Resources Connection, Inc. — Form 10-Q Summary
Business context and reporting period
Resources Connection, Inc. operates RGP, a multinational professional services and consulting firm. This filing covers the 13-week second quarter and six months of fiscal 2019, ended November 24, 2018; comparisons are with the periods ended November 25, 2017. The company reports as one operating segment.
Financial results
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $188.8m | $156.7m | $367.4m | $297.9m |
| Gross margin | $73.4m; 38.9% | $59.4m; 37.9% | $141.6m; 38.5% | $113.1m; 38.0% |
| Operating income | $16.3m; 8.6% | $10.7m; 6.8% | $26.1m; 7.1% | $16.0m; 5.4% |
| Net income | $10.6m | $8.1m | $16.3m | $10.3m |
| Diluted EPS | $0.33 | $0.27 | $0.50 | $0.34 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $1.7m | $1.6m |
Q2 revenue grew 20.5% year over year, or 21.3% on a constant-currency basis. Six-month revenue rose 23.3%, or 23.8% constant currency. Q2 hours worked increased 19.6% and bill rates 0.8%; for the first six months, hours rose 21.5% and bill rates 1.6%. North America drove much of the growth; management said acquired Accretive revenue could not be separately quantified after integration.
Q2 direct costs were 61.1% of revenue, compared with 62.1% a year earlier; six-month direct costs were 61.5%, versus 62.0%. SG&A was 29.1% of Q2 revenue, down from 30.3%, and 30.3% for the first half, down from 31.9%. Non-GAAP adjusted EBITDA was $20.0m in Q2 (10.6% margin), versus $13.4m (8.5%); first-half adjusted EBITDA was $33.2m (9.0%), versus $21.3m (7.1%).
Balance sheet, liquidity and capital allocation
At November 24, 2018, cash and cash equivalents were $40.8m, versus $56.5m at May 26, 2018. Total assets were $431.3m and stockholders’ equity $277.4m. Current assets of $195.4m exceeded current liabilities of $85.6m (current ratio approximately 2.3). Trade receivables were $146.5m, up from $130.5m at fiscal year-end.
Long-term debt was $58.0m, down from $63.0m; net debt was approximately $17.2m. The secured revolving credit facility is $120m and expires October 2021. The filing reports $30.7m remaining under the revolving loan and $30.0m under the reducing revolving loan; $1.3m of letters of credit were outstanding. The company was in compliance with facility covenants. Management said cash, operating cash flow and facility availability should cover working capital and capital needs for at least 12 months.
First-half operating cash flow was modest at $1.7m despite $16.3m of net income, principally reflecting a $17.8m cash use from receivables and other working-capital movements. Investing activities used $3.4m, mainly for property and equipment. Financing activities used $13.3m, including $7.9m of dividends, $13.0m of share repurchases and $5.0m of debt repayment, partly offset by employee option and stock-purchase proceeds. The quarterly dividend declared was $0.13 per share. About $107.0m remained under the stock-repurchase authorization.
Material changes, outlook and risks
- Profitability improved as revenue grew faster than direct costs and SG&A as a percentage of revenue declined. Management attributed growth partly to sales-process and operating-model changes, stronger client engagement, and incentive and business-development initiatives. The North American operating-model rollout was complete; rollout in Europe and Asia Pacific was continuing.
- Prior-year comparisons include acquisitions: taskforce, acquired in August 2017, and Accretive, acquired in December 2017. Accretive had been integrated into RGP by the start of fiscal 2019. Acquisition-related intangible amortization increased to $1.0m in Q2 and $1.9m in the first half.
- There is no formal revenue or earnings guidance in the provided filing text. Management stated a goal of direct service costs at 60% of revenue and continued focus on SG&A leverage and cost containment.
- Cash conversion warrants attention: receivables growth and working-capital changes absorbed much of first-half earnings. The company also noted clients generally have no long-term service contracts and may terminate engagements at any time; demand is sensitive to economic conditions, competition, consultant availability and project mix.
- Other risks include foreign-exchange exposure (the company does not hedge currency risk), variable-rate debt, acquisition integration and contingent consideration, client credit and collections, cybersecurity and data privacy, and possible goodwill impairment. Management disclosed prior cybersecurity incidents without material impact to date. Ordinary-course legal matters were not considered material.
- The effective tax rate was about 33% in Q2 and 35% for the first half, versus 21% and 33%, respectively, in the comparable prior periods. The prior-year Q2 included a $2.4m reversal of foreign deferred-tax valuation allowances, which did not recur; the company was still evaluating its accounting policy for GILTI-related taxes. Adoption of ASC 606 did not significantly affect revenue recognition.
Important facts for investors to verify
- Whether revenue growth and improved margins persist after separating organic performance from acquisition contributions; management could not isolate Accretive revenue.
- Whether receivables and working capital convert reported earnings into stronger operating cash flow, and how collections and bad-debt provisions develop.
- Whether the 60% direct-cost target and SG&A leverage goals are achieved, including as the international operating-model rollout continues.
- Debt-facility availability, covenant headroom and interest-rate exposure, alongside continued dividends and buybacks.
- Assumptions behind the approximately $4.4m fair value of taskforce contingent consideration, and the effect of acquisition-related amortization and tax items on future earnings.