Kelly Services, Inc.
KELLY SERVICES INC (Form: 10-Q, Received: 11/05/2014 11:04:35)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2014
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-1088
KELLY SERVICES, INC.
---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
38-1510762
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
                            
999 WEST BIG BEAVER ROAD, TROY, MICHIGAN 48084
-------------------------------------------------------------------------------
(Address of principal executive offices)  (Zip Code)
 
(248) 362-4444
----------------------------------------------------------------------
(Registrant's telephone number, including area code)
 
No Change
-----------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last report.)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).                                           Yes [X] No [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [  ]
Accelerated filer [X]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)
Smaller reporting company [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                             Yes [  ] No [X]
At October 24, 2014 , 34,212,892 shares of Class A and 3,451,261 shares of Class B common stock of the Registrant were outstanding.



KELLY SERVICES, INC. AND SUBSIDIARIES 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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
 
39 Weeks Ended
 
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
Revenue from services
$
1,396.4

 
$
1,345.6

 
$
4,137.7

 
$
4,027.3

 
 
 
 
 
 
 
 
Cost of services
1,171.0

 
1,125.2

 
3,461.9

 
3,369.3

 
 
 
 
 
 
 
 
Gross profit
225.4

 
220.4

 
675.8

 
658.0

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
218.3

 
200.2

 
656.5

 
612.6

 
 
 
 
 
 
 
 
Asset impairments

 

 

 
1.7

 
 
 
 
 
 
 
 
Earnings from operations
7.1

 
20.2

 
19.3

 
43.7

 
 
 
 
 
 
 
 
Other expense, net
2.2

 
1.3

 
4.2

 
3.9

 
 
 
 
 
 
 
 
Earnings before taxes
4.9

 
18.9

 
15.1

 
39.8

 
 
 
 
 
 
 
 
Income tax expense (benefit)
3.5

 
0.1

 
8.4

 
(1.9
)
 
 
 
 
 
 
 
 
Net earnings
$
1.4

 
$
18.8

 
$
6.7

 
$
41.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.03

 
$
0.49

 
$
0.17

 
$
1.09

Diluted earnings per share
$
0.03

 
$
0.49

 
$
0.17

 
$
1.09

 
 
 
 
 
 
 
 
Dividends per share
$
0.05

 
$
0.05

 
$
0.15

 
$
0.15

 
 
 
 
 
 
 
 
Average shares outstanding (millions):
 
 
 
 
 

 
 

Basic
37.6

 
37.4

 
37.5

 
37.2

Diluted
37.6

 
37.4

 
37.5

 
37.3

 
See accompanying unaudited Notes to Consolidated Financial Statements.

3


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In millions of dollars)
 
 
13 Weeks Ended
 
39 Weeks Ended
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
Net earnings
$
1.4

 
$
18.8

 
$
6.7

 
$
41.7

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax benefit of $0.3, benefit of $0.0, expense of $0.0 and benefit of $0.1, respectively
(12.6
)
 
4.7

 
(10.4
)
 
(4.7
)
Less: Reclassification adjustments included in net earnings
(0.6
)
 

 
(0.6
)
 

Foreign currency translation adjustments
(13.2
)
 
4.7

 
(11.0
)
 
(4.7
)
 
 
 
 
 
 
 
 
Unrealized (losses) gains on investment, net of tax benefit of $0.4, expense of $2.3, $5.8 and $13.3, respectively
(1.9
)
 
4.5

 
8.6

 
28.3

 
 
 
 
 
 
 
 
Pension liability adjustments, net of tax of $0.0

 
(0.2
)
 

 
(0.2
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) income
(15.1
)
 
9.0

 
(2.4
)
 
23.4

 
 
 
 
 
 
 
 
Comprehensive (Loss) Income
$
(13.7
)
 
$
27.8

 
$
4.3

 
$
65.1

 
See accompanying unaudited Notes to Consolidated Financial Statements.

4


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS 
(UNAUDITED)
(In millions) 
ASSETS
September 28,
2014
 
December 29,
2013
CURRENT ASSETS:
 
 
 
Cash and equivalents
$
51.6

 
$
125.7

Trade accounts receivable, less allowances of $9.2 and $9.9, respectively
1,158.1

 
1,023.1

Prepaid expenses and other current assets
56.8

 
52.2

Deferred taxes
28.9

 
35.5

Total current assets
1,295.4

 
1,236.5

PROPERTY AND EQUIPMENT:
 
 
 
Property and equipment
357.4

 
350.5

Accumulated depreciation
(266.3
)
 
(258.5
)
Net property and equipment
91.1

 
92.0

NONCURRENT DEFERRED TAXES
132.7

 
121.7

GOODWILL, NET
90.3

 
90.3

OTHER ASSETS
291.5

 
258.1

TOTAL ASSETS
$
1,901.0

 
$
1,798.6

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term borrowings
$
88.7

 
$
28.3

Accounts payable and accrued liabilities
339.0

 
342.4

Accrued payroll and related taxes
318.6

 
294.9

Accrued insurance
24.4

 
27.6

Income and other taxes
74.0

 
68.8

Total current liabilities
844.7

 
762.0

NONCURRENT LIABILITIES:
 
 
 
Accrued insurance
43.4

 
46.0

Accrued retirement benefits
146.6

 
134.7

Other long-term liabilities
40.7

 
33.3

Total noncurrent liabilities
230.7

 
214.0

Commitments and contingencies (See contingencies footnote)


 


STOCKHOLDERS' EQUITY:
 
 
 
Capital stock, $1.00 par value
 
 
 
Class A common stock, shares issued 36.6 at 2014 and 2013
36.6

 
36.6

Class B common stock, shares issued 3.5 at 2014 and 2013
3.5

 
3.5

Treasury stock, at cost
 
 
 
Class A common stock, 2.5 shares at 2014 and 2.7 shares at 2013
(51.9
)
 
(55.6
)
Class B common stock
(0.6
)
 
(0.6
)
Paid-in capital
26.7

 
26.0

Earnings invested in the business
752.3

 
751.3

Accumulated other comprehensive income
59.0

 
61.4

Total stockholders' equity
825.6

 
822.6

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,901.0

 
$
1,798.6

See accompanying unaudited Notes to Consolidated Financial Statements.

