KELLY SERVICES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Executive Overview The COVID-19 pandemic, including the delta variant, related containment measures and the subsequent economic recovery have resulted in ongoing shifts in most aspects of the economy and how professional and private lives are conducted. While the pace of change has been unprecedented and the resulting impacts are still being determined, our Noble Purpose, “We connect people to work in ways that enrich their lives,” will continue to guide our strategy and actions. As we navigate a world of work now impacted by these changes, we will continue to demonstrate our expected behaviors and actions: • Employ a talent-first mentality • Relentlessly deliver for customers • Grow through discipline and focus • Deliver efficiency and effectiveness in everything we do Kelly remains committed to being a leading talent solutions provider among the talent with whom we choose to specialize and in the global markets in which we choose to compete. By aligning ourselves with our Noble Purpose and executing against these behaviors, we have navigated the challenges of the pandemic and are emerging as a more agile and focused organization, prepared to achieve new levels of growth and profitability as we further develop our portfolio of specialty businesses. The Talent Solutions Industry Prior to the COVID-19 pandemic, labor markets were in the midst of change due to automation, secular shifts in labor supply and demand, and skills gaps, and the current economic situation is accelerating that change. Global demographic trends are reshaping and redefining the way in which companies find and use talent, and the COVID-19 pandemic is changing where and how companies expect work to be performed. In response, the talent solutions industry is adjusting how it sources, recruits, trains and places talent. Our industry is evolving to meet businesses’ growing demand for specialized talent, whether delivered as a single individual or as part of a total workforce solution. Companies in our industry are using novel sourcing approaches—including gig platforms, independent contractors and other talent pools—to create customized workforce solutions that are flexible and responsive to the labor market. In addition, today’s companies are elevating their commitment to talent, with the growing realization that meeting the changing needs and requirements of talent is essential to remain competitive. The ways in which people view, find and conduct work are undergoing fundamental shifts. And as the demand for skilled talent continues to climb, workers’ changing ideas about the integration of work into life are becoming more important. In this increasingly talent-driven market, a diverse set of workers empowered by technology is seeking to take greater control over their career trajectories, and Kelly’s Talent Promise confirms our responsibility to workers in search of a better way to work. Our Business Kelly is a talent and global workforce solutions company serving customers of all sizes in a variety of industries. We offer innovative outsourcing and consulting services, as well as staffing on a temporary and direct-hire basis. In 2020, we adopted the Kelly Operating Model and realigned our business into five specialty business units which are also our reportable segments. • Professional & Industrial – delivers staffing, outcome-based and direct-hire services focused on office, professional, light industrial and contact center specialties in the U.S. and Canada, including our KellyConnect product • Science, Engineering & Technology – delivers staffing, outcome-based and direct-hire services focused on science and clinical research, engineering, information technology and telecommunications specialties predominantly in the U.S. and Canada and includes our NextGen and Global Technology Associates subsidiaries, as well as our Softworld, Inc. ("Softworld") subsidiary as of the beginning of the second quarter of 2021 29 • Education – delivers staffing, direct-hire and executive search services to the K-12, early childhood and higher education markets in the U.S., and includes several acquisitions: Teachers On Call, Insight Workforce Solutions and Greenwood/Asher & Associates • Outsourcing & Consulting – delivers Master Service Provider ("MSP"), Recruitment Process Outsourcing ("RPO"), Payroll Process Outsourcing ("PPO") and Advisory Services to customers on a global basis • International – operates in Mexico and 15 European countries where it delivers staffing, RPO and direct-hire services In addition, we provide staffing services to customers in the Asia-Pacific region through PersolKelly Pte. Ltd., our joint venture with Persol Asia Pacific Pte. Ltd, a wholly owned subsidiary of Persol Holdings, a leading provider of HR solutions in Japan. We earn revenues from customers that procure the services of our temporary employees on a time and materials basis, that use us to recruit permanent employees, and that rely on our talent advisory and outsourcing services. Our working capital requirements are primarily generated from temporary employee payroll and customer accounts receivable. The nature of our business is such that trade accounts receivable are our most significant asset. Average days sales outstanding varies within and outside the U.S. and was 63 days on a global basis as of the end of the third quarter of 2021 and 64 days as of the end of 2020. Since receipts from customers generally lag temporary employee payroll, working capital requirements increase substantially in periods of growth and decline in periods of economic contraction. Our Perspective Looking Back The impacts of COVID-19 on the global economy, the talent solutions industry, our customers and our talent became clearer as 2020 progressed. Beginning in mid-March 2020, our year-over-year revenues declined swiftly and substantially as governments and businesses reacted to the crisis. In response, in April 2020 we took a series of proactive steps to reduce spending, minimize layoffs, and bolster the strength and flexibility of Kelly’s finances. These actions included salary reductions for full-time salaried employees, including reduced CEO and senior leader compensation, temporary furloughing and/or redeployment of some employees. Our actions generated substantial cost savings and allowed us the time necessary to assess the variety of impacts the crisis had on our business. Most actions were in place until early in the fourth quarter of 2020. In addition, we benefited in 2020 from CARES Act provisions allowing deferral of employer social security tax payments. In connection with expiration of the temporary cost reduction measures noted above, management reduced staffing levels to align with expected revenue levels and recorded restructuring charges of $4.4 million for severance and related benefits for impacted employees in the fourth quarter of 2020. Given the level of uncertainty surrounding the duration of the COVID-19 crisis, Kelly’s board also voted to suspend the quarterly dividend in May 2020 and continued to assess economic and business conditions to determine future actions with respect to our dividend policy. The negative market reaction to the COVID-19 crisis in March 2020 also resulted in a decline in our common stock price which caused our market capitalization to decline significantly