Kelly Services, Inc.
KELLY SERVICES INC (Form: 10-K, Received: 02/14/2013 13:57:55)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
      For the fiscal year ended December 30, 2012
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                

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)
     
Securities Registered Pursuant to Section 12(b) of the Act:
 Title of each class    Name of each exchange on which registered
Class A Common    NASDAQ Global Market
 Class B Common    NASDAQ Global Market
     
Securities Registered Pursuant to Section 12(g) of the Act:  None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes [  ]      No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes [  ]      No [X]

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     [X]
 
 
 

 
 
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 “smaller 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 Act).  Yes [  ] No [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $373,723,242.

Registrant had 33,723,170 shares of Class A and 3,452,585 of Class B common stock, par value $1.00, outstanding as of February 3, 2013.

Documents Incorporated by Reference

The proxy statement of the registrant with respect to its 2013 Annual Meeting of Stockholders is incorporated by reference in Part III.

 
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PART I

Unless the context otherwise requires, throughout this Annual Report on Form 10-K the words “Kelly,” “Kelly Services,” “the Company,” “we,” “us” and “our” refer to Kelly Services, Inc. and its consolidated subsidiaries.

ITEM 1.  BUSINESS .

History and Development of Business

Founded by William R. Kelly in 1946, Kelly Services® has developed innovative workforce solutions for customers in a variety of industries throughout our 66-year history.  Our range of solutions has grown steadily over the years to match the expanding needs of our customers.

We have evolved from a United States-based company concentrating primarily on traditional office staffing into a global workforce solutions leader offering a full breadth of specialty services.  While ranking as one of the world’s largest scientific staffing providers, we are also among the leaders in information technology, engineering and financial staffing, and we place professional and technical employees at all levels in law, healthcare, education and creative services.  These specialty services complement our expertise in office services, contact center, light industrial and electronic assembly staffing. As the human capital arena has become more complex, we have also developed a suite of innovative solutions to help many of the world’s largest companies manage their supply of talent, including outsourcing, consulting, recruitment, career transition and vendor management services.

Geographic Breadth of Services

Headquartered in Troy, Michigan, we provide employment for approximately 560,000 employees annually to a variety of customers around the globe—including 99 of the Fortune 100™ companies.

Kelly provides workforce solutions to a diversified group of customers in three regions: the Americas, Europe, the Middle East, and Africa (“EMEA”), and Asia Pacific (“APAC”) .

Description of Business Segments

Our operations are divided into seven principal business segments: Americas Commercial, Americas Professional and Technical (“Americas PT”), EMEA Commercial, EMEA   Professional and Technical (“EMEA PT”) , APAC Commercial, APAC Professional and Technical (“APAC PT”) and   Outsourcing and Consulting Group (“OCG”).

Americas Commercial
Our Americas Commercial segment specialties include: Office, providing trained employees for word processing, data entry, clerical and administrative support roles; Contact Center, providing staff for contact centers, technical support hotlines and telemarketing units; Education, supplying schools nationwide with instructional and non-instructional employees; Marketing, providing support staff for seminars, sales and trade shows; Electronic Assembly, providing assemblers, quality control inspectors and technicians; and Light Industrial, placing maintenance workers, material handlers and assemblers.  We also offer a temporary-to-hire service that provides customers and temporary staff the opportunity to evaluate their relationship before making a full-time employment decision, a direct-hire placement service and vendor on-site management.

Americas PT
Our Americas PT segment includes a number of industry-specific specialty services: Science, providing all levels of scientists and scientific and clinical research workforce solutions; Engineering, supplying engineering professionals across all disciplines including aeronautical, chemical, civil/structural, electrical/instrumentation, environmental, industrial, mechanical, petroleum, pharmaceutical, quality and telecommunications; Information Technology, placing IT specialists across all disciplines; Creative Services, placing creative talent in the spectrum of creative services positions; Finance and Accounting, serving the needs of corporate finance departments, accounting firms and financial institutions with all levels of financial professionals; Government, providing a full spectrum of talent management solutions to the U.S. federal government; Healthcare, providing all levels of healthcare specialists and professionals;   and Law, placing legal professionals including attorneys, paralegals, contract administrators, compliance specialists and legal administrators.  Our temporary-to-hire service, direct-hire placement service and vendor on-site management are also offered in this segment.
 
 
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EMEA Commercial
Our EMEA Commercial segment provides a similar range of staffing services as described for our Americas Commercial segment above, including: Office, Contact Center and our temporary-to-hire service.  Additional service areas include Catering and Hospitality, providing chefs, porters and hospitality representatives; and Industrial , supplying manual workers to semi-skilled professionals in a variety of trade, non-trade and operational positions.

EMEA PT
Our EMEA PT segment provides many of the same services as described for our Americas PT segment, including: Engineering, Finance and Accounting, Healthcare, IT and Science.

APAC Commercial
Our APAC Commercial segment offers a similar range of commercial staffing services as described for our Americas and EMEA Commercial segments above, through staffing solutions that include permanent placement, temporary staffing and temporary to full-time staffing.

APAC PT
Our APAC PT segment provides many of the same services as described for our Americas and EMEA PT segments, including: Engineering, IT and Science.  Additional services in Australia and New Zealand include mid- to senior-level search and selection for leaders in core practice areas such as HR, Sales and Marketing, Finance, Procurement and General Management.

OCG
OCG delivers integrated talent management solutions to meet customer needs across multiple regions, skill sets and the entire spectrum of human resources.  Using talent supply chain strategies, we help customers manage their contingent labor spend and gain access to service providers and quality talent at competitive rates and with minimized risk.  Services in this segment include: Contingent Workforce Outsourcing (CWO) , providing globally managed service solutions that integrate supplier and vendor management technology partners to optimize contingent workforce spend; Business Process Outsourcing (BPO) , offering full staffing and operational management of non-core functions or departments; Recruitment Process Outsourcing (RPO) , offering end-to-end talent acquisition solutions, including customized recruitment projects; Independent Contractor Solutions , delivering evaluation, classification and risk management services that enable safe access to this critical talent pool; Payroll Process Outsourcing (PPO) , providing centralized payroll processing solutions globally for our customers; Career Transition & Organizational Effectiveness (CTO) , offering a range of outplacement services; and Executive Search , providing leadership in executive placement in various regions throughout the world.

Financial information regarding our industry segments is included in the Segment Disclosures note to our consolidated financial statements presented in Part II, Item 8 of this report.

Business Objectives

Kelly’s philosophy is rooted in our conviction that we can and do make a difference on a daily basis — for our customers, in the lives of our employees, in the local communities we serve and in our industry.  Our vision is “to provide the world’s best workforce solutions.”  We aspire to be a strategic business partner to our customers and strive to assist them in operating efficient, profitable organizations.  Our solutions are customizable to benefit any scope or scale customers require.

As the use of contingent labor, consultants and independent contractors becomes more prevalent and critical to the ongoing success of our customer base, our core competencies are refined to help them realize their respective business objectives.  Kelly offers a comprehensive array of outsourcing and consulting services, as well as world-class staffing on a temporary, temporary-to-hire and direct placement basis.  Kelly will continue to deliver the strategic expertise our customers need to transform their workforce challenges into opportunities.
 
 
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Business Operations

Service Marks

We own numerous service marks that are registered with the United States Patent and Trademark Office, the European Union Community Trademark Office and numerous individual country trademark offices.

Seasonality

Our quarterly operating results are affected by the seasonality of our customers’ businesses.  Demand for staffing services historically has been lower during the first quarter, and typically increases during the remainder of the year.

Working Capital

Our working capital requirements are primarily generated from temporary employee payroll and customer accounts receivable.  Since receipts from customers generally lag payroll to temporary employees, working capital requirements increase substantially in periods of growth.

Customers

We are not dependent on any single customer or a limited segment of customers.  In 2012, an estimated 49% of total Company revenue was attributed to 100 large customers.  Our largest single customer accounted for approximately five percent of total revenue in 2012.

Government Contracts

Although we conduct business under various federal, state, and local government contracts, they do not account for a significant portion of our business.

Competition

The worldwide temporary staffing industry is competitive and highly fragmented.  In the United States, approximately 100 competitors operate nationally, and approximately 10,000 smaller companies compete in varying degrees at local levels.  Additionally, several similar staffing companies compete globally.  In 2012, our largest competitors were Allegis Group, Adecco S.A., Manpower Inc., Robert Half International Inc. and Randstad Holding N.V.

Key factors that influence our success are quality of service, price, breadth of service, and geographic coverage.
 
Quality of service is highly dependent on the availability of qualified, competent temporary employees, and our ability to recruit, screen, train, retain, and manage a pool of employees who match the skills required by particular customers.  During an economic downturn, we must balance competitive pricing pressures with the need to retain a qualified workforce.  Price competition in the staffing industry is intense — particularly for office clerical and light industrial personnel — and pricing pressure from customers and competitors continues to be significant.

Breadth of service, or ability to manage staffing suppliers, has become more critical as customers seek “one-stop shopping” for all their staffing needs.  Geographic presence is important, as temporary employees are generally unwilling to travel great distances for assignment, and customers prefer working with companies in their local market.

Environmental Concerns

Because we are involved in a service business, federal, state or local laws that regulate the discharge of materials into the environment do not materially impact us.

Employees

We employ approximately 1,100 people at our corporate headquarters in Troy, Michigan, and approximately 7,000 staff members in our international network of branch offices.  In 2012, we assigned approximately 560,000   temporary employees to a variety of customers around the globe.

 
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While services may be provided inside the facilities of customers, we remain the employer of record for our temporary employees.  We retain responsibility for employee assignments, the employer’s share of all applicable payroll taxes and the administration of the employee’s share of these taxes.

Foreign Operations

For information regarding sales, earnings from operations and long-lived assets by domestic and foreign operations, please refer to the information presented in the Segment Disclosures note to our consolidated financial statements, presented in Part II, Item 8 of this report.

Access to Company Information

We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (“SEC”).  The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC also maintains an Internet website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.

We make available, free of charge, through our Internet website, and by responding to requests addressed to our vice president of investor relations, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports.  These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.  Our website address is: www.kellyservices.com.   The information contained on our website, or on other websites linked to our website, is not part of this report.

 
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ITEM 1A.  RISK FACTORS.

We operate in a highly competitive industry with low barriers to entry and may be unable to compete successfully against existing or new competitors.

The worldwide staffing services market is highly competitive with limited barriers to entry.  We compete in global, national, regional and local markets with full-service and specialized temporary staffing companies.  While the majority of our competitors are significantly smaller than us, several competitors, including Allegis Group, Adecco S.A., Manpower Inc., Robert Half International Inc. and Randstad Holding N.V., have substantial marketing and financial resources.  In particular, Adecco S.A., Manpower Inc. and Randstad Holding N.V. are considerably larger than we are and, thus, have significantly more marketing and financial resources than we do.  Additionally, the emergence of on-line staffing platforms may pose a competitive threat to our services which operate under a more traditional staffing business model.  Price competition in the staffing industry is intense, particularly for the provision of office clerical and light industrial personnel.  We expect that the level of competition will remain high, which could limit our ability to maintain or increase our market share or profitability.

