What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-05-13 compared with 2020-11-05 · 191 added, 335 removed, 480 unchanged (52% of the section changed)

4 unchanged sentences

(In millions of dollars except per share data)

13 Weeks Ended 39 Weeks Ended

September 27,

2020 September 29,

2019 September 27,

2020 September 29,

13 Weeks Ended

2021 March 29,

Revenue from services $ 1,205.9 $ 1,261.1

22 unchanged sentences

(In millions of dollars)

13 Weeks Ended 39 Weeks Ended

September 27,

2020 September 29,

2019 September 27,

2020 September 29,

13 Weeks Ended

2021 March 29,

Net earnings (loss) $ 25.6 $ ( 153.2 )

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments, net of tax expense of $0.4, tax benefit of $0.2, tax expense of $0.0 and tax benefit of $0.1, respectively 5.1 ( 6.2 ) 0.4 ( 0.8 )

Reclassification adjustments included in net earnings ( 1.5 ) — ( 1.5 ) —

Foreign currency translation adjustments, net of tax expense of $0.5 and $0.1, respectively ( 13.6 ) ( 7.4 )

Reclassification adjustments included in net earnings (loss) — —

Foreign currency translation adjustments ( 13.6 ) ( 7.4 )

6 unchanged sentences

(In millions)

September 27,

2020 December 29,

2021 January 3,

Current Assets

2 unchanged sentences

Prepaid expenses and other current assets 76.5 61.4

Properties held for sale — 21.2

Total current assets 1,595.6 1,549.6

17 unchanged sentences

(In millions)

September 27,

2020 December 29,

2021 January 3,

Liabilities and Stockholders’ Equity

34 unchanged sentences

(In millions of dollars)

13 Weeks Ended 39 Weeks Ended

September 27,

2020 September 29,

2019 September 27,

2020 September 29,

13 Weeks Ended

2021 March 29,

Capital Stock

37 unchanged sentences

13 Weeks Ended

September 27,

2020 September 29,

2021 March 29,

Cash flows from operating activities:

8 unchanged sentences

(Gain) loss on investment in Persol Holdings ( 30.0 ) 77.8

(Gain) loss on sale of assets ( 32.1 ) ( 12.3 )

Gain on sale of assets — ( 32.1 )

Equity in net (earnings) loss of PersolKelly Pte.

4 unchanged sentences

Capital expenditures ( 2.7 ) ( 3.0 )

Proceeds from company-owned life insurance 10.4 —

Proceeds from sale of assets — 55.5

Acquisition of companies, net of cash received — ( 36.3 )

Proceeds from company-owned life insurance 2.3 3.0

Proceeds from sale of Brazil, net of cash disposed 1.2 —

Loans to equity affiliate — ( 4.4 )

Investment in equity securities — ( 0.3 )

Other investing activities 0.2 —

Net cash from (used in) investing activities 10.3 ( 88.8 )

Net cash from investing activities 7.9 15.9

Cash flows from financing activities:

1 unchanged sentence

Financing lease payments ( 0.2 ) ( 0.3 )

Dividend payments ( 3.0 ) ( 8.9 )

Payments of tax withholding for stock awards ( 0.5 ) ( 1.1 )

Dividend payments — ( 3.0 )

Other financing activities — ( 0.1 )

Net cash (used in) from financing activities ( 6.8 ) 3.6

Net cash from (used in) financing activities 0.1 ( 4.6 )

Effect of exchange rates on cash, cash equivalents and restricted cash ( 1.4 ) 2.8

9 unchanged sentences

13 Weeks Ended

September 27,

2020 September 29,

2021 March 29,

Reconciliation of cash, cash equivalents and restricted cash:

14 unchanged sentences

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 29, 2019, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 13, 2020 (the 2019 consolidated financial statements).

The Company’s third fiscal quarter ended on September 27, 2020 (2020) and September 29, 2019 (2019), each of which contained 13 weeks.

The corresponding September year to date periods for 2020 and 2019 each contained 39 weeks.

Noncurrent accrued payroll and related taxes of $ 75.7 million in the consolidated balance sheet as of third quarter-end 2020 represent deferred U.S.

payroll tax payments as allowed by COVID-19 economic relief legislation.

Approximately half of the balance is expected to be paid by the end of fiscal 2021, with the remaining amount expected to be paid by the end of fiscal 2022.

As discussed in the Segment Disclosures footnote, the Company has changed its reportable segments during the third quarter of 2020.

As a result, certain reclassifications have been made to the prior year's financial statements to conform to the current year's presentation.

The unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended January 3, 2021, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 18, 2021 (the 2020 consolidated financial statements).

The Company’s first fiscal quarter ended on April 4, 2021 (2021) and March 29, 2020 (2020), each of which contained 13 weeks.

As discussed in the Segment Disclosures footnote, the Company changed its reportable segments during the third quarter of 2020.

As a result, certain reclassifications have been made to the financial statements for the first quarter of 2020 to conform to our updated reportable segment presentation.

KELLY SERVICES, INC.

3 unchanged sentences

Kelly has five specialty segments:

Professional & Industrial (“P&I” formerly Commercial), Science, Engineering & Technology (“SET”), Education, Outsourcing & Consulting Group ("Outsourcing & Consulting," "OCG") and International.

Professional & Industrial (“P&I”), Science, Engineering & Technology (“SET”), Education, Outsourcing & Consulting Group ("Outsourcing & Consulting," "OCG") and International.

Other than OCG, each segment delivers talent through staffing services, permanent placement or outcome-based services.

Our OCG segment delivers talent solutions including managed service provider ("MSP"), payroll process outsourcing ("PPO"), recruitment process outsourcing ("RPO"), and talent advisory services.

International also delivers RPO talent solutions within its local markets.

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

Third Quarter September Year to Date

2020 2019 2020 2019

First Quarter

Professional & Industrial

17 unchanged sentences

Permanent placement 5.5 5.7

Talent solutions 1.8 —

Total International 272.9 265.2

10 unchanged sentences

The below table presents our revenues disaggregated by geography (in millions):

Third Quarter September Year to Date

2020 2019 2020 2019

First Quarter

United States $ 858.5 $ 928.5

Canada 30.3 34.6 88.7 100.8

Mexico 34.6 28.7

Canada 34.1 32.8

Puerto Rico 24.2 17.7

Brazil 1.8 8.4 17.0 25.1

Total Americas Region 951.4 1,016.8

Switzerland 49.6 50.6 141.2 150.0

France 54.3 52.5

Switzerland 52.7 44.2

Portugal 43.7 43.6

Russia 32.6 32.1

United Kingdom 16.4 24.9 56.5 81.6

Italy 18.1 14.7

United Kingdom 17.0 22.3

Germany 7.1 8.0

9 unchanged sentences

The below table presents our SET, OCG and International segment revenues disaggregated by geographic region (in millions):

Third Quarter September Year to Date

2020 2019 2020 2019

First Quarter

Science, Engineering & Technology

12 unchanged sentences

Deferred Costs

Deferred sales commissions, which are included in other assets in the consolidated balance sheet, were $ 1.0 million as of third quarter-end 2020 and $ 1.5 million as of year-end 2019.