at the end of the first quarter of 2020. This triggered an interim goodwill impairment test and resulted in a $147.7 million non-cash goodwill impairment charge in the first quarter of 2020. Short Term The early months of 2021 brought optimism for a slow but steady, sustained recovery. With that optimism, in August 2021 the Board of Directors reinstated the dividend at $0.05 per share. In the second quarter of 2021, as we passed the one-year anniversary of the crisis, it became apparent that progress would be slower than originally anticipated. Several headwinds continued throughout the third quarter, including the delta variant and its impact on talent availability and business operations, as well as ongoing global supply chain disruptions and uncertainty over vaccination requirements. Despite these challenges, Kelly’s year-over-year revenue growth in the second and third quarters points to a continuation of the underlying recovery. We expect that demand for our services will continue to gradually recover from the economic slowdown and the effects of customer and talent concerns related to operating safely during a pandemic. The impact on the revenues of each segment will vary, given the differences in pandemic-related measures enacted in each geography, the customer industries served and the availability of the talent provided to our customers. We are proactively taking steps to address talent shortages and mismatches in our 30 businesses that were most impacted by the pandemic, including implementing new technologies, streamlining processes, adopting efficient recruiting models and collaborating with clients on innovative approaches to attract and retain talent. We currently expect a gradual return to pre-crisis levels of customer demand; however, the pace of such a return may be delayed if a resurgence in infections leads to additional containment measures, disruptions including the ongoing global supply chain disruption, or increased lack of available talent to match our customers’ demand. As 2021 progresses and we enter 2022, we expect that our revenue will reflect a continued gradual improvement in demand and result in continued improvements in year-over-year gross profit and earnings from operations. In November 2021, the Company initiated a series of cost management actions primarily designed to increase operational efficiencies within enterprise functions that provide centralized support to our operating units. The actions are designed to align expenses with current expectations for top-line growth. As a result, a restructuring charge of $3.5 to $4.5 million will be recorded in the 2021 fourth quarter, with expected expense savings of at least $10 million on an annual basis beginning in the first quarter of 2022. Moving Forward While the continuing economic and labor market recovery cannot be precisely predicted, we believe that the mid-term impacts on how people view, find and conduct work will continue to align with our strategic path. As a result, we have continued to move forward with our specialization strategy, reinventing our operating model and reorganizing our business into five distinct reporting segments. These specialties represent areas where we see the most robust demand, the most promising growth opportunities, and where we believe we excel in attracting and placing talent. Our current operating segments also reflect our desire to shift our portfolio toward high-margin, higher-value specialties. Kelly has done business in these specialties for many years, but our current operating model represents a new approach – one that brings together both staffing and outcome-based pieces of a specialty under a single specialty leader and aggregates assets to accelerate growth and profitability. We believe this specialty structure gives us greater advantages in the market, and we expect our disciplined focus to deliver profitable growth coming out of the crisis. In addition, we intend to invest in strategic, targeted M&A opportunities in our specialties, while optimizing our portfolio, as demonstrated by the recent acquisition of Softworld in the second quarter of 2021, the acquisition of Greenwood/Asher & Associates in the fourth quarter of 2020 and the sale of our operations in Brazil during the third quarter of 2020. Faced with market conditions that may continue to be uneven in the near term, Kelly continues to focus on accelerating the execution of our strategic plan and making necessary investments to advance that strategy. • We are making strides in our digital transformation journey, building a technology foundation to sustain growth and to support our teams, clients and talent with powerful new technologies that make it faster and easier than ever to connect. • We are using our platform, Equity@Work, to break down long-standing, systemic barriers that make it difficult for many people to secure enriching work. This powerful extension of our Noble Purpose uses our unique position in the middle of the supply and demand equation to help more people flow into Kelly’s talent pools, while also helping families, communities and economies thrive. • We are committed to helping each Kelly team define the fastest, most efficient and creative paths to achieving their business goals by removing unnecessary work and refocusing efforts in the right places to achieve our defined performance expectations in the most effective way possible. While the COVID-19 pandemic has resulted in uncertainty in the economy and the labor markets that will affect our near-term financial performance, we have determined long-term measures to gauge our progress, including: • Revenue growth (both organic and inorganic) • Gross profit rate improvement • Conversion rate and EBITDA margin 31 Financial Measures The constant currency (“CC”) change amounts refer to the year-over-year percentage changes resulting from translating 2021 financial data into U.S. dollars using the same foreign currency exchange rates used to translate financial data for 2020. We believe that CC measurements are a useful measure, indicating the actual trends of our operations without distortion due to currency fluctuations. We use CC results when analyzing the performance of our segments and measuring our results against those of our competitors. Additionally, substantially all of our foreign subsidiaries derive revenues and incur cost of services and selling, general and administrative (“SG&A”) expenses within a single country and currency which, as a result, provides a natural hedge against currency risks in connection with their normal business operations. CC measures are non-GAAP (Generally Accepted Accounting Principles) measures and are used to supplement measures in accordance with GAAP. Our non-GAAP measures may be calculated differently from those provided by other companies, limiting their usefulness for comparison purposes. Non-GAAP measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Reported and CC percentage changes were computed based on actual amounts in thousands of dollars. Return on sales (earnings from operations divided by revenue from services) and conversion rate (earnings from operations divided by gross profit) are ratios used to measure the Company’s operating efficiency. EBITDA (earnings before interest, taxes, depreciation and amortization) and EBITDA margin (EBITDA divided by revenue from services) are measures used for understanding the Company's ability to generate cash flow and for judging overall operating performance. NM (not meaningful) in the following tables is used in place of percentage changes where: the change is in excess of 500%, the change involves a comparison between earnings and loss amounts, or the comparison amount is zero. Days sales outstanding (“DSO”) represents the number of days that sales remain unpaid for the period being reported. DSO is calculated by dividing average net sales per day (based on a rolling three-month period) into trade accounts receivable, net of allowances at the period end. Although secondary supplier revenues are recorded on a net basis (net of secondary supplier expense), secondary supplier revenue is included in the daily sales calculation in order to properly reflect the gross revenue amounts billed to the customer. 