Kelly Services, Inc. — Q3 2011 Form 10-Q Summary
Business Context and Reporting Period
Kelly Services is a global staffing and workforce-solutions provider with Commercial, Professional and Technical, and Outsourcing and Consulting Group businesses across the Americas, EMEA, and APAC. The filing covers the 13 weeks and 39 weeks ended October 2, 2011, compared with the periods ended October 3, 2010. Results are unaudited.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 39 Weeks 2011 | 39 Weeks 2010 |
|---|---|---|---|---|
| Revenue from services | $1,409.8 million | $1,284.7 million | $4,154.7 million | $3,624.5 million |
| Gross profit | $228.6 million | $207.2 million | $666.9 million | $578.1 million |
| Gross profit rate | 16.2% | 16.1% | 16.1% | 16.0% |
| Earnings from operations | $22.1 million | $14.3 million | $45.0 million | $21.2 million |
| Operating margin | 1.6% | 1.1% | 1.1% | 0.6% |
| Net earnings | $19.7 million | $9.6 million | $39.6 million | $11.5 million |
| Diluted EPS | $0.52 | $0.26 | $1.05 | $0.32 |
- Q3 revenue increased 9.7% reported and 6.1% in constant currency. Management attributed constant-currency growth to a 2% increase in hours worked, a 2% increase in average bill rates, and higher fee-based income.
- First-nine-month revenue increased 14.6% reported and 11.2% in constant currency, primarily reflecting a 9% increase in hours worked.
- Fee-based income increased 48.5% to $36.7 million in Q3 and 43.1% to $104.2 million for the first nine months.
- Q3 SG&A increased 7.1% to $206.5 million; SG&A excluding restructuring charges increased 9.0%.
- Income tax expense was $3.4 million in Q3 and $4.1 million year to date, representing effective tax rates of 14.6% and 9.1%, respectively. Employment-related tax credits totaled $8.6 million in Q3 and $20.6 million year to date.
- Net cash provided by operating activities was $5.6 million for the first nine months, compared with $0.1 million in the prior-year period. Capital expenditures were $10.0 million, and net cash used in investing activities was $9.0 million.
- Cash and equivalents were $73.5 million at October 2, 2011, versus $80.5 million at January 2, 2011. Trade accounts receivable were $939.9 million, and global days sales outstanding remained 52 days.
- Debt was $79.0 million at quarter-end, essentially unchanged from year-end. Debt-to-total capital was 10.7%, compared with 11.2% at year-end 2010.
Material Changes Versus the Prior Comparable Period
- All business segments reported year-over-year revenue growth in Q3. The strongest reported Q3 growth was in APAC PT, EMEA PT, OCG, and APAC Commercial, although currency translation contributed materially to several international increases.
- Americas Commercial revenue increased 4.5%, but operating earnings declined 5.9% to $21.8 million as its gross profit rate fell to 14.2% from 14.6%.
- Americas PT revenue increased 7.4%, while operating earnings declined 12.6% to $12.0 million due to lower gross profit rates and higher investment in recruiters and compensation.
- EMEA Commercial operating earnings increased 36.7% to $6.5 million, and EMEA PT operating earnings increased to $1.6 million from $0.3 million.
- OCG reduced its Q3 operating loss to $0.2 million from $4.2 million and its nine-month operating loss to $3.4 million from $14.5 million.
- Restructuring activity decreased substantially. Q3 restructuring reflected a $0.6 million credit versus $2.8 million of expense in Q3 2010; year-to-date expense was $2.8 million versus $7.2 million. The remaining restructuring accrual was $5.4 million, primarily for future lease payments expected through 2018.
- The company refinanced its facilities in March 2011. The revolving credit facility increased to $150 million and matures March 31, 2016; the receivables securitization facility also increased to $150 million and matures December 4, 2014.
- Term debt of approximately $63 million was repaid in March 2011. At quarter-end, the revolver had $145.0 million of capacity remaining, while the securitization facility had $24.6 million of capacity remaining after $74.0 million of borrowings and $51.4 million of standby letters of credit.
- The company paid its first reported quarterly dividend of $1.9 million, or $0.05 per share, in Q3 2011.
Outlook, Management Commentary, Risks, and Unusual Items
Management described the global recovery as uneven and cited concerns regarding U.S. and European deficits. Its stated strategy is to expand higher-margin Professional and Technical staffing, grow fee-based businesses, and provide customer-focused workforce solutions. The filing does not provide specific quantitative revenue or earnings guidance.
- The expiration of the HIRE Act payroll tax benefit adversely affected temporary staffing gross profit rates in 2011. The related HIRE Act retention credit and work opportunity credits significantly reduced the reported tax rate; the retention credit was available only in 2011.
- Q3 other income included a $1.5 million foreign-exchange gain from releasing accumulated currency translation adjustments upon the substantially complete liquidation of certain EMEA subsidiaries. The related disposals were not classified as discontinued operations because they were immaterial.
- A $1.2 million after-tax charge was recognized in discontinued operations in Q2 2011 for litigation retained from the 2007 sale of Kelly Home Care Services.
- Two California class-action lawsuits involve alleged worker misclassification, wage-and-hour matters, pay-stub violations, and compensation for interviewing. Tentative settlements had been reached but required final court approval at the filing date.
- Management expects liquidity needs to be funded through operating cash flow, cash balances, receivables securitization, and committed credit facilities, but notes that materially weaker economic or operating conditions could require additional funding.
- Principal risks include staffing demand and pricing pressure, loss of major customers, availability of qualified temporary workers, employment-related claims, workers’ compensation and benefit costs, covenant compliance, access to credit, foreign currency fluctuations, information technology risks, regulatory changes, and the expiration of certain tax credits.
- All disclosed debt covenants were met at October 2, 2011. Management stated that controls and procedures were effective and that no material changes to internal control over financial reporting occurred during the quarter.
Important Facts for Investors to Verify
- Whether revenue growth and fee-based income growth can continue after the expiration of the HIRE Act payroll tax benefit and related 2011 tax credits.
- Whether Professional and Technical expansion and OCG growth can improve consolidated margins without SG&A growth outpacing gross profit.
- The availability and terms of the remaining $145.0 million revolver capacity and $24.6 million securitization capacity, including covenant and cross-default provisions.
- The conversion of substantial receivables into operating cash flow, given $939.9 million of receivables and only $5.6 million of operating cash flow for the first nine months.
- Final court approval and ultimate costs of the two California class-action settlements, together with any additional employment-related claims.
- The sustainability of the unusually low 9.1% year-to-date effective tax rate and the impact of future tax-law changes.
- Currency effects on international revenue, earnings, and accumulated other comprehensive income.