Kelly Services, Inc. — Fiscal 2017 Form 10-K Summary
Business context and reporting period
Kelly Services is a global workforce-solutions provider offering temporary and direct-hire staffing, professional and technical staffing, education staffing, outsourcing, consulting, recruitment, talent advisory and related services. The company operates through Americas Staffing, Global Talent Solutions (GTS) and International Staffing. Fiscal 2017 ended December 31, 2017 and contained 52 weeks; fiscal 2016 also contained 52 weeks, while fiscal 2015 contained 53 weeks.
Kelly assigned nearly 500,000 temporary employees during 2017 and served customers across the Americas, EMEA and APAC. APAC staffing operations were moved into the PersolKelly Asia Pacific joint venture in 2016, with Kelly retaining a 49% interest.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue from services | $5,374.4 million | $5,276.8 million | +1.9% |
| Gross profit | $954.1 million | $906.3 million | +5.3% |
| Gross profit rate | 17.8% | 17.2% | +60 bps |
| SG&A expenses | $870.8 million | $843.1 million | +3.3% |
| Earnings from operations | $83.3 million | $63.2 million | +31.7% |
| Net earnings | $71.6 million | $120.8 million | -40.7% |
| Diluted earnings per share | $1.81 | $3.08 | Declined |
| Operating cash flow | $71.2 million | $39.6 million | +79.8% |
| Capital expenditures | $24.6 million | $12.7 million | Higher technology investment |
Return on sales increased to 1.5% from 1.2%, and conversion rate increased to 8.7% from 7.0%. Excluding restructuring charges, earnings from operations were $85.7 million in 2017 versus $66.6 million in 2016.
- Americas Staffing: Revenue of $2,345.9 million, up 7.0%; earnings from operations of $82.7 million, up 20.0%.
- GTS: Revenue of $1,998.9 million, up 1.1%; earnings from operations of $77.0 million, up 32.4%.
- International Staffing: Revenue of $1,048.2 million, down 7.0%; earnings from operations of $22.1 million, up 13.3%. The revenue decline primarily reflects the 2016 transfer of APAC staffing operations to the joint venture.
Liquidity, cash flow, debt and balance sheet
- Cash and equivalents were $32.5 million at year-end 2017 versus $29.6 million at year-end 2016.
- Working capital was $458.1 million, compared with $443.5 million; the current ratio declined to 1.5 from 1.6.
- Trade accounts receivable increased to $1,286.7 million from $1,138.3 million. Global days sales outstanding increased to 55 days from 53 days, primarily due to customer mix.
- Total debt was $10.2 million at year-end 2017 versus zero in 2016. Debt-to-total capital was 0.9%.
- The company had $140.5 million of unused capacity on its $150.0 million revolving credit facility and $145.0 million of unused capacity on its $200.0 million securitization facility. The facilities include financial covenants, cross-default provisions and restrictions on dividends and share repurchases; Kelly reported compliance with the covenants.
- Investing cash usage was $61.0 million, including $37.2 million for the acquisition of Teachers On Call and $24.6 million of capital expenditures.
- Dividends paid were $0.30 per share, compared with $0.275 in 2016. The company repurchased 1,134 Class A shares during the fourth quarter solely to cover employee tax withholding.
Material changes versus the prior comparable period
- Operating performance improved despite only modest consolidated revenue growth, with gross profit up 5.3% and operating earnings up 31.7%.
- Net earnings and diluted EPS fell because 2016 included an $87.2 million pretax gain from forming the PersolKelly Asia Pacific joint venture. The 2016 gain did not recur in 2017.
- 2017 included $2.4 million of restructuring charges, compared with $3.4 million in 2016, primarily related to optimizing GTS service-delivery models and Americas Staffing operations.
- Income tax expense declined to $12.8 million from $30.0 million. The 2017 provision included a $13.9 million charge to revalue deferred tax assets following the U.S. Tax Cuts and Jobs Act, partly offset by other tax benefits and valuation-allowance releases.
- Kelly acquired Teachers On Call on September 5, 2017 for a stated purchase price of $41.0 million and cash paid at closing of $39.0 million. The acquisition added $18.7 million of goodwill and $18.3 million of intangible assets and was included in Americas Staffing.
- Other comprehensive income increased substantially, largely because of a $56.2 million after-tax unrealized gain on the Persol Holdings investment and a $16.4 million foreign-currency translation gain.
Guidance, outlook, commentary and risks
Management did not provide specific numerical revenue or earnings guidance in the filing. Its stated priorities are to grow higher-margin professional and technical specialties and outsourced solutions, strengthen branch-delivered staffing, invest in technology and process automation, reduce structural costs and continue improving the conversion rate. Management expects demand for skilled workers and flexible staffing models to remain favorable but noted that objectives may change with economic and business conditions.
- Major risks include economic downturns, customer pricing pressure, intense competition, automation and other technology-driven disruption, and difficulty attracting qualified permanent and temporary personnel.
- Approximately 52% of 2017 revenue was attributed to 100 large customers, and the largest customer represented approximately 5% of revenue. Customer contracts generally may be terminated on short notice.
- Working capital is sensitive to payroll growth, customer payment timing and credit losses. Receivables increased materially and DSO worsened during 2017.
- The company self-insures or bears significant exposure for workers’ compensation, unemployment, disability and medical claims. The net workers’ compensation accrual was $59.4 million at year-end 2017.
- Legal and regulatory exposure includes employment, wage-and-hour, privacy, anti-competition, tax and government-contract matters. The gross litigation accrual declined to $5.3 million from $9.2 million.
- In January 2018, the Hungarian Competition Authority initiated proceedings involving Kelly and a local industry trade association. Management did not expect a material adverse effect, but the outcome remains uncertain.
- Cybersecurity, data privacy, third-party vendors, data-center availability, foreign currency, joint-venture performance and regulatory compliance remain material operating risks.
- The controlling stockholder and related trusts control approximately 93% of Class B voting shares. Class A shares generally have no voting rights, creating significant governance and minority-shareholder considerations.
- Goodwill was $107.1 million at year-end 2017 and no impairment was recorded. Management stated that the fair values of the Americas Staffing and GTS reporting units were at least twice their carrying values.
Most important facts for investors to verify
- Whether operating-margin and conversion-rate improvements continue after restructuring and technology investments.
- Whether Americas Staffing and GTS growth can offset the structurally lower International Staffing revenue base following the APAC joint venture transaction.
- The sustainability of improved gross profit rates, including the effects of customer mix, workers’ compensation adjustments and temporary tax benefits.
- Receivables growth, DSO trends, customer concentration and the adequacy of credit-loss reserves.
- Future performance and valuation of the PersolKelly Asia Pacific investment and Persol Holdings securities investment.
- The final accounting effects of the Tax Cuts and Jobs Act and implementation of new revenue-recognition, lease and financial-instrument standards.
- Compliance with debt covenants and continued availability of revolving and receivables-securitization capacity.
- Developments in employment-related litigation, the Hungarian competition investigation and other regulatory matters.