Kelly Services(KELYA) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents Kelly Services' unaudited consolidated financial statements and detailed notes for Q2 and YTD 2020 and 2019 Consolidated Statements of Earnings Consolidated Statements of Earnings (13 Weeks Ended) | Metric | June 28, 2020 (Millions $) | June 30, 2019 (Millions $) | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Revenue from services | 975.3 | 1,367.5 | -28.7% | | Gross profit | 189.2 | 244.0 | -22.5% | | Earnings (loss) from operations | 11.1 | 34.8 | -68.2% | | Net earnings (loss) | 41.1 | 83.8 | -51.0% | | Basic earnings (loss) per share | 1.04 | 2.12 | -50.9% | | Diluted earnings (loss) per share | 1.04 | 2.12 | -50.9% | Consolidated Statements of Earnings (26 Weeks Ended) | Metric | June 28, 2020 (Millions $) | June 30, 2019 (Millions $) | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Revenue from services | 2,236.4 | 2,750.1 | -18.7% | | Gross profit | 412.5 | 495.6 | -16.8% | | Earnings (loss) from operations | (100.7) | 51.6 | NM | | Net earnings (loss) | (112.1) | 105.9 | NM | | Basic earnings (loss) per share | (2.86) | 2.69 | NM | | Diluted earnings (loss) per share | (2.86) | 2.68 | NM | Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Comprehensive Income (Loss) (13 Weeks Ended) | Metric | June 28, 2020 (Millions $) | June 30, 2019 (Millions $) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net earnings (loss) | 41.1 | 83.8 | | Foreign currency translation adjustments | 2.7 | 6.9 | | Comprehensive income (loss) | 43.8 | 90.7 | Consolidated Statements of Comprehensive Income (Loss) (26 Weeks Ended) | Metric | June 28, 2020 (Millions $) | June 30, 2019 (Millions $) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net earnings (loss) | (112.1) | 105.9 | | Foreign currency translation adjustments | (4.7) | 5.4 | | Comprehensive income (loss) | (116.8) | 111.3 | Consolidated Balance Sheets Consolidated Balance Sheets | Asset/Liability | June 28, 2020 (Millions $) | December 29, 2019 (Millions $) | | :-------------------------------- | :------------ | :---------------- | | Assets | | | | Cash and equivalents | 216.2 | 25.8 | | Trade accounts receivable, net | 1,085.0 | 1,282.2 | | Total current assets | 1,377.2 | 1,405.7 | | Goodwill, net | — | 127.8 | | Total Assets | 2,318.7 | 2,480.6 | | Liabilities & Equity | | | | Total current liabilities | 791.4 | 884.1 | | Total noncurrent liabilities | 381.7 | 332.0 | | Total stockholders' equity | 1,145.6 | 1,264.5 | | Total Liabilities and Stockholders' Equity | 2,318.7 | 2,480.6 | Consolidated Statements of Stockholders' Equity Consolidated Statements of Stockholders' Equity (26 Weeks Ended June 28, 2020 vs. June 30, 2019) | Metric | June 28, 2020 (Millions $) | June 30, 2019 (Millions $) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Balance at beginning of period (Earnings Invested in Business) | 1,238.6 | 1,138.1 | | Net earnings (loss) | (112.1) | 105.9 | | Dividends | (3.0) | (5.9) | | Accumulated Other Comprehensive Income (Loss) at end of period | (20.5) | (11.7) | | Stockholders' Equity at end of period | 1,145.6 | 1,268.2 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (26 Weeks Ended) | Activity | June 28, 2020 (Millions $) | June 30, 2019 (Millions $) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash from operating activities | 178.1 | 73.5 | | Net cash from (used in) investing activities | 13.3 | (79.6) | | Net cash (used in) from financing activities | (6.2) | 8.6 | | Net change in cash, cash equivalents and restricted cash | 190.9 | 2.4 | | Cash, cash equivalents and restricted cash at end of period | 221.9 | 42.5 | Notes to Consolidated Financial Statements 1. Basis of Presentation These unaudited statements adhere to Regulation S-X, with necessary adjustments for fair interim reporting, and include deferred U.S. tax payments - Noncurrent accrued payroll and related taxes of $38.4 million as of Q2 2020 include deferred U.S. tax payments due to COVID-19 economic relief legislation[29] 2. Revenue Revenue is disaggregated by service type and geography, showing significant declines in Q2 and YTD 2020 due to the COVID-19 pandemic Revenue from Services by Segment (Second Quarter, in millions) | Segment | 2020 (Millions $) | 2019 (Millions $) | Change (%) | | :---------------------- | :----- | :----- | :--------- | | Americas Staffing | 326.7 | 597.6 | -45.3% | | International Staffing | 184.6 | 268.1 | -31.1% | | Global Talent Solutions | 466.9 | 505.9 | -7.7% | | Total Revenue | 975.3 | 1,367.5 | -28.7% | Revenue from Services by Segment (June Year to Date, in millions) | Segment | 2020 (Millions $) | 2019 (Millions $) | Change (%) | | :---------------------- | :----- | :----- | :--------- | | Americas Staffing | 860.1 | 1,224.1 | -29.7% | | International Staffing | 412.2 | 527.0 | -21.8% | | Global Talent Solutions | 970.1 | 1,006.9 | -3.7% | | Total Revenue | 