Robert Half Inc 10-Q for FY2020 Q3
Robert Half Inc. (RHI)
10-Q
2020-11-02
For: 2020-09-30
View Original
Added on
April 09, 2026
About this 10-Q
Robert Half Inc filed this 10-Q on November 2, 2020, covering the quarter ended September 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.19B
- down 23.3% from $1.55B a year earlier
- Net income
- $75.75M
- down 35.4% from net income of $117.18M a year earlier
- Diluted EPS
- $0.67
- down 33.7% from $1.01 a year earlier
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
______________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
FOR THE QUARTERLY PERIOD ENDED September 30, 2020
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
FOR THE TRANSITION PERIOD FROM to .
Commission File Number 1-10427
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (zip-code) | ||||||||||
Registrant’s telephone number, including area code: (650 ) 234-6000
| Securities registered pursuant to Section 12(b) of the Act | ||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | |||||||||||||||||||
| Smaller reporting company | Emerging growth company | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of October 31, 2020:
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROBERT HALF INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
(in thousands, except share amounts)
| September 30, 2020 | December 31, 2019 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Right-of-use assets | |||||||||||
| Other intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Noncurrent deferred income taxes | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Accrued payroll and benefit costs | |||||||||||
| Income taxes payable | |||||||||||
| Notes payable, current | |||||||||||
| Current operating lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Notes payable, less current portion | |||||||||||
| Noncurrent operating lease liabilities | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and Contingencies (Note I) | |||||||||||
| STOCKHOLDERS’ EQUITY | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ outstanding | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income (loss) | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
are an integral part of these financial statements.
2
ROBERT HALF INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Service revenues | $ | $ | $ | $ | |||||||||||||||||||
Costs of services | |||||||||||||||||||||||
| Gross margin | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
Income from investments held in employee deferred compensation trusts (which is completely offset by related costs and expenses -Notes A and H) | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Interest income, net | ( | ( | ( | ( | |||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Shares: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Dividends declared per share | $ | $ | $ | $ | |||||||||||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
are an integral part of these financial statements.
3
ROBERT HALF INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS): | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | ( | ( | |||||||||||||||||||||
| Total comprehensive income (loss) | $ | $ | $ | $ | |||||||||||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
are an integral part of these financial statements.
4
ROBERT HALF INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except per share amounts)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | |||||||||||||||||||||||||||||||
| Shares | Par Value | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Adoption of accounting pronouncement | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
Dividends declared ($ | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net issuances of restricted stock | ( | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
Balance at March 31, 2020 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | |||||||||||||||||||||||||||||||
Dividends declared ($ | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net issuances of restricted stock | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | ( | ( | |||||||||||||||||||||||||||||||
Balance at June 30, 2020 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | |||||||||||||||||||||||||||||||
Dividends declared ($ | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net issuances of restricted stock | ( | — | — | — | — | ||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
Balance at September 30, 2020 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
are an integral part of these financial statements.
5
ROBERT HALF INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)-(Continued)
(in thousands, except per share amounts)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | |||||||||||||||||||||||||||||||
| Shares | Par Value | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
Dividends declared ($ | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net issuances of restricted stock | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
Balance at March 31, 2019 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | |||||||||||||||||||||||||||||||
Dividends declared ($ | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net issuances of restricted stock | ( | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
Dividends declared ($ | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net issuances of restricted stock | ( | — | — | — | — | ||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
Balance at September 30, 2019 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
are an integral part of these financial statements.
