Robert Half - 10-Q quarterly report FY2016 Q2

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016

OR

FOR THE TRANSITION PERIOD FROM                      to                     .

Commission File Number 1-10427

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (Check one):

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of July 31, 2016:

PART I—FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)

(in thousands, except share amounts)

ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share amounts)

ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except per share amounts)

ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

Note A—Summary of Significant Accounting Policies

Note B— New Accounting Pronouncements

guidance was effective for the Company in the first quarter of 2016. The adoption of this guidance did not have a material impact on the Company's financial statements.

with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue

recognition guidance, including industry-specific revenue guidance. The new guidance requires a company to recognize

revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive

in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing and uncertainty

of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and

assets recognized from costs incurred to obtain or fulfill a contract. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The amended guidance also requires additional quantitative and qualitative disclosures. In March 2016, amended guidance was issued to clarify implementation guidance on principal versus agent consideration. In April 2016 an amendment provided clarifications on determining whether a promised license provides a customer with a right to use or a right to access an entity’s intellectual property. In May 2016 an amendment provided narrow scope improvements and practical expedients to reduce the potential diversity, cost and complexity of applying new revenue standard. These amendments, as well as the original guidance, are all effective for annual and interim periods beginning after December 15, 2017. The Company is in the process of evaluating the impact of the adoption of this guidance on its Financial Statements.

Note C—Other Current Assets

Other current assets consisted of the following (in thousands):

Note D—Goodwill

Note E—Property and Equipment, Net

Note F—Accrued Payroll and Benefit Costs

Accrued payroll and benefit costs consisted of the following (in thousands):

    

Included in employee deferred compensation plans is the following (in thousands):

Note G—Commitments and Contingencies

The Company is involved in a number of other lawsuits arising in the ordinary course of business. While management does not expect any of these other matters to have a material adverse effect on the Company’s results of operations, financial position or cash flows, litigation is subject to certain inherent uncertainties.

Legal costs associated with the resolution of claims, lawsuits and other contingencies are expensed as incurred.

Note H— Stockholders' Equity

Repurchases of shares and issuances of cash dividends are applied first to the extent of retained earnings and any remaining amounts are applied to capital surplus.

Note I—Net Income Per Share

Note J—Business Segments

Note K—Subsequent Events

On August 2, 2016, the Company announced the following:

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: the global financial and economic situation; 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, or for events impacting its temporary employees 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; 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 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; 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.

Demand for the Company’s temporary and permanent staffing services and risk consulting and internal audit services is

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

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 trends and conditions, we do expect modest headcount increases in our Accountemps, Robert Half Finance & Accounting and Robert Half Management Resources reporting units throughout the remainder of 2016.

events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with Financial

Accounting Standards Board (“FASB”) authoritative guidance. The Company completed its annual goodwill impairment

The Company follows FASB authoritative guidance utilizing a two-step approach for determining goodwill impairment.

In the first step the Company determines the fair value of each reporting unit utilizing a present value technique derived from a

discounted cash flow methodology. For purposes of this assessment the Company’s reporting units are its lines of business. The

fair value of the reporting unit is then compared to its carrying value. If the fair value of the reporting unit exceeds the carrying

value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. The second step under

the FASB guidance is contingent upon the results of the first step. To the extent a reporting unit’s carrying value exceeds its fair

value, an indication exists that the reporting unit’s goodwill may be impaired and the Company must perform a second, more

detailed impairment assessment. The second step involves allocating the reporting unit’s fair value to its net assets in order to

determine the implied fair value of the reporting unit’s goodwill as of the assessment date. The implied fair value of the

reporting unit’s goodwill is then compared to the carrying amount of goodwill to quantify an impairment charge, if any, as of

the assessment date.

$127.3 million, $26.3 million, $0.0 million, $7.0 million, $0.0 million and $49.5 million, respectively, totaling $210.1 million.

The goodwill impairment assessment is based upon a discounted cash flow analysis. The estimate of future cash flows is

based upon, among other things, a discount rate and certain assumptions about expected future operating performance. The

discount rate for all reporting units was determined by management based on estimates of risk free interest rates, beta and

market risk premiums. The discount rate used was compared to the rate published in various third party research reports, which

indicated that the rate was within a range of reasonableness. The primary assumptions related to future operating performance

include revenue growth rates and profitability levels. In addition, the impairment assessment requires that management make

certain judgments in allocating shared assets and liabilities to the balance sheets of the reporting units. Solely for purposes of

establishing inputs for the fair value calculations described above related to its annual goodwill impairment testing, the

Company made the following assumptions. The Company assumed that year-to-date trends through the date of the most recent

assessment would continue for all reporting units through 2016, using unique assumptions for each reporting unit. In addition,

the Company applied profitability assumptions consistent with each reporting unit’s historical trends at various revenue levels

and, for years 2018 and beyond, used a 5% growth factor. This rate is comparable to the Company’s most recent ten-year annual

compound revenue growth rate. The model used to calculate fair value extends a total of 10 years with a terminal value

calculation at the end of the 10 year period. In its most recent calculation, the Company used a 9.8% discount rate, which is

beta.

In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, the Company applied

hypothetical decreases to the fair values of each reporting unit. The Company determined that hypothetical decreases in fair

value of at least 75% would be required before any reporting unit would have a carrying value in excess of its fair value.

Given the current economic environment and the uncertainties regarding the impact on the Company’s business, there can

be no assurance that the Company’s estimates and assumptions made for purposes of the Company’s goodwill impairment

testing will prove to be accurate predictions of the future. If the Company’s assumptions regarding forecasted revenue or

profitability growth rates of certain reporting units are not achieved, the Company may be required to recognize goodwill

impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would

result or, if it does, whether such charge would be material.

See Note B—“New Accounting Pronouncements” to the Company’s Condensed Consolidated Financial Statements included under Part I—Item 1 of this report.

Demand for the Company’s temporary and permanent placement staffing services and risk consulting and internal audit services is largely dependent upon general economic and labor market conditions both domestically and abroad. All segments of the business contributed to a solid quarter for the Company. Because of the inherent difficulty in predicting economic trends and the absence of material long-term contracts in any of our business units, future demand for the Company’s services cannot be forecasted with certainty.

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. The Company provides “same billing days and constant currency” 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 a same day, constant-currency basis for global, U.S. and international operations. The Company has provided this data because management believes it better reflects the Company’s actual revenue growth rates 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.

The term “same billing days and constant currency” means that the impact of different billing days has been removed from the constant currency 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 same-day, constant-currency 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.

Gross margin dollars from the Company’s temporary and consultant staffing represent revenues less direct costs of services, which consist of payroll, payroll taxes and benefit costs for temporary employees, and reimbursable expenses. The key drivers of gross margin are: i) pay/bill spreads, which represent the differential between wages paid to temporary employees and amounts billed to clients; ii) fringe costs, which are primarily composed of payroll taxes and benefit costs for temporary

On August 2, 2016, the Company announced a quarterly dividend of $.22 per share to be paid to all shareholders of record as of August 25, 2016. The dividend will be paid on September 15, 2016.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

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's foreign subsidiaries. Exchange rates impact the U.S. dollar value of the Company’s reported revenues, expenses, earnings, assets and liabilities.

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 Chairman and Chief Executive Officer and the Vice Chairman 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 Chairman and Chief Executive Officer and the Vice Chairman 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.

There have been no changes in 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 the legal proceedings previously disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2015.

ITEM 1A. Risk Factors

The following risk factor is added:

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosure

Not applicable.

ITEM 5. Other Information

On August 2, 2016, the Board of Directors amended the Company’s By-Laws to update the notice and related procedural and disclosure requirements by which a stockholder may nominate a director for election to the Board or propose business at an annual meeting of stockholders. The amendments require any notice provided pursuant to Article II, Section 9(a)(2) to disclose additional information regarding each person proposed for nomination for election as a director, the stockholder giving the notice, and the beneficial owner, if any, on whose behalf the nomination or proposal is made.

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.

Date: August 4, 2016