2,236.4 | 2,750.1 | -18.7% | Revenue from Services by Geography (Second Quarter, in millions) | Region | 2020 (Millions $) | 2019 (Millions $) | Change (%) | | :------------- | :----- | :----- | :--------- | | Americas | 774.3 | 1,082.0 | -28.4% | | EMEA | 194.2 | 278.9 | -30.4% | | APAC | 6.8 | 6.6 | 3.0% | | Total Revenue | 975.3 | 1,367.5 | -28.7% | Revenue from Services by Geography (June Year to Date, in millions) | Region | 2020 (Millions $) | 2019 (Millions $) | Change (%) | | :------------- | :----- | :----- | :--------- | | Americas | 1,791.1 | 2,189.1 | -18.2% | | EMEA | 431.8 | 548.9 | -21.4% | | APAC | 13.5 | 12.1 | 11.6% | | Total Revenue | 2,236.4 | 2,750.1 | -18.7% | - Deferred sales commissions were $1.1 million at Q2 2020, down from $1.5 million at year-end 2019. Amortization expense for these costs was $0.3 million for Q2 2020 and $0.6 million YTD 2020[37] - Deferred fulfillment costs were $3.4 million at Q2 2020, down from $3.6 million at year-end 2019. Amortization expense for these costs was $4.8 million for Q2 2020 and $9.6 million YTD 2020[38] 3. Credit Losses The Company adopted ASC Topic 326, changing credit loss measurement, with a Q2 2020 allowance of $9.3 million - Adopted ASC Topic 326 on December 30, 2019, for credit losses, resulting in a $0.7 million decrease to retained earnings, net of tax, in Q1 2020[126] Rollforward of Allowance for Credit Losses (June Year to Date 2020, in millions) | Item | Amount (Millions $) | | :---------------------- | :----- | | Beginning balance | 9.7 | | Impact of adopting ASC 326 | 0.3 | | Current period provision | 0.4 | | Currency exchange effects | (0.4) | | Write-offs | (0.7) | | Ending balance | 9.3 | 4. Acquisitions Kelly Services made strategic acquisitions in 2019 and 2020 to expand staffing, but goodwill from these was impaired in Q1 2020 - Acquired Insight Workforce Solutions LLC on January 14, 2020, for $34.5 million ($38.1 million cash paid), to expand U.S. education staffing market share. This acquisition resulted in $19.9 million in goodwill and $10.6 million in customer relationships (intangible assets)[50][51] - Acquired NextGen Global Resources LLC on January 2, 2019, for $51.0 million ($54.3 million cash paid), a telecommunications staffing provider[52] - Acquired Global Technology Associates, LLC on January 2, 2019, for $34.0 million ($35.7 million cash paid), an engineering, technology, and business consulting provider in telecommunications[55] - Goodwill from these acquisitions was included in the $147.7 million impairment charge taken in Q1 2020 due to the COVID-19 crisis[57] 5. Investment in Persol Holdings The yen-denominated investment in Persol Holdings, recorded at fair value, generated a Q2 2020 gain but a YTD loss Gain (Loss) on Investment in Persol Holdings (in millions) | Period | 2020 (Millions $) | 2019 (Millions $) | | :---------------------- | :----- | :----- | | Second Quarter | 29.6 | 61.2 | | June Year to Date | (48.2) | 74.4 | - Investment in Persol Holdings is recorded at fair value based on Tokyo Stock Exchange quoted prices[58] 6. Investment in PersolKelly Pte. Ltd. The 49% equity interest in PersolKelly, accounted for using the equity method, reported a loss in Q2 and YTD 2020 Equity in Net Earnings (Loss) of Affiliate (in millions) | Period | 2020 (Millions $) | 2019 (Millions $) | | :---------------------- | :----- | :----- | | Second Quarter | (1.3) | 0.3 | | June Year to Date | (2.8) | (0.1) | - Investment in equity affiliate totaled $113.6 million at Q2 2020, down from $117.2 million at year-end 2019[60] - The JV sold its Australian and New Zealand subsidiaries on April 1, 2020, for $17.5 million, with the Company receiving a direct royalty payment of $0.7 million[64] 7. Fair Value Measurements Assets measured at fair value include money market funds and Persol Holdings investment, with a Q1 2020 goodwill impairment Assets Measured at Fair Value on a Recurring Basis (in millions of dollars) | Description | June 28, 2020 (Total, Millions $) | December 29, 2019 (Total, Millions $) | | :---------------------- | :-------------------- | :------------------------ | | Money market funds | 121.5 | 4.9 | | Investment in Persol Holdings | 127.2 | 173.2 | | Total assets at fair value | 248.7 | 178.1 | - Money market funds increased significantly due to higher cash and cash equivalent balances from increased cash flows from operations[68] - A goodwill impairment charge of $147.7 million was recorded in Q1 2020 due to a triggering event from negative market reaction to the COVID-19 crisis, impacting fair value measurements on a nonrecurring basis[73] 8. Restructuring Q1 2020 restructuring actions, totaling $8.5 million, aimed to align costs and optimize operations, with most payments due by year-end Restructuring Costs Incurred in 2020 (in millions of dollars) | Segment | Lease Termination Costs (Millions $) | Severance Costs (Millions $) | Total (Millions $) | | :---------------------- | :---------------------- | :-------------- | :---- | | Americas Staffing | 4.1 | 1.4 | 5.5 | | Global Talent Solutions | — | 0.8 | 0.8 | | International Staffing | 0.7 | 0.4 | 1.1 | | Corporate | — | 1.1 | 1.1 | | Total | 4.8 | 3.7 | 8.5 | Global Restructuring Balance Sheet Accrual (in millions of dollars) | Item | Amount (Millions $) | | :------------------------------------------------ | :----- | | Balance as of year-end 2019 | 0.3 | | Additions charged to segments and Corporate | 8.7 | | Reductions for lease termination costs | (0.6) | | Reductions for cash payments | (6.6) | | Accrual adjustments | (0.2) | | Balance as of second quarter-end 2020 | 1.6 | 9. Goodwill A $147.7 million goodwill impairment charge was recorded in Q1 2020 due to the COVID-19 crisis's negative market impact - A goodwill impairment charge of $147.7 million was recorded in Q1 2020, writing off all goodwill for Americas Staffing ($78.4 million) and Global Talent Solutions ($69.3 million)[80][83] - The impairment was triggered by declines in the Company's common stock price due to the COVID-19 crisis[80] 10. Accumulated Other Comprehensive Income (Loss) This section details changes in accumulated other comprehensive income, primarily foreign currency translation and pension liability adjustments Changes in Accumulated Other Comprehensive Income (Loss) (in millions of dollars) | Component | Q2 2020 (Millions $) | Q2 2019 (Millions $) | YTD 2020 (Millions $) | YTD 2019 (Millions $) | | :-------------------------------------- | :------ | :------ | :------- | :------- | | Foreign currency translation adjustments (beginning balance) | (20.6) | (17.2) | (13.2) | (15.7) | | Net current-period other comprehensive income (loss) | 2.7 | 6.9 | (4.7) | 5.4 | | Foreign currency translation adjustments (ending balance) | (17.9) | (10.3) | (17.9) | (10.3) | | Pension liability adjustments (ending balance) | (2.6) | (1.4) | (2.6) | (1.4) | | Total accumulated other comprehensive income (loss) | (20.5) | (11.7) | (20.5) | (11.7) | 11. Earnings (Loss) Per Share Diluted EPS decreased significantly in Q2 and YTD 2020, primarily due to goodwill impairment and investment losses Earnings (Loss) Per Share (in millions of dollars except per share data) | Metric | Q2 2020 (Millions $) | Q2 2019 (Millions $) | YTD 2020 (Millions $) | YTD 2019 (Millions $) | | :-------------------------------- | :------ | :------ | :------- | :------- | | Net earnings (loss) | 41.1 | 83.8 | (112.1) | 105.9 | | Net earnings (loss) available to common shareholders | 40.8 | 83.0 | (112.1) | 104.9 | | Basic earnings (loss) per share | 1.04 | 2.12 | (2.86) | 2.69 | | Diluted earnings (loss) per share | 1.04 | 2.12 | (2.86) | 2.68 | | Average diluted shares outstanding (millions) | 39.4 | 39.2 | 39.2 | 39.2 | - Dividends paid per share for Class A and Class B common stock were $0.00 for Q2 2020, compared to $0.075 for Q2 2019[87] 12. Stock-Based Compensation Stock compensation expense decreased to $1.2 million in Q2 2020 from $2.0 million in Q2 2019, and to $2.4 million year-to-date 2020 from $5.2 million year-to-date 2019 Stock Compensation Expense (in millions of dollars) | Period | 2020 (Millions $) | 2019 (Millions $) | | :---------------------- | :----- | :----- | | Second Quarter | 1.2 | 2.0 | | June Year to Date | 2.4 | 5.2 | Nonvested Performance Shares at Target (in thousands of shares) | Item | Financial Measure Performance Shares (Thousands of Shares) | TSR Performance Shares (Thousands of Shares) | | :---------------------- | :----------------------------------- | :--------------------- | | Nonvested at year-end 2019 | 502 | 114 | | Vested | (155) | — | | Forfeited | (19) | (2) | | Vesting adjustment | — | (62) | | Nonvested at second quarter-end 2020 | 328 | 50 | Nonvested Restricted Stock (in thousands of shares) | Item | Shares (Thousands) | | :---------------------- | :----- | | Nonvested at year-end 2019 | 360 | | Granted | 65 | | Vested | (108) | | Forfeited | (20) | | Nonvested at second quarter-end 2020 | 297 | 13. Sale of Assets The Company sold headquarters properties for a $32.1 million gain in Q1 2020 and monetized wage subsidy receivables in Q2 2020 - Sold three headquarters properties for $58.5 million ($55.5 million cash proceeds) in Q1 2020, generating a $32.1 million gain[98] - Monetized $16.9 million in wage subsidy receivables outside the U.S. in Q2 2020[99] - Gain on sale of assets in Q2 2019 was $12.3 million, primarily from the sale of unused land and customer contracts[100] 14. Other Income (Expense), Net Other income (expense), net, increased in Q2 and YTD 2020, driven by foreign exchange gains offsetting interest expense Other Income (Expense), Net (in millions of dollars) | Item | Q2 2020 (Millions $) | Q2 2019 (Millions $) | YTD 2020 (Millions $) | YTD 2019 (Millions $) | | :---------------------- | :------ | :------ | :------- | :------- | | Interest income | 0.1 | 0.2 | 0.4 | 0.4 | | Interest expense | (0.8) | (1.2) | (1.7) | (2.3) | | Dividend income | 1.3 | 1.3 | 1.3 | 1.3 | | Foreign exchange gains (losses) | 1.3 | (0.1) | 3.7 | (0.7) | | Other | 0.7 | — | 0.6 | 0.4 | | Total | 2.6 | 0.2 | 4.3 | (0.9) | 15. Income Taxes Income tax expense decreased in Q2 2020, with a YTD benefit due to goodwill impairment and Persol Holdings investment impacts Income Tax Expense (Benefit) (in millions of dollars) | Period | 2020 (Millions $) | 2019 (Millions $) | | :---------------------- | :----- | :----- | | Second Quarter | 0.9 | 12.7 | | June Year to Date | (35.3) | 19.1 | - YTD 2020 income tax benefit includes $23.0 million on goodwill impairment and a $14.8 million benefit related to the investment in Persol Holdings[103] - Q2 2020 benefited $7.7 million from Brazil outside basis differences[103] 16. Leases The Company adopted ASC 842 in Q1 2019 and recognized ROU assets and lease liabilities from a headquarters sale and leaseback in Q1 2020 - Adopted ASC 842, Leases, in Q1 2019, recognizing $74.1 million of ROU assets and $74.1 million of lease liabilities[107] - In Q1 2020, recognized $37.6 million of ROU assets and $37.3 million of lease liabilities (current and noncurrent) related to the sale and leaseback of the headquarters building, with a 15-year lease term[108] 17. Contingencies The Company faces various legal proceedings, with accruals for loss contingencies totaling $2.9 million at Q2 2020 - Gross accrual for litigation costs amounted to $2.9 million at Q2 2020, down from $9.9 million at year-end 2019[110] - Estimated aggregate range of reasonably possible losses, in excess of amounts accrued, is $0.0 million to $1.4 million as of Q2 2020[113] - Engaged in litigation with a customer over a disputed accounts receivable balance of approximately $10 million[115] 18. Segment Disclosures The Company operates through Americas Staffing, Global Talent Solutions, and International Staffing, with plans to revise segments in Q3 2020 Revenue from Services by Segment (in millions of dollars) | Segment | Q2 2020 (Millions $) | Q2 2019 (Millions $) | YTD 2020 (Millions $) | YTD 2019 (Millions $) | | :---------------------- | :------ | :------ | :------- | :------- | | Americas Staffing | 326.7 | 597.6 | 860.1 | 1,224.1 | | Global Talent Solutions | 466.9 | 505.9 | 970.1 | 1,006.9 | | International Staffing | 184.6 | 268.1 | 412.2 | 527.0 | | Consolidated Total | 975.3 | 1,367.5 | 2,236.4 | 2,750.1 | Earnings (Loss) from Operations by Segment (in millions of dollars) | Segment | Q2 2020 (Millions $) | Q2 2019 (Millions $) | YTD 2020 (Millions $) | YTD 2019 (Millions $) | | :---------------------- | :------ | :------ | :------- | :------- | | Americas Staffing | (6.3) | 15.6 | (6.2) | 31.6 | | Global Talent Solutions | 38.8 | 25.4 | 65.3 | 51.1 | | International Staffing | (1.9) | 3.5 | (1.3) | 6.8 | | Corporate | (19.5) | (9.7) | (158.5) | (37.9) | | Consolidated Total | 11.1 | 34.8 | (100.7) | 51.6 | - Beginning in Q3 2020, the Company will revise reportable segments and recast prior year results due to a new operating model focusing on specialty talent solutions[122] 19. New Accounting Pronouncements The Company adopted ASU 2018-15 and ASU 2016-13 in Q1 2020, and is evaluating other pronouncements for future impact - Adopted ASU 2018-15 (capitalizing implementation costs for hosting arrangements) prospectively effective December 30, 2019[125] - Adopted ASU 2016-13 (credit losses) using the modified retrospective method, resulting in a $0.7 million decrease to retained earnings, net of tax, in Q1 2020[126] - Evaluating ASU 2020-01 (equity securities, equity method, forward contracts) and ASU 2019-12 (income taxes) for future impact[128][129] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Kelly Services' financial performance, condition, and the significant impact of the COVID-19 pandemic on its operations Executive Overview The COVID-19 pandemic has dramatically shifted the economy, but Kelly Services remains committed to its talent solutions strategy - The COVID-19 pandemic has caused dramatic shifts in the economy, impacting the Company's operations[134] - Kelly Services remains committed to being a leading talent solutions provider, guided by its Noble Purpose: 'We connect people to work in ways that enrich their lives'[134] - The Company's strategy focuses on a talent-first mentality, customer delivery, disciplined growth, and efficiency to emerge as a more agile and focused organization[135][141] The Talent Solutions Industry The talent solutions industry is evolving due to automation, labor shifts, skills gaps, and the accelerating impact of COVID-19 - The talent solutions industry is evolving due to automation, shifts in labor supply/demand, skills gaps, and the COVID-19 pandemic, which is accelerating changes in how work is performed[136] - Companies are increasingly