RESOURCES CONNECTION, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes. This discussion and analysis contains "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements relate to expectations concerning matters that are not historical facts. For example, statements discussing, among other things, expected costs and liabilities, business strategies, growth strategies and initiatives, acquisition strategies, future revenues and future performance, are forward-looking statements. Such forward-looking statements may be identified by words such as "anticipates," "believes," "can," "continue," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "remain," "should," or "will" or the negative of these terms or other comparable terminology. These statements, and all phases of our operations, are subject to known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements and those of our industry to differ materially from those expressed or implied by these forward-looking statements. The disclosures we make concerning risks, uncertainties and other factors that may affect our business or operating results included in Part I, Item 1A of our Fiscal Year 2021 Form 10-K and our other public filings made with theSEC should be reviewed carefully. These risks and uncertainties include, but are not limited to, the following: risks arising from epidemic diseases, such as the COVID-19 pandemic (the "Pandemic"), the possible adverse effects from economic conditions or changes in the use of outsourced professional services consultants, the highly competitive nature of the market for professional services, risks related to the loss of a significant number of our consultants, or an inability to attract and retain new consultants, the possible impact on our business from the loss of the services of one or more key members of our senior management, risks related to potential significant increases in wages or payroll-related costs, our ability to secure new projects from clients, our ability to achieve or maintain a suitable pay/bill ratio, our ability to compete effectively in the competitive bidding process, risks related to unfavorable provisions in our contracts which may permit our clients to, among other things, terminate the contracts partially or completely at any time prior to completion, our ability to realize the level of benefit that we expect from our restructuring initiatives, risks that our recent digital expansion and technology transformation efforts many not be successful, our ability to build an efficient support structure as our business continues to grow and transform, our ability to grow our business, manage our growth or sustain our current business, our ability to serve clients internationally, additional operational challenges from our international activities, possible disruption of our business from our past and future acquisitions, risks that our computer hardware and software and telecommunications systems are damaged, breached or interrupted, risks related to the failure to comply with data privacy laws and regulations and the adverse effect it may have on our reputation, results of operations or financial condition, our ability to comply with governmental, regulatory and legal requirements and company policies, the possible legal liability for damages resulting from the performance of projects by our consultants or for our clients' mistreatment of our personnel, risks arising from changes in applicable tax laws or adverse results in tax audits or interpretations, the possible adverse effect on our business model from the reclassification of our independent contractors by foreign tax and regulatory authorities, the possible difficulty for a third party to acquire us and resulting depression of our stock price, the operating and financial restrictions from our credit facility, risks related to the variable rate of interest in our credit facility, and the possibility that we are unable to or elect not to pay our quarterly dividend payment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business or operating results. Readers are cautioned not to place undue reliance on the forward-looking statements included herein, which speak only as of the date of this filing. We do not intend, and undertake no obligation, to update the forward-looking statements in this filing to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, unless required by law to do so. References in this filing to "Resources Global Professionals," the "Company," "we," "us," and "our" refer toResources Connection, Inc. and its subsidiaries.
Overview
Resources Global Professionals is a global consulting firm helping businesses tackle transformation, change and compliance challenges by supplying the right professional talent and solutions. As a next-generation human capital partner for our clients, we specialize in solving today's most pressing business problems across the enterprise in the areas of transactions, regulations, and transformations. Disrupting the professional services industry since our founding in 1996, we are an emerging leader in the "now of work" - attracting and retaining the best talent in an increasingly fluid gig-oriented environment. Based inIrvine, California , with offices worldwide, our agile human capital model attracts top-caliber professionals with in-demand skillsets who seek a workplace environment that embraces flexibility, collaboration, and human connection. Our agile professional services model quickly aligns the right resources and solutions for the work at hand with speed and efficiency. See Part 1, Item 1 "Business" of our Fiscal Year 2021 Form 10-K for further discussions about our business and operations. 20
-------------------------------------------------------------------------------- Despite the impacts of the Pandemic, we successfully evolved our operating model to allow us to operate from a position of strength. The Pandemic accelerated certain macro trends that we believe favor our model. These include the increased use of contingent talent and virtual or remote work becoming mainstream. We expect to continue to evolve our client engagement and talent delivery model to take advantage of these important shifts. Our agile talent platform has helped our clients pivot their workforce and operating models in many ways. Fiscal 2021 was a year of validation, innovation, and strengthening for growth, which has continued into fiscal 2022. During the three and six months endedNovember 27, 2021 , we experienced robust top line growth and margin expansion propelled by continued acceleration of pipeline and sales activities, sustained improvement in operational execution and delivery, and enhanced fixed cost structure. We believe that we are continuing to lay a solid foundation for even stronger growth ahead.
