Robert Half International Inc. — Q2 2013 Form 10-Q
Business context and period. Unaudited results for the quarter and six months ended June 30, 2013, compared with the corresponding 2012 periods. The company provides specialized staffing, permanent placement, and risk consulting and internal audit services through three reportable segments. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2013 | Q2 2012 | H1 2013 | H1 2012 |
|---|---|---|---|---|
| Net service revenue | $1,063.2 | $1,028.4 | $2,086.9 | $2,043.8 |
| Gross margin | $432.1 | $415.3 | $842.4 | $817.4 |
| Gross margin percentage | 40.6% | 40.4% | 40.4% | 40.0% |
| Operating income | $100.8 | $72.0 | $190.3 | $152.1 |
| Operating margin | 9.5% | 7.0% | 9.1% | 7.4% |
| Net income | $63.1 | $45.3 | $119.0 | $93.7 |
| Diluted EPS | $0.46 | $0.32 | $0.86 | $0.67 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $129.9 | $115.3 |
Segment trends. Q2 revenue growth was led by risk consulting and internal audit (+18.7% reported), while temporary and consultant staffing grew 1.6% and permanent placement 1.4%. For H1, the respective increases were 16.2%, 0.4%, and 1.0%. U.S. staffing revenue grew, but international staffing revenue declined: Q2 temporary staffing fell 5.8% reported (6.2% lower on a same-billing-day, constant-currency basis), and permanent placement fell 10.8% reported (10.1% lower on that basis). Risk consulting benefited from demand for regulatory/compliance and IT controls/security work, and from higher utilization. Temporary staffing margins improved with lower fringe benefit costs and higher U.S. pay/bill spreads.
Financial position and liquidity
- At June 30, cash and equivalents were $247.0 million, down from $287.6 million at December 31, 2012. Current assets were $1,119.1 million and current liabilities $534.9 million; working capital was approximately $584.2 million.
- Total notes payable and other indebtedness was approximately $1.5 million ($0.1 million current and $1.4 million long-term).
- For H1, operating activities generated $129.9 million; investing activities used $52.2 million, including $33.1 million deposited into employee-benefit and retirement trusts and $19.1 million in capital expenditures. Financing activities used $111.0 million, including $86.4 million of share repurchases and $43.9 million of dividends.
- The company repurchased 2.0 million shares in open-market transactions for $69.1 million during H1, in addition to employee-plan repurchases. It declared dividends of $0.32 per share for H1. A subsequent quarterly dividend of $0.16 per share was announced for payment September 16, 2013.
Changes, outlook, and risks
- Q2 revenue rose 3.4% year over year; net income increased 39.2% and diluted EPS rose from $0.32 to $0.46. H1 revenue increased 2.1%, net income 27.0%, and diluted EPS from $0.67 to $0.86.
- Lower SG&A was a key contributor to improved operating results. Q2 2012 included a $19 million litigation-settlement charge; Q2 2013 SG&A was $331.3 million versus $343.3 million a year earlier. H1 SG&A was $652.1 million versus $665.3 million.
- The H1 effective tax rate was 37%, compared with 39% in 2012, primarily reflecting resolution of certain tax matters. Q2 tax rates were 37% in both years.
- Management expected general macroeconomic conditions to continue affecting 2013 results and said future demand could not be forecast with certainty. No specific revenue or earnings guidance was provided. The company stated internally generated cash should cover working-capital needs, fixed payments, dividends, and other obligations in the short and long term.
- Principal risks include economic and labor-market weakness, competition and margin pressure, attracting and retaining candidates and staff, reliance on short-term contracts, regulatory and litigation exposure, foreign-exchange movements, and potential interruption of technology systems. About 25% of H1 revenue came from outside the U.S.; currency translation reduced accumulated other comprehensive income by $11.3 million in H1.
- The annual June 2013 goodwill impairment test found no impairment. Management said hypothetical fair-value reductions of at least 70% would be needed before any reporting unit’s carrying value exceeded fair value, while noting future results could differ from assumptions.
- A California putative wage-and-hour class complaint was ordered to arbitration in July 2013, with the class waiver upheld and the case stayed as to the company; management said it was not currently material. A separate staffing-manager overtime case was also compelled to arbitration; potential loss could not be estimated and no provision was recorded.
Investor verification priorities
- Check whether U.S. staffing growth and Protiviti’s strong growth persisted, and whether international staffing weakness—particularly in Europe—continued.
- Assess the sustainability of improved margins and operating leverage, including the effect of the nonrecurring $19 million prior-year litigation charge.
- Review working-capital and cash conversion trends, given the increase in receivables and the larger employee-benefit trust deposits.
- Monitor share repurchases, dividend commitments, foreign-currency exposure, and developments in the disclosed employment-related litigation.
- Compare future operating performance with the assumptions underpinning goodwill valuations; the filing provides no quantified forward revenue or earnings guidance.