Kelly Services, Inc.
KELLY SERVICES INC (Form: 10-Q, Received: 08/09/2017 14:23:30)
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 2, 2017
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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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 [  ]
Emerging growth company [  ]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]
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 31, 2017 , 34,871,144 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 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
Revenue from services
$
1,333.6

 
$
1,375.5

 
$
2,623.3

 
$
2,724.6

 
 
 
 
 
 
 
 
Cost of services
1,104.8

 
1,145.0

 
2,162.9

 
2,261.4

 
 
 
 
 
 
 
 
Gross profit
228.8

 
230.5

 
460.4

 
463.2

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
208.5

 
220.6

 
423.7

 
438.6

 
 
 
 
 
 
 
 
Earnings from operations
20.3

 
9.9

 
36.7

 
24.6

 
 
 
 
 
 
 
 
Other expense, net
0.5

 

 
2.1

 
0.9

 
 
 
 
 
 
 
 
Earnings before taxes and equity in net earnings (loss) of affiliate
19.8

 
9.9

 
34.6

 
23.7

 
 
 
 
 
 
 
 
Income tax expense
1.5

 
0.8

 
4.2

 
3.5

 
 
 
 
 
 
 
 
Net earnings before equity in net earnings (loss) of affiliate
18.3

 
9.1

 
30.4

 
20.2

 
 
 
 
 
 
 
 
Equity in net earnings (loss) of affiliate
0.4

 
(0.2
)
 
0.5

 
(0.1
)
 
 
 
 
 
 
 
 
Net earnings
$
18.7

 
$
8.9

 
$
30.9

 
$
20.1

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.48

 
$
0.23

 
$
0.79

 
$
0.52

Diluted earnings per share
$
0.47

 
$
0.23

 
$
0.78

 
$
0.51

 
 
 
 
 
 
 
 
Dividends per share
$
0.075

 
$
0.075

 
$
0.150

 
$
0.125

 
 
 
 
 
 
 
 
Average shares outstanding (millions):
 
 
 
 
 

 
 

Basic
38.3

 
38.0

 
38.3

 
38.0

Diluted
38.8

 
38.3

 
38.7

 
38.2

 
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 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
Net earnings
$
18.7

 
$
8.9

 
$
30.9

 
$
20.1

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax expense of $0.0, tax benefit of $0.1, tax expense of $0.1 and $0.1, respectively
6.9

 
(0.6
)
 
12.6

 
11.3

Less: Reclassification adjustments included in net earnings

 

 

 
(0.3
)
Foreign currency translation adjustments
6.9

 
(0.6
)
 
12.6

 
11.0

 
 
 
 
 
 
 
 
Unrealized gains on investment, net of tax expense of $0.4, $7.7, $9.0 and $3.7, respectively
0.9

 
15.6

 
19.8

 
7.5

 
 
 
 
 
 
 
 
Other comprehensive income
7.8

 
15.0

 
32.4

 
18.5

 
 
 
 
 
 
 
 
Comprehensive income
$
26.5

 
$
23.9

 
$
63.3

 
$
38.6

 
See accompanying unaudited Notes to Consolidated Financial Statements.

4


KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS 
(UNAUDITED)
(In millions) 
ASSETS
July 2,
2017
 
January 1,
2017
CURRENT ASSETS:
 
 
 
Cash and equivalents
$
60.8

 
$
29.6

Trade accounts receivable, less allowances of $12.7 and $12.5, respectively
1,188.1

 
1,138.3

Prepaid expenses and other current assets
61.8

 
46.7

Total current assets
1,310.7

 
1,214.6

 
 
 
 
NONCURRENT ASSETS:
 
 
 
Property and equipment:
 
 
 
Property and equipment
280.3

 
270.0

Accumulated depreciation
(198.8
)
 
(189.2
)
Net property and equipment
81.5

 
80.8

Deferred taxes
185.8

 
180.1

Goodwill
88.4

 
88.4

Investment in equity affiliate
115.2

 
114.8

Other assets
402.5

 
349.4

Total noncurrent assets
873.4

 
813.5

 
 
 
 
TOTAL ASSETS
$
2,184.1

 
$
2,028.1

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 2,
2017
 
January 1,
2017
CURRENT LIABILITIES:
 
 
 
Short-term borrowings
$
0.7

 
$

Accounts payable and accrued liabilities
476.1

 
455.1

Accrued payroll and related taxes
286.4

 
241.5

Accrued insurance
22.8

 
23.4

Income and other taxes
57.0

 
51.1

Total current liabilities
843.0

 
771.1

 
 
 
 
NONCURRENT LIABILITIES:
 
 
 
Accrued insurance
44.2

 
45.5

Accrued retirement benefits
170.1

 
157.4

Other long-term liabilities
53.4

 
42.1

Total noncurrent liabilities
267.7

 
245.0

 
 
 
 
Commitments and contingencies (see contingencies footnote)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
Capital stock, $1.00 par value
 
 
 
Class A common stock, shares issued 36.6 at 2017 and 2016
36.6

 
36.6

Class B common stock, shares issued 3.5 at 2017 and 2016
3.5

 
3.5

Treasury stock, at cost
 
 
 
Class A common stock, 1.8 shares at 2017 and 1.9 shares at 2016
(37.0
)
 
