Resources Connection Inc (RGP) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen and thank you for your patience. Welcome to the Resources Global Professionals Q3 2010 earnings conference.

At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder this conference may be recorded.

I would now like to turn the call over to the Chief Legal Officer, Ms. Kate Duchene. Ma'am, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for participating with us today. Joining me on the call are Don Murray, Chairman and Chief Executive Officer; Tony Cherbak, President and Chief Operating Officer; and Nate Franke, our Chief Financial Officer.

During this call, we will be providing you with comments on our results for the third quarter of fiscal year 2010. By now you should have a copy of today's press release. If you need a copy and are unable to access one via our website, please call Patricia Marquez at (714) 430-6314 and she will be happy to fax a copy to you. Before introducing Tony I would like to read an important announcement about certain statements that we may make during this call. Specifically, we may make forward-looking statements. In other words, statements regarding future events or future financial performance of the Company. We wish to caution you that such statements are just predictions and actual events or results may differ materially. We refer you to our 10-K report for the year-ended May 30, 2009, for a discussion of some of the risks, uncertainties and other factors such as seasonal and economic conditions that may cause our business results of operations and financial conditions to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call.

I will now turn the call over to Tony Cherbak, our President and COO.

Thanks, Kate. Good afternoon, and welcome to the Resources Global third quarter conference call.

Let me begin by giving you a brief overview of our third quarter operating results. Total revenue for the third quarter of fiscal 2010 was $125.3 million, a sequential improvement of 3.1% over our second quarter revenue of $121.5 million. Included in our third quarter results is revenue of $5.4 million attributable to our recent acquisition of the Sitrik Brinko Group. Third quarter gross margin was 38.6%, an improvement of 50 basis points sequentially and 140 basis points over the comparable quarter last year. During the third quarter, our SG&A costs were $44.1 million, a sequential increase of $500,000 over recurring SG&A and a $6.7 million decrease from the comparable quarter last year. For the quarter, our pretax income was $132,000, which includes a $788,000 noncash expense, or $0.01 per share related to an increase in the estimated fair value of the Sitrik Brinko contingent consideration.

Our after tax loss was $5 million, or $0.11 per share due to a significantly disproportionate GAAP tax provision which included a $3.9 million charge, or $0.09 per share to reserve for deferred tax assets of certain of our foreign subsidiaries. In spite of our GAAP net loss, during the third quarter we generated cash flow from operations and adjusted EBITDA of $6.7 million and $7.4 million, respectively. Nate will provide more detail on each of these items later in the call. Revenues for our third quarter started off strong in the three weeks prior to the winter holidays averaging $10.5 million per week. After the normally slow, two week winter holiday period, weekly revenues were fairly choppy throughout the remainder of the quarter ranging between $9.6 million during a week when the winter storms shut down most of the northeast, to $10.7 million per week. In the first four weeks of the fourth quarter, weekly revenues had averaged $10.6 million.

Now I will talk a little bit about an outlook for our business going forward. As we discussed in our last call and at recent investor conferences, we continue to see a gradual revenue growth as we emerge from the recession. Excluding Sitrik Brinko revenues from our third quarter results, our average non holiday weekly revenues grew by approximately 3.3%, sequentially. The storms in the northeast and the strengthening of the dollar compared to the pound in Euro had an adverse effect on our sequential growth rate. During recent investor conferences we received many questions about the trajectory of our revenue growth.

Why are you not growing as fast as you did when you came out of the last recession cycle especially in light of the recent pick-up at the temporary staffing firms? Well first of all, we are not a temporary staffing firm, we are a professional services firm. The staffers are currently benefiting primarily from the needs of manufacturing firms to put temporary personnel back on the production floor. Manufacturers are not yet certain enough about the strength of the recovery to hire permanent workers and the use of variable workers by these firms gives them significant flexibility. Although this trend is currently benefiting the staffers we believe we will be a strong beneficiary of the same mentality as companies work to adapt to a new business environment and increase the flexibility of their higher level intellectual capital.

In February 2010, senior management is a new Fortune 100 client told us that in late 2009, they had cut their permanent headcount to the minimum level possible to cover routine business functions. Strategically, they were adopting a variable labor model to accomplish nonroutine business tasks such as initiative-based projects as required throughout their global organization. The varied skill sets of our consultants and global footprint makes Resources an excellent business partner to this Fortune 100 company as they move forward with this model. Although we believe more and more companies will adopt similar human capital strategies as they react to new global economic realities, the severity of the credit crisis and recession has not yet faded from memory and an air of caution still influences corporate budgets.

Consequently, one of the key differences we are currently seeing in our business compared to prior years is that project cycles and associated budgets are very discreet. The two month project lasts for two months and is held accountable for the clients predetermined budget. At the end of the project we have to sell another project to replace the work that just ended to stay even and sell two projects to grow. 48 months ago, a two month project would often times turn into a two year project, and any new business on top of that drove incremental growth. We simply did not have to fight as hard to replace projects from consultants rolling off of engagements.

We do not expect the current cautionary environment to continue indefinitely. However, we believe that consumer and business confidence and other economic metrics need to improve to drive greater overall confidence back into the global marketplace. In light of these current market conditions we are still winning our fair share of projects with our clients and bringing in new clients to Resources as well. Our client retention is excellent and our experience has always been that once a client uses our services they come back to us over and over again. We were recently engaged to help a new client in the communications industry with a critical operational issue involving their supply chain, specifically the management and tracking of their inventory. Due to the time critical nature of this project we quickly assembled teams around the country that included up to 45 of our consultants to help our client set up a process to track inventory and inventory movement throughout the clients various deployment sites.

Our client was so pleased with the results of our you work that he sent our team a note that read in part, " I want to advise you of the excellent work your team's are performing on our behalf, and I look forward to continuing on the great work we have started with Resources". This project is a great example of the power of our organization, the ability to deploy extremely capable teams of our consultants across diverse geographies at a moments notice to help a client solve a critical issue.

