- 1 - Index to Exhibits on page 13 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 30, 1996 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) (810) 362-4444 ---------------------------------------------------- (Registrant's telephone number, including area code) 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 2, 1996, 34,473,121 shares of Class A and 3,583,605 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 12 Index to Exhibits Required by Item 601, Regulation S-K 13
- 3 - <TABLE> KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF EARNINGS (UNAUDITED) (In thousands of dollars except per share items) <CAPTION> 13 Weeks Ended 26 Weeks Ended ------------------------------ ------------------------------ June 30, 1996 July 2, 1995 June 30, 1996 July 2, 1995 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Sales of services $804,262 $652,417 $1,538,193 $1,273,102 Cost of services 652,007 519,739 1,248,252 1,018,406 -------- -------- ---------- ---------- Gross profit 152,255 132,678 289,941 254,696 Selling, general and administrative expenses 124,259 107,789 241,997 212,094 -------- -------- ---------- ---------- Earnings from operations 27,996 24,889 47,944 42,602 Interest income 1,142 2,321 2,687 4,710 -------- -------- ---------- ---------- Earnings before income taxes 29,138 27,210 50,631 47,312 -------- -------- ---------- ---------- Income taxes: Federal 9,270 8,505 16,055 14,895 State and other 2,420 2,045 4,225 3,495 -------- -------- ---------- ---------- Total income taxes 11,690 10,550 20,280 18,390 -------- -------- ---------- ---------- Net earnings $ 17,448 $ 16,660 $ 30,351 $ 28,922 ======== ======== ========== ========== Earnings per share $.46 $.44 $.80 $.76 Dividends per share $.21 $.20 $.41 $.38 Average shares outstanding (thousands) 38,041 37,987 38,029 37,977 </TABLE>
- 4 - <TABLE> KELLY SERVICES, INC. AND SUBSIDIARIES BALANCE SHEETS AS OF JUNE 30, 1996 AND DECEMBER 31, 1995 (UNAUDITED) (In thousands of dollars) <S> <C> <C> ASSETS 1996 1995 - ------ ------------ ------------ CURRENT ASSETS: Cash and equivalents $ 16,278 $ 52,811 Short-term investments 62,455 74,737 Accounts receivable, less allowances of $10,505 and $6,950, respectively 487,312 397,534 Prepaid expenses and other current assets 38,474 33,520 --------- --------- Total current assets 604,519 558,602 PROPERTY AND EQUIPMENT: Land and buildings 35,187 35,153 Equipment, furniture and leasehold improvements 121,099 113,521 Accumulated depreciation (73,835) (64,286) --------- --------- Total property and equipment 82,451 84,388 INTANGIBLES AND OTHER ASSETS 79,622 75,697 --------- --------- TOTAL ASSETS $766,592 $718,687 ========= ========= LIABILITIES & STOCKHOLDERS' EQUITY - ---------------------------------- CURRENT LIABILITIES: Accounts payable $ 77,554 $ 53,013 Payroll and related taxes 135,697 118,996 Accrued insurance 51,224 51,309 Income and other taxes 12,781 19,265 --------- --------- Total current liabilities 277,256 242,583 --------- --------- STOCKHOLDERS' EQUITY: Capital stock, $1 par value 40,116 40,116 Treasury stock, 2,060 shares in 1996 and 2,101 shares in 1995, respectively, at cost (6,205) (6,327) Paid-in capital 8,194 7,215 Earnings invested in the business 447,231 435,100 --------- --------- Total stockholders' equity 489,336 476,104 --------- --------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $766,592 $718,687 ========= ========= </TABLE>
- 5 - <TABLE> KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (In thousands of dollars) <CAPTION> 13 Weeks Ended 26 Weeks Ended ---------------------------- ----------------------------- June 30, 1996 July 2, 1995 June 30, 1996 July 2, 1995 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Capital Stock Class A common stock Balance at beginning of period $ 36,512 $ 36,510 $ 36,512 $ 36,507 Conversions from Class B 15 1 15 4 --------- --------- --------- --------- Balance at end of period 36,527 36,511 36,527 36,511 Class B common stock Balance at beginning of period 3,604 3,606 3,604 3,609 Conversions to Class A (15) (1) (15) (4) --------- --------- --------- --------- Balance at end of period 3,589 3,605 3,589 3,605 Treasury Stock Balance at beginning of period (6,314) (6,216) (6,327) (6,186) Exercise of stock options 50 -- 59 (30) Restricted stock awards 59 35 63 35 --------- --------- --------- --------- Balance at end of period (6,205) (6,181) (6,205) (6,181) Paid-in Capital Balance at beginning of period 7,324 6,210 7,215 5,868 Exercise of stock options 390 131 462 473 Restricted stock awards 480 297 517 297 --------- --------- --------- --------- Balance at end of period 8,194 6,638 8,194 6,638 Earnings Invested in the Business Balance at beginning of period 439,103 402,592 435,100 391,718 Net earnings 17,448 16,660 30,351 28,922 Cash dividends (7,991) (7,599) (15,594) (14,433) Equity adjustment for foreign currency translation (cumulative charge of $505 in 1996 and credit of $3,425 in 1995) (1,329) (613) (2,626) 4,833 --------- --------- --------- --------- Balance at end of period 447,231 411,040 447,231 411,040 --------- --------- --------- --------- Stockholders' Equity at end of period $489,336 $451,613 $489,336 $451,613 ========= ========= ========= ========= </TABLE>
- 6 - <TABLE> KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 26 WEEKS ENDED JUNE 30, 1996 AND JULY 2, 1995 (In thousands of dollars) <S> <C> <C> 1996 1995 ---------- ---------- Cash flows from operating activities: Net earnings $30,351 $28,922 Noncash adjustments: Depreciation and amortization 12,911 10,619 Changes in certain working capital components (61,221) (21,891) -------- -------- Net cash from operating activities (17,959) 17,650 -------- -------- Cash flows from investing activities: Capital expenditures (10,053) (14,907) Proceeds from sales and maturities of short-term investments 561,375 613,074 Purchases of short-term investments (549,093) (584,739) Increase in intangibles and other assets (6,310) (15,664) -------- -------- Net cash from investing activities (4,081) (2,236) -------- -------- Cash flows from financing activities: Dividend payments (15,594) (14,433) Exercise of stock options and restricted stock awards 1,101 775 -------- -------- Net cash from financing activities (14,493) (13,658) -------- -------- Net change in cash and equivalents (36,533) 1,756 Cash and equivalents at beginning of period 52,811 49,207 -------- -------- Cash and equivalents at end of period $16,278 $50,963 ======== ======== </TABLE>
- 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 1996 were $804,262,000, an increase of 23.3% from the same period in 1995. Domestic sales grew in excess of 20%, and reflects growth in the staffing business and significant expansion in our staff leasing services. International sales continued to grow at double digit rates. Cost of services, consisting of payroll and related costs of employees assigned to customers, increased 25.4% in the second quarter as compared to the same period in 1995. Average hourly wage rates and related costs from U.S. operations have increased from 1995 at a rate somewhat higher than the general inflation rate due to a tightening labor market. Gross profit of $152,255,000 was 14.8% higher than 1995, while the Company-wide gross profit rates declined from 20.3% in 1995 to 18.9% in 1996. Growth in the staff leasing business, with its inherently lower margins, along with the upward pressure on wage rates noted above and growth of sales with our very large customers, where contracts require special pricing and additional implementation costs, all had the effect of reducing the consolidated gross profit rate. Selling, general and administrative expenses were $124,259,000 in the second quarter, an increase of 15.3% over the same period in 1995. As a percent of sales, the spending rate averaged 15.5%, compared to 16.5% in last year's second quarter. Earnings before income taxes were $29,138,000, an increase of 7.1%, compared to pretax earnings of $27,210,000 for the same period in 1995. The pretax margin was 3.6%, a .6 percentage point decrease from the second quarter of 1995. Lower interest income represented .2 percentage point of the decline while the net of the lower gross margin rate and lower expense spending rate accounted for the remaining .4 percentage point of the decrease. Income taxes were 40.1% of pretax income. This was 1.3 percentage point over the applicable tax rate for the second quarter of 1995 due to increased state tax rates, reduced tax-exempt income and the expiration of tax credits against federal income tax liability earned through the targeted jobs tax credit program.