32 Results of Operations Total Company (Dollars in millions) Third Quarter September Year to Date 2021 2020 % Change 2021 2020 % Change Revenue from services $ 1,195.4 $ 1,038.2 15.1 % $ 3,659.4 $ 3,274.6 11.8 % Gross profit 228.9 191.0 19.8 673.2 603.5 11.5 SG&A expenses excluding restructuring charges 220.0 193.5 13.7 640.0 582.6 9.8 Restructuring charges (0.1) (0.1) (15.4) (0.1) 8.4 (101.7) Total SG&A expenses 219.9 193.4 13.7 639.9 591.0 8.3 Goodwill impairment charge — — NM — 147.7 NM Gain on sale of assets — — NM — 32.1 NM Earnings (loss) from operations 9.0 (2.4) NM 33.3 (103.1) NM Gain (loss) on investment in Persol Holdings 35.5 16.8 112.0 71.8 (31.4) NM Other income (expense), net (0.3) (0.7) 50.1 (4.0) 3.6 (211.5) Earnings (loss) before taxes and equity in net earnings (loss) of affiliate 44.2 13.7 222.8 101.1 (130.9) NM Income tax expense (benefit) 11.1 (1.2) NM 19.0 (36.5) 152.0 Equity in net earnings (loss) of affiliate 1.7 1.8 (3.6) 2.3 (1.0) NM Net earnings (loss) $ 34.8 $ 16.7 108.9 % $ 84.4 $ (95.4) NM % Gross profit rate 19.2 % 18.4 % 0.8 pts. 18.4 % 18.4 % — pts. Conversion rate 3.9 (1.3) 5.2 4.9 (17.1) 22.0 Third Quarter Results Revenue from services in the third quarter increased 15.1% on a reported basis and 14.5% on a constant currency basis, and reflects revenue increases in all operating segments. Our acquisition of Softworld, a technology staffing and solutions firm, added approximately 320 basis points to the revenue growth rate. Compared to the third quarter of 2020, revenue from staffing services increased 11.8% and revenue from outcome-based services increased 15.1%. Permanent placement revenue, which is included in revenue from services, increased 118.0% from the prior year. Gross profit increased 19.8% on higher revenue volume, combined with an increase in the gross profit rate. The gross profit rate increased primarily due to the impact of higher permanent placement income and the acquisition of Softworld, which generates higher gross profit rates, partially offset by unfavorable product mix and higher employee-related costs. Increases in the gross profit rate for Science, Engineering & Technology and International were partially offset by decreases in Professional & Industrial, Education and Outsourcing & Consulting. Permanent placement revenue, which is included in revenue from services and has very low direct costs of services, has a disproportionate impact on gross profit rates. Total SG&A expenses increased 13.7% on a reported basis and 13.2% on a constant currency basis. SG&A expenses related to Softworld, including amortization of intangibles and other operating expenses, accounted for approximately 500 basis points of the year-over-year increase. The increase in SG&A expenses also reflects increases in performance-based incentive compensation expenses and the impact of temporary expense mitigation efforts in the prior year. In addition, 2020 expenses included a $9.5 million charge related to a customer dispute in the International segment. Earnings from operations for the third quarter of 2021 totaled $9.0 million, compared to a loss of $2.4 million in the third quarter of 2020. Included in total earnings from operations in the third quarter of 2021 is approximately $1.7 million related to 33 Softworld earnings from operations, inclusive of amortization of intangibles. Included in earnings from operations in the third quarter of 2020 was a $9.5 million charge related to a customer dispute. Gain (loss) on investment in Persol Holdings represents the gain or loss resulting from changes in the market price of our investment in the common stock of Persol Holdings. The gains or losses fluctuate each quarter based on the quoted market price of the Persol Holdings common stock at period end. Income tax expense was $11.1 million in the third quarter of 2021 and income tax benefit was $1.2 million for the third quarter of 2020. These amounts were impacted by changes in the fair value of the Company's investment in Persol Holdings, which resulted in charges of $10.9 million and $5.2 million for the third quarter of 2021 and 2020, respectively. The amounts were also impacted by improved earnings from operations in the third quarter of 2021. Our tax expense is affected by recurring items, such as the amount of pretax income and its mix by jurisdiction, U.S. work opportunity credits and the change in cash surrender value of tax exempt investments in life insurance policies. It is also affected by discrete items that may occur in any given period but are not consistent from period to period, such as tax law changes, changes in judgment regarding the realizability of deferred tax assets, the tax effects of stock compensation, and changes in the fair value of the Company’s investment in Persol Holdings, which are treated as discrete since they cannot be estimated. The net earnings for the period were $34.8 million, compared to net earnings of $16.7 million from the third quarter of 2020. This change was due primarily to higher earnings from operations and higher gains on Persol Holdings common stock. September Year-to-Date Results Revenue from services in the first nine months of 2021 increased 11.8% on a reported basis and 10.3% on a constant currency basis, and reflects revenue increases in all operating segments. Our acquisition of Softworld in early April 2021 added approximately 200 basis points to the revenue growth rate. Compared to the first nine months of 2020, revenue from staffing services increased 9.9%, revenue from outcome-based services increased 9.0%, and permanent placement income increased 87.8%. Gross profit increased 11.5% on higher revenue volume. The gross profit rate was flat in comparison to the prior year primarily due to the impact of higher permanent placement income and the acquisition of Softworld, which generates higher gross profit rates, partially offset by unfavorable product mix and higher employee-related costs. Decreases in the gross profit rate for Professional & Industrial and Outsourcing & Consulting were offset by increases in the gross profit rate for Science, Engineering & Technology, Education and International. The April 2021 acquisition of Softworld accounted for approximately 30 basis points. Government wage subsidies improved our 2020 gross profit rate by approximately 20 basis points. Total SG&A expenses increased 8.3% compared to last year. Excluding restructuring charges, SG&A expenses in all segments increased in comparison to the prior year. SG&A