Resources Connection Inc (RGP) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Resources Global Professionals Q3 2011 earnings conference call. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to introduce your host for today's conference, Chief Legal Officer, Ms. Kate Duchene.

Thank you, operator. Good afternoon, everyone, and thank you for participating with us today. Joining me on this call are Don Murray, our 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 2011. By now you should have a copy of today's press release. If you need a copy and are unable to access it via our website, please call Patricia Marquez at 714-430-6314, and she is 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 29, 2010, 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 condition 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 Chief Operating Officer.

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

Before giving a brief overview of our third-quarter operating results, let me first say thank you to all of those who have made inquiries as to the well-being of our colleagues in Japan. While our hearts go out to those impacted by the tragic series of events, we are pleased to report that all of our colleagues in Japan are safe and accounted for. Our Japanese offices located in Tokyo and Nagoya are vital pieces of our business in the Asia-Pacific region, as well as our global footprint and currently comprise about 3% of our total revenues.

In the immediate aftermath of the events in Japan, our operations there are running at about 65% of normal. However, we serve many of our Japanese clients globally, and as such, the overall financial impact of the recent events has yet to be determined.

Now let me give you a brief overview of the highlights of our third quarter. Total revenue was $137.6 million, a 9.8% increase over revenue of $125.3 million in the comparable quarter a year ago and down 0.6% from our second-quarter revenue of $138.5 million. While our third quarter is a seasonally weak quarter for the Company, all of our geographic regions grew quarter over quarter led by our Asia-Pacific region with growth in excess of 50%.

Third-quarter gross margins was 37%, representing a 250 basis point decrease from our second quarter. Approximately 150 basis points of this decline results from the seasonal impact of resetting payroll taxes and the impact of holidays and vacations during the third quarter. The additional 100 basis points stems from a decline in bill versus pay spreads and slightly higher healthcare costs.

During the third quarter, our SG&A costs were up $45.3 million, a $1.2 million increase from the comparable quarter a year ago, and sequentially SG&A increased $2.6 million. As we discussed last quarter, the sequential increase stems primarily from the relaunch of our branding campaign and the reset of payroll taxes. To a lesser extent, slightly higher compensation costs related to additions of personnel in high-growth areas like China and Germany, as well as an increase in healthcare costs in our self-insured medical plan added to the increase. We remain focused on tightly controlling our SG&A spend while investing for the long-term benefit of the Company.

During the third quarter, we generated cash flow from operations and adjusted EBITDA of $3.9 million and $8.2 million respectively. For the quarter, our pretax income was $3 million, which includes $239,000 of non-cash income or about [$0.003] per share related to a decrease in the estimated fair value of the Sitrick Brincko contingent consideration resulting from time value of money adjustments.

Our third-quarter net income was $753,000 or $0.02 per share, which includes the impact of the contingent consideration adjustment.

Now a brief word about revenue trends. As we reported in January, non-holiday weekly revenues during the first three weeks of the third quarter averaged $11.5 million. Following the Christmas and New Year's holiday weeks, weekly revenues ranged from $10.3 million to $11.7 million, averaging $11.2 million per week.

During January and February, our weekly run-rate was somewhat volatile due to winter storms impacting the Midwest and East Coast of the United States, along with various national holidays such as Martin Luther King and Presidents' Day.

As we begin our fourth quarter, our weekly revenues have ranged between $10.9 million experienced the week following the events in Japan and $11.4 million. We continue to see new client projects spanning all of our service lines and geographies, and we believe that the band environment will continue to improve. However, our clients' cost management efforts related to project scoping and budgeting will continue to exist, resulting in some near-term pressure on our billing rates.

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

Thank you, Tony. As mentioned, revenues for the quarter were $137.6 million, an increase of $12.3 million or 9.8% from $125.3 million in the third quarter of fiscal 2010. On a sequential basis, revenues declined approximately 0.6%. On a constant currency basis, the quarter-over-quarter increase was 9.7%, and the sequential decrease was 0.8%.

Let me discuss some highlights of our revenues geographically. For the third quarter, revenues in the US were $99.9 million, up 5.3% quarter over quarter, down 1.7% sequentially. For the third quarter, total revenues internationally were $37.7 million, up 24% quarter over quarter and about 1.9% sequentially. International revenue accounted for approximately 27% of total revenues for the quarter, similar to the second quarter.

Europe's third-quarter revenue increased 9.5% quarter over quarter and 1.7% sequentially, while the Asia-Pacific region saw third-quarter revenues increase 61% quarter over quarter and 8% sequentially. This is the second consecutive quarter our Asia-Pacific region has experienced greater than 40% growth quarter over quarter.

On a constant currency basis, total international revenue increased 23.4% quarter over quarter and 1.4% sequentially. On a sequential quarterly basis, the US dollar was about even against the major currencies in Europe and weaker against currencies in Asia-Pacific. As a result, on a sequential constant currency basis, Europe's revenue increase would have been the same, and Asia-Pacific's revenue increase would have been approximately 6.8%. On a quarter-over-quarter basis, Europe's revenue increase would have been 12.3%, and Asia-Pacific's increase would have been 52.5%.