(38.4
)
Class B common stock
(0.6
)
 
(0.6
)
Paid-in capital
31.1

 
28.6

Earnings invested in the business
948.7

 
923.6

Accumulated other comprehensive income
91.1

 
58.7

Total stockholders’ equity
1,073.4

 
1,012.0

 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,184.1

 
$
2,028.1

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 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
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
(37.5
)
 
(43.1
)
 
(38.4
)
 
(43.7
)
Issuance of restricted stock and other
0.5

 
1.6

 
1.4

 
2.2

Balance at end of period
(37.0
)
 
(41.5
)
 
(37.0
)
 
(41.5
)
 
 
 
 
 
 
 
 
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
31.5

 
27.4

 
28.6

 
25.4

Issuance of restricted stock and other
(0.4
)
 
0.7

 
2.5

 
2.7

Balance at end of period
31.1

 
28.1

 
31.1

 
28.1

 
 
 
 
 
 
 
 
Earnings Invested in the Business
 
 
 
 
 
 
 
Balance at beginning of period
932.9

 
822.8

 
923.6

 
813.5

Net earnings
18.7

 
8.9

 
30.9

 
20.1

Dividends
(2.9
)
 
(2.9
)
 
(5.8
)
 
(4.8
)
Balance at end of period
948.7

 
828.8

 
948.7

 
828.8

 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
Balance at beginning of period
83.3

 
64.2

 
58.7

 
60.7

Other comprehensive income, net of tax
7.8

 
15.0

 
32.4

 
18.5

Balance at end of period
91.1

 
79.2

 
91.1

 
79.2

 
 
 
 
 
 
 
 
Stockholders’ Equity at end of period
$
1,073.4

 
$
934.1

 
$
1,073.4

 
$
934.1

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 2,
2017
 
July 3,
2016
Cash flows from operating activities:
 
 
 
Net earnings
$
30.9

 
$
20.1

Noncash adjustments:
 
 
 
Depreciation and amortization
10.6

 
10.9

Provision for bad debts
2.9

 
3.5

Stock-based compensation
3.6

 
4.5

Other, net
(0.5
)
 
(0.7
)
Changes in operating assets and liabilities
(3.5
)
 
2.9

 
 
 
 
Net cash from operating activities
44.0

 
41.2

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(7.3
)
 
(4.3
)
Other investing activities
(0.1
)
 
(0.4
)
 
 
 
 
Net cash used in investing activities
(7.4
)
 
(4.7
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net change in short-term borrowings
0.7

 
(29.1
)
Dividend payments
(5.8
)
 
(4.8
)
Other financing activities
(0.1
)
 
0.2

 
 
 
 
Net cash used in financing activities
(5.2
)
 
(33.7
)
 
 
 
 
Effect of exchange rates on cash and equivalents
(0.2
)
 
6.4

 
 
 
 
Net change in cash and equivalents
31.2

 
9.2

Less: cash balance included in current assets held for sale

 
(18.1
)
Cash and equivalents at beginning of period
29.6

 
42.2

 
 
 
 
 
 
 
 
Cash and equivalents at end of period
$
60.8

 
$
33.3

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 1, 2017 , included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 17, 2017 (the 2016 consolidated financial statements). The Company’s second fiscal quarter ended on July 2, 2017 ( 2017 ) and July 3, 2016 ( 2016 ), each of which contained 13 weeks. The corresponding June year to date periods for 2017 and 2016 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.

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
The Company has a 49% ownership interest in TS Kelly Asia Pacific. The operating results of the Company’s interest in TS Kelly Asia Pacific are accounted for on a one-quarter lag under the equity method and are reported in the equity in net earnings (loss) of affiliate in the consolidated statement of earnings. These operating results include the operating results of the Company’s interest in TS Kelly Workforce Solutions, a previous joint venture in which the Company held a 49% interest, which was transferred to TS Kelly Asia Pacific during the first quarter of 2017. As of the second quarter-end 2016, the Company presented the assets and liabilities of its Asia Pacific staffing operations as held for sale on the consolidated balance sheet which were subsequently included in the formation of TS Kelly Asia Pacific.
The investment in equity affiliate on the Company’s consolidated balance sheet totaled $115.2 million as of second quarter-end 2017 and $114.8 million as of year-end 2016 . The net amount due to TS Kelly Asia Pacific, a related party, was $1.6 million as of the second quarter-end 2017 and $1.1 million as of year-end 2016 . The amount included in trade accounts payable for staffing services provided by TS Kelly Asia Pacific as a supplier to CWO programs was $3.6 million as of second quarter-end 2017 and $3.1 million as of year-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 second quarter-end 2017 and year-end 2016 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.

