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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 27, 2009 Commission file number: 1-11997 SFN GROUP, INC. (Exact name of registrant as specified in its charter)

     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 registrant’s 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 stock held by non-affiliates of the Registrant, computed by reference to the closing price of the Registrant’s Common Stock, par value $0.01 per share (“Common Stock”), as of June 28, 2009 on the New York Stock Exchange, was $210,526,156.

     Number of shares of Registrant’s Common Stock outstanding on February 19, 2010 was 51,590,746.

DOCUMENTS INCORPORATED BY REFERENCE:

     Certain specified portions of the registrant’s definitive proxy statement for its 2010 annual meeting of stockholders to be filed within 120 days after December 27, 2009, 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.

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PART I

Item 1. BUSINESS

     As used in this report, the terms “we,” “us,” “our,” “SFN Group,” “SFN” and the “Company” refer to SFN Group, Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.

Company Overview

     SFN Group, Inc. is a strategic workforce solutions provider. We have two operating segments, Professional Services and Staffing Services which provide temporary staffing and other services and permanent placement under several specialty brands. Within Professional Services we operate as Technisource, the Mergis Group, Todays Office Professionals and SourceRight Solutions. 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 to professional and specialty services.

     In February 2010, SFN Group acquired Tatum, LLC (“Tatum”) a leading executive services firm focused on the office of the chief financial officer. The acquisition of Tatum furthers the Company’s strategy of expanding our higher level professional services business. Tatum will be included in the Professional Services segment.

     Temporary staffing and other services include placing our employees at a customer location under the customer’s supervision in the following skill categories: clerical, light industrial, information technology, finance and accounting, legal, engineering, sales and marketing, human resources and administrative. Permanent placement is a service where on a contingent fee basis we locate talent on behalf of our customers, screen the candidates and assist in the recruitment efforts.

     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 only 2.9% of our consolidated revenues in 2009.

     SFN is headquartered in Fort Lauderdale, Florida and operates a network of 569 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 “Management’s 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”.

Industry Overview

     According to the Department of Labor, Bureau of Labor Statistics during 2009 there were an average of 1.8 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 in mid-2006. Estimated industry revenues, per Staffing Industry Analysts, are in excess of $100 billion including temporary staffing, permanent placement and other services similar to those provided by SFN.

     About 53% 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 SFN’s 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 SFN’s Staffing Services operating segment.

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     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. Consistent with the prior year, almost 1.5% of the total workforce was temporary help as of December 2009. Although recent trends show a decline, temporary help has increased from 1.0% of total workforce in the early 1990’s. Despite the impact of the recent economic recession, the U.S. Bureau of Labor Statistics projects the U.S. employment services sector, which is primarily staffing, is expected to be the second largest job growth industry. 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.

Operations Overview

     The Company is organized around two operating segments—Professional Services and Staffing Services. Within each of our operating segments, we provide temporary staffing and other and permanent placement services. These services are further described as follows:

• Temporary Staffing & Other—Temporary 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, legal, engineering, marketing, light industrial and administrative 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 pay. Other services include services where we manage aspects of the operation of a customer function such as recruiting, administrative services, help desk and data center services usually under long-term contracts.

• Permanent Placement—This 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 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 2009 revenues derived from each of these services within our operating segments (in thousands):

 

     Within the services described above, the Professional Services operating segment concentrates on temporary staffing and placement of professional skill sets in the areas of information technology, finance and accounting, legal, engineering, sales and marketing, human resources and administrative. The Staffing Services operating segment concentrates on temporary staffing, other services and placement of individuals with administrative, clerical and light industrial skill sets. See Note 15, “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 2009, 2008 and 2007.

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Location Structure

     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 2009, 88.0% 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 3.6% of the Company’s total revenue.

 

     Company-Owned 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 customer’s location to serve only that customer. Over the last two years, the number of our locations decreased due to cost containment actions undertaken due to the slowing of U.S. economic conditions and lower demand for our services.

 

     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. We typically grant franchisees the exclusive right to establish an office to market and provide light industrial and clerical temporary personnel within a designated geographic area. Franchisees contribute dollars towards 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.

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     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 75% of the franchised offices’ gross profit for the fiscal year ended December 27, 2009. Our Consolidated Statements of Operations reflect the franchisee commission as an operating expense, but do not include the rent, utilities and salaries of the franchisee’s 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 (Financial Accounting Standards Board Interpretation No. 46 (“FIN 46R”)).

     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 $1.6 million as of December 27, 2009, and is included in “Other current assets” in the Consolidated Balance Sheets.

