- 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 28, 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 July 31, 1998, 34,695,228 shares of Class A and 3,569,266 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 11 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 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Sales of services $1,001,286 $959,726 $1,960,668 $1,840,572 Cost of services 823,542 789,618 1,615,014 1,514,126 ----------- --------- ----------- ----------- Gross profit 177,744 170,108 345,654 326,446 Selling, general and administrative expenses 143,584 137,636 286,653 269,855 ----------- --------- ----------- ----------- Earnings from operations 34,160 32,472 59,001 56,591 Interest income, net 793 486 1,486 490 ----------- --------- ----------- ----------- Earnings before income taxes 34,953 32,958 60,487 57,081 Income taxes 14,330 13,515 24,800 23,410 ----------- --------- ----------- ----------- Net earnings $ 20,623 $ 19,443 $ 35,687 $ 33,671 =========== ========= =========== =========== Earnings per share: Basic $.54 $.51 $.93 $.88 Diluted .54 .51 .93 .88 Average shares outstanding (thousands): Basic 38,238 38,078 38,207 38,069 Diluted 38,497 38,131 38,449 38,114 Dividends per share $.23 $.22 $.45 $.43 </TABLE>
- 4 - <TABLE> KELLY SERVICES, INC. AND SUBSIDIARIES BALANCE SHEETS AS OF JUNE 28, 1998 AND DECEMBER 28, 1997 (In thousands of dollars) <S> <C> <C> ASSETS 1998 1997 - ------ ------------ ------------ CURRENT ASSETS: (UNAUDITED) Cash and equivalents $ 73,328 $ 76,690 Short-term investments 92,560 67,301 Accounts receivable, less allowances of $12,840 and $12,375, respectively 564,807 572,134 Prepaid expenses and other current assets 57,127 54,847 ----------- --------- Total current assets 787,822 770,972 PROPERTY AND EQUIPMENT: Land and buildings 43,173 44,405 Equipment, furniture and leasehold improvements 154,216 130,472 Accumulated depreciation (72,523) (62,144) ----------- --------- Total property and equipment 124,866 112,733 INTANGIBLES AND OTHER ASSETS 89,320 83,524 ----------- --------- TOTAL ASSETS $1,002,008 $967,229 =========== ========= LIABILITIES & STOCKHOLDERS' EQUITY - ---------------------------------- CURRENT LIABILITIES: Short-term borrowings $ 48,653 $ 54,958 Accounts payable 58,615 60,408 Payroll and related taxes 225,238 197,092 Accrued insurance 66,108 61,077 Income and other taxes 26,102 33,865 ----------- --------- Total current liabilities 424,716 407,400 ----------- --------- STOCKHOLDERS' EQUITY: Capital stock, $1 par value 40,116 40,116 Treasury stock, 1,851,000 shares in 1998 and 1,953,000 shares in 1997, respectively, at cost (6,143) (6,214) Paid-in capital 13,751 10,980 Earnings invested in the business 540,526 522,039 Accumulated foreign currency adjustments (10,958) (7,092) ----------- --------- Total stockholders' equity 577,292 559,829 ----------- --------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $1,002,008 $967,229 =========== ========= </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 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Capital Stock Class A common stock Balance at beginning of period $ 36,540 $ 36,531 $ 36,538 $ 36,527 Conversions from Class B 1 6 3 10 --------- --------- --------- --------- Balance at end of period 36,541 36,537 36,541 36,537 Class B common stock Balance at beginning of period 3,576 3,585 3,578 3,589 Conversions to Class A (1) (6) (3) (10) --------- --------- --------- --------- Balance at end of period 3,575 3,579 3,575 3,579 Treasury Stock Balance at beginning of period (6,282) (6,204) (6,214) (6,197) Exercise of stock options 101 41 28 32 Restricted stock awards 38 59 43 61 --------- --------- --------- --------- Balance at end of period (6,143) (6,104) (6,143) (6,104) Paid-in Capital Balance at beginning of period 12,627 8,365 10,980 8,265 Exercise of stock options 814 322 2,426 406 Restricted stock awards 310 393 345 409 --------- --------- --------- --------- Balance at end of period 13,751 9,080 13,751 9,080 Earnings Invested in the Business Balance at beginning of period 528,703 480,644 522,039 474,409 Net earnings 20,623 19,443 35,687 33,671 Cash dividends (8,800) (8,379) (17,200) (16,372) --------- --------- --------- --------- Balance