Kelly Services, Inc. — Form 10-Q Summary
Business context and reporting period
Kelly Services provides staffing, permanent placement, outcome-based services, and talent solutions through five segments: Professional & Industrial, Science, Engineering & Technology, Education, Outsourcing & Consulting, and International. This unaudited Form 10-Q covers the 13-week third quarter and 39-week year-to-date periods ended October 1, 2023, compared with October 2, 2022.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Revenue from services | $1,118.0 million | $1,167.9 million | $3,603.5 million | $3,731.6 million |
| Gross profit | $228.5 million | $240.6 million | $723.2 million | $761.6 million |
| Gross profit rate | 20.4% | 20.6% | 20.1% | 20.4% |
| Earnings from operations | $0.1 million | $(21.4) million | $17.0 million | $10.2 million |
| Net earnings (loss) | $6.6 million | $(16.2) million | $25.0 million | $(61.6) million |
| Diluted EPS | $0.18 | $(0.43) | $0.67 | $(1.62) |
| Net cash from operating activities | Not separately provided for Q3 | $33.4 million | $(111.7) million |
- Q3 revenue declined 4.3% reported and 5.8% on a constant-currency basis. Year-to-date revenue declined 3.4% reported and 3.8% constant currency.
- Q3 gross profit decreased 5.1%, and the gross profit rate declined 20 basis points. Year-to-date gross profit decreased 5.0%, with the rate down 30 basis points.
- SG&A was $228.4 million in Q3, including $15.4 million of restructuring and transformation charges. Excluding those charges, SG&A declined 7.8%. Year-to-date SG&A included $27.6 million of restructuring and transformation charges.
- Cash, cash equivalents, and restricted cash totaled $126.5 million at quarter-end, versus $162.4 million at year-end 2022. Cash declined primarily because of share repurchases, dividends, investing expenditures, and foreign-exchange effects.
- Trade accounts receivable were $1.4 billion, and global days sales outstanding increased to 63 days from 61 days at year-end 2022.
- There was no short-term debt at quarter-end. Debt-to-total capital was 0.0%.
- Available liquidity included $200.0 million under the revolving credit facility and $100.6 million under the $150.0 million securitization facility. The securitization facility had $49.4 million of standby letters of credit outstanding.
- The current ratio was 1.6 at quarter-end, compared with 1.5 at year-end 2022.
Material changes versus the prior comparable period
- Education was the strongest segment: revenue increased 22.9% in Q3 and 34.8% year to date, driven by improved fill rates, existing-customer demand, new wins, and the PTS acquisition.
- Professional & Industrial revenue decreased 10.8% in both Q3 and year to date, primarily because of lower staffing hours and sharply lower permanent-placement revenue. Q3 operating earnings increased because of lower SG&A.
- Science, Engineering & Technology revenue declined 8.0% in Q3 and 6.2% year to date, reflecting lower staffing volume and permanent-placement revenue.
- Outsourcing & Consulting revenue declined 3.8% in Q3 and 2.7% year to date. Operating results improved versus the prior year primarily because Q3 2022 included a $30.7 million RocketPower goodwill impairment charge.
- International revenue increased 2.4% on a reported basis in Q3 but declined 6.2% in constant currency; year-to-date revenue declined 8.2% reported. Comparisons were affected by the 2022 sale of the Russia operations and foreign-exchange movements.
- Net earnings benefited from the absence of significant 2022 unusual losses, including the $67.2 million Persol Holdings investment loss, $20.4 million Japan liquidation translation loss, $30.7 million RocketPower goodwill impairment, and $18.7 million Russia disposal loss.
- The company repurchased $42.2 million of Class A shares year to date, completing the $50.0 million repurchase program in August 2023. The repurchases reduced average shares outstanding to 36.2 million from 38.2 million year to date.
Guidance, outlook, commentary, risks, and unusual items
- Management described continued macroeconomic headwinds, guarded employer hiring, constrained candidate supply, and decelerating demand for temporary and permanent-placement services.
- Management expects transformation actions to produce continuing improvement in EBITDA margin through the end of 2023 and beyond, but the filing does not provide a specific revenue, earnings, or EBITDA forecast.
- Transformation activities include workforce reductions, operating-model changes, supplier and real-estate renegotiations, and external consulting. Remaining restructuring accruals were $10.6 million at quarter-end, with most expected to be paid by the first quarter of 2024.
- On November 2, 2023, after quarter-end, Kelly agreed to sell its European staffing business to Gi Group for cash proceeds of €100 million, subject to adjustments, plus a potential earnout of up to €30 million based on adjusted 2023 EBITDA. Closing is expected in the first quarter of 2024, subject to regulatory and customary conditions.
- The European business was not classified as held for sale at quarter-end; management expected that classification in the fourth quarter of 2023. A €90 million foreign-currency forward contract was entered into after quarter-end to manage transaction-related currency exposure.
- Reported litigation accruals were $5.2 million at quarter-end, with a reasonably possible additional loss range of zero to $6.8 million. Management does not believe pending matters will have a material adverse effect, but outcomes remain uncertain.
- Key risks include staffing-market deterioration, technology-driven changes in labor demand, customer concentration or loss, regulatory and tax exposure, workers’ compensation and benefit claims, litigation, foreign currency, cybersecurity, availability of qualified temporary workers, and execution of the transformation and European sale.
- The company stated that its disclosure controls and procedures were effective at a reasonable assurance level and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether transformation-related cost reductions translate into sustainable EBITDA-margin improvement after restructuring charges end.
- The timing, regulatory approval, final proceeds, working-capital adjustments, and earnout terms of the proposed European staffing-business sale.
- Whether staffing volumes, permanent placement, RPO, and other talent-solution demand stabilize or continue to decline.
- The sustainability of cash generation given lower revenue, $1.4 billion of receivables, 63-day DSO, dividends, and completed share repurchases.
- The treatment and financial impact of the European disposal group, including deferred taxes, valuation allowances, currency hedging, and any gain or loss on sale.
- Potential cash payments for litigation, workers’ compensation, indemnification, restructuring, and other contingencies, including the disclosed possible litigation loss range.