Kelly Services (Kelly) places employees at clients' businesses on a temporary basis. It segments its services into (1) commercial, (2) professional and technical, and (3) international. Kelly recognizes revenues for the amount billed to clients. Kelly includes the amount it pays to temporary employees in cost of services sold. It includes the compensation paid to permanent employees that administer its offices in selling and administrative expenses. The latter expense also includes data processing costs relating to payroll records for all employees, rent, taxes, and insurance on office space. Amounts receivable from clients appear in accounts receivable, and amounts payable to permanent and temporary employees appear in current liabilities.
The temporary personnel business offers clients flexibility in adjusting the number of workers to meet changing capacity needs. Temporary employees are typically less costly than permanent workers because they have fewer fringe benefits. However, temporary workers generally are not as well trained as permanent workers and have less loyalty to clients.
Barriers to entry in the personnel supply business are low. This business does not require capital for physical facilities (most space is rented), does not need specialized assets (most temporary employees do not possess unique skills; needed data processing technology is readily available), and operates with little government regulation. Thus, competition is intense and margins tend to be thin.
Exhibit 4.38 presents selected profitability ratios and other data for Kelly Services, the largest temporary personnel supply firm in the United States. Note that the data in Exhibit 4.38 reflect the capitalization of operating leases in property, plant, and equipment and long-term debt, a topic discussed in Chapter 6.

REQUIRED
Analyze the changes in the profitability of Kelly Services during the three-year period in as much depth as permitted by the data provided.

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Exhibit 4.38 Profitability Ratios and Other Data for Kelly Services (Problem 4.26) Year 4 Year 3 Year 2 Profit margin for ROA 0.6% 0.3% 0.6% Assets turnover 3.5 3.8 3.5 ROA 2.1% 2.2% 0.9% Profit margin for ROCE Capital structure leverage 0.4% 0.1% 0.4% 2.1 2.0 1.9 ROCE 0.8% 3.3% 2.9% Revenues 100.0% 100.0% 100.0% Compensation of temporary employees/Revenues Selling and administrative expense/Revenues Income tax expense/Revenues 84.0% 83.9% 82.9% 15.1% 15.7% 16.1% 0.3% 7.2 0.2% 0.4% 7.1 7.3 Accounts receivable turnover Fixed assets turnover 16.0 14.0 12.9 Sales mix data: Commercial 46.7% 49.3% 51.9% Professional and technical 20.7 20.7 21.4 International 30.0 32.6 26.7 Total 100.0% 100.0% 100.0% Exhibit 4.38 (Continued) Segment profit margin: Commercial 5.1% 4.4% 5.6% Professional and technical 6.0% 5.9% 5.8% International 0.8% 0.0% 0.5% Number of offices 2,600 2,500 2,400 Number of permanent employees Number of temporary employees, approximate 8,400 7,900 8,200 700,000 700,000 700,000 Growth rate in revenues 15.2% 6.9% (4.7%) Per-office data: Revenues $1,916,923 $1,730,000 $1,690,417 Net income 8,077 2,000 7,500 Permanent employees Temporary employees Per-permanent-employee data: 3.2 3.2 3.4 269 280 292 Revenues $ 593,333 $ 547,468 $ 494,756 Net income 2$ 2,500 83.3 633 2,195 Temporary employees Per-temporary-employee data: 88.6 85.4 Revenues 7,120 6,177 5,796 Net income 2$ 26