Item 1. Financial Statements
Item 1. Financial Statements.
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In millions of dollars except per share data)
13 Weeks Ended 26 Weeks Ended
July 4,
2021 June 28,
2020 July 4,
2021 June 28,
2020
Revenue from services $ 1,258.1 $ 975.3 $ 2,464.0 $ 2,236.4
Cost of services 1,027.1 786.1 2,019.7 1,823.9
Gross profit 231.0 189.2 444.3 412.5
Selling, general and administrative expenses 217.3 178.1 420.0 397.6
Goodwill impairment charge — — — 147.7
Gain on sale of assets — — — ( 32.1 )
Earnings (loss) from operations 13.7 11.1 24.3 ( 100.7 )
Gain (loss) on investment in Persol Holdings 6.3 29.6 36.3 ( 48.2 )
Other income (expense), net ( 0.3 ) 2.6 ( 3.7 ) 4.3
Earnings (loss) before taxes and equity in net earnings (loss) of affiliate 19.7 43.3 56.9 ( 144.6 )
Income tax expense (benefit) ( 2.6 ) 0.9 7.9 ( 35.3 )
Net earnings (loss) before equity in net earnings (loss) of affiliate 22.3 42.4 49.0 ( 109.3 )
Equity in net earnings (loss) of affiliate 1.7 ( 1.3 ) 0.6 ( 2.8 )
Net earnings (loss) $ 24.0 $ 41.1 $ 49.6 $ ( 112.1 )
Basic earnings (loss) per share $ 0.60 $ 1.04 $ 1.25 $ ( 2.86 )
Diluted earnings (loss) per share $ 0.60 $ 1.04 $ 1.25 $ ( 2.86 )
Average shares outstanding (millions):
Basic 39.4 39.3 39.4 39.2
Diluted 39.5 39.4 39.5 39.2
See accompanying unaudited Notes to Consolidated Financial Statements.
4
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In millions of dollars)
13 Weeks Ended 26 Weeks Ended
July 4,
2021 June 28,
2020 July 4,
2021 June 28,
2020
Net earnings (loss) $ 24.0 $ 41.1 $ 49.6 $ ( 112.1 )
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax benefit of $0.1 and $0.5, tax expense of $0.4 and tax benefit of $0.4, respectively 2.0 2.7 ( 11.6 ) ( 4.7 )
Less: Reclassification adjustments included in net earnings (loss) — — — —
Foreign currency translation adjustments 2.0 2.7 ( 11.6 ) ( 4.7 )
Other comprehensive income (loss) 2.0 2.7 ( 11.6 ) ( 4.7 )
Comprehensive income (loss) $ 26.0 $ 43.8 $ 38.0 $ ( 116.8 )
See accompanying unaudited Notes to Consolidated Financial Statements.
5
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions)
July 4,
2021 January 3,
2021
Assets
Current Assets
Cash and equivalents $ 64.4 $ 223.0
Trade accounts receivable, less allowances of $12.5 and $13.3, respectively 1,362.5 1,265.2
Prepaid expenses and other current assets 82.4 61.4
Total current assets 1,509.3 1,549.6
Noncurrent Assets
Property and equipment:
Property and equipment 207.9 222.3
Accumulated depreciation ( 170.2 ) ( 181.3 )
Net property and equipment 37.7 41.0
Operating lease right-of-use assets 83.2 83.2
Deferred taxes 302.9 282.0
Goodwill, net 114.8 3.5
Investment in Persol Holdings 187.7 164.2
Investment in equity affiliate 120.0 118.5
Other assets 391.3 319.9
Total noncurrent assets 1,237.6 1,012.3
Total Assets $ 2,746.9 $ 2,561.9
See accompanying unaudited Notes to Consolidated Financial Statements.
6
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions)
July 4,
2021 January 3,
2021
Liabilities and Stockholders’ Equity
Current Liabilities
Short-term borrowings $ 0.1 $ 0.3
Accounts payable and accrued liabilities 612.6 536.8
Operating lease liabilities 19.6 19.6
Accrued payroll and related taxes 337.0 293.0
Accrued workers’ compensation and other claims 22.0 22.7
Income and other taxes 62.6 53.2
Total current liabilities 1,053.9 925.6
Noncurrent Liabilities
Operating lease liabilities 67.1 67.5
Accrued payroll and related taxes 58.5 58.5
Accrued workers’ compensation and other claims 40.8 42.2
Accrued retirement benefits 214.6 205.8
Other long-term liabilities 68.2 59.3
Total noncurrent liabilities 449.2 433.3
Commitments and contingencies (see Contingencies footnote)
Stockholders’ Equity
Capital stock, $1.00 par value
Class A common stock, 100.0 shares authorized; 36.7 shares issued at 2021 and 2020 36.7 36.7
Class B common stock, 10.0 shares authorized; 3.4 shares issued at 2021 and 2020 3.4 3.4
Treasury stock, at cost
Class A common stock, 0.7 shares at 2021 and 0.8 shares at 2020 ( 14.7 ) ( 16.5 )
Class B common stock ( 0.6 ) ( 0.6 )
Paid-in capital 22.3 21.3
Earnings invested in the business 1,212.5 1,162.9
Accumulated other comprehensive income (loss) ( 15.8 ) ( 4.2 )
Total stockholders’ equity 1,243.8 1,203.0
Total Liabilities and Stockholders’ Equity $ 2,746.9 $ 2,561.9
See accompanying unaudited Notes to Consolidated Financial Statements.
7
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In millions of dollars)
13 Weeks Ended 26 Weeks Ended
July 4,
2021 June 28,
2020 July 4,
2021 June 28,
2020
Capital Stock
Class A common stock
Balance at beginning of period $ 36.7 $ 36.6 $ 36.7 $ 36.6
Conversions from Class B — — — —
Balance at end of period 36.7 36.6 36.7 36.6
Class B common stock
Balance at beginning of period 3.4 3.5 3.4 3.5
Conversions to Class A — — — —
Balance at end of period 3.4 3.5 3.4 3.5
Treasury Stock
Class A common stock
Balance at beginning of period ( 15.1 ) ( 17.4 ) ( 16.5 ) ( 20.3 )
Net issuance of stock awards 0.4 0.7 1.8 3.6
Balance at end of period ( 14.7 ) ( 16.7 ) ( 14.7 ) ( 16.7 )
Class B common stock
Balance at beginning of period ( 0.6 ) ( 0.6 ) ( 0.6 ) ( 0.6 )
Net issuance of stock awards — — — —
Balance at end of period ( 0.6 ) ( 0.6 ) ( 0.6 ) ( 0.6 )
Paid-in Capital
Balance at beginning of period 20.6 19.5 21.3 22.5
Net issuance of stock awards 1.7 1.0 1.0 ( 2.0 )
Balance at end of period 22.3 20.5 22.3 20.5
Earnings Invested in the Business
Balance at beginning of period 1,188.5 1,081.7 1,162.9 1,238.6
Cumulative-effect adjustment, net of tax, from adoption of ASU 2016-13, Credit Losses — — — ( 0.7 )
Net earnings (loss) 24.0 41.1 49.6 ( 112.1 )
Dividends — — — ( 3.0 )
Balance at end of period 1,212.5 1,122.8 1,212.5 1,122.8
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period ( 17.8 ) ( 23.2 ) ( 4.2 ) ( 15.8 )
Other comprehensive income (loss), net of tax 2.0 2.7 ( 11.6 ) ( 4.7 )
Balance at end of period ( 15.8 ) ( 20.5 ) ( 15.8 ) ( 20.5 )
Stockholders’ Equity at end of period $ 1,243.8 $ 1,145.6 $ 1,243.8 $ 1,145.6
See accompanying unaudited Notes to Consolidated Financial Statements.
