Kelly Services (KELYA) 10-Q 2001 Q2 Quarterly report

1

Index to Exhibits on page 14

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 2, 2000

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934  

Commission File Number 0-1088

 

KELLY SERVICES, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE	38-1510762
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

999 WEST BIG BEAVER ROAD, TROY, MICHIGAN 48084

(Address of principal executive offices)
(Zip Code)

(248) 362-4444

(Registrant’s telephone number, including area code)

No Change

(Former name, former address and former fiscal year,
if changed since last report.)

Indicate 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.
Yes  X      No    

At August 4, 2000, 32,228,477 shares of Class A and 3,497,509 shares of Class B common stock of the Registrant were outstanding.

2

KELLY SERVICES, INC. AND SUBSIDIARIES

			Page
			Number
PART I.  FINANCIAL INFORMATION
	Item 1.  Financial Statements (unaudited)
		Statements of Earnings		3
		Balance Sheets		4
		Statements of Stockholders’ Equity		5
		Statements of Cash Flows		6
		Notes to Financial Statements		7
	Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition			9
PART II.  OTHER INFORMATION AND SIGNATURE
	Item 4. Submission of Matters to a Vote of Security Holders			12
	Item 6. Exhibits and Reports on Form 8-K			12
	Signature			13
	Index to Exhibits Required by Item 601, Regulation S-K			14

3

PART I. FINANCIAL INFORMATION

      Item 1. Financial Statements.

KELLY SERVICES, INC. AND SUBSIDIARIES

STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands of dollars except per share data)

		13 Weeks Ended					26 Weeks Ended
		July 2, 2000			July 4, 1999		July 2, 2000		July 4, 1999
Sales of services		$	1,106,740		$	1,066,783	$	2,186,809	$	2,092,742
Cost of services			909,731			876,809		1,801,826		1,723,637
Gross profit			197,009			189,974		384,983		369,105
Selling, general and administrative expenses			160,342			154,841		321,748		308,380
Earnings from operations			36,667			35,133		63,235		60,725
Interest (expense) income, net			(167	)		11		120		162
Earnings before income taxes			36,500			35,144		63,355		60,887
Income taxes			14,675			14,410		25,470		24,965
Net earnings		$	21,825		$	20,734	$	37,885	$	35,922
Earnings per share:
	Basic	$	.61		$	.58	$	1.06	$	1.00
	Diluted		.61			.58		1.06		1.00
Average shares outstanding (thousands):
	Basic		35,714			35,842		35,709		35,828
	Diluted		35,779			36,002		35,777		35,973
Dividends per share		$	.25		$	.24	$	.49	$	.47

See accompanying Notes to Financial Statements.

4

KELLY SERVICES, INC. AND SUBSIDIARIES

BALANCE SHEETS AS OF JULY 2, 2000 AND JANUARY 2, 2000
(In thousands of dollars)

ASSETS		2000			1999
CURRENT ASSETS:			(UNAUDITED	)
	Cash and equivalents	$	36,155		$	54,032
	Short-term investments		6,468			6,018
	Accounts receivable, less allowances of $13,616 and $13,575, respectively		634,440			602,485
	Prepaid expenses and other current assets		19,990			22,801
	Deferred taxes		51,787			50,832
	Total current assets		748,840			736,168
PROPERTY AND EQUIPMENT:
	Land and buildings		50,855			49,458
	Equipment, furniture and leasehold improvements		249,716			231,654
	Accumulated depreciation		(109,321	)		(94,112	)
	Total property and equipment		191,250			187,000
INTANGIBLES AND OTHER ASSETS			117,369			110,523
TOTAL ASSETS		$	1,057,459		$	1,033,691
LIABILITIES & STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Short-term borrowings	$	44,627		$	47,210
	Accounts payable		65,555			73,516
	Payroll and related taxes		247,051			215,706
	Accrued insurance		63,222			65,881
	Income and other taxes		44,919			49,005
	Total current liabilities		465,374			451,318
STOCKHOLDERS’ EQUITY:
	Capital stock, $1 par value   Class A common stock, shares issued 36,609,040   in 2000 and 36,602,210 in 1999		36,609			36,602
	Class B common stock, shares issued 3,506,826   in 2000 and 3,513,656 in 1999		3,507			3,514
	Treasury stock, at cost   Class A common stock, 4,391,571 shares in 2000   and 4,234,524 shares in 1999		(84,792	)		(80,538	)
	Class B common stock, 9,317 shares in 2000   and 7,767 shares in 1999		(284	)		(248	)
	Paid-in capital		16,212			15,761
	Earnings invested in the business		643,965			623,564
	Accumulated foreign currency adjustments		(23,132	)		(16,282	)
	Total stockholders’ equity		592,085			582,373
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY		$	1,057,459		$	1,033,691

See accompanying Notes to Financial Statements.