- 8 - Net earnings were $17,448,000 in the second quarter of 1996, an increase of 4.7% over the second quarter of 1995. Earnings per share were $.46 compared to the $.44 in the same period last year. Year-to-Date Sales of services totaled $1,538,193,000 during the first six months of 1996, an increase of 20.8% over 1995. This increase reflects continued growth in the volume of domestic and international sales. Cost of services of $1,248,252,000 was 22.6% higher than last year, reflecting domestic and international volume growth and increases in payroll costs due to a tightening U.S. labor market. Gross profit increased 13.8% in 1996 due to strong increased sales volume, but at lower gross profit rates on sales. The gross profit rate was 18.8% for the first six months of 1996 compared to 20.0% for 1995. This decline reflects competitive constraints on price increases in U.S. service lines, growth of sales with our very large customers and higher volume growth in the staff leasing business. Selling, general and administrative expenses of $241,997,000 were 14.1% higher than last year. The spending rate was 15.7% of sales, 1.0 percentage point below last year's rate. Expenses continue to be closely monitored in response to tightening margins in both U.S. and overseas markets. Earnings before taxes were $50,631,000, an increase of 7.0% over 1995. These earnings averaged a pretax margin of 3.3%, or .4 percentage point decrease over 1995. Lower interest income accounts for half of this decline, and the net of lower gross margin rates, offset by a decreased expense spending rate, accounted for the remainder. Income taxes were 40.1% of pretax earnings and were 1.2 percentage point higher than last year's first half income tax rate. The absence of the targeted jobs tax credit, increased state and local rates and increased foreign tax rates account for this change. Net earnings were $30,351,000, or 4.9% higher than the first six months of 1995. Earnings per share were $.80 compared to $.76 last year.
- 9 - Financial Condition Assets totaled $766,592,000 at June 30, 1996, an increase of 6.7% over the $718,687,000 at December 31, 1995. Working capital increased $11,244,000 during the six-month period. The components of working capital, notably accounts receivable, have changed due to increased business activity. The current ratio was 2.2 at June 30, 1996, a decline of .1 percentage point since December 31, 1995. The quarterly dividend rate applicable to Class A and Class B shares outstanding was increased to $.21 per share in the second quarter of 1996. This compares to a dividend rate of $.20 per share in the second quarter of 1995. Management believes the financial condition of the Company continues to be strong, which enables it to fund working capital requirements and long-term growth opportunities from internal resources. -------------------------------------------------------------- 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., Lenore Simpson Personnel, Ltd., 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 Pinpoint, Inc., Your Staff, Inc., The Wallace Law Registry, Inc., Kelly Services France S.A., Bourse Du Travail Temporaire 2000, Kelly Formation S.A.R.L. and Kelly Services Luxembourg S.A.R.L. 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 1. Legal Proceedings. ------------------ Reference is made to Item 3, Legal Proceedings, of the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and to the description therein of the proposed imposition by the Internal Revenue Service of an accumulated earnings tax in connection with an audit of the Company's consolidated federal tax liability for the years 1988, 1989 and 1990. As disclosed in Item 1, Legal Proceedings, of the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996, this assessment was waived in its entirety by the Internal Revenue Service in April, 1996. Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- (a) The annual meeting of stockholders of registrant was held May 21, 1996. (b) The nominees for director, as listed in the Company's proxy statement dated April 22, 1996, 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" "Withhold" ------------ ------------ W. R. Kelly 3,494,348 3,730 B. J. White 3,494,247 3,831 (2) Approval of amendment to the Certificate of Incorporation to increase the size of the Board of Directors: Shares voted "For" 3,428,489 Shares voted "Against" 54,742 Shares voted "Abstain" 14,847
- 11 - Item 4. Submission of Matters to a Vote of Security Holders (continued). --------------------------------------------------- (3) Approval of Amended and Restated Performance Incentive Plan including performance-based criteria for performance awards for senior executive officers: Shares voted "For" 3,449,750 Shares voted "Against" 9,156 Shares voted "Abstain" 14,470 (4) Ratification of the selection of Price Waterhouse LLP as the Company's independent auditors: Shares voted "For" 3,494,051 Shares voted "Against" 1,800 Shares voted "Abstain" 2,227 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 13 of this filing. (b) No reports on Form 8-K were filed during the quarter for which this report is filed.
- 12 - 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 13, 1996 /s/ P. K. Geiger P. K. Geiger Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
- 13 - INDEX TO EXHIBITS REQUIRED BY ITEM 601, REGULATION S-K --------------------- Exhibit No. Description Document - ------- ----------- -------- 3.1 Certificate of Amendment of Certificate of Incorporation dated June 14, 1996 and filed with the Secretary of State, State of Delaware, on June 20, 1996. (Reference is made to Exhibit A to the Definitive Proxy for the fiscal year ended December 31, 1995, filed with the Commission in April, 1996, which is incorporated herein by reference.) 3.2 Complete copy of the Certificate of Incorporation, 2 as amended. 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, Exhibit 3.2. 27 Financial Data Schedule 3