Kelly Services, Inc.
KELLY SERVICES INC (Form: 10-Q, Received: 11/09/2016 15:31:15)
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 October 2, 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 October 28, 2016 , 34,802,738 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
 
39 Weeks Ended
 
October 2,
2016
 
September 27,
2015
 
October 2,
2016
 
September 27,
2015
Revenue from services
$
1,247.8

 
$
1,351.0

 
$
3,972.4

 
$
4,056.6

 
 
 
 
 
 
 
 
Cost of services
1,032.7

 
1,122.8

 
3,294.1

 
3,385.8

 
 
 
 
 
 
 
 
Gross profit
215.1

 
228.2

 
678.3

 
670.8

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
196.3

 
211.6

 
634.9

 
630.6

 
 
 
 
 
 
 
 
Earnings from operations
18.8

 
16.6

 
43.4

 
40.2

 
 
 
 
 
 
 
 
Gain on investment in TS Kelly Asia Pacific
87.2

 

 
87.2

 

 
 
 
 
 
 
 
 
Other expense, net
(0.4
)
 

 
(1.4
)
 
(3.5
)
 
 
 
 
 
 
 
 
Earnings before taxes
105.6

 
16.6

 
129.2

 
36.7

 
 
 
 
 
 
 
 
Income tax expense
24.7

 
7.5

 
28.2

 
17.1

 
 
 
 
 
 
 
 
Net earnings
$
80.9

 
$
9.1

 
$
101.0

 
$
19.6

 
 
 
 
 
 
 
 
Basic earnings per share
$
2.08

 
$
0.23

 
$
2.59

 
$
0.51

Diluted earnings per share
$
2.06

 
$
0.23

 
$
2.58

 
$
0.51

 
 
 
 
 
 
 
 
Dividends per share
$
0.075

 
$
0.05

 
$
0.20

 
$
0.15

 
 
 
 
 
 
 
 
Average shares outstanding (millions):
 
 
 
 
 

 
 

Basic
38.1

 
37.9

 
38.0

 
37.8

Diluted
38.4

 
37.9

 
38.3

 
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
 
39 Weeks Ended
 
October 2,
2016
 
September 27,
2015
 
October 2,
2016
 
September 27,
2015
Net earnings
$
80.9

 
$
9.1

 
$
101.0

 
$
19.6

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax benefit of $1.8 million, $0.2 million, $1.7 million and $0.4 million, respectively
1.8

 
(9.8
)
 
13.1

 
(15.5
)
Less: Reclassification adjustments included in net earnings
0.2

 

 
(0.1
)
 
(0.2
)
Foreign currency translation adjustments
2.0

 
(9.8
)
 
13.0

 
(15.7
)
 
 
 
 
 
 
 
 
Unrealized gains on investment, net of tax expense of $0.6 million, $8.9 million, $4.3 million and $12.7 million, respectively
1.3

 
16.4

 
8.8

 
23.0

 
 
 
 
 
 
 
 
Other comprehensive income
3.3

 
6.6

 
21.8

 
7.3

 
 
 
 
 
 
 
 
Comprehensive income
$
84.2

 
$
15.7

 
$
122.8

 
$
26.9

 
See accompanying unaudited Notes to Consolidated Financial Statements.

4


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS 
(UNAUDITED)
(In millions) 
ASSETS
October 2,
2016
 
January 3,
2016
CURRENT ASSETS:
 
 
 
Cash and equivalents
$
27.6

 
$
42.2

Trade accounts receivable, less allowances of $11.1 and $10.5, respectively
1,125.8

 
1,139.1

Prepaid expenses and other current assets
53.0

 
45.8

Total current assets
1,206.4

 
1,227.1

 
 
 
 
NONCURRENT ASSETS:
 
 
 
Property and equipment:
 
 
 
Property and equipment
271.6

 
361.8

Accumulated depreciation
(191.1
)
 
(272.9
)
Net property and equipment
80.5

 
88.9

Noncurrent deferred taxes
179.8

 
189.3

Goodwill, net
88.4

 
90.3

Investment in equity affiliate
113.6

 
9.4

Other assets
370.6

 
334.6

Total noncurrent assets
832.9

 
712.5

 
 
