KELLY SERVICES INC - Quarter Report: 2010 July (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

o		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.)

(Address of principal executive offices)

(Zip Code)

(248) 362-4444

No Change

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 þ No o

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 o No o

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 o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

At July 28, 2010, 33,228,664 shares of Class A and 3,459,785 shares of Class B common stock of the Registrant were outstanding.

 

 

KELLY SERVICES, INC. AND SUBSIDIARIES

		Page
		Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Statements of Earnings			3
Consolidated Balance Sheets			4
Consolidated Statements of Stockholders’ Equity			5
Consolidated Statements of Cash Flows			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 6. Exhibits			30
SIGNATURES			31
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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 4, 2010				June 28, 2009				July 4, 2010				June 28, 2009
Revenue from services		$	1,209.4			$	1,028.9			$	2,339.8			$	2,071.5
Cost of services			1,018.5				857.2				1,968.9				1,724.3
Gross profit			190.9				171.7				370.9				347.2
Selling, general and administrative expenses			180.9				193.6				362.5				399.7
Asset impairments			1.5				52.6				1.5				52.6
Earnings (loss) from operations			8.5				(74.5	)			6.9				(105.1	)
Other (expense) income, net			(2.1	)			(1.0	)			(3.2	)			0.3
Earnings (loss) from continuing operations before taxes			6.4				(75.5	)			3.7				(104.8	)
Income taxes			2.5				(9.5	)			1.8				(22.7	)
Earnings (loss) from continuing operations			3.9				(66.0	)			1.9				(82.1	)
Earnings from discontinued operations, net of tax			—				—				—				0.6
Net earnings (loss)		$	3.9			$	(66.0	)		$	1.9			$	(81.5	)
Basic earnings (loss) per share:
Earnings (loss) from continuing operations		$	0.11			$	(1.89	)		$	0.05			$	(2.36	)
Earnings from discontinued operations		$	—			$	—			$	—			$	0.02
Net earnings (loss)		$	0.11			$	(1.89	)		$	0.05			$	(2.34	)
Diluted earnings (loss) per share:
Earnings (loss) from continuing operations		$	0.11			$	(1.89	)		$	0.05			$	(2.36	)
Earnings from discontinued operations		$	—			$	—			$	—			$	0.02
Net earnings (loss)		$	0.11			$	(1.89	)		$	0.05			$	(2.34	)
Average shares outstanding (millions):
Basic			36.0				34.8				35.5				34.8
Diluted			36.0				34.8				35.5				34.8

See accompanying Notes to Consolidated Financial Statements.

KELLY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In millions)

		July 4, 2010				January 3, 2010
ASSETS
CURRENT ASSETS:
Cash and equivalents		$	65.3			$	88.9
Trade accounts receivable, less allowances of $13.0 and $15.0, respectively			751.8				717.9
Prepaid expenses and other current assets			60.7				70.6
Deferred taxes			21.2				21.0
Total current assets			899.0				898.4
PROPERTY AND EQUIPMENT:
Land and buildings			58.9				58.8
Computer hardware and software, equipment, furniture and leasehold improvements			254.6				264.0
Accumulated depreciation			(201.4	)			(195.7	)
Net property and equipment			112.1				127.1
NONCURRENT DEFERRED TAXES			74.2				77.5
GOODWILL, NET			67.3				67.3
OTHER ASSETS			127.5				131.4
TOTAL ASSETS		$	1,280.1			$	1,301.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt		$	68.4			$	79.6
Accounts payable and accrued liabilities			144.8				182.6
Accrued payroll and related taxes			228.3				208.3
Accrued insurance			19.8				19.7
Income and other taxes			47.3				47.4
Total current liabilities			508.6				537.6
NONCURRENT LIABILITIES:
Long-term debt			49.9				57.5
Accrued insurance			47.1				47.3
Accrued retirement benefits			72.4				76.9
Other long-term liabilities			15.4				16.0
Total noncurrent liabilities			184.8				197.7
STOCKHOLDERS’ EQUITY:
Capital stock, $1.00 par value
Class A common stock, shares issued 36.6 million at 2010 and 2009			36.6				36.6
Class B common stock, shares issued 3.5 million at 2010 and 2009			3.5				3.5
Treasury stock, at cost
Class A common stock, 3.4 million shares at 2010 and 5.1 million at 2009			(70.7	)			(106.6	)
Class B common stock			(0.6	)			(0.6	)
Paid-in capital			26.8				36.9
Earnings invested in the business			573.4				571.5
Accumulated other comprehensive income			17.7				25.1
Total stockholders’ equity			586.7				566.4
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,280.1			$	1,301.7

See accompanying Notes to Consolidated Financial Statements.

