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Resources Connection Inc. Reports Operating Results (10-Q)

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Oct 07, 2010
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Resources Connection Inc. (RECN, Financial) filed Quarterly Report for the period ended 2010-08-28.

Resources Connection Inc. has a market cap of $689.2 million; its shares were traded at around $14.83 with a P/E ratio of 494.3 and P/S ratio of 1.4. The dividend yield of Resources Connection Inc. stocks is 1.1%. Resources Connection Inc. had an annual average earning growth of 2.7% over the past 10 years.RECN is in the portfolios of Chuck Royce of Royce& Associates, Bruce Kovner of Caxton Associates.

Highlight of Business Operations:

Revenue. Revenue increased $5.4 million, or 4.6%, to $123.7 million for the three months ended August 28, 2010 from $118.3 million for the three months ended August 29, 2009. Included in revenue for the three months ended August 28, 2010 was $6.2 million from the operations of Sitrick Brincko Group, acquired November 20, 2009. Absent the impact of Sitrick Brincko Group, revenue in the first quarter of fiscal 2011 remained relatively flat compared to the first quarter of fiscal 2010. We believe we have improved the awareness of our service offerings with clients and prospective clients through our completed and on-going engagements in our various service lines

Direct Cost of Services. Direct cost of services increased $1.3 million, or 1.8%, to $74.4 million for the three months ended August 28, 2010 from $73.1 million for the three months ended August 28, 2009. Direct cost of services increased because the number of hours worked rose 4.9% in the first quarter of fiscal 2011 as compared to the same period of fiscal 2010, offset partially by a 4.6% decline in the average pay rate per hour to our consultants. The direct cost of services as a percentage of revenue (the direct cost of services percentage) was 60.2% and 61.8% for the three months ended August 28, 2010 and August 29, 2009, respectively. The improvement in the direct cost of services percentage between the quarters resulted from the blended impact of higher margin work performed for Sitrick Brincko Group clients and fewer claims under the Companys self-insured healthcare plans, offset by a decrease in the ratio of pay rate to bill rate.

Selling, General and Administrative Expenses. Selling, general and administrative expenses (S, G & A) as a percentage of revenue were 33.1% and 43.6% for the quarters ended August 28, 2010 and August 29, 2009, respectively. S, G &A decreased $10.7 million, or 20.7%, to $40.9 million for the three months ended August 28, 2010 from $51.6 million for the three months ended August 29, 2009.

The three months ended August 29, 2009 included $7.0 million of expenses related to the resignation of two senior executives during the quarter, including the acceleration of recognition of compensation expense for employee stock option grants of $2.2 million. The remaining $3.7 million decrease quarter-over-quarter is primarily related to management and administrative headcount driven reductions in salary, benefits, stock based compensation and related costs as headcount decreased from 757 at the end of the first quarter of fiscal 2010 to 713 at the end of the first quarter of fiscal 2011. These reductions were mitigated by the addition of S, G &A related to operations of the Sitrick Brincko Group, acquired on November 20, 2009 and included in quarterly results only since the acquisition.

Amortization and Depreciation Expense. Amortization of intangible assets increased to $1.3 million for the three months ended August 28, 2010 from $393,000 for the three months ended August 29, 2009. The increase is the result of amortization related to identifiable intangible assets acquired in the November 2009 purchase of Sitrick Brincko Group. Those assets include: $5.6 million for customer relationships, $1.2 million for trade names, $3.0 million for non-competition agreements and $250,000 for customer backlog. The backlog will be amortized over 13 months, the customer relationships over two years, and the trade names and non-competition agreements over five years. Based upon identified intangible assets recorded at August 28, 2010, the Company anticipates amortization expense related to identified intangible assets to approximate $5.0 million during the fiscal year ending May 28, 2011.

Income Taxes. The Company provided for income taxes of $2.9 million for the three months ended August 28, 2010 while there was a benefit for income taxes of $1.7 million for the three months ended August 29, 2009. The provision increased because of the Companys pre-tax income position in the first quarter of fiscal 2011 as compared to the pretax loss in the first quarter of fiscal 2010. The provision for taxes in fiscal 2011 results from taxes on income in the United States and certain other foreign jurisdictions, a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the U.S. statutory rates, and no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established. As a result, the effective tax rate was 70.7% in the first quarter of fiscal 2011 and a benefit percentage of 19.1% for the first quarter of fiscal 2010. The disproportionate effective tax rates are also the result of the effect of the components of the tax rate that differ from the standard federal rate, including non-deductible permanent differences and incentive stock options (ISO) in proportion to lower pretax income amounts. Based upon current economic circumstances, management will continue to monitor the need to record additional valuation allowances in the future, primarily related to certain foreign jurisdictions.

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