Robert Half International Inc. — Q3 2013 Form 10-Q
Business context and period: The company provides specialized temporary and permanent staffing, and risk consulting and internal audit services, through three reportable segments. This unaudited filing covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net service revenue | $1,075.1 | $1,033.2 | $3,162.0 | $3,077.0 |
| Gross margin | $437.5 | $415.2 | $1,279.9 | $1,232.6 |
| Operating income | $103.9 | $94.2 | $294.2 | $246.3 |
| Net income | $66.4 | $57.7 | $185.3 | $151.3 |
| Diluted EPS | $0.48 | $0.41 | $1.35 | $1.08 |
- Q3 revenue rose 4.1%, net income 15.1%, and diluted EPS 17.1% year over year. Nine-month revenue rose 2.8%, net income 22.5%, and diluted EPS 25.0%.
- Gross margin was 40.7% of revenue in Q3 versus 40.2% a year earlier; operating margin was 9.7% versus 9.1%. For the nine months, operating margin was 9.3% versus 8.0%.
- Q3 segment revenue: temporary and consultant staffing $847.9 million; permanent placement $88.2 million; risk consulting and internal audit $139.0 million. Segment operating income was $76.5 million, $13.7 million, and $13.7 million, respectively. Risk consulting growth and margin improvement were particularly strong.
- Cash from operations for the first nine months was $211.1 million, compared with $191.3 million in 2012. Investing activities used $70.6 million, including $38.5 million deposited into employee benefit and retirement trusts; financing activities used $145.4 million, including $106.8 million of share repurchases and $65.6 million of dividends.
- At September 30, cash was $279.7 million, current assets $1,166.2 million, and current liabilities $551.9 million, implying working capital of about $614.3 million. Total notes payable and other indebtedness were approximately $1.5 million.
Material changes and management commentary
- U.S. performance was stronger than international performance; management cited weaker economies in several countries, particularly in Europe. Q3 temporary staffing revenue grew 4.5% in the U.S. but declined 5.9% internationally as reported. Permanent placement grew 13.8% in the U.S. and declined 0.8% internationally.
- Q3 risk consulting revenue increased 16.3%; U.S. revenue rose 22.1%, attributed in part to demand for regulatory risk, compliance, and technology controls and security work. Its gross margin rate increased to 30.5% from 26.9%, primarily reflecting higher staff utilization.
- For the first nine months, SG&A was nearly flat at $985.7 million, while SG&A as a share of revenue declined to 31.2% from 32.1%. Management attributed part of the comparison to a $19 million litigation settlement charge in 2012.
- The effective tax rate declined to 36% from 39% in Q3 and to 37% from 39% for the nine months. Management cited non-U.S. entity restructuring and improved results in certain foreign jurisdictions that enabled tax benefits previously limited.
- The company repurchased 2.8 million shares on the open market for $97.6 million during the nine months and had authorization to repurchase up to 8.6 million additional shares at September 30. Dividends declared were $0.48 per share for the nine months; a subsequent quarterly dividend of $0.16 per share was announced October 30.
Outlook, risks, and contingencies
No specific earnings or revenue guidance is provided. Management expects 2013 results to remain affected by macroeconomic conditions and states that demand is difficult to forecast because the business has few material long-term contracts. It expects internally generated cash to cover working capital, fixed payments, dividends, and other obligations in the short and long term.
- Key risks include economic and labor-market weakness, candidate availability, competition and margin pressure, client retention, personnel-related liabilities and regulation, foreign currency movements, international operations, and Protiviti’s ability to retain staff and attract clients. The company also cites technology disruption, health-care reform costs, and litigation risks.
- A putative class action alleges staffing managers were misclassified under federal overtime rules. The court ordered arbitration; the company says it intends to defend the matter, but its outcome and possible loss range are not estimable, and no amount was accrued. Other ordinary-course lawsuits were not expected by management to have a material adverse effect.
- The June 2013 annual goodwill impairment test found no impairment. Management said hypothetical fair-value declines of at least 70% would be needed to put any reporting unit’s carrying value above fair value, while noting future impairment remains possible if assumptions are not met.
- Foreign operations represented 24% of revenue for the nine months. Foreign currency translation reduced comprehensive income by $4.5 million over that period.
Important facts for investors to verify
- Whether U.S. staffing growth can offset persistent international weakness, especially in Europe, and how reported growth compares with same-billing-day, constant-currency growth.
- Whether risk consulting’s stronger demand, utilization, and margins are sustainable, and whether permanent placement margins recover.
- The quality and sustainability of operating cash flow, including receivables growth and the increased funding of employee benefit trusts.
- The scale and timing of future repurchases and dividends relative to cash generation, and the status of the remaining repurchase authorization.
- Developments in the overtime class action, tax benefits from foreign restructuring, and assumptions underlying goodwill impairment tests.