6
ROBERT HALF INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Allowance for credit losses | |||||||||||
| Depreciation | |||||||||||
| Amortization of cloud computing implementation costs | |||||||||||
| Amortization of intangible assets | |||||||||||
Realized and unrealized gain from investments held in employee deferred compensation trusts | ( | ( | |||||||||
| Stock-based compensation | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Capitalized cloud computing implementation costs | ( | ( | |||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Accrued payroll and benefit cost | |||||||||||
| Income taxes payable | ( | ||||||||||
| Other assets and liabilities, net | |||||||||||
| Net cash flows provided by operating activities | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Investments in employee deferred compensation trusts | ( | ( | |||||||||
| Proceeds from employee deferred compensation trust redemptions | |||||||||||
| Net cash flows used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Repayment of notes payable | ( | ( | |||||||||
| Repurchases of common stock | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Net cash flows used in financing activities | ( | ( | |||||||||
| Effect of exchange rate fluctuations | ( | ||||||||||
| Change in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |||||||||||
| Non-cash items: | |||||||||||
| Stock repurchases awaiting settlement | $ | $ | |||||||||
| Fund exchanges within employee deferred compensation trusts | $ | $ | |||||||||
The accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
are an integral part of these financial statements.
7
ROBERT HALF INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2020
Note A—Summary of Significant Accounting Policies
We are continuing to monitor the efforts to mitigate the spread of coronavirus (“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 ongoing economic disruption, we continue to 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.
8
ROBERT HALF INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
September 30, 2020
The following table presents the Company’s income from investments held in employee deferred compensation trusts (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||
| Dividend income | $ | $ | $ | $ | |||||||||||||||||||||||||
| Realized and unrealized gain | |||||||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||
Fair Value of Financial Instruments. Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market to measure fair value, summarized as follows:
Level 1: observable inputs for identical assets or liabilities, such as quoted prices in active markets
Level 2: inputs other than the quoted prices in active markets that are observable either directly or indirectly
Level 3: unobservable inputs in which there is little or no market data, which requires management’s best
estimates and assumptions that market participants would use in pricing the asset or liability
9
ROBERT HALF INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
September 30, 2020
The following table sets forth the composition of the underlying assets which comprise the Company’s deferred compensation trust assets (in thousands):
| Fair Value Measurements Using | |||||||||||||||||||||||
Balance at September 30, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Money market funds | $ | $ | |||||||||||||||||||||
| Mutual funds - bond | |||||||||||||||||||||||
| Mutual funds - stock | |||||||||||||||||||||||
| Mutual funds - blend | |||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
| Fair Value Measurements Using | |||||||||||||||||||||||
Balance at December 31, 2019 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Money market funds | $ | $ | |||||||||||||||||||||
| Mutual funds - bond | |||||||||||||||||||||||
| Mutual funds - stock | |||||||||||||||||||||||
| Mutual funds - blend | |||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
Certain items such as goodwill and other intangible assets are recognized or disclosed at fair value on a non-recurring basis. The Company determines the fair value of these items using level 3 inputs. There are inherent limitations when estimating the fair value of financial instruments, and the fair values reported are not necessarily indicative of the amounts that would be realized in current market transactions.
10
ROBERT HALF INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
September 30, 2020
The following table sets forth the activity in the allowance for credit losses from December 31, 2019, through September 30, 2020 (in thousands):
| Allowance for Credit Losses | |||||
Balance as of December 31, 2019 | $ | ||||
| Adoption of accounting pronouncement | |||||
Balance as of January 1, 2020 | $ | ||||
| Charges to expense | |||||
| Deductions | ( | ||||
| Other, including translation adjustments | ( | ||||
Balance as of September 30, 2020 | $ | ||||
Note B—New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Current Expected Credit Losses Model. In June 2016, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance amending how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model, which is a new impairment model based on expected losses. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2019. The Company has adopted the new guidance prospectively as of January 1, 2020, and the impact of adoption was not material to its financial statements.
Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued authoritative guidance to simplify the goodwill impairment testing process. The new standard eliminates Step 2 of the goodwill impairment test. If a company determines in Step 1 of the goodwill impairment test that the carrying value of goodwill is greater than the fair value, an impairment in that amount should be recorded to the income statement, rather than proceeding to Step 2. The new guidance is effective for the Company for fiscal years beginning after December 15, 2019, although early adoption is permitted. The Company has adopted the new guidance prospectively as of January 1, 2020, and the impact of adoption was not material to its financial statements.
