Robert Half International Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Robert Half provides specialized staffing and risk consulting services through three reportable segments: temporary and consultant staffing, permanent placement staffing, and risk consulting and internal audit services. The quarter’s results began to reflect COVID-19 effects, particularly in staffing, in the second half of March.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Service revenues | $1.507 billion | $1.469 billion | Up 2.6% reported |
| Gross margin | $610.7 million | $607.6 million | Up 0.5%; 40.5% of revenue versus 41.4% |
| Operating income | $131.1 million | $146.2 million | Down 10.3%; operating margin 8.7% versus 10.0% |
| Income before taxes | $131.8 million | $147.4 million | Down 10.6% |
| Net income | $89.9 million | $109.8 million | Down 18.1% |
| Diluted EPS | $0.79 | $0.93 | Down $0.14 |
| Cash from operations | $124.9 million | $127.1 million | Nearly unchanged |
Margins and expenses: SG&A was $479.6 million, up 3.9%, and increased to 31.8% of revenue from 31.4%. The effective tax rate rose to 31.8% from 25.5%, primarily because nondeductible items had a larger impact on lower pretax income and the tax benefit from restricted-stock vesting was lower.
Segment results: Temporary and consultant staffing revenue increased 0.7% to $1.092 billion, while segment operating income fell to $93.8 million from $106.0 million. Permanent placement revenue fell 8.4% to $120.5 million and operating income declined to $10.9 million from $21.6 million. Risk consulting and internal audit revenue rose 16.5% to $294.1 million and operating income increased to $26.5 million from $18.7 million. Protiviti posted double-digit year-over-year revenue growth for the eighth consecutive quarter.
Cash, liquidity and debt
- Cash and cash equivalents were $249.9 million at March 31, 2020, versus $270.5 million at December 31, 2019. Net cash declined $20.6 million during the quarter.
- Operating cash flow of $124.9 million was offset by $28.4 million used in investing and $110.5 million used in financing. Financing uses included $70.0 million of share repurchases and $40.5 million of dividends paid.
- Accounts receivable was $853.5 million; management cited cash and receivables as significant sources of liquidity and expected internally generated cash to support working capital, fixed payments, dividends and other obligations.
- Notes payable totaled approximately $0.4 million. Operating lease liabilities totaled $275.9 million, including $71.3 million current. The filing reports no material conventional borrowing balance.
- Capital expenditures were $14.3 million, with an additional $10.4 million of capitalized cloud implementation costs in operating cash flow. The company expected 2020 capital expenditures of $65 million to $75 million.
Material changes and management outlook
Revenue growth was concentrated in risk consulting; permanent placement staffing weakened, and staffing demand deteriorated as COVID-19 restrictions and business closures affected clients. On an adjusted basis excluding billing-day and currency effects, temporary staffing was flat, permanent placement declined 9.0%, and risk consulting grew 15.5% year over year. Foreign operations represented 22% of revenue, down from 24% a year earlier.
Management described high uncertainty and limited visibility because of the pandemic, macroeconomic conditions and short client-engagement durations. It reduced costs during Q1 and early Q2, including eliminating nonessential spending and reducing staff; reported results for Q2 were expected to reflect SG&A savings of about 25% versus Q1. No revenue or earnings guidance was provided. The company expected 2020 capital expenditures of $65 million to $75 million, including $35 million to $45 million for software and technology infrastructure. A $0.34-per-share dividend was declared on April 30 for payment June 15, 2020.
Risks, contingencies and unusual items
- COVID-19 could further reduce demand, disrupt operations and recruiting, weaken client payment capacity, and materially adversely affect revenue, earnings, cash flows and liquidity. Remote work also heightened cybersecurity and third-party service-provider risks.
- The allowance for credit losses increased to $26.3 million from $22.9 million at year-end; Q1 credit-loss expense was $4.7 million, compared with $2.3 million in Q1 2019.
- Foreign-currency translation reduced Q1 comprehensive income by $13.7 million. Management estimated currency movements reduced reported revenue by $10.5 million and net income by $0.4 million versus Q1 2019.
- Two California employment-related putative class actions remain outstanding. The company said loss outcomes or ranges were not estimable and recorded no provision; it stated it intends to defend the claims. It did not expect other ordinary-course litigation to have a material adverse effect.
- The company adopted the current expected credit loss standard and the simplified goodwill impairment standard on January 1, 2020; adoption impacts were not material. It reported no goodwill impairment trigger identified in Q1.
- Q1 share repurchases totaled $70.0 million, and dividends declared totaled $39.4 million. The company had authorization to repurchase up to 1.5 million additional shares at March 31.
Important facts for investors to verify
- How quickly COVID-19-related demand declines affect Q2 and subsequent staffing revenue, utilization and margins.
- Whether announced cost reductions deliver the expected savings, and how those reductions affect capacity and future growth.
- Receivable collections, credit-loss provisions and the adequacy of liquidity if clients face financial stress.
- Progress against the $65 million to $75 million capital expenditure outlook and the company’s ability to sustain dividends and repurchases.
- Developments in the California employment litigation; potential losses remain unquantified in the filing.
- Changes in foreign exchange rates, lease commitments and the impact of pandemic-related operational and cybersecurity risks.