Resources Connection, Inc. — Form 10-Q Summary
Business context and period: Resources Connection operates as RGP, a global consulting firm providing business transformation, finance and accounting, risk and compliance, and technology and digital services. This report covers the 13-week second quarter and six months of fiscal 2020 ended November 23, 2019; comparatives are for the periods ended November 24, 2018. Amounts below are in U.S. dollars.
Key financial results
| Metric | Three months ended Nov. 23, 2019 | Prior-year quarter | Six months ended Nov. 23, 2019 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $184.5 million | $188.8 million | $356.7 million | $367.4 million |
| Gross margin | $74.4 million; 40.3% | $73.4 million; 38.9% | $141.9 million; 39.8% | $141.6 million; 38.5% |
| Operating income | $17.7 million | $16.3 million | $25.8 million | $26.1 million |
| Net income | $12.3 million | $10.6 million | $17.3 million | $16.3 million |
| Diluted EPS | $0.38 | $0.33 | $0.54 | $0.50 |
| Adjusted EBITDA and margin | $22.7 million; 12.3% | $20.0 million; 10.6% | $34.6 million; 9.7% | $33.2 million; 9.0% |
Adjusted EBITDA and margin are non-GAAP measures; the company cautions they should not be considered substitutes for GAAP results or cash flows.
- Cash flow: Six-month operating cash flow was $17.2 million, compared with $1.7 million in the prior year. Investing cash outflow was $25.5 million, including $30.3 million paid net of acquired cash for Veracity. Financing provided $8.5 million. Cash declined $0.01 million to $43.0 million.
- Liquidity and debt: At November 23, cash was $43.0 million, including $26.2 million held internationally; revolving-credit borrowings were $54.0 million. The $120 million secured facility had $34.5 million remaining under the revolving loan and $30.0 million under the non-reborrowable reducing facility, plus $1.5 million of letters of credit. The company reported compliance with covenants and said available cash, operating cash flow and facility capacity should meet needs for at least 12 months.
- Dividends: A $0.14-per-share quarterly dividend was declared, up from $0.13 a year earlier. The board retains discretion over future dividends.
Material changes and management commentary
- Quarterly revenue decreased 2.3% year over year (1.9% at constant currency); first-half revenue declined 2.9% (2.4% constant currency). Management attributed declines mainly to fewer hours worked, the wind-down of North American technical-accounting implementation projects, and exits from Sweden and Belgium. The quarter’s hours fell 2.0% year over year; average bill rates decreased slightly.
- By region, quarterly revenue decreased 0.9% in North America and 16.4% in Europe, while Asia Pacific increased 7.6%. First-half revenue fell 2.4% in North America and 13.0% in Europe, and rose 9.7% in Asia Pacific. Constant-currency Europe declines were smaller.
- Gross margin improved as direct costs fell to 59.7% of quarterly revenue from 61.1% (first half: 60.2% versus 61.5%). Management cited improved bill/pay ratios and fewer U.S. holidays. SG&A was 29.1% of quarterly revenue in both years; it was 31.0% for the first half versus 30.3%.
- Quarterly net income rose despite lower revenue, with improved gross margin and a $0.5 million gain from settlement of an Accretive pre-acquisition claim contributing to results. Adjusted EBITDA excludes specified items, including contingent-consideration changes.
- Veracity, acquired July 31, 2019 to expand digital-transformation capabilities, contributed $5.8 million of quarterly and $7.2 million of first-half revenue. The acquisition added $22.953 million of goodwill and identifiable intangible assets; estimated contingent consideration was $6.4 million at quarter-end. Future earn-out valuation depends on subjective performance projections.
- The company sold certain Sweden operations and substantially exited Belgium. Remaining Belgium exit activities, including analysis of potential tax benefits, were expected in fiscal 2020’s third quarter. Related exit costs were approximately $0.7 million for the quarter and first half.
- Adoption of lease accounting added $40.0 million of operating right-of-use assets and $46.6 million of lease liabilities at November 23, 2019. The company said adoption had an immaterial impact on current-period operating results and cash flows.
Outlook, risks and contingencies
The filing gives no quantified revenue, earnings or margin guidance. Management said it would continue investing in its brand and digital innovation, refine its operating model, and optimize systems and structure. Demand is uncertain because clients do not sign long-term contracts; management cautioned that quarterly comparisons may not predict future performance.
- Foreign-currency movements affect reported results; approximately 19.2% of quarterly revenue came from outside the U.S. The company does not currently hedge currency exposure.
- Variable-rate debt creates interest-rate exposure; management estimated a 10% rate change would alter annual interest expense by about $0.2 million at the quarter-end borrowing balance.
- Acquisition earn-outs and purchase-price allocations remain subject to estimates and possible revisions. The company also disclosed ordinary-course legal matters but stated they were not expected to have a material adverse effect.
- No material changes to the risk factors in the prior Form 10-K were reported. Disclosure controls were assessed as effective, with no reported material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and consultant assignment hours stabilize, particularly in North America and Europe, and whether Asia Pacific growth continues.
- Veracity’s ongoing revenue and profitability contribution, integration progress, and the range and timing of contingent earn-out payments.
- Cash conversion, working-capital movements, and debt levels following the acquisition; the filing’s strong year-over-year operating cash flow comparison includes a much larger prior-year receivables outflow.
- Progress and costs of the Belgium exit, and any tax benefits ultimately identified.
- Capacity to sustain dividends and potential repurchases while funding investment and servicing variable-rate debt; the filing reported no share repurchases in the period.