ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
March 31, 20192020
The following table provides a reconciliation of revenue and operating income by reportable segment to consolidated results for the three months ended March 31, 20192020 and 20182019 (in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Net service revenues | | | |
Temporary and consultant staffing | $ | 1,084,627 |
| | $ | 1,066,288 |
|
Permanent placement staffing | 131,562 |
| | 121,400 |
|
Risk consulting and internal audit services | 252,341 |
| | 207,645 |
|
| $ | 1,468,530 |
| | $ | 1,395,333 |
|
Operating income | | | |
Temporary and consultant staffing | $ | 106,018 |
| | $ | 96,723 |
|
Permanent placement staffing | 21,557 |
| | 22,379 |
|
Risk consulting and internal audit services | 18,654 |
| | 15,265 |
|
| 146,229 |
| | 134,367 |
|
Amortization of intangible assets | 342 |
| | 463 |
|
Interest income, net | (1,496 | ) | | (735 | ) |
Income before income taxes | $ | 147,383 |
| | $ | 134,639 |
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
Service revenues | | | | | | | |
Temporary and consultant staffing | $ | 1,092,120 | | | $ | 1,084,627 | | | | | |
Permanent placement staffing | 120,489 | | | 131,562 | | | | | |
Risk consulting and internal audit services | 294,082 | | | 252,341 | | | | | |
| $ | 1,506,691 | | | $ | 1,468,530 | | | | | |
Operating income | | | | | | | |
Temporary and consultant staffing | $ | 93,764 | | | $ | 106,018 | | | | | |
Permanent placement staffing | 10,911 | | | 21,557 | | | | | |
Risk consulting and internal audit services | 26,469 | | | 18,654 | | | | | |
| 131,144 | | | 146,229 | | | | | |
Amortization of intangible assets | 338 | | | 342 | | | | | |
Interest income, net | (957) | | | (1,496) | | | | | |
Income before income taxes | $ | 131,763 | | | $ | 147,383 | | | | | |
Note L—M—Subsequent Events
On May 2, 2019,April 30, 2020, the Company announced the following:
|
| | | | |
Quarterly dividend per share | $.31.34 |
Declaration date | May 2, 2019April 30, 2020
|
Record date | May 24, 201926, 2020 |
Payment date | June 14, 201915, 2020 |
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain information contained in Management’s Discussion and Analysis and in other parts of this report may be deemed forward-looking statements regarding events and financial trends that may affect the Company’s future operating results or financial positions. These statements may be identified by words such as “estimate”, “forecast”, “project”, “plan”, “intend”, “believe”, “expect”, “anticipate”, or variations or negatives thereof or by similar or comparable words or phrases. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. These risks and uncertainties include, but are not limited to, the following: changes to or new interpretations of U.S. or international tax regulations, the global financial and economic situation; the duration and impact of the COVID-19 pandemic and efforts to mitigate its spread; changes in levels of unemployment and other economic conditions in the United States or foreign countries where the Company does business, or in particular regions or industries; reduction in the supply of candidates for temporary employment or the Company’s ability to attract candidates; the entry of new competitors into the marketplace or expansion by existing competitors; the ability of the Company to maintain existing client relationships and attract new clients in the context of changing economic or competitive conditions; the impact of competitive pressures, including any change in the demand for the Company’s services, on the Company’s ability to maintain its margins; the possibility of the Company incurring liability for its activities, including the activities of its temporary employees,engagement professionals, or for events impacting its temporary employeesengagement professionals on clients’ premises; the possibility that adverse publicity could impact the Company’s ability to attract and retain clients and candidates; the success of the Company in attracting, training, and retaining qualified management personnel and other staff employees;employees and in managing the recently announced leadership transition; the Company’s ability to comply with governmental regulations affecting personnel services businesses in particular or employer/employee relationships in general; whether there will be ongoing demand for Sarbanes-Oxley or other regulatory compliance services; the Company’s reliance on short-term contracts for a significant percentage of its business; litigation relating to prior or current transactions or activities, including litigation that may be disclosed from time to time in the Company’s Securities and Exchange Commission (“SEC”) filings; the ability of the Company to manage its international operations and comply with foreign laws and regulations; the impact of fluctuations in foreign currency exchange rates; the possibility that the additional costs the Company will incur as a result of health care reform legislation may adversely affect the Company’s profit margins or the demand for the Company’s services; the possibility that the Company’s computer and communications hardware and software systems could be damaged or their service interrupted;interrupted or the Company could experience a cybersecurity breach; and the possibility that the Company may fail to maintain adequate financial and management controls and as a result suffer errors in its financial reporting. Additionally, with respect to Protiviti, other risks and uncertainties include the fact that future success will depend on its ability to retain employees and attract clients; there can be no assurance that there will be ongoing demand for Sarbanes-Oxley or other regulatory compliance services; failure to produce projected revenues could adversely affect financial results; and there is the possibility of involvement in litigation relating to prior or current transactions or activities. Because long-term contracts are not a significant part of the Company’s business, future results cannot be reliably predicted by considering past trends or extrapolating past results.
Executive Overview
The global outbreak of the coronavirus disease 2019 (“COVID-19”) was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020 and has negatively affected the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place”. The Company has been working to ensure the health and welfare of its employees while maintaining its service commitments to customers. As we navigate through this crisis, preserving the long-term intrinsic value of the Company is our guiding principle. Given the magnitude of the COVID 19 impact on the Company’s business, we fully understand that we must also adjust the Company’s cost structure. The extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain and cannot be predicted.
