ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
RESOURCES CONNECTION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in
thousands, except par value per share)
|
|
|
|
|
|
|
|
|
|
|
February 25,
2017
|
|
|
May 28,
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
44,607
|
|
|
$
|
91,089
|
|
Short-term investments
|
|
|
|
|
|
|
24,957
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $2,627 and $2,994 as of
February 25, 2017 and May 28, 2016, respectively
|
|
|
96,864
|
|
|
|
97,807
|
|
Prepaid expenses and other current assets
|
|
|
4,944
|
|
|
|
4,735
|
|
Income taxes receivable
|
|
|
2,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
149,035
|
|
|
|
218,588
|
|
Goodwill
|
|
|
170,068
|
|
|
|
171,183
|
|
Property and equipment, net
|
|
|
23,476
|
|
|
|
21,274
|
|
Deferred income taxes
|
|
|
904
|
|
|
|
4,237
|
|
Other assets
|
|
|
1,872
|
|
|
|
1,973
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
345,355
|
|
|
$
|
417,255
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
14,188
|
|
|
$
|
13,606
|
|
Accrued salaries and related obligations
|
|
|
36,827
|
|
|
|
50,155
|
|
Other liabilities
|
|
|
7,530
|
|
|
|
7,123
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
58,545
|
|
|
|
70,884
|
|
Long-term debt
|
|
|
48,000
|
|
|
|
|
|
Other long-term liabilities
|
|
|
5,330
|
|
|
|
3,722
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
111,875
|
|
|
|
74,606
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 5,000 shares authorized; zero shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 70,000 shares authorized; 58,976 and 58,237 shares
issued, and 29,646 and 36,229 shares outstanding as of February 25, 2017 and May 28, 2016, respectively
|
|
|
590
|
|
|
|
582
|
|
Additional
paid-in
capital
|
|
|
397,282
|
|
|
|
388,763
|
|
Accumulated other comprehensive loss
|
|
|
(13,329
|
)
|
|
|
(10,794
|
)
|
Retained earnings
|
|
|
330,841
|
|
|
|
327,954
|
|
Treasury stock at cost, 29,330 and 22,008 shares as of February 25, 2017 and
May 28, 2016, respectively
|
|
|
(481,904
|
)
|
|
|
(363,856
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
233,480
|
|
|
|
342,649
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
345,355
|
|
|
$
|
417,255
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
Revenue
|
|
$
|
143,844
|
|
|
$
|
146,779
|
|
|
$
|
434,791
|
|
|
$
|
446,006
|
|
Direct cost of services, primarily payroll and related taxes for professional services
employees
|
|
|
91,597
|
|
|
|
91,851
|
|
|
|
271,507
|
|
|
|
274,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
52,247
|
|
|
|
54,928
|
|
|
|
163,284
|
|
|
|
171,267
|
|
Selling, general and administrative expenses
|
|
|
45,376
|
|
|
|
43,318
|
|
|
|
135,046
|
|
|
|
130,446
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
90
|
|
Depreciation expense
|
|
|
909
|
|
|
|
867
|
|
|
|
2,511
|
|
|
|
2,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,962
|
|
|
|
10,713
|
|
|
|
25,727
|
|
|
|
38,125
|
|
Interest expense
|
|
|
351
|
|
|
|
|
|
|
|
415
|
|
|
|
|
|
Interest income
|
|
|
(16
|
)
|
|
|
(52
|
)
|
|
|
(126
|
)
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
5,627
|
|
|
|
10,765
|
|
|
|
25,438
|
|
|
|
38,243
|
|
Provision for income taxes
|
|
|
2,743
|
|
|
|
4,808
|
|
|
|
11,224
|
|
|
|
16,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,884
|
|
|
$
|
5,957
|
|
|
$
|
14,214
|
|
|
$
|
21,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
$
|
0.42
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.09
|
|
|
$
|
0.16
|
|
|
$
|
0.41
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,764
|
|
|
|
37,073
|
|
|
|
33,916
|
|
|
|
37,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
30,584
|
|
|
|
37,615
|
|
|
|
34,550
|
|
|
|
37,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
0.11
|
|
|
$
|
0.10
|
|
|
$
|
0.33
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,884
|
|
|
$
|
5,957
|
|
|
$
|
14,214
|
|
|
$
|
21,766
|
|
Foreign currency translation adjustment, net of tax
|
|
|
509
|
|
|
|
842
|
|
|
|
(2,535
|
)
|
|
|
(830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
3,393
|
|
|
$
|
6,799
|
|
|
$
|
11,679
|
|
|
$
|
20,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
(Amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Treasury Stock
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Retained
|
|
|
Total
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(Amounts in thousands)
|
|
Balances as of May 28, 2016
|
|
|
58,237
|
|
|
$
|
582
|
|
|
$
|
388,763
|
|
|
|
22,008
|
|
|
$
|
(363,856
|
)
|
|
$
|
(10,794
|
)
|
|
$
|
327,954
|
|
|
$
|
342,649
|
|
Exercise of stock options
|
|
|
289
|
|
|
|
3
|
|
|
|
3,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,647
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,658
|
|
Tax shortfall from stock-based compensation arrangements
|
|
|
|
|
|
|
|
|
|
|
(4,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,276
|
)
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
359
|
|
|
|
4
|
|
|
|
4,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,497
|
|
Issuance of restricted stock
|
|
|
92
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Issuance of restricted stock out of treasury stock to board of director members
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
838
|
|
|
|
|
|
|
|
(838
|
)
|
|
|
|
|
Cancellation of shares
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,358
|
|
|
|
(118,886
|
)
|
|
|
|
|
|
|
|
|
|
|
(118,886
|
)
|
Cash dividends declared ($0.33 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,489
|
)
|
|
|
(10,489
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,535
|
)
|
|
|
|
|
|
|
(2,535
|
)
|
Net income for the nine months ended February 25, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,214
|
|
|
|
14,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of February 25, 2017
|
|
|
58,976
|
|
|
$
|
590
|
|
|
$
|
397,282
|
|
|
|
29,330
|
|
|
$
|
(481,904
|
)
|
|
$
|
(13,329
|
)
|
|
$
|
330,841
|
|
|
$
|
233,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,214
|
|
|
$
|
21,766
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,511
|
|
|
|
2,696
|
|
Stock-based compensation expense
|
|
|
4,658
|
|
|
|
5,028
|
|
Excess tax benefits from stock-based compensation
|
|
|
(6
|
)
|
|
|
(185
|
)
|
Loss (gain) on disposal of assets
|
|
|
20
|
|
|
|
(4
|
)
|
Bad debt expense
|
|
|
214
|
|
|
|
1,118
|
|
Deferred income taxes
|
|
|
3,468
|
|
|
|
687
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(651
|
)
|
|
|
(5,715
|
)
|
Prepaid expenses and other current assets
|
|
|
(188
|
)
|
|
|
(686
|
)
|
Income taxes
|
|
|
(7,347
|
)
|
|
|
(3,204
|
)
|
Other assets
|
|
|
236
|
|
|
|
93
|
|
Accounts payable and accrued expenses
|
|
|
817
|
|
|
|
(799
|
)
|
Accrued salaries and related obligations
|
|
|
(12,968
|
)
|
|
|
(12,028
|
)
|
Other liabilities
|
|
|
1,948
|
|
|
|
(1,720
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
6,926
|
|
|
|
7,047
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Redemption of short-term investments
|
|
|
24,957
|
|
|
|
35,000
|
|
Purchase of short-term investments
|
|
|
|
|
|
|
(34,983
|
)
|
Proceeds from sale of fixed assets
|
|
|
215
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(4,039
|
)
|
|
|
(1,676
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
21,133
|
|
|
|
(1,659
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
3,647
|
|
|
|
4,929
|
|
Proceeds from issuance of common stock under Employee Stock Purchase Plan
|
|
|
4,497
|
|
|
|
4,462
|
|
Purchase of common stock
|
|
|
(118,886
|
)
|
|
|
(20,007
|
)
|
Proceeds from use of Revolving Credit Facility
|
|
|
58,000
|
|
|
|
|
|
Repayment of Revolving Credit Facility
|
|
|
(10,000
|
)
|
|
|
|
|
Debt issuance costs
|
|
|
(190
|
)
|
|
|
|
|
Cash dividends paid
|
|
|
(10,859
|
)
|
|
|
(10,410
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
6
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(73,785
|
)
|
|
|
(20,841
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(756
|
)
|
|
|
(306
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(46,482
|
)
|
|
|
(15,759
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
91,089
|
|
|
|
87,250
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
44,607
|
|
|
$
|
71,491
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three and
nine months ended February 25, 2017 and February 27, 2016
1. Description of the Company and its Business
Resources Connection, Inc. (Resources Connection), a Delaware corporation, was incorporated on November 16, 1998. Resources
Connection is a multinational professional services firm; its operating entities primarily provide services under the name Resources Global Professionals (RGP or the Company). The Company is organized around client service
teams utilizing experienced professionals and provides consulting and business support services in the areas of accounting; finance; governance, risk and compliance management; corporate advisory, strategic communications and restructuring;
information management; human capital; supply chain management; and legal and regulatory. The Company has offices in the United States (U.S.), Asia, Australia, Canada, Europe and Mexico.
