Back to GetFilings.com



Table of Contents

1

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 28, 2004

 

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

of incorporation or organization)

 

(I.R.S. Employer

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  ¨

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  x  No  ¨

 

At April 23, 2004, 31,566,405 shares of Class A and 3,472,598 shares of Class B common stock of the Registrant were outstanding.

 



Table of Contents

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

   14

PART II. OTHER INFORMATION AND SIGNATURE

    

     Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

   15

     Item 6. Exhibits and Reports on Form 8-K

   15

Signature

   16


Table of Contents

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

     March 28, 2004

    March 30, 2003

Revenue from services

   $ 1,158,811     $ 1,003,397

Cost of services

     975,455       837,845
    


 

Gross profit

     183,356       165,552

Selling, general and administrative expenses

     181,342       165,162
    


 

Earnings from operations

     2,014       390

Interest (expense) income, net

     (239 )     122
    


 

Earnings before income taxes

     1,775       512

Income taxes

     710       202
    


 

Net earnings

   $ 1,065     $ 310
    


 

Earnings per share:

              

Basic

   $ .03     $ .01

Diluted

     .03       .01

Average shares outstanding (thousands):

              

Basic

     34,881       35,548

Diluted

     35,302       35,626

Dividends per share

   $ .10     $ .10

 

See accompanying Notes to Financial Statements.


Table of Contents

4

 

KELLY SERVICES, INC. AND SUBSIDIARIES

 

BALANCE SHEETS

(In thousands of dollars)

 

    

March 28,

2004


   

December 28,

2003


 
     (UNAUDITED)        

ASSETS

                

CURRENT ASSETS:

                

Cash and equivalents

   $ 55,347     $ 76,378  

Short-term investments

     452       457  

Trade accounts receivable, less allowances of $16,004 and $14,983, respectively

     704,771       658,090  

Prepaid expenses and other current assets

     34,777       31,784  

Deferred taxes

     24,530       24,962  
    


 


Total current assets

     819,877       791,671  

PROPERTY AND EQUIPMENT:

                

Land and buildings

     57,650       57,543  

Equipment, furniture and leasehold improvements

     306,852       302,938  

Accumulated depreciation

     (183,015 )     (172,359 )
    


 


Total property and equipment

     181,487       188,122  

NONCURRENT DEFERRED TAXES

     14,378       14,606  

GOODWILL, NET

     84,398       85,788  

OTHER ASSETS

     58,847       57,550  
    


 


TOTAL ASSETS

   $ 1,158,987     $ 1,137,737  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                

CURRENT LIABILITIES:

                

Short-term borrowings

   $ 37,904     $ 39,190  

Accounts payable

     96,561       92,265  

Accrued payroll and related taxes

     218,792       200,503  

Accrued insurance

     33,674       36,016  

Income and other taxes

     52,754       49,342  
    


 


Total current liabilities

     439,685       417,316  

NONCURRENT LIABILITIES:

                

Accrued insurance

     54,941       58,763  

Accrued retirement benefits

     48,788       48,025  
    


 


Total noncurrent liabilities

     103,729       106,788  

STOCKHOLDERS’ EQUITY:

                

Capital stock, $1.00 par value

                

Class A common stock, shares issued 36,619,693 at 2004 and 36,619,148 at 2003

     36,620       36,619  

Class B common stock, shares issued 3,496,173 at 2004 and 3,496,718 at 2003

     3,496       3,497  

Treasury stock, at cost

                

Class A common stock, 5,077,112 shares at 2004 and 5,319,995 at 2003

     (107,397 )     (112,535 )

Class B common stock, 23,575 shares at 2004 and 23,475 at 2003

     (626 )     (623 )

Paid-in capital

     19,651       19,096  

Earnings invested in the business

     654,300       656,726  

Accumulated foreign currency adjustments

     9,529       10,853  
    


 


Total stockholders’ equity

     615,573       613,633  
    


 


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,158,987     $ 1,137,737  
    


 


 

See accompanying Notes to Financial Statements.