demanding specialized talent and customized workforce solutions, utilizing gig platforms, independent contractors, and other talent pools[137] - There's a growing realization that meeting the changing needs of talent is essential for competitiveness, with workers seeking greater control over their careers[138] Our Business Kelly provides global workforce solutions across Americas Staffing, International Staffing, and Global Talent Solutions segments - Kelly is a talent and global workforce solutions company offering outsourcing, consulting, and staffing services (temporary, temporary-to-hire, direct-hire)[139] - Segments include Americas Staffing, International Staffing, and Global Talent Solutions (GTS), which provides integrated talent management solutions like CWO, RPO, BPO, and Talent Fulfillment[139][140] - Working capital requirements are primarily driven by temporary employee payroll and customer accounts receivable, with average global days sales outstanding (DSO) at 61 days as of Q2 2020[143] Our Perspective Short Term The COVID-19 pandemic has caused substantial revenue declines, leading to proactive cost reductions and a goodwill impairment charge - Revenue declines have been substantial and are likely to continue for the next several quarters due to COVID-19[144] - Proactive cost reduction actions implemented in April 2020 include[144] * 10% pay cut for full-time salaried employees in the U.S., Puerto Rico, and Canada, with similar actions in EMEA and APAC * Substantially reduced CEO compensation and 10%+ reduction for senior leaders * Temporary furloughing and/or redeployment of some employees * Suspension of Company match to certain retirement accounts * Reduction of discretionary expenses and projects, including capital expenditures * Hiring freeze, except for critical revenue-generating positions - The quarterly dividend was suspended until conditions improve[145] - A $147.7 million non-cash goodwill impairment charge was recorded in Q1 2020 due to negative market reaction to COVID-19[147] Moving Forward Kelly is pursuing a specialized talent solutions strategy, investing in growth platforms, accelerating technology, and optimizing its branch network - Continuing specialized talent solutions strategy, with investments in engineering (GTA, NextGen acquisitions in 2019) and education staffing (Insight acquisition in 2020)[148] - Accelerated implementation of a new front office platform, deployed to most U.S. operations in June 2020, to streamline recruiting and onboarding[149] - Reduced U.S. and International branch network locations, incurring $4.8 million in lease termination costs and fixed asset write-offs, and $3.7 million in severance costs for 123 positions in H1 2020[150] - Expected annual expense savings from Q1 2020 actions are approximately $20 million[150] - New reportable segments will be introduced in Q3 2020, reflecting a focus on specialty talent solutions[151] Financial Measures The Company uses constant currency, return on sales, conversion rate, and days sales outstanding to analyze financial performance - Constant currency (CC) change amounts are used to analyze year-over-year percentage changes, translating 2020 financial data using 2019 foreign currency exchange rates to remove distortion from currency fluctuations[153] - Return on sales (earnings from operations / revenue from services) and conversion rate (earnings from operations / gross profit) are used to measure operating efficiency[155] - Days sales outstanding (DSO) is calculated by dividing average net sales per day (rolling three-month) into trade accounts receivable, net of allowances[156] Results of Operations The COVID-19 pandemic significantly impacted Q2 and YTD 2020 results, causing revenue declines and a diluted loss per share Total Company - Second Quarter Q2 2020 saw a 28.7% revenue decline, but gross profit rate increased due to wage subsidies and lower employee costs Total Company Performance (Second Quarter, in millions) | Metric | 2020 (Millions $) | 2019 (Millions $) | Change (%) | CC Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :------------ | | Revenue from services | 975.3 | 1,367.5 | (28.7)% | (27.7)% | | Gross profit | 189.2 | 244.0 | (22.5)% | (21.7)% | | SG&A expenses | 178.1 | 221.5 | (19.6)% | (18.9)% | | Earnings from operations | 11.1 | 34.8 | (68.2)% | | | Diluted earnings per share | 1.04 | 2.12 | (50.9)% | | | Gross profit rate | 19.4% | 17.8% | 1.6 pts. | | - Revenue from services declined primarily due to lower demand from the COVID-19 pandemic, with the Insight acquisition adding approximately 40 basis points to growth[158] - Gross profit rate increased by 160 basis points, mainly due to government wage subsidies (approx. 