ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
RESOURCES CONNECTION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in
thousands, except par value per share)
|
|
|
|
|
|
|
|
|
|
|
November 25,
2017
|
|
|
May 27,
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
56,284
|
|
|
$
|
62,329
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $2,047 and $2,517 as of
November 25, 2017 and May 27, 2017, respectively
|
|
|
109,025
|
|
|
|
98,222
|
|
Prepaid expenses and other current assets
|
|
|
5,147
|
|
|
|
4,395
|
|
Income taxes receivable
|
|
|
|
|
|
|
1,899
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
170,456
|
|
|
|
166,845
|
|
Goodwill
|
|
|
181,208
|
|
|
|
171,088
|
|
Intangible assets, net
|
|
|
4,959
|
|
|
|
|
|
Property and equipment, net
|
|
|
22,326
|
|
|
|
23,354
|
|
Deferred income taxes
|
|
|
1,571
|
|
|
|
973
|
|
Other assets
|
|
|
1,798
|
|
|
|
1,868
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
382,318
|
|
|
$
|
364,128
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
20,293
|
|
|
$
|
14,102
|
|
Accrued salaries and related obligations
|
|
|
43,840
|
|
|
|
49,241
|
|
Other liabilities
|
|
|
8,206
|
|
|
|
8,428
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
72,339
|
|
|
|
71,771
|
|
Long-term debt
|
|
|
48,000
|
|
|
|
48,000
|
|
Deferred income taxes
|
|
|
995
|
|
|
|
1,280
|
|
Other long-term liabilities
|
|
|
8,138
|
|
|
|
4,935
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
129,472
|
|
|
|
125,986
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 5,000 shares authorized; zero shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 70,000 shares authorized; 59,630 and 58,992 shares
issued, and 30,300 and 29,662 shares outstanding as of November 25, 2017 and May 27, 2017, respectively
|
|
|
596
|
|
|
|
590
|
|
Additional
paid-in
capital
|
|
|
408,412
|
|
|
|
398,828
|
|
Accumulated other comprehensive loss
|
|
|
(9,291
|
)
|
|
|
(11,396
|
)
|
Retained earnings
|
|
|
335,033
|
|
|
|
332,024
|
|
Treasury stock at cost, 29,330 shares as of both November 25, 2017 and May 27,
2017
|
|
|
(481,904
|
)
|
|
|
(481,904
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
252,846
|
|
|
|
238,142
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
382,318
|
|
|
$
|
364,128
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
Revenue
|
|
$
|
156,738
|
|
|
$
|
147,558
|
|
|
$
|
297,924
|
|
|
$
|
290,947
|
|
Direct cost of services, primarily payroll and related taxes for professional services
employees
|
|
|
97,319
|
|
|
|
91,048
|
|
|
|
184,807
|
|
|
|
179,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
59,419
|
|
|
|
56,510
|
|
|
|
113,117
|
|
|
|
111,037
|
|
Selling, general and administrative expenses
|
|
|
47,498
|
|
|
|
46,056
|
|
|
|
94,913
|
|
|
|
89,670
|
|
Amortization of intangible assets
|
|
|
322
|
|
|
|
|
|
|
|
322
|
|
|
|
|
|
Depreciation expense
|
|
|
947
|
|
|
|
808
|
|
|
|
1,887
|
|
|
|
1,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
10,652
|
|
|
|
9,646
|
|
|
|
15,995
|
|
|
|
19,765
|
|
Interest expense
|
|
|
397
|
|
|
|
64
|
|
|
|
734
|
|
|
|
64
|
|
Interest income
|
|
|
(32
|
)
|
|
|
(40
|
)
|
|
|
(60
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
10,287
|
|
|
|
9,622
|
|
|
|
15,321
|
|
|
|
19,811
|
|
Provision for income taxes
|
|
|
2,149
|
|
|
|
3,930
|
|
|
|
5,071
|
|
|
|
8,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,138
|
|
|
$
|
5,692
|
|
|
$
|
10,250
|
|
|
$
|
11,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.27
|
|
|
$
|
0.16
|
|
|
$
|
0.34
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.27
|
|
|
$
|
0.16
|
|
|
$
|
0.34
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,173
|
|
|
|
35,716
|
|
|
|
29,991
|
|
|
|
35,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
30,579
|
|
|
|
36,248
|
|
|
|
30,319
|
|
|
|
36,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.24
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,138
|
|
|
$
|
5,692
|
|
|
$
|
10,250
|
|
|
$
|
11,330
|
|
Foreign currency translation adjustment, net of tax
|
|
|
(610
|
)
|
|
|
(3,687
|
)
|
|
|
2,105
|
|
|
|
(3,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
7,528
|
|
|
$
|
2,005
|
|
|
$
|
12,355
|
|
|
$
|
8,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
(Amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury Stock
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Earnings
|
|
|
Equity
|
|
Balances as of May 27, 2017
|
|
|
58,992
|
|
|
$
|
590
|
|
|
$
|
398,828
|
|
|
|
29,330
|
|
|
$
|
(481,904
|
)
|
|
$
|
(11,396
|
)
|
|
$
|
332,024
|
|
|
$
|
238,142
|
|
Exercise of stock options
|
|
|
137
|
|
|
|
1
|
|
|
|
1,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,666
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,062
|
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
194
|
|
|
|
2
|
|
|
|
2,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,260
|
|
Issuance of restricted stock
|
|
|
80
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared ($0.24 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,241
|
)
|
|
|
(7,241
|
)
|
Issuance of common stock for acquisition of
taskforce
|
|
|
227
|
|
|
|
2
|
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,602
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,105
|
|
|
|
|
|
|
|
2,105
|
|
Net income for the six months ended November 25, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,250
|
|
|
|
10,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of November 25, 2017
|
|
|
59,630
|
|
|
$
|
596
|
|
|
$
|
408,412
|
|
|
|
29,330
|
|
|
$
|
(481,904
|
)
|
|
$
|
(9,291
|
)
|
|
$
|
335,033
|
|
|
$
|
252,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
November 25,
|
|
|
November 26,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,250
|
|
|
$
|
11,330
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,209
|
|
|
|
1,602
|
|
Stock-based compensation expense
|
|
|
3,062
|
|
|
|
3,150
|
|
Loss on disposal of assets
|
|
|
|
|
|
|
41
|
|
Bad debt expense
|
|
|
364
|
|
|
|
214
|
|
Deferred income taxes
|
|
|
(906
|
)
|
|
|
(436
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(8,394
|
)
|
|
|
(1,115
|
)
|
Prepaid expenses and other current assets
|
|
|
(568
|
)
|
|
|
(53
|
)
|
Income taxes
|
|
|
1,468
|
|
|
|
(3,625
|
)
|
Other assets
|
|
|
84
|
|
|
|
138
|
|
Accounts payable and accrued expenses
|
|
|
1,245
|
|
|
|
1,748
|
|
Accrued salaries and related obligations
|
|
|
(5,943
|
)
|
|
|
(5,191
|
)
|
Other liabilities
|
|
|
(1,231
|
)
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,640
|
|
|
|
8,137
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Redemption of short-term investments
|
|
|
|
|
|
|
19,961
|
|
Proceeds from sale of property and equipment
|
|
|
1
|
|
|
|
166
|
|
Acquisition of
taskforce
, net of cash acquired
|
|
|
(3,423
|
)
|
|
|
|
|
Purchase of property and equipment
|
|
|
(784
|
)
|
|
|
(2,294
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(4,206
|
)
|
|
|
17,833
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,666
|
|
|
|
2,139
|
|
Proceeds from issuance of common stock under Employee Stock Purchase Plan
|
|
|
2,260
|
|
|
|
2,184
|
|
Purchase of common stock
|
|
|
|
|
|
|
(111,959
|
)
|
Proceeds from Revolving Credit Facility
|
|
|
|
|
|
|
58,000
|
|
Debt issuance costs
|
|
|
|
|
|
|
(190
|
)
|
Cash dividends paid
|
|
|
(6,833
|
)
|
|
|
(7,600
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(2,907
|
)
|
|
|
(57,426
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(572
|
)
|
|
|
(1,066
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(6,045
|
)
|
|
|
(32,522
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
62,329
|
|
|
|
91,089
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
56,284
|
|
|
$
|
58,567
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three and
six months ended November 25, 2017 and November 26, 2016
1. Description of the Company and its Business
Resources Connection, Inc. (Resources Connection), a Delaware corporation, was incorporated on November 16, 1998. Resources
Connection is a multinational professional services firm; its operating entities primarily provide services under the name Resources Global Professionals (RGP or the Company). The Company provides agile consulting services to
its global client base utilizing experienced professionals in the areas of accounting; finance; governance, risk and compliance management; corporate advisory, strategic communications and restructuring; information management; human capital; supply
chain management; and legal and regulatory. The Company has offices in the United States (U.S.), Asia, Australia, Canada, Europe and Mexico.
