1
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 March 31, 2002
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
--------------------------------- -------------------
(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)
(248) 362-4444
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(Registrant's telephone number, including area code)
No Change
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(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 May 3, 2002, 32,493,680 shares of Class A and 3,482,943 shares of Class B
common stock of the Registrant were outstanding.
2
KELLY SERVICES, INC. AND SUBSIDIARIES
Page
Number
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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 10
PART II. OTHER INFORMATION AND SIGNATURE
Item 6. Exhibits and Reports on Form 8-K 13
Signature 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
----------------------------------------
March 31, 2002 April 1, 2001
------------------ -----------------
Sales of services $ 1,000,040 $ 1,087,198
Cost of services 841,080 905,824
------------------ -----------------
Gross profit 158,960 181,374
Selling, general and administrative expenses 157,774 173,199
------------------ -----------------
Earnings from operations 1,186 8,175
Interest income (expense), net 141 (175)
------------------ -----------------
Earnings before income taxes 1,327 8,000
Income taxes 531 3,200
------------------ -----------------
Net earnings $ 796 $ 4,800
================== =================
Earnings per share:
Basic $ .02 $ .13
Diluted .02 .13
Average shares outstanding (thousands):
Basic 35,890 35,763
Diluted 36,001 35,915
Dividends per share $ .10 $ .25
See accompanying Notes to Financial Statements.
4
KELLY SERVICES, INC. AND SUBSIDIARIES
BALANCE SHEETS
(In thousands of dollars)
ASSETS March 31, 2002 December 30, 2001
- ------ ------------------ ---------------------
CURRENT ASSETS: (UNAUDITED)
Cash and equivalents $ 84,616 $ 83,461
Short-term investments 575 630
Accounts receivable, less allowances of $12,830 and $12,105, respectively 539,834 539,692
Prepaid expenses and other current assets 26,132 24,950
Deferred taxes 20,833 21,469
------------------ ---------------------
Total current assets 671,990 670,202
PROPERTY AND EQUIPMENT:
Land and buildings 56,619 56,639
Equipment, furniture and leasehold improvements 280,301 275,063
Accumulated depreciation (129,111) (119,729)
------------------ ---------------------
Total property and equipment 207,809 211,973
NONCURRENT DEFERRED TAXES 31,415 31,415
GOODWILL, NET 73,868 73,643
OTHER ASSETS 53,563 52,148
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TOTAL ASSETS $ 1,038,645 $ 1,039,381
================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 23,702 $ 32,939
Accounts payable 63,742 65,896
Payroll and related taxes 193,913 177,134
Accrued insurance 24,017 24,071
Income and other taxes 44,040 48,149
------------------ ---------------------
Total current liabilities 349,414 348,189
NONCURRENT LIABILITIES:
Accrued insurance 39,185 39,273
Accrued retirement benefits 44,175 44,764
------------------ ---------------------
Total noncurrent liabilities 83,360 84,037
STOCKHOLDERS' EQUITY:
Capital stock, $1.00 par value
Class A common stock, shares issued 36,609,078 at 2002 and 2001 36,609 36,609
Class B common stock, shares issued 3,506,788 at 2002 and 2001 3,507 3,507
Treasury stock, at cost
Class A common stock, 4,150,425 shares at 2002 and 4,232,542 shares at 2001 (80,136) (81,721)
Class B common stock, 15,675 shares at 2002 and 2001 (435) (435)
Paid-in capital 17,459 17,035
Earnings invested in the business 658,691 661,483
Accumulated foreign currency adjustments (29,824) (29,323)
------------------ ---------------------
Total stockholders' equity 605,871 607,155
------------------ ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,038,645 $ 1,039,381
================== =====================
See accompanying Notes to Financial Statements.
