Our Class A and Class B common stock are quoted on the NASDAQ Global Market. Under the listing standards of the NASDAQ Global Market, we are deemed to be a “controlled company” by virtue of the fact that Terence E. Adderley, the Executive Chairman of our board of directors, and certain trusts of which he acts as trustee or co-trustee have voting power with respect to more than fifty percent of our outstanding voting stock. A controlled company is not required to have a majority of its board of directors comprised of independent directors. Director nominees are not required to be selected or recommended for the board’s selection by a majority of independent directors or a nominations committee comprised solely of independent directors, nor do the NASDAQ Global Market listing standards require a controlled company to certify the adoption of a formal written charter or board resolution, as applicable, addressing the nominations process. A controlled company is also exempt from NASDAQ Global Market’s requirements regarding the determination of officer compensation by a majority of independent directors or a compensation committee comprised solely of independent directors. A controlled company is required to have an audit committee composed of at least three directors, who are independent as defined under the rules of both the Securities and Exchange Commission and the NASDAQ Global Market. The NASDAQ Global Market further requires that all members of the audit committee have the ability to read and understand fundamental financial statements and that at least one member of the audit committee possess financial sophistication. The independent directors must also meet at least twice a year in meetings at which only they are present.
We currently comply with certain of the listing standards of the NASDAQ Global Market that do not apply to controlled companies. Our compliance is voluntary, however, and there can be no assurance that we will continue to comply with these standards in the future.
Provisions in our certificate of incorporation and bylaws and Delaware law may delay or prevent an acquisition of our company.
Our restated certificate of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. For example, if a potential acquirer were to make a hostile bid for us, the acquirer would not be able to call a special meeting of stockholders to remove our board of directors or act by written consent without a meeting. The acquirer would also be required to provide advance notice of its proposal to replace directors at any annual meeting, and would not be able to cumulate votes at a meeting, which would require the acquirer to hold more shares to gain representation on the board of directors than if cumulative voting were permitted.
Our board of directors also has the ability to issue additional shares of common stock that could significantly dilute the ownership of a hostile acquirer. In addition, Section 203 of the Delaware General Corporation Law limits mergers and other business combination transactions involving 15 percent or greater stockholders of Delaware corporations unless certain board or stockholder approval requirements are satisfied. These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation.
Our board of directors could choose not to negotiate with an acquirer that it did not believe was in our strategic interests. If an acquirer is discouraged from offering to acquire us or prevented from successfully completing a hostile acquisition by these or other measures, our shareholders could lose the opportunity to sell their shares at a favorable price.
The holders of shares of our Class A common stock are not entitled to voting rights.
Under our certificate of incorporation, the holders of shares of our Class A common stock are not entitled to voting rights, except as otherwise required by Delaware law. As a result, Class A common stock holders do not have the right to vote for the election of directors or in connection with most other matters submitted for the vote of our stockholders.
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ITEM 3. | | LEGAL PROCEEDINGS. |
ITEM 3. LEGAL PROCEEDINGS.The
During the second quarter of 2012, the Company is the subjectreceived final court approval of two pendinga settlement of a single class action, lawsuits. The two lawsuits, Fuller v. Kelly Services, Inc. and Kelly Home Care Services, Inc., pending in the Superior Court of California, Los Angeles, and Sullivan v. Kelly Services, Inc., pending in the U.S. District Court Southern District of California, both involve claimswhich involved a claim for monetary damages by current and former temporary employees working in the State of California.
The Fuller matter involves claims relatingwere related to alleged misclassification of personal attendants as exempt and not entitled to overtime compensation under state law and to alleged technical violations of a state law governing the content of employee pay stubs. On April 30, 2007,Recognized in discontinued operations in 2011 was a $1.2 million after tax charge relating to the Courtsettlement and in 2012 a $0.4 million after tax reduction in our estimate of costs to settle the Fuller case certified both plaintiff classes involved in the suit. In the third quarter of 2008, Kelly was granted a hearing date for its motions related to summary judgment on both certified claims. On March 13, 2009, the Court granted Kelly’s motion for decertification of the classes. Plaintiffs filed a petition for review on April 3, 2009 requesting the decertification ruling be overturned. Plaintiffs’ request was granted on May 17, 2010 and the suit was recertified as a class action. The Sullivan matter relates to claims by temporary workers for compensation while interviewing for assignments. On April 27, 2010, the Court in the Sullivan matter certified the lawsuit as a class action. The Company believes it has meritorious defenses in both lawsuits and will continue to vigorously defend itself during the litigation process.litigation.
The Company is also involvedcontinuously engaged in a number of other lawsuitslitigation arising in the ordinary course of its business, typically matters alleging employment discrimination, andalleging wage and hour matters.violations or enforcing the restrictive covenants in the Company’s employment agreements. While management does not expectthere is no expectation that any of these other matters towill have a material adverse effect on the Company’s results of operations, financial position or cash flows, litigation is always subject to inherent uncertaintiesuncertainty and the Company is not at this time able to reasonably predict the outcome of these matters. Itif any matter will be resolved in a manner that is reasonably possible that some matters could be decided unfavorablymaterially adverse to the Company and, if so, could have a material adverse impact on our consolidated financial statements. During 2010 and 2009, the Company reassessed its potential exposure from pending litigation and established additional reserves of $3.5 million and $4.4 million, respectively.Company.
Disclosure of Certain IRS Penalties
None.ITEM 4. MINE SAFETY DISCLOSURES.
12
Not applicable.
PART II
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ITEM 5. | | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information and Dividends
Our Class A and Class B common stock is traded on the NASDAQ Global Market under the symbols “KELYA” and “KELYB,” respectively. The high and low selling prices for our Class A common stock and Class B common stock as quoted by the NASDAQ Global Market and the dividends paid on the common stock for each quarterly period in the last two fiscal years are reported in the table below. Payments ofbelow. Our ability to pay dividends are restricted by theis subject to compliance with certain financial covenants contained in our short- and long-term debt facilities, as described in the Debt footnote to the consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | |
| | Per share amounts (in dollars) | |
| | First | | | Second | | | Third | | | Fourth | | | | |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Year | |
2010 | | | | | | | | | | | | | | | | | | | | |
Class A common | | | | | | | | | | | | | | | | | | | | |
High | | $ | 18.02 | | | $ | 18.93 | | | $ | 16.28 | | | $ | 20.29 | | | $ | 20.29 | |
Low | | | 11.80 | | | | 12.80 | | | | 10.07 | | | | 11.70 | | | | 10.07 | |
| | | | | | | | | | | | | | | | | | | | |
Class B common | | | | | | | | | | | | | | | | | | | | |
High | | | 17.56 | | | | 18.54 | | | | 14.40 | | | | 20.90 | | | | 20.90 | |
Low | | | 10.66 | | | | 13.16 | | | | 10.45 | | | | 10.51 | | | | 10.45 | |
| | | | | | | | | | | | | | | | | | | | |
Dividends | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
2009 | | | | | | | | | | | | | | | | | | | | |
Class A common | | | | | | | | | | | | | | | | | | | | |
High | | $ | 14.13 | | | $ | 12.99 | | | $ | 14.10 | | | $ | 13.69 | | | $ | 14.13 | |
Low | | | 6.11 | | | | 7.68 | | | | 10.39 | | | | 10.01 | | | | 6.11 | |
| | | | | | | | | | | | | | | | | | | | |
Class B common | | | | | | | | | | | | | | | | | | | | |
High | | | 14.50 | | | | 11.65 | | | | 14.12 | | | | 14.99 | | | | 14.99 | |
Low | | | 9.21 | | | | 10.00 | | | | 10.74 | | | | 11.18 | | | | 9.21 | |
| | | | | | | | | | | | | | | | | | | | |
Dividends | | | — | | | | — | | | | — | | | | — | | | | — | |
Holders | | Per share amounts (in dollars) | |
| | | | | | | | | | | | | | | |
| | First | | | Second | | | Third | | | Fourth | | | | |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Year | |
2012 | | | | | | | | | | | | | | | |
Class A common | | | | | | | | | | | | | | | |
High | | $ | 18.09 | | | $ | 16.25 | | | $ | 14.30 | | | $ | 15.90 | | | $ | 18.09 | |
Low | | | 13.75 | | | | 11.30 | | | | 11.26 | | | | 12.40 | | | | 11.26 | |
| | | | | | | | | | | | | | | | | | | | |
Class B common | | | | | | | | | | | | | | | | | | | | |
High | | | 17.40 | | | | 18.02 | | | | 14.47 | | | | 15.50 | | | | 18.02 | |
Low | | | 13.80 | | | | 12.13 | | | | 11.65 | | | | 12.93 | | | | 11.65 | |
| | | | | | | | | | | | | | | | | | | | |
Dividends | | | 0.05 | | | | 0.05 | | | | 0.05 | | | | 0.05 | | | | 0.20 | |
| | | | | | | | | | | | | | | | | | | | |
2011 | | | | | | | | | | | | | | | | | | | | |
Class A common | | | | | | | | | | | | | | | | | | | | |
High | | $ | 22.99 | | | $ | 21.41 | | | $ | 17.58 | | | $ | 17.00 | | | $ | 22.99 | |
Low | | | 17.50 | | | | 14.61 | | | | 10.95 | | | | 10.77 | | | | 10.77 | |
| | | | | | | | | | | | | | | | | | | | |
Class B common | | | | | | | | | | | | | | | | | | | | |
High | | | 22.99 | | | | 21.30 | | | | 16.70 | | | | 17.12 | | | | 22.99 | |
Low | | | 18.10 | | | | 14.53 | | | | 12.23 | | | | 11.26 | | | | 11.26 | |
| | | | | | | | | | | | | | | | | | | | |
Dividends | | | - | | | | - | | | | 0.05 | | | | 0.05 | | | | 0.10 | |
Holders
The number of holders of record of our Class A and Class B common stock were 5,400approximately 8,600 and 410,300, respectively, as of February 7, 2011.3, 2013.
Recent Sales of Unregistered Securities
None.
13
Issuer Purchases of Equity Securities
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Maximum Number | |
| | | | | | | | | | Total Number | | | (or Approximate | |
| | | | | | | | | of Shares (or | | | Dollar Value) of | |
| | Total Number | | | Average | | | Units) Purchased | | | Shares (or Units) | |
| | of Shares | | | Price Paid | | | as Part of Publicly | | | That May Yet Be | |
| | (or Units) | | | per Share | | | Announced Plans | | | Purchased Under the | |
Period | | Purchased | | | (or Unit) | | | or Programs | | | Plans or Programs | |
| | | | | | | | | (in millions of dollars) | |
October 4, 2010 through November 7, 2010 | | | 276 | | | $ | 14.24 | | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
November 8, 2010 through December 5, 2010 | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
December 6, 2010 through January 2, 2011 | | | 6,961 | | | | 18.80 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total | | | 7,237 | | | $ | 18.63 | | | | — | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | Maximum Number | |
| | | | | | | | Total Number | | | (or Approximate | |
| | | | | | | | of Shares (or | | | Dollar Value) of | |
| | Total Number | | | Average | | | Units) Purchased | | | Shares (or Units) | |
| | of Shares | | | Price Paid | | | as Part of Publicly | | | That May Yet Be | |
| | (or Units) | | | per Share | | | Announced Plans | | | Purchased Under the | |
Period | | Purchased | | | (or Unit) | | | or Programs | | | Plans or Programs | |
| | | | | | | | | | | (in millions of dollars) | |
| | | | | | | | | | | | |
October 1, 2012 through November 4, 2012 | | | 280 | | | $ | 12.77 | | | | - | | | $ | - | |
| | | | | | | | | | | | | | | | |
November 5, 2012 through December 2, 2012 | | | 30,192 | | | | 13.66 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
December 3, 2012 through December 30, 2012 | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Total | | | 30,472 | | | $ | 13.65 | | | | - | | | | | |
We may reacquire shares sold to cover taxes due upon the vesting of restricted stock held by employees. Accordingly, 7,23730,472 shares were reacquired during the Company’s fourth quarter.
14
Performance Graph
The following graph compares the cumulative total return of our Class A common stock with that of the S&P 600 SmallCap Index and the S&P 1500 Human Resources and Employment Services Index for the five years ended December 31, 2010.2012. The graph assumes an investment of $100 on December 31, 20052007 and that all dividends were reinvested.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Assumes Initial Investment of $100
December 31, 2005 —2007 – December 31, 20102012
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2005 | | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | |
Kelly Services, Inc. | | $ | 100.00 | | | $ | 112.20 | | | $ | 73.91 | | | $ | 53.20 | | | $ | 48.78 | | | $ | 76.87 | |
S&P SmallCap 600 Index | | $ | 100.00 | | | $ | 115.11 | | | $ | 114.77 | | | $ | 79.10 | | | $ | 99.32 | | | $ | 125.45 | |
S&P 1500 Human Resources and Employment Services Index | | $ | 100.00 | | | $ | 119.59 | | | $ | 91.28 | | | $ | 58.72 | | | $ | 81.15 | | | $ | 93.87 | |
15
| | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | |
Kelly Services, Inc. | | $ | 100.00 | | | $ | 71.98 | | | $ | 66.00 | | | $ | 104.01 | | | $ | 76.20 | | | $ | 89.04 | |
S&P SmallCap 600 Index | | $ | 100.00 | | | $ | 68.92 | | | $ | 86.53 | | | $ | 109.31 | | | $ | 109.05 | | | $ | 124.41 | |
S&P 1500 Human Resources and Employment Services Index | | $ | 100.00 | | | $ | 64.34 | | | $ | 88.91 | | | $ | 102.84 | | | $ | 86.88 | | | $ | 97.38 | |
| | |
ITEM 6. | | SELECTED FINANCIAL DATA. |
15
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes selected financial information of Kelly Services, Inc. and its subsidiaries for each of the most recent five fiscal years. This table should be read in conjunction with the other financial information, including “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" and the consolidated financial statements included elsewhere in this report.
| | | | | | | | | | | | | | | | | | | | |
(In millions except per share amounts) | | 2010 (2) | | | 2009 (1,2) | | | 2008 (2) | | | 2007 | | | 2006 | |
| | | | | | | | | | | | | | | | | | | | |
Revenue from services | | $ | 4,950.3 | | | $ | 4,314.8 | | | $ | 5,517.3 | | | $ | 5,667.6 | | | $ | 5,546.8 | |
Earnings (loss) from continuing operations | | | 26.1 | | | | (105.1 | ) | | | (81.7 | ) | | | 53.7 | | | | 56.8 | |
Earnings (loss) from discontinued operations, net of tax (3) | | | — | | | | 0.6 | | | | (0.5 | ) | | | 7.3 | | | | 6.7 | |
Net earnings (loss) | | | 26.1 | | | | (104.5 | ) | | | (82.2 | ) | | | 61.0 | | | | 63.5 | |
| | | | | | | | | | | | | | | | | | | | |
Basic earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) from continuing operations | | | 0.71 | | | | (3.01 | ) | | | (2.35 | ) | | | 1.46 | | | | 1.56 | |
Earnings (loss) from discontinued operations | | | — | | | | 0.02 | | | | (0.02 | ) | | | 0.20 | | | | 0.18 | |
Net earnings (loss) | | | 0.71 | | | | (3.00 | ) | | | (2.37 | ) | | | 1.65 | | | | 1.74 | |
| | | | | | | | | | | | | | | | | | | | |
Diluted earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) from continuing operations | | | 0.71 | | | | (3.01 | ) | | | (2.35 | ) | | | 1.45 | | | | 1.55 | |
Earnings (loss) from discontinued operations | | | — | | | | 0.02 | | | | (0.02 | ) | | | 0.20 | | | | 0.18 | |
Net earnings (loss) | | | 0.71 | | | | (3.00 | ) | | | (2.37 | ) | | | 1.65 | | | | 1.73 | |
| | | | | | | | | | | | | | | | | | | | |
Dividends per share | | | | | | | | | | | | | | | | | | | | |
Classes A and B common | | | — | | | | — | | | | 0.54 | | | | 0.52 | | | | 0.45 | |
| | | | | | | | | | | | | | | | | | | | |
Working capital | | | 367.6 | | | | 357.6 | | | | 427.4 | | | | 478.6 | | | | 463.3 | |
Total assets | | | 1,368.4 | | | | 1,312.5 | | | | 1,457.3 | | | | 1,574.0 | | | | 1,469.4 | |
Total noncurrent liabilities | | | 153.6 | | | | 205.3 | | | | 203.8 | | | | 200.5 | | | | 142.6 | |
(In millions except per share amounts) | | 2012 | | | 2011 | | | 2010 | | | 2009 (1) | | | 2008 | |
| | | | | | | | | | | | | | | |
Revenue from services | | $ | 5,450.5 | | | $ | 5,551.0 | | | $ | 4,950.3 | | | $ | 4,314.8 | | | $ | 5,517.3 | |
Earnings (loss) from continuing operations (2) | | | 49.7 | | | | 64.9 | | | | 26.1 | | | | (105.1 | ) | | | (81.7 | ) |
Earnings (loss) from discontinued operations, net of tax (3) | | | 0.4 | | | | (1.2 | ) | | | - | | | | 0.6 | | | | (0.5 | ) |
Net earnings (loss) | | | 50.1 | | | | 63.7 | | | | 26.1 | | | | (104.5 | ) | | | (82.2 | ) |
| | | | | | | | | | | | | | | | | | | | |
Basic earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) from continuing operations | | | 1.31 | | | | 1.72 | | | | 0.71 | | | | (3.01 | ) | | | (2.35 | ) |
Earnings (loss) from discontinued operations | | | 0.01 | | | | (0.03 | ) | | | - | | | | 0.02 | | | | (0.02 | ) |
Net earnings (loss) | | | 1.32 | | | | 1.69 | | | | 0.71 | | | | (3.00 | ) | | | (2.37 | ) |
| | | | | | | | | | | | | | | | | | | | |
Diluted earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) from continuing operations | | | 1.31 | | | | 1.72 | | | | 0.71 | | | | (3.01 | ) | | | (2.35 | ) |
Earnings (loss) from discontinued operations | | | 0.01 | | | | (0.03 | ) | | | - | | | | 0.02 | | | | (0.02 | ) |
Net earnings (loss) | | | 1.32 | | | | 1.69 | | | | 0.71 | | | | (3.00 | ) | | | (2.37 | ) |
| | | | | | | | | | | | | | | | | | | | |
Dividends per share | | | | | | | | | | | | | | | | | | | | |
Classes A and B common | | | 0.20 | | | | 0.10 | | | | - | | | | - | | | | 0.54 | |
| | | | | | | | | | | | | | | | | | | | |
Working capital | | | 470.3 | | | | 417.0 | | | | 367.6 | | | | 357.6 | | | | 427.4 | |
Total assets | | | 1,635.7 | | | | 1,541.7 | | | | 1,368.4 | | | | 1,312.5 | | | | 1,457.3 | |
Total noncurrent liabilities | | | 172.4 | | | | 168.3 | | | | 153.6 | | | | 205.3 | | | | 203.8 | |
| | |
(1) | | Fiscal year included 53 weeks. |
|
(2) | | Included in results of continuing operations are asset impairments of $3.1 million in 2012, $2.0 million in 2010, $53.1 million in 2009 and $80.5 million in 2008. |
|
(3) | | Kelly Home Care (“KHC”) was sold effective March 31, 2007 for an after-tax gainDiscontinued Operations represent adjustments to assets and liabilities retained from the 2006 sale of $6.2 million. Additionally, Kelly Staff Leasing (“KSL”) was sold effective December 31, 2006 for an after-tax gain and 2007 sale of $2.3 million. In accordance with the Discontinued Operations Subtopic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification, the gains on the sales as well as KHC’s and KSL’s results of operations for the current and prior periods have been reported as discontinued operations in the Company’s consolidated statements of earnings. |
16
Kelly Home Care.
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ITEM 7. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Executive Overview
The U.S.Staffing Industry
The worldwide staffing industry is competitive and global economies exhibited signs of slowly strengthening throughout 2010. Economic growth, coupled with the emergence of positive labor market trends, was favorable to the staffing industry.highly fragmented. In the U.S.,United States, approximately 100 competitors operate nationally, and approximately 10,000 smaller companies compete in varying degrees at local levels. Additionally, several similar staffing companies compete globally. Demand for temporary services is highly dependent on the overall strength of the global economy and labor markets. In periods of economic growth, demand for temporary employment penetration rate increased forservices generally increases, and the 15th consecutive monthneed to recruit, screen, train, retain and manage a pool of employees who match the skills required by particular customers becomes critical. Conversely, during an economic downturn, competitive pricing pressures can pose a threat to retaining a qualified temporary workforce. Accordingly, the on-going economic crisis in December to 1.7%, the highest level in over 21/2 years. More than 300,000 temporary jobs were addedEurozone and slow recovery from recession in the U.S. duringhas impacted all staffing firms over the last several years.
Our Business
Kelly Services is a global staffing company, providing innovative workforce solutions for customers in a variety of industries. Our staffing operations are divided into three regions, Americas, EMEA and APAC, with commercial and professional and technical staffing businesses in each region. As the human capital arena has become more complex, we have also developed a suite of innovative solutions within our global OCG Group. We are forging strategic relationships with our customers to help them manage their flexible workforces, through outsourcing, consulting, recruitment, career transition and vendor management services.
We earn revenues from the hourly sales of services by our temporary employees to customers, as a result of recruiting permanent employees for our customers, and through our outsourcing and consulting activities. Our working capital requirements are primarily generated from temporary employee payroll and customer accounts receivable. The nature of our business is such that trade accounts receivable are our most significant financial asset. Average days sales outstanding varies within and outside the U.S., but averages more than 50 days on a global basis. Since receipts from customers generally lag temporary employee payroll, working capital requirements increase substantially in periods of growth.
Our Strategy and Outlook
Our long-term strategic objective is to create shareholder value by delivering a competitive profit from the best workforce solutions and talent in the industry. We have set a long-term goal to achieve a competitive return on sales of 4%. To attain this, we are focused on the following key areas:
| · | Maintain our core strengths in commercial staffing and key markets; |
| · | Aggressively grow our professional and technical staffing; |
| · | Transform our OCG segment into a market-leading provider of talent supply chain management; |
| · | Capture permanent placement growth in selected specialties; and |
| · | Lower our costs through deployment of efficient service delivery models. |
In the face of economic uncertainty, softening demand, and declining revenue, we made progress in 2012, although at a pace slower than we had originally expected. During 2012, we:
| · | Maintained our competitive position in key global staffing markets; |
| · | Grew our professional and technical business by 3% year over year, despite a 2% decline in total revenue; |
| · | Increased our OCG revenue by 25% year over year and improved earnings from operations by over $11 million; |
| · | Increased permanent placement fees by 7% year over year; and |
| · | Reduced expenses by 1% in comparison to last year. |
We improved our return on sales by 30 basis points to 1.3%, although still far short of our long-term goal of 4.0%. In order to make significant progress against our long-term goal, we will need much stronger economic growth in order to leverage our business.
Looking ahead, although the U.S. unemployment rate is currently below 8%, overall job growth remains tepid, and U.S. temporary job growth is decelerating -- trends that are likely to continue in 2013. We expect that ongoing economic uncertainty in the U.S., fueled by the fiscal situation, will continue to constrain hiring in the near-term. In Europe, we do not anticipate any significant changes to the recessionary conditions that continue to take their toll on the labor market.
An additional challenge for us will be to meet the 2014 provisions of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 a growth of nearly 30% since(collectively, the low“Acts”). The Acts represent comprehensive health care reform legislation that, in addition to other provisions, will require that we offer affordable, minimum essential health care coverage to certain temporary employees (and dependents) in the United States or incur penalties. In order to comply with the Acts, Kelly intends to begin offering health care coverage in 2014 to all temporary employees eligible for coverage under the Acts.
At this point in September, 2009. While still shorttime, we are unable to estimate the costs of pre-recession levels,complying with the current environmentActs. Estimating the costs of complying with the Acts is encouragingdifficult due to a variety of factors associated with our temporary employee population, including: the number of employees who are eligible for coverage; the percentage of eligible employees who will enroll for health care coverage; the number of months during the following year that those employees who accept coverage remain an employee; determination of the appropriate employee contribution share for affordability purposes; the cost and availability of health care coverage that meets the Acts’ requirements; and the cost of implementation and ongoing administrative costs of compliance. Although we intend to pass ongoing costs on to our customers, there can be no assurance that we will be able to increase pricing to our customers in a sufficient amount to cover the increased costs, and the net financial impact on our results of operations could be significant.
Longer-term, we believe the trends in the staffing industry as employers seekare positive: companies are becoming more comfortable with the use of flexible staffing models; there is increasing acceptance of free agents and contractual employment by companies and candidates alike; and companies are searching for more comprehensive workforce management solutions. This shift in demand for contingent labor models. However, it will likely take several years for the overall labor marketplays to fully recover.our strengths and experience -- particularly serving large companies.
