Resources Connection, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 27, 2010; comparable periods ended November 28, 2009. Amounts below are in U.S. dollars. Financial statements are unaudited.
Business context and key financial results
Resources Connection is a multinational professional services firm providing experienced consultants for client projects. It operated 82 offices, including 29 abroad, at quarter-end. The company reported one operating segment.
| Metric | Three months ended Nov. 27, 2010 | Year-over-year change | Six months ended Nov. 27, 2010 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $138.5 million | +14.0% | $262.2 million | +9.3% |
| Gross profit / gross margin | $54.7 million / 39.5% | Margin up from 38.1% | $104.0 million / 39.7% | Margin up from 38.2% |
| SG&A | $42.7 million | Down 3.4% | $83.6 million | Down 12.8% |
| Operating income (loss) | $32.5 million | Compared with a $0.5 million loss | $36.5 million | Compared with a $9.6 million loss |
| Net income (loss) | $17.5 million; diluted EPS $0.38 | Compared with a $1.9 million loss | $18.7 million; diluted EPS $0.40 | Compared with a $9.1 million loss |
| Adjusted EBITDA (non-GAAP) | $14.6 million; 10.5% margin | Compared with $5.6 million; 4.6% margin | $25.7 million; 9.8% margin | Compared with $5.0 million; 2.1% margin |
Revenue growth reflected higher hours worked—up 12.4% year over year in the quarter and 8.7% in the six-month period—with average bill rates roughly flat year over year. Excluding Sitrick Brincko Group, acquired in November 2009, quarterly revenue increased 8.7%. Quarterly revenue rose in North America and Asia Pacific but fell in Europe; for the six-month period, Europe revenue declined 11.1% while North America and Asia Pacific grew.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $11.2 million, versus $5.5 million used in the prior-year period. Investing activities used $6.3 million and financing activities used $5.4 million. Cash and cash equivalents increased $0.8 million to $131.4 million; cash, cash equivalents and short-term investments totaled $146.7 million.
- At November 27, 2010, current assets were $242.7 million and current liabilities were $58.7 million. Total liabilities were $98.4 million and stockholders’ equity was $373.8 million.
- The balance sheet reported no funded debt. The company had a $3.0 million unsecured revolving facility, with approximately $1.4 million available after $1.6 million of letters of credit; it was in covenant compliance. The facility expires November 29, 2011.
- The company repurchased 558,000 shares for $7.3 million during the six months and had approximately $19.2 million remaining under its repurchase authorization. It declared dividends of $0.08 per share for the six-month period; the regular quarterly dividend was $0.04 per share, subject to board approval.
Material changes and unusual items
- Reported operating and net income benefited materially from a $23.7 million non-cash reduction in the estimated Sitrick Brincko contingent-consideration liability. The company said the adjustment increased after-tax net income by $14.0 million, or $0.30 per share. Adjusted EBITDA excludes this adjustment and stock-based compensation.
- Sitrick Brincko’s first annual measurement-period EBITDA was $8.9 million, below the $11.3 million threshold specified in the earn-out arrangement. The ultimate earn-out depends on average EBITDA over the full four-year measurement period; the potential payment has no stated upper limit. Management reported a current contingent-consideration fair-value estimate of $46.2 million. The balance sheet separately identifies $37.4 million of estimated contingent consideration within other long-term liabilities.
- The effective tax rate was 46.6% for the quarter and 49.2% for the six months. Tax expense included the effect of the contingent-consideration valuation change and a $769,000 valuation allowance on certain foreign deferred tax assets.
- SG&A fell substantially in the six-month comparison partly because the prior-year period included $7.0 million of costs related to two senior executive resignations, including accelerated stock compensation.
Outlook, commentary and risks
The filing provides no specific revenue or earnings guidance. Management said near-term demand would continue to be affected by the global economy, while noting an improving environment and increased client awareness of the company’s services. It anticipated current cash and operating cash flows would be sufficient for working capital and capital expenditures for at least 12 months. Management expected SG&A to increase modestly in the fiscal third quarter due to payroll-tax resets and a branding campaign relaunch.
Key risks include uncertain economic recovery and client demand, the absence of long-term client contracts, competition, consultant recruitment and retention, foreign-currency movements, client credit and collections, acquisition integration and highly judgmental contingent-consideration estimates. The company does not use financial hedges for foreign-currency exposure. It reported no material legal proceedings, no off-balance-sheet arrangements, effective disclosure controls at quarter-end, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Assess earnings excluding the non-cash contingent-consideration gain, and compare GAAP results with the company’s non-GAAP Adjusted EBITDA reconciliation.
- Review the earn-out assumptions, the $46.2 million fair-value estimate and its reconciliation to the $37.4 million balance-sheet liability; the estimate is sensitive to future EBITDA and other assumptions.
- Track operating cash conversion, receivables, consultant hours and bill rates, and the continued weakness in Europe.
- Monitor the high effective tax rate, foreign deferred-tax-asset valuation allowances, and the sustainability of dividends and share repurchases.
- Consider that management’s 12-month liquidity assessment and demand commentary are forward-looking, and that client demand and quarterly results may fluctuate.