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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, 2002
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 November 1, 2002, 32,041,084 shares of Class A and 3,478,443 shares of Class
B common stock of the Registrant were outstanding.
2
KELLY SERVICES, INC. AND SUBSIDIARIES
Page
Number
------
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 10
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION AND SIGNATURE
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
Certifications 18
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)
13 Weeks Ended 39 Weeks Ended
------------------------- -------------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Sales of services $ 1,122,715 $ 1,066,380 $ 3,199,724 $ 3,219,833
Cost of services 940,453 894,659 2,688,286 2,688,419
----------- ----------- ----------- -----------
Gross profit 182,262 171,721 511,438 531,414
Selling, general and
administrative expenses 171,547 163,975 493,062 504,622
----------- ----------- ----------- -----------
Earnings from operations 10,715 7,746 18,376 26,792
Interest income (expense), net 35 (135) 258 (411)
----------- ----------- ----------- -----------
Earnings before income taxes 10,750 7,611 18,634 26,381
Income taxes 4,245 3,045 7,398 10,555
----------- ----------- ----------- -----------
Net earnings $ 6,505 $ 4,566 $ 11,236 $ 15,826
=========== =========== =========== ===========
Earnings per share:
Basic $ .18 $ .13 $ .31 $ .44
Diluted .18 .13 .31 .44
Average shares outstanding
(thousands):
Basic 35,508 35,855 35,792 35,817
Diluted 35,603 35,948 35,968 35,910
Dividends per share $ .10 $ .25 $ .30 $ .75
See accompanying Notes to Financial Statements.
4
KELLY SERVICES, INC. AND SUBSIDIARIES
BALANCE SHEETS
(In thousands of dollars)
September 29, December 30,
ASSETS 2002 2001
- ------ ------------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and equivalents $ 80,363 $ 83,461
Short-term investments 4,300 630
Accounts receivable, less allowances of
$13,044 and $12,105, respectively 590,976 539,692
Prepaid expenses and other current assets 25,653 24,950
Deferred taxes 20,815 21,469
---------- ----------
Total current assets 722,107 670,202
PROPERTY AND EQUIPMENT:
Land and buildings 57,644 56,639
Equipment, furniture and
leasehold improvements 296,903 275,063
Accumulated depreciation (154,014) (119,729)
---------- ----------
Total property and equipment 200,533 211,973
NONCURRENT DEFERRED TAXES 26,802 31,415
GOODWILL, NET 77,807 73,643
OTHER ASSETS 45,599 52,148
---------- ----------
TOTAL ASSETS $1,072,848 $1,039,381
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 27,781 $ 32,939
Accounts payable 87,028 88,217
Payroll and related taxes 199,815 154,813
Accrued insurance 25,644 24,071
Income and other taxes 43,427 48,149
---------- ----------
Total current liabilities 383,695 348,189
NONCURRENT LIABILITIES:
Accrued insurance 41,840 39,273
Accrued retirement benefits 37,992 44,764
---------- ----------
Total noncurrent liabilities 79,832 84,037
STOCKHOLDERS' EQUITY:
Capital stock, $1.00 par value
Class A common stock, shares issued 36,619,148
at 2002 and 36,609,078 at 2001 36,619 36,609
Class B common stock, shares issued 3,496,718
at 2002 and 3,506,788 at 2001 3,497 3,507
Treasury stock, at cost
Class A common stock, 4,578,135 shares at 2002
and 4,232,542 at 2001 (91,852) (81,721)
Class B common stock, 17,175 shares at 2002
and 15,675 at 2001 (472) (435)
Paid-in capital 17,873 17,035
Earnings invested in the business 661,980 661,483
Accumulated foreign currency adjustments (18,324) (29,323)
---------- ----------
Total stockholders' equity 609,321 607,155
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,072,848 $1,039,381
========== ==========
See accompanying Notes to Financial Statements.