Now to the capital markets pick-up as well. We also expect to see more work in M&A activity and IPO's. We recently won an engagement in which up to four of our consultants will assist a Chinese technology company prepare for an IPO in the United States. Our specific assignment is to help the client with the US GAAP and financial reporting requirements of their filing. Over the last few weeks we have seen a market increase in new business activity both from the perspective of new products, new project sales, as well as our pipeline of potential opportunities. The new projects have consultant start dates ranging from immediately to end of May. Our opportunity to maintain this momentum will line our ability to convert more project opportunities than projects being completed. In any case, we are excited to see the new opportunities arise, as more and more companies begin to implement strategies reacting to the changing global economic environment.

With that I will now turn the call over the call to Nate for a detailed review of financial results.

Thank, Tony.

As mentioned revenues for the quarter were $125.3 million versus $121.5 million in the second quarter of fiscal 2010, an increase of 3.1%, sequentially, and a decrease of 19.7% on a quarter-over-quarter basis. On a constant currency basis, the sequential quarterly increase was 3.6%. As we reported during our second quarter conference call, the third quarter began with weekly revenues ranging from $10.5 million to $10.7 million during the first three weeks of the quarter. Following the two winter holiday weeks, when weekly revenues averaged $5.5 million, weekly revenues began to trend upward to $10.7 million in the last week of January as the return from the holiday effects typically felt in early January began to subside. As Tony mentioned, February's weekly revenues were uneven, stemming in part from weather issues along the Eastern seaboard.

Average weekly revenues of the Sitrik Brinko Group, excluding the two winter holiday weeks, were $433,000. Through the end of January, a significant amount of effort was expended to introduce the Sitrik Brinko model to various law firms and financial firms located in major markets in the US. It is encouraging to see Sitrik Brinko's weekly revenues grow to $514,000 during the last week of the third quarter, and to over $600,000 per week during the past couple of weeks. Sitrik Brinko's revenue can vary week to week due to the episodic nature of a portion of their work.

Now let me discuss some highlights of our revenues geographically. For the third quarter revenues in the US were $94.9 million, up 8.6% sequentially and a decrease of 15% quarter-over-quarter. For the third quarter, total revenues internationally were $30.4 million versus $34.1 million in the second quarter, a decrease of 10.9%, sequentially and a decline of 31.4% quarter-over-quarter. International revenue accounted for approximately 24% of total revenues in the quarter versus 28% last quarter. Europe's third quarter revenue decreased 12.7%, sequentially, and 33.9% quarter-over-quarter while the Asia Pacific region saw quarter, saw third quarter revenues decrease 4.8%, sequentially, and 26.3% quarter-over-quarter.

Since Europe trailed the US into the economic downturn, we anticipate Europe will lag the US out of it. On a constant currency basis, total international revenue decreased 9.1%, sequentially, and 34.8% quarter-over-quarter. On a sequential quarterly basis, the US dollar strengthened against major currencies in Europe while it was virtually unchanged in the Asia Pacific region. As a result on a sequentially constant currency basis, Europe's revenue decreased would have been 9.9%, and Asia Pacific's unchanged. On a quarter-over-quarter basis, Europe's revenue decrease would have been 37.8%, and Asia Pacific's would have been 28.8%.

Following is some additional revenue detail related to certain markets. Total revenues for the Netherlands practice in the third quarter were $9.6 million, down 17.2%, sequentially. On a constant currency basis, the Netherlands experienced a sequential decrease of 14.7%. UK revenues were down 16.7%, sequentially, and 14.3% on a constant currency basis. Let me now discuss early revenue trends for the fourth quarter of fiscal 2010. Weekly revenues for the first four weeks of the fourth quarter were $10.5 million, $10.7 million, $10.6 million and $10.5 million. Included in these amounts are weekly revenues of the Sitrik Brinko Group, which averaged $581,000 per week.

In thinking about the remainder of the fourth quarter, with the exception of Easter-related holidays and a minor impact from spring break vacations, which we are experiencing currently, there are no other significant holidays falling during the quarter. Now let me discuss gross margins. Gross margin for the third quarter was 38.6%, a 50 basis point improvement from 38.1% in the second quarter, and 140 basis point and a 140 basis points higher than a year ago. The sequential gross margin improvement stems primarily from improved bill-versus-pay spreads and slightly higher conversion fees. Excluding reimburseable expenses, our third quarter gross margin was 39.3% which compares to 37.9% in the third quarter a year ago. The average billing rate for the quarter was approximately $133, an increase from $130 in the second quarter and a year ago.

The average pay rate for the third quarter was approximately $65, equivalent to the $65 in the second quarter but a decrease from approximately $67 a year ago. The increase in the average billing rate is attributable to the Sitrik Brinko Group. Please remember these hourly rates are derived based upon prevailing exchange rates during each given period. As anticipated, the seasonal impact of the winter holidays and the resetting of payroll taxes on our gross margin was offset by the Sitrik Brinko Group acquisition. We believe our gross margin should improve modestly in the upcoming quarters. For the third quarter gross margin in the US was 40.1% and our international gross margin was 33.9%. Now to headcount, for the third quarter the average consultant FTE count was 1,968. This compares to 1,931 in the previous quarter and 2,513 in the year ago quarter. Quarter end consultant headcount was 2,057, versus 2,363 a year ago. Total headcount of the Company was 2,789 at quarter end.

Now to the other components of our third quarter financial results. Selling, general and administrative expenses for the third quarter were $44.1 million, or 35.2% of revenue, a sequential increase of $500,000, when compared to recurring SG&A costs of $43.6 million, which excludes acquisition-related costs of $600,000 in the second quarter of fiscal 2010. SG&A was $50.8 million, or 32.6% of revenue in the third quarter of fiscal 2009. As we highlighted last quarter, the sequential increase in SG&A stems from the Sitrik Brinko acquisition and the resetting of payroll taxes. But the increase was somewhat mitigated by reductions in marketing, total employee compensation and other business expenses. While we will continue to invest in our business as needs dictate, on average we continue to believe our existing infrastructure can support revenue levels experienced about a year ago. As such we believe the substantial portion of the gross margin associated with incremental revenue growth will increase our income from operations.

