RECN Resources Connection Inc

PART I—FINANCIAL INFORMATION

The accompanying notes are an integral part of these consolidated financial statements.

4

The accompanying notes are an integral part of these consolidated financial statements.

5

The accompanying notes are an integral part of these consolidated financial statements.

6

The accompanying notes are an integral part of these consolidated financial statements.

7

RESOURCES CONNECTION, INC.

The Company recognizes revenues on a gross basis as it acts as a principal for primarily all of its revenue transactions. The Company has concluded that gross reporting is appropriate because the Company a) has the risk of identifying and hiring qualified consultants; b) has the discretion to select the consultants and establish the price and responsibilities for services to be provided; and c) bears the risk for services provided that are not fully paid for by clients. 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 $3.2 million and $2.9 million for the three months ended November 24, 2018 and November 25, 2017, respectively, and $6.5 million and $5.5 million for the six months ended November 24, 2018 and November 25, 2017, respectively.

The Company’s clients are contractually obligated to pay the Company for all hours billed. We invoice the majority of our clients on a weekly basis or, in certain circumstances, on a monthly basis, in accordance with our standard arrangement of payment due within 30 days. To a much lesser extent, the Company also earns revenue if one of its consultants is hired by, or if the Company places an outside candidate with, its client. Conversion fees or permanent placement fees are recognized when one of the Company’s professionals or a candidate identified by the Company, accepts an offer of permanent employment from a client and all requisite terms of the agreement have been met. Such conversion fees or permanent placement fees are recognized when the performance obligation is considered complete, which the Company considers a) when the consultant or candidate accepts the position; b) the consultant or candidate has notified either RGP or their current employer of their decision; and c) the start date is within the Company’s current quarter. Conversion fees were 0.4% of revenue for each of the three months ended November 24, 2018 and November 25, 2017, and 0.5% and 0.4% of revenue for the six months ended November 24, 2018 and November 25, 2017, respectively. Permanent placement fees were 0.6% and 0.2% of revenue for the three months ended November 24, 2018 and November 25, 2017, respectively, and 0.6% and 0.1% of revenue for the six months ended November 24, 2018 and November 25, 2017, respectively.

The Company’s contracts generally have termination for convenience provisions and do not have termination penalties. While our clients are contractually obligated to pay the Company for all hours billed, the Company does not have long-term agreements with its clients for the provision of services and the Company’s clients may terminate engagements at any time. All costs of compensating the Company’s professionals are the responsibility of the Company and are included in direct cost of services.

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 and the amount of compensation cost for future services the Company has not yet recognized. 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.

The following table summarizes the calculation of net income per common share for the periods indicated (in thousands, except per share amounts):

9

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, restricted stock units (“RSUs”) and employee stock purchases made via the Company’s 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 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 Company’s 2014 Performance Incentive Plan (the “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 9 —  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. Acquisitions

During fiscal 2018, the Company completed two acquisitions. The first acquisition, completed August 31, 2017 (the second quarter of fiscal 2018), was of taskforce – Management on Demand AG (“taskforce”) , a German based professional services firm founded in 2007, that provides clients with senior interim management and project management expertise. Subsequent to the acquisition, taskforce continues to operate as a separate brand. The Company paid initial consideration of €5.8 million (approximately $6.9 million at the date of acquisition) in a combination of cash and restricted stock.

In addition, the purchase agreement for taskforce requires additional earn-out payments to be made based on performance in calendar years 2017, 2018 and 2019. Under accounting rules for business combinations, obligations that are contingently payable to the sellers based upon the occurrence of one or more future events are recorded as a discounted liability on the Company’s balance sheet. The Company is obligated to pay the sellers in Euros as follows: for calendar year 2017, Adjusted EBITDA times 6.1 times 20%; and for both calendar years 2018 and 2019, Adjusted EBITDA times 6.1 times 15%; (Adjusted EBITDA is calculated as defined in the purchase agreement). The payment for calendar 2017 of €2.1 million was made March 28, 2018. The Company estimated the fair value of the obligation to pay the remaining contingent consideration for calendar years 2018 and 2019 based on a number of different projections of the estimated Adjusted EBITDA for each such years. The Company recorded this future obligation using a discount rate of approximately 11.0%, representing the Company’s weighted average cost of capital. The current estimated fair value of the contractual obligation to pay the contingent consideration for calendar years 2018 and 2019 totals €3.9 million (approximately $4.4 million based on the exchange rate on the last day of the second quarter of fiscal 2019) as of November 24, 2018. Each reporting period, the Company will estimate changes in the fair value of contingent consideration and any change in fair value will be recognized in the Company’s Consolidated Statements of Operations. The estimate of fair value of contingent consideration requires very subjective assumptions to be made of various potential Adjusted EBITDA results and discount rates. Future revisions to these assumptions could materially change the estimate of the fair value of contingent consideration and therefore could materially affect the Company’s future operating results. During the three and six months ended November 24, 2018, the Company decreased the estimated contingent consideration by €114,000 ($130,000) and €30,000 ($33,000), respectively, and also recognized accretion expense on the discounted liability. These amounts are included in S, G & A for the respective periods. Results of operations of taskforce are included in the Consolidated Statements of Operations from the date of acquisition.

The second acquisition occurred December 4, 2017 (the third quarter of fiscal 2018) when the Company acquired substantially all of the assets and assumed certain liabilities of Accretive Solutions, Inc. (“Accretive”). Accretive was a professional services firm that provided expertise in accounting and finance, enterprise governance, business technology and business transformation solutions to a wide variety of organizations in the U.S. and supported startups through its Countsy suite of back office services. The Company paid consideration of $20.0 million in cash and issued 1,072,000 shares of Resources Connection, Inc. common stock restricted for sale for four years; additional cash and shares of Company stock will be due after settlement of working capital adjustments. In addition, additional amounts may be paid to the sellers at the end of a certain period of time if there are no claims or may be used to satisfy any preacquisition claims in favor of the buyers. As of the end of the second quarter of fiscal 2019, the amounts due based on initial estimates of the resolution of these items are $0.1 million in cash and 108,000 in additional shares of common stock and are accrued as a liability on the balance sheet as of November 24, 2018. The Company completed its integration of the operations of Accretive into its business model as of the first day of fiscal 2019 and thus the Company is unable to estimate the impact of additional revenue attributable to the Accretive acquisition during fiscal 2019.