8
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions of dollars)
26 Weeks Ended
July 4,
2021 June 28,
2020
Cash flows from operating activities:
Net earnings (loss) $ 49.6 $ ( 112.1 )
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
Goodwill impairment charge — 147.7
Deferred income taxes on goodwill impairment charge — ( 23.0 )
Depreciation and amortization 14.1 12.0
Operating lease asset amortization 10.7 10.5
Provision for credit losses and sales allowances — 0.1
Stock-based compensation 2.8 2.4
(Gain) loss on investment in Persol Holdings ( 36.3 ) 48.2
Gain on sale of assets — ( 32.1 )
Equity in net (earnings) loss of PersolKelly Pte. Ltd. ( 0.6 ) 2.8
Other, net 2.2 0.8
Changes in operating assets and liabilities, net of acquisitions 5.1 120.8
Net cash from operating activities 47.6 178.1
Cash flows from investing activities:
Capital expenditures ( 4.9 ) ( 7.7 )
Proceeds from sale of assets — 55.5
Acquisition of companies, net of cash received ( 219.0 ) ( 36.4 )
Proceeds (payments) related to loans with equity affiliate 5.8 —
Proceeds from company-owned life insurance 10.4 2.3
Proceeds from (investment in) equity securities 5.0 —
Other investing activities 1.0 ( 0.4 )
Net cash (used in) from investing activities ( 201.7 ) 13.3
Cash flows from financing activities:
Net change in short-term borrowings ( 0.1 ) ( 1.4 )
Financing lease payments ( 0.3 ) ( 0.6 )
Payments of tax withholding for stock awards ( 0.6 ) ( 1.1 )
Dividend payments — ( 3.0 )
Other financing activities — ( 0.1 )
Net cash used in financing activities ( 1.0 ) ( 6.2 )
Effect of exchange rates on cash, cash equivalents and restricted cash ( 2.3 ) 5.7
Net change in cash, cash equivalents and restricted cash ( 157.4 ) 190.9
Cash, cash equivalents and restricted cash at beginning of period 228.1 31.0
Cash, cash equivalents and restricted cash at end of period (1)
$ 70.7 $ 221.9
9
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
(In millions of dollars)
(1) The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported in our consolidated balance sheets:
26 Weeks Ended
July 4,
2021 June 28,
2020
Reconciliation of cash, cash equivalents and restricted cash:
Current assets:
Cash and cash equivalents $ 64.4 $ 216.2
Restricted cash included in prepaid expenses and other current assets 0.1 0.5
Noncurrent assets:
Restricted cash included in other assets 6.2 5.2
Cash, cash equivalents and restricted cash at end of period $ 70.7 $ 221.9
See accompanying unaudited Notes to Consolidated Financial Statements.
10
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Kelly Services, Inc. (the “Company,” “Kelly,” “we” or “us”) have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and notes required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair statement of the results of the interim periods, have been made. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. The unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended January 3, 2021, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 18, 2021 (the 2020 consolidated financial statements). The Company’s second fiscal quarter ended on July 4, 2021 (2021) and June 28, 2020 (2020), each of which contained 13 weeks. The corresponding June year to date periods for 2021 and 2020 each contained 26 weeks.
As discussed in the Segment Disclosures footnote, the Company changed its reportable segments during the third quarter of 2020. As a result, certain reclassifications have been made to the financial statements for the second quarter of 2020 and June year to date 2020 to conform to our updated reportable segment presentation.
11
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. Revenue
Revenue Disaggregated by Service Type
Kelly has five specialty segments: Professional & Industrial (“P&I”), Science, Engineering & Technology (“SET”), Education, Outsourcing & Consulting Group ("Outsourcing & Consulting," "OCG") and International. Other than OCG, each segment delivers talent through staffing services, permanent placement or outcome-based services. Our OCG segment delivers talent solutions including managed service provider ("MSP"), payroll process outsourcing ("PPO"), recruitment process outsourcing ("RPO"), and talent advisory services. International also delivers RPO talent solutions within its local markets.
The following table presents our segment revenues disaggregated by service type (in millions of dollars):
Second Quarter June Year to Date
2021 2020 2021 2020
Professional & Industrial
Staffing services $ 359.8 $ 300.6 $ 712.3 $ 689.0
Permanent placement 5.3 1.7 10.2 4.7
Outcome-based services 101.4 104.1 211.6 206.5
Total Professional & Industrial 466.5 406.4 934.1 900.2
Science, Engineering & Technology
Staffing services 212.9 181.6 399.1 380.8
Permanent placement 6.1 2.5 10.9 5.9
Outcome-based services 79.2 63.2 142.9 130.8
Total Science, Engineering & Technology 298.2 247.3 552.9 517.5
Education
Staffing services 104.1 25.1 214.9 167.5
Permanent placement 1.8 — 2.6 0.1
Total Education 105.9 25.1 217.5 167.6
Outsourcing & Consulting
Talent solutions 107.3 83.6 206.6 173.1
Total Outsourcing & Consulting 107.3 83.6 206.6 173.1
International
Staffing services 272.0 209.6 537.6 469.1
Permanent placement 5.4 3.4 10.9 9.1
Talent solutions 3.0 — 4.8 —
Total International 280.4 213.0 553.3 478.2
Total Intersegment ( 0.2 ) ( 0.1 ) ( 0.4 ) ( 0.2 )
Total Revenue from Services $ 1,258.1 $ 975.3 $ 2,464.0 $ 2,236.4
12
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Revenue Disaggregated by Geography
Our operations are subject to different economic and regulatory environments depending on geographic location. Our P&I and Education segments operate in the Americas region, our SET segment operates in the Americas and Europe regions, and OCG operates in the Americas, Europe and Asia-Pacific regions. The International segment includes Europe and our Brazil and Mexico operations, which are included in the Americas region. Our Brazil operations were sold in August 2020 (see Acquisitions and Disposition footnote).
