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Index to Exhibits on page 12
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 September 29, 1996
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.
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(Exact name of Registrant as specified in its charter)
DELAWARE 38-1510762
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
999 WEST BIG BEAVER ROAD, TROY, MICHIGAN 48084
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(Address of principal executive offices)
(Zip Code)
(810) 362-4444
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(Registrant's telephone number, including area code)
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 November 1, 1996, 34,474,225 shares of Class A and 3,583,605 shares of Class
B common stock of the Registrant were outstanding.
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KELLY SERVICES, INC. AND SUBSIDIARIES
Page
Number
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PART I. FINANCIAL INFORMATION
Statements of Earnings 3
Balance Sheets 4
Statements of Stockholders' Equity 5
Statements of Cash Flows 6
Management's Discussion and
Analysis of Results of
Operations and Financial
Condition 7
PART II. OTHER INFORMATION 10
Signature 11
Index to Exhibits Required by
Item 601, Regulation S-K 12
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KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands of dollars except per share items)
13 Weeks Ended 39 Weeks Ended
------------------------------ ------------------------------
Sept. 29, 1996 Oct. 1, 1995 Sept. 29, 1996 Oct. 1, 1995
------------- ------------- ------------- -------------
Sales of services $873,242 $698,453 $2,411,435 $1,971,555
Cost of services 711,950 555,968 1,960,202 1,574,374
-------- -------- ---------- ----------
Gross profit 161,292 142,485 451,233 397,181
Selling, general and
administrative expenses 125,794 111,125 367,791 323,219
-------- -------- ---------- ----------
Earnings from operations 35,498 31,360 83,442 73,962
Interest income 822 1,798 3,509 6,508
-------- -------- ---------- ----------
Earnings before income taxes 36,320 33,158 86,951 80,470
-------- -------- ---------- ----------
Income taxes:
Federal 11,830 10,285 27,885 25,180
State and other 3,060 2,500 7,285 5,995
-------- -------- ---------- ----------
Total income taxes 14,890 12,785 35,170 31,175
-------- -------- ---------- ----------
Net earnings $ 21,430 $ 20,373 $ 51,781 $ 49,295
======== ======== ========== ==========
Earnings per share $.56 $.54 $1.36 $1.30
Dividends per share $.21 $.20 $.62 $.58
Average shares outstanding
(thousands) 38,057 38,005 38,038 37,986
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KELLY SERVICES, INC. AND SUBSIDIARIES
BALANCE SHEETS AS OF SEPTEMBER 29, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
(In thousands of dollars)
ASSETS 1996 1995
- ------ ------------ ------------
CURRENT ASSETS:
Cash and equivalents $ 9,603 $ 52,811
Short-term investments 36,424 74,737
Accounts receivable, less
allowances of $11,165 and
$6,950, respectively 554,915 397,534
Prepaid expenses and other
current assets 38,969 33,520
--------- ---------
Total current assets 639,911 558,602
PROPERTY AND EQUIPMENT:
Land and buildings 36,002 35,153
Equipment, furniture and
leasehold improvements 128,030 113,521
Accumulated depreciation (79,514) (64,286)
--------- ---------
Total property and equipment 84,518 84,388
INTANGIBLES AND OTHER ASSETS 81,101 75,697
--------- ---------
TOTAL ASSETS $805,530 $718,687
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES:
Accounts payable $ 81,281 $ 53,013
Payroll and related taxes 148,729 118,996
Accrued insurance 49,175 51,309
Income and other taxes 23,423 19,265
--------- ---------
Total current liabilities 302,608 242,583
--------- ---------
STOCKHOLDERS' EQUITY:
Capital stock, $1 par value 40,116 40,116
Treasury stock, 2,058 shares in
1996 and 2,101 shares in 1995,
respectively, at cost (6,200) (6,327)
Paid-in capital 8,238 7,215
Earnings invested in the business 460,768 435,100
--------- ---------
Total stockholders' equity 502,922 476,104
--------- ---------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $805,530 $718,687
========= =========
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KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands of dollars)
13 Weeks Ended 39 Weeks Ended
---------------------------- -----------------------------
Sept. 29, 1996 Oct. 1, 1995 Sept. 29, 1996 Oct. 1, 1995
------------ ------------ ------------ ------------
Capital Stock
Class A common stock
Balance at beginning of period $ 36,527 $ 36,511 $ 36,512 $ 36,507
Conversions from Class B -- -- 15 4
--------- --------- --------- ---------
Balance at end of period 36,527 36,511 36,527 36,511
Class B common stock
Balance at beginning of period 3,589 3,605 3,604 3,609
Conversions to Class A -- -- (15) (4)
--------- --------- --------- ---------
