Kelly Services, Inc.
KELLY SERVICES INC (Form: 10-Q, Received: 11/07/2012 08:10:32)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

      For the quarterly period ended September 30, 2012

 

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 [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

                           

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [ ]

Accelerated filer [X]

Non-accelerated filer [ ] (Do not check if a smaller reporting company)

Smaller reporting company [ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

 

At October 26, 2012, 33,630,590 shares of Class A and 3,454,485 shares of Class B common stock of the Registrant were outstanding.

 

 
1

 

 

KELLY SERVICES, INC. AND SUBSIDIARIES

 

 

Page

Number

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Consolidated Statements of Earnings

3

Consolidated Statements of Comprehensive Income

4

Consolidated Balance Sheets

5

Consolidated Statements of Stockholders' Equity

6

Consolidated Statements of Cash Flows

7

Notes to Consolidated Financial Statements

8

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

17

Item 3. Quantitative and Qualitative Disclosures About Market Risk

27

Item 4. Controls and Procedures

27

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

28

Item 1A. Risk Factors

28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 4. Mine Safety Disclosures

28

Item 6. Exhibits

28

SIGNATURES

29

 

 
2

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

KELLY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

(In millions of dollars except per share data)


 

13 Weeks Ended

39 Weeks Ended

 

Sept. 30,

2012

Oct. 2,

2011

Sept. 30,

2012

Oct. 2,

2011

Revenue from services

  $ 1,354.2   $ 1,409.8   $ 4,075.1   $ 4,154.7
                                 

Cost of services

    1,126.7     1,184.1     3,400.7     3,495.7
                                 

Gross profit

    227.5     225.7     674.4     659.0
                                 

Selling, general and administrative expenses

    203.5     203.6     611.9     614.0
                                 

Earnings from operations

    24.0     22.1     62.5     45.0
                                 

Other (expense) income, net

    (0.7 )     1.0     (1.8 )     (0.1 )
                                 

Earnings from continuing operations before taxes

    23.3     23.1     60.7     44.9
                                 

Income taxes

    6.7     3.4     19.9     4.1
                                 

Earnings from continuing operations

    16.6     19.7     40.8     40.8
                                 

Earnings (loss) from discontinued operations, net of tax

    -     -     0.4     (1.2 )
                                 

Net earnings

  $ 16.6   $ 19.7   $ 41.2   $ 39.6
                                 

Basic earnings (loss) per share:

                               

Earnings from continuing operations

  $ 0.43   $ 0.52   $ 1.07   $ 1.09

Earnings (loss) from discontinued operations

  $ -   $ -   $ 0.01   $ (0.03 )

Net earnings

  $ 0.43   $ 0.52   $ 1.09   $ 1.05
                                 

Diluted earnings (loss) per share:

                               

Earnings from continuing operations

  $ 0.43   $ 0.52   $ 1.07   $ 1.09

Earnings (loss) from discontinued operations

  $ -   $ -   $ 0.01   $ (0.03 )

Net earnings

  $ 0.43   $ 0.52   $ 1.09   $ 1.05
                                 

Dividends per share

  $ 0.05   $ 0.05   $ 0.15   $ 0.05
                                 

Average shares outstanding (millions):

                               

Basic

    37.1     36.8     37.0     36.8

Diluted

    37.1     36.8     37.0     36.8

 

See accompanying unaudited Notes to Consolidated Financial Statements.

 

 
3

 

 

KELLY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(In millions of dollars)


 

13 Weeks Ended

39 Weeks Ended

 

Sept. 30,

2012

Oct. 2,

2011

Sept. 30,

2012

Oct. 2,

2011

                                 

Net earnings

  $ 16.6   $ 19.7   $ 41.2   $ 39.6
                                 

Other comprehensive income, net of tax:

                               

Foreign currency translation adjustments, net of tax benefit of $0.3, $0.7, $0.3 and $0.6, respectively

    5.8     (17.3 )     4.7     (5.5 )

Less: Reclassification adjustments included in net earnings

    -     (1.5 )     -     (1.5 )

Foreign currency translation adjustments

    5.8     (18.8 )     4.7     (7.0 )
                                 

Unrealized gains (losses) on investments

    (0.5 )     (0.6 )     9.8     (1.1 )
                                 

Pension liability adjustments

    -     -     0.3     -
                                 

Other comprehensive income

    5.3     (19.4 )     14.8     (8.1 )
                                 

Comprehensive Income

  $ 21.9   $ 0.3   $ 56.0   $ 31.5

 

See accompanying unaudited Notes to Consolidated Financial Statements.