10

4. Intangible Assets and Goodwill

The following table summarizes details of the Company’s intangible assets and related accumulated amortization (amounts in thousands):

The Company recorded amortization expense of $1.0 million and $0.3 million for the three months ended November 24, 2018 and November 25, 2017, respectively, and $1.9 million and $0.3 million for the six months ended November 24, 2018 and November 25, 2017, respectively. The increase in the current fiscal year is due to the amortization of intangible assets acquired in the Accretive transaction. Future estimated intangible asset amortization expense (based on existing intangible assets) is $3.8 million, $3.8 million, $2.5 million, $1.8 million and $1.8 million for the years ending May 25, 2019, May 30, 2020, May 29, 2021, May 28, 2022 and May 27, 2023, respectively. The estimates of future intangible asset amortization expense do not incorporate the potential impact of future currency fluctuations when translating the financial results of the Company’s international operations that have amortizable intangible assets into U.S. dollars.

The following table summarizes the activity in the Company’s goodwill balance (in thousands):

5. Income Taxes

On December 22, 2017, Congress enacted H.R.1, the “Tax Cuts and Jobs Act” (“Tax Reform Act”), which made significant changes to U.S. federal income tax laws including reducing the corporate rate from 35% to 21% effective January 1, 2018. In December 2017, the SEC issued Staff Accounting Bulletin No. 118 which allows the Company to record provisional amounts related to the impact of the Tax Reform Act and adjust those amounts during a measurement period not to extend more than one year from date of enactment. During fiscal 2018, the Company recorded a provisional income tax benefit of approximately $0.8 million upon re-measurement of U.S. deferred tax assets and liabilities at the rate the balances are expected to be realized.

11

The Tax Reform Act also includes the Global Intangible Low-Tax Income (“GILTI”) provision, a new mechanism for taxing certain foreign profits, the Base Erosion Anti-Abuse Tax , a minimum tax on payments to related parties, and the Foreign-Derived Intangible Income provision, a tax incentive to earn income abroad. The Company is permitted to make an accounting policy election to account for GILTI as either a period charge when the tax arises or as a part of deferred taxes. Due to the complexity of the GILTI provisions, the Company is still evaluating the impact on future periods and has not yet elected an accounting policy regarding GILTI. The Company has recognized provisional tax impacts associated with GILTI as a current expense for the six months ended November 24, 2018.

The Company’s provision for income taxes was $5.1 million (effective tax rate of approximately 33%) and $2.1 million (effective tax rate of approximately 21%) for the three months ended November 24, 2018 and November 25, 2017, respectively, and $8.6 million (effective tax rate of approximately 35%) and $5.1 million (effective tax rate of approximately 33%) for the six months ended November 24, 2018 and November 25, 2017, 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 that span numerous tax jurisdictions.

The provision for income taxes in the three and six months ended November 24, 2018 and November 25, 2017 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 provision for income taxes increased for the three months ended November 24, 2018 compared to the prior year quarter because of improved global income. Also in the prior year quarter, the Company reversed $2.4 million of valuation allowances that offset deferred tax assets of certain foreign entities; there was no reversal in the current year quarter. Although the effective rate for the three months ended November 24, 2018 is positively impacted by the reduced US tax rate, the effective rate increased as the prior year quarter benefited from the aforementioned valuation allowance reversal.

The Company recognized a tax benefit of approximately $0.1 million and $0.2 million during the second quarter of fiscal 2019 and 2018, respectively and no net tax benefit and $0.6 million, during the first six months of fiscal 2019 and 2018, respectively, related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP.

12

6. Long-Term Debt

The Company has a $120 million secured revolving credit facility (“Facility”) with Bank of America, consisting of (i) a $90 million revolving loan facility (“Revolving Loan”), which includes a $5 million sublimit for the issuance of standby letters of credit, and (ii) a $30 million reducing revolving loan facility (“Reducing Revolving Loan”), any amounts of which may not be reborrowed after being repaid. The Facility is available for working capital and general corporate purposes, including potential acquisitions and stock repurchases. The Company’s obligations under the Facility are guaranteed by all of the Company’s 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 Company’s option, (i) a London Interbank Offered Rate (“LIBOR”) 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 Company’s consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of America’s 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 Company’s consolidated leverage ratio. The Facility expires October 17, 2021.

The Facility contains both affirmative and negative covenants. Covenants include, but are not limited to, limitations on the Company’s 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 the Company to comply with financial covenants limiting the Company’s 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 November 24, 2018.

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.

The Company’s borrowings on the Facility were $58.0 million as of November 24, 2018, all of which were under the Revolving Loan. In addition, the Company has $1.3 million of outstanding letters of credit issued under the Revolving Loan. The Company has $30.7 million remaining to borrow under the Revolving Loan and $30.0 million remaining under the Reducing Revolving Loan as of November 24, 2018. As of November 24, 2018, the interest rate on the Company’s borrowings was 4.0% on a tranche of $19.0 million (6-month LIBOR plus 1.50%), 4.1% on a tranche of $24.0 million (6-month LIBOR plus 1.50%) and 4.3% on a tranche of $15.0 million (6-month LIBOR plus 1.50%).

7. Stockholders’ Equity

Stock Repurchase Program

In July 2015, the Company’s board of directors approved a stock repurchase program (the “July 2015 program”), authorizing the repurchase, at the discretion of the Company’s senior executives, of the Company’s 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 November 24, 2018, the Company purchased 338,536 shares of its common stock on the open market at an average price of $16.36 per share, for approximately $5.5 million, and during the six months ended November 24, 2018, the Company purchased 806,448 shares of its common stock on the open market at an average price of $16.12 per share, for approximately $13.0 million. As of November 24, 2018, approximately $107.0 million remained available for future repurchases of the Company’s common stock under the July 2015 program.