11
ROBERT HALF INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
September 30, 2020
Recently Issued Accounting Pronouncements Not Yet Adopted
Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company believes this guidance will not have a material impact on its financial statements.
Note C—Revenue Recognition
The Company derives its revenues from three segments: temporary and consultant staffing, permanent placement staffing, and risk consulting and internal audit services. Revenues are recognized when promised goods or services are delivered to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Service revenues as presented in the unaudited Condensed Consolidated Statements of Operations represent services rendered to customers less variable consideration, such as sales adjustments and allowances. Reimbursements, including those related to travel and out-of-pocket expenses, are also included in service revenues and equivalent amounts of reimbursable expenses are included in costs of services.
Temporary and consultant staffing revenues. Temporary and consultant staffing revenues from contracts with customers are recognized in the amount to which the Company has a right to invoice, when the services are rendered by the Company’s engagement professionals. The substantial majority of engagement professionals placed on assignment by the Company are the Company’s legal employees while they are working on assignments. The Company pays all related costs of employment, including workers’ compensation insurance, state and federal unemployment taxes, social security and certain fringe benefits. The Company assumes the risk of acceptability of its employees to its customers.
The Company records temporary and consultant staffing revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. The Company has concluded that gross reporting is appropriate because the Company (i) has the risk of identifying and hiring qualified employees, (ii) has the discretion to select the employees and establish their price and duties and (iii) bears the risk for services that are not fully paid for by customers. Fees paid to Time Management or Vendor Management service providers selected by clients are recorded as a reduction of revenues, as the Company is not the primary obligor with respect to those services.
Permanent placement staffing revenues. Permanent placement staffing revenues from contracts with customers are primarily recognized when employment candidates accept offers of permanent employment. The Company has a substantial history of estimating the financial impact of permanent placement candidates who do not remain with its clients through the 90 -day guarantee period. These amounts are established based primarily on historical data and are recorded as liabilities. Fees to clients are generally calculated as a percentage of the new employee’s annual compensation. No fees for permanent placement services are charged to employment candidates.
12
ROBERT HALF INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
September 30, 2020
Risk consulting and internal audit services revenues. Risk consulting and internal audit services are generally provided on a time-and-material basis or fixed-fee basis. Revenues earned under time-and-material arrangements and fixed-fee arrangements are recognized using a proportional performance method. Revenue is measured using cost incurred relative to total estimated cost for the engagement to measure progress towards satisfying the Company’s performance obligations. Cost incurred represents work performed and thereby best depicts the transfer of control to the customer. Risk consulting and internal audit services generally contain one or more performance obligation(s) which are satisfied over a period of time. Revenues are recognized over time as the performance obligations are satisfied, because the services provided do not have any alternative use to the Company, and contracts generally include language giving the Company an enforceable right to payment for services provided to date.
The Company periodically evaluates the need to provide for any losses on these projects, and losses are recognized when it is probable that a loss will be incurred.
The following table presents the Company’s service revenues disaggregated by line of business (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||
| Accountemps | $ | $ | $ | $ | |||||||||||||||||||||||||
| OfficeTeam | |||||||||||||||||||||||||||||
| Robert Half Technology | |||||||||||||||||||||||||||||
| Robert Half Management Resources | |||||||||||||||||||||||||||||
| Elimination of intersegment revenues (a) | ( | ( | ( | ( | |||||||||||||||||||||||||
| Temporary and consulting staffing | |||||||||||||||||||||||||||||
| Permanent placement staffing | |||||||||||||||||||||||||||||
| Risk consulting and internal audit services | |||||||||||||||||||||||||||||
| Service revenues | $ | $ | $ | $ | |||||||||||||||||||||||||
(a) Service revenues for Accountemps, OfficeTeam, Robert Half Technology and Robert Half Management Resources include intersegment revenues, which represent revenues from services provided to the Company’s risk consulting and internal audit services segment in connection with the Company’s blended business solutions. Intersegment revenues for each line of business are aggregated and then eliminated as a single line.
