Item 7. Management’s Discussion and Analysis
Item 7. 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 contract 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
The Company’s financial results during 2020 were affected by the economic crisis resulting from the COVID-19 pandemic, primarily in the Company’s staffing business. Annual service revenues reached $5.11 billion in 2020, a decrease of 15.9% from the prior year. Full-year 2020 net income decreased to $306 million and diluted net income per share decreased to $2.70. Both the temporary and consultant staffing segment and the permanent placement staffing segment experienced revenue declines, while revenue in the risk consulting and internal audit services segment increased 11.8% in 2020 compared to last year.
Demand for the Company’s contract 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. Although 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. We believe that the Company is well positioned to participate fully as broader economic growth returns. Despite continued general economic declines, there is still strong competition for skilled talent, which increases the Company’s value to clients.
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.
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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.
Protiviti continued its record of multi-year double-digit revenue growth, with particular strength in its technology consulting practice, and it continues to benefit fro m multiple solutions offerings and pipeline, including particularly robust growth from the blended solutions with the Company’s temporary and consultant staffing operations.
The United States economic backdrop during 2020 was one of uncertainty as real gross domestic product (“GDP”) decreased 3.5% compared with an increase of 2.3% in 2019. The unemployment rate increased from 3.5% in December 2019, to a peak of 14.7% during April 2020, ending with 6.7% in December 2020.
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 environmen t. The Company’s investments in headcount are typically structured to proactively support and align with expected revenue growth trends and productivity metrics. 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 2020, we decreased headcount in our staffing lines of business but increased headcount in the Protiviti line of business when compar ed to prior year-end levels. We are focused on the productivity levels of tenured staff and believe we have aligned staffing levels to drive increased profitability.
Capital expenditures, including $33 million related to cloud computing implementations, in 2020 totaled $67 million, approximately 71% of which represented investments in software initiatives and technology infrastructure, both of which are important to the Company’s future growth opportunities. Capital expenditures for cloud computing implementation costs are included in cash flows from operating activities on the Company’s 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 2021 capitalized expenditures will range from $85 million to $95 million, of which $50 million to $60 million relates to software initiatives and technology infrastructure, including capitalized costs relating to the implementation of cloud computing arrangements.
Critical Accounting Policies and Estimates
As described below, the Company’s most critical accounting policies and estimates are those that involve subjective decisions or assessments.
Service Revenues. 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. See Note C—“Revenue Recognition” to the Company’s Consolidated Financial Statements included under Part II—Item 8 of this report.
Income Taxes. The Company’s operations are subject to U.S. federal, state and local, and foreign income taxes. In establishing its deferred income tax assets and liabilities and its provision for income taxes, the Company makes judgments and interpretations based on the enacted tax laws that are applicable to its operations in various jurisdictions. Deferred tax assets and liabilities are measured and recorded using current enacted tax rates, which the Company expects will apply to taxable income in the years in which those temporary differences are recovered or settled. The likelihood of a material change in the Company’s expected realization of its deferred tax assets is dependent on future taxable income and the effectiveness of its tax planning in the various relevant jurisdictions.
The Company also evaluates the need for valuation allowances to reduce the deferred tax assets to realizable amounts. Management evaluates all positive and negative evidence and uses judgment regarding past and future events, including operating results, to help determine when it is more likely than not that all or some portion of the deferred tax assets may not be realized. When appropriate, a valuation allowance is recorded against deferred tax assets to offset future tax benefits that may not be realized. Valuation allowances of $24.1 million and $21.6 million were recorded as of December 31, 2020 and 2019, respectively. The valuation allowances recorded relate primarily to net operating losses in certain foreign operations. If such losses are ultimately utilized to offset future segment income, the Company will recognize a tax benefit up to the full amount of the related valuation reserve.
While management believes that its judgments and interpretations regarding income taxes are appropriate, significant differences in actual experience may materially affect the future financial results of the Company.