9

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

 
 
Fair Value Measurements on a Recurring Basis
As of Second Quarter-End 2017
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In millions of dollars)
Money market funds
 
$
38.5

 
$
38.5

 
$

 
$

Available-for-sale investment
 
170.7

 
170.7

 

 

 
 
 
 
 
 
 
 
 
Total assets at fair value
 
$
209.2

 
$
209.2

 
$

 
$

 
 
Fair Value Measurements on a Recurring Basis
As of Year-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
 
141.2

 
141.2

 

 

 
 
 
 
 
 
 
 
 
Total assets at fair value
 
$
145.2

 
$
145.2

 
$

 
$

Money market funds as of second quarter-end 2017 represents investments in money market accounts, of which $34.5 million is included in cash and equivalents on the consolidated balance sheet and $4.0 million is restricted as to use and included in other assets on the consolidated balance sheet. Money market funds as of year-end 2016 represent investments in money market accounts, all of which are restricted as to use and included in other assets on the consolidated balance sheet. The valuations of money market funds 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 Persol Holdings (formerly Temp Holdings), the Company’s joint venture partner in TS Kelly Asia Pacific, and is included in other assets on the consolidated balance sheet. The valuation is based on the quoted market price of Persol Holdings stock on the Tokyo Stock Exchange as of the period end. The unrealized gain, net of tax, of $0.9 million for the second quarter of 2017 and $15.6 million for the second quarter of 2016 was recorded in other comprehensive income, and in accumulated other comprehensive income, a component of stockholders’ equity. The unrealized gain, net of tax, of $19.8 million for June year to date 2017 and $7.5 million for June year to date 2016 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 $18.4 million as of the second quarter-end 2017 and $17.7 million at year-end 2016 .

Assets Measured at Fair Value on a Nonrecurring Basis
We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. Generally accepted accounting principles require that goodwill be tested for impairment at a reporting unit level. We have determined that our reporting units are the same as our operating and reportable segments.

The realignment of the Company’s operations into three reportable segments effective with the first quarter of 2017 (see Goodwill and Segment Disclosures footnotes) resulted in a change in our reporting units. As a result, we completed a step one quantitative test for our new reporting units with goodwill. We determined the estimated fair value of each reporting unit tested exceeded its related carrying value. As a result of these quantitative assessments, we determined it was more likely than not that the fair value of each of the reporting units was in excess of its carrying value.

10

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

4. Restructuring
In the first quarter of 2017, the Company took restructuring actions in Global Talent Solutions and Americas Staffing to optimize service delivery models and deliver cost savings in 2017.
Restructuring costs incurred in the first quarter of 2017 totaled $2.4 million . Global Talent Solutions incurred $2.0 million and Americas Staffing incurred $0.4 million . All costs, which are primarily severance costs, were recorded entirely in selling, general and administrative (“SG&A”) expenses in the consolidated statement of earnings.
 
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 2016
$
0.5

Additions charged to Global Talent Solutions
2.0

Additions charged to Americas Staffing
0.4

Reductions for cash payments related to all restructuring activities
(0.7
)
Balance as of first quarter-end 2017
2.2

Reductions for cash payments related to all restructuring activities
(1.3
)
Balance as of second quarter-end 2017
$
0.9

The remaining balance of $0.9 million as of second quarter-end 2017 represents primarily severance costs, and the majority is expected to be paid during 2017. No material adjustments are expected to be recorded.

5. Goodwill
As discussed in the Segment Disclosures footnote, during the first quarter of 2017 the Company’s chief operating decision maker (“CODM”) changed the way he regularly reviews information for purposes of allocating resources and assessing performance, which resulted in a change in our operating segments and reporting units. We allocated goodwill to our new reporting units using a relative fair value approach. In addition, as discussed in the Fair Value Measurements footnote, we completed an assessment of any potential goodwill impairment for all reporting units with goodwill and determined that no impairment existed. The changes in the carrying amount of goodwill for the second quarter-end 2017 are included in the table below.

11

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

 
As of Year-End 2016
 
 
 
As of Second Quarter-End 2017
 
Goodwill,
Gross
 
Accumulated Impairment Losses
 
Goodwill,
Net
 
Allocation of Goodwill
 
Goodwill
 
(In millions of dollars)
 
 
 
 
 
 
 
 
 
 
Americas Commercial
$
40.0

 
$
(16.4
)
 
$
23.6

 
$
(23.6
)
 
$

Americas PT
37.9

 

 
37.9

 
(37.9
)
 

EMEA Commercial
50.4

 
(50.4
)
 

 

 

EMEA PT
22.0

 
(22.0
)
 

 

 

APAC Commercial
12.1

 
(12.1
)
 

 

 

APAC PT

 

 

 

 

OCG
26.9

 

 
26.9

 
(26.9
)
 

 
 
 
 
 
 
 
 
 
 
Americas Staffing

 

 

 
25.9

 
25.9

Global Talent Solutions

 

 

 
62.5

 
62.5

International Staffing

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
$
189.3

 
$
(100.9
)
 
$
88.4

 
$

 
$
88.4


6.  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 2017 and 2016 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 2017
 
Foreign
Currency
Translation Adjustments
 
Unrealized
Gains and
Losses on Investment
 
Pension
Liability Adjustments
 
Total
 
(In millions of dollars)
Beginning balance
$
(17.6
)
 
$
102.7

 
$
(1.8
)
 
$
83.3

Other comprehensive income before reclassifications
6.9

 
0.9

 

 
7.8

Amounts reclassified from accumulated other comprehensive income

 

 

 

Net current-period other comprehensive income
6.9

 
0.9

 

 
7.8

 
 
 
 
 
 
 
 
Ending balance
$
(10.7
)
 
$
103.6

 
$
(1.8
)
 
