KELLY SERVICES, INC. Executive Overview
In 2022, Kelly moved forward on its strategic growth journey amid a dynamic macroeconomic environment in the first half of the year. As the year progressed, a mixed pattern of revenue growth and deceleration emerged and persisted through the balance of 2022 driven by rising inflation, increasing interest rates and heightened economic uncertainty. Consequently, a growing number of employers scaled back or paused hiring - and in some cases reduced the size of their workforces - to align their costs with declining growth. Notwithstanding these dynamics, the labor market remained tight. The economy continued to add jobs - albeit at a slightly slower pace to end the year - and unemployment remained at historically low levels, which contributed to ongoing challenges with sourcing talent.
By executing our strategy in a disciplined manner and focusing on factors within our control, we managed through these ongoing headwinds and achieved solid growth over the prior year.
•We increased total company revenue driven by top-line growth in our Education, SET and OCG business units. •Our more profitable outcome-based solutions demonstrated resilience amid macroeconomic headwinds and generated solid revenue and gross profit growth. •Each of our five business units expanded its gross profit rate, reflecting our ongoing drive to shift toward a higher-margin, higher-value business mix. •Excluding the impact of goodwill impairment charges and a loss on the disposal of our Russian operations, we improved earnings from operations, demonstrating our ability to effectively translate gross margin expansion to earnings growth.
2022 was also a year in which we accelerated our transformation and streamlined our portfolio.
•We ended the cross-ownership arrangement between Kelly and Persol Holdings - selling our investment in the common shares of Persol Holdings and repurchasing our Class A and B common shares held by Persol Holdings - and reduced our ownership interest in our PersolKelly joint venture, unlocking$235 million of liquidity. •We redeployed a portion of the net proceeds from these transactions to advance our inorganic growth strategy, while preserving the remaining capital to pursue additional high-margin, high-growth acquisitions in the future. •We monetized non-core real estate holdings, unlocking more capital to invest in growth initiatives. •We acted decisively to transfer ownership of our Russian operations to a Russian company. •We increased our dividend to its pre-pandemic level and authorized a$50 million repurchase of outstanding Class A common shares.
Together, these achievements and actions demonstrate our commitment to our specialty growth strategy and create long-term value for all our stakeholders.
As the macroeconomic situation unfolds in 2023, we will stay the course in our
pursuit of profitable growth while proactively controlling costs to manage
through this economic cycle. In each of our chosen specialties, we will continue
to shift toward a business mix characterized not only by higher margins and
value, but greater resilience to lessen the impact of market fluctuations. We
also intend to drive inorganic growth using our available capital to pursue
additional high-quality acquisitions in Education, SET and OCG. Finally, we will
continue to invest in technology and new products that will improve the talent
and customer experience, increase efficiency and enable organic growth.
Together, these actions will ensure that we continue to move forward on our
strategic journey in pursuit of profitable, specialty growth.
21
--------------------------------------------------------------------------------Financial Measures
The constant currency ("CC") change amounts in the following tables refer to the
year-over-year percentage changes resulting from translating 2022 financial data
into U.S. dollars using the same foreign currency exchange rates used to
translate financial data for 2021. 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 measures and are used to supplement measures in
accordance with GAAP (Generally Accepted Accounting Principles). 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.
22
--------------------------------------------------------------------------------
Results of Operations
Total Company
(Dollars in millions)
2022 2021 Change
Revenue from services $ 4,965.4 $ 4,909.7 1.1 %
Gross profit 1,011.8 919.2 10.1
SG&A expenses excluding restructuring charges 943.5 866.6 8.9
Restructuring charges - 4.0 NM
Total SG&A expenses 943.5 870.6 8.4
Goodwill impairment charge (41.0) - NM
Loss on disposal (18.7) - NM
Gain on sale of assets 6.2 - NM
Earnings (loss) from operations 14.8 48.6 (69.7)
Gain (loss) on investment in Persol Holdings (67.2) 121.8 NM
Loss on currency translation from liquidation of
subsidiary (20.4) - NM
Gain on insurance settlement - 19.0 NM
Other income (expense), net 1.6 (3.6) 146.4Earnings (loss) before taxes and equity in net earnings (loss) of affiliate
(71.2) 185.8 NM
Income tax expense (benefit) (7.9) 35.1 (122.6)
Equity in net earnings (loss) of affiliate 0.8 5.4 (85.9)
Net earnings (loss) $ (62.5) $ 156.1 NM %
Gross profit rate 20.4 % 18.7 % 1.7 pts.
Conversion rate 1.5 5.3 (3.8)
The discussion that follows focuses on 2022 results compared to 2021. For a
discussion of 2021 results compared to 2020, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of
our Annual Report on Form 10-K for the fiscal year ended January 2, 2022 , filed
on February 17, 2022 .