Amortization expense for the deferred costs for the third quarter and September year to date 2020 was $ 0.2 million and $ 0.8 million, respectively.

Amortization expense for the deferred costs for the third quarter and September year to date 2019 was $ 0.4 million and $ 1.3 million, respectively.

Deferred fulfillment costs, which are included in prepaid expenses and other current assets in the consolidated balance sheet, were $ 4.0 million as of third quarter-end 2020 and $ 3.6 million as of year-end 2019.

Amortization expense for the deferred costs for the third quarter and September year to date 2020 was $ 5.3 million and $ 14.9 million, respectively.

Amortization expense for the deferred costs for the third quarter and September year to date 2019 was $ 3.8 million and $ 10.3 million, respectively.

Deferred sales commissions, which are included in other assets in the consolidated balance sheet, were $ 1.0 million as of first quarter-end 2021 and year-end 2020.

Amortization expense for the deferred costs for the first quarter 2021 was $ 0.2 million and in the first quarter 2020 was $ 0.3 million.

Deferred fulfillment costs, which are included in prepaid expenses and other current assets in the consolidated balance sheet, were $ 2.4 million as of first quarter-end 2021 and $ 4.1 million as of year-end 2020.

Amortization expense for the deferred costs for the first quarter 2021 was $ 6.8 million and in the first quarter 2020 was $ 4.8 million.

Credit Losses

On December 30, 2019, we adopted Accounting Standards Codification ("ASC") Topic 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures, as applicable.

Results for reporting periods beginning after December 30, 2019 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

As a result of adopting this guidance, we have updated our accounting policies as follows.

Allowance for Uncollectible Accounts Receivable The Company records an allowance for uncollectible accounts receivable, billed and unbilled, based on historical loss experience, customer payment patterns, current economic trends, and reasonable and supportable forecasts, as applicable.

The reserve for sales allowances is also included in the allowance for uncollectible accounts receivable.

The Company estimates the current expected credit losses by applying internally developed loss rates to all outstanding receivable balances by aging category.

Accounts receivable are written-off against the allowance when they are deemed uncollectible.

The Company reviews the adequacy of the allowance for uncollectible accounts receivable on a quarterly basis and, if necessary, increases or decreases the balance by recording a charge or credit to selling, general and administrative ("SG&A") expenses for the portion of the adjustment relating to uncollectible accounts receivable, and a charge or credit to revenue from services for the portion of the adjustment relating to sales allowances.

KELLY SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Allowance for Credit Losses - Other Financial Assets The Company measures expected credit losses on qualified financial assets that do not result from revenue transactions using a probability of default method by type of financing receivable.

The estimate of expected credit losses considers credit ratings, financial data, historical write-off experience, current conditions, and reasonable and supportable forecasts, as applicable, to estimate the risk of loss.

We are exposed to credit losses primarily through our sales of workforce solution services to customers.

We establish an allowance for estimated credit losses in the current period resulting from the failure of our customers to make required payments on their trade accounts receivable in future periods.

We pool such assets by geography and other similar risk characteristics, such as accounts in collection, and apply an aging method to estimate future credit losses utilizing inputs such as historical write-off experience, customer payment patterns, current collection data, and reasonable and supportable forecasts, as applicable.

Credit risk with respect to accounts receivable is limited due to short payment terms.

The Company also performs ongoing credit evaluations using applicable credit ratings of its customers to help analyze credit risk.

We monitor ongoing credit exposure thr ough frequent review of past due accounts (based on the payment terms of the contract) and follow-up with customers, as appropriate.

We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.

We are engaged in litigation with a customer over a disputed accounts receivable balance of approximately $ 10 million for certain services rendered more than five years ago, which is recorded as a long-term receivable in other assets in the consolidated balance sheet.

In September 2020, a ruling was issued in favor of the customer, which we have appealed.

Upon receiving the ruling, we increased our allowance for credit losses by $ 9.2 million to reflect the likelihood of collection, which is recorded in other assets in the consolidated balance sheet.

We are also exposed to credit losses from our loan to PersolKelly Pte.

and other receivables measured at amortized cost.

No other allowances related to the loan or other receivables were material for September year to date 2020.

See Investment in PersolKelly Pte.

footnote for more information on the loan to PersolKelly Pte.

The rollforward of our allowance for credit losses related to trade accounts receivable, which is recorded in trade accounts receivable, less allowance in the consolidated balance sheet, is as follows (in millions):

September Year to Date

First Quarter

Allowance for credit losses:

5 unchanged sentences

Ending balance $ 9.1 $ 8.9

Write-offs are presented net of recoveries, which were not material for September year to date 2020.

KELLY SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Write-offs are presented net of recoveries, which were not material for first quarter-end 2020 and 2021.

In September 2020, a ruling was issued in favor of the customer, which we have appealed.

Upon receiving the ruling, we increased our allowance for credit losses by $ 9.2 million to reflect the likelihood of collection, which is recorded in other assets in the consolidated balance sheet.

The rollforward of our allowance for credit losses related to the long-term customer receivable, which is recorded in other assets in the consolidated balance sheet, is as follows (in millions):

September Year to Date

First Quarter

Allowance for credit losses:

4 unchanged sentences

Ending Balance $ 10.9 $ 1.7

KELLY SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

We are also exposed to credit losses from our loan to PersolKelly Pte.

and other receivables measured at amortized cost.

No other allowances related to the loan or other receivables were material for first quarter-end 2021.

See Investment in PersolKelly Pte.

footnote for more information on the loan to PersolKelly Pte.

Acquisitions and Disposition

In the first quarter of 2020, Kelly Services USA, LLC, a wholly owned subsidiary of the Company, acquired Insight Workforce Solutions LLC and its affiliate, Insight EDU LLC (collectively, "Insight"), as detailed below.

In the first quarter of 2019, the Company acquired NextGen Global Resources LLC (“NextGen”) and Global Technology Associates, LLC (“GTA”), as detailed below.

We have accounted for these acquisitions under ASC 805, Business Combinations.

On January 14, 2020, Kelly Services USA, LLC acquired 100 % of the membership interests of Insight, an educational staffing company in the U.S, for a purchase price of $ 34.5 million.

Under terms of the purchase agreement, the purchase price was adjusted for cash held by Insight at the closing date and estimated working capital adjustments resulting in the Company paying cash of $ 38.1 million.

The purchase price of the acquisition also includes contingent consideration with an estimated fair value of $ 1.6 million related to an earnout payment in the event certain conditions are met per the terms of the agreement.

The initial fair value of the earnout was established using a Monte Carlo simulation and the liability is recorded in accounts payable and accrued liabilities in the consolidated balance sheet (see Fair Value Measurements footnote).

In the third quarter of 2020, the earnout was revalued, resulting in an increase to the liability of $ 0.5 million.

In the second quarter of 2020, the Company paid a working capital adjustment of $ 0.1 million.

