- 1 -
                          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 June 29, 1997

                                       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 August 1, 1997, 34,526,630 shares of Class A and 3,573,052 shares of Class B 
common stock of the Registrant were outstanding.

                           
                            - 2 -


            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                               10

      Signature                                           11

      Index to Exhibits Required by
        Item 601, Regulation S-K                          12



                                                
                                                 - 3 -


                                  KELLY SERVICES, INC. AND SUBSIDIARIES

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

13 Weeks Ended 26 Weeks Ended ----------------------------- ----------------------------- June 29, 1997 June 30, 1996 June 29, 1997 June 30, 1996 ------------- ------------- ------------- ------------- Sales of services $959,726 $804,262 $1,840,572 $1,538,193 Cost of services 789,618 652,007 1,514,126 1,248,252 --------- --------- ----------- ----------- Gross profit 170,108 152,255 326,446 289,941 Selling, general and administrative expenses 137,636 123,778 269,855 241,080 --------- --------- ----------- ----------- Earnings from operations 32,472 28,477 56,591 48,861 Interest income, net 486 661 490 1,770 --------- --------- ----------- ----------- Earnings before income taxes 32,958 29,138 57,081 50,631 --------- --------- ----------- ----------- Income taxes: Federal 11,095 9,270 19,230 16,055 State and other 2,420 2,420 4,180 4,225 --------- --------- ----------- ----------- Total income taxes 13,515 11,690 23,410 20,280 --------- --------- ----------- ----------- Net earnings $ 19,443 $ 17,448 $ 33,671 $ 30,351 ========= ========= =========== =========== Earnings per share $.51 $.46 $.88 $.80 Dividends per share $.22 $.21 $.43 $.41 Average shares outstanding (thousands) 38,078 38,041 38,069 38,029
- 4 - KELLY SERVICES, INC. AND SUBSIDIARIES BALANCE SHEETS AS OF JUNE 29, 1997 AND DECEMBER 29, 1996 (UNAUDITED) (In thousands of dollars) ASSETS 1997 1996 - ------ ------------ ------------ CURRENT ASSETS: Cash and equivalents $ 66,002 $ 33,408 Short-term investments 38,442 28,035 Accounts receivable, less allowances of $11,880 and $8,320, respectively 578,042 554,025 Prepaid expenses and other current assets 45,074 43,118 --------- --------- Total current assets 727,560 658,586 PROPERTY AND EQUIPMENT: Land and buildings 44,068 43,748 Equipment, furniture and leasehold improvements 132,943 118,737 Accumulated depreciation (73,645) (64,763) --------- --------- Total property and equipment 103,366 97,722 INTANGIBLES AND OTHER ASSETS 80,091 82,571 --------- --------- TOTAL ASSETS $911,017 $838,879 ========= ========= LIABILITIES & STOCKHOLDERS' EQUITY - ---------------------------------- CURRENT LIABILITIES: Short-term borrowings $ 46,260 $ 41,616 Accounts payable 58,415 48,111 Payroll and related taxes 195,697 151,769 Accrued insurance 59,046 53,119 Income and other taxes 22,763 27,365 --------- --------- Total current liabilities 382,181 321,980 --------- --------- STOCKHOLDERS' EQUITY: Capital stock, $1 par value 40,116 40,116 Treasury stock, 2,019 shares in 1997 and 2,057 shares in 1996, respectively, at cost (6,104) (6,197) Paid-in capital 9,080 8,265 Earnings invested in the business 485,744 474,715 --------- --------- Total stockholders' equity 528,836 516,899 --------- --------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $911,017 $838,879 ========= =========
- 5 - KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (In thousands of dollars)
13 Weeks Ended 26 Weeks Ended ----------------------------- ----------------------------- June 29, 1997 June 30, 1996 June 29, 1997 June 30, 1996 ------------- ------------- ------------- ------------- Capital Stock Class A common stock Balance at beginning of period $ 36,531 $ 36,512 $ 36,527 $ 36,512 Conversions from Class B 6 15 10 15 --------- --------- --------- --------- Balance at end of period 36,537 36,527 36,537 36,527 Class B common stock Balance at beginning of period 3,585 3,604 3,589 3,604 Conversions to Class A (6) (15) (10) (15) --------- --------- --------- --------- Balance at end of period 3,579 3,589 3,579 3,589 Treasury Stock Balance at beginning of period (6,204) (6,314) (6,197) (6,327) Exercise