For Kelly, the strengthening economic trends are reflected in our 2010 fiscal year results. We reported net earnings
Financial Measures – Operating Margin and Constant Currency
Operating margin (earnings from continuing operations of $0.71 per diluted share, compared to a net loss of $3.01 per diluted share in 2009. Revenue, which declined significantly in 2009, increaseddivided by 15% during 2010, and our expense base continues to reflect the benefitrevenue from restructuring initiatives we undertook in 2009. However, our gross profit rate declined to 16.0% in 2010 from 16.3%services) in the prior year, reflecting changing business mixfollowing tables is a ratio used to measure the Company’s pricing strategy and related pressure on temporary margins.
Whileoperating efficiency. Constant currency (“CC”) change amounts are non-GAAP measures. CC change amounts in the continued pace of the global economic recovery is expected to remain slow, we believe that the strategic and restructuring actions we have taken will enable us to leverage our experience and expertise as we help our customers adaptfollowing tables refer to the changing marketplace. We remain focused on emphasizing higher-margin specialty-staffing, expanding fee-based business and delivering customer-focused workforce solutions,year-over-year percentage changes resulting from traditional staffing to professional and technical offerings and outsourcing and consulting services.
Results of Operations
2010 versus 2009
Revenue from services for 2010 totaled $5.0 billion, an increase of 14.7% from 2009. This was the result of an increase in hours worked of 16.8%, partially offset by a decrease in average hourly bill rates of 2.7% on a constant currency basis. Fee-based income, which is included in revenue from services, totaled $99.0 million, or 2.0% of total revenue, for 2010, an increase of 15.0% (12.6% on a constant currency basis) as compared to $86.1 million for 2009. On a constant currency basis, revenue for 2010 increased in all seven business segments, with the exception of EMEA Commercial.
17
Compared to 2009, the U.S. dollar was weaker against many foreign currencies, including the Australian dollar and Canadian dollar, and stronger against the euro. As a result, on a net basis, our consolidated U.S. dollar translated revenue was higher than would have otherwise been reported. On a constant currency basis, revenue for 2010 increased 13.7% as compared with the prior year. When we use the term “constant currency,” it means that we have translatedtranslating 2012 financial data for 2010 into U.S. dollars using the same foreign currency exchange rates that we used to translate financial data for 2009.2011. We believe that constant currencyCC 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
Results of foreign exchange adjustments onOperations
2012 versus 2011
| | 2012 | | | 2011 | | | Change | | | | |
Revenue from services | | $ | 5,450.5 | | | $ | 5,551.0 | | | | (1.8 | ) % | | | (0.2 | ) % |
Fee-based income | | | 148.2 | | | | 138.0 | | | | 7.3 | | | | 10.1 | |
Gross profit | | | 896.6 | | | | 883.3 | | | | 1.5 | | | | 3.3 | |
SG&A expenses excluding restructuring charges | | | 822.1 | | | | 822.8 | | | | (0.1 | ) | | | | |
Restructuring charges | | | (0.9 | ) | | | 2.8 | | | | (132.3 | ) | | | | |
Total SG&A expenses | | | 821.2 | | | | 825.6 | | | | (0.6 | ) | | | 1.2 | |
Asset impairments | | | 3.1 | | | | - | | | NM | | | | | |
Earnings from operations | | | 72.3 | | | | 57.7 | | | | 25.3 | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 16.5 | % | | | 15.9 | % | | | 0.6 | pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 15.1 | | | | 14.8 | | | | 0.3 | | | | | |
% of gross profit | | | 91.7 | | | | 93.2 | | | | (1.5 | ) | | | | |
Operating margin | | | 1.3 | | | | 1.0 | | | | 0.3 | | | | | |
Total Company revenue from services for 2010 on a 53-week reported basis for 2009:
| | | | | | | | | | | | |
| | Revenue from Services | |
| | 2010 | | | 2009 | | | | |
| | (52 Weeks) | | | (53 Weeks) | | | % Change | |
| | (In millions of dollars) | | | | |
Revenue from Services — Constant Currency: | | | | | | | | | | | | |
Americas Commercial | | $ | 2,404.0 | | | $ | 1,980.3 | | | | 21.4 | % |
Americas PT | | | 887.3 | | | | 792.6 | | | | 12.0 | |
| | | | | | | | | |
Total Americas Commercial and PT — Constant Currency | | | 3,291.3 | | | | 2,772.9 | | | | 18.7 | |
| | | | | | | | | | | | |
EMEA Commercial | | | 886.9 | | | | 895.2 | | | | (0.9 | ) |
EMEA PT | | | 151.4 | | | | 141.9 | | | | 6.7 | |
| | | | | | | | | |
Total EMEA Commercial and PT — Constant Currency | | | 1,038.3 | | | | 1,037.1 | | | | 0.1 | |
| | | | | | | | | | | | |
APAC Commercial | | | 321.7 | | | | 284.9 | | | | 12.9 | |
APAC PT | | | 29.6 | | | | 25.4 | | | | 16.8 | |
| | | | | | | | | |
Total APAC Commercial and PT — Constant Currency | | | 351.3 | | | | 310.3 | | | | 13.2 | |
| | | | | | | | | | | | |
OCG — Constant Currency | | | 254.2 | | | | 219.9 | | | | 15.6 | |
| | | | | | | | | | | | |
Less: Intersegment revenue | | | (29.0 | ) | | | (25.4 | ) | | | 14.2 | |
| | | | | | | | | |
Total Revenue from Services — Constant Currency | | | 4,906.1 | | | | 4,314.8 | | | | 13.7 | |
Foreign Currency Impact | | | 44.2 | | | | | | | | | |
| | | | | | | | | |
Revenue from Services | | $ | 4,950.3 | | | $ | 4,314.8 | | | | 14.7 | % |
| | | | | | | | | |
The 2009 fiscal year included a 53rd week. This fiscal leap year occurs every five or six years and is necessary to align the fiscal and calendar periods. The 53rd week added approximately 1% to 2009 revenue.
Gross profit of $794.5 million2012 was 13.2% higher than the gross profit of $701.7 million for the prior year. The gross profit rate for 2010 was 16.0%, versus 16.3% for 2009. Compareddown 2% in comparison to the prior year, and declined 3% excluding the Company’s 2011 acquisition of Tradição described below. On a CC basis, total Company revenue was flat and down 1% excluding the Company’s acquisition of Tradição. This reflected an 11% decrease in hours worked, partially offset by a 9% increase in average bill rates on a CC basis. Hours decreased in our staffing business in all three regions. The decrease in the Americas and EMEA was due, in large part, to the economic uncertainty existing in both regions, while the decline in APAC was due to decisions we made to exit low-margin business in India. The improvement in average bill rates was primarily due to the mix of countries, particularly the business we exited in India with very low average bill rates.
Compared to 2011, the gross profit rate decreased or remained flat in all business segments, with the exception of EMEA Commercialimproved by 60 basis points due to higher fee-based income and APAC PT. The decrease in thean improved temporary gross profit rate was caused by a reduction in our temporary margins, primarily within the Americas and APAC regions and the OCG businesses. Our average temporary margin continues to be impacted by shifts to a higher proportion of light industrial business compared to clerical, to large corporate customers compared to retail and, within OCG, to a higher proportion of the lower-margin PPO business. In addition, our temporary margins were impacted by higher state unemployment taxessegment. The improvement in the Americas to the extent not recovered through pricing. All of these items negatively impacting theAmericas’ temporary gross profit rate wereincluded the impact of lower workers’ compensation costs. We regularly update our estimates of open workers’ compensation claims. Due to favorable development of claims and payment data, we reduced our estimated costs of prior year workers’ compensation by $10 million for 2012. This compares to an adjustment reducing prior year workers’ compensation claims by $6 million for 2011.
Fee-based income, which is included in revenue from services, 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 in fee-based income can have a disproportionate impact on gross profit rates.
Selling, general and administrative (“SG&A”) expenses excluding restructuring decreased slightly year over year. In the fourth quarter of 2012, we embarked on a restructuring program for certain of our EMEA operations in Italy, France and Ireland. The total net restructuring benefit in 2012 included $3 million of revisions of the estimated lease termination costs for previously closed EMEA Commercial branches, partially offset by $2 million of severance and lease termination costs for those EMEA Commercial branches which are in the favorable impact fromprocess of closing. We expect to spend approximately $0.5 million in the HIRE Act.first quarter of 2013 to complete the restructuring in EMEA. Restructuring costs in 2011 relate primarily to revisions of the estimated lease termination costs for previously closed EMEA Commercial branches.
In the fourth quarter of 2012, we made the decision to abandon our PeopleSoft billing system implementation in the U.S., Canada and Puerto Rico and, accordingly, recorded asset impairment charges of $3 million, representing previously capitalized costs associated with this project.
Income tax expense for 2012 was $19 million (27.8%), compared to a benefit of $7 million (-12.6%) for 2011. The 2012 income tax expense was impacted by the expiration of employment-related income tax credits, including the Hiring Incentives to Restore Employment (“HIRE”) Act retention credit, which allowswas unavailable in 2012, and the work opportunity credit, which was available in 2012 only for veterans and pre-2012 hires. Together, these income tax credits totaled $8 million in 2012, compared to $28 million in 2011. The work opportunity credit was retroactively reinstated on January 2, 2013, which will result in a first quarter 2013 tax benefit of $9 million that would have been recognized in 2012 if the law had been in effect at year-end 2012. In 2012, the Company closed income tax examinations relating to prior years, resulting in a $5 million benefit. During 2011, the Company determined that for tax reporting purposes, it was eligible for worthless stock deductions related to foreign subsidiaries, which provided U.S. federal and state benefits of $8 million in 2011.
Diluted earnings from continuing operations per share for 2012 were $1.31, as compared to $1.72 for 2011.
Earnings (loss) from discontinued operations for 2012 and 2011 represent adjustments to the estimated costs of litigation, net of tax, retained from the 2007 sale of the Kelly Home Care business unit.
| | 2012 | | | 2011 | | | Change | | | | |
Revenue from services | | $ | 3,672.1 | | | $ | 3,643.7 | | | | 0.8 | % | | | 1.3 | % |
Fee-based income | | | 30.2 | | | | 25.3 | | | | 19.0 | | | | 20.3 | |
Gross profit | | | 547.9 | | | | 523.1 | | | | 4.7 | | | | 5.2 | |
Total SG&A expenses | | | 405.8 | | | | 396.4 | | | | 2.4 | | | | 3.0 | |
Earnings from operations | | | 142.1 | | | | 126.7 | | | | 12.0 | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 14.9 | % | | | 14.4 | % | | | 0.5 | pts. | | | | |
Expense rates: | | | | | | | | | | | | | | | | |
% of revenue | | | 11.1 | | | | 10.9 | | | | 0.2 | | | | | |
% of gross profit | | | 74.1 | | | | 75.8 | | | | (1.7 | ) | | | | |
Operating margin | | | 3.9 | | | | 3.5 | | | | 0.4 | | | | | |
On an organic basis, excluding the Tradição acquisition in Brazil in late 2011, CC revenue decreased slightly. This was attributable to a 4% decrease in hours worked, partially offset by a 3% increase in average bill rates on a CC basis. During 2012, the PT segment revenue grew by 5%, while the Commercial segment revenue, excluding Tradição, declined 3%. The PT segment growth was fueled primarily by increases in hours and revenues in our engineering, IT and finance services. The decrease in Commercial segment revenue was driven primarily by decreases in light industrial and electronic assembly service lines, reflecting slowing demand as the year progressed, due to economic uncertainties. Americas represented 67% of total Company revenue in 2012 and 66% in 2011.
The increase in our gross profit rate was due to the combined effects of increased fee-based income, pricing increases and the decreases in workers’ compensation costs noted above. The year-over-year increase in total SG&A expenses is due to the costs associated with our Tradição operation. Total SG&A expenses without Tradição decreased slightly from last year.
| | 2012 | | | 2011 | | | Change | | | | |
Revenue from services | | $ | 1,022.9 | | | $ | 1,169.0 | | | | (12.5 | ) % | | | (6.7 | ) % |
Fee-based income | | | 39.2 | | | | 44.1 | | | | (11.2 | ) | | | (5.5 | ) |
Gross profit | | | 176.8 | | | | 207.7 | | | | (14.9 | ) | | | (9.2 | ) |
SG&A expenses excluding restructuring charges | | | 169.0 | | | | 186.9 | | | | (9.7 | ) | | | | |
Restructuring charges | | | (0.9 | ) | | | 2.8 | | | | (132.3 | ) | | | | |
Total SG&A expenses | | | 168.1 | | | | 189.7 | | | | (11.5 | ) | | | (6.0 | ) |
Earnings from operations | | | 8.7 | | | | 18.0 | | | | (51.6 | ) | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 17.3 | % | | | 17.8 | % | | | (0.5 | ) pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 16.5 | | | | 16.0 | | | | 0.5 | | | | | |
% of gross profit | | | 95.6 | | | | 90.1 | | | | 5.5 | | | | | |
Operating margin | | | 0.8 | | | | 1.5 | | | | (0.7 | ) | | | | |
The change in EMEA revenue from services reflected an 11% decrease in hours worked. The decrease primarily reflects the difficult economic environment in the European Union. However, we also saw a decrease in our hours in Russia, where we were focused on gaining higher-margin customers. The decrease in volume was partially offset by a 5% increase in average bill rates on a CC basis. This was the result of average bill rate increases in Switzerland due to favorable customer mix and Russia where, as noted above, we were focused on higher-margin customers. EMEA represented 19% of total Company revenue in 2012 and 21% in 2011.
The EMEA gross profit rate decreased due to both a mix change, where higher-margin retail business decreased by more than lower-margin corporate accounts, and a decrease in fee-based income in the Eurozone due to the economic environment.
The decrease in SG&A expenses excluding restructuring charges was primarily due to a reduction of full-time employees in specific countries. Restructuring costs recorded in 2012 reflect the net costs associated with the restructuring actions taken in Italy, France and Ireland in the fourth quarter of 2012, offset by adjustments to prior restructuring costs in the U.K.
| | 2012 | | | 2011 | | | Change | | | | |
Revenue from services | | $ | 394.8 | | | $ | 449.0 | | | | (12.1 | ) % | | | (11.5 | ) % |
Fee-based income | | | 27.5 | | | | 29.2 | | | | (5.8 | ) | | | (4.8 | ) |
Gross profit | | | 71.1 | | | | 76.3 | | | | (6.8 | ) | | | (6.3 | ) |
Total SG&A expenses | | | 73.4 | | | | 77.0 | | | | (4.7 | ) | | | (4.1 | ) |
Earnings from operations | | | (2.3 | ) | | | (0.7 | ) | | | (207.4 | ) | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 18.0 | % | | | 17.0 | % | | | 1.0 | pts. | | | | |
Expense rates: | | | | | | | | | | | | | | | | |
% of revenue | | | 18.6 | | | | 17.2 | | | | 1.4 | | | | | |
% of gross profit | | | 103.3 | | | | 101.0 | | | | 2.3 | | | | | |
Operating margin | | | (0.6 | ) | | | (0.2 | ) | | | (0.4 | ) | | | | |
The change in total APAC revenue reflected a 35% decrease in hours worked, partially offset by a 35% increase in average bill rates on a CC basis. The change in both hours worked and average bill rates were due primarily to a decision to exit low-margin customers in India. In addition to reducing hours, this changed our mix of business, as the average bill rate in India is significantly lower than that of the APAC region. We also saw a decrease in hours worked in Australia, where market demand for temporary volume in the lower margin manufacturing and light industrial service lines has slowed down. APAC revenue represented 7% of total Company revenue in 2012 and 8% in 2011.
The improvement in the APAC gross profit rate was also due to the decision to exit a number of lower-margin customers in India. The temporary gross profit rate in India was significantly lower than the temporary gross profit rate of the region. Fee-based income also contributed to the improvement in the gross profit rate. Although fees declined on a year-over-year basis, they declined by less than total revenue and thus had a positive mix effect.
The change in SG&A expenses reflects a decrease in full-time salaries due, in part, to a decision to keep open positions vacant in response to volume pressures in the region.
| | 2012 | | | 2011 | | | Change | | | | |
Revenue from services | | $ | 396.1 | | | $ | 317.3 | | | | 24.8 | % | | | 25.5 | % |
Fee-based income | | | 51.4 | | | | 39.5 | | | | 30.0 | | | | 32.1 | |
Gross profit | | | 104.0 | | | | 78.8 | | | | 32.0 | | | | 33.5 | |
Total SG&A expenses | | | 95.4 | | | | 81.4 | | | | 17.0 | | | | 18.6 | |
Earnings from operations | | | 8.6 | | | | (2.6 | ) | | NM | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 26.3 | % | | | 24.8 | % | | | 1.5 | pts. | | | | |
Expense rates: | | | | | | | | | | | | | | | | |
% of revenue | | | 24.1 | | | | 25.7 | | | | (1.6 | ) | | | | |
% of gross profit | | | 91.6 | | | | 103.4 | | | | (11.8 | ) | | | | |
Operating margin | | | 2.2 | | | | (0.8 | ) | | | 3.0 | | | | | |
Revenue from services in the OCG segment increased during 2012 due to growth in BPO of 40%, RPO growth of 22% and CWO growth of 20%. The revenue growth in BPO was due to expansion of programs with existing customers, RPO revenue increased, in part, due to a large project which was completed in the third quarter and CWO growth was due to implementation of new customers. OCG revenue represented 7% of total Company revenue in 2012 and 6% in 2011.
The OCG gross profit rate increased primarily due to mix as volume increased in the higher margin BPO, RPO and CWO practice areas. The increase in SG&A expenses is primarily the result of support costs, salaries and incentive-based compensation associated with new customer programs, as well as higher volumes on existing programs in our BPO, RPO and CWO practice areas.
Results of Operations
2011 versus 2010
| | 2011 | | | 2010 | | | Change | | | | |
Revenue from services | | $ | 5,551.0 | | | $ | 4,950.3 | | | | 12.1 | % | | | 9.6 | % |
Fee-based income | | | 138.0 | | | | 99.0 | | | | 39.4 | | | | 33.4 | |
Gross profit | | | 883.3 | | | | 786.9 | | | | 12.3 | | | | 9.4 | |
SG&A expenses excluding restructuring charges | | | 822.8 | | | | 739.6 | | | | 11.3 | | | | | |
Restructuring charges | | | 2.8 | | | | 7.2 | | | | (61.7 | ) | | | | |
Total SG&A expenses | | | 825.6 | | | | 746.8 | | | | 10.6 | | | | 7.6 | |
Asset impairments | | | - | | | | 2.0 | | | | (100.0 | ) | | | | |
Earnings from operations | | | 57.7 | | | | 38.1 | | | | 51.4 | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 15.9 | % | | | 15.9 | % | | | - | pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 14.8 | | | | 14.9 | | | | (0.1 | ) | | | | |
% of gross profit | | | 93.2 | | | | 94.0 | | | | (0.8 | ) | | | | |
Operating margin | | | 1.0 | | | | 0.8 | | | | 0.2 | | | | | |
The U.S. and global economies slowly strengthened during 2011. More than 1.8 million jobs were created in the U.S., representing the best performance in five years. Within the U.S. staffing industry, more than 650,000 jobs were added since the recovery began in September 2009, and the temporary help penetration rate grew steadily during 2011, concluding the year at 1.81%. As a result of these improving conditions, we were able to increase the number of hours worked by 7%, in comparison to 2010. This, combined with a 2% increase in average bill rates on a CC basis, drove our year-over-year revenue increase. On a CC basis, revenue increased in all business segments.
Compared to 2010, the 2011 gross profit rate was unchanged. The growth in fee-based income offset a decline in the temporary staffing gross profit rate which resulted from the expiration of the HIRE Act payroll tax benefit in the U.S. The HIRE Act, which allowed employers to receive tax incentives to hirefor hiring and retainretaining previously unemployed individuals, resulted in a benefit to our gross profit of $21 million in 2010. The HIRE Act expired atbenefits were also available in 2011, but as an income tax credit, rather than a benefit to the end of 2010.Company’s gross profit.
Selling, general and administrative (“
SG&A”)&A expenses totaled $754.4 million and decreasedincreased year over year by $40.3 million, or 5.1% (5.9% on a constant currency basis), due primarily to higher compensation costs. During 2011 we hired full-time employees, primarily in our PT and OCG businesses as part of executing our business strategy, reinstated certain retirement benefits and merit increase programs and increased incentive-based compensation. Restructuring costs incurred in 2011 primarily related to revisions of the impact of expense reduction initiatives implementedestimated lease termination costs for EMEA Commercial branches that closed in 2009 and lower restructuringprior years. Restructuring costs partially offset by an increase in incentive compensation. Included in SG&A expenses are pretax charges for restructuring costs of $7.2 millionincurred in 2010 and $29.9 million in 2009.
Restructuring costs in 2010 relate primarily related to severance and lease termination costs for branches in the EMEA Commercial and APAC Commercial segments that were in the process of closure at the end of 2009, as well asand severance costs related to the corporate headquarters. Restructuring costs in 2009 relate primarily to global severance, lease terminations, asset write-offs and other miscellaneous costs incurred in connection with the reduction in the number of permanent employees and the consolidation, sale or closure of branch locations.
We recorded asset impairment charges of $2.0
Income tax benefit for 2011 was $7 million in 2010 and $53.1 million in 2009. Asset impairment charges in 2010 represent the write-off of incomplete software projects in Europe and the U.S. Asset impairment charges in 2009 represent goodwill impairment losses related to Americas Commercial, EMEA PT and APAC Commercial, and impairment of long-lived assets and intangible assets in Japan and Europe.
As a result of the above, we reported earnings from operations for 2010 totaling $38.1 million,(-12.6%), compared to a loss of $146.1 million reported for 2009.
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We recorded income tax expense of $7 million (20.2%) for 2010 at an effective rate of 20.2%, compared to an2010. The income tax benefit at an effective rate of 29.1% in 2009. The 2010 rate2011 was positivelylargely impacted by nontaxablesignificant employment-related income fromtax credits, including the cash surrender valuefavorable impact of life insurance policies used to fund the Company’s deferred compensation plan,HIRE Act retention credit of $11 million and bycontinued strong work opportunity credits of $17 million. Together, these income tax credits. The 2009 rate was positively impacted by these items, but was also negatively impacted by non-deductible asset impairment charges and valuation allowances on operating losses and restructuring charges in certain foreign countries. See the Income Taxes footnote in the notes to consolidated financial statements.
Earnings from continuing operations were $26.1credits totaled $28 million in 2010,2011, compared to a loss of $105.1$12 million in 2009. 2010. The Company also determined that for tax reporting purposes it was eligible for worthless stock deductions related to foreign subsidiaries, which provided U.S. federal and state benefits of $8 million in 2011, compared to $1 million in 2010. The HIRE Act retention credit was available only in 2011, and was in addition to the HIRE Act payroll tax benefits recognized in cost of services in 2010.
Included in earnings from continuing operations for 2010 was $5.4were restructuring charges of $3 million, net of tax, of restructuring chargesfor 2011 and $1.5$5 million, net of tax, of asset impairment charges. Included in loss from continuing operations in 2009 were $24.0 million, net of tax, of restructuring charges and $50.0 million, net of tax, of asset impairment charges.
Net earnings for 2010 totaled $26.1 million, compared to a loss of $104.5 million in 2009.2010. Diluted earnings from continuing operations per share for 2010 was $0.71,2011 were $1.72, as compared to diluted loss$0.71 for 2010. Discontinued operations in 2011 represents costs of litigation, net of tax, retained from continuing operations per sharethe 2007 sale of $3.01 for 2009.the Kelly Home Care business unit.