Following some additional detail related to certain markets, total revenues for the Netherlands practice in the third quarter were $8.6 million, down 10.4% quarter over quarter and down 4.4% sequentially. On a constant currency basis, the Netherlands experienced a sequential decrease of 3.3%.

UK revenues were even quarter over quarter and down 5.4% sequentially. On a constant currency basis, the UK's sequential revenue decrease was 5.4% as well.

Average weekly revenues of the Sitrick Brincko Group were $454,000 compared to a weekly average of $513,000 last quarter, representing a decrease of 11.5%.

Let me now discuss early revenue trends for the fourth quarter of fiscal 2011. Weekly revenues for the first four weeks of the fourth quarter were $11.4 million, $11.3 million, $10.9 million, and $11.4 million last week. In thinking about the remainder of the fourth quarter, with the exception of the Easter holidays and certain international locations and a minor impact from spring break vacations, which we are currently experiencing, there are no other significant holidays occurring this quarter. This year Memorial Day falls in the first week of the first quarter of fiscal 2012.

I will now discuss gross margins. Gross margin for the third quarter was 37% versus 38.6% in the year ago quarter and 39.5% in the second quarter. The 250 basis point decrease in the sequential gross margin is comprised of the following. Approximately 150 basis points of the decrease relates to the resetting of payroll taxes on January 1, the impact of which will begin to subside over the balance of the calendar year and the winter holidays. The other 100 basis points relates to a decrease in our bill versus pay spreads and higher healthcare costs. Excluding reimbursable expenses, our third-quarter gross margin was 37.9%, which compares to 39.3% in the third quarter a year ago. The average billing rate for the quarter was approximately $130, a decrease from $131 in the second quarter and $133 a year ago. The average pay rate for the third quarter was approximately $65, unchanged from $65 in the second quarter and a year ago. Please remember these hourly rates are derived based upon prevailing exchange rates during each given period.

In thinking about gross margin in the fourth quarter of fiscal 2011, we would expect margins to improve at least 100 basis points. This improvement is expected due to the absence of major holidays in the US during the fourth quarter and the declining impact of payroll taxes late in the quarter.

For the third quarter, gross margin in the US was 38.5%, and our international gross margin was 33%.

Now to headcount. For the third quarter, the average consultant FTE count was 2180. This is similar to the previous quarter and compares to 1968 in the year ago quarter. Quarter-end consultant headcount was 2266 versus 2057 a year ago. The total headcount of the Company was 2986 at quarter-end.

Selling, general and administrative expenses for the third quarter were $45.3 million or 32.9% of revenue, a quarter-over-quarter increase of $1.2 million and a sequential increase of $2.6 million. SG&A was $42.7 million or 30.8% of revenue in the second quarter of fiscal 2011.

The increase in our third-quarter SG&A results from the reset of payroll taxes, the relaunch of our branding campaign, and to a lesser extent an increase in compensation and health care costs. We believe SG&A expenses in the fourth quarter of fiscal 2011 will slightly decline from the third-quarter level.

Stock compensation was $2.6 million or 1.9% of total revenue equivalent to the second quarter and versus $3.2 million or 2.6% of total revenue in the third quarter of fiscal 2010. We would anticipate quarterly stock compensation expense to decrease by approximately $300,000 in the upcoming quarters.

At the end of the third quarter, our office count was unchanged from last quarter with a total of 82, 53 domestic and 29 international. Related to the other components of our financial statements, depreciation and amortization was $3 million for the quarter compared to $3.2 million last quarter. We would expect depreciation and amortization expense for the upcoming quarters to approximate $3 million per quarter.

Interest income was $124,000 in the third quarter versus $114,000 last quarter and $178,000 a year ago. Quarter-over-quarter interest income has declined primarily due to lower interest rates on our investments. Our adjusted EBITDA or cash flow margin, which we defined as EBITDA before stock compensation and contingent consideration adjustments, was 6% in the third quarter, roughly equivalent to 5.9% a year ago, but a decline from 10.5% in the second quarter of fiscal 2011.

During the third quarter, on a GAAP basis, we recorded a provision for income taxes of $2.3 million on GAAP pretax income of $3 million, representing an effective tax rate of approximately 75.2%. Our effective tax rate continues to be impacted by our current inability to offset income in tax jurisdictions in which we are profitable with losses in tax jurisdictions in which we are not profitable.

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 mix of operating results between our US and foreign locations, each of which are taxed or benefited at different statutory rates and the offset of the tax benefit of foreign losses in certain locations by valuation allowances.

On a cash basis, our tax rate was about 42%, and we would expect that rate to continue over the next couple of quarters.

In summary, our per-share income of $0.02 during the third quarter includes $0.003 per share associated with the adjustment to the estimated fair value of contingent consideration.

Now to our balance sheet. Cash and investments at the end of the third quarter were $150.9 million, a $4.2 million increase from the end of the second quarter. The increase stems primarily from cash generated from operations of $3.9 million and employee stock purchases of $4.6 million offset in part by share repurchases and dividends totaling approximately $3.7 million during the quarter.

