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 April 4, 1999 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 May 7, 1999, 32,268,706 shares of Class A and 3,566,931 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 Notes to Financial Statements 7 Management's Discussion and Analysis of Results of Operations and Financial Condition 8 PART II. OTHER INFORMATION 12 Signature 13 Index to Exhibits Required by Item 601, Regulation S-K 14
3 KELLY SERVICES, INC. and SUBSIDIARIES STATEMENTS OF EARNINGS (UNAUDITED) (In thousands of dollars except per share data) 13 Weeks Ended ------------------------------ April 4, 1999 March 29, 1998 ------------- -------------- Sales of services $1,025,959 $ 959,382 Cost of services 846,828 791,472 ---------- ---------- Gross profit 179,131 167,910 Selling, general and administrative expenses 153,539 143,069 ---------- ---------- Earnings from operations 25,592 24,841 Interest income, net 151 693 ---------- ---------- Earnings before income taxes 25,743 25,534 Income taxes 10,555 10,470 ---------- ---------- Net earnings $ 15,188 $ 15,064 ========== ========== Earnings per share: Basic $ .42 $ .39 Diluted .42 .39 Average shares outstanding (thousands): Basic 35,814 38,177 Diluted 35,953 38,384 Dividends per share $ .23 $ .22 See accompanying Notes to Financial Statements.
4 KELLY SERVICES, INC. and SUBSIDIARIES BALANCE SHEETS AS OF APRIL 4, 1999 AND JANUARY 3, 1999 (In thousands of dollars) ASSETS 1999 1998 ---------- ---------- CURRENT ASSETS: (UNAUDITED) Cash and equivalents $ 74,379 $ 59,799 Short-term investments 12,290 12,069 Accounts receivable, less allowances of $13,575 and $13,035, respectively 589,691 584,653 Prepaid expenses and other current assets 14,203 15,012 Deferred taxes 48,658 48,343 --------- --------- Total current assets 739,221 719,876 PROPERTY AND EQUIPMENT: Land and buildings 46,712 44,135 Equipment, furniture and leasehold improvements 189,797 179,707 Accumulated depreciation (84,319) (77,491) --------- --------- Total property and equipment 152,190 146,351 INTANGIBLES AND OTHER ASSETS 101,803 98,020 --------- --------- TOTAL ASSETS $ 993,214 $ 964,247 ========= ========= LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings $ 52,095 $ 47,629 Accounts payable 72,106 79,089 Payroll and related taxes 217,955 195,670 Accrued insurance 67,816 66,830 Income and other taxes 43,507 37,265 --------- --------- Total current liabilities 453,479 426,483 STOCKHOLDERS' EQUITY: Capital stock, $1 par value Class A common stock, shares issued 36,540,770 in 1999 and 1998 36,541 36,541 Class B common stock, shares issued 3,575,096 in 1999 and 1998 3,575 3,575 Treasury stock, at cost Class A common stock, 4,270,320 shares in 1999 and 4,301,321 in 1998 (81,080) (81,669) Class B common stock, 7,767 shares in 1999 and 1998 (248) (248) Paid-in capital 15,205 14,844 Earnings invested in the business 579,468 572,517 Accumulated foreign currency adjustments (13,726) (7,796) --------- --------- Total stockholders' equity 539,735 537,764 --------- --------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 993,214 $ 964,247 ========= ========= See accompanying Notes to Financial Statements.