The Companys fiscal year consists of 52 or 53 weeks, ending on the last Saturday in May. The third quarters of fiscal 2017 and 2016
each consisted of 13 weeks.
2. Summary of Significant Accounting Policies
Interim Financial Information
The financial information as of and for the three and nine months ended February 25, 2017 and February 27, 2016 is unaudited but
includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of its financial position at such dates and the operating results and cash flows for those periods. The fiscal
2016
year-end
balance sheet data was derived from audited financial statements, and certain information and note disclosures normally included in annual financial statements prepared in accordance with
generally accepted accounting principles in the U.S. (GAAP) have been condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules or regulations; however, the Company believes the disclosures made are
adequate to make the information presented not misleading.
The results of operations for the interim periods presented are not necessarily
indicative of the results of operations to be expected for the fiscal year. These condensed interim financial statements should be read in conjunction with the audited financial statements for the year ended May 28, 2016, which are included in
the Companys Annual Report on Form
10-K
for the year then ended
(File No. 0-32113).
Cash, Cash Equivalents and Short-Term Investments
The Company considers cash on hand, deposits in banks, and short-term investments purchased with an original maturity date of three months or
less to be cash and cash equivalents. The carrying amounts reflected in the consolidated balance sheets for cash, cash equivalents and short-term investments approximate their fair values due to the short maturities of these instruments.
Client Reimbursements of
Out-of-Pocket
Expenses
The Company recognizes all reimbursements received from clients for
out-of-pocket
expenses as revenue and all such expenses as direct cost of services. Reimbursements received from clients were $2.5 million and $2.4 million for the three months ended
February 25, 2017 and February 27, 2016, respectively, and $7.3 million and $8.0 million for the nine months ended February 25, 2017 and February 27, 2016, respectively.
Foreign Currency Translation
The financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the exchange rates effective at the end of the period, income and expense items are translated at average exchange rates prevailing during the period and the related translation adjustments are
recorded as a component of accumulated other comprehensive income or loss within the Consolidated Balance Sheets. Gains and losses from foreign currency transactions are included in the Consolidated Statements of Operations.
Net Income Per Share Information
The Company presents both basic and diluted earnings per common share (EPS). Basic EPS is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the period, calculated using the treasury stock method for stock
options. Under the treasury stock method, assumed proceeds include the amount the employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized and the amount of tax
benefits that would be recorded in additional
paid-in
capital when the award becomes deductible. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive
effect. Stock options for which the exercise price exceeds the average market price per common share over the period are anti-dilutive and are excluded from the calculation.
8
The following table summarizes the calculation of net income per common share for the periods
indicated (amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
Net income
|
|
$
|
2,884
|
|
|
$
|
5,957
|
|
|
$
|
14,214
|
|
|
$
|
21,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
29,764
|
|
|
|
37,073
|
|
|
|
33,916
|
|
|
|
37,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
29,764
|
|
|
|
37,073
|
|
|
|
33,916
|
|
|
|
37,186
|
|
Potentially dilutive shares
|
|
|
820
|
|
|
|
542
|
|
|
|
634
|
|
|
|
591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dilutive shares
|
|
|
30,584
|
|
|
|
37,615
|
|
|
|
34,550
|
|
|
|
37,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
$
|
0.42
|
|
|
$
|
0.59
|
|
Dilutive
|
|
$
|
0.09
|
|
|
$
|
0.16
|
|
|
$
|
0.41
|
|
|
$
|
0.58
|
|
Anti-dilutive shares not included above
|
|
|
4,189
|
|
|
|
5,286
|
|
|
|
4,678
|
|
|
|
4,690
|
|
Stock-Based Compensation
The Company recognizes compensation expense for all share-based awards made to employees and directors, including employee stock options,
restricted stock grants and employee stock purchases made via the Companys Employee Stock Purchase Plan (the ESPP), based on estimated fair value at the date of grant.
The Company estimates the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as an expense over the requisite service periods. Stock option awards vest over four years and restricted stock award vesting is determined on an individual grant basis under the Companys
2014 Performance Incentive Plan (2014 Plan). The Company determines the estimated value of stock option awards using the Black-Scholes valuation model. The Company recognizes stock-based compensation expense on a straight-line basis over
the service period for options and restricted stock that are expected to vest and records adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.
See Note 8
Stock-Based Compensation Plans
for further information on the 2014 Plan and stock-based compensation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates
and assumptions are adequate, actual results could differ from the estimates and assumptions used.
3. Intangible Assets and Goodwill
Amortization of the Companys intangible assets was completed during fiscal 2016 and there was no outstanding balance of intangibles as of
February 25, 2017 or May 28, 2016. Amortization expense related to trade name and trademark intangibles was $30,000 and $90,000 for the three and nine months ended February 27, 2016, respectively.
The following table summarizes the activity in the Companys goodwill balance (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
Goodwill, beginning of year
|
|
$
|
171,183
|
|
|
$
|
170,878
|
|
Impact of foreign currency exchange rate changes
|
|
|
(1,115
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Goodwill, end of period
|
|
$
|
170,068
|
|
|
$
|
170,868
|
|
|
|
|
|
|
|
|
|
|
9
4. Income Taxes
The Companys provision for income taxes was $2.7 million (effective tax rate of approximately 49%) and $4.8 million (effective
tax rate of approximately 44%) for the three months ended February 25, 2017 and February 27, 2016, respectively, and $11.2 million (effective tax rate of approximately 44%) and $16.5 million (effective tax rate of approximately
43%) for the nine months ended February 25, 2017 and February 27, 2016, respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax rate because of the volatility in its international
operations which span numerous tax jurisdictions.
The provision for income taxes in the three and nine months ended February 25, 2017 and
February 27, 2016 results from taxes on income in the U.S. and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a
lower benefit for losses in certain foreign jurisdictions with tax rates lower than the U.S. statutory rates. The effective tax rate increased for the three months ended February 25, 2017 due to the lower profitability in the Companys
domestic and foreign operations, increasing the percentage impact of permanent differences between book and tax income.
The Company
recognized a benefit of approximately $673,000 and $488,000 related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the third quarter of fiscal 2017 and 2016, respectively,
and $1.7 million for both the nine months ended February 25, 2017 and February 27, 2016.
See
Note 12
Recent Accounting Pronouncements
, for a discussion of the early adoption of Accounting Standards Update (ASU)
2015-17,
related to the balance sheet
classification of deferred income taxes.
5. Long-Term Debt
In October 2016, the Company entered into a $120 million secured revolving credit facility (Facility) with Bank of America,
consisting of (i) a $90 million revolving loan facility, which includes a $5 million sublimit for the issuance of standby letters of credit (Revolving Loan), and (ii) a $30 million reducing revolving loan
facility, any amounts of which may not be reborrowed after being repaid (Reducing Revolving Loan). The Facility is available for working capital and general corporate purposes, including potential acquisitions and stock repurchases. Our
obligations under the Facility are guaranteed by all of the Companys domestic subsidiaries and secured by essentially all assets of the Company, Resources Connection LLC and their domestic subsidiaries, subject to certain customary exclusions.
Borrowings under the Facility bear interest at a rate per annum of either, at the Companys option, (i) a LIBO rate defined in the Facility plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus a margin of 0.25% or
0.50%, with the applicable margin depending on the Companys consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of Americas prime rate, (ii) the federal funds rate plus 0.50% and (iii) the
Eurodollar rate plus 1.0%. The Company pays an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.15% to 0.25% depending upon on the Companys consolidated leverage ratio. The Facility expires
October 17, 2021.
In November 2016, the Company borrowed $58.0 million under the Facility to fund a portion of the purchase
price of its modified Dutch auction tender offer. See Note 6
Stockholders Equity
, for additional information about the tender offer. During the third quarter of fiscal 2017, the Company reduced the amount borrowed by
$10.0 million. As of February 25, 2017, the outstanding balance on the Facility was $49.2 million, including $1.2 million of outstanding letters of credit issued under the Facility. There is $40.8 million remaining to borrow
under the Revolving Loan and $30.0 million remaining under the Reducing Revolving Loan as of February 25, 2017. As of February 25, 2017, the interest rate on the Companys borrowings was 2.28% on one tranche of $24.0 million
based on a
1-month
LIBOR plus 1.5% and 2.5% on a second tranche of $24.0 million based on a
3-month
LIBOR plus 1.5%.
