Business Context and Reporting Period
Company: Kelly Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 4, 2010 (13 weeks)
Business Overview: Kelly Services provides temporary staffing, professional and technical 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).
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenue from Services | $1,130.4 | $1,042.6 |
| Gross Profit | $180.0 | $175.5 |
| Gross Profit Margin | 15.9% | 16.8% |
| Loss from Operations | $(1.6) | $(30.6) |
| Net Loss | $(2.0) | $(15.5) |
| Diluted Loss Per Share | $(0.06) | $(0.45) |
| Cash and Equivalents (End of Period) | $55.7 | $115.4 |
| Net Cash Used in Operating Activities | $(18.9) | $25.1 |
| Total Debt (Short-term + Long-term) | $124.3 | $137.1 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 8.4% year-over-year to $1.13 billion. On a constant currency basis, revenue grew 4.4%, driven by an 8.1% increase in hours worked, partially offset by a 0.1% decrease in average hourly bill rates.
- Profitability Improvement: The net loss narrowed significantly from $15.5 million in Q1 2009 to $2.0 million in Q1 2010. Operating loss improved from $30.6 million to $1.6 million.
- Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased 11.9% to $181.6 million, reflecting continued cost control initiatives and lower compensation expenses.
- Segment Performance:
- Americas Commercial: Revenue up 13.5%; operating earnings improved to $13.1 million from $0.5 million.
- EMEA Commercial: Revenue declined 5.4% (12.4% constant currency) due to branch closures in the UK and exits in Spain, Turkey, Ukraine, and Finland. Operating loss narrowed to $2.3 million from $12.1 million.
- APAC Commercial: Revenue surged 25.6% (6.8% constant currency) driven by growth in India and Malaysia, turning an operating loss of $1.3 million into a profit of $1.0 million.
- Cash Flow: Operating cash flow turned negative ($18.9 million used) compared to positive ($25.1 million generated) in the prior year, primarily due to increased working capital needs (trade receivables) associated with revenue growth.
Guidance, Outlook, and Risks
- Management Commentary: Management views the results as characteristic of the "early phase of recovery." Demand for light industrial staffing has increased, with early signs of improvement in clerical and professional sectors. Fee-based businesses remain depressed.
- Restructuring: The company incurred $4.4 million in restructuring costs in Q1 2010, primarily for severance and lease terminations in EMEA and APAC. The global restructuring program initiated in 2008 is substantially complete.
- Liquidity: As of April 4, 2010, the company had $88.3 million available on its $90 million revolving credit facility and $0.6 million on its $100 million securitization facility. Management expects to meet cash requirements through operations and existing facilities.
- Risk Factors:
- Healthcare Reform: The Patient Protection and Affordable Care Act may require the company to provide healthcare coverage to temporary employees in the U.S. or incur penalties. The net financial impact is currently unestimable but could be significant.
- Legal Contingencies: The company faces various legal proceedings, including wage and hour class actions, which could have a material impact on financial statements.
- Market Risks: Exposure to foreign currency fluctuations and interest rate changes, though mitigated by local borrowings and hedging strategies.
- Subsequent Event: On May 11, 2010, Kelly sold 1,576,169 shares of Class A common stock to Temp Holdings Co., Ltd. (Japan) for approximately $24.3 million ($15.42/share). Temp Holdings' representative will join the Board of Directors.
Investor Verification Checklist
- Working Capital Trends: Verify the sustainability of the increase in trade accounts receivable ($727.3 million) and its impact on future cash flow.
- EMEA Restructuring Impact: Confirm the timeline for the completion of branch closures in EMEA and the associated cost savings.
- Healthcare Reform Costs: Monitor updates on the estimated financial impact of the Affordable Care Act on temporary employee benefits.
- Fee-Based Revenue: Assess the trajectory of fee-based income, which remains at depressed levels despite overall revenue growth.
- Debt Covenants: Review the terms of the revolving credit and securitization facilities to ensure compliance with covenants given the recent cash burn.