Robert Half International Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Robert Half provides specialized staffing and Protiviti risk consulting and internal audit services. Figures are unaudited; dollar amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net service revenues | $1,308.4 | $1,344.2 | $2,595.8 | $2,646.8 |
| Gross margin | $538.4 | $557.0 | $1,064.3 | $1,089.0 |
| Operating income | $130.7 | $149.5 | $256.3 | $283.4 |
| Net income | $80.3 | $91.6 | $158.8 | $175.0 |
| Diluted EPS | $0.64 | $0.71 | $1.26 | $1.35 |
- Q2 revenue fell 2.7% reported; first-half revenue fell 1.9%. First-half net income declined 9% and diluted EPS declined 6%, per management.
- Q2 operating margin was 10.0%, versus 11.1%; first-half operating margin was 9.9%, versus 10.7%. SG&A was 31.2% of revenue in Q2 and 31.1% in the first half, up from 30.3% and 30.4%, respectively.
- Q2 segment revenues: temporary and consultant staffing $998.3 million (down 3.3% reported), permanent placement $112.7 million (down 0.7%), and risk consulting/internal audit $197.5 million (down 0.6%). For the first half, these segments changed by -2.7%, -1.6%, and +2.0%, respectively.
- Temporary staffing’s Q2 same-day, constant-currency revenue declined 1.6%, as fewer hours worked outweighed 2.5% higher average bill rates. Risk consulting’s comparable revenue grew 1.1%, but its Q2 gross margin rate fell to 26.7% from 28.1%, primarily on lower utilization.
Cash flow, balance sheet and capital allocation
- First-half operating cash flow was $258.1 million, up from $207.2 million. Investing activities used $38.1 million, including $21.2 million of capital expenditures; financing activities used $190.8 million.
- Cash and cash equivalents were $297.8 million at June 30, 2017, versus $260.2 million at year-end 2016. Total notes payable and other indebtedness was approximately $0.9 million. Current assets were $1,347.1 million and current liabilities $719.4 million.
- First-half repurchases totaled $129.2 million in cash flow (including employee-plan repurchases); cash dividends paid were $61.4 million. The company declared dividends of $0.48 per share in the first half and announced a further $0.24 quarterly dividend payable September 15, 2017. Up to 4.2 million additional shares remained authorized for repurchase at June 30.
- Management said internally generated cash should cover working capital, fixed payments, dividends and other obligations in the short and long term.
Outlook, risks and notable items
- Management reported slight sequential improvement in Q2 demand and improving conditions for staffing in continental Europe. It expected U.S. full-time staff headcount to remain steady through Q3 2017, with modest international growth as demand required. No revenue or earnings guidance was provided.
- Management expected 2017 capital expenditures of $45 million to $55 million; first-half spending was $21 million, approximately 54% of which supported software and technology infrastructure.
- Key risks include economic and labor-market changes, talent availability and competition, margin pressure, short client engagement duration and limited revenue visibility, employment-related liabilities, regulatory compliance, litigation, foreign-exchange movements, and technology or control failures.
- Three employment-related matters remained unresolved, including claims concerning overtime classification and California interview-related compensation and wage statements. Outcomes and potential losses could not be reasonably estimated; no amounts were accrued. Management said it intended to defend the claims. No material developments in previously disclosed proceedings or material changes in risk factors were reported.
- Foreign operations generated 21% of first-half revenue. Currency translation reduced reported first-half revenue by $17 million (0.6%) and net income by $0.5 million (0.3%). Management said that, if July 2017 exchange rates persisted, the full-year revenue benefit would be mostly offset by higher reported operating expenses, with an immaterial net-income effect.
- The annual goodwill impairment test found no impairment. Management’s test used a 10.3% discount rate; a hypothetical fair-value decline of at least 62% was required before any reporting unit would have carrying value above fair value. Future impairment remained possible if revenue or profitability assumptions were not achieved.
- The company adopted updated share-based payment accounting in 2017, with no material impact. It expected no material impact from the revenue standard effective January 1, 2018, and planned modified-retrospective adoption. Lease accounting changes will require recognition of lease assets and liabilities; the impact was still under evaluation.
Important facts for investors to verify
- Whether staffing hours, bill rates and U.S. demand improve, and whether international growth continues.
- Whether lower staffing revenue and higher SG&A as a share of revenue continue to pressure operating margins.
- Cash generation relative to planned buybacks, dividends and the $45 million–$55 million capital-spending outlook.
- Developments in the employment litigation and any changes to the estimated exposure.
- Progress and eventual balance-sheet impact of lease-accounting adoption and revenue-standard implementation.