The Facility contains both affirmative and negative covenants. Covenants include, but are not limited to, limitations on the Companys
and its subsidiaries ability to incur liens, incur additional indebtedness, make certain restricted payments, merge or consolidate and make disposition of assets. In addition, the Facility requires us to comply with financial covenants
limiting the Companys total funded debt, minimum interest coverage ratio and maximum leverage ratio. The Company was in compliance with all financial covenants under the Facility as of February 25, 2017.
Upon the occurrence of an event of default under the Facility, the lender may cease making loans, terminate the Facility and declare all
amounts outstanding to be immediately due and payable. The Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things,
non-payment
defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults.
10
6. Stockholders Equity
Stock Repurchase Program
In July 2015, the Companys board of directors approved a stock repurchase program (the July 2015 program), authorizing the
repurchase, at the discretion of the Companys senior executives, of the Companys common stock for an aggregate dollar limit not to exceed $150 million. Repurchases under the program may take place in the open market or in privately
negotiated transactions and may be made pursuant to a Rule
10b5-1
plan. During the three months ended February 25, 2017, the Company purchased 400,102 shares of its common stock on the open market at an
average price of $17.31 per share, for approximately $6.9 million. During the nine months ended February 25, 2017, the Company purchased 843,358 shares of its common stock on the open market at an average price of $15.99 per share, for
approximately $13.5 million. As of February 25, 2017, approximately $125.1 million remained available for future repurchases of the Companys common stock under the July 2015 program.
Tender Offer for Common Stock
In October 2016, the Company commenced a modified Dutch auction tender offer to purchase up to 6,000,000 shares of common stock at a price not
greater than $16.00 per share and not less than $13.50 per share. In November 2016, the Company exercised its right to increase the size of the tender offer by up to 2.0% of its outstanding common stock. The tender offer period expired on
November 15, 2016 and on November 22, 2016, the Company purchased 6,515,264 shares of its common stock at a per share price of $16.00, excluding transaction costs, for approximately $104.2 million. These shares are currently held as
treasury stock. The tender offer was funded through borrowings of $58.0 million under the Facility and the remainder with cash on hand.
7. Supplemental Disclosure of Cash Flow Information
The following table presents information regarding income taxes paid and
non-cash
investing and
financing activities (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
Income taxes paid
|
|
$
|
15,116
|
|
|
$
|
18,975
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Capitalized leasehold improvements paid directly by landlord
|
|
$
|
1,026
|
|
|
$
|
405
|
|
|
|
|
|
|
|
|
|
|
Dividends declared, not paid
|
|
$
|
3,295
|
|
|
$
|
3,675
|
|
|
|
|
|
|
|
|
|
|
8. Stock-Based Compensation Plans
Stock Options and Restricted Stock
The maximum number of shares of the Companys common stock that may be issued or transferred pursuant to awards under the 2014 Plan equals
the sum of: (1) 2,400,000 shares, plus (2) the number of shares subject to stock options granted under the Resources Connection, Inc. 2004 Performance Incentive Plan and the 1999 Long Term Incentive Plan (the Prior Stock Plans) and
outstanding as of September 3, 2014 (the date at which the Prior Stock Plans terminated), which expire, or for any reason are cancelled or terminated, after that date without being exercised, plus (3) the number of shares subject to
restricted stock, restricted stock unit and other full-value awards granted under the Prior Stock Plans that were outstanding and unvested as of September 3, 2014, which are forfeited, terminated, cancelled, or otherwise reacquired after that
date without having become vested. As of February 25, 2017, 2,636,000 shares were available for award grant purposes under the 2014 Plan, subject to future increases as described in (2) and (3) above and subject to increase as
then-outstanding awards expire or terminate without having become vested or exercised, as applicable.
Awards under the 2014 Plan may
include, but are not limited to, stock options and restricted stock grants. Stock option grants generally vest in equal annual installments over four years and terminate ten years from the date of grant. Restricted stock award vesting is determined
on an individual grant basis. Awards of restricted stock under the 2014 Plan will be counted against the available share limit as two and a half shares for every one share actually issued in connection with the award. The Companys policy is to
issue shares from its authorized shares upon the exercise of stock options.
11
The following table summarizes the stock option activity for the nine months ended
February 25, 2017 (number of shares under option and aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
Under Option
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at May 28, 2016
|
|
|
7,347
|
|
|
$
|
16.08
|
|
|
|
5.41
|
|
|
$
|
10,109
|
|
Granted, at fair market value
|
|
|
1,212
|
|
|
$
|
14.52
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(289
|
)
|
|
$
|
12.60
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(172
|
)
|
|
$
|
14.12
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(787
|
)
|
|
$
|
29.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 25, 2017
|
|
|
7,311
|
|
|
$
|
15.12
|
|
|
|
5.82
|
|
|
$
|
17,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at February 25, 2017
|
|
|
4,655
|
|
|
$
|
15.66
|
|
|
|
4.27
|
|
|
$
|
10,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at February 25, 2017
|
|
|
7,040
|
|
|
$
|
15.14
|
|
|
|
5.69
|
|
|
$
|
17,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, which is the
difference between the Companys closing stock price on the last trading day of the third quarter of fiscal 2017 and the exercise price multiplied by the number of shares that would have been received by the option holders if they had exercised
their in the money options on February 25, 2017. This amount will change based on changes in the fair market value of the Companys common stock. The aggregate intrinsic value of stock options exercised for the three months
ended February 25, 2017 and February 27, 2016 was $514,000 and $15,000, respectively, and for the nine months ended February 25, 2017 and February 27, 2016 was $1.0 million and $1.8 million, respectively.
Stock-Based Compensation Expense
As of February 25, 2017, there was $8.3 million of total unrecognized compensation cost related to unvested employee stock options
granted. That cost is expected to be recognized over a weighted-average period of 33 months. Stock-based compensation expense included in selling, general and administrative expenses was $1.5 million for both the three months ended
February 25, 2017 and February 27, 2016, and $4.7 million and $5.0 million for the nine months ended February 25, 2017 and February 27, 2016, respectively; this consisted of stock-based compensation expense related to
employee stock options, employee stock purchases made via the Companys ESPP and restricted stock awards. Included in stock-based compensation expense for the nine months ended February 25, 2017 was
non-cash
stock-based compensation expense of approximately $400,000 related to the accelerated vesting of options previously granted to a senior executive in connection with his departure from the Company.
Included in stock-based compensation expense for the nine months ended February 27, 2016 was approximately $900,000 related to the accelerated vesting of options previously granted to Donald Murray in connection with his transition from
Executive Chairman to Chairman. There were no capitalized share-based compensation costs during the nine months ended February 25, 2017 and February 27, 2016.
The Company granted 110,987 shares and 127,720 shares of restricted stock during the three and nine months ended February 25, 2017,
respectively, and 44,275 shares and 50,354 shares of restricted stock during the three and nine months ended February 27, 2016, respectively. Stock-based compensation expense for existing restricted stock awards for the three months ended
February 25, 2017 and February 27, 2016 was $212,000 and $154,000, respectively, and $561,000 and $440,000 for the nine months ended February 25, 2017 and February 27, 2016, respectively. There were 189,612 unvested restricted
shares, with approximately $2.9 million of remaining unrecognized compensation cost, as of February 25, 2017.
The Company
recognizes compensation expense for only the portion of stock options and restricted stock that is expected to vest, rather than recording forfeitures when they occur. If the actual number of forfeitures differs from that estimated by management,
additional adjustments to compensation expense may be required in future periods.
The Company reflects, in its Consolidated Statements of
Cash Flows, the tax impact resulting from tax deductions in excess of expense recognized in its Consolidated Statements of Operations as a financing cash flow, which will impact the Companys future reported cash flows from operating
activities. Gross excess tax benefits totaled $6,000 and $185,000 for the nine months ended February 25, 2017 and February 27, 2016, respectively.
Employee Stock Purchase Plan
The Companys ESPP allows qualified employees (as defined in the ESPP) to purchase designated shares of the Companys common stock at
a price equal to 85% of the lesser of the fair market value of common stock at the beginning or end of each semi-annual stock purchase period. The ESPPs term expires October 16, 2024. A total of 5,900,000 shares of common stock may
be issued under the ESPP. The Company issued 359,000 and 325,000 shares of common stock pursuant to the ESPP during the nine months ended February 25, 2017 and the year ended May 28, 2016, respectively. There were 918,000 shares
of common stock available for issuance under the ESPP as of February 25, 2017.
