Supply Chain Strategy and Advisory | Supply Chain Planning and Forecasting | |
• Supply chain technology and strategic planning • Merger planning and integration • Organizational design, alignment, process, policies and procedures | • Sales and operations planning • Demand and supply planning • Production planning |
Procurement and Supplier Management | Manufacturing and Operations | |
• Strategic sourcing • Contract and supplier relationship management • Procure-to-pay | • Manufacturing assessment and strategy • Production process • LEAN/Six Sigma |
Logistics and Materials Management | Supply Chain Risk and Compliance | |
• Inventory and transportation management • Distribution network analysis • Reverse logistics | • Risk assessments • Regulatory compliance • Third party oversight |
Sample Engagement Negotiation, Monitoring and Supervision of Construction Projects:Our client, a Fortune 1000 technology company, has multiple priorities in procurement and design of internal construction projects. Working with the client’s personnel, RGP consultants oversaw the negotiation and implementation of construction/redesign projects at the client’s corporate headquarters. The client’s primary concerns were: design consistency with the company’s culture, operating within a set budget, andon-time completion of the various projects.
RGP provided procurement personnel to work closely with our client’s counterparts to negotiate, monitor, and supervise construction projects. In addition, RGP consultants provided budget management for the client’s procurement department and an advisory/quality assurance lead. The client lacked procurement expertise and construction/real estate sourcing knowledge. RGP built a detailed timeline collaborating with the client and their commercial real estate company. Our consultants negotiated project costs leveraging future growth opportunities, especially with subcontractor firms, reviewed quotes, researched benchmarks and imposed cost structure across the client’s organization. In addition, RGP worked with the client’s legal department to negotiate and document contract parameters. Ultimately, the client estimates it was able to achieve a 6.5% cost savings.
Sample Engagement — Vendor Risk Management Software Selection and Monitoring: A publicly-traded financial services company wanted to effectively and proactively identify and manage previously unaddressed significant vendor risks. Working collaboratively, a cross-functional team of client personnel and RGP consultants developed a comprehensive vendor performance monitoring function. The team identified three key project work streams: 1) establishment of solutions to support and maintain the client’s third party vendor management processes, systems, standards and metrics tracking; 2) development of user guides and materials and training on the selected software tool to support the function; 3) development and support of the day to day processes to ensure compliance with regulations, guidelines and firm requirements. Specifically, RGP was responsible for:
Procurement and Supplier Management
Logistics and Materials Management
Supply Chain Planning and Forecasting
Production
Sample Engagement – Conflict Minerals Compliance: For a large, global technology component manufacturer, RGP helped address its complex global supply chain related to compliance requirements adopted by of the SEC pursuant to Dodd Frank Section 1502. RGP’s Conflict Minerals compliance team applied their deep functional experience in supply chain management and risk assessment and engaged with the client’s designated team to design and deploy a customized end-to-end Conflict Minerals compliance program, including Reasonable Country of Origin Inquiry (“RCOI”) and due diligence process design. RGP project activities included:
Sample Engagement — Accounts Payable Assessment:Improvement inOn-Line Checkout:A U.S. based product distributor initiated a major campaign to drive consumers to using ane-commerce platform. However, during checkout, customers realized that shipping and handling fees associated with the purchase were too high, resulting in an 80% cart abandonment rate and a significant loss in sales. In the currente-commerce environment, consumers have been trained to expect free shipping, free shipping over a specific order value or flat rate shipping.
The client engaged RGP to identify short term solutions to reduce shipping and handling charges prior to the next selling season, as well as longer term ideas for future releases. After implementing the Oracle R11 application for all financial activities and implementing an off-shore shared services organization to support Accounts Payable (“AP”) processing and vendor management responsibilities, this luxury e-retailer experienced significant delays in processing vendor payments. The delays adversely affected merchandise availability and supplier relationships, essential elements in the retailer’s business model.
Ourconducting a four week assessment of the Finance organization’s people, processesrecent sales cycle and technology identified factors impeding AP’s abilityassociated data, RGP consultants provided specific recommendations to effectively manage vendor payment processes. We also identifiedreduce shipping and handling costs, reduce the order cycle and transit time and reduce packaging waste. In addition, observations were made to improve the consumer experience, with the goal of increasing sales.
Sample Engagement —Procure-to-Pay Assessment:A large multinational consumer electronic company needed assistance in conducting an assessment of itsProcure-to-Pay process to review performance and to identify recommendations to fill gaps. The client had two primary goals: 1) to assess the current state; and 2) to provide insights on the future state, with comparison to leading practices and a series of Oracle R11 features which improvedhigh-level implementation roadmap. RGP, acting in project management and business analyst roles, was tasked with:
Sample Engagement — Cost Recovery Review: One of the world’s largest multinational energy companies engaged RGP to provide services to ensure contract compliance and to identify cost recovery opportunities with a supplier of significant services. Performing services at the supplier location, the RGP consultants developed the procedure plan, conducted supplier interviews, performed test work on selected transactions and issued a final report. The findings ultimately resulted in recording invoices, payments and supplier inquiries. We provided an improvement roadmap containing a series of discrete recommendations built to address the various deficiencies identified during the assessment, with implementation plans supporting each recommendation. As a result,recovery for the client was able to measure their improvements againstand an enhanced understanding with the roadmap, test effectiveness of each recommendation as implemented, and resolve both payment delays as well as improve end-to-end process effectiveness.supplier.
Governance, Risk and Compliance (“GRC”): Corporate Governance, Risk Management, Internal Audit and Compliance Services
RGP’s GRC practice assists clients with a variety of governance, risk management, internal audit and compliance initiatives. The professionals in our GRC practice have experience in operations, controllership and internal and external audit and serve our clients in any number of roles required — from program manager to team member. In addition to helping clients worldwide in the areas of audit, risk and compliance, we are able to draw on RGP’s other practice areas to bring the required business expertise to the engagement. Our GRC core competencies include:
Enterprise Risk Management | Sarbanes and Internal Controls | |
• Strategic and operational objectives and risk assessment • Risk management and monitoring process development • Implementation of comprehensive ERM programs | • Documentation and testing of key controls • COSO framework documentation • Control rationalization and self-assessment • Remediation of control deficiencies • Internal auditco-sourcing |
Contract and Regulatory Compliance Audits | Operational and IT Audits | |
• Regulatory compliance assessments • Royalty, license and franchise partner audits | • Specialized skill sets and subject matter expertise • Global geographic coverage • Audit plan development and periodic risk assessment |
Sample Engagement — Global Internal Audit & Internal Controls Delivery:A global technology leader decided to outsource its internal controls testing andco-source its internal audit needs, engaging RGP on a multi-yearco-sourcing and advisory contract. During the transition phase, RGP created a core delivery team of experts and set up a dedicated, offshored testing/audit center.
For internal audit, RGP carries out internal audits on behalf of the client, following the client’s specific audit methodology. Deploying consultants from our offices in cities where our client has operations, RGP adds local knowledge and skills to the client’s fieldwork. To fully integrate the methodology, RGP created customized onboarding and training.
For internal controls testing, the client leverages RGP in a cost-efficient manner versus developing its own larger internal audit team. In addition, by leveraging industry best practices in control and finance compliance audits, RGP provides our client with better insights into more efficient ways of working and control. The client further leverages cost control by having RGP consultants perform a large portion of independent (local) testing to reduce time and budget of the external auditor.
Sample Engagement — Creation of Corporate Compliance Function:A leading independent specialty chemical company needed an effective compliance program to meet federal regulations and all necessary standards, procedures and training to support it. RGP established the client’s first corporate compliance function with three major areas of significance: Foreign Corrupt Practices Act compliance (FCPA), Global trade compliance (OFAC) and Federal Acquisition Regulation compliance (FAR). RGP provided the client with the overall compliance framework, policies, procedures and tools necessary to support an effective compliance program.
Sample Engagement — Enterprise Risk Management:A Fortune 1000 U.S. based financial services company launched an initiative to significantly increase the risk governance and standardization of project management within their organization. Our enterprise risk management consultants focused on establishing more consistent, simplified processes to optimize the risk management process and create ways to identify and implement standardization of reporting, process and procedures across all lines of business. Our work will establish a comprehensive view of projects, enabling reporting and escalation to significantly mitigate their risk.
Sample Engagement — Documentation and Enhancement of Internal Controls in Preparation for IPO or Sale:A highly profitable and fast growing maker of electronic equipment had both inadequate IT general controls and poor documentation of its processes. As a result, highly detailed and expensive substantive audit procedures needed to be performed in order to prepare financial statements for a contemplated IPO or sale of the company. Serving as project manager and change management lead, RGP consultants performed an assessment of IT general controls, identified critical risk areas and prepared detailed action plans to remediate or implement controls.
Sample Engagement — Documentation and Enhancement of Internal Controls:A rapidly growing maker of automation software needed an assessment of current state business processes and internal controls at its U.S. and India operations for Sarbanes and general business purposes. Our consultants documented current state of internal controls, made recommendations for enhanced future state of controls and presented our findings to executive management. The assessments identified a significant number of high risk items that the client was unaware of, with actionable recommendations for improvement.
Sample Engagement — Banking Compliance Support:Our client, a Fortune 500 financial services company, wanted to develop and implement a more formal approach to the assessment of the company’s regulatory risk profile. Previously, decisions on assessment of regulatory risk were more of an intuitive exercise than a formalized methodology. To help the client evolve its process, RGP was responsible for the entire project, including:
Contract and Regulatory Compliance Audits
Sox and Internal Controls
Operational and IT Audits
The final deliverable allowed bank management to better allocate limited resources to maximize coverage of critical compliance issues using the quantifiable basis of risk assessment. Ultimately, RGP consultants deployed the methodology through other facets of the company’s operation, including property/casualty and life insurance and investment management.
Sample Engagement — Co-Sourced Internal Audit:Audit IT Security Controls: AThe CIO of a global automotive parts supplier engagedhealthcare company headquartered in Europe planned a series of global IT audits. Working as a part of a client team, RGP as its worldwide co-sourcing internal audit partner. We executedwas responsible for an assessment of the client’s audit work programstrength and sophistication of the IT security organization, implementation of the IT security governance model, conducting a series of interviews with top management stakeholders in the United States, Brazil, Mexico, China, Japan,IT organization, and Turkey utilizing professionals with local language and culturaltransfer of knowledge to ensure efficient and high quality audits.
Sample Engagement — Global Sarbanes Implementation: The CFO of a privately-held international manufacturer of building products wanted to help enhance the company’s ability to compete for capital by becoming Sarbanes compliant.
RGP implemented Sarbanes at over 100 sites across 14 countries. Our international team of 32 consultants served as the client’s lead IT project manager, Sarbanes experts and team leads to ensure its finance, operations and IT compliance with initial Sarbanes’ requirements and to provide the education and knowledge transfer to help ensure future compliance. Specific duties included: planning, scheduling, documentation, segregation of duties analysis, end-user computing analysis, testing, and remediation.
Sample Engagement — Post Merger Integration: A United States based pharmaceutical company with global operations acquired an India-based pharmaceutical developer and manufacturer with a strong product pipeline focused on niche first-to-file and first-to-market products. The client faced a significant challenge since the acquired company lacked internal controls and violated numerous regulatory standards.
The client engaged RGP to ensure full compliance of the acquired company with standards applicable to the parent company in the United States from finance and accounting, operational, ethical and governance standpoints. Tasks included post-merger integration execution, a “forensic audit” of internal controls and identification of significant internal control deficiencies.audit techniques.
policyIQ
RGP’s policyIQ is our proprietary cloud-based GRC software application, enabling the focused management of a wide range of GRC processes, including Risk Assessments, Sarbanes Compliance, Foreign Corrupt Practices Act, Policy and Procedure Management, Internal Audit Programs, Anti-Corruption Compliance and Conflict Minerals Compliance. PolicyIQContract Administration. policyIQ can be implemented quickly to manage a specific aspect of an overall GRC program, or easily scaled to integrate multiple initiatives, allowing the organization to realize greater efficiency. Additionally,In addition, our engagement teams often utilize policyIQ as a tool to assist in the efficient collection, storing and review of project workpapers, deliverables and other critical project content. Business problems that our clients have used policyIQ to resolve include:
| • | Sarbanes Compliance Management: Clients use policyIQ to manage their entire Sarbanes compliance program, from risk assessment through remediation tracking. Electronic forms automate quarterly certifications, and reporting allows all stakeholders insight into the status of Sarbanes compliance at any time. |
| • | Policy and Procedure Management: With policyIQ as the central location for all organizational policies and procedures, all employees have access to the most current documentation |
| • | Internal Audit Programs: Companies use policyIQ to capture workpapers electronically, gathering all evidence in a central location and assigning testing to the appropriate auditors. With robust reporting, audit managers have oversight into the process and withbuilt-in workflow, audits can flow through appropriate channels of approval. |
| • |
Sample Engagement — Fresh Approach to Sarbanes Compliance: For a publicly traded pharmaceuticalmanufacturing company in acquisition mode,with global operations, RGP was engaged to assist with a fresh approachbring efficiency and consistency to theirits Sarbanes compliance program.and internal audit programs. Using policyIQ, our consulting team was able to:
Sample Engagement — Policy and Procedure Management Program: Following a divestiture, a US-based, regional healthcare organization needed a comprehensive review and reconciliation of outdated policies and procedures inherited by their former parent company. Engaging an experienced RGP consultant, policyIQ helped to:
Sample Engagement — Automation of Account Reconciliation Tracking and Reporting: A large, global provider of relocation services used policyIQ to automate processes in many areas, most notably to track monthly and quarterly account reconciliations across their global business. With RGP and the policyIQ application, they have been able to:
Operations
We generally provide our professional services to clients at a local level, with the oversight of our regional managing directors and consultation of our corporate management team. The managing director, client service director(s) and recruiting director(s) in each office are responsible for initiating client relationships, identifying consultants specifically skilled to perform client projects, ensuring client and consultant satisfaction throughout engagements and maintaining client relationships post-engagement. Throughout this process, the corporate management team and regional managing directors are available to consult with the managing director with respect to client services.
Our offices operate in an entrepreneurial manner. The managing directors of our offices are given significant autonomy in the daily operations of their respective offices, and are responsible for overall guidance and supervision, budgeting and forecasting,
sales and marketing, pricing and hiring within their office. We believe that a substantial portion of the buying decisions made by our clients are made on a local or regional basis and that our offices most often compete with other professional services providers on a local or regional basis. Because our managing directors are in the best position to understand the local and regional outsourced professional services market and because clients often prefer local relationships, we believe that a decentralized operating environment maximizes operating performance and contributes to employee and client satisfaction.
We believe that our ability to deliver professional services successfully to clients is dependent on our managing directors working together as a collegial and collaborative team, at times working jointly on client projects. To build a sense of team effort and increase camaraderie among our managing directors, we have an incentive program for our office management that awards annual bonuses based on both the performance of the Company and the performance of the individual’s particular officeindividual. We also share across the Company the best and the individual. In addition, we believe many membersmost effective practices of our office management own equity in the Company. We also have a managing director training program wherebyhighest achieving offices and use this as an introductory tool with new managing directors. New managing directors participate in a series of development activities as set forth in a formalized training plan, a significant portion of which includesalso spend time with another practice, partnering with experienced managing directors and other senior management personnel. This allows the veteran managing directors to share their success stories, foster the culture of the Company with new managing directors and review specific client and consultant development programs. We believe these team-based practices enable us to better serve clients who prefer a centrally organized service approach.
From our corporate headquarters in Irvine, California, we provide our North American offices and certain of our international offices with centralized administrative, marketing, finance, HR, IT, legal and real estate support. Our financial reporting is also centralized in our corporate service center. This center also handles invoicing, accounts payable and collections, and administers HR services including employee compensation and benefits administration.administration for North American offices. We also have a business support operations center in our Utrecht, Netherlands office to provide centralized finance, HR, IT, payroll and legal support to our European offices. In addition, in the United States, Canada and Mexico,North America, we have a corporate networked IT platform with centralized financial reporting capabilities and a front office client management system. These centralized functions minimize the administrative burdens on our office management and allow them to spend more time focused on client and consultant development.
Business Development
Our business development initiatives are composed of:
Our business development efforts are driven by the networking and sales efforts of our management. In addition, the local office managing directors are assisted by management professionals focused on business development efforts on a national basis based on firm-wide and industry-focused initiatives. These business development professionals, teamed with the managing director and client service teams, are responsible for initiating and fostering relationships with the senior management and decision makers of our targeted client companies. TheseDuring fiscal 2017, we commenced implementation of software from SalesForce.com as a tool to enhance our local efforts are supplemented with national marketing assistance. and worldwide business development efforts.
We believe that theseour national marketing efforts have been effective in generating incremental revenues from existing clients and developing new client relationships.
Our brand marketing initiatives help develop RGP’s image in the markets we serve. Our brand is reinforced by our professionally designed website, television, print, radio and online advertising, direct marketing, seminars, initiative-oriented brochures, social media and public relations efforts. We believe that our branding initiatives, coupled with our high-quality client service, help to differentiate us from our competitors and to establish RGP as a credible and reputable global professional services firm.
Competition
We operate in a competitive, fragmented market and compete for clients and consultants with a variety of organizations that offer similar services. Our principal competitors include:
We compete for clients on the basis of the quality of professionals, the timely availability of professionals with requisite skills, the scope and price of services, and the geographic reach of services. We believe that our attractive value proposition, consisting of our highly qualified consultants, relationship-oriented approach and professional culture, enables us to differentiate ourselves from our competitors. Although we believe we compete favorably with our competitors, many of our competitors have significantly greater financial resources, generate greater revenues and have greater name recognition than we do.
Employees
As of May 31, 2014,27, 2017, we had a total of 3,1133,301 employees, including 712732 corporate and local office employees and 2,4012,569 consultants. Our employees are not covered by any collective bargaining agreements.
Available Information
The Company’s principal executive offices are located at 17101 Armstrong Avenue, Irvine, California 92614. The Company’s telephone number is(714) 430-6400 and its website address is http://www.rgp.com. The information set forth in the website does not constitute part of this Annual Report onForm 10-K. We file our annual reports onForm 10-K, quarterly reports onForm 10-Q, and current reports onForm 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 with the SEC electronically. These reports are maintained on the SEC’s website at http://www.sec.gov.
A free copy of our annual reports onForm 10-K, quarterly reports onForm 10-Q, and current reports onForm 8-K and amendments to those reports may be obtained on our website at http://www.rgp.com as soon as reasonably practicable after we file such reports with the SEC.
| ITEM 1A. | RISK FACTORS. |
You should carefully consider the risks described below before making a decision to buy shares of our common stock. The order of the risks is not an indication of their relative weight or importance. The risks and uncertainties described below are not the only ones facing us but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely impact and impair our business. If any of the following risks actually occur, our business could be harmed. In that case, the trading price of our common stock could decline, and you might lose all or part of your investment. When determining whether to buy our common stock, you should also refer to the other information in this Annual Report onForm 10-K, including our financial statements and the related notes.
A future economic downturn or change in the use of outsourced professional services consultants could adversely affect our business.
While we believe general economic conditions continue to improve in most parts of the world, there continues to be some uncertainty regarding general economic conditions within some regions and countries in which we operate, leading to reluctance on the part of some multinational companies to spend on discretionary projects. Deterioration of or increased uncertainty related to the global economy or tightening credit markets could result in a reduction in the demand for our services and adversely affect our business in the future. In addition, the use of professional services consultants on aproject-by-project basis could decline fornon-economic reasons. In the event of a reduction in the demand for our consultants, our financial results would suffer.
Economic deterioration at one or more of our clients may also affect our allowance for doubtful accounts. Our estimate of losses resulting from our clients’ failure to make required payments for services rendered has historically been within our
expectations and the provisions established. However, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of our clients could cause unfavorable trends in receivable collections and cash flows and additional allowances may be required. These additional allowances could materially affect the Company’s future financial results.
In addition, we are required to periodically, but at least annually, assess the recoverability of certain assets, including deferred tax assets and goodwill. Softening of the United States economy and international economies could adversely affect our evaluation of the recoverability of deferred tax assets, requiring us to record additional tax valuation allowances. Our assessment of impairment of goodwill is currently based upon comparing our market capitalization to our net book value. Therefore, a significant downturn in the future market value of our stock could potentially result in impairment reductions of goodwill and such an adjustment could materially affect the Company’s future financial results and financial condition.
The market for professional services is highly competitive, and if we are unable to compete effectively against our competitors, our business and operating results could be adversely affected.
We operate in a competitive, fragmented market, and we compete for clients and consultants with a variety of organizations that offer similar services. The competition is likely to increase in the future due to the expected growth of the market and the relatively few barriers to entry. Our principal competitors include:
We cannot assure you that we will be able to compete effectively against existing or future competitors. Many of our competitors have significantly greater financial resources, greater revenues and greater name recognition, which may afford them an advantage in attracting and retaining clients and consultants and in offering pricing concessions. Some of our competitors in certain markets do not provide medical and other benefits to their consultants, thereby allowing them to potentially charge lower rates to clients. In addition, our competitors may be able to respond more quickly to changes in companies’ needs and developments in the professional services industry.
Our business depends upon our ability to secure new projects from clients and, therefore, we could be adversely affected if we fail to do so.
