Resources Connection, Inc. — Form 10-Q summary
Reporting period: The filing covers the third quarter and first nine months of fiscal 2019, ended February 23, 2019, with comparisons to the periods ended February 24, 2018. This differs from the request metadata’s “2018 Q3.” Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Resources Connection operates RGP, a multinational consulting firm providing experienced professionals and project services across finance, accounting, risk and compliance, technology, human capital, supply chain, and other areas. It operates as one segment. Revenue is primarily recognized over time based on hours worked; client engagements generally may be terminated without penalty and are not covered by long-term service agreements.
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $179.5 | $172.4 | $546.9 | $470.3 |
| Gross margin | $67.9; 37.8% | $62.5; 36.3% | $209.5; 38.3% | $175.6; 37.3% |
| Operating income | $10.2 | $5.1 | $36.3 | $21.1 |
| Net income | $5.8 | $4.6 | $22.1 | $14.8 |
| Diluted EPS | $0.18 | $0.14 | $0.68 | $0.48 |
| Adjusted EBITDA and margin (non-GAAP) | $13.9; 7.8% | $8.7; 5.0% | $47.2; 8.6% | $29.9; 6.4% |
Financial position, cash flow and capital
- Cash and liquidity: Cash and cash equivalents were $48.0 million at February 23, 2019, including $21.5 million held internationally. Current assets were $198.0 million and current liabilities $81.3 million.
- Debt: Long-term debt was $58.0 million, down from $63.0 million at May 26, 2018. The company had a $120 million revolving credit facility, $1.3 million of letters of credit, and reported $60.7 million of remaining borrowing capacity. It was in compliance with financial covenants. A $10 million principal payment was made February 28, after quarter-end.
- Cash flow, nine months: Operating activities provided $13.5 million, versus $2.3 million used in the prior-year period. Investing activities used $5.9 million, compared with $25.1 million, which included acquisition spending in the prior year. Financing activities used $15.6 million, including $22.3 million of share repurchases and $12.0 million of dividends paid. Cash declined $8.5 million to $48.0 million.
- Shareholder returns: Quarterly dividends declared were $0.13 per share, compared with $0.12 a year earlier. The company repurchased 1.37 million shares for $22.3 million during the nine months; $97.7 million remained authorized for repurchases.
Changes versus comparable periods
- Q3 revenue increased 4.1% reported and 5.3% at constant currency; nine-month revenue rose 16.3% and 17.0%, respectively. Q3 growth reflected a 3.5% increase in hours worked and 0.8% higher bill rates. Nine-month growth also included acquisition contributions, and management said it could not isolate Accretive’s contribution after integration.
- In Q3, North America revenue rose 6.4%, Asia Pacific 4.0%, and Europe declined 9.7% reported (down 3.5% at constant currency). Nine-month revenue increased across all three regions.
- Direct costs as a share of revenue improved to 62.2% from 63.7% in Q3 and to 61.7% from 62.7% for the nine-month period. Selling, general and administrative expense was 31.0% of Q3 revenue versus 32.1%, and 30.5% versus 31.9% for nine months.
- Operating income and adjusted EBITDA grew faster than revenue. Q3 operating income was nearly twice the prior-year level; nine-month operating income increased about 72%.
- The effective tax rate was approximately 40% in Q3 and 36% for nine months, versus approximately 1% and 26% in the prior-year periods. Prior-year tax results included benefits related to U.S. tax-rate changes and a reversal of foreign valuation allowances.
Outlook, management commentary, risks and unusual items
- Management said it believes cash, operating cash flows, and facility availability will meet working-capital and capital-expenditure needs for at least the next 12 months. The filing gives no revenue or earnings guidance.
- Management attributed growth partly to sales-process and organizational changes, increased client interaction, and sales incentives aligned with revenue and gross margin. It said the international redesign of the operating model was completed in Q3 FY2019 and that cost containment remains a focus.
- Quarterly revenue declined 4.9% sequentially, primarily due to Christmas, New Year’s, and Chinese New Year holidays; hours worked also fell 4.9%. The company cautioned that quarterly results fluctuate and may not indicate future performance.
- Key risks include economic weakness and reduced demand for discretionary consulting, client engagement termination and limited contract visibility, competition and consultant retention, integration of acquisitions, foreign-exchange movements, cybersecurity and data-privacy exposure, and variable-rate debt. The company does not use financial hedges for foreign-currency risk.
- Taskforce earn-out liabilities depend on estimated future Adjusted EBITDA and use subjective assumptions; the remaining estimated 2019 contingent consideration was approximately $2.4 million at quarter-end. The 2018 earn-out payment of approximately $1.9 million was made after quarter-end.
- The company expected adoption of the lease accounting standard in fiscal 2020 to result in an initial lease liability of up to $65 million and a right-of-use asset of up to $60 million. Adoption of ASC 606 had no significant impact on revenue recognition.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. Ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the applicable period: this is Q3 FY2019, not Q3 FY2018.
- Assess whether revenue growth and margin improvement are sustainable, particularly given Europe’s Q3 decline, seasonal quarter-to-quarter variability, and the absence of long-term client contracts.
- Track working-capital conversion: receivables rose, and operating cash flow was affected by unfavorable working-capital movements, including receivables and accrued salaries.
- Review the effective tax rate and its drivers, including international jurisdiction mix, valuation allowances, and GILTI treatment.
- Monitor debt, covenant headroom, floating-rate exposure, planned dividends and repurchases, and the forthcoming lease liability recognition.
- Evaluate contingent consideration estimates and acquisition integration, as well as cybersecurity, data privacy, and consultant-retention risks.