Fiscal 2022 Strategic Focus Areas
Our strategic focus areas in fiscal 2022 are:
?Drive meaningful revenue growth and deliver enhanced EBITDA margin
?Commercialize our digital strategies
?Modernize our global technology infrastructure
?Strengthen the RGP brand
Driving meaningful growth in our top-line revenue and expanding our EBITDA margin will remain our highest priority in fiscal 2022. Our strategy is to continue to focus on the growth of our strategic client and key industry vertical programs, particularly in healthcare, leveraging broader market talent for virtual delivery and the increasing focus on account penetration. Since inception, our strategic account program has been one of the key drivers of revenue and business growth. In fiscal 2022, we are further broadening our strategic account program by moving additional accounts into the program and adopting the client centric and borderless approach to serve these clients. We believe our efforts will allow us to continue to develop in-depth knowledge of these clients' needs and increase the scope and size of our projects with them. In our healthcare industry vertical, we see strong growth momentum from pharmaceutical to medical device to payor and provider, including in practice areas such as revenue cycle optimization, clinical trials process redesign and supply chain transformation. To align with market demand, we are expanding our capabilities in such areas as revenue integrity, clinical trials support and supply chain optimization and are leveraging our depth of industry expertise to help clients operate with enhanced agility and efficiency in the rapidly evolving healthcare industry. In addition, the continued evolution of our operating and delivery model to be more flexible, virtual, and borderless has allowed us to expand opportunities within existing core clients and markets as well as to uncover opportunities to effectively serve new clients in new markets. As our clients continue to accelerate their digital and workforce paradigm transformations in this still uncertain economic environment, we are ready and positioned to deliver greater workforce agility and flexibility to our clients. We are committed to improving EBITDA performance and delivering enhanced stockholder value. We are building on significant cost savings and margin expansion achieved in fiscal 2021 through heightened focus on pricing and delivery and operational efficiency. We are improving our pay/bill ratio through value-based pricing and strategic management of our direct delivery costs. In a world with intensified competition for talent, we are striving to attract high-caliber professionals with the right skillsets and qualifications, and appropriately reflect the value delivered in our bill rates. We are also achieving a structural improvement in cost leverage through disciplined management of headcount, business expenses, and real estate costs in an increasingly digital, virtual market. Our second focus area for this fiscal year is to commercialize our digital strategies, and we continue to make solid strides. We have completed the development of the core functionalities of HUGO, a digital staffing platform within our employment model where talent and businesses/clients can connect and engage directly. HUGO is designed to offer clients and talent unprecedented transparency, speed, and control. We launched HUGO in the Tri-State markets inOctober 2021 . We continue to enhance its functionality with further artificial intelligence and machine learning. Additionally, our efforts to commercialize our digital strategies this year also include the acceleration of digital transformation services revenue through the continued expansion of go-to-market penetration forVeracity Consulting Group, LLC ("Veracity") inNorth America and further development of our Digital Technology Practice in theAsia Pacific region. We expect to drive continued enhancement in our abilities to provide digital transformation and technology consulting services from strategy and roadmap to technical implementation. Our focus on introducing Veracity more broadly to our client base has generated positive returns since inception, with Veracity revenue growing 40.2% year-over-year in the first half of fiscal 2022. We believe the increase in virtual or remote delivery arrangements resulting from the Pandemic has and will continue to accelerate digital transformation agendas in our existing client base and create opportunities for us to engage with new clients, contributing to further topline revenue growth. The third area of focus for fiscal 2022 is to modernize our technology platform. We recently launched a multi-year project to elevate our technology infrastructure globally, including a cloud-based enterprise resource planning system and talent acquisition and management system. We believe our investment in this technology initiative will accelerate our efficiency and data-led decision-making capabilities, optimize process flow and automation, scale our operations to support future growth, and create an enhanced digital experience for our consultants and clients. 21 -------------------------------------------------------------------------------- Fourth, we will focus even more on our human-first brand to improve the consultant experience. Our brand is built on the power of human. Through enhanced transparency, flexibility and digital connection, fulfilling assignments, competitive compensation and benefits and continued education, training and professional development, we are strengthening our professional community and delivering care and wellbeing to our consultants. We are positioning ourselves as the preferred human capital partner in the "now of work," providing the best talent to meet our clients' needs in an increasingly fluid gig-oriented environment.
COVID-19 Impact and Outlook
During the Pandemic, we experienced adverse impacts to our business including, among other things, reduced demand for or delayed client decisions to procure our services, especially in certain of our markets. In response to the Pandemic, we evolved our operating model to be more virtual and borderless, which resulted in improved operational execution and leverage. At the same time, the ongoing shifts accelerated by the Pandemic, including the increased use of contingent talent and virtual or remote delivery, have increased the importance and relevance of our solutions and allowed us to operate from a position of strength, as evidenced by the sustained improvement in our financial results. As the Pandemic continues to evolve, we are following local government mandates, where applicable, and will continue to revise and refine our client delivery solutions and plans to return to on-site work to ensure exceptional client service, business continuity, and the safety and wellbeing of our employees. The full extent to which the Pandemic impacts our business will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact, the impacts of new variants of the virus, and the timing, distribution, efficacy and public acceptance of vaccines and other treatments for COVID-19.
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements in accordance with GAAP requires us to make estimates and judgments. There have been no material changes in our critical accounting policies or in the estimates and assumptions underlying those policies, from those described under the heading "Critical Accounting Policies and Estimates" in Item 7 of Part II of our Fiscal Year 2021 Form 10-K.
Non-GAAP Financial Measures
We use certain non-GAAP financial measures to assess our financial and operating performance that are not defined by, or calculated in accordance with, GAAP. A non-GAAP financial measure is defined as a numerical measure of a company's financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the Consolidated Statements of Operations; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable GAAP measure so calculated and presented.
Our primary non-GAAP financial measures are listed below and reflect how we evaluate our operating results.
?Same day constant currency revenue is adjusted for the following items:
oCurrency impact. In order to remove the impact of fluctuations in foreign currency exchange rates, we calculate constant currency revenue, which represents the outcome that would have resulted had exchange rates in the current period been the same as those in effect in the comparable prior period.
oBusiness days impact. In order to remove the fluctuations caused by comparable periods having a different number of business days, we calculate same day revenue as current period revenue (adjusted for currency impact) divided by the number of business days in the current period, multiplied by the number of business days in the comparable prior period. The number of business days in each respective period is provided in the "Number of Business Days" section in the table below. ?Adjusted EBITDA is calculated as net income (loss) before amortization of intangible assets, depreciation expense, interest and income taxes plus stock-based compensation expense, restructuring costs, technology transformation costs, and plus or minus contingent consideration adjustments. Adjusted EBITDA at the segment level excludes certain shared corporate administrative costs that are not practical to allocate.
?Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenue.
