Kelly Services, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Kelly Services provides staffing, permanent placement, outcome-based services, and outsourced talent solutions through five segments: Professional & Industrial, Science, Engineering & Technology, Education, Outsourcing & Consulting, and International. The second quarter ended July 2, 2023 and comprised 13 weeks; the year-to-date period comprised 26 weeks. Comparative periods ended July 3, 2022.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue from services | $1,217.2 million | $1,267.3 million | $2,485.5 million | $2,563.7 million |
| Gross profit | $240.6 million | $262.4 million | $494.7 million | $521.0 million |
| Gross profit rate | 19.8% | 20.7% | 19.9% | 20.3% |
| SG&A expense | $232.0 million | $240.1 million | $475.4 million | $476.2 million |
| Earnings from operations | $6.2 million | $8.2 million | $16.9 million | $31.6 million |
| Net earnings (loss) | $7.5 million | $2.2 million | $18.4 million | $(45.4) million |
| Diluted EPS | $0.20 | $0.06 | $0.49 | $(1.19) |
| Net cash from operating activities | Not presented separately for the quarter | Not presented separately for the quarter | $23.4 million | $(107.3) million |
Q2 revenue declined 3.9% year over year, while gross profit declined 8.3% and earnings from operations declined 23.1%. The six-month revenue decline was 3.0%, and operating earnings declined 46.4%. The filing does not provide a clear quarterly EBITDA or EBITDA margin value.
At July 2, 2023, cash and equivalents were $124.8 million, and cash, cash equivalents, and restricted cash totaled $134.5 million, compared with $162.4 million at year-end 2022. Trade accounts receivable were $1.4 billion, global DSO was 61 days, and the current ratio was 1.5. There were no short-term borrowings at quarter-end, versus $0.7 million at year-end 2022; debt-to-total capital was 0.0%.
Available liquidity included $200.0 million of unused capacity under the revolving credit facility and $100.6 million under the $150.0 million securitization facility. The securitization facility had no borrowings and $49.4 million of standby letters of credit related to workers’ compensation. The company stated that it was in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Education was the strongest segment, with Q2 revenue up 32.6% to $206.4 million and six-month revenue up 38.6% to $455.8 million. Growth reflected new customer wins, higher fill rates, and the PTS acquisition.
- Professional & Industrial revenue declined 9.3% in Q2 and 10.9% year to date, primarily from lower staffing hours and permanent placement activity. Higher-margin outcome-based revenue increased.
- Science, Engineering & Technology revenue declined 7.0% in Q2 and 5.2% year to date, driven by lower staffing volumes and permanent placement revenue.
- Outsourcing & Consulting revenue declined 8.6% in Q2 and 2.2% year to date. Results included a $2.0 million right-of-use asset impairment charge in Q2 and a $3.9 million year-to-date operating loss contribution from RocketPower.
- International revenue declined 9.1% in Q2 and 12.7% year to date, primarily reflecting the July 2022 sale of the Russia operations and the transfer of certain customer programs to OCG.
- Gross margin decreased 90 basis points in Q2 and 40 basis points year to date, primarily due to lower permanent placement revenue, unfavorable mix, and higher employee-related costs.
- Year-to-date operating cash flow improved to an inflow of $23.4 million from an outflow of $107.3 million, mainly because of lower working capital requirements and the absence of significant 2022 tax and acquisition-related cash uses.
- The six-month 2022 loss included a $67.2 million loss on the Persol Holdings investment and a $20.4 million currency translation loss from liquidation of a subsidiary; neither item recurred in 2023.
Guidance, outlook, commentary, risks, and unusual items
Management described employer demand as guarded amid economic uncertainty, with pressure on temporary and permanent placement services. Candidate supply remained constrained in resilient areas. Management expects its transformation actions to produce an immediate and meaningful improvement in EBITDA margin through the end of 2023 and beyond, but the filing does not provide specific revenue or earnings guidance.
The 2023 transformation initiative included operating-model changes, supplier and real estate renegotiations, performance-management changes, and workforce reductions. Q2 restructuring and transformation costs were $5.6 million, including $4.5 million of external consulting costs, $1.1 million of severance, and a $2.4 million right-of-use asset impairment charge. Total year-to-date restructuring costs were $12.2 million. Management expected Q3 2023 restructuring charges of $7.5 million to $8.5 million; the remaining restructuring accrual at quarter-end was $8.5 million, with most payments expected by year-end.
The company repurchased $34.8 million of Class A shares during the first six months, including $16.5 million in Q2. Approximately $7.4 million remained available under the $50.0 million authorization, which expired in November 2023. Dividends were $0.075 per share in each of the first two quarters.
Reported risks include economic and labor-market weakness, reduced demand for human capital, customer concentration or loss, regulatory and tax changes, workers’ compensation and benefit claims, litigation, foreign currency exposure, availability of qualified temporary workers, cyberattacks, reliance on third parties, and execution of growth and transformation strategies.
Gross litigation accruals were $5.2 million at quarter-end, compared with $2.3 million at year-end 2022. The estimated range of reasonably possible losses in excess of accrued amounts was zero to $6.8 million, excluding matters for which a loss range could not be estimated. Management did not expect pending matters to have a material adverse effect, but outcomes remain uncertain.
Facts investors should verify
- Whether the transformation and workforce-reduction actions deliver the stated improvement in EBITDA margin and offset continued staffing-volume weakness.
- The timing and total amount of restructuring, severance, lease, and consulting costs, including the Q3 estimate of $7.5 million to $8.5 million.
- Whether Education growth is sustainable after considering customer concentration, fill rates, and the contribution from PTS.
- Trends in permanent placement, temporary staffing hours, gross margin, and DSO, which materially affect profitability and working capital.
- The remaining $7.4 million share-repurchase authorization and its effect on cash balances and share count.
- Potential exposure from litigation, workers’ compensation claims, the Brazil indemnification liability, and other contingencies.
- Liquidity under the revolving credit and securitization facilities if demand weakens or working-capital needs increase.