KELLY SERVICES INC quarterly report, Q3 FY2019

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

MetricQ3 2019Q3 20189M 20199M 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 rate18.0%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 activitiesNot separately providedNot 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.