What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-07 · 188 added, 102 removed, 173 unchanged (63% of the section changed)

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Executive Overview

Over the past several weeks, the impact of COVID-19 has resulted in dramatic shifts in most aspects of the economy and how professional and private lives are conducted.

While the pace of change is 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.

Kelly remains committed to being a leading talent solutions provider among the talent with whom we choose to specialize and in the markets in which we choose to compete.

The COVID-19 pandemic and related containment measures 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.

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.

As we navigate the uncertainty over the next several quarters, we will continue to demonstrate our expected behaviors and actions:

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The Talent Solutions Industry

Labor markets are in the midst of change due to automation, secular shifts in labor supply and demand and skills gaps and we expect the current economic situation to further accelerate that change.

Global demographic trends are reshaping and redefining the way in which companies find and use talent.

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 we expect the current economic situation to further accelerate 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 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 workforce solutions that are flexible, responsive to the labor market and tailored to meet clients’ needs.

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.

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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.

Kelly Services is a talent and global workforce solutions company serving customers of all sizes in a variety of industries.

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.

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, temporary-to-hire and direct-hire basis.

We provide commercial and professional/technical staffing through our branch networks in our Americas Staffing and International Staffing segments and, in APAC, we provide staffing solutions to customers through PersolKelly Pte.

We provide commercial and professional/technical staffing in our Americas Staffing and International Staffing segments and, in APAC, we provide staffing solutions to customers through PersolKelly Pte.

Ltd., our joint venture with Persol Holdings, a leading provider of HR solutions in Japan.

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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.

The nature of our business is such that trade accounts receivable are our most significant asset.

Average days sales outstanding varies within and outside the U.S.

but was 59 days on a global basis as of the 2020 first quarter end and 58 days as of the 2019 year end and first quarter end.

but was 61 days on a global basis as of the 2020 second quarter end, 58 days as of the 2019 year end and 57 days as of the 2019 second quarter end.

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

Over the next several months we will have greater clarity on the impact of COVID-19 on the global economy, the talent solutions industry, our customers and our talent.

In April 2020, we took a series of proactive actions in response to the crisis.

While far from certain, the impacts of COVID-19 on the global economy, the talent solutions industry, our customers and our talent have become more clear since the beginning of the pandemic.

Revenue declines have been substantial, and while recently trends have pointed to a slow recovery in demand, revenue declines are likely to continue for the next several quarters.

In response to the crisis, in April 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.

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Given the level of uncertainty surrounding the duration of the COVID-19 crisis, Kelly’s board also voted to suspend the quarterly dividend until conditions improve.

To enhance financial flexibility, we have drawn down additional cash borrowings from Kelly’s existing credit facility subsequent to the 2020 first quarter end.

The impact of the pandemic on our first quarter results began in March 2020 with the limitations on public life in the U.S.

and the European markets we serve.

We do expect that there will be a material decline in our revenues during the period of time in which stay-at-home orders and other limitations on activities are in place.

The impact of the pandemic began in March 2020 with the limitations on public life in the U.S.

and the European markets we serve and have continued in the second quarter as the effect of the pandemic response has slowed global economic activity.

We do expect that there will be a material decline in our revenues during the period of time in which demand for our services is dampened by reaction to the economic slowdown and by companies 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 skill sets of the talent provided to our customers and their ability to work remotely.

We currently expect a gradual return to pre-crisis levels of customer demand over the next several quarters.

While our cost reductions efforts are expected to reduce year-over-year expenses significantly in the second quarter, they will not be enough to offset declines in revenue and gross profit.

As a result, we expect our second quarter and full year earnings to decline year-over-year.

We currently expect a gradual return to pre-crisis levels of customer demand over the next several quarters, however, the pace of such a return may be further delayed by repeated cycles of increased economic activity and a resurgence in infection leading to additional containment measures.

