Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Executive
Overview
During the third quarter, we made good progress with our strategic plan to diversify geographically, invest in high-growth, high-margin businesses and
accelerate globalization of our professional and technical staffing services. Reflecting confidence in our strategic course, we took two important steps this quarter:
|
|
In August, Kellys board of directors authorized the repurchase of up to $50 million of our Companys outstanding Class A common shares over the next two
years.
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We also increased the quarterly dividend by 8%. Kelly has now paid a quarterly dividend for 45 consecutive years.
|
Currently our greatest challenge remains the U.S. staffing market, where we do nearly two-thirds of our business. The U.S. labor market has slowed since the beginning of the year,
with declines in temporary employment hitting the U.S. staffing market particularly hard. Declines in temporary employment occurred in 11 out of the last 12 months, and the U.S. penetration rate for temporary labor has been on a downward trend since
peaking in December 2006.
However, despite the soft labor market in the U.S., global demand for highly skilled, credentialed temporary workers continues. In fact,
our PTSA business is strengthening in both the Americas and International markets. This quarter, we added more than 20 PTSA branches in growing markets around the world to meet the need for engineers, IT professionals, scientific staff and other
highly skilled workers. This growth is also supporting our successful expansion efforts into higher margin and fee-based businesses.
We plan to continue to reduce
our U.S. dependency, gain greater scale internationally, accelerate PTSA staffing globally, increase our fee-based business, acquire new, complimentary businesses for our portfolio, carefully manage expenses, improve operating margins and position
Kelly for long-term growth.
Results of Operations
Third Quarter
Revenue from services in the third quarter of 2007 totaled $1.425 billion, an increase of 2.0% from the same period in 2006. This was
the result of an increase in average hourly bill rates of 6.7%, partially offset by a decrease in hours worked of 4.9%. Fee based income, which is included in revenue from services, totaled $35.7 million, or 2.5% of total revenue, for the third
quarter of 2007, an increase of 26.7% as compared to $28.1 million in the third quarter of 2006. Reflecting the economic slowdown in the U.S. market, revenue for the quarter decreased in the Americas - Commercial business segment and increased
slightly in the Americas - Professional Technical and Staffing Alternatives (Americas - PTSA) business segment. Revenue increased at double-digit rates in both the International - Commercial and International - Professional, Technical
and Staffing Alternatives (International - PTSA) business segments.
Compared to the third quarter of 2006, the U.S. dollar was weaker against many
foreign currencies, including the euro, the British pound and the Canadian dollar. As a result, our consolidated U.S. dollar translated revenue was slightly higher than would have otherwise been reported. On a constant currency basis, third quarter
revenue decreased 0.6% as compared with the prior year. When we use the term constant currency, it means that we have translated financial data for 2007 into U.S. dollars using the same foreign currency exchange rates that we used to
translate financial data for 2006. Management believes constant currency measurements are an important analytical tool to aid in understanding underlying operating trends without distortion due to currency fluctuations. The table below summarizes
the impact of foreign exchange adjustments on third quarter revenue:
20
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Third Quarter Revenue
|
|
|
|
2007
|
|
2006
|
|
|
% Change
|
|
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|
(In millions of dollars)
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|
|
|
|
Revenue from Services - Constant Currency:
|
|
|
|
|
|
|
|
|
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|
Americas - Commercial
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|
$
|
678.3
|
|
$
|
723.8
|
|
|
(6.3
|
) %
|
Americas - PTSA
|
|
|
277.6
|
|
|
273.5
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
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Total Americas - Constant Currency
|
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955.9
|
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|
997.2
|
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(4.1
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)
|
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International - Commercial
|
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383.4
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|
362.2
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5.8
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International - PTSA
|
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48.8
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|
37.5
|
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|
30.3
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|
|
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|
|
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|
|
|
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Total International - Constant Currency
|
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|
432.2
|
|
|
399.7
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8.1
|
|
|
|
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Total Revenue from Services - Constant Currency
|
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|
1,388.1
|
|
|
1,396.9
|
|
|
(0.6
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)
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Foreign Currency Impact
|
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37.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from Services
|
|
$
|
1,425.3
|
|
$
|
1,396.9
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
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Gross profit of $246.9 million was 6.9% higher than the gross profit of $230.9 million for the same period of the prior
year. The gross profit rate for the third quarter of 2007 was 17.3%, versus 16.5% for the third quarter of 2006. Compared to the prior year, the gross profit rate increased in all four business segments.
The improvement in the gross profit rate is primarily due to improved workers compensation rates and growth in fee based income. Fee based income has a significant impact on
gross profit rates. There are very low direct costs of services associated with fee based income. Therefore, increases or decreases can have a disproportionate impact on gross profit rates.
We regularly update our estimates of the ultimate costs of open workers compensation claims. As a result, we reduced the estimated cost of prior year workers
compensation claims by $2.8 million for the third quarter of 2007. This compares to a similar adjustment reducing prior year workers compensation claims by $1.0 million for the third quarter of 2006.