Same day constant currency revenue
Same day constant currency revenue assists management in evaluating revenue trends on a more comparable and consistent basis. We believe this measure also provides more clarity to our investors in evaluating our core operating performance and facilitates
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a comparison of such performance from period to period. The following table presents a reconciliation of same day constant currency revenue to revenue, the most directly comparable GAAP financial measure, by geography.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
Three Months Ended Six Months Ended
Revenue by Geography November 27, November 28, November 27, November 28,
2021 2020 2021 2020
(Unaudited) (Unaudited)
(Amounts in thousands, except number of business days)
North America
As reported (GAAP) $ 167,154 $ 122,732 $ 319,033 $ 243,346
Currency impact (107) (382)
Business days impact - 2,549
Same day constant currency revenue $ 167,047 $ 321,200
Europe
As reported (GAAP) $ 19,921 $ 19,082 $ 38,786 $ 35,374
Currency impact (138) (1,109)
Same day constant currency revenue $ 19,783 $ 37,677
Asia Pacific
As reported (GAAP) $ 13,163 $ 11,408 $ 25,559 $ 21,847
Currency impact 238 48
Same day constant currency revenue $ 13,401 $ 25,607
Total Consolidated
As reported (GAAP) $ 200,238 $ 153,222 $ 383,378 $ 300,567
Currency impact (7) (1,443)
Business days impact - 2,549
Same day constant currency revenue $ 200,231 $ 384,484
Number of Business Days
North America (1) 62 62 125 126
Europe (2) 65 65 129 129
Asia Pacific (2) 61 61 124 124
(1) This represents the number of business days in the
?
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Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA and Adjusted EBITDA Margin assist management in assessing our
core operating performance. We also believe these measures provide investors
with a useful perspective on underlying business results and trends and
facilitate a comparison of our performance from period to period. The following
table presents Adjusted EBITDA and Adjusted EBITDA Margin for the periods
indicated and includes a reconciliation of such measures to net income (loss)
and net income (loss) margin, the most directly comparable GAAP financial
measures (amounts in thousands, except percentages):
Three Months Ended Six Months Ended
November
27, % of November 28, % of November 27, % of November 28, % of
2021 Revenue 2020 Revenue 2021 Revenue 2020 Revenue
(Unaudited, Amounts in thousands, except percentages)
Net income (loss) $ 14,305 7.1 % $ (992) (0.6) % $ 27,228 7.1 % $ 1,292 0.4 %
Adjustments:
Amortization of
intangible assets 1,184 0.6 1,393 0.9 2,287 0.6 2,923 1.0
Depreciation expense 893 0.5 984 0.7 1,812 0.5 1,991 0.6
Interest expense, net 222 0.1 460 0.3 438 0.1 955 0.3
Provision for income
taxes 5,567 2.8 2,256 1.4 10,752 2.8 4,213 1.4
EBITDA 22,171 11.1 4,101 2.7 42,517 11.1 11,374 3.7
Stock-based compensation
expense 2,019 1.0 1,708 1.1 3,648 0.9 3,105 1.1
Restructuring costs 583 0.3 6,775 4.4 739 0.2 7,791 2.6
Technology
transformation costs (1) 229 0.1 - - 229 0.1 - -
Contingent consideration
adjustment (54) (0.0) (189) (0.1) 167 0.0 342 0.1
Adjusted EBITDA
(1) Commencing with the three months ended
Our non-GAAP financial measures are not measurements of financial performance or
liquidity under GAAP and should not be considered in isolation or construed as
substitutes for revenue, net income, earnings per share, cash flows, or other
measures of financial performance prepared in accordance with GAAP for purposes
of analyzing our revenue, profitability or liquidity.
Further, a limitation of our non-GAAP financial measures is they exclude items
detailed above that have an impact on our GAAP reported results. Other companies
in our industry may calculate these non-GAAP financial measures differently than
we do, limiting their usefulness as a comparative measure. Because of these
limitations, these non-GAAP financial measures should not be considered a
substitute for performance measures calculated in accordance with GAAP.
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Results of Operations
The following table sets forth, for the periods indicated, our Consolidated Statements of Operations data. These historical results are not necessarily indicative of future results.
Three Months Ended Six Months Ended
November 27, November 28, November 27, November 28,
2021 2020 2021 2020
(Amounts in thousands, except percentages)
Revenue $ 200,238 100.0 % $ 153,222 100.0 % $ 383,378 100.0 % $ 300,567 100.0 %
Direct cost of
services 121,497 60.7 95,044 62.0 233,204 60.8 184,493 61.4
Gross profit 78,741 39.3 58,178 38.0 150,174 39.2 116,074 38.6
Selling, general and
administrative 28.4 54,552 35.6 28.2 105,707 35.2
expenses 56,881 108,274
Amortization of 0.6 1,393 0.9 0.6 2,923 1.0
intangible assets 1,184 2,287
Depreciation expense 893 0.4 984 0.7 1,812 0.5 1,991 0.6
Income from 19,783 9.9 1,249 0.8 9.9 5,453 1.8
operations 37,801
Interest expense, net 222 0.1 460 0.3 438 0.1 955 0.3
Other income (311) (0.1) (475) (0.3) (617) (0.1) (1,007) (0.3)
Income before
provision for income
taxes 19,872 9.9 1,264 0.8 37,980 9.9 5,505 1.8
Provision for income 2.8 2,256 1.4 2.8 4,213 1.4
taxes 5,567 10,752
Net income (loss) $ 14,305 7.1 % $ (992) (0.6) % $ 27,228 7.1 % $ 1,292 0.4 %
Consolidated Operating Results - Three Months Ended
Percentage change computations are based upon amounts in thousands.
Revenue. Revenue increased$47.0 million to$200.2 million in the second quarter of fiscal 2022 from$153.2 million in the second quarter of fiscal 2021. The year-over-year revenue growth was 30.7% on both a GAAP and same day constant currency basis. Billable hours increased 28.8% and the average bill rate improved 1.7% from the prior year quarter.
