Kelly Services, Inc. — Fiscal 2022 Form 10-K Summary
Business context and reporting period
Kelly Services is a global talent solutions provider operating through five reportable segments: Professional & Industrial, Science, Engineering & Technology, Education, Outsourcing & Consulting, and International. The filing covers the 52-week fiscal year ended January 1, 2023, compared primarily with the 52-week year ended January 2, 2022. Kelly assigned more than 300,000 temporary employees to customers during 2022 and employed approximately 7,500 internal staff at year-end.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue from services | $4,965.4 million | $4,909.7 million | 1.1% |
| Gross profit | $1,011.8 million | $919.2 million | 10.1% |
| Gross profit rate | 20.4% | 18.7% | Up 1.7 points |
| SG&A expenses | $943.5 million | $870.6 million | 8.4% |
| Earnings from operations | $14.8 million | $48.6 million | Down 69.7% |
| Net earnings (loss) | $(62.5) million | $156.1 million | Decline |
| Diluted EPS | $(1.64) | $3.91 | Decline |
| Net cash from operating activities | $(76.3) million | $85.0 million | Decline |
Reported revenue increased 1.1%, or 3.2% on a constant-currency basis. Outcome-based services increased 6.3%, permanent placement revenue increased 18.9%, and staffing-services revenue decreased 1.2%. Gross margin expanded across all five segments, reflecting favorable mix, higher permanent placement activity, lower employee-related costs, and contributions from acquisitions.
Year-end cash, cash equivalents and restricted cash totaled $162.4 million, including $153.7 million of cash and equivalents. Trade accounts receivable were $1.5 billion, with fourth-quarter days sales outstanding of 61 days versus 60 days in 2021. Working capital was $586.4 million and the current ratio was 1.5.
Year-end debt was $0.7 million, consisting of local borrowings. Kelly had $200.0 million of unused capacity under its revolving credit facility and $100.5 million of remaining capacity under its $150.0 million receivables securitization facility. The securitization facility had $49.5 million of standby letters of credit. The Company met its debt covenants throughout 2022.
Material changes versus the prior comparable period
- Segment mix shifted materially: Education revenue rose 52.7% to $636.2 million; Science, Engineering & Technology rose 9.4% to $1,265.4 million; and Outsourcing & Consulting rose 8.3% to $468.0 million. Professional & Industrial declined 9.3%, while International declined 12.7% on a reported basis.
- Profitability improved before unusual items: Gross profit increased $92.6 million, but SG&A increased $72.9 million. Operating earnings were reduced by a $41.0 million RocketPower goodwill impairment charge and an $18.7 million loss on the disposal of Russian operations.
- Significant investment-related items reversed: 2022 included a $67.2 million loss on the Persol Holdings investment and a $20.4 million loss from liquidation of the Kelly Japan subsidiary. In contrast, 2021 included a $121.8 million gain on Persol Holdings and a $19.0 million insurance settlement gain.
- Cash flow weakened: Operating cash flow declined to a $76.3 million use, reflecting $86.8 million of deferred U.S. payroll-tax repayments, $48.4 million of taxes related to the Persol Holdings sale, and higher working-capital needs.
- Portfolio activity increased: Kelly acquired RocketPower for approximately $63.5 million of total consideration and Pediatric Therapeutic Services for approximately $86.8 million. It also sold substantially all of its PersolKelly interest, sold its Persol Holdings investment, and completed the sale of its Russian operations.
Guidance, outlook, commentary and risks
Management did not provide specific numerical revenue or earnings guidance in the filing. For 2023, management intends to pursue profitable specialty growth, control costs, increase exposure to higher-margin and more resilient solutions, consider acquisitions in Education, SET and OCG, and continue investing in technology and new products.
Management reported that inflation, higher interest rates and economic uncertainty caused some employers to reduce or pause hiring, while historically low unemployment continued to constrain talent availability. The Company expects to manage through the economic cycle by emphasizing higher-value outcome-based services and controlling expenses.
- RocketPower impairment: High-tech customers reduced or eliminated full-time hiring, and broader RPO growth slowed. Kelly recorded $30.7 million of impairment in the third quarter and $10.3 million in the fourth quarter, eliminating RocketPower goodwill.
- Liquidity and working capital: Payroll obligations generally precede customer collections. A downturn could reduce revenue, while customer payment delays or a major customer bankruptcy could increase liquidity needs.
- Customer concentration and pricing: The largest 100 customers generated approximately 54% of 2022 revenue, and the largest single customer generated approximately 7%. Most contracts can be terminated on short notice, and staffing pricing pressure remains significant.
- Claims and litigation: Kelly self-insures or bears significant exposure for workers’ compensation, unemployment, disability and medical claims. Net accrued workers’ compensation was $43.3 million. Litigation accruals were $2.3 million, with reasonably possible losses in excess of accruals estimated at zero to $5.6 million, excluding matters for which a loss range could not be estimated.
- Other contingencies: The Company faces employment, wage-and-hour, privacy, tax, competition-law, worker-classification, cyber and regulatory risks. A Brazil indemnification liability of $3.4 million remained outstanding, subject to an aggregate indemnification cap of $8.8 million.
- Capital allocation: Kelly paid $0.275 per share in dividends during 2022 and had $42.2 million remaining under its $50.0 million Class A share-repurchase authorization at year-end.
- Control structure: Trust K controls approximately 93.5% of Class B shares. Class B is the only voting class, giving the trustees effective control over director elections and other stockholder matters.
Most important facts for investors to verify
- Whether revenue growth in Education, SET and OCG offsets continuing weakness in Professional & Industrial and International.
- Whether the $41.0 million RocketPower goodwill impairment represents the full downside from weaker high-tech hiring and RPO demand, or whether additional impairments could arise.
- Whether operating cash flow normalizes after completion of deferred payroll-tax repayments and taxes related to the Persol transaction.
- Actual utilization and covenant headroom under the $200.0 million revolving facility and $150.0 million securitization facility.
- Accounts-receivable collections, DSO trends and exposure to large customers during an economic slowdown.
- Progress and returns from the RocketPower and PTS acquisitions, including RocketPower’s potential earnout of up to $31.8 million.
- The sustainability of dividends and the remaining $42.2 million share-repurchase authorization given negative 2022 earnings and negative operating cash flow.
- Workers’ compensation, employment-related, tax, privacy and cybersecurity claims, including the disclosed range of reasonably possible litigation losses.