While our cost reduction efforts are expected to reduce year-over-year expenses significantly in the third quarter, they will not be enough to completely offset declines in revenue and gross profit.

As a result, we expect our third quarter and full year earnings to decline year-over-year.

In addition, negative market reaction to the COVID-19 crisis in March 2020, including declines in our common stock price, caused our market capitalization to decline significantly.

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We continue to make investments in technology, particularly those which support greater efficiency in finding talent to answer customer needs.

We are accelerating the implementation of our front office platforms which, when fully deployed in mid-2020, will streamline the processes and workflows associated with recruiting, onboarding and reassigning workers.

This investment will create the platform from which we will deploy additional operational improvements over the next several years that will enhance the experience of the hundreds of thousands of job seekers who interact and work with Kelly each year.

We accelerated the implementation of our front office platform which was deployed to most U.S.

operations in June 2020.

This platform will streamline the processes and workflows associated with recruiting, onboarding and reassigning workers.

This investment creates the platform from which we have begun to deploy additional operational improvements, and will continue over the next several years to enhance the experience of the hundreds of thousands of job seekers who interact and work with Kelly each year.

In the first quarter of 2020, we completed a review of the U.S.

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In addition, we took similar actions on branch locations in International Staffing.

We recorded $4.8 million of lease termination costs and fixed asset write-offs related to those actions.

During the first six months of 2020, we recorded $4.8 million of lease termination costs and fixed asset write-offs related to those actions.

In addition, we took cost reduction actions in Americas Staffing, GTS, International Staffing and corporate support functions which resulted in $3.7 million of severance costs and eliminated 123 positions.

We expect that the expense savings from the first quarter of 2020 actions will be approximately $20 million on an annual basis.

Beginning in the third quarter of 2020, in connection with the adoption of a new operating model reflecting the Company's focus on delivering specialty talent solutions, the Company will be revising the reportable segments and recasting prior year reportable segment results.

While faced with market conditions that may temporarily delay our efforts, Kelly continues to focus on accelerating the execution of our strategic plan and making the necessary investments and adjustments to advance that strategy.

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Results of Operations

Total Company - First Quarter

Total Company - Second Quarter

(Dollars in millions)

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Total SG&A expenses 178.1 221.5 (19.6) (18.9)

Goodwill impairment charge 147.7 — NM

Gain on sale of assets — 12.3 NM

Earnings from operations 11.1 34.8 (68.2)

Earnings from operations excluding restructuring charges 10.9 34.2 (68.2)

Diluted earnings per share 1.04 2.12 (50.9)

Permanent placement income (included in revenue from services) 7.6 15.7 (51.5) (50.5)

Gross profit rate 19.4 % 17.8 % 1.6 pts.

Total Company revenue from services for the second quarter of 2020 declined 28.7% in comparison to the prior year and declined 27.7% on a CC basis.

As noted in the following discussions, revenue decreased in all three segments, due primarily to lower demand as a result of the COVID-19 pandemic and the resulting economic slow-down.

Revenue from services for the second quarter of 2020 includes the results of the Insight acquisition, which added approximately 40 basis points to the total revenue growth rate.

The gross profit rate increased by 160 basis points from the prior year.

The increase was due primarily to government wage subsidies, received as the employer of record, which accounted for approximately 100 basis points, lower employee-related costs and the impact of improved product mix.

As noted in the following discussions, increases in the GTS and Americas Staffing gross profit rates were partially offset by a decrease in the gross profit rate of International Staffing.

Total SG&A expenses decreased 19.6% on a reported basis and 18.9% on a CC basis.

This decrease was due primarily to lower administrative salaries and performance-based compensation, including additional short-term cost reductions implemented to further align costs with current revenue volume trends.

Included in total SG&A expenses are adjustments to previously recorded restructuring charges of $0.2 million in the second quarter of 2020 and $0.6 million in the second quarter of 2019.

Gain on sale of assets of $12.3 million primarily represents the excess of the proceeds over the cost of an unused parcel of land located near the Company headquarters sold during the second quarter of 2019.

