Resources Connection, Inc. — Form 10-K Summary
Period clarification: The request identifies “2011 Q4,” but the filing is the annual report for the fiscal year ended May 26, 2012 (52 weeks), with comparative results for the year ended May 28, 2011. Fiscal 2012 fourth-quarter data are also provided.
Business context
Resources Connection, operating primarily as Resources Global Professionals, provides experienced consultants for project-based professional services, including finance and accounting, information management, restructuring, risk and internal audit, human capital, supply chain, healthcare, and legal and regulatory work. It served approximately 1,900 clients through 77 offices in 21 countries. Its business is mainly billed hourly, without long-term client contracts.
Financial results and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $571.8 million | $545.5 million |
| Gross profit / margin | $219.2 million / 38.3% | $210.5 million / 38.6% |
| Operating income | $73.1 million | $51.5 million |
| Net income / diluted EPS | $41.1 million / $0.94 | $24.9 million / $0.53 |
| Adjusted EBITDA / margin | $56.5 million / 9.9% | $47.6 million / 8.7% |
| Cash from operations | $36.4 million | $26.1 million |
FY2012 revenue rose 4.8%; hours worked increased 6.2%, while average bill rates fell 0.8%. North America revenue grew 3.3%, Europe 8.1%, and Asia Pacific 14.1%. The fourth quarter generated $145.5 million of revenue and $8.9 million of net income.
Gross margin edged down as direct costs grew slightly faster than revenue. SG&A declined to $171.0 million, or 29.9% of revenue, from $172.6 million, or 31.6%. Adjusted EBITDA is a non-GAAP measure; it excludes stock compensation and contingent-consideration adjustments and should not be treated as a substitute for GAAP results or cash flow.
FY2012 operating cash flow was $36.4 million; investing activities used $20.5 million and financing activities used $49.1 million. At year-end, cash, cash equivalents and short-term investments totaled $128.1 million; working capital was $166.6 million. Total debt is not reported as outstanding. The company had a $3.0 million unsecured revolver, with about $1.3 million available after letters of credit, expiring November 29, 2012; it reported compliance with covenants. Operating lease obligations were $44.9 million.
The company repurchased approximately 3.9 million shares for $45.4 million in FY2012 and paid $8.3 million in dividends. The quarterly dividend was $0.05 per share, subject to board approval.
Changes, outlook and notable items
- Net income increased year over year, but results included a $33.4 million favorable, non-cash reduction in the Sitrick Brincko contingent-consideration estimate and a $0.5 million reversal of employee-related contingent consideration. Management said no earn-out payment was more likely than not; the estimate remains sensitive to future EBITDA assumptions. If no earn-out is payable, a $2.25 million payment to Mr. Brincko may be due subject to employment conditions.
- Adjusted EBITDA increased 18.6% to $56.5 million, providing a view excluding the contingent-consideration adjustment. The reported operating-income increase should be considered in light of that unusual non-cash credit.
- Management expected existing cash and operating cash flow to cover working capital and capital spending for at least 12 months. It anticipated continued selective geographic and service-line expansion, but gave no quantified revenue or earnings guidance.
- Management cautioned that economic uncertainty, including Europe’s fiscal crisis, and summer holiday seasonality could pressure demand and FY2013 first-quarter results. Other stated risks include competition, client project cancellations, consultant retention, foreign currency movements, international operating conditions, and client credit and collections.
- Foreign operations represented 27.2% of revenue; the company did not use financial hedges for foreign currency exposure. The largest client accounted for less than 2.7% of revenue and the top 10 about 16%.
Key facts for investors to verify
- Confirm the intended period: this filing covers FY2012, not FY2011, and the specified Q4 figures are unaudited quarterly data.
- Review how much reported earnings growth depends on the non-cash Sitrick Brincko estimate reversal, and monitor the earn-out assumptions and any related compensation expense.
- Assess underlying demand, hours, bill rates and direct-cost trends; revenue growth outpaced neither direct-cost growth nor gross-margin pressure.
- Verify cash-flow sustainability after buybacks and dividends, and the status or replacement of the revolver expiring in November 2012.
- Consider dividend and repurchase discretion, lease commitments, tax-asset realizability, and the company’s exposure to economic and currency risks.
PricewaterhouseCoopers LLP gave unqualified opinions on the consolidated financial statements and internal control over financial reporting as of May 26, 2012; management also concluded controls were effective.