ROBERT HALF INC. quarterly report, Q1 FY2019

Robert Half International Inc. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; unaudited. Robert Half provides specialized staffing and consulting services, including through its Protiviti risk consulting and internal audit business.

Financial performance

MetricQ1 2019Q1 2018Change
Net service revenues$1,468.5 million$1,395.3 million+5.2%
Gross margin dollars$607.6 million$572.4 million+6.2%
Gross margin as % of revenue41.4%41.0%+0.4 percentage points
Operating income$146.2 million$134.4 million+8.8%
Operating margin10.0%9.6%+0.4 percentage points
Net income$109.8 million$96.2 million+14.2%
Diluted EPS$0.93$0.78+19.2%
Cash from operating activities$127.1 million$116.2 million+$10.9 million

Revenue by segment: temporary and consultant staffing $1,084.6 million (+1.7% reported; +6.2% as adjusted); permanent placement staffing $131.6 million (+8.4% reported; +12.3% as adjusted); risk consulting and internal audit services $252.3 million (+21.5% reported; +17.3% as adjusted). “As adjusted” growth removes the effects of billing days, currency and certain intercompany adjustments.

Temporary staffing gross margin percentage improved to 38.0% from 37.2%, primarily on higher pay-bill spreads and conversion revenue. Risk consulting gross margin percentage declined to 25.3% from 26.4%, mainly due to higher staff pay rates and headcount. The effective tax rate was 25.5%, versus 28.6%, reflecting tax benefits related to restricted stock vesting and the absence of the prior-year Tax Cuts and Jobs Act transition-tax charge.

Financial position, cash flow and capital returns

  • Cash and cash equivalents were $269.6 million at March 31, 2019, down from $276.6 million at December 31, 2018. Operating cash flow of $127.1 million was offset by $23.1 million used in investing activities and $110.3 million used in financing activities; cash decreased $6.9 million.
  • Investing cash outflows included $12.7 million of capital expenditures and $10.4 million deposited into employee deferred compensation trusts. Financing outflows included $72.3 million of share repurchases and $37.9 million of dividends paid.
  • At quarter-end, reported notes payable and other indebtedness totaled approximately $0.6 million. The company also had $276.7 million of operating lease liabilities, including $71.1 million current. A new, uncommitted credit facility of up to $100 million had no borrowings outstanding.
  • Current assets were $1.532 billion and current liabilities were $900.7 million. The company stated internally generated cash should meet working-capital needs, fixed payments, dividends and other obligations.
  • Quarterly dividends declared were $0.31 per share, compared with $0.28 in Q1 2018. The company had authorization to repurchase up to 5.9 million additional shares at March 31.

Changes, outlook and risks

  • Management attributed growth to improving economic conditions and tight labor markets, with all three reporting segments growing. Risk consulting and internal audit services led reported segment growth.
  • Management expected full-time staff headcount in each reporting segment to be modestly higher through Q2 2019, based on then-current trends. It cautioned that visibility is limited because of macroeconomic dependence and short client-engagement durations.
  • 2019 capital expenditures were expected to be $60–$70 million, including $35–$45 million for software initiatives and technology infrastructure. Q1 capital expenditures were approximately $17 million including cloud-computing arrangements; the cash-flow statement reports $12.7 million, with cloud-arrangement capital expenditures classified in operating cash flow.
  • Adoption of the lease accounting standard on January 1, 2019 materially increased reported assets and liabilities through recognition of right-of-use assets and lease liabilities; prior periods were not restated. This limits direct balance-sheet comparison with December 31, 2018.
  • Foreign operations generated approximately 24% of revenue. Currency movements reduced reported Q1 revenue by $26 million, or 1.9%, year over year; management said the corresponding expense effect largely offset the revenue impact. Continued currency changes, economic and labor-market conditions, competition, talent availability, regulation and short-term contracts were cited as risks.
  • Two California employment-related class/PAGA matters remained unresolved. The company said loss outcomes and ranges could not be estimated and recorded no amounts; it stated it intended to defend the claims. Management did not expect other ordinary-course litigation to materially affect results, financial position or cash flows.

Important facts for investors to verify

  • Whether segment growth, particularly Protiviti-related risk consulting growth, is sustained and how reported growth compares with the company’s “as adjusted” measure.
  • Whether staffing and consulting margins hold up against compensation-cost increases, utilization changes and competitive pricing.
  • The effect of lease obligations and ongoing capital spending on future cash generation, alongside dividends and share repurchases.
  • Developments in the California employment cases and any change in the company’s ability to estimate potential exposure.
  • Whether management’s Q2 headcount expectations and 2019 capital expenditure range remain appropriate as economic, labor-market and currency conditions evolve.