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| RHI > SEC Filings for RHI > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
Certain information contained in Management's Discussion and Analysis and in other parts of this report may be deemed forward-looking statements regarding events and financial trends that may affect the Company's future operating results or financial positions. These statements may be identified by words such as "estimate", "forecast", "project", "plan", "intend", "believe", "expect", "anticipate", or variations or negatives thereof or by similar or comparable words or phrases. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. These risks and uncertainties include, but are not limited to, the following: the global financial and economic situation; changes in levels of unemployment and other economic conditions in the United States or foreign countries where the Company does business, or in particular regions or industries; reduction in the supply of candidates for temporary employment or the Company's ability to attract candidates; the entry of new competitors into the marketplace or expansion by existing competitors; the ability of the Company to maintain existing client relationships and attract new clients in the context of changing economic or competitive conditions; the impact of competitive pressures, including any change in the demand for the Company's services, on the Company's ability to maintain its margins; the possibility of the Company incurring liability for its activities, including the activities of its temporary employees, or for events impacting its temporary employees 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 Company's computer and communications hardware and software systems could be damaged or their service interrupted; and the possibility that the Company may fail to maintain adequate financial and management controls and as a result suffer errors in its financial reporting. Additionally, with respect to Protiviti, other risks and uncertainties include the fact that future success will depend on its ability to retain employees and attract clients; there can be no assurance that there will be ongoing demand for Sarbanes-Oxley or other regulatory compliance services; failure to produce projected revenues could adversely affect financial results; and there is the possibility of involvement in litigation relating to prior or current transactions or activities. Because long-term contracts are not a significant part of the Company's business, future results cannot be reliably predicted by considering past trends or extrapolating past results.
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.
Accounts Receivable Allowances. The Company maintains allowances for estimated losses resulting from (i) the inability of its customers to make required payments, (ii) temporary placement sales adjustments, and (iii) permanent placement candidates not remaining with the client through the 90-day guarantee period, commonly referred to as "fall offs". The Company establishes these allowances based on its review of customers' credit profiles, historical loss statistics and current trends. The adequacy of these allowances is reviewed each reporting period. Historically, the Company's actual losses and credits have been consistent with these allowances. As a percentage of gross accounts receivable, the Company's accounts receivable allowances totaled 6.8% and 6.6% as of March 31, 2009, and December 31, 2008, respectively. As of March 31, 2009, a five-percentage point deviation in the Company's accounts receivable allowances balance would have resulted in an increase or decrease in the allowance of $1.5 million. Although future results cannot always be predicted by extrapolating past results, management believes that it is reasonably likely that future results will be consistent with historical trends and experience. However, if the financial condition of the Company's customers were to
Income Tax Assets and Liabilities. In establishing its deferred income tax assets and liabilities, the Company makes judgments and interpretations based on the enacted tax laws and published tax guidance that are applicable to its operations. 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 these assets is dependent on future taxable income, its ability to use foreign tax credit carryforwards and carrybacks, final U.S. and foreign tax settlements, 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 our 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. In relation to actual net operating losses in certain foreign operations, valuation allowances of $17.5 million were recorded as of March 31, 2009. If such losses are ultimately utilized to offset future operating income, the Company will benefit its deferred tax assets up to the full amount of the 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.
Goodwill Impairment. The Company assesses the impairment of goodwill annually in the second quarter, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Due to the recent significant decline in global economic and labor market conditions the Company updated its impairment assessment during the three months ended March 31, 2009.
SFAS 142 requires a two-step approach for determining goodwill impairment. In the first step the Company determines the fair value of each reporting unit utilizing a present value technique derived from a discounted cash flow methodology. For purposes of this assessment the Company's reporting units are its lines of business. The fair value of the reporting unit is then compared to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. The second step under the provisions of SFAS 142 is contingent upon the results of the first step. To the extent a reporting unit's carrying value exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform a second more detailed impairment assessment. The second impairment assessment involves allocating the reporting unit's fair value to its net assets in order to determine the implied fair value of the reporting unit's goodwill as of the assessment date. The implied fair value of the reporting unit's goodwill is then compared to the carrying amount of goodwill to quantify an impairment charge as of the assessment date.
