Robert Half International Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited. The company provides specialized staffing, permanent placement, risk consulting, and internal audit services across the Americas, Europe, Asia, and Australia.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1,033.2 million | $984.7 million | $3,077.0 million | $2,803.5 million |
| Gross margin | $415.2 million; 40.2% of revenue | $391.9 million; 39.8% | $1,232.6 million; 40.1% | $1,102.3 million; 39.3% |
| Operating income | $94.2 million; 9.1% of revenue | $72.1 million; 7.3% | $246.3 million; 8.0% | $177.6 million; 6.3% |
| Net income | $57.7 million | $44.2 million | $151.3 million | $107.3 million |
| Diluted EPS | $0.41 | $0.31 | $1.08 | $0.74 |
| Operating cash flow | Not separately provided | Not separately provided | $191.3 million | $159.7 million |
Q3 revenue increased 5% year over year and net income increased 31%. For the nine months, revenue rose 10% and net income rose 41%. Effective tax rates were 39% for Q3 2012 and 2011, and 39% for the first nine months of 2012 versus 40% in 2011.
Liquidity, cash flow, and capital
- At September 30, cash and cash equivalents were $289.4 million, versus $279.3 million at December 31, 2011. Current assets were $1,104.8 million and current liabilities $532.6 million.
- Total notes payable and other indebtedness were approximately $1.6 million; the company therefore had substantial net cash. Total liabilities were $570.8 million and stockholders’ equity was $835.9 million.
- Nine-month operating cash flow of $191.3 million was offset by $43.1 million of investing outflows and $139.3 million of financing outflows, producing a $10.1 million net increase in cash. Accounts receivable growth used $68.6 million of cash.
- Capital expenditures were $35.8 million. The company repurchased $117.5 million of shares and paid $62.7 million in dividends during the nine months. It had authorization to repurchase approximately 12.6 million additional shares at September 30.
- The board declared a $0.15 per-share quarterly dividend on November 8, payable December 14, 2012.
Material changes and segment trends
- Q3 temporary and consultant staffing revenue rose 4.7% reported, or 7.9% on a same-billing-day, constant-currency basis. U.S. growth was 10.0% reported; international revenue declined 8.7% reported, but was down 0.8% on the adjusted basis.
- Q3 permanent placement revenue increased 3.4% reported and 8.0% adjusted. U.S. revenue rose 15.2%; international revenue fell 10.2% reported and 1.9% adjusted.
- Q3 risk consulting and internal audit revenue rose 7.8%, with U.S. revenue up 10.2% and international revenue flat.
- For the first nine months, adjusted revenue growth was 12.0% for temporary and consultant staffing and 14.7% for permanent placement. Risk consulting and internal audit revenue increased 5.8% reported. The U.S. drove results; foreign operations represented 27% of nine-month revenue, down from 30% a year earlier.
- Q3 temporary staffing gross margin improved to 36.2% from 35.5%, which management attributed primarily to lower fringe benefit costs and higher U.S. pay/bill spreads. Risk consulting gross margin declined to 26.9% from 27.5%, reflecting higher direct costs, partly offset by improved utilization.
- Consolidated SG&A was nearly flat in Q3 and declined as a share of revenue to 31.1% from 32.5%, reflecting operating leverage. Nine-month SG&A included a $19 million charge related to a litigation settlement disclosed in a July 5, 2012 Form 8-K.
Outlook, risks, and unusual items
- Management expects 2012 results to remain affected by macroeconomic conditions and says future demand is difficult to forecast because the business has few material long-term contracts. No specific revenue, earnings, or margin guidance is provided.
- Management cited European debt concerns, a cautious international business environment, and currency effects. Key risks include economic and labor-market changes, competition, candidate availability, client retention, margin pressure, regulation, litigation, foreign exchange, and technology-system disruption.
- The annual June 2012 goodwill impairment review found no impairment. Management reported that hypothetical fair-value declines of at least 75% would be required before any reporting unit’s carrying value exceeded fair value, but warned that weaker-than-assumed revenue or profitability could lead to future impairment.
- A putative class action alleges staffing managers were improperly classified as exempt from overtime requirements. The court ordered arbitration; the company says the outcome and potential loss cannot be estimated and has recorded no provision. It intends to defend the matter. Management does not expect other ordinary-course lawsuits to materially affect results, financial position, or cash flows.
- Management stated that internally generated cash should meet working-capital needs, fixed payments, dividends, and other obligations. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Investor verification points
- Review whether U.S. staffing growth can continue and whether international weakness, currency movements, and billing-day differences obscure underlying trends.
- Track temporary staffing pay/bill spreads and fringe costs, alongside risk consulting direct costs and utilization, for evidence of margin durability.
- Assess receivables, collections, and cash conversion, given the $68.6 million operating cash use from increased accounts receivable.
- Verify the status and financial consequences, if any, of the staffing-manager overtime litigation and the previously disclosed settlement charge.
- Monitor goodwill assumptions and the company’s continued share repurchases and dividends relative to operating cash generation.