Demand for the Company’s temporary and consulting staffing, permanent placement staffing, and risk consulting and internal audit services is largely dependent upon general economic and labor trends both domestically and abroad. Correspondingly, financial results for the first quarter of 2019 were positively impacted by an improving global economy.2020, specifically the second half of March 2020, began to reflect the COVID-19 impact on the Company’s business, particularly its staffing operations. During the first quarter of 2019,2020, net service revenues were $1.47$1.51 billion, an increase of 5%3% from the prior year. Net income increased 14% to $110for the quarter was $90 million and diluted net income per share increased 19% to $.93. Persistent tight labor markets globally continue to result in heightened demand for our professionalwas $.79. Temporary and consultant staffing services. All three of the Company's reportable segments experienced solid revenue growth, led byand risk consulting and internal audit services which increased 22% forhad modest growth, slightly offset by a decline in permanent placement staffing during the first quarter of 20192020, compared to the first quarter of 2018.2019. The Company’s staffing clients, most of whom are small and midsize businesses, are feeling the crisis, and the downstream effect is a much tougher business climate for the Company. Demand for Protiviti’s services was broad-based
We believe that the Company is well positioned in the current macroeconomic environment.
across its diversified service offerings, including internal audit, technology consulting and regulatory compliance consulting. Protiviti continues to nurture and grow a loyal client base.
The United States economic backdrop throughoutas we ended the first quarter of 20192020 was conducive to growth for the Companyone of slowdown and uncertainty as real gross domestic product (“GDP”) grew 3.2%decreased 4.8%, while the unemployment rate declinedincreased from 3.9%3.5% in December 20182019 to 3.8%4.4% at the end of the first quarter of 2019. In the United States, the number of job openings has exceeded the number of hires since February 2015, creating competition for skilled talent that increases the Company's value to clients. The U.S. labor market remains robust, with significant demand due to talent shortages across our professional disciplines. The number of temporary workers as a percentage of the overall U.S. workforce remains near an all-time high, a sign employers are building flexible staffing options into their human resource plans with increasing frequency.
Protiviti continues to see strong demand for its consulting and internal audit solutions. Protiviti has expanded its service offerings and continues to nurture and grow a loyal client base.2020.
We monitor various economic indicators and business trends in all of the countries in which we operate to anticipate demand for the Company’s services. We evaluate these trends to determine the appropriate level of investment, including
personnel, which will best position the Company for success in the current and future global macroeconomic environment. The Company’s investments in headcount are typically structured to proactively support and align with expected revenue growth trends. As such, during the first quarter of 2019, we added headcount in our temporary and consultant staffing, permanent placement staffing, and risk consulting and internal audit services compared to prior year-end levels.
We have limited visibility into future revenues not only due to the dependence on macroeconomic conditions noted above, but also because of the relatively short duration of the Company’s client engagements. Accordingly, we typically assess headcount and other investments on at least a quarterly basis. That said, based on current trendsAs such, during the first quarter and conditions, we expect headcount levels for our full-time staff to be modestly higher for each of our reporting segments throughearly into the second quarter of 2019.2020, we took actions to reduce operating costs including laying off the Company’s less experienced and lower performing staff. Impacted corporate staff were furloughed with paid benefits, awaiting a return to higher activity levels.
Capital expenditures, including $4$10 million for cloud computing arrangements, for the three months ended March 31, 2019,2020, totaled $17$25 million, approximately 57%62% of which represented investments in software initiatives and technology infrastructure, both of which are important to the Company’s sustainability and future growth opportunities. Capital expenditures for cloud computing arrangements are included in cash flows from operating activities on the Company’s Condensed Consolidated Statements of Cash Flows. Capital expenditures also included amounts spent on tenant improvements and furniture and equipment in the Company’s leased offices. We currently expect that 20192020 capital expenditures will range from $60$65 million to $70$75 million, of which $35 million to $45 million relates to software initiatives and technology infrastructure, including capitalized costs related to implementation of cloud computing arrangements.
Critical Accounting Policies and Estimates
The Company’s most critical accounting policies and estimates are those that involve subjective decisions or assessments and are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019. There were no material changes to the Company'sCompany’s critical accounting policies or estimates for the three months ended March 31, 2019.2020.
Recent Accounting Pronouncements
See Note B—“New Accounting Pronouncements” to the Company’s Condensed Consolidated Financial Statements included under Part I—Item 1 of this report.
Results of Operations
Demand for the Company’s temporary and consulting staffing, permanent placement staffing, and risk consulting and internal audit services is largely dependent upon general economic and labor market conditions both domestically and abroad. Correspondingly, all three of the Company’s reportable segments for the quarter ended March 31, 2019, were positively impacted by an improving global economy. Because of the inherent difficulty in predicting economic trends and the absence of material long-term contracts in any of the Company'sCompany’s business units, future demand for the Company’s services cannot be forecast with certainty. The Company’s investments in technology have allowed its internal staff to remain fully functional during this pandemic. We believe the Company is well positioned to meet the demand of our customers.
Temporary and consultant staffing and risk consulting and internal audit services had modest growth, slightly offset by a decline in permanent placement staffing during the current global macroeconomic environment.first quarter. Robert Half Technology and Robert Half Management Resources divisions turned in solid results during the first quarter. Protiviti had a strong quarter, posting double-digit, year-on-year revenue gains for the eighth consecutive quarter.
The Company’s temporary and permanent placement staffing business has 325327 offices in 42 states, the District of Columbia and 17 foreign countries, while Protiviti has 62 offices in 23 states and 11 foreign countries.
Non-GAAP Financial Measures
The financial results of the Company are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the SEC. To help readers understand the Company’s financial performance, the Company supplements its GAAP financial results with revenue growth rates derived from non-GAAP revenue amounts.
