Kelly Services, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
Kelly Services is a global workforce solutions company providing temporary staffing, permanent placement, talent fulfillment, outsourcing, and advisory services. The filing covers the 13 weeks ended September 30, 2018, and the 39 weeks ended September 30, 2018, compared with the corresponding periods ended October 1, 2017. Reportable segments are Americas Staffing, Global Talent Solutions (GTS), and International Staffing.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue from services | $1,342.4 million | $1,328.8 million | $4,099.2 million | $3,952.1 million |
| Gross profit | $239.1 million | $230.7 million | $717.8 million | $691.1 million |
| Gross profit margin | 17.8% | 17.4% | 17.5% | 17.5% |
| Earnings from operations | $21.9 million | $18.2 million | $54.3 million | $54.9 million |
| Net earnings | $33.1 million | $23.0 million | $46.8 million | $53.9 million |
| Diluted EPS | $0.84 | $0.58 | $1.19 | $1.37 |
- Q3 operating margin was 1.6%, compared with 1.4% in the prior-year quarter; conversion rate improved to 9.2% from 7.9%.
- Q3 revenue increased 1.0% reported and 1.9% in constant currency. Nine-month revenue increased 3.7% reported and 2.8% in constant currency.
- Q3 net earnings included a $15.8 million gain on the Persol Holdings investment, contributing approximately $0.28 to diluted EPS after tax. Nine-month results included a $13.0 million loss on that investment, reducing diluted EPS by approximately $0.23 after tax.
- Net cash provided by operating activities was $33.3 million for the first nine months, compared with $33.0 million in the prior-year period. Capital expenditures were $17.9 million.
- Cash, cash equivalents, and restricted cash totaled $25.9 million at quarter-end, compared with $36.9 million at December 31, 2017. Trade accounts receivable were $1.294 billion, and global days sales outstanding remained 58 days.
- Short-term borrowings were $8.1 million, compared with $10.2 million at year-end 2017. Debt-to-total capital was 0.7%.
- Available capacity was $144.0 million under the $150.0 million revolving credit facility and $145.0 million under the $200.0 million securitization facility. The securitization facility had no borrowings and $55.0 million of standby letters of credit.
Material changes versus the prior comparable period
- Americas Staffing Q3 revenue increased 1.3%, gross profit increased 7.3%, and operating earnings increased 11.3%. Higher bill rates and the Teachers On Call acquisition helped offset a 2% decline in hours volume.
- GTS Q3 revenue increased 0.9%, while operating earnings increased 15.7% as gross profit margin improved to 19.2% from 18.5%. Growth in CWO, BPO, and KellyConnect offset weaker demand from certain customers.
- International Staffing Q3 revenue increased 0.6%, but operating earnings declined 31.1%. Gross profit margin fell to 13.2% from 14.3%, primarily because of French payroll tax adjustments and unfavorable customer mix.
- For the first nine months, Americas Staffing operating earnings declined 11.4% despite revenue growth, primarily because of higher recruiting and sales-related SG&A expenses. GTS operating earnings increased 12.5%, while International Staffing operating earnings declined 1.4%.
- SG&A increased 2.2% in Q3 and 4.3% year to date. The increase reflected additional recruiting resources, technology and program investments, and the Teachers On Call business. The 2017 year-to-date period included $2.4 million of restructuring charges.
- Cash used in investing activities declined to $26.6 million from $51.3 million, mainly because the prior-year period included the $37.2 million Teachers On Call acquisition. Current-year investing included a $5.0 million investment in Business Talent Group and a $2.9 million loan to PersolKelly Asia Pacific.
Guidance, outlook, risks, contingencies, and unusual items
- Management reported continued strong global demand for skilled workers but noted that the U.S. labor market is highly constrained. Candidate shortages, higher recruiting effort, and increased turnover are making it more difficult to fill customer requisitions.
- Strategic priorities include growing higher-margin professional and technical and outsourced solutions, expanding core staffing capabilities, investing in technology and process automation, and improving conversion rates.
- Management expects to fund ongoing requirements principally through operating cash flow, available cash, receivables securitization, and committed credit facilities. It stated that current facilities should cover short-term working-capital needs, but additional funding could be required if conditions or operating results change materially.
- Kelly entered an agreement to sell its legal staffing and legal management services business; closing was expected in the fourth quarter of 2018. The related assets were immaterial for held-for-sale disclosure.
- Changes in the fair value of the yen-denominated Persol Holdings investment are now recorded in earnings under ASU 2016-01, creating potentially significant quarter-to-quarter earnings volatility. The investment was valued at $213.6 million at quarter-end.
- The company adopted ASC 606 using the modified retrospective method, recording a $3.4 million increase to opening earnings invested in the business. Management stated that the adoption did not materially affect current-period results.
- Kelly expects adoption of the new lease standard to have a material effect on the balance sheet through recognition of operating lease right-of-use assets and liabilities, but does not expect a material effect on the statements of earnings.
- The company is exposed to foreign-currency, interest-rate, employment-related litigation, workers’ compensation, privacy, cybersecurity, regulatory, customer concentration, acquisition, and qualified-worker availability risks. Management believes existing litigation will not have a material adverse effect, although outcomes cannot be predicted with certainty.
- The Hungarian Competition Authority initiated proceedings involving the company and a local industry trade association. Management does not expect a material adverse effect.
- Following the death of former Executive Chairman Terence E. Adderley, Trust K controls approximately 92% of Kelly’s Class B voting stock and can generally control director elections and other matters requiring stockholder approval.
Important facts for investors to verify
- Determine the portion of Q3 earnings and EPS attributable to the nonrecurring $15.8 million Persol Holdings fair-value gain.
- Assess whether U.S. labor shortages, recruiting costs, turnover, and declining hours volume could pressure future margins and operating earnings.
- Monitor International Staffing profitability, including the effects of French payroll taxes, customer mix, and currency movements.
- Review liquidity relative to the company’s large receivables and payroll-driven working-capital needs, including availability and covenants under the credit facilities.
- Evaluate the expected balance-sheet impact and implementation timing of the new lease accounting standard.
- Follow the planned legal-services disposition, the Hungarian competition proceeding, and employment-related litigation contingencies.
- Consider the governance and ownership implications of Trust K’s approximately 92% control of Class B voting stock.