Table of Contents

5

 

KELLY SERVICES, INC. AND SUBSIDIARIES

 

STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)

(In thousands of dollars)

 

     13 Weeks Ended

 
    

March 28,

2004


   

March 30,

2003


 

Capital Stock

                

Class A common stock

                

Balance at beginning of period

   $ 36,619     $ 36,619  

Conversions from Class B

     1       —    
    


 


Balance at end of period

     36,620       36,619  

Class B common stock

                

Balance at beginning of period

     3,497       3,497  

Conversions to Class A

     (1 )     —    
    


 


Balance at end of period

     3,496       3,497  

Treasury Stock

                

Class A common stock

                

Balance at beginning of period

     (112,535 )     (91,648 )

Exercise of stock options, restricted stock awards and other

     5,138       1,314  
    


 


Balance at end of period

     (107,397 )     (90,334 )

Class B common stock

                

Balance at beginning of period

     (623 )     (511 )

Purchase of treasury stock

     (3 )     (38 )
    


 


Balance at end of period

     (626 )     (549 )

Paid-in Capital

                

Balance at beginning of period

     19,096       17,902  

Exercise of stock options, restricted stock awards and other

     555       383  
    


 


Balance at end of period

     19,651       18,285  

Earnings Invested in the Business

                

Balance at beginning of period

     656,726       665,759  

Net earnings

     1,065       310  

Dividends

     (3,491 )     (3,555 )
    


 


Balance at end of period

     654,300       662,514  

Accumulated Foreign Currency Adjustments

                

Balance at beginning of period

     10,853       (12,554 )

Equity adjustment for foreign currency

     (1,324 )     3,920  
    


 


Balance at end of period

     9,529       (8,634 )
    


 


Stockholders’ Equity at end of period

   $ 615,573     $ 621,398  
    


 


Comprehensive Income

                

Net earnings

   $ 1,065     $ 310  

Other comprehensive income - Foreign currency adjustments

     (1,324 )     3,920  
    


 


Comprehensive income

   $ (259 )   $ 4,230  
    


 


 

See accompanying Notes to Financial Statements.


Table of Contents

6

 

KELLY SERVICES, INC. AND SUBSIDIARIES

 

STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands of dollars)

 

     13 Weeks Ended

 
     March 28, 2004

    March 30, 2003

 

Cash flows from operating activities:

                

Net earnings

   $ 1,065     $ 310  

Noncash adjustments:

                

Depreciation and amortization

     11,326       11,908  

Increase in trade accounts receivable, net

     (47,447 )     (22,552 )

Changes in operating assets and liabilities

     18,743       (4,391 )
    


 


Net cash from operating activities

     (16,313 )     (14,725 )
    


 


Cash flows from investing activities:

                

Capital expenditures

     (4,375 )     (8,445 )

Proceeds from sales and maturities of short-term investments

     80       259  

Purchases of short-term investments

     (75 )     (153 )

Increase in other assets

     (173 )     (951 )
    


 


Net cash from investing activities

     (4,543 )     (9,290 )
    


 


Cash flows from financing activities:

                

Decrease in short-term borrowings

     (708 )     (1,034 )

Dividend payments

     (3,491 )     (3,555 )

Stock options and other

     4,169       6  

Purchase of treasury stock

     (3 )     (38 )
    


 


Net cash from financing activities

     (33 )     (4,621 )
    


 


Effect of exchange rates on cash and equivalents

     (142 )     337  
    


 


Net change in cash and equivalents

     (21,031 )     (28,299 )

Cash and equivalents at beginning of period

     76,378       100,936  
    


 


Cash and equivalents at end of period

   $ 55,347     $ 72,637  
    


 


 

See accompanying Notes to Financial Statements.


Table of Contents

7

 

KELLY SERVICES, INC. AND SUBSIDIARIES

 

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

(In thousands of dollars except share and per share items)

 

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 28, 2003 (the 2003 consolidated financial statements). Certain prior year amounts have been reclassified to conform with the current presentation.

 

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 revenue from services and earnings from operations of the Company for the 13-week periods ended March 28, 2004 and March 30, 2003. 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

 
     2004

    2003

 

Revenue from Services:

                

U.S. Commercial Staffing

   $ 549,422     $ 504,309  

PTSA

     238,698       221,659  

International

     370,691       277,429  
    


 


Consolidated Total

   $ 1,158,811     $ 1,003,397  
    


 


Earnings (Loss) from Operations:

                

U.S. Commercial Staffing

   $ 24,313     $ 24,100  

PTSA

     14,162       13,388  

International

     (952 )     (3,157 )

Corporate Expense

     (35,509 )     (33,941 )
    


 


Consolidated Total

   $ 2,014     $ 390  
    


 



Table of Contents

8

 

KELLY SERVICES, INC. AND SUBSIDIARIES

 

NOTES TO FINANCIAL STATEMENTS (continued)

(UNAUDITED)

(In thousands of dollars except share and per share items)

 

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 matters could be decided unfavorably to the Company. Although the amount of the liability at March 28, 2004 with respect to these matters cannot be ascertained, the Company believes that any resulting liability will not be material to the financial condition of the Company at March 28, 2004.

