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 October 1, 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 (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 November 3, 2000, 32,238,678 shares of Class A and 3,495,009 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 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 39 Weeks Ended
------------------------- ---------------------------
October 1, October 3, October 1, October 3,
2000 1999 2000 1999
---------- ---------- ---------- ----------
Sales of services $1,154,480 $1,092,002 $3,341,289 $3,184,744
Cost of services 948,683 893,900 2,750,509 2,617,537
---------- ---------- ---------- ----------
Gross profit 205,797 198,102 590,780 567,207
Selling, general and
administrative expenses 162,017 155,390 483,765 463,770
---------- ---------- ---------- ----------
Earnings from operations 43,780 42,712 107,015 103,437
Interest expense, net 297 309 177 147
---------- ---------- ---------- ----------
Earnings before income taxes 43,483 42,403 106,838 103,290
Income taxes 17,480 17,385 42,950 42,350
---------- ---------- ---------- ----------
Net earnings $ 26,003 $ 25,018 $ 63,888 $ 60,940
========== ========== ========== ==========
Earnings per share:
Basic $ .73 $ .70 $ 1.79 $ 1.70
Diluted .73 .69 1.78 1.69
Average shares outstanding
(thousands):
Basic 35,728 35,868 35,716 35,842
Diluted 35,840 36,060 35,807 36,000
Dividends per share $ .25 $ .24 $ .74 $ .71
See accompanying Notes to Financial Statements.
4
KELLY SERVICES, INC. AND SUBSIDIARIES
BALANCE SHEETS AS OF OCTOBER 1, 2000 AND JANUARY 2, 2000
(In thousands of dollars)
ASSETS 2000 1999
- ------ ----------- -----------
CURRENT ASSETS: (UNAUDITED)
Cash and equivalents $ 69,092 $ 54,032
Short-term investments 3,979 6,018
Accounts receivable, less allowances of
$13,667 and $13,575, respectively 640,790 602,485
Prepaid expenses and other current assets 21,870 22,801
Deferred taxes 50,882 50,832
----------- -----------
Total current assets 786,613 736,168
PROPERTY AND EQUIPMENT:
Land and buildings 51,472 49,458
Equipment, furniture and
leasehold improvements 257,712 231,654
Accumulated depreciation (116,648) (94,112)
----------- -----------
Total property and equipment 192,536 187,000
INTANGIBLES AND OTHER ASSETS 134,740 110,523
----------- -----------
TOTAL ASSETS $ 1,113,889 $ 1,033,691
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 53,512 $ 47,210
Accounts payable 79,600 73,516
Payroll and related taxes 260,781 215,706
Accrued insurance 65,486 65,881
Income and other taxes 51,367 49,005
----------- -----------
Total current liabilities 510,746 451,318
STOCKHOLDERS' EQUITY:
Capital stock, $1 par value
Class A common stock, 36,609,040 shares issued
in 2000 and 36,602,210 in 1999 36,609 36,602
Class B common stock, 3,506,826 shares issued
in 2000 and 3,513,656 in 1999 3,507 3,514
Treasury stock, at cost
Class A common stock, 4,370,651 shares in 2000
and 4,234,524 shares in 1999 (84,387) (80,538)
Class B common stock, 10,817 shares in 2000
and 7,767 shares in 1999 (322) (248)
Paid-in capital 16,306 15,761
Earnings invested in the business 661,035 623,564
Accumulated foreign currency adjustments (29,605) (16,282)
----------- -----------
Total stockholders' equity 603,143 582,373
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 1,113,889 $ 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 39 Weeks Ended
----------------------- --------------------------
October 1, October 3, October 1, October 3,
2000 1999 2000 1999
--------- ---------- ---------- ---------
Capital Stock
Class A common stock
Balance at beginning of period $ 36,609 $ 36,548 $ 36,602 $ 36,541
Conversions from Class B -- 12 7 19
--------- --------- --------- ---------
Balance at end of period 36,609 36,560 36,609 36,560
Class B common stock
Balance at beginning of period 3,507 3,568 3,514 3,575
Conversions to Class A -- (12) (7) (19)
--------- --------- --------- ---------
Balance at end of period 3,507 3,556 3,507 3,556
