TrueBlue, Inc.: Form 10-Q for the period ended Sep 24, 2023

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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Part I, Item 2 of this Form 10-Q),“Quantitative and Qualitative Disclosures about Market Risk” (Part I, Item 3 of this Form 10-Q), and “Risk Factors” (Part II, Item 1A 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.

BUSINESS OVERVIEW

TrueBlue, Inc. (the “company,” “TrueBlue,” “we,” “us” and “our”) is a leading provider of specialized workforce solutions that helps our clients improve productivity and grow their businesses. Client demand for contingent workforce solutions and outsourced recruiting services is cyclical and heavily influenced by the overall strength of the economy and labor market, as well as trends in workforce flexibility. During periods of rising economic uncertainty, clients reduce their contingent labor in response to lower volumes and reduced appetite for expanding production or inventory, which reduces the demand for our services. That environment also reduces demand for permanent placement recruiting, whether outsourced or in-house. However, as the economy emerges from periods of uncertainty, contingent labor providers are uniquely positioned to respond quickly to increasing demand for labor and rapidly fill new or temporary positions, replace absent employees, and convert fixed labor costs to variable costs. Similarly, companies turn to hybrid or fully outsourced recruiting models during periods of rapid re-hiring and high employee turnover. In order to competitively differentiate our services and grow market share in these highly fragmented industries, we are committed to executing our digital strategies to increase our ability to attract and retain clients, employees, and associates, and reduce the cost of delivering our services. We have implemented these core strategies for each of our business segments: PeopleReady, PeopleScout and PeopleManagement.

PeopleReady

PeopleReady provides clients with access to qualified associates through a wide range of staffing solutions for on-demand, contingent general and skilled labor. Our services range from providing one associate to hundreds, and are generally short-term in nature as they are filling the contingent staffing needs of our clients. PeopleReady connects people with work in a broad range of industries through our network of branches across all 50 states in the United States (“U.S.”), Canada and Puerto Rico, and increasingly through our industry-leading mobile app, JobStackTM. JobStack creates a digital exchange between our associates and clients, and allows our branch resources to expand their recruiting, sales and service delivery efforts. JobStack is competitively differentiating our services, expanding our reach into new demographics, and improving our service delivery and work order fill rates. Our primary focus at PeopleReady is the use of digitalization to supplement our nationwide footprint, improve our operating efficiency and effectiveness, and gain market share.

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PeopleScout

PeopleScout offers recruitment process outsourcing (“RPO”), managed service provider (“MSP”) solutions and talent advisory services to a wide variety of industries, primarily in the U.S., Canada, the United Kingdom and Australia. Our RPO solutions are multi-year in duration, highly scalable and provide clients the support they need as their hiring volumes fluctuate. We tailor our services based on individual client needs, including sourcing, screening, hiring and onboarding, as well as employer branding and recruitment marketing, to improve the candidate experience and regulatory compliance, and ultimately lower our clients’ recruiting costs. Our proprietary technology platform (AffinixTM) uses artificial intelligence and machine learning to rapidly source a qualified talent pool within minutes, and engages candidates through a seamless digital experience. Our MSP business manages our clients’ contingent labor programs, including vendor selection, performance management, compliance monitoring and risk management. Our primary focus at PeopleScout is leveraging our strong brand reputation, continuing to invest in our sales team, and using Affinix to continue to gain market share in high growth sectors.

PeopleManagement

PeopleManagement provides recruitment and on-site management of a facility’s contingent industrial workforce throughout the U.S., Canada and Puerto Rico. Our client engagements are generally multi-location and multi-year, and include scalable recruiting, screening, hiring and management of the contingent workforce. We deploy dedicated management and service teams that work side-by-side with a client’s full-time workforce. Our teams are an integral part of the production and logistics process, and specialize in labor-intensive manufacturing, warehousing and distribution. PeopleManagement also provides dedicated and contingent commercial drivers to the transportation and distribution industries through our Centerline Drivers (“Centerline”) brand. Centerline matches drivers to each client’s specific needs, allowing them to improve productivity, control costs, ensure compliance and deliver improved service. Our primary focus at PeopleManagement continues to be growing our client base by targeting local and underserved markets, as well as investing in client and associate care programs to improve retention.