 

 
4

 

 

KELLY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In millions)


ASSETS

Sept. 30, 2012

January 1, 2012

CURRENT ASSETS:

               

Cash and equivalents

  $ 70.3   $ 81.0

Trade accounts receivable, less allowances of $11.9 and $13.4, respectively

    1,018.8     944.9

Prepaid expenses and other current assets

    62.9     50.6

Deferred taxes

    38.1     38.2

Total current assets

    1,190.1     1,114.7
                 

PROPERTY AND EQUIPMENT:

               

Property and equipment

    336.0     326.9

Accumulated depreciation

    (245.6 )     (236.3 )

Net property and equipment

    90.4     90.6
                 

NONCURRENT DEFERRED TAXES

    88.8     94.1
                 

GOODWILL, NET

    91.2     90.2
                 

OTHER ASSETS

    174.8     152.1
                 

TOTAL ASSETS

  $ 1,635.3   $ 1,541.7

LIABILITIES AND STOCKHOLDERS' EQUITY

               

CURRENT LIABILITIES:

               

Short-term borrowings

  $ 83.6   $ 96.3

Accounts payable and accrued liabilities

    279.1     237.2

Accrued payroll and related taxes

    269.9     271.4

Accrued insurance

    28.8     31.5

Income and other taxes

    62.7     61.3

Total current liabilities

    724.1     697.7
                 

NONCURRENT LIABILITIES:

               

Accrued insurance

    48.9     53.5

Accrued retirement benefits

    108.5     91.1

Other long-term liabilities

    25.1     23.7

Total noncurrent liabilities

    182.5     168.3
                 

STOCKHOLDERS' EQUITY:

               

Capital stock, $1.00 par value

               

Class A common stock, shares issued 36.6 at 2012 and 2011

    36.6     36.6

Class B common stock, shares issued 3.5 at 2012 and 2011

    3.5     3.5

Treasury stock, at cost

               

Class A common stock, 3.0 shares at 2012 and 3.2 at 2011

    (62.5 )     (66.3 )

Class B common stock

    (0.6 )     (0.6 )

Paid-in capital

    27.7     28.8

Earnings invested in the business

    693.0     657.5

Accumulated other comprehensive income

    31.0     16.2

Total stockholders' equity

    728.7     675.7
                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 1,635.3   $ 1,541.7

See accompanying unaudited Notes to Consolidated Financial Statements.

 

 
5

 

 

KELLY SERVICES, INC. AND SUBSIDIARIES

  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)

(In millions of dollars)


 

13 Weeks Ended

39 Weeks Ended

 

Sept. 30,

2012

Oct. 2,

2011

Sept. 30,

2012

Oct. 2,

2011

Capital Stock

                               

Class A common stock

                               

Balance at beginning of period

  $ 36.6   $ 36.6   $ 36.6   $ 36.6

Conversions from Class B

    -     -     -     -

Balance at end of period

    36.6     36.6     36.6     36.6
                                 

Class B common stock

                               

Balance at beginning of period

    3.5     3.5     3.5     3.5

Conversions to Class A

    -     -     -     -

Balance at end of period

    3.5     3.5     3.5     3.5
                                 

Treasury Stock

                               

Class A common stock

                               

Balance at beginning of period

    (62.6 )     (68.1 )     (66.3 )     (70.3 )

Exercise of stock options, restricted stock awards and other

    0.1     0.1     3.8     2.3

Balance at end of period

    (62.5 )     (68.0 )     (62.5 )     (68.0 )
                                 

Class B common stock

                               

Balance at beginning of period

    (0.6 )     (0.6 )     (0.6 )     (0.6 )

Exercise of stock options, restricted stock awards and other

    -     -     -     -

Balance at end of period

    (0.6 )     (0.6 )     (0.6 )     (0.6 )
                                 

Paid-in Capital

                               

Balance at beginning of period

    27.4     28.0     28.8     28.0

Exercise of stock options, restricted stock awards and other

    0.3     1.3     (1.1 )     1.3

Balance at end of period

    27.7     29.3     27.7     29.3
                                 

Earnings Invested in the Business

                               

Balance at beginning of period

    678.3     617.5     657.5     597.6

Net earnings

    16.6     19.7     41.2     39.6

Dividends

    (1.9 )     (1.9 )     (5.7 )     (1.9 )

Balance at end of period

    693.0     635.3     693.0     635.3
                                 

Accumulated Other Comprehensive Income

                               

Balance at beginning of period

    25.7     40.3     16.2     29.0

Other comprehensive income, net of tax

    5.3     (19.4 )     14.8     (8.1 )

Balance at end of period

    31.0     20.9     31.0     20.9
                                 

Stockholders' Equity at end of period

  $ 728.7   $ 657.0   $ 728.7   $ 657.0

See accompanying unaudited Notes to Consolidated Financial Statements.

