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
December 30, 2018
, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on
February 14, 2019
(the
2018
consolidated financial statements). The Company’s
second
fiscal quarter ended on
June 30, 2019
(
2019
) and
July 1, 2018
(
2018
), each of which contained
13
weeks. The corresponding June year to date periods for 2019 and 2018 each contained 26 weeks.
Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the current year’s presentation.
2.
Revenue
Adoption of ASC Topic 606, Revenue from Contracts with Customers
On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605.
We recorded a net increase to opening earnings invested in the business of
$3.4 million
as of January 1, 2018 due to the cumulative impact of adopting ASC 606. The impact is primarily driven by the deferral of contract costs related to our customer contracts of
$5.2 million
, partially offset by deferring revenue billed at a point in time for services performed over time of
$0.6 million
and a deferred tax liability of
$1.2 million
. As of and for year to date 2018, the consolidated financial statements were not materially impacted as a result of the application of Topic 606 compared to Topic 605.
Revenue Recognition
Revenues are recognized when control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Our revenues are recorded net of any sales, value added, or similar taxes collected from our customers. We generate revenue from: the hourly sales of services by our temporary employees to customers (“staffing solutions” revenue), the recruiting of permanent employees for our customers (“permanent placement” revenue), and through our talent fulfillment and outcome-based activities (“talent solutions” and “outcome-based services” revenue).
Staffing Solutions Revenue
Staffing solutions can be branch-delivered (Americas and EMEA regions) or centrally delivered (within Global Talent Solutions (“GTS”)). Our Americas Staffing segment is organized to deliver services in a number of specialty staffing solutions, which are summarized as: commercial, specialized professional/technical (“PT”) and educational staffing.
Permanent Placement Revenue
Permanent placement solutions can be branch-delivered (Americas and EMEA regions) or centrally delivered (within GTS). Our permanent placement revenue is recorded when the permanent placement candidate begins full-time employment. On the candidate start date, the customer accepts the candidate and can direct the use of the candidate as well as obtains the significant risk and rewards of the candidate. As such, we consider this the point the control transfers to the customer.
Talent Solutions and Outcome-Based Services Revenue
In addition to centrally delivered staffing services, our GTS segment also includes talent solutions (contingent workforce outsourcing “CWO”, payroll process outsourcing “PPO” and recruitment process outsourcing “RPO”) and outcome-based services (business process outsourcing “BPO”, KellyConnect, career transition/outplacement services and talent advisory services).
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
The following table presents our segment revenues disaggregated by service type (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
June Year to Date
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Branch-Delivered Staffing
|
|
|
|
|
|
|
|
|
Americas Staffing
|
|
|
|
|
|
|
|
|
Staffing Solutions
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
384.1
|
|
|
$
|
414.5
|
|
|
$
|
776.6
|
|
|
$
|
812.9
|
|
Educational Staffing
|
|
117.4
|
|
|
110.0
|
|
|
257.0
|
|
|
240.1
|
|
Professional/Technical
|
|
87.3
|
|
|
70.1
|
|
|
172.8
|
|
|
137.5
|
|
Permanent Placement
|
|
8.8
|
|
|
9.4
|
|
|
17.7
|
|
|
17.8
|
|
Total Americas Staffing
|
|
597.6
|
|
|
604.0
|
|
|
1,224.1
|
|
|
1,208.3
|
|
|
|
|
|
|
|
|
|
|
International Staffing
|
|
|
|
|
|
|
|
|
Staffing Solutions
|
|
261.7
|
|
|
279.1
|
|
|
513.9
|
|
|
556.0
|
|
Permanent Placement
|
|
6.4
|
|
|
7.5
|
|
|
13.1
|
|
|
15.3
|
|
Total International Staffing
|
|
268.1
|
|
|
286.6
|
|
|
527.0
|
|
|
571.3
|
|
|
|
|
|
|
|
|
|
|
Global Talent Solutions
|
|
|
|
|
|
|
|
|
Talent Fulfillment
|
|
|
|
|
|
|
|
|
Staffing Solutions
|
|
258.2
|
|
|
288.3
|
|
|
513.8
|
|
|
572.5
|
|
Permanent Placement
|
|
0.5
|
|
|
0.4
|
|
|
0.8
|
|
|
0.8
|
|
Talent Solutions
|
|
93.3
|
|
|
88.9
|
|
|
183.0
|
|
|
173.9
|
|
Total Talent Fulfillment
|
|
352.0
|
|
|
377.6
|
|
|
697.6
|
|
|
747.2
|
|
|
|
|
|
|
|
|
|
|
Outcome-Based Services
|
|
153.9
|
|
|
123.1
|
|
|
309.3
|
|
|
239.3
|
|
Total Global Talent Solutions
|
|
505.9
|
|
|
500.7
|
|
|
1,006.9
|
|
|
986.5
|
|
|
|
|
|
|
|
|
|
|
Total Intersegment
|
|
(4.1
|
)
|
|
(4.4
|
)
|
|
(7.9
|
)
|
|
(9.3
|
)
|
|
|
|
|
|
|
|
|
|
Total Revenue from Services
|
|
$
|
1,367.5
|
|
|
$
|
1,386.9
|
|
|
$
|
2,750.1
|
|
|
$
|
2,756.8
|
|
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Our operations are subject to different economic and regulatory environments depending on geographic location. Our GTS segment operates in the Americas, EMEA and APAC regions. In the
second
quarter of
2019
and
2018
, GTS made up
$488.4 million
and
$483.9 million
in total Americas, respectively,
$10.9 million
and
$11.2 million
in total EMEA, respectively, and the entire balance in APAC. For June year to date in 2019 and 2018, GTS made up
$972.8 million
and
$952.5 million
in total Americas, respectively,
$22.0 million
and
$23.3 million
in total EMEA, respectively, and the entire balance in APAC.