5


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In millions of dollars)
 
 
13 Weeks Ended
 
39 Weeks Ended
 
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
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
(54.9
)
 
(60.0
)
 
(55.6
)
 
(61.0
)
Issuance of restricted stock and other
3.0

 
3.1

 
3.7

 
4.1

Balance at end of period
(51.9
)
 
(56.9
)
 
(51.9
)
 
(56.9
)
 
 
 
 
 
 
 
 
Class B common stock
 
 
 
 
 
 
 
Balance at beginning of period
(0.6
)
 
(0.6
)
 
(0.6
)
 
(0.6
)
Issuance of restricted stock and other

 

 

 

Balance at end of period
(0.6
)
 
(0.6
)
 
(0.6
)
 
(0.6
)
 
 
 
 
 
 
 
 
Paid-in Capital
 
 
 
 
 
 
 
Balance at beginning of period
29.0

 
28.9

 
26.0

 
27.1

Issuance of restricted stock and other
(2.3
)
 
(2.8
)
 
0.7

 
(1.0
)
Balance at end of period
26.7

 
26.1

 
26.7

 
26.1

 
 
 
 
 
 
 
 
Earnings Invested in the Business
 
 
 
 
 
 
 
Balance at beginning of period
752.8

 
719.1

 
751.3

 
700.0

Net earnings
1.4

 
18.8

 
6.7

 
41.7

Dividends
(1.9
)
 
(1.9
)
 
(5.7
)
 
(5.7
)
Balance at end of period
752.3

 
736.0

 
752.3

 
736.0

 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
Balance at beginning of period
74.1

 
49.8

 
61.4

 
35.4

Other comprehensive income, net of tax
(15.1
)
 
9.0

 
(2.4
)
 
23.4

Balance at end of period
59.0

 
58.8

 
59.0

 
58.8

 
 
 
 
 
 
 
 
Stockholders' Equity at end of period
$
825.6

 
$
803.5

 
$
825.6

 
$
803.5

See accompanying unaudited Notes to Consolidated Financial Statements.

6


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions of dollars)
 
 
39 Weeks Ended
 
September 28,
2014
 
September 29,
2013
Cash flows from operating activities:
 
 
 
Net earnings
$
6.7

 
$
41.7

Noncash adjustments:
 
 
 
Impairment of assets

 
1.7

Depreciation and amortization
16.2

 
15.4

Provision for bad debts
3.6

 
1.1

Stock-based compensation
4.1

 
2.7

Other, net
1.3

 
0.7

Changes in operating assets and liabilities
(140.9
)
 
(41.4
)
 
 
 
 
Net cash (used in) from operating activities
(109.0
)
 
21.9

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(15.0
)
 
(11.7
)
Investment in equity affiliate
(5.4
)
 

Other investing activities
0.2

 

 
 
 
 
Net cash used in investing activities
(20.2
)
 
(11.7
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net change in short-term borrowings
60.4

 
(6.1
)
Dividend payments
(5.7
)
 
(5.7
)
Other financing activities
0.4

 
0.3

 
 
 
 
Net cash from (used in) financing activities
55.1

 
(11.5
)
 
 
 
 
Effect of exchange rates on cash and equivalents

 
(1.1
)
 
 
 
 
Net change in cash and equivalents
(74.1
)
 
(2.4
)
Cash and equivalents at beginning of period
125.7

 
76.3

 
 
 
 
 
 
 
 
Cash and equivalents at end of period
$
51.6

 
$
73.9

See accompanying unaudited Notes to Consolidated Financial Statements.

7


KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


1 .   Basis of Presentation
The accompanying unaudited consolidated financial statements of Kelly Services, Inc. (the “Company,” “Kelly,” “we” or “us”) have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and notes required by generally accepted accounting principles for complete financial statements. All adjustments, including normal recurring adjustments, have been made which, in the opinion of management, are necessary for a fair statement of the results of the interim periods. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. The unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended December 29, 2013 , included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 13, 2014 (the 2013 consolidated financial statements). The Company’s third fiscal quarter ended on September 28, 2014 ( 2014 ) and September 29, 2013 ( 2013 ), each of which contained 13 weeks. The corresponding September year to date periods for 2014 and 2013 each contained 39 weeks.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. During the third quarter of 2013, the Company determined that both cash and equivalents and accrued payroll and related taxes were understated by $4.8 million as of December 30, 2012. The Company determined that the impact of this error on the consolidated balance sheets and consolidated statements of cash flows was not material. As a result of correcting the error in the third quarter of 2013, changes in operating assets and liabilities and net cash from operating activities are both overstated by $4.8 million in the consolidated statements of cash flows for the 39 weeks ended September 29, 2013. Effective with the first quarter of 2014, the project-based legal services business in the Americas PT segment was reclassified to the OCG segment and the prior period was recast to conform to the current presentation.
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 on the consolidated balance sheet as of third quarter-end 2014 and year-end 2013 by fair value hierarchy level, as described below.
Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 measurements include significant unobservable inputs.
 