2022 vs. 2021
Revenue from services increased 1.1% on a reported basis and 3.2% on a constant
currency basis, and reflects revenue increases in Education, Science,
Engineering & Technology, and Outsourcing & Consulting operating segments,
partially offset by declines in Professional & Industrial and International
segments. Our first quarter 2021 acquisition of Softworld , a technology staffing
and solutions firm, and our first quarter 2022 acquisition of RocketPower, an
RPO solutions provider, and our second quarter 2022 acquisition of PTS, a
specialty firm that provides in-school therapy services, added approximately 180
basis points to the revenue growth rate. Compared to 2021, revenue from staffing
services decreased 1.2% and revenue from outcome-based services increased 6.3%.
Permanent placement revenue, which is included in revenue from services,
increased 18.9% from 2021.
Gross profit increased 10.1% on a reported basis and 12.1% on a constant
currency basis on higher revenue volume, combined with an increase in the gross
profit rate. The gross profit rate increased 170 basis points due primarily to
favorable product mix, lower employee-related costs, higher permanent placement
income and the impact of the acquisitions of Softworld , RocketPower and PTS,
which generate higher gross profit rates. The gross profit rate increased in all
operating segments. 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 8.4% on a reported basis and 10.0% on a constant
currency basis. Approximately 320 basis points of the year-over-year increase is
attributable to the first quarter SG&A expenses for Softworld and the SG&A
expenses for RocketPower and PTS, including amortization of intangibles and
other operating expenses. The increase in SG&A
23
--------------------------------------------------------------------------------expenses also reflects increases in salary and related costs and increases in performance-based incentive compensation expenses.
The goodwill impairment charge relates to our RocketPower business, which delivers RPO services primarily to customers in the high-tech industry, and is included in the Outsourcing & Consulting segment. Changes in market conditions related to demand in hiring in the high-tech industry and slowing growth in RPO more broadly resulted in a goodwill impairment charge of$41.0 million in 2022. Loss on disposal relates to our decision inMay 2022 to sell our business inRussia . As a result, our Russian operations were classified as a held for sale disposal group and an impairment loss of$18.5 million representing the excess carrying value over the fair value of the net assets, less costs to sell, was recognized in the second quarter of 2022 with an additional loss of$0.2 million recognized in the third quarter upon completion of the transaction. Gain on sale of assets relates to the disposition of under-utilized real property located inthe United States . Earnings from operations for 2022 totaled$14.8 million , compared to earnings of$48.6 million in 2021. The decline is due primarily to the goodwill impairment charge and the loss on disposal, partially offset by higher gross profit, net of increased SG&A expenses and gain on sale of assets. Included in total earnings from operations in 2022 is approximately$14.4 million related toSoftworld , RocketPower and PTS earnings from operations, inclusive of amortization of intangibles but excluding the RocketPower goodwill impairment charge, and$6.3 million in 2021 related toSoftworld , inclusive of amortization of intangibles. The loss on investment in Persol Holdings in 2022 represented the$52.4 million loss resulting from changes in the market price of our investment in the common stock of Persol Holdings up until the date of the transaction and the$14.8 million loss on sale, including transaction costs from the sale of the investment in an open-market transaction. The gain on the investment in Persol Holdings in 2021 resulted from changes in the quoted market price of the Persol Holdings common stock. Loss on currency translation from liquidation of subsidiary represents the impact of the liquidation of ourKelly Japan subsidiary following the sale of the company's investment in Persol Holdings and the return of capital through a dividend payment to itsU.S. parent. The change in Other income (expense), net is primarily the result of$5.5 million of foreign exchange gains related toU.S. -denominated cash equivalents held by ourKelly Japan subsidiary following the sale of the Persol Holdings shares and prior to its dividend payment to theU.S. parent in the first quarter of 2022. Income tax benefit was$7.9 million for 2022 and income tax expense was$35.1 million for 2021. 2022 benefited from lower pretax earnings, changes in the fair value of the Company's investment in Persol Holdings, and the impairment of tax deductible goodwill. These benefits were offset by the charge associated with tax exempt life insurance cash surrender value losses. Income tax expense for 2021 included charges from changes in the fair value of the Company's investment in Persol Holdings and the gain on insurance settlement. These amounts were offset by benefits from a change in tax rate in theUnited Kingdom and tax exempt life insurance cash surrender value gains. 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 toFebruary 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 net loss for 2022 was
24
--------------------------------------------------------------------------------
Operating Results By Segment
(Dollars in millions)
2022 2021 % Change
Revenue From Services:
Professional & Industrial $ 1,666.2 $ 1,837.4 (9.3) %
Science, Engineering & Technology 1,265.4 1,156.8 9.4
Education 636.2 416.5 52.7
Outsourcing & Consulting 468.0 432.1 8.3
International 932.2 1,067.8 (12.7)
Less: Intersegment revenue (2.6) (0.9) 182.8
Consolidated Total $ 4,965.4 $ 4,909.7 1.1 %
2022 vs. 2021
Professional & Industrial revenue from services decreased 9.3%. The decrease was
due primarily to a 12.4% decline in staffing services resulting from lower hours
volume, partially offset by higher bill rates. Included in the decline in hours
was the impact from a shift of a large staffing customer to a permanent
placement model which resulted in lower staffing volume. Revenue from
outcome-based services declined 0.3% due to lower demand for our call center
specialty, partially offset by growth in other specialties.
