Kelly Services, Inc.
KELLY SERVICES INC (Form: 10-Q, Received: 08/05/2015 11:26:13)
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 June 28, 2015
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-1088
KELLY SERVICES, INC.
---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
38-1510762
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

999 WEST BIG BEAVER ROAD, TROY, MICHIGAN 48084
-------------------------------------------------------------------------------
(Address of principal executive offices)  (Zip Code)

(248) 362-4444
----------------------------------------------------------------------
(Registrant’s telephone number, including area code)

No Change
-----------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).
Yes [X] No [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [  ]
Accelerated filer [X]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)
Smaller reporting company [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ] No [X]
At July 24, 2015 , 34,403,801 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
 
26 Weeks Ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Revenue from services
$
1,385.0

 
$
1,410.5

 
$
2,705.6

 
$
2,741.3

 
 
 
 
 
 
 
 
Cost of services
1,162.7

 
1,182.4

 
2,263.0

 
2,290.9

 
 
 
 
 
 
 
 
Gross profit
222.3

 
228.1

 
442.6

 
450.4

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
210.8

 
222.2

 
419.0

 
438.2

 
 
 
 
 
 
 
 
Earnings from operations
11.5

 
5.9

 
23.6

 
12.2

 
 
 
 
 
 
 
 
Other expense, net
1.0

 
0.3

 
3.5

 
2.0

 
 
 
 
 
 
 
 
Earnings before taxes
10.5

 
5.6

 
20.1

 
10.2

 
 
 
 
 
 
 
 
Income tax expense
3.7

 
2.8

 
9.6

 
4.9

 
 
 
 
 
 
 
 
Net earnings
$
6.8

 
$
2.8

 
$
10.5

 
$
5.3

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.18

 
$
0.07

 
$
0.27

 
$
0.14

Diluted earnings per share
$
0.18

 
$
0.07

 
$
0.27

 
$
0.14

 
 
 
 
 
 
 
 
Dividends per share
$
0.05

 
$
0.05

 
$
0.10

 
$
0.10

 
 
 
 
 
 
 
 
Average shares outstanding (millions):
 
 
 
 
 

 
 

Basic
37.7

 
37.4

 
37.7

 
37.4

Diluted
37.8

 
37.4

 
37.8

 
37.4

 
See accompanying unaudited Notes to Consolidated Financial Statements.

3


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In millions of dollars)
 
 
13 Weeks Ended
 
26 Weeks Ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Net earnings
$
6.8

 
$
2.8

 
$
10.5

 
$
5.3

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax expense of $0.1 million, expense of $0.1 million, tax benefit of $0.2 million, and tax expense of $0.3 million, respectively
2.7

 
1.8

 
(5.7
)
 
2.2

Less: Reclassification adjustments included in net earnings

 

 
(0.2
)
 

Foreign currency translation adjustments
2.7

 
1.8

 
(5.9
)
 
2.2

 
 
 
 
 
 
 
 
Unrealized gains on investment, net of tax expense of $2.1 million, $6.5 million, $3.8 million and $6.2 million, respectively
3.5

 
10.6

 
6.6

 
10.5

 
 
 
 
 
 
 
 
Other comprehensive income
6.2

 
12.4

 
0.7

 
12.7

 
 
 
 
 
 
 
 
Comprehensive income
$
13.0

 
$
15.2

 
$
11.2

 
$
18.0

 
See accompanying unaudited Notes to Consolidated Financial Statements.

4


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS 
(UNAUDITED)
(In millions) 
ASSETS
June 28,
2015
 
December 28,
2014
CURRENT ASSETS:
 
 
 
Cash and equivalents
$
48.7

 
$
83.1

Trade accounts receivable, less allowances of $9.4 and $10.7, respectively
1,152.3

 
1,122.8

Prepaid expenses and other current assets
50.6

 
47.9

Deferred taxes
35.8

 
34.4

Total current assets
1,287.4

 
1,288.2

PROPERTY AND EQUIPMENT:
 
 
 
Property and equipment
361.4

 
360.0

Accumulated depreciation
(272.8
)
 
(267.0
)
Net property and equipment
88.6

 
93.0

NONCURRENT DEFERRED TAXES
144.6

 
146.3

GOODWILL, NET
90.3

 
90.3

OTHER ASSETS
321.7

 
300.1

TOTAL ASSETS
$
1,932.6

 
$
1,917.9

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term borrowings
$
89.9

 
$
91.9

Accounts payable and accrued liabilities
380.4

 
364.0

Accrued payroll and related taxes
296.5

 
308.5

Accrued insurance
27.1

 
26.9

Income and other taxes
62.8

 
68.8

Total current liabilities
856.7

 
860.1

NONCURRENT LIABILITIES:
 
 
 
Accrued insurance
44.3

 
43.9

Accrued retirement benefits
146.5

 
140.8

Other long-term liabilities
40.6

 
39.4

Total noncurrent liabilities
231.4

 
224.1

Commitments and contingencies (see contingencies footnote)


 


STOCKHOLDERS’ EQUITY:
 
 
 
Capital stock, $1.00 par value
 
 
 
Class A common stock, shares issued 36.6 at 2015 and 2014
36.6

 
36.6

Class B common stock, shares issued 3.5 at 2015 and 2014
3.5

 
3.5

Treasury stock, at cost
 
 
 
Class A common stock, 2.3 shares at 2015 and 2.4 shares at 2014
(48.4
)
 
(49.2
)
Class B common stock
(0.6
)
 
(0.6
)
Paid-in capital
27.5

 
24.9

Earnings invested in the business
774.1

 
767.4

Accumulated other comprehensive income
51.8

 
51.1

Total stockholders’ equity
844.5

 
833.7

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,932.6

 
$
1,917.9

See accompanying unaudited Notes to Consolidated Financial Statements.