8. Supplemental Disclosure of Cash Flow Information

The following table presents information regarding income taxes paid, interest paid and non-cash investing and financing activities (amounts in thousands):

13

9. Stock-Based Compensation Plans

Stock Options and Restricted Stock

The maximum number of shares of the Company’s 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, RSUs 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 November 24, 2018, 1,359,000 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, RSUs 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 RSUs and 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 Company’s policy is to issue shares from its authorized shares upon the exercise of stock options.

The following table summarizes the stock option activity for the six months ended November 24, 2018 (number of shares under option and aggregate intrinsic value in thousands):

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, which is the difference between the Company’s closing stock price on the last trading day of the second quarter of fiscal 2019 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 November 24, 2018. This amount will change based on changes in the fair market value of the Company’s common stock. The total pre-tax intrinsic value related to stock options exercised during the three months ended November 24, 2018 and November 25, 2017 was $2.3 million and $0.4 million, respectively, and during the six months ended November 24, 2018 and November 25, 2017 was $3.1 million and $0.5 million, respectively.

14

Stock-Based Compensation Expense

As of November 24, 2018, there was $10.5 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 38 months. Stock-based compensation expense included in selling, general and administrative expenses was $1.7 million and $1.5 million for the three months ended November 24, 2018 and November 25, 2017, respectively, and $3.0 million and $3.1 million for the six months ended November 24, 2018 and November 25, 2017, respectively. These amounts consisted of stock-based compensation expense related to employee stock options employee stock purchases made via the ESPP and restricted stock awards. In addition, commencing in the third quarter of fiscal 2018, stock-based compensation expense includes expense related to stock units credited under the Directors Deferred Compensation Plan. For the three and six months ended November 24, 2018, this expense was $41,000 and $75,000, respectively. As of November 24, 2018, there were 34,715 stock units not vested, with approximately $0.4 million of remaining unrecognized compensation cost. There were no capitalized share-based compensation costs during the six months ended November 24, 2018 or November 25, 2017.

The Company granted no restricted stock during the six months ended November 24, 2018 and granted 79,810 shares of restricted stock during the three and six months ended November 25, 2017. Stock-based compensation expense for existing restricted stock awards was $0.4 million and $0.3 million for the three months ended November 24, 2018 and November 25, 2017, respectively, and $0.8 million and $0.6 million for the six months ended November 24, 2018 and November 25, 2017, respectively. As of November 24, 2018, there were 202,775 unvested restricted shares, with approximately $2.3 million of remaining unrecognized compensation cost.

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.

Employee Stock Purchase Plan

The ESPP allows qualified employees (as defined in the ESPP) to purchase designated shares of the Company’s 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 ESPP’s term expires October 16, 2024. A total of 5,900,000 shares of common stock may be issued under the ESPP. The Company issued 166,000 and 338,000 shares of common stock pursuant to the ESPP during the six months ended November 24, 2018 and the year ended May 26, 2018, respectively. There were 414,000 shares of common stock available for issuance under the ESPP as of November 24, 2018.

10. 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 Company’s Annual Report on Form 10-K for the fiscal year ended May 26, 2018. Summarized information regarding the Company’s domestic and international operations is shown in the following table (amounts in thousands):

11. 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 Company’s financial position, cash flows or results of operations.

15

12. Recent Accounting Pronouncements

Accounting Pronouncements Adopted During Current Fiscal Year

Revenue from Contracts with Customers (Topic 606) : In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, a comprehensive new revenue recognition standard that supersedes current 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. Effective the beginning of fiscal year 2019 (May 27, 2018), the Company adopted ASC 606, Revenue from Contracts with Customers , using the modified retrospective method, which allows companies to apply the new revenue standard to reporting periods beginning in the year the standard is first implemented, while prior periods continue to be reported in accordance with previous accounting guidance. The adoption of ASC 606 did not have a significant impact on revenue recognition; therefore, the Company did not have an opening retained earnings adjustment. See Note 2— Summary of Significant Accounting Policies for additional information.

Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. In August 2018, the FASB issued ASU 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). An entity in a hosting arrangement that is a service contract must determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Costs that cannot be capitalized include training costs, certain data conversion costs, costs incurred during preliminary project and post implementation stages. Costs that are subject to evaluation for potential capitalization are incurred during the application development stage. The guidance also specifies factors to consider when developing the period over which to amortize the capitalized costs once the arrangement is deployed for usage by the entity and elements to consider in analyzing potential impairment of the asset.

The guidance is effective for financial statements for annual periods beginning after December 15, 2019 (for the Company, fiscal 2021) and for interim periods within those fiscal years. However, early adoption is permitted. The Company adopted this guidance prospectively in the first quarter of fiscal 2019 as the Company has an initiative involving a cloud computing arrangement that is a service contract for its processing of payroll. The initiative is now complete and the amount capitalized during fiscal 2019 was approximately $0.8 million and is accounted for in Other Assets in the Company’s Consolidated Balance Sheet.

Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting. In May 2017, the FASB issued ASU 2017-09, which clarifies when changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, modification accounting is only required if the fair value, vesting conditions or classification (equity or liability) of the new award are different from the original award immediately before the original award is modified. The new standard is effective for financial statements for annual periods beginning after December 15, 2017 and was adopted by the Company effective May 27, 2018. The guidance must be applied prospectively to awards modified on or after the adoption date. The future impact of ASU 2017-09 will be dependent on the nature of future stock award modifications.

Accounting Pronouncements Pending Adoption

Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13, which eliminates, adds and modifies certain fair value measurement disclosures. The ASU is effective for annual reporting periods beginning after December 15, 2019 (for the Company, fiscal 2021), including interim reporting periods within those annual periods, with early adoption permitted. We do not expect the adoption of this standard to have a material impact to our consolidated financial statements and related disclosures.

Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued ASU 2017-04, which provides guidance regarding the goodwill impairment testing process. The new standard eliminates Step 2 of the goodwill impairment test. If a company determines in Step 1 of the goodwill impairment test that the carrying value of goodwill is greater than the fair value, an impairment for that difference must be recorded in the income statement, rather than proceeding to Step 2. The new standard is effective for financial statements for annual periods beginning after December 15, 2019 (for the Company, fiscal 2021). Early adoption is permitted. Based on the Company’s most recent annual goodwill impairment test completed in fiscal 2018, the Company expects no initial impact on adoption.

Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU 2016-13, which provides guidance on accounting for credit losses, including trade receivables. The guidance requires the application of a current expected credit loss model, which measure credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts. The guidance is effective for annual periods beginning after December 15, 2019 (for the Company, fiscal 2021). The guidance requires companies to apply the requirements using a modified retrospective approach. The Company is currently evaluating the potential impact on the Consolidated Financial Statements and required disclosures.

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). The FASB has also subsequently issued certain additional ASUs with clarifications and improvements of ASU 2016-02 which the Company will consider during its implementation process. The Company is currently evaluating the impact ASU 2016-02 will have on its consolidated financial statements and believes it will have a significant impact on the Company’s Consolidated Balance Sheet assets and liabilities. Although the Company is still completing its assessment of the effect on the Consolidated Statements of Operations, the Company does not currently believe the adoption will have

16

a material impact. The Company has completed a preliminary qualitative assessment of its lease portfolio and is in the process of implementing a new lease software system and designing revised processes and controls to use such software to account for its leases in accordance with the new guidance. Under current accounting guidelines, the Company’s 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 the related obligation to the lessor as a liability.

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 Company’s results of operations, financial position or cash flows.

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 November 24, 2018, we served clients from offices in 21 countries, including 26 international offices and 48 offices in the United States. Our world-wide footprint allows the Company to support the global initiatives of our multinational client base.

The Company announced certain strategic initiatives in April 2017. The first initiative focused on cultivating a more sophisticated and robust sales culture. The Company has now completed this initiative. Among the features of the initiative are enhanced training activities; the alignment of the Company’s sales process using tools such as Salesforce.com and the establishment of an enterprise-wide business development function; and the current year initiation of a new incentive compensation program for individuals focused on profitable revenue generation and gross margin. The new incentive compensation program rewards individuals for achieving or exceeding pre-determined sales goals, with bonus multipliers applicable for exceeding goals; the rewards for sales achievement are tied to both gross margin goals and qualitative goals associated with the Company’s culture of “LIFE AT RGP”. Finally, to complete this initiative, the Company expanded its Strategic Client Program, which involves a dedicated account team for certain high profile clients with world-wide operations.

The Company is close to completing its second initiative to redesign the Company’s business model to enhance its client offerings, with a focus on building its integrated solutions capabilities and delivering multi-disciplinary offerings to its clients in three areas of focus –Transaction Services, Technical Accounting Services, and Data & Analytics. During fiscal 2018, the Company implemented the new operating model for sales, talent and integrated solutions within RGP for all of North America; that is, reporting relationships are now largely defined by functional area rather than on an office location basis. We believe this effort has already delivered improved revenue growth and improved customer experience into fiscal 2019. The rollout of the operating model will continue in Europe and Asia Pacific during the current fiscal year.

The third initiative focuses on cost containment. Goals of this initiative include (i) improving leverage of selling, general and administrative expenses (“S, G & A”) as a percentage of revenue and (ii) realizing cost synergies in the core business and with the Accretive acquisition. S, G & A as a percentage of revenue decreased to 29.1% in the second quarter of fiscal 2019 as compared to the first quarter’s 31.6%; RGP remains committed to managing its cost structure to achieve improved S, G & A performance as measured against revenue throughout fiscal 2019.

During fiscal 2018, the Company completed two acquisitions. The first acquisition, completed August 31, 2017 (the second quarter of fiscal 2018), was of taskforce – Management on Demand AG (“taskforce”) , a German based professional services firm founded in 2007, that provides clients with senior interim management and project management expertise. The Company paid initial consideration of €5.8 million (approximately $6.9 million at the date of acquisition) in a combination of cash and restricted stock.

In addition, the purchase agreement for taskforce requires additional earn-out payments to be made based on performance in calendar years 2017, 2018 and 2019. Under accounting rules for business combinations, obligations that are contingently payable to the sellers based upon the occurrence of one or more future events are recorded as a discounted liability on the Company’s balance sheet. The Company is obligated to pay the sellers in Euros as follows: for calendar year 2017, Adjusted EBITDA times 6.1 times 20%; and for both calendar years 2018 and 2019, Adjusted EBITDA times 6.1 times 15%; (Adjusted EBITDA is calculated as defined in the purchase agreement). The payment for calendar 2017 of €2.1 million was made March 28, 2018. The Company estimated the fair value of the obligation to pay the remaining contingent consideration for calendar years 2018 and 2019 based on a number of different projections of the estimated Adjusted EBITDA for each such years. The Company recorded this future obligation using a discount rate of approximately 11.0%, representing the Company’s weighted average cost of capital. The current estimated fair value of the contractual obligation to pay the contingent consideration for calendar years 2018 and 2019 totals €3.9 million (approximately $4.4 million based on the exchange rate on the last day of the second quarter of fiscal 2019) as of November 24, 2018. Each reporting period, the Company will estimate changes in the fair value of contingent consideration and any change in fair value will be recognized in the Company’s Consolidated Statements of Operations. The estimate of fair value of contingent consideration requires very subjective assumptions to be made of various potential Adjusted EBITDA results and discount rates. Future revisions to these assumptions could materially change the estimate of the fair value of contingent consideration and therefore could materially affect the Company’s future operating results. During the three and six months ended November 24, 2018, the Company decreased the estimated contingent consideration by €114,000 ($130,000) and €30,000 ($33,000), respectively, and also recognized accretion expense on the discounted liability. These amounts are included in S, G & A for the respective periods. Results of operations of taskforce are included in the Consolidated Statements of Operations from the date of acquisition.

