Kelly Services, Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
Kelly Services provides temporary staffing, professional and technical staffing, outsourcing, consulting, recruitment process outsourcing, payroll process outsourcing, and related workforce solutions. The filing covers the 13 weeks ended April 1, 2012, compared with the 13 weeks ended April 3, 2011. The financial statements are unaudited.
Management reported that economic uncertainty, high fuel prices, slower U.S. job growth, and weak European conditions affected demand. The fourth-quarter 2011 acquisition of Brazil-based Tradição contributed to reported growth.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue from services | $1,354.8 million | $1,339.1 million | Up 1.2%; up 1.9% constant currency |
| Gross profit | $223.7 million | $211.2 million | Up 5.9% |
| Gross profit rate | 16.5% | 15.8% | Up 0.7 percentage points |
| SG&A expenses | $209.0 million | $209.6 million | Down 0.3% |
| Earnings from operations | $14.7 million | $1.6 million | Up $13.1 million |
| Operating margin | 1.1% | 0.1% | Up 1.0 percentage point |
| Earnings from continuing operations | $9.2 million | $1.1 million | Up $8.1 million |
| Net earnings | $9.6 million | $1.1 million | Up $8.5 million |
| Diluted EPS | $0.26 | $0.03 | Up $0.23 |
| Cash flow from operating activities | $13.4 million | $(5.0) million | Improved $18.4 million |
Fee-based income increased 15.1% to $36.6 million and was a significant contributor to the higher gross profit rate. Management also reduced estimated prior-year workers’ compensation costs by approximately $2 million during the quarter.
At April 1, 2012, cash and equivalents were $88.3 million, compared with $81.0 million at year-end 2011. Trade accounts receivable were $977.9 million, with global days sales outstanding of 54 days versus 52 days at the end of the prior-year quarter. Working capital was $429 million and the current ratio was 1.6.
Short-term borrowings were $94.7 million, compared with $96.3 million at year-end 2011. Debt-to-total capital was 12.0%, compared with 12.5% at year-end 2011. The company generated $13.4 million from operations, used $4.4 million for investing activities, including $4.0 million of capital expenditures, and used $4.2 million for financing activities, including $1.9 million of dividends.
At quarter-end, Kelly had $150 million of available capacity on its $150 million revolving credit facility and $6 million of available capacity on its $150 million securitization facility. The securitization facility had $88 million of borrowings and $56 million of standby letters of credit related to workers’ compensation.
Material changes versus the prior comparable period
- Reported revenue increased modestly, but constant-currency revenue excluding the Tradição acquisition was approximately flat. Hours worked declined 7%, partly offset by a 6% increase in average bill rates.
- Americas revenue increased 2.9% to $919.4 million, with professional and technical revenue growth of 4%. Americas operating earnings increased to $35.3 million from $25.2 million.
- EMEA revenue declined 6.5% to $255.2 million because hours worked fell 10%. Lower SG&A and the absence of prior-year restructuring charges moved EMEA to $0.3 million of operating earnings from a $1.7 million operating loss.
- APAC revenue declined 9.0% to $101.1 million and operating losses widened to $1.4 million from $0.5 million. Kelly exited certain low-margin customers in India and Australia.
- Outsourcing and Consulting Group revenue rose 27.1% to $86.7 million, and operating earnings improved to $0.5 million from a $2.4 million loss.
- SG&A was relatively stable despite the Tradição acquisition, while Q1 2011 included $4.0 million of restructuring charges.
- The company changed the classification of certain vendor management and technology costs from SG&A to cost of services and revised the prior period. The change reduced Q1 2011 gross profit and SG&A by approximately $2.5 million in the financial statements, or approximately $3 million as described in MD&A.
- Income tax expense increased to $4.9 million from $0.1 million, primarily because of higher pretax income. Q1 2012 tax expense was reduced by approximately $0.9 million to correct an immaterial prior-year work opportunity credit error.
Outlook, commentary, risks, contingencies, and unusual items
Management intends to improve returns by expanding professional and technical, fee-based, outsourcing, and other higher-margin offerings while maintaining a lower cost structure. No quantitative earnings or revenue guidance was provided.
The U.S. work opportunity credit program had expired at the end of 2011, and future reinstatement was described as uncertain. The company also identified risks from economic and employment conditions, pricing pressure, customer concentration or contract loss, availability of skilled temporary workers, foreign currency movements, workers’ compensation and benefit claims, employment-related litigation, credit facility covenants, access to financing, information technology execution, and regulatory or tax changes.
Q1 2012 discontinued-operations earnings of $0.4 million reflected a reduction in estimated litigation settlement costs related to the 2007 sale of Kelly Home Care. The company received final court approval of the related California class-action settlement in May 2012. Ordinary-course litigation remains subject to uncertainty, although management did not expect currently known matters to have a material adverse effect.
European customer receivables totaled $283 million, or 29% of net trade receivables. Receivables from Italy, Portugal, and Ireland totaled $43 million, with no significant deterioration reported during the quarter. Management stated that there were no material changes to contractual obligations or risk factors from the 2011 Form 10-K.
Disclosure controls and procedures were concluded to be effective. Internal control integration for the acquired Tradição business was ongoing, but no material change to internal control over financial reporting was reported.
Important facts for investors to verify
- Confirm the sustainability of the improved 16.5% gross profit rate, including the effects of fee-based income and workers’ compensation reserve adjustments.
- Assess whether revenue and hours worked can recover, particularly in EMEA and APAC, and separate organic performance from the Tradição acquisition contribution.
- Monitor the expiration and possible reinstatement of U.S. work opportunity tax credits.
- Review liquidity needs associated with payroll funding, receivables growth, the securitization facility, standby letters of credit, and available borrowing capacity.
- Evaluate European receivables exposure and foreign currency risk amid continuing Eurozone weakness.
- Track employment-related litigation, workers’ compensation claims, and the final financial impact of the Kelly Home Care settlement.
- Verify the effect of the accounting reclassification and the immaterial tax-error correction when comparing Q1 2012 with Q1 2011.