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MarketScreener Homepage  >  Equities  >  Nyse  >  Robert Half International    RHI

ROBERT HALF INTERNATIONAL

(RHI)
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ROBERT HALF INTERNATIONAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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11/12/2019 | 01:41pm EST
Certain information contained in Management's Discussion and Analysis and in
other parts of this report may be deemed forward-looking statements regarding
events and financial trends that may affect the Company's future operating
results or financial positions. These statements may be identified by words such
as "estimate", "forecast", "project", "plan", "intend", "believe", "expect",
"anticipate", or variations or negatives thereof or by similar or comparable
words or phrases. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in the statements. These risks and uncertainties include, but are not
limited to, the following: changes to or new interpretations of U.S. or
international tax regulations, the global financial and economic situation;
changes in levels of unemployment and other economic conditions in the United
States or foreign countries where the Company does business, or in particular
regions or industries; reduction in the supply of candidates for temporary
employment or the Company's ability to attract candidates; the entry of new
competitors into the marketplace or expansion by existing competitors; the
ability of the Company to maintain existing client relationships and attract new
clients in the context of changing economic or competitive conditions; the
impact of competitive pressures, including any change in the demand for the
Company's services, on the Company's ability to maintain its margins; the
possibility of the Company incurring liability for its activities, including the
activities of its temporary employees, or for events impacting its temporary
employees on clients' premises; the possibility that adverse publicity could
impact the Company's ability to attract and retain clients and candidates; the
success of the Company in attracting, training, and retaining qualified
management personnel and other staff employees and in managing the recently
announced leadership transition; the Company's ability to comply with
governmental regulations affecting personnel services businesses in particular
or employer/employee relationships in general; whether there will be ongoing
demand for Sarbanes-Oxley or other regulatory compliance services; the Company's
reliance on short-term contracts for a significant percentage of its business;
litigation relating to prior or current transactions or activities, including
litigation that may be disclosed from time to time in the Company's Securities
and Exchange Commission ("SEC") filings; the ability of the Company to manage
its international operations and comply with foreign laws and regulations; the
impact of fluctuations in foreign currency exchange rates; the possibility that
the additional costs the Company will incur as a result of health care reform
legislation may adversely affect the Company's profit margins or the demand for
the Company's services; the possibility that the Company's computer and
communications hardware and software systems could be damaged or their service
interrupted or the Company could experience a cybersecurity breach; and the
possibility that the Company may fail to maintain adequate financial and
management controls and as a result suffer errors in its financial reporting.
Additionally, with respect to Protiviti, other risks and uncertainties include
the fact that future success will depend on its ability to retain employees and
attract clients; there can be no assurance that there will be ongoing demand for
Sarbanes-Oxley or other regulatory compliance services; failure to produce
projected revenues could adversely affect financial results; and there is the
possibility of involvement in litigation relating to prior or current
transactions or activities. Because long-term contracts are not a significant
part of the Company's business, future results cannot be reliably predicted by
considering past trends or extrapolating past results.
Executive Overview
Demand for the Company's temporary and consulting staffing, permanent placement
staffing, and risk consulting and internal audit services is largely dependent
upon general economic and labor trends both domestically and abroad.
Correspondingly, financial results for the first three quarters of 2019 were
positively impacted by global talent shortages, particularly in the United
States. During the first three quarters of 2019, net service revenues were $4.54
billion, an increase of 5% from the prior year. Net income increased 7% to $342
million and diluted net income per share increased 11% to $2.92. All three of
the Company's reportable segments experienced revenue growth, led by risk
consulting and internal audit services which increased 19% for the first three
quarters of 2019 compared to the first three quarters of 2018.
We believe that the Company is well positioned in the current macroeconomic
environment. The United States economic backdrop throughout the first three
quarters of 2019 was conducive to growth for the Company as real gross domestic
product ("GDP") grew 3.1%, 2.0%, and 1.9% for the first, second, and third
quarter, respectively, while the unemployment rate declined from 3.9% in
December 2018 to 3.5% at the end of the third quarter of 2019. In the United
States, the number of job openings has exceeded the number of hires since
February 2015, creating competition for skilled talent that increases the
Company's value to clients. The U.S. labor market remains robust, with
significant demand due to talent shortages across our professional disciplines,
where unemployment remains near a 50-year low.
Demand for Protiviti's services was broad-based across all of its consulting and
internal audit solutions. Protiviti continues to nurture and grow a loyal client
base.
We monitor various economic indicators and business trends in all of the
countries in which we operate to anticipate demand for the Company's services.
We evaluate these trends to determine the appropriate level of investment,
including personnel, which will best position the Company for success in the
current and future global macroeconomic environment. The


