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 1,~~September 30, 2018

[ ] 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, 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 ~~[ ]~~[X]	Accelerated filer ~~[X]~~[ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [ ]
Emerging growth company [ ]

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s second fiscal quarter of 2017 was approximately $702.3 million.

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 30,~~October 29, 2018, ~~35,372,584~~35,434,862 shares of Class A and ~~3,431,972~~3,432,072 shares of Class B common stock of the Registrant were outstanding.

KELLY SERVICES, INC. AND SUBSIDIARIES



	Page Number

PART I. FINANCIAL INFORMATION	34

Item 1. Financial Statements (unaudited).	34

Consolidated Statements of Earnings	34

Consolidated Statements of Comprehensive Income	45

Consolidated Balance Sheets	56

Consolidated Statements of Stockholders' Equity	78

Consolidated Statements of Cash Flows	89

Notes to Consolidated Financial Statements	910

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.	2425

Item 3. Quantitative and Qualitative Disclosures About Market Risk.	3738

Item 4. Controls and Procedures.	3839

PART II. OTHER INFORMATION	3839

Item 1. Legal Proceedings.	3839

Item 1A. Risk Factors.	3839

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	3941

Item 3. Defaults Upon Senior Securities.	3941

Item 4. Mine Safety Disclosures.	3941

Item 5. Other Information.	3941

Item 6. Exhibits.	3941

SIGNATURES	4042

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						13 Weeks Ended						39 Weeks Ended
	July 1, 2018			July 2, 2017			July 1, 2018			July 2, 2017			September 30, 2018			October 1, 2017			September 30, 2018			October 1, 2017
Revenue from services	$	1,386.9		$	1,333.6		$	2,756.8		$	2,623.3		$	1,342.4		$	1,328.8		$	4,099.2		$	3,952.1

Cost of services	1,146.4			1,104.8			2,278.1			2,162.9			1,103.3			1,098.1			3,381.4			3,261.0

Gross profit	240.5			228.8			478.7			460.4			239.1			230.7			717.8			691.1

Selling, general and administrative expenses	220.1			208.5			446.3			423.7			217.2			212.5			663.5			636.2

Earnings from operations	20.4			20.3			32.4			36.7			21.9			18.2			54.3			54.9

Loss on investment in Persol Holdings	(52.5		)	—			(28.8		)	—
Gain (loss) on investment in Persol Holdings													15.8			—			(13.0		)	—

Other income (expense), net	0.6			(0.5		)	(1.1		)	(2.1		)
Other expense, net													(0.7		)	(0.4		)	(1.8		)	(2.5		)

Earnings (loss) before taxes and equity in net earnings (loss) of affiliate	(31.5		)	19.8			2.5			34.6
Earnings before taxes and equity in net earnings (loss) of affiliate													37.0			17.8			39.5			52.4

Income tax (benefit) expense	(15.6		)	1.5			(9.2		)	4.2
Income tax expense (benefit)													5.9			(4.1		)	(3.3		)	0.1

Net earnings (loss) before equity in net earnings (loss) of affiliate	(15.9		)	18.3			11.7			30.4
Net earnings before equity in net earnings (loss) of affiliate													31.1			21.9			42.8			52.3

Equity in net earnings (loss) of affiliate	0.5			0.4			2.0			0.5			2.0			1.1			4.0			1.6

Net earnings (loss)	$	(15.4	)	$	18.7		$	13.7		$	30.9
Net earnings													$	33.1		$	23.0		$	46.8		$	53.9

Basic earnings (loss) per share	$	(0.40	)	$	0.48		$	0.35		$	0.79
Diluted earnings (loss) per share	$	(0.40	)	$	0.47		$	0.35		$	0.78
Basic earnings per share													$	0.84		$	0.59		$	1.20		$	1.38
Diluted earnings per share													$	0.84		$	0.58		$	1.19		$	1.37

Dividends per share	$	0.075		$	0.075		$	0.15		$	0.15		$	0.075		$	0.075		$	0.225		$	0.225

Average shares outstanding (millions):
Basic	38.8			38.3			38.7			38.3			38.8			38.3			38.7			38.3
Diluted	38.8			38.8			38.8			38.7			38.9			38.8			38.8			38.8

See accompanying unaudited Notes to Consolidated Financial Statements.

KELLY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(In millions of dollars)


	13 Weeks Ended					26 Weeks Ended					13 Weeks Ended					39 Weeks Ended
	July 1, 2018			July 2, 2017		July 1, 2018			July 2, 2017		September 30, 2018			October 1, 2017		September 30, 2018			October 1, 2017
Net earnings (loss)	$	(15.4	)	$	18.7	$	13.7		$	30.9
Net earnings											$	33.1		$	23.0	$	46.8		$	53.9

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax expense of $0.6, $0.0, $0.6 and $0.1, respectively	(14.8		)	6.9		(0.8		)	12.6
Foreign currency translation adjustments, net of tax benefit of $0.9, tax expense of $0.2, tax benefit of $0.3 and tax expense of $0.3, respectively											(7.0		)	3.4		(7.8		)	16.0
Less: Reclassification adjustments included in net earnings	—			—		—			—		—			—		—			—
Foreign currency translation adjustments	(14.8		)	6.9		(0.8		)	12.6		(7.0		)	3.4		(7.8		)	16.0

Unrealized gains on investment, net of tax expense of $0.4 and $9.0 in 2017, respectively	—			0.9		—			19.8
Unrealized gains on investment, net of tax expense of $12.9 and $21.9 in 2017, respectively											—			28.8		—			48.6

Other comprehensive income (loss)	(14.8		)	7.8		(0.8		)	32.4		(7.0		)	32.2		(7.8		)	64.6

Comprehensive income (loss)	$	(30.2	)	$	26.5	$	12.9		$	63.3
Comprehensive income											$	26.1		$	55.2	$	39.0		$	118.5

See accompanying unaudited Notes to Consolidated Financial Statements.

KELLY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In millions)


ASSETS	July 1, 2018			December 31, 2017			September 30, 2018			December 31, 2017
CURRENT ASSETS:
Cash and equivalents	$	33.9		$	32.5		$	20.8		$	32.5
Trade accounts receivable, less allowances of $13.1 and $12.9, respectively	1,248.9			1,286.7
Trade accounts receivable, less allowances of $12.4 and $12.9, respectively							1,294.0			1,286.7
Prepaid expenses and other current assets	64.5			65.1			68.0			65.1
Total current assets	1,347.3			1,384.3			1,382.8			1,384.3

NONCURRENT ASSETS:
Property and equipment:
Property and equipment	292.7			291.8			290.7			291.8
Accumulated depreciation	(208.0		)	(205.7		)	(205.7		)	(205.7		)
Net property and equipment	84.7			86.1			85.0			86.1
Deferred taxes	191.7			183.4			196.5			183.4
Goodwill	107.3			107.1			107.3			107.1
Investment in Persol Holdings	203.2			228.1			213.6			228.1
Investment in equity affiliate	122.0			117.4			120.3			117.4
Other assets	278.4			271.8			287.6			271.8
Total noncurrent assets	987.3			993.9			1,010.3			993.9

TOTAL ASSETS	$	2,334.6		$	2,378.2		$	2,393.1		$	2,378.2

See accompanying unaudited Notes to Consolidated Financial Statements.

KELLY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In millions)


LIABILITIES AND STOCKHOLDERS’ EQUITY	July 1, 2018			December 31, 2017			September 30, 2018			December 31, 2017
CURRENT LIABILITIES:
Short-term borrowings	$	1.7		$	10.2		$	8.1		$	10.2
Accounts payable and accrued liabilities	505.5			537.7			497.0			537.7
Accrued payroll and related taxes	284.7			287.4			304.7			287.4
Accrued insurance	25.3			25.7			25.9			25.7
Income and other taxes	60.7			65.2			66.5			65.2
Total current liabilities	877.9			926.2			902.2			926.2

NONCURRENT LIABILITIES:
Accrued insurance	49.2			49.9			50.2			49.9
Accrued retirement benefits	182.2			178.1			186.9			178.1
Other long-term liabilities	64.4			72.5			68.0			72.5
Total noncurrent liabilities	295.8			300.5			305.1			300.5

Commitments and contingencies (see contingencies footnote)

STOCKHOLDERS’ EQUITY:
Capital stock, $1.00 par value
Class A common stock, shares issued 36.6 at 2018 and 2017	36.6			36.6			36.6			36.6
Class B common stock, shares issued 3.5 at 2018 and 2017	3.5			3.5			3.5			3.5
Treasury stock, at cost
Class A common stock,1.3 shares at 2018 and 1.7 shares at 2017	(26.8		)	(34.6		)
Class A common stock, 1.3 shares at 2018 and 1.7 shares at 2017							(26.7		)	(34.6		)
Class B common stock	(0.6		)	(0.6		)	(0.6		)	(0.6		)
Paid-in capital	23.4			32.2			25.0			32.2
Earnings invested in the business	1,134.8			983.6			1,165.0			983.6
Accumulated other comprehensive income (loss)	(10.0		)	130.8			(17.0		)	130.8
Total stockholders’ equity	1,160.9			1,151.5			1,185.8			1,151.5

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,334.6		$	2,378.2		$	2,393.1		$	2,378.2

See accompanying unaudited Notes to Consolidated Financial Statements.

KELLY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In millions of dollars)


	13 Weeks Ended						26 Weeks Ended						13 Weeks Ended						39 Weeks Ended
	July 1, 2018			July 2, 2017			July 1, 2018			July 2, 2017			September 30, 2018			October 1, 2017			September 30, 2018			October 1, 2017
Capital Stock
Class A common stock
Balance at beginning of period	$	36.6		$	36.6		$	36.6		$	36.6		$	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			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			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			3.5			3.5			3.5			3.5

Treasury Stock
Class A common stock
Balance at beginning of period	(27.3		)	(37.5		)	(34.6		)	(38.4		)	(26.8		)	(37.0		)	(34.6		)	(38.4		)
Issuance of stock awards	0.5			0.5			7.8			1.4			0.1			2.4			7.9			3.8
Balance at end of period	(26.8		)	(37.0		)	(26.8		)	(37.0		)	(26.7		)	(34.6		)	(26.7		)	(34.6		)

Class B common stock
Balance at beginning of period	(0.6		)	(0.6		)	(0.6		)	(0.6		)	(0.6		)	(0.6		)	(0.6		)	(0.6		)
Issuance of stock awards	—			—			—			—			—			—			—			—
Balance at end of period	(0.6		)	(0.6		)	(0.6		)	(0.6		)	(0.6		)	(0.6		)	(0.6		)	(0.6		)

Paid-in Capital
Balance at beginning of period	21.1			31.5			32.2			28.6			23.4			31.1			32.2			28.6
Issuance of stock awards	2.3			(0.4		)	(8.8		)	2.5			1.6			(1.1		)	(7.2		)	1.4
Balance at end of period	23.4			31.1			23.4			31.1			25.0			30.0			25.0			30.0

Earnings Invested in the Business
Balance at beginning of period	1,153.2			932.9			983.6			923.6			1,134.8			948.7			983.6			923.6
Cumulative-effect adjustment from adoption of ASU 2016-01, Financial Instruments	—			—			140.0			—			—			—			140.0			—
Cumulative-effect adjustment from adoption of ASU 2014-09, Revenue	—			—			3.4			—			—			—			3.4			—
Net earnings (loss)	(15.4		)	18.7			13.7			30.9
Net earnings													33.1			23.0			46.8			53.9
Dividends	(3.0		)	(2.9		)	(5.9		)	(5.8		)	(2.9		)	(2.9		)	(8.8		)	(8.7		)
Balance at end of period	1,134.8			948.7			1,134.8			948.7			1,165.0			968.8			1,165.0			968.8

Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	4.8			83.3			130.8			58.7			(10.0		)	91.1			130.8			58.7
Cumulative-effect adjustment from adoption of ASU 2016-01, Financial Instruments	—			—			(140.0		)	—			—			—			(140.0		)
Other comprehensive income (loss), net of tax	(14.8		)	7.8			(0.8		)	32.4			(7.0		)	32.2			(7.8		)	64.6
Balance at end of period	(10.0		)	91.1			(10.0		)	91.1			(17.0		)	123.3			(17.0		)	123.3

Stockholders’ Equity at end of period	$	1,160.9		$	1,073.4		$	1,160.9		$	1,073.4		$	1,185.8		$	1,127.0		$	1,185.8		$	1,127.0

See accompanying unaudited Notes to Consolidated Financial Statements.