The Company's reporting units are Accountemps, Robert Half Finance & Accounting, OfficeTeam, Robert Half Technology, Robert Half Management Resources and Protiviti, which had goodwill balances at March 31, 2009, of $126.8 million, $26.4 million, $0.0 million, $6.9 million, $0.0 million and $27.0 million, respectively, totaling $187.1 million. There were no changes to the Company's reporting units or to the allocations of goodwill by reporting unit in the first quarter of 2009.
The goodwill impairment assessment is based upon a discounted cash flow analysis. The estimate of future cash flows is based upon, among other things, a discount rate and certain assumptions about expected future
In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, the Company applied hypothetical decreases to the fair values of each reporting unit. The Company determined that hypothetical decreases in fair value of at least 41% would be required before any reporting unit would have a carrying value in excess of its fair value.
Given the current economic environment and the uncertainties regarding the impact on the Company's business, there can be no assurance that the Company's estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of the Company's goodwill impairment testing will prove to be accurate predictions of the future. If the Company's assumptions regarding forecasted revenue or profitability growth rates of certain reporting units are not achieved, the Company may be required to recognize goodwill impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.
Workers' Compensation. Except for states which require participation in state-operated insurance funds, the Company retains the economic burden for the first $0.5 million per occurrence in workers' compensation claims. Workers' compensation includes ongoing healthcare and indemnity coverage for claims and may be paid over numerous years following the date of injury. Claims in excess of $0.5 million are insured. Workers' compensation expense includes the insurance premiums for claims in excess of $0.5 million, claims administration fees charged by the Company's workers' compensation administrator, premiums paid to state-operated insurance funds, and an estimate for the Company's liability for Incurred But Not Reported ("IBNR") claims and for the ongoing development of existing claims. Total workers' compensation expense was $3.1 million and $4.8 million, representing 0.52% and 0.54% of applicable U.S. revenue for the three months ended March 31, 2009 and 2008, respectively.
The accrual for IBNR claims and for the ongoing development of existing claims in each reporting period includes estimates. The Company has established reserves for workers' compensation claims using loss development rates which are estimated using periodic third-party actuarial valuations based upon historical loss statistics which include the Company's historical frequency and severity of workers' compensation claims, and an estimate of future cost trends. While management believes that its assumptions and estimates are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the Company's future results. Based on the Company's results for the three months ended March 31, 2009, a five-percentage point deviation in the Company's estimated loss development rates would have resulted in an increase or decrease in the allowance of $0.1 million.
Compensation expense for restricted stock and stock units is generally recognized on a straight-line basis over the vesting period, based on the stock's fair market value on the grant date. For restricted stock grants issued with performance conditions, compensation expense is recognized over each vesting tranche. The Company recognizes compensation expense for only the portion of restricted stock and stock units that is expected to vest, rather than record forfeitures when they occur. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods. For purposes of calculating stock-based compensation expense for retirement-eligible employees, the service period is assumed to be met on the grant date or retirement-eligible date, whichever is later.
No stock appreciation rights have been granted under the Company's existing stock plans.
The Company determines the fair value of options to purchase common stock using the Black-Scholes valuation model. The Company recognizes expense over the service period for options that are expected to vest and records adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates. The Company has not granted any options to purchase common stock since 2006.
For the three months ended March 31, 2009 and 2008, compensation expense related to restricted stock and stock units was $14.4 million and $15.6 million, respectively, of which $1.5 million and $3.0 million was related to grants made in 2009 and 2008, respectively. A one-percentage point deviation in the estimated forfeiture rates would have resulted in a $0.1 million and a $0.2 million increase or decrease in compensation expense related to restricted stock and stock units for the three months ended March 31, 2009 and 2008, respectively.