Variations in the Company’s financial results include the impact of changes in foreign currency exchange rates and billing days, and certain intercompany adjustments.days. The Company provides “as adjusted” revenue growth calculations to remove the impact of these items. These calculations show the year-over-year revenue growth rates for the Company’s reportable segments on both a reported basis and also on an as adjusted basis for global, U.S. and international operations. The Company has provided this data because management believes it better reflectsfocuses on the Company’s actual revenue growth rates attributable to operating activities and aids in evaluating revenue trends over time. The Company expresses year-over-year revenue changes as calculated percentages using the same number of billing days and constant currency exchange rates, and certain intercompany adjustments.
rates.
In order to calculate constant currency revenue growth rates, as reported amounts are retranslated using foreign currency exchange rates from the prior year’s comparable period. Management then calculates a global, weighted-average number of billing days for each reporting period based upon input from all countries and all lines of business. In order to remove the fluctuations caused by comparable periods having different billing days, the Company calculates same billing day revenue growth rates by dividing each comparative period’s reported revenues by the calculated number of billing days for that period to arrive at a per billing day amount. Same billing day growth rates are then calculated based upon the per billing day amounts. In order to remove the fluctuations caused by the impact of certain intercompany adjustments, applicable comparative period revenues are reclassified to conform with the current period presentation. The term “as adjusted” means that the impact of different billing days and constant currency fluctuations and certain intercompany adjustments are removed from the revenue growth rate calculation.
The non-GAAP financial measures provided herein may not provide information that is directly comparable to that provided by other companies in the Company’s industry, as other companies may calculate such financial results differently. The Company’s non-GAAP financial measures are not measurements of financial performance under GAAP, and should not be considered as alternatives to actual revenue growth derived from revenue amounts presented in accordance with GAAP. The Company does not consider these non-GAAP financial measures to be a substitute for, or superior to, the information provided by GAAP financial results. A reconciliation of the as adjusted revenue growth rates to the reported revenue growth rates is provided herein.
Refer to Item 3. “Quantitative and Qualitative Disclosures About Market Risk” for further discussion of the impact of foreign currency exchange rates on the Company’s results of operations and financial condition.
Three Months Ended March 31, 20192020 and 20182019
Revenues. The Company’s revenues were $1.51 billion for the three months ended March 31, 2020, increasing by 2.6% compared to $1.47 billion for the three months ended March 31, 2019, increasing by 5.2% compared to $1.40 billion2019. Revenues from foreign operations represented 22% of total revenues for the three months ended March 31, 2018. Revenues2020, down from foreign operations represented 24% of total revenues for both the three months ended March 31, 2019 and 2018.2019. The Company analyzes its revenues for three reportable segments: temporary and consultant staffing, permanent placement staffing, and risk consulting and internal audit services. Revenue growth was strongest domestically. For the three months ended March 31, 2019, revenues for all three of the Company's reportable segments were up,2020, risk consulting and internal audit services continued to post strong growth rates, compared to the same period in 2018.2019. Contributing factors for each reportable segment are discussed below in further detail.
Temporary and consultant staffing revenues were $1.09 billion for the three months ended March 31, 2020, increasing by 0.7% compared to revenues of $1.08 billion for the three months ended March 31, 2019, increasing by 1.7% compared to revenues of $1.07 billion for the three months ended March 31, 2018.2019. Key drivers of temporary and consultant staffing revenues include average hourly bill rates and the number of hours worked by the Company’s temporary employeesengagement professionals on client engagements. On an as adjusted basis, temporary and consultant staffing revenues increased 6.2%were essentially flat for the first quarter of 20192020 compared to the first quarter of 2018, due primarily to a 5.7% increase in average bill rates.2019. In the U.S., revenues in the first quarter of 20192020 increased 3.4%2.0% on an as reported basis and 5.1%0.5% on an as adjusted basis, compared to the first quarter of 2018.2019. For the Company’s international operations, 20192020 first quarter revenues decreased 3.7%3.8% on an as reported basis and increased 10.2%decreased 1.9% on an as adjusted basis, compared to the first quarter of 2018.2019.
Permanent placement staffing revenues were $120 million for the three months ended March 31, 2020, decreasing by 8.4% compared to revenues of $132 million for the three months ended March 31, 2019, increasing by 8.4% compared to revenues of $121 million for the three months ended March 31, 2018.2019. Key drivers of permanent placement staffing revenues consist of the number of candidate placements and average fees earned per placement. The second half of March 2020, began to reflect the COVID-19 impact on permanent placement staffing operations. On an as adjusted basis,
permanent placement staffing revenues increased 12.3%decreased 9.0% for the first quarter of 20192020 compared to the first quarter of 2018,2019, driven by increasesa decrease in number of placements, andpartially offset by an increase in average fees earned per placement. In the U.S., revenues for the first quarter of 2019 increased 10.0%2020 decreased 4.9% on an as reported basis and 11.8%6.3% on an as adjusted basis, compared to the first quarter of 2018.2019. For the Company’s international operations, revenues for the first quarter of 2019 increased 4.9%2020 decreased 15.9% on an as reported basis and 12.8%decreased 14.6% on an as adjusted basis, compared to the first quarter of 2018. Historically, demand2019. Demand for permanent placement staffing is even more sensitive to economic and labor market conditions than demand for temporary and consultant staffing and this is expected to continue.as demonstrated by the results in the current economic environment.
