Business Context and Reporting Period
Company: Kelly Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 4, 2010 (13 weeks) and 26 weeks year-to-date.
Business Overview: Kelly Services provides temporary staffing, professional and technical staffing, and outsourcing services globally. The company operates through seven segments: Americas Commercial, Americas PT, EMEA Commercial, EMEA PT, APAC Commercial, APAC PT, and Outsourcing and Consulting Group (OCG).
Key Financial Metrics
| Metric (in millions) | Q2 2010 (13 Wks) | Q2 2009 (13 Wks) | YTD 2010 (26 Wks) | YTD 2009 (26 Wks) |
|---|---|---|---|---|
| Revenue from Services | $1,209.4 | $1,028.9 | $2,339.8 | $2,071.5 |
| Gross Profit | $190.9 | $171.7 | $370.9 | $347.2 |
| Gross Margin % | 15.8% | 16.7% | 15.9% | 16.8% |
| Operating Earnings (Loss) | $8.5 | $(74.5) | $6.9 | $(105.1) |
| Net Earnings (Loss) | $3.9 | $(66.0) | $1.9 | $(81.5) |
| Diluted EPS | $0.11 | $(1.89) | $0.05 | $(2.34) |
| Cash and Equivalents | $65.3 | $115.2 | $65.3 | $115.2 |
| Total Debt | $118.3 | $137.1 | $118.3 | $137.1 |
| Working Capital | $390.4 | $360.8 | $390.4 | $360.8 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 17.5% in Q2 2010 and 13.0% YTD compared to the prior year. This was driven by a 20.0% increase in hours worked, partially offset by a 2.5% decrease in average hourly bill rates. On a constant currency basis, Q2 revenue grew 16.8%.
- Profitability Turnaround: The company returned to profitability, reporting net earnings of $3.9 million in Q2 2010 compared to a net loss of $66.0 million in Q2 2009. This improvement is largely due to the absence of the $52.6 million goodwill impairment charge recorded in Q2 2009.
- Expense Management: Selling, general, and administrative (SG&A) expenses decreased 6.5% year-over-year in Q2 2010, benefiting from restructuring actions taken in the prior year.
- Asset Impairments: Q2 2010 included a $1.5 million impairment charge for incomplete software projects in Europe, a significant reduction from the $52.6 million charge in Q2 2009.
Guidance, Outlook, and Risks
Management Commentary: Management notes that the global economy continues to show signs of recovery with strengthening labor markets. Demand for temporary staffing improved across all geographic regions, with strong growth in light industrial staffing and stability in office-clerical staffing.
Strategic Developments:
- Temp Holdings Alliance: Kelly entered a strategic alliance with Temp Holdings Co., Ltd. (Japan), selling 1.6 million shares of Class A common stock for approximately $24.3 million. Temp Holdings added a representative to Kelly's board.
- Executive Change: The board decided to eliminate the position of Chief Administrative Officer, effective September 30, 2010, incurring approximately $2.8 million in severance costs in Q3 2010.
Risks and Contingencies:
- Legal Proceedings: Two pending class action lawsuits in California (Fuller and Sullivan) involve claims regarding employee misclassification and compensation. The Fuller case was recertified as a class action in May 2010; the Sullivan case was certified in April 2010. Management believes it has meritorious defenses.
- Market Risks: The company is exposed to foreign currency fluctuations and interest rate risks. It uses forward exchange contracts to hedge yen-denominated debt.
- Margin Pressure: Gross profit rates declined due to a shift toward lower-margin light industrial and payroll process outsourcing (PPO) businesses.
Investor Verification Checklist
- Revenue Quality: Verify the sustainability of the 20% increase in hours worked versus the 2.5% decline in bill rates to ensure margin compression does not accelerate.
- Legal Exposure: Monitor the status of the Fuller and Sullivan class action lawsuits for potential settlement costs or adverse rulings.
- Working Capital: Assess the impact of the $20.3 million cash outflow from operating activities, driven by increased trade receivables, on future liquidity.
- Segment Performance: Review the continued losses in the OCG segment (operating loss of $5.8 million in Q2) and the impact of lower-margin PPO growth.
- Debt Structure: Confirm the utilization of the $90 million revolving credit facility and $100 million securitization facility to ensure adequate liquidity coverage.