Resources Connection, Inc. — Form 10-Q Summary
Business context and period: Resources Connection, operating primarily as Resources Global Professionals (RGP), provides project-based professional consulting services across finance, risk, advisory, technology, human capital, and other practices. This report covers the 13 weeks ended August 24, 2013 (first quarter fiscal 2014); comparisons are with the 13 weeks ended August 25, 2012.
Key financial results
Amounts below are in millions except per-share data. Margins are calculated from reported figures.
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $131.7 | $136.9 |
| Gross margin | $49.7 (37.7%) | $53.4 (39.0%) |
| Operating income | $6.7 (5.1%) | $9.7 (7.1%) |
| Net income | $3.7 | $4.8 |
| Diluted EPS | $0.09 | $0.12 |
| Adjusted EBITDA / margin | $9.8 / 7.4% | $13.1 / 9.6% |
| Operating cash flow | $5.3 | $3.7 |
- Revenue declined 3.8% year over year. Hours worked fell about 3.4%, average bill rates were flat, and consultants on assignment decreased to 2,237 from 2,284.
- Direct service costs were 62.3% of revenue versus 61.0%; management cited an unfavorable bill-rate/pay-rate ratio and higher healthcare costs. SG&A fell 1.2% in dollars but rose to 31.6% of revenue from 30.7%.
- Cash and cash equivalents were $96.4 million and short-term investments were $25.0 million at quarter-end, totaling $121.4 million. Current assets exceeded current liabilities by $158.4 million. The filing reports no outstanding debt.
- The company generated $5.3 million in operating cash flow, spent $1.4 million net on investing activities, and used $1.6 million in financing activities. Cash increased $2.4 million during the quarter.
Material changes and capital allocation
- Revenue declined across North America (3.1%), Europe (6.5%), and Asia Pacific (6.7%). Management attributed weaker demand to cautious client spending amid global economic uncertainty, particularly in some European markets.
- Compared with Q4 FY2013, revenue fell 6.1% sequentially, primarily due to fewer billable hours during the summer holiday period; bill rates also declined 1.6% sequentially.
- The effective tax rate was approximately 46%, down from 50%, primarily due to a $350,000 reversal of uncertain international tax accruals after statutes of limitation expired. Tax rates may fluctuate with international losses and stock-option-related tax items.
- The company repurchased approximately 312,100 shares for $4.2 million at an average $13.34 per share; $68.4 million remained authorized. It declared a $0.07 quarterly dividend per share.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management expected cash and ongoing operating cash flows to cover working capital and capital expenditures for at least the next 12 months.
- A $3.0 million unsecured revolving credit facility expires November 30, 2013; management intended to renew it. Approximately $1.3 million was available after $1.7 million of letters of credit.
- Management considered a contingent earn-out payment related to the 2009 Sitrick Brincko acquisition unlikely and recorded no contingent consideration liability. However, if the earn-out is not paid, former owner John Brincko may receive $2.25 million, subject to continued employment in good standing; the company was recognizing this amount as SG&A over the remaining service period.
- Key risks include uncertain project demand and the absence of long-term client contracts, competition and consultant retention, economic weakness, foreign-exchange exposure, client collection risk, tax-rate variability, and potential impairment of goodwill. The company said it does not use currency hedging.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of August 24, 2013. No material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether project demand, billable hours, bill rates, and consultant assignments stabilize, especially in Europe.
- Whether the higher direct-cost ratio and lower operating and adjusted EBITDA margins persist or improve.
- Renewal and terms of the revolving credit facility before its November 2013 expiration.
- The final Sitrick Brincko earn-out determination and the separate potential $2.25 million payment obligation.
- Cash generation, share repurchases, and dividend sustainability relative to operating results and capital needs.
- Potential effects of foreign exchange, client credit deterioration, and tax uncertainties; interim results are not necessarily indicative of full-year performance.