5


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In millions of dollars)
 
 
13 Weeks Ended
 
26 Weeks Ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
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
(49.1
)
 
(55.4
)
 
(49.2
)
 
(55.6
)
Issuance of restricted stock and other
0.7

 
0.5

 
0.8

 
0.7

Balance at end of period
(48.4
)
 
(54.9
)
 
(48.4
)
 
(54.9
)
 
 
 
 
 
 
 
 
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
25.9

 
27.5

 
24.9

 
26.0

Issuance of restricted stock and other
1.6

 
1.5

 
2.6

 
3.0

Balance at end of period
27.5

 
29.0

 
27.5

 
29.0

 
 
 
 
 
 
 
 
Earnings Invested in the Business
 
 
 
 
 
 
 
Balance at beginning of period
769.2

 
751.9

 
767.4

 
751.3

Net earnings
6.8

 
2.8

 
10.5

 
5.3

Dividends
(1.9
)
 
(1.9
)
 
(3.8
)
 
(3.8
)
Balance at end of period
774.1

 
752.8

 
774.1

 
752.8

 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
Balance at beginning of period
45.6

 
61.7

 
51.1

 
61.4

Other comprehensive income, net of tax
6.2

 
12.4

 
0.7

 
12.7

Balance at end of period
51.8

 
74.1

 
51.8

 
74.1

 
 
 
 
 
 
 
 
Stockholders’ Equity at end of period
$
844.5

 
$
840.5

 
$
844.5

 
$
840.5

See accompanying unaudited Notes to Consolidated Financial Statements.

6


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions of dollars)
 
 
26 Weeks Ended
 
June 28,
2015
 
June 29,
2014
Cash flows from operating activities:
 
 
 
Net earnings
$
10.5

 
$
5.3

Noncash adjustments:
 
 
 
Depreciation and amortization
11.0

 
10.8

Provision for bad debts
2.1

 
2.6

Stock-based compensation
3.1

 
3.5

Other, net
(0.3
)
 
0.7

Changes in operating assets and liabilities
(52.9
)
 
(130.4
)
 
 
 
 
Net cash used in operating activities
(26.5
)
 
(107.5
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(6.7
)
 
(8.9
)
Investment in equity affiliate
(0.5
)
 
(5.4
)
Other investing activities
(0.1
)
 
0.4

 
 
 
 
Net cash used in investing activities
(7.3
)
 
(13.9
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net change in short-term borrowings
(1.4
)
 
61.2

Dividend payments
(3.8
)
 
(3.8
)
 
 
 
 
Net cash (used in) from financing activities
(5.2
)
 
57.4

 
 
 
 
Effect of exchange rates on cash and equivalents
4.6

 
1.1

 
 
 
 
Net change in cash and equivalents
(34.4
)
 
(62.9
)
Cash and equivalents at beginning of period
83.1

 
125.7

 
 
 
 
 
 
 
 
Cash and equivalents at end of period
$
48.7

 
$
62.8

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. In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair statement of the results of the interim periods, have been made. 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 28, 2014 , included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 12, 2015 (the 2014 consolidated financial statements). The Company’s second fiscal quarter ended on June 28, 2015 ( 2015 ) and June 29, 2014 ( 2014 ), each of which contained 13 weeks. The corresponding June year to date periods for 2015 and 2014 each contained 26 weeks.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
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 second quarter-end 2015 and year-end 2014 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 Second Quarter-End 2015
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In millions of dollars)
Money market funds
 
$
3.3

 
$
3.3

 
$

 
$

Available-for-sale investment
 
107.8

 
107.8

 

 

 
 
 
 
 
 
 
 
 
Total assets at fair value
 
$
111.1

 
$
111.1

 
$

 
$

 
 
Fair Value Measurements on a Recurring Basis
As of Year-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
 
97.9

 
97.9

 

 

 
 
 
 
 
 
 
 
 
Total assets at fair value
 
$
101.2

 
$
101.2

 
$

 
$

Money market funds as of second quarter-end 2015 and as of year-end 2014 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. 

8



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

Available-for-sale investment represents the Company’s investment in Temp Holdings Co., Ltd. (“Temp Holdings”), a leading integrated human resources company in Japan, and is included in other assets on the consolidated balance sheet. The valuation is based on the quoted market price of Temp Holdings stock on the Tokyo Stock Exchange as of the period end. The unrealized gain, net of tax, of $3.5 million for the second quarter of 2015 and the unrealized gain, net of tax, of $10.6 million for the second quarter of 2014 was recorded in other comprehensive income, and in accumulated other comprehensive income, a component of stockholders’ equity. The unrealized gain, net of tax, of $6.6 million for June year to date 2015 and the unrealized gain, net of tax, of $10.5 million for June year to date 2014 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 $16.7 million as of the second quarter-end 2015 and $17.2 million at year-end 2014 .

3. Restructuring
 
A summary of our global restructuring balance sheet accrual, primarily included in accrued payroll and related taxes, is detailed below (in millions of dollars):
Balance as of year-end 2014
$
6.9

Reductions for cash payments related to all restructuring activities
(4.2
)
Balance as of first quarter-end 2015
2.7

Reductions for cash payments related to all restructuring activities
(1.1
)
Balance as of second quarter-end 2015
$
1.6


The remaining balance of $1.6 million as of the 2015 second quarter end represents primarily severance costs and the majority is expected to be paid in 2015.