Diluted earnings per share for the second quarter of 2020 was $1.04, as compared to diluted earnings per share of $2.12 for the second quarter of 2019.

The 2020 second quarter diluted earnings per share was impacted by a gain, net of tax, of approximately $0.52 per share related to the investment in Persol Holdings.

The 2019 second quarter diluted earnings per share were impacted by a gain, net of tax, of approximately $1.07 per share related to the gain on the investment in Persol Holdings, a gain, net of tax, of approximately $0.23 related to a gain on sale of an unused parcel of land and approximately $0.01 per share, net of tax, related to adjustments to restructuring charges.

Americas Staffing - Second Quarter

(Dollars in millions)

2020 2019 Change CC

Revenue from services $ 326.7 $ 597.6 (45.3) % (44.1) %

Gross profit 63.4 108.8 (41.7) (40.9)

SG&A expenses excluding restructuring charges 69.8 93.8 (25.5) (24.7)

Restructuring charges (0.1) (0.6) (88.3) (88.3)

Total SG&A expenses 69.7 93.2 (25.1) (24.3)

Earnings (loss) from operations (6.3) 15.6 NM

Earnings (loss) from operations excluding restructuring charges (6.4) 15.0 NM

Gross profit rate 19.4 % 18.2 % 1.2 pts.

The change in Americas Staffing revenue from services reflects a 40% decrease in hours volume and a 9% decrease in average bill rates (a 6% decrease on a CC basis), partially offset by the impact of the January 2020 acquisition of Insight.

The decline in hours reflects the impact from the challenging market conditions resulting from COVID-19, primarily in education related to school closures, and in manufacturing industry clients from the temporary closure of customer facilities.

The decrease in average bill rates was related to both customer mix and product mix due to lower education volume.

Americas Staffing represented 33% of total Company revenue in the second quarter of 2020 and 44% in the second quarter of 2019.

From a product perspective, the change in revenue reflects lower volume in all products, most significantly in commercial and education.

The Americas Staffing gross profit rate increased 120 basis points in comparison to the prior year, due primarily to lower overall employee costs.

Total SG&A expenses decreased 25.1% from the prior year, due primarily to lower administrative salaries and performance-based compensation, including additional short-term cost reductions implemented to further align costs with current revenue volume trends.

Included in total SG&A expenses in the second quarter of 2020 and 2019 are credits of $0.1 million and $0.6 million, respectively, related primarily to the adjustments of previously accrued severance charges for U.S.

branch-based staffing operations.

GTS - Second Quarter

(Dollars in millions)

2020 2019 Change CC

Revenue from services $ 466.9 $ 505.9 (7.7) % (7.5) %

Gross profit 103.0 99.7 3.3 3.8

SG&A expenses excluding restructuring charges 64.3 74.3 (13.5) (13.2)

Restructuring charges (0.1) — NM NM

Total SG&A expenses 64.2 74.3 (13.6) (13.4)

Earnings from operations 38.8 25.4 53.3

Earnings from operations excluding restructuring charges 38.7 25.4 52.7

Gross profit rate 22.1 % 19.7 % 2.4 pts.

Revenue from services decreased 7.7% compared to last year.

While many of GTS’s products and customers are in essential industries and have been generally resilient during the COVID-19 pandemic, there was a decline in the second quarter of 2020 volume in centrally delivered staffing business and PPO businesses, predominantly in the automotive manufacturing, industrial and energy industries.

These reductions were partially offset by increases from program expansions and new customer contracts in our KellyConnect and BPO products.

GTS revenue represented 48% of total Company revenue in the second quarter of 2020 and 37% in the second quarter of 2019.

The increase in the GTS gross profit rate was due to lower employee-related costs and the continued structural improvement in our product mix.

Total SG&A expenses decreased 13.6% from the prior year, due to effective cost management and the impact of short-term cost reduction actions.

