Resources Connection, Inc. (RGP) — Q1 FY2021 Form 10-Q
Business context and period: RGP is a global consulting and professional staffing firm. The unaudited quarter ended August 29, 2020 (13 weeks); the comparable quarter ended August 24, 2019. The company attributed weaker demand and delayed or canceled client projects to the COVID-19 pandemic.
Financial results
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $147.3 million | $172.2 million | Down 14.4% |
| Gross margin | $57.9 million; 39.3% | $67.5 million; 39.2% | Down 14.2% in dollars |
| Income from operations | $4.2 million; 2.9% margin | $8.1 million; 4.7% margin | Down 47.8% in dollars |
| Net income | $2.3 million | $4.9 million | Down 53.8% |
| Diluted EPS | $0.07 | $0.15 | |
| Adjusted EBITDA (non-GAAP) | $10.2 million; 6.9% margin | $11.9 million; 6.9% margin | Down 14.2% in dollars |
| Cash from operating activities | $18.6 million | $(3.0) million |
- Billable hours fell 15.2%; average bill rate rose 1.7%. Consultants on assignment decreased to 2,444 from 3,120. Same-day, constant-currency revenue declined 15.7%.
- SG&A fell to $51.2 million from $57.0 million, but increased as a share of revenue to 34.7% from 33.1%. The decrease in dollars reflected lower compensation, travel and other costs, partly offset by restructuring and contingent-consideration costs.
- The effective tax rate rose to 46.1% from 34.8%, primarily due to higher international losses and lower domestic pretax income.
- Cash and cash equivalents were $114.6 million at quarter-end, including $30.7 million held internationally. Long-term debt was $88.0 million; cash exceeded debt by approximately $26.6 million. Current assets were $231.5 million and current liabilities were $88.1 million.
- Operating cash flow benefited chiefly from a $16.8 million reduction in receivables; the company also cited a $4.5 million payroll-tax deferral, collections and payroll timing. Cash dividends paid were $4.5 million; the declared quarterly dividend was $0.14 per share.
Material changes, outlook and risks
- Revenue declined across all geographies amid pandemic disruption. Veracity contributed $5.7 million of revenue, compared with $1.4 million in the prior-year quarter, partly reflecting acquisition timing.
- The North America and Asia Pacific restructuring plan had incurred $6.0 million of cumulative costs by quarter-end. Management expected $10 million to $12 million of FY2021 savings from the plan and approximately $0.4 million of additional employee-termination costs during the rest of FY2021.
- After quarter-end, the company approved a European restructuring plan proposing a reduction of approximately 40% of European positions. It estimated termination costs of $5.5 million to $6.5 million and annual personnel savings of $6 million to $7 million. It also expected $2.5 million to $3.5 million of charges to exit leases and other contracts, with annual savings of $1 million to $2 million. Timing and amounts remain subject to consultation, negotiations and other variables.
- After quarter-end, a September 3 credit amendment extended facility maturity from October 2021 to October 2022, increased the revolving commitment to $120 million, raised the applicable interest margin by 0.25 percentage points and increased the LIBOR floor to 0.25%. The company repaid $20 million on September 21, reducing borrowings to $68 million.
- Management believed cash, operating cash flows and facility availability would meet working-capital, capital-expenditure and restructuring needs for at least 12 months. It estimated $8 million to $11 million of cash needs to complete remaining restructuring actions. Pandemic-related demand, project cancellations, foreign-exchange movements and the execution and costs of restructuring remain risks; management cautioned that the pandemic’s full effects were uncertain.
- Other notable items: the company reported $0.5 million of other income in the quarter; the filing text does not clearly identify its source in the statements. Contingent consideration liabilities totaled $8.5 million, with $5.3 million expected to be paid in Q2 FY2021. The company reported compliance with credit-facility covenants at quarter-end and no material legal proceedings or off-balance-sheet arrangements.
Important facts for investors to verify
- Whether client demand, billable hours and consultant assignments recover, and whether the reported rate gains persist.
- Whether restructuring savings are realized and whether the European plan’s costs, timing and projected savings change.
- Post-amendment borrowing capacity, interest costs, covenant compliance and cash needs for restructuring and contingent-consideration payments.
- The sustainability of operating cash flow, which benefited from working-capital movements and a payroll-tax deferral, and the continuation of the discretionary quarterly dividend.
- The source and presentation of the quarter’s $0.5 million of other income and contingent-consideration adjustments.