 
 
TOTAL ASSETS
$
2,039.3

 
$
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
October 2,
2016
 
January 3,
2016
CURRENT LIABILITIES:
 
 
 
Short-term borrowings
$
8.7

 
$
55.5

Accounts payable and accrued liabilities
408.7

 
405.5

Accrued payroll and related taxes
276.9

 
268.1

Accrued insurance
26.8

 
26.7

Income and other taxes
56.9

 
60.0

Total current liabilities
778.0

 
815.8

 
 
 
 
NONCURRENT LIABILITIES:
 
 
 
Accrued insurance
40.2

 
40.0

Accrued retirement benefits
153.9

 
141.0

Other long-term liabilities
50.7

 
47.4

Total noncurrent liabilities
244.8

 
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, 1.9 shares at 2016 and 2.1 Shares at 2015
(38.5
)
 
(43.7
)
Class B common stock
(0.6
)
 
(0.6
)
Paid-in capital
26.2

 
25.4

Earnings invested in the business
906.8

 
813.5

Accumulated other comprehensive income
82.5

 
60.7

Total stockholders’ equity
1,016.5

 
895.4

 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,039.3

 
$
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
 
39 Weeks Ended
 
October 2,
2016
 
September 27,
2015
 
October 2,
2016
 
September 27,
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
(41.5
)
 
(48.4
)
 
(43.7
)
 
(49.2
)
Issuance of restricted stock and other
3.0

 
2.1

 
5.2

 
2.9

Balance at end of period
(38.5
)
 
(46.3
)
 
(38.5
)
 
(46.3
)
 
 
 
 
 
 
 
 
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
28.1

 
27.5

 
25.4

 
24.9

Issuance of restricted stock and other
(1.9
)
 
(0.8
)
 
0.8

 
1.8

Balance at end of period
26.2

 
26.7

 
26.2

 
26.7

 
 
 
 
 
 
 
 
Earnings Invested in the Business
 
 
 
 
 
 
 
Balance at beginning of period
828.8

 
774.1

 
813.5

 
767.4

Net earnings
80.9

 
9.1

 
101.0

 
19.6

Dividends
(2.9
)
 
(1.9
)
 
(7.7
)
 
(5.7
)
Balance at end of period
906.8

 
781.3

 
906.8

 
781.3

 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
Balance at beginning of period
79.2

 
51.8

 
60.7

 
51.1

Other comprehensive income, net of tax
3.3

 
6.6

 
21.8

 
7.3

Balance at end of period
82.5

 
58.4

 
82.5

 
58.4

 
 
 
 
 
 
 
 
Stockholders’ Equity at end of period
$
1,016.5

 
$
859.6

 
$
1,016.5

 
$
859.6

See accompanying unaudited Notes to Consolidated Financial Statements.

7


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions of dollars)
 
 
39 Weeks Ended
 
October 2,
2016
 
September 27,
2015
Cash flows from operating activities:
 
 
 
Net earnings
$
101.0

 
$
19.6

Noncash adjustments:
 
 
 
Depreciation and amortization
16.0

 
16.6

Provision for bad debts
6.1

 
3.3

Stock-based compensation
5.5

 
4.6

Gain on investment in TS Kelly Asia Pacific equity affiliate
(87.2
)
 

Other, net
(2.2
)
 
(0.7
)
Changes in operating assets and liabilities
(13.1
)
 
(44.9
)
 
 
 
 
Net cash from (used in) operating activities
26.1

 
(1.5
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(7.8
)
 
(12.3
)
Net cash proceeds from investment in TS Kelly Asia Pacific equity affiliate
18.8

 

Investment in TS Kelly equity affiliate

 
(0.5
)
Other investing activities
(0.4
)
 
(0.4
)
 
 
 
 
Net cash from (used in) investing activities
10.6

 
(13.2
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net change in short-term borrowings
(47.8
)
 
(13.8
)
Dividend payments
(7.7
)
 
(5.7
)
Other financing activities
0.4

 
0.2

 
 
 
 
Net cash used in financing activities
(55.1
)
 
(19.3
)
 
 
 
 
Effect of exchange rates on cash and equivalents
3.8

 
(4.2
)
 
 
 
 
Net change in cash and equivalents
(14.6
)
 
(38.2
)
Cash and equivalents at beginning of period
42.2

 
83.1

 
 
 
 
 
 
 
 
Cash and equivalents at end of period
$
27.6

 
$
44.9

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 third fiscal quarter ended on October 2, 2016 ( 2016 ) and September 27, 2015 ( 2015 ), each of which contained 13 weeks. The corresponding September year to date periods for 2016 and 2015 each contained 39 weeks.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the current year’s presentation.

