UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2023
OR
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-1088
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(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
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(Address of principal executive offices) (Zip Code)
(248 ) 362-4444
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(Registrant’s telephone number, including area code)
No Change
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(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbols | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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 large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
At May 1, 2023, 32,755,700 shares of Class A and 3,342,146 shares of Class B common stock of the Registrant were outstanding.
2
KELLY SERVICES, INC. AND SUBSIDIARIES
| Page Number | |||||
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In millions of dollars except per share data)
| 13 Weeks Ended | |||||||||||
| April 2, 2023 | April 3, 2022 | ||||||||||
| Revenue from services | $ | $ | |||||||||
| Cost of services | |||||||||||
| Gross profit | |||||||||||
| Selling, general and administrative expenses | |||||||||||
| Gain on sale of assets | ( | ||||||||||
| Earnings (loss) from operations | |||||||||||
| Loss on investment in Persol Holdings | ( | ||||||||||
| Loss on currency translation from liquidation of subsidiary | ( | ||||||||||
| Other income (expense), net | |||||||||||
| Earnings (loss) before taxes and equity in net earnings (loss) of affiliate | ( | ||||||||||
| Income tax expense (benefit) | ( | ||||||||||
| Net earnings (loss) before equity in net earnings (loss) of affiliate | ( | ||||||||||
| Equity in net earnings (loss) of affiliate | |||||||||||
| Net earnings (loss) | $ | $ | ( | ||||||||
| Basic earnings (loss) per share | $ | $ | ( | ||||||||
| Diluted earnings (loss) per share | $ | $ | ( | ||||||||
| Average shares outstanding (millions): | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
See accompanying unaudited Notes to Consolidated Financial Statements.
4
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In millions of dollars)
| 13 Weeks Ended | |||||||||||
| April 2, 2023 | April 3, 2022 | ||||||||||
| Net earnings (loss) | $ | $ | ( | ||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustments, net of tax expense of $0.0 and $0.1, respectively | ( | ||||||||||
| Less: Reclassification adjustments included in net earnings (loss) - liquidation of Japan subsidiary | |||||||||||
| Less: Reclassification adjustments included in net earnings (loss) - equity method investment and other | |||||||||||
| Foreign currency translation adjustments | |||||||||||
| Other comprehensive income (loss) | |||||||||||
| Comprehensive income (loss) | $ | $ | ( | ||||||||
See accompanying unaudited Notes to Consolidated Financial Statements.
5
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions)
| April 2, 2023 | January 1, 2023 | ||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and equivalents | $ | $ | |||||||||
| Trade accounts receivable, less allowances of $11.0 and $11.2, respectively | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Noncurrent Assets | |||||||||||
| Property and equipment: | |||||||||||
| Property and equipment | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Net property and equipment | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Deferred taxes | |||||||||||
| Goodwill, net | |||||||||||
| Other assets | |||||||||||
| Total noncurrent assets | |||||||||||
| Total Assets | $ | $ | |||||||||
See accompanying unaudited Notes to Consolidated Financial Statements.
6
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions)
| April 2, 2023 | January 1, 2023 | ||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current Liabilities | |||||||||||
| Short-term borrowings | $ | $ | |||||||||
| Accounts payable and accrued liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Accrued payroll and related taxes | |||||||||||
| Accrued workers’ compensation and other claims | |||||||||||
| Income and other taxes | |||||||||||
| Total current liabilities | |||||||||||
| Noncurrent Liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Accrued workers’ compensation and other claims | |||||||||||
| Accrued retirement benefits | |||||||||||
| Other long-term liabilities | |||||||||||
| Total noncurrent liabilities | |||||||||||
| Commitments and contingencies (see Contingencies footnote) | |||||||||||
| Stockholders’ Equity | |||||||||||
| Capital stock, $1.00 par value | |||||||||||
| Class A common stock, 100.0 shares authorized; 35.2 shares issued at 2023 and 35.1 shares issued at 2022 | |||||||||||
| Class B common stock, 10.0 shares authorized; 3.3 shares issued at 2023 and 3.4 shares issued at 2022 | |||||||||||
| Treasury stock, at cost | |||||||||||
| Class A common stock, 1.9 shares at 2023 and 1.0 shares at 2022 | ( | ( | |||||||||
| Class B common stock | ( | ( | |||||||||
| Paid-in capital | |||||||||||
| Earnings invested in the business | |||||||||||
| Accumulated other comprehensive income (loss) | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | |||||||||
See accompanying unaudited Notes to Consolidated Financial Statements.
