Resources Connection, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended May 27, 2017 (52 weeks), compared primarily with the 52-week year ended May 28, 2016. The company provides project-based professional consulting services under the RGP brand across finance and accounting, information management, risk and compliance, human capital, supply chain, legal and other practices. It reported one operating segment and served more than 1,800 clients through 67 offices in 21 countries.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $583.4 million | $598.5 million | Down 2.5% |
| Gross margin | $221.3 million; 37.9% | $232.2 million; 38.8% | Down $10.8 million; 0.9 percentage points |
| Operating income | $34.4 million; 5.9% | $53.8 million; 9.0% | Down 36.1% |
| Net income | $18.7 million | $30.4 million | Down 38.7% |
| Diluted EPS | $0.56 | $0.81 | Down $0.25 |
| Adjusted EBITDA and margin | $43.9 million; 7.5% | $63.6 million; 10.6% | Down $19.7 million; 3.1 percentage points |
| Operating cash flow | $28.3 million | $38.3 million | Down $10.0 million |
Adjusted EBITDA is a company-defined non-GAAP measure and excludes stock-based compensation; it should not be treated as a substitute for GAAP earnings or cash flow. The effective tax rate was 44.8%, versus 43.6% in FY2016.
Balance sheet at May 27, 2017: Cash and cash equivalents were $62.3 million, with no short-term investments (versus $25.0 million of short-term investments at FY2016 year-end). Working capital was $95.1 million, down from $147.7 million. Total assets were $364.1 million and stockholders’ equity was $238.1 million. Funded long-term debt was $48.0 million under a $120 million secured revolving facility; the filing also reports $1.0 million of letters of credit, making total facility usage approximately $49.0 million. The company said it complied with facility covenants and expected available cash, operating cash flow and facility capacity to cover needs for at least 12 months.
Cash used in financing was $76.9 million, principally reflecting share repurchases and dividends. The company paid $14.2 million in dividends and declared $0.44 per share for FY2017, compared with $0.40 per share in FY2016.
Material changes and unusual items
- North American revenue fell 4.0% to $479.3 million; Europe rose 4.8% to $60.5 million and Asia Pacific rose 5.1% to $43.7 million. On a constant-currency basis, total revenue declined 1.9%; reported international revenue was reduced by currency translation.
- Average bill rates declined 1.7% and hours worked declined 0.9%. Management cited weaker energy-sector demand and ineffective client penetration in financial services as contributors to lower revenue.
- Direct costs declined 1.2%, but rose to 62.1% of revenue from 61.2%, pressuring gross margin. SG&A increased 5.0% to $183.5 million, or 31.4% of revenue versus 29.2%.
- FY2017 SG&A included approximately $2.4 million of restructuring costs, primarily severance, and approximately $1.1 million of severance and $0.4 million of accelerated stock compensation related to a senior executive’s departure. The FY2016 comparison included approximately $0.9 million of accelerated stock compensation related to the chairman’s transition.
- In November 2016, the company repurchased 6.5 million shares for approximately $104.2 million through a modified Dutch auction tender offer at $16 per share, funded partly with $58.0 million of facility borrowings. It also repurchased approximately $13.5 million of shares on the open market during FY2017. The remaining authorization was approximately $125.1 million.
Outlook, risks and contingencies
Management announced three performance initiatives: reduce annual SG&A by approximately $7 million, strengthen sales and business development, and redesign the operating model to improve client offerings and collaboration. The cost-reduction program, including a reduction of 49 front- and back-office positions and closure of one U.S. and one international office, was completed by fiscal year-end. Sales-process and account-development changes were expected to take approximately 9–15 months. The filing provides no specific revenue, earnings or margin guidance.
Key risks include uncertain demand for discretionary consulting projects, the absence of long-term client contracts and clients’ ability to terminate engagements, competition and pricing pressure, consultant recruitment and retention, foreign-currency exposure, cybersecurity and data risks, and client credit and collection risks. The company does not use financial hedges for foreign-currency exposure. Goodwill was $171.1 million; no impairment was indicated in the FY2017 test, which relied on market capitalization compared with book value.
Operating leases totaled $45.0 million in future minimum commitments, with obligations extending through 2027; purchase obligations were $1.1 million. The company anticipated that new lease accounting rules would significantly affect reported balance-sheet assets and liabilities beginning in fiscal 2020. Management reported no material legal proceedings. Management and the independent auditor concluded that internal control over financial reporting was effective as of May 27, 2017, and the auditor issued unqualified opinions on the financial statements and controls.
Investor verification priorities
- Verify whether FY2017 revenue stabilization and the planned $7 million annual SG&A reduction materialize, and whether sales and client-penetration initiatives improve results.
- Track bill rates, hours worked, direct-cost percentage and margins, particularly in North America, energy and financial services.
- Assess cash conversion and working-capital needs, including receivables and income-tax cash flows, alongside facility borrowings, covenant headroom and variable-rate exposure.
- Review the returns and balance-sheet consequences of the large tender offer, continuing repurchases and dividend payments.
- Monitor the high effective tax rate, foreign deferred-tax valuation allowances, goodwill impairment sensitivity and the future balance-sheet effect of lease accounting.