KELLY SERVICES, INC. Executive Overview
The COVID-19 pandemic and related containment measures have resulted in dramatic shifts in most aspects of the economy and how professional and private lives are conducted. While the pace of change was unprecedented and the resulting impacts are still being determined, our Noble Purpose, "We connect people to work in ways that enrich their lives," will continue to guide our strategy and actions. Kelly remains committed to being a leading talent solutions provider among the talent with whom we choose to specialize and in the global markets in which we choose to compete. As we navigate the uncertainty over the next several quarters, we will continue to demonstrate 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
By aligning ourselves with our Noble Purpose and executing against these behaviors, we intend to weather the current situation and emerge as a more agile and focused organization, prepared to achieve new levels of growth and profitability as we further develop our portfolio of businesses.
The Talent Solutions Industry
Prior to the COVID-19 pandemic, labor markets were in the midst of change due to automation, secular shifts in labor supply and demand and skills gaps and we expect the current economic situation to further accelerate that change. Global demographic trends are reshaping and redefining the way in which companies find and use talent and the COVID-19 pandemic is changing where and how companies expect work to be performed. 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 specialized 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 customized workforce solutions that are flexible and responsive to the labor market. 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 and Kelly's Talent Promise confirms our responsibility to workers in search of a better way to work. Our Business Kelly 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 in our Americas Staffing and International Staffing segments and, in APAC, we provide staffing solutions to customers throughPersolKelly Pte. Ltd. , 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. 28 -------------------------------------------------------------------------------- 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 61 days on a global basis as of the 2020 second quarter end, 58 days as of the 2019 year end and 57 days as of the 2019 second quarter end. Since receipts from customers generally lag temporary employee payroll, working capital requirements increase substantially in periods of growth and decline in periods of economic contraction. Our Perspective Short Term While far from certain, the impacts of COVID-19 on the global economy, the talent solutions industry, our customers and our talent have become more clear since the beginning of the pandemic. Revenue declines have been substantial, and while recently trends have pointed to a slow recovery in demand, revenue declines are likely to continue for the next several quarters. In response to the crisis, inApril 2020 we took a series of proactive actions. These actions were designed to reduce spending, minimize layoffs, and bolster the strength and flexibility of Kelly's finances. These actions include: •a 10% pay cut for full-time salaried employees in theU.S. ,Puerto Rico andCanada , in addition to certain actions in EMEA and APAC; •substantially reduced CEO compensation and reduced compensation of 10% or more for senior leaders; •temporary furloughing and/or redeployment of some employees until business conditions improve; •suspension of the Company match to certain retirement accounts in theU.S. andPuerto Rico ; •reduction of discretionary expenses and projects, including capital expenditures; and •a hiring freeze with the exception of critical revenue-generating positions.
Given the level of uncertainty surrounding the duration of the COVID-19 crisis, Kelly's board also voted to suspend the quarterly dividend until conditions improve.