5
KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands of dollars)
13 Weeks Ended 39 Weeks Ended
------------------------- -------------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Capital Stock
Class A common stock
Balance at beginning of period $ 36,617 $ 36,609 $ 36,609 $ 36,609
Conversions from Class B 2 - 10 -
-------- -------- -------- --------
Balance at end of period 36,619 36,609 36,619 36,609
Class B common stock
Balance at beginning of period 3,499 3,507 3,507 3,507
Conversions to Class A (2) - (10) -
-------- -------- -------- --------
Balance at end of period 3,497 3,507 3,497 3,507
Treasury Stock
Class A common stock
Balance at beginning of period (79,457) (82,315) (81,721) (84,251)
Exercise of stock options, restricted stock
awards and other 321 56 2,177 1,541
Treasury stock issued for acquisitions 424 470 832 921
Purchase of treasury stock (13,140) - (13,140) -
-------- -------- -------- --------
Balance at end of period (91,852) (81,789) (91,852) (81,789)
Class B common stock
Balance at beginning of period (454) (376) (435) (371)
Purchase of treasury stock (18) (59) (37) (64)
-------- -------- -------- --------
Balance at end of period (472) (435) (472) (435)
Paid-in Capital
Balance at beginning of period 17,686 16,871 17,035 16,371
Exercise of stock options, restricted stock
awards and other 111 19 670 417
Treasury stock issued for acquisitions 76 109 168 211
-------- -------- -------- --------
Balance at end of period 17,873 16,999 17,873 16,999
Earnings Invested in the Business
Balance at beginning of period 659,027 668,747 661,483 675,388
Net earnings 6,505 4,566 11,236 15,826
Dividends (3,552) (8,966) (10,739) (26,867)
-------- -------- -------- --------
Balance at end of period 661,980 664,347 661,980 664,347
Accumulated Foreign Currency Adjustments
Balance at beginning of period (16,741) (32,572) (29,323) (23,784)
Equity adjustment for foreign currency (1,583) 4,922 10,999 (3,866)
-------- -------- -------- --------
Balance at end of period (18,324) (27,650) (18,324) (27,650)
-------- -------- -------- --------
Stockholders' Equity at end of period $609,321 $611,588 $609,321 $611,588
======== ======== ======== ========
Comprehensive Income
Net earnings $ 6,505 $ 4,566 $ 11,236 $ 15,826
Other comprehensive income - Foreign
currency adjustments (1,583) 4,922 10,999 (3,866)
-------- -------- -------- --------
Comprehensive Income $ 4,922 $ 9,488 $ 22,235 $ 11,960
======== ======== ======== ========
See accompanying Notes to Financial Statements.
6
KELLY SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands of dollars)
39 Weeks Ended
-----------------------------------
September 29, September 30,
2002 2001
------------- -------------
Cash flows from operating activities:
Net earnings $ 11,236 $ 15,826
Noncash adjustments:
Depreciation and amortization 33,281 32,351
(Increase) decrease in accounts receivable, net (39,368) 41,651
Changes in operating assets and liabilities 37,696 14,966
-------- --------
Net cash from operating activities 42,845 104,794
-------- --------
Cash flows from investing activities:
Capital expenditures (20,027) (31,086)
Decrease in other assets 6,705 9,667
Proceeds from sales and maturities of short-term investments 620 2,046
Purchases of short-term investments (4,290) (529)
Acquisition of building - (11,783)
Acquisition of companies, net of cash received - (139)
-------- --------
Net cash from investing activities (16,992) (31,824)
-------- --------
Cash flows from financing activities:
Decrease in short-term borrowings (7,718) (9,238)
Dividend payments (10,739) (26,827)
Stock options and other 842 131
Purchase of treasury stock (13,177) (64)
-------- --------
Net cash from financing activities (30,792) (35,998)
-------- --------
Effect of exchange rates on cash and equivalents 1,841 (595)
-------- --------
Net change in cash and equivalents (3,098) 36,377
Cash and equivalents at beginning of period 83,461 43,318
-------- --------
Cash and equivalents at end of period $ 80,363 $ 79,695
======== ========
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, including 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 30,
2001 (the 2001 consolidated financial statements). Certain prior year amounts
have been reclassified to conform with the current presentation.
2. Impairment of Long-Lived Assets
The Company evaluates long-lived assets and intangible assets subject to
amortization for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. When it is probable
that undiscounted future cash flows will not be sufficient to recover an asset's
carrying amount, the asset is written down to its fair value. Assets to be
disposed of by sale, if any, are reported at the lower of the carrying amount or
fair value less cost to sell. See footnote 6 for the discussion on the
impairment testing of goodwill and intangible assets not subject to
amortization.