expenses related to Softworld, including amortization of intangibles and other operating expenses, accounted for approximately 310 basis points to the year-over-year increase. The increase in SG&A expenses also reflects increases in performance-based incentive compensation expenses and the impact of temporary expense mitigation efforts in the prior year. Included in SG&A expenses in the first nine months of 2020 was a $9.5 million charge related to a customer dispute and $8.4 million of restructuring charges. Actions were taken in the first quarter of 2020 to position the Company to adopt the updated operating model and to align the U.S. branch network facilities footprint with a more technology-enabled service delivery methodology. During the first nine months of 2020, the negative reaction to the pandemic by the global equity markets also resulted in a decline in the Company's common stock price. This triggered an interim goodwill impairment test, resulting in a $147.7 million goodwill impairment charge in the first quarter of 2020. Gain on sale of assets of $32.1 million in 2020 represents the excess of the proceeds over the cost of the headquarters properties sold in the first quarter of 2020. The main headquarters building was subsequently leased back by the Company during the first quarter of 2020. Earnings from operations for the first nine months of 2021 totaled $33.3 million, compared to a loss from operations of $103.1 million in the first nine months of 2020. The increase in earnings from operations from the prior year primarily reflects the 34 impact of the goodwill impairment charge, the customer dispute charge and a restructuring charge in 2020, partially offset by the 2020 gain on sale of assets. Gain (loss) on investment in Persol Holdings represents the gain or loss resulting from changes in the market price of our investment in the common stock of Persol Holdings. The gains or losses fluctuate each quarter based on the quoted market price of the Persol Holdings common stock at period end. Other expense for the first nine months of 2021 totaled $4.0 million, compared to other income of $3.6 million for the first nine months of 2020. Included in the 2021 amount are transaction-related expenses from the April 2021 acquisition of Softworld and a one-time, non-cash write-down of an equity investment. Income tax expense was $19.0 million in the first nine months of 2021 and income tax benefit was $36.5 million for the first nine months of 2020. These amounts were impacted by changes in the fair value of the Company's investment in Persol Holdings, which resulted in a charge of $22.0 million and a benefit of $9.6 million for September year to date 2021 and 2020, respectively. September year to date 2021 also included a benefit of $5.2 million from a change in United Kingdom tax rates. September year to date 2020 includes a tax benefit of $23.0 million on the impairment of goodwill and a tax benefit of $7.7 million from Brazil outside basis differences. Our tax expense is affected by recurring items, such as the amount of pretax income and its mix by jurisdiction, U.S. work opportunity credits and the change in cash surrender value of tax exempt investments in life insurance policies. It is also affected by discrete items that may occur in any given period but are not consistent from period to period, such as tax law changes, changes in judgment regarding the realizability of deferred tax assets, the tax effects of stock compensation, and changes in the fair value of the Company’s investment in Persol Holdings, which are treated as discrete since they cannot be estimated. The United Kingdom rate change benefit in the second quarter of 2021, the first quarter of 2020 impairment of goodwill and the second quarter of 2020 Brazil outside basis differences were treated as discrete. The net earnings for the period were $84.4 million, compared to a net loss of $95.4 million for the first nine months of 2020. This change was due primarily to higher earnings from operations and increased gains of Persol Holdings common stock, net of tax. 35 Operating Results By Segment (Dollars in millions) Third Quarter September Year to Date 2021 2020 % Change 2021 2020 % Change Revenue from Services: Professional & Industrial $ 452.6 $ 446.5 1.4 % $ 1,386.7 $ 1,346.7 3.0 % Science, Engineering & Technology 306.2 244.0 25.5 859.1 761.5 12.8 Education 66.6 27.5 142.1 284.1 195.1 45.6 Outsourcing & Consulting 113.4 87.9 29.1 320.0 261.0 22.6 International 256.8 232.4 10.5 810.1 710.6 14.0 Less: Intersegment revenue (0.2) (0.1) 103.4 (0.6) (0.3) 91.6 Consolidated Total $ 1,195.4 $ 1,038.2 15.1 % $ 3,659.4 $ 3,274.6 11.8 % Third Quarter Results Professional & Industrial revenue from services increased 1.4%. The increase was due primarily to higher revenue in the staffing product due to an increase in the bill rate per hour as compared to last year, partially offset by a lower hours volume, reflecting the challenge to meet customers’ increasing demand for talent amid a tighter labor supply. The increase in staffing revenue was coupled with higher permanent placement income, partially offset by a decrease in revenue from our outcome-based services as customer demand declined. Science, Engineering & Technology revenue from services increased 25.5% on a reported basis, which includes revenues from the acquisition of Softworld. On an organic basis, the revenue growth was 11.7%, which was driven by hours volume increases in our staffing business across most specialties as customer demand increased compared to last year, which was impacted by COVID-19, coupled with increases in outcome-based services and permanent placement income. Education revenue from services increased 142.1%, reflecting the return to in-school instruction by many schools, resulting in increased demand for our services as compared to a year ago, as well as the impact of new customer wins. In the third quarter of 2020, many districts were using virtual or hybrid instruction methods due to the impact of COVID-19, which decreased the demand for our services. Outsourcing & Consulting revenue from services increased 29.1% due primarily to the increase in hours revenue volume in our PPO specialty, coupled with revenue growth in both RPO and MSP products. International revenue from services increased 10.5% on a reported basis and increased 8.8% in constant currency. Year-over-year revenue comparisons were unfavorably impacted by the sale of our staffing operations in Brazil in August 2020. Excluding Brazil, revenue increased 11.4% on a reported basis and 9.7% on a constant currency basis. The increase was primarily due to higher hours volume, particularly in France, Russia and Portugal. This was partially offset by lower hours volume in Mexico, due to new labor legislation which became effective September 1, 2021 and prohibits staffing solutions not considered specialized services. September Year-to-Date Results Professional & Industrial revenue from services increased 3.0%, due primarily to a higher bill rate per hour on lower hours volume. This increase was combined with an increase in revenue from permanent placement income and our outcome-based services. Science, Engineering & Technology revenue from services increased 12.8% on a reported basis, which includes revenues from the acquisition of Softworld. On an organic basis, the revenue growth was 4.4%, which was driven by hours increases in our staffing business across most specialties, coupled with an increase in permanent placement income. 