ROBERT HALF INC. (RHI) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain information contained in Management’s Discussion and Analysis and in other parts of this report may be deemed forward-looking statements regarding events and financial trends that may affect the future operating results or financial positions of Robert Half International Inc. (the “Company”). These statements may be identified by words such as “estimate,” “forecast,” “project,” “plan,” “intend,” “believe,” “expect,” “anticipate,” or variations or negatives thereof or by similar or comparable words or phrases. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. These risks and uncertainties include, but are not limited to, the following: changes to or new interpretations of 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 Securities and Exchange Commission (“SEC”) filings; the ability of the Company to manage its international operations and comply with foreign laws and regulations; the impact of fluctuations in foreign currency exchange rates; the possibility that the additional costs the Company will incur as a result of health care 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
During 2022 the Company unified its family of Robert Half brands to focus on its key brand, Robert Half. This simplifies the Company’s go-to-market brand structure for clients and candidates, provides leverage for greater brand awareness, and allows future flexibility to expand the Company’s existing functional specializations. In connection with this process, the Company’s current financial statement disclosures reflect new names for its reportable segments, including contract talent solutions (formerly temporary and consultant staffing), permanent placement talent solutions (formerly permanent placement staffing) and Protiviti (formerly risk consulting and internal audit services). What was previously referred to as staffing operations is now referred to as talent solutions.
The presentation of contract talent solutions includes functional specializations rather than the previously branded divisions. The functional specializations are: finance and accounting, which combines the former Accountemps® and Robert Half® Management Resources divisions; administrative and customer support, which consists of the former OfficeTeam®; and technology, which includes the former Robert Half® Technology.
The Company achieved record levels of service revenues and net income during 2022, and achieved new record levels for each. Annual service revenues reached $7.24 billion in 2022, increasing 12.0% from the prior year. Full-year 2022 net income was up 9.9% to $658 million and diluted net income per share increased 12.5% to $6.03. All of our major practice areas — contract talent, permanent placement and Protiviti — reached all-time high revenues, over and above very strong growth reported in the prior year.
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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 during 2022 was conducive to growth for the Company as real gross domestic product (“GDP”) increased 2.1% in 2022, compared to an increase of 5.7% in 2021, while the unemployment rate declined from 3.9% in December 2021, to 3.5% in December 2022. Although recent metrics have come off all-time highs, talent shortages persist. In the U.S., unemployment stands at a 50-year low and remains even lower for those with a college degree, where the rate is 1.9%. Similar reports across the global also point to labor market resilience.
While there remains volatility in the macroeconomic environment, the Company is optimistic about its outlook for 2023. Clients continue to hire, albeit at an even more measured pace, which has the effect of lengthening 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. In addition, the structural shift to remote work, particularly with higher skills, creates a new competitive advantage as it highlights the Company’s numerous strengths, including global brand, office network, candidate database and advanced AI-driven technologies. The Company’s investments in innovation and technology position it to meaningfully improve the digital and recruiter experience for its clients and candidates and the internal productivity of its staff.
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.
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 2022 the Company increased headcount across all segments, when compared to prior year-end levels.
Critical Accounting Policies and Estimates
As described below, the Company’s most critical accounting policies and estimates are those that involve subjective decisions or assessments.
Service Revenues. The Company derives its revenues from three segments: contract talent solutions, permanent placement talent solutions, and Protiviti. Revenues are recognized when promised goods or services are delivered to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. See Note C—“Revenue Recognition” to the Company’s Consolidated Financial Statements included under Part II—Item 8 of this report.
Income Taxes. The Company’s operations are subject to U.S. federal, state, local and foreign income taxes. In establishing its deferred income tax assets and liabilities and its provision for income taxes, the Company makes judgments and interpretations based on the enacted tax laws that are applicable to its operations in various jurisdictions. Deferred tax assets and liabilities are measured and recorded using current enacted tax rates, which the Company expects will apply to taxable income in the years in which those temporary differences are recovered or settled. The likelihood of a material change in the Company’s expected realization of its deferred tax assets is dependent on future taxable income and the effectiveness of its tax planning in the various relevant jurisdictions.
