WASHINGTON, D.C. 20549
KELLY SERVICES, INC.
(Former name, former address and former fiscal year, if changed since last report.)
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).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
KELLY SERVICES, INC. AND SUBSIDIARIES
See accompanying unaudited Notes to Consolidated Financial Statements.
KELLY SERVICES, INC. AND SUBSIDIARIES
See accompanying unaudited Notes to Consolidated Financial Statements.
KELLY SERVICES, INC. AND SUBSIDIARIES
See accompanying unaudited Notes to Consolidated Financial Statements.
KELLY SERVICES, INC. AND SUBSIDIARIES
See accompanying unaudited Notes to Consolidated Financial Statements.
KELLY SERVICES, INC. AND SUBSIDIARIES
See accompanying unaudited Notes to Consolidated Financial Statements.
KELLY SERVICES, INC. AND SUBSIDIARIES
See accompanying unaudited Notes to Consolidated Financial Statements.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Kelly Services, Inc. (the “Company,” “Kelly,” “we” or “us”) have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and notes required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair statement of the results of the interim periods, have been made. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. The unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended January 1, 2017,2, 2022, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 17, 20172022 (the 20162021 consolidated financial statements). There were no changes in accounting policies as disclosed in the Form 10-K, with the exception of those described in the New Accounting Pronouncements footnote. The Company’s third fiscal quarter ended on October 1, 2017 (2017)2, 2022 (2022) and October 2, 2016 (2016)3, 2021 (2021), each of which contained 13 weeks. The corresponding September year to dateyear-to-date periods for 20172022 and 20162021 each contained 39 weeks.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. SG&A expenses for the 13 and 39 weeks ended October 1, 2017 include a $2.8 million and $1.4 million, respectively, benefit resulting from an out-of-period correction of expenses that were overstated in prior periods. The out-of-period errors and adjustments did not have a material effect on any of the periods impacted.
Certain reclassifications have been made to the prior years’year's consolidated financial statements to conform to the current year’syear's presentation.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. AcquisitionRevenue
OnRevenue Disaggregated by Service Type
Kelly has five operating segments: Professional & Industrial (“P&I”), Science, Engineering & Technology (“SET”), Education, Outsourcing & Consulting Group ("Outsourcing & Consulting," "OCG") and International. Other than OCG, each segment delivers talent through staffing services, permanent placement or outcome-based services. Our OCG segment delivers talent solutions including managed service provider ("MSP"), payroll process outsourcing ("PPO"), recruitment process outsourcing ("RPO"), and talent advisory services. International also delivers RPO talent solutions within its local markets.
The following table presents our segment revenues disaggregated by service type (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | September Year to Date |
| | 2022 | | 2021 | | 2022 | | 2021 |
Professional & Industrial | | | | | | | | |
Staffing services | | $ | 297.9 | | | $ | 344.7 | | | $ | 942.3 | | | $ | 1,057.0 | |
Permanent placement | | 6.1 | | | 6.9 | | | 24.0 | | | 17.1 | |
Outcome-based services | | 104.6 | | | 101.0 | | | 302.4 | | | 312.6 | |
Total Professional & Industrial | | 408.6 | | | 452.6 | | | 1,268.7 | | | 1,386.7 | |
| | | | | | | | |
Science, Engineering & Technology | | | | | | | | |
Staffing services | | 220.6 | | | 214.0 | | | 664.3 | | | 613.1 | |
Permanent placement | | 7.1 | | | 6.5 | | | 23.6 | | | 17.4 | |
Outcome-based services | | 93.6 | | | 85.7 | | | 274.8 | | | 228.6 | |
Total Science, Engineering & Technology | | 321.3 | | | 306.2 | | | 962.7 | | | 859.1 | |
| | | | | | | | |
Education | | | | | | | | |
Staffing services | | 103.0 | | | 65.7 | | | 427.4 | | | 280.6 | |
Permanent placement | | 1.3 | | | 0.9 | | | 5.8 | | | 3.5 | |
Total Education | | 104.3 | | | 66.6 | | | 433.2 | | | 284.1 | |
| | | | | | | | |
Outsourcing & Consulting | | | | | | | | |
Talent solutions | | 118.5 | | | 113.4 | | | 352.0 | | | 320.0 | |
Total Outsourcing & Consulting | | 118.5 | | | 113.4 | | | 352.0 | | | 320.0 | |
| | | | | | | | |
International | | | | | | | | |
Staffing services | | 205.8 | | | 247.1 | | | 684.7 | | | 784.7 | |
Permanent placement | | 5.3 | | | 5.4 | | | 17.8 | | | 16.3 | |
Talent solutions | | 4.4 | | | 4.3 | | | 13.4 | | | 9.1 | |
Total International | | 215.5 | | | 256.8 | | | 715.9 | | | 810.1 | |
| | | | | | | | |
Total Intersegment | | (0.3) | | | (0.2) | | | (0.9) | | | (0.6) | |
| | | | | | | | |
Total Revenue from Services | | $ | 1,167.9 | | | $ | 1,195.4 | | | $ | 3,731.6 | | | $ | 3,659.4 | |
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Revenue Disaggregated by Geography
Our operations are subject to different economic and regulatory environments depending on geographic location. Our P&I and Education segments operate in the Americas region, our SET segment operates in the Americas and Europe regions, and OCG operates in the Americas, Europe and Asia-Pacific regions. The International segment includes our Mexico operations, which are included in the Americas region, and Europe.
The below table presents our revenues disaggregated by geography (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | September Year to Date | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Americas | | | | | | | | | | | | |
United States | | $ | 861.0 | | | $ | 851.7 | | | $ | 2,746.5 | | | $ | 2,604.8 | | | | | |
Canada | | 43.3 | | | 43.3 | | | 122.7 | | | 116.9 | | | | | |
Puerto Rico | | 28.3 | | | 25.5 | | | 84.8 | | | 76.6 | | | | | |
Mexico | | 10.9 | | | 14.4 | | | 32.4 | | | 82.1 | | | | | |
| | | | | | | | | | | | |
Total Americas Region | | 943.5 | | | 934.9 | | | 2,986.4 | | | 2,880.4 | | | | | |
| | | | | | | | | | | | |
Europe | | | | | | | | | | | | |
Switzerland | | 55.2 | | | 54.5 | | | 165.5 | | | 161.2 | | | | | |
France | | 45.8 | | | 56.3 | | | 150.8 | | | 168.1 | | | | | |
Portugal | | 41.9 | | | 36.6 | | | 125.8 | | | 120.9 | | | | | |
Italy | | 16.4 | | | 18.5 | | | 54.3 | | | 56.0 | | | | | |
United Kingdom | | 14.2 | | | 17.2 | | | 45.2 | | | 51.9 | | | | | |
Russia | | 5.0 | | | 33.0 | | | 63.4 | | | 99.3 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other | | 35.6 | | | 33.7 | | | 107.6 | | | 93.3 | | | | | |
Total Europe Region | | 214.1 | | | 249.8 | | | 712.6 | | | 750.7 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total Asia-Pacific Region | | 10.3 | | | 10.7 | | | 32.6 | | | 28.3 | | | | | |
| | | | | | | | | | | | |
Total Kelly Services, Inc. | | $ | 1,167.9 | | | $ | 1,195.4 | | | $ | 3,731.6 | | | $ | 3,659.4 | | | | | |
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
The below table presents our SET, OCG and International segment revenues disaggregated by geographic region (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | September Year to Date | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Science, Engineering & Technology | | | | | | | | | | | | |
Americas | | $ | 317.2 | | | $ | 304.3 | | | $ | 951.4 | | | $ | 854.1 | | | | | |
Europe | | 4.1 | | | 1.9 | | | 11.3 | | | 5.0 | | | | | |
Total Science, Engineering & Technology | | $ | 321.3 | | | $ | 306.2 | | | $ | 962.7 | | | $ | 859.1 | | | | | |
| | | | | | | | | | | | |
Outsourcing & Consulting | | | | | | | | | | | | |
Americas | | $ | 103.1 | | | $ | 97.5 | | | $ | 302.5 | | | $ | 274.9 | | | | | |
Europe | | 5.1 | | | 5.2 | | | 16.9 | | | 16.8 | | | | | |
Asia-Pacific | | 10.3 | | | 10.7 | | | 32.6 | | | 28.3 | | | | | |
Total Outsourcing & Consulting | | $ | 118.5 | | | $ | 113.4 | | | $ | 352.0 | | | $ | 320.0 | | | | | |
| | | | | | | | | | | | |
International | | | | | | | | | | | | |
Americas | | $ | 10.6 | | | $ | 14.1 | | | $ | 31.5 | | | $ | 81.2 | | | | | |
Europe | | 204.9 | | | 242.7 | | | 684.4 | | | 728.9 | | | | | |
Total International | | $ | 215.5 | | | $ | 256.8 | | | $ | 715.9 | | | $ | 810.1 | | | | | |
Deferred Costs
Deferred fulfillment costs, which are included in prepaid expenses and other current assets in the consolidated balance sheet, were $2.4 million as of third quarter-end 2022 and $1.3 million as of year-end 2021. Amortization expense for the deferred costs for the third quarter and September 5, 2017,year-to-date 2022 was $3.2 million and $7.0 million, respectively. Amortization expense for the deferred costs for the third quarter and September year-to-date 2021 was $4.3 million and $16.4 million, respectively.
3. Credit Losses
The rollforward of our allowance for credit losses related to trade accounts receivable, which is recorded in trade accounts receivable, less allowance in the consolidated balance sheet, is as follows (in millions of dollars): | | | | | | | | | | | |
| September Year to Date |
| 2022 | | 2021 |
Allowance for credit losses: | | | |
Beginning balance | $ | 9.4 | | | $ | 9.8 | |
Current period provision | 1.3 | | | 0.8 | |
Currency exchange effects | (0.4) | | | (0.4) | |
Write-offs | (1.8) | | | (0.7) | |
Ending balance | $ | 8.5 | | | $ | 9.5 | |
Write-offs are presented net of recoveries, which were not material for September year-to-date 2022 and 2021.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
We were engaged in litigation with a customer over a disputed accounts receivable balance for certain services rendered more than five years ago, which had been recorded as a long-term receivable in other assets in the consolidated balance sheet. The related allowance for credit losses on this long-term customer receivable was $10.9 million and represented the likelihood of collection. In September 2021, a final ruling in the case was entered in favor of the customer. As a result, in the third quarter of 2021, we wrote off the entire receivable balance with this customer, including $0.6 million not previously reserved. The unreserved portion was recorded in SG&A expenses in the consolidated statements of earnings. The 2021 September year-to-date rollforward of our allowance for credit losses related to the long-term customer receivable, which was recorded in other assets in the consolidated balance sheet, is as follows (in millions of dollars):
| | | | | |
| September Year to Date |
| 2021 |
Allowance for credit losses: | |
Beginning balance | $ | 10.9 | |
| |
Current period provision | 0.6 | |
| |
Write-offs | (11.5) | |
Ending Balance | $ | — | |
There were no allowances for long-term customer receivables during September year-to-date 2022. No other allowances related to other receivables were material for September year-to-date 2022.
4. Acquisitions and Disposition
Acquisitions
In the second quarter of 2022, Kelly Services USA, LLC ("KSU"), a wholly owned subsidiary of the Company, acquired Pediatric Therapeutic Services ("PTS"), as detailed below. In the first quarter of 2022, the Company acquired Rocket Power Holdings LLC and Rocket Power Ops LLC (collectively, "RocketPower"), as detailed below. In the second quarter of 2021, the Company acquired Softworld, Inc. ("Softworld"), as detailed below.
Pediatric Therapeutic Services
On May 2, 2022, KSU acquired 100% of the issued and outstanding sharesmembership interests of Teachers On Call, Inc. (“TOC”), an educational staffing firm in the U.S.PTS for a purchase price of $41.0$82.1 million. PTS is a specialty firm that provides and manages various state and federally mandated in-school therapy services. This acquisition expands Education's K-12 solution offering in the education staffing market and serves as an entry point into the therapeutic services market. Under terms of the purchase agreement, the purchase price was adjusted for cash held by TOCPTS at the closing date less anand estimated working capital adjustmentadjustments resulting in the Company paying cash of $39.0$85.7 million. Total consideration includes $1.1 million at closing.of additional consideration that is payable to the seller by the end of 2022 related to employee retention credits and is recorded in accounts payable and accrued liabilities in the consolidated balance sheet. In the third quarter of 2022, the Company paid $0.1 million of the employee retention credits. The final purchase pricetotal consideration is subjectas follows (in millions of dollars):
| | | | | |
Cash consideration paid | $ | 85.7 | |
Additional consideration payable | 1.1 | |
Total consideration | $ | 86.8 | |
Due to a final working capital adjustment calculation, which is not expected to be material. Thethe limited amount of time that has passed since acquiring PTS, the purchase price allocation for this acquisition is preliminary and could change.
This acquisition will increase our market share in the educational staffing market in the U.S. TOC’s results of operations are included in the Americas Staffing segment as of the 2017 third quarter end.
Pro forma results of operations for this acquisition have not been presented as it is not material to the consolidated statement of earnings. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the acquisition (in millions of dollars):
|
| | | |
Cash | $ | 1.8 |
|
Other current assets | 3.6 |
|
Goodwill | 18.7 |
|
Intangibles | 18.3 |
|
Other noncurrent assets | 0.5 |
|
Current liabilities | (3.9 | ) |
Purchase price paid at closing | $ | 39.0 |
|
Included in the assets purchased was approximately $18.3 million of intangible assets, made up of $12.0 million in customer relationships, $4.8 million associated with TOC’s trademark and $1.5 million for a candidate database. The customer relationships will be amortized over 10 years with no residual value and the database will be amortized over four years with no residual value. The trademark has an indefinite life. Goodwill generated from this acquisition is primarily attributable to expected synergies from combining operations and expanding market potential, and is assigned to the Americas Staffing reporting unit (see Goodwill footnote). The amount of goodwill expected to be deductible for tax purposes is
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
approximately $18.3 | | | | | |
Cash | $ | 0.9 | |
Trade accounts receivable | 10.0 | |
Prepaid expenses and other current assets | 1.6 | |
Net property and equipment | 0.4 | |
| |
| |
Goodwill | 36.3 | |
Intangibles | 40.3 | |
| |
Accounts payable and accrued liabilities, current | (2.6) | |
| |
Accrued payroll and related taxes, current | (0.1) | |
| |
| |
| |
Total consideration, including working capital adjustments | $ | 86.8 | |
The fair value of the acquired receivables represents the contractual value. Included in the assets purchased in the PTS acquisition was $40.3 million of intangibles, made up of $29.8 million in customer relationships, $9.3 million associated with PTS's trade names and $1.2 million for non-compete agreements. Customer relationships will be amortized over 15 years with no residual value, trade names will be amortized over 15 years with no residual value, and the non-compete agreements will be amortized over five years with no residual value. Goodwill generated from the acquisition was primarily attributable to expected synergies from combining operations and expanding market potential and was assigned to the Education operating segment (see Goodwill and Intangible Assets footnote). All of the goodwill is expected to be deductible for tax purposes.
PTS's results of operations are included in the Education segment. Our consolidated revenues for the third quarter and September year-to-date 2022 included $8.0 million and $15.2 million, respectively, from PTS. Our consolidated earnings from operations for the third quarter and September year-to-date 2022 included $0.7 million and $1.6 million, respectively, from PTS. Pro forma results of operations for this acquisition have not been presented as the acquisition does not have a material impact to the consolidated statements of earnings.