3. 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 and 39-week periods ended September 29, 2002 and
September 30, 2001. Segment data presented are net of intersegment revenues.
Asset information by reportable segment is not presented, since the Company does
not produce such information internally.
13 Weeks Ended 39 Weeks Ended
2002 2001 2002 2001
---------- ---------- ---------- ----------
Sales:
U.S. Commercial Staffing $ 549,904 $ 515,289 $1,557,137 $1,592,215
PTSA 287,424 270,349 841,888 809,471
International 285,387 280,742 800,699 818,147
---------- ---------- ---------- ----------
Consolidated Total $1,122,715 $1,066,380 $3,199,724 $3,219,833
========== ========== ========== ==========
Earnings from Operations:
U.S. Commercial Staffing $ 33,325 $ 27,324 $ 84,231 $ 90,069
PTSA 13,121 10,039 36,898 35,988
International 3,141 4,282 2,447 7,853
Corporate (38,872) (33,899) (105,200) (107,118)
---------- ---------- ---------- ----------
Consolidated Total $ 10,715 $ 7,746 $ 18,376 $ 26,792
========== ========== ========== ==========
8
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (continued)
(UNAUDITED)
(In thousands of dollars)
4. 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 matters could
be decided unfavorably to the Company. Although the amount of the liability at
September 29, 2002 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 September 29, 2002.
5. Earnings Per Share
The reconciliations of earnings per share computations for the 13-week and
39-week periods ended September 29, 2002 and September 30, 2001 were as follows:
13 Weeks Ended 39 Weeks Ended
2002 2001 2002 2001
------- ------- ------- -------
Net earnings $ 6,505 $ 4,566 $11,236 $15,826
======= ======= ======= =======
Determination of shares (thousands):
Weighted average common
shares outstanding 35,508 35,855 35,792 35,817
Effect of dilutive securities:
Stock options 22 6 63 10
Restricted and performance awards and other 73 87 113 83
------- ------- ------- -------
Weighted average common shares
outstanding - assuming dilution 35,603 35,948 35,968 35,910
======= ======= ======= =======
Earnings per share - basic $ .18 $ .13 $ .31 $ .44
Earnings per share - assuming dilution $ .18 $ .13 $ .31 $ .44
Stock options representing 2,128,000 and 1,764,000 shares, respectively, for
the third quarters of 2002 and 2001, and stock options representing 1,248,000
and 1,428,000 shares, respectively, for the nine months ended September 29, 2002
and September 30, 2001 were excluded from the computation of diluted earnings
per share. The exercise prices of these options were greater than the average
market price of the common shares and the options were therefore anti-dilutive.
9
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (continued)
(UNAUDITED)
(In thousands of dollars)
6. Goodwill and Other Intangible Assets - Adoption of Statement 142
Effective for fiscal 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," and eliminated
the amortization of purchased goodwill. The Company also reevaluated intangible
assets and determined that their remaining useful lives are appropriate. At
September 29, 2002, the unamortized purchased goodwill balance was approximately
$78 million. Impairment tests of goodwill and intangible assets not subject to
amortization were completed as of December 31, 2001. It was determined that
goodwill and intangible assets not subject to amortization are not impaired;
therefore there was no transitional impairment charge to be recorded. In
accordance with SFAS No. 142 the Company will test goodwill and intangible
assets not subject to amortization on an annual basis or more often if
circumstances change, indicating potential impairment. The following table
presents net earnings and basic and diluted earnings per share for the 13-week
and 39-week periods ended September 29, 2002 and September 30, 2001, as adjusted
for the non-amortization provisions of SFAS No. 142.