5 KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (In thousands of dollars) 13 Weeks Ended ------------------------------- April 4, 1999 March 29, 1998 ------------- --------------- Capital Stock Class A common stock Balance at beginning of period $ 36,541 $ 36,538 Conversions from Class B -- 2 --------- --------- Balance at end of period 36,541 36,540 Class B common stock Balance at beginning of period 3,575 3,578 Conversions to Class A -- (2) --------- --------- Balance at end of period 3,575 3,576 Treasury Stock Class A common stock Balance at beginning of period (81,669) (6,029) Exercise of stock options, restricted stock awards and other 589 (68) --------- --------- Balance at end of period (81,080) (6,097) Class B common stock Balance at beginning of period (248) (185) Purchase of treasury stock -- -- --------- --------- Balance at end of period (248) (185) Paid-in Capital Balance at beginning of period 14,844 10,980 Exercise of stock options, restricted stock awards and other 361 1,647 --------- --------- Balance at end of period 15,205 12,627 Earnings Invested in the Business Balance at beginning of period 572,517 522,039 Net earnings 15,188 15,064 Cash dividends (8,237) (8,400) --------- --------- Balance at end of period 579,468 528,703 Accumulated Foreign Currency Adjustments Balance at beginning of period (7,796) (7,092) Equity adjustment for foreign currency (5,930) (1,333) --------- --------- Balance at end of period (13,726) (8,425) Stockholders' Equity at end of period $ 539,735 $ 566,739 ========= ========= Comprehensive Income Net earnings $ 15,188 $ 15,064 Other comprehensive income - Foreign currency adjustments (5,930) (1,333) --------- --------- Comprehensive Income $ 9,258 $ 13,731 ========= ========= See accompanying Notes to Financial Statements.
6 KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 13 WEEKS ENDED APRIL 4, 1999 AND MARCH 29, 1998 (In thousands of dollars) 1999 1998 --------- --------- Cash flows from operating activities: Net earnings $ 15,188 $ 15,064 Noncash adjustments: Depreciation and amortization 8,129 6,802 Changes in certain working capital components 15,319 36,677 --------- --------- Net cash from operating activities 38,636 58,543 --------- --------- Cash flows from investing activities: Capital expenditures (15,224) (7,031) Proceeds from sales and maturities of short-term investments 298,598 409,802 Purchases of short-term investments (298,819) (410,129) (Increase) decrease in intangibles and other assets (3,455) 1,539 Acquisition of company, net of cash received (2,205) -- --------- --------- Net cash from investing activities (21,105) (5,819) --------- --------- Cash flows from financing activities: (Decrease) increase in short-term borrowings 4,466 (7,100) Dividend payments (8,237) (8,400) Exercise of stock options and restricted stock awards 820 1,579 --------- --------- Net cash from financing activities (2,951) (13,921) --------- --------- Net change in cash and equivalents 14,580 38,803 Cash and equivalents at beginning of period 59,799 76,690 --------- --------- Cash and equivalents at end of period $ 74,379 $ 115,493 ========= ========= 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 condensed 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 condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto for the fiscal year ended January 3, 1999 (the 1998 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 operating income of the Company for the 13-week periods ended April 4, 1999 and March 29, 1998. 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 1999 1998 ----------- ----------- Sales: U.S. Commercial Staffing $ 580,743 $ 560,082 PTSA 198,910 182,992 International 246,306 216,308 ----------- ----------- Consolidated Total $ 1,025,959 $ 959,382 =========== =========== Earnings from Operations: U.S. Commercial Staffing $ 46,514 $ 45,730 PTSA 9,584 7,758 International 4,299 3,083 Corporate (34,805) (31,730) ----------- ----------- Consolidated Total $ 25,592 $ 24,841 =========== =========== 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 April 4, 1999 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 April 4, 1999.
