Kelly Services, Inc. 2011 Form 10-K Summary
Business Context and Reporting Period
Kelly Services is a global workforce-solutions provider offering temporary staffing, professional and technical staffing, outsourcing, consulting, recruitment, career-transition and related services through seven operating segments across the Americas, EMEA and APAC. The filing covers the 52-week fiscal year ended January 1, 2012; fiscal 2010 also included 52 weeks, while fiscal 2009 included 53 weeks.
Fiscal 2011 quarterly data show fourth-quarter revenue of $1,396.3 million, earnings from continuing operations of $24.1 million and diluted earnings per share of $0.64. Staffing demand is seasonal, historically being lower in the first and fourth quarters.
Financial Performance and Key Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue from services | $5,551.0 million | $4,950.3 million | 12.1% increase |
| Gross profit | $894.1 million | $794.5 million | 12.5% increase |
| Gross profit margin | 16.1% | 16.0% | 0.1 point increase |
| SG&A expense | $836.4 million | $754.4 million | 10.9% increase |
| Restructuring charges | $2.8 million | $7.2 million | 61.7% decrease |
| Asset impairments | None | $2.0 million | Eliminated |
| Earnings from operations | $57.7 million | $38.1 million | 51.4% increase |
| Operating margin | 1.0% | 0.8% | 0.2 point increase |
| Earnings from continuing operations | $64.9 million | $26.1 million | Increase |
| Net earnings | $63.7 million | $26.1 million | Increase |
| Diluted EPS | $1.69 | $0.71 | Increase |
| Cash flow from operations | $19.1 million | $41.8 million | Decrease |
Revenue growth reflected a 7% increase in hours worked and a 2% increase in average bill rates on a constant-currency basis. Fee-based income increased 39.4% to $138.0 million and supported gross-margin performance.
- Americas Commercial revenue increased 9.6% to $2,660.9 million; operating earnings increased 5.9% to $83.9 million.
- Americas PT revenue increased 10.6% to $982.8 million, but operating earnings declined 7.4% to $42.8 million as margin declined to 4.4% from 5.2%.
- EMEA Commercial revenue increased 13.6% to $990.1 million and operating earnings increased to $13.8 million from $6.3 million.
- EMEA PT revenue increased 21.2% to $178.9 million and operating earnings increased to $4.2 million from $1.8 million.
- APAC Commercial revenue increased 11.9% to $397.6 million, while operating earnings declined 29.1% to $1.9 million.
- APAC PT revenue increased 58.1% to $51.4 million; the operating loss improved to $2.6 million from $3.1 million.
- OCG revenue increased 24.5% to $317.3 million, and its operating loss narrowed to $2.6 million from $17.6 million.
The 2011 income tax benefit was $7.3 million, compared with $6.6 million of tax expense in 2010. The effective tax result benefited from approximately $28.5 million of employment-related tax credits and an $8.4 million benefit from worthless-stock deductions. Management expects a substantially higher tax rate in 2012 because the HIRE Act retention credit and work opportunity credit programs had expired or were uncertain.
Cash Flow, Liquidity and Debt
- Cash and equivalents were $81.0 million at year-end 2011 versus $80.5 million in 2010.
- Operating cash flow declined to $19.1 million, primarily because trade accounts receivable increased by $148.5 million as the business grew.
- Trade accounts receivable reached $944.9 million; fourth-quarter global DSO increased to 52 days from 49 days.
- Working capital increased to $417.0 million from $367.6 million, while the current ratio remained 1.6.
- Investing activities used $20.7 million, including $15.4 million of capital expenditures and $6.5 million for the acquisition of Tradição in Brazil.
- Total debt increased to $96.3 million from $78.8 million; debt-to-total capital increased to 12.5% from 11.2%.
- The amended secured revolving credit facility has $150 million of capacity and matures in March 2016. Borrowings at year-end were $6.2 million, leaving approximately $143.8 million available.
- The $150 million securitization facility had $84.0 million of borrowings, $50.1 million of standby letters of credit and approximately $15.9 million of remaining capacity.
- Additional unsecured, uncommitted local facilities totaled $15.9 million, of which $6.1 million was borrowed.
- All financial covenants were met at year-end. Dividends and share repurchases remain subject to covenant restrictions.
Material Changes, Outlook and Unusual Items
- Management reported improving U.S. and global labor-market conditions, including more than 1.8 million U.S. jobs created during 2011, and expects these trends to support staffing demand.
- Strategy remains focused on higher-margin professional and technical staffing, fee-based services, outsourcing and consulting, operational leverage and customer-focused workforce solutions.
- OCG growth was particularly strong, driven by business-process outsourcing, recruitment-process outsourcing and contingent-workforce outsourcing.
- Kelly acquired Brazilian staffing provider Tradição in November 2011 for $6.6 million in cash and assumed $8.8 million of debt. Its 2011 operating results were not included because of a one-month reporting lag.
- Restructuring charges declined substantially and primarily related to revised lease-termination estimates for previously closed EMEA branches. No 2011 asset-impairment charge was recorded, and annual goodwill testing found no impairment.
- The Company expects to spend approximately $20 million to $25 million through 2015 to complete its PeopleSoft payroll, billing and receivables project. Capitalized costs for unimplemented modules were $4.8 million at year-end.
- A $1.2 million after-tax charge was recognized in discontinued operations for a California class-action settlement. The Company also paid $1.9 million in the fourth quarter to settle another legal matter.
- Management identified Europe’s economic conditions as a concern. Principal risks include cyclical staffing demand, intense pricing competition, customer concentration and termination rights, worker availability, employment-related claims, workers’ compensation estimates, data privacy, foreign currency exposure, regulatory changes and access to credit.
- The filing does not provide formal numerical revenue or earnings guidance for 2012.
Investor Verification Priorities
- Verify whether revenue growth and improved operating leverage continued after 2011, particularly in Americas PT, APAC Commercial and OCG.
- Assess the recurring tax rate after the approximately $28.5 million of 2011 employment-related tax credits and the expiration of related programs.
- Monitor receivables growth, DSO, operating cash conversion and borrowing under the securitization facility.
- Review compliance with interest-coverage and leverage covenants, including the effect of working-capital needs and dividends.
- Evaluate the integration, profitability and debt assumed in the Tradição acquisition.
- Assess execution and remaining costs of the PeopleSoft project and potential impairment risk for its $4.8 million of capitalized unimplemented modules.
- Review workers’ compensation, litigation, employment-classification and healthcare-reform exposures, including the $4.5 million litigation accrual and $70 million workers’ compensation accrual.
- Consider governance and ownership risk: Class B shareholders control voting rights, and Terence E. Adderley and related trusts control approximately 93% of Class B voting shares.