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 and direct-hire basis. At the beginning of the third quarter, we have adopted our new Kelly Operating Model and have realigned our business into five specialty business units which are also our reportable segments. •Professional & Industrial - delivers staffing, outcome-based and direct-hire services focused on office, Professional,Light Industrial and Contact Center specialties in theU.S. andCanada , including our KellyConnect product
•Science, Engineering & Technology - delivers staffing, outcome-based and
direct-hire services focused on science and clinical research, engineering,
information technology and telecommunications specialties predominately in the
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•Education - delivers staffing and direct-hire services to the K-12, early
childhood and higher education market in the
•Outsourcing & Consulting - delivers Master Service Provider ("MSP"), Recruitment Process Outsourcing ("RPO"), Business Process Outsourcing ("BPO") and Advisory Services to customers on a global basis
•International - delivers staffing and direct-hire services in fifteen countries
in
In addition, we provide staffing services to customers in APAC through
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. and was 61 days on a global basis as of the 2020 third quarter end, 58 days as of the 2019 year end and 59 days as of the 2019 third 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. Year-over-year revenue declines have been substantial and recent trends have pointed to a slow recovery in demand. 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. The actions have generated substantial cost savings and have allowed us the time necessary to assess the variety of impacts the crisis has had on our business. These initial actions were intentionally broad in scope and as we have moved forward our actions are becoming more targeted to the areas of business where demand declines have been more significant and persistent. Actions such as the 10% pay cut, compensation adjustments for senior leaders and temporary furloughs were ended early in the fourth quarter of 2020. The suspension of the Company match to retirement accounts will end inJanuary 2021 and others such as reductions in discretionary spending, capital expenditures and carefully managing staffing levels in non-revenue generating positions will continue. InOctober 2020 , management made the decision to begin reducing staffing levels through involuntary terminations, and restructuring charges of approximately$4-$5 million for severance and related benefits to be paid to impacted employees are expected to be recognized in our fourth quarter results.
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 and continues to assess future actions with respect to dividend policy.
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 and third quarters as the effect of the pandemic response has slowed global economic activity. We do expect that there will continue to be a material decline in our year-over-year revenues through the first quarter 31 -------------------------------------------------------------------------------- of 2021 as 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, however, the pace of such a return may be 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 fourth quarter, they will not be enough to completely offset declines in revenue and gross profit. As a result, we expect our fourth 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 their duration cannot be precisely predicted, we believe that the mid-term impacts on how people view, find and conduct work will continue to align with our strategic path.
As a result, we have continued to move forward with our specialization strategy, reinventing our operating model and reorganizing our business into five distinct reporting segments. These specialties represent areas where we see the most robust demand, the most promising growth opportunities, and where we believe we excel in attracting and placing talent. Our new segments also reflect our desire to shift our portfolio toward high-margin, higher-value specialties. Kelly has done business in these specialties for many years, but our new operating model represents a new approach - one that brings together both staffing and outcome-based pieces of a specialty under a single specialty leader and aggregates assets to accelerate specialty growth and profitability. We believe this new specialty structure will give us greater advantages in the market, and we expect our disciplined focus to deliver profitable growth coming out of the crisis. In addition, we intend to invest in strategic, targeted M&A opportunities in our specialties, while optimizing our portfolio, as demonstrated by the sale of our operations inBrazil during the third quarter.
Faced with market conditions that may temporarily delay our growth efforts, Kelly continues to focus on accelerating the execution of our strategic plan and making necessary investments to advance that strategy.
•We are making strides in our digital transformation journey, building a technology foundation to sustain growth.
•We're capturing a larger share of voice in the marketplace, using television
spots and targeted social media campaigns to re-introduce Kelly to companies,
highlight our specialty skills sets, and showcase our refreshed brand.
•We are consistently investing to better understand and support our talent. And
we have affirmed our commitment to that talent, recently introducing our
five-point Talent Promise and reallocating resources to be solely focused on the
temporary worker experience.