18

The second acquisition occurred December 4, 2017 (the third quarter of fiscal 2018) when the Company acquired substantially all of the assets and assumed certain liabilities of Accretive Solutions, Inc. (“Accretive”). Accretive was a professional services firm that provided expertise in accounting and finance, enterprise governance, business technology and business transformation solutions to a wide variety of organizations in the U.S. and supported startups through its Countsy suite of back office services. The Company paid consideration of $20.0 million in cash and issued 1,072,000 shares of Resources Connection, Inc. common stock restricted for sale for four years; additional cash and shares of Company stock will be due after settlement of working capital adjustments. In addition, additional amounts may be paid to the sellers at the end of a certain period of time if there are no claims or may be used to satisfy any preacquisition claims in favor of the buyers. As of the end of the second quarter of fiscal 2019, the amounts due based on initial estimates of the resolution of these items are estimated at $0.1 million in cash and 108,000 in additional shares of common stock and are accrued as a liability on the balance sheet as of November 24, 2018. The Company completed its integration of the operations of Accretive into its business model as of the first day of fiscal 2019 and thus the Company is unable to estimate the impact of additional revenue attributable to the Accretive acquisition during fiscal 2019.

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 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 management’s most difficult, subjective or complex judgments. The Company’s accounting policies were revised in connection with the adoption of ASC 606 (described further in Note 2 “Summary of Significant Accounting Policies” in Part I, Item 1, of this Quarterly Report on Form 10-Q). 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 26, 2018.

Revenue recognition — Revenues are recognized when control of the promised service is transferred to our clients, in an amount that reflects the consideration expected in exchange for the services. Revenue is recorded net of sales or other transaction taxes collected from clients and remitted to taxing authorities. Revenues from contracts are recognized over time, based on hours worked by the Company’s professionals. The performance of the agreed-to service over time is the single performance obligation for revenues. Certain clients may receive discounts (for example, volume discounts or rebates) to the amounts billed. These discounts or rebates are considered variable consideration. Management evaluates the facts and circumstances of each contract and client relationship to estimate the variable consideration assessing the most likely amount to recognize and considering management’s expectation of the volume of services to be provided over the applicable period. Rebates are the largest component of variable consideration and are estimated using the most likely amount method prescribed by Accounting Standards Codification (“ASC”) Topic 606, contracts terms and estimates of revenue. Revenues are recognized net of variable consideration to the extent that it is probable that a significant reversal of revenues will not occur in subsequent periods.

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 the carrying value may not be recoverable. Identifiable intangibles assets are amortized over their lives, typically ranging from three to ten years. Goodwill is not subject to 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 Company’s future financial results and financial condition.

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 we will continue to experience the same credit loss rates 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 Company’s 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 Company’s 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 Company’s future financial results and financial condition.

19

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 (the “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 ($0.13 per share in the first and second quarters of fiscal 2019 and $0.12 per share in each quarter of fiscal 2018) 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 Company’s expected life of stock option grants is 5.7 years for non-officers and 8.2 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.

20

We also assess the results of our operations using EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin. EBITDA is defined as earnings before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus stock-based compensation expense plus or minus contingent consideration adjustments. 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:

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 company’s financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the 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 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 investors can also use to assess the core performance of the Company and compare it to the Company’s peers. EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not measurements of financial performance or liquidity under GAAP and should not be considered in isolation or construed as substitutes for net income or other cash flow data prepared in accordance with GAAP for purposes of analyzing our profitability or liquidity. These measures should be considered in addition to, and not as a substitute 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:

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.

21

Three Months Ended November 24, 2018 Compared to Three Months Ended November 25, 2017

Percentage change computations are based upon amounts in thousands.

Revenue . Revenue increased $32.1 million, or 20.5%, to $188.8 million for the three months ended November 24, 2018 from $156.7 million for the three months ended November 25, 2017. On a constant currency basis, revenue increased 21.3%. Revenue in the second quarter of fiscal 2019 includes revenue in North America attributable to historic clients of Accretive but it is not possible to isolate this revenue due to the completion of the integration of Accretive operations into RGP at the beginning of the first quarter of fiscal 2019. Accretive was acquired in the third quarter of fiscal 2018.

We deliver our services to clients, whether multi-national or locally based, in a similar fashion across the globe. Bill rates improved 0.8% (the same on a constant currency basis) and hours worked increased 19.6% between the two periods. We believe the improvement in revenue for the current quarter as compared to the prior year quarter is in part the product of the operational changes made throughout fiscal 2018, including the usage of Salesforce as a tool to measure individual productivity directly and structuring reporting lines with a function. In addition, we believe a portion of the revenue growth is attributable to client service and technical teams spending more time interacting with clients and prospects, improved alignment of our incentive systems to sales growth and increased sales efforts delivered by a focused business development team. Also in this current quarter, the Company’s financial service industry revenue exceeded the prior year and sequential quarters’ revenue, reversing a downward trend noted in previous quarters.

As presented in the table below, revenue increased in the second quarter of fiscal 2019 compared to the same quarter of fiscal 2018 in North America, Europe and Asia Pacific (dollars in thousands):

A significant portion of the increase in North America is attributable to the Accretive acquisition but the integration of Accretive operations into RGP’s existing North American operations prevents a specific analysis of the contribution of such operations.

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 2018 second quarter conversion rates, international revenues would have been higher than reported under GAAP by approximately $1.3 million in the second quarter of fiscal 2019. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue increased in North America, Europe and Asia Pacific by 25.8%, 4.2% and 7.4%, respectively.

The number of consultants on assignment as of November 24, 2018 was 3,389 compared to 2,746 consultants engaged as of November 25, 2017. With the integration of Accretive into RGP daily operations, we are unable to attribute a specific portion of the increase in headcount from the prior year quarter to that acquisition.

We operated 74 (26 abroad) offices as of November 24, 2018 and 69 (26 abroad) as of November 25, 2017. The change between the two years is the result of the addition of five offices acquired in the Accretive transaction.