We do not have long-term agreements with our clients for the provision of services and our clients may terminate engagements with us at any time. The success of our business is dependent on our ability to secure new projects from clients. For example, if we are unable to secure new client projects because of improvements in our competitors’ service offerings, or because of a change in government regulatory requirements, or because of an economic downturn decreasing the demand for outsourced professional services, our business is likely to be materially adversely affected. New impediments to our ability to secure projects from clients may develop over time, such as the increasing use by large clients ofin-house procurement groups that manage their relationship with service providers.
We may be legally liable for damages resulting from the performance of projects by our consultants or for our clients’ mistreatment of our consultants.personnel.
Many of our engagements with our clients involve projects or services that are critical to our clients’ businesses. If we fail to meet our contractual obligations, we could be subject to legal liability or damage to our reputation, which could adversely affect our business, operating results and financial condition. While we are not currently subject to any client-related legal claims which we believe are material, it remains possible, because of the nature of our business, that we may be involved in litigation in the future that could materially affect our future financial results. Claims brought against us could have a serious negative effect on our reputation and on our business, financial condition and results of operations.
Because we are in the business of placing our consultantspersonnel in the workplaces of other companies, we are subject to possible claims by our consultantspersonnel alleging discrimination, sexual harassment, negligence and other similar activities by our clients. We may also be subject to similar claims from our clients based on activities by our consultants.personnel. The cost of defending such claims, even if groundless, could be substantial and the associated negative publicity could adversely affect our ability to attract and retain consultantspersonnel and clients.
We may not be able to grow our business, manage our growth or sustain our current business.
Historically, we have grown by opening new offices and by increasing the volume of services provided through existing offices. Since the first quarter of fiscal 2010, we have had difficulty sustaining consistent revenue growth either quarter-over-quarter or in sequential quarters and, experienced a year-over-year declineduring fiscal 2017, we closed two offices, one in revenue between fiscal 2012the U.S. and fiscal 2013.one in Europe. There can be no assurance that we will be able to maintain or expand our market presence in our current locations or to successfully enter other markets or locations. Our ability to continue to grow our business will depend upon an improving global economy and a number of factors, including our ability to:
Even if we are able to resume more rapid growth in our revenue, the growth will result in new and increased responsibilities for our management as well as increased demands on our internal systems, procedures and controls, and our administrative, financial, marketing and other resources. For instance, a limited number of clients are requesting that certain engagements be of a fixed fee nature rather than our traditional hourly time and materials approach, thus shifting a portion of the burden of financial risk and monitoring to us. Failure to adequately respond to these new responsibilities and demands may adversely affect our business, financial condition and results of operations.
Our ability to serve clients internationally is integral to our strategy and our international activities expose us to additional operational challenges that we might not otherwise face.
Our international activities require us to confront and manage a number of risks and expenses that we would not face if we conducted our operations solely in the United States. Any of these risks or expenses could cause a material negative effect on our operating results. These risks and expenses include:
We have acquired, and may continue to acquire, companies, and these acquisitions could disrupt our business.
We have acquired several companies and we may continue to acquire companies in the future. Entering into an acquisition entails many risks, any of which could harm our business, including:
We must provide our clients with highly qualified and experienced consultants, and the loss of a significant number of our consultants, or an inability to attract and retain new consultants, could adversely affect our business and operating results.
Our business involves the delivery of professional services, and our success depends on our ability to provide our clients with highly qualified and experienced consultants who possess the skills and experience necessary to satisfy their needs. At various times, such professionals can be in great demand, particularly in certain geographic areas or if they have specific skill sets. Our ability to attract and retain consultants with the requisite experience and skills depends on several factors including, but not limited to, our ability to:
There can be no assurance that we will be successful in accomplishing any of these factors and, even if we are, we cannot assure that we will be successful in attracting and retaining the number of highly qualified and experienced consultants necessary to maintain and grow our business.
Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees.
We have historically used stock options as a key component of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention and provide competitive compensation packages. A significant portion of our options outstanding awarded prior to fiscal 2012 are priced at more than the current per share market value of our stock, limiting the past severalgrants from those years of option grants as a significant incentive to retain employees. In addition, the current Performance Incentive Plan (the “Plan”) is scheduled to terminate on September 3, 2014. After the termination, no additional awards may be granted under the Plan but previously granted awards will remain outstanding in accordance with their applicable terms and conditions and the terms and conditions of the Plan. Management is currently considering alternatives for replacing or extending the current Plan; but in the event that a satisfactory replacement is not implemented and approved by our stockholders, our ability to use equity compensation as an incentive to attract and retain employees will cease.
Our computer hardware and software and telecommunications systems are susceptible to damage, breach or interruption.
The management of our business is aided by the uninterrupted operation of our computer and telecommunication systems. These systems are vulnerable to security breaches, natural disasters or other catastrophic events, computer viruses, or other interruptions or damage stemming from power outages, equipment failure or unintended usage by employees. In particular, our employees may have access or exposure to personally identifiable or otherwise confidential information and customer data and systems, the misuse of which could result in legal liability. In addition, we rely on information technology systems to process, transmit and store electronic information and to communicate among our locations around the world and with our clients, partners and consultants. The breadth and complexity of this infrastructure increases the potential risk of security breaches. Security breaches, including cyber-attacks or cyber-intrusions by computer hackers, foreign governments, cyber terrorists or others with grievances against the industry in which we operate or us in particular, may disable or damage the proper functioning of our networks and systems. It is possible that our security controls over personal and other data may not prevent unauthorized access to, or destruction, loss, theft, misappropriation or release of personally identifiable or other proprietary, confidential, sensitive or valuable information of ours or others; this access could lead to potential unauthorized disclosure of confidential personal, Company or client information that others could use to compete against us or for other disruptive, destructive or harmful purposes and outcomes. Any such disclosure or damage to our networks and systems could subject us to third party claims against us and reputational harm. If these events occur, our ability to attract new clients may be impaired or we may be subjected to damages or penalties. In addition, system-wide or local failures of these information technology systems could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Our cash and short-term investments are subject to economic risk.
The Company invests its cash, cash equivalents and short-term investments in foreign and domestic bank deposits, money market funds, commercial paper and certificates of deposit. Certain of these investments are subject to general credit, liquidity, market and interest rate risks. In the event these risks caused a decline in value of any of the Company’s investments, it could adversely affect the Company’s financial condition.
Our business could suffer if we lose the services of one or more key members of our senior management.
Our future success depends upon the continued employment of our senior management team. The unforeseen departure of one or more key members of our senior management team could significantly disrupt our operations.operations if we are unable to successfully manage the transition. The replacement of members of senior management can involve significant time and expense and create uncertainties that could delay, prevent the achievement of, or make it more difficult for us to pursue and execute on our business opportunities, which could have an adverse effect on our business, financial condition and operating results.
Further, we generally do not havenon-compete agreements with our employees and, therefore, they could terminate their employment with us at any time. Our ability to retain the services of members of our senior management and other key employees could be impacted by a number of factors, including competitors’ hiring practices or the effectiveness of our compensation programs. If members of our senior management or other key employees leave our employ for any reason, they could pursue other employment opportunities with our competitors or otherwise compete with us. If we are unable to retain the services of these key personnel or attract and retain other qualified and experienced personnel on acceptable terms, our business, financial condition and operating results could be adversely affected.
Our quarterly financial results may be subject to significant fluctuations that may increase the volatility of our stock price.
Our results of operations could vary significantly from quarter to quarter. Factors that could affect our quarterly operating results include:
Due to these factors, we believe thatquarter-to-quarter comparisons of our results of operations are not meaningful indicators of future performance. It is possible that in some future periods, our results of operations may be below the expectations of investors. If this occurs, the price of our common stock could decline.
If our internal control over financial reporting does not comply with the requirements of Sarbanes, our business and stock price could be adversely affected.
Section 404 of Sarbanes requires us to evaluate periodically the effectiveness of our internal control over financial reporting, and to include a management report assessing the effectiveness of our internal controls as of the end of each fiscal year. Our management report on internal controls is contained in this Annual Report onForm 10-K. Section 404 also requires our independent registered public accountant to report on our internal control over financial reporting.
Our management does not expect that our internal control over financial reporting will prevent all errors or acts of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, involving us have been, or will be, detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts of a person, or by collusion among two or more people, or by management override of controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraudulent acts may occur and not be detected.
Although our management has determined, and our independent registered public accountant has attested, that our internal control over financial reporting was effective as of May 31, 2014,27, 2017, we cannot assure you that we or our independent registered public accountant will not identify a material weakness in our internal controls in the future. A material weakness in our internal control over financial reporting may require management and our independent registered public accountant to evaluate our internal
controls as ineffective. If our internal control over financial reporting is not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and our stock price. Additionally, if our internal control over financial reporting otherwise fails to comply with the requirements of Sarbanes, our business and stock price could be adversely affected.
We may be subject to laws and regulations that impose difficult and costly compliance requirements and subject us to potential liability and the loss of clients.
In connection with providing services to clients in certain regulated industries, such as the gaming, energy and energyhealthcare industries, we are subject to industry-specific regulations, including licensing and reporting requirements. Complying with these requirements is costly and, if we fail to comply, we could be prevented from rendering services to clients in those industries in the future. Additionally, changes in these requirements, or in other laws applicable to us, in the future could increase our costs of compliance.
In addition, we may face challenges from certain state regulatory bodies governing the provision of certain professional services, likesuch as legal services or audit services. The imposition of such regulations could require additional financial and operational burdens on our business.
It may be difficult for a third party to acquire the Company, and this could depress our stock price.
Delaware corporate law and our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay, defer or prevent a change of control of the Company or our management. These provisions could also discourage proxy contests and make it difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that future investors are willing to pay for your shares. These provisions:
We are required to recognize compensation expense related to employee stock options and our employee stock purchase plan. There is no assurance that the expense that we are required to recognize measures accurately the value of our share-based payment awards and the recognition of this expense could cause the trading price of our common stock to decline.
We measure and recognize compensation expense for all stock-based compensation based on estimated values. Thus, our operating results contain anon-cash charge for stock-based compensation expense related to employee stock options and our employee stock purchase plan. In general, accounting guidance requires the use of an option-pricing model to determine the value of share-based payment awards. This determination of value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion the existing valuation models may not provide an accurate measure of the value of our employee stock options. Although the value of employee stock options is determined using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
The terms of our credit facility impose operating and financial restrictions on us, which may limit our ability to respond to changing business and economic conditions.
We currently have a $120.0 million secured revolving credit facility which is available through October 21, 2021. We are subject to various operating covenants under the credit facility which restrict our ability to, among other things, incur liens, incur additional indebtedness, make certain restricted payments, merge or consolidate and make dispositions of assets. The credit facility also requires us to comply with financial covenants limiting our total funded debt, minimum interest coverage ratio and maximum leverage ratio. Any failure to comply with these covenants may constitute a breach under the credit facility, which could result in the acceleration of all or a substantial portion of any outstanding indebtedness and termination of revolving credit commitments under the credit facility. Our inability to maintain our credit facility could materially and adversely affect our liquidity and our business.
We may be unable to or elect not to pay our quarterly dividend payment.
The Company pays a regular quarterly dividend, subject to quarterly board of director approval. The payment of, or continuation of, the quarterly dividend is at the discretion of our board of directors and is dependent upon our financial condition, results of operations, capital requirements, general business conditions, tax treatment of dividends in the United States, potential future contractual restrictions contained in credit agreements and other agreements and other factors deemed relevant by our board of directors. We can give no assurance that dividends will be declared and paid in the future. The failure to pay the quarterly dividend, reduction of the quarterly dividend rate or the discontinuance of the quarterly dividend could adversely affect the trading price of our common stock.
We may be unable to adequately protect our intellectual property rights, including our brand name. If we fail to adequately protect our intellectual property rights, the value of such rights may diminish and our results of operations and financial condition may be adversely affected.
We believe that establishing, maintaining and enhancing the RGP and Resources Global Professionals brand name is essentialimportant to our business. We have applied for registration in the United States and some foreign registrationsjurisdictions on thiscertain service mark. We have previously obtained United States registrations on our Resources Connection service mark and puzzle piece logo, Registration No. 2,516,522 registered December 11, 2001; No. 2,524,226 registered January 1, 2002; and No. 2,613,873, registered September 3, 2002, as well as certain foreign registrations.marks. On March 29, 2013, we filed a United States trademark application for our RGP service mark and puzzle piece logo, Serial No. 85/890,836 as well as United States trademark applications on our RGP service mark, puzzle piece and tag line, Serial No. 85/890,838; our RGP Healthcare service mark and puzzle piece logo, Serial No. 85/890,839; our RGP Legal service mark and puzzle piece logo, Serial No. 85/890,843; and our RGP Search service mark and puzzle piece logo, Serial No. 85/890,845. We received approval of these applications and registration was granted as of December 2, 2014.
We obtained a United States registration for our Resources Global Professionals service mark, Registration No. 3,298,841, which registered September 25, 2007. However, our rights to this service mark are not currently protected in some of our foreign jurisdictions, and there is no guarantee that any of our pending applications (or any appeals thereof or future applications) will be successful.
We had been aware from time to time of other companies using the name “Resources Connection” or some variation thereof and this contributed to our decision to adopt the operating company name of Resources Global Professionals. We obtained United States registration on our Resources Global Professionals service mark, Registration No. 3,298,841 registered September 25, 2007. However, our rights to this service mark are not currently protected in some of our foreign registrations, and there is no guarantee that any of our pending applications for such registration (or any appeals thereof or future applications) will be successful. Although we are not aware of other companies using the name “Resources Global Professionals” at this time, there could be potential trade name or service mark infringement claims brought against us by the users of these similar names and marks and those users may have service mark rights that are senior to ours. If these claims were successful, we could be forced to cease using the service mark “Resources Global Professionals” even if an infringement claim is not brought against us. It is also possible that our competitors or others will adopt service names similar to ours or that our clients will be confused by another company using a name, service mark or trademark similar to ours, thereby impeding our ability to build brand identity. We cannot assure you that our business would not be adversely affected if confusion did occur or if we were required to change our name.
Recently,In 2014, we have developed a software product for the healthcare industry to address enterprise-wide incident management and patient safety issues. We have applied for registration in the United States and in the appropriate jurisdictions on the service mark for this product. Registration was granted September 9, 2014. On February 13, 2014, we filed a Nonprovisional Application, App. No. H180290, with the United States Patent Office for patent protection for this invention.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
Not applicable.
| ITEM 2. | PROPERTIES. |
As of May 31, 2014,27, 2017, we maintained 4543 domestic offices, all under operating lease agreements (except for the Irvine, California location), in the following metropolitan areas:
| Phoenix, Arizona | Cincinnati, Ohio | |||
| Irvine, California | Cleveland, Ohio | |||
| Los Angeles, California (2) | Columbus, Ohio | |||
| Sacramento, California | Tulsa, Oklahoma | |||
| Santa Clara, California | Portland, Oregon | |||
| San Diego, California | Boston, Massachusetts | Cranberry Township, Pennsylvania | ||
| San Francisco, California | Detroit, Michigan | Philadelphia, Pennsylvania | ||
| Minneapolis, Minnesota | Pittsburgh, Pennsylvania | |||
| Kansas City, Missouri | Nashville, Tennessee | |||
| Denver, Colorado | Las Vegas, Nevada | |||
| Hartford, Connecticut | Parsippany, New Jersey | |||
| Stamford, Connecticut | Princeton, New Jersey | |||
| Fort Lauderdale, Florida | New York, New York | |||
| Tampa, Florida | Charlotte, North Carolina | Washington, D.C. (McLean, Virginia) | ||
As of May 31, 2014,27, 2017, we maintained 2324 international offices under operating lease agreements, located in the following cities and countries:
| Sydney, Australia | ||||
| Milan, Italy | Shanghai, People’s Republic of China | |||
| Tokyo, Japan | ||||
| Mexico City, Mexico | ||||
| Amsterdam (Utrecht), Netherlands | ||||
| Oslo, Norway | ||||
| Beijing, People’s Republic of China | Zurich, Switzerland | |||
| Mumbai, India | Hong Kong, People’s Republic of China | Taipei, Taiwan | ||
| Dublin, Ireland | Guangzhou, People’s Republic of China | London, United Kingdom |
Our corporate offices are located in Irvine, California. We own an approximately 56,200 square foot office building in Irvine, California, of which we occupied approximately 35,40038,000 square feet as of May 31, 2014,27, 2017, including space occupied by our Orange County, California practice. Approximately 20,80018,200 square feet is leased to independent third parties.
| ITEM 3. | LEGAL PROCEEDINGS. |
We are not currently subject to any material legal proceedings; however, we are a party to various legal proceedings arising in the ordinary course of our business.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Price Range of Common Stock
Our common stock has traded on the NASDAQ Global Select Market under the symbol “RECN” since December 15, 2000. Prior to that time, there was no public market for our common stock. The approximate number of holders of record of our common stock as of July 7, 201413, 2017 was 3843 (a holder of record is the name of an individual or entity that an issuer carries in its records as the registered holder (not necessarily the beneficial owner) of the issuer’s securities).
The following table sets forth, for the range offiscal quarters indicated, the high and low closingintraday sales prices reported on the NASDAQ Global Select Market for our common stock for the periods indicated.
| Price Range of Common Stock | Price Range of Common Stock | |||||||||||||||
| High | Low | High | Low | |||||||||||||
Fiscal 2014: | ||||||||||||||||
Fiscal 2017: | ||||||||||||||||
First Quarter | $ | 13.74 | $ | 10.95 | $ | 15.93 | $ | 13.79 | ||||||||
Second Quarter | $ | 13.86 | $ | 11.67 | $ | 17.00 | $ | 12.41 | ||||||||
Third Quarter | $ | 14.98 | $ | 12.94 | $ | 19.80 | $ | 15.85 | ||||||||
Fourth Quarter | $ | 14.96 | $ | 12.07 | $ | 17.40 | $ | 12.60 | ||||||||
Fiscal 2013: | ||||||||||||||||
Fiscal 2016: | ||||||||||||||||
First Quarter | $ | 12.30 | $ | 10.98 | $ | 17.12 | $ | 14.37 | ||||||||
Second Quarter | $ | 13.53 | $ | 11.18 | $ | 18.45 | $ | 14.65 | ||||||||
Third Quarter | $ | 13.02 | $ | 10.93 | $ | 18.71 | $ | 13.37 | ||||||||
Fourth Quarter | $ | 13.08 | $ | 10.76 | $ | 15.72 | $ | 12.30 | ||||||||
Dividend Policy
Our board of directors has established a quarterly dividend, subject to quarterly board of directordirectors’ approval. Pursuant to declaration and approval set at $0.07by our board of directors, we declared a dividend of $0.11 per share of common stock during each quarter in fiscal 20142017 and $0.06$0.10 per share of common stock during each quarter in fiscal 2013.2016. On April 29, 2014,20, 2017, our board of directors declared a regular quarterly dividend of $0.07$0.11 per share of our common stock. The dividend was payable on June 19, 201415, 2017 to stockholders of record at the close of business on May 22, 2014.18, 2017. Continuation of the quarterly dividend will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, capital requirements, general business condition, contractual restrictions contained in our current or future credit agreementagreements and other agreements, and other factors deemed relevant by our board of directors.
Issuances of Unregistered Securities
None.
Issuer Purchases of Equity Securities
In April 2011,July 2015, our board of directors approved a stock repurchase program, authorizing the purchase, at the discretion of our senior executives, of our common stock for an aggregate dollar limit not to exceed $150.0 million. This program commenced in July 2011 when the previous program’s authorized limit had been met. Subject to the aggregate dollar limit, the currently authorized stock repurchase program does not have an expiration date. Repurchases under the program may take place in the open market or in privately negotiated transactions and may be made pursuant to a Rule10b5-1 plan.
The table below provides information regarding our stock repurchases made during
During the fourth quarter of fiscal 2014 under our2017, we did not make any stock repurchase program.repurchases, as indicated in the table below.
| Total Number of | Approximate Dollar | |||||||||||||||
| Average | Shares | Value of Shares | ||||||||||||||
| Total | Price | Purchased as | that May Yet be | |||||||||||||
| Number | Paid | Part of Publicly | Purchased Under the | |||||||||||||
| of Shares | per | Announced | April | |||||||||||||
Period | Purchased | Share | Program | 2011 Program | ||||||||||||
February 23, 2014 — March 22, 2014 | — | $ | — | — | $ | 50,946,124 | ||||||||||
March 23, 2014 — April 19, 2014 | 157,950 | $ | 13.61 | 157,950 | 48,796,781 | |||||||||||
April 20, 2014 — May 31, 2014 | 443,300 | $ | 13.10 | 443,300 | 42,990,159 | |||||||||||
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Total February 23, 2014 — May 31, 2014 | 601,250 | $ | 13.23 | 601,250 | $ | 42,990,159 | ||||||||||
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Period February 26, 2017—March 25, 2017 March 26, 2017—April 22, 2017 April 23, 2017—May 27, 2017 Total February 26, 2017—May 27, 2017 Total
Number
of Shares
Purchased Average
Price
Paid
per
Share Total Number of
Shares
Purchased as
Part of
Announced
Programs Approximate Dollar
Value of Shares that
May Yet be
Purchased Under Announced
Program — $ — — $ 125,103,123 — $ — — $ 125,103,123 — $ — — $ 125,103,123 — $ — — $ 125,103,123
Performance Graph
Set forth below is a line graph comparing the annual percentage change in the cumulative total return to the holders of our common stock with the cumulative total return of the Russell 3000 Index, a customized peer group consisting of eleventen companies listed below the following table and a combined classification of companies under Standard Industry Codes as 8742-Management Consulting Services for the period commencingfive years ended May 30, 2009 and ending on May 31, 2014.27, 2017. The graph assumes $100 was invested on May 30, 200926, 2012 in our common stock and in each index (based on prices from the close of trading on May 30, 2009)26, 2012), and that all dividends are reinvested. Stockholder returns over the indicated period may not be indicative of future stockholder returns.
