KELLY SERVICES, INC. Executive Overview
The COVID-19 pandemic and related containment measures and the subsequent economic recovery 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. As we navigate a world of work now impacted by these changes, 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
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. By aligning ourselves with our Noble Purpose and executing against these behaviors, we have navigated the challenges of the past year and are emerging 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 the current economic situation is accelerating 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. In 2020, we adopted the Kelly Operating Model and 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 theU.S. andCanada and includes ourNextGen andGlobal Technology Associates subsidiaries, as well as ourSoftworld, Inc. ("Softworld") subsidiary as of the beginning of the second quarter of 2021 29 -------------------------------------------------------------------------------- •Education - delivers staffing, direct-hire and executive search services to the K-12, early childhood and higher education markets in theU.S. , and includes several acquisitions: Teachers On Call, Insight Workforce Solutions andGreenwood/Asher & Associates
•Outsourcing & Consulting - delivers Master Service Provider ("MSP"), Recruitment Process Outsourcing ("RPO"), Payroll Process Outsourcing ("PPO") and Advisory Services to customers on a global basis
•International - delivers staffing and direct-hire services in 15 countries in
In addition, we provide staffing services to customers in theAsia-Pacific region throughPersolKelly Pte. Ltd. , our joint venture withPersol Asia Pacific Pte. Ltd , a wholly owned subsidiary of Persol Holdings, a leading provider of HR solutions inJapan . 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 60 days on a global basis as of the end of the second quarter of 2021 and 64 days as of the end of 2020. 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 clearer since the beginning of the pandemic. Beginning inmid-March 2020 , our year-over-year revenues declined swiftly and substantially as governments and businesses reacted to the crisis. In response, 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 included salary reductions for full-time salaried employees, including reduced CEO and senior leader compensation, temporary furloughing and/or redeployment of some employees. Our actions generated substantial cost savings and allowed us the time necessary to assess the variety of impacts the crisis had on our business. Most actions were in place until early in the fourth quarter of 2020. In addition, we benefited in 2020 from CARES Act provisions allowing deferral of employer social security tax payments. In connection with expiration of the temporary cost reduction measures noted above, management reduced staffing levels to align with expected revenue levels and recorded restructuring charges of$4.4 million for severance and related benefits for impacted employees in the fourth quarter of 2020. Given the level of uncertainty surrounding the duration of the COVID-19 crisis, Kelly's board also voted to suspend the quarterly dividend inMay 2020 and continued to assess economic and business conditions to determine future actions with respect to our dividend policy. As ofAugust 2021 , the Board of Directors declared a dividend of$0.05 per share. The negative market reaction to the COVID-19 crisis inMarch 2020 also resulted in a decline in our common stock price which caused our market capitalization to decline significantly at the end of the first quarter of 2020. 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. In the second quarter of 2021, as we anniversary the impacts of the crisis, revenues have returned to year-over-year growth. In addition, our sequential quarter-over-quarter revenue growth points to a continuation of the recovery. We expect that demand for our services will continue to gradually recover from the economic slowdown and the effects of customer 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 availability of the talent provided to our customers. We are proactively taking steps to address talent shortages and mismatches in our businesses that were most impacted by the pandemic, including implementing new technologies, streamlining processes, adopting efficient recruiting models and collaborating with clients on innovative approaches to attract and retain talent. We currently expect a gradual return to pre-crisis levels of customer demand; however, the pace of such a return may be delayed if a resurgence in infections leads to additional disruption, containment measures or increased lack of available talent to match our customers' demand. As 30 -------------------------------------------------------------------------------- 2021 progresses, we expect that our revenue will reflect a continued gradual improvement in demand and result in continued improvements in year-over-year gross profit and earnings from operations.
