Business context and reporting period
Robert Half International Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2011. The company provides temporary and permanent staffing services and risk consulting and internal audit services, primarily through its Robert Half brands and Protiviti. Results are compared with the three months ended March 31, 2010, except balance-sheet figures, which are compared with December 31, 2010.
Financial results and key metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net service revenues | $880.9 million | $737.2 million | +19% |
| Gross margin | $338.1 million | $268.1 million | +26% |
| Gross margin percentage | 38.4% | 36.4% | +2.0 percentage points |
| Operating income | $44.4 million | $12.5 million | More than tripled |
| Operating margin | 5.0% | 1.7% | +3.3 percentage points |
| Income before taxes | $44.6 million | $12.3 million | — |
| Net income | $26.7 million | $8.5 million | — |
| Diluted EPS | $0.18 | $0.05 | — |
| Operating cash flow | $19.0 million | $14.5 million | — |
- Temporary and consultant staffing revenue was $714.7 million, up 19%; permanent placement revenue was $67.6 million, up 39%; risk consulting and internal audit revenue was $98.6 million, up 10%.
- SG&A was $293.7 million, up 15%, but fell to 33.3% of revenue from 34.7%. The effective tax rate rose to 40% from 31%, primarily because of non-recurring state tax credits claimed in Q1 2010.
- Cash and cash equivalents were $281.8 million at March 31, versus $315.1 million at year-end. Current assets were $984.6 million and current liabilities $420.4 million. Total debt and other indebtedness was approximately $1.7 million.
- Quarter-end cash declined $33.3 million. Investing activities used $15.6 million, including $14.6 million in capital expenditures; financing activities used $41.0 million, including $31.0 million of share repurchases and $20.3 million of dividends, partly offset by stock-option proceeds.
- The company declared quarterly dividends of $0.14 per share, compared with $0.13 a year earlier. It repurchased approximately 1.0 million shares for $30 million and had authorization to repurchase about 10.4 million additional shares at quarter-end.
Material changes and management commentary
Management attributed the year-over-year improvement to stronger global economic and labor-market conditions. Revenue and gross margin increased across all three reportable segments. Temporary staffing benefited from improved pay/bill spreads and higher conversion revenue; Protiviti’s margin improved with higher utilization and greater use of variable-cost labor. SG&A leverage improved as revenue grew. Foreign operations generated 31% of revenue, compared with 29% in Q1 2010.
Management said overall results would continue to be affected by macroeconomic conditions in 2011 and that future demand cannot be forecast with certainty. It expected internally generated cash to be sufficient for working-capital needs, fixed payments, dividends, and other obligations in the short and long term. The filing provides no quantified earnings or revenue guidance.
Risks, contingencies, and unusual items
- Staffing demand is sensitive to economic and labor-market conditions, competition, candidate supply, client retention, and the ability to maintain margins. Short-term contracts are significant, limiting the reliability of forecasts based on past trends.
- Other identified risks include foreign-currency fluctuations, regulatory and employment-law compliance, health-care reform costs, technology interruptions, and litigation. Foreign currency translation adjustments increased other comprehensive income by $7.4 million in the quarter.
- Several wage-and-hour and employee-classification class actions are pending, including a California case filed in February 2011. Certain cases are stayed pending court decisions. The company says it cannot predict outcomes or estimate potential losses and has recorded no amounts for these matters; it intends to defend them.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing says there were no material changes to the risk factors in the 2010 Form 10-K.
Important facts for investors to verify
- Whether staffing demand, permanent-placement growth, and Protiviti utilization and profitability continued to improve after Q1.
- Whether gross-margin gains and SG&A leverage were sustainable, particularly as economic conditions and staffing competition change.
- Cash conversion and working-capital trends: receivables rose to $466.5 million, while operating cash flow was $19.0 million.
- Capital allocation and liquidity implications of ongoing repurchases and dividends, alongside capital expenditures and the remaining repurchase authorization.
- Developments in the disclosed employment litigation and any resulting change to the company’s ability to estimate or recognize potential losses.