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; 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 As COVID-19 continues to impact the global economy, the Company has prioritized the health and safety of its employees, and a majority of global staffing and Protiviti employees continue 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 three quarters of 2020 were affected by the economic crisis resulting from the COVID-19 pandemic, primarily in the Company's staffing business. During the first three quarters of 2020 service revenues were$3.80 billion , a decrease of 16% from the prior year. Net income for the first three quarters of 2020 was$212 million and diluted net income per share was$1.87 . Risk consulting and internal audit services experienced strong revenue growth increasing by 9%, offset by declines in temporary and consultant staffing of 21% and permanent placement staffing of 32% during the first three quarters of 2020, compared to the first three quarters of 2019. The Company's staffing clients, most of whom are small and midsize businesses, are feeling the crisis, however, there are improving trends in the small business community. 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 three quarters of 2020 and continues to 21
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benefit from multiple solutions offerings and pipeline, including particularly robust growth from the blended solutions with the Company's temporary and consulting staffing operations.The United States economic backdrop as we ended the first three quarters of 2020 was showing signs of modest recovery as real gross domestic product ("GDP") decreased 5.0% and 32.9% for the first and second quarter, respectively, and increased 33.1% for the third quarter, while the unemployment rate increased from 3.5% inDecember 2019 to 4.4%, 11.1%, and 7.9% at the end of the first, second, and third quarter of 2020, respectively. 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 three quarters of 2020, we took actions to reduce headcount. We are focused on the productivity levels of tenured staff and believe we have aligned staffing levels to drive profitability. Capital expenditures, including$26 million for cloud computing arrangements, for the nine months endedSeptember 30, 2020 , totaled$55 million , approximately 68% 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$65 million to$75 million , of which$40 million to$50 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 nine months endedSeptember 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. While uncertainty remains in the overall economic environment, we approach the fourth 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 62 offices in 23 states and 12 foreign countries. The Company has changed its Condensed Consolidated Statements of Operations to separately present income from investments held in employee deferred compensation trusts. Under the Company's employee deferred compensation plans, employees direct the investment of their account balances, and the Company invests amounts held in the associated investment trusts consistent with these directions. As realized and unrealized investment gains and losses occur, the Company's deferred compensation obligation to employees changes accordingly. However, the value of the related investment trust assets also changes by an equal and offsetting amount, leaving no net cost to the Company. Under the new presentation, changes in the Company's deferred compensation obligations noted above will continue to be included in selling, general and administrative expenses or, in the case of risk consulting and internal audit services, direct cost. However, the offsetting changes in the investment trust assets will be presented separately below selling, general and administrative expenses. This does not change the reported level of pre-tax or after-tax income or cash flow previously provided. Under the new presentation, we will replace 22
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the discussion of consolidated operating income with the non-GAAP measure of
combined segment income. This will be calculated as consolidated income before
income taxes adjusted for net interest income and amortization of intangible
assets, and is equal to the sum of segment income.
Non-GAAP Financial Measures
The financial results of the Company are prepared in conformity with accounting
principles generally accepted in
Combined segment income is defined as income before income taxes adjusted for net interest income and amortization of intangible assets, and is equal to the sum of segment income. The Company provides combined segment income because it is how the Company evaluates segment performance. A reconciliation of combined segment income to reported income before income taxes is provided herein.