Americas Commercial | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Constant | |
| | 2010 | | | 2009 | | | | | | | Currency | |
| | (52 Weeks) | | | (53 Weeks) | | | Change | | | Change | |
| | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 2,428.2 | | | $ | 1,980.3 | | | | 22.6 | % | | | 21.4 | % |
Fee-based income | | | 8.8 | | | | 6.6 | | | | 31.8 | | | | 29.0 | |
Gross profit | | | 354.9 | | | | 290.7 | | | | 22.0 | | | | 21.0 | |
SG&A expenses excluding restructuring charges | | | 275.3 | | | | 273.2 | | | | 0.7 | | | | | |
Restructuring charges | | | 0.3 | | | | 7.2 | | | | (95.0 | ) | | | | |
Total SG&A expenses | | | 275.6 | | | | 280.4 | | | | (1.7 | ) | | | (2.6 | ) |
Earnings from Operations | | | 79.3 | | | | 10.3 | | | NM | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 14.6 | % | | | 14.7 | % | | (0.1 | )pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 11.3 | | | | 13.8 | | | | (2.5 | ) | | | | |
% of gross profit | | | 77.5 | | | | 93.9 | | | | (16.4 | ) | | | | |
Operating margin | | | 3.3 | | | | 0.5 | | | | 2.8 | | | | | |
Total Americas(Dollars in millions)
| | 2011 | | | 2010 | | | Change | | | | |
Revenue from services | | $ | 3,643.7 | | | $ | 3,317.2 | | | | 9.8 | % | | | 9.5 | % |
Fee-based income | | | 25.3 | | | | 17.8 | | | | 43.3 | | | | 42.6 | |
Gross profit | | | 523.1 | | | | 493.5 | | | | 6.1 | | | | 5.8 | |
SG&A expenses excluding restructuring charges | | | 396.4 | | | | 367.6 | | | | 7.9 | | | | | |
Restructuring charges | | | - | | | | 0.3 | | | | (100.0 | ) | | | | |
Total SG&A expenses | | | 396.4 | | | | 367.9 | | | | 7.8 | | | | 7.5 | |
Earnings from operations | | | 126.7 | | | | 125.6 | | | | 1.0 | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 14.4 | % | | | 14.9 | % | | | (0.5 | ) pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 10.9 | | | | 11.1 | | | | (0.2 | ) | | | | |
% of gross profit | | | 75.8 | | | | 74.5 | | | | 1.3 | | | | | |
Operating margin | | | 3.5 | | | | 3.8 | | | | (0.3 | ) | | | | |
The change in Americas Commercial revenue from services reflected ana 7% increase in hours worked, of 22%.combined with a 2% increase in average bill rates on a CC basis. Commercial revenues increased by nearly 10%, primarily due to increases in demand from existing and new light industrial customers and an increase in our electronic assembly service lines during the year. Our PT segment grew just over 10%, fueled by solid growth in our science, engineering and IT services. Americas Commercial represented 49.1%66% of total Company revenue for 2010in 2011 and 45.9% for 2009.67% in 2010.
The decreasechange in the gross profit rate was due primarily to the unfavorable impact related to the expiration of the HIRE Act payroll tax benefit. SG&A expenses increased due to an increasethe reinstatement of merit increases and certain retirement benefits, higher incentive-based compensation and additional PT staff.
(Dollars in the proportion of lower-margin light industrial business to higher-margin clerical business and higher state unemployment taxes to the extent not recovered through pricing, partially offset by the impact of HIRE Act benefits. The HIRE Act benefits impacted the gross profit rate by 60 basis points. SG&A expenses excluding restructuring were essentially flat as lower facilities costs, depreciation and corporate allocation offset higher performance-based compensation.millions)
19
| | | | | | | | | | | | | | | | | | | | | | | | | | | CC | |
| | Constant | | | 2011 | | | 2010 | | | Change | | | Change | |
| | 2010 | | 2009 | | Currency | | |
| | (52 Weeks) | | (53 Weeks) | | Change | | Change | | |
| | (In millions of dollars) | | | | | | |
Revenue from Services | | $ | 889.0 | | $ | 792.6 | | | 12.2 | % | | | 12.0 | % | |
Revenue from services | | | $ | 1,169.0 | | | $ | 1,019.6 | | | | 14.7 | % | | | 6.7 | % |
Fee-based income | | 9.0 | | 9.4 | | | (4.5 | ) | | | (4.9 | ) | | | 44.1 | | | | 34.1 | | | | 28.6 | | | | 20.7 | |
Gross profit | | 140.0 | | 125.1 | | 12.0 | | 11.8 | | | | 207.7 | | | | 179.5 | | | | 15.6 | | | | 7.6 | |
SG&A expenses excluding restructuring charges | | 93.7 | | 100.9 | | | (7.0 | ) | | | | 186.9 | | | | 167.2 | | | | 11.9 | | | | | |
Restructuring charges | | — | | 1.0 | | | (100.0 | ) | | | | 2.8 | | | | 2.7 | | | | 4.0 | | | | | |
Total SG&A expenses | | 93.7 | | 101.9 | | | (8.0 | ) | | | (8.2 | ) | | | 189.7 | | | | 169.9 | | | | 11.8 | | | | 3.9 | |
Earnings from Operations | | 46.3 | | 23.2 | | 100.1 | | |
Asset impairments | | | | - | | | | 1.5 | | | | (100.0 | ) | | | | |
Earnings from operations | | | | 18.0 | | | | 8.1 | | | | 115.7 | | | | | |
| | | | | | | | | | | | | | | | | |
Gross profit rate | | | 15.8 | % | | | 15.8 | % | | — | pts. | | | | 17.8 | % | | | 17.6 | % | | | 0.2 | pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | | |
% of revenue | | 10.5 | | 12.7 | | | (2.2 | ) | | | | 16.0 | | | | 16.4 | | | | (0.4 | ) | | | | |
% of gross profit | | 67.0 | | 80.7 | | | (13.7 | ) | | | | 90.1 | | | | 93.0 | | | | (2.9 | ) | | | | |
Operating margin | | 5.2 | | 2.9 | | 2.3 | | | | 1.5 | | | | 0.8 | | | | 0.7 | | | | | |
The change in Americas PT revenue from services reflected an increase in hours worked of 8.7%, combined with an increase in average billing rates of 3.2% on a constant currency basis. Americas PT revenue represented 18.0% of total Company revenue in 2010 and 18.4% in 2009.
The Americas PT gross profit rate was unchanged, as higher state unemployment taxes to the extent not recovered through pricing were offset by the impact of HIRE Act benefits. The HIRE Act benefits impacted the gross profit rate by 60 basis points. The decrease in SG&A expenses was primarily due to lower salary expense related to reductions in personnel.
EMEA Commercial
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Constant | |
| | 2010 | | | 2009 | | | | | | | Currency | |
| | (52 Weeks) | | | (53 Weeks) | | | Change | | | Change | |
| | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 872.0 | | | $ | 895.2 | | | | (2.6 | )% | | | (0.9 | )% |
Fee-based income | | | 19.1 | | | | 16.6 | | | | 15.9 | | | | 16.0 | |
Gross profit | | | 141.0 | | | | 140.2 | | | | 0.6 | | | | 2.3 | |
SG&A expenses excluding restructuring charges | | | 130.5 | | | | 150.3 | | | | (13.2 | ) | | | | |
Restructuring charges | | | 2.7 | | | | 15.6 | | | | (82.8 | ) | | | | |
Total SG&A expenses | | | 133.2 | | | | 165.9 | | | | (19.7 | ) | | | (18.9 | ) |
Asset impairments | | | 1.5 | | | | — | | | NM | | | | | |
Earnings from Operations | | | 6.3 | | | | (25.7 | ) | | NM | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 16.2 | % | | | 15.7 | % | | 0.5 | pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 15.0 | | | | 16.8 | | | | (1.8 | ) | | | | |
% of gross profit | | | 92.6 | | | | 107.2 | | | | (14.6 | ) | | | | |
Operating margin | | | 0.7 | | | | (2.9 | ) | | | 3.6 | | | | | |
The change in revenue from services in EMEA Commercial resulted from a decrease6% increase in average hourly bill rates of 5.8% on a constant currency basis, partially offset by a 4.8%CC basis. Approximately half of the increase in hours worked. The decreaserelates to the strategic focus on higher skilled candidates in the constant currency average hourly bill ratesU.K., France, Germany and Norway. Salary inflation in Russia also accounts for EMEA Commercial was due to a change in the mix from countries with higher average bill rates to those with lower average bill rates, such as Russia and Portugal. During 2009, EMEA Commercial completed a significant restructuring within the United Kingdom and exited the staffing business in Spain, Turkey, Ukraine and Finland, and in 2010 exited the staffing business in the Czech Republic. Exiting these locations accounted for approximately 4 percentage pointslarge portion of the 2010 constant currency decline.increase. EMEA Commercial revenue represented 17.6%21% of total Company revenue in 2010both 2011 and 20.7% in 2009.2010.
20
The change in the gross profit rate is due to higher fee-based income, as well as higher temporary margins as a result of business and customer mix. Fee-based income has a significant impact on gross profit rates. There are very low direct costs of services associated with fee-based recruitment income. Therefore, increases or decreases can have a disproportionate impact on gross profit rates. The restructuring actions and other continuing cost-savings initiatives, partially offset by higher incentive-based compensation, resulted in the decrease in SG&A expenses.
EMEA PT
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Constant | |
| | 2010 | | | 2009 | | | | | | | Currency | |
| | (52 Weeks) | | | (53 Weeks) | | | Change | | | Change | |
| | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 147.6 | | | $ | 141.9 | | | | 4.0 | % | | | 6.7 | % |
Fee-based income | | | 15.0 | | | | 15.7 | | | | (4.3 | ) | | | (4.1 | ) |
Gross profit | | | 38.7 | | | | 37.8 | | | | 2.9 | | | | 4.8 | |
SG&A expenses | | | 36.9 | | | | 40.6 | | | | (9.3 | ) | | | (8.2 | ) |
Earnings from Operations | | | 1.8 | | | | (2.8 | ) | | NM | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 26.3 | % | | | 26.6 | % | | (0.3 | )pts. | | | | |
Expense rates: | | | | | | | | | | | | | | | | |
% of revenue | | | 25.0 | | | | 28.6 | | | | (3.6 | ) | | | | |
% of gross profit | | | 94.8 | | | | 107.6 | | | | (12.8 | ) | | | | |
Operating margin | | | 1.4 | | | | (2.0 | ) | | | 3.4 | | | | | |
The change in revenue from services in EMEA PT resulted from a 7% increase in hours worked. EMEA PT revenue represented 3.0% of total Company revenue in 2010 and 3.3% in 2009.
The decrease in the EMEA PT gross profit rate was primarily due to decreasesincreases in fee-based income.income, as a result of targeted investments in additional full-time employees in new or existing branches in Russia, France, Italy and Germany. Russia accounted for approximately one-third of the growth in fees, and France, Italy and Germany each accounted for approximately 15% of the fee growth.
The increase in SG&A expenses declinedwas due to reductionsincreased hiring of full-time employees in personnel.specific countries. The vast majority of the investments were done in Switzerland, France, Germany and Russia, countries with identified high-growth potential and investments in additional PT branches in Russia, Germany and the U.K.
APAC Commercial
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Constant | |
| | 2010 | | | 2009 | | | | | | | Currency | |
| | (52 Weeks) | | | (53 Weeks) | | | Change | | | Change | |
| | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 355.3 | | | $ | 284.9 | | | | 24.7 | % | | | 12.9 | % |
Fee-based income | | | 11.4 | | | | 9.7 | | | | 16.6 | | | | 5.6 | |
Gross profit | | | 48.4 | | | | 41.6 | | | | 16.2 | | | | 4.6 | |
SG&A expenses excluding restructuring charges | | | 45.1 | | | | 44.6 | | | | 1.3 | | | | | |
Restructuring charges | | | 0.5 | | | | 1.6 | | | | (66.5 | ) | | | | |
Total SG&A expenses | | | 45.6 | | | | 46.2 | | | | (1.0 | ) | | | (10.7 | ) |
Earnings from Operations | | | 2.8 | | | | (4.6 | ) | | NM | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 13.6 | % | | | 14.6 | % | | (1.0 | )pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 12.7 | | | | 15.6 | | | | (2.9 | ) | | | | |
% of gross profit | | | 93.3 | | | | 107.0 | | | | (13.7 | ) | | | | |
Operating margin | | | 0.8 | | | | (1.6 | ) | | | 2.4 | | | | | |
Total APAC
(Dollars in millions)
| | | | | | | | | | | CC | |
| | 2011 | | | 2010 | | | Change | | | Change | |
Revenue from services | | $ | 449.0 | | | $ | 387.8 | | | | 15.8 | % | | | 7.9 | % |
Fee-based income | | | 29.2 | | | | 21.9 | | | | 34.8 | | | | 25.6 | |
Gross profit | | | 76.3 | | | �� | 62.2 | | | | 22.6 | | | | 13.6 | |
SG&A expenses excluding restructuring charges | | | 77.0 | | | | 62.0 | | | | 24.0 | | | | | |
Restructuring charges | | | - | | | | 0.5 | | | | (100.0 | ) | | | | |
Total SG&A expenses | | | 77.0 | | | | 62.5 | | | | 23.0 | | | | 13.8 | |
Earnings from operations | | | (0.7 | ) | | | (0.3 | ) | | | (83.8 | ) | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 17.0 | % | | | 16.0 | % | | | 1.0 | pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 17.2 | | | | 16.0 | | | | 1.2 | | | | | |
% of gross profit | | | 101.0 | | | | 99.8 | | | | 1.2 | | | | | |
Operating margin | | | (0.2 | ) | | | (0.1 | ) | | | (0.1 | ) | | | | |
The change in revenue from services in APAC Commercial resulted from an 11% increase in hours worked, of 18.5%, partially offset by a decrease3% decline in average hourly bill rates of 4.5% on a constant currencyCC basis. The decreasevolume increase was due to a 20% increase in hours worked by temporary employees in India for customers in the constant currencytelecommunication services sector in the first half of the year. The decline in average hourly bill rates for APAC Commercial was primarily due to the decision to exit the staffing marketmix effect of adding hours in Japan. Excluding Japan,India, where the average bill rate increased by 0.6% on a constant currency basis.is significantly lower than the average for the APAC Commercialregion. APAC revenue represented 7.2%8% of total Company revenue in 2010both 2011 and 6.6% in 2009.2010.
21
The decreaseimprovement in the APAC Commercial gross profit rate was primarily due to a decrease in temporary gross profit rates due tohigher growth in lower margin business, primarily in Australia and Malaysia, as well as our decision to exit the staffing business in Japan. The decision to exit the staffing business in Japan impacted constant currency revenue and SG&A expense comparisons by approximately 8 percentage points and 11 percentage points, respectively.
APAC PT
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Constant | |
| | 2010 | | | 2009 | | | | | | | Currency | |
| | (52 Weeks) | | | (53 Weeks) | | | Change | | | Change | |
| | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 32.5 | | | $ | 25.4 | | | | 28.2 | % | | | 16.8 | % |
Fee-based income | | | 10.5 | | | | 3.8 | | | | 172.1 | | | | 156.3 | |
Gross profit | | | 13.9 | | | | 7.7 | | | | 81.3 | | | | 68.3 | |
SG&A expenses | | | 17.0 | | | | 9.2 | | | | 85.1 | | | | 72.0 | |
Earnings from Operations | | | (3.1 | ) | | | (1.5 | ) | | | (104.5 | ) | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 42.7 | % | | | 30.2 | % | | 12.5 | pts. | | | | |
Expense rates: | | | | | | | | | | | | | | | | |
% of revenue | | | 52.2 | | | | 36.2 | | | | 16.0 | | | | | |
% of gross profit | | | 122.3 | | | | 119.8 | | | | 2.5 | | | | | |
Operating margin | | | (9.5 | ) | | | (6.0 | ) | | | (3.5 | ) | | | | |
The change in revenue from services in APAC PT resulted from an increase in fee-based income and an increase in hours worked of 5.8%, partially offset by a decrease in average hourly bill rates of 13.0% on a constant currency basis. The decrease in the constant currency average hourly bill rates for APAC PT was due to a change in mix from countries with higher average bill rates to those with lower average bill rates, such as India, as well as the decision to exit the staffing market in Japan. APAC PT revenue represented 0.7% of total Company revenue in 2010 and 0.6% in 2009.
The change in the APAC PT gross profit rate was due primarily to increases in fee-based income. Nearly 50% of the fee growth came from Australia and New Zealand and approximately 25% came from China. This was the result of a focused effort on building the PT permanent placement practice in these countries. SG&A expenses increased, primarily due primarily to hiring of permanent placement recruiters.higher salaries and related costs from the investment in additional full-time employees across the region.
OCG
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Constant | |
| | 2010 | | | 2009 | | | | | | | Currency | |
| | (52 Weeks) | | | (53 Weeks) | | | Change | | | Change | |
| | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 254.8 | | | $ | 219.9 | | | | 15.8 | % | | | 15.6 | % |
Fee-based income | | | 25.6 | | | | 24.4 | | | | 4.9 | | | | 3.9 | |
Gross profit | | | 60.0 | | | | 59.7 | | | | 0.2 | | | | (0.1 | ) |
SG&A expenses excluding restructuring charges | | | 77.5 | | | | 69.6 | | | | 11.3 | | | | | |
Restructuring charges | | | 0.1 | | | | 1.9 | | | | (96.0 | ) | | | | |
Total SG&A expenses | | | 77.6 | | | | 71.5 | | | | 8.5 | | | | 8.1 | |
Earnings from Operations | | | (17.6 | ) | | | (11.8 | ) | | | (50.8 | ) | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 23.5 | % | | | 27.2 | % | | (3.7 | )pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 30.4 | | | | 31.7 | | | | (1.3 | ) | | | | |
% of gross profit | | | 129.5 | | | | 116.6 | | | | 12.9 | | | | | |
Operating margin | | | (7.0 | ) | | | (5.3 | ) | | | (1.7 | ) | | | | |
OCG
| | | | | | | | | | | CC | |
| | 2011 | | | 2010 | | | Change | | | Change | |
Revenue from services | | $ | 317.3 | | | $ | 254.8 | | | | 24.5 | % | | | 23.6 | % |
Fee-based income | | | 39.5 | | | | 25.6 | | | | 54.3 | | | | 49.8 | |
Gross profit | | | 78.8 | | | | 54.1 | | | | 45.6 | | | | 43.2 | |
SG&A expenses excluding restructuring charges | | | 81.4 | | | | 71.6 | | | | 13.5 | | | | | |
Restructuring charges | | | - | | | | 0.1 | | | | (100.0 | ) | | | | |
Total SG&A expenses | | | 81.4 | | | | 71.7 | | | | 13.4 | | | | 10.6 | |
Earnings from operations | | | (2.6 | ) | | | (17.6 | ) | | | 85.0 | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 24.8 | % | | | 21.3 | % | | | 3.5 | pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 25.7 | | | | 28.2 | | | | (2.5 | ) | | | | |
% of gross profit | | | 103.4 | | | | 132.6 | | | | (29.2 | ) | | | | |
Operating margin | | | (0.8 | ) | | | (7.0 | ) | | | 6.2 | | | | | |
Revenue from services in the OCG segment for 2010 increased in the Americas, EMEA and APAC regions, due primarily to growth in our PPORPO of 42%, growth in BPO of 25% and RPO practices.growth in CWO of 22%. Growth in all practice areas was due to the expansion of programs with existing customers. OCG revenue represented 5.1%6% of total Company revenue in 20102011 and 2009.
22
The OCG gross profit rate decreased primarily due to the growth5% in our lower-margin PPO practice and training costs associated with our BPO Kellyconnect unit. The decline was mitigated somewhat from increased revenues in our higher margin RPO, CWO and executive placement practice areas during 2010. SG&A expenses increased, due to increased investments in implementation and travel costs for new customer business, as well as higher technology costs in our CWO practice area.
During 2010, OCG had positive growth in our PPO, RPO and CWO practice areas. However, earnings from operations were negatively impacted by decreased operating earnings in our outplacement business unit, as well as the aforementioned investments for new customer programs and the upfront Kellyconnect BPO training costs, where the revenue stream tends to lag our investment.
Results of Operations
2009 versus 2008
Revenue from services for 2009 totaled $4.31 billion, a decrease of 21.8% from 2008. This was the result of a decrease in hours worked of 18.7% combined with a decrease in average hourly bill rates of 5.0% (1.2% on a constant currency basis). Fee-based income, which is included in revenue from services, totaled $86.1 million, or 2.0% of total revenue, for 2009, a decrease of 43.1% as compared to $151.3 million for 2008. Revenue for 2009 decreased in all seven business segments, reflecting the global economic slowdown.
Compared to 2008, the U.S. dollar was stronger against many foreign currencies, including the euro, British pound, Australian dollar and Canadian dollar. As a result, our consolidated U.S. dollar translated revenue was lower than would have otherwise been reported. On a constant currency basis, revenue for 2009 decreased 19.2% as compared with 2008. The table below summarizes the impact of foreign exchange adjustments on revenue for 2009 on a 53-week reported basis:
| | | | | | | | | | | | |
| | Revenue from Services | |
| | 2009 | | | 2008 | | | | |
| | (53 Weeks) | | | (52 Weeks) | | | % Change | |
| | (In millions of dollars) | | | | |
Revenue from Services — Constant Currency: | | | | | | | | | | | | |
Americas Commercial | | $ | 2,006.1 | | | $ | 2,516.7 | | | | (20.3 | )% |
Americas PT | | | 793.4 | | | | 938.2 | | | | (15.4 | ) |
| | | | | | | | | |
Total Americas Commercial and PT — Constant Currency | | | 2,799.5 | | | | 3,454.9 | | | | (19.0 | ) |
| | | | | | | | | | | | |
EMEA Commercial | | | 984.3 | | | | 1,310.5 | | | | (24.9 | ) |
EMEA PT | | | 154.0 | | | | 172.5 | | | | (10.7 | ) |
| | | | | | | | | |
Total EMEA Commercial and PT — Constant Currency | | | 1,138.3 | | | | 1,483.0 | | | | (23.2 | ) |
| | | | | | | | | | | | |
APAC Commercial | | | 299.2 | | | | 336.0 | | | | (11.0 | ) |
APAC PT | | | 26.0 | | | | 34.3 | | | | (24.3 | ) |
| | | | | | | | | |
Total APAC Commercial and PT — Constant Currency | | | 325.2 | | | | 370.3 | | | | (12.2 | ) |
| | | | | | | | | | | | |
OCG — Constant Currency | | | 222.3 | | | | 233.3 | | | | (4.7 | ) |
| | | | | | | | | | | | |
Less: Intersegment revenue | | | (25.3 | ) | | | (24.2 | ) | | | 5.0 | |
| | | | | | | | | |
Total Revenue from Services — Constant Currency | | | 4,460.0 | | | | 5,517.3 | | | | (19.2 | ) |
Foreign Currency Impact | | | (145.2 | ) | | | | | | | | |
| | | | | | | | | |
Revenue from Services | | $ | 4,314.8 | | | $ | 5,517.3 | | | | (21.8 | )% |
| | | | | | | | | |
Gross profit of $701.7 million for 2009 was 28.2% lower than the gross profit of $977.6 million for 2008. The gross profit rate for 2009 was 16.3%, versus 17.7% for 2008. Compared to 2008, the gross profit rate decreased in all business segments, with the exception of APAC PT. The decrease in the gross profit rate was primarily due to decreases in fee-based income, lower margins as a result of business and customer mix and a lower level of favorable workers’ compensation adjustments in the Americas. Our average mark-up was impacted by shifts to a higher proportion of light industrial business compared to clerical, and to large corporate customers compared to retail.
23
As more fully described in Critical Accounting Estimates, 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 2009. This compares to an adjustment reducing prior year workers’ compensation claims by $12.7 million for 2008.
SG&A expenses totaled $794.7 million, a year-over-year decrease of $172.7 million, or 17.9% (14.8% on a constant currency basis). Included in SG&A expenses for 2009 are litigation costs of $5.3 million and restructuring charges of $29.9 million, of which $14.4 million related to severance, $7.9 million related to lease termination costs and $7.6 million related to asset write-offs and other costs. Included in SG&A expenses for 2008 are litigation costs of $22.5 million and restructuring costs of $6.5 million.
Starting in the third quarter of 2008, we began taking selected cost savings actions, including employee headcount reductions and branch closings. In January, 2009, we initiated a more significant restructuring plan for our U.K. operations, and completed it during 2009. Throughout 2009, we continued to expand our focus to achieve further cost savings and related efficiencies by assessing the scale of our global branch network, along with permanent employee headcount levels. By the 2009 year end, our restructuring actions encompassed a global reach beyond that originally anticipated. Accordingly, we included all related costs, including severance and lease terminations, in connection with these actions taken around the world, in our reported restructuring charges for 2009 and 2008. Refer to the segment discussions for more detail of the restructuring actions.
The largest components of the $172.7 million year-over-year decrease in SG&A expenses were approximately $110 million of structural changes, $55 million of compensation and other discretionary savings and the $17 million decrease in year-over-year litigation costs, partially offset by restructuring charges and incremental costs related to acquisitions and investments in 2008. Structural changes represented the restructuring actions we took around the world since June 2008 to reduce expenses, including a reduction of approximately 1,900 full-time employees and the closing, sale or consolidation of approximately 240 branches, some of which were still in process at year-end 2009. Compensation and other discretionary savings represented the impact of expense-reduction initiatives implemented during the first quarter of 2009, including suspension of headquarters and field-based incentive compensation and retirement matching contribution, along with a reduction in discretionary spending on travel and general expenses.
