SFN Group Inc. 10-K 2011
SECURITIES AND EXCHANGE COMMISSION
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 26, 2010
Commission file number: 1-11997
SFN GROUP, INC.
(Exact name of registrant as specified in its charter)
Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of the Registrants Common Stock, par value $0.01 per share (Common Stock), as of June 25, 2010 on the New York Stock Exchange, was $316,192,411.
Number of shares of Registrants Common Stock outstanding on February 18, 2011 was 51,102,746.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain specified portions of the registrants definitive proxy statement for its 2011 annual meeting of stockholders to be filed within 120 days after December 26, 2010, are incorporated herein by reference in response to Part III, Items 11, 13 and 14, inclusive, and to certain portions of Part III, Items 10 and 12.
Item 1. BUSINESS
As used in this report, the terms we,us,our,SFN and the Company refer to SFN Group, Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.
SFN Group, Inc. is a strategic workforce solutions provider. We have two operating segments, Professional Services and Staffing Services which provide temporary staffing, outsourcing and other services and permanent placement under several specialty brands. Within Professional Services we operate as Technisource, The Mergis Group, Todays Office Professionals, SourceRight Solutions and Tatum. Within our Staffing Services segment we operate as Spherion. In February 2010, we changed our name from Spherion Corporation to SFN Group, Inc., reflecting the evolution of our business toward more professional and specialty services.
Temporary staffing includes placing our employees at a customer location under the customers supervision in the following skill categories: information technology, finance and accounting, administrative, legal, engineering, sales and marketing, human resources, light industrial and clerical. Outsourcing and other includes services where we manage aspects of the operation of a customer function such as recruiting, supplying contingent labor, independent contractor compliance and professional payrolling; these services are typically provided under long-term contracts. Permanent placement is a service where we locate talent on behalf of our customers, screen the candidates and assist in the recruitment efforts for a fee.
We provide services to a wide variety of customers across most major industries in North America. Our customers range in size from large Fortune 500 companies to small, locally run businesses. A key component of our business strategy is to continue to diversify our customer base, particularly amongst our small to mid-sized customers. Our largest customer accounted for 4.0% of our consolidated revenues in 2010.
SFN is headquartered in Fort Lauderdale, Florida and operates a network of 559 locations across the United States and Canada. We are incorporated under the laws of the State of Delaware.
For information concerning our financial condition, results of operations and related financial data, you should review the Managements Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements and Supplementary Data sections of this document. You also should review and consider the risks relating to our business and industry that we describe under the heading Risk Factors.
According to the Department of Labor, Bureau of Labor Statistics, during 2010 there were an average of 2.1 million temporary workers in the United States. The recent global recession has negatively impacted employment in the United States, reducing the use of temporary labor in the U.S. from its peak of 2.7 million temporary workers in mid-2006. Estimated industry revenues, per Staffing Industry Analysts, are in excess of $90 billion including temporary staffing, permanent placement and other services similar to those provided by SFN.
About 52% of the staffing industry is estimated to be concentrated in professional skills, including information technology, finance and accounting, legal, engineering and other skills that are consistent with those offered within SFNs Professional Services operating segment. The balance of the North American staffing market is concentrated on services in the clerical and light industrial skill sets, similar to those offered in SFNs Staffing Services operating segment.
Business conditions in the staffing industry are economically sensitive. Historically, temporary staffing growth has been closely correlated with changes in non-farm employment. Companies have experienced success in the usage of temporary help to facilitate rapid workforce adjustments as economic conditions change. This practice has historically increased the demand for temporary help in North America. As of December 2010, almost 1.7% of the total workforce was temporary help, an increase from 1.5% at the end of 2009. Temporary help has increased from 1.0% of total workforce in the early 1990s. Demographics of the labor force continue to indicate that the overall labor pool may shrink slightly over the next 10 years, creating a shortage of qualified job candidates, especially for certain professional workers. We believe the shortage may increase the need for companies to continue to use the services of SFN and other companies within the staffing industry.
The Company is organized around two operating segmentsProfessional Services and Staffing Services. Within our Professional Services operating segment, we provide temporary staffing, outsourcing and other and permanent placement services. Within our Staffing Services segment, we provide temporary staffing and permanent placement services. These services are further described as follows:
· Temporary StaffingTemporary staffing is a service where our employees work at customer locations under the supervision of customer personnel. The duration of a typical assignment can be from a day or less to a period of several months. The number of our temporary employees at any given time is directly related to our customers requirements and these employees are generally only paid when on assignment with a customer. We provide temporary employees with information technology, finance and accounting, administrative, legal, engineering, sales and marketing, human resources, light industrial and clerical skill sets. Services are generally billed by the hour for the number of hours worked. Bill rates are typically determined as a rate per hour or a mark-up over hourly pay rates.
· Outsourcing & OtherThese services include recruitment process outsourcing (RPO) and managed service programs (MSP). RPO is the outsourcing of all or part of the recruitment process from requisition creation through hiring and employee on-boarding for a client. Within our MSP offering, we provide solutions that manage and optimize a customers contingent workforce spend. We also provide professional contingent workforce services including independent contractor compliance and professional payrolling.
· Permanent PlacementThis is a service where we identify candidates on behalf of our customers, screen the candidates and assist in the recruitment efforts. If the customer hires the candidate, our fee is generally determined as a percentage of first year compensation for the candidate placed. Recognizing the fee revenue is generally contingent upon filling the assigned position and we establish reserves for candidates placed with customers who do not stay through a guarantee period, typically three months.
The following table represents the fiscal year 2010 revenues derived from each of these services within our operating segments (in thousands):
See Note 16, Segment Information, in the accompanying Consolidated Financial Statements for additional information regarding the revenues, profits and losses and total assets for both our Professional Services and Staffing Services operating segments for 2010, 2009 and 2008.
Our business is generally conducted through a broad network of locations in the U.S. and Canada. Our locations are company‑owned, franchised or area-based franchised. We believe that we can increase profitability and serve our customer base through a combination of these locations. For 2010, 87% of revenues were derived from company‑owned locations, with the remaining derived from franchised and area-based franchised locations. All of our Canadian locations are company-owned and represent approximately 3.5% of the Companys total revenue.
The following table details the number of locations:
We operate both company‑owned branch and customer on-premise locations. A branch location is designed to serve multiple customers in a geographic market, while a customer on-premise location is established at the customers location to serve only that customer. The number of locations has decreased over the last three years due to branch office consolidations between brands and closures, primarily customer on-premise locations, as demand decreased from 2008 to 2010.
We grant franchises, which give the franchisee the right to establish a recruitment and staffing business utilizing our tradenames, service marks, advertising materials, sales programs, operating systems and procedures, manuals and forms within a designated territory. Franchisees have the exclusive right to establish an office to market and provide light industrial and clerical temporary staffing and permanent placement services within a designated geographic area. Franchisees make contributions toward national advertising and they are responsible for their own local advertising with assistance from us. We also assist our franchisees in obtaining business from our national accounts. Franchise agreements are generally for an initial term of 10 years and are renewable for successive 5-year terms at our discretion. Our franchisees operate primarily in the Staffing Services operating segment under the Spherion brand.
In our franchise arrangements, we act as the principal in customer transactions through direct contractual relationships with the customers, owning related customer receivables and being the legal employer of the temporary employee and the franchisee acts as our agent providing certain sales and recruiting services. Sales by the franchised locations are included in our revenues and payroll for the temporary employees, and related payroll taxes and employee benefits are included in our cost of services. We are responsible for paying the wages of the temporary employees and all related payroll taxes, employee benefits and insurance. We share responsibilities in collecting accounts receivable with the franchisee. The franchisee is responsible to reimburse us up to 100% of uncollected accounts receivable, but we bear the loss in cases where the franchisee does not have sufficient financial wherewithal to reimburse us for uncollectible accounts.
The franchisee is responsible for establishing its location and paying its related administrative and operating expenses, such as the rent, utilities and salaries of their sales and service staff. The franchisee receives a commission from us, which averaged 74% of the franchised offices gross profit for the fiscal year ended December 26, 2010. Our Consolidated Statements of Operations reflect the franchisee commission as an operating expense, but do not include the rent, utilities and salaries of the franchisees full-time office employees as these expenses are the responsibility of the franchisee. Our Consolidated Balance Sheets include the accounts receivable, payroll liabilities for temporary employees and related employee benefit liabilities and the franchisee commission payable. The only exception to this financial statement presentation is the circumstance when we are required to consolidate certain franchisees pursuant to ASC 810 (SFAS No.167 Amendments to FASB Interpretation No. 46(R)).
From time to time, we may finance a portion of the purchase price of the franchise at market rates of interest, or provide working capital or equipment purchase loans to franchisees. The outstanding principal balance of such notes receivable was $1.1 million as of December 26, 2010.
Area-Based Franchised Locations
In the past, we granted area-based franchises, which gave the area-based franchisee the right to establish a recruitment business utilizing our tradenames and service marks as well as the ability to access our advertising materials, sales programs, operating systems and procedures, manuals and forms within a designated territory. The area-based franchisees have the exclusive right to establish an office to market and provide light industrial and clerical temporary staffing and permanent placement services within a designated geographic area. We provide national, regional and local advertising support to our area-based franchises. We also assist our area-based franchisees in obtaining business from our national accounts. Most area-based franchise agreements are 10 years in length and renewable every 5 years thereafter. A number of area-based franchisees are second-generation and most operate in more than one area-based franchise territory.