4.  Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income by component, net of tax, for the second quarter and June year to date 2015 and 2014 are included in the tables below. Amounts in parentheses indicate debits. Reclassification adjustments out of accumulated other comprehensive income, as shown in the tables below, were recorded in the other expense, net line item in the consolidated statement of earnings.
 
Second Quarter 2015
 
Foreign
Currency
Translation Adjustments
 
Unrealized
Gains and
Losses on Investment
 
Pension
Liability Adjustments
 
Total
 
(In millions of dollars)
Beginning balance
$
(11.6
)
 
$
59.4

 
$
(2.2
)
 
$
45.6

Other comprehensive income
2.7

 
3.5

 

 
6.2

 
 
 
 
 
 
 
 
Ending balance
$
(8.9
)
 
$
62.9

 
$
(2.2
)
 
$
51.8


9



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

 
June Year to Date 2015
 
Foreign
Currency
Translation Adjustments
 
Unrealized
Gains and
Losses on Investment
 
Pension
Liability Adjustments
 
Total
 
(In millions of dollars)
Beginning balance
$
(3.0
)
 
$
56.3

 
$
(2.2
)
 
$
51.1

Other comprehensive income (loss) before reclassifications
(5.7
)
 
6.6

 

 
0.9

Amounts reclassified from accumulated other comprehensive income
(0.2
)
 

 

 
(0.2
)
Net current-period other comprehensive income (loss)
(5.9
)
 
6.6

 

 
0.7

 
 
 
 
 
 
 
 
Ending balance
$
(8.9
)
 
$
62.9

 
$
(2.2
)
 
$
51.8

 
Second Quarter 2014
 
Foreign
Currency
Translation Adjustments
 
Unrealized
Gains and
Losses on Investment
 
Pension
Liability Adjustments
 
Total
 
(In millions of dollars)
Beginning balance
$
18.5

 
$
44.7

 
$
(1.5
)
 
$
61.7

Other comprehensive income
1.8

 
10.6

 

 
12.4

 
 
 
 
 
 
 
 
Ending balance
$
20.3

 
$
55.3

 
$
(1.5
)
 
$
74.1

 
June 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
2.2

 
10.5

 

 
12.7

 
 
 
 
 
 
 
 
Ending balance
$
20.3

 
$
55.3

 
$
(1.5
)
 
$
74.1


10



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 second quarter and June year to date 2015 and 2014 follows (in millions of dollars except per share data):
 
Second Quarter
 
June Year to Date
 
2015
 
2014
 
2015
 
2014
Net earnings
$
6.8

 
$
2.8

 
$
10.5

 
$
5.3

Less: earnings allocated to participating securities
(0.2
)
 
(0.1
)
 
(0.3
)
 
(0.2
)
Net earnings available to common shareholders
$
6.6

 
$
2.7

 
$
10.2

 
$
5.1

 
 
 
 
 
 
 
 
Basic earnings per share on common stock
$
0.18

 
$
0.07

 
$
0.27

 
$
0.14

Diluted earnings per share on common stock
$
0.18

 
$
0.07

 
$
0.27

 
$
0.14

 
 
 
 
 
 
 
 
Average common shares outstanding (millions):
 
 
 
 
 
 
 
Basic
37.7

 
37.4

 
37.7

 
37.4

Diluted
37.8

 
37.4

 
37.8

 
37.4

Stock options excluded from the computation of diluted earnings per share due to their anti-dilutive effect for the second quarter 2015 and June year to date 2015 were not significant. Stock options representing 0.1 million shares for the second quarter of 2014 and 0.1 million for June year to date 2014 were excluded from the computation of diluted earnings per share due to their anti-dilutive effect.
6.  Stock-Based Compensation

Performance Shares

Under the Equity Incentive Plan, amended and restated February 12, 2015 and approved by the stockholders of the Company on May 6, 2015, the Company granted performance awards associated with the Company’s Class A stock to certain senior officers. The payment of performance shares, which will be satisfied with the issuance of shares out of treasury stock, is contingent upon the achievement of specific performance goals over a stated period of time. The maximum number of performance shares that may be earned is 750,000 , of which two-thirds may be earned upon the achievement of certain financial goals and one-third may be earned based on the Company’s total shareholder return (“TSR”) relative to the S&P SmallCap 600 Index. No dividends are paid on these performance shares.

The performance shares associated with the financial goals, which have a weighted average grant date fair value of $16.31 , have a one -year performance measure and vest after the completion of an additional two -year service period. The performance shares related to relative TSR have a three -year performance measure with vesting at the end of the performance period. These shares have an estimated fair value of $16.01 , which was computed using a Monte Carlo simulation model incorporating assumptions for inputs of expected stock price volatility, dividend yield and risk-free interest rate.

For June year to date 2015, total compensation expense related to performance shares totaled $0.3 million , and the related tax benefit was $0.1 million .


11



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

7.  Other Expense, Net  
Included in other expense, net for the second quarter and June year to date 2015 and 2014 are the following: 
 
Second Quarter
 
June Year to Date
 
2015
 
2014
 
2015
 
2014
 
(In millions of dollars)
Interest income
$
0.1

 
$
0.1

 
$
0.2

 
$
0.2

Interest expense
(0.9
)
 
(0.7
)
 
(1.8
)
 
(1.3
)
Dividend income
0.4

 
0.4

 
0.4

 
0.4

Net loss on equity investment
(0.5
)
 
(0.4
)
 
(0.6
)
 
(0.8
)
Foreign exchange (losses) gains
(0.1
)
 
0.3

 
(1.7
)
 
(0.5
)
 
 
 
 
 
 
 
 
Other expense, net
$
(1.0
)
 
$
(0.3
)
 
$
(3.5
)
 
$
(2.0
)
 