2.  Investment in TS Kelly Asia Pacific
On July 4, 2016, the Company and Temp Holdings Co., Ltd. (“Temp Holdings”), a leading integrated human resources company in Japan, completed a transaction to form a new joint venture, TS Kelly Asia Pacific. The Company transferred its Asia Pacific staffing operations and certain APAC OCG businesses in exchange for a 49% ownership interest in TS Kelly Asia Pacific and $36.5 million in cash received at closing. The Company subsequently deconsolidated the contributed APAC staffing and OCG operations and recorded a $104.2 million investment in equity affiliate on the consolidated balance sheet, which represented the fair value of the Company’s ownership interest in TS Kelly Asia Pacific as of July 4, 2016. The operating results of the Company’s interest in TS Kelly Asia Pacific will be accounted for on a one-quarter lag under the equity method. Accordingly, the consolidated financial statements for the third quarter of 2016 do not include operating results for TS Kelly Asia Pacific. In the fourth quarter, the Company will also receive a $4.5 million post-close cash true-up adjustment from Temp Holdings. The Company’s interest in TS Kelly Workforce Solutions is expected to be transferred to TS Kelly Asia Pacific in the fourth quarter under the terms of the transaction agreement.
The Company recorded a pretax gain of $87.2 million on the investment in TS Kelly Asia Pacific in the consolidated statement of earnings which represents the fair value of the Company’s retained investment in TS Kelly Asia Pacific in addition to the cash received less the carrying value of net assets transferred to the joint venture. Income taxes of $23.5 million on this gain result primarily from recording deferred income taxes on outside basis differences. The fair value of the Company’s contributed operations was determined using both an income-based and market-based approach. The income approach utilized a discounted cash flow analysis which included significant assumptions about the timing of future cash flows, growth rates, and discount rates commensurate with the underlying risks of the investment. The market approach entailed deriving market multiples from publicly traded companies with similar financial and operating characteristics to TS Kelly Asia Pacific and corroborated the results of the discounted cash flow method.
As part of this transaction, the Company deconsolidated the goodwill related to the contributed entities in our APAC PT and OCG segments amounting to $1.9 million .
The amount due to TS Kelly Asia Pacific was $2.1 million as of third quarter-end 2016.
3.  Fair Value Measurements
Trade accounts receivable, short-term borrowings, accounts payable, accrued liabilities and accrued payroll and related taxes approximate their fair values due to the short-term maturities of these assets and liabilities.
Assets Measured at Fair Value on a Recurring Basis
The following tables present assets measured at fair value on a recurring basis on the consolidated balance sheet as of third quarter-end 2016 and year-end 2015 by fair value hierarchy level, as described below.

9

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

Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 measurements include significant unobservable inputs.
 
 
Fair Value Measurements on a Recurring Basis
As of Third Quarter-End 2016
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In millions of dollars)
Money market funds
 
$
4.0

 
$
4.0

 
$

 
$

Available-for-sale investment
 
158.6

 
158.6

 

 

 
 
 
 
 
 
 
 
 
Total assets at fair value
 
$
162.6

 
$
162.6

 
$

 
$

 
 
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 third quarter-end 2016 represent investments in government money market accounts, and as of year-end 2015 represent investments in prime 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 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 $1.3 million for the third quarter of 2016 and $16.4 million for the third 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 $8.8 million for September year to date 2016 and $23.0 million for September 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 $20.4 million as of the third quarter-end 2016 and $17.2 million at year-end 2015 .


