SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
FOR THE TRANSITION PERIOD FROM to .
Commission File Number 1-10427
ROBERT HALF INTERNATIONAL INC. (Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code: (650) 234-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) had been subject to such filing requirements for the past 90 days. Yes /x/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of April 30, 2002:
176,163,854 shares of $.001 par value Common Stock
The financial statements for the quarter ended March 31, 2002, contained in this report have not been reviewed by an independent public accountant because we severed our auditing relationship with Arthur Andersen LLP on April 24, 2002. See Part II, Item 5.
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in thousands, except share amounts)
The accompanying Notes to Consolidated Financial Statements arean integral part of these financial statements.
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ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
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ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
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ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
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ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (Unaudited)
Note A—Summary of Significant Accounting Policies
Nature of Operations. Robert Half International Inc. (the "Company") provides specialized staffing services through such divisions as Accountemps®, Robert Half®, OfficeTeam®, RHI Consulting®, RHI Management Resources®, The Affiliates®, and The Creative Group®. The Company, through its Accountemps, Robert Half, and RHI Management Resources divisions, is the world's largest specialized provider of temporary, full-time, and project professionals in the fields of accounting and finance. OfficeTeam specializes in highly skilled temporary administrative support personnel. RHI Consulting provides information technology professionals. The Affiliates provides temporary, project, and full-time staffing of attorneys and specialized support personnel within law firms and corporate legal departments. The Creative Group provides project staffing in the advertising, marketing, and web design fields. Revenues are predominantly from temporary services. The Company operates in the United States, Canada, Europe, Australia, and New Zealand. The Company is a Delaware corporation.
Principles of Consolidation. The Consolidated Financial Statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany balances have been eliminated. Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation.
Revenue Recognition. Temporary and consultant staffing services revenues are recognized when the services are rendered by the Company's temporary employees. Permanent placement staffing revenues are recognized when employment candidates accept offers of permanent employment. Allowances are established to estimate losses due to placed candidates not remaining employed for the Company's guarantee period, typically 90 days.
Cash and Cash Equivalents. The Company considers all highly liquid investments with a maturity of three months or less as cash equivalents.
Intangible Assets. Intangible assets primarily consist of the cost of acquired companies in excess of the fair market value of their net tangible assets at acquisition date, which were being amortized on a straight-line basis over a period of 40 years through December 31, 2001. The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), on January 1, 2002. Under SFAS 142, goodwill is no longer subject to amortization over its estimated useful life. The methods used for evaluating and measuring impairment of certain intangible assets have changed in accordance with the provisions of SFAS 142. While the Company has not completed the new impairment analysis, it is not expected to have a material effect on the financial statements.
Income Taxes. Deferred taxes are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rates.
Foreign Currency Translation. The results of operations of the Company's foreign subsidiaries are translated at the monthly average exchange rates prevailing during the period. The financial position of the Company's foreign subsidiaries is translated at the current exchange rates at the end of the period, and the related translation adjustments are recorded as a component of comprehensive income within Stockholders' Equity. Gains and losses resulting from foreign currency transactions are included in the Consolidated Statements of Income.
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Stock Option Plans. The Company accounts for its stock option plans under APB Opinion 25. Accordingly, no compensation expense related to stock options is included in determining net income and net income per share in the consolidated financial statements.
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As of March 31, 2002, such estimates included accounts receivable allowances of $11.8 million and workers' compensation accruals of $14.5 million, both of which were determined using historical loss statistics, which could differ materially from actual losses.
Property and Equipment. Property and equipment are recorded at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, primarily two to five years. Leasehold improvements are amortized over the shorter of the life of the related asset or the life of the lease.
Advertising Costs. The Company expenses all advertising costs as incurred.
Note B—Net Income Per Share
The calculation of net income per share for the three months ended March 31, 2002 and 2001 is reflected in the following table (in thousands, except per share amounts):
Note C—Business Segments
The Company has two reportable segments: temporary and consultant staffing; and permanent placement staffing. The temporary and consultant staffing segment provides specialized personnel in the accounting and finance, administrative and office, information technology, legal, advertising, marketing,
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and web design fields. The permanent placement staffing segment provides full-time personnel in the accounting, finance, administrative and office, and information technology fields.