Science, Engineering & Technology revenue from services increased 9.4% on a
reported basis, which includes revenue from the acquisition of Softworld in the
second quarter of 2021. Excluding the impact of the addition of Softworld
revenue in the first quarter of 2022, the revenue growth was 6.1%, which was
driven by increases in our outcome-based services as well as an increase in
revenue in our staffing business coming from increases in bill rates and
permanent placement income, partially offset by a decline in hours.
Education revenue from services increased 52.7%. The revenue increase includes
the impact of the acquisition of PTS in May 2022 . On an organic basis, revenue
increased 45.9% reflecting increased demand from existing customers, new
customer wins and the impact of higher bill rates.
Outsourcing & Consulting revenue from services increased 8.3% on a reported
basis, which includes the revenue from the acquisition of RocketPower in March
2022 . On an organic basis, revenue growth was 2.7% due primarily to strong
demand for RPO services, coupled with revenue growth in MSP, partially offset by
declines in PPO revenue.
International revenue from services decreased 12.7% on a reported basis and
decreased 4.7% in constant currency. The decrease was primarily the result of
the sale of our Russian operations in July 2022 , combined with revenue declines
in Mexico due to the impact of legislation enacted in the third quarter of 2021,
which placed restrictions on the staffing industry. Revenue in Europe decreased
9.2% on a reported basis and decreased 0.3% in constant currency, with the
impact of the sale of our Russian operations nearly offset by growth in most
geographies.
25
--------------------------------------------------------------------------------
Operating Results By Segment (continued)
(Dollars in millions)
2022 2021 Change
Gross Profit:
Professional & Industrial $ 302.5 $ 310.0 (2.4) %
Science, Engineering & Technology 297.0 253.9 17.0
Education 100.3 65.1 54.0
Outsourcing & Consulting 169.6 141.4 20.0
International 142.4 148.8 (4.3)
Consolidated Total $ 1,011.8 $ 919.2 10.1 %
Gross Profit Rate:
Professional & Industrial 18.2 % 16.9 % 1.3 pts.
Science, Engineering & Technology 23.5 21.9 1.6
Education 15.8 15.6 0.2
Outsourcing & Consulting 36.3 32.7 3.6
International 15.3 13.9 1.4
Consolidated Total 20.4 % 18.7 % 1.7 pts.
2022 vs. 2021
Gross profit for the Professional & Industrial segment decreased due to lower
revenue volume, partially offset by an increase in the gross profit rate. In
comparison to the prior year, the gross profit rate increased 130 basis points.
This increase reflects improved business mix, higher permanent placement income,
including conversion fees related to a large customer and lower employee-related
costs.
Science, Engineering & Technology gross profit increased on higher revenue
volume, combined with an increase in the gross profit rate. The gross profit
rate increased 160 basis points due to improved specialty mix, including the
acquisition of Softworld which generates higher gross profit margins, and
increased permanent placement income, partially offset by higher
employee-related costs.
Gross profit for the Education segment increased on higher revenue volume and an
increase in the gross profit rate. The gross profit rate increased 20 basis
points, due primarily to the acquisition of PTS which generates higher margins,
and higher permanent placement income at Greenwood/Asher.
Outsourcing & Consulting gross profit increased on higher revenue volume,
combined with an increase in the gross profit rate. The gross profit rate
increased 360 basis points, primarily due to a change in product mix within this
segment. Growth in RPO, including the acquisition of RocketPower, and MSP with
higher margins, was coupled with decreased revenues in our PPO product, which
generates lower profit margins.
International gross profit decreased 4.3% on a reported basis and improved 4.6%
on a constant currency basis. On a reported basis, lower revenue volume was
partially offset by an improved gross profit rate. On a constant currency basis,
the improved gross profit rate more than offset the impact of lower revenue
volume. In comparison to the prior year, the gross profit rate increased 140
basis points, primarily due to improved business mix and higher permanent
placement income.
