Kelly Services, Inc. 2017 Second-Quarter Form 10-Q Summary
Business context and reporting period
Kelly Services is a global workforce-solutions provider offering branch-delivered staffing through Americas Staffing and International Staffing, plus outsourced and consulting services through Global Talent Solutions (GTS). The report covers the 13 weeks ended July 2, 2017 and the 26 weeks ended July 2, 2017; comparable 2016 periods ended July 3, 2016. The financial statements are unaudited.
Kelly realigned its operations into three reportable segments in the first quarter of 2017. Its APAC staffing operations were transferred to TS Kelly Asia Pacific, a 49%-owned joint venture, in the third quarter of 2016; this materially affects year-over-year International Staffing comparisons.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | 26 weeks 2017 | 26 weeks 2016 |
|---|---|---|---|---|
| Revenue from services | $1,333.6 million | $1,375.5 million | $2,623.3 million | $2,724.6 million |
| Gross profit | $228.8 million | $230.5 million | $460.4 million | $463.2 million |
| Gross profit margin | 17.2% | 16.8% | 17.6% | 17.0% |
| Earnings from operations | $20.3 million | $9.9 million | $36.7 million | $24.6 million |
| Net earnings | $18.7 million | $8.9 million | $30.9 million | $20.1 million |
| Diluted EPS | $0.47 | $0.23 | $0.78 | $0.51 |
- Q2 revenue declined 3.1%, while gross profit declined 0.7%. For the first six months, revenue declined 3.7% and gross profit declined 0.6%.
- Q2 operating earnings increased 104.7%; excluding $3.4 million of 2016 restructuring charges, operating earnings increased 52.0% from $13.3 million. The operating conversion rate was 8.9%, versus 5.8% excluding restructuring in the prior-year quarter.
- Q2 return on sales was 1.5%, versus 0.7% in 2016. The first-half return on sales was 1.4%, versus 0.9%.
- Income tax expense was $1.5 million in Q2, representing a 7.6% effective tax rate, and $4.2 million for the first six months, representing a 12.2% effective tax rate. Q2 tax expense benefited from a valuation-allowance release in Norway and increased cash surrender values of life-insurance policies.
- Q2 dividend was $0.075 per share; first-half dividends were $0.150 per share, compared with $0.125 in the prior-year period.
Segment performance
| Segment | Q2 revenue | Q2 revenue change | Q2 operating earnings | Q2 operating earnings change |
|---|---|---|---|---|
| Americas Staffing | $575.6 million | 6.1% | $20.4 million | 29.9% |
| Global Talent Solutions | $505.5 million | 1.0% | $15.3 million | 10.1% |
| International Staffing | $256.8 million | (23.9%) | $4.1 million | 6.3% |
- Americas Staffing benefited from higher average bill rates and growth in educational staffing, light industrial, and engineering and science services, partly offset by lower office-services volume.
- GTS gross profit increased 3.5%, supported by favorable practice and customer mix; revenue growth in BPO, KellyConnect, and CWO offset declines in centrally delivered staffing and payroll.
- International Staffing revenue was reduced by the APAC deconsolidation. Excluding APAC, management stated that Q2 revenue increased 7%, driven by European growth. European hours volume increased 8% in Q2.
Cash flow, balance sheet, debt, and liquidity
- First-half operating cash flow was $44.0 million, compared with $41.2 million in 2016. Capital expenditures were $7.3 million, versus $4.3 million, and investing cash use was $7.4 million.
- Financing cash use was $5.2 million, compared with $33.7 million in 2016, primarily because the prior-year period included larger debt repayments.
- Cash and equivalents were $60.8 million at July 2, 2017, versus $29.6 million at January 1, 2017. Trade receivables were $1.188 billion, and global days sales outstanding increased to 55 days from 53 days at year-end 2016 and at the prior-year quarter-end.
- Working capital was $467.7 million and the current ratio was 1.6. Short-term borrowings were $0.7 million; debt-to-total-capital was 0.1%.
- The company reported $150.0 million of available capacity under its $150.0 million revolving credit facility and $149.3 million available under its $200.0 million securitization facility. The securitization facility had no borrowings and $50.7 million of standby letters of credit related to workers’ compensation.
- Kelly stated that it met its debt covenants and expects to fund requirements through operating cash flow, cash balances, receivables securitization, and available credit facilities.
Material changes, outlook, risks, and unusual items
- Management is prioritizing professional and technical staffing, outsourced solutions, local branch staffing, expense control, and continued improvement in the conversion rate.
- First-quarter 2017 restructuring actions focused on optimizing GTS and Americas Staffing service-delivery models. First-half restructuring costs were $2.4 million, with $0.9 million remaining accrued at quarter-end, primarily for severance.
- Q2 SG&A included $2.5 million of one-time corporate executive-compensation savings. The former President and CEO’s retirement also generated a $0.2 million stock-compensation benefit in Q2, compared with $2.3 million of expense in Q2 2016.
- The company expects a potential income-tax benefit of approximately $5 million from future valuation-allowance releases if sufficient taxable income is generated in certain jurisdictions.
- The nationwide Hillson Fair Credit Reporting Act class action remained pending. A $4.1 million accrual was recorded in 2015 for the expected settlement cost, and the company was awaiting the court’s ruling after the August 2, 2017 approval hearing.
- Key risks include economic and labor-market changes, pricing and competitive pressure, foreign currency exposure, customer concentration and demand, availability of qualified workers, employment-related litigation, workers’ compensation claims, cybersecurity and privacy risks, dependence on third parties, tax changes, and compliance with debt covenants.
- Kelly expects to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. Most revenue will continue to be recognized over time, but contract-cost deferrals, variable consideration, and expanded disclosures may affect reported results and presentation. The new lease standard is expected to have a material balance-sheet impact.
Important facts for investors to verify
- Whether revenue growth in Americas Staffing and GTS can offset the structural comparison effect from the APAC joint-venture transaction.
- Whether gross-margin and conversion-rate improvements persist after restructuring benefits, executive-compensation savings, and other unusual items.
- Whether the increase in DSO to 55 days creates additional working-capital requirements or collection risk.
- The final resolution and total cost of the Hillson class action and other employment-related litigation.
- The timing and amount of any future valuation-allowance tax benefit.
- The effect of the 2018 revenue-recognition and lease-accounting adoptions on reported revenue, earnings, assets, liabilities, and disclosures.
- Management’s forward-looking statements remain subject to material uncertainty; the filing does not provide specific full-year revenue or earnings guidance.