Kelly Services, Inc. — 2021 Second-Quarter Form 10-Q
Business Context and Reporting Period
Kelly Services is a global talent-solutions provider offering temporary staffing, permanent placement, outcome-based services, and outsourcing and consulting solutions. The company reports five segments: Professional & Industrial, Science, Engineering & Technology, Education, Outsourcing & Consulting, and International.
The filing covers the 13 weeks ended July 4, 2021, compared with the 13 weeks ended June 28, 2020, and the 26-week year-to-date periods ended on those dates. Results remained influenced by the COVID-19 recovery, labor shortages, changing customer demand, and the April 5, 2021 acquisition of Softworld.
Key Financial Metrics
| Metric | Second Quarter 2021 | Second Quarter 2020 | Year-to-Date 2021 | Year-to-Date 2020 |
|---|---|---|---|---|
| Revenue from services | $1,258.1 million | $975.3 million | $2,464.0 million | $2,236.4 million |
| Revenue growth | 29.0% | — | 10.2% | — |
| Gross profit | $231.0 million | $189.2 million | $444.3 million | $412.5 million |
| Gross profit margin | 18.4% | 19.4% | 18.0% | 18.4% |
| SG&A expense | $217.3 million | $178.1 million | $420.0 million | $397.6 million |
| Earnings from operations | $13.7 million | $11.1 million | $24.3 million | $(100.7) million |
| Net earnings (loss) | $24.0 million | $41.1 million | $49.6 million | $(112.1) million |
| Diluted EPS | $0.60 | $1.04 | $1.25 | $(2.86) |
| Operating margin | 1.1% | 1.1% | 1.0% | (4.5)% |
Second-quarter revenue increased in every segment. Education revenue grew 322.1%, International 31.6%, Outsourcing & Consulting 28.2%, Science, Engineering & Technology 20.6%, and Professional & Industrial 14.8%. Softworld contributed approximately 310 basis points to second-quarter revenue growth and $30.4 million of revenue.
Second-quarter net earnings declined despite higher operating earnings, primarily because the gain on the Persol Holdings investment was $6.3 million versus $29.6 million in the prior-year quarter. The company recognized a $2.6 million income tax benefit in the quarter, including a $5.2 million benefit from a United Kingdom tax-rate change.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Year-to-date operating cash flow was $47.6 million, compared with $178.1 million in 2020, reflecting increased working-capital needs as revenue recovered.
- Year-to-date investing cash flow was $(201.7) million, including $219.0 million of cash used for the Softworld acquisition.
- Cash, cash equivalents, and restricted cash totaled $70.7 million at quarter-end, compared with $228.1 million at year-end 2020. Cash and equivalents alone were $64.4 million.
- Trade accounts receivable were $1.36 billion, and global days sales outstanding improved to 60 days from 64 days at year-end 2020.
- Total debt was $0.1 million, and debt-to-total capital was reported at 0.0%.
- The company had $200.0 million of available capacity under its $200.0 million revolving credit facility and $97.0 million under its $150.0 million securitization facility. The latter had $53.0 million of standby letters of credit related to workers’ compensation.
- The current ratio was 1.4 at quarter-end versus 1.7 at year-end 2020. Working capital was $455.4 million, down $168.6 million from year-end, primarily because of lower cash.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated as customer demand recovered from the COVID-19 disruption. Constant-currency revenue growth was 26.2% in the second quarter and 8.3% year to date.
- Gross profit increased, but the consolidated gross margin declined by 100 basis points in the quarter and 40 basis points year to date. The primary factors were the absence of prior-year government wage subsidies and unfavorable product mix, partly offset by increased permanent-placement revenue and Softworld’s higher margins.
- SG&A increased 21.9% in the quarter and 5.6% year to date, reflecting higher incentive compensation, the reversal of prior-year expense-mitigation measures, and Softworld-related costs.
- Year-to-date operating results improved substantially because 2020 included a $147.7 million goodwill impairment charge and $8.5 million of restructuring charges. These improvements were partly offset by the absence of the prior-year $32.1 million gain on sale of assets.
- The company acquired Softworld for total consideration of $217.0 million, including $111.3 million of preliminary goodwill and $79.4 million of intangible assets. The acquisition added approximately $2.3 million of second-quarter operating earnings, inclusive of intangible amortization.
- No restructuring charges were incurred year to date in 2021; the remaining restructuring accrual was $0.6 million at quarter-end.
- The company continued its dividend suspension through the first six months of 2021. In August 2021, the board declared a $0.05-per-share dividend.
Outlook, Commentary, Risks, and Unusual Items
Management expects a gradual recovery in customer demand and continued year-over-year improvements in revenue, gross profit, and earnings from operations as 2021 progresses. Management also plans continued investment in digital transformation, specialized businesses, recruiting capabilities, and targeted mergers and acquisitions.
The outlook is subject to uncertainty regarding COVID-19 resurgences, containment measures, labor availability, customer demand, inflationary or wage pressures, technology-driven changes in staffing demand, and foreign-currency movements. Management specifically identified talent shortages and mismatches as operating challenges.
- The market value of Persol Holdings is recorded through earnings; the investment generated a $36.3 million year-to-date gain in 2021 versus a $48.2 million loss in 2020. Future volatility could materially affect reported earnings.
- The company is appealing a ruling involving a disputed customer receivable of approximately $10 million. A $10.9 million allowance was recorded against the long-term receivable.
- Ordinary-course litigation and claims had gross accruals of $1.3 million. The estimated range of reasonably possible losses in excess of accruals was $0.4 million to $4.3 million, excluding matters for which a loss could not be estimated.
- The company expects to repay deferred U.S. payroll taxes under the CARES Act by the end of 2021 and 2022, with 50% due in the fourth quarter of each year.
- The company sold its Brazil operations in 2020 and retained indemnification exposure capped at $8.8 million; the related liability was $2.7 million at quarter-end.
- Management concluded that disclosure controls were effective at a reasonable assurance level, but intends to exclude the acquired Softworld business from its 2021 internal-control assessment because of the significance and complexity of the acquisition.
Important Facts for Investors to Verify
- Whether revenue recovery and labor-market demand continue without a renewed COVID-19 disruption.
- Whether gross-margin pressure from product mix, wage costs, and the loss of government subsidies is offset by permanent placement, specialty services, and Softworld synergies.
- The durability of operating cash flow as receivables and payroll obligations expand with revenue growth.
- The company’s ability to fund deferred payroll taxes, working-capital needs, and acquisition-related obligations while maintaining available credit capacity.
- The preliminary purchase-price allocation, goodwill, intangible amortization, and integration performance of Softworld.
- The volatility and earnings impact of the Persol Holdings investment and foreign-currency exposure.
- The outcome of the disputed customer receivable litigation, ordinary-course claims, and the Hungarian competition matter.
- Whether the August 2021 dividend declaration represents a sustained return of capital distributions.