UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
x | | |
| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended December 28, 2008January 2, 2011
¨ | | |
| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to Commission file number 0-1088 (Exact Name of Registrant as specified in its Charter)
| | |
Delaware | | |
|
| Delaware | | 38-1510762 |
| |
| (State or other jurisdiction of incorporation or organization)
| | (IRS Employer Identification Number) |
| | |
| incorporation or organization) | | |
| | |
| 999 West Big Beaver Road, Troy, Michigan | | 48084 |
| |
| (Address of Principal Executive Office) | | (Zip Code) |
(248) 362-4444
(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
| | |
|
Title of each class | | Name of each exchange on which registered |
| Class A Common | | NASDAQ Global Market |
| Class B Common | | NASDAQ Global Market |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes¨o NoxþIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes¨o NoxþIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesxþ No¨oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yeso Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
xþIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| | | | | | |
|
| Large accelerated filer | | xo | | Accelerated filerþ | | Non-accelerated filero | | Smaller reporting company¨o |
| | | |
Non-accelerated filer | | ¨ (Do(Do not check if a smaller reporting company) | | Smaller reporting company | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
¨o No
xþ
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, was approximately
$551,245,963.$390,606,685.
Registrant had
31,315,57533,252,100 shares of Class A and
3,459,7853,459,885 of Class B common stock, par value $1.00, outstanding as of February
2, 2009.7, 2011.
Documents Incorporated by Reference The proxy statement of the registrant with respect to its 20092011 Annual Meeting of Stockholders is incorporated by reference in Part III.
TABLE OF CONTENTS
Unless the context otherwise requires, throughout this Annual Report on Form 10-K the words “Kelly,” “Kelly Services,” “the Company,” “we,” “us” and “our” refer to Kelly Services, Inc. and its consolidated subsidiaries.
ITEM 1. BUSINESS.History and Development of Business
Founded by William R. Kelly in 1946, Kelly Services has
delivered pioneeringdeveloped innovative workforce solutions
tofor customers in a variety of industries throughout our
62-year64-year history. Our range of solutions and geographic coverage has grown steadily over the years to match the expanding needs of our customers.
We have evolved from a United States-based company concentrating primarily on traditional office staffing into a global workforce solutions leader with a breadth of specialty businesses. We currently assign professional and technical employees in the fields of creative services, education, legal and health care—while ranking as one of the world’s largest scientific staffing providers, and among the leaders in information technology, engineering and financial staffing. These specialty service lines complement our
traditional expertise in office services, contact center, light industrial and electronic assembly staffing.
We alsoIn addition to staffing, we offer innovative talent management solutions for our customers including outsourcing, consulting, recruitment, career transition and vendor management services.
Geographic Breadth of Services Headquartered in Troy, Michigan, we
serve customers in all major staffing markets throughout the world. We provide temporary employment for approximately
650,000530,000 employees annually to a variety of customers around the
globe—globe — including more than 90 percent of the
Fortune500 companies.
We offer
Kelly’s workforce solutions
are provided to a diversified group of customers through offices in three regions: the
Americas, Europe, the Middle East, and Africa (“EMEA”)and
Asia Pacific (“APAC”).
Description of Business Segments Our operations are divided into seven principal business segments:
Americas Commercial,Americas Professional and Technical
(“Americas PT”), EMEA Commercial,EMEA Professional and Technical
(“EMEA PT”),
APAC Commercial,APAC Professional and Technical
(“(“APAC PT”)and
the Outsourcing and Consulting Group
(“OCG”).Our Americas Commercial segment includes:Kelly Office Services, offering trained employees who work in word processing, data entry and as administrative support staff;KellyConnect, providing staff on-site and remotely for contact centers, technical support hotlines and telemarketing units;Kelly Educational Staffing, the first nationwide program supplying qualified substitute teachers;Kelly Marketing Services, including support staff for seminars, sales and trade shows;Kelly Electronic Assembly Services, providing technicians to serve the technology, aerospace and pharmaceutical industries;Kelly Light Industrial Services, placing maintenance workers, material handlers assemblers, and more;assemblers;KellySelect, a temporary to full-time service that provides both customers and temporary staff the opportunity to evaluate their relationship before making a full-time employment decision; andKellyDirect, a permanent placement service used across all staffing business units.
2
Our Americas PT segment includes a number of industry-specific services:
CGR/seven, placing employees in creative services positions;
Kelly Automotive Services Group, placing employees in a variety of technical, non-technical, and administrative positions with major automotive manufacturers and their suppliers;Kelly Engineering Resources, supplying engineering professionals across all disciplines including aeronautical, chemical, civil/structural, electrical/instrumentation, environmental, industrial, mechanical, petroleum, pharmaceutical, quality and telecommunications;
Kelly Financial Resources, serving the needs of corporate finance departments, accounting firms and financial institutions with professional personnel;
Kelly Government Solutions, providing a full spectrum of talent management solutions to the
USU.S. federal government;
Kelly Healthcare Resources, providing all levels of healthcare specialists and professionals for work in hospitals, ambulatory care centers, HMOs and other health insurance companies;
Kelly IT Resources, placing information technology specialists across all IT disciplines;
Kelly Law Registry, placing legal professionals including attorneys, paralegals, contract administrators, compliance specialists and legal administrators; and
Kelly Scientific Resources, providing entry-level to Ph.D. professionals to a broad spectrum of scientific and clinical research industries. Our temporary-to-hire service,
KellySelect, and permanent placement service,
KellyDirect, are also offered in this segment.
Our EMEA Commercial segment provides a similar range of commercial staffing services as described for our Americas Commercial segment above, including:
Kelly Office Services,
KellyConnect,
Kelly Educational Staffing,
Kelly Light Industrial Servicesand
KellySelect. Additional service areas of focus include
Kelly Catering and Hospitality,providing
various chefs, porters and hospitality representatives; and
Kelly Industrial,supplying manual workers to semi-skilled professionals in a variety of trade, non-trade and operational positions.
Our EMEA PT segment provides many of the same services as described for our Americas PT segment,
above, including:
Kelly Engineering Resources, Kelly Financial Resources, Kelly Healthcare Resources, Kelly IT ResourcesandKelly Scientific ResourcesandKellySelect.
Kelly is also placing increased emphasis on cross-border recruitment for professional and technical opportunities across this region through ourKelly International Recruitment service line.Our APAC Commercial segment
provides manyoffers a similar range of
the same commercial staffing services as described for our Americas and EMEA Commercial segments above,
including:Kelly Office Services,KellyConnect,Kelly Marketing Services,Kelly Light Industrial Services,Kelly Hospitality, KellySelect, andKellyDirect. An additional service area includesKelly Exhibition & Promotions,which focuses on providingthrough staffing solutions
for trade showsthat include permanent placement, temporary staffing, temporary to full-time staffing and
exhibitions.vendor on-site.
Our APAC PT segment provides many of the same services as described for our Americas and EMEA PT segments,
above, including:
Kelly Engineering Resources, Kelly FinancialIT Resources Kelly IT Resources,and Kelly Scientific Resources KellySelect, . Additional service areas includeKelly Selectionand
KellyDirectKelly Executive.(Australia and New Zealand only) which offer mid- to senior-level search and selection to identify leaders who help organizations grow, in core practice areas such as HR, Sales and Marketing, Finance, Procurement and General Management.
Our Outsourcing and Consulting Group segment delivers integrated talent management solutions configured to satisfy our customers’ needs across multiple regions, skill sets and the entire spectrum of human
resources challenge.resources. Services in this segment include:
Recruitment Process Outsourcing (“RPO”), offering
end-to-end talent acquisition
and HR solutions,
from RPO and HR consulting toincluding customized recruitment projects;
Contingent Workforce Outsourcing (“CWO”), providing globally managed service solutions that integrate supplier and vendor management technology partners to optimize contingent workforce spend;
Independent Contractor Solutions, delivering evaluation, classification and risk management services that
improve success withenable safe access to this critical talent pool;
Payroll Process Outsourcing (“PPO”), providing centralized payroll processing solutions globally for our customers;Business Process Outsourcing (“BPO”), offering full staffing and operational management of non-core functions or departments;
HR Consulting, providing human capital solutions from consulting resources and services, to global mobility and strategic workforce planning;Career Transition & Organizational Effectiveness, offering a range of custom solutions to maintain effective operations and maximize employee motivation and performance in
the wake of corporate restructurings; and
Executive Search, providing leadership in executive placement worldwide.
Financial information regarding our industry segments is included in the Segment DisclosureDisclosures note to our consolidated financial statements presented in Part II, Item 8 of this report.
3
Kelly’s philosophy is rooted in our conviction that we can and do make a difference on a daily basis—for our customers, in the lives of our employees, in the local communities we serve and in our industry.
Our vision is “To provide the world’s best workforce solutions.” We aspire to be a strategic business partner to our customers, and strive to assist them in running efficient, profitable organizations. Our consultative approach to customer relationships leverages a collective expertise spanning more than 60 years of thought leadership, while Kelly solutions are customizable to benefit them on any scope or scale required.
For most of our customers, navigating the human capital arena has never been more complex. As the use of contingent labor, consultants, and independent contractors becomes more prevalent and critical to the ongoing success of our customer base—our core competencies are refined to help them realize their respective business objectives.
Whether providing traditionalKelly offers a comprehensive array of outsourcing and consulting services, as well as world-class staffing
services, streamlined technology, or our integrated suite of talent management solutions—on a temporary, temp-to-hire and permanent placement basis. Kelly will continue to deliver the strategic expertise our customers need to transform their workforce management challenges into
opportunity.opportunities.
We own numerous service marks that are registered with the United States Patent and Trademark
Office, the European Union Community Trademark Office and numerous individual country trademark
offices.
Our quarterly operating results are affected by the seasonality of our customers’ businesses. Demand for staffing services historically has been lower during the first and fourth quarters, in part as a result of holidays, and typically increases during the second and third quarters of the year.
Working CapitalWe believe there are no unusual or special
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
the staffing services industry.periods of growth.
We are not dependent on any single customer, or a limited segment of customers. Our largest single customer accounted for approximately
fourthree percent of total revenue in
2008.2010.
Although we conduct business under various federal, state, and local government contracts, they do not account for a significant portion of our business.
The worldwide temporary staffing industry is competitive and highly fragmented. In the 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. In
2008,2010, our largest competitors were
Allegis Group, Adecco
S.A.S.A, Manpower Inc.,
Manpower,Robert Half International, Inc., Randstad Holding N.V.
, Spherion Corporation, Allegis and SFN Group,
and Robert Half International, Inc.
Key factors that influence our success are geographic coverage, breadth of service, quality of service, and price.
Geographic presence is of utmost importance,important, as temporary employees are generally unwilling to travel great distances for assignment, and customers prefer working with companies in their local market. Breadth of service, or ability to manage staffing suppliers, has become more critical as customers seek “one-stop shopping” for all their staffing needs.
4
Quality of service is highly dependent on the availability of qualified, competent temporary employees, and our ability to recruit, screen, train, retain, and manage a pool of employees who match the skills required by particular customers.
Conversely, duringDuring an economic downturn, we must balance competitive pricing pressures with the need to retain a qualified workforce. Price competition in the staffing industry is intense—particularly for office clerical and light industrial personnel—and pricing pressure from customers and competitors continues to be significant.
Because we are involved in a service business, federal, state or local laws that regulate the discharge of materials into the environment do not materially impact us.
We employ approximately
1,2001,100 people at our corporate headquarters in Troy, Michigan, and approximately
8,9006,900 staff members in our international network of
company-owned branch offices. In
2008,2010, we assigned approximately
650,000530,000 temporary employees with a variety of customers around the globe.
While services may be provided inside the facilities of customers, we remain the employer of record for our temporary employees. We retain responsibility for employee assignments, the employer’s share of all applicable payroll taxes and the administration of the employee’s share of these taxes.
For information regarding sales, earnings from operations and long-lived assets by domestic and foreign operations, please refer to the information presented in the Segment Disclosures note to our consolidated financial statements, presented in Part II, Item 8 of this report.
Access to Company Information We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (“SEC”). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
We make available, free of charge, through our Internet website, and by responding to requests addressed to our
directorvice president of investor relations, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our website address is: www.kellyservices.com. The information contained on our website, or on other websites linked to our website, is not part of this report.
ITEM 1A. RISK FACTORS.We operate in a highly competitive industry with low barriers to entry, and may be unable to compete successfully against existing or new competitors.
The worldwide staffing services market is highly competitive with limited barriers to entry. We compete in global, national, regional and local markets with full-service and specialized temporary staffing companies. While the majority of our competitors are significantly smaller than us, several competitors, including Allegis Group, Adecco S.A.S.A, Manpower Inc., ManpowerRobert Half International, Inc., Randstad Holding N.V. and SFN Group, Inc., Spherion Corporation, Allegis Group and Robert Half International, Inc.,have substantial marketing and financial resources. In particular, Adecco S.A.,S.A, Manpower Inc., and Randstad Holding N.V. are considerably larger than we are and, thus, have significantly more marketing and financial resources than we do. Price competition in the staffing industry is intense, particularly for the provision of office clerical and light industrial personnel. We expect that the level of competition will remain high, which could limit our ability to maintain or increase our market share or profitability.
There has been a significant increase in the5
The number of customers consolidating their staffing services purchases with a single provider or small group of
providers. The trendproviders continues to
consolidate purchases hasincrease which, in some cases,
mademay make it more difficult for us to obtain or retain customers. We also face the risk that our current or prospective customers may decide to provide similar services internally. As a result, there can be no assurance that we will not encounter increased competition in the future.
Our business is significantly affected by fluctuations in general economic conditions. Demand for staffing services is significantly affected by the general level of economic activity and unemploymentemployment in the United States and the other countries in which we operate. When economic activity increases, temporary employees are often added before full-time employees are hired. As economic activity slows, however, many companies reduce their use of temporary employees before laying off full-time employees. We may also experience more competitive pricing pressure during periods of economic downturn. A substantial portion of our revenues and earnings are generated by our business operations in the United States. Any significant economic downturn in the United States or certain other countries in which we operate has a material adverse effect on our business, financial condition and results of operations. For 2008,
In 2009, the already-weak economic conditions and employment trends
in the U.S., present at the start of the year
continued to worsenworsened as the year progressed.
The most notable deterioration occurred in the fourth quarter of 2008 as the economic slowdown became more evident outside the U.S. and anxiety over the global financial crisis intensified. The weakened global economy significantly affected our earnings performance in
2008. We2009. While our earnings performance improved during 2010, we cannot
predict whenbe certain that the global economy will
begincontinue to recover
or when and
to what extentthat the conditions affecting the temporary staffing industry will
continue to improve. We also cannot ensure that the actions we have taken or may take in the future in response to these challenges will
continue to be successful or that our business, financial condition or results of operations will not continue to be adversely impacted by these conditions.
We may not achieve the intended effects of our business strategy.
Our business strategy focuses on improving profitability through scale and specialization, particularly with our professional and technical and OCG businesses. We have implemented steps to increase our presence in the commercial staffing markets, grow our higher margin specialty staffing and grow our outsourcing and consulting business. We plan to implement cost-efficient service delivery models to enable local teams to focus on profit-generating activities and relationships. If we are not successful in achieving these objectives, our revenues, costs and overall profitability could be negatively affected. If we are unable to execute our business strategy effectively, our productivity and cost competitiveness could be negatively affected.
Our loss of major customers or the deterioration of their financial condition or prospects could have a material adverse effect on our business. Our business strategy is increasingly focused on serving large corporate customers through high volume global service agreements. While our strategy is intended to enable us to increase our revenues and earnings from our major corporate customers, the strategy also exposes us to increased risks arising from the possible loss of major customer accounts. In addition, some of our customers are in industries, such as the automotive and manufacturing industries, that have experienced adverse business and financial conditions in recent years. The deterioration of the financial condition or business prospects of these customers could reduce their need for temporary employment services, and result in a significant decrease in the revenues and earnings we derive from these customers.
Impairment charges relating to our goodwill and long-lived assets could adversely affect our results of operations.
We regularly monitor our goodwill and long-lived assets for impairment indicators. In conducting our goodwill impairment testing, we compare the fair value of each of our reporting units to the related net book value. In conducting our impairment analysis of long-lived assets, we compare the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. Changes in economic or operating conditions impacting our estimates and assumptions could result in the impairment of our goodwill or long-lived assets. In the event that we determine that our goodwill or long-lived assets are impaired, we may be required to record a significant charge to earnings that could adversely affect our results of operations.
6
Our customer contracts contain termination provisions that could decrease our future revenues and earnings. Most of our customer contracts can be terminated by the customer on short notice without penalty. Our customers are, therefore, not contractually obligated to continue to do business with us in the future. This creates uncertainty with respect to the revenues and earnings we may recognize with respect to our customer contracts.
We depend on our ability to attract and retain qualified temporary personnel.personnel (employed directly by us or through a third-party supplier).
We depend on our ability to attract qualified temporary personnel who possess the skills and experience necessary to meet the staffing requirements of our customers. We must continually evaluate our base of available qualified personnel to keep pace with changing customer needs. Competition for individuals with proven professional skills is intense, and demand for these individuals is expected to remain strong for the foreseeable future. There can be no assurance that qualified personnel will continue to be available in sufficient numbers and on terms of employment acceptable to us. Our success is substantially dependent on our ability to recruit and retain qualified temporary personnel.
We may be exposed to employment-related claims and losses, including class action lawsuits, thatwhich could have a material adverse effect on our business. Temporary staffing services providers employ and assign personnel in the workplaces of other businesses. The risks of these activities include possible claims relating to:
discrimination and harassment;
wrongful termination or denial of employment;
violations of employment rights related to employment screening or privacy issues;
classification of employees including independent contractors;
employment of illegal aliens;
violations of wage and hour requirements;
retroactive entitlement to employee benefits; and
errors and omissions by our temporary employees, particularly for the actions of professionals such as attorneys, accountants and scientists.
We are also subject to potential risks relating to misuse of customer proprietary information, misappropriation of funds, damage to customer facilities due to negligence of temporary employees, criminal activity and other similar claims. We may incur fines and other losses or negative publicity with respect to these problems. In addition, these claims may give rise to litigation, which could be time-consuming and expensive. In the U.S. and certain other countries in which we operate, new employment and labor laws and regulations have been proposed or adopted that may increase the potential exposure of employers to employment-related claims and litigation. There can be no assurance that the corporate policies we have in place to help reduce our exposure to these risks will be effective or that we will not experience losses as a result of these risks. There can also be no assurance that the insurance policies we have purchased to insure against certain risks will be adequate or that insurance coverage will remain available on reasonable terms or be sufficient in amount or scope of coverage.
Unexpected changes in claim trends on our workers’ compensation and benefit plans may negatively impact our financial condition. We self-insure, or otherwise bear financial responsibility for, a significant portion of expected losses under our workers’ compensation program and medical benefits claims. Unexpected changes in claim trends, including the severity and frequency of claims, actuarial estimates and medical cost inflation could result in costs that are significantly different than initially reported. If future claims-related liabilities increase due to unforeseen circumstances, our costs could increase significantly. There can be no assurance that we will be able to increase the fees charged to our customers in a timely manner and in a sufficient amount to cover increased costs as a result of any changes in claims-related liabilities.
7
Failure to maintain specified financial ratioscovenants in the Company’sour bank credit facilityfacilities, or credit market events beyond our control, could adversely restrict our financial and operating flexibility and subject us to other risks, including inadequate access to capital markets.The Company’sliquidity.
Our Bank Credit
Facility containsFacilities contain covenants that require
the Companyus to maintain specified financial ratios and satisfy other financial conditions.
The abilityDuring 2010, we met all of the
Companycovenant requirements. Our ability to continue to meet these financial covenants,
particularly with respect to interest coverage (see Debt note in the footnotes to the consolidated financial statements), may
not be
affected by events beyond its control.assured. If
the Company defaultswe default under
this or any
other of these requirements, the lenders could declare all outstanding borrowings, accrued interest and fees to be due and payable or significantly increase the cost of the facility.
Our Bank Credit Facility matures in November, 2010. If we are unable to extend or refinance our Bank Credit Facility or the terms applicable to any extension or refinancing are unfavorable to us, our financial condition and results of operations may be materially adversely affected. In these circumstances, there can be no assurance that
the Companywe would have sufficient liquidity to repay or refinance this indebtedness at favorable rates or at all.
Events beyond our control could result in the failure of one or more of our banks, reducing our access to liquidity and potentially resulting in reduced financial and operating flexibility. If broader credit markets were to experience dislocation, our potential access to other funding sources would be limited.
Damage to our key data centers could affect our ability to sustain critical business applications. Many business processes critical to
the Company’sour continued operation are housed in
the Company’sour data center situated within the corporate headquarters complex as well as regional data centers in Asia-Pacific and Europe. Those processes include, but are not limited to, payroll, customer reporting and order management. While we have taken steps to protect
the Company’sthese operations, the loss of a data center would create a substantial risk of business interruption.
Our investment in theour PeopleSoft payroll, billing and accounts receivable project may not yield its intended results. In the fourth quarter of 2004, we commenced
theour PeopleSoft project to replace our payroll, billing and accounts receivable information systems in the United States, Canada, Puerto Rico, the United Kingdom and Ireland. To date we have several modules in production including accounts receivable
in all locations, payroll in Canada,
and payroll and billing in the United Kingdom and
Ireland. We are delaying implementation of the remaining components, including payrollIreland and
billinggeneral ledger in the
United StatesU.S., Puerto Rico and
billingCanada. We anticipate spending approximately $25 to $30 million from 2011 through 2014 to complete the PeopleSoft project. Although the technology is intended to increase productivity and operating efficiencies, the PeopleSoft project may not yield its intended results. Any delays in
Canada, until at least 2010completing, or an inability to successfully complete, this technology initiative or an inability to achieve the anticipated efficiencies could adversely affect our operations, liquidity and
do not have an estimate of the cost for completion.financial condition. There is
also a risk that if the remaining modules are not completed or the cost of completion is prohibitive, an impairment charge relating to all or a portion of the
$6.1$5.5 million capitalized cost of the in-process modules
as of January 2, 2011 could be required.
We are highly dependent on our senior management and the continued performance and productivity of our local management and field personnel. We are highly dependent on the continued efforts of the members of our senior management. We are also highly dependent on the performance and productivity of our local management and field personnel. The loss of any of the members of our senior management may cause a significant disruption in our business. In addition, the loss of any of our local managers or field personnel may jeopardize existing customer relationships with businesses that use our services based on relationships with these individuals. The loss of the services of members of our senior management could have a material adverse effect on our business.
8
Our business is subject to extensive government regulation, which may restrict the types of employment services we are permitted to offer or result in additional or increased taxtaxes, including payroll taxes, or other costs that reduce our revenues and earnings. The temporary employment industry is heavily regulated in many of the countries in which we operate. Changes in laws or government regulations may result in prohibition or restriction of certain types of employment services we are permitted to offer or the imposition of new or additional benefit, licensing or tax requirements that could reduce our revenues and earnings.
In particular, we are subject to state unemployment taxes in the U.S. which typically increase during periods of increased levels of unemployment. There can be no assurance that we will be able to increase the fees charged to our customers in a timely manner and in a sufficient amount to cover increased costs as a result of any changes in laws or government regulations. Any future changes in laws or government regulations,
or interpretations thereof, may make it more difficult or expensive for us to provide staffing services and could have a material adverse effect on our business, financial condition and results of operations.
The net financial impact of recent U.S. healthcare legislation on our results of operations could be significant.
In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Acts”) were signed into U.S. law. The Acts represent comprehensive healthcare reform legislation that, in addition to other provisions, will require that we provide healthcare coverage to our temporary employees in the United States or incur penalties. Although we intend to bill these costs to our customers, there can be no assurance that we will be able to increase the fees charged to our customers in a sufficient amount to cover the increased costs. Additionally, since significant provisions of the Acts will not become effective until 2014, possible future changes to the Acts could significantly impact any estimates we develop during that period. While we are unable at this time to estimate the net impact of the Acts, we believe the net financial impact on our results of operations could be significant.
We conduct a significant portion of our operations outside of the United States and we are subject to risks relating to our international business activities, including fluctuations in currency exchange rates. We conduct our business in all major staffing markets throughout the world. Our operations outside the United States are subject to risks inherent in international business activities, including:
fluctuations in currency exchange rates;
varying economic and political conditions;
differences in cultures and business practices;
differences in tax laws and regulations;
differences in accounting and reporting requirements;
changing and, in some cases, complex or ambiguous laws and regulations; and
Our operations outside the United States are reported in the applicable local currencies and then translated into U.S. dollars at the applicable currency exchange rates for inclusion in our consolidated financial statements. Exchange rates for currencies of these countries may fluctuate in relation to the U.S. dollar and these fluctuations may have an adverse or favorable effect on our operating results when translating foreign currencies into U.S. dollars.
If we fail to maintain effective internal control over our financial reporting, we may cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act, our management is required to include in our Annual Report on Form 10-K a report that assesses the effectiveness of our internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act. Our Annual Report on Form 10-K is also required to include an attestation report of our independent registered public accounting firm on the effectiveness of our internal controls.
Our efforts to comply with Section 404 have resulted in, and are likely to continue to result in, significant costs, the commitment of time and operational resources and management attention. If our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent auditors are unable to attest that our management’s report is fairly stated or they are unable to express an opinion on the effectiveness of our internal controls, our business may be harmed. Market perception of our financial condition and the trading price of our stock may also be adversely affected and customer perception of our business may suffer.
Our controlling stockholder exercises voting control over our company and has the ability to elect or remove from office all of our directors. Terence E. Adderley, the Chairman of our board of directors, and certain trusts with respect to which he acts as trustee or co-trustee, control approximately 92.9%93% of the outstanding shares of Kelly Class B common stock, which is the only class of our common stock entitled to voting rights. Mr. Adderley is therefore able to exercise voting control with respect to all matters requiring stockholder approval, including the election or removal from office of all of our directors.
9
We are not subject to most of the listing standards that normally apply to companies whose shares are quoted on the NASDAQ Global Market. 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 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,
our certificate of incorporation establishes a classified or “staggered” board of directors, which means that only approximately one third of our directors are required to stand for election at each annual meeting of our stockholders. In addition, 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.
In addition, our certificate of incorporation requires the approval of the holders of at least 75% of our Class B common stock for certain transactions involving our company, including a merger, consolidation or sale of all or substantially all of our assets that has not been approved by our board of directors.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.
10
Our stock price may be subject to significant volatility and could suffer a decline in value. The market price of our common stock may be subject to significant volatility. We believe that many factors, including several which are beyond our control, have a significant effect on the market price of our common stock. These include:
actual or anticipated variations in our quarterly operating results;
announcements of new services by us or our competitors;
announcements relating to strategic relationships or acquisitions;
changes in financial estimates by securities analysts;
changes in general economic conditions;
actual or anticipated changes in laws and government regulations;
changes in industry trends or conditions; and
sales of significant amounts of our common stock or other securities in the market.
In addition, the stock market in general, and the NASDAQ Global Market in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, securities class action litigation has often been instituted following periods of volatility in the market price of a company’s securities. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of our management’s attention and resources. Further, our operating results may be below the expectations of securities analysts or investors. In such event, the price of our common stock may decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
| | |
| ITEM 1B. | | UNRESOLVED STAFF COMMENTS. |
We own our headquarters in Troy, Michigan, where corporate, subsidiary and divisional offices are currently located. The original headquarters building was purchased in 1977. Headquarters operations were expanded into additional buildings purchased in 1991, 1997 and 2001.
The combined usable floor space in the headquarters complex is approximately 350,000 square
feet, and an additional 29,000 square feet, commencing on January 1, 2009, is being leased nearby.feet. Our buildings are in good condition and are currently adequate for their intended purpose and use. We also own undeveloped land in Troy and northern Oakland County,
Michigan, for possible future expansion.Michigan.
Branch office business is conducted in leased premises with the majority of leases being fixed for terms of generally five years in the United States and Canada and 5 to 10 years outside the United States.States and Canada. We own virtually all of the office furniture and the equipment used in our corporate headquarters and branch offices.
ITEM 3. LEGAL PROCEEDINGS.11
See Note 17, Contingencies,
| | |
| ITEM 3. | | LEGAL PROCEEDINGS. |
The Company is the subject of two pending class action lawsuits. The two lawsuits, Fuller v. Kelly Services, Inc. and Kelly Home Care Services, Inc., pending in the NotesSuperior Court of California, Los Angeles, and Sullivan v. Kelly Services, Inc., pending in the U.S. District Court Southern District of California, both involve claims for monetary damages by current and former temporary employees working in the State of California.
The Fuller matter involves claims relating to Consolidated Financial Statementsalleged 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, the Court in 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.
The Company is also involved in a number of other lawsuits arising in the ordinary course of its business, typically employment discrimination and wage and hour matters. While management does not expect any of these other matters to have a material adverse effect on the Company’s results of operations, financial position or cash flows, litigation is subject to inherent uncertainties and the Company is not at this
Annual Reporttime able to predict the outcome of these matters. It is reasonably possible that some matters could be decided unfavorably to the Company and, if so, could have a material adverse impact on
Form 10-K for a discussionour consolidated financial statements. During 2010 and 2009, the Company reassessed its potential exposure from pending litigation and established additional reserves of
current legal proceedings.$3.5 million and $4.4 million, respectively.
Disclosure of Certain IRS Penalties
None.
None.12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders in the fourth quarter of 2008.
| | |
| 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
below: | | | | | | | | | | | | | | | |
| | | Per share amounts (in dollars) |
| | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | Year |
2008 | | | | | | | | | | | | | | | |
Class A common | | | | | | | | | | | | | | | |
High | | $ | 21.38 | | $ | 23.20 | | $ | 21.53 | | $ | 19.68 | | $ | 23.20 |
Low | | | 15.01 | | | 19.38 | | | 16.50 | | | 9.47 | | | 9.47 |
| | | | | |
Class B common | | | | | | | | | | | | | | | |
High | | | 25.99 | | | 22.01 | | | 20.00 | | | 22.92 | | | 25.99 |
Low | | | 19.55 | | | 19.75 | | | 17.00 | | | 10.99 | | | 10.99 |
| | | | | |
Dividends | | | .135 | | | .135 | | | .135 | | | .135 | | | .54 |
| | | | | |
2007 | | | | | | | | | | | | | | | |
Class A common | | | | | | | | | | | | | | | |
High | | $ | 32.82 | | $ | 33.97 | | $ | 28.14 | | $ | 24.39 | | $ | 33.97 |
Low | | | 28.04 | | | 26.73 | | | 19.47 | | | 18.20 | | | 18.20 |
| | | | | |
Class B common | | | | | | | | | | | | | | | |
High | | | 32.10 | | | 36.89 | | | 31.00 | | | 34.90 | | | 36.89 |
Low | | | 26.05 | | | 28.00 | | | 20.00 | | | 21.00 | | | 20.00 |
| | | | | |
Dividends | | | .125 | | | .125 | | | .135 | | | .135 | | | .52 |
in the table below. Payments of dividends are restricted by the 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 | | | — | | | | — | | | | — | | | | — | | | | — | |
The number of holders of record of our Class A and Class B common stock were
5,4305,400 and
417,410, respectively, as of February
2, 2009.7, 2011.
Recent Sales of Unregistered Securities
None.