Area-based franchisees operate their businesses autonomously within the framework of our policies and standards and recruit, employ and pay their own full-time and temporary employees. Area-based franchisees are responsible for all employment related taxes and workers compensation costs of their employees. Area-based franchisees do not use our computer systems except to bill activity relating to national accounts. We receive royalty revenue from each area-based franchise based upon the area-based franchisees sales. Royalty revenues from franchise owners are included in our revenue in the accompanying Consolidated Statements of Operations.
We are not actively marketing any new area-based franchise territories.
From time to time we evaluate various acquisition opportunities and may acquire competitors to improve our service offering and enhance business mix. In February 2010, we acquired Tatum, LLC (Tatum), a leading executive services firm focused on the office of the chief financial officer that provides services within the U.S. The consideration for Tatum was $42.8 million. See Note 7, Acquisitions, in the accompanying Consolidated Financial Statements for further discussion.
In addition, we periodically enter into transactions with our franchisees and area-based franchises to buy and sell operations in certain markets. We are generally the purchaser of choice when a franchisee or area-based franchisee decides to sell its business. We have a right of first refusal on any franchise or area-based franchise sale at the same terms and conditions as may be agreed with another purchaser (who ultimately must be approved by us, even if we waive our right of first refusal), and we have a standard end of term purchase option on our franchises and our more recently granted area-based franchises; however we are not obligated in our standard agreements to repurchase either our franchised or area-based franchised locations. In 2009, we acquired area-based franchise operations in New Jersey for a purchase price totaling $0.3 million in the first quarter and franchised operations in Indiana for a purchase price totaling $1.4 million in the fourth quarter. We acquired franchised operations in San Antonio for a purchase price totaling $0.4 million in the fourth quarter of 2008.
We operate in highly competitive and fragmented markets in our operating segments. Within temporary staffing and permanent placement services, there are low barriers to entry. Within outsourcing and other services, there can be more significant barriers to entry as capital and systems requirements are higher.
The staffing industry is served by thousands of competitors with most having small, local operations. There are several very large national and international competitors who also directly compete with us. The local competitors are generally characterized as independent operators serving local marketplaces. The ability to fund working capital requirements is one of the key success factors for these competitors. Local competitors may also be more flexible in offering alternatives to their customers in either attracting candidates or in servicing the customer, but generally cannot service national customers due to a lack of systems or geographic coverage. We compete with local competitors in all of our markets generally when the customer is a local or retail customer, and we expect to continue to do so.
Many of the large national and international competitors are characterized by very broad geographic coverage, large and complex information systems that can handle numerous legal and regulatory requirements and have substantial financial resources. We compete against these companies for the larger customers where the customer requires broad geographic coverage, competitive national pricing and typically consolidated reporting to assist in controlling costs. Since most national customers use a central procurement department, the industry has moved towards consolidated competitive bidding with pricing as one of the key selection criteria. This has led to intense price competition within the staffing and recruitment industry, particularly within the large account customer sector.
We believe that our customers primarily focus on the following key factors in selecting a service provider: location or geographic coverage, price and quality of service delivery. Geographic coverage is important from the customer and candidate standpoint. Customers require that their providers be able to service most, if not all, of their locations. Location is important to the candidate because many candidates are unwilling to travel outside of their particular geographic market for a position. We have 559 locations in North America, and believe that our coverage is adequate in the markets we serve. Our lack of international coverage could put us at a disadvantage compared with our larger competitors in obtaining new business from multinational customers. However, we do not believe our North American focus to be a significant disadvantage in competing for business in our targeted customer segments. Service delivery quality is assessed through understanding the customers specific job requirements through consultative assessments, the ability to provide the right candidate for the right job and the ability to measure the quality of job performance. Factors in obtaining qualified candidates for employment assignments with customers include the quality of available opportunities, wages, responsiveness to work schedules and the number of available work hours.
Within the Professional Services operating segment, we compete with Robert Half International Inc., Resources Connection, Inc., Hudson Highland Group, Inc., Allegis Group (a privately held company) and Kforce Inc., among others. Within the Staffing Services operating segment, some of our largest competitors are Manpower Inc. and Kelly Services, Inc.
Through out subsidiaries, we maintain a number of trademarks, tradenames and service marks in the United States of American and certain other countries. We believe that many of these trademarks and tradenames, including SFN Groupsm, SPHERION®, SOURCERIGHT SOLUTIONSsm, THE MERGIS GROUP®, TODAYS OFFICE PROFESSIONALS®, TATUM® and TECHNISOURCE® are important to our business. In addition, we maintain other intangible property rights including a registered trademark on EMERGING WORKFORCE®. Our trademark registrations in the United States of America for SPHERION®, THE MERGIS GROUP®, TODAYS®, TATUM® and TECHNISOURCE® expire October 9, 2011, July 10, 2017, March 24, 2018, October 2, 2017 and October 9, 2017, respectively, but are renewable for ten-year successive terms.
Staffing firms are generally subject to one or more of the following types of government regulations: (i) regulation of the employer/employee relationship between a firm and its flexible staff, (ii) registration, licensing, record keeping and reporting requirements and (iii) substantive limitations on its operations. Staffing firms are the legal employers of their temporary workers. Therefore, staffing firms are governed by laws regulating the employer/employee relationship such as wage and hour regulations, tax withholding and reporting, social security or retirement, anti-discrimination and workers compensation. We do not anticipate that these legal structures and requirements will have a material effect on our growth or prospects. However, any material change in federal, state or local regulation of staffing services could have an adverse effect on us.
We also have operations in Canada, where there are significant national, provincial or local regulations of staffing services. These laws may require that part-time, temporary and contract workers receive benefits similar to full-time workers, such as vacation, welfare plan contributions, notice prior to termination and severance pay. In some cases, hours of work and the duration of assignments are limited and workers may not be assigned to certain industries. We do not anticipate that these legal structures and requirements will have a material effect on our growth or prospects. However, any material change in national, provincial or local regulation of staffing services could have an adverse effect on us.
Our sale and operation of area-based franchises and franchises is regulated by the Federal Trade Commission and by authorities in approximately 15 states. Under these laws, we must deliver a franchise disclosure document to prospective franchisees. These and other state laws may also apply substantive standards that govern the relationship between franchisors and franchisees. In states where we are selling franchises, we have filed either the appropriate registration or obtained an exemption from registration. We do not anticipate that these requirements or other state laws will have a material effect on our ability to sell franchises or operate our business through area-based franchised and franchised offices.
We estimate that we employed approximately 171,000 people in 2010. On average, approximately 47,000 billable personnel were assigned with our customers at any given time.
Seasonality and Cyclical Nature of Business
SeasonalityOur business, particularly our Staffing Services segment, is seasonal in nature with customer related demand generally at its highest point during the third and fourth quarters and lowest during the first quarter. The third and fourth quarters are normally higher as our customers increase their temporary workforces for the holiday season. We typically experience a seasonal decrease in our first quarter revenues compared with fourth quarter revenues. However, first quarter total Company 2010 revenues increased compared with the fourth quarter of 2009 by 1.6%, due to the acquisition of Tatum, LLC. Excluding the impact of the acquisition, revenues decreased sequentially from the fourth quarter 2009 to the first quarter 2010 by 1.7%. This seasonal decrease was less than in prior years primarily due to the initial recovery of the U.S. economy. The decrease in the first quarter 2009 compared with the fourth quarter of 2008 was 16%.
Cyclical Nature of the BusinessThe staffing industry has historically been cyclical, often acting as an indicator of both economic downswings and upswings. Staffing customers tend to use temporary staffing to supplement their existing workforces and generally hire permanent workers when long-term demand is expected to increase. As a consequence of this, our revenues tend to increase quickly when the economy begins to grow as occurred in 2010. Conversely, our revenues also decrease quickly when the economy begins to weaken, as occurred in 2009. While we have longer-term customer contracts which are not as directly dependent upon the economic cycle, these revenues are not significant enough to offset the impact of cyclical economic activity in our temporary staffing or permanent placement service offerings.
Our executive officers are:
Availability of Reports and Other Information
Our corporate website is http://www.sfngroup.com. We make available on this website or in print, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission (SEC). Also available on our website, or in print to any stockholder that requests it, are SFNs Corporate Governance Principles, Code of Business Conduct and Ethics, as well as charters for the Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee. To obtain printed materials contact Investor Relations at SFN Group, Inc., 2050 Spectrum Boulevard, Fort Lauderdale, FL 33309. In addition, the Commissions website is http://www.sec.gov. The Commission makes available on its website, free of charge, reports, proxy and information statements, and other information regarding issuers, such as us, that file electronically with the Commission. Information provided on our website or on the Commissions website is not part of this Annual Report on Form 10-K.
Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Annual Report on Form 10-K, as well as other written or oral statements made from time to time by us or by our authorized officers on our behalf, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should note that our forward-looking statements speak only as of the date of this Annual Report on Form 10-K or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our stockholders and prospective investors should consider include the following:
We operate in highly competitive and fragmented markets in both of our operating segments. There are low barriers to entry by potential competitors at the local level. We face significant competition in the markets we serve and will continue to face significant competition in any geographic markets or industry sectors that we may enter. The majority of competitors are significantly smaller than we are. However, certain of our competitors are larger, have greater marketing, technical and financial resources, and have stronger brand name recognition than we have. As a result, some of our competitors may be in a better position to capitalize on new technologies and changes in customer requirements, and to devote more resources than we can to the development, promotion and sale of their service offerings. In some cases, our large competitors have lower operating cost structures and as a result, we may face increased competitive pricing pressures and may not be able to obtain or retain our new or existing customers. Some of our competitors can provide broader geographic coverage than we can and this could limit our ability to service large customers that wish to consolidate services.