The information contained in the performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference into such filing.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
SIC Code 8742—Management Consulting and Peer Group
| For the Fiscal Years Ended | ||||||||||||||||||||||||
| May 29, 2009 | May 29, 2010 | May 28, 2011 | May 26, 2012 | May 25, 2013 | May 31, 2014 | |||||||||||||||||||
Resources Connection, Inc. | $ | 100.00 | $ | 87.10 | $ | 76.96 | $ | 66.63 | $ | 62.08 | $ | 71.79 | ||||||||||||
Russell 3000 | $ | 100.00 | $ | 123.20 | $ | 156.51 | $ | 153.58 | $ | 196.40 | $ | 236.81 | ||||||||||||
SIC code 8742 – Management Consulting | $ | 100.00 | $ | 108.91 | $ | 132.07 | $ | 120.15 | $ | 171.39 | $ | 193.71 | ||||||||||||
Peer Group | $ | 100.00 | $ | 103.52 | $ | 115.88 | $ | 111.77 | $ | 140.68 | $ | 167.07 | ||||||||||||
*$100 invested on 5/26/12 in stock or index, including reinvestment of dividends.
| For the Fiscal Years Ended | ||||||||||||||||||||||||
| May 26, 2012 | May 25, 2013 | May 31, 2014 | May 30, 2015 | May 28, 2016 | May 27, 2017 | |||||||||||||||||||
Resources Connection, Inc. | $ | 100.00 | $ | 92.73 | $ | 107.03 | $ | 138.15 | $ | 140.09 | $ | 117.61 | ||||||||||||
Russell 3000 | $ | 100.00 | $ | 128.38 | $ | 153.30 | $ | 171.47 | $ | 171.90 | $ | 202.67 | ||||||||||||
SIC Code 8742—Management Consulting | $ | 100.00 | $ | 147.02 | $ | 165.58 | $ | 186.17 | $ | 205.89 | $ | 228.92 | ||||||||||||
Peer Group | $ | 100.00 | $ | 115.28 | $ | 141.66 | $ | 146.76 | $ | 131.97 | $ | 143.07 | ||||||||||||
The Company’s customized peer group includes the following eleventen professional services companies that we believe reflect the competitive landscape in which the Company operates and acquires talent: CRA International, Inc.; FTI Consulting, Inc.; Heidrick & Struggles International, Inc.; Hudson Global, Inc.; Huron Consulting Group Inc.; ICF International, Inc.; Kforce, Inc.; Korn/Ferry International; Navigant Consulting, Inc.; and The Advisory Board Company; andCompany. We have removed The Corporate Executive Board Company.Company from our customized peer group due to its acquisition by Gartner, Inc. in 2017. The Company’s compensation committee, a committee of our board of directors comprised of independent directors, reviews the composition of the peer group annually to ensure its alignment with the Company’s size, practice areas, business model delivery and geographic reach.
| ITEM 6. | SELECTED FINANCIAL DATA. |
You should read the following selected historical consolidated financial data in conjunction with our Consolidated Financial Statements and related notes beginning on page 4454 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 30.36. The Consolidated Statements of Operations data for the years ended May 28, 201131, 2014 and May 29, 201025, 2013 and the Consolidated Balance Sheet data at May 26, 2012,30, 2015, May 28, 201131, 2014 and May 29, 201025, 2013 were derived from our audited Consolidated Financial Statements that are not included in this Annual Report onForm 10-K. The Consolidated Statements of Operations data for the years ended May 31, 2014,27, 2017, May 25, 201328, 2016 and May 26, 201230, 2015 and the Consolidated Balance Sheet data at May 31, 201427, 2017 and May 25, 201328, 2016 were derived from our audited Consolidated Financial Statements that are included elsewhere in this Annual Report onForm 10-K. Historical results are not necessarily indicative of results that may be expected for any future periods.
| Years Ended | ||||||||||||||||||||||||||||||||||||||||
| May 31, | May 25, | May 26, | May 28, | May 29, | Years Ended | |||||||||||||||||||||||||||||||||||
| 2014 (1) | 2013 | 2012 | 2011 | 2010 | May 27, 2017 | May 28, 2016 | May 30, 2015 | May 31, 2014 (1) | May 25, 2013 | |||||||||||||||||||||||||||||||
| (In thousands, except net income (loss) per common share and other data) | (In thousands, except per common share and other data) | |||||||||||||||||||||||||||||||||||||||
Revenue | $ | 567,181 | $ | 556,334 | $ | 571,763 | $ | 545,546 | $ | 498,998 | $ | 583,411 | $ | 598,521 | $ | 590,589 | $ | 567,181 | $ | 556,334 | ||||||||||||||||||||
Direct cost of services, primarily payroll and related taxes for professional services employees | 351,359 | 342,040 | 352,524 | 335,071 | 303,768 | 362,086 | 366,355 | 362,227 | 351,359 | 342,040 | ||||||||||||||||||||||||||||||
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Gross margin | 215,822 | 214,294 | 219,239 | 210,475 | 195,230 | 221,325 | 232,166 | 228,362 | 215,822 | 214,294 | ||||||||||||||||||||||||||||||
Selling, general and administrative expenses(2) | 172,531 | 168,318 | 170,992 | 172,622 | 182,985 | |||||||||||||||||||||||||||||||||||
Employee portion of contingent consideration(3) | — | — | (500 | ) | — | 500 | ||||||||||||||||||||||||||||||||||
Contingent consideration adjustment(4) | — | — | (33,440 | ) | (25,852 | ) | 1,492 | |||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 183,471 | 174,806 | 173,797 | 172,531 | 168,318 | |||||||||||||||||||||||||||||||||||
Amortization of intangible assets | 1,688 | 1,694 | 3,364 | 5,030 | 3,496 | — | 90 | 918 | 1,688 | 1,694 | ||||||||||||||||||||||||||||||
Depreciation expense | 3,628 | 4,580 | 5,731 | 7,223 | 8,544 | 3,452 | 3,467 | 3,389 | 3,628 | 4,580 | ||||||||||||||||||||||||||||||
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Income (loss) from operations | 37,975 | 39,702 | 73,092 | 51,452 | (1,787 | ) | ||||||||||||||||||||||||||||||||||
Income from operations | 34,402 | 53,803 | 50,258 | 37,975 | 39,702 | |||||||||||||||||||||||||||||||||||
Interest expense | 773 | — | — | — | — | |||||||||||||||||||||||||||||||||||
Interest income | (168 | ) | (175 | ) | (252 | ) | (473 | ) | (656 | ) | (144 | ) | (186 | ) | (148 | ) | (168 | ) | (175 | ) | ||||||||||||||||||||
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Income before provision for income taxes | 38,143 | 39,877 | 73,344 | 51,925 | (1,131 | ) | 33,773 | 53,989 | 50,406 | 38,143 | 39,877 | |||||||||||||||||||||||||||||
Provision for income taxes(5) | 18,257 | 19,373 | 32,202 | 27,070 | 10,618 | |||||||||||||||||||||||||||||||||||
Provision for income taxes | 15,122 | 23,546 | 22,898 | 18,257 | 19,373 | |||||||||||||||||||||||||||||||||||
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Net income (loss) | $ | 19,886 | $ | 20,504 | $ | 41,142 | $ | 24,855 | $ | (11,749 | ) | |||||||||||||||||||||||||||||
Net income | $ | 18,651 | $ | 30,443 | $ | 27,508 | $ | 19,886 | $ | 20,504 | ||||||||||||||||||||||||||||||
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Net income (loss) per common share: | ||||||||||||||||||||||||||||||||||||||||
Net income per common share: | ||||||||||||||||||||||||||||||||||||||||
Basic | $ | 0.51 | $ | 0.50 | $ | 0.94 | $ | 0.54 | $ | (0.26 | ) | $ | 0.57 | $ | 0.82 | $ | 0.73 | $ | 0.51 | $ | 0.50 | |||||||||||||||||||
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Diluted | $ | 0.51 | $ | 0.50 | $ | 0.94 | $ | 0.53 | $ | (0.26 | ) | $ | 0.56 | $ | 0.81 | $ | 0.72 | $ | 0.51 | $ | 0.50 | |||||||||||||||||||
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Weighted average common shares outstanding: | ||||||||||||||||||||||||||||||||||||||||
Basic | 39,216 | 41,108 | 43,541 | 46,124 | 45,894 | 32,851 | 37,037 | 37,825 | 39,216 | 41,108 | ||||||||||||||||||||||||||||||
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Diluted | 39,307 | 41,151 | 43,599 | 46,489 | 45,894 | 33,471 | 37,608 | 38,248 | 39,307 | 41,151 | ||||||||||||||||||||||||||||||
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Cash dividends declared per common share | $ | 0.44 | $ | 0.40 | $ | 0.32 | $ | 0.28 | $ | 0.24 | ||||||||||||||||||||||||||||||
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Other Data: | ||||||||||||||||||||||||||||||||||||||||
Number of offices open at end of year | 68 | 73 | 77 | 80 | 82 | 67 | 68 | 68 | 68 | 73 | ||||||||||||||||||||||||||||||
Total number of consultants on assignment at end of period | 2,401 | 2,208 | 2,317 | 2,249 | 2,067 | |||||||||||||||||||||||||||||||||||
Cash dividends paid (in thousands)(6) | $ | 10,625 | $ | 9,497 | $ | 8,306 | $ | 5,538 | $ | — | ||||||||||||||||||||||||||||||
Total number of consultants on assignment at end of year | 2,569 | 2,511 | 2,516 | 2,401 | 2,208 | |||||||||||||||||||||||||||||||||||
Cash dividends paid | $ | 14,157 | $ | 14,085 | $ | 11,748 | $ | 10,625 | $ | 9,497 | ||||||||||||||||||||||||||||||
| (1) | The year ended May 31, 2014 |
| May 31, | May 25, | May 26, | May 28, | May 29, | May 27, 2017 | May 28, 2016 | May 30, 2015 | May 31, 2014 | May 25, 2013 | |||||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | (Amounts in thousands) | |||||||||||||||||||||||||||||||||||
| (Amounts in thousands) | ||||||||||||||||||||||||||||||||||||||||
Consolidated Balance Sheet Data | ||||||||||||||||||||||||||||||||||||||||
Cash, cash equivalents, short-term investments and U.S. government agency securities | $ | 114,277 | $ | 119,012 | $ | 128,115 | $ | 144,873 | $ | 140,905 | $ | 62,329 | $ | 116,046 | $ | 112,238 | $ | 114,277 | $ | 119,012 | ||||||||||||||||||||
Working capital | 150,287 | 155,844 | 166,584 | 182,675 | 173,472 | 95,074 | 147,704 | 152,760 | 150,287 | 155,844 | ||||||||||||||||||||||||||||||
Total assets | 420,078 | 417,640 | 430,719 | 476,397 | 473,200 | 364,128 | 417,255 | 416,981 | 420,078 | 417,640 | ||||||||||||||||||||||||||||||
Long-term debt | 48,000 | — | — | — | — | |||||||||||||||||||||||||||||||||||
Stockholders’ equity | 345,761 | 352,327 | 365,868 | 372,726 | 353,241 | 238,142 | 342,649 | 340,452 | 345,761 | 352,327 | ||||||||||||||||||||||||||||||
| ITEM 7. | MANAGEMENT’S 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 financial statements and related notes. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in Part I Item 1A. “Risk Factors.” and elsewhere in this Annual Report onForm 10-K.
Overview
RGP is a multinational consulting firm that provides agile consulting and business initiative support services to its global client base who are faced with disruption and business transformation issues. We bring functional competencies in the areas of accounting; finance; corporate governance, risk and compliance management; corporate advisory, strategic communications and restructuring; information management; human capital; supply chain management; healthcare solutions; and legal and regulatory services.regulatory. We assist our clients with projects requiring specialized expertise in:
We were founded in June 1996 by a team at Deloitte, led by our executive 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 from our inception in June 1996 until April 1999. In April 1999, we completed amanagement-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. In January 2005, we announcedWe operate under the change ofacronym RGP, branding for our operating entity name toof Resources Global Professionals to better reflect the Company’s multinational capabilities and during fiscal 2013, we redesigned our logo and adopted the acronym RGP for branding and marketing purposes.Professionals.
We operated solely in the United States 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 May 31, 2014,27, 2017, we served clients from offices in 1921 countries, including 2324 international offices and 4543 offices in the United States. Our global footprint allows the Company to support the global initiatives of our multinational client base.
We expect to continue opportunistic domestic and multinational expansion while also investing in complementary professional services lines that we believe will augment our service offerings.
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 contractuallynon-refundable revenue is recognized at the time our client completes the hiring process and represented 0.5% of our revenue for each of the years ended May 31, 2014,27, 2017, May 25, 201328, 2016 and May 26, 2012.30, 2015. We periodically review our outstanding accounts receivable balance and determine an estimate of the amount of those receivables we believe may prove uncollectible. Our provision for bad debts, if any, is included in our selling, general and administrative expenses.
The costs to pay our professional consultants and all related benefit and incentive costs, including provisions for paid time off and other employee benefits, are included in direct cost of services. We pay most of our consultants on an hourly basis for all hours worked on client engagements and, therefore, direct cost of services tends to vary directly with the volume of revenue we earn. We expense the benefits we pay to our consultants as they are earned. These benefits include paid time off and holidays; a discretionary bonus plan; subsidized group health, dental and life insurance programs; a matching 401(k) retirement plan; the ability to participate in the Company’s Employee Stock Purchase Plan (“ESPP”); and professional development and career training. In addition, we pay the related costs of employment, including state and federal payroll taxes, workers’ compensation insurance, unemployment insurance and other costs. Typically, a consultant must work a threshold number of hours to be eligible for all of the benefits. We recognize direct cost of services when incurred.
Selling, general and administrative expenses include the payroll and related costs of our internal management as well as general and administrative, marketing and recruiting costs. Our sales and marketing efforts are led by our management team who are salaried employees and earn bonuses based on operating results for the Company as a whole and within each individual’s geographic market.performance.
The Company’s fiscal year consists of 52 or 53 weeks, ending on the Saturday in May closest to May 31. Fiscal years 2017, 2016 and 2015 consisted of four 13 week quarters and a total of 52 weeks of activity for the fiscal year. For fiscal years of 53 weeks such as(the next of which occurs for fiscal 2014,2020), the first three quarters consistedconsist of 13 weeks each and the fourth quarter consistedconsist of 14 weeks. Fiscal 2013
On April 5, 2017, the Company announced implementation of three strategic initiatives to help improve its performance in cost containment and 2012 consistedrevenue generation. The initiatives include (1) reducing selling, general and administrative expenses by approximately $7.0 million per year; related to this initiative, the Company took a charge of 52 weeks each.approximately $2.4 million in the fourth quarter of fiscal 2017, primarily for severance expenses; (2) improving the sales culture and business development process and practices; and (3) redesigning the business model to enhance client offerings.
The first initiative, which includes a clear and actionable plan for reducing costs in low growth markets, will streamline the Company’s field and back office operations to better match current and anticipated demand in certain geographies. The implementation of this plan will result in a reduction in overhead expenses and head count, and was completed at the end of the fiscal 2017 fourth quarter.
The second priority initiative focuses on driving the sales process on an enterprise level to advance the account development and account penetration and management activities in local markets, and will support a more sophisticated and robust sales culture. The initiative includes four major components: the implementation of Salesforce as a global Customer Relationship Management tool and the alignment of the Company’s sales process, the establishment of an enterprise-wide Business Development function, the creation of a Strategic Client Program dedicated to expanding service and revenue in the Company’s highest level clients and the evolution of the incentive compensation plans to prioritize growth. These transition activities will involve multi-step changes that are expected to take approximately9-15 months to complete.
Finally, the Company’s decision to redesign its operating model is expected to enhance its client offerings, providing insightful business solutions as well as industry-leading project execution. For example, the Company will build deeper capabilities in project support for M&A transactions and data governance, security & analytics solutions. The shift will also enable stronger inter-office collaboration and allow the Company to deliver improved solutions, expertise and talent to all of its clients around the globe, regardless of their location.
Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The following represents a summary of our critical accounting policies, defined as those policies that we believe: (a) are the most important to the portrayal of our financial condition and results of operations and (b) involve inherently uncertain issues that require management’s most difficult, subjective or complex judgments.
Valuation of long-lived assets — We assess the potential impairment of long-lived tangible and intangible assets periodically or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our goodwill and certain other intangible assets areis not subject to periodic amortization. These assets areThis asset is considered to have an indefinite life and theirits carrying values arevalue 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 thesethis intangible assetsasset in the future and this adjustment may materially affect the Company’s future financial results and financial condition.
Contingent consideration — The Company estimates and records the acquisition date fair value of contingent consideration as part of purchase price consideration for acquisitions and each reporting period, the Company estimates changes in the fair value of contingent consideration and any change in fair value is recognized in the Company’s Consolidated Statement of Operations. If the Company has an estimated liability of the fair value of contingent consideration, the computation requires very subjective assumptions to be made of future operating results, discount rates and probabilities assigned to various potential operating result scenarios. Future revisions to these assumptions could materially change the estimate of the fair value of contingent consideration and therefore materially affect the Company’s future financial results and financial condition.
On November 20, 2009, the Company acquired certain assets of Sitrick And Company (“Sitrick Co”), a strategic communications firm, and Brincko Associates, Inc. (“Brincko”), a corporate advisory and restructuring firm, through the purchase of all of the outstanding membership interests in Sitrick Brincko Group, a Delaware limited liability company, formed for the purpose of the acquisition, pursuant to a Membership Interest Purchase Agreement by and among the Company, Sitrick Co, Michael S. Sitrick, an individual, Brincko and John P. Brincko, an individual (together with Mr. Sitrick, Sitrick Co and Brincko, the “Sellers”). Prior to the acquisition date, Mr. Sitrick and Nancy Sitrick were the sole shareholders of Sitrick Co and Mr. Brincko was the sole shareholder of Brincko. In addition, on the same date, the Company acquired the personal goodwill of Mr. Sitrick pursuant to a Goodwill Purchase Agreement by and between the Company and Mr. Sitrick (collectively with the Membership Interest Purchase Agreement, the “Acquisition Agreements”). Sitrick Brincko Group is now a wholly-owned subsidiary of the Company.
Per the Acquisition Agreements, contingent consideration was payable to the Sellers in a lump sum following the fourth anniversary of the acquisition if the average annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) (calculated from each of the four one-year periods following the acquisition date) of Sitrick Brincko Group exceeded $11.3 million. The Company determined that the average annual EBITDA of Sitrick Brincko Group did not exceed the required $11.3 million as of November 23, 2013, the end of the four-year earn-out period, and so no contingent consideration was payable to the Sellers.
Because the contingent consideration was not owed at the conclusion of the earn-out period, Mr. Brincko was entitled to a cash payment of $2,250,000, which was paid in the third quarter of fiscal 2014. As of May 31, 2014, there are no amounts recorded for contingent consideration.
Allowance for doubtful accounts — We maintain an allowance for doubtful accounts for estimated losses resulting from our clients failing to make required payments for services rendered. We estimate this allowance based upon our knowledge of the financial condition of our clients (which may not include knowledge of all significant events), review of historical receivable and reserve trends and other pertinent information. While such losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of our clients could cause unfavorable trends in receivable collections and additional allowances may be required. These additional allowances could materially affect the Company’s future financial results.
Income taxes — In order to prepare our Consolidated Financial Statements, we are required to make estimates of income taxes, if applicable, in each jurisdiction in which we operate. The process incorporates an assessment of any current tax exposure together with temporary differences resulting from different treatment of transactions for tax and financial statement purposes. These differences result in deferred tax assets and liabilities that are included in our Consolidated Balance Sheets. The recovery of deferred tax assets from future taxable income must be assessed and, to the extent recovery is not likely, we will establish a valuation allowance. An increase in the valuation allowance results in recording additional tax expense and any such adjustment may materially affect the Company’s future financial result. If the ultimate tax liability differs from the amount of tax expense we have reflected in the Consolidated Statements of Operations, an adjustment of tax expense may need to be recorded and this adjustment may materially affect the Company’s future financial results and financial condition.
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 contractuallynon-refundable revenue is recognized at the time our client completes the hiring process.
Stock-based compensation — Under our 20042014 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 ESPP, eligible officers and employees may purchase our common stock in accordance with the terms of the plan.
The Company estimates a value for employee stock options on the date of grant using an option-pricing model. We have elected to use the Black-Scholes option-pricing model which takes into account assumptions regarding a number of highly complex and subjective variables. These variables include the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Additional variables to be considered are the expected term, expected
dividends and the risk-free interest rate over the expected term of our employee stock options. In addition, because stock-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures must be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If facts and circumstances change and we employ different assumptions in future periods, the compensation expense recorded may differ materially from the amount recorded in the current period.
