Resources Connection, Inc. (RGP) — Form 10-Q Summary
Business and reporting period: RGP provides project execution and consulting services using on-demand professional talent, principally through its RGP business. This filing covers the 13-week second quarter and first six months of fiscal 2024, ended November 25, 2023, compared with the periods ended November 26, 2022. RGP accounted for about 99% of quarterly revenue. The quarter included the November 15 acquisition of CloudGo, a Singapore-based ServiceNow and digital transformation firm.
Key financial results
| Metric | Q2 FY2024 | Q2 FY2023 | First six months FY2024 | First six months FY2023 |
|---|---|---|---|---|
| Revenue | $163.1 million | $200.4 million | $333.3 million | $404.4 million |
| Gross profit / margin | $63.5 million / 38.9% | $82.4 million / 41.1% | $130.5 million / 39.1% | $165.8 million / 41.0% |
| Operating income / margin | $8.4 million / 5.1% | $23.5 million / 11.7% | $13.2 million / 3.8% | $48.6 million / 12.0% |
| Net income / margin | $4.9 million / 3.0% | $17.4 million / 8.7% | $8.0 million / 2.4% | $35.6 million / 8.8% |
| Diluted EPS | $0.14 | $0.51 | $0.24 | $1.04 |
| Adjusted EBITDA / margin (non-GAAP) | $16.1 million / 9.8% | $29.6 million / 14.8% | $27.6 million / 8.3% | $60.3 million / 14.9% |
Quarterly revenue fell 18.6% (19.2% on a same-day constant-currency basis); first-half revenue fell 17.6% (18.1% on that basis). Management attributed the decline principally to lower client spending: quarterly billable hours declined 15.1% and average bill rate declined 4.7%. In the first half, billable hours declined 14.8% and average bill rate declined 3.9%.
Gross margin declined as direct costs rose to 61.1% of quarterly revenue from 58.9% a year earlier, reflecting a higher pay/bill ratio, lower revenue leverage and higher employee health-benefit costs. SG&A decreased in dollars in Q2 but rose as a share of revenue, to 32.5% from 28.3%; first-half SG&A was nearly flat in dollars but increased to 34.0% of revenue from 28.0%.
Cash, debt and liquidity
- Cash and cash equivalents were $95.8 million at November 25, 2023, down from $116.8 million at May 27, 2023. Approximately $47.3 million was held in international operations.
- Operating activities used $1.8 million in the first half, versus providing $23.7 million in the prior-year period. The current-period use reflected lower earnings and unfavorable working-capital movements, including a $17.2 million decrease in accrued salaries and related obligations, partly offset by an $8.3 million decrease in receivables.
- Investing activities used $8.1 million, including $7.2 million for CloudGo, net of cash acquired. Financing activities used $11.2 million, principally for $9.4 million in dividends and $5.0 million in share repurchases. Cash declined by $21.0 million overall.
- No borrowings were outstanding under the $175 million revolving credit facility; $173.6 million remained available after letters of credit. The company reported compliance with its financial covenants. There was also no outstanding Beijing Revolver debt.
- Operating lease liabilities totaled $16.5 million. The company reported $12.1 million in non-cancellable purchase obligations, primarily technology licensing commitments.
Material changes, outlook and risks
- CloudGo acquisition: RGP paid initial net cash consideration of $7.2 million; contingent consideration may reach $12 million, with a preliminary fair value of $4.5 million. CloudGo contributed $0.2 million of revenue and a $0.1 million operating loss in the quarter. Purchase accounting remains provisional. The company recorded $1.1 million in acquisition costs.
- Restructuring: A U.S. cost-reduction plan, substantially completed in Q2, reduced management and administrative workforce by approximately 8%. Restructuring costs were $2.3 million; a $0.3 million liability remained at quarter-end.
- Technology investment: RGP had capitalized $11.9 million for its technology transformation and expensed $3.6 million in the first half. Remaining investment was estimated at $15 million to $20 million, with most expected in fiscal 2024 and 2025. Management expects current cash, operating cash flows and credit availability to fund needs for at least 12 months.
- Management commentary: The company said client spending remained cautious and sales opportunities were taking longer to close, despite a relatively resilient gross pipeline. It plans to continue digital transformation, brand and operating-model initiatives, value-based pricing and targeted acquisitions. A North American talent-management system launch was planned for February 2024. The filing provides no quantified revenue or earnings guidance.
- Tax and unusual items: The quarterly effective tax rate was 43.4%, versus 25.2% a year earlier; management cited a nonrecurring increase in stock-option forfeitures and tax capitalization of acquisition costs. Q2 results also included restructuring and acquisition costs. Adjusted EBITDA excludes certain costs and is a non-GAAP measure; it should be considered alongside GAAP results.
- Risks and contingencies: Management identified macroeconomic weakness, further reductions in client spending and billable hours, pricing and wage pressures, talent retention, international and currency exposure, execution risks in technology initiatives and acquisitions, and the possibility that restructuring benefits may not materialize. The company uses no foreign-currency hedges. Management said ordinary-course legal matters were not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
- Capital allocation and subsequent event: The quarterly dividend remained $0.14 per share, subject to board approval. RGP repurchased about $5.0 million of shares during the first half, with $45.2 million authorized for future repurchases. On December 28, 2023, it signed a 10-year New York office lease beginning July 1, 2024, with annual fixed rent of $1.2 million for the first five years and $1.3 million for the remaining five.
Important facts for investors to verify
- Whether revenue, billable hours and client spending stabilize, and whether the pipeline converts into completed engagements.
- Whether the company can protect gross margin through pricing, pay/bill management and cost control amid lower utilization and higher benefit costs.
- How operating cash flow trends after the first-half working-capital outflow, and the pace of cash use for technology commitments, dividends and repurchases.
- CloudGo’s performance against contingent-payment targets, final purchase-price allocation and the expected contribution of the acquisition.
- Actual remaining technology-transformation spending and whether the planned investments deliver operational efficiencies and growth.
- The effect of the elevated effective tax rate and nonrecurring items on future GAAP earnings; compare reported results with the company’s adjusted, non-GAAP measures.