Moving Forward
While the continuing economic and labor market recovery 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 current operating 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 current 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 specialty structure gives 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 recent acquisition ofSoftworld in the second quarter of 2021, the acquisition ofGreenwood/Asher & Associates in the fourth quarter of 2020 and the sale of our operations inBrazil during the third quarter of 2020. Faced with market conditions that may continue to be uneven in the near term, 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 and to support our teams, clients and talent with powerful new technologies that make it faster and easier than ever to connect. •We are using our platform, 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 uses our unique position in the middle of the supply and demand equation to help more people flow into Kelly's talent pools, while also helping families, communities and economies thrive. •We are committed to helping each Kelly team define the fastest, most efficient and creative paths to achieving their business goals by removing unnecessary work and refocusing efforts in the right places to achieve our defined performance expectations in the most effective way possible.
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 refer to the year-over-year
percentage changes resulting from translating 2021 financial data into U.S.
dollars using the same foreign currency exchange rates used to translate
financial data for 2020. 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.
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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 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.
EBITDA (earnings before interest, taxes, depreciation and amortization) and
EBITDA margin (EBITDA divided by revenue from services) are measures used for
understanding the Company's ability to generate cash flow and for judging
overall operating performance.
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)
Second Quarter June Year to Date
2021 2020 % Change 2021 2020 % Change
Revenue from services $ 1,258.1 $ 975.3 29.0 % $ 2,464.0 $ 2,236.4 10.2 %
Gross profit 231.0 189.2 22.1 444.3 412.5 7.7
SG&A expenses excluding
restructuring charges 217.3 178.3 21.8 420.0 389.1 7.9
Restructuring charges - (0.2) NM - 8.5 NM
Total SG&A expenses 217.3 178.1 21.9 420.0 397.6 5.6
Goodwill impairment charge - - NM - 147.7 NM
Gain on sale of assets - - NM - 32.1 NM
Earnings (loss) from operations 13.7 11.1 24.1 24.3 (100.7) NM
Gain (loss) on investment in
Persol Holdings 6.3 29.6 (78.8) 36.3 (48.2) NM
Other income (expense), net (0.3) 2.6 (109.0) (3.7) 4.3 (185.8)
Earnings (loss) before taxes
and equity in net earnings
(loss) of affiliate 19.7 43.3 (54.4) 56.9 (144.6) NM
Income tax expense (benefit) (2.6) 0.9 (406.2) 7.9 (35.3) 122.2
Equity in net earnings (loss)
of affiliate 1.7 (1.3) NM 0.6 (2.8) NM
Net earnings (loss) $ 24.0 $ 41.1 (41.6) % $ 49.6 $ (112.1) NM %
Gross profit rate 18.4 % 19.4 % (1.0) pts. 18.0 % 18.4 % (0.4) pts.
Conversion rate 5.9 5.8 0.1 5.5 (24.4) 29.9
Second Quarter Results
Revenue from services in the second quarter increased 29.0% on a reported basis
and 26.2% on a constant currency basis, and reflects revenue increases in all
operating segments. Our acquisition of Softworld , a technology staffing and
solutions firm, added approximately 310 basis points to the revenue growth rate.
Compared to the second quarter of 2020, revenue from staffing services increased
32.4% and revenue from outcome-based services increased 7.8%. Permanent
placement revenue, which is included in revenue from services, more than doubled
from the prior year.
Gross profit increased 22.1% on higher revenue volume, partially offset by a
decrease in the gross profit rate. The gross profit rate decreased primarily due
to the impact of temporary government wage subsidies in the prior year,
partially offset by the impact of higher permanent placement income and the
acquisition of Softworld , which generates higher gross profit rates. Decreases
in the gross profit rate for Professional & Industrial, Education and
Outsourcing & Consulting were partially offset by increases in the gross profit
rate for Science, Engineering & Technology and International. 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.
Total SG&A expenses increased 21.9% on a reported basis and 19.8% on a constant
currency basis. SG&A expenses related to Softworld , including amortization of
intangibles and other operating expenses, accounted for approximately 460 basis
points to the year-over-year increase. The increase in SG&A expenses also
reflects increases in performance-based incentive compensation expenses and the
impact of temporary expense mitigation efforts in the prior year.
Earnings from operations for the second quarter of 2021 totaled $13.7 million ,
compared to earnings from operations of $11.1 million in the second quarter of
2020. Included in total earnings from operations is approximately $2.3 million ,
related to Softworld earnings from operations, inclusive of amortization of
intangibles. Earnings from operations increased in all operating segments, with
the exception of Professional & Industrial.