The number of customers consolidating their staffing services purchases with a single provider or small group of providers continues to increase which, in some cases, may make it more difficult for us to obtain or retain customers.  We also face the risk that our current or prospective customers may decide to provide similar services internally.  As a result, there can be no assurance that we will not encounter increased competition in the future.

Our business is significantly affected by fluctuations in general economic conditions.

Demand for staffing services is significantly affected by the general level of economic activity and employment in the United States and the other countries in which we operate.  When economic activity increases, temporary employees are often added before full-time employees are hired.  As economic activity slows, however, many companies reduce their use of temporary employees before laying off full-time employees.  Significant swings in economic activity historically have had a disproportionate impact on staffing industry volumes.  We may also experience more competitive pricing pressure during periods of economic downturn.  A substantial portion of our revenues and earnings are generated by our business operations in the United States.  Any significant economic downturn in the United States or certain other countries in which we operate could have a material adverse effect on our business, financial condition and results of operations.

We may not achieve the intended effects of our business strategy.

Our business strategy focuses on improving profitability through scale and specialization, particularly with our professional and technical and OCG businesses.  We have also implemented steps to increase our operating efficiency in our commercial staffing markets, grow our higher margin specialty staffing and grow our outsourcing and consulting business.  We are implementing cost-efficient service delivery models to enable local teams to focus on profit-generating activities and relationships.  If we are not successful or timely in achieving these objectives, our revenues, costs and overall profitability could be negatively affected.  If we are unable to execute our business strategy effectively, our productivity and cost competitiveness could be negatively affected.

Our loss of major customers or the deterioration of their financial condition or prospects could have a material adverse effect on our business.

Our business strategy is focused on serving large corporate customers through high volume global service agreements.  While our strategy is intended to enable us to increase our revenues and earnings from our major corporate customers, the strategy also exposes us to increased risks arising from the possible loss of major customer accounts.  The deterioration of the financial condition or business prospects of these customers could reduce their need for temporary employment services and result in a significant decrease in the revenues and earnings we derive from these customers.  The bankruptcy of a major customer could have a material adverse impact on our ability to meet our working capital requirements.

 
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Impairment charges relating to our goodwill and long-lived assets could adversely affect our results of operations.

We regularly monitor our goodwill and long-lived assets for impairment indicators.  In conducting our goodwill impairment testing, we compare the fair value of each of our reporting units to the related net book value.  In conducting our impairment analysis of long-lived assets, we compare the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values.  Changes in economic or operating conditions impacting our estimates and assumptions could result in the impairment of our goodwill or long-lived assets.  In the event that we determine that our goodwill or long-lived assets are impaired, we may be required to record a significant non-cash charge to earnings that could adversely affect our results of operations.

Our customer contracts contain termination provisions that could decrease our future revenues and earnings.

Most of our customer contracts can be terminated by the customer on short notice without penalty.  Our customers are, therefore, not contractually obligated to continue to do business with us in the future.  This creates uncertainty with respect to the revenues and earnings we may recognize with respect to our customer contracts.

We depend on our ability to attract and retain qualified temporary personnel (employed directly by us or through third-party suppliers).

We depend on our ability to attract qualified temporary personnel who possess the skills and experience necessary to meet the staffing requirements of our customers.  We must continually evaluate our base of available qualified personnel to keep pace with changing customer needs. Competition for individuals with proven professional skills is intense, and demand for these individuals is expected to remain strong for the foreseeable future.  There can be no assurance that qualified personnel will continue to be available in sufficient numbers and on terms of employment acceptable to us.  Our success is substantially dependent on our ability to recruit and retain qualified temporary personnel.

We may be exposed to employment-related claims and losses, including class action lawsuits and collective actions, which could have a material adverse effect on our business.

We employ and assign personnel in the workplaces of other businesses.  The risks of these activities include possible claims relating to:

 
·
discrimination and harassment;
 
 
·
wrongful termination or retaliation;
 
 
·
violations of employment rights related to employment screening or privacy issues;
 
 
·
classification of employees including independent contractors;
 
 
·
employment of unauthorized workers;
 
 
·
violations of wage and hour requirements;
 
 
·
retroactive entitlement to employee benefits;
 
 
·
failure to comply with leave policy requirements; and
 
 
·
errors and omissions by our temporary employees, particularly for the actions of professionals such as attorneys, accountants and scientists.
 
 
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We are also subject to potential risks relating to misuse of customer proprietary information, misappropriation of funds, damage to customer facilities due to negligence of temporary employees, criminal activity and other similar claims.  We may incur fines and other losses or negative publicity with respect to these problems.  In addition, these claims may give rise to litigation, which could be time-consuming and expensive.  In the U.S., and increasingly at the state and local level, and certain other countries in which we operate, new employment and labor laws and regulations have been proposed or adopted that may increase the potential exposure of employers to employment-related claims and litigation.  There can be no assurance that the corporate policies we have in place to help reduce our exposure to these risks will be effective or that we will not experience losses as a result of these risks.  Although we maintain insurance in types and amounts we believe are appropriate in light of the aforementioned exposures, there can also be no assurance that such insurance policies will remain available on reasonable terms or be sufficient in amount or scope of coverage.

Improper disclosure of sensitive or private information could result in liability and damage our reputation.

Our business involves the use, storage and transmission of information about full-time and temporary   employees.  Additionally, our employees may have access or exposure to customer data and systems, the misuse of which could result in legal liability.  We are dependent on, and are ultimately responsible for, the security provisions of vendors who have custodial control of our data.  We have established policies and procedures to help protect the security and privacy of this information.  It is possible that our security controls over personal and other data and other practices we follow may not prevent the improper access to or disclosure of personally identifiable or otherwise confidential information.  Such disclosure could harm our reputation and subject us to liability under our contracts and laws that protect personal data and confidential information, resulting in increased costs or loss of revenue.  Further, data privacy is subject to frequently evolving rules and regulations, which sometimes conflict among the various jurisdictions and countries in which we provide services.  Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability, additional compliance costs, missed business opportunities or damage to our reputation in the marketplace.

Unexpected changes in claim trends on our workers’ compensation and benefit plans may negatively impact our financial condition.

We self-insure, or otherwise bear financial responsibility for, a significant portion of expected losses under our workers’ compensation program and medical benefits claims.  Unexpected changes in claim trends, including the severity and frequency of claims, actuarial estimates and medical cost inflation, could result in costs that are significantly different than initially reported.  If future claims-related liabilities increase due to unforeseen circumstances, our costs could increase significantly.  There can be no assurance that we will be able to increase the fees charged to our customers in a timely manner and in a sufficient amount to cover increased costs as a result of any changes in claims-related liabilities.

Failure to maintain specified financial covenants in our bank credit facilities, or credit market events beyond our control, could adversely restrict our financial and operating flexibility and subject us to other risks, including risk of loss of access to capital markets.

Our bank credit facilities contain covenants that require us to maintain specified financial ratios and satisfy other financial conditions.  During 2012, we met all of the covenant requirements.  Our ability to continue to meet these financial covenants, particularly with respect to interest coverage (see Debt note in the footnotes to the consolidated financial statements), may not be assured.  If we default under this or any other of these requirements, the lenders could declare all outstanding borrowings, accrued interest and fees to be due and payable or significantly increase the cost of the facility.  In these circumstances, there can be no assurance that we would have sufficient liquidity to repay or refinance this indebtedness at favorable rates or at all.  Events beyond our control could result in the failure of one or more of our banks, reducing our access to liquidity and potentially resulting in reduced financial and operating flexibility.  If broader credit markets were to experience dislocation, our potential access to other funding sources would be limited.

 
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Damage to our key data centers could affect our ability to sustain critical business applications.

Many business processes critical to our continued operation are housed in our data center situated within the corporate headquarters complex as well as regional data centers in Asia-Pacific and Europe. Those processes include, but are not limited to, payroll, customer reporting and order management.  While we have taken steps to protect these operations, the loss of a data center would create a substantial risk of business interruption.

Our information technology projects may not yield their intended results.

At the present time, we have a number of information technology projects in process or in the planning stages, including improvements to applicant onboarding and tracking systems, order management, billing and customer data analytics.  Although the technology is intended to increase productivity and operating efficiencies, these projects may not yield their intended results.  Any delays in completing, or an inability to successfully complete, these technology initiatives or an inability to achieve the anticipated efficiencies could adversely affect our operations, liquidity and financial condition.

We are highly dependent on our senior management and the continued performance and productivity of our local management and field personnel.

We are highly dependent on the continued efforts of the members of our senior management.  We are also highly dependent on the performance and productivity of our local management and field personnel.  The loss of any of the members of our senior management may cause a significant disruption in our business.  In addition, the loss of any of our local managers or field personnel may jeopardize existing customer relationships with businesses that use our services based on relationships with these individuals.  The loss of the services of members of our senior management could have a material adverse effect on our business.

Our business is subject to extensive government regulation, which may restrict the types of employment services we are permitted to offer or result in additional or increased taxes, including payroll taxes, or other costs that reduce our revenues and earnings.

The temporary employment industry is heavily regulated in many of the countries in which we operate.  Changes in laws or government regulations may result in prohibition or restriction of certain types of employment services we are permitted to offer or the imposition of new or additional benefit, licensing or tax requirements that could reduce our revenues and earnings.  In particular, we are subject to state unemployment taxes in the U.S. which typically increase during periods of increased levels of unemployment.  We also receive benefits, such as the work opportunity income tax credit in the U.S., that regularly expire and may not be reinstated.  There can be no assurance that we will be able to increase the fees charged to our customers in a timely manner and in a sufficient amount to fully cover increased costs as a result of any changes in laws or government regulations.  Any future changes in laws or government regulations, or interpretations thereof, may make it more difficult or expensive for us to provide staffing services and could have a material adverse effect on our business, financial condition and results of operations.

The net financial impact of recent U.S. healthcare legislation on our results of operations could be significant.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Acts”) were signed into U.S. law.  The Acts represent comprehensive healthcare reform legislation that, in addition to other provisions, will require that we provide affordable, minimum essential healthcare coverage to certain temporary employees (and dependents) in the United States or incur penalties.  Although we intend to pass these costs on to our customers, there can be no assurance that we will be able to increase pricing to our customers in a sufficient amount to cover the increased costs.  While we are unable at this time to estimate the net impact of the Acts, we believe the net financial impact on our results of operations could be significant.

 
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We conduct a significant portion of our operations outside of the United States and we are subject to risks relating to our international business activities, including fluctuations in currency exchange rates.

We conduct our business in most major staffing markets throughout the world.  Our operations outside the United States are subject to risks inherent in international business activities, including:

 
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fluctuations in currency exchange rates;
 
 
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varying economic and political conditions;
 
 
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differences in cultures and business practices;
 
 
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differences in employment and tax laws and regulations;
 
 
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differences in accounting and reporting requirements;
 
 
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differences in labor and market conditions;
 
 
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changing and, in some cases, complex or ambiguous laws and regulations; and
 
 
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litigation and claims.