Fiscal third quarter of 2023 summary

Total company revenue declined 17.8% to $473.2 million for the thirteen weeks ended September 24, 2023, compared to the same period in the prior year. The decline was primarily driven by continued economic uncertainty impacting demand trends across all three segments. Our contingent staffing clients are focused on employee retention as well as reducing costs, causing them to become increasingly selective in the positions they fill using outsourced labor providers. The decline in demand has impacted most industries and markets, especially transportation, retail and services.

Total company gross profit as a percentage of revenue for the thirteen weeks ended September 24, 2023 decreased by 90 basis points to 26.2%, compared to 27.1% for the same period in the prior year. This decrease was primarily driven by changes in revenue mix towards our lower margin staffing businesses.

Total company selling, general and administrative (“SG&A”) expense decreased 2.9% to $120.7 million for the thirteen weeks ended September 24, 2023, compared to the same period in the prior year. SG&A expense decreased as a result of operational cost management actions we have taken in response to the decline in demand for our services, while maintaining our operational strengths and readiness to increase our market share when demand rebounds. These cost reductions were partially offset by inflation in certain employee costs, most notably medical benefits.

The items above resulted in net loss of $0.0 million for the thirteen weeks ended September 24, 2023, compared to net income of $20.7 million for the same period in the prior year.

As of September 24, 2023, we had cash and cash equivalents of $47.1 million, no debt, and $123.0 million available under the most restrictive covenant of our revolving credit agreement (“Revolving Credit Facility”), for total liquidity of $170.1 million.

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RESULTS OF OPERATIONS

Total company results

The following table presents selected financial data:

(in thousands, except percentages and per share data)

Revenue from services

(in thousands, except percentages)

Total company revenue declined 17.8% to $473.2 million for the thirteen weeks ended September 24, 2023, and declined 16.6% to $1.4 billion for the thirty-nine weeks ended September 24, 2023, compared to the same periods in the prior year. These declines were primarily driven by continued economic uncertainty impacting demand trends across all three segments. Our contingent staffing clients are focused on employee retention as well as reducing costs, causing them to become increasingly selective in the positions they fill using outsourced labor providers. Our PeopleScout clients continue to face uncertain future workforce needs, and have reduced volumes in an attempt to manage costs.

PeopleReady

PeopleReady revenue declined 15.4% to $283.2 million for the thirteen weeks ended September 24, 2023, and declined 15.4% to $811.1 million for the thirty-nine weeks ended September 24, 2023, compared to the same periods in the prior year. PeopleReady revenue declined as a result of continued economic uncertainty, leading our clients to reduce their dependence on variable labor to supplement their core workforce in order to manage their costs. Our clients are focused on employee retention, causing them to become increasingly selective in the positions they fill using outsourced labor providers.

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PeopleScout

PeopleScout revenue declined 31.7% to $52.9 million for the thirteen weeks ended September 24, 2023, and declined 26.8% to $182.1 million for the thirty-nine weeks ended September 24, 2023, compared to the same periods in the prior year. PeopleScout revenue declined as clients continued to respond to economic uncertainty and unknown future workforce needs through reducing hiring volumes, sourcing candidates with internal resources, and initiating hiring freezes to control costs. In addition, the prior year comparable periods benefited from historically high client employee turnover rates, which increased volumes for those periods.

PeopleManagement

PeopleManagement revenue declined 16.2% to $137.1 million for the thirteen weeks ended September 24, 2023, and declined 14.0% to $420.8 million for the thirty-nine weeks ended September 24, 2023, compared to the same periods in the prior year. PeopleManagement revenue declined as clients in our on-site business continued to respond to economic uncertainty by reducing dependence on variable labor to supplement their core workforce.

Gross profit

(in thousands, except percentages)

Gross profit as a percentage of revenue declined 90 basis points to 26.2% for the thirteen weeks ended September 24, 2023, compared to 27.1% for the same period in the prior year. A contraction of 90 basis points was due to unfavorable revenue shifts toward our lower margin staffing businesses, including revenue growth in the renewable energy business within PeopleReady, which has lower margins than average PeopleReady margins. Our staffing businesses contributed an additional 30 basis points of contraction from higher workers’ compensation costs, offset by 30 basis points of expansion as a result of disciplined pricing in the form of bill rates, which have increased ahead of pay rates.