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Company's investments in headcount are typically structured to proactively
support and align with expected revenue growth trends. As such, during the first
three quarters of 2019, we added headcount in our temporary and consultant
staffing, permanent placement staffing, and risk consulting and internal audit
services compared to prior year-end levels.
We have limited visibility into future revenues not only due to the dependence
on macroeconomic conditions noted above, but also because of the relatively
short duration of the Company's client engagements. Accordingly, we typically
assess headcount and other investments on at least a quarterly basis. That said,
based on current trends and conditions, we expect headcount levels for our
full-time staff to be modestly higher for each of our reporting segments
throughout the remainder of 2019.
Capital expenditures, including $21 million for cloud computing arrangements,
for the nine months ended September 30, 2019, totaled $66 million, approximately
62% of which represented investments in software initiatives and technology
infrastructure, both of which are important to the Company's future growth
opportunities. Capital expenditures for cloud computing arrangements are
included in cash flows from operating activities on the Company's Condensed
Consolidated Statements of Cash Flows. Capital expenditures also included
amounts spent on tenant improvements and furniture and equipment in the
Company's leased offices. We currently expect that 2019 capital expenditures
will range from $80 million to $90 million, of which $50 million to $60 million
relates to software initiatives and technology infrastructure, including
capitalized costs related to implementation of cloud computing arrangements.
On November 6, 2019, the Company announced that Harold M. Messmer, Jr., will
continue to serve as Executive Chairman of the Company's Board of Directors, but
will retire from his position as Chief Executive Officer after 34 years of
service to the Company, effective December 15, 2019. In connection with this
leadership transition, and as part of the succession plan developed by the Board
of Directors, M. Keith Waddell, currently Chief Financial Officer, will succeed
Mr. Messmer as Chief Executive Officer.
Critical Accounting Policies and Estimates
The Company's most critical accounting policies and estimates are those that
involve subjective decisions or assessments and are included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2018. There were no
changes to the Company's critical accounting policies or estimates for the nine
months ended September 30, 2019.
Recent Accounting Pronouncements
See Note B-"New Accounting Pronouncements" to the Company's Condensed
Consolidated Financial Statements included under Part I-Item 1 of this report.
Results of Operations
Demand for the Company's temporary and consulting staffing, permanent placement
staffing, and risk consulting and internal audit services is largely dependent
upon general economic and labor market conditions both domestically and abroad.
Correspondingly, all three of the Company's reportable segments for the quarter
ended September 30, 2019, were positively impacted by global talent shortages,
particularly in the United States. Because of the inherent difficulty in
predicting economic trends and the absence of material long-term contracts in
any of the Company's business units, future demand for the Company's services
cannot be forecast with certainty. We believe the Company is well positioned in
the current global macroeconomic environment.
The Company's temporary and permanent placement staffing business has 325
offices in 42 states, the District of Columbia and 17 foreign countries, while
Protiviti has 62 offices in 23 states and 11 foreign countries.
Non-GAAP Financial Measures
The financial results of the Company are prepared in conformity with accounting
principles generally accepted in the United States of America ("GAAP") and the
rules of the SEC. To help readers understand the Company's financial
performance, the Company supplements its GAAP financial results with revenue
growth rates derived from non-GAAP revenue amounts.
Variations in the Company's financial results include the impact of changes in
foreign currency exchange rates, billing days, and certain intercompany
adjustments. The Company provides "as adjusted" revenue growth calculations to
remove the impact of these items. These calculations show the year-over-year
revenue growth rates for the Company's reportable segments on both a reported
basis and also on an as adjusted basis for global, U.S. and international
operations. The Company has provided this data because it focuses on the
Company's revenue growth rates attributable to operating activities and aids in
evaluating revenue trends over time. The Company expresses year-over-year
revenue changes as calculated percentages using the same number of billing days,
constant currency exchange rates, and certain intercompany adjustments.