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 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 EndedSeptember 30, 2020 and 2019 Revenues. The Company's revenues were$1.19 billion for the three months endedSeptember 30, 2020 , decreasing by 23.3% compared to$1.55 billion for the three months endedSeptember 30, 2019 . Revenues from foreign operations represented 22% of total revenues for both the three months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2020 continued to be 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$781 million for the three months endedSeptember 30, 2020 , decreasing by 30.1% compared to revenues of$1.12 billion for the three months endedSeptember 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 third quarter 23
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of 2020 reflected the economic circumstances present in the quarter. On an as adjusted basis, temporary and consultant staffing revenues decreased 30.7% for the third quarter of 2020 compared to the third quarter of 2019, due primarily to fewer hours worked by the Company's engagement professionals on client engagements. In theU.S. , revenues in the third quarter of 2020 decreased 31.0% on an as reported basis and 31.3% on an as adjusted basis, compared to the third quarter of 2019. For the Company's international operations, 2020 third quarter revenues decreased 27.0% on an as reported basis and decreased 28.4% on an as adjusted basis, compared to the third quarter of 2019. Permanent placement staffing revenues were$87 million for the three months endedSeptember 30, 2020 , decreasing by 35.2% compared to revenues of$135 million for the three months endedSeptember 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 third quarter of 2020 reflected the economic circumstances present in the quarter. On an as adjusted basis, permanent placement staffing revenues decreased 35.7% for the third quarter of 2020 compared to the third 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 third quarter of 2020 decreased 37.1% on an as reported basis and 37.3% on an as adjusted basis, compared to the third quarter of 2019. For the Company's international operations, revenues for the third quarter of 2020 decreased 30.9% on an as reported basis and decreased 31.7% on an as adjusted basis, compared to the third 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$321 million for the three months endedSeptember 30, 2020 , increasing by 7.4% compared to revenues of$299 million for the three months endedSeptember 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 6.4% for the third quarter of 2020 compared to the third quarter of 2019, primarily due to an increase in billable hours. In theU.S. , revenues in the third quarter of 2020 increased 10.8% on an as reported basis and 10.3% on an as adjusted basis, compared to the third quarter of 2019. Contributing to theU.S. increase were services related to risk and compliance and technology consulting practice areas including blended solutions with the Company's temporary and consulting staffing operations. The Company's risk consulting and internal audit services revenues from international operations decreased 5.0% on an as reported basis and 8.0% on an as adjusted basis for the third quarter of 2020 compared to the third 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 endedSeptember 30, 2020 , is presented in the following table: Global United States International
Temporary and consultant staffing
As Reported -30.1 % -31.0 % -27.0 % Billing Days Impact -0.3 % -0.3 % 0.0 % Currency Impact -0.3 % - -1.4 % As Adjusted -30.7 % -31.3 % -28.4 %
Permanent placement staffing
As Reported -35.2 % -37.1 % -30.9 % Billing Days Impact -0.2 % -0.2 % 0.0 % Currency Impact -0.3 % - -0.8 % As Adjusted -35.7 % -37.3 % -31.7 %
Risk consulting and internal audit services
As Reported 7.4 % 10.8 % -5.0 % Billing Days Impact -0.3 % -0.5 % 0.1 % Currency Impact -0.7 % - -3.1 % As Adjusted 6.4 % 10.3 % -8.0 %
Gross Margin. The Company's gross margin dollars were
24
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Gross margin dollars for temporary and consultant staffing represent revenues less 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$293 million for the three months endedSeptember 30, 2020 , decreasing 30.8% compared to$424 million for the three months endedSeptember 30, 2019 . As a percentage of revenues, gross margin for temporary and consultant staffing was 37.5% in the third quarter of 2020, down from 37.9% in the third 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$87 million for the three months endedSeptember 30, 2020 , decreasing 35.2% from$134 million for the three months endedSeptember 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 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$87 million for the three months endedSeptember 30, 2020 , decreasing 1.1% compared to$88 million for the three months endedSeptember 30, 2019 . Impacting gross margin is deferred compensation expense related to changes in the fair value of participants' accounts of$3 million and less than a million for the three months endedSeptember 30, 2020 and 2019, respectively. Equal and offsetting amounts are included in income from investments held in employee deferred compensation trusts. As a percentage of revenues, gross margin for risk consulting and internal audit services in the third quarter of 2020 was 27.1%, down from 29.4% in the third 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$391 million for the three months endedSeptember 30, 2020 , decreasing 19.4% from$485 million for the three months endedSeptember 30, 2019 . As a percentage of revenues, the Company's selling, general and administrative expenses were 32.8% for the third quarter of 2020, up from 31.2% in the third quarter of 2019. The increase in selling, general and administrative expenses as a percentage of revenues was primarily impacted by negative leverage as revenues decreased. 