None.13
Issuer Purchases of Equity Securities | | | | | | | | | | |
Period | | Total Number
of Shares
(or Units)
Purchased | | Average
Price Paid
per Share
(or Unit) | | Total Number
of Shares (or
Units) Purchased
as Part of Publicly
Announced Plans
or Programs | | Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
That May Yet Be
Purchased Under the
Plans or Programs |
| | | | | | | | | (in thousands of dollars) |
September 29, 2008 through
November 2, 2008 | | 167 | | $ | 14.12 | | - | | $ | 7,322 |
| | | | |
November 3, 2008 through
November 30, 2008 | | - | | | - | | - | | $ | 7,322 |
| | | | |
December 1, 2008 through
December 28, 2008 | | - | | | - | | - | | $ | 7,322 |
| | | | |
| | | | | | | | | | |
| | | | |
Total | | 167 | | $ | 14.12 | | - | | | |
| | | | | | | | | | |
On August 8, 2007, the board of directors authorized the repurchase of up to $50 million of the Company’s outstanding Class A common shares. The Company has repurchased $42.7 million of shares in the open market. It has the ability to repurchase additional shares for up to $7.3 million. The repurchase program has a term of 24 months. The Company does not intend to make further share repurchases under the plan.
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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 | | | | — | | | | | |
| | | | | | | | | | | | | | |
We may reacquire shares outside the program in connection with the surrender of shares to cover taxes due upon the vesting of restricted stock held by employees. 167Accordingly, 7,237 shares were reacquired in transactions outside the repurchase program during the Company’s fourth quarter.
14
The following graph compares the cumulative total return of our Class A common stock with that of the S&P
MidCap 400600 SmallCap Index and the S&P 1500 Human Resources and Employment Services Index for the five years ended December 31,
2008.2010. The graph assumes an investment of $100 on December 31,
20032005 and that all dividends were reinvested.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Assumes Initial Investment of $100
December 31, 2003 –2005 — December 31, 2008
2010 | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | | | | | | | |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | 2008 |
Kelly Services, Inc. | | $ | 100.00 | | $ | 107.24 | | $ | 94.47 | | $ | 106.00 | | $ | 69.82 | | $ | 50.26 |
S&P MidCap 400 Index | | $ | 100.00 | | $ | 116.50 | | $ | 131.12 | | $ | 144.65 | | $ | 156.15 | | $ | 99.56 |
S&P 1500 Human Resources and Employment Services Index | | $ | 100.00 | | $ | 120.38 | | $ | 138.67 | | $ | 165.84 | | $ | 126.57 | | $ | 115.13 |
15
ITEM 6. SELECTED FINANCIAL DATA.
| | |
| 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 Discussion and Analysis of Financial Condition and Results of Operations” and
the consolidated financial statements included elsewhere in this report.
| | | | | | | | | | | | | | | | | |
(In millions except per share amounts) | | 2008 | | | 2007 | | 2006 | | 2005 | | 2004 (1) | |
Revenue from services | | $ | 5,517.3 | | | $ | 5,667.6 | | $ | 5,546.8 | | $ | 5,186.4 | | $ | 4,863.4 | |
(Loss) earnings from continuing operations | | | (81.7 | ) | | | 53.7 | | | 56.8 | | | 37.7 | | | 22.2 | |
(Loss) earnings from discontinued operations, net of tax (2) | | | (0.5 | ) | | | 7.3 | | | 6.7 | | | 1.6 | | | (1.0 | ) |
Net (loss) earnings | | | (82.2 | ) | | | 61.0 | | | 63.5 | | | 39.3 | | | 21.2 | |
| | | | | |
Basic (loss) earnings per share: | | | | | | | | | | | | | | | | | |
(Loss) earnings from continuing operations | | | (2.35 | ) | | | 1.48 | | | 1.58 | | | 1.06 | | | 0.63 | |
(Loss) earnings from discontinued operations | | | (0.02 | ) | | | 0.20 | | | 0.19 | | | 0.04 | | | (0.03 | ) |
Net (loss) earnings | | | (2.37 | ) | | | 1.68 | | | 1.76 | | | 1.10 | | | 0.60 | |
| | | | | |
Diluted (loss) earnings per share: | | | | | | | | | | | | | | | | | |
(Loss) earnings from continuing operations | | | (2.35 | ) | | | 1.47 | | | 1.56 | | | 1.05 | | | 0.63 | |
(Loss) earnings from discontinued operations | | | (0.02 | ) | | | 0.20 | | | 0.18 | | | 0.04 | | | (0.03 | ) |
Net (loss) earnings | | | (2.37 | ) | | | 1.67 | | | 1.75 | | | 1.09 | | | 0.60 | |
| | | | | |
Dividends per share | | | | | | | | | | | | | | | | | |
Classes A and B common | | | 0.54 | | | | 0.52 | | | 0.45 | | | 0.40 | | | 0.40 | |
| | | | | |
Working capital | | | 427.4 | | | | 478.6 | | | 463.3 | | | 428.0 | | | 413.1 | |
Total assets | | | 1,457.3 | | | | 1,574.0 | | | 1,469.4 | | | 1,312.9 | | | 1,249.8 | |
Total noncurrent liabilities | | | 203.8 | | | | 200.5 | | | 142.6 | | | 119.9 | | | 115.8 | |
| | | | | | | | | | | | | | | | | | | | | |
| (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 | |
| | |
| (1) | | Fiscal year included 53 weeks. |
|
| (2) | As discussed | Included in Note 4 to the consolidated financial statements, results of continuing operations are asset impairments of $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 gain of $6.2 million. Additionally, Kelly Staff Leasing (“KSL”) was sold effective December 31, 2006 for an after-tax gain of $2.3 million. In accordance with the provisionsDiscontinued Operations Subtopic of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”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. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.16
| | |
| ITEM 7. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Executive Overview2008 was a very difficult year.
The
already-weak economic conditions and employment trends in the U.S., present at the start of 2008, continued to worsen as the year progressed. The most notable deterioration occurred in the fourth quarter as the economic slowdown became more evident outside the U.S. and
anxiety overglobal economies exhibited signs of slowly strengthening throughout 2010. Economic growth, coupled with the
global financial crisis intensified.Accordingemergence of positive labor market trends, was favorable to the U.S. Bureau of Labor Statistics, during the year, the U.S. economy lost 2.6 million jobs, compared with 2.1 million jobs created in 2006 and 1.1 million in 2007. Temporary staffing was impacted especially hard, posting 21 consecutive months of year-over-year declines.industry. In fact, the rate of temporary job losses accelerated throughout the year, with December’s drop being the highest in this cycle. Outside of the U.S., the effectstemporary employment penetration rate increased for the 15th consecutive month in December to 1.7%, the highest level in over 21/2 years. More than 300,000 temporary jobs were added in the U.S. during 2010, a growth of a global recession quickly spread, resultingnearly 30% since the low point in almost immediate deteriorationSeptember, 2009. While still short of employment markets and temporary staffing.
The weakened global economy significantly affectedpre-recession levels, the current environment is encouraging for the staffing industry as employers seek more flexible labor models. However, it will likely take several years for the overall labor market to fully recover.
For Kelly, the strengthening economic trends are reflected in our
2010 fiscal year results. We reported net earnings
performance in 2008. For the year, we recorded a net lossfrom continuing operations of
$2.37$0.71 per diluted share, compared to
a net
earningsloss of
$1.67$3.01 per diluted share in
2007. Included2009. Revenue, which declined significantly in
those 2008 results are impairment charges of $2.22 per diluted share. Our efforts2009, increased by 15% during 2010, and our expense base continues to
implementreflect the benefit from restructuring initiatives we undertook in 2009. However, our
strategic plan to diversify business offerings, expand geographically, reduce costs, consolidate facilities and close unprofitable branches helped to mitigate the negative impact of this economic environment.In spite of these challenges, we did make measurable strategic progress during the year. For example, we:
Acquired the Portuguese subsidiaries of Randstad Holding N.V., establishing our presence in Portugal, a growing staffing market,
Expanded into more fee-based businesses through the acquisition of Toner Graham, a specialized accountancy and financial recruiting company headquartered in the U.K.,
Opened approximately 50 new Professional and Technical, and Outsourcing and Consulting branches outside the U.S., in response to demand for technically skilled, degreed and certified professional workers throughout the world,
Maintained our overall gross profit rate despite the weakening economic and labor market, and
In January 2009, announced a second restructuring plandeclined to 16.0% in 2010 from 16.3% in the U.K.prior year, reflecting changing business mix and related pressure on temporary margins.
While the continued pace of the global economic recovery is expected to bringremain slow, we believe that the strategic and restructuring actions we have taken will enable us to leverage our infrastructure in line with current U.K. market conditionsexperience and labor trends.
We expectexpertise as we help our customers adapt to continue the focus on our strategic plan; however, until we witness sustained temporary staffing job creation and signs of a strengthening global economy, we will continue to take decisive actions to minimize short-term risks.changing marketplace. We remain committedfocused on emphasizing higher-margin specialty-staffing, expanding fee-based business and delivering customer-focused workforce solutions, from traditional staffing to prudent cost actionsprofessional and diligent management of the Company’s balance sheet without impairing our ability to competetechnical offerings and meet the future staffing needs of our customers.
outsourcing and consulting services.
Results of Operations2008
2010 versus 2007
2009
Revenue from services for 20082010 totaled $5.5$5.0 billion, a decreasean increase of 2.7%14.7% from 2007.2009. This was the result of a decreasean increase in hours worked of 8.3%16.8%, partially offset by an increasea decrease in average hourly bill rates of 4.1% (3.0%2.7% on a constant currency basis).basis. Fee-based income, which is included in revenue from services, totaled $151.4$99.0 million, or 2.7%2.0% of total revenue, for 2008,2010, an increase of 11.1%15.0% (12.6% on a constant currency basis) as compared to $136.3$86.1 million for 2009. On a constant currency basis, revenue for 2010 increased in 2007. Revenue decreased in the Americas Commercial and Americas PTall seven business segments, and increased in each of the five other business segments. Reflecting the accelerating slowdown in the global economy, the trend in revenue growth during 2008 was negative in all business units, with the largest decline occurring in the fourth quarter.exception of EMEA Commercial.
17
Compared to
2007,2009, the U.S. dollar was weaker against
certainmany foreign currencies, including the
euroAustralian dollar and
Canadian dollar, and stronger against the
Swiss franc.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,
2008 revenue
from services decreased 3.7%for 2010 increased 13.7% as compared with the prior year. When we use the term “constant currency,” it means that we have translated financial data for
20082010 into U.S. dollars using the same foreign currency exchange rates that we used to translate financial data for
2007.2009. We believe that constant currency measurements are an important analytical tool to aid in understanding underlying operating trends without distortion due to currency fluctuations. The table below summarizes the impact of foreign exchange adjustments on revenue from services for
2008: | | | | | | | | | |
| | | Revenue from Services | |
| | | 2008 | | 2007 | | % Change | |
| | | (In millions of dollars) | | | |
Revenue from Services - Constant Currency: | | | | | | | | | |
Americas Commercial | | $ | 2,502.6 | | $ | 2,759.4 | | (9.3 | ) % |
Americas PT | | | 911.4 | | | 929.1 | | (1.9 | ) |
| | | | | | | | | |
Total Americas Commercial and PT - Constant Currency | | | 3,414.0 | | | 3,688.5 | | (7.4 | ) |
| | | |
EMEA Commercial | | | 1,271.3 | | | 1,292.4 | | (1.6 | ) |
EMEA PT | | | 166.1 | | | 158.8 | | 4.6 | |
| | | | | | | | | |
Total EMEA Commercial and PT - Constant Currency | | | 1,437.4 | | | 1,451.2 | | (1.0 | ) |
| | | |
APAC Commercial | | | 326.9 | | | 310.6 | | 5.2 | |
APAC PT | | | 32.7 | | | 26.7 | | 22.4 | |
| | | | | | | | | |
Total APAC Commercial and PT - Constant Currency | | | 359.6 | | | 337.3 | | 6.6 | |
| | | |
OCG - Constant Currency | | | 246.6 | | | 190.6 | | 29.3 | |
| | | | | | | | | |
Total Revenue from Services - Constant Currency | | | 5,457.6 | | | 5,667.6 | | (3.7 | ) |
Foreign Currency Impact | | | 59.7 | | | | | | |
| | | | | | | | | |
Revenue from Services | | $ | 5,517.3 | | $ | 5,667.6 | | (2.7 | ) % |
| | | | | | | | | |
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 $977.7$794.5 million was 1.2% lower13.2% higher than in 2007. Grossthe gross profit as a percentage of revenues was 17.7% in 2008 and increased 0.2 percentage points compared to the 17.5% rate in$701.7 million for the prior year. The gross profit rate for 2010 was 16.0%, versus 16.3% for 2009. Compared to the prior year, the gross profit rate increaseddecreased or remained flat in all business segments, with the exception of EMEA Commercial and APAC PT. The decrease in the gross profit rate was caused by a reduction in our temporary margins, primarily within the Americas and 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 taxes in the Americas to the extent not recovered through pricing. All of these items negatively impacting the gross profit rate were partially offset by the favorable impact from the HIRE Act. The Hiring Incentives to Restore Employment (“HIRE”) Act, which allows employers to receive tax incentives to hire and retain previously unemployed individuals, resulted in a benefit of $21 million in 2010. The HIRE Act expired at the end of 2010.
Selling, general and administrative (“SG&A”) expenses totaled $754.4 million and decreased year over year by $40.3 million, or 5.1% (5.9% on a constant currency basis), due to the impact of expense reduction initiatives implemented in 2009 and lower restructuring costs, partially offset by an increase in incentive compensation. Included in SG&A expenses are pretax charges for restructuring costs of $7.2 million in 2010 and $29.9 million in 2009.
Restructuring costs in 2010 relate primarily 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 as 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 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 OCG segments,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, compared to a loss of $146.1 million reported for 2009.
18
We recorded income tax expense for 2010 at an effective rate of 20.2%, compared to an income tax benefit at an effective rate of 29.1% in 2009. The 2010 rate was flatpositively impacted by nontaxable income from the cash surrender value of life insurance policies used to fund the Company’s deferred compensation plan, and by work opportunity 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 $26.1 million in 2010, compared to a loss of $105.1 million in 2009. Included in earnings from continuing operations for 2010 was $5.4 million, net of tax, of restructuring charges and $1.5 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. Diluted earnings from continuing operations per share for 2010 was $0.71, as compared to diluted loss from continuing operations per share of $3.01 for 2009.
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 | | | | | |
The change in Americas Commercial business segment. revenue from services reflected an increase in hours worked of 22%. Americas Commercial represented 49.1% of total Company revenue for 2010 and 45.9% for 2009.
The decrease in the gross profit rate decreasedwas primarily due to an increase in all otherthe proportion of lower-margin light industrial business segments.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.
19
Americas PT
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Constant | |
| | | 2010 | | | 2009 | | | | | | | Currency | |
| | | (52 Weeks) | | | (53 Weeks) | | | Change | | | Change | |
| | | (In millions of dollars) | | | | | | | |
| Revenue from Services | | $ | 889.0 | | | $ | 792.6 | | | | 12.2 | % | | | 12.0 | % |
| Fee-based income | | | 9.0 | | | | 9.4 | | | | (4.5 | ) | | | (4.9 | ) |
| Gross profit | | | 140.0 | | | | 125.1 | | | | 12.0 | | | | 11.8 | |
| SG&A expenses excluding restructuring charges | | | 93.7 | | | | 100.9 | | | | (7.0 | ) | | | | |
| Restructuring charges | | | — | | | | 1.0 | | | | (100.0 | ) | | | | |
| Total SG&A expenses | | | 93.7 | | | | 101.9 | | | | (8.0 | ) | | | (8.2 | ) |
| Earnings from Operations | | | 46.3 | | | | 23.2 | | | | 100.1 | | | | | |
| | | | | | | | | | | | | | | | | |
| Gross profit rate | | | 15.8 | % | | | 15.8 | % | | — | pts. | | | | |
| Expense rates (excluding restructuring charges): | | | | | | | | | | | | | | | | |
| % of revenue | | | 10.5 | | | | 12.7 | | | | (2.2 | ) | | | | |
| % of gross profit | | | 67.0 | | | | 80.7 | | | | (13.7 | ) | | | | |
| Operating margin | | | 5.2 | | | | 2.9 | | | | 2.3 | | | | | |
The improvementchange 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 decrease in average hourly bill rates of 5.8% on a constant currency basis, partially offset by a 4.8% increase in hours worked. The decrease in the constant currency average hourly bill rates 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 points of the 2010 constant currency decline. EMEA Commercial revenue represented 17.6% of total Company revenue in 2010 and 20.7% in 2009.
20
The change in the gross profit rate is primarily due to growth inhigher fee-based income.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 decreases in fee-based income. SG&A expenses declined due to reductions in personnel.
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 | | | | | |
The change in revenue from services in APAC Commercial resulted from an increase in hours worked of 18.5%, partially offset by a decrease in average hourly bill rates of 4.5% on a constant currency basis. The decrease in the constant currency average hourly bill rates for APAC Commercial was primarily due to the decision to exit the staffing market in Japan. Excluding Japan, the average bill rate increased by 0.6% on a constant currency basis. APAC Commercial revenue represented 7.2% of total Company revenue in 2010 and 6.6% in 2009.
21
The decrease in the APAC Commercial gross profit rate was due to a decrease in temporary gross profit rates due to 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. SG&A expenses increased, due primarily to hiring of permanent placement recruiters.
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 | ) | | | | |
Revenue from services in the OCG segment for 2010 increased in the Americas, EMEA and APAC regions, due primarily to growth in our PPO and RPO practices. OCG revenue represented 5.1% of total Company revenue in 2010 and 2009.
22
The OCG gross profit rate decreased primarily due to the growth 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 2008 and 2007 also included the effect of French payroll tax credits. During 2007, the French government changed the method of calculating payroll tax credits, retroactive2009 was 16.3%, versus 17.7% for 2008. Compared to the beginning of 2006 and on a go-forward basis until October 1, 2007. During 2008, the French government extended eligibilitygross profit rate decreased in all business segments, with the exception of APAC PT. The decrease in the gross profit rate was primarily due to claim payroll tax creditsdecreases 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 2005. In connection with these changes, $2.4 milliona higher proportion of French payroll tax credits were recognized in 2008light industrial business compared to clerical, and $4.8 million were recognized in 2007.to large corporate customers compared to retail.
23
As more fully described in Critical Accounting Estimates, we regularly update our estimates of the ultimate
costcosts of open workers’ compensation claims. As a result,
during 2008, we reduced the estimated cost of prior year workers’ compensation claims by
$12.7 million.$2.8 million for 2009. This compares to an adjustment reducing prior year workers’ compensation claims by
$11.6$12.7 million
in 2007.Selling, general and administrativefor 2008.
SG&A expenses totaled $967.4$794.7 million, a year-over-year increasedecrease of 6.4% (5.2%$172.7 million, or 17.9% (14.8% on a constant currency basis). Selling, general and administrative expenses expressed as a percentage of gross profit were 99.0% in 2008, a 7.1 percentage point increase compared to the 91.9% rate in 2007. Included in selling, generalSG&A expenses for 2009 are litigation costs of $5.3 million and administrativerestructuring 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 litigation costs for several pending lawsuits. (See Note 17, Contingencies,$6.5 million.
Starting in the
Notes to Consolidated Financial Statements for further discussion.)Onthird quarter of 2008, we began taking selected cost savings actions, including employee headcount reductions and branch closings. In January, 21, 2009, the Chief Executive Officer of Kelly Services, Inc. authorizedwe initiated a more significant restructuring plan for our United KingdomU.K. operations, (“Kelly U.K.”). The plan isand completed it during 2009. Throughout 2009, we continued to expand our focus to achieve further cost savings and related efficiencies by assessing the resultscale of management’s strategic reviewour 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 operationsrestructuring actions.
The largest components of
Kelly U.K. which identified the
opportunity for additional operational cost savings. We have not yet identified specific branches or$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
affected, but expect thatand the
plan will result in the eliminationclosing, sale or consolidation of
certain operationsapproximately 240 branches, some of which were still in process at year-end 2009. Compensation and
may involve approximately 350 staff reductions. We expect thatother discretionary savings represented the
plan will be completed byimpact of expense-reduction initiatives implemented during the
end of 2009.We currently estimate that we will incur total pre-tax charges associated with these actions of approximately $11 million to $14 million, including approximately $9 million to $11 million in facility exit costs and approximately $2 million to $3 million in severance expenses. We recorded $1.5 million of severance costs in the fourthfirst quarter of 20082009, including suspension of headquarters and expect the remainder to be recordedfield-based incentive compensation and retirement matching contribution, along with a reduction in 2009. We expect all of the expense will result in future cash expenditures.
Included in selling,discretionary spending on travel and general and administrative expenses for 2007 were $8.9 million of expenses related to 2007 Americas and U.K. restructuring actions. The Americas restructuring costs totaled $3.0 million, of which $2.7 million related to facility exit costs and $0.2 million related to accelerated depreciation. The U.K. restructuring costs totaled $5.9 million, of which $4.2 million related to facility exit costs, $0.6 million related to accelerated depreciation and $1.1 million related to moving, fit out and lease origination fees related to the headquarters consolidation. We did not incur any significant severance costs in connection with the restructuring actions.
expenses.
During the fourth quarter of 2008,2009, asset impairment charges of $80.5$53.1 million were also recorded. We completed our goodwill impairment test during the fourth quarter and, dueDue to worseningsignificantly worse than anticipated economic conditions and the Company’s discounted cash flow forecastimpacts to our business in the second quarter of 2009, we revised our internal forecasts for future yearsall 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 revised.tested for impairment in the second quarter of 2009. This resulted in the recognition of a goodwill impairment loss of $50.4$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 in 2008. At December 28, 2008, the Company also determined that its available-for-sale investment in Temp Holdings Co. Ltd. (“Temp Holdings,” formerly Tempstaff), a Japanese staffing company, was impaired and an other-than-temporary impairment of $18.7 million was recorded. While Temp Holdings’ performance remains strong, its value has been affected by global market movements. The length of time (approximately nine months as of December 28, 2008) and extent to which the market value of the investment has been less than cost resulted in the Company’s determination that the impairment was other-than-temporary. segment.
Additionally, the Company evaluateswe evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amountvalue 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. Due to a history of losses in the U.K. and uncertainty around future financial projections, theThe Company’s evaluationestimates as of DecemberJune 28, 20082009 resulted in an $11.4a $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,
the Companywe reported
lossesa loss from operations for
2008 of $70.32009 totaling $146.1 million, compared to
earnings from operations of $80.1$70.3 million reported
in 2007.Other (expense) income was expense of $3.5 million in 2008, compared to income of $3.2 million in 2007. Included in other expense for 2008 is $3.7 million of foreign exchange losses booked primarily in the fourth quarter, related to yen-denominated net debt for the Temp Holdings investment and ruble-denominated intercompany balances in Russia. Foreign exchange losses were not significant in 2007.
2008.
Income tax expensebenefit on continuing operations for 20082009 was $8.0$43.2 million, compared to last year’s expense of $29.6 million. Most of the$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 are not tax deductible. Inin certain foreign countries, where futureoffset by work opportunity tax deductions are possible, a valuation allowance was recorded against the deferred tax assets created by the charges. The valuation allowances related to impairment and restructuring charges equaled $2.2 million in Germany, $7.9 million in Japan and $1.1 millioncredits in the United Kingdom. The 2008U.S. 2009 income tax expense wastaxes also impacted by nondeductible lossesbenefited from investments in the cash surrender value of life insurance policies used to fund the Company’s deferred compensation plans,plan, which generated non-taxable income in 2009, and bynon-deductible losses in foreign countries which are not currently deductible.2008.
Losses24
Loss from continuing operations
werewas $105.1 million in 2009, compared to $81.7 million in
2008, compared to earnings of $53.7 million in 2007.2008. Included in
lossesloss 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
$1.5and $5.3 million, net of tax, of
U.K. restructuring
costs and $1.6 million of French payroll tax credits, net of tax. Included in earnings from continuing operations in 2007 are $7.8 million of expenses, net of tax, related to the U.K. and Americas restructuring actions and $3.2 million of French payroll tax credits, net of tax.charges.
Discontinued operations include the operating results of Kelly Home Care, (“KHC”), which was sold in 2007 and Kelly Staff Leasing, (“KSL”), which was sold in 2006. LossesEarnings from discontinued operations totaled $0.6 million for 2009, compared to a loss of $0.5 million for 2008, compared to earnings of $7.3 million for 2007. Discontinued operations for 20082008. These amounts represent adjustments to assets and liabilities retained as part of the sale agreements. Discontinued operations
Net loss for
2007 included the $6.2 million gain, net of tax, on the sale of KHC.Net losses in 2008 were $82.22009 totaled $104.5 million, compared to earnings of $61.0$82.2 million in 2007.2008. Diluted loss per share from continuing operations per share for 20082009 was $2.35,$3.01, as compared to diluted earnings per shareloss from continuing operations of $1.47 in 2007. Diluted loss per share from continuing operations for 2008 include the $2.22 per share cost of impairments, $0.40 per share cost of litigation expenses, $0.04 per share cost of the U.K. restructuring and a $0.05 per share benefit related to French payroll tax credits. Diluted earnings per share from continuing operations for 2007 include $0.21 per share of restructuring costs and a $0.09 per share benefit related to French payroll tax credits.
During$2.35 for 2008.
Effective with the first quarter of
2008,2009, we adopted the
Company realigned its operations into seven reporting segments – Americas Commercial, Americas PT, EMEA Commercial, EMEA PT, APAC Commercial, APAC PTprovisions 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,
OCG. Corporate expenses that directly supporttherefore, included in the
operating units have been allocated tocalculation of earnings per share using the two-class method in accordance with generally accepted accounting principles. Accordingly, all
seven segments. The segment operating results exclude the asset impairment charges discussed above. Prior periodsprior period earnings per share data presented were
reclassifiedadjusted retrospectively to conform
withto the
current presentation.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 | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | Change | | | Constant
Currency
Change | |
| | | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 2,504.3 | | | $ | 2,759.4 | | | (9.2 | ) % | | (9.3 | ) % |
Fee-based income | | | 15.7 | | | | 18.9 | | | (16.5 | ) | | (16.7 | ) |
Earnings from Operations | | | 70.0 | | | | 95.6 | | | (26.8 | ) | | | |
| | | | |
Gross profit rate | | | 15.9 | % | | | 15.9 | % | | 0.0 | pts. | | | |
Expense rates: | | | | | | | | | | | | | | |
% of revenue | | | 13.1 | | | | 12.4 | | | 0.7 | | | | |
% of gross profit | | | 82.4 | | | | 78.2 | | | 4.2 | | | | |
Operating margin | | | 2.8 | | | | 3.5 | | | (0.7 | ) | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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
in the Americas Commercial segment reflected
the decrease in fee-based income, a decrease in hours worked of
12.4%20.3%,
partially offset by an increasecombined with a decrease in average hourly bill rates of
3.7% (3.6%0.9% (an increase of 0.3% on a constant currency basis).
Year-over-year revenue comparisons reflect decreases of 6.4% in the first quarter, 6.1% in the second quarter, 9.4% in the third quarter, and 14.9% in the fourth quarter. Americas Commercial represented
45.4%45.9% of total Company revenue for
20082009 and
48.6%45.6% for
2007.As noted above,2008.
The decrease in the Company revised its estimategross 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 costimpact of outstandinglower favorable workers’ compensation claims and, accordingly, reduced expense in 2008.adjustments from prior years. Of the total $12.7$2.8 million adjustment booked in 2008, $10.52009 noted above, $2.4 million iswas reflected in the results of Americas Commercial. This compares to an adjustment of $10.0$10.5 million in 2007. Selling, general2008.
The decrease in SG&A expenses reflected reduced salaries and administrativeincentive 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.
25
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
decreased by 4.0 % compared to the prior year, but were higher as a percentage of revenuewas primarily due to lower
revenue from services.incentive compensation, combined with reduced recruiting and retention, travel and other costs as a result of lower volume and cost-savings initiatives.
Americas PTEMEA Commercial | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | Change | | | Constant
Currency
Change | |
| | | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 911.6 | | | $ | 929.1 | | | (1.9 | ) % | | (1.9 | ) % |
Fee-based income | | | 19.4 | | | | 20.6 | | | (5.8 | ) | | (6.0 | ) |
Earnings from Operations | | | 47.7 | | | | 53.5 | | | (10.8 | ) | | | |
| | | | |
Gross profit rate | | | 17.6 | % | | | 17.8 | % | | (0.2 | ) pts. | | | |
Expense rates: | | | | | | | | | | | | | | |
% of revenue | | | 12.4 | | | | 12.0 | | | 0.4 | | | | |
% of gross profit | | | 70.3 | | | | 67.6 | | | 2.7 | | | | |
Operating margin | | | 5.2 | | | | 5.8 | | | (0.6 | ) | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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 AmericasEMEA 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 reflected
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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
4.2%10.7%,
partially offset by an increasecombined with a 3.7% decrease in average
billinghourly bill rates
(an increase of
2.5%3.9% on a constant currency basis).
On a year-over-year basis, revenue increased 2.0% in the first quarter and 0.9% in the second quarter, and decreased 3.1% in the third quarter and 7.3% in the fourth quarter. AmericasEMEA PT revenue represented
16.5%3.3% of total Company revenue for
20082009 and
16.4%3.1% for
2007.Americas PT’s share of the reduction in workers’ compensation expense was $1.4 million in 2008 and $1.0 million in 2007. Selling, general and administrative expenses were flat compared to the prior year, but were higher as a percentage of revenue due to lower revenue from services.
EMEA Commercial
| | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | Change | | | Constant
Currency
Change | |
| | | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 1,310.4 | | | $ | 1,292.4 | | | 1.4 | % | | (1.6 | ) % |
Fee-based income | | | 39.5 | | | | 38.2 | | | 3.5 | | | 0.0 | |
Earnings from Operations | | | (3.0 | ) | | | 8.9 | | | (133.5 | ) | | | |
| | | | |
Gross profit rate | | | 17.4 | % | | | 17.7 | % | | (0.3 | ) pts. | | | |
Expense rates: | | | | | | | | | | | | | | |
% of revenue | | | 17.6 | | | | 17.0 | | | 0.6 | | | | |
% of gross profit | | | 101.3 | | | | 96.1 | | | 5.2 | | | | |
Operating margin | | | (0.2 | ) | | | 0.7 | | | (0.9 | ) | | | |
2008.
The
change in translated U.S. dollar revenue from services in EMEA Commercial resulted from the increase in fee-based income and an increase in average hourly bill rates of 4.0% (an increase of 0.7% on a constant currency basis), partially offset by a decrease
in hours worked of 4.7%. Constant currency year-over-year revenue comparisons reflect decreases of 1.6% in the first quarter and 1.1% in the second quarter, an increase of 1.3% in the third quarter and decrease of 5.0% in the fourth quarter. EMEA Commercial revenue represented 23.8% of total Company revenue for 2008 and 22.8% for 2007. The Portugal acquisition contributed approximately 2 percentage points to EMEA Commercial year-over-year constant currency revenue growth.EMEA Commercial earnings from operations for 2008 includes a $2.4 million benefit related to French payroll tax credits and a $1.5 million charge related to the restructuring of the U.K. operations. The prior year included a $5.9 million charge related to the restructuring of the U.K. operations and a $4.8 million benefit related to French payroll tax credits.
The change in the gross profit rate was due to lower French payroll tax credits recognized in 2008 as compared to 2007, and lower temporary gross profits rates primarily in the U.K. On a constant currency basis, selling, general and administrative expenses increased 2.0% from the prior year. Excluding the effect of restructuring and the Portugal acquisition in 2008, constant currency expenses were about flat with 2007. Included in expenses for 2007 was the effect of $5.9 million in U.K. restructuring costs.