KELLY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In millions of dollars)

		13 Weeks Ended								26 Weeks Ended
		July 4,				June 28,				July 4,				June 28,
		2010				2009				2010				2009
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			(106.1	)			(109.9	)			(106.6	)			(110.6	)
Sale of stock, exercise of stock options, restricted stock awards and other			35.4				2.7				35.9				3.4
Balance at end of period			(70.7	)			(107.2	)			(70.7	)			(107.2	)
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			37.4				36.3				36.9				35.8
Sale of stock, exercise of stock options, restricted stock awards and other			(10.6	)			(1.6	)			(10.1	)			(1.1	)
Balance at end of period			26.8				34.7				26.8				34.7
Earnings Invested in the Business
Balance at beginning of period			569.5				660.5				571.5				676.0
Net earnings (loss)			3.9				(66.0	)			1.9				(81.5	)
Balance at end of period			573.4				594.5				573.4				594.5
Accumulated Other Comprehensive Income
Balance at beginning of period			25.5				2.2				25.1				12.2
Foreign currency translation adjustments, net of tax			(7.8	)			11.7				(9.1	)			6.5
Unrealized gains on investments, net of tax			—				8.8				1.7				4.0
Balance at end of period			17.7				22.7				17.7				22.7
Stockholders’ Equity at end of period		$	586.7			$	584.2			$	586.7			$	584.2
Comprehensive (Loss) Income
Net earnings (loss)		$	3.9			$	(66.0	)		$	1.9			$	(81.5	)
Foreign currency translation adjustments, net of tax			(7.8	)			11.7				(9.1	)			6.5
Unrealized gains on investments, net of tax			—				8.8				1.7				4.0
Comprehensive (Loss) Income		$	(3.9	)		$	(45.5	)		$	(5.5	)		$	(71.0	)

See accompanying Notes to Consolidated Financial Statements.

KELLY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In millions of dollars)

		26 Weeks Ended
		July 4,				June 28,
		2010				2009
Cash flows from operating activities:
Net earnings (loss)		$	1.9			$	(81.5	)
Noncash adjustments:
Impairment of assets			1.5				52.6
Depreciation and amortization			17.8				21.0
Provision for bad debts			0.5				1.3
Stock-based compensation			1.4				2.2
Other, net			0.8				(1.5	)
Changes in operating assets and liabilities			(44.2	)			53.0
Net cash from operating activities			(20.3	)			47.1
Cash flows from investing activities:
Capital expenditures			(3.8	)			(5.0	)
Acquisition of companies, net of cash received			—				(7.5	)
Other investing activities			0.9				(3.0	)
Net cash from investing activities			(2.9	)			(15.5	)
Cash flows from financing activities:
Net change in revolving line of credit			(11.8	)			(13.1	)
Repayment of debt			(7.3	)			(22.9	)
Sale of stock and other financing activities			24.2				(0.8	)
Net cash from financing activities			5.1				(36.8	)
Effect of exchange rates on cash and equivalents			(5.5	)			2.1
Net change in cash and equivalents			(23.6	)			(3.1	)
Cash and equivalents at beginning of period			88.9				118.3
Cash and equivalents at end of period		$	65.3			$	115.2

See accompanying Notes to Consolidated Financial Statements.

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 3, 2010, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 18, 2010 (the 2009 consolidated financial statements).

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform with the current presentation, including the reclassification of the year-to-date increase in book overdrafts of $22.8 million in 2009 from financing to operating activities in the statement of cash flows.

2. Fair Value Measurements

Trade accounts receivable, accounts payable, accrued liabilities and short-term borrowings approximate their fair values due to the short-term maturities of these assets and liabilities. As of July 4, 2010 and January 3, 2010, the carrying value of long-term debt approximates the fair value.

Assets Measured at Fair Value on a Recurring Basis

The following tables present assets measured at fair value on a recurring basis as of July 4, 2010 and January 3, 2010 on the consolidated balance sheet by fair value hierarchy level, as described below. The Company carried no liabilities at fair value as of July 4, 2010 and January 3, 2010.

		Fair Value Measurements on a Recurring Basis
		As of July 4, 2010
Description		Total				Level 1				Level 2				Level 3
		(In millions of dollars)
Money market funds		$	1.5			$	1.5			$	—			$	—
Available-for-sale investment			26.6				26.6				—				—
Forward exchange contracts, net			0.4				—				0.4				—
Total assets at fair value		$	28.5			$	28.1			$	0.4			$	—

		Fair Value Measurements on a Recurring Basis
		As of January 3, 2010
Description		Total				Level 1				Level 2				Level 3
		(In millions of dollars)
Money market funds		$	1.0			$	1.0			$	—			$	—
Available-for sale investment			23.6				23.6				—				—
Total assets at fair value		$	24.6			$	24.6			$	—			$	—

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

2. Fair Value Measurements (continued)

Assets Measured at Fair Value on a Recurring Basis (continued)

Level 1 measurements consist of 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.