7
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In millions of dollars)
| 13 Weeks Ended | |||||||||||
| April 2, 2023 | April 3, 2022 | ||||||||||
| Capital Stock | |||||||||||
| Class A common stock | |||||||||||
| Balance at beginning of period | $ | $ | |||||||||
| Conversions from Class B | |||||||||||
| Share retirement | ( | ||||||||||
| Balance at end of period | |||||||||||
| Class B common stock | |||||||||||
| Balance at beginning of period | |||||||||||
| Conversions to Class A | ( | ||||||||||
| Balance at end of period | |||||||||||
| Treasury Stock | |||||||||||
| Class A common stock | |||||||||||
| Balance at beginning of period | ( | ( | |||||||||
| Net issuance of stock awards and other | |||||||||||
| Purchase of treasury stock | ( | ||||||||||
| Balance at end of period | ( | ( | |||||||||
| Class B common stock | |||||||||||
| Balance at beginning of period | ( | ( | |||||||||
| Net issuance of stock awards | |||||||||||
| Balance at end of period | ( | ( | |||||||||
| Paid-in Capital | |||||||||||
| Balance at beginning of period | |||||||||||
| Net issuance of stock awards | ( | ( | |||||||||
| Balance at end of period | |||||||||||
| Earnings Invested in the Business | |||||||||||
| Balance at beginning of period | |||||||||||
| Net earnings (loss) | ( | ||||||||||
| Dividends | ( | ( | |||||||||
| Share retirement | ( | ||||||||||
| Balance at end of period | |||||||||||
| Accumulated Other Comprehensive Income (Loss) | |||||||||||
| Balance at beginning of period | ( | ( | |||||||||
| Other comprehensive income (loss), net of tax | |||||||||||
| Balance at end of period | ( | ( | |||||||||
| Stockholders’ Equity at end of period | $ | $ | |||||||||
See accompanying unaudited Notes to Consolidated Financial Statements.
8
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions of dollars)
| 13 Weeks Ended | |||||||||||
| April 2, 2023 | April 3, 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net earnings (loss) to net cash from operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Operating lease asset amortization | |||||||||||
| Provision for credit losses and sales allowances | |||||||||||
| Stock-based compensation | |||||||||||
| Gain on sale of equity securities | ( | ||||||||||
| Loss on investment in Persol Holdings | |||||||||||
| Loss on currency translation from liquidation of subsidiary | |||||||||||
| Gain on foreign currency remeasurement | ( | ||||||||||
| Gain on sale of assets | ( | ||||||||||
| Equity in net (earnings) loss of PersolKelly Pte. Ltd. | ( | ||||||||||
| Other, net | ( | ||||||||||
| Changes in operating assets and liabilities, net of acquisitions | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from sale of assets | |||||||||||
| Acquisition of companies, net of cash received | ( | ||||||||||
| Proceeds from sale of Persol Holdings investment | |||||||||||
| Proceeds from sale of equity method investment | |||||||||||
| Proceeds from equity securities | |||||||||||
| Other investing activities | ( | ||||||||||
| Net cash (used in) from investing activities | ( | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Net change in short-term borrowings | ( | ||||||||||
| Financing lease payments | ( | ( | |||||||||
| Dividend payments | ( | ( | |||||||||
| Payments of tax withholding for stock awards | ( | ( | |||||||||
| Buyback of common shares | ( | ( | |||||||||
| Contingent consideration payments | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rates on cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Net change in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
Cash, cash equivalents and restricted cash at end of period (1) | $ | $ | |||||||||
9
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
(In millions of dollars)
(1) The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported in our consolidated balance sheets:
| 13 Weeks Ended | |||||||||||
| April 2, 2023 | April 3, 2022 | ||||||||||
| Reconciliation of cash, cash equivalents and restricted cash: | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash included in prepaid expenses and other current assets | |||||||||||
| Noncurrent assets: | |||||||||||
| Restricted cash included in other assets | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
See accompanying unaudited Notes to Consolidated Financial Statements.