RocketPower
On March 7, 2022, the Company acquired 100% of the issued and outstanding membership interests of RocketPower for a purchase price of $59.3 million. An indemnification assetRocketPower is a leading provider of $2.8RPO and other outsourced talent solutions to U.S. high-tech companies. This acquisition expands OCG's RPO solution and delivery offering and enhances the specialty RPO strategy and expertise within the high-tech industry. Under terms of the purchase agreement, the purchase price was adjusted for cash held by RocketPower at the closing date and estimated working capital adjustments resulting in the Company paying cash of $61.8 million. Total consideration includes $1.1 million of additional consideration that is payable to the seller in 2023 related to employee retention credits and contingent consideration with an initial estimated fair value of $0.6 million related to an earnout payment with a maximum potential cash payment of $31.8 million in the event certain financial metrics are met per the terms of the agreement. The initial fair value of the earnout was recognizedestablished using a Black Scholes model and it was reassessed in the third quarter of 2022 (see Fair Value Measurements footnote). The total consideration is as follows (in millions of dollars):
| | | | | |
Cash consideration paid | $ | 61.8 | |
Additional consideration payable | 1.1 | |
Contingent consideration | 0.6 | |
Total consideration | $ | 63.5 | |
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Due to the limited amount of time that has passed since acquiring RocketPower, the purchase price allocation for this acquisition is preliminary and could change. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the acquisition (in millions of dollars):
| | | | | |
Cash | $ | 3.5 | |
Trade accounts receivable | 6.9 | |
Prepaid expenses and other current assets | 1.8 | |
Net property and equipment | 0.1 | |
| |
| |
Goodwill | 41.0 | |
Intangibles | 15.8 | |
| |
Accounts payable and accrued liabilities, current | (2.9) | |
| |
Accrued payroll and related taxes, current | (1.5) | |
| |
Other long-term liabilities | (1.2) | |
| |
Total consideration, including working capital adjustments | $ | 63.5 | |
The fair value of the acquired receivables represents the contractual value. Included in the assets purchased in the RocketPower acquisition was $15.8 million of intangible assets, made up of $7.5 million in customer relationships, $6.6 million associated with RocketPower's trade names and $1.7 million for non-compete agreements. Customer relationships will be amortized over three years with no residual value, trade names will be amortized over 10 years with no residual value, and the non-compete agreements will be amortized over six years with no residual value. Goodwill generated from the acquisition was primarily attributable to expected synergies from combining operations and expanding market potential and was assigned to the OCG operating segment. The amount of goodwill expected to be deductible for tax purposes is approximately $28.0 million. In the third quarter of 2022, changes in market conditions triggered interim impairment tests for both long-lived assets and goodwill, resulting in the Company recording goodwill impairment expense of $30.7 million (see Goodwill and Intangible Assets footnote).
RocketPower's results of operations are included in the OCG segment in 2022 on a one-month lag, accordingly our first quarter 2022 consolidated revenues and earnings from operations did not include any results from RocketPower. Our consolidated revenues for the third quarter and September year-to-date 2022 included $7.0 million and $18.5 million, respectively, from RocketPower. Our consolidated earnings from operations for the third quarter and September year-to-date 2022 included a loss of $0.6 million and earnings of $0.5 million, respectively, from RocketPower. Pro forma results of operations for this acquisition have not been presented as the acquisition does not have a material impact to the consolidated statements of earnings.
Softworld
On April 5, 2021, the Company acquired 100% of the shares of Softworld for a purchase price of $215.0 million. Softworld is a leading technology staffing and workforce solutions firm that serves clients across several end-markets, including financial services, life sciences, aerospace, defense, insurance, retail and IT consulting. This acquisition is intended to expand our capabilities, scale and solution set in our technology specialty. Under terms of the purchase agreement, the purchase price was adjusted for cash held by Softworld at the closing date and estimated working capital adjustments resulting in the Company paying cash of $220.4 million. Total consideration includes $2.6 million of additional consideration that is payable to the seller in the fourth quarter of 2022. In the third quarter of 2021, the Company received cash for a post-close working capital adjustment of $6.0 million. The total consideration is as follows (in millions of dollars):
| | | | | |
Cash consideration paid | $ | 220.4 | |
Additional consideration payable | 2.6 | |
Net working capital adjustment | (6.0) | |
Total consideration | $ | 217.0 | |
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
As of first quarter-end 2022, the purchase price allocation for this acquisition was final. Goodwill generated from the acquisition was primarily attributable to expanding market potential and the expected revenue synergies and was assigned to the SET operating segment (see Goodwill and Intangible Assets footnote). All of the goodwill is expected to be deductible for tax purposes.
Disposition
On July 20, 2022, the Company completed the sale of its Russia operations ("disposal group"), which was included in the Company's International operating segment. The Company received cash proceeds of $7.4 million, which is less than the cash disposed of in the sale, resulting in investing cash outflows of $6.0 million in the consolidated statements of cash flows. The disposal group was previously reported as held for sale as of our second quarter-end 2022 with an $18.5 million impairment charge associated with the transaction. The total loss on the sale is $18.7 million, resulting from an additional $0.2 million loss on the transaction in the third quarter of 2022, which is recorded in loss on disposal in the consolidated statements of earnings. The loss on disposal includes the liquidation of the cumulative translation adjustment of $1.4 million.
The disposal group does not meet the requirements to be classified as discontinued operations as the sale does not have a material effect on the Company's operations and does not represent a strategic shift in the Company's strategy. Our consolidated revenue for the third quarter of 2022 and 2021 included $5.0 million and $33.0 million, respectively, from the Russia operations and for September year-to-date 2022 and 2021 included $63.4 million and $99.3 million, respectively, from the Russia operations. Our consolidated earnings before taxes for the third quarter of 2022 and 2021 included $0.3 million and $1.1 million, respectively, from the Russia operations and for September year-to-date 2022 and 2021 included $1.4 million and $2.4 million, respectively, from the Russia operations.
The major classes of divested assets and liabilities were as follows (in millions of dollars):
| | | | | | | | |
Assets divested | | |
Cash and equivalents | | $ | 13.4 | |
Trade accounts receivable, net | | 22.8 | |
Prepaid expenses and other current assets | | 0.7 | |
Property and equipment, net | | 0.7 | |
| | |
Deferred taxes | | 0.4 | |
Other assets | | 0.3 | |
Assets divested | | 38.3 | |
| | |
Liabilities divested | | |
Accounts payable and accrued liabilities | | (0.6) | |
| | |
Accrued payroll and related taxes | | (7.3) | |
Income and other taxes | | (5.7) | |
Liabilities divested | | (13.6) | |
| | |
Disposal group, net | | $ | 24.7 | |
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
5. Investment in Persol Holdings
Prior to February 2022, the Company had a yen-denominated investment through the Company's subsidiary, Kelly Services Japan, Inc., in the common stock of Persol Holdings Co., Ltd. ("Persol Holdings"), the 100% owner of Persol Asia Pacific Pte. Ltd., the Company’s joint venture partner in PersolKelly Pte. Ltd. (the "JV"). In February 2022, the Company's board approved a series of transactions that ended the cross-shareholding agreement with Persol Holdings.
On February 14, 2022, the Company repurchased 1,576,169 Class A and 1,475 Class B common shares held by Persol Holdings for $27.2 million. The purchase price was based on the average closing price of the last five business days prior to the transaction. The shares were subsequently retired and returned to an authorized, unissued status. In accordance with the Company's policy, the amount paid to repurchase the shares in excess of par value of $25.6 million was recorded to earnings invested in the business in the consolidated balance sheet at the time of the share retirement.
On February 15, 2022, Kelly Services Japan, Inc. sold the investment in the common stock of Persol Holdings in an open-market transaction for proceeds of $196.9 million, net of transaction fees. As our investment was a noncontrolling interest in Persol Holdings, the investment was recorded at fair value based on the quoted market price of Persol Holdings stock on the Tokyo Stock Exchange through the date of the transaction (see Fair Value Measurements footnote). The $67.2 million loss in the first quarter of 2022 recorded in gain (loss) on investment in Persol Holdings in the consolidated statements of earnings included $52.4 million for losses related to pre-acquisition tax liabilities.changes in fair value up to the date of the transaction and $14.8 million for the discount from the market price on the date of the sale and transaction costs. The gain on the investment of $35.5 million and $71.8 million in the third quarter and September year-to-date 2021, respectively, was recorded in gain (loss) on investment in Persol Holdings in the consolidated statements of earnings.
Subsequent to the transaction discussed above, the Company commenced the dissolution process of its Kelly Services Japan, Inc. subsidiary, which was considered substantially liquidated as of first quarter-end 2022. As a result, the Company recognized a $20.4 million cumulative translation adjustment loss in the first quarter of 2022, which is recorded in loss on currency translation from liquidation of subsidiary in the consolidated statements of earnings. The Company also recognized a $5.5 million foreign exchange gain related to U.S.-denominated cash equivalents held by Kelly Services Japan, Inc. following the sale of the Persol Holdings shares and prior to a dividend payment to the Company in the first quarter of 2022. The foreign exchange gain is recorded in other income (expense), net in the consolidated statements of earnings. 3.
6. Investment in TS Kelly Asia PacificPersolKelly Pte. Ltd.
The
Prior to February 2022, the Company hashad a 49% ownership interest in TS Kellythe JV (see Investment in Persol Holdings footnote above), a staffing services business operating in ten geographies in the Asia-Pacific region. On February 14, 2022, the Company entered into an agreement to sell 95% of the Company's shares in the JV to Persol Asia Pacific. Pacific Pte. Ltd. On March 1, 2022, the Company received cash proceeds of $119.5 million. The carrying value of the shares sold was $117.6 million. In addition, the Company had $1.9 million of accumulated other comprehensive income representing the Company's share of the JV's other comprehensive income over time related to the shares sold that was realized upon the sale, offsetting the $1.9 million gain that resulted from the proceeds in excess of the carrying value.
The operating results of the Company’s interest in TS Kelly Asia Pacific arethe JV were accounted for on a one-quarter lag under the equity method and arewere reported in the equity in net earnings (loss) of affiliate in the consolidated statementstatements of earnings. These operating results includeearnings through the operating resultsdate of the Company’s interestsale. Such amounts were earnings of $0.8 million in TS Kelly Workforce Solutions, a previous joint ventureSeptember year-to-date 2022, representing the results through the date of the sale, and earnings of $1.7 million and $2.3 million in which the Company held a 49% interest, which was transferred to TS Kelly Asia Pacific during the first quarter of 2017. In the third quarter of 2016,and September year-to-date 2021, respectively.
After the sale, the Company recordedhas a pretax gain of $87.2 million on the investment in TS Kelly Asia Pacific 2.5% ownership interest in the consolidated statementJV and discontinued its use of earnings, which represented theequity method accounting. The remaining investment is accounted for as an equity investment without a readily determinable fair value of the Company’s retained(see Fair Value Measurements footnote). The equity investment, included in TS Kelly Asia Pacific in addition to the cash received less the carrying value of netother assets transferred to the joint venture.
The investment in equity affiliate on the Company’s consolidated balance sheet, totaled $116.4$6.4 million as of third quarter-end 20172022 and $114.8the investment in equity affiliate on the Company's consolidated balance sheet totaled $123.4 million as of year-end 2016. The net amount due to TS Kelly Asia Pacific, a related party, was $3.8 million as of the third quarter-end 2017 and $1.1 million as of year-end 2016. The amount included in trade accounts payable for staffing services provided by TS Kelly Asia Pacific as a supplier to CWO programs was $2.4 million as of third quarter-end 2017 and $3.1 million as of year-end 2016.2021.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
7. Fair Value Measurements
Trade accounts receivable, short-term borrowings, accounts payable, accrued liabilities and accrued payroll and related taxes approximate their fair values due to the short-term maturities of these assets and liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present assets and liabilities measured at fair value on a recurring basis onas of third quarter-end 2022 and year-end 2021 in the consolidated balance sheet as of third quarter-end 2017 and year-end 2016 by fair value hierarchy level, as described below.
Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 measurements include significant unobservable inputs.
| | | | Fair Value Measurements on a Recurring Basis As of Third Quarter-End 2017 | | | As of Third Quarter-End 2022 |
Description | | Total | | Level 1 | | Level 2 | | Level 3 | Description | | Total | | Level 1 | | Level 2 | | Level 3 |
| | (In millions of dollars) | | | (In millions of dollars) |
Money market funds | | $ | 4.2 |
| | $ | 4.2 |
| | $ | — |
| | $ | — |
| Money market funds | | $ | 33.8 | | | $ | 33.8 | | | $ | — | | | $ | — | |
Available-for-sale investment | | 212.4 |
| | 212.4 |
| | — |
| | — |
| |
Investment in Persol Holdings | | Investment in Persol Holdings | | — | | | — | | | — | | | — | |
| | | | | | | | | |
Total assets at fair value | | $ | 216.6 |
| | $ | 216.6 |
| | $ | — |
| | $ | — |
| Total assets at fair value | | $ | 33.8 | | | $ | 33.8 | | | $ | — | | | $ | — | |
| Brazil indemnification | | Brazil indemnification | | $ | (3.3) | | | $ | — | | | $ | — | | | $ | (3.3) | |
Greenwood/Asher earnout | | Greenwood/Asher earnout | | (3.2) | | | — | | | — | | | (3.2) | |
RocketPower earnout | | RocketPower earnout | | — | | | — | | | — | | | — | |
Total liabilities at fair value | | Total liabilities at fair value | | $ | (6.5) | | | $ | — | | | $ | — | | | $ | (6.5) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of Year-End 2021 |
Description | | Total | | Level 1 | | Level 2 | | Level 3 |
| | (In millions of dollars) |
Money market funds | | $ | 96.3 | | | $ | 96.3 | | | $ | — | | | $ | — | |
Investment in Persol Holdings | | 264.3 | | | 264.3 | | | — | | | — | |
Total assets at fair value | | $ | 360.6 | | | $ | 360.6 | | | $ | — | | | $ | — | |
| | | | | | | | |
Brazil indemnification | | $ | (2.4) | | | $ | — | | | $ | — | | | $ | (2.4) | |
Greenwood/Asher earnout | | (4.6) | | | — | | | — | | | (4.6) | |
| | | | | | | | |
Total liabilities at fair value | | $ | (7.0) | | | $ | — | | | $ | — | | | $ | (7.0) | |
|
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements on a Recurring Basis As of Year-End 2016 |
Description | | Total | | Level 1 | | Level 2 | | Level 3 |
| | (In millions of dollars) |
Money market funds | | $ | 4.0 |
| | $ | 4.0 |
| | $ | — |
| | $ | — |
|
Available-for-sale investment | | 141.2 |
| | 141.2 |
| | — |
| | — |
|
| | | | | | | | |
Total assets at fair value | | $ | 145.2 |
| | $ | 145.2 |
| | $ | — |
| | $ | — |
|
Money market funds represent investments in money market funds that hold government securities, of which $7.5 million as of third quarter-end 2022 and $6.5 million as of year-end 2021 are restricted as to use and are included in other assets in the consolidated balance sheet. The money market funds that are restricted as to use account for the majority of our restricted cash balance and represents cash balances that are required to be maintained to fund disability claims in California. The remaining money market funds as of third quarter-end 20172022 and 2016 represent investments in money market accounts, all of whichyear-end 2021 are restricted as to use and included in other assets oncash and equivalents in the consolidated balance sheet. The valuations of money market funds wereare based on quoted market prices of those accounts as of the respective period end.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Available-for-sale investment representsOn February 15, 2022, Kelly Services Japan, Inc. sold the Company’s investment in the common stock of Persol Holdings (formerly Temp Holdings), the Company’s joint venture partner in TS Kelly Asia Pacific, and is included in other assets on the consolidated balance sheet.an open-market transaction. The valuation isof the investment was based on the quoted market price of Persol Holdings stock on the Tokyo Stock Exchange as of year-end 2021, and the period end. The unrealized gain, net of tax, of $28.8 million for the third quarter of 2017 and $1.3 million for the third quarter of 2016 wasrelated changes in fair value were recorded in other comprehensive income, andthe consolidated statements of earnings (see Investment in accumulated other comprehensive income, a component of stockholders’ equity. The unrealized gain, net of tax, of $48.6 million for September year to date 2017 and $8.8 million for September year to date 2016 was recorded in other comprehensive income, as well as in accumulated other comprehensive income.Persol Holdings footnote). The cost of this yen-denominated investment, which fluctuatesfluctuated based on foreign exchange rates, was $18.4$18.0 million at year-end 2021.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
As of third quarter-end 2022, the Company had an indemnification liability totaling $3.3 million with $0.3 million in accounts payable and accrued liabilities and $3.0 million in other long-term liabilities, and $2.4 million at year-end 2021, in other long-term liabilities in the consolidated balance sheet related to the 2020 sale of the Brazil operations. As part of the sale, the Company agreed to indemnify the buyer for losses and costs incurred in connection with certain events or occurrences initiated within a six-year period after closing. The aggregate losses for which the Company will provide indemnification shall not exceed $8.8 million. The valuation of the indemnification liability was established using a discounted cash flow methodology based on probability weighted-average cash flows discounted by weighted-average cost of capital. The valuation, which represents the fair value, is considered a Level 3 liability, and is being measured on a recurring basis. During year-to-date 2022, the Company reassessed the value of the indemnification liability and determined that it was necessary to record an increase to the liability of $0.8 million. Additionally, during year-to-date 2022, the Company recognized an increase of $0.1 million to the indemnification liability related to exchange rate fluctuations in other income (expense), net in the consolidated statements of earnings.
