Kelly Services(KELYB) - 2021 Q4 - Annual Report

Part I Business Overview Kelly Services, Inc. is a global specialty talent solutions company, realigned into five segments in 2020, serving a diverse customer base and facing intense competition - In 2020, Kelly Services assigned nearly 370,000 temporary employees to customers worldwide and served 75 of the Fortune 100™ companies[16][17] - The company's largest single customer accounted for approximately 5% of total revenue in 2020, while the largest 100 customers contributed an estimated 53%[31] - Working capital needs are significant as customer payments lag employee payroll, with Days Sales Outstanding (DSO) at 64 days as of January 3, 2021[30] - The company competes in a highly fragmented industry against major players like Randstad, Adecco Group, ManpowerGroup Inc., Recruit Holdings, and Allegis Group[33] Company Business Segments (as of 2020) | Segment | Description | | :--- | :--- | | Professional & Industrial | Staffing, outcome-based, and direct-hire services for office, professional, light industrial, and contact center specialties in the U.S. and Canada | | Science, Engineering & Technology | Staffing, outcome-based, and direct-hire services for science, clinical research, engineering, IT, and telecommunications specialties, mainly in the U.S. and Canada | | Education | Staffing, direct-hire, and executive search for K-12, early childhood, and higher education markets in the U.S. | | Outsourcing & Consulting | Delivers Managed Service Provider (MSP), Recruitment Process Outsourcing (RPO), and Payroll Process Outsourcing (PPO) services globally | | International | Staffing and direct-hire services in 15 countries in Europe, as well as Mexico | Risk Factors The company faces significant macroeconomic, competitive, strategic, operational, and regulatory risks, including the impact of COVID-19, intense industry competition, and concentrated voting control - The COVID-19 outbreak has negatively impacted business, with decreased customer demand for staffing services, especially in the Education segment due to school closures, with the duration and extent of the impact remaining uncertain[57][58][59] - The company operates in a highly competitive market with low barriers to entry, facing pressure from larger competitors like Randstad and Adecco, as well as emerging online platforms[63] - Technological advances such as automation, robotics, and AI may disrupt the labor market and weaken demand for human capital, posing a risk to the staffing industry[65] - The Terence E. Adderley Revocable Trust K is the controlling stockholder, holding approximately 91.6% of the outstanding Class B voting shares, giving it the ability to elect or remove all directors[101] - The company's bank credit facilities contain financial covenants, and failure to meet them could result in lenders declaring all outstanding borrowings due and payable[111] Properties The company's headquarters is in Troy, Michigan, with other operations in leased facilities, and most employees worked remotely in 2020 due to COVID-19 - The company's headquarters is in Troy, Michigan, with other U.S. and international operations in leased facilities, and most internal employees worked remotely in 2020 due to COVID-19[113] Legal Proceedings The company is involved in routine litigation, including a $300,000 secondary liability from a Hungarian Competition Authority decision, with no expected material adverse financial impact - The company is subject to ordinary course litigation, including a fine from the Hungarian Competition Authority with the company's secondary liability being approximately $300,000[116] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A and B common stock trade on NASDAQ, with dividends suspended in 2020 due to COVID-19, and its five-year performance graph shows underperformance against the S&P SmallCap 600 Quarterly Stock Price and Dividend Data (2020 vs. 2019) | Year | Quarter | Class A High ($) | Class A Low ($) | Dividends/Share ($) | | :--- | :--- | :--- | :--- | :--- | | 2020 | Q1 | 22.77 | 10.13 | 0.075 | | | Q2 | 18.18 | 11.01 | — | | | Q3 | 19.89 | 13.55 | — | | | Q4 | 23.00 | 15.56 | — | | 2019 | Q1 | 25.63 | 20.00 | 0.075 | | | Q2 | 26.39 | 22.03 | 0.075 | | | Q3 | 28.91 | 23.50 | 0.075 | | | Q4 | 25.09 | 20.74 | 0.075 | - The company suspended its quarterly dividend in May 2020 due to the uncertainty surrounding the COVID-19 crisis[143] Five-Year Cumulative Total Return Comparison | Investment | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Kelly