We believe the SG&A expenses in the fourth quarter will be modestly higher in light of current revenue run rates, and our need to invest in certain markets. Additionally, we expect to report a charge in the fourth quarter of approximately $500,000, for early east termination costs, primarily associated with combining Sitrik Brinko and Resources offices in New York City. Stock compensation expense associated with active employees was $3.2 million, or 2.6% of total revenue versus $3.5 million, or 2.9% of total revenue in the second quarter and $4.2 million, or 2.7% of total revenue in the third quarter of fiscal 2009. We would anticipate quarterly stock compensation expense in the upcoming quarters to approximate the amount recorded in the third quarter. At the end of the third quarter our offers count remained at 85. 55 domestic and 30 offices international.

Related to the other components of our financial statements, depreciation and amortization was $3.5 million for the quarter, versus $2.6 million last quarter. The increase stems from the Sitrik Brinko acquisition. We would expect depreciation and amortization expense for the upcoming quarters to approximate $3.5 million per quarter. Additionally, during the quarter we recorded a noncash expense of $788,000, or approximately $0.01 per share, related to an increase in the estimated fair value of the contingent consideration, stemming from the Sitrik Brinko acquisition. The expense stems from recording the time value of money or interest component of the estimated fair value of the contingent consideration. Interest income decreased by about 61%, to $178,000 for the third quarter, versus $458,000 a year ago. Interest income decreased primarily due to a lower average interest rate earned on our invested cash in the third quarter.

Our adjusted EBITDA or cash flow margin which we define as EBITDA before stock compensation, and contingent consideration adjustments was 5.9% in the third quarter, compared to 4.6% of fiscal 2010 and 7.3% a year ago. Our pretax income was $132,000 for the quarter. During the third quarter, we recorded a provision for income taxes of $5.1 million resulting in a net loss for the quarter of $5 million, or $0.11 per share, versus a net loss of $1.9 million, or $0.04 per diluted share in the second quarter of fiscal 2010 and an earnings of $0.05 per share a year ago. In the third quarter the noncash after tax charge for continuing employee stock compensation was $0.05 per share, versus $.07 per share in the comparable quarter a year ago.

Our tax expense during the quarter reflects a $1.2 million provision for taxes in the US and other tax jurisdictions in which we are profitable, offset in part by tax losses in certain foreign jurisdictions for which tax rates are significantly lower than in the US, or in which no tax benefit is recorded as well as the continuing impact of incentive stock options. Additionally during the quarter, we recorded a noncash $3.9 million charge, or $0.09 per share for newly established deferred tax asset valuation allowances. Accounting standards related to income taxes generally require valuation allowances to be recorded against deferred tax assets in tax jurisdictions in which three years of cumulative losses have been experienced. For tax purposes, the vast majority of the tax jurisdictions in which we have recorded a valuation allowance, the NOLs may be carried forward indefinitely and can be used to offset future taxable income.

Our GAAP tax rate for each of the upcoming quarters is difficult to predict and could be volatile as the rate will be dependent on several factors including the operating results of our US and foreign locations. Each of which are taxed or benefited at different statutory rates and the number of incentive stock options exercised each quarter. In summary, our per share loss of $0.11 during the third quarter includes $0.09 per share associated with the recording of the newly established tax valuation allowances, and $0.01 per share associated with the adjustment to the contingent consideration.

Now let me turn to our balance sheet. Cash and investments at the end of the third quarter were $138 million, a $25.7 million decrease from the end of fiscal 2009. The decrease in the nine month period stems primarily from the use of $28.6 million for the acquisition of Sitrik Brinko, and $5.9 million of share repurchases. During the third quarter, we generated cash flow from operations of $6.7 million. During the third quarter, we repurchased approximately 309,000 shares at an aggregate cost of $5.9 million, or $18.96 per share. Our current board authorization for our stock buyback program has approximately $29.7 million remaining. We will continue to assess the strategies associated with returning cash to shareholders while maintaining a balance between the capital requirements of growing our business and fiscal prudence.

Our shares outstanding at the end of the third quarter were approximately 46.3 million, a decrease of approximately 100,000 shares from the end of last quarter, stemming from share repurchases offset by the issuance of 236,000 shares associated with stock option exercises, and our employee stock purchase program. Receivables at the end of the quarter were approximately $72.8 million, generally flat from the prior quarter. Days of revenue outstanding were approximately 56 days, up nine days from the prior year's comparable quarter and two days lower than the second quarter of fiscal 2010. Our days of revenue outstanding are impacted by Sitrik Brinko as they have historically had longer repayment trends. Now, I would turn the call over to Don for some closing thoughts.

Thanks, Nate.

While we have talked frequently about the cash generation capabilities of our business model, this gives us the ability to be opportunistic when it comes to acquisitions and returning cash to shareholders. In addition, we have had no need access the credit markets for over the last 18 months. Many companies found themselves seeking liquidity with a banking system that was frozen. During our third quarter we generated cash from operations of $6.7 million, and we again had a positive cash flow from operations, in six out of our last seven quarters dating back to September 2008, even through some of Dell's quarters (inaudible) GAAP losses. My personal opinion is that GAAP financial statements are becoming confusing, and not indicative of a company's real financial results. There are too many estimated noncash expenses with noncash tax consequences to make them useful in running the business.

From the inception of Resources, we have built the Company to withstand significant downturns in the economy. We have managed our balance sheet conservatively and although we never expected as drastic of a downturn as we saw the last 18 months, we are emerging from the recession with our firm in tact, $138 million of cash in the bank and no debt. That means we should be able to leverage our near term revenue growth at approximately 85% at each incremental gross margin dollar should follow our bottom line. Geographic footprint is a strategic advantage to Resources. I've got a lot of news to compute for a (inaudible) enterprise, wide engagements with our multi-national clients wherever they do business around the world. The noncash tax charge we took this quarter to reserve for the deferred tax assets of certain of our foreign subsidiaries in no way reflect any lack of confidence or committment to those businesses over the long term. Due to the (inaudible) foreign net operating loss carryover did not expire, we believe these NOLs will be available to us in the future to offset taxable income.

