KELLY SERVICES INC - Quarter Report: 2015 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2015
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-1088
KELLY SERVICES, INC.
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(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
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(Address of principal executive offices) (Zip Code)
(248) 362-4444
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(Registrant’s telephone number, including area code)
No Change
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(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 23, 2015, 34,542,499 shares of Class A and 3,439,261 shares of Class B common stock of the Registrant were outstanding.
KELLY SERVICES, INC. AND SUBSIDIARIES
Page Number | |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In millions of dollars except per share data)
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||
September 27, 2015 | September 28, 2014 | September 27, 2015 | September 28, 2014 | ||||||||||||
Revenue from services | $ | 1,351.0 | $ | 1,396.4 | $ | 4,056.6 | $ | 4,137.7 | |||||||
Cost of services | 1,122.8 | 1,171.0 | 3,385.8 | 3,461.9 | |||||||||||
Gross profit | 228.2 | 225.4 | 670.8 | 675.8 | |||||||||||
Selling, general and administrative expenses | 211.6 | 218.3 | 630.6 | 656.5 | |||||||||||
Earnings from operations | 16.6 | 7.1 | 40.2 | 19.3 | |||||||||||
Other expense, net | — | 2.2 | 3.5 | 4.2 | |||||||||||
Earnings before taxes | 16.6 | 4.9 | 36.7 | 15.1 | |||||||||||
Income tax expense | 7.5 | 3.5 | 17.1 | 8.4 | |||||||||||
Net earnings | $ | 9.1 | $ | 1.4 | $ | 19.6 | $ | 6.7 | |||||||
Basic earnings per share | $ | 0.23 | $ | 0.03 | $ | 0.51 | $ | 0.17 | |||||||
Diluted earnings per share | $ | 0.23 | $ | 0.03 | $ | 0.51 | $ | 0.17 | |||||||
Dividends per share | $ | 0.05 | $ | 0.05 | $ | 0.15 | $ | 0.15 | |||||||
Average shares outstanding (millions): | |||||||||||||||
Basic | 37.9 | 37.6 | 37.8 | 37.5 | |||||||||||
Diluted | 37.9 | 37.6 | 37.8 | 37.5 | |||||||||||
See accompanying unaudited Notes to Consolidated Financial Statements.
3
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In millions of dollars)
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||
September 27, 2015 | September 28, 2014 | September 27, 2015 | September 28, 2014 | ||||||||||||
Net earnings | $ | 9.1 | $ | 1.4 | $ | 19.6 | $ | 6.7 | |||||||
Other comprehensive income, net of tax: | |||||||||||||||
Foreign currency translation adjustments, net of tax benefit of $0.2 million, $0.3 million, $0.4 million, and tax expense of $0.0 million, respectively | (9.8 | ) | (12.6 | ) | (15.5 | ) | (10.4 | ) | |||||||
Less: Reclassification adjustments included in net earnings | — | (0.6 | ) | (0.2 | ) | (0.6 | ) | ||||||||
Foreign currency translation adjustments | (9.8 | ) | (13.2 | ) | (15.7 | ) | (11.0 | ) | |||||||
Unrealized gains (losses) on investment, net of tax expense of $8.9 million, tax benefit of $0.4 million and tax expense of $12.7 million and $5.8 million, respectively | 16.4 | (1.9 | ) | 23.0 | 8.6 | ||||||||||
Other comprehensive income (loss) | 6.6 | (15.1 | ) | 7.3 | (2.4 | ) | |||||||||
Comprehensive income (loss) | $ | 15.7 | $ | (13.7 | ) | $ | 26.9 | $ | 4.3 | ||||||
See accompanying unaudited Notes to Consolidated Financial Statements.
4
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions)
ASSETS | September 27, 2015 | December 28, 2014 | |||||
CURRENT ASSETS: | |||||||
Cash and equivalents | $ | 44.9 | $ | 83.1 | |||
Trade accounts receivable, less allowances of $9.7 and $10.7, respectively | 1,160.3 | 1,122.8 | |||||
Prepaid expenses and other current assets | 49.0 | 47.9 | |||||
Deferred taxes | 35.0 | 34.4 | |||||
Total current assets | 1,289.2 | 1,288.2 | |||||
PROPERTY AND EQUIPMENT: | |||||||
Property and equipment | 357.9 | 360.0 | |||||
Accumulated depreciation | (269.6 | ) | (267.0 | ) | |||
Net property and equipment | 88.3 | 93.0 | |||||
NONCURRENT DEFERRED TAXES | 140.8 | 146.3 | |||||
GOODWILL, NET | 90.3 | 90.3 | |||||
OTHER ASSETS | 341.3 | 300.1 | |||||
TOTAL ASSETS | $ | 1,949.9 | $ | 1,917.9 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
CURRENT LIABILITIES: | |||||||
Short-term borrowings | $ | 76.8 | $ | 91.9 | |||
Accounts payable and accrued liabilities | 385.2 | 364.0 | |||||
Accrued payroll and related taxes | 312.8 | 308.5 | |||||
Accrued insurance | 25.9 | 26.9 | |||||
Income and other taxes | 59.5 | 68.8 | |||||
Total current liabilities | 860.2 | 860.1 | |||||
NONCURRENT LIABILITIES: | |||||||
Accrued insurance | 42.2 | 43.9 | |||||
Accrued retirement benefits | 139.5 | 140.8 | |||||
Other long-term liabilities | 48.4 | 39.4 | |||||
Total noncurrent liabilities | 230.1 | 224.1 | |||||
Commitments and contingencies (see contingencies footnote) | |||||||
STOCKHOLDERS’ EQUITY: | |||||||
Capital stock, $1.00 par value | |||||||
Class A common stock, shares issued 36.6 at 2015 and 2014 | 36.6 | 36.6 | |||||
Class B common stock, shares issued 3.5 at 2015 and 2014 | 3.5 | 3.5 | |||||
Treasury stock, at cost | |||||||
Class A common stock, 2.2 shares at 2015 and 2.4 shares at 2014 | (46.3 | ) | (49.2 | ) | |||
Class B common stock | (0.6 | ) | (0.6 | ) | |||
Paid-in capital | 26.7 | 24.9 | |||||
Earnings invested in the business | 781.3 | 767.4 | |||||
Accumulated other comprehensive income | 58.4 | 51.1 | |||||
Total stockholders’ equity | 859.6 | 833.7 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,949.9 | $ | 1,917.9 | |||
See accompanying unaudited Notes to Consolidated Financial Statements.
5
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In millions of dollars)
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||
September 27, 2015 | September 28, 2014 | September 27, 2015 | September 28, 2014 | ||||||||||||
Capital Stock | |||||||||||||||
Class A common stock | |||||||||||||||
Balance at beginning of period | $ | 36.6 | $ | 36.6 | $ | 36.6 | $ | 36.6 | |||||||
Conversions from Class B | — | — | — | — | |||||||||||
Balance at end of period | 36.6 | 36.6 | 36.6 | 36.6 | |||||||||||
Class B common stock | |||||||||||||||
Balance at beginning of period | 3.5 | 3.5 | 3.5 | 3.5 | |||||||||||
Conversions to Class A | — | — | — | — | |||||||||||
Balance at end of period | 3.5 | 3.5 | 3.5 | 3.5 | |||||||||||
Treasury Stock | |||||||||||||||
Class A common stock | |||||||||||||||
Balance at beginning of period | (48.4 | ) | (54.9 | ) | (49.2 | ) | (55.6 | ) | |||||||
Issuance of restricted stock and other | 2.1 | 3.0 | 2.9 | 3.7 | |||||||||||
Balance at end of period | (46.3 | ) | (51.9 | ) | (46.3 | ) | (51.9 | ) | |||||||
Class B common stock | |||||||||||||||
Balance at beginning of period | (0.6 | ) | (0.6 | ) | (0.6 | ) | (0.6 | ) | |||||||
Issuance of restricted stock and other | — | — | — | — | |||||||||||
Balance at end of period | (0.6 | ) | (0.6 | ) | (0.6 | ) | (0.6 | ) | |||||||
Paid-in Capital | |||||||||||||||
Balance at beginning of period | 27.5 | 29.0 | 24.9 | 26.0 | |||||||||||
Issuance of restricted stock and other | (0.8 | ) | (2.3 | ) | 1.8 | 0.7 | |||||||||
Balance at end of period | 26.7 | 26.7 | 26.7 | 26.7 | |||||||||||
Earnings Invested in the Business | |||||||||||||||
Balance at beginning of period | 774.1 | 752.8 | 767.4 | 751.3 | |||||||||||
Net earnings | 9.1 | 1.4 | 19.6 | 6.7 | |||||||||||
Dividends | (1.9 | ) | (1.9 | ) | (5.7 | ) | (5.7 | ) | |||||||
Balance at end of period | 781.3 | 752.3 | 781.3 | 752.3 | |||||||||||
Accumulated Other Comprehensive Income | |||||||||||||||
Balance at beginning of period | 51.8 | 74.1 | 51.1 | 61.4 | |||||||||||
Other comprehensive income, net of tax | 6.6 | (15.1 | ) | 7.3 | (2.4 | ) | |||||||||
Balance at end of period | 58.4 | 59.0 | 58.4 | 59.0 | |||||||||||
Stockholders’ Equity at end of period | $ | 859.6 | $ | 825.6 | $ | 859.6 | $ | 825.6 | |||||||
See accompanying unaudited Notes to Consolidated Financial Statements.
