Resources Connection, Inc. (Nasdaq: RGP) — Q2 FY2021 10-Q
Business context and reporting period. Resources Connection provides consulting, professional staffing and project services, principally through its RGP brand. This unaudited filing covers the 13-week quarter ended November 28, 2020, and the six months then ended; comparisons are to the periods ended November 23, 2019. The company reports that COVID-19 disrupted demand, delayed client decisions and led to project cancellations.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $153.2 million | $184.5 million | $300.6 million | $356.7 million |
| Gross margin | 38.0% | 40.3% | 38.6% | 39.8% |
| Operating income | $1.2 million | $17.7 million | $5.5 million | $25.8 million |
| Net income (loss) | $(1.0) million | $12.3 million | $1.3 million | $17.3 million |
| Diluted EPS | $(0.03) | $0.38 | $0.04 | $0.54 |
| Adjusted EBITDA (non-GAAP) | $12.4 million | $22.7 million | $22.6 million | $34.6 million |
| Adjusted EBITDA margin (non-GAAP) | 8.1% | 12.3% | 7.5% | 9.7% |
Q2 revenue fell 17.0% year over year; on a same-day constant-currency basis it declined 15.6%. Billable hours decreased 16.9%, partly offset by a 1.0% increase in average bill rate. Revenue improved sequentially: 4.0% on a reported basis and 6.4% on a same-day constant-currency basis. Management said weekly revenue improved through the quarter. For the first half, revenue declined 15.7% year over year, while billable hours fell 16.1% and average bill rate increased 1.4%.
Direct costs were 62.0% of Q2 revenue versus 59.7% a year earlier. Management attributed the margin pressure to a narrower bill/pay spread, more holiday pay, unfavorable self-insured medical expense and lower executive search and conversion fees. Average pay rates rose faster than bill rates, reducing the bill/pay spread by 90 basis points in Q2. SG&A was $54.6 million, including $6.8 million of restructuring charges; excluding those charges, SG&A declined $6.0 million year over year.
Cash and cash equivalents were $97.2 million at November 28, 2020, including $31.3 million held internationally. Debt under the secured revolving facility was $68.0 million, down $20.0 million from May 30, 2020; $50.7 million of capacity remained after outstanding letters of credit. The company reported compliance with facility covenants. Operating cash flow for the first half was $29.6 million, compared with $17.2 million a year earlier. Investing activities used $1.6 million; financing activities used $29.1 million, including debt repayments, dividends and contingent consideration. Cash increased $1.6 million during the period.
Current assets were $218.6 million and current liabilities were $91.6 million. Total liabilities were $205.0 million and stockholders’ equity was $306.9 million at quarter-end. The quarterly dividend declared was $0.14 per share; the board’s continuation of the dividend remains discretionary.
Material changes and unusual items
- Q2 operating income fell to $1.2 million from $17.7 million; the company recorded a net loss, versus net income in the prior-year quarter. First-half net income also declined substantially year over year.
- Restructuring charges were $6.8 million in Q2 and $7.8 million for the first half. The global plans target organizational streamlining, market exits and a smaller real-estate footprint. The company estimated another $6.5 million to $9.5 million of cash requirements to complete remaining restructuring actions; timing and cost may vary, including with real-estate market conditions.
- The Q2 income-tax provision was $2.3 million despite $1.3 million of pretax income, producing a 178.5% effective rate. The company said European restructuring losses did not generate recognized tax benefits because of valuation allowances, while tax expense was primarily associated with income outside Europe.
- First-half operating cash flow benefited from an $8.2 million payroll-tax payment deferral under the CARES Act and favorable working-capital movements, including lower receivables. These factors should be considered when assessing cash-flow sustainability.
- The company paid $5.3 million of Veracity earn-out consideration in November; $3.0 million was classified as financing cash flow and the balance as operating cash flow. The remaining contingent-consideration liability was $3.0 million at quarter-end.
- Management changed its segment reporting in Q2: RGP is the sole reportable segment, while taskforce and Sitrick are combined as Other Segments. Prior periods were recast. A goodwill impairment assessment following the change found no impairment.
Outlook, management commentary and risks
The filing provides no specific revenue or earnings guidance. Management said the pandemic’s full effects remain uncertain and demand may continue to be reduced or delayed. It cited an improving pipeline and faster client decision-making, and sees potential opportunity from increased demand for flexible talent, virtual delivery and digital transformation. The company aims to launch its human cloud platform by the end of fiscal 2021 and is expanding Veracity’s offerings and integration with RGP. Healthcare and strategic client programs are additional growth priorities.
Management said current cash, operating cash flow and facility availability should cover working capital, capital spending, restructuring and potential contingent payments for at least the next 12 months. Risks include continued pandemic-related demand weakness, execution and cost uncertainty in restructuring, variable tax outcomes, foreign-currency movements, and variable-rate debt exposure. The company does not currently hedge foreign-currency risk. It reported no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the reported sequential revenue recovery and strengthening pipeline continue, and how they translate into billable hours and revenue.
- Whether gross margin stabilizes as bill/pay spread, holiday timing and medical costs change.
- Actual remaining restructuring cash costs and timing compared with the estimated $6.5 million to $9.5 million.
- Cash generation after the benefit of the payroll-tax deferral and working-capital improvements.
- Debt levels, borrowing costs, covenant headroom and the company’s ability to maintain dividends while funding restructuring and growth initiatives.
- Tax-rate variability and the realization of tax benefits associated with losses in Europe and other jurisdictions.
- Progress toward the human cloud platform launch and the expected commercial contribution from Veracity and healthcare initiatives.