Our recently acquired Sitrik Brinko Group is hard at work on a multitude of new projects. Sitrik Brinko has won over 20 new assignments since our acquisition, primarily related to crisis communications and mitigation support. In March we were informed of our selection to provide the advisory services to an entity that manages financial assets from troubled financial institutions. Additionally, Sitrik Brinko is a [water and southern engagement] who assisted foreign organizations with product awareness matters. These two wins are examples of the new capabilities the combination of Sitrik Brinko and Resources brings to our global organization, both in terms of geographic reach and technical skill sets. And it provides you with some client statistics.

In fiscal 2009, we had 293 clients for whom we provided services exceeding $500,000 in fees. In our third quarter of 2010, on our loan rate basis, we have served 208 clients at this level. Our top 50 clients represents 41.1% of total revenues, while 50% of our revenues came from 84 clients. Our largest client for the quarter was approximately 4.5% of revenue. Client continuity continues to be outstanding. Through our third quarter of fiscal 2010, we saved all of our top 50 clients from fiscal year 2009 and 49 of our top 50 from 2008. Our loyal client followings is respective of our client-centered approach, and the quality of the work performed by our consultants. Through the third quarter 92% of our top 50 clients has used more than one service line. 74% of those top 50 clients have used three or more service lines. In this service line penetration reflects the diversity of relationships we had within our clients organizations. While the past 18 months have certainly tested Resources, our variable operating model and established infrastructure make us extremely well positioned to take advantage of the opportunities stemming from the changing nature and how global companies address their intellectual capital needs. We remain committed to achieving our long term goal of a 50% cash flow margin.

So this concludes our prepared remarks. We will be happy to answer your questions at this time. Thank you.

Ladies and gentlemen, we have now entered our Q&A session. (Operator Instructions).

Our first question comes from Tim McHugh of William Blair & Company.

Yes. I was just wondering if you could update us on the underlying pricing trends you mentioned? You gave us the pricing for the quarter but you mentioned that was impacted by the recent acquisitions. So just curious what you are seeing from clients in that regard, and the spread between the bill and pay rates?

I would say relative to pricing of engagements we have probably seen a little bit less pressure than we have in the past. I believe a lot of that is due to the fact that we are in the middle of the audit busy season. So you would have less Resources out competing in the marketplace. I would say you still probably have a little bit, a little bit of pressure from some of the regional firms. And then, internationally, there is probably a slightly more acute pressure say still from the big four consulting firms. But outside of that I would say that we look at it over the last six months, it has definitely improved to some degree.

And have you rolled in the the increases in the unemployment taxes and so forth into your pricing fully at this point? Or would you expect further pressure from that?

Jim, the answer is that it had a very minor impact given the pay rates of our people, and that most states they reach those limits pretty quickly. And that's kind of a differentiator between probably the lower level staffing companies.

Okay. And then lastly, can you talk a little more in detail about you're seeing in the Netherlands and some of the international markets relative to the US? Just comparing how the demand trends are shaping up there, and where you may be seeing better or worse performance within those markets?

Well, you are telling me that? This is Don,Tony and I are going to Europe in just a few weeks, to visit with the leadership groups over there. But what we are - - we think that Europe is at least a quarter or so behind the US. They were lagged up to the US into the recession, and they're certainly lagging coming out of the recession. The Netherlands, which is our biggest group is - - has been very focused on financial type of clients since the Netherlands had got that type of an industry. We are expecting to see again slight improvements over the next few quarters in Europe. We think that we are seeing it in France and the UK. But we don't expect anything for another three or four months before we, hopefully, they catch up to where the US is today.

Okay. Thank you.

The next question is from Kevin Mcveigh of Macquarie.

Thank you. Nice job on the gross margins.

I wanted to drill-down a little bit more if possible on the guide. Which is actually - - wondering - - it was kind of interesting that you mentioned that you expect year-on-year growth, and sequential growth in the press release. So I wonder, is that - - is there anything within the business that gives you more confidence? And, Tony, is it reasonable to assume that if you average for the first four weeks of the quarter about $10.6 million, assuming a 13 week quarter. Is a range of 138, is that unreasonable? Or just, can you help us understand the revenue trends a little bit more?

Well I won't comment on your $138 million but I will tell you that as - - we've said in our prepared remarks throughout the entire quarter we have been winning our share of projects. They have probably been to some degree a little bit less in duration than what we have experienced in the past. But over the last couple of weeks we have seen a definite pick-up in terms of new business activity, including projects that we have won, and also additional l projects that are in the pipeline.

So as we hear I would say virtually on a daily basis from our offices around the country, there is a fair bit of optimism. So - - we feel good about our prospects, but I would tell you that there, without seeing some significant movements in some of the other economic metrics like employment, I would tell you that I would still caution that the growth is going to be gradual. It's not going to be a hockey stick but it's feeling pretty good right now with all of the new activity.

Great. And then in terms of, what is that translate to directionally from obviously the gross margin is going to be up sequentially, but from an operating perspective do you have any type of range you are thinking about?

I think as you go back to our comments that while we believe SG&A will trend upward during the fourth quarter, just because of the revenue increases. If you go back to the comments that we have made around our existing infrastructure and the, the gross margin dollars, that would fall to the bottom line. We continue to believe that - - probably all but $0.05 of the gross margin dollars would go to operating range.

Great. Okay. Thank you very much.

Thank you. Our next question comes from Jim Janesky of Stifel Nicolaus.

Good afternoon. On the revenue trends just to get a little bit more clarity on your expectation for holidays. Would you expect that there would be roughly between spring break and Easter, the equivalent of two weeks of quote holiday-type of revenues? And would you expect them to be down on the order of magnitude of 10% to 15% that you do during other holidays, or is there a change that we should know about?

I think that - - I think that's a reasonable approximation. I think if you look at the last couple of weeks, you saw a little, a little choppiness. And I think some of that is caused by the people taking some PTO over - - over the spring breaks which started in various regions a couple of weeks ago.

And so the choppiness lasted a couple of weeks would you say?

Well I think like I said, I think we've seen it the last couple of weeks if you look at the weekly run rates we gave you for the last couple of weeks in March. I think we still have - - next week to get through where we will be impacted slightly by that PTO.

