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 April 1, 2001 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 4, 2001, 32,334,990 shares of Class A and 3,494,309 shares of Class B common stock of the Registrant were outstanding.
2 KELLY SERVICES, INC. AND SUBSIDIARIES <TABLE> <CAPTION> Page Number ------ <S> <C> 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 11 Signature 12 Index to Exhibits Required by Item 601, Regulation S-K 13 </TABLE>
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) <TABLE> <CAPTION> 13 Weeks Ended ------------------------------ April 1, April 2, 2001 2000 ---------- ---------- <S> <C> <C> Sales of services $1,087,198 $1,080,069 Cost of services 905,824 892,095 ---------- ---------- Gross profit 181,374 187,974 Selling, general and administrative expenses 173,199 161,406 ---------- ---------- Earnings from operations 8,175 26,568 Interest (expense) income, net (175) 287 ---------- ---------- Earnings before income taxes 8,000 26,855 Income taxes 3,200 10,795 ---------- ---------- Net earnings $ 4,800 $ 16,060 ========== ========== Earnings per share: Basic $ .13 .45 Diluted .13 $ .45 Average shares outstanding (thousands): Basic 35,763 35,705 Diluted 35,915 35,808 Dividends per share $ .25 $ .24 </TABLE> See accompanying Notes to Financial Statements.
4 KELLY SERVICES, INC. AND SUBSIDIARIES BALANCE SHEETS AS OF APRIL 1, 2001 AND DECEMBER 31, 2000 (In thousands of dollars) <TABLE> <CAPTION> ASSETS 2001 2000 - ------ ----------- ----------- <S> <C> <C> CURRENT ASSETS: (UNAUDITED) Cash and equivalents $ 56,974 $ 43,318 Short-term investments 2,394 2,394 Accounts receivable, less allowances of $13,651 and $13,614, respectively 599,757 631,771 Prepaid expenses and other current assets 27,302 24,903 Deferred taxes 51,776 52,209 ----------- ----------- Total current assets 738,203 754,595 PROPERTY AND EQUIPMENT: Land and buildings 57,053 44,971 Equipment, furniture and leasehold improvements 263,959 253,666 Accumulated depreciation (105,142) (97,552) ----------- ----------- Total property and equipment 215,870 201,085 INTANGIBLES AND OTHER ASSETS 124,228 133,896 ----------- ----------- TOTAL ASSETS $ 1,078,301 $ 1,089,576 =========== =========== LIABILITIES & STOCKHOLDERS' EQUITY - ---------------------------------- CURRENT LIABILITIES: Short-term borrowings $ 49,460 $ 57,839 Accounts payable 71,866 69,375 Payroll and related taxes 236,970 234,807 Accrued insurance 57,181 55,272 Income and other taxes 49,214 48,814 ----------- ----------- Total current liabilities 464,691 466,107 STOCKHOLDERS' EQUITY: Capital stock, $1.00 par value Class A common stock, shares issued 36,608,540 at 2001 and 36,609,040 at 2000 36,609 36,609 Class B common stock, shares issued 3,507,326 at 2001 and 3,506,826 at 2000 3,507 3,507 Treasury stock, at cost Class A common stock, 4,272,736 shares at 2001 and 4,363,578 shares at 2000 (82,498) (84,251) Class B common stock, 13,017 shares at 2001 and 12,817 shares at 2000 (376) (371) Paid-in capital 16,808 16,371 Earnings invested in the business 671,247 675,388 Accumulated foreign currency adjustments (31,687) (23,784) ----------- ----------- Total stockholders' equity 613,610 623,469 ----------- ----------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 1,078,301 $ 1,089,576 =========== =========== </TABLE> See accompanying Notes to Financial Statements.
