KELLY SERVICES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Executive Overview We entered 2025 propelled by positive momentum from our recent growth and efficiency improvements. Our priorities remained focused on delivering organic growth, realizing efficiencies by further streamlining our operating model, and driving incremental margin expansion. As anticipation of global trade policy shifts increased throughout the first quarter of 2025, we remained agile and ready to respond to changing external dynamics while keeping our sights set on our priorities. By focusing on what we can control and through disciplined execution, we delivered solid results in the quarter and substantial progress on our strategic priorities. We combined our former P&I and OCG segments into the ETM segment in the first quarter of 2025, responding to a shift in customer demand toward integrated workforce solutions and enabling a more streamlined and efficient go-to-market approach. This streamlined structure builds upon the enterprise account growth initiative we implemented in 2023, further enhancing our ability to deliver the full suite of Kelly offerings to large enterprise accounts. We also shifted certain customers from the SET segment to the ETM segment to support this integrated strategy. Also in the first quarter of 2025, we moved Motion Recruitment Partners’ Sevenstep business from the SET segment to the ETM segment as part of the broader integration of MRP. We also accelerated our progress on integrating MRP’s portfolio of businesses with our existing SET businesses. We initiated plans to modernize SET’s front- and back-office systems leveraging MRP’s leading technology stack. This will create a scalable, efficient, and integrated technology platform within SET that reduces complexity and enhances agility across the business. In addition, we implemented targeted cost-reduction actions to deliver additional structural improvements to our cost base. These actions underscore our commitment to enhancing Kelly’s profitability over the long term. In parts of our portfolio where customers are taking a more measured approach to hiring, we took action to align resources with demand. Together, our actions in the first quarter of 2025 reflect Kelly’s strategic progress, and our team’s ability to execute in any environment. These achievements reinforce our confidence in the resilience of our business, the strength of our operating model, and the expertise of our team – momentum we aim to carry forward throughout the remainder of 2025. Financial Measures Reported percentage changes were computed based on actual amounts in thousands of dollars. EBITDA (earnings before interest, taxes, depreciation and amortization) and EBITDA margin (EBITDA divided by revenue from services) are measures used for understanding our ability to generate cash flow and for judging overall operating performance. EBITDA 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. 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. 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. 28 Results of Operations Total Company (Dollars in millions) First Quarter 2025 2024 % Change Revenue from services $ 1,164.9 $ 1,045.1 11.5 % Gross profit 236.5 205.7 15.0 SG&A expenses excluding integration, realignment, and restructuring charges and depreciation and amortization 202.2 178.0 13.6 Integration, realignment and restructuring charges 10.7 2.3 361.1 Total SG&A expenses excluding depreciation and amortization 212.9 180.3 18.1 Depreciation and amortization 12.8 10.2 25.4 Total SG&A expenses 225.7 190.5 18.5 Gain on sale of EMEA staffing operations — (11.6) NM Earnings from operations 10.8 26.8 (59.8) Gain on forward contract — 1.2 NM Other income (expense), net (3.2) 1.8 (271.3) Earnings before taxes 7.6 29.8 (74.6) Income tax expense 1.8 4.0 (54.7) Net earnings $ 5.8 $ 25.8 (77.7) % Gross profit rate 20.3 % 19.7 % 0.6 pts. First Quarter Results Revenue from services in the first quarter increased 11.5%, which is primarily driven by the acquisition of MRP in May 2024. Excluding the impact from the acquisition, revenue from services was flat year-over-year with increases in the Education segment mostly offset by decreases in the SET segment. Compared to the first quarter of 2024 and excluding the impact from the acquisition, revenue from staffing services and outcome-based services were flat to the prior year. Revenue from talent solutions increased 3.0% and permanent placement revenue decreased 31.4% from the prior year, excluding the impact from the acquisition. Gross profit increased 15.0% largely driven by the acquisition of MRP. Excluding the impact from the acquisition, gross profit decreased 1.1%. The gross profit rate increased 60 basis points to 20.3% primarily due to a 90 basis point increase due to the acquisition of MRP, partially offset by a 20 basis point decrease related to lower permanent placement fees and a 10 basis point decrease related to business mix and other. Permanent placement revenue has very low direct costs of services and has a disproportionate impact on gross profit rates. The gross profit rate decreased in the ETM and SET segments excluding the acquisition and increased in the Education segment. Total SG&A expenses increased 18.5%, primarily due to the acquisition of MRP. Excluding the impact of the acquisition, SG&A expenses increased 1.0%. SG&A expenses in the first quarter of 2025 include $10.7 million of integration and