Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes [X]☒ No [ ]☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer [ ] | ☒ | Accelerated filer [X] | ☐ |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) | ☐ | Smaller reporting company [ ] | ☐ |
Emerging growth company [ ] | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ]☐ No [X]☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $699,819,783.$824.2 million.
Registrant had 34,997,71536,041,230 shares of Class A and 3,431,8623,358,621 of Class B common stock, par value $1.00, outstanding as of February 6, 2018. 2022.
Documents Incorporated by Reference
The proxy statement of the registrant with respect to its 20182022 Annual Meeting of Stockholders is incorporated by reference in Part III.
PART I
Unless the context otherwise requires, throughout this Annual Report on Form 10-K the words “Kelly,” “Kelly Services,” “the Company,” “we,” “us” and “our” refer to Kelly Services, Inc. and its consolidated subsidiaries.
ITEM 1. BUSINESS.
History and Development of Business
Founded by William R.Russell Kelly in 1946, Kelly Services® pioneered an industry that connects people withto work in ways that enrich their lives. At ourOur inception we helped usher in and embolden a workforce of women, opening doors and creating opportunities where none had existed. Ascompletely new opportunities. Over the next 75 years, as work evolved, weKelly equipped people with the skills to master the technologies of the day: launching the first-of-its-kind online learning center for scientists; creating testing &and training packages for newbreakthrough office programs; and launching skill builders to alignthat aligned with new light industrial protocols. With each advance, we have empowered people to meetKelly met the needs of a changing marketplace,the marketplace; empowering our people to reach their personal goals and enabled companiesenabling our clients to access skilled talent that canto move their businesses forward.
As work has evolved so has ourKelly's range of solutions, growing over the years to reflect the changing needs of our customersbusinesses and the changing naturedesires and lifestyles of work itself.talent. We have progressed from a United States-based company concentrating primarily on traditional office staffing intobusiness to a workforce solutions leadercreative, insightful and agile talent company delivering expertise in a numberportfolio of specialty services. While rankingIn line with market demand, we are increasingly delivering a variety of outcome-based services in which we provide specialized talent and operational management of functions and departments on behalf of our clients.
We rank as one of the world’s largest scientific and clinical research staffing providers we alsoand place professional and technical employeestalent at allvarious levels in engineering, IT law and finance.telecommunications specialties. We are also a leading education staffing provider in the U.S., as well as providing talent across the full education spectrum from early childhood education to higher education. These specialty services complement our expertise in professional office services, contact center and light industrial and electronic assembly staffing, as well as our leading position in the K-12 educational staffing market in the U.S.staffing. As work has evolved and workforcetalent management has become more complex, we have also developed a talent supply chain management approachinnovative solutions to help many of the world’s largest companies plan for and manage their workforce. Innovative solutions supporting this approach spanworkforce through recruitment outsourcing, consulting, recruitment,payroll processing, talent advisory, career transition and vendorsupplier management services.
Geographic Breadth of Services
Headquartered in Troy, Michigan,the United States, Kelly provides workforce solutions to a diversifieddiverse group of customerslocal, regional and global clients in three regions: the Americas,; Europe and the Middle East, and Africa (“EMEA”); and Asia Pacific(“APAC”).Our customer base spansAsia-Pacific regions across a variety of industries and includes 95 of the Fortune 100™ companies.industries.
In 2017,2021, we assigned nearly 500,000more than 350,000 temporary employees to a variety of customers around the globe.
Description of Business Segments
Our operations
Kelly is a specialty talent solutions company organized into five specialty businesses, which are divided into three principal business segments: Americas Staffingalso our reportable segments, serving clients of all sizes across a variety of industries. This structure enables us to focus on specialties with robust demand, promising growth opportunities and areas in which we excel at attracting and placing talent.
•Professional & Industrial – delivers staffing, outcome-based and direct-hire services focused on office, professional, light industrial and contact center specialties in the U.S. and Canada, including our KellyConnect and Skilled Professional Solutions products
•Science, Engineering & Technology – delivers staffing, outcome-based and direct-hire services focused on science and clinical research, engineering, technology and telecommunications specialties predominantly in the U.S. and Canada and includes our Softworld, NextGen and Global Technology Associates subsidiaries
•Education – delivers staffing, direct-hire and executive search services across the full education spectrum from early childhood to higher education in the U.S. and includes Teachers On Call, Insight Workforce Solutions and Greenwood/Asher
•Outsourcing & Consulting – delivers Managed Service Provider ("MSP"), Global Talent Solutions (“GTS”Recruitment Process Outsourcing ("RPO"), Payroll Process Outsourcing ("PPO") and Talent Advisory Services to customers on a global basis
•International Staffing.– delivers staffing, RPO and direct-hire services in 15 countries in Europe, as well as services in Mexico delivered in accordance with recent changes in labor market regulations
In July 2016, we expandedaddition, PersolKelly Pte. Ltd., our joint venture with Persol Holdings (formerly Temp Holdings) to form PersolKelly Asia Pacific (the “JV”)Pte. Ltd., a wholly owned subsidiary of Persol Holdings Co., Ltd., a leading provider of HR solutions in Japan, provides staffing and moved our APAC staffing operations into the JV. In early 2017, we restructured components of our previous Americas Commercial, Americas Professional and Technical, and Outsourcing and Consulting Group segments under a single delivery organization, triggering a change in our operating structure. We now provide staffing through our branch networks in our Americas and International operations, with commercial and specialized professional/technical staffing businesses in each region. We also provide a suite of innovative talent fulfillment and outcome-based solutions through our GTS segment, which delivers integrated talent management solutionsdirect hire services to meet customer needs across the entire spectrum of talent categories. Using talent supply chain strategies, GTS helps customers design, execute, and manage workforce programs that enable them to connect with talent across all work styles (full-time, contract, temporary, etc.), gain access to a vast network of service providers, and achieve their business goals on time and on budget.
Americas Staffing
Our Americas Staffing segment represents the Company’s branch-delivered staffing business in the U.S., Puerto Rico, Canada, Mexico and Brazil. This segment delivers temporary staffing, as well as direct-hire placement services, in a number of specialty staffing services, including: Office, providing trained employees for data entry, clerical and administrative support roles across numerous industries; Education, supplying schools nationwide with instructional and non-instructional employees; Marketing, providing support staff for seminars, sales and trade shows; Electronic Assembly, providing assemblers, quality control inspectors and technicians; Light Industrial, placing maintenance workers, material handlers and assemblers; Science, providing all levels of scientists and scientific and clinical research workforce solutions; Engineering, supplying engineering professionals across all disciplines, including aeronautical, chemical, civil/structural, electrical/instrumentation, environmental, industrial, mechanical, petroleum, pharmaceutical, quality and telecommunications; Information Technology, placing IT
specialists across all disciplines; Creative Services, placing creative talent in the spectrum of creative services positions; Finance and Accounting, serving the needs of corporate finance departments, accounting firms and financial institutions with all levels of financial professionals; and Law, placing legal professionals including attorneys, paralegals, contract administrators, compliance specialists and legal administrators.
Our services allow customers and temporary staff the opportunity to evaluate their relationship before making a full-time employment decision. We also offer direct-hire placement services.
International Staffing
Our International Staffing segment represents the Company’s branch-delivered staffing business in the EMEA region, as well as the Company’s APAC region staffing business prior to the transaction to form the PersolKelly Asia Pacific joint venture in July 2016. International Staffing provides a similar range of staffing services as described for our Americas Staffing segment above, including: Office, Engineering, Finance and Accounting, Healthcare, IT and Science. Additional service areas include: Catering and Hospitality, providing chefs, porters and hospitality representatives; and Industrial, supplying manual workers to semi-skilled professionals in a variety of trade, non-trade and operational positions.region.
GTS
Our GTS segment combines the delivery structure of the Company’s outsourcing and consulting group and centrally delivered staffing business. It reflects the trend of customers towards the adoption of holistic talent supply chain solutions which combine contingent labor, full-time hiring and outsourced services. Services in this segment include: Centrally delivered staffing for large accounts; Contingent Workforce Outsourcing (“CWO”), delivering contingent labor to customers using a managed service provider model; Recruitment Process Outsourcing (“RPO”), offering end-to-end talent acquisition solutions, including customized recruitment projects; Business Process Outsourcing (“BPO”), offering full staffing and operational management of non-core functions or departments; Payroll Process Outsourcing (“PPO”), providing centralized payroll processing solutions for our customers; KellyConnect, offering contact center staffing solutions which focus on delivering talent to a customer’s physical call center; and Kelly Legal Managed Services (“KLMS”), delivering a full suite of legal managed review solutions to our customers. This segment also provides executive placement, career transition/outplacement services and talent advisory services.
Financial information regarding our industryreportable segments is included in the Segment Disclosures footnote in the notes to our consolidated financial statements presented in Part II, Item 8 of this report.
Business Objectives
Kelly’s philosophy is rooted
By connecting our clients with qualified talent in our conviction that our business canan ever-evolving world of work, Kelly has a positive impact on the people, businesses and does make a difference on a daily basis—for our customers, in the lives of our employees and talent networks, in the local communities we serve and in the broader economy. We aspire to beserve. As a destination for top talent and a strategic business partner for our customers. Our solutions are designedclients, we continue to connect with talent across targeted specialties and flexible work styles, and to offer customers access to workforce solutions that can be customized to any scope or scale as they seek to operate more efficient, competitive organizations. To achieve these goals, we will adopt forward-looking technologies and innovative business practices and forward-looking technologies that can drive success in a dynamic market.
With more than one-third of the world’s workforce now participating as independent workers, morewe help companies are adoptingadopt strategies that recognize and utilize contingent labor, consultants and project-based work as keys toenablers of their ongoing success. We
We’re also using our position in the middle of the talent supply and demand equation to challenge outdated barriers that hold back far too many people from attaining meaningful work, supporting their families and contributing to the economy. Our Equity@Work initiative seeks to upend systemic barriers to employment and make the labor market more equitable and accessible for more people. While systemic change takes time, we continue to refine our core competencies to help them connectmake progress with talentadditional outreach, new alliances and realize their business objectives. Kelly offers world-class staffing on a temporarypartnerships and direct placement basis, as well as a comprehensive array of outsourcing, consulting and talent advisory services. Kelly will continue to target our areas of investment and expertise to solve our customers’ workforce challenges and create opportunity for talent in the changing marketplace.continued executive commitment.
Business Operations
Service Marks
We own numerous service marks that are registered with the United States Patent and Trademark Office, the European Union Community TrademarkIntellectual Property Office and numerous individual country trademark offices.
Seasonality
Our quarterly operating results are affected by the seasonality of our customers’ businesses. Demandbusinesses which impact the demand for staffingour services. With the exception of our Education operating segment, demand for our services historically has been lower during the first quarter, and typically increases during the remainder of the year. Our Education operating segment generally has its lowest revenue in the third quarter in line with schools’ summer break.
Working Capital
Our working capital requirements are primarily generated from temporary employee payroll which is generally paid weekly or monthly and customer accounts receivable.receivable which is generally outstanding for longer periods, with days sales outstanding ("DSO") of 60 days as of January 2, 2022. Since receipts from customers generally lag payroll payments to temporary employees, working capital requirements increase and operating cash flows decrease substantially in periods of growth. Conversely, when economic activity slows, working capital requirements may substantially decrease and operating cash flows increase. Such increases dissipate over time if the economic downturn continues for an extended period.
Customers
Customers
Kelly’s client portfolio spans companies of all sizes, ranging from local and mid-sized businesses to the Fortune 500. In 2017,2021, an estimated 52%56% of total Companycompany revenue was attributed to our largest 100 large customers. Our largest single customer accounted for approximately five percent of total revenue in 2017.2021.
Government Contracts
Although we conduct business under various federal, state and local government contracts, no single one accounts forcontract represents more than three percent of total Companycompany revenue in 2017. 2021.
Competition
The worldwide temporary staffingworkforce solutions industry is competitive and highly fragmented. In the United States, approximately 100 competitorswe compete with other firms that operate nationally and approximately 10,000offer a breadth of service similar to ours, and with thousands of smaller regional or specialized companies that compete in varying degrees at local levels. Additionally, severaldegrees. Outside the United States, we face similar staffing companies compete globally.competition. In 2017,2021, our largest competitors were Randstad, Adecco S.A., Randstad Holding N.V.,Group, ManpowerGroup Inc., Recruit Holdings and Allegis Group and Recruit Holdings. Group.
Key factors that influence our success are quality of service, price and breadth of service.
Quality of service is highly dependent on the availability of qualified competent talent, and our ability to promptly and effectively recruit, screen, train, retain and manage a pool of employees who match the skills required by particularour customers. During an economic downturn, weWe must balance competitive pricing pressures, which may intensify during an economic downturn, with the need to attract and retain a qualified workforce. Price competition in the staffing industry is intense, particularly for education, office clerical and light industrial personnel and pricing pressure from customers and competitors continues to be significant.
Breadth of service, or ability to manage staffing suppliers, has become more critical as customers
Companies increasingly seek a single supplier to manage all of their demand for contingent talent. To provide the breadth of service required, clients may need us to manage staffing needs. Kelly’s talent supply chain management approachsuppliers and independent workers on their behalf. Kelly seeks to address this requirement for our larger customers,clients, enabling us to deliver talent wherever and whenever they need it around the world.
Environmental Concerns
BecauseCorporate Sustainability
Kelly is committed to the highest standards of corporate citizenship. Given the worldwide reach of our workers, clients, suppliers and partners, we recognize the global impact of our business practices and the importance of public accountability. We continue to advocate on behalf of the global workforce, improve our workplaces, contribute to the communities we serve and ensure our actions are socially, ethically and environmentally responsible.
Regulation
Our services are subject to a variety of complex federal and state laws and regulations in the countries where we operate. We continuously monitor legislation and regulatory changes for their potential effect on our business. We invest in technology and process improvements to implement required changes while minimizing the impact on our operating efficiency and effectiveness. Regulatory cost increases are passed through to our clients to the fullest extent possible. As a service business, we are involved in a service business,not materially impacted by federal, state or local laws that regulate the discharge of materials into the environment do not materially impact us. environment.
Employees
Human Capital
We employare a talent solutions company dedicated to connecting people to work in ways that enrich their lives, and our employees are critical to achieving this noble purpose. To succeed in our highly competitive and rapidly evolving market, it is crucial that we attract and retain experienced internal employees, as well as the talent we put to work for our customers. As part of these efforts, we strive to offer competitive total rewards programs, promote employee development, foster an inclusive and diverse environment and give employees the opportunity to give back to their communities and make a social impact.
We are committed to the health, safety and wellness of our employees and talent. The success of our business is fundamentally connected to the well-being of our people. Accordingly, we seek to implement policies and practices that align with applicable laws and regulations and are in the best interest of our employees and talent, and the communities in which we operate.
Internal Employees
As of January 2, 2022, we employed approximately 1,100 people at our corporate headquarters in Troy, Michigan, and approximately 6,7004,500 staff members in the United States and an additional 2,900 in our international locations. Kelly retention rates for employees identified as High Performing and High Potential align with our comparable external benchmark.
Compensation and Benefits. Kelly is committed to providing competitive, equitable and fiscally responsible total rewards programs to our employees. Our compensation programs are designed to attract, retain and reward talented individuals who possess the skills necessary to achieve our strategic goals and create long-term value for our shareholders. We provide employees with competitive compensation opportunities, with strong pay for performance linkages that include a mix of base salary, short-term incentives and, in the case of our more senior employees, long-term equity awards. We believe that our programs provide fair and competitive opportunities that align employee and stockholder interests. In addition to cash and equity compensation, we also offer employees competitive benefits such as life and health (medical, dental and vision)
insurance, paid time off, wellness benefits and defined contribution retirement plans. We review our compensation and benefit programs regularly and respond to changes in market practice. Recent changes have included enhancements to our U.S. paid time off for mental health and well-being, voting and family and parental support. Pay and benefits programs provided to our international networkemployees are in line with competitive local practice.
Inclusion and Diversity. Since 1947, our founder fought to increase access to work for women and we’ve long been an outspoken advocate for the value temporary and independent workers bring to the workplace. We are committed to fostering an inclusive and diverse workforce. For example, a significant majority of branch offices. Kelly's U.S. workforce is female, including a majority of director and above roles. Additionally, for a fifth consecutive year, we’ve achieved a 100% rating from the Human Rights Campaign Foundation’s Corporate Equality Index for LGBTQ+ equality in the workplace. We believe an inclusive environment with diverse teams creates a workplace that is conducive to producing more creative solutions, results in better, more innovative products and services and presents Kelly as a workplace leader, aiding our ability to attract and retain key talent. We are focused on fostering a culture of belonging, where everyone feels welcomed and respected and can thrive as we work together. Kelly promotes employee development and internal career mobility to enable our team to achieve their full potential and to ensure we have the evolving workforce capabilities that the future demands.
Community Involvement. We consider sustainability to be a guiding principle in strengthening the relationship with our global workforce, suppliers and customers. Through our programs and initiatives, we seek to contribute to improving the quality of life of our employees, their families, as well as the communities in which they operate. Designed on the concept of social investment and creating shared values, our approach ensures the creation of future development capacities instead of aiding on isolated occasions. We support initiatives where our employees can actively engage in the causes they believe in that are also connected to our sustainability strategy. Through our Equity@Work initiative, we are living our commitment to ensure equitable access to work and growth for all by creating alliances with like-minded companies, policy groups and institutions to positively impact the way companies hire, advance and help more people thrive.
For more information on our diversity and inclusion and community involvement initiatives, please see our Sustainability Report - Growing with Purpose, which is available at kellyservices.com.
Talent
In 2017,addition to our internal employees, Kelly recruits talent on behalf of our customers on a global basis. In 2021, we assigned nearly 500,000 temporary employees to a variety of customers around the globe.
While services may be provided inside the facilities of customers, we remainplaced more than 350,000 individuals in positions with our customers. Kelly remains the employer of record for all employees working at our temporary employees. Wecustomer locations. This means that we retain responsibility for employeeall assignments (including ensuring appropriate health and safety protocols in conjunction with our customers), wages, benefits, workers’ compensation insurance, and the employer’semployers’ share of all applicable payroll taxes andas well as the administration of the employee’semployees' share of these taxes. We also offer our Kelly talent access to competitive health and benefit programs while they are working with us.
Foreign Operations
For information regarding sales, earnings from operations and long-lived assets by domestic and foreign operations, please refer to the information presented in the Segment Disclosures footnote in the notes to our consolidated financial statements, presented in Part II, Item 8 of this report.
Access to Company Information
We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (“SEC”). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
We make available, free of charge, through our website, and by responding to requests addressed to our senior vice president of investor relations, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our website address is: www.kellyservices.com. The information contained on our website, or on other websites linked to our website, is not part of this report.
ITEM 1A. RISK FACTORS.
Risks Related to Macroeconomic Conditions
Our business is significantly affected by fluctuations in general economic conditions.
Demand for staffing services is significantly affected by the general level of economic activity and employment in the United States and the other countries in which we operate. When economic activity increases, temporary employees are often added before full-time employees are hired. As economic activity slows, however, many companies reduce their use of temporary employees before laying off full-time employees. Customer responses to real or perceived economic conditions, including perceptions related to market conditions, labor supply and inflation, could negatively impact customer behavior. Significant swings in economic activity historically have had a disproportionate impact on staffing industry volumes. We may not fully benefit from times of increased economic activity should we experience shortages in the supply of temporary employees. We may also experience more competitive pricing pressure and slower customer payments during periods of economic downturn. A substantial portion of our revenues and earnings are generated by our business operations in the United States. Any significant economic downturn in the United States or certain other countries in which we operate could have a material adverse effect on our business, financial condition and results of operations.
Our business has been adversely impacted by the novel coronavirus (COVID-19) outbreak and could be impacted by future outbreaks.
The COVID-19 outbreak and related containment and mitigation efforts negatively impacted the economies and general welfare in the countries in which we operate, as well as in the countries where our customers provide goods and services. This resulted in a decline in demand for our services. The overall threat of COVID-19 in the countries in which we operate has been reduced with the advent of health and safety measures, effective vaccines, and treatment regimens to combat current known strains of COVID-19 and demand for our services has increased. The emergence of new strain(s) of COVID-19 that are more deadly, contagious, or vaccine resistant, or a decline in the effectiveness of vaccines or treatment regimens could result in another economic downtown or a decline in demand for our services. Likewise, the financial viability of third parties on which we rely to provide staffing services or manage critical business functions could also be impacted by further negative COVID-19 developments. Future government actions or business decisions by customers made in response to the COVID-19 pandemic, including automation, social distancing and remote work, and vaccination and testing programs could negatively impact customer demand for our services.
Our stock price may be subject to significant volatility and could suffer a decline in value.
The market price of our common stock may be subject to significant volatility. We believe that many factors, including several which are beyond our control, have a significant effect on the market price of our common stock. These include:
•actual or anticipated variations in our quarterly operating results;
•announcements of new services by us or our competitors;
•announcements relating to strategic relationships or acquisitions;
•changes in financial estimates by securities analysts;
•changes in general economic conditions;
•actual or anticipated changes in laws and government regulations;
•commencement of, or involvement in, litigation;
•any major change in our board or management;
•changes in industry trends or conditions; and
•sales of significant amounts of our common stock or other securities in the market.
