NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three and nine months ended February 22, 2020 and February 23, 2019
1. Description of the Company and its Business
Resources Connection, Inc. (“Resources Connection”), a Delaware corporation, was incorporated on November 16, 1998. The Company’s operating entities provide services primarily under the name Resources Global Professionals (“RGP”, the “Company,” “we,” “our” or “us”)). RGP is a global consulting firm that enables rapid business outcomes by bringing together the right people to create transformative change. As a human capital partner for its clients, the Company specializes in solving today’s most pressing business problems across the enterprise in the areas of Business Strategy & Transformation, Finance & Accounting, Risk & Compliance and Technology & Digital Innovation. The Company has offices in the United States (“U.S.”), Asia, Australia, Canada, Europe and Mexico.
The Company’s fiscal year consists of 52 or 53 weeks, ending on the last Saturday in May. The third quarters of fiscal 2020 and 2019 each consisted of 13 weeks. The Company’s fiscal 2020 will consist of 53 weeks.
2. Summary of Significant Accounting Policies
Interim Financial Information
The financial information as of and for the three and nine months ended February 22, 2020 and February 23, 2019 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) 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 2019 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 full fiscal year. These interim financial statements should be read in conjunction with the audited financial statements for the year ended May 25, 2019, which are included in the Company’s Annual Report on Form 10-K (“Fiscal Year 2019 Form 10-K”) which was filed with the SEC on July 19, 2019 (File No. 000-32113).
The Company's significant accounting policies are described in Note 2 to the consolidated financial statements included in the Fiscal Year 2019 Form 10-K. The Company has reviewed its accounting policies, identifying those that it believes to be critical to the preparation and understanding of its consolidated financial statements in the list set forth below. See the disclosure under the heading "Critical Accounting Policies" in Item 7 of Part II of the Fiscal Year 2019 Form 10-K for a detailed description of these policies and their potential effects on the Company’s results of operations and financial condition.
|
·
|
|
Allowance for doubtful accounts
|
|
·
|
|
Stock-based compensation
|
|
·
|
|
Valuation of long-lived assets
|
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.
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 and unvested restricted stock. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
February 22,
|
|
February 23,
|
|
February 22,
|
|
February 23,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
6,942
|
|
$
|
5,796
|
|
$
|
24,218
|
|
$
|
22,101
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
32,159
|
|
|
31,890
|
|
|
31,954
|
|
|
31,784
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
32,159
|
|
|
31,890
|
|
|
31,954
|
|
|
31,784
|
|
Potentially dilutive shares
|
|
339
|
|
|
480
|
|
|
396
|
|
|
644
|
|
Total dilutive shares
|
|
32,498
|
|
|
32,370
|
|
|
32,350
|
|
|
32,428
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.22
|
|
$
|
0.18
|
|
$
|
0.76
|
|
$
|
0.70
|
|
Dilutive
|
$
|
0.21
|
|
$
|
0.18
|
|
$
|
0.75
|
|
$
|
0.68
|
|
Anti-dilutive shares not included above
|
|
4,274
|
|
|
3,716
|
|
|
3,749
|
|
|
3,313
|
|
Financial Instruments
The fair value of the Company’s financial instruments reflects the amounts that the Company estimates it will receive in connection with the sale of an asset in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the following three levels:
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets.
Level 3 – Unobservable inputs.
Contingent consideration liability is for estimated future contingent consideration payments related to the Company’s acquisitions. Total contingent consideration liabilities were $7.8 million and $2.2 million as of February 22, 2020 and May 25, 2019, respectively. The fair value measurement of the liability is based on significant inputs not observed in the market and thus represents a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the contingent consideration liability are the Company’s measures of the estimated payouts based on internally generated financial projections and discount rates. The fair value of contingent consideration liability is reassessed on a quarterly basis by the Company using additional information as it becomes available, and any change in the fair value estimates are recorded in selling, general and administrative expenses in the Company’s Consolidated Statements of Operations. See Note 3 – Acquisitions and Dispositions.
