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EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATIONS - TrueBlue, Inc.tbi10q070217ex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - TrueBlue, Inc.tbi10q070217ex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - TrueBlue, Inc.tbi10q070217ex311.htm

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
    ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 2, 2017
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14543
____________________________________ 
TrueBlue, Inc.
(Exact name of registrant as specified in its charter)
______________________________________ 
 
Washington
 
91-1287341
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
1015 A Street, Tacoma, Washington
 
98402
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:    (253) 383-9101
______________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock no par value
 
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
 Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Emerging growth company
¨
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of July 17, 2017, there were 42,001,799 shares of the registrant’s common stock outstanding.

 



TrueBlue, Inc.
Table of Contents







 
Page - 2


PART I. FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
TRUEBLUE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)
(unaudited)
 
July 2,
2017
 
January 1,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
29,123

 
$
34,970

Accounts receivable, net of allowance for doubtful accounts of $5,186 and $5,160
337,058

 
352,606

Prepaid expenses, deposits and other current assets
18,430

 
21,373

Income tax receivable
10,094

 
18,854

Total current assets
394,705

 
427,803

Property and equipment, net
61,821

 
63,998

Restricted cash and investments
229,931

 
231,193

Deferred income taxes, net
3,229

 
6,770

Goodwill
226,191

 
224,223

Intangible assets, net
115,244

 
125,671

Other assets, net
47,752

 
50,787

Total assets
$
1,078,873

 
$
1,130,445

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued expenses
$
54,992

 
$
66,758

Accrued wages and benefits
75,222

 
79,782

Current portion of workers' compensation claims reserve
75,410


79,126

Contingent consideration

 
21,600

Current portion of long-term debt
23,989

 
2,267

Other current liabilities
1,194

 
1,602

Total current liabilities
230,807

 
251,135

Workers’ compensation claims reserve, less current portion
202,707

 
198,225

Long-term debt, less current portion
87,204

 
135,362

Other long-term liabilities
24,581

 
20,544

Total liabilities
545,299

 
605,266

 
 
 
 
Commitments and contingencies (Note 5)

 

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock, $0.131 par value, 20,000 shares authorized; No shares issued and outstanding

 

Common stock, no par value, 100,000 shares authorized; 41,982 and 42,171 shares issued and outstanding
1

 
1

Accumulated other comprehensive loss
(8,447
)
 
(11,433
)
Retained earnings
542,020

 
536,611

Total shareholders’ equity
533,574

 
525,179

Total liabilities and shareholders’ equity
$
1,078,873

 
$
1,130,445

See accompanying notes to consolidated financial statements

 
Page - 3


TRUEBLUE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
 
July 2, 2017
 
June 24, 2016
Revenue from services
$
610,122

 
$
672,612

 
$
1,178,366

 
$
1,318,592

Cost of services
454,842

 
502,688

 
883,657

 
998,156

Gross profit
155,280


169,924


294,709

 
320,436

Selling, general and administrative expense
124,754

 
135,787

 
246,598

 
266,411

Depreciation and amortization
12,287

 
11,694

 
23,461

 
22,983

Goodwill and intangible asset impairment charge

 
99,269

 

 
99,269

Income (loss) from operations
18,239


(76,826
)

24,650


(68,227
)
Interest expense
(1,296
)
 
(1,740
)
 
(2,528
)
 
(3,709
)
Interest and other income
1,451

 
853

 
2,757

 
1,803

Interest and other income (expense), net
155


(887
)

229

 
(1,906
)
Income (loss) before tax expense
18,394


(77,713
)

24,879

 
(70,133
)
Income tax expense (benefit)
5,260

 
(13,978
)
 
7,071

 
(13,366
)
Net income (loss)
$
13,134


$
(63,735
)

$
17,808

 
$
(56,767
)
 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.32

 
$
(1.53
)
 
$
0.43

 
$
(1.36
)
Diluted
$
0.31

 
$
(1.53
)
 
$
0.43

 
$
(1.36
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
41,579

 
41,688

 
41,608

 
41,595

Diluted
41,856

 
41,688

 
41,875

 
41,595

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
$
540

 
$
(307
)
 
$
2,340

 
$
2,094

Unrealized gain (loss) on investments, net of tax
(91
)
 
86

 
646

 
162

Total other comprehensive income (loss), net of tax
449


(221
)

2,986

 
2,256

Comprehensive income (loss)
$
13,583


$
(63,956
)

$
20,794

 
$
(54,511
)
See accompanying notes to consolidated financial statements
 

 
Page - 4


TRUEBLUE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
17,808

 
$
(56,767
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
23,461

 
22,983

Goodwill and intangible asset impairment charge

 
99,269

Provision for doubtful accounts
3,619

 
4,221

Stock-based compensation
5,146

 
6,042

Deferred income taxes
2,975

 
(21,404
)
Other operating activities
1,877

 
2,264

Changes in operating assets and liabilities, net of effects of acquisition of business:
 
 
 
Accounts receivable
11,925

 
116,112

Income tax receivable
8,828

 
11,238

Other assets
5,977

 
425

Accounts payable and other accrued expenses
(13,181
)
 
754

Accrued wages and benefits
(4,560
)
 
(10,897
)
Workers’ compensation claims reserve
767

 
7,838

Other liabilities
(580
)
 
2,258

Net cash provided by operating activities
64,062

 
184,336

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(9,137
)
 
(11,430
)
Acquisition of business

 
(71,863
)
Change in restricted cash and cash equivalents
8,829

 
(1,265
)
Purchases of restricted investments
(20,712
)
 
(21,076
)
Maturities of restricted investments
13,546

 
8,416

Net cash used in investing activities
(7,474
)
 
(97,218
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Purchases and retirement of common stock
(15,530
)
 

Net proceeds from stock option exercises and employee stock purchase plans
858

 
840

Common stock repurchases for taxes upon vesting of restricted stock
(2,873
)
 
(2,321
)
Net change in Revolving Credit Facility
(25,303
)
 
(94,186
)
Payments on debt
(1,133
)
 
(1,133
)
Payment of contingent consideration at acquisition date fair value
(18,300
)
 

Other

 
25

Net cash used in financing activities
(62,281
)
 
(96,775
)
Effect of exchange rate changes on cash and cash equivalents
(154
)
 
1,648

Net change in cash and cash equivalents
(5,847
)
 
(8,009
)
Cash and cash equivalents, beginning of period
34,970

 
29,781

Cash and cash equivalents, end of period
$
29,123

 
$
21,772

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid (received) during the period for:
 
 
 
Interest
$
1,549

 
$
1,981

Income taxes
(4,740
)
 
(3,845
)
Non-cash transactions:
 
 
 
Property, plant, and equipment purchased but not yet paid
2,888

 
1,961

Non-cash acquisition adjustments

 
3,783

See accompanying notes to consolidated financial statements

 
Page - 5


TRUEBLUE, INC.
Notes to Consolidated Financial Statements
NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statement preparation
The accompanying unaudited consolidated financial statements (“financial statements”) of TrueBlue, Inc. (the “Company,” “TrueBlue,” “we,” “us,” and “our”) are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures usually found in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The financial statements reflect all adjustments which, in the opinion of management, are necessary to fairly state the financial statements for the interim periods presented. We follow the same accounting policies for preparing both quarterly and annual financial statements.

These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2017. The results of operations for the twenty-six weeks ended July 2, 2017, are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.

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 second fiscal quarter, and more frequently if an event occurs or circumstances change that would indicate impairment may exist. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, customer 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.
Based on our annual goodwill impairment test performed as of the first day of our second fiscal quarter, all reporting units’ fair values were substantially in excess of their respective carrying values. We consider a reporting unit’s fair value to be substantially in excess of its carrying value at a 20% premium or greater. Accordingly, no impairment loss was recognized for the thirteen weeks ended July 2, 2017. Based on our test performed in the prior year, we recorded a goodwill impairment charge of $65.9 million for the thirteen weeks ended June 24, 2016.

We performed our annual indefinite-lived intangible asset impairment test as of the first day of our second fiscal quarter and determined that the estimated fair values exceeded the carrying amounts for both of our indefinite-lived trade names. Accordingly, no impairment loss was recognized for the thirteen weeks ended July 2, 2017. Based on our test performed in the prior year, we recorded an impairment charge of $4.5 million for the thirteen weeks ended June 24, 2016.

Recently adopted accounting standards

In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance to simplify the subsequent measurement of goodwill by eliminating the requirement to perform a Step 2 impairment test to compute the implied fair value of goodwill. Instead, companies will only compare the fair value of a reporting unit to its carrying value (Step 1) and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized may not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This amended guidance is effective for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We early adopted this guidance for our fiscal 2017 annual impairment test. The adoption of the new standard did not have any impact to our consolidated financial statements.

Recently issued accounting pronouncements not yet adopted

In May 2017, the FASB issued guidance to provide clarity and reduce diversity in practice when accounting for a change to the terms or conditions of share-based payment awards. The objective is to reduce the scope of transactions that would require modification accounting. Disclosure requirements remain unchanged. This amended guidance is effective for fiscal years and interim periods beginning after December 15, 2017 (Q1 2018 for TrueBlue), with early adoption permitted. We plan to adopt this guidance on the effective date and do not expect the adoption of this guidance to have a material impact on our financial statements.