5
KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands of dollars)
13 Weeks Ended
----------------------------------------
March 31, 2002 April 1, 2001
------------------ -----------------
Capital Stock
Class A common stock
Balance at beginning of period $ 36,609 $ 36,609
Conversions from Class B - -
------------------ -----------------
Balance at end of period 36,609 36,609
Class B common stock
Balance at beginning of period 3,507 3,507
Conversions to Class A - -
------------------ -----------------
Balance at end of period 3,507 3,507
Treasury Stock
Class A common stock
Balance at beginning of period (81,721) (84,251)
Exercise of stock options, restricted stock awards and other 1,177 1,346
Treasury stock issued for acquisition 408 407
------------------ -----------------
Balance at end of period (80,136) (82,498)
Class B common stock
Balance at beginning of period (435) (371)
Purchase of treasury stock - (5)
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Balance at end of period (435) (376)
Paid-in Capital
Balance at beginning of period 17,035 16,371
Exercise of stock options, restricted stock awards and other 332 344
Treasury stock issued for acquisition 92 93
------------------ -----------------
Balance at end of period 17,459 16,808
Earnings Invested in the Business
Balance at beginning of period 661,483 675,388
Net earnings 796 4,800
Dividends (3,588) (8,941)
------------------ -----------------
Balance at end of period 658,691 671,247
Accumulated Foreign Currency Adjustments
Balance at beginning of period (29,323) (23,784)
Equity adjustment for foreign currency (501) (7,903)
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Balance at end of period (29,824) (31,687)
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Stockholders' Equity at end of period $ 605,871 $ 613,610
================== =================
Comprehensive Income
Net earnings $ 796 $ 4,800
Other comprehensive income - Foreign currency adjustments (501) (7,903)
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Comprehensive income (loss) $ 295 $ (3,103)
================== =================
See accompanying Notes to Financial Statements.
6
KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands of dollars)
13 Weeks Ended
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March 31, 2002 April 1, 2001
------------------ -----------------
Cash flows from operating activities:
Net earnings $ 796 $ 4,800
Noncash adjustments:
Depreciation and amortization 9,982 10,534
(Increase) decrease in accounts receivable, net (472) 23,094
Changes in operating assets and liabilities 10,992 12,714
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Net cash from operating activities 21,298 51,142
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Cash flows from investing activities:
Capital expenditures (5,847) (13,849)
(Increase) decrease in other assets (1,841) 6,268
Proceeds from sales and maturities of short-term investments 260 51
Purchases of short-term investments (205) (51)
Acquisition of building - (11,783)
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Net cash from investing activities (7,633) (19,364)
------------------ -----------------
Cash flows from financing activities:
Decrease in short-term borrowings (9,237) (8,379)
Dividend payments (3,585) (8,929)
Stock options and other 417 114
Purchase of treasury stock - (5)
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Net cash from financing activities (12,405) (17,199)
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Effect of exchange rates on cash and equivalents (105) (923)
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Net change in cash and equivalents 1,155 13,656
Cash and equivalents at beginning of period 83,461 43,318
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Cash and equivalents at end of period $ 84,616 $ 56,974
================== =================
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
December 30, 2001 (the 2001 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 periods ended March 31, 2002 and April 1, 2001.
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
2002 2001
------------ ------------
Sales:
U.S. Commercial Staffing $ 480,672 $ 548,063
PTSA 272,292 267,645
International 247,076 271,490
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Consolidated Total $ 1,000,040 $ 1,087,198
============ ============
Earnings from Operations:
U.S. Commercial Staffing $ 23,293 $ 31,852
PTSA 11,445 12,362
International (1,195) 1,577
Corporate (32,357) (37,616)
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Consolidated Total $ 1,186 $ 8,175
============ ============
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 March 31, 2002 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 March 31, 2002.