•Using our unique position in the middle of the supply and demand equation, we
are stepping up with a new platform called Equity@Work to break down
long-standing, systemic barriers that make it difficult for many people to
secure enriching work. This powerful extension of our Noble Purpose will help
more people flow into Kelly's talent pools, while also helping families,
communities and economies thrive.
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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 have determined long-term measures to gauge our progress, including:
•Revenue growth (both organic and inorganic)
•Gross profit rate improvement
•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.
NM ("not meaningful") in the following tables is used in place of percentage
changes where: the change is in excess of 500%, the change involves a comparison
between earnings and loss amounts, or the comparison amount is zero.
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
Total Company
(Dollars in millions)
Third Quarter September Year to Date
2020 2019 % Change 2020 2019 % Change
Revenue from services $ 1,038.2 $ 1,267.7 (18.1) % $ 3,274.6 $ 4,017.8 (18.5) %
Gross profit 191.0 227.7 (16.1) 603.5 723.3 (16.6)
SG&A expenses excluding
restructuring charges 193.5 210.7 (8.1) 582.6 661.3 (11.9)
Restructuring charges (0.1) (0.1) 68.5 8.4 5.6 49.1
Total SG&A expenses 193.4 210.6 (8.2) 591.0 666.9 (11.4)
Goodwill impairment charge - - - 147.7 - NM
Gain on sale of assets - - - 32.1 12.3 161.6
Earnings (loss) from operations (2.4) 17.1 NM (103.1) 68.7 NM
Gain (loss) on investment in
Persol Holdings 16.8 (39.3) NM (31.4) 35.1 NM
Other income (expense), net (0.7) (0.2) (286.4) 3.6 (1.1) 421.4
Earnings (loss) before taxes and
equity in net earnings (loss) of
affiliate 13.7 (22.4) NM (130.9) 102.7 NM
Income tax expense (benefit) (1.2) (12.8) 90.9 (36.5) 6.3 NM
Equity in net earnings (loss) of
affiliate 1.8 (0.9) NM (1.0) (1.0) (1.8)
Net earnings (loss) $ 16.7 $ (10.5) NM $ (95.4) $ 95.4 NM
Gross profit rate 18.4 % 18.0 % 0.4 pts. 18.4 % 18.0 % 0.4 pts.
Conversion rate (1.3) 7.5 (8.8) (17.1) 9.5 (26.6)
Third Quarter Results
Revenue from services in the third quarter declined in all segments, reflecting
the continuing impact of the COVID-19 pandemic and resulting mitigation efforts.
These efforts have resulted in a decline in demand for our temporary staffing
and permanent placement services across a broad range of industries and
geographies. Revenue from staffing services declined 22% compared to the third
quarter of 2019. Additionally, permanent placement revenue, which is included in
revenue from services, decreased 40% year-over-year as the impact of economic
uncertainty depressed full-time hiring in all operating segments. These declines
were partially offset by an increase in outcome-based services of 4% as demand
from customers utilizing these services increased during the quarter.
Gross profit declined as a result of lower revenue volume, partially offset by
an increase in the gross profit rate. The gross profit rate increased 40 basis
points from the prior year. The increase in the gross profit rate was due to the
impact of lower employee-related costs and improved product mix. This was
partially offset by the negative impact of lower permanent placement revenue and
unfavorable customer mix. The recovery of demand for temporary staffing services
from large customers with lower margins outpaced the recovery for small and
medium-sized customers.
Total SG&A expenses decreased 8.2% compared to last year. This decrease reflects
lower salaries and benefits costs as a result of temporary expense mitigation
actions that were taken in response to the COVID-19 crisis, lower incentive
compensation expenses and the benefit of COVID-19 government subsidies related
to full-time employees recognized in the third quarter. Included in SG&A
expenses in the third quarter of 2020 is a $9.5 million non-cash charge in the
International segment related to a customer dispute that resulted in additional
uncollectible accounts receivable charges.