5

KELLY SERVICES, INC. AND SUBSIDIARIES

STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands of dollars)

			13 Weeks Ended						26 Weeks Ended
			July 2, 2000			July 4, 1999			July 2, 2000			July 4, 1999
Capital Stock
	Class A common stock
		Balance at beginning of period	$	36,606		$	36,541		$	36,602		$	36,541
		Conversions from Class B		3			7			7			7
		Balance at end of period		36,609			36,548			36,609			36,548
	Class B common stock
		Balance at beginning of period		3,510			3,575			3,514			3,575
		Conversions to Class A		(3	)		(7	)		(7	)		(7	)
		Balance at end of period		3,507			3,568			3,507			3,568
Treasury Stock
	Class A common stock
		Balance at beginning of period		(84,888	)		(81,080	)		(80,538	)		(81,669	)
		Treasury stock issued for acquisition		—			—			164			—
		Purchase of treasury stock		—			—			(5,614	)		—
		Exercise of stock options, restricted stock awards and other		96			445			1,196			1,034
		Balance at end of period		(84,792	)		(80,635	)		(84,792	)		(80,635	)
	Class B common stock
		Balance at beginning of period		(248	)		(248	)		(248	)		(248	)
		Purchase of treasury stock		(36	)		—			(36	)		—
		Balance at end of period		(284	)		(248	)		(284	)		(248	)
Paid-in Capital
		Balance at beginning of period		16,167			15,205			15,761			14,844
		Treasury stock issued for acquisition		—			—			39			—
		Exercise of stock options, restricted stock awards and other		45			243			412			604
		Balance at end of period		16,212			15,448			16,212			15,448
Earnings Invested in the Business
		Balance at beginning of period		631,067			579,468			623,564			572,517
		Net earnings		21,825			20,734			37,885			35,922
		Dividends		(8,927	)		(8,603	)		(17,484	)		(16,840	)
		Balance at end of period		643,965			591,599			643,965			591,599
Accumulated Foreign Currency Adjustments
		Balance at beginning of period		(20,850	)		(13,726	)		(16,282	)		(7,796	)
		Equity adjustment for foreign currency		(2,282	)		(3,403	)		(6,850	)		(9,333	)
		Balance at end of period		(23,132	)		(17,129	)		(23,132	)		(17,129	)
Stockholders’ Equity at end of period			$	592,085		$	549,151		$	592,085		$	549,151
Comprehensive Income
		Net earnings	$	21,825		$	20,734		$	37,885		$	35,922
		Other comprehensive income — Foreign currency adjustments		(2,282	)		(3,403	)		(6,850	)		(9,333	)
		Comprehensive Income	$	19,543		$	17,331		$	31,035		$	26,589

See accompanying Notes to Financial Statements.

6

KELLY SERVICES, INC. AND SUBSIDIARIES

STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE 26 WEEKS ENDED JULY 2, 2000 AND JULY 4, 1999
(In thousands of dollars)

				2000			1999
Cash flows from operating activities:
	Net earnings			$	37,885		$	35,922
	Noncash adjustments:
		Depreciation and amortization			19,308			16,066
		Increase in accounts receivable, net			(40,837	)		(38,131	)
		Changes in certain working capital components			26,345			44,586
			Net cash from operating activities		42,701			58,443
Cash flows from investing activities:
	Capital expenditures				(24,007	)		(36,604	)
	Proceeds from sales and maturities of short-term investments				532,384			489,223
	Purchases of short-term investments				(532,834	)		(482,864	)
	Increase in other assets				(8,951	)		(7,627	)
	Acquisition of companies, net of cash received				(1,534	)		(3,275	)
			Net cash from investing activities		(34,942	)		(41,147	)
Cash flows from financing activities:
	Decrease in short-term borrowings				(2,583	)		(2,764	)
	Dividend payments				(17,460	)		(16,840	)
	Purchase of treasury stock				(5,650	)		—
	Stock options and other				57			445
			Net cash from financing activities		(25,636	)		(19,159	)
Net change in cash and equivalents					(17,877	)		(1,863	)
Cash and equivalents at beginning of period					54,032			59,799
Cash and equivalents at end of period				$	36,155		$	57,936

      See accompanying Notes to Financial Statements.