Risk consulting and internal audit services revenues were $294 million for the three months ended March 31, 2020, increasing by 16.5% compared to revenues of $252 million for the three months ended March 31, 2019, increasing by 21.5% compared to revenues of $208 million for the three months ended March 31, 2018.2019. Key drivers of risk consulting and internal audit services revenues are the billable hours worked by consultants on client engagements and average hourly bill rates. On an as adjusted basis, risk consulting and internal audit services revenues increased 17.3%15.5% for the first quarter of 20192020 compared to the first quarter of 2018,2019, primarily due primarily to an increase in billable hours. In the U.S., revenues in the first quarter of 20192020 increased 14.9%21.3% on an as reported basis and 16.8%19.5% on an as adjusted basis, compared to the first quarter of
2018. 2019. Contributing to the U.S. increase were services related to business performance improvement, technology consulting, and internal audit and financial advisory practice areas. The Company’s risk consulting and internal audit services revenues from international operations increased 48.8%1.3% on an as reported basis and 18.9%2.4% on an as adjusted basis for the first quarter of 20192020 compared to the first quarter of 2018.2019.
A reconciliation of the non-GAAP year-over-year revenue growth rates to the as reported year-over-year revenue growth rates for the three months ended March 31, 2019,2020, is presented in the following table:
| | | Global | | United States | | International | | Global | | United States | | International |
Temporary and consultant staffing | | | | | | Temporary and consultant staffing | | | | | |
As Reported | 1.7 | % | | 3.4 | % | | -3.7 | % | As Reported | 0.7 | % | | 2.0 | % | | -3.8 | % |
Billing Days Impact | 1.4 | % | | 1.7 | % | | 0.4 | % | Billing Days Impact | -1.4 | % | | -1.5 | % | | -1.4 | % |
Currency Impact | 1.8 | % | | — |
| | 8.1 | % | Currency Impact | 0.7 | % | | — | | | 3.3 | % |
Intercompany Adjustments | 1.3 | % | | — |
| | 5.4 | % | |
| As Adjusted | 6.2 | % | | 5.1 | % | | 10.2 | % | As Adjusted | 0.0 | % | | 0.5 | % | | -1.9 | % |
Permanent placement staffing | | | | | | Permanent placement staffing | | | | | |
As Reported | 8.4 | % | | 10.0 | % | | 4.9 | % | As Reported | -8.4 | % | | -4.9 | % | | -15.9 | % |
Billing Days Impact | 1.4 | % | | 1.8 | % | | 0.3 | % | Billing Days Impact | -1.4 | % | | -1.4 | % | | -1.1 | % |
Currency Impact | 2.5 | % | | — |
| | 7.6 | % | Currency Impact | 0.8 | % | | — | | | 2.4 | % |
As Adjusted | 12.3 | % | | 11.8 | % | | 12.8 | % | As Adjusted | -9.0 | % | | -6.3 | % | | -14.6 | % |
Risk consulting and internal audit services | | | | | | Risk consulting and internal audit services | | | | | |
As Reported | 21.5 | % | | 14.9 | % | | 48.8 | % | As Reported | 16.5 | % | | 21.3 | % | | 1.3 | % |
Billing Days Impact | 1.5 | % | | 1.9 | % | | 0.3 | % | Billing Days Impact | -1.6 | % | | -1.8 | % | | -1.4 | % |
Currency Impact | 1.7 | % | | — |
| | 7.1 | % | Currency Impact | 0.6 | % | | — | | | 2.5 | % |
Intercompany Adjustments | -7.4 | % | | — |
| | -37.3 | % | |
| As Adjusted | 17.3 | % | | 16.8 | % | | 18.9 | % | As Adjusted | 15.5 | % | | 19.5 | % | | 2.4 | % |
Gross Margin. The Company’s gross margin dollars were $611 million for the three months ended March 31, 2020, increasing by 0.5% compared to $608 million for the three months ended March 31, 2019, increasing by 6.2% compared to $572 million for the three months ended March 31, 2018.2019. Contributing factors for each reportable segment are discussed below in further detail.
Gross margin dollars for temporary and consultant staffing represent revenues less direct costs of services, which consist of payroll, payroll taxes and benefit costs for temporary employees,engagement professionals, and reimbursable expenses. The key drivers of gross margin are: i) pay-bill spreads, which represent the differential between wages paid to temporary employeesengagement professionals and amounts billed to clients; ii) fringe costs, which are primarily composed of payroll taxes and benefit costs for temporary and consultant staffing employees; and iii) conversion revenues, which are earned when a temporary position converts to a permanent position with the Company'sCompany’s client. Gross margin dollars for the Company’s temporary and consultant staffing division were $413 million for the three months ended of both March 31, 2019, increasing 4.1% compared to $396 million for the three months ended2020 and March 31, 2018.2019. As a percentage of revenues, gross margin for temporary and consultant staffing was 37.8% in the first quarter of 2020, down slightly from 38.0% in the first quarter of 2019, up from 37.2% in the first quarter of 2018. This year-over-year improvement in gross margin percentage was primarily attributable to higher pay-bill spreads and conversion revenues.2019.
Gross margin dollars for permanent placement staffing represent revenues less reimbursable expenses. Gross margin dollars for the Company’s permanent placement staffing division were $120 million for the three months ended March 31, 2020, decreasing 8.4% from $131 million for the three months ended March 31, 2019, increasing 8.4% from $121 million for the three months ended March 31, 2018.2019. Because reimbursable expenses for
permanent placement staffing are de minimis, gross margin dollars are substantially explained by revenues previously discussed.
