Resources Connection, Inc. — Q2 FY2012 Form 10-Q
Reporting period: 13 weeks ended November 26, 2011; six-month results are compared with the six months ended November 27, 2010. Unless otherwise noted, amounts are in millions of dollars. Resources Connection provides project-based professional services across finance, accounting, advisory, risk, technology, human capital, supply chain, actuarial, and legal disciplines.
Financial results
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Revenue | $145.0 | $138.5 | $283.0 | $262.2 |
| Gross profit | $54.9 | $54.7 | $107.1 | $104.0 |
| Gross margin | 37.9% | 39.5% | 37.8% | 39.7% |
| Income from operations | $43.2 | $32.5 | $50.0 | $36.5 |
| Net income | $25.3 | $17.5 | $27.9 | $18.7 |
| Diluted EPS | $0.58 | $0.38 | $0.63 | $0.40 |
| Adjusted EBITDA / margin | $14.3 / 9.9% | $14.6 / 10.5% | $25.8 / 9.1% | $25.7 / 9.8% |
| Operating cash flow | Not presented quarterly | $7.0 | $11.2 |
Adjusted EBITDA is a company-defined non-GAAP measure that adds back stock-based compensation and contingent-consideration fair-value adjustments. It was approximately flat in the first half despite revenue growth, while its margin declined.
Business trends and changes
- Revenue rose 4.7% in Q2 and 7.9% for the first half. First-half hours worked increased 8.6%, while average bill rates fell 0.8%. For Q2, hours increased 6.9% and average bill rates declined 1.5% year over year.
- International markets led growth: first-half revenue increased 24.4% in Europe and 29.5% in Asia Pacific, versus 2.9% in North America. Foreign exchange benefited reported international revenue; at prior-year exchange rates, first-half international revenue would have been $4.9 million lower.
- Gross margin weakened as direct costs rose faster than revenue. Management cited an unfavorable bill-rate/pay-rate ratio and higher employee benefit costs. Direct costs were 62.2% of first-half revenue, versus 60.3% a year earlier.
- SG&A increased 2.4% in the first half but declined as a share of revenue to 30.2% from 31.9%.
- Reported earnings include a large non-cash favorable adjustment: the company reduced the Sitrick Brincko contingent-consideration liability from $33.4 million to zero and reversed $0.5 million of employee-related contingent consideration. The combined adjustment increased Q2 net income by $20.4 million after tax, or $0.47 per share. The prior-year comparison also included a substantial favorable earn-out adjustment.
Liquidity, capital allocation, and outlook
- At November 26, 2011, cash and cash equivalents were $109.7 million and short-term investments were $11.0 million. Current assets were $227.7 million and current liabilities $60.9 million. The balance sheet lists no funded borrowings; the $3.0 million revolving facility had $1.3 million available after $1.7 million of letters of credit. The company reported compliance with facility covenants.
- Cash from operations was $7.0 million for the first half, down from $11.2 million. Capital expenditures were $1.7 million. Financing cash outflow was $29.2 million, including $27.5 million of share repurchases and $4.0 million of dividends. Cash declined by $30.0 million from fiscal year-end.
- The company repurchased approximately 2.5 million shares in the first half at an average $11.18 per share; $124.6 million remained under the April 2011 authorization. The quarterly dividend had increased to $0.05 per share.
- Management expects current cash and ongoing operating cash flows to cover working-capital and capital-expenditure needs for at least 12 months. No specific revenue or earnings guidance was provided. Management cautioned that demand is difficult to predict because clients generally do not sign long-term service contracts.
- Key exposures include economic weakness and reduced demand for outsourced services, pricing and consultant-retention pressures, client collection risk, foreign-exchange fluctuations (the company does not hedge), tax-rate variability, and changes in estimated contingent consideration. The earn-out is payable only if average four-year EBITDA exceeds $11.3 million; first-two-year average EBITDA was $6.5 million. The contractual potential payment has no stated upper limit.
- The company reported no material legal proceedings or off-balance-sheet arrangements. Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported earnings growth reflects the non-cash earn-out adjustment, and what are underlying operating trends as reflected in Adjusted EBITDA and its margin?
- Whether bill rates, pay costs, and benefits stabilize sufficiently to recover gross margin.
- Whether the Sitrick Brincko earn-out estimate remains appropriate as actual results and projections change; the liability was reduced to zero, but the agreement permits an uncapped payment if the threshold is met.
- Whether operating cash flow can support continued buybacks and dividends while maintaining liquidity and funding investment.
- How economic conditions, foreign exchange, client collections, and tax-related factors affect future demand, reported revenue, cash flow, and earnings.