The below table presents our revenues disaggregated by geography (in millions of dollars):
Second Quarter June Year to Date
2021 2020 2021 2020
Americas
United States $ 894.6 $ 700.1 $ 1,753.1 $ 1,628.6
Canada 39.5 25.6 73.6 58.4
Mexico 33.1 22.5 67.7 51.2
Puerto Rico 26.9 20.0 51.1 37.7
Brazil — 6.1 — 15.2
Total Americas Region 994.1 774.3 1,945.5 1,791.1
Europe
France 57.5 39.9 111.8 92.4
Switzerland 54.0 47.4 106.7 91.6
Portugal 40.6 23.8 84.3 67.4
Russia 33.7 29.3 66.3 61.4
Italy 19.4 13.3 37.5 28.0
United Kingdom 17.7 17.8 34.7 40.1
Germany 8.5 7.1 15.6 15.1
Ireland 6.3 4.1 11.4 9.1
Other 17.0 11.5 32.6 26.7
Total Europe Region 254.7 194.2 500.9 431.8
Total Asia-Pacific Region 9.3 6.8 17.6 13.5
Total Kelly Services, Inc. $ 1,258.1 $ 975.3 $ 2,464.0 $ 2,236.4
13
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
The below table presents our SET, OCG and International segment revenues disaggregated by geographic region (in millions of dollars):
Second Quarter June Year to Date
2021 2020 2021 2020
Science, Engineering & Technology
Americas $ 296.6 $ 246.1 $ 549.8 $ 514.5
Europe 1.6 1.2 3.1 3.0
Total Science, Engineering & Technology $ 298.2 $ 247.3 $ 552.9 $ 517.5
Outsourcing & Consulting
Americas $ 92.6 $ 68.4 $ 177.4 $ 143.0
Europe 5.5 8.3 11.7 16.5
Asia-Pacific 9.2 6.9 17.5 13.6
Total Outsourcing & Consulting $ 107.3 $ 83.6 $ 206.6 $ 173.1
International
Americas $ 32.8 $ 28.4 $ 67.1 $ 66.0
Europe 247.6 184.6 486.2 412.2
Total International $ 280.4 $ 213.0 $ 553.3 $ 478.2
Deferred Costs
Deferred sales commissions, which are included in other assets in the consolidated balance sheet, were $ 0.9 million as of second quarter-end 2021 and $ 1.0 million as of year-end 2020. Amortization expense for the deferred costs for the second quarter and June year to date 2021 was $ 0.2 million and $ 0.4 million, respectively. Amortization expense for the deferred costs for the second quarter and June year to date 2020 was $ 0.3 million and $ 0.6 million, respectively.
Deferred fulfillment costs, which are included in prepaid expenses and other current assets in the consolidated balance sheet, were $ 2.0 million as of second quarter-end 2021 and $ 4.1 million as of year-end 2020. Amortization expense for the deferred costs for the second quarter and June year to date 2021 was $ 5.2 million and $ 12.1 million, respectively. Amortization expense for the deferred costs for the second quarter and June year to date 2020 was $ 4.8 million and $ 9.6 million, respectively.
3. Credit Losses
On December 30, 2019, we adopted Accounting Standards Codification ("ASC") Topic 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures, as applicable.
14
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
The rollforward of our allowance for credit losses related to trade accounts receivable, which is recorded in trade accounts receivable, less allowance in the consolidated balance sheet, is as follows (in millions of dollars):
June Year to Date
2021 2020
Allowance for credit losses:
Beginning balance $ 9.8 $ 9.7
Impact of adopting ASC 326 — 0.3
Current period provision ( 0.2 ) 0.4
Currency exchange effects 0.1 ( 0.4 )
Write-offs ( 0.8 ) ( 0.7 )
Ending balance $ 8.9 $ 9.3
Write-offs are presented net of recoveries, which were not material for June year to date 2021 and 2020.
We are engaged in litigation with a customer over a disputed accounts receivable balance of approximately $ 10 million for certain services rendered more than five years ago, which is recorded as a long-term receivable in other assets in the consolidated balance sheet. In September 2020, a ruling was issued in favor of the customer, which we have appealed. Upon receiving the ruling, we increased our allowance for credit losses by $ 9.2 million to reflect the likelihood of collection, which is recorded in other assets in the consolidated balance sheet.
The rollforward of our allowance for credit losses related to the long-term customer receivable, which is recorded in other assets in the consolidated balance sheet, is as follows (in millions of dollars):
June Year to Date
2021 2020
Allowance for credit losses:
Beginning balance $ 10.9 $ 1.0
Impact of adopting ASC 326 — 0.7
Current period provision — —
Currency exchange effects — —
Ending Balance $ 10.9 $ 1.7
We are also exposed to credit losses for other receivables measured at amortized cost, including the working capital adjustment receivable for Softworld (see Acquisitions and Disposition footnote). No other allowance s related to the working capital adjustment receivable or other receivables were material for second quarter-end 2021 .
4. Acquisitions and Disposition
Acquisitions
In the second quarter of 2021, the Company acquired Softworld, Inc. ("Softworld"), as detailed below. In the first quarter of 2020, Kelly Services USA, LLC ("KSU"), a wholly owned subsidiary of the Company, acquired Insight Workforce Solutions LLC and its affiliate, Insight EDU LLC (collectively, "Insight"), as detailed below. In the fourth quarter of 2020, KSU acquired Greenwood/Asher & Associates, LLC ("Greenwood/Asher"), as detailed below.
Softworld
On April 5, 2021, the Company acquired 100 % of the shares of Softworld for a purchase price of $ 215.0 million. Softworld is a leading technology staffing and workforce solutions firm that serves clients across several end-markets, including financial services, life sciences, aerospace, defense, insurance, retail and IT consulting. This acquisition will expand our capabilities, scale and solution set in our technology specialty. Under terms of the purchase agreement, the purchase price was adjusted for
15
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
cash held by Softworld at the closing date and estimated working capital adjustments resulting in the Company paying cash of $ 220.4 million. Total consideration includes $ 2.6 million of additional consideration that is payable to the seller in 2022. The Company recorded a post-close receivable for a working capital adjustment of $ 6.0 million, which is included in prepaid expenses and other current assets in the consolidated balance sheet. There are no expected credit losses associated with the receivable as of second quarter-end 2021. The total consideration is as follows (in millions of dollars):
Cash consideration paid $ 220.4
Additional consideration payable 2.6
Net working capital adjustment ( 6.0 )
Total consideration $ 217.0
Due to the limited amount of time that has passed since acquiring Softworld, the purchase price allocation for this acquisition is preliminary and could change.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the acquisition (in millions of dollars):
Cash $ 1.4
Trade accounts receivable 21.6
Prepaid expenses and other current assets 3.3
Net property and equipment 1.2
Operating lease right-of-use assets 7.6
Non-current deferred tax 5.9
Goodwill 111.3
Intangibles 79.4
Other assets, noncurrent 1.2
Accounts payable and accrued liabilities, current ( 2.5 )
Operating lease liabilities, current ( 1.3 )
Accrued payroll and related taxes, current ( 4.6 )
Income and other taxes, current ( 1.2 )
Operating lease liabilities, noncurrent ( 6.3 )
Total consideration, including working capital adjustments $ 217.0
The fair value of the acquired receivables represents the contractual value. Included in the assets purchased in the Softworld acquisition was $ 79.4 million of intangible assets, made up of $ 54.9 million in customer relationships, $ 23.1 million associated with Softworld's trade names and trademarks, and $ 1.4 million for non-compete agreements. The customer relationships and trade names and trademarks will be amortized over 10 years with no residual value and the non-compete agreements will be amortized over five years with no residual value. Goodwill generated from the acquisition was primarily attributable to expanding market potential and the expected revenue synergies and was assigned to the SET operating segment (see Goodwill footnote). All of the goodwill is expected to be deductible for tax purposes.