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--------------------------------------------------------------------------------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$2.6 million in the second quarter of 2021 and income tax expense was$0.9 million for the second quarter of 2020. These amounts were impacted by changes in the fair value of the Company's investment in Persol Holdings, which resulted in charges of$1.9 million and$9.0 million for the second quarter of 2021 and 2020, respectively. The second quarter of 2021 had a benefit of$5.2 million from a change inUnited Kingdom tax rates, while the second quarter of 2020 had a benefit of$7.7 million fromBrazil outside basis differences. 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 were$24.0 million , compared to net earnings of$41.1 million from the second quarter of 2020. This change was due primarily to lower gains on Persol Holdings common stock.
June Year-to-Date Results
Revenue from services in the first six months of 2021 increased 10.2% on a reported basis and 8.3% on a constant currency basis, and reflects revenue increases in all operating segments. Our acquisition ofSoftworld in earlyApril 2021 added approximately 140 basis points to the revenue growth rate. Compared to the first six months of 2020, revenue from staffing services increased 9.2%, revenue from outcome-based services increased 5.1%, and permanent placement income increased 74.1%. Gross profit increased 7.7% on higher revenue volume, partially offset by a decrease in the gross profit rate. The gross profit rate decreased primarily due to the impact of temporary government wage subsidies in the prior year, partially offset by the impact of higher permanent placement income and the acquisition ofSoftworld , which generates higher gross profit rates. Decreases in the gross profit rate for Professional & Industrial and Outsourcing & Consulting were partially offset by increases in the gross profit rate for Science, Engineering & Technology, Education and International. TheApril 2021 acquisition ofSoftworld accounted for approximately 20 basis points. Total SG&A expenses increased 5.6% compared to last year. With the exception of Professional & Industrial, SG&A expenses in all segments increased in comparison to the prior year. SG&A expenses related toSoftworld , including amortization of intangibles and other operating expenses, accounted for approximately 210 basis points to the year-over-year increase. The increase in SG&A expenses also reflects increases in performance-based incentive compensation expenses and the impact of temporary expense mitigation efforts in the prior year. Included in SG&A expenses in the first six months of 2020 was$8.5 million of restructuring charges. Actions were taken in the first quarter of 2020 to position the Company to adopt the updated operating model and to align theU.S. branch network facilities footprint with a more technology-enabled service delivery methodology. 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 in 2020 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 by the Company during the first quarter of 2020. Earnings from operations for the first six months of 2021 totaled$24.3 million , compared to a loss from operations of$100.7 million in the first six months of 2020. The increase in earnings from operations from the prior year primarily reflects the impact of the goodwill impairment charge and restructuring charge in 2020, partially offset by the 2020 gain on sale of assets. 34 --------------------------------------------------------------------------------
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.
Other expense for the first six months of 2021 totaled$3.7 million , compared to other income of$4.3 million for the first six months of 2020. Included in the 2021 amount are transaction-related expenses from theApril 2021 acquisition ofSoftworld and a one-time, non-cash write-down of an equity investment. Income tax expense was$7.9 million in the first six months of 2021 and income tax benefit was$35.3 million for the first six months of 2020. These amounts were impacted by changes in the fair value of the Company's investment in Persol Holdings, which resulted in a charge of$11.1 million and a benefit of$14.8 million for June year to date 2021 and 2020, respectively. June year to date 2020 includes a tax benefit of$23.0 million on the impairment of goodwill. 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 first quarter of 2020 impairment of goodwill was treated as discrete. The net earnings for the period were$49.6 million , compared to a net loss of$112.1 million from the first six months of 2020. This change was due primarily to higher earnings from operations and increased gains of Persol Holdings common stock, net of tax. 35 -------------------------------------------------------------------------------- Operating Results By Segment (Dollars in millions) Second Quarter June Year to Date 2021 2020 % Change 2021 2020 % Change Revenue from Services: Professional & Industrial$ 466.5 $ 406.4 14.8 %$ 934.1 $ 900.2 3.8 % Science, Engineering & Technology 298.2 247.3 20.6 552.9 517.5 6.8 Education 105.9 25.1 322.1 217.5 167.6 29.8 Outsourcing & Consulting 107.3 83.6 28.2 206.6 173.1 19.3 International 280.4 213.0 31.6 553.3 478.2 15.7 Less: Intersegment revenue (0.2) (0.1) 18.0 (0.4) (0.2) 84.1 Consolidated Total$ 1,258.1 $ 975.3
