Europe, referenceable clients and employer branding capabilities.
We incurred acquisition and integration-related costs of $1.6 million and $2.7 million for the years ended December 29, 2019 and December 30, 2018, respectively, which are included in SG&A expense on the Consolidated Statements of Operations and Comprehensive Income and cash flows from operating activities on the Consolidated Statements of Cash Flows.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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The following table reflects the allocation of the purchase price, net of cash acquired, to the fair value of the assets acquired and liabilities assumed:
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(in thousands)
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Purchase price allocation
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Cash purchase price, net of cash acquired
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$
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22,742
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|
|
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Accounts receivable
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9,770
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|
Prepaid expenses, deposits and other current assets
|
337
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|
Property and equipment
|
435
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|
Customer relationships
|
6,286
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Trade names/trademarks
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1,738
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|
Total assets acquired
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18,566
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Accounts payable and other accrued expenses
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9,139
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|
Accrued wages and benefits
|
1,642
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|
Income tax payable
|
205
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Deferred income tax liability
|
1,444
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Total liabilities assumed
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12,430
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|
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Net identifiable assets acquired
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6,136
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Goodwill (1)
|
16,606
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Total consideration allocated
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$
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22,742
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(1) Goodwill represents the expected synergies with our existing business, the acquired assembled workforce, potential new clients and future cash flows after the acquisition of TMP, and is non-deductible for income tax purposes.
Intangible assets include identifiable intangible assets for customer relationships and trade names/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, their estimated fair values and useful lives as of June 12, 2018:
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(in thousands, except for estimated useful lives, in years)
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Estimated fair value
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Estimated useful life in years
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Customer relationships - other
|
$
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2,809
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|
3
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Customer relationships - RPO
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3,477
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|
7
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Trade names/trademarks
|
1,738
|
|
14
|
Total acquired identifiable intangible assets
|
$
|
8,024
|
|
|
The results of TMP’s operations and cash flows reported for 2018 on our Consolidated Statements of Operations and Comprehensive Income and Consolidated Statements of Cash Flows relate to the period from June 12, 2018 to December 30, 2018. Revenue from TMP included in our Consolidated Statements of Operations and Comprehensive Income was $31.0 million from the acquisition date to December 30, 2018, and $51.3 million for the year ended December 29, 2019. The acquisition of TMP was not material to our consolidated results of operations and as such, pro forma financial information was not required.
2018 divestiture
Effective March 12, 2018, we divested substantially all the assets and certain liabilities of PlaneTechs, LLC (“PlaneTechs”) for a sales price of $11.4 million, of which $8.5 million was paid in cash, and $1.6 million in a note receivable, with monthly principal payments of $0.1 million beginning in April 2018. The outstanding balance as of December 30, 2018 was included in prepaid expenses, deposits and other current assets on the Consolidated Balance Sheets, and fully repaid as of December 29, 2019. The remaining purchase price balance consisted of the preliminary working capital adjustment, which was included in prepaid expenses, deposits and other current assets on the Consolidated Balance Sheets. The company recognized a pre-tax gain on the divestiture of $0.7 million, which was included in interest and other income on the Consolidated Statements of Operations and Comprehensive Income for the year ended December 30, 2018. Fiscal first quarter revenue through the closing date of the divestiture for the PlaneTechs business of $8.0 million was reported in the PeopleManagement reportable segment for the year ended December 30, 2018.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
The divestiture of PlaneTechs did not represent a strategic shift with a major effect on the company’s operations and financial results and, therefore was not reported as discontinued operations in the Consolidated Balance Sheets or Consolidated Statements of Operations and Comprehensive Income for the periods presented.
