Resources Connection, Inc. — Q2 Fiscal 2022 Form 10-Q
Reporting period: Second quarter and first six months of fiscal 2022, ended November 27, 2021. Comparisons are with the periods ended November 28, 2020. The company provides consulting, professional staffing and related services through RGP and smaller Other Segments.
Financial performance
| Metric | Q2 FY22 | Q2 FY21 | Six months FY22 | Six months FY21 |
|---|---|---|---|---|
| Revenue | $200.2m | $153.2m | $383.4m | $300.6m |
| Gross margin | 39.3% | 38.0% | 39.2% | 38.6% |
| Operating income | $19.8m | $1.2m | $37.8m | $5.5m |
| Net income (loss) | $14.3m | $(1.0)m | $27.2m | $1.3m |
| Diluted EPS | $0.42 | $(0.03) | $0.81 | $0.04 |
| Adjusted EBITDA (non-GAAP) | $24.9m | $12.4m | $47.3m | $22.6m |
| Adjusted EBITDA margin (non-GAAP) | 12.5% | 8.1% | 12.3% | 7.5% |
Q2 revenue increased 30.7%; management reported same-day constant-currency growth of 30.7%. For the six months, revenue grew 27.6% reported and 27.9% same-day constant-currency. Q2 billable hours rose 28.8% and average bill rate 1.7%; first-half billable hours rose 25.8% and average bill rate 1.8%. North America drove the bulk of growth. In Q2, RGP revenue increased 33.4%, while Other Segments revenue declined 3.4%.
Direct costs were 60.7% of Q2 revenue versus 62.0% a year earlier; SG&A was 28.4% versus 35.6%. Management attributed margin improvement to better pay/bill ratios, operating leverage and lower fixed costs, partly offset by higher bonuses and commissions. GAAP net margin was 7.1% in Q2 versus a 0.6% loss margin in the prior-year quarter.
Cash, debt and liquidity
- Cash and cash equivalents were $70.6m at November 27, 2021, down from $74.4m at May 29, 2021. Cash from operations was $3.5m for the six months, compared with $29.6m in the prior-year period.
- Operating cash flow was pressured by a $29.2m increase in receivables amid revenue growth and a $3.1m increase in income taxes receivable. Investing cash outflow was $2.3m; financing cash outflow was $3.3m. The company paid $9.3m in dividends.
- Long-term debt was $44.0m. The company replaced its prior facility with a $175m secured revolving facility maturing November 2026; $129.7m of capacity remained available at quarter-end, with $1.3m of letters of credit outstanding. The quarter-end borrowing rate was 1.41%; the company reported compliance with financial covenants.
- Current assets were $260.0m and current liabilities $99.1m. The filing reports no material liquidity shortfall and says cash, operating cash flows and facility availability are expected to meet needs for at least 12 months.
Material changes, outlook and risks
- Management cited strong client demand, improving sales activity and execution, larger and longer projects, and demand for workforce agility and digital transformation. It identified revenue growth and EBITDA-margin improvement as top priorities, alongside digital commercialization, technology modernization and brand development. No quantitative revenue or earnings guidance is provided.
- The company launched HUGO, its digital staffing platform, in Tri-State markets in October 2021. Veracity revenue grew 40.2% year over year in the first half. A multi-year technology upgrade is expected to require $20m–$25m in total investment; $11.4m of non-cancellable purchase obligations were disclosed.
- Restructuring was substantially completed; first-half FY22 restructuring costs were $0.7m, compared with $7.8m a year earlier. The final Veracity earn-out payment was made in the quarter, and no contingent consideration liability remained at quarter-end.
- The company entered a new SOFR-based variable-rate facility, creating interest-rate exposure. Other stated risks include the evolving COVID-19 pandemic, competition for talent and wage costs, client demand and project wins, execution of technology and restructuring initiatives, foreign-exchange movements, and the ability to maintain dividends. The company does not currently hedge foreign-currency exposure.
- After quarter-end, the company borrowed an additional $20m on December 6 and repurchased 1,155,236 shares on December 8 for $17.01 per share. It also expects a $34m federal tax refund before fiscal year-end, based on prior-year tax planning; timing and receipt remain relevant to liquidity monitoring.
Key facts for investors to verify
- Whether strong revenue growth and improved margins persist, particularly as billable hours, consultant availability, pay rates and client demand change.
- How receivables and operating cash conversion develop after first-half cash from operations fell to $3.5m.
- Debt utilization, covenant headroom and interest expense following the additional borrowing, including exposure to SOFR rate changes.
- Actual timing and total cost of the technology program, and measurable returns from HUGO and digital consulting initiatives.
- Whether the expected $34m tax refund is received, and whether the board continues the quarterly dividend and share repurchases.
Adjusted EBITDA and its margin are non-GAAP measures; the company cautions they should not be viewed as substitutes for GAAP results.