The Company’s short-term investments were $6.0 million as of May 25, 2019. The short-term investments represented commercial papers with original contractual maturities between three months and one year and were considered “held-to-maturity” securities. The investments were measured using quoted prices in markets that are not active (Level 2).
The Company's financial instruments, including cash, accounts receivable, accounts payable, accrued expenses and long-term debt are carried at cost, which approximates their fair value because of the short‑term maturity of these instruments or because their stated interest rates are indicative of market interest rates.
Recent Accounting Pronouncements Adopted
Effective as of the beginning of fiscal year 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases, ASU No. 2018-10, Codification Improvements to Topic 842 (Leases) and ASU No. 2018-11, Targeted Improvements to Topic 842 (Leases). The guidance is intended to increase transparency and comparability among companies for leasing transactions, including a requirement for companies that lease assets to recognize on their balance sheets the assets and liabilities for the rights and
obligations created by those leases. The guidance also provides for disclosures that allow the users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The Company adopted the guidance on May 26, 2019 using the modified retrospective method without restatement of comparative periods. As such, periods prior to the date of adoption are presented in accordance with ASC 840 - Leases. The Company utilized the available practical expedient that allowed the Company to not reassess whether existing contracts contain a lease under the new definition of a lease, the lease classification for existing leases, whether previously capitalized initial direct costs would qualify for capitalization under the new guidance and recognize leases with an initial term of 12 months or less on a straight-line basis without recognizing a right-of-use (“ROU”) asset or operating lease liability.
The adoption of this guidance had a material impact on the Consolidated Balance Sheet beginning May 26, 2019 due to the recognition of ROU assets and lease liabilities for the Company's portfolio of operating leases. The adoption of the guidance had an immaterial impact on the Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows for the three and nine months ended February 22, 2020.
Additional information and disclosures required by the new standard are contained in Note 5, Leases.
3. Acquisitions and Dispositions
Acquisition of Expertence
On November 30, 2019, the Company acquired Expertforce Interim Projects GmBH, LLC (“Expertence”), a leading provider of professional interim management services, based in Munich Germany. With the acquisition of Expertence, the Company is able to offer a full range of project and management consulting services in the Germany market. The Company paid initial cash consideration of $0.4 million. The initial consideration is subject to final adjustments for the impact of working capital as defined in the purchase agreement.
In addition, the purchase agreement requires earn-out payments to be made based on performance over an 18-month period ending on May 31, 2021. The Company is obligated to pay the former owners of Expertence contingent consideration if certain revenue targets are achieved, up to a maximum of $0.3 million. In determining the fair value of the contingent consideration liability, the Company used an estimate based on a number of possible projections over the earnout period and applied a probability to each possible outcome. Given the short duration of the earnout period, the fair value of contingent liability was measured on an undiscounted basis. 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 revenue results. We do not expect future revisions to these assumptions to materially change the estimate of the fair value of contingent consideration and the Company’s future operating results.
Fair value of consideration transferred (in thousands):
|
|
|
|
|
|
Cash
|
$
|
383
|
Estimated initial contingent consideration
|
|
305
|
Total
|
$
|
688
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
11
|
Accounts receivable
|
|
215
|
Prepaid expenses and other current assets
|
|
7
|
Intangible assets:
|
|
|
Computer software (24 months useful life)
|
|
184
|
Total identifiable assets
|
|
417
|
Accounts payable
|
|
196
|
Accrued expenses and other current liabilities
|
|
8
|
Deferred tax liability
|
|
59
|
Total liabilities assumed
|
|
263
|
Net identifiable assets acquired
|
|
154
|
Goodwill
|
|
534
|
Net assets acquired
|
$
|
688
|
Results of operations of Expertence are included in the Consolidated Statements of Operations from the date of acquisition and were not material to the Company’s consolidated results. During the third quarter of fiscal 2020, the Company incurred $0.1 million in acquisition costs which were recorded in selling, general and administrative expenses in the Consolidated Statement of Operations.
