Robert Half International Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Robert Half provides specialized temporary and permanent staffing, consulting, and risk consulting and internal audit services. Results are unaudited.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net service revenue | $1.395 billion | $1.287 billion |
| Gross margin | $572.4 million | $525.8 million |
| Operating income | $134.4 million | $125.6 million |
| Income before taxes | $134.6 million | $125.5 million |
| Net income | $96.2 million | $78.5 million |
| Diluted EPS | $0.78 | $0.62 |
| Cash from operating activities | $116.2 million | $123.5 million |
Revenue grew 8.4%; gross margin dollars rose 8.9%. Operating margin was 9.6%, compared with 9.8%. SG&A increased 9.4% to $438.0 million, or 31.4% of revenue versus 31.1%. The effective tax rate fell to 28.6% from 37.4%, primarily reflecting the U.S. federal corporate tax rate reduction; management said the lower rate significantly benefited year-over-year net income and EPS growth.
Segment revenue: Temporary and consultant staffing was $1.066 billion, up 8.0%; permanent placement staffing was $121.4 million, up 17.1%; and risk consulting and internal audit was $207.6 million, up 5.9%. International growth was stronger than U.S. growth across segments on a reported basis, with currency and billing-day effects contributing to reported increases.
Cash, liquidity, and capital
Cash and cash equivalents were $292.0 million at March 31, 2018, versus $294.8 million at December 31, 2017 and $260.1 million at March 31, 2017. Operating cash flow was $116.2 million; investing activities used $18.6 million, including $8.0 million of capital expenditures and $10.6 million deposited into employee deferred-compensation trusts. Financing activities used $103.5 million, including $68.5 million for share repurchases and $34.9 million for dividends. Cash declined $2.8 million during the quarter.
Total notes payable and other indebtedness was approximately $0.8 million, including the current portion. Current assets were $1.468 billion and current liabilities were $764.4 million. Management expects internally generated cash to support working capital, fixed payments, dividends, and other obligations. The company had authorization to repurchase up to 11.3 million additional shares at quarter-end. A $0.28 quarterly dividend was announced May 1, payable June 15, 2018.
Material changes and management outlook
- All three reportable segments recorded revenue growth. Permanent placement staffing led, with both placements and average fees higher year over year.
- Temporary staffing revenue growth reflected higher average bill rates and hours worked; its segment gross margin percentage declined to 37.2% from 37.4%, primarily due to higher fringe costs.
- Risk consulting gross margin percentage declined to 26.4% from 27.0%, primarily due to higher professional staff pay rates; segment operating income fell to $15.3 million from $16.9 million.
- Management cited a growing global economy and favorable U.S. labor-market conditions. It expected full-time staff headcount to be modestly higher in each reporting segment through Q2 2018, while noting limited revenue visibility because client engagements are relatively short-term.
- Management expected 2018 capital expenditures of $45 million to $55 million, including continued investment in digital technology and service offerings.
Risks, contingencies, and unusual items
- Foreign operations generated 24% of Q1 revenue. Currency movements increased reported revenue by $33 million (2.5%) and net income by $2 million (2.6%) year over year. Management said April exchange rates, if sustained, would adversely affect reported full-year revenue, largely offset by operating expenses, with an immaterial net-income effect.
- The company recorded a $3 million charge in Q1 related to the TCJA transition tax and said its tax-law accounting remained subject to measurement-period updates and interpretation.
- Two previously disclosed California employment-related putative class actions remained unresolved; loss outcomes and ranges were not estimable, and no amounts were accrued. A third California putative class action, filed April 6, alleged recruiter misclassification and related wage-and-hour violations; no loss amount was accrued. The company said it intends to defend the claims.
- The company identified economic and labor-market conditions, candidate availability, competition, margin pressure, regulatory compliance, litigation, foreign-exchange changes, and technology disruptions among factors that could affect results. It said there were no material changes to the risk factors in its 2017 Form 10-K.
- Revenue guidance adopted January 1, 2018 had no material impact on the income statement; certain allowances were reclassified, increasing reported receivables and accrued liabilities by $10.6 million. Lease accounting guidance was not yet adopted; the company was evaluating its effects and expected recognition of lease assets and liabilities.
Important facts for investors to verify
- How much reported revenue growth reflects underlying demand versus currency and billing-day effects.
- Whether the lower tax rate and Q1 transition-tax charge affect subsequent-period earnings or tax estimates.
- Whether receivables and working-capital movements constrain operating cash flow as revenue grows.
- Developments in the California employment lawsuits and any eventual exposure.
- Execution of capital-spending and headcount plans, and the effect of continued repurchases and dividends on cash balances.