Resources Connection, Inc. Reports Fourth Quarter and Year-End Results for Fiscal 2011

RESOURCES CONNECTION, INC.

STATEMENT OF OPERATIONS

(in thousands, except per share amounts)

Quarter Ended

Year Ended

May 28, 2011

May 29, 2010

May 28, 2011

May 29, 2010

(unaudited)

(unaudited)

Revenue

$145,697

$133,905

$545,546

$498,998

Direct costs of services

90,189

78,523

335,071

303,768

Gross profit

55,508

55,382

210,475

195,230

Selling, general and administrative expenses (1)

43,738

43,004

172,622

182,985

Employee portion of contingent consideration expense (2)

—

500

—

500

Contingent consideration adjustment (2)

(3,200)

704

(25,852)

1,492

Operating income (loss) before amortization and depreciation (1), (2)

14,970

11,174

63,705

10,253

Amortization of
intangible assets

1,206

1,305

5,030

3,496

Depreciation expense

1,747

2,021

7,223

8,544

Operating income (loss) (1), (2)

12,017

7,848

51,452

(1,787)

Interest income

(107)

(132)

(473)

(656)

Income (loss) before provision for income taxes (1), (2)

12,124

7,980

51,925

(1,131)

Provision for income taxes (3)

6,723

5,666

27,070

10,618

Net income (loss) (1), (2), (3)

$5,401

$2,314

$24,855

$(11,749)

Basic net income (loss) per share

$0.12

$0.05

$0.54

$(0.26)

Diluted net income (loss) per share

$0.12

$0.05

$0.53

$(0.26)

Basic shares

45,958

46,340

46,124

45,894

Diluted shares

46,325

46,906

46,489

45,894

EXPLANATORY NOTES

(1) Selling, general and administrative expenses ("SG&A") include non-cash compensation expense for employee stock option grants and employee stock purchases of $2.0 million and $2.9 million for the three months ended May 28, 2011 and May 29, 2010, respectively, and $9.8 million and $15.5 million for the years ended May 28, 2011 and May 29, 2010, respectively.  The SG&A expenses for the year ended May 29, 2010 also include $7.0 million related to the resignation of two senior executives during the period, including the acceleration of recognition of compensation expense for employee stock option grants of $2.2 million.

(2)The contingent consideration adjustment for the three months and year ended May 28, 2011 is a favorable adjustment of approximately $3.2 million and $25.9 million, respectively, in recognition of the change in the fair value of the contingent consideration liability associated with the November 2009 acquisition of the Sitrick Brincko Group.  These adjustments are a reduction in the anticipated contingent consideration payable in November 2013.   As required by accounting rules under generally accepted accounting principles ("GAAP") for acquisitions that include earn-out provisions, the Company periodically assesses the likely fair value to be paid at the earn-out date.  The Sitrick Brincko Group earn-out is based upon an annual assessment of actual EBITDA of the Sitrick Brincko Group and an updated assessment of various probability weighted projected EBITDA scenarios over the remaining two and a half years of the earn-out period.  Until the earn-out payment is certain at the end of the earn-out period, this periodic adjustment is a non-cash change in the results of operations and can materially impact operating results.  An increase in the earn-out expected to be paid will result in a charge to operations in the quarter that the anticipated fair value of contingent consideration increases, while a decrease in the earn-out expected to be paid will result in a credit to operations in the quarter that the anticipated fair value of contingent consideration decreases. Based upon the first eighteen months of actual results and an updated probability weighted assessment of various projected EBITDA scenarios of the Sitrick Brincko Group for the two and a half years remaining in the earn-out period, the Company estimated the current fair value of the contingent consideration to be $33.5 million as of May 28, 2011, representing a decrease of $3.2 million from the Company's previous estimate.  For the quarter ended May 29, 2010, the Company also recognized $500,000 as an estimate of the amount of contingent consideration owed to employees related to the Sitrick Brincko Group acquisition; this estimate is also subject to revision based on projected EBITDA scenarios.

(3)The Company's effective tax rate was 55.5% and 71.0% for the three months ended May 28, 2011 and May 29, 2010, respectively and 52.1% and (938.8%) for the years ended May 28, 2011 and May 29, 2010, respectively.    For the three months ended May 28, 2011 and May 29, 2010, the Company established new valuation allowances against deferred tax assets in certain foreign locations of $711,000 and $778,000, respectively.  For the years ended May 28, 2011 and May 29, 2010, the Company established new valuation allowances against deferred tax assets in certain foreign locations of $1.5 million and $4.7 million, respectively. For all periods presented, the Company is unable to benefit from, or has limitations on the benefit of, tax losses in certain foreign jurisdictions. To a lesser extent, the accounting treatment under GAAP for the cost associated with incentive stock options and shares purchased through the Employee Stock Purchase Plan have caused volatility in the Company's effective tax rate.

RESOURCES CONNECTION, INC.

Reconciliation of Net Income (Loss) to Adjusted EBITDA

(in thousands, except Adjusted EBITDA Margin)

Quarter Ended

Year Ended

May 28, 2011

May 29, 2010

May 28, 2011

May 29, 2010

(unaudited)

(unaudited)

Consolidated EBITDA and Adjusted EBITDA

Net income (loss)

$  5,401

$  2,314

$  24,855

$  (11,749)

Adjustments:

Amortization of intangible assets

1,206

1,305

5,030

3,496

Depreciation expense

1,747

2,021

7,223

8,544

Interest income

(107)

(132)

(473)

(656)

Provision for income taxes

6,723

5,666

27,070

10,618

EBITDA

14,970

11,174

63,705

10,253

Stock-based compensation expense

1,952

2,882

9,778

15,493

Contingent consideration adjustment

(3,200)

704

(25,852)

1,492

Adjusted EBITDA

$13,722

$14,760

$47,631

$27,238

Revenue

$145,697

$133,905

$545,546

$498,998

Adjusted EBITDA Margin

9.4%

11.0%

8.7%

5.5%

The Company utilizes certain financial measures and key performance indicators that are not defined by, or calculated in accordance, with GAAP to assess our financial and operating performance.  A non-GAAP financial measure is defined as a numerical measure of a company's financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the statement of operations; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.

Adjusted EBITDA, a non-GAAP financial measure, is calculated as net income (loss) before amortization of intangible assets, depreciation expense, interest income, income taxes, stock-based compensation expense and contingent consideration expense.  Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by Revenue.  We believe that Adjusted EBITDA and Adjusted EBITDA Margin provide useful measures to our investors because they are financial measures used by management to assess the performance of our Company.  Adjusted EBITDA and Adjusted EBITDA Margin are not measurements of financial performance or liquidity under GAAP and should not be considered in isolation or construed as substitutes for net income or other cash flow data prepared in accordance with GAAP for purposes of analyzing our profitability or liquidity.  These measures should be considered in addition to, and not as a substitute to, net income, earnings per share, cash flows or other measures of financial performance prepared in accordance with GAAP.

RESOURCES CONNECTION, INC.

SELECTED BALANCE SHEET INFORMATION

(in thousands)

May 28, 2011

May 29, 2010

    (unaudited)

Cash, cash equivalents and short-term investments

$ 144,873

$140,905

Accounts receivable, less allowances

$  87,162

$  73,936

Total assets

$476,397

$473,200

Current liabilities

$  67,199

$  57,749

Total stockholders' equity

$372,726

$353,241