Kelly Services, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Kelly Services, Inc. is a workforce solutions provider with five reportable segments: Professional & Industrial (P&I), Science, Engineering & Technology (SET), Education, Outsourcing & Consulting (OCG), and International. The unaudited first quarter ended April 2, 2023, and comprised 13 weeks, compared with 13 weeks ended April 3, 2022.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue from services | $1,268.3 million | $1,296.4 million | (2.2%) |
| Gross profit | $254.1 million | $258.6 million | (1.7%) |
| Gross profit rate | 20.0% | 19.9% | +0.1 percentage points |
| SG&A expense | $243.4 million | $236.1 million | +3.1% |
| Earnings from operations | $10.7 million | $23.4 million | (54.4%) |
| Operating margin | 0.8% | 1.8% | Down approximately 1.0 point |
| Net earnings (loss) | $10.9 million | $(47.6) million | Improved from loss |
| Diluted EPS | $0.29 | $(1.23) | Improved from loss |
| Net cash used in operating activities | $(13.5) million | $(106.1) million | Improved by $92.6 million |
Reported revenue declined 2.2%, or 1.4% on a constant-currency basis. Staffing-services revenue decreased 4.3%, outcome-based services increased 13.3%, talent solutions increased 1.4%, and permanent-placement revenue decreased 34.2%.
Segment revenue changes were: Education up 43.9% to $249.4 million; OCG up 5.0% to $114.6 million; SET down 3.4% to $306.4 million; P&I down 12.3% to $389.8 million; and International down 16.2% to $211.8 million. Education included $15.8 million of revenue from PTS, acquired in May 2022. OCG included $2.6 million of revenue from RocketPower, acquired in March 2022.
Cash, cash equivalents and restricted cash totaled $121.1 million at quarter-end, down from $162.4 million at year-end 2022. Trade accounts receivable were $1.4385 billion, and global DSO improved to 59 days from 61 days at year-end 2022 and 62 days in the prior-year quarter. Working capital was $581.6 million and the current ratio was 1.6.
There was no debt at quarter-end, compared with $0.7 million of short-term borrowings at year-end 2022. Debt-to-total-capital was 0.0%. Kelly reported $200.0 million of available capacity under its revolving credit facility and $100.6 million of available capacity under its securitization facility, which had $49.4 million of standby letters of credit outstanding.
Material changes versus the prior comparable period
- Net earnings improved primarily because the prior-year period included a $67.2 million loss on the Persol Holdings investment and a $20.4 million currency-translation loss from liquidation of the Japan subsidiary. Those items did not recur in 2023.
- Operating earnings fell despite the improved bottom line, reflecting lower revenue, higher SG&A, and $5.7 million of 2023 restructuring charges versus $1.7 million in the prior-year quarter.
- Gross margin improved modestly because of a more favorable mix, including growth in higher-margin outcome-based services and contributions from PTS and RocketPower. P&I gross margin declined to 17.9% from 18.7%, while OCG increased to 36.3% from 34.2% and Education increased to 15.8% from 15.3%.
- Operating cash use improved substantially because of lower working-capital requirements and the absence of the $29.5 million of deferred U.S. payroll-tax payments made in Q1 2022.
- Investing cash flow changed from $257.1 million of inflow in Q1 2022 to $2.2 million of outflow in Q1 2023. The prior period included $196.9 million from the Persol Holdings investment sale and $119.5 million from the sale of most of the PersolKelly joint-venture interest.
- Kelly repurchased 1,099,728 Class A shares for $18.3 million under its $50.0 million program; $23.9 million remained available, and the program expires in November 2023.
Guidance, outlook, commentary, risks and unusual items
Management did not provide specific numerical revenue or earnings guidance in the filing. Management stated that it expects near-term improvement in EBITDA margin from a comprehensive business transformation initiative focused on reducing organizational complexity, improving efficiency, identifying growth opportunities, and accelerating profitable growth. A Transformation Management Office and Chief Transformation Officer were established, and an outside consulting firm was engaged.
Management cited resilient demand in Education and in higher-margin outcome-based solutions, while noting decreased demand for traditional staffing services. P&I restructuring was intended to reposition the business for local-market opportunities. The company expects the remaining $5.0 million restructuring accrual, primarily severance, to be paid mostly by year-end 2023.
Key risks include macroeconomic and labor-market weakness, lower customer demand, pricing and competitive pressures, technology-driven disruption, dependence on large customers and third parties, acquisition and goodwill impairment risk, foreign-currency exposure, employment-related claims, workers’ compensation and benefit-cost volatility, cybersecurity and privacy risks, regulatory and tax changes, and compliance with financial covenants.
Kelly reported gross litigation accruals of $4.7 million at quarter-end, up from $2.3 million at year-end 2022. The estimated aggregate range of reasonably possible losses in excess of accrued amounts was $0.1 million to $2.8 million, excluding matters for which a loss range could not be estimated. Management stated that pending matters are not expected to have a material adverse effect, although outcomes remain uncertain.
Other unusual items included a $2.0 million gain from final proceeds related to the 2021 sale of Business Talent Group, a $5.7 million restructuring charge, and a $3.3 million payment of the remaining Greenwood/Asher earnout. The filing states that the company met its credit-facility covenants at quarter-end.
Investor verification points
- Verify whether the transformation initiative produces the expected EBITDA-margin improvement and whether additional restructuring costs arise.
- Monitor staffing demand, hours volume, bill rates, permanent-placement activity, and the performance of P&I and International.
- Assess whether Education and OCG growth, including PTS and RocketPower, continues to offset weakness in traditional staffing.
- Reconcile cash usage, receivables, DSO, and utilization of the revolving and securitization facilities as demand and working-capital needs change.
- Track the remaining $23.9 million share-repurchase authorization and its effect on liquidity and share count.
- Review litigation, workers’ compensation, indemnification, earnout, tax, and acquisition-related exposures, including potential goodwill or intangible-asset impairments.
- Confirm that covenant compliance and available borrowing capacity remain adequate under weaker operating conditions.