 
Page - 6

 
Notes to Consolidated Financial Statements—(Continued)



In November 2016, the FASB issued guidance to amend the presentation of restricted cash and restricted cash equivalents on the statement of cash flows. The standard requires restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This amended guidance is effective for fiscal years and interim periods beginning after December 15, 2017 (Q1 2018 for TrueBlue), with early adoption permitted. We plan to adopt this guidance on the effective date. Changes in restricted cash and cash equivalents recorded in cash flows from investing were $8.8 million and $1.3 million for the twenty-six weeks ended July 2, 2017 and June 24, 2016, respectively.

In October 2016, FASB issued guidance on the accounting for income tax effects of intercompany sales or transfers of assets other than inventory. The guidance requires entities to recognize the income tax impact of an intra-entity sale or transfer of an asset other than inventory when the sale or transfer occurs, rather than when the asset has been sold to an outside party. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017 (Q1 2018 for TrueBlue), with early adoption permitted. The guidance will require a modified retrospective application with a cumulative catch-up adjustment to opening retained earnings. We plan to adopt this guidance on the effective date and do not expect the adoption of this guidance to have a material impact on our financial statements.

In August 2016, the FASB issued an accounting standards update relating to how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. The update is intended to reduce the existing diversity in practice. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (Q1 2018 for TrueBlue), with early adoption permitted, including adoption in an interim period. The adoption of the amendment should be applied using the retrospective transition method, if practicable. We plan to adopt this amendment on the effective date and do not expect the adoption of this guidance to have a material impact on our financial statements.

In June 2016, the FASB issued guidance on accounting for credit losses on financial instruments. This guidance sets forth a current expected credit loss model, which requires measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and some off-balance sheet exposures, as well as trade account receivables. This guidance is effective for fiscal years beginning after December 15, 2019 (Q1 2020 for TrueBlue) with early adoption permitted no sooner than Q1 2019. A modified retrospective approach is required for all investments, except debt securities for which an other-than-temporary impairment had been recognized prior to the effective date, which will require a prospective transition approach. We plan to adopt this guidance on the effective date and are currently assessing the impact of the adoption of this guidance on our financial statements.

In February 2016, the FASB issued guidance on lease accounting. The new guidance will continue to classify leases as either finance or operating and will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet with classification affecting the pattern of expense recognition in the statement of income. This guidance is effective for annual and interim periods beginning after December 15, 2018 (Q1 2019 for TrueBlue), and early adoption is permitted. A modified retrospective approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. We plan to adopt the guidance on the effective date. We are currently evaluating the impact of this guidance on our financial statements and expect that, upon adoption, a majority of our operating lease commitments will be recognized on our Consolidated Balance Sheets as operating lease liabilities and right-of-use assets. We do not expect the adoption of this guidance to have a material impact on the pattern of expense recognition in our Consolidated Statements of Operations and Comprehensive Income (Loss).

In January 2016, the FASB issued guidance on the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The guidance is effective for annual and interim periods beginning after December 15, 2017 (Q1 2018 for TrueBlue). Early adoption of the amendments in the guidance is not permitted, with limited exceptions, and should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We plan to adopt the guidance on the effective date. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
 
In May 2014, the FASB issued guidance outlining a single comprehensive model for accounting for revenue arising from contracts with customers, which supersedes the current revenue recognition guidance. This guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from

 
Page - 7

 
Notes to Consolidated Financial Statements—(Continued)


customer contracts, including significant judgments and changes in judgments as well as assets recognized from costs incurred to obtain or fulfill a contract. The guidance provides two methods of initial adoption: retrospective for all periods presented (full retrospective), or a cumulative adjustment in the year of adoption (modified retrospective). Since the issuance of the original standard, the FASB has issued several other subsequent updates including the following: 1) clarification of the implementation guidance on principal versus agent considerations; 2) further guidance on identifying performance obligations in a contract as well as clarifications on the licensing implementation guidance; and 3) additional guidance and practical expedients in response to identified implementation issues. The effective date is for annual and interim periods beginning after December 15, 2017 (Q1 2018 for TrueBlue). We expect to adopt the guidance using the modified retrospective approach.

We established a cross-functional implementation team consisting of representatives from across our business segments and various departments. We are utilizing a bottoms-up approach to analyze the impact of the standard on our various revenue streams by reviewing our current contracts with customers, accounting policies, and business practices to identify potential differences that would result from applying the requirements of the new standard. We are in the process of identifying appropriate changes to our business processes, systems, and controls to support recognition and disclosure under the new standard.

We have been closely monitoring FASB activity related to the new standard to conclude on specific interpretive issues. We are substantially complete with our evaluation of the potential impact that adopting the new standard will have on our financial statements. Revenue on the majority of our contracts with customers will continue to be recognized over time as services are rendered. The impact of adopting this new standard will result in deferring certain contract costs and will require estimating variable consideration. We do not anticipate this will have a material impact on our financial reporting other than expanded disclosures. However, the full extent of the impact is subject to the completion of our assessment.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

Subsequent events

We evaluated events and transactions occurring after the balance sheet date through the date the financial statements were issued, and identified no other events that were subject to recognition or disclosure.
NOTE 2:
FAIR VALUE MEASUREMENT
Our assets and liabilities measured at fair value on a recurring basis consisted of the following (in thousands):
 
July 2, 2017
 
Total Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents (1)
$
29,123

 
$
29,123

 
$

 
$

Restricted cash and cash equivalents (1)
59,316

 
59,316

 

 

Other restricted assets (2)
19,891

 
19,891

 

 

Restricted investments classified as held-to-maturity
152,370

 

 
152,370

 


 
Page - 8

 
Notes to Consolidated Financial Statements—(Continued)


 
January 1, 2017
 
Total Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents (1)
$
34,970

 
$
34,970

 
$

 
$

Restricted cash and cash equivalents (1)
67,751

 
67,751

 

 

Other restricted assets (2)
16,925

 
16,925

 

 

Restricted investments classified as held-to-maturity
145,953

 

 
145,953

 

 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
Contingent consideration (3)
21,600

 

 

 
21,600


(1)
Cash equivalents and restricted cash equivalents consist of money market funds, deposits, and investments with original maturities of three months or less.
(2)
Other restricted assets primarily consist of deferred compensation plan accounts, which are comprised of mutual funds classified as available-for-sale securities.
(3)
The estimated fair value of the contingent consideration associated with the acquisition of SIMOS Insourcing Solutions Corporation (“SIMOS”), which was estimated using a probability-adjusted discounted cash flow model.

The following table presents the change in the estimated fair value of our liability for contingent consideration measured using significant unobservable inputs (Level 3) for the twenty-six weeks ended July 2, 2017 (in thousands):
Fair value measurement at beginning of period
 
$
21,600

Accretion on contingent consideration
 
900

Payment of contingent consideration
 
(22,500
)
Fair value measurement at end of period
 
$

During the second quarter of 2017, we paid $22.5 million relating to the contingent consideration associated with our acquisition of SIMOS. The purchase price fair value of the contingent consideration of $18.3 million is reflected in cash flows used in financing activities and the remaining balance of $4.2 million is recognized in cash flows used in operating activities as a decrease in Other assets and liabilities.

The preliminary achievement of the defined performance milestone occurred in the fourth quarter of 2016; however, the final determination was subject to a verification period through the payout date in the second quarter of 2017. Amortization of the present value discount was recorded in Interest expense on the Consolidated Statements of Operations and Comprehensive Income (Loss).

There were no material transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the twenty-six weeks ended July 2, 2017 or June 24, 2016.
NOTE 3:
RESTRICTED CASH AND INVESTMENTS

Restricted cash and investments consist principally of collateral that has been provided or pledged to insurance carriers for workers’ compensation and state workers’ compensation programs. Our insurance carriers and certain state workers’ compensation programs require us to collateralize a portion of our workers’ compensation obligation. The collateral typically takes the form of cash and cash equivalents and highly rated investment grade securities, primarily in debt and asset-backed securities. The majority of our collateral obligations are held in a trust at the Bank of New York Mellon (“Trust”). Our investments have not resulted in any other-than-temporary impairments.

