Kelly Services, Inc.
KELLY SERVICES INC (Form: 10-Q, Received: 08/10/2016 14:02:44)
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 July 3, 2016
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 29, 2016 , 34,656,091 shares of Class A and 3,437,643 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
 
July 3,
2016
 
June 28,
2015
 
July 3,
2016
 
June 28,
2015
Revenue from services
$
1,375.5

 
$
1,385.0

 
$
2,724.6

 
$
2,705.6

 
 
 
 
 
 
 
 
Cost of services
1,145.0

 
1,162.7

 
2,261.4

 
2,263.0

 
 
 
 
 
 
 
 
Gross profit
230.5

 
222.3

 
463.2

 
442.6

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
220.6

 
210.8

 
438.6

 
419.0

 
 
 
 
 
 
 
 
Earnings from operations
9.9

 
11.5

 
24.6

 
23.6

 
 
 
 
 
 
 
 
Other expense, net
0.2

 
1.0

 
1.0

 
3.5

 
 
 
 
 
 
 
 
Earnings before taxes
9.7

 
10.5

 
23.6

 
20.1

 
 
 
 
 
 
 
 
Income tax expense
0.8

 
3.7

 
3.5

 
9.6

 
 
 
 
 
 
 
 
Net earnings
$
8.9

 
$
6.8

 
$
20.1

 
$
10.5

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.23

 
$
0.18

 
$
0.52

 
$
0.27

Diluted earnings per share
$
0.23

 
$
0.18

 
$
0.51

 
$
0.27

 
 
 
 
 
 
 
 
Dividends per share
$
0.075

 
$
0.05

 
$
0.125

 
$
0.10

 
 
 
 
 
 
 
 
Average shares outstanding (millions):
 
 
 
 
 

 
 

Basic
38.0

 
37.7

 
38.0

 
37.7

Diluted
38.3

 
37.8

 
38.2

 
37.8

 
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
 
July 3,
2016
 
June 28,
2015
 
July 3,
2016
 
June 28,
2015
Net earnings
$
8.9

 
$
6.8

 
$
20.1

 
$
10.5

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax benefit of $0.1 million, tax expense of $0.1 million and $0.1 million and tax benefit of $0.2 million, respectively
(0.6
)
 
2.7

 
11.3

 
(5.7
)
Less: Reclassification adjustments included in net earnings

 

 
(0.3
)
 
(0.2
)
Foreign currency translation adjustments
(0.6
)
 
2.7

 
11.0

 
(5.9
)
 
 
 
 
 
 
 
 
Unrealized gains on investment, net of tax expense of $7.7 million, $2.1 million, $3.7 million and $3.8 million, respectively
15.6

 
3.5

 
7.5

 
6.6

 
 
 
 
 
 
 
 
Other comprehensive income
15.0

 
6.2

 
18.5

 
0.7

 
 
 
 
 
 
 
 
Comprehensive income
$
23.9

 
$
13.0

 
$
38.6

 
$
11.2

 
See accompanying unaudited Notes to Consolidated Financial Statements.

4


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS 
(UNAUDITED)
(In millions) 
ASSETS
July 3,
2016
 
January 3,
2016
CURRENT ASSETS:
 
 
 
Cash and equivalents
$
33.3

 
$
42.2

Trade accounts receivable, less allowances of $11.0 and $10.5, respectively
1,079.8

 
1,139.1

Prepaid expenses and other current assets
47.8

 
45.8

Current assets held for sale
94.0

 

Total current assets
1,254.9

 
1,227.1

 
 
 
 
NONCURRENT ASSETS:
 
 
 
Property and equipment:
 
 
 
Property and equipment
345.2

 
361.8

Accumulated depreciation
(263.7
)
 
(272.9
)
Net property and equipment
81.5

 
88.9

Noncurrent deferred taxes
197.0

 
189.3

Goodwill, net
88.3

 
90.3

Other assets
368.4

 
344.0

Total noncurrent assets
735.2

 
712.5

 
 
 
 
TOTAL ASSETS
$
1,990.1

 
$
1,939.6

See accompanying unaudited Notes to Consolidated Financial Statements.


5


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS 
(UNAUDITED)
(In millions) 
LIABILITIES AND STOCKHOLDERS’ EQUITY
July 3,
2016
 
January 3,
2016
CURRENT LIABILITIES:
 
 
 
Short-term borrowings
$
26.9

 
$
55.5

Accounts payable and accrued liabilities
403.7

 
405.5

Accrued payroll and related taxes
259.2

 
268.1

Accrued insurance
27.1

 
26.7

Income and other taxes
50.9

 
60.0

Current liabilities held for sale
48.0

 

Total current liabilities
815.8

 
815.8

 
 
 
 
NONCURRENT LIABILITIES:
 
 
 
Accrued insurance
41.1

 
40.0

Accrued retirement benefits
148.5

 
141.0

Other long-term liabilities
50.6

 
47.4

Total noncurrent liabilities
240.2

 
228.4

 
 
 
 
Commitments and contingencies (see contingencies footnote)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
Capital stock, $1.00 par value
 
 
 
Class A common stock, shares issued 36.6 at 2016 and 2015
36.6

 
36.6

Class B common stock, shares issued 3.5 at 2016 and 2015
3.5

 
3.5

Treasury stock, at cost
 
 
 
Class A common stock, 2.0 shares at 2016 and 2.1 Shares at 2015
(41.5
)
 
(43.7
)
Class B common stock
(0.6
)
 
(0.6
)
Paid-in capital
28.1

 
25.4

Earnings invested in the business
828.8

 
813.5

Accumulated other comprehensive income
79.2

 
60.7

Total stockholders’ equity
934.1

 
895.4

 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,990.1

 
$
1,939.6

See accompanying unaudited Notes to Consolidated Financial Statements.

