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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 June 29, 1997
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 August 1, 1997, 34,526,630 shares of Class A and 3,573,052 shares of Class B
common stock of the Registrant were outstanding.
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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
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<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 29, 1997 June 30, 1996 June 29, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales of services $959,726 $804,262 $1,840,572 $1,538,193
Cost of services 789,618 652,007 1,514,126 1,248,252
--------- --------- ----------- -----------
Gross profit 170,108 152,255 326,446 289,941
Selling, general and
administrative expenses 137,636 123,778 269,855 241,080
--------- --------- ----------- -----------
Earnings from operations 32,472 28,477 56,591 48,861
Interest income, net 486 661 490 1,770
--------- --------- ----------- -----------
Earnings before income taxes 32,958 29,138 57,081 50,631
--------- --------- ----------- -----------
Income taxes:
Federal 11,095 9,270 19,230 16,055
State and other 2,420 2,420 4,180 4,225
--------- --------- ----------- -----------
Total income taxes 13,515 11,690 23,410 20,280
--------- --------- ----------- -----------
Net earnings $ 19,443 $ 17,448 $ 33,671 $ 30,351
========= ========= =========== ===========
Earnings per share $.51 $.46 $.88 $.80
Dividends per share $.22 $.21 $.43 $.41
Average shares outstanding
(thousands) 38,078 38,041 38,069 38,029
</TABLE>
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<TABLE>
KELLY SERVICES, INC. AND SUBSIDIARIES
BALANCE SHEETS AS OF JUNE 29, 1997 AND DECEMBER 29, 1996
(UNAUDITED)
(In thousands of dollars)
<S> <C> <C>
ASSETS 1997 1996
- ------ ------------ ------------
CURRENT ASSETS:
Cash and equivalents $ 66,002 $ 33,408
Short-term investments 38,442 28,035
Accounts receivable, less
allowances of $11,880 and
$8,320, respectively 578,042 554,025
Prepaid expenses and other
current assets 45,074 43,118
--------- ---------
Total current assets 727,560 658,586
PROPERTY AND EQUIPMENT:
Land and buildings 44,068 43,748
Equipment, furniture and
leasehold improvements 132,943 118,737
Accumulated depreciation (73,645) (64,763)
--------- ---------
Total property and equipment 103,366 97,722
INTANGIBLES AND OTHER ASSETS 80,091 82,571
--------- ---------
TOTAL ASSETS $911,017 $838,879
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 46,260 $ 41,616
Accounts payable 58,415 48,111
Payroll and related taxes 195,697 151,769
Accrued insurance 59,046 53,119
Income and other taxes 22,763 27,365
--------- ---------
Total current liabilities 382,181 321,980
--------- ---------
STOCKHOLDERS' EQUITY:
Capital stock, $1 par value 40,116 40,116
Treasury stock, 2,019 shares in
1997 and 2,057 shares in 1996,
respectively, at cost (6,104) (6,197)
Paid-in capital 9,080 8,265
Earnings invested in the business 485,744 474,715
--------- ---------
Total stockholders' equity 528,836 516,899
--------- ---------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $911,017 $838,879
========= =========
</TABLE>
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<TABLE>
KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands of dollars)
<CAPTION>
13 Weeks Ended 26 Weeks Ended
----------------------------- -----------------------------
June 29, 1997 June 30, 1996 June 29, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Capital Stock
Class A common stock
Balance at beginning of period $ 36,531 $ 36,512 $ 36,527 $ 36,512
Conversions from Class B 6 15 10 15
--------- --------- --------- ---------
Balance at end of period 36,537 36,527 36,537 36,527
Class B common stock
Balance at beginning of period 3,585 3,604 3,589 3,604
Conversions to Class A (6) (15) (10) (15)
--------- --------- --------- ---------
Balance at end of period 3,579 3,589 3,579 3,589
Treasury Stock
Balance at beginning of period (6,204) (6,314) (6,197) (6,327)
Exercise of stock options 41 50 32 59
Restricted stock awards 59 59 61 63
--------- --------- --------- ---------
Balance at end of period (6,104) (6,205) (6,104) (6,205)
Paid-in Capital
Balance at beginning of period 8,365 7,324 8,265 7,215
Exercise of stock options 322 390 406 462
Restricted stock awards 393 480 409 517
--------- --------- --------- ---------
Balance at end of period 9,080 8,194 9,080 8,194
Earnings Invested in the Business
Balance at beginning of period 475,818 439,103 474,715 435,100