Softworld's results of operations are included in the SET segment in 2021. Our consolidated revenues and net earnings for the second quarter and June year to date 2021 included $ 30.4 million and $ 1.7 million, respectively, from Softworld. The date of the acquisition was the first day of our second quarter, therefore, our first quarter results do not include any revenue or earnings from Softworld.
16
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Pro Forma Information
The following unaudited pro forma information presents a summary of the operating results as if the Softworld acquisition had been completed as of December 30, 2019 (in millions of dollars):
Second Quarter June Year to Date
2021 2020 2021 2020
Pro forma revenues $ 1,258.1 $ 1,001.3 $ 2,495.2 $ 2,290.6
Pro forma net earnings (loss) $ 24.0 $ 42.0 $ 51.2 $ ( 112.8 )
Due to the date of the acquisition, the second quarter 2021 pro forma results reflect actual results for the period. The pro forma results for June year to date 2021 and 2020 reflect amortization of the intangible assets of $ 2.0 million per quarter, a non-recurring adjustment to reclassify $ 1.3 million of transaction expenses from June year to date 2021 to June year to date 2020 and applicable taxes. The unaudited pro forma information presented has been prepared for comparative purposes only and is not necessarily indicative of the results of operations as they would have been had the acquisitions occurred on the assumed date, nor is it necessarily an indication of future operating results.
Greenwood/Asher
On November 18, 2020, KSU acquired 100 % of the membership interests of Greenwood/Asher, a premier specialty education executive search firm in the U.S., for a purchase price of $ 3.5 million. Under terms of the purchase agreement, the purchase price was adjusted for cash held by Greenwood/Asher at the closing date and estimated working capital adjustments resulting in the Company paying cash of $ 5.2 million. The purchase price of the acquisition also included contingent consideration with an estimated fair value of $ 2.1 million related to an earnout payment in the event certain conditions are met per the terms of the agreement. The initial fair value of the earnout was established using a Black Scholes model and the liability is recorded in accounts payable and accrued liabilities and other noncurrent liabilities in the consolidated balance sheet (see Fair Value Measurements footnote). Subsequently, the earnout was revalued, resulting in a decrease to the liability of $ 0.4 million in the first quarter of 2021. The earnout is expected to be paid in 2022 and 2023 after each earnout year pursuant to the terms of the purchase agreement. The purchase price allocation for this acquisition is preliminary and could change.
Goodwill generated from the acquisition was primarily attributable to the expected synergies from combining operations and expanding market potential, and was assigned to the Education reporting unit (see Goodwill footnote). The amount of goodwill expected to be deductible for tax purposes is approximately $ 0.9 million.
Insight
On January 14, 2020, KSU acquired 100 % of the membership interests of Insight, an educational staffing company in the U.S., for a purchase price of $ 34.5 million. Under terms of the purchase agreement, the purchase price was adjusted for cash held by Insight at the closing date and estimated working capital adjustments resulting in the Company paying cash of $ 38.1 million. The purchase price of the acquisition also included contingent consideration with an estimated fair value of $ 1.6 million related to an earnout payment in the event certain conditions are met per the terms of the agreement. The initial fair value of the earnout was established using a Monte Carlo simulation and the liability is recorded in accounts payable and accrued liabilities in the consolidated balance sheet (see Fair Value Measurements footnote). Subsequently, the earnout was revalued, resulting in a net increase to the liability of $ 0.1 million in 2020 and a further increase of $ 0.1 million in the second quarter of 2021, and is expected to be paid in the third quarter of 2021. In the second quarter of 2020, the Company paid a working capital adjustment of $ 0.1 million. As of year-end 2020, the purchase price allocation for this acquisition is final.
Goodwill generated from the acquisition was primarily attributable to the expected synergies from combining operations and expanding market potential, and was assigned to the former Americas Staffing reporting unit. The goodwill related to this acquisition was included in the goodwill impairment charge taken in the first quarter of 2020. The goodwill impairment charge resulted from an interim goodwill impairment test triggered by declines in our common stock price as a result of negative market reaction to the COVID-19 crisis (see Goodwill footnote). The amount of goodwill expected to be deductible for tax purposes is approximately $ 18.6 million.
17
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Disposition
On August 18, 2020, the Company sold its Brazil operations for a purchase price of $ 1.4 million. The Company received cash proceeds of $ 1.2 million, net of cash disposed. As a part of the transaction, the Company has agreed to indemnify the buyer for losses and costs incurred in connection with certain events or occurrences initiated within a six-year period after closing. The aggregate losses for which the Company will provide indemnification shall not exceed $ 8.8 million. Accordingly, the Company recorded an indemnification liability of $ 2.5 million in other long-term liabilities in the consolidated balance sheet, which represented the fair value of the liability at the time of disposition (see Fair Value Measurements footnote) and completely offset the gain on the sale.
5. Investment in Persol Holdings
The Company has a yen-denominated investment through the Company's subsidiary, Kelly Services Japan, Inc., in the common stock of Persol Holdings Co., Ltd. ("Persol Holdings"), the 100% owner of Persol Asia Pacific Pte. Ltd., the Company’s joint venture partner in PersolKelly Pte. Ltd. (the "JV"). As our investment is a noncontrolling interest in Persol Holdings, this investment is recorded at fair value based on the quoted market price of Persol Holdings stock on the Tokyo Stock Exchange as of the period end (see Fair Value Measurements footnote). A gain on the investment of $ 6.3 million and $ 36.3 million in the second quarter and June year to date 2021, respectively, a gain on the investment of $ 29.6 million and a loss on the investment of $ 48.2 million in the second quarter and June year to date 2020, respectively, was recorded in gain (loss) on investment in Persol Holdings in the consolidated statements of earnings.
6. Investment in PersolKelly Pte. Ltd.
The Company has a 49 % ownership interest in the JV (see Investment in Persol Holdings footnote above), a staffing services business operating in ten geographies in the Asia-Pacific region. The operating results of the Company’s interest in the JV are accounted for on a one-quarter lag under the equity method and are reported in equity in net earnings (loss) of affiliate in the consolidated statements of earnings, which amounted to a gain of $ 1.7 million and $ 0.6 million in the second quarter and June year to date 2021, respectively, and a loss of $ 1.3 million and $ 2.8 million in the second quarter and June year to date 2020, respectively. This investment is evaluated for indicators of impairment on a quarterly basis or whenever events or circumstances indicate the carrying amount may be other-than-temporarily impaired. If we conclude that there is an other-than-temporary impairment of this equity investment, we will adjust the carrying amount of the investment to the current fair value.