6


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In millions of dollars)
 
 
13 Weeks Ended
 
26 Weeks Ended
 
July 3,
2016
 
June 28,
2015
 
July 3,
2016
 
June 28,
2015
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
(43.1
)
 
(49.1
)
 
(43.7
)
 
(49.2
)
Issuance of restricted stock and other
1.6

 
0.7

 
2.2

 
0.8

Balance at end of period
(41.5
)
 
(48.4
)
 
(41.5
)
 
(48.4
)
 
 
 
 
 
 
 
 
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
27.4

 
25.9

 
25.4

 
24.9

Issuance of restricted stock and other
0.7

 
1.6

 
2.7

 
2.6

Balance at end of period
28.1

 
27.5

 
28.1

 
27.5

 
 
 
 
 
 
 
 
Earnings Invested in the Business
 
 
 
 
 
 
 
Balance at beginning of period
822.8

 
769.2

 
813.5

 
767.4

Net earnings
8.9

 
6.8

 
20.1

 
10.5

Dividends
(2.9
)
 
(1.9
)
 
(4.8
)
 
(3.8
)
Balance at end of period
828.8

 
774.1

 
828.8

 
774.1

 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
Balance at beginning of period
64.2

 
45.6

 
60.7

 
51.1

Other comprehensive income, net of tax
15.0

 
6.2

 
18.5

 
0.7

Balance at end of period
79.2

 
51.8

 
79.2

 
51.8

 
 
 
 
 
 
 
 
Stockholders’ Equity at end of period
$
934.1

 
$
844.5

 
$
934.1

 
$
844.5

See accompanying unaudited Notes to Consolidated Financial Statements.

7


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions of dollars)
 
 
26 Weeks Ended
 
July 3,
2016
 
June 28,
2015
Cash flows from operating activities:
 
 
 
Net earnings
$
20.1

 
$
10.5

Noncash adjustments:
 
 
 
Depreciation and amortization
10.9

 
11.0

Provision for bad debts
3.5

 
2.1

Stock-based compensation
4.5

 
3.1

Other, net
(0.7
)
 
(0.3
)
Changes in operating assets and liabilities
2.9

 
(52.9
)
 
 
 
 
Net cash from (used in) operating activities
41.2

 
(26.5
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(4.3
)
 
(6.7
)
Investment in equity affiliate

 
(0.5
)
Other investing activities
(0.4
)
 
(0.1
)
 
 
 
 
Net cash used in investing activities
(4.7
)
 
(7.3
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net change in short-term borrowings
(29.1
)
 
(1.4
)
Dividend payments
(4.8
)
 
(3.8
)
Other financing activities
0.2

 

 
 
 
 
Net cash used in financing activities
(33.7
)
 
(5.2
)
 
 
 
 
Effect of exchange rates on cash and equivalents
6.4

 
4.6

 
 
 
 
Net change in cash and equivalents
9.2

 
(34.4
)
Less: cash balance included in current assets held for sale
(18.1
)
 

Cash and equivalents at beginning of period
42.2

 
83.1

 
 
 
 
 
 
 
 
Cash and equivalents at end of period
$
33.3

 
$
48.7

See accompanying unaudited Notes to Consolidated Financial Statements.

8


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 January 3, 2016 , included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 18, 2016 (the 2015 consolidated financial statements). The Company’s second fiscal quarter ended on July 3, 2016 ( 2016 ) and June 28, 2015 ( 2015 ), each of which contained 13 weeks. The corresponding June year to date periods for 2016 and 2015 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.  Assets and Liabilities Held for Sale
On July 4, 2016, the Company and Temp Holdings Co., Ltd. (“Temp Holdings”), completed a transaction to expand their existing North Asia joint venture, TS Kelly Workforce Solutions. A new joint venture, TS Kelly Asia Pacific, has been formed by combining the Company’s Asia Pacific staffing operations with businesses of Temp Holdings. Under the agreement, Temp Holdings owns 51% of the expanded joint venture, and the Company owns the remaining 49% (see Subsequent Event footnote for further discussion). During the second quarter of 2016 , the transaction met the criteria to be classified as held for sale and the assets and liabilities must be recorded at the lower of the carrying value or fair value less costs to sell.
Accordingly, the Company has presented the assets and liabilities of its Asia Pacific staffing operations (the “disposal group”) as held for sale on the consolidated balance sheet as of July 3, 2016. The disposal group is composed of two reportable segments, Asia Pacific Commercial and Asia Pacific Professional and Technical. The disposal group was recorded at the carrying value as the fair value less costs to sell exceeded the carrying value. The assets and liabilities classified as held for sale are 100% of the disposal group, however, the Company will retain a 49% interest in TS Kelly Asia Pacific, which it will record as an equity method investment on the consolidated balance sheet.

9



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

The following table presents information related to the major classes of assets and liabilities that are classified as held for sale in the consolidated balance sheet (in millions):
ASSETS
July 3, 2016
Cash and equivalents
$
18.1

Trade accounts receivable, less allowance of $1.5
62.2

Prepaid expenses and other current assets
7.8

Net property and equipment
1.4

Noncurrent deferred taxes
0.7

Goodwill, net
2.0

Other assets
1.8

Total current assets held for sale
$
94.0

 
 
LIABILITIES
 
Accounts payable and accrued liabilities
$
17.9

Accrued payroll and related taxes
21.2

Accrued insurance
0.3

Income and other taxes
7.8

Accrued retirement benefits
0.5

Other long-term liabilities
0.3

Total current liabilities held for sale
$
48.0

The Company has recorded these assets and liabilities of the disposal group in the current assets held for sale and current liabilities held for sale lines on the consolidated balance sheet, as the disposal group was sold on July 4, 2016. The disposal group did not meet the criteria in the applicable guidance to be classified as discontinued operations.

