Resources Connection, Inc. — Q1 FY2018 Form 10-Q
Business context and period. RGP provides multinational consulting and professional services across finance, accounting, technology, risk, human capital, supply chain, legal and related areas. The unaudited quarter ended August 26, 2017, comprised 13 weeks; comparisons are with the 13 weeks ended August 27, 2016. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $141.2 million | $143.4 million |
| Gross margin | $53.7 million; 38.0% of revenue | $54.5 million; 38.0% |
| Operating income | $5.3 million; 3.8% | $10.1 million; 7.1% |
| Net income / diluted EPS | $2.1 million / $0.07 | $5.6 million / $0.15 |
| Adjusted EBITDA / margin | $7.9 million / 5.6% | $12.2 million / 8.5% |
| Operating cash flow | $(13.1) million | $(7.1) million |
Revenue declined 1.5%; bill rates improved 1.7%, while hours worked fell 3.6%. Direct costs were 62.0% of revenue in both periods. SG&A rose $3.8 million to $47.4 million, equal to 33.6% of revenue versus 30.4%. The effective tax rate increased to approximately 58% from 45%; the filing attributes this largely to lower profitability increasing the relative impact of permanent book-tax differences.
Cash and cash equivalents were $49.6 million at August 26, down from $62.3 million at May 27, 2017. Current assets were $154.1 million and current liabilities $54.6 million. Debt was $48.0 million, with $1.0 million of letters of credit outstanding; the company reported $41.0 million available under the revolving loan and $30.0 million under the reducing revolving loan. It was in compliance with facility covenants. Net cash used in investing was $0.4 million; financing used $0.5 million. The quarterly dividend was $0.12 per share.
Changes, outlook and key commentary
- Operating income fell approximately 47% and net income approximately 63% year over year, despite stable gross margin. Lower revenue and higher SG&A weighed on results.
- Management cited weaker financial-services client development as the primary cause of the revenue decline. By geography, Europe revenue grew 7.4%, while North America declined 1.7% and Asia Pacific declined 10.7% (reported currency). Consultant assignments fell to 2,495 from 2,570.
- SG&A included approximately $1.4 million of severance and $0.7 million of acquisition-related costs. The quarter also included approximately $140,000 of noncash stock compensation for accelerated vesting related to a senior executive’s departure. Management said other spending reflected transformation and growth initiatives.
- Cash used in operations was driven in part by the customary first-quarter settlement of prior-year bonus obligations; accrued salaries and related obligations fell $18.8 million. Management expected current cash, operating cash flows and facility availability to meet working-capital and capital needs for at least 12 months.
- Strategic initiatives include targeting approximately $7.0 million of annual SG&A reductions, strengthening sales and business development, and redesigning the operating model. The cost-reduction plan was completed by fiscal year-end 2017; sales-process changes were expected to continue through Q4 FY2018 or Q1 FY2019. No financial forecast was provided.
- After quarter-end, on August 31, 2017, the company acquired Germany-based taskforce for initial consideration of €6.0 million (about $7.1 million) in cash and restricted stock, plus performance-based earn-outs for 2017–2019. Taskforce reported approximately €12 million ($13.3 million) of revenue for 2016; its results were expected to be included beginning in the quarter ending November 25, 2017.
- Key risks include demand and project volatility, competition, the absence of long-term client contracts, consultant recruitment and retention, foreign-exchange exposure, acquisition integration, and credit-facility covenants. The company does not hedge foreign-currency exposure. Management reported effective disclosure controls and no material change in internal control over financial reporting; no material legal proceedings were reported.
Important facts for investors to verify
- Whether the sales and client-development initiatives improve hours worked and revenue, particularly in financial services and North America.
- Whether SG&A and transformation spending decline as planned, and how recurring margins compare after severance and acquisition costs.
- Whether operating cash flow recovers after the seasonal bonus payments and whether cash remains adequate following the taskforce acquisition and earn-outs.
- The taskforce acquisition’s final purchase accounting, integration performance, and any earn-out obligations.
- The sustainability of the $0.12 quarterly dividend, covenant headroom, and variable-rate exposure on $48.0 million of debt.
- The high, variable effective tax rate and potential tax effects from stock-based compensation and expiring options.