$
91.1


12

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

 
June Year to Date 2017
 
Foreign
Currency
Translation Adjustments
 
Unrealized
Gains and
Losses on Investment
 
Pension
Liability Adjustments
 
Total
 
(In millions of dollars)
Beginning balance
$
(23.3
)
 
$
83.8

 
$
(1.8
)
 
$
58.7

Other comprehensive income before reclassifications
12.6

 
19.8

 

 
32.4

Amounts reclassified from accumulated other comprehensive income

 

 

 

Net current-period other comprehensive income
12.6

 
19.8

 

 
32.4

 
 
 
 
 
 
 
 
Ending balance
$
(10.7
)
 
$
103.6

 
$
(1.8
)
 
$
91.1

 
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


13

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

7.  Earnings Per Share
The reconciliation of basic and diluted earnings per share on common stock for the second quarter and June year to date 2017 and 2016 follows (in millions of dollars except per share data):
 
Second Quarter
 
June Year to Date
 
2017
 
2016
 
2017
 
2016
Net earnings
$
18.7

 
$
8.9

 
$
30.9

 
$
20.1

Less: earnings allocated to participating securities
(0.3
)
 
(0.2
)
 
(0.6
)
 
(0.5
)
Net earnings available to common shareholders
$
18.4

 
$
8.7

 
$
30.3

 
$
19.6

 
 
 
 
 
 
 
 
Average shares outstanding (millions):
 
 
 
 
 
 
 
Basic
38.3

 
38.0

 
38.3

 
38.0

Dilutive share awards
0.5

 
0.3

 
0.4

 
0.2

Diluted
38.8

 
38.3

 
38.7

 
38.2

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.48

 
$
0.23

 
$
0.79

 
$
0.52

Diluted earnings per share
$
0.47

 
$
0.23

 
$
0.78

 
$
0.51

Potentially dilutive shares outstanding are primarily related to performance shares for the second quarter and June year to date 2017 and 2016 . 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 were not significant, and all remaining stock options expired in the second quarter 2016.

8.  Stock-Based Compensation
During the second quarter of 2017, our former President and Chief Executive Officer retired, which resulted in forfeitures of performance shares and restricted stock awards. For the second quarter 2017 and 2016 , respectively, the Company recognized a stock compensation benefit of $0.2 million and expense of $2.3 million , and related tax expense of $0.1 million and tax benefit of $0.9 million . For June year to date 2017 and 2016 , respectively, the Company recognized stock compensation expense of $4.2 million and $5.2 million , and related tax benefits of $1.8 million and $2.0 million .
Performance Shares
During 2017, the Company granted performance awards associated with the Company’s Class A stock to certain senior officers. The payment of performance shares, which will be satisfied with the issuance of shares out of treasury stock, is contingent upon the achievement of specific performance goals over a stated period of time. The maximum number of performance shares that may be earned is 200% of the target shares originally granted. These awards have a three -year performance period and will cliff vest after the approval by the Compensation Committee, if not forfeited by the recipient. No dividends are paid on these performance shares.
Financial measure performance goals may be earned upon the achievement of two financial goals and have a weighted average grant date fair value of $21.07 . For each of the two financial measures, there are annual goals set in February of each year, with the total award payout based on a cumulative average of the 2017, 2018 and 2019 goals. Accordingly, the Company remeasures the fair value of the 2017 financial measure performance shares each reporting period until the 2019 goals are set, after which the fair value will be fixed for the remaining performance period. As of second quarter-end 2017 , for the performance shares granted in 2017 and 2016, the current fair value for the financial measure performance shares was $21.58 and $21.57 , respectively.
Total shareholder return (“TSR”) performance shares may be earned based on the Company’s TSR relative to the S&P SmallCap 600 Index. The TSR performance shares have an estimated fair value of $20.16 , 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.

14

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

A summary of the status of all nonvested performance shares at target as of second quarter-end 2017 and year-to-date changes, which includes the impact of forfeitures related to the retirement of the Company’s former President and Chief Executive Officer, is presented as follows (in thousands of shares except per share data):
 
Financial Measure Performance Shares
 
TSR Performance Shares
 
Shares
 
Weighted Average Grant Date Fair Value
 
Shares
 
Weighted Average Grant Date Fair Value
Nonvested at year-end 2016
499

 
$
19.17

 
208

 
$
17.49

Granted
286

 
21.32

 
101

 
20.16

Vested

 

 

 

Forfeited
(182
)
 
20.32

 
(65
)
 
18.99

Nonvested at second quarter-end 2017
603

 
$
19.70

 
244

 
$
18.20

Restricted Stock
A summary of the status of nonvested restricted stock as of second quarter-end 2017 and year-to-date changes, which includes the impact of forfeitures related to the retirement of the Company’s former President and Chief Executive Officer, is presented as follows (in thousands of shares except per share data):
 
Shares
 
Weighted Average Grant Date Fair Value
Nonvested at year-end 2016
653

 
$
16.58

Granted
189

 
21.90

Vested
(74
)
 
17.25

Forfeited
(163
)
 
16.91

Nonvested at second quarter-end 2017
605

 
$
18.07

9.  Other Expense, Net  
Included in other expense, net for the second quarter and June year to date 2017 and 2016 are the following: 
 
