SEC Filing | Kelly Services Inc.

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

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 9-MOS DEC-31-2000 JAN-03-2000 OCT-01-2000 69,092 3,979 654,457 13,667 0 786,613 309,184 116,648 1,113,889 510,746 0 0 0 40,116 563,027 1,113,889 0 3,341,289 0 2,750,509 0 0 0 106,838 42,950 63,888 0 0 0 63,888 1.79 1.78