 

     We grant area-based franchises, which give the area-based franchisee the right to establish a recruitment business utilizing our tradenames, service marks, advertising materials, sales programs, operating systems and procedures, manuals and forms within a designated territory. We typically grant area-based franchisees the exclusive right to establish an office to market and provide light industrial and clerical temporary personnel within a designated geographic area. We provide area-based franchisees with our national, regional and local advertising. 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 franchisee’s sales. Royalty revenues from franchise owners are included in the Company’s revenue in the accompanying “Consolidated Statements of Operations”.

     From time to time, we may finance a portion of the purchase price of the area-based franchise at market rates of interest or provide working capital loans to area-based franchisees. As of December 27, 2009, we did not have any area-based franchisees with outstanding notes receivable.

Acquisitions

     From time to time we evaluate various acquisition opportunities and may acquire competitors to accelerate our growth. 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 $46.0 million. See Note 17, “Subsequent Events,” in the accompanying Consolidated Financial Statements for further discussion.

     In 2007, we acquired Resulté Universal, Ltd. (“Resulté”), Todays Staffing, Inc. (“Todays Staffing”), and IntelliMark Holdings, Inc., and its wholly owned subsidiary Technisource, Inc. (“Technisource”), collectively the (“2007 Acquisitions”), within the U.S. In addition, we periodically enter into transactions with our franchisees and area-based franchisees to buy and sell operations in certain markets.

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     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 2007, we acquired area-based franchise operations in Boston, Kansas City, Lexington, Pittsburgh and several smaller franchised operations for consideration of approximately $12.2 million. We acquired franchised operations in San Antonio for a purchase price totaling $0.4 million in the fourth quarter of 2008. 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.

     During the second quarter of 2007, we sold our outplacement consulting business. This business was included within the Staffing Services segment and the operating results for all periods presented have been reclassified as discontinued operations.

Competition

     We operate in highly competitive and fragmented markets in our operating segments. There are low barriers to entry and thus many competitors in temporary staffing, especially in the commercial staffing market. There are somewhat higher barriers to entry, and thus fewer competitors, when providing more specialized services, such as RPO, permanent placements, or professional services.

     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 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 569 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 to 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 is 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., MPS Group, 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.

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Trademarks

     Through our subsidiaries, we maintain a number of trademarks, tradenames and service marks in the United States of America and certain other countries. We believe that many of these trademarks and tradenames, including SFN GROUP^sm, SPHERION^®, SPHERION RECRUITMENT PROCESS OUTSOURCING^sm, SOURCERIGHT SOLUTIONS^sm, THE MERGIS GROUP^®, TODAYS OFFICE PROFESSIONALS^sm, 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^®, and TECHNISOURCE^® expire October 9, 2011, July 10, 2017, March 24, 2018, and October 9, 2017, respectively, but are renewable for ten-year successive terms.

Governmental Regulation

     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 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 a material adverse effect on us.

     Our sale of area-based franchises and franchises is regulated by the Federal Trade Commission and by authorities in approximately 15 states and is subject to statutory requirements in certain Canadian provinces. 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 area-based franchises and 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 area-based franchises and franchises or operate our business through area-based franchised and franchised offices.

Employees

     We estimate that we employed approximately 161,000 people in 2009. On average, approximately 42,000 billable personnel were assigned with our customers at any given time.

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Seasonality and Cyclical Nature of Business

     Seasonality—Our businesses are 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. The decrease in first quarter 2009 revenues compared with the fourth quarter of 2008 was 16%, which is higher than usual based on the impact of the U.S. economic downturn. The decrease in the first quarter 2008 compared with the fourth quarter of 2007 was 9% after giving effect for the 2007 Acquisitions.

     Cyclical Nature of the Business—The staffing industry has historically been considered to be 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. Conversely, our revenues also decrease quickly when the economy begins to weaken, as occurred in 2008 and 2009, as our customers reduce temporary workers before reducing their own permanent staff. 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.

Executive Officers of the Registrant

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 Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statement 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 SFN’s 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 Commission’s 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 Commission’s website is not part of this Annual Report on Form 10-K.

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Item 1A. RISK FACTORS

     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 markets with low barriers to entry, and may be unable to compete successfully against existing or new competitors.

     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 who wish to consolidate services.

     There has been a significant 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.

