Resources Connection, Inc. — Q1 Fiscal 2020 Form 10-Q
Reporting period: Three months ended August 24, 2019 (13 weeks); comparison is the three months ended August 25, 2018. Amounts are in U.S. dollars unless stated otherwise.
Business context and results
Resources Connection operates as RGP, a global consulting firm providing project-based services in business strategy and transformation, finance and accounting, risk and compliance, and technology and digital innovation. The company reports as one operating segment.
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $172.2 million | $178.6 million | Down 3.6%; down 3.0% constant currency |
| Gross margin | $67.5 million | $68.2 million | Down $0.6 million |
| Direct cost of services / revenue | 60.8% | 61.8% | Improved 1.0 percentage point |
| SG&A | $57.0 million | $56.4 million | Up $0.6 million |
| Income from operations | $8.1 million | $9.8 million | Down $1.7 million |
| Net income | $4.9 million | $5.7 million | Down $0.8 million |
| Diluted EPS | $0.15 | $0.18 | Down $0.03 |
| Adjusted EBITDA and margin (non-GAAP) | $11.9 million; 6.9% | $13.2 million; 7.4% | Down $1.3 million; margin down 0.5 point |
Revenue excluding Veracity was down 4.3% year over year. Bill rates declined 1.6% and hours worked declined 2.2%. By region, reported revenue fell 4.0% in North America and 9.3% in Europe, while Asia Pacific grew 11.8%. The company attributed lower demand to weakness in the Nordics and the wind-down of technical-accounting implementation projects. Veracity contributed $1.4 million of revenue and $0.3 million of operating income after its July 31 acquisition.
Cash flow, liquidity and debt
- Operating cash flow was a use of $3.0 million, compared with a use of $16.6 million a year earlier. Management attributed the current-period outflow mainly to annual incentive compensation payments and other working-capital changes.
- Investing activities used $24.8 million, including $30.3 million net cash paid for Veracity; redemption of $6.0 million of short-term investments partly offset the outflow.
- Financing activities provided $30.7 million, including $35.0 million of additional revolving-credit borrowings and $5.0 million of repayments. Cash dividends paid were $4.1 million.
- Cash and cash equivalents were $45.7 million at August 24, 2019, including $21.5 million held internationally. The company also had $73.0 million of revolving-credit debt and $1.3 million of letters of credit outstanding.
- The $120 million secured credit facility matures October 17, 2021. The filing reports $15.7 million available under the revolving loan and $30.0 million under the reducing revolving loan; the company was in compliance with its financial covenants.
- Management believed cash, operating cash flows and available facility funding would be adequate for working capital and capital expenditure needs for at least the next 12 months.
Material changes, outlook and risks
- Veracity acquisition: The acquisition advances the company’s digital-transformation strategy. Preliminary purchase accounting recorded $25.8 million of goodwill and $12.3 million of intangible assets. Earn-outs depend on EBITDA targets; the acquisition-date contingent consideration was recorded at $10.4 million. The MD&A separately states an estimated contingent-consideration fair value of $11.5 million as of August 24, 2019, which investors may wish to reconcile.
- European exits: The company agreed to divest its Sweden business for SEK 558,120 (the filing describes this as approximately $57,000); the sale closed September 2, 2019. It also closed its Belgium office during the quarter and accrued $0.7 million of related divestiture and exit costs.
- Operating costs: SG&A included $1.4 million of retention bonus and additional payroll and benefits, $1.1 million of severance costs mainly related to Sweden, and $0.6 million of Veracity acquisition costs. These were partly offset by lower systems, commissions and other expenses.
- Management commentary: The company plans to continue investing in its brand and digital capabilities, refining its operating model, and optimizing systems and structure. Sequential revenue declined 5.4%; management cited U.S. holidays, summer breaks, a 3.9% reduction in hours worked and lower average bill rates.
- Seasonality and uncertainty: Clients generally do not sign long-term contracts, limiting visibility into future demand. Management cautioned that quarterly results may fluctuate and that quarter-to-quarter comparisons may not predict future performance. The fiscal 2020 year has 53 weeks.
- Other disclosures: Adoption of lease accounting (ASC 842) materially increased balance-sheet assets and liabilities, with operating right-of-use assets of $40.2 million and lease liabilities of $47.0 million; the income-statement and cash-flow effects were described as immaterial. The company reported no material changes to its previously disclosed risk factors, no material legal proceedings, and no off-balance-sheet arrangements. It does not currently use financial hedges for foreign-currency exposure.
Important facts for investors to verify
- Reconcile the $10.4 million acquisition-date contingent-consideration amount with the $11.5 million fair-value figure stated in MD&A, and track subsequent earn-out valuation changes.
- Confirm the final Veracity purchase-price allocation, earn-out performance and acquisition contribution as more periods are reported.
- Monitor demand, hours worked and bill rates, particularly in Europe and North America, and whether the stated demand pressures persist.
- Assess cash generation after incentive-payment timing, debt usage, facility availability and covenant headroom.
- Verify the reported Sweden sale consideration and subsequent financial effects of the divestiture and Belgium closure.