KELLY SERVICES INC 10-Q

Item 1. Financial Statements. KELLY SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (In millions of dollars except per share data) 13 Weeks Ended 26 Weeks Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Revenue from services $ 1,267.3 $ 1,258.1 $ 2,563.7 $ 2,464.0 Cost of services 1,004.9 1,027.1 2,042.7 2,019.7 Gross profit 262.4 231.0 521.0 444.3 Selling, general and administrative expenses 240.1 217.3 476.2 420.0 Impairment of assets held for sale 18.5 — 18.5 — Gain on sale of assets ( 4.4 ) — ( 5.3 ) — Earnings from operations 8.2 13.7 31.6 24.3 Gain (loss) on investment in Persol Holdings — 6.3 ( 67.2 ) 36.3 Loss on currency translation from liquidation of subsidiary — — ( 20.4 ) — Other income (expense), net ( 1.1 ) ( 0.3 ) 1.7 ( 3.7 ) Earnings (loss) before taxes and equity in net earnings (loss) of affiliate 7.1 19.7 ( 54.3 ) 56.9 Income tax expense (benefit) 4.9 ( 2.6 ) ( 8.1 ) 7.9 Net earnings (loss) before equity in net earnings (loss) of affiliate 2.2 22.3 ( 46.2 ) 49.0 Equity in net earnings (loss) of affiliate — 1.7 0.8 0.6 Net earnings (loss) $ 2.2 $ 24.0 $ ( 45.4 ) $ 49.6 Basic earnings (loss) per share $ 0.06 $ 0.60 $ ( 1.19 ) $ 1.25 Diluted earnings (loss) per share $ 0.06 $ 0.60 $ ( 1.19 ) $ 1.25 Average shares outstanding (millions): Basic 37.9 39.4 38.3 39.4 Diluted 38.2 39.5 38.3 39.5 See accompanying unaudited Notes to Consolidated Financial Statements. 4 KELLY SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (In millions of dollars) 13 Weeks Ended 26 Weeks Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Net earnings (loss) $ 2.2 $ 24.0 $ ( 45.4 ) $ 49.6 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments, net of tax expense of $0.0, tax benefit of $0.1, tax expense of $0.1 and $0.4, respectively 1.3 2.0 ( 8.6 ) ( 11.6 ) Less: Reclassification adjustments included in net earnings (loss) - liquidation of Japan subsidiary — — 20.4 — Less: Reclassification adjustments included in net earnings (loss) - equity method investment and other 0.2 — 2.7 — Foreign currency translation adjustments 1.5 2.0 14.5 ( 11.6 ) Other comprehensive income (loss) 1.5 2.0 14.5 ( 11.6 ) Comprehensive income (loss) $ 3.7 $ 26.0 $ ( 30.9 ) $ 38.0 See accompanying unaudited Notes to Consolidated Financial Statements. 5 KELLY SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In millions) July 3, 2022 January 2, 2022 Assets Current Assets Cash and equivalents $ 133.9 $ 112.7 Trade accounts receivable, less allowances of $12.0 and $12.6, respectively 1,497.9 1,423.2 Prepaid expenses and other current assets 80.6 52.8 Assets held for sale 24.6 — Total current assets 1,737.0 1,588.7 Noncurrent Assets Property and equipment: Property and equipment 173.3 205.1 Accumulated depreciation ( 147.9 ) ( 169.8 ) Net property and equipment 25.4 35.3 Operating lease right-of-use assets 70.1 75.8 Deferred taxes 298.3 302.8 Goodwill, net 192.1 114.8 Investment in Persol Holdings — 264.3 Investment in equity affiliate — 123.4 Other assets 412.3 389.1 Total noncurrent assets 998.2 1,305.5 Total Assets $ 2,735.2 $ 2,894.2 See accompanying unaudited Notes to Consolidated Financial Statements. 6 KELLY SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In millions) July 3, 2022 January 2, 2022 Liabilities and Stockholders’ Equity Current Liabilities Short-term borrowings $ — $ — Accounts payable and accrued liabilities 734.7 687.2 Operating lease liabilities 15.3 17.5 Accrued payroll and related taxes 322.4 318.4 Accrued workers’ compensation and other claims 24.4 20.8 Income and other taxes 50.5 51.3 Liabilities held for sale 13.7 — Total current liabilities 1,161.0 1,095.2 Noncurrent Liabilities Operating lease liabilities 57.7 61.4 Accrued payroll and related taxes — 57.6 Accrued workers’ compensation and other claims 43.4 37.0 Accrued retirement benefits 180.2 220.0 Other long-term liabilities 16.0 86.8 Total noncurrent liabilities 297.3 462.8 Commitments and contingencies (see Contingencies footnote) Stockholders’ Equity Capital stock, $1.00 par value Class A common stock, 100.0 shares authorized; 35.1 shares issued at 2022 and 36.7 shares issued at 2021 35.1 36.7 Class B common stock, 10.0 shares authorized; 3.4 shares issued at 2022 and 3.4 shares issued at 2021 3.4 3.4 Treasury stock, at cost Class A common stock, 0.6 shares at 2022 and 0.7 shares at 2021 ( 11.9 ) ( 14.5 ) Class B common stock ( 0.6 ) ( 0.6 ) Paid-in capital 24.9 23.9 Earnings invested in the business 1,239.2 1,315.0 Accumulated other comprehensive income (loss) ( 13.2 ) ( 27.7 ) Total stockholders’ equity 1,276.9 1,336.2 Total Liabilities and Stockholders’ Equity $ 2,735.2 $ 2,894.2 See accompanying unaudited Notes to Consolidated Financial Statements. 7 KELLY SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) (In millions of dollars) 13 Weeks Ended 26 Weeks Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Capital Stock Class A common stock Balance at beginning of period $ 35.1 $ 36.7 $ 36.7 $ 36.7 Conversions from Class B — — — — Share retirement — — ( 1.6 ) — Balance at end of period 35.1 36.7 35.1 36.7 Class B common stock Balance at beginning of period 3.4 3.4 3.4 3.4 Conversions to Class A — — — — Balance at end of period 3.4 3.4 3.4 3.4 Treasury Stock Class A common stock Balance at beginning of period ( 12.4 ) ( 15.1 ) ( 14.5 ) ( 16.5 ) Net issuance of stock awards 0.5 0.4 2.6 1.8 Balance at end of period ( 11.9 ) ( 14.7 ) ( 11.9 ) ( 14.7 ) Class B common stock Balance at beginning of period ( 0.6 ) ( 0.6 ) ( 0.6 ) ( 0.6 ) Net issuance of stock awards — — — — Balance at end of period ( 0.6 ) ( 0.6 ) ( 0.6 ) ( 0.6 ) Paid-in Capital Balance at beginning of period 22.8 20.6 23.9 21.3 Net issuance of stock awards 2.1 1.7 1.0 1.0 Balance at end of period 24.9 22.3 24.9 22.3 Earnings Invested in the Business Balance at beginning of period 1,239.9 1,188.5 1,315.0 1,162.9 Net earnings (loss) 2.2 24.0 ( 45.4 ) 49.6 Dividends ( 2.9 ) — ( 4.8 ) — Share retirement — — ( 25.6 ) — Balance at end of period 1,239.2 1,212.5 1,239.2 1,212.5 Accumulated Other Comprehensive Income (Loss) Balance at beginning of period ( 14.7 ) ( 17.8 ) ( 27.7 ) ( 4.2 ) Other comprehensive income (loss), net of tax 1.5 2.0 14.5 ( 11.6 ) Balance at end of period ( 13.2 ) ( 15.8 ) ( 13.2 ) ( 15.8 ) Stockholders’ Equity at end of period $ 1,276.9 $ 1,243.8 $ 1,276.9 $ 1,243.8 See accompanying unaudited Notes to Consolidated Financial Statements. 