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The loss from operations for the quarter of $2.4 million reflects a decline from
the $17.1 million of earnings from operations in the prior year. Our earnings
from operations declined as a result of lower gross profit, partially offset by
lower expenses due to cost reduction efforts.
Gain (loss) on investment in Persol Holdings represents the gain or loss resulting from changes in the market price of our investment in the common stock of Persol Holdings. The gains or losses fluctuate each quarter based on the quoted market price of the Persol Holdings common stock at period end.
Income tax benefit was$1.2 million and$12.8 million for the third quarter of 2020 and 2019, respectively. These amounts were impacted by changes in the fair value of the Company's investment in Persol Holdings, which resulted in an income tax charge of$5.2 million for the third quarter of 2020 compared to an income tax benefit of$12.1 million for the third quarter of 2019. The change in income taxes also reflects a decline in earnings from operations in the third quarter of 2020. Our tax expense is affected by recurring items, such as the amount of pretax income and its mix by jurisdiction,U.S. work opportunity credits and the change in cash surrender value of tax exempt investments in life insurance policies. It is also affected by discrete items that may occur in any given period but are not consistent from period to period, such as tax law changes, changes in judgment regarding the realizability of deferred tax assets, the tax effects of stock compensation, and changes in the fair value of the Company's investment in Persol Holdings, which are treated as discrete since they cannot be estimated. The net earnings for the period of$16.7 million , an increase of$27.2 million from the third quarter of 2019, was due primarily to increased gains of Persol Holdings common stock and a lower effective income tax rate, partially offset by lower earnings from operations. September Year-to-Date Results Revenue from services for the first nine months of 2020 declined in all segments, reflecting the impact of COVID-19, and resulting in a decline in demand for our staffing services and permanent placement services across a broad range of industries and geographies. Revenue from staffing services declined 23% compared to last year. Permanent placement revenue, which is included in revenue from services, decreased 38% year-over-year as the impact of economic uncertainty depressed full-time hiring in all operating segments. These declines were partially offset by an increase in outcome-based services of 9% as demand from customers utilizing these services increased during the year. Gross profit declined as a result of lower revenue volume, partially offset by an increase in the gross profit rate. The gross profit rate increased 40 basis points in comparison to the prior year. With the exception of Education and International, the gross profit rate increased in all other operating segments, primarily reflecting improved product mix and lower employee-related costs. International's gross profit rate was negatively impacted by the decrease in permanent placement revenue. Government subsidies accounted for approximately 20 basis points of the increase for the year. Total SG&A expenses decreased 11.4% in comparison to the prior year. 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$8.4 million in the first nine months of 2020. This is related to actions taken to position the Company to adopt the new operating model and to align theU.S. branch network facilities footprint with a more technology-enabled service delivery methodology. Restructuring charges of$5.6 million in the first nine months of 2019 represent severance costs primarily related toU.S. branch-based staffing operations. During the first nine 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. The loss from operations for the first nine months of 2020 of$103.1 million reflects a decline from the$68.7 million of earnings from operations in the prior year. Our earnings from operations declined as a result of the goodwill impairment charge and lower gross profit, partially offset by the gain on sale of assets and lower expenses due to cost reduction efforts. 