Gross margin dollars for risk consulting and internal audit services represent revenues less direct costs of services, which consist primarily of professional staff payroll, payroll taxes, benefit costs and reimbursable expenses. The primary drivers of risk consulting and internal audit services gross margin are: i) the relative composition of and number of professional staff and their respective pay and bill rates; and ii) staff utilization, which is the relationship of time spent on client engagements in proportion to the total time available for the Company’s risk consulting and internal audit services staff. Gross margin dollars for the Company’s risk consulting and internal audit division were $78 million for the three months ended March 31, 2020, increasing 21.4% compared to $64 million for the three months ended March 31, 2019,
increasing 16.3% compared to $55 million for the three months ended March 31, 2018.2019. As a percentage of revenues, gross margin for risk consulting and internal audit services in the first quarter of 20192020 was 25.3%26.3%, downup from 26.4%25.3% in the first quarter of 2018.2019. The year-over-year improvement in gross margin decline inpercentage was due primarily to improved staff utilization and the first quarterrelative composition of 2019 compared to the first quarter of 2018 was primarily attributable to increases in pay rates for professional staff and headcount.staff.
Selling, General and Administrative Expenses. The Company’s selling, general and administrative expenses consist primarily of staff compensation, advertising, variable overhead, depreciation, and occupancy costs. The Company’s selling, general and administrative expenses were $480 million for the three months ended March 31, 2020, increasing 3.9% from $461 million for the three months ended March 31, 2019, increasing 5.3% from $438 million for the three months ended March 31, 2018.2019. As a percentage of revenues, the Company’s selling, general and administrative expenses were 31.4%31.8% for the first quarter of both 2019 and 2018.2020, up from 31.4% in the first quarter of 2019. Contributing factors for each reportable segment are discussed below in further detail.
Selling, general and administrative expenses for the Company’s temporary and consultant staffing division were $319 million for the three months ended March 31, 2020, increasing 4.2% from $306 million for the three months ended March 31, 2019, increasing 2.3% from $299 million for the three months ended March 31, 2018.2019. As a percentage of revenues, selling, general and administrative expenses for temporary and consultant staffing were 29.2% in the first quarter of 2020, up from 28.3% in the first quarter of 2019 up from 28.1% in the first quarter 2018 due primarily to increasesnegative leverage as revenues decreased in staff compensation costs.response to the COVID-19 pandemic.
Selling, general and administrative expenses for the Company’s permanent placement staffing division were $110 million for the three months ended of both March 31, 2019, increasing by 11.1% compared to $99 million for the three months ended2020 and March 31, 2018.2019. As a percentage of revenues, selling, general and administrative expenses for permanent placement staffing were 90.8% in the first quarter of 2020, up from 83.4% in the first quarter of 2019 up from 81.4% in the first quarter of 2018 due primarily to increasesnegative leverage as revenues decreased in staff compensation costs.response to the COVID-19 pandemic.
Selling, general and administrative expenses for the Company’s risk consulting and internal audit services division were $51 million for the three months ended March 31, 2020, increasing by 12.9% compared to $45 million for the three months ended March 31, 2019, increasing by 14.0% compared to $40 million for the three months ended March 31, 2018.2019. As a percentage of revenues, selling, general and administrative expenses for risk consulting and internal audit services were 17.3% in the first quarter of 2020, down from 17.9% in the first quarter of 2019 down from 19.1% in the first quarter of 2018 due primarily to positive operating leverage resulting from increased revenues.
Operating Income. The Company’s total operating income was $131 million, or 8.7% of revenues, for the three months ended March 31, 2020, down from $146 million, or 10.0% of revenues, for the three months ended March 31, 2019, up from $134 million, or 9.6% of revenues, for the three months ended March 31, 2018.2019. For the Company’s temporary and consultant staffing division, operating income was $94 million, or 8.6% of applicable revenues, down from $106 million, or 9.8% of applicable revenues, up from $97 million, or 9.1% of applicable revenues, in the first quarter of 2018.2019. For the Company’s permanent placement staffing division, operating income was $21$11 million, or 16.4%9.1% of applicable revenues, compared to an operating income of $22$21 million, or 18.4%16.4% of applicable revenues, in the first quarter of 2018.2019. For the Company’s risk consulting and internal audit services division, operating income was $19$26 million, or 7.4%9.0% of applicable revenues, compared to an operating income of $15$19 million, or 7.4% of applicable revenues, in the first quarter of 2018.2019.
Provision for income taxes. The provision for income taxes was 25.5%31.8% and 28.6%25.5% for the three months ended March 31, 20192020 and 2018,2019, respectively. The lowerhigher tax rate is primarily due to the recognition of tax benefits related to restricted stock vesting in the first quarter of 2019, and2020 is primarily due to a charge relatedlarger percentage impact that permanent non-deductible tax items have on lower year-over-year income before taxes. Also contributing to the Tax Cuts and Jobs Act transitionincrease is a lower tax in the firstbenefit this quarter of 2018 that did not repeat in the first quarter of 2019.compared to last year for restricted stock vesting.
Liquidity and Capital Resources
The change in the Company’s liquidity during the three months ended March 31, 20192020 and 2018,2019, is primarily the net effect of funds generated by operations and the funds used for capital expenditures, payment to trusts for employee deferred compensation plans, repurchases of common stock, and payment of dividends.
Cash and cash equivalents were $270$250 million and $292$270 million at March 31, 2020 and 2019, respectively. Operating activities provided $125 million during the three months ended March 31, 2020, offset by $28 million and 2018,$110 million of net cash used in investing activities and financing activities, respectively. Operating activities provided $127 million during the three months ended March 31, 2019, which was offset by $23 million and $110 million of net cash used in investing activities and financing activities, respectively.