26--------------------------------------------------------------------------------
Operating Results By Segment (continued)
(Dollars in millions)
2022 2021 % Change
SG&A Expenses:
Professional & Industrial $ 270.5 $ 278.6 (2.9) %
Science, Engineering & Technology 214.9 180.2 19.2
Education 81.8 62.1 31.7
Outsourcing & Consulting 149.8 122.7 22.1
International 132.5 138.9 (4.6)
Corporate expenses 94.0 88.1 6.6
Consolidated Total $ 943.5 $ 870.6 8.4 %
2022 vs. 2021
Total SG&A expenses in Professional & Industrial decreased 2.9%, primarily due
to lower expenses to support lower volumes in our staffing and outcome-based
call center specialties, partially offset by higher performance-based incentive
compensation expense.
Total SG&A expenses in Science, Engineering & Technology increased 19.2%, and
includes the impact of the acquisition of Softworld in the second quarter of
2021. Excluding the impact of the addition of Softworld expenses in the first
quarter of 2022, SG&A expenses increased 13.6%. The increase in organic SG&A
expenses is due primarily to higher performance-based incentive compensation
expense and higher salary-related costs from increasing headcount.
Total SG&A expenses in Education increased 31.7%, and includes the impact of the
acquisition of PTS in May 2022 . Excluding the impact of the PTS acquisition,
SG&A expenses increased 24.0%, due primarily to higher salary-related expenses
as headcount has increased as revenues have grown.
Total SG&A expenses in Outsourcing & Consulting increased 22.1%, and includes
the impact of the acquisition of RocketPower in March 2022 . Excluding the impact
of the RocketPower acquisition, SG&A expenses increased 12.0%, due primarily to
higher salary-related expenses as headcount has increased as revenues have
grown.
Total SG&A expenses in International decreased 4.6% on a reported basis and
increased 3.6% on a constant currency basis. The increase in constant currency
was primarily due to higher salary-related expenses driven by an increase in
headcount, reflecting improving revenue in Europe , partially offset by the
impact of the sale of our Russian operations in July 2022 .
Corporate expenses increased 6.6%, primarily due to higher performance-based incentive compensation expense.
27
--------------------------------------------------------------------------------
Operating Results By Segment (continued)
(Dollars in millions)
2022 2021 % Change
Earnings (Loss) from Operations:
Professional & Industrial $ 32.0 $ 31.4 1.8 %
Science, Engineering & Technology 82.1 73.7 11.4
Education 18.5 3.0 NM
Outsourcing & Consulting (21.2) 18.7 NM
International 9.9 9.9 (0.5)
Corporate (94.0) (88.1) (6.6)
Loss on disposal (18.7) - NM
Gain on sale of assets 6.2 - NM
Consolidated Total $ 14.8 $ 48.6 (69.7) %
2022 vs. 2021
Professional & Industrial reported earnings of $32.0 million , a 1.8% increase
from 2021. The increase was due to effective cost management as gross profit
declined.
Science, Engineering & Technology reported earnings of $82.1 million , an 11.4%
increase from 2021. The increase in earnings was primarily due to the impact of
the Softworld acquisition. In addition, increases in gross profit in our
outcome-based and telecom specialties were partially offset by increases in
certain expenses in most of our specialties in the SET business unit, including
those related to additional headcount and increased performance-based incentive
compensation.
Education reported earnings of $18.5 million in 2022, compared to earnings of
$3.0 million in 2021. The change was primarily due to the increase in revenue
resulting from improved demand for our services as compared to 2021, coupled
with operating leverage. 2022 results also include earnings of $3.8 million from
PTS acquired in May 2022 .
Outsourcing & Consulting reported a loss of $21.2 million in 2022, compared to
earnings of $18.7 million in 2021, due primarily to a charge of $41.0 million
related to the impairment of goodwill of RocketPower in 2022.
International reported earnings of
28
--------------------------------------------------------------------------------
Results of Operations
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 paid 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$162.4 million at year-end 2022, compared to$119.5 million at year-end 2021. As further described below, during 2022, we used$76.3 million of cash for operating activities, generated$167.5 million of cash from investing activities and used$50.6 million of cash for financing activities. Operating Activities In 2022, we used$76.3 million of net cash for operating activities, as compared to generating$85.0 million in 2021 and generating$186.0 million in 2020. Net cash used for operating activities in 2022 and 2021 included$86.8 million and$29.7 million , respectively, of cash outflows related to the repayment ofU.S. payroll taxes originally deferred in 2020. Net cash from operating activities in 2020 benefited from the deferral of$117.0 million ofU.S. payroll taxes. In addition, in 2022 we paid$48.4 million of income taxes related to the sale of Persol Holdings common stock. The change from 2021 to 2022 was primarily due to the impact of payments related to the payroll tax deferral, income tax payments related to the sale of Persol Holdings common stock and increased working capital requirements. Trade accounts receivable totaled$1.5 billion at year-end 2022 and$1.4 billion at year-end 2021. Global DSO for the fourth quarter was 61 days for 2022, compared to 60 days for 2021. Accounts payable and accrued liabilities was$723.3 million and increased from year-end 2021 as a result of increased MSP supplier payables. The change from 2020 to 2021 was primarily due to the deferral of payroll tax payments, partially offset by the impact of higher global DSO. Our working capital position (total current assets less total current liabilities) was$586.4 million at year-end 2022, an increase of$92.9 million from year-end 2021. Excluding the increase in cash, working capital increased$51.9 million from year-end 2021. The current ratio (total current assets divided by total current liabilities) was 1.5 at year-end 2022 and 2021.