10
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
11
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
2. Revenue
Revenue Disaggregated by Service Type
Kelly has five operating segments: Professional & Industrial (“P&I”), Science, Engineering & Technology (“SET”), Education, Outsourcing & Consulting Group ("Outsourcing & Consulting," "OCG") and International. Other than OCG, each segment delivers talent through staffing services, permanent placement or outcome-based services. Our OCG segment delivers talent solutions including managed service provider ("MSP"), payroll process outsourcing ("PPO"), recruitment process outsourcing ("RPO"), and talent advisory services. International also delivers RPO talent solutions within its local markets.
The following table presents our segment revenues disaggregated by service type (in millions of dollars):
| First Quarter | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Professional & Industrial | ||||||||||||||
| Staffing services | $ | $ | ||||||||||||
| Permanent placement | ||||||||||||||
| Outcome-based services | ||||||||||||||
| Total Professional & Industrial | ||||||||||||||
| Science, Engineering & Technology | ||||||||||||||
| Staffing services | ||||||||||||||
| Permanent placement | ||||||||||||||
| Outcome-based services | ||||||||||||||
| Total Science, Engineering & Technology | ||||||||||||||
| Education | ||||||||||||||
| Staffing services | ||||||||||||||
| Permanent placement | ||||||||||||||
| Total Education | ||||||||||||||
| Outsourcing & Consulting | ||||||||||||||
| Talent solutions | ||||||||||||||
| Total Outsourcing & Consulting | ||||||||||||||
| International | ||||||||||||||
| Staffing services | ||||||||||||||
| Permanent placement | ||||||||||||||
| Talent solutions | ||||||||||||||
| Total International | ||||||||||||||
| Total Intersegment | ( | ( | ||||||||||||
| Total Revenue from Services | $ | $ | ||||||||||||
12
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Revenue Disaggregated by Geography
Our operations are subject to different economic and regulatory environments depending on geographic location. Our P&I and Education segments operate in the Americas region, our SET segment operates in the Americas and Europe regions, and OCG operates in the Americas, Europe and Asia-Pacific regions. Our International segment includes our staffing operations in Europe as well as Mexico, which is included in the Americas region.
The below table presents our revenues disaggregated by geography (in millions of dollars):
| First Quarter | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Americas | ||||||||||||||
| United States | $ | $ | ||||||||||||
| Canada | ||||||||||||||
| Puerto Rico | ||||||||||||||
| Mexico | ||||||||||||||
| Total Americas Region | ||||||||||||||
| Europe | ||||||||||||||
| Switzerland | ||||||||||||||
| France | ||||||||||||||
| Portugal | ||||||||||||||
| Italy | ||||||||||||||
| Russia | ||||||||||||||
| Other | ||||||||||||||
| Total Europe Region | ||||||||||||||
| Total Asia-Pacific Region | ||||||||||||||
| Total Kelly Services, Inc. | $ | $ | ||||||||||||
13
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
The below table presents our SET, OCG and International segment revenues disaggregated by geographic region (in millions of dollars):
| First Quarter | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Science, Engineering & Technology | ||||||||||||||
| Americas | $ | $ | ||||||||||||
| Europe | ||||||||||||||
| Total Science, Engineering & Technology | $ | $ | ||||||||||||
| Outsourcing & Consulting | ||||||||||||||
| Americas | $ | $ | ||||||||||||
| Europe | ||||||||||||||
| Asia-Pacific | ||||||||||||||
| Total Outsourcing & Consulting | $ | $ | ||||||||||||
| International | ||||||||||||||
| Americas | $ | $ | ||||||||||||
| Europe | ||||||||||||||
| Total International | $ | $ | ||||||||||||
Deferred Costs
Deferred fulfillment costs, which are included in prepaid expenses and other current assets in the consolidated balance sheet, were $1.9 million as of first quarter-end 2023 and $2.7 million as of year-end 2022. Amortization expense for the deferred costs in the first quarter of 2023 was $2.4 million and in the first quarter of 2022 was $1.9 million.
