Robert Half International Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Robert Half provides specialized staffing and consulting services, including through its Protiviti risk consulting and internal audit business.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net service revenues | $1,468.5 million | $1,395.3 million | +5.2% |
| Gross margin dollars | $607.6 million | $572.4 million | +6.2% |
| Gross margin as % of revenue | 41.4% | 41.0% | +0.4 percentage points |
| Operating income | $146.2 million | $134.4 million | +8.8% |
| Operating margin | 10.0% | 9.6% | +0.4 percentage points |
| Net income | $109.8 million | $96.2 million | +14.2% |
| Diluted EPS | $0.93 | $0.78 | +19.2% |
| Cash from operating activities | $127.1 million | $116.2 million | +$10.9 million |
Revenue by segment: temporary and consultant staffing $1,084.6 million (+1.7% reported; +6.2% as adjusted); permanent placement staffing $131.6 million (+8.4% reported; +12.3% as adjusted); risk consulting and internal audit services $252.3 million (+21.5% reported; +17.3% as adjusted). “As adjusted” growth removes the effects of billing days, currency and certain intercompany adjustments.
Temporary staffing gross margin percentage improved to 38.0% from 37.2%, primarily on higher pay-bill spreads and conversion revenue. Risk consulting gross margin percentage declined to 25.3% from 26.4%, mainly due to higher staff pay rates and headcount. The effective tax rate was 25.5%, versus 28.6%, reflecting tax benefits related to restricted stock vesting and the absence of the prior-year Tax Cuts and Jobs Act transition-tax charge.
Financial position, cash flow and capital returns
- Cash and cash equivalents were $269.6 million at March 31, 2019, down from $276.6 million at December 31, 2018. Operating cash flow of $127.1 million was offset by $23.1 million used in investing activities and $110.3 million used in financing activities; cash decreased $6.9 million.
- Investing cash outflows included $12.7 million of capital expenditures and $10.4 million deposited into employee deferred compensation trusts. Financing outflows included $72.3 million of share repurchases and $37.9 million of dividends paid.
- At quarter-end, reported notes payable and other indebtedness totaled approximately $0.6 million. The company also had $276.7 million of operating lease liabilities, including $71.1 million current. A new, uncommitted credit facility of up to $100 million had no borrowings outstanding.
- Current assets were $1.532 billion and current liabilities were $900.7 million. The company stated internally generated cash should meet working-capital needs, fixed payments, dividends and other obligations.
- Quarterly dividends declared were $0.31 per share, compared with $0.28 in Q1 2018. The company had authorization to repurchase up to 5.9 million additional shares at March 31.
Changes, outlook and risks
- Management attributed growth to improving economic conditions and tight labor markets, with all three reporting segments growing. Risk consulting and internal audit services led reported segment growth.
- Management expected full-time staff headcount in each reporting segment to be modestly higher through Q2 2019, based on then-current trends. It cautioned that visibility is limited because of macroeconomic dependence and short client-engagement durations.
- 2019 capital expenditures were expected to be $60–$70 million, including $35–$45 million for software initiatives and technology infrastructure. Q1 capital expenditures were approximately $17 million including cloud-computing arrangements; the cash-flow statement reports $12.7 million, with cloud-arrangement capital expenditures classified in operating cash flow.
- Adoption of the lease accounting standard on January 1, 2019 materially increased reported assets and liabilities through recognition of right-of-use assets and lease liabilities; prior periods were not restated. This limits direct balance-sheet comparison with December 31, 2018.
- Foreign operations generated approximately 24% of revenue. Currency movements reduced reported Q1 revenue by $26 million, or 1.9%, year over year; management said the corresponding expense effect largely offset the revenue impact. Continued currency changes, economic and labor-market conditions, competition, talent availability, regulation and short-term contracts were cited as risks.
- Two California employment-related class/PAGA matters remained unresolved. The company said loss outcomes and ranges could not be estimated and recorded no amounts; it stated it intended to defend the claims. Management did not expect other ordinary-course litigation to materially affect results, financial position or cash flows.
Important facts for investors to verify
- Whether segment growth, particularly Protiviti-related risk consulting growth, is sustained and how reported growth compares with the company’s “as adjusted” measure.
- Whether staffing and consulting margins hold up against compensation-cost increases, utilization changes and competitive pricing.
- The effect of lease obligations and ongoing capital spending on future cash generation, alongside dividends and share repurchases.
- Developments in the California employment cases and any change in the company’s ability to estimate potential exposure.
- Whether management’s Q2 headcount expectations and 2019 capital expenditure range remain appropriate as economic, labor-market and currency conditions evolve.