 
Page - 9

 
Notes to Consolidated Financial Statements—(Continued)


The following is a summary of our restricted cash and investments (in thousands):
 
July 2,
2017
 
January 1,
2017
Cash collateral held by insurance carriers
$
28,737

 
$
34,910

Cash and cash equivalents held in Trust
30,579

 
32,841

Investments held in Trust
150,724

 
146,517

Other (1)
19,891

 
16,925

Total restricted cash and investments
$
229,931

 
$
231,193


(1)
Primarily consists of deferred compensation plan accounts, which are comprised of mutual funds classified as available-for-sale securities.
The following tables present fair value disclosures for our held-to-maturity investments, which are carried at amortized cost (in thousands):
 
July 2, 2017
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
Municipal debt securities
$
77,573

 
$
1,583

 
$
(297
)
 
$
78,859

Corporate debt securities
67,204

 
474

 
(158
)
 
67,520

Agency mortgage-backed securities
4,948

 
38

 
(18
)
 
4,968

U.S. government and agency securities
999

 
24

 

 
1,023

 
$
150,724

 
$
2,119

 
$
(473
)
 
$
152,370

 
January 1, 2017
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
Municipal debt securities
$
71,618

 
$
443

 
$
(865
)
 
$
71,196

Corporate debt securities
68,934

 
212

 
(352
)
 
68,794

Agency mortgage-backed securities
5,965

 
30

 
(32
)
 
5,963

 
$
146,517

 
$
685

 
$
(1,249
)
 
$
145,953

The amortized cost and fair value by contractual maturity of our held-to-maturity investments are as follows (in thousands):
 
July 2, 2017
 
Amortized Cost
 
Fair Value
Due in one year or less
$
14,581

 
$
14,597

Due after one year through five years
72,477

 
73,070

Due after five years through ten years
63,666

 
64,703

 
$
150,724

 
$
152,370

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.
NOTE 4:WORKERS’ COMPENSATION INSURANCE AND RESERVES

We provide workers’ compensation insurance for our temporary and permanent employees. The majority of our current workers’ compensation insurance policies cover claims for a particular event above a $2.0 million deductible limit, on a “per occurrence” basis. This results in our being substantially self-insured.
Our workers’ compensation reserve for claims below the deductible limit is discounted to its estimated net present value using discount rates based on average returns of “risk-free” U.S. Treasury instruments available during the year in which the liability was incurred. The weighted average discount rate was 1.6% at July 2, 2017 and January 1, 2017. Payments made against self-insured claims are made over a weighted average period of approximately 4.5 years at July 2, 2017.

 
Page - 10

 
Notes to Consolidated Financial Statements—(Continued)


The table below presents a reconciliation of the undiscounted workers’ compensation reserve to the discounted workers’ compensation reserve for the periods presented (in thousands):
 
July 2,
2017
 
January 1,
2017
Undiscounted workers’ compensation reserve
$
293,927

 
$
292,169

Less discount on workers’ compensation reserve
15,810

 
14,818

Workers' compensation reserve, net of discount
278,117

 
277,351

Less current portion
75,410

 
79,126

Long-term portion
$
202,707

 
$
198,225

Payments made against self-insured claims were $31.5 million and $37.2 million for the twenty-six weeks ended July 2, 2017 and June 24, 2016, respectively.
Our workers’ compensation reserve includes estimated expenses related to claims above our self-insured limits (“excess claims”), and we record a corresponding receivable for the insurance coverage on excess claims based on the contractual policy agreements we have with insurance carriers. We discount this reserve and corresponding receivable to its estimated net present value using the discount rates based on average returns of “risk-free” U.S. Treasury instruments available during the year in which the liability was incurred. The claim payments are made and the corresponding reimbursements from our insurance carriers are received over an estimated weighted average period of approximately 15 years. The discounted workers’ compensation reserve for excess claims was $51.0 million and $52.9 million as of July 2, 2017 and January 1, 2017, respectively. The discounted receivables from insurance companies, net of valuation allowance, were $46.3 million and $48.9 million as of July 2, 2017 and January 1, 2017, respectively, and are included in Other assets, net on the accompanying Consolidated Balance Sheets.
Workers’ compensation expense of $22.3 million and $24.6 million was recorded in Cost of services for the thirteen weeks ended July 2, 2017 and June 24, 2016, respectively. Workers’ compensation expense of $42.1 million and $48.7 million was recorded in Cost of services for the twenty-six weeks ended July 2, 2017 and June 24, 2016, respectively.
NOTE 5:
COMMITMENTS AND CONTINGENCIES

Workers’ compensation commitments

We have provided our insurance carriers and certain states with commitments in the form and amounts listed below (in thousands):
 
July 2,
2017
 
January 1,
2017
Cash collateral held by workers’ compensation insurance carriers
$
28,098

 
$
28,066

Cash and cash equivalents held in Trust
30,579

 
32,841

Investments held in Trust
150,724

 
146,517

Letters of credit (1)
7,783

 
7,982

Surety bonds (2)
20,605

 
20,440

Total collateral commitments
$
237,789

 
$
235,846


(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.
Legal contingencies and developments
We are involved in various proceedings arising in the normal course of conducting business. We believe the liabilities included in our financial statements reflect the probable loss that can be reasonably estimated. The resolution of those proceedings is not expected to have a material effect on our results of operations or financial condition.

 
Page - 11

 
Notes to Consolidated Financial Statements—(Continued)


NOTE 6:
INCOME TAXES

Our tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment. Our quarterly tax provision and our quarterly estimate of our annual effective tax rate are subject to variation due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, tax credits, audit developments, changes in law, regulations and administrative practices, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of discrete items, tax credits, and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower. Except as required under U.S. tax law, we do not provide for U.S. taxes on undistributed earnings of our foreign subsidiaries since we consider those earnings to be permanently invested outside of the U.S.

Our effective tax rate for the twenty-six weeks ended July 2, 2017 was 28.4%. The principal difference between the statutory federal income tax rate of 35.0% and our effective income tax rate results primarily from the federal Work Opportunity Tax Credit. This tax credit is designed to encourage employers to hire workers from certain targeted groups with higher than average unemployment rates. Other differences between the statutory federal income tax rate of 35.0% and our effective tax rate result from state and foreign income taxes, certain non-deductible expenses, tax exempt interest, and tax effects of share based compensation.
NOTE 7:
NET INCOME (LOSS) PER SHARE

Diluted common shares were calculated as follows (in thousands, except per share amounts):
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
 
July 2, 2017
 
June 24, 2016
Net income (loss)
$
13,134

 
$
(63,735
)
 
$
17,808

 
$
(56,767
)
 
 
 
 
 
 
 
 
Weighted average number of common shares used in basic net income (loss) per common share
41,579

 
41,688

 
41,608

 
41,595

Dilutive effect of non-vested restricted stock
277

 

 
267

 

Weighted average number of common shares used in diluted net income (loss) per common share
41,856


41,688


41,875

 
41,595

Net income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.32

 
$
(1.53
)
 
$
0.43

 
$
(1.36
)
Diluted
$
0.31

 
$
(1.53
)
 
$
0.43

 
$
(1.36
)
 
 
 
 
 
 
 
 
Anti-dilutive shares
60

 
527

 
183

 
446


 
Page - 12

 
Notes to Consolidated Financial Statements—(Continued)


NOTE 8:
ACCUMULATED OTHER COMPREHENSIVE LOSS

Changes in the balance of each component of accumulated other comprehensive loss during the reporting periods were as follows (in thousands):
 
Thirteen weeks ended
 
July 2, 2017
 
June 24, 2016
 
Balance at beginning of period
 
Current period other comprehensive income (loss)
 
Balance at end of period
 
Balance at beginning of period
 
Current period other comprehensive income (loss)
 
Balance at end of period
Foreign currency translation adjustment
$
(9,884
)
 
$
540

 
$
(9,344
)
 
$
(11,113
)
 
$
(307
)
 
$
(11,420
)
Unrealized gain (loss) on investments (1)
988

 
(91
)
 
897

 
(423
)
 
86

 
(337
)
Total other comprehensive income (loss), net of tax
$
(8,896
)
 
$
449

 
$
(8,447
)
 
$
(11,536
)
 
$
(221
)
 
$
(11,757
)
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
 
Balance at beginning of period
 
Current period other comprehensive income
 
Balance at end of period
 
Balance at beginning of period
 
Current period other comprehensive income
 
Balance at end of period
Foreign currency translation adjustment
$
(11,684
)
 
$
2,340

 
$
(9,344
)
 
$
(13,514
)
 
$
2,094

 
$
(11,420
)
Unrealized gain (loss) on investments (1)
251

 
646

 
897

 
(499
)
 
162

 
(337
)
Total other comprehensive income (loss), net of tax
$
(11,433
)
 
$
2,986

 
$
(8,447
)
 
$
(14,013
)
 
$
2,256

 
$
(11,757
)

(1)
Consists of deferred compensation plan accounts, which are comprised of mutual funds classified as available-for-sale securities. The tax impact on unrealized gain (loss) on available-for-sale securities was de minimis for the thirteen and twenty-six weeks ended July 2, 2017 and June 24, 2016, respectively.

There were no material reclassifications out of accumulated other comprehensive loss during the thirteen weeks ended July 2, 2017 or June 24, 2016, nor during the twenty-six weeks ended July 2, 2017 or June 24, 2016.
NOTE 9:
SEGMENT INFORMATION

Commencing in the fourth quarter of 2016, we changed our internal reporting structure to better align our operations with customer needs and how our chief operating decision maker, our Chief Executive Officer, currently evaluates financial results to determine resource allocation and assess performance. As a result of this change, our former Staffing Services reportable segment has been separated into two reportable segments, PeopleReady and PeopleManagement, and our former Managed Services reportable segment has been renamed PeopleScout. In addition, we changed our methodology for allocating certain corporate costs to our segments, which decreased our corporate unallocated expenses. The prior year amounts have been recast to reflect this change for consistency purposes.