Acquisition of Veracity
On July 31, 2019, the Company acquired Veracity Consulting Group, LLC (“Veracity”), a fast-growing, digital transformation firm based in Richmond, Virginia, that delivers innovative solutions to the Fortune 500 and leading healthcare organizations. The acquisition of Veracity is a step in accelerating the Company’s stated objective to enhance its digital capabilities and allows the Company to offer comprehensive end-to-end solutions to its clients by combining Veracity’s customer-facing offerings with the Company’s depth of experience in transforming the back office. The Company paid initial cash consideration of $30.3 million (net of $2.1 million cash acquired). The initial consideration is subject to final adjustments for the impact of the Internal Revenue Code Section 338(h)(10) joint election between the Company and former owners of Veracity and working capital as defined in the purchase agreement.
In addition, the purchase agreement requires earn-out payments to be made based on performance after each of the first and second anniversary of the acquisition date. The Company is obligated to pay the former owners of Veracity contingent consideration if certain earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirements are achieved. In determining the fair value of the contingent consideration liability, the Company used the Monte Carlo simulation modeling which included the application of an appropriate discount rate (Level 3 fair value). 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 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 quarter ended August 24, 2019, the Company made an initial provisional allocation of the purchase price for Veracity based on the fair value of the assets acquired and liabilities assumed, with the residual amount recorded as goodwill, in accordance with Accounting Standards Codification (“ASC”) 805. The Company’s initial purchase price allocation considered a number of factors, including the valuation of identifiable intangible assets and contingent consideration. During the three months ended November 23, 2019, the Company adjusted the previously reported provisional allocation of the purchase price to reflect new information obtained during the quarter, which resulted in changes in expected future performance and cash flows as of the acquisition date. There were no additional adjustments to the provisional purchase price allocation during the three months ended February 22, 2020.
The following table provides a summary of the adjusted provisional purchase price allocation.
Fair value of consideration transferred (in thousands):
|
|
|
|
|
|
Cash
|
$
|
32,314
|
Estimated initial contingent consideration
|
|
6,290
|
Total
|
$
|
38,604
|
Recognized provisional amounts of identifiable assets acquired and liabilities assumed (in thousands):
|
|
|
Cash and cash equivalents
|
$
|
2,056
|
Accounts receivable
|
|
3,299
|
Prepaid expenses and other current assets
|
|
116
|
Intangible assets:
|
|
|
Backlog (17 months useful life)
|
|
1,210
|
Customer relationships (7 years useful life)
|
|
9,300
|
Trademarks (3 years useful life)
|
|
570
|
Property and equipment
|
|
117
|
Total identifiable assets
|
|
16,668
|
Accounts payable
|
|
305
|
Accrued expenses and other current liabilities
|
|
712
|
Total liabilities assumed
|
|
1,017
|
Net identifiable assets acquired
|
|
15,651
|
Goodwill
|
|
22,953
|
Net assets acquired
|
$
|
38,604
|
The remeasured purchase price allocation above may be subject to further adjustments during the measurement period if new information is obtained about facts and circumstances that existed as of the acquisition date. A final determination of fair value of assets acquired and liabilities assumed relating to the acquisition could differ from the stated purchase price allocation. As of the acquisition date, the gross contractual amount of accounts receivable of $3.3 million was expected to be fully collected.
During the three and nine months ended February 22, 2020, the fair value of contingent consideration decreased by $0.8 million and $0.6 million, respectively. Such amounts were recorded in selling, general and administrative expense in the Consolidated Statements of Operations. As of February 22, 2020, the contingent consideration liability was $5.6 million of which $3.0 million was included in Other current liabilities and $2.6 million was included in Long-term liabilities in the Consolidated Balance Sheet. The change in fair value of contingent consideration from the remeasurement was recorded in selling, general and administrative expense in the Consolidated Statement of Operations for the three months ended February 22, 2020.
Results of operations of Veracity are included in the Consolidated Statements of Operations from the date of acquisition. Veracity contributed $5.4 million and $12.6 million to consolidated revenue and $1.1 million and $2.5 million to income from operations in the three and nine months ended February 22, 2020, respectively. The Company incurred $0.6 million in acquisition costs which were recorded in selling, general and administrative expenses in the Consolidated Statement of Operations for the nine months ended February 22, 2020.