These actions were taken in the second quarter of 2020 to mitigate the impact of COVID-19 related demand disruption to further align the costs with current revenue volume trends.

International Staffing - Second Quarter

(Dollars in millions)

2020 2019 Change CC

Revenue from services $ 184.6 $ 268.1 (31.1) % (29.3) %

Gross profit 23.2 36.1 (36.0) (34.3)

Total 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.

In comparison to the prior year, International Staffing revenue from services decreased 31.1% on a reported basis and 29.3% on a CC basis.

The decline was primarily due to a decrease in hours volume as COVID-19 disrupted operations across the segment and, in particular, in Portugal, France and the U.K.

These decreases were partially offset by increased revenue in Russia, due to increased information technology and call center business.

International Staffing represented 19% of total Company revenue in the second quarter of 2020 and 20% in the second quarter of 2019.

The International Staffing gross profit rate decreased primarily due to lower permanent placement income, as well as unfavorable customer mix.

Permanent placement income, 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 decreased 23.2% due to cost management to mitigate the impact of the COVID-19 disruption.

Results of Operations

Total Company - June Year to Date

(Dollars in millions)

2020 2019 Change CC

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 excluding restructuring charges 389.1 450.6 (13.7) (13.2)

Restructuring charges 8.5 5.7 49.3 49.7

Total 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

Earnings (loss) from operations excluding restructuring charges (92.2) 57.3 NM

Diluted earnings (loss) per share (2.86) 2.68 NM

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Gross profit rate 18.4 % 18.0 % 0.4 pts.

Total Company revenue from services for the first quarter of 2020 declined 8.8% in comparison to the prior year and declined 8.3% on a CC basis.

As noted in the following discussions, revenue decreased in Americas Staffing and International Staffing, and increased in GTS.

The economic slow-down resulting from COVID-19 began in March 2020.

The impact of the current unfavorable economic conditions on our results of operations for the first quarter of 2020 came primarily from lower demand during that period, resulting in a 2.7% decline in year-over-year revenues for the quarter.

Revenue from services for the first quarter of 2020 includes the results of the Insight acquisition, which added approximately 110 basis points to the total revenue growth rate.

The gross profit rate decreased by 50 basis points from the prior year.

As noted in the following discussions, the gross profit rate decreased in all operating segments, but primarily in the Americas Staffing segment.

Total Company revenue from services for the first six months of 2020 declined 18.7% in comparison to the prior year and declined 18.0% on a CC basis.

As noted in the following discussions, revenue decreased in all three segments, due primarily to the impact of COVID-19, which began in mid-March of this year.

Revenue from services for the first six months of 2020 includes the results of the Insight acquisition, which added approximately 70 basis points to the total revenue growth rate.

The gross profit rate increased by 40 basis points from the prior year.

As noted in the following discussions, an increase in the GTS gross profit rate was partially offset by decreases in the gross profit rate in Americas Staffing and International Staffing.

Total SG&A expenses decreased 12.9% on a reported basis and 12.4% on a CC basis.

Included in total SG&A expenses are restructuring charges of $8.7 million in the first quarter of 2020 related to actions taken to position the Company to adopt a new operating model later in 2020 and to align the U.S.

Included in total SG&A expenses are restructuring charges of $8.5 million in the first six months of 2020.

This is related to actions taken to position the Company to adopt a new operating model later in 2020 and to align the U.S.

branch network facilities footprint with a more technology-enabled service delivery methodology.

Restructuring charges of $6.3 million in the first quarter of 2019 represent severance costs primarily related to U.S.

Restructuring charges of $5.7 million in the first six months of 2019 represent severance costs primarily related to U.S.

branch-based staffing operations.

During the first quarter 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.

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.

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The main headquarters building was subsequently leased back to the Company during the first quarter of 2020.

Diluted loss per share for the first quarter of 2020 was $3.91, as compared to diluted earnings per share of $0.56 for the first quarter of 2019.

