Robert Half International Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. Dollar amounts below are in millions unless stated otherwise. The company provides specialized staffing and risk consulting/internal audit services; staffing is its predominant revenue source.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net service revenue | $938.0 | $769.1 | $1,818.8 | $1,506.3 |
| Gross margin | $372.3 | $289.9 | $710.4 | $558.0 |
| Operating income | $61.1 | $22.3 | $105.5 | $34.8 |
| Income before taxes | $61.3 | $22.4 | $105.9 | $34.7 |
| Net income | $36.4 | $12.2 | $63.1 | $20.7 |
| Diluted EPS | $0.25 | $0.08 | $0.43 | $0.13 |
- Q2 revenue increased 22%; first-half revenue increased 21%. Revenue growth was broad-based: Q2 temporary/consultant staffing rose 21%, permanent placement 44%, and risk consulting/internal audit 13%.
- Q2 gross margin was 39.7% of revenue versus 37.7% a year earlier; operating margin was 6.5% versus 2.9%. SG&A was 33.2% of revenue versus 34.8%. First-half operating margin was 5.8% versus 2.3%.
- Management attributed improved staffing margins to higher bill rates/pay-bill spreads and conversion revenue; risk consulting margin gains reflected higher revenue and staff utilization. Operating leverage also reduced SG&A as a share of revenue.
- Q2 segment operating income: temporary/consultant staffing $46.2 million; permanent placement $13.9 million; risk consulting/internal audit $1.0 million, compared with a $6.8 million segment loss in Q2 2010. For the first half, risk consulting/internal audit still recorded a $0.6 million operating loss, improved from a $14.4 million loss.
Cash, balance sheet, and capital allocation
- Six-month operating cash flow was $87.9 million, up from $51.0 million. Capital expenditures were $28.4 million versus $14.4 million; investing cash outflow was $31.2 million.
- Cash and equivalents were $261.1 million at June 30, down from $315.1 million at December 31, 2010. Financing cash outflow was $117.3 million, including $91.5 million of share repurchases and $40.3 million of dividends.
- Current assets were $995.1 million and current liabilities $453.2 million. Notes payable and other indebtedness totaled approximately $1.7 million, including the current portion; the company reported no material debt burden.
- The company repurchased 3.0 million shares in the first half for $85.9 million through its program and had authorization for approximately 8.4 million additional shares at June 30. Dividends declared were $0.28 per share for the first half; a $0.14 quarterly dividend was announced for payment September 15, 2011.
Outlook, risks, and notable items
- Management said improving global economic conditions benefited first-half results and expected macroeconomic conditions to continue affecting 2011 results. It provided no numerical earnings or revenue guidance, and cautioned that future demand is difficult to forecast given economic uncertainty and limited long-term contracts.
- Management expected internally generated cash to cover working capital, fixed payments, dividends, and other obligations, while noting that further volatility in global capital and credit markets could impair liquidity.
- Key risks include economic and labor-market weakness, competition and margin pressure, candidate availability, foreign-exchange movements, reliance on short-term contracts, regulatory and healthcare-reform costs, systems interruptions, and litigation.
- Several wage-and-hour cases remain pending, including California employee classification and wage-statement claims and a federal staffing-manager classification case. Loss amounts and outcomes were not estimable; no related amounts were accrued. The company intends to defend the claims. The filing identified potential material adverse effects from unfavorable outcomes.
- The annual goodwill impairment test at June 30 found no impairment. Management reported that hypothetical fair-value reductions of at least 70% would be required before any reporting unit’s carrying value exceeded fair value, but future impairment remains possible if operating assumptions are not achieved.
- Foreign operations generated about 31% of first-half revenue; currency translation affected reported results and equity. The effective tax rate was 41% for Q2 and 40% for the first half.
Important facts for investors to verify
- Whether staffing demand and permanent-placement growth persisted after Q2, given sensitivity to economic and labor-market conditions.
- Whether improved gross margins, utilization, and SG&A leverage were sustainable as revenue trends changed.
- Developments in the wage-and-hour lawsuits, potential exposure, and any effect on employee compensation plans or operating costs.
- Cash conversion and working-capital needs, particularly the increase in receivables, alongside repurchases, dividends, and elevated capital expenditures.
- Foreign-exchange exposure and the assumptions supporting goodwill valuations and the company’s 2011 outlook.