Resources Connection, Inc. (Nasdaq: RECN) — Form 10-K Summary
Reporting period: Fiscal year ended May 25, 2019 (52 weeks), with fourth-quarter results for the quarter ended May 25, 2019. The filing is an annual report, not a standalone quarterly filing. Fiscal 2018 ended May 26, 2018.
Business context
Resources Connection operates RGP, a global consulting firm providing project-based professional services in business transformation, finance and accounting, governance, risk and compliance, and technology and digital innovation. It served more than 2,400 clients in 20 countries. Fiscal 2019 revenue growth reflected the full-year contribution of the fiscal 2018 acquisitions of Accretive and taskforce, as well as higher hours worked and bill rates.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $729.0 million | $654.1 million |
| Gross margin | $282.4 million; 38.7% | $246.1 million; 37.6% |
| Operating income | $50.2 million; 6.9% of revenue | $30.6 million; 4.6% |
| Net income | $31.5 million; diluted EPS $0.98 | $18.8 million; diluted EPS $0.60 |
| Adjusted EBITDA (non-GAAP) | $64.6 million; 8.9% margin | $43.0 million; 6.6% margin |
| Cash provided by operations | $43.6 million | $15.4 million |
Revenue rose 11.5% year over year; operating income increased about 64% and net income about 67%. Gross margin improved as direct costs declined to 61.3% of revenue from 62.4%, which management attributed mainly to a better bill/pay ratio and lower self-insured medical costs. SG&A increased 7.1% in dollars but fell to 30.7% of revenue from 32.0%.
Fourth quarter: Revenue was $182.1 million, versus $183.8 million in the prior-year quarter and $179.5 million in the preceding quarter. Net income was $9.4 million, compared with $4.0 million a year earlier. Sequential gross margin improved to 40.1% (gross profit of $73.0 million on revenue of $182.1 million), while SG&A was $56.9 million, or 31.2% of revenue.
Cash, debt and liquidity
At May 25, 2019, cash and cash equivalents were $43.0 million and short-term investments were $6.0 million; revolving credit facility borrowings were $43.0 million, down from $63.0 million a year earlier. The company reported $47.0 million remaining under the revolving loan and $30.0 million under the reducing revolving loan, plus $1.3 million of letters of credit. Current assets were $191.7 million and current liabilities $91.4 million. Management said available cash, operating cash flow and facility capacity were expected to cover working capital and capital needs for at least 12 months. The company made a further $5.0 million debt payment on June 28, 2019.
Operating cash flow increased to $43.6 million, while investing activities used $12.9 million, including $6.0 million for short-term investments and $6.9 million for property and equipment. Financing activities used $43.6 million, including $29.9 million for share repurchases, $16.2 million in dividends and $20.0 million of debt repayment, partly offset by $24.3 million from stock option exercises and employee stock purchases.
Changes, outlook and risks
- Reported revenue growth included acquired businesses; management said acquisition-related revenue and hours could not be isolated following integration. Constant-currency revenue growth was 12.4%, versus reported growth of 11.5%.
- Consultants on assignment at year-end declined to 2,965 from 3,247, although hours worked increased 10.7% year over year. Management linked operating improvement to sales-process changes, a functional operating model, targeted account teams and cost discipline.
- No specific revenue or earnings guidance was provided. Management described continued focus on growth, integrated solutions and cost containment, and anticipated adequate liquidity for at least the next 12 months.
- The company’s $120 million secured facility expires October 17, 2021, carries variable-rate borrowing costs and includes financial and operating covenants. The company reported covenant compliance at year-end. A 10% change in interest rates was estimated to change annual interest expense by about $0.2 million at the year-end borrowing level.
- Foreign-currency exposure is meaningful: approximately 21% of revenue was generated outside the United States. The company does not use financial hedges for currency risk. Other principal risks include economic weakness affecting discretionary client projects, intense competition, consultant recruitment and retention, client termination of engagements, data privacy and cybersecurity, and acquisition integration.
- Fiscal 2019 included a $0.6 million reduction in estimated taskforce contingent consideration. The company completed its accounting for the U.S. Tax Cuts and Jobs Act; its effective tax rate was 34.4%, compared with 34.8% in fiscal 2018. Adoption of the new lease standard in fiscal 2020 was expected to add approximately $45–$50 million of right-of-use assets and lease liabilities to the balance sheet, with no material effect on earnings or cash flows.
- Quarterly dividends declared rose to $0.13 per share from $0.12 in fiscal 2018. Dividend continuation remains subject to board approval. The company repurchased approximately 1.8 million shares during fiscal 2019, with about $90.1 million remaining under its authorized repurchase program.
Important facts for investors to verify
- How much of revenue and earnings growth was organic versus attributable to Accretive and taskforce, and whether acquired growth can be sustained.
- Whether improved gross margin and SG&A leverage persist, particularly given the year-end decline in consultants on assignment.
- Receivables and credit-loss trends: net receivables were $133.3 million, and the doubtful-account allowance increased to $2.5 million from $1.6 million.
- Debt repayment capacity, covenant headroom, variable interest-rate exposure and the effect of recognizing lease liabilities in fiscal 2020.
- The sustainability of dividends and repurchases alongside operating investment needs, and the effect of stock-based compensation and equity issuance.