Robert Half International Inc. — Q2 2019 Form 10-Q
Business context and period. The company provides specialized temporary and permanent staffing, risk consulting, and internal audit services. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net service revenue | $1.516 billion | $1.457 billion | $2.985 billion | $2.852 billion |
| Gross margin | $637.5 million | $607.1 million | $1.245 billion | $1.179 billion |
| Income from operations | $159.4 million | $149.5 million | $305.6 million | $283.9 million |
| Net income | $114.6 million | $109.3 million | $224.4 million | $205.5 million |
| Diluted EPS | $0.98 | $0.89 | $1.91 | $1.68 |
| Cash dividends declared per share | $0.31 | $0.28 | $0.62 | $0.56 |
- Q2 revenue grew 4.1%, net income 4.8%, and diluted EPS 10.1%. For the first half, revenue grew 4.6%, net income 9%, and diluted EPS 14%, as rounded by management.
- Q2 gross margin was 42.0% of revenue versus 41.7% a year earlier; operating margin was 10.5% versus 10.3%. First-half operating margin was 10.2% versus 10.0%.
- Segment revenue growth in Q2 was led by risk consulting and internal audit (+16.6% reported; +13.8% as adjusted). Temporary and consulting staffing rose 1.4% reported (+3.7% adjusted), and permanent placement rose 4.3% (+6.2% adjusted). “As adjusted” removes billing-day, currency, and specified intercompany effects.
Cash, liquidity, and balance sheet
- Cash was $269.4 million at June 30, 2019, down from $276.6 million at year-end 2018. Current assets were $1.565 billion and current liabilities $909.5 million.
- First-half operating cash flow was $247.8 million, compared with $264.0 million in 2018. Investing used $47.7 million, including $28.6 million of capital expenditures and $19.1 million deposited into employee deferred compensation trusts. Financing used $207.7 million, mainly $133.6 million of share repurchases and $74.0 million of dividends.
- Notes payable and other indebtedness totaled $559,000. Operating lease liabilities were $270.0 million; the company adopted lease accounting on January 1, 2019, materially increasing reported assets and liabilities, with prior periods not restated.
- The company had a $100 million uncommitted credit facility, with no borrowings outstanding at quarter-end, and intended to renew it before its March 2020 expiration. Management said internally generated cash should meet working-capital, fixed-payment, dividend, and other obligations.
Changes, outlook, and risks
- Management attributed favorable first-half results to a supportive economic backdrop and talent shortages, particularly in the United States. All three reportable segments grew in the first half; risk consulting and internal audit revenue increased 18.9% reported.
- Management expected full-time staff headcount in each segment to be modestly higher through Q3 2019. It forecast 2019 capital expenditures of $60–$70 million, including $35–$45 million for software initiatives and technology infrastructure. The filing provides no specific revenue or earnings guidance.
- Q2 staffing gross margin improved, primarily from higher pay-bill spreads and lower payroll taxes; consulting gross margin also improved in Q2 with higher bill rates. For the first half, consulting gross margin percentage declined to 26.6% from 26.9%, attributed to higher professional staff pay rates and headcount. Permanent placement operating income declined year over year in both Q2 and the first half, as expenses rose faster than revenue.
- Foreign operations represented 23% of first-half revenue. A stronger U.S. dollar reduced first-half reported revenue by $44 million (1.6%) and net income by $2 million (0.9%); management said that, if July 2019 exchange rates persisted, reported full-year revenue would be adversely affected, with operating-expense offsets and an immaterial net-income impact.
- Two California putative class actions allege wage-and-hour or employee-classification violations. Potential damages are unspecified; the company said loss estimates are not feasible, recorded no amounts, and intends to defend the cases. Management reported no material changes to previously disclosed risk factors or legal proceedings.
- Other risks cited include sensitivity to economic and labor-market conditions, talent availability and retention, competition and margin pressure, short-term client engagements, regulatory and litigation exposure, currency movements, and technology or systems interruptions.
Important facts for investors to verify
- Whether staffing demand, bill rates, placement activity, and consulting utilization sustain reported growth, particularly given the limited visibility from short-duration engagements.
- Progress against the 2019 capital expenditure outlook and the effect of technology investments and higher staff costs on margins.
- Developments in the California litigation and any change in the company’s ability to estimate or accrue potential losses.
- Renewal terms and availability of the uncommitted credit facility, alongside cash needs for dividends and repurchases.
- Currency impacts and the continuing presentation of operating lease obligations and deferred compensation plan assets and liabilities.