A few years back a Kelly SVP gave a lecture to a group of us at a staffing industry conference. “This industry needs to seriously examine itself,” I remember him saying. “Without a radical improvement in customer satisfaction rates, some of you will find yourselves without a profitable business model.”
It appears he was right. Kelly reported a massive loss again for the traditionally strong third quarter. The company also posted $60+ million in undeclared expense as “Goodwill”.
[Someone challenged me on my reporting of Kelly’s “Goodwill” accounting, citing standard GAAP accounting principles. Look, if I bought a company in 2007 for $10 million and now the company is worthless, then I’ve lost $10 million. It doesn’t matter what GAAP says. Same goes for mortgage companies – if they issued a mortgage for a $1 million South Beach condo and the borrower defaults and the condo now sits on the market at $250k, then they’ve lost $750k.]
I’ve read through Kelly’s earnings call transcripts, and nowhere can I find mention of significant impairment.
Given the larger number of branch closings that they did discuss, goodwill impairment should have been the story of the call.
Upright and magnanimous the CEO should have said flat out, “Our egos got the best of us and we overpaid at the top of the market to the tune of $60 million for acquisitions that are now almost worthless. We apologize to our shareholders.”
Let’s look at the revenue trend:
And the low cash reserves:
Finally, the profit (loss) trend:
What I can’t figure out is why a company with weakening credit, mounting losses and undeclared expenses can maintain the market cap it does:
Here’s what Kelly needs to do to survive. First, get rid of all non-revenue generating headcount. That means outsourcing all back office and IT. Ok, there’s a little self-interest in me saying this first – it’s what Tempworks does, after all. Second, get all the performers on a clearly laid out compensation plan. Think Glengarry – first place the new car, third place you’re fired.
In any case it would seem the Kelly executive was clairvoyant.
4 comments:
A little self-serving????
First of all have you looked around to see what is happening in the Staffing Industry,the US economy, the marketplace in general? Can you point to any public staffing company that hasn't reported significant drops in revenue, losses on the bottomline and impairment charges. If you would have taken the time to look you would have noticed that Kelly has taken a significant hit to the bottomline for writeoff on goodwill from over $160 mil down to $60 mil. Have eliminate branches, people, lower performers, all the regular stuff everyone has done. Into the bone now, need an increase in the economy now to drive revenue. Thanks for your Monday morning quarterbacking.....
Hi Anonymous and welcome to StaffingTalk.
Kelly suffers from huge fixed costs, bloated internal headcount, antiquated systems. Their stars move on, don't stay. Some are my customers now.
If u have justification for the $60 million sitting on goodwill, would be happy to reconsider.
Kelly has lost more than 50% of its market cap over the last 20 years. In constant dollars it's worth about 15% of what it was in 1991. Your recession excuse doesn't work.
Here's what does work and yes it is self-serving - it's why we do what we do at Tempworks: eliminate all the non-revenue generators at staffing companies.
Problem is Kelly is being run for the benefit of headquarter employees, not shareholders.
Your last comment shows you really don't understand the structure of Kelly or you would know that the company is publicly held but family controlled. Two classes of stock but the Kelly family/trust controls 93% of the voting shares. So the company is really run for the benefit of the important shareholders.
On your point of the company having lost 50% of market cap, it is the economy that has driven it. From 1990 to early 2008 (when the temp industry gave it's usual forecast on the coming economy) the company consistently traded between 20 and 30, indicating a market cap of about 1 bil. The significant drop has occurred once the US went into it's worst economic slide in 60 years. Under your theory, both RHI and MAN are stupid too and should become your clients as their market cap is about 50% of what it was before the "fall"
On the point of Goodwill, Kelly made acquisitions starting in 2Q '06 thru 3Q '08 that totalled about $110 million. As you know, most acquisitions in this industry are about client lists and people in the acquired companies. Accounting for them usually ends up with about 50% going to Goodwill as there aren't a lot of hard assets in these deals, it's about future earning potential. It isn't broken out in the 10k but I would suspect that most of the $60 remaining on the books is related to these deals. So in combination with the new rules for accounting for goodwill, (you don't write off over 30 years any more) and these recent deals, the goodwill is probably pretty fairly stated. By the way PwC has to sign off on these and they are required to review at least annually.
Not saying Kelly is perfect but you analysis of their situation isn't either.
Anonymous
Galbraith et al have long detailed how many corporations are run for the benefit of top managers, not the shareholders (witness Lehman, AIG of late). It matters not who controls the shares although I do appreciate your clarification on the founding family.
Picking on Kelly? Nope. These criticisms apply equally well to other staffing companies, even privately held ones. I've criticized MAN, RHI in the past and more recently Adecco and MPS on similar issues and will continue to spread my love evenly.
But yes it's all out of self-interest. I write to promote my businesses. It's my blog after all not Le Monde.
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