Robert Half International Inc. — Q3 2011 Form 10-Q
Business context and period. The company provides specialized temporary and permanent placement staffing and risk consulting/internal audit services. This unaudited quarterly report covers the three and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods unless noted. Results reflect management’s view that improving global economic conditions supported demand.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net service revenues | $984.7m | $817.3m | $2,803.5m | $2,323.5m |
| Gross margin | $391.9m; 39.8% | $309.1m; 37.8% | $1,102.3m; 39.3% | $867.1m; 37.3% |
| Operating income | $72.1m; 7.3% of revenue | $37.2m; 4.5% | $177.6m; 6.3% | $72.0m; 3.1% |
| Income before taxes | $72.2m | $37.3m | $178.1m | $71.9m |
| Net income | $44.2m | $20.6m | $107.3m | $41.3m |
| Diluted EPS | $0.31 | $0.14 | $0.74 | $0.27 |
Q3 revenue rose 20% (18% constant currency); nine-month revenue rose 21% (constant-currency growth varied by segment). Q3 segment revenue was $794.7m for temporary and consultant staffing, $79.1m for permanent placement, and $110.9m for risk consulting/internal audit. Each segment grew year over year. Nine-month segment operating income was $145.5m, $29.5m, and $2.6m, respectively; risk consulting improved from a $14.3m loss in 2010.
SG&A was $319.8m in Q3, up 18%, but declined to 32.5% of revenue from 33.3%. For nine months, SG&A was $924.7m, up 16%, and 33.0% of revenue versus 34.2%. Q3 effective tax rate was 39%, compared with 45%; the nine-month rate was 40%, compared with 43%.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $159.7m, versus $101.5m. Capital expenditures were $41.7m, versus $22.0m; operating cash flow less capital expenditures was approximately $118.0m.
- Investing activities used $46.5m and financing activities used $184.1m. Financing included $140.4m of share repurchases and $60.0m of dividends, partly offset by $15.3m of option-exercise proceeds.
- Cash was $242.7m at September 30, 2011, down from $315.1m at December 31, 2010. Current assets were $1,005.0m and current liabilities $483.4m (current ratio about 2.1). Accounts receivable increased to $516.0m from $423.2m at year-end.
- Total notes payable and other indebtedness were approximately $1.7m; the filing reports no significant debt burden. The company said internally generated cash was expected to cover working capital, fixed payments, dividends, and other obligations, while warning that credit-market disruption could impair liquidity.
- The company declared quarterly dividends of $0.14 per share in November 2011, payable December 15. At September 30, up to 6.4m additional shares were authorized for repurchase.
Changes, outlook and risks
Growth and operating leverage improved materially year over year: revenue increased across all segments, margins expanded, and nine-month operating income more than doubled. Management attributed staffing margin improvement to higher pay/bill spreads and conversion revenue; risk consulting margins benefited from higher revenue and staff utilization. The filing provides no specific numerical earnings or revenue guidance. Management expected 2011 results to remain affected by macroeconomic conditions and cautioned that demand is difficult to forecast given short-term contracts and limited long-term contracts.
Principal disclosed risks include economic and labor-market conditions, competition, maintaining clients and candidate supply, margin pressure, foreign-exchange movements, regulation and employment-related liabilities, dependence on short-term contracts, and technology or control disruptions. Approximately 30% of nine-month revenue came from outside the U.S.; foreign-currency translation reduced nine-month other comprehensive income by $3.6m.
Contingencies include several wage-and-hour class actions. California cases were stayed, generally until March 1, 2012; a New Jersey case was ordered to arbitration on October 6, 2011. The company said outcomes and possible losses could not be estimated and recorded no provision. A separate California wage-statement matter had a verbal settlement agreement, contingent on formal written agreement and court approval. The company reported no material change in previously disclosed risk factors and said disclosure controls were effective.
Goodwill was $189.4m. The June 2011 annual impairment test found no impairment; management said hypothetical fair-value declines of at least 70% would be required before any reporting unit’s carrying value exceeded fair value, but warned that forecast assumptions may not prove accurate. No impairment charge was recorded.
Investor verification priorities
- Confirm that staffing demand and margin gains persist, particularly given the company’s exposure to macroeconomic and labor-market changes.
- Track receivables and cash conversion as receivables rose while cash declined, and assess the effect of continued repurchases, dividends, and capital spending on liquidity.
- Monitor outcomes of wage-and-hour litigation, including the stayed California cases and arbitration proceedings; potential losses are unquantified.
- Review foreign-exchange impacts and the assumptions underpinning goodwill valuations and future segment profitability.
- Confirm the final written agreement and court approval for the wage-statement settlement; the filing describes only a verbal agreement.