6
KELLY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions of dollars)
39 Weeks Ended | |||||||
September 27, 2015 | September 28, 2014 | ||||||
Cash flows from operating activities: | |||||||
Net earnings | $ | 19.6 | $ | 6.7 | |||
Noncash adjustments: | |||||||
Depreciation and amortization | 16.6 | 16.2 | |||||
Provision for bad debts | 3.3 | 3.6 | |||||
Stock-based compensation | 4.6 | 4.1 | |||||
Other, net | (0.7 | ) | 1.3 | ||||
Changes in operating assets and liabilities | (44.9 | ) | (140.9 | ) | |||
Net cash used in operating activities | (1.5 | ) | (109.0 | ) | |||
Cash flows from investing activities: | |||||||
Capital expenditures | (12.3 | ) | (15.0 | ) | |||
Investment in equity affiliate | (0.5 | ) | (5.4 | ) | |||
Other investing activities | (0.4 | ) | 0.2 | ||||
Net cash used in investing activities | (13.2 | ) | (20.2 | ) | |||
Cash flows from financing activities: | |||||||
Net change in short-term borrowings | (13.8 | ) | 60.4 | ||||
Dividend payments | (5.7 | ) | (5.7 | ) | |||
Other financing activities | 0.2 | 0.4 | |||||
Net cash (used in) from financing activities | (19.3 | ) | 55.1 | ||||
Effect of exchange rates on cash and equivalents | (4.2 | ) | — | ||||
Net change in cash and equivalents | (38.2 | ) | (74.1 | ) | |||
Cash and equivalents at beginning of period | 83.1 | 125.7 | |||||
Cash and equivalents at end of period | $ | 44.9 | $ | 51.6 | |||
See accompanying unaudited Notes to Consolidated Financial Statements.
7
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Kelly Services, Inc. (the “Company,” “Kelly,” “we” or “us”) have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair statement of the results of the interim periods, have been made. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. The unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended December 28, 2014, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 12, 2015 (the 2014 consolidated financial statements). The Company’s third fiscal quarter ended on September 27, 2015 (2015) and September 28, 2014 (2014), each of which contained 13 weeks. The corresponding September year to date periods for 2015 and 2014 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.
2. Fair Value Measurements
Trade accounts receivable, accounts payable, accrued liabilities, accrued payroll and related taxes and short-term borrowings approximate their fair values due to the short-term maturities of these assets and liabilities.
Assets Measured at Fair Value on a Recurring Basis
The following tables present assets measured at fair value on a recurring basis on the consolidated balance sheet as of third quarter-end 2015 and year-end 2014 by fair value hierarchy level, as described below.
Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 measurements include significant unobservable inputs.
Fair Value Measurements on a Recurring Basis As of Third Quarter-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 | 133.6 | 133.6 | — | — | ||||||||||||
Total assets at fair value | $ | 137.3 | $ | 137.3 | $ | — | $ | — | ||||||||
Fair Value Measurements on a Recurring Basis As of Year-End 2014 | ||||||||||||||||
Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
(In millions of dollars) | ||||||||||||||||
Money market funds | $ | 3.3 | $ | 3.3 | $ | — | $ | — | ||||||||
Available-for-sale investment | 97.9 | 97.9 | — | — | ||||||||||||
Total assets at fair value | $ | 101.2 | $ | 101.2 | $ | — | $ | — | ||||||||
Money market funds as of third quarter-end 2015 and as of year-end 2014 represent investments in money market accounts, all of which are restricted as to use and are included in other assets on the consolidated balance sheet. The valuations were based on quoted market prices of those accounts as of the respective period end.
8
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Available-for-sale investment represents the Company’s investment in Temp Holdings Co., Ltd. (“Temp Holdings”), a leading integrated human resources company in Japan, and is included in other assets on the consolidated balance sheet. The valuation is based on the quoted market price of Temp Holdings stock on the Tokyo Stock Exchange as of the period end. The unrealized gain, net of tax, of $16.4 million for the third quarter of 2015 and the unrealized loss, net of tax, of $1.9 million for the third quarter of 2014 was recorded in other comprehensive income, and in accumulated other comprehensive income, a component of stockholders’ equity. The unrealized gain, net of tax, of $23.0 million for September year to date 2015 and the unrealized gain, net of tax, of $8.6 million for September year to date 2014 was recorded in other comprehensive income, as well as in accumulated other comprehensive income. The cost of this yen-denominated investment, which fluctuates based on foreign exchange rates, was $17.2 million as of the third quarter-end 2015 and $17.2 million at year-end 2014.
3. Restructuring
A summary of our global restructuring balance sheet accrual, primarily included in accrued payroll and related taxes, is detailed below (in millions of dollars):
Balance as of year-end 2014 | $ | 6.9 | |
Reductions for cash payments related to all restructuring activities | (4.2 | ) | |
Balance as of first quarter-end 2015 | 2.7 | ||
Reductions for cash payments related to all restructuring activities | (1.1 | ) | |
Balance as of second quarter-end 2015 | 1.6 | ||
Reductions for cash payments related to all restructuring activities | (0.5 | ) | |
Balance as of third quarter-end 2015 | $ | 1.1 | |
The remaining balance of $1.1 million as of the 2015 third quarter end represents primarily severance costs and the majority is expected to be paid in 2015.
4. Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income by component, net of tax, for the third quarter and September year to date 2015 and 2014 are included in the tables below. Amounts in parentheses indicate debits. Reclassification adjustments out of accumulated other comprehensive income, as shown in the tables below, were recorded in the other expense, net line item in the consolidated statement of earnings.
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) | (9.8 | ) | 16.4 | — | 6.6 | ||||||||||
Ending balance | $ | (18.7 | ) | $ | 79.3 | $ | (2.2 | ) | $ | 58.4 | |||||
9
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 | |||||
Third Quarter 2014 | |||||||||||||||
Foreign Currency Translation Adjustments | Unrealized Gains and Losses on Investment | Pension Liability Adjustments | Total | ||||||||||||
(In millions of dollars) | |||||||||||||||
Beginning balance | $ | 20.3 | $ | 55.3 | $ | (1.5 | ) | $ | 74.1 | ||||||
Other comprehensive loss before reclassifications | (12.6 | ) | (1.9 | ) | — | (14.5 | ) | ||||||||
Amounts reclassified from accumulated other comprehensive income | (0.6 | ) | — | — | (0.6 | ) | |||||||||
Net current-period other comprehensive income (loss) | (13.2 | ) | (1.9 | ) | — | (15.1 | ) | ||||||||
Ending balance | $ | 7.1 | $ | 53.4 | $ | (1.5 | ) | $ | 59.0 | ||||||
September Year to Date 2014 | |||||||||||||||
Foreign Currency Translation Adjustments | Unrealized Gains and Losses on Investment | Pension Liability Adjustments | Total | ||||||||||||
(In millions of dollars) | |||||||||||||||
Beginning balance | $ | 18.1 | $ | 44.8 | $ | (1.5 | ) | $ | 61.4 | ||||||
Other comprehensive income (loss) before reclassifications | (10.4 | ) | 8.6 | — | (1.8 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income | (0.6 | ) | — | — | (0.6 | ) | |||||||||
Net current-period other comprehensive income (loss) | (11.0 | ) | 8.6 | — | (2.4 | ) | |||||||||
Ending balance | $ | 7.1 | $ | 53.4 | $ | (1.5 | ) | $ | 59.0 | ||||||
10
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
5. Earnings Per Share
The reconciliation of basic and diluted earnings per share on common stock for the third quarter and September year to date 2015 and 2014 follows (in millions of dollars except per share data):
Third Quarter | September Year to Date | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net earnings | $ | 9.1 | $ | 1.4 | $ | 19.6 | $ | 6.7 | |||||||
Less: earnings allocated to participating securities | (0.2 | ) | — | (0.5 | ) | (0.2 | ) | ||||||||
Net earnings available to common shareholders | $ | 8.9 | $ | 1.4 | $ | 19.1 | $ | 6.5 | |||||||
Basic earnings per share on common stock | $ | 0.23 | $ | 0.03 | $ | 0.51 | $ | 0.17 | |||||||
Diluted earnings per share on common stock | $ | 0.23 | $ | 0.03 | $ | 0.51 | $ | 0.17 | |||||||
Average common shares outstanding (millions): | |||||||||||||||
Basic | 37.9 | 37.6 | 37.8 | 37.5 | |||||||||||
Diluted | 37.9 | 37.6 | 37.8 | 37.5 | |||||||||||
Stock options excluded from the computation of diluted earnings per share due to their anti-dilutive effect for the third quarter 2015 and 2014 and September year to date 2015 were not significant. Stock options representing 0.1 million shares for September year to date 2014 were excluded from the computation of diluted earnings per share due to their anti-dilutive effect.