Operating activities—Net cash provided by operating activities provided $116 million duringfor the three months ended March 31, 2018, which2020, was composed of net income of $90 million adjusted upward for non-cash items of $50 million, offset by $19 million and $103 million of net cash used in investing activities and financing activities, respectively.
Operating activities—working capital of $15 million. Net cash provided by operating activities for the three months ended March 31, 2019, was composed of net income of $110 million adjusted upward for non-cash items of $35 million, partially offset by net cash used in
changes in working capital of $18 million. Net cash provided by operating activities for the three months ended March 31, 2018, was composed of net income of $96 million, adjusted upward for non-cash items of $31 million, partially offset by net cash used in changes in working capital of $11$18 million.
Investing activities—Net cashCash used in investing activities for the three months ended March 31, 2020, was $28 million. This was composed of capital expenditures of $14 million and net payments for employee deferred compensation plans of $14 million. Cash used in investing activities for the three months ended March 31, 2019, was $23 million. This was composed of capital expenditures of $13 million and deposits to trustsnet payments for employee deferred compensation plans of $10 million. Net cash
Financing activities—Cash used in investingfinancing activities for the three months ended March 31, 2018,2020, was $19$110 million. This was primarily composedincluded repurchases of capital expenditures of $8$70 million in common stock and deposits$40 million in dividends paid to trusts for employee deferred compensation plans of $11 million.
Financing activities—Net cashstockholders. Cash used in financing activities for the three months ended March 31, 2019, was $110 million. This primarily included repurchases of $72 million in common stock and $38 million in cash dividends paid to stockholders. Net cash used in financing activities for the three months ended March 31, 2018, was $103 million. This primarily included repurchases of $68 million in common stock and $35 million in cash dividends to stockholders.
As of March 31, 2019,2020, the Company is authorized to repurchase, from time to time, up to 5.91.5 million additional shares of the Company’s common stock on the open market or in privately negotiated transactions, depending on market conditions. During the three months ended March 31, 20192020 and 2018,2019, the Company repurchased 0.81.0 million shares, at a cost of $51 million, and 1.10.8 million shares, of common stock, at a cost of $60$52 million, on the open market, respectively. Additional stock repurchases were made in connection with employee stock plans, whereby Company shares were tendered by employees for the payment of exercise price and applicable statutory withholding taxes. During the three months ended March 31, 20192020 and 2018,2019, such repurchases totaled 0.3 million shares, at a cost of $12 million, and 0.2 million shares, at a cost of $17 million, and 0.1 million shares, at a cost of $8 million, respectively. Repurchases of shares have been funded with cash generated from operations. Future repurchases of shares may be made after considering market conditions, cash flow from operations, and other relevant factors.
The Company’s working capital at March 31, 2019,2020, included $270$250 million in cash and cash equivalents.equivalents and $854 million in accounts receivable, both of which will be a significant source of ongoing liquidity and financial resilience. The Company expects that internally generated cash will be sufficient to support the working capital needs of the Company, the Company’s fixed payments, dividends, and other obligations on both a short-term and long-term basis.
We have limited visibility into future cash flows as the Company’s revenues are dependent on macroeconomic conditions, including COVID-19. In March 2019,order to mitigate expected declines in revenue, during the Company enteredfirst quarter and early into an uncommitted credit facility (the “Credit Agreement”)the second quarter of up2020, we took actions to $100 million. The Company may request borrowings underreduce selling, general and administrative costs by approximately 30%, however, given the Credit Agreement thattiming of these reductions, reported results for the second quarter are denominated in U.S. dollars and each request is subjectexpected to approval by the lender. The Company must repay the aggregate principal amountreflect savings of loans outstanding under the Credit Agreement on the termination date of each borrowing. Borrowings under the Credit Agreement will bear interest in accordance with the terms of the borrowing, which typically will be calculated accordingapproximately 25%, compared to the London Interbank Offered Rate plus an applicable margin. There were no borrowings underfirst quarter of 2020. These actions have been focused on eliminating all non-essential costs such as travel and events, as well as laying off the Credit Agreement as of March 31, 2019. The Company intends to renew this facility priorCompany’s less experienced and lower performing staff. In addition, the Company’s variable direct costs related to its March 19, 2020 expiration.temporary and consultant staffing business will largely fluctuate in relation to its revenues.
On May 2, 2019,April 30, 2020, the Company announced a quarterly dividend of $.31$.34 per share to be paid to all shareholders of record as of May 24, 2019.26, 2020. The dividend will be paid on June 14, 2019.15, 2020.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
In March 2020, the World Health Organization announced that a novel strain of coronavirus (“COVID-19”) had become pandemic. COVID-19 has emerged as a serious threat to the health and economic well-being of our clients, employment candidates, employees, and the overall economy. The COVID-19 pandemic is having a significant impact on global economies as a result of stay-at-home orders and business closures to stop the spread of the virus. We are continuing to monitor the spread of COVID-19 and related risks, including risks related to efforts to mitigate the disease’s spread, although the rapid development and fluidity of the situation precludes any prediction as to its ultimate impact on us. However, if the spread and related business restrictions continue, such impact could grow and our business, financial condition, results of operations and cash flows could be materially adversely affected.
Because a portion of the Company’s net revenues are derived from its operations outside the U.S. and are denominated in local currencies, the Company is exposed to the impact of foreign currency fluctuations. The Company’s exposure to foreign currency exchange rates relates primarily to the Company'sCompany’s foreign subsidiaries. Exchange rates impact the U.S. dollar value of the Company’s reported revenues, expenses, earnings, assets and liabilities.