KELLY SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In millions of dollars)


	26 Weeks Ended						39 Weeks Ended
	July 1, 2018			July 2, 2017			September 30, 2018			October 1, 2017
Cash flows from operating activities:
Net earnings	$	13.7		$	30.9		$	46.8		$	53.9
Noncash adjustments:
Depreciation and amortization	12.9			10.6			19.5			16.5
Provision for bad debts	1.5			2.9			1.3			3.6
Stock-based compensation	4.7			4.2			6.7			6.8
Loss on investment in Persol Holdings	28.8			—			13.0			—
Other, net	(2.6		)	(0.5		)	(5.0		)	(2.3		)
Changes in operating assets and liabilities	(25.8		)	(3.7		)
Changes in operating assets and liabilities, net of acquisition							(49.0		)	(45.5		)

Net cash from operating activities	33.2			44.4			33.3			33.0

Cash flows from investing activities:
Capital expenditures	(10.3		)	(7.3		)	(17.9		)	(14.7		)
Acquisition of company, net of cash received							—			(37.2		)
Investment in equity securities							(5.0		)	—
(Loan to) proceeds from repayment of loan to equity affiliate							(2.9		)	0.6
Other investing activities	(0.6		)	—			(0.8		)	—

Net cash used in investing activities	(10.9		)	(7.3		)	(26.6		)	(51.3		)

Cash flows from financing activities:
Net change in short-term borrowings	(8.4		)	0.7			(1.9		)	23.9
Dividend payments	(5.9		)	(5.8		)	(8.8		)	(8.7		)
Payments of tax withholding for stock awards	(6.2		)	(0.5		)	(6.3		)	(1.7		)
Other financing activities	—			(0.1		)	—			(0.1		)

Net cash used in financing activities	(20.5		)	(5.7		)
Net cash (used in) from financing activities							(17.0		)	13.4

Effect of exchange rates on cash, cash equivalents and restricted cash	(0.1		)	(0.2		)	(0.7		)	(2.3		)

Net change in cash, cash equivalents and restricted cash	1.7			31.2			(11.0		)	(7.2		)
Cash, cash equivalents and restricted cash at beginning of period	36.9			34.3			36.9			34.3

Cash, cash equivalents and restricted cash at end of period ⁽¹⁾	$	38.6		$	65.5		$	25.9		$	27.1

⁽¹⁾ The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported in our consolidated balance sheets:


Reconciliation of cash, cash equivalents and restricted cash:
Current assets:
Cash and cash equivalents	$	33.9	$	60.8	$	20.8	$	22.2
Restricted cash included in prepaid expenses and other current assets	0.3		0.3		0.5		0.6
Noncurrent assets:
Restricted cash included in other assets	4.4		4.4		4.6		4.3
Cash, cash equivalents and restricted cash at end of period	$	38.6	$	65.5	$	25.9	$	27.1

See accompanying unaudited Notes to Consolidated Financial Statements.

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 (“GAAP”) 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 31, 2017, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 20, 2018 (the 2017 consolidated financial statements). The Company’s ~~second~~third fiscal quarter ended on ~~July 1,~~September 30, 2018 (2018) and ~~July 2,~~October 1, 2017 (2017), each of which contained 13 weeks. The corresponding ~~June~~September year to date periods for 2018 and 2017 each contained 2639 weeks.

Selling, general and administrative (“SG&A”) expenses for the 13 and 39 weeks ended October 1, 2017 include a $2.8 million and $1.4 million, respectively, benefit resulting from an out-of-period correction of expenses that were overstated in prior periods. The out-of-period errors and adjustments did not have a material effect on any of the periods impacted.

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

2. Revenue

Adoption of ASC Topic 606, Revenue from Contracts with Customers

On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605.

We recorded a net increase to opening earnings invested in the business of $3.4 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606. The impact is primarily driven by the deferral of contract costs related to our customer contracts of $5.2 million, partially offset by deferring revenue billed at a point in time for services performed over time of $0.6 million and a deferred tax liability of $1.2 million. As of and for the three and ~~six~~nine month periods ended ~~July 1,~~September 30, 2018, the consolidated financial statements were not materially impacted as a result of the application of Topic 606 compared to Topic 605.

Revenue Recognition

Revenues are recognized when control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Our revenues are recorded net of any sales, value added, or similar taxes collected from our customers.

We generate revenue from: the hourly sales of services by our temporary employees to customers (“staffing solutions” revenue), the recruiting of permanent employees for our customers (“permanent placement” revenue), and through our talent fulfillment and outcome-based activities (“talent solutions” and “outcome-based services” revenue).

We record revenues from sales of services and the related direct costs in accordance with the accounting guidance on reporting revenue gross as a principal versus net as an agent. When Kelly is the principal, we demonstrate control over the service by being the employer of record for the individuals performing the service, by being primarily responsible to our customers and by having a level of discretion in establishing pricing in which the gross amount is recorded as revenues. When Kelly arranges for other contingent labor suppliers and/or service providers to perform services for the customer, we do not control those services before they are transferred, and therefore, the amounts billed to our customers are net of the amounts paid to the secondary suppliers/service providers and the net amount is recorded as revenues.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

Staffing Solutions Revenue

Staffing solutions can be branch-delivered (Americas and EMEA regions) or ~~centrally-delivered~~centrally delivered (within Global Talent Solutions (“GTS”)). Our Americas Staffing segment is organized to deliver services in a number of specialty staffing solutions, which are summarized as: commercial, specialized professional/technical (“PT”) and educational staffing. Staffing solutions

~~KELLY SERVICES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(UNAUDITED)~~

contracts are short-term in nature. Billings are generally negotiated and invoiced on a per-hour or per-unit basis as the temporary staffing services are transferred to the customer. Revenue from the majority of our staffing solutions services continues to be recognized over time as the customer simultaneously receives and consumes the services we provide. We have applied the practical expedient to recognize revenue for these services over the term of the agreement in proportion to the amount we have the right to invoice the customer.

Permanent Placement Revenue

Permanent placement solutions can be branch-delivered (Americas and EMEA regions) or ~~centrally-delivered~~centrally delivered (within GTS). Our permanent placement revenue is recorded at the point in time the permanent placement candidate begins full-time employment. On the candidate start date, the customer accepts the candidate and can direct the use of the candidate as well as obtains the significant risk and rewards of the candidate. As such, we consider this the point the control transfers to the customer.

Talent Solutions and Outcome-Based Services Revenue

In addition to ~~centrally-delivered~~centrally delivered staffing services, our GTS segment also includes talent solutions (contingent workforce outsourcing “CWO”, payroll process outsourcing “PPO” and recruitment process outsourcing “RPO”) and outcome-based services (business process outsourcing “BPO”, KellyConnect, career transition/outplacement services and talent advisory services). Billings are generally negotiated and invoiced on a measure of time (hours, weeks, months) or per-unit basis for our services performed. We continue to recognize revenue from the majority of our talent solutions services and our outcome-based services over time as the customer simultaneously receives and consumes the services we provide. We have applied the practical expedient to recognize revenue for these services over the term of the agreement in proportion to the amount we have the right to invoice the customer.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

The following table presents our segment revenues disaggregated by service type (in millions):


	Second Quarter			June Year to Date			Third Quarter			September Year to Date
	2018			2018			2018			2018
Branch-Delivered Staffing
Americas Staffing
Staffing Solutions
Commercial	$	414.5		$	812.9		$	424.3		$	1,237.2
Educational Staffing	110.0			240.1			57.7			297.8
Professional/Technical	70.1			137.5			68.8			206.3
Permanent Placement	9.4			17.8			11.0			28.8
Total Americas Staffing	604.0			1,208.3			561.8			1,770.1

International Staffing
Staffing Solutions	279.1			556.0			270.4			826.4
Permanent Placement	7.5			15.3			6.8			22.1
Total International Staffing	286.6			571.3			277.2			848.5

Global Talent Solutions
Talent Fulfillment
Staffing Solutions	288.3			572.5			279.0			851.5
Permanent Placement	0.4			0.8			0.6			1.4
Talent Solutions	88.9			173.9			94.0			267.9
Total Talent Fulfillment	377.6			747.2			373.6			1,120.8

Outcome-Based Services	123.1			239.3			134.0			373.3
Total Global Talent Solutions	500.7			986.5			507.6			1,494.1

Total Intersegment	(4.4		)	(9.3		)	(4.2		)	(13.5		)

Total Revenue from Services	$	1,386.9		$	2,756.8		$	1,342.4		$	4,099.2

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

Our operations are subject to different economic and regulatory environments depending on geographic location. Our GTS segment operates in Americas, EMEA and APAC regions. In the ~~second~~third quarter of 2018 and 2017, GTS made up ~~$483.9~~$490.4 million and ~~$492.0~~$489.2 million in total Americas, respectively, ~~$11.2~~$11.0 million and ~~$9.0~~$8.9 million in total EMEA, respectively, and the entire balance in APAC. For ~~June~~September year to date in 2018 and 2017, GTS made up ~~$952.5~~$1,442.9 million and ~~$967.7~~$1,456.9 million in total Americas, respectively, ~~$23.3~~$34.3 million and ~~$16.4~~$25.3 million in total EMEA, respectively, and the entire balance in APAC. The below table presents our revenues disaggregated by geography (in millions):