5 KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (In thousands of dollars) <TABLE> <CAPTION> 13 Weeks Ended --------------------------------- April 1, 2001 April 2, 2000 ------------- ------------- <S> <C> <C> Capital Stock Class A common stock Balance at beginning of period $ 36,609 $ 36,602 Conversions from Class B - 4 ------------- ------------- Balance at end of period 36,609 36,606 Class B common stock Balance at beginning of period 3,507 3,514 Conversions to Class A - (4) ------------- ------------- Balance at end of period 3,507 3,510 Treasury Stock Class A common stock Balance at beginning of period (84,251) (80,538) Exercise of stock options, restricted stock awards and other 1,346 1,100 Treasury stock issued for acquisition 407 164 Purchase of treasury stock - (5,614) ------------- ------------- Balance at end of period (82,498) (84,888) Class B common stock Balance at beginning of period (371) (248) Purchase of treasury stock (5) - ------------- ------------- Balance at end of period (376) (248) Paid-in Capital Balance at beginning of period 16,371 15,761 Exercise of stock options, restricted stock awards and other 344 367 Treasury stock issued for acquisition 93 39 ------------- ------------- Balance at end of period 16,808 16,167 Earnings Invested in the Business Balance at beginning of period 675,388 623,564 Net earnings 4,800 16,060 Dividends (8,941) (8,557) ------------- ------------- Balance at end of period 671,247 631,067 Accumulated Foreign Currency Adjustments Balance at beginning of period (23,784) (16,282) Equity adjustment for foreign currency (7,903) (4,568) ------------- ------------- Balance at end of period (31,687) (20,850) ------------- ------------- Stockholders' Equity at end of period $ 613,610 $ 581,364 ============= ============= Comprehensive Income Net earnings $ 4,800 $ 16,060 Other comprehensive income - Foreign currency adjustments (7,903) (4,568) ------------- ------------- Comprehensive income (loss) $ (3,103) $ 11,492 ============= ============= </TABLE> See accompanying Notes to Financial Statements.
6 KELLY SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE 13 WEEKS ENDED APRIL 1, 2001 AND APRIL 2, 2000 (In thousands of dollars) <TABLE> <CAPTION> 2001 2000 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net earnings $ 4,800 $ 16,060 Noncash adjustments: Depreciation and amortization 10,534 9,625 Decrease (increase) in accounts receivable, net 21,554 (4,180) Changes in certain working capital components 13,781 12,552 ------------ ------------ Net cash from operating activities 50,669 34,057 ------------ ------------ Cash flows from investing activities: Capital expenditures (13,849) (12,821) Acquisition of building (11,783) - Proceeds from sales and maturities of short-term investments 176,237 278,782 Purchases of short-term investments (176,237) (276,104) Decrease (increase) in other assets 5,818 (4,796) Acquisition of companies, net of cash received - (1,534) ------------ ------------ Net cash from investing activities (19,814) (16,473) ------------ ------------ Cash flows from financing activities: Decrease in short-term borrowings (8,379) (5,539) Dividend payments (8,929) (8,545) Purchase of treasury stock (5) (5,614) Stock options and other 114 57 ------------ ------------ Net cash from financing activities (17,199) (19,641) ------------ ------------ Net change in cash and equivalents 13,656 (2,057) Cash and equivalents at beginning of period 43,318 54,032 ------------ ------------ Cash and equivalents at end of period $ 56,974 $ 51,975 ============ ============ </TABLE> 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 December 31, 2000 (the 2000 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 periods ended April 1, 2001 and April 2, 2000. 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 2001 2000 ---------- ---------- Sales: U.S. Commercial Staffing $ 550,051 $ 549,550 PTSA 265,657 257,662 International 271,490 272,857 ---------- ---------- Consolidated Total $1,087,198 $1,080,069 ========== ========== Earnings from Operations: U.S. Commercial Staffing $ 32,179 $ 40,519 PTSA 12,231 15,627 International 1,577 4,864 Corporate (37,812) (34,442) ---------- ---------- Consolidated Total $ 8,175 $ 26,568 ========== ========== 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 April 1, 2001 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 April 1, 2001.
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 periods ended April 1, 2001 and April 2, 2000 were as follows: 13 Weeks Ended 2001 2000 -------- -------- Net earnings $ 4,800 $ 16,060 ======== ======== Determination of shares (thousands): Weighted average common shares outstanding 35,763 35,705 Effect of dilutive securities: Stock options 50 2 Restricted and performance awards and other 102 101 -------- -------- Weighted average common shares outstanding - assuming dilution 35,915 35,808 ======== ======== Earnings per share - basic $ .13 $ .45 Earnings per share - assuming dilution $ .13 $ .45
9 Item 2. 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 2001 were $1.087 billion, an increase of 0.7% from the same period in 2000. Sales in the U.S. Commercial Staffing segment grew by 0.1% in the first quarter. Sales grew 2.9% in January, but declined 0.6% in February and 2.5% in March, resulting in the small net positive growth reported for the quarter. Professional, Technical and Staffing Alternatives (PTSA) sales grew by 3.1% compared to last year. Within the PTSA segment, the automotive services group revenues declined approximately 7.5% during the quarter due to softness in the automobile industry. Kelly Law Registry sales decreased, and sales of the staff leasing unit were flat during the quarter. The impact of unfavorable foreign currency translation on international revenue continues to be significant. Translated U.S. dollar sales in the International segment decreased by 0.5% as compared to the