7

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(In thousands of dollars)

1. Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and notes required by generally accepted accounting principles for complete financial statements. All adjustments, consisting only of normal recurring adjustments, have been made which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. The unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended January 2, 2000 (the 1999 consolidated financial statements).

2. Segment Disclosures
The Company’s reportable segments, which are based on the Company’s method of internal reporting, are: (1) U.S. Commercial Staffing, (2) Professional, Technical and Staffing Alternatives (PTSA) and (3) International. The following table presents information about the reported sales and earnings from operations of the Company for the 13-week and 26-week periods ended July 2, 2000 and July 4, 1999. Segment data presented is net of intersegment revenues. Asset information by reportable segment is not presented, since the Company does not produce such information internally.

		13 Weeks Ended						26 Weeks Ended
		2000			1999			2000			1999
Sales:
U.S. Commercial Staffing		$	574,995		$	563,387		$	1,124,661		$	1,115,090
PTSA			260,088			235,677			517,634			463,627
International			271,657			267,719			544,514			514,025
	Consolidated Total	$	1,106,740		$	1,066,783		$	2,186,809		$	2,092,742
Earnings from Operations:
U.S. Commercial Staffing		$	47,729		$	48,799		$	90,052		$	92,982
PTSA			16,461			13,839			32,203			26,036
International			7,493			7,313			12,587			11,604
Corporate			(35,016	)		(34,818	)		(71,607	)		(69,897	)
	Consolidated Total	$	36,667		$	35,133		$	63,235		$	60,725

3. Contingencies
The Company is subject to various legal proceedings, claims and liabilities which arise in the ordinary course of its business. Litigation is subject to many uncertainties, the outcome of individual litigated matters is not predictable with assurance and it is reasonably possible that some of the foregoing matters could be decided unfavorably to the Company. Although the amount of the liability at July 2, 2000 with respect to these matters cannot be ascertained, the Company believes that any resulting liability will not be material to the financial statements of the Company at July 2, 2000.

8

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (continued)
(UNAUDITED)
(In thousands of dollars)

4. Earnings Per Share
The reconciliations of earnings per share computations for the 13-week and 26-week periods ended July 2, 2000 and July 4, 1999 were as follows:

		13 Weeks Ended				26 Weeks Ended
		2000		1999		2000		1999
Net earnings		$	21,825	$	20,734	$	37,885	$	35,922
Determination of shares (thousands):
	Weighted average common shares outstanding		35,714		35,842		35,709		35,828
Effect of dilutive securities:
	Stock options		—		49		—		32
	Restricted and performance awards and other		65		111		68		113
Weighted average common shares
	outstanding — assuming dilution		35,779		36,002		35,777		35,973
Earnings per share — basic		$	.61	$	.58	$	1.06	$	1.00
Earnings per share — assuming dilution		$	.61	$	.58	$	1.06	$	1.00

9

Item 2. Management’s Discussion and Analysis of Results of Operations and
              Financial Condition.

Results of Operations:
Second Quarter
Sales of services in the second quarter of 2000 were $1.107 billion, an increase of 3.7% from the same period in 1999. Sales in the U.S. Commercial Staffing segment grew by 2.1%, while Professional, Technical and Staffing Alternatives (PTSA) sales grew by 10.4% compared to last year. International sales grew by 1.5% as compared to the second quarter of 1999. The impact of unfavorable foreign currency translation on revenue was significant.

Cost of services, consisting of payroll and related tax and benefit costs of employees assigned to customers, increased 3.8% in the second quarter as compared to the same period in 1999. Direct wage costs have increased from 1999 at a rate somewhat higher than the general inflation rate, due to strong worldwide demand for labor.

Gross profit of $197.0 million was 3.7% higher than the second quarter of 1999, and gross profit as a percentage of sales was 17.8% in 2000 and 1999. This reflected a small increase in the gross profit rate of the Company’s professional, technical and international businesses, offset by a small decrease in the U.S. Commercial Staffing segment.

Selling, general and administrative expenses were $160.3 million in the second quarter, an increase of 3.6% over the same period in 1999. Expenses averaged 14.5% of sales in 2000 and 1999. Compared to last year, the elimination of Y2K expenses essentially offset the increase in depreciation expense.

Earnings from operations of $36.7 million were 4.4% greater than the second quarter of 1999. Net interest expense was $167 thousand, compared to last year’s net interest income of $11 thousand. The swing is attributable primarily to lower cash balances than last year.