100 basis points), lower employee-related costs, and improved product mix[159] - Diluted EPS was impacted by a $0.52 per share gain (net of tax) from the investment in Persol Holdings in 2020, compared to a $1.07 gain in 2019[162] Americas Staffing - Second Quarter Americas Staffing revenue declined 45.3% in Q2 2020 due to COVID-19, with a slight increase in gross profit rate Americas Staffing Performance (Second Quarter, in millions) | Metric | 2020 (Millions $) | 2019 (Millions $) | Change (%) | CC Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :------------ | | Revenue from services | 326.7 | 597.6 | (45.3)% | (44.1)% | | Gross profit | 63.4 | 108.8 | (41.7)% | (40.9)% | | SG&A expenses | 69.7 | 93.2 | (25.1)% | (24.3)% | | Earnings (loss) from operations | (6.3) | 15.6 | NM | | | Gross profit rate | 19.4% | 18.2% | 1.2 pts. | | - Revenue decline reflects a 40% decrease in hours volume and a 9% decrease in average bill rates, primarily due to COVID-19 impacts on education (school closures) and manufacturing[165] - Gross profit rate increased by 120 basis points due to lower overall employee costs[166] - SG&A expenses decreased 25.1% due to lower administrative salaries, performance-based compensation, and short-term cost reductions[167] GTS - Second Quarter GTS revenue decreased 7.7% in Q2 2020, but earnings from operations increased 53.3% due to improved gross profit rate and cost management GTS Performance (Second Quarter, in millions) | Metric | 2020 (Millions $) | 2019 (Millions $) | Change (%) | CC Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :------------ | | Revenue from services | 466.9 | 505.9 | (7.7)% | (7.5)% | | Gross profit | 103.0 | 99.7 | 3.3% | 3.8% | | SG&A expenses | 64.2 | 74.3 | (13.6)% | (13.4)% | | Earnings from operations | 38.8 | 25.4 | 53.3% | | | Gross profit rate | 22.1% | 19.7% | 2.4 pts. | | - Revenue decreased 7.7% due to volume declines in centrally delivered staffing and PPO businesses (automotive, industrial, energy), partially offset by growth in KellyConnect and BPO[170] - Gross profit rate increased due to lower employee-related costs and continued structural improvement in product mix[171] - SG&A expenses decreased 13.6% due to effective cost management and short-term cost reduction actions[171] International Staffing - Second Quarter International Staffing revenue declined 31.1% in Q2 2020 due to COVID-19, with a decrease in gross profit rate International Staffing Performance (Second Quarter, in millions) | Metric | 2020 (Millions $) | 2019 (Millions $) | Change (%) | CC Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :------------ | | Revenue from services | 184.6 | 268.1 | (31.1)% | (29.3)% | | Gross profit | 23.2 | 36.1 | (36.0)% | (34.3)% | | SG&A expenses | 25.1 | 32.6 | (23.2)% | (21.5)% | | Earnings (loss) from operations | (1.9) | 3.5 | NM | | | Gross profit rate | 12.5% | 13.5% | (1.0) pts. | | - Revenue decreased 31.1% due to lower hours volume from COVID-19 disruptions, particularly in Portugal, France, and the U.K., partially offset by increased revenue in Russia[174] - Gross profit rate decreased primarily due to lower permanent placement income and unfavorable customer mix[175] - SG&A expenses decreased 23.2% due to cost management to mitigate COVID-19 impact[176] Total Company - June Year to Date YTD 2020 saw an 18.7% revenue decline and a diluted loss per share due to goodwill impairment and investment losses Total Company Performance (June Year to Date, in millions) | Metric | 2020 (Millions $) | 2019 (Millions $) | Change (%) | CC Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :------------ | | Revenue from services | 2,236.4 | 2,750.1 | (18.7)% | (18.0)% | | Gross profit | 412.5 | 495.6 | (16.8)% | (16.2)% | | SG&A expenses | 397.6 | 456.3 | (12.9)% | (12.4)% | | Goodwill impairment charge | 147.7 | — | NM | | | Gain on sale of assets | 32.1 | 12.3 | 161.6% | | | Earnings (loss) from operations | (100.7) | 51.6 | NM | | | Diluted earnings (loss) per share | (2.86) | 2.68 | NM | | | Gross profit rate | 18.4% | 18.0% | 0.4 pts. | | - Revenue from services declined 18.7% due to COVID-19, with the Insight acquisition adding approximately 70 basis points to growth[179] - Gross profit rate increased by 40 basis points[180] - Diluted loss per share of $2.86 was impacted by a $3.18 per share goodwill impairment charge (net of tax) and a $0.85 per share loss (net of tax) on investment in Persol Holdings[184] Americas Staffing - June Year to Date Americas Staffing revenue declined 29.7% YTD 2020 due to COVID-19, with a decrease in gross profit rate Americas Staffing Performance (June Year to Date, in millions) | Metric | 2020 (Millions $) | 2019 (Millions $) | Change (%) | CC Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :------------ | | Revenue from services | 860.1 | 1,224.1 | (29.7)% | (29.0)% | | Gross profit | 157.0 | 226.0 | (30.5)% | (30.1)% | | SG&A expenses | 163.2 | 194.4 | (16.0)% | (15.6)% | | Earnings (loss) from operations | (6.2) | 31.6 | NM | | | Gross profit rate | 18.3% | 18.5% | (0.2) pts. | | - Revenue decline reflects