8 KELLY SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In millions of dollars) 26 Weeks Ended July 3, 2022 July 4, 2021 Cash flows from operating activities: Net earnings (loss) $ ( 45.4 ) $ 49.6 Adjustments to reconcile net earnings (loss) to net cash from operating activities: Impairment of assets held for sale 18.5 — Depreciation and amortization 16.1 14.1 Operating lease asset amortization 9.8 10.7 Provision for credit losses and sales allowances 1.3 — Stock-based compensation 3.8 2.8 (Gain) loss on investment in Persol Holdings 67.2 ( 36.3 ) Loss on currency translation from liquidation of subsidiary 20.4 — Gain on foreign currency remeasurement ( 5.5 ) — Gain on sale of assets ( 5.3 ) — Equity in net (earnings) loss of PersolKelly Pte. Ltd. ( 0.8 ) ( 0.6 ) Other, net 2.9 2.2 Changes in operating assets and liabilities, net of acquisitions ( 190.3 ) 5.1 Net cash (used in) from operating activities ( 107.3 ) 47.6 Cash flows from investing activities: Capital expenditures ( 3.5 ) ( 4.9 ) Proceeds from sale of assets 4.5 — Acquisition of companies, net of cash received ( 143.1 ) ( 219.0 ) Proceeds from company-owned life insurance 1.5 10.4 Proceeds from sale of Persol Holdings investment 196.9 — Proceeds from sale of equity method investment 119.5 — Proceeds related to loans with equity affiliate — 5.8 Proceeds from equity securities — 5.0 Other investing activities ( 0.2 ) 1.0 Net cash from (used in) investing activities 175.6 ( 201.7 ) Cash flows from financing activities: Net change in short-term borrowings — ( 0.1 ) Financing lease payments ( 0.4 ) ( 0.3 ) Dividend payments ( 4.8 ) — Payments of tax withholding for stock awards ( 0.8 ) ( 0.6 ) Buyback of common shares ( 27.2 ) — Contingent consideration payments ( 0.7 ) — Net cash used in financing activities ( 33.9 ) ( 1.0 ) Effect of exchange rates on cash, cash equivalents and restricted cash 0.1 ( 2.3 ) Net change in cash, cash equivalents and restricted cash 34.5 ( 157.4 ) Cash, cash equivalents and restricted cash at beginning of period 119.5 228.1 Cash, cash equivalents and restricted cash at end of period (1) $ 154.0 $ 70.7 9 KELLY SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (UNAUDITED) (In millions of dollars) (1) The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported in our consolidated balance sheets: 26 Weeks Ended July 3, 2022 July 4, 2021 Reconciliation of cash, cash equivalents and restricted cash: Current assets: Cash and cash equivalents $ 133.9 $ 64.4 Cash included in assets held for sale 12.2 — Restricted cash included in prepaid expenses and other current assets 0.6 0.1 Noncurrent assets: Restricted cash included in other assets 7.3 6.2 Cash, cash equivalents and restricted cash at end of period $ 154.0 $ 70.7 See accompanying unaudited Notes to Consolidated Financial Statements. 10 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 January 2, 2022, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 17, 2022 (the 2021 consolidated financial statements). There were no changes in accounting policies as disclosed in the Form 10-K, with the exception of those described in the New Accounting Pronouncements footnote. The Company’s second fiscal quarter ended on July 3, 2022 (2022) and July 4, 2021 (2021), each of which contained 13 weeks. The corresponding June year-to-date periods for 2022 and 2021 each contained 26 weeks. Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year's presentation. 11 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) 2. Revenue Revenue Disaggregated by Service Type Kelly has five operating segments: 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 of dollars): Second Quarter June Year to Date 2022 2021 2022 2021 Professional & Industrial Staffing services $ 309.5 $ 359.8 $ 644.4 $ 712.3 Permanent placement 7.7 5.3 17.9 10.2 Outcome-based services 98.6 101.4 197.8 211.6 Total Professional & Industrial 415.8 466.5 860.1 934.1 Science, Engineering & Technology Staffing services 223.1 212.9 443.7 399.1 Permanent placement 8.5 6.1 16.5 10.9 Outcome-based services 92.7 79.2 181.2 142.9 Total Science, Engineering & Technology 324.3 298.2 641.4 552.9 Education Staffing services 152.5 104.1 324.4 214.9 Permanent placement 3.0 1.8 4.5 2.6 Total Education 155.5 105.9 328.9 217.5 Outsourcing & Consulting Talent solutions 124.4 107.3 233.5 206.6 Total Outsourcing & Consulting 124.4 107.3 233.5 206.6 International Staffing services 237.2 272.0 478.9 537.6 Permanent placement 5.6 5.4 12.5 10.9 Talent solutions 4.8 3.0 9.0 4.8 Total International 247.6 280.4 500.4 553.3 Total Intersegment ( 0.3 ) ( 0.2 ) ( 0.6 ) ( 0.4 ) Total Revenue from Services $ 1,267.3 $ 1,258.1 $ 2,563.7 $ 2,464.0 12 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) Revenue Disaggregated by Geography Our operations are subject to different economic and regulatory environments depending on geographic location. Our P&I and Education segments operate in the Americas region, our SET segment operates in the Americas and Europe regions, and OCG operates in the Americas, Europe and Asia-Pacific regions. The International segment includes our Mexico operations, which are included in the Americas region, and Europe. The below table presents our revenues disaggregated by geography (in millions of dollars): Second Quarter June Year to Date 2022 2021 2022 2021 Americas United States $ 928.9 $ 894.6 $ 1,885.5 $ 1,753.1 Canada 40.3 39.5 79.4 73.6 Puerto Rico 28.9 26.9 56.5 51.1 Mexico 11.2 33.1 21.5 67.7 Total Americas Region 1,009.3 994.1 2,042.9 1,945.5 Europe Switzerland 55.3 54.0 110.3 106.7 France 50.4 57.5 105.0 111.8 Portugal 42.0 40.6 83.9 84.3 Russia 28.7 33.7 58.4 66.3 Italy 18.4 19.4 37.9 37.5 United Kingdom 16.0 17.7 31.0 34.7 Other 35.7 31.8 72.0 59.6 Total Europe Region 246.5 254.7 498.5 500.9 Total Asia-Pacific Region 11.5 9.3 22.3 17.6 Total Kelly Services, Inc. $ 1,267.3 $ 1,258.1 $ 2,563.7 $ 2,464.0 13 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) The below table presents our SET, OCG and International segment revenues disaggregated by geographic region (in millions of dollars): Second Quarter June Year to Date 2022 2021 2022 2021 Science, Engineering & Technology Americas $ 320.4 $ 296.6 $ 634.2 $ 549.8 Europe 3.9 1.6 7.2 3.1 Total Science, Engineering & Technology $ 324.3 $ 298.2 $ 641.4 $ 552.9 Outsourcing & Consulting Americas $ 107.1 $ 92.6 $ 199.4 $ 177.4 Europe 5.8 5.5 11.8 11.7 Asia-Pacific 11.5 9.2 22.3 17.5 Total Outsourcing & Consulting $ 124.4 $ 107.3 $ 233.5 $ 206.6 International Americas $ 10.8 $ 32.8 $ 20.9 $ 67.1 Europe 236.8 247.6 479.5 486.2 Total International $ 247.6 $ 280.4 $ 500.4 $ 553.3 Deferred Costs Deferred fulfillment costs, which are included in prepaid expenses and other current assets in the consolidated balance sheet, were $ 3.1 million as of second quarter-end 2022 and $ 1.3 million as of year-end 2021. Amortization expense for the deferred costs for the second quarter and June year-to-date 2022 was $ 1.9 million and $ 3.8 million, respectively. Amortization expense for the deferred costs for the second quarter and June year-to-date 2021 was $ 5.2 million and $ 12.1 million, respectively. 