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, 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 ongoing impact of the COVID-19 virus 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 Revenue and net income results for the third quarter exceeded management's expectations, notwithstanding the ongoing macroeconomic uncertainty that lengthens client and job candidate decision cycles. Gross margins remained strong due to pricing discipline and the ongoing benefit from the rising mix shift to higher skill levels. The Company’s operating cost base also benefited from targeted actions to align costs with revenues across all reportable segments. During the first three quarters of 2023, service revenues were $4.92 billion, a decrease of 10.7% from the prior year. Net income was $324 million and diluted net income per share was $3.04. Global labor markets remain tight and the scarcity of talent persists. The urgency and velocity of that demand is impacted by the prolonged period of macroeconomic uncertainty, which continued in the third-quarter. Clients are budget sensitive and very selective in their hiring activities - including approval of new projects. On a segment basis, year-to-date revenues for contract talent solutions, permanent placement talent solutions and Protiviti were down 13.1%, 21.7% and 1.0% year-over-year, respectively. 19 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 three quarters of 2023 remained steady for the Company as the unemployment rate increased slightly from 3.5% for December 2022 to 3.8% at the end of the third 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 2.1%. 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 a negative impact on short-term results. The Company is confident about its ability to weather the current global macroeconomic environment and its future growth prospects as the macro landscape improves. Clients continue to hire, but are generally maintaining internal headcounts based on the anticipated difficulty in finding suitable replacements, resulting in less churn in the labor markets. The Company continues to invest in services involving higher-skilled positions across its practice groups. This has advantages of higher bill rates and gross margins, longer assignment lengths, and less economic sensitivity. 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 and labor market 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 three quarters of 2023, the Company decreased headcount for its contract talent solutions and permanent placement talent solutions segments, while it increased its full-time 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 nine months ended September 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 segments conducts placement activities through 319 offices in 42 states, the District of Columbia and 18 foreign countries, while Protiviti has 65 offices in 23 states and 13 foreign countries. 20 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 expenses; 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 September 30, 2023 and 2022 Service Revenues. The Company’s revenues were $1.56 billion for the three months ended September 30, 2023, a decrease of 14.7% compared to $1.83 billion for the three months ended September 30, 2022. Revenues from U.S. operations decreased 17.5% to $1.21 billion (77.3% of total revenue) for the three months ended September 30, 2023, compared to $1.47 billion (79.9% of total revenue) for the three months ended September 30, 2022. Revenues from international operations decreased 3.5% to $355 million (22.7% of total revenue) for the three months ended September 30, 2023, compared to $368 million (20.1% of total revenue) for the three months ended September 30, 2022. Contributing factors for each reportable segment are discussed below in further detail. Contract talent solutions revenues were $943 million for the three months ended September 30, 2023, decreasing by 17.3% compared to revenues of $1.14 billion for the three months ended September 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 September 30, 2023, was primarily due to a 22.9% decrease in the number of hours worked by the Company’s engagement professionals, partially offset by a 6.9% increase in average bill rates. On an as adjusted basis, contract talent solutions revenues decreased 16.4% for the third quarter of 2023, compared to the third quarter of 2022. In the U.S., revenues in the third quarter of 2023 decreased 20.7% on an as reported basis, and decreased 19.2% on an as adjusted basis, compared to the third quarter of 2022. International revenues for the third quarter of 2023 decreased 3.1% on an as reported basis, and decreased 4.9% on an as adjusted basis compared to the third quarter of 2022. 