a 28% decrease in hours volume and a 5% decrease in average bill rates, primarily due to COVID-19 impacts on education and manufacturing[188] - Gross profit rate decreased due to customer mix[190] - SG&A expenses decreased 16.0% due to lower administrative salaries, performance-based compensation, and short-term cost reductions, including $5.5 million in restructuring costs[191] GTS - June Year to Date GTS revenue decreased 3.7% YTD 2020, but earnings from operations increased 27.8% due to improved gross profit rate and cost management GTS Performance (June Year to Date, in millions) | Metric | 2020 (Millions $) | 2019 (Millions $) | Change (%) | CC Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :------------ | | Revenue from services | 970.1 | 1,006.9 | (3.7)% | (3.5)% | | Gross profit | 203.2 | 200.1 | 1.6% | 1.9% | | SG&A expenses | 137.9 | 149.0 | (7.5)% | (7.2)% | | Earnings from operations | 65.3 | 51.1 | 27.8% | | | Gross profit rate | 20.9% | 19.9% | 1.0 pts. | | - Revenue decreased 3.7% due to volume declines in centrally delivered staffing and PPO businesses, partially offset by growth in BPO and KellyConnect[194] - Gross profit rate increased due to continued structural improvement in product mix and lower employee-related costs[195] - SG&A expenses decreased 7.5% due to effective cost management and short-term cost reduction actions, including $0.8 million in restructuring charges[196] International Staffing - June Year to Date International Staffing revenue declined 21.8% YTD 2020 due to COVID-19, with a decrease in gross profit rate International Staffing Performance (June Year to Date, in millions) | Metric | 2020 (Millions $) | 2019 (Millions $) | Change (%) | CC Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :------------ | | Revenue from services | 412.2 | 527.0 | (21.8)% | (20.2)% | | Gross profit | 53.1 | 70.7 | (24.9)% | (23.3)% | | SG&A expenses | 54.4 | 63.9 | (14.9)% | (13.4)% | | Earnings (loss) from operations | (1.3) | 6.8 | NM | | | Gross profit rate | 12.9% | 13.4% | (0.5) pts. | | - Revenue decreased 21.8% due to lower hours volume in France, Portugal, and Italy from COVID-19, partially offset by increased revenue in Russia[200] - Gross profit rate decreased due to lower permanent placement income and unfavorable customer mix[201] - SG&A expenses decreased 14.9% due to cost management and increased productivity, including $1.1 million in restructuring charges[202] Financial Condition Cash and equivalents significantly increased at Q2 2020, driven by operating cash flows and reduced working capital requirements - Cash, cash equivalents, and restricted cash totaled $221.9 million at Q2 2020, a significant increase from $31.0 million at year-end 2019[207] - Net cash from operating activities was $178.1 million in H1 2020, up from $73.5 million in H1 2019, driven by reduced working capital requirements as revenues slowed[208] - Working capital position increased by $64.2 million to $585.8 million at Q2 2020, and the current ratio improved to 1.7 from 1.6[210] - Net cash from investing activities was $13.3 million in H1 2020, compared to using $79.6 million in H1 2019, primarily due to $55.5 million from the sale of headquarters properties, partially offset by the Insight acquisition[211] - Net cash used in financing activities was $6.2 million in H1 2020, compared to generating $8.6 million in H1 2019, mainly due to changes in short-term borrowing activities and dividend payments[212][213] Liquidity The Company expects to meet cash requirements through operations, available cash, securitization, and credit facilities, maintaining higher cash levels - The Company expects to meet cash requirements through operations, available cash, securitization of receivables, and committed unused credit facilities[217] - Cash generated from operations in 2020 is supplemented by deferred U.S. social security tax payments allowed by COVID-19 relief legislation, to be repaid in 2021 and 2022[217] - As of Q2 2020, the Company had $200.0 million available on its revolving credit facility and $96.8 million available on its securitization facility[219] - The Company anticipates maintaining a higher level of cash than prior practice due to cash generated from operations and uncertainty surrounding the COVID-19 crisis[220] Critical Accounting Estimates Critical accounting estimates are discussed in the 2019 Form 10-K, with goodwill impairment detailed in its respective footnote - For a discussion of critical accounting estimates, refer to the 2019 Form 10-K. The goodwill impairment charge recognized in Q1 2020 is discussed in the Goodwill footnote[215] Contractual Obligations and Commercial Commitments No significant changes to contractual obligations from 2019 Form 10-K, except for the headquarters sale and leaseback - No significant changes to contractual obligations and commercial commitments from those disclosed in the 2019 