Resources Connection, Inc. — Form 10-Q Summary
Business context and period: Resources Connection operates Resources Global Professionals (RGP), a multinational professional-services firm providing consulting and business support services. This unaudited filing covers the third quarter and first nine months of fiscal 2015, ended February 28, 2015; comparisons are to the periods ended February 22, 2014.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Revenue | $146.8 million | $132.7 million | $441.8 million | $410.4 million |
| Gross margin | $54.8 million; 37.4% | $47.8 million; 36.0% | $170.5 million; 38.6% | $154.9 million; 37.7% |
| Income from operations | $10.5 million | $4.9 million | $35.7 million | $24.5 million |
| Net income | $6.0 million | $2.3 million | $19.4 million | $13.0 million |
| Diluted EPS | $0.16 | $0.06 | $0.51 | $0.33 |
| Adjusted EBITDA margin | 8.8% | 5.8% | 9.9% | 8.1% |
- Quarterly revenue rose 10.6%; management estimated growth of approximately 7.6% excluding the prior-year Thanksgiving calendar comparison. Nine-month revenue increased 7.7%.
- Q3 revenue increased in North America (17.1%) and Asia Pacific (15.0%), but declined in Europe (28.0%). On a constant-currency basis, the European quarterly decline was 17.1%. For the first nine months, reported revenue rose 12.8% in North America and 6.8% in Asia Pacific, and fell 20.9% in Europe.
- Hours worked increased 15.6% year over year in Q3 and 11.2% for the nine-month period; average bill rates declined 4.0% and 3.2%, respectively. The company attributed pressure partly to foreign exchange and a large, lower-rate Philippines engagement.
- Cash and cash equivalents were $67.3 million and short-term investments were $25.0 million at February 28, 2015, totaling $92.3 million. Total current assets were $206.1 million and current liabilities $55.2 million. Total liabilities were $62.1 million; the filing reports no outstanding debt balance.
- Operating cash flow for the first nine months was $2.8 million, down from $13.7 million a year earlier. The company cited unfavorable working-capital movements, including receivables, income-tax accounts, and accrued salaries and obligations. Investing activities provided $7.4 million, while financing activities used $20.8 million.
- The company repurchased approximately 1.315 million shares for $20.3 million in the first nine months; $22.7 million remained under the authorization. It paid $8.7 million in dividends and declared a quarterly dividend of $0.08 per share.
Changes, outlook, and risks
- Quarterly operating income and net income improved substantially year over year, supported by revenue growth, higher gross margin, and lower amortization expense. SG&A increased in dollars but declined as a share of revenue.
- Nine-month cash from operations fell despite higher net income, principally reflecting working-capital outflows. Cash and short-term investments declined from $114.3 million at May 31, 2014 to $92.3 million at February 28, 2015.
- Management expected existing cash and ongoing operating cash flows to meet working-capital and capital-expenditure needs for at least the next 12 months. No specific revenue or earnings guidance was provided. Management noted potential strategic acquisitions and the possibility of seeking equity or debt financing if additional capital is needed.
- The company had a $3.0 million unsecured revolving credit facility expiring November 30, 2015, with approximately $1.9 million available after letters of credit. It reported compliance with the facility’s financial covenants.
- Management cited cautious client spending in parts of Europe, foreign-exchange effects, quarter-to-quarter seasonality and holiday timing, and uncertainty in demand. Clients generally do not sign long-term service contracts and may terminate engagements at any time.
- Foreign currency is a material exposure: approximately 17% of quarterly revenue was generated outside the United States. The company did not use financial hedges; currency translation reduced nine-month comprehensive income, with a $7.6 million translation loss.
- Other disclosed risks include competition, attracting and retaining consultants, client credit and collections, goodwill or deferred-tax-asset impairment, cybersecurity and technology disruptions, legal or regulatory claims, and fluctuations in tax rates. The company reported no material legal proceedings and no material changes to its previously disclosed risk factors.
- Management concluded disclosure controls were effective as of February 28, 2015 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether North American and Asia Pacific growth can offset continued weakness in Europe, particularly after adjusting for foreign exchange and holiday timing.
- Whether bill rates and gross margins hold up as hours grow, given lower average bill rates and management’s 60% direct-cost-of-services target.
- Whether operating cash flow recovers as receivables, tax balances, and accrued compensation normalize.
- How the company deploys cash among dividends, share repurchases, capital investment, and potential acquisitions, and whether the credit facility is renewed before expiration.
- Whether currency movements, client concentration or credit quality, and tax-jurisdiction losses materially affect future results.