13 Weeks Ended 39 Weeks Ended
---------------------- ------------------------
2002 2001 2002 2001
------ ------ ------- -------
Reported net earnings $6,505 $4,566 $11,236 $15,826
Add back: Goodwill amortization, net of tax - 505 - 1,557
------ ------ ------- -------
Adjusted net earnings $6,505 $5,071 $11,236 $17,383
====== ====== ======= =======
Basic earnings per share:
Reported net earnings $ 0.18 $ 0.13 $ 0.31 $ 0.44
Goodwill amortization, net of tax - 0.01 - 0.05
------ ------ ------- -------
Adjusted net earnings $ 0.18 $ 0.14 $ 0.31 $ 0.49
====== ====== ======= =======
Diluted earnings per share:
Reported net earnings $ 0.18 $ 0.13 $ 0.31 $ 0.44
Goodwill amortization, net of tax - 0.01 - 0.04
------ ------ ------- -------
Adjusted net earnings $ 0.18 $ 0.14 $ 0.31 $ 0.48
====== ====== ======= =======
7. New Accounting Standard
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which supercedes Emerging Issues
Task Force (EITF) No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred, rather than at the date of a commitment to an exit or disposal plan as
was required by EITF No. 94-3. This statement is effective for disposal
activities initiated after December 31, 2002, with early application encouraged.
SFAS No. 146 is not expected to have a material effect on the Company's
consolidated results of operations or financial position.
10
Item 2. 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 2002 were $1.123 billion, an increase
of 5.3% from the same period in 2001. This improvement was a result of an
increase in hours worked of 4.1% and an increase in average hourly bill rates of
1.6%. Sales for the quarter increased in each of the Company's three business
segments: U.S. Commercial, Professional, Technical and Staffing Alternatives
(PTSA) and International.
The gross profit rate for the third quarter of 2002 averaged 16.2%, an increase
of 0.1 percentage point compared to the 16.1% rate earned for the same period in
2001. The gross profit rates of U.S. Commercial and PTSA increased compared to
last year, while gross profit in the International segment decreased. The
increase in gross profit rates was primarily due to the favorable impact of a
decrease in benefit costs, including workers' compensation, and improved pricing
in the office/clerical service line, offset by the unfavorable impact of the
continuing shift in the mix of customers to large corporate and national
accounts and a decline in recruitment fee income.
Many of the Company's large corporate and national account customers have
negotiated high volume global service agreements, which tend to result in lower
gross profit rates than those earned with the Company's small and medium size
customers. The Company's strategy is focused on serving and growing these large
corporate and national accounts. As customer mix shifts to large corporate and
national accounts, the Company's average gross margins tend to decrease. The
Company expects this trend to continue throughout the balance of 2002.
Fee based recruitment income, which represents approximately one percent of the
Company's total sales, has a significant impact on gross profit rates. There are
very low direct costs of services associated with recruitment income. Therefore,
decreases in permanent placement fees can have a disproportionate impact on
gross profit rates. As compared to last year, many customers reduced or
eliminated the recruiting of full-time employees and the conversions of
temporary to permanent staff. The Company expects that recruitment fee income
will begin to increase when economic growth and job creation resume.
Selling, general and administrative expenses expressed as a percentage of sales
were 15.3% in the third quarter of 2002, a 0.1 percentage point improvement
compared to the 15.4% rate in the third quarter of 2001. Selling, general and
administrative expenses totaled $171.5 million, a 4.6% year-over-year increase.
The increase was primarily due to the effect of currency exchange rates on
international expenses, higher depreciation and field bonus costs, expenses
related to the Company's information technology programs and a loss related to
the Company's equity investment in itiliti, an internet-based vendor management
software provider. These costs were partially offset by lower telecommunication
costs and a favorable settlement related to federal payroll taxes.
Earnings from operations in the third quarter of 2002 totaled $10.7 million, a
38.3% increase compared to the $7.7 million reported for the third quarter of
2001. Earnings were 1.0% of sales for the third quarter of 2002 as compared to
0.7% for the same period last year.
Net interest income in the third quarter of 2002 was $35 thousand, a $170
thousand improvement compared to last year's net interest expense of $135
thousand. The improvement is primarily attributable to lower short-term debt
levels, somewhat offset by the impact of lower interest rates earned on cash
balances.
The effective income tax rate in the third quarter of 2002 was 39.5%, a 0.5
percentage point improvement compared with last year's 40.0% rate.
Third quarter net earnings totaled $6.5 million in 2002, an increase of 42.5%
from $4.6 million earned last year. The rate of return on sales for the third
quarter of 2002 was 0.6% compared with last year's 0.4% rate. Diluted earnings
per share for the third quarter of 2002 were $0.18, a 38.5% increase as compared
to diluted earnings per share of $0.13 reported for the third quarter of 2001.