Selling, general and administrative expenses totaled $226.1 million, an increase of 8.8% year over year. Selling, general and administrative expenses expressed as a percentage of
revenue (expense rate) were 15.9% in the third quarter of 2007, a 1.0 percentage point increase compared to the 14.9% rate in the third quarter of 2006. Included in selling, general and administrative expenses are $2.5 million of
expenses related to the Americas and UK restructuring actions. See the Restructuring UK Operations and Restructuring Americas Operations sections for further discussion. The remaining increase in selling,
general and administrative expenses is due primarily to the growth in compensation related costs in all four business segments.
Earnings from operations in the
third quarter of 2007 totaled $20.8 million, a 9.6% decrease compared to earnings from operations of $23.0 million reported for the third quarter of 2006. Included in earnings from operations are $2.5 million of expenses related to the restructuring
actions.
Other income, net in the third quarter of 2007 was $0.6 million, compared to $0.3 million for the same period last year. The change is primarily
attributable to an increase in interest income related to higher interest rates and higher average cash balances, as compared to last year.
The effective income tax
rate on continuing operations in the third quarter of 2007 was 31.3%, an increase from last years rate of 29.5% for the third quarter. The increase is primarily due to a favorable resolution of an income tax audit in the third quarter of 2006,
partially offset by the reinstatement of Work Opportunity Tax credits this year.
Earnings from continuing operations were $14.7 million in the third quarter of
2007, compared to $16.4 million in the third quarter of 2006. Included in earnings from continuing operations are $1.9 million of expenses, net of tax, related to the restructuring actions.
21
During the first quarter of 2007, we sold the Kelly Home Care (KHC) business unit. Accordingly, third quarter 2006
results of operations were revised to remove KHCs operating results from continuing operations. Additionally, third quarter 2006 results of operations were also revised to remove the operating results of Kelly Staff Leasing (KSL),
which was sold in the fourth quarter of 2006. Earnings from discontinued operations, which include KHCs and KSLs operating results, totaled $0.5 million for the third quarter of 2007, as compared to $1.4 million in the third quarter of
2006.
Third quarter net earnings for 2007 totaled $15.1 million, a decrease of 15.0% as compared to last year. Basic and diluted earnings per share from continuing
operations for the third quarter of 2007 were $0.40, as compared to basic and diluted earnings per share from continuing operations of $0.46 and $0.45, respectively, for the third quarter of 2006.
During the first quarter of 2007, the Company realigned its operations into four reporting segments Americas - Commercial, Americas - PTSA, International - Commercial and
International - PTSA. The Americas include the U.S. operations, as well as Canada, Mexico and Puerto Rico, which were previously included in International. In addition, corporate expenses that directly support the operating units have been allocated
to all four segments. Prior periods were reclassified to conform with the current presentation.
Americas - Commercial
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Third Quarter
|
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|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In millions of dollars)
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|
|
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|
Revenue from Services
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|
$
|
682.5
|
|
|
$
|
723.8
|
|
|
(5.7
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) %
|
Earnings from Operations
|
|
|
19.0
|
|
|
|
25.8
|
|
|
(26.4
|
)
|
|
|
|
|
Gross profit rate
|
|
|
15.7
|
%
|
|
|
15.4
|
%
|
|
0.3
|
%
|
Expense rate
|
|
|
13.0
|
|
|
|
11.9
|
|
|
1.1
|
|
Operating margin
|
|
|
2.8
|
|
|
|
3.6
|
|
|
(0.8
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)
|
Revenue from services in the Americas - Commercial segment totaled $682.5 million in the third quarter of 2007, a 5.7%
decrease compared to the $723.8 million reported for the same period in 2006. This reflected a decrease in hours worked of 9.5%, partially offset by an increase in average hourly bill rates of 4.2%. Fee based income totaled $4.9 million in the third
quarter of 2007, a 5.5% decrease from the $5.1 million in the third quarter of 2006. On a year-over-year basis, revenue decreased 4.9% in July, 6.4% in August and 5.9% in September. Americas - Commercial revenue represented 47.9% of total Company
revenue in the third quarter of 2007 and 51.8% in the third quarter of 2006.
Americas - Commercial earnings from operations totaled $19.0 million in the third
quarter of 2007, as compared to third quarter earnings of $25.8 million last year, reflecting a 0.8 percentage point decrease in the operating margin. This was driven by the 5.7% decrease in revenue and a 1.1 percentage point increase in the
selling, general and administrative expense rate, partially offset by the 0.3 percentage point increase in the gross profit rate.
The increase in the gross profit
rate reflected lower workers compensation costs. As noted above, the Company revised its estimate of the cost of outstanding workers compensation claims and, accordingly, reduced expense in the third quarter. Of the total $2.8 million
adjustment, $2.5 million is reflected in the results of Americas Commercial for the third quarter of 2007. The entire $1.0 million adjustment in the third quarter of 2006 is reflected in the results of Americas Commercial. The increase
in selling, general and administrative expense rate was due to growth in compensation costs and $1.5 million of US restructuring costs.