During the third quarter, we repurchased approximately 90,000 shares of our common stock at an aggregate cost of $1.8 million or $20.38 per share. On a fiscal year-to-date basis, we have repurchased approximately 647,400 shares at an aggregate cost of $9.2 million or $14.18 per share.

Our current board authorization for our stock buyback program has approximately $17.4 million remaining. We will continue to return cash to shareholders through our regular quarterly dividend and share repurchases, 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. Receivables at quarter-end were approximately $85.2 million compared to $80.3 million at the end of the second quarter. Days of revenue outstanding were approximately 54 days compared to 56 days in the prior year's comparable quarter and 51 days in the second quarter.

Now I would like to turn the call over to Don for some closing thoughts.

Thanks, Nate. Well, we continue to be pleased with the stability of our business, despite the events occurring in Japan and the Middle East. Unlike one year ago when sovereign debt issues in Europe seemed to cause a slowdown in our business during the spring of 2010, strengthening economies in many of the geographies in which we operate appear to be partially offsetting the impacts these events might otherwise cause.

As Tony and Nate mentioned, investments in our off-season -- in the Asia-Pacific region, especially in China, are paying off as evidenced by the vibrant Chinese business environment and recent growth rates in the region. I continue to believe our offices in this region will become some of our biggest, largest practices in the coming years.

Tony and I just returned from a trip to Asia and met with many of our global clients there. We were impressed with their optimism and their growth plans for the regions.

As I mentioned last quarter, we remain very focused on growing our business with new and existing clients. While our clients continue to acknowledge the superior skill sets we bring to their business initiatives, we will continue to make strategic pricing decisions where appropriate. As Tony mentioned, our clients remain very budget and cost focused. We also believe our clients continue to be very loyal to us as shown by the following statistics.

Client continuity is outstanding. During our third quarter, we [assumed] all of our top 50 clients from fiscal 2010 and 48 of our top 50 from 2009. In fiscal 2010, we had 202 clients for whom we provided services exceeding $500,000 in fees. In the third quarter of fiscal 2011, on a run-rate basis, we have served 219 clients at this level, representing an increase of over 8%.

Our top 50 clients represented 40% of total revenues, while 50% of our revenues came from 90 clients. So our loyal client following is reflective of our clients in this approach and the quality of the work performed by our consultants. Our largest client for the quarter was approximately 3.6% of revenues.

During the third quarter, 96% of our top 50 clients have used more than one service line, and 70% of those top 50 clients have used three or more service lines. This service line penetration reflects the diversity of relationships we have within our clients' organizations.

During the third quarter, we relaunched our branding campaign, which focuses on our vast relationships with companies comprising the various function rankings. These clients, coupled with our geographic footprint and our people, give us a great platform for growth as these companies respond to the changing global landscape.

So this concludes our prepared remarks, and we would be happy to answer your questions at this time.

(Operator Instructions). Tim McHugh, William Blair & Co.

First, I wanted to follow-up on some of those comments about the pricing environment. Can you give us a little more color on if it is in any one particular geography or service line? And then also it sounds like this is something I guess you are saying is incrementally more that you are seeing lately, or is this something you have been seeing for a while out there?

And then I'm sorry, one more thing. If you can talk about within the context of what seems like an improving discretionary or GDP environment, what is driving the pricing sensitivity in your view?

I would tell you that the pricing within the competitive environment is pretty much across all geographies, and it is pretty much across all service lines. I would say maybe to some degree a little bit less in information management than it is in, say, accounting and finance, but it is relatively widespread. We are seeing it both with, say, local competitors, as well as even some totally irrational pricing by the big four in certain circumstances.

The pricing environment has been fairly competitive over the last 12 months or so. We were hoping that there would be a little bit of a relief as the economy improved, but we are finding an awful lot of people that got displaced within the procession are also out kind of putting up their own shingles and competing with us for certain projects. So that is an element just along with the various different competitors that we are going up against.

We do still see, as we mentioned in our prepared remarks, we do still see an awful lot of projects. We are still battling to some degree the rolloff process and having to sell new projects to create our incremental growth. But I think the good news is we still are seeing an awful lot of project activity.

Okay. And then you mentioned the weather impact as a disruption during the quarter. Is there anyway you can kind of quantify what -- or at least in a ballpark sense -- what the impact might have been during this quarter?

That is something that we don't necessarily track. We know that on certain days people were not able to get their engagements, and then I think that caused some of the volatility. Obviously if they are engaged, that work does not necessarily go away. It just ends up being down in future weeks, so to speak, during the project length. But clearly in some of the week-to-week trends, when you add the storms in the Southeast and the Northeast, you definitely felt that. That is something we experience I think every third quarter a little bit that causes the volatility.

Okay. And then my last question would be on Sitrick. Can you give us a sense for the outlook there? The revenue seems to have slowed down a bit there lately going a couple of quarters. Is that cyclical in the sense that the improving economy means a little less work for their type of services, or is it just the volatility there?

Yes, I talked to Mike last night, and he indicated that the demand for the private communication services is still strong, and they have a pipeline that continues. It varies depending on the significance of the case how much resources have to be put onto case because each case is separate, and it's not predictable like a typical consulting project.

