Kelly Services, Inc. — Form 10-Q Summary
Business context and reporting period
Kelly Services provides temporary staffing, professional and technical staffing, outsourcing, consulting, recruitment process outsourcing, contingent workforce outsourcing, payroll outsourcing, executive placement, and career transition services. The filing covers the 13-week quarter and 39-week year-to-date period ended September 30, 2012, compared with the periods ended October 2, 2011. The company reports Americas, EMEA, APAC, and Outsourcing and Consulting Group (OCG) segments.
Financial performance and condition
| Metric | Third quarter 2012 | Third quarter 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Revenue from services | $1,354.2 million | $1,409.8 million | $4,075.1 million | $4,154.7 million |
| Gross profit | $227.5 million | $225.7 million | $674.4 million | $659.0 million |
| Gross margin | 16.8% | 16.0% | 16.5% | 15.9% |
| Earnings from operations | $24.0 million | $22.1 million | $62.5 million | $45.0 million |
| Operating margin | 1.8% | 1.6% | 1.5% | 1.1% |
| Net earnings | $16.6 million | $19.7 million | $41.2 million | $39.6 million |
| Diluted EPS from continuing operations | $0.43 | $0.52 | $1.07 | $1.09 |
- Third-quarter revenue declined 3.9%, while gross profit increased 0.7% and operating earnings increased 8.5%. Year-to-date revenue declined 1.9%, while gross profit increased 2.3% and operating earnings increased 38.8%.
- Income tax expense increased to $6.7 million in the quarter from $3.4 million and to $19.9 million year to date from $4.1 million. Effective tax rates were 28.9% and 32.8%, respectively, versus 14.6% and 9.1% in the prior periods.
- Cash from operating activities was $20.9 million year to date, compared with $5.6 million in the prior year. Capital expenditures were $13.9 million, producing net investing cash outflow of $13.8 million.
- Financing activities used $18.2 million, including $12.6 million of net short-term debt repayments and $5.7 million of dividends. Cash declined to $70.3 million from $81.0 million at January 1, 2012.
- Trade receivables were $1.019 billion, with global days sales outstanding of 54 days versus 52 days at the comparable prior-year date. Working capital was $466 million and the current ratio was 1.6.
- Short-term borrowings were $83.6 million versus $96.3 million at year-end 2011. Debt-to-total capital declined to 10.3% from 12.5%.
- At quarter-end, the company reported $150 million of available capacity on its $150 million revolving credit facility and $11 million of available capacity on its $150 million securitization facility. The company stated that it complied with applicable debt covenants.
Material changes versus the prior comparable period
- Revenue pressure reflected a 12% decline in hours worked in the quarter, partially offset by a 9% increase in average bill rates on a constant-currency basis. Year-to-date hours worked declined 10%, while constant-currency average bill rates increased 9%.
- Americas third-quarter revenue declined 1.0%, but operating earnings rose 5.8% to $35.8 million. Year-to-date revenue increased 1.1% and operating earnings increased 18.3% to $109.5 million.
- EMEA remained under pressure: third-quarter revenue declined 16.8% and operating earnings declined 51.3% to $3.9 million. Year-to-date revenue declined 13.4% and operating earnings declined 32.7% to $9.6 million.
- APAC third-quarter operating earnings declined to $0.2 million from $0.5 million. Year-to-date APAC generated an operating loss of $2.4 million versus a $0.4 million loss.
- OCG was the strongest growth area. Third-quarter revenue increased 29.7% and operating earnings improved to $4.0 million from a $0.2 million loss. Year-to-date revenue increased 26.8% and operating earnings improved to $5.4 million from a $3.4 million loss.
- Gross margin benefited from higher fee-based income, improved Americas and APAC temporary margins, OCG mix, and favorable workers’ compensation claim development. The company reduced estimated prior-year workers’ compensation costs by $4 million in the quarter and $8 million year to date, compared with reductions of $1 million and $3 million in the prior periods.
- Restructuring activity generated a $2.2 million benefit year to date, compared with a $2.8 million expense in the prior year. The remaining restructuring accrual was $1.4 million, primarily for future lease payments expected through 2016.
- Revenue and operating results include the 2011 acquisition of Tradição in Brazil. The related purchase price allocation remained preliminary, with revised goodwill of $23.9 million.
Outlook, commentary, risks, contingencies, and unusual items
- Management described continuing global economic headwinds, including worsening conditions in Europe, a softer U.S. recovery, fiscal-cliff concerns, and election-related uncertainty. Management remains focused on higher-margin professional and technical, fee-based, outsourcing, and consulting offerings.
- Management expects OCG to remain profitable in the fourth quarter, but anticipates lower profit than in the third quarter because two major projects will be completed.
- In October 2012, management terminated the PeopleSoft billing-system implementation in the U.S., Canada, and Puerto Rico. The company expects to record approximately $3.0 million of pretax charges in the fourth quarter to write off capitalized costs.
- The company entered into an agreement with Temp Holdings to establish TS Kelly Workforce Solutions, a Hong Kong-based North Asia joint venture expected to become effective in the fourth quarter of 2012. Kelly also acquired the remaining 30% noncontrolling interest in its Shanghai subsidiary and recorded a $1.1 million charge to paid-in capital.
- European customer receivables totaled $276 million, or 27% of net trade receivables. Receivables from Italy, Portugal, and Ireland totaled $39 million; management reported no significant deterioration during the quarter.
- Risks include economic and pricing pressure, customer concentration and contract loss, foreign-currency movements, workers’ compensation and employment-related claims, litigation, tax-law changes and expiration of tax credits, debt-covenant compliance, access to financing, information-technology implementation, data-center continuity, and international operations.
- The company is involved in ordinary-course employment, wage-and-hour, discrimination, and restrictive-covenant litigation. Management does not expect these matters to have a material adverse effect but notes that outcomes are inherently uncertain.
- Approximately $6 million of unrecognized tax benefits and related interest and penalties could reasonably reverse within the next twelve months.
- The filing states that disclosure controls and procedures were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether continued declines in hours worked, especially in EMEA and APAC, offset pricing, fee-based income, and OCG growth.
- The sustainability of gross-margin improvement, including the impact of workers’ compensation estimate adjustments and fee-based revenue mix.
- The timing and final amount of the approximately $3 million PeopleSoft project write-off and any further information-technology costs.
- OCG fourth-quarter performance after completion of two major projects.
- European receivable aging and collections, particularly in Italy, Portugal, and Ireland.
- Availability of credit facilities, debt-covenant compliance, and liquidity if working-capital requirements increase.
- Potential tax-rate effects from the expiration or reinstatement of U.S. work opportunity credits and other tax matters.
- Future restructuring payments, remaining lease obligations, and litigation or employment-related contingencies.