Resources Connection, Inc. — Form 10-Q
Reporting period: First quarter of fiscal 2016, the 13 weeks ended August 29, 2015. Comparisons are with the 13 weeks ended August 30, 2014, unless noted. Amounts below are in millions of U.S. dollars except per-share data.
Business context and results
Resources Connection operates as Resources Global Professionals (RGP), providing consulting and business support services across the United States and international markets. It reported one operating segment and served clients from 68 offices in 20 countries.
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $148.3 | $143.4 | +3.4% |
| Gross profit | $57.5 | $56.2 | +2.2% |
| Gross margin | 38.7% | 39.2% | Down 0.5 percentage points |
| Operating income | $12.6 | $10.7 | +18.3% |
| Operating margin | 8.5% | 7.4% | Up 1.1 percentage points |
| Net income | $7.1 | $5.4 | +32.2% |
| Diluted EPS | $0.19 | $0.14 | +35.7% |
| Adjusted EBITDA (non-GAAP) | $15.7 | $13.5 | +16.1% |
| Adjusted EBITDA margin (non-GAAP) | 10.6% | 9.4% | Up 1.2 percentage points |
| Operating cash flow | $(4.6) | $(8.7) | Use decreased by $4.1 |
Revenue rose as hours worked increased approximately 6.4%, partly offset by average bill rates down 3.3%. Reported regional revenue grew 4.7% in North America and 16.9% in Asia Pacific, but declined 14.3% in Europe; management said Europe grew 1.8% at constant exchange rates. Management estimated foreign exchange reduced reported international revenue by $4.1 million versus prior-year exchange rates. Gross margin pressure reflected higher medical coverage costs and zero-margin expense reimbursements, partly offset by a favorable bill-rate/pay-rate ratio. SG&A declined slightly to $44.0 million; as a share of revenue it fell to 29.7% from 30.9%.
Liquidity, cash flow, debt and capital allocation
At August 29, 2015, cash and cash equivalents were $76.2 million, short-term investments were $25.0 million, and combined cash and short-term investments were $101.2 million. Current assets were $209.3 million and current liabilities $54.4 million. Total liabilities were $61.6 million, with no long-term borrowings reported on the balance sheet.
Operating cash use was mainly associated with working-capital movements, including a $17.0 million decrease in accrued salaries and related obligations, partly offset by income-tax cash inflows and collections of receivables. Investing activities used $0.6 million; financing activities used $5.7 million, including $6.2 million of share repurchases and $3.0 million of dividends paid. Cash declined $11.0 million during the quarter.
The company had a $3.0 million unsecured revolving credit facility, expiring November 30, 2015, and stated that the parties intended to extend it. Approximately $1.9 million was available after letters of credit; the company reported compliance with its financial covenants. Management expected cash and operating cash flows to meet working-capital and capital expenditure needs for at least 12 months.
The company repurchased approximately 395,000 shares for $6.2 million at an average price of $15.76. About $10.5 million remained under the then-current authorization; a new $150 million authorization approved in July would begin after that authorization was exhausted. The board declared a $0.10-per-share quarterly dividend, approximately $3.7 million, paid September 22, 2015.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management cautioned that quarterly results fluctuate and that past trends are not reliable predictors; clients do not sign long-term service contracts.
- Management cited global economic uncertainty and cautious consulting spending, particularly in some European markets. The company also faces foreign-exchange exposure and does not use financial hedges for currency risk.
- SG&A included approximately $0.9 million of non-cash stock compensation related to accelerated option vesting following Donald Murray’s transition from Executive Chairman to Chairman. Stock-based compensation totaled $2.2 million, versus $1.5 million in the prior-year quarter.
- The effective tax rate was approximately 44%, down from approximately 50%. Management said the rate is affected by international jurisdiction mix, losses for which no tax benefit is recognized, and the timing of eligible stock-option and ESPP tax benefits; future rates may fluctuate.
- Key disclosed risks include economic weakness, competition and pricing pressure, securing new projects, consultant recruitment and retention, international and currency risks, acquisitions, client credit and collections, technology and cybersecurity, and goodwill impairment. Management reported no material legal proceedings and no material change in risk factors from its FY2015 Form 10-K.
- Disclosure controls were deemed effective as of August 29, 2015, with no material change in internal control over financial reporting during the quarter. The filing reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether revenue and consultant utilization continue to grow, and whether bill rates stabilize after the reported decline.
- Whether European revenue improves on a constant-currency basis and how exchange rates affect reported results and margins.
- Whether operating cash flow recovers from quarterly cash use, particularly as accrued compensation and other working-capital balances change.
- The credit-facility extension and availability, and the continued capacity to fund dividends, repurchases, capital spending and potential acquisitions.
- The sustainability of the improved operating margin and tax rate, including the effects of one-time accelerated stock compensation and tax-benefit timing.
- Potential goodwill impairment, client collection issues, and other risks described in the filing; results are unaudited interim results and may not indicate full-year performance.