3. Credit Losses 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 of dollars): June Year to Date 2022 2021 Allowance for credit losses: Beginning balance $ 9.4 $ 9.8 Current period provision 0.9 ( 0.2 ) Currency exchange effects ( 0.3 ) 0.1 Write-offs ( 1.6 ) ( 0.8 ) Ending balance $ 8.4 $ 8.9 Write-offs are presented net of recoveries, which were not material for June year-to-date 2022 and 2021. We were engaged in litigation with a customer over a disputed accounts receivable balance for certain services rendered more than five years ago, which was recorded as a long-term receivable in other assets in the consolidated balance sheet as of second quarter-end 2021. The related allowance for credit losses on this long-term customer receivable was $ 10.9 million and represented the likelihood of collection as of second quarter-end 2021. Based on a final ruling in the case in favor of the customer, we wrote off the entire receivable balance in the third quarter of 2021. No other allowances related to other receivables were material for second quarter-end 2022. 14 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) 4. Acquisitions In the second quarter of 2022, Kelly Services USA, LLC ("KSU"), a wholly owned subsidiary of the Company, acquired Pediatric Therapeutic Services ("PTS"), as detailed below. In the first quarter of 2022, the Company acquired Rocket Power Holdings LLC and Rocket Power Ops LLC (collectively, "RocketPower"), as detailed below. In the second quarter of 2021, the Company acquired Softworld, Inc. ("Softworld"), as detailed below. Pediatric Therapeutic Services On May 2, 2022, KSU acquired 100 % of the membership interests of PTS for a purchase price of $ 82.1 million. PTS is a specialty firm that provides and manages various state and federally mandated in-school therapy services. This acquisition will expand Kelly Education's K-12 solution offering in the education staffing market and serve as an entry point into the therapeutic services market. Under terms of the purchase agreement, the purchase price was adjusted for cash held by PTS at the closing date and estimated working capital adjustments resulting in the Company paying cash of $ 85.7 million. Total consideration includes $ 1.1 million of additional consideration that is payable to the seller by the end of 2022 related to employee retention credits. The total consideration is as follows (in millions of dollars): Cash consideration paid $ 85.7 Additional consideration payable 1.1 Total consideration $ 86.8 Due to the limited amount of time that has passed since acquiring PTS, the purchase price allocation for this acquisition is preliminary and could change. 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): Cash $ 0.9 Trade accounts receivable 10.0 Prepaid expenses and other current assets 1.6 Net property and equipment 0.4 Goodwill 36.3 Intangibles 40.3 Accounts payable and accrued liabilities, current ( 2.6 ) Accrued payroll and related taxes, current ( 0.1 ) Total consideration, including working capital adjustments $ 86.8 The fair value of the acquired receivables represents the contractual value. Included in the assets purchased in the PTS acquisition was $ 40.3 million of intangibles, made up of $ 29.8 million in customer relationships, $ 9.3 million associated with PTS's trade names and $ 1.2 million for non-compete agreements. Customer relationships will be amortized over 15 years with no residual value, trade names will be amortized over 15 years with no residual value, and the non-compete agreements will be amortized over five years with no residual value. Goodwill generated from the acquisition was primarily attributable to expected synergies from combining operations and expanding market potential and was assigned to the Education operating segment (see Goodwill footnote). All of the goodwill is expected to be deductible for tax purposes. PTS's results of operations are included in the Education segment. Our consolidated revenues and earnings from operations for the second quarter and June year-to-date 2022 included $ 7.2 million and $ 0.9 million, respectively, from PTS. Pro forma results of operations for this acquisition have not been presented as the acquisition does not have a material impact to the consolidated statements of earnings. RocketPower On March 7, 2022, the Company acquired 100 % of the issued and outstanding membership interests of RocketPower for a purchase price of $ 59.3 million. RocketPower is a leading provider of RPO and other outsourced talent solutions to U.S. high- 15 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) tech companies. This acquisition will expand OCG's RPO solution and delivery offering and enhance the specialty RPO strategy and expertise within the high-tech industry. Under terms of the purchase agreement, the purchase price was adjusted for cash held by RocketPower at the closing date and estimated working capital adjustments resulting in the Company paying cash of $ 61.8 million. Total consideration includes $ 1.1 million of additional consideration that is payable to the seller in 2023 related to employee retention credits and contingent consideration with an estimated fair value of $ 0.6 million related to an earnout payment with a maximum potential cash payment of $ 31.8 million in the event certain financial metrics are met per the terms of the agreement. The initial fair value of the earnout was established using a Black Scholes model (see Fair Value Measurements footnote). The earnout is expected to be paid in 2023 and 2024 after each earn-out year pursuant to the terms of the purchase agreement. The total consideration is as follows (in millions of dollars): Cash consideration paid $ 61.8 Additional consideration payable 1.1 Contingent consideration 0.6 Total consideration $ 63.5 Due to the limited amount of time that has passed since acquiring RocketPower, the purchase price allocation for this acquisition is preliminary and could change. 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): Cash $ 3.5 Trade accounts receivable 6.9 Prepaid expenses and other current assets 1.8 Net property and equipment 0.1 Goodwill 41.0 Intangibles 15.8 Accounts payable and accrued liabilities, current ( 2.9 ) Accrued payroll and related taxes, current ( 1.5 ) Other long-term liabilities ( 1.2 ) Total consideration, including working capital adjustments $ 63.5 The fair value of the acquired receivables represents the contractual value. Included in the assets purchased in the RocketPower acquisition was $ 15.8 million of intangible assets, made up of $ 7.5 million in customer relationships, $ 6.6 million associated with RocketPower's trade names and $ 1.7 million for non-compete agreements. Customer relationships will be amortized over three years with no residual value, trade names will be amortized over 10 years with no residual value, and the non-compete agreements will be amortized over six years with no residual value. Goodwill generated from the acquisition was primarily attributable to expected synergies from combining operations and expanding market potential and was assigned to the OCG operating segment (see Goodwill footnote). The amount of goodwill expected to be deductible for tax purposes is approximately $ 28.0 million. RocketPower's results of operations are included in the OCG segment in 2022 on a one-month lag, accordingly our first quarter 2022 consolidated revenues and earnings from operations did not include any results from RocketPower. Our consolidated revenues and earnings from operations for the second quarter and June year-to-date 2022 included $ 11.5 million and $ 1.0 million, respectively, from RocketPower. Pro forma results of operations for this acquisition have not been presented as the acquisition does not have a material impact to the consolidated statements of earnings. 