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Recent Accounting Pronouncements
See Note B—“New Accounting Pronouncements” to the Company’s Consolidated Financial Statements included under
Part II—Item 8 of this report.
Results of Operations
Demand for the Company’s temporary and consultant 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 while working remotely during this pandemic. While uncertainty remains in the overall economic environment, we enter 2021 with renewed optimism about the Company’s positioning for future growth. We have retained our key staff and they are committed to driving our success as the backbone of our enterprise. Our technology investments have facilitated remote working models internally and, with the Company's advanced AI-driven capabilities, are providing clients with real-time choices of candidates from outside their local market area. Owing to its diversified solution offerings, Protiviti continues its record of multi-year double-digit revenue growth. The collaboration between Protiviti and staffing is at an all-time high.
The Company’s temporary and permanent staffing business conducts placement activities through 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 Consolidated Statements of Operations to separately present (income) loss 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 employee deferred compensation obligations remain in selling, general and administrative expenses or, in the case of risk consulting and internal audit services, costs of services. However, the offsetting changes in the investment trust assets will be presented separately below selling, general and administrative expenses. This does not change the previously reported levels of pre-tax or after-tax income or cash flow. Under the new presentation, we replaced the discussion of consolidated operating income with the non-GAAP measure of combined segment income. This is 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: as adjusted revenue growth rates and combined segment income.
Variations in the Company’s financial results include the impact of changes in foreign currency exchange rates, billing days, and certain intercompany adjustments. The Company provides “as adjusted” revenue growth calculations to remove the impact of these items. These calculations show the year-over-year revenue growth rates for the Company’s reportable segments on both a reported basis and also on an as adjusted basis for global, U.S. and international operations. The Company has provided this data because it focuses on the Company’s revenue growth rates attributable to operating activities and aids in evaluating revenue trends over time. The Company expresses year-over-year revenue changes as calculated percentages using the same number of billing days 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.
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
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how the Company evaluates segment performance. A reconciliation of combined segment income to reported income before
income taxes is provided herein.
The non-GAAP financial measures provided herein may not provide information that is directly comparable to that provided by other companies in the Company’s industry, as other companies may calculate such financial results differently. The Company’s non-GAAP financial measures are not measurements of financial performance under GAAP, and should not be considered as alternatives to actual revenue growth derived from revenue amounts presented in accordance with GAAP. The Company does not consider these non-GAAP financial measures to be a substitute for, or superior to, the information provided by GAAP financial results. A reconciliation of the as adjusted revenue growth rates to the reported revenue growth rates is provided herein.
Refer to Item 7a. “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.
Years ended December 31, 2020 and 2019
Revenues. The Company’s revenues were $5.11 billion for the year ended December 31, 2020, decreasing by 15.9% compared to $6.07 billion for the year ended December 31, 2019. Revenues from foreign operations represented 22% of total revenues for both the years ended December 31, 2020 and 2019, respectively. The Company analyzes its revenues for three reportable segments: temporary and consultant staffing, permanent placement staffing and risk consulting and internal audit services. In 2020 revenues for the two staffing segments of the Company were down whereas revenue was up for the Company's risk consulting and internal audit segment when compared to 2019. The Company’s revenues for the year ended December 31, 2020 were adversely affected by the global stay-at-home orders, significant travel restrictions, and business closures which resulted in global economic disruptions. Revenue declines were experienced both domestically and internationally. Risk consulting and internal audit services continued to post strong growth rates. Contributing factors for each reportable segment are discussed below in further detail.
Temporary and consultant staffing revenues were $3.48 billion for the year ended December 31, 2020, decreasing by 21.2% compared to revenues of $4.41 billion for the year ended December 31, 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 21.5% for 2020, compared to 2019, due primarily to fewer hours worked by the Company’s engagement professionals, partially offset by a 6.4% increase in weighted average bill rates. In the U.S., 2020 revenues decreased 21.4% on an as reported basis and 21.7% on an as adjusted basis, compared to 2019. For the Company’s international operations, 2020 revenues decreased 20.4% on an as reported basis and decreased 20.6% on an as adjusted basis, compared to 2019.