For the three months ended March 31, 2019,2020, approximately 24%22% of the Company’s revenues were generated outside of the United States. These operations transact business in their functional currency, which is the same as their local currency. As a result, fluctuations in the value of foreign currencies against the U.S. dollar, particularly the Canadian dollar, British pound, Euro, and Australian dollar, have an impact on the Company’s reported results. Under GAAP, revenues and expenses denominated in foreign currencies are translated into U.S. dollars at the monthly average exchange rates prevailing during the period. Consequently, as the value of the U.S. dollar changes relative to the currencies of the Company’s non-U.S. markets, the Company’s reported results vary.
During the first three months of 2019,2020, the U.S. dollar fluctuated, but generally strengthened, against the primary currencies in which the Company conducts business, compared to one year ago. Currency exchange rates had the effect of decreasing reported net service revenues by $26$10.5 million, or 1.9%0.7%, in the first quarter of 20192020 compared to the same period one year ago. The general strengthening of the U.S. dollar also affected the reported level of expenses incurred in ourthe Company’s foreign
operations. Because substantially all ourthe Company’s foreign operations generated revenues and incurred expenses within the same country and currency, the effect of lower reported revenues is largely offset by the decrease in reported operating expenses. Reported net lossincome was $1$0.4 million, or 1.2%0.3%, lower in the first quarter of 20192020 compared to the same period one year ago due to the effect of currency exchange rates.
For the one month ended April 30, 2019,2020, the U.S. dollar has strengthenedweakened against the Canadian dollar, Euro, Australian dollar, and British pound but slightly strengthened against the Euro since March 31, 2019.2020. If currency exchange rates were to remain at April 20192020 levels throughout the remainder of 2019,2020, the currency impact on the Company’s full-year reported revenues and operating expenses would be impacted unfavorably, mostly offset by a favorable impact to operating expensesnearly flat compared to full year 20182019 results. Should current trends continue, the impact to reported net income would be immaterial.
Fluctuations in currency exchange rates impact the U.S. dollar amount of the Company’s stockholders’ equity. The assets and liabilities of the Company’s non-U.S. subsidiaries are translated into U.S. dollars at the exchange rates in effect at period end. The resulting translation adjustments are recorded in stockholders’ equity as a component of accumulated other comprehensive income. Although currency fluctuations impact the Company’s reported results and shareholders’ equity, such fluctuations generally do not affect cash flow or result in actual economic gains or losses. The Company generally has few cross-border transfers of funds, except for transfers to the U.S. for payment of intercompany loans, working capital loans made between the U.S. and the Company’s foreign subsidiaries, and dividends from the Company’s foreign subsidiaries.
ITEM 4. Controls and Procedures
Management, including the Company’s ChairmanPresident and Chief Executive Officer and the Executive Vice ChairmanPresident and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the ChairmanPresident and Chief Executive Officer and the Executive Vice ChairmanPresident and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
During the quarter ended March 31, 2019, the Company implemented controls to ensure it adequately evaluated its contracts and properly assessed the impact of the new lease accounting standard on its financial statements to facilitate adoption of the standard on January 1, 2019. The Company further implemented new lease administration software to support accounting for leases and have integrated the new software functionality with its processes, systems, and controls. Except as otherwise described, there have been no other changes to the Company’s internal controls over financial reporting identified in connection with the evaluation required by Rule 13a-15 of the Securities Exchange Act of 1934 that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. Legal Proceedings
There have been no material developments with regard to any of the legal proceedings previously disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018.2019.
ITEM 1A. Risk Factors
ThereThe outbreak of a novel coronavirus disease ("COVID-19") has impacted demand for our services, disrupted our operations and may continue to do so.
The outbreak of a novel strain of coronavirus (“COVID-19”) has emerged as a serious threat to the health and economic well-being of our clients, employment candidates, employees, and the overall economy. In March 2020, the World Health Organization announced that infections of COVID-19 had become pandemic, and the President of the United States announced a National Emergency relating to the disease. Since the beginning of the outbreak, many counties, states and countries have taken dramatic action including, without limitation, ordering all non-essential workers to stay home, mandating the closure of schools and non-essential business premises and imposing isolation measures on large portions of the population. These measures, while intended to protect human life, have had serious adverse impacts on domestic and foreign economies and the severity and the duration of these is highly uncertain. The effectiveness of economic stabilization efforts, including proposed government payments to affected citizens and industries, is also uncertain and many economists are predicting extended local or global recessions.
Actions intended to mitigate the spread of COVID-19 have caused a dramatic increase in unemployment in the United States and in certain other regions in which the Company operates and created significant uncertainty and volatility in our business. Mandated business closures and slowing economic activity have reduced use of temporary workers and reduced businesses’ recruitment of new employees resulting in less demand for our services, which may materially harm our business and financial condition. Many of our clients have or may be required to or choose to voluntarily close their worksites and we have already witnessed a significant drop in the demand of our services by clients, particularly our staffing clients, most of whom are small and midsize businesses that are feeling the crisis. Deterioration in economic conditions or the financial or credit markets could also have an adverse impact on our clients’ ability to pay for services we have already provided. Furthermore, the spread of COVID-19 may adversely impact our ability to recruit sufficient candidates for staffing in certain industries or regions in which we operate. See “Item 1A. Risk Factors--Risks Related to the Company’s Operations--The Company may be unable to find sufficient candidates for its staffing business” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”).
