Kelly Services, Inc. 2012 Form 10-K Summary
Business context and reporting period
Kelly Services is a global workforce-solutions provider offering temporary and permanent staffing, professional and technical staffing, outsourcing, consulting, recruitment, career transition and vendor-management services. Operations span the Americas, EMEA and APAC, with seven reportable segments and approximately 560,000 employees assigned annually. The filing covers the 52-week fiscal year ended December 30, 2012; the fourth quarter ended December 30, 2012.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue from services | $5,450.5 million | $5,551.0 million | (1.8%) |
| Gross profit | $896.6 million | $883.3 million | 1.5% |
| Gross profit rate | 16.5% | 15.9% | +0.6 points |
| Earnings from operations | $72.3 million | $57.7 million | 25.3% |
| Operating margin | 1.3% | 1.0% | +0.3 points |
| Earnings from continuing operations | $49.7 million | $64.9 million | (23.5%) |
| Net earnings | $50.1 million | $63.7 million | (21.3%) |
| Diluted EPS | $1.32 | $1.69 | (21.9%) |
| Cash flow from operations | $61.1 million | $19.1 million | Increase of $42.0 million |
| Cash and equivalents | $76.3 million | $81.0 million | Decrease of $4.7 million |
| Short-term borrowings | $64.1 million | $96.3 million | Decrease of $32.2 million |
Fourth-quarter revenue was $1,375.4 million, gross profit was $222.2 million, earnings from continuing operations were $8.9 million and diluted EPS was $0.23. Fourth-quarter results included a $3.1 million asset impairment charge and $1.3 million of restructuring charges.
Working capital increased to $470.3 million from $417.0 million, and the current ratio improved to 1.7 from 1.6. Trade accounts receivable were $1.014 billion, with fourth-quarter global days sales outstanding of 53 days versus 52 days in 2011. Total assets were $1.636 billion and stockholders’ equity was $741.0 million at year-end.
Capital expenditures were $21.5 million, compared with $15.4 million in 2011. Debt-to-total capital declined to 8.0% from 12.5%. The company paid $0.20 per share in dividends during 2012, compared with $0.10 in 2011.
Material changes versus the prior comparable period
- Revenue declined 1.8%, although constant-currency revenue was approximately flat. Hours worked decreased 11%, partly offset by a 9% increase in average bill rates on a constant-currency basis.
- Americas revenue increased 0.8% to $3.672 billion and operating earnings increased 12.0% to $142.1 million. Professional and technical revenue grew 5%, while commercial revenue excluding the 2011 Brazil acquisition declined 3%.
- EMEA revenue declined 12.5% to $1.023 billion and operating earnings declined 51.6% to $8.7 million, reflecting an 11% reduction in hours worked and continued recessionary conditions in Europe.
- APAC revenue declined 12.1% to $394.8 million and the operating loss widened to $2.3 million. The company exited low-margin customers in India, substantially reducing hours but improving the regional gross profit rate.
- Outsourcing and Consulting Group revenue increased 24.8% to $396.1 million, and operating results improved from a $2.6 million loss to $8.6 million of earnings.
- Gross profit improved despite lower revenue, supported by higher fee-based income, pricing, business mix and a $10.1 million favorable adjustment to prior-year workers’ compensation estimates.
- SG&A excluding restructuring charges was essentially flat. EMEA restructuring generated a net $0.9 million benefit in 2012, and the remaining restructuring accrual was $2.4 million.
- Income tax expense increased to $19.1 million from a $7.3 million benefit in 2011, principally because employment-related tax credits were materially lower. The work opportunity credit was retroactively reinstated in January 2013, resulting in an anticipated first-quarter 2013 tax benefit of approximately $9.3 million.
Liquidity, debt and cash flow
- Operating cash flow was $61.1 million, compared with $19.1 million in 2011, primarily because working-capital requirements were lower.
- The company had $150.0 million of unused capacity under its revolving credit facility and $32.0 million of remaining capacity under its $150.0 million receivables securitization facility. The securitization facility carried $63.0 million of borrowings and $55.0 million of workers’ compensation standby letters of credit.
- Additional unsecured, uncommitted local facilities totaled $12.9 million, of which $1.1 million was borrowed.
- Management stated that it met all applicable debt covenants during 2012 and expected to fund ongoing needs through operating cash flow, cash balances, receivables securitization and available credit facilities.
- Total contractual obligations were $415.0 million, including $108.0 million of operating leases, $64.1 million of short-term borrowings, $116.5 million of accrued retirement benefits and $31.6 million of purchase obligations.
Outlook, management commentary, risks and unusual items
Management’s long-term objective is a 4.0% return on sales, compared with 1.3% in 2012. The strategy emphasizes professional and technical staffing, growth in outsourcing and consulting, permanent placement, commercial-staffing efficiency and lower-cost service delivery. Management cautioned that progress was slower than expected and that substantially stronger economic growth would be needed to achieve the long-term margin objective.
Management expected tepid U.S. job growth, decelerating temporary-job growth and continued economic uncertainty in 2013. Recessionary conditions in Europe were expected to continue. The company planned to offer healthcare coverage to eligible temporary employees beginning in 2014 under the Affordable Care Act, but stated that the cost and net financial impact could not yet be estimated and could be significant.
- Key operating risks include economic sensitivity, intense competition and pricing pressure, customer concentration and short-notice contract termination.
- The company depends on attracting qualified temporary and professional personnel and remains exposed to employment-related litigation, wage-and-hour claims, worker classification issues and regulatory changes.
- Workers’ compensation liabilities are partly self-insured and depend on actuarial estimates; adverse claims development or medical-cost inflation could increase expenses.
- Credit facilities contain financial covenants, restrictions on dividends and buybacks, and cross-default provisions. Failure to comply could limit liquidity or accelerate borrowings.
- International operations create foreign-exchange, political, regulatory and economic risks. European receivables totaled $284 million, or 28% of total trade receivables.
- The company abandoned the U.S., Canadian and Puerto Rican billing-system portion of its PeopleSoft implementation and recorded a $3.1 million impairment charge. It expected to spend approximately $3 million to $4 million in 2013 to complete remaining aspects of the project.
- Kelly contributed operations in China, Hong Kong and South Korea to TS Kelly Workforce Solutions in exchange for a 49% interest. The investment was $5.1 million at year-end, and results were to be recorded under the equity method beginning in 2013.
- Goodwill totaled $89.5 million and was not impaired in 2012. The company stated that a 10% reduction in growth assumptions would not have caused estimated fair values to fall below carrying values.
- The company received final approval of a California class-action settlement and recorded a $0.4 million after-tax reduction in the estimated settlement cost in 2012. It also faced unclaimed-property examinations, including a preliminary potential Delaware liability of approximately $3 million, which it disputed.
- Internal controls over financial reporting were assessed as effective by management and PricewaterhouseCoopers LLP.
Important facts for investors to verify
- Whether the 2013 and later margin improvement can continue after the favorable $10.1 million workers’ compensation estimate adjustment.
- Whether EMEA restructuring and the exit from low-margin Indian business improve profitability without causing further volume deterioration.
- The actual cost and pricing pass-through achieved for Affordable Care Act healthcare coverage.
- Compliance with interest-coverage and other debt covenants as operating conditions change.
- Collection trends, days sales outstanding and credit exposure, particularly for European customers.
- Progress and remaining costs of the PeopleSoft project and the effect of abandoning the billing-system implementation.
- The outcome of unclaimed-property examinations and other employment-related litigation or contingencies.
- Execution of the TS Kelly venture and the resulting equity-method earnings beginning in 2013.