35 -------------------------------------------------------------------------------- Gain (loss) on investment in Persol Holdings represents the gain or loss resulting from changes in the market price of our investment in the common stock of Persol Holdings. The gains or losses fluctuate based on the quoted market price of the Persol Holdings common stock at period end. Income tax benefit was$36.5 million and expense was$6.3 million for September year to date 2020 and 2019, respectively. These amounts were impacted by changes in the fair value of the Company's investment in Persol Holdings, which resulted in an income tax benefit of$9.6 million for September year to date 2020, compared to an income tax charge of$10.7 million for September year to date 2019. September year to date 2020 includes a first quarter tax benefit of$23.0 million on the impairment of goodwill and a second quarter tax benefit of$7.7 million fromBrazil outside basis differences. September year to date 2019 includes a net benefit of$10.4 million from valuation allowance changes in theUnited Kingdom andGermany . Our tax expense is affected by recurring items, such as the amount of pretax income and its mix by jurisdiction,U.S. work opportunity credits and the change in cash surrender value of tax exempt investments in life insurance policies. It is also affected by discrete items that may occur in any given period but are not consistent from period to period, such as tax law changes, changes in judgment regarding the realizability of deferred tax assets, the tax effects of stock compensation, and changes in the fair value of the Company's investment in Persol Holdings, which are treated as discrete since they cannot be estimated. The impairment of goodwill in the first quarter of 2020 and the recording of deferred taxes onBrazil outside basis differences in the second quarter of 2020 were treated as discrete items. The net loss for the period of$95.4 million , a decrease of$190.8 million from the prior year, was due primarily to lower earnings from operations due to the goodwill impairment charge taken in the first quarter of 2020, combined with increased losses of Persol Holdings common stock, partially offset by the impact of an income tax benefit in comparison to income tax expense last year. Operating Results By Segment (Dollars in millions) Third Quarter September Year to Date 2020 2019 % Change 2020 2019 % Change (Dollars in millions) Revenue from Services: Professional & Industrial$ 446.5 $ 538.0 (17.0) %$ 1,346.7 $ 1,668.7 (19.3) % Science, Engineering & Technology 244.0 285.2 (14.4) 761.5 859.7 (11.4) Education 27.5 57.1 (51.8) 195.1 313.9 (37.8) Outsourcing & Consulting 87.9 94.4 (7.0) 261.0 282.3 (7.6) International 232.4 293.4 (20.8) 710.6 893.6 (20.5) Less: Intersegment revenue (0.1) (0.4) (69.6) (0.3) (0.4) (31.9) Consolidated Total$ 1,038.2 $ 1,267.7 (18.1) %$ 3,274.6 $ 4,017.8 (18.5) % Third Quarter Results Professional & Industrial revenue from services decreased due primarily to decreases in our hours volume in our staffing businesses which continue to be impacted by COVID-19 due to a slow recovery rate. These decreases were partially offset by increased revenue in our outcome-based businesses due to program expansions. Science, Engineering & Technology revenue from services decreased due to lower hours volume in our staffing business across most specialties due to the continued impact of COVID-19, with the exception of our government staffing business, which has seen increased demand in talent to support life sciences and clinical research. Education revenue from services decreased due primarily to the impact of COVID-19. School districts delayed starts and when instruction did begin, many districts used a virtual or hybrid instructional style, reducing the typical demand for Education services. These decreases were partially offset by the revenues from the first quarter 2020 acquisition of Insight. 36 --------------------------------------------------------------------------------
Outsourcing & Consulting revenue from services decreased due primarily to decreases in our PPO, MSP and RPO products due somewhat to COVID-19-related demand impacts as well as lower demand in the Oil and Gas Industry, partially offset by increases in our Career Transitions product.
International revenue from services decreased 20.8% on a reported basis and 21.1% in CC. The decline was primarily due to a decrease in hours volume as COVID-19 disruptions continued across operations in all countries, in particularPortugal andFrance . Revenue was also impacted following the sale of operations inBrazil inAugust 2020 . Overall, although COVID-19 related demand declines continued, demand for our services in the third quarter of 2020 in each segment has increased sequentially since the second quarter of 2020.
September Year-to-Date Results
Professional & Industrial revenue from services decreased due primarily to decreases in our hours volume in our staffing businesses which were impacted by COVID-19. These decreases were partially offset by increased revenue in our outcome-based products due to program expansions.
Science, Engineering & Technology revenue from services decreased due to lower hours volume in our staffing business across most products due to the continued impact of COVID-19, with the exception of our government staffing business, which has seen increased demand in life sciences support.