 
Fair Value Measurements on a Recurring Basis
As of Third Quarter-End 2014
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In millions of dollars)
Money market funds
 
$
3.3

 
$
3.3

 
$

 
$

Available-for-sale investment
 
94.3

 
94.3

 

 

 
 
 
 
 
 
 
 
 
Total assets at fair value
 
$
97.6

 
$
97.6

 
$

 
$


8



KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

 
 
Fair Value Measurements on a Recurring Basis
As of Year-End 2013
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In millions of dollars)
Money market funds
 
$
2.9

 
$
2.9

 
$

 
$

Available-for-sale investment
 
80.7

 
80.7

 

 

 
 
 
 
 
 
 
 
 
Total assets at fair value
 
$
83.6

 
$
83.6

 
$

 
$

Money market funds as of third quarter-end 2014 and as of year-end 2013 represent investments in money market accounts, all of which are restricted as to use and are included in other 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, net of tax, of $1.9 million for the third quarter of 2014 and the unrealized gain, net of tax, of $4.5 million for the third quarter of 2013 was recorded in other comprehensive income, as well as in accumulated other comprehensive income, a component of stockholders’ equity. The unrealized gain, net of tax, of $8.6 million for September year to date 2014 and unrealized gain, net of tax, of $28.3 million for September year to date 2013 was recorded in other comprehensive income, as well as in accumulated other comprehensive income. The cost of this yen-denominated investment, which fluctuates based on foreign exchange rates, was $19.0 million as of the third quarter-end 2014 and $19.7 million at year-end 2013 .

Assets Measured at Fair Value on a Nonrecurring Basis

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, based on estimated undiscounted future cash flows. During the second quarter of 2013, a triggering event for the evaluation of certain long-lived assets for impairment occurred as the Company made the decision to exit the executive search business operating in an asset group within Germany that was associated with the OCG business segment. Based on the Company’s estimates as of the 2013 second quarter-end, a $ 1.7 million reduction in the carrying value of OCG intangible assets was recorded. The resulting expense was recorded in the asset impairments line on the consolidated statement of earnings.

3. Restructuring

On September 15, 2014, the Board of Directors of the Company approved a management simplification restructuring plan ("Plan") that was subsequently communicated to Kelly personnel in October 2014. We expect to complete this Plan during the fourth quarter of 2014.

We began 2014 with a firm commitment to growth and a clear plan for accelerating Kelly's strategic priorities through significant investments in our PT specialties, our OCG practices and our centralized approach to servicing large customers. We have executed these investments on schedule, and the Plan now brings additional efficiency to our operating models across the organization by:

In the Americas segment:
Streamlining our local U.S. field operations through the closure or consolidation of approximately 50 branches
Simplifying our centralized large account delivery structure
Simplifying our U.S. management structure
Continuing to align OCG resources more efficiently against areas that deliver rapid growth and return on investment
Optimizing our headquarters operations



9



KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

Estimated headcount reduction related to the above actions is approximately 100 permanent positions across our global workforce, including several senior leadership positions that will be vacated at the end of December 2014. The headcount reduction related to the Americas segment is estimated to be 40 positions, OCG headcount is estimated to be reduced by 5 positions and corporate headquarters is estimated to be reduced by 55 positions.

Related to this Plan, we reported restructuring charges of $3.7 million , consisting entirely of severance costs, in the third quarter of 2014. These severance costs include contract termination costs of $2.9 million and substantive plan costs of $0.8 million . Subsequent restructuring charges, to be incurred in the fourth quarter, are estimated to range between $5.3 million to $6.3 million and will include additional severance, as well as lease termination costs of approximately $2.0 million .
We estimate restructuring charges to total between $9.0 million to $10.0 million , as detailed below, and will be recorded entirely in corporate selling, general and administrative expenses. The majority of these costs will result in future cash expenditures, starting in the fourth quarter of 2014.
 
Severance Costs
 
Lease Termination Costs
 
Total
 
(In millions of dollars)
 
Range
 
Range
 
Range
Americas
$
1.8

-
$
2.0

 
$
1.9

-
$
2.1

 
$
3.7

-
$
4.1

OCG
1.3

-
1.5

 
0.0

-
0.0

 
1.3

-
1.5

Headquarters
4.0

-
4.4

 
0.0

-
0.0

 
4.0

-
4.4

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
7.1

-
$
7.9

 
$
1.9

-
$
2.1

 
$
9.0

-
$
10.0


10



KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

4.  Goodwill 
The changes in the net carrying amount of goodwill for September year to date 2014 are included in the table below. Effective with the first quarter of 2014, the project-based legal services business in the Americas PT segment was reclassified to the OCG segment. Accordingly, the related portion of Americas PT goodwill was reclassified to OCG during the first quarter of 2014.
 
As of Year-End 2013
 
 
 
As of Third Quarter-End 2014
 
Goodwill,
Gross
 
Accumulated Impairment Losses
 
Adjustments
to Goodwill
 
Goodwill,
Gross
 
Accumulated Impairment Losses
 
Goodwill,
Net
 
(In millions of dollars)
Americas
 
 
 
 
 
 
 
 
 
 
 
Americas Commercial
$
40.0

 
$
(16.4
)
 
$

 
$
40.0

 
$
(16.4
)
 
$
23.6

Americas PT
39.2

 

 
(1.3
)
 
37.9

 

 
37.9

Total Americas
79.2

 
(16.4
)
 
(1.3
)
 
77.9

 
(16.4
)
 
61.5

 
 
 
 
 
 
 
 
 
 
 
 
EMEA
 
 
 
 
 
 
 
 
 
 
 
EMEA Commercial
50.4

 
(50.4
)
 

 
50.4

 
(50.4
)
 

EMEA PT
22.0

 
(22.0
)
 

 
22.0

 
(22.0
)
 

Total EMEA
72.4

 
(72.4
)
 

 
72.4

 
(72.4
)
 

 
 
 
 
 
 
 
 
 
 
 
 
APAC
 
 
 
 
 
 
 
 
 
 
 
APAC Commercial
12.1

 
(12.1
)
 

