ROBERT HALF INTERNATIONAL, INC 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 ofU.S. or international tax regulations, the global financial and economic situation; the duration and impact of the COVID-19 pandemic and efforts to mitigate its spread; changes in levels of unemployment and other economic conditions inthe 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 engagement professionals, or for events impacting its engagement professionals 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'sSecurities 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 The global outbreak of the coronavirus disease 2019 ("COVID-19") was declared a pandemic by theWorld Health Organization and a national emergency by theU.S. Government inMarch 2020 . The subsequent global stay-at-home orders resulted in significant travel restrictions and business closures. These actions have led to global economic disruptions. The Company has prioritized the health and safety of its employees, and virtually all global staffing and Protiviti employees have been working remotely. The Company has maintained full operations even where physical locations have remained closed. Given the magnitude of the COVID-19 impact on the Company's business, we have worked to effectively manage our costs and pursue revenue-generation opportunities. 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. The extent of the economic disruption on the Company's operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by theU.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain and cannot be predicted. The Company's financial results for the first half of 2020 were clearly affected by the economic crisis resulting from the COVID-19 pandemic, most acutely in the Company's staffing business. During the first half of 2020 net service revenues were$2.62 billion , a decrease of 12% from the prior year. Net income for the first half of 2020 was$136 million and diluted net income per share was$1.20 . Risk consulting and internal audit services experienced strong revenue growth increasing by 10%, offset by declines in temporary and consultant staffing of 16% and permanent placement staffing of 30% during the first half of 2020, compared to the first half of 2019. The Company's staffing clients, most of whom are small and midsize businesses, are feeling the crisis, and the downstream effect is a much tougher business climate for the Company. 18
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Demand for Protiviti's services was broad-based across its diversified service offerings, including internal audit, technology consulting and regulatory compliance consulting. Protiviti had a strong first half of 2020 and continues to benefit from strong solutions offerings and pipeline.The United States economic backdrop as we ended the first half of 2020 was one of slowdown and uncertainty as real gross domestic product ("GDP") decreased 5.0% and 32.9% for the first and second quarter, respectively, while the unemployment rate increased from 3.5% inDecember 2019 to 11.1% at the end of the second quarter of 2020, respectively. In one quarter's time, we have shifted from operating in a candidate-constrained labor market to a labor market with unprecedented unemployment levels. 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 Company's investments in headcount are typically structured to proactively support and align with expected revenue growth trends. 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. As such, during the first half of 2020, we took actions to reduce operating costs including laying off the Company's less experienced and lower performing staff. Impacted corporate staff were furloughed with paid benefits, awaiting a return to higher activity levels. Capital expenditures, including$8 million for cloud computing arrangements, for the six months endedJune 30, 2020 , totaled$16 million , approximately 71% of which represented investments in software initiatives and technology infrastructure, both of which are important to the Company's sustainability and 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 2020 capital expenditures will range from$75 million to$85 million , of which$45 million to$55 million relates to software initiatives and technology infrastructure, including capitalized costs related to implementation of cloud computing arrangements. 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 endedDecember 31, 2019 . There were no material changes to the Company's critical accounting policies or estimates for the six months endedJune 30, 2020 . 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. Because of the inherent difficulty in predicting economic trends, future demand for the Company's services cannot be forecast with certainty. The Company's investments in technology have allowed its internal staff to remain fully functional during this pandemic. We have found innovative ways to maintain connections with candidates and clients in a remote environment and we believe the Company is well positioned to meet the demand of our customers. The Company's second-quarter results were clearly affected by the economic crisis resulting from the COVID-19 pandemic, most acutely in our staffing business. Protiviti had an outstanding quarter and continues to benefit from strong solutions offerings and pipeline. We are encouraged by recent signs of week-on-week sequential growth in our staffing operations at the end of the second quarter. Although significant uncertainty continues, we approach the third quarter with optimism. The Company's temporary and permanent placement staffing business has 326 offices in 42 states, theDistrict of Columbia and 17 foreign countries, while Protiviti has 63 offices in 23 states and 12 foreign countries. 19