12
9. Segment Information and Enterprise Reporting
The Company discloses information regarding operations outside of the U.S. The Company operates as one segment. The accounting policies
for the domestic and international operations are the same as those described in Note 2 -
Summary of Significant Accounting Policies
in the Notes to Consolidated Financial Statements included in the Companys Annual Report on Form
10-K
for the fiscal year ended May 28, 2016. Summarized information regarding the Companys domestic and international operations is shown in the following table (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the
Three Months Ended
|
|
|
Revenue for the
Nine Months Ended
|
|
|
Long-Lived Assets (1) as of
|
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
|
February 25,
2017
|
|
|
May 28,
2016
|
|
United States
|
|
$
|
116,920
|
|
|
$
|
121,016
|
|
|
$
|
350,205
|
|
|
$
|
364,659
|
|
|
$
|
174,168
|
|
|
$
|
172,155
|
|
The Netherlands
|
|
|
3,992
|
|
|
|
3,830
|
|
|
|
12,683
|
|
|
|
11,572
|
|
|
|
17,070
|
|
|
|
17,728
|
|
Other
|
|
|
22,932
|
|
|
|
21,933
|
|
|
|
71,903
|
|
|
|
69,775
|
|
|
|
2,306
|
|
|
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143,844
|
|
|
$
|
146,779
|
|
|
$
|
434,791
|
|
|
$
|
446,006
|
|
|
$
|
193,544
|
|
|
$
|
192,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Long-lived assets are comprised of goodwill and property and equipment.
|
10. Legal Proceedings
The Company is involved in certain legal matters arising in the ordinary course of business. In the opinion of management, all such matters, if
disposed of unfavorably, would not have a material adverse effect on the Companys financial position, cash flows or results of operations.
11.
Subsequent Event
On April 5, 2017, the Company announced a restructuring plan involving a reduction in 60 management and
administrative positions (approximately 7.7% of management and administrative headcount) as well as the consolidation of two offices into existing locations within a reasonable proximity. The Company will record approximately $2.0-$2.5 million
for severance and lease related termination costs in the quarter ended May 27, 2017. On an annualized basis, these actions should produce cost savings of approximately $7.0 million.
12. Recent Accounting Pronouncements
Accounting
Pronouncements Adopted During Current Fiscal Year
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.
In
November 2015, the Financial Accounting Standards Board (FASB) issued ASU
2015-17.
The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet
rather than being separated into current and noncurrent portions. ASU
2015-17
is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. As permitted, the
Company early adopted ASU
2015-17
during the first quarter of fiscal year 2017 on a retrospective basis. Accordingly, current deferred taxes have been reclassified as noncurrent on the May 28, 2016
Consolidated Balance Sheet. This reclassification decreased current deferred tax assets by $8.4 million and increased noncurrent deferred tax assets by $8.4 million. The Company also netted noncurrent deferred tax liabilities of
$5.0 million against noncurrent deferred tax assets.
13
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period
Adjustments.
In September 2015, the FASB issued ASU
2015-16.
This ASU eliminates the requirement to retrospectively account for changes to provisional amounts initially recorded in a business combination.
ASU
2015-16
requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined, including
the effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The Company adopted this guidance as of the beginning of fiscal 2017 and will consider it during future business combinations.
Presentation of Financial Statements-Going Concern (Subtopic
205-40):
Disclosure of Uncertainties
about an Entitys Ability to Continue as a Going Concern.
In August 2014, the FASB issued ASU
2014-15.This
ASU provides new guidance regarding managements responsibility in evaluating whether
there is substantial doubt about a companys ability to continue as a going concern and to provide related footnote disclosures. The Company adopted this guidance as of the beginning of fiscal 2017.
Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance
Target Could Be Achieved after the Requisite Service Period.
In June 2014, the FASB issued ASU
2014-12.
This ASU provides new guidance requiring that a performance target that affects vesting and could be
achieved after the requisite service period be treated as a performance condition. The Company adopted this guidance as of the beginning of fiscal 2017. The Company does not currently have any performance based awards and thus the adoption has not
had a material impact on its consolidated financial statements.
Accounting Pronouncements Pending Adoption
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
In August 2016, the FASB issued ASU
2016-15,
which provides authoritative guidance designed to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Examples include cash payments
for debt prepayment or debt extinguishment; contingent consideration payments made after a business combination; and proceeds from the settlement of corporate-owned life insurance policies.
The new standard is effective for financial
statements for annual and interim periods within those annual periods beginning after December 15, 2017 (for the Company, fiscal 2019). Early adoption is permitted. The Company believes the adoption of this guidance will not have a material
impact on its consolidated financial statements.
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting.
In March 2016, the FASB issued ASU
2016-09.
The new standard modifies several aspects of the accounting and reporting for employee share-based payments and related tax accounting
impacts, including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. The new standard is
effective for financial statements for annual and interim periods within those annual periods beginning after December 15, 2016 (for the Company, fiscal 2018); early adoption is permitted. The Company is currently evaluating the impact the
adoption of this new standard will have on its consolidated financial statements but anticipates three potential impacts: a) added volatility to the Companys effective tax rate from the change in accounting for income taxes; b) changes to its
classification of excess tax benefits on the Consolidated Statement of Cash Flows; and c) change in the accounting for forfeitures, as the guidance allows the Company to account for forfeitures as they occur, rather than estimating the expected
forfeitures over the course of the vesting period. The Company will continue to evaluate the impact of adoption of this guidance and its preliminary assessments are subject to change.
Leases (Topic 842): Leases.
In February 2016, the FASB issued ASU
2016-02,
which amends the
existing guidance to require lessees to recognize operating lease obligations on their balance sheets by recording the rights and obligations created by those leases. The requirements are effective for financial statements for annual periods and
interim periods within those annual periods beginning after December 15, 2018 (for the Company, fiscal 2020), and early adoption is permitted. The Company is currently evaluating the impact that ASU
2016-02
will have on its consolidated financial statements and believes that it will have a significant impact on the Companys reported balance sheet assets and liabilities. Under current accounting
guidelines, the Companys office leases are operating lease arrangements, in which rental payments are treated as operating expenses and there is no recognition of the arrangement on the balance sheet as an asset with related obligation to the
lessor.
Revenue from Contracts with Customers (Topic 606)
: In May 2014, the FASB issued ASU
2014-09,
a comprehensive new revenue recognition standard that will supersede most existing revenue recognition guidance and is intended to improve and converge revenue recognition and related financial
reporting requirements. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. The guidance provides a number of steps to apply to achieve that core principle and requires additional disclosures. In August 2015, the FASB issued ASU
2015-14,
which delays the required implementation date for the Company until fiscal 2019, although the Company has the option to adopt this guidance beginning in fiscal 2018. The standard allows for either
full retrospective adoption, meaning the standard is applied to all periods presented, or cumulative effect adoption, meaning the standard is applied only to the most current period presented in the financial statements. In
addition, in March 2016, the FASB issued
ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients (Topic 606), which provides clarifying guidance in certain areas and adds some practical
expedients. The effective date for this ASU is the same as the effective date for
ASU 2014-09.
We intend to implement the standard using the modified retrospective approach, which recognizes
14
the cumulative effect (if any) of application recognized on that date. The Company is currently evaluating the impact of adoption of this guidance, including required disclosures, and based upon
our current analysis, does not expect a significant impact on processes, systems or controls. The Company will continue to evaluate the impact of adoption of this guidance and its preliminary assessments are subject to change.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified
Public Accountants and the SEC did not, or are not expected to, have a material effect on the Companys results of operations, financial position or cash flows.
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with our consolidated financial statements and accompanying notes. This discussion and analysis contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to expectations concerning matters that are not historical facts. Such forward-looking statements may be identified by words such as
anticipates, believes, can, continue, could, estimates, expects, intends, may, plans, potential,
predicts, remain, should, or will or the negative of these terms or other comparable terminology. These statements, and all phases of our operations, are subject to known and unknown risks,
uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements and those of our industry to differ materially from those expressed or implied by these forward-looking statements. You are urged to
carefully review the disclosures we make concerning risks, uncertainties and other factors that may affect our business or operating results, including those identified in Part II, Item 1A. Risk Factors below and in our Annual Report on Form
10-K
for the year ended May 28, 2016 (File
No. 0-32113).
Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also
affect our business or operating results. Readers are cautioned not to place undue reliance on the forward-looking statements included herein, which speak only as the date of this filing. We do not intend, and undertake no obligation, to update the
forward-looking statements in this filing to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, unless required by law to do so. References in this filing to Resources
Connection, RGP, Resources Global Professionals, Resources Global, the Company, we, us, and our refer to Resources Connection, Inc. and its subsidiaries.