22
Americas - PTSA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In millions of dollars)
|
|
|
|
|
Revenue from Services
|
|
$
|
277.9
|
|
|
$
|
273.5
|
|
|
1.6
|
%
|
Earnings from Operations
|
|
|
14.5
|
|
|
|
15.0
|
|
|
(3.1
|
)
|
|
|
|
|
Gross profit rate
|
|
|
18.7
|
%
|
|
|
17.5
|
%
|
|
1.2
|
%
|
Expense rate
|
|
|
13.5
|
|
|
|
12.0
|
|
|
1.5
|
|
Operating margin
|
|
|
5.2
|
|
|
|
5.5
|
|
|
(0.3
|
)
|
Revenue from services in the Americas - PTSA segment for the third quarter of 2007 totaled $277.9 million, an increase of
1.6% compared to the $273.5 million reported in the third quarter of 2006. This reflected a decrease in hours worked of 0.4%, partially offset by an increase in average billing rates of 2.4% for the professional and technical staffing businesses.
Fee based income totaled $8.2 million in the third quarter of 2007 and $6.8 million in the third quarter of 2006, an increase of 20.0%. On a year-over-year basis, revenue increased 1.5% in July, 0.9% in August and 2.4% in September. Americas - PTSA
revenue represented 19.5% of total Company revenue in the third quarter of 2007 and 19.6% in the third quarter of 2006.
Kelly Health Care, Kelly Management Services
and HRfirst were the leading performers in revenue growth in the third quarter of 2007. Kelly IT Resources and Automotive Services Group reported year-over-year revenue declines in the third quarter of 2007.
Americas - PTSA earnings from operations for the third quarter of 2007 totaled $14.5 million, a decrease of 3.1% from the same period in 2006, reflecting a 0.3 percentage point
decrease in the operating margin. This was the result of a 1.5 percentage point increase in the selling, general and administrative expense rate, partially offset by a 1.2 percentage point improvement in the gross profit rate.
The PTSA gross profit rate increased primarily due to increases in fee based income. The increase in selling, general and administrative expenses was due to increased compensation
related costs, including increased staffing costs related to adding permanent placement recruiters.
International - Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In millions of dollars)
|
|
|
|
|
Revenue from Services
|
|
$
|
412.3
|
|
|
$
|
362.2
|
|
|
13.8
|
%
|
Earnings from Operations
|
|
|
4.6
|
|
|
|
3.2
|
|
|
43.5
|
|
|
|
|
|
Gross profit rate
|
|
|
17.3
|
%
|
|
|
17.1
|
%
|
|
0.2
|
%
|
Expense rate
|
|
|
16.2
|
|
|
|
16.2
|
|
|
0.0
|
|
Operating margin
|
|
|
1.1
|
|
|
|
0.9
|
|
|
0.2
|
|
Translated U.S. dollar revenue from services in International - Commercial for the third quarter of 2007 totaled $412.3
million, a 13.8% increase compared to the $362.2 million reported in the third quarter of 2006. This resulted from a 16.4% increase in fee based income, an increase in hours worked of 2.8% and an increase in the translated U.S. dollar average hourly
bill rates of 10.6%. Fee based income totaled $13.9 million in the third quarter of 2007 and $11.9 million in the third quarter of 2006. International - Commercial revenue represented 28.9% of total Company revenue in the third quarter of 2007 and
25.9% in the third quarter of 2006.
On a constant currency basis, revenue increased by 5.8%, fee based income increased 7.4% and average hourly bill rates increased
2.9% from the third quarter of 2006. On a year-over-year basis, constant currency revenue growth by month was 7.2% in July, 6.0% in August and 4.1% in September.
23
During the second quarter of 2007, the French government changed the method of calculating payroll tax credits. In connection with
this change, $0.6 million of French payroll tax credits were recognized in the third quarter of 2007.
International - Commercial earnings from operations for the
third quarter of 2007 totaled $4.6 million compared to $3.2 million last year. The current year includes the effect of the French payroll tax credits of $0.6 million, partially offset by a $1.0 million charge related to the restructuring of the UK
operations. The 13.8% increase in revenue, combined with a 0.2 percentage point increase in the gross profit rate, resulted in a 0.2 percentage point increase in the operating margin.
The 0.2 percentage point increase in International - Commercial gross profit rate for the third quarter of 2007 was primarily due to strong growth in fee-based income and effect of the French payroll tax credits.
International - PTSA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In millions of dollars)
|
|
|
|
|
Revenue from Services
|
|
$
|
52.6
|
|
|
$
|
37.5
|
|
|
40.4
|
%
|
Earnings from Operations
|
|
|
1.0
|
|
|
|
0.3
|
|
|
229.9
|
|
|
|
|
|
Gross profit rate
|
|
|
30.5
|
%
|
|
|
25.1
|
%
|
|
5.4
|
%
|
Expense rate
|
|
|
28.7
|
|
|
|
24.3
|
|
|
4.4
|
|
Operating margin
|
|
|
1.8
|
|
|
|
0.8
|
|
|
1.0
|
|
Translated U.S. dollar revenue from services in International - PTSA for the third quarter of 2007 totaled $52.6 million, a
40.4% increase compared to the $37.5 million reported in the third quarter of 2006. This resulted from a 105.7% increase in fee based income and an increase in hours worked of 15.4%, combined with an increase in the translated U.S. dollar average
hourly bill rates of 14.5%. Fee based income totaled $8.7 million in the third quarter of 2007 and $4.2 million in the third quarter of 2006. International - PTSA revenue represented 3.7% of total Company revenue in the third quarter of 2007 and
2.7% in the third quarter of 2006.