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Non-GAAP Financial Measures The financial results of the Company are prepared in conformity with accounting principles generally accepted inthe United States of America ("GAAP") and the rules of theSEC . 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 and billing days. 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 and constant currency exchange rates. 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. The term "as adjusted" means that the impact of different billing days and constant currency fluctuations 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 EndedJune 30, 2020 and 2019 Revenues. The Company's revenues were$1.11 billion for the three months endedJune 30, 2020 , decreasing by 26.9% compared to$1.52 billion for the three months endedJune 30, 2019 . Revenues from foreign operations represented 22% of total revenues for both the three months endedJune 30, 2020 and 2019. 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 three months endedJune 30, 2020 , risk consulting and internal audit services continued to post solid growth rates, compared to the same period in 2019. The Company's revenues for the three months endedJune 30, 2020 were impacted by the global stay-at-home orders, significant travel restrictions, and business closures which resulted in global economic disruptions. Contributing factors for each reportable segment are discussed below in further detail. Temporary and consultant staffing revenues were$753 million for the three months endedJune 30, 2020 , decreasing by 31.7% compared to revenues of$1.10 billion for the three months endedJune 30, 2019 . Key drivers of temporary and consultant staffing revenues include average hourly bill rates and the number of hours worked by the Company's engagement professionals on client engagements. The Company's temporary and consultant staffing revenue in the second quarter of 2020 reflected the economic circumstances present in the quarter. On an as adjusted basis, temporary and consultant staffing revenues decreased 31.2% for the second quarter of 2020 compared to the second quarter of 2019. In theU.S. , revenues in the second quarter of 2020 decreased 31.7% on both an as reported basis and on an as adjusted basis, compared to the second quarter of 2019. For the Company's international operations, 2020 second quarter revenues decreased 31.8% on an as reported basis and decreased 28.9% on an as adjusted basis, compared to the second quarter of 2019. The decreases ultimately resulted from fewer hours worked by the Company's engagement professionals on client engagements. 20
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Permanent placement staffing revenues were$71 million for the three months endedJune 30, 2020 , decreasing by 49.6% compared to revenues of$141 million for the three months endedJune 30, 2019 . Key drivers of permanent placement staffing revenues consist of the number of candidate placements and average fees earned per placement. Permanent placement staffing revenues in the second quarter of 2020, reflected the economic circumstances present in the quarter. On an as adjusted basis, permanent placement staffing revenues decreased 49.1% for the second quarter of 2020 compared to the second quarter of 2019, driven by a decrease in number of placements, partially offset by an increase in average fees earned per placement. In theU.S. , revenues for the second quarter of 2020 decreased 51.6% on both an as reported basis and on an as adjusted basis, compared to the second quarter of 2019. For the Company's international operations, revenues for the second quarter of 2020 decreased 45.0% on an as reported basis and decreased 43.2% on an as adjusted basis, compared to the second quarter of 2019. Demand for permanent placement staffing is even more sensitive to economic and labor market conditions than demand for temporary and consultant staffing as demonstrated by the results in the current economic environment. Risk consulting and internal audit services revenues were$284 million for the three months endedJune 30, 2020 , increasing by 4.1% compared to revenues of$273 million for the three months endedJune 30, 2019 . 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 4.5% for the second quarter of 2020 compared to the second quarter of 2019, primarily due to an increase in billable hours. In theU.S. , revenues in the second quarter of 2020 increased 6.4% on an as reported basis and 6.3% on an as adjusted basis, compared to the second quarter of 2019. Contributing to theU.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 decreased 3.9% on an as reported basis and 1.5% on an as adjusted basis for the second quarter of 2020 compared to the second quarter of 2019. 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 endedJune 30, 2020 , is presented in the following table: Global United States International
