ROBERT HALF INC. 10-Q

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 future operating results or financial positions of Robert Half Inc. (the “Company”). Forward-looking statements are not guarantees or promises that goals or targets will be met. These statements may be identified by words such as “estimate,” “forecast,” "target," “project,” “plan,” “intend,” “believe,” “expect,” “anticipate,” or variations or negatives thereof or by similar or comparable words or phrases. In addition, historical, current, and forward-looking information about the Company’s ESG and compliance programs, including targets or goals, may not be considered material for the Securities and Exchange Commission (“SEC”) reporting purposes and may be based on standards for measuring progress that are still developing, on internal controls, diligence, or processes that are evolving, and on assumptions that are subject to change in the future. Forward-looking statements are estimates only, based on management’s current expectations, currently available information and current strategy, plans, or forecasts, and involve certain known and unknown risks and, uncertainties, and assumptions that are difficult to predict and often beyond our control and are inherently uncertain. 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 United States of America (“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 U.S. 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 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 or other 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 broad based consulting, regulatory compliance, technology services, public sector or other high demand advisory 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 second-quarter results for talent solutions were impacted by elongated client hiring cycles resulting from ongoing global macro uncertainty. Protiviti was much less impacted with its diversified suite of solutions offerings. During the first half of 2023, service revenues were $3.36 billion, a decrease of 8.8% from the prior year. Net income was $228 million and diluted net income per share was $2.14. Global labor markets remain tight and the scarcity of talent persists. Client hiring and project needs continue to be significant. However, the urgency or velocity of that demand is impacted by the prolonged period of macroeconomic uncertainty, which continued in the second-quarter. As clients become more cost-focused, hiring timeframes extend, projects are delayed and contractor workloads are shifted to internal staff. On a segment basis, year-to-date revenues for contract talent solutions and permanent placement talent solutions were down 11.1% and 20.9% year-over-year, respectively, and Protiviti year-to-date revenues grew by 1.6% year-over-year. 18 Demand for the Company’s contract talent solutions, permanent placement talent solutions, and Protiviti is largely dependent upon general economic and labor trends both domestically and abroad. The U.S. economic backdrop and labor trends for the first half of 2023 remained steady for the Company as the unemployment rate increased slightly from 3.5% for December 2022 to 3.6% at the end of the second quarter of 2023. Although recent metrics are modestly off their peaks, talent shortages persist. In the U.S., unemployment stands near a 50-year low and remains even lower for those with a college degree, where the rate is 2.0%. Although labor markets remain strong, ongoing uncertainty related to inflation and interest rates cause clients to be more cautious, resulting in elongated hiring cycles and has a negative impact on short-term results. The Company is confident about its ability to navigate the uncertain global macroeconomic environment and is well positioned to benefit as the macro landscape improves. Clients continue to hire, but are being more selective and have added steps to their hiring process which impacts decision time frames and lengthens the sales cycle. Longer term, the growth and margin prospects from an ongoing focus on services related to talent with higher level skills is encouraging. The Company continues to invest in the tools needed to secure top talent for its clients by making enhancements to further improve our already effective, industry-leading artificial intelligence. Reported results were unfavorably impacted by foreign currency exchange rates as the U.S. dollar strengthened against the Euro, British pound, Australian Dollar, and Canadian Dollar, when compared to the prior year. The Company monitors various economic indicators and business trends in all of the countries in which it operates to anticipate demand for the Company’s services. These trends are evaluated 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 and productivity metrics. Visibility into future revenues is limited 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, the Company’s headcount and other investments are typically assessed on at least a quarterly basis. During the first half of 2023, the Company decreased headcount for its contract talent solutions and permanent placement talent solutions segments, while it increased headcount for its Protiviti segment, when compared to prior year-end levels. 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, 2022. There were no material changes to the Company’s critical accounting policies or estimates for the six months ended June 30, 2023. 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 The Company analyzes its operating results for three reportable segments: contract talent solutions, permanent placement talent solutions, and Protiviti. The contract talent solutions and permanent placement talent solutions segments provide engagement professionals and full-time personnel, respectively, for finance and accounting, technology, marketing and creative, legal, and administrative and customer support roles. The Protiviti segment provides business and technology risk consulting and internal audit services. Demand for the Company’s services is largely dependent upon general economic and labor trends 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 talent solutions business conducts placement activities through 318 offices in 42 states, the District of Columbia and 18 foreign countries, while Protiviti has 65 offices in 23 states and 13 foreign countries. 