16 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) Softworld On April 5, 2021, the Company acquired 100 % of the shares of Softworld for a purchase price of $ 215.0 million. 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. This acquisition is intended to expand our capabilities, scale and solution set in our technology specialty. Under terms of the purchase agreement, the purchase price was adjusted for cash held by Softworld at the closing date and estimated working capital adjustments resulting in the Company paying cash of $ 220.4 million. Total consideration includes $ 2.6 million of additional consideration that is payable to the seller in 2022. In the third quarter of 2021, the Company received cash for a post-close working capital adjustment of $ 6.0 million. The total consideration is as follows (in millions of dollars): Cash consideration paid $ 220.4 Additional consideration payable 2.6 Net working capital adjustment ( 6.0 ) Total consideration $ 217.0 As of first quarter-end 2022, the purchase price allocation for this acquisition was final. Goodwill generated from the acquisition was primarily attributable to expanding market potential and the expected revenue synergies and was assigned to the SET operating segment (see Goodwill footnote). All of the goodwill is expected to be deductible for tax purposes. 5. Investment in Persol Holdings Prior to February 2022, the Company had 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 100% owner of Persol Asia Pacific Pte. Ltd., the Company’s joint venture partner in PersolKelly Pte. Ltd. (the "JV"). In February 2022, the Company's board approved a series of transactions that ended the cross-shareholding agreement with Persol Holdings. On February 14, 2022, the Company repurchased 1,576,169 Class A and 1,475 Class B common shares held by Persol Holdings for $ 27.2 million. The purchase price was based on the average closing price of the last five business days prior to the transaction. The shares were subsequently retired and returned to an authorized, unissued status. In accordance with the Company's policy, the amount paid to repurchase the shares in excess of par value of $ 25.6 million was recorded to earnings invested in the business in the consolidated balance sheet at the time of the share retirement. On February 15, 2022, Kelly Services Japan, Inc. sold the investment in the common stock of Persol Holdings in an open-market transaction for proceeds of $ 196.9 million, net of transaction fees. As our investment was a noncontrolling interest in Persol Holdings, the investment was recorded at fair value based on the quoted market price of Persol Holdings stock on the Tokyo Stock Exchange through the date of the transaction (see Fair Value Measurements footnote). The $ 67.2 million loss in the first quarter of 2022 recorded in gain (loss) on investment in Persol Holdings in the consolidated statements of earnings included $ 52.4 million for losses related to changes in fair value up to the date of the transaction and $ 14.8 million for the discount from the market price on the date of the sale and transaction costs. The gain on the investment of $ 6.3 million and $ 36.3 million in the second quarter and June year-to-date 2021, respectively, was recorded in gain (loss) on investment in Persol Holdings in the consolidated statements of earnings. Subsequent to the transaction discussed above, the Company commenced the dissolution process of its Kelly Services Japan, Inc. subsidiary, which was considered substantially liquidated as of first quarter-end 2022. As a result, the Company recognized a $ 20.4 million cumulative translation adjustment loss in the first quarter of 2022, which is recorded in loss on currency translation from liquidation of subsidiary in the consolidated statements of earnings. The Company also recognized a $ 5.5 million foreign exchange gain related to U.S.-denominated cash equivalents held by Kelly Services Japan, Inc. following the sale of the Persol Holdings shares and prior to a dividend payment to the Company in the first quarter of 2022. The foreign exchange gain is recorded in other income (expense), net in the consolidated statements of earnings. 17 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) 6. Investment in PersolKelly Pte. Ltd. Prior to February 2022, the Company had 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. On February 14, 2022, the Company entered into an agreement to sell 95 % of the Company's shares in the JV to Persol Asia Pacific Pte. Ltd. On March 1, 2022, the Company received cash proceeds of $ 119.5 million. The carrying value of the shares sold was $ 117.6 million. In addition, the Company had $ 1.9 million of accumulated other comprehensive income representing the Company's share of the JV's other comprehensive income over time related to the shares sold that was realized upon the sale, offsetting the $ 1.9 million gain that resulted from the proceeds in excess of the carrying value. The operating results of the Company’s interest in the JV were accounted for on a one-quarter lag under the equity method and were reported in equity in net earnings (loss) of affiliate in the consolidated statements of earnings through the date of the sale. Such amounts were earnings of $ 0.8 million in June year-to-date 2022, representing the results through the date of the sale, and earnings of $ 1.7 million and $ 0.6 million in the second quarter and June year-to-date 2021, respectively. After the sale, the Company has a 2.5 % ownership interest in the JV and discontinued its use of equity method accounting. The remaining investment is accounted for as an equity investment without a readily determinable fair value (see Fair Value Measurements footnote). The equity investment, included in other assets on the Company’s consolidated balance sheet, totaled $ 6.4 million as of second quarter-end 2022 and the investment in equity affiliate on the Company's consolidated balance sheet totaled $ 123.4 million as of year-end 2021. 7. 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 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 second quarter-end 2022 and year-end 2021 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. 