	Second Quarter				June Year to Date				Third Quarter				September Year to Date
	2018		2017		2018		2017		2018		2017		2018		2017
Americas
United States	$	981.2	$	970.1	$	1,955.9	$	1,925.7	$	942.5	$	941.1	$	2,898.4	$	2,866.8
Canada	37.0		34.6		70.6		68.7		37.0		37.1		107.6		105.8
Mexico	30.0		28.3		60.4		52.1		32.3		32.9		92.7		85.0
Puerto Rico	26.2		17.6		46.0		35.3		28.2		15.9		74.2		51.2
Brazil	9.0		12.7		18.5		26.0		8.1		12.3		26.6		38.3
Total Americas	1,083.4		1,063.3		2,151.4		2,107.8		1,048.1		1,039.3		3,199.5		3,147.1

EMEA
France	72.0		68.3		143.9		129.1		68.8		73.0		212.7		202.1
Switzerland	52.8		53.9		102.5		102.2		53.8		59.1		156.3		161.3
Portugal	51.2		41.7		102.3		78.0		48.2		46.0		150.5		124.0
United Kingdom	28.5		20.8		57.5		41.0		28.1		23.3		85.6		64.3
Russia	25.6		24.0		51.7		46.8		24.0		22.5		75.7		69.3
Italy	19.3		15.7		39.8		29.4		18.3		15.9		58.1		45.3
Germany	14.8		14.6		31.2		27.8		13.8		15.5		45.0		43.3
Ireland	11.7		7.4		23.0		15.1		11.3		8.3		34.3		23.4
Norway	9.2		8.4		17.6		16.0		8.8		8.9		26.4		24.9
Other	12.8		11.0		25.2		21.4		13.0		12.1		38.2		33.5
Total EMEA	297.9		265.8		594.7		506.8		288.1		284.6		882.8		791.4

Total APAC	5.6		4.5		10.7		8.7		6.2		4.9		16.9		13.6

Total Kelly Services, Inc.	$	1,386.9	$	1,333.6	$	2,756.8	$	2,623.3	$	1,342.4	$	1,328.8	$	4,099.2	$	3,952.1

Variable Consideration

Certain customers may receive cash-based incentives or credits, which are accounted for as a form of variable consideration. We estimate these amounts based on the expected or likely amount to be provided to customers and reduce revenues recognized to the extent that it is probable that a significant reversal of such adjustment will not occur. Provisions for sales allowances (billing adjustments related to errors, service issues and compromises on billing disputes), based on historical experience, are recognized at the time the related sale is recognized as a reduction in revenue from services.

Payment Terms

Customer payments are typically due within 60 days of invoicing, but may be shorter or longer depending on contract terms. Management does not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the services to the customer will be less than one year. We do not have any significant financing components or extended payment terms.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

Deferred Revenue

Items which are billed to the customer at a point in time, rather than billed over time as the services are delivered to the customer, are assessed for potential revenue deferral. At this time, the balance of the contract liability as well as the amount of revenue recognized in the reporting period that was included in the deferred revenue balance at the beginning of the period is not material.

Deferred Costs

Sales commissions paid at initial contract inception and upon contract renewal by our sales team are considered incremental and recoverable costs of obtaining a contract with a customer. The sales commissions (and related fringe benefits such as taxes and benefits) are deferred and then amortized on a straight-line basis over an appropriate period of benefit that we have determined to be contract duration. We determined the period of benefit by taking into consideration our customer contracts and other relevant factors. Anticipated renewal periods are not included in the amortization period of the initial commission. Amortization expense is included in ~~selling, general and administrative (“~~SG~~&A”)~~&A expenses on the consolidated ~~statement~~statements of earnings. As a practical expedient, sales commissions with amortization periods of 12 months or less are expensed as incurred. These costs are recorded in SG&A expenses on the consolidated ~~statement~~statements of earnings.

Deferred sales commissions, which are included in other assets on the consolidated balance sheet, were ~~$2.6~~$2.4 million as of ~~second~~third quarter-end 2018 and $3.2 million as of January 1, 2018. Amortization expense for the deferred costs was $0.4 million and ~~$0.8~~$1.2 million for the ~~second~~third quarter and ~~June~~September year to date 2018, respectively. ~~There~~For the third quarter and September year to date 2018, there was no impairment loss in relation to the costs ~~capitalized for the second quarter and June year to date 2018.~~capitalized.

Occasionally, fulfillment costs are incurred after obtaining a contract in order to generate a resource that will be used to provide our services. These costs are considered incremental and recoverable costs to fulfill our contract with the customer. These costs to fulfill a contract are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be the average length of assignment of the employees. We determined the period of benefit by taking into consideration our customer contracts, attrition rates and other relevant factors. Amortization expense is included in SG&A expenses on the consolidated ~~statement~~statements of earnings.

Deferred fulfillment costs, which are included in prepaid expenses and other current assets on the consolidated balance sheet, were ~~$3.4~~$4.0 million as of ~~second~~third quarter-end 2018 and $2.0 million as of January 1, 2018. Amortization expense for the deferred costs was ~~$2.5~~$4.1 million and ~~$4.6~~$8.7 million for the ~~second~~third quarter and ~~June~~September year to date 2018, respectively. ~~There~~For the third quarter and September year to date 2018, there was no impairment loss in relation to the costs ~~capitalized for the second quarter and June year to date 2018.~~capitalized.

Unsatisfied Performance Obligations

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

3. Acquisition and Disposition

Acquisition

On September 5, 2017, Kelly Services USA, LLC, a wholly owned subsidiary of the Company, acquired 100% of the issued and outstanding shares of Teachers On Call, Inc. (“TOC”), an educational staffing firm in the U.S. for a purchase price of $41.0 million. Under terms of the purchase agreement, the purchase price was adjusted for cash held by TOC at the closing date less an estimated working capital adjustment resulting in the Company paying cash of $39.0 million at closing. In the first quarter of 2018, the Company paid a working capital adjustment of $0.2 million, resulting in an increase of goodwill (see Goodwill footnote). ~~The purchase price allocation for this acquisition is preliminary and could change, but will be finalized in September, 2018.~~

Goodwill generated from this acquisition is primarily attributable to expected synergies from combining operations and expanding market potential, and is assigned to the Americas Staffing reporting unit. The amount of goodwill expected to be deductible for tax purposes is approximately $18.8 million as of the ~~second~~third quarter-end 2018. An indemnification asset of $2.8 million was recognized as of the acquisition date related to pre-acquisition tax liabilities. As of the ~~second quarter end~~third quarter-end 2018, the

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

~~the~~ indemnification asset is $0.1 million with the change driven by cash received from the seller to pay pre-acquisition tax liabilities.

Disposition

On September 21, 2018, Kelly Services entered into an agreement with TrustPoint International, LLC to sell the assets related to the Company’s legal staffing and legal management services business. The transaction is expected to close in the fourth quarter of 2018. The assets related to the sale that are included on the consolidated balance sheet are immaterial for held for sale disclosure.

4. Investment in Persol Holdings

The Company has a yen-denominated investment in the common stock of Persol Holdings, the Company’s joint venture partner in PersolKelly Asia Pacific. As our investment is a noncontrolling interest in Persol Holdings, this investment is recorded at fair value based on the quoted market price of Persol Holdings stock on the Tokyo Stock Exchange as of the period end (see Fair Value Measurements footnote). The Company adopted ~~ASU~~Accounting Standards Update (“ASU”) 2016-01 and as a result, effective January 1, 2018, all changes in fair value on the investment are recognized in net earnings which previously were recorded in other comprehensive income.

Accordingly, for the ~~second~~third quarter-end and ~~June~~September year to date 2018, a gain on the investment of $15.8 million and a loss on the investment of ~~$52.5 million and $28.8~~$13.0 million, respectively, was recorded entirely in the ~~Loss~~gain (loss) on ~~Investment~~investment in Persol Holdings in the consolidated statements of earnings. During the ~~second~~third quarter-end and ~~June~~September year to date 2017, an unrealized gain, net of tax, of ~~$0.9~~$28.8 million and ~~$19.8~~$48.6 million, respectively, was recorded in other comprehensive income, and in accumulated other comprehensive income (loss), a component of stockholders’ equity. A cumulative catch-up adjustment of the prior net unrealized gains previously recorded in other comprehensive income, and in accumulated other comprehensive income (loss), a component of stockholders’ equity, was recorded in earnings invested in the business as of January 1, 2018 for $140.0 million, net of $69.9 million of taxes.

5. Investment in Equity Affiliate

The Company has a 49% ownership interest in PersolKelly Asia Pacific. The operating results of the Company’s interest in PersolKelly 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~~statements of earnings. This investment is evaluated for indicators of impairment on a periodic basis or whenever events or circumstances indicate the carrying amount may be other-than-temporarily impaired. If we conclude that there is an other-than-temporary impairment of this equity investment, we will adjust the carrying amount of the investment to the current fair value.

The investment in equity affiliate on the Company’s consolidated balance sheet totaled ~~$122.0~~$120.3 million as of ~~second~~third quarter-end 2018 and $117.4 million as of year-end 2017. The net amount due tofrom PersolKelly Asia Pacific, a related party, was ~~$1.0~~$2.8 million as of the ~~second~~third quarter-end 2018 ~~and~~including a loan made to PersolKelly Asia Pacific for $2.9 million in the third quarter to fund working capital requirements. The net amount due to PersolKelly Asia Pacific was $2.3 million as of year-end 2017. The amount included in trade accounts payable for staffing services provided by PersolKelly Asia Pacific as a supplier to CWO programs was ~~$1.7~~$1.6 million as of ~~second~~third quarter-end 2018 and $2.5 million as of year-end 2017.

6. 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~~third quarter-end 2018 and year-end 2017 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.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)


	Fair Value Measurements on a Recurring Basis As of Second Quarter-End 2018								Fair Value Measurements on a Recurring Basis As of Third Quarter-End 2018
Description	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
	(In millions of dollars)								(In millions of dollars)
Money market funds	$	13.6	$	13.6	$	—	$	—	$	4.5	$	4.5	$	—	$	—
Investment in Persol Holdings	203.2		203.2		—		—		213.6		213.6		—		—

Total assets at fair value	$	216.8	$	216.8	$	—	$	—	$	218.1	$	218.1	$	—	$	—



	Fair Value Measurements on a Recurring Basis As of Year-End 2017
Description	Total		Level 1		Level 2		Level 3
	(In millions of dollars)
Money market funds	$	4.3	$	4.3	$	—	$	—
Investment in Persol Holdings	228.1		228.1		—		—

Total assets at fair value	$	232.4	$	232.4	$	—	$	—

Money market funds as of ~~second~~third quarter-end 2018 ~~represents investments in money market accounts, of which $9.3 million is included in cash~~ and ~~equivalents on the consolidated balance sheet and $4.3 million is restricted as to use and included in other assets on the consolidated balance sheet. Money market funds as of year-end~~ 2017 ~~represents~~represent investments in money market accounts, all of which are restricted as to use and included ~~as restricted cash within~~in other assets on the consolidated balance sheet. The money market funds that are restricted as to use account for the majority of our restricted cash balance and represents cash balances that are required to be maintained to fund disability claims in California. The valuations of money market funds were based on quoted market prices of those accounts as of the respective period end.