Temporary and consultant staffing
As Reported -31.7 % -31.7 % -31.8 % Billing Days Impact -0.1 % 0.0 % 0.0 % Currency Impact 0.6 % - 2.9 % As Adjusted -31.2 % -31.7 % -28.9 %
Permanent placement staffing
As Reported -49.6 % -51.6 % -45.0 % Billing Days Impact -0.1 % 0.0 % -0.1 % Currency Impact 0.6 % - 1.9 % As Adjusted -49.1 % -51.6 % -43.2 %
Risk consulting and internal audit services
As Reported 4.1 % 6.4 % -3.9 % Billing Days Impact -0.1 % -0.1 % 0.0 % Currency Impact 0.5 % - 2.4 % As Adjusted 4.5 % 6.3 % -1.5 %
Gross Margin. The Company's gross margin dollars were
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quarter of 2020, down from 38.2% in the second quarter of 2019. This year-over-year decline in gross margin percentage was primarily attributable to lower conversion revenues. Gross margin dollars for permanent placement staffing represent revenues less reimbursable expenses. Gross margin dollars for the Company's permanent placement staffing division were$71 million for the three months endedJune 30, 2020 , decreasing 49.6% from$141 million for the three months endedJune 30, 2019 . 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$73 million for the three months endedJune 30, 2020 , decreasing 4.2% compared to$76 million for the three months endedJune 30, 2019 . As a percentage of revenues, gross margin for risk consulting and internal audit services in the second quarter of 2020 was 25.7%, down from 27.9% in the second quarter of 2019. The year-over-year decline in gross margin percentage was due primarily to lower staff utilization rates. 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$365 million for the three months endedJune 30, 2020 , decreasing 23.7% from$478 million for the three months endedJune 30, 2019 . Despite the significant reduction in selling, general and administrative cost during the quarter, as a percentage of revenues, the Company's selling, general and administrative expenses were 32.9% for the second quarter of 2020, up from 31.5% in the second quarter of 2019. The increase in selling, general and administrative expenses as a percentage of revenues was significantly impacted by negative leverage as revenues decreased. The timing of our cost-reduction actions, including compensation-related costs associated with employee terminations, impacted total selling, general and administrative costs for the quarter. 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$251 million for the three months endedJune 30, 2020 , decreasing 20.5% from$316 million for the three months endedJune 30, 2019 . As a percentage of revenues, selling, general and administrative expenses for temporary and consultant staffing were 33.3% in the second quarter of 2020, up from 28.6% in the second quarter of 2019 due primarily to negative leverage as revenues decreased as a result of financial conditions during the quarter. Selling, general and administrative expenses for the Company's permanent placement staffing division were$71 million for the three months endedJune 30, 2020 , decreasing by 38.3% compared to$115 million for the three months endedJune 30, 2019 . As a percentage of revenues, selling, general and administrative expenses for permanent placement staffing were 100.2% in the second quarter of 2020, up from 81.8% in the second quarter of 2019 due primarily to negative leverage as revenues decreased in response to the COVID-19 pandemic. Selling, general and administrative expenses for the Company's risk consulting and internal audit services division were$43 million for the three months endedJune 30, 2020 , decreasing by 9.5% compared to$47 million for the three months endedJune 30, 2019 . As a percentage of revenues, selling, general and administrative expenses for risk consulting and internal audit services were 15.1% in the second quarter of 2020, down from 17.3% in the second quarter of 2019 due primarily to a decrease in variable overhead costs. Operating Income. The Company's total operating income was$58 million , or 5.3% of revenues, for the three months endedJune 30, 2020 , down from$159 million , or 10.5% of revenues, for the three months endedJune 30, 2019 . For the Company's temporary and consultant staffing division, operating income was$28 million , or 3.8% of applicable revenues, down from$105 million , or 9.5% of applicable revenues, in the second quarter of 2019. For the Company's permanent placement staffing division, operating loss was less than a million, or (0.3)% of applicable revenues, compared to an operating income of$25 million , or 18.0% of applicable revenues, in the second quarter of 2019. For the Company's risk consulting and internal audit services division, operating income was$30 million , or 10.6% of applicable revenues, compared to an operating income of$29 million , or 10.6% of applicable revenues, in the second quarter of 2019. 22