The following table represents our consolidated revenues by geography for the
three months ended
November 27, 2021 % of Revenue November 28, 2020 % of Revenue
(Amounts in thousands, except percentages)
North America $ 167,154 83.5 % $ 122,732 80.1 %
Europe 19,921 9.9 19,082 12.5
Asia Pacific 13,163 6.6 11,408 7.4
Total $ 200,238 100 % $ 153,222 100 %
Revenue acceleration across all geographies during the second quarter of fiscal
2022 compared to the prior year quarter continued to be propelled by strong
client demand and better operational execution and delivery. The increase in
client demand across most of our markets and solution offerings reflected macro
trends. Such trends include workforce agility, workforce gaps caused by the
"Great Resignation," the demand for digital transformation services, and the
continued strengthening in client spending on significant and transformational
initiatives, as evidenced by larger deal size, longer project duration and
record high pipelines and closed deals. The strong revenue growth was led by
solution areas in Finance and Accounting and Business Transformation and our
strategic client account program. Additionally, revenue conversion benefited
from our sustained improvement in operational execution and delivery, as we
continued to refine our client centric and borderless approach. Our focus on
value-based pricing also continued to drive year-over-year improvement in
average bill rate, contributing to overall revenue growth.
North America experienced the most robust revenue growth of 36.2%, or 36.1% on a
same day constant currency basis, from the second quarter of fiscal 2021. The
broad-based strengthening in client demand and spending resulted from continued
recovery of the macro economy in the U.S. , with clients resuming their
discretionary spending and accelerating their digital and workforce paradigm
transformation. The shift towards workforce agility and the increased acceptance
of co-delivery and remote delivery contracts not only enhanced our value
proposition to our clients, but also allowed for sustained improvement in our
operational efficiency with better
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matching of supply and demand that allowed us to respond to client opportunities
in a more nimble and efficient manner. In Europe , our adoption of a more
integrated global go-to-market approach to focus on serving our tier one
multi-national clients in this region drove strong business growth. Europe
revenue increased 4.4%, or 3.7% on a same day constant currency basis, from the
second quarter of fiscal 2021, despite $1.1 million of lost revenue from the
exit of certain markets in connection with our restructuring initiatives in the
prior fiscal year. Asia Pacific revenue improved 15.4%, or 17.5% on a same day
constant currency basis, led by continued penetration and growth at our
strategic client accounts in this region.
Direct Cost of Services. Direct cost of services increased $26.5 million , or
27.8%, to $121.5 million for the second quarter of fiscal 2022 from $95.0
million for the second quarter of fiscal 2021. The increase in the amount of
direct cost of services year-over-year was primarily attributable to a 28.8%
increase in billable hours.
Direct cost of services as a percentage of revenue was 60.7% for the second
quarter of fiscal 2022 compared to 62.0% for the second quarter of fiscal 2021.
The decreased percentage compared to the prior year was primarily attributable
to an improvement of 80 basis points in overall pay/bill ratio, better leverage
in healthcare cost and other indirect benefits, and lower passthrough revenue
from client reimbursement. Our target direct cost of services percentage is 60%.
The number of consultants on assignment at the end of the second quarter of fiscal 2022 was 3,319 compared to 2,669 at the end of the second quarter of fiscal 2021.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") was $56.9 million , or 28.4% as a percentage of
revenue, for the second quarter of fiscal 2022, compared to $54.6 million , or
35.6% as a percentage of revenue, for the second quarter of fiscal
2021. Excluding restructuring costs in both periods, SG&A as a percentage of
revenue improved 310 basis points compared to the second quarter of fiscal 2021.
This is primarily driven by improvements of 440 basis points in management
compensation and 80 basis points in occupancy costs as a percentage of revenue,
as we continue to optimize sales productivity and operating efficiency while
reducing our fixed cost structure. The savings were partially offset by a
280-basis-point increase in bonuses and commissions as a percentage of revenue,
as a direct result of significant growth in both topline and profitability.
Management and administrative headcount was 884 at the end of the second quarter
of fiscal 2022 and 896 at the end of the second quarter of fiscal 2021.
Management and administrative headcount includes full time equivalent headcount
for our seller-doer group, which is determined by utilization levels achieved by
the seller-doers. Any unutilized time is converted to full time equivalent
headcount.
Restructuring charges. We substantially completed our North America and APAC
Plan and the European Plan in fiscal 2021. All employee termination and facility
exit costs incurred under the restructuring plans were associated with the RGP
segment, and are recorded in selling, general and administrative expenses in the
Consolidated Statements of Operations. Restructuring costs for the three months
ended November 27, 2021 and November 28, 2020 were as follows (in thousands):
Three Months Ended
November 27, 2021 November 28, 2020
North North
America America
and and
APAC APAC
Plan European Plan Total Plan European Plan Total
Employee termination costs
(adjustments) $ 44 $ (22) $ 22 $ 159 $ 5,296 $ 5,455
Real estate exit costs 542 1 543 700 382 1,082
Other costs - 18 18 - 238 238
Total restructuring costs
(adjustments) $ 586 $ (3) $ 583 $
859 $ 5,916
For further information on our restructuring initiatives, please refer to Note 10 - Restructuring Activities in Part I, Item 1 above.