29.0 %$ 2,464.0 $ 2,236.4 10.2 % Second Quarter Results Professional & Industrial revenue from services increased 14.8%, due primarily to an increase in the hours volume as customer demand improved in our staffing businesses as compared to last year, which was significantly impacted by COVID-19. This increase was coupled with higher permanent placement income, partially offset by a decrease in revenue from our outcome-based services as customer demand declined. Science, Engineering & Technology revenue from services increased 20.6% on a reported basis, which includes revenues from the acquisition ofSoftworld . On an organic basis, the revenue growth was 8.3%, which was driven by hours volume increases in our staffing business across most specialties as customer demand increased compared to last year, which was impacted by COVID-19, coupled with increases in outcome-based services and permanent placement income. Education revenue from services increased 322.1%, reflecting the return to in-school instruction by many schools, resulting in increased demand for our services as compared to a year ago. In the second quarter of 2020, many districts were using virtual or hybrid instruction methods due to the impact of COVID-19, which decreases the demand for our services.
Outsourcing & Consulting revenue from services increased due primarily to the increase in hours revenue volume in our PPO specialty.
International revenue from services increased 31.6% on a reported basis and increased 21.6% in constant currency. Year-over-year revenue comparisons were unfavorably impacted by the sale of our staffing operations inBrazil inAugust 2020 . ExcludingBrazil , revenue increased 35.5% on a reported basis and 25.2% on a constant currency basis. The increase was primarily due to higher hours volume, particularly inFrance ,Portugal andMexico .
June Year-to-Date Results
Professional & Industrial revenue from services increased 3.8%, due primarily to an increase in the hours volume as customer demand improved in our staffing businesses as compared to last year, which was significantly impacted by COVID-19. This increase was combined with an increase in revenue from permanent placement income and our outcome-based services. Science, Engineering & Technology revenue from services increased 6.8% on a reported basis, which includes revenues from the acquisition ofSoftworld . On an organic basis the revenue growth was 1.0%, which was driven by hours increases in our staffing business across most specialties, coupled with an increase in permanent placement income. Education revenue from services increased 29.8% reflecting the return to in-school instruction by many schools, resulting in increased demand for our services as compared to a year ago. In the first six months of 2020, many districts were using virtual or hybrid instruction methods due to the impact of COVID-19.
Outsourcing & Consulting revenue from services increased 19.3% due primarily to increased hours volume in our PPO product and new customer wins in our RPO product.
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International revenue from services increased 15.7% on a reported basis and
increased 9.0% in constant currency. Year-over-year revenue comparisons were
unfavorably impacted by the sale of our staffing operations in Brazil in August
2020 . Excluding Brazil , revenue increased 19.5% on a reported basis and 12.6% on
a constant currency basis. The increase was primarily due to higher hours
volume, particularly in France , Portugal and Mexico .
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Operating Results By Segment (continued)
(Dollars in millions)
Second Quarter June Year to Date
2021 2020 Change 2021 2020 Change
Gross Profit:
Professional & Industrial $ 75.2 $ 78.9 (4.7) % $ 151.1 $ 164.0 (7.9) %
Science, Engineering &
Technology 66.5 50.6 31.5 119.7 105.3 13.7
Education 16.8 4.3 291.1 34.0 24.7 37.6
Outsourcing & Consulting 34.8 29.2 19.3 66.1 58.0 14.1
International 37.7 26.2 43.8 73.4 60.5 21.3
Consolidated Total $ 231.0 $ 189.2 22.1 % $ 444.3 $ 412.5 7.7 %
Gross Profit Rate:
Professional & Industrial 16.1 % 19.4 % (3.3) pts. 16.2 % 18.2 % (2.0) pts.
