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MarketScreener Homepage  >  Equities  >  Nyse  >  Robert Half International, Inc    RHI

ROBERT HALF INTERNATIONAL, INC

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

11/02/2020 | 04:51pm EST
Certain information contained in Management's Discussion and Analysis and in
other parts of this report may be deemed forward-looking statements regarding
events and financial trends that may affect the Company's future operating
results or financial positions. These statements may be identified by words such
as "estimate", "forecast", "project", "plan", "intend", "believe", "expect",
"anticipate", or variations or negatives thereof or by similar or comparable
words or phrases. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in the statements. These risks and uncertainties include, but are not
limited to, the following: changes to or new interpretations of U.S. or
international tax regulations, the global financial and economic situation; the
duration and impact of the COVID-19 pandemic and efforts to mitigate its spread;
changes in levels of unemployment and other economic conditions in the United
States or foreign countries where the Company does business, or in particular
regions or industries; reduction in the supply of candidates for temporary
employment or the Company's ability to attract candidates; the entry of new
competitors into the marketplace or expansion by existing competitors; the
ability of the Company to maintain existing client relationships and attract new
clients in the context of changing economic or competitive conditions; the
impact of competitive pressures, including any change in the demand for the
Company's services, on the Company's ability to maintain its margins; the
possibility of the Company incurring liability for its activities, including the
activities of its 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's Securities and Exchange Commission ("SEC") filings; the ability of the
Company to manage its international operations and comply with foreign laws and
regulations; the impact of fluctuations in foreign currency exchange rates; the
possibility that the additional costs the Company will incur as a result of
health care reform legislation may adversely affect the Company's profit margins
or the demand for the Company's services; the possibility that the Company's
computer and communications hardware and software systems could be damaged or
their service interrupted or the Company could experience a cybersecurity
breach; and the possibility that the Company may fail to maintain adequate
financial and management controls and as a result suffer errors in its financial
reporting. Additionally, with respect to Protiviti, other risks and
uncertainties include the fact that future success will depend on its ability to
retain employees and attract clients; there can be no assurance that there will
be ongoing demand for Sarbanes-Oxley or other regulatory compliance services;
failure to produce projected revenues could adversely affect financial results;
and there is the possibility of involvement in litigation relating to prior or
current transactions or activities. Because long-term contracts are not a
significant part of the Company's business, future results cannot be reliably
predicted by considering past trends or extrapolating past results.
Executive Overview
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 the U.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

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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% in December 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 ended September 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 ended December 31, 2019. There were no
material changes to the Company's critical accounting policies or estimates for
the nine months ended September 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, the District 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

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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 the United States of America ("GAAP") and the rules of the SEC. To help readers understand the Company's financial performance, the Company supplements its GAAP financial results with the following non-GAAP measures: combined segment income and as adjusted revenue growth rates.

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 Ended September 30, 2020 and 2019
Revenues. The Company's revenues were $1.19 billion for the three months ended
September 30, 2020, decreasing by 23.3% compared to $1.55 billion for the three
months ended September 30, 2019. Revenues from foreign operations represented
22% of total revenues for both the three months ended September 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 ended September 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
ended September 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 ended September 30, 2020, decreasing by 30.1% compared to revenues of
$1.12 billion for the three months ended September 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

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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 the U.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
ended September 30, 2020, decreasing by 35.2% compared to revenues of $135
million for the three months ended September 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 the U.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 ended September 30, 2020, increasing by 7.4% compared to revenues
of $299 million for the three months ended September 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 the U.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 the
U.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 ended
September 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 $467 million for the three months ended September 30, 2020, decreasing by 27.7% compared to $646 million for the three months ended September 30, 2019. Contributing factors for each reportable segment are discussed below in further detail.


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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 ended September 30, 2020, decreasing 30.8% compared to $424 million for
the three months ended September 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 ended
September 30, 2020, decreasing 35.2% from $134 million for the three months
ended September 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 ended September 30, 2020, decreasing 1.1% compared
to $88 million for the three months ended September 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 ended September 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 ended
September 30, 2020, decreasing 19.4% from $485 million for the three months
ended September 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 ended
September 30, 2020, decreasing 16.6% from $324 million for the three months
ended September 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 ended September 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 ended
September 30, 2020, decreasing by 29.7% compared to $113 million for the three
months ended September 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 ended September 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.

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Selling, general and administrative expenses for the Company's risk consulting and internal audit services division were $42 million for the three months ended September 30, 2020, decreasing by 14.2% compared to $48 million for the three months ended September 30, 2019. As a percentage of revenues, selling, general and administrative expenses for risk consulting and internal audit services were 13.0% in the third quarter of 2020, down from 16.2% in the third quarter of 2019 due primarily to a decrease in variable overhead costs and positive leverage on revenues.

