Resources Connection, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2022, the 13 weeks ended August 28, 2021; comparisons are with the 13 weeks ended August 29, 2020. The company provides consulting and professional staffing services, primarily through Resources Global Professionals (RGP). RGP is its only reportable segment.
Key financial results
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $183.1 million | $147.3 million |
| Gross profit / margin | $71.4 million / 39.0% | $57.9 million / 39.3% |
| Operating income / margin | $18.0 million / 9.8% | $4.2 million / 2.9% |
| Net income / diluted EPS | $12.9 million / $0.39 | $2.3 million / $0.07 |
| Adjusted EBITDA / margin | $22.4 million / 12.2% | $10.2 million / 6.9% |
| Cash from operations | $0.5 million | $18.6 million |
Revenue grew 24.3% year over year; same-day constant-currency revenue grew 25.0%. Billable hours increased 22.7% and average bill rate rose 1.9%. Net income margin improved to 7.1% from 1.6%. Direct costs rose to 61.0% of revenue from 60.7%, slightly reducing gross margin. SG&A was nearly flat in dollars at $51.4 million, but fell to 28.1% of revenue from 34.7%, reflecting restructuring savings and operating leverage. The effective tax rate declined to 28.6% from 46.1%, primarily because improved results at international entities enabled use of historical tax losses.
Financial position and cash flow
- At August 28, 2021, cash and cash equivalents were $61.9 million, down from $74.4 million at May 29, 2021. The company reported $33.0 million of revolving-credit-facility borrowings, down $10.0 million during the quarter.
- The $120 million secured facility had $85.7 million of remaining capacity, net of $1.3 million in letters of credit. Borrowing rates were 1.62%–1.68%; the company reported compliance with all financial covenants.
- Operating cash flow was $0.5 million versus $18.6 million a year earlier. Higher receivables and lower accrued salaries were key uses of cash. Investing activities used $1.0 million; financing activities used $11.4 million, including debt repayment and dividends.
- Working capital was $137.9 million. Operating lease liabilities totaled $28.7 million. The company declared a quarterly dividend of $0.14 per share.
Material changes and management commentary
- Growth was broad across geographies: North America revenue rose 25.9%, Europe 15.8%, and Asia Pacific 18.7%. RGP revenue increased 26.1%; Other Segments revenue was essentially flat.
- Management attributed the rebound to strong client demand, improved delivery and execution, and demand for workforce agility and digital transformation. Strategic client accounts grew revenue 25.5% year over year. Veracity revenue grew 44.9%.
- The company substantially completed its restructuring plans. Q1 restructuring costs were $0.2 million, compared with $1.0 million in the prior-year quarter; cumulative plan costs were $13.4 million. It also completed the dissolution of two non-core European subsidiaries, recording a $0.1 million loss.
- Management’s fiscal 2022 priorities include revenue growth and improved EBITDA margin, commercializing digital offerings, modernizing technology infrastructure, and strengthening the RGP brand. The HUGO digital staffing platform was expected to begin pilot launches in fall 2021. No specific financial guidance was provided.
Outlook, risks and contingencies
Management said cash, operating cash flows and facility availability should fund working capital, capital spending, technology investment and contingent consideration for at least the next 12 months. The multi-year technology investment’s total cost was still being assessed. The company expected a $34.0 million federal tax refund before fiscal year-end and had $6.3 million of deferred payroll taxes expected to be paid in calendar 2022. An estimated $7.0 million contingent-consideration liability was expected to be paid before the end of calendar 2021.
Risks highlighted include the uncertain effects of COVID-19 and new variants, changing client demand, competition for talent and wage costs, client project cancellations or delays, execution of restructuring and digital initiatives, international operations and currency fluctuations, variable-rate debt, and the company’s ability to sustain its dividend. The company does not currently use foreign-currency hedges. Management stated that ordinary-course legal matters were not expected to have a material adverse effect; it reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue growth, utilization, bill rates and client demand remain strong, and whether the slight gross-margin decline reverses.
- Whether receivables convert to cash and operating cash flow recovers after the quarter’s working-capital outflow.
- The amount and timing of technology-infrastructure spending, the expected tax refund, deferred payroll-tax payments and contingent-consideration payments.
- Progress and returns from HUGO, Veracity and other digital initiatives, alongside execution risks and ongoing exposure to COVID-19 and foreign exchange.
- Future dividend decisions, facility availability and compliance with credit-facility covenants.