The Company recorded an earnout liability relating to the 2020 acquisition of Greenwood/Asher, totaling $3.2 million at third quarter-end 2022 in accounts payable and accrued liabilities and $4.6 million at year-end 2021 with $2.3 million in accounts payable and accrued liabilities and $2.3 million in other long-term liabilities in the consolidated balance sheet. The initial valuation of the earnout liability was established using a Black Scholes model and represented the fair value and is considered a Level 3 liability. During the first quarter of 2022, the Company paid the year one portion of the earnout totaling $2.3 million. In the consolidated statements of cash flows, $0.7 million of the payment is reflected as a financing activity representing the initial fair value of the earnout, with the remainder flowing through operating activities. During year-to-date 2022, the Company reassessed the value of the earnout liability and determined it was necessary to record an increase to the liability of $0.9 million.
The Company recorded an initial earnout liability relating to the 2022 acquisition of RocketPower, totaling $0.6 million, with $0.5 million in accounts payable and accrued liabilities and $0.1 million in other long-term liabilities in the consolidated balance sheet (see Acquisitions and Disposition footnote). The initial valuation of the earnout liability was established using a Black Scholes model and represented the fair value and was considered a Level 3 liability. In the third quarter of 2022, we reassessed the value of the earnout liability and determined that the fair value was zero. The maximum total cash payments which may be due related to the earnout liability is $31.8 million.
Equity Investment Without Readily Determinable Fair Value
On March 1, 2022, the Company sold the majority of its investment in the JV (see Investment in PersolKelly Pte. Ltd. footnote), with the remaining 2.5% interest now being measured using the measurement alternative for equity investments without a readily determinable fair value. The measurement alternative represents cost, less impairment, plus or minus observable price changes. The sale of the shares of the JV represented an observable transaction requiring the Company to calculate the current fair value based on the purchase price of the shares, in which the resulting adjustment was not material. The investment totaled $6.4 million as of the third quarter-end 20172022, representing total cost plus observable price changes to date.
Prior to April 2021, the Company had a minority investment in Business Talent Group, LLC, which was included in other assets in the consolidated balance sheet. The investment was also measured using the measurement alternative for equity investments without a readily determinable fair value as described above. In the second quarter of 2021, BTG entered into a merger agreement which resulted in all of the Company's shares of BTG being automatically canceled upon approval of the merger and $17.7resulted in the receipt of $5.0 million at year-end 2016.in cash, which was equal to the carrying value and purchase price of the BTG investment.
Prior to March 2021, the Company had a minority investment in Kenzie Academy Inc., which was included in other assets in the consolidated balance sheet. The investment was also measured using the measurement alternative for equity investments without a readily determinable fair value as described above. On March 8, 2021, Kenzie entered into a transaction to sell its assets. As of the date of the sale, the investment had a carrying value of $1.4 million, representing total cost plus observable price changes to date. In the first quarter of 2021, the asset was written down as a result of the sale and the loss of $1.4 million was recorded in other income (expense), net in the consolidated statements of earnings.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Assets Measured at Fair Value on a Nonrecurring Basis
We
During the third quarter of 2022, customers within the high-tech industry vertical in which RocketPower specializes reduced or eliminated their full-time hiring, reducing demand for RocketPower’s services, and on-going economic uncertainty has more broadly impacted the growth in demand for RPO in the near-term. These changes in market conditions therefore caused a triggering event requiring an interim impairment test for both long-lived assets and goodwill.
As a result of the long-lived asset recoverability test for RocketPower’s intangible assets, we determined that undiscounted future cash flows exceeded the carrying amount of the asset group and were recoverable. As a result of the quantitative assessment for goodwill, we determined that the estimated fair value of the RocketPower reporting unit no longer exceeded the carrying value, and recorded a goodwill impairment charge of $30.7 million in the third quarter of 2022 (see Goodwill and Intangible Assets footnote).
8. Restructuring
In the first quarter of 2022, the Company took restructuring actions designed to increase efficiency. There were no restructuring charges incurred in the second or third quarter of 2022 or September year-to-date 2021.
Restructuring costs incurred in the first quarter of 2022 totaled $1.7 million and were recorded entirely in SG&A expenses in the consolidated statements of earnings, as detailed below (in millions of dollars):
| | | | | | | | | | | | | | | | | |
| Severance Costs | | Lease Termination Costs | | Total |
| | | | | |
Professional & Industrial | $ | 0.1 | | | $ | 0.2 | | | $ | 0.3 | |
| | | | | |
Education | 0.4 | | | — | | | 0.4 | |
Outsourcing & Consulting | 0.2 | | | — | | | 0.2 | |
| | | | | |
Corporate | 0.8 | | | — | | | 0.8 | |
Total | $ | 1.5 | | | $ | 0.2 | | | $ | 1.7 | |
A summary of the global restructuring balance sheet accrual, included in accrued payroll and related taxes and accounts payable and accrued liabilities in the consolidated balance sheet, is detailed below (in millions of dollars):
| | | | | |
Balance as of year-end 2021 | $ | 2.9 | |
Additions charged to Professional & Industrial | 0.3 | |
| |
Additions charged to Outsourcing & Consulting | 0.2 | |
Additions charged to Education | 0.4 | |
| |
Additions charged to Corporate | 0.8 | |
| |
Reductions for cash payments related to all restructuring activities | (2.0) | |
Balance as of first quarter-end 2022 | 2.6 | |
Reductions for cash payments related to all restructuring activities | (1.1) | |
Accrual adjustments | (0.2) | |
Balance as of second quarter-end 2022 | 1.3 | |
Reductions for cash payments related to all restructuring activities | (0.6) | |
| |
Balance as of third quarter-end 2022 | $ | 0.7 | |
| |
| |
The remaining balance of $0.7 million as of third quarter-end 2022 primarily represents severance costs, and the majority is expected to be paid by year-end 2022. No material adjustments are expected to be recorded.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
9. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill as of September year-to-date 2022 are included in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of Year-End 2021 | | Additions to Goodwill | | Impairment Adjustments | | As of Third Quarter-End 2022 |
| | (In millions of dollars) |
Science, Engineering & Technology | | $ | 111.3 | | | $ | — | | | $ | — | | | $ | 111.3 | |
Education | | 3.5 | | | 36.3 | | | — | | | 39.8 | |
Outsourcing & Consulting | | — | | | 41.0 | | | (30.7) | | | 10.3 | |
Total | | $ | 114.8 | | | $ | 77.3 | | | $ | (30.7) | | | $ | 161.4 | |
The goodwill resulting from the acquisition of RocketPower during the first quarter of 2022 was allocated to the OCG reportable segment. The goodwill resulting from the acquisition of PTS during the second quarter of 2022 was allocated to the Education reportable segment. (See Additions to Goodwill column in the table above and the Acquisitions and Disposition footnote for more details regarding each acquisition.)
The Company performs its annual goodwill impairment annuallytesting in the fourth quarter each year and regularly assesses whenever events or circumstances make it more likely than not that an impairment may have occurred. U.S. GAAP requiresWe also perform a qualitative review on a quarterly basis of our long-lived assets, comprised of net property and equipment and definite-lived intangible assets, whenever events or changes in circumstances indicate that goodwillthe carrying amount of an asset may not be testedrecoverable.
During the third quarter of 2022, customers within the high-tech industry vertical in which RocketPower specializes reduced or eliminated their full-time hiring, reducing demand for RocketPower’s services, and on-going economic uncertainty has more broadly impacted the growth in demand for RPO in the near-term. These changes in market conditions therefore caused a triggering event requiring an interim impairment attest for both long-lived assets and goodwill.
RocketPower has definite-lived intangible assets, consisting of trades names, customer relationships and non-compete agreements, which are amortized over their estimated useful lives. We performed a reporting unit level. We havelong-lived asset recoverability test for RocketPower and determined that our reporting units areundiscounted future cash flows exceeded the same as our operating and reportable segments.
The realignmentcarrying amount of the Company’s operations into three reportable segments effective with the first quarter of 2017 (see Goodwillasset group and Segment Disclosures footnotes) resulted in a change in our reporting units. As a result, we completed awere recoverable.
We performed an interim step one quantitative test for our new reporting units with goodwill. WeRocketPower’s goodwill and determined that the estimated fair value of eachthe reporting unit testedno longer exceeded its relatedthe carrying value. As aBased on the result of theseour interim goodwill impairment test as of third quarter 2022, we recorded a goodwill impairment charge of $30.7 million to write off a portion of RocketPower’s goodwill, with $10.3 million goodwill remaining in the OCG reportable segment as of third quarter-end 2022. (See Impairment Adjustments column in the table above.)
In performing the step one quantitative assessments,test and consistent with our prior practice, we determined it was more likely than not that the fair value of eachthe RocketPower reporting unit using the income approach. Under the income approach, estimated fair value is determined based on estimated future cash flows discounted by an estimated market participant weighted-average cost of capital, which reflects the overall level of inherent risk of the reporting units was in excessunit being measured. Estimated future cash flows are based on our internal projection model and reflects management’s outlook for the reporting unit. Assumptions and estimates about future cash flows and discount rates are complex and often subjective. Our analysis used the following significant assumptions: expected future revenue growth rates, profit margins and discount rate.
If current expectations of its carrying value.
5. Restructuring
Infuture revenue and profit margins are not met, or if market factors outside of our control change significantly, including discount rate, and other market factors, then the first quarterremaining goodwill of 2017, the Company took restructuring actions in Global Talent Solutions and Americas Staffing to optimize service delivery models and deliver cost savings in 2017.
Restructuring costs incurredRocketPower reporting unit may be impaired in the first quarter of 2017 totaled $2.4 million. Global Talent Solutions incurred $2.0 million and Americas Staffing incurred $0.4 million. All costs, which are primarily severance costs, were recorded entirelyfuture, resulting in selling, general and administrative (“SG&A”) expenses in the consolidated statement of earnings.A summary of the global restructuring balance sheet accrual, primarily included in accrued payroll and related taxes, is detailed below (in millions of dollars). |
| | | |
Balance as of year-end 2016 | $ | 0.5 |
|
Additions charged to Global Talent Solutions | 2.0 |
|
Additions charged to Americas Staffing | 0.4 |
|
Reductions for cash payments related to all restructuring activities | (0.7 | ) |
Balance as of first quarter-end 2017 | 2.2 |
|
Reductions for cash payments related to all restructuring activities | (1.3 | ) |
Balance as of second quarter-end 2017 | 0.9 |
|
Reductions for cash payments related to all restructuring activities | (0.4 | ) |
Balance as of third quarter-end 2017 | $ | 0.5 |
|
The remaining balance of $0.5 million as of third quarter-end 2017 represents primarily severance costs, and the majority is expected to be paid by the end of 2017. No material adjustments are expected to be recorded.
6. Goodwill
As discussed in the Segment Disclosures footnote, during the first quarter of 2017 the Company’s chief operating decision maker (“CODM”) changed the way he regularly reviews information for purposes of allocating resources and assessing performance, which resulted in a change in our operating segments and reporting units. We allocated goodwill to our new reporting units using a relative fair value approach. In addition, as discussed in the Fair Value Measurements footnote, we completed an assessment of any potentialadditional goodwill impairment for all reporting units with goodwill and determined that no impairment existed.
charges.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
See Acquisition footnote for a description of the additions to goodwill in the third quarter of 2017. The additions in the carrying amount of goodwill for the third quarter-end 2017 are included in the table below.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of Year-End 2016 | | | | | | As of Third Quarter-End 2017 |
| Goodwill, Gross | | Accumulated Impairment Losses | | Goodwill, Net | | Allocation of Goodwill | | Additions to Goodwill | | Goodwill |
| (In millions of dollars) |
| | | | | | | | | | | |
Americas Commercial | $ | 40.0 |
| | $ | (16.4 | ) | | $ | 23.6 |
| | $ | (23.6 | ) | | $ | — |
| | $ | — |
|
Americas PT | 37.9 |
| | — |
| | 37.9 |
| | (37.9 | ) | | — |
| | — |
|
EMEA Commercial | 50.4 |
| | (50.4 | ) | | — |
| | — |
| | — |
| | — |
|
EMEA PT | 22.0 |
| | (22.0 | ) | | — |
| | — |
| | — |
| | — |
|
APAC Commercial | 12.1 |
| | (12.1 | ) | | — |
| | — |
| | — |
| | — |
|
APAC PT | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
OCG | 26.9 |
| | — |
| | 26.9 |
| | (26.9 | ) | | — |
| | — |
|
| | | | | | | | | | | |
Americas Staffing | — |
| | — |
| | — |
| | 25.9 |
| | 18.7 |
| | 44.6 |
|
Global Talent Solutions | — |
| | — |
| | — |
| | 62.5 |
| | — |
| | 62.5 |
|
International Staffing | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | |
| $ | 189.3 |
| | $ | (100.9 | ) | | $ | 88.4 |
| | $ | — |
| | $ | 18.7 |
| | $ | 107.1 |
|
7.10. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the third quarter and September year to date 2017year-to-date 2022 and 20162021 are included in the tablestable below. Amounts in parentheses indicate debits. Reclassification
Third quarter 2022 reclassification adjustments out of accumulated other comprehensive income as shown(loss) related to equity method investment and other, included $1.4 million related to the liquidation of the cumulative translation adjustment for the sale of our Russia operations, which was recorded in loss on disposal in the tables below,consolidated statements of earnings. (See Acquisitions and Disposition footnote for more details.) The remaining third quarter 2022 reclassification adjustments out of accumulated other comprehensive income (loss) related to equity method investment and other, were recorded in the other expense,income (expense), net line item in the consolidated statement of earnings.
September year-to-date 2022 reclassification adjustments out of accumulated other comprehensive income (loss) related to the liquidation of the Japan subsidiary, were recorded in loss on currency translation from liquidation of subsidiary in the consolidated statements of earnings. September year-to-date 2022 reclassification adjustments out of accumulated other comprehensive income (loss) related to equity method investment and other, included $1.9 million related to the investment in PersolKelly Pte. Ltd., were recorded in other income (expense), net in the consolidated statements of earnings. (See Investment in PersolKelly Pte. Ltd. footnote for more details.)