 

4. Earnings Per Share

 

The reconciliations of earnings per share computations for the 13-week periods ended March 28, 2004 and March 30, 2003 were as follows:

 

     13 Weeks Ended

     2004

   2003

Net earnings

   $ 1,065    $ 310
    

  

Determination of shares (thousands):

             

Weighted average common shares outstanding

     34,881      35,548

Effect of dilutive securities:

             

Stock options

     314      3

Restricted and performance awards and other

     107      75
    

  

Weighted average common shares outstanding - assuming dilution

     35,302      35,626
    

  

Earnings per share—basic

   $ .03    $ .01

Earnings per share—assuming dilution

   $ .03    $ .01

 

Stock options representing 446,000 and 2,553,000 shares, respectively, for the quarters ended March 28, 2004 and March 30, 2003 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.


Table of Contents

9

 

KELLY SERVICES, INC. AND SUBSIDIARIES

 

NOTES TO FINANCIAL STATEMENTS (continued)

(UNAUDITED)

(In thousands of dollars except share and per share items)

 

5. Stock-Based Compensation

 

The Company has a Performance Incentive Plan for key employees and accounts for this plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company has not recognized any expense related to employee stock options, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share for the 13-week periods ended March 28, 2004 and March 30, 2003 if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

 

     13 Weeks Ended

 
     2004

    2003

 

Net earnings, as reported

   $ 1,065     $ 310  

Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects

     463       402  

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

     (1,024 )     (957 )
    


 


Pro forma net earnings (loss)

   $ 504     $ (245 )
    


 


Earnings (loss) per share:

                

Basic-as reported

   $ .03     $ .01  

Basic-pro forma

   $ .01     $ (.01 )

Diluted-as reported

   $ .03     $ .01  

Diluted-pro forma

   $ .01     $ (.01 )


Table of Contents

10

 

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.

 

Executive Overview

 

Sales for the first quarter of 2004 grew by more than 15 percent when compared to the prior year. This was the strongest quarterly growth achieved by Kelly since the second quarter of 1997. We continue to be encouraged by the recent economic data, as well as the steady job growth within our own industry. The March Bureau of Labor Statistics employment report brought the best news to date. Not only were January and February employment figures revised upwards, but total non-farm employment surged in March, showing the greatest job producing increase in nearly four years. Within our industry, temporary employment has grown on a year-over-year basis since April of 2003.

 

At Kelly, we have seen a similar pattern of increasing demand for temporary staffing, as well as an increase in the length of assignments for our temporary workers. Three signs which we believe have signaled the beginning of recovery in the staffing industry are particularly encouraging: (1) Our light industrial business, which was the first business to respond after the recession, has continued to grow at double-digit rates; (2) Our office/clerical business grew nearly 6% in the first quarter; and (3) Most recently, our temporary–to-permament conversion fees, while not yet back to pre-recession levels, are recovering. Office/clerical business and fee based income, such as placement fees and temporary-to-permanent conversion fees, tend to be cyclical in nature and typically increase when economic growth and job creation resume. Certain of these trends and developments are discussed in greater detail below.

 

Results of Operations

First Quarter

 

Revenue from services in the first quarter of 2004 totaled $1.159 billion, an increase of 15.5% from the same period in 2003. This was the result of an increase in hours worked of 11.4% and an increase in average hourly bill rates of 3.6%. Revenue for the quarter increased in all three business segments: U.S. Commercial Staffing, Professional, Technical and Staffing Alternatives (PTSA) and International.

 

During the past year, the U.S. dollar declined in comparison to many foreign currencies, including the euro and British pound. As a result, Kelly’s U.S. dollar translated revenue was higher than would have otherwise been reported. On a constant currency basis, first quarter revenue increased 11.1% as compared with the prior year. When we use the term “constant currency,” it means that we have translated financial data for 2004 into U.S. dollars using the same foreign currency exchange rates that we used to translate financial data for 2003. Management believes constant currency measurements are an important analytical tool to aid in understanding underlying operating trends without distortion due to currency fluctuations. The table below summarizes the impact of foreign exchange adjustments on first quarter revenue:

 

     First Quarter Revenue

 
     2004

   2003

   % Change

 
     (In millions of dollars)       

