Business Context and Reporting Period
Kelly Services, Inc. filed this Form 10-K for the fiscal year ended January 3, 2016. Fiscal 2015 included 53 weeks versus 52 weeks in 2014, with the additional week contributing approximately 1% to reported revenue. Kelly provides global temporary staffing, professional and technical staffing, outsourcing, consulting, recruitment, and talent-management solutions through Americas, EMEA, APAC, and Outsourcing and Consulting Group (OCG) operations.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue from services | $5,518.2 million | $5,562.7 million | (0.8%) reported; 4.7% constant currency |
| Gross profit | $920.3 million | $908.4 million | 1.3% |
| Gross profit rate | 16.7% | 16.3% | +0.4 percentage points |
| SG&A expenses | $853.6 million | $886.5 million | (3.7%) |
| Earnings from operations | $66.7 million | $21.9 million | 206.2% |
| Net earnings | $53.8 million | $23.7 million | 127.0% |
| Diluted EPS | $1.39 | $0.61 | Up $0.78 |
| Operating cash flow | $23.5 million | $(70.0) million | Improved by $93.5 million |
| Capital expenditures | $16.9 million | $21.7 million | Down $4.8 million |
| Cash and equivalents | $42.2 million | $83.1 million | Down $40.9 million |
| Total debt | $55.5 million | $91.9 million | Down $36.4 million |
| Debt-to-total capital | 5.8% | 9.9% | Improved |
| Working capital | $411.3 million | $428.1 million | Down $16.8 million |
The current ratio was 1.5 at year-end. Trade accounts receivable were $1.1 billion, and global days sales outstanding was 54 days. Kelly had $200.0 million of unused revolving-credit capacity and $51.0 million of remaining securitization-facility capacity at year-end.
Segment Performance
- Americas: Revenue increased 0.3% reported and 2.0% in constant currency to $3,576.2 million; operating earnings increased 22.7% to $108.7 million.
- EMEA: Reported revenue declined 12.9% to $945.0 million, primarily because of currency translation; constant-currency revenue increased 3.4%. Operating earnings increased 16.1% to $14.0 million.
- APAC: Reported revenue declined 1.1% to $387.7 million, while constant-currency revenue increased 12.9%. Operating earnings increased to $9.1 million from $2.5 million.
- OCG: Revenue increased 14.8% to $673.8 million and operating earnings increased 75.8% to $28.5 million. BPO revenue grew 25% and CWO revenue grew 17%.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially despite slightly lower reported revenue. Management attributed the improvement to higher gross profit, cost controls, operating leverage, and the absence of $12.0 million of 2014 restructuring charges.
- SG&A excluding restructuring charges decreased 2.4% reported, although it increased 2.2% on a constant-currency basis because of higher U.S. branch, OCG, and litigation-related costs.
- The 2015 tax provision was $8.7 million, compared with a $7.1 million tax benefit in 2014, primarily reflecting higher pretax income.
- Operating cash flow returned to positive territory as growth in trade receivables moderated and earnings improved.
- Debt declined through repayments on the U.S. securitization facility. The revolving facility had no borrowings at year-end.
- OCG continued to gain scale, while EMEA and APAC reported lower gross profit rates because of business mix, lower staffing fee-based income, and currency effects.
- The company recorded a $4.1 million fourth-quarter accrual for a tentative settlement of the Hillson nationwide Fair Credit Reporting Act class action. Court approval and final settlement structure remained pending.
- Goodwill of $90.3 million was unchanged, and no goodwill impairment was identified. The company early adopted deferred-tax balance-sheet classification guidance, reclassifying current deferred taxes to noncurrent.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management did not provide specific numerical revenue or earnings guidance. Its stated objectives were to grow professional and technical staffing and OCG revenue, maintain Commercial staffing, control costs, improve operating leverage, and increase the conversion rate of earnings from operations to gross profit. Management anticipated a stable U.S. labor market and increasing demand for skilled workers and flexible workforce solutions.
- Key operating risks include intense competition, pricing pressure, economic cyclicality, loss of major customers, and customers shifting from single-source to competitively sourced arrangements.
- Foreign exchange movements materially affected reported results, particularly in EMEA and APAC.
- Liquidity depends on operating cash flow, receivables securitization, available credit facilities, and effective working-capital management. The securitization facility was scheduled to expire December 9, 2016 and management intended to refinance it.
- Debt facilities contain interest-coverage, leverage, dividend, stock-repurchase, and other operating covenants. The company reported compliance at year-end.
- Additional risks include employment-related claims, wage-and-hour and worker-classification issues, workers’ compensation and healthcare costs, tax audits, cyberattacks, data privacy, technology interruptions, third-party service-provider failures, acquisitions, and goodwill impairment.
- The company self-insures or bears significant risk for workers’ compensation, disability, and medical claims. The workers’ compensation accrual, net of related receivables, was $57.3 million at year-end 2015.
- Cash dividends remained $0.20 per share for the year, subject to debt-facility restrictions.
- Terence E. Adderley and related trusts controlled approximately 93% of Class B voting shares. Class A shares generally have no voting rights.
Investor Verification Checklist
- Verify the impact of the 53rd fiscal week and foreign-currency translation on reported versus constant-currency growth.
- Assess whether OCG and Americas professional and technical growth can offset weakness or margin pressure in Commercial, EMEA, and APAC operations.
- Review the refinancing and renewal status of the $150.0 million securitization facility before its December 2016 expiration.
- Monitor compliance with debt covenants and the availability of committed liquidity relative to seasonal payroll and receivables needs.
- Confirm the final court-approved terms and total cost of the Hillson class-action settlement.
- Evaluate the sustainability of 2015 profitability improvements after excluding the benefit from no restructuring charges and considering higher litigation and employee-related costs.
- Review workers’ compensation, tax, employment litigation, cybersecurity, and customer-concentration exposures, including the fact that approximately 51% of 2015 revenue came from 100 large customers.