 

 
6

 

 

KELLY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In millions of dollars)


 

39 Weeks Ended

 

Sept. 30,

2012

Oct. 2,

2011

                 

Cash flows from operating activities:

               

Net earnings

  $ 41.2   $ 39.6

Noncash adjustments:

               

Depreciation and amortization

    16.8     23.9

Provision for bad debts

    1.2     3.5

Stock-based compensation

    3.7     3.5

Other, net

    -     (1.5 )

Changes in operating assets and liabilities

    (42.0 )     (63.4 )
                 

Net cash from operating activities

20.9

    5.6
                 
                 

Cash flows from investing activities:

               

Capital expenditures

    (13.9 )     (10.0 )

Other investing activities

    0.1     1.0
                 

Net cash from investing activities

    (13.8 )     (9.0 )
                 
                 

Cash flows from financing activities:

               

Net change in short-term borrowings

    (12.6 )     61.9

Repayment of debt

    -     (62.9 )

Dividend payments

    (5.7 )     (1.9 )

Other financing activities

    0.1     (1.0 )
                 

Net cash from financing activities

    (18.2 )     (3.9 )
                 

Effect of exchange rates on cash and equivalents

    0.4     0.3
                 

Net change in cash and equivalents

    (10.7 )     (7.0 )

Cash and equivalents at beginning of period

    81.0     80.5
                 
                 

Cash and equivalents at end of period

  $ 70.3   $ 73.5

See accompanying unaudited Notes to Consolidated Financial Statements.

 

 
7

 

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1 . Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Kelly Services, Inc. (the “Company,” “Kelly,” “we” or “us”) 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 statement 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 January 1, 2012, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 16, 2012 (the 2011 consolidated financial statements). The Company's third fiscal quarter ended on September 30, 2012 (2012) and October 2, 2011 (2011), each of which contained 13 weeks. The corresponding 2012 and 2011 year-to-date periods each contained 39 weeks.

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

 

Effective with the first quarter of 2012, certain vendor management and other technology costs which were previously included in selling, general and administrative (“SG&A”) expenses are now included in cost of services, and the prior year's results were revised to conform to this presentation. The only effect of this change was to increase cost of services and decrease SG&A expenses (and gross profit) by $2.9 million in the third quarter of 2011 and $7.9 million in the first nine months of 2011 from those amounts previously reported in 2011.

 

Earnings from discontinued operations represent adjustments to costs of litigation, net of tax, retained from the 2007 sale of the Kelly Home Care business unit.

 

2. Fair Value Measurements

 

Trade accounts receivable, accounts payable, accrued liabilities, accrued payroll and related taxes and short-term borrowings approximate their fair values due to the short-term maturities of these assets and liabilities.

 

Assets Measured at Fair Value on a Recurring Basis

The following tables present assets measured at fair value on a recurring basis as of third quarter-end 2012 and year-end 2011 on the consolidated balance sheet by fair value hierarchy level, as described below.


Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities.  Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 measurements include significant unobservable inputs.

 

 

Fair Value Measurements on a Recurring Basis

As of Third Quarter-End 2012

                                 

Description

Total

Level 1

Level 2

Level 3

 

(In millions of dollars)

 

Money market funds

  $ 2.3   $ 2.3   $ -   $ -

Available-for-sale investment

    37.0     37.0     -     -
                                 

Total assets at fair value

  $ 39.3   $ 39.3   $ -   $ -

 

 
8

 

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

2. Fair Value Measurements (continued)

 

 

Fair Value Measurements on a Recurring Basis

As of Year-End 2011

Description

Total

Level 1

Level 2

Level 3

 

(In millions of dollars)

 

Money market funds

  $ 2.0   $ 2.0   $ -   $ -

Available-for-sale investment

    27.1     27.1     -     -
                                 

Total assets at fair value

  $ 29.1   $ 29.1   $ -   $ -

 

Money market funds as of third quarter-end 2012 and as of year-end 2011 represent investments in money market accounts, all of which are restricted as to use and are included in prepaid expenses and other current assets on the consolidated balance sheet. The valuations were based on quoted market prices of those accounts as of the respective period end.