Science, Engineering &
Technology 22.3 20.4 1.9 21.6 20.3 1.3
Education 15.8 17.1 (1.3) 15.6 14.7 0.9
Outsourcing & Consulting 32.5 34.9 (2.4) 32.0 33.5 (1.5)
International 13.4 12.3 1.1 13.3 12.7 0.6
Consolidated Total 18.4 % 19.4 % (1.0) pts. 18.0 % 18.4 % (0.4) pts.
Second Quarter Results
Gross profit for the Professional & Industrial segment decreased due to a
decline in the gross profit rate, partially offset by higher revenue volume. In
comparison to the prior year, the gross profit rate decreased 330 basis points.
This decrease reflects the unfavorable year-over-year impact of government wage
subsidies, increased costs associated with our outcome-based services, and a
shift in product mix compared to the prior year as demand for staffing services
increased. These decreases were partially offset by the impact of increased
permanent placement income this year.
The Science, Engineering & Technology gross profit increased on higher revenue
volume and an increase in the gross profit rate. The gross profit rate increased
190 basis points due to increased permanent placement income, coupled with
improved specialty mix, including the acquisition of Softworld which generates
higher gross profit margins.
Gross profit for the Education segment increased on higher revenue volume, partially offset by a decrease in the gross profit rate. The gross profit rate decreased 130 basis points due primarily to the unfavorable year-over-year impact of government wage subsidies, partially offset by an increase in permanent placement income from Greenwood/Asher, our acquisition in late 2020.
The Outsourcing & Consulting gross profit increased on higher revenue volume, partially offset by a decrease in the gross profit rate. The gross profit rate decreased 240 basis points primarily due to a change in product mix within this segment, as PPO revenues increased.
International gross profit increased on higher revenue volume and an increase in the gross profit rate. The gross profit rate increased 110 basis points primarily due to customer mix and higher permanent placement income.
June Year-to-Date Results
Gross profit for the Professional & Industrial segment decreased due to a
decrease in the gross profit rate, partially offset by higher revenue volume. In
comparison to the prior year, the gross profit rate decreased 200 basis points.
This decrease reflects the unfavorable year-over-year impact of government wage
subsidies, increased costs associated with our outcome-based services, and a
shift in product mix compared to the prior year as demand for staffing services
increased. These decreases were partially offset by the impact of increased
permanent placement income this year.
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The Science, Engineering & Technology gross profit increased on higher revenue
volume and an increase in the gross profit rate. The gross profit rate increased
130 basis points due to increased permanent placement income, coupled with
improved specialty mix, including the acquisition of Softworld in April 2021 .
Gross profit for the Education segment increased on higher revenue volume and an
increase in the gross profit rate. The gross profit rate increased 90 basis
points due primarily to higher permanent placement income from Greenwood/Asher,
our acquisition in late 2020. This increase was partially offset by the
unfavorable year-over-year impact of government wage subsidies.
The Outsourcing & Consulting gross profit increased on higher revenue volume,
partially offset by a decrease in the gross profit rate. The gross profit rate
decreased 150 basis points primarily due to a change in product mix within this
segment as PPO revenues increased.
International gross profit increased on higher revenue volume and an increase in
the gross profit rate. The gross profit rate increased 60 basis points primarily
due to customer mix.