6. Stock-Based Compensation
Performance Shares
Under the Equity Incentive Plan, amended and restated February 12, 2015 and approved by the stockholders of the Company on May 6, 2015, the Company granted performance awards associated with the Company’s Class A stock to certain senior officers. The payment of performance shares, which will be satisfied with the issuance of shares out of treasury stock, is contingent upon the achievement of specific performance goals over a stated period of time. The maximum number of performance shares that may be earned for this grant is 750,000, of which two-thirds may be earned upon the achievement of certain financial goals and one-third may be earned based on the Company’s total shareholder return (“TSR”) relative to the S&P SmallCap 600 Index. No dividends are paid on these performance shares.
The performance shares associated with the financial goals, which have a weighted average grant date fair value of $16.31, have a one-year performance measure and vest after the completion of an additional two-year service period. The performance shares related to relative TSR have a three-year performance measure with vesting at the end of the performance period. These shares have an estimated fair value of $16.01, which was computed using a Monte Carlo simulation model incorporating assumptions for inputs of expected stock price volatility, dividend yield and risk-free interest rate.
For the third quarter and September year to date 2015, total compensation expense related to performance shares totaled $0.8 million and $1.1 million respectively, and the related tax benefit was $0.3 million and $0.4 million, respectively.
11
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
7. Other Expense, Net
Included in other expense, net for the third quarter and September year to date 2015 and 2014 are the following:
Third Quarter | September Year to Date | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In millions of dollars) | |||||||||||||||
Interest income | $ | 0.1 | $ | 0.1 | $ | 0.3 | $ | 0.3 | |||||||
Interest expense | (0.9 | ) | (0.7 | ) | (2.7 | ) | (2.0 | ) | |||||||
Dividend income | — | — | 0.4 | 0.4 | |||||||||||
Net loss on equity investment | (0.1 | ) | (1.5 | ) | (0.7 | ) | (2.3 | ) | |||||||
Foreign exchange gains (losses) | 0.9 | (0.1 | ) | (0.8 | ) | (0.6 | ) | ||||||||
Other expense, net | $ | — | $ | (2.2 | ) | $ | (3.5 | ) | $ | (4.2 | ) | ||||
8. Contingencies
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. While there is no expectation that any of these matters will have a material adverse effect on the Company’s results of operations, financial position or cash flows, litigation is always subject to inherent uncertainty and the Company is not able to reasonably predict if any matter will be resolved in a manner that is materially adverse to the Company.
9. Segment Disclosures
The Company’s segments are based on the organizational structure for which financial results are regularly evaluated by the Company’s chief operating decision makers (the Company’s Chief Executive Officer and Chief Operating Officer) to determine resource allocation and assess performance. The Company’s seven reporting segments are: (1) Americas Commercial, (2) Americas Professional and Technical (“Americas PT”), (3) Europe, Middle East and Africa Commercial (“EMEA Commercial”), (4) Europe, Middle East and Africa Professional and Technical (“EMEA PT”), (5) Asia Pacific Commercial (“APAC Commercial”), (6) Asia Pacific Professional and Technical (“APAC PT”) and (7) Outsourcing and Consulting Group (“OCG”).
The Commercial business segments within the Americas, EMEA and APAC regions represent traditional office services, contact-center staffing, marketing, electronic assembly, light industrial and, in the Americas, substitute teachers. The PT segments encompass a wide range of highly skilled temporary employees, including scientists, financial professionals, attorneys, engineers, IT specialists and healthcare workers. OCG includes recruitment process outsourcing (“RPO”), contingent workforce outsourcing (“CWO”), business process outsourcing (“BPO”), payroll process outsourcing (“PPO”), executive placement and career transition/outplacement services. Corporate expenses that directly support the operating units have been allocated to the Americas, EMEA and APAC regions and OCG based on a work effort, volume or, in the absence of a readily available measurement process, proportionately based on revenue from services.
The following tables present information about the reported revenue from services and gross profit of the Company by segment, along with a reconciliation to consolidated earnings before taxes, for the third quarter and September year to date 2015 and 2014. Asset information by reportable segment is not presented, since the Company does not produce such information internally nor does it use such data to manage its business.
12
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Third Quarter | September Year to Date | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In millions of dollars) | |||||||||||||||
Revenue from Services: | |||||||||||||||
Americas Commercial | $ | 615.5 | $ | 640.8 | $ | 1,908.2 | $ | 1,915.1 | |||||||
Americas PT | 242.8 | 242.5 | 721.8 | 723.1 | |||||||||||
Total Americas Commercial and PT | 858.3 | 883.3 | 2,630.0 | 2,638.2 | |||||||||||
EMEA Commercial | 199.0 | 231.3 | 573.0 | 690.2 | |||||||||||
EMEA PT | 43.6 | 48.1 | 126.8 | 145.5 | |||||||||||
Total EMEA Commercial and PT | 242.6 | 279.4 | 699.8 | 835.7 | |||||||||||
APAC Commercial | 83.2 | 91.0 | 259.1 | 260.5 | |||||||||||
APAC PT | 9.9 | 10.6 | 30.7 | 29.2 | |||||||||||
Total APAC Commercial and PT | 93.1 | 101.6 | 289.8 | 289.7 | |||||||||||
OCG | 171.8 | 149.8 | 486.3 | 422.1 | |||||||||||
Less: Intersegment revenue | (14.8 | ) | (17.7 | ) | (49.3 | ) | (48.0 | ) | |||||||
Consolidated Total | $ | 1,351.0 | $ | 1,396.4 | $ | 4,056.6 | $ | 4,137.7 | |||||||
13
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Third Quarter | September Year to Date | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In millions of dollars) | |||||||||||||||
Earnings from Operations: | |||||||||||||||
Americas Commercial gross profit | $ | 96.6 | $ | 91.7 | $ | 290.3 | $ | 280.0 | |||||||
Americas PT gross profit | 41.0 | 39.6 | 122.0 | 118.4 | |||||||||||
Americas Region gross profit | 137.6 | 131.3 | 412.3 | 398.4 | |||||||||||
Americas Region SG&A expenses | (113.7 | ) | (110.8 | ) | (339.8 | ) | (332.9 | ) | |||||||
Americas Region Earnings from Operations | 23.9 | 20.5 | 72.5 | 65.5 | |||||||||||
EMEA Commercial gross profit | 27.7 | 33.6 | 79.1 | 101.0 | |||||||||||
EMEA PT gross profit | 9.4 | 10.9 | 27.2 | 33.3 | |||||||||||
EMEA Region gross profit | 37.1 | 44.5 | 106.3 | 134.3 | |||||||||||
EMEA Region SG&A expenses | (31.8 | ) | (40.0 | ) | (99.5 | ) | (125.0 | ) | |||||||
EMEA Region Earnings from Operations | 5.3 | 4.5 | 6.8 | 9.3 | |||||||||||
APAC Commercial gross profit | 10.7 | 11.7 | 34.9 | 35.7 | |||||||||||
APAC PT gross profit | 2.5 | 3.3 | 8.1 | 9.4 | |||||||||||
APAC Region gross profit | 13.2 | 15.0 | 43.0 | 45.1 | |||||||||||
APAC Region SG&A expenses | (11.1 | ) | (14.5 | ) | (35.5 | ) | (44.6 | ) | |||||||
APAC Region Earnings from Operations | 2.1 | 0.5 | 7.5 | 0.5 | |||||||||||
OCG gross profit | 41.4 | 35.8 | 112.6 | 101.3 | |||||||||||
OCG SG&A expenses | (33.2 | ) | (32.2 | ) | (98.1 | ) | (94.7 | ) | |||||||
OCG Earnings from Operations | 8.2 | 3.6 | 14.5 | 6.6 | |||||||||||
Less: Intersegment gross profit | (1.1 | ) | (1.2 | ) | (3.4 | ) | (3.3 | ) | |||||||
Less: Intersegment SG&A expenses | 1.1 | 1.2 | 3.4 | 3.3 | |||||||||||
Net Intersegment Activity | — | — | — | — | |||||||||||
Corporate | (22.9 | ) | (22.0 | ) | (61.1 | ) | (62.6 | ) | |||||||
Consolidated Total | 16.6 | 7.1 | 40.2 | 19.3 | |||||||||||
Other Expense, Net | — | 2.2 | 3.5 | 4.2 | |||||||||||
Earnings Before Taxes | $ | 16.6 | $ | 4.9 | $ | 36.7 | $ | 15.1 | |||||||
14
KELLY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
10. New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued new revenue recognition guidance under Accounting Standards Update (“ASU”) 2014-09 that will supersede the existing revenue recognition guidance under U.S. Generally Accepted Accounting Principles. The new standard focuses on creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard is for companies to recognize revenue when it transfers the promised goods or services to its customers at an amount that represents what the company expects to be entitled to in exchange for those goods or services. In July 2015, the FASB deferred the effective date by one year. This ASU will now be effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017. Early adoption is permitted, but not before the original effective date of December 15, 2016. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15 requiring management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern, which is currently performed by the external auditors. Management will be required to perform this assessment for both interim and annual reporting periods and must make certain disclosures if it concludes that substantial doubt exists. This ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2016. The adoption of this guidance is not expected to have a material effect on our financial statements.