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. As of Second Quarter-End 2022 Description Total Level 1 Level 2 Level 3 (In millions of dollars) Money market funds $ 51.2 $ 51.2 $ — $ — Investment in Persol Holdings — — — — Total assets at fair value $ 51.2 $ 51.2 $ — $ — Brazil indemnification $ ( 3.3 ) $ — $ — $ ( 3.3 ) Greenwood/Asher earnout ( 3.0 ) — — ( 3.0 ) RocketPower earnout ( 0.6 ) — — ( 0.6 ) Total liabilities at fair value $ ( 6.9 ) $ — $ — $ ( 6.9 ) 18 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) As of Year-End 2021 Description Total Level 1 Level 2 Level 3 (In millions of dollars) Money market funds $ 96.3 $ 96.3 $ — $ — Investment in Persol Holdings 264.3 264.3 — — Total assets at fair value $ 360.6 $ 360.6 $ — $ — Brazil indemnification $ ( 2.4 ) $ — $ — $ ( 2.4 ) Greenwood/Asher earnout ( 4.6 ) — — ( 4.6 ) Total liabilities at fair value $ ( 7.0 ) $ — $ — $ ( 7.0 ) Money market funds represent investments in money market funds that hold government securities, of which $ 7.3 million as of second quarter-end 2022 and $ 6.5 million as of year-end 2021 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 remaining money market funds as of second quarter-end 2022 and year-end 2021 are included in cash and equivalents in the consolidated balance sheet. The valuations of money market funds are based on quoted market prices of those accounts as of the respective period end. On February 15, 2022, Kelly Services Japan, Inc. sold the investment in the common stock of Persol Holdings in an open-market transaction. The valuation of the investment was based on the quoted market price of Persol Holdings stock on the Tokyo Stock Exchange as of year-end 2021, and the related changes in fair value were recorded in the consolidated statements of earnings (see Investment in Persol Holdings footnote). The cost of this yen-denominated investment, which fluctuated based on foreign exchange rates, was $ 18.0 million at year-end 2021. As of second quarter-end 2022 and year-end 2021, the Company had an indemnification liability of $ 3.3 million and $ 2.4 million, respectively, in other long-term liabilities in the consolidated balance sheet related to the 2020 sale of the Brazil operations. As part of the sale, the Company agreed to indemnify the buyer for losses and costs incurred in connection with certain events or occurrences initiated within a six-year period after closing. The aggregate losses for which the Company will provide indemnification shall not exceed $ 8.8 million. 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 is being measured on a recurring basis. During the second quarter of 2022, the Company reassessed the value of the indemnification liability and determined that it was necessary to record an increase to the liability of $ 0.8 million. Additionally, during year-to-date 2022, the Company recognized an increase of $ 0.1 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 Greenwood/Asher, totaling $ 3.0 million at second quarter-end 2022 in accounts payable and accrued liabilities and $ 4.6 million at year-end 2021 with $ 2.3 million in accounts payable and accrued liabilities and $ 2.3 million in other long-term liabilities in the consolidated balance sheet. The initial valuation of the earnout liability was established using a Black Scholes model and represented the fair value and is considered a Level 3 liability. During the first quarter of 2022, the Company paid the year one portion of the earnout totaling $ 2.3 million. In the consolidated statements of cash flows, $ 0.7 million of the payment is reflected as a financing activity representing the initial fair value of the earnout, with the remainder flowing through operating activities. During the second quarter of 2022, the Company reassessed the value of the indemnification liability and determined it was necessary to record an increase to the liability of $ 0.7 million. The Company recorded an earnout liability relating to the 2022 acquisition of RocketPower, totaling $ 0.6 million at second quarter-end 2022 with $ 0.5 million in accounts payable and accrued liabilities and $ 0.1 million in other long-term liabilities in the consolidated balance sheet (see Acquisitions footnote). The maximum total cash payments which may be due related to the earnout liability is $ 31.8 million. 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. 19 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) Equity Investment Without Readily Determinable Fair Value On March 1, 2022, the Company sold the majority of its investment in the JV (see Investment in PersolKelly Pte. Ltd. footnote), with the remaining 2.5 % interest now being 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 sale of the shares of the JV represented an observable transaction requiring the Company to calculate the current fair value based on the purchase price of the shares, in which the resulting adjustment was not material. The investment totaled $ 6.4 million as of second quarter-end 2022, representing total cost plus observable price changes to date. Prior to April 2021, the Company had a minority investment in Business Talent Group, LLC, which was 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. In the second quarter of 2021, BTG entered into a merger agreement which resulted in all of the Company's shares of BTG being automatically canceled upon approval of the merger and resulted in the receipt of $ 5.0 million in cash, which was equal to the carrying value and purchase price of the BTG investment. Prior to March 2021, the Company had a minority investment in Kenzie Academy Inc., which was 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, the investment had a carrying value of $ 1.4 million, representing total cost plus observable price changes to date. In the first quarter of 2021, 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. 8. Restructuring In the first quarter of 2022, the Company took restructuring actions designed to increase efficiency. There were no restructuring charges incurred in the second quarter of 2022 or June year-to-date 2021. Restructuring costs incurred in the first quarter of 2022 totaled $ 1.7 million and were recorded entirely in SG&A expenses in the consolidated statements of earnings, as detailed below (in millions of dollars): Severance Costs Lease Termination Costs Total Professional & Industrial $ 0.1 $ 0.2 $ 0.3 Education 0.4 — 0.4 Outsourcing & Consulting 0.2 — 0.2 Corporate 0.8 — 0.8 Total $ 1.5 $ 0.2 $ 1.7 20 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) 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 2021 $ 2.9 Additions charged to Professional & Industrial 0.3 Additions charged to Outsourcing & Consulting 0.2 Additions charged to Education 0.4 Additions charged to Corporate 0.8 Reductions for cash payments related to all restructuring activities ( 2.0 ) Balance as of first quarter-end 2022 2.6 Reductions for cash payments related to all restructuring activities ( 1.1 ) Accrual adjustments ( 0.2 ) Balance as of second quarter-end 2022 $ 1.3 The remaining balance of $ 1.3 million as of second quarter-end 2022 primarily represents severance costs, and the majority is expected to be paid by year-end 2022. No material adjustments are expected to be recorded. 