In addition, the stock market in general, and the NASDAQ Global Market in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, securities class action litigation has often been instituted following periods of volatility in the market price of a company’s securities. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of our management’s attention and resources. Further, our operating results may be below the expectations of securities analysts or investors. In such event, the price of our common stock may decline.
Risks Related to our Industry Segment
We operate in a highly competitive industry with low barriers to entry and may be unable to compete successfully against existing or new competitors.
The worldwide staffing services market is highly competitive with limited barriers to entry. We compete in global, national, regional and local markets with full-service and specialized temporary staffing and consulting companies. While the majority of our competitors are significantly smaller than us, several competitors, includingRandstad, Adecco S.A., Randstad Holding N.V.,Group, ManpowerGroup Inc., Recruit Holdings and Allegis Group and Recruit Holdings, are considerably larger than we are and have more substantial marketing and financial resources. Additionally, the emergence of online staffing platforms or other forms of disintermediation may pose a competitive threat to our services, which operate under a more traditional staffing business model. Price competition in the staffing industry is intense, particularly for the provision of office clerical, and light industrial and education personnel. We expect that the level of competition will remain high, which could limit our ability to maintain or increase our market share or profitability.
The number of customers distributing their staffing service purchases among a broader group of competitors continues to increase which, in some cases, may make it more difficult for us to obtain new customers, or to retain or maintain our current share of business, with existing customers. We also face the risk that our current or prospective customers may decide to provide similar services internally. As a result, there can be no assurance that we will not encounter increased competition in the future.
Our business is significantly affected by fluctuations in general economic conditions.
Demand for staffing services is significantly affected by the general level of economic activity and employment in the United States and the other countries in which we operate. When economic activity increases, temporary employees are often added before full-time employees are hired. As economic activity slows, however, many companies reduce their use of temporary employees before laying off full-time employees. Significant swings in economic activity historically have had a disproportionate impact on staffing industry volumes. We may also experience more competitive pricing pressure and slower customer payments during periods of economic downturn. A substantial portion of our revenues and earnings are generated by our business operations in the United States. Any significant economic downturn in the United States or certain other countries in which we operate could have a material adverse effect on our business, financial condition and results of operations.
Technological advances may significantly disrupt the labor market and weaken demand for human capital at a rapid rate.capital.
Our success is directly dependent on our customers’ demands for talent. As technology continues to evolve, more tasks currently performed by people may be replaced by automation, robotics, machine learning, artificial intelligence, and other technological advances outside of our control. This trend poses a risk to the staffing industry, as a whole, particularly in lower-skill job categories that may be more susceptible to such replacement. If we are unsuccessful in responding to this potential shift in customer demand due to advancing technology it could have a material adverse effect on our results of operations and financial condition.
Competition rules arising from government legislation, litigation or regulatory activity may limit how we structure and market our services.
As a leading staffing and recruiting company, we are closely scrutinized by government agencies under U.S. and foreign competition laws. An increasing number of governments are regulating competition law activities, leading to increased scrutiny. Some jurisdictions also allow competitors or consumers to assert claims of anti-competitive conduct.
The European Commission and its various competition authorities have targeted industry trade associations in which we participate, resulting in the assessment of fines against our business in the past. Although we have safeguards in place to comply with competition laws, there can be no guarantee that such safeguards will be successful. Any government regulatory actions may result in fines and penalties or hamper our ability to provide the cost-effective benefits to consumers and businesses, reducing the attractiveness of our services and the revenues that come from them. New competition law actions could be initiated. The outcome of such actions, or steps taken to avoid them, could adversely affect us in a variety of ways, including:
•We may have to choose between withdrawing certain services from certain geographies to avoid fines or designing and developing alternative versions of those services to comply with government rulings, which may entail a delay in a service delivery.
•Adverse rulings may act as precedent in other competition law proceedings.
Our business is subject to extensive government regulation, which may restrict the types of employment services we are permitted to offer or result in additional or increased taxes, including payroll taxes or other costs that reduce our revenues and earnings.
The temporary employment industry is heavily regulated in many of the countries in which we operate. Changes in laws or government regulations may result in prohibition or restriction of certain types of employment services we are permitted to offer or the imposition of new or additional benefit, licensing or tax requirements that could reduce our revenues and earnings. In particular, we are subject to state unemployment taxes in the U.S., which typically increase during periods of increased levels of unemployment. We also receive benefits, such as the work opportunity income tax credit in the U.S., that regularly expire
and may not be reinstated. There can be no assurance that we will be able to increase the fees charged to our customers in a timely manner and in a sufficient amount to fully cover increased costs as a result of any changes in laws or government regulations. Any future changes in laws or government regulations, or interpretations thereof, including additional laws and regulations enacted at a local level may make it more difficult or expensive for us to provide staffing services and could have a material adverse effect on our business, financial condition and results of operations.
Unexpected changes in claim trends on our workers’ compensation, unemployment, disability and medical benefit plans may negatively impact our financial condition.
We self-insure, or otherwise bear financial responsibility for, a significant portion of expected losses under our workers’ compensation program, disability and medical benefits claims. Unexpected changes in claim trends, including the severity and frequency of claims, actuarial estimates and medical cost inflation, could result in costs that are significantly different than initially reported. If future claims-related liabilities increase due to unforeseen circumstances, or if we must make unfavorable adjustments to accruals for prior accident years, our costs could increase significantly. In addition, unemployment insurance costs are dependent on benefit claims experience from employees which may vary from current levels and result in increased costs. There can be no assurance that we will be able to increase the fees charged to our customers in a timely manner and in a sufficient amount to cover increased costs as a result of any changes in claims-related liabilities.
We may not achievehave additional tax liabilities that exceed our estimates.
We are subject to a multitude of federal, state, local, and foreign taxes in the intended effectsjurisdictions we operate in, including the tax provisions of the U.S. Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Our tax expense could be materially impacted by changes in tax laws in these jurisdictions, changes in the valuation of deferred tax assets and liabilities or changes in the mix of income by country. The overall size of our workforce and visibility of our industry may make it more likely we become a target of government investigations, and we are regularly subject to audit by tax authorities. Although we believe our tax estimates are reasonable, the final determination of audits and any related litigation could be materially different from our historical tax provisions and accruals. The results of an audit or litigation could materially harm our business.
Risks Related to Strategy and Execution
Our future performance depends on the Company’s effective execution of our business strategy.
The performance of the Company’s business is dependent on our ability to effectively execute our growth strategy. Our business strategy focuses on driving growth in higher margin specialties. We have madeincludes targeted investments adjustedin select specialty areas, focusing on growth platforms and implementation of a robust operating model to bridge our operating models and increased the resources necessary for driving sustainable growth within our targeted higher-margin solutions.strategy to execution. If we are unsuccessful in executing our strategy, we may not achieve either our stated goal of strong revenue growth or the intended productivity improvements, which could negatively impact profitability.
We are at risk of damage to Even if effectively executed, our brand, which is important to our success.
Our success depends,strategy may be insufficient considering changes in part, on the goodwill associated with our brand. Because we assign employees to work under the direction and supervision of our customer at work locations not under Kelly’s control, we are at risk of our employees engaging in unauthorized conduct that could harm our reputation. Our Kelly Educational Staffing product is particularly susceptible to this exposure. An occurrence that damages Kelly’s reputation could cause the loss of current and future customers, additional regulatory scrutiny and liability to third parties.
Our intellectual property assets could be infringed upon or compromised, and there are limitations to our ability to protect against such events.
Our success is dependent in part on our proprietary business processes, our intellectual property and our thought leadership. To protect those rights, we depend upon protections afforded by the laws of the various countries in which we operate, as well as contractual language and our own enforcement initiatives. These defenses may not be sufficient to fully protect us or to deter infringementmarket conditions, technology, competitive pressures or other misappropriation of our trade secrets and other intellectual property. In addition, third parties may challenge the validity or enforceability of our intellectual property rights. We also face the risk that third parties may allege that the operation of our business infringes or otherwise misappropriates intellectual property rights that they own or license. Losses or claims of this nature could cause us to incur significant expense, harm our reputation, reduce our competitive advantages or prevent us from offering certain services or solutions. The remedies available to us may be limited or leave us without full compensation.external factors.
If we fail to successfully develop new service offerings, we may be unable to retain our currentand acquire customers, and gain new customers and our revenues would decline.resulting in a decline in revenues.
The processCompany’s successful execution of developingour growth strategy requires that we match evolving customer expectations with evolving service offerings. The development of new service offerings requires accurate anticipation of customers’ changingcustomer needs and emerging technologicaltechnology trends. This may require that weWe must make long-term investments in our information technology infrastructure and commit significant resources to development efforts before knowing whether these investments will eventually result in service offerings that achieve customer acceptance and generate the revenues required to provide desired returns. If we fail to accurately anticipate and meet our customers’ needs through the development of new service offerings or do not successfully deliver new service offerings, our competitive position could be weakened and that could materially adversely affectweaken, causing a material adverse effect on our results of operations and financial condition.
As we increasingly offer services outside the realm of traditional staffing, including business process outsourcing, we are exposed to additional risks which could have a material adverse effect on our business.
Our business strategy focuses on growing our outsourcing and consulting business, including business process outsourcing, where we provide operational management of our customers’ non-core functions or departments. This could expose us to certain risks unique to that business, including product liability or product recalls. Although we have internal vetting processes intended to control such risks, there is no assurance that these processes will be effective. Additionally, while we maintain insurance in types and amounts we believe are appropriate in light of the aforementioned exposures, there can also be no assurance that such insurance policies will remain available on reasonable terms or be sufficient in amount or scope of coverage.
We are increasingly dependent on third parties for the execution of critical functions.
We do not maintain our own vendor management technology, and we have outsourced certain other critical applications or business processes to external providers, including cloud-based services. We have elected to enter into supplier partnerships rather than establishing or maintaining our own operations in some of the territories where our customers require our services. We do not maintain a controlling interest in our expanded staffing joint venture in Asia Pacific (PersolKelly Asia Pacific) and have elected to rely on the joint venture to provide certain back office and administrative services to our GTS operations in the region. The failure or inability to perform on the part of one or more of these critical suppliers or partners could cause significant disruptions and increased costs.
Past and future acquisitions may not be successful.
From time to time, we acquire and invest in companies throughout the world. Acquisitions involve a number of risks, including the diversion of management’s attention from its existing operations, the failure to retain key personnel or customers of an acquired business, the failure to realize anticipated benefits such as cost savings and revenue enhancements, the potentially substantial transaction costs associated with acquisitions, the assumption of unknown liabilities of the acquired business and the inability to successfully integrate the business into our operations. Potential impairment losses could result if we overpay for an acquisition. There can be no assurance that any past or future acquired businesses will generate anticipated revenues or earnings.
Investments in equity affiliates expose us to additional risks and uncertainties.
We participate, or may participate in the future, in certain investments in equity affiliates, such as joint ventures or other equity investments with strategic partners, including PersolKelly Asia Pacific. These arrangements expose us to a number of risks, including the risk that the management of the combined venture may not be able to fulfill their performance obligations under the management agreements or that the joint venture parties may be incapable of providing the required financial support. Additionally, improper, illegal or unethical actions by the venture management could have a negative impact on the reputation of the venture and our company.
A loss of major customers or a change in such customers’ buying behavior or economic strength could have a material adverse effect on our business.
Our business strategy is focused on servingWe serve many large corporate customers through high volume global service agreements. While our strategy is intendedwe intend to enable us tomaintain or increase our revenues and earnings from our major corporate customers, the strategy also exposes uswe are exposed to increased risks arising from the possible loss of major customer accounts. TheA change in labor strategy or the deterioration of the financial condition or business prospects of these customers could reduce their need for our services and result in a significant decrease in the revenues and earnings we derive from these customers. Such change could occur due to factors in our customers' control but also could occur due to economic,
social, climate, or political factors outside of our customers' control. Our customers are also exposed to third-party risk through their use of vendors and suppliers which, in the event of a third-party incident at a customer, could result in a deterioration in their financial condition. Continuing merger and acquisition activity involving our large corporate customers could put existing business at risk or impose additional pricing pressures. Since receipts from customers generally lag payroll to temporary employees, the bankruptcy of a major customer could have a material adverse impact on our ability to meet our working capital requirements. Additionally, most of our customer contracts can be terminated by the customer on short notice without penalty. This creates uncertainty with respect to the revenues and earnings we may recognize with respect to our customer contracts.
Our business with large customer accounts reflects a market-driven shift in buying behaviors in which reliance on a small number of staffing partners has shifted to reliance upon outsourced workforce solutions.a network of talent providers. The movement from single-sourced to competitively sourced staffing contracts may also substantially reduce our future revenues from such customers. While Kelly has sought to address this trend, with the adoption of talent supply chain strategies, including providing CWOManaged Service Provider ("MSP") services within our GTSOutsourcing & Consulting ("OCG") segment, we may not be selected or retained as the CWO service providerMSP by our large customers. This may result in a material decrease in the revenue we derive from providing staffing services to such customers. In addition, revenues may be materially impacted from our decision to exit customers due to pricing pressure or other business factors.
Our business with the federal government and government contractors presents additional risk considerations. We must comply with laws and regulations relating to the formation, administration and performance of federal government contracts. Failure to meet these obligations could result in civil penalties, fines, suspension of payments, reputational damage, disqualification from doing business with government agencies and other sanctions or adverse consequences. Government procurement practices may change in ways that impose additional costs or risks upon us or pose a competitive disadvantage. Our employees may be unable to obtain or retain the security clearances necessary to conduct business under certain contracts, or we could lose or be unable to secure or retain a necessary facility clearance. Government agencies may temporarily or permanently lose funding for awarded contracts, or there could be delays in the start-up of projects already awarded and funded.
We are at risk of damage to our brand, which is important to our success.
Our success depends, in part, on the goodwill associated with our brand. Because we assign employees to work under the direction and supervision of our customer at work locations not under Kelly’s control, we are at risk of our employees engaging in unauthorized conduct that could harm our reputation. Our Education segment is particularly susceptible to this exposure. Any incident, act or omission that damages Kelly’s reputation could cause the loss of current and future customers, additional regulatory scrutiny and liability to third parties, which could negatively impact profitability.
As we increasingly offer services outside the realm of traditional staffing, including business process outsourcing and services intended to connect talent to independent work, we are exposed to additional risks which could have a material adverse effect on our business.
Our business strategy focuses on driving profitable growth in key specialty areas, including through business process outsourcing arrangements, where we provide operational management of our customers’ non-core functions or departments. This could expose us to certain risks unique to that business, including product liability or product recalls. As the nature of work changes, we deliver services that connect talent to independent work with our customers and expose the Company to risks of misclassifying workers, which could result in regulatory audits and penalties. Although we have internal vetting processes intended to control such risks, there is no assurance that these processes will be effective or that we will be able to identify these potential risks in a timely manner. Our specialties also include professional engineering services where design, construction or systems failures and project delays can result in substantial injury or damages. We attempt to mitigate and transfer such risks through contractual arrangements with our customers; however, these services may give rise to liability claims and litigation. While we maintain insurance in types and amounts we believe are appropriate for the contemplated risks, there is no assurance that such insurance coverage will remain available on reasonable terms or be sufficient in amount or scope.
We are increasingly dependent on third parties for the execution of critical functions.
We rely on third parties to support critical functions within our operations, including portions of our technology infrastructure, vendor management, customer relationship management, and applicant tracking systems. If we are unable to contract with third parties having the specialized skills needed to support our growth strategies or integrate their products and services with our business, or if they fail to meet our performance requirements, the results of operations could be adversely impacted. We also rely on supplier partnerships to deliver our services to customers in certain territories. If our suppliers fail to meet our standards and expectations or are unfavorably regarded by our customers, our ability to discontinue the relationship may be limited and could result in reputational damage, customer loss, and adversely affect our results of operations. For example, in the Asia-Pacific region, we rely on third parties and partners to provide certain back office and administrative services to our operations
in that region. The failure or inability to perform on the part of one or more of these critical suppliers or partners could cause significant disruptions and increased costs.
Our information technology strategy may not yield its intended results.
Our information technology strategy includes improvements to our applicant onboarding and tracking systems, order management, and improvements to financial processes such as billing and accounts payable through system consolidation and upgrades. We do not use a single enterprise resource planning system, which limits our ability to react to evolving technology and customer expectations and increases the amount of investment and effort necessary to provide global service integration to our customers. Although the technology strategy is intended to increase productivity and operating efficiencies, these initiatives may not yield their intended results. Any delays in completing, or an inability to successfully complete, these technology initiatives or an inability to achieve the anticipated efficiencies could adversely affect our operations, liquidity and financial condition. Some of the initiatives are dependent on the products and services of third party vendors. If our vendors are unable to provide these services, or fail to meet our standards and expectations, we could experience business interruptions or data loss which could have a material adverse effect on our business, financial condition and results of operations.
Past and future acquisitions may not be successful.
As a part of our growth strategy, we continue to monitor the market for acquisition targets to bolster our inorganic growth aspirations. Acquisitions involve a number of risks, including the diversion of management’s attention from its existing operations, the failure to retain key personnel or customers of an acquired business, the failure to realize anticipated benefits such as cost savings and revenue enhancements, potential substantial transaction costs associated with acquisitions, the assumption of unknown liabilities of the acquired business and the inability to successfully integrate the business into our operations. There can be no assurance that any past or future acquired businesses will generate anticipated revenues or earnings.
Further, acquisitions result in goodwill and intangible assets which have the risk of impairment if the future operating results and cash flows of such acquisitions are lower than our initial estimates. In the event that we determine that there is an impairment, we may be required to record a significant non-cash charge to earnings that could adversely affect our results of operations.
Investments in equity affiliates expose us to additional risks and uncertainties.
We participate, or may participate in the future, in certain investments in equity affiliates, such as joint ventures or other equity method investments with strategic partners, including PersolKelly Pte. Ltd. These arrangements expose us to a number of risks, including the risk that the management of the combined venture may not be able to fulfill their performance obligations under the management agreements or that the joint venture parties may be incapable of providing the required financial support. Additionally, improper, illegal or unethical actions by the venture management could have a negative impact on the reputation of the venture and our Company.
Risks Related to Operating a Global Enterprise
We conduct a significant portion of our operations outside of the United States and we are subject to risks relating to our international business activities, including fluctuations in currency exchange rates and numerous legal and regulatory requirements.
We conduct our business in most major staffing markets throughout the world. Our operations outside the United States are subject to risks inherent in international business activities, including:
•fluctuations in currency exchange rates;
•restrictions or limitations on the transfer of funds;
•government intrusions including asset seizures, expropriations or de facto control;
•varying economic and political conditions;
•differences in cultures and business practices;
•differences in employment and tax laws and regulations;
•differences in accounting and reporting requirements;
•differences in labor and market conditions;
•compliance with trade sanctions;
•changing and, in some cases, complex or ambiguous laws and regulations; and
•litigation, investigations and claims.
Our operations outside the United States are reported in the applicable local currencies and then translated into U.S. dollars at the applicable currency exchange rates for inclusion in our consolidated financial statements. Exchange rates for currencies of
these countries may fluctuate in relation to the U.S. dollar and these fluctuations may have an adverse or favorable effect on our operating results when translating foreign currencies into U.S. dollars.
Our investment in Persol Holdings exposes us to potential market and currency exchange risks.
We are exposed to market and currency risks on our investment in Persol Holdings. The investment is stated at fair value and is marked to market through net earnings. Changes in the market price are based on the Persol Holdings stock price as listed in the Tokyo stock exchange, and such changes may be material. Foreign currency fluctuations on this yen-denominated investment are reflected as a component of other comprehensive income and, accordingly, the exchange rate fluctuations may have a material adverse or favorable effect on our financial statements.
Our international operations subject us to potential liability under anti-corruption, trade protection, and other laws and regulations.
The Foreign Corrupt Practices Act and other anti-corruption laws and regulations (“Anti-Corruption Laws”) prohibit corrupt payments by our employees, vendors, or agents. While we devote substantial resources to our global compliance programs and have implemented policies, training, and internal controls designed to reduce the risk of corrupt payments, our employees, vendors, or agents may violate our policies. Our failure to comply with Anti-Corruption Laws could result in significant fines and penalties, criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business, and damage to our reputation. Operations outside the U.S. may be affected by changes in trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment. As a result, we may be subject to legal liability and reputational damage.
Risks Related to Human Capital
We depend on our ability to attract, develop and retain qualified permanent full-time employees.
As we aim to expand the number of clients adopting talent supply chain management and other complexutilizing our higher margin specialty solutions in order to support of our growth strategy, we are highly reliant on individuals who possess specialized knowledge and skills to lead complexrelated specialty solutions and operations. ThereSocial, political and financial conditions can be no assurance thatnegatively impact the availability of qualified personnel will continuepersonnel. Competition for individuals with proven specialized knowledge and skills is intense, and demand for these individuals is expected to be available.remain strong in the foreseeable future. Our success is increasingly dependent on our ability to attract, develop and retain these experts.employees.
We depend on our ability to attract and retain qualified temporary personnel (employed directly by us or through third-party suppliers).
We depend on our ability to attract qualified temporary personnel who possess the skills and experience necessary to meet the staffing requirements of our customers. We must continually evaluate our base of available qualified personnel to keep pace with changing customer needs. Competition for individuals with proven professional skills is intense, and demand for these individuals is expected to remain strong for the foreseeable future. Social, political and financial conditions can negatively impact the amount of qualified personnel available to meet the staffing requirements of our customers. There can be no assurance that qualified personnel will continue to be available in sufficient numbers and on terms of employment acceptable to us and our customers. Our success is substantially dependent on our ability to recruit and retain qualified temporary personnel.