8.  Contingencies
The Company is continuously engaged in litigation arising in the ordinary course of its business, typically matters alleging employment discrimination, alleging wage and hour violations or enforcing the restrictive covenants in the Company’s employment agreements. 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.
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 makers (the Company’s Chief Executive Officer and Chief Operating Officer) to determine resource allocation and assess performance. The Company’s seven reporting segments are: (1) Americas Commercial, (2) Americas Professional and Technical (“Americas PT”), (3) Europe, Middle East and Africa Commercial (“EMEA Commercial”), (4) Europe, Middle East and Africa Professional and Technical (“EMEA PT”), (5) Asia Pacific Commercial (“APAC Commercial”), (6) Asia Pacific Professional and Technical (“APAC PT”) and (7) Outsourcing and Consulting Group (“OCG”). 
The Commercial business segments within the Americas, EMEA and APAC regions represent traditional office services, contact-center staffing, marketing, electronic assembly, light industrial and, in the Americas, substitute teachers. The PT segments encompass a wide range of highly skilled temporary employees, including scientists, financial professionals, attorneys, engineers, IT specialists and healthcare workers. OCG includes recruitment process outsourcing (“RPO”), contingent workforce outsourcing (“CWO”), business process outsourcing (“BPO”), payroll process outsourcing (“PPO”), executive placement and career transition/outplacement services. Corporate expenses that directly support the operating units have been allocated to the Americas, EMEA and APAC regions and OCG based on a work effort, volume or, in the absence of a readily available measurement process, proportionately based on revenue from services.
The following tables present information about the reported revenue from services and gross profit of the Company by segment, along with a reconciliation to consolidated earnings before taxes, for the second quarter and June year to date 2015 and 2014 . 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.

12



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

 
Second Quarter
 
June Year to Date
 
2015
 
2014
 
2015
 
2014
 
(In millions of dollars)
Revenue from Services:
 
 
 
 
 
 
 
Americas Commercial
$
651.3

 
$
661.1

 
$
1,292.7

 
$
1,274.3

Americas PT
246.2

 
244.2

 
479.0

 
480.6

Total Americas Commercial and PT
897.5

 
905.3

 
1,771.7

 
1,754.9

 
 
 
 
 
 
 
 
EMEA Commercial
195.7

 
237.0

 
374.0

 
458.9

EMEA PT
42.9

 
49.7

 
83.2

 
97.4

Total EMEA Commercial and PT
238.6

 
286.7

 
457.2

 
556.3

 
 
 
 
 
 
 
 
APAC Commercial
90.3

 
86.5

 
175.9

 
169.5

APAC PT
10.3

 
10.0

 
20.8

 
18.6

Total APAC Commercial and PT
100.6

 
96.5

 
196.7

 
188.1

 
 
 
 
 
 
 
 
OCG
165.0

 
137.9

 
314.5

 
272.3

 
 
 
 
 
 
 
 
Less: Intersegment revenue
(16.7
)
 
(15.9
)
 
(34.5
)
 
(30.3
)
 
 
 
 
 
 
 
 
Consolidated Total
$
1,385.0

 
$
1,410.5

 
$
2,705.6

 
$
2,741.3


13



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

 
Second Quarter
 
June Year to Date
 
2015
 
2014
 
2015
 
2014
 
(In millions of dollars)
Earnings from Operations:
 
 
 
 
 
 
 
Americas Commercial gross profit
$
95.9

 
$
96.5

 
$
193.7

 
$
188.3

Americas PT gross profit
42.1

 
39.0

 
81.0

 
78.8

Americas Region gross profit
138.0

 
135.5

 
274.7

 
267.1

Americas Region SG&A expenses
(112.6
)
 
(112.6
)
 
(226.1
)
 
(222.1
)
Americas Region Earnings from Operations
25.4

 
22.9

 
48.6

 
45.0

 
 
 
 
 
 
 
 
EMEA Commercial gross profit
26.8

 
34.5

 
51.4

 
67.4

EMEA PT gross profit
9.1

 
11.3

 
17.8

 
22.4

EMEA Region gross profit
35.9

 
45.8

 
69.2

 
89.8

EMEA Region SG&A expenses
(34.2
)
 
(43.1
)
 
(67.7
)
 
(85.0
)
EMEA Region Earnings from Operations
1.7

 
2.7

 
1.5

 
4.8

 
 
 
 
 
 
 
 
APAC Commercial gross profit
11.2

 
11.7

 
24.2

 
24.0

APAC PT gross profit
2.7

 
3.3

 
5.6

 
6.1

APAC Region gross profit
13.9

 
15.0

 
29.8

 
30.1

APAC Region SG&A expenses
(12.3
)
 
(15.8
)
 
(24.4
)
 
(30.1
)
APAC Region Earnings from Operations
1.6

 
(0.8
)
 
5.4

 

 
 
 
 
 
 
 
 
OCG gross profit
35.7

 
32.9

 
71.2

 
65.5

OCG SG&A expenses
(32.2
)
 
(31.1
)
 
(64.9
)
 
(62.5
)
OCG Earnings from Operations
3.5

 
1.8

 
6.3

 
3.0

 
 
 
 
 
 
 
 
Less: Intersegment gross profit
(1.2
)
 
(1.1
)
 
(2.3
)
 
(2.1
)
Less: Intersegment SG&A expenses
1.2

 
1.1

 
2.3

 
2.1

Net Intersegment Activity

 

 

 

 
 
 
 
 
 
 
 
Corporate
(20.7
)
 
(20.7
)
 
(38.2
)
 
(40.6
)
Consolidated Total
11.5

 
5.9

 
23.6

 
12.2

Other Expense, Net
1.0

 
0.3

 
3.5

 
2.0

 
 
 
 
 
 
 
 
Earnings Before Taxes
$
10.5

 
$
5.6

 
$
20.1

 
$
10.2


14



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

10.  New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued new revenue recognition guidance under Accounting Standards Update (“ASU”) 2014-09 that will supersede the existing revenue recognition guidance under U.S. Generally Accepted Accounting Principles. 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. In July 2015, the FASB deferred the effective date by one year. This ASU will now be effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017. Early adoption is permitted, but not before the original effective date of December 15, 2016. 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.
In April 2015, the FASB issued ASU 2015-03 amending current guidance for debt issuance costs. The new guidance requires debt issuance costs to be presented as a deduction from the carrying amount of the related debt liability rather than as an asset. This ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2015 and early adoption is permitted. The new guidance will be applied retrospectively to all prior periods presented. The adoption of this guidance is not expected to have a material effect on our financial statements.
Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated financial statements and related disclosures.

15



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, competitive consolidation and secular shifts in labor supply and demand.  Global employment trends are reshaping and redefining traditional employment models, sourcing strategies and human resource capability requirements. In response, the industry has accelerated its 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. As clients’ workforce solutions strategies move up the maturity model, the TSCM concept seeks to manage all categories of talent (temporary, project-based, outsourced and full-time) and thus, represents significant market potential.
Strategic clients are increasingly looking for global, flexible and holistic talent solutions that encompass all worker categories, driving adoption of our TSCM approach covering temporary staffing, Contingent Workforce Outsourcing (“CWO”), Recruitment Process Outsourcing (“RPO”), Business Process Outsourcing (“BPO”), independent contractor management, strategic workforce planning and more. 

In the U.S., near-term demand for temporary staffing is benefiting from improving labor market conditions. Across all regions, the structural shifts toward higher-skilled, project-based professional/technical talent continue to represent long-term opportunities for the industry. In fact, professional/technical staffing is projected to steadily increase as a percent of the global market, with demand for specialty staffing projected to outpace commercial.  

While the remaining outlook for 2015 is encouraging, expectations are being tempered by a global economy that is forecasted to accelerate only modestly in the short term, with both strengths and risks present in all regions.

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 plan for and 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 56 days on a global basis as of the 2015 second quarter end, 54 days as of the 2014 year end and 57 days as of the 2014 second quarter end. 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.

16



In order to accelerate our strategy, execute our commitment to growth and work toward our long-term goal of a 4.0% return on sales, we made targeted investments in 2014, which included adjusting our operating models and increasing the resources necessary for driving growth in higher margin specialties and solutions. Specifically, we designed our investments to align with our long-term strategic objectives including growing Americas PT staffing and expanding our global OCG solutions. These investments are intended to achieve strong sales growth in 2015 in both OCG and our Americas PT segments. We have seen strong growth in our OCG segment and encouraging signs of growth in our Americas PT segment. We will need to continue to accelerate PT growth, particularly within our centralized accounts, to fully realize the expected benefit of our investments.
  
To bring additional efficiency to our operating models across the organization, on September 15, 2014, the Board of Directors of the Company approved a management simplification restructuring plan (“Plan”) that we completed during the fourth quarter of 2014. We expect that the total result of the Plan will reduce our year-over-year SG&A expense growth by approximately $35 million.

We have started to see the benefits of our 2014 actions in our 2015 year-to-date results and will continue to remain focused on executing a well-formed strategy with increased speed and precision, making the necessary investments to advance that strategy.

Although total company revenue decreased 1%, reflecting the continued global currency volatility, year-to-date revenue was up 4% on a constant currency basis year over year, accelerating the trend we saw in 2014. This revenue growth was helped by stable economic conditions in the U.S., along with the investments we made in our U.S. PT and OCG operations.

We increased year-to-date revenue in our OCG segment by 16% year over year (17% on a constant currency basis), confirming that our direction aligns with increased market demand for consultative outsourced solutions. Growth was particularly strong in BPO and CWO, which continue to be key drivers of our strategic and financial progress.

While only halfway through the year, we nearly doubled our operating earnings in comparison to the same period last year.

For the balance of the year, we anticipate a stable U.S. labor market and an increasing demand for skilled workers. Long term, we believe the trends in the staffing industry are positive: companies are relying more heavily on the use of flexible staffing models; there is growing acceptance of free agents and contractual employment by companies and talent 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 whose needs span the globe and cross multiple labor categories.

Financial Measures
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 2015 financial data into U.S. dollars using the same foreign currency exchange rates used to translate financial data for 2014. We believe that CC measurements are an important analytical tool to aid in understanding underlying operating trends without distortion due to currency fluctuations. Additionally, substantially all of our foreign subsidiaries derive revenues and incur cost of services and SG&A expenses within a single country and currency which, as a result, provide a natural hedge against currency risks in connection with their normal business operations.
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.

17



Results of Operations
Total Company - Second Quarter
(Dollars in millions)
 
2015
 
2014
 
Change
 
CC
Change
Revenue from services
$
1,385.0

 
$
1,410.5

 
(1.8
)%
 
 
   3.9
%
Staffing fee-based income
16.8

 
19.8

 
(15.2
)
 
 
(5.5
)
Gross profit
222.3

 
228.1

 
(2.5
)
 
 
2.9

SG&A expenses excluding restructuring charges
210.8

 
220.4

 
(4.4
)
 
 
 
Restructuring charges

 
1.8

 
(100.0
)
 
 
 
Total SG&A expenses
210.8

 
222.2

 
(5.2
)
 
 
(0.4
)
Earnings from operations
11.5

 
5.9

 
99.9

 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
16.1
%
 
16.2
%
 
(0.1
)
pts.
 
 
Expense rates (excluding restructuring charges):
 
 
 
 
 
 
 
 
% of revenue
15.2

 
15.6

 
(0.4
)
 
 
 
% of gross profit
94.8

 
96.6

 
(1.8
)
 
 
 
Return on sales
0.8

 
0.4

 
0.4

 
 
 
 
Total Company revenue from services for the second quarter of 2015 was down 1.8% in comparison to the prior year, primarily as a result of currency fluctuations. Compared to the same period last year, the U.S. dollar strengthened against certain currencies, primarily the Russian ruble, Euro and Australian dollar. On a CC basis, total Company revenue increased 3.9% year over year, as more fully described in the following discussions.
The gross profit rate decreased by 10 basis points. An increase in the Americas region gross profit rate was more than offset by declines in the gross profit rate in EMEA, APAC and OCG, as more fully described in the following discussions.
Selling, general and administrative (“SG&A”) expenses decreased 5.2% year over year, reflecting the impact of changes in foreign currency exchange rates. On a CC basis, SG&A expenses decreased 0.4%, due to the cost savings of our management simplification plan, partially offset by the year-over-year impact of investments made in the later quarters of 2014. Restructuring charges in the second quarter of 2014 relate to costs incurred for exiting the staffing business in Sweden and closing branches in Australia.
Income tax expense for the second quarter of 2015 was $3.7 million, compared to $2.8 million for the second quarter of 2014. The expense was higher primarily due to increased pretax income.  The U.S. work opportunity credit expired at the end of 2014, making credits available only for employees hired before 2015.  This is consistent with the second quarter of 2014, as the credit expired at the end of 2013 and was not retroactively reinstated until the fourth quarter.  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.  If such 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 second quarter of 2015 were $0.18, as compared to $0.07 for the second quarter of 2014.


18



Total Americas - Second Quarter
(Dollars in millions)
 
2015
 
2014
 
Change
 
CC
Change
Revenue from services
$
897.5

 
$
905.3

 
(0.9
)%
 
 
   0.7%
Staffing fee-based income
8.4

 
7.1

 
17.4

 
 
19.3
Gross profit
138.0

 
135.5

 
1.8

 
 
3.2
Total SG&A expenses
112.6

 
112.6

 
(0.1
)
 
 
1.2
Earnings from operations
25.4

 
22.9

 
11.4

 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
15.4
%
 
15.0
%
 
0.4

pts.
 
 
Expense rates:
 
 
 
 
 
 
 
 
% of revenue
12.5

 
12.4

 
0.1

 
 
 
% of gross profit
81.6

 
83.1

 
(1.5
)
 
 
 
Return on sales
2.8

 
2.5

 
0.3

 
 
 

The change in Americas revenue from services was due to the impact of changes in average bill rates, with relatively flat hours volume in Americas Commercial.  Average bill rates declined approximately 1% (and increased approximately 1% on a CC basis) in Americas Commercial. The increase in average bill rates on a CC basis was due to a combination of wage and bill rate inflation, coupled with increased pricing in a number of accounts serviced through our branch-based delivery model. Americas represented 65% of total Company revenue in the second quarter of 2015 and 64% in the second quarter of 2014.

Revenue in our Commercial segment was down 2% (up 1% on a CC basis) in comparison to the prior year. The CC increase in revenue in Commercial was primarily due to increases in our educational staffing business, as a result of new customer wins, and in our light industrial product, due to increased demand at existing customer locations, coupled with additional new customer wins. Light industrial business is up in accounts using our branch-based delivery model, while revenue in our large accounts using our centralized delivery model was down primarily due to our exit from certain large accounts due to pricing discipline. Office-clerical business for accounts serviced through our centralized delivery model was down year over year due to lower demand and project completions, while office-clerical revenue in the accounts serviced through our branch-based delivery model was basically flat compared to the prior year as volume demand softened in some accounts.
In the PT segment, reported and CC revenue increased 1% in comparison to the prior year. Revenue increased in our finance, science and IT products, primarily due to growth in accounts serviced through our branch-based delivery model. That growth was partially offset by lower revenue in our engineering product for customers serviced through the centralized delivery and branch-based delivery models. The year-over-year decrease in engineering was due primarily to the completion of certain projects.
The increase in the gross profit rate was primarily due to customer mix and increased staffing fee-based income.
SG&A expenses decreased 0.1% from the prior year due to the effect of exchange rates. On a CC basis, the 1.2% increase in SG&A expenses is attributable to the increased costs from the investments we started in the second half of last year, primarily in the sales and recruiting areas. The year-over-year impact of these investments was partially offset by the impact of the management simplification plan we implemented in the fourth quarter of last year.

19



Total EMEA - Second Quarter
(Dollars in millions)
 
2015
 
2014
 
Change
 
CC
Change
Revenue from services
$
238.6

 
$
286.7

 
(16.8
)%
 
 
   0.8%
Staffing fee-based income
5.7

 
8.6

 
(33.5
)
 
 
(17.3)
Gross profit
35.9

 
45.8

 
(21.6
)
 
 
(4.7)
SG&A expenses excluding restructuring charges
34.2

 
42.3

 
(19.1
)
 
 
 
Restructuring charges

 
0.8

 
(100.0
)
 
 
 
Total SG&A expenses
34.2

 
43.1

 
(20.6
)
 
 
(5.0)
Earnings from operations
1.7

 
2.7

 
(38.1
)
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
15.0
%
 
16.0
%
 
(1.0
)
pts.
 
