Kelly Services(KELYB) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited consolidated financial statements for Q2 2019 show net earnings of $83.8 M (vs. $15.4 M loss in 2018) driven by a $61.2 M investment gain, with total assets rising to $2.54 B and operating cash flow at $73.5 M Consolidated Statements of Earnings Financial Metric | Financial Metric | 13 Weeks Ended June 30, 2019 | 13 Weeks Ended July 1, 2018 | | :--- | :--- | :--- | | Revenue from services | $1,367.5 M | $1,386.9 M | | Gross profit | $244.0 M | $240.5 M | | Earnings from operations | $34.8 M | $20.4 M | | Gain (loss) on investment in Persol Holdings | $61.2 M | $(52.5) M | | Net earnings (loss) | $83.8 M | $(15.4) M | | Diluted earnings (loss) per share | $2.12 | $(0.40) | - The company's net earnings for Q2 2019 were significantly impacted by a $61.2 M gain on its investment in Persol Holdings, a stark contrast to the $52.5 M loss from the same investment in Q2 2018. This swing was the primary driver of the increase in net earnings and EPS year-over-year[12] Consolidated Balance Sheets Balance Sheet Item | Balance Sheet Item | June 30, 2019 | December 30, 2018 | | :--- | :--- | :--- | | Total current assets | $1,392.9 M | $1,400.5 M | | Goodwill | $127.8 M | $107.3 M | | Operating lease right-of-use assets | $66.9 M | $— M | | Investment in Persol Holdings | $213.7 M | $135.1 M | | Total Assets | $2,542.3 M | $2,314.4 M | | Total current liabilities | $931.1 M | $897.5 M | | Operating lease liabilities (noncurrent) | $49.3 M | $— M | | Total stockholders' equity | $1,268.2 M | $1,159.5 M | - Total assets increased primarily due to a $20.5 M increase in goodwill from acquisitions, a $78.6 M increase in the fair value of the Persol Holdings investment, and the recognition of $66.9 M in operating lease right-of-use assets upon adoption of the new lease standard (ASC 842)[17][77][102] Consolidated Statements of Cash Flows Cash Flow Item (26 Weeks Ended) | Cash Flow Item (26 Weeks Ended) | June 30, 2019 | July 1, 2018 | | :--- | :--- | :--- | | Net cash from operating activities | $73.5 M | $33.2 M | | Net cash used in investing activities | $(79.6) M | $(10.9) M | | Net cash from (used in) financing activities | $8.6 M | $(20.5) M | | Net change in cash, cash equivalents and restricted cash | $2.4 M | $1.7 M | - Cash used in investing activities for the first half of 2019 increased significantly to $79.6 M, primarily due to $86.4 M spent on acquisitions (NextGen and GTA), partially offset by $13.8 M in proceeds from asset sales[26] Notes to Consolidated Financial Statements - In Q1 2019, the company acquired NextGen Global Resources for $51.0 M and Global Technology Associates (GTA) for $34.0 M to increase market share in telecommunications and engineering solutions[48][49][51] - The company recorded a gain of $74.4 M on its investment in Persol Holdings for the first six months of 2019, compared to a loss of $28.8 M in the same period of 2018, due to changes in the investment's fair value[59] - Restructuring costs of $5.7 M were incurred in 2019, primarily for severance related to the transformation of U.S. branch-based staffing operations within the Americas Staffing segment[72] - The company adopted the new lease accounting standard (ASC 842) in Q1 2019, resulting in the recognition of $74.1 M of right-of-use assets and corresponding lease liabilities on the balance sheet[101][102] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Q2 2019 saw total revenue decline 1.4% (up 0.2% constant currency) with gross profit up 1.4% and earnings from operations surging 70.7% to $34.8 M, while operating cash flow reached $73.5 M despite acquisition-driven negative investing cash flow Executive Overview - The company's strategy is focused on becoming a leading talent solutions provider by achieving leadership in scale or specialty, embracing the future of work, attracting top talent, and investing in innovation and efficiency[143] - In January 2019, Kelly acquired Global Technology Associates (GTA) and NextGen Global Resources to expand its engineering portfolio, positioning itself as a leader in the growing 5G telecommunications market[145] - In Q1 2019, the company restructured its U.S. commercial staffing operations to improve efficiency and focus on specialties, resulting in $5.7 M in restructuring charges for the first half of the year[148] Results of Operations Total Company Performance - Q2 2019 vs Q2 2018 | Metric | 2019 | 2018 | Change | CC Change | | :--- | :--- | :--- | :--- | :--- | | Revenue from services | $1,367.5 M | $1,386.9 M | (1.4)% | (0.2)% | | Gross profit | $244.0 M | $240.5 M | 1.4% | 2.6% | | Earnings from operations | $34.8 