- 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 September 29, 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 November 1, 1996, 34,474,225 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 11 Index to Exhibits Required by Item 601, Regulation S-K 12
- 3 - <TABLE> KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF EARNINGS (UNAUDITED) (In thousands of dollars except per share items) <CAPTION> 13 Weeks Ended 39 Weeks Ended ------------------------------ ------------------------------ Sept. 29, 1996 Oct. 1, 1995 Sept. 29, 1996 Oct. 1, 1995 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Sales of services $873,242 $698,453 $2,411,435 $1,971,555 Cost of services 711,950 555,968 1,960,202 1,574,374 -------- -------- ---------- ---------- Gross profit 161,292 142,485 451,233 397,181 Selling, general and administrative expenses 125,794 111,125 367,791 323,219 -------- -------- ---------- ---------- Earnings from operations 35,498 31,360 83,442 73,962 Interest income 822 1,798 3,509 6,508 -------- -------- ---------- ---------- Earnings before income taxes 36,320 33,158 86,951 80,470 -------- -------- ---------- ---------- Income taxes: Federal 11,830 10,285 27,885 25,180 State and other 3,060 2,500 7,285 5,995 -------- -------- ---------- ---------- Total income taxes 14,890 12,785 35,170 31,175 -------- -------- ---------- ---------- Net earnings $ 21,430 $ 20,373 $ 51,781 $ 49,295 ======== ======== ========== ========== Earnings per share $.56 $.54 $1.36 $1.30 Dividends per share $.21 $.20 $.62 $.58 Average shares outstanding (thousands) 38,057 38,005 38,038 37,986 </TABLE>
- 4 - <TABLE> KELLY SERVICES, INC. AND SUBSIDIARIES BALANCE SHEETS AS OF SEPTEMBER 29, 1996 AND DECEMBER 31, 1995 (UNAUDITED) (In thousands of dollars) <S> <C> <C> ASSETS 1996 1995 - ------ ------------ ------------ CURRENT ASSETS: Cash and equivalents $ 9,603 $ 52,811 Short-term investments 36,424 74,737 Accounts receivable, less allowances of $11,165 and $6,950, respectively 554,915 397,534 Prepaid expenses and other current assets 38,969 33,520 --------- --------- Total current assets 639,911 558,602 PROPERTY AND EQUIPMENT: Land and buildings 36,002 35,153 Equipment, furniture and leasehold improvements 128,030 113,521 Accumulated depreciation (79,514) (64,286) --------- --------- Total property and equipment 84,518 84,388 INTANGIBLES AND OTHER ASSETS 81,101 75,697 --------- --------- TOTAL ASSETS $805,530 $718,687 ========= ========= LIABILITIES & STOCKHOLDERS' EQUITY - ---------------------------------- CURRENT LIABILITIES: Accounts payable $ 81,281 $ 53,013 Payroll and related taxes 148,729 118,996 Accrued insurance 49,175 51,309 Income and other taxes 23,423 19,265 --------- --------- Total current liabilities 302,608 242,583 --------- --------- STOCKHOLDERS' EQUITY: Capital stock, $1 par value 40,116 40,116 Treasury stock, 2,058 shares in 1996 and 2,101 shares in 1995, respectively, at cost (6,200) (6,327) Paid-in capital 8,238 7,215 Earnings invested in the business 460,768 435,100 --------- --------- Total stockholders' equity 502,922 476,104 --------- --------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $805,530 $718,687 ========= ========= </TABLE>
- 5 - <TABLE> KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (In thousands of dollars) <CAPTION> 13 Weeks Ended 39 Weeks Ended ---------------------------- ----------------------------- Sept. 29, 1996 Oct. 1, 1995 Sept. 29, 1996 Oct. 1, 1995 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Capital Stock Class A common stock Balance at beginning of period $ 36,527 $ 36,511 $ 36,512 $ 36,507 Conversions from Class B -- -- 15 4 --------- --------- --------- --------- Balance at end of period 36,527 36,511 36,527 36,511 Class B common stock Balance at beginning of period 3,589 3,605 3,604 3,609 Conversions to Class A -- -- (15) (4) --------- --------- --------- --------- Balance at end of period 3,589 3,605 3,589 3,605 Treasury Stock Balance at beginning of period (6,205) (6,181) (6,327) (6,186) Exercise of stock options 2 (155) 61 (185) Restricted stock awards 3 6 66 41 --------- --------- --------- --------- Balance at end of period (6,200) (6,330) (6,200) (6,330) Paid-in Capital Balance at beginning of period 8,194 6,638 7,215 5,868 Exercise of stock options 12 475 474 948 Restricted stock awards 32 57 549 354 --------- --------- --------- --------- Balance at end of period 8,238 7,170 8,238 7,170 Earnings Invested in the Business Balance at beginning of period 447,231 411,040 435,100 391,718 Net earnings 21,430 20,373 51,781 49,295 Cash dividends (7,992) (7,603) (23,586) (22,036) Equity adjustment for foreign currency translation (cumulative charge of $406 in 1996 and credit of $3,024 in 1995) 99 (401) (2,527) 4,432 --------- --------- --------- --------- Balance at end of period 460,768 423,409 460,768 423,409 --------- --------- --------- --------- Stockholders' Equity at end of period $502,922 $464,365 $502,922 $464,365 ========= ========= ========= ========= </TABLE>
