KELLY SERVICES, INC. The Talent Solutions Industry
Labor markets are in the midst of change due to automation, secular shifts in labor supply and demand and skills gaps. Global demographic trends are reshaping and redefining the way in which companies find and use talent. In response, the talent solutions industry is adjusting how it sources, recruits, trains and places talent. Our industry is evolving to meet businesses' growing demand for talent, whether delivered as a single individual or as part of a total workforce solution. Companies in our industry are using novel sourcing approaches-including gig platforms, independent contractors and other talent pools-to create workforce solutions that are flexible, responsive to the labor market and tailored to meet clients' needs. In addition, today's companies are elevating their commitment to talent, with the growing realization that meeting the changing needs and requirements of talent is essential to remain competitive. The ways in which people view, find and conduct work are undergoing fundamental shifts. And as the demand for skilled talent continues to climb, workers' changing ideas about the integration of work into life are becoming more important. In this increasingly talent-driven market, a diverse set of workers, empowered by technology, is seeking to take greater control over their career trajectories.
Our Business
Kelly Services is a talent and global workforce solutions company serving customers of all sizes in a variety of industries. We offer innovative outsourcing and consulting services, as well as staffing on a temporary, temporary-to-hire and direct-hire basis. We provide commercial and professional/technical staffing through our branch networks in ourAmericas Staffing and International Staffing segments and, in APAC, we provide staffing solutions to customers through PersolKelly Asia Pacific, our joint venture with Persol Holdings, a leading provider of HR solutions inJapan . For theU.S. education market, Kelly Education is the leading provider of substitute teachers to more than 7,000 schools nationwide. We also provide a suite of talent fulfillment and outcome-based solutions through our Global Talent Solutions ("GTS") segment, which delivers integrated talent management solutions on a global basis. GTS provides Contingent Workforce Outsourcing ("CWO"), Recruitment Process Outsourcing ("RPO"), Business Process Outsourcing ("BPO"), Advisory and Talent Fulfillment solutions to help customers plan for, manage and execute their acquisition of contingent labor, full-time labor and free agents, and gain access to service providers and qualified talent quickly, at competitive rates, with minimized risk. We earn revenues from customers that procure the services of our temporary employees on a time and materials basis, that use us to recruit permanent employees, and that rely on our talent advisory and outsourcing services. Our working capital requirements are primarily generated from temporary employee payroll and customer accounts receivable. The nature of our business is such that trade accounts receivable are our most significant asset. Average days sales outstanding varies within and outside theU.S. but was 58 days on a global basis as of the 2019 year end and 55 days as of the 2018 year end. Since receipts from customers generally lag temporary employee payroll, working capital requirements increase substantially in periods of growth.
Our Strategic Intent and Outlook
Kelly is committed to being a leading talent solutions provider among the talent with whom we choose to specialize and in the markets in which we choose to compete, which is the foundation of our strategy in 2019 and beyond. This strategic intent is underpinned by our Noble Purpose, "We connect people to work in ways that enrich their lives," and is brought to life by our expected behaviors and actions:
•Employ a talent-first mentality
•Relentlessly deliver for customers
•Grow through discipline and focus
•Deliver efficiency and effectiveness in everything we do
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By aligning ourselves with our Noble Purpose, executing against these strategic
pillars and investing in additional innovation, we intend to reap the benefits
of operating as a more agile and focused organization and we expect to achieve
new levels of growth and profitability as we develop further specializations
across our portfolio of businesses.
We have continued our progress as a talent solutions company and identified
several specialty growth platforms for investment. We expanded our engineering
portfolio with the January 2, 2019 acquisition of Global Technology Associates,
LLC ("GTA") and NextGen Global Resources LLC ("NextGen"), leaders in the growing
5G telecommunications market. These position Kelly as one of the leading
engineering workforce solutions companies in this fast-growing market. On
January 14, 2020 , we acquired Insight Workforce Solutions LLC , an educational
staffing company, to expand our leadership position in the U.S. education talent
solutions industry. We intend to further accelerate our efforts to drive revenue
and earnings growth through additional inorganic growth platforms, making smart
acquisitions that align with Kelly's focus on specialization.
We continue to make investments in technology, particularly those which support
greater efficiency in finding talent to answer customer needs. We are
accelerating the implementation of our front office platforms, which, when fully
deployed in mid-2020, will streamline the processes and workflows associated
with recruiting, onboarding and reassigning workers. This investment will create
the platform from which we will deploy additional operational improvements over
the next several years that will enhance the experience of the hundreds of
thousands of job seekers who interact and work with Kelly each year.
We completed a review of our commercial staffing operations delivered by our
U.S. branch network in the first quarter of 2019 and reorganized our operations
to improve geographic coverage and operational efficiency. The new structure
will allow us to refine our focus on specialties within the commercial staffing
portfolio, including light industrial, electronic assembly, office professionals
and contact center staffing. During 2019, we recorded total restructuring
charges of $5.5 million as a result of these actions. While we have already
gained efficiency from the restructure, the growth we anticipated has not yet
occurred. We remain committed to delivering revenue growth in our U.S. market
and have initiated further actions to modernize our operations and deliver on
that commitment.
