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Robert Half International (NYSE:RHI)

Q4 2012 Earnings Call

January 29, 2013 5:00 pm ET

Executives

Harold Max Messmer - Chairman, Chief Executive Officer and Member of Executive Committee

M. Keith Waddell - Vice Chairman, President and Chief Financial Officer

Analysts

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Timothy McHugh - William Blair & Company L.L.C., Research Division

Jeffrey M. Silber - BMO Capital Markets U.S.

Paul Ginocchio - Deutsche Bank AG, Research Division

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Kelly A. Flynn - Crédit Suisse AG, Research Division

Sara Gubins - BofA Merrill Lynch, Research Division

Gary E. Bisbee - Barclays Capital, Research Division

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

James Samford - Citigroup Inc, Research Division

Kevin D. McVeigh - Macquarie Research

Randle G. Reece - Avondale Partners, LLC, Research Division

John M. Healy - Northcoast Research

Operator

Hello, and welcome to the Robert Half International Fourth Quarter 2012 Conference Call. Our hosts for today's call are Mr. Max Messmer, Chairman and CEO of Robert Half International; and Mr. Keith Waddell, Vice Chairman, President and Chief Financial Officer. Mr. Messmer, you may begin.

Harold Max Messmer

Thank you, and good afternoon, everyone. As is our custom, we would like to start today's call with a reminder that comments made on the call that contain predictions, estimates and other forward-looking statements, these statements represent our current judgment of what the future holds and include words such as forecast, estimate, project, expect, believe, guidance and so forth. We believe these remarks to be reasonable, but would remind you that they are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. We've described some of these risks and uncertainties in today's press release and in our SEC filings, including our 10-Ks, 10-Qs and today's 8-K. We assume no obligation to update the statements made on this call.

Now let's discuss the fourth quarter. Global revenues for the fourth quarter were $1.03 billion, this is a 5% year-over-year on a same-day constant currency basis. Income per share was $0.42, an increase of $0.40, excuse me, 40% from the fourth quarter of 2011. Cash flow from operations during the fourth quarter was $98 million. Capital expenditures were $14 million. We paid our stockholders a cash dividend of $0.15 per share at a cost of $21 million. We also repurchased 1.2 million RHI shares during the fourth quarter at a cost of $34 million. There are approximately 11.4 million shares still available under our board-approved stock repurchase plan.

We were pleased with the fourth quarter financial results for Robert Half. Global operating income was up 35% as result of continued gross margin expansion, lower selling, general and administrative expense ratios, and a solid fourth quarter for Protiviti. This is the 11th consecutive quarter in which net income and earnings per share [indiscernible] or more on a year-over-year basis. Revenue growth in our staffing operations [indiscernible] basis, most notably, in the United States. Now [indiscernible] quarter results.

M. Keith Waddell

Thank you, Max. As you noted, fourth quarter revenues for the company were $1.03 billion, a reported increase of 6% over last year. On a same-day constant currency basis, global staffing revenues increased 4% year-over-year, with the U.S. growing 8% and international locations declining 4% on this basis.

U.S. staffing revenues were $677 million in the fourth quarter, while international staffing revenues were $237 million. We have 349 locations worldwide, including 102 locations in 19 countries outside the U.S. We calculated 62 billing days in the fourth quarter, compared to 61 days in last year's fourth quarter, the effect of which was a 1.7% increase in reported year-over-year staffing growth rates in the fourth quarter. The current quarter has 62.2 days.

Currency exchange rates increased fourth quarter 2012 sequential staffing revenues by $5 million and reduced fourth quarter year-over-year staffing revenues by $3 million. This had the effect of reducing year-over-year reported staffing growth rates by 0.3% in the fourth quarter.

A supplemental schedule, accompanying our earnings release today shows year-over-year revenue growth rates for each of our staffing lines of business on a reported basis, as well as a same-day constant currency basis, the schedule further divides the data between U.S. and non-U.S. operations. This is a non-GAAP financial measure that provides additional information on certain revenue trends in our staffing operations. You can find the schedule in today's press release and in the Investor Center on our website.

Fourth quarter global revenues for Protiviti were $120 million, including $93 million in the United States and $27 million outside the U.S. Year-over-year growth rates were 10% globally, with U.S. revenue up 15% and non-U.S. revenue down 5%. Protiviti and its independently-owned member firms serve clients through a network of 73 locations in 23 countries.

Now let's review gross margin. Fourth quarter gross margin in our temporary and consulting staffing operations was 36.4% of applicable revenues. This was a 60-basis point increase over the fourth quarter of last year. The improvements reflect contingent strength in pay bill spreads, and higher temp-to-hire conversion fees. The fourth quarters of 2012 and 2011 also included workers' compensation and other payroll-related credits of $2 million and $1.5 million, respectively.

Permanent placement revenue was 8.8% of overall staffing revenue for the quarter, slightly higher than the 8.7% of revenue reported 1 year ago. Together with the higher temporary and consulting gross margins, overall staffing gross margin expanded by 70 basis points versus 1 year ago. Protiviti's fourth quarter gross margin was $32 million or 26.9% of Protiviti revenues, compared to $30 million or 27.6% revenues a year ago.

Turning to selling, general and administrative cost. In the fourth quarter, our staffing SG&A costs were 32% of staffing revenues, down 130 basis points from the 33.3% reported a year ago. We ended 2012 with 9,500 full-time employees in our staffing divisions, up 6% from the prior year.

Fourth quarter SG&A cost for Protiviti were 22.4% of revenues. This is a 300 basis point improvement from the 25.4% level reported last year. We ended 2012 with 2,900 full-time Protiviti employees and contractors, up 8% from the prior year.

Fourth quarter operating income from our staffing divisions was $92 million or 10% of staffing revenues. Temporary and consulting divisions reported $80 million in operating income for the quarter or 9.6% of applicable revenues. Fourth quarter operating income for our permanent placement division was $12 million or 14.4% of applicable revenues. Protiviti's operating profit was $5 million in the fourth quarter of 2012 or 4.5% of revenue, compared to $2 million in the fourth quarter 1 year ago, which was 2.2% of revenue.

Accounts receivable were $513 million at the end of the fourth quarter, with implied days outstanding, DSO, of 45.1 days, compared to 46.1 days at the end of the fourth quarter of 2011.

Now let's turn to guidance. We saw the following trends in the fourth quarter and so far in January. In the U.S., year-over-year -- year-over-year growth rates for our temporary and consulting divisions decelerated throughout the quarter, however, we did see sequential growth in every U.S. line of business during the quarter. Also in the U.S., year-over-year growth rates for our permanent placement divisions decelerated in October, accelerated in November, then decelerated again in December, while still maintaining double-digit growth rates for the month of December versus the prior year.

Outside the U.S., year-over-year growth rates remained negative and weakened throughout the quarter, however, the sequential declines in the fourth quarter were lower or better than the prior 2 sequential quarters. For the first 3 weeks of January, revenues for our temporary and consulting operations were up 2% on a same-day constant currency basis, compared to the same period last year, with U.S. temporary and consulting revenues up 5%, and non-U.S. temporary and consulting revenues down 7%. For the first -- first 4 weeks of January, permanent placement revenues were down 5% on a same-day constant currency basis, compared to the same period last year, with U.S. perm revenues up 10% and non-U.S. revenues down 28%. We would caution, however, it's very difficult to evaluate trends over such short time periods.

Taking this information into account, we offer the following first quarter guidance: Revenues, $1.01 billion to $1.06 billion; income per share, $0.38 to $0.43. It is our policy to limit guidance to 1 quarter. All estimates we provide on this call are subject to the risks mentioned in today's press release.

Now I'll turn the call back over to Max.

Harold Max Messmer

Thank you, Keith. We finished the fourth quarter with broad-based year-over-year and sequential revenue growth in our U.S. staffing operations and Protiviti. Non-U.S. operations remained affected by weaker economies in several countries, most notably in Europe. As previously discussed, our U.S. staffing branches, as well as select non-U.S. locations, are seeing rising demand for professional staffing and consulting services, particularly in the Technology and accounting sectors. Protiviti had a solid fourth quarter with double-digit revenue growth year-over-year. Protiviti continues to diversify its consulting solutions, and we are pleased with their results. We announced in December that Protiviti had purchased the assets of SusQtech, a leading provider of Microsoft SharePoint implementation, design and integration services. In doing so, we gained an experienced team of technical talent and consulting professionals. We anticipate opportunities for joint go-to-market solutions with Protiviti and our staffing business around these and other Microsoft technology-based initiatives.

As we continue into 2013, we do feel Robert Half is well-positioned, based on certain economic trends that could work in our favor, as well as what we believe are unique strengths of our company.

First the demand for skilled talent has persisted even with relatively high overall unemployment rates. Skill shortages exist in certain specialties, particularly in the fields we serve. In the fourth quarter, for example, the U.S. unemployment rate was just 1.5% for database administrators, and 1 -- 1.9% for financial analysts.

Our industry is growing. The BLS reports that employment services will be among the 20 industries adding the most jobs between 2010 and 2020. Annual global revenues for the staffing industry are estimated at approximately $400 billion. Small and midsize companies are hiring. The latest ADP national employment report showed that nearly 60% of the private-sector jobs gained in December were added by small and midsize companies. Because smaller firms often lack their own HR departments, they value the personalized service and insights a specialized recruiter can provide, including proprietary testing processes, direct interaction with the people we place, and most important, direct client feedback. There is ongoing demand for flexible staffing. The percentage of temporary jobs created in the U.S. in this cycle is double that of the prior one, 13.2% versus 6.5%. The pace of temporary staffing growth in the current recovery also has been faster. 792,000 temporary jobs were created in the 39 months ended December 2012. In the prior recovery, it took 56 months to add 513,000 temporary jobs.

As of the end of 2012, the temp penetration rate in the United States was 1.9%, of total U.S. non-farm employment, which is close to the high point in the last cycle. This percentage is approaching the record high of just over 2% in 2000. There is opportunity, we believe, for the temp penetration rate to expand further based on the secular demand for staffing flexibility we have been discussing. Technology staffing continues to present a market opportunity for our company. The IT staffing market is more than 4x the size of the accounting staffing market. Technology is advancing faster than the supply of skilled workers, which is fueling demand for experienced IT professionals on a project and full-time basis. We are optimistic about the possibilities within the Technology staffing sector.

Other business trends could benefit our Protiviti and staffing operations. These trends include ongoing regulatory changes in the financial services industry, an increase in Technology spending by companies, and implementation of the President's new health care legislation. Our business is performing well, U.S. staffing revenues are recovering at rates roughly consistent with the previous cycle, notwithstanding the higher unemployment rates in this cycle. We also have seen broad-based improvement in gross margins and operating income throughout 2012, and our staffing operations and Protiviti. We are particularly optimistic about the combined service offerings of staffing and Protiviti. We are able to offer our clients a full complement of staffing, project and consulting solutions for their businesses at competitive prices.

We are also confident in the experienced leadership in our staffing operations and Protiviti, leaving us well-positioned, we believe, as we head into 2013. And we are in a strong financial position. We had positive operating cash flow of $289 million in 2012, which helped to fund approximately $133 million in RHI's stock repurchases, $50 million in capital expenditures and the payment of $84 million in dividends to stockholders.

At this time, Keith and I will be happy to respond to questions. Please limit yourself to 1 question as usual, and a single follow-up as needed. If time permits, we'll certainly try to return to you later in the call if you have additional questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Mark Marcon with R.W. Baird.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

One question and one follow-up. The first question has to do with the U.S. Specifically, there's been an increasing level of investor dialogue regarding the potential ramifications of the Affordable Care Act, and how it could potentially influence the penetration rate on a go-forward basis? Keith, I know you've done a lot of work on this, there's obviously been a lot of dialogue between the regulatory agencies regarding a look back period. Wondering if you can give us your latest sense for what the potential impact would be?

M. Keith Waddell

Well, the potential impact of -- I think we have to look at 2 sides of it. One is the potential revenue opportunity, and the other is the potential internal cost. On the potential revenue opportunity, clearly, firms that have 50 or fewer employees that do not presently offer coverage to their employees will be particularly interested in the Health Care Act, which requires those with over 50 to comply. We are already getting inquiries from our client base for companies in and around 50, asking us to help them understand this legislation, and to inquire as to how we might be helpful. Our response is that, we can legally help them remain under 50 since we're the employer of record for the temporaries we provide to them, and that we have every intention of ourselves legally complying with the act on a go-forward basis. As you talked about, as to the cost side of the equation, for our temporary employees, there's a 12-month period after we first hire them, where they essentially audition to be full-time, followed by a 12-month period, if once qualified, we have to pay or offer [ph] coverage, or pay a penalty. It's our intention to offer coverage to those qualifying temporaries. We've done a fair amount of work as to what those costs might be. They require us to estimate the percentage that will qualify as full-time. The percentage that will accept and decline coverage, what the cost of that coverage might be, as well as the number of months during that second 12-month period where they would remain an employee. It's our estimate, at this early time, that the increase to the -- to our cost would be a small single digit percentage increase to the overall pay rates we provide. So we believe, based on what we know today, and clearly, it's somewhat early, and subject to those assumptions, we think the cost side will be manageable. Back to the revenue side, we certainly see it as an opportunity. We're in somewhat of an investigation stage by many of our clients, we are getting inquiries. We do expect to add to demand, it's very difficult to project what that added demand would be. It's estimated that there are 130,000 firms with 50 or fewer employees, that over half of them do not provide coverage to their employees. The good part of the new health care legislation would be those employees will have a new place to go, called the State Exchange, to provide coverage for themselves. But again, long story short, an opportunity hard to quantify at this point. On the cost side, we believe it manageable based on our current estimates.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Great, and you think the 12-month look back is solid?

M. Keith Waddell

The way the regs have currently been written is that we can rely on the regulations that include this 12-month period. And that any changes that might come out in further clarifications would be prospective only and would only apply after 2015 at the earliest. So I don't think there's any question, at least 2000 -- through 2014, this measurement or look back period and 12-month stability period are solid.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Perfect. And then what's your confidence level with regards to being able to pass along the price increase? Pass along the additional costs?

M. Keith Waddell

Well, because we believe, the additional cost to be a small, single-digit percentage, we're confident that with a little time, we can pass it on.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Great. And how about the administrative costs?

M. Keith Waddell

The administrative cost, we -- we currently plan, essentially to outsource to a third-party. We already have a health care plan offered to our temporary employees, and totally at, totally at their cost. And we have -- and a third-party administer that administers that plan. And our plan is, that we would stay with them, so they're used to having to administer that number of employees. So we're reasonably confident that we can continue to outsource that function in the future.

Operator

Your next question comes from the line of Tim McHugh with William Blair & Company.

Timothy McHugh - William Blair & Company L.L.C., Research Division

First, just I guess, more specifically on Europe, but I guess also in the U.S. I think last quarter, there's kind of a growing sentiment, at least I felt, that you're kind of feeling a bottom in Europe in terms of the demand trends. Can you update us and how you think about that, as kind of the quarter progressed in terms of growth rates starting to get better here in the next couple of quarters?

Harold Max Messmer

Well, on Europe, while the year-on-year growth rates are ever more negative, I think more relevant would be the sequential growth rates. And as I mentioned in our prepared remarks, the rate of decline, sequentially, has lessened the last 3 quarters, such that for the fourth quarter, on a same-day constant currency basis, our international operations were down 1% sequentially. And that compares to down 2% and 3% sequentially for the prior 2 quarters. So those numbers are generally consistent with what we expected. Our guidance on a sequential basis in the quarter that we're in, would be to continue that trend, to down a little bit, to even flat sequentially. So I think as we've discussed before, the numbers, the data would show that our European operations are bottoming, if you look at a sequential basis, because of the comps from a year ago, the year-over-year growth rates don't look as good. The post-quarter start, the perm number, was particularly negative. I would invite everybody to go back through time and look at how we started a quarter in perm versus how we reported the entire quarter, and what you're going to see, loud and clear, is that our start in a quarter, as we reported in these calls, isn't very indicative of how we end up for the full quarter. So I wouldn't be overly spooked by the post-quarter, non-U.S. perm number.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. Is there anything, as we look forward at the gross margin, for my follow-up, I guess, excluding the credits you got in the quarter, the gross margin would still be 36.2 for the temp business. Can you talk to us what you're assuming going forward? And I guess underlying bill and pay rate trends, is there any sign that that's changing, that you could see pressure or do you think you'll be able to continue to expand that number?

M. Keith Waddell

Well, the short answer is, in our guidance, we've clearly taken away the credit we got during the fourth quarter for our workers' comp and other credits, which are roughly 25 to 30 basis points. But absent that, I'd say the pay bill spreads are stable, they're constant. Will we expand them to the extent we did in 2012? Maybe not, but we do think they're stable. And maybe there's a little bit of upside there. But particularly for the first quarter, you've got to model out the credits we got during the fourth quarter, which is consistent with what has happened in prior first quarters.

Operator

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

Jeffrey M. Silber - BMO Capital Markets U.S.

I was particularly impressed with the incremental margin expansion you got in the perm business. Can you give us a little bit more color how that happened? And do you think that can continue?

M. Keith Waddell

Well, in the perm business and, to some extent, in temp as well, we've contained our cost quite successfully. As we've talked about for a few calls in a row, our non-U.S. operations have been particularly vigilant with their cost. The perm business has been more impacted than the temp business, non-U.S., and therefore, their costs have been more impacted accordingly. We do continue to expect to contain our cost as we go forward. So our modeling for the quarter that we're in, assume contingent SG&A cost, in line with what we've seen the last few quarters.

Jeffrey M. Silber - BMO Capital Markets U.S.

Okay, great. And then, and just some numbers questions. Just for modeling purposes for 2013, what should we be using for capital spending, depreciation, amortization and the tax rate?

M. Keith Waddell

So capital spending will be up a little bit in 2013 because we -- some of what we were planning to spend in '12 got rolled over. So let's call it $60 million, plus or minus $5 million. Let's see, the depreciation flat to down slightly versus 2012. Tax rate, let's talk about a bit because for the first quarter of 2013 and for full 2013, we do expect a lower tax rate. So for the first quarter of 2013, we expect something between 37%, 38%, take the midpoint, if you'd like. We did some non-U.S. structuring during 2012 that'll benefit 2013, starting in the first quarter, but then continuing throughout. So we do expect the benefit of a lower tax rate in 2013 than '12.

Jeffrey M. Silber - BMO Capital Markets U.S.

Okay, great. And just a quick one, are there any billing date issues, the rest of the year? If can you give us the billing days for rest of the year by quarter, that'll be great.

Harold Max Messmer

Okay, billing days, obviously, we don't have a leap year again. In 2013, we have 62.2, quarter 1; 63.5, quarter 2; 64.0, quarter 3; 61.9, quarter 4. So we end the year at 251.6 which is down a day because of leap year.

Operator

Your next question comes from the line of Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG, Research Division

Just 2 quick questions. One on -- any way to kind of give us an idea what SharePoint is, in the first quarter, roughly? And then just on -- it sounds like there's more to go on the SG&A. So would we expect so that as you talked about perm a little bit, there's still more, sort of -- or better incremental margins going forward as you take some cost out of Europe?

M. Keith Waddell

Okay, on the SharePoint acquisition, which we're very pleased about, both for staffing and for Protiviti, it's a small acquisition, we did not disclose the financial impact. We said it had just under 60 employees. So it's not going to have a material impact on our numbers. As to SG&A, as I talked earlier, we do plan to continue to contain our SG&A for those areas that are growing. And we are still growing in the U.S. We do have pockets outside of the U.S., notably Germany, where we're growing, and those areas will add to hits. In the other areas, we'll keep them same [ph]. Or if there's a decline, we'll try to manage them accordingly. So our hope is, just as we've had very good success managing SG&A the last 4 quarters, we expect that to continue into the first quarter.

Operator

Your next question comes from the line of Andrew Steinerman with JPMorgan.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

I may have a point about first quarter guidance, if you could comment, on Accountemps, that usually has a seasonally strong quarter. If you could comment on Protiviti, which you say has a seasonally weak quarter, and if you could comment on International, which still has somewhat of a difficult comp, year-over-year. What's included in the guidance?

M. Keith Waddell

Sure. And so, the -- Andrew, if you look at Accountemps on a same-day constant currency basis, historically, you get a little lift in the first quarter. But it's not a huge number. I think last year, it was 1.6% on a same-day constant currency basis. That's been offset by traditionally, OfficeTeam that have holiday lift in the first quarter, Robert Half Technology, it's -- takes longer, to get it to new projects started. So that, if you look back in time, on a same-day basis, as an example for the last 3 years, our temp business has grown sequentially 0.8%, 1.1%, 0.8%, as you look back 3 years. So frankly, the first quarter, on a same-day basis sequentially, is up a little bit. Our guidance, that same kind of assumption would be in the middle of our low and high guidance. As to Protiviti, Protiviti, seasonally, is always weaker in the first quarter. Typically, it's down 6% to 10% on a sequential basis. Our guidance would include those kind of assumptions again, the first quarter, note that, notwithstanding that sequential decline, they would still be up high single to low double digits on a year-over-year basis. At the operating income line for Protiviti, last year, we lost a little money. This year, we're hoping to be around breakeven. For the International zone, the -- we do believe we're in the process of bottoming as we talked about a little earlier on a sequential basis. You see that more noticeably than you do on a year-over-year basis, because the comps come up into play, as you noted.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

But what type of year-over-year declines are in, in international, in the guidance?

M. Keith Waddell

Well, I'm not sure if we've ever gotten that granular. I'll say this, that we certainly don't expect the full quarter declines on a year-over-year basis that we had in the first few weeks that we did disclose. I think the first few weeks, we said down 7% temp, down 28% perm. We think we'll do better than that in the guidance. But it's overall, baked into the numbers that we talked about. So on a year-over-year basis, they will appear weak. On a sequential basis, it will -- it will be consistent with the last couple, 3 quarters.

Operator

Your next question comes from the line of Kelly Flynn with Credit Suisse.

Kelly A. Flynn - Crédit Suisse AG, Research Division

Couple of quick ones. Just on the billing days, I just want to clarify. You're down about 1.5 days year-over-year in the first quarter, is that right?

M. Keith Waddell

That's correct.

Kelly A. Flynn - Crédit Suisse AG, Research Division

Okay, great. And then can you guide to gross margin for [ph] the staffing business for Q1?

M. Keith Waddell

Well, we basically said we're going to lose 25 to 30 basis points from the absence of the credits we had in the fourth quarter. So all things being equal, sequentially, your gross margin's going to be down 25, 30 basis points. On a year-over-year basis, you're still going to be up 50, 60 basis points year-over-year.

Kelly A. Flynn - Crédit Suisse AG, Research Division

Okay. And when you said though, in your comments, you were hoping to keep the bill pay spreads kind of flat, maybe pick up a little bit, I mean, can we take that 50 to 60 basis points through the year in your view? Or is there some caution you would give as we look to the out quarters?

M. Keith Waddell

Well, given that, a, our gross margins are on the highest in the industry; b, our gross margins have probably recovered better than anybody in the industries, I would tend to be conservative as we project out for 2013, which would mean, on a year-over-year basis, the basis points improvement might moderate. But again, I think you have to take that in the context of how we've done relative to everybody else so far.

Kelly A. Flynn - Crédit Suisse AG, Research Division

Okay, great. And then on the tax rate, you talked about Q1, I think you said 37%, 38%. I got the impression you might have had different comments for the out quarters, is that a good rate for the year or are there any changes that will occur later the year?

M. Keith Waddell

Most of the benefits to the first quarter remain for the remaining quarters. So 37%, 38% is not a bad range as we sit here today. As we've talked about on prior calls, there are a lot of moving parts to the tax rate. So don't hold me to basis points, but the thought is, it should be down, and it should be in the order of magnitude of 37%, 38%.

Kelly A. Flynn - Crédit Suisse AG, Research Division

Okay, great. So I still one -- a last one on the health care, ObamaCare issue. What portion of the temporary employees do you currently pay benefits to?

M. Keith Waddell

Well, the direct answer to your question would be, fewer than 10% of our current temporaries choose health care benefits for which they have to pay themselves all of the cost. That's not necessarily the same situation that we're talking about going forward. We could further say that about 25% of our current temporaries on a full-time equivalency basis, would qualify as full-time, based on the 30 hours per week. However, that entire number wouldn't work, the -- all of the second 12 months, which is the period for which you're actually, either offering or paying penalties. So the calculation, as I alluded to earlier is, what percentage become full-time as defined? Historically, that would be 25%. What percentage actually accept the coverage versus decline it? I don't think you can rely on historical percentages because the economics change so much. It's clearly going to be more than 10%. It'll be a lot less than 100%, however. And then we look at what's the cost of the coverage, we've worked with our underwriters, we have some estimates of that. And then, also as I've said, how many of the temporaries remain employed the second 12 months after they've qualified the first 12 months, and clearly, not all of that 25% are going to work all of the second 12 months. So we dialed all those assumptions in to, we believe that the cost will result in a single -- a small single digit increase to our overall pay rates.

Operator

Your next question comes from the line of Sara Gubins with Bank of America Merrill Lynch.

Sara Gubins - BofA Merrill Lynch, Research Division

Just to clarify your comments about who would qualify as an FTE. When you say 25% of current temps would qualify as FTE, just to make sure I understand that, what you meant there was, they work more than 30 hours a week, and they worked for more than 12 consecutive months, is that correct?

M. Keith Waddell

Well so, over the course of a year, as we disclose in our 10-K, I believe for 2012, it's going to be, in the U.S., approximately 160,000 temporaries. However, on a given day, we don't have 160,000 temporaries out working. We have between 40,000 and 45,000 out working. So I'm saying, of that 40,000 to 45,000 that were out working every day, 25% of those, or 10,000 or 12,000, actually got to 30 hours per week, or more specifically, 1,560 hours over a 12-month period. So it starts with, frankly, for 2012, you had 10,000 or 12,000 people that made it to 1,560 hours. We believe, if we offered all 10,000 or 12,000 of them coverage, many of them would decline it, because they have it through other sources. They don't need it from us. It's -- they get a better deal somewhere. There's tons of reasons why, once we offer it, it doesn't necessarily mean they're going to accept it. But when we say 25%, we say, of the temporaries out working on any given day, about 25% of those would qualify as full-time as defined under the Health Care Act.

Sara Gubins - BofA Merrill Lynch, Research Division

Got it, that's helpful. I'm wondering if you could give any incremental commentary around bill rate trends that you saw in the quarter?

M. Keith Waddell

Okay, for bill rate trends, hold on a second here. The year-over-year, we're up 2.3%. And sequentially, we're up 0.5%. So flat to a little better on a sequential basis, up a couple percentage points year-over-year.

Sara Gubins - BofA Merrill Lynch, Research Division

Is that U.S. specifically, or does that include International?

M. Keith Waddell

That's global. It's clearly better in the U.S.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. And then, just a last, quick question. Could you give us any update on demand trends within IT staffing? It showed a pretty good sequential slowdown in the growth rate in the quarter, and I'm wondering what you're seeing there in terms of client demand?

M. Keith Waddell

Well, I'd say, in IT, somewhat similar to our other divisions. We saw steady demand. It wasn't great, it wasn't bad. Further, in the IT business, you always have project ends that, many times, happen around year end. And we did have a project ends again this year. So the net effect of which was the sequential, was as you described, the IT perm business was a little more solid than the IT temp and consulting business.

Operator

Your next question comes from the line of Gary Bisbee with Barclays Capital.

Gary E. Bisbee - Barclays Capital, Research Division

I'd like to just follow up on that last point. And maybe more broadly, what are you hearing from businesses? Was there any putting off of projects or retrenchment around the fiscal cliff issues and tax uncertainty? And has that changed with the tax deal or are you hearing that maybe that, that remains a headwind until they make some progress on deficit reduction or is that not really been an issue at all?

M. Keith Waddell

Well, I'd say, generally, our clients were and remain cautious. And whether, it's election uncertainty, election certainty, fiscal cliff, debt ceiling uncertainty, there's many reasons. But there clearly remains some cautiousness. And our guidance reflects that cautiousness. That said, it's steady, job order flow is consistent. It's not great, it's not bad.

Gary E. Bisbee - Barclays Capital, Research Division

Okay. And did you see any impact from Hurricane Sandy in the quarter that was a meaningful amount?

M. Keith Waddell

We saw an impact, it was relatively small in the scheme of things. We don't tend to invoke weather or other related events, unless they have a material impact, but it had a small impact.

Operator

Your next question comes from the line of Tobey Sommer with SunTrust Robinson Humphrey.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Wanted to ask a follow-up question about IT and the bill rates. Is there a discernible difference in the bill rates in the IT business versus the Finance & Accounting businesses?

M. Keith Waddell

Well, discernible, I mean, I think, they're all within a general range, I don't think there are huge differences among divisions. Our client base are all non-FORTUNE 1000. The clients in our IT business are modestly larger, than our client size in the accounting and finance business, but it's not hugely larger. And for that reason, the bill and pay rate trends tend to be somewhat similar.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

And how are the bill rates across your businesses mapping against what your salary surveys would have predicted at this point?

M. Keith Waddell

Well, the salary surveys for certain positions map very nicely, and for other positions, don't map so nicely. So I don't think I would get not overly analytic, trying to overall correlate one to the other.

Operator

Your next question comes from the line of James Samford with Citigroup.

James Samford - Citigroup Inc, Research Division

Just wanted to touch on the mix shift potential from temp to perm, assuming there's some of these new secular trends that are rising either from the Affordable Care Act or even just potential people planning towards changing environment, macro-wise. How are you thinking about -- how should we think about the margin, peak margins relative to historicals? And are some of the bill rate pay spreads and the cost cutting efforts going to offset some of the mix shift impacts that might occur?

M. Keith Waddell

Well I'd say that one of the things we're most proud of, to this point in the cycle, whereas the overall unemployment rates have been -- have remained high. Our margin recovery looks pretty good. So we're very pleased with where our operating margins are, temp and perm, at this point in the cycle. And we're cautiously optimistic that, within the divisions, we can take margins to higher levels. You might have a little mix offset over time, depending on how temp grows versus perm. But quite frankly, perm's holding up pretty well. And so far in this recovery, perm has acted at least as good as it has in the past, and it's held its own from a mix standpoint. So as we sit here today, I don't see any major mix dilution from significantly less perm as temp outgrows it. So long answer short, we feel good about our margin so far. And we feel good about our margins in respect to our ability to continue to expand them as we work forward.

James Samford - Citigroup Inc, Research Division

And I guess a follow on to the high-level questions here. People are talking, certainly about -- the press about [ph] a new manufacturing renaissance, et cetera. Are you planning for a more mix shift or at least, is there demand increasing on the manufacturing side? And is that an area that you are looking at as potential growth opportunities?

M. Keith Waddell

From an industry standpoint, we're very diversified. Manufacturing is not a huge portion of our client base. That said, we're well represented there, and with expected lower energy costs in the U.S., many do expect manufacturing to have a resurgence. We have nice participation across all major markets in the U.S. And if manufacturing rebounds, as you indicate, I think we'll participate accordingly.

Operator

Your next question comes from the line of Kevin McVeigh with Macquarie Research.

Kevin D. McVeigh - Macquarie Research

Keith, it looks like the EPS guidance is essentially identical to Q4 on revenue, that's a little lighter in terms of the low end of the range. Is the swing factor there with the lower tax rate, or with payroll tax reset, things like that, is it better bill rates that's driving kind of the same EPS, if you can just help us understand that?

M. Keith Waddell

Okay, so the revenue range is exactly the same as it was a revenue range for the past quarter. And the EPS range is exactly the same. At $50,000 feed [ph], one way to look at our guidance would be, on the one hand, Protiviti has a seasonally slower quarter in the first quarter, and therefore there's a margin impact from that. On the other hand, the first quarter, you have -- you don't have the credits in gross margin that you had in the fourth quarter. On the other hand, and offsetting those, are the expected lower tax rate in the first quarter, versus what we had in the fourth quarter. So a little sequential growth in the staffing business, a somewhat lower seasonally adjusted gross margins, the impact of Protiviti offset by lower taxes.

Kevin D. McVeigh - Macquarie Research

Super. And then, the only other comment, it looks like you scaled up the buyback in Q4, was that just a function of getting to kind of annual targets, or how should we think about the buyback in 2013?

M. Keith Waddell

So if you look at our operating cash flow for the full year of 2013, between buybacks, dividends, capital expenditures and the small acquisitions that we did, we spent 100% of our cash flow, which is what we've been saying, for many years, is our plan.

Operator

Your next question comes from the line Randy Reece with Avondale Partners.

Randle G. Reece - Avondale Partners, LLC, Research Division

I was wondering, if you looked at your permanent placement personnel capacity versus the demand levels, how closely are you managing headcount to activity?

M. Keith Waddell

Well, while we are managing it closely to activity, we are leaving a capacity buffer there. So just as you look at all of 2012 revenues versus headcount, you'll see our headcount growth lagged by a few percentage points. Revenue growth, I would think that for 2013, a similar pattern would repeat, i.e. while we will closely manage it, we do have some capacity to grow revenues a little more than headcount.

Randle G. Reece - Avondale Partners, LLC, Research Division

Okay. What was the stock comp number in the quarter?

M. Keith Waddell

Stock comp was $10.6 million.

Randle G. Reece - Avondale Partners, LLC, Research Division

So, that means that, if I take depreciation and stock comp out of SG&A, everything else that's left, grew 2% year-over-year, when you managed much stronger growth in revenue and gross profit. That's really powerful leverage. But you say you still have some capacity, you're not really running totally lean.

M. Keith Waddell

Well, and to capacity is not only with our field staffing professionals, it's with our field administrative professionals, branch managers and above, as well as our back office and headquarters cost. And so we believe we can continue to leverage our field administrative infrastructure, as well as our corporate and back-office infrastructure, such that we will get leverage from them, separate and apart from, the leverage we get from our staffing professionals that sell and recruit.

Randle G. Reece - Avondale Partners, LLC, Research Division

Okay. Do you have the working capital change number for the fourth quarter or for the year? Either one would help.

M. Keith Waddell

I don’t have it off the top of my head, Randy. We clearly will have our full balance sheet soon with the K. We'll give you some of the working capital elements in the detail, supplemental schedule in the press release.

Operator

Our last question comes from the line of John Healey with Northcoast Research.

John M. Healy - Northcoast Research

Just wanted to ask a bigger picture question. Early in the call, you talked about your exposure in the Tech vertical. And as large as that vertical is for the market, and how big it is relative to you guys, there's clearly an opportunity there. And I know historically, you guys have kind of built your business internally, and the focused on the culture of Robert Half, but I was curious to know, if you guys are more willing and more open to maybe an acquisition, to kind of beef up your presence on the IT side. Is that something that you guys have on the table, or not necessarily on the table, but is that something that you guys are interested, or maybe would look at, maybe in 2013?

M. Keith Waddell

Well, I think the fact that we just did a small acquisition in the IT space in the SharePoint area would, in part, answer the question that, yes, we are more willing to increase our exposure through acquisition. But it's more likely to be a series of smaller deals, where we're more comfortable that we can integrate the cultures than it would be a larger deal, where that'd be more difficult.

John M. Healy - Northcoast Research

And that would also be on the temp side of things, not necessarily just to build it through to Protiviti consulting side of things, correct?

M. Keith Waddell

That's right, and to be clear, the acquisition we did will benefit both the staffing side and Protiviti. Where we -- we're active in SharePoint in both sides.

John M. Healy - Northcoast Research

Okay. That's helpful. And one housekeeping question. With the year coming to a close, is there a way you could give us just some color on the next year of business today, in terms of, if you looked at maybe small customers and maybe midsized customers of 50 to couple hundred employees, and then maybe Fortune 500 customers. What percentage of your business you'd put in each of those buckets?

M. Keith Waddell

Well, while we've never disclosed precise percentages, the overwhelming majority of our business remains with non-FORTUNE 1000 firms. We've talked about our sweet spot, is 75 to 100 employees, that remains our sweet spot. We do, do business with larger firms below the FORTUNE 1000, but that said, we continue to be primarily focused, and our revenues are primarily generated from non-FORTUNE 1000 firms. Sweet spot, 75 to 100 employees.

Harold Max Messmer

That was our last question. Keith and I would like to thank everyone, again, for joining us on today's call.

Operator

This concludes today's teleconference. If you missed any part of the call, it will be archived in audio format in the Investor Center of Robert Half International's website at www.rhi.com. You can also dial the conference call replay, dial-in details and conference ID are contained in the company's press release issued earlier today.

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