The below table presents our revenues disaggregated by geography (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
June Year to Date
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Americas
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
991.3
|
|
|
$
|
981.2
|
|
|
$
|
2,010.2
|
|
|
$
|
1,955.9
|
|
Canada
|
|
33.2
|
|
|
37.0
|
|
|
66.2
|
|
|
70.6
|
|
Mexico
|
|
29.7
|
|
|
30.0
|
|
|
57.2
|
|
|
60.4
|
|
Puerto Rico
|
|
19.6
|
|
|
26.2
|
|
|
38.8
|
|
|
46.0
|
|
Brazil
|
|
8.2
|
|
|
9.0
|
|
|
16.7
|
|
|
18.5
|
|
Total Americas
|
|
1,082.0
|
|
|
1,083.4
|
|
|
2,189.1
|
|
|
2,151.4
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
|
|
|
|
|
|
France
|
|
64.6
|
|
|
72.0
|
|
|
128.9
|
|
|
143.9
|
|
Switzerland
|
|
49.9
|
|
|
52.8
|
|
|
99.4
|
|
|
102.5
|
|
Portugal
|
|
46.7
|
|
|
51.2
|
|
|
91.5
|
|
|
102.3
|
|
United Kingdom
|
|
30.5
|
|
|
28.5
|
|
|
56.7
|
|
|
57.5
|
|
Russia
|
|
28.8
|
|
|
25.6
|
|
|
54.2
|
|
|
51.7
|
|
Italy
|
|
20.7
|
|
|
19.3
|
|
|
41.3
|
|
|
39.8
|
|
Ireland
|
|
10.9
|
|
|
11.7
|
|
|
21.0
|
|
|
23.0
|
|
Germany
|
|
9.9
|
|
|
14.8
|
|
|
21.0
|
|
|
31.2
|
|
Other
|
|
16.9
|
|
|
22.0
|
|
|
34.9
|
|
|
42.8
|
|
Total EMEA
|
|
278.9
|
|
|
297.9
|
|
|
548.9
|
|
|
594.7
|
|
|
|
|
|
|
|
|
|
|
Total APAC
|
|
6.6
|
|
|
5.6
|
|
|
12.1
|
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
Total Kelly Services, Inc.
|
|
$
|
1,367.5
|
|
|
$
|
1,386.9
|
|
|
$
|
2,750.1
|
|
|
$
|
2,756.8
|
|
Deferred Costs
Deferred sales commissions are paid at initial contract inception and upon contract renewal by our sales team. Deferred sales commissions, which are included in other assets in the consolidated balance sheet, were
$1.8 million
as of
second quarter-end 2019
and
$2.3 million
as of year-end
2018
. Amortization expense for the deferred costs for the
second
quarter and June year to date
2019
was
$0.4 million
and
$0.9 million
, respectively. Amortization expense for the deferred costs for the
second
quarter and June year to date
2018
was
$0.4 million
and
$0.8 million
, respectively.
Deferred fulfillment costs are incurred after obtaining a contract in order to generate a resource that will be used to provide our services. Deferred fulfillment costs, which are included in prepaid expenses and other current assets in the consolidated balance sheet, were
$3.0 million
as of
second quarter-end 2019
and as of year-end
2018
. Amortization expense for the deferred costs for the
second
quarter and June year to date
2019
was
$3.1 million
and
$6.5 million
, respectively. Amortization expense for the deferred costs for the
second
quarter and June year to date
2018
was
$2.5 million
and
$4.6 million
, respectively.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
3.
Acquisitions
In the first quarter of 2019, the Company acquired NextGen Global Resources LLC (“NextGen”) and Global Technology Associates, LLC (“GTA”), as detailed below. We have accounted for these acquisitions under Accounting Standards Update (“ASU”) 2017-01, Business Combinations.
NextGen Global Resources
On January 2, 2019, the Company acquired
100%
of the membership interests of NextGen, a leading provider of telecommunications, wireless and connected technology staffing solutions, for a purchase price of
$51.0 million
. Under terms of the purchase agreement, the purchase price was adjusted for cash held by NextGen at the closing date and estimated working capital adjustments resulting in the Company paying cash of
$54.3 million
. Due to the limited amount of time that has passed since acquiring NextGen, the purchase price allocation for this acquisition is preliminary and could change.
This acquisition will increase our market share in the telecommunications, wireless and connected technology markets within our engineering solutions in the U.S. NextGen’s results of operations are included in the Americas Staffing segment for the 2019 second quarter and June year-to-date periods.
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
|
$
|
3.5
|
|
Trade accounts receivable
|
19.7
|
|
Other current assets
|
0.3
|
|
Goodwill
|
13.7
|
|
Intangibles
|
21.5
|
|
Other noncurrent assets
|
0.5
|
|
Current liabilities
|
(4.9
|
)
|
Purchase price paid, including working capital adjustments
|
$
|
54.3
|
|
Included in the assets purchased in the NextGen acquisition was approximately
$21.5 million
of intangible assets, made up of
$12.9 million
in customer relationships,
$8.1 million
associated with NextGen’s trade name and
$0.5 million
for non-compete agreements. The customer relationships will be amortized over
10
years with no residual value, the trade name will be amortized over
15
years with no residual value and the non-compete agreements will be amortized over
five years
with no residual value. Goodwill generated from this acquisition is primarily attributable to the market potential as a staffing solutions provider to the expanding telecommunications industry, and is assigned to the Americas Staffing reporting unit (see Goodwill footnote). All of the goodwill is expected to be deductible for tax purposes.
