Now that Christmas is out of the way, it's time for that other "most wonderful time of the year" -- year-end earnings season, when those companies whose fiscal years align sensibly with the calendar version report their fourth-quarter and full-year results. Next up is employment firm Spherion (NYSE:SFN), which reports Wednesday afternoon.

What analysts say:

  • Buy, sell, or waffle? Eight analysts still follow Spherion, which garners six hold ratings and two sells.
  • Revenues. On average, they expect to see sales rise 1% to $501 million.
  • Earnings. Profits are predicted to drop a penny to $0.14 per share.

What management says:
When the news officially comes out on Wednesday, don't be surprised if you're not surprised -- Spherion has already told you what to expect. Just two weeks ago, the firm issued an earnings update confirming almost exactly what Wall Street's finest are now "predicting." (As recently as one month ago, these same analysts were guessing that earnings would be almost 30% lower than "their" new numbers.)

Still, the details may be interesting to read. Explaining why the analysts are now calling for $0.14 in earnings, Spherion noted that its earnings from continuing operations will fall somewhere between $0.16 and $0.18 for Q4. But $0.03 worth of those earnings will come from "retroactive approval of the Work Opportunity Tax Credit program and the favorable resolution of certain investment and tax related items." Back out those one-time gains, and you've got an expected earnings range of $0.13 to $0.15 -- or $0.14 if you just split the difference, as the analysts are doing.

What management does:
For the entire time period reflected in the table below, we've watched Spherion's rolling gross and operating margins march relentlessly upward. Net margins took a downward detour before following them up, primarily thanks to a string of $5.5 million in losses from discontinued operations in the first three quarters shown, followed by $2.6 million in gains from discontinued operations in the last three quarters.

Margins

7/05

10/05

1/06

4/06

7/06

10/06

Gross

20.9%

21.3%

22.0%

22.5%

22.9%

23.3%

Operating

1.0%

1.3%

1.5%

1.5%

1.8%

1.8%

Net

2.0%

0.8%

0.6%

0.8%

0.9%

1.1%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
Which should you focus on: gross, operating, or net profitability? CEO Roy Krause suggests the middle row is the one to watch. In the earnings update, he praised his firm's "improvements in operating leverage and earnings," attributing these to a "continued focus on growth in our higher-margin services and disciplined expense control."

Krause also pointed out that while revenue growth was "modest," the strongest growth was found among Spherion's targeted customers -- presumably the ones consuming the aforementioned higher-margin services. Assuming that's true, we should see it reflected in an improved net margin on Wednesday.

Also worth looking into: Krause advised that the firm has been emphasizing improvements in working capital management, yielding "solid operating cash flow for the fourth quarter and a sequential increase in our cash position." Note that Spherion does not ordinarily include cash flow statements in its earnings releases (tsk, tsk). However, if the firm follows its usual practice, you'll find both operating cash flow and capital expenditures described in a section called, appropriately, "Supplemental Cash Flow Information."

Customers:

  • Adecco (NYSE:ADO)
  • CDI Corp (NYSE:CDI)
  • Kelly Services (NASDAQ:KELYA)
  • Kforce
  • Manpower
  • Robert Half

How is the rest of this industry doing? Find out in:

Fool contributor Rich Smith does not own shares of any company named above.