The 2020 first quarter diluted loss per share was impacted by a loss, net of tax, of approximately $1.38 per share related to the investment in Persol Holdings.

The 2019 first quarter diluted earnings per share were impacted by a gain, net of tax, of approximately $0.23 per share related to the gain on the investment in Persol Holdings.

Americas Staffing - First Quarter

Diluted loss per share for the first six months of 2020 was $2.86, as compared to diluted earnings per share of $2.68 for the first six months of 2019.

The 2020 diluted loss per share was impacted by the goodwill impairment charge, net of tax, of approximately $3.18 per share, a loss, net of tax, of approximately $0.85 per share related to the investment in Persol Holdings, gain on sale of assets, net of tax, of approximately $0.61 per share and restructuring charges, net of tax, of approximately $0.16 per share.

The 2019 diluted earnings per share were impacted by a gain, net of tax, of approximately $1.31 per share related to the gain on the investment in Persol Holdings, gain on sale of assets, net of tax, of approximately $0.23 per share and restructuring charges, net of tax, of approximately $0.11 per share.

Americas Staffing - June Year to Date

(Dollars in millions)

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Total SG&A expenses 163.2 194.4 (16.0) (15.6)

Earnings from operations 0.1 16.0 (99.5)

Earnings from operations excluding restructuring charges 5.7 22.3 (74.4)

Earnings (loss) from operations (6.2) 31.6 NM

Earnings (loss) from operations excluding restructuring charges (0.7) 37.3 NM

Gross profit rate 18.3 % 18.5 % (0.2) pts.

The change in Americas Staffing revenue from services reflects a 28% decrease in hours volume and a 5% decrease in average bill rates (a 4% decrease on a CC basis), partially offset by the impact of the January 2020 acquisition of Insight.

The decrease in hours volume was primarily due to the disruption resulting from the restructure of the U.S.

branch-based staffing in the first quarter of 2019 and slower achievement of the related benefits.

Additionally, the decline reflects an approximately 5% decline in revenues in Americas Staffing from the more challenging market conditions resulting from COVID-19, primarily in education related to school closures, and in manufacturing from the temporary closure of customer facilities.

The decrease in average bill rates was related to customer mix in commercial, education and engineering products.

Americas Staffing represented 42% of total Company revenue in the first quarter of 2020 and 45% in the first quarter of 2019.

From a product perspective, the change in revenue reflects lower volume in commercial, including light industrial and office services, as well as education, engineering and science products.

The Americas Staffing gross profit rate decreased in comparison to the prior year.

The gross profit rate was negatively impacted by higher employee benefit costs, workers' compensation costs, payroll taxes and lower permanent placement income.

Permanent placement income, 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 decreased 7.6% from the prior year, due primarily to lower administrative salaries and performance-based compensation.

Included in total SG&A expenses are $5.6 million related to restructuring costs in the first quarter of 2020 and $6.3 million in the first quarter of 2019.

The restructuring costs in the first quarter of 2020 primarily represent facilities lease buy-out costs and severance costs related to U.S.

The decrease in average bill rates was related to customer mix in commercial, education and engineering products as well as product mix from lower education volumes.

Americas Staffing represented 39% of total Company revenue in the first six months of 2020 and 45% in the first six months of 2019.

From a product perspective, the change in revenue reflects lower volume in all products, most significantly in commercial and education.

The Americas Staffing gross profit rate decreased in comparison to the prior year, due primarily to customer mix.

Total SG&A expenses decreased 16.0% from the prior year, due primarily to lower administrative salaries and performance-based compensation, including additional short-term cost reductions implemented to further align costs with current revenue volume trends.

The restructuring costs in the first six months of 2020 primarily represent facilities lease buy-out costs and severance costs related to U.S.

branch-based staffing operations.

The restructuring costs in the first quarter of 2019 primarily represent severance costs related to U.S.