Our operations outside the United States are reported in the applicable local currencies and then translated into U.S. dollars at the applicable currency exchange rates for inclusion in our consolidated financial statements.  Exchange rates for currencies of these countries may fluctuate in relation to the U.S. dollar and these fluctuations may have an adverse or favorable effect on our operating results when translating foreign currencies into U.S. dollars.

Our controlling stockholder exercises voting control over our company and has the ability to elect or remove from office all of our directors.

Terence E. Adderley, the Executive Chairman of our board of directors, and certain trusts with respect to which he acts as trustee or co-trustee, control approximately 93% of the outstanding shares of Kelly Class B common stock, which is the only class of our common stock entitled to voting rights.  Mr. Adderley is therefore able to exercise voting control with respect to all matters requiring stockholder approval, including the election or removal from office of all members of the Board of Directors.

We are not subject to most of the listing standards that normally apply to companies whose shares are quoted on the NASDAQ Global Market.

Our Class A and Class B common stock are quoted on the NASDAQ Global Market.  Under the listing standards of the NASDAQ Global Market, we are deemed to be a “controlled company” by virtue of the fact that Terence E. Adderley, the Executive Chairman of our board of directors, and certain trusts of which he acts as trustee or co-trustee have voting power with respect to more than fifty percent of our outstanding voting stock.  A controlled company is not required to have a majority of its board of directors comprised of independent directors.  Director nominees are not required to be selected or recommended for the board’s selection by a majority of independent directors or a nominations committee comprised solely of independent directors, nor do the NASDAQ Global Market listing standards require a controlled company to certify the adoption of a formal written charter or board resolution, as applicable, addressing the nominations process.  A controlled company is also exempt from NASDAQ Global Market’s requirements regarding the determination of officer compensation by a majority of independent directors or a compensation committee comprised solely of independent directors.  A controlled company is required to have an audit committee composed of at least three directors, who are independent as defined under the rules of both the Securities and Exchange Commission and the NASDAQ Global Market.  The NASDAQ Global Market further requires that all members of the audit committee have the ability to read and understand fundamental financial statements and that at least one member of the audit committee possess financial sophistication.  The independent directors must also meet at least twice a year in meetings at which only they are present.

We currently comply with certain of the listing standards of the NASDAQ Global Market that do not apply to controlled companies.  Our compliance is voluntary, however, and there can be no assurance that we will continue to comply with these standards in the future.

 
10

 
 
Provisions in our certificate of incorporation and bylaws and Delaware law may delay or prevent an acquisition of our company.

Our restated certificate of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors.  For example, if a potential acquirer were to make a hostile bid for us, the acquirer would not be able to call a special meeting of stockholders to remove our board of directors or act by written consent without a meeting.  The acquirer would also be required to provide advance notice of its proposal to replace directors at any annual meeting, and would not be able to cumulate votes at a meeting, which would require the acquirer to hold more shares to gain representation on the board of directors than if cumulative voting were permitted.

Our board of directors also has the ability to issue additional shares of common stock that could significantly dilute the ownership of a hostile acquirer.  In addition, Section 203 of the Delaware General Corporation Law limits mergers and other business combination transactions involving 15 percent or greater stockholders of Delaware corporations unless certain board or stockholder approval requirements are satisfied.  These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation.

Our board of directors could choose not to negotiate with an acquirer that it did not believe was in our strategic interests.  If an acquirer is discouraged from offering to acquire us or prevented from successfully completing a hostile acquisition by these or other measures, our shareholders could lose the opportunity to sell their shares at a favorable price.

The holders of shares of our Class A common stock are not entitled to voting rights.

Under our certificate of incorporation, the holders of shares of our Class A common stock are not entitled to voting rights, except as otherwise required by Delaware law.  As a result, Class A common stock holders do not have the right to vote for the election of directors or in connection with most other matters submitted for the vote of our stockholders.

Our stock price may be subject to significant volatility and could suffer a decline in value.

The market price of our common stock may be subject to significant volatility.  We believe that many factors, including several which are beyond our control, have a significant effect on the market price of our common stock.  These include:

 
·
actual or anticipated variations in our quarterly operating results;
 
 
·
announcements of new services by us or our competitors;
 
 
·
announcements relating to strategic relationships or acquisitions;
 
 
·
changes in financial estimates by securities analysts;
 
 
·
changes in general economic conditions;
 
 
·
actual or anticipated changes in laws and government regulations;
 
 
·
changes in industry trends or conditions; and
 
 
·
sales of significant amounts of our common stock or other securities in the market.

In addition, the stock market in general, and the NASDAQ Global Market in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies.  These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.  In the past, securities class action litigation has often been instituted following periods of volatility in the market price of a company’s securities.  A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of our management’s attention and resources.  Further, our operating results may be below the expectations of securities analysts or investors.  In such event, the price of our common stock may decline.

 
11

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS.

None.
 
ITEM 2.  PROPERTIES.

We own our headquarters in Troy, Michigan, where corporate, subsidiary and divisional offices are currently located.  The original headquarters building was purchased in 1977.  Headquarters operations were expanded into additional buildings purchased in 1991, 1997 and 2001.
 
The combined usable floor space in the headquarters complex is approximately 350,000 square feet.  Our buildings are in good condition and are currently adequate for their intended purpose and use.  We also own undeveloped land in Troy and northern Oakland County, Michigan.

Branch office business is conducted in leased premises with the majority of leases being fixed for terms of generally three to five years in the United States and Canada and five to ten years outside the United States and Canada.  We own virtually all of the office furniture and the equipment used in our corporate headquarters and branch offices.
 
ITEM 3.  LEGAL PROCEEDINGS .
 
During the second quarter of 2012, the Company received final court approval of a settlement of a single class action, Fuller v. Kelly Services, Inc. and Kelly Home Care Services, Inc., in the Superior Court of California, Los Angeles, which involved a claim for monetary damages by current and former temporary employees in the State of California.  The claims were related to alleged misclassification of personal attendants as exempt and not entitled to overtime compensation under state law and alleged technical violations of a state law governing the content of employee pay stubs.  Recognized in discontinued operations in 2011 was a $1.2 million after tax charge relating to the settlement and in 2012 a $0.4 million after tax reduction in our estimate of costs to settle the litigation.

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.
 
ITEM 4.  MINE SAFETY DISCLOSURES.

Not applicable.

 
12

 
 
PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES .

Market Information and Dividends

Our Class A and Class B common stock is traded on the NASDAQ Global Market under the symbols “KELYA” and “KELYB,” respectively.  The high and low selling prices for our Class A common stock and Class B common stock as quoted by the NASDAQ Global Market and the dividends paid on the common stock for each quarterly period in the last two fiscal years are reported in the table below .   Our ability to pay dividends is subject to compliance with certain financial covenants contained in our debt facilities, as described in the Debt footnote to the consolidated financial statements.
 
   
Per share amounts (in dollars)
 
                               
   
First
   
Second
   
Third
   
Fourth
       
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Year
 
2012
                             
Class A common
                             
High
  $ 18.09     $ 16.25     $ 14.30     $ 15.90     $ 18.09  
Low
    13.75       11.30       11.26       12.40       11.26  
                                         
Class B common
                                       
High
    17.40       18.02       14.47       15.50       18.02  
Low
    13.80       12.13       11.65       12.93       11.65  
                                         
Dividends
    0.05       0.05       0.05       0.05       0.20  
                                         
2011
                                       
Class A common
                                       
High
  $ 22.99     $ 21.41     $ 17.58     $ 17.00     $ 22.99  
Low
    17.50       14.61       10.95       10.77       10.77  
                                         
Class B common
                                       
High
    22.99       21.30       16.70       17.12       22.99  
Low
    18.10       14.53       12.23       11.26       11.26  
                                         
Dividends
    -       -       0.05       0.05       0.10  
 
Holders
The number of holders of record of our Class A and Class B common stock were approximately 8,600 and 300, respectively, as of February 3, 2013.

Recent Sales of Unregistered Securities

None.

 
13

 
 
Issuer Purchases of Equity Securities

                     
Maximum Number
 
               
Total Number
   
(or Approximate
 
               
of Shares (or
   
Dollar Value) of
 
   
Total Number
   
Average
   
Units) Purchased
   
Shares (or Units)
 
   
of Shares
   
Price Paid
   
as Part of Publicly
   
That May Yet Be
 
   
(or Units)
   
per Share
   
Announced Plans
   
Purchased Under the
 
Period
 
Purchased
   
(or Unit)
   
or Programs
   
Plans or Programs
 
                     
(in millions of dollars)
 
                         
October 1, 2012 through November 4, 2012
    280     $ 12.77       -     $ -  
                                 
November 5, 2012 through December 2, 2012
    30,192       13.66       -       -  
                                 
December 3, 2012 through December 30, 2012
    -       -       -       -  
                                 
Total
    30,472     $ 13.65       -          
 
We may reacquire shares sold to cover taxes due upon the vesting of restricted stock held by employees.  Accordingly, 30,472 shares were reacquired during the Company’s fourth quarter.
 
 
14

 

Performance Graph

The following graph compares the cumulative total return of our Class A common stock with that of the S&P 600 SmallCap Index and the S&P 1500 Human Resources and Employment Services Index for the five years ended December 31, 2012.  The graph assumes an investment of $100 on December 31, 2007 and that all dividends were reinvested.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Assumes Initial Investment of $100
December 31, 2007 – December 31, 2012


 
   
2007
   
2008
   
2009
   
2010
   
2011
   
2012
 
Kelly Services, Inc.
  $ 100.00     $ 71.98     $ 66.00     $ 104.01     $ 76.20     $ 89.04  
S&P SmallCap 600 Index
  $ 100.00     $ 68.92     $ 86.53     $ 109.31     $ 109.05     $ 124.41  
S&P 1500 Human Resources and Employment Services Index
  $ 100.00     $ 64.34     $ 88.91     $ 102.84     $ 86.88     $ 97.38  
 
 
15

 
 
ITEM 6.  SELECTED FINANCIAL DATA.

The following table summarizes selected financial information of Kelly Services, Inc. and its subsidiaries for each of the most recent five fiscal years.  This table should be read in conjunction with the other financial information, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements included elsewhere in this report.