8 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 1999 were $1.026 billion, an increase of 6.9% from the same period in 1998. Sales in the U.S. Commercial Staffing segment grew by 3.7%, while Professional, Technical and Staffing Alternatives (PTSA) sales grew by 8.7% compared to last year. International sales grew by 13.9% as compared to the first quarter of 1998. Cost of services, consisting of payroll and related tax and benefit costs of employees assigned to customers, increased 7.0% in the first quarter as compared to the same period in 1998. Direct wage costs have increased from 1998 at a rate somewhat higher than the general inflation rate, due to strong worldwide demand for labor. Gross profit of $179.1 million was 6.7% higher than the first quarter of 1998, and gross profit as a percentage of sales was 17.5% in 1999 and 1998. Although the total company gross profit rate was consistent with last year, a continued mix shift to larger national account customers reduced the U.S. Commercial Staffing gross profit rate slightly, which was offset by increases in gross profit rate in the International segment. Selling, general and administrative expenses were $153.5 million in the first quarter, an increase of 7.3% over the same period in 1998. Expenses averaged 15.0% of sales as compared to 14.9% in last year's first quarter. The rate of growth of these expenses reflects spending for the year 2000 project and amortization of costs associated with the Company's information technology programs. Earnings from operations of $25.6 million were 3.0% greater than the first quarter of 1998. Interest income (net) of $0.2 million decreased as compared to the first quarter of 1998 due to lower average cash and short-term investment balances, primarily as a result of the $76 million utilized in the fourth quarter of 1998 for the Company's share repurchase program. Earnings before income taxes were $25.7 million, an increase of .8%, compared to pretax earnings of $25.5 million for the same period in 1998. The pretax margin was 2.5% as compared to 2.7% in last year's first quarter, due primarily to the effect of lower interest income (net) noted above. Income taxes were 41.0% of pretax income in the first quarters of 1999 and 1998. Net earnings were $15.2 million in the first quarter of 1999, an increase of .8% over the first quarter of 1998. Basic and diluted earnings per share were $.42 compared to $.39 in the same period last year, a 7.7% increase. The rate of growth of earnings per share exceeded the rate of growth of net earnings as a result of the 2.5 million shares repurchased during the fourth quarter of 1998. Financial Condition Assets totaled $993.2 million at April 4, 1999, an increase of 3.0% over the $964.2 million at January 3, 1999. Working capital decreased $7.7 million during the three-month period. The current ratio was 1.6 at April 4, 1999 and 1.7 at January 3, 1999. During the first three months of 1999, net cash from operating activities was $38.6 million, a decrease of 34.0% over the comparable period in 1998. This decrease resulted principally from an increase in the accounts receivable balance and a decrease in the growth of accrued liability balances. The Company's global days sales outstanding improved to 52 days in 1999, as compared to 54 days in 1998. Capital expenditures of $15.2 million in 1999 and $7.0 million in 1998 were principally for developing new information systems. The quarterly dividend rate applicable to Class A and Class B shares outstanding was $.23 per share in the first quarter of 1999. This represents a 5% increase compared to a dividend rate of $.22 per share in the first quarter of 1998.
9 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. Year 2000 Systems Update The Year 2000 problem is an issue regarding computer programs and non-information technology systems that use embedded computer chips such as microcontrollers. Many of these programs are unable to distinguish between a year that begins with "20" instead of the familiar "19" and therefore could fail or produce incorrect results. In 1995, the Company embarked upon a global Year 2000 Project. The project scope includes hardware, software and embedded chip technology. A formal Project Office was established with complete executive sponsorship and funding in February 1997. This initiated a global business system strategy that included a wide-scale Oracle implementation of business and financial systems, plus major enhancements to branch automation systems. Included in these initiatives is the remediation of Year 2000 non-compliant systems. The Company's State of Readiness Plans for remediation of Year 2000 non-compliant systems are divided into the following major initiatives: mainframe, client server, domestic and international subsidiaries. The common project phases consisted of: inventory all hardware, software and embedded systems; prioritize systems based on business criticality; complete a risk assessment based on interviews with business users and subject matter experts, analysis of date functionality, and vendor documentation; test and decide to upgrade, replace or retire, as appropriate; internal certification; and a return to production. As a part of the risk assessment process, contingency plans will be developed in the event of system failure. Compuware Corporation was selected to assist in the inventory remediation and testing process. The inventory and assessment phase is 100% complete for all business areas. Remediation and testing is 100% complete for some of the Kelly business units. Overall completion is approximately 85% when all countries and business units are considered. The Company was 100% remediated of all mission-critical customer support systems at year-end 1998. Testing will continue throughout 1999 with planned completion during the third quarter of 1999. Testing teams are in place for mainframe, client server and international. The testing process includes a detailed risk assessment to determine the necessity and scope of testing. In some instances internal certification is recommended without testing, based on the risk assessment. This process will ensure resources remain focused on areas of greatest risk. External communications and readiness assessments have been distributed to all customers, landlords, vendors, suppliers and facilities for North America. International communications and assessments were 100% complete at year-end 1998. Ongoing analysis of responses will determine follow-up action including additional contingency plans. The Costs To Address The Company's Year 2000 Issues The total cost of the Year 2000 project is expected to be at least somewhat offset by the benefits to be realized by the Company. These include: enhanced functionality at the branch level; a worldwide inventory of information technology and systems; a high-level documentation of business processes used by strategic business units; rationalization and standardization of diverse information systems; upgrades and standardization of desktop computing; upgrade of wide area network to remote business units; improved software quality assurance; and clean-up and documentation of older program code. Total cost of the Year 2000 remediation project is estimated to be approximately $21 million. The total amount incurred to date is $11.1 million, of which $1 million was expended in 1997, $8 million in 1998 and $2.1 million in 1999. Approximately $5.6 million of the total cost has been incurred for remediation (code remediation, project management compliance and risk assessment), $3.5 million for testing, and the balance for contingency development. The estimated future cost of completing the Year 2000 project is approximately $9.9 million to be incurred throughout 1999 and early 2000. Of these future costs the Company estimates approximately $2.4 million will relate to remediation, $4.5 million for testing and the balance for contingency activities. Funds for the project are budgeted separately from other Information Technology initiatives. These costs are being expensed as an element of Selling, General and Administrative expense and are funded from cash provided by operations.