11
U.S. Commercial Staffing
Sales in the U.S. Commercial Staffing segment totaled $549.9 million in the
third quarter of 2002, a 6.7% increase compared to the $515.3 million reported
for the same period in 2001. This reflected a 6.3% increase in hours worked and
a 0.5% increase in average hourly bill rates. The sales growth by month, on a
year-over-year basis, were: up 3% in July, up 8% in August and up 11% in
September, indicating sequential improvement throughout the third quarter.
However, the rate of improvement slowed in September, leading the Company to
expect that year-over-year growth may flatten somewhat in the fourth quarter.
U.S. Commercial Staffing sales represented 49% of total Company sales in the
third quarter of 2002 and 48% of total Company sales in the third quarter of
2001.
U.S. Commercial Staffing earnings from operations totaled $33.3 million in the
third quarter of 2002, an increase of 22.0% compared to earnings of $27.3
million last year. This was the result of the 6.7% increase in sales and a 0.4
percentage point increase in the gross profit rate, partially offset by a 2.8%
increase in expenses. The increase in the gross profit rate reflects an
improvement in benefit costs and improved pricing for the office/clerical
business line. This increase was partially offset by an ongoing shift in mix of
sales to larger corporate and national account customers and decreases in fee
based income. The year-over-year decrease in fee based recruitment income for
U.S. Commercial was 30% in the third quarter. The increase in expenses was due
primarily to higher field bonus payouts and increased bad debts associated with
corporate bankruptcies.
Professional, Technical and Staffing Alternatives
PTSA includes the following business units: Kelly Scientific Resources, Kelly
Healthcare Resources, Kelly Home Care Services, Kelly Automotive Services Group,
Kelly Engineering Resources, Kelly Information Technology Resources, Kelly Law
Registry, Kelly Financial Resources, National Payroll Services, Kelly Management
Services, Kelly Staff Leasing, Inc., Kelly Human Resource Consulting, HRFirst
and Kelly Vendor Management Solutions. PTSA sales represented 26% of total
Company sales in the third quarter of 2002 and 25% in the third quarter of 2001.
Sales in the PTSA segment for the third quarter of 2002 totaled $287.4 million,
an increase of 6.3% compared to the $270.3 million reported in the third quarter
of 2001. This reflected a 4.3% increase in average hourly bill rates and a 3.3%
increase in hours worked in the professional and technical businesses. Revenues
in the staffing alternatives businesses, which include the staff leasing and
management services business units, increased by 2.6% compared to the third
quarter of 2001.
Results continued to vary among the 14 business units that comprise PTSA. Kelly
Healthcare Resources and Kelly Financial Resources continue to be the leading
performers in 2002, exhibiting sales growth of 25% or better for the third
quarter. Kelly Information Technology Resources, Kelly Engineering Resources and
Kelly Staff Leasing maintained positive sales growth during the third quarter,
and sales comparisons for Kelly Automotive Services Group turned positive during
the third quarter. The sales growth in Kelly Healthcare Resources and Kelly
Financial Resources reflect the impact of new branches opened in 2001.
One large PTSA unit, Kelly Home Care, continued to experience revenue declines
during the third quarter of 2002. This decrease, however, reflects the general
softening of the home healthcare industry within the overall economy.
PTSA earnings from operations for the third quarter of 2002 totaled $13.1
million and increased 30.7% from the same period in 2001. This was the result of
the 6.3% increase in sales and a 0.5 percentage point increase in the gross
profit rate, partially offset by a 2.3% increase in expenses.
The increase in the gross profit rate was due to the favorable impact of lower
benefit costs, including workers' compensation expense, and pricing increases
within individual business units. This was partially offset by an unfavorable
change in business unit sales mix, particularly as a result of the decline in
sales at the Kelly Home Care division, which has a higher than average gross
profit margin. The 2.3% increase in expenses was due primarily to higher
liability insurance costs and increased facilities expense associated with the
expansion of Kelly Financial Resources and Kelly Healthcare Resources.
International
Translated U.S. dollar sales in the International segment for the third quarter
of 2002 totaled $285.4 million, a 1.7% increase compared to the $280.7 million
reported in the third quarter of 2001. This resulted from an increase in the
translated U.S. dollar average hourly bill rates of 1.5% and an increase in
hours worked of 0.8%, partially offset by a 19% decrease in recruitment fee
income.