Education revenue from services decreased due to the impact of COVID-19. Temporary school closures, delayed starts and use of virtual or hybrid instructional styles reduced the typical demand for our Education services. These decreases were partially offset by the revenues from the first quarter acquisition of Insight.
Outsourcing & Consulting revenue from services decreased due primarily to decreases in our PPO, MSP and RPO products due somewhat to COVID-19 as well as lower demand in the Oil and Gas Industry.
International revenue from services decreased 20.5% on a reported basis and 18.7% on a CC basis. The decline was primarily due to a decrease in hours volume as COVID-19 disruptions continued across operations in all countries, in particularFrance ,Portugal and theU.K. These decreases were partially offset by increased revenue inRussia , due to higher hours volume combined with higher average bill rates. 37 -------------------------------------------------------------------------------- Operating Results By Segment (continued) (Dollars in millions) Third Quarter September Year to Date 2020 2019 Change 2020 2019 Change (Dollars in millions) Gross Profit: Professional & Industrial$ 77.1 $ 91.8 (16.1)
%$ 241.1 $ 291.6 (17.3) % Science, Engineering & Technology 50.7 58.3 (13.1) 156.0 171.8 (9.3) Education 4.1 8.6 (51.1) 28.8 49.9 (42.2) Outsourcing & Consulting 29.1 29.5 (1.5) 87.1 90.7 (4.0) International 30.0 39.5 (23.9) 90.5 119.3 (24.1) Consolidated Total$ 191.0 $ 227.7 (16.1) %$ 603.5 $ 723.3 (16.6) % Gross Profit Rate: Professional & Industrial 17.3 % 17.1 % 0.2 pts. 17.9 % 17.5 % 0.4 pts. Science, Engineering & Technology 20.8 20.4 0.4 20.5 20.0 0.5 Education 15.2 15.0 0.2 14.8 15.9 (1.1) Outsourcing & Consulting 33.1 31.3 1.8 33.4 32.2 1.2 International 12.9 13.5 (0.6) 12.7 13.3 (0.6) Consolidated Total 18.4 % 18.0 % 0.4 pts. 18.4 % 18.0 % 0.4 pts. Third Quarter Results Gross Profit for the Professional & Industrial segment declined as the result of lower revenue volume, partially offset by an improved gross profit rate. The gross profit rate increased 20 basis points due to lower employee-related costs coupled with improved product mix, as a greater proportion of the segment revenue came from outcome-based services with higher margins. The Science, Engineering & Technology gross profit declined as lower revenue volume was partially offset by a higher gross profit rate. The gross profit rate increased 40 basis points due to lower employee-related costs, partially offset by specialty mix. Gross profit for the Education segment declined as a result of lower revenue volume, partially offset by an improved gross profit rate. The gross profit rate increased 20 basis points due to lower employee-related costs, partially offset by increased pricing pressures.
The Outsourcing & Consulting gross profit declined on lower revenue volume, partially offset by an improved gross profit rate. The gross profit rate increased by 180 basis points due to improved product mix coupled with lower employee-related costs in the PPO product.
International gross profit declined as a result of lower revenue volume and a decline in the gross profit rate. The gross profit rate decreased primarily due to lower permanent placement revenue. Permanent placement revenue, which is included in revenue from services and has very low direct costs of services, has a disproportionate impact on gross profit rates.
September Year-to-Date Results
Gross Profit for the Professional & Industrial segment declined as the result of
lower revenue volume, partially offset by an improved gross profit rate. The
gross profit rate increased 40 basis points due to lower employee-related costs
coupled with improved product mix, as a greater proportion of the segment
revenue came from outcome-based services with higher margins.
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The Science, Engineering & Technology gross profit declined as lower revenue
volume was partially offset by a higher gross profit rate. The gross profit rate
increased 50 basis points due to lower employee-related costs, partially offset
by specialty mix.