first quarter of 2000. However, on a constant currency basis, international revenue growth was approximately 7%, consistent with fourth quarter results. Cost of services, consisting of payroll and related tax and benefit costs of employees assigned to customers, increased 1.5% in the first quarter as compared to the same period in 2000. Gross profit of $181.4 million was 3.5% lower than the first quarter of 2000, and gross profit as a percentage of sales was 16.7% in 2001, which was down from the 17.4% rate in 2000. This reflected a decrease in the gross profit rates of the U.S. Commercial and International segments, primarily due to a shift in mix of sales to larger national account customers. Selling, general and administrative expenses were $173.2 million in the first quarter, an increase of 7.3% over the same period in 2000. Expenses averaged 15.9% of sales in the first quarter of 2001, a 1.0% increase versus the 14.9% rate in 2000. Sales growth decreased faster during the quarter than the Company could prudently reduce expenses. Earnings from operations of $8.2 million were 69.2% lower than the first quarter of 2000. U.S. Commercial earnings totaled $32.2 million, a decrease of 20.6% compared to earnings of $40.5 million last year. The decrease in earnings is due to the decline in gross profit margins noted above and the Company's inability to cut field expenses quickly enough as sales volumes declined. PTSA earnings totaled $12.2 million, a 21.7% decrease compared to earnings of $15.6 million last year. During the last six months, the Company continued to invest heavily in the professional and technical businesses, opening over twenty new branches, which impacted the expense rates in the first quarter. In addition, fee income from permanent placement and temp-to-perm decreased significantly in many business units. International earnings totaled $1.6 million, down 67.6%, compared to earnings of $4.9 million last year. The strong U.S. dollar significantly weakened both translated sales and profit results. In addition, the slowing of staffing demand in Canada, Puerto Rico and Australia further reduced operating results. Net interest expense was $175 thousand, as compared to last year's net interest income of $287 thousand. The swing is primarily attributable to higher borrowing levels than last year, as a result of the Business Trends acquisition completed in the third quarter of 2000. Earnings before income taxes were $8.0 million, a decrease of 70.2%, compared to pretax earnings of $26.9 million earned for the same period in 2000. Income taxes were 40.0% of pretax income in the first quarter of 2001 and 40.2% in the first quarter of 2000. Net earnings were $4.8 million in the first quarter of 2001, a decrease of 70.1% from the first quarter of 2000. Diluted earnings per share were $.13, a decrease of 71.1% as compared to $.45 in the same period last year.
10 Financial Condition Assets totaled $1.078 billion at April 1, 2001, a decrease of 1.0% from the $1.090 billion at December 31, 2000. Working capital decreased $15.0 million during the first quarter. The current ratio was 1.6 at April 1, 2001 and December 31, 2000. During the first three months of 2001, net cash from operating activities was $50.7 million, an increase of 48.8% from the comparable period in 2000. This increase resulted principally from a decrease in the accounts receivable balance offset by a decline in net earnings. The Company's global day's sales outstanding for the 13-week period were 50 days in 2001, an improvement of one day over the 51 days reported in 2000. Capital expenditures for the first quarter totaled $13.8 million, up slightly from the $12.8 million spent during the same period of 2000. Of the total, over 75% related to information technology investments. Annual capital expenditures are projected to total between $45 to $50 million in 2001. During the first quarter, the Company acquired a fully leased commercial office building that will be used for future expansion. This transaction was the second leg of a tax-free exchange for undeveloped land the Company initiated in the fourth quarter of 2000. The land was effectively swapped for the building, but in accordance with generally accepted accounting principles, it is shown as a cash acquisition for $11.8 million in the first quarter. The quarterly dividend rate applicable to Class A and Class B shares outstanding was $.25 per share in the first quarter of 2001. This represents a 4.2% increase compared to a dividend rate of $.24 per share in the first quarter of 2000. The Company's financial position continues to be strong. The Company continues to carry no long-term debt and expects to meet its growth requirements principally through cash generated from operations. Market Risk-Sensitive Instruments And Positions The Company does not hold or invest in derivative contracts. The Company is exposed to foreign currency risk primarily due to its net investment in foreign subsidiaries. This risk is mitigated by the use of the Company's multi-currency line of credit. This credit facility is used to borrow in local currencies which mitigates the exchange rate risk resulting from foreign currency-denominated net investments fluctuating in relation to the U.S. dollar. In addition, the Company is exposed to interest rate risks through its use of the multi-currency line of credit. Overall, the Company's holdings and positions in market risk-sensitive instruments do not subject the Company to material risk. 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 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 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: May 14, 2001 /s/ William K. Gerber William K. Gerber Executive 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 --- ----------- -------- 10 Kelly Services, Inc. Performance Incentive Plan, as 2 amended and restated on March 29, 1996 and April 14, 2000.