The Company uses its historical volatility over the expected life of the stock option award to estimate the expected volatility of the price of its common stock. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The impact of expected dividends ($0.070.11 per share for each quarter during fiscal 2014)2017 and $0.10 per share for each quarter of fiscal 2016) is also incorporated in determining the estimated value per share of employee stock option grants. Such dividends are subject to quarterly board of director approval. The Company’s expected life of stock option grants is 5.35.6 years fornon-officers and 7.58.1 years for officers. The Company uses its historical volatility over the expected life of the stock option award to estimate the expected volatility of the price of its common stock. The Company reviews the underlying assumptions related to stock-based compensation at least annually.
We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
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.
| For the Years Ended | For the Years Ended | |||||||||||||||||||||||
| May 31, 2014 | May 25, 2013 | May 26, 2012 | May 27, 2017 | May 28, 2016 | May 30, 2015 | |||||||||||||||||||
| (Amounts in thousands) | (Amounts in thousands) | |||||||||||||||||||||||
Revenue | $ | 567,181 | $ | 556,334 | $ | 571,763 | $ | 583,411 | $ | 598,521 | $ | 590,589 | ||||||||||||
Direct cost of services | 351,359 | 342,040 | 352,524 | 362,086 | 366,355 | 362,227 | ||||||||||||||||||
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Gross margin | 215,822 | 214,294 | 219,239 | 221,325 | 232,166 | 228,362 | ||||||||||||||||||
Selling, general and administrative expenses | 172,531 | 168,318 | 170,992 | 183,471 | 174,806 | 173,797 | ||||||||||||||||||
Employee portion of contingent consideration | — | — | (500 | ) | ||||||||||||||||||||
Contingent consideration adjustment | — | — | (33,440 | ) | ||||||||||||||||||||
Amortization of intangible assets | 1,688 | 1,694 | 3,364 | — | 90 | 918 | ||||||||||||||||||
Depreciation expense | 3,628 | 4,580 | 5,731 | 3,452 | 3,467 | 3,389 | ||||||||||||||||||
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Income from operations | 37,975 | 39,702 | 73,092 | 34,402 | 53,803 | 50,258 | ||||||||||||||||||
Interest expense | 773 | — | — | |||||||||||||||||||||
Interest income | (168 | ) | (175 | ) | (252 | ) | (144 | ) | (186 | ) | (148 | ) | ||||||||||||
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Income before provision for income taxes | 38,143 | 39,877 | 73,344 | 33,773 | 53,989 | 50,406 | ||||||||||||||||||
Provision for income taxes | 18,257 | 19,373 | 32,202 | 15,122 | 23,546 | 22,898 | ||||||||||||||||||
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Net income | $ | 19,886 | $ | 20,504 | $ | 41,142 | $ | 18,651 | $ | 30,443 | $ | 27,508 | ||||||||||||
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Our operating results for the periods indicated are expressed as a percentage of revenue below.
| For the Years Ended | ||||||||||||
| May 31, 2014 | May 25, 2013 | May 26, 2012 | ||||||||||
Revenue | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Direct cost of services | 61.9 | 61.5 | 61.7 | |||||||||
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Gross margin | 38.1 | 38.5 | 38.3 | |||||||||
Selling, general and administrative expenses | 30.4 | 30.3 | 29.9 | |||||||||
Employee portion of contingent consideration | — | — | (0.1 | ) | ||||||||
Contingent consideration adjustment | — | — | (5.8 | ) | ||||||||
Amortization of intangible assets | 0.3 | 0.3 | 0.6 | |||||||||
Depreciation expense | 0.7 | 0.8 | 1.0 | |||||||||
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Income from operations | 6.7 | 7.1 | 12.7 | |||||||||
Interest income | — | (0.1 | ) | (0.1 | ) | |||||||
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Income before provision for income taxes | 6.7 | 7.2 | 12.8 | |||||||||
Provision for income taxes | 3.2 | 3.5 | 5.6 | |||||||||
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Net income | 3.5 | % | 3.7 | % | 7.2 | % | ||||||
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Revenue Direct cost of services Gross margin Selling, general and administrative expenses Amortization of intangible assets Depreciation expense Income from operations Interest expense Interest income Income before provision for income taxes Provision for income taxes Net income For the Years Ended May 27,
2017 May 28,
2016 May 30,
2015 100.0 % 100.0 % 100.0 % 62.1 61.2 61.3 37.9 38.8 38.7 31.4 29.2 29.4 — — 0.2 0.6 0.6 0.5 5.9 9.0 8.6 0.1 — — — — — 5.8 9.0 8.6 2.6 3.9 3.9 3.2 % 5.1 % 4.7 %
We also assess the results of our operations using EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin. EBITDA is defined as our earnings before interest, taxes, depreciation and amortization. We define Adjusted EBITDA isas EBITDA plus stock-based compensation expense and contingent consideration adjustments, if any.expense. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by revenue. These measures assist management in assessing our core operating performance. The following table presents EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin results for the periods indicated and includes a reconciliation of such measures to net income, the most directly comparable GAAP financial measure:
| For the Years Ended | For the Years Ended | |||||||||||||||||||||||
| May 31, 2014 | May 25, 2013 | May 26, 2012 | May 27, 2017 | May 28, 2016 | May 30, 2015 | |||||||||||||||||||
| (Amounts in thousands) | (Amounts in thousands) | |||||||||||||||||||||||
Net income | $ | 19,886 | $ | 20,504 | $ | 41,142 | $ | 18,651 | $ | 30,443 | $ | 27,508 | ||||||||||||
Adjustments: | ||||||||||||||||||||||||
Amortization of intangible assets | 1,688 | 1,694 | 3,364 | — | 90 | 918 | ||||||||||||||||||
Depreciation expense | 3,628 | 4,580 | 5,731 | 3,452 | 3,467 | 3,389 | ||||||||||||||||||
Interest expense | 773 | — | — | |||||||||||||||||||||
Interest income | (168 | ) | (175 | ) | (252 | ) | (144 | ) | (186 | ) | (148 | ) | ||||||||||||
Provision for income taxes | 18,257 | 19,373 | 32,202 | 15,122 | 23,546 | 22,898 | ||||||||||||||||||
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EBITDA | $ | 43,291 | $ | 45,976 | $ | 82,187 | 37,854 | 57,360 | 54,565 | |||||||||||||||
Stock-based compensation expense | 6,519 | 7,188 | 7,742 | 6,068 | 6,280 | 5,989 | ||||||||||||||||||
Contingent consideration adjustment | — | — | (33,440 | ) | ||||||||||||||||||||
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Adjusted EBITDA | $ | 49,810 | $ | 53,164 | $ | 56,489 | $ | 43,922 | $ | 63,640 | $ | 60,554 | ||||||||||||
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Revenue | $ | 567,181 | $ | 556,334 | $ | 571,763 | $ | 583,411 | $ | 598,521 | $ | 590,589 | ||||||||||||
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Adjusted EBITDA Margin | 8.8 | % | 9.6 | % | 9.9 | % | 7.5 | % | 10.6 | % | 10.3 | % | ||||||||||||
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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. Anon-GAAP financial measure is defined as a numerical measure of a company’s financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the consolidated statement 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 arenon-GAAP financial measures. We believe that EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin provide useful information to our investors because they are financial measures used by management to assess the core performance of the Company. 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:
Because of these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin should not be considered a substitute for performance measures calculated in accordance with GAAP.
Year Ended May 31, 201427, 2017 Compared to Year Ended May 25, 201328, 2016
Computations of percentagePercentage change period over periodcomputations are based upon our results, as rounded and presented herein.amounts in thousands.
Revenue. Revenue increased $10.9decreased $15.1 million, or 2.0%2.5%, to $567.2$583.4 million for the year ended May 31, 201427, 2017 from $556.3$598.5 million for the year ended May 25, 2013.28, 2016. We deliver our services to clients, whether multi-national or locally-based, in a similar fashion across the globe; howeverglobe. Bill rates decreased 1.7% on average in fiscal 2014,2017 compared to fiscal 2016 and hours worked decreased 0.9% between the two periods. The revenue decrease is partially attributable to reduced business consulting opportunities in fiscal 2017, including declines in services provided to clients in the economically challenged energy sector and inefficiencies in our client penetration efforts in financial services. The timing of efforts to stabilize our client penetration in this industry is uncertain. As presented in the table below, revenue increased in North Americafiscal 2017 in Asia Pacific and Europe but declined in Europe and Asia PacificNorth America as compared to fiscal 2013. In light of continuing global economic uncertainty, we believe that our global clients and prospects are initiating operational improvement projects cautiously, resulting in reduced levels of consulting spending, particularly in certain European markets. Results in fiscal 2014 consisted of 53 weeks while fiscal 2013 consisted of 52 weeks. Revenue during the extra week of fiscal 2014 (which included the Memorial Day holiday in the United States) was $9.8 million. Excluding this extra week in fiscal 2014, revenue increased $1.1 million (0.2%) over the fiscal 2013 amount. For the 53-week period in fiscal 2014, the number of hours worked increased 3.5% compared to the prior year, offset by a 1.6% decrease in average bill rates from the prior year.2016.
The number of consultants on assignment at the end of fiscal 20142017 was 2,4012,569 compared to the 2,2082,511 consultants engaged at the end of fiscal 20132016 (the average number of consultants assigned was 2,2542,487 in fiscal 20142017 compared to 2,2702,503 in fiscal 2013)2016).
We operated 67 offices (24 abroad) as of May 27, 2017 and 68 offices (23 abroad) atas of May 31, 2014 and 73 offices (26 abroad) at May 25, 2013 as we consolidated certain offices in contiguous areas.28, 2016. Our clients do not sign long-term contracts with us. As such, there can be no assurance as to future demand levels for the services that we provide or that future results can be reliably predicted by considering past trends.
Revenue for the Company’s major geographies across the globe consisted of the following (dollars in thousands):
| Revenue for the Year Ended | % of Total | |||||||||||||||||||||||||||||||||||||||
| May 31, | May 25, | % | May 31, | May 25, | Revenue for the For the Years Ended | % of Total | ||||||||||||||||||||||||||||||||||
| 2014 | 2013 | Change | 2014 | 2013 | May 27, 2017 | May 28, 2016 | % Change | May 27, 2017 | May 28, 2016 | |||||||||||||||||||||||||||||||
North America | $ | 453,659 | $ | 436,025 | 4.0 | % | 80.0 | % | 78.4 | % | $ | 479,263 | $ | 499,229 | (4.0 | )% | 82.1 | % | 83.4 | % | ||||||||||||||||||||
Europe | 76,960 | 83,441 | (7.8 | )% | 13.6 | 15.0 | 60,461 | 57,714 | 4.8 | % | 10.4 | 9.6 | ||||||||||||||||||||||||||||
Asia Pacific | 36,562 | 36,868 | (0.8 | )% | 6.4 | 6.6 | 43,687 | 41,578 | 5.1 | % | 7.5 | 7.0 | ||||||||||||||||||||||||||||
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Total | $ | 567,181 | $ | 556,334 | 1.9 | % | 100.0 | % | 100.0 | % | $ | 583,411 | $ | 598,521 | (2.5 | )% | 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 United States dollar.dollar (“U.S. dollar”). Revenues denominated in foreign currencies are translated into United StatesU.S. dollars at the monthly average exchange rates in effect during each quarter.period. Thus, as the value of the United States dollar fluctuatesstrengthens relative to the currencies inof ournon-United States based operations, our translated revenue can(and expenses) will be impacted.lower; conversely, if the value of the U.S. dollar weakens relative to the currencies of ournon-United States operations, our translated revenue (and expenses) will be higher. Using the comparable fiscal 20132016 conversion rates, international revenues would have been higher than reported under GAAP by $981,000$3.5 million for the year ended May 31, 2014.27, 2017. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue increased by 3.8% in Asia Pacific and by 10.4% in Europe, but decreased by 3.8% in North America and by 1.9% overall. Average bill rates were about the same on a constant currency basis.
Direct Cost of Services. Direct cost of services increased $9.4decreased $4.3 million, or 2.7%1.2%, to $351.4$362.1 million for the year ended May 31, 201427, 2017 from $342.0$366.4 million for the year ended May 25, 2013. Direct28, 2016. Comparing fiscal 2017 to fiscal 2016, direct cost of services increaseddecreased primarily because of a 3.5% increase0.9% decrease in hours worked compared to the prior year whileand a 1.7% decrease in the average consultant pay rate per hour was flat compared to the prior year. As noted above, fiscal 2014 consisted of 53 weeks while fiscal 2013 consisted of 52 weeks; we estimate this added approximately $5.9 million to the total of direct cost of services for fiscal 2014.hour. The direct cost of services as a percentage of revenue (“direct cost of services percentage”) was 61.9%62.1% and 61.5%61.2% for the years ended May 31, 201427, 2017 and May 25, 2013,28, 2016, respectively. The increase inComparing the two fiscal years, the direct cost of services percentage resulted primarily fromincreased because of an unfavorable change in the bill rate/rate to pay rate relationship (billratio. The stronger U.S. dollar against most of the currencies of the international countries in which we operate during fiscal 2017 affected our average pay rate. Average pay rates were down 1.6% overall compared to no change in pay rate average) offset byabout the same on a decrease in zero margin client reimbursements.constant currency basis.
Our target direct cost of services percentage is 60% for all of our offices.
Selling, General and Administrative Expenses (“S, G & A”). S, G & A increased $4.2$8.7 million, or 2.5%5.0%, to $172.5$183.5 million for the year ended May 31, 201427, 2017 from $168.3$174.8 million for the year ended May 25, 2013. In addition, S, G & A28, 2016 and increased as a percentage of revenue from 30.3%to 31.4% in fiscal 2013 to 30.4%2017 from 29.2% in fiscal 2014.2016. Management and administrative head count was 712732 and 772 at the end of fiscal 20142017 and 707 atfiscal 2016, respectively. During the endfourth quarter of fiscal 2013.2017, the Company announced a restructuring program, reducing front and back office personnel by 49 and closing one U.S.-based location and one international location. The approximate cost of the program was $2.4 million, which is included in S, G & A for the fourth quarter of fiscal 2017. Fiscal 2017 S, G & A also includes severance of approximately $1.1 million andnon-cash stock-based compensation expense of approximately $400,000 related to the accelerated vesting of options previously granted to a senior executive in connection with his departure from the Company. S, G & A in fiscal 2016 includes additionalnon-cash stock-based compensation expense of approximately $900,000 related to the accelerated vesting of options previously granted to Donald Murray in connection with his transition from Executive Chairman to Chairman. Absent these costs, S, G & A increased by $5.7 million in fiscal 20142017 as compared to the same prior year period; the primary cause of this increase was investments in the Company’s managing consultant program to provide more specific skill sets to address evolving client needs and business development professionals in United States offices with high growth potential. In addition, the Company engaged external assistance on the transformation of its sales process and tools during the second half of fiscal 2013 primarily because of an increase in management compensation, related benefits, business expenses and stock compensation expense because2017, incurring consulting fees of the 53 weeks of activity in fiscal 2014approximately $1.3 million. These increased costs were partially offset as compared to fiscal 2013’s 52 weeks; absent the extra week,prior year by a decrease in marketing related costs and provision for uncollectable accounts. S, G & A would have increased about 1.2%, attributablein fiscal 2017 was favorably impacted by $1.1 million due to no single significant category.the strengthening of the U.S. dollar compared primarily to the Euro, Swedish Kronor and British Pound.
Sequential Operations. On a sequential quarter basis, fiscal 20142017 fourth quarter revenuesrevenue increased 18.2%3.3% to $156.8$148.6 million from $132.7$143.8 million, hours worked improved 18.4%1.4% and bill rates were flat.up 1.7%. The improvementCompany’s sequential revenue increased in hours worked is partially attributable toNorth America (2.5%), Europe (11.5%), and Asia Pacific (1.4%); using the 14th week of activitycomparable third quarter fiscal 2017 conversion rates, consolidated sequential revenue increased 3.0% and in North America (2.4%) and Europe (9.7%), but was down in Asia Pacific(-0.1%). Third quarter revenue was impacted by the Christmas, New Year’s and Chinese New Year’s holidays; there were no significant holidays in the fourth quarter as compared to the 13 week quarter in the third quarter; revenue during the extra week was approximately $9.8 million, including the Memorial Day holiday. In addition, while the fourth quarter contained the Memorial Day holiday, the third quarter included the Thanksgiving, Christmas and New Year’s holidays. quarter.
The direct cost of services percentage decreasedimproved from 64.0%63.7% in the third quarter to 61.1%61.0% in the fourth quarter. This decreaseimprovement is primarily attributable to the absence of paidno compensated holidays in the United States during the fourth quarter compared to two in the third quarter, the declining impact of payroll taxes as the calendar year progresses and an improvement in the bill rate/pay rate ratio. The directCompany’s cost of services percentage was also negatively impacted by approximately $331,000 related to the European headcount reduction that affected consultants in the fourth quarter.its self-insured medical coverage of consultants.
S, G & A expenses increased $4.6$3.0 million from the quarter ended February 22, 201425, 2017 to the quarter ended May 31, 2014, primarily as27, 2017. During the fourth quarter of fiscal 2017, the Company initiated and completed a resultrestructuring program, reducing front and back office personnel by 49 and closing one U.S. based location and one international location. The approximate cost of $1.7the program was $2.4 million, which is included in S, G & A for severance and related expenses for headcount reductions in certain European offices; in addition, salary and related benefits and bonusesthe fourth quarter of fiscal 2017. Absent these costs, S, G & A increased due to the additional 14th weekby $0.6 million in the fourth quarter of fiscal 2014,2017 as compared to the same prior year period. The increase was primarily a result of the consulting spend related to the Company’s transformation of its sales process and tools during the fourth quarter of fiscal 2017, incurring fees of approximately $1.0 million, offset by reduced spending for marketing during the quarter.declining impact of payroll taxes as the calendar year progresses. The leverage of S, G & A expenses was improved to 29.5%30.9% (32.6% including severance costs) in the fourth quarter of fiscal 20142017 compared to 31.3%31.5% in the third quarter. This was attributable to the improved revenue in the fourth quarter, as well asproviding leverage on certain fixed expenses, such as rent, in the fourth quarter. A downturn or softening in global economic conditions
Depreciation and Amortization Expense.Depreciation expense was $3.5 million for both fiscal 2017 and 2016. Depreciation on newly acquired property and equipment during fiscal 2017 was offset by the impactcompletion of depreciation on certain assets during the summer holiday period could put resulting pressure on revenue in the first quarter of fiscal 2015, and may limit our ability to leverage direct cost of services and S, G & A expenses.year.
Amortization and Depreciation Expense.Amortization of intangible assets was flat at $1.7 million$90,000 in both fiscal 2014 and fiscal 2013. No intangibles2016. All of the Company’s intangible assets (other than goodwill) were fully amortized duringas of the end of fiscal 2014. Based upon identified intangible assets recorded at May 31, 2014, the Company anticipates amortization expense related to identified intangible assets to approximate $914,000 during the fiscal year ending May 30, 2015; the amount may fluctuate depending upon foreign currency translation rates in effect during the year. During the 2015 fiscal year, several intangible assets will be fully amortized.
Depreciation expense decreased from $4.6 million for the year ended May 25, 2013 to $3.6 million for the year ended May 31, 2014. Depreciation decreased as a number of assets were fully depreciated during fiscal 2013 and fiscal 2014.2016.
Interest Income.Expense (Income). InterestAs described further below under the captionLiquidity and Capital Resources, the Company entered into a $120 million secured revolving credit facility (“Facility”) with Bank of America in October 2016. The Facility is available for working capital and general corporate purposes, including potential acquisitions and stock repurchases. On November 21, 2016, the Company completed its Dutch auction tender offer, purchasing approximately 6.5 million shares of the Company’s common stock for approximately $104.2 million, excluding transaction costs, funded partially by borrowing $58.0 million under the Facility and $46.2 million of cash on hand. Borrowings under the Facility bear interest at a rate per annum of either, at the Company’s 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 margin of 0.25% or 0.50% with the applicable margin depending on the Company’s consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of America’s prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company also pays an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.15% to 0.25%, depending upon our leverage ratio.
Total interest expense for fiscal 2017, including commitment fees, was approximately $773,000. The Company incurred no interest expense during fiscal 2016. During the third quarter of fiscal 2017, the Company repaid $10.0 million on the Facility and had outstanding borrowings of $49.0 million as of May 27, 2017, including outstanding letters of credit of $1.0 million. As of May 27, 2017, the interest rate on the Company’s borrowings was 2.5% on one tranche of $24.0 million based on a1-month LIBOR plus 1.5% and 2.65% on a second tranche of $24.0 million based on a3-month LIBOR plus 1.5%.
The Company’s interest income was $144,000 during fiscal 2017 compared to $186,000 for fiscal 2016. Although rates improved generally during fiscal 2017 compared to fiscal 2016, interest income declined to $168,000 in fiscal 2014 compared to $175,000 in fiscal 2013. The decrease in interest income isbetween the two periods as a result of lowerthe use of cash balancesin the Dutch auction tender offer in November 2016, reducing amounts available for investment infor the remainder of the fiscal 2014. The Company has invested available cash in certificates of deposit, money market investments and commercial paper that have been classified as cash equivalents due to the short maturities of these investments. As of May 31, 2014, the Company had $34.0 million of investments in commercial paper and certificates of deposit with remaining maturity dates between three months and one year from the balance sheet date classified as short-term investments and considered “held-to-maturity” securities.year.
