Resources Connection, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended May 26, 2018 (52 weeks), with comparative results for the year ended May 27, 2017. Although the request metadata identifies “2017 Q4,” this filing is an annual report for FY2018; it also presents FY2018 fourth-quarter results.
Business context
Resources Connection provides project-based consulting and professional talent through Resources Global Professionals (RGP), across finance and accounting, information management, risk and compliance, human capital, supply chain, legal, and related areas. It served more than 2,400 clients through 74 offices in 21 countries. No customer generated more than 10% of revenue; the ten largest generated approximately 15%.
Financial and operating metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $654.1 million | $583.4 million |
| Gross margin | $246.1 million; 37.6% | $221.3 million; 37.9% |
| Income from operations | $30.6 million; 4.6% of revenue | $34.4 million; 5.9% |
| Net income | $18.8 million | $18.7 million |
| Diluted EPS | $0.60 | $0.56 |
| Adjusted EBITDA and margin | $43.0 million; 6.6% | $43.9 million; 7.5% |
| Cash provided by operations | $15.4 million | $28.3 million |
| Cash and cash equivalents at year-end | $56.5 million | $62.3 million |
| Working capital | $100.4 million | $95.1 million |
| Long-term debt | $63.0 million | $48.0 million |
| Dividends declared per share | $0.48 | $0.44 |
FY2018 revenue rose 12.1%; excluding acquisitions, it increased 4.1%. Average bill rates and hours worked, excluding acquisitions, increased 2.5% and 1.2%, respectively. North America revenue increased 9.5% as reported, Europe 40.1%, and Asia Pacific 2.0%; Europe’s reported increase included taskforce. At comparable exchange rates, total revenue growth was 10.9%.
Fourth-quarter FY2018 revenue was $183.8 million, up 6.6% sequentially from $172.4 million. The quarter included $22.0 million from acquisitions. Fourth-quarter gross margin was 38.3% and operating income was $9.5 million; the filing attributes sequential margin improvement partly to fewer compensated holidays and lower medical costs.
Material changes versus FY2017
- Revenue growth included contributions from two acquisitions; excluding them, growth was more modest. Financial-services revenue remained weak, limiting growth.
- Operating income declined 11.0%, despite higher revenue. Gross margin slipped 0.3 percentage points, while SG&A rose to 32.0% of revenue from 31.4%.
- Adjusted EBITDA decreased about 2.0%, and its margin fell 0.9 percentage points. Management cited unfavorable bill-rate-to-pay-rate movement and higher costs.
- Operating cash flow fell by $12.9 million, primarily reflecting a $19.4 million increase in accounts receivable, partly offset by other working-capital changes.
- Cash declined while debt increased, reflecting acquisition funding and ongoing shareholder returns. Investing cash use was $25.7 million, including acquisition spending; financing activities provided $3.5 million.
- The effective tax rate decreased to 34.8% from 44.8%, including effects of U.S. tax reform, deferred-tax remeasurement, and foreign valuation-allowance changes.
Acquisitions, outlook, risks, and other notable items
- Acquisitions: Accretive contributed $35.5 million of revenue and $1.8 million of income before depreciation and amortization for the six months included in FY2018. Taskforce contributed $11.4 million of revenue and $0.6 million of income before depreciation and amortization for the nine months included. Accretive consideration included $20.0 million cash and approximately 1.07 million restricted shares; taskforce includes performance-based earn-outs, with $4.3 million estimated remaining contingent consideration at year-end.
- Management outlook: No quantified revenue or earnings guidance is provided. Management expected Accretive EBITDA to increase in FY2019 as cost synergies were implemented, targeted by the end of calendar 2018. It planned continued cost management and rollout of the redesigned operating model in Europe and Asia Pacific during FY2019. Strategic Client Program revenue was up 8.4% year over year.
- Cash, debt, and returns: The company had a $120 million secured revolving credit facility expiring in October 2021; it reported covenant compliance at year-end. About $56 million remained available to borrow, excluding the approximately $1 million of letters of credit. The board-approved quarterly dividend was $0.12 per share, subject to future approval; $120 million remained authorized under the repurchase program.
- Unusual costs and tax items: FY2018 SG&A included approximately $14.0 million for severance, acquisition costs, and transformation/integration initiatives. Tax reform reduced the U.S. federal corporate rate, phased in for FY2018; the company also recorded a one-time $12 million dividend from certain foreign subsidiaries and related tax estimates that management said could change with further guidance.
- Key risks: Client engagements are generally not long-term contracts and may be terminated; demand is exposed to economic conditions and competition for clients and consultants. Other cited risks include acquisition integration, recruiting and retention, foreign exchange, cybersecurity and privacy compliance (including GDPR), potential fixed-fee engagements, and credit-facility covenants. The company does not use financial hedges for foreign-currency exposure.
- Commitments and controls: Operating-lease commitments totaled $42.5 million and purchase obligations $1.3 million. The company anticipated that lease-accounting adoption in FY2020 would significantly increase reported balance-sheet assets and liabilities. It reported no material legal proceedings and no off-balance-sheet arrangements. The auditor issued unqualified opinions on the financial statements and internal controls, which were assessed as effective.
Investor verification checklist
- Reconcile reported revenue growth with acquisition contributions and the 4.1% acquisition-excluded growth measure; assess whether organic growth and financial-services recovery persisted.
- Track bill rates versus consultant pay rates, gross margin, SG&A leverage, and the realization of Accretive synergies.
- Review receivables, collections, and operating cash flow, given the substantial year-over-year increase in accounts receivable.
- Monitor debt, remaining facility capacity, variable-rate interest exposure, covenant headroom, and the taskforce earn-out estimate.
- Assess the sustainability of the dividend and repurchases relative to cash generation, integration spending, and lease commitments.
- Check subsequent tax guidance and the realization of deferred tax assets, as well as the results of the FY2019 operating-model rollout and accounting-standard adoptions.