10

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

4. Restructuring
 
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

Reductions for cash payments related to all restructuring activities
(1.6
)
Balance as of third quarter-end 2016
$
1.2

The remaining balance of $1.2 million as of third quarter-end 2016 represents primarily severance costs, and the majority is expected to be paid by the end of 2016. No material adjustments are expected to be recorded.


11

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

5. Goodwill
The changes in the net carrying amount of goodwill as of third quarter-end 2016 are included in the table below. See Investment in TS Kelly Asia Pacific footnote for a description of adjustments to APAC PT and OCG goodwill.
 
As of Year-End 2015
 
 
 
As of Third Quarter-End 2016
 
Goodwill,
Gross
 
Accumulated Impairment Losses
 
Adjustments
to Goodwill
 
Goodwill,
Gross
 
Accumulated Impairment Losses
 
Goodwill,
Net
 
(In millions of dollars)
Americas
 
 
 
 
 
 
 
 
 
 
 
Americas Commercial
$
40.0

 
$
(16.4
)
 
$

 
$
40.0

 
$
(16.4
)
 
$
23.6

Americas PT
37.9

 

 

 
37.9

 

 
37.9

Total Americas
77.9

 
(16.4
)
 

 
77.9

 
(16.4
)
 
61.5

 
 
 
 
 
 
 
 
 
 
 
 
EMEA
 
 
 
 
 
 
 
 
 
 
 
EMEA Commercial
50.4

 
(50.4
)
 

 
50.4

 
(50.4
)
 

EMEA PT
22.0

 
(22.0
)
 

 
22.0

 
(22.0
)
 

Total EMEA
72.4

 
(72.4
)
 

 
72.4

 
(72.4
)
 

 
 
 
 
 
 
 
 
 
 
 
 
APAC
 
 
 
 
 
 
 
 
 
 
 
APAC Commercial
12.1

 
(12.1
)
 

 
12.1

 
(12.1
)
 

APAC PT
1.4

 

 
(1.4
)
 

 

 

Total APAC
13.5

 
(12.1
)
 
(1.4
)
 
12.1

 
(12.1
)
 

 
 
 
 
 
 
 
 
 
 
 
 
OCG
27.4

 

 
(0.5
)
 
26.9

 

 
26.9

Consolidated Total
$
191.2

 
$
(100.9
)
 
$
(1.9
)
 
$
189.3

 
$
(100.9
)
 
$
88.4



12

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

6.  Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income by component, net of tax, for the third quarter and September year to date 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.
 
Third Quarter 2016
 
Foreign
Currency
Translation Adjustments
 
Unrealized
Gains and
Losses on Investment
 
Pension
Liability Adjustments
 
Total
 
(In millions of dollars)
Beginning balance
$
(11.6
)
 
$
92.4

 
$
(1.6
)
 
$
79.2

Other comprehensive income before reclassifications
1.8

 
1.3

 

 
3.1

Amounts reclassified from accumulated other comprehensive income
0.2

 

 

 
0.2

Net current-period other comprehensive income
2.0

 
1.3

 

 
3.3

 
 
 
 
 
 
 
 
Ending balance
$
(9.6
)
 
$
93.7

 
$
(1.6
)
 
$
82.5

 
September 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
13.1

 
8.8

 

 
21.9

Amounts reclassified from accumulated other comprehensive income
(0.1
)
 

 

 
(0.1
)
Net current-period other comprehensive income
13.0

 
8.8

 

 
21.8

 
 
 
 
 
 
 
 
Ending balance
$
(9.6
)
 
$
93.7

 
$
(1.6
)
 
$
82.5

 
Third Quarter 2015
 
Foreign
Currency
Translation Adjustments
 
Unrealized
Gains and
Losses on Investment
 
Pension
Liability Adjustments
 
Total
 
(In millions of dollars)
Beginning balance
$
(8.9
)
 
$
62.9

 
$
(2.2
)
 
$
51.8

Other comprehensive income (loss) before reclassifications
(9.8
)
 
16.4

 

 
6.6

Amounts reclassified from accumulated other comprehensive income

 

 

 

Net current-period other comprehensive income (loss)
(9.8
)
 
16.4

 

 
6.6

 
 
 
 
 
 
 
 
Ending balance
$
(18.7
)
 
$
79.3

 
$
(2.2
)
 
