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Index to Exhibits on page 12
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 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 October 31, 1997, 34,587,665 shares of Class A and 3,573,052 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 10
Signature 11
Index to Exhibits Required by
Item 601, Regulation S-K 12
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KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands of dollars except per share items)
13 Weeks Ended 39 Weeks Ended
------------------------------- -------------------------------
Sept. 28, 1997 Sept. 29, 1996 Sept. 28, 1997 Sept. 29, 1996
-------------- -------------- -------------- ---------------
Sales of services $1,001,209 $873,242 $2,841,781 $2,411,435
Cost of services 824,820 711,950 2,338,946 1,960,202
----------- --------- ----------- -----------
Gross profit 176,389 161,292 502,835 451,233
Selling, general and
administrative expenses 136,464 125,101 406,319 366,181
----------- --------- ----------- -----------
Earnings from operations 39,925 36,191 96,516 85,052
Interest income, net 62 129 552 1,899
----------- --------- ----------- -----------
Earnings before income taxes 39,987 36,320 97,068 86,951
----------- --------- ----------- -----------
Income taxes:
Federal 13,440 11,830 32,670 27,885
State and other 2,960 3,060 7,140 7,285
----------- --------- ----------- -----------
Total income taxes 16,400 14,890 39,810 35,170
----------- --------- ----------- -----------
Net earnings $ 23,587 $ 21,430 $ 57,258 $ 51,781
=========== ========= =========== ===========
Earnings per share $.62 $.56 $1.50 $1.36
Dividends per share $.22 $.21 $.65 $.62
Average shares outstanding
(thousands) 38,101 38,057 38,080 38,038
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KELLY SERVICES, INC. AND SUBSIDIARIES
BALANCE SHEETS AS OF SEPTEMBER 28, 1997 AND DECEMBER 29, 1996
(UNAUDITED)
(In thousands of dollars)
ASSETS 1997 1996
- ------ ------------ ------------
CURRENT ASSETS:
Cash and equivalents $ 82,316 $ 33,408
Short-term investments 51,771 28,035
Accounts receivable, less
allowances of $13,740 and
$8,320, respectively 595,441 554,025
Prepaid expenses and other
current assets 43,138 43,118
--------- ---------
Total current assets 772,666 658,586
PROPERTY AND EQUIPMENT:
Land and buildings 44,339 43,748
Equipment, furniture and
leasehold improvements 140,178 118,737
Accumulated depreciation (78,399) (64,763)
--------- ---------
Total property and equipment 106,118 97,722
INTANGIBLES AND OTHER ASSETS 79,925 82,571
--------- ---------
TOTAL ASSETS $958,709 $838,879
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 46,400 $ 41,616
Accounts payable 69,513 48,111
Payroll and related taxes 211,813 151,769
Accrued insurance 62,790 53,119
Income and other taxes 25,409 27,365
--------- ---------
Total current liabilities 415,925 321,980
--------- ---------
STOCKHOLDERS' EQUITY:
Capital stock, $1 par value 40,116 40,116
Treasury stock, 2,007 shares in
1997 and 2,057 shares in 1996,
respectively, at cost (6,222) (6,197)
Paid-in capital 9,510 8,265
Earnings invested in the business 499,380 474,715
--------- ---------
Total stockholders' equity 542,784 516,899
--------- ---------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $958,709 $838,879
========= =========
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KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands of dollars)
13 Weeks Ended 39 Weeks Ended
------------------------------ -----------------------------
Sept. 28, 1997 Sept. 29, 1996 Sept. 28, 1997 Sept. 29, 1996
-------------- -------------- ------------- -------------
Capital Stock
Class A common stock
Balance at beginning of period $ 36,537 $ 36,527 $ 36,527 $ 36,512
Conversions from Class B -- -- 10 15
--------- --------- --------- ---------
Balance at end of period 36,537 36,527 36,537 36,527
Class B common stock
Balance at beginning of period 3,579 3,589 3,589 3,604
Conversions to Class A -- -- (10) (15)