Income Taxes. The provision for income taxes decreased from $19.4to $15.1 million (effective rate of 48.6%approximately 45%) for the year ended May 25, 2013 to $18.327, 2017 from $23.5 million (effective rate of 47.9%44%) for the year ended May 31, 2014.28, 2016. The effective tax rate decreased primarily as a result of expiring statutes of limitations in the Company’s FIN 48 reserves. In addition, the provision for taxes in each ofboth fiscal 20142017 and fiscal 20132016 resulted from taxes on income from operations in the United States and certain other foreign jurisdictions, a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the United States statutory rates, and no benefit for losses in jurisdictions in which a valuation allowance on operating loss carryforwards had previously been established. The decrease in the provision for income taxes is because of lower U.S. pretax income. The effective tax rate increased because of lower U.S. pretax income in fiscal 2017 partially offset by lower international pretax losses. The effective tax rate in both fiscal years disproportionallydisproportionately magnifies the effect of the components of the tax rate that differ from the standard federal rate, includingnon-deductible permanent differences and incentive stock options (“ISOs”). Based upon current economic circumstances, management will continue to monitor the need to record additional or release existing valuation allowances in the future, primarily related to certain foreign jurisdictions. Realization of the currently reserved foreign deferred tax assets is dependent upon generating sufficient future taxable income in those foreign territories.
Periodically, the Company reviews the components of both book and taxable income to analyze the adequacy of the tax provision. There can be no assurance that the Company’s effective tax rate will remain constant in the future because of the lower benefit from the United States statutory rate for losses in certain foreign jurisdictions, the limitation on the benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established, and the unpredictability of timing and the amount of eligible disqualifying ISO exercises.
The Company cannot recognize a tax benefit for certain ISO grants unless and until the holder exercises his or her option and then sells the shares within a certain period of time. In addition, 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 Company’s provision for income taxes is likely to fluctuate from these factors for the foreseeable future. Further, those tax benefits associated with ISO grants fully vested at the date of adoption of the current accounting rules governing stock awards will be recognized as additions topaid-in capital when and if those options are exercised and not as a reduction to the Company’s tax provision. The Company recognized a benefit of approximately $2.1 million and $2.3 million related to stock-based compensation for nonqualified stock options expensed and for eligible disqualifying ISO exercises during both fiscal 20142017 and 2013, respectively.2016. The proportion of expense related tonon-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 ISOs (including ESPPs). However, the timing and amount of eligible disqualifying ISO exercises cannot be predicted. The Company predominantly grants nonqualified stock options to employees in the United States.
The Company has maintained a position of being indefinitely reinvested in its foreign subsidiaries’ earnings by not expecting to remit foreign earnings in the foreseeable future. Being indefinitely reinvested does not require a deferred tax liability to be recognized on the foreign earnings. Management’s indefinite reinvestment position is supported by:
| 1) | RGP in the United States has generated more than enough cash to fund operations and expansion, including acquisitions. RGP uses its excess cash to, at its discretion, return cash to shareholders through dividend payments and stock repurchases. |
| 2) | RGP in the United States has no debt or any other current or known obligations that require cash to be remitted from foreign subsidiaries. |
| 3) | Management’s growth objectives include allowing cash to accumulate in RGP’s profitable foreign subsidiaries with the expectation of finding strategic expansion plans to further penetrate RGP’s most successful locations. |
| 4) | The consequences of distributing foreign earnings have historically been deemed to be tax inefficient for RGP or not materially beneficial. |
Management determined during the fiscal year ended May 25, 2013 that it was a prudent time to make an exception to the indefinite reinvestment position and approved the payment of a one-time dividend from RGP Japan of $9.7 million and RGP Hong Kong of $3.9 million. The one-time exception is based upon opportunistic timing for a dividend distribution because of the favorable exchange rates between the United States and Japan for a tax beneficial result from both RGP Japan and RGP Hong Kong. After the one-time dividend, management’s intent and ability for indefinite reinvestment has continued for all entities, including RGP Japan and RGP Hong Kong.
Year Ended May 25, 201328, 2016 Compared to Year Ended May 26, 201230, 2015
Computations of percentagePercentage change period over periodcomputations are based upon our results, as rounded and presented herein.amounts in thousands.
Revenue. Revenue decreased $15.5increased $7.9 million, or 2.7%1.3%, to $556.3$598.5 million for the year ended May 25, 201328, 2016 from $571.8$590.6 million for the year ended May 26, 2012.30, 2015. We deliver our services to clients, whether multi-national or locally -ased, in a similar fashion across the globe; however inglobe. In fiscal 2013,2016, revenue increased in North America and Asia Pacific but declined in Europe and Asia Pacific as compared to fiscal 2012. In light of continuing global economic uncertainty, we believe that our global clients and prospects are initiating operation and improvement projects cautiously, resulting2015 as noted in reduced levels of consulting spending, particularlythe table below. Bill rates increased 0.8% on average in certain European markets. The number offiscal 2016 compared to fiscal 2015, while hours worked increased 1.4% over the same period. During fiscal 2016, revenue declined with certain clients in fiscal 2013 decreased 1.2% from the prior year and average bill rates decreased by 1.6% comparedenergy services industries due to the prior year. on-going turmoil in the energy market, primarily in the U.S. The timing of stabilization with clients in this industry is uncertain.
The number of consultants on assignment at the end of fiscal 20132016 was 2,2082,511 compared to the 2,3172,516 consultants engaged at the end of fiscal 20122015 (the average number of consultants assigned was 2,2702,503 in fiscal 20132016 compared to 2,2902,487 in fiscal 2012)2015).
We operated 7368 offices (23 abroad) at both May 25, 201328, 2016 and 77 offices at May 26, 2012 as we consolidated certain offices in contiguous areas.30, 2015. Our clients do not sign long-term contracts with us. As such, there can be no assurance as to future demand levels for the services that we provide or that future results can be reliably predicted by considering past trends.
Revenue for the Company’s major geographies across the globe consisted of the following (dollars in thousands):
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| 2013 | 2012 | Change | 2013 | 2012 | May 28, 2016 | May 30, 2015 | % Change | May 28, 2016 | May 30, 2015 | |||||||||||||||||||||||||||||||
North America | $ | 436,025 | $ | 430,584 | 1.3 | % | 78.4 | % | 75.3 | % | $ | 499,229 | $ | 492,207 | 1.4 | % | 83.4 | % | 83.3 | % | ||||||||||||||||||||
Europe | 83,441 | 100,332 | (16.8 | )% | 15.0 | 17.6 | 57,714 | 59,350 | (2.8 | )% | 9.6 | 10.1 | ||||||||||||||||||||||||||||
Asia Pacific | 36,868 | 40,847 | (9.7 | )% | 6.6 | 7.1 | 41,578 | 39,032 | 6.5 | % | 7.0 | 6.6 | ||||||||||||||||||||||||||||
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Total | $ | 556,334 | $ | 571,763 | (2.7 | )% | 100.0 | % | 100.0 | % | $ | 598,521 | $ | 590,589 | 1.3 | % | 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 United States dollar. Revenues denominated in foreign currencies are translated into United States dollars at the monthly average exchange rates in effect during each quarter.period. Thus, asif the value of the United States dollar fluctuatesstrengthens relative to the currencies inof ournon-United States based operations, our translated revenue can(and expenses) will be impacted.lower. Using the comparable fiscal 20122015 conversion rates, international revenues would have been higher than reported under GAAP by $4.4$8.9 million for the year ended May 25, 2013.
The stronger U.S. dollar against most of the currencies of the international countries in which we operate during fiscal 2016 affected our average bill rate. Using the comparable fiscal 2015 conversion rates, the average bill rate would have increased 1.7% in fiscal 2016 compared to fiscal 2015.
Direct Cost of Services. Direct cost of services decreased $10.5increased $4.2 million, or 3.0%1.2%, to $342.0$366.4 million for the year ended May 25, 201328, 2016 from $352.5$362.2 million for the year ended May 26, 2012. Direct30, 2015. Comparing fiscal 2016 to fiscal 2015, direct cost of services decreasedincreased primarily because of a 1.2% decrease1.4% increase in hours worked, compared towhile the prior year; in addition, the average consultant pay rate per hour to our consultants was down 1.6% compared to the prior year.same in both years. The direct cost of services percentage was 61.5%61.2% and 61.6%61.3% for the years ended May 25, 201328, 2016 and May 26, 2012,30, 2015, respectively. The decreaseComparing the two fiscal years, there were no significant differences in the components comprising the direct cost of services percentage resulted primarily from improvementpercentage. The stronger U.S. dollar against most of the currencies of the international countries in which we operate during fiscal 2016 affected our average pay rate. Using the bill rate tocomparable fiscal 2015 conversion rates, the average pay rate relationship and a decreasewould have increased 1.7% in zero margin client reimbursements.fiscal 2016 compared to fiscal 2015.
Our target direct cost of services percentage is 60% for all of our offices.
Selling, General and Administrative Expenses. S, G & A decreased $2.7increased $1.0 million, or 1.6%0.6%, to $168.3$174.8 million for the year ended May 25, 201328, 2016 from $171.0$173.8 million for the year ended May 26, 2012.30, 2015. However, S, G & A increaseddecreased as a percentage of revenue from 29.9% for the year ended May 26, 201229.4% in fiscal 2015 to 30.3% for the year ended May 25, 2013.29.2% in fiscal 2016. Management and administrative head count was 707772 at the end of fiscal 20132016 and 700742 at the end of fiscal 2012.2015. S, G & A decreasedfor the year ended May 28, 2016 includes additionalnon-cash stock-based compensation expense of approximately $900,000 related to the accelerated vesting of options previously granted to Donald Murray in connection with his transition from Executive Chairman to Chairman. During fiscal 20132016, compensation and related benefit costs increased, attributable to headcount additions in U.S. and Asia Pacific in offices experiencing growth; and the Company increased its reserve for uncollectable accounts by $1.1 million. These costs were offset as compared to fiscal 2012 primarily because ofthe prior year by a reductiondecrease in management compensationseverance charges related to our European operations and related business expenses (much of which is attributable to foreign currency exchange fluctuationsdecreases in our international operations),othernon-cash stock-based compensation expenses and lower occupancy costs for certainexpense. S, G & A in fiscal 2016 was favorably impacted by $3.0 million due to the strengthening of the Company’s leased office facilities.U.S. dollar compared primarily to the Euro, Swedish Kronor and British Pound.
Sequential Operations. On a sequential quarter basis, fiscal 20132016 fourth quarter revenuesrevenue increased 1.6%3.9% to $140.2$152.5 million from $138.0$146.8 million, hours worked improved 0.8%2.8% and bill rates increasedwere up 0.8%. The improvementCompany’s sequential revenue increased in hours worked is partially attributable toNorth America (3.1%), Europe (11.7%), and Asia Pacific (2.8%); using the lack ofcomparable third quarter fiscal 2016 conversion rates, sequential revenue increased in North America (3.1%) and Europe (9.5%), but was down in Asia Pacific(-0.7%). Third quarter revenue was impacted by the Christmas, New Year’s and Chinese New Year’s holidays; there were no significant holidays in the United States in the fourth quarter versus the third quarter, which included the Christmas and New Year’s holidays. quarter.
The direct cost of services percentage decreasedimproved from 62.9%62.6% in the third quarter to 61.1%.60.1% in the fourth quarter. This decreaseimprovement is primarily attributable to the absence of paidno compensated holidays in the United States during the fourth quarter andcompared to two in the third quarter, the declining impact of payroll taxes as the calendar year progresses. progresses and an improvement in the Company’s cost of its self-insured medical coverage of consultants.
S, G & A expenses increased $700,000$1.0 million from the quarter ended February 23, 201327, 2016 to the quarter ended May 25, 2013,28, 2016, primarily as a result of the increased spending for marketing spend and severance expenses in certain European officesprograms, offset by reducedthe declining impact of payroll related benefit costs.taxes as the calendar year progresses and improvement in the Company’s cost of self-insured medical coverage for employees. The leverage of S, G & A expenses was relatively flat at 30.1% in the third quarter of fiscal 2013 and 30.2%improved to 29.1% in the fourth quarter of fiscal 2013.
Employee Portion of Contingent Consideration Adjustment and Contingent Consideration Adjustment. At the conclusion of the second annual evaluation period for earn-out qualification as of November 26, 2012, the Company determined that it was more likely than not that the Sitrick Brincko Group would not exceed the target average EBITDA of $11.3 million necessary for an earn-out payment in November 2013 and reduced the fair value of the estimated liability from $33.4 million2016 compared to zero, representing a non-cash favorable adjustment as reflected in the Company’s Consolidated Statement of Operations for the year ended May 26, 2012 ($20.4 million net of tax, including the employee portion adjustment discussed below). As of May 25, 2013, the Company had not altered its conclusion after updating its probability weighted assessment of various projected EBITDA scenarios for the remaining two quarters in the earn-out period. In addition, in fiscal 2012, the Company also reversed its previously recorded estimate of $500,000 for the employee portion of contingent consideration after determining that it was more likely than not that the earn-out contingent consideration would not be paid. As of May 25, 2013, the Company continued to believe it was more likely than not that no contingent consideration would be payable. Because the contingent consideration was not owed at the conclusion of the earn-out period, Mr. Brincko was entitled to receive a cash payment of $2,250,000, which was paid29.5% in the third quarter. This was attributable to the improved revenue in the fourth quarter, of fiscal 2014. As a result ofwhich provided leverage on certain fixed expenses, such as rent, in the Company’s determination that it was more likely than not that the contingent consideration would not be earned, this amount was recognized as a component of S, G & A over the remaining service period from the time it was estimated that no contingent consideration would be due. The Company determined that the average annual EBITDA of Sitrick Brincko Group did not exceed the required $11.3 million as of November 23, 2013, the end of the four-year earn-out period, and so no contingent consideration was payable.fourth quarter.
Amortization and Depreciation Expense.Amortization of intangible assets decreased to $1.7 millionfrom $918,000 in fiscal 2013 from $3.4 million2015 to $90,000 in fiscal 2012. The decrease is2016. During fiscal 2016, the resultCompany completed amortization of the completionall of amortization on certain identifiableits intangible assets.
Depreciation expense decreasedincreased from $5.7$3.4 million for the year ended May 26, 201230, 2015 to $4.6$3.5 million for the year ended May 25, 2013. Depreciation decreased as a number of assets were fully depreciated during fiscal 2012 and fiscal 2013 and the Company has slowed the amount invested in property and equipment since fiscal 2009 as compared to previous fiscal years.28, 2016.
Interest Income. Interest income declinedincreased to $175,000$186,000 in fiscal 20132016 compared to $252,000$148,000 in fiscal 2012.2015. The decreaseincrease in interest income is the result of lower interestimproved rates on amounts available for the Company’s investments as compared toinvestment in fiscal 2012 and, to a lesser extent, lower available cash balances available for investment.2016. The Company has invested available cash in certificates of deposit and money market investments and commercial paper that have been classified as cash equivalents due to the short maturities of these investments. As of May 25, 2013,28, 2016, the Company had $25.0 million of investments in commercial paper and certificates of depositU.S. Government Agency securities with remaining maturity dates between three months and one year from the balance sheet date which are classified as short-term investments and considered “held-to-maturity”“held-to-maturity” securities.
Income Taxes. The provision for income taxes decreasedincreased from $32.2$22.9 million (effective rate of 43.9%45.4%) for the year ended May 26, 201230, 2015 to $19.4$23.5 million (effective rate of 48.6%43.6%) for the year ended May 25, 2013. While the provision decreased because of lower pretax income, the effective tax rate increased as a consequence of the mix of international results. In addition, the28, 2016. The provision for taxes in each ofboth fiscal 20132016 and fiscal 20122015 resulted from taxes on income from operations in the United States and certain other foreign jurisdictions, a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the United States statutory rates, and no benefit for losses in jurisdictions in which a valuation allowance on operating loss carryforwards had previously been established. The effective tax rateincrease in both fiscal years disproportionally magnifies the effect of the components of the tax rate that differ from the standard federal rate, including non-deductible permanent differences andISOs. Based upon current economic circumstances, management will continue to monitor the need to record additional valuation allowances in the future, primarily related to certain foreign jurisdictions. Realization of the foreign deferred tax assets is dependent upon generating sufficient future taxable income.
The Company cannot recognize a tax benefit for certain ISO grants unless and until the holder exercises his or her option and then sells the shares within a certain period of time. In addition, 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 Company’s provision for income taxes is likely to fluctuatebecause of higher pretax income. The effective tax rate decreased because of higher U.S. pretax income coupled with lower international pretax losses. Decreased losses from these factors forcountries with valuation allowances allow the foreseeable future. Further, those tax benefits associated with ISO grants fully vested at the date of adoption of the current accounting rules governing stock awards will be recognized as additions to paid-in capital when and if those options are exercised and not as a reduction to the Company’s tax provision. The Company recognized a benefit of approximately $2.3 million and $2.4 million related to stock-based compensation for nonqualified stock options expensed and for eligible disqualifying ISO exercises during fiscal 2013 and 2012, 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 ISOs (including ESPPs). However, the timing and amount of eligible disqualifying ISO exercises cannot be predicted. The Company predominantly grants nonqualified stock options to employees in the United States.
The Company has maintained a position of being indefinitely reinvested in its foreign subsidiaries’ earnings by not expecting to remit foreign earnings in the foreseeable future. Being indefinitely reinvested does not require a deferred tax liability to be recognized onspread over a higher pretax base, which lowers the foreign earnings. Management’s indefinite reinvestment position is supported by:
Management determined during the fiscal year ended May 25, 2013 that it was a prudent time to make an exception to the indefinite reinvestment position and approved the payment of a one-time dividend from RGP Japan of $9.7 million and RGP Hong Kong of $3.9 million. The one-time exception is based upon opportunistic timing for a dividend distribution because of the favorable exchange rates between the United States and Japan for aeffective tax beneficial result from both RGP Japan and RGP Hong Kong. After the one-time dividend, management’s intent and ability for indefinite reinvestment will continue for all entities, including RGP Japan and RGP Hong Kong.rate.
Quarterly Results
The following table sets forth our unaudited quarterly Consolidated Statements of Operations data for each of the eight quarters in thetwo-year period ended May 31, 2014.27, 2017. In the opinion of management, this data has been prepared on a basis substantially consistent with our audited Consolidated Financial Statements appearing elsewhere in this document, and includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the data. The quarterly data should be read together with our Consolidated Financial Statements and related notes appearing elsewhere in this document. The operating results are not necessarily indicative of the results to be expected in any future period.
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| May 31, | Feb. 22, | Nov. 23, | Aug. 24, | May 25, | Feb. 23, | Nov. 24, | Aug. 25, | Quarters Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2014 (1) | 2014 | 2013 | 2013 | 2013 | 2013 | 2012 | 2012 | May 27, 2017 | Feb. 25, 2017 | Nov. 26, 2016 | Aug. 27, 2016 | May 28, 2016 | Feb. 27, 2016 | Nov. 28, 2015 | Aug. 29, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except net income per common share) | (In thousands, except net income per common share) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue | $ | 156,783 | $ | 132,725 | $ | 145,969 | $ | 131,704 | $ | 140,184 | $ | 138,020 | $ | 141,197 | $ | 136,933 | $ | 148,620 | $ | 143,844 | $ | 147,558 | $ | 143,389 | $ | 152,515 | $ | 146,779 | $ | 150,887 | $ | 148,340 | ||||||||||||||||||||||||||||||||
Direct cost of services, primarily payroll and related taxes for professional services employees | 95,841 | 84,960 | 88,564 | 81,994 | 85,684 | 86,825 | 85,987 | 83,544 | 90,579 | 91,597 | 91,048 | 88,862 | 91,616 | 91,851 | 92,011 | 90,877 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Gross margin | 60,942 | 47,765 | 57,405 | 49,710 | 54,500 | 51,195 | 55,210 | 53,389 | 58,041 | 52,247 | 56,510 | 54,527 | 60,899 | 54,928 | 58,876 | 57,463 | ||||||||||||||||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 46,194 | 41,604 | 43,121 | 41,612 | 42,325 | 41,591 | 42,342 | 42,060 | 48,425 | 45,376 | 46,056 | 43,614 | 44,360 | 43,318 | 43,171 | 43,957 | ||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of intangible assets | 426 | 424 | 421 | 417 | 412 | 422 | 434 | 426 | — | — | — | — | — | 30 | 30 | 30 | ||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation expense | 881 | 877 | 909 | 961 | 1,092 | 1,125 | 1,172 | 1,191 | 941 | 909 | 808 | 794 | 861 | 867 | 881 | 858 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Income from operations | 13,441 | 4,860 | 12,954 | 6,720 | 10,671 | 8,057 | 11,262 | 9,712 | 8,675 | 5,962 | 9,646 | 10,119 | 15,678 | 10,713 | 14,794 | 12,618 | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense | 358 | 351 | 64 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest income | (45 | ) | (41 | ) | (43 | ) | (39 | ) | (40 | ) | (37 | ) | (50 | ) | (48 | ) | (18 | ) | (16 | ) | (40 | ) | (70 | ) | (68 | ) | (52 | ) | (34 | ) | (32 | ) | ||||||||||||||||||||||||||||||||
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Income before provision for income taxes | 13,486 | 4,901 | 12,997 | 6,759 | 10,711 | 8,094 | 11,312 | 9,760 | 8,335 | 5,627 | 9,622 | 10,189 | 15,746 | 10,765 | 14,828 | 12,650 | ||||||||||||||||||||||||||||||||||||||||||||||||
Provision for income taxes | 6,627 | 2,622 | 5,902 | 3,106 | 5,396 | 3,601 | 5,448 | 4,928 | 3,898 | 2,743 | 3,930 | 4,551 | 7,069 | 4,808 | 6,152 | 5,517 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Net income | $ | 6,859 | $ | 2,279 | $ | 7,095 | $ | 3,653 | $ | 5,315 | $ | 4,493 | $ | 5,864 | $ | 4,832 | $ | 4,437 | $ | 2,884 | $ | 5,692 | $ | 5,638 | $ | 8,677 | $ | 5,957 | $ | 8,676 | $ | 7,133 | ||||||||||||||||||||||||||||||||
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Net income per common share(2): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Basic | $ | 0.18 | $ | 0.06 | $ | 0.18 | $ | 0.09 | $ | 0.13 | $ | 0.11 | $ | 0.14 | $ | 0.12 | $ | 0.15 | $ | 0.10 | $ | 0.16 | $ | 0.16 | $ | 0.24 | $ | 0.16 | $ | 0.23 | $ | 0.19 | ||||||||||||||||||||||||||||||||
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Diluted | $ | 0.18 | $ | 0.06 | $ | 0.18 | $ | 0.09 | $ | 0.13 | $ | 0.11 | $ | 0.14 | $ | 0.12 | $ | 0.15 | $ | 0.09 | $ | 0.16 | $ | 0.15 | $ | 0.23 | $ | 0.16 | $ | 0.23 | $ | 0.19 | ||||||||||||||||||||||||||||||||
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| (1) |
| Net income per common share calculations for each of the quarters were based upon the weighted average number of shares outstanding for each period, and the sum of the quarters may not necessarily be equal to the full year net income per common share amount. |
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 I Item 1A. “Risk Factors.” Due to these and other factors, we believe thatquarter-to-quarter comparisons of our results of operations are not meaningful indicators of future performance.