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$270 million for the three months endedSeptember 30, 2020 , decreasing 16.6% from$324 million for the three months endedSeptember 30, 2019 . This includes deferred compensation expense related to changes in the fair value of participants' accounts of$20 million and$1 million for the three months endedSeptember 30, 2020 and 2019, respectively. Equal and offsetting amounts are included in income from investments held in employee deferred compensation trusts. As a percentage of revenues, selling, general and administrative expenses for temporary and consultant staffing were 34.5% in the third quarter of 2020, up from 28.9% in the third quarter of 2019 due primarily to negative leverage as revenues decreased as a result of financial conditions during the quarter and an increase in deferred compensation expense related to changes in the fair value of participants' accounts. Selling, general and administrative expenses for the Company's permanent placement staffing division were$79 million for the three months endedSeptember 30, 2020 , decreasing by 29.7% compared to$113 million for the three months endedSeptember 30, 2019 . This includes deferred compensation expense related to changes in the fair value of participants' accounts of$2 million and less than a million for the three months endedSeptember 30, 2020 and 2019, respectively. Equal and offsetting amounts are included in income from investments held in employee deferred compensation trusts. As a percentage of revenues, selling, general and administrative expenses for permanent placement staffing were 90.8% in the third quarter of 2020, up from 83.7% in the third quarter of 2019 due primarily to an increase in deferred compensation expense related to changes in the fair value of participants' accounts and negative leverage as revenues decreased as a result of financial conditions during the quarter. 25
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Selling, general and administrative expenses for the Company's risk consulting
and internal audit services division were
Income from Investments Held in Employee Deferred Compensation Trusts. Under the
Company's employee deferred compensation plans, employees direct the investment
of their account balances, and the Company invests amounts held in the
associated investment trusts consistent with these directions. As realized and
unrealized investment gains and losses occur, the Company's deferred
compensation obligation to employees changes accordingly. Changes in the
Company's deferred compensation obligations noted above are included in selling,
general and administrative or in the case of the Company's risk consulting and
internal audit services division, direct cost. The value of the related
investment trust assets also changes by the equal and offsetting amount, leaving
no net costs to the Company. The Company's income from investments held in
employee deferred compensation trusts consists primarily of unrealized and
realized gains and losses and dividend income from trust investments. The
Company's income from investments held in employee deferred compensation trusts
was
Income before income taxes and Segment Income. The Company's total income before
income taxes was
Quarter Ended September 30, 2020 2019 Income before income taxes$ 102,510 $ 163,782 Interest income, net (202) (1,230) Amortization of intangible assets 334 339 Combined segment income$ 102,642 $ 162,891
For the Company's temporary and consultant staffing division, segment income was
26
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Nine Months EndedSeptember 30, 2020 and 2019 Revenues. The Company's revenues were$3.80 billion for the nine months endedSeptember 30, 2020 , decreasing by 16.1% compared to$4.54 billion for the nine months endedSeptember 30, 2019 . Revenues from foreign operations represented 22% of total revenues for the nine months endedSeptember 30, 2020 , down from 23% of total revenues for the nine months endedSeptember 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$2.63 billion for the nine months endedSeptember 30, 2020 , decreasing by 20.5% compared to revenues of$3.31 billion for the nine months endedSeptember 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 20.7% for the first three quarters of 2020 compared to the first three quarters of 2019, due primarily to fewer hours worked by the Company's engagement professionals on client engagements. In theU.S. , revenues in the first three quarters of 2020 decreased 20.5% on an as reported basis and 21.0% on an as adjusted basis, compared to the first three quarters of 2019. For the Company's international operations, revenues for the first three quarters of 2020 decreased 20.7% on