 
Expense rates (excluding restructuring charges):
 
 
 
 
 
 
 
 
% of revenue
14.3

 
14.7

 
(0.4
)
 
 
 
% of gross profit
95.3

 
92.3

 
3.0

 
 
 
Return on sales
0.7

 
0.9

 
(0.2
)
 
 
 

The decrease in EMEA revenue from services was primarily due to the impact of changes in foreign currency exchange rates. On a CC basis, revenue increased 0.8%, due to a 5% increase in hours worked, partially offset by a 3% decrease in average bill rates on a CC basis and a decrease in staffing fee-based income. The decrease in average bill rates and increase in hours was due primarily to higher revenue in Portugal, a country with lower average bill rates. The increased hours in Portugal were partially offset by customer losses in the U.K. and a reduction of hours volume with larger customers in Switzerland and Ireland. EMEA represented 17% of total Company revenue in the second quarter of 2015 and 20% in the second quarter of 2014.

The EMEA gross profit rate decreased primarily due to a decline in the temporary gross profit rate and a decline in staffing fee-based income. The decline in the temporary gross profit rate was primarily driven by unfavorable country mix, as described above. Staffing fee-based income declined in both Commercial and PT, primarily in Russia, partially offset by increases in staffing fee-based income in other countries. Economic uncertainty is causing a postponement of recruitment decisions by customers in Russia resulting in the decline in staffing fee-based income. The declines in staffing fee-based income and temporary margins negatively impacted the gross profit rate by approximately 60 and 40 basis points, respectively.
SG&A expenses excluding restructuring charges decreased primarily due to cost reduction actions taken as a result of revenue declines, mainly in Switzerland and the U.K., and the exit of staffing operations in Sweden, partially offset by targeted PT investments in selected countries. Restructuring charges recorded in the second quarter of 2014 reflect the costs incurred for exiting the staffing business in Sweden.


20



Total APAC - Second Quarter
(Dollars in millions)
 
2015
 
2014
 
Change
 
CC
Change
Revenue from services
$
100.6

 
$
96.5

 
4.3
 %
 
 
   17.7%
Staffing fee-based income
3.3

 
4.1

 
(20.3
)
 
 
(10.9)
Gross profit
13.9

 
15.0

 
(6.9
)
 
 
4.8
SG&A expenses excluding restructuring charges
12.3

 
14.8

 
(17.0
)
 
 
 
Restructuring charges

 
1.0

 
(100.0
)
 
 
 
Total SG&A expenses
12.3

 
15.8

 
(22.5
)
 
 
(12.9)
Earnings from operations
1.6

 
(0.8
)
 
NM

 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
13.9
%
 
15.5
%
 
(1.6
)
pts.
 
 
Expense rates (excluding restructuring charges):
 
 
 
 
 
 
 
 
% of revenue
12.2

 
15.4

 
(3.2
)
 
 
 
% of gross profit
88.3

 
99.0

 
(10.7
)
 
 
 
Return on sales
1.6

 
(0.9
)
 
2.5

 
 
 

The 4.3% change in total APAC revenue from services was primarily the result of an increase in hours worked. On a CC basis, the 17.7% change in total APAC revenue from services reflected a 14% increase in hours worked, combined with a 4% increase in average bill rates. Hours worked increased primarily in India, Australia and Singapore. APAC revenue represented 7% of total Company revenue in the second quarter of both 2015 and 2014.
The gross profit rate decreased 160 basis points year over year, primarily due to decreases in the temporary gross profit rate and staffing fee-based income, which each reduced the gross profit rate by 100 basis points, partially offset by an increase of 40 basis points related to higher wage credits in Singapore. The reduction in the temporary gross profit rate is due to the increasing proportion of international and national large accounts with lower margins. Staffing fee-based income decreased due mainly to a weaker hiring climate in Australia. Wage credits in Singapore totaled approximately $0.9 million in the second quarter of 2015 and $0.6 million in the second quarter of 2014.
The decrease in SG&A expenses excluding restructuring charges was due to continuing productivity improvements primarily achieved by consolidating the Australia and New Zealand operations in the prior year. Restructuring charges in the second quarter of 2014 relate to costs for exiting branches in Australia.

21



OCG - Second Quarter
(Dollars in millions)
 
2015
 
2014
 
Change
 
CC
Change
Revenue from services
$
165.0

 
$
137.9

 
19.7
 %
 
 
   21.6%
Gross profit
35.7

 
32.9

 
8.4

 
 
11.4
Total SG&A expenses
32.2

 
31.1

 
3.6

 
 
6.4
Earnings from operations
3.5

 
1.8

 
88.8

 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
21.6
%
 
23.9
%
 
(2.3
)
pts.
 
 
Expense rates:
 
 
 
 
 
 
 
 
% of revenue
19.5

 
22.5

 
(3.0
)
 
 
 
% of gross profit
90.2

 
94.4

 
(4.2
)
 
 
 
Return on sales
2.1

 
1.3

 
0.8

 
 
 

Revenue from services in the OCG segment increased during the second quarter of 2015 due primarily to growth in the BPO and CWO practice areas. Revenue in BPO grew by 29% year over year and CWO, which includes PPO, grew by 23% year over year. The revenue growth in BPO and CWO was due to new customers and the expansion of programs with existing customers. OCG revenue represented 12% of total Company revenue in the second quarter of 2015 and 10% in the second quarter of 2014.
The OCG gross profit rate decreased primarily due to a lower RPO gross profit rate due to customer mix, and the timing of investments in BPO in advance of business activity.
The increase in SG&A expenses is primarily a result of costs associated with increased volume with existing customers and implementation costs of new customers mainly in our CWO practice area.