While faced with market conditions that may hamper our efforts, including a
sluggish manufacturing sector and a tight labor market, Kelly continues to focus
on accelerating the execution of our strategic plan and making the necessary
investments and adjustments to advance that strategy. Our objective is to become
an even more agile, consultative and profitable company, and we are reshaping
our business to make that goal a reality. We will measure our progress using
financial measures, including:
•Revenue growth (both organic and inorganic);
•Gross profit rate improvement; and
•Conversion rate and EBITDA margin.
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The constant currency ("CC") change amounts in the following tables refer to the
year-over-year percentage changes resulting from translating 2019 financial data
into U.S. dollars using the same foreign currency exchange rates used to
translate financial data for 2018. We believe that CC measurements are a useful
measure, indicating the actual trends of our operations without distortion due
to currency fluctuations. We use CC results when analyzing the performance of
our segments and measuring our results against those of our competitors.
Additionally, substantially all of our foreign subsidiaries derive revenues and
incur cost of services and selling, general and administrative ("SG&A") expenses
within a single country and currency which, as a result, provides a natural
hedge against currency risks in connection with their normal business
operations.
CC measures are non-GAAP (Generally Accepted Accounting Principles) measures and
are used to supplement measures in accordance with GAAP. Our non-GAAP measures
may be calculated differently from those provided by other companies, limiting
their usefulness for comparison purposes. Non-GAAP measures should not be
considered a substitute for, or superior to, measures of financial performance
prepared in accordance with GAAP.
Reported and CC percentage changes in the following tables were computed based on actual amounts in thousands of dollars.
Return on sales (earnings from operations divided by revenue from services) and conversion rate (earnings from operations divided by gross profit) in the following tables are ratios used to measure the Company's operating efficiency.
Days sales outstanding ("DSO") represents the number of days that sales remain
unpaid for the period being reported. DSO is calculated by dividing average net
sales per day (based on a rolling three-month period) into trade accounts
receivable, net of allowances at the period end. Although secondary supplier
revenues are recorded on a net basis (net of secondary supplier expense),
secondary supplier revenue is included in the daily sales calculation in order
to properly reflect the gross revenue amounts billed to the customer.
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Results of Operations
2019 versus 2018
Total Company
(Dollars in millions except per share data)
CC
2019 2018 Change Change
Revenue from services $ 5,355.6 $ 5,513.9 (2.9) % (1.9) %
Gross profit 968.4 972.2 (0.4) 0.5
SG&A expenses excluding restructuring
charges 877.6 884.8 (0.8) 0.1
Restructuring charges 5.5 - NM NM
Total SG&A expenses 883.1 884.8 (0.2) 0.7
Gain on sale of assets 12.3 - NM
Asset impairment charge 15.8 - NM
Earnings from operations 81.8 87.4 (6.5)
Earnings from operations excluding
restructuring charges 87.3 87.4 (0.2)
Diluted earnings per share $ 2.84 $ 0.58 389.7
Staffing fee-based income (included in
revenue from services) 60.1 68.6 (12.5) (10.6)
Gross profit rate 18.1 % 17.6 % 0.5 pts.
Conversion rate 8.4 9.0 (0.6)
Conversion rate excluding restructuring
charges 9.0 9.0 -
Return on sales 1.5 1.6 (0.1)
Return on sales excluding restructuring
charges 1.6 1.6 -
Total Company revenue from services for 2019 declined 2.9% in comparison to the
prior year and 1.9% on a CC basis. As noted in the following discussions,
revenue decreases in Americas Staffing and International Staffing were partially
offset by an increase in GTS revenue. Revenue from services for 2019 includes
the results of NextGen and GTA acquisitions, which added approximately 250 basis
points to the total revenue growth rate.
The gross profit rate increased by 50 basis points from the prior year. As noted
in the following discussions, the gross profit rate increased in all segments.
The NextGen and GTA acquisitions accounted for approximately 30 basis points of
the gross profit rate growth.
Total SG&A expenses decreased 0.2% on a reported basis, due primarily to the
effect of currency exchange rates. On a CC basis, SG&A expenses increased 0.7%
due primarily to the addition of SG&A expenses from the NextGen and GTA
acquisitions. Also included in SG&A expenses for 2019 are restructuring charges
of $5.5 million , related primarily to the U.S. branch-based staffing operations.
Gain on sale of assets primarily represents the excess of the proceeds over the
cost of an unused parcel of land located near the Company headquarters sold
during the second quarter of 2019. Asset impairment charge represents the
write-off of previously capitalized costs associated with a new U.S. front and
middle office technology development project which management determined would
not be completed but replaced by an enhanced and expanded use of an existing
technology platform.
Diluted earnings per share for 2019 were $2.84 , as compared to diluted earnings
per share of $0.58 for 2018. Diluted earnings per share for 2019 were favorably
impacted by a gain, net of tax, of approximately $0.63 per share related to the
investment in Persol Holdings, a gain, net of tax, of approximately $0.23 per
share related to the sale of assets and a gain, net of tax, of approximately
$0.22 per share related to acquisitions. Diluted earnings per share for 2019
were unfavorably impacted by approximately $0.30 per share related to the asset
impairment charge, net of tax, and approximately $0.10 per share related to
restructuring charges, net of tax. Diluted earnings per share for 2018 were
unfavorably impacted by a loss, net of tax, of approximately $1.69 per share
related to the investment in Persol Holdings.