 
12.1

 
(12.1
)
 

APAC PT
1.4

 

 

 
1.4

 

 
1.4

Total APAC
13.5

 
(12.1
)
 

 
13.5

 
(12.1
)
 
1.4

 
 
 
 
 
 
 
 
 
 
 
 
OCG
26.1

 

 
1.3

 
27.4

 

 
27.4

Consolidated Total
$
191.2

 
$
(100.9
)
 
$

 
$
191.2

 
$
(100.9
)
 
$
90.3

 

11



KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

5.   Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income by component, net of tax, for the third quarter and September year to date 2014 and 2013 are included in the tables below. Amounts in parentheses indicate debits. Reclassification adjustments out of accumulated other comprehensive income for the third quarter and September year to date 2014 totaled $0.6 million , which was recorded in the other expense, net line item in the consolidated statement of earnings. Reclassification adjustments for 2013 were not significant.
 
Third Quarter 2014
 
Foreign
Currency
Translation Adjustments
 
Unrealized
Gains and
Losses on Investment
 
Pension
Liability Adjustments
 
Total
 
(In millions of dollars)
Beginning balance
$
20.3

 
$
55.3

 
$
(1.5
)
 
$
74.1

Other comprehensive income (loss) before reclassifications
(12.6
)
 
(1.9
)
 

 
(14.5
)
Amounts reclassified from accumulated other comprehensive income
(0.6
)
 

 

 
(0.6
)
Net current-period other comprehensive income
(13.2
)
 
(1.9
)
 

 
(15.1
)
 
 
 
 
 
 
 
 
Ending balance
$
7.1

 
$
53.4

 
$
(1.5
)
 
$
59.0

 
September Year to Date 2014
 
Foreign
Currency
Translation Adjustments
 
Unrealized
Gains and
Losses on Investment
 
Pension
Liability Adjustments
 
Total
 
(In millions of dollars)
Beginning balance
$
18.1

 
$
44.8

 
$
(1.5
)
 
$
61.4

Other comprehensive income (loss) before reclassifications
(10.4
)
 
8.6

 

 
(1.8
)
Amounts reclassified from accumulated other comprehensive income
(0.6
)
 

 

 
(0.6
)
Net current-period other comprehensive income
(11.0
)
 
8.6

 

 
(2.4
)
 
 
 
 
 
 
 
 
Ending balance
$
7.1

 
$
53.4

 
$
(1.5
)
 
$
59.0


12



KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

 
Third Quarter 2013
 
Foreign
Currency
Translation Adjustments
 
Unrealized
Gains and
Losses on Investment
 
Pension
Liability Adjustments
 
Total
 
(In millions of dollars)
Beginning balance
$
15.5

 
$
37.4

 
$
(3.1
)
 
$
49.8

Other comprehensive income (loss)
4.7

 
4.5

 
(0.2
)
 
9.0

 
 
 
 
 
 
 
 
Ending balance
$
20.2

 
$
41.9

 
$
(3.3
)
 
$
58.8

 
September Year to Date 2013
 
Foreign
Currency
Translation Adjustments
 
Unrealized
Gains and
Losses on Investment
 
Pension
Liability Adjustments
 
Total
 
(In millions of dollars)
Beginning balance
$
24.9

 
$
13.6

 
$
(3.1
)
 
$
35.4

Other comprehensive income (loss)
(4.7
)
 
28.3

 
(0.2
)
 
23.4

 
 
 
 
 
 
 
 
Ending balance
$
20.2

 
$
41.9

 
$
(3.3
)
 
$
58.8

6.  Earnings Per Share
The reconciliation of basic and diluted earnings per share on common stock for the third quarter and September year to date 2014 and 2013 follows (in millions of dollars except per share data):
 
Third Quarter
 
September Year to Date
 
2014
 
2013
 
2014
 
2013
Net Earnings
$
1.4

 
$
18.8

 
$
6.7

 
$
41.7

Less: Earnings allocated to participating securities

 
(0.4
)
 
(0.2
)
 
(1.0
)
Net Earnings available to common shareholders
$
1.4

 
$
18.4

 
$
6.5

 
$
40.7

 
 
 
 
 
 
 
 
Basic earnings per share on common stock
$
0.03

 
$
0.49

 
$
0.17

 
$
1.09

Diluted earnings per share on common stock
$
0.03

 
$
0.49

 
$
0.17

 
$
1.09

 
 
 
 
 
 
 
 
Average common shares outstanding (millions)
 
 
 
 
 
 
 
Basic
37.6

 
37.4

 
37.5

 
37.2

Diluted
37.6

 
37.4

 
37.5

 
37.3

Stock options representing 0.0 million and 0.2 million shares, respectively, for the third quarter 2014 and 2013 and 0.1 million and 0.3 million shares, respectively, for September year to date 2014 and 2013 , were excluded from the computation of diluted earnings per share due to their anti-dilutive effect.

13



KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

7.   Other Expense, Net  
Included in other expense, net for the third quarter and September year to date 2014 and 2013 are the following: 
 
Third Quarter
 
September Year to Date
 
2014
 
2013
 
2014
 
2013
 
(In millions of dollars)
Interest income
$
0.1

 
$
0.1

 
$
0.3

 
$
0.3

Interest expense
(0.7
)
 
(0.7
)
 
(2.0
)
 
(2.2
)
Dividend income

 

 
0.4

 
0.3

Net loss on equity investment
(1.5
)
 
(0.3
)
 
(2.3
)
 
(1.1
)
Foreign exchange losses
(0.1
)
 
(0.4
)
 
(0.6
)
 
(1.2
)
 
 
 
 
 
 
 
 
Other expense, net
$
(2.2
)
 
$
(1.3
)
 
$
(4.2
)
 
$
(3.9
)
 