19 Non-GAAP Financial Measures The financial results of the Company are prepared in conformity with accounting principles generally accepted in the U.S. (“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: adjusted gross margin; adjusted selling, general and administrative expense; combined segment income; and as adjusted revenue growth rates. The following measures: adjusted gross margin and adjusted selling, general and administrative expenses include gains and losses on investments held to fund the Company’s obligations under employee deferred compensation plans. The Company provides these measures because they are used by management to review its operational results. Combined segment income is income before income taxes, adjusted for interest income and amortization of intangible assets. The Company provides combined segment income because it is how management evaluates performance. As adjusted revenue growth rates represent year-over-year revenue growth rates after removing the impacts on reported revenues from the changes in the number of billing days and foreign currency exchange rates. The Company provides 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 impacts from the changes in billing days and foreign currency exchange rates are calculated as follows: • Billing days impact is calculated by dividing each comparative period’s reported revenues by the number of billing days for that period to arrive at a per billing day amount. Same billing day growth rates are then calculated based on the per billing day amounts. Management calculates a global, weighted-average number of billing days for each reporting period based upon inputs from all countries and all functional specializations and segments. • Foreign currency impact is calculated by retranslating current period international revenues using foreign currency exchange rates from the prior year’s comparable period. 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 non-GAAP financial measures to the most directly comparable GAAP financial measures is provided on the following pages. 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 June 30, 2023 and 2022 Service Revenues. The Company’s revenues were $1.64 billion for the three months ended June 30, 2023, a decrease of 12.0% compared to $1.86 billion for the three months ended June 30, 2022. Revenues from U.S. operations decreased 13.3% to $1.27 billion (77.6% of total revenue) for the three months ended June 30, 2023, compared to $1.47 billion (78.8% of total revenue) for the three months ended June 30, 2022. Revenues from international operations decreased 7.0% to $368 million (22.4% of total revenue) for the three months ended June 30, 2023, compared to $396 million (21.2% of total revenue) for the three months ended June 30, 2022. Contributing factors for each reportable segment are discussed below in further detail. Contract talent solutions revenues were $1.00 billion for the three months ended June 30, 2023, decreasing by 14.3% compared to revenues of $1.16 billion for the three months ended June 30, 2022. Key drivers of contract talent solutions revenues include average hourly bill rates and the number of hours worked by the Company’s engagement professionals on client engagements. The decrease in contract talent solutions revenues for the three months ended June 30, 2023, was primarily due to a 21.1% decrease in the number of hours worked by the Company's engagement professionals, partially offset by a 7.7% increase in average bill rates. On an as adjusted basis, contract talent solutions revenues decreased 14.0% for the second quarter of 2023, compared to the second quarter of 2022. In the U.S., revenues in the second quarter of 2023 decreased 16.0% on an as reported basis, and decreased 15.9% on an as adjusted basis, compared to the second quarter of 2022. International revenues for the second quarter of 2023 decreased 7.6% on an as reported basis, and decreased 6.2% on an as adjusted basis compared to the second quarter of 2022. 20 Permanent placement talent solutions revenues were $149 million for the three months ended June 30, 2023, decreasing by 25.4% compared to revenues of $200 million for the three months ended June 30, 2022. Key drivers of permanent placement talent solutions revenues consist of the number of candidate placements and average fees earned per placement. The decrease in permanent placement talent revenues for the three months ended June 30, 2023, was due to a 25.9% decrease in the number of placements, partially offset by a 0.4% increase in average fees earned per placement. On an as adjusted basis, permanent placement talent solutions revenues decreased 25.0% for the second quarter of 2023, compared to the second quarter of 2022. In the U.S., revenues for the second quarter of 2023 decreased 26.2% on an as reported basis, and decreased 26.1% on an as adjusted basis, compared to the second quarter of 2022. International revenues for the second quarter of 2023 decreased 23.4% on an as reported basis and decreased 21.9% on an as adjusted basis, compared to the second quarter of 2022. Historically, demand for permanent placement talent solutions is even more sensitive to economic and labor market conditions than demand for contract talent solutions and this is expected to continue. Protiviti revenues were $491 million for the three months ended June 30, 2023, decreasing by 1.2% compared to revenues of $497 million for the three months ended June 30, 2022. Key drivers of Protiviti revenues are the billable hours worked by consultants on client engagements and average hourly bill rates. The decrease in Protiviti revenues for the three months ended June 30, 2023, was due to a 3.4% decrease in billable hours, partially offset by a 2.2% increase in average hourly bill rates. On an as adjusted basis, Protiviti revenues decreased 1.0% for the second quarter of 2023, compared to the second quarter of 2022. In the U.S., revenues in the second quarter of 2023 decreased 2.4% on an as reported basis, and decreased 2.3% on an as adjusted basis, compared to the second quarter of 2022. International revenues for the second quarter of 2023 increased 3.3% on an as reported basis and increased 4.2% on an as adjusted basis, compared to the second quarter of 2022. 