Kelly Services, Inc. — 2018 Q2 Form 10-Q Summary
Business context and reporting period
Kelly Services is a global workforce solutions provider offering temporary staffing, permanent placement, talent fulfillment, outsourcing, and advisory services. The filing covers the 13-week quarter and 26-week year-to-date period ended July 1, 2018, compared with the periods ended July 2, 2017. Reportable segments are Americas Staffing, Global Talent Solutions (GTS), and International Staffing.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Change |
|---|---|---|---|
| Revenue from services | $1,386.9 million | $1,333.6 million | +4.0%; +3.0% constant currency |
| Gross profit | $240.5 million | $228.8 million | +5.1% |
| Gross profit margin | 17.3% | 17.2% | +10 basis points |
| SG&A expense | $220.1 million | $208.5 million | +5.6% |
| Earnings from operations | $20.4 million | $20.3 million | Approximately flat |
| Net earnings (loss) | $(15.4) million | $18.7 million | Declined primarily due to Persol Holdings loss |
| Diluted EPS | $(0.40) | $0.47 | Declined $0.87 |
| Operating conversion rate | 8.5% | 8.9% | Down 0.4 points |
For the first six months, revenue increased 5.1% to $2,756.8 million, while gross profit increased 4.0% to $478.7 million. Operating earnings declined 11.7% to $32.4 million, and diluted EPS declined to $0.35 from $0.78. The year-to-date gross profit margin was 17.4%, compared with 17.6% in the prior-year period.
Second-quarter segment revenue and operating earnings were: Americas Staffing revenue of $604.0 million and operating earnings of $17.8 million; GTS revenue of $500.7 million and operating earnings of $17.7 million; and International Staffing revenue of $286.6 million and operating earnings of $6.4 million. Intersegment revenue was $(4.4) million.
Cash flow, liquidity, debt, and balance sheet
- Year-to-date operating cash flow was $33.2 million, compared with $44.4 million in 2017.
- Year-to-date investing cash flow was $(10.9) million, including $10.3 million of capital expenditures, primarily for technology, IT infrastructure, and headquarters improvements.
- Year-to-date financing cash flow was $(20.5) million, including $5.9 million of dividends and $8.4 million of net short-term debt repayments.
- Cash, cash equivalents, and restricted cash totaled $38.6 million at quarter-end, compared with $36.9 million at year-end 2017.
- Cash and equivalents were $33.9 million; trade receivables were $1,248.9 million, with global days sales outstanding of 55 days.
- Short-term borrowings were $1.7 million versus $10.2 million at year-end 2017. Debt-to-total capital was 0.1% versus 0.9% at year-end.
- The company had $150.0 million of available capacity under its $150.0 million revolving credit facility and $145.0 million available under its $200.0 million securitization facility. The securitization facility had $55.0 million of standby letters of credit outstanding.
- Management stated that the company met applicable debt covenants and expects to fund requirements through operating cash flow, available cash, receivables securitization, and credit facilities.
Material changes versus the prior comparable period
- Revenue growth was driven by Americas Staffing and International Staffing, while GTS revenue declined modestly.
- Americas Staffing revenue increased 4.9%, supported by the Teachers On Call acquisition and higher bill rates, but hours volume declined 2%. Segment operating earnings fell 12.8% as recruiting, sales, acquisition-related, and other personnel costs increased.
- GTS revenue declined 0.9%, but operating earnings increased 15.9% as improved product mix increased the gross profit margin to 18.5% from 17.5%.
- International Staffing revenue increased 11.6%, reflecting higher bill rates and a 5% increase in hours volume. Operating earnings increased 54.2%, although the gross profit margin declined to 13.9% from 14.3%.
- The company recorded a $52.5 million second-quarter and $28.8 million year-to-date loss on its investment in Persol Holdings. Beginning January 1, 2018, changes in the investment’s fair value are recognized in earnings rather than other comprehensive income.
- The Persol Holdings loss, net of tax, reduced second-quarter diluted EPS by approximately $0.94 and year-to-date diluted EPS by approximately $0.51.
- In 2017, the company recorded $2.4 million of restructuring charges in the first six months; there were no comparable restructuring charges in 2018.
- The company adopted ASC 606 using the modified retrospective method, recording a $3.4 million increase to opening earnings invested in the business. Management reported no material current-period effect compared with prior revenue accounting.
Outlook, management commentary, risks, and unusual items
Management expects to grow higher-margin professional and technical staffing and outsourced solutions, strengthen core staffing operations, expand specialty offerings including educational staffing, invest in technology and process automation, and improve the conversion rate. Management reported strong global demand for skilled workers but described the U.S. labor market as constrained, with greater difficulty attracting and retaining qualified candidates, longer recruiting times, and increased employee turnover.
The principal unusual item was the mark-to-market loss on Persol Holdings. The investment was valued at $203.2 million at quarter-end, compared with $228.1 million at year-end 2017, and is exposed to market and foreign-currency volatility.
Ordinary-course litigation and investigations include employment-related claims, wage-and-hour matters, privacy and competition matters, and a Hungarian Competition Authority proceeding. Management believes these matters will not have a material adverse effect, although outcomes cannot be predicted with certainty. The company reported no material changes to the risk factors in its 2017 Form 10-K.
Future risks include labor availability, customer demand and concentration, pricing and technology competition, acquisitions, foreign-currency movements, Persol-related market exposure, cybersecurity and privacy matters, employment claims, workers’ compensation trends, regulatory and tax changes, and compliance with debt covenants. The company expects adoption of the new lease standard to materially increase reported assets and liabilities, but does not expect a material earnings impact.
Investor verification checklist
- Verify whether operating earnings and conversion rates improve as technology, recruiting, and other investments mature.
- Monitor the fair value and earnings volatility of the Persol Holdings investment and the performance of the PersolKelly Asia Pacific affiliate.
- Assess whether constrained U.S. labor supply affects fill rates, wage costs, customer pricing, hours volume, and employee turnover.
- Review operating cash flow, receivables growth, days sales outstanding, and use of borrowing facilities as staffing revenue changes.
- Evaluate the sustainability of GTS growth, International Staffing profitability, and Americas Staffing margin recovery.
- Confirm the final purchase-price allocation for the Teachers On Call acquisition and any related goodwill changes.
- Track litigation, regulatory investigations, workers’ compensation claims, and potential effects of privacy, employment, and competition laws.