The impact of the pandemic began inMarch 2020 with the limitations on public life in theU.S. and the European markets we serve and have continued in the second quarter as the effect of the pandemic response has slowed global economic activity. We do expect that there will be a material decline in our revenues during the period of time in which demand for our services is dampened by reaction to the economic slowdown and by companies and talent concerns related to operating safely during a pandemic. The impact on the revenues of each segment will vary given the differences in pandemic-related measures enacted in each geography, the customer industries served and the skill sets of the talent provided to our customers and their ability to work remotely. We currently expect a gradual return to pre-crisis levels of customer demand over the next several quarters, however, the pace of such a return may be further delayed by repeated cycles of increased economic activity and a resurgence in infection leading to additional containment measures. While our cost reduction efforts are expected to reduce year-over-year expenses significantly in the third quarter, they will not be enough to completely offset declines in revenue and gross profit. As a result, we expect our third quarter and full year earnings to decline year-over-year. In addition, negative market reaction to the COVID-19 crisis inMarch 2020 , including declines in our common stock price, caused our market capitalization to decline significantly. This triggered an interim goodwill impairment test and resulted in a$147.7 million non-cash goodwill impairment charge in the first quarter of 2020. Moving Forward While the severity of the economic impacts and the duration of these impacts cannot be precisely measured at this time, we do believe that the mid-term impacts on how people view, find and conduct work will continue to align with our current strategic path. We continue to pursue a specialized talent solutions strategy and have identified several specialty growth platforms for investment. We expanded our engineering portfolio with theJanuary 2, 2019 acquisitions ofGlobal Technology Associates, LLC ("GTA") andNextGen 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. OnJanuary 14, 2020 , we acquiredInsight Workforce Solutions LLC ("Insight"), an educational staffing company, to expand our leadership position in theU.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 as market conditions improve. 29 -------------------------------------------------------------------------------- We continue to make investments in technology, particularly those which support greater efficiency in finding talent to answer customer needs. We accelerated the implementation of our front office platform which was deployed to mostU.S. operations inJune 2020 . This platform will streamline the processes and workflows associated with recruiting, onboarding and reassigning workers. This investment creates the platform from which we have begun to deploy additional operational improvements, and will continue over the next several years to enhance the experience of the hundreds of thousands of job seekers who interact and work with Kelly each year. In the first quarter of 2020, we completed a review of theU.S. branch network of physical locations and reduced the number of branch locations utilized. In addition, we took similar actions on branch locations in International Staffing. During the first six months of 2020, we recorded$4.8 million of lease termination costs and fixed asset write-offs related to those actions. In addition, we took cost reduction actions in Americas Staffing, GTS, International Staffing and corporate support functions which resulted in$3.7 million of severance costs and eliminated 123 positions. We expect that the expense savings from the first quarter of 2020 actions will be approximately$20 million on an annual basis. Beginning in the third quarter of 2020, in connection with the adoption of a new operating model reflecting the Company's focus on delivering specialty talent solutions, the Company will be revising the reportable segments and recasting prior year reportable segment results. While faced with market conditions that may temporarily delay our efforts, 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. While the COVID-19 pandemic has resulted in uncertainty in the economy and the labor markets that will affect our near term financial performance, 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.
Financial Measures
The constant currency ("CC") change amounts in the following tables refer to the
year-over-year percentage changes resulting from translating 2020 financial data
into U.S. dollars using the same foreign currency exchange rates used to
translate financial data for 2019. 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) 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.
30
--------------------------------------------------------------------------------
Results of Operations
Total Company - Second Quarter
(Dollars in millions)
CC
2020 2019 Change Change
Revenue from services $ 975.3 $ 1,367.5 (28.7) % (27.7) %
Gross profit 189.2 244.0 (22.5) (21.7)
SG&A expenses excluding restructuring charges 178.3 222.1 (19.7) (19.0)
Restructuring charges (0.2) (0.6) (66.5) (66.5)
Total SG&A expenses 178.1 221.5 (19.6) (18.9)
Gain on sale of assets - 12.3 NM
Earnings from operations 11.1 34.8 (68.2)
Earnings from operations excluding
restructuring charges 10.9 34.2 (68.2)
Diluted earnings per share 1.04 2.12 (50.9)
Permanent placement income (included in
revenue from services) 7.6 15.7 (51.5) (50.5)
Gross profit rate 19.4 % 17.8 % 1.6 pts.
`
Total Company revenue from services for the second quarter of 2020 declined
28.7% in comparison to the prior year and declined 27.7% on a CC basis. As noted
in the following discussions, revenue decreased in all three segments, due
primarily to lower demand as a result of the COVID-19 pandemic and the resulting
economic slow-down. Revenue from services for the second quarter of 2020
includes the results of the Insight acquisition, which added approximately 40
basis points to the total revenue growth rate.
The gross profit rate increased by 160 basis points from the prior year. The
increase was due primarily to government wage subsidies, received as the
employer of record, which accounted for approximately 100 basis points, lower
employee-related costs and the impact of improved product mix. As noted in the
following discussions, increases in the GTS and Americas Staffing gross profit
rates were partially offset by a decrease in the gross profit rate of
International Staffing.
Total SG&A expenses decreased 19.6% on a reported basis and 18.9% on a CC basis.
