Kelly Services, Inc. 2013 Form 10-K Summary
Business context and reporting period
Kelly Services is a global workforce-solutions provider offering commercial staffing, professional and technical staffing, outsourcing, consulting, recruitment, career transition, vendor management and related services. Operations are organized across the Americas, EMEA, APAC and the Outsourcing and Consulting Group (OCG). The filing covers the 52-week fiscal year ended December 29, 2013; fourth-quarter information is presented on an unaudited basis. Approximately 540,000 employees were assigned to customers during 2013.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue from services | $5,413.1 million | $5,450.5 million | Down 0.7% |
| Gross profit | $889.5 million | $896.6 million | Down 0.8% |
| Gross profit rate | 16.4% | 16.5% | Down 0.1 percentage points |
| Earnings from operations | $53.3 million | $72.3 million | Down 26.3% |
| Operating margin | 1.0% | 1.3% | Down 0.3 percentage points |
| Earnings from continuing operations | $58.9 million | $49.7 million | Up 18.5% |
| Net earnings | $58.9 million | $50.1 million | Up 17.6% |
| Diluted earnings per share | $1.54 | $1.32 | Up $0.22 |
| Cash flow from operations | $115.3 million | $61.1 million | Up $54.2 million |
| Capital expenditures | $20.0 million | $21.5 million | Down $1.5 million |
| Cash and equivalents | $125.7 million | $76.3 million | Up $49.4 million |
| Debt | $28.3 million | $64.1 million | Down $35.8 million |
| Working capital | $474.5 million | $470.3 million | Up $4.2 million |
Fourth-quarter 2013 revenue was $1,385.8 million, gross profit was $231.5 million, earnings from continuing operations were $17.2 million and diluted earnings per share were $0.45. The company paid $0.20 per share in dividends during 2013.
Trade accounts receivable were $1.0 billion at year-end, with global fourth-quarter days sales outstanding of 52 days versus 53 days in 2012. The current ratio was 1.6 versus 1.7 in the prior year. The company reported total assets of $1,798.6 million and stockholders’ equity of $822.6 million.
Liquidity included a $200.0 million revolving credit facility with full availability and a $150.0 million securitization facility with $67.0 million of remaining capacity. The securitization facility had $28.0 million of borrowings and $55.0 million of standby letters of credit related to workers’ compensation. The company stated that it met all debt covenants at year-end.
Material changes versus the prior comparable period
- Total revenue declined modestly because hours worked fell 4%, partly offset by a 3% increase in average bill rates.
- Americas revenue declined 3.4% and operating earnings declined 23.5%; the region’s operating margin fell to 3.1% from 3.9%.
- EMEA revenue increased 3.4% and operating earnings increased 32.9%, although the gross profit rate declined to 16.7% from 17.3%.
- APAC revenue declined 3.1% as the company exited low-margin Indian business, but APAC returned to operating earnings of $2.8 million from a $2.3 million loss.
- OCG revenue increased 20.2% and operating earnings increased 35.6%, supported by growth in business-process outsourcing and contingent-workforce outsourcing. OCG represented 9% of consolidated revenue versus 7% in 2012.
- SG&A expenses increased 1.6% to $834.5 million, including $3.0 million for a Delaware unclaimed-property settlement, $1.6 million of restructuring charges and $1.7 million of asset impairments.
- The effective tax rate benefited from $18.3 million of additional work-opportunity tax credits recorded in 2013, including $9.3 million related to 2012. The work-opportunity credit program expired again at year-end 2013, and future renewal was uncertain.
- The company refinanced its facilities in December 2013. Revolving-credit capacity increased from $150.0 million to $200.0 million, and the revolving facility was extended to December 2018.
Guidance, outlook, risks and unusual items
Management planned targeted 2014 investments in professional and technical recruiting, OCG capabilities, talent-supply-chain analytics and centralized service delivery. It expected these investments to support double-digit sales growth in OCG and Americas PT in 2015, assuming continued economic growth, but stated that revenue growth would lag the investments and overall 2014 earnings were expected to decline year over year.
Management’s long-term return-on-sales goal is 4.0%, compared with 1.0% in 2013. The outlook depends on stronger demand for temporary and full-time labor in the sectors served by Kelly, continued execution of the higher-margin specialty strategy and effective cost control.
- Healthcare reform implementation was expected to create costs in 2014 before coverage was offered to eligible temporary employees in 2015. Management could not assure that customer pricing would fully recover these costs.
- A Louisiana jury awarded $4.4 million in litigation involving Kelly and the Jefferson Parish School Board; Kelly’s stated share was $2.7 million plus a portion of interest. Kelly said it was appropriately insured and was evaluating appeals.
- The company recorded a $4.5 million Delaware unclaimed-property settlement, including a $3.0 million additional reserve in the first quarter of 2013.
- Workers’ compensation, disability and medical claims are subject to actuarial estimation and substantial self-insured exposure. The workers’ compensation accrual, net of related receivables, was $58.4 million at year-end.
- Key risks include economic sensitivity, intense pricing competition, customer concentration, loss of major accounts, international currency and regulatory exposure, employment-related litigation, data-security incidents, technology-project execution, goodwill impairment, tax liabilities and debt-covenant compliance.
- Approximately 51% of 2013 revenue came from 100 large customers, and the largest customer represented approximately 5% of revenue. Most customer contracts can be terminated on short notice.
- Terence E. Adderley and related trusts controlled approximately 93% of the voting Class B shares. Class A shares generally have no voting rights, making the company a controlled company under NASDAQ rules.
Important facts for investors to verify
- Whether 2014 investments produce the targeted 2015 double-digit growth in Americas PT and OCG without further substantial margin deterioration.
- The renewal status and financial effect of the U.S. work-opportunity tax credit program.
- The actual cost, timing and customer-price recovery associated with healthcare reform compliance.
- The resolution, insurance recovery and cash impact of the Louisiana litigation award and other employment-related claims.
- Receivables quality, European customer exposure and the effect of the $20.0 million year-end supplier-payment timing item on 2014 operating cash flow.
- Availability and covenant compliance under the revolving and securitization facilities, including the securitization facility’s delayed-funding provision.
- Workers’ compensation reserve development, impairment assumptions and the sustainability of the company’s unusually favorable 2013 tax rate.
- The filing states that management and PricewaterhouseCoopers concluded internal control over financial reporting was effective as of December 29, 2013.