Form 10-K, except for the sale and leaseback of the main headquarters building[216] New Accounting Pronouncements Refer to the dedicated footnote in the Consolidated Financial Statements for details on new accounting pronouncements - Refer to the 'New Accounting Pronouncements' footnote in the Notes to Consolidated Financial Statements for details[214] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company faces foreign currency and interest rate risks, with its Persol Holdings investment exposed to market and currency fluctuations - Exposed to foreign currency risk primarily related to foreign subsidiaries, which generally provide a natural hedge[225] - Exposed to interest rate risks from multi-currency line of credit and other borrowings; a hypothetical 10% fluctuation would not materially impact Q2 2020 earnings[226] - Investment in Persol Holdings is exposed to market and currency risks, marked to market through net earnings, with foreign currency fluctuations in other comprehensive income (loss)[227] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of the reporting period, with no material changes in internal control over financial reporting - CEO and CFO concluded that disclosure controls and procedures are effective at a reasonable assurance level[229] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[230] PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in various legal proceedings, including a disputed $10 million accounts receivable and a Hungarian competition investigation - The Company is continuously engaged in litigation, claims, audits, or investigations arising in the ordinary course of business[232] - Resolution of legal proceedings is not expected to have a material adverse effect on financial condition, results of operations, or cash flows[233] - Engaged in litigation with a customer over a disputed accounts receivable balance of approximately $10 million[234] - Cooperating with a Hungarian Competition Authority investigation initiated in January 2018 regarding alleged infringement of national competition regulations[235][236] Item 1A. Risk Factors The COVID-19 pandemic has significantly impacted the Company's business, leading to substantial revenue declines and ongoing uncertainty - The COVID-19 pandemic has adversely impacted the Company's business, leading to substantial revenue declines and expected continued adverse economic conditions[238] - Containment and mitigation measures for COVID-19 have negatively impacted customer demand and may affect the financial viability of third parties[238] - The Company has implemented cost reduction actions, but there is no assurance these will be adequate, and further actions may be required[238] - The extent and duration of the pandemic's impact on the Company's business, financial condition, and ability to meet financial covenants cannot be predicted with certainty but could be material[238] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales occurred, but the Company reacquired 2,439 Class A common shares in Q2 2020 for employee tax withholdings - No unregistered sales of equity securities[240] Issuer Repurchases of Equity Securities (Second Quarter 2020) | Period | Number of Shares Purchased | Average Price Paid per Share ($) | | :-------------------------------- | :------------------------- | :------------------------------- | | March 30, 2020 through May 3, 2020 | 239 | 12.96 | | May 4, 2020 through May 31, 2020 | 1,999 | 13.39 | | June 1, 2020 through June 28, 2020 | 201 | 15.22 | | Total | 2,439 | 13.50 | - Shares were reacquired to cover employee tax withholdings upon the vesting of restricted stock and performance shares[240] Item 3. Defaults Upon Senior Securities This item is not applicable to the Company Item 4. Mine Safety Disclosures This item is not applicable to the Company Item 5. Other Information This item is not applicable to the Company Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications (31.1, 31.2, 32.1, 32.2) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104) - Exhibits include[246] * Certifications (31.1, 31.2, 32.1, 32.2) * Inline XBRL Instance Document (101.INS) * Inline XBRL Taxonomy Extension Schema Document (101.SCH) * Inline XBRL Taxonomy Extension Calculation Linkbase Document (101.CAL) * Inline XBRL Taxonomy Extension Definition Linkbase Document (101.DEF) * Inline XBRL Taxonomy Extension Label Linkbase Document (101.LAB) * Inline XBRL Taxonomy Extension Presentation Linkbase Document (101.PRE) * Cover Page Interactive Data File (104) SIGNATURES The report is duly signed on behalf of Kelly Services, Inc. by Olivier G. Thirot, Executive Vice President and Chief Financial Officer, and Laura S. Lockhart, Vice President, Corporate Controller and Chief Accounting Officer, on August 6, 2020 - Report signed by Olivier G. Thirot (EVP & CFO) and Laura S. Lockhart (VP, Corporate Controller & CAO) on August 6, 2020[250]