Resources Connection, Inc. — Form 10-Q
Reporting period: Fiscal third quarter and first nine months ended February 26, 2011; comparable periods ended February 27, 2010. Dollar amounts are in millions unless noted. The company provides multinational project-based professional services.
Key financial results
| Metric | Three months ended Feb. 26, 2011 | Three months ended Feb. 27, 2010 | Nine months ended Feb. 26, 2011 | Nine months ended Feb. 27, 2010 |
|---|---|---|---|---|
| Revenue | $137.6 | $125.3 | $399.8 | $365.1 |
| Gross profit / margin | $50.9 / 37.0% | $48.4 / 38.6% | $155.0 / 38.8% | $139.8 / 38.3% |
| Operating income (loss) | $2.9 | $(0.05) | $39.4 | $(9.6) |
| Net income (loss) | $0.8 | $(5.0) | $19.5 | $(14.1) |
| Diluted EPS | $0.02 | $(0.11) | $0.42 | $(0.31) |
| Adjusted EBITDA / margin (non-GAAP) | $8.2 / 6.0% | $7.4 / 5.9% | $33.9 / 8.5% | $12.5 / 3.4% |
- Cash flow: Nine-month operating cash flow was $15.1, versus $1.2 a year earlier. Investing activities provided $2.3, compared with $23.3 used in the prior period; financing activities used $4.1, versus $2.8 provided.
- Liquidity and debt: Cash and cash equivalents were $145.6 at February 26, 2011, and short-term investments were $5.2, for combined liquidity of about $150.9. Current assets were $255.7 and current liabilities $66.0. The filing reports no borrowings; a $3.0 revolving facility had about $1.4 available after $1.6 of letters of credit. The company reported covenant compliance.
- Other balance-sheet items: Total assets were $485.9, total liabilities $105.6, and stockholders’ equity $380.3. Other long-term liabilities included estimated contingent consideration of $37.1.
Material changes and drivers
- Quarterly revenue rose 9.8% year over year; hours worked increased about 11.8%, while average bill rates declined 2.3%. Consultants on assignment increased to 2,266 from 2,057.
- Nine-month revenue rose 9.5%. Regional revenue increased in North America (11.1%) and Asia Pacific (37.4%) but declined in Europe (4.4%). Quarterly Asia Pacific revenue grew 61.3% year over year.
- Quarterly gross margin fell to 37.0% from 38.6%, reflecting a weaker bill-rate/pay-rate ratio and more reimbursed expenses recorded at zero gross margin. Management cited calendar-year payroll tax resets and healthcare costs as additional sequential-quarter cost pressures.
- Nine-month SG&A declined 7.9% to $128.9, partly because the prior-year period included $7.0 of costs related to senior executive departures, including accelerated stock compensation. The current quarter included renewed branding campaign spending.
- Nine-month results included a $22.7 noncash favorable adjustment to estimated Sitrick Brincko acquisition contingent consideration. The company reported that this adjustment increased net income after tax by $13.4, or $0.29 per share. The first annual earn-out measurement-period EBITDA was $8.9, below the $11.3 threshold; the remaining earn-out depends on future results and is uncapped.
- The effective tax rate was unusually high: 75.2% for the quarter and 51.0% for the nine months, reflecting jurisdictional losses without recognized tax benefits, valuation allowances, and tax effects associated with the contingent-consideration adjustment and stock compensation.
Outlook, risks and other items
- No formal revenue or earnings guidance was provided. Management said the economic environment would continue to affect near-term demand, which is difficult to forecast because clients generally do not sign long-term service contracts.
- Management expected the direct cost-of-services percentage to improve in the fourth quarter as paid holidays and the impact of payroll tax resets diminished. It stated existing cash and anticipated operating cash flows should cover working capital and capital spending for at least 12 months.
- The company declared quarterly dividends of $0.04 per share, subject to board approval; $0.12 per share was declared during the nine-month period. It repurchased about 648,000 shares for $9.2 and had approximately $17.4 remaining under its repurchase authorization.
- Key risks include economic deterioration and lower demand, competition and pricing pressure, client payment/receivable risk, consultant retention, foreign currency movements, acquisition integration and highly judgmental earn-out valuations. The company did not use currency hedges. It reported no material legal proceedings, no off-balance-sheet arrangements, and no material change in risk factors from its prior annual filing.
- Management concluded disclosure controls were effective as of February 26, 2011, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Reconcile the $22.7 noncash contingent-consideration gain, its tax effects, and the reported $37.1 long-term contingent-consideration balance; review assumptions for the uncapped Sitrick Brincko earn-out.
- Assess whether revenue growth and increased consultant hours can persist despite lower bill rates, quarterly margin pressure, and continued economic uncertainty.
- Review the sustainability of cash generation, working-capital movements, and the company’s planned dividends and share repurchases.
- Examine the unusually high and potentially variable tax rate, including deferred-tax-asset valuation allowances and stock-compensation tax effects.
- Confirm current facility availability and covenant status, and consider the impact of foreign-exchange movements and the lack of hedging.