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In order to calculate constant currency revenue growth rates, as reported
amounts are retranslated using foreign currency exchange rates from the prior
year's comparable period. Management then calculates a global, weighted-average
number of billing days for each reporting period based upon input from all
countries and all lines of business. In order to remove the fluctuations caused
by comparable periods having different billing days, the Company calculates same
billing day revenue growth rates by dividing each comparative period's reported
revenues by the calculated number of billing days for that period to arrive at a
per billing day amount. Same billing day growth rates are then calculated based
upon the per billing day amounts. In order to remove the fluctuations caused by
the impact of certain intercompany adjustments, applicable comparative period
revenues are reclassified to conform with the current period presentation. The
term "as adjusted" means that the impact of different billing days, constant
currency fluctuations, and certain intercompany adjustments are removed from the
revenue growth rate calculation.
The non-GAAP financial measures provided herein may not provide information that
is directly comparable to that provided by other companies in the Company's
industry, as other companies may calculate such financial results differently.
The Company's non-GAAP financial measures are not measurements of financial
performance under GAAP, and should not be considered as alternatives to actual
revenue growth derived from revenue amounts presented in accordance with GAAP.
The Company does not consider these non-GAAP financial measures to be a
substitute for, or superior to, the information provided by GAAP financial
results. A reconciliation of the as adjusted revenue growth rates to the
reported revenue growth rates is provided herein.
Refer to Item 3. "Quantitative and Qualitative Disclosures About Market Risk"
for further discussion of the impact of foreign currency exchange rates on the
Company's results of operations and financial condition.
Three Months Ended September 30, 2019 and 2018
Revenues. The Company's revenues were $1.55 billion for the three months ended
September 30, 2019, increasing by 5.9% compared to $1.47 billion for the three
months ended September 30, 2018. Revenues from foreign operations represented
22% of total revenues for the three months ended September 30, 2019, down from
24% of total revenues for the three months ended September 30, 2018. The Company
analyzes its revenues for three reportable segments: temporary and consultant
staffing, permanent placement staffing, and risk consulting and internal audit
services. Revenue growth was strongest domestically. For the three months ended
September 30, 2019, revenues for all three of the Company's reportable segments
were up, compared to the same period in 2018. Contributing factors for each
reportable segment are discussed below in further detail.
Temporary and consultant staffing revenues were $1.12 billion for the three
months ended September 30, 2019, increasing by 3.2% compared to revenues of
$1.08 billion for the three months ended September 30, 2018. Key drivers of
temporary and consultant staffing revenues include average hourly bill rates and
the number of hours worked by the Company's temporary employees on client
engagements. On an as adjusted basis, temporary and consultant staffing revenues
increased 3.4% for the third quarter of 2019 compared to the third quarter of
2018, due primarily to a 4.8% increase in average bill rates, partially offset
by fewer hours worked by the Company's temporary employees. In the U.S.,
revenues in the third quarter of 2019 increased 5.7% on an as reported basis and
4.5% on an as adjusted basis, compared to the third quarter of 2018. For the
Company's international operations, 2019 third quarter revenues decreased 5.0%
on an as reported basis and decreased 0.2% on an as adjusted basis, compared to
the third quarter of 2018.
Permanent placement staffing revenues were $135 million for the three months
ended September 30, 2019, increasing by 3.8% compared to revenues of $130
million for the three months ended September 30, 2018. Key drivers of permanent
placement staffing revenues consist of the number of candidate placements and
average fees earned per placement. On an as adjusted basis, permanent placement
staffing revenues increased 3.4% for the third quarter of 2019 compared to the
third quarter of 2018, driven by increases in the number of placements and
average fees earned per placement. In the U.S., revenues for the third quarter
of 2019 increased 6.5% on an as reported basis and 5.3% on an as adjusted basis,
compared to the third quarter of 2018. For the Company's international
operations, revenues for the third quarter of 2019 decreased 2.1% on an as
reported basis and decreased 0.6% on an as adjusted basis, compared to the third
quarter of 2018. Historically, demand for permanent placement staffing is even
more sensitive to economic and labor market conditions than demand for temporary
and consultant staffing and this is expected to continue.
Risk consulting and internal audit services revenues were $299 million for the
three months ended September 30, 2019, increasing by 18.3% compared to revenues
of $253 million for the three months ended September 30, 2018. Key drivers of
risk consulting and internal audit services revenues are the billable hours
worked by consultants on client engagements and average hourly bill rates. On an
as adjusted basis, risk consulting and internal audit services revenues
increased 14.6% for the third


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quarter of 2019 compared to the third quarter of 2018, primarily due to an increase in billable hours. In the U.S., revenues in the third quarter of 2019 increased 17.5% on an as reported basis and 16.2% on an as adjusted basis, compared to the third quarter of 2018. Contributing to the U.S. increase were services related to business performance improvement, technology consulting, and internal audit and financial advisory practice areas. The Company's risk consulting and internal audit services revenues from international operations increased 21.2% on an as reported basis and 9.3% on an as adjusted basis for the third quarter of 2019 compared to the third quarter of 2018. A reconciliation of the non-GAAP year-over-year revenue growth rates to the as reported year-over-year revenue growth rates for the three months ended September 30, 2019, is presented in the following table:

                                            Global     United States     International
Temporary and consultant staffing
As Reported                                  3.2  %         5.7  %            -5.0  %
Billing Days Impact                         -1.3  %        -1.2  %            -1.6  %
Currency Impact                              0.9  %           -                3.8  %
Intercompany Adjustments                     0.6  %           -                2.6  %
As Adjusted                                  3.4  %         4.5  %            -0.2  %
Permanent placement staffing
As Reported                                  3.8  %         6.5  %            -2.1  %
Billing Days Impact                         -1.4  %        -1.2  %            -1.5  %
Currency Impact                              1.0  %           -                3.0  %
As Adjusted                                  3.4  %         5.3  %            -0.6  %
Risk consulting and internal audit services
As Reported                                 18.3  %        17.5  %            21.2  %
Billing Days Impact                         -1.4  %        -1.3  %            -1.8  %
Currency Impact                              0.8  %           -                3.5  %
Intercompany Adjustments                    -3.1  %           -              -13.6  %
As Adjusted                                 14.6  %        16.2  %             9.3  %

Gross Margin. The Company's gross margin dollars were $646 million for the three months ended September 30, 2019, increasing by 5.9% compared to $610 million for the three months ended September 30, 2018. Contributing factors for each reportable segment are discussed below in further detail. Gross margin dollars for temporary and consultant staffing represent revenues less direct costs of services, which consist of payroll, payroll taxes and benefit costs for temporary employees, and reimbursable expenses. The key drivers of gross margin are: i) pay-bill spreads, which represent the differential between wages paid to temporary employees and amounts billed to clients; ii) fringe costs, which are primarily composed of payroll taxes and benefit costs for temporary and consultant staffing employees; and iii) conversion revenues, which are earned when a temporary position converts to a permanent position with the Company's client. Gross margin dollars for the Company's temporary and consultant staffing division were $424 million for the three months ended September 30, 2019, increasing 3.4% compared to $410 million for the three months ended September 30, 2018. As a percentage of revenues, gross margin for temporary and consultant staffing was 37.9% in the third quarter of 2019, up slightly from 37.8% in the third quarter of 2018. Gross margin dollars for permanent placement staffing represent revenues less reimbursable expenses. Gross margin dollars for the Company's permanent placement staffing division were $134 million for the three months ended September 30, 2019, increasing 3.8% from $129 million for the three months ended September 30, 2018. Because reimbursable expenses for permanent placement staffing are de minimis, gross margin dollars are substantially explained by revenues previously discussed. Gross margin dollars for risk consulting and internal audit services represent revenues less direct costs of services, which consist primarily of professional staff payroll, payroll taxes, benefit costs and reimbursable expenses. The primary drivers of risk consulting and internal audit services gross margin are: i) the relative composition of and number of professional staff and their respective pay and bill rates; and ii) staff utilization, which is the relationship of time spent on client engagements in proportion to the total time available for the Company's risk consulting and internal audit services staff. Gross margin dollars



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for the Company's risk consulting and internal audit division were $88 million for the three months ended September 30, 2019, increasing 24.1% compared to $71 million for the three months ended September 30, 2018. As a percentage of revenues, gross margin for risk consulting and internal audit services in the third quarter of 2019 was 29.5%, up from 28.1% in the third quarter of 2018. The year-over-year improvement in gross margin percentage was due primarily to improved staff utilization and the relative composition of professional staff. Selling, General and Administrative Expenses. The Company's selling, general and administrative expenses consist primarily of staff compensation, advertising, variable overhead, depreciation, and occupancy costs. The Company's selling, general and administrative expenses were $484 million for the three months ended September 30, 2019, increasing 5.3% from $459 million for the three months ended September 30, 2018. As a percentage of revenues, the Company's selling, general and administrative expenses were 31.2% for the third quarter of 2019, down slightly from 31.3% in the third quarter of 2018. Contributing factors for each reportable segment are discussed below in further detail. Selling, general and administrative expenses for the Company's temporary and consultant staffing division were $323 million for the three months ended September 30, 2019, increasing 4.9% from $307 million for the three months ended September 30, 2018. As a percentage of revenues, selling, general and administrative expenses for temporary and consultant staffing were 28.8% in the third quarter of 2019, up from 28.4% in the third quarter of 2018 due primarily to negative leverage resulting from the Company's international operations. Selling, general and administrative expenses for the Company's permanent placement staffing division were $113 million for the three months ended September 30, 2019, increasing by 5.7% compared to $106 million for the three months ended September 30, 2018. As a percentage of revenues, selling, general and administrative expenses for permanent placement staffing were 83.6% in the third quarter of 2019, up from 82.1% in the third quarter of 2018 due primarily to negative leverage resulting from the Company's international operations. Selling, general and administrative expenses for the Company's risk consulting and internal audit services division were $48 million for the three months ended September 30, 2019, increasing by 6.6% compared to $46 million for the three months ended September 30, 2018. As a percentage of revenues, selling, general and administrative expenses for risk consulting and internal audit services were 16.2% in the third quarter of 2019, down from 18.0% in the third quarter of 2018 due primarily to positive operating leverage resulting from increased revenues. Operating Income. The Company's total operating income was $163 million, or 10.5% of revenues, for the three months ended September 30, 2019, up from $151 million, or 10.3% of revenues, for the three months ended September 30, 2018. For the Company's temporary and consultant staffing division, operating income was $101 million, or 9.1% of applicable revenues, down from $103 million, or 9.5% of applicable revenues, in the third quarter of 2018. For the Company's permanent placement staffing division, operating income was $22 million, or 16.2% of applicable revenues, compared to an operating income of $23 million, or 17.7% of applicable revenues, in the third quarter of 2018. For the Company's risk consulting and internal audit services division, operating income was $40 million, or 13.3% of applicable revenues, compared to an operating income of $25 million, or 10.1% of applicable revenues, in the third quarter of 2018. Provision for income taxes. The provision for income taxes was 28.5% and 24.1% for the three months ended September 30, 2019 and 2018, respectively. The higher tax rate in the third quarter of 2019 is primarily due to a one-time accounting method change to account for the effect of the Tax Cuts and Jobs Act on the Company's 2017 tax return filing, which resulted in a revaluation of deferred taxes recorded in the third quarter of 2018. The effect of this one-time accounting method change resulted in a reduced income tax expense in the third quarter of 2018 which was not repeated in the third quarter of 2019.