What remains slow is the business around bankruptcy, restructuring business, including the restructuring work, as well as the price of communications around that work. So he does not see a pickup in that, but he says his pipeline for crisis communication services remains strong. And I would say that the volume differences in quarters is more attune to the type of the crisis that they are involved in and the effort that it is going to take to help the client through that crisis.

Kevin McVeigh, Macquarie.

Tony or Nate, I wonder if we could just talk about the revenue trends a little bit and try to get a sense -- beyond the first couple of weeks of the quarter, what type of uptick would you expect in the eight-week period ex-Easter? I know you typically don't give that, but if you look back historically, should we expect a 3%, 5% increase based on the run-rate of the first couple of weeks, or is there any impact from Asia-Pacific or Middle East and rest that you would expect?

A couple of questions in there. I will not throw a percentage at it, but like we said again in our prepared remarks, we expect the demand environment to improve throughout the balance of the quarter and beyond. Again, we are still seeing a lot of projects. A little bit of it can relate to timing in terms of client decisions and whatnot. Very hard to predict how much the conflicts in the Middle East or what has happened in Japan has impacted revenues outside of the absolute value that we see in terms of declines within Japan and in the week following the earthquake.

But outside of that, I would tell you that we are optimistic about demand. Everything that we hear from our regional managing directors is relatively optimistic in terms of project opportunities. So I would leave it at that relative to just the go forward demand environment.

Got it. And then Tony, could you help us understand the types of projects you are doing? Are they more pro-growth or still cost savings initiatives if you think about the mix of the type of projects overall?

Well, if you look at our most -- our highest growth rate service line right now, it is really an information management. It has grown in excess of 30% over the last three quarters. That to me is pro-growth. You know, people are looking to upgrade systems for the future of their business. Supply chain management is still relatively strong as is accounting and finance.

So we are seeing projects across all service lines, which -- you know, in IM we are seeing a lot of SAP implementation work, and we are doing a lot of the project management on those projects. We are doing a lot of work in accounting and finance whether it is derivative accounting or budgeting, forecasting and whatnot. On the supply chain side, it is looking at procure to pay supply chain projects. So it is really across the board, and I think that we will continue to see a variety of those types of engagements.

Got it. Again, Tony, it sounds like it is starting to gravitate a little more towards growth than what you have experienced over the last 12 to 18 months.

There certainly is a fair amount of that, but I would also tell you that there is still -- supply chain still continues to be important to us as a service line, and I think important to our clients as they try to look for any kind of cost advantages they can get.

Paul Ginocchio, Deutsche Bank.

Just a couple of small ones. The Q-on-Q, or the quarter-on-quarter -- or I'm sorry, the sequential improvement in SG&A or increase in SG&A, how much of that was from branding? What is the sequential increase in ad expense?

And also, any way to split that 100 basis point impact from bill pay rate spread in healthcare into the two components?

And finally, it does look like on a year-on-year basis January and February grew about 8%, and then March ex-Japan was up about 7%. So it does look like there is a little deceleration. Is that just tougher comps because it just does not quite jive with the improving demand environment?

Yes, Paul, I will -- you had a handful of questions in there, and I will try to go through them from memory here. But with regard to the SG&A, if you look at that $2.6 million, about $2 million was split between the branding and then the reset of payroll taxes. Now about -- the $600,000 was split. About half of it is healthcare, and about half of it relates to the additions, primarily in Germany and China of people.

And then I think your second question related to gross margin. The 100 basis point decrease that was incremental to the payroll tax and holidays if I remember, and what I would tell you is that was -- if you look at that dollar sequential decrease in the bill rate, that made up about 3/4 or 75 basis points of the 100 basis points.

So 75 basis points was healthcare, and then, of the $2 million of Q-on-Q increase in SG&A, that was half branding, half the reset in healthcare, or you won't break it out further?

Well, what I said is -- I think what we had said last quarter is that SG&A we expected to go up approximately $2 million, and that was kind of split between the branding and the reset of FICA.

Great. And then just -- (multiple speakers)

Should I clarify that?

Absolutely. And then just the deceleration it looks like from January, February, into March. I know it is just a month, but it does not seem -- it seems like (inaudible). Is it just tougher comp, or what is that?

(multiple speakers). In March we experienced some pretty unusual events, including the earthquake and tsunami, which affected our Japanese practice and affected a lot of our clients who rely on our Japanese components. So you can see that we had a drop to one week that was most affected in March, and we have come back a little bit. We are still probably not getting as much work as we would have if the tsunami and the earthquake had not occurred, but our Japanese clients and our rural clients that rely on Japanese components are coming back and trying to make other arrangements. So I think part of that -- the issue at large has been the world events, which have affected our clients.

Sara Gubins, Bank of America.

A question about the competitive environment in pricing. When you go to market, are your clients now regularly considering an individual provider you and a big four offering?

Oftentimes, you will have multiple people within a proposal process. Typically it will always be firms. It could be a big four. It could be a local/regional and ourselves involved. But I would say relative to like project management positions, one of the things that we have seen at some of our clients is that they are kind of going out into the local market, hiring just single shingle contractors to do some of the work. That certainly is out there. Is that a huge component? No, but it is just another competitor in the marketplace that is tending to put a little bit of pressure on the prices.