During 2009, asset impairment charges of $53.1 million were also recorded. Due to significantly worse than anticipated economic conditions and the impacts to our business in the second quarter of 2009, we revised our internal forecasts for all of our segments, which we deemed to be a triggering event for purposes of assessing goodwill for impairment. Accordingly, goodwill at all of our reporting units was tested for impairment in the second quarter of 2009. This resulted in the recognition of a goodwill impairment loss of $50.5 million in total, of which $16.4 million related to the Americas Commercial segment, $22.0 million related to the EMEA PT segment and $12.1 million related to the APAC Commercial segment.
Additionally, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When estimated undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value, determined by estimated future discounted cash flows. The Company’s estimates as of June 28, 2009 resulted in a $2.1 million reduction in the carrying value of long-lived assets and intangible assets in Japan. The Company’s estimates as of September 27, 2009 resulted in a $0.5 million reduction in the carrying value of long-lived assets and intangible assets in Europe.
During 2008, we recorded goodwill impairment charges of $50.4 million related to the EMEA Commercial segment, long-lived asset impairment charges of $11.4 million related to U.K. and an other-than-temporary impairment of $18.7 million related to our investment in Temp Holdings Co., Ltd. (“Temp Holdings”), a leading integrated human resources services company in Japan.
As a result of the above, we reported a loss from operations for 2009 totaling $146.1 million, compared to $70.3 million reported for 2008.
Income tax benefit on continuing operations for 2009 was $43.2 million, compared to expense of $8.0 million for 2008. Income taxes were negatively impacted in 2009 and 2008 by non-deductible impairment charges and valuation allowances on operating losses and restructuring charges in certain foreign countries, offset by work opportunity tax credits in the U.S. 2009 income taxes also benefited from investments in life insurance policies used to fund the Company’s deferred compensation plan, which generated non-taxable income in 2009, and non-deductible losses in 2008.
24
Loss from continuing operations was $105.1 million in 2009, compared to $81.7 million in 2008. Included in loss from continuing operations in 2009 were $50.0 million, net of tax, of asset impairment charges, $24.0 million, net of tax, of restructuring charges and $3.3 million, net of tax, related to litigation expenses. Included in loss from continuing operations in 2008 were $77.2 million, net of tax, of impairment charges, $13.9 million, net of tax, of litigation expenses and $5.3 million, net of tax, of restructuring charges.
Discontinued operations include the operating results of Kelly Home Care, which was sold in 2007 and Kelly Staff Leasing, which was sold in 2006. Earnings from discontinued operations totaled $0.6 million for 2009, compared to a loss of $0.5 million for 2008. These amounts represent adjustments to assets and liabilities retained as part of the sale agreements.
Net loss for 2009 totaled $104.5 million, compared to $82.2 million in 2008. Diluted loss from continuing operations per share for 2009 was $3.01, as compared to diluted loss from continuing operations per share of $2.35 for 2008.
Effective with the first quarter of 2009, we adopted the provisions of Financial Accounting Standards Board guidance which clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating securities and, therefore, included in the calculation of earnings per share using the two-class method in accordance with generally accepted accounting principles. Accordingly, all prior period earnings per share data presented were adjusted retrospectively to conform to the provisions of this guidance. Adopting these provisions had no effect on previously reported basic or diluted earnings per share for the year ended December 28, 2008.
Americas Commercial
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Constant | |
| | 2009 | | | 2008 | | | | | | | Currency | |
| | (53 Weeks) | | | (52 Weeks) | | | Change | | | Change | |
| | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 1,980.3 | | | $ | 2,516.7 | | | | (21.3 | )% | | | (20.3 | )% |
Fee-based income | | | 6.6 | | | | 15.7 | | | | (58.4 | ) | | | (56.8 | ) |
Gross profit | | | 290.7 | | | | 399.0 | | | | (27.1 | ) | | | (26.3 | ) |
SG&A expenses excluding restructuring charges | | | 273.2 | | | | 328.2 | | | | (16.7 | ) | | | | |
Restructuring charges | | | 7.2 | | | | 0.9 | | | NM | | | | | |
Total SG&A expenses | | | 280.4 | | | | 329.1 | | | | (14.8 | ) | | | (13.8 | ) |
Earnings from Operations | | | 10.3 | | | | 69.9 | | | | (85.1 | ) | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 14.7 | % | | | 15.9 | % | | (1.2 | )pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 13.8 | | | | 13.0 | | | | 0.8 | | | | | |
% of gross profit | | | 93.9 | | | | 82.2 | | | | 11.7 | | | | | |
Operating margin | | | 0.5 | | | | 2.8 | | | | (2.3 | ) | | | | |
The change in Americas Commercial revenue from services reflected a decrease in hours worked of 20.3%, combined with a decrease in average hourly bill rates of 0.9% (an increase of 0.3% on a constant currency basis). Americas Commercial represented 45.9% of total Company revenue for 2009 and 45.6% for 2008.
The decrease in the gross profit rate was due to lower fee-based income, an increase in the proportion of lower-margin light industrial business to higher-margin clerical business, as well as the impact of lower favorable workers’ compensation adjustments from prior years. Of the total $2.8 million adjustment in 2009 noted above, $2.4 million was reflected in the results of Americas Commercial. This compares to an adjustment of $10.5 million in 2008.
The decrease in SG&A expenses reflected reduced salaries and incentive compensation related to expense control initiatives. Restructuring charges in 2009 and 2008 included severance, lease termination and other costs to close or consolidate approximately 115 branches.
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Americas PT
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Constant | |
| | 2009 | | | 2008 | | | | | | | Currency | |
| | (53 Weeks) | | | (52 Weeks) | | | Change | | | Change | |
| | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 792.6 | | | $ | 938.2 | | | | (15.5 | )% | | | (15.4 | )% |
Fee-based income | | | 9.4 | | | | 19.4 | | | | (51.5 | ) | | | (51.4 | ) |
Gross profit | | | 125.1 | | | | 161.7 | | | | (22.6 | ) | | | (22.5 | ) |
SG&A expenses excluding restructuring charges | | | 100.9 | | | | 113.3 | | | | (10.9 | ) | | | | |
Restructuring charges | | | 1.0 | | | | — | | | NM | | | | | |
Total SG&A expenses | | | 101.9 | | | | 113.3 | | | | (10.0 | ) | | | (9.8 | ) |
Earnings from Operations | | | 23.2 | | | | 48.4 | | | | (52.2 | ) | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 15.8 | % | | | 17.2 | % | | (1.4 | )pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 12.7 | | | | 12.1 | | | | 0.6 | | | | | |
% of gross profit | | | 80.7 | | | | 70.1 | | | | 10.6 | | | | | |
Operating margin | | | 2.9 | | | | 5.2 | | | | (2.3 | ) | | | | |
The change in Americas PT revenue from services reflected a decrease in hours worked of 15.3%, partially offset by an increase in average billing rates of 0.7% (0.8% on a constant currency basis). Americas PT revenue represented 18.4% of total Company revenue for 2009 and 17.0% for 2008.
The Americas PT gross profit rate decreased, due primarily to lower fee-based income, changes in customer mix and higher growth in certain lower-margin customer accounts.
The decrease in SG&A expenses was primarily due to lower incentive compensation, combined with reduced recruiting and retention, travel and other costs as a result of lower volume and cost-savings initiatives.
EMEA Commercial
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Constant | |
| | 2009 | | | 2008 | | | | | | | Currency | |
| | (53 Weeks) | | | (52 Weeks) | | | Change | | | Change | |
| | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 895.2 | | | $ | 1,310.5 | | | | (31.7 | )% | | | (24.9 | )% |
Fee-based income | | | 16.6 | | | | 39.5 | | | | (58.0 | ) | | | (52.6 | ) |
Gross profit | | | 140.2 | | | | 227.3 | | | | (38.4 | ) | | | (32.5 | ) |
SG&A expenses excluding restructuring charges | | | 150.3 | | | | 226.5 | | | | (33.7 | ) | | | | |
Restructuring charges | | | 15.6 | | | | 3.9 | | | | 301.4 | | | | | |
Total SG&A expenses | | | 165.9 | | | | 230.4 | | | | (28.0 | ) | | | (20.2 | ) |
Earnings from Operations | | | (25.7 | ) | | | (3.1 | ) | | NM | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 15.7 | % | | | 17.4 | % | | (1.7 | )pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 16.8 | | | | 17.3 | | | | (0.5 | ) | | | | |
% of gross profit | | | 107.2 | | | | 99.6 | | | | 7.6 | | | | | |
Operating margin | | | (2.9 | ) | | | (0.2 | ) | | | (2.7 | ) | | | | |
The change in revenue from services in EMEA Commercial resulted from a 28.8% decrease in hours worked and a decrease in fee-based income, combined with a decrease in average hourly bill rates of 7.6% (an increase of 1.9% on a constant currency basis). EMEA Commercial revenue represented 20.7% of total Company revenue for 2009 and 23.8% for 2008.
26
The decrease in the gross profit rate was due primarily to decreases in fee-based income, a decline in temporary margins due to pricing pressure and shift in customer mix to corporate accounts, along with the effect of French payroll tax credits recorded in 2008, which contributed approximately 30 basis points to the EMEA Commercial gross profit rate.
Restructuring actions taken during 2009 resulted in the closure of approximately 85 branches and reduction of approximately 525 permanent employees for EMEA Commercial. Total restructuring costs for EMEA Commercial in 2009 included $5.0 million of severance, $4.4 million of lease termination costs and $6.2 million of asset write-offs and other costs. These actions and other cost-savings initiatives resulted in the decrease in SG&A expenses.
EMEA PT
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Constant | |
| | 2009 | | | 2008 | | | | | | | Currency | |
| | (53 Weeks) | | | (52 Weeks) | | | Change | | | Change | |
| | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 141.9 | | | $ | 172.5 | | | | (17.8 | )% | | | (10.7 | )% |
Fee-based income | | | 15.7 | | | | 26.8 | | | | (41.2 | ) | | | (33.2 | ) |
Gross profit | | | 37.8 | | | | 51.2 | | | | (26.2 | ) | | | (18.8 | ) |
SG&A expenses | | | 40.6 | | | | 48.9 | | | | (16.9 | ) | | | (8.5 | ) |
Earnings from Operations | | | (2.8 | ) | | | 2.3 | | | NM | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 26.6 | % | | | 29.7 | % | | (3.1 | )pts. | | | | |
Expense rates: | | | | | | | | | | | | | | | | |
% of revenue | | | 28.6 | | | | 28.3 | | | | 0.3 | | | | | |
% of gross profit | | | 107.6 | | | | 95.5 | | | | 12.1 | | | | | |
Operating margin | | | (2.0 | ) | | | 1.3 | | | | (3.3 | ) | | | | |
The change in revenue from services in EMEA PT resulted from the decrease in fee-based income, a decrease in hours worked of 10.7%, combined with a 3.7% decrease in average hourly bill rates (an increase of 3.9% on a constant currency basis). EMEA PT revenue represented 3.3% of total Company revenue for 2009 and 3.1% for 2008.
The decrease in the EMEA PT gross profit rate was primarily due to decreases in fee-based income. SG&A expenses declined, due to reductions in personnel and incentive compensation.
27
APAC Commercial
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Constant | |
| | 2009 | | | 2008 | | | | | | | Currency | |
| | (53 Weeks) | | | (52 Weeks) | | | Change | | | Change | |
| | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 284.9 | | | $ | 336.0 | | | | (15.2 | )% | | | (11.0 | )% |
Fee-based income | | | 9.7 | | | | 17.0 | | | | (43.0 | ) | | | (40.6 | ) |
Gross profit | | | 41.6 | | | | 56.3 | | | | (26.1 | ) | | | (22.6 | ) |
SG&A expenses excluding restructuring charges | | | 44.6 | | | | 56.6 | | | | (21.3 | ) | | | | |
Restructuring charges | | | 1.6 | | | | — | | | NM | | | | | |
Total SG&A expenses | | | 46.2 | | | | 56.6 | | | | (18.5 | ) | | | (14.8 | ) |
Earnings from Operations | | | (4.6 | ) | | | (0.3 | ) | | NM | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 14.6 | % | | | 16.8 | % | | (2.2 | )pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 15.6 | | | | 16.8 | | | | (1.2 | ) | | | | |
% of gross profit | | | 107.0 | | | | 100.5 | | | | 6.5 | | | | | |
Operating margin | | | (1.6 | ) | | | (0.1 | ) | | | (1.5 | ) | | | | |
The change in revenue from services in APAC Commercial resulted from a decrease in average hourly bill rates of 11.6% (7.1% on a constant currency basis), combined with the decrease in fee-based income and a decrease in hours worked of 2.6%. The decrease in the average hourly bill rates for APAC Commercial was due to a change in mix from countries with higher average bill rates to those with lower average bill rates, such as India and Malaysia. APAC Commercial revenue represented 6.6% of total Company revenue for 2009 and 6.1% for 2008.
The decrease in the APAC Commercial gross profit rate was primarily due to decreases in fee-based income. SG&A expenses declined, due to reductions in personnel and incentive compensation.
APAC PT
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Constant | |
| | 2009 | | | 2008 | | | | | | | Currency | |
| | (53 Weeks) | | | (52 Weeks) | | | Change | | | Change | |
| | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 25.4 | | | $ | 34.3 | | | | (26.0 | )% | | | (24.3 | )% |
Fee-based income | | | 3.8 | | | | 5.1 | | | | (25.0 | ) | | | (21.0 | ) |
Gross profit | | | 7.7 | | | | 10.2 | | | | (25.1 | ) | | | (22.6 | ) |
SG&A expenses | | | 9.2 | | | | 10.7 | | | | (14.2 | ) | | | (9.9 | ) |
Earnings from Operations | | | (1.5 | ) | | | (0.5 | ) | | | (224.9 | ) | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 30.2 | % | | | 29.8 | % | | 0.4 | pts. | | | | |
Expense rates: | | | | | | | | | | | | | | | | |
% of revenue | | | 36.2 | | | | 31.2 | | | | 5.0 | | | | | |
% of gross profit | | | 119.8 | | | | 104.6 | | | | 15.2 | | | | | |
Operating margin | | | (6.0 | ) | | | (1.4 | ) | | | (4.6 | ) | | | | |
The change in translated U.S. dollar revenue from services in APAC PT resulted from a decrease in the translated U.S. dollar average hourly bill rates of 13.4% (11.8% on a constant currency basis), combined with a decrease in hours worked of 14.8% and the decrease in fee-based income. The decrease in the average hourly bill rates for APAC PT was due to a change in mix from countries with higher average bill rates to those with lower average bill rates, such as India. APAC PT revenue represented 0.6% of total Company revenue for 2009 and 2008.
SG&A expenses declined, due to reductions in personnel and incentive compensation.
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OCG
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Constant | |
| | 2009 | | | 2008 | | | | | | | Currency | |
| | (53 Weeks) | | | (52 Weeks) | | | Change | | | Change | |
| | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 219.9 | | | $ | 233.3 | | | | (5.7 | )% | | | (4.7 | )% |
Fee-based income | | | 24.4 | | | | 27.8 | | | | (12.3 | ) | | | (9.4 | ) |
Gross profit | | | 59.7 | | | | 72.9 | | | | (18.0 | ) | | | (16.1 | ) |
SG&A expenses excluding restructuring charges | | | 69.6 | | | | 69.5 | | | | 0.0 | | | | | |
Restructuring charges | | | 1.9 | | | | 0.5 | | | | 328.4 | | | | | |
Total SG&A expenses | | | 71.5 | | | | 70.0 | | | | 2.0 | | | | 4.3 | |
Earnings from Operations | | | (11.8 | ) | | | 2.9 | | | NM | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit rate | | | 27.2 | % | | | 31.2 | % | | (4.0 | )pts. | | | | |
Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
% of revenue | | | 31.7 | | | | 29.8 | | | | 1.9 | | | | | |
% of gross profit | | | 116.6 | | | | 95.6 | | | | 21.0 | | | | | |
Operating margin | | | (5.3 | ) | | | 1.2 | | | | (6.5 | ) | | | | |
Revenue from services in the OCG segment for 2009 decreased in all three regions — Americas, Europe and Asia-Pacific. OCG revenue represented 5.1% of total Company revenue for 2009 and 4.2% for 2008.
The OCG gross profit rate decreasedincreased primarily due to a shift in revenue mix among the OCG business units. Revenueincreased volume in the higher-margin BPO, RPO and CWO units declined, while revenuepractice areas, as well as increases in our lower-margin BPO unit grew modestly during 2009. This change in business mix, coupled with a decrease in the gross profit rates in ourfor both the BPO and RPO practice as compared to 2008, resultedareas in the overall gross profit decline.
Total2011. The increase in SG&A expenses were relatively unchanged fromis primarily the prior year. Continuingresult of support costs, related to investments to build out implementationsalaries and operations infrastructure fromincentive-based compensation associated with the second and third quartersexpansion of 2008, and continued investment in new initiatives, were partially offset by a reduction in salary costscustomer programs, as well as higher volumes on existing programs, in our RPO and executive placement business units, as well as an overall decrease in discretionary spending on business travel and general staffing expenses.CWO practice areas.
Results of Operations
Financial Condition
Historically, we have financed our operations through cash generated by operating activities and access to credit markets. Our working capital requirements are primarily generated from temporary employee payroll and customer accounts receivable. Since receipts from customers generally lag payroll to temporary employees, working capital requirements increase substantially in periods of growth. Conversely, when economic activity slows, working capital requirements may substantially decrease. As highlighted in the consolidated statements of cash flows, our 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 $80.5$76 million at the end of 2010, a decrease of $8.4 million from the $88.92012, compared to $81 million at year-end 2009.2011. As further described below, during 2010,2012, we generated $41.8$61 million of cash from operating activities, used $11.3$28 million of cash infor investing activities and used $35.3 million in financing activities.
29
Operating Activities
In 2010, we generated $41.8$39 million in cash for financing activities.
Operating Activities
In 2012, we generated $61 million of cash from our operating activities, as compared to using $27.4generating $19 million in 20092011 and generating $111.4$42 million in 2008.2010. The increase from 20092011 to 20102012 was primarily due to improved earnings in 2010.lower additional working capital requirements. The decrease from 20082010 to 20092011 was primarily due to the declinegrowth in working capital requirements, partially offset by improved operating earnings, after adjustment for non-cash asset impairments and non-cash changes in deferred tax assets.results.
Trade accounts receivable totaled $810.9 million$1.0 billion at the end of 2010.2012. Global days sales outstanding (“DSO”) for the fourth quarter were 4953 days for 2010,2012, compared to 5152 days for 2009.2011.
Our working capital position was $367.6$470 million at the end of 2010,2012, an increase of $10.0$53 million from year-end 2009.2011. The current ratio was 1.7 at year-end 2012 and 1.6 at year-end 2010 and 1.7 at year-end 2009. The year-over-year decrease in book overdrafts of $10.2 million in 2009 and increase of $9.8 million in 2008 was reclassified from financing to operating activities in the consolidated statement of cash flows.2011.
Investing Activities
In 2010,2012, we used $11.3$28 million inof cash for investing activities, compared to $23.4$21 million in 20092011 and $64.0$11 million in 2008.2010. Capital expenditures, which totaled $11.0$22 million in 2010, $13.12012, $15 million in 20092011 and $31.1$11 million in 2008,2010, primarily related to the Company’s information technology programs. In 2008, capital expenditures includedprograms, including costs for the implementation of the PeopleSoft payroll, billing and accounts receivable project.
The PeopleSoft payroll, billing and accounts receivable project, which commenced in the fourth quarter of 2004, iswas intended to cover the U.S., Canada, Puerto Rico, the U.K. and Ireland. Through 2010,During 2012, management made the decision to abandon the billing system module in the U.S., Canada and Puerto Rico, and wrote off the previously capitalized costs related to this portion of the project. To date, the Company has implemented modules associated with payroll in the northeast region of the U.S. and Canada, accounts receivable in all locations, payroll and billing in the U.K. and Ireland, payroll in Canada and general ledger and fixed assets in the U.S., Puerto Rico and Canada. The total cost of the project to date is $79 million, of which $56 million was capital expenditures and $23 million was selling, general and administrative expenses. We anticipate spending approximately $25$3 to $30$4 million in 2013 to complete the PeopleSoft project byproject.
During 2012, we entered into an agreement with Temp Holdings Co., Ltd. (“Temp Holdings”) to form a venture, TS Kelly Workforce Solutions (“TS Kelly”), in order to expand both companies’ presence in North Asia. As part of this agreement, we contributed our operations in China, South Korea and Hong Kong for a 49% ownership interest in TS Kelly. The $7 million investment represents a $2 million payment to TS Kelly, as well as the endcash on hand at the operations we contributed. Our share of 2014. Includedthe operating results of TS Kelly will be recorded on an equity basis beginning in the consolidated balance sheet at year-end 2010 was $5.5first quarter of 2013.
To establish the Company’s presence in the Brazilian market, we acquired the stock of Tradição Planejamento e Tecnologia de Serviços S.A. and Tradição Tecnologia e Serviços Ltda. (collectively, “Tradição”), a national service provider in Brazil, in November, 2011 for $7 million of capitalized costs related to unimplemented PeopleSoft modules.
During 2009, we made the following payments related to acquisitions: $5.7 million earnout payment relatedin cash. In addition to the 2007 acquisitioncash payment, the Company assumed debt of access AG, $1.0$9 million related toas part of this transaction. The operating results of Tradição are included as a business unit in the 2007 acquisition of CGR/seven LLC, $0.6 million earnout payment related to the 2006 acquisition of The Ayers Group and $0.2 million earnout payment related to the 2008 acquisition of Toner Graham.Americas Commercial operating segment.
During 2008, we made the following net cash payments related to acquisitions: $13.0 million related to the acquisition of the Portuguese subsidiaries of Randstad Holding N.V., $9.1 million related to the acquisition of Toner Graham, $7.6 million related primarily to the acquisition of access AG and $3.0 million related to the acquisition of CGR/seven LLC.
As of January 2, 2011, there are no remaining contingent earnout payments related to any acquisitions from previous years.
Financing Activities
In 2010,2012, we used $35.3$39 million in cash fromfor financing activities, as compared to generating $19.6$6 million in 20092011 and using $18.6$35 million in 2008.2010. Changes in cash from financing activities are primarily related to borrowing activities. Debt totaled $78.8$64 million at year-end 20102012 compared to $137.1$96 million at year-end 2009.2011. Debt-to-total capital is a common ratio to measure the relative capital structure and leverage of the Company. Our ratio of debt-to-total capital (total debt reported on the balance sheet divided by total debt plus stockholders’ equity) was 11.2%8.0% at the end of 20102012 and 19.5%12.5% at the end of 2009.2011.
Effective September 28, 2009, we negotiated a new secured
In 2012, the net change in short-term borrowings included $21 million and $6 million related to payments on the securitization facility and revolving credit facility, with a total capacityrespectively. In 2011, the net change in short-term borrowings included $67 million related to borrowings on the securitization facility. Subsequent to the acquisition of $90 million and carrying a term of three years, maturingTradição in September of 2012. Effective December 4, 2009,November, 2011, we established a 364-day, $100an unsecured, uncommitted revolving line of credit for the Brazilian legal entities, and used the facility to pay off short-term debt. Accordingly, also included in the 2011 net change in short-term borrowings was $6 million securitization facility.related to borrowings under the revolving line of credit in Brazil. In 2010, the net change in short-term borrowings included $38 million related to payments on the securitization facility. In 2009,
During 2011, we repaid term debt of $68 million. Included in this amount was $5 million of short-term debt which was paid off by our Brazilian legal entities subsequent to the net change in short-term borrowings included $55 million related to borrowings on the securitization facility.
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acquisition of Tradição. During 2010, we paid $14.9$15 million due on our yen-denominated credit facility. During 2009, we repaid short-term debt of $22.9 million, and $7.6 million due on our yen-denominated credit facility. On October 10, 2008, we closed and funded a three-year syndicated term loan facility comprised of 9 million euros and 5 million U.K. pounds. The facility was used to refinance the short-term borrowings related to the Portugal and Toner Graham acquisitions.
As of year-end 2010, we had $127.3 million of committed unused credit facilities. At year-end 2010, we had additional uncommitted one-year credit facilities totaling $11.2 million, under which we had borrowed $0.1 million. Details of our debt facilities as of the 2010 year end are contained in the Liquidity section and Debt footnote to our consolidated financial statements.
Included in financing activities during 2010 was $24.3$24 million related to the sale of 1,576,169 shares of Kelly’s Class A common stock to Temp Holdings. The shares were sold in a private transaction at $15.42 per share, which was the average of the closing prices of the Class A common stock for the five days from May 3, 2010 through May 7, 2010, and represented 4.8 percent of the outstanding Class A shares after the completion of the sale.