The valuation of the investment in Persol Holdings is based on the quoted market price of Persol Holdings stock on the Tokyo Stock Exchange as of the period end. Effective January 1, 2018, the changes in fair value of this investment are recorded in the consolidated statements of earnings (see Investment in Persol Holdings footnote). In 2017, changes in fair value were recorded in other comprehensive income, and in accumulated other comprehensive income (loss), a component of stockholders’ equity. The cost of this yen-denominated investment, which fluctuates based on foreign exchange rates, was ~~$18.7~~$18.2 million as of the ~~second~~third quarter-end 2018 and $18.4 million at year-end 2017.

Equity Investment Without Readily Determinable Fair Value

The Company made a minority investment in Business Talent Group, LLC in the third quarter of 2018, which is included in other assets on the consolidated balance sheet. This investment is measured using the measurement alternative for equity investments without a readily determinable fair value. The measurement alternative represents cost, less impairment, plus or minus observable price changes. The carrying amount of $5.0 million represents the purchase price. There have been no adjustments to the carrying amount or impairments.

7. Goodwill

The changes in the carrying amount of goodwill as of ~~second~~third quarter-end 2018 are included in the table below. See Acquisition and Disposition footnote for a description of the change in goodwill.


	As of Year-End 2017		Additions to Goodwill		As of Second Quarter-End 2018		As of Year-End 2017		Additions to Goodwill		As of Third Quarter-End 2018
	(In millions of dollars)						(In millions of dollars)
Americas Staffing	$	44.6	$	0.2	$	44.8	$	44.6	$	0.2	$	44.8
Global Talent Solutions	62.5		—		62.5		62.5		—		62.5
International Staffing	—		—		—		—		—		—
	$	107.1	$	0.2	$	107.3	$	107.1	$	0.2	$	107.3

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

8. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component, net of tax, for the ~~second~~third quarter and ~~June~~September year to date 2018 and 2017 are included in the table below. Amounts in parentheses indicate debits. See Investment in Persol Holdings footnote for a description of the cumulative-effect adjustment from the adoption of ASU 2016-01.


	Second Quarter						June Year to Date						Third Quarter						September Year to Date
	2018			2017			2018			2017			2018			2017			2018			2017
	(In millions of dollars)												(In millions of dollars)
Foreign currency translation adjustments:
Beginning balance	$	7.1		$	(17.6	)	$	(6.9	)	$	(23.3	)	$	(7.7	)	$	(10.7	)	$	(6.9	)	$	(23.3	)
Other comprehensive income (loss) before classifications	(14.8		)	6.9			(0.8		)	12.6			(7.0		)	3.4			(7.8		)	16.0
Amounts reclassified from accumulated other comprehensive income	—			—			—			—			—			—			—			—
Net current-period other comprehensive income (loss)	(14.8		)	6.9			(0.8		)	12.6			(7.0		)	3.4			(7.8		)	16.0
Ending balance	(7.7		)	(10.7		)	(7.7		)	(10.7		)	(14.7		)	(7.3		)	(14.7		)	(7.3		)

Unrealized gains and losses on investment:
Beginning balance	—			102.7			140.0			83.8			—			103.6			140.0			83.8
Cumulative-effect adjustment from adoption of ASU 2016-01, Financial Instruments	—			—			(140.0		)	—			—			—			(140.0		)	—
Other comprehensive income (loss) before classifications	—			0.9			—			19.8			—			28.8			—			48.6
Amounts reclassified from accumulated other comprehensive income	—			—			—			—			—			—			—			—
Net current-period other comprehensive income (loss)	—			0.9			(140.0		)	19.8			—			28.8			(140.0		)	48.6
Ending balance	—			103.6			—			103.6			—			132.4			—			132.4

Pension liability adjustments:
Beginning balance	(2.3		)	(1.8		)	(2.3		)	(1.8		)	(2.3		)	(1.8		)	(2.3		)	(1.8		)
Other comprehensive income (loss) before classifications	—			—			—			—			—			—			—			—
Amounts reclassified from accumulated other comprehensive income	—			—			—			—			—			—			—			—
Net current-period other comprehensive income (loss)	—			—			—			—			—			—			—			—
Ending balance	(2.3		)	(1.8		)	(2.3		)	(1.8		)	(2.3		)	(1.8		)	(2.3		)	(1.8		)

Total accumulated other comprehensive income (loss)	$	(10.0	)	$	91.1		$	(10.0	)	$	91.1		$	(17.0	)	$	123.3		$	(17.0	)	$	123.3

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

9. Earnings Per Share

The reconciliation of basic and diluted earnings ~~(loss)~~ per share on common stock for the ~~second~~third quarter and ~~June~~September year to date 2018 and 2017 follows (in millions of dollars except per share data):


	Second Quarter						June Year to Date						Third Quarter						September Year to Date
	2018			2017			2018			2017			2018			2017			2018			2017
Net earnings (loss)	$	(15.4	)	$	18.7		$	13.7		$	30.9
Net earnings													$	33.1		$	23.0		$	46.8		$	53.9
Less: earnings allocated to participating securities	—			(0.3		)	(0.2		)	(0.6		)	(0.4		)	(0.3		)	(0.5		)	(0.9		)
Net earnings (loss) available to common shareholders	$	(15.4	)	$	18.4		$	13.5		$	30.3
Net earnings available to common shareholders													$	32.7		$	22.7		$	46.3		$	53.0

Average shares outstanding (millions):
Basic	38.8			38.3			38.7			38.3			38.8			38.3			38.7			38.3
Dilutive share awards	—			0.5			0.1			0.4			0.1			0.5			0.1			0.5
Diluted	38.8			38.8			38.8			38.7			38.9			38.8			38.8			38.8

Basic earnings (loss) per share	$	(0.40	)	$	0.48		$	0.35		$	0.79
Diluted earnings (loss) per share	$	(0.40	)	$	0.47		$	0.35		$	0.78
Basic earnings per share													$	0.84		$	0.59		$	1.20		$	1.38
Diluted earnings per share													$	0.84		$	0.58		$	1.19		$	1.37

Potentially dilutive shares outstanding are primarily related to performance shares for the ~~second~~third quarter and ~~June~~September year to date 2018 and 2017.

10. Stock-Based Compensation

For the ~~second~~third quarter of 2018, the Company recognized stock compensation expense of ~~$2.2~~$2.0 million, and related tax benefit of ~~$0.5~~$0.8 million. For the ~~second~~third quarter 2017, the Company recognized stock compensation ~~benefit~~expense of ~~$0.2~~$2.6 million, and related tax ~~expense~~benefit of ~~$0.1 million, which included the impact of forfeitures related to the retirement of the Company’s former President and Chief Executive Officer in the second quarter of 2017.~~$1.5 million. For ~~June~~September year to date 2018, the Company recognized stock compensation expense of ~~$4.7~~$6.7 million, and related tax benefit of ~~$3.2~~$4.0 million. For ~~June~~September year to date 2017, the Company recognized stock compensation expense of ~~$4.2~~$6.8 million, and related tax benefit of ~~$1.8~~$3.3 million.

Performance Shares

During 2018, 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 operating and pretax earnings and total shareholder return (“TSR”) 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.

The financial measure performance shares may be earned upon the achievement of two financial goals. For each of the two financial measures, there are annual goals set in February of each year, with the total award payout for 2018 grants based on a cumulative measure of the 2018, 2019 and 2020 goals. Accordingly, the Company remeasures the fair value of the 2018 and 2017 financial measure performance shares each reporting period until the third year goals are set, after which the grant date fair value will be fixed for the remaining performance period. As of ~~second~~third quarter-end 2018, for both the financial measure performance shares granted in 2018 and 2017, the current fair value for the financial measure performance shares was ~~$21.59.~~$23.17. In addition, during the first quarter 2018, the final year of goals was set for the performance shares granted in 2016. Therefore, the grant date fair value for the 2016 financial measure performance shares was set at $28.40, and will remain fixed for the remaining performance period.

TSR performance shares may be earned based on the Company’s TSR relative to the S&P SmallCap 600 Index. The 2018 TSR performance shares have an estimated fair value of $31.38, 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.

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~~third quarter-end 2018 and year-to-date changes is presented as follows below (in thousands of shares except per share data). The majority of the vested shares below is related to the 2015 performance share grant, which cliff-vested after approval from the Compensation Committee during the first quarter of 2018.


	Financial Measure Performance Shares				TSR Performance Shares				Financial Measure Performance Shares				TSR Performance Shares
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Nonvested at year-end 2017	592		$	22.32	240		$	18.17	592		$	22.32	240		$	18.17
Granted	163		28.64		59		31.38		163		28.64		59		31.38
Vested	(229	)	16.62		(109	)	16.01		(229	)	16.62		(109	)	16.01
Forfeited	(20	)	27.78		(8	)	22.75		(45	)	26.18		(17	)	22.94
Nonvested at second quarter-end 2018	506		$	24.67	182		$	23.54
Nonvested at third quarter-end 2018									481		$	25.43	173		$	23.56

Restricted Stock

A summary of the status of nonvested restricted stock as of ~~second~~third quarter-end 2018 and year-to-date changes is presented as follows below (in thousands of shares except per share data).


	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Nonvested at year-end 2017	440		$	18.76	440		$	18.76
Granted	146		29.17		153		28.94
Vested	(96	)	19.61		(104	)	19.70
Forfeited	(26	)	20.07		(44	)	20.19
Nonvested at second quarter-end 2018	464		$	21.79
Nonvested at third quarter-end 2018					445		$	21.89

11. Other ~~Income (Expense),~~Expense, Net

Included in other ~~income (expense),~~expense, net for the ~~second~~third quarter and ~~June~~September year to date 2018 and 2017 are the following:


	Second Quarter						June Year to Date						Third Quarter						September Year to Date
	2018			2017			2018			2017			2018			2017			2018			2017
	(In millions of dollars)												(In millions of dollars)
Interest income	$	0.2		$	0.2		$	0.4		$	0.3		$	0.2		$	0.2		$	0.6		$	0.5
Interest expense	(0.8		)	(0.6		)	(1.6		)	(1.1		)	(0.7		)	(0.7		)	(2.3		)	(1.8		)
Dividend income	0.8			0.7			0.8			0.7			—			—			0.8			0.7
Foreign exchange gain (loss)	0.4			(0.8		)	(0.7		)	(2.0		)	(0.2		)	0.1			(0.9		)	(1.9		)

Other income (expense), net	$	0.6		$	(0.5	)	$	(1.1	)	$	(2.1	)
Other expense, net													$	(0.7	)	$	(0.4	)	$	(1.8	)	$	(2.5	)

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

12. Income Taxes

Income tax ~~benefit~~expense was ~~$15.6~~$5.9 million for the ~~second~~third quarter of 2018 and income tax ~~expense~~benefit was ~~$1.5~~$4.1 million for the ~~second~~third quarter of 2017. Income tax benefit was ~~$9.2~~$3.3 million for ~~June~~September year to date 2018 and income tax expense was ~~$4.2~~$0.1 million for ~~June~~September year to date 2017. Income taxes in the ~~second~~third quarter ~~and June~~of 2018 were impacted by a gain on the Persol Holdings investment, while the third quarter of 2017 benefited from the release of a valuation allowance in Germany. Income taxes for September year to date of 2018 benefited from a lower U.S. tax rate and a loss on the Persol Holdings investment.

