Kelly Services(KELYA) - 2018 Q4 - Annual Report

Part I Business Kelly Services is a global workforce solutions provider operating in three segments, serving a diverse customer base including over 90% of Fortune 100 companies, while navigating seasonality and intense industry competition - The company operates through three primary business segments: Americas Staffing, Global Talent Solutions (GTS), and International Staffing[17] - In 2018, Kelly Services assigned approximately 500,000 temporary employees to customers globally[15][37] - The company's customer base includes over 90% of the Fortune 100™ companies. In 2018, 100 large customers accounted for an estimated 51% of total revenue, with the largest single customer representing about 5%[15][30] - The business experiences seasonality, with demand typically being lower in the first quarter and increasing throughout the rest of the year, except for the education business[28] - The worldwide workforce solutions industry is highly competitive. Key competitors in 2018 included Adecco S.A., Randstad Holding N.V., ManpowerGroup Inc., Allegis Group, and Recruit Holdings[32] Description of Business Segments The company's operations are structured into three segments: Americas Staffing, International Staffing, and Global Talent Solutions (GTS), which delivers integrated talent management solutions globally, reflecting a market trend towards holistic talent supply chain management Business Segment Overview | Segment | Description | Services Offered | | :--- | :--- | :--- | | Americas Staffing | Branch-delivered staffing in the U.S., Puerto Rico, Canada, Mexico, and Brazil | Temporary staffing and direct-hire in Office, Education, Marketing, Electronic Assembly, Light Industrial, Science, Engineering, IT, Creative Services, Finance & Accounting | | International Staffing | Branch-delivered staffing in the EMEA region | Similar range to Americas Staffing, plus Catering, Hospitality, and Industrial services | | Global Talent Solutions (GTS) | Outsourcing, consulting, and centrally delivered staffing on a global basis | Contingent Workforce Outsourcing (CWO), Recruitment Process Outsourcing (RPO), Business Process Outsourcing (BPO), Payroll Process Outsourcing (PPO), KellyConnect (contact center), career transition, and talent advisory services | Risk Factors The company faces significant risks from intense competition, economic sensitivity, technological disruption, international operations, employment-related claims, cybersecurity threats, and concentrated voting control - The company operates in a highly competitive staffing market with low barriers to entry, facing price competition and the risk of customers diversifying suppliers or insourcing services[45][46] - Demand for staffing services is significantly affected by general economic conditions, with business volumes historically showing a disproportionate impact from economic swings[47] - Technological advances like automation and AI pose a risk by potentially replacing human tasks, which could weaken demand for talent, especially in lower-skill categories[48] - A significant portion of operations are outside the U.S., exposing the company to risks from currency fluctuations, political/economic instability, and varying legal and regulatory requirements[61] - The company is exposed to numerous employment-related claims, including discrimination, wrongful termination, and wage and hour violations, which could lead to material losses[67][68] - Cyber attacks and breaches of IT security are a significant risk, as the company relies on IT systems to store confidential information. A breach could result in reputational damage, fines, and financial liabilities[70][71] - The Terence E. Adderley Revocable Trust K holds approximately 91.5% of the voting Class B common stock, giving it voting control over the company, including the election of all directors[84][85] Properties The company owns its 345,000 square foot corporate headquarters in Troy, Michigan, while branch office operations are conducted in leased premises with typical terms of three to ten years - The company owns its headquarters in Troy, Michigan, with a combined usable floor space of approximately 345,000 square feet[95][96] - Branch offices operate out of leased properties. Leases are generally for terms of three to five years in the U.S. and Canada, and five to ten years elsewhere[97] Legal Proceedings The company is involved in routine litigation, benefiting from a favorable Supreme Court decision on class action waivers, and does not expect a material adverse effect from Hungarian competition authority proceedings initiated in January 2018 - Following a favorable U.S. Supreme Court ruling on May 21, 2018, most lower courts have been enforcing the company's arbitration agreements and class action waivers[98] - In January 2018, the Hungarian Competition Authority initiated proceedings against the Company for alleged infringement of national competition