Robert Half International Inc. — Q2 2012 Form 10-Q
Business and period: Specialized staffing and risk consulting services provider operating across North America, South America, Europe, Asia, and Australia. This unaudited report covers the quarter and six months ended June 30, 2012; comparisons are with the same periods in 2011 unless stated otherwise. Figures below are in millions, except per-share data.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net service revenue | $1,028.4 | $938.0 | $2,043.8 | $1,818.8 |
| Gross margin dollars | $415.3 | $372.3 | $817.4 | $710.4 |
| Gross margin | 40.4% | 39.7% | 40.0% | 39.1% |
| Operating income | $72.0 | $61.1 | $152.1 | $105.5 |
| Net income | $45.3 | $36.4 | $93.7 | $63.1 |
| Diluted EPS | $0.32 | $0.25 | $0.67 | $0.43 |
| Operating cash flow | — | $115.3 | $87.9 |
Q2 revenue increased 10% and net income 24%; first-half revenue increased 12% and net income 48%. Q2 operating margin was 7.0%, versus 6.5%; first-half operating margin was 7.4%, versus 5.8%. The effective tax rate was 37% for Q2 and 39% for the first half, compared with 41% and 40%, respectively; management attributed the lower rates primarily to resolution of certain tax matters.
Segments and material changes
- Temporary and consultant staffing: Q2 revenue rose 10.2% reported (12.8% same billing days and constant currency); first-half revenue rose 13.1% (14.2% adjusted). U.S. growth was strongest. Segment gross margin improved to 35.8% in Q2 and 35.7% for the first half, attributed to higher pay/bill spreads.
- Permanent placement staffing: Q2 revenue rose 10.5% reported (14.7% adjusted); first-half revenue rose 16.0% (18.3% adjusted). Demand is described as more sensitive to economic and labor-market conditions than temporary staffing.
- Risk consulting and internal audit: Q2 revenue rose 5.0%; first-half revenue rose 4.7%. Gross margin was 26.4% in Q2 versus 26.9%, and 24.8% for the first half versus 26.1%; management cited lower staff utilization, particularly internationally.
- Foreign operations generated 26% of Q2 revenue and 27% of first-half revenue, down from 31% in both comparable 2011 periods. Management cited European debt concerns, cautious business conditions, and unfavorable currency effects; U.S. results were stronger.
Liquidity, capital and balance sheet
- Cash and equivalents were $258.6 at June 30, 2012, versus $279.3 at December 31, 2011. Current assets were $1,040.7 and current liabilities $496.3.
- Operating activities provided $115.3 in the first half. Investing used $29.3, including $24.2 of capital expenditures; financing used $105.0, including $101.4 of share repurchases and $41.9 of dividends paid. Cash decreased $20.8 over the period.
- Notes payable and other indebtedness totaled approximately $1.6, with $0.1 current. Management expects internally generated cash to support working capital, fixed payments, dividends, and other obligations in the short and long term.
- The company declared dividends of $0.15 per share in Q2. On August 1, it authorized repurchases of up to an additional 10 million shares, alongside 3.6 million shares remaining under the prior authorization, and announced another $0.15 quarterly dividend.
Outlook, risks and unusual items
- Management expects 2012 results to remain affected by macroeconomic conditions and says future demand cannot be forecast with certainty, given limited long-term contracts. No specific earnings or revenue guidance is provided.
- A July 5, 2012 memorandum of agreement to settle three California employment lawsuits produced a $19.0 pretax Q2 SG&A charge and an approximately $11.4 after-tax charge to Q2 net income. Settlement remains contingent on a formal written agreement and court approval.
- A separate federal wage-and-hour case was ordered to arbitration; management said the outcome and any loss range could not be predicted, and no amount was accrued. The company also faces ordinary-course litigation.
- The annual goodwill impairment test found no impairment. Management used a 10.0% discount rate and stated that a decline of at least 75% in reporting-unit fair values would be needed to trigger impairment under its sensitivity analysis; future impairment remains possible if revenue or profitability assumptions are not met.
- Key risks include economic and labor-market changes, competition, candidate and client retention, staffing margins, regulatory and litigation exposure, foreign exchange, health-care reform costs, and demand for Protiviti compliance services. Foreign currency translation reduced first-half comprehensive income by $2.4.
Important facts for investors to verify
- Whether the California lawsuit settlement was formally executed and court-approved, and whether final costs differed from the recorded charge.
- Whether staffing demand, pay/bill spreads, international utilization, and currency trends sustained or changed after quarter-end.
- Receivables and working-capital movements, including the sizable increase in accounts receivable and income taxes payable shown in cash-flow disclosures.
- Execution and remaining capacity of the August 1 repurchase authorization, and the company’s ability to maintain dividends while repurchasing shares.
- Goodwill-test assumptions and sensitivity if economic conditions or reporting-unit forecasts weaken.