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, changes in judgment regarding the realizability of deferred tax assets, or the tax effects of stock compensation. With the Company’s adoption of ASU 2016-01 in the first quarter of 2018, changes in the fair value of the Company’s investment in Persol Holdings are now recognized in the consolidated statements of earnings. These investment gains or losses are treated as discrete since they cannot be estimated.

At year-end 2017, the Company anticipated that the one-time transition tax under the U.S. Tax Cuts and Jobs Act (“the Act”) would be zero. In accordance with SEC Staff Accounting Bulletin 118, a provisional amount of zero was recorded due to the need for additional analysis of historical data. As of the end of the third quarter 2018, we have completed our analysis and finalized our transition tax calculation. Consistent with our estimate at year-end, the transition tax is zero.

13. Contingencies

In the ordinary course of business, the Company is continuously engaged in litigation, threatened ligation, or investigations arising in the ordinary course of its business, such as matters alleging employment discrimination, wage and hour violations, or violations of privacy rights or anti-competition regulations, which could result in a material adverse outcome. There are matters that ~~are currently~~were stayed pending a decision from the United States Supreme Court in the matter of Epic Systems Corp. v. Lewis, regarding the enforceability of class action waivers in favor of arbitration. On May 21, 2018, the Court determined that class action waivers in employment contracts are enforceable. As a result of the ruling, the lower courts have begun the process of ordering arbitration and determining what additional steps are necessary. We are still assessing how the recent Supreme Court ruling affects our overall litigation strategy. We record accruals for loss contingencies when we believe it is probable that liability has been incurred and the amount of loss can be reasonably estimated. Such accruals are recorded in accounts payable and accrued liabilities on the consolidated balance sheet. While the ultimate outcome of these matters cannot be predicted with certainty, we believe that the resolution of any such proceedings will not have a material adverse effect on our financial condition, results of operations or cash flows.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

14. Segment Disclosures

The Company’s segments are based on the organizational structure for which financial results are regularly evaluated by the CODM (the Company’s CEO) to determine resource allocation and assess performance. The Company’s three reportable segments, (1) Americas Staffing, (2) GTS and (3) International Staffing, reflect how the Company delivers services to customers and how its business is organized internally. 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. 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~~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~~centrally delivered staffing, RPO, CWO, BPO, PPO, KellyConnect, career transition/outplacement services and talent 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. Unallocated corporate expenses include those related to incentive compensation, law and risk management, certain finance and accounting functions, executive management, corporate campus facilities, IT production support, certain legal costs, and expenses related to corporate initiatives that do not directly benefit a specific operating segment.

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 ~~(loss)~~ before taxes and equity in net earnings (loss) of affiliate, for the ~~second~~third quarter and ~~June~~September year to date 2018 and 2017. 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						Third Quarter						September Year to Date
	2018			2017			2018			2017			2018			2017			2018			2017
	(In millions of dollars)												(In millions of dollars)
Revenue from Services:

Americas Staffing	$	604.0		$	575.6		$	1,208.3		$	1,148.7		$	561.8		$	554.8		$	1,770.1		$	1,703.5
Global Talent Solutions	500.7			505.5			986.5			992.8			507.6			503.0			1,494.1			1,495.8
International Staffing	286.6			256.8			571.3			490.4			277.2			275.6			848.5			766.0

Less: Intersegment revenue	(4.4		)	(4.3		)	(9.3		)	(8.6		)	(4.2		)	(4.6		)	(13.5		)	(13.2		)

Consolidated Total	$	1,386.9		$	1,333.6		$	2,756.8		$	2,623.3		$	1,342.4		$	1,328.8		$	4,099.2		$	3,952.1

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)


	Second Quarter						June Year to Date						Third Quarter						September Year to Date
	2018			2017			2018			2017			2018			2017			2018			2017
	(In millions of dollars)												(In millions of dollars)
Earnings from Operations:

Americas Staffing gross profit	$	108.5		$	103.8		$	216.5		$	209.1		$	106.0		$	98.8		$	322.5		$	307.9
Americas Staffing SG&A expenses	(90.7		)	(83.4		)	(182.6		)	(167.5		)	(91.2		)	(85.5		)	(273.8		)	(253.0		)
Americas Staffing Earnings from Operations	17.8			20.4			33.9			41.6			14.8			13.3			48.7			54.9

Global Talent Solutions gross profit	92.7			88.7			184.5			179.2			97.3			93.0			281.8			272.2
Global Talent Solutions SG&A expenses	(75.0		)	(73.4		)	(150.8		)	(148.6		)	(73.2		)	(72.2		)	(224.0		)	(220.8		)
Global Talent Solutions Earnings from Operations	17.7			15.3			33.7			30.6			24.1			20.8			57.8			51.4

International Staffing gross profit	39.9			36.8			79.0			73.2			36.4			39.5			115.4			112.7
International Staffing SG&A expenses	(33.5		)	(32.7		)	(67.6		)	(63.9		)	(31.6		)	(32.3		)	(99.2		)	(96.2		)
International Staffing Earnings from Operations	6.4			4.1			11.4			9.3			4.8			7.2			16.2			16.5

Less: Intersegment gross profit	(0.6		)	(0.5		)	(1.3		)	(1.1		)	(0.6		)	(0.6		)	(1.9		)	(1.7		)
Less: Intersegment SG&A expenses	0.6			0.5			1.3			1.1			0.6			0.6			1.9			1.7
Net Intersegment Activity	—			—			—			—			—			—			—			—

Corporate	(21.5		)	(19.5		)	(46.6		)	(44.8		)	(21.8		)	(23.1		)	(68.4		)	(67.9		)
Consolidated Total	20.4			20.3			32.4			36.7			21.9			18.2			54.3			54.9
Loss on investment in Persol Holdings	(52.5		)	—			(28.8		)	—
Other income (expense), Net	0.6			(0.5		)	(1.1		)	(2.1		)
Gain (loss) on investment in Persol Holdings													15.8			—			(13.0		)	—
Other expense, net													(0.7		)	(0.4		)	(1.8		)	(2.5		)

Earnings (loss) before taxes and equity in net earnings (loss) of affiliate	$	(31.5	)	$	19.8		$	2.5		$	34.6
Earnings before taxes and equity in net earnings (loss) of affiliate													$	37.0		$	17.8		$	39.5		$	52.4

15. New Accounting Pronouncements

In ~~June~~August 2018, the Financial Accounting Standards Board (“FASB”) issued ~~Accounting Standards Update (“ASU”)~~ASU 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual periods, with early adoption permitted. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13 which eliminates, adds and modifies certain fair value measurement disclosures. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual periods, with early adoption permitted. We do not expect the adoption of this standard to have a material impact to our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07 simplifying the accounting for nonemployee share-based payment awards by expanding the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The ASU is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods, with early adoption permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

In February 2018, the FASB issued ASU 2018-02 allowing reclassification from accumulated other comprehensive income (loss) to retained earnings for the income tax effects resulting from the Act enacted by the U.S. federal government in December 2017. The new guidance eliminates the stranded tax effects resulting from the Act and will improve the usefulness of information reported to financial statement users. It also requires certain disclosures about stranded tax effects. ASU 2018-02 relates only to the reclassification of the income tax effects of the Act and does not change the underlying guidance requiring that the effect of a change in tax laws or rates be included in income from continuing operations. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. It should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. Early adoption is permitted. We adopted this guidance during the second quarter of 2018. We elected not to reclassify the income tax effects of the Act from accumulated other comprehensive income (loss) to retained earnings.

~~KELLY SERVICES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(UNAUDITED)~~

In May 2017, the FASB issued 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 was 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. The adoption of this ASU did not have an 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 was effective retrospectively for reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted this guidance effective January 1, 2018.

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 transactions. 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 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and required retrospective application. Early adoption was permitted. We adopted this guidance effective January 1, 2018 and the impact related to this implementation was immaterial.

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 February 2016, the FASB issued ASU 2016-02 amending the existing accounting standards for lease accounting and requiring lessees to recognize lease assets and lease liabilities for all leases with lease terms of more than 12 months, including those classified as operating leases. Both the asset and liability will initially be measured at the present value of the future minimum lease payments, with the asset being subject to adjustments such as initial direct costs. Consistent with current U.S.

KELLY SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

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. In July 2018, the FASB issued ASU 2018-11, which provided entities with an additional transition method to adopt the new lease standard at the adoption date, as compared to the beginning of the earliest period presented, and recognize a cumulative-effect adjustment to the beginning balance of retained earnings in the period of adoption. We expect to elect this transition method at the adoption date.

A cross-functional implementation team is working to assess the impact of the standard. We ~~are currently in the process of~~continue to make progress with upgrading our lease accounting software and developing processes to determine key judgments, such as the discount rates to be used for required present value calculations. We believe that our adoption of this standard will likely have a material impact to our consolidated balance sheets for the recognition of certain operating leases as right-of-use assets and lease liabilities. Our operating lease obligations are described in the Commitments footnote of our 2017 Form 10-K. Based on our preliminary assessment, we do not expect this standard to have a material impact to our consolidated ~~statement~~statements of earnings.

~~KELLY SERVICES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(UNAUDITED)~~

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 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption was only permitted for the financial liability provision. We adopted this guidance effective January 1, 2018. See Investment in Persol Holdings footnote for the impact on the financial statements.

In May 2014, the FASB issued new revenue recognition guidance under ASU 2014-09 that superseded the existing revenue recognition guidance under U.S. GAAP. The new standard focused on creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard was 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 was 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 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). We adopted this guidance with the modified retrospective approach effective January 1, 2018. See Revenue footnote for the impact on the 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.

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, automation, 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 solutions. As clients’ workforce solutions strategies move up the maturity model, use of a talent supply chain management approach, which seeks to manage all categories of talent (temporary, project-based, outsourced and full-time), represents significant market potential.

Strategic clients are increasingly looking for global, flexible and holistic talent solutions that encompass all worker categories, driving adoption of a talent supply chain management approach. 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 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 the Americas and Europe, respectively. In July 2016, we moved our APAC staffing operations into our expanded joint venture with Persol Holdings, PersolKelly Asia Pacific (the “JV”), enabling us to more efficiently provide staffing solutions to customers throughout the APAC region via the JV. 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 talent solutions and outsourcing and advisory services. 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 asset. Average days sales outstanding varies within and outside the U.S., but was 5558 days on a global basis as of the 2018 ~~second~~and 2017 third quarter end and 55 days as of the 2017 year ~~end and the 2017 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:

Continue to build our core strengths in staffing in key markets where we have scale or specialization;

Maintain our position as a market-leading provider of talent management solutions; and

Lower our costs through deployment of technology and efficient service delivery models.