Overview
Resources Global Professionals
(RGP) is a multinational consulting firm that provides consulting and business initiative support services to its global client base in the areas of accounting; finance; governance, risk and compliance management; corporate advisory,
strategic communications and restructuring; information management; human capital; supply chain management; and legal and regulatory. We assist our clients with projects requiring specialized expertise in:
|
|
|
Finance and accounting services including process transformation and improvement; financial reporting and analysis; technical and operational accounting; merger and acquisition due diligence; audit response;
implementation of new accounting standards such as the revenue recognition and lease pronouncements; and remediation support
|
|
|
|
Information management services including strategy development; program and project management; business and technology integration; data strategy, including data security and privacy; and business performance
management (such as core planning and consolidation systems)
|
|
|
|
Corporate advisory, strategic communications and restructuring services
|
|
|
|
Governance, risk and compliance management services including contract and regulatory compliance efforts under, for example, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes Oxley Act of
2002 (Sarbanes); Enterprise Risk Management; internal controls management; and operation and information technology audits
|
|
|
|
Supply chain management services including supply chain strategy development; procurement and supplier management; logistics and materials management; supply chain planning and forecasting; and Unique Device
Identification compliance
|
|
|
|
Human capital services including change management; organization development and effectiveness; and optimization of human resources technology and operations
|
|
|
|
Legal and regulatory services with projects, secondments or tactical needs including commercial transactions; compliance initiatives; law department operations and business strategy; and litigation support
|
15
We were founded in June 1996 by a team at Deloitte, led by our chairman, Donald B. Murray, who
was then a senior partner with Deloitte. Our founders created Resources Connection to capitalize on the increasing demand for high quality outsourced professional services. We operated as a part of Deloitte until April 1999. In April 1999, we
completed a
management-led
buyout in partnership with several investors. In December 2000, we completed our initial public offering of common stock and began trading on the NASDAQ Stock Market. We currently
trade on the NASDAQ Global Select Market under the ticker symbol RECN. We operate under the acronym RGP, branding for our operating entity name of Resources Global Professionals.
We operated solely in the United States (U.S.) until fiscal year 2000, when we opened our first three international offices and
began to expand geographically to meet the demand for project consulting services across the world. As of February 25, 2017, we served clients from offices in 20 countries, including 23 international offices and 44 offices in the United States.
Our global footprint allows the Company to support the global initiatives of our multinational client base.
On April 5, 2017, the
Company announced implementation of three strategic initiatives to help improve its performance in cost containment and revenue generation. The initiatives include (1) reducing selling, general and administrative expenses by approximately
$7.0 million per year; related to this initiative, the Company will take a charge of approximately $2.0-$2.5 million in the fourth quarter, primarily for severance expenses; (2) improving the sales culture and business development
process; and (3) redesigning the business model to enhance client offerings.
The first initiative, which includes a clear and
actionable plan for reducing costs in low growth markets, will streamline the Companys field and back office operations to better match current and anticipated demand in certain geographies. The implementation of this plan will result in a
reduction in overhead expenses and head count, and is expected to be completed by the end of the fiscal 2017 fourth quarter.
The second
priority initiative focuses on driving sales on an enterprise level to advance the account development and management activities in local markets, and will support a more sophisticated and robust sales culture. The initiative includes four major
components: the implementation of Salesforce as a global Customer Relationship Management tool and the realignment of the Companys sales process, the establishment of an enterprise-wide Business Development function, the creation of a
Strategic Client Program dedicated to expanding service and revenue in the Companys highest level clients, and the evolution of the incentive compensation plans to prioritize growth. These transition activities will involve multi-step changes
that are expected to take approximately
12-18
months to complete.
Finally, the Companys
decision to redesign its operating model is expected to enhance its client offerings, providing insightful business solutions as well as industry-leading project execution. For example, the Company will build deeper capabilities in project support
for M&A transactions and data governance, security & analytics solutions. The shift will also enable stronger inter-office collaboration and allow the Company to deliver improved solutions, expertise and talent to all of its clients
around the globe, regardless of their location.
Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial
Statements, which have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The following represents a summary of our critical accounting policies, defined as those policies that we believe: (a) are the most
important to the portrayal of our financial condition and results of operations and (b) involve inherently uncertain issues that require managements most difficult, subjective or complex judgments. There have been no material changes in
our critical accounting policies, or in the estimates and assumptions underlying those policies, from those described in our Annual Report on Form
10-K
for the year ended May 28, 2016.
Valuation of long-lived assets
We assess the potential impairment of long-lived tangible and intangible assets periodically or
whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our goodwill is not subject to periodic amortization. This asset is considered to have an indefinite life and its carrying value is required to be
assessed by us for impairment at least annually. Depending on future market values of our stock, our operating performance and other factors, these assessments could potentially result in impairment reductions of this intangible asset in the future
and this adjustment may materially affect the Companys future financial results and financial condition.
16
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts for
estimated losses resulting from our clients failing to make required payments for services rendered. We estimate this allowance based upon our knowledge of the financial condition of our clients (which may not include knowledge of all significant
events), review of historical receivable and reserve trends and other pertinent information. While such losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the
same credit loss rates that we have in the past. A significant change in the liquidity or financial position of our clients could cause unfavorable trends in receivable collections and additional allowances may be required. These additional
allowances could materially affect the Companys future financial results.
Income taxes
In order to prepare our
Consolidated Financial Statements, we are required to make estimates of income taxes, if applicable, in each jurisdiction in which we operate. The process incorporates an assessment of any current tax exposure together with temporary differences
resulting from different treatment of transactions for tax and financial statement purposes. These differences result in deferred tax assets and liabilities that are included in our Consolidated Balance Sheets. The recovery of deferred tax assets
from future taxable income must be assessed and, to the extent recovery is not likely, we will establish a valuation allowance. An increase in the valuation allowance results in recording additional tax expense and any such adjustment may materially
affect the Companys future financial results. If the ultimate tax liability differs from the amount of tax expense we have reflected in the Consolidated Statements of Operations, an adjustment of tax expense may need to be recorded and this
adjustment may materially affect the Companys future financial results and financial condition.
Revenue recognition
We primarily charge our clients on an hourly basis for the professional services of our consultants. We recognize revenue once services have been rendered and invoice the majority of our clients in the United States on a weekly basis. Some of our
clients served by our international offices are billed on a monthly basis. Our clients are contractually obligated to pay us for all hours billed. To a much lesser extent, we also earn revenue if a client hires one of our consultants. This type of
contractually
non-refundable
revenue is recognized at the time our client completes the hiring process.
Stock-based compensation
Under our 2014 Performance Incentive Plan, officers, employees, and outside directors have received or
may receive grants of restricted stock, stock units, options to purchase common stock or other stock or stock-based awards. Under our Employee Stock Purchase Plan (ESPP), eligible officers and employees may purchase our common stock in
accordance with the terms of the plan.
The Company estimates a value for employee stock options on the date of grant using an
option-pricing model. We have elected to use the Black-Scholes option-pricing model which takes into account assumptions regarding a number of highly complex and subjective variables. These variables include the expected stock price volatility over
the term of the awards and actual and projected employee stock option exercise behaviors. Additional variables to be considered are the expected term, expected dividends and the risk-free interest rate over the expected term of our employee stock
options. In addition, because stock-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures must be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If facts and circumstances change and we employ different assumptions in future
periods, the compensation expense recorded may differ materially from the amount recorded in the current period.
The Company uses its
historical volatility over the expected life of the stock option award to estimate the expected volatility of the price of its common stock. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our
employee stock options. The impact of expected dividends ($0.11 per share in each quarter of fiscal 2017 and $0.10 per share in each quarter of fiscal 2016) is also incorporated in determining the estimated value per share of employee stock option
grants. Such dividends are subject to quarterly board of director approval. The Companys expected life of stock option grants is 5.6 years for
non-officers
and 8.1 years for officers. The
Company uses its historical volatility over the expected life of the stock option award to estimate the expected volatility of the price of its common stock. The Company reviews the underlying assumptions related to stock-based compensation at least
annually.