During 2008, we repurchased 436,697 Class A shares for $8.0 million under the $50 million Class A share repurchase program authorized by the board of directors in August, 2007. No shares were repurchased during 2009 under the share repurchase program, which expired in August, 2009.
Dividends paid per common share were $0.54$0.20 in 2008.2012 and $0.10 in 2011. No dividends were paid in 2009 or 2010. Payments of dividends are restricted by the financial covenants contained in our debt facilities. Details of this restriction are contained in the Debt footnote in the notes to our consolidated financial statements.
Contractual Obligations and Commercial Commitments
Summarized below are our obligations and commitments to make future payments as of year-end 2010:2012:
| | | | | | | | | | | | | | | | | | | | |
| | Payment due by period | |
| | | | | | Less than | | | | | | | | | | | More than | |
| | Total | | | 1 year | | | 1-3 Years | | | 3-5 Years | | | 5 years | |
| | (In millions of dollars) | |
Operating leases | | $ | 115.8 | | | $ | 44.0 | | | $ | 51.4 | | | $ | 13.2 | | | $ | 7.2 | |
Short-term borrowings and current portion of long-term debt | | | 78.8 | | | | 78.8 | | | | — | | | | — | | | | — | |
Accrued insurance | | | 84.9 | | | | 31.3 | | | | 26.4 | | | | 12.8 | | | | 14.4 | |
Accrued retirement benefits | | | 92.4 | | | | 7.2 | | | | 14.1 | | | | 14.1 | | | | 57.0 | |
Other long-term liabilities | | | 4.2 | | | | 0.8 | | | | 1.6 | | | | 1.6 | | | | 0.2 | |
Uncertain income tax positions, interest and penalties | | | 6.1 | | | | 0.2 | | | | 5.8 | | | | 0.1 | | | | — | |
Purchase obligations | | | 25.4 | | | | 12.8 | | | | 12.5 | | | | 0.1 | | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 407.6 | | | $ | 175.1 | | | $ | 111.8 | | | $ | 41.9 | | | $ | 78.8 | |
| | | | | | | | | | | | | | | |
The table above excludes interest payments and, in certain cases, payment streams are estimated. | | Payment due by period | |
| | Total | | | | | | 1-3 Years | | | 3-5 Years | | | | |
| | (In millions of dollars) | |
Operating leases | | $ | 108.0 | | | $ | 42.6 | | | $ | 45.1 | | | $ | 15.8 | | | $ | 4.5 | |
Short-term borrowings | | | 64.1 | | | | 64.1 | | | | - | | | | - | | | | - | |
Accrued insurance | | | 76.3 | | | | 32.8 | | | | 19.8 | | | | 9.2 | | | | 14.5 | |
Accrued retirement benefits | | | 116.5 | | | | 5.5 | | | | 11.1 | | | | 11.2 | | | | 88.7 | |
Other long-term liabilities | | | 15.4 | | | | 2.1 | | | | 7.5 | | | | 4.0 | | | | 1.8 | |
Uncertain income tax positions | | | 3.1 | | | | 0.1 | | | | 0.8 | | | | 1.0 | | | | 1.2 | |
Purchase obligations | | | 31.6 | | | | 16.7 | | | | 14.9 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 415.0 | | | $ | 163.9 | | | $ | 99.2 | | | $ | 41.2 | | | $ | 110.7 | |
Purchase obligations above represent unconditional commitments relating primarily to voice and data communications services which we expect to utilize generally within the next threetwo fiscal years, in the ordinary course of business. We have no material, unrecorded commitments, losses, contingencies or guarantees associated with any related parties or unconsolidated entities.
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Liquidity
Liquidity
We expect to meet our ongoing short- and long-term cash requirements principally through cash generated from operations, available cash and equivalents, securitization of customer receivables and committed unused credit facilities. Additional funding sources could include public or private bonds, asset-based lending, additional bank facilities, issuance of equity or other sources. We expect these same sources of liquidity to fund the $61.7 million of our debt which matures on October 3, 2011.
We utilize intercompany loans, dividends, capital contributions and redemptions and a notional cash pool to effectively manage our cash on a global basis. We periodically review our foreign subsidiaries’ cash balances and projected cash needs. As part of those reviews, we may identify cash that we feel should be repatriated to optimize the Company’s overall capital structure. At the present time, we dothese reviews have not haveresulted in any specific plans to repatriate the majorityour international cash balances. We expect much of our international excess cash balances. As our business recovers, we expect this international cash will be needed to fund working capital growth in our local operations. The majority of our international cash was investedis concentrated in oura cash poolpooling arrangement (the “Cash Pool”) and wasis available to fund general corporate needs bothinternationally. The Cash Pool is a set of cash accounts maintained with a single bank that must, as a whole, maintain at our headquartersleast a zero balance; individual accounts may be positive or negative. This allows countries with excess cash to invest and at other international affiliates. There are no significant restrictions on our abilitycountries with cash needs to utilize the cash pool, and we did so throughout the year. As our global cash position improved in December, funds from the cash pool were used to help finance reductions of debt.excess cash.
We manage our cash and debt very closely to minimize outstanding debt balances.optimize our capital structure. As our cash balances build, we tend to pay down debt as appropriate. Conversely, when working capital needs grow, we tend to use corporate cash and cash available in the cash poolCash Pool first, and then we access our borrowing facilities.
As of January 2, 2011,
At year-end 2012, we had $90.0$150 million of available capacity on our $90$150 million revolving credit facility and $37.3$32 million of available capacity on our $100$150 million securitization facility. The securitization facility carried $17.0$63 million of short-term borrowings and $45.7$55 million of standby letters of credit related to workers’ compensation. Together, the revolving credit and securitization facilities provide the Company with committed funding capacity that may be used for general corporate purposes. While we believe these facilities will cover our working capital needs over the short term, if economic conditions or operating results change significantly, we may need to seek additional sources of funds. DuringThroughout 2012 and as of the first quarter of 2011,2012 year end we expectmet the debt covenants related to refinance theour revolving credit facility and the securitization facility to increase capacity and improve pricing, terms, and conditions. Once this process is complete, it is our intention to prepay our term loans and move the debt onto the revolving credit facility and the securitization facility.
At year-end 2012, we also had additional unsecured, uncommitted short-term credit facilities totaling $13 million, under which we had borrowed $1 million. Details of our debt facilities as of the 2012 year end are contained in the Debt footnote in the notes to our consolidated financial statements.
We monitor the credit ratings of our major banking partners on a regular basis. We also have regular discussions with them. Based on our reviews and communications, we believe the risk of one or more of our banks not being able to honor their commitments is insignificant. We also review the ratings and holdings of our money market funds and other investment vehicles regularly to ensure high credit quality and access to our invested cash.
As of the end of fiscal 2012, we had no holdings of sovereign debt in Italy, Portugal, Ireland, Spain or Greece. Our investment policy requires our international affiliates to contribute any excess cash balances to the Cash Pool. We then manage this as counterparty exposure and distribute the risk among our Cash Pool provider and other banks we may designate from time to time.
At the end of fiscal 2012, our total exposure to European receivables from our customers was $284 million, which represents 28% of total trade accounts receivable, net. The percentage of trade accounts receivable over 90 days past due for Europe was consistent with our global experience. Net trade accounts receivable for Italy, Portugal and Ireland, specific countries currently experiencing economic volatility, totaled $38 million at the 2012 year end, and we have not experienced a significant deterioration in these amounts during 2012.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. In this process, it is necessary for us to make certain assumptions and related estimates affecting the amounts reported in the consolidated financial statements and the attached notes. Actual results can differ from assumed and estimated amounts.
Critical accounting estimates are those that we believe require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Judgments and uncertainties affecting the application of those estimates may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following estimates to be most critical in understanding the judgments involved in preparing our consolidated financial statements.
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Workers’ Compensation
We have a combination of insurance and self-insurance contracts under which we effectively bear the first $500,000 of risk per single accident, except in the state of California, where we bear the first $750,000 of risk per single accident. There is no aggregate limitation on our per-risk exposure under these insurance and self-insurance programs. We establish accruals for workers’ compensation utilizing actuarial methods to estimate the undiscounted future cash payments that will be made to satisfy the claims, including an allowance for incurred-but-not-reported claims. This process includes establishing loss development factors, based on our historical claims experience as well as industry experience, and applying those factors to current claims information to derive an estimate of our ultimate claims liability. In preparing the estimates, we also consider the nature, frequency and severity of the claims, reserving practices of our third party claims administrators, performance of our medical cost management programs, changes in our territory and business line mix and current legal, economic and regulatory factors such as industry estimates of medical cost trends. Where appropriate, multiple generally-accepted actuarial techniques are applied and tested in the course of preparing our estimates. When claims exceed insured limits and realization of the claim for recovery is deemed probable, we record a receivable from the insurance company for the excess amount.
We evaluate the accrual, and the underlying assumptions, regularly throughout the year and make adjustments as needed. The ultimate cost of these claims may be greater than or less than the established accrual. While we believe that the recorded amounts are reasonable, there can be no assurance that changes to our estimates will not occur due to limitations inherent in the estimation process. In the event we determine that a smaller or larger accrual is appropriate, we would record a credit or a charge to cost of services in the period in which we made such a determination. The accrual for workers’ compensation, net of related receivables which are included in other assets in the consolidated balance sheet, was $61 million and $70 million at year-end 2012 and 2011, respectively.
Income Taxes
Income tax expense is based on expected income and statutory tax rates in the various jurisdictions in which we operate. Judgment is required in determining our income tax expense. We establish accruals for uncertain tax positions under generally accepted accounting principles, which require that a position taken or expected to be taken in a tax return be recognized in the consolidated financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Our effective tax rate includes the impact of accruals and changes to accruals that we consider appropriate, as well as related interest and penalties. A number of years may lapse before a particular matter, for which we have or have not established an accrual, is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our accruals are appropriate under generally accepted accounting principles. Favorable or unfavorable adjustment of the accrual for any particular issue would be recognized as an increase or decrease to our income tax expense in the period of a change in facts and circumstances. Our current tax accruals are presented in the consolidated balance sheet within income and other taxes and long-term tax accruals are presented in the consolidated balance sheet within other long-term liabilities.
Tax laws require items to be included in the tax return at different times than the items are reflected in the consolidated financial statements. As a result, the income tax expense reflected in our consolidated financial statements is different than the liability reported in our tax return. Some of these differences are permanent, which are not deductible or taxable on our tax return, and some are temporary differences, which give rise to deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the tax benefit in our consolidated income statement. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent items for which we have already taken a deduction on our tax return, but have not yet recognized as expense in our consolidated financial statements. Our net deferred tax asset is recorded using currently enacted tax rates, and may need to be adjusted in the event tax rates change.
The U.S. work opportunity credit is allowed for wages earned by employees in certain targeted groups. The actual amount of creditable wages in a particular period is estimated, since the credit is only available once an employee reaches a minimum employment period and the employee’s inclusion in a targeted group is certified by the applicable state. As these events often occur after the period the wages are earned, judgment is required in determining the amount of work opportunity credits accrued for in each period. We evaluate the accrual regularly throughout the year and make adjustments as needed.
Goodwill
We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. Generally accepted accounting principles require that goodwill be tested for impairment at a reporting unit level. We have determined that our reporting units are the same as our operating and reportable segments. If we have determined that it is more likely than not that the fair value for one or more reporting units is greater than their carrying value, we may use a qualitative assessment for the annual impairment test.
In conducting the qualitative assessment, we assess the totality of relevant events and circumstances that affect the fair value or carrying value of the reporting unit. Such events and circumstances may include macroeconomic conditions, industry and competitive environment conditions, overall financial performance, reporting unit specific events and market considerations. We may also consider recent valuations of the reporting unit, including the magnitude of the difference between the most recent fair value estimate and the carrying value, as well as both positive and adverse events and circumstances, and the extent to which each of the events and circumstances identified may affect the comparison of a reporting unit’s fair value with its carrying value.
For reporting units where the qualitative assessment is not used, goodwill is tested for impairment using a two-step process. In the first step, the estimated fair value of a reporting unit is compared to its carrying value. If the estimated fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is not considered impaired and no further testing is required. To derive the estimated fair value of reporting units, we primarily relied on an income approach. Under the income approach, estimated fair value is determined based on estimated future cash flows discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of the reporting unit being measured. Estimated future cash flows are based on our internal projection model. Assumptions and estimates about future cash flows and discount rates are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.
If the carrying value of the net assets assigned to a reporting unit exceeds the estimated fair value of a reporting unit, a second step of the impairment test is performed in order to determine the implied fair value of a reporting unit’s goodwill. Determining the implied fair value of goodwill requires valuation of a reporting unit’s tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference.
We completed our annual impairment test for all reporting units in the fourth quarter for the fiscal year ended 2012 and 2011 and determined that goodwill was not impaired. In 2012, we performed a qualitative assessment for the Americas Commercial and Americas PT reporting units, and a step one quantitative assessment for the APAC PT and OCG reporting segments. In 2011, we performed a step one quantitative assessment for all reporting units.
Our step one analysis used significant assumptions by segment, including: expected future revenue and expense growth rates, profit margins, cost of capital, discount rate and forecasted capital expenditures. Our revenue projections assumed near-term growth consistent with current year results, followed by long-term modest growth. Although we believe the assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. Different assumptions of the anticipated future results and growth from these businesses could result in an impairment charge, which would decrease operating income and result in lower asset values on our consolidated balance sheet. For example, a 10% reduction in our growth rate assumptions would not result in the estimated fair value falling below book value for any of our segments.
At year-end 2012 and 2011, total goodwill amounted to $90 million. (See the Goodwill footnote in the notes to our consolidated financial statements).
Litigation
Kelly is subject to legal proceedings and claims arising out of the normal course of business. Kelly routinely assesses the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the accruals required, if any, for these contingencies is made after analysis of each known issue. Development of the analysis includes consideration of many factors including: potential exposure, the status of proceedings, negotiations, results of similar litigation and participation rates. The required accruals may change in the future due to new developments in each matter. For further discussion, see the Contingencies footnote in the notes to consolidated financial statements of this Annual Report on Form 10-K. At year-end 2012 and 2011, the accrual for litigation costs amounted to $3 million and $5 million, respectively, and is included in accounts payable and accrued liabilities on the consolidated balance sheet.
Allowance for Uncollectible Accounts Receivable
We make ongoing estimates relating to the collectibility of our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the allowance, we consider our historical level of credit losses and apply percentages to certain aged receivable categories. We also make judgments about the creditworthiness of significant customers based on ongoing credit evaluations, and we monitor historical trends that might impact the level of credit losses in the future. Historically, losses from uncollectible accounts have not exceeded our allowance. Since we cannot predict with certainty future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required. In the event we determined that a smaller or larger allowance was appropriate, we would record a credit or a charge to SG&A expense in the period in which we made such a determination. In addition, we also include a provision for sales allowances, based on our historical experience, in our allowance for uncollectible accounts receivable. If sales allowances vary from our historical experience, an adjustment to the allowance may be required. As of year-end 20102012 and 2009,2011, the allowance for uncollectible accounts receivable was $12.3$10 million and $15.0$13 million, respectively.
Workers’ Compensation
We have a combination of insurance and self-insurance contracts under which we effectively bear the first $500,000 of risk per single accident, except in the state of California, where we bear the first $750,000 of risk per single accident. We establish accruals for workers’ compensation utilizing actuarial methods to estimate the undiscounted future cash payments that will be made to satisfy the claims, including an allowance for incurred-but-not-reported claims. This process includes establishing loss development factors, based on our historical claims experience, as well as industry experience, and applying those factors to current claims information to derive an estimate of our ultimate claims liability. In preparing the estimates, we also consider the nature, frequency and severity of the claims, analyses provided by third party claims administrators, performance of our medical cost management programs, changes in our territory and business line mix and current legal, economic and regulatory factors. Where appropriate, multiple generally-accepted actuarial techniques are applied and tested in the course of preparing our estimates.NEW ACCOUNTING PRONOUNCEMENTS
We evaluate the accrual, and the underlying assumptions, regularly throughout the year and make adjustments as needed. The ultimate cost of these claims may be greater than or less than the established accrual. While we believe that the recorded amounts are adequate, there can be no assurance that changes to our estimates will not occur due to limitations inherent in the estimation process. In the event we determine that a smaller or larger accrual is appropriate, we would record a credit or a charge to cost of services in the period in which we made such a determination. The accrual for workers’ compensation, net of related receivables which are included in other assets in the consolidated balance sheet, was $70.5 million and $67.0 million at year-end 2010 and 2009, respectively.
Goodwill
We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. Generally accepted accounting principles require that goodwill be tested for impairment at a reporting unit level. We have determined that our reporting units are the same as our operating and reportable segments. Goodwill is tested for impairment using a two-step process. In the first step, the estimated fair value of a reporting unit is compared to its carrying value. If the estimated fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is not considered impaired and no further testing is required. To derive the estimated fair value of reporting units, we primarily relied on an income approach. Under the income approach, estimated fair value is determined based on estimated future cash flows discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of the reporting unit being measured. Estimated future cash flows are based on our internal projection model. Assumptions and estimates about future cash flows and discount rates are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.
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If the carrying value of the net assets assigned to a reporting unit exceeds the estimated fair value of a reporting unit, a second step of the impairment test is performed in order to determine the implied fair value of a reporting unit’s goodwill. Determining the implied fair value of goodwill requires valuation of a reporting unit’s tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference.
Continuing operating losses in the Company’s OCG reporting unit were deemed to be a triggering event for purposes of assessing goodwill for impairment during the second quarter of 2010. Accordingly, we tested goodwill related to OCG and determined that OCG goodwill was not impaired. Additionally, we completed our annual impairment test for all reporting units in the fourth quarter for the year ended January 2, 2011 and January 3, 2010 and determined that goodwill was not impaired.
The goodwill impairment loss of $50.5 million recognized in the second quarter of 2009 related to the Americas Commercial, EMEA PT and APAC Commercial reporting units. The goodwill impairment loss of $50.4 million recognized in 2008 related to the EMEA Commercial reporting unit. These expenses have been recorded in the asset impairments line on the consolidated statement of earnings.
Although we believe the assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. Different assumptions of the anticipated future results and growth from these businesses could result in an impairment charge, which would decrease operating income and result in lower asset values on our consolidated balance sheet. At year-end 2010 and 2009, total goodwill amounted to $67.3 million. (See the GoodwillSee New Accounting Pronouncements footnote in the notesNotes to consolidated financial statements).
Income Taxes
Income tax expense is based on expected income and statutory tax rates in the various jurisdictions in which we operate. Judgment is required in determining our income tax expense. We establish accruals for uncertain tax positions under generally accepted accounting principles, which require that a position taken or expected to be taken in a tax return be recognized in the consolidated financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Our effective tax rate includes the impact of accrual provisions and changes to accruals that we consider appropriate, as well as related interest and penalties. A number of years may elapse before a particular matter, for which we have or have not established an accrual, is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our accruals are appropriate under generally accepted accounting principles. Favorable or unfavorable adjustment of the accrual for any particular issue would be recognized as an increase or decrease to our income tax expense in the period of a change in facts and circumstances. Our current tax accruals areConsolidated Financial Statements presented in the consolidated balance sheet within income and other taxes and long-term tax accruals are presented in the consolidated balance sheet within other long-term liabilities.
Tax laws require items to be included in the tax return at different times than the items are reflected in the consolidated financial statements. As a result, the income tax expense reflected in our consolidated financial statements is different than the liability reported in our tax return. Some of these differences are permanent, which are not deductible on our tax return, and some are temporary differences, which give rise to deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the tax benefit in our consolidated income statement. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent items for which we have already taken a deduction on our tax return, but have not yet recognized as expense in our consolidated financial statements.
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Litigation
Kelly is subject to legal proceedings and claims arising out of the normal course of business. Kelly routinely assesses the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the accruals required, if any, for these contingencies is made after analysis of each known issue. Development of the analysis includes consideration of many factors including: potential exposure, the status of proceedings, negotiations, results of similar litigation and participation rates. The required accruals may change in the future due to new developments in each matter. For further discussion, see the Contingencies footnote in the notes to consolidated financial statementsPart II, Item 8 of this Annual Report on Form 10-K. At year-end 2010 and 2009, the accrualreport for litigation costs amounted to $3.6 million and $2.3 million, respectively, and is included in accounts payable and accrued liabilities on the consolidated balance sheet.a description of new accounting pronouncements.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are “forward-looking”"forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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,"expects,” “anticipates,"anticipates,” “intends,"intends,” “plans,” “believes,"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 actions by us that may be provided by management, including oral statements or other written materials released to the public, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our company and economic and market factors in the countries in which we do business, among other things. These statements are not guarantees of future performance, and we have 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 our 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 and technology introductions, changing market and economic conditions, our ability to achieve our business strategy, including our ability to successfully expand into new markets and service lines, material changes in demand from or loss of large corporate customers, further impairment charges initiatedtriggered by adverse industry or market developments, unexpected termination of customer contracts, availability of temporary workers with appropriate skills required by customers, liabilities for employment-related claims and losses, including class action lawsuits and collective actions, liability for improper disclosure of sensitive or private employee information, unexpected changes in claim trends on workers’ compensation and benefit plans, our ability to maintain specified financial covenants in our bank facilities, our ability to access credit markets and continued availability of financing for funding working capital, our ability to sustain critical business applications through our key data centers, our ability to effectively implement and manage our information technology programs, our ability to retain the services of our senior management, local management and field personnel, the impact of changes in laws and regulations (including federal, state and international tax laws), the net financial impact of recent U.S. healthcare legislationthe Patient Protection and Affordable Care Act on our business, and risks associated with conducting business in foreign countries, including foreign currency fluctuations. Certain risk factors are discussed more fully under “Risk Factors” in Part I, Item 1A of this report.
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ITEM 7A. | | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to foreign currency risk primarily due to our net investment in foreign subsidiaries, which conduct business in their local currencies, as well as ourcurrencies. We may also utilize local currency-denominated borrowings. With the exception of our yen-denominated debt, the local currency-denominated debt offsets the exchange rate risk resulting from foreign currency-denominated net investments fluctuating in relation to the U.S. dollar.
During the second quarter of 2010, we entered into forward foreign currency exchange contracts to offset the variability in exchange rates on our yen-denominated debt. By using these derivative instruments to hedge exposures to foreign exchange risk, we expose ourselves to credit risk and market risk. To mitigate the credit risk, which is the failure of the counterparty to perform under the terms of the contract, we place hedging instruments with different investment grade-rated counterparties that we believe are minimal credit risk. To manage market risk, which is the change in the value of the contract that results from a change in foreign exchange rate, we match the contract and maturity with the yen-denominated debt repayment schedule. We do not hold or issue derivative financial instruments for speculative or trading purposes.
In addition, we are exposed to interest rate risks through our use of the multi-currency line of credit and other borrowings. A hypothetical fluctuation of 10% of market interest rates would not have had a material impact on 20102012 earnings.
Marketable equity investments, representing our investment in Temp Holdings, are stated at fair value and marked to market through stockholders’ equity, net of tax. Impairments in value below historical cost, if any, deemed to be other than temporary, would be expensed in the consolidated statement of earnings. See the Fair Value Measurements footnote in the notesNotes to consolidated financial statementsConsolidated Financial Statements of this Annual Report on Form 10-K for further discussion.
We are exposed to market risk as a result of our obligation to pay benefits under our nonqualified deferred compensation plan and our related investments in company-owned variable universal life insurance policies. The obligation to employees increases and decreases based on movements in the equity and debt markets. The investments in mutual funds, as part of the company-owned variable universal life insurance policies, are designed to mitigate, but not eliminate, this risk with offsetting gains and losses.
Overall, our holdings and positions in market risk-sensitive instruments do not subject us to material risk.
36
| | |
ITEM 8. | | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this Item are set forth in the accompanying index on page 4341 of this filing and are presented in pages 44-73.42-74.
| | |
ITEM 9. | | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| | |
ITEM 9A. | | CONTROLS AND PROCEDURES. |
ITEM 9A. CONTROLS AND PROCEDURES.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective.
Management’s Report on Internal Control Over Financial Reporting
Management’s report on internal control over financial reporting is presented preceding the consolidated financial statements on page 4442 of this report.
Attestation Report of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of January 2, 2011December 30, 2012, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
During 2012, the Company implemented the PeopleSoft payroll system for payroll processing in the northeast region of the U.S. Management has reviewed the internal controls impacted by the implementation of the PeopleSoft payroll system and has made changes to these internal controls as appropriate.
There were no other changes in our internal control over financial reporting that occurred during our fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| | |
ITEM 9B. | | OTHER INFORMATION |
ITEM 9B. OTHER INFORMATION
None.