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 June 30, 2023, is presented in the following table: Global United States International Contract talent solutions As Reported -14.3 % -16.0 % -7.6 % Billing Days Impact 0.1 % 0.1 % 0.6 % Currency Impact 0.2 % ― 0.8 % As Adjusted -14.0 % -15.9 % -6.2 % Permanent placement talent solutions As Reported -25.4 % -26.2 % -23.4 % Billing Days Impact 0.1 % 0.1 % 0.5 % Currency Impact 0.3 % ― 1.0 % As Adjusted -25.0 % -26.1 % -21.9 % Protiviti As Reported -1.2 % -2.4 % 3.3 % Billing Days Impact 0.2 % 0.1 % 0.7 % Currency Impact 0.0 % ― 0.2 % As Adjusted -1.0 % -2.3 % 4.2 % Gross Margin . The Company’s gross margin dollars were $660 million for the three months ended June 30, 2023, down 19.1% from $816 million for the three months ended June 30, 2022. Contributing factors for each reportable segment are discussed below in further detail. Gross margin dollars for contract talent solutions 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; and iii) conversion revenues, which are earned when a contract position converts to a permanent position with the Company’s client. Gross margin dollars for contract talent solutions were $399 million for the three months ended June 30, 2023, down 14.2% from $465 million for the three months ended June 30, 2022. As a percentage of revenues, gross margin dollars for contract talent solutions were 39.9% in both the second quarter of 2023 and the second quarter of 2022. Gross margin dollars for permanent placement talent solutions represent revenues less reimbursable expenses. Gross margin dollars for permanent placement talent solutions were $149 million for the three months ended June 30, 2023, down 21 25.4% from $200 million for the three months ended June 30, 2022. Because reimbursable expenses for permanent placement talent solutions are de minimis, the decrease in gross margin dollars is substantially explained by the decrease in revenues previously discussed. Gross margin dollars for Protiviti represent revenues less costs of services, which consist primarily of professional staff payroll, payroll taxes, benefit costs, and reimbursable expenses. The primary drivers of Protiviti's 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 Protiviti staff. Gross margin dollars for Protiviti were $112 million for the three months ended June 30, 2023, down 25.5% from $151 million for the three months ended June 30, 2022. As a percentage of revenues, reported gross margin dollars for Protiviti were 22.9% in the second quarter of 2023, down from 30.4% in the second quarter of 2022. As a percentage of revenues, adjusted gross margin dollars for Protiviti were 24.0% in the second quarter of 2023, down from 28.1% in the second quarter of 2022. The year-over-year decrease in adjusted gross margin percentage was primarily due to lower staff utilization. The Company's gross margin by reporting segment is summarized as follows (in thousands): Three Months Ended June 30, Relationships As Reported As Adjusted As Reported As Adjusted 2023 2022 2023 2022 2023 2022 2023 2022 Gross Margin Contract talent solutions $ 398,636 $ 464,853 $ 398,636 $ 464,853 39.9 % 39.9 % 39.9 % 39.9 % Permanent placement talent solutions 148,975 199,664 148,975 199,664 99.8 % 99.8 % 99.8 % 99.8 % Protiviti 112,558 151,030 117,882 139,617 22.9 % 30.4 % 24.0 % 28.1 % Total $ 660,169 $ 815,547 $ 665,493 $ 804,134 40.3 % 43.8 % 40.6 % 43.2 % The following tables provide reconciliations of the non-GAAP adjusted gross margin to reported gross margin for the three months ended June 30, 2023 and 2022 (in thousands): Three Months Ended June 30, 2023 Contract Talent Solutions Permanent Placement Talent Solutions Protiviti Total $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Gross Margin As Reported $ 398,636 39.9 % $ 148,975 99.8 % $ 112,558 22.9 % $ 660,169 40.3 % Adjustments (1) — — — — 5,324 1.1 % 5,324 0.3 % As Adjusted $ 398,636 39.9 % $ 148,975 99.8 % $ 117,882 24.0 % $ 665,493 40.6 % Three Months Ended June 30, 2022 Contract Talent Solutions Permanent Placement Talent Solutions Protiviti Total $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Gross Margin As Reported $ 464,853 39.9 % $ 199,664 99.8 % $ 151,030 30.4 % $ 815,547 43.8 % Adjustments (1) — — — — (11,413) (2.3 %) (11,413) (0.6 %) As Adjusted $ 464,853 39.9 % $ 199,664 99.8 % $ 139,617 28.1 % $ 804,134 43.2 % (1) Changes in the Company’s employee deferred compensation plan obligations related to Protiviti operations are included in costs of services, while the related investment (income) loss is presented separately. The non-GAAP financial adjustments shown in the table above are to reclassify investment (income) loss from investments held in employee deferred compensation trusts to the same line item that includes the corresponding change in obligation. These adjustments have no impact on income before income taxes. 