Liquidity and Capital Resources
Our primary source of liquidity is cash provided by our operations and ability to access our Facility and, historically, to a lesser extent, stock option exercises. Weexercises and ESPP purchases. On an annual basis, we have generated positive cash flows annually from operations since inception, and we continued to do so duringfor the year ended May 31, 2014.27, 2017. Our ability to continue to increasegenerate positive cash flow from operations in the future will be, at least in part, dependent on continued improvement in global economic conditions.
At As of May 31, 2014,27, 2017, the Company had operating leases, primarily for office premises,$62.3 million of cash and purchase obligations, primarily for property and equipment, expiring at various dates through August 2024. At May 31, 2014, the Company had no capital leases. The following table summarizes our future minimum rental commitments under operating leases and our other known contractual obligations as of May 31, 2014:cash equivalents.
| Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Fiscal 2015 | Fiscal 2016-2017 | Fiscal 2018-2019 | Thereafter | |||||||||||||||
| (Amounts in thousands) | ||||||||||||||||||||
Operating lease obligations | $ | 44,038 | $ | 10,656 | $ | 17,203 | $ | 9,019 | $ | 7,160 | ||||||||||
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Purchase obligations | $ | 1,672 | $ | 777 | $ | 723 | $ | 172 | $ | — | ||||||||||
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The Company hasIn October 2016, we entered into a $3.0$120 million unsecured revolving credit facilityFacility with Bank of America (the “Credit Agreement”).America. The Credit AgreementFacility is available for working capital and general corporate purposes, including acquisitions and stock repurchases. The Facility allows the Company to choose the interest rate applicable to advances. Borrowings under the Facility bear interest at a rate per annum of either, at the Company’s
option, (i) 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 margin of 0.25% or 0.50% with the applicable margin depending on the Company’s consolidated leverage ratio. The interestalternate base rate options areis the highest of (i) Bank of America’s prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company pays an unused commitment fee on the average daily unused portion of the Facility at a London Inter-Bank Offered Rate plus 2.25%. Interest, if any, is payable monthly.rate of 0.15% to 0.25% depending upon on the Company’s consolidated leverage ratio. The Credit AgreementFacility expires November 30, 2014. October 17, 2021.
As of May 31, 2014,27, 2017, the Company had borrowings of approximately $1.5$48.0 million available under the terms of the Credit Agreement, asFacility and directed Bank of America has issuedto issue approximately $1.5$1.0 million of outstanding letters of credit in favorfor the benefit of third parties related to operating leases.leases and guarantees. As of May 31, 2014,27, 2017, the Company was in compliance with allthe financial covenants included in the Credit Agreement.Facility.
In October 2016, we commenced a modified Dutch auction tender offer to purchase up to 6 million shares of our common stock at a price not greater than $16.00 per share and not less than $13.50 per share. In November 2016, the Company exercised its right to increase the size of the tender offer by up to 2.0% of its outstanding common stock and, following expiration of the tender offer on November 15, 2016, we purchased 6,515,264 shares of our common stock at a per share price of $16.00 for approximately $104.2 million, excluding transaction costs. We funded the tender offer through $58.0 million borrowed under the Facility and the remainder with cash on hand.
Operating Activities, fiscal 2017 and 2016
Operating activities provided $32.0$28.3 million and $38.3 million in cash in fiscal 2014 compared to $35.0 million in2017 and fiscal 2013.2016, respectively. Cash provided by operations in fiscal 20142017 resulted from net income of $19.9$18.7 million and net favorablenon-cash reconciling adjustments of $14.0 million (principally depreciation and amortization and stock-based compensation expense).$14.5 million. Other balance sheet account changes between the two periods,in fiscal 2017, including working capital balances, were a net use of cash of $1.9$4.9 million; the primary driver of the use was the increase in the Company’s accounts receivable as of the end of the fiscal year becauseand the unfavorable change in the balance of higher weekly revenues as compared to the same period of the prior fiscal year.income taxes due. In fiscal 2013,2016, cash provided by operations resulted from net income of $20.5$30.4 million and net favorablenon-cash reconciling adjustments of $14.5 million (principally depreciation and amortization and stock-based compensation expense).$12.0 million. Other balance sheet account changes between the two periods,in fiscal 2016, including working capital balances, were negligible.a net use of cash of $4.2 million.Non-cash items in both years include depreciation and amortization (which decreased between the two periods by $0.1 million) and stock-based compensation expense which decreased between the two periods by $0.2 million. Stock-based compensation expense does not reflect an actual cash outflow from the Company but is an estimate of the fair value of the services provided by employees and directors in exchange for share-based payments such as stock option grantsoptions, restricted stock and ESPP purchase rights. The change between the two years is also influenced by the acceleration of stock throughvesting related to options granted to a senior executive who left the Company’s ESPP and was relatively the same between fiscal 2014 and fiscal 2013. In addition, non-cash depreciation and amortization fellCompany in fiscal 2014 as certain assets were fully amortized2017 (approximately $0.4 million) and the acceleration of vesting in fiscal 2013.2016 of options previously granted to Donald Murray in connection with his transition from Executive Chairman to Chairman (approximately $0.9 million).
Investing Activities, fiscal 2017 and 2016
Net cash used inprovided by investing activities was $12.7$20.4 million for fiscal 20142017 compared to $5.2net cash used of $2.4 million for fiscal 2013. Cash received from the redemption2016. During fiscal 2017, redemptions of short-term investments (primarily commercial paper), netwere $25.0 million as the Company accumulated cash from maturing investments in preparation for the tender offer; in the prior year period, purchases and redemptions of cash used to purchase short-term investments resulted in a usewere about the same. Purchases of cash of $9.0 million in fiscal 2014 compared to $2.0 million in fiscal 2013; although interest rates remained relatively low in fiscal 2014, the Company invested in more short-term investments to try to secure a better return. The Company spent approximately $600,000 more on property and equipment inincreased approximately $2.4 million between the two periods as the Company completed several office relocations.
Financing Activities, fiscal 2014 compared to fiscal 2013.2017 and 2016
Net cash used in financing activities totaled $32.9$76.9 million and $32.3 million for the yearyears ended May 31, 2014, compared27, 2017 and May 28, 2016, respectively. Net cash used in financing activities for fiscal 2017 included $104.2 million, excluding transaction costs, used to $38.1purchase 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 Company’s existing cash balances. Subsequent to the Dutch auction tender offer, the Company repaid $10.0 million borrowed under the Facility. The Company also used $13.5 million to purchase approximately 843,000 shares of common stock on the open market during fiscal 2017. This compares to $28.1 million used in fiscal 2016 to purchase approximately 1.8 million shares of its common stock on the open market. Payments for the year ended May 25, 2013.Company’s dividend program increased slightly from $14.1 million in fiscal 2016 to $14.2 million in fiscal 2017. The increase in quarterly
dividend from $0.10 per common share in fiscal 2016 to $0.11 per common share in fiscal 2017 was offset by the reduced number of shares eligible for dividend after the Company’s Dutch auction tender offer in November 2016. Finally, the Company received approximately $7.3$8.4 million in fiscal 20142017 from the exercise of employee stock options and issuance of shares via the Company’sCompany’ ESPP, compared to $5.6$9.8 million in the prior fiscal year. However, the Company used less cash in fiscal 2014 ($29.6 million) to purchase approximately 2.2 million shares of our common stock as compared to $34.2 million to purchase 2.9 million shares of common stock in fiscal 2013. Payments for the Company’s dividend program increased from $9.5 million in fiscal 2013 to $10.6 million in fiscal 2014 as a result of the Company’s increase in fiscal 2014 of its quarterly dividend from $0.06 to $0.07 per common share.
The Company had $114.3 million in cash and cash equivalents and short-term investments at May 31, 2014. We anticipate that our current cash and the ongoing cash flows from operations will be adequate to meet our working capital and capital expenditure needs for at least the next 12 months.
Our ongoing operations and anticipated growth in the geographic markets we currently serve will require us to continue to make investments in office premises and capital equipment, primarily technology hardware and software. In addition, we may consider making strategic acquisitions. We currently believe that our current cash, ongoing cash flows from our operations and funding available under our Facility will be adequate to meet our working capital and capital expenditure needs for at least the next 12 months. If we require additional capital resources to grow our business, either internally or through acquisition, we may seek to sell additional equity securities or to secure debt financing.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.
Operating Activities, fiscal 2016 and 2015
Operating activities provided $35.0$38.3 million and $31.8 million in cash in fiscal 2013 compared to $36.4 million in2016 and fiscal 2012.2015, respectively. Cash provided by operations in fiscal 20132016 resulted from net income of $20.5$30.4 million and net favorablenon-cash reconciling adjustments of $14.5 million (principally depreciation and amortization and stock compensation expense).$12.0 million. Other balance sheet account changes between the two periods,in fiscal 2016, including working capital balances, were negligible.a net use of cash of $4.2 million; the primary driver of the use was the increase in the Company’s accounts receivable as of the end of the fiscal year because of higher weekly revenues as compared to the same period of the prior fiscal year. In fiscal 2012,2015, cash provided by operations resulted from net income of $41.1$27.5 million and net unfavorable favorablenon-cash reconciling adjustments of $3.1 million (principally depreciation and amortization, stock-based compensation expense and contingent consideration and related deferred tax impact) and by net negative$11.1 million. Other balance sheet account changes in fiscal 2015, including working capital accounts,balances, were a net use of $1.6cash of $6.9 million. Operating cash flowsNon-cash items in both years include depreciation and amortization (which decreased between the two years are relatively similar as, absent the impact of the adjustments to contingent considerationperiods by $0.8 million because certain intangible assets became fully amortized during fiscal 2015) and related deferred taxes in fiscal 2012, net incomestock-based compensation expense which increased between the two years is virtually the same ($20.5 million in fiscal 2013 and $20.7 million in fiscal 2012). The adjustment to contingent consideration in fiscal 2012 was the result of the Company’s determination that it was more likely than not that no contingent consideration was payable in November 2013 related to the acquisition of Sitrick Brincko Group based on projected earn-out scenarios.periods by $0.3 million. Stock-based compensation expense does not reflect an actual cash outflow from the Company but is an estimate of the fair value of the services provided by employees and directors in exchange for share-based payments such as stock option grantsoptions, restricted stock and ESPP purchase of stock through the Company’s ESPP and was relatively the same between fiscal 2013 and fiscal 2012. In addition, non-cash amortization fellrights. The increase in fiscal 2013 as certain assets were fully amortized2016 is attributable to the acceleration of vesting related to options previously granted to Donald Murray in connection with his transition from Executive Chairman to Chairman.
Investing Activities, fiscal 2012.2016 and 2015
Net cash used in investing activities was $5.2$2.4 million for fiscal 20132016 compared to $20.5net cash provided of $6.6 million for fiscal 2012.2015. Cash received from the redemption and purchases of short-term investments (primarily commercial paper), net was approximately the same in fiscal 2016 but was a source of cash used to purchase short-term investments, resulted in a use of cash of $2.0 million in fiscal 2013 compared to $17.7 million in fiscal 2012.2015 of $9.0 million. The Company spent approximately $400,000 morethe same amount ($2.4 million) on property and equipment in fiscal 2013 compared to2016 as fiscal 2012.2015.
Financing Activities, fiscal 2016 and 2015
Net cash used in financing activities totaled $38.1$32.3 million for the year ended May 25, 2013,28, 2016, compared to $49.1$28.9 million for the year ended May 26, 2012.30, 2015. The Company received approximately $5.6$9.8 million in fiscal 20132016 from the exercise of employee stock options and issuance of shares via the Company’s ESPP compared to $4.3$9.1 million in the prior fiscal year. However, the Company used lessmore cash in fiscal 20132016 ($34.228.1 million) to purchase approximately 2.91.8 million shares of our common stock as compared to $45.4$26.3 million to purchase 3.91.7 million shares of common stock in fiscal 2012.2015. Payments for the Company’s dividend program increased from $8.3$11.7 million in fiscal 20122015 to $9.5$14.1 million in fiscal 20132016 as a result of the Company’s increase in fiscal 20132016 of its quarterly dividend from $0.05$0.08 to $0.06$0.10 per common share.
Off-Balance
Contractual Obligations
At May 27, 2017, the Company had operating leases, primarily for office premises, and purchase obligations, primarily for property and equipment, expiring at various dates through March 2027. At May 27, 2017, the Company had no capital leases (although, as described in “Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements, we will recognize as liabilities in our Balance Sheet the obligation for outstanding operating leases primarily related to office facilities commencing in fiscal 2020). The following table summarizes our future minimum rental commitments under operating leases and our other known contractual obligations as of May 27, 2017:
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| Total | Fiscal 2018 | Fiscal 2019-2020 | Fiscal 2021-2022 | Thereafter | ||||||||||||||||
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Operating lease obligations | $ | 45,009 | $ | 10,537 | $ | 16,297 | $ | 11,182 | $ | 6,993 | ||||||||||
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Purchase obligations | $ | 1,129 | $ | 440 | $ | 575 | $ | 114 | $ | — | ||||||||||
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Long-term debt | $ | 48,000 | $ | — | $ | — | $ | 48,000 | $ | — | ||||||||||
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Off-Balance Sheet Arrangements
The Company has nooff-balance sheet arrangements.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2 —Summary of Significant Accounting Policies — to the Consolidated Financial Statements for the year ended May 31, 2014.27, 2017.
Inflation
Inflation was not a material factor in either revenue or operating expenses during the fiscal years ended May 31, 2014,27, 2017, May 25, 2013 and28, 2016 or May 26, 2012.30, 2015.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Interest Rate Risk. We are primarily exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on the market values of our cash and cash equivalents and our borrowings under our Facility that bear interest at a variable market rate.
At the end of fiscal 2014,2017, we had approximately $114.3$62.3 million of cash and cash equivalents and short-term investments. Securities that the Company has the ability and positive intent to hold to maturity are carried at amortized cost. These securities consist$48.0 million of commercial paper. Cost approximates market for these securities.borrowings under our Facility. The earnings on these investments are subject to changes in interest rates; however, assuming a constant balance available for investment, a 10% decline in interest rates would reduce our interest income but would not have a material impact on our consolidated financial position or results of operations.
Borrowings under the Facility bear interest at a rate per annum of either, at the Company’s option, (i) a London Interbank Offered Rate (“LIBOR”) rate defined in the Facility plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus margin of 0.25% or 0.50% with the applicable margin depending on the Company’s consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of America’s prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. We are exposed to rate risk related to fluctuations in the LIBOR rate primarily; at the current level of borrow as of May 27, 2017 of $48.0 million, a 10% change in interest rates would have resulted in approximately a $0.1 million change in annual interest expense.
Foreign Currency Exchange Rate Risk. For the year ended May 31, 2014,27, 2017, approximately 21.9%19.5% of the Company’s revenues were generated outside of the United States. As a result, our operating results are subject to fluctuations in the exchange rates of foreign currencies in relation to the United StatesU.S. dollar. Revenues and expenses denominated in foreign currencies are translated into United StatesU.S. dollars at the monthly average exchange rates prevailing during the period. Thus, as the value of the United StatesU.S. dollar fluctuates relative to the currencies in ournon-United States based operations, our reported results may vary.
Assets and liabilities of ournon-United States based operations are translated into United StatesU.S. dollars at the exchange rate effective at the end of each monthly reporting period. Approximately 84%58% of our fiscalyear-end balances of cash and cash equivalents and short-term investments were denominated in United StatesU.S. dollars. The remaining amount of approximately 16%42% was comprised primarily of cash balances translated from Canadian Dollars, Japanese Yen, Euros, or Hong Kong Dollars.Canadian Dollars and Chinese Yuan. The difference resulting from the translation each period of assets and liabilities of ournon-United States based operations is recorded in stockholders’ equity as a component of stockholders’ equity in other accumulated other comprehensive income or loss.
Although we intend to monitor our exposure to foreign currency fluctuations, we do not currently use financial hedging techniques to mitigate risks associated with foreign currency fluctuations andincluding in a limited number of circumstances when we may be asked to transact with our client in one currency but are obligated to pay our consultant in another currency. We cannot assure youprovide assurance that exchange rate fluctuations will not adversely affect our financial results in the future.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
RESOURCES CONNECTION, INC.
CONSOLIDATED FINANCIAL STATEMENTS
See also “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Quarterly Results,” which is incorporated herein by reference.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Resources Connection, Inc.
We have audited the accompanying consolidated balance sheets of Resources Connection, Inc. and subsidiaries as of May 31, 201427, 2017 and May 25, 2013,28, 2016, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the twothree years in the period ended May 31, 2014.27, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Resources Connection, Inc. and subsidiaries as of May 31, 201427, 2017 and May 25, 2013,28, 2016, and the results of their operations and their cash flows for each of the twothree years in the period ended May 31, 2014,27, 2017, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Resources Connection, Inc.’s‘s and subsidiaries’ internal control over financial reporting as of May 31, 2014,27, 2017, based on criteria established inInternal Control — Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992,2013, and our report dated July 28, 201424, 2017 expressed an unqualified opinion on the effectiveness of Resources Connection, Inc.’s and subsidiaries’ internal control over financial reporting.
/s/ McGladrey LLP
Irvine, California
July 28, 2014
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Resources Connection, Inc.