Balance at end of period 3,589 3,605 3,589 3,605
Treasury Stock
Balance at beginning of period (6,205) (6,181) (6,327) (6,186)
Exercise of stock options 2 (155) 61 (185)
Restricted stock awards 3 6 66 41
--------- --------- --------- ---------
Balance at end of period (6,200) (6,330) (6,200) (6,330)
Paid-in Capital
Balance at beginning of period 8,194 6,638 7,215 5,868
Exercise of stock options 12 475 474 948
Restricted stock awards 32 57 549 354
--------- --------- --------- ---------
Balance at end of period 8,238 7,170 8,238 7,170
Earnings Invested in the Business
Balance at beginning of period 447,231 411,040 435,100 391,718
Net earnings 21,430 20,373 51,781 49,295
Cash dividends (7,992) (7,603) (23,586) (22,036)
Equity adjustment for foreign
currency translation (cumulative
charge of $406 in 1996 and
credit of $3,024 in 1995) 99 (401) (2,527) 4,432
--------- --------- --------- ---------
Balance at end of period 460,768 423,409 460,768 423,409
--------- --------- --------- ---------
Stockholders' Equity at end of period $502,922 $464,365 $502,922 $464,365
========= ========= ========= =========
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KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE 39 WEEKS ENDED SEPTEMBER 29, 1996 AND OCTOBER 1, 1995
(In thousands of dollars)
1996 1995
---------- ----------
Cash flows from operating activities:
Net earnings $51,781 $49,295
Noncash adjustments:
Depreciation and amortization 19,316 16,433
Changes in certain working capital
components (104,052) (58,049)
-------- --------
Net cash from operating activities (32,955) 7,679
-------- --------
Cash flows from investing activities:
Capital expenditures (17,745) (25,192)
Proceeds from sales and maturities of
short-term investments 835,485 887,679
Purchases of short-term investments (797,172) (840,221)
Increase in intangibles and other assets (8,385) (16,904)
-------- --------
Net cash from investing activities 12,183 5,362
-------- --------
Cash flows from financing activities:
Dividend payments (23,586) (22,036)
Exercise of stock options and
restricted stock awards 1,150 1,158
-------- --------
Net cash from financing activities (22,436) (20,878)
-------- --------
Net change in cash and equivalents (43,208) (7,837)
Cash and equivalents at beginning
of period 52,811 49,207
-------- --------
Cash and equivalents at end of period $ 9,603 $41,370
======== ========
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MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Results of Operations:
Third Quarter
Sales of services in the third quarter of 1996 were $873,242,000, an
increase of 25% from the same period in 1995. Domestic sales grew
25%, and reflects strong growth in the staffing business and
significant expansion in our staff leasing services. International
sales continued to grow at double digit rates.
Cost of services, consisting of payroll and related costs of employees
assigned to customers, increased 28.1% in the third quarter as compared
to the same period in 1995. Average hourly wage rates and related
costs from U.S. operations have increased from 1995 at a rate somewhat
higher than the general inflation rate due to a tightening labor
market.
Gross profit of $161,292,000 was 13.2% higher than 1995, while the
Company-wide gross profit rates as a percentage of sales of services
declined from 20.4% in 1995 to 18.5% in 1996. Growth in the staff
leasing business, with its inherently lower margins, the upward
pressure on wage rates noted above and the growth of sales with our
very large customers, where contracts require special pricing and
additional implementation costs, all had the effect of reducing the
consolidated gross profit rate.
Selling, general and administrative expenses were $125,794,000 in the
third quarter, an increase of 13.2% over the same period in 1995. As a
percent of sales, the spending rate averaged 14.4%, compared to 15.9%
in last year's third quarter.
Earnings before income taxes were $36,320,000, an increase of 9.5%,
compared to pretax earnings of $33,158,000 for the same period in 1995.
The pretax margin was 4.2%, a .5 percentage point decrease from the
third quarter of 1995. Lower interest income represented .1 percentage
point of the decline while the net of the lower gross profit rate and
lower expense spending rate accounted for the remaining .4 percentage
point of the decrease.
Income taxes were 41.0% of pretax income. This was 2.4 percentage
points over the applicable tax rate for the third quarter of 1995 due
to increased state taxes, reduced tax-exempt income and the expiration
of tax credits against federal income tax liability earned through the
targeted jobs tax credit program.
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Net earnings were $21,430,000 in the third quarter of 1996, an increase
of 5.2% over the third quarter of 1995. Earnings per share were $.56
compared to $.54 in the same period last year.