22 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 $542 million for the three months ended June 30, 2023, up 6.4% from $509 million for the three months ended June 30, 2022. As a percentage of revenues, reported selling, general and administrative expenses were 33.1% in the second quarter of 2023, up from 27.3% in the second quarter of 2022. As a percentage of revenues, adjusted selling, general and administrative expenses were 31.6% in the second quarter of 2023, up from 30.3% in the second quarter of 2022. Contributing factors for each reportable segment are discussed below in further detail. Selling, general and administrative expenses for contract talent solutions were $338 million for the three months ended June 30, 2023, increasing by 18.9% from $284 million for the three months ended June 30, 2022. As a percentage of revenues, reported selling, general and administrative expenses for contract talent solutions were 33.8% in the second quarter of 2023, up from 24.4% in the second quarter of 2022. As a percentage of revenues, adjusted selling, general and administrative expenses for contract talent solutions were 31.8% in the second quarter of 2023, up from 28.4% in the second quarter of 2022, due primarily to negative leverage as revenues decreased as a result of economic conditions during the quarter. Selling, general and administrative expenses for permanent placement talent solutions were $130 million for the three months ended June 30, 2023, decreasing by 16.7% from $156 million for the three months ended June 30, 2022. As a percentage of revenues, reported selling, general and administrative expenses for permanent placement talent solutions were 87.0% in the second quarter of 2023, up from 77.9% in the second quarter of 2022. As a percentage of revenues, adjusted selling, general and administrative expenses for permanent placement was 85.3% in the second quarter of 2023, up from 81.4% in the second quarter of 2022, due primarily to negative leverage as revenues decreased as a result of economic conditions during the quarter. Selling, general and administrative expenses for the Company’s Protiviti division were $74 million for the three months ended June 30, 2023, increasing by 7.1% from $69 million for the three months ended June 30, 2022. As a percentage of revenues, selling, general and administrative expenses for Protiviti services were 15.1% in the second quarter of 2023, up from 14.0% in the second quarter of 2022, due primarily to operating expenditures returning to more normal pre-pandemic levels. The Company's selling, general and administrative expenses by reportable segment are summarized as follows: (in thousands): Three Months Ended June 30, Relationships As Reported As Adjusted As Reported As Adjusted 2023 2022 2023 2022 2023 2022 2023 2022 Selling, General and Administrative Expenses Contract talent solutions $ 337,742 $ 284,090 $ 317,320 $ 331,286 33.8 % 24.4 % 31.8 % 28.4 % Permanent placement talent solutions 129,846 155,900 127,245 162,913 87.0 % 77.9 % 85.3 % 81.4 % Protiviti 74,316 69,404 74,316 69,404 15.1 % 14.0 % 15.1 % 14.0 % Total $ 541,904 $ 509,394 $ 518,881 $ 563,603 33.1 % 27.3 % 31.6 % 30.3 % The following tables provide reconciliations of the non-GAAP selling, general and administrative expenses to reported selling, general and administrative expenses for the three months ended June 30, 2023 and 2022 (in thousands): Three Months Ended June 30, 2023 Contract Talent Solutions Permanent Placement Talent Solutions Protiviti Total $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Selling, General and Administrative Expenses As Reported $ 337,742 33.8 % $ 129,846 87.0 % $ 74,316 15.1 % $ 541,904 33.1 % Adjustments (1) (20,422) (2.0 %) (2,601) (1.7 %) — — (23,023) (1.5 %) As Adjusted $ 317,320 31.8 % $ 127,245 85.3 % $ 74,316 15.1 % $ 518,881 31.6 % 23 Three Months Ended June 30, 2022 Contract Talent Solutions Permanent Placement Talent Solutions Protiviti Total $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Selling, General and Administrative Expenses As Reported $ 284,090 24.4 % $ 155,900 77.9 % $ 69,404 14.0 % $ 509,394 27.3 % Adjustments (1) 47,196 4.0 % 7,013 3.5 % — — 54,209 3.0 % As Adjusted $ 331,286 28.4 % $ 162,913 81.4 % $ 69,404 14.0 % $ 563,603 30.3 % (1) Changes in the Company’s employee deferred compensation plan obligations related to talent solutions operations are included in selling, general and administrative expenses, while the related investment (income) loss is presented separately. The non-GAAP financial adjustments shown in the table above are to reclassify investment (income) loss from investments held in employee deferred compensation trusts to the same line item that includes the corresponding change in obligation. These adjustments have no impact on income before income taxes. (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 employee deferred compensation plan obligations change and adjustments are recorded in selling, general and administrative expenses, or in the case of Protiviti, 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) loss from investments held in employee deferred compensation trusts consists primarily of unrealized and realized gains and losses and dividend income from trust investments and is presented separately on the unaudited Condensed Consolidated Statements of Operations. The Company’s (income) loss from investments held in employee deferred compensation trusts was income of $28 million and a loss of $66 million for the three months ended June 30, 2023 and 2022, respectively. The income from trust investments was due to positive market returns during the second quarter of 2023. Income Before Income Taxes and Segment Income. The Company’s total income before income taxes was $151 million, or 9.2% of revenues, for the three months ended June 30, 2023, down from $241 million or 12.9% of revenues, for the three months ended June 30, 2022. Combined segment income was $147 million, or 8.9% of revenues, for the three months ended June 30, 2023, down from $241 million, or 12.9% of revenues, for the three months ended June 30, 2022. The Company's non-GAAP combined segment income is summarized as follows (in thousands): Three Months Ended June 30, 2023 % of Revenue 2022 % of Revenue Combined Segment Income Contract talent solutions $ 81,316 8.1 % $ 133,567 11.5 % Permanent placement talent solutions 21,730 14.6 % 36,751 18.4 % Protiviti 43,566 8.9 % 70,213 14.1 % Total $ 146,612 8.9 % $ 240,531 12.9 % The following table provides a reconciliation of the non-GAAP combined segment income to reported income before income taxes for the three months ended June 30, 2023 and 2022 (in thousands): Three Months Ended June 30, 2023 % of Revenue 2022 % of Revenue Income before income taxes $ 151,211 9.2 % $ 240,833 12.9 % Interest income, net (5,320) (0.3 %) (718) 0.0 % Amortization of intangible assets 721 0.0 % 416 0.0 % Combined segment income $ 146,612 8.9 % $ 240,531 12.9 % Provision for income taxes . The provision for income taxes was 29.7% and 27.0% for the three months ended June 30, 2023 and 2022, respectively. The higher tax rate for 2023 can be attributed to an increased impact of nondeductible expenses, fewer tax credits as well as lower stock compensation deductions. 