Gross profit as a percentage of revenue declined 10 basis points to 26.7% for the thirty-nine weeks ended September 24, 2023, compared to 26.8% for the same period in the prior year. A contraction of 80 basis points was due to unfavorable revenue shifts toward our lower margin staffing businesses. The contraction was partially offset by 40 basis points of expansion due to lower workers’ compensation costs in our staffing businesses. An additional 30 basis points of expansion was a result of higher bill rates in our staffing businesses, which have increased ahead of pay rates.

SG&A expense

(in thousands, except percentages)

Total company SG&A expense decreased by $3.6 million or 2.9% for the thirteen weeks ended September 24, 2023, compared to the same period in the prior year. The cost cutting measures taken during fiscal 2023 to scale down our operating cost structure have resulted in savings of approximately $12 million during the thirteen weeks ended September 24, 2023. Cost reductions were made to promote a return to profitability, while maintaining our operational strengths and readiness to increase market share when demand rebounds. However, operating cost savings have been partially offset by inflation of certain employee costs, most notably for employee medical benefits which have been rising nation-wide. Cost savings were also offset by $2.5 million of accelerated compensation costs related to transitions in our executive leadership.

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Total company SG&A expense decreased by $2.3 million or 0.6% for the thirty-nine weeks ended September 24, 2023, compared to the same period in the prior year. We incurred $2.1 million in workforce reduction costs during the period to scale down our operating cost structure in conjunction with other cost cutting measures, which have resulted in savings of approximately $17 million during the thirty-nine weeks ended September 24, 2023. Cost reductions were made promote a return to profitability, while maintaining our operational strengths and readiness to increase market share when demand rebounds. However, operating cost savings have been partially offset by inflation of certain employee costs, most notably for employee medical benefits, which have been rising nation-wide. Cost savings were also offset by $2.5 million of accelerated compensation costs related to transitions in our executive leadership. SG&A expense in the prior year included a benefit of $3.3 million for the reversal of accrued compensation related to the resignation of a former Chief Executive Officer.

Depreciation and amortization

(in thousands, except percentages)

Depreciation and amortization decreased for the thirteen weeks and thirty-nine weeks ended September 24, 2023 compared to the same periods in the prior year, due to certain assets becoming fully depreciated or amortized during 2022.

Goodwill and intangible asset impairment charge

A summary of the goodwill and intangible asset impairment charge for the thirty-nine weeks ended September 24, 2023, by reportable segment, is as follows:

(in thousands)

Goodwill

We performed our annual impairment test as of the first day of our fiscal second quarter of 2023. As a result of this impairment test, we concluded that the carrying amount of our PeopleScout MSP reporting unit exceeded its fair value and we recorded a non-cash goodwill impairment charge of $8.9 million, which was included in goodwill and intangible asset impairment charge on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirty-nine weeks ended September 24, 2023. The PeopleScout MSP goodwill impairment was related to our revised internal revenue projections, which anticipated the current year declining trends would continue into future periods. These projections were updated based on our then-current outlook and a recent industry analysis, which indicated that our business would underperform due to a strategic lack of investment in technology within an increasingly competitive market. No further impairment loss was recognized during the thirteen weeks ended September 24, 2023. The remaining goodwill balance for PeopleScout MSP was $0.8 million as of September 24, 2023. See Note 5: Goodwill and Intangible Assets, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional details.

Indefinite-lived intangible assets

We performed our annual impairment test as of the first day of our fiscal second quarter of 2023. As a result of this impairment test, we concluded that a trade name/trademark related to our PeopleManagement segment exceeded its estimated fair value and we recorded a non-cash impairment charge of $0.6 million, which was included in goodwill and intangible asset impairment charge on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirty-nine weeks ended September 24, 2023. The charge was primarily the result of an increase in the discount rate, as well as lower projected revenues given our then-current outlook. No further impairment loss was recognized during the thirteen weeks ended September 24, 2023. The remaining balance for this trade name/trademark was $3.3 million as of September 24, 2023.

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Income tax expense

(in thousands, except percentages)

Our tax provision and our effective tax rate are subject to variation due to several factors, including variability in accurately predicting our annual 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 and loss. 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 or loss is lower.