Investing Activities
In 2022, we generated$167.5 million of net cash from investing activities, compared to using$180.7 million in 2021 and generating$9.8 million in 2020. Included in cash generated from investing activities in 2022 is$196.9 million of proceeds from the sale of the investment in Persol Holdings,$119.5 million of proceeds from the sale of almost all of the Company's shares in our equity investment in PersolKelly and$10.1 million of proceeds from the sale of land and other real property. This was partially offset by$58.3 million of cash used for the acquisition of RocketPower inMarch 2022 , net of cash received,$84.8 million of cash used for the acquisition of PTS inMay 2022 , net of cash received, and$6.0 million of cash disposed from the sale of our operations inRussia inJuly 2022 , net of proceeds. Included in cash used for investing activities in 2021 is$213.0 million of cash used for the acquisition ofSoftworld inApril 2021 , net of cash received and including working capital adjustments. This was partially offset by$19.0 million of proceeds from an insurance settlement that represented a payment received in the fourth quarter of 2021 related to the settlement of claims under a representations and warranties insurance policy purchased by the Company in connection with the acquisition ofSoftworld . Included in cash generated from investing activities in 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 and$5.6 million received from a payment on the loans toPersolKelly Pte. Ltd. This was partially offset by cash used for the acquisitions of 29 -------------------------------------------------------------------------------- Insight inJanuary 2020 and Greenwood/Asher inNovember 2020 . Cash used for the acquisition of Insight totaled$36.4 million , net of the cash received and including working capital adjustments. Cash used for the acquisition of Greenwood/Asher totaled$2.8 million , net of the cash received and including working capital adjustments. Capital expenditures totaled$12.0 million in 2022,$11.2 million in 2021 and$15.5 million in 2020. Capital expenditures in both 2022 and 2021 primarily related to the Company's IT infrastructure, technology programs and headquarters furniture and fixtures. Capital expenditures in 2020 primarily related to the Company's headquarters leasehold improvements, IT infrastructure and technology programs. Financing Activities In 2022, we used$50.6 million of cash for financing activities, as compared to using$8.1 million in both 2021 and 2020. The change in cash used for financing activities was primarily related to the buyback of the Company's common shares held by Persol Holdings for$27.2 million inFebruary 2022 ,$7.8 million in share repurchases of the Company's Class A common stock in the fourth quarter of 2022 and the year-over-year change in dividend payments. Dividends paid per common share were$0.275 in 2022,$0.10 in 2021 and$0.075 in 2020. Payments of dividends are restricted by the financial covenants contained in our debt facilities. Details of this restriction are contained in the Debt footnote in the notes to our consolidated financial statements. Changes in net cash from financing activities are also impacted by short-term borrowing activities. Debt totaled$0.7 million at year-end 2022, which represented local borrowings, compared to no debt at year-end 2021. 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 0.1% at year-end 2022 and 0.0% at year-end 2021.
In 2022, the net change in short-term borrowings was primarily due to borrowings on local lines of credit. In 2021 and 2020, the net change in short-term borrowings was primarily due to payments on local lines of credit.
Contractual Obligations and Commercial Commitments
Summarized below are our obligations and commitments to make future payments as
of year-end 2022:
Payment due by period
Less than More than
Total 1 year 1-3 Years 3-5 Years 5 years
(In millions of dollars)
Leases $ 85.9 $ 19.1 $ 23.3 $ 13.2 $ 30.3
Short-term borrowings 0.7 0.7 - - -
Accrued workers' compensation 63.6 22.9 19.1 8.3 13.3
Accrued retirement benefits 197.5 23.4 46.7 46.9 80.5
Other liabilities 7.4 2.2 4.2 0.6 0.4
Uncertain income tax positions 0.6 0.2 0.3 0.1 -
Purchase obligations 53.0 32.9 20.1 - -
Total $ 408.7 $ 101.4 $ 113.7 $ 69.1 $ 124.5
Purchase obligations above represent unconditional commitments relating
primarily to technology services and online tools which we expect to utilize
generally within the next three fiscal years, in the ordinary course of
business. We have no material, unrecorded commitments, losses, contingencies or
guarantees associated with any related parties or unconsolidated entities.