Money market funds as of July 4, 2010 and January 3, 2010 represent investments in money market accounts, of which $1.0 million is restricted cash and is included in prepaid expenses and other current assets on the consolidated balance sheet. The valuations were based on quoted market prices of those accounts as of the respective period end.

Available-for-sale investment represents the Company’s investment in Temp Holdings Co., Ltd. (“Temp Holdings”), a leading integrated human resources company in Japan, and is included in other assets on the consolidated balance sheet. The valuation is based on the quoted market price of Temp Holdings stock on the Tokyo Stock Exchange as of the period end. The unrealized loss for the quarter ended July 4, 2010, which was insignificant, and $8.8 million gain for the quarter ended June 28, 2009 was recorded in other comprehensive income, a component of stockholders’ equity. The unrealized gain of $1.7 million for the 26 weeks ended July 4, 2010 and $4.0 million for the 26 weeks ended June 28, 2009 was recorded in other comprehensive income.

During the second quarter of 2010, the Company entered into two forward exchange contracts to offset the variability in exchange rates on its yen-denominated debt. These contracts, which are included on a net basis in prepaid expenses and other current assets on the consolidated balance sheet, are valued using market exchange rates and are not designated as hedging instruments. Accordingly, gains and losses resulting from recording the foreign exchange contracts at fair value are reported in other (expense) income, net on the consolidated statement of earnings, and amounted to a gain of $0.5 million for the quarter ended July 4, 2010. At July 4, 2010, the Company had open forward foreign currency exchange contracts, all with expiration dates of less than one year, to buy or sell foreign currencies with a U.S. dollar equivalent of $13.7 million. The Company does not use financial instruments for trading or speculative purposes.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis, such as when there is evidence of impairment. In the second quarter of 2010, management assessed the viability of certain incomplete software projects in Europe. Based on the estimated costs to complete, management terminated the projects and recorded an impairment charge of $1.5 million. After the impairment charge, the remaining balance related to these software projects is zero, which represents the fair value at July 4, 2010.

Continuing operating losses in the Company’s Outsourcing and Consulting Group (“OCG”) reporting unit were deemed to be a triggering event for purposes of assessing goodwill for impairment during the second quarter of 2010. Accordingly, we tested goodwill related to OCG and determined that OCG goodwill was not impaired.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

2. Fair Value Measurements (continued)

Assets Measured at Fair Value on a Nonrecurring Basis (continued)

In the second quarter of 2009, due to significantly worse than anticipated economic conditions and the impacts to our business, we revised our internal forecasts for all of our segments, which we deemed to be a triggering event for purposes of assessing goodwill for impairment. Accordingly, goodwill at all of our reporting units was tested for impairment in the second quarter of 2009. As a result, we recorded a goodwill impairment loss of $50.5 million, of which $16.4 million related to the Americas Commercial reporting unit, $12.1 million related to the APAC Commercial reporting unit and $22.0 million related to the EMEA PT reporting unit. The expense was recorded in the asset impairments line on the consolidated statement of earnings for the quarter and six months ended June 28, 2009.

Additionally, we evaluate long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When estimated undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value, determined by estimated future discounted cash flows. The Company’s estimates as of June 28, 2009 resulted in a $2.1 million reduction in the carrying value of long-lived assets and intangible assets in Japan.

3. Acquisitions

During the first six months of 2009, the Company made payments as follows: $5.7 million earnout payment related to the 2007 acquisition of access AG, $1.0 million related to the 2007 acquisition of CGR/seven LLC, $0.6 million earnout payment related to the 2006 acquisition of The Ayers Group and $0.2 million earnout payment related to the 2008 acquisition of Toner Graham.

4. Restructuring

Restructuring costs incurred in the first six months of 2010 totaled $4.4 million and primarily relate 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. Restructuring costs in the second quarter and first six months of 2009 totaled $4.7 million and $11.9 million, respectively, and primarily relate to global severance, lease terminations, asset write-offs and other miscellaneous costs incurred in connection with the reduction in the number of permanent employees and the consolidation, sale or closure of branch locations. These costs were reported as a component of selling, general and administrative expenses. Total costs incurred since July 2008 for the program amounted to $40.8 million.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

4. Restructuring (continued)

A summary of the balance sheet accrual, the majority of which is expected to be paid within the next 12 months, related to the global restructuring costs follows (in millions of dollars):

Balance at beginning of year		$	12.7
Additions charged to operations			4.4
Reductions for cash payments			(8.7	)
Balance at April 4, 2010			8.4
Additions charged to operations			—
Reductions for cash payments			(3.6	)
Balance at July 4, 2010		$	4.8

5. Earnings Per Share and Sale of Stock

Due to the fact that there were no potentially dilutive common shares outstanding during the period and that earnings allocated to participating securities were insignificant, the computations of basic and diluted earnings (loss) per share on common stock are the same for both 13-week and 26-week periods ended July 4, 2010 and June 28, 2009. Stock options representing 0.7 million and 0.9 million shares, respectively, for the 13 weeks ended July 4, 2010 and June 28, 2009, and 0.7 million and 0.9 million shares, respectively, for the 26 weeks ended July 4, 2010 and June 28, 2009 were excluded from the computation of diluted earnings (loss) per share due to their anti-dilutive effect.

On May 11, 2010, the Company sold 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. As part of this transaction, Kelly added a representative of Temp Holdings to Kelly’s board of directors.

6. Other (Expense) Income, Net

Included in other (expense) income, net are the following:

		13 Weeks Ended								26 Weeks Ended
		2010				2009				2010				2009
		(In millions of dollars)								(In millions of dollars)
Interest income		$	0.2			$	0.4			$	0.4			$	0.9
Interest expense			(1.5	)			(0.8	)			(3.0	)			(1.4	)
Dividend income			0.2				0.3				0.2				0.3
Foreign exchange (losses) gains			(1.0	)			(1.0	)			(0.8	)			0.3
Other			—				0.1				—				0.2
Other (expense) income, net		$	(2.1	)		$	(1.0	)		$	(3.2	)		$	0.3

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

7. Contingencies

The Company is the subject of two pending class action lawsuits. The two lawsuits, Fuller v. Kelly Services, Inc. and Kelly Home Care Services, Inc., pending in the Superior Court of California, Los Angeles and Sullivan v. Kelly Services, Inc., pending in the US District Court Southern District of CA, both involve claims for monetary damages by current and former temporary employees working in the State of California.

The Fuller matter involves claims relating to alleged misclassification of personal attendants as exempt and not entitled to overtime compensation under state law and to alleged technical violations of a state law governing the content of employee pay stubs. On April 30, 2007, the Court in the Fuller case certified both plaintiff classes involved in the suit. In the third quarter of 2008, Kelly was granted a hearing date for its motions related to summary judgment on both certified claims. On March 13, 2009, the Court granted Kelly’s motion for decertification of the classes. Plaintiffs filed a petition for review on April 3, 2009 requesting the decertification ruling be overturned. Plaintiffs’ request was granted on May 17, 2010 and the suit was recertified as a class action. The Sullivan matter relates to claims by temporary workers for compensation while interviewing for assignments. On April 27, 2010, the Court in the Sullivan matter certified the lawsuit as a class action. The Company believes it has meritorious defenses in both lawsuits and will continue to vigorously defend itself during the litigation process.

The Company is also involved in a number of other lawsuits arising in the ordinary course of its business, typically employment discrimination and wage and hour matters. While management does not expect any of these other matters to have a material adverse effect on the Company’s results of operations, financial position or cash flows, litigation is subject to inherent uncertainties and the Company is not at this time able to predict the outcome of these matters. It is reasonably possible that some matters could be decided unfavorably to the Company and, if so, could have a material adverse impact on our consolidated financial statements.

8. 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. Each reportable segment is managed by its own management team and reports to executive management. 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) 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 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, contingent workforce outsourcing, business process outsourcing, executive placement and career transition/outplacement services. Corporate expenses that directly support the operating units have been allocated to the seven segments. Included in unallocated corporate expenses in the 13 and 26 weeks ended June 28, 2009 is $52.6 million related to asset impairment charges.

The following table presents information about the reported revenue from services and earnings from operations of the Company for the 13 and 26 weeks ended July 4, 2010 and June 28, 2009. 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.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

8. Segment Disclosures (continued)

		13 Weeks Ended								26 Weeks Ended
		2010				2009				2010				2009
		(In millions of dollars)								(In millions of dollars)
Revenue from Services:
Americas Commercial		$	600.9			$	473.0			$	1,148.6			$	955.4
Americas PT			219.9				194.8				425.5				392.2
Total Americas Commercial and PT			820.8				667.8				1,574.1				1,347.6
EMEA Commercial			209.8				211.7				414.7				428.3
EMEA PT			34.4				33.1				69.3				65.9
Total EMEA Commercial and PT			244.2				244.8				484.0				494.2
APAC Commercial			83.7				66.3				164.6				130.7
APAC PT			7.8				5.5				15.4				11.7
Total APAC Commercial and PT			91.5				71.8				180.0				142.4
OCG			60.4				50.1				115.7				98.8
Less: Intersegment revenue			(7.5	)			(5.6	)			(14.0	)			(11.5	)
Consolidated Total		$	1,209.4			$	1,028.9			$	2,339.8			$	2,071.5
Earnings (Loss) from Operations:
Americas Commercial		$	18.0			$	2.0			$	31.1			$	2.5
Americas PT			11.8				6.6				20.3				11.9
Total Americas Commercial and PT			29.8				8.6				51.4				14.4
EMEA Commercial			1.4				(5.3	)			(0.9	)			(17.4	)
EMEA PT			0.5				(1.3	)			0.4				(1.9	)
Total EMEA Commercial and PT			1.9				(6.6	)			(0.5	)			(19.3	)
APAC Commercial			1.0				(1.2	)			2.0				(2.5	)
APAC PT			(0.4	)			(0.4	)			(1.4	)			(0.7	)
Total APAC Commercial and PT			0.6				(1.6	)			0.6				(3.2	)
OCG			(5.8	)			(3.2	)			(10.3	)			(4.4	)
Corporate Expense			(18.0	)			(71.7	)			(34.3	)			(92.6	)
Consolidated Total		$	8.5			$	(74.5	)		$	6.9			$	(105.1	)

9. Subsequent Event

On August 10, 2010, the board of directors of the Company decided to eliminate the position of Chief Administrative Officer, currently held by Michael L. Durik, effective September 30, 2010. Under the terms of the Company’s Executive Severance Plan, the Company will incur severance costs of approximately $2.8 million in the third quarter of 2010.

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

Executive Overview

During the second quarter of 2010, the global economy continued to show signs of recovery and labor markets strengthened as demand for temporary staffing improved. In the U.S., more than 360,000 temporary jobs have been added in the last ten months, representing 21% growth from the low point in September, 2009. While July, 2010 posted a decline of 5,600 temporary jobs, it follows nine months of consecutive growth and was the smallest decline since November, 2007.

For Kelly, positive economic conditions and favorable labor trends resulted in improved second quarter performance highlighted by: increased demand for temporary staffing across all geographic regions; strong, sustainable growth in light industrial staffing; stability in office-clerical staffing; and, improvement in professional and technical staffing. For the second quarter,

•

Revenue was up 18% compared to last year.

•

Year-over-year expenses were down 7%, as we continued to benefit from the restructuring actions we took last year.

•

Our gross profit rate declined compared to last year, reflecting the continued shift in business and customer mix.

•

Earnings per share totaled $0.11, a marked improvement over last year’s second quarter loss per share of $1.89.

Also during the quarter, we entered into a strategic alliance with Temp Holdings, a leading integrated human resources services company in Japan, strengthening both companies’ competitive positions in the global staffing market. This arrangement involved the sale of 1.6 million shares of Kelly’s Class A common stock to Temp Holdings in a private transaction.

Results of Operations
Second Quarter

Revenue from services in the second quarter of 2010 totaled $1.2 billion, an increase of 17.5% from the same period in 2009. This was the result of an increase in hours worked of 20.0%, partially offset by a decrease in average hourly bill rates of 2.5% (2.7% on a constant currency basis). Fee-based income, which is included in revenue from services, totaled $24.4 million, or 2.0% of total revenue, for the second quarter of 2010, an increase of 18.9% (17.2% on a constant currency basis) as compared to $20.6 million in the second quarter of 2009. On a constant currency basis, revenue for the quarter increased in all business segments.

Compared to the second quarter of 2009, the U.S. dollar was weaker against certain foreign currencies, including the Australian dollar and Canadian dollar, and stronger against the euro and British pound. As a net result, our consolidated U.S. dollar translated revenue was higher than would have otherwise been reported. On a constant currency basis, second quarter revenue increased 16.8% as compared with the prior year. When we use the term “constant currency,” it means that we have translated financial data for 2010 into U.S. dollars using the same foreign currency exchange rates that we used to translate financial data for 2009. Management believes constant currency measurements are an important analytical tool to aid in understanding underlying operating trends without distortion due to currency fluctuations. The table below summarizes the impact of foreign exchange adjustments on second quarter revenue:

		Second Quarter Revenue
		2010				2009				% Change
		(In millions of dollars)
Revenue from Services — Constant Currency:
Americas Commercial		$	593.7			$	473.0				25.5	%
Americas PT			219.5				194.8				12.6
Total Americas Commercial and PT — Constant Currency			813.2				667.8				21.8
EMEA Commercial			216.7				211.7				2.4
EMEA PT			35.9				33.1				8.6
Total EMEA Commercial and PT — Constant Currency			252.6				244.8				3.2
APAC Commercial			75.5				66.3				13.8
APAC PT			7.1				5.5				28.8
Total APAC Commercial and PT — Constant Currency			82.6				71.8				15.0
OCG — Constant Currency			60.3				50.1				20.3
Less: Intersegment revenue			(7.4	)			(5.6	)			32.6
Total Revenue from Services — Constant Currency			1,201.3				1,028.9				16.8
Foreign Currency Impact			8.1
Revenue from Services		$	1,209.4			$	1,028.9				17.5	%

Gross profit of $190.9 million was 11.2% higher than gross profit of $171.7 million for the same period of the prior year. The gross profit rate for the second quarter of 2010 was 15.8%, versus 16.7% for the second quarter of 2009. The decrease in the gross profit rate was caused by a reduction in our temporary margins, primarily within the Americas and OCG businesses, partially offset by a favorable impact from recent U.S. legislation described below. In the Americas, the average temporary margin continues to be impacted by shifts to a higher proportion of light industrial business compared to clerical, and to large corporate customers compared to retail. Within OCG, the temporary margins reflect the shift to a higher proportion of the lower-margin payroll process outsourcing (“PPO”) business and the impact of non-billable implementation costs associated with our business process outsourcing (“BPO”) units.

Recent U.S. legislation, the Hiring Incentives to Restore Employment (“HIRE”) Act, allows employers to receive tax incentives to hire and retain previously unemployed individuals. The HIRE Act expires at the end of 2010.

Selling, general and administrative (“SG&A”) expenses totaled $180.9 million, a year-over-year decrease of $12.7 million, or 6.5% (6.9% on a constant currency basis). Included in SG&A expenses for the second quarter of 2009 is $4.7 million for restructuring costs. These costs relate primarily to global severance, lease terminations, asset write-offs and other miscellaneous costs incurred in connection with the reduction in the number permanent employees and the consolidation, sale or closure of branch locations.

We recorded asset impairment charges of $1.5 million in the second quarter of 2010 and $52.6 million in the second quarter of 2009. In the second quarter of 2010, management assessed the viability of certain incomplete software projects in Europe. Based on the estimated costs to complete, management terminated the projects and recorded an asset impairment charge of $1.5 million. Due to significantly worse than anticipated economic conditions and the impacts to our business in the second quarter of 2009, we revised our internal forecasts for all of our segments, which we deemed to be a triggering event for purposes of assessing goodwill for impairment. Accordingly, goodwill at all of our reporting units was tested for impairment in the second quarter of 2009. This resulted in the recognition of a goodwill impairment loss of $50.5 million in total, of which $16.4 million related to the Americas Commercial segment, $12.1 million related to the APAC Commercial segment and $22.0 million related to the EMEA PT segment.

Additionally, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When estimated undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value, determined by estimated future discounted cash flows. The Company’s estimates as of June 28, 2009 resulted in a $2.1 million reduction in the carrying value of long-lived assets and intangible assets in Japan.

As a result of the above, we reported earnings from operations in the second quarter of 2010 totaling $8.5 million, compared to a loss of $74.5 million reported for the second quarter of 2009.

Income tax expense for the second quarter of 2010 was $2.5 million, compared to a benefit of $9.5 million for the second quarter of 2009. The increase in tax expense is primarily due to the increase in earnings. Our tax benefit for the second quarter of 2009 was reduced by the non-deductibility of asset impairment and restructuring charges.

Earnings from continuing operations were $3.9 million in the second quarter of 2010, compared to a loss of $66.0 million in the second quarter of 2009. Included in earnings from continuing operations in the second quarter of 2010 were $1.2 million, net of tax, of asset impairment charges. Included in the loss from continuing operations in the second quarter of 2009 were $49.2 million, net of tax, related to asset impairments and $4.0 million, net of tax, of restructuring charges.

Diluted earnings from continuing operations per share for the second quarter of 2010 were $0.11, as compared to a diluted loss of $1.89 for the second quarter of 2009.

Americas Commercial

		Second Quarter
														Constant
														Currency
		2010				2009				Change				Change
		(In millions of dollars)
Revenue from Services		$	600.9			$	473.0				27.0	%			25.5	%
Fee-based income			2.2				1.6				41.8				38.3
Gross profit			85.7				70.6				21.2				20.0
SG&A expenses excluding restructuring charges			67.7				67.5				0.3
Restructuring charges			—				1.1				(100.0	)
Total SG&A expenses			67.7				68.6				(1.4	)			(2.5	)
Earnings from Operations			18.0				2.0				NM
Gross profit rate			14.3	%			14.9	%		(0.6		)pts.
Expense rates (excluding restructuring charges):
% of revenue			11.3				14.3				(3.0	)
% of gross profit			79.0				95.5				(16.5	)
Operating margin			3.0				0.4				2.6

The change in Americas Commercial revenue from services reflected an increase in hours worked of 25.2%, combined with an increase in average hourly bill rates of 1.4% (0.2% on a constant currency basis). Americas Commercial represented 49.7% of total Company revenue in the second quarter of 2010 and 46.0% in the second quarter of 2009.

The decrease in the gross profit rate was primarily due to an increase in the proportion of lower-margin light industrial business to higher-margin clerical business, partially offset by HIRE Act benefits.

Americas PT

		Second Quarter
														Constant
														Currency
		2010				2009				Change				Change
		(In millions of dollars)
Revenue from Services		$	219.9			$	194.8				12.9	%			12.6	%
Fee-based income			2.2				2.3				(2.7	)			(3.1	)
Gross profit			34.5				32.2				7.3				7.0
SG&A expenses excluding restructuring charges			22.7				25.5				(10.5	)
Restructuring charges			—				0.1				(100.0	)
Total SG&A expenses			22.7				25.6				(10.9	)			(11.1	)
Earnings from Operations			11.8				6.6				76.4
Gross profit rate			15.7	%			16.5	%		(0.8		)pts.
Expense rates (excluding restructuring charges):
% of revenue			10.3				13.0				(2.7	)
% of gross profit			65.8				78.8				(13.0	)
Operating margin			5.4				3.4				2.0

The change in Americas PT revenue from services reflected an increase in hours worked of 8.9%, combined with an increase in average billing rates of 3.9% (3.7% on a constant currency basis). Americas PT revenue represented 18.2% of total Company revenue in the second quarter of 2010 and 18.9% in the second quarter of 2009.

The Americas PT gross profit rate decreased, due to changes in customer mix and higher state unemployment taxes, partially offset by the effect of HIRE Act benefits. The decrease in SG&A expenses was primarily due to reductions in personnel as a result of continuing cost-savings initiatives.

EMEA Commercial

		Second Quarter
														Constant
														Currency
		2010				2009				Change				Change
		(In millions of dollars)
Revenue from Services		$	209.8			$	211.7				(0.9	)%			2.4	%
Fee-based income			5.1				3.9				33.2				35.5
Gross profit			33.8				34.4				(1.6	)			2.0
SG&A expenses excluding restructuring charges			30.9				36.6				(15.5	)
Restructuring charges			—				3.1				(100.0	)
Total SG&A expenses			30.9				39.7				(22.2	)			(19.6	)
Asset impairments			1.5				—				NM
Earnings from Operations			1.4				(5.3	)			NM
Gross profit rate			16.1	%			16.2	%		(0.1		)pts.
Expense rates (excluding restructuring charges):
% of revenue			14.7				17.3				(2.6	)
% of gross profit			91.5				106.5				(15.0	)
Operating margin			0.6				(2.5	)			3.1

The change in revenue from services in EMEA Commercial resulted from a decrease in average hourly bill rates of 9.5% (6.4% on a constant currency basis), partially offset by an 8.7% increase in hours worked. The decrease in the constant currency average hourly bill rates for EMEA Commercial was due to a change in the mix from countries with higher average bill rates to those with lower average bill rates, such as Russia and Portugal. EMEA Commercial revenue represented 17.3% of total Company revenue in the second quarter of 2010 and 20.6% in the second quarter of 2009.

During 2009, EMEA Commercial completed a significant restructuring within the United Kingdom and exited the staffing business in Spain, Turkey, Ukraine and Finland. Exiting these locations accounted for approximately 2 percentage points of the change in second quarter constant currency revenue for EMEA Commercial. These actions and other continuing cost-savings initiatives resulted in the decrease in SG&A expenses.

EMEA PT

		Second Quarter
														Constant
														Currency
		2010				2009				Change				Change
		(In millions of dollars)
Revenue from Services		$	34.4			$	33.1				4.1	%			8.6	%
Fee-based income			3.9				3.8				3.6				5.2
Gross profit			9.3				8.8				6.2				9.8
Total SG&A expenses			8.8				10.1				(13.1	)			(10.0	)
Earnings from Operations			0.5				(1.3	)			NM
Gross profit rate			27.1	%			26.6	%		0.5		pts.
Expense rates:
% of revenue			25.5				30.6				(5.1	)
% of gross profit			94.1				115.1				(21.0	)
Operating margin			1.6				(4.0	)			5.6

The change in revenue from services in EMEA PT resulted from a 7.1% increase in hours worked, partially offset by a 2.7% decrease in average hourly bill rates (an increase of 1.8% on a constant currency basis). EMEA PT revenue represented 2.8% of total Company revenue in the second quarter of 2010 and 3.2% in the second quarter of 2009.

The change in the EMEA PT gross profit rate was primarily due to increases in temporary margins. SG&A expenses declined, due to reductions in personnel and continuing cost-savings initiatives.

APAC Commercial

		Second Quarter
														Constant
														Currency
		2010				2009				Change				Change
		(In millions of dollars)
Revenue from Services		$	83.7			$	66.3				26.2	%			13.8	%
Fee-based income			2.7				2.3				15.1				3.6
Gross profit			11.7				9.7				20.9				8.5
SG&A expenses excluding restructuring charges			10.7				10.8				(0.8	)
Restructuring charges			—				0.1				(100.0	)
Total SG&A expenses			10.7				10.9				(1.2	)			(11.3	)
Earnings from Operations			1.0				(1.2	)			NM
Gross profit rate			14.0	%			14.6	%		(0.6		)pts.
Expense rates (excluding restructuring charges):
% of revenue			12.8				16.3				(3.5	)
% of gross profit			91.8				111.8				(20.0	)
Operating margin			1.2				(1.8	)			3.0

The change in revenue from services in APAC Commercial resulted from an increase in hours worked of 22.4%, combined with an increase in average hourly bill rates of 3.4% (a decrease of 6.7% on a constant currency basis). The decrease in the constant currency average hourly bill rates for APAC Commercial was due to a change in mix from countries with higher average bill rates to those with lower average bill rates, such as India and Malaysia, as well as the decision to exit the staffing market in Japan. APAC Commercial revenue represented 6.9% of total Company revenue in the second quarter of 2010 and 6.4% in the second quarter of 2009.

The decrease in the APAC Commercial gross profit rate was primarily due to lower temporary margins as a result of country mix, fueled by the growth in India, as well as our decision to exit the staffing business in Japan. The decision to exit the staffing business in Japan impacted second quarter year-over-year constant currency revenue and expense comparisons by approximately 10 percentage points.

APAC PT

		Second Quarter
														Constant
														Currency
		2010				2009				Change				Change
		(In millions of dollars)
Revenue from Services		$	7.8			$	5.5				41.1	%			28.8	%
Fee-based income			2.8				0.8				227.9				211.0
Gross profit			3.5				1.7				103.8				90.4
Total SG&A expenses			3.9				2.1				84.2				70.7
Earnings from Operations			(0.4	)			(0.4	)			2.5
Gross profit rate			45.5	%			31.5	%		14.0		pts.
Expense rates:
% of revenue			50.4				38.6				11.8
% of gross profit			110.8				122.6				(11.8	)
Operating margin			(4.9	)			(7.1	)			2.2

The change in revenue from services in APAC PT resulted from an increase in hours worked of 15.8% and an increase in fee-based income, partially offset by a decrease in average hourly bill rates of 7.4% (17.3% on a constant currency basis). The decrease in the constant currency average hourly bill rates for APAC PT was due to a change in mix from countries with higher average bill rates to those with lower average bill rates, such as India, as well as the decision to exit the staffing market in Japan. APAC PT revenue represented 0.6% of total Company revenue in the second quarter of 2010 and 0.5% in the second quarter of 2009.

The change in the APAC PT gross profit rate was due primarily to increases in fee-based income. Fee-based income 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 increased, due to hiring of permanent placement recruiters, positioning this segment for future growth.

OCG

		Second Quarter
														Constant
														Currency
		2010				2009				Change				Change
		(In millions of dollars)
Revenue from Services		$	60.4			$	50.1				20.5	%			20.3	%
Fee-based income			5.6				6.0				(6.1	)			(6.4	)
Gross profit			13.0				14.6				(11.0	)			(10.9	)
SG&A expenses excluding restructuring charges			18.8				17.4				7.9
Restructuring charges			—				0.4				(100.0	)
Total SG&A expenses			18.8				17.8				5.6				5.7
Earnings from Operations			(5.8	)			(3.2	)			(80.8	)
Gross profit rate			21.4	%			29.0	%		(7.6		)pts.
Expense rates (excluding restructuring charges):
% of revenue			31.1				34.7				(3.6	)
% of gross profit			144.9				119.5				25.4
Operating margin			(9.6	)			(6.4	)			(3.2	)