Robert Half International Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Robert Half provides specialized staffing and risk consulting services in North America and internationally. The interim statements are unaudited.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net service revenue | $1,224.3 million | $1,075.1 million | $3,473.6 million | $3,162.0 million |
| Gross margin | $505.2 million | $437.5 million | $1,422.2 million | $1,279.9 million |
| Operating income | $138.3 million | $103.9 million | $364.0 million | $294.2 million |
| Net income | $85.2 million | $66.4 million | $221.9 million | $185.3 million |
| Diluted EPS | $0.63 | $0.48 | $1.63 | $1.35 |
- Q3 revenue grew 13.9%; operating income increased 33.0%. Nine-month revenue grew 9.9% and operating income 23.7%.
- Q3 gross margin was 41.3% of revenue versus 40.7% a year earlier; operating margin was 11.3% versus 9.7%. Nine-month operating margin was 10.5% versus 9.3%.
- Q3 selling, general and administrative expenses were $367.0 million, or 30.0% of revenue, compared with $333.6 million, or 31.0%. The filing attributes the lower expense ratio to improved operating leverage.
- Effective income tax rates were 38.4% in Q3 and 39.1% for the first nine months, up from 36.0% and 36.9%, respectively, primarily due to fewer foreign tax benefits and lower federal tax credits.
Segments and material changes
- Q3 segment revenue: temporary and consultant staffing $954.2 million, up 12.5%; permanent placement $102.3 million, up 16.0%; risk consulting and internal audit $167.7 million, up 20.7%. All three segments also grew in the first nine months.
- Q3 same-billing-days, constant-currency growth was 12.3% for temporary and consultant staffing, 15.7% for permanent placement, and 18.3% for risk consulting and internal audit.
- Management cited improving labor markets and higher global demand. Growth accelerated during the quarter in both U.S. and international operations; results were strongest domestically over the first nine months, with demand also improving in several countries, notably in Europe.
- Temporary staffing margin improvement reflected higher conversion revenue, wider pay/bill spreads, and lower fringe costs. Risk consulting’s nine-month margin improvement was attributed primarily to higher staff utilization. SG&A leverage improved across segments.
Cash, liquidity, and capital allocation
- Cash and cash equivalents were $290.9 million at September 30, 2014, versus $275.8 million at December 31, 2013. Current assets were $1.315 billion and current liabilities $623.9 million; the current ratio was approximately 2.1.
- Nine-month operating cash flow was $257.8 million, up from $211.1 million. Accounts receivable increased $123.3 million, partially offset by increases in accrued expenses and payroll and income taxes payable.
- Investing cash outflow was $54.4 million, including $36.2 million in capital expenditures and $18.2 million in employee-benefit and retirement-plan trust deposits. Financing cash outflow was $183.2 million.
- The company spent $124.7 million on share repurchases and paid $72.8 million in dividends during the nine months. It had authorization to repurchase up to 5.5 million additional shares as of September 30. A quarterly dividend of $0.18 per share was announced for payment December 15, 2014.
- Notes payable and other indebtedness totaled approximately $1.3 million. Management said internally generated cash should support working capital, fixed payments, dividends, and other obligations in both the short and long term.
Outlook, risks, and other notable items
- No quantified earnings or revenue guidance was provided. Management expected 2014 results to continue to be affected by macroeconomic conditions and said demand cannot be forecast with certainty given the business’s limited long-term contracts.
- Risks include economic and labor-market changes, competition, candidate supply and retention, margin pressure, foreign-exchange movements, regulatory compliance, health-care reform costs, systems interruptions, and litigation. About 23% of nine-month revenue came from outside the United States; foreign-currency translation reduced accumulated other comprehensive income by $13.0 million over the period.
- Goodwill was $200.1 million. The June 2014 annual impairment test found no impairment; management reported that a hypothetical fair-value decline of at least 70% would be required before any reporting unit’s carrying value exceeded fair value. Future impairment remains possible if revenue or profitability assumptions are not met.
- Three employment-related class or representative actions are discussed. The company says loss outcomes or ranges cannot presently be estimated and recorded no amounts for these matters; it intends to defend the claims. In the Rodriguez case, most claims were compelled to individual arbitration, while the PAGA claim remains excepted.
- On October 29, 2014, certain executive part-time employment agreements were amended to change the compensation reference from the last five calendar years to the five highest years within the last ten years before retirement. Management reported no material change in risk factors and no material control deficiencies.
Important facts for investors to verify
- Whether staffing demand and segment growth continue, particularly in international markets and the more economically sensitive permanent-placement business.
- Whether higher temporary-staffing conversion revenue and pay/bill spreads, risk-consulting utilization, and operating leverage are sustainable.
- Cash conversion and receivables growth, alongside the pace of repurchases and dividends.
- Developments in the employment litigation and any resulting financial exposure.
- Foreign-exchange effects, tax rates, and the assumptions underlying goodwill valuation.