The Companys fiscal year consists of 52 or 53 weeks, ending on the last Saturday in May. The second quarters of fiscal 2018 and
2017 each consisted of 13 weeks.
2. Summary of Significant Accounting Policies
Interim Financial Information
The financial information as of and for the three and six months ended November 25, 2017 and November 26, 2016 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 2017
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 condensed interim financial statements should be read in conjunction with the audited financial statements for the year ended May 27, 2017, which are included in the
Companys Annual Report on Form
10-K
for the year then ended (File No.
0-32113).
Cash, Cash Equivalents and Short-Term Investments
The Company considers cash on hand, deposits in banks, and short-term investments purchased with an original maturity date of three months or
less to be cash and cash equivalents. The carrying amounts, if any, reflected in the consolidated balance sheets for cash, cash equivalents and short-term investments approximate their fair values due to the short maturities of these instruments.
Client Reimbursements of
Out-of-Pocket
Expenses
The Company recognizes all reimbursements received from clients for
out-of-pocket
expenses as revenue and all such expenses as direct cost of services. Reimbursements received from clients were $2.9 million and $2.4 million for the three months ended
November 25, 2017 and November 26, 2016, respectively, and $5.5 million and $4.8 million for the six months ended November 25, 2017 and November 26, 2016, respectively.
Foreign Currency Translation
The financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the exchange rates effective at the end of the period, income and expense items are translated at average exchange rates prevailing during the period and the related translation adjustments are
recorded as a component of accumulated other comprehensive income or loss within the Consolidated Balance Sheets. Gains and losses from foreign currency transactions are included in the Consolidated Statements of Operations.
Net Income Per Share Information
The Company presents both basic and diluted earnings per common share (EPS). Basic EPS is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the period, calculated using the treasury stock method for stock
options. Under the treasury stock method, assumed proceeds include the amount the employee must pay for exercising stock options 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.
8
The following table summarizes the calculation of net income per common share for the periods
indicated (amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
November 25,
|
|
|
November 26,
|
|
|
November 25,
|
|
|
November 26,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
8,138
|
|
|
$
|
5,692
|
|
|
$
|
10,250
|
|
|
$
|
11,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
30,173
|
|
|
|
35,716
|
|
|
|
29,991
|
|
|
|
35,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
30,173
|
|
|
|
35,716
|
|
|
|
29,991
|
|
|
|
35,992
|
|
Potentially dilutive shares
|
|
|
406
|
|
|
|
532
|
|
|
|
328
|
|
|
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dilutive shares
|
|
|
30,579
|
|
|
|
36,248
|
|
|
|
30,319
|
|
|
|
36,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.27
|
|
|
$
|
0.16
|
|
|
$
|
0.34
|
|
|
$
|
0.31
|
|
Dilutive
|
|
$
|
0.27
|
|
|
$
|
0.16
|
|
|
$
|
0.34
|
|
|
$
|
0.31
|
|
Anti-dilutive shares not included above
|
|
|
5,268
|
|
|
|
5,263
|
|
|
|
5,225
|
|
|
|
4,922
|
|
Stock-Based Compensation
The Company recognizes compensation expense for all share-based awards made to employees and directors, including employee stock options,
restricted stock grants and employee stock purchases made via the Companys Employee Stock Purchase Plan (the ESPP), based on estimated fair value at the date of grant.
The Company estimates the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the
award ultimately expected to vest is recognized as an expense over the requisite service periods. Stock option awards vest over four years and restricted stock award vesting is determined on an individual grant basis under the Companys 2014
Performance Incentive Plan (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
On August 31, 2017, the Company acquired
taskforce
Management on Demand AG (taskforce),
a German
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.
9
In addition, the purchase agreement of
taskforce
requires
earn-out
payments to be made based on performance in calendar 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 Companys 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 as defined in the purchase agreement). 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 Companys weighted average cost of capital. The estimated
fair value of the contractual obligation to the contingent consideration recognized at the date of acquisition was 5.5 million (approximately $6.5 million), of which the Company estimates $2.4 million will be payable based upon
calendar year adjusted EBITDA in March 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 Companys 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 Companys future operating results.
In accordance with the accounting requirements of Accounting Standard Codification (ASC 805), Business Combinations,
the Company made an initial allocation of the purchase price of
taskforce
based on the fair value of the assets acquired and liabilities assumed, with the residual recorded as goodwill. As a result of the contingent consideration obligation,
the Company recorded a deferred tax asset on the temporary difference between the book and tax treatment of the contingent consideration. The Companys initial purchase price allocation considers a number of factors, including the valuation of
identifiable intangible assets. In connection with this acquisition, the Company provisionally recorded total intangible assets acquired including approximately $9.0 million of goodwill, $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 $0.6 million for
non-competition
agreements (amortized over 3 years). The goodwill and other intangibles recognized in this transaction are not deductible for tax purposes.
Taskforce
contributed approximately $3.7 million to revenue and approximately $0.3 million to
pre-tax
earnings for the quarter ended November 25, 2017.
On December 4, 2017, the
Company announced the completion of its acquisition of substantially all of the assets and assumption of certain liabilities of Accretive Solutions, Inc. (Accretive). See Note 12,
Subsequent Events
, for additional information.
The Company incurred approximately $0.7 million of transaction related costs during the quarter ended November 25, 2017; these
expenses are included in selling, general and administrative expenses in the Companys Consolidated Statement of Operations.
The
following table summarizes the consideration for the acquisition of
taskforce
and the amounts of the identified assets acquired and liabilities assumed at the acquisition date:
Fair Value of Consideration Transferred (in thousands, except share amounts):
|
|
|
|
|
Cash
|
|
$
|
4,274
|
|
Common stock - 226,628 shares @ $11.48 (closing price on acquisition date discounted for
restriction on sale)
|
|
|
2,602
|
|
Estimated contingent consideration
|
|
|
6,514
|
|
|
|
|
|
|
Total
|
|
$
|
13,390
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
974
|
|
Accounts receivable
|
|
|
1,930
|
|
Prepaid expenses and other current assets
|
|
|
45
|
|
Intangible assets
|
|
|
5,321
|
|
Property and equipment, net
|
|
|
39
|
|
Other assets
|
|
|
(57
|
)
|
|
|
|
|
|
Total identifiable assets
|
|
|
8,252
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
2,116
|
|
Accrued salaries and related obligations
|
|
|
15
|
|
Other current liabilities
|
|
|
83
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
2,215
|
|
|
|
|
|
|
Net identifiable assets acquired
|
|
|
6,037
|
|
Deferred tax liability
|
|
|
(1,686
|
)
|
Goodwill
|
|
|
9,039
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
13,390
|
|
|
|
|
|
|
4. Intangible Assets and Goodwill
The following table summarizes details of the Companys intangible assets and related accumulated amortization as of November 25,
2017. The Company had no amortizable intangible assets as of May 27, 2017 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As November 25, 2017
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
Tradenames (10 years)
|
|
$
|
2,013
|
|
|
$
|
(50
|
)
|
|
$
|
1,963
|
|
Customer contracts & relationships (3 years)
|
|
|
1,895
|
|
|
|
(158
|
)
|
|
|
1,737
|
|
Consultant list (3 years)
|
|
|
781
|
|
|
|
(65
|
)
|
|
|
716
|
|
Non-compete
agreements (3 years)
|
|
|
592
|
|
|
|
(49
|
)
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,281
|
|
|
$
|
(322
|
)
|
|
$
|
4,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intangible assets described above are based upon the provisional estimate of purchase price of
taskforce
discussed in Note 3
Acquisitions
, and may be subject to revision after receipt of certain pending information.
The Company recorded amortization expense for the quarter ended November 25, 2017 of $0.3 million. Future estimated intangible asset
amortization expense (based on existing intangible assets) is $1.0 million, $1.3 million, $1.3 million, $0.5 million and $0.2 million for the years ending May 26, 2018, May 25, 2019, May 30, 2020, May 29,
2021 and May 28, 2022, 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 Companys
international operations that have amortizable intangible assets into U.S. dollars.