Permanent placement staffing revenues were $370 million for the year ended December 31, 2020, decreasing by 30.6% compared to revenues of $533 million for the year ended December 31, 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 30.9% for 2020 compared to 2019, primarily driven by a decrease in number of placements. In the U.S., 2020 revenues decreased 31.7% on an as reported basis and 32.0% on an as adjusted basis, compared to 2019. For the Company’s international operations, 2020 revenues decreased 28.1% on an as reported basis, and decreased 28.3% on an as adjusted basis, compared to 2019. Historically, demand for permanent placement services 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 $1.26 billion for the year ended December 31, 2020, increasing by 11.8% compared to revenues of $1.13 billion for the year ended December 31, 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 11.0% for 2020 compared to 2019, driven primarily by an increase in billable hours. In the U.S., 2020 revenues increased 15.4% on an as reported basis, or 14.9% on an as adjusted basis, compared to 2019. For the Company’s international operations, 2020 revenues decreased 0.8% on an as reported basis, or decreased 2.3% on an as adjusted basis, compared to 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 year ended December 31, 2020, is presented in the following table:
Global United States International
Temporary and consultant staffing
As Reported -21.2 % -21.4 % -20.4 %
Billing Days Impact -0.4 % -0.3 % -0.5 %
Currency Impact 0.1 % — 0.3 %
As Adjusted -21.5 % -21.7 % -20.6 %
Permanent placement staffing
As Reported -30.6 % -31.7 % -28.1 %
Billing Days Impact -0.4 % -0.3 % -0.5 %
Currency Impact 0.1 % — 0.3 %
As Adjusted -30.9 % -32.0 % -28.3 %
Risk consulting and internal audit services
As Reported 11.8 % 15.4 % -0.8 %
Billing Days Impact -0.6 % -0.5 % -0.7 %
Currency Impact -0.2 % — -0.8 %
As Adjusted 11.0 % 14.9 % -2.3 %
Gross Margin . The Company’s gross margin dollars were $2.01 billion for the year ended December 31, 2020, down 20.3% from $2.53 billion for the year ended December 31, 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 $1.31 billion for the year ended December 31, 2020, down 21.7% from $1.68 billion for the year ended December 31, 2019. As a percentage of revenues, gross margin dollars for temporary and consultant staffing were 37.8% in 2020, down from 38.0% in 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 $369 million for the year ended December 31, 2020, down 30.6% from $532 million for the year ended December 31, 2019. Because reimbursable expenses for permanent placement staffing are de minimis, gross margin dollars are substantially explained by the decline in 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 $330 million for the year ended December 31, 2020, up 4.8% from $315 million for the year ended December 31, 2019. Impacting gross margin is employee deferred compensation expense related to changes in the fair value of participants’ accounts of $12 million and $6 million for the years ended December 31, 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 dollars for risk consulting and internal audit services were 26.2% in 2020, down from 27.9% in 2019. The year-over-year decline in gross margin percentage was due primarily to a decline in staff utilization.
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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 $1.67 billion for the year ended December 31, 2020, down 14.9% from $1.96 billion for the year ended December 31, 2019. As a percentage of revenues, the Company’s selling, general and administrative expenses were 32.6% in 2020, up slightly from 32.2% in 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 $1.13 billion for the year ended December 31, 2020, decreasing by 13.6% from $1.31 billion for the year ended December 31, 2019. This includes employee deferred compensation expense related to changes in the fair value of participants’ accounts of $57 million and $44 million for the years ended December 31, 2020 and 2019, respectively. As a percentage of revenues, selling, general and administrative expenses for temporary and consultant staffing were 32.6% in 2020, up from 29.7% in 2019 due primarily to negative leverage as revenues decreased as a result of economic conditions during the year and an increase in employee 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 $347 million for the year ended December 31, 2020, decreasing by 23.6% from $454 million for the year ended December 31, 2019. This includes employee deferred compensation expense related to changes in the fair value of participants’ accounts of $6 million and $5 million for the years ended December 31, 2020 and 2019, respectively. As a percentage of revenues, selling, general and administrative expenses for permanent placement staffing services were 93.7% in 2020, up from 85.1% in 2019 due primarily to negative leverage as revenues decreased as a result of economic conditions during the year.