$
58.4


13

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

 
September 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
(15.5
)
 
23.0

 

 
7.5

Amounts reclassified from accumulated other comprehensive income
(0.2
)
 

 

 
(0.2
)
Net current-period other comprehensive income (loss)
(15.7
)
 
23.0

 

 
7.3

 
 
 
 
 
 
 
 
Ending balance
$
(18.7
)
 
$
79.3

 
$
(2.2
)
 
$
58.4


7.  Earnings Per Share
The reconciliation of basic and diluted earnings per share on common stock for the third quarter and September year to date 2016 and 2015 follows (in millions of dollars except per share data):
 
Third Quarter
 
September Year to Date
 
2016
 
2015
 
2016
 
2015
Net earnings
$
80.9

 
$
9.1

 
$
101.0

 
$
19.6

Less: earnings allocated to participating securities
(1.8
)
 
(0.2
)
 
(2.3
)
 
(0.5
)
Net earnings available to common shareholders
$
79.1

 
$
8.9

 
$
98.7

 
$
19.1

 
 
 
 
 
 
 
 
Average shares outstanding (millions):
 
 
 
 
 
 
 
Basic
38.1

 
37.9

 
38.0

 
37.8

Dilutive share awards
0.3

 

 
0.3

 

Diluted
38.4

 
37.9

 
38.3

 
37.8

 
 
 
 
 
 
 
 
Basic earnings per share
$
2.08

 
$
0.23

 
$
2.59

 
$
0.51

Diluted earnings per share
$
2.06

 
$
0.23

 
$
2.58

 
$
0.51

Potentially dilutive shares outstanding are primarily related to performance shares for the third quarter and September 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 third quarter and September year to date 2016 and 2015 were not significant.

8.  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.

14

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

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 third quarter-end 2016 , the current fair value for financial measure performance shares was $18.34 .
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 third quarter 2016 and 2015 , respectively, total compensation expense related to all performance shares was $1.0 million and $0.8 million , and the related tax benefit was $0.4 million and $0.3 million . For September year to date 2016 and 2015 , respectively, total compensation expense related to all performance shares was $3.1 million and $1.1 million , and the related tax benefit was $1.2 million and $0.4 million .

9.  Other Expense, Net  
Included in other expense, net for the third quarter and September year to date 2016 and 2015 are the following: 
 
Third Quarter
 
September Year to Date
 
2016
 
2015
 
2016
 
2015
 
(In millions of dollars)
Interest income
$
0.2

 
$
0.1

 
$
0.3

 
$
0.3

Interest expense
(0.9
)
 
(0.9
)
 
(2.7
)
 
(2.7
)
Dividend income

 

 
0.6

 
0.4

Net loss on equity investment

 
(0.1
)
 
(0.1
)
 
(0.7
)
Foreign exchange gain (loss)
0.3

 
0.9

 
0.5

 
(0.8
)
 
 
 
 
 
 
 
 
Other expense, net
$
(0.4
)
 
$

 
$
(1.4
)
 
$
(3.5
)
 

10.  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 on 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.


15

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

11.  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 Company may change how it allocates resources and analyzes performance, which 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 third quarter and September year to date 2016 and 2015 . Segment information for 2016 is impacted by the transfer of the APAC Commercial, APAC PT and certain OCG businesses to TS Kelly Asia Pacific in the third quarter of 2016 (see Investment in TS Kelly Asia Pacific footnote).
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.
 
Third Quarter
 
September Year to Date
 
2016
 
2015
 
2016
 
2015
 
(In millions of dollars)
Revenue from Services:
 
 
 
 
 
 
 
Americas Commercial
$
603.7

 
$
615.5

 
$
1,887.6

 
$
1,908.2

Americas PT
239.6

 
242.8

 
718.3

 
721.8

Total Americas Commercial and PT
843.3

 
858.3

 
2,605.9

 
2,630.0

 
 
 
 
 
 
 
 
EMEA Commercial
197.6

 
199.0

 
570.2

 
573.0

EMEA PT
41.7

 
43.6

 
126.4

 
126.8

Total EMEA Commercial and PT
239.3

 
242.6

 
696.6

 
699.8

 
 
 
 
 
 