10
The following table summarizes the activity in the Companys goodwill balance (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
Goodwill, beginning of year
|
|
$
|
171,088
|
|
|
$
|
171,183
|
|
Acquisitions (see Note 3)
|
|
|
9,039
|
|
|
|
|
|
Impact of foreign currency exchange rate changes
|
|
|
1,081
|
|
|
|
(1,148
|
)
|
|
|
|
|
|
|
|
|
|
Goodwill, end of period
|
|
$
|
181,208
|
|
|
$
|
170,035
|
|
|
|
|
|
|
|
|
|
|
5. Income Taxes
The Companys provision for income taxes was $2.1 million (effective tax rate of approximately 21%) and $3.9 million (effective
tax rate of approximately 41%) for the three months ended November 25, 2017 and November 26, 2016, respectively and $5.1 million (effective tax rate of approximately 33%) and $8.5 million (effective tax rate of approximately 43%)
for the six months ended November 25, 2017 and November 26, 2016, respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax rate because of the volatility in its international operations
that span numerous tax jurisdictions.
The provision for income taxes in the three and six months ended November 25, 2017 and
November 26, 2016 results from taxes on income in the U.S. and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a
lower benefit for losses in certain foreign jurisdictions with tax rates lower than the U.S. statutory rates. The effective tax rate decreased for the three months ended November 25, 2017 due to the reversal of valuation allowances that offset
the deferred tax assets of certain foreign entities.
The Company recognized a benefit of approximately $0.2 million and
$0.5 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the second quarter of fiscal 2018 and 2017, respectively, and approximately $0.6 million and
$1.0 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the six months ended November 25, 2017 and November 26, 2016, respectively.
11
6. Long-Term Debt
In October 2016, the Company entered into a $120 million secured revolving credit facility (Facility) with Bank of America,
consisting of (i) a $90 million revolving loan facility, which includes a $5 million sublimit for the issuance of standby letters of credit (Revolving Loan), and (ii) a $30 million reducing revolving loan
facility, any amounts of which may not be reborrowed after being repaid (Reducing Revolving Loan). The Facility is available for working capital and general corporate purposes, including potential acquisitions and stock repurchases. The
Companys obligations under the Facility are guaranteed by all of the Companys domestic subsidiaries and secured by essentially all assets of the Company, Resources Connection LLC and their domestic subsidiaries, subject to certain
customary exclusions. Borrowings under the Facility bear interest at a rate per annum of either, at the Companys option, (i) a 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 Companys consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of Americas prime rate,
(ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company pays an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.15% to 0.25% depending upon on the Companys
consolidated leverage ratio. The Facility expires October 17, 2021.
The Facility contains both affirmative and negative covenants.
Covenants include, but are not limited to, limitations on the Companys and its subsidiaries ability to incur liens, incur additional indebtedness, make certain restricted payments, merge or consolidate and make disposition of assets. In
addition, the Facility requires the Company to comply with financial covenants limiting the Companys total funded debt, minimum interest coverage ratio and maximum leverage ratio. The Company was in compliance with all financial covenants
under the Facility as of November 25, 2017.
Upon the occurrence of an event of default under the Facility, the lender may cease
making loans, terminate the Facility and declare all amounts outstanding to be immediately due and payable. The Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other
things,
non-payment
defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults.
The Companys borrowings on the Facility were $48.0 million as of November 25, 2017; the Company used the funds in fiscal 2017
to fund a portion of the purchase price of its modified Dutch auction tender offer held in November 2016. In addition, the Company has $1.0 million of outstanding letters of credit issued under the Facility. The Company has $41.0 million
remaining to borrow under the Revolving Loan and $30.0 million remaining under the Reducing Revolving Loan as of November 25, 2017. As of November 25, 2017, the interest rate on the Companys borrowings was 2.9% on one tranche of
$24.0 million based on a
3-month
LIBOR plus 1.50% and 2.8% on a second tranche of $24.0 million based on a
3-month
LIBOR plus 1.50%.
7. Stockholders Equity
Stock Repurchase Program
In July 2015, the Companys board of directors approved a stock repurchase program (the July 2015 program), authorizing the
repurchase, at the discretion of the Companys senior executives, of the Companys common stock for an aggregate dollar limit not to exceed $150 million. Repurchases under the program may take place in the open market or in privately
negotiated transactions and may be made pursuant to a Rule
10b5-1
plan. The Company did not repurchase any common stock on the open market during the six months ended November 25, 2017. As of
November 25, 2017, approximately $125.1 million remained available for future repurchases of the Companys common stock under the July 2015 program.
12
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):
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
Income taxes paid
|
|
$
|
6,248
|
|
|
$
|
12,499
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
712
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Capitalized leasehold improvements paid directly by landlord
|
|
$
|
|
|
|
$
|
485
|
|
Acquisition of
taskforce:
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
$
|
2,602
|
|
|
$
|
|
|
Liability for contingent consideration
|
|
$
|
6,514
|
|
|
$
|
|
|
Dividends declared, not paid
|
|
$
|
3,663
|
|
|
$
|
3,259
|
|
9. Stock-Based Compensation Plans
Stock Options and Restricted Stock
The maximum number of shares of the Companys common stock that may be issued or transferred pursuant to awards under the 2014 Plan equals
the sum of: (1) 2,400,000 shares, plus (2) the number of shares subject to stock options granted under the Resources Connection, Inc. 2004 Performance Incentive Plan and the 1999 Long Term Incentive Plan (the Prior Stock Plans) and
outstanding as of September 3, 2014 (the date at which the Prior Stock Plans terminated), which expire, or for any reason are cancelled or terminated, after that date without being exercised, plus (3) the number of shares subject to
restricted stock, restricted stock unit and other full-value awards granted under the Prior Stock Plans that were outstanding and unvested as of September 3, 2014, which are forfeited, terminated, cancelled, or otherwise reacquired after that
date without having become vested. As of November 25, 2017, 1,831,000 shares were available for award grant purposes under the 2014 Plan, subject to future increases as described in (2) and (3) above and subject to increase as
then-outstanding awards expire or terminate without having become vested or exercised, as applicable.
Awards under the 2014 Plan may
include, but are not limited to, stock options and restricted stock grants. Stock option grants generally vest in equal annual installments over four years and terminate ten years from the date of grant. Restricted stock award vesting is determined
on an individual grant basis. Awards of restricted stock under the 2014 Plan will be counted against the available share limit as two and a half shares for every one share actually issued in connection with the award. The Companys policy is to
issue shares from its authorized shares upon the exercise of stock options.
The following table summarizes the stock option activity for
the six months ended November 25, 2017 (number of shares under option and aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
Under Option
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at May 27, 2017
|
|
|
7,164
|
|
|
$
|
15.08
|
|
|
|
5.56
|
|
|
$
|
1,696
|
|
Granted, at fair market value
|
|
|
984
|
|
|
$
|
15.80
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(137
|
)
|
|
$
|
12.12
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(96
|
)
|
|
$
|
14.65
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(152
|
)
|
|
$
|
20.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at November 25, 2017
|
|
|
7,763
|
|
|
$
|
15.13
|
|
|
|
5.69
|
|
|
$
|
11,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at November 25, 2017
|
|
|
5,301
|
|
|
$
|
15.17
|
|
|
|
4.23
|
|
|
$
|
9,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at November 25, 2017
|
|
|
7,341
|
|
|
$
|
15.11
|
|
|
|
5.47
|
|
|
$
|
11,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, which is the
difference between the Companys closing stock price on the last trading day of the second quarter of fiscal 2018 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 25, 2017. This amount will change based on changes in the fair market value of the Companys common stock. The total
pre-tax
intrinsic
value related to stock options exercised during the three months ended November 25, 2017 and November 26, 2016 was $0.4 million and $0.2 million, respectively, and $0.5 million for both the six months ended November 25,
2017 and November 26, 2016.
13
Stock-Based Compensation Expense
As of November 25, 2017, there was $8.5 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 35 months. Stock-based compensation expense included in selling, general and administrative expenses was $1.5 million and $1.9 million for the three
months ended November 25, 2017 and November 26, 2016, respectively, and $3.1 million and $3.2 million for the six months ended November 25, 2017 and November 26, 2016, 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. There were no capitalized share-based compensation costs during the six months ended November 25, 2017
or November 26, 2016.
The Company granted 79,810 shares of restricted stock during the three and six months ended November 25,
2017 and 16,733 shares of restricted stock during the three and six months ended November 26, 2016. Stock-based compensation expense for existing restricted stock awards was $0.3 million and $0.2 million for the three months ended
November 25, 2017 and November 26, 2016, respectively, and $0.6 million and $0.3 million for the six months ended November 25, 2017 and November 26, 2016, respectively. As of November 25, 2017, there were 260,625
unvested restricted shares, with approximately $3.3 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 Companys common stock at a price equal
to 85% of the lesser of the fair market value of common stock at the beginning or end of each semi-annual stock purchase period. The ESPPs term expires October 16, 2024. A total of 5,900,000 shares of common stock may be issued under
the ESPP. The Company issued 194,000 and 359,000 shares of common stock pursuant to the ESPP during the six months ended November 25, 2017 and the year ended May 27, 2017, respectively. There were 724,000 shares of common stock
available for issuance under the ESPP as of November 25, 2017.