37
PART III
Information required by Part III with respect to Directors, Executive Officers and Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters (Item 12), Certain Relationships and Related Transactions, and Director Independence (Item 13) and Principal Accounting Fees and Services (Item 14), except as set forth under the titles “Executive"Executive Officers of the Registrant”Registrant", which is included on page 38,36, and “Code of Business Conduct and Ethics,” which is included on page 39,37, (Item 10), and except as set forth under the title “Equity Compensation Plan Information,” which is included on page 39,37, (Item 12), is to be included in a definitive proxy statement filed not later than 120 days after the close of our fiscal year and the proxy statement, when filed, is incorporated in this report by reference.
| | |
ITEM 10. | | ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT. |
| | | | | | |
| | | | Served as an | | Business Experience |
Name/Office | | Age | | Officer Since | | During Last 5 Years |
Carl T. Camden President and Chief Executive Officer | | 56 | | 1995 | | Served as officer of the Company. |
| | | | | | |
George S. Corona Executive Vice President and Chief Operating Officer | | 52 | | 2000 | | Served as officer of the Company. |
| | | | | | |
Patricia Little Executive Vice President and Chief Financial Officer | | 50 | | 2008 | | Served as officer of the Company since July 2008. Served in various key finance positions at Ford Motor Company from 1984 to 2008, most recently as general auditor (2006 — 2008) and director of global accounting (2002 — 2006). |
| | | | | | |
Michael S. Webster Executive Vice President | | 55 | | 1996 | | Served as officer of the Company. |
| | | | | | |
Leif Agneus Senior Vice President and General Manager, EMEA | | 47 | | 2002 | | Served as officer of the Company. |
| | | | | | |
Michael E. Debs Senior Vice President, Controller and Chief Accounting Officer | | 53 | | 2000 | | Served as officer of the Company. |
| | | | | | |
Rolf E. Kleiner Senior Vice President | | 56 | | 1995 | | Served as officer of the Company. |
| | | | | | |
Daniel T. Lis Senior Vice President, General Counsel and Corporate Secretary | | 64 | | 2003 | | Served as officer of the Company. |
| | | | | | |
Antonina M. Ramsey Senior Vice President | | 56 | | 1992 | | Served as officer of the Company. |
| | | | | | |
Dhirendra Shantilal Senior Vice President and General Manager, APAC | | 54 | | 2000 | | Served as officer of the Company. |
38
Name/Office | | Age | | Served as an Officer Since | | Business Experience During Last 5 Years |
| | | | | | |
Carl T. Camden President and Chief Executive Officer | | 58 | | 1995 | | Served as officer of the Company. |
| | | | | | |
George S. Corona Executive Vice President and Chief Operating Officer | | 54 | | 2000 | | Served as officer of the Company. |
| | | | | | |
Patricia Little Executive Vice President and Chief Financial Officer | | 52 | | 2008 | | Served as officer of the Company since July 2008. Served in various key finance positions at Ford Motor Company from 1984 to 2008, most recently as general auditor (2006 – 2008). |
| | | | | | |
Michael S. Webster Executive Vice President | | 57 | | 1996 | | Served as officer of the Company. |
| | | | | | |
Leif Agneus Senior Vice President and General Manager, EMEA / APAC | | 49 | | 2002 | | Served as officer of the Company. |
| | | | | | |
Teresa S. Carroll Senior Vice President and General Manger, Outsourcing and Consulting Group | | 47 | | 2000 | | Served as officer of the Company. |
| | | | | | |
Michael E. Debs Senior Vice President, Controller and Chief Accounting Officer | | 55 | | 2000 | | Served as officer of the Company. |
| | | | | | |
Peter W. Quigley Senior Vice President and General Counsel | | 51 | | 2004 | | Served as officer of the Company. |
| | | | | | |
Antonina M. Ramsey Senior Vice President | | 58 | | 1992 | | Served as officer of the Company. |
CODE OF BUSINESS CONDUCT AND ETHICS.
We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer or controller or persons performing similar functions. The Code of Business Conduct and Ethics is included as Exhibit 14 in the Index to Exhibits on page 75.76. We have posted our Code of Business Conduct and Ethics on our website at www.kellyservices.com. We intend to post any changes in or waivers from our Code of Business Conduct and Ethics applicable to any of these officers on our website.
| | |
ITEM 12. | | ITEM 12. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS. |
Equity Compensation Plan Information
The following table shows the number of shares of our common stock that may be issued upon the exercise of outstanding options, warrants and rights, the weighted-average exercise price of outstanding options, warrants and rights, and the number of securities remaining available for future issuance under our equity compensation plans as of the fiscal year end for 2010.2012.
| | | | | | | | | | | | |
| | | | | | | | | | Number of securities | |
| | | | | | | | | | remaining available | |
| | | | | | | | | | for future issuance | |
| | Number of securities | | | | | | | under equity | |
| | to be issued upon | | | Weighted-average | | | compensation plans | |
| | exercise of outstanding | | | exercise price of | | | (excluding securities | |
| | options, warrants | | | outstanding options, | | | reflected in the first | |
| | and rights | | | warrants and rights | | | column) (2) | |
Equity compensation plans approved by security holders (1) | | | 645,036 | | | $ | 25.32 | | | | 2,143,304 | |
| | | | | | | | | | | | |
Equity compensation plans not approved by security holders (3) | | | — | | | | — | | | | — | |
| | | | | | | | | |
| | | | | | | | | | | | |
Total | | | 645,036 | | | $ | 25.32 | | | | 2,143,304 | |
| | | | | | | | | |
| | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) (2) | |
Equity compensation plans approved by security holders (1) | | | 392,599 | | | $ | 26.16 | | | | 1,866,542 | |
| | | | | | | | | | | | |
Equity compensation plans not approved by security holders (3) | | | - | | | | - | | | | - | |
| | | | | | | | | | | | |
Total | | | 392,599 | | | $ | 26.16 | | | | 1,866,542 | |
| | |
(1) | | The equity compensation plans approved by our stockholders include our Equity Incentive Plan, Non-Employee Director Stock Option Plan and Non-Employee Director Stock Award Plan. |
|
| | The number of shares to be issued upon exercise of outstanding options, warrants and rights excludes 708,4051,062,525 of restricted stock awards granted to employees and not yet vested at January 2, 2011.December 30, 2012. |
|
(2) | | The Equity Incentive Plan provides that the maximum number of shares available for grants, including stock options and restricted stock, awards, is 10 percent of the outstanding Class A common stock, adjusted for plan activity over the preceding five years. |
|
| | The Non-Employee Director Stock Option Plan provides that the maximum number of shares available for settlement of options is 250,000 shares of Class A common stock. |
|
| | The Non-Employee Director Stock Award Plan provides that the maximum number of shares available for awards is one-quarter of one percent of the outstanding Class A common stock. |
|
(3) | | We have no equity compensation plans that have not been approved by our stockholders. |
39
PART IV
| | |
ITEM 15. | | EXHIBITS, FINANCIAL STATEMENT SCHEDULES. |
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as part of this report:
(1) Financial statements:
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings for the three fiscal years ended January 2, 2011December 30, 2012
Consolidated Statements of Comprehensive Income for the three fiscal years ended December 30, 2012
Consolidated Balance Sheets at January 2, 2011December 30, 2012 and January 3, 20101, 2012
Consolidated Statements of Stockholders’Stockholders' Equity for the three fiscal years ended January 2, 2011December 30, 2012
Consolidated Statements of Cash Flows for the three fiscal years ended January 2, 2011December 30, 2012
Notes to Consolidated Financial Statements
| (2) | | Financial Statement Schedule - |
(2) Financial Statement Schedule -
For the three fiscal years ended January 2, 2011:December 30, 2012:
Schedule II —- Valuation Reserves
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
| (3) | | The Exhibits are listed in the Index to Exhibits included beginning at page 74,75, which is incorporated herein by reference. |
(b) | | The Index to Exhibits and required Exhibits are included following the Financial Statement Schedule beginning at page 7475 of this filing. |
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | |
|
Date: February 17, 201114, 2013 | | KELLY SERVICES, INC. | |
| | Registrant | |
| | | |
| | | | |
| By | Registrant | /s/ P. Little | |
| | | | | | |
| | By: | | /s/ P. LittleP. Little | | |
| | | | Executive Vice President and | | |
| | | | Chief Financial Officer | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | |
|
Date: February 17, 2011 | 14, 2013 | * | | T. E. Adderley |
| |
| | T. E. Adderley | |
| | Executive Chairman of the Board and Director | | Chairman and Director |
| | | | |
Date: February 17, 2011 | 14, 2013 | * | | C. T. Camden |
| |
| | C. T. Camden |
| |
| | President, Chief Executive Officer and Director |
| |
| | (Principal Executive Officer) |
|
| | | |
Date: February 17, 2011 | 14, 2013 | * | | C. M. Adderley |
| |
| | C. M. Adderley | |
| | Director | | Director |
| | | | |
Date: February 17, 2011 | 14, 2013 | * | | J. E. Dutton |
| |
| | J. E. Dutton | |
| | Director | | Director |
| | | | |
Date: February 17, 2011 | 14, 2013 | * | | M. A. Fay, O.P. |
| |
| | M. A. Fay, O.P. | |
| | Director | | Director |
| | | | |
Date: February 17, 2011 | 14, 2013 | * | | T. B. Larkin |
| |
| | T. B. Larkin | |
| | Director | | Director |
| | | | |
Date: February 17, 2011 | 14, 2013 | * | C. L. Mallett, Jr. | L. A. Murphy |
| | C. L. Mallett, Jr. | | L. A. Murphy |
| | Director | | Director |
| | | | |
Date: February 17, 2011 | 14, 2013 | * | L. A. Murphy | D. R. Parfet |
| | L. A. Murphy | | D. R. Parfet |
| | Director | | Director |
| | | | |
Date: February 17, 2011 | 14, 2013 | * | D. R. Parfet | T. Saburi |
| | D. R. Parfet | | T. Saburi |
| | Director | | Director |
| | | | |
Date: February 17, 201114, 2013 | * | T. Saburi | |
| | *T. Saburi | |
| | B. J. WhiteDirector | |
| | | | B. J. White |
| | | | Director |
41
SIGNATURES (continued)
| | | | | | |
|
Date: February 17, 201114, 2013 | * | | | /s/ P. LittleP. Little | B. J. White | |
| | B. J. White | |
| | Director | |
Date: February 14, 2013 | | /s/ P. Little | |
| | P. Little | |
| | Executive Vice President and Chief Financial Officer | | |
| | | | (Principal Financial Officer) | |
| | | |
| | | | | | |
Date: February 17, 2011 | | 14, 2013 | | /s/ M. E. Debs | |
| | M. E. Debs | |
| | Senior Vice President, Controller and Chief Accounting Officer | |
| | (Principal Accounting Officer) | |
| | | |
| | | |
Senior Vice President, Controller and ChiefDate: February 14, 2013 | *By | /s/ P. Little | |
| | | | Accounting Officer | P. Little | |
| | | | (Principal Accounting Officer) | | |
| | | | | | |
Date: February 17, 2011 | | *By | | /s/ P. LittleP. Little | | |
| | | | Attorney-in-Fact | | |
42
INDEX TO FINANCIAL STATEMENTS AND
SUPPLEMENTAL SCHEDULE
Kelly Services, Inc. and Subsidiaries
| | Page Reference in Report on Form 10-K |
| | |
| | Page Reference | |
| | in Report on | |
| | Form 10-K | |
| | | | |
| | | 44 | 42 |
| | | | |
| | | 45 | 43 |
| | | | |
December 30, 2012 | | | 46 | 44 |
| | | | |
Statements of Comprehensive Income for the three fiscal years ended December 30, 2012 | | | 47 | 45 |
| | |
Consolidated Balance Sheets at December 30, 2012 and January 1, 2012 | | 46 |
| | |
December 30, 2012 | | | 48 | 47 |
| | | | |
December 30, 2012 | | | 49 | 48 |
| | | | |
| | | 50 - 72 | 49-73 |
| | | | |
| | | 73 | |
| | | | 74 |
43
Management’s Report on Internal Control Over Financial Reporting
The management of Kelly Services, Inc. (the “Company”), is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company;
· | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
· | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; |
· | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may change.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of January 2, 2011.December 30, 2012. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment, management determined that, as of January 2, 2011,December 30, 2012, the Company’s internal control over financial reporting was effective based on those criteria.
The effectiveness of the Company’s internal control over financial reporting as of January 2, 2011December 30, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page 45.43.
44
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Kelly Services, Inc.:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Kelly Services, Inc. and its subsidiaries at January 2, 2011December 30, 2012 and January 3, 2010,1, 2012, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 2, 2011December 30, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 2, 2011,December 30, 2012, based on criteria established inInternal Control —- Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’sCompany's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’sManagement's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Detroit, MI
Michigan
February 17, 201114, 2013
45
CONSOLIDATED STATEMENTS OF EARNINGS
Kelly Services, Inc. and Subsidiaries
| | | | | | | | | | | | |
| | 2010 | | | 2009 (1) | | | 2008 | |
| | (In millions of dollars except per share items) | |
| | | | | | | | | | | | |
Revenue from services | | $ | 4,950.3 | | | $ | 4,314.8 | | | $ | 5,517.3 | |
| | | | | | | | | | | | |
Cost of services | | | 4,155.8 | | | | 3,613.1 | | | | 4,539.7 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Gross profit | | | 794.5 | | | | 701.7 | | | | 977.6 | |
| | | | | | | | | | | | |
Selling, general and administrative expenses | | | 754.4 | | | | 794.7 | | | | 967.4 | |
| | | | | | | | | | | | |
Asset impairments | | | 2.0 | | | | 53.1 | | | | 80.5 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Earnings (loss) from operations | | | 38.1 | | | | (146.1 | ) | | | (70.3 | ) |
| | | | | | | | | | | | |
Other expense, net | | | (5.4 | ) | | | (2.2 | ) | | | (3.4 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Earnings (loss) from continuing operations before taxes | | | 32.7 | | | | (148.3 | ) | | | (73.7 | ) |
| | | | | | | | | | | | |
Income taxes | | | 6.6 | | | | (43.2 | ) | | | 8.0 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Earnings (loss) from continuing operations | | | 26.1 | | | | (105.1 | ) | | | (81.7 | ) |
| | | | | | | | | | | | |
Earnings (loss) from discontinued operations, net of tax | | | — | | | | 0.6 | | | | (0.5 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Net earnings (loss) | | $ | 26.1 | | | $ | (104.5 | ) | | $ | (82.2 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Basic earnings (loss) per share | | | | | | | | | | | | |
Earnings (loss) from continuing operations | | $ | 0.71 | | | $ | (3.01 | ) | | $ | (2.35 | ) |
Earnings (loss) from discontinued operations | | | — | | | | 0.02 | | | | (0.02 | ) |
Net earnings (loss) | | $ | 0.71 | | | $ | (3.00 | ) | | $ | (2.37 | ) |
| | | | | | | | | | | | |
Diluted (loss) earnings per share | | | | | | | | | | | | |
Earnings (loss) from continuing operations | | $ | 0.71 | | | $ | (3.01 | ) | | $ | (2.35 | ) |
Earnings (loss) from discontinued operations | | | — | | | | 0.02 | | | | (0.02 | ) |
Net earnings (loss) | | $ | 0.71 | | | $ | (3.00 | ) | | $ | (2.37 | ) |
| | | | | | | | | | | | |
Dividends per share | | $ | — | | | $ | — | | | $ | 0.54 | |
| | | | | | | | | | | | |
Average shares outstanding (millions): | | | | | | | | | | | | |
Basic | | | 36.1 | | | | 34.9 | | | | 34.8 | |
Diluted | | | 36.1 | | | | 34.9 | | | | 34.8 | |
| | |
(1) | | Fiscal year included 53 weeks. |
| | 2012 | | | 2011 | | | 2010 | |
| | (In millions of dollars except per share items) | |
| | | | | | | | | |
Revenue from services | | $ | 5,450.5 | | | $ | 5,551.0 | | | $ | 4,950.3 | |
| | | | | | | | | | | | |
Cost of services | | | 4,553.9 | | | | 4,667.7 | | | | 4,163.4 | |
| | | | | | | | | | | | |
Gross profit | | | 896.6 | | | | 883.3 | | | | 786.9 | |
| | | | | | | | | | | | |
Selling, general and administrative expenses | | | 821.2 | | | | 825.6 | | | | 746.8 | |
| | | | | | | | | | | | |
Asset impairments | | | 3.1 | | | | - | | | | 2.0 | |
| | | | | | | | | | | | |
Earnings from operations | | | 72.3 | | | | 57.7 | | | | 38.1 | |
| | | | | | | | | | | | |
Other expense, net | | | 3.5 | | | | 0.1 | | | | 5.4 | |
| | | | | | | | | | | | |
Earnings from continuing operations before taxes | | | 68.8 | | | | 57.6 | | | | 32.7 | |
| | | | | | | | | | | | |
Income tax expense (benefit) | | | 19.1 | | | | (7.3 | ) | | | 6.6 | |
| | | | | | | | | | | | |
Earnings from continuing operations | | | 49.7 | | | | 64.9 | | | | 26.1 | |
| | | | | | | | | | | | |
Earnings (loss) from discontinued operations, net of tax | | | 0.4 | | | | (1.2 | ) | | | - | |
| | | | | | | | | | | | |
Net earnings | | $ | 50.1 | | | $ | 63.7 | | | $ | 26.1 | |
| | | | | | | | | | | | |
Basic earnings (loss) per share | | | | | | | | | | | | |
Earnings from continuing operations | | $ | 1.31 | | | $ | 1.72 | | | $ | 0.71 | |
Earnings (loss) from discontinued operations | | | 0.01 | | | | (0.03 | ) | | | - | |
Net earnings | | $ | 1.32 | | | $ | 1.69 | | | $ | 0.71 | |
| | | | | | | | | | | | |
Diluted earnings (loss) per share | | | | | | | | | | | | |
Earnings from continuing operations | | $ | 1.31 | | | $ | 1.72 | | | $ | 0.71 | |
Earnings (loss) from discontinued operations | | | 0.01 | | | | (0.03 | ) | | | - | |
Net earnings | | $ | 1.32 | | | $ | 1.69 | | | $ | 0.71 | |
| | | | | | | | | | | | |
Dividends per share | | $ | 0.20 | | | $ | 0.10 | | | $ | - | |
| | | | | | | | | | | | |
Average shares outstanding (millions): | | | | | | | | | | | | |
Basic | | | 37.0 | | | | 36.8 | | | | 36.1 | |
Diluted | | | 37.0 | | | | 36.8 | | | | 36.1 | |
See accompanying Notes to Consolidated Financial Statements.
46
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE INCOME
Kelly Services, Inc. and Subsidiaries
| | | | | | | | |
| | 2010 | | | 2009 | |
| | (In millions of dollars) | |
ASSETS | | | | | | | | |
Current Assets | | | | | | | | |
Cash and equivalents | | $ | 80.5 | | | $ | 88.9 | |
Trade accounts receivable, less allowances of $12.3 million and $15.0 million, respectively | | | 810.9 | | | | 717.9 | |
Prepaid expenses and other current assets | | | 44.8 | | | | 70.6 | |
Deferred taxes | | | 22.4 | | | | 21.0 | |
| | | | | | |
Total current assets | | | 958.6 | | | | 898.4 | |
| | | | | | | | |
Property and Equipment | | | | | | | | |
Land and buildings | | | 59.0 | | | | 58.8 | |
Computer hardware, software and other | | | 260.3 | | | | 264.0 | |
Accumulated depreciation | | | (215.3 | ) | | | (195.7 | ) |
| | | | | | |
Net property and equipment | | | 104.0 | | | | 127.1 | |
| | | | | | | | |
Noncurrent Deferred Taxes | | | 84.0 | | | | 77.5 | |
| | | | | | | | |
Goodwill, net | | | 67.3 | | | | 67.3 | |
| | | | | | | | |
Other Assets | | | 154.5 | | | | 142.2 | |
| | | | | | |
| | | | | | | | |
Total Assets | | $ | 1,368.4 | | | $ | 1,312.5 | |
| | | | | | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current Liabilities | | | | | | | | |
Short-term borrowings and current portion of long-term debt | | $ | 78.8 | | | $ | 79.6 | |
Accounts payable and accrued liabilities | | | 181.6 | | | | 182.6 | |
Accrued payroll and related taxes | | | 243.3 | | | | 208.3 | |
Accrued insurance | | | 31.3 | | | | 22.9 | |
Income and other taxes | | | 56.0 | | | | 47.4 | |
| | | | | | |
Total current liabilities | | | 591.0 | | | | 540.8 | |
| | | | | | | | |
Noncurrent Liabilities | | | | | | | | |
Long-term debt | | | — | | | | 57.5 | |
Accrued insurance | | | 53.6 | | | | 54.9 | |
Accrued retirement benefits | | | 85.4 | | | | 76.9 | |
Other long-term liabilities | | | 14.6 | | | | 16.0 | |
| | | | | | |
Total noncurrent liabilities | | | 153.6 | | | | 205.3 | |
| | | | | | | | |
Stockholders’ Equity | | | | | | | | |
Capital stock, $1.00 par value | | | | | | | | |
Class A common stock, shares issued 36.6 million at 2010 and 2009 | | | 36.6 | | | | 36.6 | |
Class B common stock, shares issued 3.5 million at 2010 and 2009 | | | 3.5 | | | | 3.5 | |
Treasury stock, at cost | | | | | | | | |
Class A common stock, 3.4 million shares at 2010 and 5.1 million at 2009 | | | (70.3 | ) | | | (106.6 | ) |
Class B common stock | | | (0.6 | ) | | | (0.6 | ) |
Paid-in capital | | | 28.0 | | | | 36.9 | |
Earnings invested in the business | | | 597.6 | | | | 571.5 | |
Accumulated other comprehensive income | | | 29.0 | | | | 25.1 | |
| | | | | | |
| | | | | | | | |
Total stockholders’ equity | | | 623.8 | | | | 566.4 | |
| | | | | | |
| | | | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 1,368.4 | | | $ | 1,312.5 | |
| | | | | | |
| | 2012 | | | 2011 | | | 2010 | |
| | (In millions of dollars) | |
| | | | | | | | | |
Net earnings | | $ | 50.1 | | | $ | 63.7 | | | $ | 26.1 | |
| | | | | | | | | | | | |
Other comprehensive income, net of tax: | | | | | | | | | | | | |
Foreign currency translation adjustments, net of tax benefit of $0.4, $0.6 and $0.5 million, respectively | | | 4.9 | | | | (8.0 | ) | | | 3.9 | |
Less: Reclassification adjustments included in net earnings | | | 0.7 | | | | (1.6 | ) | | | (0.3 | ) |
Foreign currency translation adjustments | | | 5.6 | | | | (9.6 | ) | | | 3.6 | |
| | | | | | | | | | | | |
Unrealized gains (losses) on investments | | | 13.1 | | | | (2.1 | ) | | | 1.0 | |
| | | | | | | | | | | | |
Pension liability adjustments, net of tax expense of $0.0, $0.1 and $0.3 million, respectively | | | 0.3 | | | | (1.2 | ) | | | (0.8 | ) |
Less: Reclassification adjustments included in net earnings | | | 0.2 | | | | 0.1 | | | | 0.1 | |
Pension liability adjustments | | | 0.5 | | | | (1.1 | ) | | | (0.7 | ) |
| | | | | | | | | | | | |
Other comprehensive income (loss) | | | 19.2 | | | | (12.8 | ) | | | 3.9 | |
| | | | | | | | | | | | |
Comprehensive Income | | $ | 69.3 | | | $ | 50.9 | | | $ | 30.0 | |
See accompanying Notes to Consolidated Financial Statements.