12
On a constant currency basis, International revenue decreased 4% in the third
quarter of 2002. This compares to a constant currency sales decline of 2% in the
second quarter of 2002 and a decline of 6% in the first quarter of 2002. The
Americas and Asia-Pacific, the first regions within the International segment to
reflect the negative impact of the global economic slowdown, are continuing to
show improvement. Year-over-year sales comparisons in continental Europe
remained negative, while the United Kingdom slowed further in the third quarter.
International sales represented 25% of total Company sales in the third quarter
of 2002 and 26% in the third quarter of 2001.
International earnings from operations were $3.1 million in the third quarter of
2002 compared to $4.3 million for the same period in 2001. However, this result
does represent a significant sequential improvement compared to the operating
loss of $1.2 million in the first quarter of 2002 and operating earnings of $0.5
million in the second quarter of 2002. The year-over-year decrease in earnings
from operations was the result of a 0.5 percentage point decline in the gross
profit rate and a 1.0% increase in expenses, partially offset by the 1.7%
increase in sales.
The decline in the gross profit rate was primarily due to a 19.1% decrease in
recruitment fee income. On a year-over-year basis, translated U.S. dollar
expenses in the International segment increased 1.0%. On a constant currency
basis expenses actually decreased 6% from the third quarter of 2001. The
decrease in expenses, on a constant currency basis, was due primarily to staff
reductions and lower recruiting and retention costs.
Year-to-Date
Sales of services totaled $3.200 billion during the first nine months of 2002, a
decrease of 0.6% from the same period in 2001. The decrease was a result of a
decrease in hours worked of 2.2% partially offset by an increase in average
hourly bill rates of 1.4%. Sales decreases in the U.S. Commercial Staffing and
International segments were partially offset by a sales increase in the PTSA
segment.
Gross profit of $511.4 million was 3.8% lower than the first nine months of
2001, and gross profit as a percentage of sales was 16.0% in 2002, which
decreased 0.5% compared to the 16.5% rate recorded in the prior year. This
reflected decreases in the gross profit rates of all three business segments.
The decline in gross profit rates was due primarily to a continuing shift in the
mix of customers to large corporate and national accounts and a decline in
recruitment fee income.
Selling, general and administrative expenses of $493.1 million were 2.3% lower
than last year. The expense rate improved to 15.4% of sales in 2002 as compared
to 15.7% in 2001. The decrease was due primarily to staff reductions and lower
telecommunication and recruiting costs, which were the result of expense
reduction initiatives the Company implemented during 2001. The staff reductions
in both field operations and headquarters units generated savings of
approximately $8 million in the nine-month period as compared with the prior
year. The Company did not incur significant termination costs as a result of
these staff reductions. The majority of the staff reductions took place during
the second and third quarters of 2001.
Net interest income for the first nine months of 2002 was $258 thousand, a $669
thousand improvement compared to last year's net interest expense of $411
thousand. The improvement is primarily attributable to higher cash balances and
lower short-term debt levels, offset by the impact of lower interest rates.
Earnings before taxes were $18.6 million, a decrease of 29.4% from 2001.
Earnings before taxes averaged 0.6% of sales in the first nine months of 2002
and 0.8% of sales in 2001. Income taxes were 39.7% of pretax earnings in the
first nine months of 2002 and 40.0% in the first nine months of 2001.
Net earnings were $11.2 million, or a 29.0% decrease compared to the first nine
months of 2001. Basic and diluted earnings per share were $.31, a decrease of
29.5% as compared to basic and diluted earnings per share of $.44 in the first
nine months of 2001.
U.S. Commercial Staffing
Sales in the U.S. Commercial Staffing segment totaled $1.557 billion for the
first nine months of 2002, a 2.2% decrease compared to the $1.592 billion
reported for the same period in 2001. This reflected a 2.7% decrease in hours
worked partially offset by a 0.7% increase in average hourly bill rates. U.S.
Commercial Staffing sales represented 49% of total Company sales for the first
nine months of 2002 and 2001.