The items creating a difference between income taxes computed at the statutory federal income tax rate and income taxes reported on the Consolidated Statements of Operations and Comprehensive Income (Loss) are as follows:

(in thousands, except percentages)

Significant fluctuations in our effective tax rate are primarily due to the non-deductible goodwill impairment charge and the Work Opportunity Tax Credit (“WOTC”). Other differences between the statutory federal income tax rate and our effective tax rate result from certain other non-deductible and non-taxable items, the tax impact of stock-based compensation, and state and foreign income taxes.

Of the total goodwill and intangible asset impairment charge of $9.5 million recorded in the fiscal second quarter of 2023, $8.9 million (tax effect of $2.3 million) related to goodwill from a stock acquisition, and accordingly was not deductible for tax purposes.

WOTC, our primary hiring tax credit, is designed to encourage employers to hire workers from certain targeted groups with higher than average unemployment rates. WOTC is generally calculated as a percentage of wages over a twelve-month period up to worker maximums by targeted groups. 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 groups; 2) the targeted groups 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 an adjustment to prior year hiring tax credits if credits certified by government offices differ from original estimates. The U.S. Congress has approved the WOTC program through the end of 2025.

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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 asset impairment charges, depreciation and amortization expense, unallocated corporate general and administrative expense, interest expense, other income and expense, income taxes, and other costs and benefits not considered to be ongoing. See Note 12: Segment Information, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional details on our reportable segments, as well as a reconciliation of segment profit to income (loss) before tax expense.

Segment profit should not be considered a measure of financial performance in isolation or as an alternative to net income (loss) on the Consolidated Statements of Operations and Comprehensive Income (Loss) calculated 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:

(in thousands, except percentages)

PeopleReady segment profit declined $19.1 million and $46.6 million for the thirteen and thirty-nine weeks ended September 24, 2023, and also declined as a percentage of revenue, compared to the same periods in the prior year, respectively. These declines were primarily due to the decline in revenue and the relatively high level of fixed to variable costs within SG&A expense which creates higher operating leverage, as well as changes in revenue mix towards our lower margin renewable energy business.

PeopleScout segment performance was as follows:

(in thousands, except percentages)

PeopleScout segment profit declined $4.4 million and $18.3 million for the thirteen and thirty-nine weeks ended September 24, 2023, and also declined as a percentage of revenue, compared to the same periods in the prior year, respectively. These declines were a result of the decline in revenue, the effects of which were softened by our workforce reductions during each quarter of 2023 to manage our operating cost structure.

PeopleManagement segment performance was as follows:

(in thousands, except percentages)

PeopleManagement segment profit declined $2.3 million and $7.5 million for the thirteen and thirty-nine weeks ended September 24, 2023, and also declined as a percentage of revenue, compared to the same periods in the prior year, respectively. These declines were primarily due to the decline in revenue and the associated impact from higher operating leverage. We took actions during each quarter of 2023 to reduce costs for the remainder of the year.

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FUTURE OUTLOOK

The following highlights represent our operating outlook. These expectations are subject to revision as our business changes with the overall economy.

Operating outlook

• The fiscal fourth quarter of 2023 will include a 14th week, which we expect will add between $17 million and $22 million in revenue, but is expected to contribute a small net loss due to it falling during a slow demand period between the Christmas and New Year holidays.

The outlook information below is on a comparable 13-week basis:

• We expect revenue for the fiscal fourth quarter of 2023 to decline between 19% and 15% compared to the same period in the prior year, primarily due to our clients’ continued response to macroeconomic uncertainty.
• We anticipate gross profit as a percentage of revenue to remain relatively consistent for the fiscal fourth quarter of 2023 compared to the same period in the prior year.
• For the fiscal fourth quarter of 2023, we anticipate SG&A expense to be between $123 million and $127 million.
• We expect basic weighted average shares outstanding to be approximately 31 million for the fiscal fourth quarter of 2023. This expectation does not include the impact of potential share repurchases.
• We expect an income tax benefit for fiscal fourth quarter of 2023 between $4 million and $6 million. The estimated income tax benefit is primarily the result of our hiring tax credits.

Liquidity outlook

• Capital expenditures and spending for software as a service assets for the fiscal fourth quarter of 2023 are expected to be approximately $11 million. Approximately $1 million relates to spending for software as a service assets.