9. Goodwill The changes in the carrying amount of goodwill as of June year-to-date 2022 are included in the table below. The goodwill resulting from the acquisition of RocketPower during the first quarter of 2022 was allocated to the OCG reportable segment and the goodwill resulting from the acquisition of PTS during the second quarter of 2022 was allocated to the Education reportable segment (see Acquisitions footnote). As of Year-End 2021 Additions to Goodwill Impairment Adjustments As of Second Quarter-End 2022 (In millions of dollars) Science, Engineering & Technology $ 111.3 $ — $ — $ 111.3 Education 3.5 36.3 — 39.8 Outsourcing & Consulting — 41.0 — 41.0 Total $ 114.8 $ 77.3 $ — $ 192.1 21 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) 10. Accumulated Other Comprehensive Income (Loss) The changes in accumulated other comprehensive income (loss) by component, net of tax, for the second quarter and June year-to-date 2022 and 2021 are included in the table below. Amounts in parentheses indicate debits. June year-to-date 2022 reclassification adjustments out of accumulated other comprehensive income (loss) related to the liquidation of the Japan subsidiary, as shown in the table below, were recorded in the loss on currency translation from liquidation of subsidiary line item in the consolidated statements of earnings. June year-to-date 2022 reclassification adjustments out of accumulated other comprehensive income (loss) related to the equity method investment and other, as shown in the table below, which includes $ 1.9 million related to the investment in PersolKelly Pte. Ltd., were recorded in the other income (expense), net line item in the consolidated statements of earnings. See Investment in PersolKelly Pte. Ltd. footnote for more details. Second Quarter June Year to Date 2022 2021 2022 2021 (In millions of dollars) Foreign currency translation adjustments: Beginning balance $ ( 12.0 ) $ ( 14.4 ) $ ( 25.0 ) $ ( 0.8 ) Other comprehensive income (loss) before reclassifications 1.3 2.0 ( 8.6 ) ( 11.6 ) Amounts reclassified from accumulated other comprehensive income (loss) - liquidation of Japan subsidiary — — 20.4 — Amounts reclassified from accumulated other comprehensive income (loss) - equity method investment and other 0.2 — 2.7 — Net current-period other comprehensive income (loss) 1.5 2.0 14.5 ( 11.6 ) Ending balance ( 10.5 ) ( 12.4 ) ( 10.5 ) ( 12.4 ) Pension liability adjustments: Beginning balance ( 2.7 ) ( 3.4 ) ( 2.7 ) ( 3.4 ) Other comprehensive income (loss) before reclassifications — — — — Amounts reclassified from accumulated other comprehensive income (loss) — — — — Net current-period other comprehensive income (loss) — — — — Ending balance ( 2.7 ) ( 3.4 ) ( 2.7 ) ( 3.4 ) Total accumulated other comprehensive income (loss) $ ( 13.2 ) $ ( 15.8 ) $ ( 13.2 ) $ ( 15.8 ) 22 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) 11. Earnings (Loss) Per Share The reconciliation of basic and diluted earnings (loss) per share on common stock for the second quarter and June year-to-date 2022 and 2021 follows (in millions of dollars except per share data): Second Quarter June Year to Date 2022 2021 2022 2021 Net earnings (loss) $ 2.2 $ 24.0 $ ( 45.4 ) $ 49.6 Less: earnings allocated to participating securities — ( 0.2 ) — ( 0.4 ) Net earnings (loss) available to common shareholders $ 2.2 $ 23.8 $ ( 45.4 ) $ 49.2 Average shares outstanding (millions): Basic 37.9 39.4 38.3 39.4 Dilutive share awards 0.3 0.1 — 0.1 Diluted 38.2 39.5 38.3 39.5 Basic earnings (loss) per share $ 0.06 $ 0.60 $ ( 1.19 ) $ 1.25 Diluted earnings (loss) per share $ 0.06 $ 0.60 $ ( 1.19 ) $ 1.25 Potentially dilutive shares outstanding are primarily related to deferred common stock related to the non-employee directors deferred compensation plan for the second quarter of 2022 and 2021 and June year-to-date 2021. Due to our net loss in June year-to-date 2022, potentially dilutive shares primarily related to deferred common stock related to the non-employee directors deferred compensation plan of 0.2 million shares had an anti-dilutive effect on diluted earnings per share and were excluded from the computation for June year-to-date 2022. Dividends paid per share for Class A and Class B common stock were $ 0.075 for the second quarter 2022, $ 0.125 for June year-to-date 2022 and $ 0.00 for the second quarter 2021 and June year-to-date 2021. 12. Stock-Based Compensation For the second quarter of 2022, the Company recognized stock compensation expense of $ 1.7 million, and a related tax benefit of $ 0.2 million. For the second quarter of 2021, the Company recognized stock compensation expense of $ 1.4 million, and a related tax benefit of $ 0.3 million. For June year-to-date 2022, the Company recognized stock compensation expense of $ 3.8 million, and a related tax benefit of $ 0.5 million. For June year-to-date 2021, the Company recognized stock compensation expense of $ 2.8 million, and a related tax benefit of $ 0.4 million. Performance Shares During the first quarter of 2022, 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 earnings before interest, taxes, depreciation and amortization ("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: 2022, 2023 and 2024, 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. Earned shares during each performance period will cliff vest in February 2025 after approval of the financial results by the Compensation Committee, if not forfeited by the recipient. No dividends are paid on these performance shares. 23 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) A summary of the status of all nonvested performance shares at target as of second quarter-end 2022 and year-to-date changes is presented as follows below (in thousands of shares except per share data). The vesting adjustment in the table below represents the 2019 and a portion of the 2021 financial measure performance shares that did not vest because actual achievement was below the threshold level and resulted in no payout. Financial Measure Performance Shares Shares Weighted Average Grant Date Fair Value Nonvested at year-end 2021 708 $ 20.03 Granted 186 21.19 Vested ( 48 ) 22.55 Forfeited ( 6 ) 16.81 Vesting adjustment ( 142 ) 24.45 Nonvested at second quarter-end 2022 698 $ 19.39 Restricted Stock A summary of the status of nonvested restricted stock as of second quarter-end 2022 and year-to-date changes is presented as follows below (in thousands of shares except per share data). During the second quarter of 2022, the Company granted 128,000 shares with a weighted average grant date fair value of $ 17.92 as a special retention stock award to certain key employees and is reflected in the granted line item below. Shares Weighted Average Grant Date Fair Value Nonvested at year-end 2021 403 $ 21.24 Granted 388 20.47 Vested ( 101 ) 22.43 Forfeited ( 72 ) 21.62 Nonvested at second quarter-end 2022 618 $ 20.52 13. Sale of Assets In June 2022, the Company sold an under-utilized real property for a purchase price of $ 4.5 million, subject to final closing adjustments. The Company received cash proceeds of $ 3.6 million in the second quarter of 2022 and previously received cash proceeds of $ 0.8 million as a deposit in 2021 when the contract was first executed. As of the date of the sale, the land had insignificant carrying value; as such, the resulting gain on the sale was $ 4.4 million, which is recorded in gain on sale of assets in the consolidated statements of earnings. In January 2022, the Company sold a property for a purchase price of $ 0.9 million, subject to final closing adjustments. The Company received cash proceeds of $ 0.9 million in the first quarter of 2022. As of the date of the sale, the property had an immaterial carrying value; as such, the resulting gain on the sale of the property was $ 0.9 million, which is recorded in gain on sale of assets in the consolidated statements of earnings. 