3. Credit Losses
| First Quarter | |||||||||||
| 2023 | 2022 | ||||||||||
| Allowance for credit losses: | |||||||||||
| Beginning balance | $ | $ | |||||||||
| Current period provision | |||||||||||
| Currency exchange effects | ( | ||||||||||
| Write-offs | ( | ( | |||||||||
| Ending balance | $ | $ | |||||||||
Write-offs are presented net of recoveries, which were not material for first quarter-end 2023 or 2022. No other allowances related to other receivables were material as of first quarter-end 2023 or year-end 2022.
14
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
4. Acquisitions and Disposition
Acquisitions
In the second quarter of 2022, Kelly Services USA, LLC ("KSU"), a wholly owned subsidiary of the Company, acquired Pediatric Therapeutic Services ("PTS"), as detailed below. In the first quarter of 2022, the Company acquired Rocket Power Holdings LLC and Rocket Power Ops LLC (collectively, "RocketPower"), as detailed below.
Pediatric Therapeutic Services
On May 2, 2022, KSU acquired 100 % of the membership interests of PTS for a purchase price of $82.1 million. PTS is a specialty firm that provides and manages various state and federally mandated in-school therapy services. This acquisition expands Education's K-12 solution offering in the education staffing market and serves as an entry point into the therapeutic services market. Under terms of the purchase agreement, the purchase price was adjusted for cash held by PTS at the closing date and estimated working capital adjustments resulting in the Company paying cash of $85.7 million. Total consideration included $1.1 million of additional consideration that is payable to the seller related to employee retention credits and is recorded in accounts payable and accrued liabilities in the consolidated balance sheet. In the third quarter of 2022, the Company paid $0.1 million of the employee retention credits and the remainder is expected to be paid by second quarter-end 2023. The total consideration was as follows (in millions of dollars):
| Cash consideration paid | $ | ||||
| Additional consideration payable | |||||
| Total consideration | $ | ||||
As of May 2023, the purchase price allocation for this acquisition is final. PTS's results of operations are included in the Education segment. Our consolidated revenues and earnings from operations for the first quarter of 2023 included $15.8 million and $2.7 million, respectively, from PTS. Goodwill generated from the acquisition was primarily attributable to expected synergies from combining operations and expanding market potential and was assigned to the Education operating segment. All of the goodwill is expected to be deductible for tax purposes.
RocketPower
On March 7, 2022, the Company acquired 100 % of the issued and outstanding membership interests of RocketPower for a purchase price of $59.3 million. RocketPower is a provider of RPO and other outsourced talent solutions to customers including U.S. technology companies. This acquisition expands OCG's RPO solution and delivery offering. Under terms of the purchase agreement, the purchase price was adjusted for cash held by RocketPower at the closing date and estimated working capital adjustments resulting in the Company paying cash of $61.8 million. Total consideration included $1.1 million of additional consideration that is payable to the seller in 2023 related to employee retention credits and contingent consideration with an initial estimated fair value of $0.6 million related to an earnout payment with a maximum potential cash payment of $31.8 million in the event certain financial metrics are met per the terms of the agreement. The initial fair value of the earnout was established using a Black Scholes model, see the Fair Value Measurements footnote for information regarding subsequent reassessments. The total consideration was as follows (in millions of dollars):
| Cash consideration paid | $ | ||||
| Additional consideration payable | |||||
| Contingent consideration | |||||
| Total consideration | $ | ||||
As of first quarter-end 2023, the purchase price allocation for this acquisition is final. RocketPower's results of operations are included in the OCG segment. Our consolidated revenues for the first quarter of 2023 included $2.6 million from RocketPower and our consolidated earnings from operations for the first quarter of 2023 included a loss of $2.6 million from RocketPower. Goodwill generated from the acquisition was primarily attributable to expected synergies from combining operations and expanding market potential and was assigned to the OCG operating segment. The amount of goodwill expected to be
15
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
deductible for tax purposes is approximately $27.5 million. In the third and fourth quarters of 2022, changes in market conditions triggered interim impairment tests for both long-lived assets and goodwill, resulting in the Company recording a goodwill impairment charge of $41.0 million.