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 Companys Annual Report on
Form
10-K
for the fiscal year ended May 27, 2017. Summarized information regarding the Companys domestic and international operations is shown in the following table (amounts in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the
Three Months Ended
|
|
|
Revenue for the
Six Months Ended
|
|
|
Long-Lived Assets (1) as of
|
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
|
November 25,
2017
|
|
|
May 27,
2017
|
|
United States
|
|
$
|
119,443
|
|
|
$
|
117,645
|
|
|
$
|
232,568
|
|
|
$
|
233,285
|
|
|
$
|
172,587
|
|
|
$
|
173,781
|
|
The Netherlands
|
|
|
4,674
|
|
|
|
4,761
|
|
|
|
8,442
|
|
|
|
8,691
|
|
|
|
19,051
|
|
|
|
18,036
|
|
Other
|
|
|
32,621
|
|
|
|
25,152
|
|
|
|
56,914
|
|
|
|
48,971
|
|
|
|
16,855
|
|
|
|
2,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
156,738
|
|
|
$
|
147,558
|
|
|
$
|
297,924
|
|
|
$
|
290,947
|
|
|
$
|
208,493
|
|
|
$
|
194,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Long-lived assets are comprised of goodwill, intangible assets and property and equipment.
|
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 Companys financial position, cash flows or results of operations.
12. Subsequent Event
On December 4,
2017, the Company announced the completion of its acquisition of substantially all of the assets and assumption of certain liabilities of Accretive. Accretive is a professional services firm that provides expertise in accounting and finance,
enterprise governance, business technology and business transformation solutions to a wide variety of organizations in the U.S. and supports startups through its Countsy suite of back office services. The Company paid consideration of
$19.4 million in cash subject to working capital adjustments and issued 1,150,000 shares of Resources Connection common stock restricted for sale for four years. Results of operations from this transaction will be included in the Companys
consolidated statement of operations beginning in the quarter ending February 24, 2018.
14
In late December 2017, Congress enacted tax reform, Tax Cuts and Jobs Act (H.R. 1).
As details become available, the Company will assess the impact to RGP. While the reduced tax rate is anticipated to benefit RGPs tax position, a number of the changes will partially offset that benefit. Management anticipates the
tax reform will cause a
one-time
reduction in the carrying value of the domestic deferred tax assets and liabilities, causing a
one-time
impact on tax expense during the
quarter of enactment. The Company anticipates further clarification will be available in the third quarter of fiscal 2018.
13. Recent Accounting
Pronouncements
Accounting Pronouncements Adopted During Current Fiscal Year
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
In March 2016, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2016-09.
The new standard modifies several aspects of the accounting and reporting for employee share-based
payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the
vesting period (record forfeitures as they occur or estimate over the vesting period). The new standard is effective for financial statements for annual and interim periods within those annual periods beginning after December 15, 2016 and was
adopted by the Company on a prospective basis effective May 28, 2017. The Company has elected to account for forfeitures based on previous guidance and will make an estimate of the number of awards expected to vest with a subsequent true up to
actual forfeitures. As a result of the adoption, excess income tax benefits and deficiencies from stock-based compensation are now recognized as a discrete item within the provision for income taxes in the Consolidated Statement of Operations rather
than additional
paid-in
capital in the Consolidated Balance Sheets. In future quarters, when tranches of unexercised options expire, there could be a potentially significant impact on the Companys income
tax expense and income tax percentage.
Accounting Pronouncements Pending Adoption
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 (for the Company, fiscal 2019). Early adoption is permitted. 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.
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 for interim or
annual goodwill impairments tests performed on testing dates after January 1, 2017. Based on the Companys most recent annual goodwill impairment test completed in fiscal 2017, the Company expects no initial impact on adoption.
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
In August 2016, the FASB issued ASU
2016-15,
which provides guidance designed to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Examples include cash payments for debt
prepayment or debt extinguishment; contingent consideration payments made after a business combination; and proceeds from the settlement of corporate-owned life insurance policies.
The new standard is effective for financial statements for
annual and interim periods within those annual periods beginning after December 15, 2017 (for the Company, fiscal 2019). Early adoption is permitted. The Company believes the adoption of this guidance will not have a material impact on its
consolidated financial statements.
Leases (Topic 842): Leases.
In February 2016, the FASB issued ASU
2016-02,
which amends the existing guidance to require lessees to recognize operating lease obligations on their balance sheets by recording the rights and obligations created by those leases. The requirements are
effective for financial statements for annual periods and interim periods within those annual periods beginning after December 15, 2018 (for the Company, fiscal 2020), and early adoption is permitted. The Company is currently evaluating the
impact ASU
2016-02
will have on its consolidated financial statements and believes it will have a significant impact on the Companys reported balance sheet assets and liabilities. Under current
accounting guidelines, the Companys office leases are operating lease arrangements, in which rental payments are treated as operating expenses and there is no recognition of the arrangement on the balance sheet as an asset with the related
obligation to the lessor as a liability.
15
Revenue from Contracts with Customers (Topic 606)
: In May 2014, the FASB issued ASU
2014-09,
a comprehensive new revenue recognition standard that will supersede 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. The guidance provides a number of steps to apply to achieve that core principle and requires additional disclosures. In August 2015, the FASB issued ASU
2015-14,
which
delays the required implementation date for the Company until fiscal 2019, with early adoption permitted for fiscal 2018. The Company has elected to adopt the guidance beginning in fiscal 2019. The standard allows for either full
retrospective adoption, meaning the standard is applied to all periods presented, or cumulative effect adoption, meaning the standard is applied only to the most current period presented in the financial statements. In addition, in
March 2016, the FASB issued
ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients (Topic 606), which provides clarifying guidance in certain areas and adds some practical expedients. The
effective date for this ASU is the same as the effective date for
ASU 2014-09.
We intend to implement the standard using the modified retrospective approach, which recognizes the cumulative effect (if
any) of application recognized on that date. The Company is currently evaluating the impact of adoption of this guidance, including required disclosures, and based upon our current analysis, does not expect a significant impact on processes, systems
or controls. The Company will continue to evaluate the impact of adoption of this guidance and its preliminary assessments are subject to change.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified
Public Accountants and the SEC did not, or are not expected to, have a material effect on the Companys results of operations, financial position or cash flows.
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with our consolidated financial statements and accompanying notes. This discussion and analysis contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to expectations concerning matters that are not historical facts. Such forward-looking statements may be identified by words such as
anticipates, believes, can, continue, could, estimates, expects, intends, may, plans, potential,
predicts, remain, should, or will or the negative of these terms or other comparable terminology. These statements, and all phases of our operations, are subject to known and unknown risks,
uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements and those of our industry to differ materially from those expressed or implied by these forward-looking statements. You are urged to
carefully review the disclosures we make concerning risks, uncertainties and other factors that may affect our business or operating results, including those identified in Part II, Item 1A. Risk Factors below and in our Annual Report on Form
10-K
for the year ended May 27, 2017 (File
No. 0-32113).
Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also
affect our business or operating results. Readers are cautioned not to place undue reliance on the forward-looking statements included herein, which speak only as the date of this filing. We do not intend, and undertake no obligation, to update the
forward-looking statements in this filing to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, unless required by law to do so. References in this filing to Resources
Connection, RGP, Resources Global Professionals, the Company, we, us, and our refer to Resources Connection, Inc. and its subsidiaries.
Overview
RGP is a multinational
consulting firm that provides agile consulting services to its global client base who are faced with disruption, business transformation and compliance issues. We bring functional competencies in the areas of accounting; finance; governance, risk
and compliance management; corporate advisory, strategic communications and restructuring; information management; human capital; supply chain management; and legal and regulatory. We assist our clients with projects requiring specialized expertise
in:
|
|
|
Finance and accounting process transformation and optimization; financial reporting and analysis; technical and operational accounting; merger and acquisition due diligence and integration; audit response;
implementation of new accounting standards such as the revenue recognition pronouncement and lease accounting standard; and remediation support
|
|
|
|
Information management services including program and project management; business and technology integration; data strategy, including governance, security and privacy; and business performance management (such as core
planning and consolidation systems)
|
|
|
|
Corporate advisory, strategic communications and restructuring services
|
|
|
|
Governance, risk and compliance management services including contract and regulatory compliance efforts under, for example, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes Oxley Act of
2002 (Sarbanes); Enterprise Risk Management; internal controls management; and operation and IT audits
|
16
|
|
|
Supply chain management services including strategy development; procurement and supplier management; logistics and materials management; supply chain planning and forecasting; and Unique Device Identification
compliance
|
|
|
|
Human capital services including change management; organization development and effectiveness; compensation and incentive plan strategies and design; and optimization of human resources technology and operations
|
|
|
|
Legal and regulatory services supporting commercial transactions; global compliance initiatives; and law department operations, business strategy and analytics
|
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 25, 2017, we served clients from offices in 21 countries, including 26 international offices and 43 offices in the United States.
