Kelly Services, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Kelly Services provides temporary staffing, professional and technical staffing, outsourcing, consulting, recruitment process outsourcing, business process outsourcing, payroll outsourcing, executive placement, and career transition services across the Americas, EMEA, and APAC.
This unaudited report covers the 13 and 26 weeks ended July 3, 2011, compared with the periods ended July 4, 2010. The company reported seven operating segments: Americas Commercial, Americas Professional and Technical, EMEA Commercial, EMEA Professional and Technical, APAC Commercial, APAC Professional and Technical, and Outsourcing and Consulting Group.
Key Financial Metrics
| Metric | 13 Weeks Ended July 3, 2011 | 13 Weeks Ended July 4, 2010 | 26 Weeks Ended July 3, 2011 | 26 Weeks Ended July 4, 2010 |
|---|---|---|---|---|
| Revenue from services | $1,405.8 million | $1,209.4 million | $2,744.9 million | $2,339.8 million |
| Gross profit | $224.6 million | $190.9 million | $438.3 million | $370.9 million |
| Gross profit rate | 16.0% | 15.8% | 16.0% | 15.9% |
| Earnings from operations | $21.3 million | $8.5 million | $22.9 million | $6.9 million |
| Operating margin | 1.5% | 0.7% | 0.8% | 0.3% |
| Earnings from continuing operations | $20.0 million | $3.9 million | $21.1 million | $1.9 million |
| Net earnings | $18.8 million | $3.9 million | $19.9 million | $1.9 million |
| Diluted earnings per share | $0.50 | $0.11 | $0.53 | $0.05 |
Second-quarter revenue increased 16.2% year over year, or 11.3% on a constant-currency basis. Six-month revenue increased 17.3%, or 13.9% on a constant-currency basis. Management attributed constant-currency quarterly growth primarily to a 10% increase in hours worked.
Fee-based income, which is included in revenue, increased 46.2% to $35.7 million in the quarter and 40.3% to $67.5 million for the first six months. Fee-based income supported gross profit because it carries relatively low direct service costs.
Liquidity, Cash Flow, Debt, and Balance Sheet
- Cash and equivalents were $80.5 million at July 3, 2011, unchanged from January 2, 2011.
- Operating activities used $6.8 million of cash in the first six months, compared with $20.3 million used in the prior-year period.
- Investing activities used $5.4 million, including $6.3 million of capital expenditures.
- Financing activities generated $7.9 million, including a $71.9 million increase in short-term borrowings and $62.9 million of debt repayments.
- Trade accounts receivable were $929.8 million, with global days sales outstanding of 52 days versus 50 days in the prior-year second quarter.
- Working capital was $413 million, up $45 million from year-end 2010; the current ratio was 1.6.
- Debt was $89.0 million at July 3, 2011 versus $78.8 million at year-end 2010. Debt-to-total-capital increased to 11.9% from 11.2%.
- The amended revolving credit facility has $150 million of capacity, matures March 31, 2016, and had $15 million outstanding at 2.44%, leaving $135 million available.
- The amended receivables securitization facility has $150 million of capacity, matures December 4, 2014, and had $74 million outstanding at 1.39%, $50.6 million of standby letters of credit, and $25.4 million of remaining capacity.
- Management expects to fund ongoing requirements through operating cash flow, cash balances, the securitization facility, and committed unused credit facilities.
Material Changes Versus the Prior Comparable Period
- Revenue growth occurred in every business segment. The strongest reported quarterly growth rates were APAC Professional and Technical, EMEA Professional and Technical, and EMEA Commercial, although currency movements materially affected reported growth in several international segments.
- Americas Commercial operating earnings increased to $23.0 million from $18.0 million, while Americas Professional and Technical earnings declined to $10.4 million from $11.8 million due to lower gross profit rates and higher expansion-related expenses.
- EMEA Commercial improved to $6.6 million of operating earnings from $1.4 million; EMEA Professional and Technical improved to $1.4 million from $0.5 million.
- APAC Commercial earnings declined to $0.4 million from $1.0 million, and APAC Professional and Technical remained loss-making at negative $0.8 million.
- OCG reduced its operating loss to $0.8 million from $5.8 million, benefiting from growth and improved gross profit rates in RPO and CWO activities.
- SG&A increased 12.4% in the quarter and 14.6% year to date, primarily from additional employees, salaries, incentive compensation, and investments supporting growth.
- No asset impairment was recorded in 2011 compared with $1.5 million in the second quarter and first six months of 2010.
- The company incurred a $0.6 million restructuring credit in the second quarter and $3.4 million of restructuring expense for the first six months, compared with $4.4 million in the prior-year six-month period.
- The effective tax expense was unusually low because of employment-related tax credits, including the 2011 HIRE Act retention credit and improved work opportunity credit estimates. The HIRE Act retention credit is available only in 2011.
- Interest expense declined to $0.8 million in the quarter and $1.9 million year to date, compared with $1.5 million and $3.0 million, respectively.
Outlook, Commentary, Risks, and Unusual Items
Management stated that U.S. temporary employment grew 9% year over year in the second quarter and nearly 11% in the first six months, but noted a moderate recent deceleration in job creation and broader labor-market growth. Kelly intends to continue expanding higher-margin professional and technical staffing, fee-based services, and workforce solutions while streamlining operations and executing its restructuring strategy.
- Future results depend on economic conditions, labor demand, pricing pressure, customer concentration, loss or termination of major contracts, and availability of qualified temporary workers.
- Staffing growth increases working-capital requirements because payroll generally precedes customer collections.
- The company must maintain financial covenants, including an interest coverage ratio of at least 4.0 to 1.0 before the fourth quarter of 2012 and 5.0 to 1.0 thereafter, and a total-indebtedness-to-total-capital-related ratio below 0.4 to 1.0. Management stated that all covenants were met at July 3, 2011.
- Two California class-action matters, Fuller and Sullivan, had tentative settlements pending final court approval. A $1.2 million after-tax Fuller-related charge was recorded in discontinued operations.
- The company retained a $6.6 million restructuring accrual at July 3, 2011, primarily for future lease payments expected to continue through 2018.
- Foreign currency exposure arises from international operations and foreign-currency borrowings. All remaining forward exchange contracts matured during the quarter, and none were outstanding at July 3, 2011.
- Additional risks include workers’ compensation claims, employment-related litigation, regulatory and tax changes, information-technology disruptions, foreign-market risks, and the possibility of nonpayment by the U.S. federal government, a significant customer.
- Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether revenue growth and improved operating earnings continue as labor-market growth decelerates.
- The sustainability of gross margins as HIRE Act benefits expire and business mix shifts toward lower-margin services.
- Conversion of strong reported earnings into operating cash flow, given receivable growth and 52-day days sales outstanding.
- Available borrowing capacity after considering $74 million of securitization borrowings and $50.6 million of standby letters of credit.
- Compliance with interest-coverage and leverage covenants as working-capital borrowing increases.
- Final court approval and ultimate costs of the Fuller and Sullivan settlements.
- Whether APAC Professional and Technical, OCG, and other loss-making or low-margin operations achieve sustained profitability.
- The extent to which unusually favorable employment-related tax credits affected the reported tax rate and earnings per share.