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | September Year to Date |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In millions of dollars) |
Foreign currency translation adjustments: | | | | | | | |
Beginning balance | $ | (10.5) | | | $ | (12.4) | | | $ | (25.0) | | | $ | (0.8) | |
Other comprehensive income (loss) before reclassifications | (8.8) | | | (3.5) | | | (17.4) | | | (15.1) | |
Amounts reclassified from accumulated other comprehensive income (loss) - liquidation of Japan subsidiary | — | | | — | | | 20.4 | | | — | |
Amounts reclassified from accumulated other comprehensive income (loss) - equity method investment and other | 1.9 | | | — | | | 4.6 | | | — | |
Net current-period other comprehensive income (loss) | (6.9) | | | (3.5) | | | 7.6 | | | (15.1) | |
Ending balance | (17.4) | | | (15.9) | | | (17.4) | | | (15.9) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Pension liability adjustments: | | | | | | | |
Beginning balance | (2.7) | | | (3.4) | | | (2.7) | | | (3.4) | |
Other comprehensive income (loss) before reclassifications | — | | | — | | | — | | | — | |
Amounts reclassified from accumulated other comprehensive income (loss) | — | | | — | | | — | | | — | |
Net current-period other comprehensive income (loss) | — | | | — | | | — | | | — | |
Ending balance | (2.7) | | | (3.4) | | | (2.7) | | | (3.4) | |
| | | | | | | |
Total accumulated other comprehensive income (loss) | $ | (20.1) | | | $ | (19.3) | | | $ | (20.1) | | | $ | (19.3) | |
|
| | | | | | | | | | | | | | | |
| Third Quarter 2017 |
| Foreign Currency Translation Adjustments | | Unrealized Gains and Losses on Investment | | Pension Liability Adjustments | | Total |
| (In millions of dollars) |
Beginning balance | $ | (10.7 | ) | | $ | 103.6 |
| | $ | (1.8 | ) | | $ | 91.1 |
|
Other comprehensive income before reclassifications | 3.4 |
| | 28.8 |
| | — |
| | 32.2 |
|
Amounts reclassified from accumulated other comprehensive income | — |
| | — |
| | — |
| | — |
|
Net current-period other comprehensive income | 3.4 |
| | 28.8 |
| | — |
| | 32.2 |
|
| | | | | | | |
Ending balance | $ | (7.3 | ) | | $ | 132.4 |
| | $ | (1.8 | ) | | $ | 123.3 |
|
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| September Year to Date 2017 |
| Foreign Currency Translation Adjustments | | Unrealized Gains and Losses on Investment | | Pension Liability Adjustments | | Total |
| (In millions of dollars) |
Beginning balance | $ | (23.3 | ) | | $ | 83.8 |
| | $ | (1.8 | ) | | $ | 58.7 |
|
Other comprehensive income before reclassifications | 16.0 |
| | 48.6 |
| | — |
| | 64.6 |
|
Amounts reclassified from accumulated other comprehensive income | — |
| | — |
| | — |
| | — |
|
Net current-period other comprehensive income | 16.0 |
| | 48.6 |
| | — |
| | 64.6 |
|
| | | | | | | |
Ending balance | $ | (7.3 | ) | | $ | 132.4 |
| | $ | (1.8 | ) | | $ | 123.3 |
|
|
| | | | | | | | | | | | | | | |
| Third Quarter 2016 |
| Foreign Currency Translation Adjustments | | Unrealized Gains and Losses on Investment | | Pension Liability Adjustments | | Total |
| (In millions of dollars) |
Beginning balance | $ | (11.6 | ) | | $ | 92.4 |
| | $ | (1.6 | ) | | $ | 79.2 |
|
Other comprehensive income before reclassifications | 1.8 |
| | 1.3 |
| | — |
| | 3.1 |
|
Amounts reclassified from accumulated other comprehensive income | 0.2 |
| | — |
| | — |
| | 0.2 |
|
Net current-period other comprehensive income | 2.0 |
| | 1.3 |
| | — |
| | 3.3 |
|
| | | | | | | |
Ending balance | $ | (9.6 | ) | | $ | 93.7 |
| | $ | (1.6 | ) | | $ | 82.5 |
|
|
| | | | | | | | | | | | | | | |
| September Year to Date 2016 |
| Foreign Currency Translation Adjustments | | Unrealized Gains and Losses on Investment | | Pension Liability Adjustments | | Total |
| (In millions of dollars) |
Beginning balance | $ | (22.6 | ) | | $ | 84.9 |
| | $ | (1.6 | ) | | $ | 60.7 |
|
Other comprehensive income before reclassifications | 13.1 |
| | 8.8 |
| | — |
| | 21.9 |
|
Amounts reclassified from accumulated other comprehensive income | (0.1 | ) | | — |
| | — |
| | (0.1 | ) |
Net current-period other comprehensive income | 13.0 |
| | 8.8 |
| | — |
| | 21.8 |
|
| | | | | | | |
Ending balance | $ | (9.6 | ) | | $ | 93.7 |
| | $ | (1.6 | ) | | $ | 82.5 |
|
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
8.11. Earnings (Loss) Per Share
The reconciliation of basic and diluted earnings (loss) per share on common stock for the third quarter and September year to date 2017year-to-date 2022 and 20162021 follows (in millions of dollars except per share data): | | | | | | | | | | | | Third Quarter | | September Year to Date |
| Third Quarter | | September Year to Date | | 2022 | | 2021 | | 2022 | | 2021 |
| 2017 | | 2016 | | 2017 | | 2016 | |
Net earnings | $ | 23.0 |
| | $ | 80.9 |
| | $ | 53.9 |
| | $ | 101.0 |
| |
Net earnings (loss) | | Net earnings (loss) | $ | (16.2) | | | $ | 34.8 | | | $ | (61.6) | | | $ | 84.4 | |
Less: earnings allocated to participating securities | (0.3 | ) | | (1.8 | ) | | (0.9 | ) | | (2.3 | ) | Less: earnings allocated to participating securities | — | | | (0.4) | | | — | | | (0.8) | |
Net earnings available to common shareholders | $ | 22.7 |
| | $ | 79.1 |
| | $ | 53.0 |
| | $ | 98.7 |
| |
Net earnings (loss) available to common shareholders | | Net earnings (loss) available to common shareholders | $ | (16.2) | | | $ | 34.4 | | | $ | (61.6) | | | $ | 83.6 | |
| | | | | | | | | | | | | | | |
Average shares outstanding (millions): | | | | | | | | Average shares outstanding (millions): | |
Basic | 38.3 |
| | 38.1 |
| | 38.3 |
| | 38.0 |
| Basic | 37.9 | | | 39.4 | | | 38.2 | | | 39.4 | |
Dilutive share awards | 0.5 |
| | 0.3 |
| | 0.5 |
| | 0.3 |
| Dilutive share awards | — | | | 0.1 | | | — | | | 0.1 | |
Diluted | 38.8 |
| | 38.4 |
| | 38.8 |
| | 38.3 |
| Diluted | 37.9 | | | 39.5 | | | 38.2 | | | 39.5 | |
| | | | | | | | | | | | | | | |
Basic earnings per share | $ | 0.59 |
| | $ | 2.08 |
| | $ | 1.38 |
| | $ | 2.59 |
| |
Diluted earnings per share | $ | 0.58 |
| | $ | 2.06 |
| | $ | 1.37 |
| | $ | 2.58 |
| |
Basic earnings (loss) per share | | Basic earnings (loss) per share | $ | (0.43) | | | $ | 0.87 | | | $ | (1.62) | | | $ | 2.12 | |
Diluted earnings (loss) per share | | Diluted earnings (loss) per share | $ | (0.43) | | | $ | 0.87 | | | $ | (1.62) | | | $ | 2.12 | |
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. Incomeassets, the tax expenseeffects of stock compensation and, prior to February 2022, changes in the third quarterfair value of 2017 included a $5.1 million benefit from the release of a valuation allowance in Germany, while the third quarter of 2016 included a $23.5 million charge from the gain on theCompany's investment in TS Kelly Asia Pacific. For September year to date 2017, incomePersol Holdings, which were treated as discrete since they cannot be estimated.
While the ultimate outcome of these matters cannot be predicted with certainty, we believe that the resolution of any such proceedings will not have a material adverse effect on our financial condition, results of operations or cash flows.
The following tables present information about the reported revenue from services and gross profit of the Company by reportable segment, along with a reconciliation to consolidated earnings (loss) before taxes and equity in net earnings (loss) of affiliate, for the third quarter and September year to date 2017year-to-date 2022 and 2016.2021. Asset information by reportable segment is not presented, since the Company does not produce such information internally nor does it use such datainformation to manage its business.
|
| | | | | | | | | | | | | | | |
| Third Quarter | | September Year to Date |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In millions of dollars) |
Earnings from Operations: | | | | | | | |
| | | | | | | |
Americas Staffing gross profit | $ | 98.8 |
| | $ | 95.0 |
| | $ | 307.9 |
| | $ | 292.9 |
|
Americas Staffing SG&A expenses | (85.5 | ) | | (80.7 | ) | | (253.0 | ) | | (245.9 | ) |
Americas Staffing Earnings from Operations | 13.3 |
| | 14.3 |
| | 54.9 |
| | 47.0 |
|
| | | | | | | |
Global Talent Solutions gross profit | 93.0 |
| | 86.2 |
| | 272.2 |
| | 257.2 |
|
Global Talent Solutions SG&A expenses | (72.2 | ) | | (70.2 | ) | | (220.8 | ) | | (213.6 | ) |
Global Talent Solutions Earnings from Operations | 20.8 |
| | 16.0 |
| | 51.4 |
| | 43.6 |
|
| | | | | | | |
International Staffing gross profit | 39.5 |
| | 35.0 |
| | 112.7 |
| | 131.4 |
|
International Staffing SG&A expenses | (32.3 | ) | | (30.5 | ) | | (96.2 | ) | | (116.3 | ) |
International Staffing Earnings from Operations | 7.2 |
| | 4.5 |
| | 16.5 |
| | 15.1 |
|
| | | | | | | |
Less: Intersegment gross profit | (0.6 | ) | | (1.1 | ) | | (1.7 | ) | | (3.2 | ) |
Less: Intersegment SG&A expenses | 0.6 |
| | 1.1 |
| | 1.7 |
| | 3.2 |
|
Net Intersegment Activity | — |
| | — |
| | — |
| | — |
|
| | | | | | | |
Corporate | (23.1 | ) | | (16.0 | ) | | (67.9 | ) | | (62.3 | ) |
Consolidated Total | 18.2 |
| | 18.8 |
| | 54.9 |
| | 43.4 |
|
Gain on investment in TS Kelly Asia Pacific | — |
| | 87.2 |
| | — |
| | 87.2 |
|
Other Expense, Net | (0.4 | ) | | (0.4 | ) | | (2.5 | ) | | (1.3 | ) |
| | | | | | | |
Earnings before taxes and equity in net earnings (loss) of affiliate | $ | 17.8 |
| | $ | 105.6 |
| | $ | 52.4 |
| | $ | 129.3 |
|
14. New Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09 clarifying when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. It does not change the accounting for modifications. The ASU is effective prospectively for reporting periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. We do not expect the adoption of this ASU will have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04 simplifying the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to calculate the implied fair value of goodwill (Step 2 of the current two-step goodwill impairment test under ASC 350). Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (Step 1 of the current two-step goodwill impairment test). The ASU is effective prospectively for reporting periods beginning after December 15, 2019, with early adoption permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We are currently evaluating the impact of the new guidance on our goodwill impairment testing process and consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18 amending the presentation of restricted cash within the statement of cash flows. The new guidance requires that restricted cash be included within cash and cash equivalents on the statement of cash flows. The ASU is effective retrospectively for reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact of the new guidance and we do not expect it to have a material impact on our consolidated financial statements.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Depreciation and amortization expense included in SG&A expenses by segment above are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | September Year to Date |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In millions of dollars) |
Depreciation and amortization: | | | | | | | |
| | | | | | | |
Professional & Industrial | $ | 0.8 | | | $ | 1.3 | | | $ | 2.9 | | | $ | 4.1 | |
Science, Engineering & Technology | 3.2 | | | 3.2 | | | 9.5 | | | 7.5 | |
Education | 1.6 | | | 0.9 | | | 3.7 | | | 2.8 | |
Outsourcing & Consulting | 1.0 | | | 0.1 | | | 2.2 | | | 0.5 | |
International | 0.3 | | | 0.5 | | | 1.3 | | | 1.5 | |
19. New Accounting Pronouncements
Recently Adopted
In August 2016,October 2021, the FASB issued Accounting Standards Update ("ASU") 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and should be applied prospectively to business combinations that occur after the effective date. We early adopted this standard in the first quarter of 2022 and the adoption did not have a material impact to our consolidated financial statements.
In March 2020, the FASB issued ASU 2016-15 clarifying how entities should classify certain cash receipts and payments on the statement of cash flows. The new guidance addresses classification of cash flows related to the following transactions: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate2020-04, Reference Rate Reform (Topic 848) - Facilitation of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlementEffects of insurance claims; 5) proceeds from the settlementReference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of corporate-owned life insurance policies; 6) distributions received from equity method investees; and 7) beneficial interests in securitization transaction.reference rate reform. ASU 2016-15 also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. This ASU is2020-04 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and requires retrospective application. Earlythe Company in the first quarter of fiscal 2021. The adoption is permitted. We are currently evaluating theof this standard did not have a material impact of the new guidance onto our consolidated financial statements and related disclosures.statements.
In June 2016,January 2020, the FASB issued ASU 2016-13 amending how entities will measure credit losses2020-01 which clarifies the interaction of rules for most financial assetsequity securities, the equity method of accounting, and forward contracts and purchase options on certain other instruments that are not measured at fair value through net income.types of securities. The guidance requiresclarifies how to account for the applicationtransition into and out of a current expected credit loss model which is a new impairment model based on expected losses. Under this model, an entity recognizes an allowance for expected credit losses based on historical experience, current conditions and forecasted information rather than the current methodologyequity method of delaying recognition of credit losses until it is probable a loss has been incurred. Thisaccounting when considering observable transactions under the measurement alternative. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019 with early adoption permitted for annual reporting periods beginning after December 15, 2018. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures. This ASU applies to trade accounts receivable and may have an impact on our calculation of the allowance for uncollectible accounts receivable.
In March 2016, the FASB issued ASU 2016-09 amending several aspects of share-based payment accounting. This guidance requires all excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled, with prospective application required. The guidance also changes the classification of such tax benefits or tax deficiencies on the statement of cash flows from a financing activity to an operating activity, with retrospective or prospective application allowed. Additionally, the guidance requires the classification of employee taxes paid when an employer withholds shares for tax-withholding purposes as a financing activity on the statement of cash flows, with retrospective application required. This ASU is effective for annual periods, and2020, including interim reporting periods within those annual periods, beginning after December 15, 2016. Earlywith early adoption is permitted. We adoptedThe adoption of this guidance effective January 2, 2017, and the adoptionstandard did not have a material effect on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 amending the existing accounting standards for lease accounting and requiring lessees to recognize lease assets and lease liabilities for all leases with lease terms of more than 12 months, including those classified as operating leases. Both the asset and liability will initially be measured at the present value of the future minimum lease payments, with the asset being subject to adjustments such as initial direct costs. Consistent with current U.S. GAAP, the presentation of expenses and cash flows will depend primarily on the classification of the lease as either a finance or an operating lease. The new standard also requires additional quantitative and qualitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases in order to provide additional information about the nature of an organization’s leasing activities. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and requires modified retrospective application. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures. As our branch operations are primarily conducted in leased facilities, this ASU will likely have a material impact on our consolidated balance sheet, may have a material impact to our consolidated statement of earnings and will require us to disclose additional information about our leasing activities. We established a cross-functional implementation team to further assess the impact of the standard.financial statements.
In January 2016,December 2019, the FASB issued ASU 2016-01 amending the current guidance for how entities measure certain equity investments,2019-12 simplifying various aspects related to the accounting for financial liabilities underincome taxes. The guidance removes exceptions to the fair value option,general principles in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the presentation and disclosure requirements relating to financial instruments.recognition of deferred tax liabilities for outside basis differences. The new guidance requires entities to use fair value measurement for equity investments in unconsolidated entities, excluding equity method investments, and to recognize the changes in fair value in net income at the end of each reporting period. Under the new standard, for any financial liabilities in which the fair value option has been elected, the changes in fair value due to instrument-specific credit risk must be recognized separately in other comprehensive income. Presentation and disclosure requirements under the new guidance require public business entities to use the exit price when measuring the fair value of financial instruments measured at amortized cost. In addition, financial assets and liabilities must now be presented separately in the notes to the financial statements and grouped by measurement category and form of financial asset. This ASU is effective for annual reporting periods andbeginning after December 15, 2020, including interim reporting periods within those annual periods, beginning after
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
December 15, 2017. Earlywith early adoption is only permitted for the financial liability provision. We are currently evaluating the impactpermitted. The adoption of the new guidance on our consolidated financial statements and related disclosures. We expect to implement thethis standard with the modified retrospective method and the cumulative reclassification adjustment between other comprehensive income and retained earnings on the consolidated balance sheet is expected to be material. This standard will impact how we recognize changes in the fair value of our available-for-sale investment and coulddid not have a material impact onto our consolidated financial statements.