24 Six Months Ended June 30, 2023 and 2022 Service Revenues. The Company’s revenues were $3.36 billion for the six months ended June 30, 2023, a decrease of 8.8% compared to $3.68 billion for the six months ended June 30, 2022. Revenues from U.S. operations decreased 9.3% to $2.61 billion (77.9% of total revenue) for the six months ended June 30, 2023, compared to $2.88 billion (78.4% of total revenue) for the six months ended June 30, 2022. Revenues from international operations decreased 6.6% to $743 million (22.1% of total revenue) for the six months ended June 30, 2023, compared to $795 million (21.6% of total revenue) for the six months ended June 30, 2022. Contributing factors for each reportable segment are discussed below in further detail. Contract talent solutions revenues were $2.07 billion for the six months ended June 30, 2023, decreasing by 11.1% compared to revenues of $2.32 billion for the six months ended June 30, 2022. Key drivers of contract talent solutions revenues include average hourly bill rates and the number of hours worked by the Company’s engagement professionals on client engagements. The decrease in contract talent solutions revenues for the six months ended June 30, 2023, was primarily due to a 19.6% decrease in the number of hours worked by the Company's engagement professionals, partially offset by a 9.3% increase in average bill rates. On an as adjusted basis, contract talent solutions revenues in the first half of 2023 decreased 11.0% compared to the first half of 2022. In the U.S., revenues in the first half of 2023 decreased 12.3% on an as reported basis, and decreased 12.9% on as adjusted basis, compared to the first half of 2022. International revenues for the first half of 2023 decreased 6.1% on an as reported basis, and decreased 3.7% on an as adjusted basis, compared to the first half of 2022. Permanent placement talent solutions revenues were $306 million for the six months ended June 30, 2023, decreasing by 20.9% compared to revenues of $387 million for the six months ended June 30, 2022. Key drivers of permanent placement talent solutions revenues consist of the number of candidate placements and average fees earned per placement. The decrease in permanent placement staffing revenues for the six months ended June 30, 2023, was due to a 22.3% decrease in the number of placements, partially offset by a 1.4% increase in average fees earned per placement. On an as adjusted basis, permanent placement talent solutions revenues decreased 20.6% for the first half of 2023, compared to the first half of 2022. In the U.S., revenues for the first half of 2023 decreased 21.7% on an as reported basis and decreased 22.2% on an as adjusted basis, compared to the first half of 2022. International revenues for the first half of 2023 decreased 18.8% on an as reported basis, and decreased 16.3% on an as adjusted basis, compared to the first half of 2022. Historically, demand for permanent placement talent solutions is even more sensitive to economic and labor market conditions than demand for contract talent solutions and this is expected to continue. Protiviti revenues were $985 million for the six months ended June 30, 2023, increasing by 1.6% compared to revenues of $969 million for the six months ended June 30, 2022. Key drivers of Protiviti revenues are the billable hours worked by consultants on client engagements and average hourly bill rates. The increase in Protiviti revenues for the six months ended June 30, 2023, was due to a 3.2% increase in average hourly bill rates, partially offset by a 1.6% decrease in billable hours. On an as adjusted basis, Protiviti revenues increased 1.6% for the first half of 2023, compared to the first half of 2022. In the U.S., revenues in the first half of 2023 increased 2.4% on an as reported basis and increased 1.7% on an as adjusted basis, compared to the first half of 2022. International revenues in the first half of 2023 decreased 1.2% on an as reported basis, and increased 1.3% on an as adjusted basis, compared to the first half of 2022. 25 A reconciliation of the non-GAAP year-over-year revenue growth rates to the as reported year-over-year revenue growth rates for the six months ended June 30, 2023, is presented in the following table: Global United States International Contract talent solutions As Reported -11.1 % -12.3 % -6.1 % Billing Days Impact -0.5 % -0.6 % -0.6 % Currency Impact 0.6 % ― 3.0 % As Adjusted -11.0 % -12.9 % -3.7 % Permanent placement talent solutions As Reported -20.9 % -21.7 % -18.8 % Billing Days Impact -0.5 % -0.5 % -0.5 % Currency Impact 0.8 % ― 3.0 % As Adjusted -20.6 % -22.2 % -16.3 % Protiviti As Reported 1.6 % 2.4 % -1.2 % Billing Days Impact -0.7 % -0.7 % -0.6 % Currency Impact 0.7 % ― 3.1 % As Adjusted 1.6 % 1.7 % 1.3 % Gross Margin . The Company’s gross margin dollars were $1.35 billion for the six months ended June 30, 2023, down 15.0% from $1.59 billion for the six months ended June 30, 2022. Contributing factors for each reportable segment are discussed below in further detail. Gross margin dollars for contract talent solutions 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; and iii) conversion