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 $26 million for the three months ended September 30, 2020, and $1 million for the three months ended September 30, 2019. The increase in income from trust investments was due to positive market returns in 2020.

Income before income taxes and Segment Income. The Company's total income before income taxes was $103 million, or 8.6% of revenues, for the three months ended September 30, 2020, down from $164 million, or 10.6% of revenues, for the three months ended September 30, 2019. Combined segment income was $103 million, or 8.6% of revenues, for the three months ended September 30, 2020, down from $163 million, or 10.5% of revenues, for the three months ended September 30, 2019. The following table provides a reconciliation of the non-GAAP combined segment income to reported income before income taxes for the three months ended September 30, 2020 and 2019 (in thousands):

                                          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 $44 million, or 5.6% of applicable revenues, down from $101 million, or 9.1% of applicable revenues, in the third quarter of 2019. For the Company's permanent placement staffing division, segment income was $10 million, or 11.6% of applicable revenues, compared to segment income of $22 million, or 16.2% of applicable revenues, in the third quarter of 2019. For the Company's risk consulting and internal audit services division, segment income was $49 million, or 15.2% of applicable revenues, compared to an segment income of $40 million, or 13.3% of applicable revenues, in the third quarter of 2019. Provision for income taxes. The provision for income taxes was 26.1% and 28.5% for the three months ended September 30, 2020 and 2019, respectively. The lower third-quarter tax rate is primarily due to actual non-deductible expenses and other items in our federal tax return coming in more favorably than originally estimated.


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Nine Months Ended September 30, 2020 and 2019
Revenues. The Company's revenues were $3.80 billion for the nine months ended
September 30, 2020, decreasing by 16.1% compared to $4.54 billion for the nine
months ended September 30, 2019. Revenues from foreign operations represented
22% of total revenues for the nine months ended September 30, 2020, down from
23% of total revenues for the nine months ended September 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 ended September 30, 2020, decreasing by 20.5% compared to revenues of
$3.31 billion for the nine months ended September 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 the U.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
ended September 30, 2020, decreasing by 31.5% compared to revenues of $407
million for the nine months ended September 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 the U.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 ended September 30, 2020, increasing by 9.1% compared to revenues of
$824 million for the nine months ended September 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 ended September 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 the U.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.

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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 September 30, 2020, is presented in the following table:

                                                  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 ended September 30, 2020, decreasing by 20.7% compared to $1.89 billion
for the nine months ended September 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
ended September 30, 2020, decreasing 21.6% compared to $1.26 billion for the
nine months ended September 30, 2019. As a percentage of revenues, gross margin
for temporary and consultant staffing was 37.5% for the nine months ended
September 30, 2020, down from 38.0% for the nine months ended September 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 ended
September 30, 2020, decreasing 31.5% from $406 million for the nine months ended
September 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 ended September 30, 2020, increasing 4.3% compared
to $225 million for the nine months ended September 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 ended
September 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.

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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 $1.24 billion for the nine months ended September 30, 2020, decreasing 14.7% from $1.45 billion for the nine months ended September 30, 2019. As a percentage of revenues, the Company's selling, general and administrative expenses were 32.6% for the first three quarters of 2020, up from 32.1% the first three quarters 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 $845 million for the nine months ended September 30, 2020, decreasing 13.1% from $972 million for the nine months ended September 30, 2019. This includes deferred compensation expense related to changes in the fair value of participants' accounts of $26 million and $28 million for the nine months ended September 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 32.2% in the first three quarters of 2020, up from 29.4% in the first three quarters of 2019 due primarily to negative leverage as revenues decreased in response to financial conditions during the first three quarters of 2020. Selling, general and administrative expenses for the Company's permanent placement staffing division were $260 million for the nine months ended September 30, 2020, decreasing by 23.7% compared to $341 million for the nine months ended September 30, 2019. This includes deferred compensation expense related to changes in the fair value of participants' accounts of $3 million for both the nine months ended September 30, 2020 and 2019. 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 93.3% in the first three quarters of 2020, up from 83.8% in the first three quarters of 2019 due primarily to negative leverage as revenues decreased in response to financial conditions during the first three quarters of 2020. Selling, general and administrative expenses for the Company's risk consulting and internal audit services division were $135 million for the nine months ended September 30, 2020, decreasing by 3.9% compared to $141 million for the nine months ended September 30, 2019. As a percentage of revenues, selling, general and administrative expenses for risk consulting and internal audit services were 15.1% in the first three quarters of 2020, down from 17.1% in the first three quarters of 2019 due primarily to a decrease in variable overhead costs. 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 $35 million for both nine months ended September 30, 2020 and September 30, 2019. Income Before Income Taxes and Segment Income. The Company's total income before income taxes was $292 million, or 7.7% of revenues, for the nine months ended September 30, 2020, down from $471 million or 10.4% of revenues, for the nine months ended September 30, 2019. Combined segment income was $292 million, or 7.7% of revenues, for the nine months ended September 30, 2020, down from $469 million or 10.3% of revenues, for the nine months ended September 30, 2019.