Selling, general and administrative expenses for the Company’s risk consulting and internal audit services division were $186 million for the year ended December 31, 2020, decreasing by 3.4% from $193 million for the year ended December 31, 2019. As a percentage of revenues, selling, general and administrative expenses for risk consulting and internal audit services were 14.8% in 2020, down from 17.1% in 2019. The decrease in selling, general and administrative expenses as a percentage of revenue is primarily due to positive operating leverage resulting from increased revenue.
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 employee deferred compensation obligation to employees changes accordingly. Changes in the Company’s deferred
compensation obligations noted above remain in selling, general and administrative or in the case of the Company’s risk consulting and internal audit services division, costs of services. 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 $75 million and $55 million for the years ended December 31, 2020 and 2019, respectively. 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 $422 million, or 8.3% of revenues, for the year ended December 31, 2020, down from $626 million, or 10.3% of revenues, for the year ended December 31, 2019. Combined segment income was $422 million, or 8.3% of revenues, for the year ended December 31, 2020, down from $622 million, or 10.2% of revenues, for the year ended December 31, 2019.
The following table provides a reconciliation of the reported income before income taxes to the non-GAAP combined segment income for the years ended December 31, 2020 and 2019 (in thousands):
Year Ended December 31,
2020 2019
Income before income taxes $ 421,882 $ 625,515
Interest income, net (1,343) (5,125)
Amortization of intangible assets 1,219 1,361
Combined segment income $ 421,758 $ 621,751
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For the Company’s temporary and consultant staffing division, segment income was $237 million, or 6.8% of applicable revenues, down from segment income of $410 million, or 9.3% of applicable revenues, in 2019. For the Company’s permanent placement staffing division, segment income was $29 million, or 7.8% of applicable revenues, down from segment income of $84 million, or 15.7% of applicable revenues, in 2019. For the Company’s risk consulting and internal audit services division, segment income was $156 million, or 12.3% of applicable revenues, up from segment income of $128 million, or 11.3% of applicable revenues, in 2019.
Provision for income taxes. The provision for income taxes was 27.4% for both the years ended December 31, 2020 and 2019, respectively.
Years ended December 31, 2019 and 2018
A complete discussion of changes regarding our financial condition and results of operations for the year ended December 31, 2019, compared to the year ended December 31, 2018, can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 14, 2020, which is available free of charge on the SEC’s website at www.sec.gov and at www.roberthalf.com/investor-center.
Change in Presentation. In 2020 the Company changed its Consolidated Statements of Operations to separately present (income) loss 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 employee deferred compensation obligations remain in selling, general and administrative expenses or, in the case of risk consulting and internal audit services, costs of services. However, the offsetting changes in the investment trust assets are presented separately below selling, general and administrative expenses. This does not change the previously reported levels of pre-tax or after-tax income or cash flow. Under the new presentation, we replaced the discussion of consolidated operating income with the non-GAAP measure of combined segment income. This is 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.
Discussions regarding financial conditions and results of operations for the year ended December 31, 2019, compared to the year ended December 31, 2018, which were impacted by this change in presentation are presented herein.
Gross Margin. The Company’s gross margin dollars were $2.53 billion for the year ended December 31, 2019, up 4.7% from $2.41 billion for the year ended December 31, 2018. Contributing factors for each reportable segment are discussed below in further detail.