NOTE 3: FAIR VALUE MEASUREMENT
Our assets measured at fair value on a recurring basis consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 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
|
$
|
37,608
|
|
$
|
37,608
|
|
$
|
—
|
|
$
|
—
|
|
Restricted cash and cash equivalents
|
54,763
|
|
54,763
|
|
—
|
|
—
|
|
Cash, cash equivalents and restricted cash (1)
|
$
|
92,371
|
|
$
|
92,371
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
Municipal debt securities
|
$
|
74,236
|
|
$
|
—
|
|
$
|
74,236
|
|
$
|
—
|
|
Corporate debt securities
|
76,068
|
|
—
|
|
76,068
|
|
—
|
|
Agency mortgage-backed securities
|
1,376
|
|
—
|
|
1,376
|
|
—
|
|
U.S. government and agency securities
|
1,051
|
|
—
|
|
1,051
|
|
—
|
|
Restricted investments classified as held-to-maturity
|
$
|
152,731
|
|
$
|
—
|
|
$
|
152,731
|
|
$
|
—
|
|
|
|
|
|
|
Deferred compensation investments (2)
|
$
|
13,670
|
|
$
|
13,670
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 investments (2)
|
$
|
22,621
|
|
$
|
22,621
|
|
$
|
—
|
|
$
|
—
|
|
|
|
(1)
|
Cash, cash equivalents and restricted cash consist of money market funds, deposits, and investments with original maturities of three months or less.
|
|
|
(2)
|
Deferred compensation investments consist of mutual funds and money market funds.
|
There were no material transfers between level 1, level 2 and level 3 of the fair value hierarchy during the years ended December 29, 2019 or December 30, 2018.
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. There were no goodwill or intangible asset impairment charges recorded during fiscal 2019, 2018 or 2017.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 4: RESTRICTED CASH AND INVESTMENTS
The following is a summary of the carrying value of our restricted cash and investments:
|
|
|
|
|
|
|
|
(in thousands)
|
December 29,
2019
|
December 30,
2018
|
Cash collateral held by insurance carriers
|
$
|
24,612
|
|
$
|
24,182
|
|
Cash and cash equivalents held in Trust
|
23,681
|
|
28,021
|
|
Investments held in Trust
|
149,373
|
|
156,618
|
|
Deferred compensation investments
|
13,670
|
|
22,621
|
|
Company owned life insurance policies
|
13,126
|
|
742
|
|
Other restricted cash and cash equivalents
|
6,470
|
|
3,259
|
|
Total restricted cash and investments
|
$
|
230,932
|
|
$
|
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 Trust.
The amortized cost and estimated fair value of our held-to-maturity investments held in Trust, aggregated by investment category as of December 29, 2019 and December 30, 2018, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2019
|
(in thousands)
|
Amortized cost
|
Gross unrealized gains
|
Gross unrealized losses
|
Fair value
|
Municipal debt securities
|
$
|
72,017
|
|
$
|
2,219
|
|
$
|
—
|
|
$
|
74,236
|
|
Corporate debt securities
|
75,000
|
|
1,102
|
|
(34
|
)
|
76,068
|
|
Agency mortgage-backed securities
|
1,357
|
|
21
|
|
(2
|
)
|
1,376
|
|
U.S. government and agency securities
|
999
|
|
52
|
|
—
|
|
1,051
|
|
Total held-to-maturity investments
|
$
|
149,373
|
|
$
|
3,394
|
|
$
|
(36
|
)
|
$
|
152,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
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 December 29, 2019 and December 30, 2018, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 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
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
Corporate debt securities
|
15,920
|
|
(32
|
)
|
|
2,765
|
|
(2
|
)
|
|
18,685
|
|
(34
|
)
|
Agency mortgage-backed securities
|
—
|
|
—
|
|
|
276
|
|
(2
|
)
|
|
276
|
|
(2
|
)
|
U.S. government and agency securities
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Total held-to-maturity investments
|
$
|
15,920
|
|
$
|
(32
|
)
|
|
$
|
3,041
|
|
$
|
(4
|
)
|
|
$
|
18,961
|
|
$
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 29, 2019 and December 30, 2018 were 17 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:
|
|
|
|
|
|
|
|
|
December 29, 2019
|
(in thousands)
|
Amortized cost
|
Fair value
|
Due in one year or less
|
$
|
20,312
|
|
$
|
20,356
|
|
Due after one year through five years
|
92,358
|
|
94,159
|
|
Due after five years through ten years
|
36,703
|
|
38,216
|
|
Total held-to-maturity investments
|
$
|
149,373
|
|
$
|
152,731
|
|
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.