 

Available-for-sale investment represents the Company's investment in Temp Holdings Co., Ltd. (“Temp Holdings”), a leading integrated human resources company in Japan, and is included in other assets on the consolidated balance sheet. The valuation is based on the quoted market price of Temp Holdings stock on the Tokyo Stock Exchange as of the period end. The unrealized loss of $0.5 million for the 13 weeks ended 2012 and unrealized loss of $0.6 million for the 13 weeks ended 2011 was recorded in other comprehensive income, a component of stockholders' equity. The unrealized gain of $9.8 million for the 39 weeks ended 2012 and unrealized loss of $1.1 million for the 39 weeks ended 2011 was recorded in other comprehensive income.

 

3. Acquisition

 

During the fourth quarter of 2011, the Company acquired the stock of Tradição Planejamento e Tecnologia de Serviços S.A. and Tradição Tecnologia e Serviços Ltda. (collectively, “Tradição”), a national service provider in Brazil, for $6.6 million in cash. The following table summarizes the purchase price allocation at the time of purchase, along with measurement period adjustments recognized during the 39 weeks ended 2012. The purchase price allocation is still preliminary, subject to further information relating to certain liabilities assumed.

 

 

Original

Allocation

Adjustments

Revised

Allocation

 

(In millions of dollars)

Current assets

  $ 6.3   $ -     $ 6.3

Goodwill

    22.9     1.0     23.9

Identified intangibles

    5.3     0.4     5.7

Other noncurrent assets

    0.7     -       0.7

Current liabilities

    (14.4 )     (0.6 )     (15.0 )

Noncurrent liabilities

    (14.2 )     (0.8 )     (15.0 )
                         

Total purchase price

  $ 6.6   $   $ 6.6

 

The acquisition adjustments relate to an increase in Tradição's estimated identified intangibles balance, acquired contingency reserves and tax liabilities assumed.

 

 
9

 

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

4. Restructuring

 

Restructuring costs incurred in the first nine months of 2012 amounted to income of $2.2 million. Restructuring costs incurred in the third quarter and first nine months of 2011 amounted to income of $0.6 million and expense of $2.8 million, respectively. These costs primarily related to adjustments to estimated lease termination costs for EMEA Commercial branches that closed in prior years, and were reported as a component of SG&A expenses. Total costs incurred since July 2008 for our restructuring efforts amounted to $44.2 million.

 

A summary of the balance sheet accrual related to the global restructuring costs follows (in millions of dollars):

 

Balance at beginning of year

  $ 4.5
         

Reductions for cash payments

    (0.2 )
         

Balance at first quarter-end 2012

    4.3
         

Amounts charged (credited) to operations

    (2.2 )

Reductions for cash payments

    (0.6 )
         

Balance at second quarter-end 2012

    1.5
         

Reductions for cash payments

    (0.1 )
         

Balance at third quarter-end 2012

  $ 1.4

 

The remaining balance of $1.4 million as of the 2012 third quarter end represents primarily future lease payments and is expected to be paid by 2016. On a quarterly basis, the Company reassesses the accrual associated with restructuring costs and adjusts it as necessary.

5. Investment in Joint Venture  

On July 24, 2012, Temp Holdings Co., Ltd. and the Company entered into a joint venture agreement to expand both companies' presence in North Asia. The joint venture, TS Kelly Workforce Solutions (“TS Kelly”), is headquartered in Hong Kong and is expected to become effective in the fourth quarter of 2012. Under the terms of the agreement, Toshio Saburi, Executive Managing Director of Temp Holdings Co., Ltd. and board member of the Company, was appointed chief executive officer of TS Kelly.

 

In connection with this agreement, during the third quarter of 2012, the Company purchased the 30% noncontrolling interest in its Shanghai subsidiary from Shanghai Changning Talent Development Co. Ltd, and recorded a charge to paid-in capital of $1.1 million for the difference between the carrying value of the noncontrolling interest and the fair value of the consideration provided.

 

 
10

 

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

6. Goodwill

 

The changes in the net carrying amount of goodwill during the 39 weeks ended 2012 are included in the table below. See Acquisition footnote for a description of adjustments to goodwill.

