Robert Half International Inc. — Q2 2016 Form 10-Q
Business context and period. Unaudited results for the quarter and six months ended June 30, 2016. The company provides temporary and permanent staffing, and risk consulting and internal audit services, across domestic and international markets.
Financial performance
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Net service revenues | $1,344.2m | $1,272.1m | $2,646.8m | $2,477.6m |
| Gross margin | $557.0m | $530.5m | $1,089.0m | $1,024.6m |
| Income before taxes | $149.4m | $149.2m | $283.2m | $277.4m |
| Net income | $91.6m | $89.7m | $175.0m | $167.6m |
| Diluted EPS | $0.71 | $0.67 | $1.35 | $1.25 |
- Q2 revenue increased 5.7% reported; net income rose 2.1%. H1 revenue increased 6.8%, net income 4.4%, and diluted EPS 8.0%.
- Consolidated gross margin was approximately 41.4% of revenue in Q2 versus 41.7% a year earlier; H1 was approximately 41.2% versus 41.4%. SG&A was 30.3% of Q2 revenue versus 30.0%; H1 was 30.4% versus 30.2%.
- H1 operating income was $283.4m, up 2.2%, while operating margin declined to 10.7% from 11.2%. Q2 operating income was approximately $149.5m, essentially flat, with margin of 11.1% versus 11.7%.
- Effective income tax rates were 38.7% for Q2 and 38.2% for H1, below the respective 39.9% and 39.6% prior-year rates; the company cited additional tax credits and foreign restructuring.
Segments
- Q2 reported revenue: temporary and consultant staffing $1,032.1m (+5.4%); permanent placement $113.4m (+2.6%); risk consulting and internal audit $198.6m (+9.2%). On a same-billing-day, constant-currency basis, growth was 4.5%, 2.1%, and 8.3%, respectively.
- H1 reported revenue: temporary and consultant staffing $2,041.2m (+6.1%); permanent placement $219.7m (+5.1%); risk consulting and internal audit $385.8m (+11.7%). Protiviti, the risk consulting business, led growth.
- Risk consulting margins weakened: Q2 gross margin fell to 28.1% from 29.9%, and H1 to 27.7% from 29.4%. Management attributed this to service mix and utilization in Q2, and higher professional pay, hiring investment, and slightly lower utilization for H1.
Cash, liquidity, and capital
- At June 30, cash and equivalents were $238.7m, up from $224.6m at December 31, 2015. Current assets were $1,408.1m and current liabilities $668.2m.
- H1 operating cash flow was $207.2m, compared with $226.4m in H1 2015. Investing used $56.4m, including $43.7m of capital expenditures; financing used $138.6m, principally share repurchases and dividends. Cash increased $14.1m during H1.
- Total notes payable and other indebtedness were approximately $1.1m, including $0.2m current. H1 repurchases totaled $81.5m and dividends paid were $57.9m. The company had authorization to repurchase up to 8.7m additional shares at June 30.
- Management stated internally generated cash was expected to cover working capital, fixed payments, dividends, and other obligations in the short and long term. A quarterly dividend of $0.22 per share was announced August 2, payable September 15, 2016.
Outlook, risks, and unusual matters
- No specific revenue or earnings forecast was provided. Management expected modest headcount increases for Accountemps, Robert Half Finance & Accounting, and Robert Half Management Resources during the rest of 2016. It expected 2016 capital expenditures of $80m–$90m; H1 spending was $43.7m, about 65% for software and technology infrastructure. Second-half system rollout, training, and support were expected to affect SG&A and operations.
- Management cited stable economic conditions and limited revenue visibility because client engagements are relatively short and long-term contracts are not significant. Demand, hiring, margins, candidate availability, competition, and economic conditions remain key sensitivities.
- Foreign operations generated 19% of H1 revenue. Currency reduced reported H1 revenue by $16m (about 1%) and net income by $0.3m (0.2%), according to the company. Management said the currency effect on full-year results would be immaterial if July 2016 exchange rates persisted.
- The company added Brexit as a risk, citing uncertainty around UK-EU negotiations and possible effects on economic, market, regulatory, and political conditions.
- Goodwill was $210.1m; the annual June impairment test found no impairment. Management said a hypothetical fair-value decrease of at least 75% would be needed before any reporting unit’s carrying value exceeded fair value, but future impairment remains possible if revenue or profitability assumptions are not met.
- Several employment-related putative class actions involve alleged unpaid interview time, wage-statement issues, or overtime misclassification. Outcomes and potential loss ranges were not estimable, and no amounts were accrued. The company said it intends to defend the claims.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether reported growth translates into sustained operating margins, particularly in risk consulting and internal audit.
- Whether technology investment, higher SG&A, and planned headcount additions generate the expected growth and returns.
- Actual capital spending against the $80m–$90m estimate and the effects of second-half system implementation.
- Developments in Brexit-related conditions, foreign exchange, and labor-market demand across the company’s markets.
- Updates on employment litigation, goodwill assumptions, repurchase activity, and the ability to sustain dividends from operating cash flow.