Our service lines, which are our operating segments, and our reportable segments are described below:

Our PeopleReady reportable segment provides blue-collar contingent staffing through the PeopleReady service line. PeopleReady provides on-demand and skilled labor in the retail, manufacturing, warehousing, logistics, energy, construction, hospitality, and other industries.
Our PeopleManagement reportable segment provides primarily on-premise contingent staffing and on-premise management of those contingent staffing services through the following operating segments, which we aggregated into one reportable segment in accordance with U.S. GAAP:
Staff Management | SMX: Exclusive recruitment and on-premise management of a facility’s contingent industrial workforce;

 
Page - 13

 
Notes to Consolidated Financial Statements—(Continued)


SIMOS Insourcing Solutions: On-premise management and recruitment of warehouse/distribution operations;
Centerline Drivers: Recruitment and management of temporary and dedicated drivers to the transportation and distribution industries; and
PlaneTechs: Skilled mechanics and technicians, including on-premise management thereof, to the aviation and transportation industries.

Our PeopleScout reportable segment provides high-volume permanent employee recruitment process outsourcing and management of outsourced labor service providers through the following operating segments, which we aggregated into one reportable segment in accordance with U.S. GAAP:
PeopleScout: Outsourced recruitment of permanent employees on behalf of clients; and
PeopleScout MSP: Management of multiple third party staffing vendors on behalf of clients.

We have two primary measures of segment performance: revenue from services and segment earnings before interest, taxes, depreciation and amortization (“Segment EBITDA”). Segment EBITDA includes net sales to third parties, related cost of sales, and selling, general and administrative expenses directly attributable to the reportable segment together with certain allocated corporate general and administrative expenses. Segment EBITDA excludes unallocated corporate general and administrative expenses.

The following table presents a reconciliation of segment revenue from services to total company revenue (in thousands):
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
 
July 2, 2017

June 24, 2016
Revenue from services:
 
 
 
 
 
 
 
PeopleReady
$
370,712

 
$
406,274

 
$
703,336

 
$
762,284

PeopleManagement
192,887

 
219,344

 
384,573

 
465,771

PeopleScout
46,523

 
46,994

 
90,457

 
90,537

Total Company
$
610,122


$
672,612


$
1,178,366

 
$
1,318,592


The following table presents a reconciliation of Segment EBITDA to income (loss) before tax expense (in thousands):
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
 
July 2, 2017
 
June 24, 2016
Segment EBITDA (1):
 
 
 
 
 
 
 
PeopleReady
$
19,154

 
$
29,543

 
$
28,876

 
$
41,098

PeopleManagement
6,286

 
(80,091
)
 
11,819

 
(73,738
)
PeopleScout
10,129

 
(3,841
)
 
18,794

 
4,169

 
35,569

 
(54,389
)
 
59,489

 
(28,471
)
Corporate unallocated
(5,043
)
 
(10,743
)
 
(11,378
)
 
(16,773
)
Depreciation and amortization
(12,287
)
 
(11,694
)
 
(23,461
)
 
(22,983
)
Income (loss) from operations
18,239

 
(76,826
)
 
24,650

 
(68,227
)
Interest and other income (expense), net
155

 
(887
)
 
229

 
(1,906
)
Income (loss) before tax expense
$
18,394

 
$
(77,713
)
 
$
24,879

 
$
(70,133
)

(1)
Segment EBITDA was previously referred to as segment income (loss) from operations. This change had no impact on the amounts reported.

Asset information by reportable segment is not presented since we do not manage our segments on a balance sheet basis.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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

 
Page - 14


“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “goal,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from those expressed or implied in our forward-looking statements, including the risks and uncertainties described in “Risk Factors” (Part II, Item 1A of this Form 10-Q), “Quantitative and Qualitative Disclosures about Market Risk” (Part I, Item 3 of this Form 10-Q), and “Management’s Discussion and Analysis” (Part I, Item 2 of this Form 10-Q). We undertake no duty to update or revise publicly any of the forward-looking statements after the date of this report or to conform such statements to actual results or to changes in our expectations, whether because of new information, future events, or otherwise.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide the reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect future results. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the fiscal year ended January 1, 2017. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to our financial statements.
OVERVIEW

TrueBlue, Inc. (the “Company,” “TrueBlue,” “we,” “us,” and “our”) is a leading provider of specialized workforce solutions that help our clients create growth, improve efficiency, and increase reliability. Our workforce solutions meet clients’ needs for a reliable, efficient workforce in a wide variety of industries. We report our business as three distinct segments: PeopleReady; PeopleManagement; and PeopleScout. See Note 9: Segment Information, to our Consolidated Financial Statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional details of our service lines and reportable segments.

segmentscroppeda03.jpg

PeopleReady is our branch-based blue-collar industrial staffing service. PeopleReady provides a wide range of staffing solutions for contingent, on-demand, general and skilled labor to a broad range of industries that include retail, manufacturing, warehousing, logistics, energy, construction, hospitality, and others. PeopleReady helped approximately 122,000 businesses in 2016 to be more productive by providing easy access to dependable contingent labor. Additionally, we connected over 414,000 people with work in 2016. At the end of the second quarter, we had a network of 625 branches across all 50 states, Puerto Rico, and Canada.

PeopleManagement predominantly encompasses our on-site placement and management services and provides a wide range of workforce management solutions for blue-collar, contingent, on-premise staffing and management of a facility’s workforce. We use distinct brands to market our PeopleManagement contingent workforce solutions and operate as Staff Management | SMX (“Staff Management”), SIMOS Insourcing Solutions (“SIMOS”), PlaneTechs, and Centerline Drivers. Staff Management specializes in exclusive recruitment and on-premise management of a facility’s contingent industrial workforce. SIMOS specializes in exclusive recruitment and on-premise management of warehouse/distribution operations to meet the growing demand for e-commerce and scalable supply chain solutions. PlaneTechs specializes in temporary skilled mechanics and technicians, including on-premise management thereof, to the aviation and transportation industries. Centerline Drivers specializes in dedicated and temporary truck drivers to the transportation and distribution industries. PeopleManagement helped approximately 900 businesses in 2016 to be more productive by providing easy access to

 
Page - 15


dependable blue-collar contingent workforce solutions. Additionally, we connected over 133,000 people with work in 2016. At the end of the second quarter, we had 242 on-premise locations at customers’ facilities.

PeopleScout provides outsourced recruitment for permanent employees for all major industries and jobs. Our dedicated recruitment process outsourcing service delivery teams work as an integrated partner with our customers in providing end-to-end talent acquisition services from sourcing candidates to on-boarding employees. In 2016, PeopleScout placed over 268,000 individuals into permanent jobs with 200 customers. Our PeopleScout segment also includes a management service provider business, which provides customers with improved quality and spend management of their contingent labor vendors.

Total company revenue declined to $610 million for the thirteen weeks ended July 2, 2017, a 9.3% decrease compared to the same period in the prior year due primarily to lower volumes for staffing services within our PeopleReady business and with our former largest customer, Amazon. Excluding this customer, total company revenue declined 5.2% from the same period in the prior year.

PeopleReady staffing services experienced weakness in the construction, manufacturing, retail industries, and various other service industries in many of the geographies we serve, as well as both national and local accounts. Demand for our temporary staffing services is largely dependent upon general economic and labor trends. Wage growth has accelerated due to various minimum wage increases, which are more concentrated at the beginning of the year, as well as a need for higher wages to attract talent in tight labor markets. We have increased bill rates for higher wages and associated payroll burdens, as well as our traditional mark-up. While we believe our pricing strategy is the right long-term decision, these actions do impact our revenue trends in the near term as businesses make their own pricing and productivity related adjustments.

PeopleManagement staffing services revenue declined by 12.1%, but delivered growth of 1.8% excluding our former largest customer. Revenue from this customer declined by $30 million or 79.7% to $8 million for the thirteen weeks ended July 2, 2017, compared to the same period in the prior year. This customer substantially in-sourced the recruitment and management of contingent labor for their warehouse fulfillment centers and distribution sites in the United States, commencing in the second quarter of fiscal 2016. Excluding this customer, revenue trends improved with modest increases in demand from existing and new customers. We continued to experience strong demand in the e-commerce industry and have expanded our services to existing customers, as well as new customers, which will drive future growth.
PeopleScout revenue declined to $47 million for the thirteen weeks ended July 2, 2017, a 1.0% decrease compared to the same period in the prior year. The decline is primarily due to reduced demand from several significant customers as they respond to changing business conditions. This was partially offset by growing demand in a tightening labor market for permanent positions from customers in other industries as well as winning new customers which will drive future growth.
Total company gross profit as a percentage of revenue for the thirteen weeks ended July 2, 2017 was 25.5%, compared to 25.3% in the same period in the prior year. The slight increase was primarily due to continued focus on disciplined pricing of our PeopleReady and PeopleManagement industrial staffing services.