of stock options 41 50 32 59 Restricted stock awards 59 59 61 63 --------- --------- --------- --------- Balance at end of period (6,104) (6,205) (6,104) (6,205) Paid-in Capital Balance at beginning of period 8,365 7,324 8,265 7,215 Exercise of stock options 322 390 406 462 Restricted stock awards 393 480 409 517 --------- --------- --------- --------- Balance at end of period 9,080 8,194 9,080 8,194 Earnings Invested in the Business Balance at beginning of period 475,818 439,103 474,715 435,100 Net earnings 19,443 17,448 33,671 30,351 Cash dividends (8,379) (7,991) (16,372) (15,594) Equity adjustment for foreign currency translation (cumulative charges of $5,964 and $505 in 1997 and 1996, respectively) (1,138) (1,329) (6,270) (2,626) --------- --------- --------- --------- Balance at end of period 485,744 447,231 485,744 447,231 --------- --------- --------- --------- Stockholders' Equity at end of period $528,836 $489,336 $528,836 $489,336 ========= ========= ========= =========
- 6 - KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 26 WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996 (In thousands of dollars) 1997 1996 ---------- ---------- Cash flows from operating activities: Net earnings $ 33,671 $ 30,351 Noncash adjustments: Depreciation and amortization 12,849 12,911 Changes in certain working capital components 26,516 (77,886) --------- --------- Net cash from operating activities 73,036 (34,624) --------- --------- Cash flows from investing activities: Capital expenditures (17,903) (10,053) Proceeds from sales and maturities of short-term investments 967,617 561,375 Purchases of short-term investments (978,024) (549,093) Increase in intangibles and other assets (1,312) (6,310) --------- --------- Net cash from investing activities (29,622) (4,081) --------- --------- Cash flows from financing activities: Increase in short-term borrowings 4,644 16,665 Dividend payments (16,372) (15,594) Exercise of stock options and restricted stock awards 908 1,101 --------- --------- Net cash from financing activities (10,820) 2,172 --------- --------- Net change in cash and equivalents 32,594 (36,533) Cash and equivalents at beginning of period 33,408 52,811 --------- --------- Cash and equivalents at end of period $ 66,002 $ 16,278 ========= =========
- 7 - 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 1997 were $959,726,000, an increase of 19.3% from the same period in 1996. Sales growth was generally strong in both domestic and foreign operations. Cost of services, consisting of payroll and related tax and benefit costs of employees assigned to customers, increased 21.1% in the second quarter as compared to the same period in 1996. Direct wage costs have increased from 1996 at a rate somewhat higher than the general inflation rate, due to strong worldwide demand for labor. Gross profit of $170,108,000 was 11.7% higher than the second quarter of 1996, and gross profit as a percentage of sales declined from 18.9% in 1996 to 17.7% in 1997. The growth of sales with our largest customers where contracts require special pricing and additional implementation costs, the upward pressure on wage costs noted above and growth in the staff leasing business with its inherently lower margins all had the effect of reducing the consolidated gross profit rate. Selling, general and administrative expenses were $137,636,000 in the second quarter, an increase of 11.2% over the same period in 1996. Expenses averaged 14.3% of sales as compared to 15.4% in last year's second quarter. The rate of growth of these expenses in relationship to the sales increases reflects the Company's emphasis on expense control. Earnings from operations of $32,472,000 were 14.0% greater than the second quarter of 1996. Earnings before income taxes were $32,958,000, an increase of 13.1%, compared to pretax earnings of $29,138,000 for the same period in 1996. The pretax margin was 3.4%, a .2 percentage point decrease from the second quarter of 1996. The decrease was due to the lower gross profit and expense ratios and, to a lesser extent, lower net interest income. Income taxes were 41.0% of pretax income. This was .9 percentage point over the applicable tax rate for the second quarter of 1996 due to reduced tax-exempt income and earnings growth in our foreign operating units where tax rates are higher. (The income tax rate for the year 1996 averaged 40.6%.) - 8 - Net earnings were $19,443,000 in the second quarter of 1997, an increase of 11.4% over the second quarter of 1996. Earnings per share were $.51 compared to $.46 in the same period last year. Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," was issued in February 1997. Adoption of SFAS 128, effective for periods ending after December 15, 1997, is not expected to have a material effect on reported earnings per share. Year-to-Date Sales of services totaled $1,840,572,000 during the first six months of 1997, an increase of 19.7% over 1996. This increase reflects continued growth in the volume of domestic and international sales. Cost of services of $1,514,126,000 was 21.3% higher than last year, reflecting domestic and international volume growth and increases in payroll costs due to strong demand for labor worldwide. Gross profit increased 12.6% in 1997 due to increased sales, but at lower gross profit rates. The gross profit rate was 17.7% for the first six months of 1997 compared to 18.8% for 1996. This decline reflects growth with our very large customers and in the staff leasing business. Selling, general and administrative expenses of $269,855,000 were 11.9% higher than last year. The spending rate was 14.7% of sales, 1.0 percentage point below last year's rate. Expenses continue to be closely monitored in both U.S. and overseas markets. Earnings before taxes were $57,081,000, an increase of 12.7% over 1996. These earnings averaged a pretax margin of 3.1%, or .2 percentage point decrease from 1996. The decrease was due to lower gross profit and expense ratios and lower net interest income. Income taxes were 41.0% of pretax earnings and were .9 percentage point higher than last year's first half income tax rate. Reduced tax-exempt income and earnings growth in our foreign operations where tax rates are higher account for this change. Net earnings were $33,671,000, or 10.9% higher than the first six months of 1996. Earnings per share were $.88 compared to $.80 last year. - 9 - Financial Condition Assets totaled $911,017,000 at June 29, 1997, an increase of 8.6% over the $838,879,000 at December 29, 1996. Working capital increased $8,773,000 during the six-month period. The current ratio was 1.9 at June 29, 1997, a decline of .1 percentage point since December 29, 1996. During the first half of 1997, the Company generated cash from operating activities totaling $73,036,000 compared to a decline in cash from operating activities of $34,624,000 in the first half of 1996. In 1997, increased net earnings and increases in current liability balances, offset by moderate growth in accounts receivable, contributed to the increase in cash. In 1996, an increase in accounts receivable was a principal component in the decline in cash from operating activities. Capital expenditures were principally for expanding and improving the worldwide branch network. The quarterly dividend rate applicable to Class A and Class B shares outstanding was $.22 per share in the second quarter of 1997. This compares to a dividend rate of $.21 per share in the second quarter of 1996. 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. -------------------------------------------------------------- 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., 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 Staff Leasing, 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., Kelly Services Seleccion y Formacion, S.L. and Kelly Services CIS, Inc. 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. - 10 - 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 20, 1997. (b) The nominees for director, as listed in the Company's proxy statement dated April 25, 1997, 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 3,501,098 2,585 C. V. Fricke 3,501,129 2,554 V. G. Istock 3,501,129 2,554 (2) Ratification of the selection of Price Waterhouse LLP as the Company's independent auditors: Shares voted "For" 3,502,434 Shares voted "Withhold" 1,249 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. - 11 - 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 12, 1997 /s/ P. K. Geiger P. K. Geiger Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) - 12 - 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 2
 

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND STATEMENT OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-28-1997 JUN-29-1997 66,002 38,442 589,922 11,880 0 727,560 177,011 73,645 911,017 382,181 0 0 0 40,116 488,720 911,017 0 1,840,572 0 1,514,126 0 0 0 57,081 23,410 33,671 0 0 0 33,671 .88 0