We may be exposed to employment-related claims and losses, including class action lawsuits and collective actions, which could have a material adverse effect on our business.
We employ and assign personnel in the workplaces of other businesses. The risks of these activities include possible claims relating to:
•discrimination and harassment;
•wrongful termination or retaliation;
•violations of employment rights related to employment screening or privacy issues;
•apportionment between us and our customer of legal obligations as an employer of temporary employees;
•classification of workers as employees or independent contractors;
•employment of unauthorized workers;
•violations of wage and hour requirements;
•retroactive entitlement to employee benefits, including health insurance;
•failure to comply with leave policy requirements; and
•errors and omissions by our temporary employees, particularly for the actions of professionals such as attorneys, accountants, teachers and scientists.
We are also subject to potential risks relating to misuse of customer proprietary information, misappropriation of funds, death or injury to our employees, damage to customer facilities due to negligence of temporary employees, criminal activity and other similar occurrences. We may incur fines and other losses or negative publicity with respect to these risks. In addition, these occurrences may give rise to litigation, which could be time-consuming and expensive. In the U.S. and certain other countries in which we operate, new employment and labor laws and regulations have been proposed or adopted that may increase the potential exposure of employers to employment-related claims and litigation. In addition, such laws and regulations are arising with increasing frequency at the state and local level in the U.S. and the resulting inconsistency in such laws and regulations results in additional complexity. There can be no assurance that the corporate policies and practices we have in place to help reduce our exposure to these risks will be effective or that we will not experience losses as a result of
these risks. Although we maintain insurance in types and amounts we believe are appropriate in light of the aforementioned exposures, there can also be no assurance that such insurance policies will remain available on reasonable terms or be sufficient in amount or scope of coverage. Additionally, should we have a material inability to produce records as a consequence of litigation or a government investigation, the cost or consequences of such matters could become much greater.
Risks Related to Cyber Security and Data Privacy
Damage to our key data centers could affect our ability to sustain critical business applications.
Many business processes critical to our continued operation are hosted in outsourced facilities in America and Europe. Certain other processes are hosted at our corporate headquarters complex or occur in cloud-based computer environments. These critical processes include, but are not limited to, payroll, customer reporting, and order management. Although we have taken steps to protect all such instances by establishing robust data backup and disaster recovery capabilities, the loss of these data centers or access to the cloud-based environments could create a substantial risk of business interruption which could have a material adverse effect on our business, financial condition and results of operations.
A failure to maintain the privacy of information entrusted to us could have significant adverse consequences.
In the normal course of business we control, we process, or have access to personal information regarding our own employees or employment candidates, as well as that of many of our customers or managed suppliers. Information concerning our employees and candidatesthese individuals may also reside in systems controlled by third parties for purposes such as employee benefits and payroll administration. The legal and regulatory environment concerning data privacy is becoming more complex and challenging, and the potential consequences of non-compliance have become more severe. The European Union’s General Data Protection Regulation, the California Consumer Privacy Act and similar laws impose additional compliance requirements related to the collection, use, processing, transfer, disclosure, and retention of personal information, which can increase operating costs and resources to accomplish. Any failure to abide by these regulations or to protect such personal information from inappropriate access or disclosure, whether through social engineering or by accident or other cause, could have severe consequences including fines, litigation, regulatory sanctions, including loss of our status as a subscriber to the EU-U.S. Privacy Shield Framework, reputational damage, and loss of customers or employees. Although we have a program designed to preserve the privacy rights of the personal data that we control or process, as well as personal data that we entrust to third parties, there can be no assurance that our program will meet all current and future regulatory requirements, anticipate all potential methods of unauthorized access, or prevent all inappropriate disclosures. Our insurance coverage may
not be sufficient to cover all such costs or consequences, and there can be no assurance that any insurance that we now maintain will remain available under acceptable terms.
Cyber attacksCyberattacks or other breaches of network or information technology security could have an adverse effect on our systems, services, reputation and financial results.
We rely upon multiple information technology systems and networks, some of which are web-based or managed by third parties, to process, transmit, and store electronic information and to manage or support a variety of critical business processes and activities. Our networks and applications are increasingly accessed from locations and by devices not within our physical control, and the specifics of our technology systems and networks may vary by geographic region. In the course of ordinary business, we may store or process proprietary or confidential information concerning our business and financial performance and current, past or prospective employees, customers, vendors and managed suppliers. The secure and consistent operation of these systems, networks and processes is critical to our business operations. Moreover, our temporary employees may be exposed to, or have access to, similar information in the course of their customer assignments. We routinely experience cyber attacks,cyberattacks, which may include the use or attempted use of malware, ransomware, computer viruses, phishing, social engineering schemes and other means of attempted disruption or unauthorized access. Additionally, the rapid pace of change in information security and cyber security threats could result in a heightened threat level for us or companies in our industry with little notice. Our relationships with third parties, including suppliers we manage, customers, and vendors creates potential avenues for malicious actors to initiate a supply chain attack. Even in instances where we are not a target of a malicious actor, we could be exposed to risk due to our relationships and business processes with these third parties.
The actions we take to reduce the risk of impairments to our operations or systems and breaches of confidential or proprietary data may not be sufficient to prevent or repel future cyber events or other impairments of our networks or information technologies. An event involving the destruction, modification, accidental or unauthorized release, or theft of sensitive information from systems related to our business, or an attack that results in damage to or unavailability of our key technology systems or those of critical vendors (e.g., ransomware), could result in damage to our reputation, fines, regulatory sanctions or interventions, contractual or financial liabilities, additional compliance and remediation costs, loss of employees or customers, loss of payment card network privileges, operational disruptions and other forms of costs, losses or reimbursements, any of which could materially adversely affect our operations or financial condition. Our cyber security and business continuity plans, and those of our third parties with whom we do business, may not be effective in anticipating, preventing and effectively responding to all potential cyber risk exposures. Our insurance coverage may not be sufficient to cover all such costs or consequences, and there can be no assurance that any insurance that we now maintain will remain available under acceptable terms.
DamageRisks Related to our key data centers could affect our ability to sustain critical business applications.Our Capital Structure
Many business processes critical to our continued operation are housed in our data center situated within the corporate headquarters complex as well as regional data centers in Asia-Pacific and Europe. Those processes include, but are not limited to, payroll, customer reporting and order management. While we have taken steps to protect these operations and have developed remote recovery capabilities, the loss of a data center would create a substantial risk of business interruption which could have a material adverse effect on our business, financial condition and results of operations.
Our information technology projects may not yield their intended results.
We have a number of information technology projects in process or in the planning stages, including improvements to applicant onboarding and tracking systems, order management, and improvements to financial processes such as billing and accounts
payable through system consolidation and upgrades. Although the technology is intended to increase productivity and operating efficiencies, these projects may not yield their intended results. Any delays in completing, or an inability to successfully complete, these technology initiatives or an inability to achieve the anticipated efficiencies could adversely affect our operations, liquidity and financial condition. In addition, our information technology investments and strategy may not provide the ability to keep up with evolving industry trends and customer expectations which could weaken our competitive position. We also do not currently utilize a single enterprise resource planning system, which limits our ability and increases the amount of investment and effort necessary to provide global service integration to our customers.
Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting.
Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting. If our management is unable to certify the effectiveness of our internal controls or if our independent registered public accounting firm cannot render an opinion on the effectiveness of our internal controls over financial reporting, or if material weaknesses in our internal controls are identified, we could be subject to regulatory scrutiny and a loss of public confidence. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to accurately report our financial performance on a timely basis, which could have a negative effect on our stock price.
Impairment charges relating to our goodwill, intangibles and long-lived assets, including equity method investments, could adversely affect our results of operations.
We regularly monitor our goodwill, long-lived assets and equity method investments for impairment indicators. In conducting our goodwill impairment testing, we compare the fair value of each of our reporting units with goodwill to the related net book value. In conducting our impairment analysis of long-lived assets and intangibles, we compare the undiscounted cash flows expected to be generated from the long-lived assets and intangibles to the related net book values. We review our equity method investment for indicators of impairment on a periodic basis or whenever events or circumstances indicate the carrying amount may be other-than-temporarily impaired. Changes in economic or operating conditions impacting our estimates and assumptions could result in the impairment of our goodwill, intangibles, long-lived assets and equity method investments. In the event that we determine that there is an impairment, we may be required to record a significant non-cash charge to earnings that could adversely affect our results of operations.
Unexpected changes in claim trends on our workers’ compensation, unemployment, disability and medical benefit plans may negatively impact our financial condition.
We self-insure, or otherwise bear financial responsibility for, a significant portion of expected losses under our workers’ compensation program, disability and medical benefits claims. Unexpected changes in claim trends, including the severity and frequency of claims, actuarial estimates and medical cost inflation, could result in costs that are significantly different than initially reported. If future claims-related liabilities increase due to unforeseen circumstances, or if we must make unfavorable adjustments to accruals for prior accident years, our costs could increase significantly. In addition, unemployment insurance costs are dependent on benefit claims experience from employees which may vary from current levels and result in increased costs. There can be no assurance that we will be able to increase the fees charged to our customers in a timely manner and in a sufficient amount to cover increased costs as a result of any changes in claims-related liabilities.
Our business is subject to extensive government regulation, which may restrict the types of employment services we are permitted to offer or result in additional or increased taxes, including payroll taxes or other costs that reduce our revenues and earnings.
The temporary employment industry is heavily regulated in many of the countries in which we operate. Changes in laws or government regulations may result in prohibition or restriction of certain types of employment services we are permitted to offer or the imposition of new or additional benefit, licensing or tax requirements that could reduce our revenues and earnings. In particular, we are subject to state unemployment taxes in the U.S., which typically increase during periods of increased levels of unemployment. We also receive benefits, such as the work opportunity income tax credit in the U.S., that regularly expire and may not be reinstated. There can be no assurance that we will be able to increase the fees charged to our customers in a timely manner and in a sufficient amount to fully cover increased costs as a result of any changes in laws or government regulations. Any future changes in laws or government regulations, or interpretations thereof, including additional laws and regulations enacted at a local level may make it more difficult or expensive for us to provide staffing services and could have a material adverse effect on our business, financial condition and results of operations.
Government litigation and regulatory activity relating to competition rules may limit how we structure and market our services.
As a leading staffing and recruiting company, we are closely scrutinized by government agencies under U.S. and foreign competition laws. An increasing number of governments are regulating competition law activities, leading to increased scrutiny. Some jurisdictions also allow competitors or consumers to assert claims of anti-competitive conduct.
The European Commission and its various competition authorities have targeted industry trade associations in which we participate. Any government regulatory actions may hamper our ability to provide the cost-effective benefits to consumers and businesses, reducing the attractiveness of our services and the revenue that come from them. New competition law actions could be initiated. The outcome of such actions, or steps taken to avoid them, could adversely affect us in a variety of ways, including:
We may have to choose between withdrawing certain services from certain geographies to avoid fines or designing and developing alternative versions of those services to comply with government rulings, which may entail a delay in a service delivery.
Adverse rulings may act as precedent in other competition law proceedings.
We may have additional tax or unclaimed property liabilities that exceed our estimates.
We are subject to a multitude of federal, state and local taxes in the jurisdictions we operate in, including the tax provisions of the U.S. Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. We are also subject to unclaimed or abandoned property (escheat) laws. Our tax expense could be materially impacted by changes in tax laws in these jurisdictions, changes in the valuation of deferred tax assets and liabilities or changes in the mix of income by country. The demographics of our workforce and the visibility of our industry may make it more likely we become a target of government investigations, and we are regularly subject to audit by tax authorities. Although we believe our tax and unclaimed property estimates are reasonable, the final determination of audits and any related litigation could be materially different from our historical tax provisions and accruals. The results of an audit or litigation could materially harm our business.
Failure to maintain specified financial covenants in our bank credit facilities, or credit market events beyond our control, could adversely restrict our financial and operating flexibility and subject us to other risks, including risk of loss of access to capital markets.
Our bank credit facilities contain covenants that require us to maintain specified financial ratios and satisfy other financial conditions. During 2017, we met all of the covenant requirements. Our ability to continue to meet these financial covenants, particularly with respect to interest coverage (see Debt footnote in the notes to our consolidated financial statements), may not be assured. If we default under this or any other of these requirements, the lenders could declare all outstanding borrowings, accrued interest and fees to be due and payable or significantly increase the cost of the facility. In these circumstances, there can be no assurance that we would have sufficient liquidity to repay or refinance this indebtedness at favorable rates or at all. Events beyond our control could result in the failure of one or more of our banks, reducing our access to liquidity and potentially resulting in reduced financial and operating flexibility. If broader credit markets were to experience dislocation, our potential access to other funding sources would be limited.
Our controlling stockholder exercises voting control over our company and has the ability to elect or remove from office all of our directors.
The Terence E. Adderley Revocable Trust K (“Trust K”) which became irrevocable upon the Executive Chairmandeath of Terence E. Adderley on October 9, 2018, is our controlling stockholder. In accordance with the provisions of Trust K, William U. Parfet, David M. Hempstead and Andrew H. Curoe were appointed as successor trustees of the trust. Mr. Parfet is the brother of Donald R. Parfet, the Chairman of the Board of our board of directors and certain trusts with respect to which he acts as trustee or co-trustee, control approximately 93% of the outstandingCompany. The trustees, acting by majority vote, have sole investment and voting power over the shares of Kelly Class B common stock held by Trust K, which represent approximately 91.6% of the outstanding Class B shares. The voting rights of our Class B common stock are perpetual, and our Class B common stock is not subject to transfer restrictions or mandatory conversion obligations under our certificate of incorporation or bylaws.
Our Class B common stock is the only class of our common stock entitled to voting rights. Mr. Adderley isThe trustees of Trust K are therefore able to exercise voting control with respect to all matters requiring stockholder approval, including the election or removal from office of all members of the Company’s board of directors.
We are not subject to certain of the listing standards that normally apply to companies whose shares are quoted on the NASDAQ Global Market.
Our Class A and Class B common stock are quoted on the NASDAQ Global Market. Under the listing standards of the NASDAQ Global Market, we are deemed to be a “controlled company” by virtue of the fact that Terence E. Adderley, the Executive Chairman and Chairman of the Board of our board of directors, and certain trusts of which he acts as trustee or co-
trustee havedue to Trust K having voting power with respect to more than fifty percent of our outstanding voting stock. A controlled company is not required to have a majority of its board of directors comprised of independent directors. Director nominees are not required to be selected or recommended for the board’s selection by a majority of independent directors or a nominations committee comprised solely of independent directors,
nor do the NASDAQ Global Market listing standards require a controlled company to certify the adoption of a formal written charter or board resolution, as applicable, addressing the nominations process. A controlled company is also exempt from NASDAQ Global Market’s requirements regarding the determination of officer compensation by a majority of independent directors or a compensation committee comprised solely of independent directors. A controlled company is required to have an audit committee composed of at least three directors who are independent as defined under the rules of both the Securities and Exchange CommissionSEC and the NASDAQ Global Market. The NASDAQ Global Market further requires that all members of the audit committee have the ability to read and understand fundamental financial statements and that at least one member of the audit committee possess financial sophistication. The independent directors must also meet at least twice a year in meetings at which only they are present.
We currently comply with certain of the listing standards of the NASDAQ Global Market that do not apply to controlled companies. Our compliance is voluntary, however, and there can be no assurance that we will continue to comply with these standards in the future.
Provisions in our certificate of incorporation and bylaws and Delaware law may delay or prevent an acquisition of our company.Company.
Our restated certificate of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. For example, if a potential acquirer were to make a hostile bid for us, the acquirer would not be able to call a special meeting of stockholders to remove our board of directors or act by written consent without a meeting. The acquirer would also be required to provide advance notice of its proposal to replace directors at any annual meeting and would not be able to cumulate votes at a meeting, which would require the acquirer to hold more shares to gain representation on the board of directors than if cumulative voting were permitted.
Our board of directors also has the ability to issue additional shares of common stock which could significantly dilute the ownership of a hostile acquirer. In addition, Section 203 of the Delaware General Corporation Law limits mergers and other business combination transactions involving 15 percent or greater stockholders of Delaware corporations unless certain board or stockholder approval requirements are satisfied. These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation.
Our board of directors could choose not to negotiate with an acquirer that it did not believe was in our strategic interests. If an acquirer is discouraged from offering to acquire us or prevented from successfully completing a hostile acquisition by these or other measures, our shareholders could lose the opportunity to sell their shares at a favorable price.
The holders of shares of our Class A common stock are not entitled to voting rights.
Under our certificate of incorporation, the holders of shares of our Class A common stock are not entitled to voting rights, except as otherwise required by Delaware law. As a result, Class A common stock holdersstockholders do not have the right to vote for the election of directors or in connection with most other matters submitted for the vote of our stockholders.stockholders, including mergers and certain other business combination transactions involving the Company.
OurWe may not be able to realize value from, or otherwise preserve and utilize, our tax credit and net operating loss carryforwards.
Provisions in U.S. and foreign tax law could limit the use of tax credit and net operating loss carryforwards in the event of an ownership change. In general, an ownership change occurs under U.S. tax law if there is a change in the corporation’s equity ownership that exceeds 50% over a rolling three-year period. If we experience an ownership change, inclusive of our Class A and Class B common stock, priceour tax credit and net operating loss carryforwards generated prior to the ownership change may be subject to significant volatilityannual limitations that could reduce, eliminate or defer their utilization. Such limitation could materially impact our financial condition and could suffer a declineresults of operations.
Failure to maintain specified financial covenants in value.
Theour bank credit facilities, or credit market price of our common stock may be subject to significant volatility. We believe that many factors, including several which areevents beyond our control, have a significant effect oncould adversely restrict our financial and operating flexibility and subject us to other risks, including risk of loss of access to capital markets.
Our bank credit facilities contain covenants that require us to maintain specified financial ratios and satisfy other financial conditions. During 2021, we met all of the market price of our common stock. These include:
actual or anticipated variations in our quarterly operating results;
announcements of new services by us or our competitors;
announcements relatingcovenant requirements. Our ability to strategic relationships or acquisitions;
changes incontinue to meet these financial estimates by securities analysts;
changes in general economic conditions;
actual or anticipated changes in laws and government regulations;
commencement of, or involvement in, litigation;
any major change in our board or management;
changes in industry trends or conditions; and
sales of significant amounts of our common stock or other securitiescovenants, particularly with respect to interest coverage (see Debt footnote in the market.notes to our consolidated financial statements), cannot be assured. If we default under this or any other of these requirements, the lenders could declare all outstanding borrowings,
accrued interest and fees to be due and payable or significantly increase the cost of the facility. Additionally, our credit facilities contain cross-default provisions. In addition, the stock market in general, and the NASDAQ Global Market in particular,these circumstances, there can be no assurance that we would have experienced significant price and volume fluctuations that have often been unrelatedsufficient liquidity to repay or disproportionate to the operating performance of listed companies. These broad market and industry factors may seriously harm the market price ofrefinance this indebtedness at favorable rates or at all. Events beyond our common stock, regardless of our operating performance. In the past, securities class action litigation has often been instituted following periods of volatility in the market price of a company’s securities. A securities class action suit against uscontrol could result in substantial costs, potential liabilities and the diversionfailure of one or more of our management’s attentionbanks, reducing our access to liquidity and resources. Further,potentially resulting in reduced financial and operating flexibility. If broader credit markets were to experience dislocation, our operating results maypotential access to other funding sources would be below the expectations of securities analysts or investors. In such event, the price of our common stock may decline.limited.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We own our
Our headquarters is located in Troy, Michigan where we both own and lease facilities and where our corporate, subsidiary and divisional offices are currently located. The original headquarters building was purchased in 1977. Headquartersemployees work. Our remaining business operations were expanded into additional buildings purchased in 1991, 1997 and 2001.
The combined usable floor space in the headquarters complex is approximately 345,000 square feet. Our buildingsU.S., as well as our international locations, are in good condition and are currently adequate for their intended purpose and use. We also own undeveloped land in Troy and northern Oakland County, Michigan.
Branch office business is conducted in leased premises withfacilities. Since 2020, as the result of COVID-19, the majority of leases being fixed for termsour internal employees have also conducted business remotely as the result of generally threegovernmental orders or our internal policies designed to five years inprotect the U.S.health and Canada and five to ten years outside the U.S. and Canada. We own virtually allsafety of the office furniture and the equipment used in our corporate headquarters and branch offices.employees.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business the Company is the subject of, or party to, various pending or threatened legal actions which could result in a material adverse outcome for which the related damages may not be estimable. As previously disclosed, the Company entered into a settlement with plaintiffs in Hillson et. al. v Kelly Services in order to avoid the cost of continued litigation. On August 17, 2017, the District Court approved the settlement and entered a Final Order of Judgment and Dismissal. The Company made the final payment, which was accrued in 2015, on September 19, 2017.