Total company selling, general and administrative ("SG&A") expense decreased by $11 million to $125 million for the thirteen weeks ended July 2, 2017, compared to the same period in the prior year, due to continued success of our cost management programs. Total company SG&A expense as a percentage of revenue increased to 20.4% for the thirteen weeks ended July 2, 2017, from 20.2% in the same period in the prior year. The revenue decline outpaced the decline in operating expenses. With the decline in revenues, we put in place cost control programs commencing in the prior year, which continued in the current year, and have reduced costs in line with our plans. However, we will continue to monitor and manage our SG&A costs.

Total company income from operations was $18 million or 3.0% as a percent of revenue for the thirteen weeks ended July 2, 2017, compared to a loss of $77 million in the same period in the prior year. The prior year loss included a non-cash goodwill and intangible impairment charge to operating expense of $99 million. The impairment was primarily driven by a change in the scope of services with our largest customer and other changes in outlook reflecting recent economic and industry conditions. Excluding the impairment charge, net income from operations was $22 million or 3.3% as a percent of revenue for the thirteen weeks ended June 24, 2016. Excluding this charge, the decrease in income from operations was primarily due to the decline in revenue, partially offset by disciplined pricing which improved gross margin performance and the success of our cost management programs.

Net income was $13 million, or $0.31 per diluted share for the thirteen weeks ended July 2, 2017, compared to net loss of $64 million, or $1.53 per diluted share in the same period in the prior year. The prior year results include the impairment charge of $99.3 million, which is equivalent to $80 million after tax or $1.91 per diluted share. Excluding the impairment charge, net income would have been $16 million or $0.38 per diluted share.

 
Page - 16


 
We believe we are taking the right steps to preserve our operating margin and produce long-term growth for shareholders. We also believe we are in a strong financial position to fund working capital needs for growth opportunities. As of July 2, 2017, we had cash and cash equivalents of $29 million and $128 million available under the Second Amended and Restated Revolving Credit Agreement for a secured revolving credit facility ("Revolving Credit Facility") for total liquidity of $157 million.
RESULTS OF OPERATIONS
Total company results
The following table presents selected financial data (in thousands, except percentages and per share amounts):
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2,
2017
 
% of revenue
 
June 24,
2016
 
% of revenue
 
July 2,
2017
 
% of revenue
 
June 24,
2016
 
% of revenue
Revenue from services
$
610,122

 
 
 
$
672,612

 
 
 
$
1,178,366

 
 
 
$
1,318,592

 
 
Total revenue growth (decline) %
(9.3
)%
 
 
 
7.2
%
 
 
 
(10.6
)%
 
 
 
9.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
$
155,280

 
25.5
%
 
$
169,924

 
25.3
 %
 
$
294,709

 
25.0
%
 
$
320,436

 
24.3
 %
Selling, general and administrative expense
124,754

 
20.4
%
 
135,787

 
20.2
 %
 
246,598

 
20.9
%
 
266,411

 
20.2
 %
Depreciation and amortization
12,287

 
2.0
%
 
11,694

 
1.7
 %
 
23,461

 
2.0
%
 
22,983

 
1.7
 %
Goodwill and intangible asset impairment charge

 
%
 
99,269

 
14.8
 %
 

 
%
 
99,269

 
7.5
 %
Income (loss) from operations
18,239

 
3.0
%
 
(76,826
)
 
(11.4
)%
 
24,650

 
2.1
%
 
(68,227
)
 
(5.2
)%
Interest and other income (expense), net
155

 
 
 
(887
)
 
 
 
229

 
 
 
(1,906
)
 
 
Income (loss) before tax expense
18,394

 
 
 
(77,713
)
 
 
 
24,879





(70,133
)
 
 
Income tax expense (benefit)
5,260

 
 
 
(13,978
)
 
 
 
7,071

 
 
 
(13,366
)
 
 
Net income (loss)
$
13,134

 
2.2
%
 
$
(63,735
)
 
(9.5
)%
 
$
17,808

 
1.5
%
 
$
(56,767
)
 
(4.3
)%
Net income (loss) per diluted share
$
0.31

 
 
 
$
(1.53
)
 
 
 
$
0.43

 
 
 
$
(1.36
)
 
 
Revenue from services

Revenue from services by reportable segment was as follows for the thirteen weeks and twenty-six weeks ended July 2, 2017 (in thousands, except percentages):
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2, 2017
 
Decline %
 
Segment % of Total
 
June 24, 2016
 
Segment % of Total
 
July 2, 2017
 
Decline %
 
Segment % of Total
 
June 24, 2016
 
Segment % of Total
Revenue from services
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PeopleReady
$
370,712

 
(8.8
)%
 
60.8
%
 
$
406,274

 
60.4
%
 
$
703,336

 
(7.7
)%
 
59.7
%
 
$
762,284

 
57.8
%
PeopleManagement
192,887

 
(12.1
)%
 
31.6
%
 
219,344

 
32.6
%
 
384,573

 
(17.4
)%
 
32.6
%
 
465,771

 
35.3
%
PeopleScout
46,523

 
(1.0
)%
 
7.6
%
 
46,994

 
7.0
%
 
90,457

 
(0.1
)%
 
7.7
%
 
90,537

 
6.9
%
          Total Company
$
610,122

 
(9.3
)%
 
100.0
%
 
$
672,612

 
100.0
%
 
$
1,178,366

 
(10.6
)%
 
100.0
%
 
$
1,318,592

 
100.0
%

Total company revenue declined to $610 million for the thirteen weeks ended July 2, 2017, a 9.3% decrease compared to the same period in the prior year. Total company revenue declined to $1.2 billion for the twenty-six weeks ended July 2, 2017, a 10.6% decrease compared to the same period in the prior year. The decrease is primarily due to lower volumes for staffing services within our PeopleReady business and with our former largest customer, Amazon. Excluding this customer, total company revenue declined 5.2% for the thirteen weeks ended July 2, 2017 and 4.3% for the twenty-six weeks ended July 2, 2017.

PeopleReady
PeopleReady revenue declined to $371 million for the thirteen weeks ended July 2, 2017, an 8.8% decrease compared to the same period in the prior year. Revenue declined to $703 million for the twenty-six weeks ended July 2, 2017, a 7.7% decrease compared to the same period in the prior year. PeopleReady staffing services experienced weakness in the construction, manufacturing, retail industries and various other service industries in many of the geographies we serve as well as both national and local accounts. Demand for our temporary staffing services is largely dependent upon general economic and labor trends. Wage growth has accelerated due to various minimum wage increases, which are more concentrated at the beginning of the year, as well as a need for higher wages

 
Page - 17


to attract talent in tight labor markets. We have increased bill rates for higher wages and associated payroll burdens, as well as our traditional mark-up. While we believe our pricing strategy is the right long-term decision, these actions do impact our revenue trends in the near term as businesses make their own pricing and productivity related adjustments.

PeopleManagement

PeopleManagement revenue declined to $193 million for the thirteen weeks ended July 2, 2017, a 12.1% decrease compared to the same period in the prior year. PeopleManagement revenue declined to $385 million for the twenty-six weeks ended July 2, 2017, a 17.4% decrease compared to the same period in the prior year. Excluding our former largest customer, PeopleManagement delivered growth of 1.8% for the thirteen and twenty-six weeks ended July 2, 2017. Revenue from this customer declined by $30 million or 79.7% to $8 million for the thirteen weeks ended July 2, 2017, and declined by $88 million, or 83.0% for the twenty-six weeks ended July 2, 2017, compared to their respective prior year periods. This customer substantially in-sourced the recruitment and management of contingent labor for their warehouse fulfillment centers and distribution sites in the United States, commencing in the second quarter of fiscal 2016. Excluding this customer, revenue trends improved with modest increases in demand from existing and new customers. We continued to experience strong demand in the e-commerce industry and have expanded our services to existing customers, as well as new customers, which will drive future growth.