13
U.S. Commercial Staffing earnings from operations totaled $84.2 million for the
first nine months of 2002 compared to earnings of $90.1 million last year, a
decrease of 6.5%. The 2.2% sales decrease, combined with a 0.3 percentage point
decrease in the gross profit rate, produced the 6.5% earnings decline. The
decline in the gross profit rate reflects both an ongoing shift in mix of sales
to larger corporate and national accounts and decreases in fee based income. The
year-over-year decrease in recruitment fee income for U.S. Commercial was 33%
for the first nine months of 2002. Expenses were tightly controlled and
decreased 2.7% year-over-year primarily due in large part to staff reductions
and lower recruiting costs, partially offset by higher field bonus expenses.
Professional, Technical and Staffing Alternatives
Sales in the PTSA segment for the first nine months of 2002 totaled $841.9
million, an increase of 4.0% compared to the $809.5 million reported for the
first nine months of 2001. This reflected a 5.1% increase in average hourly bill
rates, partially offset by a 1.9% decrease in hours worked in the professional
and technical businesses. Revenues in the staffing alternatives businesses,
which include the staff leasing and management services business units,
increased by 5.9% compared to the first nine months of 2001. PTSA sales
represented 26% of total Company sales for the first nine months of 2002 as
compared with 25% in the same period of 2001.
For the first nine months of 2002, Kelly Healthcare Resources and Kelly
Financial Resources continued to be the leading performers, exhibiting sales
growth of 25% or better as compared to the comparable period in 2001. Kelly
Staff Leasing, Kelly Engineering Resources, Kelly Information Technology
Resources, Kelly Management Services and Kelly Law Registry also maintained
positive sales growth. However, two large PTSA units, Kelly Automotive Services
Group and Kelly Home Care, experienced revenue declines during the first nine
months of 2002 as compared to the first nine months of 2001. These decreases,
however, were consistent with industry trends in their staffing sectors.
PTSA earnings from operations for the first nine months of 2002 totaled $36.9
million and increased 2.5% from the same period in 2001. This was the result of
the 4.0% increase in sales and a 0.8% decrease in expenses, partially offset by
a 0.5 percentage point decrease in the gross profit rate.
The decrease in the gross profit rate was due to changes in business unit mix
and rate decreases in certain business units, such as Kelly Automotive Services
Group and Kelly Information Technology Resources. The most significant factor
impacting the business unit mix was the decline in sales at the Kelly Home Care
unit, which has a higher than average gross profit rate.
International
Translated U.S. dollar sales in International for the first nine months of 2002
totaled $800.7 million, a 2.1% decrease compared to the $818.1 million reported
in the first nine months of 2001. This resulted from a decrease in hours worked
of 1.6% and a 20.8% decrease in recruitment fees, partially offset by a 0.1%
increase in average hourly bill rates.
On a constant currency basis, International revenue decreased 4% in the first
nine months of 2002. International sales represented 25% of total Company sales
in the first nine months of 2002 and 2001.
International earnings from operations were $2.4 million for the first nine
months of 2002 compared to $7.9 million for the same period in 2001. The
decrease in earnings from operations was the result of the 2.1% decrease in
sales and a 0.8 percentage point decline in the gross profit rate, partially
offset by a 3.0% reduction in expenses.
The decline in the gross profit rate was primarily due to a 20.8% decrease in
recruitment fee income, with the most significant decrease occurring in the
United Kingdom. On a year-over-year basis, translated U.S. dollar expenses in
the International segment decreased 3.0% primarily due to lower recruiting costs
and the elimination of goodwill amortization. On a constant currency basis,
expenses decreased 6%.
Financial Condition
Assets totaled $1.073 billion at September 29, 2002, an increase of 3.2% from
the $1.039 billion at December 30, 2001. The Company's working capital position
was $338.4 million at September 29, 2002, an increase of $16.4 million from
year-end 2001. The current ratio was 1.9 at both third quarter-end 2002 and
year-end 2001. Cash and short-term investments totaled $84.7 million at
September 29, 2002, an increase of $0.6 million compared to the $84.1 million at
year-end 2001.
14
During the first nine months of 2002, net cash from operating activities totaled
$42.8 million, a decrease of 59.1% from the comparable period in 2001. This
decrease is primarily due to a $39.4 million increase in the accounts receivable
balance, compared to the $41.7 million decrease in accounts receivable during
the same period in 2001. The change in the accounts receivable balance resulted
primarily from increasing sales trends during 2002, as opposed to decreasing
sales trends in 2001. The global days sales outstanding for the third quarter of
2002 were 48 days, a two-day improvement compared to the third quarter of last
year.
