- 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 March 29, 1998 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 1, 1998, 34,653,026 shares of Class A and 3,570,195 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 ------------------------------- March 29, 1998 March 30, 1997 -------------- -------------- <S> <C> <C> Sales of services $959,382 $880,846 Cost of services 791,472 724,508 --------- --------- Gross profit 167,910 156,338 Selling, general and administrative expenses 143,069 132,219 --------- --------- Earnings from operations 24,841 24,119 Interest income, net 693 4 --------- --------- Earnings before income taxes 25,534 24,123 --------- --------- Income taxes: Federal 8,555 8,135 State and other 1,915 1,760 --------- --------- Total income taxes 10,470 9,895 --------- --------- Net earnings $ 15,064 $ 14,228 ========= ========= Earnings per share: Basic $.39 $.37 Diluted .39 .37 Average shares outstanding (thousands): Basic 38,177 38,061 Diluted 38,384 38,115 Dividends per share $.22 $.21 </TABLE>
- 4 - <TABLE> KELLY SERVICES, INC. AND SUBSIDIARIES BALANCE SHEETS AS OF MARCH 29, 1998 AND DECEMBER 28, 1997 (In thousands of dollars) <S> <C> <C> ASSETS 1998 1997 - ------ ----------- --------- CURRENT ASSETS: (UNAUDITED) Cash and equivalents $ 115,493 $ 76,690 Short-term investments 67,628 67,301 Accounts receivable, less allowances of $11,830 and $12,375, respectively 570,636 572,134 Prepaid expenses and other current assets 55,996 54,847 ----------- --------- Total current assets 809,753 770,972 PROPERTY AND EQUIPMENT: Land and buildings 44,376 44,405 Equipment, furniture and leasehold improvements 136,711 130,472 Accumulated depreciation (67,602) (62,144) ----------- --------- Total property and equipment 113,485 112,733 INTANGIBLES AND OTHER ASSETS 80,769 83,524 ----------- --------- TOTAL ASSETS $1,004,007 $967,229 =========== ========= LIABILITIES & STOCKHOLDERS' EQUITY - ---------------------------------- CURRENT LIABILITIES: Short-term borrowings $ 47,858 $ 54,958 Accounts payable 68,710 60,408 Payroll and related taxes 220,740 197,092 Accrued insurance 63,082 61,077 Income and other taxes 36,878 33,865 ----------- --------- Total current liabilities 437,268 407,400 ----------- --------- STOCKHOLDERS' EQUITY: Capital stock, $1 par value 40,116 40,116 Treasury stock, 1,894,000 shares in 1998 and 1,953,000 shares in 1997, respectively, at cost (6,282) (6,214) Paid-in capital 12,627 10,980 Earnings invested in the business 528,703 522,039 Accumulated foreign currency adjustments (8,425) (7,092) ----------- --------- Total stockholders' equity 566,739 559,829 ----------- --------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $1,004,007 $967,229 =========== ========= </TABLE>
- 5 - <TABLE> KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (In thousands of dollars) <CAPTION> 13 Weeks Ended -------------------------------- March 29, 1998 March 30, 1997 -------------- -------------- <S> <C> <C> Capital Stock Class A common stock Balance at beginning of period $ 36,538 $ 36,527 Conversions from Class B 2 4 --------- --------- Balance at end of period 36,540 36,531 Class B common stock Balance at beginning of period 3,578 3,589 Conversions to Class A (2) (4) --------- --------- Balance at end of period 3,576 3,585 Treasury Stock Balance at beginning of period (6,214) (6,197) Exercise of stock options (73) (9) Restricted stock awards 5 2 --------- --------- Balance at end of period (6,282) (6,204) Paid-in Capital Balance at beginning of period 10,980 8,265 Exercise of stock options 1,612 84 Restricted stock awards 35 16 --------- --------- Balance at end of period 12,627 8,365 Earnings Invested in the Business Balance at beginning of period 522,039 474,409 Net earnings 15,064 14,228 Cash dividends (8,400) (7,993) --------- --------- Balance at end of period 528,703 480,644 Accumulated Foreign Currency Adjustments Balance at beginning of period (7,092) 306 Equity adjustment for foreign currency (1,333) (5,132) --------- --------- Balance at end of period (8,425) (4,826) --------- --------- Stockholders' Equity at end of period $566,739 $518,095 ========= ========= Comprehensive Income Net earnings $ 15,064 $ 14,228 Other comprehensive income - Foreign currency adjustments (1,333) (5,132) --------- --------- Comprehensive Income $ 13,731 $ 9,096 ========= ========= </TABLE>
- 6 - <TABLE> KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 13 WEEKS ENDED MARCH 29, 1998 AND MARCH 30, 1997 (In thousands of dollars) <S> <C> <C> 1998 1997 ---------- ---------- Cash flows from operating activities: Net earnings $ 15,064 $ 14,228 Noncash adjustments: Depreciation and amortization 6,802 6,439 Changes in certain working capital components 36,677 22,254 --------- --------- Net cash from operating activities 58,543 42,921 --------- --------- Cash flows from investing activities: Capital expenditures (7,031) (6,131) Proceeds from sales and maturities of short-term investments 409,802 518,006 Purchases of short-term investments (410,129) (511,384) Decrease in intangibles and other assets 1,539 1,355 --------- --------- Net cash from investing activities (5,819) 1,846 --------- --------- Cash flows from financing activities: (Decrease) increase in short-term borrowings (7,100) 622 Dividend payments (8,400) (7,993) Exercise of stock options and restricted stock awards 1,579 93 --------- --------- Net cash from financing activities (13,921) (7,278) --------- --------- Net change in cash and equivalents 38,803 37,489 Cash and equivalents at beginning of period 76,690 33,408 --------- --------- Cash and equivalents at end of period $115,493 $ 70,897 ========= ========= </TABLE>
