Business context and reporting period
Resources Connection, Inc. is a multinational professional-services firm operating primarily as Resources Global Professionals. It provides experienced consultants for client projects across finance, accounting, risk, restructuring, information management, human capital, supply chain, healthcare, actuarial, and legal and regulatory services. The filing covers the 13-week third quarter and nine months of fiscal 2012 ended February 25, 2012, compared with periods ended February 26, 2011. This is fiscal 2012 Q3, notwithstanding the request metadata’s “2011 Q3.”
Financial results and liquidity
Amounts below are in U.S. dollars; financial statement amounts are shown in millions except per-share data.
| Metric | Quarter ended Feb. 25, 2012 | Quarter ended Feb. 26, 2011 | Nine months ended Feb. 25, 2012 | Nine months ended Feb. 26, 2011 |
|---|---|---|---|---|
| Revenue | $143.3 | $137.6 | $426.3 | $399.8 |
| Gross profit | $53.6 | $50.9 | $160.7 | $155.0 |
| Gross margin | 37.4% | 37.0% | 37.7% | 38.8% |
| Operating income | $8.4 | $2.9 | $58.4 | $39.4 |
| Net income | $4.3 | $0.8 | $32.2 | $19.5 |
| Diluted EPS | $0.10 | $0.02 | $0.73 | $0.42 |
| Adjusted EBITDA and margin | $12.3; 8.6% | $8.2; 6.0% | $38.1; 8.9% | $33.9; 8.5% |
Quarterly operating income margin was 5.8% versus 2.1%; quarterly net margin was 3.0% versus 0.5%. Nine-month GAAP operating income and net income were materially affected by a noncash contingent-consideration adjustment, so those increases do not solely reflect underlying operations. Adjusted EBITDA is a company-defined non-GAAP measure.
- Cash flow: Nine-month operating cash flow was $19.8 million versus $15.1 million. Investing used $22.1 million, primarily reflecting purchases of short-term investments net of redemptions; financing used $40.3 million, including $38.4 million of share repurchases and $6.2 million of dividends. Cash and cash equivalents declined $43.2 million to $96.4 million.
- Liquidity and debt: Cash, cash equivalents, and short-term investments totaled $121.4 million at February 25, 2012. Current assets were $228.9 million and current liabilities $66.0 million. The company reported no borrowings; it had a $3.0 million unsecured revolving facility, with approximately $1.3 million available after letters of credit. It was in covenant compliance.
- Capital returns: The company repurchased approximately 3.4 million shares for $38.4 million during the nine months and paid $6.2 million in dividends. The quarterly dividend was $0.05 per share; approximately $113.8 million remained authorized for repurchases.
Material changes versus comparable periods
- Quarterly revenue grew 4.1%; hours worked rose approximately 5.9%, while average bill rates fell approximately 1.5%. Nine-month revenue grew 6.6%, with hours up 7.7% and average bill rates down 0.8%.
- Quarterly direct-cost ratio improved to 62.6% from 63.0%, while nine-month ratio worsened to 62.3% from 61.3%, reflecting a less favorable bill-rate/pay-rate relationship and higher benefits costs.
- Quarterly SG&A fell 4.2% to $43.4 million, or 30.3% of revenue versus 32.9%. Nine-month SG&A was essentially unchanged at $128.9 million, but declined as a share of revenue to 30.2% from 32.2%.
- Quarterly revenue was down 1.2% sequentially from the prior quarter; management cited seasonal vacation usage and approximately $1.0 million of adverse sequential foreign-exchange impact. North America grew sequentially, while Europe and Asia Pacific declined.
- International revenue was 26.9% of quarterly revenue. For the nine-month period, currency translation increased reported international revenue by $4.8 million relative to applying prior-year exchange rates.
Outlook, commentary, risks, and unusual items
- Contingent consideration: After Sitrick Brincko Group’s average EBITDA for its first two annual measurement periods was $6.5 million, about $4.8 million below the $11.3 million earn-out threshold, the company concluded payment was more likely than not not to be due in November 2013. It reduced the estimated liability from $33.4 million to zero and reversed a further $0.5 million employee-related estimate. The favorable noncash adjustment increased nine-month net income by $20.4 million after tax, or $0.46 per share, including the employee portion. Management cautioned that revised forecasts could change the estimate materially. A separate $2.25 million payment to a seller may be required if the earn-out is not paid, subject to an employment condition.
- Outlook: No numerical revenue or earnings guidance is provided. Management expected existing cash and ongoing operating cash flows to meet working-capital and capital-expenditure needs for at least 12 months, while noting possible future investment or acquisitions.
- Key risks: Client demand is project-based and clients generally do not sign long-term contracts; economic weakness, pricing pressure, competition, consultant retention, client collections, international operations, and currency fluctuations could affect results. The company does not use foreign-currency hedging. It also highlighted uncertain tax rates, goodwill and deferred-tax-asset recoverability, and subjective earn-out estimates.
- Other matters: Management stated that ordinary-course legal matters were not expected to have a material adverse effect and reported no material legal proceedings. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported nine-month earnings growth reflects the $33.4 million noncash contingent-consideration reversal rather than ongoing operating performance; compare GAAP results with adjusted measures and their reconciliations.
- Whether revenue growth can continue if bill rates remain under pressure, and whether the nine-month deterioration in direct-cost margin reverses.
- Whether cash generation supports the ongoing dividend and repurchases, given $38.4 million spent on buybacks and the $43.2 million decline in cash and cash equivalents.
- Whether Sitrick Brincko Group results or updated earn-out assumptions could cause a future liability or material earnings adjustment, and how foreign exchange and tax items affect reported results.