U.S. Commercial Staffing

   $ 549.4    $ 504.3    8.9 %

PTSA

     238.7      221.7    7.7  

International—Constant Currency

     326.9      277.4    17.8  
    

  

  

Revenue from Services—Constant Currency

     1,115.0      1,003.4    11.1  

Foreign Currency Impact

     43.8      —         
    

  

  

Revenue from Services

   $ 1,158.8    $ 1,003.4    15.5 %
    

  

  

 

Gross profit of $183.4 million was 10.8% higher than the gross profit of $165.6 million for the same period of the prior year. The gross profit rate for the first quarter of 2004 was 15.8%, a decrease of 0.7 percentage points compared to the 16.5% rate earned for the same period in 2003. The gross profit rates of each of the business segments decreased compared to the prior year. The decrease in the gross profit rate was principally due to higher workers’ compensation costs and state unemployment taxes in the United States as well as gross profit rate decreases in Europe. The increases in workers’ compensation costs are national in scope; however, the rate of growth experienced in California is substantial in comparison to the more moderate growth rates seen elsewhere in the U.S.


Table of Contents

11

 

Selling, general and administrative expenses totaled $181.3 million, an increase of 9.8% year over year. Selling, general and administrative expenses expressed as a percentage of revenue were 15.6% in the first quarter of 2004, a 0.9 percentage point decrease compared to the 16.5% rate in the first quarter of 2003. As measured on a constant currency basis, selling, general and administrative expenses increased by 5.1%. The increase in selling, general and administrative expenses is due primarily to the growth in billable hours.

 

Earnings from operations in the first quarter of 2004 totaled $2.0 million, a $1.6 million increase compared to earnings from operations of $390 thousand reported for the first quarter of 2003.

 

Net interest expense in the first quarter of 2004 was $239 thousand compared to last year’s net interest income of $122 thousand. The change is primarily attributable to increased short-term debt levels and lower cash balances, as a result of increased working capital requirements.

 

The effective income tax rate in the first quarter of 2004 was 40.0%, a small increase from last year’s rate of 39.5% for the first quarter. The Company expects to utilize a 40.0% effective rate for the balance of 2004, which is a reduction from the 41.0% rate for the full year of 2003.

 

First quarter net earnings totaled $1.1 million, as compared to net earnings of $310 thousand last year. Diluted earnings per share for the first quarter of 2004 were $0.03, as compared to diluted earnings per share of $0.01 for the first quarter of 2003.

 

U.S. Commercial Staffing

 

Revenue from services in the U.S. Commercial Staffing segment totaled $549.4 million in the first quarter of 2004, an 8.9% increase compared to the $504.3 million reported for the same period in 2003. This reflected an increase in hours worked of 8.0% and an increase in average hourly bill rates of 0.9%. On a year-over-year basis, revenue increased 6% in January, 10% in February and 12% in March. The year-over-year revenue growth trend accelerated throughout the first quarter. Staffing volume also showed strong sequential increases beginning in January and continuing through March, which is a typical season pattern for the first quarter.

 

U.S. Commercial Staffing sales represented 47% of total Company sales in the first quarter of 2004 and 50% of total Company sales in the first quarter of 2003.

 

U.S. Commercial Staffing earnings from operations totaled $24.3 million in the first quarter of 2004, a slight increase of 0.9% compared to earnings of $24.1 million last year. This was the result of the 8.9% increase in revenue, offset by a 0.9 percentage point decrease in the gross profit rate and a 3.2% increase in expenses. The decline in the gross profit rate was principally due to higher state unemployment taxes and workers’ compensation costs. Continued shifts in customer mix to large corporate and national account customers also reduced the segment gross profit rate. Selling, general and administrative expenses as a percentage of sales were 9.8% in the first quarter of 2004 and 10.4% in the first quarter of 2003.

 

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. However, these accounts also have a lower administrative cost due to economies of scale, and can yield an operating margin similar to that realized with small or medium size customers. The Company’s strategy is focused on serving and growing large national and local accounts. As customer mix shifts to larger accounts, the Company’s average gross margins tend to decrease. The Company expects this trend to continue over the balance of 2004.

 

Professional, Technical and Staffing Alternatives

 

Revenue from services in the Professional, Technical and Staffing Alternatives (“PTSA”) segment for the first quarter of 2004 totaled $238.7 million, an increase of 7.7% compared to the $221.7 million reported in the first quarter of 2003. This reflected an increase in hours worked of 3.0% and an increase in average billing rates of 3.1% for the professional and technical staffing businesses. In addition, revenues in the staffing alternatives businesses, which include staff leasing and management services, increased by 20.8%. PTSA sales represented 21% of total Company sales in the first quarter of 2004 and 22% in the first quarter of 2003.


