Kelly Services, Inc. 2020 Form 10-K Summary
Business context and reporting period
Kelly Services is a global specialty talent and workforce-solutions provider serving customers through Professional & Industrial, Science, Engineering & Technology, Education, Outsourcing & Consulting, and International segments. The filing covers the fiscal year ended January 3, 2021, which included 53 weeks, compared with 52 weeks in fiscal 2019. The results were materially affected by the COVID-19 pandemic, including reduced staffing demand, school closures, delayed hiring, and operating restrictions.
Kelly placed nearly 370,000 temporary employees during 2020. Approximately 53% of revenue came from the 100 largest customers, and the largest customer represented approximately 5% of revenue.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue from services | $4,516.0 million | $5,355.6 million | (15.7%) |
| Gross profit | $827.6 million | $968.4 million | (14.5%) |
| Gross profit rate | 18.3% | 18.1% | +0.2 points |
| SG&A expenses | $805.6 million | $883.1 million | (8.8%) |
| Earnings (loss) from operations | $(93.6) million | $81.8 million | Loss versus earnings |
| Net earnings (loss) | $(72.0) million | $112.4 million | Loss versus earnings |
| Basic and diluted EPS | $(1.83) | $2.85 and $2.84 | Declined |
| Net cash from operating activities | $186.0 million | $102.2 million | +81.8% |
Revenue from staffing services declined 20%, permanent-placement revenue declined 34%, and outcome-based services increased 9%. Cost reductions and favorable mix increased the gross profit rate, but were insufficient to offset the volume decline.
Year-end cash, cash equivalents, and restricted cash totaled $228.1 million, compared with $31.0 million at year-end 2019. Cash from operations benefited substantially from $117.0 million of deferred payroll-tax payments under COVID-19 relief legislation. Trade accounts receivable totaled $1.3 billion, and global days sales outstanding increased to 64 days from 58 days.
Year-end debt was $0.3 million, compared with $1.9 million in 2019. Kelly had $200.0 million of unused capacity under its revolving credit facility and $97.0 million of unused capacity under its securitization facility. The company reported a current ratio of 1.7 and working capital of $624.0 million.
Material changes versus the prior comparable period
- All segments experienced revenue declines except that outcome-based services grew. Education revenue fell 36.3%, International fell 16.4%, Professional & Industrial fell 16.0%, Science, Engineering & Technology fell 9.9%, and Outsourcing & Consulting fell 3.8%.
- Education changed from $15.8 million of operating earnings to a $9.0 million operating loss, while International changed from $18.7 million of earnings to an $8.9 million loss.
- A $147.7 million non-cash goodwill impairment charge was recorded in the first quarter after COVID-19-related declines in market capitalization triggered impairment testing. Year-end goodwill was $3.5 million versus $127.8 million in 2019.
- Restructuring charges increased to $12.8 million from $5.5 million, including $4.4 million of fourth-quarter severance and related costs.
- Kelly recognized a $32.1 million gain on a headquarters sale-and-leaseback transaction and a $16.6 million loss on its Persol Holdings investment, compared with a $35.8 million gain in 2019.
- Kelly acquired Insight Workforce Solutions for approximately $38.1 million of cash consideration and acquired Greenwood/Asher. It also sold its Brazil operations and recorded a $2.5 million indemnification liability related to the sale.
- The company suspended quarterly dividends beginning in May 2020. Dividends paid during 2020 totaled $3.0 million, or $0.075 per share.
Guidance, outlook, commentary, risks, and unusual items
Management expected revenue to decline materially year over year through the first quarter of 2021, with first-quarter earnings also expected to decline. For full-year 2021, management expected gradual demand improvement and year-over-year improvement in gross profit and earnings from operations, but did not provide specific revenue or earnings targets.
Management’s strategy emphasizes specialty talent solutions, higher-margin services, digital transformation, disciplined cost management, targeted acquisitions, and optimization of the business portfolio. Long-term performance measures include revenue growth, gross profit rate, conversion rate, and EBITDA margin.
- COVID-19 remained the principal near-term risk, particularly for Education, where school closures and virtual or hybrid instruction reduced demand. The timing and extent of recovery were uncertain.
- Deferred U.S. payroll taxes must be repaid in 2021 and 2022, including 50% expected in the fourth quarter of 2021.
- Financial covenants restrict dividends, share repurchases, and certain operating activities. Kelly met its debt covenants during 2020, but future compliance, particularly interest-coverage requirements, was not assured.
- Workers’ compensation, employment claims, wage-and-hour matters, privacy and cybersecurity incidents, tax audits, customer credit losses, regulatory changes, and worker misclassification remain material risk areas.
- A customer dispute involved an approximately $10 million receivable; Kelly increased the related allowance by $9.2 million after an adverse ruling and appealed the ruling.
- The company reported a $9.5 million additional uncollectible-receivable charge related to a customer dispute in Mexico.
- The aggregate estimated range of reasonably possible litigation losses in excess of accrued amounts was zero to $1.3 million, excluding matters for which a loss could not currently be estimated.
- The filing reports effective disclosure controls and effective internal control over financial reporting, with no material changes in internal controls during the fourth quarter.
Most important facts for investors to verify
- Whether staffing demand, Education volumes, and permanent-placement activity recover as expected after COVID-19 disruptions.
- The sustainability of the $186.0 million operating cash flow, particularly after deferred payroll taxes are repaid and customer payment terms normalize.
- Future compliance with debt-facility covenants and the effect of covenant restrictions on dividends and capital allocation.
- Accounts-receivable aging, the 64-day DSO, and potential additional losses from disputed or slow-paying customers.
- Progress toward restoring profitability after the goodwill impairment, restructuring actions, and segment-level losses in Education and International.
- The status of the suspended dividend and management’s conditions for reinstatement.
- Exposure to workers’ compensation, litigation, cybersecurity, tax, employment-classification, and regulatory contingencies.