Robert Half International Inc. — Q2 2020 Form 10-Q
Business and period: Robert Half provides specialized temporary, permanent-placement and consulting staffing, as well as risk consulting and internal audit services through Protiviti. This unaudited report covers the three and six months ended June 30, 2020; amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Service revenues | $1,108.3 million | $1,516.4 million | $2,615.0 million | $2,984.9 million |
| Gross margin | $423.1 million; 38.2% | $637.5 million; 42.1% | $1,033.8 million; 39.5% | $1,245.1 million; 41.7% |
| Operating income | $58.0 million; 5.3% margin | $159.4 million; 10.5% margin | $189.4 million; 7.2% margin | $305.6 million; 10.2% margin |
| Net income | $46.2 million | $114.6 million | $136.1 million | $224.4 million |
| Diluted EPS | $0.41 | $0.98 | $1.20 | $1.91 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $425.9 million | $247.8 million |
- Q2 segment revenues: temporary and consultant staffing $753.4 million, down 31.7%; permanent placement $71.0 million, down 49.6%; risk consulting and internal audit $283.9 million, up 4.1% year over year.
- Q2 profitability: temporary-staffing gross margin rate was 37.1% versus 38.2%, primarily reflecting lower conversion revenue. Risk consulting gross margin rate was 25.7% versus 27.9%, primarily due to lower utilization. SG&A fell 23.7% in dollars but increased to 32.9% of revenue from 31.5%, as revenue declines reduced operating leverage.
- Cash and liquidity: cash and equivalents were $501.5 million at June 30, versus $270.5 million at December 31, 2019. Accounts receivable was $665.4 million. Six-month investing cash use was $43.0 million and financing cash use was $149.0 million, including $78.9 million of dividends and $70.0 million of share repurchases.
- Debt and obligations: notes payable totaled approximately $0.35 million. The company had a new $100 million unsecured 364-day revolving credit facility, with no borrowings at June 30 and covenant compliance reported. Operating lease liabilities totaled $280.4 million, including current obligations.
Material changes and management commentary
- Management attributed the sharp Q2 and first-half staffing declines to COVID-19-related business closures, travel restrictions and economic disruption. First-half revenue decreased 12.4%; temporary and consultant staffing declined 15.6%, permanent placement fell 29.7%, while risk consulting and internal audit grew 10.1%.
- Management said virtually all global staffing and Protiviti employees were working remotely while the company maintained operations. It reduced costs, including eliminating non-essential spending and laying off less experienced and lower-performing staff; some corporate employees were furloughed with benefits.
- Management reported week-on-week sequential staffing growth toward the end of Q2 and approached Q3 with optimism, but noted substantial uncertainty and limited visibility given macroeconomic exposure and short client engagement durations. No revenue or earnings forecast was provided.
- Six-month operating cash flow benefited from working-capital changes, including collections that reduced accounts receivable; management reported $221 million of cash provided by working-capital changes versus cash used in the prior-year period.
Outlook, risks and unusual items
- Management expected 2020 capital expenditures of $75 million to $85 million, including $45 million to $55 million for software initiatives and technology infrastructure.
- The company expected internally generated cash to support working capital, fixed payments, dividends and other obligations. It anticipated resuming open-market repurchases in Q3 at a reduced rate; no open-market repurchases occurred in Q2.
- A quarterly dividend of $0.34 per share was declared July 30, payable September 15, 2020, to shareholders of record August 25.
- COVID-19 duration and economic effects create uncertainty in results, liquidity, estimates and assumptions. Other disclosed risks include labor-market and client-demand changes, competition, employee retention, foreign exchange, cybersecurity, regulation and litigation.
- Two California putative class actions involving alleged unpaid interview time and recruiter classification, among other wage-and-hour claims, remained unresolved. Management said the outcomes and potential loss ranges were not reasonably estimable; no amounts were accrued. It stated that it intends to defend the claims.
- The company deferred $37.5 million of payroll taxes under the CARES Act, recorded in other liabilities. Goodwill testing as of June 30 found no circumstances indicating a likely impairment.
Important facts for investors to verify
- Whether sequential staffing improvement continued after Q2 and whether temporary and permanent-placement demand recovered.
- Whether Protiviti’s revenue growth and margins remained resilient, and whether staffing declines continued to pressure consolidated margins.
- Cash-flow sustainability after the favorable first-half working-capital contribution, including receivable collections and credit-loss trends.
- Compliance with the revolving facility’s covenants, lease commitments, deferred payroll-tax repayment requirements and declared dividend obligations.
- Developments in the California litigation and any change in management’s assessment of potential losses.
- Actual 2020 capital spending and repurchase activity compared with management’s stated expectations.