Business Context and Reporting Period
Company: Kelly Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 3, 2010 (Third Quarter)
Business Overview: Kelly Services provides temporary staffing, professional and technical staffing, and outsourcing solutions globally. The company operates through seven segments: Americas Commercial, Americas PT, EMEA Commercial, EMEA PT, APAC Commercial, APAC PT, and the Outsourcing and Consulting Group (OCG).
Key Financial Metrics
| Metric (in millions) | Q3 2010 | Q3 2009 | YTD 39 Weeks 2010 | YTD 39 Weeks 2009 |
|---|---|---|---|---|
| Revenue from Services | $1,284.7 | $1,049.2 | $3,624.5 | $3,120.7 |
| Gross Profit | $207.2 | $166.2 | $578.1 | $513.4 |
| Gross Profit Margin | 16.1% | 15.8% | 16.0% | 16.5% |
| Earnings from Operations | $14.3 | $(28.0) | $21.2 | $(133.1) |
| Net Earnings (Loss) | $9.6 | $(14.8) | $11.5 | $(96.3) |
| Diluted EPS | $0.26 | $(0.43) | $0.32 | $(2.76) |
| Cash and Equivalents | $87.2 | $91.0 | $87.2 | $91.0 |
| Total Debt | $121.0 | $137.1 | $121.0 | $137.1 |
| Working Capital | $412.9 | $360.8 | $412.9 | $360.8 |
Material Changes vs. Prior Period
- Revenue Growth: Q3 2010 revenue increased 22.4% year-over-year, driven by a 26.9% increase in hours worked, partially offset by a 3.1% decrease in average hourly bill rates. YTD revenue increased 16.1%.
- Profitability Turnaround: The company returned to profitability, reporting $9.6 million in net earnings for Q3 2010 compared to a $14.8 million loss in Q3 2009. Operating earnings improved from a $28.0 million loss to a $14.3 million gain.
- Asset Impairments: Asset impairment charges dropped significantly to $1.5 million in the first nine months of 2010 (related to incomplete software projects in Europe) compared to $53.1 million in the same period of 2009 (related to goodwill and long-lived assets).
- Restructuring Costs: Restructuring costs decreased to $2.8 million in Q3 2010 from $4.6 million in Q3 2009, reflecting the completion of major restructuring actions initiated in 2009.
- Segment Performance: Americas Commercial revenue grew 35.5% and EMEA Commercial revenue remained flat (0.0%) but improved operating margins. APAC segments showed revenue growth but continued to face margin pressure due to mix shifts and the exit from the Japanese market.
Guidance, Outlook, and Risks
- Management Commentary: Management cites a strengthening global economy and labor markets as key drivers. The company highlighted the positive impact of the U.S. HIRE Act on gross profit rates (approx. 80 basis points in Americas Commercial). The strategy focuses on increasing profitability, expanding Professional and Technical (PT) and OCG offerings, and retaining talent.
- Liquidity: The company maintains $90 million in available capacity on its revolving credit facility and $0.6 million on its securitization facility. Management expects to meet short- and long-term cash requirements through operating cash flow and existing credit facilities.
- Risks and Contingencies:
- Legal Proceedings: Two pending class action lawsuits in California (Fuller and Sullivan) regarding employee misclassification and compensation. The Fuller case was recertified as a class action in May 2010; the Sullivan case was certified in April 2010. The company believes it has meritorious defenses.
- Market Risks: Exposure to foreign currency fluctuations (hedged via forward contracts for yen-denominated debt) and interest rate risks. The company does not use derivatives for speculative purposes.
- Operational Risks: Dependence on large corporate customers, availability of skilled temporary workers, and changes in tax laws (specifically the expiration of the HIRE Act at the end of 2010).
Investor Verification Checklist
- HIRE Act Impact: Verify the sustainability of gross margin improvements once the HIRE Act tax incentives expire at the end of 2010.
- Legal Exposure: Monitor the status and potential financial impact of the recertified California class action lawsuits (Fuller and Sullivan).
- Working Capital Trends: Review the increase in trade accounts receivable ($831.3 million) and days sales outstanding (52 days) to ensure collection efficiency remains stable amidst revenue growth.
- Segment Mix: Assess the long-term margin implications of the shift toward lower-margin light industrial and payroll process outsourcing (PPO) businesses versus higher-margin clerical and RPO services.
- Debt Structure: Confirm the repayment schedule for the remaining $121.0 million in debt and the utilization of the $90 million revolving credit facility.