The Company also evaluates the need for valuation allowances to reduce the deferred tax assets to realizable amounts. Management evaluates all positive and negative evidence and uses judgment regarding past and future events, including operating results, to help determine when it is more likely than not that all or some portion of the deferred tax assets may not be realized. When appropriate, a valuation allowance is recorded against deferred tax assets to offset future tax benefits that may not be realized. Valuation allowances of $23.6 million and $24.2 million were recorded as of December 31, 2022, and 2021, respectively. The valuation allowances recorded relate primarily to net operating losses in certain international operations. If such losses are ultimately utilized to offset future operating income, the Company will recognize a tax benefit up to the full amount of the related valuation reserve.
While management believes that its judgments and interpretations regarding income taxes are appropriate, significant differences in actual experience may materially affect the future financial results of the Company.
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Recent Accounting Pronouncements
See Note B—“New Accounting Pronouncements” to the Company’s Consolidated Financial Statements included under Part II—Item 8 of this report.
Results of Operations
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 317 offices in 42 states, the District of Columbia, and 18 foreign countries, while Protiviti has 65 offices in 23 states and 13 foreign countries.
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 segment 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 7a. “Quantitative and Qualitative Disclosures About Market Risk” of this report for further discussion of the impact of foreign currency exchange rates on the Company’s results of operations and financial condition.
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Years ended December 31, 2022 and 2021
Service Revenues. The Company’s revenues were $7.24 billion for the year ended December 31, 2022, increasing by 12.0%, compared to $6.46 billion for the year ended December 31, 2021. Revenues from U.S. operations increased 14.1% to $5.71 billion (78.9% of total revenue) for the year ended December 31, 2022, compared to $5.01 billion (77.5% of total revenue) for the year ended December 31, 2021. Revenues from international operations increased 4.9% to $1.53 billion (21.1% of total revenue) for the year ended December 31, 2022, compared to $1.45 billion (22.5% of total revenue) for the year ended December 31, 2021. Contributing factors for each reportable segment are discussed below in further detail.
Contract talent solutions revenues were $4.53 billion for the year ended December 31, 2022, increasing by 12.2% compared to revenues of $4.04 billion for the year ended December 31, 2021. 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 increase in contract talent solutions revenues for 2022 was primarily due to a 9.5% increase in average bill rates and a 2.2% increase in the number of hours worked by the Company's engagement professionals. On an as adjusted basis, contract talent solutions revenues increased 14.5% for 2022, compared to 2021. In the U.S., 2022 revenues increased 14.7% on a reported basis, and increased 14.8% on an as adjusted basis, compared to 2021. For the Company’s international operations, 2022 revenues increased 3.5% on a reported basis, and increased 13.2% on an as adjusted basis, compared to 2021.
Permanent placement talent solutions revenues were $725 million for the year ended December 31, 2022, increasing by 27.2% compared to revenues of $570 million for the year ended December 31, 2021. Key drivers of permanent placement talent solutions revenues consist of the number of candidate placements and average fees earned per placement. The increase in permanent placement talent solutions revenues for 2022 was primarily due to an 18.6% increase in the number of placements and an 8.6% increase in average fees earned per placement. On an as adjusted basis, permanent placement talent solutions revenues increased 30.5% for 2022 compared to 2021. In the U.S., 2022 revenues increased 32.7% on a reported basis, and increased 32.9% on an as adjusted basis, compared to 2021. For the Company’s international operations, 2022 revenues increased 15.0% on a reported basis, and increased 25.4% on an as adjusted basis, compared to 2021. Historically, demand for permanent placement services 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 $1.98 billion for the year ended December 31, 2022, increasing by 6.9% compared to revenues of $1.85 billion for the year ended December 31, 2021. 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 2022 was primarily due to a 16.5% increase in average hourly bill rates, partially offset by a 9.6% decrease in billable hours. The increase in hourly bill rates and decrease in billable hours for 2022 was primarily due to an increase in the mix of full-time Protiviti consultants relative to contractors. On an as adjusted basis, Protiviti revenues increased 9.3% for 2022 compared to 2021. In the U.S., 2022 revenues increased 7.8% on a reported basis, and increased 7.9% on an as adjusted basis, compared to 2021. For the Company’s international operations, 2022 revenues increased 3.4% on a reported basis, and increased 14.8% on an as adjusted basis, compared to 2021.