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Provision for income taxes. The provision for income taxes was 20.4% and 28.4% for the three months endedJune 30, 2020 and 2019, respectively. The relatively low second quarter tax rate in 2020 is a consequence of a lower anticipated full-year tax rate compared to the full-year estimate in the first quarter. Six Months EndedJune 30, 2020 and 2019 Revenues. The Company's revenues were$2.62 billion for the six months endedJune 30, 2020 , decreasing by 12.4% compared to$2.98 billion for the six months endedJune 30, 2019 . Revenues from foreign operations represented 22% of total revenues for the six months endedJune 30, 2020 , down from 23% of total revenues for the six months endedJune 30, 2019 . The Company analyzes its revenues for three reportable segments: temporary and consultant staffing, permanent placement staffing, and risk consulting and internal audit services. Risk consulting and internal audit services increased, offset by decreases in temporary and consulting staffing and permanent placement staffing Contributing factors for each reportable segment are discussed below in further detail. Temporary and consultant staffing revenues were$1.85 billion for the six months endedJune 30, 2020 , decreasing by 15.6% compared to revenues of$2.19 billion for the six months endedJune 30, 2019 . Key drivers of temporary and consultant staffing revenues include average hourly bill rates and the number of hours worked by the Company's engagement professionals on client engagements. On an as adjusted basis, temporary and consultant staffing revenues decreased 15.6% for the first half of 2020 compared to the first half of 2019. In theU.S. , revenues in the first half of 2020 decreased 15.1% on an as reported basis and 15.7% on an as adjusted basis, compared to the first half of 2019. For the Company's international operations, revenues for the first half of 2020 decreased 17.6% on an as reported basis and decreased 15.1% on an as adjusted basis, compared to the first half of 2019. The decreases ultimately resulted from fewer hours worked by the Company's engagement professionals on client engagements. Permanent placement staffing revenues were$192 million for the six months endedJune 30, 2020 , decreasing by 29.7% compared to revenues of$272 million for the six months endedJune 30, 2019 . 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 decreased 29.6% for the first half of 2020 compared to the first half of 2019, driven by a decrease in number of placements, partially offset by an increase in average fees earned per placement. In theU.S. , revenues for the first half of 2020 decreased 29.3% on an as reported basis and 29.8% on an as adjusted basis, compared to the first half of 2019. For the Company's international operations, revenues for the first half of 2020 decreased 30.6% on an as reported basis and 29.0% on an as adjusted basis, compared to the first half of 2019. 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$578 million for the six months endedJune 30, 2020 , increasing by 10.1% compared to revenues of$525 million for the six months endedJune 30, 2019 . 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. For the six months endedJune 30, 2020 , risk consulting and internal audit services continued to post strong growth rates, compared to the same period in 2019. On an as adjusted basis, risk consulting and internal audit services revenues increased 9.8% for the first half of 2020 compared to the first half of 2019, due primarily to an increase in billable hours. In theU.S. , revenues in the first half of 2020 increased 13.5% on an as reported basis and 12.6% on an as adjusted basis, compared to the first half of 2019. The Company's risk consulting and internal audit services revenues for the first half of 2020 from international operations decreased 1.3% on an as reported basis and increased 0.4% on an as adjusted basis, compared to the first half of 2019. 23
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A reconciliation of the non-GAAP year-over-year revenue growth rates to the as
reported year-over-year revenue growth rates for the six months ended
Global United States International
Temporary and consultant staffing
As Reported -15.6 % -15.1 % -17.6 % Billing Days Impact -0.7 % -0.6 % -0.5 % Currency Impact 0.7 % - 3.0 % As Adjusted -15.6 % -15.7 % -15.1 %
Permanent placement staffing
As Reported -29.7 % -29.3 % -30.6 % Billing Days Impact -0.5 % -0.5 % -0.5 % Currency Impact 0.6 % - 2.1 % As Adjusted -29.6 % -29.8 % -29.0 %
Risk consulting and internal audit services
As Reported 10.1 % 13.5 % -1.3 % Billing Days Impact -0.9 % -0.9 % -0.7 % Currency Impact 0.6 % - 2.4 % As Adjusted 9.8 % 12.6 % 0.4 % Gross Margin. The Company's gross margin dollars were$1.03 billion for the six months endedJune 30, 2020 , decreasing by 17% compared to$1.25 billion for the six months endedJune 30, 2019 . 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 engagement professionals, and reimbursable expenses. The key drivers of gross margin are: i) pay-bill spreads, which represent the differential between wages paid to engagement professionals 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$692 million for the six months endedJune 30, 2020 , decreasing 16.9% compared to$833 million for the six months endedJune 30, 2019 . As a percentage of revenues, gross margin for temporary and consultant staffing was 37.5% for the six months endedJune 30, 2020 , down from 38.1% for the six months endedJune 30, 2019 . This year-over-year decline in gross margin percentage was primarily attributable to lower conversion revenues. Gross margin dollars for permanent placement staffing represent revenues less reimbursable expenses. Gross margin dollars for the Company's permanent placement staffing division were$191 million for the six months endedJune 30, 2020 , decreasing 29.7% from$272 million for the six months endedJune 30, 2019 . 