On a constant currency basis, revenue increased by 30.3%, fee based income increased 93.1% and average hourly bill rates
increased 6.0% from the third quarter of 2006. On a year-over-year basis, constant currency revenue growth by month was 25.5% in July, 33.7% in August and 32.9% in September.
Operating earnings for International - PTSA for the third quarter were $1.0 million in 2007 and a $0.3 million in 2006, which resulted in a 1.0 percentage point increase in the operating margin. The 40.4% increase in revenue
was partially offset by a 4.4 percentage point increase in the expense rate. The International - PTSA gross profit rate for the third quarter of 2007 increased 5.4 percentage points from the same period last year, primarily due to very strong growth
in fee based income. The increase in U.S. dollar reported expenses was due primarily to the growth in compensation related costs and costs associated with new branches.
Results of Operations
September Year to Date
Revenue from services for the first nine months of 2007 totaled $4.192 billion, an increase of 1.6% from the same period in 2006. This was the result of an increase in average hourly bill rates of 2.9%, partially offset by a
decrease in hours worked of 1.7%. Fee based income, which is included in revenue from services, totaled $99.7 million, or 2.4% of total revenue, for the first nine months of 2007, an increase of 30.2% as compared to $76.6 million for the first nine
months of 2006. Reflecting the economic slowdown in the U.S. market, revenue for the first nine months of 2007 decreased in the Americas - Commercial and Americas - PTSA business segments. Revenue increased at double-digit rates in both the
International - Commercial and International - PTSA business segments.
24
Compared to the first nine months of 2006, the U.S. dollar was weaker against many foreign currencies, including the euro, British
pound and Canadian dollar. As a result, our consolidated U.S. dollar translated revenue was slightly higher than would have otherwise been reported. On a constant currency basis, revenue for the first nine months of 2007 decreased 0.8% as compared
with the prior year. The table below summarizes the impact of foreign exchange adjustments on revenue for the first nine months of 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. Year to Date Revenue
|
|
|
|
2007
|
|
2006
|
|
|
% Change
|
|
|
|
(In millions of dollars)
|
|
|
|
|
Revenue from Services - Constant Currency:
|
|
|
|
|
|
|
|
|
|
|
Americas - Commercial
|
|
$
|
2,059.0
|
|
$
|
2,177.0
|
|
|
(5.4
|
) %
|
Americas - PTSA
|
|
|
812.6
|
|
|
831.0
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas - Constant Currency
|
|
|
2,871.6
|
|
|
3,007.9
|
|
|
(4.5
|
)
|
|
|
|
|
International - Commercial
|
|
|
1,086.1
|
|
|
1,013.7
|
|
|
7.1
|
|
International - PTSA
|
|
|
135.8
|
|
|
103.8
|
|
|
30.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International - Constant Currency
|
|
|
1,221.9
|
|
|
1,117.5
|
|
|
9.3
|
|
|
|
|
|
Total Revenue from Services - Constant Currency
|
|
|
4,093.6
|
|
|
4,125.4
|
|
|
(0.8
|
)
|
Foreign Currency Impact
|
|
|
98.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from Services
|
|
$
|
4,191.8
|
|
$
|
4,125.4
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit of $723.7 million was 8.5% higher than the gross profit of $667.2 million for the same period of the prior
year. The gross profit rate for the first nine months of 2007 was 17.3%, versus 16.2% for the first nine months of 2006. Compared to the prior year, the gross profit rate increased in all four business segments.
The improvement in the gross profit rate is due to lower payroll tax rates and workers compensation costs measured as a percentage of direct wages and higher fee based
income. The gross profit rate also includes the effect of the French payroll tax credits noted below.
During the second quarter of 2007, the French government
changed the method of calculating payroll tax credits, retroactive to the beginning of 2006 and on a go-forward basis until October 1, 2007. As a result, Kelly recognized a total credit of $4.4 million in the first nine months of 2007, of which
$2.6 million related to 2006.
We regularly update our estimates of the ultimate costs of open workers compensation claims. As a result, we reduced the
estimated cost of prior year workers compensation claims by $6.5 million for the first nine months of 2007. This compares to a similar adjustment reducing prior year workers compensation claims by $2.3 million for the first nine months
of 2006.
Selling, general and administrative expenses totaled $670.1 million, an increase of 9.6% year over year. Selling, general and administrative expenses
expressed as a percentage of revenue (expense rate) were 16.0% for the first nine months of 2007, a 1.2 percentage point increase compared to the 14.8% rate for the first nine months of 2006. Included in selling, general and
administrative expenses are $7.5 million of expenses related to the Americas Commercial and UK restructuring actions. The remaining increase in selling, general and administrative expenses is due primarily to the growth in compensation related
costs.
Earnings from operations for the first nine months of 2007 totaled $53.5 million, a 3.9% decrease as compared to the first nine months of 2006. Included in
earnings from operations are $7.5 million of expenses related to the restructuring actions and $4.4 million related to French payroll tax credits.
Other income, net
for the first nine months of 2007 was $2.2 million, compared to $0.9 million for the same period last year. The change is primarily attributable to an increase in interest income related to higher U.S. interest rates and higher cash balances
compared to last year.