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A reconciliation of the non-GAAP year-over-year revenue growth rates to the reported year-over-year revenue growth rates for the year ended December 31, 2022, is presented in the following table:
| Global | United States | International | ||||||
|---|---|---|---|---|---|---|---|---|
| Contract talent solutions | ||||||||
| As Reported | 12.2 | % | 14.7 | % | 3.5 | % | ||
| Billing Days Impact | 0.4 | % | 0.1 | % | 0.7 | % | ||
| Currency Impact | 1.9 | % | — | 9.0 | % | |||
| As Adjusted | 14.5 | % | 14.8 | % | 13.2 | % | ||
| Permanent placement talent solutions | ||||||||
| As Reported | 27.2 | % | 32.7 | % | 15.0 | % | ||
| Billing Days Impact | 0.3 | % | 0.2 | % | 0.7 | % | ||
| Currency Impact | 3.0 | % | — | 9.7 | % | |||
| As Adjusted | 30.5 | % | 32.9 | % | 25.4 | % | ||
| Protiviti | ||||||||
| As Reported | 6.9 | % | 7.8 | % | 3.4 | % | ||
| Billing Days Impact | 0.2 | % | 0.1 | % | 0.7 | % | ||
| Currency Impact | 2.2 | % | — | 10.7 | % | |||
| As Adjusted | 9.3 | % | 7.9 | % | 14.8 | % |
Gross Margin. The Company’s gross margin dollars were $3.09 billion for the year ended December 31, 2022, up 14.8% from $2.70 billion for the year ended December 31, 2021. 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 $1.80 billion for the year ended December 31, 2022, up 12.8% from $1.60 billion for the year ended December 31, 2021. As a percentage of revenues, gross margin dollars for contract talent solutions were 39.8% in 2022, up from 39.6% in 2021. This year-over-year improvement in gross margin percentage was primarily due to higher conversion revenues.
Gross margin dollars for permanent placement talent solutions represent revenues less reimbursable expenses. Gross margin dollars for permanent placement talent solutions were $724 million for the year ended December 31, 2022, up 27.2% from $569 million for the year ended December 31, 2021. Because reimbursable expenses for permanent placement talent solutions are de minimis, the increase in gross margin dollars is substantially explained by the increase 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 $566 million for the year ended December 31, 2022, up 7.2% from $528 million for the year ended December 31, 2021. As a percentage of revenues, reported gross margin dollars for Protiviti were 28.6% in 2022, up from 28.5% in 2021. As a percentage of revenues, adjusted gross margin dollars for Protiviti were 27.9% in 2022, down from 29.0% in 2021. The year-over-year decrease in adjusted gross margin percentage was primarily due to lower staff utilization rates.
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The Company's gross margin by reporting segment is summarized as follows (in thousands):
| Year Ended December 31, | Relationships | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As Reported | As Adjusted | As Reported | As Adjusted | ||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Gross Margin | |||||||||||||||||||||||||||
| Contract talent solutions | $ | 1,804,029 | $ | 1,598,716 | $ | 1,804,029 | $ | 1,598,716 | 39.8 | % | 39.6 | % | 39.8 | % | 39.6 | % | |||||||||||
| Permanent placement talent solutions | 723,706 | 568,983 | 723,706 | 568,983 | 99.8 | % | 99.8 | % | 99.8 | % | 99.8 | % | |||||||||||||||
| Protiviti | 566,314 | 528,329 | 552,465 | 537,176 | 28.6 | % | 28.5 | % | 27.9 | % | 29.0 | % | |||||||||||||||
| Total | $ | 3,094,049 | $ | 2,696,028 | $ | 3,080,200 | $ | 2,704,875 | 42.7 | % | 41.7 | % | 42.6 | % | 41.9 | % |
The following tables provide reconciliations of the non-GAAP adjusted gross margin to reported gross margin for the years ended 2022 and 2021 (in thousands):
| Year Ended December 31, 2022 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contract talent solutions | Permanent placement talent solutions | Protiviti | Total | ||||||||||||||||||||
| $ | % of Revenue | $ | % of Revenue | $ | % of Revenue | $ | % of Revenue | ||||||||||||||||
| Gross Margin | |||||||||||||||||||||||
| As Reported | $ | 1,804,029 | 39.8 | % | $ | 723,706 | 99.8 | % | $ | 566,314 | 28.6 | % | $ | 3,094,049 | 42.7 | % | |||||||