In April 2015, the FASB issued ASU 2015-03 amending current guidance for debt issuance costs. The new guidance requires debt issuance costs to be presented as a deduction from the carrying amount of the related debt liability rather than as an asset. This ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2015 and early adoption is permitted. The new guidance will be applied retrospectively to all prior periods presented. The adoption of this guidance is not expected to have a material effect on our financial statements.
Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated financial statements and related disclosures.
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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.
In the U.S., near-term demand for temporary staffing reflects improved labor market conditions. Across all regions, the structural shifts toward higher-skilled, project-based professional/technical talent continue to represent long-term opportunities for the industry. In fact, professional/technical staffing is projected to steadily increase as a percent of the global market, with demand for specialty staffing projected to outpace commercial.
Our Business
Kelly Services is a global workforce solutions company, serving customers of all sizes in a variety of industries. Our staffing operations are divided into three regions (Americas, EMEA and APAC), with commercial and professional/technical staffing businesses in each region. As the human capital arena has become more complex, we have also developed a suite of innovative solutions within our global OCG business. OCG delivers integrated talent management solutions to meet customer needs across the entire spectrum of talent categories. Using talent supply chain strategies, we help customers plan for and manage their acquisition of contingent and full-time labor, and gain access to service providers and quality talent at competitive rates with minimized risk.
We earn revenues from the hourly sales of services by our temporary employees to customers, as a result of recruiting permanent employees for our customers, and through our outsourcing activities. Our working capital requirements are primarily generated from temporary employee payroll and customer accounts receivable. The nature of our business is such that trade accounts receivable are our most significant financial asset. Average days sales outstanding varies within and outside the U.S., but is 57 days on a global basis as of the 2015 third quarter end, 54 days as of the 2014 year end and 58 days as of the 2014 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; |
• | Capture permanent placement growth in selected specialties; and |
• | Lower our costs through deployment of efficient service delivery models. |
In order to accelerate our strategy, execute our commitment to growth and work toward our long-term goal of a 4.0% return on sales, we made targeted investments in 2014, which included adjusting our operating models and increasing the resources necessary for driving growth in higher margin specialties and solutions. Specifically, we designed our investments to align
16
with our long-term strategic objectives including growing Americas PT staffing and expanding our global OCG solutions. These investments are intended to achieve strong sales growth in 2015 and beyond in both OCG and our Americas PT segments. We have seen strong growth in our OCG segment and encouraging signs of growth in our Americas PT segment. We will need to continue to accelerate PT growth, particularly within our centralized accounts, to fully realize the expected benefit of our investments.
To bring additional efficiency to our operating models across the organization, on September 15, 2014, the Board of Directors of the Company approved a management simplification restructuring plan (“Plan”) that we completed during the fourth quarter of 2014. We expect that the total result of the Plan will reduce our year-over-year selling, general and administrative (“SG&A”) expense growth by approximately $35 million.
We have started to see the benefits of our 2014 actions in our 2015 year-to-date results and will continue to remain focused on executing a well-formed strategy with increased speed and precision, making the necessary investments to advance that strategy.
• | Although total company revenue decreased 2%, reflecting the continued global currency volatility, year-to-date revenue was up 4% on a constant currency basis year over year. |
• | We increased year-to-date revenue in our OCG segment by 15% year over year (17% on a constant currency basis), confirming that our strategic direction aligns with increased market demand for consultative outsourced solutions. Growth was particularly strong in BPO and CWO, which continue to be key drivers of our strategic and financial progress. |
• | Despite foreign currency exchange rates negatively impacting the year-to-date change in gross profit, on a constant currency basis, we delivered strong operating leverage. Growth in constant currency year-to-date earnings from operations excluding the 2014 restructuring charges represented more than 50% of our constant currency gross profit growth. |
We anticipate a stable U.S. labor market and an increasing demand for skilled workers. Long term, we believe the trends in the staffing industry are positive: companies are relying more heavily on the use of flexible staffing models; there is growing acceptance of free agents and contractual employment by companies and talent alike; and companies are seeking more comprehensive workforce management solutions that lend themselves to Kelly’s talent supply chain management approach. This shift in demand for contingent labor and strategic solutions plays to our strengths and experience—particularly serving large companies whose needs span the globe and cross multiple labor categories.
Financial Measures
Return on sales (earnings from operations divided by revenue from services) in the following tables is a ratio used to measure the Company’s pricing strategy and operating efficiency.
Constant currency (“CC”) change amounts are non-GAAP measures. The CC change amounts in the following tables refer to the year-over-year percentage changes resulting from translating 2015 financial data into U.S. dollars using the same foreign currency exchange rates used to translate financial data for 2014. We believe that CC measurements are an important analytical tool to aid in understanding underlying operating trends without distortion due to currency fluctuations. Additionally, substantially all of our foreign subsidiaries derive revenues and incur cost of services and SG&A expenses within a single country and currency which, as a result, provide a natural hedge against currency risks in connection with their normal business operations.
Staffing Fee-Based Income
Staffing fee-based income, which is included in revenue from services in the following tables, has a significant impact on gross profit rates. There are very low direct costs of services associated with staffing fee-based income. Therefore, increases or decreases in staffing fee-based income can have a disproportionate impact on gross profit rates.
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Results of Operations
Total Company - Third Quarter
(Dollars in millions)
2015 | 2014 | Change | CC Change | |||||||||||
Revenue from services | $ | 1,351.0 | $ | 1,396.4 | (3.2 | )% | 3.0 | % | ||||||
Staffing fee-based income | 16.5 | 19.9 | (16.2 | ) | (5.8 | ) | ||||||||
Gross profit | 228.2 | 225.4 | 1.3 | 7.2 | ||||||||||
SG&A expenses excluding restructuring charges | 211.6 | 214.3 | (1.2 | ) | ||||||||||
Restructuring charges | — | 4.0 | (100.0 | ) | ||||||||||
Total SG&A expenses | 211.6 | 218.3 | (3.0 | ) | 2.0 | |||||||||
Earnings from operations | 16.6 | 7.1 | 134.9 | |||||||||||
Gross profit rate | 16.9 | % | 16.1 | % | 0.8 | pts. | ||||||||
Expense rates (excluding restructuring charges): | ||||||||||||||
% of revenue | 15.7 | 15.3 | 0.4 | |||||||||||
% of gross profit | 92.7 | 95.1 | (2.4 | ) | ||||||||||
Return on sales | 1.2 | 0.5 | 0.7 | |||||||||||
Total Company revenue from services for the third quarter of 2015 was down 3.2% in comparison to the prior year, primarily as a result of currency fluctuations. Compared to the same period last year, the U.S. dollar strengthened against certain currencies, primarily the Russian ruble, Australian dollar and the Euro. On a CC basis, total Company revenue increased 3.0% year over year, as more fully described in the following discussions.