36 Education revenue from services increased 45.6% reflecting the return to in-school instruction by many schools, resulting in increased demand for our services as compared to a year ago. In the first nine months of 2020, many districts were using virtual or hybrid instruction methods due to the impact of COVID-19. Outsourcing & Consulting revenue from services increased 22.6% due primarily to increased hours revenue volume in our PPO specialty, coupled with revenue growth in both RPO and MSP products. International revenue from services increased 14.0% on a reported basis and increased 9.0% in constant currency. Year-over-year revenue comparisons were unfavorably impacted by the sale of our staffing operations in Brazil in August 2020. Excluding Brazil, revenue increased 16.8% on a reported basis and 11.6% on a constant currency basis. The increase was primarily due to higher hours volume, particularly in France, Portugal and Switzerland. 37 Operating Results By Segment (continued) (Dollars in millions) Third Quarter September Year to Date 2021 2020 Change 2021 2020 Change Gross Profit: Professional & Industrial $ 76.6 $ 77.1 (0.5) % $ 227.7 $ 241.1 (5.5) % Science, Engineering & Technology 68.1 50.7 34.5 187.8 156.0 20.4 Education 10.0 4.1 139.7 44.0 28.8 52.5 Outsourcing & Consulting 37.3 29.1 27.9 103.4 87.1 18.7 International 36.9 30.0 22.7 110.3 90.5 21.8 Consolidated Total $ 228.9 $ 191.0 19.8 % $ 673.2 $ 603.5 11.5 % Gross Profit Rate: Professional & Industrial 16.9 % 17.3 % (0.4) pts. 16.4 % 17.9 % (1.5) pts. Science, Engineering & Technology 22.3 20.8 1.5 21.9 20.5 1.4 Education 15.1 15.2 (0.1) 15.5 14.8 0.7 Outsourcing & Consulting 32.8 33.1 (0.3) 32.3 33.4 (1.1) International 14.4 12.9 1.5 13.6 12.7 0.9 Consolidated Total 19.2 % 18.4 % 0.8 pts. 18.4 % 18.4 % — pts. Third Quarter Results Gross profit for the Professional & Industrial segment decreased due to a decline in the gross profit rate, partially offset by higher revenue volume. In comparison to the prior year, the gross profit rate decreased 40 basis points. This decrease reflects increased costs associated with our outcome-based services, and an increase in employee-related costs. These decreases were partially offset by the impact of increased permanent placement income this year. The Science, Engineering & Technology gross profit increased on higher revenue volume and an increase in the gross profit rate. The gross profit rate increased 150 basis points due to improved specialty mix, including the acquisition of Softworld which generates higher gross profit margins, coupled with increased permanent placement income, partially offset by higher employee-related costs. Gross profit for the Education segment increased on higher revenue volume, partially offset by a decrease in the gross profit rate. The gross profit rate decreased 10 basis points due primarily to higher employee-related costs, partially offset by an increase in permanent placement income from Greenwood/Asher, our acquisition in late 2020. The Outsourcing & Consulting gross profit increased on higher revenue volume, partially offset by a decrease in the gross profit rate. The gross profit rate decreased 30 basis points primarily due to a change in product mix within this segment, as revenues increased in our PPO product, which generates lower profit margins. International gross profit increased on higher revenue volume and an increase in the gross profit rate. The gross profit rate increased 150 basis points primarily due to customer mix and higher permanent placement income. September Year-to-Date Results Gross profit for the Professional & Industrial segment decreased due to a decrease in the gross profit rate, partially offset by higher revenue volume. In comparison to the prior year, the gross profit rate decreased 150 basis points. This decrease reflects the unfavorable year-over-year impact of government wage subsidies, increased costs associated with our outcome-based services, higher employee-related costs in the staffing product and a shift in product mix compared to the prior year as demand 38 for staffing services increased. These decreases were partially offset by the impact of increased permanent placement income this year. The Science, Engineering & Technology gross profit increased on higher revenue volume and an increase in the gross profit rate. The gross profit rate increased 140 basis points due to increased permanent placement income, coupled with improved specialty mix, including the acquisition of Softworld in April 2021. Gross profit for the Education segment increased on higher revenue volume and an increase in the gross profit rate. The gross profit rate increased 70 basis points due primarily to higher permanent placement income from Greenwood/Asher, our acquisition in late 2020. This increase was partially offset by the unfavorable year-over-year impact of government wage subsidies and higher employee-related costs. The Outsourcing & Consulting gross profit increased on higher revenue volume, partially offset by a decrease in the gross profit rate. The gross profit rate decreased 110 basis points primarily due to a change in product mix within this segment, as revenues increased in our PPO product, which generates lower profit margins. International gross profit increased on higher revenue volume and an increase in the gross profit rate. The gross profit rate increased 90 basis points primarily due to customer mix. 39 Operating Results By Segment (continued) (Dollars in millions) Third Quarter September Year to Date 2021 2020 % Change 2021 2020 % Change SG&A Expenses: Professional & Industrial $ 69.4 $ 65.3 6.2 % $ 207.8 $ 210.4 (1.2) % Science, Engineering & Technology 48.4 31.3 54.8 131.0 99.1 32.2 Education 17.0 11.6 46.1 46.5 37.7 23.1 Outsourcing & Consulting 30.7 25.4 20.5 89.2 79.1 12.6 International 34.5 39.9 (13.6) 102.2 101.4 0.7 Corporate expenses 19.9 19.9 0.8 63.2 63.3 (0.1) Consolidated Total $ 219.9 $ 193.4 13.7 % $ 639.9 $ 591.0 8.3 % Third Quarter September Year to Date 2021 2020 % Change 2021 2020 % Change Restructuring Charges Included in SG&A Expenses: Professional & Industrial $ — $ (0.1) NM % $ — $ 4.3 NM % Science, Engineering & Technology — — NM — 0.5 NM Education — — NM — 0.8 NM Outsourcing & Consulting — — NM — — NM International — — NM — 1.1 NM Corporate expenses (0.1) — NM (0.1) 1.7 (103.7) Consolidated Total $ (0.1) $ (0.1) (15.4) % $ (0.1) $ 8.4 (101.7) % Third Quarter Results Total SG&A expenses in Professional & Industrial increased 6.2% from the prior year. Year-over-year comparisons were impacted by temporary expense mitigation actions in place in the third quarter of 2020 as a result of lower revenue volume due to the COVID-19 disruption. This increase was combined with an increase in performance-based incentive compensation as compared to the prior year. Total SG&A expenses in Science, Engineering & Technology increased 54.8% from the prior year, and includes the impact of the acquisition of Softworld in the second quarter of 2021. On an organic basis, SG&A expenses increased 24.0% from the prior year. Year-over-year increases in salaries and related costs result from higher headcount in sales and recruiting talent, and an increase in performance-based