XNAS:KELYB Kelly Services Inc Class B Quarterly Report 10-Q Filing - 7/1/2012

Effective Date 7/1/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

      For the quarterly period ended July 1, 2012

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-1088
 
KELLY SERVICES, INC.
(Exact name of registrant as specified in its charter)
     
DELAWARE   38-1510762
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
999 WEST BIG BEAVER ROAD, TROY, MICHIGAN 48084
(Address of principal executive offices)  (Zip Code)
     
(248) 362-4444
(Registrant's telephone number, including area code)
     
No Change
(Former name, former address and former fiscal year, if changed since last report.)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).   Yes [X]     No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  [  ]    Accelerated filer  [X]  
Non-accelerated filer  [  ] (Do not check if a smaller reporting company) Smaller reporting company  [  ]  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [  ]       No  [X]

At July 27, 2012, 33,625,093 shares of Class A and 3,454,485 shares of Class B common stock of the Registrant were outstanding.
 
 
1

 
 
KELLY SERVICES, INC. AND SUBSIDIARIES
 
 
Page
Number
PART I. FINANCIAL INFORMATION
 
       
Item 1.
  Financial Statements (unaudited)  
       
   
Consolidated Statements of Earnings
3
       
   
Consolidated Statements of Comprehensive Income
4
       
   
Consolidated Balance Sheets
5
       
   
Consolidated Statements of Stockholders' Equity
6
       
 
 
Consolidated Statements of Cash Flows
7
       
 
 
Notes to Consolidated Financial Statements
8
 
     
Item 2.
  Management's Discussion and Analysis of Financial Condition and Results of Operations 17
     
 
Item 3.
  Quantitative and Qualitative Disclosures About Market Risk 27
       
Item 4.
  Controls and Procedures 27
       
PART II. OTHER INFORMATION
 
       
Item 1.
 
Legal Proceedings
27
 
     
Item 1A.
  Risk Factors
27
       
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
28
       
Item 4.
  Mine Safety Disclosures
28
       
Item 6.
  Exhibits
28
       
SIGNATURES
29
 
 
 
2

 
 
PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements
KELLY SERVICES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In millions of dollars except per share data)
 
   
13 Weeks Ended
   
26 Weeks Ended
 
   
July 1, 2012
   
July 3, 2011
   
July 1, 2012
   
July 3, 2011
 
Revenue from services
  $ 1,366.1     $ 1,405.8     $ 2,720.9     $ 2,744.9  
                                 
Cost of services
    1,142.9       1,183.7       2,274.0       2,311.6  
 
                               
Gross profit
    223.2       222.1       446.9       433.3  
                                 
Selling, general and administrative expenses
    199.4       200.8       408.4       410.4  
                                 
Earnings from operations
    23.8       21.3       38.5       22.9  
                                 
Other expense, net
    (0.5 )     (0.7 )     (1.1 )     (1.1 )
                                 
Earnings from continuing operations before taxes
    23.3       20.6       37.4       21.8  
                                 
Income taxes
    8.3       0.6       13.2       0.7  
                                 
Earnings from continuing operations
    15.0       20.0       24.2       21.1  
                                 
Earnings (loss) from discontinued operations, net of tax
    -       (1.2 )     0.4       (1.2 )
                                 
Net earnings
  $ 15.0     $ 18.8     $ 24.6     $ 19.9  
                                 
Basic earnings (loss) per share:
                               
Earnings from continuing operations
  $ 0.40     $ 0.53     $ 0.64     $ 0.56  
Earnings (loss) from discontinued operations
  $ -     $ (0.03 )   $ 0.01     $ (0.03 )
Net earnings
  $ 0.40     $ 0.50     $ 0.65     $ 0.53  
                                 
Diluted earnings (loss) per share:
                               
Earnings from continuing operations
  $ 0.40     $ 0.53     $ 0.64     $ 0.56  
Earnings (loss) from discontinued operations
  $ -     $ (0.03 )   $ 0.01     $ (0.03 )
Net earnings
  $ 0.40     $ 0.50     $ 0.65     $ 0.53  
                                 
Dividends per share
  $ 0.05     $ -     $ 0.10     $ -  
                                 
Average shares outstanding (millions):
                               
Basic
    37.0       36.8       36.9       36.7  
Diluted
    37.0       36.8       37.0       36.7  
 
See accompanying unaudited Notes to Consolidated Financial Statements.
 