21 Permanent placement talent solutions revenues were $140 million for the three months ended September 30, 2023, decreasing by 23.3% compared to revenues of $182 million for the three months ended September 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 September 30, 2023, was due to a 26.8% decrease in the number of placements, partially offset by a 3.5% increase in average fees earned per placement. On an as adjusted basis, permanent placement talent solutions revenues decreased 22.5% for the third quarter of 2023, compared to the third quarter of 2022. In the U.S., revenues for the third quarter of 2023 decreased 26.9% on an as reported basis, and decreased 25.5% on an as adjusted basis, compared to the third quarter of 2022. International revenues for the third quarter of 2023 decreased 13.0% on an as reported basis and decreased 14.2% on an as adjusted basis, compared to the third 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 $481 million for the three months ended September 30, 2023, decreasing by 6.0% compared to revenues of $511 million for the three months ended September 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 September 30, 2023, was due to a 10.2% decrease in billable hours, partially offset by a 4.2% increase in average hourly bill rates. On an as adjusted basis, Protiviti revenues decreased 4.9% for the third quarter of 2023, compared to the third quarter of 2022. In the U.S., revenues in the third quarter of 2023 decreased 7.4% on an as reported basis, and decreased 5.6% on an as adjusted basis, compared to the third quarter of 2022. International revenues for the third quarter of 2023 increased 0.3% on an as reported basis and decreased 1.5% on an as adjusted basis, compared to the third 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 September 30, 2023, is presented in the following table: Global United States International Contract talent solutions As Reported -17.3 % -20.7 % -3.1 % Billing Days Impact 1.6 % 1.5 % 1.8 % Currency Impact -0.7 % ― -3.6 % As Adjusted -16.4 % -19.2 % -4.9 % Permanent placement talent solutions As Reported -23.3 % -26.9 % -13.0 % Billing Days Impact 1.5 % 1.4 % 1.6 % Currency Impact -0.7 % ― -2.8 % As Adjusted -22.5 % -25.5 % -14.2 % Protiviti As Reported -6.0 % -7.4 % 0.3 % Billing Days Impact 1.8 % 1.8 % 1.8 % Currency Impact -0.7 % ― -3.6 % As Adjusted -4.9 % -5.6 % -1.5 % Gross Margin . The Company’s gross margin dollars were $641 million for the three months ended September 30, 2023, down 18.6% from $788 million for the three months ended September 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 $375 million for the three months ended September 30, 2023, decreasing by 16.6% from $450 million for the three months ended September 30, 2022. As a percentage of revenues, gross margin dollars for contract talent solutions were 39.8% in the third quarter of 2023, up from 39.4% in the third quarter of 2022. The increase in gross margin percentage was primarily due to lower fringe costs and higher pay-bill spreads. 22 Gross margin dollars for permanent placement talent solutions represent revenues less reimbursable expenses. Gross margin dollars for permanent placement talent solutions were $140 million for the three months ended September 30, 2023, down 23.3% from $182 million for the three months ended September 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 $126 million for the three months ended September 30, 2023, down 19.2% from $156 million for the three months ended September 30, 2022. As a percentage of revenues, reported gross margin dollars for Protiviti were 26.2% in the third quarter of 2023, down from 30.5% in the third quarter of 2022. As a percentage of revenues, adjusted gross margin dollars for Protiviti were 25.6% in the third quarter of 2023, down from 30.0% in the third quarter of 2022. The year-over-year decrease in adjusted gross margin percentage was primarily due to increases in the pay rates for its professional staff, which were only partially offset by higher bill rates. The Company’s gross margin by reporting segment is summarized as follows (in thousands): Three Months Ended September 30, Relationships As Reported As Adjusted As Reported As Adjusted 2023 2022 2023 2022 2023 2022 2023 2022 Gross Margin Contract talent solutions $ 375,158 $ 449,579 $ 375,158 $ 449,579 39.8 % 39.4 % 39.8 % 39.4 % Permanent placement talent solutions 139,681 182,034 139,681 182,034 99.8 % 99.8 % 99.8 % 99.8 % Protiviti 126,100 155,996 123,255 153,296 26.2 % 30.5 % 25.6 % 30.0 % Total $ 640,939 $ 787,609 $ 638,094 $ 784,909 41.0 % 43.0 % 40.8 % 42.8 % The following tables provide reconciliations of the non-GAAP adjusted gross margin to reported gross margin for the three months ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, 2023 Contract Talent Solutions Permanent Placement Talent Solutions Protiviti Total $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Gross Margin As Reported $ 375,158 39.8 % $ 139,681 99.8 % $ 126,100 26.2 % $ 640,939 41.0 % Adjustments (1) — — — — (2,845) (0.6 %) (2,845) (0.2 %) As Adjusted $ 375,158 39.8 % $ 139,681 99.8 % $ 123,255 25.6 % $ 638,094 40.8 % Three Months Ended September 30, 2022 Contract Talent Solutions Permanent Placement Talent Solutions Protiviti Total $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Gross Margin As Reported $ 449,579 39.4 % $ 182,034 99.8 % $ 155,996 30.5 % $ 787,609 43.0 % Adjustments (1) — — — — (2,700) (0.5 %) (2,700) (0.2 %) As Adjusted $ 449,579 39.4 % $ 182,034 99.8 % $ 153,296 30.0 % $ 784,909 42.8 % (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. 