incentive compensation. These increases were combined with the impact of temporary expense mitigation actions in place in the third quarter of 2020 as a result of lower revenue volume due to the COVID-19 disruption. Total SG&A expenses in Education increased 46.1% from the prior year, primarily due to higher salary and incentives expense related to improving revenues. In addition, year-over-year comparisons of salaries and related costs were impacted by temporary expense mitigation actions in place in the third quarter of 2020 to mitigate the impact of the lower revenue volume as a result of the COVID-19 disruption. Expenses in the third quarter of 2021 include a charge to adjust the contingent consideration due to the former owners of Greenwood/Asher & Associates as a result of better than anticipated performance. Total SG&A expenses in Outsourcing & Consulting increased 20.5% from the prior year. Year-over-year comparisons of salaries and related costs were impacted by temporary expense mitigation actions taken in the second quarter of 2020 to mitigate the impact of the lower revenue volume as a result of the COVID-19 disruption. These increases were combined with an increase in salaries and performance-based incentive compensation, reflecting improving revenue. 40 Total SG&A expenses in International decreased 13.6% on a reported basis and decreased 14.8% on a constant currency basis. The prior year included a specific customer provision in Mexico following a negative outcome of litigation over a disputed accounts receivable balance for certain services rendered several years ago. Excluding this one-time charge, SG&A expenses increased 13.6% on a reported basis and 12.0% on a constant currency basis. This increase was due to higher performance-based incentive compensation as compared to the prior year and higher salary-related expenses due to increased headcount, mainly in our branch network. September Year-to-Date Results Total SG&A expenses in Professional & Industrial decreased 1.2% and increased 0.8% excluding restructuring charges. Year-over-year comparisons were impacted by temporary expense mitigation actions enacted in 2020 as a result of lower revenue volume due to the COVID-19 disruption. This increase was combined with an increase in salaries and performance-based incentive compensation and was partially offset by reduced facilities expense as we continue to evaluate and reduce our branch footprint. Total SG&A expenses in Science, Engineering & Technology increased 32.2%, or 32.9% excluding restructuring charges. Excluding restructuring charges and the acquisition of Softworld, SG&A expenses increased 14.7%. Year-over-year comparisons of salaries and related costs were impacted by temporary expense mitigation actions taken in response to the COVID-19 disruption in 2020. These increases were combined with higher headcount in sales and recruiting talent, and an increase in performance-based incentive compensation. Total SG&A expenses in Education increased 23.1%, or 26.0% excluding restructuring charges, primarily due to higher salary and incentives expense related to improving revenues. In addition, year-over-year comparisons of salaries and related costs were impacted by temporary expense mitigation actions taken in 2020 in response to the COVID-19 disruption. Expenses in 2021 include a charge to adjust the contingent consideration due to the former owners of Greenwood/Asher & Associates as a result of better than anticipated performance. Total SG&A expenses in Outsourcing & Consulting increased 12.6% in comparison to the prior year. Year-over-year comparisons of salaries and related costs were impacted by temporary expense actions taken in 2020 in response to the impact of the COVID-19 disruption. These increases were combined with an increase in salaries and performance-based incentive compensation reflecting improving revenue. Total SG&A expenses in International increased 0.7% on a reported basis and decreased 3.9% on a constant currency basis. The prior year included a charge related to a customer dispute in Mexico, SG&A expenses related to our staffing operations in Brazil which were sold in August 2020 and restructuring charges. Excluding these items, SG&A expenses increased 16.1% on a reported basis and 10.8% on a constant currency basis. This increase was primarily due to higher performance-based compensation and higher salary-related expenses due to increased headcount, primarily in our branch network. 41 Operating Results By Segment (continued) (Dollars in millions) Third Quarter September Year to Date 2021 2020 % Change 2021 2020 % Change Earnings (Loss) from Operations: Professional & Industrial $ 7.2 $ 11.8 (38.1) % $ 19.9 $ 30.7 (34.9) % Science, Engineering & Technology 19.7 19.4 1.7 56.8 56.9 (0.2) Education (7.0) (7.5) 6.6 (2.5) (8.9) 72.1 Outsourcing & Consulting 6.6 3.7 79.1 14.2 8.0 79.0 International 2.4 (9.9) NM 8.1 (10.9) NM Corporate (19.9) (19.9) (0.8) (63.2) (178.9) 64.6 Consolidated Total $ 9.0 $ (2.4) NM % $ 33.3 $ (103.1) NM % Third Quarter Results Professional & Industrial reported earnings of $7.2 million for the quarter, a 38.1% decrease from a year ago. The decrease in earnings was primarily due to increased costs of services reducing our gross profit rate in our outcome-based products, as well as increasing expenses. These were partially offset by increased revenues in our staffing product and an increase in our permanent placement income. Science, Engineering & Technology reported earnings of $19.7 million for the quarter, a 1.7% increase from a year ago. The increase in earnings was primarily due to the impact of the Softworld acquisition, coupled with increases in organic staffing and permanent placement revenues in most of our specialties within the SET business unit. These increases were offset by increases in certain expenses, including those related to additional full-time employees and increased performance-based incentive compensation. Education reported a loss of $7.0 million for the quarter, compared to a loss of $7.5 million a year ago. The change was primarily due to the increase in revenue, reflecting the return to in-school instruction by many schools, resulting in increased demand for our services as compared to a year ago. In 2020, many districts were using virtual or hybrid instruction methods due to the impact of COVID-19. Partially offsetting this improvement is a charge to adjust the contingent consideration due to the former owners of Greenwood/Asher & Associates. Outsourcing & Consulting reported earnings of $6.6 million for the quarter, a 79.1% increase from a year ago. The increase in earnings was primarily due to the impact of increased revenue volumes within the segment. International reported earnings of $2.4 million for the quarter, compared to a loss of $9.9 million a year ago. The increase in earnings was primarily due to the favorable comparison related to the charge for a customer dispute in Mexico in the prior year. September Year-to-Date Results Professional & Industrial reported earnings of $19.9 million, a 34.9% decrease from a year ago. The decrease in earnings was primarily due to increased costs of services reducing our gross profit rate in our outcome-based product lines and the year-over-year impact of the government wage subsidies we received in 2020. These were partially offset by increased