Net earnings 19,443 17,448 33,671 30,351
Cash dividends (8,379) (7,991) (16,372) (15,594)
Equity adjustment for foreign
currency translation (cumulative
charges of $5,964 and $505 in
1997 and 1996, respectively) (1,138) (1,329) (6,270) (2,626)
--------- --------- --------- ---------
Balance at end of period 485,744 447,231 485,744 447,231
--------- --------- --------- ---------
Stockholders' Equity at end of period $528,836 $489,336 $528,836 $489,336
========= ========= ========= =========
</TABLE>
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<TABLE>
KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE 26 WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
(In thousands of dollars)
<S> <C> <C>
1997 1996
---------- ----------
Cash flows from operating activities:
Net earnings $ 33,671 $ 30,351
Noncash adjustments:
Depreciation and amortization 12,849 12,911
Changes in certain working capital
components 26,516 (77,886)
--------- ---------
Net cash from operating activities 73,036 (34,624)
--------- ---------
Cash flows from investing activities:
Capital expenditures (17,903) (10,053)
Proceeds from sales and maturities of
short-term investments 967,617 561,375
Purchases of short-term investments (978,024) (549,093)
Increase in intangibles and other assets (1,312) (6,310)
--------- ---------
Net cash from investing activities (29,622) (4,081)
--------- ---------
Cash flows from financing activities:
Increase in short-term borrowings 4,644 16,665
Dividend payments (16,372) (15,594)
Exercise of stock options and
restricted stock awards 908 1,101
--------- ---------
Net cash from financing activities (10,820) 2,172
--------- ---------
Net change in cash and equivalents 32,594 (36,533)
Cash and equivalents at beginning
of period 33,408 52,811
--------- ---------
Cash and equivalents at end of period $ 66,002 $ 16,278
========= =========
</TABLE>
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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 1997 were $959,726,000, an
increase of 19.3% from the same period in 1996. Sales growth was
generally strong in both domestic and foreign operations.
Cost of services, consisting of payroll and related tax and benefit
costs of employees assigned to customers, increased 21.1% in the second
quarter as compared to the same period in 1996. Direct wage costs have
increased from 1996 at a rate somewhat higher than the general
inflation rate, due to strong worldwide demand for labor.
Gross profit of $170,108,000 was 11.7% higher than the second quarter
of 1996, and gross profit as a percentage of sales declined from 18.9%
in 1996 to 17.7% in 1997. The growth of sales with our largest
customers where contracts require special pricing and additional
implementation costs, the upward pressure on wage costs noted above and
growth in the staff leasing business with its inherently lower margins
all had the effect of reducing the consolidated gross profit rate.
Selling, general and administrative expenses were $137,636,000 in the
second quarter, an increase of 11.2% over the same period in 1996.
Expenses averaged 14.3% of sales as compared to 15.4% in last year's
second quarter. The rate of growth of these expenses in relationship
to the sales increases reflects the Company's emphasis on expense
control.
Earnings from operations of $32,472,000 were 14.0% greater than the
second quarter of 1996. Earnings before income taxes were
$32,958,000, an increase of 13.1%, compared to pretax earnings of
$29,138,000 for the same period in 1996. The pretax margin was 3.4%, a
.2 percentage point decrease from the second quarter of 1996. The
decrease was due to the lower gross profit and expense ratios and, to a
lesser extent, lower net interest income.
Income taxes were 41.0% of pretax income. This was .9 percentage point
over the applicable tax rate for the second quarter of 1996 due to
reduced tax-exempt income and earnings growth in our foreign operating
units where tax rates are higher. (The income tax rate for the year
1996 averaged 40.6%.)
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Net earnings were $19,443,000 in the second quarter of 1997, an
increase of 11.4% over the second quarter of 1996. Earnings per share
were $.51 compared to $.46 in the same period last year. Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share," was issued in February 1997. Adoption of SFAS 128, effective
for periods ending after December 15, 1997, is not expected to have a
material effect on reported earnings per share.
