Kelly Services, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Kelly Services is a global workforce solutions provider offering temporary and permanent staffing, talent fulfillment, outsourcing, consulting, recruitment, payroll, education, engineering, science, information technology and contact-center services. Reportable segments are Americas Staffing, Global Talent Solutions (GTS) and International Staffing. The filing covers the 52-week fiscal year ended December 30, 2018; quarterly data identifies fourth-quarter revenue of $1,414.7 million and net loss of $23.9 million.
- Approximately 500,000 temporary employees were assigned to customers globally during 2018.
- Approximately 51% of revenue came from 100 large customers; the largest customer represented approximately 5% of revenue.
- Kelly retained a 49% equity-method interest in PersolKelly Asia Pacific and held a separate investment in Persol Holdings.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue from services | $5,513.9 million | $5,374.4 million | +2.6% |
| Gross profit | $972.2 million | $954.1 million | +1.9% |
| Gross profit rate | 17.6% | 17.8% | Down 0.2 points |
| SG&A expenses | $884.8 million | $870.8 million | +1.6% |
| Earnings from operations | $87.4 million | $83.3 million | +5.0% |
| Return on sales | 1.6% | 1.5% | Up 0.1 points |
| Net earnings | $22.9 million | $71.6 million | Down $48.7 million |
| Diluted EPS | $0.58 | $1.81 | Down 68.0% |
| Operating cash flow | $61.4 million | $70.8 million | Down $9.4 million |
Operating earnings improved despite a tight labor market and higher recruiting and placement costs. The company’s conversion rate, defined as earnings from operations divided by gross profit, increased to 9.0% from 8.7%.
Segment results
| Segment | 2018 revenue | 2018 operating earnings | Year-over-year change |
|---|---|---|---|
| Americas Staffing | $2,417.7 million | $77.1 million | Revenue +3.1%; operating earnings down 6.7% |
| Global Talent Solutions | $1,997.4 million | $84.6 million | Revenue down 0.1%; operating earnings +9.8% |
| International Staffing | $1,116.6 million | $20.0 million | Revenue +6.5%; operating earnings down 9.5% |
- Americas revenue benefited from higher bill rates, the Teachers On Call acquisition and growth in education, light industrial, engineering, science and IT. Hours volume declined 1%.
- GTS revenue was essentially flat, while margins improved because of favorable product mix and growth in BPO, KellyConnect and contingent workforce outsourcing.
- International revenue growth was driven primarily by higher average bill rates, but gross profit rate declined to 13.6% from 14.7% because of customer mix and French payroll tax adjustments.
Liquidity, debt and cash flow
- Cash, cash equivalents and restricted cash were $40.1 million at year-end 2018, compared with $36.9 million in 2017.
- Working capital increased to $503.0 million from $458.1 million; the current ratio improved to 1.6 from 1.5.
- Trade accounts receivable were $1.3 billion, with global days sales outstanding of 55 days, unchanged from 2017.
- Total debt was $2.2 million at year-end, compared with $10.2 million in 2017. Debt-to-total capital was 0.2%, compared with 0.9%.
- The $150.0 million revolving facility was undrawn and fully available. The $200.0 million securitization facility had $145.0 million of available capacity and $55.0 million of standby letters of credit.
- Capital expenditures were $25.6 million, primarily for technology, information technology infrastructure and headquarters improvements.
- Dividends were $0.30 per share, consistent with 2017. Debt covenants restrict dividends, buybacks and similar transactions; the company reported compliance throughout 2018.
Material changes, unusual items and outlook
- A $96.2 million pretax loss on the Persol Holdings investment materially reduced 2018 net earnings. Following adoption of ASU 2016-01, changes in that investment’s fair value are recognized in earnings rather than other comprehensive income.
- The Persol Holdings investment declined in carrying value to $135.1 million from $228.1 million. Equity in earnings from PersolKelly Asia Pacific increased to $5.2 million from $2.7 million.
- 2018 included no restructuring charges, compared with $2.4 million in 2017.
- Kelly sold its healthcare and legal specialty operations and undertook a review of its commercial staffing operations, particularly the U.S. branch network.
- Management expects to grow higher-margin specialty and outsourced solutions, improve the portfolio mix, invest in technology and process automation, and continue improving the conversion rate.
- On January 2, 2019, Kelly acquired Global Technology Associates for $34.0 million and NextGen Global Resources for $51.0 million, primarily using the securitization facility. The acquisitions expand engineering and 5G telecommunications staffing capabilities; purchase accounting was incomplete at filing.
- Management identified no goodwill impairment in 2018. The company estimated approximately $75 million of right-of-use assets and lease liabilities upon adoption of the new lease standard.
Risks, contingencies and governance
- Key risks include economic cyclicality, intense competition and pricing pressure, automation and technology-driven labor displacement, shortages of qualified workers, customer concentration and short-notice contract termination.
- Additional risks include cybersecurity and data privacy incidents, reliance on third-party providers and the PersolKelly joint venture, foreign currency exposure, acquisitions, employment-related claims, workers’ compensation estimates, tax matters and impairment charges.
- Gross litigation accruals were $12.8 million at year-end 2018, with related insurance recoveries of $6.1 million. The estimated aggregate range of reasonably possible losses in excess of accruals was zero to $2.1 million, excluding matters for which a loss range could not be estimated.
- The Hungarian Competition Authority initiated proceedings in January 2018; management did not expect a material adverse effect.
- Terence E. Adderley died on October 9, 2018. Trust K subsequently controlled approximately 91.5% of Class B voting shares, allowing its trustees to control stockholder votes, including director elections.
- Management and PwC concluded that internal control over financial reporting was effective as of December 30, 2018.
Investor verification checklist
- Separate recurring operating performance from the $96.2 million Persol Holdings fair-value loss and assess the investment’s ongoing market and currency exposure.
- Evaluate whether GTS margin improvement and the planned shift toward higher-margin specialties can offset weaker Americas and International Staffing profitability.
- Review the funding, integration progress and purchase accounting for the $85.0 million GTA and NextGen acquisitions.
- Monitor working capital, receivables collection, customer concentration and availability under the securitization and revolving facilities.
- Assess the sensitivity of workers’ compensation, litigation, tax-credit realization and deferred tax assets to adverse developments.
- Consider the governance implications of Trust K’s control of approximately 91.5% of voting Class B shares and the lack of voting rights for Class A shares.