Nine Months Ended September 30, 2019 and 2018 Revenues. The Company's revenues were $4.54 billion for the nine months ended September 30, 2019, increasing by 5.1% compared to $4.32 billion for the nine months ended September 30, 2018. Revenues from foreign operations represented 23% of total revenues for the nine months ended September 30, 2019, down from 24% of total revenues for the nine months ended September 30, 2018. The Company analyzes its revenues for three reportable segments: temporary and consultant staffing, permanent placement staffing, and risk consulting and internal audit services. For the nine months ended September 30, 2019, revenue for all three of the Company's reportable segments were up, compared to the same period in 2018. Contributing factors for each reportable segment are discussed below in further detail.



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Temporary and consultant staffing revenues were $3.31 billion for the nine
months ended September 30, 2019, increasing by 2.1% compared to revenues of
$3.24 billion for the nine months ended September 30, 2018. Key drivers of
temporary and consultant staffing revenues include average hourly bill rates and
the number of hours worked by the Company's temporary employees on client
engagements. On an as adjusted basis, temporary and consultant staffing revenues
increased 4.4% for the first three quarters of 2019 compared to the first three
quarters of 2018, due primarily to a 5.3% increase in average bill rates. In the
U.S., revenues in the first three quarters of 2019 increased 4.2% on an as
reported basis and 4.5% on an as adjusted basis, compared to the first three
quarters of 2018. For the Company's international operations, revenues for the
first three quarters of 2019 decreased 4.8% on an as reported basis and
increased 4.1% on an as adjusted basis, compared to the first three quarters of
2018.
Permanent placement staffing revenues were $407 million for the nine months
ended September 30, 2019, increasing by 5.4% compared to revenues of $386
million for the nine months ended September 30, 2018. Key drivers of permanent
placement staffing revenues consist of the number of candidate placements and
average fees earned per placement. On an as adjusted basis, permanent placement
staffing revenues increased 7.1% for the first three quarters of 2019 compared
to the first three quarters of 2018, driven by increases in the number of
placements and average fees earned per placement. In the U.S., revenues for the
first three quarters of 2019 increased 7.7% on an as reported basis and 7.9% on
an as adjusted basis, compared to the first three quarters of 2018. For the
Company's international operations, revenues for the first three quarters of
2019 increased 0.7% on an as reported basis and 5.3% on an as adjusted basis,
compared to the first three quarters of 2018. Historically, demand for permanent
placement staffing is even more sensitive to economic and labor market
conditions than demand for temporary and consultant staffing and this is
expected to continue.
Risk consulting and internal audit services revenues were $824 million for the
nine months ended September 30, 2019, increasing by 18.7% compared to revenues
of $694 million for the nine months ended September 30, 2018. Key drivers of
risk consulting and internal audit services revenues are the billable hours
worked by consultants on client engagements and average hourly bill rates. On an
as adjusted basis, risk consulting and internal audit services revenues
increased 15.2% for the first three quarters of 2019 compared to the first three
quarters of 2018, due primarily to an increase in billable hours. In the U.S.,
revenues in the first three quarters of 2019 increased 15.8% on an as reported
basis and 16.1% on an as adjusted basis, compared to the first three quarters of
2018. The Company's risk consulting and internal audit services revenues for the
first three quarters of 2019 from international operations increased 29.7% on an
as reported basis and 12.5% on an as adjusted basis, compared to the first three
quarters of 2018.
A reconciliation of the non-GAAP year-over-year revenue growth rates to the as
reported year-over-year revenue growth rates for the nine months ended
September 30, 2019, is presented in the following table:
                                            Global     United States     International
Temporary and consultant staffing
As Reported                                  2.1  %           4.2 %           -4.8  %
Billing Days Impact                          0.1  %           0.3 %           -0.6  %
Currency Impact                              1.3  %             -              5.7  %
Intercompany Adjustments                     0.9  %             -              3.8  %
As Adjusted                                  4.4  %           4.5 %            4.1  %
Permanent placement staffing
As Reported                                  5.4  %           7.7 %            0.7  %
Billing Days Impact                          0.1  %           0.2 %           -0.5  %
Currency Impact                              1.6  %             -              5.1  %
As Adjusted                                  7.1  %           7.9 %            5.3  %
Risk consulting and internal audit services
As Reported                                 18.7  %          15.8 %           29.7  %
Billing Days Impact                          0.0  %           0.3 %           -0.6  %
Currency Impact                              1.2  %             -              5.1  %
Intercompany Adjustments                    -4.7  %             -            -21.7  %
As Adjusted                                 15.2  %          16.1 %           12.5  %




