Business Context and Reporting Period
Company: Kelly Services, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: 13 and 26 weeks ended June 29, 2008
Business Overview: Kelly Services provides staffing and outsourcing solutions globally. The company operates through seven segments: Americas Commercial, Americas Professional and Technical (PT), EMEA Commercial, EMEA PT, APAC Commercial, APAC PT, and the Outsourcing and Consulting Group (OCG). The second quarter of 2008 was characterized by a weakening U.S. labor market, with 15 consecutive months of year-over-year declines in temporary employment.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended June 29, 2008 |
13 Weeks Ended July 1, 2007 |
26 Weeks Ended June 29, 2008 |
26 Weeks Ended July 1, 2007 |
|---|---|---|---|---|
| Revenue from Services | $1,452,007 | $1,415,674 | $2,840,451 | $2,766,532 |
| Gross Profit | $257,402 | $247,566 | $507,289 | $476,774 |
| Gross Profit Rate | 17.7% | 17.5% | 17.9% | 17.2% |
| Earnings from Operations | $14,954 | $22,266 | $27,894 | $32,759 |
| Net Earnings | $10,517 | $15,329 | $18,746 | $27,244 |
| Diluted EPS (Continuing Ops) | $0.30 | $0.41 | $0.53 | $0.56 |
| Cash and Equivalents | $85,369 | $112,463 | $85,369 | $112,463 |
| Short-term Borrowings | $44,962 | $49,729 | $44,962 | $49,729 |
| Long-term Debt | $51,349 | $48,394 | $51,349 | $48,394 |
Note: Cash and equivalents and debt figures represent the balance sheet position as of June 29, 2008, compared to the prior year-end or comparable period where available.
Material Changes vs. Prior Period
- Revenue: Revenue increased 2.6% in the second quarter and 2.7% year-to-date compared to 2007. This growth was driven by an 8.1% increase in average hourly bill rates, partially offset by a 6.9% decrease in hours worked. On a constant currency basis, revenue actually decreased 1.3% due to the weakening U.S. dollar.
- Profitability: Earnings from operations decreased 32.8% in the second quarter and 14.9% year-to-date. Net earnings declined 31.4% in the quarter and 31.2% year-to-date. The decline is attributed to the economic slowdown in the U.S., increased selling, general, and administrative (SG&A) expenses, and the absence of one-time benefits recorded in 2007 (French payroll tax credits and U.K. restructuring costs).
- Segment Performance:
- Americas Commercial: Revenue decreased 6.1% due to a 10.5% drop in hours worked.
- OCG: Revenue surged 60.3% and earnings increased 32.0%, driven by growth in fee-based services.
- EMEA & APAC: Revenue increased in all EMEA and APAC segments, though operating earnings were mixed due to investment costs and currency fluctuations.
- Working Capital: Trade accounts receivable increased to $952.5 million (from $888.3 million at year-end 2007). Global days sales outstanding remained stable at 51 days.
Guidance, Outlook, and Risks
- Outlook: Management notes that demand for temporary staffing in the U.S. worsened in the second quarter, with June marking the sixth straight month of job losses. The company expects to continue minimizing risk in the short term while investing in long-term shareholder value and infrastructure.
- Strategic Initiatives: The company is expanding geographic diversity (Portugal and Dubai) and growing fee-based services within the OCG segment. A new acquisition of Randstad's Portuguese subsidiaries is expected to close in the third quarter of 2008 for approximately $14 million.
- Legal Contingencies:
- Enron Litigation: Kelly is defending claims related to the purchase of Enron commercial paper. A settlement was reached regarding claims from Lehman Brothers, but litigation with Goldman Sachs continues.
- California Class Action: A lawsuit regarding the misclassification of personal attendants and pay stub violations is ongoing. Potential damages could be material.
- Religious Discrimination: A jury verdict against the company in a religious discrimination case resulted in reduced punitive damages of $650,000; the company is pursuing appellate remedies.
- Accounting Adjustments: An out-of-period adjustment of $0.9 million was recorded in Q2 2008 for an understatement of an asset impairment charge from Q1 2008. Additionally, a $1.4 million tax benefit was recognized from the reversal of a valuation allowance on Italian deferred tax assets.
Investor Verification Checklist
- U.S. Market Exposure: Verify the extent of revenue concentration in the U.S. Commercial segment, which faced a 6.1% revenue decline due to the broader economic slowdown.
- Fee-Based Growth: Confirm the sustainability of the 25.7% growth in fee-based income, which is driving gross margin expansion but represents a small portion (2.9%) of total revenue.
- Legal Exposure: Assess the potential financial impact of the ongoing California class action lawsuit and the Enron-related litigation with Goldman Sachs.
- Capital Allocation: Review the $50 million share repurchase program (with $7.3 million remaining) and the planned $14 million acquisition in Portugal.
- IT Implementation Costs: Monitor the progress and cost overruns of the PeopleSoft payroll and billing implementation, which has been delayed for U.S. and Puerto Rico operations until 2010.