24 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) 14. Held for Sale Russia Operations In the second quarter of 2022, the Company announced its intention to transition its business in Russia. On June 30, 2022, the Company entered into a definitive agreement to sell its Russia operations ("disposal group"), which is included in the Company's International operating segment. As of the date of the agreement and until closing of the sale, the disposal group is classified as held for sale and measured at the lower of its carrying amount or fair value less estimated costs to sell. As of July 3, 2022, the assets and liabilities that have met the classification as held for sale are $ 38.4 million and $ 13.7 million, respectively. The fair value as of July 3, 2022 less costs to sell was estimated based on the terms of the definitive agreement and is $ 7.3 million. As a result, the Company has recorded a held for sale impairment charge of $ 18.5 million in the second quarter of 2022, which is recorded as a reduction to the assets in the assets held for sale in the consolidated balance sheet and in impairment of assets held for sale in the consolidated statements of earnings. The impairment charge includes $ 1.1 million for the anticipated liquidation of the cumulative translation adjustment. On July 20, 2022, subsequent to the end of the second quarter, the sale was completed and the Company no longer operates in Russia. The disposal group did not meet the requirements to be classified as discontinued operations as the sale will not have a material effect on the Company's operations and does not represent a strategic shift in the Company's strategy. Our consolidated earnings before taxes for the second quarter of 2022 and 2021 included $ 0.7 million and $ 0.8 million, respectively, from the Russia operations and for June year-to-date 2022 and 2021 included $ 1.1 million and $ 1.3 million, respectively, from the Russia operations. The major classes of assets and liabilities of the disposal group that have met the classification of held for sale as of July 3, 2022 are as follows (in millions of dollars): July 3, 2022 Assets held for sale Cash and equivalents $ 12.2 Trade accounts receivable, net 23.9 Prepaid expenses and other current assets 0.8 Property and equipment, net 0.6 Operating lease right-of-use assets 0.2 Deferred taxes 0.4 Other assets 0.3 Assets held for sale 38.4 Liabilities held for sale Accounts payable and accrued liabilities ( 0.5 ) Operating lease liabilities ( 0.2 ) Accrued payroll and related taxes ( 8.3 ) Income and other taxes ( 4.7 ) Liabilities held for sale ( 13.7 ) Disposal group, net $ 24.7 Cash and equivalents in the consolidated statements of cash flows as of the second quarter-end 2022 includes $ 12.2 million of cash that is included in the disposal group. The disposal group's cash is not reflected as cash and equivalents in the consolidated balance sheet as of second quarter-end 2022, as the assets of the disposal group are recognized net of the impairment charge as assets held for sale. 25 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) Subsequent to the second quarter-end, the sale was completed and the Company received proceeds of $ 7.4 million, including purchase price adjustments, in July 2022. The assets and liabilities will be derecognized in the third quarter of 2022 as well as any adjustments to the loss on the sale. Real Property Kelly Properties, LLC, a wholly owned subsidiary of the Company, entered into an agreement on May 11, 2022 to sell real property located in Troy, Michigan. Accordingly, during the second quarter of 2022, the transaction met the criteria to classify the property as held for sale. The property held for sale includes the property and all improvements to the property, together with all rights and easements. Assets held for sale are recorded at the lower of their carrying value or fair value less estimated costs to sell, and depreciation is suspended on assets upon classification to held for sale. The carrying amount of the property held for sale as of the second quarter-end 2022 is $ 4.7 million, which is less than the sales price in the purchase agreement, less estimated costs to sell. The proceeds of the sale are expected to be approximately $ 5.6 million, net of commissions and transaction expenses. The Company has presented these assets as current assets held for sale in the consolidated balance sheet as of the second quarter-end 2022, as the property is expected to be sold in the fourth quarter of 2022 per terms of the purchase agreement. 15. Other Income (Expense), Net Included in other income (expense), net for the second quarter and June year-to-date 2022 and 2021 are the following: Second Quarter June Year to Date 2022 2021 2022 2021 (In millions of dollars) Interest income $ 0.4 $ — $ 0.5 $ 0.1 Interest expense ( 0.5 ) ( 0.6 ) ( 1.1 ) ( 1.2 ) Dividend income — 1.0 — 1.0 Foreign exchange gains (losses) 0.9 ( 0.7 ) 5.6 ( 0.9 ) Other ( 1.9 ) — ( 3.3 ) ( 2.7 ) Other income (expense), net $ ( 1.1 ) $ ( 0.3 ) $ 1.7 $ ( 3.7 ) Included in Other for the second quarter and June year-to-date 2022 is $ 0.8 million of expense related to the remeasurement of the Brazil indemnification liability (see Fair Value Measurements footnote). Included in foreign exchange gains (losses) for June year-to-date 2022 is a $ 5.5 million foreign exchange gain on a U.S. dollar-denominated cash balance held by the Company's Japan entity (see Investment in Persol Holdings footnote). Included in Other for June year-to-date 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 Acquisitions footnote). 26 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) 16. Income Taxes Income tax expense was $ 4.9 million for the second quarter of 2022 and income tax benefit was $ 2.6 million for the second quarter of 2021. Income tax benefit was $ 8.1 million for June year-to-date 2022 and income tax expense was $ 7.9 million for June year-to-date 2021. The second quarter and June year-to-date 2021 amounts benefited $ 5.2 million from a change in United Kingdom tax rates, and from tax exempt gains on life insurance policies. The second quarter and June year-to-date 2022 taxes had no tax benefit from losses on life insurance policies. The second quarter and June year-to-date 2022 amounts are also impacted by changes in earnings from operations. 