Business Context and Reporting Period
Robert Half International Inc. provides specialized staffing and risk consulting services through temporary and consultant staffing, permanent placement staffing, and risk consulting and internal audit segments. This unaudited Form 10-Q covers the three months ended March 31, 2013; comparisons are with the three months ended March 31, 2012 unless otherwise noted. Amounts below are in U.S. dollars.
Financial Performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net service revenues | $1,023.7 million | $1,015.4 million |
| Gross margin | $410.3 million; 40.1% of revenue | $402.1 million; 39.6% of revenue |
| SG&A | $320.8 million; 31.3% of revenue | $322.0 million; 31.7% of revenue |
| Operating income | $89.5 million; 8.7% of revenue | $80.1 million; 7.9% of revenue |
| Income before taxes | $89.4 million | $80.3 million |
| Net income | $55.9 million | $48.3 million |
| Diluted EPS | $0.40 | $0.34 |
| Operating cash flow | $27.9 million | $23.2 million |
The effective income tax rate was 37%, down from 40%, primarily due to non-U.S. legal entity restructuring. Cash and cash equivalents were $225.4 million at March 31, 2013, compared with $287.6 million at December 31, 2012. Total debt and other indebtedness was $3.2 million, including $1.8 million current, versus $1.5 million at year-end. Management said internally generated cash should be sufficient to support working capital, fixed payments, dividends, and other obligations over the short and long term.
Q1 operating cash flow was more than offset by $37.8 million used in investing and $49.4 million used in financing, resulting in a $62.3 million decline in cash. Investing included $8.1 million in capital expenditures and $29.7 million deposited into employee-benefit and retirement trusts. Financing included $45.7 million of share repurchases and $22.0 million of dividends, partly offset by $19.9 million from option exercises.
Material Changes and Segment Results
- Reported revenue rose 0.8%; management described revenue as approximately $1.0 billion in both periods. On a same-billing-day, constant-currency basis, temporary and consultant staffing revenue grew 1.8% globally and permanent placement revenue grew 4.0%. These are non-GAAP measures.
- Temporary and consultant staffing revenue declined 0.8% reported to $823.4 million, while segment operating income increased to $73.2 million from $69.2 million. Its gross margin rate rose to 36.1% from 35.6%, attributed mainly to lower fringe-benefit costs and improved U.S. pay/bill spreads.
- Permanent placement revenue was $83.4 million, up 0.6% reported; operating income was $12.6 million versus $13.3 million. U.S. revenue grew 14.9% reported, while international revenue fell 16.6%.
- Risk consulting and internal audit revenue increased 13.6% to $116.9 million. The segment moved to $3.7 million of operating income from a $2.4 million loss. Management cited U.S. demand for regulatory risk and compliance and IT application controls and security, along with higher staff utilization.
- Foreign operations generated 25% of revenue, compared with 28% a year earlier. Temporary staffing international revenue fell 10.7% reported; weaker economies, particularly in Europe, affected results.
Outlook, Risks, and Other Notable Items
Management expects general macroeconomic conditions to continue affecting 2013 results and said future demand cannot be forecast with certainty, given economic and labor-market sensitivity and the limited use of material long-term contracts. The filing provides no specific earnings or revenue guidance.
Risks discussed include economic and labor-market conditions, competition, client and candidate retention, margin pressure, regulation and employment-related liability, litigation, foreign-currency movements, international operations, health-care reform costs, and technology-system interruptions. Foreign-currency translation contributed a $5.8 million loss in other comprehensive income in Q1 2013, compared with a $4.1 million gain in Q1 2012.
The company disclosed two employment-related matters with unspecified potential damages: an existing federal overtime-misclassification case, for which the court had ordered arbitration, and a California putative class complaint filed April 19, 2013 alleging unpaid interview time and inaccurate wage statements. The company said loss outcomes or ranges could not be predicted and recorded no amounts; it intends to defend both matters. It reported no material changes to the risk factors in its 2012 Form 10-K.
The company repurchased 836,310 shares under its publicly announced plan in Q1 and had authorization to repurchase approximately 10.6 million additional shares at March 31. The board declared a $0.16-per-share quarterly dividend on May 2, payable June 14, 2013. Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether reported revenue trends, especially U.S. strength and international weakness, persist; distinguish reported growth from same-billing-day, constant-currency growth.
- Whether segment profitability and the improved overall operating margin are sustained, including the drivers of staffing spreads and Protiviti utilization.
- How working-capital movements and the increased employee-benefit trust funding affect cash conversion and liquidity.
- Future cash allocation among share repurchases, dividends, operating needs, and the small but increased debt balance.
- Developments, potential exposure, and financial impact, if any, from the disclosed employment-related litigation.
- Effects of macroeconomic conditions, foreign exchange, and demand for compliance-related consulting on subsequent results.