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Index to Exhibits on page 13
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 June 28, 1998
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 (I.R.S. Employer
of incorporation or organization) 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 July 31, 1998, 34,695,228 shares of Class A and 3,569,266 shares of Class B
common stock of the Registrant were outstanding.
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KELLY SERVICES, INC. AND SUBSIDIARIES
Page
Number
------
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 11
Signature 12
Index to Exhibits Required by
Item 601, Regulation S-K 13
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KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands of dollars except per share items)
13 Weeks Ended 26 Weeks Ended
----------------------------- -----------------------------
June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
------------- ------------- ------------- -------------
Sales of services $1,001,286 $959,726 $1,960,668 $1,840,572
Cost of services 823,542 789,618 1,615,014 1,514,126
----------- --------- ----------- -----------
Gross profit 177,744 170,108 345,654 326,446
Selling, general and
administrative expenses 143,584 137,636 286,653 269,855
----------- --------- ----------- -----------
Earnings from operations 34,160 32,472 59,001 56,591
Interest income, net 793 486 1,486 490
----------- --------- ----------- -----------
Earnings before income taxes 34,953 32,958 60,487 57,081
Income taxes 14,330 13,515 24,800 23,410
----------- --------- ----------- -----------
Net earnings $ 20,623 $ 19,443 $ 35,687 $ 33,671
=========== ========= =========== ===========
Earnings per share:
Basic $.54 $.51 $.93 $.88
Diluted .54 .51 .93 .88
Average shares outstanding
(thousands):
Basic 38,238 38,078 38,207 38,069
Diluted 38,497 38,131 38,449 38,114
Dividends per share $.23 $.22 $.45 $.43
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KELLY SERVICES, INC. AND SUBSIDIARIES
BALANCE SHEETS AS OF JUNE 28, 1998 AND DECEMBER 28, 1997
(In thousands of dollars)
ASSETS 1998 1997
- ------ ------------ ------------
CURRENT ASSETS: (UNAUDITED)
Cash and equivalents $ 73,328 $ 76,690
Short-term investments 92,560 67,301
Accounts receivable, less
allowances of $12,840 and
$12,375, respectively 564,807 572,134
Prepaid expenses and other
current assets 57,127 54,847
----------- ---------
Total current assets 787,822 770,972
PROPERTY AND EQUIPMENT:
Land and buildings 43,173 44,405
Equipment, furniture and
leasehold improvements 154,216 130,472
Accumulated depreciation (72,523) (62,144)
----------- ---------
Total property and equipment 124,866 112,733
INTANGIBLES AND OTHER ASSETS 89,320 83,524
----------- ---------
TOTAL ASSETS $1,002,008 $967,229
=========== =========
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 48,653 $ 54,958
Accounts payable 58,615 60,408
Payroll and related taxes 225,238 197,092
Accrued insurance 66,108 61,077
Income and other taxes 26,102 33,865
----------- ---------
Total current liabilities 424,716 407,400
----------- ---------
STOCKHOLDERS' EQUITY:
Capital stock, $1 par value 40,116 40,116
Treasury stock, 1,851,000 shares in
1998 and 1,953,000 shares in 1997,
respectively, at cost (6,143) (6,214)
Paid-in capital 13,751 10,980
Earnings invested in the business 540,526 522,039
Accumulated foreign currency adjustments (10,958) (7,092)
----------- ---------
Total stockholders' equity 577,292 559,829
----------- ---------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $1,002,008 $967,229
=========== =========
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KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands of dollars)
13 Weeks Ended 26 Weeks Ended
----------------------------- -----------------------------
June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
------------- ------------- ------------- -------------
Capital Stock
Class A common stock
Balance at beginning of period $ 36,540 $ 36,531 $ 36,538 $ 36,527
Conversions from Class B 1 6 3 10
--------- --------- --------- ---------
Balance at end of period 36,541 36,537 36,541 36,537
Class B common stock
Balance at beginning of period 3,576 3,585 3,578 3,589
Conversions to Class A (1) (6) (3) (10)
--------- --------- --------- ---------
Balance at end of period 3,575 3,579 3,575 3,579
Treasury Stock
Balance at beginning of period (6,282) (6,204) (6,214) (6,197)
Exercise of stock options 101 41 28 32
Restricted stock awards 38 59 43 61
--------- --------- --------- ---------
Balance at end of period (6,143) (6,104) (6,143) (6,104)
Paid-in Capital
Balance at beginning of period 12,627 8,365 10,980 8,265
Exercise of stock options 814 322 2,426 406
Restricted stock awards 310 393 345 409
--------- --------- --------- ---------
Balance at end of period 13,751 9,080 13,751 9,080
Earnings Invested in the Business
Balance at beginning of period 528,703 480,644 522,039 474,409
Net earnings 20,623 19,443 35,687 33,671
Cash dividends (8,800) (8,379) (17,200) (16,372)
--------- --------- --------- ---------
Balance at end of period 540,526 491,708 540,526 491,708
Accumulated Foreign Currency Adjustments
Balance at beginning of period (8,425) (4,826) (7,092) 306
Equity adjustment for foreign currency (2,533) (1,138) (3,866) (6,270)
