Kelly Services, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Kelly Services is a global talent and workforce solutions provider offering temporary and permanent staffing, outsourcing, consulting, education staffing, and outcome-based services. The filing covers the 13 weeks ended March 29, 2020, compared with the 13 weeks ended March 31, 2019. COVID-19-related economic disruption began affecting results in March 2020.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue from services | $1,261.1 million | $1,382.6 million | Down 8.8% |
| Gross profit | $223.3 million | $251.6 million | Down 11.3% |
| Gross profit rate | 17.7% | 18.2% | Down 0.5 percentage points |
| SG&A expense | $219.5 million | $234.8 million | Down 6.5% |
| Goodwill impairment | $147.7 million | None | COVID-19-triggered, non-cash |
| Gain on sale of assets | $32.1 million | None | Headquarters sale-leaseback |
| Operating income (loss) | $(111.8) million | $16.8 million | Changed to loss |
| Net income (loss) | $(153.2) million | $22.1 million | Changed to loss |
| Diluted EPS | $(3.91) | $0.56 | Changed to loss |
| Operating cash flow | $8.4 million | $21.2 million | Down $12.8 million |
Revenue declined 8.3% on a constant-currency basis. Segment revenue was $533.4 million for Americas Staffing, $503.2 million for Global Talent Solutions, and $227.6 million for International Staffing. GTS was broadly stable, while Americas Staffing and International Staffing declined materially.
At March 29, 2020, cash and equivalents were $48.3 million, or $53.5 million including restricted cash. Total assets were $2.26 billion and stockholders’ equity was $1.10 billion. Short-term borrowings were $1.7 million, representing 0.2% of total capital. The company reported a current ratio of 1.6, trade accounts receivable of approximately $1.2 billion, and global days sales outstanding of 59 days.
Available capacity at quarter-end was $200.0 million under the revolving credit facility and $96.8 million under the securitization facility. The securitization facility had no borrowings at quarter-end and $53.2 million of standby letters of credit. As of May 4, 2020, the company had borrowed $70 million under the securitization facility.
Material changes versus the prior comparable period
- Americas Staffing revenue decreased 14.9%, primarily from a 15% decline in hours volume, lower bill rates, education-related school closures, and manufacturing facility shutdowns. Operating income fell to $0.1 million from $16.0 million.
- GTS revenue increased 0.4% and operating income increased to $26.5 million from $25.7 million. Its customers were more concentrated in essential industries, remote-work-enabled operations, or businesses retaining talent.
- International Staffing revenue decreased 12.1% and operating income fell to $0.6 million from $3.3 million, reflecting lower hours volume and COVID-19 disruption.
- The company recorded a $147.7 million goodwill impairment charge after the COVID-19 market decline triggered an interim impairment test. This eliminated all reported goodwill at quarter-end.
- The company recognized a $77.8 million loss on its investment in Persol Holdings, compared with a $13.2 million gain in the prior-year quarter. The investment’s carrying value declined to $96.8 million from $173.2 million at year-end 2019.
- Restructuring charges were $8.7 million, including lease termination and severance costs. The company eliminated 123 positions and expects approximately $20 million of annualized savings from the first-quarter actions.
- Kelly acquired Insight Workforce Solutions and Insight EDU for an estimated purchase price of $34.5 million, with $38.1 million paid in cash after closing adjustments and $1.6 million of estimated contingent consideration.
- The company sold three headquarters properties for net cash proceeds of $55.5 million and recorded a $32.1 million gain, while recognizing a related operating lease liability of approximately $37.3 million.
- Cash from investing activities was $15.9 million, compared with $90.3 million used in the prior-year quarter, primarily due to the headquarters sale proceeds versus prior-year acquisitions.
Guidance, outlook, commentary, and risks
Management expects a material decline in revenue while stay-at-home orders and other restrictions remain in place. It expects a gradual return toward pre-crisis customer demand over the next several quarters, but stated that cost reductions will not offset expected declines in revenue and gross profit. Management expects second-quarter and full-year earnings to decline year over year.
In April 2020, the company implemented salary reductions, reduced executive compensation, employee furloughs or redeployments, a suspension of certain retirement-plan matching contributions, discretionary spending and capital-expenditure reductions, and a hiring freeze except for critical revenue-generating positions. The board suspended the quarterly dividend until conditions improve.
Key risks include the duration and severity of COVID-19, customer demand and third-party financial viability, compliance with debt covenants, access to credit facilities, foreign currency and market risk related to the Persol Holdings investment, potential goodwill or other asset impairments, employment-related claims, litigation, cybersecurity and privacy risks, and the company’s ability to execute its technology and operating-model initiatives.
The company reported litigation accruals of $2.9 million and estimated reasonably possible losses above recorded amounts ranging from $0.0 million to $2.4 million. It also has litigation involving an approximately $10 million disputed customer receivable, for which an unfavorable outcome is reasonably possible.
Important facts for investors to verify
- Whether COVID-19-related revenue declines and margin pressure persist beyond the second quarter and affect covenant compliance.
- The pace and sustainability of cash generation, including the effect of reduced staffing volumes and customer payment trends.
- Borrowings and remaining availability under the revolving and securitization facilities after the reported $70 million post-quarter-end draw.
- Whether the Persol Holdings investment experiences additional market-value losses and whether the PersolKelly affiliate requires additional funding.
- Progress toward the stated $20 million annualized restructuring savings and the effect of ongoing restructuring costs.
- The financial impact of the suspended dividend, reduced compensation, furloughs, and other liquidity measures.
- Potential outcomes of the disputed customer receivable litigation and other employment, regulatory, tax, and commercial proceedings.
- Execution of the Insight acquisition and the planned technology-enabled operating model.