 
 
APAC Commercial

 
83.2

 
170.7

 
259.1

APAC PT

 
9.9

 
18.3

 
30.7

Total APAC Commercial and PT

 
93.1

 
189.0

 
289.8

 
 
 
 
 
 
 
 
OCG
178.2

 
171.8

 
520.3

 
486.3

 
 
 
 
 
 
 
 
Less: Intersegment revenue
(13.0
)
 
(14.8
)
 
(39.4
)
 
(49.3
)
 
 
 
 
 
 
 
 
Consolidated Total
$
1,247.8

 
$
1,351.0

 
$
3,972.4

 
$
4,056.6


16

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

 
Third Quarter
 
September Year to Date
 
2016
 
2015
 
2016
 
2015
 
(In millions of dollars)
Earnings from Operations:
 
 
 
 
 
 
 
Americas Commercial gross profit
$
94.9

 
$
96.6

 
$
295.9

 
$
290.3

Americas PT gross profit
41.4

 
41.0

 
124.3

 
122.0

Americas Region gross profit
136.3

 
137.6

 
420.2

 
412.3

Americas Region SG&A expenses
(112.2
)
 
(113.7
)
 
(342.7
)
 
(339.8
)
Americas Region Earnings from Operations
24.1

 
23.9

 
77.5

 
72.5

 
 
 
 
 
 
 
 
EMEA Commercial gross profit
26.8

 
27.7

 
77.5

 
79.1

EMEA PT gross profit
8.2

 
9.4

 
25.6

 
27.2

EMEA Region gross profit
35.0

 
37.1

 
103.1

 
106.3

EMEA Region SG&A expenses
(30.6
)
 
(31.8
)
 
(94.1
)
 
(99.5
)
EMEA Region Earnings from Operations
4.4

 
5.3

 
9.0

 
6.8

 
 
 
 
 
 
 
 
APAC Commercial gross profit

 
10.7

 
23.3

 
34.9

APAC PT gross profit

 
2.5

 
5.0

 
8.1

APAC Region gross profit

 
13.2

 
28.3

 
43.0

APAC Region SG&A expenses

 
(11.1
)
 
(22.7
)
 
(35.5
)
APAC Region Earnings from Operations

 
2.1

 
5.6

 
7.5

 
 
 
 
 
 
 
 
OCG gross profit
45.0

 
41.4

 
130.1

 
112.6

OCG SG&A expenses
(37.3
)
 
(33.2
)
 
(112.2
)
 
(98.1
)
OCG Earnings from Operations
7.7

 
8.2

 
17.9

 
14.5

 
 
 
 
 
 
 
 
Less: Intersegment gross profit
(1.2
)
 
(1.1
)
 
(3.4
)
 
(3.4
)
Less: Intersegment SG&A expenses
1.2

 
1.1

 
3.4

 
3.4

Net Intersegment Activity

 

 

 

 
 
 
 
 
 
 
 
Corporate
(17.4
)
 
(22.9
)
 
(66.6
)
 
(61.1
)
Consolidated Total
18.8

 
16.6

 
43.4

 
40.2

Gain on investment in TS Kelly Asia Pacific
87.2

 

 
87.2

 

Other Expense, Net
(0.4
)
 

 
(1.4
)
 
(3.5
)
 
 
 
 
 
 
 
 
Earnings Before Taxes
$
105.6

 
$
16.6

 
$
129.2

 
$
36.7



17

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

12.  New Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15 clarifying how entities should classify certain cash receipts and payments on the statement of cash flows. The new guidance addresses classification of cash flows related to the following transactions: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies; 6) distributions received from equity method investees; and 7) beneficial interests in securitization transaction. ASU 2016-15 also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and requires 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 June 2016, the FASB issued ASU 2016-13 amending how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model which is a new impairment model based on expected losses. Under this model, an entity recognizes an allowance for expected credit losses based on historical experience, current conditions and forecasted information rather than the current methodology of delaying recognition of credit losses until it is probable a loss has been incurred. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019 with early adoption permitted for annual reporting periods beginning after December 15, 2018. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued 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

18

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

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 ending after December 15, 2016 and for interim periods thereafter. 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, 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.

