Business context and reporting period
Resources Connection, Inc. (operating primarily as Resources Global Professionals, or RGP) provides consulting and business-support services across finance, accounting, risk, technology, human capital, supply chain, healthcare, and legal services. This unaudited Form 10-Q covers the 13 weeks ended August 30, 2014 (fiscal 2015 first quarter), compared with the 13 weeks ended August 24, 2013, unless otherwise noted.
Financial performance and position
| Metric | Quarter ended Aug. 30, 2014 | Comparable 2013 quarter | Change |
|---|---|---|---|
| Revenue | $143.4 million | $131.7 million | +8.9% |
| Gross margin | $56.2 million; 39.2% of revenue | $49.7 million; 37.7% | Margin +1.5 percentage points |
| Operating income | $10.7 million; 7.4% of revenue | $6.7 million; 5.1% | +58.8% |
| Net income | $5.4 million | $3.7 million | +47.7% |
| Diluted EPS | $0.14 | $0.09 | +$0.05 |
| Operating cash flow | $(8.7) million | $5.3 million | Down $14.0 million |
Adjusted EBITDA, a non-GAAP measure, was $13.5 million versus $9.8 million; adjusted EBITDA margin was 9.4% versus 7.4%. The filing cautions that these measures are not substitutes for GAAP results or cash flow.
- Direct cost of services was 60.8% of revenue, down from 62.3%; SG&A was 30.9% of revenue, down from 31.6%.
- Income tax expense was $5.3 million, an approximately 50% effective rate, versus $3.1 million and approximately 46%. The higher rate reflected foreign losses without corresponding tax benefits and a prior-year $350,000 reversal of uncertain international tax accruals.
- At August 30, cash and cash equivalents were $75.1 million and short-term investments were $25.0 million, totaling $100.1 million, versus $114.3 million at May 31, 2014. Current assets were $204.4 million and current liabilities $52.3 million. Total liabilities were $59.0 million; the balance sheet reports no borrowings.
- A $3.0 million unsecured revolving credit facility expires November 30, 2014. Approximately $1.6 million was available after $1.4 million of letters of credit; management intended to renew it.
- The company repurchased approximately 383,000 shares for $5.7 million and declared a $0.08-per-share quarterly dividend. Shares outstanding were approximately 38.1 million at quarter end.
Material changes and management commentary
- Revenue growth was led by North America (+13.3%); Asia Pacific increased 1.5%, while Europe declined 12.9%. Hours worked rose 11.3%, partly offset by a 2.4% decrease in average bill rates. Consultants on assignment increased to 2,434 from 2,237.
- Management attributed improved gross margin to fewer paid holidays, a better bill-rate/pay-rate ratio, and lower healthcare costs. Average pay rates declined 3.1%.
- SG&A increased in dollars to $44.3 million, including higher marketing and growth-related staffing costs and $700,000 of severance charges tied to European operations.
- Sequential revenue fell 8.5% from the prior quarter, which had 14 weeks versus 13 weeks in this quarter. Excluding approximately $9.8 million of revenue from the extra week, sequential revenue declined 2.4%.
- Operating cash outflow was driven primarily by a $16.6 million reduction in accrued salaries and related obligations, which management linked to payroll timing and increased bonus-plan payments. Investing activities provided $8.6 million, largely reflecting net redemptions of short-term investments; financing activities used $4.9 million.
- Foreign-currency translation reduced comprehensive income by $1.2 million. About 19% of quarterly revenue was generated outside the U.S.; the company did not use financial hedges for currency exposure.
Outlook, risks, and contingencies
No specific revenue or earnings guidance was provided. Management expected existing cash and operating cash flows to cover working-capital and capital-expenditure needs for at least the next 12 months. It noted that clients were cautious about consulting spending amid continuing global economic uncertainty, particularly in some European markets, and that clients generally do not sign long-term service contracts.
- Key risks include uncertain demand for discretionary consulting projects, competition and pricing pressure, retaining qualified consultants, client credit and collections, international operating and currency risks, and quarterly revenue variability.
- The company warned that tax rates may fluctuate because of foreign losses, valuation allowances, and the uncertain timing of eligible stock-option tax benefits. It also identified potential goodwill impairment if market value or operating performance weakens.
- Legal matters arose in the ordinary course of business; management did not expect them to have a material adverse effect. The filing reports no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
- Disclosure controls were judged effective as of August 30, 2014; no material change in internal control over financial reporting was reported during the quarter.
- The prior stock plans expired September 3, 2014. A replacement incentive plan and an ESPP amendment were subject to stockholder approval at the October 23, 2014 annual meeting.
Important facts for investors to verify
- Whether North American growth continues and Europe stabilizes, given the company’s project-based demand and lack of long-term client contracts.
- Whether the improvement in gross and adjusted EBITDA margins is sustainable despite lower bill rates and European severance costs.
- Whether operating cash flow rebounds after the accrued-payroll and bonus-related outflow, and how receivables and collections develop.
- The renewal and terms of the revolving credit facility, and the continued availability and composition of cash and short-term investments.
- The effective tax rate, foreign-currency exposure, and shareholder approval and impact of the proposed incentive-plan and ESPP changes.