Kelly Services(KELYA) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for the first quarter ended April 2, 2023 Consolidated Statements of Earnings The company's net earnings improved significantly due to the absence of prior-year non-recurring investment losses Consolidated Statements of Earnings (13 Weeks Ended) | Metric | April 2, 2023 (Millions $) | April 3, 2022 (Millions $) | Change (%) | | :--- | :--- | :--- | :--- | | Revenue from services | 1,268.3 | 1,296.4 | (2.2)% | | Gross profit | 254.1 | 258.6 | (1.7)% | | Selling, general and administrative expenses | 243.4 | 236.1 | 3.1% | | Earnings (loss) from operations | 10.7 | 23.4 | (54.4)% | | Net earnings (loss) | 10.9 | (47.6) | NM | | Basic earnings (loss) per share | 0.29 | (1.23) | NM | | Diluted earnings (loss) per share | 0.29 | (1.23) | NM | - Net earnings significantly improved from a loss of $47.6 million in Q1 2022 to earnings of $10.9 million in Q1 2023, primarily due to the absence of large non-recurring losses from investment in Persol Holdings and currency translation from subsidiary liquidation that occurred in the prior year[12] Consolidated Statements of Comprehensive Income (Loss) Comprehensive income turned positive, driven by the turnaround in net earnings and favorable currency adjustments Consolidated Statements of Comprehensive Income (Loss) (13 Weeks Ended) | Metric | April 2, 2023 (Millions $) | April 3, 2022 (Millions $) | | :--- | :--- | :--- | | Net earnings (loss) | 10.9 | (47.6) | | Foreign currency translation adjustments | 2.3 | 13.0 | | Other comprehensive income (loss) | 2.3 | 13.0 | | Comprehensive income (loss) | 13.2 | (34.6) | - Comprehensive income improved from a loss of $34.6 million in Q1 2022 to income of $13.2 million in Q1 2023, driven by the turnaround in net earnings and positive foreign currency translation adjustments[14] Consolidated Balance Sheets Total assets and liabilities decreased quarter-over-quarter, driven by lower cash and accounts receivable Consolidated Balance Sheets (As of) | Metric | April 2, 2023 (Millions $) | January 1, 2023 (Millions $) | Change (QoQ) | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash and equivalents | 111.7 | 153.7 | (42.0) | | Trade accounts receivable, net | 1,438.5 | 1,491.6 | (53.1) | | Total current assets | 1,632.5 | 1,715.2 | (82.7) | | Total noncurrent assets | 956.1 | 948.6 | 7.5 | | Total Assets | 2,588.6 | 2,663.8 | (75.2) | | Liabilities & Equity | | | | | Total current liabilities | 1,050.9 | 1,128.8 | (77.9) | | Total noncurrent liabilities | 289.9 | 280.8 | 9.1 | | Total stockholders' equity | 1,247.8 | 1,254.2 | (6.4) | | Total Liabilities and Stockholders' Equity | 2,588.6 | 2,663.8 | (75.2) | - Total assets decreased by $75.2 million from January 1, 2023, to April 2, 2023, primarily driven by a reduction in cash and equivalents and trade accounts receivable[17] - Total current liabilities decreased by $77.9 million, mainly due to reductions in accounts payable and accrued liabilities, and accrued payroll and related taxes[20] Consolidated Statements of Stockholders' Equity Stockholders' equity slightly decreased due to share repurchases and dividends, partially offset by net earnings Consolidated Statements of Stockholders' Equity (13 Weeks Ended) | Metric | April 2, 2023 (Millions $) | April 3, 2022 (Millions $) | | :--- | :--- | :--- | | Balance at beginning of period (2023) | 1,254.2 | 1,273.5 | | Net earnings (loss) | 10.9 | (47.6) | | Dividends | (2.8) | (1.9) | | Purchase of treasury stock | (18.3) | — | | Other comprehensive income (loss), net of tax | 2.3 | 13.0 | | Stockholders' Equity at end of period | 1,247.8 | 1,273.5 | - Stockholders' equity decreased slightly to $1,247.8 million by April 2, 2023, primarily due to treasury stock repurchases and dividend payments, partially offset by net earnings and other comprehensive income[23] Consolidated Statements of Cash Flows Operating cash usage improved significantly, while investing activities shifted from a source to a use of cash Consolidated Statements of Cash Flows (13 Weeks Ended) | Activity | April 2, 2023 (Millions $) | April 3, 2022 (Millions $) | | :--- | :--- | :--- | | Net cash used in operating activities | (13.5) | (106.1) | | Net cash (used in) from investing activities | (2.2) | 257.1 | | Net cash used in financing activities | (24.8) | (30.7) | | Net change in cash, cash equivalents and restricted cash | (41.3) | 118.6 | | Cash, cash equivalents and restricted cash at end of period | 121.1 | 238.1 | - Net cash used in operating activities significantly decreased from $106.1 million in Q1 2022 to $13.5 million in Q1 2023, primarily due to decreased working capital requirements and lower accounts receivable[25][166] - Investing activities shifted from generating $257.1 million in Q1 2022 (due to asset sales) to using $2.2 million in Q1 2023, reflecting capital expenditures and the absence of large asset sale proceeds[25][169] Notes to Consolidated Financial Statements These notes provide detailed explanations of accounting policies and financial statement components 1. Basis of Presentation The unaudited statements are prepared in accordance with GAAP and include all necessary interim adjustments - The unaudited consolidated financial statements are prepared in accordance with Rule 10-01 of Regulation S-X and GAAP, with all necessary adjustments for fair interim period statements[30] 2. Revenue Revenue performance varied by segment, with strong growth in Education offset by declines in International and P&I Revenue Disaggregated by Service Type (First Quarter, in millions of dollars) | Segment | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Professional & Industrial | 389.8 | 444.3 | (12.3)% | | Science, Engineering & Technology | 306.4 | 317.1 | (3.4)% | | Education | 249.4 | 173.4 | 43.9% | | Outsourcing & Consulting | 114.6 | 109.1 | 5.0% | | International | 211.8 | 252.8 | (16.2)% | | Total Revenue from Services | 1,268.3 | 1,296.4 | (2.2)% | Revenue Disaggregated by Geography (First Quarter, in millions of dollars) | Region | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Americas | 1,047.7 | 1,033.6 | 1.4% | | Europe | 209.7 | 252.0 | (16.8)% | | Asia-Pacific | 10.9 | 10.8 | 0.9% | | Total Kelly Services, Inc. | 1,268.3 | 1,296.4 | (2.2)% | - Education segment revenue increased by 43.9% due to increased demand and the acquisition of PTS[35][135] - International revenue decreased by 16.2%, primarily due to the sale of Russian operations[35][137] 3. Credit Losses The allowance for credit losses on trade accounts receivable remained relatively stable year-over-year Allowance for Credit Losses (First Quarter, in millions of dollars) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Beginning balance | 7.7 | 9.4 | | Current period provision | 0.8 | 0.4 | | Currency exchange effects | 0.1 | (0.1) | | Write-offs | (0.8) | (1.2) | | Ending balance | 7.8 | 8.5 | - The allowance for credit losses for trade accounts receivable remained relatively stable, ending at $7.8 million in Q1 2023 compared to $8.5 million in Q1 2022[43] 4. Acquisitions and Disposition Recent acquisitions in Education and OCG contributed to revenue, while the sale of Russian operations impacted International results - Acquired Pediatric Therapeutic Services (PTS) in May 2022 for $82.1 million, expanding Education's K-12 and therapeutic services, contributing $15.8 million in revenue in Q1 2023[45][46] - Acquired RocketPower in March 2022 for $59.3 million, enhancing OCG's RPO solutions, contributing $2.6 million in revenue but a loss of $2.6 million from operations in Q1 2023[45][47] - Sold Russia operations in July 2022, impacting the International segment's revenue[50] 5. Investment in Persol Holdings The sale of the Persol Holdings investment in Q1 2022 resulted in a significant one-time loss - In February 2022, the Company sold its investment in Persol Holdings for $196.9 million, resulting in a $67.2 million loss in Q1 2022, which included fair value changes and transaction costs[53] - Following the sale, the Kelly Services Japan, Inc. subsidiary was liquidated, leading to a $20.4 million cumulative translation adjustment loss in Q1 2022[54] 6. Investment in PersolKelly Pte. Ltd. The company divested most of its stake in the