Robert Half International Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Robert Half provides specialized staffing and Protiviti risk consulting and internal audit services. Results are unaudited and prepared under U.S. GAAP.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net service revenue | $1.325 billion | $1.339 billion | $3.921 billion | $3.985 billion |
| Gross margin | $546.4 million | $552.5 million | $1.611 billion | $1.641 billion |
| Operating income | $132.2 million | $146.4 million | $388.5 million | $429.8 million |
| Net income | $84.7 million | $90.6 million | $243.5 million | $265.6 million |
| Diluted EPS | $0.68 | $0.71 | $1.94 | $2.06 |
| Cash dividends declared per share | $0.24 | $0.22 | $0.72 | $0.66 |
- Q3 gross margin was 41.2% of revenue versus 41.3% a year earlier; operating margin declined to 10.0% from 10.9%. Nine-month operating margin was 9.9%, down from 10.8%.
- For the nine months, operating cash flow was $388.5 million, compared with $360.4 million. Investing activities used $54.1 million and financing activities used $258.5 million. Cash increased $88.1 million to $348.3 million.
- At September 30, cash was $348.3 million, current assets $1.437 billion, and current liabilities $778.3 million. Total liabilities were $793.0 million, including just $883,000 of notes and other indebtedness. Stockholders’ equity was $1.140 billion.
- Capital expenditures were $28.5 million for the nine months; management expected full-year 2017 spending of $40–$50 million. The company repurchased $167.3 million of stock and paid $91.1 million in dividends during the nine months.
Material changes and segment trends
- Q3 revenue declined about 1% year over year; net income fell about 6% and diluted EPS about 4%. For the first nine months, revenue declined 1.6%, net income 8%, and diluted EPS 5%.
- Q3 temporary and consultant staffing revenue decreased 1.1% as reported (0.4% lower on a same-billing-day, constant-currency basis); fewer hours worked were partly offset by higher bill rates. U.S. revenue was weaker, while international revenue grew.
- Q3 permanent placement revenue increased 5.9% as reported and 6.7% on a same-day, constant-currency basis, with placements and average fees both higher.
- Q3 risk consulting and internal audit revenue decreased 4.0% as reported and 2.7% on a same-day, constant-currency basis. Lower billable hours were partly offset by higher rates; international growth contrasted with U.S. declines.
- Across the first nine months, temporary and consultant staffing revenue fell 2.2%, permanent placement rose 0.9%, and risk consulting and internal audit revenue was down 0.1%. Lower utilization and higher professional staff pay rates pressured risk consulting margins; higher fringe costs weighed on temporary staffing margins.
- SG&A rose 2.0% in Q3 despite lower revenue, increasing to 31.3% of revenue from 30.3%; management cited negative operating leverage and higher compensation in certain segments.
Outlook, commentary, and risks
- Management reported improving sequential demand in Q3 for temporary and consultant staffing and risk consulting, and improving conditions internationally, particularly in continental Europe. It cited a stable U.S. economic backdrop and competition for skilled talent.
- No revenue or earnings guidance was provided. Given limited visibility and short-duration client engagements, management expected U.S. full-time staff headcount to remain steady through the rest of 2017, with modest international growth as demand required.
- Management expects internally generated cash to cover working capital, fixed payments, dividends, and other obligations in the short and long term. A $0.24 quarterly dividend was announced October 31, payable December 15, 2017.
- Key risks include economic and labor-market shifts, talent supply and competition, client demand and margin pressure, short-term contract duration, regulatory and employment-related liabilities, litigation, international operations, and foreign-currency movements. The company said currency reduced reported nine-month revenue by $7 million, while reported net income was unchanged by currency effects.
- Two California employment-related putative class actions remained unresolved; the company said outcomes and potential losses could not be estimated and recorded no amounts. The separate Staffing Managers overtime case was effectively dismissed after the Supreme Court denied review on October 30, 2017. Management reported no material change in previously disclosed risk factors.
- The 2017 annual goodwill impairment test found no impairment; management said a hypothetical fair-value decline of at least 62% would be needed before any reporting unit’s carrying value exceeded fair value. Future impairment remains possible if forecasts are not met.
Important facts for investors to verify
- Whether revenue and operating-margin trends improve, particularly in U.S. staffing and Protiviti, and whether staffing hours and consulting utilization recover.
- Whether cost growth, compensation, fringe costs, and utilization continue to pressure segment profitability.
- Cash generation and capital allocation, including the pace of share repurchases, dividends, and planned capital spending.
- Developments in the California employment litigation and any changes in the company’s assessment of potential exposure.
- Implementation of new accounting standards: revenue recognition was scheduled for adoption January 1, 2018, with no material impact expected; lease accounting was still under evaluation and will recognize lease assets and liabilities.