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 periods
ended March 31, 2002 and April 1, 2001 were as follows:
13 Weeks Ended
2002 2001
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Net earnings $ 796 $ 4,800
======= =======
Determination of shares (thousands):
Weighted average common
shares outstanding 35,890 35,763
Effect of dilutive securities:
Stock options 29 50
Restricted and performance awards and other 82 102
------- -------
Weighted average common shares
outstanding - assuming dilution 36,001 35,915
======= =======
Earnings per share - basic $ .02 $ .13
Earnings per share - assuming dilution $ .02 $ .13
9
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (continued)
(UNAUDITED)
(In thousands of dollars)
5. Goodwill and Other Intangible Assets - Adoption of Statement 142
Effective for fiscal 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," and eliminated
the amortization of purchased goodwill. The Company also reevaluated intangible
assets and determined that their remaining useful lives remained appropriate. At
March 31, 2002, the unamortized purchased goodwill balance was approximately $74
million. Impairment tests of goodwill were completed as of December 31, 2001. It
was determined that goodwill is not impaired; therefore there was no
transitional impairment charge to be recorded. The following table presents net
earnings and basic and diluted earnings per share for the quarter ended March
31, 2002 and net earnings and basic and diluted earnings per share for the
quarter ended April 1, 2001, as adjusted for the non-amortization provisions of
SFAS No. 142.
13 Weeks Ended
2002 2001
--------- ---------
Reported net earnings $ 796 $ 4,800
Add back: Goodwill amortization, net of tax - 566
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Adjusted net earnings $ 796 $ 5,366
========= =========
Basic earnings per share:
Reported net earnings $ 0.02 $ 0.13
Goodwill amortization, net of tax - 0.02
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Adjusted net earnings $ 0.02 $ 0.15
========= =========
Diluted earnings per share:
Reported net earnings $ 0.02 $ 0.13
Goodwill amortization, net of tax - 0.02
--------- ---------
Adjusted net earnings $ 0.02 $ 0.15
========= =========
10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Results of Operations:
First Quarter
Sales of services in the first quarter of 2002 were $1.000 billion, a decrease
of 8.0% from the same period in 2001. The decrease was a result of a decline in
hours worked of 10.4% partially offset by an increase in average hourly bill
rates of 1.4%.
The gross profit rate for the first quarter of 2002 averaged 15.9%, a decrease
of 0.8 percentage points compared to the 16.7% rate earned for the same period
in 2001. The gross profit rates of all three business segments showed decreases
in the first quarter of 2002 as compared to last year, primarily due to an
ongoing shift in the mix of sales to larger customers, combined with decreases
in placement fee income.
Selling, general and administrative expenses expressed as a percentage of sales
were 15.8% in the first quarter of 2002, a 0.1 percentage point decrease
compared to the 15.9% rate in the first quarter of 2001. Selling, general and
administrative expenses totaled $157.8 million and decreased 8.9%
year-over-year. The Company implemented a number of expense reduction
initiatives during 2001 that increasingly began to show results as the year
progressed, and began to have full impact during the first quarter of 2002.
These initiatives included targeted staff reductions in both field operations
and headquarters units.
Earnings from operations in the first quarter of 2002 totaled $1.2 million, an
85.5% decrease compared to the $8.2 million reported for the first quarter of
2001. Earnings were 0.1% of sales for the first quarter of 2002 as compared to
0.8% for the same period last year.
Net interest income in the first quarter of 2002 was $141 thousand, a $316
thousand improvement compared to last year's net interest expense of $175
thousand. The improvement is primarily attributable to higher cash balances and
lower short term debt levels, offset by the impact of lower interest rates.
The effective income tax rate in the first quarter of 2002 was 40.0%, consistent
with last year.
First quarter net earnings totaled $796 thousand in 2002, a decrease of 83.4%
from $4.8 million earned last year. The rate of return on sales for the first
quarter of 2002 was 0.1% compared with last year's 0.4% rate. Diluted earnings
per share for the first quarter of 2002 were $0.02, an 84.6% decrease as
compared to diluted earnings per share of $0.13 for the first quarter of 2001.
