Item 1. Financial Statements
Item 1. Financial Statements.
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In millions of dollars except per share data)
13 Weeks Ended
April 2,
2023 April 3,
2022
Revenue from services $ 1,268.3 $ 1,296.4
Cost of services 1,014.2 1,037.8
Gross profit 254.1 258.6
Selling, general and administrative expenses 243.4 236.1
Gain on sale of assets — ( 0.9 )
Earnings (loss) from operations 10.7 23.4
Loss on investment in Persol Holdings — ( 67.2 )
Loss on currency translation from liquidation of subsidiary — ( 20.4 )
Other income (expense), net 2.0 2.8
Earnings (loss) before taxes and equity in net earnings (loss) of affiliate 12.7 ( 61.4 )
Income tax expense (benefit) 1.8 ( 13.0 )
Net earnings (loss) before equity in net earnings (loss) of affiliate 10.9 ( 48.4 )
Equity in net earnings (loss) of affiliate — 0.8
Net earnings (loss) $ 10.9 $ ( 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
Diluted 37.4 38.6
See accompanying unaudited Notes to Consolidated Financial Statements.
4
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In millions of dollars)
13 Weeks Ended
April 2,
2023 April 3,
2022
Net earnings (loss) $ 10.9 $ ( 47.6 )
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax expense of $0.0 and $0.1, respectively 2.3 ( 9.9 )
Less: Reclassification adjustments included in net earnings (loss) - liquidation of Japan subsidiary — 20.4
Less: Reclassification adjustments included in net earnings (loss) - equity method investment and other — 2.5
Foreign currency translation adjustments 2.3 13.0
Other comprehensive income (loss) 2.3 13.0
Comprehensive income (loss) $ 13.2 $ ( 34.6 )
See accompanying unaudited Notes to Consolidated Financial Statements.
5
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions)
April 2,
2023 January 1,
2023
Assets
Current Assets
Cash and equivalents $ 111.7 $ 153.7
Trade accounts receivable, less allowances of $11.0 and $11.2, respectively 1,438.5 1,491.6
Prepaid expenses and other current assets 82.3 69.9
Total current assets 1,632.5 1,715.2
Noncurrent Assets
Property and equipment:
Property and equipment 166.0 166.8
Accumulated depreciation ( 137.4 ) ( 139.0 )
Net property and equipment 28.6 27.8
Operating lease right-of-use assets 65.0 66.8
Deferred taxes 301.9 299.7
Goodwill, net 151.1 151.1
Other assets 409.5 403.2
Total noncurrent assets 956.1 948.6
Total Assets $ 2,588.6 $ 2,663.8
See accompanying unaudited Notes to Consolidated Financial Statements.
6
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions)
April 2,
2023 January 1,
2023
Liabilities and Stockholders’ Equity
Current Liabilities
Short-term borrowings $ — $ 0.7
Accounts payable and accrued liabilities 684.7 723.3
Operating lease liabilities 14.3 14.7
Accrued payroll and related taxes 275.9 315.8
Accrued workers’ compensation and other claims 23.1 22.9
Income and other taxes 52.9 51.4
Total current liabilities 1,050.9 1,128.8
Noncurrent Liabilities
Operating lease liabilities 53.4 55.0
Accrued workers’ compensation and other claims 41.0 40.7
Accrued retirement benefits 184.6 174.1
Other long-term liabilities 10.9 11.0
Total noncurrent liabilities 289.9 280.8
Commitments and contingencies (see Contingencies footnote)
Stockholders’ Equity
Capital stock, $1.00 par value
Class A common stock, 100.0 shares authorized; 35.2 shares issued at 2023 and 35.1 shares issued at 2022 35.2 35.1
Class B common stock, 10.0 shares authorized; 3.3 shares issued at 2023 and 3.4 shares issued at 2022 3.3 3.4
Treasury stock, at cost
Class A common stock, 1.9 shares at 2023 and 1.0 shares at 2022 ( 34.7 ) ( 19.5 )
Class B common stock ( 0.6 ) ( 0.6 )
Paid-in capital 26.4 28.0
Earnings invested in the business 1,224.4 1,216.3
Accumulated other comprehensive income (loss) ( 6.2 ) ( 8.5 )
Total stockholders’ equity 1,247.8 1,254.2
Total Liabilities and Stockholders’ Equity $ 2,588.6 $ 2,663.8
See accompanying unaudited Notes to Consolidated Financial Statements.
