Kelly Services, Inc. — Form 10-Q Summary
Business context and reporting period
Kelly Services is a global workforce solutions provider operating through Americas Staffing, Global Talent Solutions (GTS), and International Staffing. The filing covers the 13 weeks ended April 1, 2018, compared with the 13 weeks ended April 2, 2017. Results are unaudited.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue from services | $1,369.9 million | $1,289.7 million | 6.2% reported; 3.5% constant currency |
| Gross profit | $238.2 million | $231.6 million | 2.9% |
| Gross profit rate | 17.4% | 18.0% | Down 60 basis points |
| Earnings from operations | $12.0 million | $16.4 million | Down 26.4% |
| Net earnings | $29.1 million | $12.2 million | 138.5% increase |
| Diluted EPS | $0.74 | $0.31 | Increase of $0.43 |
| Operating cash flow | $(4.1) million | $24.6 million | Declined $28.7 million |
- The quarterly net earnings increase was materially affected by a $23.7 million gain on the investment in Persol Holdings. Management stated that approximately $0.42 of diluted EPS related to this gain, net of tax.
- SG&A expense was $226.2 million, up from $215.2 million. The prior-year amount included $2.4 million of restructuring charges; Q1 2018 had no restructuring charges.
- Conversion rate, or earnings from operations divided by gross profit, declined to 5.0% from 7.1%. Return on sales declined to 0.9% from 1.3%.
- Segment revenue was $604.3 million for Americas Staffing, $485.8 million for GTS, and $284.7 million for International Staffing, before $4.9 million of intersegment revenue eliminations.
- Cash, cash equivalents, and restricted cash totaled $41.1 million at quarter-end, compared with $36.9 million at December 31, 2017. Cash and cash equivalents alone were $36.6 million.
- Trade accounts receivable were $1.29 billion, and global days sales outstanding increased to 57 days from 55 days at both year-end 2017 and Q1 2017.
- Short-term borrowings were $33.4 million, compared with $10.2 million at year-end 2017. Debt-to-total capital was 2.7%, compared with 0.9% at year-end.
- The current ratio was 1.5, and working capital was $463.5 million at quarter-end.
- The company generated $14.1 million from financing activities, primarily from $23.2 million of net short-term borrowings, and paid $2.9 million in dividends.
- Available capacity was $117.8 million under a $150.0 million revolving credit facility and $145.0 million under a $200.0 million receivables securitization facility. The company stated that it met applicable debt covenants.
Material changes versus the prior comparable period
- Revenue growth was driven by Americas Staffing and International Staffing, while GTS revenue was essentially flat to slightly lower.
- Americas Staffing revenue increased 5.4%, helped by the Teachers On Call acquisition, higher average bill rates, and growth in educational staffing, light industrial, and engineering. Hours volume declined 2% and segment operating earnings fell to $16.1 million from $21.2 million.
- GTS revenue declined 0.3%, although gross profit rate and reported operating earnings improved. Program expansion and new customer wins were offset by lower demand in certain centrally delivered staffing and payroll process outsourcing activities.
- International Staffing revenue increased 21.9% on a reported basis, or 8.9% in constant currency, but operating earnings declined to $5.0 million from $5.2 million. The segment faced lower gross profit rates, unfavorable customer mix, and the absence of a prior-year French payroll tax benefit.
- Revenue growth did not translate into operating profit growth because of lower gross margins and increased SG&A investments, particularly in Americas Staffing and GTS.
- Cash flow from operations turned negative, primarily due to higher compensation-related payments and increased DSO.
- Effective January 1, 2018, the company adopted ASC 606 using the modified retrospective method, increasing opening earnings invested in the business by $3.4 million. Management stated that the standard did not materially affect Q1 2018 results.
- Effective January 1, 2018, changes in the fair value of the Persol Holdings investment began flowing through earnings rather than other comprehensive income. A $140.0 million cumulative after-tax catch-up adjustment was recorded in opening earnings invested in the business.
Guidance, outlook, commentary, risks, and unusual items
- Management did not provide specific quarterly or annual revenue or earnings guidance in the filing. It expects to improve the business through higher-margin professional and technical staffing, outsourced solutions, branch-delivered staffing, technology and process automation, and improved conversion rates.
- Management expects continued demand for skilled workers, flexible staffing models, contractual employment, and comprehensive workforce management solutions, but described the first-quarter results as mixed and emphasized the need to improve short-term performance.
- The September 2017 acquisition of Teachers On Call is intended to expand educational staffing and market potential. The purchase price allocation remained preliminary.
- The Persol Holdings investment is yen-denominated, marked to market through earnings, and exposed to market and currency volatility. The investment was valued at $265.2 million at quarter-end, compared with $228.1 million at year-end 2017.
- Key disclosed risks include economic and labor-market changes, pricing and technology competition, customer concentration or loss, foreign currency movements, acquisitions, dependence on third parties, cyber and privacy risks, employment-related claims, workers' compensation and benefit costs, regulatory and tax changes, and compliance with debt covenants.
- The company is involved in ordinary-course litigation and investigations, including employment-related matters. Some matters are stayed pending a U.S. Supreme Court decision concerning enforceability of the company's arbitration provision.
- The Hungarian Competition Authority initiated proceedings in January 2018 concerning alleged national competition-law infringements. The company is cooperating and does not currently expect a material adverse effect.
- Management stated that no material changes occurred in contractual obligations, commitments, or previously disclosed risk factors, and that existing proceedings are not expected to materially affect financial condition, results, or cash flows.
- Disclosure controls and procedures were determined to be effective at a reasonable assurance level. The company implemented a new PeopleSoft U.S. payroll system during the quarter and adjusted related controls as appropriate.
Important facts for investors to verify
- Separate recurring operating performance from the $23.7 million Persol Holdings fair-value gain and the related approximately $0.42 per-share EPS benefit.
- Monitor whether revenue growth converts into operating earnings, particularly given the decline in gross profit rate, conversion rate, and return on sales.
- Track accounts receivable, DSO, operating cash flow, and short-term borrowings because working-capital needs increased while first-quarter operating cash flow was negative.
- Assess the performance and integration benefits of the Teachers On Call acquisition and the effect of Americas Staffing investments on margins.
- Evaluate the volatility of the Persol Holdings investment, including yen and market-price exposure and its future effect on reported earnings.
- Review debt-facility availability, covenant compliance, receivables securitization capacity, and liquidity under weaker operating conditions.
- Follow the Hungarian competition investigation, stayed litigation, employment-related claims, and any developments involving arbitration enforceability.