8.  Contingencies
During the fourth quarter of 2013, a Louisiana jury rendered an award of $4.4 million , pursuant to litigation brought by Robert and Margaret Ward against the Jefferson Parish School Board and Kelly Services. Under the verdict, Kelly’s share of the liability consists of $2.7 million plus a portion of pre- and post-judgment interest. During April 2014, Kelly reached an agreement with the plaintiffs pursuant to which Kelly and its primary insurer agreed to pay $1.0 million to the plaintiffs to satisfy the judgment against the primary insurer and Kelly, however, Kelly's umbrella/excess insurer elected to continue to appeal the decision. In April 2014, Kelly paid $0.25 million of the settlement amount, which was previously accrued, and our primary insurer paid $0.75 million . Per the terms of the settlement with Kelly and its primary insurer, Plaintiffs must first exhaust all legal remedies to collect from our umbrella/excess insurer and its surety before pursuing Kelly for any remaining verdict amount that may be owed at the conclusion of the appellate process. Kelly’s umbrella/excess insurer recently reached a tentative settlement agreement with the plaintiffs under which Kelly would bear no additional financial obligations. However, until such time as that agreement is finalized and entered into judgment by the court, Kelly remains a nominal defendant with respect to the portion covered by the umbrella/excess insurer. Should the tentative settlement agreement with the umbrella/excess insurer not be finalized, Kelly's umbrella/excess insurer would remain responsible for any remaining verdict amounts owed plus related costs and interest.
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.  

14



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

15



KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

The following tables present information about the reported revenue from services and gross profit of the Company by segment, along with a reconciliation to consolidated earnings before taxes, for the third quarter and September year to date 2014 and 2013 . 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. Effective with the first quarter of 2014, the project-based legal services business in the Americas PT segment was reclassified to the OCG segment and the prior period was recast to conform to the current presentation.
 
Third Quarter
 
September Year to Date
 
2014
 
2013
 
2014
 
2013
 
(In millions of dollars)
Revenue from Services:
 
 
 
 
 
 
 
Americas Commercial
$
640.8

 
$
617.0

 
$
1,915.1

 
$
1,904.1

Americas PT
242.5

 
239.9

 
723.1

 
733.7

Total Americas Commercial and PT
883.3

 
856.9

 
2,638.2

 
2,637.8

 
 
 
 
 
 
 
 
EMEA Commercial
231.3

 
224.5

 
690.2

 
645.3

EMEA PT
48.1

 
45.1

 
145.5

 
131.7

Total EMEA Commercial and PT
279.4

 
269.6

 
835.7

 
777.0

 
 
 
 
 
 
 
 
APAC Commercial
91.0

 
87.6

 
260.5

 
256.8

APAC PT
10.6

 
9.1

 
29.2

 
29.3

Total APAC Commercial and PT
101.6

 
96.7

 
289.7

 
286.1

 
 
 
 
 
 
 
 
OCG
149.8

 
135.3

 
422.1

 
361.0

 
 
 
 
 
 
 
 
Less: Intersegment revenue
(17.7
)
 
(12.9
)
 
(48.0
)
 
(34.6
)
 
 
 
 
 
 
 
 
Consolidated Total
$
1,396.4

 
$
1,345.6

 
$
4,137.7

 
$
4,027.3


16



KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

 
Third Quarter
 
September Year to Date
 
2014
 
2013
 
2014
 
2013
 
(In millions of dollars)
Earnings from Operations:
 
 
 
 
 
 
 
Americas Commercial gross profit
$
91.7

 
$
86.8

 
$
280.0

 
$
274.5

Americas PT gross profit
39.6

 
38.8

 
118.4

 
116.1

Americas Region gross profit
131.3

 
125.6

 
398.4

 
390.6

Americas Region SG&A expenses
(110.8
)
 
(100.2
)
 
(332.9
)
 
(310.6
)
Americas Region Earnings from Operations
20.5

 
25.4

 
65.5

 
80.0

 
 
 
 
 
 
 
 
EMEA Commercial gross profit
33.6

 
33.9

 
101.0

 
98.8

EMEA PT gross profit
10.9

 
10.8

 
33.3

 
32.0

EMEA Region gross profit
44.5

 
44.7

 
134.3

 
130.8

EMEA Region SG&A expenses
(40.0
)
 
(40.3
)
 
(125.0
)
 
(122.2
)
EMEA Region Earnings from Operations
4.5

 
4.4

 
9.3

 
8.6

 
 
 
 
 
 
 
 
APAC Commercial gross profit
11.7

 
12.7

 
35.7

 
36.8

APAC PT gross profit
3.3

 
3.4

 
9.4

 
10.5

APAC Region gross profit
15.0

 
16.1

 
45.1

 
47.3

APAC Region SG&A expenses
(14.5
)
 
(14.6
)
 
(44.6
)
 
(45.8
)
APAC Region Earnings from Operations
0.5

 
1.5

 
0.5

 
1.5

 
 
 
 
 
 
 
 
OCG gross profit
35.8

 
34.8

 
101.3

 
91.7

OCG SG&A expenses
(32.2
)
 
(28.1
)
 
(94.7
)
 
(82.5
)
OCG asset impairments

 

 

 
(1.7
)
OCG Earnings from Operations
3.6

 
6.7

 
6.6

 
7.5

 
 
 
 
 
 
 
 
Less: Intersegment gross profit
(1.2
)
 
(0.8
)
 
(3.3
)
 
(2.4
)
Less: Intersegment SG&A expenses
1.2

 
0.8

 
3.3

 
2.4

Net Intersegment Activity

 

 

 

 
 
 
 
 
 
 
 
Corporate
(22.0
)
 
(17.8
)
 
(62.6
)
 
(53.9
)
Consolidated Total
7.1

 
20.2

 
19.3

 
43.7

Other Expense, Net
2.2

 
1.3

 
4.2

 
3.9

 
 