Again, as Nate pointed out in his remarks, the pricing differences are not huge, but a dollar of rate can have a pretty big impact on your margin. We don't think this is going to last too long, but we don't know for sure. We are out there to be competitive and to win work, and we are trying not to let a dollar or two get in the way of us getting a project or not getting a project. Just trying to be competitive and keep our consultants busy. We find that to be oftentimes one of the best ways to win new work at clients.

So even though demand trends seem to be getting better, do you think it is fair to assume we will see bill rates come down for the next quarter or two?

I cannot predict that. All I can say is I think on the billing rate side, there will continue to be a little bit of pressure, but I can't predict as to whether they are going to decrease. Again, we had a dollar decrease between this quarter and last quarter, and again, we will be out there competing for new work, and we will see where it takes us.

Okay. And then just last question. Could you talk about the branding campaign and how long you plan to continue it?

The branding campaign is running through the end of May, and then we will set a new budget for our new fiscal year, which, as you know, starts in June. So our both online, print, radio and airport advertising is through May.

Okay. But you don't know yet if you plan to continue it after that?

Well, we have not developed our plans or set the budget quite yet. No.

T.C. Robillard, Signal Hill Capital.

Not to belabor the bill pay spread here and more importantly the bill rate trend. I'm just trying to understand what changed so dramatically from three months ago where -- and I understand that there has always been some pressure there -- it just feels a lot worse now, and it seems just 75 basis points seems to be pretty dramatic. Was this a situation where you saw the big four get real aggressive real quick, people throwing Hail Marys out there? I'm just trying to get a sense as to how sudden this was.

Well, I think if you look at the hourly bill rate data that I discussed a year ago in the third quarter, it was $133, and it is now a year later down $3 to $130. So this is something that I think we talked about each quarter. It has been a competitive environment. It is something we -- each engagement our folks are very diligent in negotiating rates with the clients. But I would tell you this is based on the data that we have given on the bill rates. It kind of occurred over the last year.

Obviously this quarter, which is a seasonally weak quarter for all the reasons we have discussed, it has a little bit bigger impact. But, as Tony said, I think this is something that I believe, and I know we are up against even some other public competitors. In the restructuring arena, we have seen some of the large firms offer to do work for free to get in the door. So this is something I think it is out there in the marketplace, and it is something that, as Tony mentioned, I think we will manage through. My sense is if the employment data continues to improve as we saw today, that hopefully some of this subsides.

I guess where I was going, I mean I guess that wasn't -- you guys did a good job of calling out the payroll tax increase and some of the other stuff. This just seems to be a surprise. So I guess that is where I was just looking. I think we all understand that there has been the pressure, particularly on a year-on-year basis. It just seems a bit of a surprise.

Part of it is the mix of business. So there are certain types of work and projects that are higher gross margin, and those are typically the restructuring type projects, refinancing, things like that, which is the work that has been slowing down this year.

The Sitrick Group has a much higher gross margin, and as their business would grow at restructuring, that would affect the gross margin for the whole business. So I think part of it is just the mix of business in this last quarter. Some of our most successful projects at Resources in the past have been restructuring projects and accounting and finance restatement type work. That work typically has better margins because people need it done quickly and they need it done correctly.

So part of it is just the mix of business. And that is kind of -- that kind of happens, and we get the business, and then the business demand drops a little bit in that area and then comes back. So I would expect that as we start getting more of the higher-margin business demand, that you will see the margin go up. Otherwise, we will continue to be in a competitive environment.

Is it fair to categorize the environment out there for demand with the higher margin business to remain challenging? And I'm kind of looking out over, call it, the next two or three quarters.

I think it is going to be challenging. We keep expecting to see the demand for restructuring services start to grow, but it has not occurred, primarily I think because of the low interest rates, and the bank's willingness to let companies kind of muddle along for a while. But we do think that there will be a restructuring increase, which will help us from the margin standpoint.

We also understand that on the accounting and finance side of the big four accounting firms that they are actually now tapped out of people. So they don't seem to have the same supply chain issue or supply issue of people that they had a year ago, and in the current busy season, we understand they are all tapped out, which means that they will probably have increased turnover this year after busy season. So we might see a decrease in some of the accounting pressure for projects that we are getting from the big four.

Okay. Thanks, Don. That was very helpful.

Jeff Silber, BMO Capital Markets.

I actually wanted to follow up on that last point. We have been hearing about the big four being in a hiring frenzy, and I realize that the hiring is being done mostly at the lower end, and you guys focus more on experienced professionals. But are you seeing any supply constraints for those experienced professionals? Are there any areas where it is tough to find supply?

I would say the issues on supply from a general standpoint is we don't really have any extraordinary issues on finding people. But where we get really specialized requirements for a certain type of software implementation in a certain industry, that takes a lot more work to find the people.

The big four, my understanding is a lot of the big four are trying to rebuild consulting, and so they are going out and hiring or trying to buy consulting practices. One of the big four was hiring about 600 people a month just for the government contracting business.