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 professional/technical 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 56 days on a global basis as of the 2016 third quarter end, 54 days as of the 2015 year end and 57 days as of the 2015 third 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, and have since completed that joint venture, TS Kelly Asia Pacific. 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 in the second quarter. Kelly’s third quarter results confirm the actions taken as we continue our commitment to our strategy and to driving improved profitability within our operating segments:
Earnings from operations for the third quarter of 2016 totaled $18.8 million, compared to $16.6 million in the third quarter of 2015. Conversion rate for the third quarter was 8.7%, compared to 7.3% in the same period last year.
In the OCG segment, earnings from operations totaled $7.7 million, compared to $8.2 million the same period last year. OCG continued to deliver gross profit growth, but investments in additional headcount and sales resources lowered overall operating profit. Solid growth in BPO continues, which is 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 and began to show signs of stabilization in the third quarter. Overall Americas PT revenue fell 1% 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 consistent year-over-year earnings from operations.
Despite uneven economic conditions, EMEA continues to execute against its strategy. For the quarter, EMEA delivered $4.4 million of earnings from operations, compared to $5.3 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 - Third Quarter
(Dollars in millions)
 
2016
 
2015
 
Change
 
CC
Change
Revenue from services
$
1,247.8

 
$
1,351.0

 
(7.6
)%
 
 
   (7.1
)%
Staffing fee-based income
13.2

 
16.5

 
(19.9
)
 
 
(19.3
)
Gross profit
215.1

 
228.2

 
(5.8
)
 
 
(5.3
)
Total SG&A expenses
196.3

 
211.6

 
(7.3
)
 
 
(6.9
)
Earnings from operations
18.8

 
16.6

 
13.1

 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
17.2
%
 
16.9
%
 
0.3

pts.
 
 
Expense rates:
 
 
 
 
 
 
 
 
% of revenue
15.7

 
15.7

 

 
 
 
% of gross profit
91.3

 
92.7

 
(1.4
)
 
 
 
Return on sales
1.5

 
1.2

 
0.3

 
 
 
Conversion rate
8.7

 
7.3

 
1.4

 
 
 

During the third quarter of 2016, we transferred our APAC staffing and certain APAC OCG businesses in exchange for a 49% interest in the TS Kelly Asia Pacific joint venture. Accordingly, third quarter 2016 results of operations reflect the impact of transferring these operations to the joint venture.
Total Company revenue from services for the third quarter of 2016 was down 7.6% in comparison to the prior year and down 7.1% on a CC basis. The decrease was due to the effect of the transfer of the APAC staffing operations, as well as the changes noted in the following Americas and EMEA region discussions.
The gross profit rate increased by 30 basis points, of which the transfer of APAC businesses accounted for 20 basis points. Additionally, as more fully described in the following discussions, increases in the Americas and OCG gross profit rates were partially offset by a decline in the gross profit rate in the EMEA region.
Total SG&A expenses decreased 7.3% on a reported basis and 6.9% on a CC basis. The reduction in SG&A expenses for the third quarter of 2016 reflects the transfer of APAC staffing operations, as well as decreases in expense in our staffing operations. These decreases were partially offset by an increase in SG&A expenses in OCG, reflecting continued investment in that operating segment. Also included in total SG&A expenses is a one-time savings of $7.5 million related to the reduction in performance-based compensation expenses.
Income tax expense for the third quarter of 2016 was $24.7 million, compared to $7.5 million for the third 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 increase in income tax expense from the prior year is primarily due to tax expense of $23.5 million from the gain on the investment in TS Kelly Asia Pacific, the impact of which is partially offset by the reinstatement of the work opportunity credit program and improved non-taxable investment income. Valuation allowances in certain foreign countries could be reduced up to $7 million 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 third quarter of 2016 were $2.06, as compared to $0.23 for the third quarter of 2015.


23



Total Americas - Third Quarter
(Dollars in millions)
 
2016
 
2015
 
Change
 
CC
Change
Revenue from services
$
843.3

 
$
858.3

 
(1.8
)%
 
 
   (1.3)%
Staffing fee-based income
8.6

 
8.5

 
0.6

 
 
0.7
Gross profit
136.3

 
137.6

 
(1.0
)
 
 
(0.6)
Total SG&A expenses
112.2

 
113.7

 
(1.4
)
 
 
(1.2)
Earnings from operations
24.1

 
23.9

 
1.0

 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
16.2
%
 
16.0
%
 
0.2

pts.
 