This decrease was due primarily to lower administrative salaries and
performance-based compensation, including additional short-term cost reductions
implemented to further align costs with current revenue volume trends. Included
in total SG&A expenses are adjustments to previously recorded restructuring
charges of $0.2 million in the second quarter of 2020 and $0.6 million in the
second quarter of 2019.
Gain on sale of assets of $12.3 million 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.
Diluted earnings per share for the second quarter of 2020 was $1.04 , as compared
to diluted earnings per share of $2.12 for the second quarter of 2019. The 2020
second quarter diluted earnings per share was impacted by a gain, net of tax, of
approximately $0.52 per share related to the investment in Persol Holdings. The
2019 second quarter diluted earnings per share were impacted by a gain, net of
tax, of approximately $1.07 per share related to the gain on the investment in
Persol Holdings, a gain, net of tax, of approximately $0.23 related to a gain on
sale of an unused parcel of land and approximately $0.01 per share, net of tax,
related to adjustments to restructuring charges.
Beginning in the third quarter of 2020, in connection with the adoption of a new
operating model reflecting the Company's focus on delivering specialty talent
solutions, the Company will be revising the reportable segments and recasting
prior year reportable segment results.
31
--------------------------------------------------------------------------------
Americas Staffing - Second Quarter
(Dollars in millions)
CC
2020 2019 Change Change
Revenue from services $ 326.7 $ 597.6 (45.3) % (44.1) %
Gross profit 63.4 108.8 (41.7) (40.9)
SG&A expenses excluding restructuring charges 69.8 93.8 (25.5) (24.7)
Restructuring charges (0.1) (0.6) (88.3) (88.3)
Total SG&A expenses 69.7 93.2 (25.1) (24.3)
Earnings (loss) from operations (6.3) 15.6 NM
Earnings (loss) from operations excluding
restructuring charges (6.4) 15.0 NM
Gross profit rate 19.4 % 18.2 % 1.2 pts.
The change in Americas Staffing revenue from services reflects a 40% decrease in
hours volume and a 9% decrease in average bill rates (a 6% decrease on a CC
basis), partially offset by the impact of the January 2020 acquisition of
Insight. The decline in hours reflects the impact from the challenging market
conditions resulting from COVID-19, primarily in education related to school
closures, and in manufacturing industry clients from the temporary closure of
customer facilities. The decrease in average bill rates was related to both
customer mix and product mix due to lower education volume. Americas Staffing
represented 33% of total Company revenue in the second quarter of 2020 and 44%
in the second quarter of 2019.
From a product perspective, the change in revenue reflects lower volume in all products, most significantly in commercial and education.
The Americas Staffing gross profit rate increased 120 basis points in comparison to the prior year, due primarily to lower overall employee costs.
Total SG&A expenses decreased 25.1% from the prior year, due primarily to lower administrative salaries and performance-based compensation, including additional short-term cost reductions implemented to further align costs with current revenue volume trends. Included in total SG&A expenses in the second quarter of 2020 and 2019 are credits of$0.1 million and$0.6 million , respectively, related primarily to the adjustments of previously accrued severance charges forU.S. branch-based staffing operations. 32 --------------------------------------------------------------------------------
GTS - Second Quarter
(Dollars in millions)
CC
2020 2019 Change Change
Revenue from services $ 466.9 $ 505.9 (7.7) % (7.5) %
Gross profit 103.0 99.7 3.3 3.8
SG&A expenses excluding restructuring charges 64.3 74.3 (13.5) (13.2)
Restructuring charges (0.1) - NM NM
Total SG&A expenses 64.2 74.3 (13.6) (13.4)
Earnings from operations 38.8 25.4 53.3
Earnings from operations excluding
restructuring charges 38.7 25.4 52.7
Gross profit rate 22.1 % 19.7 % 2.4 pts.
Revenue from services decreased 7.7% compared to last year. While many of GTS's
products and customers are in essential industries and have been generally
resilient during the COVID-19 pandemic, there was a decline in the second
quarter of 2020 volume in centrally delivered staffing business and PPO
businesses, predominantly in the automotive manufacturing, industrial and energy
industries. These reductions were partially offset by increases from program
expansions and new customer contracts in our KellyConnect and BPO products. GTS
revenue represented 48% of total Company revenue in the second quarter of 2020
and 37% in the second quarter of 2019.
