Kelly Services, Inc. 2021 Form 10-K Summary
Business context and reporting period
Kelly Services is a global specialty talent and workforce-solutions provider serving the Americas, Europe, and Asia-Pacific. Its five reportable segments are Professional & Industrial, Science, Engineering & Technology, Education, Outsourcing & Consulting, and International. The filing covers the 52-week fiscal year ended January 2, 2022; the prior comparable fiscal year ended January 3, 2021 contained 53 weeks. The filing text provides annual results rather than a separate fourth-quarter income statement.
Kelly assigned more than 350,000 temporary employees to customers during 2021. Approximately 56% of revenue came from its 100 largest customers, while the largest individual customer represented approximately 5% of revenue.
Financial performance and liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue from services | $4,909.7 million | $4,516.0 million | +8.7% |
| Gross profit | $919.2 million | $827.6 million | +11.1% |
| Gross profit rate | 18.7% | 18.3% | +0.4 points |
| SG&A expenses | $870.6 million | $805.6 million | +8.1% |
| Earnings from operations | $48.6 million | $(93.6) million | Improved |
| Net earnings | $156.1 million | $(72.0) million | Improved |
| Diluted earnings per share | $3.91 | $(1.83) | Improved |
| Cash flow from operating activities | $85.0 million | $186.0 million | Down $101.0 million |
The 2021 earnings recovery included a $121.8 million gain on the Persol Holdings investment, a $19.0 million insurance settlement related to the Softworld acquisition, and $5.4 million of equity earnings from PersolKelly. The reported operating result also benefited from the absence of the $147.7 million goodwill impairment recorded in 2020. Earnings before taxes and equity earnings were $185.8 million, and income tax expense was $35.1 million.
Cash, cash equivalents, and restricted cash totaled $119.5 million at year-end 2021, compared with $228.1 million at year-end 2020. Trade receivables were $1.4 billion, and global days sales outstanding improved to 60 days from 64 days. Working capital was $493.5 million, with a current ratio of 1.5.
Kelly had no debt outstanding at year-end. Available capacity included $200.0 million under a revolving credit facility and $97.0 million under a $150.0 million receivables securitization facility. The securitization facility also supported $53.0 million of standby letters of credit related to workers’ compensation. All debt covenants were met.
Investing cash outflow was $180.7 million, including $213.0 million for the Softworld acquisition and $11.2 million of capital expenditures. Financing cash outflow was $8.1 million, including $4.0 million of dividends. Deferred U.S. payroll taxes included $87.1 million of accrued obligations at year-end; $29.5 million was paid on January 3, 2022 and $57.6 million was due on January 3, 2023.
Material changes versus the prior comparable period
- Revenue increased 8.7%, although the comparison is affected by the extra week in 2020. Constant-currency revenue growth was 7.8%.
- Revenue increased in SET, Education, Outsourcing & Consulting, and International, but declined 1.1% in Professional & Industrial.
- Permanent placement revenue increased 89.7%; staffing services increased 6.6%; outcome-based services increased 7.3%.
- Softworld, acquired April 5, 2021 for total consideration of $217.0 million, contributed approximately $98.0 million of revenue and $4.7 million of net earnings and added $111.3 million of goodwill.
- Education returned to profitability, with $3.0 million of operating earnings versus a $9.0 million operating loss in 2020. Outsourcing & Consulting operating earnings rose 62.7% to $18.7 million, and International moved to $9.9 million of earnings from an $8.9 million loss.
- Professional & Industrial operating earnings declined 24.4% to $31.4 million, primarily from lower margins, higher employee-related costs, and the absence of 2020 government wage subsidies.
- Restructuring charges declined to $4.0 million from $12.8 million. No goodwill impairment was recorded in 2021, compared with $147.7 million in 2020.
- Goodwill increased to $114.8 million from $3.5 million, and net intangible assets increased to $122.0 million from $55.6 million, primarily because of Softworld.
Guidance, outlook, risks, and unusual items
Management stated that Kelly entered 2022 having shifted from recovery to growth. It cited improving customer demand, permanent-placement growth, strong demand for specialty solutions, digital transformation initiatives, and a strategy to move toward higher-margin, higher-value specialties. The filing does not provide specific 2022 revenue, earnings, or margin guidance.
In February 2022, after year-end, Kelly announced transactions to monetize its Persol Holdings investment and reduce its PersolKelly ownership. The Company sold the Persol Holdings investment for $197.4 million before transaction expenses, agreed to sell 95% of its PersolKelly interest for $119.5 million, and repurchased and retired approximately 1.6 million Class A shares and 1,475 Class B shares for $27.2 million. Kelly expected approximately $500 million of capital to be available for specialty growth investments after these transactions. It also recorded a $52.4 million fair-value loss on Persol Holdings during early 2022 and expected an estimated $46.5 million after-tax loss in first-quarter 2022 earnings.
- Demand remains sensitive to economic activity, employment levels, labor shortages, inflation, customer pricing pressure, and future COVID-19 developments.
- Competition is intense and includes larger global staffing providers, regional firms, online platforms, automation, and other forms of disintermediation.
- Key operating risks include attracting qualified temporary and permanent talent, losing large customers, customer use of multiple staffing providers, worker classification, employment claims, self-insured workers’ compensation costs, and government regulation.
- Cybersecurity, data privacy, third-party technology providers, business interruption, and international currency and regulatory exposure could materially affect operations.
- Legal proceedings and claims are ongoing in the ordinary course. The accrued litigation liability was $1.4 million, and the estimated aggregate range of reasonably possible losses in excess of accruals was $0.7 million to $9.3 million, excluding matters for which a loss could not be estimated.
- The Hungarian Competition Authority matter includes an approximate $0.3 million potential secondary liability, although the Company does not expect a material adverse effect.
- Goodwill was not impaired at year-end 2021, but the valuation remains sensitive to revenue growth, margins, discount rates, and future operating performance.
Important facts for investors to verify
- Separate the recurring operating recovery from the $121.8 million Persol Holdings gain and the $19.0 million insurance settlement.
- Assess whether revenue growth and margin improvement persist after the Softworld acquisition contribution and the post-pandemic recovery.
- Review cash conversion, receivables growth, DSO, deferred payroll-tax payments, and the effect of working-capital growth on liquidity.
- Verify compliance with debt covenants and the availability of the revolving and receivables facilities under changing operating conditions.
- Evaluate Softworld integration, intangible-asset amortization, goodwill valuation, and the acquisition’s sustainable contribution to SET earnings.
- Incorporate the post-year-end Persol transactions and expected first-quarter 2022 investment loss into forward earnings expectations.
- Consider the controlling Trust K’s approximately 91.6% ownership of Class B shares; Class B is the only voting class, while Class A shares generally have no voting rights.
- Review exposure to labor shortages, customer concentration, employment litigation, workers’ compensation estimates, cybersecurity, regulation, and foreign-currency movements.