                                       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 September 30, 2020 and 2019 (in thousands):

                                              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 ended September 30, 2020 and 2019, respectively.
Liquidity and Capital Resources
The change in the Company's liquidity during the nine months ended September 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 at September 30,
2020 and 2019, respectively. Operating activities provided $565 million during
the nine months ended September 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 ended
September 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 ended September 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 ended September 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 ended
September 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 ended September 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 ended
September 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 ended September 30, 2019, was $324
million. This included repurchases of $214 million in common stock and $110
million in dividends paid to stockholders.
As of September 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 October 29, 2020, the Company authorized the repurchase, from time to time, of up to an additional 10 million shares of the Company's common stock on the open market or in privately negotiated transactions, depending on market conditions. During the nine months ended September 30, 2020 and 2019, the Company repurchased 1.4 million shares, at a cost of $75 million, and 3.3 million shares, at a cost of $191 million, on the open market, respectively. Additional stock repurchases were made in connection with employee stock plans, whereby Company shares were tendered by employees for the payment of exercise price and applicable statutory withholding taxes. During the nine months ended September 30, 2020 and 2019, such repurchases totaled 0.3 million shares, at a cost of $12 million, and 0.3 million shares, at a cost of $17 million, respectively. Repurchases of shares have been funded with cash generated from operations. The Company's working capital at September 30, 2020, included $587 million in cash and cash equivalents and $690 million in accounts receivable, both of which will be a significant source of ongoing liquidity and financial resilience. The Company expects that internally generated cash will be sufficient to support the working capital needs of the Company, the Company's fixed payments, dividends, and other obligations on both a short-term and long-term basis.


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.
In May 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 of
September 30, 2020. There were no borrowings under the 364-Day Credit Agreement
as of September 30, 2020.
On October 29, 2020, the Company announced a quarterly dividend of $.34 per
share to be paid to all shareholders of record as of November 25, 2020. The
dividend will be paid on December 15, 2020.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
In March 2020, the World 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 the U.S. and are denominated in local currencies, the Company is exposed
to the impact of foreign currency fluctuations. The Company's exposure to
foreign currency exchange rates relates primarily to the Company's foreign
subsidiaries. Exchange rates impact the U.S. dollar value of the Company's
reported revenues, expenses, earnings, assets and liabilities.
For the nine months ended September 30, 2020, approximately 22% of the Company's
revenues were generated outside of the United States. These operations transact
business in their functional currency, which is the same as their local
currency. As a result, fluctuations in the value of foreign currencies against
the U.S. dollar, particularly the Canadian dollar, British pound, Euro, and
Australian dollar, have an impact on the Company's reported results. Under GAAP,
revenues and expenses denominated in foreign currencies are translated into U.S.
dollars at the monthly average exchange rates prevailing during the period.
Consequently, as the value of the U.S. dollar changes relative to the currencies
of the Company's non-U.S. markets, the Company's reported results vary.
During the first nine months of 2020, the U.S. dollar fluctuated, but generally
strengthened, against the primary currencies in which the Company conducts
business, compared to one year ago. Currency exchange rates had the effect of
decreasing reported net service revenues by $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 the U.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 ended October 31, 2020, the U.S. dollar has strengthened
against the Euro and Australian dollar and weakened against the Canadian dollar
and British pound since September 30, 2020. If currency exchange rates were to
remain at October 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 the U.S. dollar amount of the
Company's stockholders' equity. The assets and liabilities of the Company's
non-U.S. subsidiaries are translated into U.S. dollars at the exchange rates in
effect at period end. The resulting translation adjustments are recorded in
stockholders' equity as a component of accumulated other comprehensive income.
Although currency fluctuations impact the Company's reported results and
shareholders' equity, such fluctuations generally do not affect cash flow or
result in actual economic gains or losses. The Company generally has few
cross-border transfers of funds, except for transfers to the U.S. for payment of
intercompany loans, working capital loans made between the U.S. and the
Company's foreign subsidiaries, and dividends from the Company's foreign
subsidiaries.
ITEM 4. Controls and Procedures
Management, including the Company's 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 the Securities and Exchange Commission and that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
Company's management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure.

© Edgar Online, source Glimpses

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