The investment in equity affiliate on the Company’s consolidated balance sheet totaled $ 120.0 million as of second quarter-end 2021 and $ 118.5 million as of year-end 2020. The net amount due to the JV, a related party, was not material as of the second quarter-end 2021 and the net amount due from the JV was $ 5.6 million as of year-end 2020. The Company made loans in prior years, proportionate to its 49 % ownership, to the JV to fund working capital requirements as a result of its sustained revenue growth. In April 2021, the Company received $ 5.8 million from the JV for the outstanding balance of the loan. As of second quarter-end 2021, there is no outstanding loan balance or accrued interest receivable relating to the loan. Accrued interest receivable, which is included in prepaid expenses and other current assets in the consolidated balance sheet, was not material at year-end 2020. The JV is a supplier to certain MSP programs in the region and the amounts for services provided to the Company, which are included in accounts payable and accrued liabilities in the consolidated balance sheet, are not material.
On April 1, 2020, 100 % of the shares of Kelly Services Australia Pty Ltd and Kelly Services (New Zealand) Limited, both subsidiaries of the JV, were sold to an affiliate of Persol Holdings. The JV received proceeds of $ 17.5 million upon the sale and the Company received a direct royalty payment of $ 0.7 million.
7. Fair Value Measurements
Trade accounts receivable, short-term borrowings, accounts payable, accrued liabilities and accrued payroll and related taxes approximate their fair values due to the short-term maturities of these assets and liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present assets and liabilities measured at fair value on a recurring basis as of second quarter-end 2021 and year-end 2020 in the consolidated balance sheet by fair value hierarchy level, as described below.
18
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 measurements include significant unobservable inputs.
As of Second Quarter-End 2021
Description Total Level 1 Level 2 Level 3
(In millions of dollars)
Money market funds $ 6.1 $ 6.1 $ — $ —
Investment in Persol Holdings 187.7 187.7 — —
Total assets at fair value $ 193.8 $ 193.8 $ — $ —
Brazil indemnification $ ( 2.7 ) $ — $ — $ ( 2.7 )
Greenwood/Asher earnout ( 1.7 ) — — ( 1.7 )
Insight earnout ( 1.8 ) — — ( 1.8 )
Total liabilities at fair value $ ( 6.2 ) $ — $ — $ ( 6.2 )
As of Year-End 2020
Description Total Level 1 Level 2 Level 3
(In millions of dollars)
Money market funds $ 120.3 $ 120.3 $ — $ —
Investment in Persol Holdings 164.2 164.2 — —
Total assets at fair value $ 284.5 $ 284.5 $ — $ —
Brazil indemnification $ ( 2.6 ) $ — $ — $ ( 2.6 )
Greenwood/Asher earnout ( 2.1 ) — — ( 2.1 )
Insight earnout ( 1.7 ) — — ( 1.7 )
Total liabilities at fair value $ ( 6.4 ) $ — $ — $ ( 6.4 )
Money market funds represent investments in money market funds that hold government securities, of which $ 6.1 million as of second quarter-end 2021 and $ 5.1 million as of year-end 2020, are restricted as to use and are included in other assets in the consolidated balance sheet. The money market funds that are restricted as to use account for the majority of our restricted cash balance and represents cash balances that are required to be maintained to fund disability claims in California. The remaining money market funds as of year-end 2020 are included in cash and equivalents in the consolidated balance sheet. The valuations of money market funds are based on quoted market prices of those accounts as of the respective period end.
The valuation of the investment in Persol Holdings is based on the quoted market price of Persol Holdings stock on the Tokyo Stock Exchange as of the period end, and the related changes in fair value are recorded in the consolidated statements of earnings (see Investment in Persol Holdings footnote). The cost of this yen-denominated investment, which fluctuates based on foreign exchange rates, was $ 18.7 million as of the second quarter-end 2021 and $ 20.1 million at year-end 2020.
As of second quarter-end 2021 and year-end 2020, the Company had an indemnification liability of $ 2.7 million and $ 2.6 million, respectively, in other long-term liabilities on the consolidated balance sheet related to the sale of the Brazil operations (see Acquisitions and Disposition footnote). The valuation of the indemnification liability was established using a discounted cash flow methodology based on probability weighted-average cash flows discounted by weighted-average cost of capital. The valuation, which represents the fair value, is considered a Level 3 liability, and is being measured on a recurring basis. During year to date 2021, the Company recognized an increase of $ 0.1 million to the indemnification liability related to exchange rate fluctuations in other income (expense), net in the consolidated statements of earnings.
19
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
The Company recorded an earnout liability relating to the 2020 acquisition of Insight, totaling $ 1.8 million at second quarter-end 2021 and $ 1.7 million at year-end 2020 in accounts payable and accrued liabilities in the consolidated balance sheet (see Acquisitions and Disposition footnote). The valuation of the earnout liability was initially established using a Monte Carlo simulation and represents the fair value and is considered a Level 3 liability.
The Company recorded an earnout liability relating to the 2020 acquisition of Greenwood/Asher, totaling $ 1.7 million at second quarter-end 2021 in accounts payable and accrued liabilities and other long-term liabilities in the consolidated balance sheet and $ 2.1 million as of year-end 2020 in other long-term liabilities in the consolidated balance sheet (see Acquisitions and Disposition footnote). The initial valuation of the earnout liability was established using a Black Scholes model and represents the fair value and is considered a Level 3 liability. During year to date 2021, the Company recorded a reduction of $ 0.4 million to the earnout liability in selling, general & administrative ("SG&A") expenses in the consolidated statements of earnings.
Equity Investment Without Readily Determinable Fair Value
Prior to April 2021, the Company had a minority investment in Business Talent Group, LLC, which was included in other assets in the consolidated balance sheet. This investment was measured using the measurement alternative for equity investments without a readily determinable fair value. The measurement alternative represents cost, less impairment, plus or minus observable price changes. In the second quarter of 2021, BTG entered into a merger agreement which resulted in all of the Company's shares of BTG being automatically canceled upon approval of the merger and resulted in the receipt of $ 5.0 million in cash, which is equal to the carrying value and purchase price of the BTG investment.
Prior to March 2021, the Company had a minority investment in Kenzie Academy Inc., which was included in other assets in the consolidated balance sheet. The investment was also measured using the measurement alternative for equity investments without a readily determinable fair value as described above. On March 8, 2021, Kenzie entered into a transaction to sell its assets. As of the date of the sale and year-end 2020, the investment had a carrying value of $ 1.4 million, representing total cost plus observable price changes to date. The asset was written down as a result of the sale and the loss of $ 1.4 million was recorded in other income (expense), net in the year to date consolidated statements of earnings.