Treasury Stock
Class A common stock
Balance at beginning of period (84,792) (80,635) (80,538) (81,669)
Treasury stock issued for acquisitions 358 146 522 146
Purchase of treasury stock -- -- (5,614) --
Exercise of stock options, restricted stock
awards and other 47 278 1,243 1,312
--------- --------- --------- ---------
Balance at end of period (84,387) (80,211) (84,387) (80,211)
Class B common stock
Balance at beginning of period (284) (248) (248) (248)
Purchase of treasury stock (38) -- (74) --
--------- --------- --------- ---------
Balance at end of period (322) (248) (322) (248)
Paid-in Capital
Balance at beginning of period 16,212 15,448 15,761 14,844
Treasury stock issued for acquisitions 73 66 112 66
Exercise of stock options, restricted stock
awards and other 21 151 433 755
--------- --------- --------- ---------
Balance at end of period 16,306 15,665 16,306 15,665
Earnings Invested in the Business
Balance at beginning of period 643,965 591,599 623,564 572,517
Net earnings 26,003 25,018 63,888 60,940
Dividends (8,933) (8,609) (26,417) (25,449)
--------- --------- --------- ---------
Balance at end of period 661,035 608,008 661,035 608,008
Accumulated Foreign Currency Adjustments
Balance at beginning of period (23,132) (17,129) (16,282) (7,796)
Equity adjustment for foreign currency (6,473) 4,718 (13,323) (4,615)
--------- --------- --------- ---------
Balance at end of period (29,605) (12,411) (29,605) (12,411)
--------- --------- --------- ---------
Stockholders' Equity at end of period $ 603,143 $ 570,919 $ 603,143 $ 570,919
========= ========= ========= =========
Comprehensive Income
Net earnings $ 26,003 $ 25,018 $ 63,888 $ 60,940
Other comprehensive income - Foreign
currency adjustments (6,473) 4,718 (13,323) (4,615)
--------- --------- --------- ---------
Comprehensive Income $ 19,530 $ 29,736 $ 50,565 $ 56,325
========= ========= ========= =========
See accompanying Notes to Financial Statements.
6
KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE 39 WEEKS ENDED OCTOBER 1, 2000 AND OCTOBER 3, 1999
(In thousands of dollars)
2000 1999
--------- ---------
Cash flows from operating activities:
Net earnings $ 63,888 $ 60,940
Noncash adjustments:
Depreciation and amortization 28,949 24,044
Increase in accounts receivable, net (52,889) (41,602)
Changes in certain working capital components 63,715 42,562
--------- ---------
Net cash from operating activities 103,663 85,944
--------- ---------
Cash flows from investing activities:
Capital expenditures (35,155) (60,621)
Proceeds from sales and maturities of short-term investments 695,165 671,510
Purchases of short-term investments (693,126) (665,440)
Increase in other assets (9,933) (9,195)
Acquisition of companies, net of cash received (19,860) (4,189)
--------- ---------
Net cash from investing activities (62,909) (67,935)
--------- ---------
Cash flows from financing activities:
Increase in short-term borrowings 6,302 1,521
Dividend payments (26,380) (25,438)
Purchase of treasury stock (5,688) --
Stock options and other 72 780
--------- ---------
Net cash from financing activities (25,694) (23,137)
--------- ---------
Net change in cash and equivalents 15,060 (5,128)
Cash and equivalents at beginning of period 54,032 59,799
--------- ---------
Cash and equivalents at end of period $ 69,092 $ 54,671
========= =========
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 39-week periods ended October 1, 2000 and
October 3, 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 39 Weeks Ended
2000 1999 2000 1999
----------- ----------- ----------- -----------
Sales:
U.S. Commercial Staffing $ 603,394 $ 570,692 $ 1,727,440 $ 1,685,781
PTSA 268,905 237,034 787,154 700,662
International 282,181 284,276 826,695 798,301
----------- ----------- ----------- -----------
Consolidated Total $ 1,154,480 $ 1,092,002 $ 3,341,289 $ 3,184,744
=========== =========== =========== ===========
Earnings from Operations:
U.S. Commercial Staffing $ 51,951 $ 51,424 $ 141,217 $ 143,973