realignment costs related to initiatives to integrate MRP and other prior acquisitions, consolidating operating segments, and further aligning processes and technology across the Company, $0.3 million of transaction costs related to the sale of our EMEA staffing operations, and $0.3 million of executive transition charges. Included in SG&A expenses in the first quarter of 2024 were $5.6 million of transaction costs related to the sale of our EMEA staffing operations and $2.3 million of transformation and restructuring charges relating to 2023 initiatives. Excluding the impact from the acquisition, as well as integration and realignment, transaction, executive transition, and restructuring and transformation charges—and excluding depreciation and amortization—SG&A expenses were flat to the prior year. The gain on sale of EMEA staffing operations relates to the completion of the sale in January 2024 in which we had recognized a gain of $11.6 million as of first quarter-end 2024. 29 Gain on forward contract of $1.2 million represents the gain recognized in the first quarter of 2024 for the settlement of the foreign currency forward contract in January 2024 that was entered into in 2023 relating to the sale of the EMEA staffing operations. Income tax expense was $1.8 million for the first quarter of 2025 compared to $4.0 million for the first quarter of 2024, with the decrease primarily related to changes in pretax income. 30 Operating Results By Segment (Dollars in millions) First Quarter 2025 2024 % Change Revenue from Services: Enterprise Talent Management $ 534.0 $ 524.1 1.9 % Science, Engineering & Technology 322.4 231.6 39.2 Education 309.0 289.9 6.6 Less: Intersegment revenue (0.5) (0.5) (10.8) Consolidated Total $ 1,164.9 $ 1,045.1 11.5 % First Quarter Results The increase in ETM revenue was driven by the acquisition of Sevenstep, the MRP talent solutions business, as revenue excluding the acquisition was flat to prior year. Excluding the acquisition, revenue from staffing services decreased 1.8%, which was offset by increases of 1.8% in outcome-based services and 3.0% in talent solutions. The increase in SET revenue from services was primarily driven by the acquisition of MRP staffing and outcome-based solutions businesses. Excluding the acquisition, revenue from services decreased 7.2% primarily driven by declines in hours volume in our staffing specialties including the impact of changes in demand related to U.S. federal government. Excluding the acquisition, revenue in our outcome-based services decreased 3.4%. Permanent placement fees decreased, reflecting continued lower market demand. The increase in Education revenue from services was driven by increased demand for our services as compared to a year ago, reflecting the impact of fill rate improvement and higher bill rates, partially offset by the impact of weather-related school closures. 31 Operating Results By Segment (continued) (Dollars in millions) First Quarter 2025 2024 Change Gross Profit: Enterprise Talent Management $ 108.0 $ 106.2 1.7 % Science, Engineering & Technology 82.3 57.4 43.3 Education 46.2 42.1 9.8 Consolidated Total $ 236.5 $ 205.7 15.0 % Gross Profit Rate: Enterprise Talent Management 20.2 % 20.3 % (0.1) pts. Science, Engineering & Technology 25.5 24.8 0.7 Education 15.0 14.5 0.5 Consolidated Total 20.3 % 19.7 % 0.6 pts. First Quarter Results Gross profit for ETM increased on higher revenue volume. In comparison to the prior year, the gross profit rate decreased 10 basis points. Factors impacting the gross profit rate included lower permanent placement fees which reduced the gross profit rate by 10 basis points and the impact of changes in business mix and employee-related costs reduced the gross profit rate by 20 basis points. This was partially offset by a 20 basis point increase due to the acquisition of Sevenstep, a MRP talent solutions business. The SET gross profit increased primarily as a result of the acquisition of the MRP staffing and outcome-based solutions businesses. The SET gross profit rate increased 70 basis points driven by a 100 basis point increase due to the MRP acquisition, which generates higher gross profit rates, and 50 basis points reflecting favorable business mix and employee-related costs, partially offset by an 80 basis point decrease as a result of lower permanent placement fees. Gross profit for the Education segment increased on higher revenue volume. The gross profit rate increased 50 basis points due primarily to favorable employee-related costs. 32 Operating Results By Segment (continued) (Dollars in millions) First Quarter 2025 2024 % Change SG&A Expenses (excluding depreciation and amortization): Enterprise Talent Management $ 101.2 $ 98.1 3.1 % Science, Engineering & Technology 68.9 43.2 59.4 Education 26.9 24.0 12.4 Corporate expenses 15.9 15.0 5.9 Consolidated Total $ 212.9 $ 180.3 18.1 % First Quarter Results The increase in ETM SG&A expenses excluding depreciation and amortization is primarily due to the acquisition of Sevenstep, the MRP talent solutions business. Excluding the acquisition, expenses decreased 0.6% from the prior year primarily due to lower employee-related costs as a result of expense management actions in response to lower revenue volume compared to the prior year, partially offset by integration and realignment charges. The increase in SET SG&A expenses excluding depreciation and amortization is primarily due to the acquisition of MRP. Excluding the acquisition, expenses were flat to the prior year. The increase in Education SG&A expenses excluding depreciation and amortization primarily related to increased year-over-year revenue levels. The increase in Corporate expenses is primarily driven by integration and realignment charges in the first quarter of 2025. 