- 7 - 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 1998 were $959.4 million, an increase of 8.9% from the same period in 1997. Sales growth was strong in foreign operations while domestic sales expanded at a moderate rate. Cost of services, consisting of payroll and related tax and benefit costs of employees assigned to customers, increased 9.2% in the first quarter as compared to the same period in 1997. Direct wage costs have increased from 1997 at a rate somewhat higher than the general inflation rate, due to strong worldwide demand for labor. Gross profit of $167.9 million was 7.4% higher than the first quarter of 1997, and gross profit as a percentage of sales declined from 17.7% in 1997 to 17.5% in 1998. The growth of sales with our largest customers where contracts require special pricing and additional implementation costs, especially in the foreign markets, 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 $143.1 million in the first quarter, an increase of 8.2% over the same period in 1997. Expenses averaged 14.9% of sales as compared to 15.0% in last year's first quarter. The rate of growth of these expenses inclusive of year 2000 modification costs in relationship to the sales increases reflects the Company's emphasis on expense control. Earnings from operations of $24.8 million were 3.0% greater than the first quarter of 1997. Interest income (net) of $.7 million increased significantly as compared to the first quarter of 1997 due to higher average cash and short-term investment balances. Earnings before income taxes were $25.5 million, an increase of 5.8%, compared to pretax earnings of $24.1 million for the same period in 1997. The pretax margin was 2.7% in the first quarters of both 1998 and 1997. Income taxes were 41.0% of pretax income in the first quarters of 1998 and 1997. Net earnings were $15.1 million in the first quarter of 1998, an increase of 5.9% over the first quarter of 1997. Basic and diluted earnings per share were $.39 compared to $.37 in the same period last year.
- 8 - Financial Condition Assets totaled $1.0 billion at March 29, 1998, an increase of 3.8% over the $967.2 million at December 28, 1997. Working capital increased $8.9 million during the three-month period. The current ratio was 1.9 at March 29, 1998 and December 28, 1997. During the first three months of 1998, net cash from operating activities was $58.5 million, an increase of 36% over the comparable period in 1997. This increase resulted principally from increases in net earnings and accrued liability balances, along with a containment on the growth of accounts receivable. Capital expenditures of $7.0 million in 1998 and $6.1 million in 1997 were principally for expanding and improving the worldwide branch network and developing new information systems. The quarterly dividend rate applicable to Class A and Class B shares outstanding was $.22 per share in the first quarter of 1998. This represents a 5% increase compared to a dividend rate of $.21 per share in the first quarter of 1997. 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. New Accounting Standard Effective December 29, 1997, the Company adopted Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income". This Statement establishes standards for reporting and display of comprehensive income and its components. Comprehensive income is comprised of net earnings and other comprehensive income. Foreign currency adjustments represent the only component of other comprehensive income. 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.
- 9 - 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., 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., 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 (Switzerland) 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.
- 10 - 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) A report on Form 8-K dated January 3, 1998 was filed by the Company in January, 1998. The report was filed under Item 1 of Form 8-K, changes in control of registrant.
- 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: May 12, 1998 /s/ William K. Gerber William K. Gerber 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 - ------- ----------- -------- 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). 11 Additional Earnings Per Share Information. 2 27.1 Financial Data Schedule for three months ended March 29, 1998. 3 27.2 Restated Financial Data Schedule for three months ended March 30, 1997. 4