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$150 million for the six months endedJune 30, 2020 , increasing 7.5% compared to$140 million for the six months endedJune 30, 2019 . As a percentage of revenues, gross margin for risk consulting and internal audit services in the first half of 2020 was 26.0%, down from 26.6% in the first half of 2019. The year-over-year decline in gross margin percentage was due primarily to slightly lower staff utilization rates. 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$844 million for the six months endedJune 30, 2020 , decreasing 10.1% from$939 million for the six months endedJune 30, 2019 . As a percentage of revenues, the Company's selling, general and administrative 24
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expenses were 32.3% for the first half of 2020, up from 31.5% the first half of 2019. 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$570 million for the six months endedJune 30, 2020 , decreasing 8.3% from$622 million for the six months endedJune 30, 2019 . As a percentage of revenues, selling, general and administrative expenses for temporary and consultant staffing were 30.9% in the first half of 2020, up from 28.4% in the first half of 2019 due primarily to negative leverage as revenues decreased in response to the COVID-19 pandemic. Selling, general and administrative expenses for the Company's permanent placement staffing division were$180 million for the six months endedJune 30, 2020 , decreasing by 19.8% compared to$225 million for the six months endedJune 30, 2019 . As a percentage of revenues, selling, general and administrative expenses for permanent placement staffing were 94.3% in the first half of 2020, up from 82.6% in the first half of 2019 due primarily to negative leverage as revenues decreased in response to the COVID-19 pandemic. Selling, general and administrative expenses for the Company's risk consulting and internal audit services division were$94 million for the six months endedJune 30, 2020 , increasing by 1.4% compared to$92 million for the six months endedJune 30, 2019 . As a percentage of revenues, selling, general and administrative expenses for risk consulting and internal audit services were 16.2% in the first half of 2020, down from 17.6% in the first half of 2019 due primarily to a decrease in variable overhead costs. Operating Income. The Company's total operating income was$189 million , or 7.2% of revenues, for the six months endedJune 30, 2020 , down from$306 million or 10.2% of revenues, for the six months endedJune 30, 2019 . For the Company's temporary and consultant staffing division, operating income was$122 million , or 6.6% of applicable revenues, down from$211 million , or 9.7% of applicable revenues, in the first half of 2019. For the Company's permanent placement staffing division, operating income was$11 million , or 5.6% of applicable revenues, down from an operating income of$47 million , or 17.2% of applicable revenues, in the first half of 2019. For the Company's risk consulting and internal audit services division, operating income was$57 million , or 9.8% of applicable revenues, compared to an operating income of$48 million or 9.0% of applicable revenues, in the first half of 2019. Provision for income taxes. The provision for income taxes was 28.3% and 27.0% for the six months endedJune 30, 2020 and 2019, respectively. The higher tax rate in 2020 is primarily due to the relatively greater impact of disallowed expenses on the full-year estimated rate and less tax benefits related to year-to-date restricted stock vesting at a lower price compared to the first half of 2019. Liquidity and Capital Resources The change in the Company's liquidity during the six months endedJune 30, 2020 and 2019, 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$501 million and$269 million atJune 30, 2020 and 2019, respectively. Operating activities provided$426 million during the six months endedJune 30, 2020 , offset by$43 million and$149 million of net cash used in investing activities and financing activities, respectively. Operating activities provided$248 million during the six months endedJune 30, 2019 , offset by$48 million and$208 million of net cash used in investing activities and financing activities, respectively. Operating activities-Net cash provided by operating activities for the six months endedJune 30, 2020 , was composed of net income of$136 million adjusted upward for non-cash items of$69 million and net cash provided by changes in working capital of$221 million . Net cash provided by operating activities for the six months endedJune 30, 2019 , was composed of net income of$224 million adjusted upward for non-cash items of$57 million , offset by net cash used in changes in working capital of$33 million . Investing activities-Cash used in investing activities for the six months endedJune 30, 2020 , was$43 million . This was composed of capital expenditures of$22 million and net payments for employee deferred compensation plans of$21 million . Cash used in investing activities for the six months endedJune 30, 2019 , was$48 million . This was composed of capital expenditures of$29 million and net payments for employee deferred compensation plans of$19 million . 25
