Resources Connection, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the first quarter of fiscal 2019, the 13 weeks ended August 25, 2018, compared with the 13 weeks ended August 26, 2017. Resources Connection operates RGP, a multinational consulting and professional services firm serving clients in areas including finance, risk and compliance, technology, human capital, supply chain, and legal services. Results are unaudited.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $178.6 million | $141.2 million | Up 26.5% (26.6% constant currency) |
| Gross margin | $68.2 million; 38.2% of revenue | $53.7 million; 38.0% | Margin up 0.2 percentage points |
| Operating income | $9.8 million; 5.5% of revenue | $5.3 million; 3.8% | Up $4.4 million |
| Net income | $5.7 million | $2.1 million | Up $3.6 million |
| Diluted EPS | $0.18 | $0.07 | Up $0.11 |
| Operating cash flow | $(16.6) million | $(13.1) million | Cash use increased $3.5 million |
Gross margin was 38.2% of revenue, compared with 38.0%. Direct costs were 61.8% of revenue versus 62.0%; SG&A was 31.6% versus 33.6%. Management reported Adjusted EBITDA of $13.2 million, or 7.4% of revenue, compared with $7.9 million and 5.6%. These are non-GAAP measures and exclude stock compensation and, for FY2019, a contingent-consideration adjustment.
Cash and cash equivalents were $27.1 million at quarter-end, down from $56.5 million at May 26, 2018; $13.9 million was held internationally. Operating cash use reflected working-capital outflows, particularly higher receivables and payment of incentive compensation. Investing activities used $1.1 million. Financing activities used $11.7 million, including $7.5 million of share repurchases, $3.8 million of dividends paid, and $5.0 million of debt repayment, partly offset by stock-plan proceeds.
Long-term debt under the secured revolving facility was $58.0 million, down from $63.0 million. The $120 million facility had $30.7 million available under the revolving loan and $30.0 million under the reducing revolving loan; $1.3 million of letters of credit was outstanding. The company was in compliance with financial covenants. Current assets were $172.5 million and current liabilities were $72.6 million.
Material changes versus the prior comparable period
- Revenue rose 26.5%; excluding taskforce, acquired in fiscal 2018, revenue increased 23.5%. Hours worked increased 23.5%, and bill rates improved 2.5%.
- Revenue increased across regions: North America 26.1%, Europe 36.5%, and Asia Pacific 15.9%. Europe growth excluding taskforce was 8.6%. The company said financial-services revenue remained weak year over year.
- Consultants on assignment increased to 3,176 from 2,495. The company reported 74 offices, including 26 outside the U.S., compared with 67 offices, including 24 internationally.
- SG&A increased to $56.4 million from $47.4 million, primarily due to acquired and growth-related personnel, higher commissions and bonuses, and marketing. The increase was partly offset by lower prior-year severance and acquisition costs.
- Interest expense increased to $0.6 million from $0.3 million, reflecting higher borrowings and interest rates. Amortization expense of $1.0 million was recorded in FY2019, primarily for acquired intangible assets; none was recorded in the prior-year quarter.
- The effective tax rate declined to approximately 38% from 58%, mainly due to the lower U.S. statutory rate and improved foreign results. The quarter included reversals of previously recorded $3.4 million capital-gains tax and matching deferred tax assets following proposed tax regulations.
Outlook, management commentary, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management said current cash, operating cash flows, and facility availability were expected to meet working-capital and capital-expenditure needs for at least the next 12 months.
- Management attributed the sequential revenue decline of approximately 2.8% from Q4 FY2018 partly to U.S. holidays and consultant summer breaks; hours worked fell 2.4% sequentially while average bill rates were unchanged.
- Management said the North American sales and operating-model changes had contributed to improved growth and customer experience; international rollout was continuing. Cost containment remained a priority.
- Clients generally have no long-term service commitments and may terminate engagements at any time. Demand, consultant availability, pricing and competition, economic conditions, foreign exchange, acquisition integration, and client collections are material risks.
- Taskforce contributed $4.2 million of quarterly revenue. Its remaining 2018–2019 earn-out was estimated at €3.9 million, approximately $4.5 million; valuation depends on subjective EBITDA and discount-rate assumptions. The estimate increased by $97,000 in the quarter.
- The company repurchased 467,912 shares at an average $15.95 per share; approximately $112.5 million remained under its repurchase authorization. The quarterly dividend declared was $0.13 per share.
- The company adopted ASC 606 without a significant revenue-recognition impact or opening retained-earnings adjustment. It also capitalized approximately $0.4 million of cloud-software implementation costs. Management expected the forthcoming lease-accounting standard to significantly increase reported balance-sheet assets and liabilities.
- Foreign-currency exposure includes approximately 21% of revenue generated outside the U.S.; the company did not use financial hedges. A 10% interest-rate change at quarter-end borrowing levels was estimated to change annual interest expense by approximately $0.2 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether revenue and hours-worked growth persist, especially in financial services and after separating acquisition contributions.
- Whether receivables and working capital normalize and operating cash flow improves after the quarter’s substantial cash use.
- Acquisition integration, realized synergies, and future taskforce earn-out payments and valuation assumptions.
- Debt repayment capacity, facility availability and covenant compliance, and exposure to variable interest rates.
- Sustainability of margin improvement, dividend payments, and share repurchases relative to cash generation.
- Future tax-rate effects, including GILTI accounting and any further tax-law or measurement-period adjustments.