Robert Half International Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; selected fourth-quarter results are included below. The company provides specialized staffing and permanent placement services, plus risk consulting and internal audit through Protiviti.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net service revenues | $5,800.3 million | $5,266.8 million |
| Gross margin | $2,410.0 million; 41.5% of revenue | $2,163.8 million; 41.1% |
| Operating income | $588.9 million; 10.2% of revenue | $517.3 million; 9.8% |
| Income before taxes | $591.6 million | $517.5 million |
| Net income | $434.3 million | $290.6 million |
| Diluted earnings per share | $3.57 | $2.33 |
| Operating cash flow | $572.3 million | $453.0 million |
- Revenue increased 10.1%. Temporary and consultant staffing revenue rose 8.0% to $4.33 billion; permanent placement rose 16.6% to $512.0 million; and risk consulting and internal audit rose 17.3% to $957.7 million. On an adjusted basis, segment growth was 7.9%, 16.0%, and 13.2%, respectively.
- Staffing gross margin improved, chiefly due to higher pay-bill spreads and conversion revenue. Protiviti’s gross margin percentage eased to 28.1% from 28.4%, primarily reflecting higher professional staff pay and headcount.
- The effective tax rate fell to 26.6% from 43.9%. The 2017 rate included a $34 million noncash charge related to the Tax Cuts and Jobs Act; the lower 2018 rate primarily reflects the federal corporate rate reduction to 21%. Final 2018 adjustments under the Act were not material.
- Fourth-quarter 2018 revenue was $1,481.7 million, versus $1,346.3 million a year earlier. Net income was $113.6 million and diluted EPS was $0.95, compared with $47.0 million and $0.38 in Q4 2017. The prior-year quarter’s results included the tax-law charge.
Cash, debt, and capital allocation
- Cash and cash equivalents were $276.6 million at year-end, down from $294.8 million. Current assets were $1,473.6 million and current liabilities were $819.5 million.
- Total notes payable and other indebtedness was approximately $0.7 million. The company also had a $35 million uncommitted letter-of-credit facility, with $14.4 million used; it was in covenant compliance and intended to renew the facility before its August 2019 expiration.
- Capital expenditures were $42.5 million. Financing cash outflows included $353.5 million of share repurchases and $136.4 million of dividends paid. The annual dividend declared per share increased to $1.12 from $0.96.
- Management said internally generated cash should fund working capital, fixed payments, dividends, and other obligations in the short and long term. Contractual commitments totaled $504.0 million, including $369.4 million of operating lease commitments.
Outlook, commentary, and risks
- Management cited improving global economic conditions, a strong U.S. labor market, and demand for skilled talent as supporting 2018 results. It emphasized limited revenue visibility because engagements are generally short term and long-term contracts are not significant.
- Management expected full-time headcount in each reporting segment to be modestly higher during Q1 2019. Expected 2019 capital expenditures were $60–$70 million, including $35–$45 million for software and technology infrastructure. The filing does not provide specific revenue or earnings guidance.
- Principal risks include economic or labor-market deterioration, difficulty sourcing candidates in a tight labor market, competition and margin pressure, international and currency exposure, regulatory and healthcare costs, data privacy and cybersecurity, technological change, and dependence on skilled employees and reputation.
- Two California putative class actions concern alleged wage-and-hour violations, including interview-related pay and recruiter classification. The company disputes the allegations; outcomes and loss ranges were not estimable, and no amounts were accrued. Other ordinary-course litigation was not expected by management to have a material adverse effect.
- The company adopted new revenue guidance in 2018 without a material income-statement impact. It adopted lease accounting in January 2019 and estimated recognition of $270–$290 million of lease liabilities and right-of-use assets, offset by approximately $30 million of accrued rent. The financial statements and internal control over financial reporting received unqualified auditor opinions.
Important facts for investors to verify
- Whether segment growth and margins remain durable, particularly given the sensitivity of permanent placement to economic conditions and Protiviti’s lower gross margin percentage.
- How much of the net-income increase reflects the lower tax rate versus underlying operating growth, and how future tax rules may affect results.
- Cash conversion and capital allocation, including the scale of repurchases and dividends relative to operating cash flow and investment needs.
- Developments in the California lawsuits, the letter-of-credit facility renewal, and the balance-sheet and expense effects of lease adoption.
- International revenue growth, currency effects, candidate availability, and progress on planned technology investment.