Resources Connection, Inc. — Q2 FY2017 Form 10-Q
Reporting period: 13 weeks ended November 26, 2016; six-month results are compared with the periods ended November 28, 2015. Amounts below are in millions unless stated otherwise. RGP provides multinational consulting and business-support services.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Revenue | $147.6 | $150.9 | $290.9 | $299.2 |
| Gross margin | $56.5; 38.3% | $58.9; 39.0% | $111.0; 38.2% | $116.3; 38.9% |
| Operating income | $9.6; 6.5% | $14.8; 9.8% | $19.8; 6.8% | $27.4; 9.2% |
| Net income | $5.7 | $8.7 | $11.3 | $15.8 |
| Diluted EPS | $0.16 | $0.23 | $0.31 | $0.42 |
| Adjusted EBITDA margin (non-GAAP) | 8.3% | 11.3% | 8.4% | 10.9% |
For the six months, operating cash flow was $8.1 versus $10.7 in the prior-year period. Capital expenditures were $2.3. Cash and cash equivalents ended at $58.6; short-term investments were $5.0. The company reported $58.0 of facility borrowings and $59.2 outstanding including $1.2 of letters of credit. The $120 facility had $30.8 remaining under its revolving loan and $30.0 under its reducing revolving loan. Current assets were $168.1 and current liabilities $65.8.
Changes and drivers
- Q2 revenue declined 2.2%; six-month revenue declined 2.8%. Management cited lower bill rates and hours worked, reduced consulting opportunities in financial services and energy, and the Memorial Day holiday timing for part of the first-half decline.
- North America revenue fell 3.9% in Q2 and 4.4% for the six months. Europe and Asia Pacific grew in both reported periods. At constant currency, international revenue would have been higher; management estimated a $0.6 Q2 and $0.9 first-half translation impact.
- Q2 bill rates decreased 1.7% and hours worked decreased 0.6% year over year. Sequentially, revenue rose 2.9%, as hours worked increased 3.8% while average bill rates fell 0.8%.
- Gross margin contracted as direct costs rose to 61.7% of Q2 revenue from 61.0%, reflecting an unfavorable bill-rate/pay-rate ratio and higher medical coverage costs. SG&A rose to $46.1 from $43.2, including $1.1 of severance and about $0.4 of accelerated stock-compensation expense related to a senior executive’s departure.
- Cash and short-term investments declined from $116.0 at May 28, 2016 to $63.6, principally following the large share repurchase. Stockholders’ equity fell to $238.7 from $342.6; treasury stock increased by $112.0.
Capital allocation, outlook and risks
- In November, the company bought 6,515,264 shares in a modified Dutch auction at $16.00 per share, for approximately $104.2 excluding transaction costs; the filing’s repurchase table reports $16.18 per share including transaction costs. The tender was funded with $58.0 of facility borrowings and cash on hand. A further 68,600 shares were purchased in the open market during Q2.
- The company paid $7.6 in dividends during the first half and declared $0.11 per share quarterly dividends, subject to board approval. Management expected quarterly dividends of approximately $3.3 for the remaining two quarters, reflecting the reduced share count.
- Management said current cash, investments, operating cash flows and facility availability were expected to meet working-capital and capital-expenditure needs for at least 12 months. No numerical revenue or earnings guidance was provided.
- Risks include uncertain demand because client engagements are not long-term commitments; economic and sector exposure; competition and consultant retention; foreign-exchange movements (the company does not hedge); client credit risk; and facility covenants. The company was compliant with financial covenants at quarter-end. Management warned that covenant failure could trigger acceleration or termination of commitments.
- The filing reports no material legal proceedings and no material change in previously disclosed risk factors apart from risks associated with the new credit facility. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
- CEO transition: Kate W. Duchene, previously interim CEO, was appointed President and CEO on December 20, 2016, after Anthony Cherbak’s resignation for health considerations. The filing also notes approximately $9.4 of unrecognized stock-option compensation cost, expected to be recognized over a weighted-average 35 months.
Key facts for investors to verify
- Whether revenue, hours worked and bill-rate trends improved after quarter-end, particularly in North America and financial services and energy.
- The cash and debt consequences of the tender offer, facility availability, interest costs and ongoing covenant compliance.
- Whether weaker gross and operating margins persist, and how much SG&A reflects recurring investment versus severance and accelerated stock compensation.
- Future dividend and repurchase decisions, including the effect of the materially lower share count on per-share results.
- The impact of foreign-exchange movements and the company’s exposure to client collections, goodwill impairment and upcoming accounting standards.