The restructuring costs in the first six months of 2019 primarily represent severance costs related to U.S.

branch-based staffing operations.

GTS - First Quarter

GTS - June Year to Date

(Dollars in millions)

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Gross profit rate 20.9 % 19.9 % 1.0 pts.

Revenue from services increased 0.4% compared to last year.

Increases from program expansions and new customer contracts in our BPO and KellyConnect products were partially offset by lower demand from a number of customers in centrally delivered staffing and PPO products.

The impact of COVID-19 on GTS revenues was not significant in the first quarter of 2020.

Many of GTS' customers are in essential industries, were able to facilitate remote work or continued to maintain, rather than lay off, their talent including talent provided by the Company.

GTS revenue represented 40% of total Company revenue in the first quarter of 2020 and 36% in the first quarter of 2019.

The decrease in the GTS gross profit rate was due to an increase in employee-related costs, partially offset by our continued structural improvement in our product mix.

Total SG&A expenses decreased 1.3% from the prior year, due to effective cost management, as we continue to align our resources and spending levels with volumes and gross profit in our products.

Revenue from services decreased 3.7% compared to last year.

While many of GTS’s products and customers are in essential industries and have been generally resilient during the COVID-19 pandemic, there was a decline in second quarter of 2020 volume in centrally delivered staffing business and PPO businesses, predominantly in the automotive manufacturing, industrial and energy industries.

These reductions were partially offset by increases from program expansions and new customer contracts in our BPO and KellyConnect products.

GTS revenue represented 43% of total Company revenue in the first six months of 2020 and 37% in the first six months of 2019.

The increase in the GTS gross profit rate was due to continued structural improvement in our product mix and lower employee-related costs.

Total SG&A expenses decreased 7.5% from the prior year, due to effective cost management and short-term cost reduction actions.

These actions were taken in the first six months of 2020 to mitigate the impact of COVID-19 related demand disruption to further align the costs with current revenue volume trends.

Included in total SG&A expenses are $0.8 million related to restructuring charges, representing primarily employee separation costs.

International Staffing - First Quarter

International Staffing - June Year to Date

(Dollars in millions)

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Total SG&A expenses 54.4 63.9 (14.9) (13.4)

Earnings from operations 0.6 3.3 (81.7)

Earnings from operations excluding restructuring charges 1.7 3.3 (48.8)

Earnings (loss) from operations (1.3) 6.8 NM

Earnings (loss) from operations excluding restructuring charges (0.2) 6.8 NM

Gross profit rate 12.9 % 13.4 % (0.5) pts.

In comparison to the prior year, International Staffing revenue from services decreased 21.8% on a reported basis and 20.2% on a CC basis.

The decline was primarily due to a decrease in hours volume in France, Switzerland and Italy, market conditions, as well as the impact of COVID-19 disruption.

These decreases were partially offset by increased revenue in Russia, due to higher hours volume combined with higher average bill rates.

Overall, the impact of unfavorable market conditions as a result of COVID-19 was approximately 2% in the first quarter of 2020.

International Staffing represented 18% of total Company revenue in the first quarter of 2020 and 19% in the first quarter of 2019.

The International Staffing gross profit rate decreased primarily due to unfavorable customer mix, as well as lower permanent placement income.

Total SG&A expenses decreased 6.2% due to continued cost management focused on increased productivity in our branch network.

The decline was primarily due to a decrease in hours volume in France, Portugal and Italy, due to declining market conditions early in the year as a result of the COVID-19 economic disruption.

These decreases were partially offset by increased revenue in Russia, due to increased information technology and call center business.

International Staffing represented 18% of total Company revenue in the first six months of 2020 and 19% in the first six months of 2019.

The International Staffing gross profit rate decreased primarily due to lower permanent placement income, as well as unfavorable customer mix.

Total SG&A expenses decreased 14.9% due to cost management to mitigate the impact of the COVID-19 disruption and a continued focus on increased productivity in our branch network.