Year-to-Date
Sales of services totaled $2,411,435,000 during the first nine months
of 1996, an increase of 22.3% over 1995. This increase reflects
continued growth in the volume of domestic and international sales.
Cost of services of $1,960,202,000 was 24.5% higher than last year,
reflecting domestic and international volume growth and increases in
payroll costs due to a tightening U.S. labor market.
Gross profit increased 13.6% in 1996 due to strong increased sales
volume, but at lower gross profit rates on sales. The gross profit
rate was 18.7% for the first nine months of 1996 compared to 20.1% for
1995. This decline reflects competitive constraints on price increases
in U.S. service lines, growth of sales with our very large customers
and higher volume growth in the staff leasing business.
Selling, general and administrative expenses of $367,791,000 were 13.8%
higher than last year. The spending rate was 15.3% of sales, 1.1
percentage point below last year's rate. Expenses continue to be
closely monitored in response to tightening margins in both U.S. and
overseas markets.
Earnings before taxes were $86,951,000, an increase of 8.1% over 1995.
These earnings averaged a pretax margin of 3.6%, or .5 percentage point
decrease from 1995. Lower interest income accounted for .2 percentage
point of this decline, and the net of lower gross margin rates, offset
by a decreased expense spending rate, accounted for the remainder.
Income taxes were 40.4% of pretax earnings and were 1.7 percentage
point higher than last year's first nine months' income tax rate. The
absence of the targeted jobs tax credit, reduced tax exempt income, and
increased state and local taxes are the largest components that account
for this change.
Net earnings were $51,781,000, or 5.0% higher than the first nine
months of 1995. Earnings per share were $1.36 compared to $1.30 last
year.
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Financial Condition
The Company's financial condition continues to be strong with cash and
equivalents and short-term investments of $46.0 million. This compares
to the $127.5 million as of December 31, 1995. This decline resulted
primarily from the growth in accounts receivable; the growth in
accounts receivable resulted from the strong increase in sales during
the nine months of 1996.
Assets totaled $805,530,000 at September 29, 1996, an increase of 12.1%
over the $718,687,000 at December 31, 1995. Working capital increased
$21,284,000 during the nine-month period. The components of working
capital, notably accounts receivable, have changed primarily due to
the strong increase in business activity during the year. The current
ratio was 2.1 at September 29, 1996, a decline of .2 percentage point
since December 31, 1995.
The quarterly dividend rate applicable to Class A and Class B shares
outstanding was $.21 per share in the third quarter of 1996. This
compares to a dividend rate of $.20 per share in the third quarter of
1995.
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Companies for which this report is filed are: Kelly Services, Inc. and
its subsidiaries, Kelly Assisted Living Services, Inc., Kelly
Properties, Inc., Kelly Professional and Technical Services, Inc.,
Kelly Services (Canada), Ltd., Les Services Kelly (Quebec) Inc.,
Lenore Simpson Personnel, Ltd., Societe Services Kelly, Kelly Professional
Services (France), Inc., 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., OK Personnel Service Holding SA, Kelly de Mexico, S.A.
de C.V., Kelly Services Norge A.S., KSI Acquisition Corp., Kelly
Pinpoint, Inc., Your Staff, Inc., The Wallace Law Registry, Inc.,
Kelly Services France S.A., Bourse Du Travail Temporaire 2000, Kelly
Formation S.A.R.L., Kelly Services Luxembourg S.A.R.L., Kelly Services
Italia S.R.L., Kelly Services Iberia Holding Company, S.L., Kelly
Services Empleo E.T.T., S.L. and Kelly Services Seleccion y Formacion,
S.L.
The information furnished reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results
of operations for the period in this filing.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
Reference is made to Item 3, Legal Proceedings, of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and to the description therein of the
proposed imposition by the Internal Revenue Service of an
accumulated earnings tax in connection with an audit of
the Company's consolidated federal tax liability for the
years 1988, 1989 and 1990. As disclosed in Item 1,
Legal Proceedings, of the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1996,
this assessment was waived in its entirety by the
Internal Revenue Service in April, 1996.
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 12 of this filing.
(b) No reports on Form 8-K were filed during the quarter
for which this report is filed.
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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: November 12, 1996
/s/ P. K. Geiger
P. K. Geiger
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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INDEX TO EXHIBITS
REQUIRED BY ITEM 601,
REGULATION S-K
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Exhibit
No. Description Document
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3 By-Laws, as amended on August 20, 1996. 2
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.)
27 Financial Data Schedule 3