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 $315 million for the year ended December 31, 2019, up 16.6% from $270 million for the year ended December 31, 2018. Impacting gross margin is deferred compensation expense related to changes in the fair value of participants’ accounts of $6 million and ($1 million) for the years ended December 31, 2019 and 2018, respectively. Equal and offsetting amounts are included in (income) loss from investments held in employee deferred compensation trusts. As a percentage of revenues, gross margin dollars for risk consulting and internal audit services were 27.9% in 2019, down from 28.2% in 2018. The year-over-year deterioration in gross margin percentage was due primarily to an increase in deferred compensation expense related to changes in the fair value of participants’ accounts partially offset by improved staff utilization.
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 $1.96 billion for the year ended December 31, 2019, up 8.2% from $1.81 billion for the year ended December 31, 2018. As a percentage of revenues, the Company’s selling, general and administrative expenses were 32.2% for the year ended December 31, 2019, and 31.2% for the year ended 2018. Contributing factors for each reportable segment are discussed below in further detail.
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Selling, general and administrative expenses for the Company’s temporary and consultant staffing division were $1.31 billion for the year ended December 31, 2019, increasing by 7.9% from $1.22 billion for the year ended December 31, 2018. This includes deferred compensation expense related to changes in the fair value of participants’ accounts of $44 million and ($9 million) for the years ended December 31, 2019 and 2018, respectively. Equal and offsetting amounts are included in (income) loss from investments held in employee deferred compensation trusts. As a percentage of revenues, selling, general and administrative expenses for temporary and consultant staffing were 29.7% in 2019, up from 28.1% in 2018 due primarily to increased deferred compensation expense related to changes in the fair value of participants’ accounts and negative leverage resulting from the Company’s international operations.
Selling, general and administrative expenses for the Company’s permanent placement staffing division were $454 million for the year ended December 31, 2019, increasing by 8.3% from $419 million for the year ended December 31, 2018. This includes deferred compensation expense related to changes in the fair value of participants’ accounts of $5 million and ($1 million) for the years ended December 31, 2019 and 2018, respectively. Equal and offsetting amounts are included in (income) loss from investments held in employee deferred compensation trusts. As a percentage of revenues, selling, general and administrative expenses for permanent placement staffing services were 85.1% in 2019, up from 81.9% in 2018 due primarily to increased deferred compensation expense related to changes in the fair value of participants’ accounts and negative leverage resulting from the Company’s international operations.
(Income) loss 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 remain in selling, general and administrative expenses or, in the case of risk consulting and internal audit services, costs of services. The value of the related investment trust assets also changes by an equal and offsetting amount, leaving no net cost to the Company. The Company’s (income) loss 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) loss from investments held in employee deferred compensation trusts was ($55 million) for the year ended December 31, 2019, and $11 million for the year ended December 31, 2018. The higher 2019 income from trust investments was due to positive market returns in 2019.
Income before income taxes and Segment income. The Company’s total income before income taxes was $626 million, or 10.3% of revenues, for the year ended December 31, 2019, up 5.7% from $592 million, or 10.2% of revenues, for the year ended December 31, 2018. Combined segment income was $622 million, or 10.2% of revenues, for the year ended December 31, 2019, up 5.6% from $589 million, or 10.2% of revenues, for the year ended December 31, 2018.
The following table provides a reconciliation of the reported income before income taxes to the non-GAAP combined segment income for the years ended December 31, 2019 and 2018 (in thousands):
Year Ended December 31,
2019 2018
Income before income taxes $ 625,515 $ 591,602
Interest income, net (5,125) (4,382)
Amortization of intangible assets 1,361 1,705
Combined segment income $ 621,751 $ 588,925
For the Company’s temporary and consultant staffing division, segment income was $410 million, or 9.3% of applicable revenues, for the year ended December 31, 2019, up from $405 million, or 9.3% of applicable revenues, for the year ended December 31, 2018. For the Company’s permanent placement staffing division, segment income was $84 million, or 15.7% of applicable revenues for the year ended December 31, 2019, down from segment income of $91 million, or 17.7% of applicable revenues, for the year ended December 31, 2018. For the Company’s risk consulting and internal audit services division, segment income was $128 million, or 11.3% of applicable revenues, for the year ended December 31, 2019, up from segment income of $93 million, or 9.7% of applicable revenues, for the year ended December 31, 2018.