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Operating Results By Segment (continued)
(Dollars in millions)
Second Quarter June Year to Date
2021 2020 % Change 2021 2020 % Change
SG&A Expenses:
Professional & Industrial $ 69.0 $ 64.6 6.9 % $ 138.4 $ 145.1 (4.6) %
Science, Engineering &
Technology 46.9 31.3 49.7 82.6 67.8 21.8
Education 15.3 9.5 60.5 29.5 26.1 12.9
Outsourcing & Consulting 30.1 25.1 19.7 58.5 53.7 8.9
International 34.6 28.3 22.3 67.7 61.5 10.1
Corporate expenses 21.4 19.3 10.7 43.3 43.4 (0.5)
Consolidated Total $ 217.3 $ 178.1 21.9 % $ 420.0 $ 397.6 5.6 %
Second Quarter June Year to Date
2021 2020 % Change 2021 2020 % Change
Restructuring Charges Included
in SG&A Expenses:
Professional & Industrial $ - $ - NM % $ - $ 4.4 NM %
Science, Engineering &
Technology - - NM - 0.5 NM
Education - (0.1) NM - 0.8 NM
Outsourcing & Consulting - - NM - - NM
International - - NM - 1.1 NM
Corporate expenses - (0.1) NM - 1.7 NM
Consolidated Total $ - $ (0.2) NM % $ - $ 8.5 NM %
Second Quarter Results
Total SG&A expenses in Professional & Industrial increased 6.9% from the prior
year. Year-over-year comparisons were impacted by temporary expense mitigation
actions taken in the second quarter of 2020 as a result of lower revenue volume
due to the COVID-19 disruption. This increase was combined with an increase in
performance-based incentive compensation as compared to the prior year.
Total SG&A expenses in Science, Engineering & Technology increased 49.7% from
the prior year, and includes the impact of the acquisition of Softworld in the
second quarter of 2021. On an organic basis, SG&A expenses increased 23% from
the prior year. Year-over-year comparisons of salaries and related costs were
impacted by temporary expense mitigation actions taken in the second quarter of
2020 as a result of lower revenue volume due to the COVID-19 disruption. These
increases were combined with higher headcount in sales and recruiting talent,
and an increase in performance-based incentive compensation.
Total SG&A expenses in Education increased 60.5% from the prior year. Year-over-year comparisons of salaries and related costs were impacted by temporary expense mitigation actions taken in the second quarter of 2020 to mitigate the impact of the lower revenue volume as a result of the COVID-19 disruption.
Total SG&A expenses in Outsourcing & Consulting increased 19.7% from the prior year. Year-over-year comparisons of salaries and related costs were impacted by temporary expense mitigation actions taken in the second quarter of 2020 to mitigate the impact of the lower revenue volume as a result of the COVID-19 disruption. These increases were combined with an increase in performance-based incentive compensation. Total SG&A expenses in International increased 22.3% on a reported basis and increased 13.3% on a constant currency basis. Expenses were higher as a result of higher salary-related expenses due to increased headcount, mainly in our branch network.
Corporate expenses increased 10.7% due primarily to higher performance-based incentive compensation.
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Total SG&A expenses in Professional & Industrial decreased 4.6%, or 1.7% excluding restructuring charges, due primarily to reduced facilities expense as we continue to evaluate and reduce our branch footprint in theU.S. andCanada . This decrease was partially offset by an increase in salaries and performance-based incentive compensation as compared to the prior year. Total SG&A expenses in Science, Engineering & Technology increased 21.8%, or 22.8% excluding restructuring charges. Excluding restructuring charges and the acquisition ofSoftworld , SG&A expenses increased 10.3%. Year-over-year comparisons of salaries and related costs were impacted by temporary expense mitigation actions taken in response to the COVID-19 disruption in 2020. These increases were combined with higher headcount in sales and recruiting talent, and an increase in performance-based incentive compensation. Total SG&A expenses in Education increased 12.9%, or 16.8% excluding restructuring charges. Year-over-year comparisons of salaries and related costs were impacted by temporary expense mitigation actions taken in 2020 in response to the COVID-19 disruption. Total SG&A expenses in Outsourcing & Consulting increased 8.9% in comparison to the prior year. Year-over-year comparisons of salaries and related costs were impacted by temporary expense actions taken in 2020 in response to the impact of the COVID-19 disruption. Total SG&A expenses in International increased 10.1% on a reported basis and increased 3.3% on a constant currency basis. Excluding the restructuring charges, expenses increased 5.1% on a constant currency basis. Expenses were higher primarily due to increases in performance-based incentive compensation.
Corporate expenses were flat in comparison to the prior year. Lower restructuring and long-term disability costs were offset by higher performance-based incentive compensation.