--------- --------- --------- ---------
Balance at end of period 3,579 3,589 3,579 3,589
Treasury Stock
Balance at beginning of period (6,104) (6,205) (6,197) (6,327)
Exercise of stock options (124) 2 (92) 61
Restricted stock awards 6 3 67 66
--------- --------- --------- ---------
Balance at end of period (6,222) (6,200) (6,222) (6,200)
Paid-in Capital
Balance at beginning of period 9,080 8,194 8,265 7,215
Exercise of stock options 375 12 781 474
Restricted stock awards 55 32 464 549
--------- --------- --------- ---------
Balance at end of period 9,510 8,238 9,510 8,238
Earnings Invested in the Business
Balance at beginning of period 485,744 447,231 474,715 435,100
Net earnings 23,587 21,430 57,258 51,781
Cash dividends (8,382) (7,992) (24,754) (23,586)
Equity adjustment for foreign
currency translation (cumulative
charges of $7,533 and $406 in
1997 and 1996, respectively) (1,569) 99 (7,839) (2,527)
--------- --------- --------- ---------
Balance at end of period 499,380 460,768 499,380 460,768
--------- --------- --------- ---------
Stockholders' Equity at end of period $542,784 $502,922 $542,784 $502,922
========= ========= ========= =========
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KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE 39 WEEKS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996
(In thousands of dollars)
1997 1996
------------ ----------
Cash flows from operating activities:
Net earnings $ 57,258 $ 51,781
Noncash adjustments:
Depreciation and amortization 19,449 19,316
Changes in certain working capital
components 43,863 (124,373)
----------- ---------
Net cash from operating activities 120,570 (53,276)
----------- ---------
Cash flows from investing activities:
Capital expenditures (26,633) (17,745)
Proceeds from sales and maturities of
short-term investments 1,361,406 835,485
Purchases of short-term investments (1,385,142) (797,172)
Increase in intangibles and other assets (2,543) (8,385)
----------- ---------
Net cash from investing activities (52,912) 12,183
----------- ---------
Cash flows from financing activities:
Increase in short-term borrowings 4,784 20,321
Dividend payments (24,754) (23,586)
Exercise of stock options and
restricted stock awards 1,220 1,150
----------- ---------
Net cash from financing activities (18,750) (2,115)
----------- ---------
Net change in cash and equivalents 48,908 (43,208)
Cash and equivalents at beginning
of period 33,408 52,811
----------- ---------
Cash and equivalents at end of period $ 82,316 $ 9,603
=========== =========
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MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Results of Operations:
Third Quarter
Sales of services in the third quarter of 1997 were $1,001,209,000, an
increase of 15% 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 16% in the third
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 $176,389,000 was 9.4% higher than the third quarter of
1996, and gross profit as a percentage of sales declined from 18.5% in
1996 to 17.6% in 1997. The growth of sales with our largest customers
where contracts require special pricing and additional implementation
costs and the upward pressure on wage costs noted above had the effect
of reducing the consolidated gross profit rate.
Selling, general and administrative expenses were $136,464,000 in the
third quarter, an increase of 9.1% over the same period in 1996.
Expenses averaged 13.6% of sales compared to 14.3% in last year's third
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 $39,925,000 were 10.3% greater than the
third quarter of 1996. Earnings before income taxes were $39,987,000,
an increase of 10.1%, compared to pretax earnings of $36,320,000 for
the same period in 1996. The pretax margin was 4.0%, a .2 percentage
point decrease from the third quarter of 1996. The decrease was
primarily due to reduced gross profit, offset by lower expense ratios.
Income taxes were 41.0% of pretax income in the third quarters of 1997
and 1996.
