Resources Connection, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended May 28, 2016 (52 weeks), compared primarily with the 52-week year ended May 30, 2015. The filing is an annual report, not a standalone fourth-quarter filing. The company provides project-based consulting and business initiative support through Resources Global Professionals (RGP), serving more than 1,800 clients across multiple practices and 20 countries.
Financial and operating performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $598.5 million | $590.6 million | +1.3% |
| Gross margin | $232.2 million; 38.8% | $228.4 million; 38.7% | +1.7% in dollars |
| Operating income | $53.8 million; 9.0% of revenue | $50.3 million; 8.6% | +7.1% |
| Net income | $30.4 million | $27.5 million | +10.7% |
| Diluted EPS | $0.81 | $0.72 | +12.5% |
| Adjusted EBITDA (non-GAAP) | $63.6 million; 10.6% margin | $60.6 million; 10.3% | +5.1% in dollars |
| Cash from operations | $38.3 million | $31.8 million | +20.5% |
Revenue growth reflected a 1.4% increase in hours worked and a 0.8% increase in average bill rates. Average consultant pay rate per hour was reported unchanged. North America generated 83.4% of revenue and grew 1.4%; Europe declined 2.8% as reported, while Asia Pacific grew 6.5%. At prior-year exchange rates, total revenue growth would have been 2.9%, and reported international revenue would have been $8.9 million higher.
Fourth-quarter revenue was $152.5 million, up 3.9% sequentially from $146.8 million; hours worked rose 2.8% and bill rates 0.8%. Fourth-quarter operating income was $15.7 million and net income was $8.7 million. Sequential direct-cost margin improved to 60.1% of revenue from 62.6% in the third quarter, partly due to holiday timing and lower medical costs.
Liquidity, debt and capital returns
- At year-end, cash and cash equivalents were $91.1 million and short-term investments were $25.0 million, totaling $116.0 million. Working capital was $156.2 million; current assets were $227.0 million against current liabilities of $70.9 million.
- The company reported no outstanding debt. Its $3.0 million unsecured revolving facility had approximately $1.9 million available after $1.1 million of letters of credit; it was in covenant compliance and scheduled to expire November 30, 2016 unless extended.
- Cash from investing activities was a $2.4 million use; capital expenditures were $2.4 million. Financing activities used $32.3 million, including $28.1 million for repurchases and $14.1 million in dividends, partly offset by equity-plan proceeds.
- FY2016 dividends declared were $0.40 per share, up from $0.32. In July 2016, the board approved a 10% increase to $0.11 per quarter. The $150 million repurchase authorization had $138.6 million remaining at year-end.
- Operating lease commitments totaled $40.0 million, with $10.0 million due in FY2017. The filing states management expects cash and operating cash flow to cover working capital and capital needs for at least 12 months.
Material changes and management commentary
- Revenue growth remained modest, although profitability improved: gross margin edged up, SG&A fell to 29.2% of revenue from 29.4%, and operating margin rose to 9.0% from 8.6%.
- Management cited continuing weakness among certain U.S. energy-services clients amid turmoil in the energy market; timing of stabilization was uncertain. Europe decreased on a reported basis, with currency translation a significant factor in international results.
- The company increased its allowance for uncollectible accounts by $1.1 million; bad debt expense was $1.1 million versus $0.2 million the prior year. It also recorded approximately $0.9 million of additional non-cash stock compensation related to accelerated vesting of options following Donald Murray’s transition from Executive Chairman to Chairman.
- All amortizable intangible assets were fully amortized during FY2016. Goodwill was $171.2 million, and the annual impairment test indicated no impairment.
- No formal revenue or earnings guidance is provided. Management described organic growth as its primary approach, with selective geographic expansion, additional service offerings, and potential strategic acquisitions.
Risks, contingencies and other notable disclosures
- Client engagements generally lack long-term commitments and can be terminated at any time; demand is exposed to economic conditions, project spending, competition, consultant availability, and pricing pressure.
- Other risks include client credit and collections, foreign exchange movements (the company does not currently hedge), international operating and regulatory challenges, cybersecurity and information-system disruption, and the ability to attract and retain experienced consultants.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. Ordinary-course legal matters were not expected to have a material adverse effect.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of May 28, 2016.
- Management was evaluating new accounting standards, including lease accounting, which it expected to significantly affect reported balance-sheet assets and liabilities. No material inflation impact was reported.
Important facts for investors to verify
- Whether modest revenue growth continues and whether energy-sector client demand and European performance stabilize.
- How much reported growth and profitability depend on foreign-exchange movements, bill rates, hours worked, and fourth-quarter seasonality.
- Whether the higher bad-debt provision signals further deterioration in client collections or credit quality.
- The sustainability of dividends and repurchases relative to operating cash flow, including the announced quarterly dividend increase and remaining buyback authorization.
- The status and terms of the revolving credit facility after its stated November 2016 expiration, and the potential balance-sheet impact of lease-accounting adoption.
- The effect of the planned CFO retirement and transition, expected during the first quarter of FY2017, and the approximately $0.9 million accelerated-vesting charge.