In our opinion, the consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for the year ended May 26, 2012 presents fairly, in all material respects, the results of operations and cash flows of Resources Connection, Inc. and its subsidiaries for the year ended May 26, 2012, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopersRSM US LLP
Irvine, California
July 24, 20122017
| May 31, 2014 | May 25, 2013 | |||||||||||||||
| (Amounts in thousands, except | May 27, 2017 | May 28, 2016 | ||||||||||||||
| par value per share) | (Amounts in thousands, except par value per share) | |||||||||||||||
| ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 80,291 | $ | 94,016 | $ | 62,329 | $ | 91,089 | ||||||||
Short-term investments | 33,986 | 24,996 | — | 24,957 | ||||||||||||
Trade accounts receivable, net of allowance for doubtful accounts of $3,139 and $3,428 as of May 31, 2014 and May 25, 2013, respectively | 90,334 | 84,194 | ||||||||||||||
Trade accounts receivable, net of allowance for doubtful accounts of $2,517 and $2,994 as of May 27, 2017 and May 28, 2016, respectively | 98,222 | 97,807 | ||||||||||||||
Prepaid expenses and other current assets | 4,876 | 4,594 | 4,395 | 4,735 | ||||||||||||
Income taxes receivable | — | 1,228 | 1,899 | — | ||||||||||||
Deferred income taxes | 7,975 | 8,149 | ||||||||||||||
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| |||||||||||||
Total current assets | 217,462 | 217,177 | 166,845 | 218,588 | ||||||||||||
Goodwill | 175,427 | 174,275 | 171,088 | 171,183 | ||||||||||||
Intangible assets, net | 1,031 | 2,659 | ||||||||||||||
Property and equipment, net | 23,158 | 21,087 | 23,354 | 21,274 | ||||||||||||
Deferred income taxes | 672 | — | 973 | 4,237 | ||||||||||||
Other assets | 2,328 | 2,442 | 1,868 | 1,973 | ||||||||||||
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Total assets | $ | 420,078 | $ | 417,640 | $ | 364,128 | $ | 417,255 | ||||||||
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| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable and accrued expenses | $ | 14,031 | $ | 15,722 | $ | 14,102 | $ | 13,606 | ||||||||
Accrued salaries and related obligations | 45,567 | 39,280 | 49,241 | 50,155 | ||||||||||||
Other liabilities | 7,577 | 6,331 | 8,428 | 7,123 | ||||||||||||
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| |||||||||||||
Total current liabilities | 67,175 | 61,333 | 71,771 | 70,884 | ||||||||||||
Long-term debt | 48,000 | — | ||||||||||||||
Deferred income taxes | 1,280 | — | ||||||||||||||
Other long-term liabilities | 7,142 | 3,980 | 4,935 | 3,722 | ||||||||||||
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Total liabilities | 74,317 | 65,313 | 125,986 | 74,606 | ||||||||||||
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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; 56,738 and 56,082 shares issued, and 38,158 and 39,705 shares outstanding as of May 31, 2014 and May 25, 2013, respectively | 567 | 561 | ||||||||||||||
Common stock, $0.01 par value, 70,000 shares authorized; 58,992 and 58,237 shares issued, and 29,662 and 36,229 shares outstanding as of May 27, 2017 and May 28, 2016, respectively | 590 | 582 | ||||||||||||||
Additional paid-in capital | 360,445 | 347,790 | 398,828 | 388,763 | ||||||||||||
Accumulated other comprehensive loss | (2,573 | ) | (3,958 | ) | (11,396 | ) | (10,794 | ) | ||||||||
Retained earnings | 298,830 | 290,549 | 332,024 | 327,954 | ||||||||||||
Treasury stock at cost, 18,580 and 16,377 shares at May 31, 2014 and May 25, 2013, respectively | (311,508 | ) | (282,615 | ) | ||||||||||||
Treasury stock at cost, 29,330 and 22,008 shares as of May 27, 2017 and May 28, 2016, respectively | (481,904 | ) | (363,856 | ) | ||||||||||||
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Total stockholders’ equity | 345,761 | 352,327 | 238,142 | 342,649 | ||||||||||||
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Total liabilities and stockholders’ equity | $ | 420,078 | $ | 417,640 | $ | 364,128 | $ | 417,255 | ||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Years Ended | For the Years Ended | |||||||||||||||||||||||
| May 31, 2014 | May 25, 2013 | May 26, 2012 | May 27, 2017 | May 28, 2016 | May 30, 2015 | |||||||||||||||||||
| (Amounts in thousands, except per | (Amounts in thousands, except per | |||||||||||||||||||||||
| share amounts) | share amounts) | |||||||||||||||||||||||
Revenue | $ | 567,181 | $ | 556,334 | $ | 571,763 | $ | 583,411 | $ | 598,521 | $ | 590,589 | ||||||||||||
Direct cost of services, primarily payroll and related taxes for professional services employees | 351,359 | 342,040 | 352,524 | 362,086 | 366,355 | 362,227 | ||||||||||||||||||
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Gross margin | 215,822 | 214,294 | 219,239 | 221,325 | 232,166 | 228,362 | ||||||||||||||||||
Selling, general and administrative expenses | 172,531 | 168,318 | 170,992 | 183,471 | 174,806 | 173,797 | ||||||||||||||||||
Employee portion of contingent consideration | — | — | (500 | ) | ||||||||||||||||||||
Contingent consideration adjustment | — | — | (33,440 | ) | ||||||||||||||||||||
Amortization of intangible assets | 1,688 | 1,694 | 3,364 | — | 90 | 918 | ||||||||||||||||||
Depreciation expense | 3,628 | 4,580 | 5,731 | 3,452 | 3,467 | 3,389 | ||||||||||||||||||
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Income from operations | 37,975 | 39,702 | 73,092 | 34,402 | 53,803 | 50,258 | ||||||||||||||||||
Interest expense | 773 | — | ||||||||||||||||||||||
Interest income | (168 | ) | (175 | ) | (252 | ) | (144 | ) | (186 | ) | (148 | ) | ||||||||||||
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Income before provision for income taxes | 38,143 | 39,877 | 73,344 | 33,773 | 53,989 | 50,406 | ||||||||||||||||||
Provision for income taxes | 18,257 | 19,373 | 32,202 | 15,122 | 23,546 | 22,898 | ||||||||||||||||||
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Net income | $ | 19,886 | $ | 20,504 | $ | 41,142 | $ | 18,651 | $ | 30,443 | $ | 27,508 | ||||||||||||
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Net income per common share: | ||||||||||||||||||||||||
Basic | $ | 0.51 | $ | 0.50 | $ | 0.94 | $ | 0.57 | $ | 0.82 | $ | 0.73 | ||||||||||||
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Diluted | $ | 0.51 | $ | 0.50 | $ | 0.94 | $ | 0.56 | $ | 0.81 | $ | 0.72 | ||||||||||||
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Weighted average common shares outstanding: | ||||||||||||||||||||||||
Basic | 39,216 | 41,108 | 43,541 | 32,851 | 37,037 | 37,825 | ||||||||||||||||||
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Diluted | 39,307 | 41,151 | 43,599 | 33,471 | 37,608 | 38,248 | ||||||||||||||||||
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Cash dividends declared per common share | $ | 0.28 | $ | 0.24 | $ | 0.20 | $ | 0.44 | $ | 0.40 | $ | 0.32 | ||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| For the Years Ended | For the Years Ended | |||||||||||||||||||||||
| May 31, 2014 | May 25, 2013 | May 26, 2012 | May 27, 2017 | May 28, 2016 | May 30, 2015 | |||||||||||||||||||
| (Amounts in thousands) | (Amounts in thousands) | |||||||||||||||||||||||
COMPREHENSIVE INCOME: | ||||||||||||||||||||||||
Net income | $ | 19,886 | $ | 20,504 | $ | 41,142 | $ | 18,651 | $ | 30,443 | $ | 27,508 | ||||||||||||
Foreign currency translation adjustment, net of tax | 1,385 | (2,068 | ) | (5,332 | ) | (602 | ) | 123 | (8,344 | ) | ||||||||||||||
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Total comprehensive income | $ | 21,271 | $ | 18,436 | $ | 35,810 | $ | 18,049 | $ | 30,566 | $ | 19,164 | ||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| For the Years Ended | ||||||||||||
| May 31, 2014 | May 25, 2013 | May 26, 2012 | ||||||||||
| (Amounts in thousands) | ||||||||||||
COMMON STOCK-SHARES: | ||||||||||||
Balance at beginning of period | 56,082 | 55,476 | 55,021 | |||||||||
Exercise of stock options | 313 | 195 | 20 | |||||||||
Issuance of restricted stock | 5 | — | 5 | |||||||||
Cancellation of shares | (10 | ) | — | — | ||||||||
Issuance of common stock under Employee Stock Purchase Plan | 348 | 411 | 430 | |||||||||
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| |||||||
Balance at end of period | 56,738 | 56,082 | 55,476 | |||||||||
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COMMON STOCK-PAR VALUE: | ||||||||||||
Balance at beginning of period | $ | 561 | $ | 555 | $ | 550 | ||||||
Exercise of stock options | 3 | 2 | 1 | |||||||||
Issuance of common stock under Employee Stock Purchase Plan | 3 | 4 | 4 | |||||||||
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| |||||||
Balance at end of period | $ | 567 | $ | 561 | $ | 555 | ||||||
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ADDITIONAL PAID-IN CAPITAL: | ||||||||||||
Balance at beginning of period | $ | 347,790 | $ | 335,791 | $ | 324,492 | ||||||
Exercise of stock options | 3,813 | 1,665 | 192 | |||||||||
Stock-based compensation expense related to share-based awards and employee stock purchases | 6,519 | 7,188 | 7,520 | |||||||||
Issuance of restricted stock | — | — | 80 | |||||||||
Issuance of restricted stock to members of board of directors | — | — | 142 | |||||||||
Tax shortfall from employee stock option plans | (1,125 | ) | (762 | ) | (782 | ) | ||||||
Issuance of common stock under Employee Stock Purchase Plan | 3,448 | 3,908 | 4,147 | |||||||||
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| |||||||
Balance at end of period | $ | 360,445 | $ | 347,790 | $ | 335,791 | ||||||
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ACCUMULATED OTHER COMPREHENSIVE LOSS: | ||||||||||||
Balance at beginning of period | $ | (3,958 | ) | $ | (1,890 | ) | $ | 3,442 | ||||
Foreign currency translation adjustment, net of tax | 1,385 | (2,068 | ) | (5,332 | ) | |||||||
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| |||||||
Balance at end of period | $ | (2,573 | ) | $ | (3,958 | ) | $ | (1,890 | ) | |||
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RETAINED EARNINGS: | ||||||||||||
Balance at beginning of period | $ | 290,549 | $ | 280,650 | $ | 248,983 | ||||||
Cash dividends | (10,911 | ) | (9,790 | ) | (8,587 | ) | ||||||
Issuance of restricted stock to members of board of directors | (694 | ) | (815 | ) | (888 | ) | ||||||
Net income | 19,886 | 20,504 | 41,142 | |||||||||
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Balance at end of period | $ | 298,830 | $ | 290,549 | $ | 280,650 | ||||||
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TREASURY STOCK-SHARES: | ||||||||||||
Balance at beginning of period | 16,377 | 13,503 | 9,632 | |||||||||
Issuance of restricted stock to members of board of directors | (29 | ) | (35 | ) | (38 | ) | ||||||
Cancellation of shares | (10 | ) | — | — | ||||||||
Purchase of shares | 2,242 | 2,909 | 3,909 | |||||||||
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| |||||||
Balance at end of period | 18,580 | 16,377 | 13,503 | |||||||||
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TREASURY STOCK-COST: | ||||||||||||
Balance at beginning of period | $ | (282,615 | ) | $ | (249,238 | ) | $ | (204,741 | ) | |||
Issuance of restricted stock to members of board of directors | 694 | 815 | 888 | |||||||||
Purchase of shares | (29,587 | ) | (34,192 | ) | (45,385 | ) | ||||||
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Balance at end of period | $ | (311,508 | ) | $ | (282,615 | ) | $ | (249,238 | ) | |||
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RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended | ||||||||||||
| May 31, 2014 | May 25, 2013 | May 26, 2012 | ||||||||||
| (Amounts in thousands) | ||||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 19,886 | $ | 20,504 | $ | 41,142 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 5,316 | 6,274 | 9,095 | |||||||||
Stock-based compensation expense related to share-based awards and employee stock purchases | 6,519 | 7,188 | 7,742 | |||||||||
Contingent consideration adjustment | — | — | (33,440 | ) | ||||||||
Excess tax benefits from stock-based compensation | (35 | ) | (18 | ) | (238 | ) | ||||||
Loss on disposal of assets | 65 | 116 | 478 | |||||||||
Bad debt expense | 300 | — | — | |||||||||
Deferred income taxes | 1,828 | 982 | 13,191 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Trade accounts receivable | (5,747 | ) | 37 | 525 | ||||||||
Prepaid expenses and other current assets | (225 | ) | 548 | (867 | ) | |||||||
Income taxes | 845 | (600 | ) | 1,844 | ||||||||
Other assets | 110 | (64 | ) | 173 | ||||||||
Accounts payable and accrued expenses | (1,496 | ) | (973 | ) | (2,140 | ) | ||||||
Accrued salaries and related obligations | 6,097 | 429 | (1,566 | ) | ||||||||
Other liabilities | (1,445 | ) | 536 | 431 | ||||||||
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| |||||||
Net cash provided by operating activities | 32,018 | 34,959 | 36,370 | |||||||||
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Cash flows from investing activities: | ||||||||||||
Redemption of short-term investments | 73,000 | 61,000 | 36,500 | |||||||||
Purchase of short-term investments | (81,990 | ) | (63,005 | ) | (54,242 | ) | ||||||
Purchase of property and equipment | (3,725 | ) | (3,147 | ) | (2,786 | ) | ||||||
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Net cash used in investing activities | (12,715 | ) | (5,152 | ) | (20,528 | ) | ||||||
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Cash flows from financing activities: | ||||||||||||
Proceeds from exercise of stock options | 3,816 | 1,667 | 193 | |||||||||
Proceeds from issuance of common stock under Employee Stock Purchase Plan | 3,451 | 3,912 | 4,151 | |||||||||
Purchase of common stock | (29,587 | ) | (34,192 | ) | (45,385 | ) | ||||||
Cash dividends paid | (10,625 | ) | (9,497 | ) | (8,306 | ) | ||||||
Excess tax benefits from stock-based compensation | 35 | 18 | 238 | |||||||||
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Net cash used in financing activities | (32,910 | ) | (38,092 | ) | (49,109 | ) | ||||||
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Effect of exchange rate changes on cash | (118 | ) | (2,823 | ) | (1,233 | ) | ||||||
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Net decrease in cash | (13,725 | ) | (11,108 | ) | (34,500 | ) | ||||||
Cash and cash equivalents at beginning of period | 94,016 | 105,124 | 139,624 | |||||||||
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Cash and cash equivalents at end of period | $ | 80,291 | $ | 94,016 | $ | 105,124 | ||||||
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| Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive (Loss) Income | Retained Earnings | Total Stockholders’ Equity | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
| (Amounts in thousands) | ||||||||||||||||||||||||||||||||
Balances as of May 31, 2014 | 56,738 | 567 | 360,445 | 18,580 | (311,508 | ) | (2,573 | ) | 298,830 | $ | 345,761 | |||||||||||||||||||||
Exercise of stock options | 408 | 4 | 5,299 | 5,303 | ||||||||||||||||||||||||||||
Stock-based compensation expense | 5,989 | 5,989 | ||||||||||||||||||||||||||||||
Tax shortfall from stock-based compensation arrangements | (1,216 | ) | (1,216 | ) | ||||||||||||||||||||||||||||
Issuance of common stock under Employee Stock Purchase Plan | 337 | 4 | 3,768 | 3,772 | ||||||||||||||||||||||||||||
Issuance of restricted stock | 6 | — | ||||||||||||||||||||||||||||||
Issuance of restricted stock out of treasury stock to board of director members | (44 | ) | 1,026 | (1,026 | ) | — | ||||||||||||||||||||||||||
Forfeitures of restricted stock | (1 | ) | — | |||||||||||||||||||||||||||||
Purchase of shares | 1,679 | (26,277 | ) | (26,277 | ) | |||||||||||||||||||||||||||
Cash dividends declared ($0.32 per share) | (12,044 | ) | (12,044 | ) | ||||||||||||||||||||||||||||
Currency translation adjustment | (8,344 | ) | (8,344 | ) | ||||||||||||||||||||||||||||
Net income for the year ended May 30, 2015 | 27,508 | 27,508 | ||||||||||||||||||||||||||||||
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Balances as of May 30, 2015 | 57,488 | 575 | 374,285 | 20,215 | (336,759 | ) | (10,917 | ) | 313,268 | 340,452 | ||||||||||||||||||||||
Exercise of stock options | 418 | 4 | 5,304 | 5,308 | ||||||||||||||||||||||||||||
Stock-based compensation expense | 6,280 | 6,280 | ||||||||||||||||||||||||||||||
Tax shortfall from stock-based compensation arrangements | (1,565 | ) | (1,565 | ) | ||||||||||||||||||||||||||||
Issuance of common stock under Employee Stock Purchase Plan | 325 | 3 | 4,459 | 4,462 | ||||||||||||||||||||||||||||
Issuance of restricted stock | 6 | — | ||||||||||||||||||||||||||||||
Issuance of restricted stock out of treasury stock to board of director members | (44 | ) | 1,031 | (1,031 | ) | — | ||||||||||||||||||||||||||
Purchase of shares | 1,837 | (28,128 | ) | (28,128 | ) | |||||||||||||||||||||||||||
Cash dividends declared ($0.40 per share) | (14,726 | ) | (14,726 | ) | ||||||||||||||||||||||||||||
Currency translation adjustment | 123 | 123 | ||||||||||||||||||||||||||||||
Net income for the year ended May 28, 2016 | 30,443 | 30,443 | ||||||||||||||||||||||||||||||
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Balances as of May 28, 2016 | 58,237 | 582 | 388,763 | 22,008 | (363,856 | ) | (10,794 | ) | 327,954 | 342,649 | ||||||||||||||||||||||
Exercise of stock options | 305 | 3 | 3,853 | 3,856 | ||||||||||||||||||||||||||||
Stock-based compensation expense | 6,068 | 6,068 | ||||||||||||||||||||||||||||||
Tax shortfall from stock-based compensation arrangements | (4,344 | ) | (4,344 | ) | ||||||||||||||||||||||||||||
Issuance of common stock under Employee Stock Purchase Plan | 359 | 4 | 4,489 | 4,493 | ||||||||||||||||||||||||||||
Issuance of restricted stock | 92 | 1 | (1 | ) | — | |||||||||||||||||||||||||||
Issuance of restricted stock out of treasury stock to board of director members | (36 | ) | 838 | (838 | ) | — | ||||||||||||||||||||||||||
Forfeitures of restricted stock | (1 | ) | — | |||||||||||||||||||||||||||||
Purchase of shares | 7,358 | (118,886 | ) | (118,886 | ) | |||||||||||||||||||||||||||
Cash dividends declared ($0.44 per share) | (13,743 | ) | (13,743 | ) | ||||||||||||||||||||||||||||
Currency translation adjustment | (602 | ) | (602 | ) | ||||||||||||||||||||||||||||
Net income for the year ended May 27, 2017 | 18,651 | 18,651 | ||||||||||||||||||||||||||||||
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Balances as of May 27, 2017 | 58,992 | $ | 590 | $ | 398,828 | 29,330 | $ | (481,904 | ) | $ | (11,396 | ) | $ | 332,024 | $ | 238,142 | ||||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended | ||||||||||||
| May 27, 2017 | May 28, 2016 | May 30, 2015 | ||||||||||
| (Amounts in thousands) | ||||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 18,651 | $ | 30,443 | $ | 27,508 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 3,452 | 3,557 | 4,307 | |||||||||
Stock-based compensation expense | 6,068 | 6,280 | 5,989 | |||||||||
Excess tax benefits from stock-based compensation | (8 | ) | (185 | ) | (86 | ) | ||||||
Loss on disposal of assets | 19 | — | 15 | |||||||||
Bad debt expense | 458 | 1,118 | 212 | |||||||||
Deferred income taxes | 4,538 | 1,243 | 692 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Trade accounts receivable | (1,494 | ) | (2,702 | ) | (10,052 | ) | ||||||
Prepaid expenses and other current assets | 374 | (651 | ) | 547 | ||||||||
Income taxes | (6,232 | ) | (949 | ) | (2,187 | ) | ||||||
Other assets | 253 | 15 | 254 | |||||||||
Accounts payable and accrued expenses | 681 | 176 | 304 | |||||||||
Accrued salaries and related obligations | (434 | ) | 1,574 | 4,090 | ||||||||
Other liabilities | 1,939 | (1,657 | ) | 158 | ||||||||
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Net cash provided by operating activities | 28,265 | 38,262 | 31,751 | |||||||||
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Cash flows from investing activities: | ||||||||||||
Redemption of short-term investments | 24,957 | 45,000 | 49,000 | |||||||||
Purchase of short-term investments | — | (44,969 | ) | (40,002 | ) | |||||||
Proceeds from sale of property and equipment | 233 | — | — | |||||||||
Purchase of property and equipment | (4,781 | ) | (2,381 | ) | (2,364 | ) | ||||||
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Net cash provided by (used in) investing activities | 20,409 | (2,350 | ) | 6,634 | ||||||||
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Cash flows from financing activities: | ||||||||||||
Proceeds from exercise of stock options | 3,856 | 5,308 | 5,303 | |||||||||
Proceeds from issuance of common stock under Employee Stock Purchase Plan | 4,493 | 4,462 | 3,772 | |||||||||
Purchase of common stock | (118,886 | ) | (28,128 | ) | (26,277 | ) | ||||||
Proceeds from Revolving Credit Facility | 58,000 | — | — | |||||||||
Repayment on Revolving Credit Facility | (10,000 | ) | — | — | ||||||||
Debt issuance costs | (190 | ) | — | — | ||||||||
Cash dividends paid | (14,157 | ) | (14,085 | ) | (11,748 | ) | ||||||
Excess tax benefits from stock-based compensation | 8 | 185 | 86 | |||||||||
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Net cash used in financing activities | (76,876 | ) | (32,258 | ) | (28,864 | ) | ||||||
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Effect of exchange rate changes on cash | (558 | ) | 185 | (2,562 | ) | |||||||
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Net (decrease) increase in cash | (28,760 | ) | 3,839 | 6,959 | ||||||||
Cash and cash equivalents at beginning of period | 91,089 | 87,250 | 80,291 | |||||||||
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Cash and cash equivalents at end of period | $ | 62,329 | $ | 91,089 | $ | 87,250 | ||||||
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The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 primarily under the name Resources Global Professionals (“RGP” or the “Company”). The Company is organized aroundprovides agile consulting services to its global client service teamsbase utilizing experienced professionals and provides consulting and business support services in the areas of accounting; finance; governance, risk and compliance;compliance management; corporate advisory, strategic communications and restructuring; information management; human capital; supply chain management; healthcare solutions; and legal and regulatory services.regulatory. The Company has offices in the United States (“U.S.”), Asia, Australia, Canada, Europe and Mexico.
