Business context and reporting period
Robert Half International Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company provides specialized temporary and permanent staffing, and risk consulting and internal audit services, through three reportable segments. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial highlights
- Second-quarter revenue: $1,164.9 million, up 9.6% from $1,063.2 million. Net income was $75.1 million, up 19.1%; diluted EPS was $0.55 versus $0.46.
- Second-quarter profitability: Gross margin was $478.4 million, or 41.1% of revenue, versus $432.1 million, or 40.6%. Operating income was $123.7 million, or 10.6% of revenue, versus $100.8 million, or 9.5%. The effective tax rate rose to 39% from 37%.
- Six-month results: Revenue was $2,249.3 million, up 7.8%; net income was $136.7 million, up 14.9%; diluted EPS was $1.01 versus $0.86. Gross margin was $916.9 million, or 40.8% of revenue, versus $842.4 million, or 40.4%. Operating income was $225.8 million, or 10.0% of revenue, versus $190.3 million, or 9.1%.
- Second-quarter segment revenue: Temporary and consultant staffing $911.0 million (+8.2%); permanent placement $102.8 million (+13.8%); risk consulting and internal audit $151.0 million (+15.5%). These are reported growth rates.
- Cash flow and capital allocation, six months: Operating cash flow was $164.1 million, compared with $129.9 million. Capital expenditures were $23.1 million; investing cash outflow was $32.9 million. Financing cash outflow was $102.0 million, including $65.2 million of share repurchases and $48.7 million of dividends paid. Cash increased $32.0 million to $307.8 million.
- Liquidity and debt at June 30: Current assets were $1,273.9 million and current liabilities $580.9 million. Total notes payable and other indebtedness were approximately $1.4 million. Accounts receivable was $617.2 million.
- Other indicators: Cash dividends declared were $0.18 per share in Q2, versus $0.16 a year earlier. The company had authorization to repurchase up to 6.8 million additional shares at quarter-end.
Material changes versus the prior comparable period
- Second-quarter revenue growth accelerated across all three segments; management described growth as broad-based, reflecting improving labor markets and higher global demand. U.S. results were stronger than international results.
- Second-quarter same-billing-day, constant-currency revenue growth was 8.3% for temporary and consultant staffing, 14.2% for permanent placement, and 14.4% for risk consulting and internal audit. International risk consulting growth was 2.4% reported, but decreased 0.2% on that adjusted basis.
- SG&A rose 7.1% in Q2, slower than revenue growth, and decreased to 30.5% of revenue from 31.2%; management attributed margin leverage primarily to higher revenue.
- For the first half, operating cash flow improved, while cash used for share repurchases was lower than in 2013. Cash and cash equivalents at June 30, 2014 were $307.8 million, versus $247.0 million at June 30, 2013.
Outlook, risks, contingencies and unusual items
- Management expected macroeconomic conditions to continue affecting 2014 results, but provided no specific revenue or earnings guidance. It said internally generated cash should support working capital, fixed payments, dividends and other obligations on both a short- and long-term basis.
- Demand depends on economic and labor-market conditions; the company noted that its limited long-term contracts make future demand difficult to forecast. Risks include competition, candidate availability, margin pressure, regulatory compliance, foreign exchange, litigation, technology disruptions and health-care reform costs.
- Two employment-related matters seek unspecified damages: a U.S. staffing-manager overtime classification case, ordered to arbitration, and a California class action concerning compensation for client interviews and related wage statements. Management said outcomes and potential losses could not be reasonably estimated; no amounts were accrued. It intends to defend both matters.
- The annual goodwill impairment review as of June 30 found no impairment. Management’s model used a 10.2% discount rate and concluded that at least a 70% hypothetical decrease in reporting-unit fair values would be required before any unit’s carrying value exceeded fair value. Future impairment remains possible if revenue or profitability assumptions are not achieved.
- The company reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting. It did not report material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether staffing demand and segment growth—particularly international growth—continued after Q2, and how reported results compare with same-billing-day, constant-currency measures.
- Whether improved operating leverage and margins persist as payroll costs, utilization, and competitive pricing change.
- Developments in the two employment-related legal matters and any change in the ability to estimate potential losses.
- Cash conversion and receivables trends, alongside continued repurchases, dividends, and capital spending.
- The effect of foreign exchange, tax benefits, and future operating assumptions on earnings and goodwill impairment risk.