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Gross Margin. The Company's gross margin dollars were $1.89 billion for the nine
months ended September 30, 2019, increasing by 5.7% compared to $1.79 billion
for the nine months ended September 30, 2018. Contributing factors for each
reportable segment are discussed below in further detail.
Gross margin dollars for temporary and consultant staffing represent revenues
less direct costs of services, which consist of payroll, payroll taxes and
benefit costs for temporary employees, and reimbursable expenses. The key
drivers of gross margin are: i) pay-bill spreads, which represent the
differential between wages paid to temporary employees and amounts billed to
clients; ii) fringe costs, which are primarily composed of payroll taxes and
benefit costs for temporary and consultant staffing employees; and iii)
conversion revenues, which are earned when a temporary position converts to a
permanent position with the Company's client. Gross margin dollars for the
Company's temporary and consultant staffing division were $1.26 billion for the
nine months ended September 30, 2019, increasing 3.5% compared to $1.21 billion
for the nine months ended September 30, 2018. As a percentage of revenues, gross
margin for temporary and consultant staffing was 38.0% for the nine months ended
September 30, 2019, up from 37.5% for the nine months ended September 30, 2018.
This year-over-year improvement in gross margin percentage was primarily
attributable to higher pay-bill spreads.
Gross margin dollars for permanent placement staffing represent revenues less
reimbursable expenses. Gross margin dollars for the Company's permanent
placement staffing division were $406 million for the nine months ended
September 30, 2019, increasing 5.4% from $385 million for the nine months ended
September 30, 2018. Because reimbursable expenses for permanent placement
staffing are de minimis, gross margin dollars are substantially explained by
revenues previously discussed.
Gross margin dollars for risk consulting and internal audit services represent
revenues less direct costs of services, which consist primarily of professional
staff payroll, payroll taxes, benefit costs and reimbursable expenses. The
primary drivers of risk consulting and internal audit services gross margin are:
i) the relative composition of and number of professional staff and their
respective pay and bill rates; and ii) staff utilization, which is the
relationship of time spent on client engagements in proportion to the total time
available for the Company's risk consulting and internal audit services staff.
Gross margin dollars for the Company's risk consulting and internal audit
division were $228 million for the nine months ended September 30, 2019,
increasing 20.1% compared to $190 million for the nine months ended
September 30, 2018. As a percentage of revenues, gross margin for risk
consulting and internal audit services in the first three quarters of 2019 was
27.7%, up slightly from 27.3% in the first three quarters of 2018.
Selling, General and Administrative Expenses. The Company's selling, general and
administrative expenses consist primarily of staff compensation, advertising,
variable overhead, depreciation, and occupancy costs. The Company's selling,
general and administrative expenses were $1.42 billion for the nine months ended
September 30, 2019, increasing 5.0% from $1.35 billion for the nine months ended
September 30, 2018. As a percentage of revenues, the Company's selling, general
and administrative expenses were 31.4% for both the first three quarters of 2019
and 2018. Contributing factors for each reportable segment are discussed below
in further detail.
Selling, general and administrative expenses for the Company's temporary and
consultant staffing division were $945 million for the nine months ended
September 30, 2019, increasing 3.6% from $912 million for the nine months ended
September 30, 2018. As a percentage of revenues, selling, general and
administrative expenses for temporary and consultant staffing were 28.6% in the
first three quarters of 2019, up from 28.2% in the first three quarters of 2018
due primarily to negative leverage resulting from the Company's international
operations.
Selling, general and administrative expenses for the Company's permanent
placement staffing division were $338 million for the nine months ended
September 30, 2019, increasing by 8.0% compared to $313 million for the nine
months ended September 30, 2018. As a percentage of revenues, selling, general
and administrative expenses for permanent placement staffing were 82.9% in the
first three quarters of 2019, up from 81.0% in the first three quarters of 2018
due primarily to negative leverage resulting from the Company's international
operations.
Selling, general and administrative expenses for the Company's risk consulting
and internal audit services division were $141 million for the nine months ended
September 30, 2019, increasing by 8.0% compared to $130 million for the nine
months ended September 30, 2018. As a percentage of revenues, selling, general
and administrative expenses for risk consulting and internal audit services were
17.1% in the first three quarters of 2019, down from 18.8% in the first three
quarters of 2018 due primarily to positive operating leverage resulting from
increased revenues.
Operating Income. The Company's total operating income was $469 million, or
10.3% of revenues, for the nine months ended September 30, 2019, up from $435
million or 10.1% of revenues, for the nine months ended September 30, 2018. For
the