In May 2014, the FASB issued new revenue recognition guidance under ASU 2014-09 that will supersede the existing revenue recognition guidance under U.S. GAAP. The new standard focuses on creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard is for companies to recognize revenue when it transfers the promised goods or services to its customers at an amount that represents what the company expects to be entitled to in exchange for those goods or services. In July 2015, the FASB deferred the effective date by one year (ASU 2015-14). This ASU will now be effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017. Since the issuance of the original standard, the FASB has issued several other subsequent updates including the following: 1) clarification of the implementation guidance on principal versus agent considerations (ASU 2016-08); 2) further guidance on identifying performance obligations in a contract as well as clarifications on the licensing implementation guidance (ASU 2016-10); 3) rescission of several SEC Staff Announcements that are codified in Topic 605 (ASU 2016-11); 4) additional guidance and practical expedients in response to identified implementation issues (ASU 2016-12); and 5) technical corrections and improvements (ASU 2016-20). The new standard will be effective for us beginning January 1, 2018.
We established a cross-functional implementation team consisting of representatives from across our business segments and various departments. We utilized a bottom-up approach to analyze the impact of the standard on our various revenue streams by reviewing our current contracts with customers, accounting policies and business practices to identify potential differences that would result from applying the requirements of the new standard. In addition, we identified, and are in the process of implementing, appropriate changes to our business processes, systems and controls to support recognition and disclosure under the new standard.Not Yet Adopted
We have been closely monitoring FASB activity related to the new standard to conclude on specific interpretive issues. During 2016 and 2017, we have made significant progress toward completing our evaluation of the potential impact that adopting the new standard will have on our consolidated financial statements. Based on our preliminary analysis, revenue from our temporary staffing contracts and substantially all of our other contracts with customers will continue to be recognized over time as services are rendered. The primary impact of adopting ASU 2014-09 is anticipated to be the deferral of contract costs. Additionally, we anticipate expanded disclosures around the nature, amount, timing and uncertainty of revenue and cash flows arising from our contracts with customers. We will continue to evaluate the impact of this guidance on our consolidated financial statements, disclosures and internal controls. Our preliminary assessments are subject to change. We expect to implement the standard with the modified retrospective approach beginning January 1, 2018, which recognizes the cumulative effect of application recognized on that date.
Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated financial statements and related disclosures.
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
20. Subsequent Event
On November 9, 2022, the Company's board of directors approved a plan for the Company to repurchase shares of its Class A common stock with a market value not to exceed $50.0 million through transactions executed in the open market within one year.
Item 2. 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
Labor markets have been in the last decade - transformed by globalization, competitive consolidation andmidst of change due to automation, 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 orsolution. Companies in our industry are using novel sourcing approaches—including gig platforms, independent contractors and other talent supply chain management (“TSCM”) solutions. As clients’pools—to create customized workforce solutions strategies move upthat are flexible and responsive to the maturity model,labor market.
In addition, today’s companies are elevating their commitment to talent, with the TSCM concept seeks to manage all categoriesgrowing realization that meeting the changing needs and requirements of talent (temporary, project-based, outsourcedis essential to remain competitive. The ways in which people view, find and full-time) and thus represents significantconduct 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, potential.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 better way to work.
Strategic clients are increasingly looking for global, flexible and holistic talent solutions that encompass all worker categories, driving adoption of our TSCM approach covering temporary staffing, Contingent Workforce Outsourcing (“CWO”), Recruitment Process Outsourcing (“RPO”), Business Process Outsourcing (“BPO”), independent contractor management, strategic workforce planning 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 July 2016,2020, we expandedadopted a new operating model and realigned our joint venture with Persol Holdings (formerly Temp Holdings)business into five specialty business units, which are also our reportable segments.
•Professional & Industrial – delivers staffing, outcome-based and direct-hire services focused in office, professional, light industrial and contact center specialties in the U.S. and Canada, including our KellyConnect and our Business and Professional Services 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 form TS Kelly Asia Pacific (the “JV”higher education in the U.S., and includes Teachers On Call, Greenwood/Asher & Associates and Pediatric Therapeutic Services ("PTS"), a specialty firm providing in-school therapy services, acquired in May 2022
•Outsourcing & Consulting – delivers Master Service Provider ("MSP"), Recruitment Process Outsourcing ("RPO"), which includes our March 2022 acquisition of RocketPower, Payroll Process Outsourcing ("PPO") and movedTalent Advisory Services to customers on a global basis
•International – delivers staffing, RPO and direct-hire services in 14 countries in Europe, as well as services in Mexico delivered in accordance with recent changes in labor market regulations. Effective July 20, 2022, we completed a transaction to sell our APACbusiness in Russia to an in-country provider and no longer operate in Russia
In addition, we hold a minority interest in PersolKelly Pte. Ltd. ("PersolKelly"), which provides staffing operations intoand direct hire services to customers in the JV. In early 2017, we restructured components of our previous Americas Commercial, Americas PT 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 Americas and International operations, with commercial and specialized professional/technical staffing businesses in eachAsia-Pacific region. 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.
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, forand that rely on our customers,talent advisory and through our outsourcing activities.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 financial asset. Average days sales outstanding varies within and outside the U.S., but and was 5864 days on a global basis as of the 2017end of the third quarter end, 53of 2022 and 63 days as of the 2016 year end and 56 days as of the 2016 third quarter end.of 2021. 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
We entered 2022 having shifted from recovery from the COVID-19 pandemic to growth. Demand for our services remains strong, although continued economic uncertainty, including inflation and rising interest rates, has created more variability in demand across industry verticals and customer size. Our long-term strategic objectivepermanent placement fee growth points toward our customers’ investments in their future workforce, and 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 fromedge and increased shareholder value. We believe that an inorganic growth strategy will accelerate the best workforce solutions and talentachievement of these goals.
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, in February 2022, we completed transactions that have allowed us to buildstrategically re-deploy resources to accelerate our core strengthsgrowth in branch-delivered staffing in key markets;
Maintainhigh-margin, high-growth specialties. Specifically, we unwound our position as a market-leading provider of talent supply chain managementcross-ownership with Persol Holdings and reduced our ownership interest in our GTS segment; and
Lower our costs through deployment of efficient service delivery models.
Our 2017 third quarter results affirm that we are focused on accelerating our progress by continuing to deliver profits and positioning our operations to capitalize on market opportunities. We also completed our acquisition of Teachers On Call, which builds on our strength in the educational staffing market in the U.S.
Earnings from operations for the third quarter of 2017 totaled $18.2 million, compared to $18.8 million in the third quarter of 2016. The conversion rate for the third quarter was 7.9%, compared to 8.7% in the same period last year.
In the Americas Staffing segment, revenue grew 7% year over year, and earnings from operations were $13.3 million, compared to $14.3 million in the third quarter last year.
The GTS segment delivered 8% gross profit growth and 30% earnings from operations growth year over year.
In the International Staffing segment, year-over-year revenue improved 15%, or 10% in constant currency, as the segment delivered strong growth across Europe.
Kelly remains focused on executing a well-formed strategy with increased speed and precision, 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, and we expect to improve our 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 professional and technical specialty and outsourced solutions, creating a more balanced portfolio that yields benefits from an improved mix;
Locally delivered staffing to remain a core component of our strategy;
Kelly Educational Staffing, including Teachers On Call, to continue to be a market leader in the U.S.;
To exercise strict expense control, delivering structural improvements that ensure a return fromAPAC joint venture, PersolKelly. Monetizing our investments in delivery infrastructurePersol Holdings and asPersolKelly provided us with additional capital, which we have already begun to use to accelerate our specialty growth strategy. In March 2022, we completed the acquisition of RocketPower, a result;
Our conversion rate tobusiness that diversifies and strengthens Kelly’s RPO business by accessing the high-tech market. And in May 2022, we completed the acquisition of PTS, a specialty firm that expands our K-12 leadership position and provides in-school services for occupational, physical, speech and behavioral health therapies. Both acquisitions expand Kelly’s presence in high-growth, high margin specialties. As we move forward, we will continue to improve.look for opportunities to 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 free agents 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 20172022 financial data into U.S. dollars using the same foreign currency exchange rates used to translate financial data for 2016.2021. We believe that CC measurements are a useful measure, indicating the actual trends of our operations without distortion due to currency fluctuations. We use CC results when analyzing the performance of our segments and measuring our results against those of our competitors. Additionally, substantially all of our foreign subsidiaries derive revenues and incur cost of services and selling, general and administrative (“SG&A&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. Although secondary supplier revenues are recorded on a net basis (net of secondary supplier expense), secondary supplier revenue is included in the daily sales calculation in order to properly reflect the gross revenue amounts billed to the customer.
Staffing Fee-Based IncomeStaffing fee-based income,
Results of Operations
Total Company
(Dollars in millions)
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| Third Quarter | | September Year to Date |
| 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
Revenue from services | $ | 1,167.9 | | | | $ | 1,195.4 | | | | (2.3) | | % | | $ | 3,731.6 | | | | $ | 3,659.4 | | | | 2.0 | | % |
Gross profit | 240.6 | | | | 228.9 | | | | 5.1 | | | | 761.6 | | | | 673.2 | | | | 13.1 | | |
SG&A expenses excluding restructuring charges | 231.1 | | | | 220.0 | | | | 5.0 | | | | 707.3 | | | | 640.0 | | | | 10.3 | | |
Restructuring charges | — | | | | (0.1) | | | | NM | | | — | | | | (0.1) | | | | NM | |
Total SG&A expenses | 231.1 | | | | 219.9 | | | | 5.1 | | | | 707.3 | | | | 639.9 | | | | 10.5 | | |
Goodwill impairment charge | 30.7 | | | | — | | | | NM | | | 30.7 | | | — | | | | NM | |
Loss on disposal | 0.2 | | | | — | | | | NM | | | 18.7 | | | | — | | | | NM | |
Gain on sale of assets | — | | | | — | | | | NM | | | (5.3) | | | | — | | | | NM | |
Earnings (loss) from operations | (21.4) | | | | 9.0 | | | | NM | | | 10.2 | | | | 33.3 | | | | (69.4) | | |
Gain (loss) on investment in Persol Holdings | — | | | | 35.5 | | | | NM | | | (67.2) | | | | 71.8 | | | | NM | |
Loss on currency translation from liquidation of subsidiary | — | | | | — | | | | NM | | | (20.4) | | | | — | | | | NM | |
Other income (expense), net | 0.2 | | | | (0.3) | | | | 156.6 | | | | 1.9 | | | | (4.0) | | | | 148.0 | | |
Earnings (loss) before taxes and equity in net earnings (loss) of affiliate | (21.2) | | | | 44.2 | | | | NM | | | (75.5) | | | | 101.1 | | | | NM | |
Income tax expense (benefit) | (5.0) | | | | 11.1 | | | | (144.6) | | | | (13.1) | | | | 19.0 | | | | (169.1) | | |
Equity in net earnings (loss) of affiliate | — | | | | 1.7 | | | | NM | | | 0.8 | | | | 2.3 | | | | (66.8) | | |
Net earnings (loss) | $ | (16.2) | | | | $ | 34.8 | | | | NM | % | | $ | (61.6) | | | | $ | 84.4 | | | | NM | % |
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Gross profit rate | 20.6 | | % | | 19.2 | | % | | 1.4 | | pts. | | 20.4 | | % | | 18.4 | | % | | 2.0 | | pts. |
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Third Quarter Results
Revenue from services in the third quarter decreased 2.3% on a reported basis and increased 0.3% on a constant currency basis, and reflects revenue increases in Education, Science, Engineering & Technology, and Outsourcing & Consulting operating segments, partially offset by declines in Professional & Industrial and International segments. Our 2022 acquisitions of RocketPower, an RPO solutions provider, and PTS, a specialty firm that provides in-school therapy services, added approximately 130 basis points to the revenue growth rate, while the sale of our Russian operations in July 2022 resulted in a 250 basis points year-over-year decline in constant currency. Compared to the third quarter of 2021, revenue from staffing services decreased 5.0% and revenue from outcome-based services increased 6.1%. Permanent placement revenue, which is included in revenue from services, increased 0.7% from the prior year.
Gross profit increased 5.1% on a reported basis and 7.6% on a constant currency basis due to an increase in the following table, has a significant impact on gross profit rates. There arerate. The gross profit rate increased 140 basis points due primarily to favorable product mix, and lower employee-related costs, coupled with the impact of the acquisitions of RocketPower and PTS which generate higher margins, as well as higher permanent placement income. The gross profit rate increased in all operating segments. Permanent placement revenue, which is included in revenue from services and has very low direct costs of services, associated with staffing fee-based income. Therefore, increases or decreases in staffing fee-based income can havehas a disproportionate impact on gross profit rates.
Results of Operations
Total Company - Third Quarter
(Dollars in millions)
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| 2017 | | 2016 | | Change | | CC Change |
Revenue from services | $ | 1,328.8 |
| | $ | 1,247.8 |
| | 6.5 | % | | | 5.3 | % |
Gross profit | 230.7 |
| | 215.1 |
| | 7.3 |
| | | 6.2 |
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Total SG&A expenses | 212.5 |
| | 196.3 |
| | 8.3 |
| | | 7.3 |
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Earnings from operations | 18.2 |
| | 18.8 |
| | (2.9 | ) | | | |
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Staffing fee-based income (included in revenue from services) | 14.2 |
| | 13.2 |
| | 6.9 |
| | | 4.1 |
|
Gross profit rate | 17.4 | % | | 17.2 | % | | 0.2 |
| pts. | | |
Conversion rate | 7.9 |
| | 8.7 |
| | (0.8 | ) | | | |
Return on sales | 1.4 |
| | 1.5 |
| | (0.1 | ) | | | |
Total Company revenue from services for the third quarter of 2017 was up 6.5% (5.3% on a CC basis) in comparison to the prior year. During the third quarter of 2017, the U.S. dollar weakened against certain currencies, primarily the Euro and the Russian ruble, resulting in the CC impact of 120 basis points. The increase in revenue from last year was primarily due to strong growth in locally delivered staffing business in the Americas Staffing and International Staffing segments. Additionally, the acquisition of Teachers On Call (“TOC”) during the third quarter of 2017 added approximately 30 basis points to the total revenue growth rate.
The gross profit rate increased by 20 basis points, reflecting an increase from higher margin solutions in the GTS segment, partially offset by decreases from the impact of margin rate erosion in the Americas Staffing and International Staffing segments due to changes in business mix.
Total SG&A expenses increased 8.3%5.1% on a reported basis and 7.1% on a constant currency basis. SG&A expenses related to RocketPower and PTS, including intangible asset amortization expense and other operating expenses, accounted for approximately 230 basis points of the year-over-year increase. The increase in SG&A expenses also reflects higher salary and related costs, as well as increases in performance-based incentive compensation expenses.
The goodwill impairment charge relates to our RocketPower business, which delivers recruitment process outsourcing services primarily to customers in the high-tech industry and is included in the OCG segment. Changes in market conditions related to demand in hiring in the high-tech industry and slowing growth in RPO more broadly triggered an interim goodwill impairment test which resulted in an impairment charge of $30.7 million.
Loss on disposal relates to the completion of the sale of our Russia operations in July 2022. We have completed the sale of our business in Russia to a local firm within the country and are no longer operating in Russia.
Loss from operations for the third quarter of 2022 totaled $21.4 million, compared to earnings of $9.0 million in the third quarter of 2021. The decline is primarily related to the goodwill impairment charge.
Income tax benefit was $5.0 million for the third quarter of 2022 and income tax expense was $11.1 million for the third quarter of 2021. These amounts were impacted by changes in earnings from 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 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 and the tax effects of stock compensation, which are treated as discrete since they cannot be estimated.
The net loss for the period was $16.2 million, compared to net earnings of $34.8 million for the third quarter of 2021. The 2022 net loss includes the goodwill impairment charge, net of tax, and the 2021 period includes a gain on the sale of Persol Holdings common shares, net of tax.
September Year to Date Results
Revenue from services in the first nine months of 2022 increased 2.0% on a reported basis and 4.0% on a constant currency basis, and reflects revenue increases in Education, Science, Engineering & Technology, and Outsourcing & Consulting operating segments, reflect investmentspartially offset by declines in Professional & Industrial and International segments. Our acquisition of Softworld, a technology staffing and solutions firm in the second quarter of 2021 and our 2022 acquisitions of RocketPower, an RPO solutions provider, and PTS, a specialty firm, that provides in-school therapy services, added approximately 200 basis points to capitalizethe revenue growth rate. Compared to the first nine months of 2021, revenue from staffing services decreased 0.6% and revenue from outcome-based services increased 6.6%. Permanent placement revenue, which is included in revenue from services, increased 31.2% from the prior year.