So we are not big in government contracting, so we really would not compete with them most of the time for that type of work. So it is really a difficult environment to just put in silos. The accounting piece of the big four, which is what we would come up against a lot, we believe they are people constrained right now because they had cut so many people in 2008 and 2009, and so they found themselves short this year. So they are pretty cautious on the accounting and auditing side in hiring, I think.

Okay. I appreciate that. (multiple speakers). I'm sorry?

I was going to say that is exactly right. And I would say one of the areas maybe that it is a little bit of a challenge on the recruiting side is, as Don mentioned, when you have these information management projects where there is a very specific skill set that is needed by the client. But outside of that, one of the core competencies of our Company has always been being able to recruit people for the projects that our people are seeing out in the field.

And one other thing on the big four, it is a little bit different by region. I would tell you it is still in Asia-Pacific they still have a little bit of a supply overlap, and we tend to get fairly competitive pricing still with the big four in Asia. So just a couple of nuances to Don's comment.

Okay. That is actually very helpful. A couple of times at the beginning of the call you guys mentioned higher healthcare costs. Can you just give a little bit more color on that? Is that something we should expect to continue?

Well, you know, we have seen this really during probably I would tell you the last 12 or 18 months at different stages where we have a self-insured plan covering our employees. It is just a usage thing, and as we got into the latter half of last year, the experience and the usage was improved. As we have crossed over into the third quarter, we have seen it pick up a little bit. We have done some things in our healthcare plan that over the long term we believe will bring costs down. But with the growth in people adding consultants since the business has grown, you do bring more people into the plan.

Well, we actually I think in the quarter I think as Kate pointed out we had two very expensive healthcare cases that ran up against the max. So we don't usually have that in a quarter.

Okay. Great. That is helpful. And then Nate, just a final question for you. Can you tell us what that capital spending was in the quarter, and what you're expecting that to be in the current quarter? Thanks.

Sure. So Q3 was about $1.4 million, of which about $0.5 million will be reimbursed to us by landlords probably in Q4. But, for GAAP purposes, we grossed that up. And then I think in Q4, it is probably going to be in the $300,000 or $400,000 level.

Giri Krishnan, Credit Suisse.

I have a quick question about capacity utilization. You made some comments about pricing pressures relative to the big four. Can you address your costs around headcount and just any excess capacity in the industry?

Can you clarify that just for a second? I was not sure of the last part that you asked.

Yes, just clarify your thoughts around headcount adds going forward, and also, you talked about capacity utilization, especially with respect to the big four?

I think, first of all, just relative to our capacity issues where we have added people have been in our very high-growth regions, so in China and Germany. Our growth in China has been significant over the last several quarters and more broadly in Asia-Pacific and the same thing in Europe. You know, we have a fairly small team in Germany, but we are seeing some good growth there. So that is where we are adding people.

Relative to your comments about capacity at the big four, I think, as Don mentioned, what we are seeing in the environment is that they are hiring significant numbers of people right now to rebuild their consulting practices. Back in the late 90s when the independent issues were significant, Deloitte was the only firm to keep their consulting practice, and now all the other firms are trying to catch up to add their consulting practice back. So that is the type of dynamics that we see in the system at this point.

Okay. And then as we think about the gross margins and international, I know you mentioned some -- referenced some investments in AsiaPac. Are there other factors that in the interim might be holding back gross margins in international?

So one thing just to clarify, the gross margins -- the consultant basis is variable. So when Tony was speaking as adding people, it is really the client service director, recruiting capabilities in these high-growth offices, which impacts SG&A, not gross margins.

Okay. I will follow up with a question off-line.

Okay.

Andrew Steinerman, JPMorgan.

Nate, do you think about incremental operating margins? Meaning over the next couple of years as Resources sees such nice topline growth, how that should accrete to operating margins?

Well, Andrew, I think what we have said in the past is that our on average there is leverage in the model. So that if you look at an incremental dollar of revenue, you take that gross margin, and probably all but 4% or 5%, all else -- you know, this is, again, I always preference this with all else being equal -- a number of our offices can support much larger revenue bases. We made a decision that we talked about last quarter on the branding, so that obviously impacts the leverage.

And then we have, as Don mentioned, is when you look at a market like China, those offices are fairly young to us. They are staffed with just a handful of people, and we are seeing very significant growth, and so to keep with that growth, we had to add people. So we do that following the growth. And in some of these high-growth markets that are in our younger offices, we are going to have to add and invest. You go to our more mature offices, primarily in the US and in some of the other markets in Europe, they can grow significantly, which is where that operating leverage comes from. Unfortunately the growth right now is -- the very significant growth is coming in some of these younger markets to us.

That sounds very helpful. Thank you.

Gary Bisbee, Barclays Capital.

A couple of questions. On the information management, is it reasonable to think that that's going to be a lower gross margin business overall, and we should expect that? Or was your comment about specialized people being difficult to get really more of the one-off thing that you are seeing?

No, it is more of a -- I think I commented earlier that on the information management based upon the type of work that we were doing, it would tend to be a little bit higher gross margins. But just incrementally I would say generally across our service lines, our target is always to achieve about a 40% gross margin.