Prior Period Acquisitions
During fiscal 2018, the Company completed two acquisitions, the acquisition of Taskforce – Management on Demand AG (“Taskforce”) and Accretive Solutions, Inc. (“Accretive”). See Note 3 to the consolidated financial statements included in Part II, Item 8 in the Fiscal Year 2019 Form 10-K for additional detail.
During the three months ended February 22, 2020, the Company did not have any material adjustment to the contingent consideration liability relating to Taskforce. A final contingent consideration payment of €1.6 million ($1.8 million) was paid to the sellers of Taskforce on March 30, 2020.
In addition, on October 14, 2019, the Company reached a final settlement on a pre-acquisition claim with the seller of Accretive. As a part of the settlement, the Company issued 82,762 shares of common stock to the seller and received $0.6 million in cash from the escrow. The resulting gain of $0.5 million was included in Other (income) expense in the Consolidated Statements of Operations for the nine months ended February 22, 2020.
Dispositions
On September 2, 2019, the Company completed the sale of certain assets and liabilities of its foreign subsidiary, Resources Global Professionals Sweden AB, to Capacent Holding AB (publ), a Swedish public company, for SEK1,016,862 (approximately $105,000) in cash resulting in a loss on sale of assets of approximately $38,000. As a part the sale, the Company transferred the majority of its local customer contracts, the existing office lease as well as all its employee consultants. As a result of the sale, the nearby Denmark and Norway markets also discontinued serving local Sweden customer contracts. The Company expects to continue to serve its global client base and to a lesser extent, its remaining local client contracts, in Sweden and Denmark.
In addition, during the quarter ended February 22, 2020, the Company continued to wind down business in the Belgium, (including its wholly owned subsidiary in Luxembourg) and Norway markets. The Company expects to fully dissolve all three entities by the end of fiscal 2020. In connection with the foregoing sale of assets and exit activities, the Company incurred costs of approximately $0.7 million primarily related to employee termination benefits. Such expenses were included in selling, general and administrative expenses in the Consolidated Statements of Operations for the nine months ended February 22, 2020. None of the markets sold or exited are considered strategic components of the Company’s operations.
In connection with exiting the above-mentioned entities, the Company analyzed the facts and circumstances regarding its historical and current investments, along with its associated accounting and tax positions. Based on the analysis, the Company recorded a tax benefit related to the worthless stock loss in the investment in its wholly owned subsidiaries as well as worthless loans to these subsidiaries. See Note 6 – Income taxes.
4. Intangible Assets and Goodwill
The following table summarizes details of the Company’s intangible assets and related accumulated amortization (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 22, 2020
|
|
As of May 25, 2019
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Customer contracts and relationships (3-8 years)
|
$
|
23,738
|
|
$
|
(5,780)
|
|
$
|
17,958
|
|
$
|
14,495
|
|
$
|
(3,439)
|
|
$
|
11,056
|
|
Tradenames (3-10 years)
|
|
4,916
|
|
|
(2,399)
|
|
|
2,517
|
|
|
4,407
|
|
|
(1,563)
|
|
|
2,844
|
|
Backlog (17 months)
|
|
1,210
|
|
|
(468)
|
|
|
742
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Consultant list (3 years)
|
|
757
|
|
|
(642)
|
|
|
115
|
|
|
783
|
|
|
(462)
|
|
|
321
|
|
Non-compete agreements (3 years)
|
|
866
|
|
|
(733)
|
|
|
133
|
|
|
896
|
|
|
(528)
|
|
|
368
|
|
Computer software (2 years)
|
|
181
|
|
|
(23)
|
|
|
158
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
31,668
|
|
$
|
(10,045)
|
|
$
|
21,623
|
|
$
|
20,581
|
|
$
|
(5,992)
|
|
$
|
14,589
|
|
The Company recorded amortization expense of $1.5 million and $0.9 million for the three months ended February 22, 2020 and February 23, 2019, respectively, and $4.2 million and $2.9 million for the nine months ended February 22, 2020 and February 23, 2019, respectively.