Gross profit for the Education segment declined as a result of lower revenue
volume, combined with a lower gross profit rate. The Education gross profit rate
decreased 110 basis points due to increased pricing pressures, partially offset
by lower employee-related costs.
The Outsourcing & Consulting gross profit declined on lower revenue volume,
partially offset by an improved gross profit rate. The Outsourcing & Consulting
gross profit rate increased 120 basis points due to improved product mix coupled
with lower employee-related costs in the PPO product.
International gross profit declined as a result of lower revenue volume and a
decline in the gross profit rate. The International gross profit rate decreased
primarily due to lower permanent placement revenue.
Operating Results By Segment (continued)
(Dollars in millions)
Third Quarter September Year to Date
2020 2019 % Change 2020 2019 % Change
(Dollars in millions)
SG&A Expenses:
Professional & Industrial $ 65.3 $ 77.6 (15.8) % $ 210.4 $ 246.9 (14.8) %
Science, Engineering &
Technology 31.3 36.0 (13.0) 99.1 111.4 (11.1)
Education 11.6 13.8 (15.5) 37.7 41.5 (9.1)
Outsourcing & Consulting 25.4 29.1 (12.7) 79.1 90.9 (13.0)
International 39.9 35.3 13.1 101.4 107.2 (5.4)
Corporate expenses 19.9 18.8 5.3 63.3 69.0 (8.3)
Consolidated Total $ 193.4 $ 210.6 (8.2) % $ 591.0 $ 666.9 (11.4) %
Third Quarter September Year to Date
2020 2019 % Change 2020 2019 % Change
(Dollars in millions)
Restructuring Charges Included
in SG&A Expenses:
Professional & Industrial $ (0.1) $ (0.1) (24.7) % $ 4.3 $ 5.2 (18.8) %
Science, Engineering &
Technology - - - 0.5 0.4 45.2
Education - - - 0.8 - NM
Outsourcing & Consulting - - - - - -
International - - - 1.1 - NM
Corporate expenses - - - 1.7 - NM
Consolidated Total $ (0.1) $ (0.1) 68.5 % $ 8.4 $ 5.6 49.1 %
Third Quarter Results
Total SG&A expenses in Professional & Industrial decreased 15.8% due primarily
to lower salaries and related costs from cost management actions and initiatives
taken to help mitigate the lower revenue volume as a result of the COVID-19
disruption, coupled with the impact of the restructuring actions taken in the
first quarter of this year.
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Total SG&A expenses in Science, Engineering & Technology decreased 13.0% due
primarily to lower salaries and related costs resulting from the cost management
actions and initiatives taken to help mitigate the lower revenue volume as a
result of the COVID-19 disruption.
Total SG&A expenses in Education decreased 15.5% due primarily to lower salaries
and related costs as a result of cost management actions and initiatives taken
to help mitigate the lower revenue volume as a result of the COVID-19
disruption. This decrease was partially offset by the impact of the acquisition
of Insight that took place in the first quarter.
Total SG&A expenses in Outsourcing & Consulting decreased 12.7% due primarily to
lower salaries and related costs due to cost management actions and initiatives
taken to help mitigate the lower revenue volume as a result of the COVID-19
disruption, partially offset by higher performance-based compensation.
Total SG&A expenses in International increased 13.1% due to a specific customer
credit loss provision in Mexico as a result of an unfavorable ruling in on-going
litigation. The disputed accounts receivable balance relates to services
rendered more than five years ago. Excluding this provision, total SG&A expenses
decreased 14.0% driven by cost management to contend with the COVID-19
disruption, due primarily to lower salaries, combined with the effect of the
sale of operations in Brazil in August 2020 .
Corporate expenses increased due to the year-over-year impact of adjustments
which lowered performance-based compensation expense in the third quarter of
2019, along with increased rent expense for the headquarters building as a
result of the 2020 first quarter sale-leaseback transaction. These increases
were partially offset by lower employee salaries and benefits related to
COVID-19 cost-saving actions taken.