Global Technology Associates
On January 2, 2019, in a separate transaction, the Company acquired
100%
of the membership interests of GTA, a leading provider of engineering, technology and business consulting solutions in the telecommunications industry, for a purchase price of
$34.0 million
. Under terms of the purchase agreement, the purchase price was adjusted for cash held by GTA at the closing date and estimated working capital adjustments resulting in the Company paying cash of
$35.7 million
. Due to the limited amount of time that has passed since acquiring GTA, the purchase price allocation for this acquisition is preliminary and could change.
This acquisition will increase our market share in the engineering solutions market in the U.S. within the telecommunications and connectivity space. GTA’s results of operations are included in the GTS segment for the 2019 second quarter and June year-to-date periods.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
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
|
$
|
0.1
|
|
Trade accounts receivable
|
13.9
|
|
Other current assets
|
0.1
|
|
Goodwill
|
6.8
|
|
Intangibles
|
17.3
|
|
Other noncurrent assets
|
0.4
|
|
Current liabilities
|
(2.9
|
)
|
Purchase price paid, including working capital adjustments
|
$
|
35.7
|
|
Included in the assets purchased in the GTA acquisition was approximately
$17.3 million
of intangible assets, made up of
$12.1 million
in customer relationships,
$4.0 million
associated with GTA’s trade name and
$1.2 million
for non-compete agreements. The customer relationships will be amortized over
10
years with no residual value, the trade name will be amortized over
15
years with no residual value and the non-compete agreements will be amortized over
five years
with no residual value. Goodwill generated from this acquisition is primarily attributable to the market potential as a solutions provider to the expanding telecommunications industry, and is assigned to the GTS reporting unit (see Goodwill footnote). All of the goodwill is expected to be deductible for tax purposes.
Pro Forma Information
Our consolidated revenues and net earnings for the second quarter 2019 included
$22.7 million
and
$1.5 million
, respectively, from NextGen and
$16.7 million
and
$1.7 million
, respectively, from GTA. Our consolidated revenues and net earnings for June year to date 2019 included
$42.9 million
and
$2.4 million
, respectively, from NextGen and
$32.4 million
and
$2.5 million
, respectively, from GTA. The following unaudited pro forma information presents a summary of the operating results as if the NextGen and GTA acquisitions had been completed as of January 1, 2018 (in millions of dollars, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
June Year to Date
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Pro forma revenues
|
$
|
1,367.5
|
|
|
$
|
1,410.9
|
|
|
$
|
2,750.1
|
|
|
$
|
2,801.3
|
|
Pro forma net earnings
|
83.8
|
|
|
(14.6
|
)
|
|
105.9
|
|
|
15.0
|
|
Pro forma basic earnings per share
|
2.12
|
|
|
(0.38
|
)
|
|
2.69
|
|
|
0.38
|
|
Pro forma diluted earnings per share
|
2.12
|
|
|
(0.38
|
)
|
|
2.68
|
|
|
0.38
|
|
Due to the date of the acquisitions, there were no adjustments for the second quarter and June year to date 2019 pro forma results. For the second quarter of 2018, NextGen pro forma revenues and net earnings were
$15.6 million
and
$0.5 million
, respectively, and GTA pro forma revenues and net earnings were
$8.4 million
and
$0.3 million
, respectively. For June year to date 2018, NextGen pro forma revenues and net earnings were
$28.2 million
and
$0.6 million
, respectively, and GTA pro forma revenues and net earnings were
$16.3 million
and
$0.7 million
, respectively.
The pro forma results for the second quarter and June year to date 2018 reflect amortization of the intangible assets, applicable taxes and adjustments for the accounting for revenue under ASC 606, none of which had a material impact on the pro forma results. 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 dates, nor is it necessarily an indication of future operating results.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
4. Investment in Persol Holdings
The Company has a yen-denominated investment in the common stock of Persol Holdings, a leading integrated human resource company in Japan and the Company’s joint venture partner in PersolKelly Asia Pacific. 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). The Company adopted ASU 2016-01 and as a result, effective January 1, 2018, all changes in fair value on the investment are recognized in net earnings which previously were recorded in other comprehensive income (loss). A cumulative catch-up adjustment of the prior net unrealized gains previously recorded in other comprehensive income (loss), and in accumulated other comprehensive income (loss), a component of stockholders’ equity, was recorded in earnings invested in the business as of January 1, 2018 for
$140.0 million
, net of
$69.9 million
of taxes.
For the second quarter and June year to date 2019, a gain on the investment of
$61.2 million
and
$74.4 million
, respectively, was recorded in gain (loss) on investment in Persol Holdings in the consolidated statements of earnings. For the
second
quarter and June year to date 2018, a loss on the investment of
$52.5 million
and
$28.8 million
, respectively, was recorded in gain (loss) on investment in Persol Holdings in the consolidated statements of earnings.