Equity investments
We hold mutual funds and money market funds to support our deferred compensation liability. Unrealized gains and losses related to equity investments still held at December 29, 2019 and December 30, 2018, were $2.8 million gain and $3.4 million loss for the years then ended, respectively, and are included in SG&A expense on the Consolidated Statements of Operations and Comprehensive Income.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 5: PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost and consist of the following:
|
|
|
|
|
|
|
|
(in thousands)
|
December 29,
2019
|
December 30,
2018
|
Buildings and land
|
$
|
43,621
|
|
$
|
41,300
|
|
Software
|
132,378
|
|
119,241
|
|
Computers, furniture and equipment
|
57,770
|
|
52,115
|
|
Construction in progress
|
8,727
|
|
8,350
|
|
Gross property and equipment
|
242,496
|
|
221,006
|
|
Less accumulated depreciation
|
(176,346
|
)
|
(163,335
|
)
|
Property and equipment, net
|
$
|
66,150
|
|
$
|
57,671
|
|
Capitalized software costs, net of accumulated depreciation, were $26.0 million and $19.4 million as of December 29, 2019 and December 30, 2018, 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 $19.7 million, $20.3 million and $24.7 million for the years ended December 29, 2019, December 30, 2018 and December 31, 2017, respectively.
NOTE 6: GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table reflects changes in the carrying amount of goodwill during the period by reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
PeopleReady
|
PeopleManagement
|
PeopleScout
|
Total company
|
Balance at
|
December 31, 2017
|
|
|
|
|
Goodwill before impairment
|
$
|
106,304
|
|
$
|
100,146
|
|
$
|
132,323
|
|
$
|
338,773
|
|
Accumulated impairment loss
|
(46,210
|
)
|
(50,700
|
)
|
(15,169
|
)
|
(112,079
|
)
|
Goodwill, net
|
60,094
|
|
49,446
|
|
117,154
|
|
226,694
|
|
|
|
|
|
|
|
Divested goodwill before impairment (1)
|
—
|
|
(19,054
|
)
|
—
|
|
(19,054
|
)
|
Divested accumulated impairment loss (1)
|
—
|
|
17,000
|
|
—
|
|
17,000
|
|
Acquired goodwill (2)
|
—
|
|
—
|
|
16,606
|
|
16,606
|
|
Foreign currency translation
|
—
|
|
—
|
|
(3,959
|
)
|
(3,959
|
)
|
|
|
|
|
|
|
Balance at
|
December 30, 2018
|
|
|
|
|
Goodwill before impairment
|
106,304
|
|
81,092
|
|
144,970
|
|
332,366
|
|
Accumulated impairment loss
|
(46,210
|
)
|
(33,700
|
)
|
(15,169
|
)
|
(95,079
|
)
|
Goodwill, net
|
60,094
|
|
47,392
|
|
129,801
|
|
237,287
|
|
|
|
|
|
|
|
Foreign currency translation
|
—
|
|
—
|
|
211
|
|
211
|
|
|
|
|
|
|
|
Balance at
|
December 29, 2019
|
|
|
|
|
Goodwill before impairment
|
106,304
|
|
81,092
|
|
145,181
|
|
332,577
|
|
Accumulated impairment loss
|
(46,210
|
)
|
(33,700
|
)
|
(15,169
|
)
|
(95,079
|
)
|
Goodwill, net
|
$
|
60,094
|
|
$
|
47,392
|
|
$
|
130,012
|
|
$
|
237,498
|
|
|
|
(1)
|
Effective March 12, 2018, we divested our PlaneTechs business. As a result of this divestiture, we eliminated the remaining goodwill balance of the PlaneTechs business, which was a part of our PeopleManagement reportable segment. For additional information, see Note 2: Acquisition and Divestiture.