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, prior to February 2022, changes in the fair value of the Company's investment in Persol Holdings, which were treated as discrete since they cannot be estimated. 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. 17. Contingencies The Company is continuously engaged in litigation, threatened litigation, claims, audits or investigations arising in the ordinary course of its business, such as matters alleging employment discrimination, wage and hour violations, claims for indemnification or liability, violations of privacy rights, anti-competition regulations, commercial and contractual disputes, and tax-related matters which could result in a material adverse outcome. We record accruals for loss contingencies when we believe it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Such accruals are recorded in accounts payable and accrued liabilities and in accrued workers’ compensation and other claims in the consolidated balance sheet. At second quarter-end 2022 and year-end 2021, the gross accrual for litigation costs amounted to $ 1.7 million and $ 1.4 million, respectively. The Company maintains insurance coverage which may cover certain losses. When losses exceed the applicable policy deductible and realization of recovery of the loss 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 second quarter-end 2022, the related insurance receivables amounted to $ 0.6 million. At year-end 2021, there were no related insurance receivables. The Company estimates the aggregate range of reasonably possible losses, in excess of amounts accrued, is $ 0.7 million to $ 8.6 million as of second quarter-end 2022. 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. The aggregate range only represents matters in which we are currently able to estimate a range of loss and does not represent our maximum loss exposure. The estimated range is subject to significant judgment and a variety of assumptions and only based upon currently available information. For other matters, we are currently not able to estimate the reasonably possible loss or range of loss. 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. 27 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) 18. Segment Disclosures 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. The following tables present information about the reported revenue from services and gross profit of the Company by reportable segment, along with a reconciliation to earnings (loss) before taxes and equity in net earnings (loss) of affiliate, for the second quarter and June year-to-date 2022 and 2021. Asset information by reportable segment is not presented, since the Company does not produce such information internally nor does it use such information to manage its business. Second Quarter June Year to Date 2022 2021 2022 2021 (In millions of dollars) Revenue from Services: Professional & Industrial $ 415.8 $ 466.5 $ 860.1 $ 934.1 Science, Engineering & Technology 324.3 298.2 641.4 552.9 Education 155.5 105.9 328.9 217.5 Outsourcing & Consulting 124.4 107.3 233.5 206.6 International 247.6 280.4 500.4 553.3 Less: Intersegment revenue ( 0.3 ) ( 0.2 ) ( 0.6 ) ( 0.4 ) Consolidated Total $ 1,267.3 $ 1,258.1 $ 2,563.7 $ 2,464.0 28 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) Second Quarter June Year to Date 2022 2021 2022 2021 (In millions of dollars) Earnings (loss) from Operations: Professional & Industrial gross profit $ 77.8 $ 75.2 $ 160.9 $ 151.1 Professional & Industrial SG&A expenses ( 67.4 ) ( 69.0 ) ( 138.8 ) ( 138.4 ) Professional & Industrial earnings (loss) from operations 10.4 6.2 22.1 12.7 Science, Engineering & Technology gross profit 75.2 66.5 149.0 119.7 Science, Engineering & Technology SG&A expenses ( 54.8 ) ( 46.9 ) ( 108.0 ) ( 82.6 ) Science, Engineering & Technology earnings (loss) from operations 20.4 19.6 41.0 37.1 Education gross profit 26.0 16.8 52.6 34.0 Education SG&A expenses ( 20.4 ) ( 15.3 ) ( 39.0 ) ( 29.5 ) Education earnings (loss) from operations 5.6 1.5 13.6 4.5 Outsourcing & Consulting gross profit 46.2 34.8 83.5 66.1 Outsourcing & Consulting SG&A expenses ( 39.8 ) ( 30.1 ) ( 74.1 ) ( 58.5 ) Outsourcing & Consulting earnings (loss) from operations 6.4 4.7 9.4 7.6 International gross profit 37.2 37.7 75.0 73.4 International SG&A expenses ( 34.6 ) ( 34.6 ) ( 67.8 ) ( 67.7 ) International earnings (loss) from operations 2.6 3.1 7.2 5.7 Corporate ( 23.1 ) ( 21.4 ) ( 48.5 ) ( 43.3 ) Impairment of assets held for sale ( 18.5 ) — ( 18.5 ) — Gain on sale of assets 4.4 — 5.3 — Consolidated Total 8.2 13.7 31.6 24.3 Gain (loss) on investment in Persol Holdings — 6.3 ( 67.2 ) 36.3 Loss on currency translation from liquidation of subsidiary — — ( 20.4 ) — Other income (expense), net ( 1.1 ) ( 0.3 ) 1.7 ( 3.7 ) Earnings (loss) before taxes and equity in net earnings (loss) of affiliate $ 7.1 $ 19.7 $ ( 54.3 ) $ 56.9 29 KELLY SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (UNAUDITED) Depreciation and amortization expense included in SG&A expenses by segment above are as follows: Second Quarter June Year to Date 2022 2021 2022 2021 (In millions of dollars) Depreciation and amortization: Professional & Industrial $ 1.0 $ 1.4 $ 2.1 $ 2.8 Science, Engineering & Technology 3.2 3.3 6.3 4.3 Education 1.3 0.9 2.1 1.9 Outsourcing & Consulting 1.0 0.2 1.2 0.4 International 0.5 0.5 1.0 1.0 19. New Accounting Pronouncements Recently Adopted In October 2021, the FASB issued Accounting Standards Update ("ASU") 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and should be applied prospectively to business combinations that occur after the effective date. We early adopted this standard in the first quarter of 2022 and the adoption did not have a material impact to our consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 was effective for the Company in the first quarter of fiscal 2021. The adoption of this standard did not have a material impact to our consolidated financial statements. 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. The guidance clarifies how to account for the transition into and out of the equity method of accounting when considering observable transactions under the measurement alternative. 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. 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. The guidance removes exceptions to the general principles in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. 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. The adoption of this standard did not have a material impact to our consolidated financial statements. Not Yet Adopted 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. 30