2017 was a year of strategic and operational progress, ~~reflecting improved operational performance over the prior year. We~~and we entered 2018 with a strengthened commitment to our strategy for continued growth. ~~Our first quarter results, while mixed, highlighted~~In the face of an increasingly competitive talent environment, our ~~need to remain focused on protecting and accelerating our strategic progress. We delivered solid top-line growth while continuing to invest in our future. Our second~~third quarter 2018 results confirm our long-term growth strategy and our need to ~~continue to~~ place ~~greater~~continued focus on managing the Company’s short-term performance:

Revenue grew ~~4.0%~~1.0%, or ~~3.0%~~1.9% in constant currency

Earnings from operations for the ~~second~~third quarter of 2018 totaled ~~$20.4~~$21.9 million, compared to ~~$20.3~~$18.2 million in 2017

The gross profit rate increased 1040 basis points and we delivered gross profit growth of ~~$12~~$8.4 million in the ~~second~~third quarter of 2018

Conversion rate, or return on gross profit, was ~~8.5%~~9.2%, compared to the 2017 conversion rate of ~~8.9%~~7.9%

~~During the second quarter, cash from operating activities and~~We used $7.5 million of free cash flow ~~generation increased from~~in the ~~first~~ quarter compared to a use of $18.8 million in the same quarter of 2017.

Kelly continues to focus on accelerating the execution of our strategy and 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, as well as earnings and 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 higher margin professional and technical specialty and outsourced solutions, creating a more balanced portfolio that yields benefits from an improved mix;

Build on our core strength in staffing;

Accelerate our ongoing investments in specialty solutions with significant growth opportunities, such as our acquisition of Teachers On Call to augment our Kelly Educational Staffing business in the U.S.;

Deliver structural improvements in costs through investments in technology and process automation that ensure a return from our delivery infrastructure and, as a result;

Improve our conversion rate.

Looking ahead, the demand for skilled workers remains strong globally, and the signs we typically look for to indicate a softening of demand are not currently present. The U.S. labor market, however, is becoming significantly constrained, creating a more challenging business environment for Kelly domestically.

With unemployment hovering near the lowest level in five decades, qualified candidates are becoming more difficult to attract and retain. As the U.S. economy approaches full employment, candidates now have more job opportunities from which to choose and they are becoming more selective in their job choices. As a result of this, we are ~~experiencing long time frames,~~expending more effort to recruit individuals and are experiencing more turnover of employees once placed with customers, resulting in a renewed search to fill the openings. This market volatility creates increased ~~competitiveness~~competition for ~~talent. While~~talent and these labor market constraints are ~~not affecting~~beginning to affect our ability to fill job ~~requisitions, they are affecting the level of activity required to do so.~~

The sustained demand for contingent labor and strategic solutions plays to our strengths and experience as the founder of the modern staffing industry more than 70 years ago. While constrained labor markets are challenging, they are manageable for Kelly, as we continue to focus on creating innovative workforce solutions that deliver greater efficiency and value to our customers.requisitions.

Financial Measures

The constant currency (“CC”) change amounts in the following tables refer to the year-over-year percentage changes resulting from translating 2018 financial data into U.S. dollars using the same foreign currency exchange rates used to translate financial data for 2017. 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 those of our competitors. Additionally, substantially all of our foreign subsidiaries derive revenues and incur cost of services and selling, general and administrative (“SG&A”) expenses within a single country and currency which, as a result, provides 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.

Reported and CC percentage changes in the following tables were computed based on actual amounts in thousands of dollars.

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 (based on a rolling three-month period) into trade accounts receivable, net of allowances at the period end. Although secondary supplier revenues are recorded on a net basis (net of secondary supplier expense), secondary supplier revenue is included in the daily sales calculation in order to properly reflect the gross revenue amounts billed to the customer.

Results of Operations

Total Company - ~~Second~~Third Quarter

(Dollars in millions)


	2018			2017			Change			CC Change		2018			2017			Change			CC Change
Revenue from services	$	1,386.9		$	1,333.6		4.0	%		3.0	%	$	1,342.4		$	1,328.8		1.0	%		1.9	%
Gross profit	240.5			228.8			5.1			4.2		239.1			230.7			3.6			4.5
Total SG&A expenses	220.1			208.5			5.6			4.9		217.2			212.5			2.2			3.0
Earnings from operations	20.4			20.3			0.1					21.9			18.2			20.6

Permanent placement income (included in revenue from services)	17.3			13.7			25.7			24.1		18.4			14.2			30.2			32.4
Gross profit rate	17.3		%	17.2		%	0.1		pts.			17.8		%	17.4		%	0.4		pts.
Conversion rate	8.5			8.9			(0.4	)				9.2			7.9			1.3
Return on sales	1.5			1.5			—					1.6			1.4			0.2

Total Company revenue from services for the ~~second~~third quarter of 2018 was up ~~4.0%~~1.0% in comparison to the prior year and up ~~3.0%~~1.9% on a CC basis, reflecting the ~~weakening~~strengthening of the U.S. dollar against several currencies, primarily the Euro. As noted in the following discussions, revenue increased in ~~Americas Staffing and International Staffing, while GTS revenue declined.~~all operating segments.

The gross profit rate increased by 1040 basis points during the ~~second~~third quarter. As noted in the following discussions, ~~while~~increases in the gross profit rate in Americas Staffing ~~was flat, an increase in the~~and GTS ~~gross profit rate was~~were partially offset by a decrease in the International Staffing gross profit rate.

Total SG&A expenses increased ~~5.6%~~2.2% on a reported basis ~~(4.9%~~(3.0% on a CC basis),. This increase was due primarily to additional resources in Americas Staffing as a result of the current talent supply ~~environment. SG&A expenses for~~environment, along with the ~~second quarter~~effect of ~~2018 also include~~ an ~~increase~~out-of-period adjustment relating to overstated expense accruals in ~~technology investments compared to~~ the prior year. ~~In addition,~~These increases were partially offset by the year-over-year ~~comparisons reflect the~~favorable impact of ~~$2.5 million of favorable adjustments related to executive compensation which reduced corporate~~litigation-related expenses in ~~2017.~~the prior year.

Diluted ~~loss~~earnings per share for the ~~second~~third quarter of 2018 was ~~$0.40,~~$0.84, as compared to earnings per share of ~~$0.47~~$0.58 for the ~~second~~third quarter of 2017. Included in ~~second~~third quarter 2018 diluted ~~loss~~earnings per share is ~~$0.94~~$0.28 per share related to the ~~loss~~gain on the investment in Persol Holdings, net of tax.

Americas Staffing - ~~Second~~Third Quarter

(Dollars in millions)


	2018			2017			Change			CC Change		2018			2017			Change			CC Change
Revenue from services	$	604.0		$	575.6		4.9	%		5.2	%	$	561.8		$	554.8		1.3	%		2.0	%
Gross profit	108.5			103.8			4.5			4.7		106.0			98.8			7.3			7.9
Total SG&A expenses	90.7			83.4			8.7			8.9		91.2			85.5			6.6			7.3
Earnings from operations	17.8			20.4			(12.8	)				14.8			13.3			11.3

Gross profit rate	18.0		%	18.0		%	—		pts.			18.9		%	17.8		%	1.1		pts.
Conversion rate	16.4			19.7			(3.3	)				14.0			13.5			0.5
Return on sales	2.9			3.5			(0.6	)				2.6			2.4			0.2

The change in Americas Staffing revenue from services reflects ~~the impact of the September 2017 acquisition of Teachers On Call (“TOC”), combined with~~ a 3% increase in average bill rates (a 4% increase on a CC basis), combined with the impact of the September 2017 acquisition of Teachers On Call (“TOC”). These increases were partially offset by a 2% decrease in hours volume. The increase in average bill rates was due to the resulting impact of wage increases on the bill rates. Americas Staffing represented ~~44%~~42% of total Company revenue in the ~~second~~third quarter of both 2018 and ~~43% in the second quarter of~~ 2017.

From a product perspective, the increase in revenue reflects an increase in educational staffing ~~due primarily~~(due, in part, to the TOC ~~acquisition,~~acquisition) and professional/technical, including engineering, IT and ~~light industrial products.~~science. These increases were partially offset by decreases in our commercial product, including office services ~~product.~~and light industrial.

The Americas Staffing gross profit rate ~~was flat~~increased in comparison to the prior year. The gross profit rate was positively impacted by lower payroll taxes and benefits and higher permanent placement ~~income, other costs of services and payroll taxes and benefits.~~income. These increases were partially offset by unfavorable customer mix. Permanent placement income, which is included in revenue from services and has very low direct costs of services, has a disproportionate impact on gross profit rates.

The increase in total SG&A expenses was due to additional resources ~~as a result of~~and effort required to attract and place candidates in the current talent supply environment, combined with SG&A expenses related to TOC.

GTS - ~~Second~~Third Quarter

(Dollars in millions)


	2018			2017			Change			CC Change		2018			2017			Change			CC Change
Revenue from services	$	500.7		$	505.5		(0.9	)%		(1.2	)%	$	507.6		$	503.0		0.9	%		1.2	%
Gross profit	92.7			88.7			4.5			4.0		97.3			93.0			4.6			5.1
Total SG&A expenses	75.0			73.4			2.2			1.8		73.2			72.2			1.5			1.9
Earnings from operations	17.7			15.3			15.9					24.1			20.8			15.7

Gross profit rate	18.5		%	17.5		%	1.0		pts.			19.2		%	18.5		%	0.7		pts.
Conversion rate	19.1			17.2			1.9					24.7			22.4			2.3
Return on sales	3.5			3.0			0.5					4.7			4.1			0.6

Revenue from services ~~decreased~~increased 1% compared to last year. ~~Lower demand~~New wins in ~~specific customers in centrally-delivered staffing and PPO was partially offset by~~CWO, combined with program expansion in BPO and KellyConnect, ~~combined with new wins~~partially offset the lower demand in ~~CWO and RPO.~~specific customers in centrally delivered staffing. GTS revenue represented ~~36%~~38% of total Company revenue in the ~~second~~third quarter of both 2018 and ~~38% in the second quarter of~~ 2017.

The increase in the GTS gross profit rate was due to improving product mix, partially offset by an increase in employee-related benefits costs.

Total SG&A expenses increased ~~2.2%~~1.5% from the prior year. The increase iswas primarily due to ~~increased performance-based incentive costs, along with~~ increased headcount and costs related to new programs and expansion of programs in BPO and CWO. These increases were partially offset by lower salary costs in centrally delivered staffing and ~~PPO.~~PPO, and the effect of an out-of-period adjustment in the prior year relating to overstated expense accruals.