Okay, that's helpful. And when you looked at your comments over the course of the past quarter, including when you did your second fiscal quarter conference call, you do use the term gradual improvement. The way - - can I characterize it that that gradual improvement is broken out into Sitrik and Brinko? I mean it looks like the revenues are coming in much better than expected there. And maybe there has been more modest or maybe just stability rather than appreciation in the core Resources revenues?

We anticipate from the core Resources business that we will continue to grow those revenues gradually. That is where a lot of the new projects that I discussed a little bit earlier are coming from, in addition to the excellent results that we are seeing from Sitrik Brinko as well.

I would say the relationship at Sitrik Brinko, we're - - we have been seeing a rash of bankruptcies which we would expect if that happens will help Sitrik Brinko grow and also help our core business grow. So, Sitrik Brinko has been selling new projects through their core competent team. But they also have other projects that are rolling off at the same time, much as Resources does. So, we belief that we are now selling more work than vending, and that is going to lead to growth in our core business.

Okay.

Because we are always selling new projects. As the other projects wrap up and roll off, - - you need to keep selling more of them that's wrapping up. And you think that we're there now. But it's like Tony said, "it's not a hockey stick. It's going to be slow growth." And we have experienced this slow growth over the last few weeks of the quarter and into this new quarter.

Can you just remind us of what the average project duration is for Sitrik Brinko?

It can really range from it can be a couple of days to a couple of years. So it really depends on the project. There is really no average duration. As Nate mentioned, his work is very episodic in nature, therefore it could be all over the map.

So is the increase versus last quarter due to an increase in the average project size, or the increase in the number of projects that you are winning?

Increase in the number of projects.

Okay, great. That's helpful. Thank you.

Thank you. Our next question comes from Paul Ginocchio of Deutsche Bank.

Thanks for taking my question. Tony, you had said earlier that corporates were using a lot of caution around their budgets, but at the end of our opening remarks you talked about activity levels really picking up over the last few weeks. It sounds like from the Q&A that the activity picking up the last three weeks is maybe winning the day. Is that right? Is that how you would feel more that there is sort of pick-up in activity where we are still in caution? As you look at the projects that you are winning, are they more to do with cost cutting like you have been seeing historically I think around supply chain management? Or now you're seeing more of what's called offensive revenue generating projects? Thanks.

I would tell you that, the remarks around caution really relate to the duration of projects, the specific client enforced budgets, and what knot that we have seen now over the last nine months or so. The comments that we have made relative to the projects that we are currently seeing, number one, they're all over the map; they're M&A integration, they're supply chain management, they're regulatory reporting; finance transformation which could include helping companies with shared services centers or stabilizing their closing process.

So they're all over the map, but the feel that we get is that there seems to be the start of the corporate CFOs unloosening the purse strings a little bit. And that's got a good feel to it. Again, we have to convert a lot of these opportunities into actual projects and revenue and we have done some of that over the past couple of weeks. We've got more to do, and again as Don pointed out, we have to make sure that we are doing that in excess of any of the projects that we have that are closing off. So again, although it has a good feel, we still want to be a little bit cautious in terms of making sure people understand the slope of this revenue curve is not a hockey stick, it is going to be more gradual. But at least it is going in the right direction.

In the US I visited a very large company utility company, a very large oil and gas company, we've got major projects going there. And I would say they're all in the nature of trying to reduce cost and becoming more efficient in the business. So, they're not - - where they are doing acquisitions or expanding service lines, it is more trying to reduce their G&A costs, and becoming more efficient with systems or shared services center, et cetera. In Asia we have seen more projects that are more growth oriented type of projects, where they're trying to go public, or they're doing M&A, et cetera.

That's very helpful, thank you. And just back to the Easter holiday, can you lose one or two day, can you size that based on what you have seen historically? Thanks.

It is probably one to two days, overall, Paul.

Thanks, that's helpful. Great. Thank you.

Thank you. Our next question comes from Gary Bisbee of Barclays Capital.

Hi, guys. Good afternoon. I guess the first question, are you expecting that this will be an ongoing thing where there will be an adjustment to the estimated fair value of the earn out every quarter that you run through the P&L?

Yes, Gary, the fair value is based on a discount rate and so every period basically accreting interest. Now I would caution you that amount could go up or down depending upon the movement of underlying interest rates, but it really is just a fair value computation.

Okay. So assuming stable interest rates, the number that it was this quarter would be sort of a good number to use? In other words, this is much more due to that as opposed to change in your model of what you are projecting of EBITDA over the next four years?

That's correct. There's no change in the underlying assumptions it was purely the time value of money component .

And so if interest rates rise, that amount would likely rise then that we would see flowing through the P&L each quarter?

Well, actually, if interest rates rise while it would be offset by a shorter discount period, depending on the amount of the rise, you could see it reverse. But it is just crazy accounting.

All right. Okay. So it's the amount. Is that - - is that, I guess sitting here looking at this thing, I've got a bunch of other companies that I cover that have used the earn outs, and I don't remember - - is this sort of the standard for accounting for earn outs?

This is - - this is the brand new accounting principle that went into effect. It's just all new, the full accountants, the Full Employment Accountants Act.

Okay.

Gary, this is, this is a new accounting standard. Even our prior acquisitions that we have used earn outs, we had not had this time of accounting. But if you have companies doing acquisitions today with earn out, this is what you will start seeing.

Okay.

Basically, it kind of confuses the earn out principle, which the earn out principal is very simple. Which is either you do, or you say you are going to do or you are not going to get any extra payments. So it protects the Company. It's kind of confusing the whole situation but it's required and you do it.

I mean, normally, or I guess historically we would have seen you have to put the value on the balance sheet. And if the business was doing better then we might see that grow period to period. But I guess, okay, well that's helpful to understand that.

The second question, based on what you know right now, do you expect as it gets implemented that the recent health care legislation would have much if any impact in your business? And I guess specifically, I am wondering, what type of health insurance if any, you are offering for the consultants?

We haven't analyzed it yet. I would say that we believe our plan would be a Cadillac plan. So there would be some tax penalties for giving your employees better health care. Whether we would adjust that a notch and try to avoid that tax penalty. We haven't even looked at that yet.