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Company's temporary and consultant staffing division, operating income was $313
million, or 9.5% of applicable revenues, up from $303 million, or 9.4% of
applicable revenues, in the first three quarters of 2018. For the Company's
permanent placement staffing division, operating income was $69 million, or
16.9% of applicable revenues, down from an operating income of $73 million, or
18.8% of applicable revenues, in the first three quarters of 2018. For the
Company's risk consulting and internal audit services division, operating income
was $87 million, or 10.6% of applicable revenues, compared to an operating
income of $59 million or 8.5% of applicable revenues, in the first three
quarters of 2018.
Provision for income taxes. The provision for income taxes was 27.5% and 26.5%
for the nine months ended September 30, 2019 and 2018, respectively. The higher
tax rate in 2019 is primarily due to a one-time accounting method change to
account for the effect of the Tax Cuts and Jobs Act on the Company's 2017 tax
return filing, which resulted in a revaluation of deferred taxes recorded in the
third quarter of 2018. The effect of this one-time accounting method change
resulted in a reduced income tax expense in 2018 which was not repeated in 2019.
This increase was partially offset by the recognition of tax benefits related to
restricted stock vesting in the first three quarters of 2019.
Liquidity and Capital Resources
The change in the Company's liquidity during the nine months ended September 30,
2019 and 2018, is primarily the net effect of funds generated by operations and
the funds used for capital expenditures, payment to trusts for employee deferred
compensation plans, repurchases of common stock, and payment of dividends.
Cash and cash equivalents were $313 million and $362 million at September 30,
2019 and 2018, respectively. Operating activities provided $439 million during
the nine months ended September 30, 2019, which was offset by $73 million and
$324 million of net cash used in investing activities and financing activities,
respectively. Operating activities provided $449 million during the nine months
ended September 30, 2018, which was partially offset by $55 million and $319
million of net cash used in investing activities and financing activities,
respectively.
Operating activities-Net cash provided by operating activities for the nine
months ended September 30, 2019, was composed of net income of $342 million,
adjusted upward for non-cash items of $81 million, and cash provided by changes
in working capital of $16 million. Net cash provided by operating activities for
the nine months ended September 30, 2018, was composed of net income of $321
million, adjusted upward for non-cash items of $82 million, and cash provided by
changes in working capital of $46 million.
Investing activities-Net cash used in investing activities for the nine months
ended September 30, 2019, was $73 million. This was composed of capital
expenditures of $45 million and deposits to trusts for employee deferred
compensation plans of $28 million. Net cash used in investing activities for the
nine months ended September 30, 2018, was $55 million. This was composed of
capital expenditures of $27 million and deposits to trusts for employee deferred
compensation plans of $28 million.
Financing activities-Net cash used in financing activities for the nine months
ended September 30, 2019, was $324 million. This primarily included repurchases
of $214 million in common stock and $110 million in cash dividends paid to
stockholders. Net cash used in financing activities for the nine months ended
September 30, 2018, was $319 million. This primarily included repurchases of
$216 million in common stock and $103 million in cash dividends paid to
stockholders.
As of September 30, 2019, the Company is authorized to repurchase, from time to
time, up to 3.4 million additional shares of the Company's common stock on the
open market or in privately negotiated transactions, depending on market
conditions. During the nine months ended September 30, 2019 and 2018, the
Company repurchased 3.3 million shares, at a cost of $191 million, and 3.3
million shares of common stock, at a cost of $215 million, on the open market,
respectively. Additional stock repurchases were made in connection with employee
stock plans, whereby Company shares were tendered by employees for the payment
of exercise price and applicable statutory withholding taxes. During the nine
months ended September 30, 2019 and 2018, such repurchases totaled 0.3 million
shares, at a cost of $17 million, and 0.2 million shares, at a cost of $9
million, respectively. Repurchases of shares have been funded with cash
generated from operations.
The Company's working capital at September 30, 2019, included $313 million in
cash and cash equivalents. The Company expects that internally generated cash
will be sufficient to support the working capital needs of the Company, the
Company's fixed payments, dividends, and other obligations on both a short-term
and long-term basis.
In March 2019, the Company entered into an uncommitted credit facility (the
"Credit Agreement") of up to $100 million. The Company may request borrowings
under the Credit Agreement that are denominated in U.S. dollars and each request
is