In the first quarter of 2020, Kelly Services USA ("KSU"), LLC, a wholly owned subsidiary of the Company, acquired Insight Workforce Solutions LLC and its affiliate, Insight EDU LLC (collectively, "Insight"), as detailed below.

In the fourth quarter of 2020, KSU acquired Greenwood/Asher & Associates, LLC ("Greenwood/Asher"), as detailed below.

Greenwood/Asher

On November 18, 2020, KSU acquired 100 % of the membership interests of Greenwood/Asher, a premier specialty education executive search firm in the U.S., for a purchase price of $ 3.5 million.

Under terms of the purchase agreement, the purchase price was adjusted for cash held by Greenwood/Asher at the closing date and estimated working capital adjustments resulting in the Company paying cash of $ 5.2 million.

The purchase price of the acquisition also included contingent consideration with an estimated fair value of $ 2.1 million related to an earnout payment in the event certain conditions are met per the terms of the agreement.

The initial fair value of the earnout was established using a Black Scholes model and the liability is recorded in accounts payable and accrued liabilities and other noncurrent liabilities in the consolidated balance sheet (see Fair Value Measurements footnote).

Subsequently, the earnout was revalued, resulting in a decrease to the liability of $ 0.4 million in the first quarter of 2021.

The earnout is expected to be paid in 2022 and 2023 after each earnout year pursuant to the terms of the purchase agreement.

The purchase price allocation for this acquisition is preliminary and could change.

This acquisition will increase our market share in the education staffing market in the U.S.

Insight's results of operations are included in the Education segment.

Pro forma results of operations for this acquisition have not been presented as it is not material to the consolidated statements of earnings.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the acquisition (in millions of dollars):

Trade accounts receivable 9.6

Other current assets 0.2

Property and equipment 0.2

Goodwill 19.9

Intangibles 10.6

Other noncurrent assets 0.2

Current liabilities ( 2.6 )

Noncurrent liabilities ( 0.1 )

Assets acquired net of liabilities assumed $ 39.8

The fair value of the acquired receivables represents the contractual value.

Included in the assets purchased in the Insight acquisition was approximately $ 10.6 million of intangible assets, made up entirely of customer relationships.

The fair value of the customer relationships was determined using the multi-period excess earnings method.

The customer relationships will be amortized over 10 years with no residual value.

Goodwill generated from the acquisition was primarily attributable to the expected synergies from combining operations and expanding market potential, and was assigned to the Americas Staffing reporting unit (see Goodwill footnote).

The amount of goodwill expected to be deductible for tax purposes is approximately $ 0.9 million.

On January 14, 2020, Kelly Services USA, LLC acquired 100 % of the membership interests of Insight, an educational staffing company in the U.S, for a purchase price of $ 34.5 million.

Under terms of the purchase agreement, the purchase price was

KELLY SERVICES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NextGen Global Resources

On January 2, 2019, the Company acquired 100 % of the membership interests of NextGen, a leading provider of telecommunications staffing solutions, for a purchase price of $ 51.0 million.

Under terms of the purchase agreement, the purchase price was adjusted for cash held by NextGen at the closing date and estimated working capital adjustments resulting in the Company paying cash of $ 54.3 million.

Due to the date of the acquisition, the third quarter and September year to date 2019 actual results represent the third quarter and September year to date 2019 pro forma results.

Goodwill generated from this acquisition was primarily attributable to the market potential as a staffing solutions provider to the expanding telecommunications industry, and was assigned to the Americas Staffing reporting unit (see Goodwill footnote).

Global Technology Associates

On January 2, 2019, in a separate transaction, the Company acquired 100 % of the membership interests of GTA, a leading provider of engineering, technology and business consulting solutions in the telecommunications industry, for a purchase price of $ 34.0 million.

Under terms of the purchase agreement, the purchase price was adjusted for cash held by GTA at the closing date and estimated working capital adjustments resulting in the Company paying cash of $ 35.7 million.

Due to the date of the acquisition, the third quarter and September year to date 2019 actual results represent the third quarter and September year to date 2019 pro forma results.

Goodwill generated from this acquisition is primarily attributable to the market potential as a solutions provider to the expanding telecommunications industry, and was assigned to the GTS reporting unit (see Goodwill footnote).

As noted above, goodwill related to these acquisitions was assigned to the Americas Staffing and GTS reporting units and was included in the goodwill impairment charge taken in the first quarter of 2020.

adjusted for cash held by Insight at the closing date and estimated working capital adjustments resulting in the Company paying cash of $ 38.1 million.

The purchase price of the acquisition also included contingent consideration with an estimated fair value of $ 1.6 million related to an earnout payment in the event certain conditions are met per the terms of the agreement.

Subsequently, the earnout was revalued, resulting in a net increase to the liability of $ 0.1 million in 2020 and there were no material adjustments to the liability in the first quarter of 2021.

In the second quarter of 2020, the Company paid a working capital adjustment of $ 0.1 million.

As of year-end 2020, the purchase price allocation for this acquisition is final.

The goodwill related to this acquisition was included in the goodwill impairment charge taken in the first quarter of 2020.

The goodwill impairment charge resulted from an interim goodwill impairment test triggered by declines in our common stock price as a result of negative market reaction to the COVID-19 crisis (see Goodwill footnote).

The amount of goodwill expected to be deductible for tax purposes is approximately $ 18.6 million.

On August 18, 2020, the Company sold its Brazil operations for a purchase price of $ 1.4 million.

2 unchanged sentences

The aggregate losses for which the Company will provide indemnification shall not exceed $ 8.8 million.

Accordingly, the Company recorded an indemnification liability of $ 2.5 million in other long-term liabilities in the consolidated balance sheet, which represents the fair value of the liability (see Fair Value Measurements footnote) and completely offset the gain on the sale.

Accordingly, the Company recorded an indemnification liability of $ 2.5 million at the time of disposition in other long-term liabilities in the consolidated balance sheet, which represented the fair value of the liability (see Fair Value Measurements footnote) and completely offset the gain on the sale.

Investment in Persol Holdings

The Company has a yen-denominated investment through the Company's subsidiary, Kelly Services Japan, Inc., in the common stock of Persol Holdings Co., Ltd.

("Persol Holdings"), the Company’s joint venture partner in PersolKelly Pte.

("Persol Holdings"), the 100% owner of Persol Asia Pacific Pte.

Ltd., the Company’s joint venture partner in PersolKelly Pte.

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).

A gain on the investment of $ 16.8 million and a loss on the investment of $ 31.4 million in the third quarter and September year to date 2020, respectively, and a loss on the investment of $ 39.3 million and a gain on the investment of $ 35.1 million in the third quarter and September year to date 2019, respectively, was recorded in gain (loss) on investment in Persol Holdings in the consolidated statements of earnings.

A gain on the investment of $ 30.0 million in the first quarter of 2021 and a loss on the investment of $ 77.8 million in the first quarter of 2020 was recorded in gain (loss) on investment in Persol Holdings in the consolidated statements of earnings.

