Resources Connection, Inc. — Q1 FY2011 Form 10-Q
Reporting period: Three months ended August 28, 2010 (13 weeks), compared with the three months ended August 29, 2009. Resources Connection provides project-based professional services across finance, accounting, risk, advisory, restructuring, technology, human capital and other disciplines.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
| Metric | Q1 FY2011 | Q1 FY2010 |
|---|---|---|
| Revenue | $123.7 million | $118.3 million |
| Gross profit / margin | $49.3 million / 39.8% | $45.1 million / 38.2% |
| Operating income (loss) | $4.0 million | $(9.1) million |
| Net income (loss) | $1.2 million | $(7.2) million |
| Diluted EPS | $0.03 | $(0.16) |
| Operating cash flow | $7.1 million | $(10.6) million |
| Adjusted EBITDA and margin (non-GAAP) | $11.1 million / 9.0% | $(0.6) million / (0.5)% |
At August 28, cash and cash equivalents were $139.3 million and short-term investments were $5.2 million, totaling $144.5 million. Current assets were $231.2 million and current liabilities $54.5 million. The balance sheet reported no borrowings. The $3.0 million unsecured revolving facility had approximately $1.5 million available after letters of credit; it expired November 29, 2010, and the company intended to renew it. The company said cash and expected operating cash flow should cover working capital and capital expenditure needs for at least 12 months.
Total liabilities were $117.9 million, including $63.4 million of other long-term liabilities, of which $61.1 million was estimated contingent acquisition consideration. The company repurchased 479,000 shares for $6.1 million during the quarter. It also accrued an approximately $1.8 million quarterly dividend of $0.04 per share, paid September 15, 2010.
Material changes versus the prior comparable period
- Revenue rose 4.6% year over year, but management said revenue excluding the acquired Sitrick Brincko Group was relatively flat. The acquisition contributed $6.2 million of quarterly revenue.
- Hours worked increased 4.9% year over year, average bill rates were about unchanged, and consultants on assignment increased to 2,072 from 1,945.
- Gross margin improved to 39.8% from 38.2%. Management attributed the improvement to higher-margin Sitrick Brincko work and fewer self-insured healthcare claims, partly offset by a lower pay-rate-to-bill-rate ratio.
- SG&A fell 20.7% to $40.9 million. The prior-year quarter included $7.0 million of costs associated with two senior executive resignations, including accelerated stock-compensation expense; lower administrative headcount and related costs also contributed.
- The company returned to operating and net profitability. The effective tax rate was unusually high at 70.7%, compared with a 19.1% tax benefit in the prior-year loss quarter.
- Operating cash flow improved to $7.1 million from cash use of $10.6 million. Cash increased $8.6 million during the quarter, while financing activities used $3.4 million, including the share repurchase.
Outlook, commentary, risks and unusual items
- Outlook: No specific revenue or earnings guidance was provided. Management said near-term revenue would continue to be affected by global economic conditions and reduced client demand. It cited summer vacation as a factor in sequential declines in hours and revenue; sequential bill rates also fell about 3.0%. Clients generally do not sign long-term service contracts, limiting visibility.
- Acquisition earn-out: Sitrick Brincko’s sellers may receive contingent consideration if average annual EBITDA over the four-year measurement period exceeds $11.3 million; the contractual amount has no stated cap. The estimated liability was $61.1 million, and a $1.3 million fair-value expense was recorded in the quarter. Management emphasized the estimate depends on subjective forecasts, probabilities and discount rates. No employee portion was accrued for the quarter because growth targets were not considered achieved.
- Taxes: Management said tax benefits vary by jurisdiction and may be limited by valuation allowances and the timing of eligible stock-option transactions. It will monitor whether additional foreign deferred-tax-asset valuation allowances are needed.
- Other risks: Weak economic conditions could depress demand, collections and asset recoverability. Other disclosed risks include competition and pricing pressure, lack of long-term client contracts, consultant retention, international and foreign-exchange exposure, acquisition integration and contingent-consideration estimates, and quarterly earnings volatility. The company did not use financial hedges for foreign-currency risk.
- Unusual items and controls: The prior-year quarter included executive severance and accelerated stock compensation. Goodwill impairment was not indicated as of August 28, 2010. Management reported effective disclosure controls and no material change in internal control over financial reporting; no material legal proceedings were reported.
Most important facts for investors to verify
- Whether underlying demand, hours worked and revenue excluding Sitrick Brincko improve, particularly given management’s limited visibility and the sequential summer-quarter decline.
- How Sitrick Brincko performs against its EBITDA earn-out threshold and how revisions to the uncapped contingent-consideration estimate affect earnings and liabilities.
- Whether gross-margin gains persist and whether operating profitability can be maintained after the prior-year executive-related charges are excluded from comparisons.
- Cash conversion, client receivable collections, and the adequacy of liquidity after dividends and share repurchases; confirm the revolving facility’s renewal and terms.
- The sustainability of the dividend and buyback, alongside the high effective tax rate and possible changes in foreign tax valuation allowances.