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 we provide or that future results can be reliably predicted by considering past trends.

Direct Cost of Services . Direct cost of services increased $18.1 million, or 18.6%, to $115.4 million for the three months ended November 24, 2018 from $97.3 million for the three months ended November 25, 2017. On a constant currency basis, direct cost of services increased 20.0%. The primary reason for the change is that hours worked increased 19.6% between the two quarters (partially attributable to the Accretive acquisition); the average consultant pay rate per hour did not change between the two periods (and was the same on a constant currency basis).

Direct cost of services as a percentage of revenue was 61.1% and 62.1% for the three months ended November 24, 2018 and November 25, 2017, respectively. The direct cost of services as a percentage of revenue improved in the current quarter primarily because of improvement in the bill/pay ratio and in the cost of the Company’s self-insured medical program as compared to the prior year period.

22

Our target direct cost of services percentage is 60% in all of our markets.

Selling, General and Administrative Expenses . S, G & A as a percentage of revenue was 29.1% and 30.3% for the quarters ended November 24, 2018 and November 25, 2017, respectively. S, G & A increased to $55.0 million for the second quarter of fiscal 2019 from $47.5 million for the same period in the prior year primarily because we added S, G & A tied to the operations of the Accretive acquisition (now integrated with the operations of RGP). More specifically, the year over year increase is primarily attributable to: 1) $3.9 million of additional payroll and benefit costs from taskforce personnel, legacy Accretive personnel and new headcount to support the growth of critical markets; 2) $3.0 million related to increased commission and bonus expenses tied to the revenue growth of the business; 3) $0.8 million of marketing costs associated with driving revenue growth; and 4) increases of $0.6 million in rent and other categories; these costs were partially offset by net lower severance and acquisition costs of $0.8 million incurred in the prior year quarter.

Management and administrative headcount was 912 at the end of the second quarter of fiscal 2019 and 783 at the end of the second quarter of fiscal 2018.

Sequential Operations . On a sequential quarter basis, fiscal 2019 second quarter revenues increased approximately 5.7% (6.0% constant currency), from $178.6 million to $188.8 million. We believe a portion of the growth is attributable to continuing improvement in: time spent by client service and technical teams with clients and prospects; alignment of our incentive systems to sales growth; and sales efforts delivered by a focused business development team. We believe second quarter revenue increased also in part because consultants typically use fewer vacation hours during the second quarter compared to the first quarter, which includes the traditional summer vacation period. Hours worked during the second quarter increased 6.1% from the first quarter while average bill rates remained the same between the two quarters. The Company’s sequential revenue increased in North America (5.2%), Europe (12.0%) and Asia Pacific (0.9%). On a constant currency basis, using the comparable first quarter fiscal 2019 conversion rates, sequential revenue improved in North America (5.2%), Europe (13.1%) and Asia Pacific (3.2%).

Direct cost of services as a percentage of revenue was 61.1% and 61.8% in the second and first quarters of fiscal 2019, respectively; the improved direct cost of services percentage in the second quarter is primarily the result of the decrease in the amount of Company payroll tax expense experienced toward the end of the calendar year.

S, G & A as a percent of revenue was 29.1% for the second quarter of fiscal 2019 compared to 31.6% for the first quarter of fiscal 2019. Spend in the second quarter decreased $1.4 million to $55.0 million from $56.4 million in the previous quarter. The primary reasons for the change were lower benefit costs of $1.7 million, primarily related to payroll tax obligations that reduce as the calendar year nears its end; lower transformation expenses of $0.8 million; and lower spend in various other categories of $0.9 million partially offset by severance expenses of $0.9 million and increased commission and bonus expenses tied to the revenue growth of the business of $1.1 million.

Amortization and Depreciation Expense. Amortization of intangible assets was $1.0 million in the second quarter of fiscal 2019 as a result of amortization related to identifiable intangible assets acquired in the December 2017 acquisition of Accretive and September 2017 acquisition of taskforce . Those assets identified based upon the allocation of purchase price of Accretive include: $12.7 million for customer relationships (amortized over eight years) and $2.5 million for tradenames (amortized over three years); and for taskforce , $1.9 million for customer relationships (amortized over 3 years), $2.0 million for tradenames (amortized over 10 years), $0.8 million for the database of potential consultants (amortized over 3 years) and $1.0 million for non-competition agreements (amortized over 3 years). Amortization expense in the second quarter of fiscal 2018 was $0.3 million, reflecting the acquisition of identifiable intangible assets of taskforce during that quarter.

Depreciation expense was $1.2 million and $0.9 million in the second quarter of fiscal 2019 and 2018, respectively. The increase is primarily the result of depreciation on fixed assets acquired in the purchase of Accretive.

Interest Expense . Interest expense for the second quarter of fiscal 2019 was approximately $0.6 million compared to $0.4 million in the same period of fiscal 2018. The increase in the 2019 second quarter expense is the result of interest on incremental borrowings of $15.0 million to finance a portion of the acquisition of Accretive and generally higher interest rates. As of November 24, 2018, the interest rates on the Company’s borrowings were 4.0% on a tranche of $19.0 million (6-month LIBOR plus 1.50%), 4.1% on a tranche of $24.0 million (6-month LIBOR plus 1.50%) and 4.3% on a tranche of $15.0 million (6-month LIBOR plus 1.50%).

Income Taxes. On December 22, 2017, Congress enacted H.R.1, the “Tax Cuts and Jobs Act” (“Tax Reform Act”), which made significant changes to U.S. federal income tax laws including reducing the corporate rate from 35% to 21% effective January 1, 2018. In December 2017, the SEC issued Staff Accounting Bulletin No. 118 which allows the Company to record provisional amounts related to the impact of the Tax Reform Act and adjust those amounts during a measurement period not to extend more than one year from date of enactment.

