Kelly Services, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Kelly Services provides temporary and permanent staffing, recruiting, outsourcing, consulting, and talent solutions through Americas Staffing, Global Talent Solutions (GTS), and International Staffing. The filing covers the 13-week quarter and 26 weeks ended June 30, 2019, compared with the periods ended July 1, 2018. Results are unaudited.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Revenue from services | $1,367.5 million | $1,386.9 million | $2,750.1 million | $2,756.8 million |
| Gross profit | $244.0 million | $240.5 million | $495.6 million | $478.7 million |
| Gross profit rate | 17.8% | 17.3% | 18.0% | 17.4% |
| Earnings from operations | $34.8 million | $20.4 million | $51.6 million | $32.4 million |
| Net earnings | $83.8 million | $(15.4) million | $105.9 million | $13.7 million |
| Diluted EPS | $2.12 | $(0.40) | $2.68 | $0.35 |
| Net cash from operating activities | Not separately provided | Not separately provided | $73.5 million | $33.2 million |
Q2 operating margin was 2.5%, versus 1.5% in the prior-year quarter. Six-month operating margin was 1.9%, versus 1.2%. Excluding restructuring charges, six-month operating earnings were $57.3 million and operating margin was 2.1%.
At June 30, 2019, cash and equivalents were $37.2 million, or $42.5 million including restricted cash. Trade accounts receivable were $1.274 billion, and global days sales outstanding was 57 days versus 55 days at the prior-year quarter-end. Short-term borrowings were $19.3 million versus $2.2 million at year-end 2018. The current ratio was 1.5 versus 1.6 at year-end 2018, and debt-to-total capital was 1.5% versus 0.2%.
The company had $150.0 million of available capacity on its $150.0 million revolving credit facility and $130.3 million of available capacity on its $200.0 million securitization facility. It was in compliance with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue declined 1.4% in Q2 and 0.2% year to date on a reported basis, but increased 0.2% and 1.3%, respectively, on a constant-currency basis.
- Gross profit increased 1.4% in Q2 and 3.5% year to date, reflecting improved mix and stronger performance in GTS and Americas Staffing.
- GTS revenue increased 1.0% in Q2 and 2.1% year to date; operating earnings increased 43.0% and 51.4%, respectively.
- Americas Staffing revenue declined 1.0% in Q2 but increased 1.3% year to date. Lower staffing hours, particularly in commercial staffing, offset higher bill rates and the NextGen acquisition.
- International Staffing revenue declined 6.5% in Q2 and 7.8% year to date on a reported basis, primarily due to currency effects and lower volumes in France and Germany.
- Q2 and year-to-date earnings benefited from gains on the Persol Holdings investment of $61.2 million and $74.4 million, respectively. The comparable 2018 periods included losses of $52.5 million and $28.8 million.
- The company recorded a $12.3 million gain on the sale of unused land and transferred customer contracts. Six-month results included $5.7 million of restructuring charges, primarily severance related to U.S. branch operations.
- January 2019 acquisitions of NextGen Global Resources and Global Technology Associates required aggregate cash consideration of approximately $90.0 million and contributed $59.4 million of Q2 revenue and $4.9 million of Q2 net earnings.
Cash Flow, Liquidity, Outlook, and Risks
Six-month operating cash flow increased to $73.5 million from $33.2 million. Investing cash use increased to $79.6 million, primarily because of the NextGen and GTA acquisitions, partially offset by asset-sale proceeds. Financing activities generated $8.6 million, including increased short-term borrowings, while dividend payments remained $5.9 million.
Management’s strategy focuses on growing specialty and outsourced solutions, integrating the NextGen and GTA acquisitions, investing in technology and process automation, improving cost structure, and increasing conversion rates. The filing does not provide specific quantitative revenue or earnings guidance.
Key risks include economic and labor-market changes, customer demand and concentration, competition and technology disruption, acquisition integration, foreign currency exposure, volatility in the Persol Holdings investment, workers’ compensation and employment-related claims, cybersecurity and privacy risks, regulatory and tax changes, covenant compliance, and the ability to execute restructuring and technology initiatives.
Litigation and investigations arise in the ordinary course of business. Litigation accruals were $11.0 million, with related insurance recoveries of $4.6 million. Estimated reasonably possible losses in excess of accruals ranged from $0.1 million to $3.7 million, excluding matters for which a loss could not be estimated. The company also faces customer litigation involving an approximately $10 million disputed receivable.
Important Facts for Investors to Verify
- Assess recurring operating performance separately from the $61.2 million Q2 and $74.4 million year-to-date Persol Holdings gains and the $12.3 million asset-sale gain.
- Monitor Americas Staffing volumes and the timing of benefits from the U.S. branch restructuring.
- Evaluate whether GTS growth and margin expansion offset continued weakness in International Staffing.
- Verify integration, profitability, and cash returns from the NextGen and GTA acquisitions.
- Track receivables, DSO, securitization-facility usage, and liquidity as working-capital needs change.
- Review the market value volatility and foreign-exchange exposure associated with the Persol Holdings investment.
- Follow litigation, workers’ compensation claims, tax valuation allowances, and the disputed customer receivable.