EMEA PT
| | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | Change | | | Constant
Currency
Change | |
| | | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 172.5 | | | $ | 158.8 | | | 8.7 | % | | 4.6 | % |
Fee-based income | | | 26.8 | | | | 21.9 | | | 22.4 | | | 15.8 | |
Earnings from Operations | | | 2.3 | | | | 2.4 | | | (5.7 | ) | | | |
| | | | |
Gross profit rate | | | 29.7 | % | | | 28.2 | % | | 1.5 | pts. | | | |
Expense rates: | | | | | | | | | | | | | | |
% of revenue | | | 28.3 | | | | 26.7 | | | 1.6 | | | | |
% of gross profit | | | 95.5 | | | | 94.6 | | | 0.9 | | | | |
Operating margin | | | 1.3 | | | | 1.5 | | | (0.2 | ) | | | |
The change in translated U.S. dollar revenue from services in EMEA PT resulted from an increase in fee-based income, a 4.7% increase in average hourly bill rates (1.0% on a constant currency basis), and an increase in hours worked of 1.2%. Constant currency year-over-year revenue comparisons reflect increases of 9.3% in the first quarter, 5.6% in the second quarter, 2.7% in the third quarter and 1.6% in the fourth quarter. EMEA PT revenue represented 3.1% of total Company revenue for 2008 and 2.8% for 2007. Acquisitions contributed approximately 2 percentage points to EMEA PT year-over-year constant currency revenue growth.
The increase in the EMEA PT gross profit rate was primarily due to growthdecreases in fee-based income. On a constant currency basis, selling, general and administrativeSG&A expenses increased 10.4% from the prior year,declined, due to costs associated with branch openings during the second half of last year. Excluding the effect of the Toner Graham acquisition, constant currency expenses increased approximately 6.5% from the prior year.reductions in personnel and incentive compensation.
27
APAC Commercial | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | Change | | | Constant
Currency
Change | |
| | | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 336.0 | | | $ | 310.6 | | | 8.2 | % | | 5.2 | % |
Fee-based income | | | 17.0 | | | | 15.0 | | | 13.2 | | | 9.1 | |
Earnings from Operations | | | (0.3 | ) | | | 3.2 | | | (109.1 | ) | | | |
| | | | |
Gross profit rate | | | 16.8 | % | | | 17.1 | % | | (0.3 | ) pts. | | | |
Expense rates: | | | | | | | | | | | | | | |
% of revenue | | | 16.8 | | | | 16.0 | | | 0.8 | | | | |
% of gross profit | | | 100.5 | | | | 93.9 | | | 6.6 | | | | |
Operating margin | | | (0.1 | ) | | | 1.0 | | | (1.1 | ) | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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 translated U.S. dollar revenue from services in APAC Commercial resulted from the increase in fee-based income and an increasea decrease in average hourly bill rates of 6.1% (3.3%11.6% (7.1% on a constant currency basis), combined with an increasethe decrease in fee-based income and a decrease in hours worked of 1.6%2.6%. Constant currency year-over-year revenue comparisons reflect increases of 23.4%The decrease in the first quarter, 6.5%average hourly bill rates for APAC Commercial was due to a change in the second quarter, 1.7% in the third quartermix from countries with higher average bill rates to those with lower average bill rates, such as India and a decrease of 5.5% in the fourth quarter.Malaysia. APAC Commercial revenue represented 6.1%6.6% of total Company revenue for 2009 and 6.1% for 2008.
The decrease in
2008 and 5.5% in 2007. Acquisitions last year contributed approximately 4 percentage points tothe APAC Commercial
year-over-year constant currency revenue growth.On a constant currency basis, selling, general and administrative expenses increased 10.1%,gross profit rate was primarily due to significant investmentsdecreases in this region, through acquisitions madefee-based income. SG&A expenses declined, due to reductions in the prior yearpersonnel and costs associated with new branches.
incentive compensation.
APAC PT | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | Change | | | Constant
Currency
Change | |
| | | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 34.3 | | | $ | 26.7 | | | 28.3 | % | | 22.4 | % |
Fee-based income | | | 5.1 | | | | 5.0 | | | 1.0 | | | (4.3 | ) |
Earnings from Operations | | | (0.5 | ) | | | 0.1 | | | (491.6 | ) | | | |
| | | | |
Gross profit rate | | | 29.8 | % | | | 33.0 | % | | (3.2 | ) pts. | | | |
Expense rates: | | | | | | | | | | | | | | |
% of revenue | | | 31.2 | | | | 32.6 | | | (1.4 | ) | | | |
% of gross profit | | | 104.6 | | | | 98.6 | | | 6.0 | | | | |
Operating margin | | | (1.4 | ) | | | 0.4 | | | (1.8 | ) | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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
an increasea decrease in
hours worked of 27.6%, combined with an increase inthe translated U.S. dollar average hourly bill rates of
0.1% (a decrease of 4.4%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
constant currency changedecrease in
the average hourly bill rates
for APAC PT was
impacted bydue to a change in mix
from countries with higher average bill rates to
those with lower average
wage rate countries,bill rates, such as
Malaysia and India.
Constant currency year-over-year revenue comparisons reflect increases of 63.5% in the first quarter, 42.4% in the second quarter, 9.5% in the third quarter and a decrease of 2.4% in the fourth quarter. APAC PT revenue represented 0.6% of total Company revenue for
20082009 and
0.5% for 2007.The decrease in the APAC PT gross profit rate in 2008 was2008.
SG&A expenses declined, due to a higher mix of traditional temporary-based revenue as compared to fee-based income. On a constant currency basis, selling, generalreductions in personnel and administrative expenses increased by 17.7%, due primarily to significant investments in this region, including costs associated with new branches.incentive compensation.
28
OCG | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | Change | | | Constant
Currency
Change | |
| | | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 248.2 | | | $ | 190.6 | | | 30.2 | % | | 29.3 | % |
Fee-based income | | | 27.8 | | | | 16.7 | | | 66.6 | | | 65.1 | |
Earnings from Operations | | | 3.4 | | | | 8.0 | | | (57.2 | ) | | | |
| | | | |
Gross profit rate | | | 29.7 | % | | | 26.4 | % | | 3.3 | pts. | | | |
Expense rates: | | | | | | | | | | | | | | |
% of revenue | | | 28.3 | | | | 22.2 | | | 6.1 | | | | |
% of gross profit | | | 95.3 | | | | 84.0 | | | 11.3 | | | | |
Operating margin | | | 1.4 | | | | 4.2 | | | (2.8 | ) | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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
2008 increased2009 decreased in all three regions
–— Americas, Europe and Asia-Pacific.
Constant currency year-over-year revenue comparisons reflect increases of 42.2% in the first quarter, 56.9% in the second quarter, 30.5% in the third quarter and 6.3% in the fourth quarter. OCG revenue represented
4.5%5.1% of total Company revenue
in 2008for 2009 and
3.4%4.2% for
2007. Acquisitions completed in the fourth quarter of last year contributed approximately 8 percentage points to OCG year-over-year constant currency revenue growth.2008.
The OCG gross profit rate increaseddecreased primarily due to improved marginsa shift in revenue mix among the OCG business units. Revenue in the recruitment processing outsourcinghigher-margin RPO and CWO units declined, while revenue in our lower-margin BPO unit grew modestly during 2009. This change in business mix, coupled with revenue growtha decrease in fee-based business units, suchthe gross profit rates in our RPO practice as contingent workforce outsourcing (“CWO”). Constant currency selling, general and administrativecompared to 2008, resulted in the overall gross profit decline.
Total SG&A expenses
increased 64.6%were relatively unchanged from the prior
year, dueyear. Continuing costs related to investments to build out implementation and operations
infrastructure.Resultsinfrastructure from the second and third quarters of Operations
2007 versus 2006
Revenue from services for 2007 totaled $5.7 billion, an increase of 2.2% from 2006. This was the result of an increase2008, and continued investment in average hourly bill rates of 4.1%,new initiatives, were partially offset by a decrease in hours worked of 2.9%. Fee-based income, which is included in revenue from services, totaled $136.3 million, or 2.4% of total revenue for 2007, an increase of 31.8% as compared to $103.4 million in 2006. Reflecting the economic slowdown in the U.S. market, revenue from services decreased from 2006 in the Americas Commercial and Americas PT business segments. Revenue from services increased from 2006 in each of the other five business segments.
Compared to 2006, the U.S. dollar was weaker against many foreign currencies, including the euro, the British pound and the Canadian dollar. As a result, our U.S. dollar translated revenue from services was slightly higher than would have otherwise been reported. On a constant currency basis, 2007 revenue from services decreased 0.6% as compared with 2006. When we use the term “constant currency,” it means that we have translated financial data for 2007 into U.S. dollars using the same foreign currency exchange rates that we used to translate financial data for 2006. We believe that constant currency measurements are an important analytical tool to aid in understanding underlying operating trends without distortion due to currency fluctuations. The table below summarizes the impact of foreign exchange adjustments on revenue from services for 2007:
| | | | | | | | | |
| | | Revenue from Services | |
| | | 2007 | | 2006 | | % Change | |
| | | (In millions of dollars) | | | |
Revenue from Services - Constant Currency: | | | | | | | | | |
Americas Commercial | | $ | 2,745.7 | | $ | 2,916.1 | | (5.8 | ) % |
Americas PT | | | 928.3 | | | 961.6 | | (3.5 | ) |
| | | | | | | | | |
Total Americas Commercial and PT - Constant Currency | | | 3,674.1 | | | 3,877.7 | | (5.3 | ) |
| | | |
EMEA Commercial | | | 1,193.3 | | | 1,145.5 | | 4.2 | |
EMEA PT | | | 146.3 | | | 119.6 | | 22.3 | |
| | | | | | | | | |
Total EMEA Commercial and PT - Constant Currency | | | 1,339.6 | | | 1,265.0 | | 5.9 | |
| | | |
APAC Commercial | | | 285.8 | | | 232.9 | | 22.7 | |
APAC PT | | | 24.7 | | | 16.4 | | 50.8 | |
| | | | | | | | | |
Total APAC Commercial and PT - Constant Currency | | | 310.5 | | | 249.2 | | 24.6 | |
| | | |
OCG - Constant Currency | | | 189.3 | | | 154.8 | | 22.3 | |
| | | | | | | | | |
Total Revenue from Services - Constant Currency | | | 5,513.3 | | | 5,546.8 | | (0.6 | ) |
Foreign Currency Impact | | | 154.3 | | | | | | |
| | | | | | | | | |
Revenue from Services | | $ | 5,667.6 | | $ | 5,546.8 | | 2.2 | % |
| | | | | | | | | |
Gross profit of $989.1 million was 9.1% higher than 2006. Gross profit as a percentage of revenues was 17.5% in 2007 and increased 1.2 percentage points compared to the 16.3% rate recorded in 2006. Compared to 2006, the gross profit rate increased in all business segments, except for APAC Commercial.
The improvement in the gross profit rate is due to lower payroll tax rates and workers’ compensation costs measured as a percentage of direct wages and higher fee-based income. The gross profit rate also includes the effect of the French payroll tax credits noted below.
During the second quarter of 2007, the French government changed the method of calculating payroll tax credits, retroactive to the beginning of 2006 and on a go-forward basis until October 1, 2007. As a result, Kelly recognized a total credit of $4.8 million in 2007, of which $2.6 million related to 2006.
As a result of regularly updating our estimates of the ultimate cost of open workers’ compensation claims, we reduced the estimated cost of prior year workers’ compensation claims by $11.6 million during 2007. This compares to an adjustment reducing workers’ compensation claims by $7.7 million in 2006.
Selling, general and administrative expenses of $909.0 million were 9.7% higher than 2006. Selling, general and administrative expenses expressed as a percentage of revenues were 16.0% in 2007, a 1.1 percentage point increase compared to the 14.9% rate in 2006.
As discussed above, included in selling, general and administrative expenses in 2007 were $8.9 million of expenses related to the Americas and U.K. restructuring actions. The remaining increase in selling, general and administrative expenses is due primarily to growth in compensation-related costs.
Other income for 2007 was $3.2 million, compared to $1.5 million in 2006. The improvement is primarily attributable to an increase in interest income related to higher U.S. interest rates earned on higher average cash balances compared to last year.
The effective income tax rate on continuing operations for 2007 was 35.5%, higher than the 2006 rate of 28.6%. The majority of the increase in the effective tax rate is a result of an increase in losses in certain international locations, particularly the U.K., for which no income tax benefit is provided, and, in the U.S., the expiration of work opportunity tax credits related to Hurricane Katrina.
Earnings from continuing operations were $53.7 million in 2007, compared to $56.8 million in 2006. Included in earnings from continuing operations are $7.8 million of expenses, net of tax, related to the U.K. and Americas restructuring actions and $3.2 million of French payroll tax credits, net of tax.
Earnings from discontinued operations, which include KHC’s and KSL’s operating results, totaled $7.3 million for 2007 and include the $6.2 million gain, net of tax, on the sale of KHC. Earnings from discontinued operations for 2006 totaled $6.7 million and include the $2.3 million gain, net of tax, on the sale of KSL.
Net earnings in 2007 were $61.0 million, or a 3.9% decrease compared to 2006. Diluted earnings per share from continuing operations in 2007 were $1.47, as compared to diluted earnings per share from continuing operations of $1.56 in 2006.
Americas Commercial
| | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | Change | | | Constant
Currency
Change | |
| | | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 2,759.4 | | | $ | 2,916.1 | | | (5.4 | ) % | | (5.8 | ) % |
Fee-based income | | | 18.9 | | | | 19.4 | | | (3.0 | ) | | (4.2 | ) |
Earnings from Operations | | | 95.6 | | | | 111.5 | | | (14.3 | ) | | | |
| | | | |
Gross profit rate | | | 15.9 | % | | | 15.4 | % | | 0.5 | pts. | | | |
Expense rates: | | | | | | | | | | | | | | |
% of revenue | | | 12.4 | | | | 11.5 | | | 0.9 | | | | |
% of gross profit | | | 78.2 | | | | 75.1 | | | 3.1 | | | | |
Operating margin | | | 3.5 | | | | 3.8 | | | (0.3 | ) | | | |
Reflecting the soft labor market in the U.S., revenue from services in the Americas Commercial segment decreased 5.4% from 2006. This was the result of an 8.8% decrease in hours worked, partially offset by a 3.8% increase in average hourly bill rates. Year-over-year revenue comparisons reflect decreases of 4.3% in the first quarter, 5.7% in both the second quarter and third quarter, and 5.9% in the fourth quarter. Americas Commercial revenue from services represented 48.6% of total Company revenue from services for 2007 and 52.6% for 2006.
The increase in the gross profit rate was principally due to lower workers’ compensation costs and reduced payroll taxes. As noted above, we revised our estimate of the cost of outstanding workers’ compensation claims and, accordingly, reduced expense in 2007. Of the total $11.6 million expense reduction in 2007, $10.0 million was credited to Americas Commercial. This compares to an adjustment reducing expense by $7.0 million in 2006.
Selling, general and administrative expenses increased by 1.8% as compared to 2006. Included in Americas Commercial selling, general and administrative expenses for 2007 is $3.0 million related to the branch restructuring. The remaining increase in selling, general and administrative expenses was due primarily to the growth in compensation costs.
Americas PT
| | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | Change | | | Constant
Currency
Change | |
| | | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 929.1 | | | $ | 961.6 | | | (3.4 | ) % | | (3.5 | ) % |
Fee-based income | | | 20.6 | | | | 15.5 | | | 33.1 | | | 32.6 | |
Earnings from Operations | | | 53.5 | | | | 51.2 | | | 4.5 | | | | |
| | | | |
Gross profit rate | | | 17.8 | % | | | 15.8 | % | | 2.0 | pts. | | | |
Expense rates: | | | | | | | | | | | | | | |
% of revenue | | | 12.0 | | | | 10.5 | | | 1.5 | | | | |
% of gross profit | | | 67.6 | | | | 66.4 | | | 1.2 | | | | |
Operating margin | | | 5.8 | | | | 5.3 | | | 0.5 | | | | |
Revenue from services in the Americas PT segment reflected a decrease in hours worked of 7.0%, partially offset by an increase in average billing rates of 2.8% for the professional and technical staffing businesses. On a year-over-year basis, revenue decreased 9.1% in the first quarter, 3.2% in the second quarter and 1.9% in the third quarter, and increased 1.1% in the fourth quarter. Americas PT revenue represented 16.4% of total Company revenue in 2007 and 17.3% in 2006.
The Americas PT gross profit rate increased primarily due to growth in fee-based income and reduced payroll taxes and workers’ compensation costs. Americas PT’s share of the reduction in workers’ compensation expense in 2007 was approximately $1.0 million, compared to an adjustment in 2006 of approximately $0.5 million.
Selling, general and administrative expenses increased by 10.5% as compared to 2006. The increase was due to increased compensation relatedsalary costs and increased staffing costs related to adding permanent placement recruiters.
EMEA Commercial
| | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | Change | | | Constant
Currency
Change | |
| | | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 1,292.4 | | | $ | 1,145.5 | | | 12.8 | % | | 4.2 | % |
Fee-based income | | | 38.2 | | | | 28.8 | | | 32.3 | | | 21.5 | |
Earnings from Operations | | | 8.9 | | | | (1.8 | ) | | NM | | | | |
| | | | |
Gross profit rate | | | 17.7 | % | | | 16.6 | % | | 1.1 | pts. | | | |
Expense rates: | | | | | | | | | | | | | | |
% of revenue | | | 17.0 | | | | 16.8 | | | 0.2 | | | | |
% of gross profit | | | 96.1 | | | | 100.9 | | | (4.8 | ) | | | |
Operating margin | | | 0.7 | | | | (0.2 | ) | | 0.9 | | | | |
The change in translated U.S. dollar revenue from services in EMEA Commercial resulted from the increase in fee-based income, an increase in average hourly bill rates of 10.2% (1.8% on a constant currency basis) and an increase in hours worked of 1.9%. EMEA Commercial revenue represented 22.8% of total Company revenue in 2007 and 20.6% in 2006.
Constant currency year-over-year revenue comparisons reflect increases of 6.5% in the first quarter, 5.8% in the second quarter, 2.9% in the third quarter and 2.0% in the fourth quarter.
EMEA Commercial earnings from operations for 2007 include a $5.9 million charge related to the restructuring of the U.K. operations and a $4.8 million benefit related to French payroll tax credits. The increase in the gross profit rate primarily reflects the effect of the French payroll tax credits.
Selling, general and administrative expenses increased by 14.5% as compared to 2006. The increase in U.S. dollar reported expenses was due primarily to the growth in compensation related costs and the $5.9 million U.K. restructuring charge.
EMEA PT
| | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | Change | | | Constant
Currency
Change | |
| | | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 158.8 | | | $ | 119.6 | | | 32.8 | % | | 22.3 | % |
Fee-based income | | | 21.9 | | | | 12.1 | | | 80.5 | | | 68.8 | |
Earnings from Operations | | | 2.4 | | | | 0.7 | | | 250.0 | | | | |
| | | | |
Gross profit rate | | | 28.2 | % | | | 24.5 | % | | 3.7 | pts. | | | |
Expense rates: | | | | | | | | | | | | | | |
% of revenue | | | 26.7 | | | | 23.9 | | | 2.8 | | | | |
% of gross profit | | | 94.6 | | | | 97.6 | | | (3.0 | ) | | | |
Operating margin | | | 1.5 | | | | 0.6 | | | 0.9 | | | | |
The change in translated U.S. dollar revenue from services in EMEA PT resulted from the increase in fee-based income and an increase in average hourly bill rates of 17.6% (8.4% on a constant currency basis), combined with an increase in hours worked of 8.3%. EMEA PT revenue represented 2.8% of total Company revenue in 2007 and 2.2% for 2006.
Constant currency year-over-year revenue comparisons reflect increases of 26.1% in the first quarter, 28.9% in the second quarter, 19.7% in the third quarter and 16.3% in the fourth quarter.
The increase in the EMEA PT gross profit rate for 2007 was primarily due to increases in fee-based income. Selling, general and administrative expenses increased by 47.9% as compared to 2006. The increase in U.S. dollar reported expenses was due primarily to the growth in compensation related costs and costs associated with new branches.
APAC Commercial
| | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | Change | | | Constant
Currency
Change | |
| | | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 310.6 | | | $ | 232.9 | | | 33.4 | % | | 22.7 | % |
Fee-based income | | | 15.0 | | | | 14.8 | | | 1.3 | | | (7.7 | ) |
Earnings from Operations | | | 3.2 | | | | 4.2 | | | (22.3 | ) | | | |
| | | | |
Gross profit rate | | | 17.1 | % | | | 18.4 | % | | (1.3 | ) pts. | | | |
Expense rates: | | | | | | | | | | | | | | |
% of revenue | | | 16.0 | | | | 16.6 | | | (0.6 | ) | | | |
% of gross profit | | | 93.9 | | | | 90.3 | | | 3.6 | | | | |
Operating margin | | | 1.0 | | | | 1.8 | | | (0.8 | ) | | | |
The change in translated U.S. dollar revenue from services in APAC Commercial resulted from an increase in hours worked of 28.3%, combined with an increase in average hourly bill rates of 5.1% (a decrease of 3.3% on a constant currency basis). The constant currency change in average hourly bill rates was impacted by significant growth in lower average wage rate countries, such as India and Malaysia.APAC Commercial revenue represented 5.5% of total Company revenue in 2007 and 4.2% for 2006.
Constant currency year-over-year revenue comparisons reflect increases of 12.0% in the first quarter, 25.5% in the second quarter, 23.0% in the third quarter and 29.1% in the fourth quarter. Acquisitions in 2007 contributed approximately 15 percentage points to APAC Commercial constant currency revenue growth.
The decrease in the APAC Commercial gross profit rate for 2007 was primarily due to a higher mix of traditional temporary-based revenue. Selling, general and administrative expenses increased by 28.6% as compared to 2006. The increase in U.S. dollar reported expenses was due to significant investments in this region, through acquisitions and costs associated with new branches.
APAC PT
| | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | Change | | | Constant
Currency
Change | |
| | | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 26.7 | | | $ | 16.4 | | | 63.2 | % | | 50.8 | % |
Fee-based income | | | 5.0 | | | | 3.0 | | | 69.4 | | | 56.5 | |
Earnings from Operations | | | 0.1 | | | | 0.0 | | | NM | | | | |
| | | | |
Gross profit rate | | | 33.0 | % | | | 32.3 | % | | 0.7 | pts. | | | |
Expense rates: | | | | | | | | | | | | | | |
% of revenue | | | 32.6 | | | | 32.4 | | | 0.2 | | | | |
% of gross profit | | | 98.6 | | | | 100.5 | | | (1.9 | ) | | | |
Operating margin | | | 0.4 | | | | (0.2 | ) | | 0.6 | | | | |
The change in translated U.S. dollar revenue from services in APAC PT resulted from the increase in fee-based income and an increase in hours worked of 44.4%, combined with an increase in average hourly bill rates of 18.3% (9.8% on a constant currency basis). APAC PT revenue represented 0.5% of total Company revenue in 2007 and 0.3% for 2006. Constant currency year-over-year revenue comparisons reflect increases of 11.8% in the first quarter, 28.0% in the second quarter, 79.1% in the third quarter and 83.1% in the fourth quarter.
The increase in the APAC PT gross profit rate for 2007 was primarily due growth in fee-based income. Selling, general and administrative expenses increased by 63.8% as compared to 2006. The increase in U.S. dollar reported expenses was due to significant investments in this region, including costs associated with new branches.
OCG
| | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | Change | | | Constant
Currency
Change | |
| | | (In millions of dollars) | | | | | | | |
Revenue from Services | | $ | 190.6 | | | $ | 154.8 | | | 23.2 | % | | 22.3 | % |
Fee-based income | | | 16.7 | | | | 9.7 | | | 72.0 | | | 67.0 | |
Earnings from Operations | | | 8.0 | | | | 8.9 | | | (10.2 | ) | | | |
| | | | |
Gross profit rate | | | 26.4 | % | | | 24.9 | % | | 1.5 | pts. | | | |
Expense rates: | | | | | | | | | | | | | | |
% of revenue | | | 22.2 | | | | 19.1 | | | 3.1 | | | | |
% of gross profit | | | 84.0 | | | | 76.8 | | | 7.2 | | | | |
Operating margin | | | 4.2 | | | | 5.8 | | | (1.6 | ) | | | |
Revenue from services in the OCG segment for 2007 increased in all three regions – Americas, Europe and Asia-Pacific. OCG revenue represented 3.4% of total Company revenue in 2007 and 2.8% for 2006. Constant currency year-over-year revenue comparisons reflect increases of 18.9% in the first quarter, 9.2% in the second quarter, 26.6% in the third quarter and 29.9% in the fourth quarter. The large growth rates in the third and fourth quarter were fueled by increased revenue in the retail sector of our business processing outsourcing organization, along with strong growth rates in our executive placement and CWO fees. Acquisitions in 2006 and 2007 contributed approximately 2 percentage points to constant currency revenue growth.
The OCG gross profit rate increased primarily due to increases in fee-based income in our executive placement business unit, continued strong growth in the CWO business unit, coupled with the full year revenue impact of the 2006 acquisition of our career transition unit, The Ayers Group. Selling, general and administrative expenses increased 43.1% as compared to 2006, due to a full year of expense of the career transition unit in 2007, as well as additional expenses in our CWORPO and executive placement business units, that supported the large revenue increases discussed above.
as well as an overall decrease in discretionary spending on business travel and general staffing expenses.
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. 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 totaled $118$80.5 million at the end of 2008, an increase2010, a decrease of $25$8.4 million from the $93$88.9 million at year-end 2007.2009. As further described below, during 2008,2010, we generated $102$41.8 million of cash from operating activities, used $64$11.3 million of cash in investing activities and used $9$35.3 million in financing activities.
29
In
2008,2010, we generated
$102$41.8 million in cash from our operating activities, as compared to
$73using $27.4 million in
20072009 and
$116generating $111.4 million in
2006.2008. The increase from
20072009 to 2010 was
primarily due
primarily to
a decreaseimproved earnings in
accounts receivable, as a result of declining revenues in the fourth quarter of 2008.2010. The decrease from
20062008 to 2009 was
primarily due to
lower net earnings.the decline in operating earnings, after adjustment for non-cash asset impairments and non-cash changes in deferred tax assets.
Trade accounts receivable totaled
$816$810.9 million at the end of
2008.2010. Global days sales outstanding for the fourth quarter were
50 days for 2008, compared to 49 days for
2007.2010, compared to 51 days for 2009.
Our working capital position was
$427$367.6 million at the end of
2008, a decrease2010, an increase of
$51$10.0 million from year-end
2007.2009. The current ratio was
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
and 1.8 at year-end 2007.was reclassified from financing to operating activities in the consolidated statement of cash flows.
In
2008,2010, we used
$64$11.3 million
in cash for investing activities, compared to
$82$23.4 million in
20072009 and
$65$64.0 million in
2006.2008. Capital expenditures,
which totaled
$31$11.0 million in
2008 and $462010, $13.1 million in
each of 20072009 and
2006. Capital expenditures are$31.1 million in 2008, primarily related to the Company’s information technology
programs, includingprograms. In 2008, capital expenditures included costs for the implementation of the PeopleSoft payroll, billing and accounts receivable
project, and branch openings, refurbishments and relocations.project.
The PeopleSoft payroll, billing and accounts receivable project,
which commenced in the fourth quarter of 2004, is intended to cover the U.S., Canada, Puerto Rico, U.K. and Ireland. Through
2007,2010, the Company implemented accounts receivable in all locations,
and payroll and billing in the U.K. and
Ireland. The Company implementedIreland, payroll in Canada
atand general ledger in the
startU.S., Puerto Rico and Canada. The total cost of the
fourth quarter of 2008. The Company spent $9 million in capital expenditures and $7 million in selling, general and administrative expenses in 2008, bringing the total costproject to
date is $79 million,
through 2008, of which $56 million was capital expenditures and $23 million was selling, general and administrative expenses.
The U.S. and Puerto Rico payroll implementations, and U.S., Canada and Puerto Rico billing implementations have been delayed until at least 2010. The total costWe anticipate spending approximately $25 to $30 million to complete
these implementations has not yet been determined.During the second quarter of 2006, we acquired the net assets of The Ayers Group, a New York-based career management firm specializing in customized career transition, consulting services and information technology staffing, for $4.6 million. The transaction included additional contingent payments, based primarily on the achievement of certain earnings targets. The 2006 earnings target was not met and no related payment was made. The 2007 earnings target was partially met and $0.1 million was paid in 2008. The 2008 earnings target was met and $0.7 million was accrued; the payment will be made in 2009. No further contingent earnout payments remain as of the 2008 year end. The Ayers Group is included as a business unit in the OCG business segment.
During the fourth quarter of 2006, we purchased an additional 1.6% interest in Temp Holdings for $16.0 million, bringing our total investment to 4.9%.
Also during the fourth quarter of 2006, we purchased Sony Corporation’s 40% interest in Tempstaff Kelly Inc. (“Tempstaff Kelly”), a joint venture originally created with Sony Corporation and Tempstaff, for $5.0 million. With the purchase of Sony Corporation’s ownership share, we increased our ownership interest to 49%. Accordingly, earnings from continuing operations for 2006 included our equity earnings in Tempstaff Kelly from the date of acquisition. AtPeopleSoft project by the end of the first quarter of 2007, we purchased the remaining shares of Tempstaff Kelly for $2.0 million, net of cash received. With the purchase of the remaining 51% interest in Tempstaff Kelly, Tempstaff Kelly became a wholly owned, consolidated subsidiary of Kelly Services, Inc. as of April 1, 2007. Tempstaff Kelly is included2014. Included in the APAC Commercial business segment subsequentconsolidated balance sheet at year-end 2010 was $5.5 million of capitalized costs related to April 1, 2007.
unimplemented PeopleSoft modules.
During
2009, we made the
first quarter of 2007, we acquired the net operating assets of Talents Technology, a permanent placement and executive search firm with operations in the Czech Republic and Poland, for $3.1 million in cash. The transaction also included additional contingent earnoutfollowing payments
based primarily on the achievement of certain earnings targets. The 2007 and 2008 earnings targets were not met. As of the 2008 year end, one contingent earnout remains, for uprelated to
approximately $0.8 million based on 2009 earnings. Talents Technology is included in the EMEA PT business segment as of April 1, 2007.During the first quarter of 2007, we also acquired the net operating assets of CGR/seven LLC, a creative staffing services firm that specializes in providing creative talent, for $12.3 million in cash at the date of acquisition and $1.0 million payable in each of the years 2008 and 2009, and possible additional earnout payments, based primarily on the achievement of certain earnings targets. In the second quarter of 2008, the Company paid the additional $1.0 million guaranteed acquisition payment and $2.0acquisitions: $5.7 million earnout payment. The earnings target for the 2008 payment was not met. No further contingent earnout payments remain as of the 2008 year end. The remaining guaranteed payment for $1.0 million is accrued as of the 2008 year end. CGR/seven is included in the Americas PT business segment as of April 1, 2007.
During the second quarter of 2007, we acquired P-Serv, a company specializing in temporary staffing, permanent staffing, outsourcing and executive search with operations in China, Hong Kong and Singapore, for $8.0 million in cash. P-Serv is included as a business unit in the APAC Commercial business segment of the Company from the date of acquisition.During 2008, the previous earnout agreement for $2.6 million was converted to a consulting agreement, payable quarterly retroactive to July, 2008 through March, 2011.
