Resources Connection, Inc. — Fiscal 2022 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended February 26, 2022; each quarter comprised 13 weeks. Comparisons are with the periods ended February 27, 2021. The company provides consulting and professional staffing services primarily through its RGP business.
Financial performance
| Metric | Third quarter FY2022 | Third quarter FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Revenue | $204.6 million | $156.6 million | $588.0 million | $457.2 million |
| Gross profit / margin | $76.8 million / 37.5% | $57.0 million / 36.4% | $227.0 million / 38.6% | $173.1 million / 37.9% |
| Operating income / margin | $17.5 million / 8.6% | $2.0 million / 1.3% | $55.3 million / 9.4% | $7.5 million / 1.6% |
| Net income / diluted EPS | $19.4 million / $0.58 | $0.7 million / $0.02 | $46.6 million / $1.39 | $2.0 million / $0.06 |
| Adjusted EBITDA / margin | $22.5 million / 11.0% | $9.5 million / 6.0% | $69.8 million / 11.9% | $32.1 million / 7.0% |
| Operating cash flow | Not provided by quarter in this filing | $22.7 million | $35.4 million |
Revenue rose 30.6% year over year in the quarter and 28.6% for the nine-month period. On a same-day constant-currency basis, growth was 31.5% and 29.2%, respectively. Quarterly billable hours increased 27.2% and average bill rates rose 2.4%. The filing reports improved operating leverage and a 120-basis-point improvement in the overall pay/bill ratio; direct costs were 62.5% of quarterly revenue versus 63.6% a year earlier.
Net income benefited from a $2.2 million income tax benefit in the quarter. The company cites a $4.9 million reversal of a valuation allowance in a European entity and a $2.6 million benefit related to dissolution of its France entity as drivers of the lower effective tax rate. These items make the period’s reported tax rate and earnings less indicative of recurring results.
Financial position and liquidity
- At February 26, 2022, cash and cash equivalents were $82.2 million, up from $74.4 million at May 29, 2021. Trade receivables were $150.5 million, compared with $116.5 million.
- Long-term debt was $54.0 million, up from $43.0 million at fiscal year-end. The new senior secured revolving facility provides $175.0 million of commitments and matures November 12, 2026; $119.8 million of capacity remained available, in addition to $1.2 million of letters of credit. The reported borrowing rate was 1.42%, and the company was compliant with its financial covenants.
- For the first nine months, operating cash flow was $22.7 million, down from $35.4 million. Management attributed the decrease in part to a $36.4 million increase in receivables associated with revenue growth and other working-capital changes. Investing cash outflow was $2.4 million; financing cash outflow was $10.4 million.
- Financing activity included $19.7 million of share repurchases and $14.0 million of dividends paid. The quarterly dividend declared was $0.14 per share. The company stated that cash, operating cash flow and available credit should cover working capital and capital expenditure needs for at least the next 12 months.
Material changes and management commentary
- Growth was led by RGP, whose revenue increased 33.3% in the quarter and 31.0% year to date. North America was the largest geography; quarterly revenue there increased 35.7%. Other Segments revenue declined 7.7% in the quarter and 3.8% year to date.
- Management cited stronger sales activity, larger and longer projects, demand for workforce flexibility and digital transformation, and improved talent matching. It also noted a tightening labor market and higher incentive compensation.
- SG&A increased in dollars but declined as a share of revenue: 27.9% versus 33.7% in the quarter, and 28.1% versus 34.7% year to date. Restructuring costs fell to $0.8 million for the nine months from $8.4 million a year earlier; management said the plans were substantially completed.
- The company launched HUGO in the New York/New Jersey market in October 2021 and is working to increase adoption. It also began a global technology transformation, including new cloud-based ERP and talent systems. Management expects total investment of $20–25 million through implementation; $9.9 million of non-cancellable licensing obligations were disclosed.
- No specific revenue, earnings or margin guidance was provided. Management described a strong pipeline and growth foundation, while stating that the company’s liquidity should be adequate for at least the next 12 months.
Risks, contingencies and unusual items
- Risks include the uncertain effects of COVID-19, inflation, geopolitical developments including the Russia-Ukraine conflict, economic weakness, client spending and creditworthiness, competition for consultants, wage and payroll cost increases, and the ability to attract and retain talent.
- The company has international currency exposure and said it does not currently use financial hedges to mitigate foreign-exchange fluctuations. Approximately 17.7% of nine-month revenue was generated outside the U.S.
- The revolving credit facility is secured, bears variable-rate interest and includes leverage and interest-coverage covenants. The company estimated that a 10% interest-rate change at the period-end borrowing level would change annual interest expense by approximately $0.1 million.
- The company expects to pay the remaining deferred payroll taxes during calendar 2022. It filed for a $35.0 million federal tax refund in March 2022 related to prior-year tax planning; receipt was not reported as completed.
- The company reported no remaining contingent-consideration liabilities after the final Veracity earn-out payment. Management said ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth, billable-hour expansion and improved bill rates continue, particularly in RGP and North America.
- Whether operating cash conversion improves as receivables rise, and how incentive compensation and other working-capital movements affect cash flow.
- The realized cost, timing and returns of the $20–25 million technology transformation, including adoption of HUGO and the new systems.
- Whether the tax benefits driving reported earnings recur; distinguish these items from underlying operating performance.
- Future borrowing, covenant headroom, variable-rate exposure, dividend decisions and any additional share repurchases.
- Effects of labor-market competition, inflation, foreign exchange, COVID-19 and geopolitical or economic disruption on client demand and costs.