There has been an increase in the number of customers consolidating their staffing services purchases with a single provider or with a small number of providers. The trend to consolidate purchases has in some cases made it more difficult for us to obtain or retain customers. We also face the risk that certain of our current and prospective customers may decide to provide similar services internally. Additionally, pricing pressures have intensified as customers have continued to competitively bid new contracts. This trend is expected to continue for the foreseeable future. As a result, we cannot assure you that we will not encounter increased competition in the future.
Our business is cyclical, as a result of a significant down turn in the economy, we could experience lower demand from customers and lower revenues.
Because demand for recruitment and staffing services is sensitive to changes in the level of economic activity, our business may suffer during economic downturns as it did in 2009. As economic activity slows, companies tend to reduce their use of temporary employees and recruitment services before undertaking layoffs of their permanent employees, resulting in decreased demand for our personnel. Also, as businesses reduce their hiring of new permanent employees, revenues from our recruitment services are adversely affected. Additionally, a prolonged economic downturn could result in higher unemployment claims and costs in future periods. As a result of an economic downturn, we could experience a material adverse effect on our business, financial condition or results of operations. However, even if economic conditions improve, there can be no assurance that any such improvement in economic conditions will be sustained or that our business or financial results will benefit from such improvement.
Government regulation may significantly increase our costs, including payroll‑related costs and unemployment taxes.
In conducting our business, we are required to pay a number of payroll and related expenses, including unemployment taxes, workers compensation and medical insurance for our personnel. Unemployment insurance premiums paid by employers typically increase during periods of increased levels of unemployment. Workers compensation costs may increase in the future if states raise benefit levels and liberalize allowable claims. Attempts to increase revenue from light industrial customers may expose us to increased workers compensation claims and higher costs. Future earnings could be adversely affected if we are not able to increase the fees charged to customers to offset increased costs related to unemployment insurance or workers compensation benefits. New requirements of healthcare legislation may increase the costs associated with employing temporary workers. The Company attempts to recover such costs through the rates it charges customers, but there is no assurance that we will be able to pass on all cost increases to our customers.
Providing our services through third-party vendor managers may expose us to financial losses.
In certain situations, we provide our services to clients under a contractual relationship with a third-party vendor manager, not directly with the client. In those circumstances, the third-party vendor manager is typically responsible for aggregating billing information, collecting receivables from the client and paying staffing suppliers once funds are received from the client. In the event that the client has paid the vendor manager for our services and we are unable to collect from the vendor manager, we may be exposed to financial losses.
A loss of customers may result in a material impact on the results of our operations.
We may experience a reduction in business from a large customer or a number of customers, or we may lose such customers. We cannot guarantee that we will be able to retain relationships with our larger customers in the future. Our customers may experience deterioration in their current financial condition or future prospects, or may experience a bankruptcy. We are also at a risk of losses from uncollectible account receivables if our customers financial positions deteriorate. A significant reduction in demand from our customers may result in an adverse impact on our business and results of operations in future periods.
We face certain risks in collecting our trade accounts receivable.
We generate a significant amount of trade accounts receivable from our customers. Delays or defaults in payments owed to us from our customers could have an adverse effect on our financial condition and results of operations. Factors that could cause a decline in the credit worthiness of our customers, resulting in delayed payment or default include business failures, tight credit markets, deterioration of U.S. economic conditions and exposure to customers in high-risk sectors. See Note 1 Summary of Significant Accounting Policies to the Consolidated Financial Statements for further details.
Our revolving line of credit provides certain affirmative and negative covenants which may limit the availability under our line of credit based upon our ability to meet these covenants. These covenants include, but are not limited to: a fixed charge coverage ratio; limitations on capital expenditures, additional debt incurred, mergers, consolidations or sales; and transactions with subsidiaries and related parties. Failure to meet compliance with one or more of these covenants in the future could affect the amount of availability we have to borrow against and as a result, our liquidity and financial condition may be adversely affected. We were in compliance with the covenants within our revolving credit facility at December 26, 2010.
We may not achieve the intended effects of our business strategy.
Our business strategy is based on expanding our North American professional services business. We have implemented steps to increase our market share by concentrating in local markets with small and mid-sized customers through relationship selling, focusing on key large accounts with profitable margins, targeting new accounts by providing integrated services, and continuing to improve operating leverage by reducing corporate and field overhead. We also plan to expand market share within our Professional Services segment by providing more services to existing Staffing Services segment customers. If we are not successful in achieving these objectives with our customers, our revenues, costs and overall profitability could be negatively affected. If we are unable to execute our business strategy effectively, our productivity and cost competitiveness could be negatively affected.
Our customer contracts contain termination provisions and pricing risks that could decrease our revenues, profitability and cash flow.
Some of our customer contracts permit termination in the event our performance is not consistent with service levels specified in those contracts. Our customers ability to terminate contracts, as well as having many short-term contracts, creates uncertain revenue streams. Some of our contracts contain pricing provisions that allow customers to pay a set fee for our services regardless of whether our costs to perform these services exceed the amount of the set fee. If we are unsuccessful in renegotiating pricing on contracts operating at a loss, the estimated contract losses would be accrued. Some of our contracts provide for credits to our customers if we fail to achieve specific contract standards. Some of our contracts contain re-pricing provisions that can result in reductions of our fees for performing our services. Many of our contracts provide for a billing at a set mark-up above the temporary employees pay rate. In estimating these mark-ups, we use our best estimates of expected costs for federal and state unemployment, workers compensation or other costs. If actual costs for these items exceed our estimates, we typically cannot recover these retroactively from customers. Additionally, the actual development of workers compensation claims can take many years after an accident or injury occurs; such development, if adverse could negatively impact the Company.
If customers are not satisfied with our level of performance, our reputation may suffer, which could materially and adversely affect our business, financial condition, results of operations and cash flow. Certain areas of our business require us to assume a greater level of responsibility for developing or maintaining processes on behalf of our customers. Many of these processes are critical to the operation of our customers businesses. Our failure or inability to complete these engagements satisfactorily could have a material effect on our customers operations and consequently may give rise to claims against us for actual or consequential damages or otherwise damage our reputation. Any of these claims could have a material adverse effect on our business, financial condition or results of operations.
Acquisitions could have an adverse effect on our financial condition, results of operation, and cash flows.
From time to time, we may evaluate or complete acquisitions to expand our service offerings, broaden our customer base or expand our geographic presence. Risks and challenges associated with the acquisition and subsequent integration of an acquired business include the diversion of managements attention from our existing operations, the failure to retain key personnel or customers of an acquired business, the assumption of unknown liabilities of the acquired business for which there are inadequate indemnifications, the potential impairment of acquired intangible assets and the ability to successfully integrate the business. Acquisitions may also involve significant cash expenditures, debt incurrence, and integration expenses that could have a material adverse effect on our financial condition, results of operation, and cash flows. We cannot assure you that acquired businesses will generate anticipated revenues or earnings. As a result, the anticipated benefits from acquisitions may not be achieved.
We could be negatively affected by natural disasters (many of our administrative functions are located in a hurricane-prone area), fire, power loss, telecommunications failures, hardware or software malfunctions and break-downs, computer viruses or similar events. Although we have disaster recovery plans in place, we may not be able to adequately execute these plans in a timely fashion. If our critical information systems fail or are otherwise unavailable, this could temporarily impact our ability to pay employees, bill customers, service customers, maintain billing and payroll records reliably and pay taxes, which could adversely affect our revenues, operating expenses, and financial condition. A prolonged outage could seriously impact our ability to service customers or hire temporary workers and could seriously threaten the organization.
We depend upon our ability to attract qualified personnel who possess the skills and experience necessary to meet the staffing requirements of our customers or to successfully bid for new customer projects. We must continually evaluate and upgrade our base of available qualified personnel to keep pace with changing customer needs and emerging technologies. Competition for individuals with proven professional or technical skills currently exists. We could have difficulty attracting and retaining sufficient numbers of qualified personnel necessary for our business to succeed. Additionally, increases in prevailing wage rates may negatively impact our financial results if we are unable to pass the higher costs on to customers through higher hourly bill rates.
We file tax returns with various governmental entities within the United States and Canada. The filings include returns with the Federal government, the states and numerous cities, counties and municipalities. When we prepare these tax filings, we are required to follow numerous and complex legal and technical requirements where interpretation of rules and regulations is required. We believe that we have appropriately filed our tax returns and properly reported taxable transactions, but the final tax amounts are subject to regulatory audit and interpretation. We believe we have established adequate reserves with respect to any tax liabilities that may arise in relation to these transactions should our position be successfully challenged by tax authorities. However, an unfavorable settlement could result in higher payments and additional charges to income above the amounts reserved.
We may lose key personnel, and therefore, our business may suffer.
Our operations are dependent on the continued efforts of our officers and executive management. In addition, we are dependent on the performance and productivity of our local managers and field personnel. Our ability to attract and retain business is significantly affected by local relationships and the quality of service rendered. The loss of those key officers and members of executive management who have acquired significant experience in our industry may cause a significant disruption to our business. Moreover, the loss of our key managers and field personnel may jeopardize existing customer relationships with businesses that continue to use our services based upon past relationships with these local managers and field personnel. The loss of such key personnel could materially adversely affect our operations, because it may result in an inability to establish and maintain customer relationships and otherwise operate our business.
We may be exposed to employment‑related claims and costs that could have an adverse affect on our business, financial condition and results of operations.
We employ and place people in the workplaces of other businesses. Attendant risks of such activity that could increase our cost of doing business include:
· possible claims of discrimination and harassment;
· errors and omissions by the personnel we place, particularly for the acts of temporary professionals (e.g., accountants, attorneys, engineers and information technology consultants);
· misuse or misappropriation of customer assets or proprietary information; and
· payment of workers compensation and other similar claims.