25
The effective income tax rate on continuing operations for the first nine months of 2007 was 36.7%, an increase from last
years rate of 35.6%. The majority of the increase in the effective tax rate is a result of an increase in losses in certain international locations, particularly the UK, for which no income tax benefit is provided. This was partially offset by
the benefit of the Work Opportunity Tax credit which was reinstated during the fourth quarter of 2006.
Earnings from continuing operations were $35.3 million for
the first nine months of 2007, compared to $36.5 million for the first nine months of 2006. Included in earnings from continuing operations are $7.0 million of expenses, net of tax, related to the UK and Americas restructuring actions and $3.0
million of French payroll tax credits, net of tax.
Earnings from discontinued operations, which include KHCs and KSLs operating results, as well as the
$6.2 million gain on the sale of KHC, net of tax, totaled $7.1 million for the first nine months of 2007, as compared to $2.6 million for the same period in 2006.
Net earnings for the first nine months of 2007 totaled $42.4 million, an increase of 8.5% as compared to last year. Basic and diluted earnings per share from continuing operations for the first nine months of 2007 were $0.96, as compared to
basic and diluted earnings per share from continuing operations of $1.01 for the first nine months of 2006.
Americas - Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. Year to Date
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In millions of dollars)
|
|
|
|
|
Revenue from Services
|
|
$
|
2,063.6
|
|
|
$
|
2,177.0
|
|
|
(5.2
|
) %
|
Earnings from Operations
|
|
|
63.1
|
|
|
|
73.3
|
|
|
(14.0
|
)
|
|
|
|
|
Gross profit rate
|
|
|
15.8
|
%
|
|
|
15.2
|
%
|
|
0.6
|
%
|
Expense rate
|
|
|
12.7
|
|
|
|
11.8
|
|
|
0.9
|
|
Operating margin
|
|
|
3.1
|
|
|
|
3.4
|
|
|
(0.3
|
)
|
Revenue from services in the Americas - Commercial segment totaled $2.064 billion for the first nine months of 2007, a 5.2%
decrease compared to the $2.177 billion reported for the same period in 2006. This reflected a decrease in hours worked of 8.5%, partially offset by an increase in average hourly bill rates of 3.5%. Fee based income totaled $14.0 million for the
first nine months of 2007, a 0.9% decrease from the $14.2 million for the same period in 2006. Americas - Commercial revenue represented 49.2% of total Company revenue for the first nine months of 2007 and 52.8% for the first nine months of 2006.
Americas - Commercial earnings from operations totaled $63.1 million for the first nine months of 2007, as compared to earnings of $73.3 million last year,
reflecting a 0.3 percentage point decrease in the operating margin. This was the result of the 5.2% decrease in revenue and a 0.9 percentage point increase in the selling, general and administrative expense rate, partially offset by a 0.6 percentage
point increase in the gross profit rate.
The increase in the gross profit rate reflected lower workers compensation costs and reduced payroll taxes. As noted
above, the Company revised its estimate of the cost of outstanding workers compensation claims and, accordingly, reduced expense during the first nine months of 2007. Of the total $6.5 million adjustment, $5.8 million is reflected in the
results of Americas - Commercial. This compares to an adjustment of $2.1 million for the first nine months of 2006. The increase in selling, general and administrative expense rate was primarily due to growth in compensation costs and the reduction
in expense leverage as a result of the decrease in revenue from services.
26
Americas - PTSA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. Year to Date
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In millions of dollars)
|
|
|
|
|
Revenue from Services
|
|
$
|
812.9
|
|
|
$
|
831.0
|
|
|
(2.2
|
) %
|
Earnings from Operations
|
|
|
41.7
|
|
|
|
43.0
|
|
|
(2.9
|
)
|
|
|
|
|
Gross profit rate
|
|
|
18.5
|
%
|
|
|
16.8
|
%
|
|
1.7
|
%
|
Expense rate
|
|
|
13.4
|
|
|
|
11.6
|
|
|
1.8
|
|
Operating margin
|
|
|
5.1
|
|
|
|
5.2
|
|
|
(0.1
|
)
|
Revenue from services in the Americas - PTSA segment for the first nine months of 2007 totaled $812.9 million, a decrease of
2.2% compared to the $831.0 million reported for the same period in 2006. This reflected a decrease in hours worked of 3.2%, partially offset by an increase in average billing rates of 1.6% for the professional and technical staffing businesses. Fee
based income totaled $22.7 million for the first nine months of 2007 and $17.8 million for the first nine months of 2006, an increase of 27.8%. Americas - PTSA revenue represented 19.4% of total Company revenue for the first nine months of 2007 and
20.1% for the first nine months of 2006.
Kelly Health Care, Kelly Management Services and HRfirst were the leading performers in revenue growth during the first
nine months of 2007. Kelly IT Resources, Kelly Scientific Resources, Kelly Engineering Resources and Automotive Services Group reported year-over-year revenue declines during the first nine months of 2007.
Americas - PTSA earnings from operations for the first nine months of 2007 totaled $41.7 million, a decrease of 2.9% from the same period in 2006. This was the result of the 2.2%
decrease in revenue and a 1.8 percentage point increase in the selling, general and administrative expense rate, partially offset by the 1.7 percentage point improvement in the gross profit rate.