During the fourth quarter of 2007, we acquired the net assets of access AG, a specialized recruitment services company headquartered in Germany with operations in Austria, for $21.2 million in cash. access AG is included as a business unit in the OCG business segment. The transaction included an additional contingent payment, based on the achievement of certain earnings targets. During the first quarter of 2008, $7.6 million was paid related primarily to the 2007 acquisition of access AG. Of this amount, $4.3AG, $1.0 million represents the payment of a previously recorded liability, and the remaining $3.3 million represents adjustmentsrelated to the initial purchase price. 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
earnings target for 2008 was met and $6.3following net cash payments related to acquisitions: $13.0 million
was accrued;related to the
related payment will be made in 2009. No further contingent earnout payments remain as of the 2008 year end.During the third quarter of 2008, we acquired all of the sharesacquisition of the Portuguese subsidiaries of Randstad Holding N.V., Randstad – Empresa de Trabalho Temporario, Unipessoal, Lda and Randstad – Gestao de Processos, Lda for $13.2$9.1 million in cash. The acquisition includes 13 branch offices and 15 on-site locations serving the Portuguese staffing market. In additionrelated to traditional temporary staffing services, current business lines also include on-site personnel management and permanent placement. This acquisition is included as business units in the EMEA Commercial segment of the Company from the date of acquisition.
During the third quarter of 2008, we also completed the acquisition of Toner Graham, a specialized accountancy$7.6 million related primarily to the acquisition of access AG and finance recruitment services company headquartered in$3.0 million related to the United Kingdom, for $9.1 million in cash. The transaction also includes additionalacquisition of CGR/seven LLC.
As of January 2, 2011, there are no remaining contingent earnout payments
up to approximately $6.1 million in total, payable over three years, based primarily on the achievement of certain earnings targets. The earnings target for the 2008 payment was partially met and $0.2 million was accrued; the related payment will be made in 2009. As of the 2008 year end, two contingent earnout payments remain, each for up to approximately $2.2 million based on 2009 and 2010 earnings. Toner Graham is included as a business unit in the EMEA PT business segment of the Company from the date of acquisition.Total future guaranteed and contingent payments related to theany acquisitions above amount to $13.4 million as of December 28, 2008.
During the first quarter of 2007, we sold the KHC business for cash proceeds of $12.5 million. During the fourth quarter of 2006, we sold the KSL business for cash proceeds of $6.5 million.
from previous years.
In
2008,2010, we used
$9$35.3 million
in cash from financing activities, as compared to
$22generating $19.6 million in
20072009 and
generating $1using $18.6 million in
2006.2008. Debt totaled
$115$78.8 million at year-end
2008,2010 compared to
$98$137.1 million at year-end
2007. At2009. 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% at the end of
2008, debt represented approximately 15.0%2010 and 19.5% at the end of
total capital.During 2008,2009.
Effective September 28, 2009, we repurchased 436,697 Class A shares for $8 million under the $50 million Class A share repurchase program authorized by the board of directors in August, 2007. During 2007, we repurchased 1,679,873 Class A shares for $34.7 million. As of December 28, 2008,negotiated a new secured revolving credit facility, with a total capacity of $7.3$90 million remained available underand carrying a term of three years, maturing in September of 2012. Effective December 4, 2009, we established a 364-day, $100 million securitization facility. In 2010, the $50net change in short-term borrowings included $38 million share repurchase program. We do not intendrelated to make further share repurchases underpayments on the plan.securitization facility. In 2009, the net change in short-term borrowings included $55 million related to borrowings on the securitization facility.
30
During 2010, we paid $14.9 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, maturing October 3, 2011.pounds. The facility was used to refinance the short-term borrowings related to the Portugal and Toner Graham acquisitions.
The loans bear interest at the LIBOR rate applicable to each currency plus a spread of 100 basis points. This credit facility contains requirements for a maximum leverage ratio and minimum interest coverage ratio, both of which were met at December 28, 2008. The entire principal amount is due upon maturity with interest payments due at intervals of one, two, three, or six months, as elected by the Company.In the first quarter of 2007, we obtained short-term financing utilizing an $8.2 million yen-denominated credit facility to purchase the additional 51% interest in Tempstaff Kelly, as well as to fund local working capital.
In connection with the additional investment in Tempstaff in the fourth quarter of 2006, we obtained short-term financing utilizing a $16 million yen-denominated credit facility. During the third quarter of 2006, we obtained short-term financing utilizing a $5 million yen-denominated credit facility to purchase the additional 40% interest in Tempstaff Kelly, Inc.
In the fourth quarter of 2007, we refinanced $49.1 million of the short-term yen denominated borrowings with a five-year term loan. The loan bears interest at LIBOR plus 45 basis points. Interest-only payments are required for periods of three, six, nine or 12 months. The loan agreement contains requirements for a maximum leverage ratio and a minimum interest coverage ratio, both of which were met at December 28, 2008.
As of year-end
2008,2010, we had
$141.8$127.3 million of committed unused credit facilities.
In November, 2005, we entered into a $150 million five-year, unsecured multi-currency revolving credit facility which may be used to fund working capital, acquisitions and for general corporate purposes. The interest rate applicable to borrowings under this facility is 40 basis points over local LIBOR. This credit facility contains requirements for a maximum leverage ratio and a minimum interest coverage ratio, both of which were met at December 28, 2008. At year-end
2008,2010, we had additional uncommitted one-year credit facilities totaling
$14.5$11.2 million, under which we had borrowed
$1.9$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 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 in
2008, $0.522008. No dividends were paid in
2007 and $0.452009 or 2010. Payments of dividends are restricted by the financial covenants contained in
2006.our debt facilities. Details of this restriction are contained in the Debt footnote 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
2008: | | | | | | | | | | | | | | | |
| | | Payment due by period |
| | | Total | | Less than
1 year | | 1-3 Years | | 3-5 Years | | More than
5 years |
| | | (In millions of dollars) |
Operating leases | | $ | 175.8 | | $ | 56.5 | | $ | 72.3 | | $ | 32.2 | | $ | 14.8 |
Short-term borrowings | | | 35.2 | | | 35.2 | | | - | | | - | | | - |
Accrued insurance | | | 73.2 | | | 26.3 | | | 23.1 | | | 11.1 | | | 12.7 |
Accrued retirement benefits | | | 68.2 | | | 6.6 | | | 13.3 | | | 13.2 | | | 35.1 |
Long-term debt | | | 80.0 | | | - | | | 19.9 | | | 60.1 | | | - |
Payments related to acquisitions | | | 13.4 | | | 8.1 | | | 5.3 | | | - | | | - |
Other long-term liabilities | | | 4.1 | | | 0.5 | | | 1.0 | | | 1.0 | | | 1.6 |
FIN 48 income tax, interest and penalties | | | 2.4 | | | 1.2 | | | 0.5 | | | 0.5 | | | 0.2 |
Purchase obligations | | | 26.8 | | | 13.5 | | | 13.0 | | | 0.3 | | | - |
| | | | | | | | | | | | | | | |
| | | | | |
Total | | $ | 479.1 | | $ | 147.9 | | $ | 148.4 | | $ | 118.4 | | $ | 64.4 |
| | | | | | | | | | | | | | | |
2010:
| | | | | | | | | | | | | | | | | | | | | |
| | | 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. Purchase obligations above represent unconditional commitments relating primarily to voice and data communications services which we expect to utilize generally within the next three 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.
31
We expect to meet our ongoing short- and long-term cash requirements including the funding of the PeopleSoft payroll and billing project and costs related to litigation, principally through cash generated from operations, available cash and equivalents, securitization and committed unused credit facilities. Additional funding sources available for potential future acquisitionscould include public or private bonds, asset-based lending, additional bank facilities or other sources appropriate to the size and nature of the acquisition.sources. We expect these same sources of liquidity to fund costs incurredthe $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. At the present time, we do not have specific plans to repatriate the majority of our international excess cash balances. As our business recovers, we expect this international cash will be needed to fund working capital growth in connection withour local operations. The majority of our international cash was invested in our cash pool and was available to fund general corporate needs both at our headquarters and at other international affiliates. There are no significant restrictions on our ability to utilize the restructuringcash 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 U.K. operations throughdebt.
We manage our cash and debt very closely to minimize outstanding debt balances. 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 future collectioncash pool first, and then we access our borrowing facilities.
As of
U.K. trade receivables.During 2008,January 2, 2011, we had $90.0 million of available capacity on our $90 million revolving credit facility and $37.3 million of available capacity on our $100 million securitization facility. The securitization facility carried $17.0 million of short-term borrowings and $45.7 million of standby letters of credit related to workers’ compensation. Together, the revolving credit and securitization facilities provide the Company met all financialwith 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. During the first quarter of 2011, we expect to refinance the 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.
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
covenants required by itsinvestment vehicles regularly to ensure high credit
facilities. The Company’s two main covenants are debtquality and access to
total capital, which was 15.0% at year end, and interest coverage, which was 13.6 times at year end. The Company’s debt agreements require debt to total capital to be less than 50% and interest coverage to be at least five times. The ratios are calculated on a rolling four quarters basis and allow the exclusion of non-cash, non-recurring items. If the Company were to continue to report losses in 2009, it is possible that we would not meet this loan covenant. If this were to occur, we believe we would be able to obtain temporary waivers of the loan covenants; however, there can be no assurance this would happen. In addition, we expect that our
borrowing cost would increase but we are not currently able to estimate an amount.invested cash.
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.
32
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
current economichistorical 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
selling, general and administrativeSG&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
20082010 and
2007,2009, the allowance for uncollectible accounts receivable was
$17.0$12.3 million and
$18.2$15.0 million, respectively.
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
as well asand current legal, economic and regulatory
factors such as indices of medical cost increases and other indicators of national severity and frequency trends.factors. Where appropriate, multiple generally-accepted actuarial techniques are applied and tested in the course of preparing our estimates.
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
assurancesassurance 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
$73.2$70.5 million and
$84.1$67.0 million at year-end
20082010 and
2007,2009, respectively.
We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. SFAS No. 142, “Goodwill and Other Intangible Assets,” requiresGenerally 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 based on our organizational structure and the financial information that is provided to and reviewed by management.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 is used.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 Company.reporting unit being measured. Estimated future cash flows are based on our internal projection model. For reasonableness, the summationAssumptions and estimates about future cash flows and discount rates are complex and often subjective. They can be affected by a variety of reporting units’ fair values is compared tofactors, including external factors such as industry and economic trends, and internal factors such as changes in our market capitalization.business strategy and our internal forecasts.
33
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
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 tests duringtest for all reporting units in the fourth quarter. As a result of worsening economic conditions, wequarter 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
fair valuesecond quarter of
our2009 related to the Americas Commercial, EMEA
PT and APAC Commercial reporting
unit was less than its carrying value. As a result, we performed step two of the goodwill impairment test to determine the implied fair value of EMEA Commercial’s goodwill.units. The
implied fair value of the goodwill was less than its carrying value. As a result, we recognized a goodwill impairment loss of $50.4 million
recognized in
2008 related to the EMEA Commercial reporting unit.
This expense hasThese expenses have been recorded in the asset
impairmentimpairments line on the consolidated statement of earnings.
The fair value of all other reporting units exceeded carrying value.Our analysis uses significant assumptions by segment, including: expected future revenue and expense growth rates, profit margins, cost of capital, discount rate and forecasted capital expenditures. Our projections assume near-term revenue declines, followed by a recovery and long-term modest growth. 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.
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
benefitsresults 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 change in the estimated discount rate of 1% could have resulted in the fair value of the Americas Commercial segment falling below its book value. At year-end
20082010 and
2007,2009, total goodwill amounted to
$117.8 million and $147.2 million, respectively.$67.3 million. (See
Note 6)the Goodwill footnote in the notes to consolidated financial statements).
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
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 requiresgenerally 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
FIN 48.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
short-termcurrent 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, such as expenses which are not deductible on our tax return, and some are temporary differences, such as depreciation expense. Temporary differences createwhich 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.
34
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
Note 17,the Contingencies
footnote in the
Notesnotes to
Consolidated Financial Statementsconsolidated financial statements of this Annual Report on Form 10-K. At year-end
20082010 and
2007,2009, the accrual for litigation costs amounted to
$24.2$3.6 million and
$1.0$2.3 million, respectively, and is included in accounts payable and accrued liabilities on the consolidated balance sheet.
New Accounting Pronouncements
See Note 19 to our consolidated financial statements presented in Part II, Item 8 of this report for a description of new accounting pronouncements.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this report are “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,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or variations or negatives thereof or by similar or comparable words or phrases. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future actions by us that may be provided by management 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, 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 initiated by adverse industry or market developments, unexpected termination of customer contracts, availability of temporary workers with appropriate skills required by customers, increases in wages paid to temporary workers, liabilities for clientemployment-related claims and employee actions, foreign currency fluctuations,losses, including class action lawsuits, 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 legislation on our ability to effectively implementbusiness, and manage our information technology programs, and our ability to successfully expand into new markets and service lines.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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.35
We do not hold or invest in derivative contracts.
| | |
| 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. These risks are mitigated bycurrencies, as well as our local currency-denominated borrowings. With the
useexception of
our yen-denominated debt, the local
currency borrowings, which mitigatecurrency-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%
inof market interest rates would not have a material impact on
20082010 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 Fair Value Measurements footnote in the notes to consolidated 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.36
| | |
| 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 43 of this filing and are presented in pages
44-79.44-73.
| | |
| ITEM 9. | | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| | |
| ITEM 9A. | | CONTROLS AND PROCEDURES. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.None.
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 44 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
December 28, 2008January 2, 2011 as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There were no 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 |
None.
During the fourth quarter of 2008, the Company converted the Canada temporary payroll system to the PeopleSoft payroll system. Management has reviewed the internal controls impacted by the implementation of the above PeopleSoft system, and has made changes to these internal controls as appropriate.37
ITEM 9B. OTHER INFORMATION
None.
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 Officers of the Registrant”, which is included on page 38, and “Code of Business Conduct and Ethics,” which is included on page 39, (Item 10), and except as set forth under the title “Equity Compensation Plan Information,” which is included on page 39, (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. EXECUTIVE OFFICERS OF THE REGISTRANT.
| | |
| 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. |
| | | | | | |
Name/Office | | Age | | Served as an
Officer Since | | Business Experience During Last 5 Years |
Carl T. Camden President and Chief Executive Officer (1) | | 54 | | 1995 | | Served as officer of the Company. |
| | | |
George S. Corona Executive Vice President and Chief Operating Officer (2) | | 50 | | 2000 | | Served as officer of the Company. |
| | | |
Michael L. Durik Executive Vice President and Chief Administrative Officer (3) | | 60 | | 1999 | | Served as officer of the Company. |
| | | |
Patricia Little Executive Vice President and Chief Financial Officer (4) | | 48 | | 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 | | 53 | | 1996 | | Served as officer of the Company. |
| | | |
Michael E. Debs Senior Vice President and Chief Accounting Officer (5) | | 51 | | 2000 | | Served as officer of the Company. |
| | | |
Rolf E. Kleiner Senior Vice President | | 54 | | 1995 | | Served as officer of the Company. |
| | | |
Daniel T. Lis Senior Vice President, General Counsel and Corporate Secretary | | 62 | | 2003 | | Served as officer of the Company. |
| | | |
Antonina M. Ramsey Senior Vice President | | 54 | | 1992 | | Served as officer of the Company. |
38
(1) | Mr. Camden was appointed Acting Chief Executive Officer on February 9, 2006 and was appointed Chief Executive Officer on February 27, 2006. |
(2) | Mr. Corona was appointed Chief Operating Officer effective January 1, 2009. |
(3) | Mr. Durik was appointed Chief Administrative Officer on May 19, 2004. |
(4) | Ms. Little was appointed Chief Financial Officer effective July 1, 2008. |
(5) | Mr. Debs served as Interim Chief Financial Officer for the first six months of fiscal 2008. |
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, 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
81.75. We have posted our Code of Business Conduct and Ethics on our website at
www.kellyservices.com. 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. | | SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS. |
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
2008. | | | | | | | |
| | | 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) | | 1,027,963 | | $ | 25.07 | | 2,477,024 |
| | | |
| Equity compensation plans not approved by securityholders (3) | | - | | | - | | - |
| | | | | | | |
| | | |
| Total | | 1,027,963 | | $ | 25.07 | | 2,477,024 |
| | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | 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 | |
| | | | | | | | | | |
| | |
| (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
682,028 of restricted stock awards granted to employees and not yet vested at December 28, 2008.
|
| | The number of shares to be issued upon exercise of outstanding options, warrants and rights excludes 708,405 of restricted stock awards granted to employees and not yet vested at January 2, 2011. |
|
| (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.
|
| | 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 IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) | The following documents are filed as part of this report: | |
| ITEM 15. | | EXHIBITS, FINANCIAL STATEMENT SCHEDULES. |
(a) The following documents are filed as part of this report:
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
December 28, 2008January 2, 2011
Consolidated Balance Sheets at January 2, 2011 and January 3, 2010
Consolidated Statements of Stockholders’ Equity for the three fiscal years ended January 2, 2011
Consolidated Statements of Cash Flows for the three fiscal years ended
December 28, 2008Consolidated Balance Sheets at December 28, 2008 and December 30, 2007
Consolidated Statements of Stockholders’ Equity for the three fiscal years ended December 28, 2008
January 2, 2011
Notes to Consolidated Financial Statements
| | (2) | | Financial Statement Schedule - |
For the three fiscal years ended
December 28, 2008:January 2, 2011:
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 8074, which is incorporated herein by reference. |
| (b) | | The Index to Exhibits and required Exhibits are included following the Financial Statement Schedule beginning at page 8074 of this filing. |
SIGNATURES40
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 11, 200917, 2011 | | | | KELLY SERVICES, INC. |
| | | | Registrant |
| | |
| | By | | |
| | Registrant | | |
| | | | | | |
| | By: | | /s/ P. Little |
| P. Little | | |
| | P. 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 11, 200917, 2011 | | * | | T. E. Adderley |
| | | | T. E. Adderley |
| | | | Chairman and Director |
| | | | |
Date: February 11, 200917, 2011 | | * | | C. T. Camden |
| | | | C. T. Camden |
| | | | President, Chief Executive Officer and Director |
| | | | (Principal Executive Officer) |
| | | | |
Date: February 11, 200917, 2011 | | * | | C. M. Adderley |
| | | | C. M. Adderley |
| | | | Director |
| | | | |
| Date: February 17, 2011 | | * | | J. E. Dutton |
| | | | J. E. Dutton |
| | | | Director |
| | | | |
Date: February 11, 200917, 2011 | | * | | M. A. Fay, O.P. |
| | | | M. A. Fay, O.P. |
| | | | Director |
| | | | |
Date: February 11, 200917, 2011 | | * | | V. G. IstockT. B. Larkin |
| | | | V. G. IstockT. B. Larkin |
| | | | Director |
| | | | |
Date: February 11, 200917, 2011 | | * | | L. A. Murphy |
| | | | L. A. Murphy |
| | | | Director |
| | | | |
Date: February 11, 200917, 2011 | | * | | D. R. Parfet |
| | | | D. R. Parfet |
| | | | Director |
| | | | |
Date: February 11, 200917, 2011 | | * | | T. Saburi |
| | | | T. Saburi |
| | | | Director |
| | | | |
| Date: February 17, 2011 | | * | | B. J. White |
| | | | B. J. White |
| | | | Director |
41
| | | | | | |
|
Date: February 11, 200917, 2011 | | | | /s/ P. Little |
| P. Little | | |
| | P. Little |
| | | | Executive Vice President and Chief Financial Officer | | |
| | | | (Principal Financial Officer) | | |
| | | | | | |
Date: February 11, 200917, 2011 | | | | /s/ M. E. Debs |
| | | | M. E. Debs | | |
| | | | Senior Vice President, Controller and Chief Accounting Officer |
| | |
| | | | Accounting Officer | | |
| | | | (Principal Accounting Officer) | | |
| | | | | | |
Date: February 11, 200917, 2011 | | *By | | /s/ P. Little |
| P. Little | | |
| | P. Little |
| | | | Attorney-in-Fact | | |
42
INDEX TO FINANCIAL STATEMENTS AND
SUPPLEMENTAL SCHEDULE
Kelly Services, Inc. and Subsidiaries
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;
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
December 28, 2008.January 2, 2011. 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
December 28, 2008,January 2, 2011, 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 December 28, 2008January 2, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page 45.
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
December 28, 2008January 2, 2011 and
December 30, 2007,January 3, 2010, and the results of their operations and their cash flows for each of the three fiscal years
in the period ended
December 28, 2008January 2, 2011 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
December 28, 2008,January 2, 2011, based on criteria established in
Internal Control—Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’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’s Report on Internal Control
Overover Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’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
February 17, 2011
February 11, 200945
CONSOLIDATED STATEMENTS OF EARNINGS Kelly Services, Inc. and Subsidiaries
| | | | | | | | | | |
| | | 2008 | | | 2007 | | 2006 |
| | | (In thousands of dollars except per share items) |
| | | |
Revenue from services | | $ | 5,517,290 | | | $ | 5,667,589 | | $ | 5,546,778 |
| | | |
Cost of services | | | 4,539,639 | | | | 4,678,500 | | | 4,640,052 |
| | | | | | | | | | |
| | | |
Gross profit | | | 977,651 | | | | 989,089 | | | 906,726 |
| | | |
Selling, general and administrative expenses | | | 967,389 | | | | 909,009 | | | 828,685 |
| | | |
Asset impairments | | | 80,533 | | | | - | | | - |
| | | | | | | | | | |
| | | |
(Loss) earnings from operations | | | (70,271 | ) | | | 80,080 | | | 78,041 |
| | | |
Other (expense) income, net | | | (3,452 | ) | | | 3,211 | | | 1,471 |
| | | | | | | | | | |
| | | |
(Loss) earnings from continuing operations before taxes | | | (73,723 | ) | | | 83,291 | | | 79,512 |
| | | |
Income taxes | | | 7,992 | | | | 29,567 | | | 22,727 |
| | | | | | | | | | |
| | | |
(Loss) earnings from continuing operations | | | (81,715 | ) | | | 53,724 | | | 56,785 |
| | | |
(Loss) earnings from discontinued operations, net of tax | | | (524 | ) | | | 7,292 | | | 6,706 |
| | | | | | | | | | |
| | | |
Net (loss) earnings | | $ | (82,239 | ) | | $ | 61,016 | | $ | 63,491 |
| | | | | | | | | | |
| | | |
Basic (loss) earnings per share | | | | | | | | | | |
(Loss) earnings from continuing operations | | $ | (2.35 | ) | | $ | 1.48 | | $ | 1.58 |
(Loss) earnings from discontinued operations | | | (0.02 | ) | | | .20 | | | .19 |
| | | | | | | | | | |
| | | |
Net (loss) earnings | | $ | (2.37 | ) | | $ | 1.68 | | $ | 1.76 |
| | | | | | | | | | |
| | | |
Diluted earnings per share | | | | | | | | | | |
(Loss) earnings from continuing operations | | $ | (2.35 | ) | | $ | 1.47 | | $ | 1.56 |
(Loss) earnings from discontinued operations | | | (0.02 | ) | | | .20 | | | .18 |
| | | | | | | | | | |
Net (loss) earnings | | $ | (2.37 | ) | | $ | 1.67 | | $ | 1.75 |
| | | | | | | | | | |
| | | |
Dividends per share | | $ | .54 | | | $ | .52 | | $ | .45 |
| | | |
Average shares outstanding | | | | | | | | | | |
(thousands): | | | | | | | | | | |
Basic | | | 34,760 | | | | 36,357 | | | 35,999 |
Diluted | | | 34,760 | | | | 36,495 | | | 36,314 |
| | | | | | | | | | | | | |
| | | 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. |
See accompanying Notes to Consolidated Financial Statements.
46
CONSOLIDATED STATEMENTS OF CASH FLOWSBALANCE SHEETS Kelly Services, Inc. and Subsidiaries
| | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (In thousands of dollars) | |
Cash flows from operating activities | | | | | | | | | | | | |
Net (loss) earnings | | $ | (82,239 | ) | | $ | 61,016 | | | $ | 63,491 | |
Noncash adjustments: | | | | | | | | | | | | |
Impairment of assets | | | 80,533 | | | | - | | | | - | |
Depreciation and amortization | | | 45,958 | | | | 42,601 | | | | 41,730 | |
Provision for bad debts | | | 6,712 | | | | 6,654 | | | | 5,178 | |
Stock-based compensation | | | 4,440 | | | | 3,941 | | | | 5,286 | |
Deferred income taxes | | | 7,505 | | | | (5,298 | ) | | | (9,159 | ) |
Gain on sale of discontinued operations | | | - | | | | (6,166 | ) | | | (2,254 | ) |
Other, net | | | 3,721 | | | | (573 | ) | | | (405 | ) |
Changes in operating assets and liabilities: | | | 34,967 | | | | (28,831 | ) | | | 12,398 | |
| | | | | | | | | | | | |
| | | |
Net cash from operating activities | | | 101,597 | | | | 73,344 | | | | 116,265 | |
| | | |
Cash flows from investing activities | | | | | | | | | | | | |
Capital expenditures | | | (31,136 | ) | | | (45,975 | ) | | | (45,526 | ) |
Proceeds from sale of discontinued operations | | | - | | | | 12,500 | | | | 6,500 | |
Acquisition of companies, net of cash received | | | (32,712 | ) | | | (48,417 | ) | | | (4,663 | ) |
Other investing activities | | | (236 | ) | | | (532 | ) | | | (550 | ) |
Investment in unconsolidated affiliates | | | - | | | | - | | | | (20,729 | ) |
| | | | | | | | | | | | |
| | | |
Net cash from investing activities | | | (64,084 | ) | | | (82,424 | ) | | | (64,968 | ) |
| | | |
Cash flows from financing activities | | | | | | | | | | | | |
Net change in revolving line of credit | | | (34,174 | ) | | | 17,500 | | | | (11,022 | ) |
Proceeds from debt | | | 42,450 | | | | 57,277 | | | | 20,729 | |
Repayment of debt | | | - | | | | (49,054 | ) | | | - | |
Dividend payments | | | (19,052 | ) | | | (19,114 | ) | | | (16,420 | ) |
Purchase of treasury stock | | | (7,975 | ) | | | (34,703 | ) | | | - | |
Stock options and other stock sales | | | 111 | | | | 5,781 | | | | 10,973 | |
Other financing activities | | | 9,874 | | | | (165 | ) | | | (2,873 | ) |
| | | | | | | | | | | | |
| | | |
Net cash from financing activities | | | (8,766 | ) | | | (22,478 | ) | | | 1,387 | |
| | | | | | | | | | | | |
| | | |
Effect of exchange rates on cash and equivalents | | | (3,287 | ) | | | 5,947 | | | | 2,045 | |
| | | | | | | | | | | | |
| | | |
Net change in cash and equivalents | | | 25,460 | | | | (25,611 | ) | | | 54,729 | |
Cash and equivalents at beginning of year | | | 92,817 | | | | 118,428 | | | | 63,699 | |
| | | | | | | | | | | | |
| | | |
Cash and equivalents at end of year | | $ | 118,277 | | | $ | 92,817 | | | $ | 118,428 | |
| | | | | | | | | | | | |
| | | | | | | | | |
| | | 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 | |
| | | | | | | |
See accompanying Notes to Consolidated Financial Statements.
47
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF STOCKHOLDERS’ EQUITY Kelly Services, Inc. and Subsidiaries
| | | | | | | | |
| | | 2008 | | | 2007 | |
| | | (In thousands of dollars) | |
ASSETS | | | | | | | | |
Current Assets | | | | | | | | |
Cash and equivalents | | $ | 118,277 | | | $ | 92,817 | |
Trade accounts receivable, less allowances of $17,003 and $18,172, respectively | | | 815,789 | | | | 888,334 | |
Prepaid expenses and other current assets | | | 61,959 | | | | 53,392 | |
Deferred taxes | | | 31,929 | | | | 29,294 | |
| | | | | | | | |
Total current assets | | | 1,027,954 | | | | 1,063,837 | |
| | |
Property and Equipment | | | | | | | | |
Land and buildings | | | 59,204 | | | | 62,707 | |
Computer hardware and software, equipment, furniture and leasehold improvements | | | 302,621 | | | | 326,314 | |
Accumulated depreciation | | | (210,533 | ) | | | (211,002 | ) |
| | | | | | | | |
Net property and equipment | | | 151,292 | | | | 178,019 | |
| | |
Noncurrent Deferred Taxes | | | 40,020 | | | | 43,436 | |
| | |
Goodwill, net | | | 117,824 | | | | 147,168 | |
| | |
Other Assets | | | 120,165 | | | | 141,537 | |
| | | | | | | | |
Total Assets | | $ | 1,457,255 | | | $ | 1,573,997 | |
| | | | | | | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current Liabilities | | | | | | | | |
Short-term borrowings | | $ | 35,197 | | | $ | 49,729 | |
Accounts payable and accrued liabilities | | | 244,119 | | | | 171,471 | |
Accrued payroll and related taxes | | | 243,160 | | | | 270,575 | |
Accrued insurance | | | 26,312 | | | | 23,696 | |
Income and other taxes | | | 51,809 | | | | 69,779 | |
| | | | | | | | |
Total current liabilities | | | 600,597 | | | | 585,250 | |
| | |
Noncurrent Liabilities | | | | | | | | |
Long-term debt | | | 80,040 | | | | 48,394 | |
Accrued insurance | | | 46,901 | | | | 60,404 | |
Accrued retirement benefits | | | 61,576 | | | | 78,382 | |
Other long-term liabilities | | | 15,234 | | | | 13,338 | |
| | | | | | | | |
Total noncurrent liabilities | | | 203,751 | | | | 200,518 | |
| | |
Stockholders’ Equity | | | | | | | | |
Capital stock, $1.00 par value | | | | | | | | |
Class A common stock, shares issued 36,633,906 at 2008 and 2007 | | | 36,634 | | | | 36,634 | |
Class B common stock, shares issued 3,481,960 at 2008 and 2007 | | | 3,482 | | | | 3,482 | |
Treasury stock, at cost | | | | | | | | |
Class A common stock, 5,326,251 shares at 2008 and 5,036,085 at 2007 | | | (110,640 | ) | | | (105,712 | ) |
Class B common stock, 22,175 shares at 2008 and 22,575 at 2007 | | | (589 | ) | | | (600 | ) |
Paid-in capital | | | 35,788 | | | | 34,500 | |
Earnings invested in the business | | | 676,047 | | | | 777,338 | |
Accumulated other comprehensive income | | | 12,185 | | | | 42,587 | |
| | | | | | | | |
Total stockholders’ equity | | | 652,907 | | | | 788,229 | |
| | | | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 1,457,255 | | | $ | 1,573,997 | |
| | | | | | | | |
| | | | | | | | | | | | | |
| | | 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. |
See accompanying Notes to Consolidated Financial Statements.