In addition, theThe Company is continuously engaged in litigation, threatened ligation, 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, or anti-competition regulations. There areregulations, commercial and contractual disputes, and tax related matters that are currently stayed pendingwhich could result in a decision from the Supreme Court of the United States on whether the Company’s arbitration provision is enforceable.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 onand in accrued workers’ compensation and other claims in the consolidated balance sheet. The Company maintains insurance coverage which may cover certain claims. When claims exceed the applicable policy deductible and realization of recovery of the claim 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 in the consolidated balance sheet.
While the ultimate outcome of these matters currently pending 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.
In January 2018, the Hungarian Competition Authority initiated proceedings against the Company, along with a local industry trade association and its members, due to alleged infringement of national competition regulations. We are fully cooperatingThe Authority announced its decision on December 18, 2020, levying a fine against the trade association with joint and several secondary liabilities placed on the investigation, and are supplying materials and information20 member companies. Our apportioned secondary liability as a member company is approximately $300,000. The matter is still pending. Certain member companies exercised their right to comply withchallenge the Authority’s undertakings.decision, which could impact the apportionment. The Company does not believe that resolution of this matter will have a material adverse effect upon the Company’s competitive position, results of operations, cash flows or financial position.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information and Dividends
Our Class A and Class B common stock is traded on the NASDAQ Global Market under the symbols “KELYA” and “KELYB,” respectively. The high and low selling prices for our Class A common stock and Class B common stock as quoted by the NASDAQ Global Market and the dividends paid on the common stock for each quarterly period in the last two fiscal years are reported in the table below. Our ability to pay dividends is subject to compliance with certain financial covenants contained in our debt facilities, as described in the Debt footnote in the notes to our consolidated financial statements. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Per share amounts (in dollars) |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Year |
2021 | | | | | | | | | |
Class A common | | | | | | | | | |
High | $ | 23.90 | | | $ | 26.98 | | | $ | 25.00 | | | $ | 20.87 | | | $ | 26.98 | |
Low | 19.13 | | | 22.51 | | | 18.58 | | | 15.88 | | | 15.88 | |
| | | | | | | | | |
Class B common | | | | | | | | | |
High | 57.46 | | | 60.00 | | | 24.70 | | | 21.27 | | | 60.00 | |
Low | 18.00 | | | 22.15 | | | 17.95 | | | 16.63 | | | 16.63 | |
| | | | | | | | | |
Dividends | — | | | — | | | 0.05 | | | 0.05 | | | 0.10 | |
| | | | | | | | | |
2020 | | | | | | | | | |
Class A common | | | | | | | | | |
High | $ | 22.77 | | | $ | 18.18 | | | $ | 19.89 | | | $ | 23.00 | | | $ | 23.00 | |
Low | 10.13 | | | 11.01 | | | 13.55 | | | 15.56 | | | 10.13 | |
| | | | | | | | | |
Class B common | | | | | | | | | |
High | 21.78 | | | 18.14 | | | 90.36 | | | 22.70 | | | 90.36 | |
Low | 10.52 | | | 10.35 | | | 14.04 | | | 15.50 | | | 10.35 | |
| | | | | | | | | |
Dividends | 0.075 | | | — | | | — | | | — | | | 0.075 | |
|
| | | | | | | | | | | | | | | | | | | |
| Per share amounts (in dollars) |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Year |
2017 | | | | | | | | | |
Class A common | | | | | | | | | |
High | $ | 23.48 |
| | $ | 24.70 |
| | $ | 25.48 |
| | $ | 30.93 |
| | $ | 30.93 |
|
Low | 20.87 |
| | 20.27 |
| | 21.01 |
| | 24.69 |
| | 20.27 |
|
| | | | | | | | | |
Class B common | | | | | | | | | |
High | 23.00 |
| | 23.75 |
| | 23.00 |
| | 28.50 |
| | 28.50 |
|
Low | 20.30 |
| | 20.18 |
| | 20.95 |
| | 27.20 |
| | 20.18 |
|
| | | | | | | | | |
Dividends | 0.075 |
| | 0.075 |
| | 0.075 |
| | 0.075 |
| | 0.30 |
|
| | | | | | | | | |
2016 | | | | | | | | | |
Class A common | | | | | | | | | |
High | $ | 19.73 |
| | $ | 20.15 |
| | $ | 20.98 |
| | $ | 23.61 |
| | $ | 23.61 |
|
Low | 14.63 |
| | 17.81 |
| | 18.01 |
| | 18.06 |
| | 14.63 |
|
| | | | | | | | | |
Class B common | | | | | | | | | |
High | 18.04 |
| | 20.00 |
| | 21.60 |
| | 27.80 |
| | 27.80 |
|
Low | 15.43 |
| | 15.04 |
| | 17.23 |
| | 17.75 |
| | 15.04 |
|
| | | | | | | | | |
Dividends | 0.05 |
| | 0.075 |
| | 0.075 |
| | 0.075 |
| | 0.275 |
|
Holders
Holders
The number of holders of record of our Class A and Class B common stock were approximately 6,6008,800 and 200,600, respectively, as of February 2, 2018. January 29, 2022.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
During the fourth quarter of 2017,2021, we reacquired shares of our Class A common stock as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares (or Units) Purchased | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs |
| | | | | | | | (in millions of dollars) |
October 4, 2021 through November 7, 2021 | | 62 | | | $ | 19.68 | | | — | | | $ | — | |
| | | | | | | | |
November 8, 2021 through December 5, 2021 | | 210 | | | 18.29 | | | — | | | — | |
| | | | | | | | |
December 6, 2021 through January 2, 2022 | | 1,589 | | | 17.50 | | | — | | | — | |
| | | | | | | | |
Total | | 1,861 | | | $ | 17.66 | | | — | | | |
|
| | | | | | | | | | | | | | |
Period | | Total Number of Shares (or Units) Purchased | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs |
| | | | | | | | (in millions of dollars) |
October 2, 2017 through November 5, 2017 | | 845 |
| | $ | 26.31 |
| | — |
| | $ | — |
|
| | | | | | | | |
November 6, 2017 through December 3, 2017 | | 289 |
| | 29.36 |
| | — |
| | — |
|
| | | | | | | | |
December 4, 2017 through December 31, 2017 | | — |
| | — |
| | — |
| | — |
|
| | | | | | | | |
Total | | 1,134 |
| | $ | 27.09 |
| | — |
| | |
|
We may reacquire shares sold to cover taxesemployee tax withholdings due upon the vesting of restricted stock held by employees. Accordingly, 1,1341,861 shares were reacquired during the Company’s fourth quarter.
Performance Graph
The following graph compares the cumulative total return of our Class A common stock with that of the S&P SmallCap 600 Index and the S&P 1500 Human Resources and Employment Services Index for the five years ended December 31, 2017.2021. The graph assumes an investment of $100 on December 31, 20122016 and that all dividends were reinvested.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Assumes Initial Investment of $100
December 31, 20122016 – December 31, 20172021
| | | | | | | | | | | | | | | | | | | | |
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
Kelly Services, Inc. | $ | 100.00 | | $ | 120.58 | | $ | 91.65 | | $ | 102.30 | | $ | 93.56 | | $ | 76.67 | |
S&P SmallCap 600 Index | $ | 100.00 | | $ | 113.23 | | $ | 103.63 | | $ | 127.24 | | $ | 141.60 | | $ | 179.58 | |
S&P 1500 Human Resources and Employment Services Index | $ | 100.00 | | $ | 127.28 | | $ | 106.57 | | $ | 130.86 | | $ | 131.97 | | $ | 199.47 | |
ITEM 6. [Reserved]
|
| | | | | | | | | | | | | | | | | | |
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 |
Kelly Services, Inc. | $ | 100.00 |
| $ | 160.17 |
| $ | 110.53 |
| $ | 106.17 |
| $ | 152.98 |
| $ | 184.46 |
|
S&P SmallCap 600 Index | $ | 100.00 |
| $ | 141.31 |
| $ | 149.45 |
| $ | 146.50 |
| $ | 185.40 |
| $ | 209.94 |
|
S&P 1500 Human Resources and Employment Services Index | $ | 100.00 |
| $ | 176.48 |
| $ | 177.11 |
| $ | 191.21 |
| $ | 209.27 |
| $ | 266.36 |
|
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes selected financial information of Kelly Services, Inc. and its subsidiaries for each of the most recent five fiscal years. This table should be read in conjunction with the other financial information, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements included elsewhere in this report. The statement of earnings data for the 2014 and 2013 fiscal years as well as the balance sheet data as of 2015, 2014 and 2013 are derived from consolidated financial statements previously on file with the SEC.
|
| | | | | | | | | | | | | | | | | | | | |
(In millions except per share amounts) | | 2017 | | 2016 | | 2015 (1) | | 2014 | | 2013 |
| | | | | | | | | | |
Revenue from services | | $ | 5,374.4 |
| | $ | 5,276.8 |
| | $ | 5,518.2 |
| | $ | 5,562.7 |
| | $ | 5,413.1 |
|
Earnings from operations | | 83.3 |
| | 63.2 |
| | 53.8 |
| | 23.7 |
| | 58.9 |
|
Gain on investment in PersolKelly Asia Pacific (2) | | — |
| | 87.2 |
| | — |
| | — |
| | — |
|
Net earnings | | 71.6 |
| | 120.8 |
| | 53.8 |
| | 23.7 |
| | 58.9 |
|
| | | | | | | | | | |
Basic earnings per share | | 1.84 |
| | 3.10 |
| | 1.39 |
| | 0.61 |
| | 1.54 |
|
Diluted earnings per share | | 1.81 |
| | 3.08 |
| | 1.39 |
| | 0.61 |
| | 1.54 |
|
| | | | | | | | | | |
Dividends per share | | | | | | | | | | |
Classes A and B common | | 0.30 |
| | 0.275 |
| | 0.20 |
| | 0.20 |
| | 0.20 |
|
| | | | | | | | | | |
Working capital (3) | | 458.1 |
| | 443.5 |
| | 411.3 |
| | 428.1 |
| | 474.5 |
|
Total assets | | 2,376.3 |
| | 2,028.1 |
| | 1,939.6 |
| | 1,917.9 |
| | 1,798.6 |
|
Total noncurrent liabilities | | 300.5 |
| | 245.0 |
| | 228.4 |
| | 224.1 |
| | 214.0 |
|
| |
(1) | Fiscal year included 53 weeks. |
| |
(2) | Represents the fair value of the Company’s investment in PersolKelly Asia Pacific in addition to the cash received less the carrying value of assets transferred to the joint venture. |
| |
(3) | Working capital is calculated as current assets minus current liabilities. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Executive Overview
Kelly’s strategy and actions are guided by our simple yet powerful Noble Purpose: “We connect people to work in ways that enrich their lives.” We are committed to being a leading talent solutions provider among the talent with whom we choose to specialize and in the global markets in which we choose to compete. As we navigate the post-pandemic landscape, we will continue to demonstrate our expected behaviors and actions:
•Employ a talent-first mentality
•Relentlessly deliver for customers
•Grow through discipline and focus
•Deliver efficiency and effectiveness in everything we do
By aligning ourselves with our Noble Purpose and executing against these behaviors, we are becoming a more agile and focused organization, prepared to achieve new levels of growth and profitability as we develop and reshape our portfolio of businesses.
The WorkforceTalent Solutions Industry
The staffing industry has changed dramatically over
Even before the last decade—transformed by globalization,COVID-19 pandemic, labor markets were in the midst of change due to automation, competitive consolidation and secular shifts in labor supply and demand.demand and skills gaps. Global employmentdemographic trends are reshaping and redefining traditional employment models, sourcing strategiesthe way in which companies find and human resource capability requirements.use talent, and the COVID-19 pandemic changed where and how companies expect work to be performed—a shift we expect will carry over into the future. In response, the industry has accelerated its evolution from commercial into specialized staffing, and has expanded into outsourced solutions.
The broader workforcetalent solutions industry has continued to evolveis adjusting how it sources, recruits, trains and places talent.
Our industry is evolving to meet businesses’ growing demand for specialized talent, whether delivered as a single individual or as part of a total workforce solutions. As clients’solution. Companies in our industry are using novel sourcing approaches—including gig platforms, independent contractors and other talent pools—to create customized workforce solutions strategies move upthat are flexible and responsive to the maturity model, uselabor market.
In addition, today’s companies are elevating their commitment to talent, with the growing realization that meeting the changing needs and requirements of talent is essential to remain competitive. The ways in which people view, find and conduct work are undergoing fundamental shifts. And as the demand for skilled talent continues to climb, workers’ changing ideas about the integration of work into life are becoming more important. 2021 saw record-breaking employee resignations in the U.S. as workers opted out of jobs that did not align with their needs. In this increasingly talent-driven market, a diverse set of workers, empowered by technology, is seeking to take even greater control over their career trajectories. Kelly is proud to be a career partner of choice for workers in search of a talent supply chain management approach, which seeksbetter way to manage all categories of talent (temporary, project-based, outsourced and full-time), represents significant market potential.work.
Strategic clients are increasingly looking for global, flexible and holistic talent solutions that encompass all worker categories, driving adoption of a talent supply chain management approach covering temporary staffing, Contingent Workforce Outsourcing (“CWO”), Recruitment Process Outsourcing (“RPO”), Business Process Outsourcing (“BPO”), independent contractor management, strategic workforce planning, talent advisory services and more. Across all regions, the structural shifts toward higher-skilled, project-based specialized talent continue to represent long-term opportunities for the industry.
Our Business
Kelly Services is a talent and global workforce solutions company serving customers of all sizes in a variety of industries. We offer innovative outsourcing and consulting services, as well as staffing on a temporary and direct-hire basis. In early 2017,2020, we restructured components ofadopted a new operating model and realigned our previous Americas Commercial, Americas PTbusiness into five specialty business units, which are also our reportable segments.
•Professional & Industrial – delivers staffing, outcome-based and OCG segments under a single delivery organization, triggering a change in our operating structure. We now provide staffing through our branch networks in our Americasdirect-hire services focused on office, professional, light industrial and International operations, with commercial and specialized professional/technical staffing businessescontact center specialties in the AmericasU.S. and Canada, including our KellyConnect and Skilled Professional Solutions products
•Science, Engineering & Technology – delivers staffing, outcome-based and direct-hire services focused on science and clinical research, engineering, technology and telecommunications specialties predominantly in the U.S. and Canada and includes our NextGen and Global Technology Associates subsidiaries, as well as Softworld, a technology staffing and workforce solutions company acquired in 2021
•Education – delivers staffing, direct-hire and executive search services across the full education spectrum from early childhood to higher education in the U.S., and includes Teachers On Call, Insight Workforce Solutions and Greenwood/Asher & Associates
•Outsourcing & Consulting – delivers Master Service Provider ("MSP"), Recruitment Process Outsourcing ("RPO"), Business Process Outsourcing ("BPO") and Talent Advisory Services to customers on a global basis
•International – delivers staffing, RPO and direct-hire services in 15 countries in Europe, respectively. as well as services in Mexico delivered in accordance with recent changes in labor market regulations
In July 2016, we movedaddition, PersolKelly Pte. Ltd., our APAC staffing operations into our expanded joint venture with Persol Holdings (formerly Temp Holdings), PersolKelly Asia Pacific (the “JV”), enabling us to more efficiently providePte. Ltd, a wholly owned subsidiary of Persol Holdings, a leading provider of HR solutions in Japan, provides staffing solutionsand direct hire services to customers throughoutin the APAC region via the JV. We also provide a suite of innovative talent fulfillment and outcome-based solutions through our Global Talent Solutions (“GTS”) segment, which delivers integrated talent management solutions to meet customer needs across the entire spectrum of talent categories. Using talent supply chain strategies, GTS helps customers plan for, manage and execute their acquisition of contingent labor, full-time labor and free agents, and gain access to service providers and quality talent at competitive rates with minimized risk.Asia-Pacific region.
We earn revenues from customers that procure the hourly salesservices of services by our temporary employees on a time and materials basis, that use us to customers, as a result of recruitingrecruit permanent employees, for our customers, and throughthat rely on our talent advisory and outsourcing services. Our working capital requirements are primarily generated from temporary employee payroll and customer accounts receivable. The nature of our business is such that trade accounts receivable are our most significant asset. Average days sales outstanding varies within and outside the U.S., but is 55 and was 60 days on a global basis as of the 2017 year end.end of 2021 and 64 days as of the end of 2020. Since receipts from customers generally lag temporary employee payroll, working capital requirements increase substantially in periods of growth.growth and decline in periods of economic contraction.
Our StrategyPerspective and Outlook on Growth
Our long-term strategic objective2020 results reflected the substantial decline in demand for our services during the depth of the COVID-19 crisis and the decisive actions we took to reduce costs and protect our balance sheet. We were successful in positioning Kelly to take advantage of improving economic conditions and the beginning of a recovery in customer demand as we entered 2021. While 2021 had its share of headwinds, most notably the emergence of the Delta and Omicron variants, continued global supply chain shortages, and a talent supply shortage, Kelly persevered and ended the year better than we began it. We made our largest-ever acquisition in April 2021 with the purchase of Softworld, a leader in the fast-growing technology staffing and solutions space. We made structural improvements in our businesses, driving growth in our GP rate; and we reinstated a dividend, which had been temporarily suspended during the worst of the pandemic. Within our specialty solutions, customer demand for our services increased throughout 2021, reaching or exceeding pre-pandemic levels at various rates across specialties. Our P&I and Education segments, the hardest-hit by COVID-19 and its variants, put the worst of the pandemic behind them by year’s end. Our SET business drove double-digit growth in outcome-based business and Softworld. Our International segment continued its recovery, led by growth in key European countries. And OCG, the most resilient of our business segments, continued to deliver double-digit growth throughout 2021.
We enter 2022 having shifted from recovery to growth. Our permanent placement fee growth points toward our customers’ investments in their future workforce, and increased demand in our staffing and outcome-based businesses reflects strong market demand for the specialty solutions we provide. Our business is arranged around specialties that target these areas of strong demand, promising growth opportunities, and Kelly’s proven ability to create shareholder value by deliveringwin. Our segments also reflect our intent to shift our portfolio toward high-margin, higher-value specialties that deliver a competitive profit from the best workforce solutionsedge and talentincreased shareholder value.
As we continue our strategic growth journey in the industry. To achieve this,year ahead, we will also invest in key value drivers.
•We are mapping our digital transformation journey, building a technology foundation to optimize our business, personalize the talent journey and improve the client experience. For example, in 2021 we launched Helix UX, an industry-leading talent management tool that is enabling our customers to better manage their global workforce across temporary, full-time and cloud-based talent pools.
•We are consistently striving to better understand and support our talent and their shifting needs. We have reallocated resources to be solely focused on the temporary worker experience, and our Equity@Work initiative is designed to break down long-standing, systemic barriers that make it difficult for many people to participate in the labor market.
.
•We are investing in the talent experience of our full-time employees, taking action to ensure we have the people coaches and performance management systems that will help our employees thrive in their Kelly careers. We know that our success is powered by our people, and we are aiming for industry-leading results.
As we execute our specialty growth strategy, we are focused on both the following key areas:
Continuespeed and scope of change. To that end, on February 14, 2022 we announced transactions that will allow us to buildstrategically re-deploy resources to accelerate our core strengthsgrowth in branch-delivered staffing in key markets wherehigh-margin, high-growth specialties. Specifically, we have scale or specialization;
Maintainare unwinding our position as a market-leading provider of talent management solutionscross-ownership with Persol Holdings and reducing our ownership interest in our GTS segment;APAC joint venture, PersolKelly. Monetizing our investments in Persol Holdings and
Lower PersolKelly provides us with additional capital, when combined with our costs through deploymentavailable borrowing capacity, that results in approximately $500 million of efficient service delivery models.
2017 was a year of strategic and operational progress that demonstrated our commitment to profitable growth. We delivered solid top-line growth and increasing earnings, even as we invested in our future. Early in the year, we reorganized our operating segments and restructured to create a more efficient and focused delivery organization. We invested in our Americas Staffing and International Staffing operations by adding additional sales and recruiting talent. In GTS, we are exercising price discipline and are continuingcapital available to invest in higher margin outcome-based and outsourcing solutions that align with market demands. In September 2017, we completed our acquisition of Teachers On Call, which exemplifies our commitment to focus
and grow in solutions where we see outsized market potential. And finally, we are accelerating investment in initiatives to enhance technology and process automation. Our 2017 results confirm ourspecialty growth strategy:
Earnings from operations for the full year of 2017 totaled $83.3 million compared to $63.2 million in 2016
We delivered gross profit growth of more than 5%, or nearly 9% when excluding our APAC staffing operations from the first half of 2016, and our gross profit rate increased 60 basis points to 17.8%
Conversion rate, or return on gross profit, continues to be a key metric to measure our drive for profitable growth. Our 2017 conversion rate was 8.7% compared to 7.0% in 2016
Cash from operating activities and free cash flow generation increased year over year
Kelly continues to focus on accelerating the execution of our strategy and making the necessary investments and adjustments to advance that strategy. We have set our sights on becoming an even more competitive, consultative and profitable company, and we are reshaping our business to make that vision a reality. We will measure our progress against both revenue and gross profit growth, as well as earnings and conversion rate. The goals we have established are based on the current economic and business environment, and may change as conditions warrant. We expect:
To grow higher margin professional and technical specialty and outsourced solutions, creating a more balanced portfolio that yields benefits from an improved mix;
To build on our core strength in branch-delivered staffing;
To accelerate our ongoing investments in specialty solutions with significant growth opportunities, such as our acquisition of Teachers On Call to augment our Kelly Educational Staffing business in the U.S.;
To deliver structural improvements in costs through investments in technology and process automation that ensure a return from our delivery infrastructure and, as a result;
Our conversion ratepositions us to continue to improve.grow both organically and inorganically in 2022 and beyond.
