Resources Connection, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended May 28, 2011 (52 weeks), compared with the year ended May 29, 2010. Although the request metadata refers to 2010 Q4, this filing reports the full fiscal year ended in 2011. Amounts below are in U.S. dollars.
Business context
Resources Connection provides project-based professional services through Resources Global Professionals, across finance and accounting, information management, risk and compliance, restructuring, human capital, supply chain, legal and related practices. It served more than 1,900 clients in 21 countries, with 80 offices and 2,249 consultants on assignment at fiscal year-end. Work is primarily billed hourly; clients generally do not have long-term service contracts.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $545.5 million | $499.0 million |
| Gross profit / gross margin | $210.5 million / 38.6% | $195.2 million / 39.1% |
| Operating income (loss) | $51.5 million | ($1.8 million) |
| Net income (loss) | $24.9 million | ($11.7 million) |
| Diluted EPS | $0.53 | ($0.26) |
| Cash from operations | $26.1 million | $7.7 million |
| Cash, cash equivalents and short-term investments at year-end | $144.9 million | $140.9 million |
| Working capital | $182.7 million | $173.5 million |
- Revenue rose 9.3%; hours worked increased about 9.7%, while average bill rates declined 0.8%. Direct costs grew 10.3%, faster than revenue, and gross margin declined 0.5 percentage points.
- Selling, general and administrative expenses fell 5.7% to $172.6 million, or 31.6% of revenue versus 36.7%. FY2010 included $4.8 million in severance and $2.2 million in accelerated stock compensation tied to two senior executive departures.
- FY2011 results included a $25.9 million non-cash gain from reducing the estimated Sitrick Brincko Group contingent-consideration liability. The adjustment increased after-tax net income by $15.6 million, or $0.34 per share. The liability was estimated at $33.4 million at year-end; the acquired business’s first measurement-period EBITDA was $8.9 million, below the $11.3 million earn-out threshold.
- Adjusted EBITDA, a company-defined non-GAAP measure, was $47.6 million (8.7% margin), versus $27.2 million (5.5%) in FY2010. The measure excludes stock compensation and contingent-consideration adjustments, among other items, and is not a substitute for GAAP results or cash flow.
- The company reported no capital leases and no material funded debt. Its $3.0 million unsecured revolving facility had $1.4 million available after letters of credit and was scheduled to expire November 29, 2011; the company said it was compliant with covenants. Operating lease commitments totaled $46.0 million.
Material changes and capital allocation
- Results recovered from FY2010’s net loss as revenue and consultant hours increased and overhead declined. Revenue remained well below FY2009’s $685.6 million.
- Revenue increased in each reported geography: North America 8.4%, Europe 4.1%, and Asia Pacific 41.9%. International operations generated approximately 26.5% of revenue.
- Operating cash flow increased to $26.1 million. The company repurchased approximately 1.7 million shares for $24.4 million and paid $5.5 million of dividends during the year; it declared a $0.16-per-share annual dividend. Continuation of dividends and repurchases is discretionary.
- The 2009 Sitrick Brincko acquisition contributed $24.4 million of FY2011 revenue and $2.9 million of pretax earnings. The acquisition included a potentially uncapped earn-out based on four-year average EBITDA; up to half of a payment may be made in restricted stock.
Outlook, commentary and risks
- No quantified revenue or earnings guidance is provided. Management described the global recovery as modest and expected continued opportunistic geographic expansion and investment in complementary service lines.
- Management noted that summer holidays and any softening in economic conditions could pressure first-quarter FY2012 revenue and limit cost leverage. Fourth-quarter revenue rose sequentially to $145.7 million; Q4 net income was $5.4 million and included a $3.2 million favorable contingent-consideration adjustment.
- Key risks include economic weakness reducing client project demand; competition and pricing pressure; lack of long-term client contracts; attracting and retaining experienced consultants; foreign-exchange and international operating risks; collection and client credit risk; and potential volatility in acquisition earn-out estimates, taxes and quarterly results.
- The effective tax rate was approximately 52% in FY2011, affected by jurisdictional income and losses, deferred-tax valuation allowances and stock-based compensation tax items. Management said further valuation allowances may be needed for certain foreign tax assets.
- The company reported no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls and internal control over financial reporting as of May 28, 2011. The financial statements and internal controls received unqualified auditor opinions.
Important facts for investors to verify
- How much FY2011 earnings growth reflects underlying operations versus the $25.9 million non-cash earn-out remeasurement gain.
- Whether consultant hours, bill rates and gross margin trends support sustained revenue growth and operating leverage.
- The Sitrick Brincko Group’s future EBITDA performance, remaining earn-out assumptions and potential cash or stock payments.
- Renewal or replacement of the revolving credit facility that was due to expire in November 2011, and the company’s future liquidity and capital-allocation plans.
- Collection trends, foreign deferred-tax-asset recoverability, and exposure to foreign-currency movements, which the company does not hedge.