The gross profit rate increased by 80 basis points. Increases in the Americas region and OCG gross profit rate were partially offset by declines in the gross profit rate in the EMEA and APAC regions, as more fully described in the following discussions.
SG&A expenses decreased 3.0% year over year, reflecting the impact of changes in foreign currency exchange rates. On a CC basis, SG&A expenses increased 2.0%, due to higher salaries and incentive expense in our U.S. branch-based business as a result of revenue growth and the impact of changes in the timing of expenses related to certain incentive and benefit plans for corporate employees. These increases were partially offset by continued cost management effort in the EMEA and APAC regions, and the year-over-year impact of our Plan. Restructuring charges in the third quarter of 2014 include $3.7 million related to our Plan, combined with $0.3 million of costs incurred to consolidate back office functions in Australia and New Zealand.
Income tax expense for the third quarter of 2015 was $7.5 million, compared to $3.5 million for the third quarter of 2014. The expense was higher primarily due to increased pretax income. The U.S. work opportunity credit expired at the end of 2014, making credits available only for employees hired before 2015. This is consistent with the third quarter of 2014, as the credit expired at the end of 2013 and was not retroactively reinstated until the fourth quarter. The credit, along with several other temporary income tax incentives, has previously expired and later been retroactively reinstated in what is commonly referred to as “extenders” legislation. If such extenders legislation is enacted, the retroactive reinstatement of the work opportunity credit would result in a significant benefit to income tax expense.
Diluted earnings per share for the third quarter of 2015 were $0.23, as compared to $0.03 for the third quarter of 2014.
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Total Americas - Third Quarter
(Dollars in millions)
2015 | 2014 | Change | CC Change | ||||||||||
Revenue from services | $ | 858.3 | $ | 888.3 | (2.8 | )% | (0.6)% | ||||||
Staffing fee-based income | 8.5 | 8.2 | 4.6 | 6.5 | |||||||||
Gross profit | 137.6 | 131.3 | 4.8 | 6.7 | |||||||||
Total SG&A expenses | 113.7 | 110.8 | 2.6 | 4.5 | |||||||||
Earnings from operations | 23.9 | 20.5 | 16.9 | ||||||||||
Gross profit rate | 16.0 | % | 14.9 | % | 1.1 | pts. | |||||||
Expense rates: | |||||||||||||
% of revenue | 13.2 | 12.5 | 0.7 | ||||||||||
% of gross profit | 82.7 | 84.5 | (1.8 | ) | |||||||||
Return on sales | 2.8 | 2.3 | 0.5 | ||||||||||
The change in Americas revenue from services was due to a 2% decrease in average bill rates (a 1% increase on a CC basis), combined with a 1% decrease in hours volume, primarily in Americas Commercial. The increase in average bill rates on a CC basis was due to wage rate and the resulting bill rate inflation, coupled with increased pricing in a number of accounts serviced through our branch-based delivery model. Americas represented 64% of total Company revenue in the third quarter of 2015 and 63% in the third quarter of 2014.
Revenue in our Commercial segment was down 4% and down 1% on a CC basis in comparison to the prior year. The CC decrease in revenue in Commercial was primarily due to exiting large clients late in 2014 due to pricing discipline, as well as a decrease in revenue from many of our natural resources customers due to low oil prices. Additionally, while our educational staffing business continues double-digit growth in comparison to the prior year, we have begun to anniversary significant customer wins from last year that are tempering our overall commercial growth. Light industrial business is up in accounts using our branch-based delivery model, while revenue in our large accounts using our centralized delivery model was down primarily due to our exit from certain large accounts due to pricing discipline, as well as the impact of low oil prices on our large natural resources customers.
In the PT segment, reported revenue was flat and increased 1% on a CC basis in comparison to the prior year. Revenue increased in our finance and science products, primarily due to growth in accounts serviced through our branch-based delivery model. That growth was partially offset by lower revenue in our engineering and IT products for customers serviced through the centralized delivery model. The year-over-year decrease in engineering was due primarily to the completion of certain projects, and the drop in IT was due to various IT customers in our centralized delivery model moving from a traditional staffing model to an outsourced service model delivered by our OCG business.
The increase in the gross profit rate was due primarily to lower payroll taxes and workers’ compensation costs in the U.S., as well as customer mix and pricing discipline. We regularly update our estimates of open workers’ compensation claims. As a result, we reduced our estimated costs of prior year workers’ compensation costs in the Americas region by $1.6 million for the third quarter of 2015, compared to no reduction in the third quarter of 2014.
The increase in SG&A expenses is attributable to the increased compensation and incentive costs in our local branch network as a result of current and expected growth in that model.
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Total EMEA - Third Quarter
(Dollars in millions)
2015 | 2014 | Change | CC Change | ||||||||||
Revenue from services | $ | 242.6 | $ | 279.4 | (13.1 | )% | 3.5% | ||||||
Staffing fee-based income | 5.8 | 7.7 | (23.8 | ) | (5.3) | ||||||||
Gross profit | 37.1 | 44.5 | (16.4 | ) | 0.1 | ||||||||
Total SG&A expenses | 31.8 | 40.0 | (20.7 | ) | (6.2) | ||||||||
Earnings from operations | 5.3 | 4.5 | 22.4 | ||||||||||
Gross profit rate | 15.3 | % | 15.9 | % | (0.6 | ) | pts. | ||||||
Expense rates: | |||||||||||||
% of revenue | 13.1 | 14.3 | (1.2 | ) | |||||||||
% of gross profit | 85.4 | 90.0 | (4.6 | ) | |||||||||
Return on sales | 2.2 | 1.6 | 0.6 | ||||||||||
The decrease in EMEA revenue from services was due to the impact of changes in foreign currency exchange rates. On a CC basis, revenue increased 3.5%, due to a 6% increase in hours worked, partially offset by a 2% decrease in average bill rates and a decrease in staffing fee-based income. The decrease in average bill rates and increase in hours was due primarily to higher revenue in Portugal, a country with lower average bill rates. The increased hours in Portugal were partially offset by customer losses in the U.K. and a reduction in volume with larger customers in Switzerland and Ireland. EMEA represented 18% of total Company revenue in the third quarter of 2015 and 20% in the third quarter of 2014.
The EMEA gross profit rate decreased primarily due to a decline in the temporary gross profit rate and a decline in staffing fee-based income. The decline in the temporary gross profit rate was primarily driven by unfavorable country mix, as described above. Staffing fee-based income declined in both Commercial and PT, primarily in Russia, partially offset by increases in staffing fee-based income in some other countries. Economic uncertainty continues to constrain recruitment decisions by customers in Russia resulting in the decline in staffing fee-based income.
SG&A expenses decreased primarily due to cost saving actions taken in 2015, mainly in Switzerland, the U.K. and Norway, partially offset by targeted PT investments in selected countries.
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Total APAC - Third Quarter
(Dollars in millions)
2015 | 2014 | Change | CC Change | ||||||||||
Revenue from services | $ | 93.1 | $ | 101.6 | (8.3 | )% | 9.5% | ||||||
Staffing fee-based income | 2.7 | 4.0 | (31.4 | ) | (19.7) | ||||||||
Gross profit | 13.2 | 15.0 | (12.1 | ) | 4.7 | ||||||||
SG&A expenses excluding restructuring charges | 11.1 | 14.2 | (21.6 | ) | |||||||||
Restructuring charges | — | 0.3 | (100.0 | ) | |||||||||
Total SG&A expenses | 11.1 | 14.5 | (23.2 | ) | (8.8) | ||||||||
Earnings from operations | 2.1 | 0.5 | 297.9 | ||||||||||
Gross profit rate | 14.2 | % | 14.8 | % | (0.6 | ) | pts. | ||||||
Expense rates (excluding restructuring charges): | |||||||||||||
% of revenue | 11.9 | 14.0 | (2.1 | ) | |||||||||
% of gross profit | 84.3 | 94.6 | (10.3 | ) | |||||||||
Return on sales | 2.2 | 0.5 | 1.7 | ||||||||||
The 8.3% decrease in total APAC revenue from services was primarily due to the impact of foreign currency exchange rates. On a CC basis, the 9.5% increase in total APAC revenue from services reflected a 12% increase in hours worked, partially offset by a 1% decrease in average bill rates, primarily driven by India. Hours worked increased primarily in India and Singapore. APAC revenue represented 7% of total Company revenue in the third quarter of both 2015 and 2014.