The accounting policies of the segments are the same as those described in Note A: Summary of Significant Accounting Policies. The Company evaluates performance based on profit or loss from operations before interest expense, intangible amortization expense, and income taxes.
The following table provides a reconciliation of revenue and operating profit by reportable segment to consolidated results (in thousands):
Note D—Goodwill
The Company adopted SFAS 142 on January 1, 2002, resulting in the discontinuance of the amortization of certain intangible assets that were being amortized over 40 years. Under SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Had goodwill not been amortized in the
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three months ended March 31, 2001, the Company's pro forma net income and net income per share would have been as follows (in thousands, except per share amounts):
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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", "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 in levels of unemployment and other economic conditions in the U.S. or foreign countries where the Company does business, or in particular regions or industries; reduction in the supply of qualified candidates for temporary employment or the Company's ability to attract qualified 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 profit margins; the possibility of the Company incurring liability for the activities of its temporary employees or for events impacting its temporary employees on clients' premises; the success of the Company in attracting, training and retaining qualified management personnel and other staff employees; and whether governments will impose additional regulations or licensing requirements on personnel services businesses in particular or on employer/employee relationships in general. 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.
Critical Accounting Policies
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," we identified the Company's most critical accounting policies to be those that involve subjective decisions, assessments or estimates. These are described in Note A to the consolidated financial statements.
The Company has a long history of issuing stock options to employees and directors as an integral part of its compensation programs. Generally accepted accounting principles allow alternative methods of accounting for these plans. The Company has chosen to account for its stock option plans under APB Opinion 25. Accordingly, no compensation expense related to stock options is included in determining net income and net income per share in the consolidated financial statements. The alternative method of accounting for stock options is prescribed by Statement of Financial Accounting Standards No. 123.
Results of Operations for Each of the Three Months Ended March 31, 2002 and 2001.
Temporary and consultant staffing revenues were $442 million and $654 million for the three months ended March 31, 2002 and 2001, respectively, decreasing by 32% during the three months ended March 31, 2002 compared to the same period in 2001. Permanent placement staffing revenues were $26 million and $65 million for the three months ended March 31, 2002 and 2001, respectively, decreasing by 60% during the three months ended March 31, 2002 compared to the same period in 2001. Overall revenue results for the three months ended March 31, 2002 were adversely impacted by the ongoing recession in the United States.
As of March 31, 2002, the Company had more than 325 offices in 41 states and the District of Columbia and 10 foreign countries. Revenues from domestic operations represented 82% and 87% of revenues for the three months ended March 31, 2002 and 2001, respectively. Revenues from foreign operations represented 18% and 13% of revenues for the three months ended March 31, 2002 and 2001, respectively.
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Gross margin dollars from the Company's temporary and consultant staffing services represent revenues less direct costs of services, which consist of payroll, payroll taxes and insurance costs for temporary employees. Gross margin dollars from permanent placement staffing services are equal to revenues, as there are no direct costs associated with such revenues. Gross margin dollars for the Company's temporary and consultant staffing services were $159 million and $246 million for the three months ended March 31, 2002 and 2001, respectively, decreasing by 36% in 2002. Gross margin amounts equaled 36% and 38% of revenues for temporary and consultant staffing services for the three months ended March 31, 2002 and 2001, respectively, which the Company believes reflect its ability to adjust billing rates and wage rates to underlying market conditions. Gross margin dollars for the Company's permanent placement staffing division were $26 million and $65 million for the three months ended March 31, 2002 and 2001, respectively, decreasing by 60% for the three months ended March 31, 2002.
Selling, general and administrative expenses were $172 million for the three months ended March 31, 2002, compared to $235 million for the three months ended March 31, 2001. Selling, general and administrative expenses as a percentage of revenues were 37% and 33% for the three months ended March 31, 2002 and 2001, respectively. Selling, general and administrative expenses consist primarily of staff compensation, advertising, depreciation and occupancy costs. The percentage increase in 2002 was due to the negative leverage from fixed operating expenses including depreciation and occupancy costs.
The Company allocates the excess of cost over the fair market value of the net tangible assets first to identifiable intangible assets, if any, and then to goodwill. Management believes that its previous acquisitions of established companies in established markets and maintaining its presence in these markets preserves the goodwill for an indeterminate period. Net intangible assets represented 16% of total assets and 19% of total stockholders' equity at March 31, 2002.
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002, resulting in the discontinuance of the amortization of certain intangible assets that were being amortized over 40 years. Upon adoption of SFAS No. 142, the Company stopped recording goodwill amortization expense. The methods used for evaluating and measuring impairment of certain intangible assets have changed in accordance with the provisions of SFAS 142. While the Company has not completed the new impairment analysis, it is not expected to have a material effect on the financial statements.
Interest income for the three months ended March 31, 2002 and 2001 was $1.5 million and $2.7 million, respectively. Higher average cash balances during the three months ended March 31, 2002 were more than offset by lower interest rates earned during the period. Interest expense for the three months ended March 31, 2002 and 2001 was $.2 million and $.3 million, respectively.
The provision for income taxes was 38% for both the three months ended March 31, 2002 and 2001, respectively.
Liquidity and Capital Resources
The change in the Company's liquidity during the three months ended March 31, 2002 is the net effect of funds generated by operations and the funds used for capital expenditures, repurchases of common stock and principal payments on outstanding notes payable. As of March 31, 2002, the Company has authorized the repurchase, from time to time, of up to 8 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, 2002, the Company did not repurchase shares of common stock on the open market. For the three months ended March 31, 2002, the Company generated $36 million from operations, used $11 million in investing activities and generated $7 million in financing activities.
The Company's working capital at March 31, 2002, included $379 million in cash and cash equivalents. In addition at March 31, 2002, the Company had available $75 million of its $80 million bank revolving line
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of credit. The Company's working capital requirements consist primarily of the financing of accounts receivable. While there can be no assurances in this regard, the Company expects that internally generated cash plus the bank revolving line of credit will be sufficient to support the working capital needs of the Company, the Company's fixed payments, and other obligations on both a short and long-term basis. As of March 31, 2002, the Company had no material capital commitments.
Subsequent Event
On April 24, 2002, the Company announced that it had reached a tentative agreement with Arthur Andersen LLP to hire partners and other employees within Andersen's U.S. internal audit and business risk consulting practices. The Andersen professionals in question are with the firm's Risk Consulting Services group and have expertise in areas such as internal audit, technology risk consulting, and financial and commodity risk consulting. The Risk Consulting Services group is separate from Andersen's external audit and attestation services. Terms of the arrangement, which is subject to completion of a definitive agreement, additional due diligence and appropriate approvals from both parties, have not been finalized as of the date of this filing.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk sensitive instruments do not subject the Company to material market risk exposures.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
On April 24, 2002, we reached a tentative agreement with Arthur Andersen LLP to hire partners and other employees within Andersen's U.S. internal audit and business risk consulting practices. Andersen and our Board of Directors determined that execution of the agreement would cause Arthur Andersen to no longer be independent. Our auditing relationship with Arthur Andersen was therefore severed by mutual agreement effective April 24, 2002. We are in the process of selecting new independent auditors.
As permitted by Securities Exchange Act Release 34-45589, an independent public accountant has not reviewed the interim financial statements for the quarter ended March 31, 2002, contained in this report. Our new independent public accountants will review these financial statements before August 14, 2002. If in the opinion of the new accountants, any changes are required, we will file an amended quarterly report on Form 10-Q before August 14, 2002. If an amendment is not required, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, will state that these first quarter financial statements have been reviewed and no changes are required.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(b) The registrant filed no current report on Form 8-K during the quarter covered by this report.
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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: May 13, 2002
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