3.  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 2016 and year-end 2015 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 2016
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In millions of dollars)
Money market funds
 
$
3.9

 
$
3.9

 
$

 
$

Available-for-sale investment
 
156.5

 
156.5

 

 

 
 
 
 
 
 
 
 
 
Total assets at fair value
 
$
160.4

 
$
160.4

 
$

 
$


10



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

 
 
Fair Value Measurements on a Recurring Basis
As of Year-End 2015
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In millions of dollars)
Money market funds
 
$
3.7

 
$
3.7

 
$

 
$

Available-for-sale investment
 
142.3

 
142.3

 

 

 
 
 
 
 
 
 
 
 
Total assets at fair value
 
$
146.0

 
$
146.0

 
$

 
$

Money market funds as of second quarter-end 2016 and as of year-end 2015 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, 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 $15.6 million for the second quarter of 2016 and $3.5 million for the second quarter of 2015 was recorded in other comprehensive income, and in accumulated other comprehensive income, a component of stockholders’ equity. The unrealized gain, net of tax, of $7.5 million for June year to date 2016 and $6.6 million for June year to date 2015 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 $20.2 million as of the second quarter-end 2016 and $17.2 million at year-end 2015 .

4. Restructuring
In the second quarter of 2016, the Company has taken restructuring actions in the Americas and Italy to manage operating expenses and to prepare the businesses for future growth. The restructuring measures taken in the Americas are a result of recent revenue trends. The restructuring in Italy is designed to reposition the Company’s operating model to pursue growth in staffing fee-based income and specialized temporary staffing business.
Restructuring costs incurred in the second quarter of 2016 totaled $3.4 million , as detailed below, and are recorded entirely in selling, general and administrative (“SG&A”) expenses in the consolidated statement of earnings.
 
Severance Costs
 
Lease Termination Costs
 
Total
 
(In millions of dollars)
Americas Commercial
$
1.5

 
$
0.4

 
$
1.9

Americas PT
0.3

 

 
0.3

EMEA Commercial
1.0

 
0.1

 
1.1

EMEA PT
0.1

 

 
0.1

 
 
 
 
 
 
Total
$
2.9

 
$
0.5

 
$
3.4


11



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

A summary of the 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 2015
$
0.5

Reductions for cash payments related to all restructuring activities
(0.4
)
Balance as of first quarter-end 2016
0.1

Additions charged to Americas
2.2

Additions charged to EMEA
1.2

Reductions for cash payments related to all restructuring activities
(0.7
)
Balance as of second quarter-end 2016
$
2.8

The remaining balance of $2.8 million as of second quarter-end 2016 represents primarily severance costs, and the majority is expected to be paid in 2016. No material adjustments are expected to be recorded.

5.  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 2016 and 2015 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 2016
 
Foreign
Currency
Translation Adjustments
 
Unrealized
Gains and
Losses on Investment
 
Pension
Liability Adjustments
 
Total
 
(In millions of dollars)
Beginning balance
$
(11.0
)
 
$
76.8

 
$
(1.6
)
 
$
64.2

Other comprehensive income (loss) before reclassifications
(0.6
)
 
15.6

 

 
15.0

Amounts reclassified from accumulated other comprehensive income

 

 

 

Net current-period other comprehensive income (loss)
(0.6
)
 
15.6

 

 
15.0

 
 
 
 
 
 
 
 
Ending balance
$
(11.6
)
 
$
92.4

 
$
(1.6
)
 
$
79.2

 
June Year to Date 2016
 
Foreign
Currency
Translation Adjustments
 
Unrealized
Gains and
Losses on Investment
 
Pension
Liability Adjustments
 
Total
 
(In millions of dollars)
Beginning balance
$
(22.6
)
 
$
84.9

 
$
(1.6
)
 
$
60.7

Other comprehensive income before reclassifications
11.3

 
7.5

 

 
18.8

Amounts reclassified from accumulated other comprehensive income
(0.3
)
 

 

 
(0.3
)
Net current-period other comprehensive income
11.0

 
7.5

 

 
18.5

 
 
 
 
 
 
 
 
Ending balance
$
(11.6
)
 
$
92.4

 
$
(1.6
)
 
$
79.2


12



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

 
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 before reclassifications
2.7

 
3.5

 

 
6.2

Amounts reclassified from accumulated other comprehensive income

 

 

 

Net current-period other comprehensive income
2.7

 
3.5

 

 
6.2

 
 
 
 
 
 
 
 
Ending balance
$
(8.9
)
 
$
62.9

 
$
(2.2
)
 
$
51.8

 
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


6.  Earnings Per Share
The reconciliation of basic and diluted earnings per share on common stock for the second quarter and June year to date 2016 and 2015 follows (in millions of dollars except per share data):
 
Second Quarter
 
June Year to Date
 
2016
 
2015
 
2016
 
2015
Net earnings
$
8.9

 
$
6.8

 
$
20.1

 
$
10.5

Less: earnings allocated to participating securities
(0.2
)
 
(0.2
)
 
(0.5
)
 
(0.3
)
Net earnings available to common shareholders
$
8.7

 
$
6.6

 
$
19.6

 
$
10.2

 
 
 
 
 
 
 
 
Average shares outstanding (millions):
 
 
 
 
 
 
 
Basic
38.0

 
37.7

 
38.0

 
37.7

Dilutive share awards
0.3

 
0.1

 
0.2

 
0.1

Diluted
38.3

 
37.8

 
38.2

 
37.8

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.23

 
$
0.18

 
$
0.52

 
$
0.27

Diluted earnings per share
$
0.23

 
$
0.18

 
$
0.51

 
$
0.27

Potentially dilutive shares outstanding are primarily related to performance shares for the second quarter and June year to date 2016 and 2015 . Stock options excluded from the computation of diluted earnings per share due to their anti-dilutive effect for the second quarter and June year to date 2016 and 2015 were not significant.