US Commercial Staffing
Sales in the U.S. Commercial Staffing segment totaled $480.7 million in the
first quarter of 2002, a 12.3% decrease compared to the $548.1 million reported
for the same period in 2001. This reflected a decrease in hours worked of 13.8%
partially offset by an increase in average hourly bill rates of 1.8%. The sales
decreases by month, on a year-over-year basis, were: 17% in January, 10% in
February and 9% in March, indicating an improving trend throughout the first
quarter. However, the Company expects continued negative U.S. Commercial
Staffing year-over-year sales comparisons for at least the second quarter, with
the possibility of small positive year-over-year sales growth by the third
quarter.
U.S. Commercial Staffing sales represented 48% of total Company sales in the
first quarter of 2002 and 50% of total Company sales in the first quarter of
2001.
U.S. Commercial Staffing earnings totaled $23.3 million in the first quarter of
2002, a decrease of 26.9% compared to earnings of $31.9 million last year.
Expenses were tightly controlled and decreased 9.1% year-over-year. However, the
12.3% sales decrease, combined with a decrease in the gross profit rate,
produced the 26.9% earnings decline. The decline in gross profit rates reflects
an ongoing shift in mix of sales to larger customers and decreases in fee based
income. U.S. Commercial gross margins may continue to decrease during 2002 as
the Company expects its large corporate and national accounts will continue to
increase as a percentage of total sales.
Professional, Technical and Staffing Alternatives
Sales in the Professional, Technical and Staffing Alternatives (PTSA) segment
for the first quarter of 2002 totaled $272.3 million, an increase of 1.7%
compared to the $267.6 million reported in the first quarter of 2001. Revenues
in the staffing alternative businesses, which include staff leasing and
management services, increased by 10.1%. This was largely offset by a 1.7%
decrease in revenues for the hours based professional and technical staffing
businesses, reflecting the net effect of a 7.0% decrease in hours and 5.9%
increase in average hourly bill rates.
11
Results continued to vary among the 13 business units that comprise PTSA. Kelly
Healthcare, Kelly Financial Resources and General Contractor Services continue
to be the leading performers in 2002, exhibiting sales growth of 40% or better
for the first quarter of 2002. Kelly Staff Leasing maintained positive sales
growth of 13% during the first quarter of 2002 as well. However, three large
PTSA units, Automotive Services Group, IT Resources and Kelly Home Care,
continued to experience revenue declines during the first quarter of 2002. These
decreases, however, were consistent with industry trends in their staffing
sectors.
PTSA sales represented 27% of total Company sales in the first quarter of 2002
and 25% of total Company sales in the first quarter of 2001.
PTSA earnings for the first quarter of 2002 totaled $11.4 million and decreased
7.4% from the same period in 2001. Gross profit rates decreased 0.9 percentage
points versus last year due to changes in business unit mix and rate decreases
in certain business units, such as Automotive Services Group. Expenses decreased
3% on a year-over-year basis.
International
Translated U.S. dollar sales in International for the first quarter of 2002
totaled $247.1 million, a 9.0% decrease compared to the $271.5 million reported
in the first quarter of 2001. This resulted from a decrease in the translated
U.S. dollar average hourly bill rates of 2.9% and a decrease in hours worked of
5.6%.
On a same currency basis, international revenue decreased 6.0% in the first
quarter of 2002, which reflected continued slowing from a 3% same currency sales
decrease in the fourth quarter of 2001. The rate of global slowing in staffing
demand continued in 2002 in the International segment, particularly throughout
continental Europe, the United Kingdom and Ireland.
International sales represented 25% of total Company sales in the first quarters
of 2002 and 2001.
International results were a loss of $1.2 million in the first quarter of 2002
compared to earnings of $1.6 million for the same period in 2001. The
significant sales decreases in continental Europe, the United Kingdom and
Ireland, combined with decreases in fee income, resulted in the operating loss.
On a year-over-year basis, expenses in the International segment decreased 8%.
