RESOURCES CONNECTION, INC. annual report, FY2013

Resources Connection, Inc. — FY2013 Form 10-K

Business context and reporting period. Resources Connection provides project-based professional consulting services, primarily through Resources Global Professionals (RGP), across finance and accounting, information management, risk and compliance, human capital, supply chain, legal and other practices. This annual report covers the 52 weeks ended May 25, 2013; fiscal 2012 also comprised 52 weeks. The filing includes fourth-quarter data, but is not a standalone quarterly report.

Financial performance and liquidity

Metric	FY2013	FY2012
Revenue	$556.3 million	$571.8 million
Gross margin	$214.3 million; 38.5%	$219.2 million; 38.3%
Operating income	$39.7 million; 7.1% margin	$73.1 million; 12.7% margin
Net income / diluted EPS	$20.5 million / $0.50	$41.1 million / $0.94
Adjusted EBITDA / margin	$53.2 million / 9.6%	$56.5 million / 9.9%
Cash from operations	$35.0 million	$36.4 million

• Revenue declined 2.7%. North America increased 1.3% to $436.0 million; Europe fell 16.8% to $83.4 million and Asia Pacific fell 9.7% to $36.9 million. Management attributed weakness, particularly in parts of Europe, to cautious client spending amid economic uncertainty.
• Hours worked declined 1.2% and average bill rates declined 1.6%. Consultants assigned at year-end fell to 2,208 from 2,317; office count declined to 73 from 77.
• Direct costs were 61.5% of revenue, versus 61.6% (the filing also presents the prior-year figure as 61.7% in selected data). SG&A declined 1.6% to $168.3 million, but rose to 30.3% of revenue from 29.9%.
• FY2012 operating income and net income benefited from a $33.4 million non-cash favorable contingent-consideration adjustment and a $0.5 million employee-related reversal. The company recorded no such adjustment in FY2013. Excluding those FY2012 favorable adjustments, operating income was broadly comparable year over year.
• Cash, cash equivalents and short-term investments totaled $119.0 million at year-end, including $25.0 million of short-term investments. Working capital was $155.8 million. Total liabilities were $65.3 million and stockholders’ equity was $352.3 million.
• The company reported no outstanding borrowings and no capital leases. Its $3.0 million unsecured revolving facility expired November 30, 2013; about $1.3 million was available at year-end after $1.7 million of letters of credit. The company was covenant-compliant.
• Investing activities used $5.2 million; financing activities used $38.1 million, including $34.2 million for repurchases and $9.5 million of dividends. The company repurchased about 2.9 million shares in FY2013 and had $72.6 million remaining under its authorization.

Outlook, risks and notable items

• Management expected existing cash and operating cash flows to cover working capital and capital expenditure needs for at least 12 months, while noting that cash generation and growth depend partly on improvement in global economic conditions. No specific revenue or earnings guidance was provided.
• Management cautioned that economic softness and the summer holiday period could pressure FY2014 first-quarter revenue and limit cost leverage. FY2014 is a 53-week year, with a 14-week fourth quarter.
• The board-approved quarterly dividend was $0.06 per share in FY2013, subject to future board approval. Continuation is not assured.
• The effective tax rate rose to 48.6% from 43.9%, reflecting the mix of international results and other tax items. The company made a one-time $9.7 million dividend from its Japan subsidiary and $3.9 million from Hong Kong, while maintaining its stated indefinite-reinvestment intent for foreign earnings going forward.
• Key risks include sensitivity to economic conditions and project demand, lack of long-term client contracts, pricing and consultant-retention competition, international and foreign-exchange exposure, client collections, technology/security interruptions, and possible fluctuations in quarterly results. The company does not currently hedge foreign-currency exposure.
• The Sitrick Brincko earn-out remained a significant estimate-sensitive item: management considered payment unlikely, but Mr. Brincko could receive $2.25 million if the earn-out is not paid, subject to employment conditions. The company had no material legal proceedings; ordinary-course matters were not expected to materially affect its financial position or results.
• Independent auditors issued unqualified opinions on the FY2013 financial statements and internal control over financial reporting; management also concluded controls were effective as of May 25, 2013.

Important facts for investors to verify

1. Whether demand, hours worked, bill rates and European revenue stabilized after FY2013, and how the extra FY2014 week affects comparisons.
2. The quality and sustainability of earnings: distinguish FY2012’s non-cash earn-out benefit from recurring operating performance, and monitor adjusted EBITDA alongside GAAP results.
3. Cash conversion and capital allocation, including ongoing repurchases, dividends, and the status or replacement of the revolving credit facility that was due to expire in November 2013.
4. The sustainability of the elevated effective tax rate, recoverability of foreign deferred tax assets, and any tax effects from foreign earnings distributions.
5. Whether client collection trends, consultant staffing, currency movements, and contingent-consideration assumptions materially change subsequent results.