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KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In millions of dollars)
13 Weeks Ended
April 2,
2023 April 3,
2022
Capital Stock
Class A common stock
Balance at beginning of period $ 35.1 $ 36.7
Conversions from Class B 0.1 —
Share retirement — ( 1.6 )
Balance at end of period 35.2 35.1
Class B common stock
Balance at beginning of period 3.4 3.4
Conversions to Class A ( 0.1 ) —
Balance at end of period 3.3 3.4
Treasury Stock
Class A common stock
Balance at beginning of period ( 19.5 ) ( 14.5 )
Net issuance of stock awards and other 3.1 2.1
Purchase of treasury stock ( 18.3 ) —
Balance at end of period ( 34.7 ) ( 12.4 )
Class B common stock
Balance at beginning of period ( 0.6 ) ( 0.6 )
Net issuance of stock awards — —
Balance at end of period ( 0.6 ) ( 0.6 )
Paid-in Capital
Balance at beginning of period 28.0 23.9
Net issuance of stock awards ( 1.6 ) ( 1.1 )
Balance at end of period 26.4 22.8
Earnings Invested in the Business
Balance at beginning of period 1,216.3 1,315.0
Net earnings (loss) 10.9 ( 47.6 )
Dividends ( 2.8 ) ( 1.9 )
Share retirement — ( 25.6 )
Balance at end of period 1,224.4 1,239.9
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period ( 8.5 ) ( 27.7 )
Other comprehensive income (loss), net of tax 2.3 13.0
Balance at end of period ( 6.2 ) ( 14.7 )
Stockholders’ Equity at end of period $ 1,247.8 $ 1,273.5
See accompanying unaudited Notes to Consolidated Financial Statements.
8
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions of dollars)
13 Weeks Ended
April 2,
2023 April 3,
2022
Cash flows from operating activities:
Net earnings (loss) $ 10.9 $ ( 47.6 )
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
Depreciation and amortization 8.4 7.5
Operating lease asset amortization 4.3 5.0
Provision for credit losses and sales allowances 0.4 0.8
Stock-based compensation 3.1 2.1
Gain on sale of equity securities ( 2.0 ) —
Loss on investment in Persol Holdings — 67.2
Loss on currency translation from liquidation of subsidiary — 20.4
Gain on foreign currency remeasurement — ( 5.5 )
Gain on sale of assets — ( 0.9 )
Equity in net (earnings) loss of PersolKelly Pte. Ltd. — ( 0.8 )
Other, net ( 0.3 ) 1.7
Changes in operating assets and liabilities, net of acquisitions ( 38.3 ) ( 156.0 )
Net cash used in operating activities ( 13.5 ) ( 106.1 )
Cash flows from investing activities:
Capital expenditures ( 4.4 ) ( 1.7 )
Proceeds from sale of assets — 0.9
Acquisition of companies, net of cash received — ( 58.3 )
Proceeds from sale of Persol Holdings investment — 196.9
Proceeds from sale of equity method investment — 119.5
Proceeds from equity securities 2.0 —
Other investing activities 0.2 ( 0.2 )
Net cash (used in) from investing activities ( 2.2 ) 257.1
Cash flows from financing activities:
Net change in short-term borrowings ( 0.7 ) 0.2
Financing lease payments ( 0.4 ) ( 0.3 )
Dividend payments ( 2.8 ) ( 1.9 )
Payments of tax withholding for stock awards ( 1.2 ) ( 0.8 )
Buyback of common shares ( 18.3 ) ( 27.2 )
Contingent consideration payments ( 1.4 ) ( 0.7 )
Net cash used in financing activities ( 24.8 ) ( 30.7 )
Effect of exchange rates on cash, cash equivalents and restricted cash ( 0.8 ) ( 1.7 )
Net change in cash, cash equivalents and restricted cash ( 41.3 ) 118.6
Cash, cash equivalents and restricted cash at beginning of period 162.4 119.5
Cash, cash equivalents and restricted cash at end of period (1)
$ 121.1 $ 238.1
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KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
(In millions of dollars)
(1) The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported in our consolidated balance sheets:
13 Weeks Ended
April 2,
2023 April 3,
2022
Reconciliation of cash, cash equivalents and restricted cash:
Current assets:
Cash and cash equivalents $ 111.7 $ 230.3
Restricted cash included in prepaid expenses and other current assets 0.5 0.4
Noncurrent assets:
Restricted cash included in other assets 8.9 7.4
Cash, cash equivalents and restricted cash at end of period $ 121.1 $ 238.1
See accompanying unaudited Notes to Consolidated Financial Statements.
10
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Kelly Services, Inc. (the “Company,” “Kelly,” “we” or “us”) have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and notes required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair statement of the results of the interim periods, have been made. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. The unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended January 1, 2023, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 16, 2023 (the 2022 consolidated financial statements). There were no changes in accounting policies as disclosed in the Form 10-K. The Company’s first fiscal quarter ended on April 2, 2023 and April 3, 2022, each of which contained 13 weeks.
Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year's presentation.
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KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. Revenue
Revenue Disaggregated by Service Type
Kelly has five operating segments: Professional & Industrial (“P&I”), Science, Engineering & Technology (“SET”), Education, Outsourcing & Consulting Group ("Outsourcing & Consulting," "OCG") and International. Other than OCG, each segment delivers talent through staffing services, permanent placement or outcome-based services. Our OCG segment delivers talent solutions including managed service provider ("MSP"), payroll process outsourcing ("PPO"), recruitment process outsourcing ("RPO"), and talent advisory services. International also delivers RPO talent solutions within its local markets.
