Resources Connection, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended February 23, 2013 (13 weeks), with nine-month results compared with periods ended February 25, 2012. The filing is for fiscal 2013 Q3, notwithstanding the request metadata’s “2012 Q3.” Amounts below are in millions of dollars unless noted.
Business context and financial performance
Resources Connection operates RGP, a multinational professional-services firm providing experienced consultants for client projects and interim needs across finance, risk, advisory, technology, human capital, healthcare, legal and other practice areas. It reported one operating segment.
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Revenue | $138.0 | $143.3 | $416.2 | $426.3 |
| Gross margin dollars | $51.2 | $53.6 | $159.8 | $160.7 |
| Gross margin percentage | 37.1% | 37.4% | 38.4% | 37.7% |
| Operating income | $8.1 | $8.4 | $29.0 | $58.4 |
| Net income | $4.5 | $4.3 | $15.2 | $32.2 |
| Diluted EPS | $0.11 | $0.10 | $0.37 | $0.73 |
| Adjusted EBITDA and margin | $11.4; 8.3% | $12.3; 8.6% | $39.3; 9.4% | $38.1; 8.9% |
Q3 revenue declined 3.7% year over year; management cited 2.4% fewer hours worked, a 0.8% decline in average bill rates, and lower reimbursable expenses. Q3 operating income fell 3.8%, while net income rose 3.7%. For the nine months, revenue fell 2.4% and net income fell 52.9%; the prior-year comparison included a large favorable, non-cash contingent-consideration adjustment.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $18.0 million, versus $19.8 million in the prior-year period. Investing used $12.5 million and financing used $23.4 million; cash declined $19.2 million to $85.9 million.
- At February 23, cash and cash equivalents were $85.9 million and short-term investments were $33.0 million, totaling $118.9 million. Total assets were $427.6 million; current assets were $224.0 million and current liabilities $61.5 million.
- The balance sheet reported no debt. The company had a $3.0 million unsecured revolver, with approximately $1.3 million available after letters of credit; it was in covenant compliance. The facility was due to expire November 30, 2013.
- Nine-month repurchases totaled $21.9 million for approximately 1.8 million shares. About $84.8 million remained authorized. Dividends declared were $0.18 per share for the nine months; the quarterly dividend was $0.06 per share.
Changes, outlook and risks
- North American Q3 revenue increased 0.5%, while Europe fell 16.1% and Asia Pacific fell 17.0%. For the nine months, North America grew 2.1%, Europe declined 18.2%, and Asia Pacific declined 9.5%. Management attributed international weakness particularly to economic uncertainty in Europe.
- Q3 direct-cost ratio rose to 62.9% from 62.6%, reflecting higher healthcare costs and reduced benefits-cost leverage; the company’s stated target is 60%. SG&A declined to $41.6 million, partly due to a $0.55 million legal settlement and lower incentive compensation.
- Prior-year nine-month operating results included a $33.44 million favorable contingent-consideration adjustment and a $0.50 million employee-related reversal. Management recorded no such adjustment in the current period and considered a November 2013 earn-out payment more unlikely than not: the first three annual measurement periods averaged $6.1 million EBITDA against an $11.3 million threshold. A separate $2.25 million payment to an acquired-business executive may be due if the earn-out is not paid, subject to employment conditions.
- No quantified revenue or earnings guidance was provided. Management said cash and expected operating cash flows should meet working-capital and capital-expenditure needs for at least the next 12 months. It noted that future demand is difficult to predict because clients generally do not sign long-term contracts.
- Key exposures include global economic weakness, especially in Europe; client demand and collections; competition and consultant retention; foreign-exchange movements (the company does not hedge); potential goodwill or other asset impairment; and volatility in tax rates. The filing reported no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Whether demand, billable hours and bill rates stabilize, particularly in Europe and Asia Pacific, and whether direct-cost margins improve toward the 60% target.
- Whether the Sitrick Brincko earn-out assessment remains appropriate through its November 2013 measurement date, including the potential employee-related payment.
- Cash generation, receivables collection, and the company’s liquidity after buybacks and dividends; also verify the revolver’s status and expiration.
- How much of the nine-month earnings decline reflects underlying operations versus the prior-year contingent-consideration benefit, and assess GAAP results alongside management’s non-GAAP Adjusted EBITDA.
- Potential effects of foreign exchange and the company’s elevated, jurisdiction-sensitive effective tax rate.