 
3

 
 
KELLY SERVICES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In millions of dollars)
 
    13 Weeks Ended     26 Weeks Ended  
   
July 1,
2012
   
July 3,
2011
   
July 1,
2012
   
July 3,
2011
 
                         
Net earnings
  $ 15.0     $ 18.8     $ 24.6     $ 19.9  
                                 
Other comprehensive income, net of tax:
                               
Foreign currency translation adjustments
    (6.1 )     5.8       (1.1 )     11.8  
                                 
Unrealized gains (losses) on investments
    7.3       0.1       10.3       (0.5 )
                                 
Pension liability adjustments
    -       -       0.3       -  
                                 
Other comprehensive income, net of tax
    1.2       5.9       9.5       11.3  
                                 
Comprehensive Income
  $ 16.2     $ 24.7     $ 34.1     $ 31.2  

See accompanying unaudited Notes to Consolidated Financial Statements.
 
 
4

 
 
KELLY SERVICES, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions)
 
   
July 1, 2012
   
January 1, 2012
 
ASSETS
           
CURRENT ASSETS:
           
Cash and equivalents
  $ 65.2     $ 81.0  
Trade accounts receivable, less allowances of $11.8 and $13.4, respectively
    985.0       944.9  
Prepaid expenses and other current assets
    57.9       50.6  
Deferred taxes
    33.4       38.2  
Total current assets
    1,141.5       1,114.7  
PROPERTY AND EQUIPMENT:
               
Property and equipment
    333.6       326.9  
Accumulated depreciation
    (243.3 )     (236.3 )
Net property and equipment
    90.3       90.6  
NONCURRENT DEFERRED TAXES
    93.4       94.1  
GOODWILL, NET
    91.4       90.2  
OTHER ASSETS
    168.4       152.1  
TOTAL ASSETS
  $ 1,585.0     $ 1,541.7  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
Short-term borrowings
  $ 88.5     $ 96.3  
Accounts payable and accrued liabilities
    269.5       237.2  
Accrued payroll and related taxes
    253.7       271.4  
Accrued insurance
    30.3       31.5  
Income and other taxes
    56.5       61.3  
Total current liabilities
    698.5       697.7  
                 
NONCURRENT LIABILITIES:
               
Accrued insurance
    51.4       53.5  
Accrued retirement benefits
    102.8       91.1  
Other long-term liabilities
    24.0       23.7  
Total noncurrent liabilities
    178.2       168.3  
                 
STOCKHOLDERS' EQUITY:
               
Capital stock, $1.00 par value
               
Class A common stock, shares issued 36.6 at 2012 and 2011
    36.6       36.6  
Class B common stock, shares issued 3.5 at 2012 and 2011
    3.5       3.5  
Treasury stock, at cost
               
Class A common stock, 3.0 shares at 2012 and 3.2 at 2011
    (62.6 )     (66.3 )
Class B common stock
    (0.6 )     (0.6 )
Paid-in capital
    27.4       28.8  
Earnings invested in the business
    678.3       657.5  
Accumulated other comprehensive income
    25.7       16.2  
Total stockholders' equity
    708.3       675.7  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 1,585.0     $ 1,541.7  

See accompanying unaudited Notes to Consolidated Financial Statements.
 
 
5

 
 
KELLY SERVICES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In millions of dollars)
 
    13 Weeks Ended     26 Weeks Ended  
   
July 1,
2012
   
July 3,
2011
   
July 1,
2012
   
July 3,
2011
 
Capital Stock
                       
Class A common stock
                       
Balance at beginning of period
  $ 36.6     $ 36.6     $ 36.6     $ 36.6  
Conversions from Class B
    -       -       -       -  
Balance at end of period
    36.6       36.6       36.6       36.6  
                                 
Class B common stock
                               
Balance at beginning of period
    3.5       3.5       3.5       3.5  
Conversions to Class A
    -       -       -       -  
Balance at end of period
    3.5       3.5       3.5       3.5  
                                 
Treasury Stock
                               
Class A common stock
                               
Balance at beginning of period
    (66.0 )     (70.2 )     (66.3 )     (70.3 )
Exercise of stock options, restricted stock awards and other
    3.4       2.1       3.7       2.2  
Balance at end of period
    (62.6 )     (68.1 )     (62.6 )     (68.1 )
                                 
Class B common stock
                               
Balance at beginning of period
    (0.6 )     (0.6 )     (0.6 )     (0.6 )
Exercise of stock options, restricted stock awards and other
    -       -       -       -  
Balance at end of period
    (0.6 )     (0.6 )     (0.6 )     (0.6 )
                                 
Paid-in Capital
                               
Balance at beginning of period
    29.8       29.3       28.8       28.0  
Exercise of stock options, restricted stock awards and other
    (2.4 )     (1.3 )     (1.4 )     -  
Balance at end of period
    27.4       28.0       27.4       28.0  
                                 
Earnings Invested in the Business
                               
Balance at beginning of period
    665.2       598.7       657.5       597.6  
Net earnings
    15.0       18.8       24.6       19.9  
Dividends
    (1.9 )     -       (3.8 )     -  
Balance at end of period
    678.3       617.5       678.3       617.5  
                                 
Accumulated Other Comprehensive Income
                               
Balance at beginning of period
    24.5       34.4       16.2       29.0  
Other comprehensive income, net of tax
    1.2       5.9       9.5       11.3  
Balance at end of period
    25.7       40.3       25.7       40.3  
                                 
Stockholders' Equity at end of period
  $ 708.3     $ 657.2     $ 708.3     $ 657.2  

See accompanying unaudited Notes to Consolidated Financial Statements.
 