23 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 $497 million for the three months ended September 30, 2023, decreasing by 9.5% from $549 million for the three months ended September 30, 2022. As a percentage of revenues, reported selling, general and administrative expenses were 31.8% in the third quarter of 2023, up from 29.9% in the third quarter of 2022. As a percentage of revenues, adjusted selling, general and administrative expenses were 32.5% in the third quarter of 2023, up from 30.6% in the third 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 $307 million for the three months ended September 30, 2023, decreasing by 3.8% from $319 million for the three months ended September 30, 2022. As a percentage of revenues, reported selling, general and administrative expenses for contract talent solutions were 32.5% in the third quarter of 2023, up from 27.9% in the third quarter of 2022. As a percentage of revenues, adjusted selling, general and administrative expenses for contract talent solutions were 33.6% in the third quarter of 2023, up from 28.9% in the third 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 $119 million for the three months ended September 30, 2023, decreasing by 19.5% from $148 million for the three months ended September 30, 2022. As a percentage of revenues, reported selling, general and administrative expenses for permanent placement talent solutions were 85.3% in the third quarter of 2023, up from 81.3% in the third quarter of 2022. As a percentage of revenues, adjusted selling, general and administrative expenses for permanent placement was 86.2% in the third quarter of 2023, up from 82.2% in the third 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 Protiviti were $71 million for the three months ended September 30, 2023, decreasing by 13.4% from $82 million for the three months ended September 30, 2022. As a percentage of revenues, selling, general and administrative expenses for Protiviti services were 14.7% in the third quarter of 2023, down from 16.0% in the third quarter of 2022, due primarily to lower variable overhead costs. The Company’s selling, general and administrative expenses by reportable segment are summarized as follows: (in thousands): Three Months Ended September 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 $ 306,503 $ 318,462 $ 316,683 $ 329,531 32.5 % 27.9 % 33.6 % 28.9 % Permanent placement talent solutions 119,376 148,290 120,626 149,856 85.3 % 81.3 % 86.2 % 82.2 % Protiviti 70,853 81,827 70,853 81,827 14.7 % 16.0 % 14.7 % 16.0 % Total $ 496,732 $ 548,579 $ 508,162 $ 561,214 31.8 % 29.9 % 32.5 % 30.6 % 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 September 30, 2023 and 2022 (in thousands): Three Months Ended September 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 $ 306,503 32.5 % $ 119,376 85.3 % $ 70,853 14.7 % $ 496,732 31.8 % Adjustments (1) 10,180 1.1 % 1,250 0.9 % — — 11,430 0.7 % As Adjusted $ 316,683 33.6 % $ 120,626 86.2 % $ 70,853 14.7 % $ 508,162 32.5 % 24 Three Months Ended September 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 $ 318,462 27.9 % $ 148,290 81.3 % $ 81,827 16.0 % $ 548,579 29.9 % Adjustments (1) 11,069 1.0 % 1,566 0.9 % — — 12,635 0.7 % As Adjusted $ 329,531 28.9 % $ 149,856 82.2 % $ 81,827 16.0 % $ 561,214 30.6 % (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 loss from investments held in employee deferred compensation trusts was $14 million and $15 million for the three months ended September 30, 2023 and 2022, respectively. The loss from trust investments was due to negative market returns during the third quarter of 2023. Income Before Income Taxes and Segment Income. The Company’s total income before income taxes was $136 million, or 8.7% of revenues, for the three months ended September 30, 2023, down from $226 million or 12.3% of revenues, for the three months ended September 30, 2022. Combined segment income was $130 million, or 8.3% of revenues, for the three months ended September 30, 2023, down from $224 million, or 12.2% of revenues, for the three months ended September 30, 2022. The Company’s non-GAAP combined segment income is summarized as follows (in thousands): Three Months Ended September 30, 2023 % of Revenue 2022 % of Revenue Combined Segment Income Contract talent solutions $ 58,475 6.2 % $ 120,048 10.5 % Permanent placement talent solutions 19,055 13.6 % 32,178 17.6 % Protiviti 52,402 10.9 % 71,469 14.0 % Total $ 129,932 8.3 % $ 223,695 12.2 % The following table provides a reconciliation of the non-GAAP combined segment income to reported income before income taxes for the three months ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, 2023 % of Revenue 2022 % of Revenue Income before income taxes $ 136,343 8.7 % $ 225,624 12.3 % Interest income, net (7,131) (0.4 %) (2,346) (0.1 %) Amortization of intangible assets 720 0.0 % 417 0.0 % Combined segment income $ 129,932 8.3 % $ 223,695 12.2 % Provision for income taxes . The provision for income taxes was 29.9% and 26.3% for the three months ended September 30, 2023 and 2022, respectively. The higher tax rate for 2023 can be attributed to an increased impact of nondeductible expenses and fewer tax credits. 25 Nine Months Ended September 30, 2023 and 2022 Service Revenues. The Company’s revenues were $4.92 billion for the nine months ended September 30, 2023, a decrease of 10.7% compared to $5.51 billion for the nine months ended September 30, 2022. Revenues from U.S. operations decreased 12.1% to $3.82 billion (77.7% of total revenue) for the nine months ended September 30, 2023, compared to $4.35 billion (78.9% of total revenue) for the nine months ended September 30, 2022. Revenues from international operations decreased 5.6% to $1.10 billion (22.3% of total revenue) for the nine months ended September 30, 2023, compared to $1.16 billion (21.1% of total revenue) for the nine months ended September 30, 2022. Contributing factors for each reportable segment are discussed below in further detail. Contract talent solutions revenues were $3.01 billion for the nine months ended September 30, 2023, decreasing by 13.1% compared to revenues of $3.46 billion for the nine months ended September 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 nine months ended September 30, 2023, was primarily due to a 20.7% decrease in the number of hours worked by the Company’s engagement professionals, partially offset by an 8.5% increase in average bill rates. On an as adjusted basis, contract talent solutions revenues in the first three quarters of 2023 decreased 12.7% compared to the first three quarters of 2022. In the U.S., revenues in the first three quarters of 2023 decreased 15.1% on an as reported basis, and decreased 15.0% on as adjusted basis, compared to the first three quarters of 2022. International revenues for the first three quarters of 2023 decreased 5.1% on an as reported basis, and decreased 4.0% on an as adjusted basis, compared to the first three quarters of 2022. Permanent placement talent solutions revenues were $446 million for the nine months ended September 30, 2023, decreasing by 21.7% compared to revenues of $569 million for the nine months ended September 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 nine months ended September 30, 2023, was due to a 23.7% decrease in the number of placements, partially offset by a 2.0% increase in average fees earned per placement. On an as adjusted basis, permanent placement talent solutions revenues decreased 21.2% for the first three quarters of 2023, compared to the first three quarters of 2022. In the U.S., revenues for the first three quarters of 2023 decreased 23.4% on an as reported basis and decreased 23.3% on an as adjusted basis, compared to the first three quarters of 2022. International revenues for the first three quarters of 2023 decreased 17.0% on an as reported basis, and decreased 15.6% on an as adjusted basis, compared to the first three quarters 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 $1.47 billion for the nine months ended September 30, 2023, decreasing by 1.0% compared to revenues of $1.48 billion for the nine months ended September 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 nine months ended September 30, 2023, was due to a 4.5% decrease in billable hours, partially offset by a 3.5% increase in average hourly bill rates. On an as adjusted basis, Protiviti revenues decreased 0.6% for the first three quarters of 2023, compared to the first three quarters of 2022. In the U.S., revenues in the first three quarters of 2023 decreased 1.1% on an as reported basis and decreased 0.9% on an as adjusted basis, compared to the first three quarters of 2022. International revenues in the first three quarters of 2023 decreased 0.7% on an as reported basis, and increased 0.5% on an as adjusted basis, compared to the first three quarters of 2022. 