 

 

Goodwill,

Gross

as of

Year-End

2011

Accumulated

Impairment

Losses

as of

Year-End

2011

Adjustments

to

Goodwill

Impairment

Losses

Goodwill,

Gross

as of

Third

Quarter-End

2012

Accumulated

Impairment

Losses

as of

Third Quarter

End 2012

Goodwill,

Net

as of

Third

Quarter-End

2012

 

(In millions of dollars)

Americas

                                                       

Americas Commercial

  $ 39.3   $ (16.4 )   $ 1.0   $ -   $ 40.3   $ (16.4 )   $ 23.9

Americas PT

    39.2     -     -     -     39.2     -     39.2

Total Americas

    78.5     (16.4 )     1.0     -     79.5     (16.4 )     63.1
                                                         

EMEA

                                                       

EMEA Commercial

    50.4     (50.4 )     -     -     50.4     (50.4 )     -

EMEA PT

    22.0     (22.0 )     -     -     22.0     (22.0 )     -

Total EMEA

    72.4     (72.4 )     -     -     72.4     (72.4 )     -
                                                         

APAC

                                                       

APAC Commercial

    12.1     (12.1 )     -     -     12.1     (12.1 )     -

APAC PT

    1.8     -     -     -     1.8     -     1.8

Total APAC

    13.9     (12.1 )     -     -     13.9     (12.1 )     1.8
                                                         

OCG

    26.3     -     -     -     26.3     -     26.3
                                                         

Consolidated Total

  $ 191.1   $ (100.9 )   $ 1.0   $ -   $ 192.1   $ (100.9 )   $ 91.2

 

 
11

 

 

  KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

7. Earnings Per Share

 

The reconciliation of basic and diluted earnings per share on common stock for the 13 and 39 weeks ended 2012 and 2011 follows (in millions of dollars except per share data):

 

 

13 Weeks Ended

39 Weeks Ended

 

2012

2011

2012

2011

                                 

Earnings from continuing operations

  $ 16.6   $ 19.7   $ 40.8   $ 40.8

Less: Earnings allocated to participating securities

    (0.5 )     (0.5 )     (1.1 )     (0.9 )

Earnings from continuing operations available to common shareholders

  $ 16.1   $ 19.2   $ 39.7   $ 39.9
                                 

Earnings (loss) from discontinued operations

  $ -   $ -   $ 0.4   $ (1.2 )

Less: Earnings (loss) allocated to participating securities

    -     -     -     -

Earnings (loss) from discontinued operations available to common shareholders

  $ -   $ -   $ 0.4   $ (1.2 )
                                 

Net Earnings

  $ 16.6   $ 19.7   $ 41.2   $ 39.6

Less: Earnings allocated to participating securities

    (0.5 )     (0.5 )     (1.1 )     (0.9 )

Net Earnings available to common shareholders

  $ 16.1   $ 19.2   $ 40.1   $ 38.7
                                 

Basic earnings (loss) per share on common stock:

                               

Earnings from continuing operations

  $ 0.43   $ 0.52   $ 1.07   $ 1.09

Earnings (loss) from discontinued operations

  $ -   $ -   $ 0.01   $ (0.03 )

Net earnings

  $ 0.43   $ 0.52   $ 1.09   $ 1.05
                                 

Diluted earnings (loss) per share on common stock:

                               

Earnings from continuing operations

  $ 0.43   $ 0.52   $ 1.07   $ 1.09

Earnings (loss) from discontinued operations

  $ -   $ -   $ 0.01   $ (0.03 )

Net earnings

  $ 0.43   $ 0.52   $ 1.09   $ 1.05
                                 

Average common shares outstanding (millions)

                               

Basic

    37.1     36.8     37.0     36.8

Diluted

    37.1     36.8     37.0     36.8

 

Stock options representing 0.4 million and 0.6 million shares, respectively, for the 13 weeks ended 2012 and 2011, and 0.4 million and 0.6 million shares, respectively, for the 39 weeks ended 2012 and 2011 were excluded from the computation of diluted earnings per share due to their anti-dilutive effect.

 

 
12

 

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

8. Stock-Based Compensation

 

The Company adopted an amendment and restatement of the Kelly Services, Inc. Equity Incentive Plan (the “Plan”) effective December 31, 2011, which was approved by the Company stockholders in May 2012. Under the Plan, the Company may grant stock options (both incentive and nonqualified), stock appreciation rights, restricted stock awards, restricted stock units and performance awards to key employees utilizing the Company's Class A stock. The Plan provides that the maximum number of shares available for grants is 10 percent of the outstanding Class A stock, adjusted for Plan activity over the preceding five years. The Company issues shares out of treasury stock to satisfy stock-based awards.