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LIQUIDITY AND CAPITAL RESOURCES

We believe our cash and borrowing capacity are sufficient sources of funding to meet our short and long term obligations. As of September 24, 2023, we had $47.1 million in cash and cash equivalents and no debt. We had $123.0 million available under the most restrictive covenant of our $300.0 million Revolving Credit Facility, as $7.2 million was utilized by outstanding standby letters of credit. We have an option to increase the total line of credit amount under the Revolving Credit Facility from $300.0 million to $450.0 million, subject to lender approval.

Cash generated through our core operations is our primary source of liquidity. Our principal ongoing cash needs are to finance working capital, fund capital expenditures, repay any outstanding Revolving Credit Facility balances, and execute share repurchases. We manage working capital through timely collection of accounts receivable, which we achieve through focused collection efforts and tightly monitoring trends in days sales outstanding. While client payment terms are generally 90 days or less, we pay our associates weekly, so additional financing through the use of our Revolving Credit Facility is sometimes necessary to support revenue growth. We also manage working capital through efficient cost management and strategically timing payments of accounts payable.

We continue to make investments in online and mobile apps to increase the competitive differentiation of our services over the long term and improve the efficiency of our service delivery model. In addition, we continue to transition our back-office technology from on-premise software platforms to cloud-based software solutions, to increase automation and the efficiency of running our business.

Outside of ongoing cash needed to support core operations, our insurance carriers and certain state workers’ compensation programs require us to collateralize a portion of our workers’ compensation obligation, for which they become responsible should we become insolvent. On a regular basis, these entities assess the amount of collateral they will require from us relative to our workers’ compensation obligation. Such amounts can increase or decrease independent of our assessments and reserves. We continue to have risk that these collateral requirements may be increased by our insurers due to our workers’ compensation claims history and market dynamics. We generally anticipate our collateral commitments to grow as we grow our business. We pay our premiums and deposit our collateral in installments. The collateral typically takes the form of cash and cash-backed instruments, highly rated investment grade securities, letters of credit, and surety bonds. Restricted cash and investments supporting our self-insured workers’ compensation obligation are held in a trust at the Bank of New York Mellon (“Trust”), and are used to pay workers’ compensation claims as they are filed. See Note 6: Workers' Compensation Insurance and Reserves, and Note 3: Restricted Cash and Investments, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q, for details on our workers’ compensation program as well as the restricted cash and investments held in Trust.

We have established investment policy directives for the Trust with the first priority to preserve capital, second to ensure sufficient liquidity to pay workers’ compensation claims, third to minimize risk by diversifying 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:

Total collateral commitments decreased $16.2 million during the thirty-nine week period ended September 24, 2023, primarily due to a decrease in collateral levels required by our insurance carriers, as well as the use of collateral to satisfy workers’ compensation claims. See Note 8: Commitments and Contingencies, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional details on our workers’ compensation commitments. We continue to actively manage workers’ compensation cost through improving the safety of our associates 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 the prior periods. Continued favorable adjustments to our prior year workers’ compensation liabilities are dependent on our ability to continue to lower accident rates and costs of our claims. We expect diminishing favorable adjustments to our workers’ compensation liabilities as the opportunity for significant reduction to the frequency and severity of accident rates has diminished.

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Restricted cash and investments also includes collateral to support our non-qualified deferred compensation plan in the form of company-owned life insurance policies. Our non-qualified deferred compensation plan is managed by a third-party service provider, and the investments backing the company-owned life insurance policies align with the amount and timing of payments based on employee elections.

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

(in thousands)

Cash flows from operating activities

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

Demand for our services is generally lower during the fiscal first quarter, due in part to limitations in outside work during the winter months and slowdowns in manufacturing and logistics after the fiscal fourth quarter holiday season. This results in a deleveraging of accounts receivable and accounts payable compared to the prior year-end. Accrued wages and benefits can fluctuate based on whether the period end requires the accrual of one or two weeks of payroll, the amount and timing of employee bonus payments, and timing of payroll tax payments.

In addition to the cyclical deleveraging, we experienced additional deleveraging of accounts receivable and payable due to the decline in revenue during the thirteen weeks ended September 24, 2023 as compared to the fiscal fourth quarter of 2022. Net cash provided by accounts receivable collections through deleveraging during the thirty-nine weeks ended September 24, 2023 was partially offset by net cash used for payments on accounts payable and accrued expenses. Net cash used for payments on accrued wages and benefits was primarily due to the timing and amount of annual bonus payments to employees, which are paid in the fiscal first quarter. In addition, our workers’ compensation claims reserve for estimated claims decreases as contingent labor services decline, as was the case in the current period.