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Americas Staffing
(Dollars in millions)
CC
2019 2018 Change Change
Revenue from services $ 2,320.1 $ 2,417.7 (4.0) % (3.8) %
Gross profit 429.5 441.3 (2.7) (2.5)
SG&A expenses excluding restructuring
charges 367.2 364.2 0.8 1.0
Restructuring charges 5.5 - NM NM
Total SG&A expenses 372.7 364.2 2.3 2.6
Earnings from operations 56.8 77.1 (26.3)
Earnings from operations excluding
restructuring charges 62.3 77.1 (19.2)
Gross profit rate 18.5 % 18.3 % 0.2 pts.
Conversion rate 13.2 17.5 (4.3)
Conversion rate excluding restructuring
charges 14.5 17.5 (3.0)
Return on sales 2.4 3.2 (0.8)
Return on sales excluding restructuring
charges 2.7 3.2 (0.5)
Americas Staffing includes the impact of the January 2019 NextGen acquisition.
Excluding NextGen, Americas Staffing revenue from services reflects a 10%
decrease in hours volume and a 2.1% increase in average bill rates (2.3% on a CC
basis). The decrease in hours volume was primarily due to the disruption
resulting from the restructure of the U.S. branch-based staffing in the first
quarter of 2019 and slower achievement of the related benefits. The increase in
average bill rates was the result of wage increases and stronger revenue growth
in our service lines with higher pay rates. Americas Staffing represented 43% of
total Company revenue in 2019 and 44% in 2018.
From a staffing specialty perspective, the change in revenue reflects decreases
in volume in our light industrial and office services specialties. These
decreases were partially offset by an increase in engineering (due primarily to
the NextGen acquisition), educational staffing and science specialties.
The Americas Staffing gross profit rate increased in comparison to the prior year. The gross profit rate was positively impacted by the addition of NextGen.
Total SG&A expenses increased 2.3% from the prior year, due primarily to the
addition of NextGen SG&A expenses during 2019. Also included in total SG&A
expenses for 2019 are restructuring charges primarily related to
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GTS
(Dollars in millions)
CC
2019 2018 Change Change
Revenue from services $ 2,024.5 $ 1,997.4 1.4 % 1.6 %
Gross profit 400.5 381.1 5.1 5.6
Total SG&A expenses 293.1 296.5 (1.2) (0.6)
Earnings from operations 107.4 84.6 26.9
Gross profit rate 19.8 % 19.1 % 0.7 pts.
Conversion rate 26.8 22.2 4.6
Return on sales 5.3 4.2 1.1
Revenue from services increased 1.4% compared to last year, due primarily to the
increase in revenue from the GTA acquisition, combined with program expansion in
our BPO and KellyConnect products. These increases were partially offset by
lower demand from a number of customers in centrally delivered staffing. GTS
revenue represented 38% of total Company revenue in 2019 and 36% in 2018.
The increase in the GTS gross profit rate was due to improving product mix coupled with lower employee-related costs.
Total SG&A expenses decreased 1.2% from the prior year on a reported basis and 0.6% on a CC basis, due to proactive cost management in a growth environment, as we continue to align our resources and spending levels with volumes and gross profit in our products. These decreases were partially offset by an increase in SG&A expenses related to theJanuary 2019 acquisition of GTA. 26 -------------------------------------------------------------------------------- International Staffing (Dollars in millions) CC 2019 2018 Change Change Revenue from services$ 1,025.9 $ 1,116.6 (8.1) % (4.0) % Gross profit 140.5 152.3 (7.7) (3.6) Total SG&A expenses 125.3 132.3 (5.3) (1.2) Earnings from operations 15.2 20.0 (24.1) Gross profit rate 13.7 % 13.6 % 0.1 pts. Conversion rate 10.8 13.2 (2.4) Return on sales 1.5 1.8 (0.3) In comparison to the prior year, International Staffing revenue from services decreased 8.1% on a reported basis and 4.0% on a CC basis. The decline was primarily due to revenue declines inFrance andGermany , reflecting current staffing market conditions. These decreases were partially offset by increased revenue inRussia , due to higher hours volume. International Staffing represented 19% of total Company revenue in 2019 and 20% in 2018.
The International Staffing gross profit decreased 7.7% on a reported basis and 3.6% on a CC basis as a result of declining revenue.
Total SG&A expenses decreased 5.3% on a reported basis and 1.2% on a CC basis due to continued effective cost management to align to revenue trends.
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Results of Operations
2018 versus 2017
Total Company
(Dollars in millions except per share data)
CC
2018 2017 Change Change
Revenue from services $ 5,513.9 $ 5,374.4 2.6 % 2.2 %
Gross profit 972.2 954.1 1.9 1.6
SG&A expenses excluding restructuring
charges 884.8 868.4 1.9 1.6
Restructuring charges - 2.4 NM NM
Total SG&A expenses 884.8 870.8 1.6 1.4
Earnings from operations 87.4 83.3 5.0
Earnings from operations excluding
restructuring charges 87.4 85.7 2.1
Diluted earnings per share $ 0.58 $ 1.81 (68.0)
Staffing fee-based income (included in
revenue from services) 68.6 57.3 19.6 19.0
Gross profit rate 17.6 % 17.8 % (0.2) pts.