The increase in the GTS gross profit rate was due to lower employee-related costs and the continued structural improvement in our product mix.
Total SG&A expenses decreased 13.6% from the prior year, due to effective cost
management and the impact of short-term cost reduction actions. These actions
were taken in the second quarter of 2020 to mitigate the impact of COVID-19
related demand disruption to further align the costs with current revenue volume
trends.
33
--------------------------------------------------------------------------------
International Staffing - Second Quarter
(Dollars in millions)
CC
2020 2019 Change Change
Revenue from services $ 184.6 $ 268.1 (31.1) % (29.3) %
Gross profit 23.2 36.1 (36.0) (34.3)
Total SG&A expenses 25.1 32.6 (23.2) (21.5)
Earnings (loss) from operations (1.9) 3.5 NM
Gross profit rate 12.5 % 13.5 % (1.0) pts.
In comparison to the prior year, International Staffing revenue from services
decreased 31.1% on a reported basis and 29.3% on a CC basis. The decline was
primarily due to a decrease in hours volume as COVID-19 disrupted operations
across the segment and, in particular, in Portugal , France and the U.K. These
decreases were partially offset by increased revenue in Russia , due to increased
information technology and call center business. International Staffing
represented 19% of total Company revenue in the second quarter of 2020 and 20%
in the second quarter of 2019.
The International Staffing gross profit rate decreased primarily due to lower
permanent placement income, as well as unfavorable customer mix. Permanent
placement income, which is included in revenue from services and has very low
direct costs of services, has a disproportionate impact on gross profit rates.
Total SG&A expenses decreased 23.2% due to cost management to mitigate the impact of the COVID-19 disruption.
34
--------------------------------------------------------------------------------
Results of Operations
Total Company - June Year to Date
(Dollars in millions)
CC
2020 2019 Change Change
Revenue from services $ 2,236.4 $ 2,750.1 (18.7) % (18.0) %
Gross profit 412.5 495.6 (16.8) (16.2)
SG&A expenses excluding restructuring charges 389.1 450.6 (13.7) (13.2)
Restructuring charges 8.5 5.7 49.3 49.7
Total SG&A expenses 397.6 456.3 (12.9) (12.4)
Goodwill impairment charge 147.7 - NM
Gain on sale of assets 32.1 12.3 161.6
Earnings (loss) from operations (100.7) 51.6 NM
Earnings (loss) from operations excluding
restructuring charges (92.2) 57.3 NM
Diluted earnings (loss) per share (2.86) 2.68 NM
Permanent placement income (included in revenue
from services) 19.9 31.6 (37.0) (36.1)
Gross profit rate 18.4 % 18.0 % 0.4 pts.
Total Company revenue from services for the first six months of 2020 declined
18.7% in comparison to the prior year and declined 18.0% on a CC basis. As noted
in the following discussions, revenue decreased in all three segments, due
primarily to the impact of COVID-19, which began in mid-March of this year.
Revenue from services for the first six months of 2020 includes the results of
the Insight acquisition, which added approximately 70 basis points to the total
revenue growth rate.
The gross profit rate increased by 40 basis points from the prior year. As noted
in the following discussions, an increase in the GTS gross profit rate was
partially offset by decreases in the gross profit rate in Americas Staffing and
International Staffing.
Total SG&A expenses decreased 12.9% on a reported basis and 12.4% on a CC basis.
This decrease was due primarily to lower administrative salaries and
performance-based compensation, including additional short-term cost reductions
implemented to further align costs with current revenue volume trends. Included
in total SG&A expenses are restructuring charges of $8.5 million in the first
six months of 2020. This is related to actions taken to position the Company to
adopt a new operating model later in 2020 and to align the U.S. branch network
facilities footprint with a more technology-enabled service delivery
methodology. Restructuring charges of $5.7 million in the first six months of
2019 represent severance costs primarily related to U.S. branch-based staffing
operations.