During the second quarter of fiscal 2018, we added two international offices as a result of our acquisition of
taskforce Management on Demand AG
(
taskforce
) discussed below. Our global footprint allows the Company to
support the global initiatives of our multinational client base.
The Company continues to make progress against its strategic initiatives
announced in April 2017. During the second quarter of fiscal 2018 the Company continued to advance its initiative to cultivate a more sophisticated and robust sales culture. The Company launched a new learning and development program to enhance
training and accountability across the organization including providing training on new management techniques and processes. RGP continued the initiative to roll out new compensation programs to drive accountability and profitable growth. The
Company has completed other facets of this initiative, including the alignment of the Companys sales process and the establishment of an enterprise-wide Business Development function. Another initiative, the Companys Strategic Client
Program, with a dedicated account team for certain high profile clients with world-wide operations, is performing well with revenue of clients in this program up 8.0% since the beginning of the fiscal year. RGP expects to complete its sales culture
transformation substantially by the end of the fiscal year.
In addition, the Company believes it made good progress on further building
its national business development function targeting the middle market, where the Company sees significant growth opportunities. The Company has now completed deployment of Salesforce across all of its markets, and continues to leverage this
platform to improve the organizations ability to drive and coordinate business development globally. The acquisition of substantially all of the assets and assumption of certain liabilities of Accretive Solutions, Inc. (Accretive)
in December 2017 and discussed further below will also enhance the Companys capabilities in the middle market.
With regard to the
second initiative to redesign the Companys business model to enhance its client offerings, the redesign is close to completion, 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. In the second quarter, the Company implemented the new operating model for sales, talent and integrated solutions within RGP
for all of North America. We believe this effort has already delivered improved revenue growth and the Company expects this upward performance trend to continue throughout fiscal year 2018.
With respect to the cost containment initiative, the Company remains focused on improved leverage of its selling general and administrative
expenses (S, G & A) as a percentage of revenue and cost synergies in the core business and with the Accretive acquisition. The impact of certain headcount reductions made in fiscal 2017 have been masked by
one-time
expenses during the first half of the fiscal year incurred for severance, acquisition and sales transformation. RGP remains committed to managing its cost structure to achieve improved S, G & A
performance as measured against revenue.
During the second quarter of fiscal 2018, the Company completed its acquisition of
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 translated to U.S. dollars based on exchange rates at the date of acquisition) for all of the outstanding shares of
taskforce
in a combination of cash and restricted stock. In addition, the purchase agreement requires additional
earn-out
payments resulting from application of a formula based upon Adjusted EBITDA (as defined in the purchase agreement) for calendar years 2017, 2018 and 2019. The estimated fair value of these additional
earn-out
payments are recorded as contingent consideration at a discounted liability in the Companys Consolidated Balance Sheet for 5.5 million (approximately $6.5 million translated to U.S. dollars
based on exchange rates at the date of acquisition) as of November 25, 2017. The contingent consideration is subject to revision until ultimately settled and such adjustments are recorded through the Companys Statement of Operations. For
the twelve months ended December 31, 2016,
taskforce
revenues were approximately 12 million ($13.3 million). Results of operations of
taskforce
are included in the Companys consolidated statement of operations in
the quarter ending November 25, 2017, including revenue of $3.7 million and
pre-tax
income of $0.3 million.
17
Subsequent to the end of the second quarter of fiscal 2018, the Company announced the completion
of its acquisition of substantially all of the assets and assumption of certain liabilities of Accretive. Accretive is a professional services firm that provides expertise in accounting and finance, enterprise governance, business technology and
business transformation solutions to a wide variety of organization in the U.S. and supports startups through its Countsy suite of back office services. The Company paid consideration of $19.4 million in cash subject to working capital
adjustments and issued 1,150,000 shares of Resources Connection, Inc. common stock restricted for sale for four years. The Company expects EBITDA to increase after
9-12
months, driven by cost synergies that
RGP expects to achieve by the end of calendar 2018, resulting from office consolidations, the elimination of redundant back-office functions and other specific cost reductions. Results of operations from this transaction will be included in the
Companys consolidated statement of operations beginning in the quarter ending February 24, 2018.
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 managements most difficult, subjective or complex judgments. There have been no material changes in our
critical accounting policies, or in the estimates and assumptions underlying those policies, from those described in our Annual Report on Form
10-K
for the year ended May 27, 2017.
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. Our goodwill is not subject to periodic amortization. This asset is considered to have an indefinite life and its carrying value is required to be
assessed by us for impairment at least annually. Depending on future market values of our stock, our operating performance and other factors, these assessments could potentially result in impairment reductions of this intangible asset in the future
and this adjustment may materially affect the Companys future financial results and financial condition.
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 Companys future financial results.
Income taxes
In order to prepare our Consolidated Financial Statements, we are required to make estimates of income taxes, if
applicable, in each jurisdiction in which we operate. The process incorporates an assessment of any current tax exposure together with temporary differences resulting from different treatment of transactions for tax and financial statement purposes.
These differences result in deferred tax assets and liabilities that are included in our Consolidated Balance Sheets. The recovery of deferred tax assets from future taxable income must be assessed and, to the extent recovery is not likely, we will
establish a valuation allowance. An increase in the valuation allowance results in recording additional tax expense and any such adjustment may materially affect the Companys future financial results. If the ultimate tax liability differs from
the amount of tax expense we have reflected in the Consolidated Statements of Operations, an adjustment of tax expense may need to be recorded and this adjustment may materially affect the Companys future financial results and financial
condition.
Revenue recognition
We primarily charge our clients on an hourly basis for the professional services of our
consultants. We recognize revenue once services have been rendered and invoice the majority of our clients in the United States on a weekly basis. Some of our clients served by our international offices are billed on a monthly basis. Our clients are
contractually obligated to pay us for all hours billed. To a much lesser extent, we also earn revenue if a client hires one of our consultants. This type of contractually
non-refundable
revenue is recognized
at the time our client completes the hiring process.
Stock-based compensation
Under our 2014 Performance Incentive Plan,
officers, employees, and outside directors have received or may receive grants of restricted stock, stock units, options to purchase common stock or other stock or stock-based awards. Under our Employee Stock Purchase Plan (the ESPP),
eligible officers and employees may purchase our common stock in accordance with the terms of the plan.
18
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 ($0.12 per share in the first and second quarter of fiscal 2018 and $0.11 per share in each quarter of fiscal 2017) is also incorporated in determining the estimated value per share of
employee stock option grants. Such dividends are subject to quarterly board of director approval. The Companys expected life of stock option grants is 5.7 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.
Results of Operations
The following
tables set forth, for the periods indicated, our Consolidated Statements of Operations data. These historical results are not necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
|
|
(Amounts in thousands)
|
|
|
(Amounts in thousands)
|
|
Revenue
|
|
$
|
156,738
|
|
|
$
|
147,558
|
|
|
$
|
297,924
|
|
|
$
|
290,947
|
|
Direct cost of services
|
|
|
97,319
|
|
|
|
91,048
|
|
|
|
184,807
|
|
|
|
179,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
59,419
|
|
|
|
56,510
|
|
|
|
113,117
|
|
|
|
111,037
|
|
Selling, general and administrative expenses
|
|
|
47,498
|
|
|
|
46,056
|
|
|
|
94,913
|
|
|
|
89,670
|
|
Amortization of intangible assets
|
|
|
322
|
|
|
|
|
|
|
|
322
|
|
|
|
|
|
Depreciation expense
|
|
|
947
|
|
|
|
808
|
|
|
|
1,887
|
|
|
|
1,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
10,652
|
|
|
|
9,646
|
|
|
|
15,995
|
|
|
|
19,765
|
|
Interest expense
|
|
|
397
|
|
|
|
64
|
|
|
|
734
|
|
|
|
64
|
|
Interest income
|
|
|
(32
|
)
|
|
|
(40
|
)
|
|
|
(60
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
10,287
|
|
|
|
9,622
|
|
|
|
15,321
|
|
|
|
19,811
|
|
Provision for income taxes
|
|
|
2,149
|
|
|
|
3,930
|
|
|
|
5,071
|
|
|
|
8,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,138
|
|
|
$
|
5,692
|
|
|
$
|
10,250
|
|
|
$
|
11,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
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. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by revenue.