PeopleScout
PeopleScout revenue declined to $47 million for the thirteen weeks ended July 2, 2017, a 1.0% decrease compared to the same period in the prior year. PeopleScout revenue declined to $90 million for the twenty-six weeks ended July 2, 2017, a 0.1% decrease compared to the same period in the prior year. The decline is primarily due to reduced demand from several significant customers as they respond to changing business conditions. This was partially offset by a growing demand in a tightening labor market for permanent positions from customers in other industries as well as winning new customers which will drive future growth.
Gross profit
Gross profit was as follows for thirteen weeks and twenty-six weeks ended July 2, 2017 (in thousands, except percentages):
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
 
July 2, 2017
 
June 24, 2016
Gross profit
$
155,280

 
$
169,924

 
$
294,709

 
$
320,436

Percentage of revenue
25.5
%
 
25.3
%
 
25.0
%
 
24.3
%

Total company gross profit as a percentage of revenue for the thirteen weeks ended July 2, 2017 was 25.5%, compared to 25.3% in the same period in the prior year. The increase of 0.2% was due primarily to favorable mix with less revenue from our former largest customer, which carries a lower gross margin than the blended average, and a continued focus on disciplined pricing of our PeopleReady and PeopleManagement industrial staffing services.
Total company gross profit as a percentage of revenue for the twenty-six weeks ended July 2, 2017 was 25.0%, compared to 24.3% in the same period in the prior year. The increase of 0.7% was due primarily to favorable mix with less revenue from our former largest customer, which carries a lower gross margin than the blended average, a continued focus on disciplined pricing of our PeopleReady and PeopleManagement industrial staffing services, and additional efficiency gains in the sourcing and recruiting activities of PeopleScout.
Workers’ compensation expense as a percentage of revenue was 3.7% for the thirteen weeks ended July 2, 2017 and the same period in the prior year. Workers’ compensation expense as a percentage of revenue was 3.6% for the twenty-six weeks ended July 2, 2017, compared to 3.7% in the same period in the prior year. Our continuous efforts to actively manage the safety of our temporary workers with our safety programs and control increasing costs with our network of workers’ compensation service providers have had a positive impact and have created favorable adjustments to our workers’ compensation liabilities recorded in prior periods. Continued favorable adjustments to our workers’ compensation liabilities are dependent on our ability to continue to lower accident rates and claim costs.

 
Page - 18


Selling, general and administrative expense
Selling, general and administrative ("SG&A") expense for thirteen weeks and twenty-six weeks ended July 2, 2017 was as follows (in thousands, except percentages):
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
 
July 2, 2017
 
June 24, 2016
Selling, general and administrative expense
$
124,754

 
$
135,787

 
$
246,598

 
$
266,411

Percentage of revenue
20.4
%
 
20.2
%
 
20.9
%
 
20.2
%

Total company SG&A expense decreased by $11 million to $125 million for the thirteen weeks ended July 2, 2017, compared to the same period in the prior year due to continued progress in managing costs. Total company SG&A expense as a percentage of revenue increased to 20.4% for the thirteen weeks ended July 2, 2017, from 20.2% in the same period in the prior year. The revenue declines outpaced the decline in operating expenses. With the decline in revenues, we have reduced costs in line with our plans. However, we will continue to monitor and manage our SG&A costs.

Total company SG&A expense decreased by $20 million to $247 million for the twenty-six weeks ended July 2, 2017, compared to the same period in the prior year due to continued progress in managing costs. Total company SG&A expense as a percentage of revenue increased to 20.9% for the twenty-six weeks ended July 2, 2017, from 20.2% in the same period in the prior year. The rate at which revenue declines outpaced the decline in operating expenses has slowed with the success of our cost reduction programs.
Goodwill and Intangible Asset Impairment Charge
Goodwill and intangible asset impairment charge was as follows for thirteen weeks and twenty-six weeks ended July 2, 2017 (in thousands, except percentages):
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
 
July 2, 2017
 
June 24, 2016
Goodwill and intangible asset impairment charge
$

 
$
99,269

 
$

 
$
99,269

Percentage of revenue
%
 
14.8
%
 
%
 
7.5
%

Net loss from operations for the thirteen and twenty-six weeks ended June 24, 2016, includes a non-cash goodwill and intangible impairment charge to operating expense of $99 million. The impairment was primarily driven by a change in the scope of services with our former largest customer and other changes in outlook reflecting recent economic and industry conditions.

We test goodwill and indefinite-lived intangible assets for impairment annually on the first day of our second fiscal quarter and whenever events or circumstances arise that indicate an impairment may exist, such as the loss of key customers and adverse industry and economic conditions.
Depreciation and amortization
Depreciation and amortization was as follows for thirteen weeks and twenty-six weeks ended July 2, 2017 (in thousands, except percentages):
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
 
July 2, 2017
 
June 24, 2016
Depreciation and amortization
$
12,287

 
$
11,694

 
$
23,461

 
$
22,983

Percentage of revenue
2.0
%
 
1.7
%
 
2.0
%
 
1.7
%
Depreciation increased $2 million and $3 million for the thirteen and twenty-six weeks ended July 2, 2017, respectively, primarily due to an increase in investments designed to further improve our efficiency and effectiveness in recruiting and retaining our contingent workers, and attracting and retaining customers. This was offset by a decline in amortization of $1 million and $2 million, for the thirteen and twenty-six weeks ended July 2, 2017, respectively, due to the intangible asset impairment in the prior year.

 
Page - 19


Income taxes
The income tax expense and the effective income tax rate for thirteen weeks and twenty-six weeks ended July 2, 2017 were as follows (in thousands, except percentages):
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
 
July 2, 2017
 
June 24, 2016
Income tax expense (benefit)
$
5,260

 
$
(13,978
)
 
$
7,071

 
$
(13,366
)
Effective income tax rate
28.6
%
 
18.0
%
 
28.4
%
 
19.1
%

Our tax provision and our effective tax rate are subject to variation due to several factors, including variability in our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, tax credits, audit developments, changes in law, regulations and administrative practices, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of tax credits and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower. Except as required under U.S. federal income tax law, we do not provide for U.S. federal income taxes on undistributed earnings of our foreign subsidiaries because we consider those earnings to be permanently invested outside of the United States.

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. WOTC was restored through December 31, 2019, as a result of the Protecting Americans from Tax Hikes Act of 2015, signed into law on December 18, 2015.

Our effective tax rate for the twenty-six weeks ended July 2, 2017 and June 24, 2016 was 28.4% and 19.1%, respectively. Our effective tax rate for the twenty-six weeks ended June 24, 2016, included a goodwill and intangible asset impairment charge of $99.3 million. Excluding the impairment charge, net income would have been $29.1 million with an effective tax rate of 21.6%. We recognized discrete tax benefits from prior year(s) hiring credits of $0.5 million for the twenty-six weeks ended July 2, 2017, compared to $2.3 million for the same period in the prior year.

Changes to our effective tax rate as a result of hiring credits, impairment, and share based compensation were for thirteen weeks and twenty-six weeks ended July 2, 2017 as follows:
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
 
July 2, 2017
 
June 24, 2016
Effective income tax rate without adjustments below
39.9
 %
 
40.4
 %
 
39.7
 %
 
41.1
 %
Hiring credits estimate from current year wages 
(8.4
)
 
(11.7
)
 
(8.4
)
 
(11.7
)
Additional hiring credits from prior year wages
(2.8
)
 
(2.2
)
 
(2.1
)
 
(7.8
)
Tax effect of share based compensation
(0.1
)
 

 
(0.8
)
 

Goodwill and intangible asset impairment impact

 
(8.5
)
 

 
(2.5
)
Effective income tax rate
28.6
 %

18.0
 %

28.4
 %
 
19.1
 %
Segment EBITDA
We realigned our reporting structure in the fourth quarter of fiscal 2016 to streamline our operations and make it easier for our customers to leverage our total workforce solution by using both our contingent work and permanent placement services. We now report our business as three distinct segments. Our former Staffing Services reportable segment was separated into two reportable segments, PeopleReady and PeopleManagement, and our former Managed Services reportable segment was renamed PeopleScout. In addition, we changed our methodology for allocating certain corporate costs to our segments, which decreased our corporate unallocated expenses. The prior year amounts have been recast to reflect this change for consistency.


 
Page - 20


PeopleReady is our branch-based blue-collar industrial staffing service. PeopleReady provides a wide range of staffing solutions for contingent, on-demand, general and skilled labor to a broad range of industries that include retail, manufacturing, warehousing, logistics, energy, construction, hospitality, and others.

PeopleManagement predominantly encompasses our on-site placement and management services and provides a wide range of workforce management solutions for blue-collar, contingent, on-premise staffing and management of a facility’s workforce. We use distinct brands to market our PeopleManagement contingent workforce solutions and operate as Staff Management, SIMOS, PlaneTechs, and Centerline Drivers. Staff Management specializes in exclusive recruitment and on-premise management of a facility’s contingent industrial workforce. SIMOS specializes in exclusive recruitment and on-premise management of warehouse/distribution operations to meet the growing demand for e-commerce and scalable supply chain solutions. PlaneTechs specializes in temporary skilled mechanics and technicians, including on-premise management thereof, to the aviation and transportation industries. Centerline Drivers specializes in dedicated and temporary truck drivers to the transportation and distribution industries.

PeopleScout provides outsourced recruitment for permanent employees for all major industries and jobs. Our dedicated recruitment process outsourcing service delivery teams work as an integrated partner with our customers in providing end-to-end talent acquisition services from sourcing candidates to on-boarding employees. Our PeopleScout segment also includes a management service provider business, which provides customers with improved quality and spend management of their contingent labor vendors.

A primary measure of segment performance, evaluated by our chief operating decision maker, to determine resource allocation and assess performance is segment earnings before interest, taxes, depreciation and amortization (“Segment EBITDA”). Segment EBITDA includes net sales to third parties, related cost of sales, and selling, general and administrative expenses directly attributable to the reportable segment together with certain allocated corporate general and administrative expenses. Segment EBITDA excludes unallocated corporate general and administrative expenses. See Note 9: Segment Information, to our Consolidated Financial Statements found in Item 1 of this Quarterly Report on Form 10-Q, for additional details of our service lines and reportable segments, as well as a reconciliation of Segment EBITDA to income (loss) before tax expense.