Earnings before income taxes were $36.5 million, an increase of 3.9%, compared to pretax earnings of $35.1 million earned for the same period in 1999. Income taxes were 40.2% of pretax income in the second quarter of 2000 and 41.0% in the second quarter of 1999.

Net earnings were $21.8 million in the second quarter of 2000, an increase of 5.3% over the second quarter of 1999. Basic and diluted earnings per share were $.61, an increase of 5.2% as compared to $.58 in the same period last year.

Year-to-Date
Sales of services totaled $2.187 billion during the first six months of 2000, an increase of 4.5% over 1999. Sales in the U.S. Commercial Staffing segment grew by 0.9%, while Professional, Technical and Staffing Alternatives (PTSA) sales grew by 11.6% compared to last year. International sales grew by 5.9% as compared to the first six months of 1999. The strong U.S. dollar significantly weakened translated sales for the international segment.

Cost of services of $1.802 billion was 4.5% higher than last year, reflecting volume growth and increases in payroll rates due to strong demand for labor worldwide.

Gross profit increased 4.3% in 2000 due to increased sales. The gross profit rate was 17.6% for the first six months of 2000 and 1999. This reflected a modest increase in the gross profit rate of the Company’s professional and technical business, and consistent results in the U.S. Commercial Staffing and International segments.

Selling, general and administrative expenses of $321.7 million were 4.3% higher than last year. The expense rate was 14.7% of sales in 2000 and 1999. Compared to last year, the elimination of Y2K expenses again was largely offset by increased depreciation.

Earnings before taxes were $63.4 million, an increase of 4.1% over 1999. These earnings averaged a pretax margin of 2.9% in the first six months of 2000 and 1999. Income taxes were 40.2% of pretax earnings in the first six months of 2000 and 41.0% in 1999.

Net earnings were $37.9 million or 5.5% above the first six months of 1999. Basic and diluted earnings per share were $1.06, an increase of 6.0% as compared to $1.00 in the first six months of 1999.

10

Financial Condition
Assets totaled $1,057.5 million at July 2, 2000, an increase of 2.3% over the $1,033.7 million at January 2, 2000. Working capital decreased $1.4 million during the six-month period. The current ratio was 1.6 at July 2, 2000 and January 2, 2000.

During the first six months of 2000, net cash from operating activities was $42.7 million, a decrease of 26.9% from the comparable period in 1999. This decrease resulted principally from a decrease in the growth of the payroll and related taxes liability balances. The Company’s global day’s sales outstanding for the 26-week period was 53 days in 2000 and 1999.

Capital expenditures for the first six months totaled $24.0 million, a planned decrease from the $36.6 million spent during the same period of 1999. Of the total, over 75% related to information technology investments. Annual capital expenditures are projected to total between $55 to $60 million this year, a planned decrease from the $77 million spent in 1999.

The quarterly dividend rate applicable to Class A and Class B shares outstanding was $.25 per share in the second quarter of 2000. This represents a 4.2% increase compared to a dividend rate of $.24 per share in the second quarter of 1999.

The Company’s financial position continues to be strong. This strength will allow it to continue to aggressively pursue growth opportunities, while supporting current operations.

Market Risk-Sensitive Instruments And Positions
The market risk inherent in the Company’s market risk-sensitive instruments and positions is the potential loss arising from adverse changes in foreign currency exchange rates and interest rates. Foreign currency exchange risk is mitigated by the usage of the Company’s multi-currency line of credit. This credit facility can be used to borrow in local currencies that can mitigate the exchange rate risk resulting from foreign currency-denominated assets fluctuating in relation to the U.S. dollar.

The Company’s holdings and positions in market risk-sensitive instruments do not subject the Company to material risk exposures.

New Accounting Standards
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements.” SAB 101 summarizes certain of the SEC’s views in applying generally accepted accounting principles to revenue recognition in financial statements. Pursuant to SAB 101B, which amends SAB 101 and SAB101A, the Company is required to adopt SAB 101 in the fourth quarter of fiscal 2000. Management does not expect the adoption of SAB 101 to have a material effect on the Company’s operations or financial position.

In March 2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB Opinion No. 25 (FIN 44), providing new accounting rules for stock-based compensation under APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). This interpretation is generally effective for transactions occurring after July 1, 2000, but applies to repricings and some other transactions after December 15, 1998. Management does not expect the adoption of FIN 44 to have a material effect on the Company’s operations or financial position.

