Resources Connection, Inc. — Fiscal 2021 Third-Quarter 10-Q
Reporting period: 13 weeks ended February 27, 2021; comparisons are with the 13 weeks ended February 22, 2020. The nine-month period also ended February 27, 2021. The company provides consulting, professional staffing and project execution services, primarily through Resources Global Professionals (RGP).
Financial results and liquidity
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $156.6m | $168.1m | $457.2m | $524.8m |
| Gross profit / margin | $57.0m / 36.4% | $61.4m / 36.5% | $173.1m / 37.9% | $203.3m / 38.7% |
| Operating income / margin | $2.0m / 1.3% | $3.5m / 2.1% | $7.5m / 1.6% | $29.2m / 5.6% |
| Net income | $0.7m | $6.9m | $2.0m | $24.2m |
| Diluted EPS | $0.02 | $0.21 | $0.06 | $0.75 |
| Adjusted EBITDA / margin | $9.5m / 6.0% | $6.8m / 4.0% | $32.1m / 7.0% | $41.3m / 7.9% |
Cash flow: Operating activities provided $35.4m in the first nine months, versus $21.6m a year earlier. Investing used $2.8m and financing used $46.0m. Cash declined $11.6m to $84.0m; operating cash flow benefited from lower receivables and higher other liabilities, including deferred payroll taxes.
Balance sheet and debt: At February 27, cash was $84.0m, current assets $212.0m, current liabilities $103.4m, and long-term debt $53.0m, down from $88.0m at May 30, 2020. The $120m revolving facility had $65.7m of remaining capacity after $1.3m of letters of credit; the company reported covenant compliance. On March 24, 2021, it repaid a further $10m, reducing facility borrowings to $43m. Operating lease liabilities totaled $34.6m.
Capital returns: The company declared a quarterly dividend of $0.14 per share, or approximately $4.6m, paid March 18, 2021. No shares were repurchased during the reported quarter or nine-month period.
Material changes and operating drivers
- Q3 revenue fell 6.8% year over year; nine-month revenue fell 12.9%. Management attributed the declines mainly to COVID-19-related demand weakness and lower billable hours. Q3 billable hours decreased 6.6%, partly offset by a 1.3% higher average bill rate.
- Revenue improved sequentially 2.2% from Q2. Non-holiday weekly revenue rose 7.6% sequentially; management also cited improved sales and pipeline measures. On a same-day constant-currency basis, Q3 revenue declined 10.4% year over year.
- Q3 gross margin was nearly flat year over year, while nine-month gross margin declined 80 basis points. Management cited pay rates rising faster than bill rates over the nine-month period, lower utilization, and reduced professional-search revenue.
- Q3 SG&A declined $2.5m year over year, but increased to 33.7% of revenue from 32.9%. Nine-month SG&A was $158.5m, including $8.4m of restructuring costs; excluding those costs, management reported lower year-over-year SG&A.
- Q3 Adjusted EBITDA increased 40.2%, with margin up 200 basis points, primarily reflecting cost savings despite lower revenue. Nine-month Adjusted EBITDA declined 22.4% as lower gross profit outweighed cost reductions.
- RGP generated $146.5m of Q3 revenue, down 7.4%; Other Segments revenue rose 3.3% to $10.1m. Veracity revenue grew 20.1% year over year in Q3, according to management.
Outlook, commentary and risks
- Management said the human-cloud platform remained on track for launch by the end of fiscal 2021 and described digital expansion, core-account growth and global cost control as strategic priorities. It highlighted technology and digital offerings and healthcare as areas of opportunity.
- The pandemic continued to cause delayed or reduced client demand, project cancellations and slower conversion from project wins to starts. Management said the full economic impact remained uncertain and provided no revenue or earnings guidance.
- Restructuring in North America, Asia Pacific and Europe was substantially complete for planned headcount reductions. The company estimated $3.5m–$6.5m of cash needs to complete remaining restructuring actions; timing and cost depend partly on real estate conditions. It had executed 75% of planned European and 63% of planned North American lease terminations as of March 2021.
- Management believed cash, operating cash flow and facility availability would cover working capital, capital expenditures, restructuring and potential contingent consideration for at least 12 months. The Veracity contingent-consideration liability was $5.7m; its fair value depends on estimates of future performance and discount rates.
- Unusual items included $8.4m of nine-month restructuring costs, a $3.1m nine-month expense from contingent-consideration remeasurement, and $1.1m of other income, primarily COVID-19 relief funds. The nine-month effective tax rate was 72.7%, partly because restructuring losses in certain European entities did not generate tax benefits due to valuation allowances. The prior-year comparison included a $6.6m discrete tax benefit from dissolving four European entities.
- Key risks include pandemic and economic uncertainty, client demand and project-conversion trends, consultant retention and utilization, restructuring execution, international operations and foreign-exchange exposure. The company does not currently hedge foreign-currency risk. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sequential revenue and sales-pipeline improvements continue and convert into billable work, particularly in North America, technology and digital, and healthcare.
- Whether restructuring and real-estate actions deliver sustainable savings, and whether the remaining $3.5m–$6.5m estimated cash requirement changes.
- How much of operating cash generation reflects sustainable business performance versus working-capital movements and payroll-tax deferrals.
- Facility borrowing, covenant headroom, interest expense and the effect of the March 2021 repayment; confirm the terms and availability under the credit agreement.
- Future contingent-consideration payments and valuation assumptions, along with tax-rate variability and any further valuation allowances.
- Whether the discretionary $0.14 quarterly dividend remains supportable given earnings, cash needs and credit-agreement restrictions.