Investment in PersolKelly Pte.

The Company has a 49 % ownership interest in the JV (see Investment in Persol Holdings footnote above), a staffing services business operating in ten geographies in the Asia-Pacific region.

The operating results of the Company’s interest in the JV are accounted for on a one-quarter lag under the equity method and are reported in equity in net earnings (loss) of affiliate in the consolidated statements of earnings, which amounted to a loss of $ 1.1 million in the first quarter of 2021 and a loss of $ 1.5 million in the first quarter of 2020.

This investment is evaluated for indicators of impairment on a quarterly 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 $ 118.7 million as of first quarter-end 2021 and $ 118.5 million as of year-end 2020.

The net amount due from the JV, a related party, was $ 5.2 million as of the first quarter-end 2021 and $ 5.6 million as of year-end 2020.

The Company made loans in prior years, proportionate to its 49 % ownership, to the JV to fund working capital requirements as a result of their sustained revenue growth.

As of first quarter-end 2021, the outstanding loan balance is $ 5.8 million and is recorded in prepaid expenses and other current assets in the consolidated balance sheet and included in the net amounts due from the JV.

The carrying value of the loan approximates the fair value based on market interest rates.

The allowance for credit losses related to the loan is not material as of the first quarter-end 2021.

The Company received payment from the JV for the remaining balance of the loan in April 2021.

Accrued interest receivable, which is included in prepaid expenses and other current assets in the consolidated balance sheet, was not material at first quarter-end 2021 and year-end 2020.

The JV is a supplier to certain MSP programs in the region and the

KELLY SERVICES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Investment in PersolKelly Pte.

The Company has a 49 % ownership interest in the JV (see Investment in Persol Holdings footnote above), a staffing solutions business operating in eight geographies in the Asia-Pacific region.

The operating results of the Company’s interest in the JV are accounted for on a one-quarter lag under the equity method and are reported in equity in net earnings (loss) of affiliate in the consolidated statements of earnings, which amounted to a gain of $ 1.8 million and a loss of $ 1.0 million in the third quarter and September year to date 2020, respectively, and a loss of $ 0.9 million and $ 1.0 million in the third quarter and September year to date 2019, respectively.

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 $ 115.6 million as of third quarter-end 2020 and $ 117.2 million as of year-end 2019.

The net amount due from the JV, a related party, was $ 10.9 million as of the third quarter-end 2020 and as of year-end 2019.

The Company made loans, proportionate to its 49 % ownership, to the JV for $ 7.0 million in 2018 and an additional $ 4.4 million in 2019 to fund working capital requirements as a result of their sustained revenue growth.

The loans, which are outstanding as of third quarter-end 2020, are included in the net amounts due from the JV.

Subsequent to the third quarter of 2020, the JV repaid $ 5.6 million of the outstanding loan balance;

therefore, as of the third quarter-end 2020, $ 5.6 million of the loan balance is included in prepaid expenses and other current assets, and the remaining balance is included in other assets in the consolidated balance sheet.

The carrying value of the loans approximates the fair value based on market interest rates.

Accrued interest receivable, which is included in prepaid expenses and other current assets in the consolidated balance sheet, was not material at third quarter-end 2020 and year-end 2019.

The JV is a supplier to certain MSP programs in the region and the amounts for services provided to the Company, which are included in trade accounts payable in the consolidated balance sheet, are not material.

Expected credit losses are estimated over the contractual term of the loans.

The required allowance is based on current and projected financial information from the JV, market-specific information and other relevant data available to the Company, as applicable.

The allowance was not material at the third quarter-end 2020.

The Company has accrued interest receivable from our loan to the JV.

If applicable, we write off the uncollectible accrued interest receivable balance related to our loan to the JV within the same quarter the interest is determined to be uncollectible, which is considered timely.

As such, an allowance for credit losses is not deemed necessary.

Any write offs, if necessary, are recorded by reversing interest income.

On April 1, 2020, 100 % of the shares of Kelly Services Australia Pty Ltd and Kelly Services (New Zealand) Limited, both subsidiaries of the JV, were sold to an affiliate of Persol Holdings.

The JV received proceeds of $ 17.5 million upon the sale and the Company received a direct royalty payment of $ 0.7 million.

amounts for services provided to the Company, which are included in accounts payable and accrued liabilities in the consolidated balance sheet, are not material.

Fair Value Measurements

1 unchanged sentence

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present assets and liabilities measured at fair value on a recurring basis as of third quarter-end 2020 and year-end 2019 in the consolidated balance sheet by fair value hierarchy level, as described below.

The following tables present assets and liabilities measured at fair value on a recurring basis as of first quarter-end 2021 and year-end 2020 in the consolidated balance sheet by fair value hierarchy level, as described below.

Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities.

1 unchanged sentence

Level 3 measurements include significant unobservable inputs.

KELLY SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of Third Quarter-End 2020

As of First Quarter-End 2021

Description Total Level 1 Level 2 Level 3

4 unchanged sentences

Brazil indemnification $ ( 2.4 ) $ — $ — $ ( 2.4 )

Greenwood/Asher earnout ( 1.7 ) — — ( 1.7 )

Insight earnout ( 1.7 ) — — ( 1.7 )

6 unchanged sentences

Total assets at fair value $ 284.5 $ 284.5 $ — $ —

Money market funds as of third quarter-end 2020 and year-end 2019 represent investments in money market funds that hold government securities, of which $ 5.3 million and $ 4.9 million, respectively, are restricted as to use and included in other assets in the consolidated balance sheet.

Brazil indemnification $ ( 2.6 ) $ — $ — $ ( 2.6 )

Greenwood/Asher earnout ( 2.1 ) — — ( 2.1 )

Insight earnout ( 1.7 ) — — ( 1.7 )

Total liabilities at fair value $ ( 6.4 ) $ — $ — $ ( 6.4 )

Money market funds represent investments in money market funds that hold government securities, of which $ 5.6 million as of first quarter-end 2021 and $ 5.1 million as of year-end 2020, are restricted as to use and are included in other assets in 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 are based on quoted market prices of those accounts as of the respective period end.

The increase in money market funds from year-end 2019 was the result of higher cash and cash equivalent balances as of the end of the third quarter from an increase in cash flows from operations.

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, and the related changes in fair value are recorded in the consolidated statements of earnings (see Investment in Persol Holdings footnote).

The cost of this yen-denominated investment, which fluctuates based on foreign exchange rates, was $ 19.6 million as of the third quarter-end 2020 and $ 18.9 million at year-end 2019.

As of third quarter-end 2020, the Company had an indemnification liability of $ 2.5 million in other long-term liabilities on the consolidated balance sheet related to the sale of the Brazil operations (see Acquisitions and Disposition footnote).

The valuation of the indemnification liability was established using a discounted cash flow methodology based on probability weighted-average cash flows discounted by weighted-average cost of capital.

The valuation, which represents the fair value, is considered a level 3 liability, and will be measured on a recurring basis.