The following table presents our segment revenues disaggregated by service type (in millions of dollars):
First Quarter
2023 2022
Professional & Industrial
Staffing services $ 271.5 $ 334.9
Permanent placement 4.3 10.2
Outcome-based services 114.0 99.2
Total Professional & Industrial 389.8 444.3
Science, Engineering & Technology
Staffing services 202.3 220.6
Permanent placement 5.5 8.0
Outcome-based services 98.6 88.5
Total Science, Engineering & Technology 306.4 317.1
Education
Staffing services 247.6 171.9
Permanent placement 1.8 1.5
Total Education 249.4 173.4
Outsourcing & Consulting
Talent solutions 114.6 109.1
Total Outsourcing & Consulting 114.6 109.1
International
Staffing services 205.6 241.7
Permanent placement 5.9 6.9
Talent solutions 0.3 4.2
Total International 211.8 252.8
Total Intersegment ( 3.7 ) ( 0.3 )
Total Revenue from Services $ 1,268.3 $ 1,296.4
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KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Revenue Disaggregated by Geography
Our operations are subject to different economic and regulatory environments depending on geographic location. Our P&I and Education segments operate in the Americas region, our SET segment operates in the Americas and Europe regions, and OCG operates in the Americas, Europe and Asia-Pacific regions. Our International segment includes our staffing operations in Europe as well as Mexico, which is included in the Americas region.
The below table presents our revenues disaggregated by geography (in millions of dollars):
First Quarter
2023 2022
Americas
United States $ 959.2 $ 956.6
Canada 44.9 39.1
Puerto Rico 26.9 27.6
Mexico 16.7 10.3
Total Americas Region 1,047.7 1,033.6
Europe
Switzerland 52.9 55.0
France 47.8 54.6
Portugal 44.4 41.9
Italy 16.9 19.5
Russia — 29.7
Other 47.7 51.3
Total Europe Region 209.7 252.0
Total Asia-Pacific Region 10.9 10.8
Total Kelly Services, Inc. $ 1,268.3 $ 1,296.4
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KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
The below table presents our SET, OCG and International segment revenues disaggregated by geographic region (in millions of dollars):
First Quarter
2023 2022
Science, Engineering & Technology
Americas $ 302.1 $ 313.8
Europe 4.3 3.3
Total Science, Engineering & Technology $ 306.4 $ 317.1
Outsourcing & Consulting
Americas $ 94.1 $ 92.3
Europe 9.6 6.0
Asia-Pacific 10.9 10.8
Total Outsourcing & Consulting $ 114.6 $ 109.1
International
Americas $ 16.0 $ 10.1
Europe 195.8 242.7
Total International $ 211.8 $ 252.8
Deferred Costs
Deferred fulfillment costs, which are included in prepaid expenses and other current assets in the consolidated balance sheet, were $ 1.9 million as of first quarter-end 2023 and $ 2.7 million as of year-end 2022. Amortization expense for the deferred costs in the first quarter of 2023 was $ 2.4 million and in the first quarter of 2022 was $ 1.9 million .
3. Credit Losses
The rollforward of our allowance for credit losses related to trade accounts receivable, which is recorded in trade accounts receivable, less allowance in the consolidated balance sheet, is as follows (in millions of dollars):
First Quarter
2023 2022
Allowance for credit losses:
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
Write-offs are presented net of recoveries, which were not material for first quarter-end 2023 or 2022. No other allowances related to other receivables were material as of first quarter-end 2023 or year-end 2022.
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KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
4. Acquisitions and Disposition
Acquisitions
In the second quarter of 2022, Kelly Services USA, LLC ("KSU"), a wholly owned subsidiary of the Company, acquired Pediatric Therapeutic Services ("PTS"), as detailed below. In the first quarter of 2022, the Company acquired Rocket Power Holdings LLC and Rocket Power Ops LLC (collectively, "RocketPower"), as detailed below.
Pediatric Therapeutic Services
On May 2, 2022, KSU acquired 100 % of the membership interests of PTS for a purchase price of $ 82.1 million. PTS is a specialty firm that provides and manages various state and federally mandated in-school therapy services. This acquisition expands Education's K-12 solution offering in the education staffing market and serves as an entry point into the therapeutic services market. Under terms of the purchase agreement, the purchase price was adjusted for cash held by PTS at the closing date and estimated working capital adjustments resulting in the Company paying cash of $ 85.7 million. Total consideration included $ 1.1 million of additional consideration that is payable to the seller related to employee retention credits and is recorded in accounts payable and accrued liabilities in the consolidated balance sheet. In the third quarter of 2022, the Company paid $ 0.1 million of the employee retention credits and the remainder is expected to be paid by second quarter-end 2023. The total consideration was as follows (in millions of dollars):
Cash consideration paid $ 85.7
Additional consideration payable 1.1
Total consideration $ 86.8
As of May 2023, the purchase price allocation for this acquisition is final. PTS's results of operations are included in the Education segment. Our consolidated revenues and earnings from operations for the first quarter of 2023 included $ 15.8 million and $ 2.7 million, respectively, from PTS. Goodwill generated from the acquisition was primarily attributable to expected synergies from combining operations and expanding market potential and was assigned to the Education operating segment. All of the goodwill is expected to be deductible for tax purposes.