| Adjustments (1) | — | — | — | — | (13,849) | (0.7 | %) | (13,849) | (0.1 | %) | |||||||||||||
| As Adjusted | $ | 1,804,029 | 39.8 | % | $ | 723,706 | 99.8 | % | $ | 552,465 | 27.9 | % | $ | 3,080,200 | 42.6 | % |
| Year Ended December 31, 2021 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contract talent solutions | Permanent placement talent solutions | Protiviti | Total | ||||||||||||||||||||
| $ | % of Revenue | $ | % of Revenue | $ | % of Revenue | $ | % of Revenue | ||||||||||||||||
| Gross Margin | |||||||||||||||||||||||
| As Reported | $ | 1,598,716 | 39.6 | % | $ | 568,983 | 99.8 | % | $ | 528,329 | 28.5 | % | $ | 2,696,028 | 41.7 | % | |||||||
| Adjustments (1) | — | — | — | — | 8,847 | 0.5 | % | 8,847 | 0.2 | % | |||||||||||||
| As Adjusted | $ | 1,598,716 | 39.6 | % | $ | 568,983 | 99.8 | % | $ | 537,176 | 29.0 | % | $ | 2,704,875 | 41.9 | % |
(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 $2.12 billion for the year ended December 31, 2022, up 8.5% from $1.95 billion for the year ended December 31, 2021. As a percentage of revenues, reported selling, general and administrative expenses were 29.3% in 2022, down from 30.2% in 2021. As a percentage of revenues, adjusted selling, general and administrative expenses were 30.3% in 2022, up from 29.4% in 2021. Contributing factors for each reportable segment are discussed below in further detail.
Selling, general and administrative expenses for contract talent solutions were $1.25 billion for the year ended December 31, 2022, flat compared to the year ended December 31, 2021. As a percentage of revenues, reported selling, general and administrative expenses for contract talent solutions were 27.5% in 2022, down from 31.0% in 2021. As a percentage of revenues, adjusted selling, general and administrative expenses for contract talent solutions were 28.9% in 2022, down from 29.8% in 2021, due primarily to positive leverage from an increase in revenues.
Selling, general and administrative expenses for permanent placement talent solutions were $587 million for the year ended December 31, 2022, increasing by 25.5% from $468 million for the year ended December 31, 2021. As a percentage of revenues, reported selling, general and administrative expenses for permanent placement talent solutions services were 81.0% in 2022, down from 82.1% in 2021. As a percentage of revenues, adjusted selling, general and administrative expenses for permanent placement talent solutions was 82.2% in 2022, up from 81.2% in 2021, due primarily to higher staff compensation costs.
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Selling, general and administrative expenses for Protiviti were $282 million for the year ended December 31, 2022, increasing by 21.6% from $232 million for the year ended December 31, 2021. As a percentage of revenues, selling, general and administrative expenses for Protiviti were 14.2% in 2022, up from 12.5% in 2021, due primarily to operating expenditures returning to more normal levels following lower levels of expenditures experienced during the COVID-19 pandemic.
The Company's selling, general and administrative expenses by reportable segment are summarized as follows (in thousands):
| Year Ended December 31, | Relationships | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As Reported | As Adjusted | As Reported | As Adjusted | ||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Selling, General and Administrative Expenses | |||||||||||||||||||||||||||
| Contract talent solutions | $ | 1,248,378 | $ | 1,251,565 | $ | 1,311,748 | $ | 1,204,844 | 27.5 | % | 31.0 | % | 28.9 | % | 29.8 | % | |||||||||||
| Permanent placement talent solutions | 587,164 | 468,028 | 596,084 | 462,518 | 81.0 | % | 82.1 | % | 82.2 | % | 81.2 | % | |||||||||||||||
| Protiviti | 281,754 | 231,689 | 281,754 | 231,689 | 14.2 | % | 12.5 | % | 14.2 | % | 12.5 | % | |||||||||||||||
| Total | $ | 2,117,296 | $ | 1,951,282 | $ | 2,189,586 | $ | 1,899,051 | 29.3 | % | 30.2 | % | 30.3 | % | 29.4 | % |