5. Investment in PersolKelly Asia Pacific
The Company has a
49%
ownership interest in PersolKelly Asia Pacific, a staffing solutions business operating in more than
10
countries in the Asia-Pacific region. The operating results of the Company’s interest in PersolKelly Asia Pacific 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. This investment is evaluated for indicators of impairment on a periodic 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
$122.0 million
as of
second quarter-end 2019
and
$121.3 million
as of year-end
2018
. The net amount due from PersolKelly Asia Pacific, a related party, was
$6.4 million
as of the
second quarter-end 2019
and
$10.2 million
as of year-end 2018. Included in both balances is a loan made to PersolKelly Asia Pacific in 2018 for
$7.0 million
to fund working capital requirements as a result of their sustained revenue growth, which is included in other assets in the consolidated balance sheet. The amount included in trade accounts payable for staffing services provided by PersolKelly Asia Pacific as a supplier to CWO programs was
$0.0 million
as of
second quarter-end 2019
and
$0.2 million
as of year-end
2018
.
Subsequent to the end of second quarter of 2019, the Company made loans, proportionate to its
49%
ownership, totaling
$4.4 million
to PersolKelly Asia Pacific to fund additional working capital requirements.
6. 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 Measured at Fair Value on a Recurring Basis
The following tables present assets measured at fair value on a recurring basis in the consolidated balance sheet as of
second
quarter-end
2019
and year-end
2018
by fair value hierarchy level, as described below.
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.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
As of Second Quarter-End 2019
|
Description
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(In millions of dollars)
|
Money market funds
|
|
$
|
4.8
|
|
|
$
|
4.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment in Persol Holdings
|
|
213.7
|
|
|
213.7
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
218.5
|
|
|
$
|
218.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
As of Year-End 2018
|
Description
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(In millions of dollars)
|
Money market funds
|
|
$
|
4.6
|
|
|
$
|
4.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment in Persol Holdings
|
|
135.1
|
|
|
135.1
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
139.7
|
|
|
$
|
139.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market funds as of
second
quarter-end
2019
and year-end 2018 represent investments in money market accounts, all of which are restricted as to use and 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 valuations of money market funds were 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
$19.2 million
as of the
second
quarter-end
2019
and
$18.8 million
at year-end
2018
.
Equity Investment Without Readily Determinable Fair Value
The Company has a minority investment in Business Talent Group, LLC, which is included in other assets in the consolidated balance sheet. This investment is 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. The carrying amount of
$5.0 million
as of the second quarter-end 2019 and year-end 2018 represents the purchase price. There have been no adjustments to the carrying amount or impairments.
During second quarter of 2019, the Company made an additional
$1.0 million
minority investment in Kenzie Academy Inc., which is included in other assets in the consolidated balance sheet. This investment is also measured using the measurement alternative for equity investments without a readily determinable fair value as described above. As of the second quarter end 2019, the investment totaled
$1.3 million
, representing total cost plus observable price changes to date.
7. Restructuring
In the first quarter of 2019, the Company took restructuring actions to transform operations in order to drive growth and operational effectiveness primarily in the U.S. branch-based staffing operations.
Restructuring costs incurred in 2019 totaled
$5.7 million
, all of which is within the Americas Staffing segment. The restructuring costs, which are all severance related, were recorded in selling, general and administrative (“SG&A”) expenses in the consolidated statements of earnings.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
A summary of the global restructuring balance sheet accrual, included in accrued payroll and related taxes, is detailed below (in millions of dollars).
|
|
|
|
|
Balance as of year-end 2018
|
$
|
—
|
|
Additions charged to Americas Staffing
|
6.3
|
|
Reductions for cash payments
|
(0.2
|
)
|
Balance as of first quarter-end 2019
|
6.1
|
|
Reductions for cash payments
|
(3.1
|
)
|
Accrual adjustments
|
(0.6
|
)
|
Balance as of second quarter-end 2019
|
$
|
2.4
|
|
The remaining balance of
$2.4 million
as of
second quarter-end 2019
represents severance costs, and the majority is expected to be paid by the end of 2019. No material adjustments are expected to be recorded.
8. Goodwill
The changes in the carrying amount of goodwill as of
second
quarter-end
2019
are included in the table below. See Acquisitions footnote for a description of the additions to goodwill in the first quarter of 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of Year-End 2018
|
|
Additions to Goodwill
|
|
As of Second Quarter-End 2019
|
|
(In millions of dollars)
|
Americas Staffing
|
$
|
44.8
|
|
|
$
|
13.7
|
|
|
$
|
58.5
|
|
Global Talent Solutions
|
62.5
|
|
|
6.8
|
|
|
69.3
|
|
|
$
|
107.3
|
|
|
$
|
20.5
|
|
|
$
|
127.8
|
|
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
9. 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 2019 and 2018
are included in the table below. Amounts in parentheses indicate debits. See Investment in Persol Holdings footnote for a description of the cumulative-effect adjustment from the adoption of ASU 2016-01.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