Although we maintain insurance coverage for general liability, errors and omissions and employee theft, such insurance coverage may not be adequate in scope or amount to cover any such liability. We retain all or a portion of the risk under our workers compensation, general liability, professional liability, and employment practices liability insurance programs. Changes in the estimates of accruals related to these retained risks are charged or credited to earnings in the period determined, and therefore a large fluctuation in any given quarter could adversely affect earnings in that period. A failure of any of our personnel to observe our policies and guidelines intended to reduce exposure to these risks could have a material effect upon us.
Unexpected changes in claim trends on our workers compensation and benefit plans may negatively impact our financial condition.
We self-insure, or otherwise bear financial responsibility for, a significant portion of expected losses under our workers compensation and health benefit programs. Unexpected changes in claim trends, including the severity and frequency of claims, actuarial estimates and medical cost inflation could result in costs that are significantly different than initially reported. If future claims-related liabilities increase due to unforeseen circumstances, our costs could increase significantly. There can be no assurance that we will be able to increase the fees charged to our customers or employees in a timely manner and in a sufficient amount to cover increased costs as a result of any changes in claims-related liabilities.
We are regularly involved in a variety of litigation arising out of our business. Occasionally, this litigation can be material. We cannot assure you that our insurance will cover all claims that may be asserted against us. Should the ultimate judgments or settlements exceed our insurance coverage, they could have an adverse effect on our results of operations, financial position and cash flows. We also cannot assure you that we will be able to obtain appropriate types or levels of insurance in the future or that adequate replacement policies will be available on acceptable terms, if at all.
Operation in this market is subject to risks inherent in international business activities, including:
· fluctuations in currency exchange rates;
· varying economic and political conditions;
· overlapping or differing tax structures; and
· multiple regulations concerning pay rates, benefits, vacation, statutory holiday pay, workers compensation, union membership, termination pay and the termination of employment.
Item 2. PROPERTIES
Our corporate headquarters is located at 2050 Spectrum Boulevard, Fort Lauderdale, Florida, in a 125,000 square-foot building owned by us. In addition, we lease approximately 56,000 square feet in Alpharetta, Georgia for operating functions. All other field locations operate in space held primarily under three to five year leases providing fixed monthly rentals. Our corporate headquarters and our field locations are used by both our Professional Services and our Staffing Services operating segments. We believe that our facilities are adequate for our needs.
Item 3. LEGAL PROCEEDINGS
In the ordinary course of our business, we are or may be threatened with or named as a defendant in various lawsuits. We maintain insurance in such amounts and with such coverages and deductibles as we believe are reasonable and prudent. The principal risks that we insure against are workers compensation, personal injury, bodily injury, property damage, professional malpractice, errors and omissions, and fidelity losses. Our management does not expect that the outcome of any pending lawsuits relating to such matters, individually or collectively, will have a material adverse effect on our financial condition, results of operations or cash flows.
On December 13, 2004, and as amended on January 13, 2005 and October 31, 2005, Glidepath Holding B.V. and Jeimon Holdings N.V., as plaintiffs, filed an action against SFN Group, Inc. in the U.S. District Court of the Southern District of New York. Glidepath and Jeimon Holdings, investors in the entity that acquired the Cyber Center business of Spherion Technology (UK) Limited, a subsidiary of SFN Group, Inc., in 2002, sued SFN for fraud, negligent misrepresentation, aiding and abetting, breach of fiduciary duty and unjust enrichment and seek $32.0 million in damages, and treble for punitive damages, plus attorneys fees, expert fees and costs. Glidepath and Jeimon Holdings allege that an individual who was an officer of Spherion Technology (UK) fraudulently induced them to invest in a corporation formed to purchase the CyberCenter business, while he remained in the employ of Spherion Technology (UK) and was to be paid an incentive bonus for the sale by SFN. They allege that he misled them as to his employment status at the time, as to the prospects for the CyberCenter, and as to whether the newly formed corporation was assuming the indebtedness of Spherion Technology (UK) associated with the CyberCenter business. They allege that in doing so, he was acting as SFNs agent. On November 14, 2008, based upon information obtained through discovery, SFN filed counterclaims against plaintiffs under theories of contract interference and unjust enrichment. SFN alleges that plaintiffs interfered with SFNs employment relationship with its Spherion Technology (UK) Limited officer, and recovered and retained damages in a U.K. arbitration proceeding against such officer, which damages belonged to SFN. Cross-motions for summary judgment were filed by the parties and fully briefed before the court on May 1, 2009. On March 30, 2010, the court granted SFNs motion for summary judgment in the action filed against SFN by plaintiffs Glidepath and Jeimon Holdings, and dismissed plaintiffs claims against SFN. The court also granted plaintiffs motion for summary judgment on the counterclaims asserted by SFN against the plaintiffs, and dismissed SFNs counterclaims against the plaintiffs. The plaintiffs have appealed the judgment granting SFNs motion for summary judgment, and SFN has cross-appealed the judgment granting the plaintiffs motion for summary judgment. The appeals have not yet been fully briefed, and a hearing date for oral arguments on the appeals has not been set at this time. SFN intends to continue vigorously defending this matter and management believes the likelihood of a loss is remote. SFN has a reserve of $0.4 million related to legal fees incurred to defend this matter and does not have insurance coverage for this claim.
Item 4. (REMOVED AND RESERVED)
Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The New York Stock Exchange under the symbol SFN. The following table sets forth, for the periods indicated, the high and low prices per share of the common stock as reported on The New York Stock Exchange:
On February 18, 2011, there were approximately 2,400 holders of record of our common stock.
We did not pay cash dividends in 2010, 2009 and 2008, and do not intend to pay cash dividends in the foreseeable future. Our U.S. revolving line of credit provides for certain covenants which restrict our ability to pay cash dividends in the event of default or if availability falls below $50 million.
The information required by Item 201(d) of Regulation S-K is set forth in Part III, Item 11 of this Annual Report on Form 10-K.
Issuer Purchases of Equity Securities
On February 17, 2009, the Board of Directors authorized the Company to repurchase up to an average of 50,000 shares per week or up to 2.6 million shares on a cumulative annual basis of the Companys common stock primarily for the purpose of offsetting dilution created through the Companys various employee benefit plans. The Plan authorized on February 17, 2009 does not have an expiration date. During 2010, SFN purchased 0.5 million shares for approximately $4.9 million at an average price per share of $9.63. During 2009, SFN purchased 2.4 million shares for approximately $8.9 million at an average price per share of $3.72.
Repurchases during the fourth quarter were as follows:
The following graph compares the cumulative total stockholder return on our Common Stock with the cumulative total return of the NYSE composite index, our New Peer Group Index (the New Peer Group) and our Old Peer Group Index (the Old Peer Group Index), each for the period beginning December 30, 2005 and ending December 23, 2010. MPS Group, Inc. is included in the Old Peer Group until January 19, 2010 when it was purchased by Adecco, S.A., a company that is not traded in the U.S. In the New Peer Group, Resource Connection, Inc., a professional services staffing firm, replaces MPS Group, Inc. We believe the New Peer Group provides a more meaningful comparison of our performance compared with our primary competition for our important product offerings and other relevant factors. The total cumulative return on investment (change in stock price plus reinvested dividends, if any) for us, the NYSE composite index, the New Peer Group Index and the Old Peer Group Index assumes that a $100 investment was made on December 30, 2005. We have not declared any dividends in the period represented in this performance graph.
The New Peer Group Index is comprised of the following publicly traded companies: Kelly Services, Inc.; Manpower, Inc.; Resource Connection, Inc.; Robert Half International, Inc.; Kforce, Inc.; and Hudson Highland Group, Inc. The Old Peer Group Index was comprised of Kelly Services, Inc.; Manpower, Inc.; MPS Group, Inc.; Robert Half International, Inc.; Hudson Highland Group, Inc. and Kforce, Inc.
The stock price performance shown on this graph is not necessarily indicative of future price performance of our Common Stock.
Item 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial information for each of the most recent five fiscal years and should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the accompanying Consolidated Financial Statements included in this Annual Report on Form 10-K.
(1) The results of operations includes Tatum from the acquisition date of February 1, 2010. In addition, SFN incurred restructuring and other charges of $2.0 million on an after tax basis or $(0.04) per share. Adjusted earnings from continuing operations were $0.31 per diluted share. See Managements Discussion and Analysis of Financial Condition and Results of Operations Non-GAAP Financial Measures for further information.
(2) The 2009 net loss from continuing operations includes an after-tax intangible asset impairment charge of $1.8 million or $(0.03) per share. SFN also incurred restructuring and other charges of $4.3 million on an after-tax basis or $(0.08) per share. Adjusted earnings per share from continuing operations in 2009 were $0.00, excluding the intangible asset impairment and restructuring and other charges. See Managements Discussion and Analysis of Financial Condition and Results of Operations Non-GAAP Financial Measures for further information.
(3) The 2008 loss from continuing operations includes an after-tax goodwill and intangible asset impairment charge of $121.2 million or $(2.27) per share and after-tax restructuring and other charges of $7.0 million or $(0.13) per share. Adjusted earnings per share was $0.24 in 2008 and excludes the impact of the impairment and restructuring and other charges.
(4) The results of operations include Todays Staffing and Technisource from the dates of acquisition on September 28, 2007, and December 3, 2007 respectively, and various other smaller acquisitions.
(5) The 2006 net earnings include a tax benefit of $30.8 million or $0.54 per share from loss on disposal in discontinued operations related to the resolution of certain international tax matters.
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Organization of Information
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides a narrative on our financial performance and condition that should be read in conjunction with the accompanying Consolidated Financial Statements. It includes the following sections:
· Company Overview
· Executive Summary
· Operating Results
· Liquidity and Capital Resources
· Contractual Obligations and Commitments
· Off-Balance Sheet Arrangements
· Critical Accounting Policies
· New Accounting Pronouncements
· Non-GAAP Financial Measures
· Forward‑Looking Statements-Safe Harbor
SFN Group, Inc. is a strategic workforce solutions provider. We have two operating segments, Professional Services and Staffing Services which provide temporary staffing, outsourcing and other services and permanent placement under several specialty brands. Within Professional Services we operate as Technisource, The Mergis Group, Todays Office Professionals, SourceRight Solutions and Tatum. Within our Staffing Services segment we operate as Spherion.
Temporary staffing includes placing our employees at a customer location under the customers supervision in the following skill categories: information technology, finance and accounting, administrative, legal, engineering, sales and marketing, human resources, light industrial and clerical. Outsourcing and other includes services where we manage aspects of the operation of a customer function such as recruiting, supplying contingent labor, independent contractor compliance and professional payrolling; these services are typically provided under long-term contracts. Permanent placement is a service where we locate talent on behalf of our customers, screen the candidates and assist in the recruitment efforts for a fee. See the Business - Operations Overview section of Part I of this Annual Report on Form 10-K for further description of our operating segments.
The following is a brief summary of our primary 2010 objectives and accomplishments:
We remain focused on executing our strategy to increase our exposure to higher value professional, outsourcing and other higher margin services. As the economy continues to improve in 2011, our activities center around three strategic planks:
First, increase sales activity among targeted customer groups:
· In the first quarter of 2010, SFN acquired Tatum, LLC, a leading executive services firm focused on the office of the CFO. This investment enhances our ability to provide high level finance and accounting talent to a wide range of customers. The acquisition of Tatum combined with growth in Technisource, Mergis and SourceRight increased our mix of Professional Services to 47.5% of total company revenues.
· Our business with small and mid-sized customers was significantly impacted in 2009 by the economic downturn. During the second half of 2010, we began to see signs of increased hiring activity by our small and mid-sized customers as the economy continued to improve. During 2010, revenues from our small to mid-sized accounts (customers that do business with SFN of $5 million or less, annually) represented 44.5% of total revenues compared with 42.8% of revenues in the prior year. Additionally, we made operating investments in sales and recruiting staff, increasing our Professional Services associate headcount by 23.6% compared with the end of 2009, to further increase our growth among small and mid-sized customers.
· In late 2009, we formally launched the SourceRight Solutions brand and in 2010, we introduced our integrated offerings including our industry leading Recruitment Process Outsourcing (RPO) and Managed Service Programs (MSP). During 2010, RPO and MSP grew 69.7% and 44.6%, respectively, compared with the prior year.
Second, improve profitability through operating effectiveness:
· We continue to maintain pricing discipline through active customer relationship management and opportunity selection. As a result of this discipline, we successfully managed pricing adjustments with many of our customers to mitigate a portion of the impact of higher state unemployment taxes in 2010. Pay/bill spreads in our temporary staffing services increased by 20 basis points in 2010 compared with 2009.
· In addition, we continue to carefully manage operating metrics and leverage our central recruiting capabilities to increase productivity in our field operations and improve operating margins. In 2010, despite significant increases in sales and recruiting resources, we reduced SG&A to 89.6% of gross profit compared with 96.0% in the same period last year.
Third, maintain financial discipline:
· Days sales outstanding (DSO) were 43 days at December 26, 2010 compared with 41 days at December 27, 2009, increasing in part due to growth in business with larger customers that have slightly longer payment terms. We have continued to maintain the quality of our accounts receivable portfolio from year to year.
We remain focused on executing our strategy to increase our exposure to higher value professional, outsourcing and other higher margin services. As the economy continues to improve in 2011, our activities center around three strategic planks:
· First, continue investing in our business to drive targeted revenue growth:
· Increase exposure to higher value professional skills;
· Maximize contribution from past and future increases in sales and recruiting staff to grow revenues among small and mid-sized customers;
· Leverage SourceRights leadership position in RPO and MSP to grow outsourcing revenues; and
· Expand permanent placement services as market conditions allow.
· Second, improve profitability through operating effectiveness:
· Maintain pricing discipline through active customer relationship management and opportunity selection; and
· Drive productivity improvements through metrics management, technology enhancements and centralized recruiting.
· Third, maintain financial discipline:
· Decrease day sales outstanding (DSO) below 2010 levels; and
· Actively manage capital spending.
Consolidated Operating Results
Fiscal 2010 compared with 2009
· Revenues in 2010 were $2.1 billion, an increase from $1.7 billion last year.
· As economic conditions in North America continued to improve in 2010, our customers increased the hiring of temporary employees. Temporary employment in the U.S. increased by 15.0% year over year in 2010 as estimated by the U.S. Bureau of Labor Statistics. The Companys temporary staffing revenues increased 17.4% to $1.8 billion from $1.6 billion in the prior year, including the impact of the Tatum acquisition which accounted for 4.9 percentage points of the year over year increase. Additionally, outsourcing and other revenues increased 49.9% to $197.2 million from $131.6 million in the same prior year period due to growth in RPO and managed services programs. In 2010, permanent placement revenues increased 28.1% to $32.9 million from $25.7 million in the same prior year period.
· Professional Services revenues, including organic growth and the impact of the Tatum acquisition, increased 29.0% compared with the prior year, and now represents 47.5% of total company revenue.
· Staffing Services revenues increased 12.9% compared with the prior year, primarily due to higher business volumes within existing customers.
· Gross profit in 2010 was $424.0 million. Gross profit margin increased to 20.6% in 2010 compared with 19.8% for 2009. Gross profit margins increased due to:
· Increased margins from a shift in mix within our services (30 basis points) primarily due to growth in professional temporary staffing, outsourcing and other services;
· An increase in temporary staffing margins in both segments (30 basis points) due to higher pay/bill spreads including the impact of the higher margin staffing from the acquired Tatum business and, lower employee burden costs; and
· Improved outsourcing and other margins (20 basis points) due to higher recruiter productivity as business volumes increased.
· SG&A expenses increased 16.7% to $380.1 million in 2010 from $325.7 million in 2009. The increase in SG&A expenses is due to the Tatum acquisition during 2010 as well as investments in sales and recruiting personnel and increased variable compensation tied to improved operating results. As a percentage of gross profit, SG&A costs decreased to 89.6 % from 96.0% in 2009. As business volumes continue to improve during 2011, we expect to manage the growth in expenses relative to growth in gross profit.
· Restructuring and other charges were $3.3 million and $7.1 million in 2010 and 2009, respectively. The charges in 2010 related to acquisition integration and transaction costs from the Tatum acquisition, while the charges in2009 were primarily due to lease and severance costs related to cost containment efforts. See Note 15, Restructuring and Other Charges, in the accompanying notes to the Consolidated Financial Statements for further discussion.
· Net interest expense was $5.8 million in 2010 compared with net interest expense of $4.0 million in 2009. The increase in net interest expense is primarily due to an increase in outstanding debt balances during the year from the financing of the Tatum acquisition.
· Our effective tax benefit rate from continuing operations for 2010 was 43.4% and was higher than the statutory rate due to the impact of non-income based state taxes. Our effective tax benefit rate from continuing operations for 2009 was 15.4% and was lower than the statutory rate due to the impact of non-income based state taxes and adjustments to valuation allowances.
· Loss from discontinued operations was $0.00 per share in 2010 compared with a loss of $(0.01) per share in 2009, respectively. The loss in 2010 included $0.3 million of pre-tax loss (net of a $0.1 million tax benefit) from operations due to expenses related to the defense of certain legal matters associated with businesses sold in 2004. See Note 14, Discontinued Operations, in the accompanying notes to the Consolidated Financial Statements for further discussion.
· Effective in the fourth quarter of 2010, SFN changed its methodology of calculating Days Sales Outstanding (DSO) due to the growth of its MSP business. Prior years DSO was recalculated to conform to the 2010 calculation. DSO was 43 days at December 26, 2010 compared with 41 days at December 27, 2009, increasing in part due to growth in business with larger customers that have slightly longer payment terms. We have continued to maintain the quality of our accounts receivable portfolio from year to year.
Fiscal 2009 compared with 2008
· Revenues in 2009 were $1.7 billion, a decrease from $2.2 billion in 2008.
· In 2009, temporary employment in the U.S. decreased by 22.4% year over year as estimated by the U.S. Bureau of Labor Statistics. The Companys temporary staffing revenues decreased 22.3% to $1.6 billion from $2.0 billion in the prior year. Additionally, outsourcing and other revenues increased 3.4% to $131.6 million from $127.2 million in the same prior year period due to growth in our professional payrolling business. In 2009, permanent placement revenues decreased 58.8% to $25.7 million from $62.3 million in the same prior year period.
· Professional Services revenues decreased 22.0% compared with the prior year and Staffing Services revenues decreased 21.8% compared with the prior year. The decline in both our Professional and Staffing Services revenues was primarily due to lower business volumes within existing customers.
· Gross profit in 2009 was $339.1 million. Gross profit margin decreased to 19.8% in 2009 compared with 22.0% for 2008. Gross profit margins decreased due to:
· Shift in business mix (100 basis points) primarily, due to lower permanent placement volumes;
· Declines in temporary staffing margins in Staffing Services (50 basis points) and Professional Services (20 basis points) primarily due to a reduction in pay/bill spreads, higher payroll taxes and other employee burden costs;
· Lower outsourcing and other margins due primarily to growth in the professional payrolling business (50 basis points).
