Resources Connection, Inc. — Q2 FY2015 Form 10-Q
Reporting period: 13-week second quarter ended November 29, 2014; six-month results are also compared with the six months ended November 23, 2013. Financial statements are unaudited. The company provides professional consulting and business-support services through Resources Global Professionals (RGP).
Financial performance and position
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Revenue | $151.5 million | $146.0 million | $294.9 million | $277.7 million |
| Gross margin | $59.4 million; 39.2% | $57.4 million; 39.3% | $115.7 million; 39.2% | $107.1 million; 38.6% |
| Operating income | $14.6 million; 9.6% | $13.0 million; 8.9% | $25.3 million; 8.6% | $19.7 million; 7.1% |
| Net income | $8.0 million | $7.1 million | $13.4 million | $10.7 million |
| Diluted EPS | $0.21 | $0.18 | $0.35 | $0.27 |
| Adjusted EBITDA margin | 11.5% | 10.9% | 10.5% | 9.2% |
Quarterly revenue increased 3.8%; management estimated growth of about 6.5% excluding the estimated $4.0 million revenue effect of Thanksgiving falling in Q2 this year. Six-month revenue grew 6.2%. Quarterly hours worked rose 7.1%, while average bill rates declined 3.2%. For the first half, hours increased 9.1% and bill rates declined 3.2%. Adjusted EBITDA is a non-GAAP measure; the company defines it as EBITDA plus stock-based compensation.
Cash flow and liquidity: Operating cash flow was $5.7 million for the six months, down from $8.4 million; management cited unfavorable working-capital movements, including receivables and tax-related accounts. Investing activities provided $3.0 million, compared with $10.6 million used in the prior-year period, reflecting net investment redemptions and lower capital spending. Financing activities used $14.4 million, mainly share repurchases and dividends. Cash and cash equivalents were $73.3 million, with $30.0 million of short-term investments, for combined cash and investments of $103.3 million. Current assets were $213.9 million and current liabilities $62.8 million. The balance sheet reports no borrowings; the $3.0 million unsecured revolving facility had approximately $1.9 million available after $1.1 million of letters of credit. Total liabilities were $69.3 million.
Capital returns: The company repurchased 906,000 shares for $13.3 million in the first half and paid $5.7 million in dividends. The declared quarterly dividend was $0.08 per share. Approximately $29.7 million remained under the repurchase authorization at November 29, 2014.
Material changes and management commentary
- North American quarterly revenue grew 8.3% and Asia Pacific grew 4.9%, while Europe declined 21.3%. For the first half, North America grew 10.7%, Asia Pacific 3.2%, and Europe fell 17.5%.
- Management attributed European weakness to cautious client spending amid economic uncertainty and said it had reduced European staffing and changed leadership. The stronger U.S. dollar also reduced reported international revenue; at comparable exchange rates, international revenue would have been $1.8 million higher in Q2 and $1.4 million higher for the first half.
- Quarterly direct cost of services was 60.8% of revenue, broadly flat year over year. First-half direct costs improved to 60.8% of revenue from 61.4%, partly due to a more favorable bill-rate/pay-rate ratio. The company’s stated target is 60%.
- SG&A was $43.6 million in Q2, including $0.5 million of European severance; first-half SG&A was $87.9 million and included $1.2 million of European severance, higher marketing costs and staffing additions. SG&A as a share of revenue improved year over year.
- Effective tax rates were approximately 45% for Q2 and 47% for the first half, compared with 45% and 46%, respectively. Management noted that foreign losses subject to valuation allowances and the timing of certain employee stock-option tax benefits may cause tax-rate variability.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects current cash and ongoing operating cash flows to meet working-capital and capital-expenditure needs for at least the next 12 months.
- Key risks include uncertain client demand and the absence of long-term client contracts; continued European weakness; foreign-exchange exposure (the company does not use financial hedges); competition and consultant recruitment/retention; client credit and collections; and potential impairment of goodwill or other assets.
- The company noted possible future exposure to fixed-fee engagements, which shift some financial risk to RGP. Its risk disclosures also address cybersecurity and systems disruptions, international operating and regulatory challenges, tax uncertainty, and fluctuations in quarterly results.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
- Foreign-currency translation reduced comprehensive income by $2.8 million in Q2 and $4.0 million in the first half. Goodwill declined $2.0 million during the first half due to currency translation. The filing reports no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether North American growth can continue to offset the pronounced revenue decline in Europe, and whether European restructuring improves performance.
- Whether growth in billable hours can be sustained without further pressure on average bill rates and margins.
- How working-capital movements, particularly receivables and tax-related balances, affect operating cash conversion.
- The continuing effects of currency movements on reported revenue, operating results and accumulated other comprehensive loss.
- Whether the $103.3 million cash-and-investment position and stated 12-month funding outlook remain adequate alongside dividends, repurchases and planned investment.