We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
17
Results of Operations
The following tables set forth, for the periods indicated, our Consolidated Statements of Operations data. These historical results are not
necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
|
|
(Amounts in thousands)
|
|
|
(Amounts in thousands)
|
|
Revenue
|
|
$
|
143,844
|
|
|
$
|
146,779
|
|
|
$
|
434,791
|
|
|
$
|
446,006
|
|
Direct cost of services
|
|
|
91,597
|
|
|
|
91,851
|
|
|
|
271,507
|
|
|
|
274,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
52,247
|
|
|
|
54,928
|
|
|
|
163,284
|
|
|
|
171,267
|
|
Selling, general and administrative expenses
|
|
|
45,376
|
|
|
|
43,318
|
|
|
|
135,046
|
|
|
|
130,446
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
90
|
|
Depreciation expense
|
|
|
909
|
|
|
|
867
|
|
|
|
2,511
|
|
|
|
2,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,962
|
|
|
|
10,713
|
|
|
|
25,727
|
|
|
|
38,125
|
|
Interest expense
|
|
|
351
|
|
|
|
|
|
|
|
415
|
|
|
|
|
|
Interest income
|
|
|
(16
|
)
|
|
|
(52
|
)
|
|
|
(126
|
)
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
5,627
|
|
|
|
10,765
|
|
|
|
25,438
|
|
|
|
38,243
|
|
Provision for income taxes
|
|
|
2,743
|
|
|
|
4,808
|
|
|
|
11,224
|
|
|
|
16,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,884
|
|
|
$
|
5,957
|
|
|
$
|
14,214
|
|
|
$
|
21,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We also assess the results of our operations using EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin. EBITDA
is defined as our earnings before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus stock-based compensation expense. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by revenue. These measures
assist management in assessing our core operating performance and the Company believes they are also useful to investors as an alternative measure of our operating performance. The following table presents EBITDA, Adjusted EBITDA and Adjusted EBITDA
Margin for the periods indicated and includes a reconciliation of such measures to net income, the most directly comparable GAAP financial measure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
|
|
(Amounts in thousands)
|
|
|
(Amounts in thousands)
|
|
Net income
|
|
$
|
2,884
|
|
|
$
|
5,957
|
|
|
$
|
14,214
|
|
|
$
|
21,766
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
90
|
|
Depreciation expense
|
|
|
909
|
|
|
|
867
|
|
|
|
2,511
|
|
|
|
2,606
|
|
Interest expense
|
|
|
351
|
|
|
|
|
|
|
|
415
|
|
|
|
|
|
Interest income
|
|
|
(16
|
)
|
|
|
(52
|
)
|
|
|
(126
|
)
|
|
|
(118
|
)
|
Provision for income taxes
|
|
|
2,743
|
|
|
|
4,808
|
|
|
|
11,224
|
|
|
|
16,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
6,871
|
|
|
|
11,610
|
|
|
|
28,238
|
|
|
|
40,821
|
|
Stock-based compensation expense
|
|
|
1,508
|
|
|
|
1,483
|
|
|
|
4,658
|
|
|
|
5,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
8,379
|
|
|
$
|
13,093
|
|
|
$
|
32,896
|
|
|
$
|
45,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
143,844
|
|
|
$
|
146,779
|
|
|
$
|
434,791
|
|
|
$
|
446,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA Margin
|
|
|
5.8
|
%
|
|
|
8.9
|
%
|
|
|
7.6
|
%
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The financial measures and key performance indicators we use to assess our financial and operating performance
above are not defined by, or calculated in accordance with, GAAP. A
non-GAAP
financial measure is defined as a numerical measure of a companys financial performance that (i) excludes amounts, or is
subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the Consolidated Statements of Operations; or (ii) includes amounts, or is subject
to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are
non-GAAP
financial measures. We believe that
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin, which are used by management to assess the core performance of our Company, provide useful information to our investors because they are alternative financial measures that investors can also use
to assess the core performance of the Company and compare it to the Companys peers. EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are
18
not measurements of financial performance or liquidity under GAAP and should not be considered in isolation or construed as substitutes for net income or other cash flow data prepared in
accordance with GAAP for purposes of analyzing our profitability or liquidity. These measures should be considered in addition to, and not as a substitute for, net income, earnings per share, cash flows or other measures of financial performance
prepared in conformity with GAAP.
Further, EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin have the following limitations:
|
|
|
Although depreciation and amortization are
non-cash
charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA and Adjusted EBITDA
do not reflect any cash requirements for such replacements;
|
|
|
|
Stock based compensation is an element of our long-term incentive compensation program, although we exclude it as an expense from Adjusted EBITDA when evaluating our ongoing operating performance for a particular
period; and
|
|
|
|
Other companies in our industry may calculate Adjusted EBITDA and Adjusted EBITDA Margin differently than we do, limiting their usefulness as comparative measures.
|
Due to these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin should not be considered a substitute for performance measures
calculated in accordance with GAAP.
Three Months Ended February 25, 2017 Compared to Three Months Ended February 27, 2016
Percentage change computations are based upon amounts in thousands.
Revenue
.
Revenue decreased $3.0 million, or 2.0%, to $143.8 million for the three months ended
February 25, 2017 from $146.8 million for the three months ended February 27, 2016. We deliver our services to clients, whether multi-national or locally based, in a similar fashion across the globe. Bill rates decreased 2.5% (1.7%
constant currency) and hours worked increased 0.6% between the two periods. A portion of the bill rate decrease is the result of currency fluctuations. The revenue decrease is partially attributable to reduced business consulting opportunities in
the economically challenged financial services and energy sectors. As presented in the table below, revenue increased in the third quarter of fiscal 2017 compared to the same quarter of fiscal 2016 in Asia Pacific and Europe but declined in North
America.
Our financial results are subject to fluctuations in the exchange rates of foreign currencies in relation to the United States
dollar (U.S. dollar). Revenues denominated in foreign currencies are translated into U.S. dollars at the monthly average exchange rates in effect during each period. Thus, as the value of the U.S. dollar strengthens relative to the
currencies of our
non-United
States based operations, our translated revenue (and expenses) will be lower; conversely, if the value of the U.S. dollar weakens relative to the currencies of our
non-United
States based operations, our translated revenue (and expenses) will be higher. Using the comparable fiscal 2016 third quarter conversion rates, international revenues would have been higher than reported
under GAAP by approximately $1.2 million in the third quarter of fiscal 2017. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue increased in Europe and Asia Pacific
by 11.1% and 5.5%, respectively, while decreasing in North America by 3.2%.
The number of consultants on assignment as of
February 25, 2017 was 2,611 compared to 2,584 consultants engaged as of February 27, 2016.
We operated 67 (23 abroad) offices
as of February 25, 2017 and 68 (23 abroad) as of February 27, 2016. Our clients do not sign long-term contracts with us. As such, there can be no assurance as to future demand levels for the services that we provide or that future results
can be reliably predicted by considering past trends.
Revenue for the Companys practice areas across the globe consisted of the
following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the
Three Months Ended
|
|
|
|
|
|
% of Total
|
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
|
%
Change
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
North America
|
|
$
|
119,126
|
|
|
$
|
123,194
|
|
|
|
(3.3
|
)%
|
|
|
82.8
|
%
|
|
|
83.9
|
%
|
Europe
|
|
|
14,381
|
|
|
|
13,740
|
|
|
|
4.7
|
%
|
|
|
10.0
|
|
|
|
9.4
|
|
Asia Pacific
|
|
|
10,337
|
|
|
|
9,845
|
|
|
|
5.0
|
%
|
|
|
7.2
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143,844
|
|
|
$
|
146,779
|
|
|
|
(2.0
|
)%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Cost of Services
.
Direct cost of services decreased $300,000, or 0.3%, to
$91.6 million for the three months ended February 25, 2017 from $91.9 million for the three months ended February 27, 2016. The decrease in the amount of direct cost of
19
services between the periods was primarily attributable to a decrease of 1.7% in the average pay rate per hour of our consultants, partially offset by an increase of 0.6% in the number of hours
worked; a portion of the decrease in average pay rate per hour is the result of currency fluctuations.
Direct cost of services as a
percentage of revenue was 63.7% and 62.6% for the three months ended February 25, 2017 and February 27, 2016, respectively. The direct cost of services percentage of revenue was higher in the third quarter of fiscal 2017 primarily because
of an unfavorable change in the bill rate/pay rate ratio and higher medical coverage expenses in the fiscal 2017 quarter as compared to the prior year quarter.
Our target direct cost of services percentage is 60% for all of our offices.
Selling, General and Administrative Expenses
.
Selling, general and administrative expense (S, G & A)
as a percentage of revenue was 31.5% and 29.5% for the quarters ended February 25, 2017 and February 27, 2016, respectively. The higher current quarter percentage is the result of reduced leverage from the revenue in the third quarter of
fiscal 2017 as well as an increase in overall S, G & A spend in the current quarter. In addition, S, G & A increased to $45.4 million for the third quarter of fiscal 2017 from $43.3 million for the same period in the prior
year. The primary cause of the $2.1 million increase in S, G & A during the third quarter of fiscal 2017 was compensation and related benefit costs attributable to investments in the Companys managing consultant program to provide
more specific skill sets to address client evolving needs and business development professionals in United States offices with high growth potential.
Management and administrative headcount increased to 783 at the end of the third quarter of fiscal 2017 from 769 at the end of the third
quarter of fiscal 2016.
Sequential Operations
.
On a sequential quarter basis, fiscal 2017 third quarter revenues
decreased approximately 2.5% (1.8% constant currency), from $147.6 million to $143.8 million. Third quarter revenue declined primarily because of the Christmas, New Years and Chinese New Years holidays during the third quarter
while the only significant holiday in the second quarter was Thanksgiving in the U.S. Comparing the two quarters, hours worked decreased 2.7% while average bill rates remained the same. The Companys sequential revenue decreased in North
America (0.8%), Europe (9.8%) and Asia Pacific (10.6%). On a constant currency basis, using the comparable second quarter fiscal 2017 conversion rates, sequential revenue decreased in North America (0.7%), Europe (7.0%) and Asia Pacific (6.8%).