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Operating Results By Segment (continued)
(Dollars in millions)
Second Quarter June Year to Date
2021 2020 % Change 2021 2020 % Change
Earnings (Loss) from
Operations:
Professional & Industrial $ 6.2 $ 14.3 (57.0) % $ 12.7 $ 18.9 (32.9) %
Science, Engineering &
Technology 19.6 19.3 1.8 37.1 37.5 (1.1)
Education 1.5 (5.2) NM 4.5 (1.4) NM
Outsourcing & Consulting 4.7 4.1 16.2 7.6 4.3 78.9
International 3.1 (2.1) NM 5.7 (1.0) NM
Corporate (21.4) (19.3) (10.7) (43.3) (159.0) 72.8
Consolidated Total $ 13.7 $ 11.1 24.1 % $ 24.3 $ (100.7) NM %
Second Quarter Results
Professional & Industrial reported earnings of $6.2 million for the quarter, a
57.0% decrease from a year ago. The decrease in earnings was primarily due to
the year-over-year impact of the government wage subsidies we received in the
second quarter of 2020 and increased costs of services reducing our gross profit
rate in our outcome-based products, as well as increasing expenses. These were
partially offset by increased revenues in our staffing product and an increase
in our permanent placement income.
Science, Engineering & Technology reported earnings of $19.6 million for the
quarter, a 1.8% increase from a year ago. The increase in earnings was primarily
due to the impact of the Softworld acquisition, coupled with increases in
organic staffing and permanent placement revenues in most of our specialties
within the SET business unit. These increases were partially offset by increases
in certain expenses, including those related to additional full-time employees
and increased performance-based incentive compensation.
Education reported earnings of $1.5 million for the quarter, compared to a loss
of $5.2 million a year ago. The change was primarily due to the increase in
revenue, reflecting the return to in-school instruction by many schools,
resulting in increased demand for our services as compared to a year ago. In
2020, many districts were using virtual or hybrid instruction methods due to the
impact of COVID-19.
Outsourcing & Consulting reported earnings of $4.7 million for the quarter, a
16.2% increase from a year ago. The increase in earnings was primarily due to
the impact of increased revenue volumes within the segment.
International reported earnings of $3.1 million for the quarter, compared to a
loss of $2.1 million a year ago. The increase in earnings was primarily due to
improving revenue across both Europe and Mexico .
June Year-to-Date Results
Professional & Industrial reported earnings of$12.7 million , a 32.9% decrease from a year ago. The decrease in earnings was primarily due to the year-over-year impact of the government wage subsidies we received in the second quarter of 2020 and increased costs of services reducing our gross profit rate in our outcome-based product lines. These were partially offset by increased revenues in our staffing product and an increase in our permanent placement income. Science, Engineering & Technology reported earnings of$37.1 million , a 1.1% decrease from a year ago. The decrease in earnings was primarily due to higher expenses related to performance-based incentive compensation and higher salaries due to investment in additional sales and recruiting resources, which exceeded revenue and gross margin growth. This was partially offset by earnings fromSoftworld , which was acquired inApril 2021 . Education reported earnings of$4.5 million , compared to a loss of$1.4 million a year ago. The increase was primarily due to an increase in revenue, reflecting the return to in-school instruction by many schools, resulting in increased demand for our services as compared to a year ago. In 2020, many districts were using virtual or hybrid instruction methods due to the impact of COVID-19. 42 -------------------------------------------------------------------------------- Outsourcing & Consulting reported earnings of$7.6 million , a 78.9% increase compared to a year ago. The increase in earnings was primarily due to the impact of increased revenue volumes within the segment.
International reported earnings of
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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, which is
generally paid weekly or monthly, and customer accounts receivable, which is
generally outstanding for longer periods. Since receipts from customers 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 . While we have yet to return to pre-crisis revenue
levels, we are seeing continued economic momentum and sustainable recovery in
the second quarter of 2021.
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 $70.7 million at the end of
the second quarter of 2021 and $228.1 million at year-end 2020. As further
described below, we generated $47.6 million of cash from operating activities,
used $201.7 million of cash for investing activities and used $1.0 million of
cash for financing activities.