(In millions except per share amounts)
 
2012
   
2011
   
2010
   
2009 (1)
   
2008
 
                               
Revenue from services
  $ 5,450.5      $ 5,551.0     $ 4,950.3     $ 4,314.8     $ 5,517.3  
Earnings (loss) from continuing operations (2)
    49.7       64.9       26.1       (105.1 )     (81.7 )
Earnings (loss) from discontinued operations, net of tax (3)
    0.4       (1.2 )     -       0.6       (0.5 )
Net earnings (loss)
    50.1       63.7       26.1       (104.5 )     (82.2 )
                                         
Basic earnings (loss) per share:
                                       
Earnings (loss) from continuing operations
    1.31       1.72       0.71       (3.01 )     (2.35 )
Earnings (loss) from discontinued operations
    0.01       (0.03 )     -       0.02       (0.02 )
Net earnings (loss)
    1.32       1.69       0.71       (3.00 )     (2.37 )
                                         
Diluted earnings (loss) per share:
                                       
Earnings (loss) from continuing operations
    1.31       1.72       0.71       (3.01 )     (2.35 )
Earnings (loss) from discontinued operations
    0.01       (0.03 )     -       0.02       (0.02 )
Net earnings (loss)
    1.32       1.69       0.71       (3.00 )     (2.37 )
                                         
Dividends per share
                                       
Classes A and B common
    0.20       0.10       -       -       0.54  
                                         
Working capital
    470.3       417.0       367.6       357.6       427.4  
Total assets
    1,635.7       1,541.7       1,368.4       1,312.5       1,457.3  
Total noncurrent liabilities
    172.4       168.3       153.6       205.3       203.8  
 
(1)
Fiscal year included 53 weeks.
 
(2)
Included in results of continuing operations are asset impairments of $3.1 million in 2012, $2.0 million in 2010, $53.1 million in 2009  and $80.5 million in 2008.
 
(3)
Discontinued Operations represent adjustments to assets and liabilities retained from the 2006 sale of Kelly Staff Leasing  and 2007 sale of Kelly Home Care.
 
 
16

 

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .

Executive Overview
The Staffing Industry

The worldwide staffing industry is competitive and highly fragmented.  In the United States, approximately 100 competitors operate nationally, and approximately 10,000 smaller companies compete in varying degrees at local levels.  Additionally, several similar staffing companies compete globally.  Demand for temporary services is highly dependent on the overall strength of the global economy and labor markets.  In periods of economic growth, demand for temporary services generally increases, and the need to recruit, screen, train, retain and manage a pool of employees who match the skills required by particular customers becomes critical.  Conversely, during an economic downturn, competitive pricing pressures can pose a threat to retaining a qualified temporary workforce.  Accordingly, the on-going economic crisis in the Eurozone and slow recovery from recession in the U.S. has impacted all staffing firms over the last several years.

Our Business

Kelly Services is a global staffing company, providing innovative workforce solutions for customers in a variety of industries.  Our staffing operations are divided into three regions, Americas, EMEA and APAC, with commercial and professional and technical staffing businesses in each region.  As the human capital arena has become more complex, we have also developed a suite of innovative solutions within our global OCG Group.  We are forging strategic relationships with our customers to help them manage their flexible workforces, through outsourcing, consulting, recruitment, career transition and vendor management services.

We earn revenues from the hourly sales of services by our temporary employees to customers, as a result of recruiting permanent employees for our customers, and through our outsourcing and consulting activities.  Our working capital requirements are primarily generated from temporary employee payroll and customer accounts receivable.  The nature of our business is such that trade accounts receivable are our most significant financial asset.  Average days sales outstanding varies within and outside the U.S., but averages more than 50 days on a global basis.  Since receipts from customers generally lag temporary employee payroll, working capital requirements increase substantially in periods of growth.

Our Strategy and Outlook

Our long-term strategic objective is to create shareholder value by delivering a competitive profit from the best workforce solutions and talent in the industry.  We have set a long-term goal to achieve a competitive return on sales of 4%.  To attain this, we are focused on the following key areas:

 
·
Maintain our core strengths in commercial staffing and key markets;
 
·
Aggressively grow our professional and technical staffing;
 
·
Transform our OCG segment into a market-leading provider of talent supply chain management;
 
·
Capture permanent placement growth in selected specialties; and
 
·
Lower our costs through deployment of efficient service delivery models.
 
In the face of economic uncertainty, softening demand, and declining revenue, we made progress in 2012, although at a pace slower than we had originally expected.  During 2012, we:

 
·
Maintained our competitive position in key global staffing markets;
 
·
Grew our professional and technical business by 3% year over year, despite a 2% decline in total revenue;
 
·
Increased our OCG revenue by 25% year over year and improved earnings from operations by over $11 million;
 
·
Increased permanent placement fees by 7% year over year; and
 
·
Reduced expenses by 1% in comparison to last year.
 
We improved our return on sales by 30 basis points to 1.3%, although still far short of our long-term goal of 4.0%.  In order to make significant progress against our long-term goal, we will need much stronger economic growth in order to leverage our business.
 
 
17

 

Looking ahead, although the U.S. unemployment rate is currently below 8%, overall job growth remains tepid, and U.S. temporary job growth is decelerating -- trends that are likely to continue in 2013.  We expect that ongoing economic uncertainty in the U.S., fueled by the fiscal situation, will continue to constrain hiring in the near-term.  In Europe, we do not anticipate any significant changes to the recessionary conditions that continue to take their toll on the labor market.

An additional challenge for us will be to meet the 2014 provisions of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Acts”).  The Acts represent comprehensive health care reform legislation that, in addition to other provisions, will require that we offer affordable, minimum essential health care coverage to certain temporary employees (and dependents) in the United States or incur penalties.  In order to comply with the Acts, Kelly intends to begin offering health care coverage in 2014 to all temporary employees eligible for coverage under the Acts. 

At this point in time, we are unable to estimate the costs of complying with the Acts.  Estimating the costs of complying with the Acts is difficult due to a variety of factors associated with our temporary employee population, including:  the number of employees who are eligible for coverage; the percentage of eligible employees who will enroll for health care coverage; the number of months during the following year that those employees who accept coverage remain an employee; determination of the appropriate employee contribution share for affordability purposes; the cost and availability of health care coverage that meets the Acts’ requirements;  and the cost of implementation and ongoing administrative costs of compliance.   Although we intend to pass ongoing costs on to our customers, there can be no assurance that we will be able to increase pricing to our customers in a sufficient amount to cover the increased costs, and the net financial impact on our results of operations could be significant.

Longer-term, we believe the trends in the staffing industry are positive:  companies are becoming more comfortable with the use of flexible staffing models; there is increasing acceptance of free agents and contractual employment by companies and candidates alike; and companies are searching for more comprehensive workforce management solutions.  This shift in demand for contingent labor plays to our strengths and experience -- particularly serving large companies.

Financial Measures – Operating Margin and Constant Currency

Operating margin (earnings from operations divided by revenue from services) in the 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 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.

 
18

 
 
Results of Operations
2012 versus 2011
 
Total Company
(Dollars in millions)
 
   
2012
   
2011
   
Change
   
CC
Change
 
Revenue from services
  $ 5,450.5     $ 5,551.0       (1.8 ) %     (0.2 ) %
Fee-based income
    148.2       138.0       7.3       10.1  
Gross profit
    896.6       883.3       1.5       3.3  
SG&A expenses excluding restructuring charges
    822.1       822.8       (0.1 )        
Restructuring charges
    (0.9 )     2.8       (132.3 )        
Total SG&A expenses
    821.2       825.6       (0.6 )     1.2  
Asset impairments
    3.1       -    
NM
         
Earnings from operations
    72.3       57.7       25.3          
                                 
Gross profit rate
    16.5 %     15.9 %     0.6  pts.        
Expense rates (excluding restructuring charges):
                               
% of revenue
    15.1       14.8       0.3          
% of gross profit
    91.7       93.2       (1.5 )        
Operating margin
    1.3       1.0       0.3          
 
Total Company revenue for 2012 was down 2% in comparison to the prior year, and declined 3% excluding the Company’s 2011 acquisition of Tradição described below.  On a CC basis, total Company revenue was flat and down 1% excluding the Company’s acquisition of Tradição.  This reflected an 11% decrease in hours worked, partially offset by a 9% increase in average bill rates on a CC basis.  Hours decreased in our staffing business in all three regions.  The decrease in the Americas and EMEA was due, in large part, to the economic uncertainty existing in both regions, while the decline in APAC was due to decisions we made to exit low-margin business in India.  The improvement in average bill rates was primarily due to the mix of countries, particularly the business we exited in India with very low average bill rates.

Compared to 2011, the gross profit rate improved by 60 basis points due to higher fee-based income and an improved temporary gross profit rate in the Americas and APAC regions and the OCG segment.  The improvement in the Americas’ temporary gross profit rate included the impact of 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 by $10 million for 2012.  This compares to an adjustment reducing prior year workers’ compensation claims by $6 million for 2011.

Fee-based income, which is included in revenue from services, has a significant impact on gross profit rates.  There are very low direct costs of services associated with fee-based income.  Therefore, increases or decreases in fee-based income can have a disproportionate impact on gross profit rates.

Selling, general and administrative (“SG&A”) expenses excluding restructuring decreased slightly year over year.  In the fourth quarter of 2012, we embarked on a restructuring program for certain of our EMEA operations in Italy, France and Ireland.  The total net restructuring benefit in 2012 included $3 million of revisions of the estimated lease termination costs for previously closed EMEA Commercial branches, partially offset by $2 million of severance and lease termination costs for those EMEA Commercial branches which are in the process of closing.  We expect to spend approximately $0.5 million in the first quarter of 2013 to complete the restructuring in EMEA.  Restructuring costs in 2011 relate primarily to revisions of the estimated lease termination costs for previously closed EMEA Commercial branches.

In the fourth quarter of 2012, we made the decision to abandon our PeopleSoft billing system implementation in the U.S., Canada and Puerto Rico and, accordingly, recorded asset impairment charges of $3 million, representing previously capitalized costs associated with this project.

 
19

 
 
Income tax expense for 2012 was $19 million (27.8%), compared to a benefit of $7 million (-12.6%) for 2011.  The 2012 income tax expense was impacted by the expiration of employment-related income tax credits, including the Hiring Incentives to Restore Employment (“HIRE”) Act retention credit, which was unavailable in 2012, and the work opportunity credit, which was available in 2012 only for veterans and pre-2012 hires.  Together, these income tax credits totaled $8 million in 2012, compared to $28 million in 2011.  The work opportunity credit was retroactively reinstated on January 2, 2013, which will result in a first quarter 2013 tax benefit of $9 million that would have been recognized in 2012 if the law had been in effect at year-end 2012.  In 2012, the Company closed income tax examinations relating to prior years, resulting in a $5 million benefit.  During 2011, the Company determined that for tax reporting purposes, it was eligible for worthless stock deductions related to foreign subsidiaries, which provided U.S. federal and state benefits of $8 million in 2011.

Diluted earnings from continuing operations per share for 2012 were $1.31, as compared to $1.72 for 2011.

Earnings (loss) from discontinued operations for 2012 and 2011 represent adjustments to the estimated costs of litigation, net of tax, retained from the 2007 sale of the Kelly Home Care business unit.
 