The gross profit rate decreased 60 basis points year over year, primarily due to decreases in staffing fee-based income and the temporary gross profit rate, partially offset by higher wage credits in Singapore. The reduction in the temporary gross profit rate is due to the increasing proportion of international and national large accounts with lower margins. Staffing fee-based income decreased due mainly to a weaker hiring climate in Singapore and Australia. Wage credits in Singapore totaled approximately $0.8 million in the third quarter of 2015 and $0.1 million in the third quarter of 2014.
The decrease in SG&A expenses excluding restructuring charges was due to continuing productivity improvements primarily achieved by consolidating the Australia and New Zealand operations in the prior year. Restructuring charges in the third quarter of 2014 relate to costs to consolidate back office functions in Australia and New Zealand.
21
OCG - Third Quarter
(Dollars in millions)
2015 | 2014 | Change | CC Change | ||||||||||
Revenue from services | $ | 171.8 | $ | 149.8 | 14.7 | % | 16.8% | ||||||
Gross profit | 41.4 | 35.8 | 15.5 | 18.4 | |||||||||
Total SG&A expenses | 33.2 | 32.2 | 3.2 | 6.3 | |||||||||
Earnings from operations | 8.2 | 3.6 | 123.7 | ||||||||||
Gross profit rate | 24.1 | % | 23.9 | % | 0.2 | pts. | |||||||
Expense rates: | |||||||||||||
% of revenue | 19.3 | 21.5 | (2.2 | ) | |||||||||
% of gross profit | 80.2 | 89.8 | (9.6 | ) | |||||||||
Return on sales | 4.8 | 2.4 | 2.4 | ||||||||||
Revenue from services in the OCG segment increased during the third quarter of 2015 due primarily to growth in the BPO and CWO practice areas. Revenue in BPO grew by 30% year over year and CWO, which includes PPO, grew by 13% year over year. The revenue growth in BPO and CWO was due to new customers and the expansion of programs with existing customers. OCG revenue represented 13% of total Company revenue in the third quarter of 2015 and 11% in the third quarter of 2014.
The OCG gross profit rate increased primarily due to increases in rate in both BPO and CWO, partially offset by a lower RPO gross profit rate. These changes are due to customer mix within the practice areas.
The increase in SG&A expenses is primarily a result of costs associated with increased volume with existing customers and implementation costs of new customers mainly in our CWO practice area.
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Results of Operations
Total Company - September Year to Date
(Dollars in millions)
2015 | 2014 | Change | CC Change | |||||||||||
Revenue from services | $ | 4,056.6 | $ | 4,137.7 | (2.0 | )% | 3.7 | % | ||||||
Staffing fee-based income | 49.5 | 58.5 | (15.3 | ) | (5.2 | ) | ||||||||
Gross profit | 670.8 | 675.8 | (0.7 | ) | 4.6 | |||||||||
SG&A expenses excluding restructuring charges | 630.6 | 650.7 | (3.1 | ) | ||||||||||
Restructuring charges | — | 5.8 | (100.0 | ) | ||||||||||
Total SG&A expenses | 630.6 | 656.5 | (4.0 | ) | 0.9 | |||||||||
Earnings from operations | 40.2 | 19.3 | 110.9 | |||||||||||
Gross profit rate | 16.5 | % | 16.3 | % | 0.2 | pts. | ||||||||
Expense rates (excluding restructuring charges): | ||||||||||||||
% of revenue | 15.5 | 15.7 | (0.2 | ) | ||||||||||
% of gross profit | 94.0 | 96.3 | (2.3 | ) | ||||||||||
Return on sales | 1.0 | 0.5 | 0.5 | |||||||||||
Total Company revenue from services for the first nine months of 2015 was down 2.0% in comparison to the prior year, primarily as a result of currency fluctuations. During the first nine months of 2015, the U.S. dollar strengthened against certain currencies, primarily the Euro, Russian ruble and the Australian dollar, as compared to the same period last year. On a CC basis, total Company revenue increased 3.7% year-over-year, as more fully described in the following discussions.
The gross profit rate increased 20 basis points on a year-over-year basis. An increase in the Americas region gross profit rate was partially offset by declines in the gross profit rate in EMEA, APAC and OCG, as more fully described in the following discussions.
SG&A expenses decreased 4.0% year over year, reflecting the impact of changes in foreign currency exchange rates. On a CC basis, SG&A expenses increased 0.9% due to the year-over-year impact of investments made in the second half of 2014, partially offset by the cost savings of our Plan. Restructuring charges in the first nine months of 2014 include $3.7 million related to the Plan, $0.8 million of costs incurred for exiting the staffing business in Sweden, and $1.3 million related to closing branches in Australia and consolidating back office functions in Australia and New Zealand.
Income tax expense for the first nine months of 2015 was $17.1 million, compared to $8.4 million for the first nine months of 2014. The expense was higher primarily due to increased pretax income. The U.S. work opportunity credit expired at the end of 2014, making credits available only for employees hired before 2015. This is consistent with the first nine months of 2014, as the credit expired at the end of 2013 and was not retroactively reinstated until the fourth quarter. The credit, along with several other temporary income tax incentives, has previously expired and later been retroactively reinstated in what is commonly referred to as “extenders” legislation. If such extenders legislation is enacted, the retroactive reinstatement of the work opportunity credit would result in a significant benefit to income tax expense.
Diluted earnings per share for the first nine months of 2015 were $0.51, as compared to $0.17 for the first nine months of 2014.
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Total Americas - September Year to Date
(Dollars in millions)
2015 | 2014 | Change | CC Change | ||||||||||
Revenue from services | $ | 2,630.0 | $ | 2,638.2 | (0.3 | )% | 1.4% | ||||||
Staffing fee-based income | 23.9 | 22.1 | 7.7 | 9.5 | |||||||||
Gross profit | 412.3 | 398.4 | 3.5 | 5.0 | |||||||||
Total SG&A expenses | 339.8 | 332.9 | 2.0 | 3.5 | |||||||||
Earnings from operations | 72.5 | 65.5 | 11.0 | ||||||||||
Gross profit rate | 15.7 | % | 15.1 | % | 0.6 | pts. | |||||||
Expense rates: | |||||||||||||
% of revenue | 12.9 | 12.6 | 0.3 | ||||||||||
% of gross profit | 82.4 | 83.6 | (1.2 | ) | |||||||||
Return on sales | 2.8 | 2.5 | 0.3 | ||||||||||
The decrease in reported Americas revenue from services was due to a 1% decrease in average bill rates (a 1% increase on a CC basis), partially offset by a 1% increase in hours worked. The increase in average bill rates on a CC basis was due to a combination of wage and bill rate inflation, increased pricing in a number of accounts serviced through our branch-based delivery model, as well as business mix. The increase in hours worked was due to increases in our local branch network customer activity. Americas represented 65% of total Company revenue in the first nine months of 2015 and 64% in the first nine months of 2014.
Revenue in our Commercial segment was flat and up 2% on a CC basis in comparison to the prior year. The increase in CC revenue in Commercial was primarily due to increases in our educational staffing business, as a result of new customer wins, and in our light industrial product, due to increased demand at existing customer locations, coupled with additional new customer wins. Light industrial business is up in accounts serviced through our branch-based delivery model. Volume in our large accounts using our centralized delivery model is down as a result of our exit from certain large accounts due to pricing discipline and the reduced revenue from our natural resources customers related to lower oil prices.
In the PT segment, reported and CC revenue was flat in comparison to the prior year. Decreases in our science, engineering and IT products for customers serviced through the centralized delivery model were offset by increases in PT revenue in accounts serviced through our branch-based delivery model. Revenue in our engineering product decreased for customers serviced through the centralized and branch-based delivery models due primarily to the completion of certain projects. IT revenue in the centralized delivery model is down due to customers moving from a traditional staffing model to an outsourced model delivered by our OCG business.
The increase in the gross profit rate was primarily due to improved pricing and customer mix, as well as lower payroll taxes and employee benefit costs.
The increase in SG&A expenses is attributable to the increased compensation and incentive costs in our local branch network as a result of current and expected growth in that model, partially offset by the impact of the Plan we implemented in the fourth quarter of last year.