48
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYCASH FLOWS
Kelly Services, Inc. and Subsidiaries
| | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (In thousands of dollars) | |
Capital Stock | | | | | | | | | | | | |
Class A common stock | | | | | | | | | | | | |
Balance at beginning of year | | $ | 36,634 | | | $ | 36,633 | | | $ | 36,620 | |
Conversions from Class B | | | - | | | | 1 | | | | 13 | |
| | | | | | | | | | | | |
Balance at end of year | | | 36,634 | | | | 36,634 | | | | 36,633 | |
Class B common stock | | | | | | | | | | | | |
Balance at beginning of year | | | 3,482 | | | | 3,483 | | | | 3,496 | |
Conversions to Class A | | | - | | | | (1 | ) | | | (13 | ) |
| | | | | | | | | | | | |
Balance at end of year | | | 3,482 | | | | 3,482 | | | | 3,483 | |
| | | |
Treasury Stock | | | | | | | | | | | | |
Class A common stock | | | | | | | | | | | | |
Balance at beginning of year | | | (105,712 | ) | | | (78,241 | ) | | | (90,319 | ) |
Exercise of stock options, restricted stock awards and other | | | 3,047 | | | | 7,232 | | | | 12,078 | |
Purchase of treasury stock | | | (7,975 | ) | | | (34,703 | ) | | | - | |
| | | | | | | | | | | | |
Balance at end of year | | | (110,640 | ) | | | (105,712 | ) | | | (78,241 | ) |
| | | |
Class B common stock | | | | | | | | | | | | |
Balance at beginning of year | | | (600 | ) | | | (600 | ) | | | (600 | ) |
Exercise of stock options, restricted stock awards and other | | | 11 | | | | - | | | | - | |
| | | | | | | | | | | | |
Balance at end of year | | | (589 | ) | | | (600 | ) | | | (600 | ) |
| | | |
Paid-in Capital | | | | | | | | | | | | |
Balance at beginning of year | | | 34,500 | | | | 32,048 | | | | 27,015 | |
Exercise of stock options, restricted stock awards and other | | | 1,288 | | | | 2,452 | | | | 5,033 | |
| | | | | | | | | | | | |
Balance at end of year | | | 35,788 | | | | 34,500 | | | | 32,048 | |
| | | |
Earnings Invested in the Business | | | | | | | | | | | | |
Balance at beginning of year | | | 777,338 | | | | 735,104 | | | | 688,033 | |
Adoption of FIN 48 | | | - | | | | 332 | | | | - | |
Net (loss) earnings | | | (82,239 | ) | | | 61,016 | | | | 63,491 | |
Dividends | | | (19,052 | ) | | | (19,114 | ) | | | (16,420 | ) |
| | | | | | | | | | | | |
Balance at end of year | | | 676,047 | | | | 777,338 | | | | 735,104 | |
| | | |
Accumulated Other Comprehensive Income | | | | | | | | | | | | |
Balance at beginning of year | | | 42,587 | | | | 30,130 | | | | 7,798 | |
Foreign currency translation adjustments, net of tax | | | (29,780 | ) | | | 18,115 | | | | 16,895 | |
Unrealized (losses) gains on investments, net of tax | | | - | | | | (6,441 | ) | | | 6,301 | |
Reclassification of unrealized losses on investments, net of tax to net (loss) earnings | | | 140 | | | | - | | | | - | |
Pension liability adjustments, net of tax | | | (762 | ) | | | 783 | | | | (864 | ) |
| | | | | | | | | | | | |
Balance at end of year | | | 12,185 | | | | 42,587 | | | | 30,130 | |
| | | | | | | | | | | | |
| | | |
Stockholders’ Equity at end of year | | $ | 652,907 | | | $ | 788,229 | | | $ | 758,557 | |
| | | | | | | | | | | | |
| | | |
Comprehensive Income | | | | | | | | | | | | |
Net (loss) earnings | | $ | (82,239 | ) | | $ | 61,016 | | | $ | 63,491 | |
Foreign currency translation adjustments, net of tax | | | (29,780 | ) | | | 18,115 | | | | 16,895 | |
Unrealized (losses) gains on investments, net of tax | | | (10,762 | ) | | | (6,441 | ) | | | 6,301 | |
Pension liability adjustments, net of tax | | | (750 | ) | | | 851 | | | | - | |
Reclassification adjustments included in net (loss) earnings | | | 10,890 | | | | (68 | ) | | | - | |
| | | | | | | | | | | | |
Comprehensive Income | | $ | (112,641 | ) | | $ | 73,473 | | | $ | 86,687 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 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. |
See accompanying Notes to Consolidated Financial Statements.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kelly Services, Inc. and Subsidiaries
1. Summary of Significant Accounting Policies Nature of OperationsKelly Services, Inc. is a global
temporary staffingworkforce solutions provider operating
in all major staffing markets throughout the world.
Fiscal YearThe Company’s fiscal year ends on the Sunday nearest to December 31. The three most recent years
all ofended on January 2, 2011 (2010, which contained 52
weeks, ended onweeks), January 3, 2010 (2009, which contained 53 weeks) and December 28, 2008
(2008), December 30, 2007 (2007) and December 31, 2006 (2006)(2008, which contained 52 weeks). 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.
In addition, the consolidated financial statements include the Company’s majority-owned subsidiaries in China acquired during the second quarter of 2007. The Company consolidates the Chinese companies and records an adjustment in other income, net in the Company’s consolidated statement of earnings to reflect the portion of the earnings, net of tax, attributable to the minority shareholders. The accumulated minority interest from the date of acquisition is included in other long-term liabilities on the Company’s consolidated balance sheet. All significant intercompany accounts and transactions have been eliminated.
The cost method of accounting is used for
Available-For-Sale InvestmentAvailable-for-sale investments
in equity securities that do not have a readily determined market value and when the Company does not have the ability to exercise significant influence. These investments are carried at cost and are adjusted only for other-than-temporary declines in fair value. The carrying value of these investments is included with other assets in the consolidated balance sheet.Available-for-sale securities 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 available-for-salesuch securities are included as a component of asset impairments expense in asset impairment expenses.the consolidated statement of earnings. The fair values for marketable equity securitiesof available-for-sale investments are based on quoted market prices.
The Company uses the equity method of accounting for its investments in and earnings or losses of affiliates that it does not control, but over which it does exert significant influence. Accordingly, the Company’s proportionate share of the earnings and losses of these companies are included in other (expense) income, net, in the accompanying consolidated statements of earnings.
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, where applicable, are reported as accumulated foreign currency 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
contract or
leasedcontract 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.
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
selling, general and administrativeSG&A expenses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
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
vacationservice bonus and holiday pay, and workers’ compensation costs. These costs differ fundamentally from
selling, general and administrativeSG&A expenses in that they arise specifically from the action of providing our services to customers whereas
selling, general and administrativeSG&A costs are incurred regardless of whether or not we place temporary employees with our customers.
Advertising ExpensesAdvertising expenses from continuing operations, which are expensed as incurred and are included in
selling, general and administrativeSG&A expenses, were
$7.0 million in 2010, $7.1 million in 2009 and $11.1 million in
2008 and 2007 and $12.3 million in 2006.2008.
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.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
Cash and EquivalentsCash and equivalents are stated at
cost, which approximates market.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.
EstimatedCost and estimated useful lives of property and equipment by function are as follows:
| | | | | | | | |
Category | | 2008 | | 2007 | | Life |
| | | (In thousands of dollars) | | |
Land | | $ | 3,818 | | $ | 3,818 | | - |
Work in process | | | 8,169 | | | 22,344 | | - |
Buildings and improvements | | | 55,386 | | | 58,889 | | 15 to 45 years |
Computer hardware and software | | | 201,369 | | | 205,574 | | 3 to 12 years |
Equipment, furniture and fixtures | | | 42,485 | | | 43,429 | | 5 years |
Leasehold improvements | | | 50,598 | | | 54,967 | | The lesser of the life of the lease or 5 years. |
| | | | | | | | |
Total property and equipment | | $ | 361,825 | | $ | 389,021 | | |
| | | | | | | | |
| | | | | | | | | | | |
| 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 | | | |
| | | | | | | | | |
The Company capitalizes external costs and internal payroll costs incurred in the development of software for internal use
in accordance with American Instituteas required by the Internal-Use Software Subtopic of
Certified Public Accountants Statement of Position No. 98-1, “Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use.”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,
software and
software, equipment, furniture and leasehold improvementsother on the
consolidated balance sheet. Depreciation expense from continuing operations was
$31.3 million for 2010, $36.0 million for 2009 and $41.4 million for
2008, $40.4 million for 2007 and $39.5 million for 2006.2008.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
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
valuedrecorded at
estimated fair value at the date of acquisition and are amortized over their respective useful lives (from 3 to 15 years) 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, determined by estimated future discounted cash flows.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.
Based on a history of losses and uncertainty around future financial projections, the Company determined that an impairment test was required for its U.K. assets. The long-lived asset impairment analysis performed as of December 28, 2008 resulted in impairment charges of $11.4 million and was recorded in the asset impairments line of the Company’s consolidated statement of earnings. The impairment primarily included computer software and leasehold improvements. 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.
SFAS No. 142, “Goodwill and Other Intangible Assets,” requires 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 based on our organizational structure and the financial information that is provided to and reviewed by management. 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 fair value of reporting units, an income approach is used. Under the income approach, 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 Company. Estimated future cash flows are based on our internal projection model. For reasonableness, the summation of reporting units’ fair values is compared to our market capitalization.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 itits implied fair value, goodwill is deemed impaired and is written down to the extent of the difference. See Note 6 of the Notes to Consolidated Financial Statements for additional information related to the results of the annual goodwill impairment testing.
51
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
$28.4$10.2 million and
$15.6$21.7 million at year-end
20082010 and
2007,2009, respectively.
Accrued Payroll and Related TaxesIncluded in accrued payroll and related taxes are outstanding checks in excess of funds on deposit. Such amounts totaled
$9.9$6.4 million and
$12.9$6.3 million at year-end
20082010 and
2007,2009, respectively. Payroll taxes 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
are accounted for under FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 requires that
a positionare taken or expected to be taken in a tax return
beare 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
Stock-Based Compensation On January 2, 2006,The Company may grant restricted stock awards, stock options (both incentive and nonqualified), stock appreciation rights and performance awards to key employees utilizing the
first dayCompany’s Class A stock. The Company utilizes the market price on the date of
grant as the
2006 fiscal year, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”) which requires the measurementfair market value for restricted stock awards and
recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values.SFAS 123R requires companies to estimateestimates 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 Statementsconsolidated statements of Earnings.
Because stock-based compensation expense recognizedearnings.
Earnings Per ShareRestricted stock awards that entitle their holders to receive nonforfeitable dividends before vesting are considered participating securities and, therefore, included in the
Consolidated Statementcalculation of
Earningsearnings per share using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for
fiscal 2008, 2007each class of common stock and
2006participating 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
awards ultimately expectedthe proportion of each class’s weighted average shares outstanding to
vest, it has been reduced for estimated forfeitures.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.
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. The Company regularly updates its estimates, and the ultimate cost of these claims may be greater than or less than the established accrual.
However, the Company believes that any such adjustments will not materially affect its consolidated financial position. During
2008,2010, the Company revised its estimate of the cost of outstanding workers’ compensation claims and, accordingly, reduced expense by
$12.7$5.2 million. This compares to adjustments reducing prior year workers’ compensation claims by
$11.6$2.8 million in
20072009 and
$7.7$12.7 million in
2006.2008.
ReclassificationsCertain prior year amounts have been reclassified to conform with the current presentation. The resultspresentation, including the reclassification of operations relatedthe year-to-date decrease in book overdrafts of $10.2 million in 2009 and increase of $9.8 million in 2008 from financing to the 2007 disposition of Kelly Home Care and 2006 disposition of Kelly Staff Leasing have been reclassified and separately statedoperating activities in the accompanying consolidated statements of earnings for 2008, 2007 and 2006. The assets and liabilities of these discontinued operations have not been reclassified in the accompanying consolidated balance sheets and related notes. In the Company’s consolidated statementsstatement of cash flows, and the cash flowsreclassification of $3.2 million and $7.6 million in workers’ compensation receivables in 2009 from discontinued operations are not separately classified.current accrued insurance and noncurrent accrued insurance, respectively, to other assets on the consolidated balance sheet.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
2. Fair Value MeasurementsEffective December 31, 2007,
Trade accounts receivable, accounts payable, accrued liabilities and short-term borrowings approximate their fair values due to the Company adopted Statementshort-term maturities of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”), forthese assets and liabilities that are measuredliabilities. 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.
Assets Measured at Fair Value on a Recurring Basis
The following tables present the assets carried at fair value
as of January 2, 2011 and January 3, 2010 on
a recurring basis. FAS 157 defines fair value, establishes a framework for measuring fair value, establishes a three-levelthe consolidated balance sheet by fair value hierarchy
based on the quality of inputs used to measurelevel, as described below. The Company carried no liabilities at fair value
as of January 2, 2011 and
enhances disclosure requirements for fair value measurements. The three fair value hierarchy levels are defined as follows: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
– inputs to the valuation methodology aremeasurements consist of quoted
market prices
in active markets for identical assets or
liabilities in active markets.liabilities. Level 2 – inputs to the valuation methodologymeasurements 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 – inputs to the valuation methodology are based on prices or valuation techniques that are unobservable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
2. Fair Value Measurements (continued)
The following table presents the assets carried at fair value as of December 28, 2008 on the consolidated balance sheet by fair value hierarchy level, as described above. The Company carried no liabilities at fair value as of December 28, 2008.
| | | | | | | | | | | | |
| | | Fair Value Measurements on a Recurring Basis
As of December 28, 2008 |
| | | (In thousands of dollars) |
Description | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | |
Money market funds | | $ | 28,566 | | $ | - | | $ | - | | $ | 28,566 |
| | | | |
Available-for sale investment | | | 22,534 | | | - | | | - | | | 22,534 |
| | | | | | | | | | | | |
| | | | |
Total assets at fair value | | $ | 51,100 | | $ | - | | $ | - | | $ | 51,100 |
| | | | | | | | | | | | |
measurements include significant unobservable inputs.
Money market funds
with Level 1 inputs to the valuation methodologyas of January 2, 2011 represent investments in money market accounts, of which
$27.3$2.9 million is included in cash and equivalents and
$1.3$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
valuation isvaluations were based on quoted market prices
in active markets of those accounts as of the
respective period end.
Available-for-sale investment with Level 1 inputs to the valuation methodology represents the Company’s investment in Temp Holdings Co., Ltd. (“Temp Holdings”, formerly Tempstaff, Inc.) and is included in other assets at the fair market value of $22.5 million as of December 28, 2008 on the consolidated balance sheet. At December 28, 2008, the Company has determined that its available-for-sale investment is impaired. While Temp Holdings’ performance remains strong, its value has been affected by global market movements. The length of time (approximately nine months as of December 28, 2008) and extent to which the market value of the investment has been less than cost resulted in the Company’s determination that the impairment was other-than-temporary. As a result, the Company recorded an other-than-temporary impairment of $18.7 million in the asset impairments line of the consolidated statement of earnings. The valuation is based on the quoted market price of Temp Holdings’Holdings stock on the Tokyo Stock Exchange as of the period end. The unrealized gain of $1.0 million pretax and net of tax for the year ended January 2, 2011 and $1.6 million pretax and net of tax for the year ended January 3, 2010 was recorded in other comprehensive income, as well as in accumulated other comprehensive income, a component of stockholders’ equity.
For53
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 liabilities that are measurednot 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
non-recurringnonrecurring basis,
such as when there is evidence of impairment. In 2010, management assessed the
Company has electedviability of certain incomplete software projects in Europe and the U.S. Based on the estimated costs to
defercomplete, management terminated the
FAS 157 measurementprojects and
disclosure requirements until fiscal 2009, consistent withrecorded impairment charges of $2.0 million. After the
provisions of Financial Accounting Standards Board Staff Position No. 157-2 (“FSP No. 157-2”). The effect of such adoption at that time is not expectedimpairment charges, the remaining balance related to
be material.Effective December 31, 2007, the Company adopted Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Liabilities Including an Amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 permits entities to elect to measure eligible financial instruments at fair value. An entity shall report unrealized gains and losses on items forthese software projects was zero, which represented the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. Upon adoption, the Company has elected not to measure its eligible financial assets and liabilities at fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
3. Acquisitions
As part of a strategy to diversify and expand our global operations, we completed several acquisitions during 2008, 2007 and 2006. Proforma financial information related to the acquisitions described below is not presented due to immateriality. The table below summarizes the estimated fair values of the assets acquired and liabilities assumed, along with adjustments to assets and liabilities related to current and prior year acquisitions, during the years ended December 28, 2008, December 30, 2007 and December 31, 2006:
| | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (In thousands of dollars) | |
| | | |
Current assets | | $ | 15,007 | | | $ | 15,126 | | | $ | 1,532 | |
Goodwill | | | 21,100 | | | | 51,542 | | | | 3,007 | |
Identified intangibles | | | 15,533 | | | | 9,434 | | | | 1,846 | |
Other noncurrent assets | | | 619 | | | | 871 | | | | 943 | |
Current liabilities | | | (12,844 | ) | | | (9,519 | ) | | | (2,665 | ) |
Noncurrent liabilities | | | (5,902 | ) | | | (90 | ) | | | - | |
| | | | | | | | | | | | |
| | | |
Total purchase price | | $ | 33,513 | | | $ | 67,364 | | | $ | 4,663 | |
| | | | | | | | | | | | |
Effective August 1, 2008, the Company acquired all of the shares of the Portuguese subsidiaries of Randstad Holding N.V., Randstad – Empresa de Trabalho Temporario, Unipessoal, Lda and Randstad – Gestao de Processos, Lda for approximately $13.2 million in cash. The acquisition includes 13 branch offices and 15 on-site locations serving the Portuguese staffing market. In addition to traditional temporary staffing services, current business lines also include on-site personnel management and permanent placement. This acquisition is included in the EMEA Commercial segment.
On August 28, 2008, the Company completed the acquisition of Toner Graham, a specialized accountancy and finance recruitment services company headquartered in the United Kingdom, for approximately $9.1 million in cash. The transaction also includes additional contingent earnout payments up to approximately $6.1 million in total, payable over three years, based primarily on the achievement of certain earnings targets. During 2008, the earnings target for 2008 was partially met and $0.2 million was accrued; the related payment will be made in 2009. Toner Graham is included in the EMEA PT segment.
Effective November 20, 2007, the Company acquired the net assets of access AG, a specialized recruitment services company headquartered in Germany with operations in Austria, for $21.2 million in cash. access AG is included in the OCG segment . The transaction included an additional contingent payment, based on the achievement of certain earnings targets. During 2008, $7.6 million was paid related primarily to the 2007 acquisition of access AG. Of this amount, $4.3 million represents the payment of a previously recorded liability, and the remaining $3.3 million represents adjustments to the initial purchase price. During 2008, the earnings target for 2008 was met and $6.3 million was accrued; the related payment will be made in 2009.
Effective May 30, 2007, the Company acquired P-Serv Pte Ltd (“P-Serv”), a company specializing in temporary staffing, permanent staffing, outsourcing and executive search, with operations in China, Hong Kong and Singapore, for $8.0 million in cash. As part of this transaction, Kelly acquired a 70% ownership interest in two permanent placement staffing joint ventures in China. Shanghai Changning Personnel Co., Ltd. and Nanchang Personnel Co., Ltd. maintain 30% minority interests in the two joint ventures. P-Serv is included in the APAC Commercial segment. During 2008, the previous earnout agreement for $2.6 million was converted to a consulting agreement, payable quarterly retroactive to July, 2008 through March,January 2, 2011.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
3. Acquisitions (continued)
Effective March 31, 2007, the Company acquired CGR/seven LLC, a creative staffing services firm that specializes in providing creative talent and placing professionals with design, publishing, marketing, fashion and media companies in the New York, New Jersey and Connecticut markets, for $12.3 million in cash at the date of acquisition and $1.0 million payable in each of the years 2008 and 2009. The transaction also included possible additional earnout payments of up to $2.0 million payable in each of the years 2008 and 2009, based primarily on the achievement of certain earnings targets. CGR/seven is included
Continuing operating losses in the Company’s
Americas PT business segment. A $1.0 million acquisition payment and $2.0 million earnout payment, both accrued asOCG reporting unit were deemed to be a triggering event for purposes of
the 2007 fiscal year end, were paid in 2008 related to the 2007 acquisition of CGR/seven LLC. The earnings targetassessing goodwill for
the 2008 earnout payment was not met.Effective March 23, 2007, the Company acquired the net operating assets of Talents Czech s.r.o. and Talents Polska Spolka z o.o., (“Talents Technology”), permanent placement and executive search firms with operations in the Czech Republic and Poland, for $3.1 million in cash. The transaction also included additional contingent earnout payments of up to approximately $1.6 million over three years, based primarily on the achievement of certain earnings targets. The earnings target for the 2007 and 2008 payments were not met. Talents Technology is included in the EMEA PT segment.
During the fourth quarter of 2006, we purchased Sony Corporation’s 40% interest in Tempstaff Kelly Inc. (“Tempstaff Kelly”), a joint venture originally created with Sony Corporation and Tempstaff, one of the largest Japanese staffing companies, for $5.0 million. With the purchase of Sony Corporation’s ownership share, we increased our ownership interest to 49%. Accordingly, earnings from continuing operations for 2006 included our equity earnings in Tempstaff Kelly from the date of acquisition. The Company’s proportionate share of Tempstaff Kelly’s net income was recorded in other income, net, in Kelly’s consolidated statement of earnings. (See Note 13.) Effective March 30, 2007, the Company paid $6.5 million for the remaining shares of Tempstaff Kelly. With the purchase of the remaining 51% ownership interest, Kelly increased its ownership interest to 100% and began directing all Tempstaff Kelly operations effective April 1, 2007. As a result, the assets and liabilities of Tempstaff Kelly, now a wholly owned subsidiary of the Company, were included in the Company’s financial statements on a fully consolidated basis as of April 1, 2007. Tempstaff Kelly’s operational results are included in the APAC Commercial business segment subsequent to April 1, 2007.
Duringimpairment during the second quarter of 2006, the Company acquired the net operating assets of The Ayers Group, a New York-based career management firm specializing in customized career transition, consulting services2010. Accordingly, we tested goodwill related to OCG and information technology staffing, for $4.6 million in cash. The transaction included additional contingent earn-out payments based primarily on the achievement of certain earnings targets. The 2006 earnings targetdetermined that OCG goodwill was not met and no related payment was made. The 2008 earnout payment was met and $0.7 million was accrued; the payment will be made in 2009. The Ayers Group is includedimpaired. Additionally, we completed our annual impairment test for all reporting units in the OCG segment.
Included in the adjustments above was $12.2 million, $8.4 million and $1.0 million of intangible assets associated with customer lists for the years ended 2008, 2007 and 2006, respectively. These assets will be amortized over a period of up to 15 years and will have no residual value. Also included in identified intangibles are the value of non-compete agreements and trademarks. The purchase price in 2007 also reflects the cost of the 49% interest in Tempstaff Kelly acquired in prior periods. All contingent earnout payments related to acquisitions will be recorded as additional goodwill. Goodwill associated with the CGR/seven LLC and the Ayers’ transactions is expected to be deductible for tax purposes.
4. Discontinued Operations
Effective March 31, 2007, the Company sold its Kelly Home Care (“KHC”) business unit to ResCare, Inc. for $12.5 million and recognized a pre-tax gain on sale of $10.2 million ($6.2 million net of tax). Effective December 31, 2006, the Company sold its Kelly Staff Leasing business unit (“KSL”) to Oasis Outsourcing Holdings, Inc. for $6.5 million and recognized a pre-tax gain on sale of $3.7 million ($2.3 million net of tax). In connection with these transactions, $0.9 million of goodwill was allocated to KHC and $0.5 million of goodwill was allocated to KSL. The sales of KHC and KSL were an important part of the Company’s strategy of reviewing existing operations, selectively divesting non-core assets and reinvesting the proceeds in strategic growth initiatives.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
4. Discontinued Operations (continued)
In accordance with the provisions of SFAS No. 144, “Accounting for the impairment or Disposal of Long-lived Assets”, the gains recognized in conjunction with the sales of KHC and KSL, as well as their results of operations for the current and prior periods, have been reported as discontinued operations in the Company’s consolidated statements of earnings. The components of earnings from discontinued operations, net of tax are as follows:
| | | | | | | | | |
| | | 2008 | | 2007 | | 2006 |
| | | (In thousands of dollars) |
Revenue from services | | $ | - | | $ | 14,777 | | $ | 92,247 |
| | | |
Operating (loss) income from discontinued operations | | $ | (849) | | $ | 1,454 | | $ | 7,248 |
Less: Income taxes | | | (325) | | | 328 | | | 2,796 |
| | | | | | | | | |
(Loss) earnings from discontinued operations, net of tax | | | (524) | | | 1,126 | | | 4,452 |
| | | |
Gain on sale of discontinued operations | | | - | | | 10,153 | | | 3,731 |
Less: Income taxes | | | - | | | 3,987 | | | 1,477 |
| | | | | | | | | |
Gain on sale of discontinued operations, net of tax | | | - | | | 6,166 | | | 2,254 |
| | | | | | | | | |
| | | |
Discontinued operations, net of tax | | $ | (524) | | $ | 7,292 | | $ | 6,706 |
| | | | | | | | | |
Discontinued operations for 2008 represent adjustments to assets and liabilities retained as part of the sale agreements, including an adjustment for $0.6 million, net of tax, related to litigation costs.
5. Restructuring
UK Operations
On January 24, 2007, the Chief Executive Officer of Kelly Services, Inc. authorized a restructuring plan for our United Kingdom operations (“Kelly U.K.”). The plan was the result of management’s strategic review of the operations of Kelly UK which identified under-performing branch locations and the opportunity for operational cost savings.
As of December 30, 2007, Kelly U.K. completed its restructuring actions and closed each of the 22 branches scheduled for closure, reached settlements with landlords for the U.K. headquarters locations and incurred $4.8 million of restructuring charges associated with these actions for year ended December 30, 2007. These expenses were reported as a component of selling, general and administrative expenses in the EMEA Commercial segment. For the year ended December 30, 2007, the $4.8 million charge included $4.2 million for facility exit costs and $0.6 million for accelerated depreciation. The Company did not incur any significant severance costs in connection with the restructuring.
In addition, the Company incurred moving, fit out and lease origination fees related to the headquarters consolidation of $1.1 millionfourth quarter for the year ended December 30, 2007. Total costs of the U.K. project were $5.9 million.
While this restructuring achieved our cost reduction goals, market conditions in the U.K. have significantly worsened. As a result, on January 21, 2009, the Chief Executive Officer of Kelly Services, Inc. authorized an additional restructuring plan for Kelly U.K.2, 2011 and determined that goodwill was not impaired. The plan is the result of management’s strategic review of the operations of Kelly U.K. which identified the opportunity for additional operational cost savings. We have not yet identified specific branches or employees affected, but expect that the plan will result in the elimination or consolidation of certain operations and approximately 350 staff reductions. We expect that the plan will be completed by the end of 2009.
We currently estimate that we will incur total pre-tax charges associated with these actions of approximately $11 million to $14 million, including approximately $9 million to $11 million in facility exit costs and approximately $2 million to $3 million in severance expenses. In the fourth quarter of 2008, we recorded $1.5 million of severance costs in selling, general and administrative expenses and expect the remainder to be recorded in 2009 in accordance with generally accepted accounting principles. We expect all of the expense will result in future cash expenditures recorded in selling, general and administrative expenses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
5. Restructuring (continued)
Americas Operations
On July 23, 2007, the Chief Executive Officer of Kelly Services, Inc. authorized a restructuring plan for our Americas Commercial branch operations. The plan was the result of management’s strategic review of operations in the U.S. which identified under-performing branch locations. The plan resulted in the closure of 58 branch locations. As of December 30, 2007, Americas Commercial completed its restructuring actions and incurred $3.0 million of restructuring charges associated with these actions. These expenses were reported as a component of selling, general and administrative expenses in the Americas Commercial segment. For the year ended December 30, 2007, the $3.0 million charge included $2.7 million for facility exit costs and $0.2 million for accelerated depreciation of leasehold improvements and personal property. The Company did not incur any significant severance costs in connection with the restructuring.
Following is a summary of our balance sheet accrual related to the facility exit and severance costs:
| | | | | | | | | | | | |
| | | UK | | | Americas | | | Total | |
| | | (in thousands of dollars) | |
Balance as of January 1, 2006 | | $ | - | | | $ | - | | | $ | - | |
| | | |
Additions charged to operations | | | 4,216 | | | | 2,713 | | | | 6,929 | |
Reductions for cash payments | | | (4,176 | ) | | | (2,359 | ) | | | (6,535 | ) |
| | | | | | | | | | | | |
| | | |
Balance as of December 30, 2007 | | | 40 | | | | 354 | | | | 394 | |
| | | |
Additions charged to operations | | | 1,500 | | | | - | | | | 1,500 | |
Reductions for cash payments | | | (40 | ) | | | (276 | ) | | | (316 | ) |
| | | | | | | | | | | | |
| | | |
Balance as of December 28, 2008 | | $ | 1,500 | | | $ | 78 | | | $ | 1,578 | |
| | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
6. Goodwill
We completed our impairment test during the fourth quarter of the years ended December 28, 2008 and December 30, 2007 as required under SFAS 142. The changes in the net carrying amount of goodwill for the fiscal years 2007 and 2008 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Balance
as of
Dec. 31,
2006 | | Acquisition
of
Companies
(Note 3) | | Divestiture
of
Company
(Note 4) | | | Balance
as of
Dec. 30,
2007 | | Acquisition
of
Companies
(Note 3) | | Purchase
Price
Adjustments
(Note 3) | | Impairment
Adjustments | | | Balance
as of
Dec. 28,
2008 |
| | | (In thousands of dollars) |
Americas | | | | | | | | | | | | | | | | | | | | | | | | | | |
Americas Commercial | | $ | 16,417 | | $ | - | | $ | - | | | $ | 16,417 | | $ | - | | $ | - | | $ | - | | | $ | 16,417 |
Americas PT | | | 24,327 | | | 15,463 | | | (565 | ) | | | 39,225 | | | - | | | - | | | - | | | | 39,225 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Americas | | | 40,744 | | | 15,463 | | | (565 | ) | | | 55,642 | | | - | | | - | | | - | | | | 55,642 |
| | | | | | | | |
EMEA | | | | | | | | | | | | | | | | | | | | | | | | | | |
EMEA Commercial | | | 25,426 | | | 16,545 | | | - | | | | 41,971 | | | 8,473 | | | - | | | (50,444 | ) | | | - |
EMEA PT | | | 9,188 | | | 5,979 | | | - | | | | 15,167 | | | 6,473 | | | 361 | | | - | | | | 22,001 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total EMEA | | | 34,614 | | | 22,524 | | | - | | | | 57,138 | | | 14,946 | | | 361 | | | (50,444 | ) | | | 22,001 |
| | | | | | | | |
APAC | | | | | | | | | | | | | | | | | | | | | | | | | | |
APAC Commercial | | | 6,574 | | | 4,278 | | | - | | | | 10,852 | | | - | | | 1,199 | | | - | | | | 12,051 |
APAC PT | | | 1,110 | | | 721 | | | - | | | | 1,831 | | | - | | | - | | | - | | | | 1,831 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total APAC | | | 7,684 | | | 4,999 | | | - | | | | 12,683 | | | - | | | 1,199 | | | - | | | | 13,882 |
| | | | | | | | |
OCG | | | 13,462 | | | 8,556 | | | (313 | ) | | | 21,705 | | | - | | | 4,594 | | | - | | | | 26,299 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
Consolidated Total | | $ | 96,504 | | $ | 51,542 | | $ | (878 | ) | | $ | 147,168 | | $ | 14,946 | | $ | 6,154 | | $ | (50,444 | ) | | $ | 117,824 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The Company uses a discounted cash flow methodology to determineestimated fair value of its reporting units, and has determined its reporting units to be the same as its operating segments and reportable segments. Due to worsening economic conditions, we determined that the fair value of our EMEA Commercialeach reporting unit was less thansignificantly exceeded its related carrying value. As a result, we performed additional impairment testing to determine the implied fair value of EMEA Commercial’s goodwill. The implied fair value of the goodwill was less than its carrying value. As a result, we recognized a goodwill impairment loss of $50.4 million in the EMEA Commercial reporting unit. This expense has been recorded in the asset impairment line on the consolidated statement of earnings. The fair value of all other reporting units exceeded carrying value.