These measures assist management in assessing our core operating performance and the Company believes they are also useful to investors as an alternative measure of our operating performance. The following table presents EBITDA, Adjusted EBITDA and
Adjusted EBITDA Margin for the periods indicated and includes a reconciliation of such measures to net income, the most directly comparable GAAP financial measure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
|
|
(Amounts in thousands)
|
|
|
(Amounts in thousands)
|
|
Net income
|
|
$
|
8,138
|
|
|
$
|
5,692
|
|
|
$
|
10,250
|
|
|
$
|
11,330
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
322
|
|
|
|
|
|
|
|
322
|
|
|
|
|
|
Depreciation expense
|
|
|
947
|
|
|
|
808
|
|
|
|
1,887
|
|
|
|
1,602
|
|
Interest expense
|
|
|
397
|
|
|
|
64
|
|
|
|
734
|
|
|
|
64
|
|
Interest income
|
|
|
(32
|
)
|
|
|
(40
|
)
|
|
|
(60
|
)
|
|
|
(110
|
)
|
Provision for income taxes
|
|
|
2,149
|
|
|
|
3,930
|
|
|
|
5,071
|
|
|
|
8,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
11,921
|
|
|
|
10,454
|
|
|
|
18,204
|
|
|
|
21,367
|
|
Stock-based compensation expense
|
|
|
1,450
|
|
|
|
1,855
|
|
|
|
3,062
|
|
|
|
3,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
13,371
|
|
|
$
|
12,309
|
|
|
$
|
21,266
|
|
|
$
|
24,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
156,738
|
|
|
$
|
147,558
|
|
|
$
|
297,924
|
|
|
$
|
290,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA Margin
|
|
|
8.5
|
%
|
|
|
8.3
|
%
|
|
|
7.1
|
%
|
|
|
8.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The financial measures and key performance indicators we use to assess our financial and operating performance
above are not defined by, or calculated in accordance with, GAAP. A
non-GAAP
financial measure is defined as a numerical measure of a companys financial performance that (i) excludes amounts, or is
subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the Consolidated Statements of Operations; or (ii) includes amounts, or is subject
to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are
non-GAAP
financial measures. We believe 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 Companys 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:
|
|
|
Although depreciation and amortization are
non-cash
charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA and Adjusted EBITDA
do not reflect any cash requirements for such replacements;
|
|
|
|
Stock-based compensation is an element of our long-term incentive compensation program, although we exclude it as an expense from Adjusted EBITDA when evaluating our ongoing operating performance for a particular
period; and
|
|
|
|
Other companies in our industry may calculate Adjusted EBITDA and Adjusted EBITDA Margin differently than we do, limiting their usefulness as comparative measures.
|
Due to these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin should not be considered a substitute for performance measures
calculated in accordance with GAAP.
Three Months Ended November 25, 2017 Compared to Three Months Ended November 26, 2016
Percentage change computations are based upon amounts in thousands.
Revenue
.
Revenue increased $9.1 million, or 6.2%, to $156.7 million for the three months ended
November 25, 2017 from $147.6 million for the three months ended November 26, 2016. On a constant currency basis, revenue increased 5.3%. Revenue in the second quarter of fiscal 2018 includes $3.7 million in revenue resulting
from
taskforce
since its acquisition on August 31, 2017. Absent the
taskforce
revenue, revenue increased $5.4 million, or 3.7%. We deliver our services to clients, whether multi-national or locally based, in a similar fashion
across the globe. Excluding
taskforce
for comparison purposes, bill rates improved 3.4% (2.5% on a constant currency basis) and hours worked increased 0.1% between the two periods. The Company experienced an upswing in revenue in certain
industries and markets during the quarter; however, consistent with recent trends, the Companys revenue in the financial services industry was down quarter-over-quarter. The timing of the result of efforts to improve our client penetration in
the financial services industry is uncertain.
20
As presented in the table below, revenue increased in the second quarter of fiscal 2018 compared
to the same quarter of fiscal 2017 in Europe and North America but declined in Asia Pacific. A portion of the European increase is due to the acquisition of
taskforce
discussed above (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the
Three Months Ended
|
|
|
|
|
|
% of Total
|
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
|
%
Change
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
North America
|
|
$
|
122,458
|
|
|
$
|
120,052
|
|
|
|
2.0
|
%
|
|
|
78.1
|
%
|
|
|
81.4
|
%
|
Europe
|
|
|
22,961
|
|
|
|
15,945
|
|
|
|
44.0
|
%
|
|
|
14.7
|
|
|
|
10.8
|
|
Asia Pacific
|
|
|
11,319
|
|
|
|
11,561
|
|
|
|
(2.1
|
)%
|
|
|
7.2
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
156,738
|
|
|
$
|
147,558
|
|
|
|
6.2
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2017 second quarter conversion rates, international revenues would have been lower than reported
under GAAP by approximately $1.3 million in the second quarter of fiscal 2018. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue increased in Europe and North America
by 35.7% and 1.9%, respectively, while decreasing in Asia Pacific by 0.8%.
The number of consultants on assignment as of
November 25, 2017 was 2,746 compared to 2,649 consultants engaged as of November 26, 2016. The number of consultants on assignment as of November 25, 2017 includes 60 consultants from the
taskforce
acquisition.
We operated 69 (26 abroad) offices as of November 25, 2017 and 67 (23 abroad) as of November 26, 2016; the change between the two
years is the result of the addition of two offices acquired in the
taskforce
transaction and the formal establishment of offices in Zurich, Switzerland and Guangzhou, China since the end of the second quarter of fiscal 2017; these additions
were offset by two office closures in the United States and one office closure in Canada.
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 $6.3 million, or 6.9%, to $97.3 million for the
three months ended November 25, 2017 from $91.0 million for the three months ended November 26, 2016. Direct cost of services includes consultant costs of $2.6 million related to the
taskforce
acquisition. Excluding the
impact of
taskforce
, the increase in the amount of direct cost of services between the periods was primarily attributable to an increase of 3.4% in the average pay rate per hour between the two quarters and an increase in benefit costs of
3.5%; hours worked increased 0.1% between the two quarters. Currency fluctuations between the quarters increased direct cost of services by $0.9 million.
Direct cost of services as a percentage of revenue was 62.1% and 61.7% for the three months ended November 25, 2017 and November 26,
2016, respectively. The increase in the direct cost of services as a percentage of revenue between the two quarters was driven principally by the impact of
taskforces
higher direct cost of services percentage and to higher medical
coverage expenses and unreimbursed out of pocket expenses, such as travel, in the fiscal 2018 quarter.
Our target direct cost
of services percentage is 60% for all of our offices.
Selling, General and Administrative Expenses
.
S, G &
A as a percentage of revenue was 30.3% and 31.2% for the quarters ended November 25, 2017 and November 26, 2016, respectively. The improved current quarter percentage is the result of leverage from the higher revenue in the second quarter
of fiscal 2018. S, G & A increased to $47.5 million for the second quarter of fiscal 2018 from $46.1 million for the same period in the prior year. The second quarter of fiscal 2018 S, G & A includes $2.9 million of
expenses as follows: approximately $0.4 million related to severance expenses, $0.7 million of acquisition related costs and $1.8 million related to costs of the Companys
on-going
transformation and integration in accordance with its strategic initiatives to drive revenue growth and improve cost containment. The prior year S, G & A included approximately $1.1 million in severance and $0.4 million in costs
related to accelerated vesting of options previously granted to a senior executive in connection with his departure from the Company. Absent these costs in each period, S, G & A spend was approximately the same in each quarter. However, the
second quarter of fiscal 2018 also includes S, G & A associated with the operations of
taskforce
of approximately $0.8 million.
21
Management and administrative headcount was 783 at the end of the second quarter of fiscal 2018
(including 17 from the
taskforce
acquisition) and 782 at the end of the second quarter of fiscal 2017.
Sequential
Operations
.
On a sequential quarter basis, fiscal 2018 second quarter revenues increased approximately 11.0% (10.6% constant currency), from $141.2 million to $156.7 million. Revenue for fiscal 2018 includes
$3.7 million from the acquisition of
taskforce
. Absent the
taskforce
revenue, revenue increased $11.8 million or 8.4%. Excluding
taskforce
, hours worked increased 7.8% while average bill rates improved 0.8% between the
first and second quarter. The Company experienced consistent revenue growth during the Companys second quarter compared to the first quarter; some of this growth is attributable to fewer consultants on holiday during the second quarter
compared to the first quarter, which included the traditional summer vacation period. The Companys sequential revenue increased in North America (5.6%), Europe (51.6%) and Asia Pacific (12.1%). On a constant currency basis, using the
comparable first quarter fiscal 2018 conversion rates, sequential revenue increased in North America (5.6%), Europe (48.0%) and Asia Pacific (11.6%).
