Resources Connection, Inc. — Form 10-Q Summary
Business and period: Resources Connection operates RGP, a multinational professional-services firm providing consulting and business-support services across finance, risk and compliance, technology, human capital, supply chain, healthcare, and legal areas. This unaudited filing covers the 13-week second quarter and six months ended November 28, 2015, compared with the corresponding 2014 periods.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $150.9 million | $151.5 million | $299.2 million | $294.9 million |
| Gross margin | $58.9 million; 39.0% | $59.4 million; 39.2% | $116.3 million; 38.9% | $115.7 million; 39.2% |
| Operating income | $14.8 million; 9.8% margin | $14.6 million; 9.6% margin | $27.4 million; 9.2% margin | $25.3 million; 8.6% margin |
| Net income / diluted EPS | $8.7 million / $0.23 | $8.0 million / $0.21 | $15.8 million / $0.42 | $13.4 million / $0.35 |
| Adjusted EBITDA margin | 11.3% | 11.5% | 10.9% | 10.5% |
Cash flow and liquidity: Six-month operating cash flow was $10.7 million, up from $5.7 million. Investing activities used $6.5 million and financing activities used $11.0 million; cash declined $7.1 million to $80.1 million. Cash, cash equivalents, and short-term investments totaled $110.1 million. Current assets were $222.6 million and current liabilities $63.7 million. The company reported no off-balance-sheet arrangements and had no disclosed borrowing under its $3.0 million credit facility; approximately $1.9 million remained available after letters of credit. It was in compliance with credit covenants.
Debt and capital returns: The filing does not report outstanding borrowings. During the half, the company repurchased 689,000 shares for $11.5 million and paid $6.7 million in dividends. The quarterly dividend was $0.10 per share, versus $0.08 in the prior-year quarter.
Changes and management commentary
- Second-quarter revenue declined 0.4% year over year; first-half revenue rose 1.5%. First-half hours worked increased 3.8%, while average bill rates fell 2.5%.
- Foreign exchange materially affected reported results. At prior-year exchange rates, second-quarter international revenue would have been $3.2 million higher and first-half international revenue $7.2 million higher. Europe was weak in reported dollars, while Asia Pacific grew.
- Second-quarter direct costs were 61.0% of revenue, compared with 60.8% a year earlier; management cited higher employee medical costs. First-half direct costs were 61.1% versus 60.8%. Management’s stated target is 60%.
- SG&A fell to $43.2 million in Q2 and $87.1 million for the half. Lower translated foreign expenses helped; the first-half period also included about $0.9 million of noncash accelerated stock-option vesting related to Donald Murray’s transition from Executive Chairman to Chairman.
- The effective tax rate declined to approximately 42% in Q2 and 43% for the half, from 45% and 47%, respectively. Management cited foreign profitability, valuation-allowance changes, and a $0.29 million Singapore valuation-allowance reversal. The rate remains subject to jurisdictional and stock-compensation-related variability.
Outlook, risks, and unusual items
Management stated that existing cash and expected operating cash flows should meet working-capital and capital-expenditure needs for at least the next 12 months. The filing gives no specific revenue or earnings guidance. Management cautioned that clients generally do not sign long-term service contracts and may end engagements at any time; demand is affected by economic conditions and discretionary project spending.
Key risks include foreign-exchange exposure (the company does not hedge currency risk), client demand and collections, competition and consultant retention, margin pressure, international operating risks, and potential goodwill impairment. Goodwill was $170.3 million; its six-month decrease reflected currency translation. Legal matters were described as arising in the ordinary course, with no material proceedings disclosed. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Amortization of intangible assets is expected to end after $30,000 in Q3 FY2016. The filing also describes planned accounting-standard adoptions, including revenue recognition in fiscal 2019 (with an option for earlier adoption), whose impact was still under assessment.
Important facts for investors to verify
- Whether underlying demand and bill-rate trends improve, particularly in Europe, and how much reported performance continues to be affected by currency translation.
- Whether gross margin can move toward management’s 60% direct-cost target despite medical and other employee costs.
- The sustainability of operating cash flow and the company’s cash and investment balances, including the impact of buybacks and dividends.
- Future effective tax rates, given international jurisdiction mix, valuation allowances, and stock-compensation tax effects.
- Goodwill recoverability and the effect of any sustained decline in the company’s market capitalization or operating performance.