Business Context and Reporting Period
Kelly Services, Inc. is a recruiting, staffing, talent-solutions and workforce-solutions provider. Its reportable segments are Americas Staffing, Global Talent Solutions (GTS) and International Staffing. This unaudited Form 10-Q covers the 13 weeks ended March 31, 2019, compared with the 13 weeks ended April 1, 2018.
Financial Highlights
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue from services | $1,382.6 million | $1,369.9 million | 0.9%; 2.9% constant currency |
| Gross profit | $251.6 million | $238.2 million | 5.6% |
| Gross profit rate | 18.2% | 17.4% | Up 80 basis points |
| SG&A expenses | $234.8 million | $226.2 million | 3.8% |
| Earnings from operations | $16.8 million | $12.0 million | 40.0% |
| Net earnings | $22.1 million | $29.1 million | Down 24.1% |
| Diluted EPS | $0.56 | $0.74 | Down 24.3% |
| Operating cash flow | $21.2 million | $(4.1) million | Improved by $25.3 million |
Operating earnings excluding the $6.3 million restructuring charge were $23.1 million, compared with $12.0 million in the prior-year quarter. The 2019 result included an $13.2 million gain on the Persol Holdings investment, compared with a $23.7 million gain in 2018. The company reported $6.4 million of income tax expense in each period; the effective tax rate was 22.2% in 2019 versus 18.8% in 2018.
Segment Performance
- Americas Staffing: Revenue increased 3.7% to $626.5 million and gross profit increased 8.5% to $117.2 million. Operating earnings were $16.0 million versus $16.1 million, including the $6.3 million restructuring charge. Excluding the charge, operating earnings increased 39.1%.
- GTS: Revenue increased 3.2% to $501.0 million, gross profit increased 9.4% to $100.4 million and operating earnings increased 60.7% to $25.7 million. Growth reflected the GTA acquisition, BPO and KellyConnect expansion, improved mix and lower employee-related costs.
- International Staffing: Revenue declined 9.1% to $258.9 million, or 1.5% on a constant-currency basis. Operating earnings fell 33.9% to $3.3 million, reflecting lower hours volume, unfavorable customer mix and lower permanent placement income.
Liquidity, Debt and Balance Sheet
- Cash and equivalents were $30.9 million at March 31, 2019, compared with $35.3 million at December 30, 2018. Cash, cash equivalents and restricted cash totaled $35.8 million versus $40.1 million.
- Trade accounts receivable were $1.283 billion, with global days sales outstanding of 58 days versus 55 days at year-end 2018 and 57 days in the prior-year quarter.
- Working capital was $426.8 million and the current ratio was 1.4, compared with 1.6 at year-end 2018.
- Short-term borrowings increased to $74.2 million from $2.2 million, primarily to fund acquisitions. Debt-to-total capital was 5.9%, compared with 0.2% at year-end 2018.
- The company had $150.0 million of unused capacity on its $150.0 million revolving credit facility and $75.7 million of available capacity on its $200.0 million securitization facility. The company stated that it met applicable debt covenants.
- Operating activities generated $21.2 million of cash. Investing activities used $90.3 million, including acquisition spending, while financing activities generated $66.7 million, principally from short-term borrowings.
Material Changes and Unusual Items
- On January 2, 2019, Kelly acquired NextGen Global Resources for $54.3 million of cash, including working-capital adjustments, and Global Technology Associates for $35.7 million. The acquisitions added $20.5 million of goodwill and expanded the company’s telecommunications, engineering and 5G-related staffing capabilities.
- NextGen contributed $20.2 million of revenue and $0.9 million of net earnings after acquisition; GTA contributed $15.7 million of revenue and $0.8 million of net earnings.
- The company recorded $6.3 million of severance-related restructuring costs tied primarily to reorganizing U.S. branch-based commercial staffing operations. A $6.1 million accrual remained at quarter-end, with most payments expected by year-end 2019.
- Kelly adopted ASC 842 lease accounting and recognized approximately $69.5 million of operating lease right-of-use assets and $71.8 million of operating lease liabilities at quarter-end.
- The Persol Holdings investment was carried at $147.2 million at quarter-end and generated a $13.2 million gain. Changes in this investment’s market value flow through earnings and may materially affect reported results.
Outlook, Risks and Contingencies
Management’s strategic priorities are to grow higher-margin specialty and outsourced solutions, integrate the NextGen and GTA acquisitions, improve costs through technology and process automation, and continue improving the conversion rate. Management expects to fund ongoing requirements through operating cash flow, cash, receivables securitization and committed credit facilities, while noting that significant deterioration in economic or operating conditions could require additional funding.
- Key operating risks include economic and labor-market changes, pricing pressure, technology disruption, customer concentration or loss, difficulty attracting qualified workers, acquisition integration, foreign currency exposure and dependence on third parties.
- Legal matters include ordinary-course employment, wage-and-hour, privacy, competition and liability claims. Gross litigation accruals were $11.6 million, with $4.6 million of related insurance recoveries. Estimated reasonably possible losses in excess of accruals ranged from $0.2 million to $2.3 million, excluding matters for which a loss could not be estimated.
- The company is disputing approximately $10 million of customer receivables and acknowledges a reasonably possible unfavorable outcome.
- The company is subject to a Hungarian Competition Authority proceeding but does not expect a material adverse effect.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Investor Verification Checklist
- Verify whether revenue growth and margin expansion continue after excluding acquisition contributions and currency effects.
- Track integration results, goodwill and intangible-asset accounting, and future performance of NextGen and GTA.
- Assess whether the $6.3 million restructuring program produces recurring cost savings and improved Americas Staffing profitability.
- Monitor days sales outstanding, receivables quality, borrowing levels, securitization availability and compliance with debt covenants.
- Separate recurring operating performance from the volatile Persol Holdings fair-value gain.
- Review potential litigation, the disputed approximately $10 million receivable, tax valuation allowances and foreign-currency exposure.