13



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

7.  Stock-Based Compensation
Performance Shares
On February 17, 2016, 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. For the 2016 performance share grant, the total target number of performance shares granted is 331,500 , and the maximum number of performance shares that may be earned is 663,000 , which assumes 200% of the target shares originally granted. Target shares of 248,625 may be earned upon the achievement of three financial goals (“financial measure performance shares”) and target shares of 82,875 may be earned based on the Company’s total shareholder return relative to the S&P SmallCap 600 Index (“TSR performance shares”). No dividends are paid on these performance shares.
The financial measure performance shares, which have a weighted average grant date fair value of $15.85 , have a three-year performance period through December 31, 2018. These shares will cliff-vest after approval by the Compensation Committee, which will be no later than March 15, 2019, if not forfeited by the recipient. For each of the three financial measures, there are annual goals set in February of each year, with the total award payout based on a cumulative average of the 2016, 2017, and 2018 goals. Accordingly, the Company will remeasure the fair value of the 2016 financial measure performance shares each reporting period until the 2018 goals are set, after which the fair value will be fixed for the remaining performance period. As of second quarter-end 2016 , the current fair value for financial measure performance shares was $18.02 .
The TSR performance shares also have a three-year performance period through December, 31 2018 and have an estimated fair value of $19.73 , 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. These shares will cliff-vest after approval by the Compensation Committee, which will be no later than March 15, 2019, if not forfeited by the recipient.
For the second quarter 2016 and 2015 , respectively, total compensation expense related to all performance shares totaled $0.8 million and $0.3 million , and the related tax benefit was $0.3 million and $0.1 million . For June year to date 2016 and 2015 , respectively, total compensation expense related to all performance shares totaled $2.1 million and $0.3 million , and the related tax benefit was $0.8 million and $0.1 million .

8.  Other Expense, Net  
Included in other expense, net for the second quarter and June year to date 2016 and 2015 are the following: 
 
Second Quarter
 
June Year to Date
 
2016
 
2015
 
2016
 
2015
 
(In millions of dollars)
Interest income
$

 
$
0.1

 
$
0.1

 
$
0.2

Interest expense
(0.9
)
 
(0.9
)
 
(1.8
)
 
(1.8
)
Dividend income
0.6

 
0.4

 
0.6

 
0.4

Net loss on equity investment
(0.2
)
 
(0.5
)
 
(0.1
)
 
(0.6
)
Foreign exchange gain (loss)
0.3

 
(0.1
)
 
0.2

 
(1.7
)
 
 
 
 
 
 
 
 
Other expense, net
$
(0.2
)
 
$
(1.0
)
 
$
(1.0
)
 
$
(3.5
)
 


14



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

9.  Contingencies
The Company is a party to a pending nationwide class action lawsuit entitled Hillson et.al. v Kelly Services. The suit alleges that current and former temporary employees of Kelly Services are entitled to monetary damages for violation of the Fair Credit Reporting Act requirement that the notice and disclosure form provided to employees for purposes of conducting a background screening be a standalone document. On April 20, 2016, the parties entered into a formal settlement agreement. The parties still must secure court approval of the settlement. In light of amounts previously expensed and anticipated recoveries from third parties, Kelly recorded an accrual in the fourth quarter of 2015 of $4.1 million (in accounts payable and accrued liabilities in the consolidated balance sheet) to reflect the expected cost of the tentative settlement.
The Company is continuously engaged in litigation arising in the ordinary course of its business, such as matters alleging employment discrimination, alleging wage and hour violations or enforcing the restrictive covenants in the Company’s employment agreements. The Company has recently experienced an increase in its litigation volume, including cases where claimants seek class action certification. 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.

10.  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 (“CODM”), 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 Company regularly assesses its organizational structure, product/service offerings and information evaluated by the CODM to determine whether any changes have occurred that would impact its segment reporting structure. The completion of the transaction establishing TS Kelly Asia Pacific will likely result in a change in how the Company allocates resources and analyzes performance and may result in a change to the Company’s segment reporting in the future.
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 2016 and 2015 . 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.

15



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

 
Second Quarter
 
June Year to Date
 
2016
 
2015
 
2016
 
2015
 
(In millions of dollars)
Revenue from Services:
 
 
 
 
 
 
 
Americas Commercial
$
635.3

 
$
651.3

 
$
1,283.9

 
$
1,292.7

Americas PT
241.6

 
246.2

 
478.7

 
479.0

Total Americas Commercial and PT
876.9

 
897.5

 
1,762.6

 
1,771.7

 
 
 
 
 
 
 
 
EMEA Commercial
197.1

 
195.7

 
372.6

 
374.0

EMEA PT
43.1

 
42.9

 
84.7

 
83.2

Total EMEA Commercial and PT
240.2

 
238.6

 
457.3

 
457.2

 
 
 
 
 
 
 
 
APAC Commercial
87.9

 
90.3

 
170.7

 
175.9

APAC PT
9.2

 
10.3

 
18.3

 
20.8

Total APAC Commercial and PT
97.1

 
100.6

 
189.0

 
196.7

 
 
 
 
 
 
 
 
OCG
173.9

 
165.0

 
342.1

 
314.5

 
 
