Resources Connection, Inc. — Form 10-Q Summary
Business context and reporting period. RGP is a global consulting firm providing services in business transformation, finance and accounting, risk and compliance, and technology and digital innovation. This filing covers the 13 weeks and nine months ended February 22, 2020 (fiscal 2020 third quarter), compared with periods ended February 23, 2019. The interim financial statements are unaudited.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $168.1 million | $179.5 million | $524.8 million | $546.9 million |
| Gross margin | $61.4 million; 36.6% | $67.9 million; 37.8% | $203.3 million; 38.7% | $209.5 million; 38.3% |
| Income from operations | $3.5 million | $10.2 million | $29.2 million | $36.3 million |
| Net income | $6.9 million | $5.8 million | $24.2 million | $22.1 million |
| Diluted EPS | $0.21 | $0.18 | $0.75 | $0.68 |
| Adjusted EBITDA and margin | $6.8 million; 4.0% | $13.9 million; 7.8% | $41.3 million; 7.9% | $47.2 million; 8.6% |
Cash flow and liquidity. Nine-month operating cash flow was $21.6 million, versus $13.5 million a year earlier. Investing activities used $26.5 million, including $30.3 million net cash for the Veracity acquisition; financing activities used $1.8 million. Cash declined by $7.1 million to $35.9 million at February 22, 2020. The company had $49.0 million of revolving-facility borrowings, $1.5 million of letters of credit, and stated availability of $39.5 million on the revolving loan plus $30.0 million on the reducing revolver. It was compliant with facility covenants.
In March 2020, RGP borrowed an additional $39.0 million as a precaution amid COVID-19 uncertainty. As of March 24, it reported $0.5 million remaining on the revolving loan and $30.0 million on the reducing revolver. The secured $120 million facility expires October 17, 2021. The filing states cash, operating cash flows and facility availability were expected to meet needs for at least 12 months, while warning that the pandemic could affect that outlook.
Balance sheet and capital returns. At February 22, total assets were $486.0 million, total liabilities $183.2 million, and stockholders’ equity $302.8 million. Long-term debt was $49.0 million. Adoption of lease accounting resulted in recognition of $38.2 million of operating right-of-use assets and $44.8 million of present-value operating lease liabilities. The company declared dividends of $0.14 per share each quarter during the nine-month period, totaling $13.1 million paid. It repurchased 318,430 shares for approximately $5.0 million during Q3; $85.1 million remained under its repurchase authorization at quarter-end.
Changes versus prior comparable periods
- Q3 revenue fell 6.4% year over year (6.2% in constant currency), reflecting 6.4% fewer hours worked and a 0.8% lower average bill rate. Consultant headcount on assignment was 2,894 versus 3,059 a year earlier.
- Q3 operating income fell to $3.5 million from $10.2 million; Adjusted EBITDA declined to $6.8 million from $13.9 million. Direct costs rose to 63.5% of revenue from 62.2%, principally due to holiday pay and a slightly lower bill/pay ratio. SG&A dollars were nearly flat, but rose to 32.9% of revenue from 31.0%.
- Q3 net income increased despite lower operating income, primarily because the quarter recorded a $4.0 million income tax benefit versus $3.8 million of tax expense a year earlier. The benefit principally reflected a tax deduction related to investments in certain exiting foreign subsidiaries.
- Nine-month revenue decreased 4.0% (3.7% in constant currency). North America revenue declined 3.4%, Europe fell 13.3%, while Asia Pacific grew 4.9%. Nine-month net income rose 9.6%, but Adjusted EBITDA fell 12.4%.
- Veracity, acquired July 31, 2019, contributed $5.4 million of Q3 revenue and $12.6 million for the nine months, and $1.1 million and $2.5 million of operating income, respectively. Expertence was acquired November 30, 2019; its results were not material. Goodwill increased to $213.5 million, including acquisition-related additions.
Outlook, commentary, risks and unusual items
- COVID-19: The company said the outbreak adversely affected Asia Pacific in Q3 and expected an adverse effect on Q4 FY2020 results; the impact on the next fiscal year was not yet quantifiable. Risks include reduced demand, delayed client purchasing decisions, collection delays, operational disruption and possible goodwill impairment. RGP moved employees to remote work and suspended non-essential travel.
- Restructuring: On February 27, 2020, management and the board approved a plan to reduce approximately 7.5% of management and administrative staff and consolidate markets. In early March, 73 positions were eliminated in North America and Asia Pacific. Expected employee termination charges are $4–$5 million, with approximately $3 million expected in Q4 FY2020; management estimates annual pre-tax personnel savings of $13–$15 million. It also plans to terminate or sublet 26% of real estate leases and expects about $1 million of related costs in Q4, with additional charges potentially continuing into FY2021. Savings may be partly reinvested, depending on COVID-19 conditions.
- International exits and tax: RGP sold its Sweden business and was winding down Belgium, Luxembourg and Norway. The Q3 tax benefit included an estimated $6.6 million benefit from a worthless-stock deduction; a separate loan-related tax benefit was fully reserved because of uncertainty and potential tax-authority examination.
- Acquisition contingencies: Veracity earn-out fair value depends on projected EBITDA and discount-rate assumptions and could materially affect future results if revised. Total contingent consideration liabilities were approximately $7.8 million at February 22, including liabilities associated with multiple acquisitions.
- Other items: The company recorded a $0.5 million gain from settlement of an Accretive pre-acquisition claim. Management said ordinary-course legal matters were not expected to have a material adverse effect. No material off-balance-sheet arrangements were reported. Disclosure controls were assessed as effective.
- No specific revenue or earnings guidance was provided. Management’s stated outlook includes the expected near-term pandemic impact, restructuring costs and projected personnel savings.
Important facts for investors to verify
- How COVID-19 affected revenue, consultant utilization, client payment patterns and liquidity after the February 22 quarter-end, including subsequent borrowing and remaining credit availability.
- Whether Q4 and FY2021 restructuring charges, lease exits and projected $13–$15 million annual personnel savings track management’s estimates.
- Whether revenue and margins stabilize after the Q3 decline in hours worked, bill rates and gross margin, and whether Veracity’s contribution offsets weakness in legacy operations.
- The sustainability of reported net income given the tax benefit, and the treatment or potential examination of the foreign-subsidiary tax deductions.
- Changes in contingent consideration estimates, goodwill impairment indicators, debt covenant compliance and the company’s capacity to maintain dividends and repurchases.