Amortization and Depreciation Expense. Amortization of intangible assets was$1.2 million in the second quarter of fiscal 2022 and$1.4 million in the second quarter of fiscal 2021. The decrease in amortization expense is primarily due to certain acquired intangible assets being fully amortized at the end of the first quarter in fiscal 2021, partially offset by the amortization of certain internally developed software put in service in the second quarter of fiscal 2021 and later quarters. Depreciation expense was$0.9 million and$1.0 million in the second quarter of fiscal 2022 and fiscal 2021, respectively. Income Taxes. The provision for income taxes was$5.6 million (effective tax rate of 28.0%) for the second quarter of fiscal 2022 compared to$2.3 million (effective tax rate of 178.5%) for the second quarter of fiscal 2021. We record tax expense based upon actual results versus a forecasted tax rate because of the volatility in our international operations that span numerous tax jurisdictions and the resulting uncertainty of our ability to utilize historical net operating losses in such jurisdictions. The decrease in effective tax 26 -------------------------------------------------------------------------------- rate resulted primarily from the improvement in operating results in our operations globally, enabling us to utilize the benefits from historical net operating losses in the foreign jurisdictions. In the second quarter of fiscal 2021, the majority of the restructuring charges were incurred in our European entities resulting in a pre-tax loss inEurope . With significant required valuation allowances on tax benefits related to these net operating losses, no tax benefits were recognized in connection with the pre-tax loss, resulting in an effective tax rate of 178.5% in the second quarter of fiscal 2021. Given the current earnings and anticipated future earnings of some of our foreign entities, we believe there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that the valuation allowance on the deferred tax assets of certain foreign entities will no longer be needed. Reversal of the valuation allowance would result in the recognition of previously unrecognized deferred tax assets and a decrease to income tax expense in the period the reversal is recorded. The exact timing and amount of the valuation allowance reversal will be subject to the level of profitability that we are able to actually achieve. We recognized a net tax benefit of approximately$0.5 million and$0.1 million from compensation expense related to stock options, restricted stock awards, restricted stock units, performance stock units, and disqualifying dispositions under our ESPP during the three months endedNovember 27, 2021 andNovember 28, 2020 , respectively. Comparability of Quarterly Results. Our quarterly results have fluctuated in the past and we believe they will continue to do so in the future. Certain factors that could affect our quarterly operating results are described in Part II, Item 1A.-Risk Factors of our Fiscal Year 2021 Form 10-K. Due to these and other factors, we believe quarter-to-quarter comparisons of our results of operations may not be meaningful indicators of future performance.
Consolidated Operating Results - Six Months Ended
Percentage change computations are based upon amounts in thousands.
Revenue. Revenue increased$82.8 million , or 27.6%, to$383.4 million for the six months endedNovember 27, 2021 from$300.6 million for the six months endedNovember 28, 2020 . On a same day constant currency basis, revenue increased 27.9% compared to the first half of fiscal 2021. Billable hours increased 25.8% and the average bill rate improved 1.8% compared to the first half of fiscal 2022.
The following table represents our consolidated revenues by geography for the
six months ended
November 27, 2021 % of Revenue November 28, 2020 % of Revenue
(Amounts in thousands, except percentages)
North America $ 319,033 83.2 % $ 243,346 81.0 %
Europe 38,786 10.1 35,374 11.8
Asia Pacific 25,559 6.7 21,847 7.2
Total $ 383,378 100 % $ 300,567 100 %
Revenue growth accelerated across all geographies during the six months ended
November 27, 2021 compared to the six months ended November 28, 2020 , as we
continued to benefit from strong demand for our services in the opportunity rich
environment and our sustained improvement in operational execution and
efficiency. By geography, North America , Europe and Asia Pacific experienced
year-over-year growth of 31.1%, 9.6% and 17.0%, respectively, or 32.0%, 6.5% and
17.2%, respectively, on the same day constant currency basis. The drivers for
the 6-month period revenue growth are consistent with those for the three-month
period, as discussed above.
Direct Cost of Services. Direct cost of services increased $48.7 million , or
26.4%, to $233.2 million for the six months ended November 27, 2021 from $184.5
million for the six months ended November 28, 2020 . The increase in the amount
of direct cost of services year-over-year was primarily attributable to a 25.8%
increase in billable hours and a 1.0% increase in average pay rate.
Direct cost of services as a percentage of revenue was 60.8% for the six months
ended November 27, 2021 compared to 61.4% for the six months ended November 28,
2020 . The decreased percentage compared to the prior year was primarily
attributable to an improvement of 40 basis points in overall pay/bill ratio,
better leverage in healthcare cost and other indirect benefits, and lower
passthrough revenue from client reimbursement, partially offset by a more
significant holiday impact. The first six months of fiscal 2022 included one
more holiday in the U.S. , due to the timing of Memorial Day , compared to the
first six months of fiscal 2021.
Selling, General and Administrative Expenses. SG&A was
27
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months ended November 27, 2021 compared to $105.7 million , or 35.2% as a
percentage of revenue, for the six months ended November 28, 2020 . Excluding
restructuring costs in both periods, SG&A as a percentage of revenue improved
450 basis points compared to the first six months of fiscal 2021. This is
primarily driven by improvements of 480 basis points in management compensation
and 90 basis points in occupancy costs as a percentage of revenue, as we
continue to optimize sales productivity and operating efficiency while reducing
our fixed cost structure. The savings were partially offset by a 160-basis-point
increase in bonuses and commissions as a percentage of revenue, as a direct
result of significant growth in both topline and profitability, and a $0.9
million decrease in legal costs recovery.
Restructuring charges. We substantially completed our North America and APAC
Plan and the European Plan in fiscal 2021. All employee termination and facility
exit costs incurred under the restructuring plans were associated with the RGP
segment, and are recorded in selling, general and administrative expenses in the
Consolidated Statements of Operations. Restructuring costs for the six months
ended November 27, 2021 and November 28, 2020 were as follows (in thousands):
Six Months Ended
November 27, 2021 November 28, 2020
North North
America America
and and
APAC APAC
Plan European Plan Total Plan European Plan Total
Employee termination costs
(adjustments) $ 78 (224) $ (146) $ 1,097 5,296 $ 6,393
Real estate exit costs
(adjustments) 874 (15) 859 722 382 1,104
Other costs - 26 26 56 238 294
Total restructuring costs
(adjustments) $ 952 $ (213) $ 739 $
1,875 $ 5,916
For further information on our restructuring initiatives, please refer to Note 10 - Restructuring Activities in Part I, Item 1 above.