22



Results of Operations
Total Company - June Year to Date
(Dollars in millions)
 
2015
 
2014
 
Change
 
CC
Change
Revenue from services
$
2,705.6

 
$
2,741.3

 
(1.3
)%
 
 
4.1
%
Staffing fee-based income
33.0

 
38.6

 
(14.9
)
 
 
(4.9
)
Gross profit
442.6

 
450.4

 
(1.7
)
 
 
3.3

SG&A expenses excluding restructuring charges
419.0

 
436.4

 
(4.0
)
 
 
 
Restructuring charges

 
1.8

 
(100.0
)
 
 
 
Total SG&A expenses
419.0

 
438.2

 
(4.4
)
 
 
0.3

Earnings from operations
23.6

 
12.2

 
96.9

 
 
 

 
 
 
 
 
 
 
 
 
Gross profit rate
16.4
%
 
16.4
%
 

pts.
 
 

Expense rates (excluding restructuring charges):
 
 
 
 
 
 
 
 
% of revenue
15.5

 
15.9

 
(0.4
)
 
 
 

% of gross profit
94.7

 
96.9

 
(2.2
)
 
 
 

Return on sales
0.9

 
0.4

 
0.5

 
 
 


Total Company revenue from services for the first six months of 2015 was down 1.3% in comparison to the prior year. Increases in hours worked in the Americas, EMEA and APAC regions were more than offset by the impact of changes in foreign currency exchange rates. During the first six months of 2015, the U.S. dollar strengthened against certain currencies, primarily the Russian ruble, Euro, Canadian dollar and Australian dollar, as compared to the same period last year. On a CC basis, total Company revenue increased 4.1% year-over-year, as more fully described in the following discussions.
The gross profit rate was flat on a year-over-year basis. An increase in the Americas region gross profit rate was offset by declines in the gross profit rate in EMEA, APAC and OCG, as more fully described in the following discussions.
SG&A expenses decreased 4.4% year over year, reflecting the impact of changes in foreign currency exchange rates. On a CC basis, SG&A expenses increased 0.3% due to the year-over-year impact of investments made in the second half of 2014, partially offset by the cost savings of our management simplification plan in the fourth quarter of 2014. Restructuring charges in the first six months of 2014 relate to costs incurred for exiting the staffing business in Sweden and closing branches in Australia.
Income tax expense for the first six months of 2015 was $9.6 million, compared to $4.9 million for the first six months of 2014. The expense was higher primarily due to increased pretax income.  The U.S. work opportunity credit expired at the end of 2014, making credits available only for employees hired before 2015.  This is consistent with the first six months of 2014, as the credit expired at the end of 2013 and was not retroactively reinstated until the fourth quarter.  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.  If such 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 first six months of 2015 were $0.27, as compared to $0.14 for the first six months of 2014.



23



Total Americas - June Year to Date
(Dollars in millions)
 
2015
 
2014
 
Change
 
CC
Change
Revenue from services
$
1,771.7

 
$
1,754.9

 
1.0
%
 
 
   2.4%
Staffing fee-based income
15.4

 
13.9

 
9.6

 
 
11.2
Gross profit
274.7

 
267.1

 
2.9

 
 
4.1
Total SG&A expenses
226.1

 
222.1

 
1.8

 
 
3.0
Earnings from operations
48.6

 
45.0

 
8.4

 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
15.5
%
 
15.2
%
 
0.3

pts.
 
 
Expense rates:
 
 
 
 
 
 
 
 
% of revenue
12.8

 
12.7

 
0.1

 
 
 
% of gross profit
82.3

 
83.2

 
(0.9
)
 
 
 
Return on sales
2.7

 
2.6

 
0.1

 
 
 

The change in Americas revenue from services represents primarily an increase in hours worked, mainly in Americas Commercial, due to increases in hours worked for accounts serviced through our branch-based delivery model and our educational staffing business. Americas represented 66% of total Company revenue in the first six months of 2015 and 64% in the first six months of 2014.
Revenue in our Commercial segment was up 1% (up 3% on a CC basis) in comparison to the prior year. The increase in revenue in Commercial was primarily due to increases in our educational staffing business, as a result of new customer wins, and in our light industrial product, due to increased demand at existing customer locations, coupled with additional new customer wins. Light industrial business is up in accounts serviced through our branch-based delivery model, while volume in our large accounts using our centralized delivery model is down due to our exit from certain large accounts due to pricing discipline. While office-clerical business serviced through our branch-based delivery model was up year over year due to increased demand, volume decreases in large accounts serviced through the centralized delivery model resulted in a slight overall decline in year-over-year office-clerical revenue. The volume decreases in large accounts resulted from lower demand and project completions.
In the PT segment, reported and CC revenue was flat in comparison to the prior year. Decreases in our science and IT products for customers serviced through the centralized delivery model were offset by increases in PT revenue in accounts serviced through our branch-based delivery model. Revenue in our engineering product decreased for customers serviced through the centralized and branch-based delivery models due primarily to the completion of certain projects.
The increase in the gross profit rate was primarily due to improved pricing, customer mix and an increase in staffing fee-based income.
The increase in SG&A expenses is attributable to the increased costs from the investments we started in the second half of last year, primarily in the sales and recruiting areas. The year-over-year impact of these investments was partially offset by the impact of the management simplification plan we implemented in the fourth quarter of last year.

24



Total EMEA - June Year to Date
(Dollars in millions)
 
2015
 
2014
 
Change
 
CC
Change
Revenue from services
$
457.2

 
$
556.3

 
(17.8
)%
 
 
(0.1
)%
Staffing fee-based income
11.8

 
17.0

 
(30.7
)
 
 
(13.1
)
Gross profit
69.2