Kelly Services, Inc. 2019 Form 10-K Summary
Business Context and Reporting Period
Kelly Services is a global talent and workforce-solutions provider operating through Americas Staffing, Global Talent Solutions (GTS), and International Staffing. Services include temporary and direct-hire staffing, education staffing, engineering, science, information technology, finance, outsourcing, consulting, recruitment process outsourcing, contingent workforce outsourcing, business process outsourcing, payroll outsourcing, and contact-center solutions.
The filing covers the 52-week fiscal year ended December 29, 2019, with comparative fiscal years ended December 30, 2018 and December 31, 2017. The fourth quarter of 2019 generated revenue of $1,337.8 million and net earnings of $17.0 million.
Financial Performance and Position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue from services | $5,355.6 million | $5,513.9 million | (2.9)% reported; (1.9)% constant currency |
| Gross profit | $968.4 million | $972.2 million | (0.4)% |
| Gross profit rate | 18.1% | 17.6% | Up 0.5 percentage points |
| Earnings from operations | $81.8 million | $87.4 million | (6.5)% |
| Net earnings | $112.4 million | $22.9 million | Up $89.5 million |
| Diluted EPS | $2.84 | $0.58 | Up $2.26 |
| Operating cash flow | $102.2 million | $61.4 million | Up $40.8 million |
| Cash, equivalents and restricted cash | $31.0 million | $40.1 million | Down $9.1 million |
| Working capital | $521.6 million | $503.0 million | Up $18.6 million |
| Total debt | $1.9 million | $2.2 million | Down $0.3 million |
Operating margin, or return on sales, was 1.5%, compared with 1.6% in 2018. Excluding $5.5 million of restructuring charges, operating earnings were $87.3 million and return on sales was 1.6%. Conversion rate was 8.4%, compared with 9.0% in 2018, or 9.0% excluding restructuring charges.
Net earnings benefited materially from a $35.8 million gain on the Persol Holdings investment, compared with a $96.2 million loss in 2018. The 2019 tax provision was $0.4 million, versus a $27.1 million tax benefit in 2018. The filing does not provide a recurring normalized earnings figure excluding all unusual items.
- Americas Staffing: Revenue declined 4.0% to $2,320.1 million; operating earnings declined 26.3% to $56.8 million. Results were affected by a 10% decline in hours volume excluding the NextGen acquisition, restructuring-related disruption, and slower-than-expected realization of operational benefits.
- GTS: Revenue increased 1.4% to $2,024.5 million; operating earnings increased 26.9% to $107.4 million. Growth reflected the GTA acquisition, BPO and KellyConnect program expansion, improved mix, and cost management.
- International Staffing: Revenue declined 8.1% to $1,025.9 million, or 4.0% in constant currency; operating earnings declined 24.1% to $15.2 million. France and Germany weakened, partially offset by growth in Russia.
Cash Flow, Liquidity, Debt and Capital Resources
Operating cash flow was $102.2 million, supported primarily by working-capital changes, including a $46.0 million decrease in trade accounts receivable. Investing cash use was $94.3 million, including $86.4 million for the NextGen and GTA acquisitions, $20.0 million of capital expenditures, and $4.4 million of loans to PersolKelly Asia Pacific. These uses were partly offset by $13.8 million of asset-sale proceeds.
Global days sales outstanding increased to 58 days from 55 days. Trade accounts receivable were $1.3 billion at year-end. The current ratio remained 1.6.
Kelly had no borrowings under its $200.0 million revolving credit facility and had $200.0 million of available capacity. Its $150.0 million securitization facility had no short-term borrowings, $52.3 million of standby letters of credit, and $97.7 million of remaining capacity. Additional unsecured, uncommitted local credit facilities totaled $11.1 million, with $1.1 million outstanding. The Company met its debt covenants throughout 2019.
The Company paid $11.9 million of dividends in 2019, or $0.30 per share. Dividend payments, stock buybacks, and similar transactions remain subject to debt-facility restrictions.