RocketPower
On March 7, 2022, the Company acquired 100 % of the issued and outstanding membership interests of RocketPower for a purchase price of $ 59.3 million. RocketPower is a provider of RPO and other outsourced talent solutions to customers including U.S. technology companies. This acquisition expands OCG's RPO solution and delivery offering. Under terms of the purchase agreement, the purchase price was adjusted for cash held by RocketPower at the closing date and estimated working capital adjustments resulting in the Company paying cash of $ 61.8 million. Total consideration included $ 1.1 million of additional consideration that is payable to the seller in 2023 related to employee retention credits and contingent consideration with an initial estimated fair value of $ 0.6 million related to an earnout payment with a maximum potential cash payment of $ 31.8 million in the event certain financial metrics are met per the terms of the agreement. The initial fair value of the earnout was established using a Black Scholes model, see the Fair Value Measurements footnote for information regarding subsequent reassessments. The total consideration was as follows (in millions of dollars):
Cash consideration paid $ 61.8
Additional consideration payable 1.1
Contingent consideration 0.6
Total consideration $ 63.5
As of first quarter-end 2023, the purchase price allocation for this acquisition is final. RocketPower's results of operations are included in the OCG segment. Our consolidated revenues for the first quarter of 2023 included $ 2.6 million from RocketPower and our consolidated earnings from operations for the first quarter of 2023 included a loss of $ 2.6 million from RocketPower. Goodwill generated from the acquisition was primarily attributable to expected synergies from combining operations and expanding market potential and was assigned to the OCG operating segment. The amount of goodwill expected to be
15
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
deductible for tax purposes is approximately $ 27.5 million. In the third and fourth quarters of 2022, changes in market conditions triggered interim impairment tests for both long-lived assets and goodwill, resulting in the Company recording a goodwill impairment charge of $ 41.0 million.
Disposition
On July 20, 2022, the Company completed the sale of its Russia operations, which was included in the Company's International operating segment.
5. Investment in Persol Holdings
Prior to February 2022, the Company had a yen-denominated investment through the Company's subsidiary, Kelly Services Japan, Inc., in the common stock of Persol Holdings Co., Ltd. ("Persol Holdings"), the 100% owner of Persol Asia Pacific Pte. Ltd., the Company’s joint venture partner in PersolKelly Pte. Ltd. (the "JV"). In February 2022, the Company's board approved a series of transactions that ended the cross-shareholding agreement with Persol Holdings.
On February 14, 2022, the Company repurchased 1,576,169 Class A and 1,475 Class B common shares held by Persol Holdings for $ 27.2 million. The purchase price was based on the average closing price of the last five business days prior to the transaction. The shares were subsequently retired and returned to an authorized, unissued status. In accordance with the Company's policy, the amount paid to repurchase the shares in excess of par value of $ 25.6 million was recorded to earnings invested in the business in the consolidated balance sheet at the time of the share retirement.
On February 15, 2022, Kelly Services Japan, Inc. sold the investment in the common stock of Persol Holdings in an open-market transaction for proceeds of $ 196.9 million, net of transaction fees. As our investment was a noncontrolling interest in Persol Holdings, the investment was recorded at fair value based on the quoted market price of Persol Holdings stock on the Tokyo Stock Exchange through the date of the transaction. The $ 67.2 million loss in the first quarter of 2022 recorded in loss on investment in Persol Holdings in the consolidated statements of earnings included $ 52.4 million for losses related to changes in fair value up to the date of the transaction and $ 14.8 million for the discount from the market price on the date of the sale and transaction costs.
Subsequent to the transaction discussed above, the Company commenced the dissolution process of its Kelly Services Japan, Inc. subsidiary, which was considered substantially liquidated as of first quarter-end 2022. As a result, the Company recognized a $ 20.4 million cumulative translation adjustment loss in the first quarter of 2022, which was recorded in loss on currency translation from liquidation of subsidiary in the consolidated statements of earnings. The Company also recognized a $ 5.5 million foreign exchange gain related to U.S.-denominated cash equivalents held by Kelly Services Japan, Inc. following the sale of the Persol Holdings shares and prior to a dividend payment to the Company in the first quarter of 2022. The foreign exchange gain was recorded in other income (expense), net in the consolidated statements of earnings. The dissolution of the Kelly Services Japan, Inc. subsidiary was completed in the fourth quarter of 2022.
6. Investment in PersolKelly Pte. Ltd.
Prior to February 2022, the Company had a 49 % ownership interest in the JV (see Investment in Persol Holdings footnote above), a staffing services business operating in ten geographies in the Asia-Pacific region. On February 14, 2022, the Company entered into an agreement to sell 95 % of the Company's shares in the JV to Persol Asia Pacific Pte. Ltd. On March 1, 2022, the Company received cash proceeds of $ 119.5 million. The carrying value of the shares sold was $ 117.6 million. In addition, the Company had $ 1.9 million of accumulated other comprehensive income representing the Company's share of the JV's other comprehensive income over time related to the shares sold that was realized upon the sale, offsetting the $ 1.9 million gain that resulted from the proceeds in excess of the carrying value.