Short-term debt totaled $27.8 million at September 29, 2002, which decreased
$5.1 million compared to the $32.9 million level at year-end 2001. All
short-term borrowings are foreign currency denominated and reduce the Company's
exposure to foreign exchange fluctuations. At third quarter end, debt
represented less than 5% of total capital.
Capital expenditures for the first nine months of 2002 totaled $20.0 million,
down 35.6% from the $31.1 million spent in the first nine months of 2001. For
2002, capital expenditures are expected to total between $30 and $35 million.
Depreciation and amortization for the first nine months of 2002 totaled $33.3
million, an increase of 2.9% compared to the $32.4 million for same period of
2001. As a result of the implementation of Statement of Financial Accounting
Standard No. 142 at the beginning of 2002, the Company will eliminate
approximately $2.7 million of amortization of goodwill in 2002. Approximately
$2.0 million of amortization was eliminated in the first nine months of 2002,
which was offset by a $2.9 million increase in depreciation. For planning
purposes, the Company expects depreciation and amortization of intangible assets
other than goodwill to total approximately $44 to $46 million for 2002,
reflecting on-going implementation of major IT projects, including the Company's
StaffNet branch automation system.
Stockholders' equity was $609.3 million at September 29, 2002, which represents
a $2.2 million increase as compared to year-end 2001. The increase in
stockholders' equity is primarily the result of the change in accumulated
foreign currency adjustments, partially offset by an increase in treasury stock.
On July 1, 2002 the Company repurchased 500,000 shares of Class A common stock
from the William R. Kelly Trust. The total value of the share repurchase was
$13.1 million. The repurchase transaction was reflected in the Company's third
quarter financial statements.
Dividends paid per common share were $.10 in the third quarter of 2002, a
decrease of 60% from dividends of $.25 per share in the third quarter of 2001,
reflecting the change in the Company's dividend policy implemented in November
2001.
The Company's financial position remains strong. The Company continues to carry
no long-term debt and expects to meet its growth requirements principally
through cash generated from operations, available cash and short term
investments and committed, unused credit facilities.
The Company has no material unrecorded commitments, losses, contingencies or
guarantees associated with any related parties or unconsolidated entities.
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, which conduct business in their local currencies. 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.
In addition, the Company is exposed to market risk as a result of its obligation
to pay benefits under its nonqualified deferred compensation plan and its
related investments in company-owned variable universal life insurance policies.
The obligation to employees increases and decreases based on movements in the
equity and debt markets. The investments in publicly traded mutual funds, as
part of the company-owned variable universal life insurance policies, are
designed to mitigate this risk with offsetting gains and losses.
Overall, the Company's holdings and positions in market risk-sensitive
instruments do not subject the Company to material risk.
15
New Accounting Standard
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which supercedes EITF No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred, rather than at the date of a commitment to an
exit or disposal plan as was required by EITF No. 94-3. This statement is
effective for disposal activities initiated after December 31, 2002, with early
application encouraged. SFAS No. 146 is not expected to have a material effect
on the Company's consolidated results of operations or financial position.
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: competitive market pressures including
pricing, changing market and economic conditions, material changes in demand
from large corporate customers, availability of temporary workers with
appropriate skills required by customers, increases in wages paid to temporary
workers not passed on to customers, currency fluctuations, changes in laws and
regulations, the Company's ability to effectively implement and manage its
information technology programs, the ability of the Company to successfully
expand into new markets and service lines 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.
Item 4. Controls and Procedures
Based on their evaluation, as of a date within 90 days of the filing date of
this Form 10-Q, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures (as
defined in Rule 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of
1934, as amended) are effective. There have been no significant changes in
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
16
PART II. OTHER INFORMATION AND SIGNATURE
6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
17
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, 2002
/s/ William K. Gerber
William K. Gerber
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
18
CERTIFICATIONS
I, Terence E. Adderley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kelly Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Terence E. Adderley
Terence E. Adderley
Chairman and
Chief Executive Officer
19
CERTIFICATIONS
I, William K. Gerber, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kelly Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ William K. Gerber
William K. Gerber
Executive Vice President and
Chief Financial Officer