Disposition
On July 20, 2022, the Company completed the sale of its Russia operations, which was included in the Company's International operating segment.
5. Investment in Persol Holdings
Prior to February 2022, the Company had a yen-denominated investment through the Company's subsidiary, Kelly Services Japan, Inc., in the common stock of Persol Holdings Co., Ltd. ("Persol Holdings"), the 100% owner of Persol Asia Pacific Pte. Ltd., the Company’s joint venture partner in PersolKelly Pte. Ltd. (the "JV"). In February 2022, the Company's board approved a series of transactions that ended the cross-shareholding agreement with Persol Holdings.
On February 14, 2022, the Company repurchased 1,576,169 Class A and 1,475 Class B common shares held by Persol Holdings for $27.2 million. The purchase price was based on the average closing price of the last five business days prior to the transaction. The shares were subsequently retired and returned to an authorized, unissued status. In accordance with the Company's policy, the amount paid to repurchase the shares in excess of par value of $25.6 million was recorded to earnings invested in the business in the consolidated balance sheet at the time of the share retirement.
On February 15, 2022, Kelly Services Japan, Inc. sold the investment in the common stock of Persol Holdings in an open-market transaction for proceeds of $196.9 million, net of transaction fees. As our investment was a noncontrolling interest in Persol Holdings, the investment was recorded at fair value based on the quoted market price of Persol Holdings stock on the Tokyo Stock Exchange through the date of the transaction. The $67.2 million loss in the first quarter of 2022 recorded in loss on investment in Persol Holdings in the consolidated statements of earnings included $52.4 million for losses related to changes in fair value up to the date of the transaction and $14.8 million for the discount from the market price on the date of the sale and transaction costs.
Subsequent to the transaction discussed above, the Company commenced the dissolution process of its Kelly Services Japan, Inc. subsidiary, which was considered substantially liquidated as of first quarter-end 2022. As a result, the Company recognized a $20.4 million cumulative translation adjustment loss in the first quarter of 2022, which was recorded in loss on currency translation from liquidation of subsidiary in the consolidated statements of earnings. The Company also recognized a $5.5 million foreign exchange gain related to U.S.-denominated cash equivalents held by Kelly Services Japan, Inc. following the sale of the Persol Holdings shares and prior to a dividend payment to the Company in the first quarter of 2022. The foreign exchange gain was recorded in other income (expense), net in the consolidated statements of earnings. The dissolution of the Kelly Services Japan, Inc. subsidiary was completed in the fourth quarter of 2022.
6. Investment in PersolKelly Pte. Ltd.
Prior to February 2022, the Company had a 49 % ownership interest in the JV (see Investment in Persol Holdings footnote above), a staffing services business operating in ten geographies in the Asia-Pacific region. On February 14, 2022, the Company entered into an agreement to sell 95 % of the Company's shares in the JV to Persol Asia Pacific Pte. Ltd. On March 1, 2022, the Company received cash proceeds of $119.5 million. The carrying value of the shares sold was $117.6 million. In addition, the Company had $1.9 million of accumulated other comprehensive income representing the Company's share of the JV's other comprehensive income over time related to the shares sold that was realized upon the sale, offsetting the $1.9 million gain that resulted from the proceeds in excess of the carrying value.