Material Changes and Unusual Items
- Kelly acquired NextGen Global Resources for $54.3 million and Global Technology Associates for $35.7 million in January 2019. The acquisitions added telecommunications engineering staffing and consulting capabilities, $20.5 million of goodwill, and $38.8 million of intangible assets.
- The Company recorded $5.5 million of restructuring charges, primarily severance, related to reorganizing U.S. branch-based staffing operations.
- Kelly recorded a $15.8 million impairment charge for capitalized costs associated with a discontinued U.S. front- and middle-office technology project.
- Kelly recorded a $12.3 million gain on asset sales, primarily from selling unused land near headquarters.
- Three Troy, Michigan headquarters properties were classified as held for sale at year-end, with expected net proceeds of approximately $51 million and an anticipated sale in the first quarter of 2020. The main headquarters building was expected to be leased back.
- On January 14, 2020, Kelly acquired Insight Workforce Solutions and Insight EDU for $34.5 million in cash, plus potential contingent earn-out consideration of up to $11.4 million. The acquisition accounting was incomplete at the filing date.
- Adoption of the new lease standard increased reported assets and liabilities, including $60.4 million of operating lease right-of-use assets and $63.4 million of operating lease liabilities at year-end.
Guidance, Outlook, Commentary and Risks
Management did not provide specific quantitative revenue, earnings, or margin guidance in the filing. Its stated strategy is to pursue profitable growth in selected specialty markets, improve gross profit rates, increase conversion and EBITDA margins, invest in technology, and expand through targeted acquisitions.
Management described a labor market affected by automation, skills shortages, changing workforce preferences, independent work, and evolving customer demand. It expected further implementation of front-office technology platforms in mid-2020 to streamline recruiting, onboarding, and reassignment processes. Management also acknowledged sluggish manufacturing conditions, a tight labor market, and weaker-than-anticipated growth following the U.S. branch restructuring.
Principal risks include economic cyclicality, intense price and service competition, technology-driven workforce disruption, customer concentration and short-notice contract termination, difficulty attracting qualified workers, employment-related claims, wage and hour regulation, privacy and cybersecurity events, dependence on cloud providers and other third parties, foreign currency and international regulatory exposure, acquisition integration, impairment risk, workers' compensation estimates, tax uncertainty, and compliance with debt covenants.
Kelly self-insures or bears significant risk for workers' compensation and other benefit claims. The net workers' compensation accrual was $59.5 million at year-end 2019. Litigation accruals totaled $9.9 million, and the estimated aggregate range of reasonably possible losses in excess of accrued amounts was zero to $2.6 million, excluding matters for which a loss range could not be estimated. The Company also reported a disputed customer receivable of approximately $10 million with a reasonably possible risk of an unfavorable outcome.
Most Important Facts for Investors to Verify
- Whether GTS growth and margin gains can offset continued weakness in Americas Staffing and International Staffing.
- Whether the U.S. branch restructuring and technology investments deliver the expected volume, productivity, and margin improvements.
- The sustainability of 2019 earnings after excluding the Persol Holdings gain, asset-sale gain, acquisition effects, restructuring charges, and technology impairment.
- Collection trends and customer payment terms, particularly given the increase in DSO to 58 days and the importance of receivables to liquidity.
- The financial performance and integration results of NextGen, GTA, and the January 2020 Insight acquisition, including any contingent earn-out obligations.
- Compliance with revolving-credit and securitization-facility covenants and continued access to the $297.7 million of combined available capacity.
- Potential changes in workers' compensation, employment, privacy, cybersecurity, tax, competition-law, and other regulatory exposures.
- The outcome of the disputed customer receivable, ongoing ordinary-course litigation, and the Hungarian Competition Authority proceeding.
- The effect of volatility in Persol Holdings' share price and foreign currency rates on earnings and comprehensive income.