Looking ahead, we are keeping a watchful eye on the global market while anticipating an increasing demand for skilled workers. We know that companies are relying more heavily on the use of flexible staffing models; there is growing acceptance of shifting work styles and contractual employment by companies and talent alike; and companies are seeking more comprehensive workforce management solutions that lend themselves to Kelly’s wide range of human resources solutions. This shift in demand for contingent labor and strategic solutions plays to our strengths and experience.
Financial Measures
The constant currency (“CC”) change amounts in the following tables refer to the year-over-year percentage changes resulting from translating 20172021 financial data into U.S. dollars using the same foreign currency exchange rates used to translate financial data for 2016.2020. We believe that CC measurements are a useful measure, indicating the actual trends of our operations without distortion due to currency fluctuations. We use CC results when analyzing the performance of our segments and measuring our results against those of our competitors. Additionally, substantially all of our foreign subsidiaries derive revenues and incur cost of services and selling, general and administrative expenses (“SG&A”) expenses within a single country and currency which, as a result, provides a natural hedge against currency risks in connection with their normal business operations.
CC measures are non-GAAP (Generally Accepted Accounting Principles) measures and are used to supplement measures in accordance with GAAP. Our non-GAAP measures may be calculated differently from those provided by other companies, limiting their usefulness for comparison purposes. Non-GAAP measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.
Reported and CC percentage changes were computed based on actual amounts in thousands of dollars.
Return on sales (earnings from operations divided by revenue from services) and conversion rate (earnings from operations divided by gross profit) in the following tables 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 (net sales excluding secondary supplier expense for(based on a rolling three-month period) into trade accounts receivable, net of allowances at the period end.
Staffing Fee-Based Income
Staffing fee-based income, which 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 from services inamounts billed to the following tables, has a significant impact on gross profit rates. There are very low direct costs of services associated with staffing fee-based income. Therefore, increases or decreases in staffing fee-based income can have a disproportionate impact on gross profit rates.customer.
Results of Operations
2017 versus 2016
Total Company
(Dollars in millions)
|
| | | | | | | | | | | | | | |
| 2017 | | 2016 | | Change | | CC Change |
Revenue from services | $ | 5,374.4 |
| | $ | 5,276.8 |
| | 1.9 | % | | | 1.3 | % |
Gross profit | 954.1 |
| | 906.3 |
| | 5.3 |
| | | 4.7 |
|
SG&A expenses excluding restructuring charges | 868.4 |
| | 839.7 |
| | 3.4 |
| | | 3.0 |
|
Restructuring charges | 2.4 |
| | 3.4 |
| | (31.6 | ) | | | (31.2 | ) |
Total SG&A expenses | 870.8 |
| | 843.1 |
| | 3.3 |
| | | 2.9 |
|
Earnings from operations | 83.3 |
| | 63.2 |
| | 31.7 |
| | | |
|
Earnings from operations excluding restructuring charges | 85.7 |
| | 66.6 |
| | 28.5 |
| | | |
|
| | | | | | | | |
Staffing fee-based income (included in revenue from services) | 57.3 |
| | 58.5 |
| | (2.2 | ) | | | (3.7 | ) |
Gross profit rate | 17.8 | % | | 17.2 | % | | 0.6 |
| pts. | | |
Conversion rate | 8.7 |
| | 7.0 |
| | 1.7 |
| | | |
|
Conversion rate excluding restructuring charges | 9.0 |
| | 7.4 |
| | 1.6 |
| | | |
|
Return on sales | 1.5 |
| | 1.2 |
| | 0.3 |
| | | |
|
Return on sales excluding restructuring charges | 1.6 |
| | 1.3 |
| | 0.3 |
| | | |
Total Company revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 vs. 2020 | | 2020 vs. 2019 |
| 2021 (52 Weeks) | | 2020 (53 Weeks) | | Change | | 2020 (53 Weeks) | | 2019 (52 Weeks) | | Change |
Revenue from services | $ | 4,909.7 | | | | $ | 4,516.0 | | | | 8.7 | | % | | $ | 4,516.0 | | | | $ | 5,355.6 | | | | (15.7) | | % |
Gross profit | 919.2 | | | | 827.6 | | | | 11.1 | | | | 827.6 | | | | 968.4 | | | | (14.5) | | |
SG&A expenses excluding restructuring charges | 866.6 | | | | 792.8 | | | | 9.3 | | | | 792.8 | | | | 877.6 | | | | (9.7) | | |
Restructuring charges | 4.0 | | | | 12.8 | | | | (69.0) | | | | 12.8 | | | | 5.5 | | | | 131.5 | | |
Total SG&A expenses | 870.6 | | | | 805.6 | | | | 8.1 | | | | 805.6 | | | | 883.1 | | | | (8.8) | | |
Goodwill impairment charge | — | | | | 147.7 | | | | NM | | | 147.7 | | | | — | | | | NM | |
Gain on sale of assets | — | | | | 32.1 | | | | NM | | | 32.1 | | | | 12.3 | | | | 161.6 | | |
Asset impairment charge | — | | | | — | | | | NM | | | — | | | | 15.8 | | | | NM | |
Earnings (loss) from operations | 48.6 | | | | (93.6) | | | | NM | | | (93.6) | | | | 81.8 | | | | NM | |
Gain (loss) on investment in Persol Holdings | 121.8 | | | | (16.6) | | | | NM | | | (16.6) | | | | 35.8 | | | | NM | |
Gain on insurance settlement | 19.0 | | | | — | | | | NM | | | — | | | | — | | | | NM | |
Other income (expense), net | (3.6) | | | | 3.4 | | | | (206.5) | | | | 3.4 | | | | (1.2) | | | | 369.5 | | |
Earnings (loss) before taxes and equity in net earnings (loss) of affiliate | 185.8 | | | | (106.8) | | | | NM | | | (106.8) | | | | 116.4 | | | | NM | |
Income tax expense (benefit) | 35.1 | | | | (34.0) | | | | 203.4 | | | | (34.0) | | | | 0.4 | | | | NM | |
Equity in net earnings (loss) of affiliate | 5.4 | | | | 0.8 | | | | NM | | | 0.8 | | | | (3.6) | | | | NM | |
Net earnings (loss) | $ | 156.1 | | | | $ | (72.0) | | | | NM | % | | $ | (72.0) | | | | $ | 112.4 | | | | NM | % |
| | | | | | | | | | | | | | | | | |
Gross profit rate | 18.7 | | % | | 18.3 | | % | | 0.4 | | pts. | | 18.3 | | % | | 18.1 | | % | | 0.2 | | pts. |
Conversion rate | 5.3 | | | | (11.3) | | | | 16.6 | | | | (11.3) | | | | 8.4 | | | | (19.7) | | |
2021 vs. 2020
Revenue from services for 2017 was up 1.9% in comparison to the prior year2021 increased 8.7% on a reported basis and up 1.3%7.8% on a CC basis. As more fully describedconstant currency basis as demand for our services increased from COVID-crisis driven levels in the following discussions, revenue increases in the Americas Staffing and GTS segments were partially offset by a decline in the International Staffing segment. During 2016, we transferred our APAC staffing businesses for a 49% interest in the PersolKelly Asia Pacific joint venture, which is accounted for as an equity method investment, resulting in the decrease in International Staffing segment revenue.
The gross profit rate increased 60 basis points year over year. As more fully described in the following discussions, increases in the GTS and Americas Staffing gross profit rates were partially offset by a decline in the gross profit rate in International Staffing.
Total SG&A expenses increased 3.3% on a reported basis and 2.9% on a CC basis. Year-over-year increases in SG&A expenses in Americas Staffing and GTS reflect higher incentive-based compensation in those segments, and were partially offset by a decrease in International Staffing SG&A expenses, as a result of the APAC transaction. Included in total SG&A expenses for 2017 are restructuring charges of $2.4 million, relating primarily to an initiative to optimize our GTS service delivery models. Included in total SG&A expenses for 2016 are restructuring charges of $3.4 million, which relate to actions taken in the Americas Staffing and International Staffing segments to increase operational efficiency and prepare the businesses for future growth.
Income tax expense for 2017 was $12.8 million, compared to $30.0 million for 2016. 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 non-taxable investments in life insurance policies that are used to fund nonqualified deferred compensation plans. 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, or changes in judgment regarding the realizability of deferred tax assets. Income tax expense in 2017 included a $13.9 million charge to revalue net deferred tax assets due to the U.S. Tax Cuts and Jobs Act, which reduced the U.S. federal corporate income tax rate from 35% to 21%. This charge was offset by a benefit from tax-free income on life insurance policies, and a benefit from the release of valuation allowances in Norway, Germany and France. Income tax expense in 2016 included a $23.5 million charge from the gain on the investment in PersolKelly Asia Pacific, partially offset by a benefit from the release of valuation allowances in Italy. Both 2017 and 2016 benefitted from the work opportunity credit, which is a temporary provision in the U.S. tax law and expires for employees hired after 2019. While the work opportunity credit has routinely been extended, it is uncertain whether it will again be extended.
Americas Staffing
(Dollars in millions)
|
| | | | | | | | | | | | | | |
| 2017 | | 2016 | | Change | | CC Change |
Revenue from services | $ | 2,345.9 |
| | $ | 2,191.6 |
| | 7.0 | % | | | 6.8 | % |
Gross profit | 429.1 |
| | 398.2 |
| | 7.8 |
| | | 7.6 |
|
SG&A expenses excluding restructuring charges | 346.0 |
| | 327.6 |
| | 5.7 |
| | | 5.5 |
|
Restructuring charges | 0.4 |
| | 1.8 |
| | (80.0 | ) | | | (79.8 | ) |
Total SG&A expenses | 346.4 |
| | 329.4 |
| | 5.2 |
| | | 5.0 |
|
Earnings from operations | 82.7 |
| | 68.8 |
| | 20.0 |
| | | |
Earnings from operations excluding restructuring charges | 83.1 |
| | 70.6 |
| | 17.5 |
| | | |
|
| | | | | | | | |
Gross profit rate | 18.3 | % | | 18.2 | % | | 0.1 |
| pts. | | |
Conversion rate | 19.3 |
| | 17.3 |
| | 2.0 |
| | | |
Conversion rate excluding restructuring charges | 19.3 |
| | 17.7 |
| | 1.6 |
| | | |
|
Return on sales | 3.5 |
| | 3.1 |
| | 0.4 |
| | | |
|
Return on sales excluding restructuring charges | 3.5 |
| | 3.2 |
| | 0.3 |
| | | |
|
The change in Americas Staffing revenue from services reflects a 7% increase in average bill rates, while hours volume was flat year over year. The increase in average bill rates was the result of wage increases and stronger revenue growth in our service lines with higher pay rates. Hours volume increases in the U.S. and Canada were offset by decreases in Mexico, Brazil and Puerto Rico. Americas Staffing represented 44% of total Company revenue in 2017 and 42% in 2016.
2020. Revenue increased in educational staffing, which includesall operating segments, with the impactexception of the September 2017Professional & Industrial. Our acquisition of Teachers On Call, light industrial, engineering, IT and science products.
The increase in the Americas Staffing gross profit rate was due to lower taxes and lower workers’ compensation expense, partially offset by negative customer mix. We regularly update our estimates of open workers’ compensation claims. AsSoftworld, a result, we reduced our estimated costs of prior year workers’ compensation claims in Americas Staffing by $2.4 million for 2017. This compares to an adjustment reducing prior year workers’ compensation claims by $0.5 million for 2016.
Total SG&A expenses increased 5.2% year over year, due to higher performance-based compensation costs and additional sales and recruiting resources to capture growing demand in the last half of the year. Included in total SG&A expenses for 2016 are restructuring charges of $1.8 million, which represent severance costs related to headcount reductions as well as lease buyout costs due to branch consolidations.
GTS
(Dollars in millions)
|
| | | | | | | | | | | | | | |
| 2017 | | 2016 | | Change | | CC Change |
Revenue from services | $ | 1,998.9 |
| | $ | 1,977.1 |
| | 1.1 | % | | | 1.0 | % |
Gross profit | 373.7 |
| | 345.9 |
| | 8.1 |
| | | 7.9 |
|
SG&A expenses excluding restructuring charges | 294.7 |
| | 287.3 |
| | 2.6 |
| | | 2.5 |
|
Restructuring charges | 2.0 |
| | 0.4 |
| | 415.5 |
| | | 417.6 |
|
Total SG&A expenses | 296.7 |
| | 287.7 |
| | 3.1 |
| | | 3.0 |
|
Earnings from operations | 77.0 |
| | 58.2 |
| | 32.4 |
| | | |
Earnings from operations excluding restructuring charges | 79.0 |
| | 58.6 |
| | 35.0 |
| | | |
| | | | | | | | |
Gross profit rate | 18.7 | % | | 17.5 | % | | 1.2 |
| pts. | | |
|
Conversion rate | 20.6 |
| | 16.8 |
| | 3.8 |
| | | |
|
Conversion rate excluding restructuring charges | 21.1 |
| | 16.9 |
| | 4.2 |
| | | |
|
Return on sales | 3.9 |
| | 2.9 |
| | 1.0 |
| | | |
Return on sales excluding restructuring charges | 4.0 |
| | 3.0 |
| | 1.0 |
| | | |
Revenue from services increased 1.1% in comparison to 2016. Revenue increases in KellyConnect, BPO and CWO practices were partially offset by declines in our centrally deliveredtechnology staffing and payroll business. GTS revenue represented 37% of total Company revenuesolutions firm, in 2017 and 38% in 2016.
The increase in the GTS gross profit rate was due to favorable product and customer mix, lower taxes and benefit costs, along with a decrease in workers’ compensation costs.
Total SG&A expenses increased 3.1% from 2016. Included in total SG&A expenses for 2017 are restructuring charges of $2.0 million, representing severance relating to an initiative to optimize our service delivery models in this segment. The remaining cost increase is due to headcount and salary costs related to additional and expanding programs, coupled with additional performance-based incentive costs. These increases were partially offset by lower bad debt expense compared to higher write-offs for certain accounts in 2016.
International Staffing
(Dollars in millions)
|
| | | | | | | | | | | | | | |
| 2017 | | 2016 | | Change | | CC Change |
Revenue from services | $ | 1,048.2 |
| | $ | 1,127.1 |
| | (7.0 | )% | | | (9.0 | )% |
Gross profit | 153.7 |
| | 166.4 |
| | (7.7 | ) | | | (9.8 | ) |
SG&A expenses excluding restructuring charges | 131.6 |
| | 145.7 |
| | (9.8 | ) | | | (11.6 | ) |
Restructuring charges | — |
| | 1.2 |
| | (100.0 | ) | | | (100.0 | ) |
Total SG&A expenses | 131.6 |
| | 146.9 |
| | (10.4 | ) | | | (12.2 | ) |
Earnings from operations | 22.1 |
| | 19.5 |
| | 13.3 |
| | | |
Earnings from operations excluding restructuring charges | 22.1 |
| | 20.7 |
| | 7.2 |
| | | |
|
| | | | | | | | |
Gross profit rate | 14.7 | % | | 14.8 | % | | (0.1 | ) | pts. | | |
|
Conversion rate | 14.4 |
| | 11.7 |
| | 2.7 |
| | | |
Conversion rate excluding restructuring charges | 14.4 |
| | 12.4 |
| | 2.0 |
| | | |
|
Return on sales | 2.1 |
| | 1.7 |
| | 0.4 |
| | | |
|
Return on sales excluding restructuring charges | 2.1 |
| | 1.8 |
| | 0.3 |
| | | |
|
International Staffing includes the Company’s APAC region staffing business priorearly April 2021 added approximately 220 basis points to the transaction to form the PersolKelly Asia Pacific joint venture in the third quarter of 2016, resulting in a 19% decrease in International Staffing revenue from services. This decrease, partially offset by a 9% increase in hours volume and 3% increase in average bill rates (flat on a CC basis) from our European operations, accounted for the change in revenue from services.growth rate. The increase in hours volume was primarily due to increases in Portugal, France and Russia. International Staffing represented 20% of total Company revenue in 2017 and 21% in 2016.
The decline in the gross profit rate from 2016 is due to change in customer mix, partially offset by a one-time benefit related to French payroll tax adjustments.
Total SG&A expenses decreased 10.4% on a reported basis, due primarily to the transfer of the APAC staffing business, which resulted in a 16% decrease. This decrease was partially offset by a 5% increase in SG&A expenses related to continued investments in recruiters in the European branch network, and the effect of higher bad debt expense. Included in total SG&A expenses for 2016 are restructuring charges of $1.2 million. These charges reflect a repositioning of the operating model to pursue growth in staffing fee-based income and specialized temporary staffing business in Italy.
Results of Operations
2016 versus 2015
Total Company
(Dollars in millions)
|
| | | | | | | | | | | | | | |
| 2016 (52 Weeks) | | 2015 (53 Weeks) | | Change | | CC Change |
Revenue from services | $ | 5,276.8 |
| | $ | 5,518.2 |
| | (4.4 | )% | | | (3.2 | )% |
Gross profit | 906.3 |
| | 920.3 |
| | (1.5 | ) | | | (0.5 | ) |
SG&A expenses excluding restructuring charges | 839.7 |
| | 853.6 |
| | (1.6 | ) | | | (0.7 | ) |
Restructuring charges | 3.4 |
| | — |
| | NM |
| | | NM |
|
Total SG&A expenses | 843.1 |
| | 853.6 |
| | (1.2 | ) | | | (0.3 | ) |
Earnings from operations | 63.2 |
| | 66.7 |
| | (5.2 | ) | | | |
|
Earnings from operations excluding restructuring charges | 66.6 |
| | 66.7 |
| | (0.1 | ) | | | |
|
| | | | | | | | |
Staffing fee-based income (included in revenue from services) | 58.5 |
| | 65.3 |
| | (10.3 | ) | | | (8.3 | ) |
Gross profit rate | 17.2 | % | | 16.7 | % | | 0.5 |
| pts. | | |
Conversion rate | 7.0 |
| | 7.2 |
| | (0.2 | ) | | | |
|
Conversion rate excluding restructuring charges | 7.4 |
| | 7.2 |
| | 0.2 |
| | | |
|
Return on sales | 1.2 |
| | 1.2 |
| | — |
| | | |
|
Return on sales excluding restructuring charges | 1.3 |
| | 1.2 |
| | 0.1 |
| | | |
Total Company results of operations for 2016 were impacted by the transfer of APAC region staffing businesses to the PersolKelly Asia Pacific joint venture in the third quarter of 2016.
Total Company revenue from services for 2016 was down 4.4% in comparison to the prior year on a reported basis, and down 3.2% on a CC basis due, in part, to the transfer of the APAC operations and as more fully described in the following discussions. In addition, the 20152020 fiscal year included a 53rd week. This fiscal leap year occurs every five or six years and is necessary to align the fiscal and calendar periods. The 53rd week added approximately 1% to 20152020 reported revenue. Compared to 2020, revenue from staffing services increased 6.6%, revenue from outcome-based services increased 7.3%, and permanent placement income increased 89.7%.
Gross profit increased 11.1% on higher revenue volume and an improving gross profit rate. The gross profit rate increased 5040 basis points year over year. The transferin comparison to 2020, primarily due to the impact of higher permanent placement income and the APAC businesses,acquisition of Softworld, which had lowergenerates higher gross profit rates, than the Company average, accounted for 10 basis points of the increase. Additionally, as more fully described in the following discussions, increases in the GTS and Americas Staffing gross profit rates were partially offset by unfavorable product mix and higher employee-related costs. Gross profit rate improved approximately 30 basis points as a declineresult of the acquisition of Softworld. The gross profit rate for 2020 includes approximately 20 basis points from COVID-related government wage subsidies. Increases in the gross profit rate for Science, Engineering & Technology, Education and International were partially offset by decreases in International Staffing.the gross profit rate for Professional & Industrial and Outsourcing & Consulting.
Total SG&A expenses decreased 1.2% on a reportedincreased 8.1% compared to 2020. SG&A expenses related to Softworld, including amortization of intangibles and other operating expenses, accounted for approximately 350 basis points to the year-over-year increase. The increase in SG&A expenses also reflects increases in performance-based incentive compensation expenses and 0.3% on a CC basis. the impact of
temporary expense mitigation efforts in 2020. With the exception of Professional & Industrial, SG&A expenses increased in all segments in comparison to 2020.
Included in SG&A expenses arefor 2021 was $4.0 million of restructuring charges, of $3.4 million, which relate primarily toreflecting cost management actions taken in the Americas Staffing and International Staffing regionsfourth quarter of 2021 to manageincrease operational efficiencies within enterprise functions that provide centralized support to operating expenses and prepare the businesses for future growth. The year-over-year decreaseunits. Included in SG&A expenses for 2020 was $12.8 million of restructuring charges and a $9.5 million charge related to a customer dispute.
During 2020, the negative reaction to the pandemic by the global equity markets also resulted in a decline in the Company's common stock price. This triggered an interim goodwill impairment test, resulting in a $147.7 million goodwill impairment charge in the first quarter of 2020.