The following table summarizes future estimated amortization expense related to intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ending
|
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
Expected amortization expense
|
|
$
|
5,741
|
|
$
|
4,589
|
|
$
|
3,331
|
|
$
|
3,133
|
|
$
|
3,097
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
February 22,
|
|
February 23,
|
|
2020
|
|
2019
|
Goodwill, beginning of year
|
$
|
190,815
|
|
$
|
191,950
|
Acquisitions- (see Note 3)
|
|
23,487
|
|
|
-
|
Impact of foreign currency exchange rate changes
|
|
(851)
|
|
|
(801)
|
Goodwill, end of period
|
$
|
213,451
|
|
$
|
191,149
|
5. Leases
The Company currently leases office space, vehicles and certain equipment under operating leases expiring through 2028. Operating leases include fixed payments plus, in some cases, scheduled base rent increases over the term of the lease. Certain leases require variable payments of common area maintenance, operating expenses and real estate taxes applicable to the property. Variable payments are excluded from the measurements of lease liabilities and are expensed as incurred. Any tenant improvement allowances received from the lessor are recorded as a reduction to rent expense over the term of the lease. No lease agreements contain any residual value guarantees or material restrictive covenants.
Certain of the Company's leases include one or more options to renew or terminate the lease at the Company’s discretion. Generally, the renewal and termination options are not included in the right-of-use assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates lease renewal and termination options and, when they are reasonably certain of exercise, includes the renewal or termination option in the lease term.
The Company measures the lease liability for each leased asset at the present value of lease payments, as defined in ASC 842, discounted using an incremental borrowing rate. As most of the Company’s leases do not provide an implicit interest rate, the Company utilizes its incremental borrowing rate based on the information available at the commencement date of the lease in determining the present value of lease payments. The Company has a centrally managed treasury function; therefore, a portfolio approach is applied in determining the incremental borrowing rate. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a fully collateralized basis over a similar term in an amount equal to the total lease
payments in a similar economic environment. The Company’s right-of-use assets are equal to the lease liabilities, adjusted for lease incentives received, including tenant improvement allowances, deferred rent, and prepayments made to the lessor.
In some instances, the Company sublease excess office space to third party tenants. The Company does not recognize liabilities or right-of-use assets for leases with an initial term of 12 months or less.
Lease cost components included within selling, general and administrative expenses in the Consolidated Statements of Operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
February 22, 2020
|
|
February 22, 2020
|
Operating lease cost
|
|
$
|
3,159
|
|
$
|
9,275
|
Short-term lease cost
|
|
|
124
|
|
|
322
|
Variable lease cost
|
|
|
562
|
|
|
1,762
|
Sublease income
|
|
|
(230)
|
|
|
(536)
|
Total lease cost
|
|
$
|
3,615
|
|
$
|
10,823
|
Supplemental cash flow information related to the Company's operating leases were as follows (in thousands):
|
|
|
|
|
|
Nine Months Ended
|
|
|
February 22, 2020
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
|
$
|
9,783
|
Right-of-use assets obtained in exchange for lease obligations
|
|
$
|
5,101
|
The weighted average remaining lease term and weighted average discount rate for our operating leases were as follows:
|
|
|
|
|
|
As of
|
|
|
February 22, 2020
|
Weighted average remaining lease term
|
|
|
4.5 years
|
Weighted average discount rate
|
|
|
4.12%
|
The maturities of operating lease liabilities were as follows as of February 22, 2020 (in thousands):
|
|
|
|
Years Ending:
|
|
Operating Lease Maturity
|
May 30, 2020 (excluding the nine months ended February 22, 2020)
|
|
$
|
3,299
|
May 29, 2021
|
|
|
12,696
|
May 28, 2022
|
|
|
10,955
|
May 27, 2023
|
|
|
8,561
|
May 25, 2024
|
|
|
7,057
|
Thereafter
|
|
|
6,570
|
Total operating lease payments
|
|
$
|
49,138
|
Less: Imputed interest
|
|
|
(4,361)
|
Present value of operating lease liabilities
|
|
$
|
44,777
|
6. Income Taxes
In general, the Company’s income tax provision primarily includes tax expense (benefit) on operating results of the Company’s U.S. and foreign entities, all taxed at different statutory rates applicable in the various tax jurisdictions, changes in valuation allowances related to tax benefits of certain foreign locations and tax expense (benefit) related to stock-based compensation for nonqualified stock options and for disqualifying dispositions under the Company’s Employee Stock Purchase Plan (“ESPP”). The Company records income tax expense (benefit) based upon actual results versus a forecasted tax rate because of the volatility in its international operations that span numerous tax jurisdictions.