Direct cost of services as a percentage of revenue was 63.7% and 61.7% in the third and second quarters of fiscal 2017, respectively; the
higher direct cost of services percentage in the third quarter is primarily the result of higher payroll related taxes with the reset of limit rates at the beginning of the new calendar year and an increase in cost of medical coverage under the
Companys self-insured medical program.
The ratio of S, G & A to revenue increased from 31.2% for the quarter ended
November 26, 2016 to 31.5% for the quarter ended February 25, 2017. The ratio changed unfavorably because of the decreased revenue in the third quarter; total spend in the third quarter declined to $45.4 million from
$46.1 million in the previous quarter. The previous quarter included costs of approximately $1.5 million in severance and
non-cash
stock-based compensation expense related to the accelerated vesting
of options previously granted to a senior executive in connection with his departure from the Company. The third quarter S, G & A spend was impacted by higher payroll related taxes with the reset of limit rates at the beginning of the new
calendar year.
Amortization and Depreciation Expense.
The Company completed amortization of all remaining amortizable
intangible assets as of the end of fiscal 2016 and thus there was no amortization expense during the third quarter of fiscal 2017. Amortization of intangible assets was $30,000 for the three months ended February 27, 2016.
Depreciation expense was $909,000 for the three months ended February 25, 2017 compared to $867,000 for the three months ended
February 27, 2016.
Interest Expense (Income)
.
As described further below under the caption
Liquidity and
Capital Resources
, the Company entered into a $120 million secured revolving credit facility (Facility) with Bank of America in October 2016. The Facility is available for working capital and general corporate purposes,
including potential acquisitions and stock repurchases. On November 21, 2016, the Company completed its Dutch auction tender offer, purchasing approximately 6.5 million shares of the Companys common stock for approximately
$104.2 million, excluding transaction costs, funded partially by borrowing $58.0 million under the Facility. Borrowings under the Facility bear interest at a rate per annum of either, at the Companys option, (i) a LIBO rate
defined in the Facility plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus a margin of 0.25% or 0.50% with the applicable margin depending on the Companys consolidated leverage ratio. The alternate base rate is the
highest of (i) Bank of Americas prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company also pays an unused commitment fee on the average daily unused portion of the Facility at a
rate of 0.15% to 0.25%, depending upon our leverage ratio.
Total interest expense for the third quarter of fiscal 2017, including
commitment fees, was approximately $351,000. There was no interest expense in the corresponding quarter of fiscal 2016. During the third quarter of fiscal 2017, the Company repaid $10.0 million on the Facility and had outstanding borrowings of
$49.2 million as of February 25, 2017, including outstanding letters of credit of $1.2 million. As of February 25, 2017, the interest rate on the Companys borrowings was 2.28% on one tranche of $24.0 million based on a
1-month
LIBOR plus 1.5% and 2.5% on a second tranche of $24.0 million based on a
3-month
LIBOR plus 1.5%.
20
The Companys interest income was $16,000 in the third quarter of fiscal 2017 compared to
$52,000 in the third quarter of fiscal 2016. The decrease in interest income between the two periods is a result of the use of cash in the Dutch auction tender offer in November, reducing amounts available for investment for the remainder of the
fiscal year.
Income Taxes.
The Companys provision for income taxes was $2.7 million (effective tax rate of
approximately 49%) and $4.8 million (effective tax rate of approximately 44%) for the three months ended February 25, 2017 and February 27, 2016, respectively. The Company records tax expense based upon an actual effective tax rate
versus a forecasted tax rate because of the volatility in its international operations which span numerous tax jurisdictions.
The
provision for income taxes in the third quarter of fiscal 2017 and 2016 results from taxes on income in the United States and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on
operating loss carryforwards had previously been established and a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the United States statutory rates. The effective tax rate increased for the three months ended
February 25, 2017 due to the lower profitability in the Companys domestic and foreign operations, increasing the percentage impact of permanent differences between book and tax income. Periodically, the Company reviews the components of
both book and taxable income to analyze the adequacy of the tax provision. There can be no assurance that the Companys effective tax rate will remain constant in the future because of the lower benefit from the United States statutory rate for
losses in certain foreign jurisdictions and the limitation on the benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established.
The Company can only recognize a potential tax benefit for employees acquisition and subsequent sale of shares purchased through the
ESPP if the sale occurs within a certain defined period. As a result, the Companys provision for income taxes may fluctuate from these factors for the foreseeable future. The Company recognized a benefit of approximately $673,000 and $488,000
related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the third quarter of fiscal 2017 and 2016, respectively. The proportion of expense related to
non-qualified
stock option grants (for which the Company may recognize a tax benefit in the same quarter as the related compensation expense in most instances) is significant as compared to expense related to
disqualifying dispositions under the ESPP. However, the timing and amount of eligible disqualifying transactions under the ESPP cannot be predicted. The Company predominantly grants nonqualified stock options to employees in the United States.
Nine Months Ended February 25, 2017 Compared to Nine Months Ended February 27, 2016
Percentage change computations are based upon amounts in thousands.
Revenue
.
Revenue decreased $11.2 million, or 2.5%, to $434.8 million for the nine months ended
February 25, 2017 from $446.0 million for the nine months ended February 27, 2016. Bill rates were down 1.7% (0.8% constant currency) and hours worked decreased 0.9% between the two periods; a portion of the bill rate decrease is due
to currency fluctuations. The decrease in revenue is partially attributable to the Memorial Day holiday which occurred in the first quarter of fiscal 2017 while the same holiday in the prior calendar year fell in the fourth quarter of fiscal 2015.
The estimated reduction in revenue attributable to the holiday was $1.4 million. The revenue decrease is also attributable to reduced business consulting opportunities in the economically challenged financial services and energy sectors. As
presented in the table below, revenue increased in the first nine months of fiscal 2017 in Asia Pacific and Europe but declined in North America as compared to the first nine months of fiscal 2016. Client reimbursement revenue also declined $700,000
between the two periods.
Our financial results are subject to fluctuations in the exchange rates of foreign currencies in relation to the
U.S. dollar. Revenues denominated in foreign currencies are translated into U.S. dollars at the monthly average exchange rates in effect during each period. Thus, as the value of the U.S. dollar strengthens relative to the currencies of our
non-United
States based operations, our translated revenue (and expenses) will be lower; conversely, if the value of the U.S. dollar weakens relative to the currencies of our
non-United
States based operations, our translated revenue (and expenses) will be higher. Using the conversion rates for the comparable fiscal 2016 period, international revenues would have been higher than
reported under GAAP by approximately $2.0 million in the first nine months of fiscal 2017. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue increased in Europe
by 9.9% and Asia Pacific by 3.2% but decreased in North America by 3.9%.
21
Revenue for the Companys practice areas across the globe consisted of the following
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the
Nine Months Ended
|
|
|
|
|
|
% of Total
|
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
|
%
Change
|
|
|
February 25,
2017
|
|
|
February 27,
2016
|
|
North America
|
|
$
|
357,154
|
|
|
$
|
372,176
|
|
|
|
(4.0
|
)%
|
|
|
82.2
|
%
|
|
|
83.4
|
%
|
Europe
|
|
|
44,434
|
|
|
|
42,369
|
|
|
|
4.9
|
%
|
|
|
10.2
|
|
|
|
9.5
|
|
Asia Pacific
|
|
|
33,203
|
|
|
|
31,461
|
|
|
|
5.5
|
%
|
|
|
7.6
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
434,791
|
|
|
$
|
446,006
|
|
|
|
(2.5
|
)%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Cost of Services
.
Direct cost of services decreased $3.2 million, or 1.2%, to
$271.5 million for the nine months ended February 25, 2017 from $274.7 million for the nine months ended February 27, 2016. The decrease in the amount of direct cost of services was attributable to a decrease of 1.7% in the
average pay rate per hour and a 0.9% decrease in hours worked between the two nine month periods; a portion of the pay rate decrease is due to currency fluctuations.
Direct cost of services as a percentage of revenue was 62.4% and 61.6% for the nine months ended February 25, 2017 and February 27,
2016, respectively. The direct cost of services percentage of revenue was higher in fiscal 2017 primarily because of an unfavorable change in the bill rate/pay rate ratio and to a lesser extent the Memorial Day holiday timing discussed above.
Selling, General and Administrative Expenses
.