revenues in our staffing product and an increase in our permanent placement income. Science, Engineering & Technology reported earnings of $56.8 million, a 0.2% decrease from a year ago. The decrease in earnings was primarily due to higher expenses related to performance-based incentive compensation and higher salaries due to investment in additional sales and recruiting resources, which exceeded revenue and gross margin growth. This was partially offset by earnings from Softworld, which was acquired in April 2021. Education reported a loss of $2.5 million, compared to a loss of $8.9 million a year ago. The change was primarily due to an increase in revenue, reflecting the return to in-school instruction by many schools, resulting in increased demand for our 42 services as compared to a year ago. In 2020, many districts were using virtual or hybrid instruction methods due to the impact of COVID-19. Partially offsetting this improvement is a charge to adjust the contingent consideration due to the former owners of Greenwood/Asher & Associates. Outsourcing & Consulting reported earnings of $14.2 million, a 79.0% increase compared to a year ago. The increase in earnings was primarily due to the impact of increased revenue volumes within the segment. International reported earnings of $8.1 million, compared to a loss of $10.9 million a year ago. The increase in earnings was primarily due to the favorable comparison related to the charge for a customer dispute in Mexico and restructuring charges in the prior year, combined with improving revenue in Europe. 43 Financial Condition Historically, we have financed our operations through cash generated by operating activities and access to credit markets. Our working capital requirements are primarily generated from temporary employee payroll, which is generally paid weekly or monthly, and customer accounts receivable, which is generally outstanding for longer periods. Since receipts from customers lag payroll to temporary employees, working capital requirements increase substantially in periods of growth. Conversely, when economic activity slows, working capital requirements may substantially decrease. This may result in an increase in our operating cash flows; however, any such increase would not be sustainable in the event that an economic downturn continued for an extended period. The impact of the current economic slow-down resulting from the COVID-19 crisis began in March 2020. While we have yet to return to pre-crisis revenue levels, we are seeing continued economic momentum and sustainable recovery in the third quarter of 2021. As highlighted in the consolidated statements of cash flows, our liquidity and available capital resources are impacted by four key components: cash, cash equivalents and restricted cash, operating activities, investing activities and financing activities. Cash, Cash Equivalents and Restricted Cash Cash, cash equivalents and restricted cash totaled $51.1 million at the end of the third quarter of 2021 and $228.1 million at year-end 2020. As further described below, we generated $31.0 million of cash from operating activities, used $198.4 million of cash for investing activities and used $5.7 million of cash for financing activities. Operating Activities In the first nine months of 2021, we generated $31.0 million of net cash from operating activities, as compared to generating $216.5 million in the first nine months of 2020, primarily due to increased working capital requirements as revenue levels continue to recover or surpass pre-COVID levels in certain segments. Trade accounts receivable totaled $1.4 billion at the end of the third quarter of 2021. Global DSO was 63 days at the end of the third quarter of 2021, 64 days at year-end 2020 and 61 days at the end of the third quarter of 2020. Our working capital position (total current assets less total current liabilities) was $460.4 million at the end of the third quarter of 2021, a decrease of $163.6 million from year-end 2020. Excluding the decrease in cash, working capital increased $15.9 million from year-end 2020. The current ratio (total current assets divided by total current liabilities) was 1.4 at the end of the third quarter of 2021 and 1.7 at year-end 2020. Investing Activities In the first nine months of 2021, we used $198.4 million of cash for investing activities, as compared to generating $10.3 million in the first nine months of 2020. Included in cash used for investing activities in the first nine months of 2021 is $213.0 million of cash used for the acquisition of Softworld in April 2021, net of cash received and including working capital adjustments. Included in cash from investing activities in the first nine months of 2020 is $55.5 million of proceeds representing the cash received, net of transaction expenses, for the sale of three headquarters properties as a part of a sale and leaseback transaction. This was partially offset by $36.4 million of cash used for the acquisition of Insight in January 2020, net of the cash received and including working capital adjustments. Financing Activities In the first nine months of 2021, we used $5.7 million of cash for financing activities, as compared to using $6.8 million in the first nine months of 2020. The change in cash from financing activities was primarily related to the year-over-year decrease of $1.3 million in short-term borrowings and lower dividend payments during the first nine months of 2021 as compared to the same period in the prior year. These decreases were partially offset by $1.6 million, representing a portion of the contingent consideration payment made in the first nine months of 2021 related to our 2020 acquisition of Insight. The change in short-term borrowings in the first nine months of 2021 and the first nine months of 2020 was primarily due to payments on local lines of credit. Dividends paid per common share were $0.05 in the first nine months of 2021 and $0.075 in first nine months of 2020. There was no debt at the end of the third quarter of 2021, compared to $0.3 million at year-end 2020, which represented local borrowings. Debt-to-total capital (total debt reported in the consolidated balance sheet divided by total debt plus stockholders’ equity) is a common ratio to measure the relative capital structure and leverage of the Company. Our ratio of debt-to-total capital was 0.0% at the end of the third quarter of 2021 and at year-end 2020. 