During the third quarter and September year to date 2020, the Company recognized $ 2.5 million in expenses related to the indemnification liability in other income (expense), net in the consolidated statements of earnings.

In connection with the first quarter 2020 acquisition of Insight, the Company has recorded an earnout liability totaling

$ 2.1 million as of third quarter-end 2020 in accounts payable and accrued liabilities in the consolidated balance sheet (see Acquisitions and Disposition footnote).

The valuation of the earnout liability was initially established using a Monte Carlo simulation and represents the fair value and is considered a level 3 liability.

The Company recognized $ 0.5 million of expense related to the earnout liability in the third quarter of 2020, in SG&A expenses in the consolidated statements of earnings.

The remaining money market funds as of year-end 2020 are included in cash and equivalents in the consolidated balance sheet.

The valuations

KELLY SERVICES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

of money market funds are based on quoted market prices of those accounts as of the respective period end.

The decrease in money market funds from year-end 2020 resulted from the transfer to other cash and cash equivalent accounts at the end of the first quarter of 2021.

The cost of this yen-denominated investment, which fluctuates based on foreign exchange rates, was $ 18.7 million as of the first quarter-end 2021 and $ 20.1 million at year-end 2020.

As of first quarter-end 2021 and year-end 2020, the Company had an indemnification liability of $ 2.4 million and $ 2.6 million, respectively, in other long-term liabilities on the consolidated balance sheet related to the sale of the Brazil operations (see Acquisitions and Disposition footnote).

The valuation, which represents the fair value, is considered a level 3 liability, and is being measured on a recurring basis.

During the first quarter of 2021, the Company recorded a reduction of $ 0.2 million to the indemnification liability related to exchange rate fluctuations in other income (expense), net in the consolidated statements of earnings.

The Company recorded an earnout liability relating to the 2020 acquisition of Insight, totaling $ 1.7 million at first quarter-end 2021 and year-end 2020 in accounts payable and accrued liabilities in the consolidated balance sheet (see Acquisitions and Disposition footnote).

The valuation of the earnout liability was initially established using a Monte Carlo simulation and represents the fair value and is considered a level 3 liability.

The Company recorded an earnout liability relating to the 2020 acquisition of Greenwood/Asher, totaling $ 1.7 million at first quarter-end 2021 in accounts payable and accrued liabilities and other long-term liabilities in the consolidated balance sheet and $ 2.1 million as of year-end 2020 in other long-term liabilities in the consolidated balance sheet (see Acquisitions and Dispositions footnote).

The initial valuation of the earnout liability was established using a Black Scholes model and represents the fair value and is considered a level 3 liability.

During the first quarter of 2021, the Company recorded a reduction of $ 0.4 million to the earnout liability in SG&A expenses in the consolidated statements of earnings.

Equity Investment Without Readily Determinable Fair Value

2 unchanged sentences

The measurement alternative represents cost, less impairment, plus or minus observable price changes.

The carrying amount of $ 5.0 million as of the third quarter-end 2020 and year-end 2019 represents the purchase price.

There have been no observable price changes to the carrying amount or impairments.

The Company also has a minority investment in Kenzie Academy Inc., which is included in other assets in the consolidated balance sheet.

This investment is also measured using the measurement alternative for equity investments without a readily determinable fair value as described above.

The investment totaled $ 1.4 million as of the third quarter-end 2020 and $ 1.3 million at year-end 2019, representing total cost plus observable price changes to date.

The carrying amount of $ 5.0 million as of the first quarter-end 2021 and year-end 2020 represents the purchase price.

There have been no material price changes to the carrying amount or impairments.

The Company has a minority investment in Kenzie Academy Inc., which is included in other assets in the consolidated balance sheet.

The investment was also measured using the measurement alternative for equity investments without a readily determinable fair value as described above.

On March 8, 2021, Kenzie entered into a transaction to sell its assets.

As of the date of the sale and year-end 2020, the investment had a carrying value of $ 1.4 million, representing total cost plus observable price changes to date.

The asset was written down as a result of the sale and the loss of $ 1.4 million was recorded in other income (expense), net in the consolidated statements of earnings.

Assets Measured at Fair Value on a Nonrecurring Basis

3 unchanged sentences

Restructuring

In the first quarter of 2020, the Company took restructuring actions to align costs with expected revenues, position the organization to adopt a new operating model later in 2020 and to align the U.S.

There were no restructuring charges incurred in the first quarter of 2021.

In the first quarter of 2020, the Company took restructuring actions to align costs with expected revenues, position the organization to adopt a new operating model in the third

KELLY SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

quarter of 2020 and to align the U.S.

branch network facilities footprint with a more technology-enabled service delivery methodology.

Restructuring costs incurred in 2020 totaled $ 8.4 million and are recorded entirely in SG&A expenses in the consolidated statements of earnings, as detailed below (in millions of dollars).

Restructuring costs incurred in the first quarter of 2020 totaled $ 8.7 million and were recorded entirely in SG&A expenses in the consolidated statements of earnings, as detailed below (in millions of dollars).

Lease Termination Costs Severance Costs Total

5 unchanged sentences

Total $ 3.9 $ 4.8 $ 8.7

KELLY SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A summary of the global restructuring balance sheet accrual, included in accrued payroll and related taxes and accounts payable and accrued liabilities in the consolidated balance sheet, is detailed below (in millions of dollars).

Balance as of year-end 2020 $ 3.5

Additions charged to Professional & Industrial 4.4

Additions charged to Science, Engineering & Technology 0.5

Additions charged to Education 0.9

Additions charged to International 1.1

Additions charged to Corporate 1.8

Reductions for lease termination costs related to fixed assets ( 0.6 )

Reductions for cash payments related to all restructuring activities ( 2.0 )

Balance as of first quarter-end 2021 $ 1.5

Reductions for cash payments related to all restructuring activities ( 2.1 )

Accrual adjustments ( 0.2 )

Balance as of second quarter-end 2020 1.6

Reductions for cash payments related to all restructuring activities ( 0.8 )

Accrual adjustments ( 0.1 )

Balance as of third quarter-end 2020 $ 0.7

The remaining balance of $ 0.7 million as of third quarter-end 2020 primarily represents severance costs, and the majority is expected to be paid by the end of 2020.

The remaining balance of $ 1.5 million as of first quarter-end 2021 primarily represents severance costs, and the majority is expected to be paid by the end of 2021.

No material adjustments are expected to be recorded.

4 unchanged sentences

A portion of the goodwill balance was deductible for tax purposes.

See impairment adjustments in the table below.

In performing the step one quantitative test and consistent with our prior practice, we determined the fair value of each reporting unit using the income approach, which is validated through reconciliation to observable market capitalization data.

4 unchanged sentences

expected future revenue and expense growth rates, profit margins, cost of capital, discount rate and forecasted capital expenditures and working capital.

During the third quarter of 2020, the Company adopted a new operating model reflecting the Company's focus on delivering specialty talent solutions, which resulted in a change in our operating segments and reporting units.