     If the current economic downturn continues for a significant period or there is deterioration 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 suffers during economic downturns as it did in 2008 and 2009. As economic activity slows, companies tend to reduce their use of temporary employees and recruitment services before undertaking layoffs of their regular employees, resulting in decreased demand for our personnel. Also, as businesses reduce their hiring of permanent employees, revenues from our recruitment services are adversely affected. Additionally, a continued economic downturn could result in higher unemployment claims and costs in future periods. As a result, if the current economic downturn continues for a significant period or there is deterioration in the economy, 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.

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     We are dependent upon availability of qualified personnel, and may not be able to attract and retain sufficient numbers of qualified personnel necessary to succeed.

     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.

     Regulatory challenges to our tax filing positions could result in additional taxes.

     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 a material 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:

• 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 funds 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. 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. We cannot assure that we will not experience such problems in the future.

     We retain all or a portion of the risk under our workers’ compensation, general liability, professional liability and employment practices liability insurance programs, and health insurance benefits programs. Changes in the estimates of these accruals are charged or credited to earnings in the period determined, and therefore a large fluctuation in any given quarter could materially adversely affect earnings in that period.

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     We are a defendant in a variety of litigation and other actions from time to time, which may have a material adverse effect on our business, financial condition and results of operations.

     We and our subsidiaries 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 a material 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.

     We are subject to business risks associated with operations in Canada, which could make this operation significantly more costly.

Operation in this market is subject to risks inherent in international business activities, including:

• 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.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

             OPERATIONS

Organization of Information

     Management’s Discussion and Analysis 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:

• Executive Summary

• Operating Results

• Liquidity and Capital Resources

• Contractual Obligations and Commitments

• Off-Balance Sheet Arrangements

• Critical Accounting Policies

• New Accounting Pronouncements

• Inflation

• Non-GAAP Financial Measures

• Forward-Looking Statements-Safe Harbor

Company Overview

     SFN Group, Inc. is a strategic workforce solutions provider. We have two operating segments, Professional Services and Staffing Services which provide temporary staffing and other services and permanent placement under several specialty brands. Within Professional Services we operate as Technisource, the Mergis Group, Todays Office Professionals and SourceRight Solutions. 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 to include professional and specialty services.

     Temporary staffing and other services include placing our employees at a customer location under the customer’s supervision in the following skill categories: clerical, light industrial, information technology, finance and accounting, legal, engineering, sales and marketing, human resources and administrative. Permanent placement is a service where on a contingent fee basis we locate talent on behalf of our customers, screen the candidates and assist in the recruitment efforts. Other services include services where we manage aspects of the operation of the customer function such as recruiting, administrative services, help desk and data center services usually under long-term contracts. See the Business - Operations Overview section of Part I of this Annual Report on Form 10-K for further description of our operating segments.

     In 2007, consistent with our strategy to expand our higher margin services in the U.S. market, we completed several acquisitions. The acquired companies focused primarily on information technology and high end administrative services. In addition, we periodically enter into transactions with our franchisees and area-based franchisees to buy and sell operations in certain markets.

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     On February 1, 2010, we acquired Tatum, LLC (“Tatum”), a company that provides executive services focused primarily on the office of the chief financial officer within the United States, which has approximately 34 locations, generating approximately $117 million of revenue in 2009. Total consideration was $46.0 million, consisting of 1.9 million shares of common stock of the Company (valued at $11.4 million) and the remainder in cash and assumed liabilities.  We held back a certain amount of cash and shares of common stock that may be issued in the future to adjust the merger consideration based upon final working capital and for indemnification purposes, as provided for in the agreement.

Executive Summary

The following is a brief summary of our primary 2009 objectives and accomplishments:

• Second, optimize cash flow. Throughout 2009, we have continued to adjust our cost structure as business volumes decreased due to the slowing economy. Based on our actions, we have reduced selling, general and administrative (“SG&A”) expenses by $122.9 million in 2009 compared with the same prior year period. We continued to see signs of stabilizing temporary staffing trends in the second half of 2009, but will monitor SG&A and adjust expenses based on customer demand. We generated operating cash flow of $41.1 million and were able to reduce debt by $25.7 million in 2009. Days sales outstanding (“DSO”) were 46 days in December 2009 compared with 49 days in December 2008.

     As economic conditions in North America begin to improve, we plan to leverage market growth through our focus on three key operating objectives in 2010:

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Fiscal 2008 compared with 2007

RECONCILIATION OF YEAR-OVER-YEAR ORGANIC⁽¹⁾ REVENUE GROWTH

 

     ⁽¹⁾ Organic revenue growth is calculated assuming that all acquisitions were consummated on January 1, 2007. This calculation has the effect of adding revenues for the acquired businesses prior to their acquisition dates to our reported revenues. Effective with the first quarter of 2008, the management of certain customer contracts was transferred between operating segments, primarily to Professional Services from Staffing Services. Additionally, we realigned our operating segments during the first quarter of 2009. The Recruitment Process Outsourcing and Todays Office Professionals businesses are now reported in Professional Services rather than within Staffing Services. Our organic revenue growth has been adjusted to conform to our 2009 segment presentation. See non-GAAP financial measures for further discussion.

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Fiscal 2008 compared with 2007 cont'd

• Loss from continuing operations was $(2.14) per diluted share for 2008 compared with earnings of $0.51 per share in 2007. Adjusted earnings per share from continuing operations in 2008 were $0.24 compared with $0.57 per share in 2007. The decrease in adjusted earnings per share reflects the impact of deleveraging in the business as the economy slowed and demand for recruiting and staffing declined. See “Management’s Discussion and Analysis – Non-GAAP Financial Measures” for further information.

• Loss from discontinued operations was $(0.07) per share in both 2008 and 2007, respectively. The loss in 2008 included $3.4 million of pre-tax loss from operations due to expenses associated with legal matters related to businesses sold in 2004 and a pre-tax loss on disposal of $2.8 million related to the settlement of indemnification claims associated with the sale of the Australian education business in 2004. See Note 13, “Discontinued Operations,” in the accompanying notes to the Consolidated Financial Statements for further discussion.

• DSO improved to 49 days at the end of 2008 compared with 51 days at the end of 2007.

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     Fiscal 2009 compared with 2008

     Revenues—Professional Services revenues decreased 26.8% to $681.7 million in 2009 from $931.0 million in the prior year. 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 service—Temporary staffing and other decreased 24.9% in 2009 compared with the prior year due to the slower economy. Permanent placement revenues decreased by 60.1%, as a result of customer decisions to defer hiring due to economic uncertainty since the second half of 2008.

     Gross Profit—Professional Services gross profit decreased to $185.4 million or 27.2% of revenues in 2009 from $272.4 million or 29.3% of revenues in the prior year. This 210 basis point decrease in gross profit margin was due to a change in service mix due to lower permanent placement revenues (180 basis points) and lower temporary staffing and other margins (40 basis points) driven by lower pay/bill spreads and higher payroll taxes, partially offset by higher margins in our RPO business (10 basis points).

     Segment Operating Profit—Professional Services segment operating profit was $26.9 million in 2009 compared with $43.8 million in the prior year. Despite the decrease in operating expenses, as a percentage of gross profit, operating expenses increased to 85.5% from 83.9%. 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.

     Outlook—We continue to focus on the execution of our strategy to expand our Professional Services business through investment in sales resources focused on leveraging our leadership position in RPO and the addition of targeted small and mid-sized accounts. As 2009 progressed, we began to see year-over-year revenue comparisons improve in all temporary staffing skill categories, as well as, with permanent placement. However, we continue to carefully monitor gross profit trends and expense levels while keeping SFN positioned to respond to growth opportunities in Professional Services markets in the future.

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     Revenues—Professional Services revenues increased 43.0% to $931.0 million in 2008 from $651.0 million in the prior year. The increase in revenues was primarily attributable to the 2007 Acquisitions and the reclassification of certain customer contracts from our Staffing Services operating segment. Revenues on an organic basis decreased 10.8% due to the completion of a large IT staffing project and lower demand from several larger customers.

• By service—Temporary staffing and other increased 48.2% due to the 2007 Acquisitions. On an organic basis, temporary staffing and other revenues decreased 10.1% primarily due to the completion of a large IT staffing project, lower demand from several large customers for temporary staffing, particularly within the technology, consumer products and financial services sectors, and lower RPO revenues due to decreases in hiring plans of our customers due to the economic slowdown. Permanent placement revenues decreased by 12.5%, or 22.0% on an organic basis, as hiring freezes and layoffs significantly impacted customers’ hiring plans and need for recruiting services, particularly in the second half of 2008.

     Gross Profit—Professional Services gross profit increased 19.9% to $272.4 million in 2008 from $227.2 million in the prior year. The overall gross profit margin was 29.3% in 2008 compared with 34.9% in the prior year. This 560 basis point decrease in gross profit margin was primarily due to a change in service mix due to lower permanent placement revenues (330 basis points). Temporary staffing and other margins were lower primarily driven by higher billable expenses (210 basis points) and lower RPO margins (50 basis points), partially offset by lower payroll taxes (30 basis points).

