Kelly Services, Inc. — Form 10-Q Summary
Business context and reporting period
Kelly provides staffing, outsourcing, consulting, talent fulfillment, and outcome-based workforce solutions through Americas Staffing, Global Talent Solutions (GTS), and International Staffing. This unaudited filing covers the 13-week second quarter and 26-week year-to-date periods ended June 28, 2020, compared with periods ended June 30, 2019. Results were materially affected by the COVID-19 pandemic and related economic restrictions.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Revenue from services | $975.3 million | $1,367.5 million | $2,236.4 million | $2,750.1 million |
| Gross profit | $189.2 million | $244.0 million | $412.5 million | $495.6 million |
| Gross profit rate | 19.4% | 17.8% | 18.4% | 18.0% |
| SG&A expense | $178.1 million | $221.5 million | $397.6 million | $456.3 million |
| Earnings from operations | $11.1 million | $34.8 million | $(100.7) million | $51.6 million |
| Net earnings (loss) | $41.1 million | $83.8 million | $(112.1) million | $105.9 million |
| Diluted EPS | $1.04 | $2.12 | $(2.86) | $2.68 |
- Q2 revenue declined 28.7% year over year, or 27.7% on a constant-currency basis. Year-to-date revenue declined 18.7%, or 18.0% constant currency.
- Q2 operating margin was approximately 1.1%, compared with 2.5% in the prior-year quarter. Year-to-date operating margin was approximately negative 4.5%, compared with 1.9% in 2019.
- Q2 results included a $29.6 million gain on the Persol Holdings investment. Year-to-date results included a $48.2 million loss on that investment.
- Year-to-date operating results included a $147.7 million non-cash goodwill impairment charge and a $32.1 million gain on the sale of headquarters properties.
- Net cash from operating activities was $178.1 million in the first six months of 2020, versus $73.5 million in the prior-year period, primarily reflecting lower working-capital requirements as revenue declined and $48.2 million of deferred tax payments.
- Cash, cash equivalents, and restricted cash totaled $221.9 million at June 28, 2020, compared with $31.0 million at year-end 2019. Cash and equivalents alone were $216.2 million.
- Trade accounts receivable were $1.085 billion, and global days sales outstanding increased to 61 days from 57 days at the end of the second quarter of 2019.
- Short-term borrowings were $0.3 million, compared with $1.9 million at year-end 2019. Debt-to-total-capital was 0.0%.
- The company had $200.0 million of available capacity under its $200.0 million revolving credit facility and $96.8 million available under its $150.0 million securitization facility. The securitization facility had $53.2 million of standby letters of credit outstanding.
Material changes versus the prior comparable period
- COVID-19 substantially reduced staffing demand, hours worked, and revenue across all three segments. Americas Staffing revenue declined 45.3% in Q2, International Staffing declined 31.1%, and GTS declined 7.7%.
- GTS was comparatively resilient: Q2 operating earnings increased 53.3% to $38.8 million, while gross profit increased 3.3% and the gross profit rate improved to 22.1% from 19.7%.
- Americas Staffing reported a Q2 operating loss of $6.3 million, compared with earnings of $15.6 million. International Staffing reported a loss of $1.9 million, compared with earnings of $3.5 million.
- Gross profit rates improved in Q2 because of government wage subsidies, lower employee-related costs, and product mix; International Staffing’s rate declined because of lower permanent-placement income and unfavorable mix.
- Management implemented salary reductions, executive compensation reductions, furloughs and redeployments, retirement-match suspension, discretionary-spending reductions, reduced capital expenditures, and a hiring freeze. The quarterly dividend was suspended.
- Restructuring costs totaled $8.5 million in the first six months, including $4.8 million of lease termination costs and $3.7 million of severance. The actions eliminated 123 positions and are expected to generate approximately $20 million of annual savings.
- Kelly acquired Insight Workforce Solutions and Insight EDU in January 2020 for an estimated purchase price of $34.5 million, including estimated contingent consideration. The acquisition added approximately 40 basis points to Q2 revenue growth and approximately 70 basis points to year-to-date growth.
- Kelly sold three headquarters properties for net proceeds of $55.5 million and entered into a leaseback arrangement. The transaction generated a $32.1 million gain and added approximately $37.6 million of lease right-of-use assets.
- Beginning in the third quarter of 2020, Kelly planned to revise its reportable segments and recast prior-year segment results to reflect a new specialty-talent-solutions operating model.
Guidance, outlook, risks, and unusual items
- Management expected revenue declines to continue for the next several quarters and anticipated a gradual return toward pre-crisis demand over several quarters, subject to renewed outbreaks and additional containment measures.
- Management expected cost reductions to materially lower third-quarter year-over-year expenses but not fully offset revenue and gross-profit declines. It expected third-quarter and full-year earnings to decline year over year.
- The COVID-19-related goodwill impairment was triggered by the decline in Kelly’s market capitalization and reduced the carrying value of goodwill to zero at quarter-end.
- Deferred U.S. payroll tax payments of $38.4 million were recorded as a noncurrent liability at quarter-end; deferred amounts are expected to be repaid in 2021 and 2022.
- The company stated that it met the financial covenants for its revolving credit and securitization facilities and expected liquidity needs to be funded through operating cash flow, available cash, receivables securitization, and committed credit facilities.
- Key risks include the duration and severity of COVID-19, staffing demand and customer concentration, foreign exchange and Persol Holdings market exposure, acquisitions, employment-related claims, workers’ compensation, cybersecurity and privacy, regulatory and tax matters, and compliance with debt covenants.
- Litigation accruals were $2.9 million at quarter-end. The estimated reasonably possible losses in excess of accruals ranged from $0 to $1.4 million, excluding matters for which a loss range could not be estimated. A disputed customer receivable of approximately $10 million remained subject to a reasonably possible unfavorable outcome.
Important facts for investors to verify
- Whether staffing demand and revenue recover as management projected, particularly in Americas Staffing and International Staffing.
- The sustainability of operating cash flow, which benefited from lower working-capital needs, deferred taxes, and monetized wage-subsidy receivables.
- The repayment schedule and cash-flow impact of deferred payroll taxes in 2021 and 2022.
- Compliance with covenants and continued availability of the revolving credit and securitization facilities.
- The effect of the new operating model and revised segment reporting beginning in the third quarter of 2020.
- Future changes in the fair value of the Persol Holdings investment and the performance of the PersolKelly joint venture.
- Potential additional COVID-19-related impairment, restructuring, litigation, receivable-credit-loss, or other unusual charges.