Resources Connection, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended August 27, 2011, the first quarter of fiscal 2012, with comparison to the 13 weeks ended August 28, 2010. Resources Connection provides project-based professional services in areas including finance, accounting, risk management, restructuring, information management, human capital, supply chain, actuarial, and legal services. It operated 80 offices, including 29 outside the United States.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Revenue | $138.0 | $123.7 |
| Gross profit / margin | $52.2 / 37.8% | $49.3 / 39.8% |
| Operating income / margin | $6.8 / 4.9% | $4.0 / 3.2% |
| Net income | $2.6 | $1.2 |
| Diluted EPS | $0.06 | $0.03 |
| Adjusted EBITDA / margin | $11.5 / 8.3% | $11.1 / 9.0% |
| Operating cash flow | $1.6 | $7.1 |
Revenue increased 11.6% year over year. Hours worked rose 10.6% and average bill rates rose 0.8%. Direct costs increased 15.3%, outpacing revenue growth; the direct-cost ratio rose to 62.2% from 60.2%, reflecting a less favorable bill-rate/pay-rate relationship, higher health-care costs, and more zero-margin client reimbursements. SG&A rose 4.2% to $42.6 million, but declined as a share of revenue to 30.9% from 33.1%. The effective tax rate was 62.3%, versus 70.7%.
Balance sheet, liquidity, and capital allocation
At August 27, 2011, cash and cash equivalents were $124.6 million and short-term investments were $5.2 million, totaling $129.8 million. Current assets were $231.1 million and current liabilities were $58.9 million. Total liabilities were $95.4 million; the balance sheet reports no funded debt. The company had a $3.0 million unsecured revolving facility, with approximately $1.4 million available after $1.6 million of letters of credit. The facility was due to expire November 29, 2011, and management intended to renew it. The company reported compliance with its covenants.
Operating cash flow was $1.6 million, down from $7.1 million, primarily due to less favorable working-capital movements. Investing activities used $1.0 million, including $1.0 million of capital expenditures. Financing activities used $16.1 million, chiefly for $16.6 million of share repurchases and $1.8 million of dividends, partly offset by $2.3 million of employee share-plan proceeds. Cash declined $15.1 million during the quarter.
The company repurchased approximately 1.46 million shares for $16.6 million at an average $11.38 per share; $135.5 million remained under the April 2011 repurchase authorization. The quarterly dividend increased from $0.04 to $0.05 per share. A $2.2 million dividend declared before quarter-end was paid after quarter-end.
Changes, outlook, and risks
- Revenue increased across all reported geographies year over year. Europe and Asia Pacific grew 30.9% and 47.5%, respectively; North America grew 5.4%. Foreign exchange translation increased reported international revenue: at prior-year exchange rates, international revenue would have been $4.0 million lower.
- Sequentially, revenue declined 5.3% from the prior quarter, with hours down 4.1% and average bill rates down 1.5%. Management attributed U.S. and European softness in part to summer vacation patterns and said it expected the direct-cost ratio to improve in the second quarter as the summer season ended.
- Management expected existing cash and ongoing operating cash flows to be adequate for working capital and capital expenditures for at least the next 12 months. No numerical revenue or earnings guidance was provided.
- The Sitrick Brincko acquisition earn-out liability was estimated at $33.9 million and did not change in the quarter. Payments depend on average EBITDA exceeding $11.3 million over the four-year earn-out period; the potential undiscounted payment has no stated upper limit. Sitrick Brincko contributed $4.9 million of revenue and $0.2 million of pretax earnings in the quarter, compared with $6.2 million and $0.9 million, respectively, a year earlier.
- Key risks include uncertain client demand and lack of long-term client contracts, economic deterioration, competition and consultant retention, foreign-exchange exposure (27.3% of revenue generated outside the U.S.; no hedging), client credit and collections, high effective-tax-rate variability, and possible impairment of goodwill. Management reported no material change in risk factors, no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether revenue growth can be sustained and gross margin recover from the year-over-year decline.
- Whether the lower operating cash flow reflects temporary working-capital timing or a persistent cash-conversion trend.
- Whether the $33.9 million contingent consideration estimate changes as Sitrick Brincko’s results and earn-out assumptions develop.
- Renewal and terms of the revolving credit facility due to expire November 29, 2011.
- The sustainability of the $0.05 quarterly dividend and the pace of repurchases relative to cash generation and business investment needs.
- Future effective tax rates, given valuation allowances and uncertainty in stock-option-related tax benefits.