Due to the complete write-off of goodwill in the first quarter of 2020, reallocation of goodwill to the new reporting units as part of the third quarter 2020 change in segment reporting was not necessary.

Subsequently, the goodwill resulting from the acquisition of Greenwood/Asher

KELLY SERVICES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The changes in the carrying amount of goodwill as of June year to date 2020 are included in the table below.

See Acquisitions and Disposition footnote for a description of the addition to goodwill in the first quarter of 2020.

There were no additions to goodwill during the third quarter of 2020.

As of Year-End 2019 Additions to Goodwill Impairment Adjustments As of Second Quarter-End 2020

(In millions of dollars)

Americas Staffing $ 58.5 $ 19.9 $ ( 78.4 ) $ —

Global Talent Solutions 69.3 — ( 69.3 ) —

Total $ 127.8 $ 19.9 $ ( 147.7 ) $ —

during the fourth quarter of 2020 (see Acquisitions and Disposition footnote) was allocated to the Education operating segment, which was deemed to be a reporting unit, under the new operating model.

As of first quarter-end 2021, there were no changes in the carrying amount of goodwill from year-end 2020.

Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component, net of tax, for the third quarter and September year to date 2020 and 2019 are included in the table below.

The changes in accumulated other comprehensive income (loss) by component, net of tax, for the first quarter 2021 and 2020 are included in the table below.

Amounts in parentheses indicate debits.

Reclassification adjustments out of accumulated other comprehensive income (loss), as shown in the table below, were recorded in the other income (expense), net line item in the consolidated statements of earnings.

Third Quarter September Year to Date

2020 2019 2020 2019

First Quarter

(In millions of dollars)

16 unchanged sentences

Earnings (Loss) Per Share

The reconciliation of basic and diluted earnings (loss) per share on common stock for the third quarter and September year to date 2020 and 2019 follows (in millions of dollars except per share data):

Third Quarter September Year to Date

2020 2019 2020 2019

The reconciliation of basic and diluted earnings (loss) per share on common stock for the first quarter 2021 and 2020 follows (in millions of dollars except per share data):

First Quarter

Net earnings (loss) $ 25.6 $ ( 153.2 )

7 unchanged sentences

Diluted earnings (loss) per share $ 0.64 $ ( 3.91 )

Potentially dilutive shares outstanding are primarily related to performance shares for the third quarter and September year to date 2020 and 2019.

Dividends paid per share for Class A and Class B common stock were $ 0.00 for the third quarter 2020, $ 0.075 for the third quarter 2019 and September year to date 2020, and $ 0.225 for September year to date 2019.

Potentially dilutive shares outstanding are primarily related to performance shares for the first quarter 2021.

There were no dividends paid per share for Class A and Class B common stock for the first quarter of 2021.

Dividends paid per share for Class A and Class B common stock were $ 0.075 for the first quarter of 2020.

Stock-Based Compensation

For the third quarter of 2020, the Company recognized stock compensation expense of $ 0.5 million, and related tax benefit of $ 0.2 million.

For the third quarter of 2019, the Company recognized stock compensation benefit of $ 0.5 million, and related tax benefit of $ 0.4 million.

For September year to date 2020, the Company recognized stock compensation expense of $ 2.9 million, and related tax benefit of $ 0.2 million.

For September year to date 2019, the Company recognized stock compensation expense of $ 4.7 million, and related tax benefit of $ 1.1 million.

For the first quarter of 2021, the Company recognized stock compensation expense of $ 1.4 million, and related tax benefit of $ 0.1 million.

For the first quarter of 2020, the Company recognized stock compensation expense of $ 1.2 million, and related tax expense of $ 0.2 million.

Performance Shares

A summary of the status of all nonvested performance shares at target as of third quarter-end 2020 and year-to-date changes is presented as follows below (in thousands of shares except per share data).

There has been no grant of performance shares since year-end 2019.

The majority of the vested shares in the table below is related to the 2017 performance share grant, which cliff-vested after approval from the Compensation Committee during the first quarter of 2020.

The majority of the forfeited shares in the table below is related to the separation of two former senior officers during the third quarter of 2020.

The vesting adjustment in the table below represents the 2017 Total Shareholder Return ("TSR") performance shares that did not vest because actual achievement was below the threshold level and resulted in no payout.

During 2021, the Company granted performance share awards associated with the Company’s Class A common stock to certain senior officers.

The payment of performance share awards, which will be satisfied with the issuance of shares out of treasury stock, is contingent upon the achievement of specific revenue growth and EBITDA margin performance goals ("financial measure performance share awards") 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 three one-year performance periods:

2021, 2022 and 2023, with the payout for each performance period based on separate financial measure goals that are set in February of each of the three performance periods.

For the 2021 and 2022 performance periods, half of the shares earned in each respective performance period will vest after achievement of the respective performance goals for the year and approval of the financial results by the Compensation Committee, in early 2022 and 2023, respectively, if not forfeited by the recipient.

The remaining half of the shares earned for the 2021 and 2022 performance periods will vest in early 2024, based on continuous employment.

For the 2023 performance period, any shares earned will vest after achievement of the 2023 performance goals for the year and approval of the financial results by the Compensation Committee in early 2024, if not forfeited by the recipient.

No dividends are paid on these performance shares.

A summary of the status of all nonvested performance shares at target as of first quarter-end 2021 and changes during this period is presented as follows below (in thousands of shares except per share data).

The vesting adjustment in the table below represents the 2018 financial measure performance shares and the 2018 Total Shareholder Return ("TSR") performance shares that did not vest because actual achievement was below the threshold level and resulted in no payout.

KELLY SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Financial Measure

7 unchanged sentences

Vesting adjustment ( 93 ) 16.99 ( 47 ) 31.38

Nonvested at third quarter-end 2020 251 $ 22.32 47 $ 31.38

KELLY SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2018 Grant Update

For the 2018 financial measure performance awards, the annual goals are 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 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.

During the first quarter 2020, the final year of goals was set for the performance shares granted in 2018 and the grant date fair value for the 2018 financial measure performance shares was set at $ 17.35 per share.

The grant date fair value per share will remain fixed for the remaining performance period.

Nonvested at first quarter-end 2021 430 $ 23.69 — $ —

Restricted Stock

A summary of the status of nonvested restricted stock as of third quarter-end 2020 and year-to-date changes is presented as follows below (in thousands of shares except per share data).

The majority of the restricted stock granted related to new hires in the first quarter of 2020.

A summary of the status of nonvested restricted stock as of first quarter-end 2021 and changes during this period is presented as follows below (in thousands of shares except per share data).

Shares Weighted Average Grant Date Fair Value

3 unchanged sentences

Forfeited ( 10 ) 24.45

Nonvested at third quarter-end 2020 280 $ 22.91

Nonvested at first quarter-end 2021 383 $ 21.70

Sale of Assets

In the second quarter of 2020, the Company monetized wage subsidy receivables outside the U.S.

for $ 16.9 million, net of fees and 5 % retainer.

The sale of these receivables was accounted for as a sale of financial assets with certain recourse provisions in which we derecognized the receivables.