 
 
 
 
 
 
Less: Intersegment revenue
(12.6
)
 
(16.7
)
 
(26.4
)
 
(34.5
)
 
 
 
 
 
 
 
 
Consolidated Total
$
1,375.5

 
$
1,385.0

 
$
2,724.6

 
$
2,705.6


16



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

 
Second Quarter
 
June Year to Date
 
2016
 
2015
 
2016
 
2015
 
(In millions of dollars)
Earnings from Operations:
 
 
 
 
 
 
 
Americas Commercial gross profit
$
98.9

 
$
95.9

 
$
201.0

 
$
193.7

Americas PT gross profit
41.3

 
42.1

 
82.9

 
81.0

Americas Region gross profit
140.2

 
138.0

 
283.9

 
274.7

Americas Region SG&A expenses
(113.9
)
 
(112.6
)
 
(230.5
)
 
(226.1
)
Americas Region Earnings from Operations
26.3

 
25.4

 
53.4

 
48.6

 
 
 
 
 
 
 
 
EMEA Commercial gross profit
27.1

 
26.8

 
50.7

 
51.4

EMEA PT gross profit
8.7

 
9.1

 
17.4

 
17.8

EMEA Region gross profit
35.8

 
35.9

 
68.1

 
69.2

EMEA Region SG&A expenses
(33.2
)
 
(34.2
)
 
(63.5
)
 
(67.7
)
EMEA Region Earnings from Operations
2.6

 
1.7

 
4.6

 
1.5

 
 
 
 
 
 
 
 
APAC Commercial gross profit
10.3

 
11.2

 
23.3

 
24.2

APAC PT gross profit
2.5

 
2.7

 
5.0

 
5.6

APAC Region gross profit
12.8

 
13.9

 
28.3

 
29.8

APAC Region SG&A expenses
(11.6
)
 
(12.3
)
 
(22.7
)
 
(24.4
)
APAC Region Earnings from Operations
1.2

 
1.6

 
5.6

 
5.4

 
 
 
 
 
 
 
 
OCG gross profit
42.8

 
35.7

 
85.1

 
71.2

OCG SG&A expenses
(38.0
)
 
(32.2
)
 
(74.9
)
 
(64.9
)
OCG Earnings from Operations
4.8

 
3.5

 
10.2

 
6.3

 
 
 
 
 
 
 
 
Less: Intersegment gross profit
(1.1
)
 
(1.2
)
 
(2.2
)
 
(2.3
)
Less: Intersegment SG&A expenses
1.1

 
1.2

 
2.2

 
2.3

Net Intersegment Activity

 

 

 

 
 
 
 
 
 
 
 
Corporate
(25.0
)
 
(20.7
)
 
(49.2
)
 
(38.2
)
Consolidated Total
9.9

 
11.5

 
24.6

 
23.6

Other Expense, Net
0.2

 
1.0

 
1.0

 
3.5

 
 
 
 
 
 
 
 
Earnings Before Taxes
$
9.7

 
$
10.5

 
$
23.6

 
$
20.1



17



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

11.  New Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09 amending several aspects of share-based payment accounting. This guidance requires all excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled, with prospective application required. The guidance also changes the classification of such tax benefits or tax deficiencies on the statement of cash flows from a financing activity to an operating activity, with retrospective or prospective application allowed. Additionally, the guidance requires the classification of employee taxes paid when an employer withholds shares for tax-withholding purposes as a financing activity on the statement of cash flows, with retrospective application required. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02 amending the existing accounting standards for lease accounting and requiring lessees to recognize lease assets and lease liabilities for all leases with lease terms of more than 12 months, including those classified as operating leases. Both the asset and liability will initially be measured at the present value of the future minimum lease payments, with the asset being subject to adjustments such as initial direct costs. Consistent with current U.S. Generally Accepted Accounting Principles (“GAAP”), the presentation of expenses and cash flows will depend primarily on the classification of the lease as either a finance or an operating lease. The new standard also requires additional quantitative and qualitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases in order to provide additional information about the nature of an organization’s leasing activities. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and requires modified retrospective application. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01 amending the current guidance for how entities measure certain equity investments, the accounting for financial liabilities under the fair value option, and the presentation and disclosure requirements relating to financial instruments. The new guidance requires entities to use fair value measurement for equity investments in unconsolidated entities, excluding equity method investments, and to recognize the changes in fair value in net income at the end of each reporting period. Under the new standard, for any financial liabilities in which the fair value option has been elected, the changes in fair value due to instrument-specific credit risk must be recognized separately in other comprehensive income. Presentation and disclosure requirements under the new guidance require public business entities to use the exit price when measuring the fair value of financial instruments measured at amortized cost. In addition, financial assets and liabilities must now be presented separately in the notes to the financial statements and grouped by measurement category and form of financial asset. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is only permitted for the financial liability provision. 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 May 2014, the FASB issued new revenue recognition guidance under ASU 2014-09 that will supersede the existing revenue recognition guidance under U.S. 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. In July 2015, the FASB deferred the effective date by one year (ASU 2015-14). 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. Since the issuance of the original standard, the FASB has issued several other subsequent updates including the following: 1) clarification of the implementation guidance on principal versus agent considerations (ASU 2016-08); 2) further guidance on identifying performance obligations in a contract as well as clarifications on the licensing implementation guidance (ASU 2016-10); 3) rescission of several SEC Staff Announcements that are codified in Topic 605 (ASU 2016-11); and 4) additional guidance and practical expedients in response to identified implementation issues (ASU 2016-12). The new standard will be effective for us beginning January 1, 2018 and we expect to implement the standard with the modified retrospective approach,