Restricted Stock

Restricted stock awards and units (collectively, “restricted stock”), which typically vest over a period of 3 to 5 years, are issued to certain key employees and are subject to forfeiture until the end of an established restriction period. The Company utilizes the market price on the date of grant as the fair market value of restricted stock and expenses the fair value on a straight-line basis over the vesting period.

 

A summary of the status of nonvested restricted stock under the Plan as of the 13 and 39 weeks ended 2012 and changes during these periods are presented as follows:

 

 

Restricted

Stock

Weighted

Average

Grant Date

Fair Value

Nonvested at year-end 2011

    907,990   $ 17.41

Granted

    21,200     15.02

Vested

    (23,075 )     15.08

Forfeited

    (400 )     18.25

Nonvested at first quarter-end 2012

    905,715     17.41

Granted

    480,700     12.91

Vested

    (191,975 )     18.15

Forfeited

    (1,650 )     16.30

Nonvested at second quarter-end 2012

    1,192,790     15.48

Granted

    9,300     11.99

Vested

    (4,290 )     14.36

Forfeited

    (5,500 )     15.88

Nonvested at third quarter-end 2012

    1,192,300   $ 15.46

 

 
13

 

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

9. Other (Expense) Income, Net

 

Included in other (expense) income, net for the 13 and 39 weeks ended 2012 and 2011 are the following:

 

 

13 Weeks Ended

39 Weeks Ended

 

2012

2011

2012

2011

 

(In millions of dollars)

(In millions of dollars)

Interest income

  $ 0.1   $ 0.3   $ 0.9   $ 0.8

Interest expense

    (0.7 )     (0.7 )     (2.6 )     (2.6 )

Dividend income

    -     -     0.3     0.2

Foreign exchange (losses) gains

    (0.1 )     1.5     (0.4 )     1.6

Other

    -     (0.1 )     -     (0.1 )
                                 

Other (expense) income, net

  $ (0.7 )   $ 1.0   $ (1.8 )   $ (0.1 )

 

 

10. Contingencies

 

The Company is continuously engaged in litigation arising in the ordinary course of its business, typically matters alleging employment discrimination, alleging wage and hour violations or enforcing the restrictive covenants in the Company's employment agreements. While there is no expectation that any of these matters will have a material adverse effect on the Company's results of operations, financial position or cash flows, litigation is always subject to inherent uncertainty and the Company is not able to reasonably predict if any matter will be resolved in a manner that is materially adverse to the Company.

 

 

11. Segment Disclosures

 

The Company's segments are based on the organizational structure for which financial results are regularly evaluated by the Company's chief operating decision maker to determine resource allocation and assess performance. The Company's seven reporting segments are: (1) Americas Commercial, (2) Americas Professional and Technical (“Americas PT”), (3) Europe, Middle East and Africa Commercial (“EMEA Commercial”), (4) Europe, Middle East and Africa Professional and Technical (“EMEA PT”), (5) Asia Pacific Commercial (“APAC Commercial”), (6) Asia Pacific Professional and Technical (“APAC PT”) and (7) Outsourcing and Consulting Group (“OCG”).

 

The Commercial business segments within the Americas, EMEA and APAC regions represent traditional office services, contact-center staffing, marketing, electronic assembly, light industrial and, in the Americas, substitute teachers. The PT segments encompass a wide range of highly skilled temporary employees, including scientists, financial professionals, attorneys, engineers, IT specialists and healthcare workers. OCG includes recruitment process outsourcing (“RPO”), contingent workforce outsourcing (“CWO”), business process outsourcing (“BPO”), payroll process outsourcing (“PPO”), executive placement and career transition/outplacement (“CTO”) services. Corporate expenses that directly support the operating units have been allocated to the Americas, EMEA and APAC regions and OCG based on a work effort, volume or, in the absence of a readily available measurement process, proportionately based on revenue from services.

 

 
14

 

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

11. Segment Disclosures (continued)

 

The following tables present information about the reported revenue from services and gross profit of the Company by segment, along with a reconciliation to consolidated earnings before taxes, for the 13 and 39 weeks ended 2012 and 2011. Asset information by reportable segment is not presented, since the Company does not produce such information internally, nor does it use such data to manage its business. Our segments themselves did not change from prior periods, however, effective with the first quarter of 2012, we changed the manner in which we evaluate and internally report segments, such that our primary measure of segment performance is now gross profit. Historically, our primary measure of segment performance was gross profit less an allocation of SG&A expenses. We revised the prior period's segment results to conform to the current manner in which we evaluate segment performance.