Although the sale of receivables is with recourse, the Company did not record a recourse obligation as of the third quarter 2020 as the Company has concluded the receivables are collectible.

The net cash proceeds related to the sale are included in operating activities in the consolidated statements of cash flows and the fees related to the sale are included in SG&A expenses in the consolidated statements of earnings.

On March 20, 2020, the Company sold three of our four headquarters properties for a purchase price of $ 58.5 million as a part of a sale and leaseback transaction.

4 unchanged sentences

The Company leased back the headquarters buildings on the same date.

see the Leases footnote for discussion of the sale and leaseback transaction.

Gain on sale of assets of $ 12.3 million in the second quarter of 2019 primarily represents the sale of unused land located near the Company headquarters, and includes the excess of the $ 11.7 million sale proceeds over the cost of the parcel.

The gain on sale of assets also includes proceeds of $ 2.1 million from the transfer of customer contracts related to the Company's legal specialty operations to a third party during the second quarter of 2019.

KELLY SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other Income (Expense), Net

Included in other income (expense), net for the third quarter and September year to date 2020 and 2019 are the following:

Third Quarter September Year to Date

2020 2019 2020 2019

Included in other income (expense), net for the first quarter 2021 and 2020 are the following:

First Quarter

(In millions of dollars)

1 unchanged sentence

Interest expense ( 0.6 ) ( 0.9 )

Dividend income — — 1.3 1.3

Foreign exchange gains (losses) ( 0.2 ) 2.4

1 unchanged sentence

Other income (expense), net $ ( 3.4 ) $ 1.7

Income tax benefit was $ 1.2 million and $ 12.8 million for the third quarter of 2020 and 2019, respectively.

Income tax benefit was $ 36.5 million and expense was $ 6.3 million for September year to date 2020 and 2019, respectively.

These amounts were impacted by changes in the fair value of the Company's investment in Persol Holdings, which resulted in a charge of $ 5.2 million for the third quarter of 2020 and a benefit of $ 9.6 million for September year to date 2020, compared to a benefit of $ 12.1 million for the third quarter of 2019 and a charge of $ 10.7 million for September year to date 2019.

September year to date 2020 includes a tax benefit of $ 23.0 million on the impairment of goodwill and a second quarter tax benefit of $ 7.7 million from Brazil outside basis differences.

September year to date 2019 includes a second quarter net benefit of $ 10.4 million from valuation allowance changes in the United Kingdom and Germany.

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 tax exempt 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, the tax effects of stock compensation, and changes in the fair value of the Company’s investment in Persol Holdings, which are treated as discrete since they cannot be estimated.

The impairment of goodwill in the first quarter of 2020, the recording of deferred taxes on Brazil outside basis differences in the second quarter of 2020, and the valuation allowance changes in the second quarter of 2019 were treated as discrete items.

The work opportunity credit program is a temporary provision in the U.S.

tax law and expires for employees hired after 2020.

While the program has routinely been extended, it is uncertain whether it will again be extended.

In the event the program is not renewed, we will continue to receive credits for qualified employees hired prior to 2021.

The impact of the current economic slow-down resulting from the COVID-19 crisis did not change our judgment on the realizability of deferred tax assets or our plans to repatriate cash from foreign subsidiaries.

The Company has operating and financing leases for field offices and various equipment.

Our leases have remaining lease terms of one year to 15 years.

We determine if an arrangement is a lease at inception.

At the beginning of the first quarter of 2019, we adopted ASC 842, Leases, using an optional transition method which allowed us 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 earnings invested in the business in the period of adoption.

We recorded $ 74.1 million of right-of-use (“ROU”) assets within operating lease right-of-use assets, $ 19.8 million of current lease liabilities within operating lease liabilities, current and $ 54.3 million of noncurrent lease liabilities within operating lease liabilities, noncurrent in the consolidated balance sheet on the date of adoption.

No adjustment to the beginning balance of earnings invested in the business was necessary as a result of adopting this standard.

KELLY SERVICES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During the first quarter 2020, the Company sold its main headquarters building and entered into a leaseback agreement, which is accounted for as an operating lease.

As of first quarter-end 2020, we recognized $ 37.6 million of ROU assets within operating lease right-of-use assets, $ 1.2 million of current lease liabilities within operating lease liabilities, current and $ 36.1 million of noncurrent lease liabilities within operating lease liabilities, noncurrent in the consolidated balance sheet, with a discount rate of 4.8 % over a 15 -year lease term related to this lease.

The sale and leaseback obligation matures as follows:

$ 0.8 million in fiscal 2020, remaining;

$ 3.3 million in fiscal 2021;

$ 3.3 million in fiscal 2022;

$ 3.4 million in fiscal 2023;

$ 3.4 million in fiscal 2024;

$ 3.4 million in fiscal 2025 and $ 34.0 million thereafter.

Included in Other for the first quarter of 2021 is a loss from the sale of the assets related to our minority investment in Kenzie Academy (see Fair Value Measurements footnote) and transaction-related expenses from the April 2021 acquisition of Softworld (see Subsequent Event footnote).

Income tax expense was $ 10.5 million for the first quarter of 2021 and income tax benefit was $ 36.2 million for the first quarter of 2020.

The first quarter of 2021 includes tax expense of $ 9.2 million for the gain on the Company's investment in Persol Holdings.

The first quarter of 2020 includes a tax benefit of $ 23.0 million on the impairment of goodwill and a tax benefit of $ 23.8 million for the loss on the Company's investment in Persol Holdings.

The first quarter of 2020 benefit was partially offset by losses on tax exempt investments in life insurance policies and income from the sale of assets discussed in the Sale of Assets footnote.

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 tax exempt investments in life insurance policies.

The first quarter of 2020 impairment of goodwill was treated as discrete.

The Company provides valuation allowances against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

At this time, we have no valuation allowance against our Mexican deferred tax asset of $ 4.2 million, though it is possible this may change as we assess the impacts of the new labor laws enacted in the second quarter of 2021 on our Mexican business operations.

Contingencies

2 unchanged sentences

Such accruals are recorded in accounts payable and accrued liabilities and in accrued workers’ compensation and other claims in the consolidated balance sheet.

At third quarter-end 2020 and year-end 2019, the gross accrual for litigation costs amounted to $ 0.8 million and $ 9.9 million, respectively.

The decrease in the gross accrual from year-end 2019 was due to cash payments made and the liabilities related to our Brazil operations which were sold during 2020.

At first quarter-end 2021 and year-end 2020, the gross accrual for litigation costs amounted to $ 1.2 million and $ 1.4 million, respectively.

The Company maintains insurance coverage which may cover certain claims.

When claims exceed the applicable policy deductible and realization of recovery of the claim from existing insurance policies is deemed probable, the Company records receivables from the insurance company for the excess amount, which are included in prepaid expenses and other current assets in the consolidated balance sheet.

At third quarter-end 2020 and year-end 2019, the related insurance receivables amounted to $ 0.0 million and $ 4.1 million, respectively.