26 A reconciliation of the non-GAAP year-over-year revenue growth rates to the as reported year-over-year revenue growth rates for the nine months ended September 30, 2023, is presented in the following table: Global United States International Contract talent solutions As Reported -13.1 % -15.1 % -5.1 % Billing Days Impact 0.2 % 0.1 % 0.2 % Currency Impact 0.2 % ― 0.9 % As Adjusted -12.7 % -15.0 % -4.0 % Permanent placement talent solutions As Reported -21.7 % -23.4 % -17.0 % Billing Days Impact 0.2 % 0.1 % 0.2 % Currency Impact 0.3 % ― 1.2 % As Adjusted -21.2 % -23.3 % -15.6 % Protiviti As Reported -1.0 % -1.1 % -0.7 % Billing Days Impact 0.2 % 0.2 % 0.2 % Currency Impact 0.2 % ― 1.0 % As Adjusted -0.6 % -0.9 % 0.5 % Gross Margin . The Company’s gross margin dollars were $1.99 billion for the nine months ended September 30, 2023, down 16.2% from $2.38 billion for the nine months ended September 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 $1.20 billion for the nine months ended September 30, 2023, down 13.0% from $1.38 billion for the nine months ended September 30, 2022. As a percentage of revenues, gross margin dollars for contract talent solutions were 39.8% in the first three quarters of both 2023 and 2022. Gross margin dollars for permanent placement talent solutions represent revenues less reimbursable expenses. Gross margin dollars for permanent placement talent solutions were $445 million for the nine months ended September 30, 2023, down 21.7% from $568 million for the nine months ended September 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 $348 million for the nine months ended September 30, 2023, down 19.1% from $431 million for the nine months ended September 30, 2022. As a percentage of revenues, reported gross margin dollars for Protiviti were 23.8% in the first three quarters of 2023, down from 29.1% in the first three quarters of 2022. As a percentage of revenues, adjusted gross margin dollars for Protiviti were 24.3% in the first three quarters of 2023, down from 27.9% in the first three quarters of 2022. The year-over-year decrease in adjusted gross margin percentage was primarily due to increases in the pay rates for its professional staff, which were only partially offset by higher bill rates. 27 The Company’s gross margin by reportable segment are summarized as follows: (in thousands): Nine Months Ended September 30, Relationships As Reported As Adjusted As Reported As Adjusted 2023 2022 2023 2022 2023 2022 2023 2022 Gross Margin Contract talent solutions $ 1,197,419 $ 1,376,293 $ 1,197,419 $ 1,376,293 39.8 % 39.8 % 39.8 % 39.8 % Permanent placement talent solutions 445,051 568,147 445,051 568,147 99.8 % 99.8 % 99.8 % 99.8 % Protiviti 348,370 430,562 355,621 412,603 23.8 % 29.1 % 24.3 % 27.9 % Total $ 1,990,840 $ 2,375,002 $ 1,998,091 $ 2,357,043 40.5 % 43.1 % 40.6 % 42.8 % The following tables provide reconciliations of the non-GAAP adjusted gross margin to reported gross margin for the nine months ended September 30, 2023 and 2022 (in thousands): Nine Months Ended September 30, 2023 Contract Talent Solutions Permanent Placement Talent Solutions Protiviti Total $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Gross Margin As Reported $ 1,197,419 39.8 % $ 445,051 99.8 % $ 348,370 23.8 % $ 1,990,840 40.5 % Adjustments (1) — — — — 7,251 0.5 % 7,251 0.1 % As Adjusted $ 1,197,419 39.8 % $ 445,051 99.8 % $ 355,621 24.3 % $ 1,998,091 40.6 % Nine Months Ended September 30, 2022 Contract Talent Solutions Permanent Placement Talent Solutions Protiviti Total $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Gross Margin As Reported $ 1,376,293 39.8 % $ 568,147 99.8 % $ 430,562 29.1 % $ 2,375,002 43.1 % Adjustments (1) — — — — (17,959) (1.2 %) (17,959) (0.3 %) As Adjusted $ 1,376,293 39.8 % $ 568,147 99.8 % $ 412,603 27.9 % $ 2,357,043 42.8 % (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 reported selling, general and administrative expenses were $1.59 billion for the nine months ended September 30, 2023, up 1.2% from $1.57 billion for the nine months ended September 30, 2022. As a percentage of revenues, reported selling, general and administrative expenses were 32.3% in the first three quarters of 2023, up from 28.5% in the first three quarters of 2022. The Company’s adjusted selling, general and administrative expenses were $1.56 billion for the nine months ended September 30, 2023, down 6.5% from $1.67 billion for the nine months ended September 30, 2022. As a percentage of revenues, adjusted selling, general and administrative expenses were 31.6% in the first three quarters of 2023, up from 30.2% in the first three quarters of 2022. Contributing factors for each reportable segment are discussed below in further detail. Selling, general and administrative expenses for contract talent solutions, on an as-reported basis, were $986 million for the nine months ended September 30, 2023, increasing by 8.6% from $908 million for the nine months ended September 30, 2022. As a percentage of revenues, reported selling, general and administrative expenses for contract talent solutions were 32.8% in the first three quarters of 2023, up from 26.2% in the first three quarters of 2022. Selling, general and administrative expenses for contract talent solutions, on an adjusted basis, were $955 million for the nine months ended September 30, 2023, down 3.4% from $989 million for the nine months ended September 30, 2022. As a percentage of revenues, adjusted selling, general and administrative expenses for contract talent solutions were 31.8% in the first three quarters of 2023, up from 28.6% in the first three quarters of 2022, due primarily to negative leverage as revenues decreased as a result of economic conditions. 