18



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

which recognizes the cumulative effect of application recognized on that date. We are evaluating the impact of adoption on our consolidated results of operations, consolidated financial position and cash flows.
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.
12.  Subsequent Event
On July 4, 2016, the Company and Temp Holdings completed a transaction to expand their existing North Asia joint venture, TS Kelly Workforce Solutions (formed in 2012). A new joint venture, TS Kelly Asia Pacific, was formed by the transfer of the Company’s Asia Pacific staffing operations, which will be subsequently deconsolidated, and Temp Holdings’ businesses, including Capita, with offices in Singapore and Malaysia; First Alliances, with offices in Vietnam; and Intelligence, with a presence in Indonesia, Vietnam, Singapore and Malaysia.
Upon closing, the Company received a cash payment of $36.5 million and a 49% equity interest in TS Kelly Asia Pacific. Temp Holdings owns the remaining 51% of the joint venture. In accordance with the terms of the transaction, a post-closing cash true-up adjustment may be required. The Company will record its interest in the joint venture as an equity method investment on the consolidated balance sheet during the third quarter of 2016 and will include its share of earnings prospectively in the consolidated statement of earnings. In connection with the transaction, the Company expects to record a gain on the deconsolidated assets of its Asia Pacific staffing operations during the third quarter of 2016, which is expected to be material. The Company is currently in the process of determining the fair value of its investment in TS Kelly Asia Pacific as of the closing date.
During the second quarter of 2016, the transaction met the criteria to be classified as held for sale. Accordingly, the Company has presented the assets and liabilities of its Asia Pacific staffing operations as held for sale on the consolidated balance sheet as of July 3, 2016 (see Assets and Liabilities Held for Sale footnote).


19



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 evolve 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.
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 increase as a percent of the global market, with demand for specialty staffing projected to outpace 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 Outsourcing & Consulting Group (OCG). 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 was 53 days on a global basis as of the 2016 second quarter end, 54 days as of the 2015 year end and 56 days as of the 2015 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; and
Lower our costs through deployment of efficient service delivery models.
Fueled by our 2014 investments in higher-margin specialties and solutions, Kelly’s strong performance in 2015 reaffirmed our strategic path and enabled us to raise the cash dividend for our shareholders. With a year of proven execution behind us, we entered 2016 with renewed confidence. Early in the year, we announced plans to expand our joint venture with Temp Holdings and form one of the largest workforce solutions companies in the Asia-Pacific region; we have since completed that joint venture to form TS Kelly Asia Pacific, accelerating Kelly’s growth in the APAC market. Our U.S. branch network is delivering growth in PT staffing, and our global OCG business continues to expand its customer reach and gain third-party validation as a leading provider of talent supply chain management solutions.

20



In line with our strategy, we took actions during the second quarter of 2016 in the Americas and EMEA designed to increase operational efficiency and align our staffing operations with growth levels within their markets. As a result, we recorded $3.4 million of restructuring expenses. Kelly’s second quarter results confirm our strategy and our commitment to driving improved profitability within our operating segments:
Earnings from operations for the second quarter of 2016 totaled $9.9 million, or $13.3 million excluding restructuring expenses, compared to $11.5 million in the second quarter of 2015. Conversion rate for the second quarter was 4.3%, or 5.8% excluding restructuring expense, compared to 5.2% in the same period last year.
In the OCG segment, earnings from operations totaled $4.8 million, a 38% increase compared to the same period last year. OCG delivered good bottom-line leverage as top-line revenue growth continues. Growth was particularly strong in BPO, which continues to be a key driver of our strategic and financial progress.
After strong demand in the first quarter, the U.S. staffing market softened in the second quarter, impacting our growth rates in the region. Overall Americas PT revenue fell 2% year over year, though accounts serviced through our U.S. branch network delivered positive PT growth. We will need to continue to accelerate PT growth, particularly within accounts serviced through our centralized delivery model, to fully realize the expected benefit of our investments. Despite the softer U.S. market, the Americas region delivered a year-over-year increase in earnings from operations excluding restructuring, as well as strong leverage for the second quarter.
Despite uneven economic conditions, EMEA continues to deliver strong operating results. For the quarter, EMEA delivered $2.6 million of earnings from operations, or $3.8 million excluding restructuring expense, compared to $1.7 million a year ago.
Kelly remains focused on executing a well-formed strategy with increased speed and precision, making the necessary investments and adjustments to advance that strategy. We have set our sights on becoming an even more competitive, consultative and profitable company, and we are reshaping our business to make that vision a reality. We will continue to rebalance our resources to align with our goals for growth, intentionally focusing more of our workforce in roles that drive increased revenue and gross profit for the Company. We will measure our progress against both revenue and gross profit growth and an improved conversion rate. The goals we have established are based on the current economic and business environment, and may change as conditions warrant:
We expect to grow PT and OCG revenue, creating a more balanced portfolio that yields benefits from an improved mix.
We expect Commercial to remain a core component of our strategy.
We expect to exercise strict control over our cost base, delivering structural improvements that create strong operating leverage.
And, as a result, we expect our conversion rate to continue to improve.
Looking ahead, we are keeping a watchful eye on demand levels in the U.S. labor market while anticipating an increasing demand for skilled workers. Despite uncertainties, we know that 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.