Gross profit increased 13.1% on a reported basis and 15.1% on a constant currency basis on higher revenue volume, combined with an increase in the gross profit rate. The gross profit rate increased 200 basis points due primarily to favorable product mix, lower employee-related costs, higher permanent placement income and the impact of the acquisitions of Softworld, RocketPower and PTS which generate higher gross profit rates. The gross profit rate increased in all operating segments. Included in gross profit for the first nine months of 2022 is a one-time permanent placement fee from a large customer, as well as an adjustment to prior periods workers' compensation expenses, resulting in 20 basis points of favorable impact. Permanent placement revenue, which is included in revenue from services and has very low direct costs of services, has a disproportionate impact on gross profit rates.
Total SG&A expenses increased 10.5% on a reported basis and 12.2% on a constant currency basis. Approximately 320 basis points of the year-over-year increase is attributable to the first quarter SG&A expenses for Softworld and the second and third quarter SG&A expenses for RocketPower and PTS, including amortization of intangibles and other operating expenses. The increase in SG&A expenses also reflects increases in salary and related costs and increases in performance-based incentive compensation expenses.
The goodwill impairment charge relates to our RocketPower business which delivers recruitment process outsourcing services primarily to customers in the high-tech industry and is included in the OCG segment. Changes in market opportunities withinconditions related to demand in hiring in the locally delivered staffinghigh-tech industry and slowing growth in RPO more broadly triggered an interim goodwill impairment test which resulted in an impairment charge of $30.7 million.
Loss on disposal relates to our decision to sell our business in Russia in May 2022. As a result, our Russian operations were classified as a held for sale disposal group and an impairment loss of $18.5 million representing the excess carrying value over the fair value of the net assets, less costs to sell, was recognized in the second quarter of 2022 with an additional loss of $0.2
million recognized in the third quarter upon completion of the transaction. Gain on sale of assets relates to the disposition of under-utilized real property located in the United States.
Earnings from operations for the first nine months of 2022 totaled $10.2 million, compared to earnings of $33.3 million in the first nine months of 2021. The decline is due primarily to the goodwill impairment charge and the loss on disposal, partially offset by higher gross profit, net of increased SG&A expenses and gain on sale of assets. Included in total earnings from operations in the first nine months of 2022 is approximately $12.5 million related to Softworld, RocketPower and PTS earnings from operations, inclusive of amortization of intangibles, and $4.1 million in the first nine months of 2021 related to Softworld, inclusive of amortization of intangibles.
The loss on investment in Persol Holdings in the first nine months of 2022 represented the $52.4 million loss resulting from changes in the market price of our investment in the common stock of Persol Holdings up until the date of the transaction and the $14.8 million loss on sale, including transaction costs from the sale of the investment in an open-market transaction. The gain on the investment in Persol Holdings in the first nine months of 2021 resulted from changes in the quoted market price of the Persol Holdings common stock.
Loss on currency translation from liquidation of subsidiary represents the impact of the substantial liquidation of our Kelly Japan subsidiary following the sale of the company’s investment in Persol Holdings and the return of capital through a dividend payment to its U.S. parent.
The change in Other income (expense), net is primarily the result of $5.5 million of foreign exchange gains related to U.S.-denominated cash equivalents held by our Kelly Japan subsidiary following the sale of the Persol Holdings shares and prior to its dividend payment to the U.S. parent in the first quarter of 2022.
Income tax benefit was $13.1 million for the first nine months of 2022 and international markets, along withincome tax expense was $19.0 million for the first nine months of 2021. These amounts were impacted by changes in earnings from operations and from non-taxable returns on life insurance policies. The second quarter of 2021 also benefited $5.2 million from a change in United Kingdom tax rates.
Our tax expense is affected by recurring items, such as the amount of pretax income and its mix by jurisdiction, U.S. work opportunity credits and the change in cash surrender value of tax exempt investments in life insurance policies. It is also affected by discrete items that may occur in any given period but are not consistent from period to period, such as tax law changes, changes in judgment regarding the realizability of deferred tax assets, the tax effects of stock compensation and, prior to February 2022, changes in the fair value of the Company’s investment in Persol Holdings, which were treated as discrete since they cannot be estimated.
The net loss for the period was $61.6 million, compared to net earnings of $84.4 million for the first nine months of 2021. This change was due to the Persol Holdings investment, including the first quarter 2022 sale and related impacts, the goodwill impairment charge, the loss on disposal related to the sale of our Russian operations, partially offset by improved gross profit in the first nine months of 2022 and the gain on sale of under-utilized real property in the United States.
Operating Results By Segment
(Dollars in millions)
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| Third Quarter | | September Year to Date | | |
| 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change | | |
Revenue from Services: | | | | | | | | | | | | | | | |
Professional & Industrial | $ | 408.6 | | | $ | 452.6 | | | (9.7) | | % | | $ | 1,268.7 | | | $ | 1,386.7 | | | (8.5) | | % | | |
Science, Engineering & Technology | 321.3 | | | 306.2 | | | 5.0 | | | | 962.7 | | | 859.1 | | | 12.1 | | | | |
Education | 104.3 | | | 66.6 | | | 56.6 | | | | 433.2 | | | 284.1 | | | 52.5 | | | | |
Outsourcing & Consulting | 118.5 | | | 113.4 | | | 4.5 | | | | 352.0 | | | 320.0 | | | 10.0 | | | | |
International | 215.5 | | | 256.8 | | | (16.1) | | | | 715.9 | | | 810.1 | | | (11.6) | | | | |
Less: Intersegment revenue | (0.3) | | | (0.2) | | | 21.5 | | | | (0.9) | | | (0.6) | | | 58.1 | | | | |
Consolidated Total | $ | 1,167.9 | | | $ | 1,195.4 | | | (2.3) | | % | | $ | 3,731.6 | | | $ | 3,659.4 | | | 2.0 | | % | | |
Third Quarter Results
Professional & Industrial revenue from services decreased 9.7%. The decrease was due primarily to a 13.6% decline in revenue from staffing services resulting from lower hours volume, partially offset by higher incentive-based compensation. Thesebill rates. Included in the decline in hours was the impact of a shift of a large staffing customer to a direct hire model which resulted in lower staffing volume. Revenue from outcome-based services increased by 3.4%, as the decline in demand for our call center specialty was more than offset by an increase in demand for other outcome-based specialties.
Science, Engineering & Technology revenue from services increased 5.0%. The revenue growth was driven by increases werein our outcome-based product, bill rates and permanent placement income, partially offset by lower hours volume in our staffing specialties.
Education revenue from services increased 56.6%, reflecting an increased demand for our services as compared to a year ago, as well as the impact of the acquisition of PTS in May 2022. On an organic basis, revenue increased 44.5% reflecting new customer wins, increased demand from existing customers and the impact of higher fill rates.
Outsourcing & Consulting revenue from services increased 4.5% on a reported basis, which includes the revenue from the acquisition of RocketPower in March 2022. On an organic basis, revenue declined 1.7% in nominal currency and 0.3% in constant currency, as declines in PPO revenue partially offset revenue growth in higher margin MSP and RPO products.
International revenue from services decreased 16.1% on a reported basis and decreased 5.4% in constant currency. The decrease was primarily the result of the sale of our Russian operations in July 2022, partially offset by the effectfavorable impact of higher hours volume in Portugal, Switzerland and Germany.
September Year to Date Results
Professional & Industrial revenue from services decreased 8.5%. The decrease was due primarily to a 10.8% decline in staffing services resulting from lower hours volume, partially offset by higher bill rates. Included in the decline in hours was the impact of a shift of a large staffing customer to a direct hire model which resulted in lower staffing volume. Revenue from outcome-based services declined 3.3% due to lower demand for our call center specialty, partially offset by growth in other specialties.
Science, Engineering & Technology revenue from services increased 12.1% on a reported basis, which includes revenue from the acquisition of Softworld in the second quarter of 2021. Excluding the impact of the addition of Softworld revenue in the first quarter of 2022, the revenue growth was 7.7%, which was driven by increases in our outcome-based services as well as increases in bill rates and permanent placement income in our staffing business.
Education revenue from services increased 52.5%, reflecting an out-of-period adjustment relatingincreased demand for our services as compared to overstateda year ago, as well as the impact of the acquisition of PTS in May 2022. On an organic basis, revenue increased 47.1% reflecting new customer wins, increased demand from existing customers and the impact of higher fill rates.
Outsourcing & Consulting revenue from services increased 10.0% on a reported basis, which includes the revenue from the acquisition of RocketPower in March 2022. On an organic basis, revenue growth was 4.2% due primarily to strong demand for RPO services, coupled with revenue growth in MSP, partially offset by declines in PPO revenue.
International revenue from services decreased 11.6% on a reported basis and decreased 3.5% in constant currency. The decrease was primarily the result of revenue declines in Mexico due to the impact of legislation enacted in the third quarter of 2021, which placed restrictions on the staffing industry, combined with the impact of the sale of our Russian operations in July 2022. Revenue in Europe decreased 6.1% on a reported basis and increased 2.9% in constant currency with growth in most geographies.
Operating Results By Segment (continued)
(Dollars in millions)
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| Third Quarter | | September Year to Date |
| 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
Gross Profit: | | | | | | | | | | | | | |
Professional & Industrial | $ | 70.3 | | | $ | 76.6 | | | (8.3) | | % | | $ | 231.2 | | | $ | 227.7 | | | 1.5 | | % |
Science, Engineering & Technology | 76.3 | | | 68.1 | | | 11.9 | | | | 225.3 | | | 187.8 | | | 19.9 | | |
Education | 16.6 | | | 10.0 | | | 65.4 | | | | 69.2 | | | 44.0 | | | 57.3 | | |
Outsourcing & Consulting | 44.1 | | | 37.3 | | | 18.6 | | | | 127.6 | | | 103.4 | | | 23.5 | | |
International | 33.3 | | | 36.9 | | | (9.6) | | | | 108.3 | | | 110.3 | | | (1.8) | | |
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Consolidated Total | $ | 240.6 | | | $ | 228.9 | | | 5.1 | | % | | $ | 761.6 | | | $ | 673.2 | | | 13.1 | | % |
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Gross Profit Rate: | | | | | | | | | | | | | |
Professional & Industrial | 17.2 | | % | 16.9 | | % | 0.3 | | pts. | | 18.2 | | % | 16.4 | | % | 1.8 | | pts. |
Science, Engineering & Technology | 23.7 | | | 22.3 | | | 1.4 | | | | 23.4 | | | 21.9 | | | 1.5 | | |
Education | 15.9 | | | 15.1 | | | 0.8 | | | | 16.0 | | | 15.5 | | | 0.5 | | |
Outsourcing & Consulting | 37.2 | | | 32.8 | | | 4.4 | | | | 36.3 | | | 32.3 | | | 4.0 | | |
International | 15.5 | | | 14.4 | | | 1.1 | | | | 15.1 | | | 13.6 | | | 1.5 | | |
Consolidated Total | 20.6 | | % | 19.2 | | % | 1.4 | | pts. | | 20.4 | | % | 18.4 | | % | 2.0 | | pts. |
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Third Quarter Results
Gross profit for the Professional & Industrial segment decreased on lower revenue volume, partially offset by an increase in the gross profit rate. In comparison to the prior year, the gross profit rate increased 30 basis points. This increase reflects lower employee-related costs.
The Science, Engineering & Technology gross profit increased on higher revenue volume, combined with an increase in the gross profit rate. The gross profit rate increased 140 basis points due to improved specialty mix, partially offset by higher employee-related costs.
Gross profit for the Education segment increased on higher revenue volume, combined with an increase in the gross profit rate. The gross profit rate increased 80 basis points due primarily to the acquisition of PTS which generates higher margins, lower employee-related costs and higher permanent placement income at Greenwood/Asher.
The Outsourcing & Consulting gross profit increased on higher revenue volume, combined with an increase in the gross profit rate. The gross profit rate increased 440 basis points primarily due to a change in product mix within this segment. Growth in RPO, including the acquisition of RocketPower, and MSP with higher margins, was coupled with decreased revenues in our PPO product, which generates lower profit margins.
International gross profit decreased 9.6% on a reported basis and increased 2.0% in constant currency. The decrease on a reported basis resulted from lower revenue volume, partially offset by an improved gross profit rate. On a constant currency basis, the improved gross profit rate more than offset the lower revenue volume. The gross profit rate increased 110 basis points primarily due to improved customer mix and higher permanent placement income.
September Year to Date Results
Gross profit for the Professional & Industrial segment increased due to an increase in the gross profit rate, partially offset by lower revenue volume. In comparison to the prior year, the gross profit rate increased 180 basis points. This increase reflects higher permanent placement income, including conversion fees related to a large customer, lower employee-related costs and improved business mix.
Science, Engineering & Technology gross profit increased on higher revenue volume, combined with an increase in the gross profit rate. The gross profit rate increased 150 basis points due to improved specialty mix, including the acquisition of Softworld which generates higher gross profit margins, and increased permanent placement income, partially offset by higher employee-related costs.
Gross profit for the Education segment increased on higher revenue volume and an increase in the gross profit rate. The gross profit rate increased 50 basis points due primarily to the acquisition of PTS which generates higher margins, and higher permanent placement income at Greenwood/Asher.
Outsourcing & Consulting gross profit increased on higher revenue volume, combined with an increase in the gross profit rate. The gross profit rate increased 400 basis points primarily due to a change in product mix within this segment. Growth in RPO, including the acquisition of RocketPower, and MSP with higher margins, was coupled with decreased revenues in our PPO product, which generates lower profit margins.
International gross profit decreased 1.8% on a reported basis and improved 7.4% on a constant currency basis. On a reported basis, lower revenue volume was partially offset by an improved gross profit rate. On a constant currency basis, the improved gross profit rate more than offset the impact of lower revenue volume. In comparison to the prior year, the gross profit rate increased 150 basis points primarily due to improved customer mix and higher permanent placement income.
Operating Results By Segment (continued)
(Dollars in millions)
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| Third Quarter | | September Year to Date |
| 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
SG&A Expenses: | | | | | | | | | | | | | |
Professional & Industrial | $ | 65.3 | | | $ | 69.4 | | | (6.0) | | % | | $ | 204.1 | | | $ | 207.8 | | | (1.8) | | % |
Science, Engineering & Technology | 53.4 | | | 48.4 | | | 10.2 | | | | 161.4 | | | 131.0 | | | 23.2 | | |
Education | 21.4 | | | 17.0 | | | 25.6 | | | | 60.4 | | | 46.5 | | | 29.9 | | |
Outsourcing & Consulting | 37.7 | | | 30.7 | | | 23.4 | | | | 111.8 | | | 89.2 | | | 25.6 | | |
International | 31.4 | | | 34.5 | | | (9.1) | | | | 99.2 | | | 102.2 | | | (3.0) | | |
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Corporate expenses | 21.9 | | | 19.9 | | | 9.9 | | | | 70.4 | | | 63.2 | | | 11.3 | | |
Consolidated Total | $ | 231.1 | | | $ | 219.9 | | | 5.1 | | % | | $ | 707.3 | | | $ | 639.9 | | | 10.5 | | % |
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Third Quarter Results
Total SG&A expenses in Professional & Industrial decreased 6.0% from the prior year, primarily due to cost management in response to lower revenue volume compared to the prior year.
Total SG&A expenses in Science, Engineering & Technology increased 10.2% from the prior year, primarily due to higher performance-based incentive compensation expense accruals. and higher salary-related costs from higher headcount and salary increases.
Total SG&A expenses in Education increased 25.6% from the prior year, and includes the impact of the acquisition of PTS in May 2022. Excluding the impact of the PTS acquisition, SG&A expenses increased 15.5% from the prior year, due primarily to higher salary-related expenses as headcount has increased as revenues have grown, partially offset by the prior year impact of a charge to adjust the earnout liability due to the former owners of Greenwood/Asher & Associates.
Total SG&A expenses in Outsourcing & Consulting increased 23.4% from the prior year, and includes the impact of the acquisition of RocketPower in March 2022. Excluding the impact of the RocketPower acquisition, SG&A expenses increased 12.6% from the prior year, primarily due to higher salary-related expenses as a result of headcount related to higher MSP and RPO revenue and salary increases.