June Year to Date
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In millions of dollars)
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
(17.2
|
)
|
|
$
|
7.1
|
|
|
$
|
(15.7
|
)
|
|
$
|
(6.9
|
)
|
Other comprehensive income (loss) before reclassifications
|
6.9
|
|
|
(14.8
|
)
|
|
5.4
|
|
|
(0.8
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net current-period other comprehensive income (loss)
|
6.9
|
|
|
(14.8
|
)
|
|
5.4
|
|
|
(0.8
|
)
|
Ending balance
|
(10.3
|
)
|
|
(7.7
|
)
|
|
(10.3
|
)
|
|
(7.7
|
)
|
|
|
|
|
|
|
|
|
Unrealized gains and losses on investment:
|
|
|
|
|
|
|
|
Beginning balance
|
—
|
|
|
—
|
|
|
—
|
|
|
140.0
|
|
Cumulative-effect adjustment from adoption of ASU 2016-01, Financial Instruments
|
—
|
|
|
—
|
|
|
—
|
|
|
(140.0
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net current-period other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
(140.0
|
)
|
Ending balance
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Pension liability adjustments:
|
|
|
|
|
|
|
|
Beginning balance
|
(1.4
|
)
|
|
(2.3
|
)
|
|
(1.4
|
)
|
|
(2.3
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net current-period other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance
|
(1.4
|
)
|
|
(2.3
|
)
|
|
(1.4
|
)
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss)
|
$
|
(11.7
|
)
|
|
$
|
(10.0
|
)
|
|
$
|
(11.7
|
)
|
|
$
|
(10.0
|
)
|
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
10. Earnings Per Share
The reconciliation of basic and diluted earnings (loss) per share on common stock for the
second quarter and June year to date 2019 and 2018
follows (in millions of dollars except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
June Year to Date
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net earnings (loss)
|
$
|
83.8
|
|
|
$
|
(15.4
|
)
|
|
$
|
105.9
|
|
|
$
|
13.7
|
|
Less: earnings allocated to participating securities
|
(0.8
|
)
|
|
—
|
|
|
(1.0
|
)
|
|
(0.2
|
)
|
Net earnings (loss) available to common shareholders
|
$
|
83.0
|
|
|
$
|
(15.4
|
)
|
|
$
|
104.9
|
|
|
$
|
13.5
|
|
|
|
|
|
|
|
|
|
Average shares outstanding (millions):
|
|
|
|
|
|
|
|
Basic
|
39.1
|
|
|
38.8
|
|
|
39.0
|
|
|
38.7
|
|
Dilutive share awards
|
0.1
|
|
|
—
|
|
|
0.2
|
|
|
0.1
|
|
Diluted
|
39.2
|
|
|
38.8
|
|
|
39.2
|
|
|
38.8
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
$
|
2.12
|
|
|
$
|
(0.40
|
)
|
|
$
|
2.69
|
|
|
$
|
0.35
|
|
Diluted earnings (loss) per share
|
$
|
2.12
|
|
|
$
|
(0.40
|
)
|
|
$
|
2.68
|
|
|
$
|
0.35
|
|
Potentially dilutive shares outstanding are primarily related to performance shares for the
second quarter and June year to date 2019 and 2018
.
Dividends paid per share for Class A and Class B common stock were
$0.075
for the
second
quarter
2019
and
2018
and
$0.15
for June year to date 2019 and 2018.
11. Stock-Based Compensation
For the
second
quarter of
2019
, the Company recognized stock compensation expense of
$2.0 million
, and related tax benefit of
$0.3 million
. For the
second
quarter of
2018
, the Company recognized stock compensation expense of
$2.2 million
, and related tax benefit of
$0.5 million
. For June year to date 2019, the Company recognized stock compensation expense of
$5.2 million
, and related tax benefit of
$0.7 million
. For June year to date 2018, the Company recognized stock compensation expense of
$4.7 million
, and related tax benefit of
$3.2 million
.
Performance Shares
2019 Grant
During 2019, the Company granted performance awards associated with the Company’s Class A common stock to certain senior officers. The payment of performance shares, which will be satisfied with the issuance of shares out of treasury stock, is contingent upon the achievement of two financial goals at the end of a
three
-year performance period. These awards will cliff vest after the approval by the Compensation Committee, if not forfeited by the recipient. No dividends are paid on these performance shares.
The 2019 financial measure performance awards were granted with a market condition in the form of a relative Total Shareholder Return (“TSR”) modifier, which could impact the number of shares earned as determined at the end of the performance period. The number of shares earned based on financial measures’ results will be reduced, increased or remain the same based on the Company’s TSR relative to the S&P SmallCap 600 Index. The maximum number of performance shares that may be earned is
200%
of the target shares originally granted and the TSR modifier will not increase payouts above the maximum.
The 2019 performance awards have an estimated fair value of
$25.58
per share, which was determined using a Monte Carlo valuation model incorporating assumptions for inputs of expected stock price volatility, dividend yield and risk-free interest rate.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2018 and 2017 Grants
For the 2018 and 2017 financial measure performance awards, the annual goals are set in February of each year, with the total award payout for 2018 grants based on a cumulative measure of the 2018, 2019 and 2020 goals and for 2017 grants based on a cumulative measure of the 2017, 2018 and 2019 goals. Accordingly, the Company remeasures the fair value of the 2018 and 2017 financial measure performance shares each reporting period until the third year goals are set, after which the grant date fair value will be fixed for the remaining performance period. As of
second
quarter-end
2019
, the current fair value for the 2018 financial measure performance shares was
$25.35
per share. During the first quarter
2019
, the final year of goals was set for the performance shares granted in 2017 and the grant date fair value for the 2017 financial measure performance shares was set at
$23.76
per share. The grant date fair value per share will remain fixed for the remaining performance period.
