Robert Half International Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Robert Half provides specialized staffing and Protiviti risk consulting and internal audit services. Amounts below are in U.S. dollars; financial statement amounts are unaudited.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net service revenues | $1.552 billion | $1.466 billion | $4.537 billion | $4.319 billion |
| Gross margin | $646.4 million | $610.5 million | $1.892 billion | $1.790 billion |
| Operating income | $162.9 million | $151.1 million | $468.5 million | $435.0 million |
| Net income | $117.2 million | $115.2 million | $341.6 million | $320.7 million |
| Diluted EPS | $1.01 | $0.95 | $2.92 | $2.62 |
Q3 revenue increased 5.9%, net income 1.7%, and diluted EPS 6.3% year over year. Nine-month revenue increased 5.1%, net income 6.5%, and diluted EPS 11.5%. Q3 gross margin was about 41.7% of revenue and operating margin 10.5%, versus 41.6% and 10.3%, respectively, a year earlier. Nine-month operating margin was 10.3%, versus 10.1%.
- Q3 segment revenue: temporary and consultant staffing $1.118 billion (+3.2% reported); permanent placement $134.6 million (+3.8%); risk consulting and internal audit $299.1 million (+18.3%).
- Nine-month segment revenue: temporary and consultant staffing $3.306 billion (+2.1% reported); permanent placement $407.0 million (+5.4%); risk consulting and internal audit $824.2 million (+18.7%). Management’s adjusted growth rates, which exclude billing-day, currency and certain intercompany effects, were 4.4%, 7.1% and 15.2%, respectively.
- Cash and cash equivalents were $312.7 million at September 30, 2019, versus $361.7 million at September 30, 2018. Nine-month operating cash flow was $439.0 million, compared with $449.3 million. Investing activities used $73.5 million and financing activities used $323.9 million.
- Nine-month capital expenditures were $45.1 million in investing cash flows; management also reported $21 million of cloud-computing arrangement capital expenditures classified in operating cash flows. Repurchases and dividends used $214.0 million and $109.7 million, respectively.
- Notes payable and other indebtedness totaled about $0.5 million. The company had no borrowings under its uncommitted credit facility, which offers up to $100 million subject to lender approval. Operating lease liabilities were $271.6 million, including $70.9 million current.
Material changes and notable items
All three reportable segments grew revenue. Risk consulting and internal audit was the leading growth area, with higher revenue and improved operating leverage; its Q3 gross margin rate rose to 29.5% from 28.1%. Temporary staffing benefited from higher average bill rates, partly offset by fewer hours worked. For the nine months, temporary staffing gross margin improved primarily because of higher pay-bill spreads. Permanent placement operating margin weakened year over year, which management attributed in part to negative leverage in international operations.
The effective tax rate was 28.5% in Q3 2019 versus 24.1% in Q3 2018, and 27.5% for the first nine months versus 26.5% a year earlier. Management said the comparison was affected by a one-time accounting-method change related to the Tax Cuts and Jobs Act that reduced 2018 tax expense and did not recur in 2019; 2019 restricted-stock vesting tax benefits partly offset the nine-month increase.
The company adopted lease accounting on January 1, 2019; prior periods were not restated. Adoption materially increased reported assets and liabilities. At September 30, right-of-use assets were $241.4 million. The company also reported $21.2 million of future minimum lease obligations for leases not yet commenced.
During the first nine months, the company repurchased 3.3 million shares in open-market transactions for $191.0 million, in addition to employee-plan repurchases. The declared quarterly dividend increased to $0.31 per share from $0.28 in the comparable quarter.
Outlook, risks and contingencies
Management cited a strong U.S. labor market and skilled-talent shortages as supportive of demand, but noted limited revenue visibility because engagements are generally short-term and results depend on economic and labor-market conditions. It expected full-time staff headcount in each reporting segment to be modestly higher through the remainder of 2019. Expected 2019 capital expenditures were $80 million to $90 million, including $50 million to $60 million for software initiatives and technology infrastructure.
CEO Harold M. Messmer, Jr. was expected to retire from that role effective December 15, 2019, while remaining Executive Chairman. CFO M. Keith Waddell was designated to succeed him as CEO.
Risks highlighted include economic and labor-market changes, competition and margin pressure, attracting and retaining candidates and employees, regulatory and employment-law compliance, foreign-currency movements, cybersecurity and systems interruptions, and litigation. The company reported two California employment-related class or representative actions for which outcomes and loss ranges were not estimable; no amounts were accrued. Management said it intended to defend the claims. The filing reported no material changes to previously disclosed risk factors and no material developments in previously disclosed legal proceedings.
Foreign operations generated about 23% of nine-month revenue. Currency movements reduced reported revenue by $56 million (1.3%) and reported net income by $2 million (0.7%) compared with the prior-year period, according to management. The company said the revenue effect was largely offset by lower expenses in the same currencies.
Important facts for investors to verify
- Whether staffing demand, bill rates and hours worked continue to support growth, particularly amid limited visibility and economic sensitivity.
- Whether Protiviti’s strong growth and improved utilization are sustained, and whether permanent-placement margins recover.
- Progress on the CEO transition, the planned credit-facility renewal before March 19, 2020, and actual capital spending against the stated range.
- Developments in the California employment litigation, for which potential loss was not estimable and no provision was recorded.
- The effects of foreign exchange, lease commitments, share repurchases and dividends on cash and capital allocation.