International Staffing - ~~Second~~Third Quarter

(Dollars in millions)


	2018			2017			Change			CC Change		2018			2017			Change			CC Change
Revenue from services	$	286.6		$	256.8		11.6	%		6.6	%	$	277.2		$	275.6		0.6	%		2.8	%
Gross profit	39.9			36.8			8.3			3.5		36.4			39.5			(7.8	)		(5.6	)
Total SG&A expenses	33.5			32.7			2.4			(1.3	)	31.6			32.3			(2.7	)		(0.3	)
Earnings from operations	6.4			4.1			54.2					4.8			7.2			(31.1	)

Gross profit rate	13.9		%	14.3		%	(0.4	)	pts.			13.2		%	14.3		%	(1.1	)	pts.
Conversion rate	16.0			11.2			4.8					13.5			18.0			(4.5	)
Return on sales	2.2			1.6			0.6					1.8			2.6			(0.8	)

The change in International Staffing revenue from services reflects a 6%3% increase in average bill rates ~~driven by currency exchange rates~~ (a 1%5% increase on a CC basis) ~~combined with~~, partially offset by a ~~5% increase~~2% decrease in hours volume. The ~~increase~~decrease in hours volume was mainly due to ~~increases~~declines in Portugal ~~Italy~~ and ~~Ireland.~~France. International Staffing represented 21% of total Company revenue in the ~~second~~third quarter of both 2018 and ~~19% in the second quarter of~~ 2017.

The International Staffing gross profit rate decreased primarily due to the year-over-year impact related to French payroll tax adjustments and unfavorable customer ~~mix,~~mix. These decreases were partially offset by the growth in permanent placement income.

The ~~increase~~decrease in total SG&A expenses was primarily due to the effect of currency exchange ~~rates, combined with investments~~rates. On a constant currency basis, SG&A expenses were flat in comparison to the prior year. Investments in the branch ~~network. These increases~~network were ~~partially~~ offset by effective cost management of headquarters expenses across the region.

Results of Operations

Total Company - ~~June~~September Year to Date

(Dollars in millions)


	2018			2017			Change			CC Change		2018			2017			Change			CC Change
Revenue from services	$	2,756.8		$	2,623.3		5.1	%		3.2	%	$	4,099.2		$	3,952.1		3.7	%		2.8	%
Gross profit	478.7			460.4			4.0			2.3		717.8			691.1			3.9			3.1
SG&A expenses excluding restructuring charges	446.3			421.3			5.9			4.5		663.5			633.8			4.7			4.0
Restructuring charges	—			2.4			(100.0	)		(100.0	)	—			2.4			(100.0	)		(100.0	)
Total SG&A expenses	446.3			423.7			5.3			3.9		663.5			636.2			4.3			3.6
Earnings from operations	32.4			36.7			(11.7	)				54.3			54.9			(1.0	)
Earnings from operations excluding restructuring charges	32.4			39.1			(17.1	)				54.3			57.3			(5.1	)

Permanent placement income (included in revenue from services)	33.9			27.2			24.4			20.6		52.3			41.4			26.4			24.6
Gross profit rate	17.4		%	17.6		%	(0.2	)	pts.			17.5		%	17.5		%	—		pts.
Conversion rate	6.8			8.0			(1.2	)				7.6			7.9			(0.3	)
Conversion rate excluding restructuring charges	6.8			8.5			(1.7	)				7.6			8.3			(0.7	)
Return on sales	1.2			1.4			(0.2	)				1.3			1.4			(0.1	)
Return on sales excluding restructuring charges	1.2			1.5			(0.3	)				1.3			1.4			(0.1	)

Total Company revenue from services for the first ~~six~~nine months of 2018 was up ~~5.1%~~3.7% in comparison to the prior year and up ~~3.2%~~2.8% on a CC basis, reflecting the weakening of the U.S. dollar against several currencies, primarily the Euro. As noted in the following discussions, revenue increased in Americas Staffing and International Staffing, while GTS revenue declined.

The gross profit rate ~~decreased by 20 basis points.~~was flat in comparison to the prior year. As noted in the following discussions, ~~decreases~~increases in the Americas Staffing and ~~International Staffing~~GTS gross profit rates were ~~partially~~ offset by ~~an increase~~a decrease in the ~~GTS~~International Staffing gross profit rate.

Total SG&A expenses increased ~~5.3%~~4.3% on a reported basis ~~(3.9%~~(3.6% on a CC basis), due primarily to investments in Americas Staffing which were made beginning in the second quarter of ~~2017.~~2017 and additional effort to attract and place candidates in the current talent environment. Included in total SG&A expenses for the first ~~six~~nine months of 2017 are restructuring charges of $2.4 million, relating primarily to an initiative to optimize our GTS service delivery models. ~~In addition, the year-over-year comparisons reflect the impact of favorable adjustments related to executive compensation which reduced corporate expenses in 2017.~~

Diluted earnings per share for the first ~~six~~nine months of 2018 were ~~$0.35,~~$1.19, as compared to ~~$0.78~~$1.37 for the first ~~six~~nine months of 2017. Included in diluted earnings per share for the first ~~six~~nine months of 2018 is approximately ~~$0.51~~$0.23 per share related to the loss on investment in Persol Holdings, net of tax.

Americas Staffing - ~~June~~September Year to Date

(Dollars in millions)


	2018			2017			Change			CC Change		2018			2017			Change			CC Change
Revenue from services	$	1,208.3		$	1,148.7		5.2	%		5.1	%	$	1,770.1		$	1,703.5		3.9	%		4.1	%
Gross profit	216.5			209.1			3.6			3.5		322.5			307.9			4.7			4.9
SG&A expenses excluding restructuring charges	182.6			167.1			9.3			9.2		273.8			252.6			8.4			8.6
Restructuring charges	—			0.4			(100.0	)		(100.0	)	—			0.4			(100.0	)		(100.0	)
Total SG&A expenses	182.6			167.5			9.1			9.0		273.8			253.0			8.2			8.4
Earnings from operations	33.9			41.6			(18.6	)				48.7			54.9			(11.4	)
Earnings from operations excluding restructuring charges	33.9			42.0			(19.3	)				48.7			55.3			(12.0	)

Gross profit rate	17.9		%	18.2		%	(0.3	)	pts.			18.2		%	18.1		%	0.1		pts.
Conversion rate	15.6			19.9			(4.3	)				15.1			17.8			(2.7	)
Conversion rate excluding restructuring charges	15.6			20.1			(4.5	)				15.1			18.0			(2.9	)
Return on sales	2.8			3.6			(0.8	)				2.8			3.2			(0.4	)
Return on sales excluding restructuring charges	2.8			3.7			(0.9	)				2.8			3.2			(0.4	)

The change in Americas Staffing revenue from services reflects the impact of the September 2017 acquisition of TOC, combined with a 4%3% increase in average bill rates (a 4% increase on a CC basis) and partially offset by a 2% decrease in hours volume. 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 ~~44%~~43% of total Company revenue in the first ~~six~~nine months of both 2018 and 2017.

From a product perspective, the increase in revenue reflects an increase in ~~our~~commercial, including light industrial, educational staffing business ~~due~~(due primarily to the TOC ~~acquisition, light industrial~~acquisition) and professional/technical engineering products. These increases were partially offset by ~~decreases~~a decrease in our commercial office services volume.

The ~~decrease~~increase in the Americas Staffing gross profit rate was primarily due to ~~unfavorable customer mix,~~higher permanent placement income and lower payroll taxes, partially offset by ~~higher permanent placement income.~~unfavorable customer mix.

The increase in total SG&A expenses was due to additional sales and recruiting resources, combined with SG&A expenses related to TOC.

GTS - ~~June~~September Year to Date

(Dollars in millions)


	2018			2017			Change			CC Change		2018			2017			Change			CC Change
Revenue from services	$	986.5		$	992.8		(0.6	)%		(1.0	)%	$	1,494.1		$	1,495.8		(0.1	)%		(0.3	)%
Gross profit	184.5			179.2			3.0			2.2		281.8			272.2			3.6			3.2
SG&A expenses excluding restructuring charges	150.8			146.6			2.9			2.0		224.0			218.8			2.4			2.0
Restructuring charges	—			2.0			(100.0	)		(100.0	)	—			2.0			(100.0	)		(100.0	)
Total SG&A expenses	150.8			148.6			1.5			0.6		224.0			220.8			1.5			1.0
Earnings from operations	33.7			30.6			10.4					57.8			51.4			12.5
Earnings from operations excluding restructuring charges	33.7			32.6			3.7					57.8			53.4			8.3

Gross profit rate	18.7		%	18.0		%	0.7		pts.			18.9		%	18.2		%	0.7		pts.
Conversion rate	18.3			17.1			1.2					20.5			18.9			1.6
Conversion rate excluding restructuring charges	18.3			18.2			0.1					20.5			19.6			0.9
Return on sales	3.4			3.1			0.3					3.9			3.4			0.5
Return on sales excluding restructuring charges	3.4			3.3			0.1					3.9			3.6			0.3

Revenue from services ~~decreased 1% compared~~was flat in comparison to last year. Lower demand in specific customers in ~~centrally-delivered~~centrally delivered staffing and PPO was partially offset by program expansion in ~~BPO and~~ KellyConnect, ~~combined with~~ new wins in CWO and ~~RPO.~~expansion of programs in BPO. GTS revenue represented 36% of total Company revenue in the first ~~six~~nine months of 2018 and 38% in the first ~~six~~nine months of 2017.

The increase in the GTS gross profit rate was due to improving product mix, partially offset by increases in employee-related benefits costs.

Total SG&A expenses increased 1.5% from the prior year. Included in total SG&A for the first ~~six~~nine months of 2017 are restructuring charges of $2.0 million, representing severance relating to an initiative to optimize our service delivery models in this segment. The increase in SG&A expenses is also due to increased headcount and costs related to new ~~programs.~~programs and expansion of programs in BPO and CWO. These increases were partially offset by lower salary costs in centrally delivered staffing and PPO.

International Staffing - ~~June~~September Year to Date

(Dollars in millions)


	2018			2017			Change			CC Change		2018			2017			Change			CC Change
Revenue from services	$	571.3		$	490.4		16.5	%		7.7	%	$	848.5		$	766.0		10.8	%		5.9	%
Gross profit	79.0			73.2			7.8			(0.3	)	115.4			112.7			2.3			(2.1	)
Total SG&A expenses	67.6			63.9			5.8			(1.4	)	99.2			96.2			3.0			(1.0	)
Earnings from operations	11.4			9.3			21.2					16.2			16.5			(1.4	)

Gross profit rate	13.8		%	14.9		%	(1.1	)	pts.			13.6		%	14.7		%	(1.1	)	pts.
Conversion rate	14.4			12.8			1.6					14.1			14.6			(0.5	)
Return on sales	2.0			1.9			0.1					1.9			2.2			(0.3	)

The change in International Staffing revenue from services reflects a 9%7% increase in average bill rates ~~driven by currency exchange rates~~ (a 1%2% increase on a CC basis) combined with a 6%3% increase in hours volume. The increase in hours volume was due to increases in Portugal, ~~Italy~~Ireland and ~~Ireland.~~Italy. International Staffing represented 21% of total Company revenue in the first ~~six~~nine months of 2018 and 19% in the first ~~six~~nine months of 2017.