Gain on sale of assets of $32.1 million in 2020 represents the excess of the proceeds over the cost of the headquarters properties sold in the first quarter of 2020. The main headquarters building was subsequently leased back by the Company during the first quarter of 2020.
Earnings from operations for 2021 totaled $48.6 million, compared to a loss from operations of $93.6 million in 2020. The increase in earnings from operations from 2020 primarily reflects the transferimpact of APAC staffing operations to the joint venture, decreasesgoodwill impairment charge, the customer dispute charge and higher restructuring charges in expense in our staffing operations and savings from reductions in performance-based compensation expenses. These decreases were2020, partially offset by the 2020 gain on sale of assets.
Gain (loss) on investment in Persol Holdings represents the noncash gain or loss resulting from changes in the market price of our investment in the common stock of Persol Holdings. The gains or losses fluctuate each quarter based on the quoted market price of the Persol Holdings common stock at period end.
The gain on insurance settlement of $19.0 million in 2021 represents 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 of Softworld.
Other expense for 2021 totaled $3.6 million, compared to other income of $3.4 million for 2020. Included in the 2021 amount is a one-time, non-cash write-down of an increase in GTS SG&Aequity investment and transaction-related expenses due to current and expected growth in that segment.from the April 2021 acquisition of Softworld.
Income tax expense for 2016 was $30.0 million, compared to $8.7$35.1 million for 2015. 2021 and income tax benefit was $34.0 million for 2020. The 2021 income tax expense was impacted by higher pretax earnings and changes in the fair value of the Company's investment in Persol Holdings. Income taxes for 2021 also includes a charge for gain on insurance settlement and a benefit from a United Kingdom tax rate change. Income taxes for 2020 includes a tax benefit from the impairment of goodwill and a U.S. tax benefit from the sale of Brazil operations.
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 non-taxabletax 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, or changes in judgment regarding the realizability of deferred tax assets. The increaseassets, the tax effects of stock compensation, and changes in income tax expense from the prior year is primarily due to tax expensefair value of $23.5 million from the gain on theCompany’s investment in PersolKelly Asia Pacific,Persol Holdings, which are treated as discrete since they cannot be estimated. The United Kingdom rate change benefit in the second quarter of 2021, the first quarter of 2020 impairment of goodwill and the second quarter of 2020 Brazil outside basis differences were treated as discrete.
The net earnings for 2021 were $156.1 million, compared to a net loss of $72.0 million for 2020. This change was due primarily to higher earnings from operations and increased gains of Persol Holdings common stock, net of tax.
2020 vs. 2019
Revenue from services for 2020 declined in all segments, reflecting the impact of COVID-19, and resulting in a decline in demand for both our staffing and permanent placement services across a broad range of industries and geographies. Revenue from staffing services declined 20% compared to 2019. Permanent placement revenue, which is included in revenue from services, decreased 34% year-over-year as the impact of economic uncertainty depressed full-time hiring in all operating segments. These declines were partially offset by a benefit9% increase in outcome-based services as demand from customers utilizing these services increased during the release of valuation allowances in Italy.
Americas Staffing
(Dollars in millions)year. The 2020 fiscal year included a 53rd week. This fiscal leap year occurs every five or six years and is necessary to align the fiscal and calendar periods. The 53rd week added approximately 1% to 2020 reported and CC revenue.
|
| | | | | | | | | | | | | | |
| 2016 (52 Weeks) | | 2015 (53 Weeks) | | Change | | CC Change |
Revenue from services | $ | 2,191.6 |
| | $ | 2,209.0 |
| | (0.8 | )% | | | 0.3 | % |
Gross profit | 398.2 |
| | 394.1 |
| | 1.0 |
| | | 1.8 |
|
SG&A expenses excluding restructuring charges | 327.6 |
| | 333.6 |
| | (1.8 | ) | | | (1.2 | ) |
Restructuring charges | 1.8 |
| | — |
| | NM |
| | | NM |
|
Total SG&A expenses | 329.4 |
| | 333.6 |
| | (1.3 | ) | | | (0.7 | ) |
Earnings from operations | 68.8 |
| | 60.5 |
| | 13.8 |
| | | |
Earnings from operations excluding restructuring charges | 70.6 |
| | 60.5 |
| | 16.8 |
| | | |
| | | | | | | | |
Gross profit rate | 18.2 | % | | 17.8 | % | | 0.4 |
| pts. | | |
|
Conversion rate | 17.3 |
| | 15.3 |
| | 2.0 |
| | | |
|
Conversion rate excluding restructuring charges | 17.7 |
| | 15.3 |
| | 2.4 |
| | | |
Return on sales | 3.1 |
| | 2.7 |
| | 0.4 |
| | | |
Return on sales excluding restructuring charges | 3.2 |
| | 2.7 |
| | 0.5 |
| | | |
The decrease in reported Americas StaffingGross profit declined as a result of lower revenue from services was due to a 2% decrease in hours volume, partially offset by a 1% increase in average bill rates. The decrease in hours volume is due, in part, to the 53rd week in 2015, which added approximately 1% to 2015 revenue in Americas Staffing. The increase in average bill rates was primarily due to wage inflation and the resulting impact on the bill rate. Americas Staffing represented 42% of total Company revenue in 2016 and 40% in 2015.
Thean increase in the gross profit rate. The gross profit rate increased 20 basis points in comparison to 2019. With the exception of Education and International, the gross profit rate increased in all other operating segments, primarily reflecting improved product mix and lower employee-related costs. The gross profit rate for Education declined primarily as a result of increased pricing pressures. International's gross profit rate was primarily duenegatively impacted by the decrease in permanent placement revenue. The total Company 2020 gross profit rate included approximately 20 basis points related to lower taxes, partially offset by higher workers’ compensation and employee benefit costs, and the negative impact of changes in customer mix.COVID-19 government subsidies.
Total SG&A expenses decreased 1.3% on a reported basis and 0.7% on a CC basis8.8% in comparison to 2019. This decrease was due mainlyprimarily to lower administrative salaries and performance-based compensation.compensation, including short-term cost reductions implemented to further align costs with revenue volume trends. Included in 2016total SG&A expenses are restructuring charges of $1.8 million. These$12.8 million in 2020. Actions were taken in the first quarter of 2020 to position the Company to adopt the new operating model and to align the U.S. branch network facilities footprint with a more technology-enabled service delivery methodology. Actions were taken in the fourth quarter of 2020 to align costs with expected revenue levels. Restructuring charges of $5.5 million in 2019 represent severance costs primarily related to headcount reductionsposition eliminations within Professional & Industrial staffing operations.
During 2020, the negative reaction to the pandemic by the global equity markets also resulted in a decline in the Company's common stock price. This triggered an interim goodwill impairment test, resulting in a $147.7 million goodwill impairment charge in the first quarter of 2020.
Gain on sale of assets of $32.1 million represented the excess of the proceeds over the cost of the headquarters properties sold in the first quarter of 2020. The main headquarters building was subsequently leased back to the Company during the first quarter of 2020. Gain on sale of assets in 2019 of $12.3 million primarily represented the excess of the proceeds over the cost upon the sale of an unused parcel of land located near the Company headquarters. Asset impairment charge of $15.8 million in 2019 represented the write-off of previously capitalized costs associated with a new U.S. front and middle office technology development project which management determined would not be completed but replaced by an enhanced and expanded use of an existing technology platform.
The loss from operations for 2020 of $93.6 million reflected a decline from the $81.8 million of earnings from operations in 2019. Earnings from operations declined as wella result of the goodwill impairment charge and lower gross profit as lease buyout costsa result of the impact of COVID-19 on demand, partially offset by lower expenses due to branch consolidations.cost reduction efforts and higher gain on sale of assets.
Gain (loss) on investment in Persol Holdings represented the noncash gain or loss resulting from changes in the market price of our investment in the common stock of Persol Holdings. The gains or losses fluctuate based on the quoted market price of the Persol Holdings common stock at period end.
GTS
Income tax benefit was $34.0 million and expense was $0.4 million for 2020 and 2019, respectively. The 2020 income tax benefited from lower pretax earnings and included the impairment of goodwill, a decline in the fair value of the Company's investment in Persol Holdings, and a tax loss on the sale of our Brazil operations. These benefits were offset by lower work opportunity credits. The 2019 tax expense benefited from releasing a valuation allowance in the United Kingdom. The work opportunity credit has been extended through 2025 as part of the Consolidated Appropriations Act, 2021.
Our tax expense is affected by recurring items, such as the amount of pretax income and its mix by jurisdiction, U.S. work opportunity credits and the change in cash surrender value of tax exempt investments in life insurance policies. It is also affected by discrete items that may occur in any given period but are not consistent from period to period, such as tax law changes, changes in judgment regarding the realizability of deferred tax assets, the tax effects of stock compensation, and changes in the fair value of the Company’s investment in Persol Holdings, which are treated as discrete since they cannot be estimated. The impairment of goodwill in the first quarter of 2020 and the recording of deferred taxes on the Brazil outside basis differences in the second quarter of 2020 were treated as discrete items.
The net loss for 2020 of $72.0 million, a decrease from net earnings of $112.4 million in 2019, was due primarily to lower earnings from operations due to the goodwill impairment charge taken in the first quarter of 2020, combined with losses of Persol Holdings common stock, partially offset by the impact of an income tax benefit in comparison to income tax expense in 2019.
Operating Results By Segment
(Dollars in millions)
|
| | | | | | | | | | | | | | |
| 2016 (52 Weeks) | | 2015 (53 Weeks) | | Change | | CC Change |
Revenue from services | $ | 1,977.1 |
| | $ | 1,997.2 |
| | (1.0 | )% | | | (0.7 | )% |
Gross profit | 345.9 |
| | 331.4 |
| | 4.3 |
| | | 4.8 |
|
SG&A expenses excluding restructuring charges | 287.3 |
| | 260.5 |
| | 10.3 |
| | | 10.8 |
|
Restructuring charges | 0.4 |
| | — |
| | NM |
| | | NM |
|
Total SG&A expenses | 287.7 |
| | 260.5 |
| | 10.4 |
| | | 11.0 |
|
Earnings from operations | 58.2 |
| | 70.9 |
| | (18.0 | ) | | | |
|
Earnings from operations excluding restructuring charges | 58.6 |
| | 70.9 |
| | (17.5 | ) | | | |
|
| | | | | | | | |
Gross profit rate | 17.5 | % | | 16.6 | % | | 0.9 |
| pts. | | |
Conversion rate | 16.8 |
| | 21.4 |
| | (4.6 | ) | | | |
Conversion rate excluding restructuring charges | 16.9 |
| | 21.4 |
| | (4.5 | ) | | | |
|
Return on sales | 2.9 |
| | 3.6 |
| | (0.7 | ) | | | |
|
Return on sales excluding restructuring charges | 3.0 |
| | 3.6 |
| | (0.6 | ) | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 vs. 2020 | | 2020 vs. 2019 |
| 2021 (52 Weeks) | | 2020 (53 Weeks) | | % Change | | 2020 (53 Weeks) | | 2019 (52 Weeks) | | % Change |
Revenue From Services: | | | | | | | | | | | | | |
Professional & Industrial | $ | 1,837.4 | | | $ | 1,858.4 | | | (1.1) | | % | | $ | 1,858.4 | | | $ | 2,213.4 | | | (16.0) | | % |
Science, Engineering & Technology | 1,156.8 | | | 1,019.1 | | | 13.5 | | | | 1,019.1 | | | 1,131.8 | | | (9.9) | | |
Education | 416.5 | | | 286.9 | | | 45.2 | | | | 286.9 | | | 450.7 | | | (36.3) | | |
Outsourcing & Consulting | 432.1 | | | 363.5 | | | 18.9 | | | | 363.5 | | | 377.7 | | | (3.8) | | |
International | 1,067.8 | | | 988.6 | | | 8.0 | | | | 988.6 | | | 1,182.5 | | | (16.4) | | |
Less: Intersegment revenue | (0.9) | | | (0.5) | | | 97.0 | | | | (0.5) | | | (0.5) | | | (16.6) | | |
Consolidated Total | $ | 4,909.7 | | | $ | 4,516.0 | | | 8.7 | | % | | $ | 4,516.0 | | | $ | 5,355.6 | | | (15.7) | | % |
Revenue
2021 vs. 2020
Professional & Industrial revenue from services in the GTS segment decreased during 20161.1% due primarily to revenue declines inlower demand from our centrally deliveredoutcome-based call center specialty. Revenue from staffing businessservices also declined on lower hours volume due to lower demand. This decreasetalent supply constraints even as customer demand improved. Lower hours volume in staffing services was partially offset by growth in the BPO, CWO and RPO practice areas due primarily to the expansion of programs with existing customers and, to a lesser extent, new customer programs. The 53rd week in 2015 added approximately 1% to 2015 revenue in GTS. GTS revenue represented 38% of total Company revenue in 2016 and 36% in 2015.
The GTS gross profit rate increased primarily due to favorable product and customer mix and lower taxes,higher average bills rates. These decreases were partially offset by increased outcome-based revenue in other specialties, as well as higher employee benefit costs.
The increase in SG&A expenses was primarily a result of costs related to additional sales resources, costs associated with increased volume with existing customers and implementation of new business, including salaries and performance-based compensation, and bad debt expense. The bad debt expense was primarily related to certain aged accounts receivable at a subsidiary in Germany.
International Staffing
(Dollars in millions)
|
| | | | | | | | | | | | | | |
| 2016 (52 Weeks) | | 2015 (53 Weeks) | | Change | | CC Change |
Revenue from services | $ | 1,127.1 |
| | $ | 1,332.7 |
| | (15.4 | )% | | | (12.7 | )% |
Gross profit | 166.4 |
| | 199.0 |
| | (16.3 | ) | | | (14.0 | ) |
SG&A expenses excluding restructuring charges | 145.7 |
| | 175.7 |
| | (17.0 | ) | | | (14.3 | ) |
Restructuring charges | 1.2 |
| | — |
| | NM |
| | | NM |
|
Total SG&A expenses | 146.9 |
| | 175.7 |
| | (16.4 | ) | | | (13.7 | ) |
Earnings from operations | 19.5 |
| | 23.3 |
| | (16.2 | ) | | | |
Earnings from operations excluding restructuring charges | 20.7 |
| | 23.3 |
| | (11.4 | ) | | | |
|
| | | | | | | | |
Gross profit rate | 14.8 | % | | 14.9 | % | | (0.1 | ) | pts. | | |
|
Conversion rate | 11.7 |
| | 11.7 |
| | — |
| | | |
Conversion rate excluding restructuring charges | 12.4 |
| | 11.7 |
| | 0.7 |
| | | |
|
Return on sales | 1.7 |
| | 1.7 |
| | — |
| | | |
|
Return on sales excluding restructuring charges | 1.8 |
| | 1.7 |
| | 0.1 |
| | | |
|
International Staffing includes the Company’s APAC region staffing business prior to the transaction to form the PersolKelly Asia Pacific joint venture in the third quarter of 2016, resulting in a 14% decrease in International Staffing revenue from services. This decrease, combined with a 3% decrease in average bill rates (flat on a CC basis) and partially offset by a 2% increase in hours volume in our European operations, accounted for the changepermanent placement income which is included in revenue from services. The 53rd week added approximately 1% to 2020 reported revenue from services in Professional & Industrial.
Science, Engineering & Technology revenue from services increased 13.5% on a reported basis, which includes revenues from the acquisition of Softworld. On an organic basis, revenue growth was 3.9%, which was driven by hours increases in our staffing business across most specialties, coupled with an increase in outcome-based revenue and permanent placement income. The 53rd week added approximately 1% to 2020 reported revenue from services in Science, Engineering & Technology.
Education revenue from services increased 45.2% reflecting the return to in-school instruction by many schools, resulting in increased demand for our services as compared to a year ago. In 2020, many districts were using virtual or hybrid instruction methods due to the impact of COVID-19. The 53rd week added less than 1% to 2020 reported revenue from services in Education.
Outsourcing & Consulting revenue from services increased 18.9% due primarily to increased hours revenue volume in our PPO specialty, coupled with revenue growth in both RPO and MSP products. The 53rd week added approximately 2% to 2020 reported revenue from services in Outsourcing & Consulting.
International revenue from services increased 8.0% on a reported basis and increased 4.9% on a CC basis. Year-over-year revenue comparisons were unfavorably impacted by the sale of our staffing operations in Brazil in August 2020. Excluding Brazil, revenue increased 9.9% on a reported basis and 6.8% on a constant currency basis. The increase was primarily due to increased customer demandhigher hours volume, particularly in Portugal. International Staffing represented 21% of total Company revenue in 2016Switzerland, Portugal, Italy and 24% in 2015.France. The 53rd week in 2015 added approximately 1% to 20152020 reported revenue from services in International.
2020 vs. 2019
Professional & Industrial revenue from services decreased due primarily to decreases in our hours volume in our staffing product which was impacted by COVID-19. These decreases were partially offset by increased revenue in our outcome-based products due to program expansions. The 53rd week added approximately 1% to 2020 reported revenue from services in Professional & Industrial.
Science, Engineering & Technology revenue from services decreased due to lower hours volume in our staffing product across most specialties due to the continued impact of COVID-19, with the exception of our government staffing business, which has seen increased demand for life sciences support. The 53rd week added approximately 1% to 2020 reported revenue from services in Science, Engineering & Technology.
Education revenue from services decreased due to the impact of COVID-19. Temporary school closures and use of virtual or hybrid instructional delivery reduced the demand. These decreases were partially offset by the revenues from the first quarter 2020 acquisition of Insight. The 53rd week added less than 1% to 2020 reported revenue from services in Education.
Outsourcing & Consulting revenue from services decreased due primarily to decreases in our PPO, MSP and RPO products due in part to COVID-19 demand declines, as well as lower demand from customers in the oil and gas industry. The 53rd week added approximately 2% to 2020 reported revenue from services in Outsourcing & Consulting.
International Staffing.
The International Staffing gross profit rate decrease was mainly driven by unfavorable customer mix in Switzerland.
Total SG&A expensesrevenue from services decreased 16.4% on a reported basis and 13.7%15.6% on a CC basis. The decline was primarily due to a decrease in hours volume as COVID-19 disruptions continued across operations in all countries, in particular France, Portugal and the U.K. These decreases were partially offset by increased revenue in Russia, due to higher average bill rates. The 53rd week added approximately 1% to 2020 reported and CC revenue from services in International.
Operating Results By Segment (continued)
(Dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 vs. 2020 | | 2020 vs. 2019 |
| 2021 (52 Weeks) | | 2020 (53 Weeks) | | Change | | 2020 (53 Weeks) | | 2019 (52 Weeks) | | Change |
Gross Profit: | | | | | | | | | | | | | |
Professional & Industrial | $ | 310.0 | | | $ | 330.2 | | | (6.1) | | % | | $ | 330.2 | | | $ | 388.4 | | | (15.0) | | % |
Science, Engineering & Technology | 253.9 | | | 209.4 | | | 21.3 | | | | 209.4 | | | 226.2 | | | (7.5) | | |
Education | 65.1 | | | 42.2 | | | 54.1 | | | | 42.2 | | | 72.0 | | | (41.3) | | |
Outsourcing & Consulting | 141.4 | | | 119.8 | | | 18.0 | | | | 119.8 | | | 122.3 | | | (2.0) | | |
International | 148.8 | | | 126.0 | | | 18.1 | | | | 126.0 | | | 159.5 | | | (21.0) | | |
Consolidated Total | $ | 919.2 | | | $ | 827.6 | | | 11.1 | | % | | $ | 827.6 | | | $ | 968.4 | | | (14.5) | | % |
| | | | | | | | | | | | | |
Gross Profit Rate: | | | | | | | | | | | | | |
Professional & Industrial | 16.9 | % | 17.8 | % | (0.9) | | pts. | | 17.8 | % | 17.5 | % | 0.3 | | pts. |
Science, Engineering & Technology | 21.9 | | 20.5 | | 1.4 | | | | 20.5 | | 20.0 | | 0.5 | | |
Education | 15.6 | | 14.7 | | 0.9 | | | | 14.7 | | 16.0 | | (1.3) | | |
Outsourcing & Consulting | 32.7 | | 33.0 | | (0.3) | | | | 33.0 | | 32.4 | | 0.6 | | |
International | 13.9 | | 12.7 | | 1.2 | | | | 12.7 | | 13.5 | | (0.8) | | |
Consolidated Total | 18.7 | % | 18.3 | % | 0.4 | | pts. | | 18.3 | % | 18.1 | % | 0.2 | | pts. |
2021 vs. 2020
Gross profit for the Professional & Industrial segment decreased due to a decrease in the gross profit rate, combined with lower revenue volume. In comparison to the prior year, the gross profit rate decreased 90 basis points. This decrease reflects the unfavorable year-over-year impact of government wage subsidies, increased costs associated with our outcome-based call center specialties, higher employee-related costs in the staffing product and a shift in product mix compared to the prior year as demand for staffing services, which generally carry lower margins, increased. These decreases were partially offset by the impact of increased permanent placement income in 2021.
The Science, Engineering & Technology gross profit increased on higher revenue volume and an increase in the gross profit rate. The gross profit rate increased 140 basis points due to increased permanent placement income and improved specialty mix, including the acquisition of Softworld in April 2021, 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 90 basis points due primarily to higher permanent placement income from Greenwood/Asher, our acquisition in late 2020. This increase was partially offset by the unfavorable year-over-year impact of government wage subsidies.