23

The Tax Reform Act also includes the Global Intangible Low-Tax Income (“GILTI”) provision, a new mechanism for taxing certain foreign profits, the Base Erosion Anti-Abuse Tax, a minimum tax on payments to related parties, and the Foreign-Derived Intangible Income provision, a tax incentive to earn income abroad. The Company is permitted to make an accounting policy election to account for GILTI as either a period charge when the tax arises or as a part of deferred taxes. Due to the complexity of the GILTI provisions, the Company is still evaluating the impacts on future periods and has not yet elected an accounting policy regarding GILTI. The Company has recognized provisional tax impacts associated with GILTI as a current expense for the three months ended November 24, 2018.

The Company’s provision for income taxes was $5.1 million (effective tax rate of approximately 33%) and $2.1 million (effective tax rate of approximately 21%) for the three months ended November 24, 2018 and November 25, 2017, 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 that span numerous tax jurisdictions.

The provision for income taxes in the three months ended November 24, 2018 and November 25, 2017 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 provision for income taxes increased for the three months ended November 24, 2018 compared to the prior year quarter because of improved global income. Also in the prior year quarter, the Company reversed $2.4 million of valuation allowances that offset deferred tax assets of certain foreign entities; there was no reversal in the current year quarter. Although the current quarter effective rate is positively impacted by the reduced US tax rate, the effective rate increased from the three months ended November 26, 2017 primarily due to the favorable impact of the valuation allowance reversal benefit in the prior year quarter.

The Company recognized tax benefit of approximately $0.1 million and $0.2 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the second quarter of fiscal 2019 and 2018, respectively.

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 Company’s 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, the limitation on the benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established, and the unpredictability of timing and the amount of eligible disqualifying incentive stock options exercises.

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 quarter-to-quarter comparisons of our results of operations may not be meaningful indicators of future performance.

Six Months Ended November 24, 2018 Compared to Six Months Ended November 25, 2017

Percentage change computations are based upon amounts in thousands.

Revenue . Revenue increased $69.5 million, or 23.3%, to $367.4 million for the six months ended November 24, 2018 from $297.9 million for the six months ended November 25, 2017. On a constant currency basis, revenue increased 23.8%. Revenue in the first half of fiscal 2019 includes revenue in North America attributable to historic clients of Accretive but it is not possible to isolate this revenue due to the completion of the integration of Accretive operations into RGP at the beginning of the first quarter of fiscal 2019. Accretive was acquired in the third quarter of fiscal 2018. Bill rates improved 1.6% and hours worked increased 21.5% between the two periods; a significant portion of the increase in hours is due to the Accretive and taskforce acquisitions.

We believe the improvement in revenue for the current period compared to the prior year period is in part the product of the operational changes made throughout fiscal 2018, including the usage of Salesforce as a tool to measure individual productivity directly and structuring reporting lines with a function and client focus. In addition, we believe a portion of the revenue growth is attributable to client service and technical teams spending more time interacting with clients and prospects, improved alignment of our incentive systems to sales growth and increased sales efforts delivered by a focused business development team. Also in the current six month period , the Company’s financial service industry revenue exceeded the prior year comparable period’s revenue, reversing a downward trend noted in previous periods.

24

As presented in the table below, revenue increased in the first six months of fiscal 2019 compared to the same period of fiscal 2018 in North America, Europe and Asia Pacific (dollars in thousands):

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 of the comparable fiscal 2018 period, international revenues would have been higher than reported under GAAP by approximately $1.5 million in the first half of fiscal 2019. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue increased in North America, Europe and Asia Pacific by 26.1%, 16.8% and 11.5%, respectively.

Direct Cost of Services . Direct cost of services increased $41.0 million, or 22.2%, to $225.8 million for the six months ended November 24, 2018 from $184.8 million for the six months ended November 25, 2017. On a constant currency basis, direct cost of services increased 23.8%. The primary reason for the change is an increase in hours worked of 21.5% between the two quarters (partially attributable to the Accretive and taskforce acquisitions), and an increase in the average consultant pay rate per hour of 1.6%.

Direct cost of services as a percentage of revenue was 61.5% and 62.0% for the six months ended November 24, 2018 and November 25, 2017, respectively. The direct cost of services as a percentage of revenue improved slightly in the current quarter primarily because an increase in the bill/pay ratio was offset by a reduction in claims in the Company’s self-insured medical program as compared to the prior year.

Our target direct cost of services percentage is 60% in all of our markets.

Selling, General and Administrative Expenses . S, G & A as a percentage of revenue was 30.3% and 31.9% for the six months ended November 24, 2018 and November 25, 2017, respectively. S, G & A increased to $111.3 million for the first half of fiscal 2019 from $94.9 million for the same period in the prior year for the following primary reasons: we added S, G & A tied to the operations of the Accretive acquisition (now integrated with the operations of RGP) and the taskforce acquisition (which operates as a separate brand). More specifically, the year over year increase is primarily attributable to: 1) $10.5 million of additional payroll and benefit costs from taskforce personnel, legacy Accretive personnel and new headcount to support the growth of critical markets; 2) $5.6 million related to increased commission and bonus expenses tied to the revenue growth of the business; 3) $1.6 million of marketing costs associated with driving revenue growth; and 4) increases of $1.8 million in rent, bad debt and other categories; these costs were offset by lower severance and acquisition, transformation and integration costs of $3.1 million incurred in the prior year quarter.

Amortization and Depreciation Expense. Amortization of intangible assets was $1.9 million in the first half of fiscal 2019 as a result of amortization related to identifiable intangible assets acquired in the December 2017 acquisition of Accretive and September 2017 acquisition of taskforce . Amortization expense in the equivalent prior year period was $0.3 million reflecting the acquisition of identifiable intangible assets of taskforce during that period.

Depreciation expense was $2.3 million and $1.9 million in the first half of fiscal 2019 and 2018, respectively. The increase is primarily the result of depreciation on fixed assets acquired in the purchase of Accretive.

Interest Expense . Interest expense for the first half of fiscal 2019 was approximately $1.2 million compared to $0.7 million in the same period of fiscal 2018. The increase in the 2019 period is the result of interest on incremental borrowings of $15.0 million to finance a portion of the acquisition of Accretive and generally higher interest rates.