Cash flows from investing activities

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

Capital expenditures for the thirty-nine weeks ended September 24, 2023 were higher than the thirty-nine weeks ended September 25, 2022 due in part to the continued investments we are making to upgrade our PeopleReady technology platform. For the thirty-nine weeks ended September 24, 2023, cash used for purchases of restricted investments was partially offset by maturities. In the prior period, cash provided by maturities of restricted investments was not immediately reinvested by the Trust, and partially offset capital expenditures.

Cash flows from financing activities

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

Net cash used in financing activities during the thirty-nine weeks ended September 24, 2023 was primarily due to the repurchase of $34.2 million of our common stock in the open market. As of September 24, 2023, $55.1 million remains available for repurchase under existing authorizations.

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 25, 2022. The following has been updated to reflect the results of our impairment analyses.

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Goodwill and indefinite-lived intangible assets

We evaluate goodwill and indefinite-lived intangible assets for impairment on an annual basis as of the first day of our fiscal second quarter, 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, legal factors, operating performance indicators, competition, client engagement, or sale or disposition of a significant portion of a reporting unit. We monitor the existence of potential impairment indicators throughout the fiscal year.

Goodwill

We test for goodwill impairment at the reporting unit level. We consider our operating segments to be our reporting units for goodwill impairment testing. Our operating segments with remaining goodwill are PeopleReady, PeopleManagement Centerline, PeopleScout RPO and PeopleScout MSP.

When evaluating goodwill for impairment, we may first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount. Qualitative factors include macroeconomic conditions, industry and market conditions and overall company financial performance. If, after assessing the totality of events and circumstances, we determine that it is more likely than not the fair value of the reporting unit is greater than its carrying amount, the quantitative impairment test is unnecessary.

The quantitative impairment test, if necessary, involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds the carrying value, we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, we recognize an impairment charge in an amount equal to the excess, not to exceed the carrying value of the goodwill. We consider a reporting unit’s fair value to be substantially in excess of its carrying value at a 20% premium or greater.

Determining the fair value of a reporting unit when performing a quantitative impairment test involves the use of significant estimates and assumptions to evaluate the impact of operational and macroeconomic changes on each reporting unit. We estimate the fair value of each reporting unit using a weighting of the income and market valuation approaches. The income approach applies a fair value methodology to each reporting unit based on discounted cash flows. This analysis requires significant estimates and judgments, including estimation of future cash flows, which is dependent on 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 develops a value correlation based on the market capitalization of similar publicly traded companies, referred to as a multiple, to apply to the operating results of the reporting units. The primary market multiples to which we compare are revenue and earnings before interest, taxes, depreciation, and amortization.

We base fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We confirm the reasonableness of the valuation conclusions by comparing the indicated values of all the reporting units to the overall company value indicated by the stock price and outstanding shares as of the valuation date, or market capitalization.

Annual impairment test

We performed our annual goodwill impairment test as of the first day of our fiscal second quarter of 2023. The weighted average cost of capital used in our most recent impairment test was risk-adjusted to reflect the specific risk profile of the reporting units and ranged from 13.0% to 13.5%. The combined fair values for all reporting units were then reconciled to our aggregate market value of our shares of common stock on the date of valuation, resulting in a control premium of 27.9%.

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As a result of our annual impairment test, we concluded that the carrying amount of the PeopleScout MSP reporting unit exceeded its fair value and we recorded a non-cash goodwill impairment charge of $8.9 million, which was included in goodwill and intangible asset impairment charge on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirty-nine weeks ended September 24, 2023. The PeopleScout MSP goodwill impairment was related to our revised internal revenue projections, which anticipated the current year declining trends would continue into future periods. These projections were updated based on our then-current outlook and a recent industry analysis, which indicated that our business would underperform due to a strategic lack of investment in technology within an increasingly competitive market. The remaining goodwill balance for PeopleScout MSP was $0.8 million as of September 24, 2023. Any further declines in PeopleScout MSP revenue, in excess of our projections used in the annual impairment test, could give rise to an additional impairment. Based on our annual impairment test, we concluded the fair value of all other reporting units were substantially in excess of their carrying value, and the goodwill associated with those reporting units was not impaired.