at end of period 540,526 491,708 540,526 491,708 Accumulated Foreign Currency Adjustments Balance at beginning of period (8,425) (4,826) (7,092) 306 Equity adjustment for foreign currency (2,533) (1,138) (3,866) (6,270) --------- --------- --------- --------- Balance at end of period (10,958) (5,964) (10,958) (5,964) --------- --------- --------- --------- Stockholders' Equity at end of period $577,292 $528,836 $577,292 $528,836 ========= ========= ========= ========= Comprehensive Income Net earnings $ 20,623 $ 19,443 $ 35,687 $ 33,671 Other comprehensive income - Foreign currency adjustments (2,533) (1,138) (3,866) (6,270) --------- --------- --------- --------- Comprehensive Income $ 18,090 $ 18,305 $ 31,821 $ 27,401 ========= ========= ========= ========= </TABLE>
- 6 - <TABLE> KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 26 WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997 (In thousands of dollars) <S> <C> <C> 1998 1997 ---------- ---------- Cash flows from operating activities: Net earnings $ 35,687 $ 33,671 Noncash adjustments: Depreciation and amortization 13,808 12,849 Changes in certain working capital components 26,792 26,516 --------- --------- Net cash from operating activities 76,287 73,036 --------- --------- Cash flows from investing activities: Capital expenditures (25,198) (17,903) Proceeds from sales and maturities of short-term investments 814,996 967,617 Purchases of short-term investments (840,255) (978,024) Increase in intangibles and other assets (8,529) (1,312) --------- --------- Net cash from investing activities (58,986) (29,622) --------- --------- Cash flows from financing activities: (Decrease) increase in short-term borrowings (6,305) 4,644 Dividend payments (17,200) (16,372) Exercise of stock options and restricted stock awards 2,842 908 --------- --------- Net cash from financing activities (20,663) (10,820) --------- --------- Net change in cash and equivalents (3,362) 32,594 Cash and equivalents at beginning of period 76,690 33,408 --------- --------- Cash and equivalents at end of period $ 73,328 $ 66,002 ========= ========= </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 1998 were $1.0 billion, an increase of 4.3% from the same period in 1997. Sales growth was stronger in professional, technical and European operations, while U.S. office-administrative and electronic assembly sectors grew at a more modest rate. Cost of services, consisting of payroll and related tax and benefit costs of employees assigned to customers, increased 4.3% in the second 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 $177.7 million was 4.5% higher than the second quarter of 1997, and gross profit as a percentage of sales increased to 17.8% in 1998 from 17.7% in 1997. The strong performance of the professional, technical and European businesses improved margins slightly. Selling, general and administrative expenses were $143.6 million in the second quarter, an increase of 4.3% over the same period in 1997. Expenses averaged 14.3% of sales in the second quarters of both 1998 and 1997. The moderate rate of growth of these expenses, which include year 2000 costs and the expenditures related to the information technology investment program, reflects the Company's commitment to expense control. Earnings from operations of $34.2 million were 5.2% greater than the second quarter of 1997. Interest income (net) of $0.8 million increased significantly as compared to the second quarter of 1997 due to higher average cash and short-term investment balances. Earnings before income taxes were $35.0 million, an increase of 6.1%, compared to pretax earnings of $33.0 million for the same period in 1997. The pretax margin was 3.5% as compared to 3.4% in last year's second quarter. Improved gross margins combined with effective expense management were the principal reasons for the improvement. Income taxes were 41.0% of pretax income in the second quarters of 1998 and 1997. Net earnings were $20.6 million in the second quarter of 1998, an increase of 6.1% over the second quarter of 1997. Basic and diluted earnings per share were $.54 compared to $.51 in the same period last year.