PTSA 20,125 14,263 52,385 40,561
International 8,596 11,359 21,183 22,963
Corporate (36,892) (34,334) (107,770) (104,060)
----------- ----------- ----------- -----------
Consolidated Total $ 43,780 $ 42,712 $ 107,015 $ 103,437
=========== =========== =========== ===========
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 October 1, 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 October 1, 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
39-week periods ended October 1, 2000 and October 3, 1999 were as follows:
13 Weeks Ended 39 Weeks Ended
2000 1999 2000 1999
------- ------- ------- -------
Net earnings $26,003 $25,018 $63,888 $60,940
======= ======= ======= =======
Determination of shares (thousands):
Weighted average common
shares outstanding 35,728 35,868 35,716 35,842
Effect of dilutive securities:
Stock options -- 71 -- 42
Restricted and performance awards and other 112 121 91 116
------- ------- ------- -------
Weighted average common shares
outstanding - assuming dilution 35,840 36,060 35,807 36,000
======= ======= ======= =======
Earnings per share - basic $ .73 $ .70 $ 1.79 $ 1.70
Earnings per share - assuming dilution $ .73 $ .69 $ 1.78 $ 1.69
9
Item 2. 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 2000 were $1.154 billion, an increase
of 5.7% from the same period in 1999. Sales in the U.S. Commercial Staffing
segment grew by 5.7%, while Professional, Technical and Staffing Alternatives
(PTSA) sales grew by 13.4% compared to last year. Within the PTSA segment,
science and healthcare revenue growth remained strong, at more than 15%. There
was also a significant improvement in the staff leasing business unit during the
quarter. International sales decreased by 0.7% as compared to the third quarter
of 1999. The sales decline in International was due to the impact of unfavorable
foreign currency translation as well as a slowdown in sales in the United
Kingdom.
Cost of services, consisting of payroll and related tax and benefit costs of
employees assigned to customers, increased 6.1% in the third 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 $205.8 million was 3.9% higher than the third quarter of 1999,
and gross profit as a percentage of sales was 17.8% in 2000, which was down from
the 18.1% rate in 1999. This reflected a decrease in the gross profit rate of
the U.S. Commercial and International businesses, primarily due to a shift in
mix of sales to our larger customers.
Selling, general and administrative expenses were $162.0 million in the third
quarter, an increase of 4.3% over the same period in 1999. Expenses averaged
14.0% of sales in 2000, a 0.2% improvement versus the 14.2% rate in 1999.
Compared to last year, the elimination of Y2K expenses was partially offset by
an increase in depreciation expense.
Earnings from operations of $43.8 million were 2.5% greater than the third
quarter of 1999. Net interest expense was $297 thousand, virtually unchanged
from last year's net interest expense of $309 thousand.
Earnings before income taxes were $43.5 million, an increase of 2.5%, compared
to pretax earnings of $42.4 million earned for the same period in 1999. Income
taxes were 40.2% of pretax income in the third quarter of 2000 and 41.0% in the
third quarter of 1999.
Net earnings were $26.0 million in the third quarter of 2000, an increase of
3.9% over the third quarter of 1999. Diluted earnings per share were $.73, an
increase of 5.8% as compared to $.69 in the same period last year.
Year-to-Date
Sales of services totaled $3.341 billion during the first nine months of 2000,
an increase of 4.9% over 1999. Sales in the U.S. Commercial Staffing segment
grew by 2.5%, while Professional, Technical and Staffing Alternatives (PTSA)
sales grew by 12.3% compared to last year. International sales grew by 3.6% as
compared to the first nine months of 1999. The strong U.S. dollar significantly
weakened translated sales for the International segment.