Our analysis usesused significant assumptions by segment, including: expected future revenue and expense growth rates, profit margins, cost of capital, discount rate and forecasted capital expenditures. Our projections assume near-term revenue declines, followed by a recovery and long-term modest growth. 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 internal forecasts. Our revenue projections assumed a moderate recovery in the near term, followed by long-term modest growth.
In the second quarter of 2009, due to significantly worse than anticipated economic conditions and the impacts to our business, we revised our internal forecasts. Althoughforecasts for all of our segments, which we believe the assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impactdeemed to be a triggering event for purposes of assessing goodwill for impairment. Accordingly, goodwill at all of our reported financial results. Different assumptions of the anticipated future benefits from these businesses could result in anreporting units was tested for impairment charge, which would decrease operating income and result in lower asset values on our balance sheet. For example, a change in the estimated discount ratesecond quarter of 1% could have resulted in the fair value2009. As a result, we recorded a goodwill impairment loss of $50.5 million, of which $16.4 million related to the Americas Commercial segment falling below its book value.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.
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.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
2. Fair Value Measurements (continued)
During 2008, we determined that the fair value of our EMEA Commercial reporting unit was less than its carrying value. As a result, we recognized a goodwill impairment loss of $50.4 million in 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. 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.
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 2010 totaled $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.
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 | |
| | | | |
The remaining balance of $4.7 million as of January 2, 2011 represents primarily severance and future lease payments and is expected to be paid by 2016.
7.55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
5. 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:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 and January 3, 2010 was $168.2 million.
Included in other assets are the following:
| | | | | | |
| | | 2008 | | 2007 |
| | | (In thousands of dollars) |
Deferred compensation plan (See Note 9) | | $ | 65,140 | | $ | 84,334 |
Available-for-Sale Investment (See Note 2) | | | 22,534 | | | 33,026 |
Intangibles, net of accumulated amortization of $8,247 and $3,664, respectively | | | 19,895 | | | 9,685 |
Other | | | 12,596 | | | 14,492 |
| | | | | | |
| | |
Other assets | | $ | 120,165 | | $ | 141,537 |
| | | | | | |
| | | | | | | | | |
| | | 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 | |
| | | | | | | |
Intangible amortization expense was $3.6 million, $4.9 million and $4.6 million $2.0in 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 $0.3Europe.
Included in the Other line item is a $3.4 million note receivable from a staffing entity in 2008, 2007Brazil. 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%.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Kelly Services, Inc. and
2006, respectively.8.Subsidiaries
The Company has a
committed $150$90 million
unsecured multi-currency revolving credit facility
(“facility”) that is secured by the assets of the Company and has a three-year term, maturing on September 28, 2012. The facility allows for borrowings in various currencies, and is used to fund working capital, acquisitions and for general corporate purposes.
This credit facility expires in November 2010. The interest rate applicable to borrowings under the
line of credit is 40facility at year-end 2010 and 2009 was 310 basis points over
LIBOR and may include additional costs if the
funds are drawn from certain countries.London InterBank Offering Rate (“LIBOR”) in addition to a 40 bps facility fee. LIBOR rates
variedvary by currency.
The weighted average interest rate for both 2008 and 2007 was 2.4%. Borrowings under
this arrangementthe facility were
$8.2 millionzero at year-end 2010, and
$49.7$9.0 million at year-end
20082009, which carried an interest rate of 5.35%. The facility contained financial covenants and
2007, respectively. The carrying amounts of the Company’s borrowings under the lines of creditcertain restrictions, described
above approximate their fair values. This credit facility contains requirements for a maximum leverage ratio and minimum interest coverage ratio, bothbelow, all of which were met at
December 28, 2008.On February 6, 2008,January 2, 2011.
As long as any loan is outstanding under the facility, the Company closedmust maintain a level of earnings before interest, taxes, depreciation, amortization and certain cash and non-cash charges that are non-recurring in nature (“EBITDA”) for the last twelve months of not less than negative $30 million as of the end of Q3 2009 and Q4 2009, negative $20 million as of the end of Q1 2010 and negative $7.5 million as of the end of Q2 2010. This covenant expired after Q2 2010.
The Company must not allow its ratio of EBITDA to interest expense (“Interest Coverage Ratio”) for the last twelve months to be below 1.5 to 1.0 as of the end of Q3 2010, 3.0 to 1.0 as of the end of Q4 2010, and 3.5 to 1.0 as of the end of Q1 2011 and thereafter.
The Company must keep its ratio of total indebtedness to the sum of net worth and total indebtedness below 0.4 to 1.0 at all times.
Dividends, stock buybacks and similar transactions are restricted when the Interest Coverage Ratio is less than 3.0 to 1.0. When the Interest Coverage Ratio is above 3.0 to 1.0, the Company may pay up to $20 million annually, and when the Interest Coverage Ratio is above 5.0 to 1.0, the Company may pay up to $30 million annually.
The Company must adhere to other operating restrictions relating to the conduct of business, such as certain limitations on asset sales and the type and scope of investments.
On December 4, 2009, the Company and Kelly Receivables Funding, LLC, a wholly owned bankruptcy remote special purpose subsidiary of the Company (the “Receivables Entity”) entered into a Receivables Purchase Agreement to establish a 364-day, $100 million securitization facility (“Securitization Facility”). The Receivables Purchase Agreement will terminate in five years, after the date of the agreement, unless terminated earlier pursuant to its terms. Under the Securitization Facility, the Company will sell certain trade receivables and related rights (“Receivables”), on a revolving basis, to the Receivables Entity. The Receivables Entity may from time to time sell an 18undivided variable percentage ownership interest in the Receivables. The Securitization Facility also allows for the issuance of standby letters of credit (“SBLC”). The Securitization Facility contains a cross-default clause that could result in a termination of the facility if defaults occur under our other loan agreements. The Securitization Facility also contains certain restrictions based on the performance of the Receivables.
As of January 2, 2011, the Securitization Facility carried $17.0 million euro term loanof short-term borrowings at a rate of 1.57%. As of January 3, 2010, the Securitization Facility carried $55.0 million of short-term borrowings at a rate of 1.87%. The cost of borrowings on this facility which maturedvaries on a daily basis. At year-end 2010 and was repaid2009, the Securitization Facility also contained $45.7 million and $44.3 million, respectively, of SBLCs related to workers’ compensation. The remaining capacity on February 4, 2009. Thethe facility was used to refinance short-term borrowings on$37.3 million at year-end 2010 and $0.7 million at year-end 2009.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
7. Debt (continued)
The Receivables Entity’s sole business consists of the
$150 million revolving linepurchase or acceptance through capital contributions of
credittrade accounts receivable and related
to the acquisition of access AG in Germany. The interest rate on this loan was Euribor plus 35 basis points. The entire principal amount was due upon maturity with interest payments due at intervals of one, three, or six months, as elected byrights from the Company.
As described above, the Receivables Entity may retransfer these receivables or grant a security interest in those receivables under the terms and conditions of the Receivables Purchase Agreement. The
weighted average interest rate onReceivables Entity is a separate legal entity with its own creditors who would be entitled, if it were ever liquidated, to be satisfied out of its assets prior to any assets or value in the
amount outstanding during 2008 was 5.0%. At December 28, 2008,Receivables Entity becoming available to its equity holders. The assets of the
amount outstanding under this loan agreement totaled approximately $25.1 million.Receivables Entity are not available to pay creditors of the Company or any of its other subsidiaries. The assets and liabilities of the Receivables Entity are included in the consolidated financial statements of the Company.
The Company has additional uncommitted one-year local credit facilities that total
$14.5$11.2 million as of
December 28, 2008.January 2, 2011. Borrowings under these lines totaled
$1.9$0.1 million and
less than $0.1$1.0 million at year-end
20082010 and
2007,2009, respectively. The interest rate for these borrowings
ranged from 3.2% to 6.7% for 2008was 5.0% at January 2, 2011 and
was 7.0%2.2% at
year-end 2007.During March, 2007, in connection with the purchase of the remaining 51% interest in Tempstaff Kelly, as well as to fund local working capital, theJanuary 3, 2010.
Long-Term Debt
The Company
obtained short-term financing utilizing an $8.2 million yen-denominated credit facility.Long-Term Debt
On October 10, 2008, the Company closedhas a three-year syndicated term loan facility comprised of 9.0 million euros and 5.0 million U.K. pounds, dated October 10, 2008 and maturing October 3, 2011. The facility was used to refinance short-term borrowings related to the Portugal and Toner Graham acquisitions. On September 28, 2009, the Company amended this term loan to conform to the pricing, terms, and conditions of the $90 million revolving credit facility. The loans bearmaturity date of the term loan remained unchanged. As of year end, the loan bore interest at the LIBOR rate applicable to each currency plus a spread of 100350 basis points. This credit facility contains requirements for a maximum leverage ratio and minimum interest coverage ratio, both of which were met as of December 28, 2008. The entire principal amount is due upon maturity with interest payments due at intervals of one, two, three, or six months, as elected by the Company. The weighted average interest rate on the amount outstanding under the loan agreement during 2008 varied by currency and ranged from 5.36%4.24% to 5.49%. At December 28, 20084.44% at the end of 2010 and 3.95% to 4.02% at the end of 2009. The U.S. dollar amount outstanding, under this loan agreementwhich fluctuates based on foreign exchange rates, totaled approximately $19.9 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc.$19.7 million at January 2, 2011, all of which is classified as current, and Subsidiaries
8. Debt (continued)
Long-Term Debt (continued)
$20.9 million at January 3, 2010.
In November, 2007, the Company entered into a five-year 5.5 billion yen-denominated loan agreement, the proceeds of which were used to repay all of the Company’s outstanding short-term yen-denominated borrowings. TheOn September 28, 2009, the Company amended this term loan agreement, which matures on November 13, 2012, bearsto conform to the pricing, terms, and conditions of the $90 million revolving credit facility. As of the 2010 and 2009 year end, the loan bore interest at JPY LIBOR plus 45350 basis points. The weighted average interest rate on the amount outstanding underdebt was 3.70% at the end of 2010 and 4.03% at the end of 2009. As a result of the amendment, the Company is required to make principal payments equal to 12.5% of the original 5.5 billion yen-denominated loan agreement during 2008balance, as well as the related interest payments, on November 17, 2009, May 13, 2010, November 13, 2010, May 13, 2011, and 2007 was 1.41% and 1.43%, respectively. Interest-only payments are required for periods of three, six, nine or 12 months, as elected by the Company.remaining 50% due on October 3, 2011. The U.S. dollar amount outstanding, which fluctuates based on foreign exchange rates, totaled approximately $60.1$42.0 million at December 28, 2008January 2, 2011, all of which is classified as current, and $48.4$51.2 million at December 30, 2007. This loan agreement contains requirementsJanuary 3, 2010, of which $14.6 million was classified as current.
The Company’s long-term debt is secured by the general assets of the Company. All the long-term loans carry the same financial covenants and restrictions as described above for a maximum leverage ratio and minimum interest coverage ratio, boththe $90 million revolving credit facility, all of which were met at December 28, 2008. No principal payments are due in 2008-2011. The entire loan balance is due in 2012.as of January 2, 2011.
As of December 28, 2008, the fair market value of the long-term debt approximates the carrying value.58
9.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
The Company provides a qualified defined contribution plan covering substantially all U.S.-based full-time employees, except officers and certain other management employees. Upon approval by the Board of Directors, a discretionary contribution based on eligible wages
ismay be funded annually.
Discretionary contributions, which were suspended in 2008 and 2009, were reinstated in 2010. The plan also offers a savings feature with Company matching contributions.
Company matching contributions were suspended as of October, 2009, and have been reinstated effective January, 2011. Assets of this plan are held by an independent trustee for the sole benefit of participating employees.
A nonqualified deferred compensation plan is provided for officers and certain other management employees. Upon approval by the Board of Directors, a discretionary contribution based on eligible wages
ismay be made annually.
Discretionary contributions, which were suspended in 2008 and 2009, were reinstated in 2010. This plan also includes provisions for salary deferrals and Company matching contributions.
Company matching contributions were suspended as of February, 2009 and have been reinstated effective January, 2011.
The liability for the nonqualified plan was
$65.9$88.0 million and
$85.2$80.5 million as of year-end
20082010 and
2007,2009, respectively, and is included in current accrued payroll and related taxes and noncurrent accrued retirement benefits.
Participants’The cost of participants’ earnings on this liability, which were charged to
selling, generalSG&A expenses, were $9.0 million in 2010 and
administrative expenses were$13.6 million in 2009, and losses of $25.3 million in
2008, and earnings of $5.9 million in 2007 and $7.6 million in 2006.2008. In connection with the administration of this plan, the Company has purchased company-owned variable universal life insurance policies insuring the lives of certain officers and key employees. The cash surrender value of these policies, which is based primarily on investments in mutual funds and can only be used for payment of the Company’s obligations related to the non-qualified deferred compensation plan noted above, was
$65.1$87.8 million and
$84.3$78.3 million at year-end
20082010 and
2007,2009, respectively. These investments are included in other assets and are restricted for the use of funding this plan. Earnings on these assets, which were included in
selling, generalSG&A expenses, were $10.1 million in 2010 and
administrative expenses, were$13.8 million in 2009, and losses of $24.3 million in
2008, and earnings of $7.3 million in 2007 and $8.4 million in 2006.2008.
The net expense from continuing operations for retirement benefits
including employer contributions for both the qualified and nonqualified deferred compensation plans totaled
$0.6 million in 2010, $0.6 million in 2009 and $3.7 million in
2008, $4.7 million in 2007 and $7.5 million in 2006.2008.
In addition, the Company also has several defined benefit pension plans in locations outside of the United States. The total projected benefit obligation, assets and unfunded liability for these plans, as of December 28, 2008,January 2, 2011, were $5.5$11.9 million, $3.2$7.6 million and $2.3$4.3 million, respectively. The total projected benefit obligation, assets and unfunded liability for these plans, as of December 30, 2007,January 3, 2010, were $5.6$10.5 million, $4.0$6.9 million and $1.6$3.6 million, respectively. Total pension expense for these plans was $0.8 million, $1.0 million and $0.5 million $0.7 millionin 2010, 2009 and $0.9 million in 2008, 2007 and 2006, respectively. Pension contributions and the amount of accumulated other comprehensive income expected to be recognized in 20092011 are not significant.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
10.
The authorized capital stock of the Company is 100,000,000 shares of Class A common stock and 10,000,000 shares of Class B common stock. Class A shares have no voting rights and are not convertible. Class B shares have voting rights and are convertible into Class A shares on a share-for-share basis at any time. Both classes of stock have identical rights in the event of liquidation.
Class A shares and Class B shares are both entitled to receive dividends, subject to the limitation that no cash dividend on the Class B shares may be declared unless the Board of Directors declares an equal or larger cash dividend on the Class A shares. As a result, a cash dividend may be declared on the Class A shares without declaring a cash dividend on the Class B shares.
On May 11, 2010, the Company sold 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. As part of this transaction, Kelly added a representative of Temp Holdings to Kelly’s Board of Directors.
On August 8, 2007, the
boardBoard of
directorsDirectors authorized the repurchase of up to $50 million of the Company’s outstanding Class A common shares.
The repurchaseIn connection with this program,
has a term of 24 months. During 2008,which expired in August, 2009, the Company repurchased
436,697 Class Aa total of 2,116,570 shares for
$8.0 million. During$42.7 million in the open market during 2007
the Company repurchased 1,679,873 Class A shares for $34.7 million.A total of $7.3 million remains available under the share repurchase program at December 28,and 2008. The Company does not intend to make further share repurchases under the plan.
Accumulated Other Comprehensive Income The components of accumulated other comprehensive income at year-end 2008, 20072010 and 20062009 were as follows:
| | | | | | | | | |
| | | 2010 | | | 2009 | |
| | | (in millions of dollars) | |
| Cumulative translation adjustments, net of tax benefit of $2.1 million in 2010 and $1.6 million in 2009 | | $ | 28.9 | | | $ | 25.3 | |
| | | | | | | | | |
| Unrealized gain on marketable securities | | | 2.6 | | | | 1.6 | |
| | | | | | | | | |
| Pension liability, net of tax benefit of $0.2 million in 2010 and $0.5 million in 2009 | | | (2.5 | ) | | | (1.8 | ) |
| | | | | | | |
| | | | | | | | | |
| | | $ | 29.0 | | | $ | 25.1 | |
| | | | | | | |
| | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (in thousands of dollars) | |
Cumulative translation adjustments, net of tax benefit of $5,228 in 2008 and taxes of $657 in 2007 and $420 in 2006 | | $ | 13,028 | | | $ | 42,808 | | | $ | 24,693 | |
| | | |
Unrealized (loss) gain on marketable securities, net of tax benefit of $101 in 2007 and taxes of $4,563 in 2006 | | | - | | | | (140 | ) | | | 6,301 | |
| | | |
Pension liability, net of tax benefit of $301 in 2008, $77 in 2007 and $46 in 2006 | | | (843 | ) | | | (81 | ) | | | (864 | ) |
| | | | | | | | | | | | |
| | | |
| | $ | 12,185 | | | $ | 42,587 | | | $ | 30,130 | |
| | | | | | | | | | | | |
The pension liability adjustment of $0.9 million in 2006 represents the adjustment, net of tax, to initially apply FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
11.
The reconciliationsreconciliation of basic earnings per share computationson common stock for the fiscalyear ended January 2, 2011 follows (in millions of dollars except per share data). Reconciliations for 2009 and 2008 are not applicable, since an allocation of the net loss in those years 2008, 2007to participating securities would have an anti-dilutive effect on basic and 2006diluted per share amounts.
| | | | | |
| | | 2010 | |
| | | | | |
| Net earnings | | $ | 26.1 | |
| Less: Earnings allocated to participating securities | | | (0.3 | ) |
| | | | |
| Net earnings available to common shareholders | | $ | 25.8 | |
| | | | | |
| Earnings per share on common stock: | | | | |
| Basic | | $ | 0.71 | |
| Diluted | | | 0.71 | |
| | | | | |
| Average common shares outstanding (millions) | | | | |
| Basic | | | 36.1 | |
| Diluted | | | 36.1 | |
Due to the fact that there were
as follows: | | | | | | | | | | |
| | | 2008 | | | 2007 | | 2006 |
| | | (In thousands of dollars except per share data) |
(Loss) earnings from continuing operations | | $ | (81,715 | ) | | $ | 53,724 | | $ | 56,785 |
(Loss) earnings from discontinued operations, net of tax | | | (524 | ) | | | 7,292 | | | 6,706 |
| | | | | | | | | | |
Net (loss) earnings | | $ | (82,239 | ) | | $ | 61,016 | | $ | 63,491 |
| | | | | | | | | | |
| | | |
Determination of shares (thousands): | | | | | | | | | | |
Weighted average common shares outstanding | | | 34,760 | | | | 36,357 | | | 35,999 |
Effect of dilutive securities: | | | | | | | | | | |
Stock options | | | - | | | | 49 | | | 171 |
Restricted awards and other | | | - | | | | 89 | | | 144 |
| | | | | | | | | | |
Weighted average common shares outstanding - assuming dilution | | | 34,760 | | | | 36,495 | | | 36,314 |
| | | | | | | | | | |
| | | |
Basic (loss) earnings per share | | | | | | | | | | |
(Loss) earnings from continuing operations | | $ | (2.35 | ) | | $ | 1.48 | | $ | 1.58 |
(Loss) earnings from discontinued operations | | | (.02 | ) | | | .20 | | | .19 |
| | | | | | | | | | |
Net (loss) earnings | | $ | (2.37 | ) | | $ | 1.68 | | $ | 1.76 |
| | | | | | | | | | |
| | | |
Diluted (loss) earnings per share | | | | | | | | | | |
(Loss) earnings from continuing operations | | $ | (2.35 | ) | | $ | 1.47 | | $ | 1.56 |
(Loss) earnings from discontinued operations | | | (.02 | ) | | | .20 | | | .18 |
| | | | | | | | | | |
Net (loss) earnings | | $ | (2.37 | ) | | $ | 1.67 | | $ | 1.75 |
| | | | | | | | | | |
no potentially dilutive common shares outstanding during the period, the computations of basic and diluted earnings per share on common stock are the same for 2010, 2009 and 2008. Stock options representing 0.7 million, 0.9 million and restricted awards representing 1,697,719; 859,0901.1 million shares for 2010, 2009 and 1,040,286 shares,2008, respectively, for 2008, 2007 and 2006 were excluded from the computation of diluted earnings (loss) earnings per share due to their anti-dilutive effect.
We have presented earnings per share for our two classes of common stock on a combined basis. This presentation is consistent with the earnings per share computations that result for each class of common stock utilizing the two-class method as described in
SFAS No. 128,ASC Topic 260, “Earnings Per
Share (as amended)” (“SFAS 128”)Share”. The two-class method is an earnings allocation formula which determines earnings per share for each class of common stock according to the dividends declared (or accumulated) and participation rights in the undistributed earnings.
In applying the two class method, we have determined that the undistributed earnings should be allocated to each class on a pro rata basis after consideration of all of the participation rights of the Class B shares (including voting and conversion rights) and our history of paying dividends equally to each class of common stock on a per share basis.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
11. Earnings Per Share (continued)
The Company’s Restated Certificate of Incorporation allows the Board of Directors to declare a cash dividend to Class A shares without declaring equal dividends to the Class B shares. Class B shares’ voting and conversion rights, however, effectively allow the Class B shares to participate in dividends equally with Class A shares on a per share basis.
The Class B shares are the only shares with voting rights. The Class B shareholders are therefore able to exercise voting control with respect to all matters requiring stockholder approval, including the election of or removal of directors. The Board of Directors has historically declared and the Company historically has paid equal per share dividends on both the Class A and Class B shares. Each class has participated equally in all dividends declared since 1987.
In addition, Class B shares are convertible, at the option of the holder, into Class A shares on a one for one basis. As a result, Class B shares can participate equally in any dividends declared on the Class A shares by exercising their conversion rights.
12.61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
11. Stock-Based Compensation Under the Equity Incentive Plan (the “Plan”),
which became effective in May 2005, the Company may grant stock options (both incentive and nonqualified), stock appreciation rights,
(SARs), restricted stock awards and performance awards to key employees utilizing the Company’s Class A stock. The Plan provides that the maximum number of shares available for grants is 10 percent of the outstanding Class A stock, adjusted for Plan activity over the preceding five years.
This plan replaced the Performance Incentive Plan, which was terminated upon approval of the Equity Incentive Plan by the Board of Directors. Shares available for future grants at
December 28, 2008January 2, 2011 under the Equity Incentive Plan were
2,251,641.1,888,532. The Company issues shares out of treasury stock to satisfy stock-based awards. The Company has no intent to repurchase additional shares for the purpose of satisfying stock-based awards.
On January 2, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement
In 2010, 2009 and
recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal 2006.The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 2, 2006, the first day of the Company’s 2006 fiscal year. The adjustment in 2006 for the cumulative effect of change in accounting principle associated with the adoption of FAS 123(R) was insignificant.
In 2008, 2007 and 2006, the Company recognized stock-based compensation cost of $5.6$4.2 million, $5.6$6.0 million and $6.7$5.6 million, respectively, as well as related tax benefits of $2.2$1.6 million, $1.9$2.3 million and $2.2 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
12. Stock-Based Compensation (continued)
Restricted stock awards, which typically vest over a period of 3 to 5 years, are issued to certain key employees and are subject to forfeiture until the end of an established restriction period. The Company utilizes the market price on the date of grant as the fair market value of restricted stock awards and expenses the fair value on a straight-line basis over the vesting period.
A summary of the status of nonvested restricted stock awards under the Plan as of the year ended
December 28, 2008January 2, 2011 and changes during this period is presented as follows:
| | | | | | |
| | | Restricted
Stock | | | Weighted
Average
Grant Date
Fair Value |
Nonvested at December 30, 2007 | | 558,878 | | | $ | 28.39 |
Granted | | 380,500 | | | | 20.61 |
Vested | | (182,999 | ) | | | 28.27 |
Forfeited | | (74,351 | ) | | | 28.33 |
| | | | | | |
Nonvested at December 28, 2008 | | 682,028 | | | $ | 24.09 |
| | | | | | |
| | | | | | | | | |
| | | | | | | Weighted | |
| | | | | | | Average | |
| | | Restricted | | | Grant Date | |
| | | Stock | | | Fair Value | |
| Nonvested at January 3, 2010 | | | 519,070 | | | $ | 21.92 | |
| Granted | | | 449,900 | | | | 18.08 | |
| Vested | | | (226,640 | ) | | | 23.78 | |
| Forfeited | | | (33,925 | ) | | | 22.54 | |
| | | | | | | |
| Nonvested at January 2, 2011 | | | 708,405 | | | $ | 18.85 | |
| | | | | | | |
As of December 28, 2008,January 2, 2011, unrecognized compensation cost related to unvested restricted shares totaled $12.5$11.0 million. The weighted average period over which this cost is expected to be recognized is approximately two years. The weighted average grant date fair value of restricted stock awards granted during 2010, 2009 and 2008 2007was $18.08, $12.82 and 2006 was $20.61, $28.41 and $27.47, respectively. The total fair market value of restricted shares vested during 2010, 2009 and 2008 2007was $3.4 million, $2.8 million and 2006 was $3.7 million, $5.2 millionrespectively.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Kelly Services, Inc. and
$4.7 million, respectively.Subsidiaries
11. Stock-Based Compensation (continued)
Under the terms of the Plan, stock options may not be granted at prices less than the fair market value on the date of grant, nor for a term exceeding 10 years, and typically vest over 3 years. The Company expenses the fair value of stock option grants on a straight-line basis over the vesting period.
The Company used a binomial option pricing model to estimate the fair value of stock options granted in 2006. No stock options were granted in
2008 or 2007. The inputs for expected volatility, post-vest termination activity2010, 2009 and
exercise factor of the options were primarily based on historical information. The following weighted average assumptions were used to estimate the fair values of options granted during the year ended December 31, 2006: | | | | | |
Grant price
| | $
| | 27.24 | |
Risk-free interest rate
| | | | 5.0 | % |
Dividend yield
| | | | 1.4 | % |
Expected volatility
| | | | 21.3 | % |
Post-vest termination activity
| | | | 2.7 | % |
Exercise factor
| | | | 1.21 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
12. Stock-Based Compensation (continued)
2008.
A summary of the status of stock option grants under the Plan as of the year ended
December 28, 2008January 2, 2011 and changes during this period is presented as follows:
| | | | | | | | | | | |
| | | Options | | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Term
(Years) | | Aggregate
Intrinsic
Value |
Outstanding at December 30, 2007 | | 1,370,153 | | | $ | 26.80 | | | | | |
Granted | | - | | | | - | | | | | |
Exercised | | - | | | | - | | | | | |
Forfeited | | - | | | | - | | | | | |
Expired | | (342,190 | ) | | | 32.01 | | | | | |
| | | | | | | | | | | |
Outstanding at December 28, 2008 | | 1,027,963 | | | $ | 25.07 | | 3.26 | | $ | - |
| | | | | | | | | | | |
Options exercisable at December 28, 2008 | | 1,022,963 | | | $ | 25.06 | | 3.24 | | $ | - |
| | | | | | | | | | | |
Options expected to vest at December 28, 2008 | | 5,000 | | | $ | 27.24 | | 7.37 | | $ | - |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Weighted | | | | |
| | | | | | | Weighted | | | Average | | | | |
| | | | | | | Average | | | Remaining | | | Aggregate | |
| | | | | | | Exercise | | | Contractual | | | Intrinsic | |
| | | Options | | | Price | | | Term (Years) | | | Value | |
| Outstanding at January 3, 2010 | | | 851,306 | | | $ | 25.09 | | | | | | | | | |
| Granted | | | — | | | | — | | | | | | | | | |
| Exercised | | | — | | | | — | | | | | | | | | |
| Forfeited | | | — | | | | — | | | | | | | | | |
| Expired | | | (206,270 | ) | | | 24.36 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Outstanding at January 2, 2011 | | | 645,036 | | | $ | 25.32 | | | | 2.29 | | | $ | — | |
| | | | | | | | | | | | | |
| Options exercisable at January 2, 2011 | | | 645,036 | | | $ | 25.32 | | | | 2.29 | | | $ | — | |
| | | | | | | | | | | | | |
The table above includes
89,50055,500 of non-employee director shares outstanding at
December 28, 2008.January 2, 2011.
As of
December 28, 2008,January 2, 2011, there was no unrecognized compensation cost related to unvested stock
options was insignificant and related to 5,000 non-qualified stock options that vested on January 1, 2009. The weighted average grant date fair value of options granted during 2006 was $5.36. The total intrinsic value of options exercised during 2007 and 2006 was $1.2 million and $1.5 million, respectively.options. No stock options were exercised in
2010, 2009 and 2008.
Windfall
In 2010 and 2009, windfall tax benefits arising from stock-based compensation
inwere insignificant. In 2008,
2007 and 2006windfall tax benefits totaled $0.1 million
$0.4 million and
$0.3 million, respectively and arewere included in the
“Other“Sale of stock and other financing activities” component of net cash from financing activities in the
Statementconsolidated statement of
Cash Flows.13.cash flows.
12. Other (Expense) Income,Expense, Net Included in other
(expense) income,expense, net are the following:
| | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (In thousands of dollars) | |
Interest income | | $ | 3,802 | | | $ | 4,756 | | | $ | 3,203 | |
Interest expense | | | (4,144 | ) | | | (2,425 | ) | | | (2,316 | ) |
Dividend income | | | 672 | | | | 718 | | | | 416 | |
Minority interest (income) loss | | | (121 | ) | | | 175 | | | | - | |
Net (loss) earnings in equity investment | | | - | | | | (13 | ) | | | 148 | |
Foreign exchange losses | | | (3,661 | ) | | | - | | | | - | |
Other income | | | - | | | | - | | | | 20 | |
| | | | | | | | | | | | |
| | | |
Other (expense) income, net | | $ | (3,452 | ) | | $ | 3,211 | | | $ | 1,471 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | (In millions of dollars) | |
| | | | | | | | | | | | | |
| Interest income | | $ | 0.8 | | | $ | 1.3 | | | $ | 3.8 | |
| Interest expense | | | (5.7 | ) | | | (4.1 | ) | | | (4.1 | ) |
| Dividend income | | | 0.4 | | | | 0.6 | | | | 0.7 | |
| Foreign exchange losses | | | (1.2 | ) | | | (0.5 | ) | | | (3.7 | ) |
| Other | | | 0.3 | | | | 0.5 | | | | (0.1 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Other expense, net | | $ | (5.4 | ) | | $ | (2.2 | ) | | $ | (3.4 | ) |
| | | | | | | | | | |
Dividend income includes dividends earned on the Company’s investment in Temp Holdings while net (loss) earnings in equity investment represents the Company’s share of the net (loss) earnings from Tempstaff Kelly. (See Note 3)(see Fair Value Measurements footnote). Minority interest (income) loss represents the portion of the loss, net of tax, attributable to minority shareholders. The foreignForeign exchange losses booked primarily in the fourth quarter,2008 related to yen-denominated net debt for the Temp Holdings investment and ruble-denominated intercompany balances in Russia. Foreign exchange losses were not significant in 2007.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
14.