     Segment Operating Profit—Professional Services segment operating profit was $43.8 million compared with $44.0 million in the prior year. Operating expenses as a percentage of gross profit were up 330 basis points to 83.9% from 80.6%. The increase in operating expenses as a percentage of gross profit was primarily due to deleveraging as business volumes and gross profit margins decreased faster than operating expenses were reduced.

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Staffing Services

     Information on the Staffing Services segment’s skill sets and service lines for the periods indicated were as follows (in thousands):

 

Fiscal 2009 compared with 2008

     Revenues—Staffing Services revenues decreased to $1.0 billion in 2009 from $1.3 billion in the prior year. The decrease was primarily due to lower business volumes among existing customers in the U.S. and Canada due to the slow economy.

• By service—Temporary staffing and other revenues decreased 17.8% 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 Profit—Gross profit decreased to $153.7 million or 14.9% of revenue in 2009 compared with $209.6 million or 16.7% in the prior year period. The decrease of 180 basis points in gross profit margin resulted from lower temporary staffing and other margins of 140 basis points due to lower pay/bill spreads (110 basis points) and higher payroll taxes and other employee burden costs (30 basis points) combined with a change in revenue mix resulting from disproportionally lower permanent placement revenues (40 basis points).

     Segment Operating (Loss) Profit—Staffing Services segment operating loss was $1.1 million in 2009 compared with operating profit of $6.3 million in the prior year. Operating expenses decreased by $48.5 million year over year, but increased as a percentage of gross profit to 100.7% compared with 97.0% in the prior year. Higher operating expenses as a percentage of gross profit are due to deleveraging as volumes and gross profit margins decreased faster than operating expenses were reduced.

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SFN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

     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 margins. As 2009 progressed, we began to see year-over-year revenue comparisons improve in both temporary staffing and other and permanent placement. The 4.9% increase in revenues in the second half of 2009 compared with the first half also reflects seasonal increases in temporary staffing volumes. It is difficult to quantify how much of the second half revenue increase compared with the first half of revenue is due to seasonality versus economic improvement. As such, sales activity and careful cost management to improve operating leverage remain our major areas of focus in 2010.

 

     Revenues—Staffing Services revenues decreased slightly to $1.3 billion in 2008 from $1.4 billion in the prior year. On an organic basis, revenues decreased 8.5% from the prior year primarily due to the loss of a large customer resulting from unacceptable pricing and lower business volumes within existing customers in the U.S. and Canada due to the slowing economy.

• By service—Temporary staffing and other revenues decreased 7.4% (8.0% on an organic basis) compared with the prior year due to the loss of a large customer resulting from unacceptable pricing and lower volumes in both our U.S. and Canadian operations due to the economic slowdown. Permanent placement revenues decreased 40.3%, or 39.6% on an organic basis, as hiring freezes and layoffs significantly impacted customers’ hiring plans.

     Gross Profit—Gross profit decreased to $209.6 million or 16.7% of revenue in 2008 compared with 18.4% in the prior year. The decrease of 170 basis points in the gross profit margin resulted from lower temporary staffing and other margins of 120 basis points due to lower pay/bill spreads (80 basis points) and higher workers’ compensation costs (40 basis points), combined with a change in revenue mix resulting from disproportionally lower permanent placement revenues (50 basis points).

     Segment Operating Profit—Staffing Services segment operating profit was $6.3 million compared with $19.7 million in the prior year. Operating expenses as a percentage of gross profit increased to 97.0% compared with 92.1% in the prior year. The higher operating expenses were due to deleveraging as business volumes and gross profit margins decreased faster than operating expenses were reduced.

Unallocated Corporate Costs

     2009 compared with 2008—Unallocated corporate costs were $12.4 million and $16.7 million in 2009 and 2008, respectively, decreasing as a result of cost containment actions. Unallocated corporate costs as a percentage of revenues were 0.7% and 0.8% in 2009 and 2008, respectively.

     2008 compared with 2007—Unallocated corporate costs were $16.7 million and $16.0 million in 2008 and 2007, respectively. Unallocated corporate costs as a percentage of revenues were 0.8% in both 2008 and 2007.

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• 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 $1.2 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 2009 and 2008, our workers’ compensation and other insurance costs were reduced by $1.7 million and $0.3 million, respectively, 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 $37.0 million and $0.4 million at December 27, 2009, respectively, and $44.3 million and $0.5 million at December 28, 2008, respectively.

     Share-Based Compensation—We recognize compensation expense for all share-based payments by estimating the fair value of options at grant date 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 management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s 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 Taxes—Deferred 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.

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