So, we haven't had a lot of good, and we have some I think people coming in in May to work with - - Nate and Kate to look a the - - to try to estimate what the future is going to be for health care. We do have a plan that covers everybody, and the dependents if they elect to. And we think the benefits are better than what's mandated so, therefore, it would be a Cadillac plan.

Okay. And so that specifically includes the consultants as well not just your full time.

Yes, Gary, all of our consultants are given - - after a certain number of hours worked, they're given a benefit package. So, that.

That's in the US.

Yes. So, we won't necessarily be financially impacted. I think business wise, this, the health care reform in certain markets, we might compete against what I would call local type firms on smaller companies that don't give their folks benefits. So there's always a little more price competition there. So this, this from a business standpoint will level the playing field, in some of our engagements with the smaller companies that might use the boutique-type firm.

Okay. And then I guess just one last question, it is sort of a recurring theme over the last six months has been that there was some sense that there was pent-up demand and as we got into the new calendar year we would see CFOs start to loosen up the purse strings a bit because they had cut back too much. What's your update on that? Is some of these recent momentum and new project wins that type of stuff? Or should I take from your comments that it remains incredibly tight environment in terms of the cost consciousness of the big companies? Thanks.

I would say from a professional services standpoint it is a tight market. In the US a lot of our projects has been helping clients implement changes to reduce costs, to try to become more efficient. - - where in the past we had quite a bit of work, in the, the year-end tax and audit season, and augmenting staff for companies to help them do their filings. That work is a lot less than in previous years because clients are letting their people work a lot of overtime to get it done. So I would say it is still a tight environment for Professional Services. And that's why we think the, the growth is going be gradual.

And then I guess one more question. Is there a particular type of engagement like M&A or something which would be the ones that you talked about where you sign up for two months but it drags on for a lot longer? Is there something where - -

No. I mean, the best example of the engagement that have a long life would be any situation where a company's troubled and their going through a reorganization. So those engagements can last - - do last years. Which is why we did the Sitrik Brinko acquisition. We got Enron as a client in bankruptcy in 2001, and we probably did work for them for the next eight years through the bankruptcy. So those are the real long life projects.

The other types of things that we would see though, and this is again, you go back 48 months ago. You would work on a particular project for a couple of months, the client would be so impressed with the consultant you have out there, they would have other things for them to do. And so they would be able to go out and find the money, and keep them busy on something else.

So, one project would morph in from two months into two years because they had a multitude of things for them to do out there to help the client accomplish whatever their initiatives were. What we talked about today, is that's a little more discrete, in the market that we have seen in the last nine months. But just again, just these last couple of weeks we are starting to see more strategic initiatives that firms are rolling out, and we hope that continues.

Great. Thank you for all of the color.

Thank you. Our next question comes from Kelly Flynn of Credit Suisse.

Thanks. A couple of quick questions. First of all, can you quantify what revenue impact you think the storms had in the quarter?

We have - - it is hard so say. I would say it can be somewhere in the $0.5 million, plus or minus. I mean I think you have to be careful, that revenue probably just gets postponed, if people couldn't get to the place of business say in Washington DC, it is gets pushed out. But I think from a, our view is between the currency and the storms, we probably lost about $1 million, and maybe about half of that is the weather. But it is a - - that's not, an - - it is kind of just a rough thing by polling certain of our offices.

Okay, great. With respect to what you said about the fourth quarter kind of following up on Kevin's question. First of all, can you just confirm you did say in your prepared remarks you expect a sequential increase in gross margins?

Yes, I think what we said in the prepared remarks is that we expect - - kind of modest improvements in, in gross margins from the level they were at in the Q3 over - - as we look forward in the upcoming quarters.

Okay. And then in answering Kevin's question, you said something like you did expect all but $0.05 of the gross margin increase to drop to the bottom line. Are you implying there basically a $3 million to $4 million sequential increase in G&A? That's what $0.05 would imply, but I want to make sure I didn't misinterpret your comments.

If you just use a - - what we have talked about during the past quarter, is you - - if you look at a gross margin of 38%, and so you have an incremental dollar of revenue, you have the $0.38 of gross margin, and about $0.33 of that would throw, would go to the operating line. There's a certain amount of G&A that varies with the revenue. And that again that is just a top level, it is basically stating that - - we leave our infrastructure at a current level. We will make certain investments in people, and certain markets as needs dictate.

Okay. Got it. And next on the weekly revenue trends. I just want to make sure, do they include Sitrik? Or all the periods discussed?

Yes.

Okay. And then finally, just following up on Gary's question about the valuation allowance change. If rates stay the same, why would you see the charge in upcoming quarters in a steady rate environment? I would think - -

So that - - right. So, Kelly, just in a simplistic way of looking at it, the earn out is paid from the date of the acquisition, the earn out is paid after the fourth anniversary. So your estimate of the future payment is discounted back for four years at the date of the acquisition. Each quarter, that discount rate is shortened, so the discount period became 3.75 years. So just as you shorten the discount period - - the time value of money makes that principle value go up, all else being equal.

Okay.

You're basically accreting the liability up to its face value.

Okay. That makes sense.

But, you have to recognize it may never be paid. It is all dependent on what they do in the future. So we are accruing expense on an amount that may not be paid or may be a greater amount paid. It's just - - is break - - I think it is make believe accounting.

But it is just the estimated fair value at a 0.4 years from the date of the acquisition and it will vary over a period of time.

Okay. Great. You guys did a good job of explaining that complicated issue. Thanks a lot.

Anybody else? Hello?

(Operator Instructions).

Our next question comes from Scott Schneeberger of Oppenheimer.

Thanks. Good afternoon. Just following up on the operating margin questions. You guys had mentioned about some marketing spend, I assume to help with the acquisition. But I was asking, it felt like there was something more in there. Can you speak a little bit to end markets and geographies of what you were alluding to?

I think, I think we have reduced some of the headcount in marketing. And that's probably some of our marketing expense from previous quarters. More of the reduction were some of the people that were in the marketing group.