The following tables provide reconciliations of the non-GAAP selling, general and administrative expenses to reported selling, general and administrative expenses for the years ended 2022 and 2021 (in thousands):
| Year Ended December 31, 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 | $ | 1,248,378 | 27.5 | % | $ | 587,164 | 81.0 | % | $ | 281,754 | 14.2 | % | $ | 2,117,296 | 29.3 | % | |||||||
| Adjustments (1) | 63,370 | 1.4 | % | 8,920 | 1.2 | % | — | — | 72,290 | 1.0 | % | ||||||||||||
| As Adjusted | $ | 1,311,748 | 28.9 | % | $ | 596,084 | 82.2 | % | $ | 281,754 | 14.2 | % | $ | 2,189,586 | 30.3 | % |
| Year Ended December 31, 2021 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contract talent solutions | Permanent placement talent solutions | Protiviti | Total | ||||||||||||||||||||
| $ | % of Revenue | $ | % of Revenue | $ | % of Revenue | $ | % of Revenue | ||||||||||||||||
| Selling, General and Administrative Expenses | |||||||||||||||||||||||
| As Reported | $ | 1,251,565 | 31.0 | % | $ | 468,028 | 82.1 | % | $ | 231,689 | 12.5 | % | $ | 1,951,282 | 30.2 | % | |||||||
| Adjustments (1) | (46,721) | (1.2 | %) | (5,510) | (0.9 | %) | — | — | (52,231) | (0.8 | %) | ||||||||||||
| As Adjusted | $ | 1,204,844 | 29.8 | % | $ | 462,518 | 81.2 | % | $ | 231,689 | 12.5 | % | $ | 1,899,051 | 29.4 | % |
(1)Changes in the Company’s deferred compensation 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 obligation to employees changes 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 Consolidated Statements of Operations. The Company’s (income) loss from investments held in employee deferred compensation trusts was a loss of $86 million for the year ended December 31, 2022, down from income of $61 million for the year ended December 31, 2021. The decrease in income from trust investments was due to negative market returns in 2022.
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Income Before Income Taxes and Segment Income. The Company’s total income before income taxes was $897 million, or 12.4% of revenues, for the year ended December 31, 2022, up from $804 million or 12.4% of revenues for the year ended December 31, 2021. Combined segment income was $891 million, or 12.3% of revenues, for the year ended December 31, 2022, up from $806 million, or 12.5% of revenues, for the year ended December 31, 2021.
The Company's non-GAAP combined segment income is summarized as follows (in thousands):
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | % of Revenue | 2021 | % of Revenue | ||||||||
| Combined Segment Income | |||||||||||
| Contract talent solutions | $ | 492,281 | 10.9 | % | $ | 393,872 | 9.8 | % | |||
| Permanent placement talent solutions | $ | 127,622 | 17.6 | % | $ | 106,465 | 18.7 | % | |||
| Protiviti | $ | 270,711 | 13.7 | % | $ | 305,487 | 16.5 | % | |||
| Total | $ | 890,614 | 12.3 | % | $ | 805,824 | 12.5 | % |
The following table provides a reconciliation of the non-GAAP combined segment income to reported income before income taxes for the years ended December 31, 2022, and 2021 (in thousands):
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | % of Revenue | 2021 | % of Revenue | ||||||||
| Income before income taxes | $ | 896,955 | 12.4 | % | $ | 803,780 | 12.4 | % | |||
| Interest income, net | (8,008) | (0.1 | %) | (197) | 0.0 | % | |||||
| Amortization of intangible assets | 1,667 | 0.0 | % | 2,241 | 0.1 | % | |||||
| Combined segment income | $ | 890,614 | 12.3 | % | $ | 805,824 | 12.5 | % |
Provision for income taxes. The provision for income taxes was 26.6% and 25.5% for the years ended December 31, 2022 and 2021, respectively. The higher tax rate for 2022 can be primarily attributed to higher non-deductible expenses in 2022, as well as lower stock compensation deductions due to the Company's stock price.
Years ended December 31, 2021 and 2020
A discussion of changes regarding the Company's financial condition and results of operations for the year ended December 31, 2021, compared to the year ended December 31, 2020, can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 14, 2022, which is available free of charge on the SEC’s website at www.sec.gov and at www.roberthalf.com/investor-center.