A summary of the status of all nonvested performance shares at target as of
second
quarter-end
2019
and year-to-date changes is presented as follows below (in thousands of shares except per share data). The majority of the vested shares below is related to the 2016 performance share grant, which cliff-vested after approval from the Compensation Committee during the first quarter of 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2018
|
481
|
|
|
$
|
23.58
|
|
|
173
|
|
|
$
|
23.56
|
|
Granted
|
250
|
|
|
25.38
|
|
|
—
|
|
|
—
|
|
Vested
|
(188
|
)
|
|
28.05
|
|
|
(55
|
)
|
|
19.73
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Nonvested at second quarter-end 2019
|
543
|
|
|
$
|
25.08
|
|
|
118
|
|
|
$
|
25.35
|
|
Restricted Stock
A summary of the status of nonvested restricted stock as of
second
quarter-end
2019
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 2018
|
356
|
|
|
$
|
23.44
|
|
Granted
|
179
|
|
|
24.77
|
|
Vested
|
(101
|
)
|
|
22.70
|
|
Forfeited
|
(30
|
)
|
|
23.72
|
|
Nonvested at second quarter-end 2019
|
404
|
|
|
$
|
24.20
|
|
12. Sale of Assets
During the second quarter of 2019, the Company sold unused land located near the Company headquarters. The gain on the sale of assets in the consolidated statement of earnings for the second quarter and June year to date 2019 includes the excess of the
$11.7 million
sale proceeds over the cost of the parcel. The gain on sale of assets also includes proceeds of
$2.1 million
from the transfer of customer contracts related to the Company’s legal specialty operations to a third party during the second quarter of 2019.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
13. Other Income (Expense), Net
Included in other income (expense), net for the
second quarter and June year to date 2019 and 2018
are the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
June Year to Date
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In millions of dollars)
|
Interest income
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
Interest expense
|
(1.2
|
)
|
|
(0.8
|
)
|
|
(2.3
|
)
|
|
(1.6
|
)
|
Dividend income
|
1.3
|
|
|
0.8
|
|
|
1.3
|
|
|
0.8
|
|
Foreign exchange losses (gains)
|
(0.1
|
)
|
|
0.4
|
|
|
(0.7
|
)
|
|
(0.7
|
)
|
Other
|
—
|
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
$
|
0.2
|
|
|
$
|
0.6
|
|
|
$
|
(0.9
|
)
|
|
$
|
(1.1
|
)
|
14. Income Taxes
Income tax expense was
$12.7 million
(a
13.2%
effective tax rate) for the
second
quarter of 2019 and income tax benefit was
$15.6 million
(a
49.6%
effective tax rate) for the
second
quarter of 2018. Income tax expense was
$19.1 million
(a
15.3%
effective tax rate) for June year to date 2019 and income tax benefit was
$9.2 million
(a (
366.2%
) effective tax rate) for June year to date 2018. These amounts were impacted by changes in the fair value of the Company’s investment in Persol Holdings, which resulted in a charge of
$18.7 million
for the second quarter of 2019 and
$22.8 million
for June year to date 2019, compared to a benefit of
$16.2 million
for the second quarter of 2018 and
$8.9 million
for June year to date 2018. The second quarter of 2019 benefitted by
$14.3 million
from the release of a valuation allowance in the United Kingdom, offset by a
$3.9 million
charge for recording a valuation allowance in Germany.
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 non-taxable 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 work opportunity credit program is a temporary provision in the U.S. tax law and expires for employees hired after 2019. While the program has routinely been extended, it is uncertain whether it will again be extended. In the event the program is not renewed, we will continue to receive credits for qualified employees hired prior to 2020.
15. Leases
At the beginning of the first quarter of 2019, we adopted ASC 842, Leases, using an optional transition method which allowed us to adopt the new lease standard at the adoption date, as compared to the beginning of the earliest period presented, and recognize a cumulative-effect adjustment to the beginning balance of earnings invested in the business in the period of adoption. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carry forward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that existed prior to adoption of the new standard. We also elected to combine lease and non-lease components, to keep leases with an initial term of 12 months or less off the consolidated balance sheet and recognize the associated lease payments in the consolidated statements of earnings on a straight-line basis over the lease term.
The Company has operating and financing leases for field offices and various equipment. Our leases have remaining lease terms of
one
year to
10
years. We determine if an arrangement is a lease at inception.
We recorded
$74.1 million
of right-of-use (“ROU”) assets within operating lease right-of-use assets,
$19.8 million
of current lease liabilities within operating lease liabilities, current and
$54.3 million
of noncurrent lease liabilities within operating lease
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
liabilities, noncurrent in the consolidated balance sheet on the date of adoption. No adjustment to the beginning balance of earnings invested in the business was necessary as a result of adopting this standard.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Since most of the Company’s leases do not have an implicit borrowing rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our leases may include options allowing us in our sole discretion to extend or terminate the lease, and when it is reasonably certain that we will exercise those options, we will include those periods in our lease term. Variable costs, such as payments for insurance and tax payments, are expensed when the obligation for those payments is incurred.