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Liquidity and Capital Resources
The change in the Company’s liquidity during the years ended December 31, 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 $574 million and $270 million at December 31, 2020 and 2019, respectively. Operating activities provided $597 million during the year ended December 31, 2020, in addition to $9 million generated from investing activities offset by $315 million of net cash used in financing activities. Operating activities provided $520 million during the year ended December 31, 2019, offset by $102 million and $423 million of net cash used in investing activities and financing activities, respectively.
Operating activities—Net cash provided by operating activities for the year ended December 31, 2020, was $597 million. This was composed of net income of $306 million adjusted upward for non-cash items and changes in working capital of $59 million and $232 million, respectively. Net cash provided by operating activities for the year ended December 31, 2019, was $520 million. This was composed of net income of $454 million adjusted upward for non-cash items of $74 million offset by net cash used by changes in working capital of $8 million.
Investing activities—Net cash provided by investing activities for the year ended December 31, 2020, was $9 million. This was composed of proceeds from employee deferred compensation trust redemptions of $123 million, largely offset by capital expenditures of $33 million, investments in employee deferred compensation trusts of $65 million and $16 million cash paid for an acquisition. Cash used in investing activities for the year ended December 31, 2019, was $102 million. This was primarily composed of capital expenditures of $59 million and investments in employee deferred compensation plans of $72 million, offset by employee deferred compensation trust redemptions of $29 million.
Financing activities—Cash used in financing activities for the year ended December 31, 2020, was $315 million. This included repurchases of $159 million in common stock and $156 million in dividends paid to stockholders. Cash used in financing activities for the year ended December 31, 2019, was $423 million. This included repurchases of $277 million in common stock and $146 million in dividends paid to stockholders.
As of December 31, 2020, the Company is authorized to repurchase, from time to time, up to 9.9 million additional shares of the Company’s common stock on the open market or in privately negotiated transactions, depending on market conditions. During the years ended December 31, 2020 and 2019, the Company repurchased approximately 2.5 million shares and 4.3 million shares of common stock on the open market for a total cost of $138 million and $250 million, respectively. 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. During the years ended December 31, 2020 and 2019, such repurchases totaled approximately 0.4 million shares and 0.4 million shares at a cost of $17 million and $22 million, respectively. Repurchases of shares have been funded with cash generated from operations.
The Company’s working capital at December 31, 2020, included $574 million in cash and cash equivalents and $714
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 to control costs during the year. We 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 December 31, 2020. There were no borrowings under the 364-Day Credit Agreement as of December 31, 2020.
On February 11, 2021, the Company announced a quarterly dividend of $.38 per share to be paid to all shareholders of record on February 25, 2021. The dividend will be paid on March 15, 2021.
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The Company’s cash flows generated from operations are also the primary source for funding various contractual obligations. The table below summarizes the Company’s major commitments as of December 31, 2020 (in thousands):
Payments due by period
Contractual Obligations 2021 2022 and 2023 2024 and 2025 Thereafter Total
Debt obligations $ 252 $ — $ — $ — $ 252
Operating lease obligations 78,303 122,061 73,582 28,727 302,673
Purchase obligations 80,161 23,892 4,049 7,233 115,335
Other liabilities 1,436 1,162 2,813 13,518 18,929
Total $ 160,152 $ 147,115 $ 80,444 $ 49,478 $ 437,189
Debt obligations consist of promissory notes and related interest issued in connection with certain acquisitions and other payment obligations. Operating lease obligations consist of undiscounted minimum rental commitments for 2021 and thereafter under non-cancelable lease contracts executed as of December 31, 2020. Purchase obligations consist of purchase commitments primarily related to telecom service agreements, software subscriptions, and computer hardware and software maintenance agreements. Other liabilities consist of asset retirement and deferred compensation obligations.
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