Recent Accounting Pronouncements
In April 2009, the FASB issued Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments ("FSP FAS 107-1 and APB 28-1"). FSP FAS 107-1 and APB 28-1 requires an entity to provide disclosures about fair value of financial instruments in interim financial reporting. FSP FAS 107-1 and APB 28-1 is effective for interim periods ending after June 15, 2009. The Company is in the process of analyzing the impact of FSP FAS 107-1 and APB 28-1 on its Financial Statements.
In April 2009, The FASB issued Staff Position No. FAS 157-4, Determining Fair Value When The Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly ("FSP FAS 157-4"). FSP FAS 157-4 provides additional guidance to highlight and expand on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009. The Company is in the process of analyzing the impact of FSP FAS 157-4 on its Financial Statements.
Results of Operations-Three months ended March 31, 2009
Demand for the Company's temporary and permanent staffing services and risk consulting and internal audit services is largely dependent upon general economic and labor market conditions both domestically and abroad. Correspondingly, results of operations for the first quarter of 2009 were negatively impacted by declining global economic conditions. Because of the inherent difficulty in predicting economic trends and the absence of material long-term contracts in any of our business units, future demand for the Company's services cannot be forecasted with certainty. We expect the Company's results to continue to be negatively impacted by a relatively prolonged period of global economic contraction.
The Company's temporary and permanent staffing services business has more than 370 offices in 42 states, the District of Columbia and 20 foreign countries, while Protiviti has more than 60 offices in 23 states and 16 foreign countries.
Revenues. The Company's revenues were $823 million for the three months ended
March 31, 2009, decreasing by 33% compared to $1.2 billion for the three months
ended March 31, 2008. Revenues from foreign operations represented 29% and 28%
of total revenues for the three months ended March 31, 2009 and 2008,
respectively. The Company analyzes its revenues for three reportable segments:
temporary and consultant staffing, permanent placement staffing and risk
consulting and internal audit services. In the first quarter of 2009, revenues
for all three of the Company's reportable segments were down compared to the
first quarter of 2008. Contributing factors for each reportable segment are
discussed below in further detail.
Temporary and consultant staffing services revenues were $672 million for the three months ended March 31, 2009, decreasing by 31% compared to revenues of $968 million for the three months ended March 31, 2008. On a constant-currency basis, temporary and consultant staffing services revenues decreased 26% for the first quarter of 2009 compared to the first quarter of 2008. In the first quarter of 2009, demand for the Company's temporary and consultant staffing services decreased significantly as global labor markets weakened along with general macroeconomic conditions. In the United States, revenues in the first quarter of 2009 decreased 32% compared to the first quarter of 2008. For the Company's foreign operations, constant-currency revenues in the first quarter of 2009 decreased 10% compared to the first quarter of 2008.
Permanent placement revenues were $50 million for the three months ended March 31, 2009, decreasing by 57% compared to revenues of $116 million for the three months ended March 31, 2008. On a constant-currency basis, permanent placement revenues decreased 53% for the first quarter of 2009 compared to the first quarter of 2008. In the United States, revenues in the first quarter of 2009 decreased 60% compared to the first quarter of 2008. Historically, demand for permanent placement services is even more sensitive to economic and labor market conditions than demand for temporary and consulting staffing services and this is expected to continue. The U.S. unemployment rate ended the quarter at 8.5% as of March 2009, its highest level since 1983. For the Company's foreign operations, constant-currency revenues in the first quarter of 2009 decreased 41% compared to the first quarter of 2008.
Risk consulting and internal audit services revenues were $101 million for the three months ended March 31, 2009, decreasing by 29% compared to revenues of $142 million for the three months ended March 31, 2008. On a constant-currency basis, risk consulting and internal audit services revenues decreased 27% for the first quarter of 2009 compared to the first quarter of 2008 due to a significant decline in revenues produced by compliance-related projects, mainly those tied to the Sarbanes-Oxley Act, a trend which may continue. In addition, weakening global macroeconomic conditions negatively impacted demand. In the United States, revenues in the first quarter of 2009 decreased 30% compared to the first quarter of 2008. For the Company's foreign operations, constant-currency revenues in the first quarter of 2009 decreased 19% compared to the first quarter of 2008.
Gross Margin. The Company's gross margin dollars were $294 million for the three months ended March 31, 2009, decreasing by 43% from $511 million for the three months ended March 31, 2008. For the first quarter of 2009 compared to the first quarter of 2008, gross margin dollars for all three of the Company's reportable segments decreased under difficult economic conditions. Gross margin as a percentage of revenues also decreased for the Company's temporary and consultant staffing services and risk consulting and internal audit services divisions on a year-over-year basis. Contributing factors for each reportable segment are discussed below in further detail.
Gross margin dollars from the Company's temporary and consultant staffing services represent revenues less direct costs of services, which consist of payroll, payroll taxes and insurance costs for temporary employees,
Gross margin dollars from permanent placement staffing services represent revenues less reimbursable expenses. Gross margin dollars for the Company's permanent placement staffing division were $50 million for the three months ended March 31, 2009, decreasing by 57% compared to $116 million for the three months ended March 31, 2008. On a constant-currency basis, permanent placement gross margin dollars decreased 53% for the first quarter of 2009 compared to the first quarter of 2008. Because reimbursable expenses for permanent placement staffing services are de minimis, the decrease in gross margin dollars is substantially explained by the decrease in revenues previously discussed.
Gross margin dollars for risk consulting and internal audit services represent revenues less direct costs of services, which consist primarily of professional staff payroll, payroll taxes, insurance costs and reimbursable expenses. Gross margin dollars for the Company's risk consulting and internal audit division were $11 million for the three months ended March 31, 2009, decreasing by 74% compared to $40 million for the three months ended March 31, 2008. On a constant-currency basis, risk consulting and internal audit gross margin dollars decreased 75% for the first quarter of 2009 compared to the first quarter of 2008. As a percentage of revenues, gross margin for risk consulting and internal audit services was 10.4% in for the first quarter of 2009, down from 28.2% in the first quarter of 2008. The year-over-year margin decline is primarily due to lower staff utilization levels resulting from lower revenues, as well as staff reduction charges.
Selling, General and Administrative Expenses. The Company's selling, general and administrative expenses were $277 million for the three months ended March 31, 2009, decreasing by 30% compared to $394 million for the three months ended March 31, 2008. As a percentage of revenues, the Company's selling, general and administrative expenses were 33.7% for the first quarter of 2009, up from 32.2% for the first quarter of 2008. For the first quarter of 2009 compared to the first quarter of 2008, selling, general and administrative expenses decreased for all three of the Company's reportable segments. Selling, general and administrative expenses as a percentage of revenues increased for all three of the Company's reportable segments in the first quarter of 2009 compared to the first quarter of 2008. Contributing factors for each reportable segment are discussed below in further detail.
Selling, general and administrative expenses for the Company's temporary and consultant staffing services division were $194 million for the three months ended March 31, 2009, down 25% from $256 million for the three months ended March 31, 2008. As a percentage of revenues, selling, general and administrative expenses for temporary and consultant staffing services were 28.8% in the first quarter of 2009, up from 26.5% in the first quarter of 2008. For the first quarter of 2009 compared to the first quarter of 2008, increases as a percentage of revenues for administration costs, fixed overhead and variable overhead were partially offset by decreases as a percentage of revenue for field compensation and advertising expenses.
Selling, general and administrative expenses for the Company's permanent placement staffing division were $54 million for the three months ended March 31, 2009, decreasing by 45% compared to $98 million for the three months ended March 31, 2008. As a percentage of revenues, selling, general and administrative expenses for permanent placement staffing services were 108.3% in the first quarter of 2009, up from 85.1% in the first quarter of 2008. For the first quarter of 2009 compared to the first quarter of 2008, increases as a
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