|
|
|
(2)
|
Effective June 12, 2018, we acquired TMP through PeopleScout. Accordingly, the goodwill associated with the acquisition has been assigned to our PeopleScout reportable segment based on the purchase price allocation. For additional information, see Note 2: Acquisition and Divestiture.
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Intangible assets
Finite-lived intangible assets
The following table presents our purchased finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2019
|
|
December 30, 2018
|
(in thousands)
|
Gross carrying amount
|
Accumulated
amortization
|
Net
carrying
amount
|
|
Gross carrying amount
|
Accumulated
amortization
|
Net
carrying
amount
|
Finite-lived intangible assets (1):
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
149,299
|
|
$
|
(83,317
|
)
|
$
|
65,982
|
|
|
$
|
153,704
|
|
$
|
(70,887
|
)
|
$
|
82,817
|
|
Trade names/trademarks
|
2,052
|
|
(441
|
)
|
1,611
|
|
|
2,580
|
|
(1,069
|
)
|
1,511
|
|
Technologies
|
600
|
|
(520
|
)
|
80
|
|
|
9,800
|
|
(8,720
|
)
|
1,080
|
|
Total finite-lived intangible assets
|
$
|
151,951
|
|
$
|
(84,278
|
)
|
$
|
67,673
|
|
|
$
|
166,084
|
|
$
|
(80,676
|
)
|
$
|
85,408
|
|
|
|
(1)
|
Excludes assets that are fully amortized.
|
Amortization expense of our finite-lived intangible assets was $17.9 million, $20.8 million and $21.4 million for the years ended December 29, 2019, December 30, 2018 and December 31, 2017, respectively.
The following table provides the estimated future amortization of finite-lived intangible assets as of December 29, 2019:
|
|
|
|
|
(in thousands)
|
|
2020
|
$
|
15,885
|
|
2021
|
14,252
|
|
2022
|
13,381
|
|
2023
|
12,726
|
|
2024
|
10,319
|
|
Thereafter
|
1,110
|
|
Total future amortization
|
$
|
67,673
|
|
Indefinite-lived intangible assets
We also held indefinite-lived trade names/trademarks of $6.0 million as of December 29, 2019 and December 30, 2018.
Impairment tests
Based on our 2019 annual impairment test, the estimated fair value of our SIMOS reporting unit was in excess of its carrying value by approximately 10%. The current carrying value of goodwill for this reporting unit is $35 million. There are two key clients that individually account for more than 10% of revenue for the SIMOS reporting unit. For each client we service multiple sites. The loss of a key client, loss of a significant number of key sites, or a downturn in the economy could give rise to an impairment. Should any one of these events occur, we may need to record an impairment loss to goodwill for the amount by which the carrying value exceeds its fair value, not to exceed the total amount of goodwill. All other reporting units’ fair values were substantially in excess of their respective carrying values. Accordingly, there was no impairment loss recognized for the year ended December 29, 2019.