The components of lease expense were as follows (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
June Year to Date
|
Description
|
|
Statement of Earnings Location
|
|
2019
|
|
2019
|
Operating lease cost
|
|
Selling, general and administrative expenses
|
|
$
|
6.7
|
|
|
$
|
13.7
|
|
Short-term lease cost
|
|
Selling, general and administrative expenses
|
|
0.9
|
|
|
1.6
|
|
Variable lease cost
|
|
Selling, general and administrative expenses
|
|
1.7
|
|
|
3.5
|
|
Total lease cost
|
|
|
|
$
|
9.3
|
|
|
$
|
18.8
|
|
Supplemental consolidated balance sheet information related to leases was as follows (in millions of dollars):
|
|
|
|
|
|
|
|
Description
|
|
Balance Sheet Location
|
|
As of Second Quarter-End 2019
|
ROU Assets:
|
|
|
|
|
Operating
|
|
Operating lease right-of-use assets
|
|
$
|
66.9
|
|
Financing
|
|
Property and equipment
|
|
1.7
|
|
Total lease assets
|
|
|
|
$
|
68.6
|
|
|
|
|
|
|
ROU Liabilities:
|
|
|
|
|
Operating - current
|
|
Operating lease liabilities, current
|
|
$
|
20.3
|
|
Financing - current
|
|
Accounts payable and accrued liabilities
|
|
0.4
|
|
Operating - noncurrent
|
|
Operating lease liabilities, noncurrent
|
|
49.3
|
|
Financing - noncurrent
|
|
Other long-term liabilities
|
|
1.1
|
|
Total lease liabilities
|
|
|
|
$
|
71.1
|
|
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Weighted average remaining lease terms and discount rates for June year to date 2019 was as follows:
|
|
|
|
|
June Year to Date
|
|
2019
|
Weighted average remaining lease term (years):
|
|
Operating leases
|
4.1
|
|
Financing leases
|
3.9
|
|
Weighted average discount rate:
|
|
Operating leases
|
5.9
|
%
|
Financing leases
|
5.1
|
%
|
Other information related to leases was as follows (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
June Year to Date
|
|
2019
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
$
|
6.6
|
|
|
$
|
13.5
|
|
Financing cash flows from financing leases
|
0.2
|
|
|
0.2
|
|
|
|
|
|
ROU assets obtained in exchange for new lease obligations:
|
|
|
|
Operating leases
|
$
|
2.7
|
|
|
$
|
4.0
|
|
Financing leases
|
0.8
|
|
|
1.7
|
|
Maturities of lease liabilities as of
second
quarter-end 2019 were as follows (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Financing Leases
|
2019, remaining
|
$
|
12.7
|
|
|
$
|
0.2
|
|
2020
|
21.5
|
|
|
0.5
|
|
2021
|
17.2
|
|
|
0.5
|
|
2022
|
12.0
|
|
|
0.5
|
|
2023
|
6.8
|
|
|
—
|
|
2024
|
3.8
|
|
|
—
|
|
Thereafter
|
4.3
|
|
|
—
|
|
Total future lease payments
|
78.3
|
|
|
1.7
|
|
Less: Imputed interest
|
8.6
|
|
|
0.2
|
|
Total
|
$
|
69.7
|
|
|
$
|
1.5
|
|
Maturities of operating leases accounted for under ASC 840 as of year-end 2018 were as follows (in millions of dollars):
|
|
|
|
|
Fiscal year:
|
|
2019
|
$
|
26.7
|
|
2020
|
20.4
|
|
2021
|
15.2
|
|
2022
|
9.8
|
|
2023
|
4.7
|
|
Later years
|
4.9
|
|
|
|
Total
|
$
|
81.7
|
|
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
16. Contingencies
The Company is continuously engaged in litigation, threatened litigation, or investigations arising in the ordinary course of its business, such as matters alleging auto liability, employment discrimination, wage and hour violations, claims for indemnification or liability, or violations of privacy rights, anti-competition regulations, breach of contract and claims or actions related to customer or supplier bankruptcy proceedings or insolvency actions, 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
2019
and year-end 2018, the gross accrual for litigation costs amounted to
$11.0 million
and
$12.8 million
, respectively.
The Company maintains insurance coverage which may cover certain claims. When claims exceed the applicable loss limit 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
2019
and year-end 2018, the related insurance recoveries amounted to
$4.6 million
and
$6.1 million
, respectively.
The Company estimates the aggregate range of reasonably possible losses, in excess of amounts accrued, is
$0.1 million
to
$3.7 million
as of
second
quarter-end 2019. 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.
We are also currently engaged in litigation with a customer over a disputed accounts receivable balance for services rendered, which is recorded as a long-term receivable in other assets in the consolidated balance sheet. While we believe the balance of approximately
$10 million
is collectible, there is a reasonably possible risk of an unfavorable outcome.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
17. Segment Disclosures
The Company’s segments are based on the organizational structure for which financial results are regularly evaluated by the Company’s chief operating decision-maker (the Company’s CEO) to determine resource allocation and assess performance. The Company’s
three
reportable segments, (1) Americas Staffing, (2) GTS and (3) International Staffing, reflect how the Company delivers services to customers and how its business is organized internally. Intersegment revenue represents revenue earned between the reportable segments and is eliminated from total segment revenue from services.
Americas Staffing represents the Company’s branch-delivered staffing business in the U.S., Canada, Puerto Rico, Mexico and Brazil. International Staffing represents the EMEA region branch-delivered staffing business. Americas Staffing and International Staffing both deliver temporary staffing, as well as direct-hire placement services, in office-clerical, light industrial, and professional/technical specialties within their geographic regions. Americas Staffing also includes educational staffing in the U.S.
GTS combines the delivery structure of the Company’s outsourcing and consulting group and centrally delivered staffing business. It reflects the trend of customers towards the adoption of holistic talent solutions which combine contingent labor, full-time hiring and outsourced services. GTS includes centrally delivered staffing, RPO, CWO, BPO, PPO, KellyConnect, career transition/outplacement services and talent advisory services.
Corporate expenses that directly support the operating units have been allocated to Americas Staffing, GTS and International Staffing based on work effort, volume or, in the absence of a readily available measurement process, proportionately based on gross profit realized. Unallocated corporate expenses include those related to incentive compensation, law and risk management, certain finance and accounting functions, executive management, corporate campus facilities, IT production support, certain legal costs and expenses related to corporate initiatives that do not directly benefit a specific operating segment.