Services, Inc. | $100.00 | $144.09 | $173.74 | $132.06 | $147.41 | $134.81 | | S&P SmallCap 600 Index | $100.00 | $126.56 | $143.30 | $131.15 | $161.03 | $179.20 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A details the significant COVID-19 impact on 2020 financial performance, including a 15.7% revenue decline, net loss, and a $147.7 million goodwill impairment, offset by increased operating cash flow from cost-saving measures and CARES Act benefits Executive Overview The Executive Overview highlights the COVID-19 impact on 2020 performance, leading to cost-saving measures, a $147.7 million goodwill impairment, and a strategic realignment into five specialty business units - In response to the COVID-19 crisis in April 2020, the company implemented significant cost-saving measures, including a 10% pay cut for salaried employees, reduced executive compensation, furloughs, and suspension of the company match to certain retirement accounts[141][145] - The Board of Directors suspended the quarterly dividend effective May 2020 due to the uncertainty surrounding the pandemic[143] - A decline in the company's common stock price triggered an interim goodwill impairment test, resulting in a $147.7 million non-cash charge in the first quarter of 2020[147] - The company reorganized its business into five distinct reporting segments to focus on high-margin, higher-value specialties: Professional & Industrial, Science, Engineering & Technology, Education, Outsourcing & Consulting, and International[149] Results of Operations In fiscal year 2020, total revenue decreased 15.7% to $4.5 billion, resulting in a $93.6 million operating loss and a $72.0 million net loss, primarily due to COVID-19 and a $147.7 million goodwill impairment, with all segments experiencing declines, notably Education at 36.3% Total Company Financial Summary (2020 vs. 2019) | Metric | 2020 (53 Weeks) | 2019 (52 Weeks) | % Change | | :--- | :--- | :--- | :--- | | Revenue from services | $4,516.0 M | $5,355.6 M | (15.7)% | | Gross profit | $827.6 M | $968.4 M | (14.5)% | | Earnings (loss) from operations | ($93.6) M | $81.8 M | NM | | Net earnings (loss) | ($72.0) M | $112.4 M | NM | - The 2020 operating loss was primarily driven by a $147.7 million goodwill impairment charge taken in the first quarter[164][166] Segment Revenue Performance (2020 vs. 2019) | Segment | 2020 Revenue | 2019 Revenue | % Change | | :--- | :--- | :--- | :--- | | Professional & Industrial | $1,858.4 M | $2,213.4 M | (16.0)% | | Science, Engineering & Technology | $1,019.1 M | $1,131.8 M | (9.9)% | | Education | $286.9 M | $450.7 M | (36.3)% | | Outsourcing & Consulting | $363.5 M | $377.7 M | (3.8)% | | International | $988.6 M | $1,182.5 M | (16.4)% | - The Education segment's significant revenue decline was due to temporary school closures, delayed starts, and the use of virtual or hybrid instructional models, which reduced demand[185] Financial Condition, Liquidity and Capital Resources The company's liquidity strengthened in 2020, with cash increasing to $228.1 million driven by $186.0 million in operating cash flow, aided by a $117.0 million CARES Act payroll tax deferral and reduced working capital, despite Global DSO rising to 64 days - Cash, cash equivalents, and restricted cash increased significantly to $228.1 million at year-end 2020, compared to $31.0 million at year-end 2019[232] - Net cash from operating activities was $186.0 million in 2020, a substantial increase from $102.2 million in 2019, primarily due to the deferral of $117.0 million in payroll tax payments permitted by the CARES Act[233] - Global Days Sales Outstanding (DSO) increased to 64 days in 2020 from 58 days in 2019, attributed to some customers taking full payment terms and a shift in customer mix[234] - At year-end 2020, the company had $200.0 million of available capacity on its revolving credit facility and $97.0 million on its securitization facility, providing substantial liquidity[246] Critical Accounting Estimates Critical accounting estimates include Workers' Compensation, Business Combinations, Income Taxes, and Goodwill impairment, with the latter being significant in 2020 due to a $147.7 million impairment charge that wrote off the entire goodwill balance - The accrual for workers' compensation is a critical estimate, utilizing actuarial methods, with the net accrual being $54.6 million at year-end 2020[254][321] - Goodwill is tested for impairment annually or when a triggering event occurs, with a significant decline in market capitalization in