Conversion rate 9.0 8.7 0.3
Conversion rate excluding restructuring
charges 9.0 9.0 -
Return on sales 1.6 1.5 0.1
Return on sales excluding restructuring
charges 1.6 1.6 -
Total Company revenue from services for 2018 was up 2.6% in comparison to 2017
on a reported basis, and up 2.2% on a CC basis, reflecting the weakening of the
U.S. dollar against several currencies, primarily the Euro in the first half of
2018. As more fully described in the following discussions, revenue increased in
Americas Staffing and International Staffing, while GTS revenue was relatively
flat.
The gross profit rate decreased 20 basis points year over year. As more fully
described in the following discussions, a decline in the gross profit rate in
International Staffing was partially offset by an increase in the GTS gross
profit rate. The Americas Staffing gross profit rate was unchanged.
Total SG&A expenses increased 1.6% on a reported basis (1.4% on a CC basis), due
primarily to increases in Americas Staffing SG&A expenses, as described in the
following discussion. Included in total SG&A expenses for 2017 are restructuring
charges of $2.4 million , relating primarily to an initiative to optimize our GTS
service delivery models.
Diluted earnings per share for 2018 were $0.58 , as compared to $1.81 for 2017.
Diluted earnings per share for 2018 were impacted by a loss, net of tax, of
approximately $1.69 per share related to the investment in Persol Holdings.
Diluted earnings per share for 2017 were impacted by approximately $0.35 per
share related to the impact of revaluing net deferred tax assets as a result of
the U.S. Tax Cuts and Jobs Act and approximately $0.04 per share related to
restructuring charges.
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Americas Staffing
(Dollars in millions)
CC
2018 2017 Change Change
Revenue from services $ 2,417.7 $ 2,345.9 3.1 % 3.4 %
Gross profit 441.3 429.1 2.9 3.1
SG&A expenses excluding restructuring
charges 364.2 346.0 5.2 5.5
Restructuring charges - 0.4 NM NM
Total SG&A expenses 364.2 346.4 5.1 5.4
Earnings from operations 77.1 82.7 (6.7)
Earnings from operations excluding
restructuring charges 77.1 83.1 (7.1)
Gross profit rate 18.3 % 18.3 % - pts.
Conversion rate 17.5 19.3 (1.8)
Conversion rate excluding restructuring
charges 17.5 19.3 (1.8)
Return on sales 3.2 3.5 (0.3)
Return on sales excluding restructuring
charges 3.2 3.5 (0.3)
The change in Americas Staffing revenue from services reflects the impact of a
2% increase in average bill rates (a 3% increase on a CC basis), combined with
the impact of the September 2017 acquisition of TOC, and partially offset by a
1% decrease in hours volume. The increase in average bill rates was the result
of wage increases and stronger revenue growth in our service lines with higher
pay rates. Americas Staffing represented 44% of total Company revenue in both
2018 and 2017.
From a product perspective, the increase in revenue reflects an increase in
commercial, including light industrial and educational staffing (due primarily
to the TOC acquisition) and professional/technical, including engineering,
science and IT products. These increases were partially offset by a decrease in
our commercial office services volume.
The Americas Staffing gross profit rate was unchanged from 2017. Increases related to higher staffing fee-based income and lower payroll taxes were offset by unfavorable customer mix.
The increase in total SG&A expenses was due primarily to higher costs for recruiting and sales resources and additional effort to attract and place candidates in the current talent environment, combined with SG&A expenses related to TOC.
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GTS
(Dollars in millions)
CC
2018 2017 Change Change
Revenue from services $ 1,997.4 $ 1,998.9 (0.1) % (0.1) %
Gross profit 381.1 373.7 2.0 1.8
SG&A expenses excluding restructuring
charges 296.5 294.7 0.6 0.4
Restructuring charges - 2.0 NM NM
Total SG&A expenses 296.5 296.7 - 0.2
Earnings from operations 84.6 77.0 9.8
Earnings from operations excluding
restructuring charges 84.6 79.0 7.1
Gross profit rate 19.1 % 18.7 % 0.4 pts.
Conversion rate 22.2 20.6 1.6
Conversion rate excluding restructuring
charges 22.2 21.1 1.1
Return on sales 4.2 3.9 0.3
Return on sales excluding restructuring
charges 4.2 4.0 0.2
Revenue from services was flat in comparison to 2017. Lower demand in specific
customers in centrally delivered staffing and PPO was offset by increased
revenue in BPO, KellyConnect and CWO from program expansions and new customer
wins in each product. GTS revenue represented 36% of total Company revenue in
2018 and 37% in 2017.
The increase in the GTS gross profit rate was due to improving product mix, partially offset by increases in employee-related healthcare costs.