Segment EBITDA should not be considered a measure of financial performance in isolation or as an alternative to net income (loss) in the Consolidated Statements of Operations 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 for thirteen weeks and twenty-six weeks ended July 2, 2017 was as follows (in thousands, except for percentages):
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
 
July 2, 2017
 
June 24, 2016
Revenue from services
$
370,712

 
$
406,274

 
$
703,336

 
$
762,284

 
 
 
 
 
 
 
 
Segment EBITDA
$
19,154

 
$
29,543

 
$
28,876

 
$
41,098

Percentage of revenue
5.2
%
 
7.3
%
 
4.1
%
 
5.4
%

PeopleReady Segment EBITDA decreased to $19 million, or 5.2% of revenue for the thirteen weeks ended July 2, 2017, compared to $30 million, or 7.3% of revenue in the same period in the prior year. PeopleReady Segment EBITDA decreased to $29 million, or 4.1% of revenue for the twenty-six weeks ended July 2, 2017, compared to $41 million, or 5.4% of revenue in the same period in the prior year. The revenue decline outpaced the cost control programs primarily due to the de-leveraging effect associated with the fixed costs in a branch network. Through disciplined pricing, we have successfully passed through our normal mark-up on the increased costs for minimum wages, payroll taxes and benefits together with higher contingent worker wages in a tightening labor market. With the decline in revenue, we put in place cost control programs commencing in the prior year, which continue in the current year, and have reduced SG&A costs in line with our plans. We will continue to monitor and manage our SG&A costs.


 
Page - 21


PeopleManagement segment performance for thirteen weeks and twenty-six weeks ended July 2, 2017 was as follows (in thousands, except for percentages):
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
 
July 2, 2017
 
June 24, 2016
Revenue from services
$
192,887

 
$
219,344

 
$
384,573

 
$
465,771

 
 
 
 
 
 
 
 
Segment EBITDA
$
6,286

 
$
(80,091
)
 
$
11,819

 
$
(73,738
)
Percentage of revenue
3.3
%
 
(36.5
)%
 
3.1
%
 
(15.8
)%

PeopleManagement Segment EBITDA increased to earnings of $6 million, or 3.3% of revenue for the thirteen weeks ended July 2, 2017, compared to a loss of $80 million in the same period in the prior year. PeopleManagement Segment EBITDA increased to earnings of $12 million, or 3.1% of revenue for the twenty-six weeks ended July 2, 2017, compared to a loss of $74 million in the same period in the prior year. The increases were primarily due to the goodwill and intangible asset impairment charge of $84 million in the prior period. Excluding the goodwill and intangible asset impairment charge, Segment EBITDA as a percentage of revenue improved by 1.4% and 0.8% for the thirteen and twenty-six weeks ended July 2, 2017, compared to their respective prior year periods. This improvement is primarily due to a more favorable mix of less revenue from our former largest customer, which carried a lower gross margin than our blended average, and a cost reduction program. Revenue from our former largest customer declined by $30 million, or 79.7% to $8 million for the thirteen weeks ended July 2, 2017, from the same period in the prior year. Revenue from our former largest customer declined by $88 million, or 83.0% to $18 million for the twenty-six weeks ended July 2, 2017, from the same period in the prior year.

PeopleScout segment performance for thirteen weeks and twenty-six weeks ended July 2, 2017 was as follows (in thousands, except for percentages):
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
 
July 2, 2017
 
June 24, 2016
Revenue from services
$
46,523

 
$
46,994

 
$
90,457

 
$
90,537

 
 
 
 
 
 
 
 
Segment EBITDA
$
10,129

 
$
(3,841
)
 
$
18,794

 
$
4,169

Percentage of revenue
21.8
%
 
(8.2
)%
 
20.8
%
 
4.6
%

PeopleScout Segment EBITDA increased to earnings of $10 million, or 21.8% of revenue for the thirteen weeks ended July 2, 2017, compared to a loss of $4 million for the same period in the prior year. PeopleScout Segment EBITDA grew to $19 million, or 20.8% of revenue for the twenty-six weeks ended July 2, 2017, compared to $4 million, or 4.6% of revenue for the same period in the prior year. The increases were primarily due to the goodwill and intangible asset impairment charge of $15 million in the prior period. Excluding the goodwill and intangible asset impairment charge, Segment EBITDA as a percentage of revenue declined by 2.3% and 0.6% for the thirteen and twenty-six weeks ended July 2, 2017, compared to their respective prior year periods. This was primarily due to acquisition related transition service benefits in the prior year which did not recur.
FUTURE OUTLOOK
We have limited visibility into future demand for our services. However, we believe there is value in providing highlights of our expectations for future financial performance. The following highlights represent our expectations regarding operating trends for the remainder of fiscal 2017. These expectations are subject to revision as our business changes with the overall economy.
Revenue declined in the first half of 2017 primarily due to the decrease in revenue from our former largest customer and weakness in the residential construction, manufacturing and various other service industries in many of the geographies we serve. Demand for our temporary and permanent staffing services is largely dependent upon general economic and labor trends. Within our staffing businesses, wage growth has accelerated due to various minimum wage increases, which are more concentrated at the beginning of the year, as well as higher wages to attract talent in tight labor markets. We have made pricing discipline a strategic focus. We have increased bill rates for higher wages and associated payroll burdens, as well as our traditional mark-up. While we believe our pricing strategy is the right long-term decision, these actions do impact our revenue trends in the short term as businesses make their own pricing and productivity related adjustments. Additionally, we implemented cost reduction programs in the prior year which we continued in the current year to address revenue declines and preserve operating margin without sacrificing strategic initiatives to drive future growth. With the decline in revenues we have reduced costs in line with our plans. We will continue to monitor and manage our SG&A costs.

 
Page - 22


SIMOS specializes in exclusive recruitment and on-premise management of warehouse/distribution operations to meet the growing demand for e-commerce and scalable supply chain solutions. The SIMOS business model is based on a productivity-based pricing model where the customer outsources a complete work cell to SIMOS. Through a combination of process redesign and best practices, SIMOS is able to increase the efficiency of a customer’s contingent workforce and align the cost of the workforce with the level of demand within a customer’s business. We believe this adds an appealing solution to certain parts of our existing on-premise business as well as opportunities in the broader marketplace. We believe that SIMOS will continue to deliver growth with its compelling value proposition.
PeopleScout is a recognized industry leader of RPO services, which are in the early stages of their adoption cycles. The acquisition of the RPO business of Aon Hewitt positions PeopleScout as the leading provider of RPO solutions and accelerates our global RPO strategy. The acquisition added new services and capabilities to better meet our objective of providing customers with talent and flexible workforce solutions they need to enhance business performance. This acquisition exceeded management’s initial expectations. We expect continued organic growth with a differentiated service that leverages innovative technology for high-volume, scalable sourcing and dedicated client service teams for connecting the best talent to work opportunity, reducing the cost of hiring, and delivering a better outcome for the customer. Additionally, we are focused on growth through the disciplined pursuit of international acquisitions to improve win rates on multi-continent deals.
We are committed to technology innovation that makes it easier for our customers to do business with us and easier to connect people with work. We continue making investments in our online tools and our mobile application ("JobStack") to improve access, speed, and ease of connecting our customers and workers. We expect JobStack will increase the competitive differentiation of our services, expand our reach into new demographics, improve both service delivery and work-order fill rates and ultimately reduce our dependence on local branches to find temporary workers and connect them with work.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights our cash flow activities for the twenty-six weeks ended July 2, 2017 and June 24, 2016.
Cash flows from operating activities
Our cash flows from operating activities were as follows (in thousands):
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
Net income (loss)
$
17,808

 
$
(56,767
)
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
 
Depreciation and amortization
23,461

 
22,983

Goodwill and intangible asset impairment charge

 
99,269

Provision for doubtful accounts
3,619

 
4,221

Stock-based compensation
5,146

 
6,042

Deferred income taxes
2,975

 
(21,404
)
Other operating activities
1,877

 
2,264

Changes in operating assets and liabilities, net of effects of acquisition of business:
 
 
 
Accounts receivable
11,925

 
116,112

Income tax receivable
8,828

 
11,238

Accounts payable and other accrued expenses
(13,181
)
 
754

Accrued wages and benefits
(4,560
)
 
(10,897
)
Workers' compensation claims reserve
767

 
7,838

Other assets and liabilities
5,397

 
2,683

Net cash provided by operating activities
$
64,062

 
$
184,336

Net cash provided by operating activities was $64 million for the twenty-six weeks ended July 2, 2017, compared to $184 million for the same period in the prior year.  
The goodwill and intangible asset impairment charge of $99 million in the prior year was primarily driven by a change in the scope of services with our former largest customer of $67 million and $32 million due to the impact of other changes in outlook reflecting recent economic and industry conditions which lowered future expectations
The change to deferred income taxes is due primarily to the goodwill and intangible asset impairment charge in the second quarter 2016.