Income tax (benefit) expense was ($4.0) million, an effective tax benefit rate of (135%), and $3.8 million, an effective tax rate of 40%, for the three months ended February 22, 2020 and February 23, 2019, respectively. Income tax expense was $4.0 million,
an effective tax rate of 14%, and $12.5 million, an effective tax rate of 36%, for the nine months ended February 22, 2020 and February 23, 2019, respectively.
The income tax (benefit) for the three months ended February 22, 2020 compared to the income tax expense for the prior year quarter was primarily the result of a deduction related to a worthless stock loss in the Company’s investment in its wholly owned subsidiaries as well as lower operating results. The Company, after analyzing the facts and circumstances, determined to no longer invest in the Belgium, Luxembourg and the Nordics markets which includes Sweden and Norway. The Company has maintained a permanent investment position and, therefore, has not previously recorded a deferred tax asset for the basis differences of these entities. The financial results of these entities have created an excess of tax basis over the book basis in which the worthless stock that will be deducted for income tax purposes is approximately $25.8 million, resulting in an estimated net tax benefit of $6.6 million. Management has analyzed these transactions and determined that these worthless stock deductions qualify as ordinary losses. In addition, the Company took a deduction relating to worthless loans of approximately $4.5 million which is also treated as ordinary losses, resulting in a net tax benefit of $0.7 million after the offset of the estimated global intangible low-taxed income (“GILTI”) tax. While management believes this is a proper income tax deduction, the deduction may be subject to examination by tax authorities and thus, management has determined this tax benefit to be an uncertain tax position. Accordingly, the Company fully reserved for the tax benefit associated with the worthless loan deduction. The reserve includes offsetting the federal and state benefits, by the estimated GILTI tax increase.
The income tax expense for the nine months ended February 22, 2020 compared to the income tax expense for the prior year nine months was primarily the result of a deduction discussed above as well as lower operating results.
The Company recognized a net tax expense of approximately of $0.7 million and $0.2 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the Company’s ESPP during the three months ended February 22, 2020 and February 23, 2019, respectively. The Company recognized a tax expense of approximately breakeven and $0.2 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the first nine months of fiscal 2020 and fiscal 2019, respectively. The net tax expense results from expiring stock options during these periods.
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 U.S. 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.
7. 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 respective 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 dispositions 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 compliant with all financial covenants under the Facility as of February 22, 2020.
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 $49.0 million as of February 22, 2020, all of which were under the Revolving Loan. In addition, the Company had $1.5 million of outstanding letters of credit issued under the Revolving Loan as of February 22, 2020. The Company has $39.5 million remaining to borrow under the Revolving Loan and $30.0 million remaining under the Reducing Revolving Loan as of February 22, 2020. As of February 22, 2020, the interest rate on the Company’s borrowings were as follows (amounts in thousands, except percentages):
|
|
|
|
|
|
Principal Balance
|
Base Rate
|
Libor Rate
|
Interest Rate
|
$
|
25,000
|
1.25%
|
6-month
|
1.93%
|
3.18%
|
|
24,000
|
1.25%
|
2-month
|
1.81%
|
3.06%
|
$
|
49,000
|
|
|
|
|
8. 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 February 22, 2020, the Company purchased 318,430 shares of its common stock on the open market at an average price of $15.70 per share, for approximately $5.0 million. As of February 22, 2020, approximately $85.1 million remained available for future repurchases of the Company’s common stock under the July 2015 program.