Financial Condition
Assets totaled $1.039 billion at March 31, 2002 and December 30, 2001. The
Company's working capital position was $323 million at March 31, 2002, an
increase of $0.6 million from year-end 2001. The current ratio was 1.9 at
quarter end 2002 and year-end 2001. Cash and short-term investments totaled $85
million at March 31, 2002, an increase of $1 million from the $84 million
balance at year-end 2001.
During the first three months of 2002, net cash from operating activities
totaled $21.3 million, a decrease of 58.4% from the comparable period in 2001.
This decrease is primarily due to an essentially flat accounts receivable
balance during the first quarter of 2002, compared to the $23 million decrease
in accounts receivable during the same period in 2001. The global days sales
outstanding for the first quarter were 49 days, which is a one-day improvement
versus the Company's performance for the same period in the prior year.
Short-term debt totaled $24 million at March 31, 2002, which decreased $9
million compared to the $33 million level at year-end 2001. All short-term
borrowings are foreign currency denominated and reduce the Company's exposure to
foreign exchange fluctuations. At quarter end, debt represented less than 4% of
total capital.
Capital expenditures for the first quarter of 2002 totaled $6 million, down
57.8% from the $14 million spent in the first quarter of 2001. Of the total,
over 70% related to Information Technology investments. For 2002, capital
expenditures are expected to total between $35 and $40 million.
12
Depreciation and amortization for the first quarter of 2002 totaled $10.0
million, a 5.2% decrease from the $10.5 million for same period of 2001. As a
result of the implementation of Statement of Financial Accounting Standard
(SFAS) No. 142 at the beginning of 2002, the Company will eliminate
approximately $2.7 million of amortization of goodwill in 2002. Approximately
$0.7 million of amortization was eliminated in the first quarter. For planning
purposes, the Company expects depreciation and amortization of intangible assets
other than goodwill to total approximately $43 to $47 million for 2002,
reflecting on-going implementation of major IT projects.
Stockholders' equity was $606 million at March 31, 2002, which represents a $1
million decrease from year-end 2001. The decrease in stockholders' equity is
primarily the result of dividends paid exceeding net earnings in the first
quarter of 2002.
Dividends paid per common share were $.10 in the first quarter of 2002, a
decrease of 60% from dividends of $.25 per share in the first quarter of 2001.
The Company's financial position remains strong. The Company continues to carry
no long-term debt and expects to meet its growth requirements principally
through cash generated from operations, available cash and short term
investments and committed unused credit facilities.
The Company has no material unrecorded commitments, losses, contingencies or
guarantees associated with any related parties or unconsolidated entities.
Market Risk-Sensitive Instruments And Positions
The Company does not hold or invest in derivative contracts. The Company is
exposed to foreign currency risk primarily due to its net investment in foreign
subsidiaries. This risk is mitigated by the use of the Company's multi-currency
line of credit. This credit facility is used to borrow in local currencies which
mitigates the exchange rate risk resulting from foreign currency-denominated net
investments fluctuating in relation to the U.S. dollar. In addition, the Company
is exposed to interest rate risks through its use of the multi-currency line of
credit.
In addition, the Company is exposed to market risk as a result of its obligation
to pay benefits under its nonqualified deferred compensation plan and its
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 publicly traded mutual funds, as
part of the company-owned variable universal life insurance policies, are
designed to mitigate this risk with offsetting gains and losses.
Overall, the Company's holdings and positions in market risk-sensitive
instruments do not subject the Company to material risk.
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: competitive market pressures including
pricing, changing market and economic conditions, material changes in demand
from large corporate customers, availability of temporary workers with
appropriate skills required by customers, increases in wages paid to temporary
workers not passed on to customers, currency fluctuations, changes in laws and
regulations, the Company's ability to effectively implement and manage its
information technology programs, the ability of the Company to successfully
expand into new markets and service lines 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.
13
PART II. OTHER INFORMATION AND SIGNATURE
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
14
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: May 14, 2002
/s/ William K. Gerber
William K. Gerber
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)