To Our Stockholders,
Robert Half achieved record revenues last year in a generally stable economic environment. Global net service revenues of $5.25 billion were 3.1 percent ahead of those in the prior year. The gain was higher, at 3.4 percent, when results were adjusted to reflect the effects of foreign currency translation and the number of billing days in a given year. The reported revenue increase in the United States was 2.8 percent while the international gain was 4 percent. Adjusted domestic and non-U.S. revenue advances were 2.7 percent and 6.6 percent, respectively. All three of our reportable segments had gains in service revenues.
Net income of $343 million slipped 4 percent from the prior year, while diluted earnings per share of $2.67 were little changed from $2.69 reported a year earlier. There were 3.1 percent fewer average shares outstanding in 2016, reflecting the effects of our continuing stock repurchase program. Both revenue and earnings increases moderated as the year unfolded.
U.S. real gross domestic product in 2016 grew 1.6 percent, noticeably below the prior year’s 2.6 percent. Last year’s economic performance extended the sometimes uneven recovery from the 2008–09 recession. U.S. job growth continued in 2016, but hiring overall was less robust than in earlier years. Employers in the United States added 2.2 million jobs over the course of last year, which compares with 2.7 million positions added in 2015. The jobless rate remained at or below 5 percent in each month last year, a level that many economists believe is indicative of theoretical full employment.
The overall unemployment rate fails to tell the whole story, especially about labor market segments that are relevant to Robert Half. Supply-and-demand imbalances in the professional, white-collar segments of the workforce — the ones in which we specialize — are becoming more acute. February 2017 government statistics indicate that the unemployment rate for college-degreed workers 25 years and older is just 2.4 percent. The rate is even lower in certain technology and accounting and finance specialties. We generally thrive when labor markets are tight. Those conditions provide us with the opportunity to call on our decades of experience helping clients find the right candidates even amid talent shortages.
An unusual hiring development emerged in U.S. labor markets last year. The hiring cycle became uncharacteristically long, particularly in the second half of the year with election and economic uncertainties. We found that employers took much more time to make hiring decisions than in prior years. Their hesitation, we believe, kept our revenue gains at lower rates than would have been the case in a more typical cycle. Recent economic data show a noticeable lift in optimism about economic prospects. Renewed confidence in the economy may be a sign that we could see a return to familiar levels of employer selectivity and a shorter hiring cycle.
Our non-U.S. revenues represented 20 percent of the global total, up from 19 percent the prior year. The economic recovery outside the United States generally mirrored what we saw domestically. As would be expected, however, some markets were stronger than others. Our operations in the United Kingdom, Germany and Belgium performed particularly well last year. Revenues in those three countries represented slightly more than half of last year’s non-U.S. total.
Protiviti also had a solid year. Revenue of $804 million was up 8.3 percent from the prior year. Operating income of $81 million was the third-highest ever for Protiviti, but a revenue mix shift kept earnings below 2015’s record level. Protiviti was launched nearly 15 years ago; since then it has become an important part of our business. From its first full year in 2003 through last year, its revenues compounded at a 15 percent average annual growth rate. Protiviti represented 15 percent of both last year’s companywide revenues and aggregate operating income.
Protiviti’s business initially focused on helping clients comply with a myriad of regulations, including Sarbanes-Oxley. This became the solid foundation for a broadening range of growing practices. These include business performance improvement; data management and advanced analytics; digital transformation; forensics; technology consulting; internal audit and financial advisory; risk and compliance; and transaction services. Protiviti has established a global presence and is a respected professional services organization with a widely recognized brand name.
Robert Half continues to enjoy a sound financial position. The strength of our balance sheet is explained largely by the favorable cash-generating characteristics of our business. But our financial position also has been helped by decades of sustained profitability; we have reported an annual profit in each of the past 30 years.
Year-end assets totaled $1.78 billion. As a business services company, we require few fixed assets and no inventory. Our cash balance of $260 million far exceeded long-term debt of less than $1 million. Accounts receivable, our biggest recorded asset, was $703 million at year-end. Our history of timely collection of receivables continued in 2016. We benefit from serving a midmarket customer base and are not exposed to customer, industry or geographic concentrations. Our collection diligence is reflected in 49 days sales outstanding (DSO) as calculated for the full year, which is consistent with past experience. Our return on invested capital in 2016 was 33 percent. That compares with our 10-year average of 24 percent.
Last year’s net cash flow provided by operating activities was $442 million, modestly ahead of the prior year. Our first priority in allocating the cash we generate is to fund capital expenditures. After spending to operate the business and to grow it, the great majority of remaining cash is then returned to stockholders through share repurchases and cash dividends.
Capital expenditures in 2016 were $83 million, the highest dollar amount in 10 years but still relatively modest when compared to our revenues and cash generated from operations. Last year’s spending was equivalent to 1.6 percent of revenues and 19 percent of operating cash flow. Both percentages are consistent with long-term trends for our business.
The majority of last year’s capital spending was for technological infrastructure and software, much of which was internally generated and therefore tailored to Robert Half’s business model. We undertook several major projects last year, two of which were particularly noteworthy. One was the continued installation of an updated, cloud-based customer relationship management (CRM) platform. The system provides our professional staff with powerful tools to help them become more effective and efficient in satisfying client and candidate needs. Among other things, the new CRM system provides our team with real-time access to information and analytics using mobile and video technologies that are easily accessible in the office or from remote locations. We expect to complete the installation of the platform in remaining non-U.S. locations in 2017, after which spending should moderate. The other noteworthy undertaking was the installation of a client accounting system for Protiviti. We are already seeing productivity gains from this critical investment.
Cash provided by operating activities less cash used for investing activities (free cash flow) in 2016 was $330 million, up slightly from $320 million a year earlier. Approximately half of that amount, or $164 million, was used to repurchase our shares in open market transactions. We began repurchasing shares in 1997. In the last decade alone, we spent $1.8 billion of the $2.5 billion of free cash flow generated to repurchase 55 million of our shares. To put the share reduction in perspective, we ended 2016 with 128 million shares outstanding. At year-end, there were 6.4 million shares available to repurchase under our current board-approved repurchase plan.
About a third of last year’s free cash flow was used to pay cash dividends. Last year’s $0.22 quarterly cash dividend was equivalent to a total annual outlay of $114 million. We have paid uninterrupted quarterly cash dividends since 2004. Subsequent to year-end, the board increased the dividend to $0.24 per quarter. The cash dividend has been increased annually while compounding at a 12 percent average annual growth rate since it was initiated.
We made no material acquisitions in 2016. It has been our longstanding preference to grow organically. The staffing and consulting industries are global, large and growing. We believe they provide ample runway to allow us to sustain growth internally without incurring risks that can come with undue reliance on acquisitions. We do look at acquisition opportunities when they arise from time to time and occasionally acquire a business. But it is unusual to find reasonably priced acquisition prospects that are growing, profitable and, most important, have a business DNA that matches or complements our own. We have spent heavily over an extended period to establish and support our brands, our service-oriented culture and our values. We therefore are protective of them and hesitant to put them at risk.
Robert Half clients are predominantly small and midsize businesses — a large and underserved segment of the economy. For years, we have focused intensive marketing, sales and operational efforts on reaching and servicing this core part of the market. We bring added value to smaller clients who often lack formal human resources departments. They come to rely on the full-service, consultative approach we provide.
Although small to midsize clients remain the backbone of our business, we also see opportunities to serve select larger accounts. The key for us in working with these clients is to maintain pricing that adequately compensates us for the talent and service we provide. That is never easy in a competitive environment, but the challenge is lessened for us by the fact that we provide hard-to-find specialists. The greatest potential for working with these targeted larger clients exists through our Robert Half Management Resources and Robert Half Technology business units. This is because larger enterprises more frequently need help with major IT projects and financial systems conversions. We recently expanded our service offerings and formed our Enterprise Solutions Group, which provides business development for a full suite of staffing and Protiviti services to clients with more complex project needs. We believe we are unique in the industry in providing an in-house, flexible delivery model that blends specialized staffing and consulting services at a quality level comparable to that of the Big Four accounting firms.
We increasingly are being drawn to opportunities provided by the labor-intensive, multisegmented healthcare field. This vast, rapidly growing and complex industry is undergoing profound changes. Among other things, the continued existence of the Affordable Care Act in its present form is very much in question. It is unclear what the future healthcare industry will look like, but it is certain that changes are coming. We are positioning our business to be able to help both client companies and healthcare providers with nonclinical staffing and consulting needs as changes begin to emerge.
Protiviti has benefited from a strong regulatory environment, especially in the financial services industry in recent years. Almost from its outset, a portion of its business has come from helping clients comply with complex and changing regulations. Deregulation is now in the discussion stage in the new Congress and presidential administration. If regulations are reduced, demand for a portion of Protiviti’s compliance-related services could be affected. It is not anticipated that all of these services will be affected equally. Within its mix of compliance-related services, some offerings such as anti-money laundering might not be affected at all and actually may see higher demand. In addition, many compliance clients affected directly or tangentially will need Protiviti’s assistance in analyzing how they should proceed. On the staffing side of the business, expected tax changes could drive added demand for specialists in this complex area.
Like most businesses and industries, Robert Half and the sectors we serve continue to innovate and evolve. Early on, the company pioneered specialty recruiting and staffing in the accounting and finance fields. Soon after present management became involved, we began to transform what was initially a collection of franchised offices into a network of U.S. and international company-owned facilities. Over the years, the network has expanded and the range of specialty service offerings has widened. A critically important part of the growth strategy has been the creation and strengthening of Robert Half brands. We believe that few of our direct competitors can match the high profiles enjoyed by each of our service lines.
A new dimension has been introduced to our business in recent years with the arrival of digital technology in our company and industry. We have invested heavily in technological innovation with the dual aims of increasing the productivity of our professional staff and making it more convenient for our clients and job candidates to do business with us. We continue to direct much of our capital outlay to creating and strengthening what we believe to be best-in-class technology.
Examples include our upgraded external websites that empower clients to determine their own level of engagement in the candidate discovery and selection process. We have developed intelligent algorithms that utilize our nearly 70 years of placement experience and data to improve matching outcomes. The experience we’ve accumulated over our long history is impossible to duplicate. Moreover, the algorithms are not static; we continue to improve them by applying machine learning capabilities tailored to meet our needs.
Technology alone does not ensure that a new hire will be the right fit. There are many steps in the staffing and onboarding process, some of them quite subtle and beyond computerized abilities. An important consideration is determining the chemistry and business culture match between employer and candidate. Face-to-face involvement is key in many placements. Combining the strengths of personalized service and the power of computerized analytics provides our clients with the best opportunity to avoid the costly mistakes and business disruptions that come with a poor hiring fit.
Robert Half is unique in our industry in combining the strengths of leading-edge technology and personal service. Some online recruiting and networking sites depend on technology alone to serve clients. Others focus on a service orientation but lack the resources to embrace rapidly evolving technology. Our combination of high-tech and personalized service, along with the financial resources to support these efforts, gives us an advantage that few, if any, of our competitors can match. We believe this is a long-term, durable combination that differentiates us in our industry.
We believe economic conditions are favorable for Robert Half. Moderate (1.7 to 2.3 percent) U.S. GDP growth is forecast for 2017, and tight labor markets persist in our specialty areas. The labor participation rate, which tracks the share of working-age people in the U.S. labor force, increased to 63 percent in February 2017, the highest since March 2016. Outside the United States, moderate GDP growth is also projected this year in Canada, Germany, the United Kingdom, the Netherlands, France and Australia, and the use of temporary workers has continued to increase in some countries.
Most economists are not forecasting a recession for 2017, and many are encouraged by the jobs focus of the new administration in the United States. We think that the wait-and-see approach to hiring that affected our results last year could fade as economic optimism grows. There is good evidence that optimism already is improving.
Service providers, for example, were more upbeat about the business outlook than at any time since May 2015 in the Markit Flash U.S. Services PMI Business Activity Index, which increased to 55.1 in January from 53.9 in December. And recent data from the National Federation of Independent Business showed that, while hiring levels did not increase in the fourth quarter of 2016, small business optimism reached its highest level in more than a decade. We believe this increased business confidence will spur a greater sense of urgency on the part of our clients regarding talent shortages at higher skill levels, prompting them to move more quickly on hiring.
As a staffing firm, Robert Half is a people business. And it is also people — our people — whose talents and commitment ultimately define our success. In all respects, we have the best professionals and the most experienced management teams in our industry. We salute them for making our achievements in 2016 possible.
We would also like to express our appreciation to our board of directors for their wisdom and counsel during the year. Our most tenured board member, Andrew S. Berwick, Jr., recently announced that he plans to retire at the end of his current term. We wish to thank him for his tremendous support, encouragement and grace these past 30 years.
We also want to thank you, our stockholders, for your continued support of Robert Half.
Chief Executive Officer
March 10, 2017
Vice Chairman, President and
Chief Financial Officer
March 10, 2017