PersolKelly joint venture in Q1 2022 - In March 2022, the Company sold 95% of its shares in the PersolKelly Pte. Ltd. joint venture for $119.5 million, realizing a $1.9 million gain offset by reclassification adjustments[55] - The remaining 2.5% ownership interest is now accounted for as an equity investment without a readily determinable fair value, totaling $6.4 million as of Q1 2023[58] 7. Fair Value Measurements Fair value assets primarily consist of money market funds, which decreased significantly during the quarter Assets and Liabilities Measured at Fair Value (in millions of dollars) | Description | April 2, 2023 (Total Level 1) | January 1, 2023 (Total Level 1) | | :--- | :--- | :--- | | Money market funds | 54.1 | 108.3 | | Brazil indemnification | (3.5) | (3.4) | | Greenwood/Asher earnout | — | (3.3) | | RocketPower earnout | — | — | - Money market funds, primarily Level 1 assets, decreased from $108.3 million at year-end 2022 to $54.1 million at Q1 2023[62] - The Greenwood/Asher earnout liability of $3.3 million was paid in Q1 2023, and the RocketPower earnout liability was reassessed to zero in Q3 2022[66][67] 8. Restructuring Restructuring costs increased significantly in Q1 2023 due to cost management and business repositioning efforts Restructuring Costs Incurred (First Quarter, in millions of dollars) | Segment | 2023 Total | 2022 Total | | :--- | :--- | :--- | | Professional & Industrial | 3.0 | 0.3 | | Science, Engineering & Technology | 0.5 | — | | Education | 0.1 | 0.4 | | Outsourcing & Consulting | 0.6 | 0.2 | | International | 0.6 | — | | Corporate | 0.9 | 0.8 | | Total | 5.7 | 1.7 | - Restructuring costs in Q1 2023 totaled $5.7 million, a significant increase from $1.7 million in Q1 2022, primarily due to cost management efforts and repositioning of the P&I staffing business[70][71] - The remaining restructuring accrual balance as of Q1 2023 was $5.0 million, mainly for severance costs, expected to be paid by year-end 2023[73] 9. Accumulated Other Comprehensive Income (Loss) The accumulated other comprehensive loss improved due to positive foreign currency translation adjustments Changes in Accumulated Other Comprehensive Income (Loss) (First Quarter, in millions of dollars) | Component | 2023 Ending Balance | 2022 Ending Balance | | :--- | :--- | :--- | | Foreign currency translation adjustments | (5.1) | (12.0) | | Pension liability adjustments | (1.1) | (2.7) | | Total accumulated other comprehensive income (loss) | (6.2) | (14.7) | - Accumulated other comprehensive income (loss) improved from $(14.7) million in Q1 2022 to $(6.2) million in Q1 2023, driven by positive foreign currency translation adjustments[75] 10. Earnings (Loss) Per Share Earnings per share returned to profitability in Q1 2023, a significant improvement from the prior-year loss Earnings (Loss) Per Share (First Quarter, in millions of dollars except per share data) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net earnings (loss) available to common shareholders | 10.7 | (47.6) | | Basic earnings (loss) per share | 0.29 | (1.23) | | Diluted earnings (loss) per share | 0.29 | (1.23) | | Average shares outstanding (millions): Basic | 37.1 | 38.6 | | Average shares outstanding (millions): Diluted | 37.4 | 38.6 | - Basic and diluted EPS improved significantly to $0.29 in Q1 2023 from a loss of $1.23 in Q1 2022[78] - The Company repurchased 1,099,728 Class A shares for $18.3 million in Q1 2023 under a $50.0 million program, with $23.9 million remaining available[79] 11. Stock-Based Compensation Stock compensation expense increased year-over-year, with new performance share awards granted in the quarter Stock Compensation Expense and Tax Benefit (First Quarter, in millions of dollars) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Stock compensation expense | 3.1 | 2.1 | | Related tax benefit | 0.3 | 0.3 | - Stock compensation expense increased to $3.1 million in Q1 2023 from $2.1 million in Q1 2022[80] - New performance share awards were granted in Q1 2023, contingent on revenue growth and EBITDA margin goals over three one-year periods (2023-2025)[81] 12. Sale of Assets A property