28 Selling, general and administrative expenses for permanent placement talent solutions were $384 million for the nine months ended September 30, 2023, decreasing by 14.7% from $450 million for the nine months ended September 30, 2022. As a percentage of revenues, reported selling, general and administrative expenses for permanent placement talent solutions were 86.1% in the first three quarters of 2023, up from 79.1% in the first three quarters of 2022. As a percentage of revenues, adjusted selling, general and administrative expenses for permanent placement talent solutions was 85.3% in the first three quarters of 2023, up from 81.1% in the first three quarters of 2022, due primarily to negative leverage as revenues decreased as a result of economic conditions. Selling, general and administrative expenses for Protiviti were $221 million for the nine months ended September 30, 2023, increasing by 3.3% from $214 million for the nine months ended September 30, 2022. As a percentage of revenues, selling, general and administrative expenses for Protiviti were 15.1% in the first three quarters of 2023, up from 14.4% in the first three quarters of 2022, due primarily to negative leverage as revenues decreased as a result of economic conditions. The Company’s selling, general and administrative expenses by reportable segment are summarized as follows: (in thousands): Nine Months Ended September 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 $ 985,967 $ 907,886 $ 955,482 $ 989,432 32.8 % 26.2 % 31.8 % 28.6 % Permanent placement talent solutions 384,066 450,437 380,439 461,890 86.1 % 79.1 % 85.3 % 81.1 % Protiviti 220,832 213,844 220,832 213,844 15.1 % 14.4 % 15.1 % 14.4 % Total $ 1,590,865 $ 1,572,167 $ 1,556,753 $ 1,665,166 32.3 % 28.5 % 31.6 % 30.2 % The following tables provide reconciliations of the non-GAAP selling, general and administrative expenses to reported selling, general and administrative expenses for the nine months ended September 30, 2023 and 2022 (in thousands): Nine Months Ended September 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 $ 985,967 32.8 % $ 384,066 86.1 % $ 220,832 15.1 % $ 1,590,865 32.3 % Adjustments (1) (30,485) (1.0 %) (3,627) (0.8 %) — — (34,112) (0.7 %) As Adjusted $ 955,482 31.8 % $ 380,439 85.3 % $ 220,832 15.1 % $ 1,556,753 31.6 % Nine Months Ended September 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 $ 907,886 26.2 % $ 450,437 79.1 % $ 213,844 14.4 % $ 1,572,167 28.5 % Adjustments (1) 81,546 2.4 % 11,453 2.0 % — — 92,999 1.7 % As Adjusted $ 989,432 28.6 % $ 461,890 81.1 % $ 213,844 14.4 % $ 1,665,166 30.2 % (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. 29 (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 $41 million and a loss of $111 million for the nine months ended September 30, 2023 and 2022, respectively. The income from trust investments was due to positive market returns during the first three quarters of 2023. Income Before Income Taxes and Segment Income. The Company’s total income before income taxes was $456 million, or 9.3% of revenues, for the nine months ended September 30, 2023, down from $694 million or 12.6% of revenues, for the nine months ended September 30, 2022. Combined segment income was $441 million, or 9.0% of revenues, for the nine months ended September 30, 2023, down from $692 million, or 12.6% of revenues, for the nine months ended September 30, 2022. The Company’s non-GAAP combined segment income is summarized as follows (in thousands): Nine Months Ended September 30, 2023 % of Revenue 2022 % of Revenue Combined Segment Income Contract talent solutions $ 241,937 8.0 % $ 386,861 11.2 % Permanent placement talent solutions 64,612 14.5 % 106,257 18.7 % Protiviti 134,789 9.2 % 198,759 13.4 % Total $ 441,338 9.0 % $ 691,877 12.6 % The following table provides a reconciliation of the non-GAAP combined segment income to reported income before income taxes for the nine months ended September 30, 2023, and 2022 (in thousands): Nine Months Ended September 30, 2023 % of Revenue 2022 % of Revenue Income before income taxes $ 456,452 9.3 % $ 693,857 12.6 % Interest income, net (17,276) (0.3 %) (3,230) 0.0 % Amortization of intangible assets 2,162 0.0 % 1,250 0.0 % Combined segment income $ 441,338 9.0 % $ 691,877 12.6 % Provision for income taxes . The provision for income taxes was 29.1% and 26.5% for the nine months ended September 30, 2023 and 2022, respectively. The higher tax