Resources Connection, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the 13 weeks ended August 27, 2016; comparison is with the 13 weeks ended August 29, 2015. Resources Connection operates RGP, a multinational professional services firm providing consulting and business support services. Amounts below are in millions of dollars unless noted.
Financial results
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $143.4 | $148.3 | Down 3.3% |
| Gross margin | $54.5; 38.0% | $57.5; 38.7% | Down $2.9 |
| Operating income | $10.1; 7.1% | $12.6; 8.5% | Down $2.5 |
| Net income | $5.6 | $7.1 | Down 21% |
| Diluted EPS | $0.15 | $0.19 | Down $0.04 |
| Adjusted EBITDA / margin | $12.2 / 8.5% | $15.7 / 10.6% | Down $3.5 / 2.1 percentage points |
| Operating cash flow | $(7.1) | $(4.6) | Greater cash use |
Direct service costs were 62.0% of revenue, compared with 61.3%; SG&A was 30.4% of revenue, compared with 29.7%. The effective tax rate was approximately 45%, versus 44%, with management attributing the increase to lower profitability in foreign operations.
Liquidity, balance sheet and capital allocation
- At August 27, cash and cash equivalents were $92.9 million and short-term investments were $10.0 million, totaling $102.9 million. Total current assets were $203.9 million and current liabilities $54.9 million.
- Total liabilities were $58.8 million; the filing reports no outstanding borrowings. The company had a $3.0 million unsecured revolving credit facility, with approximately $1.8 million available after $1.2 million of letters of credit. It was in covenant compliance and expected the facility to be extended beyond its November 30, 2016 expiry.
- Operating activities used $7.1 million, while investing activities provided $13.9 million, principally from $15.0 million of short-term investment redemptions. Financing activities used $5.6 million. Cash increased by $1.8 million during the quarter.
- The company repurchased approximately 375,000 shares for $5.7 million at an average $15.09 per share; $132.9 million remained authorized. It declared a quarterly dividend of $0.11 per share, approximately $4.0 million in total, paid September 21, 2016 and accrued at quarter-end.
Changes, outlook and notable items
- Revenue declined 3.3% year over year. Management cited 2.7% fewer hours worked, the timing of Memorial Day (estimated $1.4 million revenue impact), and fewer opportunities in financial services and energy. Bill rates were unchanged year over year. On a constant-currency basis, Europe revenue rose 9.8%, while North America declined 4.7% and Asia Pacific declined 1.1%.
- Sequentially, revenue fell approximately 6.0% from the prior quarter; management estimated Memorial Day and July Fourth holidays reduced revenue by $2.8 million. The company cautioned that quarter-to-quarter comparisons may not indicate future performance.
- Management said existing cash and expected operating cash flows should cover working capital and capital expenditure needs for at least the next 12 months. No specific revenue or earnings guidance was provided. The company noted that growth, acquisitions, or weaker cash generation could lead it to seek equity or debt financing.
- On October 5, 2016, after quarter-end, the company announced CEO Anthony Cherbak’s resignation effective October 7 for health reasons. Chief Legal Officer and EVP Kate W. Duchene was named interim CEO while the board searches for a permanent successor.
- Risks highlighted include uncertain demand and lack of long-term client contracts, competition, recruiting and retaining consultants, foreign currency exposure (about 19% of quarterly revenue generated outside the U.S.; no currency hedging), client credit risk, and potential goodwill impairment. Management said there were no material changes to previously disclosed risk factors. Ordinary-course legal matters were not expected to have a material adverse effect.
- The company early adopted deferred-tax balance-sheet classification guidance retrospectively; this reclassified deferred tax assets without changing total assets. It expects new lease accounting guidance to significantly affect reported balance-sheet assets and liabilities, but had not yet quantified the impact.
Most important facts for investors to verify
- Whether demand, hours worked and bill-rate/pay-rate economics improve, particularly in North America and the financial services and energy sectors.
- How the CEO transition affects client retention, consultant recruitment, operating execution and the permanent CEO search.
- Whether operating cash flow recovers after the quarter’s $7.1 million use and whether cash remains sufficient while supporting dividends, repurchases and investment.
- Availability and terms of the revolving credit facility extension, and the company’s ongoing compliance with its covenants.
- Future tax rates, foreign-exchange effects, goodwill recoverability and the eventual balance-sheet impact of lease accounting changes.