Business Context and Reporting Period
Company: Kelly Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 28, 2009 (Second Quarter)
Industry Context: The staffing industry faced severe headwinds due to the global recession, with temporary employment in the U.S. dropping to a 16-year low. Kelly Services reported a net loss driven by a 29.1% decline in revenue and significant asset impairment charges.
Key Financial Metrics
| Metric (in millions) | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Revenue from Services | $1,028.9 | $1,452.0 | $2,071.5 | $2,840.4 |
| Gross Profit | $171.7 | $257.4 | $347.2 | $507.3 |
| Gross Margin | 16.7% | 17.7% | 16.8% | 17.9% |
| Operating Loss | $(74.5) | $15.0 | $(105.1) | $27.9 |
| Net Loss | $(66.0) | $10.5 | $(81.5) | $18.7 |
| Diluted EPS (Loss) | $(1.89) | $0.30 | $(2.34) | $0.53 |
| Cash and Equivalents | $115.2 | $85.4 | $115.2 | $85.4 |
| Total Debt | $77.6 | $115.2 | $77.6 | $115.2 |
| Operating Cash Flow (YTD) | $69.9 | $41.3 | $69.9 | $41.3 |
Material Changes vs. Prior Period
- Revenue Decline: Revenue fell 29.1% year-over-year in Q2 2009, driven by a 24.8% decrease in hours worked and a 7.2% decrease in average hourly bill rates. On a constant currency basis, revenue declined 24.4%.
- Asset Impairments: The company recorded a non-cash asset impairment charge of $52.6 million in Q2 2009. This included a $50.5 million goodwill impairment (affecting Americas Commercial, APAC Commercial, and EMEA PT segments) and a $2.1 million write-down of long-lived assets in Japan.
- Restructuring: The company incurred $2.4 million in restructuring charges in Q2 2009 related to U.K. operations, including branch closures and a sale of assets to Interaction Recruitment. Total expected charges for the U.K. program are $10–$11 million.
- Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased by $48.8 million (20.2%) year-over-year due to structural changes, compensation cuts, and reduced discretionary spending, partially offset by restructuring costs.
- Debt Reclassification: Due to anticipated covenant breaches, all long-term debt was reclassified as current liabilities on the balance sheet.
Guidance, Outlook, Risks, and Unusual Items
- Covenant Waivers: The company did not meet EBITDA and Interest Coverage Ratio covenants for its credit facilities. Lenders granted temporary waivers effective until September 16, 2009. The $150 million revolver is capped at $75 million for new borrowing until the waiver expires. Management is negotiating to amend or replace credit facilities.
- Outlook: Management expects revenue to remain relatively flat in the near term followed by a recovery. They anticipate incurring an additional $1–$2 million in U.K. restructuring costs in the second half of 2009.
- Legal Contingencies: Significant litigation includes a California class action regarding employee misclassification (decertified but under appeal) and a religious discrimination case where a jury verdict was reduced to $0.7 million in punitive damages (under appeal). The company maintains reserves for various wage and hour claims.
- Dividends: No dividends were paid in the first six months of 2009, compared to $0.27 per share in the same period of 2008.
Investor Verification Checklist
- Covenant Compliance: Verify the status of negotiations with lenders to amend credit facilities before the September 16, 2009 waiver expiration.
- Goodwill Valuation: Assess the sensitivity of the remaining $67.3 million goodwill balance to further economic deterioration, as noted in the filing.
- U.K. Restructuring Progress: Monitor the execution of branch closures and the realization of expected cost savings in the EMEA Commercial segment.
- Litigation Reserves: Review updates on the California class action appeal and the religious discrimination case to ensure reserves remain adequate.
- Constant Currency Trends: Analyze constant currency revenue trends to distinguish between operational performance and foreign exchange headwinds.