Amortization and Depreciation Expense. Amortization of intangible assets was$2.3 million and$2.9 million in the first six months of fiscal 2022 and fiscal 2021, respectively. The decrease in amortization expense is primarily due to certain acquired intangible assets being fully amortized at the end of the first quarter in fiscal 2021, partially offset by the amortization of certain internally developed software put in service in the second quarter of fiscal 2021 and later quarters. Depreciation expense was$1.8 million and$2.0 million in the first six months of fiscal 2022 and fiscal 2021, respectively. The decrease in depreciation expense was primarily due to fully-depreciated computer equipment in periods prior to the second quarter of fiscal 2022. Income Taxes. The provision for income taxes was$10.8 million (effective tax rate of 28.3%) for the six months endedNovember 27, 2021 compared to$4.2 million (effective tax rate of 76.5%) for the six months endedNovember 28, 2020 . We record tax expense based upon actual results versus a forecasted tax rate because of the volatility in our international operations that span numerous tax jurisdictions and the resulting uncertainty of our ability to utilize historical net operating losses in such jurisdictions. The decrease in effective tax rate resulted primarily from the improvement in operating results in our international entities, enabling us to utilize the benefits from historical net operating losses in the foreign jurisdictions. In the first six months of fiscal 2021, the majority of the restructuring charges were incurred in our European entities resulting in a pre-tax loss inEurope . With significant required valuation allowances on tax benefits related to these net operating losses, no tax benefits were recognized in connection with the pre-tax loss, resulting in an effective tax rate of 76.5% in Q2 2021. We recognized a net tax benefit of approximately$0.8 million and$0.3 million from compensation expense related to stock options, restricted stock awards, restricted stock units, performance stock units, and disqualifying dispositions under our ESPP during the first half of fiscal 2022 and fiscal 2021, respectively.
Operating Results of Segment
Effective in the second quarter of fiscal 2021, we revised our historical one segment position and identified the following new operating segments to align with changes made in our internal management structure and our reporting structure of financial information used to assess performance and allocate resources: ?RGP - a global business consulting practice which operates primarily under the RGP brand and focuses on professional project consulting and staffing services in areas such as finance and accounting, business strategy and transformation, risk and compliance, and technology and digital; ?taskforce - a German professional services firm that operates under the taskforce brand. It utilizes a distinct independent contractor/partner business model and infrastructure and focuses on providing senior interim management and project management services to middle market clients in the German market;
?Sitrick - a crisis communications and public relations firm which operates under the Sitrick brand, providing corporate,
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financial, transactional and crisis communication and management services.
RGP is our only reportable segment. taskforce and Sitrick do not individually
meet the quantitative thresholds to qualify as reportable segments. Therefore,
they are combined and disclosed as Other Segments. The following table presents
our operating results by segment. All prior year periods presented below were
recast to reflect the impact of the preceding segment changes.
Three Months Ended Six Months Ended
November 27, November 28, November 27, November 28,
2021 2020 2021 2020
(In thousands)
Revenues:
RGP $ 189,400 $ 142,002 $ 362,333 $ 279,111
Other Segments 10,838 11,220 21,045 21,456
Total revenues $ 200,238 $ 153,222 $ 383,378 $ 300,567
Adjusted EBITDA:
RGP $ 32,121 $ 18,401 $ 61,177 $ 34,859
Other Segments 1,232 1,251 2,238 2,417
Reconciling items (1) (8,405) (7,257) (16,115) (14,664)
Total Adjusted EBITDA (2) $ 24,948 $ 12,395 $ 47,300 $ 22,612
(1) Reconciling items are generally comprised of unallocated corporate
administrative costs, including management and board compensation, corporate
support function costs and other general corporate costs that are not allocated
to segments.
(2) A reconciliation of the Company's net income to Adjusted EBITDA on a consolidated basis is presented above under "Non-GAAP Financial Measures-Reconciliation of GAAP to Non-GAAP Financial Measures."
Revenue by Segment
RGP - RGP revenue increased$47.4 million , or 33.4%, in the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021, primarily as a result of a 28.8% increase in billable hours and a 1.7% increase in bill rate year-over-year. Through the first half of fiscal 2022, RGP revenue increased$83.2 million , or 29.8%, to$362.3 million compared to$279.1 million in the first half of fiscal 2021, primarily as a result of a 25.8% increase in billable hours and a 1.8% increase in bill rate year-over-year. Revenue from RGP generally represents more than 90% of total consolidated revenue.
The number of consultants on assignment under the RGP segment as of
Other Segments - Other Segments' revenue decreased$0.4 million , or 3.4% in the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021, primarily due to a$0.4 million decrease in taskforce revenue, as the local economic environment continued to be challenged by the Pandemic. Through the first half of fiscal 2022, revenue from Other Segments decreased$0.4 million or 1.9%, to$21.1 million from$21.5 million in the first half of fiscal 2021, primarily due to a$0.3 million decrease in Sitrick revenue as a result of slower business development during the Pandemic.