Liquidity and Capital Resources
The change in the Company’s liquidity during the years ended December 31, 2022 and 2021, 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 $659 million and $619 million at December 31, 2022, and 2021, respectively. Operating activities provided $684 million during the year ended December 31, 2022, offset by $117 million and $509 million of net cash used in investing activities and financing activities, respectively. Operating activities provided $603 million during the year ended December 31, 2021, offset by $88 million and $459 million of net cash used in investing and financing activities, respectively.
Operating activities—Net cash provided by operating activities for the year ended December 31, 2022, was $684 million. This was composed of net income of $658 million adjusted upward for non-cash items of $254 million, offset by net cash used in changes in working capital of $228 million. Net cash provided by operating activities for the year ended December 31, 2021, was $603 million. This was composed of net income of $599 million, adjusted upward for non-cash items of $89 million, offset by net cash used in changes in working capital of $85 million.
23
Investing activities—Cash used in investing activities for the year ended December 31, 2022, was $117 million. This was composed of capital expenditures of $61 million, investments in employee deferred compensation trusts of $67 million and $19 million cash paid for an acquisition, partially offset by proceeds from employee deferred compensation trust redemptions of $30 million. Cash used in investing activities for the year ended December 31, 2021, was $88 million. This was composed of capital expenditures of $37 million and investments in employee deferred compensation trusts of $85 million, partially offset by proceeds from employee deferred compensation trust redemptions of $34 million.
Capital expenditures, including $40 million related to cloud computing implementations, in 2022, totaled $101 million, approximately 80.0% 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 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 2023 capitalized expenditures will range from $100 million to $120 million, of which $65 million to $75 million relates to software initiatives and technology infrastructure, including capitalized costs relating to the implementation of cloud computing arrangements.
Financing activities—Cash used in financing activities for the year ended December 31, 2022, was $509 million. This included repurchases of $320 million in common stock and $189 million in dividends paid to stockholders. Cash used in financing activities for the year ended December 31, 2021, was $459 million. This included repurchases of $288 million in common stock and $171 million in dividends paid to stockholders.
As of December 31, 2022, the Company is authorized to repurchase, from time to time, up to 3.8 million additional shares of the Company’s common stock on the open market or in privately negotiated transactions, depending on market conditions. On February 9, 2023, the Company authorized the repurchase, from time to time, of up to an additional 10.0 million shares of the Company’s common stock on the open market or in privately negotiated transactions, depending on market conditions. During the years ended December 31, 2022 and 2021, the Company repurchased 3.3 million shares, at a cost of $280 million, and 2.8 million shares, at a cost of $260 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 applicable statutory withholding taxes. During the years ended December 31, 2022 and 2021, such repurchases totaled 0.4 million shares, at a cost of $38 million, and 0.3 million shares, at a cost of $30 million, respectively. Repurchases of shares have been funded with cash generated from operations.
The Company’s working capital as of December 31, 2022, included $659 million in cash and cash equivalents and $1.02 billion 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 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.
The Company has an unsecured revolving credit facility (the “Credit Agreement”) of $100 million, which matures in May 2024. Borrowings under the Credit Agreement will bear interest in accordance with the terms of the borrowing, which typically will be calculated according to the LIBOR, 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 December 31, 2022. There were no borrowings under the Credit Agreement as of December 31, 2022, or December 31, 2021.
On February 9, 2023, the Company announced a quarterly dividend of $0.48 per share to be paid to all shareholders of record as of February 24, 2023. The dividend will be paid on March 15, 2023.
Material Cash Requirements from Contractual Obligations
Leases. As of December 31, 2022, the Company reported current and long-term operating lease liabilities of $86.1 million and $151.8 million, respectively. These balances consist of the minimum rental commitments for 2023 and thereafter, discounted to reflect the Company’s cost of borrowing, under non-cancelable lease contracts executed as of December 31, 2022.
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 F—“Leases” to the Company’s Consolidated Financial Statements included under Part II—Item 8 of this report.
24
Purchase Obligations. As of December 31, 2022, the Company incurred contractual purchase obligations of $251.3 million primarily related to software subscriptions, services, telecom services and software maintenance agreements. Of this amount, $113.5 million is expected to be paid within the next twelve months. These purchase obligations are incurred during the normal course of business.
Employee Deferred Compensation Plan. As of December 31, 2022, the Company reported deferred compensation plan obligations of $474.1 million in its accompanying 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 I—“Employee Deferred Compensation Plans” to the Company’s Consolidated Financial Statements included under Part II—Item 8 of this report.