Business context and reporting period
Resources Connection, Inc. provides project-based consulting and business support services through Resources Global Professionals (RGP), across finance and accounting, information management, governance and compliance, human capital, supply chain, legal and other practices. This Form 10-K covers the fiscal year ended May 30, 2015 (fiscal 2015), which had 52 weeks; fiscal 2014 had 53 weeks. Fiscal 2015 fourth-quarter information is also summarized below. The company served more than 1,700 clients through 68 offices in 20 countries.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $590.6 million | $567.2 million |
| Gross margin | $228.4 million; 38.7% | $215.8 million; 38.1% |
| Operating income | $50.3 million; 8.6% of revenue | $38.0 million; 6.7% |
| Net income | $27.5 million | $19.9 million |
| Diluted EPS | $0.72 | $0.51 |
| Adjusted EBITDA (non-GAAP) | $60.6 million; 10.3% margin | $49.8 million; 8.8% margin |
| Operating cash flow | $31.8 million | $32.0 million |
Fiscal 2015 fourth-quarter revenue was $148.8 million, operating income $14.5 million, net income $8.1 million and diluted EPS $0.21. Sequentially, revenue rose 1.4% from the third quarter. The year-earlier fourth quarter had 14 weeks and revenue of $156.8 million, so the reported quarter-to-quarter-year comparison is not like-for-like.
At May 30, 2015, cash and cash equivalents were $87.3 million and short-term investments were $25.0 million, totaling $112.2 million; working capital was $152.8 million. Total liabilities were $76.5 million and stockholders’ equity was $340.5 million. The company reported no debt outstanding. Its $3.0 million unsecured revolving facility had $1.9 million available after letters of credit and was due to expire November 30, 2015, unless extended. Management said cash and expected operating cash flows should cover working capital and capital expenditure needs for at least 12 months.
Financing cash use was $28.9 million, including $26.3 million for share repurchases and $11.7 million of dividends, partly offset by $9.1 million from option exercises and employee share purchases. The company paid a quarterly dividend of $0.08 per share in fiscal 2015, up from $0.07 in fiscal 2014.
Material changes versus the prior comparable period
- Revenue increased 4.1% as reported. Adjusting for fiscal 2014’s additional week, fiscal 2015 revenue increased $33.2 million, or 6.0%.
- Hours worked rose 8.1%, while average bill rates fell 4.0%. Management attributed rate pressure partly to U.S.-dollar strength and a large, lower-rate Philippines engagement.
- Gross margin improved 0.6 percentage points, while SG&A declined from 30.4% to 29.4% of revenue. Operating margin rose from 6.7% to 8.6%.
- Net income increased 38%, while operating cash flow was approximately flat. Higher accounts receivable was a significant use of operating cash.
- North American revenue grew 8.5%, Asia Pacific grew 6.8%, and Europe declined 22.9%. At constant currency, international revenue would have been $8.8 million higher; the European decline would have been 15.5%.
- Cash and short-term investments fell from $114.3 million to $112.2 million. Goodwill declined to $170.9 million, principally reflecting currency translation; the company reported no goodwill impairment.
Outlook, commentary, risks and unusual items
The filing provides no specific revenue or earnings guidance. Management described opportunities for organic growth, expansion of client relationships and selective geographic or service-line expansion, while noting that global economic uncertainty continued to restrain discretionary consulting spending, particularly in Europe. The company has no long-term client service agreements, and engagements can be terminated at any time.
Key disclosed risks include economic weakness and reduced demand, intense competition and pricing pressure, attracting and retaining experienced consultants, international operating and foreign-exchange exposure, client credit and collection risk, cybersecurity and systems interruptions, and execution risks from growth or acquisitions. The company does not use financial hedges for foreign currency exposure. Foreign currency translation reduced comprehensive income by $8.3 million in fiscal 2015.
Income tax expense was $22.9 million, with a 45.4% effective tax rate, reflecting jurisdictional mix, valuation allowances and other items; management cautioned that the rate may fluctuate. Fiscal 2015 also included the effects of the 52-week calendar compared with fiscal 2014’s 53 weeks. Management and the independent auditor concluded that internal control over financial reporting was effective as of May 30, 2015. The independent auditor issued unqualified opinions on the financial statements and internal controls. The company reported no material legal proceedings and no off-balance-sheet arrangements.
After year-end, Executive Chairman Donald Murray announced plans to retire from company employment effective August 31, 2015, while continuing as Board Chairman at the Board’s request.
Important facts for investors to verify
- Assess whether underlying growth, excluding the extra fiscal 2014 week, is sustainable and whether weaker European demand stabilizes.
- Track bill rates, consultant pay rates, hours worked and utilization, including the contribution and economics of the Philippines engagement.
- Review receivable growth, collections and cash conversion, given the increase in year-end accounts receivable and the allowance for doubtful accounts.
- Confirm renewal or replacement of the revolving credit facility, which was scheduled to expire in November 2015.
- Evaluate the sustainability of the elevated effective tax rate, foreign deferred tax assets and valuation allowances.
- Monitor currency exposure, share repurchases, dividend decisions and the impact of continuing equity compensation on diluted share count.