44 New Accounting Pronouncements See New Accounting Pronouncements footnote in the Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q for a description of new accounting pronouncements. Critical Accounting Estimates For a discussion of our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Form 10-K. Contractual Obligations and Commercial Commitments There were no significant changes to our contractual obligations and commercial commitments from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Form 10-K. We have no material unrecorded commitments, losses, contingencies or guarantees associated with any related parties or unconsolidated entities. Liquidity We expect to meet our ongoing short-term and long-term cash requirements principally through cash generated from operations, available cash and equivalents, securitization of customer receivables and committed unused credit facilities. Additional funding sources could include asset-based lending, additional bank facilities or sale of non-core assets. To meet significant cash requirements related to our nonqualified retirement plan, we may utilize proceeds from Company-owned life insurance policies. During 2020, cash generated from operations was supplemented by the deferral of payments of the Company's U.S. social security taxes as allowed by the Coronavirus Aid, Relief, and Economic Security Act. Such deferrals are required to be repaid by the end of 2021 and 2022. We utilize intercompany loans, dividends, capital contributions and redemptions to effectively manage our cash on a global basis. We periodically review our foreign subsidiaries’ cash balances and projected cash needs. As part of those reviews, we may identify cash that we feel should be repatriated to optimize the Company’s overall capital structure. As of the end of the third quarter of 2021, these reviews have resulted in plans to repatriate targeted amounts of foreign subsidiary cash. We expect much of our international cash will be needed to fund working capital growth in our local operations as working capital needs, primarily trade accounts receivable, increase during periods of growth. A cash pooling arrangement (the “Cash Pool”) is available to fund general corporate needs internationally. The Cash Pool is a set of cash accounts maintained with a single bank that must, as a whole, maintain at least a zero balance; individual accounts may be positive or negative. This allows countries with excess cash to invest and countries with cash needs to utilize the excess cash. As of the third quarter of 2021, we had $200.0 million of available capacity on our $200.0 million revolving credit facility and $97.0 million of available capacity on our $150.0 million securitization facility. The securitization facility carried no short-term borrowings and $53.0 million of standby letters of credit related to workers’ compensation. Together, the revolving credit and securitization facilities provide the Company with committed funding capacity that may be used for general corporate purposes subject to financial covenants and restrictions. While we believe these facilities will cover our working capital needs over the short term, if economic conditions or operating results change significantly from our current expectations, we may need to seek additional sources of funds. As of the end of the third quarter of 2021, we met the debt covenants related to our revolving credit facility and securitization facility. We have historically managed our cash and debt closely to optimize our capital structure. As our cash balances build, we tend to pay down debt as appropriate. Conversely, when working capital needs grow, we tend to use corporate cash and cash available in the Cash Pool first, and then access our borrowing facilities. We expect our working capital requirements to increase over the next several quarters if demand for our services continues to increase and to pay the deferred payroll tax balances, 50% of which are due in the fourth quarter of both 2021 and 2022. We monitor the credit ratings of our major banking partners on a regular basis and have regular discussions with them. Based on our reviews and communications, we believe the risk of one or more of our banks not being able to honor commitments is insignificant. We also review the ratings and holdings of our money market funds and other investment vehicles regularly to ensure high credit quality and access to our invested cash. 45 Forward-Looking Statements Certain statements contained in this report are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or variations or negatives thereof or by similar or comparable words or phrases. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future actions by us that may be provided by management, including oral statements or other written materials released to the public, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and assumptions about our Company and economic and market factors in the countries in which we do business, among other things. These statements are not guarantees of future performance, and we have no specific intention to update these statements. Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The principal important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changing market and economic conditions, the recent novel coronavirus (COVID-19) outbreak, competitive market pressures including pricing and technology introductions and disruptions, disruption in the labor market and weakened demand for human capital resulting from technological advances, competition law risks, the impact of changes in laws and regulations (including federal, state and international tax laws), unexpected changes in claim trends on workers’ compensation, unemployment, disability and medical benefit plans, or the risk of additional tax liabilities in excess of our estimates, our ability to achieve our business strategy, our ability to successfully develop new service offerings, material changes in demand from or loss of large corporate customers as well as changes in their buying practices, risks particular to doing business with government or government contractors, the risk of damage to our brand, our exposure to risks associated with services outside traditional staffing, including business process outsourcing, services of licensed professionals and services connecting talent to independent work, our increasing dependency on third parties for the execution of critical functions, our ability to effectively implement and manage our information technology strategy, the risks associated with past and future acquisitions, including risk of related impairment of goodwill and intangible assets, exposure to risks associated with investments in equity affiliates including PersolKelly Pte. Ltd., risks associated with conducting business in foreign countries, including foreign currency fluctuations, the exposure to potential market and currency exchange risks relating to our investment in Persol Holdings, risks associated with violations of anticorruption, trade protection and other laws and regulations, availability of qualified full-time employees, availability of temporary workers with appropriate skills required by customers, liabilities for employment-related claims and losses, including class action lawsuits and collective actions, our ability to sustain critical business applications through our key data centers, risks arising from failure to preserve the privacy of information entrusted to us or to meet our obligations under global privacy laws, the risk of cyberattacks or other breaches of network or information technology security, our ability to realize value from our tax credit and net operating loss carryforwards, our ability to maintain specified financial covenants in our bank facilities to continue to access credit markets, and other risks, uncertainties and factors discussed in this report and in our other filings with the Securities and Exchange Commission. Actual results may differ materially from any forward-looking statements contained herein, and we undertake no duty to update any forward-looking statement to conform the statement to actual results or changes in the Company’s expectations. Certain risk factors are discussed more fully under “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K. 46