Business context and reporting period
Robert Half International Inc. provides specialized temporary and permanent staffing and risk consulting/internal audit services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods unless stated otherwise. Results remain sensitive to economic and labor-market conditions.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net service revenues | $769.1 million | $749.9 million | $1,506.3 million | $1,573.2 million |
| Gross margin | $289.9 million | $265.1 million | $558.0 million | $558.8 million |
| SG&A | $267.5 million | $255.0 million | $523.2 million | $532.1 million |
| Operating income | $22.3 million | $10.1 million | $34.8 million | $26.7 million |
| Net income | $12.2 million | $5.4 million | $20.7 million | $14.2 million |
| Diluted EPS | $0.08 | $0.03 | $0.13 | $0.09 |
Q2 gross margin was 37.7% of revenue versus 35.3% a year earlier; operating margin was 2.9% versus 1.3%. Six-month operating margin was 2.3% versus 1.7%. The effective tax rate was 46% in Q2 and 40% for the first half, compared with 47% in each 2009 period. The first-half rate benefited from state tax credits and a lower relative impact from permanent nondeductible items.
Six-month operating cash flow was $51.0 million, down from $125.5 million. Investing used $13.8 million, mainly capital expenditures; financing used $104.4 million, including $71.8 million of share repurchases and $38.6 million of dividends. Cash declined $75.8 million from year-end 2009 to $290.0 million at June 30. Cash was $385.8 million at June 30, 2009. June 30, 2010 total debt was approximately $1.8 million; the filing reports no material debt financing. Current assets were $897.6 million and current liabilities $357.7 million.
Material changes and segment trends
- Q2 revenue rose 3%, while first-half revenue fell 4%. Q2 net income more than doubled year over year; first-half net income increased about 45%.
- Temporary and consultant staffing revenue rose 1% in Q2 but declined 5% for the first half. First-half segment operating income fell to $40.5 million from $65.0 million, with lower pay/bill spreads and higher SG&A relative to revenue.
- Permanent placement revenue rose 29% in Q2 and 12% for the first half, and the segment returned to operating profitability: $5.5 million in Q2 and $8.7 million for the first half.
- Risk consulting and internal audit revenue rose 4% in Q2 but declined 4% for the first half, including a decline in compliance-related work. The segment remained loss-making, although its operating loss narrowed to $6.8 million in Q2 and $14.4 million for the first half.
- Q2 gross margin improvement reflected higher conversion revenue and lower workers’ compensation expense in staffing, and improved utilization and lower payroll/staff-reduction costs in risk consulting. First-half staffing gross margin percentage declined slightly, while risk consulting margin improved.
Outlook, risks, contingencies and unusual items
Management expects results to continue to be affected by macroeconomic conditions in 2010 and says demand cannot be forecast with certainty, given limited long-term contracts. No specific revenue or earnings guidance was provided. Management expects internally generated cash to support working capital, fixed payments, dividends and other obligations, while cautioning that further capital-market disruption could harm operations and liquidity.
Key risks include economic and labor-market weakness, competition, attracting and retaining staff and clients, margin pressure, foreign-exchange movements, regulatory and employment-law compliance, health-care reform costs, reliance on short-term contracts, and litigation. Foreign operations generated 29% of first-half revenue; currency translation reduced first-half comprehensive income, and exchange-rate changes affected reported equity. The annual goodwill impairment review found no impairment; management disclosed that a decline of at least 48% in reporting-unit fair values would be needed to indicate impairment under its test, but future impairment remains possible if forecasts are missed.
Q2 SG&A included $2.6 million of charges related to settlements of several staffing litigation claims and $2.4 million for a Protiviti wage-and-hour settlement. The Tran matter was expected to settle subject to a court-approved agreement; the Presser matter was settled for an amount described as immaterial. Laffitte and Williamson California wage-and-hour cases were set for mediation in August 2010; potential payments could be material, and no loss estimate was recorded because outcomes were not estimable. A separate California temporary-worker case also remained unresolved. The company stated it believed it had meritorious defenses.
The board announced a $0.13-per-share quarterly dividend on July 28, payable September 15, 2010. At quarter-end, 2.6 million additional shares were authorized for repurchase. The company completed its annual goodwill impairment assessment without an adjustment and did not expect a newly issued multiple-deliverable revenue standard to materially affect its financial statements.
Important facts for investors to verify
- Whether staffing demand and margins recover, particularly in temporary staffing, and whether permanent-placement growth continues.
- Whether Protiviti revenue stabilizes given reduced compliance-related demand, and when the segment may return to profitability.
- Cash conversion and working-capital trends: first-half operating cash flow fell sharply, partly reflecting a $35.3 million increase in receivables.
- Outcomes and potential costs of unresolved wage-and-hour litigation, including the August 2010 mediations; settlement terms were not fully disclosed.
- How share repurchases and dividends affect cash balances, given $110.4 million of repurchases and dividends paid during the first half.
- Whether goodwill assumptions, deferred tax asset recoverability, workers’ compensation estimates and foreign-exchange movements remain supportable.