sale in the prior-year quarter contributed a small one-time gain - In January 2022, the Company sold a property for $0.9 million, resulting in a $0.9 million gain recorded in Q1 2022[89] 13. Other Income (Expense), Net Other income decreased due to a shift from foreign exchange gains to losses Other Income (Expense), Net (First Quarter, in millions of dollars) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Interest income | 1.4 | 0.1 | | Interest expense | (0.8) | (0.6) | | Foreign exchange gains (losses) | (0.7) | 4.7 | | Other | 2.1 | (1.4) | | Other income (expense), net | 2.0 | 2.8 | - Other income (expense), net decreased to $2.0 million in Q1 2023 from $2.8 million in Q1 2022, primarily due to a shift from foreign exchange gains to losses and a one-time gain from an investment receipt in 2023[91] 14. Income Taxes The company recorded an income tax expense in Q1 2023, compared to a significant tax benefit in the prior year - Income tax expense was $1.8 million in Q1 2023, compared to a benefit of $13.0 million in Q1 2022, with the prior-year benefit largely driven by the loss on the Persol Holdings investment[92] - The Company may release a $5.7 million valuation allowance for its German business in the near term due to sustained profitability[94] 15. Contingencies The accrual for litigation costs increased, with a defined range of reasonably possible additional losses - The Company is involved in ongoing litigation and claims, with a gross accrual for litigation costs of $4.7 million at Q1 2023, up from $2.3 million at year-end 2022[97][98] - The estimated aggregate range of reasonably possible losses, in excess of amounts accrued, is $0.1 million to $2.8 million as of Q1 2023[100] 16. Segment Disclosures Segment results show strong growth in Education, while Professional & Industrial and International segments faced declines Revenue from Services by Segment (First Quarter, in millions of dollars) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Professional & Industrial | 389.8 | 444.3 | | Science, Engineering & Technology | 306.4 | 317.1 | | Education | 249.4 | 173.4 | | Outsourcing & Consulting | 114.6 | 109.1 | | International | 211.8 | 252.8 | | Consolidated Total | 1,268.3 | 1,296.4 | Earnings (Loss) from Operations by Segment (First Quarter, in millions of dollars) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Professional & Industrial | 2.3 | 11.7 | | Science, Engineering & Technology | 18.5 | 20.6 | | Education | 15.5 | 8.0 | | Outsourcing & Consulting | 1.1 | 3.0 | | International | (0.3) | 4.6 | | Corporate | (26.4) | (24.5) | | Consolidated Total | 10.7 | 23.4 | - Education segment showed strong growth in both revenue (43.9%) and earnings from operations (93.6%), while Professional & Industrial and International segments experienced declines[105][107] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 performance, highlighting specialty solutions growth amid headwinds and a new transformation initiative Executive Overview The company is focused on profitable growth through specialty solutions and a new transformation initiative - The Company is committed to profitable growth despite macroeconomic and labor market headwinds, with specialty solutions showing resilience[109] - A comprehensive transformation initiative has been launched to optimize business and functional operations, unlock value, and accelerate profitable growth, with a focus on improving EBITDA margin[112][113][116] - Key Q1 highlights include significant top-line growth in Education, resilient revenue and gross profit growth in higher-margin outcome-based solutions (P&I and SET), and proactive expense management[115] Financial Measures The company utilizes various non-GAAP and operational metrics to analyze business performance - Constant currency (CC) measures are used to analyze performance without distortion from currency fluctuations, serving as non-GAAP supplements[114][115] - Return on sales, conversion rate, EBITDA, EBITDA margin, and Days Sales Outstanding (DSO) are key metrics used to measure operating efficiency and cash flow generation[117][118][119] Results of Operations - Total Company Total company revenue and operating earnings declined, though the gross profit rate saw a slight improvement Total Company Financial Results (First Quarter, in millions of dollars) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Revenue from services | 1,268.3 | 1,296.4 | (2.2)% | | Gross profit | 254.1 | 258.6 | (1.7)% | | Total SG&A expenses | 243.4 | 236.1 | 3.1% | | Earnings (loss) from operations | 10.7 | 23.4 | (54.4)% | | Net earnings (loss) | 10.9 | (47.6) | NM | | Gross profit rate | 20.0% | 19.9% | 0.1 pts. | - Revenue from services decreased by 2.2% (1.4% in constant currency), primarily due to declines in P&I, International, and SET, partially offset by growth in Education and OCG[122] - Gross profit rate increased by 10 basis points to 20.0%, driven by a favorable product mix and higher-margin acquisitions, despite a decrease in permanent placement revenue[123] - Earnings from operations declined by 54.4% to $10.7 million, mainly due to a $5.7 million restructuring charge in Q1 2023 and lower revenue[124][125] Operating Results By Segment Segment performance was mixed, with Education showing strong growth while P&I and International faced significant declines Revenue from Services by Segment (First Quarter, in millions of dollars) | Segment | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Professional & Industrial | 389.8 | 444.3 | (12.3)% | | Science, Engineering & Technology | 306.4 | 317.1 | (3.4)% | | Education | 249.4 | 173.4 | 43.9% | | Outsourcing & Consulting | 114.6 | 109.1 | 5.0% | | International | 211.8 | 252.8 | (16.2)% | Gross Profit Rate by Segment (First Quarter) | Segment | 2023 | 2022 | Change (pts.) | | :--- | :--- | :--- | :--- | | Professional & Industrial | 17.9% | 18.7% | (0.8) | | Science, Engineering & Technology | 23.3% | 23.3% | — | | Education | 15.8% | 15.3% | 0.5 | | Outsourcing & Consulting | 36.3% | 34.2% | 2.1 | | International | 15.2% | 15.0% | 0.2 | Earnings (Loss) from Operations by Segment (First Quarter, in millions of dollars) | Segment | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Professional & Industrial | 2.3 | 11.7 | (80.0)% | | Science, Engineering & Technology | 18.5 | 20.6 | (10.2)% | | Education | 15.5 | 8.0 | 93.6% | | Outsourcing & Consulting | 1.1 | 3.0 | (63.7)% | | International | (0.3) | 4.6 | NM | | Corporate | (26.4) | (25.4) | (4.3)% | - Education revenue surged 43.9% (34.8% organic) and earnings from operations increased 93.6%, benefiting from the PTS acquisition and improved demand[135][159] - Professional & Industrial revenue decreased 12.3% due to lower staffing hours, leading to an 80.0% drop in earnings from operations[133][157] - International segment reported a loss of $0.3 million, down from $4.6 million earnings, primarily due to the sale of Russian operations and lower hours volume in key European markets[137][161] Financial Condition The company's short-term liquidity improved, with better working capital management and a higher current ratio - Cash, cash equivalents, and restricted cash decreased to $121.1 million at Q1 2023 from $162.4 million at year-end 2022[165] - Net cash used in operating activities improved significantly to $13.5 million in Q1 2023 from $106.1 million in Q1 2022, driven by decreased working capital requirements and lower accounts receivable[166] - Global Days Sales Outstanding (DSO) improved to 59 days at Q1 2023 from 61 days at year-end 2022 and 62 days at Q1 2022[167] - The current ratio improved to 1.6 at Q1 2023 from 1.5 at year-end 2022, indicating improved short-term liquidity[168] New Accounting Pronouncements Recently issued accounting pronouncements are not expected to materially impact the financial statements - Management believes recently issued accounting pronouncements will not have a significant impact on the consolidated financial statements[172] Critical Accounting Estimates The company's critical accounting estimates remain consistent with those disclosed in the 2022 Form 10-K - For critical accounting estimates, the Company refers to the disclosures in its 2022 Form 10-K[173] Contractual Obligations and Commercial Commitments