The operating results of the Company’s interest in the JV were accounted for on a one-quarter lag under the equity method and were reported in equity in net earnings (loss) of affiliate in the consolidated statements of earnings through the date of the sale. Such amounts were earnings of $ 0.8 million in the first quarter of 2022, representing the results through the date of the sale.
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KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
After the sale, the Company has a 2.5 % ownership interest in the JV and discontinued its use of equity method accounting. The remaining investment is accounted for as an equity investment without a readily determinable fair value (see Fair Value Measurements footnote). The equity investment, included in other assets on the Company’s consolidated balance sheet, totaled $ 6.4 million as of first quarter-end 2023 and year-end 2022.
7. Fair Value Measurements
Trade accounts receivable, short-term borrowings, accounts payable, accrued liabilities and accrued payroll and related taxes approximate their fair values due to the short-term maturities of these assets and liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present assets and liabilities measured at fair value on a recurring basis as of first quarter-end 2023 and year-end 2022 in the consolidated balance sheet by fair value hierarchy level, as described below.
Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 measurements include significant unobservable inputs.
As of First Quarter-End 2023
Description Total Level 1 Level 2 Level 3
(In millions of dollars)
Money market funds $ 54.1 $ 54.1 $ — $ —
Total assets at fair value $ 54.1 $ 54.1 $ — $ —
Brazil indemnification $ ( 3.5 ) $ — $ — $ ( 3.5 )
Total liabilities at fair value $ ( 3.5 ) $ — $ — $ ( 3.5 )
As of Year-End 2022
Description Total Level 1 Level 2 Level 3
(In millions of dollars)
Money market funds $ 108.3 $ 108.3 $ — $ —
Total assets at fair value $ 108.3 $ 108.3 $ — $ —
Brazil indemnification $ ( 3.4 ) $ — $ — $ ( 3.4 )
Greenwood/Asher earnout ( 3.3 ) — — ( 3.3 )
Total liabilities at fair value $ ( 6.7 ) $ — $ — $ ( 6.7 )
Money market funds represent investments in money market funds that hold government securities, of which $ 8.8 million as of first quarter-end 2023 and $ 8.6 million as of year-end 2022 are restricted as to use and are included in other assets in the consolidated balance sheet. The money market funds that are restricted as to use account for the majority of our restricted cash balance and represents cash balances that are required to be maintained to fund disability claims in California. The remaining money market funds as of first quarter-end 2023 and year-end 2022 are included in cash and equivalents in the consolidated balance sheet. The valuations of money market funds are based on quoted market prices of those accounts as of the respective period end.
As of first quarter-end 2023, the Company had an indemnification liability totaling $ 3.5 million with $ 0.3 million in accounts payable and accrued liabilities and $ 3.2 million in other long-term liabilities, and $ 3.4 million at year-end 2022, with $ 0.3 million in accounts payable and accrued liabilities and $ 3.1 million in other long-term liabilities in the consolidated balance sheet related to the 2020 sale of the Brazil operations. As part of the sale, the Company agreed to indemnify the buyer for losses and costs incurred in connection with certain events or occurrences initiated within a six-year period after closing. The aggregate losses for which the Company will provide indemnification shall not exceed $ 8.8 million. The valuation of the indemnification liability was established using a discounted cash flow methodology based on probability weighted-average cash
17
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
flows discounted by weighted-average cost of capital. The valuation, which represents the fair value, is considered a Level 3 liability, and is being measured on a recurring basis. During the first quarter of 2023 and 2022, the Company recognized an increase of $ 0.1 million and $ 0.5 million, respectively, to the indemnification liability related to exchange rate fluctuations in other income (expense), net in the consolidated statements of earnings.
The Company recorded an earnout liability relating to the 2020 acquisition of Greenwood/Asher, with a remaining liability of $ 3.3 million at year-end 2022 in accounts payable and accrued liabilities in the consolidated balance sheet. The initial valuation of the earnout liability was established using a Black Scholes model and represented the fair value and was considered a Level 3 liability. During the first quarter of 2023, the Company paid the remaining earnout liability totaling $ 3.3 million, representing the year two portion of the earnout. In the consolidated statements of cash flows, $ 1.4 million of the payment is reflected as a financing activity representing the initial fair value of the earnout, with the remainder flowing through operating activities. There is no remaining earnout liability as of first quarter-end 2023. During the first quarter of 2022, the Company paid the year one portion of the earnout totaling $ 2.3 million. In the consolidated statements of cash flows, $ 0.7 million of the payment is reflected as a financing activity representing the initial fair value of the earnout, with the remainder flowing through operating activities.
The Company recorded an initial earnout liability relating to the 2022 acquisition of RocketPower, totaling $ 0.6 million, with $ 0.5 million in accounts payable and accrued liabilities and $ 0.1 million in other long-term liabilities in the consolidated balance sheet as of first quarter-end 2022 (see Acquisitions and Disposition footnote). The initial valuation of the earnout liability was established using a Black Scholes model and represented the fair value and was considered a Level 3 liability. In the third quarter of 2022, we reassessed the value of the earnout liability and determined that the fair value was zero . There have been no changes to the value as a result of first quarter 2023 assessments and there is no related liability as of first quarter-end 2023. The maximum total cash payments which may be due related to the earnout liability is $ 12.9 million, which represents the second year earnout period. There is no longer a maximum cash payment or liability associated with the first year earnout as the corresponding period has concluded.