--------- --------- --------- ---------
Balance at end of period (10,958) (5,964) (10,958) (5,964)
--------- --------- --------- ---------
Stockholders' Equity at end of period $577,292 $528,836 $577,292 $528,836
========= ========= ========= =========
Comprehensive Income
Net earnings $ 20,623 $ 19,443 $ 35,687 $ 33,671
Other comprehensive income - Foreign
currency adjustments (2,533) (1,138) (3,866) (6,270)
--------- --------- --------- ---------
Comprehensive Income $ 18,090 $ 18,305 $ 31,821 $ 27,401
========= ========= ========= =========
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KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE 26 WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997
(In thousands of dollars)
1998 1997
---------- ----------
Cash flows from operating activities:
Net earnings $ 35,687 $ 33,671
Noncash adjustments:
Depreciation and amortization 13,808 12,849
Changes in certain working capital
components 26,792 26,516
--------- ---------
Net cash from operating activities 76,287 73,036
--------- ---------
Cash flows from investing activities:
Capital expenditures (25,198) (17,903)
Proceeds from sales and maturities of
short-term investments 814,996 967,617
Purchases of short-term investments (840,255) (978,024)
Increase in intangibles and other assets (8,529) (1,312)
--------- ---------
Net cash from investing activities (58,986) (29,622)
--------- ---------
Cash flows from financing activities:
(Decrease) increase in short-term
borrowings (6,305) 4,644
Dividend payments (17,200) (16,372)
Exercise of stock options and
restricted stock awards 2,842 908
--------- ---------
Net cash from financing activities (20,663) (10,820)
--------- ---------
Net change in cash and equivalents (3,362) 32,594
Cash and equivalents at beginning
of period 76,690 33,408
--------- ---------
Cash and equivalents at end of period $ 73,328 $ 66,002
========= =========
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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 1998 were $1.0 billion, an
increase of 4.3% from the same period in 1997. Sales growth was
stronger in professional, technical and European operations, while U.S.
office-administrative and electronic assembly sectors grew at a more
modest rate.
Cost of services, consisting of payroll and related tax and benefit
costs of employees assigned to customers, increased 4.3% in the second
quarter as compared to the same period in 1997. Direct wage costs have
increased from 1997 at a rate somewhat higher than the general
inflation rate, due to strong worldwide demand for labor.
Gross profit of $177.7 million was 4.5% higher than the second quarter
of 1997, and gross profit as a percentage of sales increased to 17.8%
in 1998 from 17.7% in 1997. The strong performance of the
professional, technical and European businesses improved margins
slightly.
Selling, general and administrative expenses were $143.6 million in the
second quarter, an increase of 4.3% over the same period in 1997.
Expenses averaged 14.3% of sales in the second quarters of both 1998
and 1997. The moderate rate of growth of these expenses, which include
year 2000 costs and the expenditures related to the information
technology investment program, reflects the Company's commitment to
expense control.
Earnings from operations of $34.2 million were 5.2% greater than the
second quarter of 1997. Interest income (net) of $0.8 million
increased significantly as compared to the second quarter of 1997 due
to higher average cash and short-term investment balances.
Earnings before income taxes were $35.0 million, an increase of 6.1%,
compared to pretax earnings of $33.0 million for the same period in
1997. The pretax margin was 3.5% as compared to 3.4% in last year's
second quarter. Improved gross margins combined with effective expense
management were the principal reasons for the improvement. Income
taxes were 41.0% of pretax income in the second quarters of 1998 and
1997.
Net earnings were $20.6 million in the second quarter of 1998, an
increase of 6.1% over the second quarter of 1997. Basic and diluted
earnings per share were $.54 compared to $.51 in the same period last
year.
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Year-to-Date
Sales of services totaled $2.0 billion during the first six months of
1998, an increase of 6.5% over 1997. This increase reflects modest
growth in domestic sales and strong international sales.
Cost of services of $1.6 billion was 6.7% higher than last year,
reflecting volume growth and increases in payroll rates due to strong
demand for labor worldwide.
Gross profit increased 5.9% in 1998 due to increased sales, but at
lower gross profit rates. The gross profit rate was 17.6% for the
first six months of 1998 compared to 17.7% for 1997. This decline
reflects sales growth with large customers, not only in the United
States but in international markets as well.
Selling, general and administrative expenses of $286.7 million were
6.2% higher than last year. The spending rate was 14.6% of sales, 0.1
percentage point below last year's rate. Expenses included the
information technology investment program and year 2000 related
conversion costs. Strong controls continue to be effective in managing
expenses in proper relationship to sales growth.