Total SG&A expenses in International decreased 9.1% on a reported basis and increased 1.5% on a constant currency basis. The constant currency increase was due to higher salary-related expenses driven by an increase in headcount, reflecting improving revenue in Europe, partially offset by the impact of the sale of our Russian operations in July 2022.
Corporate expenses increased 9.9% primarily due to higher performance-based incentive compensation expense.
September Year to Date Results
Total SG&A expenses in Professional & Industrial decreased 1.8% from the prior year, overprimarily due to lower expenses to support lower volumes in our staffing and outcome-based call center specialties, partially offset by higher performance-based incentive compensation expense.
Total SG&A expenses in Science, Engineering & Technology increased 23.2% from the prior year, reflecting a return to normalized levelsand includes the impact of performance-based compensationthe acquisition of Softworld in the second quarter of 2021. Excluding the impact of the addition of Softworld expenses along within the first quarter of 2022, SG&A expenses increased legal expenses.
Americas Staffing - Third Quarter
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| | | | | | | | | | | | | | | |
| 2017 | | 2016 | | Change | | CC Change |
Revenue from services | $ | 554.8 |
| | $ | 518.2 |
| | 7.1 | % | | | | 6.6 | % |
Gross profit | 98.8 |
| | 95.0 |
| | 4.1 |
| | | 3.7 |
|
Total SG&A expenses | 85.5 |
| | 80.7 |
| | 6.0 |
| | | 5.6 |
|
Earnings from operations | 13.3 |
| | 14.3 |
| | (6.7 | ) | | | |
| | | | | | | | |
Gross profit rate | 17.8 | % | | 18.3 | % | | (0.5 | ) | pts. | | |
Conversion rate | 13.5 |
| | 15.0 |
| | (1.5 | ) | | | |
Return on sales | 2.4 |
| | 2.8 |
| | (0.4 | ) | | | |
The change in Americas Staffing revenue15.4% from services reflect the increase in average bill rates. Hours volume was flat in comparison to the prior year. The increase in average bill rates wasorganic SG&A expenses are due primarily to higher performance-based incentive compensation expense and higher salary-related costs from increasing headcount.
Total SG&A expenses in Education increased 29.9% from the resultprior year, and includes the impact of wage increases, which are passed throughthe acquisition of PTS in May 2022. Excluding the impact of the PTS acquisition, SG&A expenses increased 23.4% from the prior year, due primarily to customers. Americas Staffing represented 42%higher salary-related expenses as headcount has increased as revenues have grown.
Total SG&A expenses in Outsourcing & Consulting increased 25.6% from the prior year, and includes the impact of total Company revenuethe acquisition of RocketPower in March 2022. Excluding the third quarterimpact of 2017the RocketPower acquisition, SG&A expenses increased 17.4% from the prior year, due primarily to higher salary-related expenses as headcount has increased as revenues have grown.
Total SG&A expenses in International decreased 3.0% on a reported basis and 2016.
Revenue increased 5.4% on a constant currency basis. The increase in our light industrial, educational staffing business, science, finance and office clerical products.
The decrease in the Americas Staffing gross profit rateconstant currency was primarily due to business mix, with higher growthsalary-related expenses driven by an increase in light industrial, which hasheadcount, reflecting improving revenue in Europe, partially offset by the impact of the sale of our Russian operations in July 2022.
Corporate expenses increased 11.3% primarily due to higher performance-based incentive compensation expense.
Operating Results By Segment (continued)
(Dollars in millions)
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| Third Quarter | | September Year to Date |
| 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
Earnings (Loss) from Operations: | | | | | | | | | | | | | |
Professional & Industrial | $ | 5.0 | | | $ | 7.2 | | | (30.7) | | % | | $ | 27.1 | | | $ | 19.9 | | | 36.1 | | % |
Science, Engineering & Technology | 22.9 | | | 19.7 | | | 16.2 | | | | 63.9 | | | 56.8 | | | 12.5 | | |
Education | (4.8) | | | (7.0) | | | 31.8 | | | | 8.8 | | | (2.5) | | | NM | |
Outsourcing & Consulting | (24.3) | | | 6.6 | | | NM | | | (14.9) | | | 14.2 | | | NM | |
International | 1.9 | | | 2.4 | | | (16.9) | | | | 9.1 | | | 8.1 | | | 13.4 | | |
Corporate | (21.9) | | | (19.9) | | | (9.9) | | | | (70.4) | | | (63.2) | | | (11.3) | | |
Loss on disposal | (0.2) | | | — | | | NM | | | (18.7) | | | — | | | NM | |
Gain on sale of assets | — | | | — | | | NM | | | 5.3 | | | — | | | NM | |
Consolidated Total | $ | (21.4) | | | $ | 9.0 | | | NM | % | | $ | 10.2 | | | $ | 33.3 | | | (69.4) | | % |
Third Quarter Results
Professional & Industrial reported earnings of $5.0 million for the quarter, a 30.7% decrease from a year ago. The decrease in earnings was primarily due to lower gross profit, rate than other products in this segment.
Total SG&A expenses increased compared to the prior year, due to additional sales and recruiting resources to capture growing demand and higher performance-based compensation.
GTS - Third Quarter
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| 2017 | | 2016 | | Change | | CC Change |
Revenue from services | $ | 503.0 |
| | $ | 495.0 |
| | 1.6 | % | | | 1.3 | % |
Gross profit | 93.0 |
| | 86.2 |
| | 7.9 |
| | | 7.6 |
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Total SG&A expenses | 72.2 |
| | 70.2 |
| | 2.8 |
| | | 2.5 |
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Earnings from operations | 20.8 |
| | 16.0 |
| | 30.3 |
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Gross profit rate | 18.5 | % | | 17.4 | % | | 1.1 |
| pts. | | |
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Conversion rate | 22.4 |
| | 18.5 |
| | 3.9 |
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Return on sales | 4.1 |
| | 3.2 |
| | 0.9 |
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GTS revenue represented 38% of total Company revenue in the third quarter of 2017 and 40% in the third quarter of 2016. Revenue from services was up 1.6% compared to last year. Revenue increases in KellyConnect, BPO and CWO practices were partially offset by declines in our centrally delivered staffing business and payroll business.lower SG&A expense.
Science, Engineering & Technology reported earnings of $22.9 million for the quarter, a 16.2% increase from a year ago. The increase in the GTS gross profit rateearnings was due to favorable practice and customer mix, as well as lower workers’ compensation costs.
Total SG&A expenses increased 2.8% from the prior year. The increase is primarily due to increases in performance-based incentive costs, coupled with headcount and salary costsrevenues in most of our specialties within the SET business unit that were partially offset by increases in certain expenses, including those related to additional programs. These increases areheadcount and increased performance-based incentive compensation.
Education reported a loss of $4.8 million for the quarter, compared to a loss of $7.0 million a year ago. The change was primarily due to the increase in revenue resulting from improved demand for our services as compared to a year ago, coupled with good operating leverage. 2022 results also include earnings of $0.7 million from PTS acquired in May 2022.
Outsourcing & Consulting reported a loss of $24.3 million for the quarter, compared to earnings of $6.6 million a year ago, due primarily to a $30.7 million charge related to the impairment of goodwill of RocketPower. Excluding the goodwill impairment charge, earnings decreased from a year ago as a result of increasing costs, partially offset by cost reductions resulting fromhigher revenue and gross profit.
International reported earnings of $1.9 million for the quarter, compared to earnings of $2.4 million a year ago. The decrease in earnings was primarily due to the sale of our services delivery optimization initiativeRussian operations in our talent fulfillment business which we undertook inJuly 2022.
September Year to Date Results
Professional & Industrial reported earnings of $27.1 million for the first quarternine months of 2017 in line with demand, and the effect of an out-of-period adjustment relating to overstated expense accruals.
International Staffing - Third Quarter
(Dollars in millions)
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| 2017 | | 2016 | | Change | | CC Change |
Revenue from services | $ | 275.6 |
| | $ | 239.3 |
| | 15.2 | % | | | 10.4 | % |
Gross profit | 39.5 |
| | 35.0 |
| | 12.7 |
| | | 7.7 |
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Total SG&A expenses | 32.3 |
| | 30.5 |
| | 6.1 |
| | | 1.9 |
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Earnings from operations | 7.2 |
| | 4.5 |
| | 57.0 |
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Gross profit rate | 14.3 | % | | 14.7 | % | | (0.4 | ) | pts. | | |
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Conversion rate | 18.0 |
| | 12.9 |
| | 5.1 |
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Return on sales | 2.6 |
| | 1.9 |
| | 0.7 |
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International Staffing revenue2022, a 36.1% increase from services increased 15.2%, of which 4.8% related to changes in foreign currency exchange rates.a year ago. The remainder of the increase was due to an 8%improved gross profit, including conversion fees related to a large customer and good cost management.
Science, Engineering & Technology reported earnings of $63.9 million for the first nine months of 2022, a 12.5% increase in hours volume from our European operations, combined with a 7% increase in average bill rates (a 3% increase on a CC basis).year ago. The increase in hours volumeearnings was due to Portugal and France. International Staffing represented 21% of total Company revenue in the third quarter of 2017 and 19% in the third quarter of 2016.
The International Staffing gross profit rate decreased primarily due to a decline in the temporary gross profit rate from change in customer mix.
Total SG&A expenses increased 6.1% on a reported basis primarily due to the impact of changesthe Softworld acquisition. Increases in foreign currency exchange ratesrevenues in most of our specialties within the SET business unit were partially offset by increases in certain expenses, including those related to additional headcount and ongoing investments in recruiters in our branch network.increased performance-based incentive compensation.
ResultsEducation reported earnings of Operations
Total Company - September Year to Date
(Dollars in millions)
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| 2017 | | 2016 | | Change | | CC Change |
Revenue from services | $ | 3,952.1 |
| | $ | 3,972.4 |
| | (0.5 | )% | | | (0.7 | )% |
Gross profit | 691.1 |
| | 678.3 |
| | 1.9 |
| | | 1.7 |
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SG&A expenses excluding restructuring charges | 633.8 |
| | 631.5 |
| | 0.4 |
| | | 0.3 |
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Restructuring charges | 2.4 |
| | 3.4 |
| | (31.6 | ) | | | (31.2 | ) |
Total SG&A expenses | 636.2 |
| | 634.9 |
| | 0.2 |
| | | 0.1 |
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Earnings from operations | 54.9 |
| | 43.4 |
| | 26.5 |
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Earnings from operations excluding restructuring charges | 57.3 |
| | 46.8 |
| | 22.2 |
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Staffing fee-based income (included in revenue from services) | 41.4 |
| | 46.3 |
| | (10.8 | ) | | | (11.7 | ) |
Gross profit rate | 17.5 | % | | 17.1 | % | | 0.4 |
| pts. | | |
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Conversion rate | 7.9 |
| | 6.4 |
| | 1.5 |
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Conversion rate excluding restructuring charges | 8.3 |
| | 6.9 |
| | 1.4 |
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Return on sales | 1.4 |
| | 1.1 |
| | 0.3 |
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Return on sales excluding restructuring charges | 1.4 |
| | 1.2 |
| | 0.2 |
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During the third quarter of 2016, we transferred our APAC staffing business in exchange for a 49% interest in the TS Kelly Asia Pacific joint venture. As a result, for the first six months of 2017, year-over-year revenue comparisons were negatively impacted. Total Company revenue from services$8.8 million for the first nine months of 20172022, compared to a loss of $2.5 million a year ago. The change was down 0.5% in comparison to the prior year. The decrease wasprimarily due to the effect of the transfer of the APAC staffing operations, as well as the changes noted in the following Americas Staffing and GTS segment discussions.
The gross profit rate increased by 40 basis points. As noted in the following discussions, an increase in the GTS gross profit rate was partially offset byrevenue resulting from improved demand for our services as compared to a decreaseyear ago, coupled with good operating leverage. 2022 results also include earnings of $1.6 million from PTS acquired in the International Staffing rate, while the Americas Staffing rate was flat year over year.May 2022.
Total SG&A expenses increased 0.2% on
Outsourcing & Consulting reported a reported basis. Year-over-year increases in SG&A expenses in Americas Staffing and GTS reflect higher incentive-based compensation in those segments, while the transferloss of the APAC staffing operations resulted in a decrease in International Staffing SG&A expenses. Corporate expenses increased due primarily to higher incentive-based compensation. Included in total SG&A expenses$14.9 million for the first nine months of 2017 are restructuring charges2022, compared to earnings of $2.4$14.2 million relatingfrom a year ago, due primarily to an initiativea $30.7 million charge related to optimize our GTS service delivery models. Included in total SG&A expensesthe impairment of goodwill of RocketPower.
International reported earnings of $9.1 million for the first nine months of 2016 are restructuring charges2022, compared to earnings of $3.4$8.1 million which relate to actions taken primarily in the Americas Staffing and International Staffing segments to increase operational efficiency and prepare the businesses for future growth.
Americas Staffing - September Year to Date
(Dollars in millions)
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| 2017 | | 2016 | | Change | | CC Change |
Revenue from services | $ | 1,703.5 |
| | $ | 1,614.7 |
| | 5.5 | % | | | 5.3 | % |
Gross profit | 307.9 |
| | 292.9 |
| | 5.1 |
| | | 5.0 |
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SG&A expenses excluding restructuring charges | 252.6 |
| | 244.1 |
| | 3.5 |
| | | 3.4 |
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Restructuring charges | 0.4 |
| | 1.8 |
| | (80.0 | ) | | | (79.8 | ) |
Total SG&A expenses | 253.0 |
| | 245.9 |
| | 2.9 |
| | | 2.8 |
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Earnings from operations | 54.9 |
| | 47.0 |
| | 16.8 |
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Earnings from operations excluding restructuring charges | 55.3 |
| | 48.8 |
| | 13.2 |
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Gross profit rate | 18.1 | % | | 18.1 | % | | — |
| pts. | | |
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Conversion rate | 17.8 |
| | 16.1 |
| | 1.7 |
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Conversion rate excluding restructuring charges | 18.0 |
| | 16.7 |
| | 1.3 |
| | | |
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Return on sales | 3.2 |
| | 2.9 |
| | 0.3 |
| | | |
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Return on sales excluding restructuring charges | 3.2 |
| | 3.0 |
| | 0.2 |
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The change in Americas Staffing revenue from services reflects a 6% increase in average bill rates, partially offset by a 1% decrease in hours volume.year ago. The increase in average bill rates was the result of wage increases and stronger revenue growth in our service lines with higher pay rates. Americas Staffing represented 43% of total Company revenue in the first nine months of 2017 and 41% in the first nine months of 2016.
The increase in revenueearnings was primarily due to an increasegross profit growth in our educational staffing business, light industrial and engineering products. These increases weremost geographies, partially offset by decreases in our office services volume.
The Americas Staffing gross profit rate was flat in comparison to the prior year. Decreases in the rate due to business mix were offset by lower employee-related costs, including workers’ compensation costs.
Total SG&A expenses increased 2.9% year over year, due to higher performance-based compensation costs and additional sales and recruiting resources to capture growing demand. Included in total SG&A expenses for the first nine months of 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 - September Year to Date
(Dollars in millions)
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| 2017 | | 2016 | | Change | | CC Change |
Revenue from services | $ | 1,495.8 |
| | $ | 1,486.5 |
| | 0.6 | % | | | 0.6 | % |
Gross profit | 272.2 |
| | 257.2 |
| | 5.8 |
| | | 5.9 |
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SG&A expenses excluding restructuring charges | 218.8 |
| | 213.2 |
| | 2.6 |
| | | 2.7 |
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Restructuring charges | 2.0 |
| | 0.4 |
| | 415.5 |
| | | 417.6 |
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Total SG&A expenses | 220.8 |
| | 213.6 |
| | 3.4 |
| | | 3.5 |
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Earnings from operations | 51.4 |
| | 43.6 |
| | 18.0 |
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Earnings from operations excluding restructuring charges | 53.4 |
| | 44.0 |
| | 21.5 |
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Gross profit rate | 18.2 | % | | 17.3 | % | | 0.9 |
| pts. | | |
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Conversion rate | 18.9 |
| | 16.9 |
| | 2.0 |
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Conversion rate excluding restructuring charges | 19.6 |
| | 17.1 |
| | 2.5 |
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Return on sales | 3.4 |
| | 2.9 |
| | 0.5 |
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Return on sales excluding restructuring charges | 3.6 |
| | 3.0 |
| | 0.6 |
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GTS revenue represented 38% of total Company revenue in the first nine months of 2017 and 37% in the first nine months of 2016. Revenue from services was nearly flat compared to last year. Revenue increases in KellyConnect, BPO and CWO practices were offset by declines in our centrally delivered staffing and payroll business.