During the first six months of 2020, the negative reaction to the pandemic by
the global equity markets also resulted in a decline in the Company's common
stock price. This triggered an interim goodwill impairment test, resulting in a
$147.7 million goodwill impairment charge in the first quarter of 2020.
Gain on sale of assets of $32.1 million represents the excess of the proceeds
over the cost of the headquarters properties sold in the first quarter of 2020.
The main headquarters building was subsequently leased back to the Company
during the first quarter of 2020. Gain on sale of assets of $12.3 million
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.
Diluted loss per share for the first six months of 2020 was $2.86 , as compared
to diluted earnings per share of $2.68 for the first six months of 2019. The
2020 diluted loss per share was impacted by the goodwill impairment charge, net
of tax, of approximately $3.18 per share, a loss, net of tax, of approximately
$0.85 per share related to the investment in Persol Holdings, gain on sale of
assets, net of tax, of approximately $0.61 per share and restructuring charges,
net of tax, of approximately $0.16 per share. The 2019 diluted earnings per
share were impacted by a gain, net of tax, of approximately $1.31 per share
related to the gain on the investment in Persol Holdings, gain on sale of
assets, net of tax, of approximately $0.23 per share and restructuring charges,
net of tax, of approximately $0.11 per share.
35
--------------------------------------------------------------------------------
Beginning in the third quarter of 2020, in connection with the adoption of a new
operating model reflecting the Company's focus on delivering specialty talent
solutions, the Company will be revising the reportable segments and recasting
prior year reportable segment results.
36
--------------------------------------------------------------------------------
Americas Staffing - June Year to Date
(Dollars in millions)
CC
2020 2019 Change Change
Revenue from services $ 860.1 $ 1,224.1 (29.7) % (29.0) %
Gross profit 157.0 226.0 (30.5) (30.1)
SG&A expenses excluding restructuring charges 157.7 188.7 (16.4) (16.0)
Restructuring charges 5.5 5.7 (2.3) (2.3)
Total SG&A expenses 163.2 194.4 (16.0) (15.6)
Earnings (loss) from operations (6.2) 31.6 NM
Earnings (loss) from operations excluding
restructuring charges (0.7) 37.3 NM
Gross profit rate 18.3 % 18.5 % (0.2) pts.
The change in Americas Staffing revenue from services reflects a 28% decrease in
hours volume and a 5% decrease in average bill rates (a 4% decrease on a CC
basis), partially offset by the impact of the January 2020 acquisition of
Insight. The decline in hours reflects the impact from the challenging market
conditions resulting from COVID-19, primarily in education related to school
closures, and in manufacturing industry clients from the temporary closure of
customer facilities. The decrease in average bill rates was related to customer
mix in commercial, education and engineering products as well as product mix
from lower education volumes. Americas Staffing represented 39% of total Company
revenue in the first six months of 2020 and 45% in the first six months of 2019.
From a product perspective, the change in revenue reflects lower volume in all products, most significantly in commercial and education.
The Americas Staffing gross profit rate decreased in comparison to the prior year, due primarily to customer mix.
Total SG&A expenses decreased 16.0% from the prior year, due primarily to lower administrative salaries and performance-based compensation, including additional short-term cost reductions implemented to further align costs with current revenue volume trends. The restructuring costs in the first six months of 2020 primarily represent facilities lease buy-out costs and severance costs related toU.S. branch-based staffing operations. The restructuring costs in the first six months of 2019 primarily represent severance costs related toU.S. branch-based staffing operations. 37 --------------------------------------------------------------------------------
GTS - June Year to Date
(Dollars in millions)
CC
2020 2019 Change Change
Revenue from services $ 970.1 $ 1,006.9 (3.7) % (3.5) %
Gross profit 203.2 200.1 1.6 1.9
SG&A expenses excluding restructuring charges 137.1 149.0 (8.0) (7.7)
Restructuring charges 0.8 - NM NM
Total SG&A expenses 137.9 149.0 (7.5) (7.2)
Earnings from operations 65.3 51.1 27.8
Earnings from operations excluding
restructuring charges 66.1 51.1 29.4
Gross profit rate 20.9 % 19.9 % 1.0 pts.