Operating results have declined compared to our expectations as of the date of the annual impairment test; however, we did not identify any events or conditions that make it more likely than not that an additional impairment may have occurred during the thirty-nine weeks ended September 24, 2023. Further declines in our projected operating performance could give rise to a future impairment. See Note 5: Goodwill and Intangible Assets, to our consolidated financial statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional details on the 2023 goodwill impairment.

There was no goodwill impairment charge recorded during fiscal 2022 nor 2021.

Indefinite-lived intangible assets

We have indefinite-lived intangible assets for trade names/trademarks related to business within our PeopleManagement and PeopleScout segments. We evaluate our indefinite-lived intangible assets for impairment on an annual basis as of the first day of our fiscal second quarter, or whenever events or circumstances make it more likely than not that an impairment may have occurred. These events or circumstances could include significant change in general economic conditions, deterioration in industry environment, changes in cost factors, declining operating performance indicators, legal factors, competition, client engagement, or sale or disposition of a significant portion of the business. We monitor the existence of potential impairment indicators throughout the fiscal year.

When evaluating indefinite-lived intangible assets for impairment, we may first assess qualitative factors to determine whether it is more likely than not the fair value of the indefinite-lived intangible is less than its carrying amount. Qualitative factors include macroeconomic conditions, industry and market conditions and overall company financial performance. If, after assessing the totality of events and circumstances, we determine that it is more likely than not the fair value of the indefinite-lived intangible is greater than its carrying amount, the quantitative impairment test is unnecessary.

The quantitative impairment test, if necessary, utilizes the relief from royalty method to determine the fair value of each of our trade names. If the carrying value exceeds the fair value, we recognize an impairment charge in an amount equal to the excess, not to exceed the carrying value. Management uses considerable judgment to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates.

Annual impairment test

We performed our annual indefinite-lived intangible asset impairment test as of the first day of our fiscal second quarter of 2023. As a result of this impairment test, we concluded that a trade name/trademark related to the PeopleManagement segment exceeded its estimated fair value and we recorded a non-cash impairment charge of $0.6 million, which was included in goodwill and intangible asset impairment charge on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the thirty-nine weeks ended September 24, 2023. The charge was primarily the result of an increase in the discount rate, as well as lower projected revenues given our then-current outlook. The remaining balance for this trade name/trademark was $3.3 million as of September 24, 2023.

The fair value of the trade name/trademark related to the PeopleScout segment was substantially in excess of its carrying value of $2.1 million, and therefore did not result in an impairment. Additionally, following performance of the annual impairment test, we did not identify any events or conditions that make it more likely than not that an additional impairment may have occurred during the thirteen or thirty-nine weeks ended September 24, 2023.

No impairment charge was recorded during fiscal 2022 nor 2021.

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Finite-lived intangible assets and other long-lived assets

We review intangible assets that have finite useful lives and other long-lived assets whenever an event or change in circumstances indicates that the carrying value of the asset may not be recoverable. Important factors that could result in an impairment review include, but are not limited to, significant underperformance relative to historical or planned operating results, or significant changes in business strategies. We estimate the recoverability of these assets by comparing the carrying amount of the asset to the future undiscounted cash flows that we expect the asset to generate. An impairment charge is recognized when the estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment charge is recognized, the carrying amount of the asset is reduced to its estimated fair value based on discounted cash flow analysis or other valuation techniques.

We did not identify any events or conditions that make it more likely than not that an impairment of our finite-lived intangible assets or other long-lived assets may have occurred during the thirteen or thirty-nine weeks ended September 24, 2023.

No impairment charge was recorded during fiscal 2022 or 2021.

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.

Our quantitative and qualitative disclosures about market risk are discussed in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022, and have not changed materially.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

During the fiscal third quarter of 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures at a reasonable assurance level, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level, as of September 24, 2023.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

The certifications required by Rule 13a-14 of the Exchange Act are filed as exhibits 31.1 and 31.2, respectively, to this Quarterly Report on Form 10-Q.

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There have been no material changes in the Company's risk factors previously disclosed in Part I, Item 1A of the Company's Annual Report filed on Form 10-K for the year ended December 25, 2022.