Second Quarter
 
June Year to Date
 
2017
 
2016
 
2017
 
2016
 
(In millions of dollars)
Interest income
$
0.2

 
$

 
$
0.3

 
$
0.1

Interest expense
(0.6
)
 
(0.9
)
 
(1.1
)
 
(1.8
)
Dividend income
0.7

 
0.6

 
0.7

 
0.6

Foreign exchange loss
(0.8
)
 
0.3

 
(2.0
)
 
0.2

 
 
 
 
 
 
 
 
Other expense, net
$
(0.5
)
 
$

 
$
(2.1
)
 
$
(0.9
)
 


15

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

10. Income Taxes
Income tax expense was $1.5 million and $0.8 million (with effective tax rates of 7.6% and 8.1% ) for the second quarter of 2017 and 2016 , respectively, and $4.2 million and $3.5 million (with effective tax rates of 12.2% and 14.8% ) for June year to date 2017 and 2016 , respectively.  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.  Income tax expense in the second quarter of 2017 benefited from the release of a valuation allowance in Norway and from increases in the cash surrender value of life insurance policies. There could be an income tax benefit from a valuation allowance release of approximately $5 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 certain jurisdictions.

11.  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. A court hearing was held on August 2, 2017 to consider final approval for settlement. We await the Court’s ruling. 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 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.


16

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

12.  Segment Disclosures 
The Company’s segments are based on the organizational structure for which financial results are regularly evaluated by the CODM to determine resource allocation and assess performance. During the first quarter of 2017, the Company’s CODM, who was previously the Company’s Chief Executive Officer (“CEO”) and Chief Operating Officer, was determined to be the Company’s CEO. 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. During the first quarter of 2017, the Company realigned its business into three reportable segments, which reflect how the Company delivers services to customers and how its business is organized internally. These segments are: (1) Americas Staffing, (2) Global Talent Solutions (“GTS”), and (3) International Staffing. Accordingly, prior year’s segment information was recast to conform to the current presentation. Intersegment revenue represents revenue earned between the reportable segments and is eliminated from total segment revenue from services.
Americas Staffing represents the Company’s branch-delivered staffing business in the U.S., Canada, Puerto Rico, Mexico and Brazil. International Staffing represents the EMEA region branch-delivered staffing business, as well as the Company’s APAC region staffing business prior to the transaction to form the TS Kelly Asia Pacific joint venture in July 2016. Americas Staffing and International Staffing both deliver temporary staffing, as well as direct-hire placement services, in office-clerical, educational, light industrial and professional and technical specialties within their geographic regions.
GTS combines the delivery structure of the Company’s outsourcing and consulting group and centrally delivered staffing business. It reflects the trend of customers towards the adoption of holistic talent supply chain solutions which combine contingent labor, full-time hiring and outsourced services. GTS includes centrally delivered staffing, recruitment process outsourcing (“RPO”), contingent workforce outsourcing (“CWO”), business process outsourcing (“BPO”), payroll process outsourcing (“PPO”), executive placement, career transition/outplacement services and advisory services.
Corporate expenses that directly support the operating units have been allocated to Americas Staffing, GTS and International Staffing based on work effort, volume or, in the absence of a readily available measurement process, proportionately based on gross profit realized. In connection with the realignment of the segment structure, we reassessed the allocation of corporate expenses to the operating segments and updated the allocation method for corporate expenses which do not have a readily available measurement from revenue to gross profit. Prior periods have been recast to reflect the current period allocation method. The update had no impact on the consolidated financial information.
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 and equity in net earnings (loss) of affiliate, for the second quarter and June year to date 2017 and 2016 . 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.
 
Second Quarter
 
June Year to Date
 
2017
 
2016
 
2017
 
2016
 
(In millions of dollars)
Revenue from Services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas Staffing
$
575.6

 
$
542.4

 
$
1,148.7

 
$
1,096.5

Global Talent Solutions
505.5

 
500.6

 
992.8

 
991.5

International Staffing
256.8

 
337.3

 
490.4

 
646.3

 
 
 
 
 
 
 
 
Less: Intersegment revenue
(4.3
)
 
(4.8
)
 
(8.6
)
 
(9.7
)
 
 
 
 
 
 
 
 
Consolidated Total
$
1,333.6

 
$
1,375.5

 
$
2,623.3

 
$
2,724.6


17

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

 
Second Quarter
 
June Year to Date
 
2017
 
2016
 
2017
 
2016
 
(In millions of dollars)
Earnings from Operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas Staffing gross profit
$
103.8

 
$
97.2

 
$
209.1

 
$
197.9

Americas Staffing SG&A expenses
(83.4
)
 
(81.6
)
 
(167.5
)
 
(165.2
)
Americas Staffing Earnings from Operations
20.4

 
15.6

 
41.6

 
32.7

 
 
 
 
 
 
 
 
Global Talent Solutions gross profit
88.7

 
85.7

 
179.2

 
171.0

Global Talent Solutions SG&A expenses
(73.4
)
 
(71.8
)
 
(148.6
)
 
(143.4
)
Global Talent Solutions Earnings from Operations
15.3

 
13.9

 
30.6

 
27.6

 
 
 
 
 
 
 
 
International Staffing gross profit
36.8

 
48.6

 
73.2

 
96.4

International Staffing SG&A expenses
(32.7
)
 
(44.6
)
 