Total SG&A expenses were flat in comparison to 2017. Increased headcount and costs related to new programs and expansion of programs in the CWO, BPO and KellyConnect practices were partially offset by lower salary costs in centrally delivered staffing and PPO. Additionally, the year-over-year change in total SG&A expenses was impacted by restructuring charges of$2.0 million in 2017, representing severance relating to an initiative to optimize our GTS service delivery models. 30 -------------------------------------------------------------------------------- International Staffing (Dollars in millions) CC 2018 2017 Change Change Revenue from services$ 1,116.6 $ 1,048.2 6.5 % 4.0 % Gross profit 152.3 153.7 (0.9) (3.2) Total SG&A expenses 132.3 131.6 0.5 (1.4) Earnings from operations 20.0 22.1 (9.5) Gross profit rate 13.6 % 14.7 % (1.1) pts. Conversion rate 13.2 14.4 (1.2) Return on sales 1.8 2.1 (0.3) The change in International Staffing revenue from services reflects primarily a 6% increase in average bill rates (a 3% increase on a CC basis), due to customer and country mix. Hours volume was flat in comparison to 2017. International Staffing represented 20% of total Company revenue in both 2018 and 2017.
The International Staffing gross profit rate decreased primarily due to unfavorable customer mix and the effect of French payroll tax adjustments. These decreases were partially offset by an increase in staffing fee-based income.
The increase in total SG&A expenses was due to the effect of currency exchange
rates. On a constant currency basis, SG&A expenses decreased due to effective
cost control in expenses across the region.
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Results of Operations
Financial Condition
Historically, we have financed our operations through cash generated by
operating activities and access to credit markets. Our working capital
requirements are primarily generated from temporary employee payroll and
customer accounts receivable. Since receipts from customers generally lag
payroll to temporary employees, working capital requirements increase
substantially in periods of growth. Conversely, when economic activity slows,
working capital requirements may substantially decrease. This may result in an
increase in our operating cash flows; however, any such increase would not be
sustainable in the event that an economic downturn continued for an extended
period. As highlighted in the consolidated statements of cash flows, our
liquidity and available capital resources are impacted by four key components:
cash, cash equivalents and restricted cash, operating activities, investing
activities and financing activities.
Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash totaled$31.0 million at year-end 2019, compared to$40.1 million at year-end 2018. As further described below, during 2019, we generated$102.2 million of cash from operating activities, used$94.3 million of cash for investing activities and used$16.1 million of cash for financing activities. Operating Activities In 2019, we generated$102.2 million of net cash from operating activities, as compared to generating$61.4 million in 2018 and$70.8 million in 2017. The change from 2018 to 2019 was primarily driven by working capital changes. The change from 2017 to 2018 was primarily driven by working capital changes and an increase in performance-based compensation payments. Trade accounts receivable totaled$1.3 billion at year-end 2019 and 2018. Global DSO for the fourth quarter was 58 days for 2019, compared to 55 days for 2018. The increase in DSO reflects both increasing pressure to extend payment terms from our large customers and the timing of customer payments at year end. Our working capital position (total current assets less total current liabilities) was$521.6 million at year-end 2019, an increase of$18.6 million from year-end 2018. The current ratio (total current assets divided by total current liabilities) was 1.6 at year-end 2019 and 2018.
Investing Activities
In 2019, we used$94.3 million of net cash for investing activities, compared to using$29.8 million in 2018 and using$61.0 million in 2017. Included in cash used for investing activities in 2019 is$50.8 million for the acquisition of NextGen inJanuary 2019 , net of cash received,$35.6 million for the acquisition of GTA inJanuary 2019 , net of cash received, and$4.4 million for loans to PersolKelly Asia Pacific to fund working capital requirements. These uses of cash were partially offset by proceeds of$13.8 million primarily from the sale of unused land during the second quarter of 2019. Included in cash used for investing activities in 2018 is$7.0 million for loans to PersolKelly Asia Pacific to fund working capital requirements as a result of their sustained revenue growth and$5.0 million for an investment in equity securities relating to the Company's investment inBusiness Talent Group, LLC , partially offset by$7.9 million for proceeds from company-owned life insurance. Included in cash used for investing activities in 2017 is$37.2 million for the acquisition of Teachers On Call, net of the cash received. Capital expenditures, which totaled$20.0 million in 2019,$25.6 million in 2018 and$24.6 million in 2017, were primarily related to the Company's technology programs in 2019 and primarily related to the Company's technology programs, IT infrastructure and headquarters building improvements in 2018 and 2017.
Financing Activities
In 2019, we used$16.1 million of cash for financing activities, as compared to using$26.5 million in 2018 and using$3.4 million in 2017. Changes in net cash from financing activities were primarily related to dividend payments in 2019, 2018 and 2017. Dividends paid per common share were$0.30 in 2019, 2018 and 2017. Payments of dividends are restricted by the financial covenants contained in our debt facilities. Details of this restriction are contained in the Debt footnote in the notes to our consolidated financial statements. 32 -------------------------------------------------------------------------------- Changes in net cash from financing activities are also impacted by short-term borrowing activities. Debt totaled$1.9 million at year-end 2019 and was$2.2 million at year-end 2018. Debt-to-total capital (total debt reported in the consolidated balance sheet divided by total debt plus stockholders' equity) is a common ratio to measure the relative capital structure and leverage of the Company. Our ratio of debt-to-total capital was 0.1% at year-end 2019 and 0.2% at year-end 2018. In 2019, the net change in short-term borrowings was primarily due to payments on local lines of credit. In 2018, the net change in short-term borrowings was primarily due to payments on our revolving credit facility. In 2017, the net change in short-term borrowings was primarily due to borrowings on our revolving credit facility.