The Americas - PTSA gross profit rate increased primarily due to increases in fee based income, reduced payroll taxes and workers compensation costs and the benefit of a
full nine-month impact of the higher margin Ayers outplacement business, acquired in the second quarter of 2006. The increase in selling, general and administrative expenses was due to increased compensation related costs, including a
nine-month impact of the Ayers outplacement business and increased staffing costs related to adding permanent placement recruiters.
International
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. Year to Date
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In millions of dollars)
|
|
|
|
|
Revenue from Services
|
|
$
|
1,168.9
|
|
|
$
|
1,013.7
|
|
|
15.3
|
%
|
Earnings from Operations
|
|
|
4.4
|
|
|
|
0.3
|
|
|
NM
|
|
|
|
|
|
Gross profit rate
|
|
|
17.4
|
%
|
|
|
16.9
|
%
|
|
0.5
|
%
|
Expense rate
|
|
|
17.0
|
|
|
|
16.9
|
|
|
0.1
|
|
Operating margin
|
|
|
0.4
|
|
|
|
0.0
|
|
|
0.4
|
|
Translated U.S. dollar revenue from services in International - Commercial for the first nine months of 2007 totaled $1.169
billion, a 15.3% increase compared to the $1.014 billion reported for the first nine months of 2006. This resulted from an 18.7% increase in fee based income, an increase in hours worked of 14.3% and an increase in the translated U.S. dollar average
hourly bill rates of 0.8%. Fee based income totaled $39.2 million for the first nine months of 2007 and $33.1 million for the first nine months of 2006. International - Commercial revenue represented 27.9% of total Company revenue for the first nine
months of 2007 and 24.6% for the first nine months of 2006.
27
On a constant currency basis, revenue increased by 7.1%, fee based income increased 9.5% and average hourly bill rates decreased
6.3% from the first nine months of 2006. The change in average bill rates was impacted by significant growth in lower average wage rate countries, such as India and Malaysia.
International - Commercial earnings from operations for the first nine months of 2007 totaled $4.4 million, compared to earnings of $0.3 million last year. The current year includes a $6.0 million charge related to the
restructuring of the UK operations and a $4.4 million benefit related to French payroll tax credits. The 15.3% increase in revenue, combined with a 0.5 percentage point increase in the gross profit rate, was partially offset by a 0.1 percentage
point increase in the selling, general and administrative expense rate.
The 0.5 percentage point increase in International - Commercial gross profit rate for the
first nine months of 2007 primarily reflects the effect of the French payroll tax credits. The increase in U.S. dollar reported expenses was due primarily to the growth in compensation related costs and the $6.0 million UK restructuring charge.
International - PTSA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. Year to Date
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In millions of dollars)
|
|
|
|
|
Revenue from Services
|
|
$
|
146.4
|
|
|
$
|
103.8
|
|
|
41.1
|
%
|
Earnings from Operations
|
|
|
1.7
|
|
|
|
0.4
|
|
|
346.7
|
|
|
|
|
|
Gross profit rate
|
|
|
29.9
|
%
|
|
|
25.0
|
%
|
|
4.9
|
%
|
Expense rate
|
|
|
28.7
|
|
|
|
24.6
|
|
|
4.1
|
|
Operating margin
|
|
|
1.2
|
|
|
|
0.4
|
|
|
0.8
|
|
Translated U.S. dollar revenue from services in International - PTSA for the first nine months of 2007 totaled $146.4
million, a 41.1% increase compared to the $103.8 million reported for the first nine months of 2006. This resulted from a 105.0% increase in fee based income and an increase in hours worked of 17.1%, combined with an increase in the translated U.S.
dollar average hourly bill rates of 13.7%. Fee based income totaled $23.7 million for the first nine months of 2007 and $11.5 million for the first nine months of 2006. International - PTSA revenue represented 3.5% of total Company revenue in the
first nine months of 2007 and 2.5% for the same period in 2006.
On a constant currency basis, revenue increased by 30.9%, fee based income increased 93.0% and
average hourly bill rates increased 5.1% from the first nine months of 2006.
Operating results for International - PTSA were earnings of $1.7 million for the first
nine months of 2007, compared to $0.4 million in 2006, reflecting a 0.8 percentage point increase in the operating margin. The 41.1% increase in revenue was partially offset by a 4.1 percentage point increase in the expense rate. The International -
PTSA gross profit rate for the first nine months of 2007 increased 4.9 percentage points from the same period last year. Growth in fee based income was partially offset by the effects of growth in pan-European corporate account business, which
carries a lower gross profit rate. The increase in U.S. dollar reported expenses was due primarily to the growth in compensation related costs and costs associated with new branches.
Many of the Companys large corporate accounts and pan-European customers have negotiated high volume global service agreements, which tend to result in lower gross profit rates than those earned with the Companys
small and medium size customers. However, these accounts typically also have lower administrative costs due to economies of scale, and can yield an operating margin similar to that realized with small or medium size customers. The Companys
strategy is focused on serving and growing large corporate and local accounts. As customer mix shifts to larger accounts, the Companys average gross margins tend to decrease.
28
Restructuring - UK Operations
On
January 24, 2007, the Chief Executive Officer of Kelly Services, Inc. authorized a restructuring plan for our United Kingdom operations (Kelly UK). The plan is the result of managements strategic review of the operations of
Kelly UK which identified under-performing branch locations and the opportunity for additional operational cost savings.
