Kelly Services, Inc. — Form 10-Q Summary
Business context and reporting period
Kelly Services is a global workforce solutions company providing commercial and professional and technical staffing, outsourcing, consulting, recruitment process outsourcing, contingent workforce outsourcing, and related services through the Americas, EMEA, APAC, and Outsourcing and Consulting Group segments. The filing covers the 13 weeks ended April 3, 2016, compared with the 13 weeks ended March 29, 2015. The financial statements are unaudited.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue from services | $1,349.1 million | $1,320.6 million | 2.2%; 4.6% constant currency |
| Gross profit | $232.7 million | $220.3 million | 5.6% |
| Gross profit rate | 17.3% | 16.7% | Up 0.6 percentage points |
| SG&A expense | $218.0 million | $208.2 million | 4.7% |
| Earnings from operations | $14.7 million | $12.1 million | 21.5% |
| Return on sales | 1.1% | 0.9% | Up 0.2 percentage points |
| Net earnings | $11.2 million | $3.7 million | Increase of $7.5 million |
| Diluted EPS | $0.29 | $0.10 | Increase of $0.19 |
| Operating cash flow | $20.2 million | $(16.4) million | Improvement of $36.6 million |
Income tax expense declined to $2.7 million from $5.9 million, primarily because of reinstatement of the work opportunity credit program and a more favorable mix of income. Other expense, net improved to $0.8 million from $2.5 million, largely because foreign exchange losses were lower.
At April 3, 2016, cash and equivalents were $46.4 million, trade accounts receivable were $1.2 billion, total assets were $2.0 billion, and total stockholders’ equity was $910.8 million. Short-term borrowings were $39.3 million versus $55.5 million at year-end 2015. Debt-to-total capital was 4.1%, compared with 5.8% at year-end 2015. The current ratio was 1.5, and working capital was $429.1 million.
Capital expenditures were $1.5 million. The company paid $1.9 million in dividends, or $0.05 per share. Global days sales outstanding improved to 55 days from 57 days in the prior-year first quarter.
Material changes versus the prior comparable period
- Americas revenue increased 1.3%, or 2.9% in constant currency, and operating earnings increased 16.8% to $27.1 million. Growth reflected higher hours volume, commercial staffing demand, and improved gross profit management.
- EMEA reported revenue decreased 0.7% because of currency effects, but increased 3.7% in constant currency. Operating earnings improved from a $0.2 million loss to $2.0 million after cost-saving actions, despite a lower gross profit rate.
- APAC reported revenue declined 4.4% because of currency translation, while constant-currency revenue increased 3.6%. Operating earnings increased 19.2% to $4.4 million, aided by cost control and higher Singapore wage credits.
- OCG revenue increased 12.5%, or 13.4% in constant currency, and operating earnings rose 89.6% to $5.4 million. Growth was led by business process outsourcing and contingent workforce outsourcing.
- The consolidated conversion rate, defined as earnings from operations divided by gross profit, improved to 6.3% from 5.5%.
- Operating cash flow improved substantially as trade receivable growth moderated, global DSO improved, and earnings increased.
Guidance, outlook, commentary, risks, and unusual items
Management expects growth in professional and technical and OCG revenue, continued importance of commercial staffing, strict cost control, improved operating leverage, and further conversion-rate improvement. Management anticipates a stable U.S. labor market and increasing demand for skilled workers and flexible workforce models. No specific full-year revenue or earnings guidance was provided.
On April 7, 2016, the board authorized an agreement with Temp Holdings to expand the existing North Asia joint venture into TS Kelly Asia Pacific. Kelly expects to transfer its APAC staffing operations, receive cash, own 49% of the expanded joint venture, and account for its interest under the equity method after deconsolidation. The transaction was expected to close by the end of 2016, and management anticipated recording a gain; the filing states that discontinued-operations presentation was not expected.
Kelly entered into a formal settlement agreement on April 20, 2016, in the Hillson nationwide class action concerning Fair Credit Reporting Act background-screening disclosures. Court approval remained outstanding. The company had recorded a $4.1 million accrual in the fourth quarter of 2015, net of anticipated recoveries and amounts previously expensed.
The company had $200.0 million of unused revolving-credit capacity and $68.0 million of available capacity under its $150.0 million securitization facility. The securitization facility expires December 9, 2016, and Kelly intends to refinance it by its due date. The company met applicable debt covenants. Management stated that existing facilities are expected to cover short-term working-capital needs, but materially weaker economic or operating conditions could require additional funding.
Key risks include foreign-currency movements, competitive and economic pressures, demand from major customers, availability of qualified temporary and full-time workers, employment-related claims, workers’ compensation trends, cybersecurity and data privacy, reliance on third parties, regulatory and tax changes, covenant compliance, and execution of the APAC joint venture. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
New accounting standards discussed include changes to share-based payment accounting, lease accounting, financial instruments, going-concern assessments, and revenue recognition. Management was evaluating their effects; no material impact was identified in the filing for the current period.
Important facts for investors to verify
- Completion, consideration, accounting treatment, and potential gain from the TS Kelly Asia Pacific transaction.
- Court approval and final cost of the Hillson class-action settlement relative to the $4.1 million accrual.
- Refinancing or renewal of the securitization facility before its December 9, 2016 expiration.
- Sustainability of OCG growth, Americas professional and technical growth, and the improved conversion rate.
- Impact of foreign-currency movements on reported revenue, gross profit, and earnings.
- Future Singapore wage credits and other nonrecurring or region-specific items affecting gross profit.
- Working-capital needs, receivable collections, DSO, short-term borrowings, and availability under committed credit facilities.