(63.9
)
 
(85.8
)
International Staffing Earnings from Operations
4.1

 
4.0

 
9.3

 
10.6

 
 
 
 
 
 
 
 
Less: Intersegment gross profit
(0.5
)
 
(1.0
)
 
(1.1
)
 
(2.1
)
Less: Intersegment SG&A expenses
0.5

 
1.0

 
1.1

 
2.1

Net Intersegment Activity

 

 

 

 
 
 
 
 
 
 
 
Corporate
(19.5
)
 
(23.6
)
 
(44.8
)
 
(46.3
)
Consolidated Total
20.3

 
9.9

 
36.7

 
24.6

Other Expense, Net
(0.5
)
 

 
(2.1
)
 
(0.9
)
 
 
 
 
 
 
 
 
Earnings before taxes and equity in net earnings (loss) of affiliate
$
19.8

 
$
9.9

 
$
34.6

 
$
23.7



18

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

13.  New Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09 clarifying when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. It does not change the accounting for modifications. The ASU is effective prospectively for reporting periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. We do not expect the adoption of this ASU will have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04 simplifying the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to calculate the implied fair value of goodwill (Step 2 of the current two-step goodwill impairment test under ASC 350). Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (Step 1 of the current two-step goodwill impairment test). The ASU is effective prospectively for reporting periods beginning after December 15, 2019, with early adoption permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We are currently evaluating the impact of the new guidance on our goodwill impairment testing process and consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18 amending the presentation of restricted cash within the statement of cash flows. The new guidance requires that restricted cash be included within cash and cash equivalents on the statement of cash flows. The ASU is effective retrospectively for reporting periods beginning after December 15, 2017, with early adoption permitted.  We are currently evaluating the impact of the new guidance and we do not expect it to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued 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. This ASU applies to trade accounts receivable and may have an impact on our calculation of the allowance for uncollectible accounts receivable.
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 adopted this guidance effective January 2, 2017, and the adoption did not have a material effect on our financial statements.
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

19

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

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. As our branch operations are primarily conducted in leased facilities, this ASU will likely have a material impact on our balance sheet, may have a material impact to our statement of earnings and will require us to disclose additional information about our leasing activities. We established a cross-functional implementation team to further assess the impact of the standard.
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. We expect to implement the standard with the modified retrospective method and the cumulative reclassification adjustment between other comprehensive income and retained earnings on the consolidated balance sheet is expected to be material. This standard will impact how we recognize changes in the fair value of our available-for-sale investment and could have a material impact 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. 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); 4) additional guidance and practical expedients in response to identified implementation issues (ASU 2016-12); and 5) technical corrections and improvements (ASU 2016-20). The new standard will be effective for us beginning January 1, 2018.
We established a cross-functional implementation team consisting of representatives from across our business segments and various departments. We utilized a bottoms-up approach to analyze the impact of the standard on our various revenue streams by reviewing our current contracts with customers, accounting policies and business practices to identify potential differences that would result from applying the requirements of the new standard. In addition, we identified, and are in the process of implementing, appropriate changes to our business processes, systems and controls to support recognition and disclosure under the new standard.
We have been closely monitoring FASB activity related to the new standard to conclude on specific interpretive issues. During 2016 and 2017, we have made significant progress toward completing our evaluation of the potential impact that adopting the new standard will have on our consolidated results of operations, consolidated financial position and cash flows. We expect to implement the standard with the modified retrospective approach beginning January 1, 2018, which recognizes the cumulative effect of application recognized on that date.

20

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

Revenue on the majority of our contracts with customers will continue to be recognized over time as services are rendered. The impact of adopting ASU 2014-09 primarily relates to deferring contract costs and estimating positive variable (or contingent) consideration, subject to constraint. Additionally, we anticipate expanded disclosures around the nature, amount, timing and uncertainty of revenue and cash flows arising from our contracts with customers.
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.

21



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 specialized staffing, and has expanded into 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 specialized talent continue to represent long-term opportunities for the industry.
Our Business
Kelly Services is a global workforce solutions company, serving customers of all sizes in a variety of industries. In July 2016, we expanded our joint venture with Persol Holdings (formerly Temp Holdings) to form TS Kelly Asia Pacific and moved our APAC staffing operations into the JV. In early 2017, we restructured components of our previous Americas Commercial, Americas PT and OCG segments under a single delivery organization, triggering a change in our operating structure. We now provide staffing through our branch networks in our Americas and International operations, with commercial and specialized professional/technical staffing businesses in each region. We also provide a suite of innovative talent fulfillment and outcome-based solutions through our Global Talent Solutions (“GTS”) segment, which delivers integrated talent management solutions to meet customer needs across the entire spectrum of talent categories. Using talent supply chain strategies, GTS helps customers plan for, manage and execute their acquisition of contingent labor, full-time labor and free agents, 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 55 days on a global basis as of the 2017 second quarter end, 53 days as of the 2016 year end and 2016 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 branch-delivered staffing in key markets;
Enhance our position as a market-leading provider of talent supply chain management in our GTS segment; and
Lower our costs through deployment of efficient service delivery models.
Our 2017 second quarter results affirm that we are focused on accelerating our progress. In the first quarter, we took actions to optimize the service delivery teams in our GTS segment, including recording a $2.4 million restructuring charge.
Earnings from operations for the second quarter of 2017 totaled $20.3 million, compared to $9.9 million in the second quarter of 2016. Excluding the impact of the second quarter 2016 restructuring charges, earnings from operations were $13.3 million. The conversion rate for the second quarter, excluding restructuring, was 8.9%, compared to 5.8% in the same period last year.