47
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYBALANCE SHEETS
Kelly Services, Inc. and Subsidiaries
| | | | | | | | | | | | |
| | 2010 | | | 2009 (1) | | | 2008 | |
| | (In millions of dollars) | |
Capital Stock | | | | | | | | | | | | |
Class A common stock | | | | | | | | | | | | |
Balance at beginning of year | | $ | 36.6 | | | $ | 36.6 | | | $ | 36.6 | |
Conversions from Class B | | | — | | | | — | | | | — | |
| | | | | | | | | |
Balance at end of year | | | 36.6 | | | | 36.6 | | | | 36.6 | |
| | | | | | | | | | | | |
Class B common stock | | | | | | | | | | | | |
Balance at beginning of year | | | 3.5 | | | | 3.5 | | | | 3.5 | |
Conversions to Class A | | | — | | | | — | | | | — | |
| | | | | | | | | |
Balance at end of year | | | 3.5 | | | | 3.5 | | | | 3.5 | |
| | | | | | | | | | | | |
Treasury Stock | | | | | | | | | | | | |
Class A common stock | | | | | | | | | | | | |
Balance at beginning of year | | | (106.6 | ) | | | (110.6 | ) | | | (105.7 | ) |
Sale of stock, exercise of stock options, restricted stock awards and other | | | 36.3 | | | | 4.0 | | | | 3.1 | |
Purchase of treasury stock | | | — | | | | — | | | | (8.0 | ) |
| | | | | | | | | |
Balance at end of year | | | (70.3 | ) | | | (106.6 | ) | | | (110.6 | ) |
| | | | | | | | | | | | |
Class B common stock | | | | | | | | | | | | |
Balance at beginning of year | | | (0.6 | ) | | | (0.6 | ) | | | (0.6 | ) |
Exercise of stock options, restricted stock awards and other | | | — | | | | — | | | | — | |
| | | | | | | | | |
Balance at end of year | | | (0.6 | ) | | | (0.6 | ) | | | (0.6 | ) |
| | | | | | | | | | | | |
Paid-in Capital | | | | | | | | | | | | |
Balance at beginning of year | | | 36.9 | | | | 35.8 | | | | 34.5 | |
Sale of stock, exercise of stock options, restricted stock awards and other | | | (8.9 | ) | | | 1.1 | | | | 1.3 | |
| | | | | | | | | |
Balance at end of year | | | 28.0 | | | | 36.9 | | | | 35.8 | |
| | | | | | | | | | | | |
Earnings Invested in the Business | | | | | | | | | | | | |
Balance at beginning of year | | | 571.5 | | | | 676.0 | | | | 777.3 | |
Net earnings (loss) | | | 26.1 | | | | (104.5 | ) | | | (82.2 | ) |
Dividends | | | — | | | | — | | | | (19.1 | ) |
| | | | | | | | | |
Balance at end of year | | | 597.6 | | | | 571.5 | | | | 676.0 | |
| | | | | | | | | | | | |
Accumulated Other Comprehensive Income | | | | | | | | | | | | |
Balance at beginning of year | | | 25.1 | | | | 12.2 | | | | 42.6 | |
Foreign currency translation adjustments, net of tax | | | 3.6 | | | | 12.3 | | | | (29.7 | ) |
Unrealized gains on investments, net of tax | | | 1.0 | | | | 1.6 | | | | — | |
Reclassification of unrealized losses on investments, net of tax to net earnings (loss) | | | — | | | | — | | | | 0.1 | |
Pension liability adjustments, net of tax | | | (0.7 | ) | | | (1.0 | ) | | | (0.8 | ) |
| | | | | | | | | |
Balance at end of year | | | 29.0 | | | | 25.1 | | | | 12.2 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Stockholders’ Equity at end of year | | $ | 623.8 | | | $ | 566.4 | | | $ | 652.9 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Comprehensive Income | | | | | | | | | | | | |
Net earnings (loss) | | $ | 26.1 | | | $ | (104.5 | ) | | $ | (82.2 | ) |
Foreign currency translation adjustments, net of tax | | | 3.9 | | | | 12.3 | | | | (29.7 | ) |
Unrealized gains (losses) on investments, net of tax | | | 1.0 | | | | 1.6 | | | | (10.8 | ) |
Pension liability adjustments, net of tax | | | (0.8 | ) | | | (1.0 | ) | | | (0.8 | ) |
Reclassification adjustments included in net earnings (loss) | | | (0.2 | ) | | | — | | | | 10.9 | |
| | | | | | | | | |
Comprehensive Income | | $ | 30.0 | | | $ | (91.6 | ) | | $ | (112.6 | ) |
| | | | | | | | | |
| | |
(1) | | Fiscal year included 53 weeks. |
| | 2012 | | | 2011 | |
| | (In millions of dollars) | |
ASSETS | | | | | | |
Current Assets: | | | | | | |
Cash and equivalents | | $ | 76.3 | | | $ | 81.0 | |
Trade accounts receivable, less allowances of $10.4 million and $13.4 million, respectively | | | 1,013.9 | | | | 944.9 | |
Prepaid expenses and other current assets | | | 57.5 | | | | 50.6 | |
Deferred taxes | | | 44.9 | | | | 38.2 | |
Total current assets | | | 1,192.6 | | | | 1,114.7 | |
| | | | | | | | |
Property and Equipment: | | | | | | | | |
Property and equipment | | | 337.6 | | | | 326.9 | |
Accumulated depreciation | | | (247.7 | ) | | | (236.3 | ) |
Net property and equipment | | | 89.9 | | | | 90.6 | |
Noncurrent Deferred Taxes | | | 82.8 | | | | 94.1 | |
Goodwill, Net | | | 89.5 | | | | 90.2 | |
Other Assets | | | 180.9 | | | | 152.1 | |
Total Assets | | $ | 1,635.7 | | | $ | 1,541.7 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
Current Liabilities: | | | | | | | | |
Short-term borrowings | | $ | 64.1 | | | $ | 96.3 | |
Accounts payable and accrued liabilities | | | 295.6 | | | | 237.2 | |
Accrued payroll and related taxes | | | 264.5 | | | | 271.4 | |
Accrued insurance | | | 32.8 | | | | 31.5 | |
Income and other taxes | | | 65.3 | | | | 61.3 | |
Total current liabilities | | | 722.3 | | | | 697.7 | |
| | | | | | | | |
Noncurrent Liabilities: | | | | | | | | |
Accrued insurance | | | 43.5 | | | | 53.5 | |
Accrued retirement benefits | | | 111.0 | | | | 91.1 | |
Other long-term liabilities | | | 17.9 | | | | 23.7 | |
Total noncurrent liabilities | | | 172.4 | | | | 168.3 | |
| | | | | | | | |
Commitments and contingencies (See Commitments and Contingencies footnotes) | | | | | | | | |
| | | | | | | | |
Stockholders' Equity: | | | | | | | | |
Capital stock, $1.00 par value | | | | | | | | |
Class A common stock, shares issued 36.6 million at 2012 and 2011 | | | 36.6 | | | | 36.6 | |
Class B common stock, shares issued 3.5 million at 2012 and 2011 | | | 3.5 | | | | 3.5 | |
Treasury stock, at cost | | | | | | | | |
Class A common stock, 2.9 million shares at 2012 and 3.2 million at 2011 | | | (61.0 | ) | | | (66.3 | ) |
Class B common stock | | | (0.6 | ) | | | (0.6 | ) |
Paid-in capital | | | 27.1 | | | | 28.8 | |
Earnings invested in the business | | | 700.0 | | | | 657.5 | |
Accumulated other comprehensive income | | | 35.4 | | | | 16.2 | |
Total stockholders' equity | | | 741.0 | | | | 675.7 | |
Total Liabilities and Stockholders' Equity | | $ | 1,635.7 | | | $ | 1,541.7 | |
See accompanying Notes to Consolidated Financial Statements.
48
CONSOLIDATED STATEMENTS OF CASH FLOWS
STOCKHOLDERS' EQUITY
Kelly Services, Inc. and Subsidiaries
| | | | | | | | | | | | |
| | 2010 | | | 2009 (1) | | | 2008 | |
| | (In millions of dollars) | |
Cash flows from operating activities | | | | | | | | | | | | |
Net earnings (loss) | | $ | 26.1 | | | $ | (104.5 | ) | | $ | (82.2 | ) |
Noncash adjustments: | | | | | | | | | | | | |
Impairment of assets | | | 2.0 | | | | 53.1 | | | | 80.5 | |
Depreciation and amortization | | | 34.9 | | | | 40.9 | | | | 46.0 | |
Provision for bad debts | | | 2.1 | | | | 2.2 | | | | 6.7 | |
Stock-based compensation | | | 3.2 | | | | 5.1 | | | | 4.4 | |
Deferred income taxes | | | (9.3 | ) | | | (31.0 | ) | | | 7.5 | |
Other, net | | | 0.5 | | | | (2.2 | ) | | | 3.7 | |
Changes in operating assets and liabilities | | | (17.7 | ) | | | 9.0 | | | | 44.8 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Net cash from operating activities | | | 41.8 | | | | (27.4 | ) | | | 111.4 | |
| | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
Capital expenditures | | | (11.0 | ) | | | (13.1 | ) | | | (31.1 | ) |
Acquisition of companies, net of cash received | | | — | | | | (7.5 | ) | | | (32.7 | ) |
Other investing activities | | | (0.3 | ) | | | (2.8 | ) | | | (0.2 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Net cash from investing activities | | | (11.3 | ) | | | (23.4 | ) | | | (64.0 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | |
Net change in short-term borrowings | | | (44.8 | ) | | | 52.7 | | | | (34.2 | ) |
Proceeds from debt | | | — | | | | — | | | | 42.5 | |
Repayment of debt | | | (14.9 | ) | | | (30.5 | ) | | | — | |
Dividend payments | | | — | | | | — | | | | (19.1 | ) |
Purchase of treasury stock | | | — | | | | — | | | | (8.0 | ) |
Sale of stock and other financing activities | | | 24.4 | | | | (2.6 | ) | | | 0.2 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Net cash from financing activities | | | (35.3 | ) | | | 19.6 | | | | (18.6 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Effect of exchange rates on cash and equivalents | | | (3.6 | ) | | | 1.8 | | | | (3.3 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Net change in cash and equivalents | | | (8.4 | ) | | | (29.4 | ) | | | 25.5 | |
Cash and equivalents at beginning of year | | | 88.9 | | | | 118.3 | | | | 92.8 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Cash and equivalents at end of year | | $ | 80.5 | | | $ | 88.9 | | | $ | 118.3 | |
| | | | | | | | | |
| | |
(1) | | Fiscal year included 53 weeks. |
| | 2012 | | | 2011 | | | 2010 | |
| | (In millions of dollars) | |
Capital Stock | | | | | | | | | |
Class A common stock | | | | | | | | | |
Balance at beginning of year | | $ | 36.6 | | | $ | 36.6 | | | $ | 36.6 | |
Conversions from Class B | | | - | | | | - | | | | - | |
Balance at end of year | | | 36.6 | | | | 36.6 | | | | 36.6 | |
| | | | | | | | | | | | |
Class B common stock | | | | | | | | | | | | |
Balance at beginning of year | | | 3.5 | | | | 3.5 | | | | 3.5 | |
Conversions to Class A | | | - | | | | - | | | | - | |
Balance at end of year | | | 3.5 | | | | 3.5 | | | | 3.5 | |
| | | | | | | | | | | | |
Treasury Stock | | | | | | | | | | | | |
Class A common stock | | | | | | | | | | | | |
Balance at beginning of year | | | (66.3 | ) | | | (70.3 | ) | | | (106.6 | ) |
Exercise of stock options, restricted stock awards and other | | | 5.3 | | | | 4.0 | | | | 36.3 | |
Balance at end of year | | | (61.0 | ) | | | (66.3 | ) | | | (70.3 | ) |
| | | | | | | | | | | | |
Class B common stock | | | | | | | | | | | | |
Balance at beginning of year | | | (0.6 | ) | | | (0.6 | ) | | | (0.6 | ) |
Exercise of stock options, restricted stock awards and other | | | - | | | | - | | | | - | |
Balance at end of year | | | (0.6 | ) | | | (0.6 | ) | | | (0.6 | ) |
| | | | | | | | | | | | |
Paid-in Capital | | | | | | | | | | | | |
Balance at beginning of year | | | 28.8 | | | | 28.0 | | | | 36.9 | |
Exercise of stock options, restricted stock awards and other | | | (1.7 | ) | | | 0.8 | | | | (8.9 | ) |
Balance at end of year | | | 27.1 | | | | 28.8 | | | | 28.0 | |
| | | | | | | | | | | | |
Earnings Invested in the Business | | | | | | | | | | | | |
Balance at beginning of year | | | 657.5 | | | | 597.6 | | | | 571.5 | |
Net earnings | | | 50.1 | | | | 63.7 | | | | 26.1 | |
Dividends | | | (7.6 | ) | | | (3.8 | ) | | | - | |
Balance at end of year | | | 700.0 | | | | 657.5 | | | | 597.6 | |
| | | | | | | | | | | | |
Accumulated Other Comprehensive Income | | | | | | | | | | | | |
Balance at beginning of year | | | 16.2 | | | | 29.0 | | | | 25.1 | |
Other comprehensive income (loss), net of tax | | | 19.2 | | | | (12.8 | ) | | | 3.9 | |
Balance at end of year | | | 35.4 | | | | 16.2 | | | | 29.0 | |
| | | | | | | | | | | | |
Stockholders' Equity at end of year | | $ | 741.0 | | | $ | 675.7 | | | $ | 623.8 | |
See accompanying Notes to Consolidated Financial Statements.
49
CONSOLIDATED STATEMENTS OF CASH FLOWS
Kelly Services, Inc. and Subsidiaries
| | 2012 | | | 2011 | | | 2010 | |
| | (In millions of dollars) | |
| | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | |
Net earnings | | $ | 50.1 | | | $ | 63.7 | | | $ | 26.1 | |
Noncash adjustments: | | | | | | | | | | | | |
Impairment of assets | | | 3.1 | | | | - | | | | 2.0 | |
Depreciation and amortization | | | 22.3 | | | | 31.4 | | | | 34.9 | |
Provision for bad debts | | | 1.1 | | | | 4.3 | | | | 2.1 | |
Stock-based compensation | | | 4.8 | | | | 4.6 | | | | 3.2 | |
Deferred income taxes | | | 4.7 | | | | (27.3 | ) | | | (9.3 | ) |
Other, net | | | 1.3 | | | | (2.6 | ) | | | 0.5 | |
Changes in operating assets and liabilities | | | (26.3 | ) | | | (55.0 | ) | | | (17.7 | ) |
| | | | | | | | | | | | |
Net cash from operating activities | | | 61.1 | | | | 19.1 | | | | 41.8 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Capital expenditures | | | (21.5 | ) | | | (15.4 | ) | | | (11.0 | ) |
Investment in equity affiliate | | | (6.6 | ) | | | - | | | | - | |
Acquisition of companies, net of cash received | | | - | | | | (6.5 | ) | | | - | |
Other investing activities | | | - | | | | 1.2 | | | | (0.3 | ) |
| | | | | | | | | | | | |
Net cash from investing activities | | | (28.1 | ) | | | (20.7 | ) | | | (11.3 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Net change in short-term borrowings | | | (31.9 | ) | | | 79.2 | | | | (44.8 | ) |
Repayment of debt | | | - | | | | (68.3 | ) | | | (14.9 | ) |
Dividend payments | | | (7.6 | ) | | | (3.8 | ) | | | - | |
Other financing activities | | | 0.1 | | | | (1.0 | ) | | | 24.4 | |
| | | | | | | | | | | | |
Net cash from financing activities | | | (39.4 | ) | | | 6.1 | | | | (35.3 | ) |
| | | | | | | | | | | | |
Effect of exchange rates on cash and equivalents | | | 1.7 | | | | (4.0 | ) | | | (3.6 | ) |
| | | | | | | | | | | | |
Net change in cash and equivalents | | | (4.7 | ) | | | 0.5 | | | | (8.4 | ) |
Cash and equivalents at beginning of year | | | 81.0 | | | | 80.5 | | | | 88.9 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cash and equivalents at end of year | | $ | 76.3 | | | $ | 81.0 | | | $ | 80.5 | |
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Kelly Services, Inc. and Subsidiaries
1. Summary of Significant Accounting Policies
Nature of OperationsKelly Services, Inc. is a global workforce solutions provider operating throughout the world.
Fiscal YearThe Company’sCompany's fiscal year ends on the Sunday nearest to December 31. The three most recent years ended on December 30, 2012 (2012), January 1, 2012 (2011) and January 2, 2011 (2010,(2010), all of which contained 52 weeks), January 3, 2010 (2009, which contained 53 weeks) and December 28, 2008 (2008, which contained 52 weeks)weeks. The Company’s operations in Brazil are accounted for on a one-month lag. The Company’s equity investment in TS Kelly Workforce Solutions is accounted for on a one-quarter lag (See Investment in Equity Affiliate footnote). Any material transactions in the intervening period are disclosed or accounted for in the current reporting period. Period costs included in selling, general and administrative (“SG&A”) expenses are recorded on a calendar-year basis.
Principles of ConsolidationThe consolidated financial statements include the accounts and operations of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Available-For-Sale InvestmentAvailable-for-sale investments are carried at fair value with the unrealized gains or losses, net of tax, included as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value below cost judged to be other-than-temporary on such securities are included as a component of asset impairments expense in the consolidated statement of earnings. The fair values of available-for-sale investments are based on quoted market prices.
Foreign Currency TranslationAll of the Company’s international subsidiaries use their local currency as their functional currency. Revenue and expense accounts of foreign subsidiaries are translated to U.S. dollars at average exchange rates, while assets and liabilities are translated to U.S. dollars at year-end exchange rates. Resulting translation adjustments, net of deferred taxes,tax, where applicable, are reported as accumulated foreign currency translation adjustments in stockholders’ equity and are recorded as a component of accumulated other comprehensive income.
Revenue RecognitionRevenue from services is recognized as services are provided by the temporary or contract employees. Revenue from permanent placement services is recognized at the time the permanent placement candidate begins full-time employment. Revenue from other fee-based consulting services is recognized when the services are provided. Provisions for sales allowances, based on historical experience, are recognized at the time the related sale is recognized as a reduction in revenue from services.services, and are included in the allowance for uncollectible accounts receivable.
Allowance for Uncollectible Accounts ReceivableThe Company records an allowance for uncollectible accounts receivable based on historical loss experience, customer payment patterns and current economic trends. The reserve for sales allowances, as discussed above, is also included in the allowance for uncollectible accounts receivable. The Company reviews the adequacy of the allowance for uncollectible accounts receivable on a quarterly basis and, if necessary, increases or decreases the balance by recording a charge or credit to SG&A expenses.
Cost of ServicesCost of services are those costs directly associated with the earning of revenue. The primary examples of these types of costs are temporary employee wages, along with associated payroll taxes, temporary employee benefits, such as service bonus and holiday pay, and workers’ compensation costs. These costs differ fundamentally from SG&A expenses in that they arise specifically from the action of providing our services to customers whereas SG&A costs are incurred regardless of whether or not we place temporary employees with our customers.
Effective with the first quarter of 2012, certain vendor management and other technology costs which were previously included in SG&A expenses are now included in cost of services, and 2011 and 2010 results were revised to conform to this presentation. The only effect of this change was to increase cost of services and decrease SG&A expenses (and gross profit) by $10.8 million in 2011 and $7.6 million in 2010 from those amounts previously reported in 2011 and 2010.
Advertising ExpensesAdvertising expenses from continuing operations, which are expensed as incurred and are included in SG&A expenses, were $8.5 million in 2012, $7.5 million in 2011 and $7.0 million in 2010, $7.1 million in 20092010.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and $11.1 million in 2008.Subsidiaries
Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for the allowance for uncollectible accounts receivable, workers’ compensation, goodwill and long-lived asset impairment, litigation costs and income taxes. Actual results could differ materially from those estimates.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
Cash and EquivalentsCash and equivalents are stated at fair value. The Company considers securities with original maturities of three months or less to be cash and equivalents.
Property and EquipmentProperty and equipment are stated at cost and are depreciated over their estimated useful lives, principally by the straight-line method. Cost and estimated useful lives of property and equipment by function are as follows:
| | | | | | | | | | |
Category | | 2010 | | | 2009 | | | Life |
| | (In millions of dollars) | | | |
Land | | $ | 3.8 | | | $ | 3.8 | | | — |
Work in process | | | 7.0 | | | | 8.2 | | | — |
Buildings and improvements | | | 55.2 | | | | 55.0 | | | 15 to 45 years |
Computer hardware and software | | | 183.4 | | | | 181.0 | | | 3 to 12 years |
Equipment, furniture and fixtures | | | 33.9 | | | | 36.9 | | | 5 years |
Leasehold improvements | | | 36.0 | | | | 37.9 | | | The lesser of the life of the lease or 5 years. |
| | | | | | | | |
Total property and equipment | | $ | 319.3 | | | $ | 322.8 | | | |
| | | | | | | | |
Category | | 2012 | | | 2011 | | | | Life | |
| | | (In millions of dollars) | | | | | | | |
Land | | $ | 3.8 | | | $ | 3.8 | | | | | - | | |
Work in process | | | 7.2 | | | | 8.6 | | | | | - | | |
Buildings and improvements | | | 56.5 | | | | 55.5 | | | | 15 | to | 45 years | |
Computer hardware and software | | | 202.3 | | | | 190.0 | | | | 3 | to | 12 years | |
Equipment, furniture and fixtures | | | 33.0 | | | | 33.6 | | | | | 5 | years | |
Leasehold improvements | | | 34.8 | | | | 35.4 | | | | The lesser of the life of the lease or 5 years. | |
Total property and equipment | | $ | 337.6 | | | $ | 326.9 | | | | | | | |
The Company capitalizes external costs and internal payroll costs incurred in the development of software for internal use as required by the Internal-Use Software Subtopic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Work in process represents capitalized costs for internal use software not yet in service and is included with computer hardware, softwarein property and otherequipment on the consolidated balance sheet. Depreciation expense from continuing operations was $19.0 million for 2012, $28.9 million for 2011 and $31.3 million for 2010, $36.0 million for 2009 and $41.4 million for 2008.2010.
Operating LeasesThe Company recognizes rent expense on a straight-line basis over the lease term. This includes the impact of both scheduled rent increases and free or reduced rents (commonly referred to as “rent holidays”). The Company records allowances provided by landlords for leasehold improvements as deferred rent in the consolidated balance sheet and as operating cash flows in the consolidated statement of cash flows.
Goodwill and Other Intangible AssetsGoodwill represents the excess of the purchase price over the fair value of net assets acquired. Purchased intangible assets with definite lives are recorded at estimated fair value at the date of acquisition and are amortized over their respective useful lives (from 3 to 15 years) on a straight-line basis or, where appropriate, on an accelerated basis commensurate with the related cash flows.
Impairment of Long-Lived Assets and Intangible AssetsThe Company evaluates long-lived assets and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When estimated undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its estimated fair value. Assets to be disposed of by sale, if any, are reported at the lower of the carrying amount or estimated fair value less cost to sell.
We test goodwill for impairment at the reporting unit level annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. We have determined that our reporting units are the same as our operating and reportable segments based on our organizational structure and the financial information that is provided to and reviewed by management. GoodwillWe may use a qualitative assessment for one or more reporting units for the annual goodwill impairment test if we have determined that it is more likely than not that the fair value of the reporting unit(s) is more than their carrying value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
For reporting units where the qualitative assessment is not used, goodwill is tested for impairment using a two-step process. In the first step, the estimated fair value of a reporting unit is compared to its carrying value. If the estimated fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is not considered impaired and no further testing is required.
If the carrying value of the net assets assigned to a reporting unit exceeds the estimated fair value of a reporting unit, a second step of the impairment test is performed in order to determine the implied fair value of a reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
Accounts PayableIncluded in accounts payable are outstanding checks in excess of funds on deposit. Such amounts totaled $10.2$22.2 million and $21.7$18.9 million at year-end 20102012 and 2009,2011, respectively.
Accrued Payroll and Related TaxesIncluded in accrued payroll and related taxes are outstanding checks in excess of funds on deposit. Such amounts totaled $6.4$5.3 million and $6.3$6.6 million at year-end 20102012 and 2009,2011, respectively. Payroll taxes for temporary employees are recognized proportionately to direct wages for interim periods based on expected full-year amounts.
Income TaxesThe Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Uncertain tax positions that are taken or expected to be taken in a tax return are recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.
Interest and penalties related to income taxes are accounted for as income tax expense.
Stock-Based CompensationThe The Company may grant restricted stock awards and units (collectively, "restricted stock"), stock options (both incentive and nonqualified), stock appreciation rights and performance awards to key employees utilizing the Company’s Class A stock. The Company utilizes the market price on the date of grant as the fair market value for restricted stock awards and estimates the fair value of stock option awards on the date of grant using an option-pricing model. The value of awards that are ultimately expected to vest is recognized as expense over the requisite service periods in SG&A expense in the Company’s consolidated statements of earnings.
Earnings Per ShareRestricted stock awards that entitle their holders to receive nonforfeitable dividends before vesting are considered participating securities and, therefore, included in the calculation of earnings per share using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Under this method, earnings from continuing operations (or net earnings) is reduced by the amount of dividends declared, and the remaining undistributed earnings is allocated to common stock and participating securities based on the proportion of each class’s weighted average shares outstanding to the total weighted average shares outstanding. The calculation of diluted earnings per share includes the effect of potential common shares outstanding in the average weighted shares outstanding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
Workers’ CompensationThe Company establishes accruals for workers’ compensation claims utilizing actuarial methods to estimate the undiscounted future cash payments that will be made to satisfy the claims. The estimates are based both on historical experience as well as current legal, economic and regulatory factors. When claims exceed insured limits and realization of the claim for recovery is deemed probable, the Company records a receivable from the insurance company for the excess amount. The receivable is included in other assets in the consolidated balance sheet. The Company regularly updates its estimates, and the ultimate cost of these claims may be greater than or less than the established accrual. During 2010,2012, due to favorable development of claims and payment data, the Company revised its estimate of the cost of outstanding workers’ compensation claims and, accordingly, reduced expense by $5.2$10.1 million. This compares to adjustments reducing prior year workers’ compensation claims by $2.8$5.6 million in 20092011 and $12.7$5.2 million in 2008.2010.