Earnings before taxes were $60.5 million, an increase of 6.0% over
1997. These earnings averaged a pretax margin of 3.1% in the first six
months of both 1998 and 1997. Income taxes were 41.0% of pretax
earnings in the first six months of 1998 and 1997.
Net earnings were $35.7 million or 6.0% higher than the first six
months of 1997. Basic and diluted earnings per share were $.93
compared to $.88 last year. This was an increase of 5.7% over 1997.
Financial Condition
Assets totaled $1.0 billion at June 28, 1998, an increase of 3.6% over
the $967.2 million at December 28, 1997. Working capital was $363.1
million, nearly the same as the end of 1997. The current ratio was 1.9
at June 28, 1998 and December 28, 1997.
During the first six months of 1998, net cash from operating activities
was $76.3 million, an increase of 4.5% over the comparable period in
1997. This increase resulted principally from an increase in net
earnings, and depreciation and amortization. Capital expenditures of
$25.2 million in 1998 and $17.9 million in 1997 were principally for
expanding and improving the worldwide branch network and developing new
information systems.
The quarterly dividend rate applicable to Class A and Class B shares
outstanding was $.23 per share in the second quarter of 1998. This
represents a 5% increase compared to a dividend rate of $.22 per share
in the second quarter of 1997.
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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.
New Accounting Standards
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information,"
effective for 1998, establishes standards for reporting information
about operating segments in annual financial statements and, beginning
in 1999, requires reporting of selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. The Company will
adopt SFAS 131 for its financial statements for the year ending
January 3, 1999. The Company has not completed its determination of
the impact that the adoption of this new accounting standard will have
on its consolidated financial statement disclosures.
In February 1998, the Financial Accounting Standards Board issued
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This Statement is effective for fiscal years
beginning after December 15, 1997. This Statement will not have an
impact on the Company's consolidated financial statements, because the
Company does not have a pension plan or other material postretirement
benefits as covered by the Statement.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
This Statement requires companies to record derivatives on the balance
sheet as assets and liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would
be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This Statement is effective for fiscal
years beginning after June 15, 1999, with earlier adoption encouraged.
This Statement will not have a material impact on the Company's
consolidated financial statements. The Company plans to adopt this
Statement beginning in the 1999 fiscal year.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," was issued
by the American Institute of Certified Public Accountants in March
1998. This SOP provides guidance on accounting for the costs of
computer software developed or obtained for internal use. Effective
for fiscal years beginning after December 15, 1998, this SOP requires
capitalization of certain internal-use computer software costs. The
Company does not expect it to have a material impact on its
consolidated financial statements. The Company plans to adopt this
Statement beginning in the 1999 fiscal year.
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In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities."
Effective for fiscal years beginning after December 15, 1998, with
earlier application encouraged, this SOP provides guidance on the
financial reporting of start-up costs and organization costs. It
requires start-up activities and organization costs to be expensed as
incurred. This Statement is not expected to have a material impact on
the Company's consolidated financial statements. The Company will
adopt this Statement beginning in the 1999 fiscal year.
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.
-------------------------------------------------------------
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., 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.,
Kelly de Mexico, S.A. de C.V., Kelly Services Norge A.S., KSI
Acquisition Corp., Kelly Staff Leasing, Inc., The Wallace Law
Registry, Inc., Kelly Services (Switzerland) Inc., Kelly Services
France S.A., 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., Kelly
Services Seleccion y Formacion, S.L., Kelly Services CIS, Inc.,
Personnel Corps ZAO, Kelly Services (societa di fornitura
di lavaro temporaneo) SpA, Kelly Services Interim, Kelly Services
Interim (Belgium) SA and Kelly Services Select (Belgium) SA.
The information furnished reflects all adjustments, consisting of only
normal and recurring items, 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 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
(a) The annual meeting of stockholders of registrant was held
May 19, 1998.
(b) The nominee for director, as listed in the Company's
proxy statement dated April 24, 1998, was 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 T. E. Adderley as director:
Shares voted "For" 3,522,509
Shares voted "Withhold" 1,715
(2) Approval of amendments to the standards for
performance-based annual incentive award criteria
and limitations for certain executive officers
under the Company's Short-Term Incentive Plan:
Shares voted "For" 3,513,585
Shares voted "Withhold" 7,849
Shares voted "Abstain" 2,790
(3) Ratification of the selection of
PricewaterhouseCoopers LLP as the Company's
independent auditors:
Shares voted "For" 3,522,929
Shares voted "Abstain" 1,295
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 13 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: August 11, 1998
/s/ William K. Gerber
William K. Gerber
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
---------------------
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 Short-Term Incentive Plan, as amended and restated on
March 23, 1998. 2
11 Additional Earnings Per Share Information. 3
27.1 Financial Data Schedule for six months ended
June 28, 1998. 4
27.2 Restated Financial Data Schedule for six months ended
June 29, 1997. 5