rate for 2023 can be attributed to an increased impact of nondeductible expenses and fewer tax credits. Liquidity and Capital Resources The change in the Company’s liquidity during the nine months ended September 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 $729 million and $593 million at September 30, 2023 and 2022, respectively. Operating activities provided cash flows of $522 million during the nine months ended September 30, 2023, offset by $91 million and $354 million of net cash used in investing activities and financing activities, respectively. Operating activities provided cash flows of $481 million during the nine months ended September 30, 2022, offset by $72 million and $400 million of net cash used in investing activities and financing activities, respectively. Fluctuations in foreign currency exchange rates had the effect of decreasing reported cash and cash equivalents by $6 million during the nine months ended September 30, 2023, compared to a decrease of $35 million during the nine months ended September 30, 2022. 30 Operating activities—Net cash provided by operating activities for the nine months ended September 30, 2023, was composed of net income of $324 million adjusted upward for non-cash items of $75 million and net cash provided by changes in working capital of $123 million. Net cash provided by operating activities for the nine months ended September 30, 2022, was composed of net income of $510 million adjusted upward for non-cash items of $224 million, offset by net cash used in changes in working capital of $253 million. Investing activities—Cash used in investing activities for the nine months ended September 30, 2023, was $91 million. This was composed of capital expenditures of $34 million, investments in employee deferred compensation trusts of $89 million, and $1 million in payments related to an acquisition, partially offset by proceeds from employee deferred compensation trusts redemptions of $33 million. Cash used in investing activities for the nine months ended September 30, 2022, was $72 million. This was composed of capital expenditures of $49 million and investments in employee deferred compensation trusts of $52 million, partially offset by proceeds from employee deferred compensation trusts redemptions of $29 million. Capital expenditures, including $28 million for cloud computing arrangements, for the nine months ended September 30, 2023, totaled $63 million, approximately 68.0% 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 $80 million to $90 million, of which $50 million to $60 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 nine months ended September 30, 2023, was $354 million. This included repurchases of $199 million in common stock and $155 million in dividends paid to stockholders. Cash used in financing activities for the nine months ended September 30, 2022, was $400 million. This included repurchases of $258 million in common stock and $142 million in dividends paid to stockholders. As of September 30, 2023, the Company is authorized to repurchase, from time to time, up to 11.5 million additional shares of the Company’s common stock on the open market or in privately negotiated transactions, depending on market conditions. During the nine months ended September 30, 2023 and 2022, the Company repurchased 2.4 million shares, at a cost of $175 million, and 2.5 million shares, at a cost of $219 million, on the open market, respectively. Additional stock repurchases were made in connection with employee stock plans, whereby Company shares were tendered by employees for the payment of exercise price and applicable statutory withholding taxes. During the nine months ended September 30, 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 September 30, 2023, included $729 million in cash and cash equivalents and $941 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 September 30, 2023. There were no borrowings under the Credit Agreement as of September 30, 2023, or December 31, 2022. On October 30, 2023, the Company announced a quarterly dividend of $0.48 per share to be paid to all shareholders of record as of November 24, 2023. The dividend will be paid on December 15, 2023. Material Cash Requirements from Contractual Obligations Leases. As of September 30, 2023, the Company reported current and long-term operating lease liabilities of $81 million and $134 million, respectively. These balances consist of the minimum rental commitments for October 2023 and thereafter, discounted to reflect the Company’s cost of borrowing, under noncancellable lease contracts executed as of September 30, 2023. 31 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 three quarters of 2023. Employee Deferred Compensation Plan. As of September 30, 2023, the Company reported employee deferred compensation plan obligations of $519 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.