The International Staffing gross profit rate decreased primarily due to the ~~year-over-year impact~~effect of ~~a one-time benefit related to~~ French payroll tax adjustments ~~in the first quarter of the prior year, combined with the effect of~~and unfavorable customer mix. These decreases were partially offset by an increase in permanent placement income.

The increase in total SG&A expenses was due to the effect of currency exchange ~~rates, partially offset by~~rates. On a constant currency basis, SG&A expenses decreased due to effective cost control in headquarters expenses across the region.

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, cash equivalents and restricted cash, operating activities, investing activities and financing activities.

Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash totaled ~~$38.6~~$25.9 million at the end of the ~~second~~third quarter of 2018 and $36.9 million at year-end 2017. As further described below, we generated ~~$33.2~~$33.3 million of cash from operating activities, used ~~$10.9~~$26.6 million of cash for investing activities and used ~~$20.5~~$17.0 million of cash for financing activities.

Operating Activities

In the first ~~six~~nine months of 2018, we generated ~~$33.2~~$33.3 million of net cash from operating activities, as compared to generating ~~$44.4~~$33.0 million in the first ~~six~~nine months of ~~2017. Other than~~2017, representing recurring working capital ~~changes, this change was primarily driven by an increase in incentive-related payments.~~changes.

Trade accounts receivable totaled ~~$1.2~~$1.3 billion at the end of the ~~second~~third quarter of 2018. Global DSO were 5558 days at the end of the ~~second~~third quarter of both 2018 and 2017.

Our working capital position (total current assets less total current liabilities) was ~~$469.4~~$480.6 million at the end of the ~~second~~third quarter of 2018, an increase of ~~$11.3~~$22.5 million from year-end 2017. The current ratio (total current assets divided by total current liabilities) was 1.5 at the end of the ~~second~~third quarter of 2018 and at year-end 2017.

Investing Activities

In the first ~~six~~nine months of 2018, we used ~~$10.9~~$26.6 million of cash for investing activities, as compared to using ~~$7.3~~$51.3 million in the first ~~six~~nine months of 2017. The year-over-year decrease in cash used for investing activities was primarily due to the $37.2 million used for the acquisition of TOC in September 2017, partially offset by an increase in capital expenditures. The year-over-year increase in capital expenditures is primarily due to higher spending for technology programs, IT infrastructure and headquarters building improvements in the first ~~six~~nine months of 2018 as compared to last year. Also included in cash used for investing activities in the first nine months of 2018 is $5.0 million for an investment in equity securities relating to the Company’s investment in Business Talent Group, LLC and a loan of $2.9 million to PersolKelly Asia Pacific to fund working capital requirements.

Financing Activities

In the first ~~six~~nine months of 2018, we used ~~$20.5~~$17.0 million of cash for financing activities, as compared to ~~using $5.7~~generating $13.4 million in the first ~~six~~nine months of 2017. The change in cash used in financing activities was primarily related to short-term borrowing activities. Debt totaled ~~$1.7~~$8.1 million at the end of the ~~second~~third quarter of 2018 and was $10.2 million at year-end 2017. Debt-to-total capital (total debt reported on the consolidated 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 ~~0.1%~~0.7% at the end of the ~~second~~third quarter of 2018 and 0.9% at year-end 2017.

The change in short-term borrowings in the first ~~six~~nine months of 2018 was primarily due to payments on our revolving credit facility. The change in short-term borrowings in the first ~~six~~nine months of 2017 was primarily due to ~~foreign~~ borrowings on ~~local facilities.~~our revolving credit facility.

We made dividend payments of ~~$5.9~~$8.8 million in the first ~~six~~nine months of 2018 and ~~$5.8~~$8.7 million in the first ~~six~~nine months of 2017.

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 20, 2018. 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. As of the 2018 ~~second~~third quarter end, 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 end of the ~~second~~third quarter of 2018, we had ~~$150.0~~$144.0 million of available capacity on our $150.0 million revolving credit facility and $145.0 million of available capacity on our $200.0 million securitization facility. The securitization facility carried no short-term borrowings and $55.0 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 end of the ~~second~~third quarter of 2018, 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.

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 and disruptions, changing market and economic conditions, our ability to achieve our business strategy, the risk of damage to our brand, the risk our intellectual property assets could be infringed upon or compromised, 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 including PersolKelly Asia Pacific, material changes in demand from or loss of large corporate customers as well as changes in their buying practices, risks particular to doing business with the government or government contractors, risks associated with conducting business in foreign countries, including foreign currency fluctuations, the exposure to potential market and currency exchange risks relating to our investment in Persol Holdings, risks associated with violations of anti-corruption, trade protection and other laws and regulations, availability of qualified full-time employees, availability of temporary workers with appropriate skills required by customers, liabilities for employment-related claims and losses, including class action lawsuits and collective actions, risks arising from failure to preserve the privacy of information entrusted to us or to meet our obligations under global privacy laws, the risk of cyber attacks or other breaches of network or information technology security, our ability to sustain critical business applications through our key data centers, our ability to effectively implement and manage our information technology projects, our ability to maintain adequate financial and management processes and controls, risk of potential impairment charges triggered by adverse industry developments or operational circumstances, unexpected changes in claim trends on workers’ compensation, unemployment, disability and medical benefit plans, the impact of changes in laws and regulations (including federal, state and international tax laws), competition law risks, the risk of additional tax or unclaimed property liabilities in excess of our estimates, our ability to realize value from our tax credit and net operating loss carryforwards, 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 report and in our other 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 and held by 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 2018 ~~second~~third quarter earnings.

We are exposed to market and currency risks on our investment in Persol Holdings, which may be material. The investment is stated at fair value and is marked to market through net earnings. Foreign currency fluctuations on this yen-denominated investment are reflected as a component of other comprehensive income. See Fair Value Measurements footnote in the Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q for further discussion.

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.

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 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.

In January 2018, the Hungarian Competition Authority initiated proceedings against the Company, along with a local industry trade association and its members, due to alleged infringement of national competition regulations. We are fully cooperating with the investigation, and are supplying materials and information to comply with the Authority’s undertakings. The Company does not believe that resolution of this matter will have a material adverse effect upon the Company’s competitive position, results of operations, cash flows or financial position.

Item 1A. Risk Factors.

There have been no material changes in the Company’s risk factors previously disclosed in Part I, Item 1A of the Company’s Annual Report filed on Form 10-K for year ended December 31, 2017, except that the Company has updated or added the below risk factors to reflect recent events. Terence E. Adderley, the former Executive Chairman of the Board of our board of directors, died on October 9, 2018. During his lifetime, Mr. Adderley funded the Terence E. Adderley Revocable Trust K (“Trust K”), including a gift of 3,139,940 shares of Class B Stock to Trust K. Upon his death, Trust K became irrevocable. In accordance with the provisions of Trust K, three successor trustees were appointed upon Mr. Adderley’s death.

The following risk factor updates supersede the corresponding risk factors previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

Our controlling stockholder exercises voting control over our company and has the ability to elect or remove from office all of our directors.

The Terence E. Adderley Revocable Trust K (“Trust K”) controls approximately 92% of the outstanding shares of Kelly Class B common stock, which is the only class of our common stock entitled to voting rights. Trust K is therefore able to exercise voting control with respect to all matters requiring stockholder approval, including the election or removal from office of all members of the board of directors.

We are not subject to certain of the listing standards that normally apply to companies whose shares are quoted on the NASDAQ Global Market.

Our Class A and Class B common stock are quoted on the NASDAQ Global Market. Under the listing standards of the NASDAQ Global Market, we are deemed to be a “controlled company” by virtue of the fact that the Terence E. Adderley Revocable Trust K has voting power with respect to more than fifty percent of our outstanding voting stock. A controlled company is not required to have a majority of its board of directors comprised of independent directors. Director nominees are not required to be selected or recommended for the board’s selection by a majority of independent directors or a nominations committee comprised solely of independent directors, nor do the NASDAQ Global Market listing standards require a controlled company to certify the adoption of a formal written charter or board resolution, as applicable, addressing the nominations process. A controlled company is also exempt from NASDAQ Global Market’s requirements regarding the determination of officer compensation by a majority of independent directors or a compensation committee comprised solely of independent directors. A controlled company is required to have an audit committee composed of at least three directors who are independent as defined under the rules of both the Securities and Exchange Commission and the NASDAQ Global Market. The NASDAQ Global Market further requires that all members of the audit committee have the ability to read and understand fundamental financial statements and that at least one member of the audit committee possess financial sophistication. The independent directors must also meet at least twice a year in meetings at which only they are present.

We currently comply with certain of the listing standards of the NASDAQ Global Market that do not apply to controlled companies. Our compliance is voluntary, however, and there can be no assurance that we will continue to comply with these standards in the future.

We may not be able to realize value from, or otherwise preserve and utilize, our tax credit and net operating loss carryforwards.

Provisions in U.S. and foreign tax law could limit the use of tax credit and net operating loss carryforwards in the event of an ownership change. In general, an ownership change occurs under U.S. tax law if there is a change in the corporation’s equity ownership that exceeds 50% over a rolling three-year period. If we experience an ownership change, inclusive of our Class A and Class B common stock, our tax credit and net operating loss carryforwards generated prior to the ownership change may be subject to annual limitations that could reduce, eliminate or defer the utilization. Such limitation could materially impact our financial condition and results of operations.

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.

During the ~~second~~third quarter of 2018, 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)
April 2, 2018 through May 6, 2018 1,389
$ 30.05
—
$ —

May 7, 2018 through June 3, 2018 2,172
24.50
—
$ —

June 4, 2018 through July 1, 2018 458
22.45
—
$ —

Total 4,019
$ 26.18
—



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)
July 2, 2018 through August 5, 2018	85	$	23.37	—	$	—

August 6, 2018 through September 2, 2018	1,271	24.67		—	$	—

September 3, 2018 through September 30, 2018	1,033	25.12		—	$	—

Total	2,389	$	24.81	—

We may reacquire shares sold to cover taxes due upon the vesting of restricted stock and performance shares held by employees. Accordingly, ~~4,019~~2,389 shares were reacquired in transactions during the quarter.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

See Index to Exhibits required by Item 601, Regulation S-K, set forth on page 4143 of this filing.

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: ~~August 8,~~November 7, 2018

	/s/ Olivier G. Thirot
	Olivier G. Thirot

	Executive Vice President and
	Chief Financial Officer
	(Principal Financial Officer)



Date: ~~August 8,~~November 7, 2018

	/s/ Laura S. Lockhart
	Laura S. Lockhart

	Vice President, Corporate Controller
	and Chief Accounting Officer
	(Principal Accounting Officer)

INDEX TO EXHIBITS

REQUIRED BY ITEM 601,

REGULATION S-K



Exhibit No.		Description
14		Code of Business Conduct and Ethics, adopted August 6, 2018.

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

4143