Subsequent to the end of the third quarter, several temporary expense mitigation
actions taken in response to COVID-19 such as furloughs and reductions in
compensation for officers and employees in the U.S. , were ended in the fourth
quarter. Reductions in staffing levels in areas of the business in which the
demand declines have been the most severe and pervasive have been initiated.
September Year-to-Date Results
Total SG&A expenses in Professional & Industrial decreased 14.8% due primarily to lower salaries and related costs due to cost management actions and initiatives taken to help mitigate the lower revenue volume as a result of the COVID-19 disruption, coupled with the impact of the restructuring actions taken in the first quarter of this year which reduced salaries and related costs and facilities expenses. Total SG&A expenses in Science, Engineering & Technology decreased 11.1% due primarily to cost management actions and initiatives taken to help mitigate the lower revenue volume as a result of the COVID-19 disruption. Total SG&A expenses in Education decreased 9.1% due primarily to lower salaries and related costs resulting from the cost management actions and initiatives taken to help mitigate the lower revenue volume as a result of the COVID-19 disruption. This decrease was partially offset by the impact of the acquisition of Insight that took place in the first quarter. Total SG&A expenses in Outsourcing & Consulting decreased 13.0% due primarily to lower salaries and related expenses resulting from cost management actions and initiatives taken to help mitigate the lower revenue volume as a result of the COVID-19 disruption. Total SG&A expenses in International decreased 5.4%. Excluding the previously mentioned specific customer credit loss provision inMexico , total SG&A expenses decreased 14.3% due primarily to lower salaries, driven by cost management to contend with the COVID-19 disruption, combined with lower incentive-based compensation. Corporate expenses decreased as a result of lower performance-based compensation expense and lower employee salaries and benefits related to COVID-19 cost-saving actions taken. These decreases were partially offset by rent expense for the headquarters building as a result of the 2020 first quarter sale-leaseback transaction. 40
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Operating Results By Segment (continued)
(Dollars in millions)
Third Quarter September Year to Date
2020 2019 % Change 2020 2019 % Change
(Dollars in millions)
Earnings (Loss) from
Operations:
Professional & Industrial $ 11.8 $ 14.2 (17.6) %$ 30.7 $ 44.7 (31.4) % Science, Engineering & Technology 19.4 22.3 (13.2) 56.9 60.4 (5.9) Education (7.5) (5.2) (43.2) (8.9) 8.4 NM Outsourcing & Consulting 3.7 0.4 NM 8.0 (0.2) NM International (9.9) 4.2 NM (10.9) 12.1 NM Corporate (19.9) (18.8) (5.3) (178.9) (56.7) (215.1) Consolidated Total$ (2.4) $ 17.1 NM$ (103.1) $ 68.7 NM Third Quarter Results Professional & Industrial reported earnings of$11.8 million for the quarter, a 17.6% decrease from a year ago. The decrease in earnings was primarily due to the impact of COVID-19 on our staffing operations, partially offset by increases in our outcome-based products and the cost management initiatives taken to mitigate the impact of the pandemic on our operations. Science, Engineering & Technology reported earnings of$19.4 million for the quarter, a 13.2% decrease from a year ago. The decrease in earnings was primarily due to the impact of COVID-19 on our operations, partially offset by the cost management initiatives taken to mitigate its impact. Education reported a loss of$7.5 million for the quarter, a 43.2% increase from a year ago. The increased loss was primarily due to the impact of COVID-19 on our operations, partially offset by the cost management initiatives taken to mitigate its impact. Outsourcing & Consulting reported earnings of$3.7 million for the quarter, a$3.3 million increase over a year ago. The increase in earnings was primarily due to the impact of the cost management initiatives taken to mitigate the impact of COVID-19 as well as improved product mix. International reported a loss for the quarter, driven by a specific customer provision inMexico . Excluding this effect, the loss was$0.4 million , as the cost management actions only partially offset the lower revenues due to the COVID-19 impact on operations. September Year-to-Date Results Professional & Industrial reported earnings of$30.7 million , a 31.4% decrease from a year ago. The decrease in earnings was primarily due to the impact of COVID-19 on our staffing operations, partially offset by increases in our outcome-based products and the cost management initiatives taken to mitigate the impact of the pandemic on our operations. Science, Engineering & Technology reported earnings of$56.9 million , a 5.9% decrease from a year ago. The decrease in earnings was primarily due to the impact of COVID-19 on our operations, partially offset by the cost management initiatives taken to mitigate its impact.
