Business Context and Reporting Period
Company: Kelly Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 27, 2009 (13 weeks) and September 27, 2009 (39 weeks/YTD)
Industry: Staffing and Human Resources Services
Kelly Services operates globally across seven segments: Americas Commercial, Americas PT, EMEA Commercial, EMEA PT, APAC Commercial, APAC PT, and Outsourcing and Consulting Group (OCG). The reporting period reflects continued impacts from the global recession, characterized by significant declines in hours worked and fee-based income, though the rate of job loss in the temporary staffing industry began to decelerate in the third quarter.
Key Financial Metrics
| Metric (in millions) | Q3 2009 | Q3 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Revenue from Services | $1,049.2 | $1,397.8 | $3,120.7 | $4,238.2 |
| Gross Profit | $166.2 | $245.7 | $513.4 | $753.0 |
| Gross Margin % | 15.8% | 17.6% | 16.5% | 17.8% |
| Operating (Loss) Earnings | $(28.0) | $(14.5) | $(133.1) | $13.4 |
| Net (Loss) Earnings | $(14.8) | $(12.2) | $(96.3) | $6.5 |
| Diluted EPS (Continuing Ops) | $(0.43) | $(0.33) | $(2.78) | $0.19 |
| Cash and Equivalents | $91.0 | $113.6 | $91.0 | $113.6 |
| Total Debt | $81.3 | $115.2 | $81.3 | $115.2 |
| Operating Cash Flow (YTD) | $40.7 | $86.4 | $40.7 | $86.4 |
Material Changes vs. Prior Period
- Revenue Decline: Q3 revenue decreased 24.9% year-over-year (22.4% on a constant currency basis) due to a 21.6% drop in hours worked and a 5.1% decrease in average hourly bill rates. Fee-based income fell 48.2% to $20.5 million.
- Asset Impairments: The company recorded a significant non-cash goodwill impairment charge of $50.5 million in the second quarter of 2009 (included in YTD results), affecting Americas Commercial ($16.4M), APAC Commercial ($12.1M), and EMEA PT ($22.0M). An additional $0.5 million in long-lived asset impairments was recorded in Q3.
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased $66.5 million (25.6%) in Q3 compared to the prior year, driven by structural changes (reduction of ~1,600 employees and ~130 branches), lower incentive compensation, and reduced litigation expenses ($4.3M in Q3 2009 vs. $22.5M in Q3 2008).
- Profitability: The company reported a net loss for both the quarter and the year-to-date, contrasting with net earnings in the prior year periods. Operating margins turned negative in most segments due to revenue declines and mix shifts toward lower-margin light industrial work.
Guidance, Outlook, and Risks
- Outlook: Management notes that while the rate of job loss has decelerated, the job market remains difficult. The company expects to continue monitoring expenses and guarding its ability to serve customers. No specific numerical guidance for future quarters was provided in this filing.
- Restructuring: A restructuring plan for U.K. operations is ongoing. Total pre-tax charges are expected to reach $11 million to $12 million, with an additional $1 million to $2 million expected in Q4 2009.
- Liquidity and Debt: On September 28, 2009, the company renegotiated its credit facilities, replacing a $150 million revolver with a new $90 million secured revolving credit facility maturing in 2012. The company also amended term loans. Covenants include minimum EBITDA levels and interest coverage ratios. The company is also pursuing a $100 million securitization facility expected to close in Q4 2009.
- Risks: Key risks include continued economic downturns, foreign currency fluctuations (stronger U.S. dollar negatively impacted reported revenue), and the potential for further goodwill impairments if economic forecasts worsen. Litigation risks remain, particularly regarding wage and hour laws.
Investor Verification Checklist
- Goodwill Impairment Sensitivity: Verify the assumptions used in the discounted cash flow models for the remaining $67.3 million goodwill balance, as further economic deterioration could trigger additional charges.
- U.K. Restructuring Progress: Monitor the completion of branch closures and the realization of expected cost savings from the U.K. restructuring plan.
- Debt Covenant Compliance: Track the company's ability to meet the new EBITDA and interest coverage covenants under the renegotiated $90 million credit facility.
- Fee-Based Income Trends: Assess the recovery of permanent placement and temporary-to-permanent conversion fees, which have declined significantly and heavily impact gross margins.
- Litigation Reserves: Review updates on the two significant wage and hour class action settlements expected to receive final court approval in Q4 2009.