So when we look at headcount on a monthly basis, we have had, we have a normal level of attrition that we have had historically. Unless in this market environment, unless those are absolutely positions that are critical to replace, we have been trying to spread their work out over the remaining people. So we have our SG&A structure has benefited from some of that.

We also terminated some outside consultants that were being used for marketing strategies.

Okay. Thanks. I must have heard it wrong, I thought it was an increase in marketing spend. So I must have caught that wrong. You guys have spoken in the past about business opportunities serving Government. Any update on that, it seems like it would be something that would work for you and I think good time.

We are still interested in the Government industry. We think that it provides some very good opportunities. I think that it is very difficult to get into something like that from an organic basis. If we do something in the Government space we will probably look to acquire a small boutique that would make sense and fall within our M&A guidelines. So we still are interested in that. Right now I think that one of our main focuses is just our core Resources business along with making sure that we roll out the Sitrik Brinko acquisition in an appropriate manner and take advantages of the synergies that we feel that we have there. We think that's our biggest opportunity right now.

Okay. So that kind of answered the question of use of cash. Kind of integrating the recent acquisition and then looking to be opportunistic maybe down the road a bit. Any comments to deceleration or acceleration of share repurchase?

The share repurchase is more difficult for us just because we don't have that much float out there. So we are looking at ways to return capital to shareholders. I would say that every month, Charlie or Nate, or I are always looking at acquisitions that are being presented to us. So, there could be some more opportunistic acquisitions, nothing of a big dollar amount. And we talk about the share repurchase but, with the lower float that we have in our stock, it is not as easy as just, if we were had more float out there. But we are looking at how to return it.

Is dividend a consideration there with the solid cash base and positive cash flow?

Yes, dividend is a consideration.

Okay.

Regular dividend.

Regular dividend. Okay. Thanks. That's interesting.

Finally, not a lot of talk recently. A lot of other distractions. (Inaudible) anything to update there?

I guess - - the current position of the FCC seems to be support of - - a single accounting standard, but they're pushing it out there further than what had been talked about two years ago. So, I think they're working on trying to bring the US GAAP and the international accounting standards together. There's probably going to be some good missions to overcome the fair market value type accounting. There are some of the European countries and Japan are - - have expressed dissatisfaction with the US's rules. So until they actually get these things reconciled, I think they will keep pushing the timeline out until it gets done.

Now there are some companies that are going ahead and implementing it anyway. In Japan, has announced that they are implementing it. But the Japanese finance minister said that if the international accounting standards go to a US Fair Market Value, then Japan won't be using that. So there's still a lot of uncertainty out there other than we know it's (inaudible), we know we should have a world capital standard of world accounting standards. I believe it will happen, we just can't project right now when.

Okay. Thanks.

And the current SEC - - 2014, is the current SEC guideline.

Right but not seeing from what you said not seeing any initial work for early adopters or early - - ?

We are doing initial work. For early adopters, so there are major companies that have multiple listings, around the world, that are, that are implementing them. So that's going on, and there's some companies that - - some major companies that are implementing it internally just to find out what the effects are going to be. So they're not surprised. But it is not a full bore - - everybody is implemented that type of situation, like it was with (inaudible). So we have a handful of engagements, whereas described I would say the Companies are in the valuation with that process.

So we have a handful of engagements as Don described but I would say that companies are in the evaluation-type mode and we're helping them with that process.

And we have an internal program to certify our own consultants on IFRS so that they have different levels of expertise, depending on the classes and things that they have finished. So we are pushing forward internally to be really ready for this.

All right, thanks. It made me think of something else. What percent of revs is RAS, or was RAS in the quarter?

10%.

10%. Okay. Thanks for taking my questions.

No problem.

Thank you. Our next question comes from Mark Marcon of R. W. Baird.

Good afternoon. I was wondering if you could talk about the other practices aside from RAS in terms of where you are seeing the strength? Is it spilling over to financial services in terms of that activity that you're seeing a pick-up on? And when we think about IPOs and M&A picking up, what extent do you think that's going to help to drive the business?

A couple of things there just relative to the overall service lines. l will start with the service lines and then comment on the financial services. But our legal business has been very good. It's up double digits sequentially, and supply chain management, same thing up double digits, sequentially. F&A still the largest piece of our practice, and it is going to spine. When you drill down through F&A, financial services on a sequentially basis is up about 3%. And as we disclosed last quarter it was up 6%, sequentially in the second quarter. It's up 3%, sequentially this quarter. Some of the projects that we mentioned that we are, that we are seeing here over these last couple of weeks deal with some of the big financial institutions, also, either on a divestiture, working on a divestiture or working on a budget M&A integration project. So that is just a little color around the service lines.

Great. And can you - - on the legal and supply chain, how big are those at this point?

Legal is still very small. Supply chain is roughly our fourth largest service line, somewhere in that range.

And fourth largest would be like 5% of revenue?

Well, again we've never really - - we've tried not to break out, break them out by percentage, but it is a substantial practice. It was a $10 million practice when we acquired it and it has grown significantly since we acquired it in 2003.

Okay. I was just trying to get a sense for at what point do legal and supply chain become big enough to move the needle? And to what extent - - ?

Well supply chain is definitely moving the needle. Legal will get there, it is just a matter of us adding critical mass. When you look at the offices in which we have legal. It is doing very, very well but it is just a matter of how we are going to invest our money and finding the right people to start those practices in other offices.

Okay. Great. And then with regards to the commentary on the length of assignments. Does that alter at all, what sort of margins you could get to, if you have to constantly turn people over and the assignments become a little bit shorter in duration. Does that have any implications with regards to efficiencies? Or do we need to get back to the older length of assignments to get back to the 15% EBITDA margin?

No, we'll get to the 15% EBITDA margin by just growing our revenue, which means I'm going to be selling more more than we're losing, or (inaudible). And if anything, the longer the assignment, it may put a little bit more of a ceiling on our gross margins because we're not repricing our people as regularly as you would if you were repricing them every three months. So it probably doesn't have much effect on our gross margins.

And then with regards to the gross margins being up moderately, sequentially. Are we thinking 30, 50 bips?