21



Financial Measures
The constant currency (“CC”) change amounts in the following tables refer to the year-over-year percentage changes resulting from translating 2016 financial data into U.S. dollars using the same foreign currency exchange rates used to translate financial data for 2015. We believe that CC measurements are a useful measure, indicating the actual trends of our operations without distortion due to currency fluctuations. We use CC results when analyzing the performance of our segments and measuring our results against that of our competitors. Additionally, substantially all of our foreign subsidiaries derive revenues and incur cost of services and selling, general and administrative expenses (“SG&A”) within a single country and currency which, as a result, provide a natural hedge against currency risks in connection with their normal business operations.
CC measures are non-GAAP (Generally Accepted Accounting Principles) measures and are used to supplement measures in accordance with GAAP. Our non-GAAP measures may be calculated differently from those provided by other companies, limiting their usefulness for comparison purposes. Non-GAAP measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.
Return on sales (earnings from operations divided by revenue from services) and conversion rate (earnings from operations divided by gross profit) in the following tables are ratios used to measure the Company’s operating efficiency.
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 - Second Quarter
(Dollars in millions)
 
2016
 
2015
 
Change
 
CC
Change
Revenue from services
$
1,375.5

 
$
1,385.0

 
(0.7
)%
 
 
   0.6
%
Staffing fee-based income
16.6

 
16.8

 
(1.6
)
 
 
0.9

Gross profit
230.5

 
222.3

 
3.7

 
 
4.8

SG&A expenses excluding restructuring charges
217.2

 
210.8

 
3.0

 
 
4.1

Restructuring charges
3.4

 

 
NM

 
 
 
Total SG&A expenses
220.6

 
210.8

 
4.6

 
 
5.7

Earnings from operations
9.9

 
11.5

 
(13.9
)
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
16.8
%
 
16.1
%
 
0.7

pts.
 
 
Expense rates (excluding restructuring charges):
 
 
 
 
 
 
 
 
% of revenue
15.8

 
15.2

 
0.6

 
 
 
% of gross profit
94.2

 
94.8

 
(0.6
)
 
 
 
Return on sales
0.7

 
0.8

 
(0.1
)
 
 
 
Conversion rate
4.3

 
5.2

 
(0.9
)
 
 
 

Total Company revenue from services for the second quarter of 2016 was down 0.7% in comparison to the prior year and up 0.6% on a CC basis, as more fully described in the following discussions.
The gross profit rate increased by 70 basis points. As more fully described in the following discussions, increases in the Americas and OCG gross profit rates were partially offset by declines in the gross profit rate in the EMEA and APAC regions.
Total SG&A expenses increased 4.6% on a reported basis and 5.7% on CC basis. Included in SG&A expenses are restructuring charges of $3.4 million, relating to actions taken in the Americas and EMEA regions to manage operating expenses and prepare the businesses for future growth. Also included in SG&A expenses for the second quarter of 2016 are $3.0 million of additional costs related to certain benefit plans and litigation, $1.2 million of one-time costs related to the expansion of the APAC staffing joint venture and an increase in OCG SG&A expenses due to growth in that segment. These increases were partially offset by continued cost management efforts in the EMEA and APAC regions.
Income tax expense for the second quarter of 2016 was $0.8 million, compared to $3.7 million for the second quarter of 2015. Our tax expense is affected by recurring items, such as the amount of pretax income and its mix by jurisdiction, U.S. work opportunity credits, and the change in cash surrender value of non-taxable investments in life insurance policies. It is also affected by discrete items that may occur in any given period but are not consistent from period to period, such as tax law changes, or changes in judgment regarding the realizability of deferred tax assets. The decrease in income tax expense from the prior year is primarily due to the reinstatement of the work opportunity credit program. Valuation allowances in certain foreign countries could be reduced in the near term if future taxable income is sufficient to make it more likely than not that deferred tax assets will be realizable in those jurisdictions.
Diluted earnings per share for the second quarter of 2016 were $0.23, as compared to $0.18 for the second quarter of 2015.


23



Total Americas - Second Quarter
(Dollars in millions)
 
2016
 
2015
 
Change
 
CC
Change
Revenue from services
$
876.9

 
$
897.5

 
(2.3
)%
 
 
   (1.4)%
Staffing fee-based income
7.9

 
8.4

 
(5.2
)
 
 
(4.7)
Gross profit
140.2

 
138.0

 
1.6

 
 
2.3
SG&A expenses excluding restructuring charges
111.7

 
112.6

 
(0.8
)
 
 
(0.2)
Restructuring charges
2.2

 

 
NM

 
 
 
Total SG&A expenses
113.9

 
112.6

 
1.2

 
 
1.8
Earnings from operations
26.3

 
25.4

 
3.6

 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
16.0
%
 
15.4
%
 
0.6

pts.
 
 
Expense rates (excluding restructuring charges):
 
 
 
 
 
 
 
 
% of revenue
12.7

 
12.5

 
0.2

 
 
 
% of gross profit
79.6

 
81.6

 
(2.0
)
 
 
 
Return on sales
3.0

 
2.8

 
0.2

 
 
 

The change in Americas revenue from services on a reported basis was due to a 3% decrease in hours volume, partially offset by a 1% increase in average bill rates (a 2% increase on a CC basis). The increase in average bill rates was due to wage rate and the resulting bill rate inflation. Americas represented 64% of total Company revenue in the second quarter of 2016 and 65% in the second quarter of 2015.
Revenue in our Commercial segment was down 3% and down 1% on a CC basis in comparison to the prior year. The lower revenue was primarily due to a decrease in our office services volume in both our branch-based and centralized delivery models. These decreases were partially offset by an increase in our educational staffing business and in our light industrial product due to new customer wins.
In the PT segment, reported and CC revenue was down 2% in comparison to the prior year. We had a revenue decrease of 3% in the accounts serviced through our centralized delivery model due to the impact of vendor neutral accounts on our business, partially offset by a 1% revenue increase in the accounts serviced through our branch delivery network. Revenue increased in our finance product, while revenue in our science, engineering and IT products were down compared to a year ago.
The increase in the gross profit rate was primarily due to improved management of our payroll taxes and employee benefit costs, as well as lower workers’ compensation costs. These increases were partially offset by customer mix.
Total SG&A expenses increased 1.2% on a reported basis and 1.8% on a CC basis. Included in SG&A expenses are restructuring charges of $2.2 million. These charges represent severance costs related to headcount reductions as well as lease buyout costs due to branch consolidations. Excluding restructuring charges, SG&A expenses decreased 0.8% on a reported basis and 0.2% on a CC basis, due primarily to lower incentive payments.