                                       23

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subject to approval by the lender. The Company must repay the aggregate
principal amount of loans outstanding under the Credit Agreement on the
termination date of each borrowing. Borrowings under the Credit Agreement will
bear interest in accordance with the terms of the borrowing, which typically
will be calculated according to the London Interbank Offered Rate plus an
applicable margin. There were no borrowings under the Credit Agreement as of
September 30, 2019. The Company intends to renew this facility prior to its
March 19, 2020 expiration.
On November 6, 2019, the Company announced a quarterly dividend of $.31 per
share to be paid to all shareholders of record as of November 25, 2019. The
dividend will be paid on December 13, 2019.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Because a portion of the Company's net revenues are derived from its operations
outside the U.S. and are denominated in local currencies, the Company is exposed
to the impact of foreign currency fluctuations. The Company's exposure to
foreign currency exchange rates relates primarily to the Company's foreign
subsidiaries. Exchange rates impact the U.S. dollar value of the Company's
reported revenues, expenses, earnings, assets and liabilities.
For the nine months ended September 30, 2019, approximately 23% of the Company's
revenues were generated outside of the United States. These operations transact
business in their functional currency, which is the same as their local
currency. As a result, fluctuations in the value of foreign currencies against
the U.S. dollar, particularly the Canadian dollar, British pound, Euro, and
Australian dollar, have an impact on the Company's reported results. Under GAAP,
revenues and expenses denominated in foreign currencies are translated into U.S.
dollars at the monthly average exchange rates prevailing during the period.
Consequently, as the value of the U.S. dollar changes relative to the currencies
of the Company's non-U.S. markets, the Company's reported results vary.
During the first nine months of 2019, the U.S. dollar fluctuated, but generally
strengthened, against the primary currencies in which the Company conducts
business, compared to one year ago. Currency exchange rates had the effect of
decreasing reported net service revenues by $56 million, or 1.3%, in the first
three quarters of 2019 compared to the same period one year ago. The general
strengthening of the U.S. dollar also affected the reported level of expenses
incurred in our foreign operations. Because substantially all our foreign
operations generated revenues and incurred expenses within the same country and
currency, the effect of lower reported revenues is largely offset by the
decrease in reported operating expenses. Reported net income was $2 million, or
0.7%, lower in the first three quarters of 2019 compared to the same period one
year ago due to the effect of currency exchange rates.
For the one month ended October 31, 2019, the U.S. dollar has weakened against
the Canadian dollar, Euro, Australian dollar, and British pound since
September 30, 2019. If currency exchange rates were to remain at October 2019
levels throughout the remainder of 2019, the Company's full-year reported
revenues would remain unfavorably impacted, mostly offset by a favorable impact
to operating expenses compared to full year 2018 results. Should current trends
continue, the impact to reported net income would be immaterial.
Fluctuations in currency exchange rates impact the U.S. dollar amount of the
Company's stockholders' equity. The assets and liabilities of the Company's
non-U.S. subsidiaries are translated into U.S. dollars at the exchange rates in
effect at period end. The resulting translation adjustments are recorded in
stockholders' equity as a component of accumulated other comprehensive income.
Although currency fluctuations impact the Company's reported results and
shareholders' equity, such fluctuations generally do not affect cash flow or
result in actual economic gains or losses. The Company generally has few
cross-border transfers of funds, except for transfers to the U.S. for payment of
intercompany loans, working capital loans made between the U.S. and the
Company's foreign subsidiaries, and dividends from the Company's foreign
subsidiaries.
ITEM 4. Controls and Procedures
Management, including the Company's Chairman and Chief Executive Officer and the
Vice Chairman and Chief Financial Officer, evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
the end of the period covered by this report. Based upon that evaluation, the
Chairman and Chief Executive Officer and the Vice Chairman and Chief Financial
Officer concluded that the disclosure controls and procedures were effective to
ensure that information required to be disclosed in the reports the Company
files and submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission and that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Company's management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure.


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