- 6 - <TABLE> KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 39 WEEKS ENDED SEPTEMBER 29, 1996 AND OCTOBER 1, 1995 (In thousands of dollars) <S> <C> <C> 1996 1995 ---------- ---------- Cash flows from operating activities: Net earnings $51,781 $49,295 Noncash adjustments: Depreciation and amortization 19,316 16,433 Changes in certain working capital components (104,052) (58,049) -------- -------- Net cash from operating activities (32,955) 7,679 -------- -------- Cash flows from investing activities: Capital expenditures (17,745) (25,192) Proceeds from sales and maturities of short-term investments 835,485 887,679 Purchases of short-term investments (797,172) (840,221) Increase in intangibles and other assets (8,385) (16,904) -------- -------- Net cash from investing activities 12,183 5,362 -------- -------- Cash flows from financing activities: Dividend payments (23,586) (22,036) Exercise of stock options and restricted stock awards 1,150 1,158 -------- -------- Net cash from financing activities (22,436) (20,878) -------- -------- Net change in cash and equivalents (43,208) (7,837) Cash and equivalents at beginning of period 52,811 49,207 -------- -------- Cash and equivalents at end of period $ 9,603 $41,370 ======== ======== </TABLE>
- 7 - 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 1996 were $873,242,000, an increase of 25% from the same period in 1995. Domestic sales grew 25%, and reflects strong 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 28.1% in the third 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 $161,292,000 was 13.2% higher than 1995, while the Company-wide gross profit rates as a percentage of sales of services declined from 20.4% in 1995 to 18.5% in 1996. Growth in the staff leasing business, with its inherently lower margins, the upward pressure on wage rates noted above and the 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 $125,794,000 in the third quarter, an increase of 13.2% over the same period in 1995. As a percent of sales, the spending rate averaged 14.4%, compared to 15.9% in last year's third quarter. Earnings before income taxes were $36,320,000, an increase of 9.5%, compared to pretax earnings of $33,158,000 for the same period in 1995. The pretax margin was 4.2%, a .5 percentage point decrease from the third quarter of 1995. Lower interest income represented .1 percentage point of the decline while the net of the lower gross profit rate and lower expense spending rate accounted for the remaining .4 percentage point of the decrease. Income taxes were 41.0% of pretax income. This was 2.4 percentage points over the applicable tax rate for the third quarter of 1995 due to increased state taxes, 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 $21,430,000 in the third quarter of 1996, an increase of 5.2% over the third quarter of 1995. Earnings per share were $.56 compared to $.54 in the same period last year. Year-to-Date Sales of services totaled $2,411,435,000 during the first nine months of 1996, an increase of 22.3% over 1995. This increase reflects continued growth in the volume of domestic and international sales. Cost of services of $1,960,202,000 was 24.5% 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 13.6% in 1996 due to strong increased sales volume, but at lower gross profit rates on sales. The gross profit rate was 18.7% for the first nine months of 1996 compared to 20.1% 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 $367,791,000 were 13.8% higher than last year. The spending rate was 15.3% of sales, 1.1 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 $86,951,000, an increase of 8.1% over 1995. These earnings averaged a pretax margin of 3.6%, or .5 percentage point decrease from 1995. Lower interest income accounted for .2 percentage point 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 40.4% of pretax earnings and were 1.7 percentage point higher than last year's first nine months' income tax rate. The absence of the targeted jobs tax credit, reduced tax exempt income, and increased state and local taxes are the largest components that account for this change. Net earnings were $51,781,000, or 5.0% higher than the first nine months of 1995. Earnings per share were $1.36 compared to $1.30 last year.
- 9 - Financial Condition The Company's financial condition continues to be strong with cash and equivalents and short-term investments of $46.0 million. This compares to the $127.5 million as of December 31, 1995. This decline resulted primarily from the growth in accounts receivable; the growth in accounts receivable resulted from the strong increase in sales during the nine months of 1996. Assets totaled $805,530,000 at September 29, 1996, an increase of 12.1% over the $718,687,000 at December 31, 1995. Working capital increased $21,284,000 during the nine-month period. The components of working capital, notably accounts receivable, have changed primarily due to the strong increase in business activity during the year. The current ratio was 2.1 at September 29, 1996, a decline of .2 percentage point since December 31, 1995. The quarterly dividend rate applicable to Class A and Class B shares outstanding was $.21 per share in the third quarter of 1996. This compares to a dividend rate of $.20 per share in the third quarter of 1995. -------------------------------------------------------------- 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., 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. and Kelly Services Seleccion y Formacion, S.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 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: November 12, 1996 /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 - ------- ----------- -------- 3 By-Laws, as amended on August 20, 1996. 2 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 3