S, G & A as a percentage of revenue was 31.1% and 29.2% for the
nine months ended February 25, 2017 and February 27, 2016, respectively. The unfavorable change in the percentage of revenue calculation in the fiscal 2017 period was attributable to reduced leverage from decreased revenue between the two
periods as well as to the increase in S, G & A from the prior year period. S, G & A increased to $135.1 million for fiscal 2017 from $130.4 million for the same period in the prior year. The current year nine
month period S, G & A includes severance of approximately $1.1 million and
non-cash
stock-based compensation expense of approximately $400,000 related to the accelerated vesting of options
previously granted to a senior executive in connection with his departure from the Company. S, G & A for the prior year period includes additional
non-cash
stock-based compensation expense of
approximately $900,000 related to the accelerated vesting of options previously granted to Donald Murray in connection with his transition from Executive Chairman to Chairman. Absent these costs, S, G & A increased by $4.0 million in
the first nine months of fiscal 2017 as compared to the same prior year period; the primary cause of this increase was investments in the Companys managing consultant program to provide more specific skill sets to address evolving client needs
and business development professionals in United States offices with high growth potential.
Amortization and Depreciation
Expense.
The Company completed amortization of all remaining amortizable intangible assets as of the end of fiscal 2016 and thus there was no amortization expense during fiscal 2017. Amortization of intangible assets was $90,000 for the nine
months ended February 27, 2016.
Depreciation expense was $2.5 million for the nine months ended February 25, 2017 compared
to $2.6 million for the nine months ended February 27, 2016.
Interest Expense (Income)
.
As described
further below under the caption
Liquidity and Capital Resources
, the Company entered into a $120 million Facility with Bank of America in October 2016. Interest expense under the Facility, including commitment fees, for the period from
October 17, 2016 to the end of the third quarter was $415,000.
The Companys interest income was $126,000 in the first nine
months of fiscal 2017 compared to $118,000 in the same period of fiscal 2016. The improvement is from slightly higher returns on cash balances available for investment.
Income Taxes.
The Companys provision for income taxes was $11.2 million (effective tax rate of approximately 44%) and
$16.5 million (effective tax rate of approximately 43%) for the nine months ended February 25, 2017 and February 27, 2016, respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax
rate because of the volatility in its international operations which span numerous tax jurisdictions.
The provision for income taxes in
the first nine months of fiscal 2017 and 2016 results from taxes on income in the United States and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had
previously been established and a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the United States statutory rates. The effective tax rate increased for the nine months ended February 25, 2017 as the overall
profitability in our foreign operations improved but profits in the U.S. declines; foreign operations have a lower tax rate than the U.S. statutory rate. Periodically, the Company reviews the components of both book and taxable income to analyze the
adequacy of the tax provision. There can be no assurance that the Companys effective tax rate will remain constant in the future because of the lower benefit from the United States statutory rate for losses in certain foreign jurisdictions and
the limitation on the benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established.
The Company can only recognize a potential tax benefit for employees acquisition and subsequent sale of shares purchased through the
ESPP if the sale occurs within a certain defined period. As a result, the Companys provision for income taxes may
22
fluctuate from these factors for the foreseeable future. The Company recognized a benefit of approximately $1.7 million related to stock-based compensation for nonqualified stock options
expensed and for disqualifying dispositions under the ESPP during the nine months of both fiscal 2017 and 2016. The proportion of expense related to
non-qualified
stock option grants (for which the Company may
recognize a tax benefit in the same quarter as the related compensation expense in most instances) is significant as compared to expense related to disqualifying dispositions under the ESPP. However, the timing and amount of eligible disqualifying
transactions under the ESPP cannot be predicted. The Company predominantly grants nonqualified stock options to employees in the United States.
Comparability of Quarterly Results
.
Our quarterly results have fluctuated in the past and we believe they will continue
to do so in the future. Certain factors that could affect our quarterly operating results are described in Part II, Item 1A.Risk Factors. Due to these and other factors, we believe that
quarter-to-quarter
comparisons of our results of operations may not be meaningful indicators of future performance.
Liquidity and Capital Resources
Our
primary source of liquidity is cash provided by our operations and, historically, to a lesser extent, stock option exercises and ESPP purchases. On an annual basis, we have generated positive cash flows from operations since inception. Our ability
to continue to increase cash flow from operations in the future will be, at least in part, dependent on continued improvement in global economic conditions. As of February 25, 2017, the Company had $44.6 million of cash and cash
equivalents.
In October 2016, we entered into a $120 million Facility with Bank of America. The Facility is available for working
capital and general corporate purposes, including potential acquisitions and stock repurchases. The Facility allows the Company to choose the interest rate applicable to advances. See Note 5 to the Consolidated Financial Statements for further
information on the Facility. As of February 25, 2017, the Company had borrowings of approximately $48.0 million under the Facility and directed Bank of America to issue approximately $1.2 million of outstanding letters of credit for
the benefit of third parties related to operating leases and guarantees. As of February 25, 2017, the Company was in compliance with the financial covenants in the Facility.
In October 2016, we commenced a modified Dutch auction tender offer to purchase up to 6 million shares of our common stock at a price not
greater than $16.00 per share and not less than $13.50 per share. In November 2016, the Company exercised its right to increase the size of the tender offer by up to 2.0% of its outstanding common stock and, following expiration of the tender offer
on November 15, 2016, we purchased 6,515,264 shares of our common stock at a per share price of $16.00 for approximately $104.2 million, excluding transaction costs. We funded the tender offer through $58.0 million borrowed under the
Facility and the remainder with cash on hand.
Operating Activities
Operating activities provided $6.9 million in cash for the nine months ended February 25, 2017 compared to $7.0 million for the
nine months ended February 27, 2016. Cash provided by operations in the first nine months of fiscal 2017 resulted from net income of $14.2 million and
non-cash
items of $10.9 million, offset by
net unfavorable changes in operating assets and liabilities of $18.2 million. In the first nine months of fiscal 2016, cash provided by operations resulted from net income of $21.8 million and
non-cash
items of $9.3 million, offset by net unfavorable changes in operating assets and liabilities of $24.1 million.
Non-cash
items in both fiscal 2017 and
fiscal 2016 include depreciation and amortization and stock-based compensation expense. These charges do not reflect an actual cash outflow from the Company.
Investing Activities
Net
cash provided by investing activities was $21.1 million for the first nine months of fiscal 2017, compared to a use of cash of $1.7 million in the comparable prior year period. In the first nine months of fiscal 2017, redemptions of
short-term investments were $25.0 million as the Company accumulated cash from maturing investments in preparation for the tender offer; in the prior year period, purchases and redemptions of short-term investments were about the same.
Purchases of property and equipment increased approximately $2.4 million between the two periods as the Company completed several office relocations.
Financing Activities
Net
cash used in financing activities totaled $73.8 million and $20.8 million for the nine months ended February 25, 2017 and February 27, 2016, respectively. Net cash used in financing activities for the nine months ended
February 25, 2017 included $104.2 million, excluding transaction costs, used to purchase shares of our common stock in the modified Dutch auction tender offer, with $58.0 million of this amount borrowed under the Facility and the
remainder funded from the Companys existing cash balances. The Company also used $13.5 million to purchase approximately 843,000 shares of common stock on the open market during the first nine months of fiscal 2017. This compares to
$20.0 million in the first nine months of the prior fiscal year to purchase approximately 1.3 million shares of its common stock on the open market.
Proceeds from the exercise of employee stock options and issuance of shares via the Companys ESPP were approximately $1.2 million
lower in the first nine months of fiscal 2017 as compared to the comparable period of fiscal 2016. The Company also paid dividends on its common stock of $10.9 million in the first nine months of fiscal 2017, approximately $500,000 higher than
in the comparable period of the prior year. The Companys dividend rate for dividends declared each quarter of fiscal 2017 is $0.11 per common share, compared to $0.10 per common share in fiscal 2016. The Companys board of directors
declared a quarterly cash
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dividend of $0.11 per common share on January 19, 2017. The dividend of approximately $3.3 million, paid on March 15, 2017, is accrued in the Companys Consolidated Balance
Sheet as of February 25, 2017.
Our ongoing operations and anticipated growth in the geographic markets we currently serve will
require us to continue to make investments in office premises and capital equipment, primarily technology hardware and software. In addition, we may consider making strategic acquisitions. We currently believe that our current cash, ongoing cash
flows from our operations and funding available under our Facility will be adequate to meet our working capital and capital expenditure needs for at least the next 12 months. If we require additional capital resources to grow our business, either
internally or through acquisition, we may seek to sell additional equity securities or to increase our use of our Facility. In addition, if we decide to do additional share repurchases, we may fund these through existing cash balances or use of our
Facility. The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders. We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future.
In the event we are unable to obtain additional financing when needed, we may be compelled to delay or curtail our plans to develop our business or to pay dividends on our capital stock, which could have a material adverse effect on our operations,
market position and competitiveness.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 12 to the Consolidated Financial Statements included in Part I,
Item 1 of this Quarterly Report on Form
10-Q.
Off-Balance
Sheet
Arrangements
The Company has no
off-balance
sheet arrangements.
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