regulations. The company does not believe the resolution will have a material adverse effect[102] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A and B common stock trade on NASDAQ, paid $0.30 dividends in 2018 and 2017, reacquired shares for tax withholdings, and its five-year cumulative total return underperformed relevant indices 2018 & 2017 Stock Price and Dividend Summary | Year | Stock Class | High Price ($) | Low Price ($) | Annual Dividend ($) | | :--- | :--- | :--- | :--- | :--- | | 2018 | Class A | $32.31 | $19.21 | $0.30 | | 2018 | Class B | $34.30 | $21.50 | $0.30 | | 2017 | Class A | $30.93 | $20.27 | $0.30 | | 2017 | Class B | $28.50 | $20.18 | $0.30 | - During Q4 2018, the company reacquired 24,931 shares of Class A common stock at an average price of $23.25 per share, primarily to cover employee tax withholdings on vested restricted stock[110] - The five-year cumulative total return for Kelly Services stock ($87.53 on a $100 investment) underperformed the S&P SmallCap 600 Index ($135.96) and the S&P 1500 Human Resources and Employment Services Index ($126.37) for the period ending December 31, 2018[112][113] Selected Financial Data This section provides a five-year financial summary, showing 2018 revenue of $5.51 billion and net earnings of $22.9 million, significantly impacted by a $96.2 million loss on the Persol Holdings investment Five-Year Selected Financial Data (In millions, except per share amounts) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue from services | $5,513.9 | $5,374.4 | $5,276.8 | $5,518.2 | $5,562.7 | | Earnings from operations | $87.4 | $83.3 | $63.2 | $66.7 | $21.9 | | Net earnings | $22.9 | $71.6 | $120.8 | $53.8 | $23.7 | | Diluted earnings per share | $0.58 | $1.81 | $3.08 | $1.39 | $0.61 | | Dividends per share | $0.30 | $0.30 | $0.275 | $0.20 | $0.20 | | Total assets | $2,314.4 | $2,378.2 | $2,028.1 | $1,939.6 | $1,917.9 | - Net earnings in 2018 were significantly impacted by a $96.2 million loss on the investment in Persol Holdings[115] - Net earnings in 2016 included an $87.2 million gain on the investment in the PersolKelly Asia Pacific joint venture[115] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's strategy for profitable growth in the evolving talent solutions industry, highlighting 2018 revenue growth to $5.5 billion, a sharp decline in net earnings due to an investment loss, and a strong liquidity position with $61.4 million cash from operations Executive Overview The company is strategically focusing on becoming a leading talent solutions provider by emphasizing scale, specialty, future of work, talent attraction, and innovation, evidenced by 2018 divestitures and acquisitions in 5G telecom, resulting in $87.4 million earnings from operations - The company's strategic pillars are: Leadership position via scale or specialty, embracing the future of work, being a destination for top talent, and investing in innovation and efficiency[125] - In 2018, the company sold its healthcare and legal specialty operations to increase focus on commercial, education, engineering, and science specialties[128] - On January 2, 2019, Kelly acquired Global Technology Associates and NextGen Global Resources to expand its engineering portfolio in the growing 5G telecommunications market[128] 2018 Performance Highlights | Metric | 2018 (in millions) | 2017 (in millions) | | :--- | :--- | :--- | | Earnings from operations | $87.4 | $83.3 | | Conversion rate (Return on gross profit) | 9.0% | 8.7% | Results of Operations This section details financial performance, showing 2018 total revenue growth of 2.6% to $5.51 billion driven by Americas and International Staffing, and 2017 revenue growth of 1.9% to $5.37 billion, with overall gross profit rates declining slightly Total Company Performance: 2018 vs 2017 (in millions) | Metric | 2018 (in millions) | 2017 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Revenue from services | $5,513.9 | $5,374.4 | 2.6% | | Gross profit | $972.2 | $954.1 | 1.9% | | Earnings from operations | $87.4 | $83.3 | 5.0% | | Diluted EPS | $0.58 | $1.81 | (68.0)% | Total Company Performance: 2017 vs 2016 (in millions) | Metric | 2017 (in millions) | 2016 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Revenue from services | $5,374.4 | $5,276.8 | 1.9% | | Gross profit | $954.1 | $906.3 | 5.3% | | Earnings from operations | $83.3 | $63.2 | 31.7% | | Diluted EPS | $1.81 | $3.08 | (41.2)% | Financial Condition The company's financial condition is solid, with $61.4 million net cash from operating activities in 2018, working capital increasing to $503.0 million, and a low debt-to-total capital ratio of 0.2%, while critical accounting estimates require significant management judgment Cash Flow Summary | Activity | 2018 (in millions) | 2017 (in millions) | 2016 (in millions) | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $61.4 | $70.8 | $40.1 | | Net cash used in investing activities | ($29.8) | ($61.0) | $10.6 | | Net