 
 
 
 
 
 
Earnings Before Taxes
$
4.9

 
$
18.9

 
$
15.1

 
$
39.8


17



KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)

10.  New Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standard update that changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on operations and financial results. The amendments are effective prospectively for fiscal periods (and interim reporting periods within those years) beginning on or after December 15, 2014 (early adoption is permitted). The adoption of this guidance is not expected to have a material effect on our results of operations, financial position or liquidity.
In May 2014, the FASB issued new revenue recognition guidance under Accounting Standards Update ("ASU") 2014-09 that will supersede the existing revenue recognition guidance under US GAAP. The new standard focuses on creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard is for companies to recognize revenue when it transfers the promised goods or services to its customers at an amount that represents what the company expects to be entitled to in exchange for those goods or services. This ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2016. Early adoption is not permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15 requiring management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern, which is currently performed by the external auditors. Management will be required to perform this assessment for both interim and annual reporting periods and must make certain disclosures if it concludes that substantial doubt exists. This ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2016. The adoption of this guidance is not expected to have a material effect on our financial statements.


18



Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Executive Overview
The Workforce Solutions Industry
The staffing industry has changed dramatically over the last decade – transformed by globalization and competitive consolidation.  The industry has also continued to evolve in terms of service line expansion and evolution from commercial into professional/technical and outsourced solutions. The broader workforce solutions industry has continued to transform to meet businesses’ growing demand for total workforce or talent supply chain management (“TSCM”) solutions. Global employment trends are reshaping and redefining traditional employment models, sourcing strategies and human resource capability requirements. Clients’ workforce solutions strategies are moving up the maturity model as they take the full spectrum of talent into consideration.  The TSCM concept seeks to manage all categories of talent (temporary, project-based, outsourced and full-time) and represents significant market potential.
The global workforce solutions market has seen some acceleration during the second half of 2014, as the engine for economic growth has gradually shifted in favor of large developed economies in recent months.   While the outlook for 2015 is encouraging, years of economic under-performance is tempering expectations.  Despite recent cyclical challenges, strategic clients are increasingly looking for global, flexible and holistic talent solutions that encompass all worker categories, driving adoption of our TSCM concept covering temporary staffing, Contingent Workforce Outsourcing ("CWO"), Recruitment Process Outsourcing ("RPO"), independent contractor management and more.  Near-term demand for traditional temporary staffing is now benefiting from improving labor market conditions in the U.S., while structural shifts toward higher-skilled, project-based professional/technical talent continue to represent long-term opportunities for the industry.   

Professional/Technical staffing is projected to steadily increase as a percent of the global market, with demand for specialty staffing projected to outperform commercial.  
Our Business
Kelly Services is a global workforce solutions company, serving customers of all sizes in a variety of industries. Our staffing operations are divided into three regions, Americas, EMEA and APAC, with commercial and professional/technical staffing businesses in each region. As the human capital arena has become more complex, we have also developed a suite of innovative solutions within our global OCG business. OCG delivers integrated talent management solutions to meet customer needs across the entire spectrum of talent categories. Using talent supply chain strategies, we help customers manage their acquisition of contingent and full-time labor, and gain access to service providers and quality talent at competitive rates with minimized risk.
We earn revenues from the hourly sales of services by our temporary employees to customers, as a result of recruiting permanent employees for our customers, and through our outsourcing activities. Our working capital requirements are primarily generated from temporary employee payroll and customer accounts receivable. The nature of our business is such that trade accounts receivable are our most significant financial asset. Average days sales outstanding varies within and outside the U.S., but is 58 days on a global basis. Since receipts from customers generally lag temporary employee payroll, working capital requirements increase substantially in periods of growth.
Our Strategy and Outlook 
Our long-term strategic objective is to create shareholder value by delivering a competitive profit from the best workforce solutions and talent in the industry. To achieve this, we are focused on the following key areas: 
Maintain our core strengths in commercial staffing in key markets;
Grow our professional and technical solutions;
Enhance our position as a market-leading provider of talent supply chain management in our OCG segment;
Capture permanent placement growth in selected specialties; and
Lower our costs through deployment of efficient service delivery models.




19



Although our objectives remain clear, ongoing economic, political and fiscal disruptions have been a persistent drag on the global recovery and our business.  Recent economic and labor market trends have been more favorable and the outlook for the remainder of 2014 and beyond is encouraging, but the global recovery remains historically weak and uneven.  Our industry is not experiencing the degree or patterns of growth typically seen at this point in the recovery cycle. 

Kelly’s third quarter revenue increased 4% year over year, helped by improving conditions in the U.S.  During the third quarter of 2014, we increased revenue in our OCG segment by 11% year over year, confirming that our direction aligns with increased market demand for outsourced solutions. Growth was particularly strong in RPO and the fee-based CWO portion of the business, which continue to be key drivers of our strategic and financial progress.

We continued to execute our planned investments, including additional resources for OCG and Americas PT. As a result, total Company expenses increased as expected, underscoring our commitment to strategically drive long-term growth.
At 0.5% for the third quarter of 2014, our return on sales ("ROS") is still well below our long-term goal of 4.0%. To make significant progress against our ROS goal and better leverage our business, we will need to see continued economic growth coupled with stronger demand for full-time and temporary labor in the sectors that Kelly supports. In the meantime, we remain focused on what we can control: executing a well-formed strategy with increased speed and precision, and making the necessary investments to advance that strategy.
During the first nine months of 2014, we made aggressive, targeted investments to adjust our operating models and increase the resources responsible for driving growth in higher margin specialties - both in Americas PT and in our fast-growing OCG segment. Specifically, our investments are designed to:

Grow Americas PT staffing by: establishing nationally focused, product-specific recruiting centers for our IT, engineering, science and finance specialties in the U.S.; hiring additional PT recruiters and PT business development representatives in local U.S. markets; and leveraging our centralized large account delivery model to drive PT growth in large accounts across the Americas.