an as reported basis and decreased 19.6% on an as adjusted basis, compared to the first three quarters of 2019. Permanent placement staffing revenues were$279 million for the nine months endedSeptember 30, 2020 , decreasing by 31.5% compared to revenues of$407 million for the nine months endedSeptember 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 31.6% for the first three quarters of 2020 compared to the first three quarters 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 three quarters of 2020 decreased 31.9% on an as reported basis and 32.3% on an as adjusted basis, compared to the first three quarters of 2019. For the Company's international operations, revenues for the first three quarters of 2020 decreased 30.7% on an as reported basis and 29.9% on an as adjusted basis, compared to the first three quarters 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$899 million for the nine months endedSeptember 30, 2020 , increasing by 9.1% compared to revenues of$824 million for the nine months endedSeptember 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 nine months endedSeptember 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 8.6% for the first three quarters of 2020 compared to the first three quarters of 2019, due primarily to an increase in billable hours. In theU.S. , revenues in the first three quarters of 2020 increased 12.5% on an as reported basis and 11.8% on an as adjusted basis, compared to the first three quarters of 2019. The Company's risk consulting and internal audit services revenues for the first three quarters of 2020 from international operations decreased 2.6% on an as reported basis and 2.5% on an as adjusted basis, compared to the first three quarters of 2019. 27
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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 nine months ended
Global United States International
Temporary and consultant staffing
As Reported -20.5 % -20.5 % -20.7 % Billing Days Impact -0.5 % -0.5 % -0.4 % Currency Impact 0.3 % - 1.5 % As Adjusted -20.7 % -21.0 % -19.6 %
Permanent placement staffing
As Reported -31.5 % -31.9 % -30.7 % Billing Days Impact -0.4 % -0.4 % -0.3 % Currency Impact 0.3 % - 1.1 % As Adjusted -31.6 % -32.3 % -29.9 %
Risk consulting and internal audit services
As Reported 9.1 % 12.5 % -2.6 % Billing Days Impact -0.6 % -0.7 % -0.5 % Currency Impact 0.1 % - 0.6 % As Adjusted 8.6 % 11.8 % -2.5 % Gross Margin. The Company's gross margin dollars were$1.50 billion for the nine months endedSeptember 30, 2020 , decreasing by 20.7% compared to$1.89 billion for the nine months endedSeptember 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 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$986 million for the nine months endedSeptember 30, 2020 , decreasing 21.6% compared to$1.26 billion for the nine months endedSeptember 30, 2019 . As a percentage of revenues, gross margin for temporary and consultant staffing was 37.5% for the nine months endedSeptember 30, 2020 , down from 38.0% for the nine months endedSeptember 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$278 million for the nine months endedSeptember 30, 2020 , decreasing 31.5% from$406 million for the nine months endedSeptember 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 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$234 million for the nine months endedSeptember 30, 2020 , increasing 4.3% compared to$225 million for the nine months endedSeptember 30, 2019 . Impacting gross margin is deferred compensation expense related to changes in the fair value of participants' accounts of$6 million and$3 million for the nine months endedSeptember 30, 2020 and 2019, respectively. As a percentage of revenues, gross margin for risk consulting and internal audit services in the first three quarters of 2020 was 26.1%, down from 27.3% in the first three quarters of 2019. The year-over-year decline in gross margin percentage was due primarily to lower staff utilization rates. 28
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Selling, General and Administrative Expenses. The Company's selling, general and
administrative expenses consist primarily of staff compensation, advertising,
variable overhead, depreciation, and occupancy costs. The Company's selling,
general and administrative expenses were
29
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The following table provides a reconciliation of the non-GAAP combined segment
income to reported income before income taxes for the nine months ended
Nine Months Ended September 30, 2020 2019 Income before income taxes$ 292,297 $ 471,268 Interest income, net (1,264) (3,768) Amortization of intangible assets 1,002 1,022 Combined segment income$ 292,035 $ 468,522 For the Company's temporary and consultant staffing division, segment income was$166 million , or 6.3% of applicable revenues, down from$313 million , or 9.5% of applicable revenues, in the first three quarters of 2019. For the Company's permanent placement staffing division, segment income was$21 million , or 7.5% of applicable revenues, down from segment income of$69 million , or 16.9% of applicable revenues, in the first three quarters of 2019. For the Company's risk consulting and internal audit services division, segment income was$105 million , or 11.7% of applicable revenues, compared to segment income of$87 million