revenues, which are earned when a contract position converts to a permanent position with the Company’s client. Gross margin dollars for contract talent solutions were $822 million for the six months ended June 30, 2023, down 11.3% from $927 million for the six months ended June 30, 2022. As a percentage of revenues, gross margin dollars for contract talent solutions were 39.8% in the first half of 2023, down from 39.9% in the first half of 2022. The decrease in gross margin percentage was primarily due to slightly lower conversion revenues. Gross margin dollars for permanent placement talent solutions represent revenues less reimbursable expenses. Gross margin dollars for permanent placement talent solutions were $305 million for the six months ended June 30, 2023, down 20.9% from $386 million for the six months ended June 30, 2022. Because reimbursable expenses for permanent placement talent solutions are de minimis, the decrease in gross margin dollars is substantially explained by the decrease in revenues previously discussed. Gross margin dollars for Protiviti represent revenues less costs of services, which consist primarily of professional staff payroll, payroll taxes, benefit costs, and reimbursable expenses. The primary drivers of Protiviti's 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 Protiviti staff. Gross margin dollars for Protiviti were $222 million for the six months ended June 30, 2023, down 19.0% from $275 million for the six months ended June 30, 2022. As a percentage of revenues, reported gross margin dollars for Protiviti were 22.6% in the first half of 2023, down from 28.3% in the first half of 2022. As a percentage of revenues, adjusted gross margin dollars for Protiviti were 23.6% in the first half of 2023, down from 26.8% in the first half of 2022. The year-over-year decrease in adjusted gross margin percentage was primarily due to lower staff utilization. 26 The Company's gross margin by reportable segment are summarized as follows: (in thousands): Six Months Ended June 30, Relationships As Reported As Adjusted As Reported As Adjusted 2023 2022 2023 2022 2023 2022 2023 2022 Gross Margin Contract talent solutions $ 822,261 $ 926,714 $ 822,261 $ 926,714 39.8 % 39.9 % 39.8 % 39.9 % Permanent placement talent solutions 305,370 386,113 305,370 386,113 99.8 % 99.8 % 99.8 % 99.8 % Protiviti 222,270 274,566 232,366 259,307 22.6 % 28.3 % 23.6 % 26.8 % Total $ 1,349,901 $ 1,587,393 $ 1,359,997 $ 1,572,134 40.2 % 43.2 % 40.5 % 42.7 % The following tables provide reconciliations of the non-GAAP adjusted gross margin to reported gross margin for the six months ended June 30, 2023 and 2022 (in thousands): Six Months Ended June 30, 2023 Contract Talent Solutions Permanent Placement Talent Solutions Protiviti Total $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Gross Margin As Reported $ 822,261 39.8 % $ 305,370 99.8 % $ 222,270 22.6 % $ 1,349,901 40.2 % Adjustments (1) — — — — 10,096 1.0 % 10,096 0.3 % As Adjusted $ 822,261 39.8 % $ 305,370 99.8 % $ 232,366 23.6 % $ 1,359,997 40.5 % Six Months Ended June 30, 2022 Contract Talent Solutions Permanent Placement Talent Solutions Protiviti Total $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Gross Margin As Reported $ 926,714 39.9 % $ 386,113 99.8 % $ 274,566 28.3 % $ 1,587,393 43.2 % Adjustments (1) — — — — (15,259) (1.5 %) (15,259) (0.5 %) As Adjusted $ 926,714 39.9 % $ 386,113 99.8 % $ 259,307 26.8 % $ 1,572,134 42.7 % (1) Changes in the Company’s deferred compensation obligations related to Protiviti operations are included in costs of services, while the related investment (income) loss is presented separately. The non-GAAP financial adjustments shown in the table above are to reclassify investment (income) loss from investments held in employee deferred compensation trusts to the same line item that includes the corresponding change in obligation. These adjustments have no impact on income before income taxes. 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 $1.09 billion for the six months ended June 30, 2023, up 6.9% from $1.02 billion for the six months ended June 30, 2022. As a percentage of revenues, reported selling, general and administrative expenses were 32.6% in the first half of 2023, up from 27.8% in the first half of 2022. As a percentage of revenues, adjusted selling, general and administrative expenses were 31.2% in the first half of 2023, up from 30.0% in the first half of 2022. Contributing factors for each reportable segment are discussed below in further detail. Selling, general and administrative expenses for contract talent solutions were $679 million for the six months ended June 30, 2023, increasing by 15.3% from $589 million for the six months ended June 30, 2022. As a percentage of revenues, reported selling, general and administrative expenses for contract talent solutions were 32.9% in the first half of 2023, up from 25.4% in the first half of 2022. As a percentage of revenues, adjusted selling, general and administrative expenses for contract talent solutions were 30.9% in the first half of 2023, up from 28.4% in the first half of 2022, due primarily to negative leverage as revenues decreased as a result of economic conditions. 