Effective December 30, 2019 (the first day of fiscal 2020), our SIMOS and Staff Management reporting units were combined into one reporting unit (On-site) due to common customers and contingent workers, similar nature of services and economic characteristics. Staff Management’s fair value was substantially in excess of its carrying value as of the annual impairment test by approximately 48% and there were no indicators of impairment during the interim period. Therefore, no interim impairment test was required for this reporting unit. Based on the annual impairment test for SIMOS, the estimated fair value was in excess of its carrying value by approximately 10%. Because the estimated fair value of goodwill for SIMOS was not substantially in excess of its carrying value, we tested the SIMOS reporting unit for impairment prior to the combination with Staff Management. The result of the most recent impairment test indicated the estimated fair value remains in excess of carrying value by approximately 7%. Therefore, no impairment loss was recognized.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 7: WORKERS’ COMPENSATION INSURANCE AND RESERVES
We provide workers’ compensation insurance for our contingent 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 PeopleReady in Ohio where we have a self-insured policy). Accordingly, because we are not the primary obligor, our consolidated 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 2.0% at December 29, 2019 and December 30, 2018. Payments made against self-insured claims are made over a weighted average period of approximately 5 years as of December 29, 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)
|
December 29,
2019
|
December 30,
2018
|
Undiscounted workers’ compensation reserve
|
$
|
274,934
|
|
$
|
284,625
|
|
Less discount on workers’ compensation reserve
|
19,316
|
|
18,179
|
|
Workers’ compensation reserve, net of discount
|
255,618
|
|
266,446
|
|
Less current portion
|
73,020
|
|
76,421
|
|
Long-term portion
|
$
|
182,598
|
|
$
|
190,025
|
|
Payments made against self-insured claims were $63.1 million, $64.7 million and $66.8 million for the years ended December 29, 2019, December 30, 2018 and December 31, 2017, respectively.
Our workers’ compensation reserve includes estimated expenses related to 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 December 29, 2019 and December 30, 2018, the weighted average rate was 2.4% 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 $45.3 million and $48.2 million as of December 29, 2019 and December 30, 2018, respectively. The discounted receivables from insurance companies, net of valuation allowance, were $44.6 million and $44.9 million as of December 29, 2019 and December 30, 2018, respectively.
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
|
The table below presents the estimated future payout of our discounted workers’ compensation claims reserve for the next five years and thereafter as of December 29, 2019:
|
|
|
|
|
(in thousands)
|
|
2020
|
$
|
73,020
|
|
2021
|
39,284
|
|
2022
|
22,190
|
|
2023
|
14,143
|
|
2024
|
9,862
|
|
Thereafter
|
51,866
|
|
Sub-total
|
210,365
|
|
Excess claims (1)
|
45,253
|
|
Total
|
$
|
255,618
|
|
|
|
(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 cost consists primarily of changes in self-insurance reserves net of changes in discount, monopolistic jurisdictions’ premiums, insurance premiums and other miscellaneous expenses. Workers’ compensation cost of $60.2 million, $69.2 million and $83.7 million was recorded in cost of services on our Consolidated Statements of Operations and Comprehensive Income for the years ended December 29, 2019, December 30, 2018 and December 31, 2017, respectively.
NOTE 8: LONG-TERM DEBT
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. (“Revolving Credit Facility”). The agreement provides for a revolving line of credit of up to $300.0 million with an option, subject to lender approval, to increase the amount to $450.0 million, and matures in five years. Included in our agreement is a $30.0 million sub-limit for Swingline loans and a $125.0 million sub-limit for letters of credit. At December 29, 2019, $37.1 million was utilized as a draw on the facility, which included a $17.1 million Swingline loan, and $6.2 million was utilized by outstanding standby letters of credit, leaving $256.7 million available under the Revolving Credit Facility for additional borrowings. At December 30, 2018, $80.0 million was utilized as a draw on the facility.
Under the terms of the agreement, we pay a variable rate of interest on funds borrowed under the revolving line of credit in excess of the Swingline loans, based on the London Interbank Offered Rate (“LIBOR”) plus an applicable spread between 1.25% and 2.50%. Alternatively, at our option, we may pay interest based on a base rate plus an applicable spread between 0.25% and 1.50%. 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%. The applicable spread is determined by the consolidated leverage ratio, as defined in the credit agreement. At December 29, 2019, the applicable spread on LIBOR was 1.25% and the index rate was 1.69%, resulting in an interest rate of 2.94%.