 
Expense rates:
 
 
 
 
 
 
 
 
% of revenue
13.3

 
13.2

 
0.1

 
 
 
% of gross profit
82.3

 
82.7

 
(0.4
)
 
 
 
Return on sales
2.9

 
2.8

 
0.1

 
 
 

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 inflation and the resulting impact on the bill rate. Americas represented 68% of total Company revenue in the third quarter of 2016 and 64% in the third quarter of 2015.
Revenue in our Commercial segment was down 2% on a reported basis 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 1% in comparison to the prior year. We had a revenue decrease of 3% in the accounts serviced through our centralized delivery model, partially offset by a 3% revenue increase in the accounts serviced through our branch delivery network. Revenue increased in our finance and IT products, while revenue in our science and engineering 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, partially offset by an increase in our workers’ compensation cost as compared to a year ago.
Total SG&A expenses decreased 1.4% on a reported basis and 1.2% on a CC basis, due primarily to lower salary cost as a result of the cost reduction initiatives we took in the second quarter of 2016.


24



Total EMEA - Third Quarter
(Dollars in millions)
 
2016
 
2015
 
Change
 
CC
Change
Revenue from services
$
239.3

 
$
242.6

 
(1.4
)%
 
 
   0.3%
Staffing fee-based income
5.5

 
5.8

 
(4.6
)
 
 
(2.9)
Gross profit
35.0

 
37.1

 
(5.6
)
 
 
(4.6)
Total SG&A expenses
30.6

 
31.8

 
(3.5
)
 
 
(2.0)
Earnings from operations
4.4

 
5.3

 
(17.8
)
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
14.7
%
 
15.3
%
 
(0.6
)
pts.
 
 
Expense rates:
 
 
 
 
 
 
 
 
% of revenue
12.8

 
13.1

 
(0.3
)
 
 
 
% of gross profit
87.3

 
85.4

 
1.9

 
 
 
Return on sales
1.9

 
2.2

 
(0.3
)
 
 
 

The change in EMEA revenue from services was due to a 4% decrease in average bill rates (a 2% decrease on a CC basis) due to country mix, partially offset by a 2% increase in hours volume. The increase in hours volume was due to Portugal, partially offset by a decrease in the U.K. EMEA represented 19% of total Company revenue in the third quarter of 2016 and 18% in the third 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 an unfavorable customer mix in Switzerland and the U.K. Staffing fee-based income decreased primarily in Western Europe, with demand mainly weakening in the U.K.
Total SG&A expenses decreased 3.5% on a reported basis and 2.0% on a CC basis, due to effective cost control in headquarters expenses across the region, partially offset by targeted investments in our branch network.



25



OCG - Third Quarter
(Dollars in millions)
 
2016
 
2015
 
Change
 
CC
Change
Revenue from services
$
178.2

 
$
171.8

 
3.7
%
 
 
   3.9%
Gross profit
45.0

 
41.4

 
8.5

 
 
8.9
SG&A expenses
37.3

 
33.2

 
12.3

 
 
12.8
Earnings from operations
7.7

 
8.2

 
(7.0
)
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
25.2
%
 
24.1
%
 
1.1

pts.
 
 
Expense rates:
 
 
 
 
 
 
 
 
% of revenue
20.9

 
19.3

 
1.6

 
 
 
% of gross profit
83.0

 
80.2

 
2.8

 
 
 
Return on sales
4.3

 
4.8

 
(0.5
)
 
 
 

The increase in revenue from services in the OCG segment was due primarily to growth in the BPO and RPO practice areas. Revenue in BPO grew by 6% year over year and RPO revenue increased 7%. This revenue growth was due to the expansion of programs with existing customers and, to a lesser extent, new customers. OCG revenue represented 14% of total Company revenue in the third quarter of 2016 and 13% in the third 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 increased headcount, as well as costs related to additional sales resources, including performance-based compensation.