Direct cost of services as a percentage of revenue was 62.1% and 62.0% in the second and first quarters of fiscal 2018, respectively; the
higher direct cost of services percentage in the second quarter is primarily the result of a 1.7% increase in average pay rate per hour, offset by a decrease in the amount of Company payroll tax expense typically experienced toward the end of the
calendar year.
The ratio of S, G & A to revenue improved from 33.6% for the quarter ended August 26, 2017 to 30.3% for the
quarter ended November 25, 2017. The ratio changed favorably because of improved leverage in the second quarter on a higher revenue base. Total spend in the second quarter of fiscal 2018 increased slightly to $47.5 million from
$47.4 million in the previous quarter. The second quarter of fiscal 2018 S, G & A includes $2.9 million of expenses as follows: approximately $0.4 million related to severance expenses, $0.7 million of acquisition related
costs and $1.8 million related to costs of the Companys
on-going
transformation and integration in accordance with its strategic initiatives to drive revenue growth and improve cost containment. The
first quarter of fiscal 2018 S, G & A includes approximately $3.8 million of expenses as follows: approximately $1.4 million in severance expenses, approximately $0.7 million of acquisition related costs and approximately
$1.7 million related to costs of the Companys
on-going
transformation and integration in accordance with its strategic initiatives to drive revenue growth and improve cost containment. Absent the S,
G & A of taskforce of approximately $0.8 million in the second quarter fiscal 2018, spend was approximately the same in each quarter.
Amortization and Depreciation Expense.
Amortization of intangible assets was $0.3 million in the second quarter of fiscal
2018 as a result of commencing amortization related to identifiable assets acquired in the August 31, 2017 purchase of
taskforce
. Those assets include: $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 $0.6 million for
non-competition
agreements (amortized
over 3 years). The Company had no amortization expense in the second quarter of fiscal 2017. Based upon identified intangible assets recorded at November 25, 2017, the Company anticipates amortization expense related to identified intangible
assets to approximate $1.0 million during the fiscal year ending May 26, 2018.
Depreciation expense was $0.9 million and
$0.8 million in the second quarter of fiscal 2018 and 2017, respectively.
Interest Expense (Income)
.
The
Company entered into a $120 million secured revolving credit facility (Facility) with Bank of America in October 2016. The Facility consists of (i) a $90 million revolving loan facility, which includes a $5 million
sublimit for the issuance of standby letters of credit (Revolving Loan), and (ii) a $30 million reducing revolving loan facility, any amounts of which may not be reborrowed after being repaid (Reducing Revolving
Loan). The Facility is available for working capital and general corporate purposes, including potential acquisitions and stock repurchases. Our obligations under the Facility are guaranteed by all of the Companys domestic subsidiaries
and secured by essentially all assets of the Company, Resources Connection LLC and their domestic subsidiaries, subject to certain customary exclusions. Borrowings under the Facility bear interest at a rate per annum of either, at the Companys
option, (i) a LIBOR rate defined in the Facility plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus a margin of 0.25% or 0.50%, with the applicable margin depending on the Companys consolidated leverage ratio. The
alternate base rate is the highest of (i) Bank of Americas prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company pays an unused commitment fee on the average daily unused portion
of the Facility at a rate of 0.15% to 0.25% depending upon on the Companys consolidated leverage ratio. The Facility expires October 17, 2021.
Total interest expense for the second quarter of fiscal 2018, including commitment fees, was approximately $0.4 million. During the
second quarter of fiscal 2017 the Company incurred $0.1 million in total interest expense, as the Facility was only utilized for a portion of the quarter. As of November 25, 2017, the interest rate on the Companys borrowings was 2.9%
on one tranche of $24.0 million based on a
3-month
LIBOR plus 1.50% and 2.8% on a second tranche of $24.0 million based on a
3-month
LIBOR plus 1.50%. The
Companys interest income was $32,000 in the second quarter of fiscal 2018 compared to $40,000 for the same period of fiscal 2017. Interest income declined between the two periods as a result of the use of cash in the Dutch auction tender offer
in November 2016, reducing amounts available for investment.
22
Income Taxes.
The Companys provision for income taxes was $2.1 million
(effective tax rate of approximately 21%) and $3.9 million (effective tax rate of approximately 41%) for the three months ended November 25, 2017 and November 26, 2016, respectively. The Company records tax expense based upon an
actual effective tax rate versus a forecasted tax rate because of the volatility in its international operations which span numerous tax jurisdictions.
The provision for income taxes in both the second quarter of fiscal 2018 and 2017 resulted from taxes on income in the United States and
certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a lower benefit for losses in certain foreign jurisdictions with tax
rates lower than the United States statutory rates. The effective tax rate decreased for the three months ended November 25, 2017 due to the reversal of valuation allowances that offset the deferred tax assets of certain foreign entities.
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 the Companys effective tax rate will remain constant in the future because of the lower
benefit from the United States statutory rate for losses in certain foreign jurisdictions and the limitation on the benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established.
The Company can only recognize a potential tax benefit for employees acquisition and subsequent sale of shares purchased through
the ESPP if the sale occurs within a certain defined period. As a result, the Companys provision for income taxes may fluctuate from these factors for the foreseeable future. The Company recognized a benefit of approximately $0.2 million
and $0.5 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the second quarter of fiscal 2018 and 2017, respectively. The proportion of expense related to
non-qualified
stock option grants (for which the Company may recognize a tax benefit in the same quarter as the related compensation expense in most instances) is significant as compared to expense related to
disqualifying dispositions under the ESPP. However, the timing and amount of eligible disqualifying transactions under the ESPP cannot be predicted. The Company predominantly grants nonqualified stock options to employees in the United States.
Six Months Ended November 25, 2017 Compared to Six Months Ended November 26, 2016
Percentage change computations are based upon amounts in thousands.
Revenue
.
Revenue increased $7.0 million, or 2.4%, to $297.9 million for the six months ended November 25,
2017 from $290.9 million for the six months ended November 26, 2016. On a constant currency basis, revenue increased 2.0%. Revenue in the first half of fiscal 2018 includes $3.7 million in revenue resulting from
taskforce
since
its acquisition on August 31, 2017. Absent the
taskforce
revenue, revenue increased $3.3 million or 1.1%. Excluding
taskforce
for comparison purposes, bill rates improved 2.5% (no difference in constant currency on a rounded
basis) and hours worked decreased 1.7% between the two periods. During the first half of fiscal 2018, the Company experienced an upswing in revenue in certain industries and markets; however, consistent with recent trends, the Companys revenue
in the financial services industry was down year-over-year. The timing of the results of efforts to improve our client penetration in the financial services industry is uncertain.
As presented in the table below, revenue increased in the first six months of fiscal 2018 compared to the first six months of fiscal 2017 in
Europe and North America but declined in Asia Pacific (dollars in thousands):
|
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|
Revenue for the
Six Months Ended
|
|
|
|
|
|
% of Total
|
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
|
%
Change
|
|
|
November 25,
2017
|
|
|
November 26,
2016
|
|
North America
|
|
$
|
238,395
|
|
|
$
|
238,028
|
|
|
|
0.2
|
%
|
|
|
80.0
|
%
|
|
|
81.8
|
%
|
Europe
|
|
|
38,110
|
|
|
|
30,053
|
|
|
|
26.8
|
%
|
|
|
12.8
|
|
|
|
10.3
|
|
Asia Pacific
|
|
|
21,419
|
|
|
|
22,866
|
|
|
|
(6.3
|
)%
|
|
|
7.2
|
|
|
|
7.9
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|
|
|
|
|
|
|
|
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Total
|
|
$
|
297,924
|
|
|
$
|
290,947
|
|
|
|
2.4
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
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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 2017 period, international revenues would have been lower than
reported under GAAP by approximately $1.1 million in the first half of fiscal 2018. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue increased in Europe and North
America by 22.3% and 0.1%, respectively, while decreasing in Asia Pacific by 4.5%.
23
Direct Cost of Services
.
Direct cost of services increased
$4.9 million, or 2.7%, to $184.8 million for the six months ended November 25, 2017 from $179.9 million for the six months ended November 26, 2016. Direct cost of services includes consultant costs of $2.6 million
related to the
taskforce
acquisition. Excluding the impact of
taskforce
, the increase in the amount of direct cost of services between the periods was primarily attributable to an increase in the average pay rate per hour of 3.4% (no
difference on a rounded constant currency basis), an increase in benefit costs of 2.4% and an increase in reimbursable expenses of 8.3%. These increases were offset by a decrease in hours worked of 1.7%.
Direct cost of services as a percentage of revenue was 62.0% and 61.8% for the six months ended November 25, 2017 and November 26,
2016, respectively. The higher percentage in fiscal 2018 was primarily due to increased medical coverage expenses and a slight decrease in the bill rate/pay rate ratio.