Target rapid expansion of our OCG solutions on three fronts: expanding our global supplier network to transform Kelly’s delivery capabilities around the world; strengthening our talent supply chain analytics solution to meet the growing demand for workforce planning among our clients; and expanding our statement of work and independent contractor solutions to ensure we take full advantage of the trend toward project-based PT work.

Ensure our technology capabilities support our growth initiatives, including: improving the end-to-end ordering process for large accounts using OCG solutions; and revamping our front-office systems to increase efficiency and productivity in our operations.

These investments are intended to achieve double-digit sales growth in 2015 in both OCG and our Americas PT segment, assuming continued growth in portions of the economy that rely on these services. As previously reported, we expect that revenue growth will lag these investments and, consequently, that our overall earnings in 2014 will be down on a year-over-year basis.
On September 15, 2014, the Board of Directors of the Company approved a management simplification restructuring plan ("Plan") that was subsequently communicated to Kelly personnel in October 2014. We expect to complete this Plan during the fourth quarter of 2014.

We began 2014 with a firm commitment to growth and a clear plan for accelerating Kelly's strategic priorities through significant investments in our PT specialties, our OCG practices and our centralized approach to servicing large customers. We have executed these investments on schedule, and the Plan now brings additional efficiency to our operating models across the organization by:

In the Americas segment:
Streamlining our local U.S. field operations through the closure or consolidation of approximately 50 branches
Simplifying our centralized large account delivery structure
Simplifying our U.S. management structure
Continuing to align OCG resources more efficiently against areas that deliver rapid growth and return on investment
Optimizing our headquarters operations


20



Estimated headcount reduction related to the above actions is approximately 100 permanent positions across our global workforce, including several senior leadership positions that will be vacated at the end of December 2014. The headcount reduction related to the Americas segment is estimated to be 40 positions, OCG headcount is estimated to be reduced by 5 positions and corporate headquarters is estimated to be reduced by 55 positions.

Related to this Plan, we reported restructuring charges of $3.7 million, consisting entirely of severance costs, in the third quarter of 2014. These severance costs include contract termination costs of $2.9 million and substantive plan costs of $0.8 million. Subsequent restructuring charges, to be incurred in the fourth quarter, are estimated to range between $5.3 million to $6.3 million and will include additional severance, as well as lease termination costs of approximately $2.0 million.
We estimate restructuring charges to total between $9.0 million to $10.0 million, as detailed below, and will be recorded entirely in corporate selling, general and administrative expenses. The majority of these costs will result in future cash expenditures, starting in the fourth quarter of 2014.

 
Severance Costs
 
Lease Termination Costs
 
Total
 
(In millions of dollars)
 
Range
 
Range
 
Range
Americas
$
1.8

-
$
2.0

 
$
1.9

-
$
2.1

 
$
3.7

-
$
4.1

OCG
1.3

-
1.5

 
0.0

-
0.0

 
1.3

-
1.5

Headquarters
4.0

-
4.4

 
0.0

-
0.0

 
4.0

-
4.4

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
7.1

-
$
7.9

 
$
1.9

-
$
2.1

 
$
9.0

-
$
10.0


Meeting the provisions of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Acts”) remains a challenge for the staffing industry. The Acts represent comprehensive U.S. healthcare reform legislation that, in addition to other provisions, will subject us to potential penalties unless we offer to our employees minimum essential healthcare coverage that is affordable and provides minimum value.  In order to comply with the Acts, Kelly intends to begin offering health care coverage in 2015 to all temporary employees eligible for coverage under the Acts. In 2014, we are continuing to incur costs related to implementing the Acts in advance of future pricing designed to pass related costs on to our customers.

Estimating the costs of complying with the Acts is difficult due to a variety of factors associated with our temporary employee population, particularly the percentage of eligible employees who will enroll for health care coverage. We are having conversations with customers aimed at increasing pricing for these implementation and ongoing costs, but there can be no assurance that we will be able to increase pricing to our customers in a sufficient amount to cover the increased costs, and the net financial impact on our results of operations could be significant.

For the balance of the year, we anticipate steady improvement in the U.S. and global economies, and we are seeing increased confidence among our large customers – though it remains to be seen whether that confidence will translate into more meaningful job growth in the months to come. Longer-term, we believe the trends in the staffing industry are positive: companies are becoming more comfortable with the use of flexible staffing models; there is increasing acceptance of free agents and contractual employment by companies and candidates alike; and companies are seeking more comprehensive workforce management solutions that lend themselves to Kelly’s talent supply chain management approach. This shift in demand for contingent labor and strategic solutions plays to our strengths and experience -- particularly serving large companies.
Financial Measures – Operating Margin and Constant Currency
Return on sales (earnings from operations divided by revenue from services) in the following tables is a ratio used to measure the Company’s pricing strategy and operating efficiency. Constant currency (“CC”) change amounts are non-GAAP measures. The CC change amounts in the following tables refer to the year-over-year percentage changes resulting from translating 2014 financial data into U.S. dollars using the same foreign currency exchange rates used to translate financial data for 2013. We believe that CC measurements are an important analytical tool to aid in understanding underlying operating trends without distortion due to currency fluctuations.

21




Realignment of Segments
Beginning in the first quarter of 2014, we realigned the project-based legal services business in our Americas PT segment to the OCG segment and recast the prior year amounts to conform to the current presentation.
Staffing Fee-Based Income
Staffing fee-based income, which is included in revenue from services in the following tables, has a significant impact on gross profit rates. There are very low direct costs of services associated with staffing fee-based income. Therefore, increases or decreases in staffing fee-based income can have a disproportionate impact on gross profit rates.