· SG&A expenses decreased 27.4% to $325.7 million in 2009 from $448.6 million in 2008. The decline in SG&A expenses was due to adjustments made to our cost structure as business volumes decreased in 2009. As a percentage of gross profit, SG&A costs increased to 96.0% from 93.1% in 2008.
· Restructuring and other charges were $7.1 million and $11.4 million in 2009 and 2008, respectively. The charges in 2009 and 2008 were primarily due to lease and severance costs related to cost containment efforts. Additionally, included in 2009 were charges of $1.7 million related primarily to adverse developments in a prior year legal matter. We also recorded an intangible asset and goodwill impairment charge of $2.9 million and $149.8 million in the fourth quarter of 2009 and 2008, respectively.
· Net interest expense was $4.0 million in 2009 compared with net interest expense of $5.3 million in 2008. The decrease in interest expense was primarily due to the reduction in average outstanding debt balances, partially offset by higher interest rate spreads due to changes associated with our amended credit facility (see MD&A-Financing for further discussion). Outstanding debt decreased from $39.3 million at December 28, 2008 to $13.6 million at December 27, 2009.
· Loss from continuing operations was $(0.11) per diluted share for 2009, compared with a loss of $(2.14) per share in 2008. Adjusted loss per share from continuing operations in 2009 was $0.00 compared with earnings of $0.24 per share in 2008. See MD&A Non-GAAP Financial Measures for further information.
· Loss from discontinued operations was $(0.01) per share in 2009 compared with a loss of $(0.07) per share in 2008, respectively. The loss in 2009 included $0.7 million of pre-tax loss (net of a $0.3 million tax benefit) from operations due to expenses related to the defense of certain legal matters associated with several of the businesses sold in 2004.
· DSO improved to 41 days at the end of 2009 compared with 45 days at the end of 2008.
SFN has two operating segments: Professional Services and Staffing Services. SFN evaluates the performance of its operating segments and allocates resources based on revenues, gross profit and segment operating profit. Segment operating profit is defined as income before unallocated corporate costs, goodwill and intangible asset impairment, amortization expense, interest expense, interest income, income taxes and restructuring and other charges. All intercompany revenues and expenses have been eliminated. Additionally, amounts related to discontinued operations have been excluded from the segment information below and are presented as discontinued operations in the Condensed Consolidated Statements of Operations. As a result of internal organizational and business strategy changes, SFN realigned its operating segments during the first quarter of 2010. The historical segment information has been adjusted to conform to SFNs segment presentation in 2010, moving the MSP and professional contingent workforce services operated under the SourceRight brand into Professional Services from Staffing Services. All of SourceRight is also now reported in Outsourcing and Other in our service line reporting and in the Other skill category. In addition, several large clerical customers previously reported as part of Professional Services are now managed and reported as part of Staffing Services.
Information on operating segments and a reconciliation to earnings (loss) from continuing operations before income taxes for the periods indicated were as follows (in thousands):
Segment Operating Results
Information on the Professional Services segments skill sets and service lines for the periods indicated were as follows (in thousands):
Fiscal 2010 compared with 2009
RevenuesProfessional Services revenues were $975.9 million or 47.5% of total revenues during 2010 compared to $756.8 million or 44.2% in the prior year. Revenues increased 29.0% compared with the prior year, including 10.3 percentage points contributed from the acquisition of Tatum and increasing demand from customers across all skills and service lines as the economy continued to improve.
· By skillInformation technology (IT) increased 11.9% to $504.1 million compared with $450.4 million in the same prior year period. IT revenues increased due to the addition of Tatum combined with increases in demand from several large customers, particularly in the technology and financial services sectors. Finance and accounting revenues increased 97.7% in 2010 compared with the prior year due to the impact of the Tatum acquisition which contributed 76.8 percentage points of the year over year finance and accounting growth and growth within several clients in the financial services industry. Revenues from administrative skills increased 13.8% compared to the prior year. Other skills increased 43.8% and primarily reflect substantial growth in our RPO and our professional contingent workforce services businesses. Demand across all skills increased due to the improvement in the U.S. economy as well as the increase in overall industry wide temporary staffing levels.
· By serviceTemporary staffing increased 24.3% in 2010 compared with the prior year due to the Tatum acquisition which contributed 12.5 percentage points of the increase combined with an improving economy which has resulted in higher demand across our customer base. Outsourcing and other revenues increased 49.9% due to an increase in professional contingent workforce services projects and RPO growth. Permanent placement revenues increased 30.6% as a result of increased hiring due to improvement in the economy and the Tatum acquisition.
Gross ProfitProfessional Services gross profit increased to $252.9 million in 2010 from $189.9 million of revenues in the prior year. The overall gross profit margin was 25.9% in 2010 compared with 25.1% in the prior year. This 80 basis point increase in gross profit margin was due to an increase in temporary staffing margins, primarily due to lower employee burden costs and the addition of higher margin staffing from Tatum (40 basis points) and an increase in outsourcing and other margins (50 basis points) due to improved margins and growth in RPO compared with other outsourcing services, offset by changes in the mix of business (10 basis points).
Segment Operating ProfitProfessional Services segment operating profit was $38.6 million or 4.0% of revenues in 2010 compared with $26.5 million or 3.5% of revenues in the prior year. As a percentage of gross profit, operating expenses decreased to 84.7% from 86.0%. The decrease in operating expenses as a percentage of gross profit was primarily due to continued effective management of our cost structure partially offset by Tatum, which had a negative contribution to segment operating profit.
OutlookWe continue to focus on the execution of our strategy to expand Professional Services through investment in sales and recruiting resources focused on our targeted small and mid-sized accounts and permanent placement services. We are also making strategic investments in the growth of SourceRight Solutions and brand awareness. We continue to improve our productivity and maintain our pricing discipline while investing in the business to respond to growth opportunities in the professional services market in the future.
Fiscal 2009 compared with 2008
RevenuesProfessional Services revenues decreased 22.0% to $756.8 million in 2009 from $969.8 million in 2008. The decrease in revenues was attributable to the lower business volumes from customers across all service lines and skill categories due to the weak economic conditions that occurred in 2009.
· By skillITdecreased 22.3% from the prior year primarily due to the completion of a large IT staffing project in mid-2008 and lower demand from several large customers. Finance and accounting revenues decreased 14.7% compared with the prior year due to lower customer demand, including significant decreases in permanent placement activity across all skills. Administrative revenues decreased 50.6% due to declines in several larger customers in the technology and financial services industries as well as lower demand in general due to the weak U.S. economy. Other skills decreased 8.6% and primarily reflected a slowdown in our RPO business due to client hiring freezes and deferrals as the U.S. economy remained weak, offset by growth in our professional contingent workforce services business.
· By serviceTemporary staffing decreased 23.7% in 2009 compared with the prior year due to the slower economy. Outsourcing and other revenues increased 3.4% due to increases in professional contingent workforce services, partially offset by lower RPO revenues. Permanent placement revenues decreased by 60.1%, as a result of customer decisions to defer hiring due to economic uncertainty.
Gross ProfitProfessional Services gross profit decreased to $189.9 million or 25.1% of revenues in 2009 from $276.2 million or 28.5% of revenues in the prior year. This 340 basis point decrease in gross profit margin was due to:
· A change in business mix primarily due to lower permanent placement revenues (170 basis points);
· Lower temporary staffing margins (50 basis points) driven by lower pay/bill spreads and higher payroll taxes which were partially offset by lower employee benefit cost;
· Lower outsourcing and other margins due to growth in the professional payrolling business (140 basis points), partially offset by higher margins in our RPO business (20 basis points).
Segment Operating ProfitProfessional Services segment operating profit was $26.5 million in 2009 compared with $46.0 million in the prior year. Although we significantly decreased operating expenses to $163.4 million from $230.2 million, operating expenses as a percentage of gross profit increased to 86.0% from 83.3%. The increase in operating expenses as a percentage of gross profit was primarily due to deleveraging as business volumes and gross profit margins decreased at a more rapid rate than related costs.
Information on the Staffing Services segments skill sets and service lines for the periods indicated were as follows (in thousands):
Fiscal 2010 compared with 2009
RevenuesStaffing Services revenues increased to $1.1 billion in 2010 from $954.1 million in the prior year. The increase was primarily due to increasing business volumes among existing customers in the United States and Canada as the economy continued to improve.
· By skillLight industrial revenues increased 27.2% from prior year levels due to higher volumes among several of our customers, primarily in the distribution, consumer products, and retail industries. Consistent with trends in past economic cycles, light industrial staffing tends to begin growing before other skills, including clerical. Clerical revenues increased 3.3% in 2010 compared with the prior year primarily due to several clients increasing their staffing needs due to the improvement in the economy.
· By serviceTemporary staffing revenues increased 12.9% compared with the prior year due to the improvement in the U.S. economy and as customers increased demand for light industrial temporary labor. Permanent placement revenues increased 20.1% in 2010 compared with the prior year primarily due to employers increasing their hiring to meet demands after significant reductions in their workforces. This revenue increase reflects slightly improving employment trends in the United States and Canada.
Gross ProfitGross profit increased to $171.1 million in 2010 compared with $149.3 million in the same prior year period. The overall gross margin was 15.9% in 2010 compared with 15.6% in the prior year. The increase of 30 basis points was due to a shift in our services due to an increase in permanent placement revenues (10 basis points) and higher temporary staffing margins (20 basis points) due to higher pay/bill spreads and lower employee burden costs.
Segment Operating Profit (Loss)Staffing Services segment operating profit was $18.2 million or 1.7% of revenues in 2010 compared with an operating loss of $0.7 million or (0.1%) in the prior year. Operating expenses increased by $2.9 million or 2.0% year over year, but decreased as a percentage of gross profit to 89.4% compared with 100.4% in the prior year. The decrease in operating expenses as a percentage of gross profit was primarily due to productivity improvements and continued effective management of our cost structure.
Outlook We continue to focus on executing our strategy of diversifying our customer base and expanding business with our targeted small and mid-sized accounts to obtain higher gross profit margins. Sales activity and improving operating leverage remain our major areas of focus for the upcoming year. Due to the sensitivity of our Staffing Services business to economic conditions, we continue to carefully monitor gross profit trends and expenses to achieve appropriate profitability.
Fiscal 2009 compared with 2008
RevenuesStaffing Services revenues decreased to $954.1 million in 2009 from $1.2 billion in the prior year. Revenues decreased 21.8% from the prior year primarily due to lower business volumes among existing customers in the U.S. and Canada due to the slow economy.
· By skillClerical revenues decreased 20.7% from prior year levels due to lower demand among various customers, primarily in the financial, business services and transportation industries. Light industrial revenues decreased 23.3% from prior year levels due to lower business volumes among several of our customers, primarily in the technology, consumer products, manufacturing and retail industries, and the loss of a large customer in mid-2008 due to unacceptable pricing.
· By serviceTemporary staffing revenues decreased 21.4% compared with the prior year due to the slowing economy, which resulted in lower temporary employment in the U.S. Permanent placement revenues decreased 54.0% in 2009 compared with the prior year primarily due to employers significantly reducing their hiring in 2009 due to the weak economy in the U.S. and Canada.
Gross ProfitGross profit decreased to $149.3 million or 15.6% of revenue in 2009 compared with $205.8 million or 16.9% in the prior year period. The decrease of 130 basis points in gross profit margin resulted from lower temporary staffing margins of 90 basis points due to lower pay/bill spreads (80 basis points) and higher payroll taxes and other employee burden costs (10 basis points) combined with a change in revenue mix resulting from disproportionally lower permanent placement revenues (40 basis points).
Segment Operating (Loss) ProfitStaffing Services segment operating loss was $0.7 million compared with profit of $4.1 million in the prior year. Operating expenses as a percentage of gross profit increased to 100.4% compared with 98.0% in the prior year. Higher operating expenses as a percentage of gross profit were due to deleveraging as volumes and gross profit margins decreased faster than operating expenses were reduced.
Unallocated Corporate Costs
2010 compared with 2009Unallocated corporate costs were consistent from year to year at $12.9 million or 0.6% of revenue in 2010 compared with $12.4 million or 0.7% in 2009.
2009 compared with 2008Unallocated corporate costs decreased to $12.4 million in 2009 from $16.7 million in 2008, due to cost containment actions as business volumes decreased. Unallocated corporate costs as a percentage of revenues were 0.7% and 0.8% in 2009 and 2008, respectively.
Liquidity and Capital Resources
As of December 26, 2010, we had total cash of $18.5 million (an increase of $10.4 million from December 27, 2009). Total debt was $5.0 million as of December 26, 2010 compared with $13.6 million as of December 27, 2009. Cash flows from operating, investing and financing activities, as reflected in the accompanying Consolidated Statements of Cash Flows, are summarized as follows (in thousands):
Operating cash flows
Cash provided by operating activities for 2010 was $63.3 million. Cash flow from operating activities before changes in working capital was $61.9 million, which increased from $32.8 million in 2009 due to higher adjusted earnings from continuing operations combined with low levels of cash taxes paid due to the utilization of existing deferred tax assets. Lower working capital employed contributed $1.4 million to operating cash flow in 2010 compared with $8.3 million in 2009.
Cash provided by operating activities for 2009 was $41.1 million. Cash flow from operating activities before changes in working capital was $32.8 million, which decreased from $48.6 million in 2008 due to lower adjusted earnings from continuing operations as the slower economy negatively impacted our operating results. Lower working capital contributed $8.3 million to operating cash flow in 2009. Cash generated from lower working capital resulted primarily from a decrease in accounts receivable compared with prior year-end levels due to lower revenue volume and improved DSO of 41 days at the end of 2009. This was partially offset by $10.9 million used for severance and leases related to restructuring and other charges (included in Accounts payable and accrued liabilities in the Consolidated Statements of Cash Flows).
Cash provided by operating activities for 2008 was $79.2 million. Cash flow from operating activities before changes in working capital was $48.6 million, which decreased from $74.6 million in 2007 due to lower earnings as the slower U.S. economy negatively impacted our financial results. Better utilization of working capital allowed us to generate $30.6 million of additional cash flow. Working capital decreased due to lower accounts receivable from improved DSO and lower revenues toward the end of 2008, partially offset by corresponding decreases in accrued salaries and wages, accounts payable and other liabilities.
Investing cash flows
Cash used for investing activities of $34.3 million in 2010 primarily relates to the payment of $29.2 million, net of cash acquired, for the Tatum acquisition in the first quarter of 2010, $1.5 million of additional consideration paid in connection with a 2007 acquisition (i.e. an earnout payment) and capital expenditures of $4.6 million.
Cash used for investing activities of $4.3 million in 2009 was primarily due to the payment of $3.0 million related to a 2007 acquisition and the purchase of a franchised operation in 2009 and capital expenditures of $2.1 million, primarily related to the implementation of an upgraded telecommunications system.
Cash provided by investing activities of $4.5 million for 2008 was primarily due to the return of $18.4 million of cash collateral from our restricted insurance deposit accounts upon the issuance of additional letters of credit as replacement collateral. This was partially offset by the payment of the final settlement of $5.3 million of indemnity claims related to the 2004 sale of the Australian education business and capital expenditures of $8.9 million which primarily related to computer hardware upgrades for acquired companies and new systems development.
Financing cash flows
Cash used in financing activities for 2010 of $18.6 million was primarily related to the repayments on our lines of credit of $10.7 million, repayment of other debt of $4.3 million and $4.2 million for the purchase of treasury shares.
Cash used in financing activities for 2009 of $36.3 million was primarily related to the repayments on our lines of credit of $23.4 million, repayment of other debt of $4.4 million and $8.6 million for the purchase of treasury shares.
Cash used in financing activities for 2008 of $90.8 million was primarily related to the repayments on our lines of credit of $49.9 million, repayment of other debt of $15.6 million, including the early payment of the Technisource deferred purchase price, and $25.3 million for the purchase of treasury shares.
We believe that a combination of our existing cash balances, other liquid assets, operating cash flows and existing revolving lines of credit, taken together, provide adequate resources to fund ongoing operating requirements. However, our operating cash flow could be impacted by factors outside of our control.
On October 29, 2010, the Company and its lenders entered into an amendment (the First Amendment) to the Amended and Restated Loan and Security Agreement (the Agreement), extending the maturity date of its U.S. dollar revolving line of credit (the Revolver) to November 15, 2014 and reducing the interest rate margins and fees. The First Amendment did not materially change any of the covenants contained in the Revolver.
As of December 26, 2010, there was $0.05 million outstanding under this facility, and as of December 27, 2009, there was $10.8 million outstanding. As of December 26, 2010, total availability was $157.6 million (calculated as eligible receivables of $224.2 million, less: borrowings outstanding of $0.05 million, letters of credit of $31.9 million and a one week payroll reserve of $34.6 million). The interest rate on this line of credit is based upon the duration of the loan, availability under the line and other conditions and was approximately 4.75% (prime rate plus 1.50% margin) as of December 26, 2010. Pursuant to the terms of the Agreement, we pay an unused line fee in the range of 0.375% to 0.5% per annum that is determined by the unused portion of the revolving line of credit. For letters of credit, we pay an annual rate based on availability under the line (currently 2.5%) plus a fixed fronting fee of 0.125%. For further discussion on letters of credit, see Note 11, Commitments and Contingencies.
The Revolver contains certain affirmative and negative covenants, the most significant of which is a minimum fixed charge coverage requirement under certain conditions. If excess availability, as defined by the Agreement, falls below $30.0 million, we are required to maintain a fixed charge coverage ratio of at least 1.1x. At December 26, 2010, excess availability was $157.6 million and we were in compliance with all covenants of the Revolver. Other covenants include, but are not limited to: limitations on additional debt incurred, mergers, consolidations, or sales, and transactions with subsidiaries and related parties. Failure to meet compliance with one or more of these covenants in the future could affect the amount of availability we have to borrow against and as a result, our liquidity and financial condition may be affected.
Contractual obligations and commitments (in thousands)
As of December 26, 2010, the Company had contractual obligations and future commitments as follows:
(1) Debt obligations include the U.S. dollar revolving line of credit and interest bearing obligations to certain former members of Tatum. The future maturity of the U.S. dollar revolving line of credit balance is presented in 2014, the year of scheduled maturity, although the revolving line of credit is classified as a current debt obligation in the accompanying Consolidated Balance Sheet in accordance with Generally Accepted Accounting Principles. These amounts primarily include estimated interest, letter of credit fees and unused line fees based on current rates as the balance was largely repaid as of year-end 2010.
(2) Operating lease obligations for rent and equipment are expected to be offset by future sublease income of $0.2 million in 2011, $0.1 million in 2012 and $0.1 million in 2013.
(3) Purchase obligations include normal and customary contracts and minimum spend contracts in the ordinary course of business, primarily information technology outsourcing and maintenance contracts.
(4) Other liabilities include the final installment of acquisition consideration for a 2007 transaction and obligations related to the acquisition of Tatum.