 

 

 

13 Weeks Ended

39 Weeks Ended

 

2012

2011

2012

2011

 

(In millions of dollars)

(In millions of dollars)

Revenue from Services:

                               

Americas Commercial

  $ 642.2   $ 661.7   $ 1,980.1   $ 1,985.3

Americas PT

    261.6     250.8     774.1     739.1

Total Americas Commercial and PT

    903.8     912.5     2,754.2     2,724.4
                                 

EMEA Commercial

    214.5     261.0     641.2     751.3

EMEA PT

    41.5     46.8     125.3     134.0

Total EMEA Commercial and PT

    256.0     307.8     766.5     885.3
                                 

APAC Commercial

    85.7     101.8     258.3     303.8

APAC PT

    14.3     14.1     39.9     39.1

Total APAC Commercial and PT

    100.0     115.9     298.2     342.9
                                 

OCG

    104.7     80.7     282.8     222.9
                                 

Less: Intersegment revenue

    (10.3 )     (7.1 )     (26.6 )     (20.8 )
                                 

Consolidated Total

  $ 1,354.2   $ 1,409.8   $ 4,075.1   $ 4,154.7

 

 
15

 

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

11. Segment Disclosures (continued)

 

 

13 Weeks Ended

39 Weeks Ended

 

2012

2011

2012

2011

 

(In millions of dollars)

(In millions of dollars)

Earnings from Operations:

                               

Americas Commercial gross profit

  $ 96.4   $ 93.6   $ 292.1   $ 278.9

Americas PT gross profit

    40.9     37.9     120.8     109.8

Americas Region gross profit

    137.3     131.5     412.9     388.7

Americas Region SG&A expenses

    (101.5 )     (97.7 )     (303.4 )     (296.3 )

Americas Region Earnings from Operations

    35.8     33.8     109.5     92.4
                                 

EMEA Commercial gross profit

    33.4     42.1     101.1     121.6

EMEA PT gross profit

    10.5     12.7     32.7     36.1

EMEA Region gross profit

    43.9     54.8     133.8     157.7

EMEA Region SG&A expenses

    (40.0 )     (46.7 )     (124.2 )     (143.3 )

EMEA Region Earnings from Operations

    3.9     8.1     9.6     14.4
                                 

APAC Commercial gross profit

    12.8     14.7     38.4     42.5

APAC PT gross profit

    6.2     5.6     16.7     16.2

APAC Region gross profit

19.0

20.3

    55.1     58.7

APAC Region SG&A expenses

    (18.8 )     (19.8 )     (57.5 )     (59.1 )

APAC Region Earnings from Operations

    0.2     0.5     (2.4 )     (0.4 )
                                 

OCG gross profit

    28.2     19.8     75.0     55.8

OCG SG&A expenses

    (24.2 )     (20.0 )     (69.6 )     (59.2 )

OCG Earnings from Operations

    4.0     (0.2 )     5.4     (3.4 )
                                 

Corporate

    (19.9 )     (20.1 )     (59.6 )     (58.0 )
                                 

Consolidated Total

    24.0     22.1     62.5     45.0
                                 

Other (Expense) Income, Net

    (0.7 )     1.0     (1.8 )     (0.1 )
                                 

Earnings Before Taxes

  $ 23.3   $ 23.1   $ 60.7   $ 44.9

 

12. New Accounting Pronouncements

 

None.

 

 

13. Subsequent Event

 

In October 2012, management made the decision to no longer pursue our PeopleSoft billing system implementation project in the U.S., Canada and Puerto Rico. Accordingly, based on the estimated costs to complete, management terminated the project at that time and will record pretax charges of approximately $3.0 million during the fourth quarter of 2012 to write off previously capitalized costs associated with the PeopleSoft billing system. Because management had not made the decision to abandon the PeopleSoft billing system project until the fourth quarter, we have determined this matter to be a fourth quarter accounting event.

 

 
16

 

 

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

 

Executive Overview

 

The third quarter of 2012 offered no relief from the global economic headwinds faced in the first half of the year, as conditions across Europe continued to decline. The U.S. recovery softened further in response to Europe's ongoing crises, anxiety over the fiscal cliff and uncertainty leading up to the presidential election.

 

Kelly achieved solid results amidst these conditions. Despite a 4% year-over-year decrease in third quarter revenue, we continued to make progress in our targeted strategic focus areas. In particular:

 

Our gross profit rate improved to 16.8%, compared to 16.0% in the third quarter of 2011. Twenty basis points of this improvement was due to changes in estimates of open workers' compensation claims.

 

SG&A expenses were relatively flat in comparison to the prior year.

