Resources Connection, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended May 31, 2014, compared primarily with the year ended May 25, 2013. FY2014 contained 53 weeks, including a 14-week fourth quarter; FY2013 contained 52 weeks. Although the request identifies “2013 Q4,” this filing reports FY2014 results and includes quarterly data for the quarter ended May 31, 2014.
Business context
Resources Connection, operating mainly as Resources Global Professionals (RGP), provides project-based consulting and business support services across finance and accounting, information management, governance and compliance, human capital, supply chain, legal, healthcare, and corporate advisory. It served more than 1,800 clients from 68 offices in 19 countries and had 2,401 consultants on assignment at year-end. The company operates as one reportable segment.
Financial and operating performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $567.2 million | $556.3 million |
| Gross margin | $215.8 million; 38.1% | $214.3 million; 38.5% |
| Operating income | $38.0 million; 6.7% margin | $39.7 million; 7.1% margin |
| Net income | $19.9 million | $20.5 million |
| Diluted EPS | $0.51 | $0.50 |
| Adjusted EBITDA and margin | $49.8 million; 8.8% | $53.2 million; 9.6% |
| Cash from operations | $32.0 million | $35.0 million |
- Reported revenue grew 2.0%; excluding the extra fiscal week’s $9.8 million of revenue, growth was approximately 0.2%. Hours worked rose 3.5%, while average bill rates fell 1.6%.
- North American revenue increased 4.0% to $453.7 million. Europe declined 7.8% to $77.0 million, and Asia Pacific declined 0.8% to $36.6 million. Management attributed weakness, particularly in some European markets, to cautious client spending amid economic uncertainty.
- Direct costs were 61.9% of revenue versus 61.5% a year earlier, reflecting weaker bill-rate/pay-rate economics, partly offset by lower zero-margin client reimbursements. SG&A was 30.4% of revenue versus 30.3%.
- FY2014’s fourth-quarter revenue was $156.8 million and net income was $6.9 million. The quarter’s results include 14 weeks; sequential revenue growth over Q3 was 18.2%, partly reflecting the extra week and differing holiday schedules.
- Effective tax rate was 47.9%, down from 48.6%, mainly due to expirations of statutes of limitations on tax reserves. The rate remains elevated, in part because of foreign losses for which tax benefits were not recognized and other tax items.
Liquidity, debt and capital allocation
- At May 31, 2014, cash and cash equivalents were $80.3 million and short-term investments were $34.0 million, totaling $114.3 million, down from $119.0 million. Working capital was $150.3 million, compared with $155.8 million.
- Operating cash flow was $32.0 million; investing activities used $12.7 million and financing activities used $32.9 million. Operating cash flow was pressured in part by higher accounts receivable at year-end.
- The balance sheet reports no debt. The company had a $3.0 million unsecured revolving facility expiring November 30, 2014; approximately $1.5 million was available after letters of credit. It was in compliance with covenants. The filing does not clearly state a drawn borrowing balance.
- Operating lease commitments totaled $44.0 million and purchase obligations $1.7 million. Management expected existing cash and operating cash flows to cover working capital and capital expenditure needs for at least 12 months.
- The company repurchased approximately 2.2 million shares for $29.6 million in FY2014 and paid $10.6 million in dividends. The quarterly dividend rose to $0.07 per share from $0.06 in FY2013; continuation remains subject to board approval.
Changes, outlook, risks and unusual items
- Profitability weakened despite slightly higher reported revenue: operating income fell 4.3%, net income fell 3.0%, and Adjusted EBITDA margin declined 0.8 percentage points. The extra week materially affects year-over-year comparisons.
- Management said economic uncertainty was restraining client project spending, especially in parts of Europe, and warned that softer global conditions and the summer holiday period could pressure FY2015 first-quarter revenue and cost leverage. The filing provides no formal revenue or earnings guidance.
- Fourth-quarter SG&A included approximately $1.7 million of severance and related expenses for reductions in certain European offices; direct costs included approximately $331,000 related to those reductions.
- The 2009 Sitrick Brincko earn-out ended without a payment because the EBITDA threshold was not met. No contingent consideration liability remained, but a $2.25 million cash payment to Mr. Brincko was made in Q3 FY2014 under the agreement.
- Key risks include dependence on discretionary client projects and the ability to secure new engagements, competition and pricing pressure, consultant recruitment and retention, international and foreign-exchange exposure, client collections, technology and data-security risks, and potential goodwill impairment. Goodwill was $175.4 million; no impairment was indicated at year-end.
- The company reported no material legal proceedings. Management and the independent auditor concluded internal control over financial reporting was effective as of May 31, 2014; the financial-statement audit opinion was unqualified.
Most important facts for investors to verify
- Whether underlying revenue growth improves after adjusting for FY2014’s extra week, and whether bill rates stabilize relative to consultant pay rates.
- Whether European demand and first-quarter FY2015 performance align with management’s cautious commentary.
- Whether margins and operating cash flow recover, including the effects of receivables, severance, and cost utilization.
- The sustainability of the high effective tax rate and the realization of deferred tax assets; the filing reports a $16.7 million valuation allowance.
- Credit-facility renewal or replacement, continued dividend and repurchase capacity, and the replacement or extension of the incentive plan scheduled to terminate in September 2014.