Robert Half International Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless stated otherwise. Robert Half provides specialized staffing and Protiviti risk consulting and internal audit services.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net service revenues | $1,466.2M | $1,324.7M | $4,318.6M | $3,920.5M |
| Gross margin | $610.5M | $546.4M | $1,790.0M | $1,610.7M |
| Operating income | $151.1M | $132.2M | $435.0M | $388.5M |
| Income before taxes | $151.9M | $132.3M | $436.6M | $388.5M |
| Net income | $115.2M | $84.7M | $320.7M | $243.5M |
| Diluted EPS | $0.95 | $0.68 | $2.62 | $1.94 |
- Revenue grew 10.7% in Q3 and 10.2% year to date. Nine-month net income increased 32% and diluted EPS rose 35%; management attributed much of the earnings growth to the lower U.S. federal corporate tax rate.
- Q3 gross margin was 41.6% of revenue versus 41.3%; operating margin was 10.3% versus 10.0%; net margin was 7.9% versus 6.4%. For the nine months, the corresponding margins were 41.4% versus 41.1%, 10.1% versus 9.9%, and 7.4% versus 6.2%.
- Q3 segment revenue: temporary and consultant staffing $1,083.8M (+7.9% reported); permanent placement $129.7M (+16.5%); risk consulting and internal audit $252.8M (+21.2%). Year-to-date growth was 8.3%, 17.9%, and 15.3%, respectively.
- Q3 effective tax rate was 24.1%, versus 36.0%; the nine-month rate was 26.5%, versus 37.3%. The decrease primarily reflects the U.S. federal rate reduction from 35% to 21%.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $449.3M, compared with $388.5M. Investing activities used $55.2M, including $27.2M in capital expenditures and $28.0M in deferred-compensation trust deposits. Financing activities used $319.2M, including $216.4M in share repurchases and $102.7M in dividends.
- Cash was $361.7M at September 30, 2018. Current assets were $1,612.4M and current liabilities $896.3M, implying working capital of about $716.1M. Total notes payable and other indebtedness was approximately $0.7M.
- Management expects internally generated cash to cover working capital needs, fixed payments, dividends, and other obligations. The company repurchased 3.3M shares in the open market for $214.5M during the first nine months and had authorization to repurchase up to 9.1M additional shares at September 30.
- Dividends declared were $0.28 per share in Q3 and $0.84 per share year to date. A further $0.28 quarterly dividend was announced October 30, payable December 14, 2018.
Changes, outlook and risks
- Management said a growing global economy supported results; U.S. unemployment fell to 3.7% by quarter-end, while competition for skilled workers supported staffing demand. Foreign operations generated 24% of nine-month revenue, up from 21% a year earlier.
- Management expects full-time staff headcount in each reporting segment to be modestly higher through the remainder of 2018. It forecast 2018 capital expenditures of $35M–$45M; $27M had been spent in the first nine months. No revenue or earnings guidance was provided.
- Temporary staffing margin improved, primarily on higher pay-bill spreads and conversion revenue, partly offset by higher fringe costs. Risk consulting margin declined, with higher professional staff pay and headcount cited; its Q3 gross margin rate was 28.1%, versus 29.6%.
- Management cautioned that demand depends on economic and labor-market conditions, engagements are generally short-term, and visibility into future revenue is limited. Disclosed risks include competition, candidate supply and retention, client demand, margins, regulation, litigation, foreign exchange, and technology interruptions.
- California employment-related putative class actions remained unresolved: the Gentry and Dorff matters had no estimable loss range, and no amounts were accrued. The Rodriguez individual arbitration settled for an amount immaterial to the company, and its PAGA claim was dismissed with prejudice on October 19, 2018.
- Management expects adoption of the new lease accounting standard on January 1, 2019 to materially affect the balance sheet. A $5M tax-provision charge related to the TCJA transition tax was recorded in the first nine months; final TCJA measurement remained open, with any further adjustment expected in Q4.
Important facts for investors to verify
- Whether staffing demand, bill rates, placement volumes, and Protiviti utilization sustain the reported growth, particularly given limited forward visibility.
- How compensation, fringe costs, and overhead affect segment margins as headcount expands.
- The final 2018 tax effects of the TCJA and the impact of lease-standard adoption on reported assets and liabilities.
- Developments in the Gentry and Dorff litigation and any potential loss exposure, which the filing says cannot currently be estimated.
- Foreign-exchange exposure: management estimated currency increased nine-month reported revenue by $41M and net income by $5M year over year.