Kelly Services, Inc. — 2013 Q1 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 Outsourcing and Consulting Group (OCG). The filing covers the 13 weeks ended March 31, 2013, compared with the 13 weeks ended April 1, 2012. Results are unaudited.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue from services | $1,314.8 million | $1,354.8 million | Down 3.0% |
| Gross profit | $216.9 million | $223.7 million | Down 3.1% |
| Gross profit rate | 16.5% | 16.5% | Flat |
| SG&A expenses | $209.8 million | $209.0 million | Up 0.4% |
| Earnings from operations | $7.1 million | $14.7 million | Down 51.8% |
| Operating margin | 0.5% | 1.1% | Down 0.6 points |
| Net earnings | $12.9 million | $9.6 million | Up 34.4% |
| Diluted EPS | $0.34 | $0.26 | Up $0.08 |
| Cash flow from operations | $5.9 million | $13.4 million | Down $7.5 million |
- The tax benefit was $6.8 million in Q1 2013 versus tax expense of $4.9 million in Q1 2012. The 2013 benefit included approximately $10 million from the retroactive reinstatement of the work opportunity credit.
- Cash and equivalents were $62.1 million at March 31, 2013, compared with $76.3 million at year-end 2012.
- Trade accounts receivable were $999.8 million, with global days sales outstanding of 54 days.
- Short-term borrowings were $50.2 million versus $64.1 million at year-end 2012. Debt-to-total capital was 6.2%, compared with 8.0% at year-end.
- Total current assets were $1,155.0 million and current liabilities were $704.8 million; the reported current ratio was approximately 1.6.
- Shareholders’ equity increased to $758.5 million from $741.0 million at year-end 2012. The quarterly dividend remained $0.05 per share.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because hours worked decreased 9%, partially offset by a 6% constant-currency increase in average bill rates.
- Americas revenue decreased 3.3%, with Commercial revenue down 4% and Professional and Technical revenue relatively stable. Americas operating earnings declined to $24.7 million from $35.3 million, partly due to higher SG&A and a $3.0 million Delaware unclaimed-property settlement.
- EMEA revenue decreased 4.2% and shifted to a $0.2 million operating loss from $0.3 million of earnings. Hours worked declined 7%, reflecting recessionary conditions in Europe.
- APAC revenue decreased 9.4%, while the operating loss narrowed to $0.9 million from $1.4 million. Results reflected customer exits in India, lost customers in Australia and New Zealand, and reduced temporary staffing volumes.
- OCG revenue increased 14.2% to $99.0 million, gross profit increased 17.0%, and operating earnings increased to $1.7 million from $0.5 million. Growth was led by business process outsourcing and contingent workforce outsourcing.
- Operating cash flow fell to $5.9 million because of increased working-capital requirements. Capital expenditures were $2.8 million, financing cash usage was $15.6 million, and ending cash declined by $14.2 million.
- Net earnings benefited from the tax item described above and are not directly indicative of underlying operating improvement.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that slow and uneven economic growth continued to constrain staffing demand. The company expects near-term hiring growth in the U.S. to remain tepid and does not anticipate significant improvement in recessionary European conditions.
- Kelly’s long-term return-on-sales objective is 4%; Q1 2013 return on sales was 0.5%.
- Kelly intends to offer healthcare coverage in 2014 to eligible temporary employees under the Affordable Care Act. Management preliminarily estimated compliance costs at approximately 1% of U.S. cost of services, while noting that pricing increases may not fully offset those costs.
- The company settled a Delaware unclaimed-property examination for $4.5 million and recorded an additional $3.0 million reserve in Q1; payment was expected in Q2 2013.
- Ordinary-course litigation includes employment discrimination, wage-and-hour, and restrictive-covenant matters. Management does not expect current matters to have a material adverse effect, but acknowledges inherent uncertainty.
- At quarter-end, Kelly had full availability under its $150 million revolving credit facility and $46 million of available capacity under its $150 million securitization facility. It was in compliance with applicable debt covenants.
- Key risks include economic and labor-market weakness, customer concentration or contract losses, pricing pressure, foreign-currency movements, employment-related claims, workers’ compensation trends, financing and covenant access, information-technology execution, and healthcare-reform costs.
Investor Verification Priorities
- Verify the sustainability of reported earnings excluding the approximately $10 million retroactive tax benefit and the $3.0 million unclaimed-property charge.
- Track hours worked, bill rates, gross-profit rates, and operating margins by region, particularly the continued weakness in EMEA and APAC.
- Assess whether OCG growth can offset pressure in traditional staffing operations without proportionate increases in SG&A.
- Monitor operating cash flow, accounts receivable collections, working-capital needs, and utilization of the securitization facility.
- Evaluate the actual cost and customer-pricing recovery of 2014 healthcare coverage requirements.
- Review exposure to European receivables, which totaled $275 million, including $39 million from Italy, Portugal, and Ireland.