Business Context and Reporting Period
Kelly Services, Inc. reported unaudited results for the 13 weeks ended March 31, 2024, compared with the 13 weeks ended April 2, 2023. The company provides staffing, permanent placement, outcome-based services, and talent solutions through four reportable segments: Professional & Industrial, Science, Engineering & Technology, Education, and Outsourcing & Consulting.
Kelly completed the sale of its EMEA staffing operations on January 2, 2024. The former International segment was eliminated, and Mexico operations were transferred to Professional & Industrial.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue from services | $1,045.1 million | $1,268.3 million | (17.6%) |
| Gross profit | $205.7 million | $254.1 million | (19.1%) |
| Gross profit rate | 19.7% | 20.0% | (0.3) percentage points |
| SG&A expense | $190.5 million | $243.4 million | (21.7%) |
| Earnings from operations | $26.8 million | $10.7 million | 150.2% |
| Earnings before taxes | $29.8 million | $12.7 million | 134.6% |
| Net earnings | $25.8 million | $10.9 million | 135.7% |
| Diluted earnings per share | $0.70 | $0.29 | Increase |
| Operating cash flow | $(25.5) million | $(13.5) million | Higher use of cash |
Reported earnings benefited from an $11.6 million gain on the EMEA staffing sale and a $1.2 million gain on settlement of a foreign currency forward contract. Q1 2024 also included $5.6 million of transaction-related costs associated with the EMEA sale.
Cash, cash equivalents, and restricted cash totaled $208.9 million at quarter-end, including $200.7 million of cash and equivalents. Cash increased from $167.6 million at year-end 2023, primarily because of $77.1 million of net proceeds from the EMEA sale, partially offset by operating cash use.
Trade accounts receivable were $1.15 billion, and global days sales outstanding was 58 days, compared with 59 days at year-end 2023. The current ratio was 1.8. Kelly reported no short-term borrowings and a debt-to-total-capital ratio of 0.0%.
Kelly had $200.0 million of available capacity under its revolving credit facility and $103.9 million of available capacity under its securitization facility. The securitization facility had $46.1 million of standby letters of credit related to workers’ compensation. The company stated that it was in compliance with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue declined 17.6%, primarily because the EMEA staffing operations were sold. Excluding the sale, revenue declined 2.6%.
- Excluding the sale, gross profit declined 8.3%, and the gross profit rate decreased 120 basis points, primarily because of unfavorable mix and lower permanent placement revenue.
- SG&A decreased 21.7% as reported and 10.3% excluding the EMEA sale, reflecting workforce reductions, lower incentive compensation, and transformation actions.
- Restructuring and transformation charges declined to $2.3 million from $6.6 million. The remaining restructuring accrual was $4.7 million, with most payments expected by year-end 2024.
- Professional & Industrial revenue declined 11.0%, but its business unit profit improved to $5.9 million from a $1.2 million loss.
- Science, Engineering & Technology revenue declined 5.6% and business unit profit declined modestly to $18.2 million.
- Education revenue increased 16.2% and business unit profit increased to $18.1 million from $15.4 million.
- Outsourcing & Consulting revenue declined 5.7% and reported a $1.8 million business unit loss, compared with a $0.1 million loss.
- Capital expenditures were $3.7 million, compared with $4.4 million in Q1 2023. Kelly paid $2.7 million in dividends and did not repurchase shares under its public repurchase program.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management described staffing-market conditions as challenging, with employers maintaining a cautious approach to hiring amid economic uncertainty. Management expects transformation initiatives, a streamlined operating model, and a greater focus on higher-margin services to support continued improvement in EBITDA margin, but the filing does not provide specific numerical revenue or earnings guidance.
Kelly is pursuing a refreshed go-to-market strategy, expanded enterprise-customer solutions, local delivery enhancements, and growth in North American staffing and global MSP and RPO services. Management also stated that the company is positioning itself for improved opportunities if market conditions strengthen.
On May 2, 2024, after quarter-end, Kelly agreed to acquire Motion Recruitment Partners for $425.0 million in cash at closing, subject to customary adjustments and regulatory and other closing conditions. Additional consideration of up to $60.0 million may be payable in 2025 under an earnout. The transaction was expected to close in Q2 2024. Kelly also expected to refinance its revolving credit and securitization facilities in Q2 2024.
Kelly expects to receive approximately $26.9 million in additional proceeds related to the EMEA sale, primarily in Q3 2024. The company entered into a €17.0 million foreign currency forward contract to hedge this receivable.
Ordinary-course litigation and claims include employment, wage and hour, workers’ compensation, privacy, competition, contractual, and tax matters. Accrued litigation costs were $4.4 million at quarter-end. The estimated aggregate range of reasonably possible losses in excess of recorded accruals was $0.1 million to $7.8 million, excluding matters for which a loss could not be estimated. Management did not expect these matters to have a material adverse effect, but ultimate outcomes remain uncertain.
Key risks include weak staffing demand, labor-market disruption, customer concentration or loss, regulatory and tax changes, workers’ compensation and benefit claims, litigation, foreign currency exposure, availability of qualified temporary workers, cybersecurity incidents, third-party dependencies, and execution of growth and transformation initiatives.
Investor Verification Items
- Verify the effect of the EMEA divestiture on year-over-year revenue, gross profit, cash flow, and the comparability of segment results.
- Assess whether EBITDA-margin improvement is sustained after excluding the EMEA gain, forward-contract gain, and transaction-related items.
- Monitor cash funding and leverage for the planned $425.0 million Motion acquisition, potential $60.0 million earnout, and facility refinancing.
- Confirm collection of the $26.9 million EMEA-sale receivable expected in Q3 2024 and the related foreign-exchange exposure.
- Evaluate whether the Education segment’s growth offsets declines in Professional & Industrial, Science, Engineering & Technology, and Outsourcing & Consulting.
- Review the $4.7 million restructuring accrual, litigation exposure, workers’ compensation claims, and indemnification liabilities.
- Track operating cash flow and working-capital requirements, particularly receivables, payroll timing, and customer demand.