Kelly Services, Inc. — Q1 2015 Form 10-Q Summary
Business context and reporting period
Kelly Services is a global workforce solutions company providing commercial and professional/technical staffing, outsourcing, consulting, recruitment process outsourcing, contingent workforce outsourcing, business process outsourcing, payroll process outsourcing, executive placement, and career transition services. The filing covers the 13-week quarter ended March 29, 2015, compared with the 13 weeks ended March 30, 2014.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue from services | $1,320.6 million | $1,330.8 million | (0.8%) reported; 4.4% constant currency |
| Gross profit | $220.3 million | $222.3 million | (0.9%) |
| Gross profit margin | 16.7% | 16.7% | Flat |
| SG&A expense | $208.2 million | $216.0 million | (3.6%) |
| Earnings from operations | $12.1 million | $6.3 million | +94.0% |
| Operating margin | 0.9% | 0.5% | +0.4 percentage points |
| Net earnings | $3.7 million | $2.5 million | +48.0% |
| Diluted EPS | $0.10 | $0.07 | Increase |
Other expense increased to $2.5 million from $1.7 million, primarily reflecting higher foreign exchange losses and interest expense. Income tax expense rose to $5.9 million from $2.1 million, due to higher pretax income and nondeductible losses in jurisdictions with valuation allowances. The U.S. work opportunity credit had expired for employees hired after 2014; retroactive reinstatement could benefit future tax expense, but no reinstatement was assured.
Net cash used in operating activities was $16.4 million, an improvement from $90.8 million used in Q1 2014. Capital expenditures were $2.6 million, compared with $3.3 million. Dividends paid were $1.9 million in both periods. Cash and equivalents declined to $49.4 million from $83.1 million at year-end 2014.
At quarter-end, trade accounts receivable were $1.1 billion, global days sales outstanding were 57 days, working capital was $424.0 million, and the current ratio was 1.5. Short-term borrowings were $80.6 million, down from $91.9 million at year-end 2014. Debt-to-total capital was 8.8%, compared with 9.9% at year-end. The company had $200.0 million of available revolving-credit capacity and $15.3 million of available securitization-facility capacity, and was in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Reported revenue declined modestly because of currency translation; revenue increased 4.4% on a constant-currency basis.
- Operating earnings nearly doubled as SG&A declined following the 2014 management simplification restructuring plan, despite continued strategic investments.
- Americas revenue increased 2.9% to $874.2 million and operating earnings increased to $23.2 million from $22.1 million.
- EMEA revenue declined 18.9% to $218.6 million, or 1.1% on a constant-currency basis, and the region moved to a $0.2 million operating loss from $2.1 million of operating earnings.
- APAC operating earnings increased to $3.8 million from $0.8 million. Results included approximately $1.6 million of additional Singapore wage credits, primarily relating to 2014.
- OCG revenue increased 11.2% to $149.5 million, driven primarily by BPO and CWO growth, while operating earnings increased to $2.8 million from $1.2 million.
- Other comprehensive loss was $5.5 million, compared with other comprehensive income of $0.3 million, primarily because of foreign currency translation losses partially offset by unrealized gains on the Temp Holdings investment.
- The company reduced its litigation accrual and related insurance receivable by $1.7 million after resolution of the Louisiana litigation matter, eliminating further financial risk to Kelly from that matter.
Guidance, outlook, commentary, and risks
Management described the 2015 outlook as encouraging, citing a stable U.S. labor market, increasing demand for skilled workers, and long-term growth in flexible staffing and workforce management solutions. Management expects continued focus on commercial staffing, professional and technical growth, OCG expansion, selected permanent-placement specialties, and operating-efficiency initiatives. The 2014 restructuring plan, including closure or consolidation of 52 branches and a reduction of more than 100 permanent positions, is expected to reduce year-over-year SG&A expense growth by approximately $35 million.
Management stated that initial pricing increases related to U.S. healthcare coverage requirements appeared sufficient to cover implementation and operating costs. However, the company remains exposed to economic weakness, foreign currency volatility, pricing pressure, demand changes from large customers, availability of qualified workers, employment-related claims, workers’ compensation and benefit costs, cybersecurity and information-technology risks, regulatory and tax changes, and compliance with debt covenants.
Ordinary-course litigation continues, including employment discrimination, wage-and-hour, and restrictive-covenant matters. Management does not expect currently known matters to have a material adverse effect, but acknowledges that litigation outcomes remain uncertain. There were no material changes to previously disclosed risk factors.
The company is evaluating new revenue-recognition guidance, going-concern assessment requirements, and debt-issuance-cost presentation rules. The filing states that the impact of the going-concern guidance is not expected to be material; the effects of the other changes were still under evaluation.
Important facts for investors to verify
- Whether constant-currency revenue growth continues and whether foreign exchange remains a material drag on reported results.
- Whether restructuring savings and operating leverage can lift return on sales toward management’s long-term 4.0% goal; Q1 2015 return on sales was 0.9%.
- Whether EMEA stabilizes after its revenue decline, margin compression, and operating loss.
- Whether OCG and Americas professional/technical investments produce sustained growth and improved margins.
- Whether cash generation improves sufficiently to support payroll and receivables-driven working-capital needs while maintaining liquidity.
- Potential effects of healthcare-reform compliance, tax-credit legislation, foreign exchange, employment litigation, workers’ compensation claims, cybersecurity events, and debt-covenant requirements.
- The company’s transition to an Acting Chief Financial Officer effective March 13, 2015, and any related changes in financial reporting or controls.