Quarterly Dividend
Subject to approval each quarter by its board of directors, the Company pays a regular quarterly cash dividend. On January 23, 2020 the Company’s board of directors declared a quarterly cash dividend of $0.14 per common share. The dividend of approximately $4.5 million was paid on March 19, 2020 to the holders on record on February 20, 2020 and is accrued in the Company’s Consolidated Balance Sheet as of February 22, 2020.
Continuation of the quarterly dividend is at the discretion of the board of directors and depends upon the Company’s financial condition, results of operations, capital requirements, general business condition, contractual restrictions contained in the Company’s current credit agreements and other agreements, and other factors deemed relevant by the board of directors.
9. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
February 22,
|
|
February 23,
|
|
|
2020
|
|
2019
|
|
Income taxes paid
|
$
|
8,163
|
|
$
|
11,640
|
|
Interest paid
|
$
|
1,669
|
|
$
|
1,878
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
Capitalized leasehold improvements paid directly by landlord
|
$
|
59
|
|
$
|
1,211
|
|
Acquisition of Veracity:
|
|
|
|
|
|
|
Liability for contingent consideration
|
$
|
5,580
|
|
$
|
-
|
|
Acquisition of taskforce:
|
|
|
|
|
|
|
Liability for contingent consideration
|
$
|
1,840
|
|
$
|
4,202
|
|
Acquisition of Expertence:
|
|
|
|
|
|
|
Liability for contingent consideration
|
$
|
302
|
|
$
|
-
|
|
Acquisition of Accretive:
|
|
|
|
|
|
|
Issuance of common stock
|
$
|
1,141
|
|
$
|
-
|
|
Dividends declared, not paid
|
$
|
4,501
|
|
$
|
4,147
|
|
|
|
|
|
|
|
|
10. Stock-Based Compensation Plans
General
Executive officers and employees, as well as non-employee directors of the Company and certain consultants and advisors to the Company, are eligible to participate in the Company’s 2014 Performance Incentive Plan ("2014 Plan"). The 2014 Plan was approved by stockholders on October 23, 2014 and replaced and succeeded in its entirety the Resources Connection, Inc. 2004 Performance Incentive Plan and the 1999 Long Term Incentive Plan. As of February 22, 2020, 1,197,000 shares were available for award grant purposes under the 2014 Plan, subject to future increases as described in the 2014 Plan.
Awards under the 2014 Plan may include, but are not limited to, stock options, restricted stock units and restricted stock grants, including restricted stock units under the Company’s Directors Deferred Compensation Plan. 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 Company’s policy is to issue shares from its authorized shares upon the exercise of stock options.
Stock Options and Restricted Stock
The following table summarizes the stock option activity for the nine months ended February 22, 2020 (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 25, 2019
|
6,029
|
|
$
|
15.95
|
|
6.06
|
|
$
|
5,482
|
Granted, at fair market value
|
1,318
|
|
|
17.37
|
|
|
|
|
|
Exercised
|
(376)
|
|
|
13.63
|
|
|
|
|
|
Forfeited
|
(409)
|
|
|
17.38
|
|
|
|
|
|
Expired
|
(551)
|
|
|
17.11
|
|
|
|
|
|
Outstanding at February 22, 2020
|
6,011
|
|
$
|
16.12
|
|
6.52
|
|
$
|
1,982
|
Exercisable at February 22, 2020
|
3,452
|
|
$
|
15.13
|
|
4.71
|
|
$
|
1,982
|
Vested and expected to vest at February 22, 2020
|
5,744
|
|
$
|
16.04
|
|
6.33
|
|
$
|
1,982
|
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 third quarter of fiscal 2020 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 22, 2020. 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 February 22, 2020 and February 23, 2019 was $0.4 million and $1.9 million, respectively, and during the nine months ended February 22, 2020 and February 23, 2019 was $1.2 million and $5.0 million, respectively. As of February 22, 2020, there was $11.7 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 1.9 years.
The Company granted 28,372 and 21,537 shares of restricted stock during the nine months ended February 22, 2020 and February 23, 2019, respectively. As of February 22, 2020, there were 177,002 unvested restricted shares, including restricted stock units under the Directors Deferred Compensation Plan, with approximately $2.5 million of remaining unrecognized compensation cost.
