Resources Connection, Inc. — Form 10-Q Summary
Business context and reporting period. Resources Connection, operating primarily as Resources Global Professionals (RGP), provides project-based professional consulting services across finance, risk, advisory, technology, human capital and other practices. This filing covers the fiscal third quarter and first nine months ended February 22, 2014; the comparable periods ended February 23, 2013. Each quarter comprised 13 weeks. Fiscal 2014 is expected to have 53 weeks, including a 14-week fourth quarter.
Financial performance and liquidity
| Metric | Quarter ended Feb. 22, 2014 | Prior-year quarter | Nine months ended Feb. 22, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $132.7 million | $138.0 million | $410.4 million | $416.2 million |
| Gross margin | $47.8 million; 36.0% | $51.2 million; 37.1% | $154.9 million; 37.7% | $159.8 million; 38.4% |
| Operating income | $4.9 million; 3.7% of revenue | $8.1 million; 5.8% | $24.5 million; 6.0% | $29.0 million; 7.0% |
| Net income / diluted EPS | $2.3 million / $0.06 | $4.5 million / $0.11 | $13.0 million / $0.33 | $15.2 million / $0.37 |
| Adjusted EBITDA / margin | $7.8 million / 5.8% | $11.4 million / 8.3% | $33.4 million / 8.1% | $39.3 million / 9.4% |
- Cash flow: Operating cash flow was $13.7 million for the first nine months, down from $18.0 million. Investing activities used $11.1 million and financing activities used $22.4 million. Cash and cash equivalents fell to $74.3 million from $94.0 million at May 25, 2013.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $107.3 million at quarter-end. The company reported no borrowings under its $3.0 million unsecured revolver; approximately $1.6 million was available after $1.4 million of letters of credit. The facility expires November 30, 2014. Management said current cash and expected operating cash flows should cover working capital and capital expenditure needs for at least 12 months.
- Capital returns: The company repurchased about 1.6 million shares for $21.6 million in the first nine months; $50.9 million remained authorized. It paid $7.9 million in dividends and declared $0.07 per share for the quarter.
Material changes versus the comparable periods
- Quarterly revenue fell 3.8%; nine-month revenue fell 1.4%. In the quarter, North America declined 2.3%, Europe 12.3% and Asia Pacific 1.8%. For nine months, North America grew 0.2%, while Europe declined 8.2% and Asia Pacific 4.4%.
- Management attributed weaker quarterly revenue to cautious client spending, particularly in parts of Europe, fewer hours worked and holiday timing. Third-quarter hours declined about 2.6% year over year and average bill rates were down 1.6%. Revenue was also estimated to be $3.3 million lower because Thanksgiving fell in the third quarter this year rather than the second quarter of the prior year.
- Quarterly direct costs were 64.0% of revenue versus 62.9% a year earlier, reflecting additional paid holidays, an unfavorable bill-rate/pay-rate ratio and lower leverage on certain benefit costs. SG&A was nearly flat in dollars, but rose to 31.3% of revenue from 30.1%. Lower gross margin and operating leverage contributed to reduced earnings.
- Foreign exchange reduced reported international revenue: using prior-year exchange rates, international revenue would have been higher by $0.6 million for the quarter and $1.3 million for the nine-month period.
- The effective tax rate was approximately 53% for the quarter versus 44% a year earlier, mainly due to foreign losses without recognized tax benefits. The nine-month rate declined to approximately 47% from 48%, including a $0.67 million reversal of uncertain international tax accruals after statutes of limitation expired.
Outlook, commentary, risks and unusual items
- No formal revenue or earnings guidance is provided. Management described client spending as cautious and noted that clients generally do not sign long-term contracts, limiting revenue visibility. Management expects a 14-week fourth quarter.
- In April 2014, after quarter-end, the company announced European headcount reductions to align costs with current revenue. It expects approximately $2.8 million of severance charges, mostly in fiscal Q4, or about $0.07 per share after tax, and annualized G&A savings of $4.5 million beginning in fiscal 2015. No office closures are planned.
- A $2.25 million cash payment to a seller related to the Sitrick Brincko acquisition was made in Q3. The acquisition earn-out threshold was not met, so no contingent consideration was payable; the payment was instead due under the agreement following the earn-out period.
- Principal disclosed risks include economic weakness and reduced demand for outsourced consulting, competition and pricing pressure, reliance on securing new projects and retaining qualified consultants, international and foreign-exchange exposure, client credit and collections, acquisition integration, and potential goodwill impairment. The company does not use currency hedging. Management reported no material change in risk factors and no material legal proceedings or off-balance-sheet arrangements.
- Disclosure controls were assessed as effective as of February 22, 2014, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether European demand and revenue stabilize, and whether the announced restructuring delivers the stated $4.5 million annualized savings.
- Whether margins recover from the quarter’s higher direct-cost ratio and lower operating leverage, especially after holiday and payroll-tax effects.
- Cash generation, receivables and liquidity after buybacks, dividends and the $2.25 million acquisition-related payment; also confirm the revolver’s status after its November 2014 expiry.
- The sustainability of reported earnings given volatile international tax benefits and the unusually high quarterly effective tax rate.
- Progress in consultant utilization, bill rates and regional performance, particularly in Europe; assess reported results alongside the company’s non-GAAP Adjusted EBITDA measure.