22



In the Americas Staffing segment, revenue grew 6% year over year, and earnings from operations was $20.4 million, an improvement of 30% (17% excluding restructuring) year over year.
The GTS segment delivered 4% gross profit growth and 10% earnings from operations growth (7% excluding restructuring) year over year.
In the International Staffing segment, year-over-year revenue declined 24% primarily as a result of the deconsolidation of APAC staffing during the third quarter of 2016. Excluding the APAC staffing results, revenue for the second quarter was up 7% as the segment delivered strong growth across Europe.
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 measure our progress against both revenue and gross profit growth, and we expect to improve our 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 professional and technical specialty and outsourced solutions, creating a more balanced portfolio that yields benefits from an improved mix;
Locally delivered staffing to remain a core component of our strategy;
Kelly Educational Staffing to continue to be a market leader in the U.S.;
To exercise strict expense control, delivering structural improvements that ensure a return from our investments in delivery infrastructure and, as a result;
Our conversion rate to continue to improve.
Looking ahead, we are keeping a watchful eye on the global market while anticipating an increasing demand for skilled workers. 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.


23



Financial Measures
The constant currency (“CC”) change amounts in the following tables refer to the year-over-year percentage changes resulting from translating 2017 financial data into U.S. dollars using the same foreign currency exchange rates used to translate financial data for 2016. 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 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.
Days sales outstanding (“DSO”) represents the number of days that sales remain unpaid for the period being reported. DSO is calculated by dividing average net sales per day (net sales excluding secondary supplier expense for a rolling three-month period) into trade accounts receivable, net at the period end.
Staffing Fee-Based Income
Staffing fee-based income, which is included in revenue from services in the following table, 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.

24



Results of Operations
Total Company - Second Quarter
(Dollars in millions)
 
2017
 
2016
 
Change
 
CC
Change
Revenue from services
$
1,333.6

 
$
1,375.5

 
(3.1
)%
 
 
   (2.7
)%
Gross profit
228.8

 
230.5

 
(0.7
)
 
 
(0.4
)
SG&A expenses excluding restructuring charges
208.5

 
217.2

 
(4.0
)
 
 
(3.6
)
Restructuring charges

 
3.4

 
(100.0
)
 
 
(100.0
)
Total SG&A expenses
208.5

 
220.6

 
(5.5
)
 
 
(5.1
)
Earnings from operations
20.3

 
9.9

 
104.7

 
 
 
Earnings from operations excluding restructuring charges
20.3

 
13.3

 
52.0

 
 
 
 
 
 
 
 
 
 
 
 
Staffing fee-based income (included in revenue from services)
13.7

 
16.6

 
(16.9
)
 
 
(17.1
)
Gross profit rate
17.2
%
 
16.8
%
 
0.4

pts.
 
 
Conversion rate
8.9

 
4.3

 
4.6

 
 
 
Conversion rate excluding restructuring charges
8.9

 
5.8

 
3.1

 
 
 
Return on sales
1.5

 
0.7

 
0.8

 
 
 
Return on sales excluding restructuring charges
1.5

 
1.0

 
0.5

 
 
 

During the third quarter of 2016, we transferred our APAC staffing business in exchange for a 49% interest in the TS Kelly Asia Pacific joint venture, negatively impacting year-over-year revenue comparisons in the second quarter of 2017. Total Company revenue from services for the second quarter of 2017 was down 3.1% in comparison to the prior year. 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 GTS segment discussions.
The gross profit rate increased by 40 basis points, reflecting an improving rate in the Americas Staffing and GTS segments and the impact of transferring the APAC staffing business on the prior year rate.
Total SG&A expenses decreased 5.5% on a reported basis, reflecting the transfer of the APAC staffing business. Included in total SG&A expenses for the second quarter of 2017 are one-time corporate expense savings of $2.5 million in executive compensation expense. Included in total SG&A expenses for the second quarter of 2016 are restructuring charges of $3.4 million, relating primarily to actions taken in the Americas and International regions designed to increase operational efficiency and align our staffing operations with opportunities for growth within their markets. Increases in SG&A expenses in Americas and GTS reflect gross profit growth in those segments.
Diluted earnings per share for the second quarter of 2017 were $0.47, as compared to $0.23 for the second quarter of 2016.


25



Americas Staffing - Second Quarter
(Dollars in millions)
 
2017
 
2016
 
Change
 
CC
Change
Revenue from services
$
575.6

 
$
542.4

 
6.1
%
 
 
   
6.1
%
Gross profit
103.8

 
97.2

 
6.8

 
 
6.8

SG&A expenses excluding restructuring charges
83.4

 
79.8

 
4.7

 
 
4.6

Restructuring charges

 
1.8

 
(100.0
)
 
 
(100.0
)
Total SG&A expenses
83.4

 
81.6

 
2.3

 
 
2.3

Earnings from operations
20.4

 
15.6

 
29.9

 
 
 
Earnings from operations excluding restructuring charges
20.4

 
17.4

 
16.5

 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
18.0
%
 
17.9
%
 
0.1

pts.
 
