Robert Half International Inc. — Q3 2016 Form 10-Q
Business context and period. The company provides specialized staffing and risk consulting/internal audit services across the Americas, Europe, Asia and Australia. This unaudited report covers the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods.
Financial results and liquidity
- Q3 revenue: $1.339 billion, up 2.0%. Gross margin was $552.5 million (41.3% of revenue), versus $549.8 million (41.9%) a year earlier. Operating income was $146.4 million (10.9% margin), down from $159.1 million (12.1%). Net income was $90.6 million versus $96.7 million; diluted EPS was $0.71 versus $0.73.
- Nine-month results: Revenue was $3.985 billion, up 5.1%; gross margin was $1.641 billion (41.2% of revenue), versus $1.574 billion (41.5%). Operating income was $429.8 million (10.8% margin), versus $436.3 million (11.5%). Net income was $265.6 million versus $264.4 million; diluted EPS rose to $2.06 from $1.98.
- Cash flow: For the nine months, operating cash flow was $360.4 million, investing cash outflow $83.0 million and financing cash outflow $211.4 million. Capital expenditures were $63.3 million; repurchases were $126.3 million and dividends paid were $86.0 million.
- Liquidity and debt: Cash was $292.5 million at September 30, 2016, up from $224.6 million at year-end 2015. Current assets were $1.494 billion and current liabilities $729.7 million. Notes payable and other indebtedness totaled approximately $1.0 million.
- Shareholder returns: Nine-month dividends declared were $0.66 per share. On November 1, the company announced a $0.22 quarterly dividend, payable December 15, 2016.
Material changes and segment trends
- For Q3, temporary and consultant staffing revenue increased 1.6% reported (2.1% on a same-billing-day, constant-currency basis); permanent placement revenue decreased 5.1% reported (4.5% on that adjusted basis); risk consulting and internal audit revenue increased 7.4% reported (7.8% adjusted).
- For the first nine months, the respective segment revenues grew 4.6%, 1.6% and 10.1% reported. Risk consulting led growth, while its gross margin percentage declined to 28.9% from 30.6%, attributed to hiring investment and slightly lower utilization.
- Q3 operating income declined across all three segments. Higher SG&A, including administrative compensation, employee medical costs and fixed overhead, contributed to lower consolidated operating margins. Temporary staffing benefited from improved pay-bill spreads; risk consulting margins were pressured by higher staff pay, lower utilization and revenue mix.
- The company repurchased 2.9 million shares in the first nine months for $112.9 million through open-market purchases, compared with $161.1 million in the prior-year period. It had authorization to repurchase up to 7.5 million additional shares at September 30.
Outlook, risks and unusual items
- Management said conditions were stable and described the company as well positioned, but emphasized limited revenue visibility because engagements are generally short term and results depend on economic and labor-market conditions. It expected full-time staff headcount to remain relatively flat across segments through the rest of 2016.
- Management expected 2016 capital expenditures of $80 million to $90 million, including technology investment and higher tenant-improvement spending. Approximately 62% of nine-month capital spending was for software initiatives and technology infrastructure.
- Implementation of a new U.S. staffing CRM system and a risk-consulting project-management system was completed during Q3. Management estimated related disruption and out-of-pocket costs reduced quarterly revenue by $9 million and net income per share by $0.05.
- Foreign operations generated about 20% of nine-month revenue. Currency movements reduced reported revenue by $20 million and net income by $0.6 million in the period, according to management; foreign-exchange changes remain a risk.
- Three employment-related matters include allegations involving overtime classification and compensation for interview-related activities. Outcomes and potential losses were not estimable, and no amounts were recorded. The company said it intends to defend the matters. Other disclosed risks include economic weakness, competition, talent supply and retention, margin pressure, regulation, technology interruption and litigation.
Important facts for investors to verify
- Whether staffing demand and permanent-placement trends improved after Q3, and whether reported growth was affected by billing days or currency.
- Whether the CRM and project-management implementations produced the estimated revenue and EPS impact, and whether further costs or disruption followed.
- Whether risk-consulting utilization and margins recovered as hiring investments matured.
- Actual full-year capital expenditures versus the $80–$90 million expectation, and the returns from technology spending.
- Developments in the employment-related litigation and any change in the company’s assessment of potential losses.