Education reported a loss of
Outsourcing & Consulting reported earnings of
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International reported a loss on a year-to-date basis, largely driven by a
specific customer provision in Mexico . Excluding this effect, the loss was $1.4
million , as the cost management actions only partially offset the lower revenues
due to the COVID-19 impact on 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. The impact of the current economic slow-down resulting from the COVID-19
crisis began in March 2020 and continued during the third quarter. Consistent
with our historical results, the impact of the current economic conditions
resulted in declines in working capital requirements, primarily trade 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 $254.4 million at the end of
the third quarter of 2020 and $31.0 million at year-end 2019. As further
described below, we generated $216.5 million of cash from operating activities,
generated $10.3 million of cash from investing activities and used $6.8 million
of cash for financing activities.
Operating Activities
In the first nine months of 2020, we generated $216.5 million of net cash from
operating activities, as compared to generating $74.2 million in the first nine
months of 2019. This change was due to reduced working capital requirements as
revenues slowed. In addition, the Company deferred $75.7 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 third quarter
of 2020. Global DSO was 61 days at the end of the third quarter of 2020 and 59
days at the end of the third quarter of 2019. The increase of two days was due
to certain customers taking advantage of full payment terms, along with a shift
in customer mix to larger customers with longer payment terms.
Our working capital position (total current assets less total current
liabilities) was $634.5 million at the end of the third quarter of 2020, an
increase of $112.9 million from year-end 2019. Excluding additional cash,
working capital declined $109.5 million from year-end 2019. The current ratio
(total current assets divided by total current liabilities) was 1.8 at the end
of the third quarter of 2020 and 1.6 at year-end 2019.
Investing Activities
In the first nine months of 2020, we generated $10.3 million of cash from
investing activities, as compared to using $88.8 million in the first nine
months of 2019. Included in cash from investing activities in the first nine
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 nine 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 nine months of 2020, we used $6.8 million of cash for financing
activities, as compared to generating $3.6 million in the first nine 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 $0.5
million at the end of the third 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 third quarter of 2020 and 0.1%
at year-end 2019.
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The change in short-term borrowings in the first nine months of 2020 was
primarily due to payments on local lines of credit. The change in short-term
borrowings in the first nine months of 2019 was primarily due to borrowings on
our securitization facility.
We made dividend payments of $3.0 million in the first nine months of 2020 and
$8.9 million in the first nine months of 2019.
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, with the exception of the sale and leaseback of the main headquarters
building and the indemnification agreement related to the sale of our Brazil
operations. 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. Details of the indemnification agreement are disclosed in the
Acquisitions and Disposition footnote and the Fair Value Measurements footnote
in the Notes to the 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
continue to 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 third 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 trade accounts receivable, increase during periods of growth. A
cash pooling arrangement (the "Cash Pool ") 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 third 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 third 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. As cash flows generated from operations through the third
quarter of 2020 have been higher than our historical results and uncertainty
remains surrounding the duration of the
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COVID-19 crisis, we anticipate maintaining a higher level of cash than our prior
practice. We do believe that we may begin to utilize a portion of our existing
cash balances to fund working capital requirements over the next several
quarters if demand for our services continues to increase.
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.
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.
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