ReclassificationsCertain prior year amounts have been reclassified to conform with the current presentation, including the reclassification of the year-to-date decrease in book overdrafts of $10.2 million in 2009 and increase of $9.8 million in 2008 from financing to operating activities in the statement of cash flows, and the reclassification of $3.2 million and $7.6 million in workers’ compensation receivables in 2009 from current accrued insurance and noncurrent accrued insurance, respectively, to other assets on the consolidated balance sheet.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
2. Fair Value Measurements
Trade accounts receivable, accounts payable, accrued liabilities, accrued payroll and related taxes and short-term borrowings approximate their fair values due to the short-term maturities of these assets and liabilities. As of January 2, 2011 and January 3, 2010, the carrying value of long-term debt (see Debt footnote), approximates the fair value. All long-term debt is classified as current as of January 2, 2011.liabilities.
Assets Measured at Fair Value on a Recurring Basis
The following tables present the assets carried at fair value as of January 2,year-end 2012 and 2011 and January 3, 2010 on the consolidated balance sheet by fair value hierarchy level, as described below. The Company carried no liabilities at fair value as of January 2, 2011 and January 3, 2010.
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements on a Recurring Basis | |
| | As of January 2, 2011 | |
Description | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | (In millions of dollars) | |
Money market funds | | $ | 4.1 | | | $ | 4.1 | | | $ | — | | | $ | — | |
Available-for-sale investment | | | 27.8 | | | | 27.8 | | | | — | | | | — | |
Forward exchange contracts, net | | | 0.7 | | | | — | | | | 0.7 | | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total assets at fair value | | $ | 32.6 | | | $ | 31.9 | | | $ | 0.7 | | | $ | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements on a Recurring Basis | |
| | As of January 3, 2010 | |
Description | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | (In millions of dollars) | |
Money market funds | | $ | 1.0 | | | $ | 1.0 | | | $ | — | | | $ | — | |
Available-for-sale investment | | | 23.6 | | | | 23.6 | | | | — | | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total assets at fair value | | $ | 24.6 | | | $ | 24.6 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 measurements include significant unobservable inputs.
| | Fair Value Measurements on a Recurring Basis | |
| | As of Year-End 2012 | |
| | | | | | | | | | | | |
Description | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | (In millions of dollars) | |
Money market funds | | $ | 2.3 | | | $ | 2.3 | | | $ | - | | | $ | - | |
Available-for-sale investment | | | 37.7 | | | | 37.7 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Total assets at fair value | | $ | 40.0 | | | $ | 40.0 | | | $ | - | | | $ | - | |
| | Fair Value Measurements on a Recurring Basis | |
| | As of Year-End 2011 | |
| | | | | | | | | | | | |
Description | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | (In millions of dollars) | |
Money market funds | | $ | 2.0 | | | $ | 2.0 | | | $ | - | | | $ | - | |
Available-for-sale investment | | | 27.1 | | | | 27.1 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Total assets at fair value | | $ | 29.1 | | | $ | 29.1 | | | $ | - | | | $ | - | |
Money market funds as of January 2,year-end 2012 and 2011 represent investments in money market accounts, of which $2.9 million is included in cash and equivalents and $1.2 million of restricted cash is included in prepaid expenses and other current assets on the consolidated balance sheet. Money market funds as of January 3, 2010 represent investments in money market accounts, all of which are restricted cash and are included in prepaid expenses and other current assets on the consolidated balance sheet. The valuations were based on quoted market prices of those accounts as of the respective period end.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
2. Fair Value Measurements (continued)
Available-for-sale investment represents the Company’s investment in Temp Holdings Co., Ltd.Ltd. (“Temp Holdings”) and is included in other assets on the consolidated balance sheet. The valuation is based on the quoted market price of Temp Holdings stock on the Tokyo Stock Exchange as of the period end. The unrealized gain of $1.0$13.1 million pretax and net of tax for the year ended January 2, 20112012 and $1.6unrealized loss of $2.1 million pretax and net of tax for the year ended January 3, 20102011 was recorded in other comprehensive income, as well as in accumulated other comprehensive income, a component of stockholders’ equity.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
2. Fair Value Measurements (continued)
During 2010, the Company entered into two forward foreign currency exchange contracts to offset the variability in exchange rates on its yen-denominated debt. These contracts, which are included on a net basis in prepaid expenses and other current assets on the consolidated balance sheet, are valued using market exchange rates and are not designated as hedging instruments. Accordingly, gains and losses resulting from recording the foreign exchange contracts at fair value are reported in other expense, net on the consolidated statement of earnings, and amounted to a gain of $1.6 million for the year ended January 2, 2011. At January 2, 2011, the Company had an open forward foreign currency exchange contract with an expiration date of less than one year to buy foreign currencies with a U.S. dollar equivalent of $6.1 million. The Company does not use financial instruments for trading or speculative purposes.
During 2008, the Company recorded in the asset impairments line of the consolidated statement of earnings an other-than-temporary impairment of $18.7 million related to the investment in Temp Holdings.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis, such as when there is evidence of impairment. In 2010, management assessed the viability of certain incomplete software projects in Europe and the U.S. Based on the estimated costs to complete, management terminated the projects and recorded impairment charges of $2.0 million. After the impairment charges, the remaining balance related to these software projects was zero, which represented the fair value at January 2, 2011.
Continuing operating losses in the Company’s OCG reporting unit were deemed to be a triggering event for purposes of assessing goodwill for impairment during the second quarter of 2010. Accordingly, we tested goodwill related to OCG and determined that OCG goodwill was not impaired. Additionally, weWe completed our annual impairment test for all reporting units in the fourth quarter for the fiscal year ended January 2,2012 and 2011 and determined that goodwill was not impaired. The
For the Americas Commercial and PT reporting units in 2012, we completed a qualitative assessment for the annual goodwill impairment test and determined it was more likely than not that the fair value of the reporting units was more than its carrying value. In conducting the qualitative assessment, we assessed the totality of relevant events and circumstances that affect the fair value or carrying value of a reporting unit. Such events and circumstances included macroeconomic conditions, industry and competitive environment considerations, overall financial performance, reporting unit specific events and market considerations. We considered recent valuations of our reporting units, including the magnitude of the difference between the most recent fair value estimate and the carrying value. We considered both positive and adverse events and circumstances and assessed the extent to which each of the events and circumstances identified affected the comparison of a reporting unit's fair value with its carrying value.
For the APAC PT and OCG reporting units in 2012 and all reporting units in 2011, we completed a step one quantitative test and the estimated fair value of each reporting unit significantly exceeded its related carrying value.
Our analysis used significant assumptions by segment, including: expected future revenue and expense growth rates, profit margins, cost of capital, discount rate and forecasted capital expenditures. Our revenue projections assumed near-term growth consistent with current year results, followed by long-term modest growth. Assumptions and estimates about future cash flows and discount rates are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and internal forecasts. Our revenue projections assumedFor example, a moderate recovery10% reduction in our growth rate assumptions would not result in the near term, followed by long-term modest growth.estimated fair value falling below book value for any of our segments.
In 2012, management made the seconddecision to abandon the PeopleSoft billing system implementation project in the U.S., Canada and Puerto Rico and accordingly, recorded impairment charges of $3.1 million representing previously capitalized costs associated with this project. In 2010, management assessed the viability of certain incomplete software projects in Europe and the U.S. Based on the estimated costs to complete, management terminated the projects and recorded impairment charges of $2.0 million. After the impairment charges, there were no amounts remaining on our consolidated balance sheet related to these software projects.
3. Acquisition
To establish the Company’s presence in the Brazilian market, we acquired the stock of Tradição Planejamento e Tecnologia de Serviços S.A. and Tradição Tecnologia e Serviços Ltda. (collectively, “Tradição”), a national service provider in Brazil, during the fourth quarter of 2009, due to significantly worse than anticipated economic conditions and the impacts to our business, we revised our internal forecasts2011 for all of our segments, which we deemed to be a triggering event for purposes of assessing goodwill for impairment. Accordingly, goodwill at all of our reporting units was tested for impairment$6.6 million in the second quarter of 2009. As a result, we recorded a goodwill impairment loss of $50.5 million, of which $16.4 million related tocash. Tradição is included the Americas Commercial reporting unit, $22.0 million related to the EMEA PT reporting unit and $12.1 million related to the APAC Commercial reporting unit. The expense was recorded in the asset impairments line on the consolidated statement of earnings.operating segment.
We evaluate long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, based on estimated undiscounted future cash flows. The Company’s estimates as of June 28, 2009 resulted in a $2.1 million reduction in the carrying value of long-lived assets and intangible assets in Japan. Additionally, the Company’s estimates as of September 27, 2009 resulted in a $0.5 million reduction in the carrying value of long-lived assets and intangible assets in Europe.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
2. Fair Value Measurements
3. Acquisition (continued)
During 2008, we determined that
The following table summarizes the estimated fair valuevalues of the assets acquired and liabilities assumed as of the date of the acquisition along with measurement period adjustments recognized during 2012:
| | Original | | | | | | Revised | |
| | Allocation | | | Adjustments | | | Allocation | |
| | (In millions of dollars) | |
Current assets | | $ | 6.3 | | | $ | - | | | $ | 6.3 | |
Goodwill | | | 22.9 | | | | (0.1 | ) | | | 22.8 | |
Identified intangibles | | | 5.3 | | | | 0.4 | | | | 5.7 | |
Other noncurrent assets | | | 0.7 | | | | - | | | | 0.7 | |
Current liabilities | | | (14.4 | ) | | | (0.6 | ) | | | (15.0 | ) |
Noncurrent liabilities | | | (14.2 | ) | | | 0.3 | | | | (13.9 | ) |
| | | | | | | | | | | | |
Total purchase price | | $ | 6.6 | | | $ | - | | | $ | 6.6 | |
The acquisition adjustments relate to changes in Tradição’s estimated identified intangibles balance, acquired contingency reserves and tax liabilities assumed.
Included in the assets purchased was approximately $5.0 million of intangible assets associated with customer lists. These assets will be amortized over approximately 7 years based on the expected cash flows and will have no residual value.
4. Restructuring
In December 2012, the Chief Executive Officer of Kelly Services, Inc. authorized a restructuring plan for our EMEA Commercial reporting unitoperations (“2012 Plan”). The 2012 Plan was less than its carrying value. As athe result we recognized a goodwill impairment loss of $50.4 millionmanagement’s strategic review of operations in EMEA, which identified under-performing locations and the EMEA Commercial reporting unit during the fourth quarter of 2008. This expense was recorded in the asset impairments line on the consolidated statement of earnings. Additionally, the Company tested its long-lived assets in the U.K.opportunity for impairment as of December 28, 2008, resulting in an impairment charge of $11.4 million, which was recorded in the asset impairments line of the Company’s consolidated statement of earnings. The impairment primarily included computer software and leasehold improvements.operational cost savings.
3. Acquisitions
During 2009, we made the following payments: $5.7 million earnout payment related to the 2007 acquisition of access AG, $1.0 million related to the 2007 acquisition of CGR/seven LLC, $0.6 million earnout payment related to the 2006 acquisition of The Ayers Group and $0.2 million earnout payment related to the 2008 acquisition of Toner Graham.
During 2008, we made the following net cash payments: $13.0 million related to the acquisition of the Portuguese subsidiaries of Randstad Holding N.V., $9.1 million related to the acquisition of Toner Graham, $7.6 million related primarily to the acquisition of access AG and $3.0 million related to the acquisition of CGR/seven LLC.
As of January 2, 2011, there are no remaining contingent earnout payments related to any acquisitions from previous years.
4. Restructuring
Restructuring costs incurred in 2012 totaled income of $0.9 million. This amount is comprised of the following: $2.0 million of severance and lease termination costs for EMEA Commercial operations which are in the process of closure or consolidation under the 2012 Plan, and income of $2.9 million related to revisions of the estimated lease termination costs for EMEA Commercial branches that closed in prior years (“Prior Years’ Plans”). Restructuring costs incurred in 2011 amounted to expense of $2.8 million and relate to restructuring costs under the Prior Years’ Plans. Restructuring costs incurred in 2010 totaledamounted to expense of $7.2 million and primarily related to severance costs for the corporate headquarters and severance and lease termination costs for branches in the EMEA Commercial and APAC Commercial segments that were in the process of closure at the end of 2009. Restructuring costs totaled $29.9 million in 2009 and $6.5 million in 2008, and primarily related to global severance, lease terminations, asset write-offs and other miscellaneous costs incurred in connection with the reduction of approximately 1,900 permanent employees and the consolidation, sale or closure of approximately 240 branch locations. These costs were reported as a component of SG&A expenses. Total costs incurred since July 2008 for the restructuring program amounted to $43.6 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
4. Restructuring (continued)
A summary of our balance sheet accrual related to the global restructuring costs follows (in millions of dollars):
| | | | |
|
Balance as of December 28, 2008 | | $ | 4.1 | |
| | | | |
Additions charged to operations | | | 29.9 | |
Noncash charges | | | (1.6 | ) |
Reductions for cash payments | | | (19.7 | ) |
| | | |
| | | | |
Balance as of January 3, 2010 | | $ | 12.7 | |
| | | | |
Additions charged to operations | | | 7.2 | |
Noncash charges | | | (0.1 | ) |
Reductions for cash payments | | | (15.1 | ) |
| | | |
| | | | |
Balance as of January 2, 2011 | | $ | 4.7 | |
| | | |
Balance as of year-end 2010 | | $ | 4.7 | |
| | | | |
Amounts charged to operations - Prior Years' Plans | | | 2.8 | |
Reductions for cash payments | | | (3.0 | ) |
| | | | |
Balance as of year-end 2011 | | | 4.5 | |
| | | | |
Amounts credited to operations - Prior Years' Plans | | | (2.9 | ) |
Amounts charged to operations - 2012 Plan | | | 2.0 | |
Reductions for cash payments | | | (1.2 | ) |
| | | | |
Balance as of year-end 2012 | | $ | 2.4 | |
The remaining balance of $4.7$2.4 million as of January 2, 2011year-end 2012 represents primarily severance and future lease payments and is expected to be paid by 2016.2015. On a quarterly basis, the Company reassesses the accrual associated with restructuring costs and adjusts it as necessary.
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5. Investment in Equity Affiliate
In 2012, we purchased the remaining 30% noncontrolling interest in our China subsidiaries, and recorded a charge to paid-in capital of $1.2 million for the difference between the carrying value of the noncontrolling interest and the fair value of the consideration provided.
On July 24, 2012, we entered into an agreement with Temp Holdings Co., Ltd. (“Temp Holdings”) to form a venture, TS Kelly Workforce Solutions (“TS Kelly”), in order to expand both companies’ presence in North Asia. On November 1, 2012, we contributed our China, Hong Kong and South Korea subsidiaries in exchange for a 49% ownership interest in TS Kelly. Consequently, we deconsolidated the operations of those entities and recorded a $5.1 million investment in other assets on the consolidated balance sheet, which represented the fair value of our ownership interest in TS Kelly at year-end 2012. The operating results of our interest in TS Kelly will be accounted for on a one-quarter lag under the equity method; accordingly, our consolidated financial statements for 2012 do not include operating results for TS Kelly.
We recorded a loss of $0.7 million in other expense, net, which represented the difference between the carrying value of net assets contributed to the venture and the fair value of our retained investment in TS Kelly. As part of this transaction, we allocated a pro-rata share of goodwill related to the contributed entities in our APAC PT and OCG segments amounting to $0.6 million.
The amount due to or due from TS Kelly is immaterial as of year-end 2012.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
5.
6. Goodwill
There were no changes in the net carrying amount of goodwill for the fiscal year 2010.
The changes in the net carrying amount of goodwill for the fiscal year 2009 were as follows:years 2012 and 2011 are included in the tables below. See Acquisition footnote for a description of adjustments to Americas Commercial goodwill and Investment in Equity Affiliate footnote for a description of adjustments to APAC PT and OCG goodwill.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Goodwill, Net | | | Accumulated Impairment Losses | |
| | Balance | | | | | | | Balance | | | Balance | | | | | | | Balance | |
| | as of | | | Impairment | | | as of | | | as of | | | Impairment | | | as of | |
| | Dec. 28, 2008 | | | Losses | | | Jan. 3, 2010 | | | Dec. 28, 2008 | | | Losses | | | Jan. 3, 2010 | |
| | (In millions of dollars) | | | (In millions of dollars) | |
Americas | | | | | | | | | | | | | | | | | | | | | | | | |
Americas Commercial | | $ | 16.4 | | | $ | (16.4 | ) | | $ | — | | | $ | — | | | $ | (16.4 | ) | | $ | (16.4 | ) |
Americas PT | | | 39.2 | | | | — | | | | 39.2 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | |
Total Americas | | | 55.6 | | | | (16.4 | ) | | | 39.2 | | | | — | | | | (16.4 | ) | | | (16.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
EMEA | | | | | | | | | | | | | | | | | | | | | | | | |
EMEA Commercial | | | — | | | | — | | | | — | | | | (50.4 | ) | | | — | | | | (50.4 | ) |
EMEA PT | | | 22.0 | | | | (22.0 | ) | | | — | | | | — | | | | (22.0 | ) | | | (22.0 | ) |
| | | | | | | | | | | | | | | | | | |
Total EMEA | | | 22.0 | | | | (22.0 | ) | | | — | | | | (50.4 | ) | | | (22.0 | ) | | | (72.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
APAC | | | | | | | | | | | | | | | | | | | | | | | | |
APAC Commercial | | | 12.1 | | | | (12.1 | ) | | | — | | | | — | | | | (12.1 | ) | | | (12.1 | ) |
APAC PT | | | 1.8 | | | | — | | | | 1.8 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | |
Total APAC | | | 13.9 | | | | (12.1 | ) | | | 1.8 | | | | — | | | | (12.1 | ) | | | (12.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
OCG | | | 26.3 | | | | — | | | | 26.3 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Total | | $ | 117.8 | | | $ | (50.5 | ) | | $ | 67.3 | | | $ | (50.4 | ) | | $ | (50.5 | ) | | $ | (100.9 | ) |
| | | | | | | | | | | | | | | | | | |
Goodwill excluding impairment losses as of January 2, 2011 | | | | | | | | | | | | | | | | | | |
| | (In millions of dollars) | |
Americas | | | | | | | | | | | | | | | | | | |
Americas Commercial | | $ | 39.3 | | | $ | (16.4 | ) | | $ | (0.1 | ) | | $ | 39.2 | | | $ | (16.4 | ) | | $ | 22.8 | |
Americas PT | | | 39.2 | | | | - | | | | - | | | | 39.2 | | | | - | | | | 39.2 | |
Total Americas | | | 78.5 | | | | (16.4 | ) | | | (0.1 | ) | | | 78.4 | | | | (16.4 | ) | | | 62.0 | |
EMEA | | | | | | | | | | | | | | | | | | | | | | | | |
EMEA Commercial | | | 50.4 | | | | (50.4 | ) | | | - | | | | 50.4 | | | | (50.4 | ) | | | - | |
EMEA PT | | | 22.0 | | | | (22.0 | ) | | | - | | | | 22.0 | | | | (22.0 | ) | | | - | |
Total EMEA | | | 72.4 | | | | (72.4 | ) | | | - | | | | 72.4 | | | | (72.4 | ) | | | - | |
APAC | | | | | | | | | | | | | | | | | | | | | | | | |
APAC Commercial | | | 12.1 | | | | (12.1 | ) | | | - | | | | 12.1 | | | | (12.1 | ) | | | - | |
APAC PT | | | 1.8 | | | | - | | | | (0.4 | ) | | | 1.4 | | | | - | | | | 1.4 | |
Total APAC | | | 13.9 | | | | (12.1 | ) | | | (0.4 | ) | | | 13.5 | | | | (12.1 | ) | | | 1.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
OCG | | | 26.3 | | | | - | | | | (0.2 | ) | | | 26.1 | | | | - | | | | 26.1 | |
Consolidated Total | | $ | 191.1 | | | $ | (100.9 | ) | | $ | (0.7 | ) | | $ | 190.4 | | | $ | (100.9 | ) | | $ | 89.5 | |
| | | | | Losses as ofYear-End 2010 | | | | | | | | | Losses as ofYear-End 2011 | | | | |
| | (In millions of dollars) | |
Americas | | | | | | | | | | | | | | | | | | |
Americas Commercial | | $ | 16.4 | | | $ | (16.4 | ) | | $ | 22.9 | | | $ | 39.3 | | | $ | (16.4 | ) | | $ | 22.9 | |
Americas PT | | | 39.2 | | | | - | | | | - | | | | 39.2 | | | | - | | | | 39.2 | |
Total Americas | | | 55.6 | | | | (16.4 | ) | | | 22.9 | | | | 78.5 | | | | (16.4 | ) | | | 62.1 | |
EMEA | | | | | | | | | | | | | | | | | | | | | | | | |
EMEA Commercial | | | 50.4 | | | | (50.4 | ) | | | - | | | | 50.4 | | | | (50.4 | ) | | | - | |
EMEA PT | | | 22.0 | | | | (22.0 | ) | | | - | | | | 22.0 | | | | (22.0 | ) | | | - | |
Total EMEA | | | 72.4 | | | | (72.4 | ) | | | - | | | | 72.4 | | | | (72.4 | ) | | | - | |
APAC | | | | | | | | | | | | | | | | | | | | | | | | |
APAC Commercial | | | 12.1 | | | | (12.1 | ) | | | - | | | | 12.1 | | | | (12.1 | ) | | | - | |
APAC PT | | | 1.8 | | | | - | | | | - | | | | 1.8 | | | | - | | | | 1.8 | |
Total APAC | | | 13.9 | | | | (12.1 | ) | | | - | | | | 13.9 | | | | (12.1 | ) | | | 1.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
OCG | | | 26.3 | | | | - | | | | - | | | | 26.3 | | | | - | | | | 26.3 | |
Consolidated Total | | $ | 168.2 | | | $ | (100.9 | ) | | $ | 22.9 | | | $ | 191.1 | | | $ | (100.9 | ) | | $ | 90.2 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and January 3, 2010 was $168.2 million.Subsidiaries
6.
7. Other Assets
Included in other assets are the following:
| | | | | | | | |
| | 2010 | | | 2009 | |
| | (In millions of dollars) | |
Deferred compensation plan (See Retirement Benefits footnote) | | $ | 87.8 | | | $ | 78.3 | |
Available-for-sale investment (See Fair Value Measurements footnote) | | | 27.8 | | | | 23.6 | |
Workers’ compensation receivable | | | 14.3 | | | | 10.8 | |
Intangibles, net of accumulated amortization of $18.1 million and $15.3 million, respectively | | | 9.1 | | | | 13.0 | |
Other | | | 15.5 | | | | 16.5 | |
| | | | | | |
| | | | | | | | |
Other assets | | $ | 154.5 | | | $ | 142.2 | |
| | | | | | |
| | 2012 | | | 2011 | |
| | (In millions of dollars) | |
Deferred compensation plan (See Retirement Benefits footnote) | | $ | 106.3 | | | $ | 88.2 | |
Available-for-sale investment (See Fair Value Measurements footnote) | | | 37.7 | | | | 27.1 | |
Workers' compensation receivable | | | 15.0 | | | | 15.1 | |
Intangibles, net of accumulated amortization of $21.8 million and $20.2 million, respectively | | | 8.1 | | | | 11.9 | |
Investment in equity affiliate (See Investment in Equity Affiliate footnote) | | | 5.1 | | | | - | |
Other | | | 8.7 | | | | 9.8 | |
| | | | | | | | |
Other assets | | $ | 180.9 | | | $ | 152.1 | |
Intangible amortization expense which is included in SG&A expenses, was $3.3 million, $2.5 million and $3.6 million $4.9 millionin 2012, 2011 and $4.6 million in 2010, 2009 and 2008, respectively. Included in accumulated amortization as of year-end 2009 is $2.2 million related to the impairment of intangible assets in Japan and Europe.
Included in the Other line item is a $3.4 million note receivable from a staffing entity in Brazil. The terms of the note will allow us to convert the principal amount of the note into a 40% ownership interest in the entity. If we were to convert the note, we also have the right to exercise, for consideration, options to increase our interest in that entity to 51% or 100%.
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