But, on information management, we are working in some very significant areas for clients that is generally kind of a valued position, and it can range across ERP implementations, people looking to put in business intelligence software, people looking at data warehousing applications. So I would tell you that we don't look at that as being low gross margin at all. I think maybe where you are thinking about is a lot of these companies that provide engineers, which is generally fairly low margin, and we have never gotten into that.

Okay. You know, the US revenue decelerated quite a bit. I take it that a big chunk of that is just having lapped the Sitrick acquisition, but relatively modest growth compared to what we have seen from a lot of other professional staffing and professional services firms. Can you give us a sense what the trend is looking like in the US? Do you expect that to perk up or any thoughts?

Our expectation is for it to pick up. I would tell you that if you looked across the United States, we were the strongest during the quarter in the central region. Probably a little bit less so in the West and in the Northeast. But, again, what we are hearing from our regional directors is that the pipeline is fairly robust, and it is a matter of really to roll off one project and to sell two more to get that incremental growth.

I think, and if you look at our Company historically, sometimes we will get into a bit of a pattern to where we will have a good spurt of growth, and like you said in North America, we were 16% last quarter. We might level off for a bit and then get on with a better growth trend. I think that is what we ran up against a little bit in this quarter, but we will see how the balance of the fourth quarter plays out. It is generally a pretty good one for us, and again we expect the trends to improve.

And then I guess is there any -- when do you think about potentially reducing pay rates to compensate for the lower bill rate to hit that 40% gross margin target? Is that something you would ever consider? And what it would it take to get you to do that?

When you look at pay rates more as a market condition of what we have to pay to get the right people, I would say about 18 months ago or so after I came back we made a strategic decision that we did not want to lose any quality projects at our Fortune-rated type clients. So we don't want to give up our bandwidth at those clients, and we want to keep them.

So we have consciously taken price discounts to keep our clients knowing that the environment when it improves, we will still have a very strong relationship there.

So that is probably a little bit of that pricing is we are not going to give up revenue growth for a short increase in margin. We want to keep the client because that is how we are going to grow. So I think that is part of the issue, and I expect that to be more of a temporary issue until the companies get more financial confidence and financial strength internally. We have seen that in our clients. They get -- as some of them have grown and gotten better, then the financial pressure gets reduced a little bit.

But you are expecting that to lead to better price or better volumes at this now lower price?

We expect better volume and better pricing as the economy hopefully keeps improving.

Okay. And then just one last cleanup -- (multiple speakers)

-- Fortune 100 company, we have a lot harder time selling business. Whereas if we are still there and still dealing with them on a day-to-day basis and managing projects, we have a much better chance to continue to grow inside that company, as well as get better rates.

Okay. That makes sense. And just, Nate, one cleanup one. The share count popped a little bit sequentially. Was that -- was there anything going on there? Should that 46.9 million be a good run-rate to use going forward?

I think it was 46.3 million.

The diluted -- or am I looking at last year's -- (multiple speakers)

Okay. On the diluted, I mean the diluted is just a function of the outstanding options and the average share price. We did have, as I mentioned in the prepared remarks, on the overall share count, we did have people exercising options and purchasing shares in the ESPP.

Okay. But the stock price rise maybe in the second half of calendar 2010 lead to more of those options coming into the money, and that would --

That is correct.

Okay. Great. Thank you.

Mark Marcon, Robert W. Baird.

I was wondering if you could give us a general perspective in terms of the size of information management and supply chain at this point, and also what RAS ended up doing?

Your first question first. RAS was down during the quarter about 10%. And relative to information management, we have typically not broken out the size of our practices, but I would tell you that information management is a significant practice to it. It is our second most significant practice after finance and accounting, and supply chain would be somewhat similar to RAS just in terms of directional scale.

Okay and how big is RAS now?

RAS is about 9% of total revenues.

Okay. Great. And could you -- the comments around SG&A were helpful earlier in terms of Andrew's question. As we think about that, as you budget for next year, should we think about maybe somewhere around a 5% increase on a constant currency basis? In other words, how much do you have to invest in terms of Germany and China to keep that growing, and are there any incremental programs above and beyond that that we should expect?

I would tell you we are just in the process of the budgeting for next fiscal year. But I would tell you obviously our biggest investment is always people. But we tend to not -- in many of these markets like we see in China, we tend to try to invest in people following the revenue growth. Clearly when we open those markets, we cede the offices with a group to begin building the business.

So we don't necessarily have what I would say a defined timeline. As we hit certain levels, we start adding people. We will also be opportunistic if the right person comes along in a given market that is a growth market.

So I would tell you as a result we don't necessarily tie ourselves necessarily to a complete budget. But clearly we are focused on running the business for the long term, but getting back to our EBITDA margin goals that we have had for the entire history of the Company.

I guess I was just trying to -- that is helpful. I am just trying to figure out the pace of that. If we can make our own revenue assumptions in terms of the growth rates there, and I was just trying to get back to the incremental margins just in terms of what percentage ideally of your incremental gross profit would drop down to the operating line, recognizing that it's going to depend on where the growth is coming from. But I was just trying to get some sort of target range.