Operating Activities
In the first six months of 2021, we generated $47.6 million of net cash from
operating activities, as compared to generating $178.1 million in the first six
months of 2020, primarily due to increased working capital requirements as
revenue levels continue to recover or surpass pre-COVID levels in certain
segments.
Trade accounts receivable totaled $1.4 billion at the end of the second quarter
of 2021. Global DSO was 60 days at the end of the second quarter of 2021, 64
days at year-end 2020 and 61 days at the end of the second quarter of 2020. The
decrease since year-end 2020 reflects the collection of receivables from several
large customers who were carrying higher balances due to customer-driven
administrative issues at year end.
Our working capital position (total current assets less total current
liabilities) was $455.4 million at the end of the second quarter of 2021, a
decrease of $168.6 million from year-end 2020. Excluding the decrease in cash,
working capital declined $10.0 million from year-end 2020. The current ratio
(total current assets divided by total current liabilities) was 1.4 at the end
of the second quarter of 2021 and 1.7 at year-end 2020.
Investing Activities
In the first six months of 2021, we used $201.7 million of cash for investing
activities, as compared to generating $13.3 million in the first six months of
2020. Included in cash used for investing activities in the first six months of
2021 is $219.0 million of cash used for the acquisition of Softworld in April
2021 , net of cash received. 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.
Financing Activities
In the first six months of 2021, we used $1.0 million of cash for financing
activities, as compared to using $6.2 million in the first six months of 2020.
The change in cash from financing activities was primarily related to the
year-over-year change in dividend payments. Dividends paid per common share were
$0.075 in first six months of 2020, while no dividends were paid in the first
six months of 2021.
Changes in net cash from financing activities are also impacted by short-term
borrowing activities. Debt totaled $0.1 million at the end of the second quarter
of 2021 and was $0.3 million at year-end 2020, and represented local borrowings
in both periods. 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 2021 and
at year-end 2020.
The change in short-term borrowings in the first six months of 2021 and the
first six months of 2020 was primarily due to payments on local lines of credit.
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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
2020 Form 10-K.
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 2020 Form
10-K. 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,
additional bank facilities or sale of non-core assets. To meet significant cash
requirements related to our nonqualified retirement plan, we may utilize
proceeds from Company-owned life insurance policies. During 2020, cash generated
from operations was supplemented by the deferral of payments of the Company's
U.S. social security taxes as allowed by the Coronavirus Aid, Relief, and
Economic Security Act. Such deferrals are required to be repaid by the end of
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 end of the second quarter of
2021, 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 second quarter of 2021, we had $200.0 million of available capacity on
our $200.0 million revolving credit facility and $97.0 million of available
capacity on our $150.0 million securitization facility. The securitization
facility carried no short-term borrowings and $53.0 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 2021, we met
the debt covenants related to our revolving credit facility and securitization
facility.
We have historically managed our cash and debt 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.
We believe that we may 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 and to pay the deferred payroll tax balances in
which 50% are due in the fourth quarter of both 2021 and 2022.
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.
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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, changing market and economic
conditions, the recent novel coronavirus (COVID-19) outbreak, competitive market
pressures including pricing and technology introductions and disruptions,
disruption in the labor market and weakened demand for human capital resulting
from technological advances, competition law risks, the impact of changes in
laws and regulations (including federal, state and international tax laws),
unexpected changes in claim trends on workers' compensation, unemployment,
disability and medical benefit plans, or the risk of additional tax liabilities
in excess of our estimates, our ability to achieve our business strategy, our
ability to successfully develop new service offerings, 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 government or
government contractors, the risk of damage to our brand, our exposure to risks
associated with services outside traditional staffing, including business
process outsourcing, services of licensed professionals and services connecting
talent to independent work, our increasing dependency on third parties for the
execution of critical functions, our ability to effectively implement and manage
our information technology strategy, the risks associated with past and future
acquisitions, including risk of related impairment of goodwill and intangible
assets, exposure to risks associated with investments in equity affiliates
including PersolKelly Pte. Ltd. , 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 anticorruption, 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, our ability to sustain critical business
applications through our key data centers, 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 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
undertake no duty to update any forward-looking statement to conform the
statement to actual results or changes in the Company's expectations. 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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