Our target direct cost of services percentage is 60% for all of our offices.
Selling, General and Administrative Expenses
.
S, G & A as a percentage of revenue was 31.9% and 30.8% for the
six months ended November 25, 2017 and November 26, 2016, respectively. The higher current quarter percentage is the result of higher spend in the first half of fiscal 2018 compared to the prior year. S, G & A increased to
$94.9 million for the first half of fiscal 2018 from $89.7 million for the same period in the prior year. The first half of fiscal 2018 S, G & A includes $6.7 million of expenses as follows: approximately $1.8 million
related to severance expenses, $1.4 million of acquisition related costs and $3.5 million related to costs of the Companys
on-going
transformation and integration in accordance with its
strategic initiatives to drive revenue growth and improve cost containment. The first half of fiscal 2017 S, G & A includes approximately $1.5 million of severance related expenses. Absent these costs in each period, S, G & A
spend was approximately the same for each six month period. However, the fiscal 2018 period also includes S, G & A associated with the operations of
taskforce
of approximately $0.8 million.
Amortization and Depreciation Expense.
Amortization of intangible assets was $0.3 million in the first half of fiscal 2018
as a result of commencing amortization related to identifiable assets acquired in the August 31, 2017 purchase of
taskforce
. The Company had no amortization expense in the first half of fiscal 2017. Depreciation expense was
$1.9 million for the six months ended November 25, 2017 compared to $1.6 million for the six months ended November 26, 2016.
Interest Expense (Income)
.
As described further below under the caption Liquidity and Capital Resources, the Company
entered into a $120 million Facility with Bank of America in October 2016.
Total interest expense for the first half of fiscal 2018 was approximately $0.7 million, compared to $0.1 million in the first half of fiscal 2017 when
the Facility was only accessed for a short period of time. The Companys interest income was $60,000 in the first half of fiscal 2018 compared to $110,000 for the same period of fiscal 2017. Although rates have generally improved in the first
half of fiscal 2018 compared to the same period in the prior year, interest income declined between the two periods as a result of the use of cash in the Dutch auction tender offer in November 2016, reducing amounts available for investment.
Income Taxes.
The Companys provision for income taxes was $5.1 million (effective tax rate of approximately 33%) and
$8.5 million (effective tax rate of approximately 43%) for the six months ended November 25, 2017 and November 26, 2016, respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax
rate because of the volatility in its international operations which span numerous tax jurisdictions.
The provision for income taxes for
the six months ended November 25, 2017 and November 26, 2016 resulted from taxes on income in the United States and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on
operating loss carryforwards had previously been established and a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the United States statutory rates. The effective tax rate decreased for the six months ended
November 25, 2017 due to the reversal of valuation allowances that offset the deferred tax assets of certain foreign entities. 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 the Companys effective tax rate will remain constant in the future because of the lower benefit from the United States statutory rate for losses in certain foreign jurisdictions and the limitation on the
benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established.
The
Company can only recognize a potential tax benefit for employees acquisition and subsequent sale of shares purchased through the ESPP if the sale occurs within a certain defined period. As a result, the Companys provision for income
taxes may fluctuate from these factors for the foreseeable future. The Company recognized a benefit of approximately $0.6 million and $1.0 million related to stock-based compensation for nonqualified stock options expensed and for
disqualifying dispositions under the ESPP during the halves of fiscal 2018 and 2017, respectively. The proportion of expense related to
non-qualified
stock option grants (for which the Company may recognize a
tax benefit in the same quarter as the related compensation expense in most instances) is significant as compared to expense related to disqualifying dispositions under the ESPP. However, the timing and amount of eligible disqualifying transactions
under the ESPP cannot be predicted. The Company predominantly grants nonqualified stock options to employees in the United States.
24
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.
Liquidity and Capital Resources
Our
primary source of liquidity is cash provided by our operations and, historically, to a lesser extent, stock option exercises and ESPP purchases. On an annual basis, we have generated positive cash flows from operations since inception. Our ability
to continue to increase cash flow from operations in the future will be, at least in part, dependent on continued improvement in global economic conditions. As of November 25, 2017, the Company had $56.3 million of cash and cash
equivalents.
In October 2016, we entered into a $120 million Facility with Bank of America. The Facility is available for working
capital and general corporate purposes, including potential acquisitions and stock repurchases. The Facility allows the Company to choose the interest rate applicable to advances. See Note 6
Long-Term Debt
in the Notes to the
Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q
for further information on the Facility. As of November 25, 2017, the Company had borrowings of
approximately $48.0 million under the Facility and approximately $1.0 million of outstanding letters of credit for the benefit of third parties related to operating leases and guarantees. As of November 25, 2017, the Company was in
compliance with the financial covenants in the Facility.
Operating Activities
Operating activities for the six months ended November 25, 2017 provided cash of $1.6 million compared to $8.1 million for the
six months ended November 26, 2016. Cash provided by operations in the first six months of fiscal 2018 resulted from net income of $10.3 million and
non-cash
items of $4.7 million. These amounts
were partially offset by net unfavorable changes in operating assets and liabilities of $13.3 million due primarily to the increase in the balance of accounts receivable as of the end of the second quarter of fiscal 2018. In the first six
months of fiscal 2017, cash provided by operations resulted from net income of $11.3 million and
non-cash
items of $4.6 million, partially offset by net unfavorable changes in operating assets and
liabilities of $7.8 million. The primary driver of the change in cash provided by operations between the two periods was the increase in accounts receivable during fiscal 2018 combined with the decrease in net income in fiscal 2018, both of
which negatively impacted cash.
Non-cash
items in both fiscal 2018 and fiscal 2017 include depreciation and stock-based compensation expense. These charges do not reflect an actual cash outflow from the
Company.
Investing Activities
Net cash used in investing activities was $4.2 million for the first six months of fiscal 2018, compared to a source of cash of
$17.8 million in the comparable prior year period. The primary use of cash in fiscal 2018 was cash used to acquire
taskforce
of approximately $3.4 million, net of cash acquired. In the first six months of fiscal 2017, redemptions of
short-term investments were $20.0 million as the Company accumulated cash from maturing investments in preparation for its November 2016 tender offer. The Company did not have money invested short-term during the first half of fiscal 2018.
Purchases of property and equipment decreased approximately $1.5 million between the two periods as the Company had limited office relocation/refurbishment activities in the current year.
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 Companys 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 calendar years 2018 and 2019, Adjusted EBITDA times 6.1
times 15% (Adjusted EBITDA as defined in the purchase agreement). 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 Companys weighted average cost of capital. The estimated fair value of the contractual obligation to the contingent
consideration recognized at the date of acquisition was $6.5 million, of which the Company estimates $2.4 million will be payable based upon calendar year Adjusted EBITDA in March 2018.
Financing Activities
Net
cash used in financing activities totaled $2.9 million and $57.4 million for the six months ended November 25, 2017 and November 26, 2016, respectively. Net cash used in financing activities for the six months ended
November 25, 2017 included dividends paid on the Companys common stock of $6.8 million, approximately $0.8 million lower than in the comparable period of the prior year. The Companys dividend rate was $0.12 per common
share in the first half of fiscal 2018, compared to $0.11 per common share in the first half of fiscal 2017. The Companys board of directors declared a quarterly cash dividend of $0.12 per common share on July 27, 2017. The dividend of
approximately $3.6 million, paid on December 14, 2017, is accrued in the Companys Consolidated Balance Sheet as of November 25, 2017. The dividend paid in fiscal 2018 was lower because of the reduced number of outstanding shares
of common stock after the Companys modified Dutch auction tender offer in November 2016.
25
Net cash used in financing activities for the six months ended November 26, 2016 included
$104.2 million, excluding transaction costs, used to purchase shares of our common stock in the modified Dutch auction tender offer, with $58.0 million of this amount borrowed under the Facility and the remainder funded from the
Companys existing cash balances. The Company also used $6.6 million to purchase an additional 443,256 shares of common stock on the open market during the first six months of fiscal 2017. The Company did not repurchase any shares during
the six months ended November 25, 2017. Proceeds from the exercise of employee stock options and issuance of shares via the ESPP were approximately $0.4 million lower in the first half of fiscal 2018 as compared to the comparable period of
fiscal 2017.
Our ongoing operations and anticipated growth in the geographic markets we currently serve will require us to continue to
make investments in office premises and capital equipment, primarily technology hardware and software. In addition, we may consider making strategic acquisitions. We currently believe our current cash, ongoing cash flows from our operations and
funding available under our Facility will be adequate to meet our working capital and capital expenditure needs for at least the next 12 months. If we require additional capital resources to grow our business, either internally or through
acquisition, we may seek to sell additional equity securities or to increase our use of our Facility. In addition, if we decide to 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.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note
13-
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.
26