As of September 30, 2007, Kelly UK has
completed its restructuring actions and closed each of the 22 branches scheduled for closure, reached settlements with landlords for the UK headquarters locations and incurred $0.2 million and $5.0 million, respectively, of restructuring charges
associated with these actions in the 13 and 39 weeks ended September 30, 2007. These expenses are reported as a component of selling, general and administrative expenses in the International - Commercial segment. For the 13 weeks ended
September 30, 2007, the $0.2 million charge includes $0.1 million for facility exit costs and less than $0.1 million for accelerated depreciation of leasehold improvements and personal property. For the 39 weeks ended September 30, 2007,
the $5.0 million charge includes $4.3 million for facility exit costs and $0.6 million for accelerated depreciation. The Company did not incur any significant severance costs in connection with the restructuring.
In addition, the Company has incurred moving, fit out and lease origination fees related to the headquarters consolidation of $0.8 million and $1.1 million, respectively, for the
13 and 39 weeks ended September 30, 2007. Total costs of the UK project were $6.0 million.
Restructuring - Americas Operations
On July 23, 2007, the Chief Executive Officer of Kelly Services, Inc. authorized a restructuring plan for our Americas Commercial branch operations. The plan is the
result of managements strategic review of operations in the U.S. which identified under-performing branch locations. The plan will result in the closure of approximately 50 branch locations.
As of September 30, 2007, Americas Commercial has closed 42 of the branches scheduled for closure and incurred $1.5 million of restructuring charges associated with
these actions in the 13 and 39 weeks ended September 30, 2007. These expenses are reported as a component of selling, general and administrative expenses in the Americas - Commercial segment. For the 13 and 39 weeks ended September 30,
2007, the $1.5 million charge includes $1.4 million for facility exit costs and $0.1 million for accelerated depreciation of leasehold improvements and personal property. The Company plans to complete the restructuring actions in the fourth quarter
of 2007. To complete the restructuring actions, we expect to incur additional facility exit costs of approximately $0.5 million and accelerated depreciation of $0.1 million. We currently expect the total pre-tax facility exit costs and accelerated
depreciation will be approximately $2.1 million. The Company does not expect to incur any significant severance costs in connection with the restructuring.
It is
currently expected that the restructuring plans above will result in improved operating results beginning in the fourth quarter of 2007 by lower selling, general and administrative expenses through reduced facilities and related expenses.
Financial Condition
Kelly has financed its operations
through cash generated by operating activities and available from revolving credit facilities. As highlighted in the Statements of Cash Flows, the Companys liquidity and available capital resources are impacted by four key components: cash and
equivalents, operating activities, investing activities and financing activities.
Cash and Equivalents
Cash and equivalents totaled $103 million at the end of the third quarter of 2007, a decrease of $15 million from the $118 million at year-end 2006. As further described below, the
Company generated $50 million of cash from operating activities, used $47 million of cash in investing activities and used $22 million in financing activities.
Operating Activities
In the first nine months of 2007, the Company generated $50 million in cash from its operating activities, as compared to
$59 million in the first nine months of 2006. This decrease is due primarily to growth in accounts receivable.
29
Trade accounts receivable totaled $904 million at the end of the third quarter of 2007. Global days sales outstanding at the end of
the third quarter of 2007 were 58 days, compared to 57 days as of the end of third quarter in the prior year. The increase of one day primarily reflects the growth in international business mix.
The Companys working capital position was $473 million at the end of the third quarter of 2007, compared to $463 million at year-end 2006. The current ratio was 1.8 at both
the end of the third quarter of 2007 and year-end 2006.
Investing Activities
In the first nine months of 2007, the Company used $47 million for investing activities, compared to $31 million in the first nine months of 2006. Capital expenditures totaled $34 million for the first nine months of 2007 and
$26 million for the first nine months of 2006.
Capital expenditures for 2007, which are primarily related to the Companys information technology programs and
branch openings, refurbishments and relocations, are expected to total between $46 and $48 million, compared to $46 million for 2006. This level reflects continued spending associated with the implementation of the PeopleSoft payroll, billing and
accounts receivable project.
The total cost related to the PeopleSoft payroll, billing and accounts receivable project, which commenced in the fourth quarter of
2004, is expected to be approximately $53 to $56 million in capital expenditures and approximately $23 to $24 million in selling, general and administrative expenses. Capital expenditures for the PeopleSoft project by year are expected to amount to
approximately $23 million in total for 2007 and approximately $6 to $9 million in 2008. Selling, general and administrative expenses for the PeopleSoft project by year are expected to amount to approximately $7 million in total for 2007 and
approximately $7 to $8 million in 2008. The PeopleSoft implementation is expected to cover U.S., Canada, Puerto Rico, U.K. and Ireland operations.
During the first
quarter of 2007, the Company sold the Kelly Home Care business for cash proceeds of $12.5 million. The results of operations and the gain on sale are presented in discontinued operations in both 2007 and 2006.
On April 1, 2007, the Company purchased the remaining shares of Tempstaff Kelly, Inc., a joint venture originally created with Sony Corporation and Tempstaff, one of the
largest staffing companies in Japan, for $2 million, net of cash received. With the purchase of the remaining 51% interest in Tempstaff Kelly, Tempstaff Kelly became a wholly owned, consolidated subsidiary of Kelly Services, Inc. as of April 1,
2007. Tempstaff Kelly is included in the International - Commercial and International - PTSA business segments subsequent to April 1, 2007.