 
Page - 23


The decline in accounts receivable for the twenty-six weeks ended July 2, 2017 is primarily due to normal seasonal de-leveraging of accounts receivable. The change in accounts receivable is significantly less than the comparable prior year period due to a decline in revenue and associated receivables from our former largest customer. The record fourth quarter of fiscal 2015 and seasonal de-leveraging that followed was in large part due to this customer who substantially in-sourced their recruitment and management of contingent labor for their warehouse fulfillment centers and distribution sites in the United States commencing in the second quarter of fiscal 2016. Revenues from our former largest customer declined by $140 million in the fourth quarter of fiscal 2016 and $88 million in the first half of fiscal 2017 compared to their respective prior year periods.
The decline in accounts payable and other accrued expenses is primarily due to cost control programs together with normal seasonal patterns and timing of payments.
The decline in accrued wages and benefits is primarily due to the lower volume of activity from revenue declines, which require reductions in the flex workforce to align with client volume changes.
Generally, our workers’ compensation claims reserve for estimated claims increases as contingent labor services increase and decreases as contingent labor services decline.
During the second quarter of 2017, we paid $23 million relating to the contingent consideration associated with our acquisition of SIMOS. The payment included $18 million related to the final purchase price fair value, which is reflected in cash flows used in financing activities. The remaining balance of $4 million is recognized in cash flows used in operating activities as a decrease in Other assets and liabilities.
Cash flows from investing activities
Our cash flows from investing activities were as follows (in thousands):
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
Capital expenditures
$
(9,137
)
 
$
(11,430
)
Acquisition of businesses, net of cash acquired

 
(71,863
)
Change in restricted cash and investments
1,663

 
(13,925
)
Net cash used in investing activities
$
(7,474
)
 
$
(97,218
)
Net cash used in investing activities was $7 million for the twenty-six weeks ended July 2, 2017, compared to $97 million for the same period in the prior year.
Cash used in investing activities of $72 million for the twenty-six weeks ended June 24, 2016, was for the acquisition of the RPO business of Aon Hewitt, effective January 4, 2016.
Change in restricted cash and investments consist primarily of collateral that has been provided or pledged to insurance carriers and state workers’ compensation programs. Restricted cash and investments changed to a cash source of $2 million for the twenty-six weeks ended July 2, 2017, compared to a cash use of $14 million for the same period in the prior year. This change was primarily due to a decrease in collateral requirements to our workers’ compensation insurance providers due to both declining claims, as well as timing of collateral payments.

 
Page - 24


Cash flows from financing activities
Our cash flows from financing activities were as follows (in thousands):
 
Twenty-six weeks ended
 
July 2, 2017
 
June 24, 2016
Purchases and retirement of common stock
$
(15,530
)
 
$

Net proceeds from stock option exercises and employee stock purchase plans
858

 
840

Common stock repurchases for taxes upon vesting of restricted stock
(2,873
)
 
(2,321
)
Net change in Revolving Credit Facility
(25,303
)
 
(94,186
)
Payments on debt and other liabilities
(1,133
)
 
(1,133
)
Payment of contingent consideration at acquisition date fair value
(18,300
)
 

Other

 
25

Net cash used in financing activities
$
(62,281
)
 
$
(96,775
)
Net cash used in financing activities was $62 million for the twenty-six weeks ended July 2, 2017, compared to $97 million for the same period in the prior year, primarily due to repayments on our Revolving Credit Facility, $16 million in share buybacks, and the payment of $23 million during the second quarter relating to the contingent consideration associated with our acquisition of SIMOS. The total contingent consideration payment included $18 million related to the final purchase price fair value, which is reflected in cash flows used in financing activities. The remaining balance of $4 million is recognized in cash flows used in operating activities as a decrease in Other assets and liabilities.

Future outlook

Our cash-generating capability provides us with financial flexibility in meeting our operating and investing needs. Our current financial position is highlighted as follows:

Our Revolving Credit Facility of up to a maximum of $300 million expires on June 30, 2019. The Revolving Credit Facility is an asset backed facility, which is secured by a pledge of substantially all of the assets of TrueBlue, Inc. and material U.S. domestic subsidiaries. The additional amount available to borrow at July 2, 2017 was $128 million. We believe the Revolving Credit Facility provides adequate borrowing availability.

We had cash and cash equivalents of $29 million at July 2, 2017.

The majority of our workers’ compensation payments are made from restricted cash rather than cash from operations. At July 2, 2017, we had restricted cash and investments totaling $230 million.

We believe that cash provided from operations and our capital resources will be adequate to meet our cash requirements for the foreseeable future.
Capital resources
Restricted cash and investments
Restricted cash and investments consist principally of collateral that has been provided or pledged to insurance carriers for workers’ compensation and state workers’ compensation programs. Our insurance carriers and certain state workers’ compensation programs require us to collateralize a portion of our workers’ compensation obligation. We have agreements with certain financial institutions that allow us to restrict cash and cash equivalents and investments for the purpose of providing collateral instruments to our insurance carriers to satisfy workers’ compensation claims. At July 2, 2017, we had restricted cash and investments totaling $230 million. The majority of our collateral obligations are held in a trust at the Bank of New York Mellon ("Trust"). See Note 3: Restricted Cash and Investments, to our Consolidated Financial Statements found in Item 1 of this Quarterly Report on Form 10-Q, for details of our Restricted Cash and Investments.
We established investment policy directives for the Trust with the first priority to preserve capital, second to ensure sufficient liquidity to pay workers’ compensation claims, third to diversify the investment portfolio, and fourth to maximize after-tax returns. Trust investments must meet minimum acceptable quality standards. The primary investments include U.S. Treasury securities,

 
Page - 25


U.S. agency debentures, U.S. agency mortgages, corporate securities, and municipal securities. For those investments rated by nationally recognized statistical rating organizations the minimum ratings at time of purchase are:
 
 
S&P
 
Moody's
 
Fitch
Short-term rating
 
A-1/SP-1
 
P-1/MIG-1
 
F-1
Long-term rating
 
A
 
A2
 
A
Workers’ compensation insurance, collateral and claims reserves
Workers’ compensation insurance
We provide workers’ compensation insurance for our temporary and permanent employees. The majority of our current workers’ compensation insurance policies cover claims for a particular event above a $2 million deductible limit, on a “per occurrence” basis and accordingly, we are substantially self-insured.
For workers’ compensation claims originating in Washington, North Dakota, Ohio, Wyoming, Canada and Puerto Rico (our “monopolistic jurisdictions”), we pay workers’ compensation insurance premiums and obtain full coverage under government-administered programs (with the exception of our PeopleReady service lines in Ohio where we have a self-insured policy). Accordingly, because we are not the primary obligor, our financial statements do not reflect the liability for workers’ compensation claims in these monopolistic jurisdictions.

Workers’ compensation collateral

Our insurance carriers and certain state workers’ compensation programs require us to collateralize a portion of our workers’ compensation obligation, for which they become responsible should we become insolvent. The collateral typically takes the form of cash and cash-backed instruments, highly rated investment grade securities, letters of credit, and/or surety bonds. On a regular basis, these entities assess the amount of collateral they will require from us relative to our workers’ compensation obligation. Such amounts can increase or decrease independent of our assessments and reserves. We generally anticipate that our collateral commitments will continue to grow as we grow our business. We pay our premiums and deposit our collateral in installments. The majority of the restricted cash and investments collateralizing our self-insured workers’ compensation policies are held in the Trust.
Our total collateral commitments were made up of the following components for the fiscal period end dates presented (in thousands):
 
July 2, 2017
 
January 1, 2017
Cash collateral held by workers’ compensation insurance carriers
$
28,098

 
$
28,066

Cash and cash equivalents held in Trust
30,579

 
32,841

Investments held in Trust
150,724

 
146,517

Letters of credit (1)
7,783

 
7,982

Surety bonds (2)
20,605

 
20,440

Total collateral commitments
$
237,789

 
$
235,846

(1)
We have agreements with certain financial institutions to issue letters of credit as collateral.
(2)
Our surety bonds are issued by independent insurance companies on our behalf and bear annual fees based on a percentage of the bond, which is determined by each independent surety carrier. These fees do not exceed 2.0% of the bond amount, subject to a minimum charge. The terms of these bonds are subject to review and renewal every one to four years and most bonds can be canceled by the sureties with as little as 60 days’ notice.


 
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Workers’ compensation reserve

The following table provides a reconciliation of our collateral commitments to our workers’ compensation reserve as of the fiscal period end dates presented (in thousands):
 
July 2, 2017
 
January 1, 2017
Total workers’ compensation reserve
$
278,117

 
$
277,351

Add back discount on workers’ compensation reserve (1)
15,810

 
14,818

Less excess claims reserve (2)
(51,029
)
 
(52,930
)
Reimbursable payments to insurance provider (3)
8,530

 
10,193

Less portion of workers’ compensation not requiring collateral (4)
(13,639
)
 
(13,586
)