Robert Half International Inc. — Q1 2015 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2015, compared with the same quarter of 2014. Robert Half provides specialized staffing and consulting services through temporary and consultant staffing, permanent placement staffing, and risk consulting and internal audit segments.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net service revenues | $1,205.6 million | $1,084.3 million |
| Gross margin | $494.1 million | $438.5 million |
| Operating income | $128.1 million | $102.1 million |
| Income before taxes | $128.2 million | $102.0 million |
| Net income | $77.9 million | $61.6 million |
| Diluted EPS | $0.58 | $0.45 |
| Operating cash flow | $84.5 million | $59.2 million |
Revenue rose 11.2% as reported; net income increased 26.6%. Operating margin was 10.6% of revenue versus 9.4%; SG&A was 30.4% of revenue versus 31.0%. The effective tax rate was 39.2%, compared with 39.7%, reflecting a favorable state audit settlement and resolution. Dividends declared were $0.20 per share versus $0.18.
Segments and material changes
- Temporary and consultant staffing: revenue $943.5 million, up 10.0% reported and 14.5% on a same-billing-day, constant-currency basis; segment operating income was $92.8 million versus $77.5 million. Gross margin rate improved to 37.0% from 36.1%, attributed primarily to higher conversion revenue and wider pay/bill spreads.
- Permanent placement staffing: revenue $98.4 million, up 6.2% reported and 11.9% on a same-day, constant-currency basis; operating income was $19.0 million versus $17.3 million.
- Risk consulting and internal audit: revenue $163.6 million, up 22.0% reported and 26.6% on a same-day, constant-currency basis; operating income rose to $16.3 million from $7.3 million. U.S. growth included internal audit, financial services risk and compliance, and IT controls and security.
Management described growth as broad-based, supported by improving labor markets and stronger global demand, with results strongest domestically. Reported international revenue was affected by currency: foreign operations represented 20.2% of revenue, down from 23.7% a year earlier. International staffing revenue declined as reported in both staffing segments but increased on a same-day, constant-currency basis.
Cash, liquidity and capital allocation
At March 31, 2015, cash and cash equivalents were $260.9 million, down from $287.1 million at December 31, 2014. Operating activities provided $84.5 million; investing activities used $20.8 million, including $13.3 million of capital expenditures; financing activities used $81.2 million, including $59.2 million of share repurchases and $27.4 million of dividends paid. The net decrease in cash was $26.2 million, including an $8.7 million adverse effect from exchange rates.
Total notes payable and other indebtedness were approximately $1.3 million. Total current assets were $1,316.3 million and total current liabilities were $607.7 million. Stockholders’ equity was $984.6 million. The company said internally generated cash should be sufficient for working capital, fixed payments, dividends, and other obligations in both the short and long term. It had authorization to repurchase up to 4.3 million additional shares at quarter-end and announced a $0.20-per-share dividend on April 30, payable June 15, 2015.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management cautioned that demand cannot be forecast with certainty because the business is economically sensitive and has few material long-term contracts.
- Key risks include economic and labor-market changes, candidate availability, competition and margin pressure, client retention, staffing-related liabilities and regulation, demand for Protiviti compliance services, international operations and foreign exchange, health-care reform costs, systems interruptions, and litigation.
- Several employment-related class or representative actions remain pending, including allegations involving overtime classification and interview-related compensation. The company said loss outcomes or ranges were not reasonably estimable and recorded no amounts for these matters; it intends to defend them. A separate Fair Credit Reporting Act matter was settled as to the plaintiff’s individual claims for an immaterial amount, and the complaint was dismissed after quarter-end.
- Foreign-currency translation reduced comprehensive income: translation adjustments were negative $20.0 million in Q1 2015, versus positive $0.4 million in Q1 2014. Accumulated other comprehensive income moved from $14.7 million at year-end to a $5.2 million loss at March 31.
- The company adopted new discontinued-operations guidance with no financial-statement impact. It was evaluating the impact of the new revenue-recognition standard and cloud-computing accounting guidance.
Most important facts to verify
- Whether staffing and consulting revenue growth, particularly constant-currency growth, continued beyond Q1 and translated into sustained margin improvement.
- Whether cash generation remains adequate alongside substantial buybacks and dividends, and how foreign exchange affects reported cash and results.
- Developments in the employment-related litigation, including any change in the company’s ability to estimate potential losses.
- The eventual financial-statement impact and implementation approach for the new revenue-recognition standard.