Business Context and Reporting Period
Kelly Services, Inc. is a recruiting, staffing, talent solutions, and workforce outsourcing company operating through Americas Staffing, Global Talent Solutions (GTS), and International Staffing. This unaudited Form 10-Q covers the 13 weeks ended September 29, 2019, and the 39 weeks ended September 29, 2019, compared with the corresponding periods ended September 30, 2018.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue from services | $1,267.7 million | $1,342.4 million | $4,017.8 million | $4,099.2 million |
| Gross profit | $227.7 million | $239.1 million | $723.3 million | $717.8 million |
| Gross profit rate | 18.0% | 17.8% | 18.0% | 17.5% |
| Earnings from operations | $17.1 million | $21.9 million | $68.7 million | $54.3 million |
| Net earnings (loss) | $(10.5) million | $33.1 million | $95.4 million | $46.8 million |
| Diluted EPS | $(0.27) | $0.84 | $2.41 | $1.19 |
| Net cash from operating activities | Not separately provided | Not separately provided | $74.2 million | $33.3 million |
Q3 operating margin was approximately 1.3%, compared with 1.6% in the prior-year quarter. Nine-month operating margin was approximately 1.7%, compared with 1.3% in the prior-year period. Q3 conversion rate declined to 7.5% from 9.2%; the nine-month rate improved to 9.5% from 7.6%.
Liquidity, Debt, and Balance Sheet
- Cash and equivalents were $22.8 million at September 29, 2019, compared with $35.3 million at December 30, 2018. Cash, cash equivalents, and restricted cash totaled $28.6 million, compared with $40.1 million at year-end.
- Trade accounts receivable were $1.262 billion, with global days sales outstanding of 59 days versus 55 days at year-end 2018.
- Short-term borrowings were $17.5 million versus $2.2 million at year-end. Debt-to-total capital was 1.4%, compared with 0.2%.
- The current ratio was 1.5 at quarter-end, compared with 1.6 at year-end. Working capital was $465.8 million, down $37.2 million from year-end.
- Net cash used in investing activities was $88.8 million, primarily reflecting the NextGen and GTA acquisitions. Financing activities generated $3.6 million, including $15.2 million of net short-term borrowings and $8.9 million of dividends.
- The company reported $150.0 million of available capacity under its revolving credit facility and $130.7 million available under its $200.0 million securitization facility. The securitization facility had $16.6 million of borrowings and $52.7 million of standby letters of credit outstanding.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 5.6% reported and 4.8% in constant currency; nine-month revenue declined 2.0% reported and 0.7% in constant currency.
- Americas Staffing Q3 revenue fell 8.1%, primarily from an 11% decline in hours volume, manufacturing weakness, and disruption from the U.S. branch restructuring. Nine-month revenue declined 1.7%.
- GTS Q3 revenue declined 1.0%, but operating earnings increased 18.0% to $28.4 million. Nine-month revenue increased 1.0% and operating earnings increased 37.5% to $79.5 million, supported by improved mix, BPO and KellyConnect growth, cost management, and the GTA acquisition.
- International Staffing Q3 revenue declined 8.8% reported and 5.8% in constant currency; operating earnings declined 29.6%. Nine-month revenue declined 8.1% reported and 3.0% in constant currency.
- Q3 results included a $39.3 million loss on the Persol Holdings investment, versus a $15.8 million gain in Q3 2018. For nine months, the investment produced a $35.1 million gain versus a $13.0 million loss in 2018. This mark-to-market item materially affected reported earnings and EPS.
- Nine-month results included a $12.3 million gain on asset sales and $5.6 million of restructuring charges, primarily severance related to U.S. branch operations.
- Kelly acquired NextGen Global Resources and Global Technology Associates on January 2, 2019, for cash consideration of approximately $54.3 million and $35.7 million, respectively. The acquisitions contributed approximately $111.1 million of nine-month revenue.
- Adoption of the lease standard added operating lease right-of-use assets and liabilities to the balance sheet; operating lease liabilities totaled $65.1 million at quarter-end.
Guidance, Outlook, Commentary, and Risks
Management did not provide numerical full-year guidance in the filing. Its strategic priorities are to grow higher-margin specialty and outsourced solutions, integrate the GTA and NextGen acquisitions, improve costs through technology and process automation, and improve conversion rates. Management noted sluggish manufacturing conditions, a tight labor market, and slower-than-expected benefits from the U.S. commercial staffing restructuring.
The company expected to complete refinancing of its revolving credit and securitization facilities by year-end 2019 and stated that existing facilities were expected to cover short-term working capital needs. Additional funding could be required if economic conditions or operating results deteriorate materially.
- The Persol Holdings investment is yen-denominated, publicly traded, and marked to market through earnings; changes in its market value and currency movements may cause significant earnings volatility.
- Key operating risks include economic and labor-market weakness, customer concentration or demand changes, competition, acquisitions, foreign currency exposure, employment-related claims, workers’ compensation costs, privacy and cybersecurity matters, regulatory changes, and compliance with debt covenants.
- Litigation accruals were $10.1 million, with insurance recoveries of $4.6 million. The estimated reasonably possible loss range, in excess of accrued amounts, was $0.4 million to $3.7 million, excluding matters for which a loss range could not be estimated.
- The company is litigating with a customer over an approximately $10 million disputed receivable and acknowledged a reasonably possible unfavorable outcome.
- Effective October 1, 2019, Peter W. Quigley became President and CEO following George S. Corona’s retirement from that role.
Important Facts for Investors to Verify
- Whether U.S. commercial staffing hours and manufacturing-related demand recover after the branch restructuring.
- The sustainability of GTS growth, improved margins, and the expected contribution from GTA and NextGen.
- Future mark-to-market gains or losses and currency exposure related to the Persol Holdings investment.
- Completion and terms of the planned refinancing, facility availability, borrowing levels, and covenant compliance.
- Collection and ultimate resolution of the approximately $10 million disputed customer receivable and other litigation matters.
- Whether technology investments and restructuring actions deliver the anticipated cost savings and conversion-rate improvement.
- The effect of higher days sales outstanding and working-capital requirements on liquidity and operating cash flow.