Kelly Services, Inc. 2013 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kelly Services is a global staffing and workforce-solutions company operating across the Americas, EMEA, APAC, and the Outsourcing and Consulting Group (OCG). The filing covers the 13 weeks ended September 29, 2013, and the year-to-date 39 weeks ended September 29, 2013, compared with equivalent periods ended September 30, 2012. Financial statements are unaudited.
Financial Results and Key Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue from services | $1,345.6 million | $1,354.2 million | $4,027.3 million | $4,075.1 million |
| Gross profit | $220.4 million | $227.5 million | $658.0 million | $674.4 million |
| Gross profit rate | 16.4% | 16.8% | 16.3% | 16.5% |
| Earnings from operations | $20.2 million | $24.0 million | $43.7 million | $62.5 million |
| Operating margin | 1.5% | 1.8% | 1.1% | 1.5% |
| Net earnings | $18.8 million | $16.6 million | $41.7 million | $41.2 million |
| Diluted EPS from continuing operations | $0.49 | $0.43 | $1.09 | $1.07 |
- Q3 revenue declined 0.6%, while year-to-date revenue declined 1.2%. Constant-currency declines were 0.5% and 1.1%, respectively.
- Q3 gross profit decreased 3.1%, and year-to-date gross profit decreased 2.4%. Gross-margin pressure reflected lower hours worked, customer mix, reduced fee-based income in certain regions, and lower favorable workers’ compensation adjustments.
- SG&A expense decreased 1.6% in Q3 but increased 0.1% year to date. Year-to-date SG&A included a $3.0 million Delaware unclaimed-property settlement.
- Q3 net earnings increased despite lower operating earnings, primarily because income-tax expense fell to $0.1 million from $6.7 million. The effective tax rate was 0.3%, compared with 28.9% in the prior-year quarter.
- Year-to-date income tax benefit was $1.9 million, compared with $19.9 million of expense in 2012. U.S. work opportunity tax credits provided $22.0 million of benefit year to date, including $9.7 million related to retroactive reinstatement.
- Cash flow from operations was $21.9 million year to date, versus $20.9 million in 2012. Capital expenditures were $11.7 million, and dividends paid were $5.7 million.
- Cash and equivalents were $73.9 million at quarter-end, compared with $76.3 million at year-end 2012. Trade receivables were $1.1 billion, with global days sales outstanding of 56 days versus 54 days at the prior-year quarter-end.
- Short-term borrowings were $58.0 million, down from $64.1 million at year-end 2012. Debt-to-total-capital declined to 6.7% from 8.0%.
- The company reported $150.0 million of available capacity under its revolving credit facility and $36.0 million available under its securitization facility. It was in compliance with related debt covenants at quarter-end.
Material Changes Versus the Prior Comparable Period
- Americas revenue declined 4.3% and operating earnings declined 26.8% in Q3. The region experienced a 5% decrease in hours worked, partly offset by a 1% constant-currency increase in average bill rates.
- EMEA revenue increased 5.3% as reported, but only 2.3% on a constant-currency basis. Operating earnings increased 11.5% despite a lower gross-profit rate.
- APAC revenue declined 3.3% as reported but increased 3.0% on a constant-currency basis. Operating earnings improved to $1.5 million from $0.2 million due largely to lower SG&A.
- OCG was the principal growth area: Q3 revenue increased 21.2%, fee-based income increased 29.4%, and operating earnings increased 45.4% to $5.9 million. Growth was concentrated in business-process outsourcing and contingent-workforce outsourcing, partially offset by lower recruitment-process-outsourcing revenue.
- For the first nine months, OCG revenue increased 18.8%, but operating earnings declined 3.8% because of growth-related costs, restructuring charges, and a $1.7 million impairment.
- Q3 total company expenses decreased 2%, but operating margin declined to 1.5%, well below management’s long-term 4.0% goal.
- Hours worked declined 4% in Q3 and 5% year to date, while average bill rates increased 2% and 3%, respectively, on a constant-currency basis.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide specific quantitative revenue or earnings guidance. It expects sluggish global economic growth and continuing weak European conditions to constrain staffing demand. Longer-term, management remains focused on commercial staffing, professional and technical growth, OCG expansion, selected permanent-placement opportunities, and cost-efficient service delivery.
- The company plans to offer healthcare coverage in 2015 to eligible temporary employees under the Affordable Care Act. Management intends to pass costs to customers, but stated that pricing may not fully offset the costs or may not do so on a timely basis.
- The work opportunity tax credit program was available for employees hired through 2013, but its extension into 2014 was uncertain. The unusually low 2013 tax rate therefore may not be recurring.
- The company recorded $3.0 million of additional expense for a $4.5 million Delaware unclaimed-property settlement, which was paid in Q2 2013.
- The company recorded $1.7 million of impairment and $0.9 million of restructuring charges year to date related principally to exiting the German executive-search business within OCG.
- A prior-period error resulted in cash and accrued payroll-related taxes being understated by $4.8 million at December 30, 2012. Management deemed the error immaterial; the correction overstated changes in operating assets and liabilities and operating cash flow by $4.8 million in the current year-to-date cash-flow statement.
- European customer receivables totaled $327.4 million, or 30% of total net receivables. Receivables from Italy, Portugal, and Ireland totaled $49.3 million.
- Risks include economic and staffing-demand volatility, pricing pressure, customer concentration and contract loss, employment-related litigation, workers’ compensation claims, foreign exchange, credit availability, debt-covenant compliance, information-technology execution, and regulatory and tax changes.
- Ordinary-course litigation involves employment discrimination, wage-and-hour matters, and restrictive covenants. Management does not expect current matters to have a material adverse effect, but acknowledges that outcomes are inherently uncertain.
Important Facts for Investors to Verify
- Whether the unusually favorable 2013 tax credits recur after 2013 and how normalized tax rates affect earnings.
- Whether declining hours worked stabilize and whether revenue growth can resume across the Americas and Europe.
- Whether OCG growth converts into sustained operating-profit improvement after implementation and support costs.
- Whether the 1.5% operating margin can move toward management’s 4.0% long-term objective.
- Receivables aging, DSO trends, and exposure to economically stressed European countries.
- The financial impact of healthcare reform compliance beginning in 2015 and the company’s ability to recover related costs through customer pricing.
- Future restructuring, impairment, litigation, workers’ compensation, and unclaimed-property charges.
- The filing’s current-ratio disclosure, which states 1.6% at quarter-end and 1.7% at year-end; these figures appear to represent ratios of approximately 1.6x and 1.7x, respectively, and should be confirmed against the source filing.