Stock-Based Compensation Expense
Stock-based compensation expense included in selling, general and administrative expenses was $1.5 million and $1.9 million for the three months ended February 22, 2020 and February 23, 2019, respectively, and $4.6 million and $5.0 million for the nine months ended February 22, 2020 and February 23, 2019, respectively. These amounts consisted of stock-based compensation expense related to employee stock options, employee stock purchases made via the ESPP, restricted stock awards and stock units credited under the Directors Deferred Compensation Plan. 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. There were no capitalized share-based compensation costs during the nine months ended February 22, 2020 or February 23, 2019.
Employee Stock Purchase Plan
On October 15, 2019, the Company’s stockholders approved the 2019 ESPP which supersedes the 2014 ESPP. The maximum number of shares of the Company’s common stock that were authorized for issuance under the 2019 ESPP is 1,825,000. All unissued shares under the 2014 ESPP are no longer available.
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 July 16, 2029. The Company issued 399,000 and 358,000 shares of common stock pursuant to the ESPP during the nine months ended February 22, 2020 and the year ended May 25, 2019, respectively. There were 1,641,000 shares of common stock available for issuance under the ESPP as of February 22, 2020.
11. 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 Fiscal Year 2019 Form 10-K. Summarized information regarding the Company’s domestic and international operations is shown in the following table (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the
|
|
Revenue for the
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Long-Lived Assets (1) as of
|
|
February 22,
|
|
February 23,
|
|
February 22,
|
|
February 23,
|
|
February 22,
|
|
May 25,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
United States
|
$
|
136,149
|
|
$
|
142,409
|
|
$
|
422,197
|
|
$
|
432,539
|
|
$
|
260,099
|
|
$
|
200,385
|
International
|
|
31,903
|
|
|
37,089
|
|
|
102,587
|
|
|
114,316
|
|
|
38,024
|
|
|
31,651
|
Total
|
$
|
168,052
|
|
$
|
179,498
|
|
$
|
524,784
|
|
$
|
546,855
|
|
$
|
298,123
|
|
$
|
232,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Long-lived assets are comprised of goodwill, intangible assets and property and equipment. Long-lived assets as of February 22, 2020 included the Company’s operating right-of-use assets which were added as a result of the Company’s adoption of ASC 842 Leases. See Note 5 — Leases.
12. 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.
13. Subsequent Events
On February 27, 2020, the Company’s management and board of directors committed to a restructuring plan to reduce approximately 7.5% of our management and administrative workforce and consolidate its geographic presence to certain key markets. The restructuring plan was designed to streamline the Company’s organizational structure, reduce operating costs and more effectively align resources to business priorities. The majority of employees impacted by the reduction in force are expected to exit before the end of fiscal 2020, with the remainder exiting in the first quarter of fiscal 2021. Based on management’s rationalization of its real estate footprint, a plan was put in place to terminate or sublet 26% of its real estate leases by the end of the 2020 calendar year. The Company expect to incur $4 million to $5 million of restructuring charges relating to employee termination costs, of which approximately $3 million will be incurred in the fourth quarter of fiscal 2020. In connection with real estate restructuring, the Company expects to incur $1 million of lease termination costs, costs associated with existing real estate facilities and non-cash asset write-offs. Further charges are expected in fiscal 2021 as the Company completes the restructuring plan.
In March 2020, as events relating to COVID-19 continued to develop globally and impact the capital markets, in an abundance of caution the Company borrowed $39.0 million under the Facility to provide substantial liquidity in the event that COVID-19 persists. As of March 24, 2020, the Company has $0.5 million remaining to borrow under the Revolving Loan and $30.0 million remaining under the Reducing Revolving Loan.
On March 27, 2020, the President of the United States signed the Coronavirus Aid Relief, and Economic Security (CARES) Act into law. The Act includes several significant provisions for corporations, including the usage of net operating losses, interest deductions
and payroll benefits. The Company is evaluating the impact, if any, this Act will have on the Company’s financials and required disclosures.