During the first
quarter of 2007, the Company acquired the net operating assets of Talents Technology, a permanent placement and executive search firm with operations in the Czech Republic and Poland, for $3 million in cash. The transaction also includes additional
contingent earnout payments of up to $1.6 million over the next three years, based primarily on the achievement of certain earnings targets. Talents Technology is included in the International - PTSA business segment as of April 1, 2007.
During the first quarter of 2007, the Company also acquired the net operating assets of CGR/seven LLC, a creative staffing services firm that specializes in
providing creative talent, for $12 million in cash at the date of acquisition and $1 million payable in each of the years 2008 and 2009, and possible additional earnout payments of up to $2 million payable in each of the years 2008 and 2009, based
primarily on the achievement of certain earnings targets. CGR/seven is included in the Americas - PTSA business segment as of April 1, 2007.
During the second
quarter of 2007, the Company acquired P-Serv, a company specializing in temporary staffing, permanent staffing, outsourcing and executive search with operations in China, Hong Kong and Singapore, for $8 million in cash. The transaction also includes
additional contingent earnout payments of up to $2.6 million in total payable in 2009 and 2010, based primarily on the achievement of certain earnings targets. P-Serv is included as a business unit in the International Commercial business
segment of the Company from the date of acquisition.
30
In October, 2007, the Company announced that it has signed a definitive agreement to acquire access AG, a specialized recruitment
services company headquartered in Germany and with operations in Austria. In connection with this acquisition, the Company will make an initial payment of approximately $20 million upon closing, with possible additional contingent payments of up to
approximately $10 million over the next two years, based on the achievement of certain earnings targets.
During the second quarter of 2006, the Company acquired the
net operating assets of The Ayers Group for $4.6 million. The transaction includes additional contingent payments of up to $1.3 million, payable over the next two years, based on achievement of targets.
On October 2, 2006, the Company purchased Sony Corporations 40% interest in Tempstaff Kelly for $5 million. With the purchase of Sony Corporations ownership
share, the Company increased its ownership interest to 49%.
Financing Activities
In the first nine months of 2007, the Company used $22 million in financing activities, compared to $15 million in the first nine months of 2006. Short-term debt totaled $75 million at the end of the third quarter of 2007,
compared to $69 million at year-end 2006. At the end of the third quarter of 2007, debt represented approximately 8.7% of total capital.
During the third quarter of
2007, the Company repurchased 556 thousand Class A shares for $12.5 million. A total of $37.5 million remains available under the $50 million share repurchase program authorized by the Companys board of directors in August, 2007.
In the first quarter of 2007, the Company obtained short-term financing utilizing an $8.2 million yen-denominated credit facility to purchase the additional 51%
interest in Tempstaff Kelly, as well as to fund local working capital. In the first nine months of 2007, the Company made $14.2 million in dividend payments and $3.5 million in net repayments on the revolving line of credit.
During the third quarter of 2006, the Company obtained short-term financing utilizing a $5 million yen-denominated credit facility to purchase the additional 40% interest in
Tempstaff Kelly.
New Accounting Pronouncements
See Note 12 , New
Accounting Pronouncements, in the Notes to Financial Statements of this Quarterly Report on Form 10-Q for a description of new accounting pronouncements.
Contractual Obligations and Commercial Commitments
Other than the obligations related to our acquisitions and income taxes disclosed in the
notes to financial statements in this Form 10-Q filing, there are no material changes in the Companys obligations and commitments to make future payments from those included in the Companys Annual Report on Form 10-K filed
February 14, 2007. The Company has no material, unrecorded commitments, losses, contingencies or guarantees associated with any related parties or unconsolidated entities
.
Summary
The Companys financial position remains strong. The Company expects
to meet its cash requirements over at least the next 12 months, including the funding of the PeopleSoft payroll, billing and accounts receivable project, principally through cash generated from operations, available cash and equivalents and
committed unused credit facilities.
31
Forward-Looking Statements
Certain statements contained in this document are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act). Forward-looking statements include statements which
are predictive in nature; which depend upon or refer to future events or conditions; or which include words such as expects, anticipates, intends, plans, believes, estimates, or
variations or negatives thereof or by similar or comparable words or phrases. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and
possible future Company actions that may be provided by management are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks,
uncertainties, and assumptions about the Company, and economic and market factors in the countries in which the Company does business, among other things. These statements are not guarantees of future performance, and the Company has no specific
intention to update these statements.
Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a
number of factors. The principal important risk factors that could cause the Companys actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, competitive
market pressures including pricing, changing market and economic conditions, material changes in demand from large corporate customers, availability of temporary workers with appropriate skills required by customers, increases in wages paid to
temporary workers, liabilities for client and employee actions, foreign currency fluctuations, changes in laws and regulations (including federal, state and international tax laws), the Companys ability to effectively implement and manage its
information technology programs, and the ability of the Company to successfully expand into new markets and service lines. Certain risk factors are discussed more fully under Risk Factors in Part I, Item 1A of the Companys
Annual Report filed on Form 10-K.
32