Contractual Obligations and Commercial Commitments
Summarized below are our obligations and commitments to make future payments as
of year-end 2019:
Payment due by period
Less than More than
Total 1 year 1-3 Years 3-5 Years 5 years
(In millions of dollars)
Leases $ 74.4 $ 24.6 $ 33.6 $ 11.8 $ 4.4
Short-term borrowings 1.9 1.9 - - -
Accrued workers' compensation 71.5 25.7 21.5 8.6 15.7
Accrued retirement benefits 207.7 20.4 40.7 40.9 105.7
Other liabilities 8.9 2.2 3.8 1.1 1.8
Uncertain income tax positions 1.1 0.5 0.2 0.1 0.3
Purchase obligations 45.6 19.5 14.6 11.5 -
Total $ 411.1 $ 94.8 $ 114.4 $ 74.0 $ 127.9
Purchase obligations above represent unconditional commitments relating
primarily to technology services and online tools which we expect to utilize
generally within the next two fiscal years, in the ordinary course of business.
We have no material, unrecorded commitments, losses, contingencies or guarantees
associated with any related parties or unconsolidated entities.
Liquidity
We expect to meet our ongoing short-term and long-term cash requirements principally through cash generated from operations, available cash and equivalents, securitization of customer receivables and committed unused credit facilities. We are reviewing other potential sources of liquidity, such as wage subsidy receivables outside theU.S. , in an effort to potentially monetize such sources. Additional funding sources could include asset-based lending or additional bank facilities. In addition, onDecember 4, 2019 , we entered into an agreement to sell three headquarters properties. See the Assets Held for Sale footnote in the notes to our consolidated financial statements for more information. We utilize intercompany loans, dividends, capital contributions and redemptions to effectively manage our cash on a global basis. We periodically review our foreign subsidiaries' cash balances and projected cash needs. As part of those reviews, we may identify cash that we feel should be repatriated to optimize the Company's overall capital structure. As of the 2019 year end, these reviews have not resulted in any specific plans to repatriate a majority of our international cash balances. We expect much of our international cash will be needed to fund working capital growth in our local operations. The majority of our international cash is concentrated in a cash pooling arrangement (the "Cash Pool ") and is available to fund general corporate needs internationally.The Cash Pool is a set of cash accounts maintained with a single bank that must, as a whole, maintain at least a zero balance; individual accounts may be positive or negative. This allows countries with excess cash to invest and countries with cash needs to utilize the excess cash. We manage our cash and debt very closely to optimize our capital structure. As our cash balances build, we tend to pay down debt as appropriate. Conversely, when working capital needs grow, we tend to use corporate cash and cash available in theCash Pool first, and then access our borrowing facilities. 33 -------------------------------------------------------------------------------- At year-end 2019, we had$200.0 million of available capacity on our$200.0 million revolving credit facility and$97.7 million of available capacity on our$150.0 million securitization facility. The securitization facility had no short-term borrowings and$52.3 million of standby letters of credit related to workers' compensation. Together, the revolving credit and securitization facilities provide the Company with committed funding capacity that may be used for general corporate purposes. While we believe these facilities will cover our working capital needs over the short term, if economic conditions or operating results change significantly, we may need to seek additional sources of funds. Throughout 2019 and as of the 2019 year end, we met the debt covenants related to our revolving credit facility and securitization facility. At year-end 2019, we also had additional unsecured, uncommitted short-term credit facilities totaling$11.1 million , under which we had$1.1 million of borrowings. Details of our debt facilities as of the 2019 year end are contained in the Debt footnote in the notes to our consolidated financial statements. OnJanuary 14, 2020 , we acquired the membership interests of a company for$34.5 million , using cash on hand. See the Subsequent Event footnote in the notes to our consolidated financial statements for more information. We monitor the credit ratings of our major banking partners on a regular basis and have regular discussions with them. Based on our reviews and communications, we believe the risk of one or more of our banks not being able to honor commitments is insignificant. We also review the ratings and holdings of our money market funds and other investment vehicles regularly to ensure high credit quality and access to our invested cash. Critical Accounting Estimates We prepare our consolidated financial statements in conformity with accounting principles generally accepted inthe United States . In this process, it is necessary for us to make certain assumptions and related estimates affecting the amounts reported in the consolidated financial statements and the attached notes. Actual results can differ from assumed and estimated amounts. Critical accounting estimates are those that we believe require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Judgments and uncertainties affecting the application of those estimates may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following estimates to be most critical in understanding the judgments involved in preparing our consolidated financial statements. Workers' Compensation In theU.S. , we have a combination of insurance and self-insurance contracts under which we effectively bear the first$1.0 million of risk per single accident. There is no aggregate limitation on our per-accident exposure under these insurance and self-insurance programs. We establish accruals for workers' compensation utilizing actuarial methods to estimate the undiscounted future cash payments that will be made to satisfy the claims, including an allowance for incurred-but-not-reported claims. We retain an independent consulting actuary to establish ultimate loss forecasts for the current and prior accident years of our insurance and self-insurance programs. The consulting actuary establishes loss development factors, based on our historical claims experience as well as industry experience, and applies those factors to current claims information to derive an estimate of our ultimate claims liability. In preparing the estimates, the consulting actuary may consider factors such as the nature, frequency