The number of consultants on assignment under Other Segments as of
Adjusted EBITDA by Segment
RGP - RGP Adjusted EBITDA increased$13.7 million , or 74.6%, to$32.1 million in the second quarter of fiscal 2022, compared to$18.4 million in the second quarter of fiscal 2021. This was primarily driven by an increase in revenue of$47.4 million , which was partially offset by an increase in the cost of services of$26.8 million . Additionally, SG&A costs attributed to RGP increased$5.7 million in the second quarter fiscal 2022 compared to the second quarter fiscal 2021 primarily due to the increase in bonuses and commissions of$5.9 million as a result of higher revenue and profitability achieved, an increase in bad debt expense of$0.4 million , and an increase in foreign currency transaction loss of$0.3 million , partially offset by savings in management compensation of$0.8 million and occupancy costs of$0.5 million . For the second quarter of fiscal 2022, material costs and expenses attributable to the RGP segment that are not included in computing the segment measure of adjusted EBITDA included depreciation and amortization of$1.9 million and stock-based compensation of$1.9 million . RGP Adjusted EBITDA increased$26.3 million or 75.5% to$61.2 million in the first half of fiscal 2022, compared to$34.9 million in the first half of fiscal 2021. The increase was primarily attributable to the$83.2 million increase in revenue partially offset by 29
-------------------------------------------------------------------------------- the increase in the cost of services of$49.1 million . Additionally, SG&A costs attributed to RGP increased$5.9 million in the first half of fiscal 2022 as compared to the first half of fiscal 2021 primarily due to the increase in bonuses and commissions of$8.3 million as a result of higher revenue and profitability achieved, an increase in bad debt expense of$0.6 million , and an increase in foreign currency transaction loss of$0.2 million , partially offset by savings in management compensation of$2.6 million and occupancy costs of$1.3 million . For the first six months of fiscal 2022, the material costs and expenses attributable to the RGP segment that are not included in computing the segment measure of adjusted EBITDA included depreciation and amortization of$3.8 million and stock-based compensation of$3.4 million . The trend in revenue, cost of services, and other costs and expenses at RGP year-over-year are generally consistent with those at the consolidated level, as discussed above, with the exception that the SG&A used to derive segment Adjusted EBITDA does not include certain unallocated corporate administrative costs. Other Segments - Other Segments' Adjusted EBITDA was$1.2 million for the second quarter of fiscal 2022, compared to$1.3 million in the prior year quarter, primarily attributable to the$0.4 million decrease in revenue partially offset by the$0.3 million decrease in the cost of services. For the second quarter of fiscal 2022, the material costs and expenses attributable to the Other Segments that are not included in computing the segment measure of adjusted EBITDA included depreciation and amortization of$0.1 million , and stock-based compensation of$0.1 million . Other Segments' Adjusted EBITDA declined$0.2 million , or 7.4%, to$2.2 million in the first six months of fiscal 2022 compared to the same period in fiscal 2021. While management compensation and bonus and commissions improved$0.6 million year-over-year, the savings were more than offset by the decrease in legal costs recovery of$0.9 million , as discussed in the consolidated operating results above, all of which was attributable to the Other Segments. For the first six months of fiscal 2022, the material costs and expenses attributable to the Other Segments that are not included in computing the segment measure of adjusted EBITDA included depreciation and amortization of$0.3 million and stock-based compensation of$0.2 million .
Liquidity and Capital Resources
Our primary sources of liquidity are cash provided by our operations, our$175.0 million senior secured revolving credit facility, as further discussed below, and, historically, to a lesser extent, stock option exercises and ESPP purchases. On an annual basis, we have generated positive cash flows from operations since inception. Our ability to generate positive cash flow from operations in the future will be, at least in part, dependent on global economic conditions and our ability to remain resilient during economic downturns. As ofNovember 27, 2021 , we had$70.6 million of cash and cash equivalents, including$29.6 million held in international operations. Prior toNovember 12, 2021 , we had a$120.0 million secured revolving credit facility withBank of America (the "Previous Credit Facility), which was scheduled to mature onOctober 17, 2022 . OnNovember 12, 2021 , the Company andResources Connection LLC and all domestic subsidiaries of the Company as guarantors, entered into a credit agreement with the lenders' party thereto andBank of America, N.A . as administrative agent (the "New Credit Agreement"), and concurrently terminated the Previous Credit Facility. The New Credit Agreement provides for a$175.0 million senior secured revolving loan (the "New Credit Facility"), which includes a$10.0 million sublimit for the issuance of standby letters of credit and a swingline sublimit of$20.0 million . The New Credit Facility also includes an option to increase the amount of the revolving loan up to an additional$75.0 million , subject to the terms of the agreement. The New Credit Facility matures onNovember 12, 2026 . Borrowings under the New Credit Facility bear interest at a rate per annum of either, at the Company's election, (i) Term SOFR (as defined in the New Credit Agreement) plus a margin ranging from 1.25% to 2.00% or (ii) the Base Rate (as defined in the New Credit Agreement), plus a margin of 0.25% to 1.00% with the applicable margin depending on the Company's consolidated leverage ratio. In addition, the Company pays an unused commitment fee on the average daily unused portion of the New Credit Facility, which ranges from 0.20% to 0.30% depending upon on the Company's consolidated leverage ratio.