Total Americas
(Dollars in millions)
 
   
2012
   
2011
   
Change
   
CC
Change
 
Revenue from services
  $ 3,672.1     $ 3,643.7       0.8 %     1.3 %
Fee-based income
    30.2       25.3       19.0       20.3  
Gross profit
    547.9       523.1       4.7       5.2  
Total SG&A expenses
    405.8       396.4       2.4       3.0  
Earnings from operations
    142.1       126.7       12.0          
                                 
Gross profit rate
    14.9 %     14.4 %     0.5  pts.        
Expense rates:
                               
% of revenue
    11.1       10.9       0.2          
% of gross profit
    74.1       75.8       (1.7 )        
Operating margin
    3.9       3.5       0.4          

On an organic basis, excluding the Tradição acquisition in Brazil in late 2011, CC revenue decreased slightly.  This was attributable to a 4% decrease in hours worked, partially offset by a 3% increase in average bill rates on a CC basis.  During 2012, the PT segment revenue grew by 5%, while the Commercial segment revenue, excluding Tradição, declined 3%.  The PT segment growth was fueled primarily by increases in hours and revenues in our engineering, IT and finance services.  The decrease in Commercial segment revenue was driven primarily by decreases in light industrial and electronic assembly service lines, reflecting slowing demand as the year progressed, due to economic uncertainties.   Americas represented 67% of total Company revenue in 2012 and 66% in 2011.

The increase in our gross profit rate was due to the combined effects of increased fee-based income, pricing increases and the decreases in workers’ compensation costs noted above.  The year-over-year increase in total SG&A expenses is due to the costs associated with our Tradição operation.  Total SG&A expenses without Tradição decreased slightly from last year.

 
20

 
 
Total EMEA
(Dollars in millions)
 
   
2012
   
2011
   
Change
   
CC
Change
 
Revenue from services
  $ 1,022.9     $ 1,169.0       (12.5 ) %     (6.7 ) %
Fee-based income
    39.2       44.1       (11.2 )     (5.5 )
Gross profit
    176.8       207.7       (14.9 )     (9.2 )
SG&A expenses excluding restructuring charges
    169.0       186.9       (9.7 )        
Restructuring charges
    (0.9 )     2.8       (132.3 )        
Total SG&A expenses
    168.1       189.7       (11.5 )     (6.0 )
Earnings from operations
    8.7       18.0       (51.6 )        
                                 
Gross profit rate
    17.3 %     17.8 %     (0.5 ) pts.        
Expense rates (excluding restructuring charges):
                               
% of revenue
    16.5       16.0       0.5          
% of gross profit
    95.6       90.1       5.5          
Operating margin
    0.8       1.5       (0.7 )        
 
The change in EMEA revenue from services reflected an 11% decrease in hours worked.  The decrease primarily reflects the difficult economic environment in the European Union.  However, we also saw a decrease in our hours in Russia, where we were focused on gaining higher-margin customers.  The decrease in volume was partially offset by a 5% increase in average bill rates on a CC basis.  This was the result of average bill rate increases in Switzerland due to favorable customer mix and Russia where, as noted above, we were focused on higher-margin customers.  EMEA represented 19% of total Company revenue in 2012 and 21% in 2011 .

The EMEA gross profit rate decreased due to both a mix change, where higher-margin retail business decreased by more than lower-margin corporate accounts, and a decrease in fee-based income in the Eurozone due to the economic environment.

The decrease in SG&A expenses excluding restructuring charges was primarily due to a reduction of full-time employees in specific countries.  Restructuring costs recorded in 2012 reflect the net costs associated with the restructuring actions taken in Italy, France and Ireland in the fourth quarter of 2012, offset by adjustments to prior restructuring costs in the U.K.
 
Total APAC
(Dollars in millions)
 
   
2012
   
2011
   
Change
   
CC
Change
 
Revenue from services
  $ 394.8     $ 449.0       (12.1 ) %     (11.5 ) %
Fee-based income
    27.5       29.2       (5.8 )     (4.8 )
Gross profit
    71.1       76.3       (6.8 )     (6.3 )
Total SG&A expenses
    73.4       77.0       (4.7 )     (4.1 )
Earnings from operations
    (2.3 )     (0.7 )     (207.4 )        
                                 
Gross profit rate
    18.0 %     17.0 %     1.0   pts.        
Expense rates:
                               
% of revenue
    18.6       17.2       1.4          
% of gross profit
    103.3       101.0       2.3          
Operating margin
    (0.6 )     (0.2 )     (0.4 )        
 
 
21

 
 
The change in total APAC revenue reflected a 35% decrease in hours worked, partially offset by a 35% increase in average bill rates on a CC basis.  The change in both hours worked and average bill rates were due primarily to a decision to exit low-margin customers in India.  In addition to reducing hours, this changed our mix of business, as the average bill rate in India is significantly lower than that of the APAC region.  We also saw a decrease in hours worked in Australia, where market demand for temporary volume in the lower margin manufacturing and light industrial service lines has slowed down.  APAC revenue represented 7% of total Company revenue in 2012 and 8% in 2011.
 
The improvement in the APAC gross profit rate was also due to the decision to exit a number of lower-margin customers in India.  The temporary gross profit rate in India was significantly lower than the temporary gross profit rate of the region.  Fee-based income also contributed to the improvement in the gross profit rate.  Although fees declined on a year-over-year basis, they declined by less than total revenue and thus had a positive mix effect.
 
The change in SG&A expenses reflects a decrease in full-time salaries due, in part, to a decision to keep open positions vacant in response to volume pressures in the region.

OCG
(Dollars in millions)
 
   
2012
   
2011
   
Change
   
CC
Change
 
Revenue from services
  $ 396.1     $ 317.3       24.8 %     25.5 %
Fee-based income
    51.4       39.5       30.0       32.1  
Gross profit
    104.0       78.8       32.0       33.5  
Total SG&A expenses
    95.4       81.4       17.0       18.6  
Earnings from operations
    8.6       (2.6 )  
NM
         
                                 
Gross profit rate
    26.3 %     24.8 %     1.5   pts.        
Expense rates:
                               
% of revenue
    24.1       25.7       (1.6 )        
% of gross profit
    91.6       103.4       (11.8 )        
Operating margin
    2.2       (0.8 )     3.0          
 
Revenue from services in the OCG segment increased during 2012 due to growth in BPO of 40%, RPO growth of 22% and CWO growth of 20%.  The revenue growth in BPO was due to expansion of programs with existing customers, RPO revenue increased, in part, due to a large project which was completed in the third quarter and CWO growth was due to implementation of new customers.  OCG revenue represented 7% of total Company revenue in 2012 and 6% in 2011.

The OCG gross profit rate increased primarily due to mix as volume increased in the higher margin BPO, RPO and CWO practice areas.  The increase in SG&A expenses is primarily the result of support costs, salaries and incentive-based compensation associated with new customer programs, as well as higher volumes on existing programs in our BPO, RPO and CWO practice areas.

 
22

 

Results of Operations
2011 versus 2010

Total Company
(Dollars in millions)
 
   
2011
   
2010
   
Change
   
CC
Change
 
Revenue from services
  $ 5,551.0     $ 4,950.3       12.1 %     9.6 %
Fee-based income
    138.0       99.0       39.4       33.4  
Gross profit
    883.3       786.9       12.3       9.4  
SG&A expenses excluding restructuring charges
    822.8       739.6       11.3          
Restructuring charges
    2.8       7.2       (61.7 )        
Total SG&A expenses
    825.6       746.8       10.6       7.6  
Asset impairments
    -       2.0       (100.0 )        
Earnings from operations
    57.7       38.1       51.4          
                                 
Gross profit rate
    15.9 %     15.9 %     -   pts.        
Expense rates (excluding restructuring charges):
                               
% of revenue
    14.8       14.9       (0.1 )        
% of gross profit
    93.2       94.0       (0.8 )        
Operating margin
    1.0       0.8       0.2          
 
The U.S. and global economies slowly strengthened during 2011.  More than 1.8 million jobs were created in the U.S., representing the best performance in five years.  Within the U.S. staffing industry, more than 650,000 jobs were added since the recovery began in September 2009, and the temporary help penetration rate grew steadily during 2011, concluding the year at 1.81%.  As a result of these improving conditions, we were able to increase the number of hours worked by 7%, in comparison to 2010.  This, combined with a 2% increase in average bill rates on a CC basis, drove our year-over-year revenue increase.  On a CC basis, revenue increased in all business segments.

Compared to 2010, the 2011 gross profit rate was unchanged.  The growth in fee-based income offset a decline in the temporary staffing gross profit rate which resulted from the expiration of the HIRE Act payroll tax benefit in the U.S.  The HIRE Act, which allowed employers to receive tax incentives for hiring and retaining previously unemployed individuals, resulted in a benefit to our gross profit of $21 million in 2010.  HIRE Act benefits were also available in 2011, but as an income tax credit, rather than a benefit to the Company’s gross profit.

SG&A expenses increased year over year due primarily to higher compensation costs.  During 2011 we hired full-time employees, primarily in our PT and OCG businesses as part of executing our business strategy, reinstated certain retirement benefits and merit increase programs and increased incentive-based compensation.  Restructuring costs incurred in 2011 primarily related to revisions of the estimated lease termination costs for EMEA Commercial branches that closed in prior years.  Restructuring costs incurred in 2010 primarily related to severance and lease termination costs for branches in the EMEA Commercial and APAC Commercial segments that were in the process of closure at the end of 2009, and severance costs related to the corporate headquarters.

Income tax benefit for 2011 was $7 million (-12.6%), compared to income tax expense of $7 million (20.2%) for 2010.  The income tax benefit in 2011 was largely impacted by significant employment-related income tax credits, including the favorable impact of the HIRE Act retention credit of $11 million and continued strong work opportunity credits of $17 million.  Together, these income tax credits totaled $28 million in 2011, compared to $12 million in 2010 .   The Company also determined that for tax reporting purposes it was eligible for worthless stock deductions related to foreign subsidiaries, which provided U.S. federal and state benefits of $8 million in 2011, compared to $1 million in 2010.  The HIRE Act retention credit was available only in 2011, and was in addition to the HIRE Act payroll tax benefits recognized in cost of services in 2010.

 
23

 
 
Included in earnings from continuing operations were restructuring charges of $3 million, net of tax, for 2011 and $5 million, net of tax, for 2010.  Diluted earnings from continuing operations per share for 2011 were $1.72, as compared to $0.71 for 2010.  Discontinued operations in 2011 represents costs of litigation, net of tax, retained from the 2007 sale of the Kelly Home Care business unit.
 
Total Americas
(Dollars in millions)
 
   
2011
   
2010
   
Change
   
CC
Change
 
Revenue from services
  $ 3,643.7     $ 3,317.2       9.8 %     9.5 %
Fee-based income
    25.3       17.8       43.3       42.6  
Gross profit
    523.1       493.5       6.1       5.8  
SG&A expenses excluding restructuring charges
    396.4       367.6       7.9          
Restructuring charges
    -       0.3       (100.0 )        
Total SG&A expenses
    396.4       367.9       7.8       7.5  
Earnings from operations
    126.7       125.6       1.0          
                                 
Gross profit rate
    14.4 %     14.9 %     (0.5 ) pts.        
Expense rates (excluding restructuring charges):
                               
% of revenue
    10.9       11.1       (0.2 )        
% of gross profit
    75.8       74.5       1.3          
Operating margin
    3.5       3.8       (0.3 )        
 
The change in Americas revenue from services reflected a 7% increase in hours worked, combined with a 2% increase in average bill rates on a CC basis.  Commercial revenues increased by nearly 10%, primarily due to increases in demand from existing and new light industrial customers and an increase in our electronic assembly service lines during the year.  Our PT segment grew just over 10%, fueled by solid growth in our science, engineering and IT services.  Americas represented 66% of total Company revenue in 2011 and 67% in 2010.