Under the terms of the agreement, we are required to pay a variable rate of interest on funds borrowed under the Swingline loan based on the base rate plus applicable spread between 0.25% and 1.50%, as described above. At December 29, 2019, the applicable spread on the base rate was 0.25% and the base rate was 4.75%, resulting in an interest rate of 5.00%.
A commitment fee between 0.250% and 0.375% is applied against the Revolving Credit Facility’s unused borrowing capacity, with the specific rate determined by the consolidated leverage ratio, as defined in the credit agreement. Letters of credit are priced at a margin between 1.00% and 2.25%, plus a fronting fee of 0.50%. Obligations under the agreement are guaranteed by TrueBlue and material U.S. domestic subsidiaries, and are secured by substantially all of the assets of TrueBlue and material U.S. domestic subsidiaries. The agreement contains customary representations and warranties, events of default, and affirmative and negative covenants, including, among others, financial covenants based on our leverage and fixed charge coverage ratios, as defined in the credit agreement. We are currently in compliance with all covenants related to the Revolving Credit Facility.
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
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
of cash and cash equivalents, highly-rated investment grade debt 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. 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)
|
December 29,
2019
|
December 30,
2018
|
Cash collateral held by workers’ compensation insurance carriers
|
$
|
22,256
|
|
$
|
22,264
|
|
Cash and cash equivalents held in Trust
|
23,681
|
|
28,021
|
|
Investments held in Trust
|
149,373
|
|
156,618
|
|
Letters of credit (1)
|
6,202
|
|
6,691
|
|
Surety bonds (2)
|
20,731
|
|
21,881
|
|
Total collateral commitments
|
$
|
222,243
|
|
$
|
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. 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, vehicles and equipment. Our leases have remaining terms of up to 17 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 is 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:
|
|
|
|
|
|
Year ended
|
(in thousands)
|
December 29, 2019
|
Operating lease costs
|
$
|
17,333
|
|
Short-term lease costs
|
7,110
|
|
Other lease costs (1)
|
4,722
|
|
Total lease costs
|
$
|
29,165
|
|
|
|
(1)
|
Other lease costs include immaterial variable lease costs and sublease income.
|
Other information related to our operating leases was as follows:
|
|
|
|
December 29, 2019
|
Weighted average remaining lease term in years
|
4.1
|
Weighted average discount rate
|
5.0%
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Future non-cancelable minimum lease payments under our operating lease commitments as of December 29, 2019, are as follows for each of the next five years and thereafter:
|
|
|
|
|
(in thousands)
|
|
2020
|
16,328
|
|
2021
|
12,283
|
|
2022
|
7,515
|
|
2023
|
5,375
|
|
2024
|
2,687
|
|
Thereafter
|
4,912
|
|
Total undiscounted future non-cancelable minimum lease payments (1)
|
49,100
|
|
Less: Imputed interest (2)
|
5,893
|
|
Present value of lease liabilities
|
$
|
43,207
|
|
|
|
(1)
|
Operating lease payments exclude approximately $36.7 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).
|
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
|
|
Total lease expense for fiscal 2018 and 2017 was $27.3 million and $25.9 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 $29.8 million of purchase obligations as of December 29, 2019, of which $13.8 million are expected to be paid in 2020.
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 consolidated 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: SHAREHOLDERS’ EQUITY
Common stock
On September 15, 2017, our Board of Directors authorized a $100.0 million share repurchase program of our outstanding common stock. The share repurchase program does not obligate us to acquire any particular amount of common stock and does not have an expiration date. During the year ended December 29, 2019, we used $38.9 million under this program to repurchase shares at an average share price of $21.04. As of December 29, 2019, $19.0 million remains available for repurchase of common stock under this authorization. On October 16, 2019, our Board of Directors authorized an additional $100.0 million share repurchase program.
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Shares of common stock outstanding include shares of unvested restricted stock. Unvested restricted stock included in reportable shares outstanding was 0.8 million and 0.7 million shares as of December 29, 2019 and December 30, 2018, respectively.
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.