Kelly Services, Inc. 2014 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kelly Services is a global workforce solutions company providing commercial staffing, professional and technical staffing, outsourcing, consulting, recruitment process outsourcing, contingent workforce outsourcing, payroll process outsourcing, executive placement, and career transition services. The filing covers the 13 weeks ended March 30, 2014, compared with the 13 weeks ended March 31, 2013. Financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue from services | $1,330.8 million | $1,314.8 million | 1.2% increase |
| Gross profit | $222.3 million | $216.9 million | 2.5% increase |
| Gross profit rate | 16.7% | 16.5% | Up 0.2 percentage points |
| SG&A expense | $216.0 million | $209.8 million | 3.0% increase |
| Earnings from operations | $6.3 million | $7.1 million | 11.8% decrease |
| Return on sales | 0.5% | 0.5% | Flat |
| Net earnings | $2.5 million | $12.9 million | Decrease |
| Diluted EPS | $0.07 | $0.34 | Decrease |
| Dividends per share | $0.05 | $0.05 | Flat |
Operating cash flow was negative $90.8 million, compared with positive $5.9 million in the prior-year quarter. The decline primarily reflected growth in trade accounts receivable and the timing of $20.0 million in customer receipts and related supplier payments. Capital expenditures were $3.3 million, and investing cash flow was negative $3.8 million.
Cash and equivalents were $57.9 million at March 30, 2014, compared with $125.7 million at December 29, 2013. Trade accounts receivable were $1.08 billion, with global days sales outstanding of 57 days versus 54 days at the end of the prior-year quarter. Short-term borrowings were $54.8 million versus $28.3 million at year-end 2013. Debt-to-total capital was 6.2% versus 3.3% at year-end. The filing reports a current ratio of 1.6%; the presentation appears to use the ratio as a measure of current assets to current liabilities, but the text does not clearly state whether the intended unit is percent or a multiple.
At quarter-end, Kelly reported $200.0 million of available capacity under its $200.0 million revolving credit facility and $42.0 million of available capacity under its $150.0 million securitization facility. The company stated that it met applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Total revenue increased modestly, reflecting higher average bill rates in the Americas, while Americas revenue declined 3.6% as hours worked fell 4% on a constant-currency basis.
- EMEA revenue increased 10.3% as hours worked rose, primarily in Portugal, Russia, and Switzerland. EMEA returned to operating profitability, with earnings from operations of $2.1 million versus a loss of $0.2 million.
- APAC revenue was essentially flat on a reported basis but increased 7.5% on a constant-currency basis. APAC operating earnings improved to $0.8 million from a $0.9 million loss, aided in part by a $1.4 million Singapore wage credit.
- OCG revenue increased 25.1%, driven primarily by BPO and CWO growth, but operating earnings fell to $1.2 million from $2.5 million because of investments, implementation costs, and lower margins from business mix.
- SG&A increased due to targeted investments in professional and technical staffing and OCG. The prior-year period included a $3.0 million unclaimed-property settlement, which partially offsets the apparent year-over-year expense increase.
- Net earnings benefited substantially in the prior-year period from a $6.8 million income tax benefit, including retroactively recognized work opportunity credits. The 2014 period recorded $2.1 million of tax expense.
- The project-based legal services business was reclassified from Americas PT to OCG, with prior-period segment data revised for comparability.
- Other comprehensive income was $0.3 million versus $5.3 million, primarily because the prior-year period included a $12.3 million unrealized gain on the Temp Holdings investment.
Guidance, Outlook, Commentary, and Risks
Management expects steady improvement in the U.S. and global economies but noted that job growth has not produced a broad-based recovery in the sectors served by Kelly. Management expects revenue growth to lag targeted investments and stated that overall earnings are expected to decline year over year while the company builds professional and technical recruiting capabilities, expands OCG services, and develops talent supply chain analytics. The investments are intended to support double-digit sales growth in OCG and Americas PT in 2015, assuming continued economic growth in relevant sectors.
Management’s long-term return-on-sales goal is 4.0%, compared with 0.5% in the first quarter. The company expects to fund liquidity needs through operating cash flow, available cash, receivables securitization, and committed credit facilities.
- Healthcare reform compliance is expected to require Kelly to offer coverage to eligible temporary employees in 2015. Implementation costs will be incurred in 2014, and the company may not be able to recover all related costs through customer pricing.
- The U.S. work opportunity tax credit had expired at year-end 2013. Future retroactive reinstatement could produce a significant tax benefit, but timing and enactment were uncertain.
- A Louisiana litigation matter resulted in a $1.0 million settlement payment by Kelly and its primary insurer in April 2014. Kelly paid $0.25 million; the primary insurer paid $0.75 million. An umbrella insurer continues to appeal and may be responsible for additional amounts, subject to the appellate process.
- Ordinary-course litigation includes employment discrimination, wage-and-hour, and restrictive-covenant matters. The company cannot predict whether any matter will ultimately have a materially adverse outcome.
- Principal risks include economic and staffing demand changes, pricing pressure, foreign currency movements, customer concentration, employment-related claims, workers’ compensation and benefit costs, healthcare reform, tax and unclaimed-property liabilities, technology and data-security issues, impairment risk, covenant compliance, and access to financing.
Important Facts for Investors to Verify
- Whether the significant use of operating cash flow was primarily seasonal and timing-related or reflects a sustained deterioration in collections and working-capital efficiency.
- Progress toward improving return on sales from 0.5% toward management’s 4.0% long-term goal.
- Whether OCG and Americas PT investments generate the targeted double-digit growth and eventually produce higher operating margins.
- The effect of healthcare reform costs, customer price recovery, and 2015 coverage requirements.
- The final outcome and insurance coverage associated with the Louisiana litigation and any additional payment exposure.
- The status of the work opportunity tax credit and the related tax-rate impact.
- The reported current ratio, because the filing text states 1.6% although the underlying balance-sheet amounts imply that the presentation may be intended as a multiple.
- Receivables aging, DSO trends, securitization-facility availability, and compliance with debt covenants as working-capital needs change.