The change in the gross profit rate was due primarily to the unfavorable impact related to the expiration of the HIRE Act payroll tax benefit.  SG&A expenses increased due to the reinstatement of merit increases and certain retirement benefits, higher incentive-based compensation and additional PT staff.
 
 
24

 
 
Total EMEA
(Dollars in millions)
 
                     
CC
 
   
2011
   
2010
   
Change
   
Change
 
Revenue from services
  $ 1,169.0     $ 1,019.6       14.7 %     6.7 %
Fee-based income
    44.1       34.1       28.6       20.7  
Gross profit
    207.7       179.5       15.6       7.6  
SG&A expenses excluding restructuring charges
    186.9       167.2       11.9          
Restructuring charges
    2.8       2.7       4.0          
Total SG&A expenses
    189.7       169.9       11.8       3.9  
Asset impairments
    -       1.5       (100.0 )        
Earnings from operations
    18.0       8.1       115.7          
                                 
Gross profit rate
    17.8 %     17.6 %     0.2   pts.        
Expense rates (excluding restructuring charges):
                               
% of revenue
    16.0       16.4       (0.4 )        
% of gross profit
    90.1       93.0       (2.9 )        
Operating margin
    1.5       0.8       0.7          
 
The change in revenue from services in EMEA resulted from a 6% increase in average hourly bill rates on a CC basis.  Approximately half of the increase relates to the strategic focus on higher skilled candidates in the U.K., France, Germany and Norway.  Salary inflation in Russia also accounts for a large portion of the increase.  EMEA revenue represented 21% of total Company revenue in both 2011 and 2010.

The change in the EMEA gross profit rate was primarily due to increases in fee-based income, as a result of targeted investments in additional full-time employees in new or existing branches in Russia, France, Italy and Germany.  Russia accounted for approximately one-third of the growth in fees, and France, Italy and Germany each accounted for approximately 15% of the fee growth.

The increase in SG&A expenses was due to increased hiring of full-time employees in specific countries.  The vast majority of the investments were done in Switzerland, France, Germany and Russia, countries with identified high-growth potential and investments in additional PT branches in Russia, Germany and the U.K.
 
 
25

 
 
Total APAC
(Dollars in millions)
 
                     
CC
 
   
2011
   
2010
   
Change
   
Change
 
Revenue from services
  $ 449.0     $ 387.8       15.8 %     7.9 %
Fee-based income
    29.2       21.9       34.8       25.6  
Gross profit
    76.3       62.2       22.6       13.6  
SG&A expenses excluding restructuring charges
    77.0       62.0       24.0          
Restructuring charges
    -       0.5       (100.0 )        
Total SG&A expenses
    77.0       62.5       23.0       13.8  
Earnings from operations
    (0.7 )     (0.3 )     (83.8 )        
                                 
Gross profit rate
    17.0 %     16.0 %     1.0   pts.        
Expense rates (excluding restructuring charges):
                               
% of revenue
    17.2       16.0       1.2          
% of gross profit
    101.0       99.8       1.2          
Operating margin
    (0.2 )     (0.1 )     (0.1 )        
 
The change in revenue from services in APAC resulted from an 11% increase in hours worked, partially offset by a 3% decline in average hourly bill rates on a CC basis. The volume increase was due to a 20% increase in hours worked by temporary employees in India for customers in the telecommunication services sector in the first half of the year. The decline in average hourly bill rates was due to the mix effect of adding hours in India, where the average bill rate is significantly lower than the average for the APAC region. APAC revenue represented 8% of total Company revenue in both 2011 and 2010.

The improvement in the APAC gross profit rate was primarily due to higher growth in fee-based income.  Nearly 50% of the fee growth came from Australia and New Zealand and approximately 25% came from China.  This was the result of a focused effort on building the PT permanent placement practice in these countries.  SG&A expenses increased, primarily due to higher salaries and related costs from the investment in additional full-time employees across the region.
 
OCG
(Dollars in millions)
 
                     
CC
 
   
2011
   
2010
   
Change
   
Change
 
Revenue from services
  $ 317.3     $ 254.8       24.5 %     23.6 %
Fee-based income
    39.5       25.6       54.3       49.8  
Gross profit
    78.8       54.1       45.6       43.2  
SG&A expenses excluding restructuring charges
    81.4       71.6       13.5          
Restructuring charges
    -       0.1       (100.0 )        
Total SG&A expenses
    81.4       71.7       13.4       10.6  
Earnings from operations
    (2.6 )     (17.6 )     85.0          
                                 
Gross profit rate
    24.8 %     21.3 %     3.5   pts.        
Expense rates (excluding restructuring charges):
                               
% of revenue
    25.7       28.2       (2.5 )        
% of gross profit
    103.4       132.6       (29.2 )        
Operating margin
    (0.8 )     (7.0 )     6.2          
 
 
26

 
 
Revenue from services in the OCG segment increased due to growth in RPO of 42%, growth in BPO of 25% and growth in CWO of 22%.  Growth in all practice areas was due to the expansion of programs with existing customers.  OCG revenue represented 6% of total Company revenue in 2011 and 5% in 2010.

The OCG gross profit rate increased primarily due to increased volume in the higher-margin BPO, RPO and CWO practice areas, as well as increases in gross profit rates for both the BPO and RPO practice areas in 2011.  The increase in SG&A expenses is primarily the result of support costs, salaries and incentive-based compensation associated with the expansion of customer programs, as well as higher volumes on existing programs, in our RPO and CWO practice areas.

Results of Operations
Financial Condition

Historically, we have financed our operations through cash generated by operating activities and access to credit markets.  Our working capital requirements are primarily generated from temporary employee payroll and customer accounts receivable.  Since receipts from customers generally lag payroll to temporary employees, working capital requirements increase substantially in periods of growth.  Conversely, when economic activity slows, working capital requirements may substantially decrease.  As highlighted in the consolidated statements of cash flows, our 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 $76 million at the end of 2012, compared to $81 million at year-end 2011.  As further described below, during 2012, we generated $61 million of cash from operating activities, used $28 million of cash for investing activities and used $39 million in cash for financing activities.

Operating Activities

In 2012, we generated $61 million of cash from operating activities, as compared to generating $19 million in 2011 and $42 million in 2010.  The increase from 2011 to 2012 was primarily due to lower additional working capital requirements.  The decrease from 2010 to 2011 was primarily due to growth in working capital requirements, partially offset by improved operating results.

Trade accounts receivable totaled $1.0 billion at the end of 2012.  Global days sales outstanding (“DSO”) for the fourth quarter were 53 days for 2012, compared to 52 days for 2011.

Our working capital position was $470 million at the end of 2012, an increase of $53 million from year-end 2011.  The current ratio was 1.7 at year-end 2012 and 1.6 at year-end 2011.

Investing Activities

In 2012, we used $28 million of cash for investing activities, compared to $21 million in 2011 and $11 million in 2010. Capital expenditures, which totaled $22 million in 2012, $15 million in 2011 and $11 million in 2010, primarily related to the Company’s information technology programs, including costs for the implementation of the PeopleSoft payroll, billing and accounts receivable project.

The PeopleSoft payroll, billing and accounts receivable project, which commenced in the fourth quarter of 2004, was intended to cover the U.S., Canada, Puerto Rico, the U.K. and Ireland.  During 2012, management made the decision to abandon the billing system module in the U.S., Canada and Puerto Rico, and wrote off the previously capitalized costs related to this portion of the project.  To date, the Company has implemented modules associated with payroll in the northeast region of the U.S. and Canada, accounts receivable in all locations, payroll and billing in the U.K. and Ireland, and general ledger and fixed assets in the U.S., Puerto Rico and Canada.  We anticipate spending approximately $3 to $4 million in 2013 to complete the PeopleSoft project.

 
27

 

During 2012, we entered into an agreement with Temp Holdings Co., Ltd. (“Temp Holdings”) to form a venture, TS Kelly Workforce Solutions (“TS Kelly”), in order to expand both companies’ presence in North Asia.  As part of this agreement, we contributed our operations in China, South Korea and Hong Kong for a 49% ownership interest in TS Kelly.  The $7 million investment represents a $2 million payment to TS Kelly, as well as the cash on hand at the operations we contributed.  Our share of the operating results of TS Kelly will be recorded on an equity basis beginning in the first quarter of 2013.

To establish the Company’s presence in the Brazilian market, we 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, in November, 2011 for $7 million in cash.  In addition to the cash payment, the Company assumed debt of $9 million as part of this transaction.  The operating results of Tradição are included as a business unit in the Americas Commercial operating segment.

Financing Activities

In 2012, we used $39 million in cash for financing activities, as compared to generating $6 million in 2011 and using $35 million in 2010.  Changes in cash from financing activities are primarily related to borrowing activities.  Debt totaled $64 million at year-end 2012 compared to $96 million at year-end 2011.  Debt-to-total capital is a common ratio to measure the relative capital structure and leverage of the Company.  Our ratio of debt-to-total capital (total debt reported on the balance sheet divided by total debt plus stockholders’ equity) was 8.0% at the end of 2012 and 12.5% at the end of 2011.

In 2012, the net change in short-term borrowings included $21 million and $6 million related to payments on the securitization facility and revolving credit facility, respectively.  In 2011, the net change in short-term borrowings included $67 million related to borrowings on t he securitization facility.  Subsequent to the acquisition of Tradição in November, 2011, we established an unsecured, uncommitted revolving line of credit for the Brazilian legal entities, and used the facility to pay off short-term debt.  Accordingly, also included in the 2011 net change in short-term borrowings was $6 million related to borrowings under the revolving line of credit in Brazil.  In 2010, the net change in short-term borrowings included $38 million related to payments on the securitization facility.
 
During 2011, we repaid term debt of $68 million.  Included in this amount was $5 million of short-term debt which was paid off by our Brazilian legal entities subsequent to the acquisition of Tradição.   During 2010, we paid $15 million due on our yen-denominated credit facility.

Included in financing activities during 2010 was $24 million related to the sale of 1,576,169 shares of Kelly’s Class A common stock to Temp Holdings.  The shares were sold in a private transaction at $15.42 per share, which was the average of the closing prices of the Class A common stock for the five days from May 3, 2010 through May 7, 2010, and represented 4.8 percent of the outstanding Class A shares after the completion of the sale.

Dividends paid per common share were $0.20 in 2012 and $0.10 in 2011.  No dividends were paid in 2010.  Payments of dividends are restricted by the financial covenants contained in our debt facilities.  Details of this restriction are contained in the Debt footnote in the notes to our consolidated financial statements.

 
28

 

Contractual Obligations and Commercial Commitments
 
Summarized below are our obligations and commitments to make future payments as of year-end 2012:
 
   
Payment due by period
 
   
Total
   
Less than
1 year
   
1-3 Years
   
3-5 Years
   
More than
5 years
 
   
(In millions of dollars)
 
Operating leases
  $ 108.0     $ 42.6     $ 45.1     $ 15.8     $ 4.5  
Short-term borrowings
    64.1       64.1       -       -       -  
Accrued insurance
    76.3       32.8       19.8       9.2       14.5  
Accrued retirement benefits
    116.5       5.5       11.1       11.2       88.7  
Other long-term liabilities
    15.4       2.1       7.5       4.0       1.8  
Uncertain income tax positions
    3.1       0.1       0.8       1.0       1.2  
Purchase obligations
    31.6       16.7       14.9       -       -  
                                         
Total
  $ 415.0     $ 163.9     $ 99.2     $ 41.2     $ 110.7  
 
Purchase obligations above represent unconditional commitments relating primarily to voice and data communications services which we expect to utilize generally within the next two fiscal years, in the ordinary course of business.  We have no material, unrecorded commitments, losses, contingencies or guarantees associated with any related parties or unconsolidated entities.

Liquidity

We expect to meet our ongoing short- and long-term cash requirements principally through cash generated from operations, available cash and equivalents, securitization of customer receivables and committed unused credit facilities.  Additional funding sources could include public or private bonds, asset-based lending, additional bank facilities, issuance of equity or other sources.

We utilize intercompany loans, dividends, capital contributions and redemptions to effectively manage our cash on a global basis.  We periodically review our foreign subsidiaries’ cash balances and projected cash needs.  As part of those reviews, we may identify cash that we feel should be repatriated to optimize the Company’s overall capital structure.  At the present time, these reviews have not resulted in any specific plans to repatriate our international cash balances.  We expect much of our international cash will be needed to fund working capital growth in our local operations.  The majority of our international cash is concentrated in a cash pooling arrangement (the “Cash Pool”) and is available to fund general corporate needs internationally.  The Cash Pool is a set of cash accounts maintained with a single bank that must, as a whole, maintain at least a zero balance; individual accounts may be positive or negative.  This allows countries with excess cash to invest and countries with cash needs to utilize the excess cash.

We manage our cash and debt very closely to optimize our capital structure.  As our cash balances build, we tend to pay down debt as appropriate.  Conversely, when working capital needs grow, we tend to use corporate cash and cash available in the Cash Pool first, and then access our borrowing facilities.

At year-end 2012, we had $150 million of available capacity on our $150 million revolving credit facility and $32 million of available capacity on our $150 million securitization facility.  The securitization facility carried $63 million of short-term borrowings and $55 million of standby letters of credit related to workers’ compensation.  Together, the revolving credit and securitization facilities provide the Company with committed funding capacity that may be used for general corporate purposes.  While we believe these facilities will cover our working capital needs over the short term, if economic conditions or operating results change significantly, we may need to seek additional sources of funds.  Throughout 2012 and as of the 2012 year end we met the debt covenants related to our revolving credit facility and securitization facility.

 
29

 

At year-end 2012, we also had additional unsecured, uncommitted short-term credit facilities totaling $13 million, under which we had borrowed $1 million.  Details of our debt facilities as of the 2012 year end are contained in the Debt footnote in the notes to our consolidated financial statements.

We monitor the credit ratings of our major banking partners on a regular basis.  We also have regular discussions with them.  Based on our reviews and communications, we believe the risk of one or more of our banks not being able to honor commitments is insignificant.  We also review the ratings and holdings of our money market funds and other investment vehicles regularly to ensure high credit quality and access to our invested cash.

As of the end of fiscal 2012, we had no holdings of sovereign debt in Italy, Portugal, Ireland, Spain or Greece.  Our investment policy requires our international affiliates to contribute any excess cash balances to the Cash Pool.  We then manage this as counterparty exposure and distribute the risk among our Cash Pool provider and other banks we may designate from time to time.
 
At the end of fiscal 2012, our total exposure to European receivables from our customers was $284 million, which represents 28% of total trade accounts receivable, net.  The percentage of trade accounts receivable over 90 days past due for Europe was consistent with our global experience.  Net trade accounts receivable for Italy, Portugal and Ireland, specific countries currently experiencing economic volatility, totaled $38 million at the 2012 year end, and we have not experienced a significant deterioration in these amounts during 2012.

Critical Accounting Estimates

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States.  In this process, it is necessary for us to make certain assumptions and related estimates affecting the amounts reported in the consolidated financial statements and the attached notes. Actual results can differ from assumed and estimated amounts.

Critical accounting estimates are those that we believe require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Judgments and uncertainties affecting the application of those estimates may result in materially different amounts being reported under different conditions or using different assumptions.  We consider the following estimates to be most critical in understanding the judgments involved in preparing our consolidated financial statements.

Workers’ Compensation

We have a combination of insurance and self-insurance contracts under which we effectively bear the first $500,000 of risk per single accident, except in the state of California, where we bear the first $750,000 of risk per single accident.  There is no aggregate limitation on our per-risk exposure under these insurance and self-insurance programs.  We establish accruals for workers’ compensation utilizing actuarial methods to estimate the undiscounted future cash payments that will be made to satisfy the claims, including an allowance for incurred-but-not-reported claims.  This process includes establishing loss development factors, based on our historical claims experience as well as industry experience, and applying those factors to current claims information to derive an estimate of our ultimate claims liability.  In preparing the estimates, we also consider the nature, frequency and severity of the claims, reserving practices of our third party claims administrators, performance of our medical cost management programs, changes in our territory and business line mix and current legal, economic and regulatory factors such as industry estimates of medical cost trends.  Where appropriate, multiple generally-accepted actuarial techniques are applied and tested in the course of preparing our estimates.  When claims exceed insured limits and realization of the claim for recovery is deemed probable, we record a receivable from the insurance company for the excess amount.
 
 
30

 
 
We evaluate the accrual, and the underlying assumptions, regularly throughout the year and make adjustments as needed.  The ultimate cost of these claims may be greater than or less than the established accrual.  While we believe that the recorded amounts are reasonable, there can be no assurance that changes to our estimates will not occur due to limitations inherent in the estimation process.  In the event we determine that a smaller or larger accrual is appropriate, we would record a credit or a charge to cost of services in the period in which we made such a determination.  The accrual for workers’ compensation, net of related receivables which are included in other assets in the consolidated balance sheet, was $61 million and $70 million at year-end 2012 and 2011, respectively.

Income Taxes

Income tax expense is based on expected income and statutory tax rates in the various jurisdictions in which we operate.  Judgment is required in determining our income tax expense.  We establish accruals for uncertain tax positions under generally accepted accounting principles, which require that a position taken or expected to be taken in a tax return be recognized in the consolidated financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information.  A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.  Our effective tax rate includes the impact of accruals and changes to accruals that we consider appropriate, as well as related interest and penalties.  A number of years may lapse before a particular matter, for which we have or have not established an accrual, is audited and finally resolved.  While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our accruals are appropriate under generally accepted accounting principles.  Favorable or unfavorable adjustment of the accrual for any particular issue would be recognized as an increase or decrease to our income tax expense in the period of a change in facts and circumstances.  Our current tax accruals are presented in the consolidated balance sheet   within income and other taxes and long-term tax accruals are presented in the consolidated balance sheet within other long-term liabilities.

Tax laws require items to be included in the tax return at different times than the items are reflected in the consolidated financial statements.  As a result, the income tax expense reflected in our consolidated financial statements is different than the liability reported in our tax return.  Some of these differences are permanent, which are not deductible or taxable on our tax return, and some are temporary differences, which give rise to deferred tax assets and liabilities.  Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the tax benefit in our consolidated income statement.  We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit.  Deferred tax liabilities generally represent items for which we have already taken a deduction on our tax return, but have not yet recognized as expense in our consolidated financial statements.  Our net deferred tax asset is recorded using currently enacted tax rates, and may need to be adjusted in the event tax rates change.

The U.S. work opportunity credit is allowed for wages earned by employees in certain targeted groups.  The actual amount of creditable wages in a particular period is estimated, since the credit is only available once an employee reaches a minimum employment period and the employee’s inclusion in a targeted group is certified by the applicable state.  As these events often occur after the period the wages are earned, judgment is required in determining the amount of work opportunity credits accrued for in each period.  We evaluate the accrual regularly throughout the year and make adjustments as needed.

Goodwill

We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred.  Generally accepted accounting principles require that goodwill be tested for impairment at a reporting unit level.  We have determined that our reporting units are the same as our operating and reportable segments.  If we have determined that it is more likely than not that the fair value for one or more reporting units is greater than their carrying value, we may use a qualitative assessment for the annual impairment test.

 
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In conducting the qualitative assessment, we assess the totality of relevant events and circumstances that affect the fair value or carrying value of the reporting unit.  Such events and circumstances may include macroeconomic conditions, industry and competitive environment conditions, overall financial performance, reporting unit specific events and market considerations.  We may also consider recent valuations of the reporting unit, including the magnitude of the difference between the most recent fair value estimate and the carrying value, as well as both positive and adverse events and circumstances, and the extent to which each of the events and circumstances identified may affect the comparison of a reporting unit’s fair value with its carrying value.

For reporting units where the qualitative assessment is not used, goodwill is tested for impairment using a two-step process.  In the first step, the estimated fair value of a reporting unit is compared to its carrying value.  If the estimated fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is not considered impaired and no further testing is required.  To derive the estimated fair value of reporting units, we primarily relied on an income approach.  Under the income approach, estimated fair value is determined based on estimated future cash flows discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of the reporting unit being measured.  Estimated future cash flows are based on our internal projection model.  Assumptions and estimates about future cash flows and discount rates are complex and often subjective.  They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.

If the carrying value of the net assets assigned to a reporting unit exceeds the estimated fair value of a reporting unit, a second step of the impairment test is performed in order to determine the implied fair value of a reporting unit’s goodwill.  Determining the implied fair value of goodwill requires valuation of a reporting unit’s tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination.  If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference.

We completed our annual impairment test for all reporting units in the fourth quarter for the fiscal year ended 2012 and 2011 and determined that goodwill was not impaired.  In 2012, we performed a qualitative assessment for the Americas Commercial and Americas PT reporting units, and a step one quantitative assessment for the APAC PT and OCG reporting segments.  In 2011, we performed a step one quantitative assessment for all reporting units.

Our step one analysis used significant assumptions by segment, including: expected future revenue and expense growth rates, profit margins, cost of capital, discount rate and forecasted capital expenditures.  Our revenue projections assumed near-term growth consistent with current year results, followed by long-term modest growth. Although we believe the assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.  Different assumptions of the anticipated future results and growth from these businesses could result in an impairment charge, which would decrease operating income and result in lower asset values on our consolidated balance sheet.  For example, a 10% reduction in our growth rate assumptions would not result in the estimated fair value falling below book value for any of our segments.

At year-end 2012 and 2011, total goodwill amounted to $90 million.  (See the Goodwill footnote in the notes to our consolidated financial statements ).

Litigation

Kelly is subject to legal proceedings and claims arising out of the normal course of business.  Kelly routinely assesses the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses.  A determination of the amount of the accruals required, if any, for these contingencies is made after analysis of each known issue.  Development of the analysis includes consideration of many factors including: potential exposure, the status of proceedings, negotiations, results of similar litigation and participation rates.  The required accruals may change in the future due to new developments in each matter.  For further discussion, see the Contingencies footnote in the notes to consolidated financial statements of this Annual Report on Form 10-K.  At year-end 2012 and 2011, the accrual for litigation costs amounted to $3   million and $5 million, respectively, and is included in accounts payable and accrued liabilities on the consolidated balance sheet.

 
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Allowance for Uncollectible Accounts Receivable

We make ongoing estimates relating to the collectibility of our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments.  In determining the amount of the allowance, we consider our historical level of credit losses and apply percentages to certain aged receivable categories.  We also make judgments about the creditworthiness of significant customers based on ongoing credit   evaluations, and we monitor historical trends that might impact the level of credit losses in the future.  Historically, losses from uncollectible accounts have not exceeded our allowance.  Since we cannot predict with certainty future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates.  If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required.  In the event we determined that a smaller or larger allowance was appropriate, we would record a credit or a charge to SG&A expense in the period in which we made such a determination.  In addition, we also include a provision for sales allowances, based on our historical experience, in our allowance for uncollectible accounts receivable.  If sales allowances vary from our historical experience, an adjustment to the allowance may be required.  As of year-end 2012 and 2011, the allowance for uncollectible accounts receivable was $10 million and $13 million, respectively.

NEW ACCOUNTING PRONOUNCEMENTS

See New Accounting Pronouncements footnote in the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this report for a description of new accounting pronouncements.

 
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this report are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995.  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 actions by us that may be provided by management, including oral statements or other written materials released to the public, are also forward-looking statements.  Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our company and economic and market factors in the countries in which we do business, among other things. These statements are not guarantees of future performance, and we have 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 our 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 and technology introductions, changing market and economic conditions, our ability to achieve our business strategy, including our ability to successfully expand into new markets and service lines, material changes in demand from or loss of large corporate customers, impairment charges triggered by adverse industry or market developments, unexpected termination of customer contracts, availability of temporary workers with appropriate skills required by customers, liabilities for employment-related claims and losses, including class action lawsuits and collective actions, liability for improper disclosure of sensitive or private employee information, unexpected changes in claim trends on workers’ compensation and benefit plans, our ability to maintain specified financial covenants in our bank facilities, our ability to access credit markets and continued availability of financing for funding working capital, our ability to sustain critical business applications through our key data centers, our ability to effectively implement and manage our information technology programs, our ability to retain the services of our senior management, local management and field personnel, the impact of changes in laws and regulations (including federal, state and international tax laws), the net financial impact of the Patient Protection and Affordable Care Act on our business, and risks associated with conducting business in foreign countries, including foreign currency fluctuations.  Certain risk factors are discussed more fully under “Risk Factors” in Part I, Item 1A of this report.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .

We are exposed to foreign currency risk primarily due to our net investment in foreign subsidiaries, which conduct business in their local currencies.  We may also utilize local currency-denominated borrowings.

In addition, we are exposed to interest rate risks through our use of the multi-currency line of credit and other borrowings.  A hypothetical fluctuation of 10% of market interest rates would not have had a material impact on 2012 earnings.

Marketable equity investments, representing our investment in Temp Holdings, are stated at fair value and marked to market through stockholders’ equity, net of tax.  Impairments in value below historical cost, if any, deemed to be other than temporary, would be expensed in the consolidated statement of earnings.  See the Fair Value Measurements footnote in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for further discussion.

We are exposed to market risk as a result of our obligation to pay benefits under our nonqualified deferred compensation plan and our 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 mutual funds, as part of the company-owned variable universal life insurance policies, are designed to mitigate, but not eliminate, this risk with offsetting gains and losses.

Overall, our holdings and positions in market risk-sensitive instruments do not subject us to material risk.

 
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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements and supplementary data required by this Item are set forth in the accompanying index on page 41 of this filing and are presented in pages 42-74.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.  CONTROLS AND PROCEDURES.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective.

Management’s Report on Internal Control Over Financial Reporting

Management’s report on internal control over financial reporting is presented preceding the consolidated financial statements on page 42 of this report.

Attestation Report of Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP, independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 30, 2012, as stated in their report which appears herein.

Changes in Internal Control Over Financial Reporting

During 2012, the Company implemented the PeopleSoft payroll system for payroll processing in the northeast region of the U.S.  Management has reviewed the internal controls impacted by the implementation of the PeopleSoft payroll system and has made changes to these internal controls as appropriate.

There were no other changes in our internal control over financial reporting that occurred during our fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.  OTHER INFORMATION

None.

 
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PART III

Information required by Part III with respect to Directors, Executive Officers and Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters (Item 12), Certain Relationships and Related Transactions, and Director Independence (Item 13) and Principal Accounting Fees and Services (Item 14), except as set forth under the titles "Executive Officers of the Registrant", which is included on page 36, and “Code of Business Conduct and Ethics,” which is included on page 37, (Item 10), and except as set forth under the title “Equity Compensation Plan Information,” which is included on page 37, (Item 12), is to be included in a definitive proxy statement filed not later than 120 days after the close of our fiscal year and the proxy statement, when filed, is incorporated in this report by reference.

ITEM 10.  EXECUTIVE OFFICERS OF THE REGISTRANT.
 
Name/Office
 
Age
 
Served as an
Officer Since
 
Business Experience
During Last 5 Years
             
Carl T. Camden
President and
  Chief Executive Officer
 
58
 
1995
 
Served as officer of the Company.
             
George S. Corona
Executive Vice President and
  Chief Operating Officer
 
54
 
2000
 
Served as officer of the Company.
             
Patricia Little
Executive Vice President and
  Chief Financial Officer
 
52
 
2008
 
Served as officer of the Company since
July 2008.  Served in various key
finance positions at Ford Motor
Company from 1984 to 2008, most
recently as general auditor (2006 –
2008).
             
Michael S. Webster
Executive Vice President
 
57
 
1996
 
Served as officer of the Company.
             
Leif Agneus
Senior Vice President and
  General Manager,
  EMEA / APAC
 
49
 
2002
 
Served as officer of the Company.
             
Teresa S. Carroll
Senior Vice President and
  General Manger, Outsourcing
  and Consulting Group
 
47
 
2000
 
Served as officer of the Company.
             
Michael E. Debs
Senior Vice President, Controller
  and Chief Accounting Officer
 
55
 
2000
 
Served as officer of the Company.
             
Peter W. Quigley
Senior Vice President and
  General Counsel
 
51
 
2004
 
Served as officer of the Company.
             
Antonina M. Ramsey
Senior Vice President
 
58
 
1992
 
Served as officer of the Company.

 
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CODE OF BUSINESS CONDUCT AND ETHICS.

We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer or controller or persons performing similar functions.  The Code of Business Conduct and Ethics is included as Exhibit 14 in the Index to Exhibits on page 76.  We have posted our Code of Business Conduct and Ethics on our website at www.kellyservices.com.  We intend to post any changes in or waivers from our Code of Business Conduct and Ethics applicable to any of these officers on our website.

ITEM 12.  SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.

Equity Compensation Plan Information

The following table shows the number of shares of our common stock that may be issued upon the exercise of outstanding options, warrants and rights, the weighted-average exercise price of outstanding options, warrants and rights, and the number of securities remaining available for future issuance under our equity compensation plans as of the fiscal year end for 2012.
 
   
Number of securities to be issued upon exercise of outstanding options, warrants and rights
   
Weighted-average exercise price of outstanding options, warrants and rights
   
Number of securities remaining available for future issuance
under equity compensation plans (excluding securities reflected in the first column) (2)
 
Equity compensation plans approved by security holders (1)
    392,599     $ 26.16       1,866,542  
                         
Equity compensation plans not approved by security holders (3)
    -       -       -  
                         
Total
    392,599     $ 26.16       1,866,542  
 
(1)
The equity compensation plans approved by our stockholders include our Equity Incentive Plan, Non-Employee Director Stock Option Plan and Non-Employee Director Stock Award Plan.
 
 
The number of shares to be issued upon exercise of outstanding options, warrants and rights excludes 1,062,525 of restricted stock granted to employees and not yet vested at December 30, 2012.
 
(2)
The Equity Incentive Plan provides that the maximum number of shares available for grants, including stock options and restricted stock, is 10 percent of the outstanding Class A common stock, adjusted for plan activity over the preceding five years.
 
 
The Non-Employee Director Stock Option Plan provides that the maximum number of shares available for settlement of options is 250,000 shares of Class A common stock.
 
The Non-Employee Director Stock Award Plan provides that the maximum number of shares available for awards is one-quarter of one percent of the outstanding Class A common stock.

(3)
We have no equity compensation plans that have not been approved by our stockholders.

 
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PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a)   The following documents are filed as part of this report:

(1)     Financial statements:

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm
 
Consolidated Statements of Earnings for the three fiscal years ended December 30, 2012

Consolidated Statements of Comprehensive Income for the three fiscal years ended December 30, 2012
 
Consolidated Balance Sheets at December 30, 2012 and January 1, 2012
 
Consolidated Statements of Stockholders' Equity for the three fiscal years ended December 30, 2012
 
Consolidated Statements of Cash Flows for the three fiscal years ended December 30, 2012

Notes to Consolidated Financial Statements
 
(2)    Financial Statement Schedule -
 
For the three fiscal years ended December 30, 2012:
 
Schedule II - Valuation Reserves

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

 
(3)
The Exhibits are listed in the Index to Exhibits included beginning at page 75,   which is incorporated herein by reference.

(b)
The Index to Exhibits and required Exhibits are included following the Financial Statement Schedule beginning at page 75 of this filing.

(c)
None.

 
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SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date:  February 14, 2013   KELLY SERVICES, INC.  
    Registrant  
       
       
  By /s/ P. Little  
    P. Little  
    Executive Vice President and Chief Financial Officer  
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 
Date: February 14, 2013 * T. E. Adderley  
    T. E. Adderley  
    Executive Chairman of the Board and Director  
       
Date: February 14, 2013 * C. T. Camden  
    C. T. Camden  
    President, Chief Executive Officer and Director  
    (Principal Executive Officer)  
       
Date: February 14, 2013   * C. M. Adderley  
    C. M. Adderley  
    Director  
       
Date: February 14, 2013 *  J. E. Dutton  
    J. E. Dutton  
    Director  
       
Date: February 14, 2013 * M. A. Fay, O.P.  
    M. A. Fay, O.P.