The operating results of the Company’s interest in the JV were accounted for on a one-quarter lag under the equity method and were reported in equity in net earnings (loss) of affiliate in the consolidated statements of earnings through the date of the sale. Such amounts were earnings of $0.8 million in the first quarter of 2022, representing the results through the date of the sale.
16
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 as of first quarter-end 2023 and year-end 2022 in the consolidated balance sheet by fair value hierarchy level, as described below.
Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 measurements include significant unobservable inputs.
| As of First Quarter-End 2023 | ||||||||||||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| (In millions of dollars) | ||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||||||||||||
| Brazil indemnification | $ | ( | $ | $ | $ | ( | ||||||||||||||||||||
| Total liabilities at fair value | $ | ( | $ | $ | $ | ( | ||||||||||||||||||||
| As of Year-End 2022 | ||||||||||||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| (In millions of dollars) | ||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||||||||||||
| Brazil indemnification | $ | ( | $ | $ | $ | ( | ||||||||||||||||||||
| Greenwood/Asher earnout | ( | ( | ||||||||||||||||||||||||
| Total liabilities at fair value | $ | ( | $ | $ | $ | ( | ||||||||||||||||||||
Money market funds represent investments in money market funds that hold government securities, of which $8.8 million as of first quarter-end 2023 and $8.6 million as of year-end 2022 are restricted as to use and are included in other assets in the consolidated balance sheet. The money market funds that are restricted as to use account for the majority of our restricted cash balance and represents cash balances that are required to be maintained to fund disability claims in California. The remaining money market funds as of first quarter-end 2023 and year-end 2022 are included in cash and equivalents in the consolidated balance sheet. The valuations of money market funds are based on quoted market prices of those accounts as of the respective period end.
As of first quarter-end 2023, the Company had an indemnification liability totaling $3.5 million with $0.3 million in accounts payable and accrued liabilities and $3.2 million in other long-term liabilities, and $3.4 million at year-end 2022, with $0.3 million in accounts payable and accrued liabilities and $3.1 million in other long-term liabilities in the consolidated balance sheet related to the 2020 sale of the Brazil operations. As part of the sale, the Company agreed to indemnify the buyer for losses and costs incurred in connection with certain events or occurrences initiated within a six-year period after closing. The aggregate losses for which the Company will provide indemnification shall not exceed $8.8 million. The valuation of the indemnification liability was established using a discounted cash flow methodology based on probability weighted-average cash
17
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
flows discounted by weighted-average cost of capital. The valuation, which represents the fair value, is considered a Level 3 liability, and is being measured on a recurring basis. During the first quarter of 2023 and 2022, the Company recognized an increase of $0.1 million and $0.5 million, respectively, to the indemnification liability related to exchange rate fluctuations in other income (expense), net in the consolidated statements of earnings.
The Company recorded an earnout liability relating to the 2020 acquisition of Greenwood/Asher, with a remaining liability of $3.3 million at year-end 2022 in accounts payable and accrued liabilities in the consolidated balance sheet. The initial valuation of the earnout liability was established using a Black Scholes model and represented the fair value and was considered a Level 3 liability. During the first quarter of 2023, the Company paid the remaining earnout liability totaling $3.3 million, representing the year two portion of the earnout. In the consolidated statements of cash flows, $1.4 million of the payment is reflected as a financing activity representing the initial fair value of the earnout, with the remainder flowing through operating activities. There is no remaining earnout liability as of first quarter-end 2023. During the first quarter of 2022, the Company paid the year one portion of the earnout totaling $2.3 million. In the consolidated statements of cash flows, $0.7 million of the payment is reflected as a financing activity representing the initial fair value of the earnout, with the remainder flowing through operating activities.