The Outsourcing & Consulting gross profit increased on higher revenue volume, partially offset by a decrease in the gross profit rate. The gross profit rate decreased 30 basis points primarily due to a change in product mix within this segment, as revenues increased in our PPO product, which generates lower profit margins.
International gross profit increased on higher revenue volume and an increase in the gross profit rate. The gross profit rate increased 120 basis points primarily due to customer mix.
2020 vs. 2019
Gross profit for the Professional & Industrial segment declined as the result of lower revenue volume, partially offset by an improved gross profit rate. The gross profit rate increased 30 basis points due to lower employee-related costs coupled with improved product mix, as a greater proportion of the segment revenue came from outcome-based services with higher margins.
The Science, Engineering & Technology gross profit declined as lower revenue volume was partially offset by a higher gross profit rate. The gross profit rate increased 50 basis points due to lower employee-related costs, partially offset by specialty and customer mix.
Gross profit for the Education segment declined as a result of lower revenue volume, combined with a lower gross profit rate. The Education gross profit rate decreased 130 basis points due to increased pricing pressures, partially offset by lower employee-related costs.
Outsourcing & Consulting gross profit declined on lower revenue volume, partially offset by an improved gross profit rate. The Outsourcing & Consulting gross profit rate increased 60 basis points due to improved customer mix in the RPO product, coupled with lower employee-related costs in the PPO product.
International gross profit declined as a result of lower revenue volume and a decline in the gross profit rate. The International gross profit rate decreased primarily due to lower permanent placement revenue.
Operating Results By Segment (continued)
(Dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 vs. 2020 | | 2020 vs. 2019 |
| 2021 (52 Weeks) | | 2020 (53 Weeks) | | % Change | | 2020 (53 Weeks) | | 2019 (52 Weeks) | | % Change |
SG&A Expenses: | | | | | | | | | | | | | |
Professional & Industrial | $ | 278.6 | | | $ | 288.6 | | | (3.5) | | % | | $ | 288.6 | | | $ | 326.0 | | | (11.5) | | % |
Science, Engineering & Technology | 180.2 | | | 134.4 | | | 34.1 | | | | 134.4 | | | 146.7 | | | (8.4) | | |
Education | 62.1 | | | 51.2 | | | 21.1 | | | | 51.2 | | | 56.2 | | | (8.8) | | |
Outsourcing & Consulting | 122.7 | | | 108.3 | | | 13.3 | | | | 108.3 | | | 119.3 | | | (9.2) | | |
International | 138.9 | | | 134.9 | | | 2.9 | | | | 134.9 | | | 140.8 | | | (4.2) | | |
Corporate expenses | 88.1 | | | 88.2 | | | (0.1) | | | | 88.2 | | | 94.1 | | | (6.3) | | |
Consolidated Total | $ | 870.6 | | | $ | 805.6 | | | 8.1 | | % | | $ | 805.6 | | | $ | 883.1 | | | (8.8) | | % |
| | | | | | | | | | | | | |
| 2021 vs. 2020 | | 2020 vs. 2019 |
| 2021 (52 Weeks) | | 2020 (53 Weeks) | | % Change | | 2020 (53 Weeks) | | 2019 (52 Weeks) | | % Change |
Restructuring Charges Included in SG&A Expenses: | | | | | | | | | | | | | |
Professional & Industrial | $ | — | | | $ | 6.0 | | | NM | % | | $ | 6.0 | | | $ | 5.1 | | | 16.8 | | % |
Science, Engineering & Technology | — | | | 0.6 | | | NM | | | 0.6 | | | 0.4 | | | 74.1 | | |
Education | — | | | 1.0 | | | NM | | | 1.0 | | | — | | | NM | |
Outsourcing & Consulting | — | | | 0.3 | | | NM | | | 0.3 | | | — | | | NM | |
International | 1.2 | | | 1.4 | | | (10.2) | | | | 1.4 | | | — | | | NM | |
Corporate expenses | 2.8 | | | 3.5 | | | (18.4) | | | | 3.5 | | | — | | | NM | |
Consolidated Total | $ | 4.0 | | | $ | 12.8 | | | (69.0) | | % | | $ | 12.8 | | | $ | 5.5 | | | 131.5 | | % |
| | | | | | | | | | | | | |
2021 vs. 2020
Total SG&A expenses in Professional & Industrial decreased 3.5% and decreased 1.4% excluding restructuring charges. Expenses are lower as a result of cost reductions in response to lower revenue volumes, partially offset by higher performance-based compensation expenses.
Total SG&A expenses in Science, Engineering & Technology increased 34.1%, or 34.7% excluding restructuring charges. Excluding restructuring charges and the acquisition of Softworld, SG&A expenses increased 13.9%. Year-over-year comparisons of salaries and related costs were impacted by temporary expense mitigation actions taken in response to the COVID-19 disruption in 2020. These increases were combined with higher headcount in sales and recruiting talent, and an increase in performance-based incentive compensation.
Total SG&A expenses in Education increased 21.1%, or 23.6% excluding restructuring charges, primarily due to higher salary and incentives expense related to improving revenues. In addition, year-over-year comparisons of salaries and related costs were impacted by temporary expense mitigation actions taken in 2020 in response to the COVID-19 disruption. Expenses in 2021 include a charge to adjust the contingent consideration due to the former owners of Greenwood/Asher as a result of better than anticipated performance.
Total SG&A expenses in Outsourcing & Consulting increased 13.3% in comparison to the prior year. Year-over-year comparisons of salaries and related costs were impacted by temporary expense actions taken in 2020 in response to the impact of the COVID-19 disruption. These increases were combined with an increase in salaries and performance-based incentive compensation reflecting improving revenue.
Total SG&A expenses in International increased 2.9% on a reported basis and increased 0.1% on a constant currency basis. Total SG&A expenses in 2021 and 2020 include restructuring charges, and the prior year also included a charge related to a customer dispute in Mexico and SG&A expenses related to our staffing operations in Brazil, which were sold in August 2020. Excluding these items, SG&A expenses increased 13.6% on a reported basis and 10.4% on a constant currency basis. This increase was primarily due to higher performance-based compensation and higher salary-related expenses driven by an increase in headcount, reflecting improving revenue in Europe.
Corporate expenses decreased $0.1 million from 2020. Lower disability, non-restructuring severance and restructuring costs were partially offset by higher performance-based compensation expense.
2020 vs. 2019
Total SG&A expenses in Professional & Industrial decreased due primarily to lower salaries and related costs due to cost management actions and initiatives taken to help mitigate the lower revenue volume as a result of the COVID-19 disruption. The decreased revenue volume also resulted in lower performance-based compensation. In addition, Professional & Industrial took restructuring actions in both 2020 and 2019, which reduced salaries and related costs and facilities expenses. Included in total SG&A expenses for 2020 and 2019 are the costs of those restructuring efforts of $6.0 million and $5.1 million, respectively, representing primarily employee severance costs.
Total SG&A expenses in Science, Engineering & Technology decreased due primarily to cost management actions and initiatives taken to help mitigate the lower revenue volume as a result of the COVID-19 disruption. The decreased revenue volume also resulted in lower performance-based compensation.
Total SG&A expenses in Education decreased due primarily to lower salaries and related costs resulting from the cost management actions and initiatives taken to help mitigate the lower revenue volume as a result of the COVID-19 disruption. The decreased revenue volume also resulted in lower performance-based compensation. These decreases were partially offset by the impact of the acquisition of Insight that took place in the first quarter of 2020.
Total SG&A expenses in Outsourcing & Consulting decreased due primarily to lower salaries and related expenses resulting from cost management actions and initiatives taken to help mitigate the lower revenue volume as a result of the COVID-19 disruption.
Total SG&A expenses in International decreased 4.2% on a reported basis and 3.6% on a CC basis. Included in International SG&A expenses for 2020 is a $9.5 million non-cash charge related to a customer dispute in Mexico that resulted in an additional uncollectible accounts receivable charge. Excluding this charge, total SG&A expenses decreased 11.0% due primarily to lower salaries, driven by cost management to contend with the COVID-19 disruption, combined with lower incentive-based compensation.
Corporate expenses decreased as a result of lower performance-based compensation expense and lower professional fees, partially offset by restructuring charges incurred during 2020.
Operating Results By Segment (continued)
(Dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 vs. 2020 | | 2020 vs. 2019 |
| 2021 (52 Weeks) | | 2020 (53 Weeks) | | % Change | | 2020 (53 Weeks) | | 2019 (52 Weeks) | | % Change |
Earnings (Loss) from Operations: | | | | | | | | | | | | | |
Professional & Industrial | $ | 31.4 | | | $ | 41.6 | | | (24.4) | | % | | $ | 41.6 | | | $ | 62.4 | | | (33.4) | | % |
Science, Engineering & Technology | 73.7 | | | 75.0 | | | (1.7) | | | | 75.0 | | | 79.5 | | | (5.8) | | |
Education | 3.0 | | | (9.0) | | | NM | | | (9.0) | | | 15.8 | | | NM | |
Outsourcing & Consulting | 18.7 | | | 11.5 | | | 62.7 | | | | 11.5 | | | 3.0 | | | 291.3 | | |
International | 9.9 | | | (8.9) | | | NM | | | (8.9) | | | 18.7 | | | NM | |
Corporate | (88.1) | | | (203.8) | | | 56.7 | | | | (203.8) | | | (97.6) | | | (108.6) | | |
Consolidated Total | $ | 48.6 | | | $ | (93.6) | | | NM | % | | $ | (93.6) | | | $ | 81.8 | | | NM | % |
| | | | | | | | | | | | | |
2021 vs. 2020
Professional & Industrial reported earnings of $31.4 million, a 24.4% decrease from 2020.The decrease in earnings was primarily due to increased costs of services reducing our gross profit rate in our outcome-based product lines and the year-over-year impact of the government wage subsidies we received in 2020.These were partially offset by an increase in our permanent placement income.
Science, Engineering & Technology reported earnings of $73.7 million, a 1.7% decrease from 2020.The decrease in earnings was primarily due to higher expenses related to performance-based incentive compensation and higher salaries. The increase in higher salaries was related to an investment in additional sales and recruiting resources, which exceeded revenue and gross margin growth.This was partially offset by earnings from Softworld, which was acquired in April 2021.
Education reported earnings of $3.0 million, compared to a loss of $9.0 million from 2020.The change was primarily due to an increase in revenue, reflecting the return to in-school instruction by many schools, resulting in increased demand for our services as compared to 2020.In 2020, many districts were using virtual or hybrid instruction methods due to the impact of COVID-19.Partially offsetting this improvement is a charge to adjust the contingent consideration due to the former owners of Greenwood/Asher.
Outsourcing & Consulting reported earnings of $18.7 million, a 62.7% increase compared to 2020.The increase in earnings was primarily due to the transferimpact of increased revenue volumes within the segment.
International reported earnings of $9.9 million, compared to a loss of $8.9 million in 2020. The increase in earnings was primarily due to the favorable comparison related to the charge for a customer dispute in Mexico and restructuring charges in 2020, combined with improving revenue in Europe.
Corporate loss from operations was $88.1 million in 2021, compared to a loss of $203.8 million in 2020. The 2020 loss includes the goodwill impairment charge of $147.7 million, partially offset by a gain on sale of assets of $32.1 million.
2020 vs. 2019
Professional & Industrial reported earnings of $41.6 million, a 33.4% decrease from 2019. The decrease in earnings was primarily due to the impact of COVID-19 on our staffing product, partially offset by increases in our outcome-based products and the cost management initiatives taken to mitigate the impact of the APAC staffing business. Additionally, SG&A expenses decreasedpandemic on our operations.
Science, Engineering & Technology reported earnings of $75.0 million, a 5.8% decrease from 2019. The decrease in earnings was primarily due to the impact of COVID-19 on demand for our services, partially offset by the cost management initiatives taken to mitigate its impact.
Education reported a loss of $9.0 million, compared to earnings of $15.8 million in 2019. The decrease is due to the impact of COVID-19 on our revenue, partially offset by the cost management initiatives taken to mitigate its impact.
Outsourcing & Consulting reported earnings of $11.5 million, an $8.5 million increase over 2019. The increase in earnings was primarily due to the impact of the cost management initiatives taken to mitigate the impact of COVID-19, partially offset by lower revenue volume due to the impact of COVID-19 and lower customer demand in the EMEA region dueoil and gas industry.
International reported a loss of $8.9 million, compared to effectiveearnings of $18.7 million in 2019, largely driven by the impact of COVID-19 on revenue and a charge related to a customer dispute in Mexico, partially offset by cost control in headquarters expenses acrossmanagement initiatives.
Corporate loss from operations of $203.8 million for 2020 includes the region. Included in SG&A expenses are restructuring chargesgoodwill impairment charge of $1.2$147.7 million which reflect a repositioningand gain on sale of the operating model to pursue growth in staffing fee-based income and specialized temporary staffing business in Italy.assets of $32.1 million.
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.receivable, which is generally outstanding for longer periods. Since receipts from customers generally 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. The impact of the COVID-19 crisis on our business began in March 2020. While we have yet to return to pre-crisis revenue levels, we have experienced improving demand for our services and expect a sustained recovery throughout 2022.
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 equivalents,restricted cash, operating activities, investing activities and financing activities.
Cash and Equivalents
Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash totaled $32.5$119.5 million at year-end 2017,2021, compared to $29.6$228.1 million at year-end 2016.2020. As further described below, during 2017,2021, we generated $71.2$85.0 million of cash from operating activities, used $61.0$180.7 million of cash for investing activities and used $3.4$8.1 million inof cash for financing activities.
Operating Activities
In 2017,2021, we generated $71.2$85.0 million of net cash from operating activities, as compared to generating $39.6$186.0 million in 20162020 and generating $25.3$102.2 million in 2015.2019. Net cash from operating activities in 2020 benefited from a deferral of $117.0 million of U.S. federal payroll taxes. Net cash from operating activities in 2021 included $29.7 million of cash outflows related to the repayment of the payroll tax deferral. The change from 20162020 to 20172021 was primarily drivendue to the impact of changes in the payroll tax deferral, partially offset by a decrease in performance based compensationthe favorable impact of improving global DSO. The change from 2019 to 2020 was primarily due to the deferral of payroll tax payments, partially offset by the impact of higher DSO as discussed below. The change from 2015 to 2016 was primarily due to lower growth in trade accounts receivable.global DSO.
Trade accounts receivable totaled $1.4 billion at year-end 2021 and $1.3 billion at year-end 2017 and $1.1 billion in 2016.2020. Global DSO for the fourth quarter was 5560 days for 2017,2021, compared to 5364 days for 2016. The increase2020. DSO at year-end 2020 reflected the impact of DSO by 2 days is due primarily to customer mix.customer-driven administrative issues among a limited number of large customers which were resolved in early 2021.
Our working capital position (total current assets less total current liabilities) was $458.1$493.5 million at year-end 2017, an increase2021, a decrease of $14.6$130.5 million from year-end 2016.2020. Excluding the decrease in cash, working capital decreased $20.2 million from year-end 2020. The current ratio (total current assets divided by total current liabilities) was 1.5 at year-end 20172021 and 1.61.7 at year-end 2016.2020.
Investing Activities
In 2017,2021, we used $61.0$180.7 million of net cash for investing activities, compared to generating $10.3$9.8 million in 20162020 and using $17.6$94.3 million in 2015.2019. Included in cash used for investing activities in 20172021 is $37.2$213.0 million of cash used for the acquisition of Teachers On Call,Softworld in April 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 cash received. 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 of Softworld.
Included in cash generated from investing activities in 20162020 is $23.3$55.5 million of net cashproceeds representing the cash received, lessnet 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 to PersolKelly Pte. Ltd. This was partially offset by cash used for the acquisitions of Insight in January 2020 and Greenwood/Asher in November 2020. Cash used for the acquisition of Insight totaled $36.4 million, net of the cash deconsolidated relatingreceived 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.
Included in cash used for investing activities in 2019 is $50.8 million for the acquisition of NextGen in January 2019, net of cash received, $35.6 million for the acquisition of GTA in January 2019, net of cash received, and $4.4 million for loans to
PersolKelly Pte. Ltd. to fund working capital requirements. These uses of cash were partially offset by proceeds of $13.8 million primarily from the sale of unused land during the second quarter of 2019.
Capital expenditures totaled $11.2 million in 2021, $15.5 million in 2020 and $20.0 million in 2019. Capital expenditures in 2021 primarily related to the PersolKelly Asia Pacific joint venture transaction.Company's IT infrastructure, technology programs and headquarters building improvements. Capital expenditures which totaled $24.6 million in 2017, $12.7 million2020 primarily related to the Company's headquarters leasehold improvements, IT infrastructure and technology programs. Capital expenditures in 2016 and $16.9 million in 2015, were2019 primarily related to the Company’s technology programs. The increase reflects higher spending for technology programs, IT infrastructure and headquarters building improvements in 2017 as compared to 2016.
Financing Activities
In 2017,both 2021 and 2020, we used $3.4$8.1 million of cash for financing activities, as compared to using $69.1$16.1 million in 2016 and using $44.0 million in 2015.2019. Changes in net cash from 2019 financing activities arewere primarily related to short-term borrowing activities. Debt totaled $10.2 million at year-end 2017 and was zero at year-end 2016. Debt-to-total capital (total debt reported on the 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 0.9% at year-end 2017 and 0.0% at year-end 2016.
In 2017, the net change in short-term borrowings was primarily due to borrowings on our revolving credit facility. In 2016 and 2015, the net change in short-term borrowings was primarily due to payments on our U.S. securitization facility.
dividend payments. Dividends paid per common share were $0.10 in 2021, $0.075 in 2020 and $0.30 in 2017, $0.275 in 2016 and $0.20 in 2015.2019. 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. There was no debt at year-end 2021 and debt was $0.3 million at year-end 2020. Debt-to-total capital (total debt reported in the consolidated balance sheet divided by total debt plus stockholders’ equity) is a common ratio to measure the relative capital structure and leverage of the Company. Our ratio of debt-to-total capital was 0.0% at year-end 2021 and 2020.
In 2021, 2020 and 2019 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 2017:2021:
| | | | | | | | | | | | | | | | Payment due by period |
| | | Payment due by period | | Total | | Less than 1 year | | 1-3 Years | | 3-5 Years | | More than 5 years |
| Total | | Less than 1 year | | 1-3 Years | | 3-5 Years | | More than 5 years | | (In millions of dollars) |
| (In millions of dollars) | |
Operating leases | $ | 82.8 |
| | $ | 25.9 |
| | $ | 34.4 |
| | $ | 16.2 |
| | $ | 6.3 |
| |
Leases | | Leases | $ | 99.6 | | | $ | 23.4 | | | $ | 26.7 | | | $ | 14.6 | | | $ | 34.9 | |
Short-term borrowings | 10.2 |
| | 10.2 |
| | — |
| | — |
| | — |
| Short-term borrowings | — | | | — | | | — | | | — | | | — | |
Accrued insurance | 75.6 |
| | 25.7 |
| | 23.5 |
| | 9.8 |
| | 16.6 |
| |
Accrued workers’ compensation | | Accrued workers’ compensation | 57.8 | | | 20.8 | | | 17.4 | | | 7.5 | | | 12.1 | |
Accrued retirement benefits | 193.2 |
| | 15.5 |
| | 31.1 |
| | 30.4 |
| | 116.2 |
| Accrued retirement benefits | 241.3 | | | 21.4 | | | 42.9 | | | 43.0 | | | 134.0 | |
Other long-term liabilities | 8.5 |
| | 1.7 |
| | 3.1 |
| | 1.7 |
| | 2.0 |
| |
Accrued payroll taxes | | Accrued payroll taxes | 87.1 | | | 29.5 | | | 57.6 | | | — | | | — | |
Other liabilities | | Other liabilities | 8.6 | | | 1.4 | | | 2.5 | | | 2.3 | | | 2.4 | |
Uncertain income tax positions | 1.4 |
| | 0.1 |
| | 0.5 |
| | 0.3 |
| | 0.5 |
| Uncertain income tax positions | 0.8 | | | 0.2 | | | 0.5 | | | — | | | 0.1 | |
Purchase obligations | 31.8 |
| | 20.4 |
| | 11.1 |
| | 0.3 |
| | — |
| Purchase obligations | 69.7 | | | 28.1 | | | 41.5 | | | 0.1 | | | — | |
| | | | | | | | | | | | | | | | | | | |
Total | $ | 403.5 |
| | $ | 99.5 |
| | $ | 103.7 |
| | $ | 58.7 |
| | $ | 141.6 |
| Total | $ | 564.9 | | | $ | 124.8 | | | $ | 189.1 | | | $ | 67.5 | | | $ | 183.5 | |
Purchase obligations above represent unconditional commitments relating primarily to technology services and online tools and voice and data communications services which we expect to utilize generally within the next twothree 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.
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 public or private bonds, asset-based lending, additional bank facilities issuanceor sale of equity or other sources.non-core assets. To meet significant cash requirements related to our nonqualified retirement plan, we may utilize proceeds from Company-owned life insurance policies. During 2020, cash generated from operations was supplemented by the deferral of payments of the Company's U.S. social security taxes as allowed by the Coronavirus Aid, Relief, and Economic Security Act. Such remaining deferrals are required to be repaid by January 3, 2023.