I think that's fair. I mean we are - - Mark, as you know, the calendar year goes on, yes, and the people that fall off the FICA tax as they reach that limit. And then it is - - the business volumes gradually improving, it helps us leverage some of the benefit costs and those types of things.

And then lastly, if we take a look at the weekly trends and we go back to last year. Obviously, it was an unusual environment. How should we think about a normal seasonal trend for the balance of this quarter relative to the first four weeks?

The only comment that I would really make on - - a seasonal trend for the fourth quarter is what we said in our prepared remarks, that we really don't have too many holidays that are getting in the way of those weekly revenues. So I think if you went back a year ago, we were going the wrong way. Our weekly revenues were going down because we were kind of - - still in the midst of fighting with the recession. Whereas, now as we've talked about, we're seeing some gradual improvement. So that's what I would say relative to the trends.

Great. Thank you very much.

Thank you. Our next question comes from T.C. Robillard of Signal Hill Capital.

Great. Thank you. I know it is getting late. I've just got a couple of quick questions. First on the valuation allowance, does that charge, does that impact your taxes, your paid taxes, or even your GAAP tax rate in a quarter?

It effects our GAAP tax rate. Because our GAAP tax rate keeps all that in consideration. That's why our tax GAAP, GAAP tax is so high. It doesn't affect the taxes that we are going to pay this year. It doesn't affect our cash tax.

Okay. Perfect. And then, you mentioned you had a little bit better conversion fees that helped gross margins on a quarter-to-quarter in the quarter. Can you give us anymore granularity there as to what that might have impacted in terms of basis points?

Yes, it was about a 20, 30 basis points or so. The delta between Q2 and Q3 in the conversion fees was a little over an improvement of about a little over $300,000.

Okay.

That does, those conversion fees are - - basically at full margin. We don't necessarily like them, but they certainly aided gross margin, somewhat,.

In the height of - - 1999, 2000, we actually would have approached 5% of our revenues from converted fees. So it is nowhere near low (inaudible) conversion fees.

Understood. Lastly, last quarter you mentioned one of the thought processes around the Sitrik Brinko was to add more headcount, particularly kind of in the senior level, kind of the rainmaker, if you will. Have you guys done any additions there, or are you still focused in terms of Mike and John just driving their own book and integrating the acquisition from that standpoint.

I would say there has been one senior level person the Sitrik Brinko, and returning from (inaudible) who took early retirement to join, and help build the practice. And I think they are looking at other from the restructuring side, trying to bring in somebody to help because - - Brinko's project is very, very time intensive. They have to testify and get ready for court and stuff like that. So we are still looking to beef that up. And like I said, we did hire one senior person.

Was that, was that senior hire was that a partner level, at Skadden, or was that just a senior level attorney?

No, it was a senior partner. He is a 30 year, a 30 year M&A partner from Skadden.

That's great. Okay. Guys, thanks. That's all I had.

Thank you. Our next question comes from David Ridley Lane of Bank of America.

Yes. I was just wondering do you to track your win rates through the recession? Because just feeling that if clients are still - - in the penny pinching mode, obviously Resources has quite a value proposition to offer for the, for full projects. I was wondering have your win rates been rising through the recession?

We don't track the win rates per se, because what's important to us is revenue and the capacity to drive revenue out of any particular client. So you can categorize a win as a client that needs one person for one week. What we are more interested in and what we spend a little bit more time on is some of those bigger, new clients that we get that have the need for multiple consultants. So we don't track the win rates per se but I would agree with you relative to the value proposition and we have really been trying to drive that home in the marketplace. We have been able to shift some attention to clients where clients might usually use a big four firm down to Resources, because of that very value proposition; greater experienced people, at a very reasonable rate.

David, I would point out again, if there's a silver lining to the, this economic downturn, is I think, certain company's that may be sole source certain types of work to the branded company's. Now as they become much more cost conscious, or certainly looking for alternatives. I think in Tony's prepared remarks, he talked about a Fortune 50 company that had done very significant headcount reductions and was going through a variable model. That would be an example of a company that historically had sole sourced a certain amount of project work to the big four. And we have now, are making in roads there, and they seem to really like the model and - - after we deployed the first consultant, they told us what a difference from the skill sets we typically see from the big four.

Thank you very much.

Thank you. Our next question comes from Paul Cundra of BMO Capital Markets.

Great. Thank you very much. I just had one more quick question. I just wondered, can you tell us your capital expenses in the quarter? And then maybe how you think that might look for the year?

Through the nine months, our CapEx were right around $2 million, and as we look to the remainder of the fourth quarter - - my guess is it will be about $0.5 million more.

Okay. Great. That's the only question I had. Thanks a lot.

Okay.

Thank you. Our next question comes from Kevin Mcveigh of Macquarie.

I know we are running late. Just to be clear, at this point do you have more consultants coming on assignment than exiting.

Yes.

Okay.

It's like now, that's why we believe that - -

I'm sorry could you repeat that? I didn't hear that.

That's why we believe in a gradual growth, because in our core business we're adding a few more consultants on a weekly basis.

Got it. And then, when you think about the pricing relative to the big four, have they become a little more rational given the demands in their business? Should they still be pretty aggressive in terms of undercutting you on price?

Well, right now they're ending their busy season. So we would anticipate they might become more aggressive in the summer. But it depends on who and what the project is. All of the big four now have consulting arms again. And those consultants will go after some of the same projects we do. If they want the client aggressive, So I would say, they're not as irrational as they were 18 months ago.

Anecdotally, too, I know they're getting beat up by their clients to reduce fees, but that's primarily on their audit work. It is probably goes to their tax work as well. But virtually any - - I will tell you that any, the high likelihood if they're undercutting us on price, they're losing money. That just doesn't last too long in the big four, that mentality, unless they're looking to make a big investment in a particular client. So - -

Understood. Thank you.

Thank you. I show no further questions in queue. Does our moderator have any closing remarks?

Just want to thank you all for your continued support in Resources. And we look forward to our next update in July for the fourth quarter and year-ended. Thank you.

Ladies and gentlemen, this does conclude your program. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.