30
--------------------------------------------------------------------------------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 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'sU.S. social security taxes as allowed by the Coronavirus Aid, Relief, and Economic Security Act. We have repaid the$117.0 million deferred payroll tax balances, including$29.5 million in the first quarter of 2022 and$57.3 million in the fourth quarter of 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 2022 year end, these reviews have not resulted in specific plans to repatriate a majority of our international cash balances. 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. At year-end 2022, we had$200.0 million of available capacity on our$200.0 million revolving credit facility and$100.5 million of available capacity on our$150.0 million securitization facility. The securitization facility carried no short-term borrowings and$49.5 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. Throughout 2022 and as of the 2022 year end, we met the debt covenants related to our revolving credit facility and securitization facility.
At year-end 2022, we also had additional unsecured, uncommitted short-term
credit facilities totaling
We have historically managed our cash and debt very 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 theCash Pool first, and then access our borrowing facilities. We expect our working capital requirements to increase if demand for our services increases. We also expect to use$42.2 million of cash for repurchases of the Company's Class A common stock during 2023 pursuant to the$50.0 million plan approved by the Company's board of directors onNovember 9, 2022 . InFebruary 2022 , we completed transactions to monetize a substantial portion of our assets in theAsia-Pacific region which will allow us to strategically redeploy resources to accelerate our growth. Specifically, we concluded our cross-shareholding arrangement with Persol Holdings and reduced our ownership interest in PersolKelly, our APAC joint venture. We sold our investment in Persol Holdings common stock in an open-market transaction. We repurchased the 1.6 million Kelly Class A and 1,475Kelly Class B common shares owned by Persol Holdings at a price based on the last five trading days prior to the transaction. We sold almost all of our ownership interest in PersolKelly to our joint venture partner. In 2022, the Company paid$48.4 million in taxes resulting from the sale of the Persol Holdings shares. 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. 31 -------------------------------------------------------------------------------- Critical Accounting Estimates We prepare our consolidated financial statements in conformity with accounting principles generally accepted inthe United States . In this process, it is necessary for us to make certain assumptions and related estimates affecting the amounts reported in the consolidated financial statements and the attached notes. Actual results can differ from assumed and estimated amounts. Critical accounting estimates are those that we believe require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Judgments and uncertainties affecting the application of those estimates may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following estimates to be most critical in understanding the judgments involved in preparing our consolidated financial statements. Workers' Compensation In theU.S. , we have a combination of insurance and self-insurance contracts under which we effectively bear the first$1.0 million of risk per single accident. There is no aggregate limitation on our per-accident exposure under these insurance and self-insurance programs. We establish accruals for workers' compensation utilizing actuarial methods to estimate the undiscounted future cash payments that will be made to satisfy the claims, including an allowance for incurred-but-not-reported claims. We retain an independent consulting actuary to establish ultimate loss forecasts for the current and prior accident years of our insurance and self-insurance programs. The consulting actuary establishes loss development factors and loss rates, based on our historical claims experience as well as industry experience, and applies those factors to current claims information to derive an estimate of our ultimate claims liability. In preparing the estimates, the consulting actuary may consider factors such as the nature, frequency and severity of the claims; reserving practices of our third party claims administrators; performance of our medical cost management and return to work programs; changes in our territory and business line mix; and current legal, economic and regulatory factors such as industry estimates of medical cost trends. Where appropriate, multiple generally accepted actuarial techniques are applied and tested in the course of preparing the loss forecast. We use the ultimate loss forecasts, as developed by the consulting actuary, to establish total expected program costs for each accident year by adding our estimates of non-loss costs such as claims handling fees and excess insurance premiums. When claims exceed the applicable loss limit or self-insured retention and realization of recovery of the claim from existing insurance policies is deemed probable, we record a receivable from the insurance company for the excess amount. We evaluate the accrual quarterly and make adjustments as needed. The ultimate cost of these claims may be greater than or less than the established accrual. While we believe that the recorded amounts are reasonable, there can be no assurance that changes to our estimates will not occur due to limitations inherent in the estimation process. In the event we determine that a smaller or larger accrual is appropriate, we would record a credit or a charge to cost of services in the period in which we made such a determination. The accrual for workers' compensation, net of related receivables which are included in prepaid expenses and other current assets and other assets in the consolidated balance sheet, was$43.3 million and$48.4 million at year-end 2022 and 2021, respectively.
Business Combinations
We account for business combinations using the acquisition method of accounting,
in which the purchase price is allocated for assets acquired and liabilities
assumed and recorded at the estimated fair values at the date of acquisition.