Earnings
(loss) from continuing operations before taxes for the years
2008, 20072010, 2009 and
20062008 were taxed under the following jurisdictions:
| | | | | | | | | | |
| | | 2008 | | | 2007 | | 2006 |
| | | (in thousands of dollars) |
Domestic | | $ | 8,700 | | | $ | 63,029 | | $ | 68,602 |
Foreign | | | (82,423 | ) | | | 20,262 | | | 10,910 |
| | | | | | | | | | |
Total | | $ | (73,723 | ) | | $ | 83,291 | | $ | 79,512 |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | (in million of dollars) | |
| | | | | | | | | | | | | |
| Domestic | | $ | 27.3 | | | $ | (56.8 | ) | | $ | 8.7 | |
| Foreign | | | 5.4 | | | | (91.5 | ) | | | (82.4 | ) |
| | | | | | | | | | |
| Total | | $ | 32.7 | | | $ | (148.3 | ) | | $ | (73.7 | ) |
| | | | | | | | | | |
The provision for income taxes from continuing operations was as follows:
| | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (in thousands of dollars) | |
Current tax expense: | | | | | | | | | | | | |
U.S. federal | | $ | (6,857 | ) | | $ | 14,700 | | | $ | 20,877 | |
U.S. state and local | | | 68 | | | | 6,528 | | | | 5,847 | |
Foreign | | | 8,178 | | | | 14,170 | | | | 6,582 | |
| | | | | | | | | | | | |
Total current | | | 1,389 | | | | 35,398 | | | | 33,306 | |
| | | | | | | | | | | | |
Deferred tax expense: | | | | | | | | | | | | |
U.S. federal | | | 5,509 | | | | (5,652 | ) | | | (5,784 | ) |
U.S. state and local | | | 1,307 | | | | (1,512 | ) | | | (2,023 | ) |
Foreign | | | (213 | ) | | | 1,333 | | | | (2,772 | ) |
| | | | | | | | | | | | |
Total deferred | | | 6,603 | | | | (5,831 | ) | | | (10,579 | ) |
| | | | | | | | | | | | |
Total provision | | $ | 7,992 | | | $ | 29,567 | | | $ | 22,727 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | (in millions of dollars) | |
| Current tax expense: | | | | | | | | | | | | |
| U.S. federal | | $ | 6.2 | | | $ | (14.0 | ) | | $ | (6.9 | ) |
| U.S. state and local | | | 0.6 | | | | 0.9 | | | | 0.1 | |
| Foreign | | | 9.1 | | | | 0.9 | | | | 8.2 | |
| | | | | | | | | | |
| Total current | | | 15.9 | | | | (12.2 | ) | | | 1.4 | |
| | | | | | | | | | |
| Deferred tax expense: | | | | | | | | | | | | |
| U.S. federal | | | (11.3 | ) | | | (21.6 | ) | | | 5.5 | |
| U.S. state and local | | | (0.3 | ) | | | (3.3 | ) | | | 1.3 | |
| Foreign | | | 2.3 | | | | (6.1 | ) | | | (0.2 | ) |
| | | | | | | | | | |
| Total deferred | | | (9.3 | ) | | | (31.0 | ) | | | 6.6 | |
| | | | | | | | | | |
| Total provision | | $ | 6.6 | | | $ | (43.2 | ) | | $ | 8.0 | |
| | | | | | | | | | |
Deferred tax assetstaxes are comprised of the following:
| | | | | | | | | |
| | | 2010 | | | 2009 | |
| | | (in millions of dollars) | |
| | | | | | | | | |
| Depreciation and amortization | | $ | (5.0 | ) | | $ | (7.7 | ) |
| Employee compensation and benefit plans | | | 49.4 | | | | 41.1 | |
| Workers’ compensation | | | 26.9 | | | | 25.7 | |
| Unrealized loss on securities | | | 7.7 | | | | 7.0 | |
| Loss carryforwards | | | 41.0 | | | | 45.8 | |
| Credit Carryforwards | | | 39.5 | | | | 36.2 | |
| Other, net | | | (4.8 | ) | | | (1.2 | ) |
| Valuation allowance | | | (52.5 | ) | | | (52.7 | ) |
| | | | | | | |
| Net deferred tax assets | | $ | 102.2 | | | $ | 94.2 | |
| | | | | | | |
| | | | | | | | |
| | | 2008 | | | 2007 | |
| | | (in thousands of dollars) | |
| | |
Depreciation and amortization | | $ | (16,395 | ) | | $ | (18,133 | ) |
Employee compensation and benefit plans | | | 39,366 | | | | 53,356 | |
Workers’ compensation | | | 28,649 | | | | 33,262 | |
Unrealized loss on securities | | | 7,904 | | | | 101 | |
Other comprehensive income | | | 5,545 | | | | (580 | ) |
Bad debt allowance | | | 5,703 | | | | 5,398 | |
Loss carryforwards | | | 30,632 | | | | 29,062 | |
Legal claims | | | 9,652 | | | | 348 | |
Other, net | | | (1,433 | ) | | | (1,347 | ) |
Valuation allowance | | | (44,180 | ) | | | (28,737 | ) |
| | | | | | | | |
Net deferred tax assets | | $ | 65,443 | | | $ | 72,730 | |
| | | | | | | | |
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
14.
13. Income Taxes (continued) The deferred tax balance is classified in the consolidated balance sheet as:
| | | | | | | |
| | | 2008 | | | 2007 |
| | | (in thousands of dollars) |
| | |
Current Assets: Deferred taxes | | $ | 31,929 | | | $ | 29,294 |
Noncurrent Deferred Taxes | | | 40,020 | | | | 43,436 |
Current Liabilities: Income and other taxes | | | (949 | ) | | | - |
Noncurrent Liabilities: Other long-term liabilities | | | (5,557 | ) | | | - |
| | | | | | | |
Net deferred tax assets | | $ | 65,443 | | | $ | 72,730 |
| | | | | | | |
| | | | | | | | | |
| | | 2010 | | | 2009 | |
| | | (in millions of dollars) | |
| | | | | | | | | |
| Current assets, deferred tax | | $ | 22.4 | | | $ | 21.0 | |
| Noncurrent deferred tax asset | | | 84.0 | | | | 77.5 | |
| Current liabilities, income and other taxes | | | (1.5 | ) | | | (0.9 | ) |
| Noncurrent liabilities, other long-term liabilities | | | (2.7 | ) | | | (3.4 | ) |
| | | | | | | |
| | | $ | 102.2 | | | $ | 94.2 | |
| | | | | | | |
The differences between income taxes from continuing operations for financial reporting purposes and the U.S. statutory rate of 35% are as follows:
| | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (in thousands of dollars) | |
| | | |
Income tax based on statutory rate | | $ | (25,803 | ) | | $ | 29,152 | | | $ | 27,829 | |
State income taxes, net of federal benefit | | | 894 | | | | 3,260 | | | | 2,529 | |
General business credits | | | (11,341 | ) | | | (8,938 | ) | | | (9,493 | ) |
Life insurance cash surrender value | | | 8,732 | | | | (2,310 | ) | | | (2,740 | ) |
Impairment | | | 25,111 | | | | - | | | | - | |
Restructuring | | | 525 | | | | 2,078 | | | | - | |
Foreign items | | | 9,164 | | | | 5,437 | | | | 3,959 | |
Other, net | | | 710 | | | | 888 | | | | 643 | |
| | | | | | | | | | | | |
Total | | $ | 7,992 | | | $ | 29,567 | | | $ | 22,727 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | (in millions of dollars) | |
| | | | | | | | | | | | | |
| Income tax based on statutory rate | | $ | 11.4 | | | $ | (51.9 | ) | | $ | (25.8 | ) |
| State income taxes, net of federal benefit | | | 0.2 | | | | (1.6 | ) | | | 0.9 | |
| General business credits | | | (11.7 | ) | | | (11.8 | ) | | | (11.3 | ) |
| Life insurance cash surrender value | | | (3.3 | ) | | | (4.6 | ) | | | 8.7 | |
| Impairment | | | 0.2 | | | | 15.6 | | | | 25.1 | |
| Restructuring | | | 0.8 | | | | 4.9 | | | | 1.2 | |
| Foreign items | | | 0.8 | | | | 5.7 | | | | 7.9 | |
| Foreign business taxes | | | 4.5 | | | | 0.4 | | | | 1.3 | |
| Worthless stock benefit | | | (0.9 | ) | | | (3.6 | ) | | | — | |
| Stock-based compensation | | | 0.7 | | | | 1.1 | | | | — | |
| Change in deferred tax realizability | | | 3.0 | | | | — | | | | (0.7 | ) |
| Other, net | | | 0.9 | | | | 2.6 | | | | 0.7 | |
| | | | | | | | | | |
| Total | | $ | 6.6 | | | $ | (43.2 | ) | | $ | 8.0 | |
| | | | | | | | | | |
General business credits primarily represent work opportunity credits in the United States. Foreign business taxes are taxes based on revenue less certain expenses and are classified as income taxes under ASC 740. The increase in 2010 is primarily due to the French business tax, which had been classified as a component of SG&A prior to 2010. The French government changed the business tax from an asset-based tax to an income-based tax, thereby requiring the classification of this tax as an income tax for 2010.
The Company has U.S. general business credit carryforwards of $1.3$37.8 million which expire from 2028 to 2030 and foreign tax credit carryforwards of $1.7 million which expire in 2028.2019 and 2020. The net tax effect of foreign loss carryforwards at December 28, 2008 total $30.6January 2, 2011 totaled $41.0 million which expire as follows:follows (in millions of dollars):
| | | | | |
| Year | | Amount | |
| | | | | |
| 2011-2013 | | $ | 0.9 | |
| 2014-2016 | | | 3.1 | |
| 2017-2020 | | | 2.8 | |
| No expiration | | | 34.2 | |
| | | | |
| Total | | $ | 41.0 | |
| | | | |
| | | |
Year | | Amount |
| | | (in thousands of dollars) |
| |
2009-2011 | | $ | 330 |
2012-2014 | | | 2,226 |
2015-2019 | | | 3,446 |
2020-2023 | | | 1,297 |
No expiration | | | 23,333 |
| | | |
Total | | $ | 30,632 |
| | | |
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
14.
13. Income Taxes (continued) The Company has established a valuation allowance for loss carryforwards and future deductible items in certain foreign jurisdictions. The valuation allowance is determined in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS 109)ASC Topic 740 (“ASC 740”),
“Accounting for Income Taxes,
” which requires an assessment of both negative and positive evidence when measuring the need for a valuation allowance. The Company’s foreign losses in recent periods in these jurisdictions represented sufficient negative evidence to require a valuation allowance under
SFAS 109.ASC 740. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support realization of the foreign deferred tax assets.
We have recorded a deferred tax asset of $0.7 million on undistributed earnings not considered permanently reinvested in our foreign subsidiaries.
Provision has not been made for U.S. or additional foreign income taxes on an estimated
$45.7$26.2 million of undistributed earnings of foreign subsidiaries, which are permanently reinvested. If such earnings were to be remitted, management believes that U.S. foreign tax credits would largely eliminate any such U.S. and foreign income taxes.
Deferred income taxes recorded in other comprehensive income include:
| | | | | | | | | | | |
| | | 2008 | | 2007 | | | 2006 | |
| | | (in thousands of dollars) | |
| | | |
Cumulative translation adjustments | | $ | 5,885 | | $ | (237 | ) | | $ | (702 | ) |
Unrealized gain/(loss) on marketable securities | | | - | | | 4,922 | | | | (4,563 | ) |
Pension liability | | | 262 | | | 25 | | | | 46 | |
| | | | | | | | | | | |
Total | | $ | 6,147 | | $ | 4,710 | | | $ | (5,219 | ) |
| | | | | | | | | | | |
The Company adopted
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | (in millions of dollars) | |
| | | | | | | | | | | | | |
| Cumulative translation adjustments | | $ | (0.3 | ) | | $ | (3.5 | ) | | $ | 5.9 | |
| Pension liability | | | (0.3 | ) | | | 0.1 | | | | 0.3 | |
| | | | | | | | | | |
| Total | | $ | (0.6 | ) | | $ | (3.4 | ) | | $ | 6.2 | |
| | | | | | | | | | |
In the provisionsfourth quarter of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), on January 1,2009, an adjustment was made to deferred taxes to correct an immaterial error related to years prior to 2007. Upon adoption of FIN 48,This caused the Company recognized a $0.3income tax benefit to be reduced by $1.7 million, increase in its retained earnings balance. and other comprehensive income to be reduced by $1.5 million.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | |
| | | 2008 | | | 2007 | |
| | | (in thousands of dollars) | |
| | |
Balance at beginning of the year | | $ | 3,750 | | | $ | 6,159 | |
| | |
Additions based on tax positions related to the current year | | | 403 | | | | 460 | |
Additions for prior years’ tax positions | | | 471 | | | | 606 | |
Reductions for prior years’ tax positions | | | (911 | ) | | | (466 | ) |
Reductions for settlements | | | (842 | ) | | | (2,685 | ) |
Reductions for expiration of statutes | | | (333 | ) | | | (324 | ) |
| | | | | | | | |
| | |
Balance at end of the year | | $ | 2,538 | | | $ | 3,750 | |
| | | | | | | | |
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | (in millions of dollars) | |
| | | | | | | | | | | | | |
| Balance at beginning of the year | | $ | 6.8 | | | $ | 2.5 | | | $ | 3.7 | |
| | | | | | | | | | | | | |
| Additions based on tax positions related to the current year | | | — | | | | 4.8 | | | | 0.4 | |
| Additions for prior years’ tax positions | | | 0.1 | | | | 0.4 | | | | 0.5 | |
| Reductions for prior years’ tax positions | | | (0.3 | ) | | | (0.4 | ) | | | (0.9 | ) |
| Reductions for settlements | | | — | | | | (0.2 | ) | | | (0.9 | ) |
| Reductions for expiration of statutes | | | (0.2 | ) | | | (0.3 | ) | | | (0.3 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Balance at end of the year | | $ | 6.4 | | | $ | 6.8 | | | $ | 2.5 | |
| | | | | | | | | | |
If the $6.4 million in 2010, $6.8 million in 2009 and $2.5 million in 2008 and $3.8 million in 2007 of unrecognized tax benefits were recognized, they would have a favorable effect of $6.0 million in 2010, $6.2 million in 2009 and $2.0 million in 2008 and $2.8 million in 2007 on the effective tax rate.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
14.
13. Income Taxes (continued) The Company recognizes both interest and penalties as part of the income tax provision. The Company recognized
expense of $0.1 million in 2010 and a benefit of
approximately$0.2 million in 2009 and $0.5 million in 2008
and expense of $0.2 million in 2007 for interest and penalties. At year end, accrued interest and penalties were
$0.7$0.6 million in
20082010 and
$1.7$0.5 million in
2007.2009.
The Company files income tax returns in the U.S. and in various states and foreign countries. In the major jurisdictions where the Company operates, it is generally no longer subject to income tax examinations by tax authorities for years before
2001.2003.
The Company and its subsidiaries have various other income tax returns in the process of examination, administrative appeals or litigation. The unrecognized tax benefit and related interest and penalty balances include approximately
$2.1$1.6 million for
20082010 and
$2.0$1.3 million for
20072009 related to tax positions which are reasonably possible to change within the next twelve months due to income tax audits, settlements and statute expirations.
15.
14. Supplemental Cash Flow Information Changes in operating assets and liabilities, net of acquisitions, as disclosed in the statements of cash flows, for the fiscal years
2008, 20072010, 2009 and
2006,2008, respectively, were as follows:
| | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (in thousands of dollars) | |
| | | |
Decrease (increase) in trade accounts receivable | | $ | 28,857 | | | $ | (14,163 | ) | | $ | (11,817 | ) |
(Increase) decrease in prepaid expenses and other current assets | | | (19,674 | ) | | | (16,691 | ) | | | 413 | |
Increase in accounts payable and accrued liabilities | | | 59,491 | | | | 18,678 | | | | 16,411 | |
(Decrease) increase in accrued payroll and related taxes | | | (9,702 | ) | | | (12,984 | ) | | | 9,093 | |
(Decrease) increase in accrued insurance | | | (10,909 | ) | | | 2,577 | | | | (7,148 | ) |
(Decrease) increase in income and other taxes | | | (13,096 | ) | | | (6,248 | ) | | | 5,446 | |
| | | | | | | | | | | | |
| | | |
Total changes in operating assets and liabilities | | $ | 34,967 | | | $ | (28,831 | ) | | $ | 12,398 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | (in millions of dollars) | |
| | | | | | | | | | | | | |
| (Increase) decrease in trade accounts receivable | | $ | (95.5 | ) | | $ | 116.6 | | | $ | 28.9 | |
| Decrease (increase) in prepaid expenses and other current assets | | | 25.0 | | | | (9.2 | ) | | | (19.7 | ) |
| Increase (decrease) in accounts payable and accrued liabilities | | | 0.4 | | | | (59.0 | ) | | | 72.3 | |
| Increase (decrease) in accrued payroll and related taxes | | | 36.0 | | | | (41.9 | ) | | | (12.7 | ) |
| Increase (decrease) in accrued insurance | | | 7.0 | | | | 4.5 | | | | (10.9 | ) |
| Increase (decrease) in income and other taxes | | | 9.4 | | | | (2.0 | ) | | | (13.1 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Total changes in operating assets and liabilities | | $ | (17.7 | ) | | $ | 9.0 | | | $ | 44.8 | |
| | | | | | | | | | |
The Company paid interest of $6.1 million, $4.2 million and $3.7 million $2.1 millionin 2010, 2009 and $1.9 million in 2008, 2007 and 2006, respectively. The Company received a refund of income taxes of $7.8 million in 2010 and $9.4 million in 2009, and paid income taxes of $26.9 million in 2008, $46.0 million in 20072008.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Kelly Services, Inc. and
$24.2 million in 2006.16.Subsidiaries
The Company conducts its field operations primarily from leased facilities. The following is a schedule by fiscal year of future minimum commitments under operating leases as of
December 28, 2008: | | | |
| | | (In Millions) |
Fiscal year: | | | |
2009 | | $ | 56.5 |
2010 | | | 42.4 |
2011 | | | 29.9 |
2012 | | | 20.2 |
2013 | | | 12.0 |
Later years | | | 14.8 |
| | | |
| |
Total | | $ | 175.8 |
| | | |
January 2, 2011 (in millions of dollars):
| | | | | |
|
| Fiscal year: | | | | |
| 2011 | | $ | 44.0 | |
| 2012 | | | 31.6 | |
| 2013 | | | 19.8 | |
| 2014 | | | 8.6 | |
| 2015 | | | 4.6 | |
| Later years | | | 7.2 | |
| | | | |
| | | | | |
| Total | | $ | 115.8 | |
| | | | |
Lease expense from continuing operations for fiscal
2008, 20072010, 2009 and
20062008 amounted to
$63.4$50.1 million,
$65.0$56.8 million and
$53.2$61.8 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
16. Commitments (continued)
In addition to operating lease agreements, the Company has entered into unconditional purchase obligations totaling
$26.8$25.4 million. These obligations relate primarily to voice and data communications services which the Company expects to utilize generally within the next
twothree fiscal years, in the ordinary course of business. The Company has no material unrecorded commitments, losses, contingencies or guarantees associated with any related parties or unconsolidated entities.
17.
16. ContingenciesIn November 2003, an action was commenced in the United States Bankruptcy Court for the Southern District of New York, Enron Corp. (“Enron”) v. J.P. Morgan Securities, Inc., et al., against approximately 100 defendants, including Kelly Properties, Inc., a wholly-owned subsidiary of Kelly Services, Inc., who invested in Enron’s commercial paper. The Complaint alleged that Enron’s October 2001 buyback of its commercial paper was a voidable preference under the bankruptcy laws, constituted a fraudulent conveyance, and that the Company received prepayment of approximately $10 million, $5 million of which was related to Enron commercial paper purchased by the Company from Lehman Brothers or its affiliate, Lehman Commercial Paper, Inc. (“Lehman”), and $5 million of which was purchased by the Company from Goldman Sachs & Co. (“Goldman”). In 2007, solely to avoid the cost of continued litigation, the Company reached a confidential settlement with Enron, Lehman and certain other defendants of all claims arising from the Company’s purchase of Enron commercial paper from Lehman. In the third quarter of 2008, solely to avoid the cost of continued litigation, the Company reached a confidential settlement with Enron and other defendants of all Enron’s claims arising out of the Company’s purchase of Enron commercial paper from Goldman. This settlement was approved by the Court and made final in the fourth quarter of 2008. The settlement amount paid is not materially different from the reserves previously established.
The Company is the subject of atwo pending class action lawsuit brought on behalflawsuits. 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 claims for monetary damages by current and former temporary employees working in the State of California, which is before the Superior Court, Central District, Los Angeles County. California.
The
Fuller matter involves claims
in the lawsuit relaterelating 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, the Court
certified two classes that correspond to the claims in the
cases.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
that it has meritorious defenses
to the claimsin both lawsuits and will continue to vigorously defend
itself during the
lawsuit.On February 5, 2003 an action was commenced in the Federal District Court for the Eastern District of California by Lynn Noyes against Kelly Services, Inc. alleging religious discrimination. In August 2004, Kelly’s Motion for Summary Judgment was granted dismissing the complaint. Noyes appealed and the case was remanded for trial. On April 4, 2008, a jury returned a verdict against Kelly Services, Inc. finding the Company liable for religious discrimination. The verdict was comprised of: $0.2 million for economic damages, $0.5 million for emotional distress damages and $5.9 million in punitive damages. The Company pursued post trial motions which resulted in the reduction of punitive damages to $0.7 million. The Company continues to believe there is no basis for finding religious discrimination and has filed an appeal with the United States Court of Appeals for the 9th Circuit.
litigation process.
The Company is also subject to various legal proceedings and claims which ariseinvolved in a number of other lawsuits arising in the ordinary course of its business, typically employment discrimination and wage and hour matters. These legal proceedings and claims areWhile management does not expect any of these other matters to have a material adverse effect on the Company’s results of operations, financial position or cash flows, litigation is subject to manyinherent uncertainties and the Company is not at this time able to predict the outcome of which is not predictable.these matters. It is reasonably possible that some matters could be decided unfavorably to the Company. In addition to the certified class action discussed above, certain other legal proceedings seek class action status; these matters individuallyCompany and, in the aggregate seek substantial compensatory, statutory or related damages. Certain of these matters involve alleged violations of state employment laws whichif so, could result in significant punitive damages. In the unlikely event that all of these matters went to trialhave a material adverse impact on our consolidated financial statements. During 2010 and were decided unfavorably to2009, the Company the Company’sreassessed its potential liability could exceed $500exposure from pending litigation and established additional reserves of $3.5 million basedand $4.4 million, respectively. The accrual for litigation costs at year-end 2010 and 2009 amounted to $3.6 million and $2.3 million, respectively, and is included in accounts payable and accrued liabilities on the statutory violations alleged. However, the variability in pleadings, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. Much of the litigation is in its early stages and litigation is subject to uncertainty. No matter reached a stage in the litigation process that caused the Company to reassess its litigation risk or change the amounts reserved during the fourth quarter of 2008.consolidated balance sheet.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
17. Contingencies (continued)During the third quarter of 2008, several of these matters reached a stage in the litigation process that caused the Company to reassess its litigation risk and establish additional reserves which, in the aggregate, resulted in a charge of $23.5 million (including costs for cash awards, legal fees, administrative costs and statutory penalties), of which $22.5 million was included in selling, general and administrative expenses from continuing operations and $1.0 million was included in discontinued operations. The Company’s potential exposure is most significant in matters involving alleged violations of state wage and hour laws. The Company continues to vigorously defend against such claims. Until these matters reach final resolution, their outcome is unpredictable. If we are able to reach negotiated settlements, we would expect cash payments to occur in 2009. However, if the issues are not resolved, litigation could extend beyond 2009. Disclosure of the most likely outcomes of individual cases and significant assumptions made in estimating related reserves are likely to have adverse consequences to the Company including, by way of example, the possibility that the disclosures themselves constitute admissible evidence in a trial and the potential to set a floor in settlement negotiations.
18. Segment Disclosures
The Company’s segments are based on the organizational structure for which financial results are regularly evaluated by the Company’s chief operating decision maker to determine resource allocation and assess performance.
Each reportable segment is managed by its own management team and reports to executive management. Effective with the first quarter of 2008, the Company realigned its operations intoThe Company’s seven reporting segments
–are: (1) Americas Commercial, (2) Americas Professional and Technical (“Americas PT”), (3) Europe, Middle East and Africa Commercial (“EMEA Commercial”), (4) Europe, Middle East and Africa Professional and Technical (“EMEA PT”), (5) Asia Pacific Commercial (“APAC Commercial”), (6) Asia Pacific Professional and Technical (“APAC PT”) and (7) Outsourcing and Consulting Group (“OCG”).
The Commercial business segments within the Americas, EMEA and APAC regions represent traditional office services, contract-centercontact-center staffing, marketing, electronic assembly, light industrial and substitute teachers. The PT segments encompass a wide range of highly skilled temporary employees, including scientists, financial professionals, attorneys, engineers, IT specialists and healthcare workers. OCG includes recruitment process outsourcing (“RPO”), contingent workforce outsourcing (“CWO”), business process outsourcing (“BPO”), payroll process outsourcing (“PPO”), executive placement and career transition/outplacement services. Corporate expenses that directly support the operating units have been allocated to the seven segments.segments based on a work effort, volume or, in the absence of an available measurement process, proportionately based on revenue from services. Included in unallocated Corporate expensesis $0.5 million in 2010, $53.1 million in 2009 and $80.5 million in 2008 is $80.5 million related to asset impairment charges (see Notes 1, 2Fair Value Measurements and 6)Goodwill footnotes) and $5.3 million in 2009 and $22.5 million in 2008 related to litigation costs (see Note 17).costs.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
18.
17. Segment Disclosures (continued) The following table presents information about the reported operating income of the Company for the fiscal years 2008, 20072010, 2009 and 2006. Segment data presented is net of intersegment revenues.2008. Asset information by reportable segment is not reported, since the Company does not produce such information internally.internally nor does it use such data to manage its business.
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | (In millions of dollars) | |
| Revenue from Services: | | | | | | | | | | | | |
| Americas Commercial | | $ | 2,428.2 | | | $ | 1,980.3 | | | $ | 2,516.7 | |
| Americas PT | | | 889.0 | | | | 792.6 | | | | 938.2 | |
| | | | | | | | | | |
| Total Americas Commercial and PT | | | 3,317.2 | | | | 2,772.9 | | | | 3,454.9 | |
| | | | | | | | | | | | | |
| EMEA Commercial | | | 872.0 | | | | 895.2 | | | | 1,310.5 | |
| EMEA PT | | | 147.6 | | | | 141.9 | | | | 172.5 | |
| | | | | | | | | | |
| Total EMEA Commercial and PT | | | 1,019.6 | | | | 1,037.1 | | | | 1,483.0 | |
| | | | | | | | | | | | | |
| APAC Commercial | | | 355.3 | | | | 284.9 | | | | 336.0 | |
| APAC PT | | | 32.5 | | | | 25.4 | | | | 34.3 | |
| | | | | | | | | | |
| Total APAC Commercial and PT | | | 387.8 | | | | 310.3 | | | | 370.3 | |
| | | | | | | | | | | | | |
| OCG | | | 254.8 | | | | 219.9 | | | | 233.3 | |
| | | | | | | | | | | | | |
| Less: Intersegment revenue | | | (29.1 | ) | | | (25.4 | ) | | | (24.2 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Consolidated Total | | $ | 4,950.3 | | | $ | 4,314.8 | | | $ | 5,517.3 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Earnings (Loss) from Operations: | | | | | | | | | | | | |
| Americas Commercial | | $ | 79.3 | | | $ | 10.3 | | | $ | 69.9 | |
| Americas PT | | | 46.3 | | | | 23.2 | | | | 48.4 | |
| | | | | | | | | | |
| Total Americas Commercial and PT | | | 125.6 | | | | 33.5 | | | | 118.3 | |
| | | | | | | | | | | | | |
| EMEA Commercial | | | 6.3 | | | | (25.7 | ) | | | (3.1 | ) |
| EMEA PT | | | 1.8 | | | | (2.8 | ) | | | 2.3 | |
| | | | | | | | | | |
| Total EMEA Commercial and PT | | | 8.1 | | | | (28.5 | ) | | | (0.8 | ) |
| | | | | | | | | | | | | |
| APAC Commercial | | | 2.8 | | | | (4.6 | ) | | | (0.3 | ) |
| APAC PT | | | (3.1 | ) | | | (1.5 | ) | | | (0.5 | ) |
| | | | | | | | | | |
| Total APAC Commercial and PT | | | (0.3 | ) | | | (6.1 | ) | | | (0.8 | ) |
| | | | | | | | | | | | | |
| OCG | | | (17.6 | ) | | | (11.8 | ) | | | 2.9 | |
| | | | | | | | | | | | | |
| Corporate | | | (77.7 | ) | | | (133.2 | ) | | | (189.9 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Consolidated Total | | $ | 38.1 | | | $ | (146.1 | ) | | $ | (70.3 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (In thousands of dollars) | |
| | | |
Revenue from Services: | | | | | | | | | | | | |
Americas Commercial | | $ | 2,504,300 | | | $ | 2,759,398 | | | $ | 2,916,079 | |
Americas PT | | | 911,558 | | | | 929,086 | | | | 961,636 | |
| | | | | | | | | | | | |
Total Americas Commercial and PT | | | 3,415,858 | | | | 3,688,484 | | | | 3,877,715 | |
| | | |
EMEA Commercial | | | 1,310,430 | | | | 1,292,406 | | | | 1,145,456 | |
EMEA PT | | | 172,540 | | | | 158,771 | | | | 119,585 | |
| | | | | | | | | | | | |
Total EMEA Commercial and PT | | | 1,482,970 | | | | 1,451,177 | | | | 1,265,041 | |
| | | |
APAC Commercial | | | 336,042 | | | | 310,585 | | | | 232,868 | |
APAC PT | | | 34,268 | | | | 26,702 | | | | 16,359 | |
| | | | | | | | | | | | |
Total APAC Commercial and PT | | | 370,310 | | | | 337,287 | | | | 249,227 | |
| | | |
OCG | | | 248,152 | | | | 190,641 | | | | 154,795 | |
| | | | | | | | | | | | |
| | | |
Consolidated Total | | $ | 5,517,290 | | | $ | 5,667,589 | | | $ | 5,546,778 | |
| | | | | | | | | | | | |
| | | |
Earnings from Operations: | | | | | | | | | | | | |
Americas Commercial | | $ | 69,956 | | | $ | 95,566 | | | $ | 111,546 | |
Americas PT | | | 47,698 | | | | 53,484 | | | | 51,180 | |
| | | | | | | | | | | | |
Total Americas Commercial and PT | | | 117,654 | | | | 149,050 | | | | 162,726 | |
| | | |
EMEA Commercial | | | (2,971 | ) | | | 8,871 | | | | (1,782 | ) |
EMEA PT | | | 2,283 | | | | 2,422 | | | | 692 | |
| | | | | | | | | | | | |
Total EMEA Commercial and PT | | | (688 | ) | | | 11,293 | | | | (1,090 | ) |
| | | |
APAC Commercial | | | (294 | ) | | | 3,239 | | | | 4,169 | |
APAC PT | | | (466 | ) | | | 119 | | | | (29 | ) |
| | | | | | | | | | | | |
Total APAC Commercial and PT | | | (760 | ) | | | 3,358 | | | | 4,140 | |
| | | |
OCG | | | 3,438 | | | | 8,033 | | | | 8,943 | |
| | | |
Corporate Expense | | | (189,915 | ) | | | (91,654 | ) | | | (96,678 | ) |
| | | | | | | | | | | | |
| | | |
Consolidated Total | | $ | (70,271 | ) | | $ | 80,080 | | | $ | 78,041 | |
| | | | | | | | | | | | |
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
18.