Payment terms in the Company’s contracts vary by the type and location of the Company’s customer and the services offered. The term between invoicing and when payment is due is not significant.
Contracts with multiple performance obligations are recognized as performance obligations are delivered, and contract value is allocated based on relative stand-alone selling values of the services and products in the arrangement. As of September 30, 2020, aggregate transaction price allocated to the performance obligations that are unsatisfied for contracts with an expected duration of greater than one year was $108.2 million. Of this amount, $99.5 million is expected to be recognized within the next twelve months . As of September 30, 2019, aggregate transaction price allocated to the performance obligations that are unsatisfied for contracts with an expected duration of greater than one year was $76.9 million.
13
ROBERT HALF INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
September 30, 2020
Contract liabilities are recorded when cash payments are received or due in advance of performance and are reflected in accounts payable and accrued expenses on the unaudited Condensed Consolidated Statement of Financial Position. The following table sets forth the activity in contract liabilities from December 31, 2018, through September 30, 2020 (in thousands):
| Contract Liabilities | |||||||||||||||||
Balance as of December 31, 2018 | $ | ||||||||||||||||
| Payments in advance of satisfaction of performance obligations | |||||||||||||||||
| Revenue recognized | ( | ||||||||||||||||
| Other, including translation adjustments | ( | ||||||||||||||||
Balance as of December 31, 2019 | $ | ||||||||||||||||
| Payments in advance of satisfaction of performance obligations | |||||||||||||||||
| Revenue recognized | ( | ||||||||||||||||
| Other, including translation adjustments | |||||||||||||||||
Balance as of September 30, 2020 | $ | ||||||||||||||||
Note D—Other Current Assets
Other current assets consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||||||||
| Deferred compensation trust assets | $ | $ | |||||||||||||||
| Prepaid expenses | |||||||||||||||||
| Other | |||||||||||||||||
| Other current assets | $ | $ | |||||||||||||||
Deferred compensation trust assets were $445.7 million and $398.4 million as of September 30, 2020, and December 31, 2019, respectively. These assets include publicly traded mutual funds and money market funds used to satisfy the Company’s liabilities under its deferred compensation plans.
Note E—Property and Equipment, Net
Property and equipment consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||||||||
| Computer hardware | $ | $ | |||||||||||||||
| Computer software | |||||||||||||||||
| Furniture and equipment | |||||||||||||||||
| Leasehold improvements | |||||||||||||||||
| Property and equipment, cost | |||||||||||||||||
| Accumulated depreciation | ( | ( | |||||||||||||||
| Property and equipment, net | $ | $ | |||||||||||||||
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ROBERT HALF INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
September 30, 2020
Note F—Leases
The Company has operating leases for corporate and field offices, and certain equipment. The Company’s leases have remaining lease terms of less than 1 year to 10 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year. Operating lease expenses were $20.6 million and $60.5 million for the three and nine months ended September 30, 2020, respectively, $19.7 million and $57.3 million for the three and nine months ended September 30, 2019, respectively.
Supplemental cash flow information related to leases consisted of the following (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash paid for operating lease liabilities | $ | $ | |||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | $ | |||||||||
Supplemental balance sheet information related to leases consisted of the following:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Weighted average remaining lease term for operating leases | |||||||||||
| Weighted average discount rate for operating leases | % | % | |||||||||
Future minimum lease payments under non-cancellable leases as of September 30, 2020, were as follows (in thousands):
2020 (excluding the nine months ended September 30, 2020) | $ | ||||
| 2021 | |||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| Thereafter | |||||
| Less: Imputed interest | ( | ||||
| Present value of operating lease liabilities (a) | $ | ||||
(a) Includes current portion of $76.6 million for operating leases.
As of September 30, 2020, the Company had no material future minimum lease obligations that had not yet commenced.