33 Operating Results By Segment (continued) (Dollars in millions) First Quarter 2025 2024 % Change Business Unit Profit (Loss) Enterprise Talent Management $ 6.8 $ 8.1 (15.4) % Science, Engineering & Technology 13.4 14.2 (5.8) Education 19.3 18.1 6.2 Business Unit Profit (Loss) 39.5 40.4 (2.3) Corporate (15.9) (15.0) 5.9 Gain on sale of EMEA staffing operations — 11.6 NM Depreciation and amortization (12.8) (10.2) 25.4 Consolidated Total Earnings from Operations $ 10.8 $ 26.8 (59.8) % First Quarter Results ETM reported profit decreased versus the prior year primarily due to higher SG&A expenses, partially offset by higher revenue and gross profit. SET reported profit includes $3.8 million of business unit profit from the acquisition of MRP. Excluding the acquisition, the decrease in profit was due primarily to lower revenue and gross profit. Education reported profit of $19.3 million compared to profit of $18.1 million a year ago. The change was primarily driven by higher revenue and gross profit, partially offset by an increase in SG&A expenses. Corporate expenses increased 5.9% over the prior year primarily driven by integration and realignment charges in the first quarter of 2025. 34 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, 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. 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 $34.5 million at the end of the first quarter of 2025 and $45.6 million at year-end 2024. As further described below, we generated $23.9 million of cash from operating activities, generated $3.2 million of cash from investing activities and used $39.5 million of cash for financing activities. Operating Activities In the first three months of 2025, we generated $23.9 million of net cash from operating activities, as compared to using $25.5 million in the first three months of 2024, primarily due to decreased working capital requirements as compared to the same period of the prior year. Trade accounts receivable totaled $1.3 billion at the end of the first quarter of 2025. Global DSO was 61 d ays at the end of the first quarter of 2025 and 59 days at year-end 2024. Our working capital position (total current assets less total current liabilities) was $528.1 million at the end of the first quarter of 2025 including the impact of our acquisition of MRP, a decrease of $10.9 million from year-end 2024. Excluding the decrease in cash, working capital decreased $0.1 million from year-end 2024. The current ratio (total current assets divided by total current liabilities) was 1.6 at the end of the first quarter of 2025 and 1.7 at year-end 2024. Investing Activities In the first three months of 2025, we generated $3.2 million of cash from investing activities, as compared to generating $72.1 million in the first three months of 2024. Included in cash from investing activities in the first three months of 2025 is $6.4 million of cash from the sale of the PersolKelly investment, partially offset by $2.5 million of cash used for capital expenditures. I ncluded in the cash from investing activities in the first three months of 2024 is $77.1 million of p roceeds from sale of EMEA staffing operations, net of cash disposed, partially offset by $3.7 million of cash used for capital expenditures and a $2.4 million payment for the settlement of forward contracts . Financing Activities We used $39.5 million of cash for financing activities in the first three months of 2025, as compared to using $4.7 million in the first three months of 2024. The change in cash used for financing activities is driven by net repayments of $34.8 million on our credit facilities in the first three months of 2025. Divi dends paid per common share were $0.075 in each of the first three months of 2025 and 2024. 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 14.2% at the end of the first quarter of 2025 and 16.2% at year-end 2024. 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 2024 Form 10-K. 35 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 2024 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. The credit facilities also include an accordion feature to increase our combined borrowing capacity by $250.0 million. Additional funding sources could include 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. 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, unless it is needed for organic or inorganic investments that align with our overall growth strategy. Conversely, when working capital needs grow, we tend to use corporate cash and cash available in the global cash pooling arrangement (the “Cash Pool”) first, and then access our borrowing facilities. We expect our working capital requirements to increase if demand for our services increases. We assess and monitor our liquidity and capital resources globally. We use the Cash Pool, intercompany loans, dividends, capital contributions, and local lines of credit to meet funding needs and allocate our capital resources among our various subsidiaries. 