17. Segment Disclosures (continued)Specified items included in segment earnings for the fiscal years 2008, 2007 and 2006 were as follows:
| | | | | | | | | |
| | | 2008 | | 2007 | | 2006 |
| | | (In thousands of dollars) |
| | | |
Depreciation and Amortization from continuing operations: | | | | | | | | | |
Americas Commercial | | $ | 7,598 | | $ | 7,603 | | $ | 7,075 |
Americas PT | | | 2,390 | | | 2,120 | | | 1,128 |
| | | | | | | | | |
Total Americas Commercial and PT | | | 9,988 | | | 9,723 | | | 8,203 |
| | | |
EMEA Commercial | | | 6,039 | | | 5,902 | | | 4,773 |
EMEA PT | | | 899 | | | 458 | | | 268 |
| | | | | | | | | |
Total EMEA Commercial and PT | | | 6,938 | | | 6,360 | | | 5,041 |
| | | |
APAC Commercial | | | 3,444 | | | 2,711 | | | 1,531 |
APAC PT | | | 253 | | | 139 | | | 97 |
| | | | | | | | | |
Total APAC Commercial and PT | | | 3,697 | | | 2,850 | | | 1,628 |
| | | |
OCG | | | 3,061 | | | 1,376 | | | 621 |
| | | |
Corporate | | | 22,274 | | | 22,108 | | | 24,297 |
| | | | | | | | | |
| | | |
Consolidated Total | | $ | 45,958 | | $ | 42,417 | | $ | 39,790 |
| | | | | | | | | |
| | | |
Interest Income: | | | | | | | | | |
Americas Commercial | | $ | 582 | | $ | 437 | | $ | 517 |
Americas PT | | | - | | | - | | | - |
| | | | | | | | | |
Total Americas Commercial and PT | | | 582 | | | 437 | | | 517 |
| | | |
EMEA Commercial | | | 1,306 | | | 828 | | | 252 |
EMEA PT | | | 21 | | | - | | | - |
| | | | | | | | | |
Total EMEA Commercial and PT | | | 1,327 | | | 828 | | | 252 |
| | | |
APAC Commercial | | | 931 | | | 533 | | | 494 |
APAC PT | | | - | | | 280 | | | - |
| | | | | | | | | |
Total APAC Commercial and PT | | | 931 | | | 813 | | | 494 |
| | | |
OCG | | | 201 | | | 53 | | | - |
| | | |
Corporate | | | 761 | | | 2,625 | | | 1,940 |
| | | | | | | | | |
| | | |
Consolidated Total | | $ | 3,802 | | $ | 4,756 | | $ | 3,203 |
| | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
18. Segment Disclosures (continued)
| | | | | | | | | |
| | | 2008 | | 2007 | | 2006 |
| | | (In thousands of dollars) |
| | | |
Interest Expense: | | | | | | | | | |
Americas Commercial | | $ | 6 | | $ | 2 | | $ | 32 |
Americas PT | | | - | | | - | | | - |
| | | | | | | | | |
Total Americas Commercial and PT | | | 6 | | | 2 | | | 32 |
| | | |
EMEA Commercial | | | 2,431 | | | 807 | | | 866 |
EMEA PT | | | 1 | | | - | | | - |
| | | | | | | | | |
Total EMEA Commercial and PT | | | 2,432 | | | 807 | | | 866 |
| | | |
APAC Commercial | | | 166 | | | 238 | | | 220 |
APAC PT | | | - | | | 3 | | | - |
| | | | | | | | | |
Total APAC Commercial and PT | | | 166 | | | 241 | | | 220 |
| | | |
OCG | | | 3 | | | 11 | | | - |
| | | |
Corporate | | | 1,537 | | | 1,364 | | | 1,198 |
| | | | | | | | | |
| | | |
Consolidated Total | | $ | 4,144 | | $ | 2,425 | | $ | 2,316 |
| | | | | | | | | |
A summary of revenue from services by geographic area for
2010, 2009 and 2008
2007 and 2006 follows:
| | | | | | | | | |
| | | 2008 | | 2007 | | 2006 |
| | | (In thousands of dollars) |
| | | |
Revenue From Services: | | | | | | | | | |
Domestic | | $ | 3,237,137 | | $ | 3,454,922 | | $ | 3,603,284 |
International | | | 2,280,153 | | | 2,212,667 | | | 1,943,494 |
| | | | | | | | | |
| | | |
Total | | $ | 5,517,290 | | $ | 5,667,589 | | $ | 5,546,778 |
| | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | (In millions of dollars) | |
| Revenue From Services: | | | | | | | | | | | | |
| Domestic | | $ | 3,121.9 | | | $ | 2,634.3 | | | $ | 3,237.1 | |
| International | | | 1,828.4 | | | | 1,680.5 | | | | 2,280.2 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Total | | $ | 4,950.3 | | | $ | 4,314.8 | | | $ | 5,517.3 | |
| | | | | | | | | | |
Foreign revenue is based on the country in which the legal subsidiary is domiciled. No single foreign country’s revenue was material to the consolidated revenues of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
18. Segment Disclosures (continued)
A summary of long-lived assets information by geographic area as of the years ended
20082010 and
20072009 follows:
| | | | | | |
| | | 2008 | | 2007 |
| | | (In thousands of dollars) |
| | |
Long-Lived Assets: | | | | | | |
Domestic | | $ | 134,941 | | $ | 153,580 |
International | | | 47,473 | | | 47,247 |
| | | | | | |
| | |
Total | | $ | 182,414 | | $ | 200,827 |
| | | | | | |
| | | | | | | | | |
| | | 2010 | | | 2009 | |
| | | (In millions of dollars) | |
| Long-Lived Assets: | | | | | | | | |
| Domestic | | $ | 90.6 | | | $ | 110.5 | |
| International | | | 22.4 | | | | 29.6 | |
| | | | | | | |
| | | | | | | | | |
| Total | | $ | 113.0 | | | $ | 140.1 | |
| | | | | | | |
Long-lived assets include primarily property and equipment and intangible assets. No single foreign country’s long-lived assets were material to the consolidated long-lived assets of the Company. The 2007 balances were revised to remove Goodwill from the Domestic and International long-lived asset amounts.
19. New Accounting Pronouncements71
In February, 2008, the Financial Accounting Standards Board (“FASB”) issued FSP No. 157-2, “Effective Date of FASB Statement No. 157,” which delays for one year the effective date of FASB Statement No. 157 (“FAS 157”), “Fair Value Measurements,” for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The delay is intended to allow additional time to consider the effect of various implementation issues that have arisen, or that may arise, from the application of FAS 157, which became effective for fiscal years beginning after November 15, 2007 (and for interim periods within those years). The requirements of FSP No. 157-2 will be effective for the Company’s 2009 fiscal year and are not expected to be material.
In December 2007, the FASB issued FAS No. 141(R), “Business Combinations” (“FAS 141(R)”). FAS 141(R) expands the definition of transactions and events that qualify as business combinations; requires that the acquired assets and liabilities, including contingencies, be recorded at the fair value determined on the acquisition date and changes thereafter be reflected in earnings, rather than goodwill; changes the recognition timing for restructuring costs; and requires acquisition costs to be expensed as incurred. Acquisition costs incurred for transactions expected to be completed in 2009 were expensed as incurred during 2008. Adoption of FAS 141(R) is required for combinations occurring in fiscal years beginning after December 15, 2008. Early adoption and retroactive application of FAS 141(R) to fiscal years preceding the effective date are not permitted. We are not able to predict the impact this guidance will have on the accounting for acquisitions we may complete in future periods. For acquisitions completed prior to January 1, 2009, the new standard requires that changes in deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period must be recognized in earnings rather than as an adjustment to the cost of the acquisition. We do not expect this new guidance to have a significant impact on our consolidated financial statements.
In December 2007, the FASB issued FAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements” (“FAS 160”). FAS 160 re-characterizes minority interests in consolidated subsidiaries as non-controlling interests and requires the classification of minority interests as a component of equity. Under FAS 160, a change in control will be measured at fair value, with any gain or loss recognized in earnings. The effective date for FAS 160 is for annual periods beginning on or after December 15, 2008. Early adoption and retroactive application of FAS 160 to fiscal years preceding the effective date are not permitted. We currently do not have significant minority interests in our consolidated subsidiaries.
In May 2008, FASB issued FAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). This statement documents the hierarchy of the various sources of accounting principles and the framework for selecting the principles used in preparing financial statements. FAS 162 shall be effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. FAS 162 will not have a material impact on our consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kelly Services, Inc. and Subsidiaries
SELECTED QUARTERLY FINANCIAL DATA (unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year 2010 | |
| | | First | | | Second | | | Third | | | Fourth | | | | |
| | | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Year | |
| | | (In millions of dollars except per share data) | |
| Revenue from services | | $ | 1,130.4 | | | $ | 1,209.4 | | | $ | 1,284.7 | | | $ | 1,325.8 | | | $ | 4,950.3 | |
| Gross profit | | | 180.0 | | | | 190.9 | | | | 207.2 | | | | 216.4 | | | | 794.5 | |
| SG&A expenses | | | 181.6 | | | | 180.9 | | | | 192.9 | | | | 199.0 | | | | 754.4 | |
| Restructuring charges (included in SG&A) | | | 4.4 | | | | — | | | | 2.8 | | | | — | | | | 7.2 | |
| Asset impairments | | | — | | | | 1.5 | | | | — | | | | 0.5 | | | | 2.0 | |
| (Loss) earnings from continuing operations | | | (2.0 | ) | | | 3.9 | | | | 9.6 | | | | 14.6 | | | | 26.1 | |
| Earnings from discontinued operations, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | |
| Net (loss) earnings | | | (2.0 | ) | | | 3.9 | | | | 9.6 | | | | 14.6 | | | | 26.1 | |
| Basic (loss) earnings per share (1) | | | | | | | | | | | | | | | | | | | | |
| (Loss) earnings from continuing operations | | | (0.06 | ) | | | 0.11 | | | | 0.26 | | | | 0.39 | | | | 0.71 | |
| Earnings from discontinued operations | | | — | | | | — | | | | — | | | | — | | | | — | |
| Net (loss) earnings | | | (0.06 | ) | | | 0.11 | | | | 0.26 | | | | 0.39 | | | | 0.71 | |
| Diluted (loss) earnings per share (1) | | | | | | | | | | | | | | | | | | | | |
| (Loss) earnings from continuing operations | | | (0.06 | ) | | | 0.11 | | | | 0.26 | | | | 0.39 | | | | 0.71 | |
| Earnings from discontinued operations | | | — | | | | — | | | | — | | | | — | | | | — | |
| Net (loss) earnings | | | (0.06 | ) | | | 0.11 | | | | 0.26 | | | | 0.39 | | | | 0.71 | |
| Dividends per share | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year 2009 | |
| | | First | | | Second | | | Third | | | Fourth | | | | |
| | | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Year | |
| | | (In millions of dollars except per share data) | |
| Revenue from services | | $ | 1,042.6 | | | $ | 1,028.9 | | | $ | 1,049.2 | | | $ | 1,194.1 | | | $ | 4,314.8 | |
| Gross profit | | | 175.5 | | | | 171.7 | | | | 166.2 | | | | 188.3 | | | | 701.7 | |
| SG&A expenses | | | 206.1 | | | | 193.6 | | | | 193.7 | | | | 201.3 | | | | 794.7 | |
| Restructuring charges (included in SG&A) | | | 7.2 | | | | 4.7 | | | | 4.6 | | | | 13.4 | | | | 29.9 | |
| Asset impairments | | | — | | | | 52.6 | | | | 0.5 | | | | — | | | | 53.1 | |
| Loss from continuing operations | | | (16.1 | ) | | | (66.0 | ) | | | (14.8 | ) | | | (8.2 | ) | | | (105.1 | ) |
| Earnings from discontinued operations, net of tax | | | 0.6 | | | | — | | | | — | | | | — | | | | 0.6 | |
| Net loss | | | (15.5 | ) | | | (66.0 | ) | | | (14.8 | ) | | | (8.2 | ) | | | (104.5 | ) |
| Basic (loss) earnings per share (1) | | | | | | | | | | | | | | | | | | | | |
| Loss from continuing operations | | | (0.46 | ) | | | (1.89 | ) | | | (0.43 | ) | | | (0.23 | ) | | | (3.01 | ) |
| Earnings from discontinued operations | | | 0.02 | | | | — | | | | — | | | | — | | | | 0.02 | |
| Net loss | | | (0.45 | ) | | | (1.89 | ) | | | (0.43 | ) | | | (0.23 | ) | | | (3.00 | ) |
| Diluted (loss) earnings per share (1) | | | | | | | | | | | | | | | | | | | | |
| Loss from continuing operations | | | (0.46 | ) | | | (1.89 | ) | | | (0.43 | ) | | | (0.23 | ) | | | (3.01 | ) |
| Earnings from discontinued operations | | | 0.02 | | | | — | | | | — | | | | — | | | | 0.02 | |
| Net loss | | | (0.45 | ) | | | (1.89 | ) | | | (0.43 | ) | | | (0.23 | ) | | | (3.00 | ) |
| Dividends per share | | | — | | | | — | | | | — | | | | — | | | | — | |
| | |
| (1) | | Earnings (loss) per share amounts for each quarter are required to be computed independently and may not equal the amounts computed for the total year. |
19. New Accounting Pronouncements (continued)72
In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). The objective of this FSP is to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FAS 141(R), and other U.S. generally accepted accounting principles. This FSP applies to all intangible assets, whether acquired in a business combination or otherwise and shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and applied prospectively to intangible assets acquired after the effective date. Early adoption is not permitted. The requirements of this FSP will be effective for the Company’s 2009 fiscal year and are not expected to have a material impact on our consolidated financial statements.
In June 2008, the FASB issued EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). This FSP 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 basic earnings per share using the two-class method under FAS No. 128, “Earnings per Share”. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, as well as interim periods within those years. Once effective, all prior-period earnings per share data presented must be adjusted retrospectively to conform with the provisions of this FSP. Early application is not permitted. We are currently evaluating the impact that FSP EITF 03-6-1 will have on our financial statements when it is adopted in the first quarter of fiscal year 2009.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SCHEDULE II — VALUATION RESERVES
Kelly Services, Inc. and Subsidiaries
SELECTED QUARTERLY FINANCIAL DATA (unaudited)
| | | | | | | | | | | | | | | | | | |
| | | Fiscal Year 2008 | |
| | | First Quarter | | Second Quarter | | Third Quarter | | | Fourth Quarter | | | Year | |
| | | (In thousands of dollars) | |
| | | | | |
Revenue from services | | $ | 1,388,444 | | $ | 1,452,007 | | $ | 1,397,748 | | | $ | 1,279,091 | | | $ | 5,517,290 | |
Gross profit | | | 249,887 | | | 257,402 | | | 245,716 | | | | 224,646 | | | | 977,651 | |
Selling, general and administrative expenses (2, 3) | | | 236,947 | | | 242,448 | | | 260,260 | | | | 227,734 | | | | 967,389 | |
Asset impairments | | | - | | | - | | | - | | | | 80,533 | | | | 80,533 | |
Earnings (loss) from continuing operations | | | 7,991 | | | 10,430 | | | (11,553 | ) | | | (88,583 | ) | | | (81,715 | ) |
Earnings (loss) from discontinued operations, net of tax | | | 238 | | | 87 | | | (663 | ) | | | (186 | ) | | | (524 | ) |
Net earnings (loss) | | | 8,229 | | | 10,517 | | | (12,216 | ) | | | (88,769 | ) | | | (82,239 | ) |
Basic earnings (loss) per share (1) | | | | | | | | | | | | | | | | | | |
Earnings (loss) from continuing operations | | | 0.23 | | | 0.30 | | | (0.33 | ) | | | (2.55 | ) | | | (2.35 | ) |
Earnings (loss) from discontinued operations | | | 0.01 | | | - | | | (0.02 | ) | | | (0.01 | ) | | | (0.02 | ) |
Net earnings (loss) | | | 0.24 | | | 0.30 | | | (0.35 | ) | | | (2.55 | ) | | | (2.37 | ) |
Diluted earnings (loss) per share (1) | | | | | | | | | | | | | | | | | | |
Earnings (loss) from continuing operations | | | 0.23 | | | 0.30 | | | (0.33 | ) | | | (2.55 | ) | | | (2.35 | ) |
Earnings (loss) from discontinued operations | | | 0.01 | | | - | | | (0.02 | ) | | | (0.01 | ) | | | (0.02 | ) |
Net earnings (loss) | | | 0.24 | | | 0.30 | | | (0.35 | ) | | | (2.55 | ) | | | (2.37 | ) |
Dividends per share | | | 0.135 | | | 0.135 | | | 0.135 | | | | 0.135 | | | | 0.54 | |
| |
| | | Fiscal Year 2007 | |
| | | First Quarter | | Second Quarter | | Third Quarter | | | Fourth Quarter | | | Year | |
| | | (In thousands of dollars) | |
| | | | | |
Revenue from services | | $ | 1,350,858 | | $ | 1,415,674 | | $ | 1,425,298 | | | $ | 1,475,759 | | | $ | 5,667,589 | |
Gross profit | | | 229,208 | | | 247,566 | | | 246,879 | | | | 265,436 | | | | 989,089 | |
Selling, general and administrative expenses (4) | | | 218,715 | | | 225,300 | | | 226,099 | | | | 238,895 | | | | 909,009 | |
Earnings from continuing operations (5) | | | 5,258 | | | 15,311 | | | 14,682 | | | | 18,473 | | | | 53,724 | |
Earnings from discontinued operations, net of tax | | | 6,657 | | | 18 | | | 459 | | | | 158 | | | | 7,292 | |
Net earnings (5) | | | 11,915 | | | 15,329 | | | 15,141 | | | | 18,631 | | | | 61,016 | |
Basic earnings per share (1) | | | | | | | | | | | | | | | | | | |
Earnings from continuing operations | | | 0.14 | | | 0.42 | | | 0.40 | | | | 0.52 | | | | 1.48 | |
Earnings from discontinued operations | | | 0.18 | | | - | | | 0.01 | | | | - | | | | 0.20 | |
Net earnings | | | 0.33 | | | 0.42 | | | 0.41 | | | | 0.52 | | | | 1.68 | |
Diluted earnings per share (1) | | | | | | | | | | | | | | | | | | |
Earnings from continuing operations | | | 0.14 | | | 0.41 | | | 0.40 | | | | 0.52 | | | | 1.47 | |
Earnings from discontinued operations | | | 0.18 | | | - | | | 0.01 | | | | - | | | | 0.20 | |
Net earnings | | | 0.32 | | | 0.41 | | | 0.41 | | | | 0.52 | | | | 1.67 | |
Dividends per share | | | 0.125 | | | 0.125 | | | 0.135 | | | | 0.135 | | | | 0.52 | |
(1) Earnings (loss) per share amounts for each quarter are required to be computed independently and may not equal the amounts computed for the total year.
(2) Included are litigation costs
January 2, 2011
(In millions of
$22.5 million for the third quarter.(3) Included are restructuring costs for the UK of $1.5 million for the fourth quarter and full year.
(4) Included are restructuring costs for the UK and Americas operations as follows: $2.6 million in the first quarter, $2.5 million in the second quarter, $2.5 million in the third quarter, $1.3 million in the fourth quarter, and $8.9 million for the full year.
(5) Included are restructuring costs, net of tax, for the UK and Americas operations as follows: $2.6 million in the first quarter, $2.5 million in the second quarter, $1.9 million in the third quarter, $0.8 million in the fourth quarter and $7.8 million for the full year.
SCHEDULE II - VALUATION RESERVES
Kelly Services, Inc. and Subsidiaries
December 28, 2008
(In thousands of dollars)
| | | | | | | | | | | | | | | | |
| | | | | Additions | | | | | | | | |
| | | Balance at
beginning
of year | | Charged to
costs and
expenses | | Charged to
other
accounts * | | Currency
exchange
effects | | | Deductions
from
reserves | | | Balance
at end
of year |
| | | | | | |
| Description | | | | | | | | | | | | | | | | |
| | | | | | |
| Fifty-two weeks ended December 28, 2008: | | | | | | | | | | | | | | | | |
| | | | | | |
Reserve deducted in the balance sheet from the assets to which it applies - | | | | | | | | | | | | | | | | |
| | | | | | |
Allowance for doubtful accounts | | $ | 18,172 | | 6,712 | | 878 | | (1,381 | ) | | (7,378 | ) | | $ | 17,003 |
| | | | | | |
Deferred tax assets valuation allowance | | $ | 28,737 | | 24,911 | | - | | (6,277 | ) | | (3,191 | ) | | $ | 44,180 |
| | | | | | |
| Fifty-two weeks ended December 30, 2007: | | | | | | | | | | | | | | | | |
| | | | | | |
Reserve deducted in the balance sheet from the assets to which it applies - | | | | | | | | | | | | | | | | |
| | | | | | |
Allowance for doubtful accounts | | $ | 16,818 | | 6,654 | | 133 | | 648 | | | (6,081 | ) | | $ | 18,172 |
| | | | | | |
Deferred tax assets valuation allowance | | $ | 28,113 | | 9,443 | | - | | 1,568 | | | (10,387 | ) | | $ | 28,737 |
| | | | | | |
| Fifty-two weeks ended December 31, 2006: | | | | | | | | | | | | | | | | |
| | | | | | |
Reserve deducted in the balance sheet from the assets to which it applies - | | | | | | | | | | | | | | | | |
| | | | | | |
Allowance for doubtful accounts | | $ | 16,648 | | 5,178 | | 200 | | 458 | | | (5,666 | ) | | $ | 16,818 |
| | | | | | |
Deferred tax assets valuation allowance | | $ | 26,625 | | 5,739 | | - | | 1,165 | | | (5,416 | ) | | $ | 28,113 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Additions | | | | | | | | | | |
| | | Balance at | | | Charged to | | | Charged to | | | Currency | | | Deductions | | | Balance | |
| | | beginning | | | costs and | | | other | | | exchange | | | from | | | at end | |
| | | of year | | | expenses | | | accounts * | | | effects | | | reserves | | | of year | |
| Description | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal year ended January 2, 2011: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Reserve deducted in the balance sheet from the assets to which it applies — | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 15.0 | | | | 2.1 | | | | — | | | | (0.2 | ) | | | (4.6 | ) | | $ | 12.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Deferred tax assets valuation allowance | | $ | 52.7 | | | | 6.1 | | | | — | | | | (1.0 | ) | | | (5.3 | ) | | $ | 52.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal year ended January 3, 2010: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Reserve deducted in the balance sheet from the assets to which it applies — | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 17.0 | | | | 2.2 | | | | — | | | | 0.6 | | | | (4.8 | ) | | $ | 15.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Deferred tax assets valuation allowance | | $ | 44.2 | | | | 7.5 | | | | — | | | | 2.3 | | | | (1.3 | ) | | $ | 52.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal year ended December 28, 2008: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Reserve deducted in the balance sheet from the assets to which it applies — | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 18.2 | | | | 6.7 | | | | 0.9 | | | | (1.4 | ) | | | (7.4 | ) | | $ | 17.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Deferred tax assets valuation allowance | | $ | 28.7 | | | | 24.9 | | | | — | | | | (6.2 | ) | | | (3.2 | ) | | $ | 44.2 | |
| | |
| * | | Allowance of companies acquired. |
73
INDEX TO EXHIBITS
REQUIRED BY ITEM 601,
REGULATION S-K
| | | | |
Exhibit No.
| | Description
| | Document | | | | |
| Exhibit No. | | Description | | Document | |
| | | | | |
| 3.1 | | | Restated Certificate of Incorporation, effective May 6, 2009 (Reference is made to Exhibit 3.1 to the Form 10-K for the year ended December 28, 2003,8-K filed with the Commission on February 18, 2004,May 8, 2009 which is incorporated herein by reference). |
| | |
| | | |
| | 3.2 | | | By-laws, as amended August 8, 2007effective May 6, 2009 (Reference is made to Exhibit 3.2 to the Form 8-K filed with the Commission on August 13, 2007,May 8, 2009, which is incorporated herein by reference). | | |
| | |
4 | | Rights of security holders are defined in Articles Fourth, Fifth, Seventh, Eighth, Ninth, Tenth, Eleventh, Twelfth, Thirteenth, Fourteenth and Fifteenth of the Restated Certificate of Incorporation (Reference is made to Exhibit 4 to the Form 10-K for the year ended December 28, 2003, filed with the Commission on February 18, 2004, which is incorporated herein by reference). | | |
| 10.1 | |
10.1 | | Short-Term Incentive Plan, as amended and restated on March 23, 1998 and further amended on February 6, 2003 and November 8, 2007 (Reference is made to Exhibit 10.1 to the Form 8-K dated November 8, 2007, filed with the Commission on November 14, 2007, which is incorporated herein by reference). |
| | | | | |
| 10.2 | |
10.2 | | Kelly Services, Inc. Equity Incentive Plan (Reference is made to Exhibit 9910.2 to the Form S-88-K filed with the Commission on May 20, 2005,14, 2010, which is incorporated herein by reference). |
| | | | | |
| 10.3 | |
10.3 | | Kelly Services, Inc. Executive Severance Plan, as amended November 8, 2007 (Reference is made to Exhibit 10.3 to the Form 8-K dated November 8, 2007, filed with the Commission on November 14, 2007, which is incorporated herein by reference). |
| | | | | |
| 10.4 | |
10.4 | | Kelly Services, Inc. 1999 Non-Employee Directors Stock Option Plan (Reference is made to Appendix B to the Definitive Proxy Statement furnished in connection with the solicitation of proxies on behalf of the Board of Directors for use at the Annual Meeting of Stockholders of the Company held on May 10, 2006 filed with the Commission on April 10, 2006, which is incorporated herein by reference). |
| | | | | |
| 10.5 | |
10.5 | | Kelly Services, Inc. Non-Employee Director Stock Award Plan, as amended and Restated effective February 12, 2008 (Reference is made to Appendix A to the Definitive Proxy Statement furnished in connection with the solicitation of proxies on behalf of the Board of Directors for use at the Annual Meeting of Stockholders of the Company held May 6, 2008 filed with the Commission on April 4, 2008, which is incorporated herein by reference). |
| | | | | |
| | |
| 10.6 | | Loan Agreement | Three-year, secured, revolving credit agreement, dated as of November 30, 2005September 28, 2009 (Reference is made to Exhibit 10.110.6 to the Form 8-K dated November 30, 2005, filed with the Commission on December 5, 2005,September 29, 2009, which is incorporated herein by reference). |
| | | | | |
| 10.7 | |
10.7 | | Kelly Services, Inc. Performance Incentive Plan, as amended and restated on March 29, 1996 and April 14, 2000 (Reference is made to Exhibit 10 to the Form 10-Q for the quarterly period ended April 1, 2001, filed with the Commission on May 14, 2001, which is incorporated herein by reference). |
| | | | | |
| 10.8 | |
10.8 | | Form of Amendment to Performance Incentive Plan (Reference is made to Exhibit 10.1 to the Form 8-K filed with the Commission on November 9, 2006, which is incorporated herein by reference). | | |
74
INDEX TO EXHIBITS
REQUIRED BY ITEM 601,
REGULATION S-K (continued)
| | | | |
Exhibit No. | | Description | | Document |
| | |
| 10.9 | | Form of Amendments to Equity Incentive Plan (Reference is made to Exhibit 10.2 to the Form 8-K filed with the Commission on November 9, 2006, which is incorporated herein by reference). | | |
| | |
| 10.10 | | Form of Amendments to 1999 Non-Employee Directors Stock Option Plan (Reference is made to Exhibit 10.4 to the Form 8-K filed with the Commission on November 9, 2006, which is incorporated herein by reference). | | |
| | |
| 10.11 | | Form of Amendment to 1999 Non-Employee Director Stock Award Plan (Reference is made to Exhibit 10.3 to the Form 8-K filed with the Commission on November 9, 2006, which is incorporated herein by reference). | | |
| | |
| 10.12 | | 2008 Management Retirement Plan (Reference is made to Exhibit 10.12 to the Form 8-K dated November 8, 2007 filed with the Commission on November 14, 2007, which is incorporated herein by reference). | | |
| | |
| 14 | | Code of Business Conduct and Ethics, adopted February 9, 2004, as amended on February 7, 2005 and February 11, 2009. | | 2 |
| | |
| 21 | | Subsidiaries of Registrant. | | 3 |
| | |
| 23 | | Consent of Independent Registered Public Accounting Firm. | | 4 |
| | |
| 24 | | Power of Attorney. | | 5 |
| | |
| 31.1 | | Certification Pursuant to Rule 13a-14(a)/15d-14(a). | | 6 |
| | |
| 31.2 | | Certification Pursuant to Rule 13a-14(a)/15d-14(a). | | 7 |
| | |
| 32.1 | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | 8 |
| | |
| 32.2 | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | 9 |
| | | | | | | | | |
| Exhibit No. | | Description | | Document | |
| | | | | | | | | |
| | 10.10 | | | Form of Amendment to 1999 Non-Employee Directors Stock Option Plan (Reference is made to Exhibit 10.4 to the Form 8-K filed with the Commission on November 9, 2006, which is incorporated herein by reference). | | | | |
| | | | | | | | | |
| | 10.12 | | | 2008 Management Retirement Plan (Reference is made to Exhibit 10.12 to the Form 8-K filed with the Commission on November 14, 2007, which is incorporated herein by reference). | | | | |
| | | | | | | | | |
| | 10.14 | | | Pledge and Security Agreement, dated September 28, 2009 (Reference is made to Exhibit 10.14 to the Form 8-K filed with the Commission on September 29, 2009, which is incorporated herein by reference). | | | | |
| | | | | | | | | |
| | 10.15 | | | Receivables Purchase Agreement, dated December 4, 2009 (Reference is made to Exhibit 10.17 to the Form 8-K filed with the Commission on December 9, 2009, which is incorporated herein by reference). | | | | |
| | | | | | | | | |
| | 14 | | | Code of Business Conduct and Ethics, adopted February 9, 2004, as amended on November 9, 2010. | | | 2 | |
| | | | | | | | | |
| | 21 | | | Subsidiaries of Registrant. | | | 3 | |
| | | | | | | | | |
| | 23 | | | Consent of Independent Registered Public Accounting Firm. | | | 4 | |
| | | | | | | | | |
| | 24 | | | Power of Attorney. | | | 5 | |
| | | | | | | | | |
| | 31.1 | | | Certification Pursuant to Rule 13a-14(a)/15d-14(a). | | | 6 | |
| | | | | | | | | |
| | 31.2 | | | Certification Pursuant to Rule 13a-14(a)/15d-14(a). | | | 7 | |
| | | | | | | | | |
| | 32.1 | | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | 8 | |
| | | | | | | | | |
| | 32.2 | | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | 9 | |
8175
