Kelly Services, Inc. 2022 First-Quarter Form 10-Q Summary
Business context and reporting period
Kelly Services is a global talent solutions company providing staffing, permanent placement, outcome-based services, outsourcing, consulting, and education-related services through five reportable segments: Professional & Industrial, Science, Engineering & Technology, Education, Outsourcing & Consulting, and International. The filing covers the 13 weeks ended April 3, 2022, compared with the 13 weeks ended April 4, 2021.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue from services | $1,296.4 million | $1,205.9 million | 7.5% increase |
| Gross profit | $258.6 million | $213.3 million | 21.2% increase |
| Gross profit rate | 19.9% | 17.7% | Up 2.2 percentage points |
| SG&A expense | $235.2 million | $202.7 million | 16.0% increase |
| Earnings from operations | $23.4 million | $10.6 million | 120.5% increase |
| Net earnings (loss) | $(47.6) million | $25.6 million | Shifted to loss |
| Diluted earnings (loss) per share | $(1.23) | $0.64 | Declined |
| Net cash from operating activities | $(106.1) million | $10.5 million | Declined |
Operating performance improved primarily because of higher revenue, favorable service mix, increased permanent placement revenue, lower employee-related costs, and the Softworld acquisition. Permanent placement revenue increased 66.2%, staffing-services revenue increased 5.9%, and outcome-based services revenue increased 7.9%.
Reported earnings were significantly affected by a $67.2 million loss on the Persol Holdings investment and a $20.4 million loss from the liquidation of the Japan subsidiary. These items more than offset the $23.4 million of operating earnings. The tax benefit was $13.0 million, including an $18.4 million benefit associated with changes in the fair value of the Persol Holdings investment.
Cash, cash equivalents, and restricted cash totaled $238.1 million at quarter-end, compared with $119.5 million at year-end 2021. Cash increased principally from $196.9 million of proceeds from the sale of Persol Holdings and $119.5 million from the sale of most of the PersolKelly joint venture interest. Trade accounts receivable were $1.5 billion, and global days sales outstanding increased to 62 days from 60 days at year-end 2021.
Debt was $0.2 million at quarter-end, and debt-to-total capital was 0.0%. Kelly reported $200.0 million of available capacity under its revolving credit facility and $97.0 million of available capacity under its securitization facility, subject to covenants and restrictions. The company stated that it met its debt covenants.
Material changes versus the prior comparable period
- Science, Engineering & Technology revenue increased 24.5%, including the contribution of Softworld; organic growth was 9.6%.
- Education revenue increased 55.4% as in-school instruction resumed, supported by new customer wins and improved fill rates.
- Outsourcing & Consulting revenue increased 9.8%, led by RPO and MSP demand.
- Professional & Industrial revenue declined 5.0%, primarily because of lower outcome-based and staffing-services volume.
- International revenue declined 7.4% on a reported basis, mainly because of Mexico-related labor-law changes; Europe grew 1.7% reported and 9.0% in constant currency.
- Kelly acquired RocketPower for total consideration of $63.5 million, including a potential earnout with maximum cash payments of $31.8 million. The acquisition closed March 7, 2022, but contributed no consolidated revenue or earnings during the quarter because results are included on a one-month lag.
- Kelly sold its Persol Holdings investment for $196.9 million and reduced its PersolKelly ownership from 49% to 2.5%, receiving $119.5 million. The remaining investment was valued at $6.4 million.
- Kelly repurchased and retired approximately 1.6 million Class A shares and 1,475 Class B shares held by Persol Holdings for $27.2 million.
- Restructuring costs were $1.7 million, primarily severance, with $2.6 million remaining accrued at quarter-end.
Guidance, outlook, commentary, risks, and unusual items
Management described demand as strong despite inflation, events in Ukraine, and broader economic uncertainty. Kelly expects continued recovery and growth in 2022 and is pursuing organic and inorganic expansion in higher-margin specialties. Management identified digital transformation, talent experience, and specialty acquisitions as key value drivers.
On May 2, 2022, after quarter-end, Kelly acquired Pediatric Therapeutic Services for $82.1 million in cash, subject to working-capital adjustments. The business will be included in the Education segment. The acquisition accounting was incomplete at filing.
After quarter-end, management began exploring an orderly transition of its Russia operations. Russia represented $28.4 million of assets, $13.0 million of liabilities, $132.2 million of 2021 revenue, and $5.3 million of 2021 operating earnings. The transition is expected to reduce International segment revenue and earnings beginning in the second quarter and may result in a loss up to the carrying value of the Russian net assets.
Kelly expects to pay approximately $50 million of taxes related to the Persol Holdings sale by the end of 2022. It also expects working-capital requirements to increase if demand continues to grow. Deferred U.S. payroll taxes of $57.6 million are due January 3, 2023, following a $29.5 million payment made January 3, 2022.
Reported cash flow was adversely affected by working-capital investment as revenue recovered and DSO increased. Key risks include labor-market disruption, inflation, customer concentration, competition, acquisitions and integration, foreign currency, international operations, regulatory and employment claims, cybersecurity, privacy, tax liabilities, and compliance with financing covenants.
Ordinary-course litigation and claims had gross accruals of $1.8 million at quarter-end. Management estimated reasonably possible losses in excess of recorded accruals at $0.5 million to $9.1 million, excluding matters for which a loss range could not be estimated. Management does not currently expect these matters to have a material adverse effect.
Important facts for investors to verify
- Whether improved operating earnings and the 19.9% gross margin rate are sustainable after excluding one-time permanent placement and workers' compensation benefits.
- The effect of the Russia transition, including any impairment, restructuring, or loss recognized in subsequent quarters.
- RocketPower and Pediatric Therapeutic Services revenue, earnings contribution, integration costs, goodwill, and contingent consideration.
- Cash conversion and working-capital trends, particularly DSO, receivables growth, and the return of operating cash flow to positive levels.
- The timing and cash impact of approximately $50 million of taxes related to the Persol Holdings sale and the $57.6 million deferred payroll-tax repayment.
- The maximum potential $31.8 million RocketPower earnout and other acquisition-related obligations.
- International regulatory, employment, tax, litigation, currency, and geopolitical exposures, including the estimated range of reasonably possible legal losses.