 
6

 
 
KELLY SERVICES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions of dollars)
 
   
26 Weeks Ended
 
   
July 1,
2012
   
July 3,
2011
 
             
Cash flows from operating activities:
           
Net earnings
  $ 24.6     $ 19.9  
Noncash adjustments:
               
Depreciation and amortization
    11.6       16.3  
Provision for bad debts
    0.6       2.2  
Stock-based compensation
    2.1       1.9  
Other, net
    -       (0.1 )
Changes in operating assets and liabilities
    (33.0 )     (47.0 )
 
               
Net cash from operating activities
    5.9       (6.8 )
 
               
Cash flows from investing activities:
               
Capital expenditures
    (9.8 )     (6.3 )
Other investing activities
    -       0.9  
 
               
Net cash from investing activities
    (9.8 )     (5.4 )
 
               
Cash flows from financing activities:
               
Net change in short-term borrowings
    (7.8 )     71.9  
Repayment of debt
    -       (62.9 )
Dividend payments
    (3.8 )     -  
Other financing activities
    -       (1.1 )
                 
Net cash from financing activities
    (11.6 )     7.9  
                 
Effect of exchange rates on cash and equivalents
    (0.3 )     4.3  
 
               
Net change in cash and equivalents
    (15.8 )     0.0  
Cash and equivalents at beginning of period
    81.0       80.5  
                 
Cash and equivalents at end of period
  $ 65.2     $ 80.5  
 
See accompanying unaudited Notes to Consolidated Financial Statements.
 
 
7

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Kelly Services, Inc. (the “Company,” “Kelly,” “we” or “us”) have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and notes required by generally accepted accounting principles for complete financial statements.  All adjustments, including normal recurring adjustments, have been made which, in the opinion of management, are necessary for a fair statement of the results of the interim periods.  The results of operations for such interim periods are not necessarily indicative of results of operations for a full year.  The unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended January 1, 2012, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 16, 2012 (the 2011 consolidated financial statements).  The Company’s second fiscal quarter ended on July 1, 2012 (2012) and July 3, 2011 (2011), each of which contained 13 weeks.  The corresponding 2012 and 2011 year-to-date periods each contained 26 weeks.

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

Effective with the first quarter of 2012, certain vendor management and other technology costs which were previously included in selling, general and administrative (“SG&A”) expenses are now included in cost of services, and the prior year’s results were revised to conform to this presentation.  The only effect of this change was to increase cost of services and decrease SG&A expenses (and gross profit) by $2.5 million in the second quarter of 2011 and $5.0 million in the first six months of 2011 from those amounts previously reported in 2011.

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

2.  Fair Value Measurements

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

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

Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities.  Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability.  Level 3 measurements include significant unobservable inputs.
 
   
Fair Value Measurements on a Recurring Basis
 
   
Second Quarter-End 2012
 
Description
 
Total
   
Level 1
   
Level 2
   
Level 3
 
   
(In millions of dollars)
 
Money market funds
  $ 2.4     $ 2.4     $ -     $ -  
Available-for-sale investment
    36.8       36.8       -       -  
                                 
Total assets at fair value
  $ 39.2     $ 39.2     $ -     $ -  

 
8

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

2.  Fair Value Measurements (continued)
 
   
Fair Value Measurements on a Recurring Basis
 
   
As of Year-End 2011
 
Description
 
Total
   
Level 1
   
Level 2
   
Level 3
 
   
(In millions of dollars)
 
Money market funds
  $ 2.0     $ 2.0     $ -     $ -  
Available-for-sale investment
    27.1       27.1       -       -  
                                 
Total assets at fair value
  $ 29.1     $ 29.1     $ -     $ -  
 
Money market funds as of second quarter-end 2012 and as of year-end 2011 represent investments in money market accounts, all of which are restricted as to use and are included in prepaid expenses and other current assets on the consolidated balance sheet.  The valuations were based on quoted market prices of those accounts as of the respective period end.

Available-for-sale investment represents the Company’s investment in Temp Holdings Co., Ltd. (“Temp Holdings”), a leading integrated human resources company in Japan, and is included in other assets on the consolidated balance sheet.  The valuation is based on the quoted market price of Temp Holdings stock on the Tokyo Stock Exchange as of the period end.  The unrealized gain of $7.3 million for the 13 weeks ended 2012 and unrealized gain of $0.1 million for the 13 weeks ended 2011 was recorded in other comprehensive income, a component of stockholders’ equity.  The unrealized gain of $10.3 million for the 26 weeks ended 2012 and unrealized loss of $0.5 million for the 26 weeks ended 2011 was recorded in other comprehensive income.

3.  Acquisition

During the fourth quarter of 2011, the Company acquired the stock of Tradição Planejamento e Tecnologia de Serviços S.A. and Tradição Tecnologia e Serviços Ltda. (collectively, “Tradição”), a national service provider in Brazil, for $6.6 million in cash.  The following table summarizes the purchase price allocation at the time of purchase, along with measurement period adjustments recognized during the 26 weeks ended 2012.  The purchase price allocation is still preliminary, subject to further information relating to liabilities assumed.
 
   
Original
Allocation
   
Adjustments
   
Revised
Allocation
 
   
(In millions of dollars)
 
Current assets
  $ 6.3     $ -     $ 6.3  
Goodwill
    22.9       1.2       24.1  
Identified intangibles
    5.3       0.4       5.7  
Other noncurrent assets
    0.7       -       0.7  
Current liabilities
    (14.4 )     (0.8 )     (15.2 )
Noncurrent liabilities
    (14.2 )     (0.8 )     (15.0 )
                         
Total purchase price
  $ 6.6     $ -     $ 6.6  
 
The acquisition adjustments relate to an increase in Tradição’s estimated identified intangibles balance, acquired contingency reserves and tax liabilities assumed.

 
9

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

4.  Restructuring

Restructuring costs incurred in the second quarter and first six months of 2012 amounted to a credit of $2.2 million.  Restructuring costs incurred in the second quarter and first six months of 2011 amounted to a credit of $0.6 million and expense of $3.4 million, respectively.  These costs primarily related to adjustments to estimated lease termination costs for EMEA Commercial branches that closed in prior years, and were reported as a component of SG&A expenses.  Total costs incurred since July 2008 for our restructuring efforts amounted to $44.2 million.

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

Balance at beginning of year
  $ 4.5  
         
Reductions for cash payments
    (0.2 )
         
Balance at first quarter-end 2012
    4.3  
         
Amounts charged (credited) to operations
    (2.2 )
Reductions for cash payments
    (0.6 )
         
Balance at second quarter-end 2012
  $ 1.5  
 
The remaining balance of $1.5 million as of the 2012 second quarter end represents primarily future lease payments and is expected to be paid by 2016.  On a quarterly basis, the Company reassesses the accrual associated with restructuring costs and adjusts it as necessary.

 
10

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

5.  Goodwill

The changes in the net carrying amount of goodwill during the 26 weeks ended 2012 are included in the table below.  See Acquisition footnote for a description of adjustments to goodwill.

   
Goodwill, Gross as of Year-End 2011
   
Accumulated Impairment Losses as of Year-End 2011
   
Adjustments to Goodwill
   
Impairment Losses
   
Goodwill, Gross as of Second Quarter-End 2012
   
Accumulated Impairment Losses as of Second Quarter End 2012
   
Goodwill, Net as of Second Quarter-End 2012
 
   
(In millions of dollars)
 
Americas
                                         
Americas Commercial
  $ 39.3     $ (16.4 )   $ 1.2     $ -     $ 40.5     $ (16.4 )   $ 24.1  
Americas PT
    39.2       -       -       -       39.2       -       39.2  
Total Americas
    78.5       (16.4 )     1.2       -       79.7       (16.4 )     63.3  
                                                         
EMEA
                                                       
EMEA Commercial
    50.4       (50.4 )     -       -       50.4       (50.4 )     -  
EMEA PT
    22.0       (22.0 )     -       -       22.0       (22.0 )     -  
Total EMEA
    72.4       (72.4 )     -       -       72.4       (72.4 )     -  
                                                         
APAC
                                                       
APAC Commercial
    12.1       (12.1 )     -       -       12.1       (12.1 )     -  
APAC PT
    1.8       -       -       -       1.8       -       1.8  
Total APAC
    13.9       (12.1 )     -       -       13.9       (12.1 )     1.8  
                                                         
OCG
    26.3       -       -       -       26.3       -       26.3  
                                                         
Consolidated Total
  $ 191.1     $ (100.9 )   $ 1.2     $ -     $ 192.3     $ (100.9 )   $ 91.4  
 
 
11

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

6.  Earnings Per Share

The reconciliation of basic and diluted earnings per share on common stock for the 13 and 26 weeks ended 2012 and 2011 follows (in millions of dollars except per share data):
 
   
13 Weeks Ended
   
26 Weeks Ended
 
   
2012
   
2011
   
2012
   
2011
 
                         
Earnings from continuing operations
  $ 15.0     $ 20.0     $ 24.2     $ 21.1  
Less: Earnings allocated to participating securities
    (0.4 )     (0.4 )     (0.6 )     (0.4 )
Earnings from continuing operations available to common shareholders
  $ 14.6     $ 19.6     $ 23.6     $ 20.7  
                                 
Earnings (loss) from discontinued operations
  $ -     $ (1.2 )   $ 0.4     $ (1.2 )
Less: Earnings (loss) allocated to participating securities
    -       -       -       -  
Earnings (loss) from discontinued operations available to common shareholders
  $ -     $ (1.2 )   $ 0.4     $ (1.2 )
                                 
Net Earnings
  $ 15.0     $ 18.8     $ 24.6     $ 19.9  
Less: Earnings allocated to participating securities
    (0.4 )     (0.4 )     (0.6 )     (0.4 )
Net Earnings available to common shareholders
  $ 14.6     $ 18.4     $ 24.0     $ 19.5  
                                 
Basic earnings (loss) per share on common stock:
                               
Earnings from continuing operations
  $ 0.40     $ 0.53     $ 0.64     $ 0.56  
Earnings (loss) from discontinued operations
  $ -     $ (0.03 )   $ 0.01     $ (0.03 )
Net earnings
  $ 0.40     $ 0.50     $ 0.65     $ 0.53  
                                 
Diluted earnings (loss) per share on common stock:
                               
Earnings from continuing operations
  $ 0.40     $ 0.53     $ 0.64     $ 0.56  
Earnings (loss) from discontinued operations
  $ -     $ (0.03 )   $ 0.01     $ (0.03 )
Net earnings
  $ 0.40     $ 0.50     $ 0.65     $ 0.53  
                                 
Average common shares outstanding (millions):
                               
Basic
    37.0       36.8       36.9       36.7  
Diluted
    37.0       36.8       37.0       36.7  
 
Stock options representing 0.4 million and 0.6 million shares, respectively, for the 13 weeks ended 2012 and 2011, and 0.4 million and 0.6 million shares, respectively, for the 26 weeks ended 2012 and 2011 were excluded from the computation of diluted earnings per share due to their anti-dilutive effect.

 
12

 
 
KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
 
7. Stock-Based Compensation

The Company adopted an amendment and restatement of the Kelly Services, Inc. Equity Incentive Plan (the “Plan”) effective December 31, 2011, which was approved by the Company stockholders in May 2012.  Under the Plan, the Company may grant stock options (both incentive and nonqualified), stock appreciation rights, restricted stock awards, restricted stock units and performance awards to key employees utilizing the Company’s Class A stock.  The Plan provides that the maximum number of shares available for grants is 10 percent of the outstanding Class A stock, adjusted for Plan activity over the preceding five years. The Company issues shares out of treasury stock to satisfy stock-based awards.  The Company has no intent to repurchase additional shares for the purpose of satisfying stock-based awards.
 
Restricted Stock
Restricted stock awards and units (collectively, "restricted stock"), which typically vest over a period of 3 to 5 years, are issued to certain key employees and are subject to forfeiture until the end of an established restriction period.  The Company utilizes the market price on the date of grant as the fair market value of restricted stock and expenses the fair value on a straight-line basis over the vesting period.

A summary of the status of nonvested restricted stock under the Plan as of the 13 and 26 weeks ended 2012 and changes during these periods is presented as follows:
 
   
Restricted Stock
   
Weighted Average Grant Date Fair Value
 
Nonvested at year-end 2011
    907,990     $ 17.41  
Granted
    21,200       15.02  
Vested
    (23,075 )     15.08  
Forfeited
    (400 )     18.25  
Nonvested at first quarter-end 2012
    905,715     $ 17.41  
Granted
    480,700       12.91  
Vested
    (191,975 )     18.15  
Forfeited
    (1,650 )     16.30  
Nonvested at second quarter-end 2012
    1,192,790     $ 15.48  

8.  Other Expense, Net

Included in other expense, net for the 13 and 26 weeks ended 2012 and 2011 are the following:
 
   
13 Weeks Ended
   
26 Weeks Ended
 
   
2012
   
2011
   
2012
   
2011
 
   
(In millions of dollars)
   
(In millions of dollars)
 
Interest income
  $ 0.2     $ 0.2     $ 0.8     $ 0.5  
Interest expense
    (0.9 )     (0.8 )     (1.9 )     (1.9 )
Dividend income
    0.3       0.2       0.3       0.2  
Foreign exchange (losses) gains
    (0.1 )     (0.3 )     (0.3 )     0.1  
                                 
Other expense, net
  $ (0.5 )   $ (0.7 )   $ (1.1 )   $ (1.1 )
 
 
13

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

9.  Other Comprehensive Income

Taxes allocated to components of other comprehensive income for the 13 and 26 weeks ended 2012 and 2011 were immaterial.

10.  Contingencies

The Company is continuously engaged in litigation arising in the ordinary course of its business, typically matters alleging employment discrimination, alleging wage and hour violations or enforcing the restrictive covenants in the Company’s employment agreements.  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.  However, litigation is always subject to inherent uncertainty and the Company is not able to reasonably predict if any matter will be resolved in a manner that is materially adverse to the Company.

11.  Segment Disclosures

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

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

The following tables present information about the reported revenue from services and gross profit of the Company by segment, along with a reconciliation to consolidated earnings before taxes, for the 13 and 26 weeks ended 2012 and 2011.  Asset information by reportable segment is not presented, since the Company does not produce such information internally, nor does it use such data to manage its business.  Our segments themselves did not change from prior periods, however, effective with the first quarter of 2012, we changed the manner in which we evaluate and internally report segments, such that our primary measure of segment performance is now gross profit.  Historically, our primary measure of segment performance was gross profit less an allocation of SG&A expenses.  We revised the prior period’s segment results to conform to the current manner in which we evaluate segment performance.

 
14

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

11.  Segment Disclosures (continued)

   
13 Weeks Ended
   
26 Weeks Ended
 
   
2012
   
2011
   
2012
   
2011
 
   
(In millions of dollars)
   
(In millions of dollars)
 
Revenue from Services:
                       
Americas Commercial
  $ 668.6     $ 670.3     $ 1,337.9     $ 1,323.6  
Americas PT
    262.4       247.7       512.5       488.3  
Total Americas Commercial and PT
    931.0       918.0       1,850.4       1,811.9  
                                 
EMEA Commercial
    213.7       258.8       426.7       490.3  
EMEA PT
    41.6       45.8       83.8       87.2  
Total EMEA Commercial and PT
    255.3       304.6       510.5       577.5  
                                 
APAC Commercial
    84.3       102.3       172.6       202.0  
APAC PT
    12.8       13.5       25.6       25.0  
Total APAC Commercial and PT
    97.1       115.8       198.2       227.0  
                                 
OCG
    91.4       74.0       178.1       142.2  
                                 
Less: Intersegment revenue
    (8.7 )     (6.6 )     (16.3 )     (13.7 )
                                 
Consolidated Total
  $ 1,366.1     $ 1,405.8     $ 2,720.9     $ 2,744.9  
 
 
15

 

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

11.  Segment Disclosures (continued)

   
13 Weeks Ended
   
26 Weeks Ended
 
   
2012
   
2011
   
2012
   
2011
 
   
(In millions of dollars)
   
(In millions of dollars)
 
Earnings from Operations:
                       
Americas Commercial gross profit
  $ 97.7     $ 93.3     $ 195.7     $ 185.3  
Americas PT gross profit
    39.7       35.9       79.9       71.9  
Americas Region gross profit
    137.4       129.2       275.6       257.2  
Americas Region SG&A expenses
    (99.0 )     (95.8 )     (201.9 )     (198.6 )
Americas Region Earnings from Operations
    38.4       33.4       73.7       58.6  
                                 
EMEA Commercial gross profit
    34.2       42.3       67.7       79.5  
EMEA PT gross profit
    10.9       12.4       22.2       23.4  
EMEA Region gross profit
    45.1       54.7       89.9       102.9  
EMEA Region SG&A expenses
    (39.7 )     (46.7 )     (84.2 )     (96.6 )
EMEA Region Earnings from Operations
    5.4       8.0       5.7       6.3  
                                 
APAC Commercial gross profit
    12.5       14.3       25.6       27.8  
APAC PT gross profit
    5.3       5.6       10.5       10.6  
APAC Region gross profit
    17.8       19.9       36.1       38.4  
APAC Region SG&A expenses
    (19.0 )     (20.3 )     (38.7 )     (39.3 )
APAC Region Earnings from Operations
    (1.2 )     (0.4 )     (2.6 )     (0.9 )
                                 
OCG gross profit
    23.7       19.0       46.8       36.0  
OCG SG&A expenses
    (22.8 )     (19.8 )     (45.4 )     (39.2 )
OCG Earnings from Operations
    0.9       (0.8 )     1.4       (3.2 )
                                 
Corporate
    (19.7 )     (18.9 )     (39.7 )     (37.9 )
                                 
Consolidated Total
    23.8       21.3       38.5       22.9  
                                 
Other Expense, Net
    (0.5 )     (0.7 )     (1.1 )     (1.1 )
                                 
Earnings Before Taxes
  $ 23.3     $ 20.6     $ 37.4     $ 21.8  

12.  New Accounting Pronouncements

None.

13.  Subsequent Event

On July 24, 2012, Temp Holdings Co., Ltd. and Kelly Services, Inc. announced that they have entered into a joint venture agreement to expand both companies’ presence in North Asia.  The joint venture, TS Kelly Workforce Solutions, will be headquartered in Hong Kong and will be effective October, 2012.  Under the terms of the agreement, Toshio Saburi, Executive Managing Director of Temp Holdings Co., Ltd. and board member of Kelly Services, Inc., will be appointed chief executive officer of the joint venture.

 
16

 

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

Executive Overview

The second quarter of 2012 brought a deceleration in the U.S. labor market, continued global economic uncertainty with the Eurozone crisis and slowdowns in emerging economies.  Most European economies slid further into recession during the first half of 2012, and low business confidence and government austerity measures are constraining hiring in the Eurozone.  U.S. employment gains averaged only 75,000 jobs per month in the second quarter, after growing three times as fast in the first quarter, reflecting a more cautious approach to job creation.

Despite these macroeconomic headwinds, Kelly made positive strides in the second quarter:

 
·
Total company revenue was flat and fee-based income increased 9% year over year.

 
·
Our gross profit rate improved to 16.3%, compared to 15.8% in the second quarter of 2011.

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

 
·
OCG earnings more than doubled, increasing year over year by $2 million.

We remain focused on achieving a competitive return on sales by growing our professional and technical, fee-based and other higher margin offerings, and maintaining our lower cost of service delivery.  Though the recovery is slow, we believe demand for our services is increasing.  We are committed to responding to customers’ needs for flexible, innovative solutions for managing their workforce – from traditional staffing to professional and technical specialties to outsourcing and consulting programs.
 
Total Company - Second Quarter
(Dollars in millions)
 
   
2012
   
2011
   
Change
   
CC
Change
 
Revenue from services
  $ 1,366.1     $ 1,405.8       (2.8 )%     - %
Fee-based income
    38.9       35.7       9.4       14.7  
Gross profit
    223.2       222.1       0.5       3.7  
SG&A expenses excluding restructuring charges
    201.6       201.4       0.1          
Restructuring charges
    (2.2 )     (0.6 )     268.8          
Total SG&A expenses
    199.4       200.8       (0.7 )     2.5  
Earnings from operations
    23.8       21.3       12.0          
                                 
Gross profit rate
    16.3 %     15.8 %     0.5  pts.        
Expense rates (excluding restructuring charges):
                               
% of revenue
    14.8       14.3       0.5          
% of gross profit
    90.3       90.7       (0.4 )        
Operating margin
    1.7       1.5       0.2          
 
Operating margin (earnings from operations divided by revenue from services) in the above and following tables is a ratio used to measure the Company’s pricing strategy and operating efficiency.  Constant currency (“CC”) change amounts in the above and following tables refer to the year-over-year percentage changes resulting from translating 2012 financial data into U.S. dollars using the same foreign currency exchange rates used to translate financial data for 2011.  We believe that CC measurements are an important analytical tool to aid in understanding underlying operating trends without distortion due to currency fluctuations.

 
17

 
 
Total Company revenue for the second quarter of 2012 was down 3% in comparison to the prior year, and down 4% excluding the Company’s acquisition of Tradição in Brazil late last year.  CC revenue for the second quarter of 2012 was flat in comparison to the prior year, and down 1% excluding Tradição.  This reflected an 11% decrease in hours worked, partially offset by a 10% increase in average bill rates on a CC basis.

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

Compared to the second quarter of 2011, the gross profit rate improved due to higher fee-based income and an improved temporary gross profit rate in the Americas and APAC regions.  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.

SG&A expenses excluding restructuring costs were flat in comparison to the prior year.  Restructuring costs related primarily to revisions of the estimated lease termination costs for previously closed EMEA Commercial branches.

Income tax expense for the second quarter of 2012 was $8 million (35.5%), compared to $1 million (3.3%) for the second quarter of 2011.  The increase in 2012 tax expense is primarily due to reduced tax credits.  The 2011 expense included the favorable impact of the Hiring Incentives to Restore Employment (“HIRE”) Act retention credits, which were available only in 2011, and work opportunity credits.  In 2012, work opportunity credits are available only for employees hired in prior years and certain U.S. veterans, due to expiration of the program at the end of 2011.  While the work opportunity credit program has expired and been retroactively reinstated many times in the past, extension of this program is uncertain. 

Diluted earnings from continuing operations per share for the second quarter of 2012 were $0.40, as compared to $0.53 for the second quarter of 2011.

Loss from discontinued operations for the second quarter of 2011 represented adjustments to the estimated costs of litigation, net of tax, retained from the 2007 sale of the Kelly Home Care business unit.
 
Total Americas - Second Quarter
(Dollars in millions)
 
   
2012
   
2011
   
Change
 
CC
Change
 
Revenue from services
  $ 931.0     $ 918.0       1.4 %   2.4 %
Fee-based income
    8.4       6.5       28.7     31.1  
Gross profit
    137.4       129.2       6.3     7.3  
Total SG&A expenses
    99.0       95.8       3.3     4.5  
Earnings from operations
    38.4       33.4       14.7        
                               
Gross profit rate
    14.8 %     14.1 %     0.7  pts.      
Expense rates:
                             
% of revenue
    10.6       10.4       0.2        
% of gross profit
    72.0       74.1       (2.1 )      
Operating margin
    4.1       3.6       0.5        
 
On an organic basis, excluding the Tradição acquisition, CC revenue increased by 1%.  This increase represents a 5% increase in average bill rates on a CC basis, partially offset by a 4% decrease in hours worked.  On a CC basis, the PT segment grew by 6%, while the Commercial segment, excluding Tradição, declined 2%.  Americas represented 68% of total Company revenue in the second quarter of 2012 and 65% in the second quarter of 2011.

 
18

 
 
The change in the gross profit rate was primarily due to lower payroll taxes and higher fee-based income in both the Commercial and PT segments.  On an organic basis, Americas SG&A expenses were flat in comparison to last year, reflecting careful management of expenses throughout the region.
 
Total EMEA - Second Quarter
(Dollars in millions)
 
   
2012
   
2011
   
Change
   
CC
Change
 
Revenue from services
  $ 255.3     $ 304.6       (16.2 )%     (7.7 ) %
Fee-based income
    10.6       11.9       (10.7 )     (1.5 )
Gross profit
    45.1       54.7       (17.5 )     (8.9 )
SG&A expenses excluding restructuring charges
    41.9       47.3       (11.4 )        
Restructuring charges
    (2.2 )     (0.6 )     268.8          
Total SG&A expenses
    39.7       46.7       (14.9 )     (6.2 )
Earnings from operations
    5.4       8.0       (32.9 )        
                                 
Gross profit rate
    17.6 %     17.9 %     (0.3 ) pts.        
Expense rates (excluding restructuring charges):
                               
% of revenue
    16.4       15.5       0.9          
% of gross profit
    93.0       86.6       6.4          
Operating margin
    2.1       2.6       (0.5 )        
 
The change in EMEA revenue from services reflected a 13% decrease in hours worked, due to the unfavorable economic environment, partially offset by a 6% increase in average bill rates on a CC basis.  The increase in average bill rates is due to a change in country mix.  On a CC basis, the Commercial segment declined 9% and the PT segment was flat.  EMEA represented 19% of total Company revenue in the second quarter of 2012 and 22% in the second quarter of 2011.

The EMEA gross profit rate decreased due to margin erosion in the Commercial segment.  The decrease in SG&A expenses excluding restructuring charges was primarily due to decreases in variable costs in the Commercial segment in line with the level of activity, coupled with the lower costs resulting from the restructuring last year in the UK operations, partially offset by some targeted investments in the PT segment.
 
Total APAC - Second Quarter
(Dollars in millions)
 
   
2012
   
2011
   
Change
     
CC
Change
 
Revenue from services
  $ 97.1     $ 115.8       (16.2 )
%
    (12.7 ) %
Fee-based income
    7.1       7.9       (7.7 )       (4.2 )
Gross profit
    17.8       19.9       (10.0 )       (6.5 )
Total SG&A expenses
    19.0       20.3       (6.4 )       (2.6 )
Earnings from operations
    (1.2 )     (0.4 )     (143.0 )          
                                   
Gross profit rate
    18.4 %     17.1 %     1.3  
pts.
       
Expense rates:
                                 
% of revenue
    19.6       17.5       2.1            
% of gross profit
    106.6       102.4       4.2            
Operating margin
    (1.2 )     (0.4 )     (0.8 )          
 
 
19

 
 
The change in total APAC revenue represents a 37% decrease in hours worked and a decrease in fee-based income, partially offset by a 38% increase in average bill rates on a CC basis.  The Company has exited a number of low-margin customers in Australia and India, resulting in the significant increase in average bill rates and significant decrease in hours worked.  APAC revenue represented 7% of total Company revenue in the second quarter of 2012 and 8% in the second quarter of 2011.

The change in the APAC gross profit rate also reflects the decision to exit low-margin Commercial customers in Australia and India.  Fee-based income was down due to slower conversions from more developed countries such as Singapore and Malaysia, partially offset by growth in China.  The change in SG&A expenses was due to careful management of expenses.  
 
OCG - Second Quarter
(Dollars in millions)
 
   
2012
   
2011
   
Change
   
CC
Change
 
Revenue from services
  $