Revenue from services decreased 3.7% compared to last year. While many of GTS's
products and customers are in essential industries and have been generally
resilient during the COVID-19 pandemic, there was a decline in second quarter of
2020 volume in centrally delivered staffing business and PPO businesses,
predominantly in the automotive manufacturing, industrial and energy industries.
These reductions were partially offset by increases from program expansions and
new customer contracts in our BPO and KellyConnect products. GTS revenue
represented 43% of total Company revenue in the first six months of 2020 and 37%
in the first six months of 2019.
The increase in the GTS gross profit rate was due to continued structural improvement in our product mix and lower employee-related costs.
Total SG&A expenses decreased 7.5% from the prior year, due to effective cost management and short-term cost reduction actions. These actions were taken in the first six months of 2020 to mitigate the impact of COVID-19 related demand disruption to further align the costs with current revenue volume trends. Included in total SG&A expenses are$0.8 million related to restructuring charges, representing primarily employee separation costs. 38
--------------------------------------------------------------------------------
International Staffing - June Year to Date
(Dollars in millions)
CC
2020 2019 Change Change
Revenue from services $ 412.2 $ 527.0 (21.8) % (20.2) %
Gross profit 53.1 70.7 (24.9) (23.3)
SG&A expenses excluding restructuring charges 53.3 63.9 (16.6) (15.1)
Restructuring charges 1.1 - NM NM
Total SG&A expenses 54.4 63.9 (14.9) (13.4)
Earnings (loss) from operations (1.3) 6.8 NM
Earnings (loss) from operations excluding
restructuring charges (0.2) 6.8 NM
Gross profit rate 12.9 % 13.4 % (0.5) pts.
In comparison to the prior year, International Staffing revenue from services
decreased 21.8% on a reported basis and 20.2% on a CC basis. The decline was
primarily due to a decrease in hours volume in France , Portugal and Italy , due
to declining market conditions early in the year as a result of the COVID-19
economic disruption. These decreases were partially offset by increased revenue
in Russia , due to increased information technology and call center business.
International Staffing represented 18% of total Company revenue in the first six
months of 2020 and 19% in the first six months of 2019.
The International Staffing gross profit rate decreased primarily due to lower permanent placement income, as well as unfavorable customer mix.
Total SG&A expenses decreased 14.9% due to cost management to mitigate the impact of the COVID-19 disruption and a continued focus on increased productivity in our branch network. Included in total SG&A are$1.1 million of restructuring charges, which primarily related toFrance staffing operations to reposition our operating model to pursue growth through specialized staffing business. 39
--------------------------------------------------------------------------------
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. The impact of the current economic slow-down resulting from the COVID-19
crisis began in March 2020 and continued during the second quarter. Consistent
with our historical results, the impact of the current economic conditions
resulted in declines in working capital requirements, primarily Accounts
Receivable, and increases in cash flows from operations as revenues slowed.
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 $221.9 million at the end of
the second quarter of 2020 and $31.0 million at year-end 2019. As further
described below, we generated $178.1 million of cash from operating activities,
generated $13.3 million of cash from investing activities and used $6.2 million
of cash for financing activities.
Operating Activities
In the first six months of 2020, we generated $178.1 million of net cash from
operating activities, as compared to generating $73.5 million in the first six
months of 2019. This change was due to reduced working capital requirements as
revenues slowed. In addition, the Company deferred $48.2 million of tax payments
as allowed by COVID-19 economic relief in several jurisdictions. In the second
quarter of 2020, the Company also monetized wage subsidy receivables outside the
U.S. for $16.9 million in cash.
Trade accounts receivable totaled $1.1 billion at the end of the second quarter
of 2020. Global DSO was 61 days at the end of the second quarter of 2020 and 57
days at the end of the second quarter of 2019.
Our working capital position (total current assets less total current
liabilities) was $585.8 million at the end of the second quarter of 2020, an
increase of $64.2 million from year-end 2019. Excluding additional cash, working
capital declined $126.2 million from year-end 2019. The current ratio (total
current assets divided by total current liabilities) was 1.7 at the end of the
second quarter of 2020 and 1.6 at year-end 2019.