 
Conversion rate
19.7

 
16.2

 
3.5

 
 
 
Conversion rate excluding restructuring charges
19.7

 
18.0

 
1.7

 
 
 
Return on sales
3.5

 
2.9

 
0.6

 
 
 
Return on sales excluding restructuring charges
3.5

 
3.2

 
0.3

 
 
 

The change in Americas Staffing revenue from services reflect the change in average bill rates. The increase in average bill rates was the result of wage increases and stronger revenue growth in our service lines with higher pay rates. Americas Staffing represented 43% of total Company revenue in the second quarter of 2017 and 39% in the second quarter of 2016.
Revenue increased in our educational staffing business, light industrial, engineering and science products. These increases were partially offset by decreases in our office services volume.
The increase in the Americas Staffing gross profit rate was primarily due to lower employee-related costs as compared to last year, partially offset by unfavorable business mix.
Total SG&A expenses increased compared to the prior year, due to higher performance-based compensation and additional sales resources. Included in total SG&A for the second quarter of 2016 are restructuring charges of $1.8 million, representing severance costs related to headcount reductions as well as lease buyout costs due to branch consolidations.


26



GTS - Second Quarter
(Dollars in millions)
 
2017
 
2016
 
Change
 
CC
Change
Revenue from services
$
505.5

 
$
500.6

 
1.0
%
 
 
   1.2
%
Gross profit
88.7

 
85.7

 
3.5

 
 
3.9

SG&A expenses excluding restructuring charges
73.4

 
71.4

 
2.8

 
 
3.2

Restructuring charges

 
0.4

 
(100.0
)
 
 
(100.0
)
Total SG&A expenses
73.4

 
71.8

 
2.2

 
 
2.7

Earnings from operations
15.3

 
13.9

 
10.1

 
 
 
Earnings from operations excluding restructuring charges
15.3

 
14.3

 
7.1

 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
17.5
%
 
17.1
%
 
0.4

pts.
 
 

Conversion rate
17.2

 
16.2

 
1.0

 
 
 
Conversion rate excluding restructuring charges
17.2

 
16.6

 
0.6

 
 
 

Return on sales
3.0

 
2.8

 
0.2

 
 
 

Return on sales excluding restructuring charges
3.0

 
2.8

 
0.2

 
 
 


GTS revenue represented 38% of total Company revenue in the second quarter of 2017 and 36% in the second quarter of 2016. Revenue from services was up 1% compared to last year. Revenue increases in BPO, KellyConnect and CWO practices were partially offset by declines in our centrally delivered staffing and payroll business.
The increase in the GTS gross profit rate was due to favorable practice and customer mix.
Total SG&A expenses increased 2.2% from the prior year. The increase is primarily due to new and existing program implementation costs as well as additional sales resources. These increases are partially offset by cost reductions from our services delivery optimization initiative we undertook in the first quarter of 2017.


27



International Staffing - Second Quarter
(Dollars in millions)
 
2017
 
2016
 
Change
 
CC
Change
Revenue from services
$
256.8

 
$
337.3

 
(23.9
)%
 
 
   (22.8
)%
Gross profit
36.8

 
48.6

 
(24.1
)
 
 
(23.3
)
SG&A expenses excluding restructuring charges
32.7

 
43.4

 
(24.9
)
 
 
(23.9
)
Restructuring charges

 
1.2

 
(100.0
)
 
 
(100.0
)
Total SG&A expenses
32.7

 
44.6

 
(26.8
)
 
 
(25.8
)
Earnings from operations
4.1

 
4.0

 
6.3

 
 
 

Earnings from operations excluding restructuring charges
4.1

 
5.2

 
(17.6
)
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit rate
14.3
%
 
14.4
%
 
(0.1
)
pts.
 
 

Conversion rate
11.2

 
8.0

 
3.2

 
 
 
Conversion rate excluding restructuring charges
11.2

 
10.3

 
0.9

 
 
 
Return on sales
1.6

 
1.2

 
0.4

 
 
 

Return on sales excluding restructuring charges
1.6

 
1.5

 
0.1

 
 
 

International Staffing includes the Company’s APAC region staffing business prior to the transaction to form the TS Kelly Asia Pacific joint venture in the third quarter of 2016, resulting in a 31% decrease in International Staffing revenue from services. This decrease, combined with a 1% decrease in average bill rates (flat on a CC basis), and partially offset by an 8% increase in hours volume from our European operations, accounted for the change in revenue from services. The increase in hours volume was due to Portugal, Russia and France. International Staffing represented 19% of total Company revenue in the second quarter of 2017 and 25% in the second quarter of 2016.
The International Staffing gross profit rate decreased primarily due to a decline in the temporary gross profit rate from unfavorable customer mix.
Total SG&A expenses decreased 26.8% on a reported basis primarily due to the transfer of the APAC staffing business. Included in total SG&A expenses for the second quarter of 2016 are restructuring charges of $1.2 million. The restructuring, which related to Italy staffing operations, was designed to reposition our operating model to pursue growth in staffing fee-based income and specialized temporary staffing business.



28



Results of Operations
Total Company - June Year to Date