Resources Connection has reduced potential earn-outs related to its 2009 acquisition of Sitrick Brincko Group from $33.9M to zero as the PR and restructuring unit has come in under targets set to trigger such payments.
“We estimate it is unlikely that contingent consideration will be payable,” Resources president and COO Tony Cherbak said Jan. 5 of the potential liabilities owed Sitrick and eligible staffers.
Cherbak noted in announcing RC’s second quarter earnings that terms of the 2009 Sitrick deal require RC to pay more than three-times the unit’s average earnings before interest, taxes and amortization over four years if the PR unit’s EBITA average revenue hits $11.3M.
But the Sitrick Brincko division has averaged only $6.5M in pre-tax income annually over the past two years, he said. Based on those results and updated projections, Cherbak said the liabilities are unlikely.
Cherbak said the relatively low number of corporate bankruptcies over the past two years has hurt the division. He added that RC has seen a “slight pick-up” in restructuring-related activities and is “cautiously optimistic” the business environment for such work will improve.
Mike Sitrick, CEO of the PR unit, said the firm has handled 22 bankruptcies since the acquisition, but noted the assignments have been “smaller and faster” and generated lower fees than in the past. He said the decline in revenues was the result of conflicts with parent company clients and the sluggish and changed bankruptcy environment
The $33.9M downward adjustment related to Sitrick earn-outs bolstered RC’s net income by $20.4M to $25.3M for the second quarter. Overall revenues rose 4.7% over Q2 of 2010 to $145M, mostly on strong growth overseas.
U.S. revenue ticked up 1.3% for the quarter, compared to 13.8% internationally.
“Despite the reduction in the Sitrick Brincko contingent consideration, we remain committed to growing this practice in the coming years and believe we have an excellent team to do so,” said RC CEO Don Murray, who added he is pleased with the overall growth “in a challenging global economy.”
Former employees of Sitrick led by ex-New York office chief Richard Wool, who filed suit over the firm's employee stock ownership plan, or ESOP, in 2010 after the sale to RC, agreed to terms of a $6.25M settlement in late November, pending court approval.
The settlement, between the ESOP, its trustee Reliance Trust, the firm and Mike Sitrick, calls for insurance to pay the sum into a 401(k) plan which succeeded the company’s employee stock ownership plan (ESOP) at the center of the employees’ suit. Thirty percent of the sum can go toward attorneys’ fees.
Neither Sitrick nor the firm will admit to any liability or misconduct under the terms and Sitrick said the suit was without merit.
“While I remain confident that the claims in the lawsuit did not have any merit and had we proceeded with the litigation we would have prevailed, I decided to settle rather than spend the next two years litigating,” he said.
The suit was slated for trial in June 2012. U.S. District Court for the Central District of California is scheduled to rule on the proposed settlement Jan. 23.
Wool declined to comment pending a final settlement deal.
The former staffers accused Sitrick of “self-dealing” and breach of duty as trustee of the ESOP, which they say lost 90 percent of its market value as Sitrick declared his own personal goodwill as key to the firm’s income.