Investing Activities
In the first six months of 2020, we generated $13.3 million of cash from
investing activities, as compared to using $79.6 million in the first six months
of 2019. Included in cash from investing activities in the first six months of
2020 is $55.5 million of proceeds representing the cash received, net of
transaction expenses, for the sale of three headquarters properties as a part of
a sale and leaseback transaction. This was partially offset by $36.4 million of
cash used for the acquisition of Insight in January 2020 , net of the cash
received and including working capital adjustments. Included in cash used for
investing activities in the first six months of 2019 is $50.8 million for the
acquisition of NextGen in January 2019 , net of the cash received, and $35.6
million for the acquisition of GTA in January 2019 , net of the cash received.
These amounts were partially offset by proceeds of $13.8 million primarily from
the sale of unused land.
Financing Activities
In the first six months of 2020, we used $6.2 million of cash for financing
activities, as compared to generating $8.6 million in the first six months of
2019. The change in cash used in financing activities was primarily related to
the year-over-year change in short-term borrowing activities. Debt totaled $0.3
million at the end of the second quarter of 2020 and was $1.9 million at
year-end 2019. 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 0.0% at the end of the second quarter of 2020 and
0.1% at year-end 2019.
The change in short-term borrowings in the first six months of 2020 was
primarily due to payments on local lines of credit. The change in short-term
borrowings in the first six months of 2019 was primarily due to borrowings on
our securitization facility.
We made dividend payments of $3.0 million in the first six months of 2020 and
$5.9 million in the first six months of 2019.
40
--------------------------------------------------------------------------------
New Accounting Pronouncements
See New Accounting Pronouncements footnote in the Notes to Consolidated
Financial Statements of this Quarterly Report on Form 10-Q for a description of
new accounting pronouncements.
Critical Accounting Estimates
For a discussion of our critical accounting estimates, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our
2019 Form 10-K. For a discussion of the goodwill impairment charge recognized
during the first quarter of 2020, see the Goodwill footnote in the Notes to our
Consolidated Financial Statements of this Quarterly Report on Form 10-Q for more
information.
Contractual Obligations and Commercial Commitments
There were no significant changes to our contractual obligations and commercial
commitments from those disclosed in the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our 2019 Form
10-K, other than the sale and leaseback of the main headquarters building.
Details of the lease payments by year are disclosed in the Leases footnote in
the Notes to Consolidated Financial Statements in this Form 10-Q filing. 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. Additional funding sources could include asset-based lending or
additional bank facilities. During 2020, cash generated from operations will be
supplemented by recent enactment of laws providing COVID-19 relief, most notably
the Coronavirus Aid, Relief, and Economic Security Act which allows for the
deferral of payments of the Company's U.S. social security taxes. Such deferrals
are required to be repaid in 2021 and 2022.
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 2020 second quarter 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 as working capital
needs, primarily Accounts Receivable, increase during periods of growth. 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.
As of the end of the second quarter of 2020, we had $200.0 million of available
capacity on our $200.0 million revolving credit facility and $96.8 million of
available capacity on our $150.0 million securitization facility. The
securitization facility carried no short-term borrowings and $53.2 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
subject to financial covenants and restrictions. While we believe these
facilities will cover our working capital needs over the short term, if economic
conditions or operating results change significantly from our current
expectations, we may need to seek additional sources of funds. As of the end of
the second quarter of 2020, we met the debt covenants related to our revolving
credit facility and securitization facility.
We have historically managed 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 the Cash Pool first, and then access our
borrowing facilities. Given the cash generated from operating activities through
the second quarter of 2020 and the level of uncertainty surrounding the duration
of the COVID-19 crisis, we anticipate maintaining a higher level of cash than
our prior practice.
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.
41
--------------------------------------------------------------------------------
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, the recent novel coronavirus
(COVID-19) outbreak, 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 Pte. Ltd. , 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 the Company's Annual Report on
Form 10-K.
42--------------------------------------------------------------------------------
© Edgar Online, source