24



Total EMEA - Second Quarter
(Dollars in millions)
 
2016
 
2015
 
Change
 
CC
Change
Revenue from services
$
240.2

 
$
238.6

 
0.7
 %
 
 
   2.8%
Staffing fee-based income
6.2

 
5.7

 
7.4

 
 
11.6
Gross profit
35.8

 
35.9

 
(0.3
)
 
 
1.6
SG&A expenses excluding restructuring charges
32.0

 
34.2

 
(6.3
)
 
 
(3.9)
Restructuring charges
1.2

 

 
NM

 
 

Total SG&A expenses
33.2

 
34.2

 
(3.0
)
 
 
(0.6)
Earnings from operations
2.6

 
1.7

 
54.4

 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
14.9
%
 
15.0
%
 
(0.1
)
pts.
 
 
Expense rates (excluding restructuring charges):
 
 
 
 
 
 
 
 
% of revenue
13.3

 
14.3

 
(1.0
)
 
 
 
% of gross profit
89.6

 
95.3

 
(5.7
)
 
 
 
Return on sales
1.1

 
0.7

 
0.4

 
 
 

The change in EMEA revenue from services was due to a 2% increase in hours volume, partially offset by a 1% decrease in average bill rates (a 1% increase on a CC basis). The increase in hours volume was due to Portugal, partially offset by Russia and the U.K. EMEA represented 18% of total Company revenue in the second quarter of 2016 and 17% in the second quarter of 2015.
The EMEA gross profit rate decreased primarily due to a decline in the temporary staffing gross profit rate, which was mainly driven by unfavorable customer mix in Switzerland and the U.K. This decrease was partially offset by higher staffing fee-based income. Staffing fee-based income increased primarily in Western Europe as a result of targeted investments in multiple markets.
Total SG&A expenses decreased 3.0% on a reported basis and 0.6% on a CC basis. Included in SG&A expenses are restructuring charges of $1.2 million. The restructuring, which relates to Italy staffing operations, is designed to reposition our operating model to pursue growth in staffing fee-based income and specialized temporary staffing business. SG&A expenses excluding restructuring decreased 6.3% on a reported basis and 3.9% on a CC basis due to effective cost control in headquarters expenses across the region.



25



Total APAC - Second Quarter
(Dollars in millions)
 
2016
 
2015
 
Change
 
CC
Change
Revenue from services
$
97.1

 
$
100.6

 
(3.5
)%
 
 
   0.6%
Staffing fee-based income
3.1

 
3.3

 
(6.6
)
 
 
(2.4)
Gross profit
12.8

 
13.9

 
(8.4
)
 
 
(4.5)
SG&A expenses
11.6

 
12.3

 
(5.4
)
 
 
(1.5)
Earnings from operations
1.2

 
1.6

 
(31.4
)
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
13.2
%
 
13.9
%
 
(0.7
)
pts.
 
 
Expense rates:
 
 
 
 
 
 
 
 
% of revenue
12.0

 
12.2

 
(0.2
)
 
 
 
% of gross profit
91.2

 
88.3

 
2.9

 
 
 
Return on sales
1.2

 
1.6

 
(0.4
)
 
 
 

The decrease in APAC revenue from services was primarily due to a 5% decrease in average bill rates partially offset by a 1% increase in hours volume. On a CC basis, average bill rates were relatively flat. The increase in hours volume was primarily driven by India. APAC revenue represented 7% of total Company revenue in the second quarter of both 2016 and 2015.
The gross profit rate decreased primarily due to a year-over-year decrease in Singapore wage credits.
The decrease in SG&A expenses was due to continued cost control across the APAC region.



26



OCG - Second Quarter
(Dollars in millions)
 
2016
 
2015
 
Change
 
CC
Change
Revenue from services
$
173.9

 
$
165.0

 
5.4
%
 
 
   5.9%
Gross profit
42.8

 
35.7

 
20.1

 
 
20.9
SG&A expenses
38.0

 
32.2

 
18.1

 
 
19.0
Earnings from operations
4.8

 
3.5

 
38.2

 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
24.6
%
 
21.6
%
 
3.0

pts.
 
 
Expense rates:
 
 
 
 
 
 
 
 
% of revenue
21.8

 
19.5

 
2.3

 
 
 
% of gross profit
88.7

 
90.2

 
(1.5
)
 
 
 
Return on sales
2.8

 
2.1

 
0.7

 
 
 

The increase in revenue from services in the OCG segment was due primarily to growth in the BPO practice area. Revenue in BPO grew by 11% year over year. This revenue growth was due to the expansion of programs with existing customers and, to a lesser extent, new customers. OCG revenue represented 13% of total Company revenue in the second quarter of 2016 and 12% in the second quarter of 2015.
The change in the OCG gross profit rate was primarily due to increased gross profit rates in RPO, BPO and CWO as a result of customer and business mix within the practice areas.
The increase in SG&A expenses was primarily a result of costs associated with increased volume with existing customers, including salaries and performance-based compensation, as well as costs related to additional sales resources.



27



Results of Operations
Total Company - June Year to Date
(Dollars in millions)