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Total EMEA - September Year to Date
(Dollars in millions)
2015 | 2014 | Change | CC Change | |||||||||||
Revenue from services | $ | 699.8 | $ | 835.7 | (16.3 | )% | 1.1 | % | ||||||
Staffing fee-based income | 17.6 | 24.7 | (28.5 | ) | (10.7 | ) | ||||||||
Gross profit | 106.3 | 134.3 | (20.8 | ) | (4.1 | ) | ||||||||
SG&A expenses excluding restructuring charges | 99.5 | 124.2 | (19.9 | ) | ||||||||||
Restructuring charges | — | 0.8 | (100.0 | ) | ||||||||||
Total SG&A expenses | 99.5 | 125.0 | (20.4 | ) | (4.7 | ) | ||||||||
Earnings from operations | 6.8 | 9.3 | (25.5 | ) | ||||||||||
Gross profit rate | 15.2 | % | 16.1 | % | (0.9 | ) | pts. | |||||||
Expense rates (excluding restructuring charges): | ||||||||||||||
% of revenue | 14.2 | 14.9 | (0.7 | ) | ||||||||||
% of gross profit | 93.5 | 92.5 | 1.0 | |||||||||||
Return on sales | 1.0 | 1.1 | (0.1 | ) | ||||||||||
The decrease in reported EMEA revenue from services was primarily due to the impact of changes in foreign currency exchange rates. On a CC basis, the increase in revenue from services was due to a 5% increase in hours, partially offset by a 4% decrease in average bill rates, combined with a decrease in staffing fee-based income. The increase in hours and decrease in average bill rates was due primarily to increasing revenue in Portugal, a country with lower average bill rates. The increased hours in Portugal were partially offset by customer losses in the U.K. and a reduction of hours volume with larger customers in Switzerland and Ireland. EMEA represented 17% of total Company revenue in the first nine months of 2015 and 20% in the first nine months of 2014.
The EMEA gross profit rate decreased primarily due to a decline in the temporary gross profit rate and a decline in staffing fee-based income. Staffing fee-based income declined in both Commercial and PT, primarily in Russia, partially offset by increases in staffing fee-based income in some other countries. Economic uncertainty continues to constrain recruitment decisions by customers in Russia resulting in the decline in staffing fee-based income. The decrease in the temporary gross profit rate was primarily driven by unfavorable country mix, as described above.
SG&A expenses decreased primarily due to cost saving actions taken in 2015, primarily in Switzerland, Norway and the U.K., and the exit of staffing operations in Sweden, partially offset by targeted PT investments in selected countries. Restructuring costs recorded in the first nine months of 2014 reflect costs incurred for exiting the staffing business in Sweden.
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Total APAC - September Year to Date
(Dollars in millions)
2015 | 2014 | Change | CC Change | ||||||||||
Revenue from services | $ | 289.8 | $ | 289.7 | 0.1 | % | 13.8% | ||||||
Staffing fee-based income | 9.1 | 11.7 | (22.0 | ) | (12.7) | ||||||||
Gross profit | 43.0 | 45.1 | (4.6 | ) | 8.0 | ||||||||
SG&A expenses excluding restructuring charges | 35.5 | 43.3 | (18.0 | ) | |||||||||
Restructuring charges | — | 1.3 | (100.0 | ) | |||||||||
Total SG&A expenses | 35.5 | 44.6 | (20.5 | ) | (10.1) | ||||||||
Earnings from operations | 7.5 | 0.5 | NM | ||||||||||
Gross profit rate | 14.8 | % | 15.6 | % | (0.8 | ) | pts. | ||||||
Expense rates (excluding restructuring charges): | |||||||||||||
% of revenue | 12.3 | 15.0 | (2.7 | ) | |||||||||
% of gross profit | 82.7 | 96.2 | (13.5 | ) | |||||||||
Return on sales | 2.6 | 0.1 | 2.5 | ||||||||||
The reported and constant currency change in total APAC revenue from services was due primarily to a 14% increase in hours worked, primarily in India, Australia and Singapore. Average bill rates declined 11% and increased 1% on a constant currency basis, primarily driven by Malaysia. APAC revenue represented 7% of total Company revenue in the first nine months of both 2015 and 2014.
The gross profit rate declined 80 basis points on a year-over-year basis due to decreases in the staffing fee-based income and the temporary gross profit rate, partially offset by higher-than-expected wage credits in Singapore. The reduction in the temporary gross profit rate was due to an increased proportion of international and national large accounts with lower margins. Staffing fee-based income decreased due mainly to a weaker hiring climate in Australia. Singapore wage credits include additional prior year credits received in the current year, and totaled $4.7 million in the first nine months of 2015 and $2.0 million in the first nine months of 2014.
The decrease in SG&A expenses was due to continuing productivity improvements primarily achieved by consolidating the Australia and New Zealand operations in the prior year. Restructuring charges in the first nine months of 2014 relate to costs for exiting branches in Australia and consolidating back office functions in Australia and New Zealand.
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OCG - September Year to Date
(Dollars in millions)
2015 | 2014 | Change | CC Change | ||||||||||
Revenue from services | $ | 486.3 | $ | 422.1 | 15.2 | % | 17.0% | ||||||
Gross profit | 112.6 | 101.3 | 11.1 | 13.4 | |||||||||
Total SG&A expenses | 98.1 | 94.7 | 3.6 | 6.4 | |||||||||
Earnings from operations | 14.5 | 6.6 | 116.7 | ||||||||||
Gross profit rate | 23.1 | % | 24.0 | % | (0.9 | ) | pts. | ||||||
Expense rates: | |||||||||||||
% of revenue | 20.2 | 22.4 | (2.2 | ) | |||||||||
% of gross profit | 87.1 | 93.4 | (6.3 | ) | |||||||||
Return on sales | 3.0 | 1.6 | 1.4 | ||||||||||
Revenue from services in the OCG segment increased during the first nine months of 2015 due primarily to growth in the BPO and CWO practice areas. Revenue in BPO grew by 25% year over year and CWO, which includes PPO, grew by 17% year over year. The revenue growth in BPO and CWO was due to new customers and the expansion of programs with existing customers. OCG revenue represented 12% of total Company revenue in the first nine months of 2015 and 10% in the first nine months of 2014.
The OCG gross profit rate decreased primarily due to a lower RPO gross profit rate due to customer mix, and the timing of investments in BPO in the first half of the year for business activity in the second half of the year.
The increase in SG&A expenses was primarily a result of costs associated with increased volume with existing customers and implementation costs of new customers mainly in our CWO practice area.
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Financial Condition
Historically, we have financed our operations through cash generated by operating activities and access to credit markets. Our working capital requirements are primarily generated from temporary employee payroll and customer accounts receivable. Since receipts from customers generally lag payroll to temporary employees, working capital requirements increase substantially in periods of growth. Conversely, when economic activity slows, working capital requirements may substantially decrease. As highlighted in the consolidated statements of cash flows, our liquidity and available capital resources are impacted by four key components: cash and equivalents, operating activities, investing activities and financing activities.
Cash and Equivalents
Cash and equivalents totaled $44.9 million at the end of the third quarter of 2015 and $83.1 million at year-end 2014. As further described below, we used $1.5 million of cash for operating activities, used $13.2 million of cash for investing activities and used $19.3 million of cash for financing activities.
Operating Activities
In the first nine months of 2015, we used $1.5 million of net cash for operating activities, as compared to using $109.0 million in the first nine months of 2014. This change was primarily due to lower growth in trade accounts receivable, along with the year-over-year impact of $20.0 million related to payments we received at year-end 2013 from our OCG customers, most of which we paid out to suppliers during the first quarter of 2014.
Trade accounts receivable totaled $1.2 billion at the end of the third quarter of 2015. Global days sales outstanding were 57 days at the end of the third quarter of 2015 and 58 at the end of the third quarter of 2014.
Our working capital position was $429.0 million at the end of the third quarter of 2015, an increase of $0.9 million from year-end 2014. The current ratio (total current assets divided by total current liabilities) was 1.5 at the end of the third quarter of 2015 and at year-end 2014.
Investing Activities
In the first nine months of 2015, we used $13.2 million of cash for investing activities, as compared to using $20.2 million in the first nine months of 2014. The decrease was primarily due to a year-over-year decrease in investments in our equity affiliate. These investments primarily represent cash contributions to TS Kelly, our equity affiliate, in which we have a 49% ownership interest. Capital expenditures in both years relate primarily to the Company’s technology programs.
Financing Activities
In the first nine months of 2015, we used $19.3 million of cash for financing activities, as compared to generating $55.1 million in the first nine months of 2014. The decrease in cash from financing activities was caused by decreased short-term borrowings. Debt totaled $76.8 million at the end of the third quarter of 2015 and $91.9 million at year-end 2014. Debt-to-total capital (total debt reported on the balance sheet divided by total debt plus stockholders’ equity) is a common ratio to measure the relative capital structure and leverage of the Company. Our ratio of debt-to-total capital was 8.2% at the end of the third quarter of 2015 and 9.9% at year-end 2014.
