Robert Half International Inc. — Q1 2017 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Robert Half provides specialized temporary and permanent staffing and risk consulting/internal audit services; staffing is the predominant source of revenue.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net service revenue | $1,287.4 million | $1,302.6 million | Down 1.2% |
| Gross margin | $525.8 million; 40.9% of revenue | $532.0 million; 40.8% | Down 1.2% in dollars |
| Operating income by segment, before net interest and intangible amortization | $125.6 million; 9.8% of revenue | $133.9 million; 10.3% | Down 6.2% |
| Income before taxes | $125.5 million | $133.8 million | Down 6.2% |
| Net income | $78.5 million | $83.4 million | Down 5.9% |
| Diluted EPS | $0.62 | $0.64 | Down 3.1% |
| Operating cash flow | $123.5 million | $78.5 million | Up $45.0 million |
SG&A was $400.2 million, up 0.5%; it rose to 31.1% of revenue from 30.6%. The effective tax rate was 37.4%, versus 37.7%. Temporary staffing gross margin percentage improved to 37.4% from 37.1%, principally on higher pay-bill spreads. Risk consulting gross margin percentage was 27.0%, versus 27.4%; the filing attributes the decline to higher professional staff pay rates and slightly lower utilization.
Segment revenue and operating income
| Segment | Revenue, Q1 2017 | Year-over-year revenue | Operating income, Q1 2017 |
|---|---|---|---|
| Temporary and consultant staffing | $987.6 million | Down 2.1% reported; down 2.8% same billing days and constant currency | $90.4 million, versus $97.9 million |
| Permanent placement staffing | $103.6 million | Down 2.5% reported; down 3.1% same billing days and constant currency | $18.3 million, versus $21.5 million |
| Risk consulting and internal audit | $196.1 million | Up 4.8% reported; up 4.2% same billing days and constant currency | $16.9 million, versus $14.5 million |
Balance sheet, liquidity and capital allocation
At March 31, 2017, cash was $260.1 million, essentially unchanged from year-end 2016. Current assets were $1.296 billion and current liabilities $682.6 million. Notes payable and other indebtedness totaled approximately $1.0 million, including current and noncurrent amounts; cash therefore substantially exceeded reported debt. Total assets were $1.775 billion and stockholders’ equity was $1.081 billion.
Operating activities generated $123.5 million; investing activities used $15.3 million, including $10.3 million of capital expenditures; financing activities used $111.3 million, including $80.7 million of share repurchases and $30.6 million of dividends paid. Cash and cash equivalents ended the quarter at $260.1 million. The company said internally generated cash should support working capital, fixed payments, dividends and other obligations in both the short and long term. A quarterly dividend of $0.24 per share was declared for payment June 15, 2017.
Material changes and management commentary
- Overall revenue and earnings declined year over year, with U.S. staffing weakness partly offset by international growth and stronger risk consulting. Foreign operations contributed 20% of revenue, versus 19% a year earlier.
- Temporary staffing revenue was down 2.8% on a same-day, constant-currency basis; fewer hours worked outweighed a 3.7% increase in average bill rates. U.S. revenue was down 5.6% on that basis, while international revenue rose 9.4%.
- Permanent placement revenue declined, primarily because the number of placements fell. U.S. revenue was down 7.6% on a same-day basis; international revenue rose 8.4% on a same-day, constant-currency basis.
- Risk consulting revenue growth reflected increases in hours worked and bill rates. Same-day, constant-currency revenue rose 3.6% in the U.S. and 7.2% internationally.
- Management described U.S. conditions as stable, with a strong job market but an unusually long hiring cycle that was restraining revenue growth. It noted improving demand, particularly in continental Europe, and competition for skilled talent.
Outlook, risks and unusual items
- Management expected U.S. full-time staff headcount to remain relatively flat through Q2 2017, with modest international growth as demand required. The filing gives no specific revenue or earnings guidance.
- 2017 capital expenditures were expected to range from $55 million to $65 million; Q1 spending was approximately 53% for software initiatives and technology infrastructure.
- Management cited limited visibility because client engagements are generally short-term and demand depends on economic and labor-market conditions. Risks include competition, talent availability, margin pressure, regulation, liability and litigation, international operations and currency movements, and technology or systems disruptions.
- Currency movements reduced reported Q1 revenue by approximately $7 million, or 1%, but reduced net income by only $0.2 million, or 0.2%, according to the filing. Management said the potential full-year currency effect on net income would be immaterial if exchange rates remained at March levels.
- Several employment-related matters remain pending, including allegations concerning overtime classification and California employee compensation. The company said loss outcomes or ranges could not be reasonably estimated and recorded no amounts for these matters; it stated it intends to defend them. Management did not expect other ordinary-course litigation to materially affect results, financial position or cash flows.
- Adoption of new share-based compensation guidance effective January 1, 2017 had no material impact. The company planned to adopt the revenue standard beginning January 1, 2018 using the modified retrospective approach and was evaluating its impact; it did not anticipate significant systems, process or control changes.
Important facts for investors to verify
- Whether the staffing revenue declines, particularly in the U.S., persist or reverse as hiring cycles and hours worked change.
- Whether risk consulting growth and international strength continue to offset staffing weakness, and how segment margins develop.
- The sustainability of cash generation and the scale of share repurchases and dividends relative to operating needs.
- Developments in the disclosed employment litigation, for which potential losses were not quantified.
- The effects of currency movements and the eventual impact of upcoming revenue and lease accounting standards.