There were no significant changes to contractual obligations from the 2022 Form 10-K - There were no significant changes to contractual obligations and commercial commitments from those disclosed in the 2022 Form 10-K[174] Liquidity The company maintains sufficient liquidity through cash flow, available cash, and credit facilities - The Company expects to meet cash requirements through operating cash flow, available cash, securitization of receivables, and committed unused credit facilities[175] - As of Q1 2023, the Company had $200.0 million available on its revolving credit facility and $100.6 million available on its $150.0 million securitization facility[177] - The Company expects to use $23.9 million for Class A common stock repurchases during 2023 under the $50.0 million plan approved in November 2022[178] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks from foreign currency and interest rates are not expected to be material - The Company is exposed to foreign currency risk, but local currency operations provide a natural hedge against currency fluctuations[184] - Interest rate risk from credit lines is not expected to have a material impact on Q1 2023 earnings from a hypothetical 10% fluctuation[185] - Market risk from the nonqualified deferred compensation plan is mitigated by investments in company-owned variable universal life insurance policies[186] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - The CEO and CFO concluded that the Company's disclosure controls and procedures are effective at a reasonable assurance level[187] - No material changes occurred in the Company's internal control over financial reporting during the most recent fiscal quarter[188] PART II. OTHER INFORMATION Item 1. Legal Proceedings Ongoing legal matters are not expected to have a material adverse effect on the company's financial condition - The Company is continuously engaged in litigation, claims, audits, or investigations in the ordinary course of business[190] - Accruals for loss contingencies are recorded when probable and estimable, and insurance coverage may cover certain losses[190] - Resolution of pending legal matters is not expected to have a material adverse effect on the Company's financial condition, results of operations, or cash flows[191] Item 1A. Risk Factors There have been no material changes to the company's risk factors since the last annual report - No material changes in the Company's risk factors have occurred since the 2022 Form 10-K filing[193] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company continued its share repurchase program during the first quarter of 2023 Issuer Repurchases of Equity Securities (First Quarter 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Dollar Value Remaining Under Program (in millions of dollars) | | :--- | :--- | :--- | :--- | | January 2, 2023 through February 5, 2023 | 314,017 | 17.35 | 36.8 | | February 6, 2023 through March 5, 2023 | 306,582 | 17.30 | 32.5 | | March 6, 2023 through April 2, 2023 | 544,713 | 16.09 | 23.9 | | Total | 1,165,312 | 16.75 | | - The Company repurchased 1,099,728 Class A common shares for $18.3 million in Q1 2023 under a $50.0 million program, with $23.9 million remaining available[79][195] Item 3. Defaults Upon Senior Securities This item is not applicable as there were no defaults upon senior securities - This item is not applicable[196] Item 4. Mine Safety Disclosures This item is not applicable as the company has no mine safety disclosures - This item is not applicable[197] Item 5. Other Information This item is not applicable as there is no other information to report - This item is not applicable[198] Item 6. Exhibits This section lists the exhibits filed with the report, including certifications and XBRL data - The section lists various exhibits, including certifications (31.1, 31.2, 32.1, 32.2) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[201] SIGNATURES - The report is signed by Olivier G. Thirot, Executive Vice President and Chief Financial Officer, and Laura S. Lockhart, Vice President, Corporate Controller and Chief Accounting Officer, on May 11, 2023[204]