Assets Measured at Fair Value on a Nonrecurring Basis
Due to the negative market reaction to the COVID-19 crisis, including declines in our common stock price, management determined that a triggering event occurred during the first quarter of 2020. We therefore performed an interim step one quantitative impairment test for both of our previous reporting units with goodwill. As a result of this quantitative assessment, we determined that the estimated fair value of the reporting units no longer exceeded the carrying value, and recorded a goodwill impairment charge of $ 147.7 million in the first quarter of 2020 (see Goodwill footnote).
20
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
8. Restructuring
There were no restructuring charges incurred for June year-to-date 2021. In the first quarter of 2020, the Company took restructuring actions to align costs with expected revenues, position the organization to adopt a new operating model in the third quarter of 2020 and to align the U.S. branch network facilities footprint with a more technology-enabled service delivery methodology.
Restructuring costs incurred in June year-to-date 2020 totaled $ 8.5 million and were recorded entirely in SG&A expenses in the consolidated statements of earnings, as detailed below (in millions of dollars):
Lease
Termination Costs Severance Costs Total
Professional & Industrial $ 3.5 $ 0.9 $ 4.4
Science, Engineering & Technology 0.5 — 0.5
Education 0.1 0.7 0.8
International 0.7 0.4 1.1
Corporate — 1.7 1.7
Total $ 4.8 $ 3.7 $ 8.5
A summary of the global restructuring balance sheet accrual, included in accrued payroll and related taxes and accounts payable and accrued liabilities in the consolidated balance sheet, is detailed below (in millions of dollars):
Balance as of year-end 2020 $ 3.5
Reductions for cash payments related to all restructuring activities ( 2.0 )
Balance as of first quarter-end 2021 1.5
Reductions for cash payments related to all restructuring activities ( 0.9 )
Balance as of second quarter-end 2021 $ 0.6
The remaining balance of $ 0.6 million as of second quarter-end 2021 primarily represents severance costs, and the majority is expected to be paid by the end of 2021. No material adjustments are expected to be recorded.
9. Goodwill
The Company performs its annual goodwill impairment testing in the fourth quarter each year and regularly assesses whenever events or circumstances make it more likely than not that an impairment may have occurred. During the first quarter of 2020, negative market reaction to the COVID-19 crisis, including declines in our common stock price, caused our market capitalization to decline significantly compared to the fourth quarter of 2019, causing a triggering event. Therefore, we performed an interim step one quantitative test for our previous reporting units with goodwill, Americas Staffing and GTS, and determined that the estimated fair values of both reporting units no longer exceeded their carrying values. Based on the result of our interim goodwill impairment test as of the first quarter of 2020, we recorded a goodwill impairment charge of $ 147.7 million to write off goodwill for both reporting units. A portion of the goodwill balance was deductible for tax purposes.
In performing the step one quantitative test and consistent with our prior practice, we determined the fair value of each reporting unit using the income approach, which is validated through reconciliation to observable market capitalization data. Under the income approach, estimated fair value is determined based on estimated future cash flows discounted by an estimated market participant weighted-average cost of capital, which reflects the overall level of inherent risk of the reporting unit being measured. Estimated future cash flows are based on our internal projection model and reflects management’s outlook for the reporting units. Assumptions and estimates about future cash flows and discount rates are complex and often subjective. Our analysis used significant assumptions by segment, including: expected future revenue and expense growth rates, profit margins, cost of capital, discount rate and forecasted capital expenditures and working capital.
21
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
The changes in the carrying amount of goodwill as of June year to date 2021 are included in the table below. The goodwill resulting from the acquisition of Softworld during the second quarter of 2021 (see Acquisitions and Disposition footnote) was allocated to the SET reportable segment.
As of
Year-End 2020 Additions to Goodwill Impairment Adjustments As of Second Quarter-End 2021
(In millions of dollars)
Science, Engineering & Technology $ — $ 111.3 $ — $ 111.3
Education 3.5 — — 3.5
Total $ 3.5 $ 111.3 $ — $ 114.8
10. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the second quarter and June year to date 2021 and 2020 are included in the table below. Amounts in parentheses indicate debits.
Second Quarter June Year to Date
2021 2020 2021 2020
(In millions of dollars)
Foreign currency translation adjustments:
Beginning balance $ ( 14.4 ) $ ( 20.6 ) $ ( 0.8 ) $ ( 13.2 )
Other comprehensive income (loss) before reclassifications 2.0 2.7 ( 11.6 ) ( 4.7 )
Amounts reclassified from accumulated other comprehensive income (loss) — — — —
Net current-period other comprehensive income (loss) 2.0 2.7 ( 11.6 ) ( 4.7 )
Ending balance ( 12.4 ) ( 17.9 ) ( 12.4 ) ( 17.9 )
Pension liability adjustments:
Beginning balance ( 3.4 ) ( 2.6 ) ( 3.4 ) ( 2.6 )
Other comprehensive income (loss) before reclassifications — — — —
Amounts reclassified from accumulated other comprehensive income (loss) — — — —
Net current-period other comprehensive income (loss) — — — —
Ending balance ( 3.4 ) ( 2.6 ) ( 3.4 ) ( 2.6 )
Total accumulated other comprehensive income (loss) $ ( 15.8 ) $ ( 20.5 ) $ ( 15.8 ) $ ( 20.5 )
22
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
11. Earnings (Loss) Per Share
The reconciliation of basic and diluted earnings (loss) per share on common stock for the second quarter and June year to date 2021 and 2020 follows (in millions of dollars except per share data):
Second Quarter June Year to Date
2021 2020 2021 2020
Net earnings (loss) $ 24.0 $ 41.1 $ 49.6 $ ( 112.1 )
Less: earnings allocated to participating securities ( 0.2 ) ( 0.3 ) ( 0.4 ) —
Net earnings (loss) available to common shareholders $ 23.8 $ 40.8 $ 49.2 $ ( 112.1 )
Average shares outstanding (millions):
Basic 39.4 39.3 39.4 39.2
Dilutive share awards 0.1 0.1 0.1 —
Diluted 39.5 39.4 39.5 39.2
Basic earnings (loss) per share $ 0.60 $ 1.04 $ 1.25 $ ( 2.86 )
Diluted earnings (loss) per share $ 0.60 $ 1.04 $ 1.25 $ ( 2.86 )
Potentially dilutive shares outstanding are primarily related to performance shares (see Stock-Based Compensation footnote for a description of performance shares) for the second quarter and June year to date 2021 and 2020. There were no dividends paid for Class A and Class B common stock for second quarter 2021 and 2020, and June year to date 2021. Dividends paid per share for Class A and Class B common stock were $ 0.075 for June year to date 2020.