The Company recorded an initial earnout liability relating to the 2022 acquisition of RocketPower, totaling $0.6 million, with $0.5 million in accounts payable and accrued liabilities and $0.1 million in other long-term liabilities in the consolidated balance sheet as of first quarter-end 2022 (see Acquisitions and Disposition footnote). The initial valuation of the earnout liability was established using a Black Scholes model and represented the fair value and was considered a Level 3 liability. In the third quarter of 2022, we reassessed the value of the earnout liability and determined that the fair value was zero . There have been no changes to the value as a result of first quarter 2023 assessments and there is no related liability as of first quarter-end 2023. The maximum total cash payments which may be due related to the earnout liability is $12.9 million, which represents the second year earnout period. There is no longer a maximum cash payment or liability associated with the first year earnout as the corresponding period has concluded.
Equity Investment Without Readily Determinable Fair Value
On March 1, 2022, the Company sold the majority of its investment in the JV (see Investment in PersolKelly Pte. Ltd. footnote), with the remaining 2.5 % interest now being measured using the measurement alternative for equity investments without a readily determinable fair value. The measurement alternative represents cost, less impairment, plus or minus observable price changes. The sale of the shares of the JV represented an observable transaction requiring the Company to calculate the current fair value based on the purchase price of the shares, in which the resulting adjustment was not material. The investment totaled $6.4 million as of first quarter-end 2023, representing total cost plus observable price changes to date.
18
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
8. Restructuring
2023 Actions
In the first quarter of 2023, the Company undertook restructuring actions to further our cost management efforts in response to the current demand levels and reflect a repositioning of our P&I staffing business to better capitalize on opportunities in local markets. Restructuring costs incurred in the first quarter of 2023 totaled $5.7 million and were recorded entirely in selling, general and administrative ("SG&A") expenses in the consolidated statements of earnings, as detailed below (in millions of dollars):
| Severance Costs | Lease Termination and Other Costs | Total | |||||||||||||||
| Professional & Industrial | $ | $ | $ | ||||||||||||||
| Science, Engineering & Technology | |||||||||||||||||
| Education | |||||||||||||||||
| Outsourcing & Consulting | |||||||||||||||||
| International | |||||||||||||||||
| Corporate | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
2022 Actions
In the first quarter of 2022, the Company took restructuring actions designed to increase efficiency. Restructuring costs incurred in the first quarter of 2022 totaled $1.7 million and were recorded entirely in SG&A expenses in the consolidated statements of earnings, as detailed below (in millions of dollars):
| Severance Costs | Lease Termination Costs | Total | |||||||||||||||
| Professional & Industrial | $ | $ | $ | ||||||||||||||
| Education | |||||||||||||||||
| Outsourcing & Consulting | |||||||||||||||||
| Corporate | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
19
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Accrual Summary
A summary of the global restructuring balance sheet accrual, included in accrued payroll and related taxes and accounts payable and accrued liabilities in the consolidated balance sheet, is detailed below (in millions of dollars):
| Balance as of year-end 2022 | $ | ||||
| Additions charged to Professional & Industrial | |||||
| Additions charged to Science, Engineering & Technology | |||||
| Additions charged to Outsourcing & Consulting | |||||
| Additions charged to Education | |||||
| Additions charged to International | |||||
| Additions charged to Corporate | |||||
| Reductions for cash payments related to all restructuring activities | ( | ||||
| Balance as of first quarter-end 2023 | $ | ||||
The remaining balance of $5.0 million as of first quarter-end 2023 primarily represents severance costs, and the majority is expected to be paid by year-end 2023. No material adjustments are expected to be recorded.
9. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the first quarter 2023 and 2022 are included in the table below. Amounts in parentheses indicate debits.
| First Quarter | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| (In millions of dollars) | ||||||||||||||
| Foreign currency translation adjustments: | ||||||||||||||
| Beginning balance | $ | ( | $ | ( | ||||||||||
| Other comprehensive income (loss) before reclassifications | ( | |||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) - liquidation of Japan subsidiary | (1) | |||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) - equity method investment and other | (2) | |||||||||||||
| Net current-period other comprehensive income (loss) | ||||||||||||||
| Ending balance | ( | ( | ||||||||||||
| Pension liability adjustments: | ||||||||||||||
| Beginning balance | ( | ( | ||||||||||||
| Other comprehensive income (loss) before reclassifications | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ||||||||||||||
| Net current-period other comprehensive income (loss) | ||||||||||||||
| Ending balance | ( | ( | ||||||||||||
| Total accumulated other comprehensive income (loss) | $ | ( | $ | ( | ||||||||||
(1)Amount was recorded in the loss on currency translation from liquidation of subsidiary in the consolidated statements of earnings.