Equity Investment Without Readily Determinable Fair Value
On March 1, 2022, the Company sold the majority of its investment in the JV (see Investment in PersolKelly Pte. Ltd. footnote), with the remaining 2.5 % interest now being measured using the measurement alternative for equity investments without a readily determinable fair value. The measurement alternative represents cost, less impairment, plus or minus observable price changes. The sale of the shares of the JV represented an observable transaction requiring the Company to calculate the current fair value based on the purchase price of the shares, in which the resulting adjustment was not material. The investment totaled $ 6.4 million as of first quarter-end 2023, representing total cost plus observable price changes to date.
18
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
8. Restructuring
2023 Actions
In the first quarter of 2023, the Company undertook restructuring actions to further our cost management efforts in response to the current demand levels and reflect a repositioning of our P&I staffing business to better capitalize on opportunities in local markets. Restructuring costs incurred in the first quarter of 2023 totaled $ 5.7 million and were recorded entirely in selling, general and administrative ("SG&A") expenses in the consolidated statements of earnings, as detailed below (in millions of dollars):
Severance Costs Lease Termination and Other Costs Total
Professional & Industrial $ 2.7 $ 0.3 $ 3.0
Science, Engineering & Technology 0.4 0.1 0.5
Education 0.1 — 0.1
Outsourcing & Consulting 0.6 — 0.6
International 0.6 — 0.6
Corporate 0.2 0.7 0.9
Total $ 4.6 $ 1.1 $ 5.7
2022 Actions
In the first quarter of 2022, the Company took restructuring actions designed to increase efficiency. Restructuring costs incurred in the first quarter of 2022 totaled $ 1.7 million and were recorded entirely in SG&A expenses in the consolidated statements of earnings, as detailed below (in millions of dollars):
Severance Costs Lease Termination Costs Total
Professional & Industrial $ 0.1 $ 0.2 $ 0.3
Education 0.4 — 0.4
Outsourcing & Consulting 0.2 — 0.2
Corporate 0.8 — 0.8
Total $ 1.5 $ 0.2 $ 1.7
19
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Accrual Summary
A summary of the global restructuring balance sheet accrual, included in accrued payroll and related taxes and accounts payable and accrued liabilities in the consolidated balance sheet, is detailed below (in millions of dollars):
Balance as of year-end 2022 $ 0.3
Additions charged to Professional & Industrial 3.0
Additions charged to Science, Engineering & Technology 0.5
Additions charged to Outsourcing & Consulting 0.6
Additions charged to Education 0.1
Additions charged to International 0.6
Additions charged to Corporate 0.9
Reductions for cash payments related to all restructuring activities ( 1.0 )
Balance as of first quarter-end 2023 $ 5.0
The remaining balance of $ 5.0 million as of first quarter-end 2023 primarily represents severance costs, and the majority is expected to be paid by year-end 2023. No material adjustments are expected to be recorded.
9. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the first quarter 2023 and 2022 are included in the table below. Amounts in parentheses indicate debits.
First Quarter
2023 2022
(In millions of dollars)
Foreign currency translation adjustments:
Beginning balance $ ( 7.4 ) $ ( 25.0 )
Other comprehensive income (loss) before reclassifications 2.3 ( 9.9 )
Amounts reclassified from accumulated other comprehensive income (loss) - liquidation of Japan subsidiary — 20.4 (1)
Amounts reclassified from accumulated other comprehensive income (loss) - equity method investment and other — 2.5 (2)
Net current-period other comprehensive income (loss) 2.3 13.0
Ending balance ( 5.1 ) ( 12.0 )
Pension liability adjustments:
Beginning balance ( 1.1 ) ( 2.7 )
Other comprehensive income (loss) before reclassifications — —
Amounts reclassified from accumulated other comprehensive income (loss) — —
Net current-period other comprehensive income (loss) — —
Ending balance ( 1.1 ) ( 2.7 )
Total accumulated other comprehensive income (loss) $ ( 6.2 ) $ ( 14.7 )
(1) Amount was recorded in the loss on currency translation from liquidation of subsidiary in the consolidated statements of earnings.
20
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
(2) Of the amount included in this line item, $ 1.9 million was recorded in the other income (expense), net in the consolidated statement of earnings related to the investment in PersolKelly Pte. Ltd., (see Investment in PersolKelly Pte. Ltd. footnote for more details).