The net change in short-term borrowings in the first nine months of 2015 was primarily due to payments on our U.S. securitization facility. The net change in short-term borrowings in the first nine months of 2014 was primarily due to additional borrowings on our securitization facility, used to fund our everyday operations.
We made dividend payments of $5.7 million in the first nine months of both 2015 and 2014.
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New Accounting Pronouncements
See New Accounting Pronouncements footnote in the Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q for a description of new accounting pronouncements.
Contractual Obligations and Commercial Commitments
There are no material changes in our obligations and commitments to make future payments from those included in the Company’s Annual Report on Form 10-K filed February 12, 2015. We have no material, unrecorded commitments, losses, contingencies or guarantees associated with any related parties or unconsolidated entities.
Liquidity
We expect to meet our ongoing short-term and long-term cash requirements principally through cash generated from operations, available cash and equivalents, securitization of customer receivables and committed unused credit facilities. Additional funding sources could include public or private bonds, asset-based lending, additional bank facilities, issuance of equity or other sources.
We utilize intercompany loans, dividends, capital contributions and redemptions to effectively manage our cash on a global basis. We periodically review our foreign subsidiaries’ cash balances and projected cash needs. As part of those reviews, we may identify cash that we feel should be repatriated to optimize the Company’s overall capital structure. At the present time, these reviews have not resulted in any specific plans to repatriate a majority of our international cash balances. We expect much of our international cash will be needed to fund working capital growth in our local operations. The majority of our international cash is concentrated in a cash pooling arrangement (the “Cash Pool”) and is available to fund general corporate needs internationally. The Cash Pool is a set of cash accounts maintained with a single bank that must, as a whole, maintain at least a zero balance; individual accounts may be positive or negative. This allows countries with excess cash to invest and countries with cash needs to utilize the excess cash.
We manage our cash and debt very closely to optimize our capital structure. As our cash balances build, we tend to pay down debt as appropriate. Conversely, when working capital needs grow, we tend to use corporate cash and cash available in the Cash Pool first, and then access our borrowing facilities.
As of the 2015 third quarter end, we had $200.0 million of available capacity on our $200.0 million revolving credit facility and $28.0 million of available capacity on our $150.0 million securitization facility. The securitization facility carried $73.0 million of short-term borrowings and $49.0 million of standby letters of credit related to workers’ compensation. Together, the revolving credit and securitization facilities provide the Company with committed funding capacity that may be used for general corporate purposes. While we believe these facilities will cover our working capital needs over the short term, if economic conditions or operating results change significantly, we may need to seek additional sources of funds. As of the 2015 third quarter end, we met the debt covenants related to our revolving credit facility and securitization facility.
We monitor the credit ratings of our major banking partners on a regular basis and have regular discussions with them. Based on our reviews and communications, we believe the risk of one or more of our banks not being able to honor commitments is insignificant. We also review the ratings and holdings of our money market funds and other investment vehicles regularly to ensure high credit quality and access to our invested cash.
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Forward-Looking Statements
Certain statements contained in this report are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or variations or negatives thereof or by similar or comparable words or phrases. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future actions by us that may be provided by management, including oral statements or other written materials released to the public, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our company and economic and market factors in the countries in which we do business, among other things. These statements are not guarantees of future performance, and we have no specific intention to update these statements.
Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The principal important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, competitive market pressures including pricing and technology introductions, changing market and economic conditions, our ability to achieve our business strategy, the risk of damage to our brand, our ability to successfully develop new service offerings, our exposure to risks associated with services outside traditional staffing, including business process outsourcing, our increasing dependency on third parties for the execution of critical functions, the risks associated with past and future acquisitions, exposure to risks associated with investments in equity affiliates, material changes in demand from or loss of large corporate customers, risks associated with conducting business in foreign countries, including foreign currency fluctuations, availability of full-time employees to lead complex talent supply chain sales and operations, availability of temporary workers with appropriate skills required by customers, liabilities for employment-related claims and losses, including class action lawsuits and collective actions, the risk of cyber attacks or other breaches of network or information technology security as well as risks associated with compliance on data privacy, our ability to sustain critical business applications through our key data centers, our ability to effectively implement and manage our information technology programs, our ability to maintain adequate financial and management processes and controls, impairment charges triggered by adverse industry or market developments, unexpected changes in claim trends on workers’ compensation, disability and medical benefit plans, the impact of the Patient Protection and Affordable Care Act on our business, the impact of changes in laws and regulations (including federal, state and international tax laws and the expiration and/or reinstatement of the U.S. work opportunity credit program), the risk of additional tax or unclaimed property liabilities in excess of our estimates, our ability to maintain specified financial covenants in our bank facilities to continue to access credit markets, and other risks, uncertainties and factors discussed in this release and in the Company’s filings with the Securities and Exchange Commission. Actual results may differ materially from any forward looking statements contained herein, and we have no intention to update these statements. Certain risk factors are discussed more fully under “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to foreign currency risk primarily related to our foreign subsidiaries. Exchange rates impact the U.S. dollar value of our reported earnings, our investments in subsidiaries, local currency denominated borrowings and intercompany transactions with and between subsidiaries. Our foreign subsidiaries primarily derive revenues and incur expenses within a single country and currency which, as a result, provide a natural hedge against currency risks in connection with normal business operations. Accordingly, changes in foreign currency rates vs. the U.S. dollar generally do not impact local cash flows. Intercompany transactions which create foreign currency risk include services, royalties, loans, contributions and distributions.
In addition, we are exposed to interest rate risks through our use of the multi-currency line of credit and other borrowings. A hypothetical fluctuation of 10% of market interest rates would not have had a material impact on 2015 third quarter earnings.
Marketable equity investments, representing our investment in Temp Holdings, are stated at fair value and marked to market through stockholders’ equity, net of tax. Impairments in value below historical cost, if any, deemed to be other than temporary, would be expensed in the consolidated statement of earnings. See the Fair Value Measurements footnote in the Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q for further discussion.
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We are exposed to market risk as a result of our obligation to pay benefits under our nonqualified deferred compensation plan and our related investments in company-owned variable universal life insurance policies. The obligation to employees increases and decreases based on movements in the equity and debt markets. The investments in mutual funds, as part of the company-owned variable universal life insurance policies, are designed to mitigate, but not eliminate, this risk with offsetting gains and losses.
Overall, our holdings and positions in market risk-sensitive instruments do not subject us to material risk.
Item 4. Controls and Procedures.
Based on their evaluation as of the end of the period covered by this Form 10-Q, the Company’s Chief Executive Officer and Acting Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective at a reasonable assurance level.
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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. 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.
Item 1A. Risk Factors.
There have been no material changes in the Company’s risk factors disclosed in Part I, Item 1A of the Company’s Annual Report filed on Form 10-K for year ended December 28, 2014.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Sales of Equity Securities Not Registered Under the Securities Exchange Act of 1933
None.
(c) Issuer Repurchases of Equity Securities
During the third quarter of 2015, we reacquired shares of our Class A common stock as follows:
Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs (in millions of dollars) | ||||||||||
June 29, 2015 through August 2, 2015 | 49,307 | $ | 15.65 | — | $ | — | ||||||||
August 3, 2015 through August 30, 2015 | 230 | 14.29 | — | $ | — | |||||||||
August 31, 2015 through September 27, 2015 | 1,396 | 14.25 | — | $ | — | |||||||||
Total | 50,933 | $ | 15.60 | — | ||||||||||
We may reacquire shares sold to cover taxes due upon the vesting of restricted stock held by employees. Accordingly, 50,933 shares were reacquired in transactions during the quarter.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 6. Exhibits.
See Index to Exhibits required by Item 601, Regulation S-K, set forth on page 34 of this filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KELLY SERVICES, INC. | |
Date: November 4, 2015 | |
/s/ Olivier G. Thirot | |
Olivier G. Thirot | |
Senior Vice President and | |
Acting Chief Financial Officer | |
(Principal Financial Officer) | |
Date: November 4, 2015 | |
/s/ Laura S. Lockhart | |
Laura S. Lockhart | |
Vice President, Corporate Controller | |
and Chief Accounting Officer | |
(Principal Accounting Officer) | |
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INDEX TO EXHIBITS
REQUIRED BY ITEM 601,
REGULATION S-K
Exhibit No. | Description | |
31.1 | Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended. | |
31.2 | Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended. | |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
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