12. Stock-Based Compensation
For the second quarter of 2021, the Company recognized stock compensation expense of $ 1.4 million, and a related tax benefit of $ 0.3 million. For the second quarter of 2020, the Company recognized stock compensation expense of $ 1.2 million, and a related tax benefit of $ 0.2 million. For June year to date 2021, the Company recognized stock compensation expense of $ 2.8 million, and a related tax benefit of $ 0.4 million. For June year to date 2020, the Company recognized stock compensation expense of $ 2.4 million, and a related tax benefit of $ 0.0 million.
Performance Shares
During 2021, the Company granted performance share awards associated with the Company’s Class A common stock to certain senior officers. The payment of performance share awards, which will be satisfied with the issuance of shares out of treasury stock, is contingent upon the achievement of specific revenue growth and earnings before interest, taxes, depreciation and amortization ("EBITDA") margin performance goals ("financial measure performance share awards") over a stated period of time. The maximum number of performance shares that may be earned is 200% of the target shares originally granted. These awards have three one-year performance periods: 2021, 2022 and 2023, with the payout for each performance period based on separate financial measure goals that are set in February of each of the three performance periods.
For the 2021 and 2022 performance periods, half of the shares earned in each respective performance period will vest after achievement of the respective performance goals for the year and approval of the financial results by the Compensation Committee, in early 2022 and 2023, respectively, if not forfeited by the recipient. The remaining half of the shares earned for the 2021 and 2022 performance periods will vest in early 2024, based on continuous employment. For the 2023 performance period, any shares earned will vest after achievement of the 2023 performance goals for the year and approval of the financial results by the Compensation Committee in early 2024, if not forfeited by the recipient. No dividends are paid on these performance shares.
On May 18, 2021, the Compensation Committee approved a modification to the performance goals of our 2021 and 2020 financial measure performance awards to increase the goals to reflect the results of the acquisition of Softworld. We accounted for this change as a Type I modification under ASC 718 as the expectation of the achievement of certain performance conditions related to these awards remained a probable-to-probable post-modification. The Company did not record any incremental stock compensation expense since the fair value of the modified awards immediately after the modification was not
23
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
greater than the fair value of the original awards immediately before the modification. All service-based vesting conditions were unaffected by the modification.
A summary of the status of all nonvested performance shares at target as of second quarter-end 2021 and year-to-date changes is presented as follows below (in thousands of shares except per share data). The vesting adjustment in the table below represents the 2018 financial measure performance shares and the 2018 Total Shareholder Return ("TSR") performance shares that did not vest because actual achievement was below the threshold level and resulted in no payout.
Financial Measure
Performance Shares TSR
Performance Shares
Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value
Nonvested at year-end 2020 366 $ 22.40 47 $ 31.38
Granted 180 20.20 — —
Vested ( 13 ) 24.90 — —
Forfeited ( 16 ) 24.73 — —
Vesting adjustment ( 94 ) 16.99 ( 47 ) 31.38
Nonvested at second quarter-end 2021 423 $ 22.50 — $ —
Restricted Stock
A summary of the status of nonvested restricted stock as of second quarter-end 2021 and year-to-date changes is presented as follows below (in thousands of shares except per share data).
Shares Weighted Average Grant Date Fair Value
Nonvested at year-end 2020 281 $ 22.74
Granted 211 21.31
Vested ( 87 ) 23.36
Forfeited ( 15 ) 24.19
Nonvested at second quarter-end 2021 390 $ 21.78
13. Sale of Assets
In the second quarter of 2020, the Company monetized wage subsidy receivables outside the U.S. for $ 16.9 million, net of fees and 5 % retainer. The sale of these receivables was accounted for as a sale of financial assets with certain recourse provisions in which we derecognized the receivables. Although the sale of receivables is with recourse, the Company did not record a recourse obligation as the Company concluded the receivables were collectible. The net cash proceeds related to the sale were included in operating activities in the consolidated statements of cash flows and the fees related to the sale were included in SG&A expenses in the consolidated statements of earnings.
On March 20, 2020, the Company sold three of our four headquarters properties for a purchase price of $ 58.5 million as a part of a sale and leaseback transaction. The properties included the parcels of land, together with all rights and easements, in addition to all improvements located on the land, including buildings. The Company received cash proceeds of $ 55.5 million, which was net of transaction expenses. As of the date of the sale, the properties had a combined net carrying amount of $ 23.4 million. The resulting gain on the sale of the assets was $ 32.1 million which was recorded in gain on sale of assets in the consolidated statements of earnings. The Company leased back the headquarters buildings on the same date.
24
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
14. Other Income (Expense), Net
Included in other income (expense), net for the second quarter and June year to date 2021 and 2020 are the following:
Second Quarter June Year to Date
2021 2020 2021 2020
(In millions of dollars)
Interest income $ — $ 0.1 $ 0.1 $ 0.4
Interest expense ( 0.6 ) ( 0.8 ) ( 1.2 ) ( 1.7 )
Dividend income 1.0 1.3 1.0 1.3
Foreign exchange gains (losses) ( 0.7 ) 1.3 ( 0.9 ) 3.7
Other — 0.7 ( 2.7 ) 0.6
Other Income (Expense), Net $ ( 0.3 ) $ 2.6 $ ( 3.7 ) $ 4.3
Included in Other for June year to date 2021 is a loss from the sale of the assets related to our minority investment in Kenzie Academy (see Fair Value Measurements footnote) and transaction-related expenses from the April 2021 acquisition of Softworld (see Acquisitions and Disposition footnote).
15. Income Taxes
Income tax benefit was $ 2.6 million and expense was $ 0.9 million for the second quarter of 2021 and 2020, respectively. Income tax expense was $ 7.9 million and income tax benefit was $ 35.3 million for June year to date 2021 and 2020, respectively. These amounts were impacted by changes in the fair value of the Company's investment in Persol Holdings, which resulted in a charge of $ 1.9 million for the second quarter of 2021 and $ 11.1 million for June year to date 2021, compared to a charge of $ 9.0 million for the second quarter of 2020 and a benefit of $ 14.8 million for June year to date 2020. The second quarter of 2021 benefited $ 5.2 million from a change in United Kingdom tax rates, while the second quarter of 2020 benefited $ 7.7 million from Brazil outside basis differences. June year to date 2020 includes a tax benefit of $ 23.0 million on the impairment of goodwill.
Our tax expense is affected by recurring items, such as the amount of pretax income and its mix by jurisdiction, U.S. work opportunity credits and the change in cash surrender value of tax exempt investments in life insurance policies. It is also affected by discrete items that may occur in any given period but are not consistent from period to period, such as tax law changes, changes in judgment regarding the realizability of deferred tax assets, the tax effects of stock compensation, and changes in the fair value of the Company's investment in Persol Holdings, which are treated as discrete since they cannot be estimated. The United Kingdom rate change benefit in the second quarter of 2021, impairment of goodwill in the first quarter of 2020 and the Brazil outside basis differences in the second quarter of 2020 were treated as discrete.
The Company provides valuation allowances against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. At this time, we have no valuation allowance against our Mexican deferred tax asset of $ 4.4 million, though it is possible this may change as we assess the impacts of the new labor laws enacted in the second quarter of 2021 on our Mexican business operations.