cash used in financing activities | ($26.5) | ($3.4) | ($69.1) | - Working capital increased by $44.9 million to $503.0 million at year-end 2018, with the current ratio improving to 1.6 from 1.5 in 2017[183] - The debt-to-total capital ratio was very low at 0.2% at year-end 2018, down from 0.9% at year-end 2017[185] - Critical accounting estimates requiring significant judgment include workers' compensation accruals, income tax provisions, impairment testing for goodwill and equity investments, litigation reserves, and the allowance for uncollectible accounts[198][199][201][206][207][212][213] Quantitative and Qualitative Disclosures About Market Risk The company faces foreign currency risk from international operations, partially mitigated by natural hedging, and a material market and currency risk from its yen-denominated Persol Holdings investment, while interest rate risk from borrowings is not considered material - The company faces foreign currency risk from its international operations, but this is partially mitigated as most foreign subsidiaries operate within a single currency[222] - A material market and currency risk exists for the company's investment in Persol Holdings. The investment is marked to market through net earnings, and currency fluctuations are reflected in other comprehensive income[224] - Interest rate risk from borrowings is not considered material; a hypothetical 10% fluctuation in market rates would not have had a material impact on 2018 earnings[223] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the three fiscal years ended December 30, 2018, including statements of earnings, comprehensive income, balance sheets, stockholders' equity, and cash flows, with detailed notes Consolidated Statements of Earnings Summary (in millions) | Line Item | 2018 (in millions) | 2017 (in millions) | 2016 (in millions) | | :--- | :--- | :--- | :--- | | Revenue from services | $5,513.9 | $5,374.4 | $5,276.8 | | Gross profit | $972.2 | $954.1 | $906.3 | | Earnings from operations | $87.4 | $83.3 | $63.2 | | Loss on investment in Persol Holdings | ($96.2) | — | — | | Gain on investment in PersolKelly Asia Pacific | — | — | $87.2 | | Net earnings | $22.9 | $71.6 | $120.8 | Controls and Procedures The CEO and CFO confirmed the effectiveness of disclosure controls and procedures as of December 30, 2018, and management's assessment also found internal controls over financial reporting effective, with no material changes in the fourth fiscal quarter - The CEO and CFO have concluded that the company's disclosure controls and procedures are effective at a reasonable assurance level as of the end of the reporting period[229] - Management assessed internal control over financial reporting using the COSO framework and determined it was effective as of December 30, 2018[257][258] - No changes in internal control over financial reporting occurred during the fourth fiscal quarter that materially affected, or are reasonably likely to materially affect, these controls[232] Part III Executive Officers of the Registrant This section lists Kelly Services' executive officers as of December 30, 2018, including George S. Corona (President and CEO), Teresa S. Carroll (EVP), Peter W. Quigley (EVP), Olivier G. Thirot (EVP and CFO), Hannah S. Lim-Johnson (SVP and Chief Legal Officer), and Laura S. Lockhart (VP, Corporate Controller and Chief Accounting Officer) Executive Officers as of December 30, 2018 | Name | Age | Title | | :--- | :--- | :--- | | George S. Corona | 60 | President and Chief Executive Officer | | Teresa S. Carroll | 53 | Executive Vice President, President, Global Talent Solutions | | Peter W. Quigley | 57 | Executive Vice President, President, Global Staffing | | Olivier G. Thirot | 57 | Executive Vice President and Chief Financial Officer | | Hannah S. Lim-Johnson | 47 | Senior Vice President and Chief Legal Officer | | Laura S. Lockhart | 49 | Vice President, Corporate Controller and Chief Accounting Officer | Securities Authorized for Issuance Under Equity Compensation Plans As of fiscal year-end 2018, the company had over 4 million securities available for future issuance under its equity compensation plans, including 3,989,910 shares under the stockholder-approved Equity Incentive Plan Equity Compensation Plan Information (as of FYE 2018) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price ($) | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by Security Holders | — | $— | 3,989,910 | | Not Approved by Security Holders | — | $— | 77,434 | | Total | — | $— | 4,067,344 | Part IV Exhibits, Financial Statement Schedules This section lists all documents filed as part of the Form 10-K report, including financial statements, management's report on internal control, the independent auditor's report, and Schedule II - Valuation Reserves, with a full index of exhibits provided - This section provides an index of all financial statements, schedules, and exhibits filed with the Form 10-K[243][246]