27 Selling, general and administrative expenses for permanent placement talent solutions were $265 million for the six months ended June 30, 2023, decreasing by 12.4% from $302 million for the six months ended June 30, 2022. As a percentage of revenues, reported selling, general and administrative expenses for permanent placement talent solutions were 86.5% in the first half of 2023, up from 78.1% in the first half of 2022. As a percentage of revenues, adjusted selling, general and administrative expenses for permanent placement talent solutions was 84.9% in the first half of 2023, up from 80.7% in the first half of 2022, due primarily to negative leverage as revenues decreased as a result of economic conditions. Selling, general and administrative expenses for Protiviti were $150 million for the six months ended June 30, 2023, increasing by 13.6% from $132 million for the six months ended June 30, 2022. As a percentage of revenues, selling, general and administrative expenses for Protiviti were 15.2% in the first half of 2023, up from 13.6% in the first half of 2022, due primarily to operating expenditures returning to more normal pre-pandemic levels. The Company's selling, general and administrative expenses by reportable segment are summarized as follows: (in thousands): Six Months Ended June 30, Relationships As Reported As Adjusted As Reported As Adjusted 2023 2022 2023 2022 2023 2022 2023 2022 Selling, General and Administrative Expenses Contract talent solutions $ 679,464 $ 589,424 $ 638,799 $ 659,901 32.9 % 25.4 % 30.9 % 28.4 % Permanent placement talent solutions 264,690 302,147 259,813 312,034 86.5 % 78.1 % 84.9 % 80.7 % Protiviti 149,979 132,017 149,979 132,017 15.2 % 13.6 % 15.2 % 13.6 % Total $ 1,094,133 $ 1,023,588 $ 1,048,591 $ 1,103,952 32.6 % 27.8 % 31.2 % 30.0 % The following tables provide reconciliations of the non-GAAP selling, general and administrative expenses to reported selling, general and administrative expenses for the six months ended June 30, 2023 and 2022 (in thousands): Six Months Ended June 30, 2023 Contract Talent Solutions Permanent Placement Talent Solutions Protiviti Total $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Selling, General and Administrative Expenses As Reported $ 679,464 32.9 % $ 264,690 86.5 % $ 149,979 15.2 % $ 1,094,133 32.6 % Adjustments (1) (40,665) (2.0 %) (4,877) (1.6 %) — — (45,542) (1.4 %) As Adjusted $ 638,799 30.9 % $ 259,813 84.9 % $ 149,979 15.2 % $ 1,048,591 31.2 % Six Months Ended June 30, 2022 Contract Talent Solutions Permanent Placement Talent Solutions Protiviti Total $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Selling, General and Administrative Expenses As Reported $ 589,424 25.4 % $ 302,147 78.1 % $ 132,017 13.6 % $ 1,023,588 27.8 % Adjustments (1) 70,477 3.0 % 9,887 2.6 % — — 80,364 2.2 % As Adjusted $ 659,901 28.4 % $ 312,034 80.7 % $ 132,017 13.6 % $ 1,103,952 30.0 % (1) Changes in the Company’s employee deferred compensation plan obligations related to talent solutions operations are included in selling, general and administrative expenses, while the related investment (income) loss is presented separately. The non-GAAP financial adjustments shown in the table above are to reclassify investment (income) loss from investments held in employee deferred compensation trusts to the same line item that includes the corresponding change in obligation. These adjustments have no impact on income before income taxes. 28 (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 employee deferred compensation plan obligations change and adjustments are recorded in selling, general and administrative expenses, or in the case of Protiviti, 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) loss from investments held in employee deferred compensation trusts consists primarily of unrealized and realized gains and losses and dividend income from trust investments and is presented separately on the unaudited Condensed Consolidated Statements of Operations. The Company’s (income) loss from investments held in employee deferred compensation trusts was income of $56 million and a loss of $96 million for the six months ended June 30, 2023 and 2022, respectively. The income from trust investments was due to positive market returns during the first half of 2023. Income Before Income Taxes and Segment Income. The Company’s total income before income taxes was $320 million, or 9.5% of revenues, for the six months ended June 30, 2023, down from $468 million or 12.7% of revenues, for the six months ended June 30, 2022. Combined segment income was $311 million, or 9.3% of revenues, for the six months ended June 30, 2023, down from $468 million, or 12.7% of revenues, for the six months ended June 30, 2022. The Company's non-GAAP combined segment income is summarized as follows (in thousands): Six Months Ended June 30, 2023 % of Revenue 2022 % of Revenue Combined Segment Income Contract talent solutions $ 183,462 8.9 % $ 266,813 11.5 % Permanent placement talent solutions 45,557 14.9 % 74,079 19.1 % Protiviti 82,387 8.4 % 127,290 13.1 % Total $ 311,406 9.3 % $ 468,182 12.7 % The following table provides a reconciliation of the non-GAAP combined segment income to reported income before income taxes for the six months ended June 30, 2023, and 2022 (in thousands): Six Months Ended June 30, 2023 % of Revenue 2022 % of Revenue Income before income taxes $ 320,109 9.5 % $ 468,233 12.7 % Interest income, net (10,145) (0.2 %) (884) 0.0 % Amortization of intangible assets 1,442 0.0 % 833 0.0 % Combined segment income $ 311,406 9.3 % $ 468,182 12.7 % Provision for income taxes . The provision for income taxes was 28.7% and 26.5% for the six months ended June 30, 2023 and 2022, respectively. The higher tax rate for 2023 can be attributed to an increased impact of nondeductible expenses, fewer tax credits as well as lower stock compensation deductions. Liquidity and Capital Resources The change in the Company’s liquidity during the six months ended June 30, 2023 and 2022, 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 $723 million and $591 million at June 30, 2023 and 2022, respectively. Operating activities provided cash flows of $347 million during the six months ended June 30, 2023, offset by $78 million and $210 million of net cash used in investing activities and financing activities, respectively. Operating activities provided cash flows of $302 million during the six months ended June 30, 2022, offset by $55 million and $257 million of net cash used in investing activities and financing activities, respectively. Fluctuations in foreign currency exchange rates had the effect of increasing reported cash and cash equivalents by $5 million during the six months ended June 30, 2023, compared to a decrease of $18 million during the six months ended June 30, 2022. 