Kelly Services, Inc. — Fiscal First Quarter 2021
Reporting period: 13 weeks ended April 4, 2021, compared with 13 weeks ended March 29, 2020. The filing is an unaudited Form 10-Q filed May 13, 2021. Kelly provides staffing, permanent placement, outsourcing, consulting, and workforce solutions through five segments: Professional & Industrial, Science, Engineering & Technology, Education, Outsourcing & Consulting, and International.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue from services | $1,205.9 million | $1,261.1 million | (4.4%) |
| Gross profit | $213.3 million | $223.3 million | (4.5%) |
| Gross profit rate | 17.7% | 17.7% | Flat |
| SG&A expense | $202.7 million | $219.5 million | (7.7%) |
| Earnings from operations | $10.6 million | $(111.8) million | Improved |
| Gain/(loss) on Persol Holdings investment | $30.0 million | $(77.8) million | Significantly improved |
| Net earnings/(loss) | $25.6 million | $(153.2) million | Improved |
| Diluted EPS | $0.64 | $(3.91) | Improved |
| Operating cash flow | $10.5 million | $8.4 million | Improved |
Revenue declined 5.5% on a constant-currency basis. Staffing-services revenue decreased 7.5%, partly offset by a 2.5% increase in outcome-based services and a 29.9% increase in permanent-placement revenue. The operating conversion rate improved to 5.0% from negative 50.1%.
Segment Revenue and Operating Results
| Segment | Q1 2021 Revenue | Year-over-year change | Q1 2021 Operating Earnings |
|---|---|---|---|
| Professional & Industrial | $467.6 million | (5.3%) | $6.5 million |
| Science, Engineering & Technology | $254.7 million | (5.7%) | $17.5 million |
| Education | $111.6 million | (21.7%) | $3.0 million |
| Outsourcing & Consulting | $99.3 million | 11.0% | $2.9 million |
| International | $272.9 million | 2.9% reported; (1.1%) constant currency | $2.6 million |
Liquidity, Cash Flow, Debt, and Balance Sheet
- Cash and equivalents increased to $239.4 million from $223.0 million at year-end 2020. Cash, cash equivalents, and restricted cash totaled $245.2 million at quarter-end.
- Net cash provided by operating activities was $10.5 million. Investing activities generated $7.9 million, including $10.4 million of company-owned life insurance proceeds. Financing activities generated $0.1 million.
- Trade accounts receivable were $1.28 billion, with global days sales outstanding of 60 days versus 64 days at year-end 2020 and 59 days in Q1 2020.
- Total current assets were $1.60 billion and total current liabilities were $962.9 million. The current ratio was 1.7.
- Short-term borrowings were $1.1 million. Debt-to-total capital was 0.1%.
- The company reported $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 securitization facility had no short-term borrowings and $53.0 million of standby letters of credit related to workers’ compensation.
- Kelly met the applicable debt covenants at quarter-end and expects to fund ongoing requirements primarily through operating cash flow, existing cash, receivables securitization, and available credit facilities.
Material Changes Versus the Prior Comparable Period
- The company returned to operating profitability, reporting $10.6 million of operating earnings versus a $111.8 million operating loss in Q1 2020.
- The comparison benefited from the absence of the $147.7 million goodwill impairment charge and $8.7 million of restructuring charges recorded in Q1 2020. The prior period also included a $32.1 million gain on the sale and leaseback of three headquarters properties.
- Net earnings benefited from a $30.0 million gain on the Persol Holdings investment, compared with a $77.8 million loss in Q1 2020. This investment is marked to market through earnings and may produce significant quarter-to-quarter volatility.
- Revenue remained below the prior-year level because of COVID-19-related demand weakness, particularly in Professional & Industrial, Science, Engineering & Technology, and Education.
- Outsourcing & Consulting and International revenue increased, while Education revenue declined sharply as school districts continued to use virtual or hybrid instruction.
- No dividends were paid in Q1 2021. The quarterly dividend was suspended in May 2020 and remained suspended.
- Kelly completed the acquisition of Softworld, Inc. on April 5, 2021, for $215.0 million in cash, subject to working-capital adjustments. Softworld is a technology staffing and workforce solutions company. Purchase accounting and pro forma results were incomplete at filing.
Guidance, Outlook, Risks, and Unusual Items
Management expects a gradual recovery in customer demand and stated that revenue should reflect continued improvement during 2021, with corresponding year-over-year improvement in gross profit and operating earnings. The company is emphasizing specialty talent solutions, digital transformation, higher-margin services, cost discipline, and targeted acquisitions.
- COVID-19 continues to affect staffing demand, labor availability, customer operations, school-district activity, and the company’s ability to forecast results. Management cannot predict the timing or extent of the recovery.
- Potential future disruptions from infection resurgences, containment measures, remote work, automation, and changes in customer buying practices could materially affect results.
- The company has deferred certain U.S. employer Social Security tax payments under COVID-19 relief legislation; deferred amounts are required to be repaid in 2021 and 2022, with 50% of the applicable balance expected to be paid in the fourth quarter of 2021.
- A disputed customer receivable of approximately $10 million remains subject to litigation and appeal. The company carries a $10.9 million allowance for the long-term receivable.
- The company recorded a $1.4 million write-down related to its Kenzie Academy investment and $1.3 million of transaction costs associated with the Softworld acquisition in other expense.
- Ordinary-course litigation accruals totaled $1.2 million. Estimated reasonably possible losses in excess of accrued amounts ranged from $0.1 million to $1.8 million, excluding matters for which a loss range could not be estimated.
- Kelly’s $181.7 million Persol Holdings investment is exposed to equity-market and foreign-currency volatility. The company also holds a $118.7 million investment in the PersolKelly joint venture, which reported a $1.1 million equity-method loss for the quarter.
Investor Verification Checklist
- Verify whether the anticipated gradual recovery in staffing demand materializes, particularly in Education, Professional & Industrial, and Science, Engineering & Technology.
- Assess the recurring earnings power excluding the nonrecurring 2020 goodwill impairment, restructuring charges, asset-sale gain, and changes in the Persol Holdings investment.
- Review the completed accounting, pro forma contribution, financing, and integration results for the $215.0 million Softworld acquisition.
- Monitor liquidity after the acquisition, repayment of deferred payroll taxes, working-capital growth, and any increased use of credit facilities.
- Evaluate the sustainability of the 17.7% consolidated gross profit rate and management’s targeted improvement in conversion rate and EBITDA margin.
- Track the customer receivable litigation, Brazil indemnification exposure, workers’ compensation claims, tax matters, and compliance with debt covenants.
- Confirm future dividend policy, as dividends remained suspended through the quarter.