10. Earnings (Loss) Per Share
The reconciliation of basic and diluted earnings (loss) per share on common stock for the first quarter 2023 and 2022 follows (in millions of dollars except per share data):
First Quarter
2023 2022
Net earnings (loss) $ 10.9 $ ( 47.6 )
Less: earnings allocated to participating securities ( 0.2 ) —
Net earnings (loss) available to common shareholders $ 10.7 $ ( 47.6 )
Average shares outstanding (millions):
Basic 37.1 38.6
Dilutive share awards 0.3 —
Diluted 37.4 38.6
Basic earnings (loss) per share $ 0.29 $ ( 1.23 )
Diluted earnings (loss) per share $ 0.29 $ ( 1.23 )
Dilutive share awards are related to deferred common stock related to the non-employee directors deferred compensation plan and performance shares for the first quarter of 2023 (see Stock-Based Compensation footnote for a description of performance shares). Due to our net loss in the first quarter of 2022, potentially dilutive shares primarily related to deferred common stock associated with the non-employee directors deferred compensation plan of 0.2 million shares had an anti-dilutive effect on diluted earnings per share and were excluded from the computation for the first quarter of 2022. Dividends paid per share for Class A and Class B common stock were $ 0.075 for the first quarter 2023 and $ 0.050 for the first quarter 2022.
In connection with our $ 50.0 million Class A share repurchase program authorized by the Company's board of directors in November 2022, the Company repurchased 1,099,728 shares for $ 18.3 million during the first quarter of 2023. A total of $ 23.9 million remains available under the share repurchase program. The repurchase program expires in November 2023.
11. Stock-Based Compensation
For the first quarter of 2023, the Company recognized stock compensation expense of $ 3.1 million and a related tax benefit of $ 0.3 million. For the first quarter of 2022, the Company recognized stock compensation expense of $ 2.1 million and a related tax benefit of $ 0.3 million.
During the first quarter of 2023, the Company granted performance share awards associated with the Company’s Class A common stock to certain senior officers. The payment of performance share awards is contingent upon the achievement of specific revenue growth and earnings before interest, taxes, depreciation and amortization ("EBITDA") margin performance goals ("financial measure performance share awards") over a stated period of time. The maximum number of performance shares that may be earned is 200 % of the target shares originally granted. These awards have three one-year performance periods: 2023, 2024 and 2025, with the payout for each performance period based on separate financial measure goals that are set in February of each of the three performance periods. Earned shares during each performance period will cliff vest in February 2026 after approval of the financial results by the Compensation Committee, if not forfeited by the recipient. No dividends are paid on these performance shares.
On February 14, 2023, the Compensation Committee approved the actual performance achievement of one of the financial goals related to the 2021 retention-based grant. At the same meeting, the Compensation Committee approved a modification to accelerate the vesting for the goal earned, where half of these awards vested immediately upon approval of the results and the remaining half will vest in August 2023, if not forfeited by the recipient. We accounted for this change as a Type I
21
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
modification under ASC 718 as the expectation of vesting remained probable-to-probable post modification. The Company did not record any incremental stock compensation expense since the fair value of the modified awards immediately after the modification was not greater than the fair value of the original awards immediately before the modification. The Company will recognize the remaining stock compensation expense over the remaining portion of the modified service requisite period.
A summary of the status of all nonvested performance shares at target as of first quarter-end 2023 and changes during this period is presented as follows below (in thousands of shares except per share data).
Financial Measure
Performance Shares
Shares Weighted Average Grant Date Fair Value
Nonvested at year-end 2022 692 $ 19.41
Granted 246 15.18
Vested ( 108 ) 19.76
Forfeited — —
Nonvested at first quarter-end 2023 830 $ 17.38
Restricted Stock
A summary of the status of nonvested restricted stock as of first quarter-end 2023 and changes during this period is presented as follows below (in thousands of shares except per share data).
Shares Weighted Average Grant Date Fair Value
Nonvested at year-end 2022 607 $ 20.27
Granted 407 17.26
Vested ( 140 ) 21.54
Forfeited ( 15 ) 20.97
Nonvested at first quarter-end 2023 859 $ 18.62
12. Sale of Assets
In January 2022, the Company sold a property for a purchase price of $ 0.9 million, subject to final closing adjustments. The Company received cash proceeds of $ 0.9 million in the first quarter of 2022. As of the date of the sale, the property had an immaterial carrying value; as such, the resulting gain on the sale of the property was $ 0.9 million, which was recorded in gain on sale of assets in the consolidated statements of earnings.
22
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
13. Other Income (Expense), Net
Included in other income (expense), net for the first quarter 2023 and 2022 are the following:
First Quarter
2023 2022
(In millions of dollars)
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
Included in Other for the first quarter of 2023 is a gain of $ 2.0 million for the receipt of final proceeds in connection with our investment in Business Talent Group, LLC that was sold in 2021. Included in foreign exchange gains (losses) for the first quarter of 2022 is a $ 5.5 million foreign exchange gain on a U.S. dollar-denominated cash balance held by the Company's Japan entity (see Investment in Persol Holdings footnote).
14. Income Taxes
Income tax expense was $ 1.8 million for the first quarter of 2023 and income tax benefit was $ 13.0 million for the first quarter of 2022. The quarterly amounts are impacted by changes in earnings from operations. The first quarter 2022 amounts were also impacted by changes in the fair value of the Company's investment in Persol Holdings, which resulted in a benefit of $ 18.4 million.