The increase in the GTS gross profit rate was due to favorable product and customer mix, coupled with a decrease in workers’ compensation and other employee-related costs.
Total SG&A expenses increased 3.4% from the prior year. Included in total SG&A expenses for the first nine months of 2017 are restructuring charges of $2.0 million, representing severance relating to an initiative to optimize our service delivery models in this segment, in line with the evolution of demand. The remaining cost increase is due to headcount and salary costs related to additional and expanding programs, coupled with additional performance-based incentive costs.
International Staffing - September Year to Date
(Dollars in millions)
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| | | | | | | | | | | | | | |
| 2017 | | 2016 | | Change | | CC Change |
Revenue from services | $ | 766.0 |
| | $ | 885.6 |
| | (13.5 | )% | | | (14.0 | )% |
Gross profit | 112.7 |
| | 131.4 |
| | (14.2 | ) | | | (14.8 | ) |
SG&A expenses excluding restructuring charges | 96.2 |
| | 115.1 |
| | (16.4 | ) | | | (16.8 | ) |
Restructuring charges | — |
| | 1.2 |
| | (100.0 | ) | | | (100.0 | ) |
Total SG&A expenses | 96.2 |
| | 116.3 |
| | (17.2 | ) | | | (17.6 | ) |
Earnings from operations | 16.5 |
| | 15.1 |
| | 9.1 |
| | | |
Earnings from operations excluding restructuring charges | 16.5 |
| | 16.3 |
| | 1.6 |
| | | |
| | | | | | | | |
Gross profit rate | 14.7 | % | | 14.8 | % | | (0.1 | ) | pts. | | |
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Conversion rate | 14.6 |
| | 11.5 |
| | 3.1 |
| | | |
Conversion rate excluding restructuring charges | 14.6 |
| | 12.3 |
| | 2.3 |
| | | |
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Return on sales | 2.2 |
| | 1.7 |
| | 0.5 |
| | | |
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Return on sales excluding restructuring charges | 2.2 |
| | 1.8 |
| | 0.4 |
| | | |
|
International Staffing includes the Company’s APAC region staffing business prior to the transaction to form the TS Kelly Asia Pacific joint venture in the third quarter of 2016, resulting in a 23% decrease in International Staffing revenue from services. This decrease, partially offset by a 9% increase in hours volume and 1% increase in average bill rates from our European operations, accounted for the change in revenue from services. The increase in hours volume was due to Portugal, Russia and France, and the increase in average bill rates was due to country mix. International Staffing represented 19% of total Company revenue in the first nine months of 2017 and 22% in the first nine months of 2016.
The decline in the gross profit rate from the prior year is due to change in customer mix.
Total SG&A expenses decreased 17.2% on a reported basis, due primarily to the transferimpact of the APAC staffing business. Includedsale of our Russian operations in total SG&A expenses for the first nine months of 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.July 2022.
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 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 $22.2$130.7 million at the end of the third quarter of 20172022 and $29.6$119.5 million at year-end 2016.2021. As further described below, we used $111.7 million of cash for operating activities, generated $32.9$167.7 million of cash from operatinginvesting activities and used $51.3$37.4 million of cash for investing activities and generated $13.4 million of cash from financing activities.
Operating Activities
In the first nine months of 2017,2022, we generated $32.9used $111.7 million of net cash fromfor operating activities, as compared to generating $28.2$31.0 million in the first nine months of 2016.2021, primarily due to increased working capital requirements. As revenue levels continue to recover or surpass pre-COVID levels in certain segments, days sales outstanding increased. As of the end of the third quarter of 2022, global DSO has increased primarily as a result of an increase in the mix of MSP and other customers with extended terms and, to a lesser extent, the timing of customer payments. Accounts payable and accrued liabilities was $735.2 million and increased from year-end 2021 as a result of increased MSP supplier payables. This change was primarily driven by a decrease in compensation-related payments,increase partially offset bymitigated the impact of higher global DSO as discussed below.on net cash from operating activities. In addition, we paid $50.1 million of income taxes related to the sale of Persol Holdings common stock and $29.5 million related to deferred U.S. payroll taxes in 2022.
Trade accounts receivable totaled $1.3$1.5 billion at the end of the third quarter of 2017.2022. Global DSO were 58was 64 days at the end of the third quarter of 20172022, 60 days at year-end 2021 and 5663 days at the end of the third quarter of 2016. The increase of DSO by two days is due primarily to seasonality, including the impact of the seasonal increase in the educational staffing business in addition to customer mix.2021.
Our working capital position (total current assets less total current liabilities) was $445.7$587.1 million at the end of the third quarter of 2017,2022, an increase of $2.2$93.6 million from year-end 2016.2021. Excluding the increase in cash, working capital increased $83.9 million from year-end 2021. The current ratio (total current assets divided by total current liabilities) was 1.5 at the end of the third quarter of 20172022 and 1.6 at year-end 2016.2021.
Investing Activities
In the first nine months of 2017,2022, we used $51.3generated $167.7 million of cash forfrom investing activities, as compared to generating $10.6using $198.4 million in the first nine months of 2016.2021. Included in cash generated from investing activities in the first nine months of 2022 is $196.9 million of proceeds from the sale of the investment in Persol Holdings and $119.5 million of proceeds from the sale of almost all of the Company's equity investment in PersolKelly. This was partially offset by $58.3 million of cash used for the acquisition of RocketPower in March 2022, net of cash received, $84.8 million of cash used for the acquisition of PTS in May 2022, net of cash received, and $6.0 million of cash disposed from the sale of Russia in July 2022, net of proceeds. Included in cash used for investing activities in the first nine months of 20172021 is $37.2$213.0 million of cash used for the acquisition of Teachers On Call,Softworld in April 2021, net of the cash received. Included inreceived and including working capital adjustments.
Financing Activities
We used $37.4 million of cash from investingfor financing activities in the first nine months of 2016 is $18.8 million of net cash representing the cash received less the cash deconsolidated relating to the TS Kelly Asia Pacific joint venture transaction. The year-over-year increase in capital expenditures is due to higher spending for technology programs, IT infrastructure and headquarters building improvements in the first nine months of 2017 as compared to last year.
Financing Activities
In the first nine months of 2017, we generated $13.4 million of cash from financing activities,2022, as compared to using $57.2$5.7 million in the first nine months of 2016.2021. The change in cash used infor financing activities was primarily related to the buyback of the Company's common shares held by Persol Holdings for $27.2 million in the first nine months of 2022 and the year-over-year change in dividend payments. Dividends paid per common share were $0.20 in the first nine months of 2022 and $0.05 in first nine months of 2021.
Changes in net cash used for financing activities are also impacted by short-term borrowing activities. The change in short-term borrowings in the first nine months of 2022 was primarily due to borrowings on local lines of credit. The change in short-
term borrowings in the first nine months of 2021 was primarily due to payments on local lines of credit. Debt totaled $23.9$0.1 million at the end of the third quarter of 2017 and was zero2022, which represented local borrowings, compared to no debt at year-end 2016.2021. Debt-to-total capital (total debt reported onin 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 2.1%0.0% at the end of the third quarter of 20172022 and 0.0% at year-end 2016.2021.
The change in short-term borrowings in the first nine months of 2017 was primarily due to borrowings on our revolving credit facility. The net change in short-term borrowings in the first nine months of 2016 was primarily due to payments on our U.S. securitization facility.
We made dividend payments of $8.7 million in the first nine months of 2017 and $7.7 million in the first nine months of 2016.
New Accounting Pronouncements
See New Accounting Pronouncements footnote in the Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q for a description of new accounting pronouncements.
Critical Accounting Estimates
For a discussion of our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K.
Contractual Obligations and Commercial Commitments
There arewere no materialsignificant changes to our contractual obligations and commercial commitments from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our obligations and commitments to make future payments from those included in the Company’s Annual Report on2021 Form 10-K filed February 17, 2017.10-K. We have no material unrecorded commitments, losses, contingencies or guarantees associated with any related parties or unconsolidated entities.
Liquidity
We expect to meet our ongoing short-term and long-term cash requirements principally through cash generated from operations, available cash and equivalents, securitization of customer receivables and committed unused credit facilities. Additional funding sources could include 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. We have repaid $59.4 million, including $29.5 million in the first quarter of 2022 and the remaining deferrals of $57.6 million 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 2017end of the third quarter end,of 2022, these reviews have not resulted in any specific plans to repatriate a majority of our international cash balances. We expect much of our international cash will be needed to fund working capital growth in our local operations. 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.
As of the third quarter of 2022, we had $200.0 million of available capacity on our $200.0 million revolving credit facility and $97.0 million of available capacity on our $150.0 million securitization facility. The securitization facility carried no short-term borrowings and $53.0 million of standby letters of credit related to workers’ compensation. Together, the revolving credit and securitization facilities provide the Company with committed funding capacity that may be used for general corporate purposes subject to financial covenants and restrictions. While we believe these facilities will cover our working capital needs over the short term, if economic conditions or operating results change significantly from our current expectations, we may need to seek additional sources of funds. As of the end of the third quarter of 2022, we met the debt covenants related to our revolving credit facility and securitization facility.
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.
As of the end of the third quarter of 2017, we had $126.8 million of available capacity on our $150.0 million revolving credit facility and $149.3 million of available capacity on our $200.0 million securitization facility. The securitization facility carried no short-term borrowings and $50.7 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 increases, to pay the remaining deferred payroll tax balances noted above by January 3, 2023, and to fund future share repurchases.
In February 2022, we may needcompleted transactions to seek additional sourcesmonetize a substantial portion of funds. Asour assets in the Asia-Pacific region which will allow us to strategically redeploy resources to accelerate our growth. Specifically, we concluded our cross-shareholding
arrangement with Persol Holdings and reduced our ownership interest in PersolKelly, our APAC joint venture. We sold our investment in Persol Holdings common stock in an open-market transaction. We repurchased the 1.6 million Kelly Class A and 1,475 Kelly Class B common shares owned by Persol Holdings at a price based on the last five trading days prior to the transaction. We sold almost all of our ownership interest in PersolKelly to our joint venture partner. In the second quarter of 2022, the Company paid $50.1 million in taxes resulting from the sale of the end of the third quarter of 2017, we met the debt covenants related to our revolving credit facility and securitization facility.Persol Holdings shares.
We monitor the credit ratings of our major banking partners on a regular basis and have regular discussions with them. Based on our reviews and communications, we believe the risk of one or more of our banks not being able to honor commitments is insignificant. We also review the ratings and holdings of our money market funds and other investment vehicles regularly to ensure high credit quality and access to our invested cash.
Forward-Looking Statements
Certain statements contained in this report and in our investor conference call related to these results are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995.applicable securities laws and regulations. Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or variations or negatives thereof or by similar or comparable words or phrases. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future actions by us that may be provided by management, including oral statements or other written materials released to the public, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and assumptions about our Company and economic and market factors in the countries in which we do business, among other things. These statements are not guarantees of future performance, and we have no specific intention to update these statements.
Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The principal important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, 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 TS Kelly 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 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, risks associated with conducting business in foreign countries, including foreign currency fluctuations, risks associated with violations of anticorruption, trade protection and other laws and regulations, availability of qualified full-time employees, to lead complex talent supply chain sales and operations, 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 programs, our ability to maintain adequate financial and management processes and controls, impairment charges triggered by adverse industry developments or operational circumstances, unexpected changes in claim trends on workers’ compensation, unemployment compensation, disability and medical benefit plans, the impact of changes in laws and regulations (including federal, state and international tax laws), 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 the Company’s Annual Report on Form 10-K.
Item 3. 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 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 20172022 third quarter earnings.
Marketable equity investments, representing our investment in Persol Holdings, are stated at fair value and marked to market through stockholders’ equity, net 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. See the Fair Value Measurements footnote in the Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q 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-ownedCompany-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 4. Controls and Procedures.
Based on their evaluation as of the end of the period covered by this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s 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.
There wereOn March 7, 2022, the Company completed the acquisition of RocketPower and on May 2, 2022 our KSU subsidiary completed the acquisition of PTS (see Acquisitions and Disposition footnote). Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired company. Accordingly, we intend to exclude the acquired RocketPower and PTS businesses from our assessment and report on internal control over financial reporting for the year ending January 1, 2023. We are in the process of integrating RocketPower and PTS into our system of internal control over financial reporting.
Except as noted above, there was no changeschange in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. 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, the 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, alleging wage and hour violations, claims for indemnification or enforcing the restrictive covenantsliability, violations of privacy rights, anti-competition regulations, commercial and contractual disputes, and tax-related matters which could result in the Company’s employment agreements. There are matters that are currently stayed pending 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. The Authority announced its decision on December 18, 2020, levying a fine against the trade association with joint and several secondary liability placed on the 20 member companies. Certain member companies exercised their right to challenge the decision. Publication of the judgement by the court will impact the apportionment of secondary liability initially announced by the Competition Authority. However, 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 1A. Risk Factors.
There have been no material changes in the Company’sCompany's risk factors previously disclosed in Part I, Item 1A of the Company’sCompany's Annual Report filed on Form 10-K for the year ended January 1, 2017.
2, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Sales of Equity Securities Not Registered Under the Securities Exchange Act of 1933
None.
(c) Issuer Repurchases of Equity Securities
During the third quarter of 2017,2022, 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) |
July 3, 2017 through August 6, 2017 | | 111 |
| | $ | 23.24 |
| | — |
| | $ | — |
|
| | | | | | | | |
August 7, 2017 through September 3, 2017 | | 3,944 |
| | 21.46 |
| | — |
| | $ | — |
|
| | | | | | | | |
September 4, 2017 through October 1, 2017 | | 44,027 |
| | 25.06 |
| | — |
| | $ | — |
|
| | | | | | | | |
Total | | 48,082 |
| | $ | 24.76 |
| | — |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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) |
July 4, 2022 through August 7, 2022 | | 489 | | | $ | 19.82 | | | — | | | $ | — | |
| | | | | | | | |
August 8, 2022 through September 4, 2022 | | 67 | | | 19.01 | | | | | $ | — | |
| | | | | | | | |
September 5, 2022 through October 2, 2022 | | 61 | | | 14.60 | | | — | | | $ | — | |
| | | | | | | | |
Total | | 617 | | | $ | 19.22 | | | | | |
We may reacquire shares sold to cover taxesemployee tax withholdings due upon the vesting of restricted stock and performance shares held by employees. Accordingly, 48,082617 shares were reacquired in transactions during the quarter.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
See Index to Exhibits required by Item 601, Regulation S-K, set forth on page 3854 of this filing.
INDEX TO EXHIBITS
REQUIRED BY ITEM 601,
REGULATION S-K
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Exhibit No. | | Description |
| | First Amended and Restated Receivables Purchase Agreement Amendment No. 3, dated September 21, 2022. |
| | |
| | Code of Business Conduct and Ethics, revised August 2022. |
| | |
| | Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended. |
| | |
| | Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended. |
| | |
| | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | |
| KELLY SERVICES, INC. |
| |
Date: November 10, 2022 | |
| |
| /s/ Olivier G. Thirot |
| Olivier G. Thirot |
| |
| KELLY SERVICES, INC. |
| |
Date: November 8, 2017 | |
| |
| /s/ Olivier G. Thirot |
| Olivier G. Thirot |
| |
| SeniorExecutive Vice President and |
| Chief Financial Officer |
| (Principal Financial Officer) |
| | | | | |
Date: November 10, 2022 | |
| |
| /s/ Laura S. Lockhart |
| Laura S. Lockhart |
| |
Date: November 8, 2017 | |
| |
| /s/ Laura S. Lockhart |
| Laura S. Lockhart |
| |
| Vice President, Corporate Controller |
| and Chief Accounting Officer |
| (Principal Accounting Officer) |
INDEX TO EXHIBITS
REQUIRED BY ITEM 601,
REGULATION S-K
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Exhibit No. | | Description |
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101.INS | | XBRL Instance Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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