RHI

Business Context and Reporting Period

Company: Robert Half International Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: The Company is the world's largest specialized provider of temporary, full-time, and project professionals in accounting and finance. Operations are conducted through three reportable segments: Temporary and Consultant Staffing, Permanent Placement Staffing, and Risk Consulting and Internal Audit Services (Protiviti). As of March 1, 2006, the Company operated through more than 330 offices in 42 U.S. states and 13 foreign countries.

Key Financial Metrics (Year Ended Dec 31, 2005)

Segment Performance (2005):

• Temporary & Consultant Staffing: Revenues of $2.64 billion; Operating Income of $250.2 million.
• Permanent Placement: Revenues of $219.2 million; Operating Income of $44.6 million.
• Risk Consulting (Protiviti): Revenues of $479.0 million; Operating Income of $86.8 million.

Material Changes vs. Prior Period

• Revenue Growth: Net service revenues increased 24.8% year-over-year, driven by a 21% increase in temporary staffing, a 61% increase in permanent placement, and a 36% increase in risk consulting services.
• Profitability: Net income increased 69% to $237.9 million. Gross margin dollars increased 30% to $1.37 billion.
• Expense Management: Selling, general, and administrative (SG&A) expenses increased to $991 million but decreased as a percentage of revenue from 31% in 2004 to 30% in 2005 due to leveraging fixed costs.
• Capital Allocation: The Company repurchased $262.4 million of common stock in 2005 (compared to $89.6 million in 2004) and paid $47.8 million in cash dividends.
• Foreign Operations: Foreign revenues represented 19% of total revenues in 2005, up from 18% in 2004.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Guidance:
The Company does not provide specific numerical guidance for 2006, noting that future results cannot be reliably predicted due to the lack of long-term contracts. Management expects total revenues to continue to be impacted by general macroeconomic conditions. A quarterly dividend of $0.08 per share was announced for payment in March 2006.

Accounting Changes:

• SFAS 123R Adoption: The Company is required to adopt SFAS 123R (Share-Based Payment) in Q1 2006. This will result in expensing approximately $17 million in 2006 for stock options previously disclosed only in pro forma footnotes.
• Classification Change: Auction rate securities were reclassified from cash equivalents to marketable securities in 2005, affecting the presentation of investing activities in the cash flow statement.

Risks and Contingencies:

• Legal Proceedings: The Company is a defendant in three class-action lawsuits (two in California, one in Massachusetts) alleging misclassification of employees as exempt, seeking unpaid overtime and penalties. No amounts have been accrued as outcomes are unpredictable.
• Economic Sensitivity: Demand is highly dependent on the state of the economy and unemployment levels.
• Regulatory Compliance: Demand for Protiviti services is partially driven by Sarbanes-Oxley compliance; there is no assurance of ongoing demand for these specific services.

Investor Verification Checklist

• Stock-Based Compensation Impact: Verify the impact of the upcoming SFAS 123R adoption on 2006 net income, estimated at a $17 million pre-tax expense increase.
• Legal Exposure: Monitor the status of the three pending class-action lawsuits regarding employee misclassification and potential liability.
• Segment Margins: Review the sustainability of the 40% gross margin in the Risk Consulting segment, which has grown significantly but faces competition from "big four" accounting firms.
• Share Repurchases: Confirm the remaining authorization for share repurchases (9.3 million shares authorized as of Dec 31, 2005) and the Company's commitment to returning capital to shareholders.
• Foreign Currency: Assess the impact of foreign currency fluctuations, as 19% of revenues are generated outside the U.S.