Yes, I mean, like I said, I mean the difficulty in the modeling is I would tell you our very mature offices have good capacity in them, and our younger offices that we opened in the couple of years leading up to the downturn, Germany, China being good examples, those are the ones that are paying the dividends. I think you will see us again being opportunistic, but I would tell you everybody sitting here is very focused on getting our EBITDA margins back up to that 15% goal, knowing obviously it is not going to happen overnight.

And can you give us a sense for how we should think about Japan based on what you are currently seeing and what sort of impact that could have on the rest of AsiaPac? I know it is hard to say, but you have got a better perspective than we do.

I would tell you our sense is that in Tokyo you cannot say enough about the Japanese people. They are very intent I think on trying to get things back up and running. Our people, as Tony mentioned, a substantial number of them are reengaged on projects. There are obviously the same issues we have all read in the paper about the rolling blackouts and the impact.

The thing that I think is a little bit unknown is just impact in the overall supply chain. I think we have read in the paper the auto industry here in the US is starting to run into issues and how that trickles down into their ultimate business decisions in terms of starting projects with us. If they have concerns about having inventory to be able to sell, you know those are the things that I think time will tell. We don't have a view either way, but it is something that I think we continue to watch both as we hear from our clients that are potentially impacted by this and obviously what we all read in the press.

In our business in Japan itself, our Japanese clients have not really cut back very much. So the Japanese companies in Tokyo we have seen very little slowdown or work stoppage. But the sovereign-owned enterprises operating in Japan are the ones that have shut down first. And we have read in the paper that a lot of these foreign managements have flown out of the country because of the fears about radiation, etc. So we have seen our clients in Japan that are foreign-owned have slowed down or stopped completely. So we are not sure when they will restart their businesses.

So it is kind of a global thing because when we were in China, one of our automobile clients basically suspended all their consulting projects until they can start up production, again, with parts they need from Japan. So the ones that seem to be dealing with this the best are the actual Japanese-owned companies in Japan, and they are kind of going on with business as usual.

But Japan in total is about 3%?

That is right, 3%.

I'm sorry, was it 2% or 3%?

3%.

3%.

Okay. Great. And then the last thing, on prior calls we have had lots of discussion around Dodd-Frank, big potential projects. Any sense around those bigger potential opportunities longer-term?

Yes, I think there is still a lot there relative to new accounting pronouncements being implemented. I think that there is work to be had from Dodd-Frank. But, as you know, Dodd-Frank needs some 200 additional pieces of legislation for it to clarify what they really meant in the original bill. So it is going to take that type of clarity for companies to really develop a need for specific project-based work that we would help them with.

So it is out there. It is really a matter of timing, but there are a few big things right now in the queue relative to new accounting pronouncements.

The biggest potential for us is if they can agree on international accounting standards and implement that with a timetable. Because it takes several years for companies to change their accounting systems both if they are European or American to come up with the combined accounting standard. So that is probably the really big potential positive for us when it occurs.

(Operator Instructions). Scott Schneeberger, Oppenheimer.

Just a couple. Could you guys compare and contrast how much of the business in the quarter was with existing clients as opposed to new? And then a little discussion of your go-to-market pricing strategy with regard to both? You obviously mentioned that you were doing what you could do retain on price sourcing -- (technical difficulty). Just a little more color on that? Thanks.

Well, the majority of our business in the quarter I would say was with existing clients. It always is. We are constantly in the marketplace trying to gain new clients as well. But even with existing clients, again, everybody is relatively cost-conscious. They don't want to pay more than they have to for services, and you typically will find on a lot of these big projects a bidding process. And that bidding process will include ourselves. It will include maybe one or two members of the big four. It might include some small regional shops. It generally involves a process in which you submit a proposal, you respond to information requests, and then they get down, they narrow it down to a couple of firms, and then they ask you for a round of last and best pricing. And that is where lately I think things have gotten a little bit more competitive, especially over the last nine to 12 months.

So that is generally the process that it takes on, and I think, as Don mentioned, we are out there trying to be competitive. We don't want to lose engagements for $1 or $2 an hour, and we want to keep our good consultants busy and on these jobs. We have always found that to be the best form of business development is when we are at a client, we are -- say, we are in the finance department, it gives us the ability to penetrate other functional areas within that client and sell other projects. So that is really the landscape of it.

Thanks. And then you mentioned following up on that theme, that certain competitors were giving away the restructuring business for free. Could you elaborate on that please? What -- I know you probably will not name names -- but what types of competitors, and what is the incentive to do the free?

Well, I would tell you is just from what we have seen is probably what I would say are some branded firms that specialize in bankruptcy and restructuring work. We have seen a couple of engagements where they basically said, let's get started and we will do the first several weeks pro bono. And this is -- in each of these cases, they were what I would call pre-filing work.

So I think, as Don mentioned, the restructuring business is soft, and I think what you're seeing is, at least in these instances, these folks willing to literally get started and try to do work for free to get in the door. Obviously businesses make the decisions to do that if they got extra people sitting around, and there is not a lot of work to do.

Thanks for all the color, guys.

Thank you and I am showing no further questions from the phone lines.

Okay. Well, to wrap it up, I would like to thank you all for your continued interest and support of Resources, and we look forward to our next update for the fourth-quarter and fiscal year-end of 2011. Thanks.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.