Resources Connection, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the third quarter and first nine months of fiscal 2018, ended February 24, 2018; the comparable periods ended February 25, 2017. This differs from the “2017 Q3” label in the request metadata. Resources Connection operates RGP, a multinational professional services firm providing project-based consulting services. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Three months ended February 24, 2018 | Prior-year quarter | Nine months ended February 24, 2018 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $172.4 million | $143.8 million | $470.3 million | $434.8 million |
| Gross margin | $62.5 million; 36.3% | $52.2 million; 36.3% | $175.6 million; 37.3% | $163.3 million; 37.6% |
| Operating income | $5.1 million; 3.0% margin | $6.0 million; 4.1% margin | $21.1 million; 4.5% margin | $25.7 million; 5.9% margin |
| Net income | $4.6 million | $2.9 million | $14.8 million | $14.2 million |
| Diluted EPS | $0.14 | $0.09 | $0.48 | $0.41 |
| Adjusted EBITDA / margin | $8.7 million / 5.0% | $8.4 million / 5.8% | $29.9 million / 6.4% | $32.9 million / 7.6% |
For the nine-month period, operating cash flow was negative $2.3 million, versus positive $6.9 million a year earlier. The company attributed the outflow mainly to increased accounts receivable late in the quarter and payment of incentive compensation. Investing activities used $25.1 million, primarily for acquisitions; financing activities provided $8.2 million.
At February 24, 2018, cash and cash equivalents were $43.2 million, current assets $180.2 million, and current liabilities $78.3 million. Long-term debt was $63.0 million, up from $48.0 million at May 27, 2017. The company had $56.0 million of remaining borrowing capacity under its $120 million facility and $1.0 million of letters of credit outstanding; it reported compliance with financial covenants. The facility is secured and expires in 2021.
Material changes versus prior comparable periods
- Quarterly revenue increased 19.9%; excluding Accretive and taskforce, it increased 5.2%. Nine-month revenue increased 8.2%; excluding the acquisitions, it increased 2.5%.
- Quarterly acquisition contribution included $17.3 million of Accretive revenue and $3.8 million from taskforce. Across the first nine months, acquisition revenue was $24.8 million.
- Quarterly operating income declined despite higher revenue, with SG&A rising to $55.3 million from $45.4 million. SG&A included acquisition expenses and costs for severance, transactions, transformation, and integration. The nine-month SG&A ratio rose to 31.9% of revenue from 31.1%.
- Quarterly net income rose primarily alongside a much lower income tax provision: $46,000 versus $2.7 million. The nine-month effective tax rate was approximately 26%, compared with 44% in the prior period.
- Cash declined to $43.2 million from $62.3 million at fiscal year-end, reflecting operating cash use, acquisitions, dividends, and other financing and investing activity. The prior-year nine-month financing outflow was substantially affected by a large share tender offer.
Outlook, management commentary, risks, and unusual items
- No formal revenue or earnings guidance is provided. Management said it expected to substantially complete its sales-culture transformation by fiscal year-end and to integrate Accretive into its business model beginning in fiscal 2019.
- Management expects Accretive cost synergies from office consolidation, removal of redundant back-office functions, and other cost reductions; it said EBITDA benefits were expected after 9–12 months, with synergies targeted by the end of calendar 2018. These are expectations, not reported results.
- Management reported 9% year-over-year revenue growth from clients in its Strategic Client Program and progress rolling out its sales model and integrated service offerings. Excluding acquisitions, quarterly revenue growth reflected higher bill rates and hours worked; financial-services revenue remained weak.
- The Tax Cuts and Jobs Act reduced the statutory federal tax rate. The company recorded a $1.1 million quarterly tax benefit from provisional remeasurement of deferred tax balances; the estimates remain subject to change. The nine-month rate also benefited from reversal of approximately $2.4 million of foreign deferred-tax valuation allowances.
- Taskforce contingent consideration was estimated at approximately $7.0 million at February 24, 2018, based on subjective earnings projections and discounting; the calendar 2017 portion was paid in March 2018. Changes in the estimate could affect future earnings.
- Key risks include clients’ ability to terminate engagements without long-term commitments, economic and project-demand volatility, competition for clients and consultants, acquisition integration and goodwill impairment, foreign currency movements, and variable-rate debt. The company said it did not use currency hedges. It also identified a potential significant balance-sheet impact from future lease accounting requirements.
- Management stated disclosure controls were effective as of February 24, 2018, with no material change in internal control over financial reporting during the quarter. Ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- How much of future revenue growth is organic, particularly after separating acquisition contribution and foreign-exchange effects.
- Whether receivables convert to cash and operating cash flow improves after the reported quarter-end working-capital outflow.
- Whether Accretive integration delivers the expected cost synergies and whether taskforce earn-out estimates change.
- How provisional tax accounting and foreign tax valuation allowances affect future effective tax rates and earnings.
- Debt-facility availability, covenant compliance, interest-rate exposure, and the company’s ability to maintain dividends and repurchases alongside acquisition spending.