15
ROBERT HALF INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
September 30, 2020
Note G—Goodwill
The following table sets forth the activity in goodwill from December 31, 2019, through September 30, 2020 (in thousands):
| Goodwill | |||||||||||||||||||||||
| Temporary and consultant staffing | Permanent placement staffing | Risk consulting and internal audit services | Total | ||||||||||||||||||||
Balance as of December 31, 2019 | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ( | |||||||||||||||||||
Balance as of September 30, 2020 | $ | $ | $ | $ | |||||||||||||||||||
Note H—Accrued Payroll and Benefit Costs
Accrued payroll and benefit costs consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||||||||
| Employee deferred compensation plans | $ | $ | |||||||||||||||
| Payroll and benefits | |||||||||||||||||
| Payroll taxes | |||||||||||||||||
| Workers’ compensation | |||||||||||||||||
| Accrued payroll and benefit costs | $ | $ | |||||||||||||||
The Company, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, deferred paying $68.3 million of applicable payroll taxes as of September 30, 2020, which is included in other liabilities in the unaudited Condensed Consolidated Statements of Financial Position.
The Company provides various qualified defined contribution 401(k) plans covering eligible employees. The plans offer a savings feature with the Company matching employee contributions. Assets of these plans are held by an independent trustee for the sole benefit of participating employees. Nonqualified plans are provided for employees not eligible for the qualified plans. These plans include provisions for salary deferrals and Company matching and discretionary contributions. The asset value of the nonqualified plans was $445.7 million and $398.4 million as of September 30, 2020, and December 31, 2019, respectively, and are included in other current assets in the unaudited Condensed Consolidated Statements of Financial Position. The Company holds these assets to satisfy the Company’s liabilities under its deferred compensation plans.
The liability value for the nonqualified plans was $465.3 million and $421.2 million as of September 30, 2020, and December 31, 2019, respectively, and is included in accrued payroll and benefit costs in the unaudited Condensed Consolidated Statements of Financial Position. Deferred compensation plan and other benefits related to the Company’s executive chairman were $88.6 million and $91.8 million as of September 30, 2020, and December 31, 2019, respectively, and are included in the liability value for the nonqualified plans.
16
ROBERT HALF INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
September 30, 2020
The following table presents the Company’s compensation expense related to its qualified defined contribution plans and nonqualified plans (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||
| Contribution expense | $ | $ | $ | $ | |||||||||||||||||||||||||
Deferred compensation expense related to changes in the fair value of trust assets | |||||||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||
The Company has statutory defined contribution plans and defined benefit plans outside the U.S., which are not material.
Note I—Commitments and Contingencies
On March 23, 2015, Plaintiff Jessica Gentry, on her own behalf and on behalf of a putative class of allegedly similarly situated individuals, filed a complaint against the Company in the Superior Court of California, San Francisco County, which was subsequently amended on October 23, 2015. The complaint alleges that a putative class of current and former employees of the Company working in California since March 13, 2010 were denied compensation for the time they spent interviewing “for temporary and permanent employment opportunities” as well as performing activities related to the interview process. Gentry seeks recovery on her own behalf and on behalf of the putative class in an unspecified amount for this allegedly unpaid compensation. Gentry also seeks recovery of an unspecified amount for the alleged failure of the Company to provide her and the putative class with accurate wage statements. Gentry also seeks an unspecified amount of other damages, attorneys’ fees, and statutory penalties, including penalties for allegedly not paying all wages due upon separation to former employees and statutory penalties on behalf of herself and other allegedly “aggrieved employees” as defined by California’s Labor Code Private Attorney General Act (“PAGA”). On January 4, 2016, the Court denied a motion by the Company to compel all of Gentry’s claims, except the PAGA claim, to individual arbitration. At this stage of the litigation, it is not feasible to predict the outcome of or a range of loss, should a loss occur, from this proceeding and, accordingly, no amounts have been provided in the Company’s Financial Statements. The Company believes it has meritorious defenses to the allegations and the Company intends to continue to vigorously defend against the litigation.