Q1 2020 being a triggering event[261][264] - The interim goodwill impairment test in Q1 2020 resulted in a non-cash charge of $147.7 million, which wrote off the entire goodwill balance of the company's reporting units at that time[264] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks including foreign currency, interest rate, and market and currency risk from its investment in Persol Holdings, which is marked to market through net earnings and can cause material fluctuations - The company is exposed to market and currency risks on its investment in Persol Holdings, which is marked to market through net earnings and may have a material impact[276] Financial Statements and Supplementary Data This section presents the consolidated financial statements for 2020, 2019, and 2018, along with PricewaterhouseCoopers LLP's unqualified auditor's report, which identifies Workers' Compensation and Goodwill Impairment as Critical Audit Matters, and detailed notes on accounting policies and financial components Auditor's Report and Management's Report on Internal Control Management and PricewaterhouseCoopers LLP concluded that internal control over financial reporting was effective, with the auditor issuing an unqualified opinion and identifying Workers' Compensation and Goodwill Impairment as Critical Audit Matters - Management and the independent auditor, PricewaterhouseCoopers LLP, concluded that the company's internal control over financial reporting was effective as of January 3, 2021[306][312] - The auditor's report identified two Critical Audit Matters: Workers' Compensation and the Goodwill Impairment Assessment for the Americas Staffing and Global Talent Solutions reporting units[320] Consolidated Financial Statements The consolidated financial statements for fiscal 2020 show revenue of $4.52 billion, a net loss of $72.0 million, diluted loss per share of $1.83, total assets of $2.56 billion, and a $197.1 million net increase in cash from operations Key Financial Statement Data (Fiscal Year 2020) | Metric | Amount | | :--- | :--- | | Statement of Earnings | | | Revenue from services | $4,516.0 M | | Net loss | ($72.0) M | | Diluted loss per share | ($1.83) | | Balance Sheet (at Jan 3, 2021) | | | Total Assets | $2,561.9 M | | Total Liabilities | $1,358.9 M | | Total Stockholders' Equity | $1,203.0 M | | Cash Flow Statement | | | Net cash from operating activities | $186.0 M | | Net change in cash | $197.1 M | Notes to Consolidated Financial Statements The notes detail financial results and accounting policies, including revenue disaggregation, 2020 acquisitions and divestitures, the $147.7 million goodwill impairment, debt facilities, and recast segment disclosures for the new five-segment operating model - In 2020, the company acquired Insight Workforce Solutions for $34.5 million and Greenwood/Asher & Associates for $3.5 million, and sold its Brazil operations for $1.4 million[422][425][438] - A goodwill impairment charge of $147.7 million was recorded in Q1 2020, writing off the entire goodwill balance of the Americas Staffing and Global Talent Solutions reporting units[469] - The company's new five-segment structure was adopted in Q3 2020, with prior period segment results recast for comparability, and corporate expenses, including the goodwill impairment charge, reported separately[569][571][572] Part III Directors, Executive Officers, Compensation, Security Ownership, and Principal Accountant Fees This section incorporates information from the 2021 proxy statement, including executive officers, the Code of Business Conduct and Ethics, and details on securities authorized for issuance under equity compensation plans - Most information required by Part III, including details on directors, executive compensation, and certain relationships, is incorporated by reference from the company's forthcoming proxy statement[288] - As of January 3, 2021, the company's executive officers included Peter W. Quigley (President and CEO) and Olivier G. Thirot (EVP and CFO)[289] - As of fiscal year-end 2020, there were 3,313,249 securities remaining available for future issuance under equity compensation plans approved by security holders[294] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K report, including Management's Report on Internal Control, the Independent Auditor's Report, and consolidated financial statements and notes - This section provides an index of all financial statements, schedules, and exhibits filed with the report, including consents of experts and certifications[298][300]