25
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
16. Contingencies
The Company is continuously engaged in litigation, threatened litigation, claims, audits or investigations arising in the ordinary course of its business, such as matters alleging employment discrimination, wage and hour violations, claims for indemnification or liability, violations of privacy rights, anti-competition regulations, commercial and contractual disputes, and tax related matters which could result in a material adverse outcome.
We record accruals for loss contingencies when we believe it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Such accruals are recorded in accounts payable and accrued liabilities and in accrued workers’ compensation and other claims in the consolidated balance sheet. At second quarter-end 2021 and year-end 2020, the gross accrual for litigation costs amounted to $ 1.3 million and $ 1.4 million, respectively.
The Company maintains insurance coverage which may cover certain claims. When claims exceed the applicable policy deductible and realization of recovery of the claim from existing insurance policies is deemed probable, the Company records receivables from the insurance company for the excess amount, which are included in prepaid expenses and other current assets in the consolidated balance sheet. At second quarter-end 2021 and year-end 2020, there were no related insurance receivables.
The Company estimates the aggregate range of reasonably possible losses, in excess of amounts accrued, is $ 0.4 million to $ 4.3 million as of second quarter-end 2021. This range includes matters where a liability has been accrued but it is reasonably possible that the ultimate loss may exceed the amount accrued and for matters where a loss is believed to be reasonably possible, but a liability has not been accrued. The aggregate range only represents matters in which we are currently able to estimate a range of loss and does not represent our maximum loss exposure. The estimated range is subject to significant judgment and a variety of assumptions and only based upon currently available information. For other matters, we are currently not able to estimate the reasonably possible loss or range of loss.
While the ultimate outcome of these matters cannot be predicted with certainty, we believe that the resolution of any such proceedings will not have a material adverse effect on our financial condition, results of operations or cash flows.
17. Segment Disclosures
The Company’s operating segments, which also represent its reporting segments, are based on the organizational structure for which financial results are regularly evaluated by the Company’s chief operating decision-maker ("CODM", the Company’s CEO) to determine resource allocation and assess performance. The Company’s five reportable segments, (1) Professional & Industrial, (2) Science, Engineering & Technology, (3) Education, (4) Outsourcing & Consulting, and (5) International, reflect the specialty services the Company provides to customers and represent how the business is organized internally. Intersegment revenue represents revenue earned between the reportable segments and is eliminated from total segment revenue from services. Consistent with the information provided to and evaluated by the CODM, the goodwill impairment charge in the first quarter of 2020 was included in Corporate expenses.
The following tables present information about the reported revenue from services and gross profit of the Company by reportable segment, along with a reconciliation to earnings (loss) before taxes and equity in net earnings (loss) of affiliate, for the second quarter and June year to date 2021 and 2020. The Company changed its reportable segments during the third quarter of 2020. As a result, certain reclassifications have been made to the reportable segment results for the second quarter of 2020 and June year to date 2020 to conform to the updated reportable segment presentation. Asset information by reportable segment is not presented, since the Company does not produce such information internally nor does it use such information to manage its business.
26
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Second Quarter June Year to Date
2021 2020 2021 2020
(In millions of dollars)
Revenue from Services:
Professional & Industrial $ 466.5 $ 406.4 $ 934.1 $ 900.2
Science, Engineering & Technology 298.2 247.3 552.9 517.5
Education 105.9 25.1 217.5 167.6
Outsourcing & Consulting 107.3 83.6 206.6 173.1
International 280.4 213.0 553.3 478.2
Less: Intersegment revenue ( 0.2 ) ( 0.1 ) ( 0.4 ) ( 0.2 )
Consolidated Total $ 1,258.1 $ 975.3 $ 2,464.0 $ 2,236.4
Second Quarter June Year to Date
2021 2020 2021 2020
(In millions of dollars)
Earnings (loss) from Operations:
Professional & Industrial gross profit $ 75.2 $ 78.9 $ 151.1 $ 164.0
Professional & Industrial SG&A expenses ( 69.0 ) ( 64.6 ) ( 138.4 ) ( 145.1 )
Professional & Industrial earnings (loss) from operations 6.2 14.3 12.7 18.9
Science, Engineering & Technology gross profit 66.5 50.6 119.7 105.3
Science, Engineering & Technology SG&A expenses ( 46.9 ) ( 31.3 ) ( 82.6 ) ( 67.8 )
Science, Engineering & Technology earnings (loss) from operations 19.6 19.3 37.1 37.5
Education gross profit 16.8 4.3 34.0 24.7
Education SG&A expenses ( 15.3 ) ( 9.5 ) ( 29.5 ) ( 26.1 )
Education earnings (loss) from operations 1.5 ( 5.2 ) 4.5 ( 1.4 )
Outsourcing & Consulting gross profit 34.8 29.2 66.1 58.0
Outsourcing & Consulting SG&A expenses ( 30.1 ) ( 25.1 ) ( 58.5 ) ( 53.7 )
Outsourcing & Consulting earnings (loss) from operations 4.7 4.1 7.6 4.3
International gross profit 37.7 26.2 73.4 60.5
International SG&A expenses ( 34.6 ) ( 28.3 ) ( 67.7 ) ( 61.5 )
International earnings (loss) from operations 3.1 ( 2.1 ) 5.7 ( 1.0 )
Corporate ( 21.4 ) ( 19.3 ) ( 43.3 ) ( 159.0 )
Consolidated Total 13.7 11.1 24.3 ( 100.7 )
Gain (loss) on investment in Persol Holdings 6.3 29.6 36.3 ( 48.2 )
Other income (expense), net ( 0.3 ) 2.6 ( 3.7 ) 4.3
Earnings (loss) before taxes and equity in net earnings (loss) of affiliate $ 19.7 $ 43.3 $ 56.9 $ ( 144.6 )
27
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Depreciation and amortization expense included in SG&A expenses by segment above are as follows:
Second Quarter June Year to Date
2021 2020 2021 2020
(In millions of dollars)
Depreciation and amortization:
Professional & Industrial $ 1.4 $ 1.3 $ 2.8 $ 2.7
Science, Engineering & Technology 3.3 1.1 4.3 2.1
Education 0.9 0.9 1.9 1.8
Outsourcing & Consulting 0.2 0.2 0.4 0.3
International 0.5 0.5 1.0 1.1
18. New Accounting Pronouncements
Recently Adopted
In January 2020, the FASB issued Accounting Standards Update ("ASU") 2020-01 which clarifies the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. The guidance clarifies how to account for the transition into and out of the equity method of accounting when considering observable transactions under the measurement alternative. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with early adoption permitted. The adoption of this standard did not have a material impact to our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 simplifying various aspects related to the accounting for income taxes. The guidance removes exceptions to the general principles in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with early adoption permitted. The adoption of this standard did not have a material impact to our consolidated financial statements.
Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated financial statements and related disclosures.
28
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.