Any excess of the purchase price over the estimated fair values of the net
assets acquired is recorded as goodwill. Management is required to make
significant assumptions and estimates in determining the fair value of the
assets acquired, particularly intangible assets. Purchased intangible assets are
primarily comprised of acquired trade names and customer relationships that are
recorded at fair value at the date of acquisition. We utilize third-party
valuation specialists to assist us in the determination of the fair value of the
intangibles. The fair value of trade name intangibles is determined using the
relief-from-royalty method, which relies on the use of estimates and assumptions
about projected revenue growth rates, royalty rates and discount rates. The fair
value of customer relationship intangibles is determined using the multi-period
excess earnings method, which relies on the use of estimates and assumptions
about projected revenue growth rates, customer attrition rates, profit margins
and discount rates. Determining the useful lives of intangible assets also
requires judgment and are inherently uncertain. There is a measurement period of
up to one year in which to finalize the fair value determinations and
preliminary fair value estimates may be revised if new information is obtained
during this period.
32
--------------------------------------------------------------------------------Income Taxes
Income tax expense is based on expected income and statutory tax rates in the various jurisdictions in which we operate. Judgment is required in determining our income tax expense. Our effective tax rate includes the impact of accruals and changes to accruals that we consider appropriate, as well as related interest and penalties. A number of years may lapse before a particular matter, for which we have or have not established an accrual, is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our accruals are appropriate under generally accepted accounting principles. Favorable or unfavorable adjustments of the accrual for any particular issue would be recognized as an increase or decrease to our income tax expense in the period of a change in facts and circumstances. Our current tax accruals are presented in income and other taxes in the consolidated balance sheet and long-term tax accruals are presented in other long-term liabilities in the consolidated balance sheet. Tax laws require items to be included in the tax return at different times than the items are reflected in the consolidated financial statements. As a result, the income tax expense reflected in our consolidated financial statements is different than the liability reported in our tax return. Some of these differences are permanent, which are not deductible or taxable on our tax return, and some are temporary differences, which give rise to deferred tax assets and liabilities. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Our net deferred tax asset is recorded using currently enacted tax laws, and may need to be adjusted in the event tax laws change. TheU.S. work opportunity credit is allowed for wages earned by employees in certain targeted groups. The actual amount of creditable wages in a particular period is estimated, since the credit is only available once an employee reaches a minimum employment period and the employee's inclusion in a targeted group is certified by the applicable state. As these events often occur after the period the wages are earned, judgment is required in determining the amount of work opportunity credits accrued for in each period. We evaluate the accrual regularly throughout the year and make adjustments as needed.
We test goodwill for impairment annually and whenever events or circumstances
make it more likely than not that an impairment may have occurred. GAAP requires
that goodwill be tested for impairment at a reporting unit level. For segments
with a goodwill balance, we have determined that our reporting units are the
same as our operating and reportable segments based on our organizational
structure or one level below our operating segments (the component level).
We may first use a qualitative assessment ("step zero test") for the annual
impairment test if we have determined that it is more likely than not that the
fair value for one or more reporting units is greater than their carrying value.
In conducting the qualitative assessment, we assess the totality of relevant
events and circumstances that affect the fair value or carrying value of the
reporting unit. Such events and circumstances may include macroeconomic
conditions, industry and market conditions, cost factors, overall financial
performance, entity-specific events and events affecting a reporting unit.
If we elect to forgo the qualitative assessment for a reporting unit, goodwill
is tested for impairment by comparing the estimated fair value of a reporting
unit to its carrying value ("step one test"). If the estimated fair value of a
reporting unit exceeds the carrying value of the net assets assigned to a
reporting unit, goodwill is not considered impaired and no further testing is
required. If the carrying value of the net assets assigned to a reporting unit
exceeds the estimated fair value of a reporting unit, goodwill is deemed
impaired and is written down to the extent of the difference.
For the step one quantitative test, we determine the fair value of our reporting
units using the income approach. Under the income approach, estimated fair value
is determined based on estimated future cash flows discounted by an estimated
market participant weighted-average cost of capital, which reflects the overall
level of inherent risk of the reporting unit being measured. Estimated future
cash flows are based on our internal projection model and reflects management's
outlook for the reporting units. Assumptions and estimates about future cash
flows and discount rates are complex and often subjective. They can be affected
by a variety of factors, including external factors such as industry and
economic trends, and internal factors such as changes in our business strategy
and our internal forecasts. Our analysis used significant assumptions by
reporting unit, including: expected future revenue growth rates, profit margins
and discount rate.
33
--------------------------------------------------------------------------------
The goodwill resulting from the acquisition of RocketPower during the first
quarter of 2022 was allocated to the OCG reportable segment and RocketPower was
deemed to be a separate reporting unit. The goodwill resulting from the
acquisition of PTS during the second quarter of 2022 was allocated to the
Education reportable segment and PTS was deemed to be a separate reporting unit.
The goodwill resulting from the acquisition of Softworld during the second
quarter of 2021 was allocated to the SET reportable segment and Softworld was
deemed to be a separate reporting unit. See the Acquisitions and Dispositions
footnote in the notes to our consolidated financial statements for more
information.