 

Earnings from operations increased year over year by $2 million.

 

OCG continued to deliver strong year-over-year results, with earnings increasing by more than $4 million.

 

PT revenue growth rates outpaced commercial growth rates in all three regions.

 

We remain focused on achieving a competitive return on sales by growing our professional and technical, fee-based and other higher margin offerings, and maintaining our lower cost of service delivery. Though the recovery is slow, we believe long-term demand for our services will continue to increase. We are committed to responding to customers' needs for flexible, innovative solutions for managing their workforce – from traditional staffing to professional and technical specialties to outsourcing and consulting programs.

 

Total Company - Third Quarter

(Dollars in millions)


 

2012

2011

Change

CC

Change

Revenue from services

  $ 1,354.2   $ 1,409.8     (3.9 ) %     (1.0 ) %

Fee-based income

    38.2     36.7     3.5     8.3

Gross profit

    227.5     225.7     0.7     4.0

SG&A expenses excluding restructuring charges

    203.5     204.2     (0.4 )        

Restructuring charges

    -     (0.6 )     (100.0 )        

Total SG&A expenses

    203.5     203.6     (0.1 )     3.2

Earnings from operations

    24.0     22.1     8.5        
                                 

Gross profit rate

    16.8

%

    16.0

%

    0.8 pts.        

Expense rates (excluding restructuring charges):

                               

% of revenue

    15.0     14.5     0.5        

% of gross profit

    89.4     90.4     (1.0 )        

Operating margin

    1.8     1.6     0.2        

 

Operating margin (earnings from operations divided by revenue from services) in the above and following tables is a ratio used to measure the Company's pricing strategy and operating efficiency. Constant currency (“CC”) change amounts are non-GAAP measures. CC change amounts in the above and following tables refer to the year-over-year percentage changes resulting from translating 2012 financial data into U.S. dollars using the same foreign currency exchange rates used to translate financial data for 2011. We believe that CC measurements are an important analytical tool to aid in understanding underlying operating trends without distortion due to currency fluctuations.

 

 
17

 

 

Total Company revenue for the third quarter of 2012 was down 4% in comparison to the prior year, and down 5% excluding the Company's acquisition of Tradição in Brazil late last year. CC revenue for the third quarter of 2012 was down 1% in comparison to the prior year, and down 2% excluding Tradição. This reflected a 12% decrease in hours worked, partially offset by a 9% increase in average bill rates on a CC basis.

 

Effective with the first quarter of 2012, certain vendor management and other technology costs which were previously included in SG&A expenses are now included in cost of services, and the prior year's results were revised to conform to this presentation. The effect of this change was to increase cost of services and decrease SG&A expenses (and gross profit) by $3 million in the third quarter of 2011.

 

Compared to the third quarter of 2011, the gross profit rate improved due to stronger performance from the OCG segment and an improved temporary gross profit rate in the Americas and APAC regions. The improvement in the Americas' temporary gross profit rate was primarily due to lower workers' compensation costs. We regularly update our estimates of open workers' compensation claims. Due to favorable development of claims and payment data, we reduced our estimated costs of prior year workers' compensation claims by $4 million in the third quarter of 2012. This compares to an adjustment reducing prior year workers' compensation claims by $1 million for the third quarter of 2011.

   

Income tax expense for the third quarter of 2012 was $7 million (28.9%), compared to $3 million (14.6%) for the third quarter of 2011.  The increase in 2012 tax expense is primarily due to reduced tax credits.  The 2011 expense included the favorable impact of the Hiring Incentives to Restore Employment (“HIRE”) Act retention credits, which were available only in 2011, and work opportunity credits.  In 2012, work opportunity credits are available only for employees hired in prior years and certain U.S. veterans, due to expiration of the program at the end of 2011.  While the work opportunity credit program has expired and been retroactively reinstated many times in the past, extension of this program is uncertain. 

 

Diluted earnings from continuing operations per share for the third quarter of 2012 were $0.43, as compared to $0.52 for the third quarter of 2011.

 

Total Americas - Third Quarter

(Dollars in millions)


 

2012

2011

Change

CC

Change

Revenue from services

  $ 903.8   $ 912.5     (1.0 ) %     (0.3 ) %

Fee-based income

    8.1     6.4     25.2     27.1

Gross profit

    137.3     131.5     4.4     5.1

Total SG&A expenses

    101.5     97.7     4.0     4.9

Earnings from operations

    35.8     33.8     5.8        
                                 

Gross profit rate

    15.2

%

    14.4

%

    0.8 pts.