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Financing activities-Cash used in financing activities for the six months ended
We have limited visibility into future cash flows as the Company's revenues are dependent on macroeconomic conditions. In order to mitigate expected declines in revenue, we aggressively cut costs in the quarter. These actions have been focused on eliminating all non-essential costs such as travel and events, as well as laying off the Company's less experienced and lower performing staff. These aggressive cost reductions, coupled with a talented and driven team that is backed by our industry-leading technology, position us to fully participate in any economic recovery. In addition, the Company's variable direct costs related to its temporary and consultant staffing business will largely fluctuate in relation to its revenues InMay 2020 , the Company entered into a new$100 million unsecured revolving credit facility (the "364-Day Credit Agreement"). Borrowings under the 364-Day Credit Agreement will bear interest in accordance with the terms of the borrowing, which typically will be calculated according to the LIBOR plus an applicable margin. The 364-Day Credit Agreement is subject to certain financial covenants and the Company was in compliance with these covenants as ofJune 30, 2020 . There were no borrowings under the 364-Day Credit Agreement as ofJune 30, 2020 . OnJuly 30, 2020 , the Company announced a quarterly dividend of$.34 per share to be paid to all shareholders of record as ofAugust 25, 2020 . The dividend will be paid onSeptember 15, 2020 . ITEM 3. Quantitative and Qualitative Disclosures About Market Risk InMarch 2020 , theWorld Health Organization announced that a novel strain of coronavirus ("COVID-19") had become pandemic. The subsequent global stay-at-home orders resulted in significant travel restrictions and business closures. These actions have led to global economic disruptions. We are continuing to monitor the efforts to mitigate the spread of COVID-19, including uncertainty around the duration and extent of the stay-at-home orders and the effect on the Company's results of operations, financial condition, and liquidity. In light of the economic disruption, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply the Company's significant accounting policies. As the situation continues to develop, we may make changes to these estimates and judgments over time, which could result in meaningful impacts to the Company's financial statements in future periods. Actual results and outcomes may differ from management's estimates and assumptions. Because a portion of the Company's net revenues are derived from its operations outside theU.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 theU.S. dollar value of the Company's reported revenues, expenses, earnings, assets and liabilities. For the six months endedJune 30, 2020 , approximately 22% of the Company's revenues were generated outside ofthe 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 theU.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 intoU.S. dollars at the monthly average exchange rates prevailing during the 26
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period. Consequently, as the value of theU.S. dollar changes relative to the currencies of the Company's non-U.S. markets, the Company's reported results vary. During the first six months of 2020, theU.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$19.2 million , or 0.6%, in the first half of 2020 compared to the same period one year ago. The general strengthening of theU.S. dollar also affected the reported level of expenses incurred in the Company's foreign operations. Because substantially all the Company's 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$0.7 million , or 0.3%, lower in the first half of 2020 compared to the same period one year ago due to the effect of currency exchange rates. For the one month endedJuly 31, 2020 , theU.S. dollar has weakened against the Canadian dollar, Euro, Australian dollar, and British pound sinceJune 30, 2020 . If currency exchange rates were to remain atJuly 2020 levels throughout the remainder of 2020, the currency impact on the Company's full-year reported revenues and operating expenses would be nearly flat compared to full year 2019 results. Should current trends continue, the impact to reported net income would be immaterial. Fluctuations in currency exchange rates impact theU.S. dollar amount of the Company's stockholders' equity. The assets and liabilities of the Company's non-U.S. subsidiaries are translated intoU.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 theU.S. for payment of intercompany loans, working capital loans made between theU.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 President and Chief Executive Officer and the Executive Vice President 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 President and Chief Executive Officer and the Executive Vice President 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 theSecurities 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. 27
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