and severity of the claims; reserving practices of our third party claims administrators; performance of our medical cost management and return to work programs; changes in our territory and business line mix; and current legal, economic and regulatory factors such as industry estimates of medical cost trends. Where appropriate, multiple generally accepted actuarial techniques are applied and tested in the course of preparing the loss forecast. We use the ultimate loss forecasts, as developed by the consulting actuary, to establish total expected program costs for each accident year by adding our estimates of non-loss costs such as claims handling fees and excess insurance premiums. When claims exceed the applicable loss limit or self-insured retention and realization of recovery of the claim from existing insurance policies is deemed probable, we record a receivable from the insurance company for the excess amount. We evaluate the accrual quarterly and make adjustments as needed. The ultimate cost of these claims may be greater than or less than the established accrual. While we believe that the recorded amounts are reasonable, there can be no assurance that changes to our estimates will not occur due to limitations inherent in the estimation process. In the event we determine that a smaller or larger accrual is appropriate, we would record a credit or a charge to cost of services in the period in which we made such a determination. The accrual for workers' compensation, net of related receivables which are included in prepaid expenses 34 --------------------------------------------------------------------------------
and other current assets and other assets in the consolidated balance sheet, was
Business Combinations
We account for business combinations using the acquisition method of accounting, in which the purchase price is allocated for assets acquired and liabilities assumed and recorded at the estimated fair values at the date of acquisition. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Management is required to make significant assumptions and estimates in determining the fair value of the assets acquired, particularly intangible assets. Purchased intangible assets are primarily comprised of acquired trade names and customer relationships that are recorded at fair value at the date of acquisition. We utilize third-party valuation specialists to assist us in the determination of the fair value of the intangibles. The fair value of trade name intangibles is determined using the relief-from-royalty method, which relies on the use of estimates and assumptions about projected revenue growth and discount rates. The fair value of customer relationship intangibles is determined using the multi-period excess earnings method, which relies on the use of estimates and assumptions about projected revenue growth, customer attrition, and discount rates. Determining the useful lives of intangible assets also requires judgment and are inherently uncertain. There is a measurement period of up to one year in which to finalize the fair value determinations and preliminary fair value estimates may be revised if new information is obtained during this period.
Income Taxes
Income tax expense is based on expected income and statutory tax rates in the various jurisdictions in which we operate. Judgment is required in determining our income tax expense. We establish accruals for uncertain tax positions under generally accepted accounting principles, which require that a position taken or expected to be taken in a tax return be recognized in the consolidated financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) the position would be sustained upon examination by tax authorities who have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Our effective tax rate includes the impact of accruals and changes to accruals that we consider appropriate, as well as related interest and penalties. A number of years may lapse before a particular matter, for which we have or have not established an accrual, is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our accruals are appropriate under generally accepted accounting principles. Favorable or unfavorable adjustments of the accrual for any particular issue would be recognized as an increase or decrease to our income tax expense in the period of a change in facts and circumstances. Our current tax accruals are presented in income and other taxes in the consolidated balance sheet and long-term tax accruals are presented in other long-term liabilities in the consolidated balance sheet. Tax laws require items to be included in the tax return at different times than the items are reflected in the consolidated financial statements. As a result, the income tax expense reflected in our consolidated financial statements is different than the liability reported in our tax return. Some of these differences are permanent, which are not deductible or taxable on our tax return, and some are temporary differences, which give rise to deferred tax assets and liabilities. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Our net deferred tax asset is recorded using currently enacted tax laws, and may need to be adjusted in the event tax laws change. TheU.S. work opportunity credit is allowed for wages earned by employees in certain targeted groups. The actual amount of creditable wages in a particular period is estimated, since the credit is only available once an employee reaches a minimum employment period and the employee's inclusion in a targeted group is certified by the applicable state. As these events often occur after the period the wages are earned, judgment is required in determining the amount of work opportunity credits accrued for in each period. We evaluate the accrual regularly throughout the year and make adjustments as needed.
We account for our investment in PersolKelly Asia Pacific under the equity
method of accounting on a one quarter lag. We review our equity method
investment for indicators of impairment on a quarterly basis or whenever events
or circumstances indicate the carrying amount may be other-than-temporarily
impaired. An impairment assessment requires the exercise of judgment related to
financial trends, forecasts, relevant events, as well as any operating,
economic, legal or regulatory changes that may have an impact on the investment.
There were no indicators of an other-than-temporary impairment in 2019 or 2018.
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As of year-end 2019 and 2018, the equity method investment was $117.2 million
and $121.3 million , respectively. See the Investment in PersolKelly Asia Pacific
footnote in the notes to our consolidated financial statements.
