Resources Connection, Inc. — Form 10-Q Summary
Business context and reporting period. Resources Connection, operating primarily as RGP, provides consulting and business support services across finance, accounting, risk, technology, human capital, supply chain, and legal functions. This filing covers the third quarter and first nine months of fiscal 2017, ended February 25, 2017; the comparative periods ended February 27, 2016. The filing is for fiscal 2017 Q3, notwithstanding the request metadata’s “2016 Q3” label. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended Feb. 25, 2017 | Year-over-year change | Nine months ended Feb. 25, 2017 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $143.8 million | Down 2.0% | $434.8 million | Down 2.5% |
| Gross margin | $52.2 million; 36.3% of revenue | $54.9 million; 37.4% | $163.3 million; 37.6% | $171.3 million; 38.4% |
| Operating income | $6.0 million; 4.1% of revenue | $10.7 million; 7.3% | $25.7 million; 5.9% | $38.1 million; 8.5% |
| Net income | $2.9 million | $6.0 million | $14.2 million | $21.8 million |
| Diluted EPS | $0.09 | $0.16 | $0.41 | $0.58 |
| Adjusted EBITDA margin | 5.8% | 8.9% | 7.6% | 10.3% |
Quarterly bill rates fell 2.5% (1.7% at constant currency), while hours worked rose 0.6%. For the nine-month period, bill rates declined 1.7% (0.8% constant currency) and hours worked declined 0.9%. Management cited weaker consulting demand in financial services and energy, and lower North American revenue; Europe and Asia Pacific revenue grew. Foreign exchange reduced reported international revenue by an estimated $1.2 million in the quarter and $2.0 million year to date, versus constant-currency comparisons.
Quarterly direct costs were 63.7% of revenue, up from 62.6%, reflecting a less favorable bill-rate/pay-rate ratio and higher medical costs. SG&A rose to $45.4 million from $43.3 million, including investment in managing consultants and U.S. business-development staff. The nine-month SG&A increase also reflects these investments and approximately $1.5 million of severance and accelerated stock compensation; comparable prior-year costs included approximately $0.9 million of accelerated stock compensation.
Cash flow, balance sheet, and capital allocation
- Cash and cash equivalents were $44.6 million at February 25, 2017, down from $91.1 million at May 28, 2016. Short-term investments declined from $25.0 million to zero, largely reflecting investment redemptions.
- Nine-month operating cash flow was $6.9 million, versus $7.0 million a year earlier. Net income was lower and working-capital movements, including income taxes and accrued salaries, affected cash generation.
- At period end, total assets were $345.4 million and stockholders’ equity was $233.5 million. Current assets were $149.0 million against current liabilities of $58.5 million.
- The company had $48.0 million of funded borrowings under its secured $120 million revolving credit facility and $1.2 million of letters of credit. The note describes total facility usage of $49.2 million including letters of credit. The facility matures in October 2021; the company reported compliance with its financial covenants. Remaining availability was $40.8 million under the revolving loan and $30.0 million under the reducing revolving loan.
- Nine-month financing cash outflow was $73.8 million. The company spent approximately $104.2 million on a modified Dutch auction tender offer for 6.5 million shares, funded partly with $58.0 million of facility borrowings, and spent another $13.5 million on open-market repurchases. It paid $10.9 million in dividends; the quarterly dividend was $0.11 per share. Approximately $125.1 million remained authorized for repurchases at quarter end.
Outlook, risks, and unusual items
- No specific revenue, earnings, or margin guidance is provided. Management said current cash, expected operating cash flows, and facility availability should meet working-capital and capital-expenditure needs for at least the next 12 months.
- On April 5, 2017, after quarter end, the company announced a restructuring involving 60 management and administrative positions and consolidation of two offices. It expected $2.0–$2.5 million in severance and lease-termination charges in the fiscal fourth quarter, with approximately $7.0 million of annualized savings.
- Management also announced initiatives to strengthen enterprise sales and redesign service offerings, including a global CRM implementation and expanded focus on M&A project support and data governance, security, and analytics. Sales-process changes were expected to take 12–18 months.
- Key risks include uncertain project demand (clients generally have no long-term service commitments), competition and pricing pressure, consultant recruitment and retention, foreign-exchange exposure, client credit and collection risk, and variable results driven by holidays and hours worked. The company does not use financial hedges for foreign-currency exposure.
- The facility imposes operating and financial covenants; noncompliance could lead to acceleration of debt and loss of borrowing availability. The company reported no material legal proceedings and no off-balance-sheet arrangements. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue, bill rates, hours worked, and North American demand stabilize, and whether growth in Europe and Asia Pacific continues.
- Whether management can improve gross margin and SG&A leverage while funding the announced sales and operating-model initiatives.
- Execution and timing of the restructuring: expected $2.0–$2.5 million charge versus approximately $7.0 million annualized savings.
- Cash generation and leverage after substantial share repurchases, including the precise facility balance, letters of credit, and remaining borrowing capacity.
- Dividend and repurchase sustainability in light of operating cash flow, credit-facility covenants, and management’s capital-allocation priorities.
- Exposure to foreign currency, client-sector weakness, and tax-rate volatility; the quarter’s effective tax rate was approximately 49%.