Table of Contents

12

 

Results continued to vary among the 14 business units that comprise PTSA. Kelly Healthcare Resources and Kelly Law Registry were the leading Professional and Technical Staffing performers in the first quarter, exhibiting double-digit sales growth in excess of 20%. Kelly HRfirst and Kelly Vendor Management Solutions were the leading Staffing Alternatives performers, with sales growth of over 20% for the first quarter. However, two PTSA units, Kelly Home Care Services and the Automotive Services Group experienced revenue declines during the first quarter of 2004 as compared to the prior year. Kelly Home Care customers are primarily private-pay, elderly clients. These decreases, however, were consistent with industry trends in their staffing sectors.

 

PTSA earnings from operations for the first quarter of 2004 totaled $14.2 million, an increase of 5.8% from the same period in 2003. This was the result of the 7.7% increase in revenue, offset by a 0.2 percentage point decrease in the gross profit rate and a 7.4% increase in selling, general and administrative expenses. The decrease in the gross profit rate was primarily due to higher workers’ compensation costs. The increase in selling, general and administrative expenses was primarily attributable to additional investments in Kelly Vendor Management Solutions and Kelly FedSecure, the newest PTSA specialty staffing unit. Selling, general and administrative expenses as a percent of sales were 11.7% in both the first quarters of 2004 and 2003.

 

International

 

Translated U.S. dollar revenue from services in International for the first quarter of 2004 totaled $370.7 million, a 33.6% increase compared to the $277.4 million reported in the first quarter of 2003. This resulted from an increase in hours worked of 19.3% and an increase in the translated U.S. dollar average hourly bill rates of 12.4%. International revenue represented 32% of total Company revenue in the first quarter of 2004 and 28% in the first quarter of 2003.

 

On a constant currency basis, revenue increased by 17.8% and average hourly bill rates decreased by 0.9%. The decrease in average hourly bill rates, on a constant currency basis, is due primarily to a shift in mix of hours worked to countries, such as Mexico, Russia and Malaysia, which typically have a lower bill rate. The 17.8% constant currency increase in revenue reflected continued improvement from the fourth quarter, when year-over-year constant currency revenue was up 16.0%.

 

Year-over-year constant currency revenue growth was positive in all regions. The Americas increased by 15%, Asia Pacific increased by 21%, and Europe increased by 18%. In Europe, our United Kingdom/Ireland operations grew sales by more than 33% on a constant currency basis.

 

The International loss from operations for the first quarter totaled $952 thousand, an improvement of $2.2 million as compared to an operating loss of $3.2 million for the same period in 2003. The 33.6% increase in revenue was partially offset by a 0.9 percentage point decrease in the gross profit rate and a 20.8% increase in expenses, as measured in U.S. dollars.

 

The decline in the International gross profit rate is due to gross profit rate decreases in Europe, primarily in the United Kingdom. The decrease in gross profit rates experienced in the United Kingdom is due, in large part, to a shift in customer mix to larger corporate account customers which, as noted above, tend to have lower gross margins. The increase in U.S. dollar reported expenses is due primarily to the effect of currency rates. On a constant currency basis, first quarter expenses increased by 6.3% as compared to the prior year. Selling, general and administrative expenses as a percent of sales were 17.3% in the first quarter of 2004, a significant improvement compared to 19.1% in the first quarter of 2003.

 

Financial Condition

 

Kelly has financed its operations through cash generated by operating activities and available from revolving credit facilities. As highlighted in the Statements of Cash Flows, the Company’s liquidity and available capital resources are impacted by four key components: cash and equivalents, operating activities, investing activities and financing activities.

 

Cash and Equivalents

 

Cash and equivalents totaled $55 million at the end of first quarter 2004, a decrease of $21 million from the $76 million at year-end 2003. As further described below, the Company used $16 million of cash in operating activities, $5 million of cash in investing activities and $33 thousand in financing activities.


Table of Contents

13

 

Operating Activities

 

In the first three months of 2004, the Company used $16 million in cash in its operating activities, as compared to using $15 million in the first three months of 2003. The most significant reason for the increase in cash used in operations was that trade accounts receivable grew at a faster rate in 2004 versus 2003. This was partially offset by an increase in accrued payroll and related taxes.

