Kelly Services, Inc. — Form 10-Q Summary
Business context and reporting period
Kelly Services is a global talent solutions provider offering staffing, permanent placement, outsourcing, consulting, and related workforce services through five segments: Professional & Industrial, Science, Engineering & Technology, Education, Outsourcing & Consulting, and International. The filing covers the 13-week third quarter and 39 weeks ended October 3, 2021, compared with the corresponding periods ended September 27, 2020. The company continued operating amid COVID-19, the Delta variant, labor shortages, supply-chain disruptions, and changing vaccination requirements.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | 39 Weeks 2021 | 39 Weeks 2020 |
|---|---|---|---|---|
| Revenue from services | $1,195.4 million | $1,038.2 million | $3,659.4 million | $3,274.6 million |
| Gross profit | $228.9 million | $191.0 million | $673.2 million | $603.5 million |
| Gross profit rate | 19.2% | 18.4% | 18.4% | 18.4% |
| Earnings from operations | $9.0 million | $(2.4) million | $33.3 million | $(103.1) million |
| Net earnings (loss) | $34.8 million | $16.7 million | $84.4 million | $(95.4) million |
| Diluted EPS | $0.87 | $0.42 | $2.12 | $(2.43) |
Q3 revenue increased 15.1% reported and 14.5% on a constant-currency basis. Year-to-date revenue increased 11.8% reported and 10.3% constant currency. Q3 operating margin was approximately 0.8%, versus negative 0.2% in the prior year; year-to-date operating margin was approximately 0.9%, versus negative 3.1%. Net margin was approximately 2.9% in Q3 and 2.3% year to date, compared with approximately 1.6% and negative 2.9%, respectively, in the comparable periods.
- Q3 segment revenue growth was led by Education, up 142.1%; Science, Engineering & Technology, up 25.5%; Outsourcing & Consulting, up 29.1%; International, up 10.5%; and Professional & Industrial, up 1.4%.
- Q3 gross profit increased 19.8%, benefiting from higher volume, permanent placement revenue, and the higher-margin Softworld acquisition. The consolidated gross profit rate improved 0.8 percentage points.
- Q3 SG&A increased 13.7%, reflecting Softworld-related costs, higher incentive compensation, and comparisons against temporary cost reductions implemented in 2020.
- Operating results benefited from the absence of the prior-year $9.5 million customer-dispute charge in International. Education remained loss-making, with a Q3 operating loss of $7.0 million.
Cash, cash equivalents, and restricted cash totaled $51.1 million at October 3, 2021, compared with $228.1 million at January 3, 2021. Operating activities generated $31.0 million of cash year to date, compared with $216.5 million in 2020, primarily because recovering revenue increased working-capital requirements. Investing activities used $198.4 million, including $213.0 million for the Softworld acquisition. Financing activities used $5.7 million.
Trade accounts receivable were $1.4 billion, and global days sales outstanding was 63 days versus 64 days at year-end 2020. The company reported no debt at quarter-end, compared with $0.3 million at year-end 2020. Available capacity was $200.0 million under the revolving credit facility and $97.0 million under the securitization facility; the latter also had $53.0 million of standby letters of credit. The company stated that it met applicable debt covenants.
Material changes versus the prior comparable period
- Kelly completed the $217.0 million Softworld acquisition in April 2021. Softworld contributed $33.7 million of Q3 revenue and $1.3 million of Q3 net earnings, and generated $111.3 million of goodwill and $79.4 million of acquired intangible assets.
- Persol Holdings investment gains were $35.5 million in Q3 and $71.8 million year to date, versus $16.8 million and a $31.4 million loss, respectively, in the comparable 2020 periods. These mark-to-market gains materially increased reported pretax and net earnings and may fluctuate with the investment’s market price and currency movements.
- The prior-year nine-month results included a $147.7 million goodwill impairment charge, a $32.1 million gain on sale of headquarters assets, $8.4 million of restructuring charges, and the $9.5 million customer-dispute charge. These items make year-over-year earnings comparisons unusually favorable in 2021.
- Kelly reinstated its quarterly dividend at $0.05 per share in August 2021 after suspending the dividend in 2020. Q3 dividends totaled $2.0 million.
- The company wrote off a fully reserved long-term customer receivable following a final court ruling; an additional $0.6 million was recorded in SG&A in Q3 2021.
Guidance, outlook, commentary, and risks
Management did not provide a specific quantitative revenue or earnings forecast. It expects a gradual recovery in customer demand, year-over-year improvement in gross profit and operating earnings, and continued labor-market recovery entering 2022. Management also expects working-capital needs to increase as revenue grows and as deferred U.S. payroll taxes are repaid, with 50% of the deferred balances due in each of the fourth quarters of 2021 and 2022.
In November 2021, Kelly initiated cost-management actions focused on enterprise efficiencies. The company expects a fourth-quarter 2021 restructuring charge of $3.5 million to $4.5 million and annual expense savings of at least $10 million beginning in Q1 2022.
- Key operating risks include COVID-19 resurgence, labor shortages, supply-chain disruption, vaccination requirements, weaker customer demand, and difficulty matching available talent with customer needs.
- Mexico labor legislation effective September 1, 2021 prohibited certain non-specialized staffing arrangements and contributed to lower Mexican hours volume.
- The company faces foreign-exchange and market-price risk on its yen-denominated Persol Holdings investment, which is marked through earnings.
- Kelly filed a Softworld representations-and-warranties insurance claim in excess of policy limits; the policy coverage limit is $21.5 million. A preliminary agreement was reached, but no insurance receivable was recorded.
- Ordinary-course litigation accruals were $1.1 million, with reasonably possible losses beyond accruals estimated at $0.5 million to $4.3 million. The estimate excludes matters for which a loss range cannot currently be determined.
- Management assessed disclosure controls as effective. Because of the significance and complexity of Softworld, the company intends to exclude that acquired business from its year-end 2021 internal-control assessment.
Most important facts for investors to verify
- Whether revenue recovery and labor availability support the company’s expectation of gradual improvement into 2022.
- The sustainability of operating profitability excluding volatile Persol Holdings investment gains and prior-year unusual charges.
- Integration performance, margins, goodwill, and intangible amortization associated with the Softworld acquisition.
- Cash conversion and liquidity as receivables and payroll-related working capital expand and deferred payroll taxes become payable.
- The final resolution and accounting impact of the Softworld insurance claim and other litigation contingencies.
- The amount and timing of the planned fourth-quarter restructuring charge and the realization of at least $10 million in annual savings.