Net earnings were $23,587,000 in the third quarter of 1997, an increase
of 10.1% over the third quarter of 1996. Earnings per share were $.62
compared to $.56 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 $2,841,781,000 during the first nine months
of 1997, an increase of 18% over 1996. This increase reflects
continued growth in the volume of both domestic and foreign sales.
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Cost of services of $2,338,946,000 was 19% 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 11.4% in 1997 due to increased sales, but at
lower gross profit rates. The gross profit rate was 17.7% for the
first nine months of 1997 compared to 18.7% for 1996. This decline
reflects growth with our very large customers, not only in the United
States but in foreign markets as well.
Selling, general and administrative expenses of $406,319,000 were 11.0%
higher than last year. The spending rate was 14.3% of sales, .9
percentage point below last year's rate. Expenses continue to be
closely monitored in both U.S. and overseas markets.
Earnings before taxes were $97,068,000, an increase of 11.6% over 1996.
These earnings averaged a pretax margin of 3.4%, or .2 percentage point
decrease from 1996. The decrease was due to lower gross profit, offset
by lower expense ratios and lower net interest income. Income taxes
were 41.0% of pretax earnings and were .6 percentage point higher than
last year's income tax rate for the first nine months. Reduced
tax-exempt income and earnings growth in our foreign operations where
tax rates are higher account for this change.
Net earnings were $57,258,000, or 10.6% higher than the first nine
months of 1996. Earnings per share were $1.50 compared to $1.36 last
year.
Financial Condition
Assets totaled $958,709,000 at September 28, 1997, an increase of 14.3%
over the $838,879,000 at December 29, 1996. Working capital increased
$20,135,000 during the nine-month period. The current ratio was 1.9 at
September 28, 1997, a decline of .1 percentage point from December 29,
1996.
During the first nine months of 1997, cash flows from operating
activities were $120,570,000 compared to a decline of $53,276,000
during the first nine months 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 during
both 1997 and 1996 were principally for expanding and improving the
worldwide branch network. In addition for 1997, capital expenditures
included amounts for developing new information systems.
In 1998, the Company will begin implementation of a major information
technology program which is expected to extend over the next five
years. The program includes completing work on Millennium 2000,
deploying a new worldwide telecommunications network, installing new
hardware and software computer systems, and replacing the current
branch automation system.
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Any one of these initiatives would represent a serious commitment. In
combination, they will require an investment of over $100 million, of
which $15-20 million will be Millennium 2000 expense.
In the long term, the new technology should enhance the Company's
productivity and growth. In the short term, however, these costs are
expected to have some impact on earnings. It is estimated that
earnings growth, which has been running at about 10 percent this year,
could be held to 4-6 percent in each of the next two years. This
further assumes the absence of an economic slowdown.
The quarterly dividend rate applicable to Class A and Class B shares
outstanding was $.22 per share in the third quarter of 1997. This
compares to a dividend rate of $.21 per share in the third 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.
Statements Relating to Future Events
Certain information in this report relating to future events is 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 this
document. 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., 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., Kelly Services CIS, Inc.,
Personnel Corps ZAO and Kelly Services (societa di fornitura di lavaro
temporaneo) SpA.
The information furnished reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results
of operations for the period in this filing.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) See Index to Exhibits required by Item 601,
Regulation S-K, set forth on page 12 of this filing.
(b) No reports on Form 8-K were filed during the quarter
for which this report is filed.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
KELLY SERVICES, INC.
Date: November 12, 1997
/s/ P. K. Geiger
P. K. Geiger
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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INDEX TO EXHIBITS
REQUIRED BY ITEM 601,
REGULATION S-K
---------------------
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
1,000
9-MOS
DEC-28-1997
SEP-28-1997
82,316
51,771
609,181
13,740
0
772,666
184,517
78,399
958,709
415,925
0
0
0
40,116
502,668
958,709
0
2,841,781
0
2,338,946
0
0
0
97,068
39,810
57,258
0
0
0
57,258
1.50
0