or 10.6% of applicable revenues, in the first three quarters of 2019. Provision for income taxes. The provision for income taxes was 27.5% for both the nine months endedSeptember 30, 2020 and 2019, respectively. Liquidity and Capital Resources The change in the Company's liquidity during the nine months endedSeptember 30, 2020 and 2019, is primarily the net effect of funds generated by operations and the funds used for capital expenditures, investment in employee deferred compensation trusts, net of redemptions from employee deferred compensation trusts, repurchases of common stock, and payment of dividends. Cash and cash equivalents were$587 million and$313 million atSeptember 30, 2020 and 2019, respectively. Operating activities provided$565 million during the nine months endedSeptember 30, 2020 , offset by$43 million and$208 million of net cash used in investing activities and financing activities, respectively. Operating activities provided$439 million during the nine months endedSeptember 30, 2019 , offset by$73 million and$324 million of net cash used in investing activities and financing activities, respectively. Operating activities-Net cash provided by operating activities for the nine months endedSeptember 30, 2020 , was composed of net income of$212 million adjusted upward for non-cash items of$52 million and net cash provided by changes in working capital of$301 million . Net cash provided by operating activities for the nine months endedSeptember 30, 2019 , was composed of net income of$342 million adjusted upward for non-cash items of$52 million and net cash provided by changes in working capital of$45 million . Investing activities-Cash used in investing activities for the nine months endedSeptember 30, 2020 , was$43 million . This was composed of capital expenditures of$29 million and investment in employee deferred compensation trusts of$48 million , offset by proceeds from employee deferred compensation trusts redemptions of$34 million . Cash used in investing activities for the nine months endedSeptember 30, 2019 , was$73 million . This was composed of capital expenditures of$45 million and investment in employee deferred compensation trusts of$52 million , offset by proceeds from employee deferred compensation trusts redemptions of$24 million . Financing activities-Cash used in financing activities for the nine months endedSeptember 30, 2020 , was$208 million . This included repurchases of$91 million in common stock and$117 million in dividends paid to stockholders. Cash used in financing activities for the nine months endedSeptember 30, 2019 , was$324 million . This included repurchases of$214 million in common stock and$110 million in dividends paid to stockholders. As ofSeptember 30, 2020 , the Company is authorized to repurchase, from time to time, up to 1.0 million additional shares of the Company's common stock on the open market or in privately negotiated transactions, depending on market 30
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conditions. On
We have limited visibility into future cash flows as the Company's revenues are dependent on macroeconomic conditions. As a result of continued economic disruptions, we have continued cost cutting actions during the quarter. These actions have been focused on maintaining low travel and events costs, as well as managing headcount. This cost management, coupled with a talented and driven team that is backed by our industry-leading technology, positions us to fully participate in the 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$100 million unsecured revolving credit facility (the "364-Day Credit Agreement"). Borrowings under the 364-Day Credit Agreement will bear interest in accordance with the terms of the borrowing, which typically will be calculated according to the LIBOR plus an applicable margin. The 364-Day Credit Agreement is subject to certain financial covenants and the Company was in compliance with these covenants as ofSeptember 30, 2020 . There were no borrowings under the 364-Day Credit Agreement as ofSeptember 30, 2020 . OnOctober 29, 2020 , the Company announced a quarterly dividend of$.34 per share to be paid to all shareholders of record as ofNovember 25, 2020 . The dividend will be paid onDecember 15, 2020 . ITEM 3. Quantitative and Qualitative Disclosures About Market Risk InMarch 2020 , theWorld Health Organization announced that 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 nine months endedSeptember 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 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 nine 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$13.1 million , or 0.3%, in the first three quarters 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 31
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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$0.9 million , or 0.3%, lower in the first three quarters of 2020 compared to the same period one year ago due to the effect of currency exchange rates. For the one month endedOctober 31, 2020 , theU.S. dollar has strengthened against the Euro and Australian dollar and weakened against the Canadian dollar and British pound sinceSeptember 30, 2020 . If currency exchange rates were to remain atOctober 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.
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