Off-Balance Sheet Arrangements
As of December 26, 2010, we had $31.9 million in irrevocable letters of credit outstanding, which were issued primarily for the benefit of certain insurance carriers to guarantee payment for various self-insurance programs such as workers compensation insurance. As of December 26, 2010, none of these irrevocable letters of credit had been drawn upon.
We do not have any other significant off-balance sheet arrangements.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be materially different from those estimates. The following policies are those that we consider to be the most critical. See Note 1, Summary of Significant Accounting Policies, for further description of these and all other accounting policies.
Allowance for Doubtful AccountsManagement analyzes aged receivables and the related allowance for doubtful accounts on a quarterly basis. We use historical experience in assessing the adequacy of the reserve which includes reviewing: net write-offs in relation to revenues, the allowance in comparison to the gross accounts receivable balance and comparative agings. Receivables deemed by management to be uncollectible based on historical trends are reserved for and/or consequently written-off. Historically, losses from uncollectible accounts have not exceeded our allowance. Due to the judgment used in making these assumptions, the ultimate amount of accounts receivable that become uncollectible could differ from our original estimate due to a changing economy or a change in our customers financial positions, which could result in charges or credits to amounts recorded in selling, general and administrative expenses.
Goodwill and Other Intangible AssetsAs required by Accounting Standards Codification No. 350 (ASC 350), (Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets), goodwill and other intangible assets with indefinite lives are not amortized, but are tested for impairment on an annual basis, or earlier if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. For the purposes of our ASC 350 impairment testing, our reporting units are the same as our operating segments, Professional and Staffing Services. Performing an impairment test involves estimating the fair value of a reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss is calculated by comparing the implied fair value of the reporting units goodwill to its carrying amount. In calculating the implied fair value of the reporting units goodwill, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied value of goodwill. An impairment loss is recognized when the carrying amount of goodwill exceeds its implied fair value.
SFN performed its annual impairment test of goodwill as of October 2010. Based on the results of our annual impairment testing, the fair values of our reporting units at October 2010, exceeded their carrying values by a significant margin.
The impairment test for other intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized. The estimates of fair value of intangibles not subject to amortization are determined using various discounted cash flow valuation methodologies. Significant assumptions are inherent in this process, including estimates of discount rates. Changes in these assumptions may have a material impact on the financial statements. The results of SFNs impairment test indicated that no adjustments to the carrying amounts of its non-amortizing intangible assets were required.
Impairment of long-lived assetsLong-lived assets, primarily fixed assets and other intangible assets, are evaluated by SFN in accordance with ASC 360 (SFAS No. 144 Accounting for the Impairment of Long-lived Assets), whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. SFN evaluates the fair value of its long-lived assets using an undiscounted cash flow analysis to estimate the assets fair value. If the estimated future cash flows are projected to be less than the carrying value, an impairment write-down would be recorded, measured by the amount of the assets carrying value in excess of fair value. Based on SFNs evaluation, there were no events or changes in circumstances that indicated that the value of the assets were not recoverable. In addition, the remaining useful lives of long-lived assets are reviewed annually. Based on SFNs evaluation, there were no changes to the remaining useful lives of the long-lived assets.
Accrued self-insurance lossesWe retain a portion of the risk under our workers' compensation, general liability, professional liability, employment practices liability and health benefits insurance programs. Recording reserves for self-insured losses involves a considerable amount of judgment. In developing the reserves, we use the assistance of actuaries to estimate most of our accruals under the following circumstances: (i) when the accruals are sufficiently material, (ii) when there is an adequate population of claims upon which to prepare actuarial estimates and (iii) when the claims develop over a longer period of time. For all other accruals we base our reserves on internal estimates. Estimated losses for workers' compensation have been discounted at 2.25% and 2.73% as of December 26, 2010 and December 27, 2009, respectively. While management believes that the amount recorded for the liabilities is adequate, there can be no assurance that changes to managements estimates may not occur due to limitations inherent in the estimation process. Factors that can affect our reserves are as follows:
· The cost of benefits under the workers' compensation programs are regulated under state law and are subject to change. Legislation can have a significant impact on our ability to control costs related to the amount and frequency of service, the amount of benefits paid if the employee is unable to work and our ability to put the employee back to work. As legislation changes, our estimated liabilities will change.
· Loss estimates from actuaries are primarily based on the historical pattern of losses, including both the frequency and severity of claims. Changes in loss patterns must often be consistently exhibited over a period of time before they are fully reflected in the reserves. Claims can also take a number of years to fully develop until the final loss is known. Changes to estimated loss reserve levels can occur several years after the loss has occurred. A 10% change in either the frequency or severity of claims for one year at current activity levels would impact workers compensation expense by approximately $1.3 million.
· Changes in the cost of health care services, claims processing costs, or increased litigation could affect the adequacy of these estimated liabilities.
· Prolonged changes in interest rates for risk-free U.S. governmental bonds could also affect the discount rate used in estimating these liabilities. An increase or decrease of 1.0% in the discount rate would result in a reduction or increase, respectively, to pre-tax expense of approximately $1.4 million.
Management reviews these assumptions and related reserves and changes in the estimates of these accruals are charged or credited to cost of services for billable temporary staff and/or selling, general and administrative expenses for branch and administrative staff in the period determined. The Company monitors the impact of reserve changes on its results of operations and over time such reserve changes tend to be insignificant to overall gross profits. During 2010, our workers compensation and other insurance costs were increased by $4.5 million and decreased by $1.7 million during 2009, for adjustments to prior year reserves and the discount rate.
SFN provides letters of credit to its workers compensation insurance carrier and various states to collateralize obligations for outstanding claims. SFN also provides cash deposits to various transaction processing vendors (Other current assets in the accompanying Consolidated Balance Sheets). The letters of credit and insurance deposits were $31.9 million and $0.3 million at December 26, 2010, respectively, and $37.0 million and $0.4 million at December 27, 2009, respectively.
Share‑Based CompensationWe recognize compensation expense for all share-based payments by estimating the fair value of restricted stock units and stock options at grant date. The fair value of stock options is estimated using the Black-Scholes-Merton option-pricing model. Calculating the fair value of share-based payment awards requires the input of subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. Management bases expected life on historical exercise and post-vesting employment-termination experience, and expected volatility on historical realized volatility trends. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. The assumptions used in calculating the fair value of share-based payment awards represent managements best estimates, but these estimates involve inherent uncertainties and the application of managements judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future. See Note 2, Share-Based Compensation to the Consolidated Financial Statements for a further discussion on share-based compensation.
Income TaxesDeferred tax assets and liabilities are determined based on the difference between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Our provision for income taxes is based on domestic and international statutory income tax rates and tax planning opportunities in the jurisdictions in which we operate. Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of tax positions.
At December 26, 2010, we had a net deferred tax asset of $137.0 million, net of a valuation allowance of $5.8 million. Net deferred tax assets are primarily comprised of net deductible temporary differences, net operating loss carryforwards and tax credit carryforwards that are available to reduce taxable income in future periods. The net deferred tax asset was evaluated under the guidelines of ASC 740 (SFAS No. 109, Accounting for Income Taxes) and a determination on the basis of objective factors was made that the asset will be realized through future years taxable earnings. These objective factors include historical taxable income, normalized for non-recurring income and expense items. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income and the impact of tax planning strategies. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing a valuation allowance, we consider all positive and negative evidence available at the time, including past operating results, projections of future taxable income and the feasibility of ongoing tax planning strategies. The current valuation allowance relates primarily to foreign tax credit carryforwards, the benefit on capital loss carryforwards and the benefit on state net operating loss carryforwards that are not expected to be realized. If we determine that future taxable earnings will be insufficient to recover the deferred tax assets, we will be required to write-off all or a portion of the remaining net deferred tax assets by a charge to earnings.
See Note 3, Income Taxes, in the accompanying notes to the Consolidated Financial Statement for further discussion on income taxes.
New Accounting Pronouncements
See Note 1, Summary of Significant Accounting Policies, in the accompanying notes to the Consolidated Financial Statements for discussion of New Accounting Pronouncements.
Our monetary assets, consisting primarily of cash and accounts receivable, are not affected by inflation because they are short-term. Our non-monetary assets, consisting primarily of intangible assets, and prepaid expenses and other assets, are not affected significantly by inflation. We believe that replacement costs of equipment, furniture and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our cost of service and expenses, such as those for employee compensation, which may not be readily recoverable in the price of services offered by us.
Non-GAAP Financial Measures
This Annual Report on Form 10-K includes information extracted from consolidated financial information but not required by generally accepted accounting principles (GAAP) to be presented in the financial statements. Certain of this information are considered non-GAAP financial measures as defined by SEC rules. Specifically, adjusted earnings from continuing operations is a non-GAAP financial measure which excludes impairment of goodwill and other intangibles, restructuring and other charges related to acquisitions and other cost reduction initiatives, and adjustments to tax valuation allowances. Adjusted earnings from continuing operations are key measures used by management to evaluate its operations. Non-GAAP financial measures should not be considered a measure of financial performance in isolation or as an alternative to revenue growth as determined in the Statement of Operations in accordance with GAAP, and, as presented, may not be comparable to similarly titled measures of other companies, and therefore this measure has material limitations. Non-GAAP financial measures should be considered in addition to, but not as a substitute for or superior to, other measures of financial performance prepared in accordance with GAAP.
Forward Looking StatementsSafe Harbor
Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Annual Report on Form 10-K, as well as other written or oral statements made from time to time by us or by our authorized executive officers on our behalf, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement and these risk factors in order to comply with such safe harbor provisions. You should note that our forward-looking statements speak only as of the date of this Annual Report on Form 10-K or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our stockholders and prospective investors should consider are included in Item 1A, Risk Factors.