The New Credit Facility is available for working capital and general corporate purposes, including potential acquisitions, dividend distribution and stock repurchases. Additional information regarding the New Credit Facility is included in Note 8 - Long-Term Debt in the Notes to consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
As ofNovember 27, 2021 , we had$44.0 million outstanding under the New Credit Facility. We borrowed an additional$20.0 million under the New Credit Facility onDecember 6, 2021 to finance the repurchase of 1,155,236 share of our common stock onDecember 8, 2021 fromDublin Acquisition, LLC (the "Seller") pursuant to a Stock Purchase Agreement, datedDecember 3, 2021 , entered into between the Company and the Seller. See Note 15 - Subsequent Events in the Notes to consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. In addition to cash needs for ongoing business operations, from time to time, we have strategic initiatives that could generate significant additional cash requirements. Our initiative to upgrade our technology platform, as described in "Fiscal 2022 Strategic Focus 30
-------------------------------------------------------------------------------- Areas" above, requires significant investments over multiple years. As ofNovember 27, 2021 , we have non-cancellable purchase obligations totaling$11.4 million , which are payable as follows pursuant to the licensing arrangement we have entered into in connection with this initiative:$1.5 million due before the end of fiscal 2022,$3.4 million due during fiscal 2023 and fiscal 2024,$3.6 million due during fiscal 2025 and 2026, and$2.9 million due thereafter. While we are still in the early stage of assessing the total amount of the investments required for this multi-year initiative, we current expect to incur total investments of$20.0 million to$25.0 million through the completion of the system implementation. Such costs primarily include technology licensing fees, third-party consulting fees, and costs associated with dedicated internal resources. The exact amount and timing will depend on a number of variables, including progress made on the implementation. We believe our current cash, ongoing cash flows from our operations and funding available under our New Credit Facility will provide sufficient funds for this initiative. Through the second quarter of fiscal 2022, we have substantially completed our restructuring initiatives globally. We do not expect future cash requirements for restructuring initiatives to be material. Additionally, during the three months endedNovember 27, 2021 , we made the final cash earn-out payment of$7.0 million related to the acquisition of Veracity. We have no remaining contingent consideration liabilities as ofNovember 27, 2021 . Other trends impacting our near-term liquidity include the deferral of payroll taxes under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and certain tax planning strategies implemented in the fourth quarter of fiscal 2021. The CARES Act includes provisions, among others, allowing deferral of the employer portion of the social security payroll taxes and addressing the carryback of net operating losses ("NOLs") for specific periods. We previously elected to defer the employer portion of social security payroll taxes throughDecember 31, 2020 totaling$12.6 million . Subsequent to the deferral, we elected to make a partial repayment of$6.3 million inMay 2021 and$2.3 million inDecember 2021 . We expect to pay all remaining deferred payroll taxes in calendar 2022. In addition, as part of our tax planning strategies, we made certain changes related to the capitalization of fixed assets effective for fiscal 2021. This strategy allowed us to carry back the NOLs of fiscal 2021 to fiscal years 2016 to 2018. We recognized a discrete tax benefit of$12.8 million in fiscal 2021 and expect to file for a federal tax refund in the amount of$34.0 million before the end of fiscal 2022. On a macro level, the Pandemic has created significant uncertainty in the global economy and capital markets, which could continue into the remainder of fiscal 2022 and beyond and impact our financial results and liquidity. A material adverse impact from the Pandemic could result in a need for us to raise additional capital or incur additional indebtedness. Our ongoing operations and growth strategy may require us to continue to make investments in critical markets and further expand our internal technology and digital capabilities. In addition, we may consider making strategic acquisitions or initiating additional restructuring initiatives, which could require significant liquidity. We believe that our current cash, ongoing cash flows from our operations and funding available under our New Credit Facility will be adequate to meet our working capital and capital expenditure needs for at least the next 12 months. Beyond the next 12 months, if we require additional capital resources to grow our business, either organically or through acquisitions, we may seek to sell additional equity securities, increase use of our New Credit Facility, expand the size of our New Credit Facility or raise additional debt. In addition, if we decide to make additional share repurchases, we may fund these through existing cash balances or use of our New Credit Facility. The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders. Our ability to secure additional financing in the future, if needed, will depend on several factors. These include our future profitability and the overall condition of the credit markets. Notwithstanding these considerations, we expect to meet our long-term liquidity needs with cash flows from operations and financing arrangements.
Other than as described herein, there have been no material changes to the contractual obligations described under the heading "Liquidity and Capital Resources" in Item 7 of Part II of our Fiscal Year 2021 Form 10-K.
Operating Activities
Operating activities for the six months endedNovember 27, 2021 provided cash of$3.5 million compared to$29.6 million for the six months endedNovember 28, 2020 . In the first six months of fiscal 2022, cash provided by operations resulted from net income of$27.2 million and non-cash adjustments of$8.8 million . Additionally, for the first half of fiscal 2022, net unfavorable changes in operating assets and liabilities totaled$32.5 million . These changes primarily consisted of a$29.2 million increase in trade accounts receivable, mainly attributable to accelerated revenue growth throughout the first half of fiscal 2022, the final Veracity contingent consideration payment, of which$3.7 million was categorized as operating (the remaining$3.3 million of the total$7.0 million contingent consideration payment was categorized as financing cash flow) and a$3.1 million increase in income taxes receivable due to timing of estimated quarterly tax payments. In the first six months of fiscal 2021, cash provided by operations resulted from net income of$1.3 million and non-cash adjustments of$8.5 million . Additionally, for the first half of fiscal 2021 net favorable changes in operating assets and liabilities totaled$19.8 million , primarily consisting of a$13.5 million decrease in trade accounts receivable and a$3.8 million increase in accounts payable and accrued expenses.
Investing Activities
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Net cash used in investing activities was $2.3 million for the first six months
of fiscal 2022 compared to $1.6 million for the first six months of fiscal 2021.
Net cash used in investing activities in both periods was primarily for the
development of internal-use software and acquisition of property and equipment.
Financing Activities
Net cash used in financing activities totaled$3.3 million for the first six months of fiscal 2022 compared to$29.1 million in the comparable prior year period. Net cash used in financing activities during the first six months of fiscal 2022 consisted of cash dividend payments of$9.3 million , the final Veracity contingent consideration payment, of which$3.3 million was categorized as financing, and the Expertence contingent consideration payment of$0.3 million , partially offset by$0.4 million of net borrowing under both the Previous Credit Facility and the New Credit Facility, and$9.2 million in proceeds received from ESPP share purchases and employee stock option exercises. Net cash used in financing activities during the six months endedNovember 28, 2020 consisted of repayments under the Previous Credit Facility of$20.0 million , cash dividend payments of$9.1 million , and Veracity year one contingent consideration payment, of which$3.0 million was categorized as financing. These were partially offset by$3.0 million in proceeds received from ESPP share purchases and employee stock option exercises.
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