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, prior to February 2022, changes in the fair value of the Company's investment in Persol Holdings, which were treated as discrete since they could not be estimated.
The Company provides valuation allowances against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Sustained profitability of our German business makes release of its $ 5.7 million valuation allowance possible in the near term.
23
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
15. Contingencies
The Company is continuously engaged in litigation, threatened litigation, claims, audits or investigations arising in the ordinary course of its business, such as matters alleging employment discrimination, wage and hour violations, claims for indemnification or liability, violations of privacy rights, anti-competition regulations, commercial and contractual disputes, and tax-related matters which could result in a material adverse outcome.
We record accruals for loss contingencies when we believe it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Such accruals are recorded in accounts payable and accrued liabilities and in accrued workers’ compensation and other claims in the consolidated balance sheet. At first quarter-end 2023 and year-end 2022, the gross accrual for litigation costs amounted to $ 4.7 million and $ 2.3 million, respectively.
The Company maintains insurance coverage which may cover certain losses. When losses exceed the applicable policy deductible and realization of recovery of the loss from existing insurance policies is deemed probable, the Company records receivables from the insurance company for the excess amount, which are included in prepaid expenses and other current assets and other assets in the consolidated balance sheet. At both first quarter-end 2023 and year-end 2022, the related insurance receivables amounted to $ 0.6 million.
The Company estimates the aggregate range of reasonably possible losses, in excess of amounts accrued, is $ 0.1 million to $ 2.8 million as of first quarter-end 2023. This range includes matters where a liability has been accrued but it is reasonably possible that the ultimate loss may exceed the amount accrued and for matters where a loss is believed to be reasonably possible, but a liability has not been accrued. The aggregate range only represents matters in which we are currently able to estimate a range of loss and does not represent our maximum loss exposure. The estimated range is subject to significant judgment and a variety of assumptions and only based upon currently available information. For other matters, we are currently not able to estimate the reasonably possible loss or range of loss.
While the ultimate outcome of these matters cannot be predicted with certainty, we believe that the resolution of any such proceedings will not have a material adverse effect on our financial condition, results of operations or cash flows.
24
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
16. Segment Disclosures
The Company’s operating segments, which also represent its reporting segments, are based on the organizational structure for which financial results are regularly evaluated by the Company’s chief operating decision-maker ("CODM", the Company’s CEO) to determine resource allocation and assess performance. The Company’s five reportable segments, (1) Professional & Industrial, (2) Science, Engineering & Technology, (3) Education, (4) Outsourcing & Consulting, and (5) International, reflect the specialty services the Company provides to customers and represent how the business is organized internally. Intersegment revenue represents revenue earned between the reportable segments and is eliminated from total segment revenue from services.
The following tables present information about the reported revenue from services and gross profit of the Company by reportable segment, along with a reconciliation to earnings (loss) before taxes and equity in net earnings (loss) of affiliate, for the first quarter 2023 and 2022. Asset information by reportable segment is not presented, since the Company does not produce such information internally nor does it use such information to manage its business.
First Quarter
2023 2022
(In millions of dollars)
Revenue from Services:
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
Less: Intersegment revenue ( 3.7 ) ( 0.3 )
Consolidated Total $ 1,268.3 $ 1,296.4
25
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
First Quarter
2023 2022
(In millions of dollars)
Earnings (loss) from Operations:
Professional & Industrial gross profit $ 69.8 $ 83.1
Professional & Industrial SG&A expenses ( 67.5 ) ( 71.4 )
Professional & Industrial earnings (loss) from operations 2.3 11.7
Science, Engineering & Technology gross profit 71.3 73.8
Science, Engineering & Technology SG&A expenses ( 52.8 ) ( 53.2 )
Science, Engineering & Technology earnings (loss) from operations 18.5 20.6
Education gross profit 39.3 26.6
Education SG&A expenses ( 23.8 ) ( 18.6 )
Education earnings (loss) from operations 15.5 8.0
Outsourcing & Consulting gross profit 41.6 37.3
Outsourcing & Consulting SG&A expenses ( 40.5 ) ( 34.3 )
Outsourcing & Consulting earnings (loss) from operations 1.1 3.0
International gross profit 32.1 37.8
International SG&A expenses ( 32.4 ) ( 33.2 )
International earnings (loss) from operations ( 0.3 ) 4.6
Corporate ( 26.4 ) ( 24.5 )
Consolidated Total 10.7 23.4
Loss on investment in Persol Holdings — ( 67.2 )
Loss on currency translation from liquidation of subsidiary — ( 20.4 )
Other income (expense), net 2.0 2.8
Earnings (loss) before taxes and equity in net earnings (loss) of affiliate $ 12.7 $ ( 61.4 )
Depreciation and amortization expense included in SG&A expenses by segment above are as follows:
First Quarter
2023 2022
(In millions of dollars)
Depreciation and amortization:
Professional & Industrial $ 0.8 $ 1.1
Science, Engineering & Technology 3.2 3.1
Education 1.5 0.8
Outsourcing & Consulting 1.0 0.2
International 0.4 0.5
26
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.