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 our overall capital structure. As of the end of the first quarter of 2025, these reviews have not resulted in specific plans to repatriate a majority of our international cash balances. Following the sale of our EMEA staffing operations completed in the first quarter of 2024, discussed below, we continue to provide MSP, RPO and Functional Service Provider solutions in the EMEA region. Therefore, we expect much of our remaining international cash will be needed to fund working capital growth in our local operations. On January 2, 2024, we completed the sale of our EMEA staffing operations to Gi Group Holdings S.P.A. and received cash proceeds of $110.6 million or $77.1 million net of cash disposed. We expect to receive additional cash proceeds related to the sale to reflect the cash-free, debt-free transaction basis, as well as working capital and other adjustments. As of first quarter-end 2025, we have recorded a net receivable of $17.0 million. We are actively reconciling the receivable in accordance with the purchase agreement and expects it to be settled upon completion of this process. We will not receive any proceeds from the contingent consideration opportunity associated with the transaction. See the Acquisitions and Disposition footnote in the notes to our consolidated financial statements for more details. On May 31, 2024, we indirectly acquired 100% of the equity interests in MRP for a purchase price of $425.0 million. Under terms of the agreement, the purchase price was adjusted for estimated cash held by MRP at the closing date and estimated working capital adjustments, resulting in us paying cash of $440.0 million, funded with cash on hand and available credit facilities. Per the terms of the agreement, there was an earnout with a maximum potential cash payment of $60.0 million due to the seller in the second quarter of 2025. As of first quarter-end 2025, the fair value of the earnout remained at zero, and no liability is recorded. See the Acquisitions and Disposition footnote in the notes to our consolidated financial statements for more details. As of first quarter-end 2025, we had $120.0 million of available capacity on our $150.0 million revolving credit facility and $32.8 million of available capacity on our $250.0 million securitization facility. The revolving credit facility carried $30.0 million of long-term borrowings on the term benchmark line of credit. The securitization facility carried $174.6 million of long-term borrowings and $42.6 million of standby letters of credit related to workers’ compensation. On July 17, 2024, we entered into interest rate swaps that effectively locked in the variable Secured Overnight Financing Rate (“SOFR” component of our interest rate for a portion of the long-term borrowings on the Securitization Facility. As of first quarter-end 2025, we recorded a liability totaling $0.3 million related to the mark-to-market fair value change of the interest rate swaps. See the Fair Value Measurements footnote and the Debt footnote in the notes to our consolidated financial statements for more details. Together, the revolving credit and securitization facilities provide us with committed funding capacity that may be used for general corporate purposes subject to financial covenants and restrictions. We believe our cash flow from operations, the availability of liquidity under our credit facilities, including the accordion feature which allows us to increase our borrowing 36 capacity and our ability to access capital from financial markets will be sufficient to meet our anticipated cash requirements, while maintaining sufficient liquidity for normal operating purposes. As of first quarter-end 2025, we met the debt covenants related to our revolving credit facility and securitization facility. As of first quarter-end of 2025, we had additional unsecured, uncommitted short-term local credit facilities totaling $3.1 million, under which we had no borrowings. Details of our debt facilities are contained in the Debt footnote in the notes to our consolidated financial statements. We monitor the credit ratings of our 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. Forward-Looking Statements Certain statements contained in this report and in our investor conference call related to these results are “forward-looking” statements within the meaning of the applicable securities laws and regulations. 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, (i) changing market and economic conditions, (ii) disruption in the labor market and weakened demand for human capital resulting from technological advances, loss of large corporate customers and government contractor requirements, (iii) the impact of laws and regulations (including federal, state and international tax laws), (iv) unexpected changes in claim trends on workers’ compensation, unemployment, disability and medical benefit plans, (v) litigation and other legal liabilities (including tax liabilities) in excess of our estimates, (vi) our ability to achieve our business's anticipated growth strategies, (vii) our future business development, results of operations and financial condition, (viii) damage to our brands, (ix) dependency on third parties for the execution of critical functions, (x) conducting business in foreign countries, including foreign currency fluctuations, (xi) availability of temporary workers with appropriate skills required by customers, (xii) cyberattacks or other breaches of network or information technology security, and (xiii) 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.