- 8 - Year-to-Date Sales of services totaled $2.0 billion during the first six months of 1998, an increase of 6.5% over 1997. This increase reflects modest growth in domestic sales and strong international sales. Cost of services of $1.6 billion was 6.7% higher than last year, reflecting volume growth and increases in payroll rates due to strong demand for labor worldwide. Gross profit increased 5.9% in 1998 due to increased sales, but at lower gross profit rates. The gross profit rate was 17.6% for the first six months of 1998 compared to 17.7% for 1997. This decline reflects sales growth with large customers, not only in the United States but in international markets as well. Selling, general and administrative expenses of $286.7 million were 6.2% higher than last year. The spending rate was 14.6% of sales, 0.1 percentage point below last year's rate. Expenses included the information technology investment program and year 2000 related conversion costs. Strong controls continue to be effective in managing expenses in proper relationship to sales growth. Earnings before taxes were $60.5 million, an increase of 6.0% over 1997. These earnings averaged a pretax margin of 3.1% in the first six months of both 1998 and 1997. Income taxes were 41.0% of pretax earnings in the first six months of 1998 and 1997. Net earnings were $35.7 million or 6.0% higher than the first six months of 1997. Basic and diluted earnings per share were $.93 compared to $.88 last year. This was an increase of 5.7% over 1997. Financial Condition Assets totaled $1.0 billion at June 28, 1998, an increase of 3.6% over the $967.2 million at December 28, 1997. Working capital was $363.1 million, nearly the same as the end of 1997. The current ratio was 1.9 at June 28, 1998 and December 28, 1997. During the first six months of 1998, net cash from operating activities was $76.3 million, an increase of 4.5% over the comparable period in 1997. This increase resulted principally from an increase in net earnings, and depreciation and amortization. Capital expenditures of $25.2 million in 1998 and $17.9 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 $.23 per share in the second quarter of 1998. This represents a 5% increase compared to a dividend rate of $.22 per share in the second quarter of 1997.
- 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. New Accounting Standards Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information," effective for 1998, establishes standards for reporting information about operating segments in annual financial statements and, beginning in 1999, requires reporting of selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will adopt SFAS 131 for its financial statements for the year ending January 3, 1999. The Company has not completed its determination of the impact that the adoption of this new accounting standard will have on its consolidated financial statement disclosures. In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement is effective for fiscal years beginning after December 15, 1997. This Statement will not have an impact on the Company's consolidated financial statements, because the Company does not have a pension plan or other material postretirement benefits as covered by the Statement. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. This Statement is effective for fiscal years beginning after June 15, 1999, with earlier adoption encouraged. This Statement will not have a material impact on the Company's consolidated financial statements. The Company plans to adopt this Statement beginning in the 1999 fiscal year. Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued by the American Institute of Certified Public Accountants in March 1998. This SOP provides guidance on accounting for the costs of computer software developed or obtained for internal use. Effective for fiscal years beginning after December 15, 1998, this SOP requires capitalization of certain internal-use computer software costs. The Company does not expect it to have a material impact on its consolidated financial statements. The Company plans to adopt this Statement beginning in the 1999 fiscal year.
- 10 - In April 1998, the American Institute of Certified Public Accountants issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." Effective for fiscal years beginning after December 15, 1998, with earlier application encouraged, this SOP provides guidance on the financial reporting of start-up costs and organization costs. It requires start-up activities and organization costs to be expensed as incurred. This Statement is not expected to have a material impact on the Company's consolidated financial statements. The Company will adopt this Statement beginning in the 1999 fiscal year. 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. ------------------------------------------------------------- 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 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., 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., 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, Kelly Services (societa di fornitura di lavaro temporaneo) SpA, Kelly Services Interim, Kelly Services Interim (Belgium) SA and Kelly Services Select (Belgium) SA. The information furnished reflects all adjustments, consisting of only normal and recurring items, which are, in the opinion of management, necessary for a fair presentation of the results of operations for the period in this filing.
- 11 - PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- (a) The annual meeting of stockholders of registrant was held May 19, 1998. (b) The nominee for director, as listed in the Company's proxy statement dated April 24, 1998, was 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 T. E. Adderley as director: Shares voted "For" 3,522,509 Shares voted "Withhold" 1,715 (2) Approval of amendments to the standards for performance-based annual incentive award criteria and limitations for certain executive officers under the Company's Short-Term Incentive Plan: Shares voted "For" 3,513,585 Shares voted "Withhold" 7,849 Shares voted "Abstain" 2,790 (3) Ratification of the selection of PricewaterhouseCoopers LLP as the Company's independent auditors: Shares voted "For" 3,522,929 Shares voted "Abstain" 1,295 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 11, 1998 /s/ William K. Gerber William K. Gerber 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 - ------- ----------- -------- 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 Short-Term Incentive Plan, as amended and restated on March 23, 1998. 2 11 Additional Earnings Per Share Information. 3 27.1 Financial Data Schedule for six months ended June 28, 1998. 4 27.2 Restated Financial Data Schedule for six months ended June 29, 1997. 5