Income Taxes. The Company’s provision for income taxes was $8.6 million (effective tax rate of approximately 35%) and $5.1 million (effective tax rate of approximately 33%) for the six months ended November 24, 2018 and November 25, 2017, 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 that span numerous tax jurisdictions.

25

The provision for income taxes for the six months ended November 24, 2018 and November 25, 2017 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 provision for income taxes increased for the six months ended November 24, 2018 compared to the prior year period because of improved global income. Also in the prior year period, the Company reversed $2.4 million of valuation allowances that offset deferred tax assets of certain foreign entities; there was no reversal in the current year comparable period. Although the current period effective rate is positively impacted by the reduced US tax rate, the effective rate increased from the six months ended November 25, 2017 primarily due to the valuation allowance reversal benefit.

The Company recognized tax benefit of approximately $0.1 million $0.6 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the first half of fiscal 2019 and 2018, respectively.

Liquidity and Capital Resources

Our primary source of liquidity is cash provided by our operations and ability to access our $120 million secured revolving credit facility (“Facility”) with Bank of America 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, and we continued to do so for the year ended May 26, 2018. Our ability to generate positive cash flow from operations in the future will be, at least in part, dependent on continued stable global economic conditions. As of November 24, 2018, the Company had $40.8 million of cash and cash equivalents including $16.8 million held in international operations.

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. Borrowings under the Facility bear interest at a rate per annum of either, at the Company’s option, (i) LIBOR plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus margin of 0.25% or 0.50% with the applicable margin depending on the Company’s consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of America’s 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 Company’s consolidated leverage ratio. The Facility expires October 17, 2021. Additional information regarding the Facility is included in Note 6 – Long Term Debt in the Company’s Notes to the Consolidated Financial Statements for the three and six months ended November 24, 2018.

As of November 24, 2018, the Company had borrowings of approximately $58.0 million under the Facility and directed Bank of America to issue approximately $1.3 million of outstanding letters of credit for the benefit of third parties related to operating leases and guarantees. As of November 24, 2018 the Company was in compliance with the financial covenants in the Facility.

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 use of our Facility. In addition, if we decide to make 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.

Operating Activities

Operating activities for the six months ended November 24, 2018 provided cash of $1.7 million compared to $1.6 million for the six months ended November 25, 2017. Cash used in operations in the first six months of fiscal 2019 resulted from net income of $16.3 million and non-cash items of $12.3 million. These amounts were offset by net unfavorable changes in operating assets and liabilities of $27.0 million due primarily to the increase in the balance of accounts receivable as of the end of the second quarter of fiscal 2019 reflecting increasing revenue during the first half of the fiscal year. In the first six months of fiscal 2018, cash provided by operations resulted from net income of $10.3 million and non-cash items of $4.7 million, partially offset by net unfavorable changes in operating assets and liabilities of $13.3 million. The primary driver of the change in cash provided by operations between the two periods was the increase in accounts receivable and amortization expense during fiscal 2019, offset by increased net income and to a lesser extent favorable changes in deferred income taxes. Non-cash items in both fiscal 2019 and fiscal 2018 include depreciation, amortization and stock-based compensation expense. These charges do not reflect an actual cash outflow from the Company.

26

Investing Activities

Net cash used in investing activities was $3.4 million for the first six months of fiscal 2019, compared to $4.2 million in the comparable prior year period. Fiscal 2018 included cash used to acquire taskforce of approximately $3.4 million, net of cash acquired; the Company did not acquire an entity in the first six months of fiscal 2019. In the current year, expenditures for property and equipment increased $2.6 million as the Company relocated or refurbished certain offices.

Financing Activities

Net cash used in financing activities totaled $13.3 million for the six months ended November 24, 2018 compared to $2.9 million for the six months ended November 25, 2017. Net cash used in financing activities for the six months ended November 24, 2018 included dividends paid on the Company’s common stock of $7.9 million, approximately $1.1 million higher than in the comparable period of the prior year. The change in dividend paid in the current period was caused by an increase in the Company’s dividend accrual rate of $0.01 per common share compared to the prior year and a higher number of outstanding common shares after the taskforce and Accretive acquisitions. The Company’s board of directors declared a quarterly cash dividend of $0.13 per common share on October 16, 2018. The dividend of approximately $4.1 million, paid on December 12, 2018, is accrued in the Company’s Consolidated Balance Sheet as of November 24, 2018.

The Company used $13.0 million to purchase approximately 807,000 shares of common stock on the open market during the first six months of fiscal 2019 at a price averaging $16.12 per common share. The Company did not purchase any shares of common stock on the open market in the prior year period. Proceeds from the exercise of employee stock options and issuance of shares via the ESPP were approximately $8.7 million higher in fiscal 2019 as compared to the comparable period of fiscal 2018. The Company also reduced its obligation on the Facility by $5.0 million during the first half of fiscal 2019; there was no payment on the Facility during the comparable prior year period.

As described in Note 3 to the financial statements – Acquisitions, - the purchase agreement for taskforce requires earn-out payments to be made. Under accounting rules for business combinations, obligations that are contingently payable to the sellers based upon the occurrence of one or more future events are recorded as a discounted liability on the Company’s balance sheet. The Company is obligated to pay the sellers (in Euros) Adjusted EBITDA times 6.1 times 15% (Adjusted EBITDA as defined in the purchase agreement) for calendar years 2018 and 2019. The Company estimated the fair value of the obligation to pay contingent consideration based on a number of different projections of the estimated Adjusted EBITDA for each of the calendar years. The Company recorded this future obligation using a discount rate of approximately 11.0%, representing the Company’s weighted average cost of capital. The estimated fair value of the contractual obligation to the contingent consideration as of November 24, 2018 is €3.9 million (approximately $4.4 million using the exchange rate at the end of the quarter).

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is contained in Note 12- Recent Accounting Pronouncements in the Notes 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.

27