20
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
10. Earnings (Loss) Per Share
The reconciliation of basic and diluted earnings (loss) per share on common stock for the first quarter 2023 and 2022 follows (in millions of dollars except per share data):
| First Quarter | |||||||||||
| 2023 | 2022 | ||||||||||
| Net earnings (loss) | $ | $ | ( | ||||||||
| Less: earnings allocated to participating securities | ( | ||||||||||
| Net earnings (loss) available to common shareholders | $ | $ | ( | ||||||||
| Average shares outstanding (millions): | |||||||||||
| Basic | |||||||||||
| Dilutive share awards | |||||||||||
| Diluted | |||||||||||
| Basic earnings (loss) per share | $ | $ | ( | ||||||||
| Diluted earnings (loss) per share | $ | $ | ( | ||||||||
Dilutive share awards are related to deferred common stock related to the non-employee directors deferred compensation plan and performance shares for the first quarter of 2023 (see Stock-Based Compensation footnote for a description of performance shares). Due to our net loss in the first quarter of 2022, potentially dilutive shares primarily related to deferred common stock associated with the non-employee directors deferred compensation plan of 0.2 million shares had an anti-dilutive effect on diluted earnings per share and were excluded from the computation for the first quarter of 2022. Dividends paid per share for Class A and Class B common stock were $0.075 0.050
11. Stock-Based Compensation
For the first quarter of 2023, the Company recognized stock compensation expense of $3.1 million and a related tax benefit of $0.3 million. For the first quarter of 2022, the Company recognized stock compensation expense of $2.1 million and a related tax benefit of $0.3 million.
During the first quarter of 2023, the Company granted performance share awards associated with the Company’s Class A common stock to certain senior officers. The payment of performance share awards is contingent upon the achievement of specific revenue growth and earnings before interest, taxes, depreciation and amortization ("EBITDA") margin performance goals ("financial measure performance share awards") over a stated period of time. The maximum number of performance shares that may be earned is 200 % of the target shares originally granted. These awards have three one-year performance periods: 2023, 2024 and 2025, with the payout for each performance period based on separate financial measure goals that are set in February of each of the three performance periods. Earned shares during each performance period will cliff vest in February 2026 after approval of the financial results by the Compensation Committee, if not forfeited by the recipient. No dividends are paid on these performance shares.
On February 14, 2023, the Compensation Committee approved the actual performance achievement of one of the financial goals related to the 2021 retention-based grant. At the same meeting, the Compensation Committee approved a modification to accelerate the vesting for the goal earned, where half of these awards vested immediately upon approval of the results and the remaining half will vest in August 2023, if not forfeited by the recipient. We accounted for this change as a Type I
21
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
modification under ASC 718 as the expectation of vesting remained probable-to-probable post modification. The Company did not record any incremental stock compensation expense since the fair value of the modified awards immediately after the modification was not greater than the fair value of the original awards immediately before the modification. The Company will recognize the remaining stock compensation expense over the remaining portion of the modified service requisite period.
A summary of the status of all nonvested performance shares at target as of first quarter-end 2023 and changes during this period is presented as follows below (in thousands of shares except per share data).
| Financial Measure Performance Shares | |||||||||||
| Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Nonvested at year-end 2022 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | |||||||||||
| Nonvested at first quarter-end 2023 | $ | ||||||||||
Restricted Stock
| Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Nonvested at year-end 2022 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Nonvested at first quarter-end 2023 | $ | ||||||||||