29 Operating activities—Net cash provided by operating activities for the six months ended June 30, 2023, was composed of net income of $228 million adjusted upward for non-cash items of $22 million and net cash provided by changes in working capital of $97 million. Net cash provided by operating activities for the six months ended June 30, 2022, was composed of net income of $344 million adjusted upward for non-cash items of $176 million, offset by net cash used in changes in working capital of $218 million. Investing activities—Cash used in investing activities for the six months ended June 30, 2023, was $78 million. This was composed of capital expenditures of $19 million, investments in employee deferred compensation trusts of $82 million, and $1 million in payments related to an acquisition, partially offset by proceeds from employee deferred compensation trusts redemptions of $24 million. Cash used in investing activities for the six months ended June 30, 2022, was $55 million. This was composed of capital expenditures of $35 million and investments in employee deferred compensation trusts of $45 million, partially offset by proceeds from employee deferred compensation trusts redemptions of $25 million. Capital expenditures, including $20 million for cloud computing arrangements, for the six months ended June 30, 2023, totaled $39 million, approximately 74.0% 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 included amounts spent on tenant improvements and furniture and equipment in the Company’s leased offices. The Company currently expects that 2023 capital expenditures will range from $70 million to $80 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. Financing activities—Cash used in financing activities for the six months ended June 30, 2023, was $210 million. This included repurchases of $105 million in common stock and $105 million in dividends paid to stockholders. Cash used in financing activities for the six months ended June 30, 2022, was $257 million. This included repurchases of $161 million in common stock and $96 million in dividends paid to stockholders. As of June 30, 2023, the Company is authorized to repurchase, from time to time, up to 12.7 million additional shares of the Company’s common stock on the open market or in privately negotiated transactions, depending on market conditions. During the six months ended June 30, 2023 and 2022, the Company repurchased 1.1 million shares, at a cost of $83 million, and 1.4 million shares, at a cost of $133 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 six months ended June 30, 2023 and 2022, such repurchases totaled 0.3 million shares, at a cost of $22 million, and 0.3 million shares, at a cost of $33 million, respectively. Repurchases of shares have been funded with cash generated from operations. The Company’s working capital at June 30, 2023, included $723 million in cash and cash equivalents and $974 million in net 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. There is limited visibility into future cash flows as the Company’s revenues and net income are largely dependent on macroeconomic conditions. The Company’s variable direct costs related to its contract talent solutions business will largely fluctuate in relation to its revenues. In May 2023, the Company entered into an amendment to extend the maturity of its $100.0 million unsecured revolving credit facility (the “Credit Agreement”) to May 2026. Borrowings under the Credit Agreement will bear interest in accordance with the terms of the borrowing which, effective May 2023, will be calculated according to the Adjusted Term Secured Overnight Financing Rate ("SOFR"), or an alternative base rate, plus an applicable margin. The Credit Agreement is subject to certain financial covenants and the Company was in compliance with these covenants as of June 30, 2023. There were no borrowings under the Credit Agreement as of June 30, 2023, or December 31, 2022. On July 31, 2023, the Company announced a quarterly dividend of $0.48 per share to be paid to all shareholders of record as of August 25, 2023. The dividend will be paid on September 15, 2023. Material Cash Requirements from Contractual Obligations Leases. As of June 30, 2023, the Company reported current and long-term operating lease liabilities of $82 million and $136 million, respectively. These balances consist of the minimum rental commitments for July 2023 and thereafter, discounted to reflect the Company’s cost of borrowing, under noncancellable lease contracts executed as of June 30, 2023. 30 The majority of these leases are for real estate. In the event the Company vacates a location prior to the end of the lease term, the Company may be obliged to continue making lease payments. For further information, see Note G— “Leases” to the Company’s Condensed Consolidated Financial Statements included under Part I—Item 1 of this report. Purchase Obligations. Purchase obligations are discussed in more detail in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. There have been no material changes to the Company’s contractual purchase obligations during the first half of 2023. Employee Deferred Compensation Plan. As of June 30, 2023, the Company reported employee deferred compensation plan obligations of $531 million in its accompanying unaudited Condensed Consolidated Statements of Financial Position. The balances are due to employees based upon elections they make at the time of deferring their funds. The timing of these payments may change based upon factors including termination of the Company’s employment arrangement with a participant. Assets of these plans are held by an independent trustee for the sole benefit of participating employees and consist of money market funds and mutual funds. For further information, see Note J—“Employee Deferred Compensation Plan Obligations” to the Company’s Condensed Consolidated Financial Statements included under Part I—Item 1 of this report.