We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. Generally accepted accounting principles require that goodwill be tested for impairment at a reporting unit level. We have determined that our reporting units are the same as our operating and reportable segments based on our organizational structure.Goodwill is tested for impairment by comparing the estimated fair value of a reporting unit to its carrying value. If the estimated fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is not considered impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the estimated fair value of a reporting unit, goodwill is deemed impaired and is written down to the extent of the difference. To derive the estimated fair value of reporting units, we primarily relied on an income approach. We also utilized various market approaches to validate the fair value determined using the income approach. Under the income approach, estimated fair value is determined based on estimated future cash flows discounted by an estimated market participant weighted-average cost of capital, which reflects the overall level of inherent risk of the reporting unit being measured. Estimated future cash flows are based on our internal projection model and reflects management's outlook for the reporting units. Assumptions and estimates about future cash flows and discount rates are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. We completed our annual impairment test for all reporting units with goodwill in the fourth quarter for the fiscal year ended 2019 and 2018 and determined that goodwill was not impaired. In 2019 and 2018, we performed a step one quantitative assessment for the Americas Staffing and GTS reporting units. Our analysis used significant assumptions by segment, including: expected future revenue and expense growth rates, profit margins, cost of capital, discount rate and forecasted capital expenditures. Although we believe the assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. Different assumptions of the anticipated future results and growth from these businesses could result in an impairment charge, which would decrease operating income and result in lower asset values on our consolidated balance sheet. As a measure of sensitivity, both reporting units have an estimated fair value more than 150% of the carrying value in 2019 and reducing our revenue growth rate assumptions by 45% would not result in the estimated fair value falling below carrying value for both reporting units. At year-end 2019 and 2018, total goodwill amounted to$127.8 million and$107.3 million , respectively. See theGoodwill and Intangible Assets footnote in the notes to our consolidated financial statements for more information.
Litigation
Kelly is subject to legal proceedings, investigations and claims arising out of the normal course of business. Kelly routinely assesses the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the accruals required, if any, for these contingencies is made after analysis of each known issue. Development of the analysis includes consideration of many factors including: potential exposure, the status of proceedings, negotiations, discussions with our outside counsel and results of similar litigation. The required accruals may change in the future due to new developments in each matter. For further discussion, see the Contingencies footnote in the notes to our consolidated financial statements. At year-end 2019 and 2018, the gross accrual for litigation costs amounted to$9.9 million and$12.8 million , respectively, which are included in accounts payable and accrued liabilities and in accrued workers' compensation and other claims in the consolidated balance sheet. 36 -------------------------------------------------------------------------------- NEW ACCOUNTING PRONOUNCEMENTS
See New Accounting Pronouncements footnote in the notes to our consolidated financial statements presented in Part II, Item 8 of this report for a description of new accounting pronouncements.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements which are predictive in nature,
which depend upon or refer to future events or conditions, or which include
words such as "expects," "anticipates," "intends," "plans," "believes,"
"estimates," or variations or negatives thereof or by similar or comparable
words or phrases. In addition, any statements concerning future financial
performance (including future revenues, earnings or growth rates), ongoing
business strategies or prospects, and possible future actions by us that may be
provided by management, including oral statements or other written materials
released to the public, are also forward-looking statements. Forward-looking
statements are based on current expectations and projections about future events
and are subject to risks, uncertainties and assumptions about our Company and
economic and market factors in the countries in which we do business, among
other things. These statements are not guarantees of future performance, and we
have no specific intention to update these statements.
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause our actual performance and
future events and actions to differ materially from such forward-looking
statements include, but are not limited to, competitive market pressures
including pricing and technology introductions and disruptions, changing market
and economic conditions, our ability to achieve our business strategy, the risk
of damage to our brand, the risk our intellectual property assets could be
infringed upon or compromised, our ability to successfully develop new service
offerings, our exposure to risks associated with services outside traditional
staffing, including business process outsourcing and services connecting talent
to independent work, our increasing dependency on third parties for the
execution of critical functions, the risks associated with past and future
acquisitions, exposure to risks associated with investments in equity affiliates
including PersolKelly Asia Pacific, material changes in demand from or loss of
large corporate customers as well as changes in their buying practices, risks
particular to doing business with the government or government contractors,
risks associated with conducting business in foreign countries, including
foreign currency fluctuations, the exposure to potential market and currency
exchange risks relating to our investment in Persol Holdings, risks associated
with violations of anti-corruption, trade protection and other laws and
regulations, availability of qualified full-time employees, availability of
temporary workers with appropriate skills required by customers, liabilities for
employment-related claims and losses, including class action lawsuits and
collective actions, risks arising from failure to preserve the privacy of
information entrusted to us or to meet our obligations under global privacy
laws, the risk of cyberattacks or other breaches of network or information
technology security, our ability to sustain critical business applications
through our key data centers, our ability to effectively implement and manage
our information technology projects, our ability to maintain adequate financial
and management processes and controls, risk of potential impairment charges
triggered by adverse industry developments or operational circumstances,
unexpected changes in claim trends on workers' compensation, unemployment,
disability and medical benefit plans, the impact of changes in laws and
regulations (including federal, state and international tax laws), competition
law risks, the risk of additional tax or unclaimed property liabilities in
excess of our estimates, our ability to realize value from our tax credit and
net operating loss carryforwards, our ability to maintain specified financial
covenants in our bank facilities to continue to access credit markets, and other
risks, uncertainties and factors discussed in this report and in our other
filings with the Securities and Exchange Commission . Actual results may differ
materially from any forward-looking statements contained herein, and we have no
intention to update these statements. Certain risk factors are discussed more
fully under "Risk Factors" in Part I, Item 1A of this report.
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