Kelly Services, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Kelly Services is a global talent solutions company operating through Professional & Industrial, Science, Engineering & Technology, Education, Outsourcing & Consulting, and International segments. The filing covers the 13-week quarter and 26-week year-to-date period ended July 3, 2022, compared with July 4, 2021. Results are unaudited.
Key Financial Metrics
| Metric | Second Quarter 2022 | Second Quarter 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Revenue from services | $1,267.3 million | $1,258.1 million | $2,563.7 million | $2,464.0 million |
| Gross profit | $262.4 million | $231.0 million | $521.0 million | $444.3 million |
| Gross profit rate | 20.7% | 18.4% | 20.3% | 18.0% |
| Earnings from operations | $8.2 million | $13.7 million | $31.6 million | $24.3 million |
| Net earnings (loss) | $2.2 million | $24.0 million | $(45.4) million | $49.6 million |
| Diluted EPS | $0.06 | $0.60 | $(1.19) | $1.25 |
Second-quarter revenue increased 0.7% reported and 2.7% on a constant-currency basis. Six-month revenue increased 4.0% reported and 5.8% constant currency. Gross profit grew faster than revenue, reflecting favorable mix, higher permanent-placement activity, lower employee-related costs, and contributions from higher-margin acquisitions.
Operating results included an $18.5 million impairment charge related to the Russia disposal group and gains on asset sales of $4.4 million in the quarter and $5.3 million year to date. Excluding these items, the filing indicates improved underlying operating performance, but it does not provide a complete adjusted earnings reconciliation.
Six-month net loss was primarily driven by a $67.2 million loss on the Persol Holdings investment and a $20.4 million currency-translation loss from liquidation of the Japan subsidiary. These were partly offset by an $8.1 million income-tax benefit.
Cash Flow, Debt, and Liquidity
- Cash, cash equivalents, and restricted cash totaled $154.0 million at July 3, 2022, compared with $119.5 million at year-end 2021.
- Operating activities used $107.3 million in the first six months, compared with $47.6 million generated in the prior-year period, primarily because of higher working-capital requirements, increased days sales outstanding, and $50.1 million of taxes paid on the Persol Holdings sale.
- Investing activities generated $175.6 million, including $196.9 million from the Persol Holdings sale and $119.5 million from selling most of the PersolKelly investment. These proceeds funded acquisitions and other strategic initiatives.
- Financing activities used $33.9 million, including $27.2 million for repurchases of Kelly shares held by Persol Holdings and $4.8 million of dividends.
- The company reported no short-term borrowings or debt at quarter-end. Debt-to-total-capital was 0.0%.
- Available capacity was $200.0 million under the revolving credit facility and $97.0 million under the securitization facility. The securitization facility had no borrowings and $53.0 million of standby letters of credit.
- Trade accounts receivable were $1.5 billion and global DSO was 63 days, compared with 60 days at year-end 2021 and in the prior-year quarter.
- Deferred U.S. payroll taxes of $57.6 million remained payable by January 3, 2023.
Material Changes Versus the Prior Comparable Period
- Professional & Industrial revenue declined 10.9% in the quarter and 7.9% year to date, primarily due to lower staffing hours and a large customer shifting from staffing to direct hire.
- Science, Engineering & Technology revenue increased 8.7% in the quarter and 16.0% year to date, supported by specialty, outcome-based, and permanent-placement growth and the Softworld acquisition.
- Education revenue increased 46.8% in the quarter and 51.2% year to date, reflecting the return to in-school instruction, customer wins, improved fill rates, and the PTS acquisition.
- Outsourcing & Consulting revenue increased 16.0% in the quarter and 13.0% year to date, including RocketPower; reported organic growth was 5.3% in the quarter and 7.5% year to date.
- International revenue declined 11.7% in the quarter and 9.5% year to date, mainly because of Mexico regulatory changes and currency effects, partly offset by constant-currency growth in Europe.
- Kelly acquired RocketPower in March 2022 for total consideration of $63.5 million and Pediatric Therapeutic Services in May 2022 for total consideration of $86.8 million.
- Kelly sold its Persol Holdings investment for $196.9 million and sold 95% of its PersolKelly interest for $119.5 million, retaining a 2.5% interest.
Guidance, Outlook, Risks, and Unusual Items
Management stated that demand remained strong despite inflation, the war in Ukraine, and economic uncertainty. The company is pursuing growth in higher-margin specialty services through organic investment, acquisitions, digital transformation, and workforce-focused initiatives. No specific numerical revenue or earnings guidance was provided in the filing.
Kelly completed the sale of its Russia operations on July 20, 2022. Management expects International revenue and earnings to be unfavorably affected beginning in the third quarter but does not expect significant additional losses from the transaction.
Key risks include labor-market and economic changes, inflation, customer concentration and changing purchasing practices, availability of qualified workers, acquisitions and potential goodwill or intangible-asset impairments, foreign currency exposure, regulatory and tax changes, employment-related claims, workers’ compensation, cybersecurity and privacy, dependence on third parties and information systems, and compliance with financial covenants.
Litigation and other ordinary-course contingencies had gross accruals of $1.7 million at quarter-end. The estimated range of reasonably possible losses in excess of accrued amounts was $0.7 million to $8.6 million, although the company noted that some matters cannot currently be estimated. Management did not expect these matters to have a material adverse effect.
Important Facts for Investors to Verify
- Assess whether gross-margin improvement can persist after the effects of favorable mix, permanent-placement activity, acquisitions, and one-time items.
- Monitor cash conversion, receivables growth, and DSO, given the $107.3 million first-half operating cash outflow.
- Evaluate the earnings contribution, integration progress, and potential purchase-accounting adjustments for RocketPower and PTS.
- Quantify the expected third-quarter impact of exiting Russia and confirm final disposal accounting and proceeds.
- Verify repayment of the remaining $57.6 million of deferred payroll taxes by January 3, 2023.
- Review acquisition-related earnouts, including RocketPower’s potential maximum cash earnout of $31.8 million.
- Consider the sustainability of earnings excluding the Persol-related losses, Russia impairment, asset-sale gains, and other discrete tax and currency items.