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 20172021 year end, these reviews have not resulted in any specific plans to repatriate a majority of our international cash balances.foreign subsidiary cash. We expect much of our international cash will be needed to fund working capital growth in our local operations. The majorityoperations as working capital needs, primarily trade accounts receivable, increase during periods of our international cash is concentrated in agrowth. A cash pooling arrangement (the “Cash Pool”) and 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 2021, we had $200.0 million of available capacity on our $200.0 million revolving credit facility and $97.0 million of available capacity on our $150.0 million securitization facility. The securitization facility carried no short-term borrowings and $53.0 million of standby letters of credit related to workers’ compensation. Together, the revolving credit and securitization facilities provide the Company with committed funding capacity that may be used for general corporate purposes subject to financial covenants and restrictions. While we believe these facilities will cover our working capital needs over the short term, if economic conditions or operating results change significantly from our current expectations, we may need to seek additional sources of funds. Throughout 2021 and as of the 2021 year end, we met the debt covenants related to our revolving credit facility and securitization facility.
At year-end 2021, we also had additional unsecured, uncommitted short-term credit facilities totaling $8.1 million, under which we had no borrowings. Details of our debt facilities as of the 2021 year end are contained in the Debt footnote in the notes to our consolidated financial statements.
We managehave 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 the Cash Pool first, and then access our borrowing facilities.
At year-end 2017, we had $140.5 million of available capacity on our $150.0 million revolving credit facility and $145.0 million of available capacity on our $200.0 million securitization facility. The securitization facility had no short-term borrowings and $55.0 million of standby letters of credit related to workers’ compensation. Together, the revolving credit and securitization facilities provide the Company with committed funding capacity that may be used for general corporate purposes. While we believe these facilities will cover We expect our working capital needsrequirements to increase over the short term,next several quarters if economic conditions or operating results change significantly,demand for our services continues to increase and to pay the deferred payroll tax balances, of which $29.5 million was paid on January 3, 2022 and another $57.6 million is due on January 3, 2023.
In February 2022, we may needentered into transactions to seek additional sourcesmonetize a portion of funds. Throughout 2017our assets in the Asia-Pacific region which will allow us to strategically redeploy resources to accelerate our growth. Specifically, we are unwinding our cross-shareholding arrangement with Persol Holdings and asreducing 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 1,475 Kelly Class B common shares owned by Persol Holdings at a price based on the last five trading days prior to the transaction. We will sell almost all of the 2017 year end, we met the debt covenants relatedour ownership interest in PersolKelly to our revolving credit facility and securitization facility.
At year-end 2017, we also had additional unsecured, uncommitted short-term credit facilities totaling $9.8 million, under which we had $0.7 million of borrowings. Details of our debt facilities as of the 2017 year end are containedjoint venture partner. The transactions will be complete in the Debt footnote in the notes to our consolidated financial statements.first quarter of 2022.
We monitor the credit ratings of our major banking partners on a regular basis and have regular discussions with them. Based on our reviews and communications, we believe the risk of one or more of our banks not being able to honor commitments is insignificant. We also review the ratings and holdings of our money market funds and other investment vehicles regularly to ensure high credit quality and access to our invested cash.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the 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 the U.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, 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 throughout the year 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 $59.4$48.4 million and $59.7$54.6 million at year-end 20172021 and 2016,2020, 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.
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. We establish accruals for uncertain tax positions under generally accepted accounting principles, which require that a position taken or expected to be taken in a tax return be recognized in the consolidated financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) the position would be sustained upon examination by tax authorities who have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.
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 within income and other taxes and long-term tax accruals are presented in other long-term liabilities in the consolidated balance sheet within other long-term liabilities. 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. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the tax benefit in our consolidated income statement. 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. Deferred tax liabilities generally represent items for which we have already taken a deduction on our tax return, but have not yet recognized as expense in our consolidated financial statements. Our net deferred tax asset is recorded using currently enacted tax laws, and may need to be adjusted in the event tax laws change.
The U.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.
The U.S. Tax Cuts and Jobs Act (“The Act”) was signed into law on December 22, 2017. We have accounted for certain tax effects of The Act on a provisional basis, in accordance with SEC Staff Accounting Bulletin 118. We have determined reasonable estimates for any income tax effects whose analysis is incomplete. We have incorporated our reasonable estimates in our financial statements as of December 31, 2017 and plan to complete our accounting during the one-year measurement period.Goodwill
Equity Method Investment
We account for our investment in PersolKelly Asia Pacific under the equity method of accounting. We review our equity method investment for indicators of impairment on a periodic basis or whenever events or circumstances indicate the carrying amount may be other-than-temporarily impaired. An impairment assessment requires the exercise of judgment related to financial trends, forecasts, relevant events, as well as any operating, economic, legal or regulatory changes that may have an impact on the investment. There were no indicators of an other-than-temporary impairment in 2017 or 2016. As of year-end 2017 and 2016, the equity method investment was $117.4 million and $114.8 million, respectively. See the Investment in PersolKelly Asia Pacific footnote in the notes to our consolidated financial statements.
Goodwill
We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. Generally accepted accounting principles require that goodwill be tested for impairment at a reporting unit level. WeFor segments with a goodwill balance, we have determined that our reporting units are the same as our operating and reportable segments. Ifsegments 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 may use aelect to forgo the qualitative assessment for the annual impairment test.
Fora reporting units where the qualitative assessment is not used,unit, goodwill is tested for impairment using a two-step process. In the first step,by comparing the estimated fair value of a reporting unit is compared to its carrying value.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.
To derive the estimated fair value of a reporting units,unit, we primarily relied on an 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.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.
If
The goodwill resulting from the carrying valueacquisition of Softworld during the net assets assignedsecond quarter of 2021 was allocated to the SET reportable segment and Softworld was deemed to be a separate reporting unit. The goodwill resulting from the acquisition of Greenwood/
Asher during the fourth quarter of 2020 was allocated to the Education reportable segment, which was deemed to be a reporting unit exceedsunit. See the estimated fair value of a reporting unit, a second step ofAcquisitions and Disposition footnote in the impairment test is performed in ordernotes to determine the implied fair value of a reporting unit’s goodwill. Determining the implied fair value of goodwill requires valuation of a reporting unit’s tangible and intangible assets andour consolidated financial statements for more information.
liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference.
We completed our annual impairment test for all reporting units with goodwill in the fourth quarter for the fiscal year ended 2017 and 2016 and determined that goodwill was not impaired. In 2017, we elected to perform2021. We performed a step one quantitative assessmenttest for the Americas StaffingSoftworld 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 GTS reporting units. In 2016, we elected to performconcluded that a step one quantitative assessment for our previous Americas Commercial, Americas PTanalysis was not necessary. As a result of the quantitative and OCG reporting units.qualitative assessments, the Company determined goodwill was not impaired as of year-end 2021.
Our step one analysis used significant assumptions, by segment, including: expected future revenue and expense growth rates, profit margins cost of capital,and discount rate and forecasted capital expenditures.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 these businessesour 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 reporting unit exceeds the carrying value by more than 10%. As a measure of sensitivity both reporting units have an estimatedof the fair value that is at least doubleof the carrying valuereporting unit, while holding all other assumptions constant, an increase in 2017. In addition, reducing ourthe discount rate of 100 basis points or a decrease of 100 basis points in the revenue growth rate assumptions by more than 100%for each forecasted period used to determine the fair value of the reporting unit would not result in an impairment of goodwill.
During the first quarter of 2020, negative market reaction to the COVID-19 crisis, including declines in our common stock price, caused our market capitalization to decline significantly compared to the fourth quarter of 2019, causing a triggering event. Therefore, we performed an interim step one quantitative test for our previous reporting units with goodwill, Americas Staffing and GTS, and determined that the estimated fair value falling below book value forvalues of both reporting units.units no longer exceeded their carrying values. Based on the result of our interim goodwill impairment test as of the first quarter of 2020, we recorded a goodwill impairment charge of $147.7 million to write off the entire goodwill balance.
In the fourth quarter of 2020, the Company elected to perform a step zero qualitative analysis to determine whether a further quantitative assessment was necessary for the reporting unit with goodwill. The step zero test included making judgments and assessments to determine whether any events or circumstances have occurred that makes it more likely than not that the fair value of a reporting unit is less than its carrying amount. As a result of this qualitative assessment, a step one quantitative analysis was not deemed necessary and the goodwill was not impaired.
At year-end 20172021 and 2016,2020, total goodwill amounted to $107.1$114.8 million and $88.4$3.5 million, respectively (seerespectively. See the Goodwill and Intangible Assets footnote in the notes to our consolidated financial statements).statements for more information.
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 and, in the case of class action lawsuits, participation rates.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 both year-end 20172021 and 2016,2020, the gross accrual for litigation costs amounted to $5.3$1.4 million and $9.2 million, respectively, which areis included in accounts payable and accrued liabilities and in accrued workers’ compensation and other claims in the consolidated balance sheet.
Allowance for Uncollectible Accounts Receivable
We make ongoing estimates relating to the collectibility of our trade accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the allowance, we consider our historical level of credit losses and apply percentages to certain aged receivable categories. We also make judgments about the creditworthiness of significant customers based on ongoing credit evaluations, and we monitor historical trends that might impact the level of credit losses in the future. Historically, losses from uncollectible accounts have not exceeded our allowance. Since we cannot predict with certainty future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required.
In the event we determined that a smaller or larger allowance was appropriate, we would record a credit or a charge to SG&A expenses in the period in which we made such a determination. In addition, for billing adjustments related to errors, service issues and compromises on billing disputes, we also include a provision for sales allowances, based on our historical experience, in our allowance for uncollectible accounts receivable. If sales allowances vary from our historical experience, an adjustment to the allowance may be required, and we would record a credit or charge to revenue from services in the period in which we made such a determination. As of year-end 2017 and 2016, the allowance for uncollectible accounts receivable was $12.9 million and $12.5 million, respectively.
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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein and in this reportour investor conference call related to these results are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Actapplicable securities laws and regulations. These forward-looking statements are based on current expectations and assumptions and are subject to a number of 1995.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, changingdisruption in the labor market and economic conditions,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, the risk of damage to our brand, the risk our intellectual property assets could be infringed upon or compromised, our ability to successfully develop new service offerings, our exposure to risks associated with services outside traditional staffing, including business process outsourcing, our increasing dependency on third parties for the execution of critical functions, the risks associated with past and future acquisitions, exposure to risks associated with investments in equity affiliates including PersolKelly Asia Pacific, 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 the government or government contractors, the risk of damage to our brand, our exposure to risks associated with services outside traditional staffing, including business process outsourcing, services of licensed professionals and services connecting talent to independent work, our increasing dependency on third parties for the execution of critical functions, our ability to effectively implement and manage our information technology strategy, the risks associated with past and future acquisitions, including risk of related impairment of goodwill and intangible assets, exposure to risks associated with investments in equity affiliates including PersolKelly Pte. Ltd., risks associated with conducting business in foreign countries, including foreign currency fluctuations, the exposure to potential market and currency exchange risks relating to our investment in Persol Holdings, risks associated with violations of 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 cyber attackscyberattacks or other breaches of network or information technology security, our ability to sustain critical business applications throughrealize value from our key data centers, our ability to effectively implementtax credit and manage our information technology projects, our ability to maintain adequate financial and management processes and controls, risk of potential impairment charges triggered by adverse industry developments or operational circumstances, unexpected changes in claim trends on workers’ compensation, unemployment, disability and medical benefit plans, the impact of changes in laws and regulations (including federal, state and international tax laws), competition law risks, the risk of additional tax or unclaimed property liabilities in excess of our estimates,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 lookingforward-looking statements contained herein, and we haveundertake no intentionduty to update these statements. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to foreign currency risk primarily related to our foreign subsidiaries. Exchange rates impact the U.S. dollar value of our reported earnings, our investments in and held by subsidiaries, local currency denominated borrowings and intercompany transactions with and between subsidiaries. Our foreign subsidiaries primarily derive revenues and incur expenses within a single country and currency which, as a result, provide a natural hedge against currency risks in connection with normal business operations. Accordingly, changes in foreign currency rates vs. the U.S. dollar, euro or Swiss franc generally do not impact local cash flows. Intercompany transactions which create transactional foreign currency risk include services, royalties, loans, contributions and distributions.
In addition, we are exposed to interest rate risks through our use of the multi-currency line of credit and other borrowings. A hypothetical fluctuation of 10% of market interest rates would not have had a material impact on 20172021 earnings.
Marketable equity investments, representing
We are exposed to market and currency risks on our available-for-sale investment in Persol Holdings, arewhich may be material. The investment is stated at fair value and is marked to market through stockholders’ equity, net earnings. Foreign currency fluctuations on this yen-denominated
investment are reflected as a component of tax. Impairments in value below historical cost, if any, deemed to be other than temporary, would be expensed in the consolidated statement of earnings.comprehensive income. See the Fair Value Measurements footnote in the notes to our consolidated financial statements of this Annual Report on Form 10-K for further discussion.
We are exposed to market risk as a result of our obligation to pay benefits under our nonqualified deferred compensation plan and our related investments in company-owned variable universal life insurance policies. The obligation to employees increases and decreases based on movements in the equity and debt markets. The investments in mutual funds, as part of the company-owned variable universal life insurance policies, are designed to mitigate, but not eliminate, this risk with offsetting gains and losses.
Overall, our holdings and positions in market risk-sensitive instruments do not subject us to material risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this Item are set forth in the accompanying index on page 4647 of this filing and are presented in pages 47-81.48-97.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective at a reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Management’s report on internal control over financial reporting is presented preceding the consolidated financial statements on page 4748 of this report.
Attestation Report of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2017,January 2, 2022, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
PART III
Information required by Part III with respect to Directors, Executive Officers and Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters (Item 12), Certain Relationships and Related Transactions, and Director Independence (Item 13) and Principal Accounting Fees and Services (Item 14), except as set forth under the titles “Executive Officers of the Registrant,” which is included on page 40,pages 42-43, and “Code of Business Conduct and Ethics,” which is included on page 41,44, (Item 10), and except as set forth under the title “Equity Compensation Plan Information,” which is included on pages 41-42,44-45, (Item 12), is to be included in a definitive proxy statement filed not later than 120 days after the close of our fiscal year and the proxy statement, when filed, is incorporated in this report by reference.
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following individuals serve as executive officers of the Company as of December 31, 2017:January 29, 2022:
| | | | | | | | | | | | | | | | | | | | |
Name/Office | | Age | | Served as an Officer Since | | Business Experience During Last 5 Years |
Peter W. Quigley President and Chief Executive Officer | | 60 | | 2004 | | Served as officer of the Company. |
| | | | | | |
Olivier G. Thirot Executive Vice President and Chief Financial Officer | | 60 | | 2008 | | Served as officer of the Company. |
| | | | | | |
Peter M. Boland Senior Vice President Chief Marketing Officer | | 57 | | 2018 | | January 2018 - Present Served as officer of the Company.
January 2012 - June 2017 SVP Brand Marketing - Charles Schwab & Co., San Francisco, CA |
| | | | | | |
Amy J. Bouque Senior Vice President Chief People Officer | | 53 | | 2020 | | September 2020 - Present Served as officer of the Company.
January 2016 - August 2020 Executive Director - Talent Management - Ally Financial, Detroit Michigan |
| | | | | | |
Tammy L. Browning Senior Vice President President, KellyOCG | | 48 | | 2018 | | October 2018 - Present Served as officer of the Company.
October 2010 - April 2018 SVP Global Operations - Yoh |
| | | | | | |
Timothy L. Dupree Senior Vice President President, Kelly Professional & Industrial | | 45 | | 2014 | | Served as officer of the Company. |
| | | | | | |
Dinette Koolhaas Senior Vice President President, Kelly International | | 52 | | 2008 | | Served as officer of the Company. |
| | | | | | |
|
| | | | | | |
Name/Office | | Age | | Served as an Officer Since | | Business Experience During Last 5 Years |
George S. Corona President and Chief Executive Officer | | 59 | | 2000 | | Served as officer of the Company. |
| | | | | | |
Teresa S. Carroll Executive Vice President, President, Global Talent Solutions and General Manager - Sales, Marketing and HR | | 52 | | 2000 | | Served as officer of the Company. |
| | | | | | |
Peter W. Quigley Executive Vice President, President, Global Staffing and General Manager - IT, Global Service and Global Business Service | | 56 | | 2004 | | Served as officer of the Company. |
| | | | | | |
Steven S. Armstrong Senior Vice President and General Manager, U.S. Operations | | 60 | | 1994 | | Served as officer of the Company. |
| | | | | | |
Hannah S. Lim-Johnson (1) Chief Legal Officer | | 46 | | 2017 | | September 2017 - Present Served as officer of the Company
October 2016 - April 2017 Deputy General Counsel, Chief Litigation Counsel & Assistant Corporate Secretary - PSEG, Newark, NJ
June 2012 - September 2016 VP, Chief Litigation & Chief Compliance Counsel - ADT Corp, Boca Raton, FL
|
| | | | | | |
Olivier G. Thirot Senior Vice President and and Chief Financial Officer | | 56 | | 2008 | | Served as officer of the Company. |
| | | | | | |
Laura S. Lockhart Vice President, Corporate Controller and Chief Accounting Officer | | 48 | | 2008 | | Served as officer of the Company. |
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT (continued)(1) Ms. Lim-Johnson was appointed Chief Legal Officer effective September 2017. | | | | | | | | | | | | | | | | | | | | |
Name/Office | | Age | | Served as an Officer Since | | Business Experience During Last 5 Years |
Daniel Hugo Malan Senior Vice President President, Kelly Science, Engineering & Technology | | 52 | | 2020 | | March 2020 - Present Served as officer of the Company.
December 2019 - February 2020 Managing Partner - Talent Capital Advisors
August 2018 - November 2019 Chief Operating Officer - Employbridge
December 2016 - July 2018 President, Commercial Business - Employbridge
November 2014 - November 2016 EVP & President - North America Staffing, CDI |
| | | | | | |
Nicola M. Soares Senior Vice President President, Kelly Education | | 53 | | 2011 | | Served as officer of the Company. |
| | | | | | |
Vanessa P. Williams Senior Vice President General Counsel Assistant Secretary | | 50 | | 2020 | | October 2020 - Present Served as officer of the Company.
February 2020 - September 2020 SVP, Division General Counsel- Transportation and Third Party Risk Management and Compliance - IHS Markit
December 2016 - February 2020 VP, Division General Counsel - Transportation - IHS Markit
February 2014 - December 2016 VP, Chief Legal Counsel & Global Privacy Officer - IHS Markit |
| | | | | | |
Laura S. Lockhart Vice President, Corporate Controller and Chief Accounting Officer | | 52 | | 2008 | | Served as officer of the Company. |
CODE OF BUSINESS CONDUCT AND ETHICS.
We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer or controller or persons performing similar functions. The Code of Business Conduct and Ethics is included as Exhibit 14 in the Index to Exhibits on page 82.98. We have posted our Code of Business Conduct and Ethics on our website at www.kellyservices.com. We intend to post any changes in or waivers from our Code of Business Conduct and Ethics applicable to any of these officers on our website.
ITEM 12. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
Equity Compensation Plan Information
The following table shows the number of shares of our Class A common stock that may be issued upon the exercise of outstanding options, warrants and rights, the weighted-average exercise price of outstanding options, warrants and rights, and the number of securities remaining available for future issuance under our equity compensation plans as of the fiscal year end for 2017.
2021. |
| | | | | | | | | | | | | | | | | | | |
| | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) |
Equity compensation plans approved by security holders - Evergreen provision(1),(2) | | — |
| | $ | — |
| | — |
|
| | | | | | |
Equity compensation plans approved by security holders - Fixed Share provision(1),(3) | | — |
| | — |
| | 4,533,7022,889,970 |
|
| | | | | | |
Equity compensation plans not approved by security holders (4) | | — |
| | — |
| | 93,055— |
|
| | | | | | |
Total | | — |
| | $ | — |
| | 4,626,757 |
|
| |
(1)Total | The equity compensation plan approved by our stockholders is our Equity Incentive Plan. |
The Company has U.S. general business credit carryforwards of $128.5$166.5 million which will expire from 20332034 to 2037,2041, foreign tax credit carryforwards of $4.1$8.4 million thatwhich will expire from 2022 to 20262031 and $0.1 million of state credit carryforwards thatwhich will expire from 2026 to 2037, or have no expiration.2041. The net tax effect of state and foreign loss carryforwards at year-end 20172021 totaled $38.8$36.4 million, $2.6 million of which expire as follows (in millionsbetween 2022 to 2041, and $33.8 million of dollars): which have no expiration.
The Company has established a valuation allowance for loss carryforwards and future deductible items in certain foreign jurisdictions, and for U.S. foreign tax credit carryforwards. The valuation allowance is determined in accordance with the provisions of ASC 740, which requires an assessment of both negative and positive evidence when measuring the need for a valuation allowance. The Company’s recent losses in these foreign jurisdictions, and its recent lack of adequate U.S. foreign source income to fully utilize foreign tax credit carryforwards, represented sufficient negative evidence to require a valuation allowance under ASC 740. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to
support realization of the foreign deferred tax assets. At this time, we have no valuation allowance against our Mexican deferred tax asset of $3.8 million, though it is possible this may change as we continue to assess the impact of the new labor laws that became effective in the third quarter of 2021 on our Mexican business operations.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: