Kelly Services. Inc. and Subsidiaries
Kelly Services' fiscal 1999, a normal 52-week year, contained four 13-week quarters. However, fiscal 1998, a 53-week year, included three 13-week quarters and a 14-week fourth quarter. To provide a better understanding of operating results, sales comparisons are provided two ways: First, 1999 actual is compared to the audited 53-week 1998, and second, as supplementary disclosure, 1999 actual is compared to the unaudited, adjusted 52-week 1998.
Results of Operations
1999 versus 1998
Sales for the 52-week fiscal year reached a record $4.269 billion in 1999, an increase of 4.3% compared to the $4.092 billion for the 53-week fiscal year in 1998. Sales increased 5.6% on an adjusted basis versus the 52- week 1998 period. Sales in the U.S. Commercial Staffing segment declined slightly by 0.7% compared to the 53-week 1998, while Professional, Technical and Staffing Alternatives (PTSA) sales grew by 8.5% compared to last year. International sales grew by 12.4% as compared to 1998. International sales represented 25% of total Company sales in 1999, as compared to 24% in 1998.
The 1999 gross profit rate averaged 17.9%, which was consistent with the 17.9% rate earned in 1998.
Selling, general and administrative expenses expressed as a percentage of sales were 14.6% as compared to 14.4% last year. The increase in expenses as a percentage of sales is attributable to the Year 2000 Project expenses and increased depreciation associated with the deployment of the Oracle finance and administration systems, and proprietary front office branch automation technology.
Earnings from operations totaled $144.0 million, a 2.4% increase from the $140.6 million reported for the 53-week 1998. Earnings were 3.4% of sales as compared to 3.4% for the 53-week period in 1998.
Net interest expense was $0.2 million compared to last year's net interest income of $3.0 million. The decrease is attributable to lower cash balances than a year ago, as a result of a 30% increase in our capital expenditures, and $76 million utilized in the share repurchase program, which was completed midway through the fourth quarter of 1998. The effective income tax rate was 40.8%, slightly lower than last year's 41.0% rate, reflecting reductions in the Company's consolidated state and local tax rate.
Net earnings totaled a record $85.1 million in 1999, a 0.5% increase over the 53-week 1998. The rate of return on sales was 2.0%, compared with last year's 2.1% rate. Basic earnings per share were $2.37 or 5.8% over last year. Diluted earnings per share for 1999 were $2.36, a 5.8% increase compared to $2.23 for the 53-week 1998.
Results of Operations 1998 versus 1997
Sales for the 53-week fiscal year reached $4.092 billion in 1998, an increase of 6.2% compared to the $3.853 billion for the 52-week fiscal year in 1997. On an adjusted 52- week basis for 1998, sales increased 4.9% over 1997. Sales in the U.S. Commercial Staffing segment grew by 2.8%, while Professional, Technical and Staffing Alternatives (PTSA) sales grew by 8.4% compared to last year. International sales grew by 12.9% as compared to 1997. International sales represented 24% of total Company sales in 1998, as compared to 22% in 1997.
The 1998 gross profit rate averaged 17.9% versus 17.7% in 1997. The improvement was principally related to an increased mix of fee-based permanent placement income and an increase in the share of our international business as a percentage of total revenue. The international component carries a higher average gross profit rate than U.S. commercial staffing.
Selling, general and administrative expenses expressed as a percentage of sales were 14.4% as compared to 14.2% in 1997. The rate of growth of expenses principally reflects increased spending for the Year 2000 Project and information technology programs.
Earnings from operations totaled $140.6 million, a 3.6% increase from the $135.8 million reported in 1997. Earnings were 3.4% of sales as compared to 3.5% in 1997.
Net interest income was $3.0 million, a 147% increase versus 1997. The increase in investment income related to an improved cash and investment position as compared to 1997.
The effective income tax rate was 41.0% in both 1998 and 1997.
Net earnings totaled $84.7 million in 1998, a 4.9% increase over 1997. The rate of return on sales was 2.1% in both 1998 and 1997. Basic earnings per share were $2.24 or a 5.7% increase over 1997. Diluted earnings per share were $2.23 or 5.2% higher than 1997.
Liquidity and Capital Resources
Cash and short-term investments totaled $60 million at the end of 1999, down from the $72 million at year-end 1998. Year-end cash was slightly lower than last year, principally as a result of the increased accounts receivable and the 30% increase in our capital expenditure program.
Accounts receivable totaled $602 million at year end as compared to $585 million at year-end 1998. Strong accounts receivable management during the year reduced global days sales outstanding to 51 days, down from 53 days in 1998.
Short-term debt totaled $47 million, which is virtually unchanged from $48 million at year-end 1998. All short-term borrowings are foreign currency denominated and support the growth of the Company's international working capital position.
The Company's working capital position was $285 million at the end of 1999, a decrease of $9 million from 1998 and $79 million from 1997. The current ratio was 1.6 in 1999, 1.7 in 1998 and 1.9 in 1997. The lower ratio in 1999 and 1998 as compared to 1997 was principally a result of the cash utilized in the share repurchase program, as well as the growth of the Company's capital expenditure program.
Assets totaled $1.034 billion in 1999 compared to $964 million in 1998. In 1997, assets totaled $967 million. The return on average assets was 8.5% in 1999 and 8.8% in 1998. In 1997 the return was 8.9%.
Stockholders' equity was $582 million in 1999, which represents 8.3% growth over 1998. In 1998 stockholders' equity was 3.9% below 1997. The return on average stockholders' equity was 15.2% in 1999, 15.4% in 1998 and 15.0% in 1997. Dividends paid per common share were $.95 in 1999, an increase of 4.4% over 1998 dividends of $.91 per share. Dividends in 1997 were $.87 per share.
The Company's financial position remains very strong. The Company continues to carry no long-term debt and expects to meet its growth requirements principally through cash flow from operations.
Year 2000 Systems Update
In 1995, the Company embarked upon a global Year 2000 Project. The project scope included hardware, software and embedded chip technology. A formal Project Office was established with complete executive sponsorship and funding in February 1997. This initiated a global business system strategy that included a wide-scale Oracle implementation of business and financial systems, plus major enhancements to branch automation systems. Included in these initiatives is the remediation of Year 2000 noncompliant systems.
The Company's ability to deliver services and products to its customers on a timely basis has not been impacted by any problems arising as a result of the Year 2000 issues. To date, the Company experienced no failures of any mission critical applications, nor were there any reports of any significant interruptions to the Company's business operations as a result of the failure of its own computer systems or those of a third party.
Year 2000 Costs
Total cost of the Year 2000 remediation project was $20.6 million, slightly below our original estimate of $21 million. The total amount incurred for 1999 approximated $11 million. Related expenses for 1998 were $8 million, and $1 million was expended in 1997.
The total cost of the Year 2000 project is expected to be at least somewhat offset by the benefits to be realized by the Company. These include: enhanced functionality at the branch level; a worldwide inventory of information technology and systems; a high-level documentation of business processes used by strategic business units; rationalization and standardization of diverse information systems; upgrades and standardization of desktop computing; upgrade of wide area network to remote business units; improved software quality assurance; and clean-up and documentation of older program code.
Market Risk-Sensitive Instruments and Positions
The market risk inherent in the Company's market risk-sensitive instruments and positions is the potential loss arising from adverse changes in foreign currency exchange rates and interest rates. Foreign currency exchange risk is mitigated by the usage of the Company's multi-currency line of credit. This credit facility can be used to borrow in the local currencies that can mitigate the exchange rate risk resulting from foreign currency-denominated assets fluctuating in relation to the U.S. dollar.
The Company's holdings and positions in market risk- sensitive instruments do not subject the Company to material risk exposures.
Adoption of the Euro
A segment of the global business system implementation is devoted to changes necessary to deal with the introduction of a European single currency (the Euro). The transition period for implementation is January 1, 1999 through January 1, 2002.
The Company does not expect that introduction and use of the Euro will result in any material increase in costs.
Except for the historical statements and discussions contained herein, statements contained in this report relate to future events that are subject to risks and uncertainties, such as: competition, changing market and economic conditions, currency fluctuations, changes in laws and regulations, the Company's ability to effectively implement and manage its information technology programs and other factors discussed in the report and in the Company's filings with the Securities and Exchange Commission. Actual results may differ materially from any projections contained herein.