Kelly Services, Inc. — 2015 Third-Quarter Form 10-Q
Business context and reporting period
Kelly Services is a global workforce-solutions provider operating through commercial staffing, professional and technical staffing, and Outsourcing and Consulting Group (OCG) businesses across the Americas, EMEA, and APAC. The third quarter ended September 27, 2015, and included 13 weeks; the year-to-date period included 39 weeks. Comparative periods ended September 28, 2014.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue from services | $1,351.0 million | $1,396.4 million | $4,056.6 million | $4,137.7 million |
| Gross profit | $228.2 million | $225.4 million | $670.8 million | $675.8 million |
| Gross profit rate | 16.9% | 16.1% | 16.5% | 16.3% |
| SG&A expense | $211.6 million | $218.3 million | $630.6 million | $656.5 million |
| Earnings from operations | $16.6 million | $7.1 million | $40.2 million | $19.3 million |
| Return on sales | 1.2% | 0.5% | 1.0% | 0.5% |
| Net earnings | $9.1 million | $1.4 million | $19.6 million | $6.7 million |
| Diluted EPS | $0.23 | $0.03 | $0.51 | $0.17 |
- Reported revenue declined 3.2% in the quarter and 2.0% year to date, primarily because of foreign-currency translation. On a constant-currency basis, revenue increased 3.0% in the quarter and 3.7% year to date.
- Q3 operating earnings increased 134.9%, while year-to-date operating earnings increased 110.9%. Results benefited from higher gross profit rates, lower SG&A, and the absence of 2014 restructuring charges.
- Operating cash flow was negative $1.5 million for the first nine months, compared with negative $109.0 million in the prior-year period. Investing cash use was $13.2 million, including $12.3 million of capital expenditures.
- Cash and equivalents were $44.9 million at September 27, 2015, versus $83.1 million at December 28, 2014. Trade receivables were $1.16 billion, and global days sales outstanding were 57 days.
- Short-term borrowings were $76.8 million, down from $91.9 million at year-end 2014. Debt-to-total-capital declined to 8.2% from 9.9%.
- The current ratio was 1.5. The company reported $200.0 million of available revolving-credit capacity and $28.0 million of available securitization-facility capacity at quarter-end. It was in compliance with applicable debt covenants.
- Dividends were $0.05 per share in the quarter and $0.15 per share year to date.
Material changes versus the prior comparable period
- Americas: Q3 revenue declined 2.8% as reported and 0.6% in constant currency, while operating earnings rose to $23.9 million from $20.5 million. Gross profit rate improved to 16.0% from 14.9%, helped by pricing, customer mix, lower payroll taxes and workers’ compensation costs, including a $1.6 million reduction in estimated prior-year workers’ compensation costs.
- EMEA: Q3 reported revenue fell 13.1%, but increased 3.5% in constant currency. Operating earnings rose to $5.3 million from $4.5 million because of cost savings, despite lower gross profit and weaker staffing fee-based income. Year-to-date operating earnings declined to $6.8 million from $9.3 million.
- APAC: Q3 reported revenue declined 8.3% but increased 9.5% in constant currency. Operating earnings increased to $2.1 million from $0.5 million, primarily due to productivity improvements and the absence of 2014 restructuring charges. Gross profit rate declined to 14.2% from 14.8%.
- OCG: Q3 revenue increased 14.7% and operating earnings increased to $8.2 million from $3.6 million. Year-to-date revenue rose 15.2% and operating earnings more than doubled to $14.5 million. Growth was driven primarily by business process outsourcing and contingent workforce outsourcing.
- No restructuring charges were recorded in 2015 through the third quarter, compared with $5.8 million in the first nine months of 2014. The remaining restructuring accrual was $1.1 million at quarter-end, primarily for severance and expected to be largely paid during 2015.
- Other comprehensive income was $6.6 million in Q3 and $7.3 million year to date, including unrealized gains on the Temp Holdings investment, partly offset by foreign-currency translation losses.
Guidance, outlook, commentary, risks, and unusual items
- Management expects a stable U.S. labor market and increasing demand for skilled workers. Its strategy emphasizes commercial staffing, professional and technical growth, OCG expansion, selected permanent-placement opportunities, and lower-cost service delivery.
- Management’s long-term objective is a 4.0% return on sales. It stated that 2014 investments are producing benefits, but continued acceleration of professional and technical growth, particularly in centralized accounts, is required.
- Management expects the 2014 restructuring plan to reduce year-over-year SG&A expense growth by approximately $35 million.
- Foreign-currency volatility remains a significant reporting headwind. Other risks include pricing pressure, customer concentration and losses, economic weakness in foreign markets, demand for skilled workers, employment-related claims, workers’ compensation trends, cybersecurity and data privacy, regulatory and tax changes, acquisition and equity-affiliate risks, and compliance with debt covenants.
- The U.S. work opportunity tax credit had expired for employees hired after 2014. Management stated that retroactive reinstatement through future “extenders” legislation could provide a significant tax benefit, but no such benefit was recognized in the reported results.
- Ordinary-course litigation includes employment discrimination, wage-and-hour, and restrictive-covenant matters. Management does not expect a material adverse effect, but cannot predict outcomes with certainty.
- The company is evaluating new revenue-recognition guidance effective for annual periods beginning after December 15, 2017. Management does not expect the other disclosed accounting changes to have a material effect.
Facts investors should verify
- Whether OCG growth, particularly in BPO and CWO, continues to offset weaker commercial staffing and regional currency effects.
- Whether the Americas margin improvement and the expected $35 million restructuring-related SG&A benefit are sustainable.
- Progress toward the 4.0% long-term return-on-sales objective, given the 1.2% Q3 and 1.0% year-to-date levels.
- Cash conversion and working-capital needs, including receivables growth, days sales outstanding, and reliance on securitization borrowings.
- Exposure to foreign-currency movements, lower oil prices, Russia and other economically challenged markets, and customer mix changes.
- The valuation and volatility of the Temp Holdings investment, which produced material unrealized gains recorded in other comprehensive income.
- Any developments in employment litigation, workers’ compensation estimates, tax-credit legislation, cybersecurity, and debt-facility covenant compliance.