The following tables present information about the reported revenue from services and gross profit of the Company by segment, along with a reconciliation to consolidated earnings (loss) before taxes and equity in net earnings (loss) of affiliate, for the
second quarter and June year to date 2019 and 2018
. Asset information by reportable segment is not presented, since the Company does not produce such information internally nor does it use such data to manage its business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
June Year to Date
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In millions of dollars)
|
Revenue from Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Staffing
|
$
|
597.6
|
|
|
$
|
604.0
|
|
|
$
|
1,224.1
|
|
|
$
|
1,208.3
|
|
Global Talent Solutions
|
505.9
|
|
|
500.7
|
|
|
1,006.9
|
|
|
986.5
|
|
International Staffing
|
268.1
|
|
|
286.6
|
|
|
527.0
|
|
|
571.3
|
|
|
|
|
|
|
|
|
|
Less: Intersegment revenue
|
(4.1
|
)
|
|
(4.4
|
)
|
|
(7.9
|
)
|
|
(9.3
|
)
|
|
|
|
|
|
|
|
|
Consolidated Total
|
$
|
1,367.5
|
|
|
$
|
1,386.9
|
|
|
$
|
2,750.1
|
|
|
$
|
2,756.8
|
|
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
June Year to Date
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(In millions of dollars)
|
Earnings from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Staffing gross profit
|
$
|
108.8
|
|
|
$
|
108.5
|
|
|
$
|
226.0
|
|
|
$
|
216.5
|
|
Americas Staffing SG&A expenses
|
(93.2
|
)
|
|
(90.7
|
)
|
|
(194.4
|
)
|
|
(182.6
|
)
|
Americas Staffing Earnings from Operations
|
15.6
|
|
|
17.8
|
|
|
31.6
|
|
|
33.9
|
|
|
|
|
|
|
|
|
|
Global Talent Solutions gross profit
|
99.7
|
|
|
92.7
|
|
|
200.1
|
|
|
184.5
|
|
Global Talent Solutions SG&A expenses
|
(74.3
|
)
|
|
(75.0
|
)
|
|
(149.0
|
)
|
|
(150.8
|
)
|
Global Talent Solutions Earnings from Operations
|
25.4
|
|
|
17.7
|
|
|
51.1
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
International Staffing gross profit
|
36.1
|
|
|
39.9
|
|
|
70.7
|
|
|
79.0
|
|
International Staffing SG&A expenses
|
(32.6
|
)
|
|
(33.5
|
)
|
|
(63.9
|
)
|
|
(67.6
|
)
|
International Staffing Earnings from Operations
|
3.5
|
|
|
6.4
|
|
|
6.8
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
Less: Intersegment gross profit
|
(0.6
|
)
|
|
(0.6
|
)
|
|
(1.2
|
)
|
|
(1.3
|
)
|
Less: Intersegment SG&A expenses
|
0.6
|
|
|
0.6
|
|
|
1.2
|
|
|
1.3
|
|
Net Intersegment Activity
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Corporate
|
(9.7
|
)
|
|
(21.5
|
)
|
|
(37.9
|
)
|
|
(46.6
|
)
|
Consolidated Total
|
34.8
|
|
|
20.4
|
|
|
51.6
|
|
|
32.4
|
|
Gain (loss) on investment in Persol Holdings
|
61.2
|
|
|
(52.5
|
)
|
|
74.4
|
|
|
(28.8
|
)
|
Other income (expense), net
|
0.2
|
|
|
0.6
|
|
|
(0.9
|
)
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
Earnings (loss) before taxes and equity in net earnings (loss) of affiliate
|
$
|
96.2
|
|
|
$
|
(31.5
|
)
|
|
$
|
125.1
|
|
|
$
|
2.5
|
|
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
18.
New Accounting Pronouncements
Recently Adopted
In June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-07 simplifying the accounting for nonemployee share-based payment awards by expanding the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The ASU is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods, with early adoption permitted. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04 simplifying the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to calculate the implied fair value of goodwill (Step 2 of the current two-step goodwill impairment test under ASC 350). Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (Step 1 of the current two-step goodwill impairment test). The ASU is effective prospectively for reporting periods beginning after December 15, 2019, with early adoption permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We elected to early adopt ASU-2017-04 as of year-end 2018 and the adoption of this ASU did not have an impact on our goodwill impairment testing process or our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 amending the existing accounting standards for lease accounting and requiring lessees to recognize lease assets and lease liabilities for all leases with lease terms of more than 12 months, including those classified as operating leases. Both the asset and liability will initially be measured at the present value of the future minimum lease payments, with the asset being subject to adjustments such as initial direct costs. Consistent with current U.S. GAAP, the presentation of expenses and cash flows will depend primarily on the classification of the lease as either a finance or an operating lease. The new standard also requires additional quantitative and qualitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases in order to provide additional information about the nature of an organization’s leasing activities. An additional optional transition method to adopt the new lease standard at the adoption date, as compared to the beginning of the earliest period presented, and recognize a cumulative-effect adjustment to the beginning balance of retained earnings in the period of adoption is allowed. We adopted this guidance with the optional transition method effective December 31, 2018. See Leases footnote for the impact on the consolidated financial statements.
Not Yet Adopted
In August 2018, the FASB issued ASU 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual periods, with early adoption permitted. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13 which eliminates, adds and modifies certain fair value measurement disclosures. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual periods, with early adoption permitted. We do not expect the adoption of this standard to have a material impact to our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, as clarified in ASU 2019-04 and ASU 2019-05, amending how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model, which is a new impairment model based on expected losses. Under this model, an entity recognizes an allowance for expected credit losses based on historical experience, current conditions and forecasted information rather than the current methodology of delaying recognition of credit losses until it is probable a loss has been incurred. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019 with early adoption permitted for annual reporting periods beginning after December 15, 2018. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures. This
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
ASU applies to trade accounts receivable and may have an impact on our calculation of the allowance for uncollectible accounts receivable.
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.