Resources Connection, Inc. — Form 10-Q Summary
Business context and reporting period
Resources Connection provides project-based professional consulting services through RGP, across finance, risk, advisory, technology, human capital, legal and other areas. This filing covers the 13-week second quarter and six months of fiscal 2014 ended November 23, 2013; comparisons are with periods ended November 24, 2012. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Three months ended Nov. 23, 2013 | Year-over-year | Six months ended Nov. 23, 2013 | Year-over-year |
|---|---|---|---|---|
| Revenue | $146.0 million | Up 3.4% | $277.7 million | Down $0.4 million (reported as 0.1%; table shows 0.2%) |
| Gross margin | $57.4 million; 39.3% | Up from 39.1% | $107.1 million; 38.6% | Down from 39.1% |
| Operating income | $13.0 million; 8.9% margin | Up from $11.3 million | $19.7 million; 7.1% margin | Down from $21.0 million |
| Net income / diluted EPS | $7.1 million / $0.18 | Up from $5.9 million / $0.14 | $10.7 million / $0.27 | Approximately flat versus $10.7 million / $0.26 |
| Operating cash flow | Not separately presented for the quarter | $8.4 million | Up from $5.1 million |
- Adjusted EBITDA was $15.9 million for the quarter, with a 10.9% margin, versus $14.7 million and 10.4% a year earlier. For the half year it was $25.7 million and 9.2%, versus $27.8 million and 10.0%. These are non-GAAP measures.
- At November 23, cash and cash equivalents were $77.5 million and short-term investments were $33.0 million, totaling $110.5 million, versus $119.0 million at May 25, 2013. Trade receivables were $93.1 million.
- No borrowings are reported on the balance sheet. A $3.0 million unsecured revolving facility had approximately $1.7 million available; $1.3 million was committed to letters of credit. The facility expires November 30, 2014.
- Six-month investing cash use was $10.6 million, including net purchases of short-term investments and $2.7 million in property and equipment. Financing cash use was $14.4 million, including $14.2 million of share repurchases and $5.2 million of dividends paid.
Material changes versus the prior comparable period
- Quarterly revenue growth was concentrated in North America, up 5.9%; Europe fell 5.8% and Asia Pacific fell 4.2%. Management estimated that the shift of the U.S. Thanksgiving holiday added about $3.3 million of quarterly revenue; excluding it, revenue growth would have been about 1.1%.
- Quarterly hours worked increased 4.7%, while average bill rates declined 0.8%. Consultants on assignment rose to 2,402 from 2,358. The half-year showed hours up 0.7% and average bill rates down 0.8%.
- Quarterly direct costs were 60.7% of revenue versus 60.9%; for the half year they rose to 61.4% from 60.9%, reflecting a weaker bill-rate/pay-rate ratio and higher healthcare costs. Management’s target is 60%.
- Quarterly SG&A was 29.5% of revenue versus 30.0%; half-year SG&A was 30.5% versus 30.3%. Six-month operating income declined despite roughly flat revenue, while net income was nearly unchanged, partly reflecting a lower effective tax rate.
- Cash decreased by $16.5 million during the half year, principally as operating cash and stock issuance proceeds were more than offset by repurchases, dividends and investment purchases.
Outlook, commentary, risks and unusual items
- Management said clients remained cautious about consulting spending amid global economic uncertainty, particularly in parts of Europe. The company has no long-term client contracts, so future demand is not assured. It expects current cash and operating cash flows to cover working capital and capital spending for at least the next 12 months; no revenue or earnings guidance is provided.
- Management attributed sequential quarterly improvement partly to higher billable hours, consultant headcount growth and fewer vacation days; bill rates were flat sequentially. It cautioned that quarterly comparisons may not predict future performance.
- The Sitrick Brincko earn-out ended without contingent consideration because the required average EBITDA threshold was not met. A separate $2.25 million payment to Mr. Brincko, subject to employment conditions, was accrued and scheduled for fiscal third-quarter payment.
- The effective tax rate was approximately 45% for both the quarter and half year, versus approximately 48% and 49%, respectively, in the prior-year periods. The decrease primarily reflected reversal of uncertain international tax accruals after statutes of limitation expired: $0.3 million for the quarter and $0.65 million for the half year.
- Key risks include economic weakness and lower client demand, competition and pricing pressure, consultant hiring and retention, foreign-exchange exposure, client credit/collections, goodwill impairment, and fluctuations in quarterly results. The company does not hedge currency exposure. It reported no material legal proceedings and no off-balance-sheet arrangements; management concluded disclosure controls were effective.
- The board’s $150 million repurchase authorization had approximately $58.3 million remaining at November 23, 2013. The quarterly dividend was $0.07 per share, subject to future board declaration.
Important facts for investors to verify
- Whether revenue growth persists after adjusting for the estimated Thanksgiving calendar benefit, and whether weakness in Europe and Asia Pacific continues.
- Whether bill rates, direct-cost ratio and half-year operating margin stabilize or improve, given management’s 60% direct-cost target.
- Cash conversion, receivables collection and the level of cash remaining after repurchases, dividends and the accrued $2.25 million payment.
- The durability of the lower tax rate, which management says may fluctuate with international tax positions and employee stock-plan events.
- Potential goodwill impairment exposure and the effect of currency movements; goodwill was $175.2 million and the filing notes the impairment assessment is sensitive to market capitalization.