Year-to-Date
Sales of services totaled $1,840,572,000 during the first six months of
1997, an increase of 19.7% over 1996. This increase reflects continued
growth in the volume of domestic and international sales.
Cost of services of $1,514,126,000 was 21.3% higher than last year,
reflecting domestic and international volume growth and increases in
payroll costs due to strong demand for labor worldwide.
Gross profit increased 12.6% in 1997 due to increased sales, but at
lower gross profit rates. The gross profit rate was 17.7% for the
first six months of 1997 compared to 18.8% for 1996. This decline
reflects growth with our very large customers and in the staff leasing
business.
Selling, general and administrative expenses of $269,855,000 were 11.9%
higher than last year. The spending rate was 14.7% of sales, 1.0
percentage point below last year's rate. Expenses continue to be
closely monitored in both U.S. and overseas markets.
Earnings before taxes were $57,081,000, an increase of 12.7% over 1996.
These earnings averaged a pretax margin of 3.1%, or .2 percentage point
decrease from 1996. The decrease was due to lower gross profit and
expense ratios and lower net interest income. Income taxes were 41.0%
of pretax earnings and were .9 percentage point higher than last year's
first half income tax rate. Reduced tax-exempt income and earnings
growth in our foreign operations where tax rates are higher
account for this change.
Net earnings were $33,671,000, or 10.9% higher than the first six
months of 1996. Earnings per share were $.88 compared to $.80 last
year.
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Financial Condition
Assets totaled $911,017,000 at June 29, 1997, an increase of 8.6% over
the $838,879,000 at December 29, 1996. Working capital increased
$8,773,000 during the six-month period. The current ratio was 1.9 at
June 29, 1997, a decline of .1 percentage point since December 29,
1996.
During the first half of 1997, the Company generated cash from
operating activities totaling $73,036,000 compared to a decline in cash
from operating activities of $34,624,000 in the first half of 1996. In
1997, increased net earnings and increases in current liability
balances, offset by moderate growth in accounts receivable, contributed
to the increase in cash. In 1996, an increase in accounts receivable
was a principal component in the decline in cash from operating
activities. Capital expenditures were principally for expanding and
improving the worldwide branch network.
The quarterly dividend rate applicable to Class A and Class B shares
outstanding was $.22 per share in the second quarter of 1997. This
compares to a dividend rate of $.21 per share in the second quarter of
1996.
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.
--------------------------------------------------------------
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.,
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 Staff Leasing, 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., Kelly
Services Seleccion y Formacion, S.L. and Kelly Services CIS, Inc.
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.
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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 20, 1997.
(b) The nominees for director, as listed in the Company's
proxy statement dated April 25, 1997, 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" "Abstain"
------------ ------------
M. A. Fay 3,501,098 2,585
C. V. Fricke 3,501,129 2,554
V. G. Istock 3,501,129 2,554
(2) Ratification of the selection of Price Waterhouse
LLP as the Company's independent auditors:
Shares voted "For" 3,502,434
Shares voted "Withhold" 1,249
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.
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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 12, 1997
/s/ P. K. Geiger
P. K. Geiger
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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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.)
27 Financial Data Schedule 2
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AND STATEMENT OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> JUN-29-1997
<CASH> 66,002
<SECURITIES> 38,442
<RECEIVABLES> 589,922
<ALLOWANCES> 11,880
<INVENTORY> 0
<CURRENT-ASSETS> 727,560
<PP&E> 177,011
<DEPRECIATION> 73,645
<TOTAL-ASSETS> 911,017
<CURRENT-LIABILITIES> 382,181
<BONDS> 0
0
0
<COMMON> 40,116
<OTHER-SE> 488,720
<TOTAL-LIABILITY-AND-EQUITY> 911,017
<SALES> 0
<TOTAL-REVENUES> 1,840,572
<CGS> 0
<TOTAL-COSTS> 1,514,126
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 57,081
<INCOME-TAX> 23,410
<INCOME-CONTINUING> 33,671
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,671
<EPS-PRIMARY> .88
<EPS-DILUTED> 0
</TABLE>