Forward-Looking Statements
Except for the historical statements and discussions contained herein, statements contained in this report relate to future events that are subject to risks and uncertainties, such as: competition, changing market and economic conditions, currency fluctuations, changes in laws and regulations, the Company’s ability to effectively implement and manage its information technology programs and other factors discussed in the report and in the Company’s filings with the Securities and Exchange Commission. Actual results may differ materially from any projections contained herein.

11

Companies for which this report is filed are:

    Kelly Services, Inc. and its subsidiaries:
        Kelly Assisted Living Services, Inc.
        Kelly Properties, Inc.
        Kelly Services (Canada), Ltd.
        Kelly Services (UK), Ltd.
        Kelly Services (Ireland), Ltd.
        Kelly Services (Australia), Ltd.
        Kelly Services (New Zealand), Ltd.
        Kelly Services (Nederland), B.V.
        Kelly Services of Denmark, Inc.
        Kelly de Mexico, S.A. de C.V.
        Kelly Services Norge A.S.
        KSI Acquisition Corp.
        Kelly Staff Leasing, Inc.
        Kelly Services (Suisse) Holding S.A.
        Kelly Professional Services (France), Inc.
        Kelly Services France S.A.
        Competences RH S.A.R.L.
        Kelly Services Luxembourg S.A.R.L.
        Kelly Services Italia Srl
        Kelly Services Iberia Holding Company, S.L.
        Kelly Services Empleo Empresa de Trabajo Temporal, S.L.
        Kelly Services Seleccion y Formacion, S.L.
        Kelly Services CIS, Inc.
        oooKelly Services
        Kelly Services (Societa di fornitura di lavaro temporaneo) SpA
        Kelly Services Interim, S.A.
        Kelly Services Deutschland GmbH
        Kelly Services Consulting GmbH
        Kelly Services Interim (Belgium) S.A., N.V.
        Kelly Services Select (Belgium) S.A., N.V.
        Kelly Services Sverige A.B.
        LabStaff Pty. Ltd.
        HTM Group
        Interim Job S.A.R.L.

12

PART II. OTHER INFORMATION AND SIGNATURE

Item 4. Submission of Matters to a Vote of Security Holders.

(a)	The annual meeting of stockholders of registrant was held May 15, 2000.
(b)	The nominees for director, as listed in the Company’s proxy statement dated April 14, 2000, were elected. The directors whose terms of office continued after the meeting are also listed in the proxy statement.
(c)	A brief description and the results of the matters voted upon at the meeting follow.

(1) Election of the following directors:

	Shares Voted		Shares Voted
	"For"		"Abstain"
M. A. Fay		3,430,647		4,828
C. V. Fricke		3,431,794		3,681
V. G. Istock		3,431,480		3,995

(2) Approval of amendment to the Performance Incentive Plan increasing the maximum number of awardable shares:

Shares voted “For”	3,308,378
Shares voted “Withhold”	126,197
Shares voted “Abstain”	900

(3) Ratification of the selection of PricewaterhouseCoopers LLP as the Company’s independent auditors:

Shares voted “For”	3,433,304
Shares voted “Withhold”	1,038
Shares voted “Abstain”	1,133

Item 6. Exhibits and Reports on Form 8-K.

(a)	See Index to Exhibits required by Item 601, Regulation S-K, set forth on page 14 of this filing.
(b)	No reports on Form 8-K were filed during the quarter for which this report is filed.

13

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

KELLY SERVICES, INC.

Date: August 14, 2000

/s/ William K. Gerber
William K. Gerber

Executive Vice President and
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)

14

INDEX TO EXHIBITS
REQUIRED BY ITEM 601,
REGULATION S-K

Exhibit
No Description Document

4	Rights of security holders are defined in Articles Fourth, Fifth, Seventh, Eighth, Ninth, Tenth, Eleventh, Twelfth, Thirteenth, Fourteenth and Fifteenth of the Certificate of Incorporation. (Reference is made to Exhibit 3.2 to the Form 10-Q for the quarterly period ended June 30, 1996, filed with the Commission in August, 1996, which is incorporated herein by reference).
10	Amendment to Kelly Services, Inc. Performance Incentive Plan, as amended and restated in 1996. (Reference is made to Exhibit A to the Definitive Proxy for the fiscal year ended January 2, 2000, filed with the Commission in April, 2000, which is incorporated herein by reference).
27	Financial Data Schedule for six months ended July 2, 2000.	2