Cost of services of $2.751 billion was 5.1% higher than last year, reflecting
volume growth and increases in payroll rates due to strong demand for labor
worldwide.
Gross profit increased 4.2% in 2000 due to increased sales. The gross profit
rate was 17.7% for the first nine months of 2000, which was slightly lower than
the 17.8% rate in 1999. This reflected a modest increase in the gross profit
rate of the Company's professional and technical business, offset by slightly
lower rates in the U.S. Commercial Staffing and International segments.
Selling, general and administrative expenses of $483.8 million were 4.3% higher
than last year. The expense rate was 14.5% of sales in 2000, slightly better
than the 14.6% rate in 1999. Compared to last year, the elimination of Y2K
expenses again was partially offset by increased depreciation.
Earnings before taxes were $106.8 million, an increase of 3.4% over 1999. Income
taxes were 40.2% of pretax earnings in the first nine months of 2000 and 41.0%
in 1999.
Net earnings were $63.9 million or 4.8% above the first nine months of 1999.
Diluted earnings per share were $1.78, an increase of 5.3% as compared to $1.69
in the first nine months of 1999.
10
Financial Condition
Assets totaled $1.114 billion at October 1, 2000, an increase of 7.8% over the
$1.034 billion at January 2, 2000. Working capital decreased $9.0 million during
the nine-month period. The current ratio was 1.5 at October 1, 2000 and 1.6 at
January 2, 2000.
During the first nine months of 2000, net cash from operating activities was
$103.7 million, an increase of 20.6% from the comparable period in 1999. This
increase resulted principally from an increase in the accounts payable balances
offset by growth in accounts receivable. The Company's global day's sales
outstanding for the 39-week period were 52 days in 2000, an improvement of one
day over the 53 days reported in 1999.
Capital expenditures for the first nine months totaled $35 million, a planned
decrease from the $61 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 $50 to $55 million this year, a
planned decrease from the $77 million spent in 1999.
During the third quarter, the Company completed two acquisitions. The ProStaff
Group, a leading Milwaukee, Wisconsin staffing company, was acquired in August.
ProStaff operates under four brand names, including ProStaff Preferred,
Accountants Preferred, HRfirst and Connectivity IT. This acquisition represents
a significant expansion of the Company's market share in the Milwaukee area and
demonstrates a commitment to growing the U.S. Commercial Staffing business. In
September, the Company acquired the Business Trends Group, based in Singapore.
Business Trends provides temporary and permanent placement staffing services,
contract staffing and payroll administration. As a result of this acquisition,
the Company will extend its coverage into Southeast Asia and add six new
countries: Singapore, India, Indonesia, Malaysia, the Philippines and Thailand.
The quarterly dividend rate applicable to Class A and Class B shares outstanding
was $.25 per share in the third quarter of 2000. This represents a 4.2% increase
compared to a dividend rate of $.24 per share in the third quarter of 1999.
During September, 2000, the Company arranged an $8.25 million one year credit
facility to be used to fund its Singapore acquisition. At October 1, 2000, the
outstanding balance was denominated in Singapore dollars and totaled $7.46
million at an interest rate of 3.2%.
The Company's financial position continues to be strong. This strength will
allow it to continue to pursue business 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.
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.
ooo Kelly 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.
Interim Job S.A.R.L.
Kellament Properties, Inc.
Kelly Services Holding (Singapore) Pte. Ltd.
Business Trends Pte. Ltd.
BTI Consultants Pte. Ltd.
Agensi Pekerjaan Business Trends Sdn. Bhd.
Agensi Pekerjaan BTI Consultants Sdn. Bhd.
12
PART II. OTHER INFORMATION AND SIGNATURE
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: November 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).
27 Financial Data Schedule for nine months ended
October 1, 2000. 2