The Company estimates the aggregate range of reasonably possible losses, in excess of amounts accrued, is $ 0.0 million to $ 1.4 million as of third quarter-end 2020.

At first quarter-end 2021 and year-end 2020, there were no related insurance receivables.

The Company estimates the aggregate range of reasonably possible losses, in excess of amounts accrued, is $ 0.1 million to $ 1.8 million as of first quarter-end 2021.

This range includes matters where a liability has been accrued but it is reasonably possible that the ultimate loss may exceed the amount accrued and for matters where a loss is believed to be reasonably possible, but a liability has not been accrued.

7 unchanged sentences

Segment Disclosures

Beginning in the third quarter of 2020, the Company adopted a new operating model reflecting the Company's focus on delivering specialty talent solutions.

The Company’s new operating segments, which also represent its reporting segments, are based on the organizational structure for which financial results are regularly evaluated by the Company’s chief operating decision-maker ("CODM", the Company’s CEO) to determine resource allocation and assess performance.

The Company’s operating segments, which also represent its reporting segments, are based on the organizational structure for which financial results are regularly evaluated by the Company’s chief operating decision-maker ("CODM", the Company’s CEO) to determine resource allocation and assess performance.

The Company’s five reportable segments, (1) Professional & Industrial, (2) Science, Engineering & Technology, (3) Education, (4) Outsourcing & Consulting, and (5) International, reflect the specialty services the Company provides to customers and represent how the business is organized internally.

Intersegment revenue represents revenue earned between the reportable segments and is eliminated from total segment revenue from services.

Professional & Industrial specializes in delivering professional and industrial talent to customers including staffing, KellyConnect, and outcome-based solutions in the Americas region.

Science, Engineering & Technology delivers both staffing and outcome-based solutions in the specialty areas of science, technology, telecom and engineering primarily in the U.S.

Education primarily specializes in K-12 substitute teachers and support staff, as well as some early childhood and higher education support, in the Americas region.

Outsourcing & Consulting is focused on providing RPO, MSP and PPO solutions in the Americas, Europe and Asia-Pacific regions.

International provides talent to customers across all specialties primarily through staffing services within Europe as well as Brazil and Mexico in the Americas region.

Our Brazil operations were sold in August 2020 (see Acquisitions and Disposition footnote).

Corporate expenses that directly support the operating units have been allocated to Professional & Industrial, Science, Engineering & Technology, Education, Outsourcing & Consulting, and International 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.

Consistent with the information provided to and evaluated by the CODM, the goodwill impairment charge in the first quarter of 2020 is included in Corporate expenses.

The following tables present information about the reported revenue from services and gross profit of the Company by segment, along with a reconciliation to earnings (loss) before taxes and equity in net earnings (loss) of affiliate, for the third quarter and September year to date 2020 and 2019 based on the new operating model.

Prior year reportable segment results were recast to align with the current presentation.

Consistent with the information provided to and evaluated by the CODM, the goodwill impairment charge in the first quarter of 2020 was included in Corporate expenses.

The Company changed its reportable segments during the third quarter of 2020.

As a result, certain reclassifications have been made to the reportable segment results for the first quarter of 2020 to conform to the updated reportable segment presentation.

Asset information by reportable segment is not presented, since the Company does not produce such information internally nor does it use such data to manage its business.

Third Quarter September Year to Date

2020 2019 2020 2019

First Quarter

(In millions of dollars)

10 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Third Quarter September Year to Date

2020 2019 2020 2019

First Quarter

(In millions of dollars)

15 unchanged sentences

International earnings (loss) from operations 2.6 1.1

Intersegment gross profit — — — —

Intersegment SG&A expenses — — — —

Net Intersegment activity — — — —

Corporate ( 21.9 ) ( 139.7 )

5 unchanged sentences

Recently Adopted

In August 2018, the FASB issued Accounting Standards Update ("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 adopted this guidance prospectively effective December 30, 2019.

In accordance with the standard, we present capitalized implementation costs incurred in a hosting arrangement that is a service contract as other assets on our consolidated balance sheet.

This presentation is consistent with the presentation of the prepayment of fees for the hosting arrangement.

We recognized $ 0.3 million of amortization expense for capitalized implementation costs incurred in hosting arrangements September year to date 2020 as a component of SG&A expenses in our consolidated statements of earnings.

We recognized $ 3.6 million of payments for capitalized implementation costs September year to date 2020 in the same manner as payments made for fees associated with the related hosting arrangements as a component of net cash from operating activities in our consolidated statements of cash flows.

The Company's cloud computing arrangements are comprised of internal-use software platforms accounted for as service contracts.

The Company does not have the ability to take possession of the software without

KELLY SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

significant penalty nor can the Company run the software on its own hardware or contract with another party unrelated to the vendor to host the software.

In June 2016, the FASB issued ASU 2016-13 (ASC Topic 326), as clarified in ASU 2019-04, ASU 2019-05, ASU 2019-11 and ASU 2018-19, 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 prior methodology of delaying recognition of credit losses until it is probable a loss has been incurred.

The standard also requires additional quantitative and qualitative disclosures regarding credit risk inherent in a reporting entity's portfolio, how management monitors this risk, management's estimate of expected credit losses, and the changes in the estimate that has taken place during the period.

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 adopted this ASU using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures, as applicable.

Results for reporting periods beginning after December 30, 2019 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

We recorded a decrease to retained earnings of $ 0.7 million, net of tax, in the first quarter 2020 for the cumulative effect of adopting ASC 326.

Related disclosures have been updated throughout the financial statements and footnotes.

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.

The adoption of this standard did not have a material impact to our consolidated financial statements.

Not Yet Adopted

In January 2020, the FASB issued ASU 2020-01 which clarifies the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities.

1 unchanged sentence

The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with early adoption permitted.

We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.

The adoption of this standard did not have a material impact to our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12 simplifying various aspects related to the accounting for income taxes.

1 unchanged sentence

The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with early adoption permitted.

We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.

The adoption of this standard did not have a material impact to our consolidated 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.

KELLY SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Subsequent Event

In October 2020, management made the decision to begin reducing staffing levels in all segments and Corporate through involuntary terminations.

Restructuring charges of approximately $ 4 -$ 5 million for severance and related benefits to be paid to impacted employees will be recognized as a charge to SG&A expenses in the fourth quarter of 2020.

On April 5, 2021, the Company acquired 100 % of the shares of Softworld, Inc.

("Softworld") for $ 215.0 million of cash, subject to working capital adjustments.

Softworld is a leading technology staffing and workforce solutions firm that serves clients across several end-markets, including financial services, life sciences, aerospace, defense, insurance, retail and IT consulting.

The related acquisition costs, which are included in other income (expense), net in the consolidated statements of earnings, were $ 1.3 million.

The initial accounting for the business combination is incomplete at the time of this filing due to the limited amount of time since the acquisition date and the ongoing status of the valuation.

Therefore, it is impracticable for the Company to provide the major classes of assets acquired and liabilities assumed or pro forma revenue and earnings.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements