Resources Connection, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months of fiscal 2023, ended February 25, 2023. The quarter comprised 13 weeks. Comparisons are to the periods ended February 26, 2022. Amounts are in millions except per-share data.
Business context
Resources Connection provides global project-execution consulting services primarily through RGP, with crisis communications firm Sitrick included in Other Segments. The company sold taskforce on May 31, 2022; prior-year results include taskforce, so reported comparisons are affected by the divestiture.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $186.8 | $204.6 | $591.2 | $588.0 |
| Gross profit / margin | $71.6 / 38.3% | $76.8 / 37.5% | $237.4 / 40.2% | $227.0 / 38.6% |
| Income from operations / margin | $7.1 / 3.8% | $17.5 / 8.6% | $55.7 / 9.5% | $55.3 / 9.4% |
| Net income / diluted EPS | $7.0 / $0.21 | $19.4 / $0.58 | $42.6 / $1.24 | $46.6 / $1.39 |
| Adjusted EBITDA / margin | $16.6 / 8.9% | $22.5 / 11.0% | $77.0 / 13.0% | $69.8 / 11.9% |
| Operating cash flow | Not presented for the quarter | $63.9 | $22.7 |
Q3 revenue fell 8.7% as reported. Excluding taskforce, revenue declined 5.6%, or 4.1% on a same-day constant-currency basis, primarily because billable hours fell 7.4%; higher average bill rates partially offset the decline. Q3 SG&A rose to $59.4 million, or 31.8% of revenue, from $57.1 million, or 27.9%. Net income also reflected a $3.0 million non-cash goodwill impairment charge and near-zero income tax benefit. Adjusted EBITDA is a non-GAAP measure.
For the first nine months, revenue increased 0.5% as reported. Excluding taskforce, revenue rose 4.0%, or 5.8% on a same-day constant-currency basis, supported by higher billable hours and rates. Gross margin improved, while net income declined, in part reflecting higher income tax expense and the different prior-year tax benefits.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $103.9 million at February 25, 2023, versus $104.2 million at May 28, 2022; $45.7 million was held in international operations.
- No borrowings were outstanding under the $175 million secured revolving facility; $174.2 million remained available after letters of credit. The company reported compliance with its financial covenants. A separate Beijing revolving facility also had no borrowings.
- Operating cash flow of $63.9 million included substantial working-capital benefit, notably $26.9 million from income taxes, which included a $35.5 million federal tax refund with interest. Cash flow therefore should be considered in light of this refund and other timing effects.
- Investing activities provided $1.5 million; property, equipment and internal-use software investment was $1.4 million. Financing activities used $64.3 million, including $54.0 million of net revolver repayments, $14.1 million of dividends paid and $10.5 million of share repurchases.
- The company declared a quarterly dividend of $0.14 per share and repurchased 618,438 shares for $10.5 million during the nine months. Approximately $54.9 million remained authorized for repurchases.
- Non-cancellable purchase obligations were $16.1 million, primarily for technology-platform licensing arrangements. The company estimated total technology transformation investment at $30 million to $33 million through implementation, with most expected in fiscal 2023 and 2024.
Material changes, outlook and risks
- Q3 North American revenue declined 5.6%, as clients grew more cautious, delayed project starts and slowed deal closings. Management said the pipeline remained healthy but revenue conversion was moderate. North American billable hours fell 9.0%, partly offset by a 4.2% increase in average bill rate.
- Europe remained affected by cautious client buying and macroeconomic uncertainty; excluding taskforce and on a same-day constant-currency basis, Q3 revenue increased 4.3%. Asia Pacific revenue increased 9.8% on that basis, with demand from strategic accounts cited as a driver.
- Management expects uncertain macroeconomic conditions and recessionary pressures to continue through the remainder of fiscal 2023 and beyond. A prolonged downturn could further reduce billable hours or pressure bill rates. The filing provides no specific revenue or earnings guidance.
- The $3.0 million impairment eliminated all goodwill in Other Segments. Management attributed Sitrick’s performance pressure to pandemic-related travel restrictions and court closures or delays, which affected legal proceedings and revenue opportunities.
- Other risks include talent attraction and retention, wage and payroll costs, competition, technology transformation execution, international and foreign-exchange exposure, variable interest rates if borrowing resumes, and client collection risks. The company holds some domestic and foreign bank deposits above applicable insured limits and added bank-failure and financial-institution liquidity risks to its disclosure.
- Management stated current cash, operating cash flows and revolver availability should be adequate for working capital and capital expenditure needs for at least 12 months. Legal matters arise in the ordinary course; management said none was expected to have a material adverse effect. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether the Q3 slowdown in billable hours and client spending caution continued after the reporting date, and whether the stated healthy pipeline converted into revenue.
- How much of reported operating cash flow is repeatable without the federal tax refund and favorable tax and receivable timing.
- Technology transformation spending, remaining obligations, implementation progress and expected operational benefits.
- Whether Sitrick’s business improves and whether further impairment or other charges arise.
- Future capital allocation, including the sustainability of the dividend and pace of buybacks, alongside liquidity needs and potential acquisition spending.
- Client receivable collectability, uninsured bank-deposit exposure, foreign-currency movements and any changes in tax valuation allowances.