Included in total SG&A are $1.1 million of restructuring charges, which primarily related to France staffing operations to reposition our operating model to pursue growth through specialized staffing business.

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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 did not begin until mid-March 2020 in the U.S.

As a result, the impact of the current economic conditions on our financial condition and cash flows was limited in our financial results as of the end of the first quarter.

The impact of the current economic slow-down resulting from the COVID-19 crisis began in March 2020 and continued during the second quarter.

Consistent with our historical results, the impact of the current economic conditions resulted in declines in working capital requirements, primarily Accounts Receivable, and increases in cash flows from operations as revenues slowed.

As highlighted in the consolidated statements of cash flows, our liquidity and available capital resources are impacted by four key components:

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Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash totaled $53.5 million at the end of the first quarter of 2020 and $31.0 million at year-end 2019.

Cash, cash equivalents and restricted cash totaled $221.9 million at the end of the second quarter of 2020 and $31.0 million at year-end 2019.

As further described below, we generated $178.1 million of cash from operating activities, generated $13.3 million of cash from investing activities and used $6.2 million of cash for financing activities.

Operating Activities

In the first three months of 2020, we generated $8.4 million of net cash from operating activities, as compared to generating $21.2 million in the first three months of 2019, due to recurring working capital changes.

Trade accounts receivable totaled $1.2 billion at the end of the first quarter of 2020.

Global DSO was 59 days at the end of the first quarter of 2020 and 58 days at the end of the first quarter of 2019.

Our working capital position (total current assets less total current liabilities) was $523.0 million at the end of the first quarter of 2020, an increase of $1.4 million from year-end 2019.

The current ratio (total current assets divided by total current liabilities) was 1.6 at the end of the first quarter of 2020 and at year-end 2019.

In the first six months of 2020, we generated $178.1 million of net cash from operating activities, as compared to generating $73.5 million in the first six months of 2019.

This change was due to reduced working capital requirements as revenues slowed.

In addition, the Company deferred $48.2 million of tax payments as allowed by COVID-19 economic relief in several jurisdictions.

In the second quarter of 2020, the Company also monetized wage subsidy receivables outside the U.S.

for $16.9 million in cash.

Trade accounts receivable totaled $1.1 billion at the end of the second quarter of 2020.

Global DSO was 61 days at the end of the second quarter of 2020 and 57 days at the end of the second quarter of 2019.

Our working capital position (total current assets less total current liabilities) was $585.8 million at the end of the second quarter of 2020, an increase of $64.2 million from year-end 2019.

Excluding additional cash, working capital declined $126.2 million from year-end 2019.

The current ratio (total current assets divided by total current liabilities) was 1.7 at the end of the second quarter of 2020 and 1.6 at year-end 2019.

Investing Activities

In the first three months of 2020, we generated $15.9 million of cash from investing activities, as compared to using $90.3 million in the first three months of 2019.

Included in cash from investing activities in the first three 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, partially offset by $36.3 million of cash used for the acquisition of Insight in January 2020, net of the cash received.

Included in cash used for investing activities in the first three months of 2019 is $50.8 million for the acquisition of NextGen in January 2019, net of the cash received, and $35.6 million for the acquisition of GTA in January 2019, net of the cash received.

In the first six months of 2020, we generated $13.3 million of cash from investing activities, as compared to using $79.6 million in the first six months of 2019.

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.

Included in cash used for investing activities in the first six months of 2019 is $50.8 million for the acquisition of NextGen in January 2019, net of the cash received, and $35.6 million for the acquisition of GTA in January 2019, net of the cash received.

These amounts were partially offset by proceeds of $13.8 million primarily from the sale of unused land.

Financing Activities

In the first three months of 2020, we used $4.6 million of cash for financing activities, as compared to generating $66.7 million in the first three months of 2019.

The change in cash used in financing activities was primarily related to short-term borrowing activities.