M | $20.4 M | 70.7% | N/A | | Gross profit rate | 17.8% | 17.3% | +0.5 pts | N/A | - The acquisitions of NextGen and GTA in January 2019 added approximately 280 basis points to the total revenue growth rate for Q2 2019 and accounted for 30 basis points of the gross profit rate growth[156][157] Segment Performance (Earnings from Operations) - Q2 2019 vs Q2 2018 | Segment | Q2 2019 | Q2 2018 | Change | | :--- | :--- | :--- | :--- | | Americas Staffing | $15.6 M | $17.8 M | (12.4)% | | Global Talent Solutions (GTS) | $25.4 M | $17.7 M | 43.0% | | International Staffing | $3.5 M | $6.4 M | (44.8)% | Financial Condition - The company generated $73.5 M of net cash from operating activities in the first six months of 2019, a significant increase from $33.2 M in the same period of 2018, reflecting recurring working capital changes[198] - Global Days Sales Outstanding (DSO) was 57 days at the end of Q2 2019, up from 55 days at the end of Q2 2018[198] - The working capital position decreased by $41.2 M from year-end 2018 to $461.8 M at the end of Q2 2019, impacted by the acquisitions of NextGen and GTA[199] - As of Q2 2019, the company had $150.0 M available on its revolving credit facility and $130.3 M available on its securitization facility, providing committed funding capacity[209] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations and interest rate changes, with a material yen-denominated investment in Persol Holdings whose fair value changes impact net earnings - The company faces foreign currency risk related to its foreign subsidiaries, which can impact the U.S. dollar value of reported earnings and investments. However, a natural hedge exists as subsidiaries primarily derive revenues and incur expenses in their local currency[215] - A significant market and currency risk exists with the investment in Persol Holdings. The investment is yen-denominated and stated at fair value, with changes in value recognized in net earnings, which can be material[217] Item 4. Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of Q2 2019, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO have concluded that the company's disclosure controls and procedures are effective at a reasonable assurance level as of the end of the second quarter of 2019[219] - No changes occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[220] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various ordinary course legal proceedings, including a Hungarian competition authority case, but management expects no material adverse effect on financial condition or operations - The company is continuously engaged in litigation arising from the ordinary course of business, including matters related to employment, contracts, and bankruptcy proceedings[222] - Management believes that the resolution of current legal proceedings will not have a material adverse effect on the company's financial condition or results of operations[223] - In January 2018, the Hungarian Competition Authority initiated proceedings against the company for alleged infringement of national competition regulations; the company is cooperating and does not expect a material adverse effect[225] Item 1A. Risk Factors There have been no material changes to the company's risk factors from those previously disclosed in its Annual Report on Form 10-K for the year ended December 30, 2018 - There have been no material changes in the Company's risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 30, 2018[226] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In Q2 2019, the company had no unregistered equity sales but reacquired 2,800 shares of Class A common stock at $24.81 per share for employee tax withholdings Issuer Repurchases of Equity Securities - Q2 2019 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 1 - May 5, 2019 | 329 | $22.70 | | May 6 - June 2, 2019 | 2,415 | $25.09 | | June 3 - June 30, 2019 | 56 | $25.26 | | Total | 2,800 | $24.81 | - The company reacquired 2,800 shares during the quarter to cover employee tax withholdings due upon the vesting of restricted stock and performance shares[228] Item 3. Defaults Upon Senior Securities This item is not applicable as there were no defaults upon senior securities - Not applicable[229] Item 4. Mine Safety Disclosures This item is not applicable - Not applicable[230] Item 5. Other Information This item is not applicable - Not applicable[231] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO pursuant to the Sarbanes-Oxley Act and Inline XBRL data files - This section provides an index of all exhibits filed with the report, including CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2) and XBRL data files[232][237]