22



Results of Operations
Total Company - Third Quarter
(Dollars in millions)
 
2014
 
2013
 
Change
 
CC
Change
Revenue from services
$
1,396.4

 
$
1,345.6

 
3.8
 %
 
 
   3.9%
Staffing fee-based income
19.9

 
20.2

 
(2.4
)
 
 
(1.6)
Gross profit
225.4

 
220.4

 
2.2

 
 
2.4
SG&A expenses excluding restructuring charges
214.3

 
199.7

 
7.3

 
 
 
Restructuring charges
4.0

 
0.5

 
NM

 
 
 
Total SG&A expenses
218.3

 
200.2

 
9.0

 
 
9.1
Earnings from operations
7.1

 
20.2

 
(65.1
)
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
16.1
%
 
16.4
%
 
(0.3
)
pts.
 
 
Expense rates (excluding restructuring charges):
 
 
 
 
 
 
 
 
% of revenue
15.3

 
14.8

 
0.5

 
 
 
% of gross profit
95.1

 
90.6

 
4.5

 
 
 
Return on sales
0.5

 
1.5

 
(1.0
)
 
 
 
 
Total Company revenue from services for the third quarter of 2014 was up 3.8% in comparison to the prior year. This reflected primarily an increase in hours worked in the Americas, EMEA and APAC regions, as well as increased revenue in OCG.
Compared to the third quarter of 2013, the gross profit rate was down 30 basis points. This decrease was primarily due to a decline in the gross profit rate in the EMEA and APAC regions and OCG, which more than offset the improvement in the gross profit rate in the Americas, as more fully described in the following discussions.
Selling, general and administrative (“SG&A”) expenses excluding restructuring charges increased year over year primarily as a result of investments in our PT and OCG businesses, as described more fully in the Executive Overview above, as well as salary increases. Restructuring costs in the third quarter of 2014 include $3.7 million related to our Plan, also described in the Executive Overview above, combined with $0.3 million of costs incurred to consolidate back office functions in Australia and New Zealand. Restructuring costs in the third quarter of 2013 primarily related to severance costs incurred from the closure of EMEA commercial branches.
Income tax expense for the third quarter of 2014 was $3.5 million, compared to $0.1 million for the third quarter of 2013. The increase in income tax expense is driven by expiration of the U.S. work opportunity credit at the end of 2013, making credits unavailable for employees hired in 2014. The credit, along with several other temporary income tax incentives, has previously expired and later been retroactively reinstated in what is commonly referred to as “extenders” legislation. While extenders legislation has been introduced in Congress that would retroactively reinstate the work opportunity credit, if or when such action would be taken is unknown. If extenders legislation is enacted, the retroactive reinstatement of the work opportunity credit would result in a significant benefit to income tax expense.

Diluted earnings per share for the third quarter of 2014 were $0.03, as compared to $0.49 for the third quarter of 2013.


23



Total Americas - Third Quarter
(Dollars in millions)
 
2014
 
2013
 
Change
 
CC
Change
Revenue from services
$
883.3

 
$
856.9

 
3.1
%
 
 
   3.4%
Staffing fee-based income
8.2

 
7.2

 
12.7

 
 
13.1
Gross profit
131.3

 
125.6

 
4.5

 
 
4.8
Total SG&A expenses
110.8

 
100.2

 
10.6

 
 
10.9
Earnings from operations
20.5

 
25.4

 
(19.7
)
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
14.9
%
 
14.7
%
 
0.2

pts.
 
 
Expense rates:
 
 
 
 
 
 
 
 
% of revenue
12.5

 
11.7

 
0.8

 
 
 
% of gross profit
84.5

 
79.8

 
4.7

 
 
 
Return on sales
2.3

 
3.0

 
(0.7
)
 
 
 

The change in Americas revenue from services represents primarily a 3% increase in hours worked. Americas represented 63% of total Company revenue in the third quarter of 2014 and 64% in the third quarter of 2013.
Revenue in our Commercial segment was up 4% and our PT revenue was up 1% in comparison to the prior year. The increase in revenue in Commercial was due to revenue from new customer wins in our educational staffing business as well as increases in our electronic assembly and light industrial products. These increases were partially offset by reductions in our office clerical product. In the PT segment, our revenue grew in our science, engineering and finance products, partially offset by a reduction in our IT product.
The increase in the gross profit rate was primarily due to improved pricing, customer mix, increased staffing fee-based income and lower payroll taxes, partially offset by higher workers' compensation costs.
SG&A expenses were up 11% in comparison to the prior year. This increase is attributable to last year's annual salary increases and planned investments in additional headcount in sales and recruiting staff, primarily for our PT segment. These investments are more fully described in the Executive Overview above. Restructuring costs related to Americas as disclosed in the Restructuring footnote are included in Corporate SG&A expenses.

24



Total EMEA - Third Quarter
(Dollars in millions)
 
2014
 
2013
 
Change
 
CC
Change
Revenue from services
$
279.4

 
$
269.6

 
3.6
 %
 
 
   3.6%
Staffing fee-based income
7.7

 
8.5

 
(9.3
)
 
 
(6.9)
Gross profit
44.5

 
44.7

 
(0.5
)
 
 
(0.1)
SG&A expenses excluding restructuring charges
40.0

 
40.0

 

 
 
 
Restructuring charges

 
0.3

 
(100.0
)
 
 
 
Total SG&A expenses
40.0

 
40.3

 
(0.8
)
 
 
(0.5)
Earnings from operations
4.5

 
4.4

 
1.6

 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
15.9
%
 
16.6
%
 
(0.7
)
pts.
 
 
Expense rates (excluding restructuring charges):
 
 
 
 
 
 
 
 
% of revenue
14.3