We completed our annual impairment test for all reporting units with goodwill in
the fourth quarter for the fiscal year ended 2022. We performed a step one
quantitative test for the Softworld and PTS reporting units. As a result of the
quantitative assessment, we determined that the estimated fair value of the
Softworld and PTS reporting units was more than its carrying value.
Additionally, we performed a step zero qualitative analysis for the Education
and RocketPower reporting units to determine whether a further quantitative
analysis was necessary and concluded that a step one quantitative analysis was
not necessary at that time. As a result of the quantitative and qualitative
assessments, the Company determined goodwill related to these reporting units
was not impaired at that time.
During 2022, customers within the high-tech industry vertical, in which
RocketPower specializes, reduced or eliminated their full-time hiring, reducing
demand for RocketPower's services, and on-going economic uncertainty has more
broadly impacted the growth in demand for RPO in the near-term. These changes in
market conditions therefore caused a triggering event requiring an interim
impairment test for goodwill as of the third quarter of 2022. Job eliminations
in the high-tech industry vertical continued during the fourth quarter of 2022,
indicating a broad, sustained reduction in hiring was likely and is now expected
to last through much of 2023, directly impacting RocketPower and the demand for
RocketPower's services in this vertical. These changes in market conditions
caused another triggering event requiring an interim impairment test for
goodwill as of year-end 2022.
We performed an interim step one quantitative test for RocketPower's goodwill
and determined that the estimated fair value of the reporting unit no longer
exceeded the carrying value as of third quarter-end and year-end 2022. Based on
the result of our interim goodwill impairment test, we recorded a goodwill
impairment charge of $30.7 million in the third quarter of 2022 and we recorded
an additional goodwill impairment charge of $10.3 million to write off the
remaining balance of RocketPower's goodwill in the fourth quarter of 2022, for a
total goodwill impairment charge of $41.0 million as of year-end 2022.
Our analysis used significant assumptions, including: expected future revenue
growth rates, profit margins and discount rate. Although we believe the
assumptions and estimates we have made are reasonable and appropriate, different
assumptions and estimates could materially impact our reported financial
results. Different assumptions of the anticipated future results and growth from
our business could result in an impairment charge, which would decrease
operating income and result in lower asset values on our consolidated balance
sheet. The estimated fair value of the Softworld and PTS reporting units exceeds
the carrying value by more than 10%. As a measure of sensitivity of the fair
value for the Softworld and PTS reporting units, while holding all other
assumptions constant, an increase in the discount rate of 100 basis points or a
decrease of 100 basis points in the revenue growth rate assumptions for each
forecasted period used to determine the fair value of both reporting units would
not result in an impairment of goodwill.
We completed our annual impairment test for all reporting units with goodwill in
the fourth quarter for the fiscal year ended 2021. We performed a step one
quantitative test for the Softworld reporting unit. As a result of the
quantitative assessment, we determined that the estimated fair value of the
Softworld reporting unit was more than its carrying value. Additionally, we
performed a step zero qualitative analysis for the Education reporting unit to
determine whether a further quantitative analysis was necessary and concluded
that a step one quantitative analysis was not necessary. As a result of the
quantitative and qualitative assessments, the Company determined goodwill was
not impaired as of year-end 2021.
At year-end 2022 and 2021, total goodwill amounted to $151.1 million and $114.8
million , respectively. See the Goodwill and Intangible Assets footnote in the
notes to our consolidated financial statements for more information.
34
--------------------------------------------------------------------------------Litigation
Kelly is subject to legal proceedings, investigations and claims arising out of the normal course of business. Kelly routinely assesses the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the accruals required, if any, for these contingencies is made after analysis of each known issue. Development of the analysis includes consideration of many factors including: potential exposure, the status of proceedings, negotiations, discussions with our outside counsel and results of similar litigation. The required accruals may change in the future due to new developments in each matter. For further discussion, see the Contingencies footnote in the notes to our consolidated financial statements. At year-end 2022 and 2021, the gross accrual for litigation costs amounted to$2.3 million and$1.4 million , respectively, which is included in accounts payable and accrued liabilities and in accrued workers' compensation and other claims in the consolidated balance sheet. NEW ACCOUNTING PRONOUNCEMENTS
See New Accounting Pronouncements footnote in the notes to our consolidated financial statements presented in Part II, Item 8 of this report for a description of new accounting pronouncements.
35
--------------------------------------------------------------------------------
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein and in our investor conference call related
to these results are "forward-looking" statements within the meaning of the
applicable securities laws and regulations. These forward-looking statements are
based on current expectations and assumptions and are subject to a number of
significant risks and uncertainties. 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 impact of the 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 brands, 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 certain equity investments, including
with strategic partners, risks associated with conducting business in foreign
countries, including foreign currency fluctuations, risks associated with
violations of anti-corruption, 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
this report.
© Edgar Online, source