Debt totaled $1.7 million at the end of the first quarter of 2020 and was $1.9 million at year-end 2019.

In the first six months of 2020, we used $6.2 million of cash for financing activities, as compared to generating $8.6 million in the first six months of 2019.

The change in cash used in financing activities was primarily related to the year-over-year change in short-term borrowing activities.

Debt totaled $0.3 million at the end of the second quarter of 2020 and was $1.9 million at year-end 2019.

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 0.2% at the end of the first quarter of 2020 and 0.1% at year-end 2019.

The change in short-term borrowings in the first three months of 2020 was primarily due to payments on local lines of credit.

The change in short-term borrowings in the first three months of 2019 was primarily due to borrowings on our securitization facility.

We made dividend payments of $3.0 million in the first three months of 2020 and 2019.

Our ratio of debt-to-total capital was 0.0% at the end of the second quarter of 2020 and 0.1% at year-end 2019.

The change in short-term borrowings in the first six months of 2020 was primarily due to payments on local lines of credit.

The change in short-term borrowings in the first six months of 2019 was primarily due to borrowings on our securitization facility.

We made dividend payments of $3.0 million in the first six months of 2020 and $5.9 million in the first six months of 2019.

New Accounting Pronouncements

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Contractual Obligations and Commercial Commitments

During the first quarter of 2020, 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 2019 Form 10-K, other than the sale and leaseback of the main headquarters building.

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 2019 Form 10-K, other than the sale and leaseback of the main headquarters building.

Details of the lease payments by year are disclosed in the Leases footnote in the Notes to Consolidated Financial Statements in this Form 10-Q filing.

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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 or additional bank facilities.

During 2020, cash generated from operations will be supplemented by recent enactment of laws providing COVID-19 relief, most notably the Coronavirus Aid, Relief, and Economic Security Act which allows for the deferral of payments of the Company's U.S.

social security taxes.

We are reviewing other potential sources of liquidity, such as wage subsidy receivables outside the U.S., in an effort to potentially monetize such sources.

Additional funding sources could include asset-based lending or additional bank facilities.

Such deferrals are required to be repaid in 2021 and 2022.

We utilize intercompany loans, dividends, capital contributions and redemptions to effectively manage our cash on a global basis.

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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 2020 first quarter end, 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 of the 2020 second quarter end, 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 Accounts Receivable, increase during periods of growth.

The majority of our international cash is concentrated in a cash pooling arrangement (the “Cash Pool”) and is available to fund general corporate needs internationally.

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This allows countries with excess cash to invest and countries with cash needs to utilize the excess cash.

As of the end of the first quarter of 2020, we had $200.0 million of available capacity on our $200.0 million revolving credit facility and $96.8 million of available capacity on our $150.0 million securitization facility.

As of the end of the second quarter of 2020, we had $200.0 million of available capacity on our $200.0 million revolving credit facility and $96.8 million of available capacity on our $150.0 million securitization facility.

The securitization facility carried no short-term borrowings and $53.2 million of standby letters of credit related to workers’ compensation.

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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 first quarter of 2020, we met the debt covenants related to our revolving credit facility and securitization facility.

As of the end of the second quarter of 2020, we met the debt covenants related to our revolving credit facility and securitization facility.

We have historically managed our cash and debt very closely to optimize our capital structure.

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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.

Given the level of uncertainty surrounding the duration of the COVID-19 crisis and to enhance financial flexibility, we may maintain a higher level of cash than our prior practice, including additional borrowings from our existing revolving credit and securitization facilities.

While we may adjust our practices in the future, as of May 4, 2020, we have borrowed $70 million under the securitization facility to build on our existing cash balance as disclosed at March 29, 2020.

Given the cash generated from operating activities through the second quarter of 2020 and the level of uncertainty surrounding the duration of the COVID-19 crisis, we anticipate maintaining a higher level of cash than our prior practice.

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.

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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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis