KELLY SERVICES INC - Quarter Report: 2011 October (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		(I.R.S. Employer
of incorporation or organization)		Identification No.)

999 WEST BIG BEAVER ROAD, TROY, MICHIGAN 48084

(Address of principal executive offices)

(Zip Code)

(248) 362-4444

No Change

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 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 þ 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		Smaller reporting company o
				(Do not check if a 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 o No þ

At October 28, 2011, 33,367,074 shares of Class A and 3,454,485 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			16
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			30
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
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

KELLY SERVICES, INC. AND SUBSIDIARIES

(UNAUDITED)

(In millions of dollars except per share data)

		13 Weeks Ended								39 Weeks Ended
		Oct. 2, 2011				Oct. 3, 2010				Oct. 2, 2011				Oct. 3, 2010
Revenue from services		$	1,409.8			$	1,284.7			$	4,154.7			$	3,624.5
Cost of services			1,181.2				1,077.5				3,487.8				3,046.4
Gross profit			228.6				207.2				666.9				578.1
Selling, general and administrative expenses			206.5				192.9				621.9				555.4
Asset impairments			—				—				—				1.5
Earnings from operations			22.1				14.3				45.0				21.2
Other income (expense), net			1.0				(1.5	)			(0.1	)			(4.7	)
Earnings from continuing operations before taxes			23.1				12.8				44.9				16.5
Income taxes			3.4				3.2				4.1				5.0
Earnings from continuing operations			19.7				9.6				40.8				11.5
Loss from discontinued operations, net of tax			—				—				(1.2	)			—
Net earnings		$	19.7			$	9.6			$	39.6			$	11.5
Basic earnings (loss) per share:
Earnings from continuing operations		$	0.52			$	0.26			$	1.09			$	0.32
Loss from discontinued operations		$	—			$	—			$	(0.03	)		$	—
Net earnings		$	0.52			$	0.26			$	1.05			$	0.32
Diluted earnings (loss) per share:
Earnings from continuing operations		$	0.52			$	0.26			$	1.09			$	0.32
Loss from discontinued operations		$	—			$	—			$	(0.03	)		$	—
Net earnings		$	0.52			$	0.26			$	1.05			$	0.32
Dividends per share		$	0.05			$	—			$	0.05			$	—
Average shares outstanding (millions):
Basic			36.8				36.7				36.8				35.9
Diluted			36.8				36.7				36.8				35.9

See accompanying Notes to Consolidated Financial Statements.

KELLY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions)

		October 2, 2011				January 2, 2011
ASSETS
CURRENT ASSETS:
Cash and equivalents		$	73.5			$	80.5
Trade accounts receivable, less allowances of $13.7 and $12.3, respectively			939.9				810.9
Prepaid expenses and other current assets			53.7				44.8
Deferred taxes			27.0				22.4
Total current assets			1,094.1				958.6
PROPERTY AND EQUIPMENT:
Property and equipment			323.9				319.3
Accumulated depreciation			(232.3	)			(215.3	)
Net property and equipment			91.6				104.0
NONCURRENT DEFERRED TAXES			89.6				84.0
GOODWILL, NET			67.3				67.3
OTHER ASSETS			145.6				154.5
TOTAL ASSETS		$	1,488.2			$	1,368.4
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt		$	79.0			$	78.8
Accounts payable and accrued liabilities			227.7				181.6
Accrued payroll and related taxes			283.0				243.3
Accrued insurance			31.4				31.3
Income and other taxes			60.0				56.0
Total current liabilities			681.1				591.0
NONCURRENT LIABILITIES:
Accrued insurance			53.7				53.6
Accrued retirement benefits			82.8				85.4
Other long-term liabilities			13.6				14.6
Total noncurrent liabilities			150.1				153.6
STOCKHOLDERS’ EQUITY:
Capital stock, $1.00 par value
Class A common stock, shares issued 36.6 million at 2011 and 2010			36.6				36.6
Class B common stock, shares issued 3.5 million at 2011 and 2010			3.5				3.5
Treasury stock, at cost
Class A common stock, 3.3 million shares at 2011 and 3.4 million at 2010			(68.0	)			(70.3	)
Class B common stock			(0.6	)			(0.6	)
Paid-in capital			29.3				28.0
Earnings invested in the business			635.3				597.6
Accumulated other comprehensive income			20.9				29.0
Total stockholders’ equity			657.0				623.8
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,488.2			$	1,368.4

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								39 Weeks Ended
		Oct. 2,				Oct. 3,				Oct. 2,				Oct. 3,
		2011				2010				2011				2010
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			(68.1	)			(70.7	)			(70.3	)			(106.6	)
Sale of stock, exercise of stock options, restricted stock awards and other			0.1				0.1				2.3				36.0
Balance at end of period			(68.0	)			(70.6	)			(68.0	)			(70.6	)
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			28.0				26.8				28.0				36.9
Sale of stock, exercise of stock options, restricted stock awards and other			1.3				0.7				1.3				(9.4	)
Balance at end of period			29.3				27.5				29.3				27.5
Earnings Invested in the Business
Balance at beginning of period			617.5				573.4				597.6				571.5
Net earnings			19.7				9.6				39.6				11.5
Dividends			(1.9	)			—				(1.9	)			—
Balance at end of period			635.3				583.0				635.3				583.0
Accumulated Other Comprehensive Income
Balance at beginning of period			40.3				17.7				29.0				25.1
Foreign currency translation adjustments, net of tax			(18.8	)			11.6				(7.0	)			2.5
Unrealized (losses) gains on investments, net of tax			(0.6	)			(0.4	)			(1.1	)			1.3
Balance at end of period			20.9				28.9				20.9				28.9
Stockholders’ Equity at end of period		$	657.0			$	608.3			$	657.0			$	608.3
Comprehensive Income
Net earnings		$	19.7			$	9.6			$	39.6			$	11.5
Foreign currency translation adjustments, net of tax			(17.3	)			11.6				(5.5	)			2.5
Unrealized (losses) gains on investments, net of tax			(0.6	)			(0.4	)			(1.1	)			1.3
Reclassification adjustments included in net earnings			(1.5	)			—				(1.5	)			—
Comprehensive Income		$	0.3			$	20.8			$	31.5			$	15.3

See accompanying Notes to Consolidated Financial Statements.

KELLY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions of dollars)

		39 Weeks Ended
		Oct. 2,				Oct. 3,
		2011				2010
Cash flows from operating activities:
Net earnings		$	39.6			$	11.5
Noncash adjustments:
Impairment of assets			—				1.5
Depreciation and amortization			23.9				26.5
Provision for bad debts			3.5				1.0
Stock-based compensation			3.5				2.2
Other, net			(1.5	)			1.0
Changes in operating assets and liabilities			(63.4	)			(43.6	)
Net cash from operating activities			5.6				0.1
Cash flows from investing activities:
Capital expenditures			(10.0	)			(5.9	)
Settlement of forward exchange contracts			0.7				—
Other investing activities			0.3				0.5
Net cash from investing activities			(9.0	)			(5.4	)
Cash flows from financing activities:
Net change in short-term borrowings			61.9				(12.8	)
Repayment of debt			(62.9	)			(7.3	)
Dividend payments			(1.9	)			—
Sale of stock and other financing activities			(1.0	)			24.3
Net cash from financing activities			(3.9	)			4.2
Effect of exchange rates on cash and equivalents			0.3				(0.6	)
Net change in cash and equivalents			(7.0	)			(1.7	)
Cash and equivalents at beginning of period			80.5				88.9
Cash and equivalents at end of period		$	73.5			$	87.2

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 2, 2011, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 17, 2011 (the 2010 consolidated financial statements).

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

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 October 2, 2011 and January 2, 2011 on the consolidated balance sheet by fair value hierarchy level, as described below.

		Fair Value Measurements on a Recurring Basis
		As of October 2, 2011
Description		Total				Level 1				Level 2				Level 3
		(In millions of dollars)
Money market funds		$	1.5			$	1.5			$	—			$	—
Available-for-sale investment			28.0				28.0				—				—
Total assets at fair value		$	29.5			$	29.5			$	—			$	—

		Fair Value Measurements on a Recurring Basis
		As of January 2, 2011
Description		Total				Level 1				Level 2				Level 3
		(In millions of dollars)
Money market funds		$	4.1			$	4.1			$	—			$	—
Available-for-sale investment			27.8				27.8				—				—
Forward exchange contracts			0.7				—				0.7				—
Total assets at fair value		$	32.6			$	31.9			$	0.7			$	—

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 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.

Money market funds as of October 2, 2011 represent investments in money market accounts, all of which is restricted cash that is included in prepaid expenses and other current assets on the consolidated balance sheet. Money market funds as of January 2, 2011 represent investments in money market accounts, of which $2.9 million is included in cash and equivalents and $1.2 million of restricted cash 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 of $0.6 million for the 13 weeks ended October 2, 2011 and unrealized loss of $0.4 million for the 13 weeks ended October 3, 2010 was recorded in other comprehensive income, a component of stockholders’ equity. The unrealized loss of $1.1 million for the 39 weeks ended October 2, 2011 and unrealized gain of $1.3 million for the 39 weeks ended October 3, 2010 was recorded in other comprehensive income.

During the second quarter of 2010, the Company entered into two forward foreign currency exchange contracts to offset the variability in exchange rates on its yen-denominated debt. One contract matured on May 13, 2011 and the other contract matured November 2010. During the first quarter of 2011, the yen-denominated debt was paid in full. As a result, the Company entered into an additional forward foreign currency exchange contract during the first quarter of 2011 to offset the remaining open contract that was purchased during 2010.

Prior to maturity, these contracts, which were included in prepaid expenses and other current assets on the consolidated balance sheet, were valued using market exchange rates and were not designated as hedging instruments. Accordingly, gains and losses resulting from recording the foreign exchange contracts at fair value were reported in other expense, net on the consolidated statement of earnings, and amounted to a minor loss for the 39 weeks ended October 2, 2011 and gains of $0.7 million and $1.2 million, respectively, for the 13 and 39 weeks ended October 3, 2010.

The two aforementioned forward currency exchange contracts, one to buy Japanese yen with a U.S. dollar equivalent of $6.1 million and one to sell Japanese yen with a U.S. dollar equivalent of $6.8 million, matured on May 13, 2011. At October 2, 2011, the Company had no open forward foreign currency exchange contracts. At January 2, 2011, the Company had one open forward foreign currency exchange contract with an expiration date of less than one year to buy foreign currencies with a U.S. dollar equivalent of $6.1 million. The Company does not use financial instruments for trading or speculative purposes.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

3. Restructuring

Restructuring costs incurred in the third quarter and first nine months of 2010 totaled $2.8 million and $7.2 million, respectively, and primarily related to severance and lease termination costs for branches in the EMEA Commercial and APAC Commercial segments that were in the process of closure at the end of 2009, and severance costs related to the corporate headquarters. Restructuring costs incurred in the third quarter and first nine months of 2011 amounted to a credit of $0.6 million and expense of $2.8 million, respectively, and primarily relate to revisions of the estimated lease termination costs for EMEA Commercial branches that closed in prior years. These costs were reported as a component of SG&A expenses. Total costs incurred since July 2008 for our restructuring efforts amounted to $46.4 million.

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

Balance at beginning of year		$	4.7
Amounts charged (credited) to operations			4.0
Reductions for cash payments			(1.1	)
Balance at April 3, 2011			7.6
Amounts charged (credited) to operations			(0.6	)
Reductions for cash payments			(0.4	)
Balance at July 3, 2011			6.6
Amounts charged (credited) to operations			(0.6	)
Reductions for cash payments			(0.6	)
Balance at October 2, 2011		$	5.4

The remaining balance of $5.4 million as of October 2, 2011 represents primarily future lease payments and is expected to be paid by 2018. On a quarterly basis, the Company reassesses the accrual associated with restructuring costs and adjusts it as necessary.

4. Debt

On March 31, 2011, the Company entered into an agreement with its lenders to amend and restate its existing $90 million, three-year revolving credit facility (the “Facility”). The amendment increased the capacity of the Facility to $150 million, and extended the term of the Facility to March 31, 2016 from September 28, 2012. The Facility allows for borrowings in various currencies and is used to fund working capital, acquisitions, and general corporate needs.

The interest rate applicable to borrowings under the Facility at October 2, 2011 was 200 basis points over the London InterBank Offering Rate (“LIBOR”) in addition to a facility fee of 25 basis points. LIBOR rates vary by currency. The Company may also borrow using rates based on the Prime Rate; these loans have shorter notice periods and interest periods. At October 2, 2011, the prime-rate based loans were available to the Company at the Prime Rate plus 100 basis points and a facility fee of 25 basis points.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

4. Debt (continued)

At October 2, 2011, borrowings under the Facility were $5.0 million, with an interest rate of 2.48%, and the Facility had a remaining capacity of $145.0 million. In connection with the refinancing, certain of the Facility’s financial covenants and restrictions were amended and are described below, all of which were met at October 2, 2011:

	•		The Company must not allow its ratio of earnings before interest, taxes, depreciation, amortization and certain cash and non-cash charges that are non-recurring in nature (“EBITDA”) to interest expense (“Interest Coverage Ratio”) for the last twelve months to be below 4.0 to 1.0 as of the end of any fiscal quarter ending prior to the fourth quarter of 2012 and 5.0 to 1.0 thereafter.
	•		The Company must keep its ratio of total indebtedness to the sum of net worth and total indebtedness below 0.4 to 1.0 at all times.
	•		Dividends, stock buybacks and similar transactions are limited based on the Interest Coverage Ratio. When the Interest Coverage Ratio is below 5.0 to 1.0, the Company may pay up to $20 million in aggregate over the four most recent fiscal quarters including the current quarter; when the Interest Coverage Ratio is above 5.0 to 1.0, the Company may pay up to $30 million in aggregate over the four most recent fiscal quarters including the current quarter.
	•		The Company must adhere to other operating restrictions relating to the conduct of business, such as certain limitations on asset sales and the type and scope of investments.

At January 2, 2011, there were no borrowings under the Facility.

On March 31, 2011, the Company and Kelly Receivables Funding, LLC, a wholly owned bankruptcy remote special purpose subsidiary of the Company (the “Receivables Entity”), amended the Receivables Purchase Agreement related to a $100 million securitization facility (“the Securitization Facility”). The amendment (i) extended the term of the Securitization Facility from 364 days to three years, (ii) reduced borrowing costs, and (iii) increased the capacity from $100 to $150 million. The Receivables Purchase Agreement will terminate December 4, 2014, unless terminated earlier pursuant to its terms.

Under the Securitization Facility, the Company will sell certain trade receivables and related rights (“Receivables”), on a revolving basis, to the Receivables Entity. The Receivables Entity may from time to time sell an undivided variable percentage ownership interest in the Receivables. The Securitization Facility also allows for the issuance of standby letters of credit (“SBLC”). The Securitization Facility contains a cross-default clause that could result in termination if defaults occur under our other loan agreements. The Securitization Facility also contains certain restrictions based on the performance of the Receivables.

As of October 2, 2011, the Securitization Facility carried $74.0 million of short-term borrowings at a rate of 1.39% and $51.4 million of SBLCs related to workers’ compensation. The interest rate applicable to borrowings under the Securitization Facility at October 2, 2011 was 55 basis points over the cost of commercial paper, in addition to a facility fee of 60 basis points. The cost of borrowings on this facility varies on a daily basis, along with the cost of commercial paper. The remaining capacity on the Facility was $24.6 million at October 2, 2011. As of January 2, 2011, the Securitization Facility carried $17.0 million of short-term borrowings at a rate of 1.57%, SBLCs related to workers’ compensation of $45.7 million and remaining capacity of $37.3 million.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

4. Debt (continued)

The Receivables Entity’s sole business consists of the purchase or acceptance through capital contributions of trade accounts receivable and related rights from the Company. As described above, the Receivables Entity may retransfer these receivables or grant a security interest in those receivables under the terms and conditions of the Receivables Purchase Agreement. The Receivables Entity is a separate legal entity with its own creditors who would be entitled, if it were ever liquidated, to be satisfied out of its assets prior to any assets or value in the Receivables Entity becoming available to its equity holders. The assets of the Receivables Entity are not available to pay creditors of the Company or any of its other subsidiaries. The assets and liabilities of the Receivables Entity are included in the consolidated financial statements of the Company.

The Company had a three-year syndicated term loan facility comprised of 9 million euros and 5 million U.K. pounds, and a five-year, 6 billion yen-denominated loan agreement, all of which had a maturity date of October 3, 2011. On March 22, 2011, the Company fully paid the euro and U.K. pound loans. On March 24, 2011, the Company also fully paid the yen loan using borrowings from the revolving credit facility and Securitization Facility.

As of January 2, 2011, the U.S. dollar amount outstanding on the euro and U.K. pound facility, which fluctuated based on foreign exchange rates, totaled approximately $19.7 million, all of which was classified as current, and carried an interest rate which ranged from 4.24% to 4.44%. As of January 2, 2011, the U.S. dollar amount outstanding on the yen-denominated loan balance, which also fluctuated based on foreign exchange rates, totaled approximately $42.0 million, all of which was classified as current, and carried an interest rate of 3.7%.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

5. Earnings Per Share

The reconciliation of basic and diluted earnings per share on common stock for the 13 and 39 weeks ended October 2, 2011 and October 3, 2010 follows (in millions of dollars except per share data):

		13 Weeks Ended								39 Weeks Ended
		2011				2010				2011				2010
Earnings from continuing operations		$	19.7			$	9.6			$	40.8			$	11.5
Less: Earnings allocated to participating securities			(0.5	)			(0.1	)			(0.9	)			(0.1	)
Earnings from continuing operations available to common shareholders		$	19.2			$	9.5			$	39.9			$	11.4
Loss from discontinued operations		$	—			$	—			$	(1.2	)		$	—
Less: Loss allocated to participating securities			—				—				—				—
Loss from discontinued operations available to common shareholders		$	—			$	—			$	(1.2	)		$	—
Net earnings		$	19.7			$	9.6			$	39.6			$	11.5
Less: Earnings allocated to participating securities			(0.5	)			(0.1	)			(0.9	)			(0.1	)
Net earnings available to common shareholders		$	19.2			$	9.5			$	38.7			$	11.4
Basic earnings (loss) per share on common stock:
Earnings from continuing operations		$	0.52			$	0.26			$	1.09			$	0.32
Loss from discontinued operations		$	—			$	—			$	(0.03	)		$	—
Net earnings		$	0.52			$	0.26			$	1.05			$	0.32
Diluted earnings (loss) per share on common stock:
Earnings from continuing operations		$	0.52			$	0.26			$	1.09			$	0.32
Loss from discontinued operations		$	—			$	—			$	(0.03	)		$	—
Net earnings		$	0.52			$	0.26			$	1.05			$	0.32
Average common shares outstanding (millions)
Basic			36.8				36.7				36.8				35.9
Diluted			36.8				36.7				36.8				35.9

Stock options representing 0.6 million and 0.7 million shares, respectively, for the 13 weeks ended October 2, 2011 and October 3, 2010, and 0.6 million and 0.7 million shares, respectively, for the 39 weeks ended October 2, 2011 and October 3, 2010, were excluded from the computation of diluted earnings per share due to their anti-dilutive effect.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

6. Stockholders’ Equity

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.

During the third quarter of 2011, the Company made dividend payments totaling $1.9 million.

7. Other Expense, Net

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

		13 Weeks Ended								39 Weeks Ended
		2011				2010				2011				2010
		(In millions of dollars)								(In millions of dollars)
Interest income		$	0.3			$	0.2			$	0.8			$	0.6
Interest expense			(0.7	)			(1.4	)			(2.6	)			(4.4	)
Dividend income			—				—				0.2				0.2
Foreign exchange gains (losses)			1.5				(0.3	)			1.6				(1.1	)
Other			(0.1	)			—				(0.1	)			—
Other income (expense), net		$	1.0			$	(1.5	)		$	(0.1	)		$	(4.7	)

Included in foreign exchange gains for the 13 and 39 weeks ended October 2, 2011 is a $1.5 million gain related to the release into earnings of accumulated currency translation adjustments upon the substantially complete liquidation of certain EMEA subsidiaries. The disposals of these operations were not reported in discontinued operations due to immateriality.

8. 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 U.S. District Court Southern District of California, 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 alleged technical violations of a state law governing the content of employee pay stubs. The Sullivan matter relates to claims by temporary workers for compensation while interviewing for assignments. Tentative settlements have been reached in both matters and are awaiting final court approval. A $1.2 million after-tax charge related to the Fuller matter was recognized in discontinued operations during the second quarter of 2011.

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

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

9. 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 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 seven segments 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 earnings from operations of the Company for the 13 and 39 weeks ended October 2, 2011 and October 3, 2010. 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.

		13 Weeks Ended								39 Weeks Ended
		2011				2010				2011				2010
		(In millions of dollars)								(In millions of dollars)
Revenue from Services:
Americas Commercial		$	661.7			$	633.3			$	1,985.3			$	1,781.9
Americas PT			250.8				233.6				739.1				659.1
Total Americas Commercial and PT			912.5				866.9				2,724.4				2,441.0
EMEA Commercial			261.0				228.1				751.3				642.8
EMEA PT			46.8				37.1				134.0				106.4
Total EMEA Commercial and PT			307.8				265.2				885.3				749.2
APAC Commercial			101.8				88.7				303.8				253.3
APAC PT			14.1				8.2				39.1				23.6
Total APAC Commercial and PT			115.9				96.9				342.9				276.9
OCG			80.7				64.1				222.9				179.8
Less: Intersegment revenue			(7.1	)			(8.4	)			(20.8	)			(22.4	)
Consolidated Total		$	1,409.8			$	1,284.7			$	4,154.7			$	3,624.5

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

9. Segment Disclosures (continued)

		13 Weeks Ended								39 Weeks Ended
		2011				2010				2011				2010
		(In millions of dollars)								(In millions of dollars)
Earnings (Loss) from Operations:
Americas Commercial		$	21.8			$	23.2			$	61.5			$	54.3
Americas PT			12.0				13.7				30.9				34.0
Total Americas Commercial and PT			33.8				36.9				92.4				88.3
EMEA Commercial			6.5				4.8				11.1				3.9
EMEA PT			1.6				0.3				3.3				0.7
Total EMEA Commercial and PT			8.1				5.1				14.4				4.6
APAC Commercial			0.6				1.0				1.2				3.0
APAC PT			(0.1	)			(0.5	)			(1.6	)			(1.9	)
Total APAC Commercial and PT			0.5				0.5				(0.4	)			1.1
OCG			(0.2	)			(4.2	)			(3.4	)			(14.5	)
Corporate			(20.1	)			(24.0	)			(58.0	)			(58.3	)
Consolidated Total		$	22.1			$	14.3			$	45.0			$	21.2

10. New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) amended its guidance on the presentation of comprehensive income to increase the prominence of items reported in other comprehensive income. The new guidance requires that all components of comprehensive income in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance will be effective for us at the beginning of fiscal 2012 and its adoption will not have any impact on our financial condition, results of operations or cash flows.

In September 2011, the FASB issued updated guidance on the periodic testing of goodwill for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. The guidance will be effective for us at the beginning of fiscal 2012, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our financial condition, results of operations or cash flows.

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

Executive Overview

During the third quarter of 2011, the global economic recovery continued at an uneven pace. Quarterly growth was negatively impacted by concerns over U.S. and European deficits. Within the U.S. temporary staffing industry, more than 550,000 jobs have been added since the September 2009 trough, with year-over-year growth stabilizing at approximately 8% at the end of the third quarter.

For Kelly, third quarter results reflect continued year-over-year improvement as well:

•

We achieved year-over-year revenue growth in all business segments.

•

Our gross profit rate improved slightly to 16.2% for the quarter compared to the third quarter of 2010.

•

Diluted earnings per share totaled $0.52, compared to $0.26 last year.

During the last several years, we refined our strategy by adjusting our geographic footprint, streamlining our operations and reducing expenses through restructuring actions. Going forward, we are committed to executing a business strategy that is focused on growing higher-margin PT staffing, expanding fee-based business and delivering customer-focused workforce solutions.

Results of Operations
Third Quarter

		Total Company - Third Quarter
														Constant
														Currency
		2011				2010				Change				Change
		(In millions of dollars)
Revenue from services		$	1,409.8			$	1,284.7				9.7	%			6.1	%
Fee-based income (included in revenue)			36.7				24.9				48.5				40.1
Gross profit			228.6				207.2				10.4				6.3
SG&A expenses excluding restructuring charges			207.1				190.1				9.0
Restructuring charges			(0.6	)			2.8				(120.7	)
Total SG&A expenses			206.5				192.9				7.1				3.0
Earnings from operations			22.1				14.3				54.7
Gross profit rate			16.2	%			16.1	%		0.1		pts.
Expense rates (excluding restructuring charges):
% of revenue			14.7				14.8				(0.1	)
% of gross profit			90.6				91.7				(1.1	)
Operating margin			1.6				1.1				0.5

The year-over-year constant currency change in revenue for the third quarter resulted from a 2% increase in hours worked, combined with a 2% increase in average bill rates on a constant currency basis and an increase in fee-based income. On a constant currency basis, revenue for the quarter increased in all business segments.

Compared to the third quarter of 2010, the gross profit rate improved slightly. The growth in fee-based income offset a decline in the temporary gross profit rate due to the unfavorable impact related to the expiration of the HIRE Act payroll tax benefit in the U.S. The Hiring Incentives to Restore Employment (“HIRE”) Act allowed employers to receive a payroll tax benefit for hiring and retaining previously unemployed individuals. HIRE Act benefits are also available in 2011, but as an income tax credit.

Selling, general and administrative (“SG&A”) expenses increased year over year due primarily to hiring of full-time employees in prior periods. Restructuring costs in the third quarter of 2011 primarily relate to revisions of the estimated lease termination costs for EMEA Commercial branches that closed in prior years.

Income tax expense for the third quarter of 2011 was $3.4 million (14.6%), compared to $3.2 million (25.1%) for the third quarter of 2010. The low tax rate in 2011 is a direct result of significant employment-related tax credits, with the 2011 expense including the favorable impact of the HIRE Act retention credit and continued strong work opportunity credits. Together, these income tax credits totaled $8.6 million in 2011, compared to $2.8 million in 2010. In comparison to 2010, the 2011 tax expense also benefitted from a change in the geographic mix of earnings, offset by non-tax deductible losses from the cash surrender value of life insurance policies used to fund the Company’s deferred compensation plan. The HIRE Act retention credit is available only in 2011, and is in addition to the HIRE Act payroll tax benefits recognized in cost of services in 2010.

Diluted earnings from continuing operations per share for the third quarter of 2011 were $0.52, as compared to $0.26 for the third quarter of 2010.

Americas Commercial

		Third Quarter
														Constant
														Currency
		2011				2010				Change				Change
		(In millions of dollars)
Revenue from services		$	661.7			$	633.3				4.5	%			3.8	%
Fee-based income (included in revenue)			3.2				2.2				47.7				46.3
Gross profit			93.9				92.3				1.7				1.1
SG&A expenses			72.1				69.1				4.3				3.7
Earnings from operations			21.8				23.2				(5.9	)
Gross profit rate			14.2	%			14.6	%		(0.4		)pts.
Expense rates:
% of revenue			10.9				10.9				—
% of gross profit			76.7				74.8				1.9
Operating margin			3.3				3.7				(0.4	)

The change in Americas Commercial revenue from services reflected a 3% increase in average bill rates on a constant currency basis, combined with a 1% increase in hours worked. Americas Commercial represented 47% of total Company revenue in the third quarter of 2011 and 49% in the third quarter of 2010.

The decrease in the gross profit rate was primarily due to the unfavorable impact related to the expiration of the HIRE Act payroll tax benefit. SG&A expenses increased due primarily to salary increases.

Americas PT

		Third Quarter
														Constant
														Currency
		2011				2010				Change				Change
		(In millions of dollars)
Revenue from services		$	250.8			$	233.6				7.4	%			7.3	%
Fee-based income (included in revenue)			3.2				2.2				48.1				47.7
Gross profit			38.0				37.2				2.0				1.9
SG&A expenses			26.0				23.5				10.6				10.4
Earnings from operations			12.0				13.7				(12.6	)
Gross profit rate			15.1	%			15.9	%		(0.8		)pts.
Expense rates:
% of revenue			10.4				10.1				0.3
% of gross profit			68.4				63.1				5.3
Operating margin			4.8				5.9				(1.1	)

The change in Americas PT revenue from services reflected a 4% increase in average bill rates on a constant currency basis, combined with a 3% increase in hours worked. Americas PT revenue represented 18% of total Company revenue in the third quarter of both 2011 and 2010.

The Americas PT gross profit rate decreased due to the unfavorable impact related to the expiration of the HIRE Act payroll tax benefit, as well as changes in service and customer mix, partially offset by increased 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.

The increase in SG&A expenses was primarily due to hiring of recruiters, higher salaries and performance-based compensation in support of our PT expansion efforts.

EMEA Commercial

		Third Quarter
														Constant
														Currency
		2011				2010				Change				Change
		(In millions of dollars)
Revenue from services		$	261.0			$	228.1				14.4	%			2.8	%
Fee-based income (included in revenue)			6.5				4.5				45.2				33.1
Gross profit			42.2				37.2				13.4				1.7
SG&A expenses excluding restructuring charges			36.3				32.4				11.8
Restructuring charges			(0.6	)			—			NM
Total SG&A expenses			35.7				32.4				10.0				(1.7	)
Earnings from operations			6.5				4.8				36.7
Gross profit rate			16.2	%			16.3	%		(0.1		)pts.
Expense rates (excluding restructuring charges):
% of revenue			13.9				14.2				(0.3	)
% of gross profit			86.0				87.2				(1.2	)
Operating margin			2.5				2.1				0.4

The change in revenue from services in EMEA Commercial resulted from a 6% increase in average hourly bill rates on a constant currency basis, partially offset by a 3% decrease in hours worked. EMEA Commercial revenue represented 19% of total Company revenue in the third quarter of 2011 and 18% in the third quarter of 2010.

On a constant currency basis, SG&A expenses were relatively flat in comparison to the prior year. Investments in specific countries with high-growth potential were offset by the savings impact from the restructuring programs completed in prior years.

EMEA PT

		Third Quarter
														Constant
														Currency
		2011				2010				Change				Change
		(In millions of dollars)
Revenue from services		$	46.8			$	37.1				26.3	%			14.1	%
Fee-based income (included in revenue)			5.3				3.6				45.9				34.5
Gross profit			12.7				9.6				31.6				19.9
SG&A expenses			11.1				9.3				20.2				8.3
Earnings from operations			1.6				0.3				312.1
Gross profit rate			27.1	%			26.0	%		1.1		pts.
Expense rates:
% of revenue			23.8				25.0				(1.2	)
% of gross profit			87.7				96.1				(8.4	)
Operating margin			3.3				1.0				2.3

The change in revenue from services in EMEA PT resulted from a 7% increase in hours worked, combined with a 5% increase in average hourly bill rates on a constant currency basis. EMEA PT revenue represented 3% of total Company revenue in the third quarter of both 2011 and 2010.

The increase in the gross profit rate is due to increases in fee-based income. SG&A expenses increased, due to hiring of full-time employees and investments in additional branches in Russia, Germany and the U.K.

APAC Commercial

		Third Quarter
														Constant
														Currency
		2011				2010				Change				Change
		(In millions of dollars)
Revenue from services		$	101.8			$	88.7				14.7	%			4.5	%
Fee-based income (included in revenue)			3.8				3.0				28.3				17.2
Gross profit			14.7				12.4				18.8				7.6
SG&A expenses			14.1				11.4				23.5				11.4
Earnings from operations			0.6				1.0				(35.5	)
Gross profit rate			14.5	%			14.0	%		0.5		pts.
Expense rates:
% of revenue			13.8				12.8				1.0
% of gross profit			95.7				92.0				3.7
Operating margin			0.6				1.1				(0.5	)

The change in revenue from services in APAC Commercial resulted from an increase in temporary sales growth in New Zealand, Singapore and Malaysia. APAC Commercial revenue represented 7% of total Company revenue in the third quarter of both 2011 and 2010.

The change in the APAC Commercial gross profit rate was due primarily to higher growth in fee based income and the impact of exiting low-margin business in Australia. SG&A expenses increased, primarily due to higher salaries and related costs from the investment in additional full-time employees across the region.

APAC PT

		Third Quarter
														Constant
														Currency
		2011				2010				Change				Change
		(In millions of dollars)
Revenue from services		$	14.1			$	8.2				72.3	%			58.8	%
Fee-based income (included in revenue)			4.2				2.9				47.1				36.2
Gross profit			5.6				3.8				52.2				40.0
SG&A expenses			5.7				4.3				31.5				20.3
Earnings from operations			(0.1	)			(0.5	)			89.3
Gross profit rate			39.9	%			45.2	%		(5.3		)pts.
Expense rates:
% of revenue			40.4				53.0				(12.6	)
% of gross profit			101.2				117.1				(15.9	)
Operating margin			(0.5	)			(7.7	)			7.2