 

Trade accounts receivable totaled $705 million at the end of the first quarter of 2004. Global days sales outstanding at the end of the first quarter of 2004 were 55 days, which is an increase of one day as compared with the end of the first quarter in the prior year. If the economic recovery continues in 2004, the Company could experience further growth in revenue, which may require the Company to continue to fund additional increases in trade accounts receivable.

 

The Company’s working capital position was $380 million at the end of the first quarter of 2004, compared to $374 million at year-end 2003. The current ratio was 1.9 at the end of the first quarter of 2004 and at year-end 2003.

 

Investing Activities

 

In the first three months of 2004, the Company used $5 million for investing activities compared to $9 million in the first three months of 2003. Capital expenditures totaled $4 million for the first three months of 2004 and $8 million for the first three months of 2003. Capital expenditures for 2004, which are primarily related to the Company’s information technology programs and branch openings, refurbishments and relocations, are expected to total between $30 and $34 million.

 

Financing Activities

 

In the first three months of 2004, the Company used $33 thousand in financing activities, compared to $5 million in the first three months of 2003. The improvement was due primarily to cash received from the exercise of employee stock options.

 

Short-term debt totaled $38 million at the end of the first quarter of 2004, compared to $39 million at year-end 2003. At the end of the first three months of 2004, debt represented approximately 6% of total capital.

 

Contractual Obligations and Commercial Commitments

 

The Company has no material, unrecorded commitments, losses, contingencies or guarantees associated with any related parties or unconsolidated entities.

 

Summary

 

The Company’s financial position remains strong. The Company continues to carry no long-term debt and expects to meet its cash requirements, including possible increases in trade accounts receivable as discussed above, principally through cash generated from operations, available cash and equivalents and committed unused credit facilities.

 

Market Risk-Sensitive Instruments and Positions

 

Kelly 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. These risks are 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.


Table of Contents

14

 

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.

 

Forward-Looking Statements

 

Certain statements contained in this document are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include statements which are predictive in nature; which depend upon or refer to future events or conditions; or which include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or variations or negatives thereof or by similar or comparable words or phrases. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions that may be provided by management are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about the Company, and economic and market factors in the countries in which the Company does business, among other things. These statements are not guarantees of future performance, and the Company has no specific intention to update these statements.

 

Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The principal important risk factors that could cause the Company’s actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, 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, liabilities for client and employee actions, foreign currency fluctuations, changes in laws and regulations (including federal, state and international tax laws), the Company’s ability to effectively implement and manage its information technology programs, and the ability of the Company to successfully expand into new markets and service lines. Certain risk factors are discussed more fully under “Risk Factors” in Part I, Item I of the Company’s annual report filed on Form 10-K.

 

Item 4. Controls and Procedures

 

Based on their evaluation as of the end of the period covered by 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 Rules 13a-15(e) and

15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

 

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


Table of Contents

15

 

PART II. OTHER INFORMATION AND SIGNATURE

 

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

  (e) Issuer Purchases of Equity Securities

 

Period


  

(a) Total Number

of Shares

(or Units)

Purchased


  

(b) Average

Price Paid

per Share

(or Unit)


  

(c) Total Number

of Shares (or

Units) Purchased

as Part of Publicly

Announced Plans

or Programs


  

(d) Maximum Number

(or Approximate

Dollar Value) of

Shares (or Units)

That May Yet Be

Purchased Under the

Plans or Programs


December 29, 2003 through February 1, 2004

   100    $ 28.16    —      —  

February 2, 2004 through February 29, 2004

   —        —      —      —  

March 1, 2004 through March 28, 2004

   —        —      —      —  
    
         
    

Total

   100    $ 28.16    —      —  
    
  

  
  

 

The share repurchase of 100 Class B shares was made in an open-market transaction.

 

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 17 of this filing.

 

  (b) A report on Form 8-K dated April 20, 2004 was filed by the Company in April, 2004. The report was filed under Item 7, Financial Statements and Exhibits, and Item 12, Results of Operations and Financial Condition.


Table of Contents

16

 

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: April 30, 2004

    
    

/s/    William K. Gerber

    

William K. Gerber

    

Executive Vice President and Chief Financial Officer

    

(Principal Financial Officer and Principal Accounting Officer)


Table of Contents

17

 

INDEX TO EXHIBITS

REQUIRED BY ITEM 601,

REGULATION S-K

 

Exhibit
No.


  

Description


31.1    Certification Pursuant to Rule 13a-15(e)/15d-15(e)
31.2    Certification Pursuant to Rule 13a-15(e)/15d-15(e)
32.1   

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2   

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.