KELYA

Business Context and Reporting Period

Company: Kelly Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 3, 2011 (13 weeks)
Industry: Staffing and Human Resources Services

Kelly Services operates globally across seven segments: Americas Commercial, Americas Professional and Technical (PT), EMEA Commercial, EMEA PT, APAC Commercial, APAC PT, and the Outsourcing and Consulting Group (OCG). The company reported strong double-digit revenue growth across all segments, driven by a 16% increase in hours worked and improved labor market trends.

Key Financial Metrics

Note: Q1 2010 debt figures are not directly comparable in the provided text due to balance sheet date differences, but Q1 2011 total debt was $65.4 million.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 18.5% year-over-year (16.7% on a constant currency basis), primarily driven by a 16% increase in hours worked.
• Profitability Turnaround: The company returned to profitability with $1.1 million in net earnings, compared to a $2.0 million net loss in the prior year. Operating earnings improved from a $1.6 million loss to a $1.6 million profit.
• Expense Management: Selling, General, and Administrative (SG&A) expenses increased 16.8% to $212.1 million. This was driven by hiring full-time employees and increased incentive compensation, partially offset by a decrease in restructuring charges ($4.0 million in 2011 vs. $4.4 million in 2010).
• Cash Flow: Net cash used in operating activities improved significantly to $5.0 million (used) from $18.9 million (used) in the prior year, reflecting better working capital management.

Guidance, Outlook, and Risks

Management Commentary: Management noted that the U.S. and global economic recovery followed a sustainable growth path. The temporary employment penetration rate in the U.S. reached 1.73% in March, the highest in over 2.5 years. The company remains focused on growing higher-margin PT staffing and expanding fee-based business.

Debt and Liquidity:

• On March 31, 2011, the company amended its revolving credit facility, increasing capacity to $150 million and extending the term to 2016.
• The securitization facility was also amended, increasing capacity to $150 million and extending the term to 2014.
• As of April 3, 2011, the company had $133.6 million available on the revolving credit facility and $50.4 million on the securitization facility.
• The company repaid $63 million in term debt during the quarter.

Risks and Contingencies:

• Legal Proceedings: Two pending class action lawsuits in California (Fuller v. Kelly Services and Sullivan v. Kelly Services) involve claims regarding employee misclassification and compensation. The Sullivan matter has a proposed settlement pending court approval.
• Market Risk: The company is exposed to foreign currency risk and interest rate risk, though it utilizes forward contracts to hedge exposures. A hypothetical 10% fluctuation in interest rates would not materially impact earnings.

Investor Verification Checklist

• Expense Run Rate: Verify if the 16.8% increase in SG&A expenses is sustainable or if it was a one-time cost associated with hiring for growth.
• Legal Exposure: Monitor the status of the Fuller and Sullivan class action lawsuits for potential settlement costs or adverse rulings.
• Debt Covenants: Confirm compliance with the new financial covenants, specifically the Interest Coverage Ratio (minimum 4.0 to 1.0) and the Debt-to-Capital ratio (maximum 0.4 to 1.0).
• Working Capital Trends: Track Days Sales Outstanding (DSO), which was 52 days at period end, to ensure receivables collection remains efficient as revenue grows.
• Segment Margins: Review the margin compression in APAC Commercial and Americas PT segments to understand the impact of lower-margin business mix.