On April 6, 2018, Plaintiff Shari Dorff, on her own behalf and on behalf of a putative class of allegedly similarly situated individuals, filed a complaint against the Company in the Superior Court of California, County of Los Angeles. In addition to certain claims individual to Plaintiff Dorff, the complaint alleges that salaried recruiters based in California have been misclassified as exempt employees and seeks an unspecified amount for: unpaid wages resulting from such alleged misclassification; alleged failure to provide a reasonable opportunity to take meal periods and rest breaks; alleged failure to pay wages on a timely basis both during employment and upon separation; alleged failure to comply with California requirements regarding wage statements and record-keeping; and alleged improper denial of expense reimbursement. Plaintiff Dorff also seeks an unspecified amount of other damages, attorneys’ fees, and penalties, including but not limited to statutory penalties on behalf of herself and other allegedly “aggrieved employees” as defined by PAGA. At this stage of the litigation, it is not feasible to predict the outcome of or a range of loss, should a loss occur, from this proceeding and, accordingly, no amounts have been provided in the Company’s Financial Statements. The Company believes it has meritorious defenses to the allegations and the Company intends to continue to vigorously defend against the litigation.
The Company is involved in a number of other lawsuits arising in the ordinary course of business. While management does not expect any of these other matters to have a material adverse effect on the Company’s results of operations, financial position or cash flows, litigation is subject to certain inherent uncertainties.
17
ROBERT HALF INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
September 30, 2020
Note J—Stockholders’ Equity
Stock Repurchase Program. 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 conditions. The number and the cost of common stock shares repurchased during the nine months ended September 30, 2020 and 2019, are reflected in the following table (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Common stock repurchased (in shares) | |||||||||||
| Common stock repurchased | $ | $ | |||||||||
Additional stock repurchases were made in connection with employee stock plans, whereby Company shares were tendered by employees for the payment of applicable statutory withholding taxes. The number and the cost of repurchases related to employee stock plans made during the nine months ended September 30, 2020 and 2019, are reflected in the following table (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Repurchases related to employee stock plans (in shares) | |||||||||||
| Repurchases related to employee stock plans | $ | $ | |||||||||
The repurchased shares are held in treasury and are presented as if constructively retired. Treasury stock is accounted for using the cost method. Repurchase activity for the three and nine months ended September 30, 2020 and 2019, is presented in the unaudited Condensed Consolidated Statements of Stockholders’ Equity.
Repurchases of shares and issuances of dividends are applied first to the extent of retained earnings and any remaining amounts are applied to additional paid-in capital.
18
ROBERT HALF INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
September 30, 2020
Note K—Net Income Per Share
The calculation of net income per share for the three and nine months ended September 30, 2020 and 2019, is reflected in the following table (in thousands, except per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Basic: | |||||||||||||||||||||||
Weighted average shares | |||||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||
Weighted average shares | |||||||||||||||||||||||
| Dilutive effect of potential common shares | |||||||||||||||||||||||
| Diluted weighted average shares | |||||||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
Note L—Business Segments
The Company has three reportable segments: temporary and consultant staffing, permanent placement staffing, and risk consulting and internal audit services. Operating segments are defined as components of the Company for which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The temporary and consultant staffing segment provides specialized staffing in the accounting and finance, administrative and office, information technology, legal, advertising, marketing and web design fields. The permanent placement staffing segment provides full-time personnel in the accounting, finance, administrative and office, and information technology fields. The risk consulting and internal audit services segment provides business and technology risk consulting and internal audit services.
The accounting policies of the segments are set forth in Note A—“Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The Company evaluates performance based on income before net interest income, intangible assets amortization expense, and income taxes.
19
ROBERT HALF INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
September 30, 2020
The following table provides a reconciliation of service revenues and segment income by reportable segment to consolidated results for the three and nine months ended September 30, 2020 and 2019 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Service revenues | |||||||||||||||||||||||
| Temporary and consultant staffing | $ | $ | $ | $ | |||||||||||||||||||
| Permanent placement staffing | |||||||||||||||||||||||
| Risk consulting and internal audit services | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Segment income | |||||||||||||||||||||||
| Temporary and consultant staffing | $ | $ | $ | $ | |||||||||||||||||||
| Permanent placement staffing | |||||||||||||||||||||||
| Risk consulting and internal audit services | |||||||||||||||||||||||
| Combined segment income | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Interest income, net | ( | ( | ( | ( | |||||||||||||||||||
| Income before income taxes | $ | $ | $ | $ | |||||||||||||||||||
Service revenues presented above are shown net of eliminations of intersegment revenues. Intersegment revenues between temporary and consulting staffing segment and risk consulting and internal audit services segment were $59.8 million and $147.6 million for the three and nine months ended September 30, 2020, respectively, and $46.5 million and $121.6 million for the three and nine months ended September 30, 2019, respectively.
Note M—Subsequent Events
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. The authorization is in addition to the approximately 1.0 million shares remaining under the existing repurchase program. There is no guarantee as to whether, when, or how many shares the Company will repurchase, and the Company may discontinue the repurchase program at any time.
On October 29, 2020, the Company announced the following:
| Quarterly dividend per share | $ | ||||
| Declaration date | October 29, 2020 | ||||
| Record date | November 25, 2020 | ||||
| Payment date | December 15, 2020 | ||||
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
21
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
22
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.
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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
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
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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.
PART II—OTHER INFORMATION
ITEM 1. Legal Proceedings
There have been no material developments with regard to any of the legal proceedings previously disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2019.
ITEM 1A. Risk Factors
Except for the modifications and additions to our risk factors appearing in our Quarterly Report on Form 10-Q for the period ended March 31, 2020, there have not been any material changes with regard to the risk factors previously disclosed in our Annual Report.
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Maximum Number of Shares that May Yet Be Purchased Under Publicly Announced Plans (c) | |||||||||||||||||||||||
| July 1, 2020 to July 31, 2020 | 1,698 | (a) | $ | 51.50 | — | 1,470,655 | ||||||||||||||||||||
| August 1, 2020 to August 31, 2020 | — | $ | — | — | 1,470,655 | |||||||||||||||||||||
| September 1, 2020 to September 30, 2020 | 450,437 | (b) | $ | 52.37 | 448,873 | 1,021,782 | ||||||||||||||||||||
| Total July 1, 2020 to September 30, 2020 | 452,135 | 448,873 | ||||||||||||||||||||||||
(a)Represents shares repurchased in connection with employee stock plans, whereby Company shares were tendered by employees for the payment of applicable withholding taxes.
(b)Includes 1,564 shares repurchased in connection with employee stock plans, whereby Company shares were tendered by employees for the payment of applicable withholding taxes.
(c)Commencing in October 1997, the Company’s Board of Directors has, at various times, authorized the repurchase, from time to time, of the Company’s common stock on the open market or in privately negotiated transactions depending on market conditions. Since plan inception, a total of 118,000,000 shares have been authorized for repurchase of which 116,978,218 shares have been repurchased as of September 30, 2020. As disclosed in Note M and Item 5, on October 29, 2020, an additional 10,000,000 shares have been authorized for repurchase bringing the total repurchase authorization since plan inception to 128,000,000.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosure
Not applicable.
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ITEM 5. Other Information
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. The authorization is in addition to the approximately 1.0 million shares remaining under the existing repurchase program. There is no guarantee as to whether, when, or how many shares the Company will repurchase, and the Company may discontinue the repurchase program at any time.
ITEM 6. Exhibits
| 3.1 | Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2009. | |||||||
| 3.2 | Amended and Restated By-Laws, incorporated by reference to Exhibit 3.2 to Registrant’s Current Report on Form 8-K dated February 12, 2020. | |||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101.1 | Part I, Item 1 of this Form 10-Q formatted in Inline XBRL. | |||||||
| 104 | Cover page of this Form 10-Q formatted in Inline XBRL and contained in Exhibit 101. | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ROBERT HALF INTERNATIONAL INC. (Registrant) | |||||
/S/ Michael C. Buckley | |||||
Michael C. Buckley Executive Vice President and Chief Financial Officer (Principal Financial Officer and duly authorized signatory) | |||||
Date: November 2, 2020
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