Business Context and Reporting Period
Kelly Services, Inc. is a global talent solutions provider operating through Professional & Industrial, Science, Engineering & Technology, Education, Outsourcing & Consulting, and International segments. This unaudited Form 10-Q covers the 13 weeks ended October 2, 2022 and the 39 weeks ended October 2, 2022, compared with the corresponding periods ended October 3, 2021.
During 2022, Kelly acquired RocketPower and Pediatric Therapeutic Services, sold its Russia operations, monetized most of its PersolKelly joint-venture interest, and sold its Persol Holdings investment.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue from services | $1,167.9 million | $1,195.4 million | $3,731.6 million | $3,659.4 million |
| Gross profit | $240.6 million | $228.9 million | $761.6 million | $673.2 million |
| Gross profit margin | 20.6% | 19.2% | 20.4% | 18.4% |
| SG&A expense | $231.1 million | $219.9 million | $707.3 million | $639.9 million |
| Earnings (loss) from operations | $(21.4) million | $9.0 million | $10.2 million | $33.3 million |
| Net earnings (loss) | $(16.2) million | $34.8 million | $(61.6) million | $84.4 million |
| Diluted EPS | $(0.43) | $0.87 | $(1.62) | $2.12 |
- Q3 revenue declined 2.3% as reported but increased 0.3% in constant currency. Nine-month revenue increased 2.0% as reported and 4.0% in constant currency.
- Gross profit increased 5.1% in Q3 and 13.1% year to date, primarily from favorable mix, lower employee-related costs, higher permanent placement activity, and acquisitions.
- Q3 operating loss included a $30.7 million RocketPower goodwill impairment charge and a $0.2 million additional loss on the Russia disposal.
- Nine-month operating earnings included $18.7 million of total Russia disposal losses, a $30.7 million RocketPower goodwill impairment charge, and a $5.3 million gain on asset sales.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash, cash equivalents, and restricted cash were $130.7 million at October 2, 2022, compared with $119.5 million at January 2, 2022.
- Operating activities used $111.7 million of cash in the first nine months of 2022, compared with $31.0 million generated in the prior-year period. The use primarily reflected higher working-capital requirements, $50.1 million of taxes related to the Persol Holdings sale, and $29.5 million of deferred U.S. payroll-tax repayments.
- Investing activities generated $167.7 million, including $196.9 million from the Persol Holdings sale and $119.5 million from the PersolKelly transaction. These proceeds were partially offset by $143.1 million of acquisitions, primarily RocketPower and PTS.
- Financing activities used $37.4 million, including $27.2 million for repurchases of shares held by Persol Holdings and $7.7 million of dividends.
- Trade accounts receivable were $1.52 billion. Global days sales outstanding increased to 64 days from 60 days at year-end 2021 and 63 days at the prior-year quarter-end.
- Debt was $0.1 million at quarter-end, and debt-to-total capital was approximately 0.0%. The company had $200.0 million of available capacity under its revolving credit facility and $97.0 million available under its $150.0 million securitization facility, subject to covenants and restrictions.
- The remaining deferred U.S. payroll-tax balance of $57.6 million was required to be repaid by January 3, 2023.
Material Changes Versus the Prior Comparable Period
- Professional & Industrial revenue decreased 9.7% in Q3 and 8.5% year to date, mainly due to lower staffing hours and a large customer shifting to direct hire.
- Science, Engineering & Technology revenue increased 5.0% in Q3 and 12.1% year to date, supported by specialty mix, bill rates, permanent placement, and the Softworld acquisition.
- Education revenue increased 56.6% in Q3 and 52.5% year to date, reflecting stronger demand, improved fill rates, customer wins, and the PTS acquisition.
- Outsourcing & Consulting revenue increased 4.5% in Q3 and 10.0% year to date, but operating results declined to losses of $24.3 million and $14.9 million, respectively, primarily because of the RocketPower impairment.
- International revenue decreased 16.1% in Q3 and 11.6% year to date, primarily due to the Russia divestiture, currency effects, and prior Mexican regulatory changes.
- The prior-year periods benefited from a $35.5 million Persol Holdings gain in Q3 2021 and a $71.8 million gain year to date. In 2022, Kelly recorded a $67.2 million loss on that investment, a $20.4 million currency-translation loss from liquidating its Japan subsidiary, and no comparable recurring investment remains.
Outlook, Management Commentary, Risks, and Unusual Items
Management stated that demand remained strong but that inflation, rising interest rates, and broader economic uncertainty increased variability by industry and customer size. Kelly continues to emphasize higher-margin specialties, digital transformation, the talent experience, and disciplined organic and inorganic growth.
- High-tech customers reduced or eliminated full-time hiring, weakening near-term demand for RocketPower's recruitment process outsourcing services. This triggered the $30.7 million goodwill impairment; the remaining RocketPower goodwill was $10.3 million and may be subject to further impairment if revenue or margin expectations deteriorate.
- The Russia business sale was completed on July 20, 2022. The sale generated total losses of $18.7 million and eliminated future Russian operating revenue.
- On October 31, 2022, Kelly completed the sale of a Troy, Michigan property for $5.6 million net of transaction costs.
- On November 9, 2022, the board approved a plan to repurchase up to $50.0 million of Class A common stock through open-market transactions over one year.
- Ordinary-course litigation includes employment, wage-and-hour, privacy, commercial, competition, indemnification, and tax matters. Accrued litigation costs were $5.6 million at quarter-end; the estimated aggregate range of reasonably possible losses in excess of accruals was $0.5 million to $4.0 million, excluding matters for which a range could not be estimated.
- Management identified no material changes to previously disclosed risk factors. Key risks include labor-market demand, customer concentration and changing buying practices, acquisitions and goodwill impairment, foreign currency, regulatory and tax changes, workers' compensation claims, cybersecurity, privacy, and maintaining debt-facility covenants.
Important Facts for Investors to Verify
- Whether RocketPower demand, revenue growth, and margins recover, and whether its remaining $10.3 million of goodwill requires additional impairment.
- Whether operating cash flow improves as receivables, DSO, MSP-related payables, and deferred payroll-tax payments normalize.
- The effect of the PTS and RocketPower acquisitions on organic growth, margins, integration costs, and future contingent consideration.
- The sustainability of higher gross margins, including the effects of favorable mix and a one-time permanent placement fee noted in the nine-month results.
- Capacity and covenant compliance under the revolving credit and securitization facilities, including the $57.6 million deferred payroll-tax repayment obligation.
- The amount, timing, and effect of the newly approved share-repurchase program and any impact on liquidity or share count.
- Potential outcomes of litigation, indemnification obligations, tax matters, foreign exchange movements, and other contingencies disclosed in the filing.