Robert Half International Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise stated. Robert Half provides specialized staffing and Protiviti risk consulting and internal audit services. Financial statements are unaudited.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net service revenues | $1,084.3 million | $1,023.7 million | Up 5.9% |
| Gross margin | $438.5 million | $410.3 million | Up 6.9% |
| Gross margin as % of revenue | 40.4% | 40.1% | Up 0.3 percentage points |
| SG&A | $336.4 million | $320.8 million | Up 4.9% |
| Operating income | $102.1 million | $89.5 million | Up 14.1% |
| Income before taxes | $102.0 million | $89.4 million | Up 14.1% |
| Net income | $61.6 million | $55.9 million | Up 10.2% |
| Diluted EPS | $0.45 | $0.40 | Up $0.05 |
| Operating cash flow | $59.2 million | $27.9 million | Up $31.3 million |
Operating margin was 9.4%, versus 8.7%. The effective tax rate rose to 39.7% from 37.5%, primarily because fewer foreign tax benefits were available. Cash dividends declared were $0.18 per share, compared with $0.16.
Segments and material changes
- Temporary and consultant staffing: Revenue of $857.6 million, up 4.1% reported and 3.8% on a same-billing-day, constant-currency basis. U.S. revenue rose 5.9% reported; international revenue declined 1.2%.
- Permanent placement staffing: Revenue of $92.6 million, up 11.1% reported and 11.6% on a same-billing-day, constant-currency basis. Growth was 12.6% in the U.S. and 8.6% internationally, reported.
- Risk consulting and internal audit: Revenue of $134.1 million, up 14.8%; U.S. revenue rose 19.0% and international revenue 0.4%. Segment gross margin increased to 27.4% from 25.7%, primarily due to higher staff utilization.
All three segments increased revenue and operating income. Management described results as strongest domestically, with demand also improving in several countries, notably in Europe. SG&A declined to 31.0% of revenue from 31.3%, reflecting operating leverage partly offset by higher selling and compensation costs.
Cash, liquidity and capital allocation
- Cash and cash equivalents were $267.7 million at March 31, 2014, versus $275.8 million at year-end 2013 and $225.4 million at March 31, 2013. Cash declined $8.0 million during the quarter.
- Operating activities provided $59.2 million; investing activities used $17.7 million, including $12.4 million of capital expenditures; financing activities used $50.1 million.
- Current assets were $1,187.3 million and current liabilities $537.5 million. Total notes payable and other indebtedness were approximately $1.4 million.
- The company repurchased $35.0 million of shares for cash and paid $24.4 million in dividends. It had authorization to repurchase approximately 7.3 million additional shares at quarter-end.
- Management stated internally generated cash should support working capital, fixed payments, dividends and other obligations in the short and long term. A $0.18 quarterly dividend was announced after quarter-end, payable June 16, 2014.
Outlook, risks and contingencies
No specific earnings or revenue guidance was provided. Management expected 2014 results to continue to be affected by macroeconomic conditions and said demand could not be forecast with certainty, given the business’s economic sensitivity and limited long-term contracts. Key risks include labor-market and economic changes, competition and margin pressure, attracting and retaining candidates and staff, client demand, regulatory compliance, foreign currency movements, technology interruptions, health-care reform costs, and litigation.
Two employment-related putative class actions remained unresolved: a previously disclosed overtime-misclassification matter, for which arbitration was ordered, and a California complaint alleging unpaid interview-related time and wage-statement violations. The company said potential outcomes and loss ranges could not be estimated, recorded no amounts, and intends to defend both matters. Other ordinary-course litigation was not expected by management to materially affect results, financial position or cash flows.
Foreign operations generated 23.7% of revenue. Currency fluctuations affect reported earnings and equity. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was identified. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue growth and segment margins continued beyond Q1, particularly in international temporary staffing and Protiviti utilization.
- Whether higher cash generation is sustained, given working-capital movements and significant dividends and share repurchases.
- Developments and potential financial exposure from the two employment-related class actions; no loss estimate was provided.
- Effects of the elevated tax rate, economic and labor-market conditions, and foreign-exchange movements on subsequent results.