We have transitioned a significant number of our corporate employee population to a remote work environment in an effort to mitigate the spread of COVID-19. This transition to remote working and the spread of COVID-19 may negatively impact the availability of key personnel necessary to conduct our business and the business and operations of our third-party service providers who perform critical services for our business. This transition to remote working has also increased our vulnerability to risks related to our computer and communications hardware and software systems and exacerbated certain related risks, including risks of phishing and other cybersecurity attacks. See “Item 1A. Risk Factors--Risks Related to the Company’s Information Technology, Cybersecurity and Data Protection” in the Annual Report.
Furthermore, as the employer of record for some individuals who have been placed in client workplaces where exposure to COVID-19 is possible, we may be subject to risk of liability should such employees allege their workplaces failed to adequately mitigate the risk of exposure to COVID-19. In addition, in order to facilitate remote working arrangements, some of our temporary workers are accessing client workspaces from their personal devices through cloud-based systems, which could increase cybersecurity risks to our clients for which they may hold us liable. “Item 1A. Risk Factors--Risks Related to the Company’s Operations--The Company may incur potential liability to employees and clients” in the Annual Report.
We are continuing to monitor the spread of COVID-19 and related risks, including risks related to efforts to mitigate the disease’s spread, although the rapid development and fluidity of the situation precludes any prediction as to its ultimate impact on us. However, if the spread and related business restrictions continue, such impact could grow and our business, financial condition, results of operations and cash flows could be materially adversely affected. A prolonged widespread pandemic, or the perception that such a pandemic may occur, could adversely impact global economies and financial markets resulting in an economic downturn that would likely impact demand for our services. See “Item 1A. Risk Factors-- Risks Related to the Company’s Business Environment --Any reduction in global economic activity may harm the Company’s business and financial condition” in the Annual Report. Any of the above factors, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could materially increase our costs, severely negatively impact our revenue, net
income, and other results of operations could impact our liquidity position. The duration of any such impacts cannot be predicted and such impacts may also have the effect of heightening many of the other risks previously disclosed in the Annual Report under the heading “Item 1A. Risk Factors”.
Except for the above modifications and additions to our risk factors regarding COVID-19, there have not been any material changes with regard to the risk factors previously disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018.Annual Report.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
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| Total Number of Shares Purchased | | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Maximum Number of Shares that May Yet Be Purchased Under Publicly Announced Plans (c) |
January 1, 2020 to January 31, 2020 | — | | | | $ | — | | | — | | | 2,453,766 | |
February 1, 2020 to February 29, 2020 | 745,802 | | (a) | | $ | 55.72 | | | 675,043 | | | 1,778,723 | |
March 1, 2020 to March 31, 2020 | 517,614 | | (b) | | $ | 42.39 | | | 308,068 | | | 1,470,655 | |
Total January 1, 2020 to March 31, 2020 | 1,263,416 | | | | | | 983,111 | | | |
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| Total Number of Shares Purchased | | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Maximum Number of Shares that May Yet Be Purchased Under Publicly Announced Plans (d) |
January 1, 2019 to January 31, 2019 | 14,248 |
| (a) | | $ | 64.43 |
| | — |
| | 6,707,039 |
|
February 1, 2019 to February 28, 2019 | 81,459 |
| (b) | | $ | 67.19 |
| | 15,238 |
| | 6,691,801 |
|
March 1, 2019 to March 31, 2019 | 942,348 |
| (c) | | $ | 65.71 |
| | 765,464 |
| | 5,926,337 |
|
Total January 1, 2019 to March 31, 2019 | 1,038,055 |
| | | | | 780,702 |
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(a) | Represents shares repurchased in connection with employee stock plans, whereby Company shares were tendered by employees for the payment of applicable withholding taxes and/or exercise price. |
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(b) | Includes 66,221 shares repurchased in connection with employee stock plans, whereby Company shares were tendered by employees for the payment of applicable withholding taxes and/or exercise price. |
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(c) | Includes 176,884 shares repurchased in connection with employee stock plans, whereby Company shares were tendered by employees for the payment of applicable withholding taxes and/or exercise price. |
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(d) | Commencing in October 1997, the Company's Board of Directors has, at various times, authorized the repurchase, from time to time, of the Company's common stock on the open market or in privately negotiated transactions depending on market conditions. Since plan inception, a total of 118,000,000 shares have been authorized for repurchase of which 112,073,663 shares have been repurchased as of March 31, 2019. |
(a)Includes 70,759 shares repurchased in connection with employee stock plans, whereby Company shares were tendered by employees for the payment of applicable withholding taxes. (b)Includes 209,546 shares repurchased in connection with employee stock plans, whereby Company shares were tendered by employees for the payment of applicable withholding taxes.
(c)Commencing in October 1997, the Company’s Board of Directors has, at various times, authorized the repurchase, from time to time, of the Company’s common stock on the open market or in privately negotiated transactions depending on market conditions. Since plan inception, a total of 118,000,000 shares have been authorized for repurchase of which 116,529,345 shares have been repurchased as of March 31, 2020.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosure
Not applicable.
ITEM 5. Other Information
None.
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3.1 | | |
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3.2 | | Amended and Restated By-Laws, incorporated by reference to Exhibit 3.2 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. |
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101.1 | | |
101.1 | | Part I, Item 1 of this Form 10-Q formatted in Inline XBRL. | |
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104 | | Cover page of this Form 10-Q formatted in Inline XBRL and contained in Exhibit 101. | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| ROBERT HALF INTERNATIONAL INC. (Registrant) |
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| /S/ M. KMichael C. BuckleyEITH WADDELL |
| M. Keith WaddellMichael C. Buckley
Executive Vice Chairman, President and Chief Financial Officer (Principal Financial Officer and duly authorized signatory) |
Date: May 6, 2019
4, 2020