10 The Risks Of The Company's Year 2000 Issues The failure to correct a material Year 2000 problem could result in an interruption, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. It is believed the most significant of risks concern the Year 2000 readiness of third party customers and suppliers. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Year 2000 Project is expected to significantly reduce the Company's level of uncertainty about the Year 2000 problem and through, in particular, the Year 2000 readiness of its internal systems and processes and its assessment of third-party preparedness. In general, all reasonable steps have been taken or are in process to ensure operations will continue without disruption. Additionally, in the event of circumstances resulting from the failure of a third party, all reasonable steps will have been taken to ensure appropriate contingency plans exist or are being developed to minimize the impact of these failures. 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 availability of the Company's multi-currency line of credit. This credit facility can be used to borrow in the local currencies that can effectively hedge the exchange rate risk resulting from foreign currencies weakening 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. New Accounting Standards In the first quarter of 1999, the Company adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP requires entities to capitalize certain internal-use software costs once certain criteria are met. Adoption of this standard did not have a material effect on first quarter earnings. In the first quarter of 1999, the Company adopted SOP 98-5, "Reporting on the Costs of Start-Up Activities." This SOP requires start-up activities and organization costs to be expensed as incurred. Adoption of this standard did not have a material effect on first quarter earnings. 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, including the Year 2000 project, 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 Professional and Technical Services, 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. The Law Registry Kelly Services (Suisse) Holding S.A. Kelly Professional Services (France), Inc. Kelly Services France S.A. Kelly Formation 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 Deutchland 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.
12 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 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: May 18, 1999 /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). 10.1 Kelly Services, Inc. 1999 Non-Employee Directors Stock Option Plan. (Reference is made to Exhibit A to the Definitive Proxy for the fiscal year ended January 3, 1999, filed with the Commission in April, 1999, which is incorporated herein by reference). 11 Additional Earnings Per Share Information. 2 27 Financial Data Schedule for three months ended April 4, 1999. 3
ADDITIONAL EARNINGS PER SHARE INFORMATION Kelly Services, Inc. and Subsidiaries Details of the common shares used to compute earnings per share are as follows in thousands except per share items: 13 Weeks Ended --------------------- April 4, March 29, 1999 1998 -------- --------- Weighted average shares outstanding 35,814 38,177 Adjustment for dilutive shares from stock options under the treasury stock method: Shares assumed issued 448 1,335 Less - Shares assumed repurchased (309) (1,128) -------- -------- Additional shares assumed outstanding 139 207 -------- -------- Applicable shares as adjusted 35,953 38,384 ======== ======== Net earnings $ 15,188 $ 15,064 ======== ======== Diluted earnings per common share $ .42 $ .39 ======== ======== This calculation is submitted in accordance with Regulation S-K item 601(b)(11).
5 1,000 3-MOS JAN-02-2000 APR-04-1999 74,379 12,290 603,266 13,575 0 739,221 236,509 84,319 993,214 453,479 0 40,116 0 0 499,619 993,214 0 1,025,959 0 846,828 0 0 0 25,743 10,555 15,188 0 0 0 15,188 0.42 0.42