The Company’s fiscal year consists of 52 or 53 weeks, ending on the Saturday in May closest to May 31. Fiscal years 2017, 2016 and 2015 consisted of four 13 week quarters and a total of 52 weeks of activity for the fiscal year. For fiscal years of 53 weeks, such as(which next occurs for fiscal 2014,2020), the first three quarters consistedconsist of 13 weeks each and the fourth quarter consistedconsists of 14 weeks. Fiscal 2013 and 2012 consisted of 52 weeks each.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Consolidated Financial Statements of the Company (“financial statements”) have been prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”). The financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Revenues are recognized and billed when the Company’s professionals deliver services. Conversion fees are recognized when one of the Company’s professionals accepts an offer of permanent employment from a client. Conversion fees were 0.5% of revenue for each of the years ended May 31, 2014,27, 2017, May 25, 201328, 2016 and May 26, 2012.30, 2015. All costs of compensating the Company’s professionals are the responsibility of the Company and are included in direct cost of services.
Contingent Consideration
The Company estimates and records the acquisition date estimated fair value of contingent consideration as part of purchase price consideration for acquisitions. In addition, if applicable, each reporting period, the Company estimates changes in the fair value of contingent consideration and any change in fair value is recognized in the Consolidated Statement of Operations. If the Company currently has a potential liability for contingent consideration, the computation of the fair value requires very subjective assumptions to be made of future operating results, discount rates and probabilities assigned to various potential operating result scenarios. Future revisions to these assumptions could materially change the estimate of the fair value of contingent consideration and related tax balances and, therefore, materially affect the Company’s future financial results and financial condition. As of May 31, 2014, the Company has no future obligation for contingent consideration.
Client Reimbursements of “Out-of-Pocket”“Out-of-Pocket” Expenses
The Company recognizes all reimbursements received from clients for “out-of-pocket”“out-of-pocket” expenses as revenue and all such expenses as direct cost of services. Reimbursements received from clients were $8.9 million, $10.1 million, $10.6 million and $12.7$10.6 million for the years ended May 31, 2014,27, 2017, May 25, 201328, 2016 and May 26, 2012,30, 2015, 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 current exchange rates, 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 comprehensive income or loss within stockholders’ equity. Gains and losses from foreign currency transactions are included in selling, general and administrative expenses in the Consolidated Statements of Operations.
Per Share Information
The Company presents both basic and diluted earnings per 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
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, exercise proceeds include the amount the employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized and the amount of tax benefits that would be recorded in additionalpaid-in capital when the award becomes deductible. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period are anti-dilutive and are excluded from the calculation.
The following table summarizes the calculation of net income per share for the years ended May 31, 2014,27, 2017, May 25, 201328, 2016 and May 26, 201230, 2015 (in thousands, except per share amounts):
| For the Years Ended | ||||||||||||||||||||||||
| 2014 | 2013 | 2012 | May 27, 2017 | May 28, 2016 | May 30, 2015 | |||||||||||||||||||
Net income | $ | 19,886 | $ | 20,504 | $ | 41,142 | $ | 18,651 | $ | 30,443 | $ | 27,508 | ||||||||||||
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Basic: | ||||||||||||||||||||||||
Weighted average shares | 39,216 | 41,108 | 43,541 | 32,851 | 37,037 | 37,825 | ||||||||||||||||||
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Diluted: | ||||||||||||||||||||||||
Weighted average shares | 39,216 | 41,108 | 43,541 | 32,851 | 37,037 | 37,825 | ||||||||||||||||||
Potentially dilutive shares | 91 | 43 | 58 | 620 | 571 | 423 | ||||||||||||||||||
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Total dilutive shares | 39,307 | 41,151 | 43,599 | 33,471 | 37,608 | 38,248 | ||||||||||||||||||
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Net income per common share: | ||||||||||||||||||||||||
Basic | $ | 0.51 | $ | 0.50 | $ | 0.94 | $ | 0.57 | $ | 0.82 | $ | 0.73 | ||||||||||||
Dilutive | $ | 0.51 | $ | 0.50 | $ | 0.94 | $ | 0.56 | $ | 0.81 | $ | 0.72 | ||||||||||||
Anti-dilutive shares not included above | 7,828 | 8,084 | 8,138 | 4,582 | 4,745 | 5,746 | ||||||||||||||||||
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks, and short-term investments purchased with an original maturity date of three months or less to be cash and cash equivalents. The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents approximate the fair values due to the short maturities of these instruments.
Short-Term Investments
AsThe Company’s short-term investments were $25.0 million as of May 31, 2014 and May 25, 2013, $34.0 million and $25.0 million, respectively, of the Company’s investments in debt securities had28, 2016 with original contractual maturities of between three months and one year. The Company had no short-term investments as of May 27, 2017. The Company had no investments with a maturity in excess of one year inas of the end of either fiscal year 20142017 or 2013.2016. The Company carries debt securities that it has the ability and positive intent to hold to maturity at amortized cost.
The fair value of the Company’s financial instruments reflects the amounts that the Company estimates it will receive in
connection with the sale of an asset in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the following three levels:
Level 1 –— Quoted prices in active markets for identical assets and liabilities.
Level 2 –— Observable inputs other than quoted prices in active markets for identical assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets.
Level 3 –— Unobservable inputs.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s investments in commercial paper and U.S. Government Agency securities are measured using quoted prices in markets that are not active (Level 2). There were no unrealized holding gains or losses as of May 31, 201427, 2017 and May 25, 2013.28, 2016. Short-term investments consist of the following (in thousands):
| As of May 31, 2014 | As of May 25, 2013 | |||||||||||||||
| Cost | Fair Value | Cost | Fair Value | |||||||||||||
Commercial paper | $ | 33,986 | $ | 33,986 | $ | 24,996 | $ | 24,996 | ||||||||
| As of May 27, 2017 | As of May 28, 2016 | |||||||||||||||
| Cost | Fair Value | Cost | Fair Value | |||||||||||||
Commercial paper | $ | — | $ | — | $ | 19,959 | $ | 19,959 | ||||||||
U.S. Government Agency securities | — | — | 4,998 | 4,998 | ||||||||||||
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| $ | — | $ | — | $ | 24,957 | $ | 24,957 | |||||||||
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Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from its clients’ failure to make required payments for services rendered. Management estimates this allowance based upon knowledge of the financial condition of the Company’s clients (which may not include knowledge of all significant events), review of historical receivable and reserve trends and other pertinent information. If the financial condition of the Company’s clients deteriorates or there is an unfavorable trend in aggregate receivable collections, additional allowances may be required.
The following table summarizes the activity in our allowance for doubtful accounts (in thousands):
| Currency | ||||||||||||||||||||
| Beginning | Charged to | Rate | Ending | |||||||||||||||||
| Balance | Operations | Changes | Write-offs | Balance | ||||||||||||||||
Years Ended: | ||||||||||||||||||||
May 26, 2012 | $ | 4,860 | $ | — | $ | (14 | ) | $ | (854 | ) | $ | 3,992 | ||||||||
May 25, 2013 | $ | 3,992 | $ | — | $ | (7 | ) | $ | (557 | ) | $ | 3,428 | ||||||||
May 31, 2014 | $ | 3,428 | $ | 300 | $ | 20 | $ | (609 | ) | $ | 3,139 | |||||||||
| Beginning Balance | Charged to Operations | Currency Rate Changes | (Write-offs)/ Recoveries | Ending Balance | ||||||||||||||||
Years Ended: | ||||||||||||||||||||
May 30, 2015 | $ | 3,139 | $ | 212 | $ | (78 | ) | $ | 18 | $ | 3,291 | |||||||||
May 28, 2016 | $ | 3,291 | $ | 1,118 | $ | (16 | ) | $ | (1,399 | ) | $ | 2,994 | ||||||||
May 27, 2017 | $ | 2,994 | $ | 458 | $ | (20 | ) | $ | (915 | ) | $ | 2,517 | ||||||||
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the following estimated useful lives:
| Building | 30 years | |
| Furniture | 5 to 10 years | |
| Leasehold improvements | Lesser of useful life of asset or term of lease | |
| Computer, equipment and software | 3 to 5 years |
Costs for normal repairs and maintenance are expensed to operations as incurred, while renewals and major refurbishments are capitalized.
Assessments of whether there has been a permanent impairment in the value of property and equipment are periodically performed by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Management believes no permanent impairment has occurred.
Intangible Assets and Goodwill
Goodwill and other intangible assets with indefinite lives areis not subject to amortization but areis tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. The Company performed its annual goodwill impairment analysis as of May 31, 2014 27, 2017
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and will continue to test for impairment at least annually. The Company performs its impairment analysis by comparing its market capitalization to its book value throughout the fiscal year. For application of this methodology the Company determined that it operates as a single reporting unit resulting from the combination of its practice offices. No impairment was indicated as of May 31, 2014. Other27, 2017. The Company has no other intangible assets with finite lives are subject to amortization and impairment reviews. No impairment was indicated as of May 31, 2014.assets.
See Note 54 —Intangible Assets and Goodwill for a further description of the Company’s intangible assets.
Stock-Based Compensation
The Company recognizes compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases made via the Company’s Employee Stock Purchase Plan (the “ESPP”), based on estimated fair value at the date of grant.
The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods. Stock options vest over four years and restricted stock award vesting is determined on an individual grant basis under the Company’s 20042014 Performance Incentive Plan.Plan (“2014 Plan”). The Company determines the estimated value of stock options using the Black-Scholes valuation model. The Company recognizes stock-based compensation expense on a straight-line basis over the service period for options 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 1410 —Stock Based Compensation Plans for further information on the 2014 Plan and stock-based compensation expense and the resulting impact on the provision for income taxes.compensation.
Income Taxes
The Company recognizes deferred income taxes for the estimated tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at eachyear-end based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when, in management’s opinion, it is more likely than not that some portion of the deferred tax assets will not be realized. The provision for income taxes represents current taxes payable net of the change during the period in deferred tax assets and liabilities.
Recent Accounting Pronouncements
Revenue from Contracts with Customers.Accounting Pronouncements Adopted During Current Fiscal Year
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.In May 2014,November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU2015-17. The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent portions. ASU2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. As permitted, the Company early adopted ASU2015-17 during the first quarter of fiscal year 2017 on a retrospective basis. Accordingly, current deferred taxes have been reclassified as noncurrent on the May 28, 2016 Consolidated Balance Sheet. This reclassification decreased current deferred tax assets by $8.4 million and increased noncurrent deferred tax assets by $8.4 million. The Company also netted noncurrent deferred tax liabilities of $5.0 million against noncurrent deferred tax assets.
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.In September 2015, the FASB issued ASU2015-16. This ASU eliminates the requirement to retrospectively account for changes to provisional amounts initially recorded in a business combination. ASU2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined, including the effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The Company adopted this guidance as of the beginning of fiscal 2017 and will consider it during future business combinations.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Presentation of Financial Statements-Going Concern (Subtopic205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.In August 2014, the FASB issued ASU2014-15.This ASU provides guidance regarding management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. The Company adopted this guidance as of the beginning of fiscal 2017.
Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. In June 2014, the FASB issued ASU2014-12. This ASU provides guidance requiring that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. The Company adopted this guidance as of the beginning of fiscal 2017. The Company does not currently have any performance based awards and thus the adoption has not had a material impact on its consolidated financial statements.
Accounting Pronouncements Pending Adoption
Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting.In May 2017, the FASB issued ASU2017-09, 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 ASU2017-09 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 ASU2017-04, 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 Company’s 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 ASU2016-15, 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.
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.In March 2016, the FASB issued ASU2016-09. The new standard modifies several aspects of the accounting and reporting for employee share-based payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. The new standard is effective for financial statements for annual and interim periods within those annual periods beginning after December 15, 2016 (for the Company, fiscal 2018). The Company is currently evaluating the impact the adoption of this new standard will have on its consolidated financial statements but anticipates three potential impacts: a) added volatility to the Company’s effective tax rate from the change in accounting for income taxes; b) changes to its classification of excess tax benefits on the Consolidated Statement of Cash Flows; and c) change in the accounting for forfeitures, as the guidance allows the
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company to account for forfeitures as they occur, rather than estimating the expected forfeitures over the course of the vesting period. The Company will continue to evaluate the impact of adoption of this guidance and its preliminary assessments are subject to change.
Leases (Topic 842): Leases.In February 2016, the FASB issued ASU2016-02, which amends the existing guidance to require lessees to recognize operating lease obligations on their balance sheets by recording the rights and obligations created by those leases. The requirements are effective for financial statements for annual periods and interim periods within those annual periods beginning after December 15, 2018 (for the Company, fiscal 2020), and early adoption is permitted. The Company is currently evaluating the impact that ASU2016-02 will have on its consolidated financial statements and believes that it will have a significant impact on the Company’s reported balance sheet assets and liabilities. Under current accounting guidelines, the Company’s office leases are operating lease arrangements, in which rental payments are treated as operating expenses and there is no recognition of the arrangement on the balance sheet as an asset with related obligation to the lessor.
Revenue from Contracts with Customers (Topic 606): In May 2014, the FASB issued ASU2014-09, a comprehensive new revenue recognition standard that will supersede most existingcurrent revenue recognition guidance and is intended to improve and converge revenue recognition and related financial reporting requirements. The standard will require companiescore principle of this guidance is that an entity should recognize revenue to review contract arrangements withdepict 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 ensure all separate performance obligations are properly recognized in compliance withrequires additional disclosures. In August 2015, the new guidance. The standard is effectiveFASB issued ASU2015-14, 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 2018 with early adoption prohibited.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 issuedASU 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 forASU 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 assessing whetherevaluating the adoptionimpact of the guidance will have a material impact on its consolidated financial statements.
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.In April 2014, the FASB issued new guidance regarding the criteria for reporting discontinued operations and enhancing disclosures in this area. Under the guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, the guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in the guidance are effective for the Company for fiscal 2015. The Company does not expect that adoption of this guidance, will have a material impact on its consolidated financial statements.
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. In July 2013, the FASB issued new guidance which requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward. To the extent the tax benefit is not available at the reporting date under the governing tax law or if the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liabilityincluding required disclosures, and not combined with deferred tax assets. The guidance is effective for annual periods, and interim periods within those years, beginning after December 15, 2013. The amendments are to be applied to all unrecognized tax benefits that exist as of the effective date and may be applied retrospectively to each prior reporting period presented. The Companybased upon our current analysis, does not expect thata significant impact on processes, systems or controls. The Company will continue to evaluate the impact of adoption of this guidance will have a material impact onand its consolidated financial statements.preliminary assessments are subject to change.
Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries.In March 2013, the FASB issued new guidance on a parent’s accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer result in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect that adoption of this guidance will have a material impact on its consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not, or are not expected to, have a material effect on the Company’s results of operations, financial position or financial position.cash flows.
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. Contingent Consideration
On November 20, 2009, the Company acquired certain assets of Sitrick And Company (“Sitrick Co”), a strategic communications firm, and Brincko Associates, Inc. (“Brincko”), a corporate advisory and restructuring firm, through the purchase of all of the outstanding membership interests in Sitrick Brincko Group, a Delaware limited liability company, formed for the purpose of the acquisition, pursuant to a Membership Interest Purchase Agreement by and among the Company, Sitrick Co, Michael S. Sitrick, an individual, Brincko and John P. Brincko, an individual (together with Mr. Sitrick, Sitrick Co and Brincko, the “Sellers”). Prior to the acquisition date, Mr. Sitrick and Nancy Sitrick were the sole shareholders of Sitrick Co and Mr. Brincko was the sole shareholder of Brincko. In addition, on the same date, the Company acquired the personal goodwill of Mr. Sitrick pursuant to a Goodwill Purchase Agreement by and between the Company and Mr. Sitrick (collectively with the Membership Interest Purchase Agreement, the “Acquisition Agreements”). Sitrick Brincko Group is now a wholly-owned subsidiary of the Company. By combining the specialized skill sets of the Sitrick Brincko Group with the Company’s existing consultant capabilities, geographic footprint and client base, the Company believes it has increased its ability to assist clients during challenging periods, particularly in the areas of management consulting, corporate advisory, strategic communications and restructuring services. This expected synergy gave rise to goodwill recorded as part of the purchase price of Sitrick Brincko Group.
Per the Acquisition Agreements, contingent consideration was payable to the Sellers in a lump sum following the fourth anniversary of the acquisition only if the average annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of Sitrick Brincko Group exceeded $11.3 million. The Company determined that the average annual EBITDA of Sitrick Brincko Group did not exceed the required $11.3 million as of November 23, 2013, the end of the four-year earn-out period, and so no contingent consideration was payable to the Sellers.
Accounting rules for business combinations require that obligations that are contingently payable based upon the occurrence of one or more future events are to be estimated and recorded as a discounted liability on the Company’s balance sheet, even though the consideration is based on future events. As of November 28, 2009, the Company estimated the fair value of the obligation to pay contingent consideration based on a number of different scenarios and recorded an estimated, discounted liability of $57.8 million.RESOURCES CONNECTION, INC.
Over the next two fiscal years, that amount was reduced as the Company determined that the likelihood of payment diminished. The Company concluded during the year ended May 26, 2012 that it was more likely than not that the contingent consideration payment would not be made and reduced the then estimated fair value of the liability from $33.4 million to zero, representing a favorable non-cash adjustment reflected in the Company’s Consolidated Statement of Operations for the year ended May 26, 2012. In addition, under the terms of the Acquisition Agreements, up to 20% of the contingent consideration was payable to the employees of Sitrick Brincko Group at the end of the measurement period to the extent certain EBITDA growth targets were met. As a result of the Company’s determination that it was more likely than not that no contingent consideration would be earned as of November 2013, the Company reversed its previously recorded estimate of $500,000 (and related tax effect of approximately $200,000) for the employee portion of contingent consideration during the year ended May 26, 2012. On an after-tax basis, the fair value adjustment increased net income for the year ended May 26, 2012 by $20.4 million or $0.47 per share (including the impact of the employee portion of contingent consideration).NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Since the contingent consideration was not payable at the conclusion of the earn-out period, Mr. Brincko was entitled to a cash payment of $2,250,000, which was paid in the third quarter of fiscal 2014. As of May 31, 2014, there are no amounts recorded for contingent consideration.
4.3. Property and Equipment
Property and equipment consist of the following (in thousands):
| As of | As of | |||||||||||||||
| May 31, 2014 | May 25, 2013 | As of May 27, 2017 | As of May 28, 2016 | |||||||||||||
Building and land | $ | 14,050 | $ | 12,935 | $ | 14,198 | $ | 14,172 | ||||||||
Computers, equipment and software | 17,474 | 18,262 | 17,811 | 16,568 | ||||||||||||
Leasehold improvements | 20,768 | 20,943 | 19,403 | 21,170 | ||||||||||||
Furniture | 10,591 | 10,141 | 9,653 | 10,306 | ||||||||||||
|
|
|
| |||||||||||||
| 62,883 | 62,281 | 61,065 | 62,216 | |||||||||||||
Less accumulated depreciation and amortization | (39,725 | ) | (41,194 | ) | (37,711 | ) | (40,942 | ) | ||||||||
|
|
|
| |||||||||||||
| $ | 23,158 | $ | 21,087 | $ | 23,354 | $ | 21,274 | |||||||||
|
|
|
| |||||||||||||
5.4. Intangible Assets and Goodwill
The following table presents details of our intangible assets, estimated lives and related accumulated amortization (in thousands):
| As of May 31, 2014 | As of May 25, 2013 | |||||||||||||||||||||||
| Accumulated | Accumulated | |||||||||||||||||||||||
| Gross | Amortization | Net | Gross | Amortization | Net | |||||||||||||||||||
Customer relationships (2-7 years) | $ | 18,286 | $ | (17,794 | ) | $ | 492 | $ | 17,978 | $ | (16,710 | ) | $ | 1,268 | ||||||||||
Non-compete agreements (1-5 years) | 3,232 | (2,937 | ) | 295 | 3,226 | (2,331 | ) | 895 | ||||||||||||||||
Trade name and trademark (5 years) | 1,341 | (1,097 | ) | 244 | 1,341 | (845 | ) | 496 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 22,859 | $ | (21,828 | ) | $ | 1,031 | $ | 22,545 | $ | (19,886 | ) | $ | 2,659 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| As of May 27, 2017 | As of May 28, 2016 | |||||||||||||||||||||||
| Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | |||||||||||||||||||
Trade name and trademark (5 years) | $ | — | $ | — | $ | — | $ | 1,341 | $ | (1,341 | ) | $ | — | |||||||||||
|
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|
|
|
|
|
|
|
|
|
| |||||||||||||
The following table summarizes amortization expense for the years ended May 31, 2014, May 25, 2013 and May 26, 2012 and the expected amount of intangible asset amortization expense (based on existing intangible assets) for the years ending May 30, 2015,27, 2017, May 28, 2016 May 27, 2017, May 26, 2018 and May 25, 201930, 2015 (in thousands):
| For the Years Ended | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Amortization expense | $ | 1,688 | $ | 1,694 | $ | 3,364 | ||||||
| For the Years Ended | ||||||||||||
| May 27, 2017 | May 28, 2016 | May 30, 2015 | ||||||||||
Amortization expense | $ | — | $ | 90 | $ | 918 | ||||||
| Fiscal Years Ending | ||||||||||||||||||||
| 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||
Expected amortization expense | $ | 914 | $ | 12 | $ | 12 | $ | 12 | $ | — | ||||||||||
These estimates do not incorporate the impact that currency fluctuations may cause when translating the financial resultsAs of May 27, 2017, all of the Company’s international operations that have amortizable intangible assets into U.S. dollars. The fluctuation in the gross balance of intangible assets primarily reflects the impact of currency fluctuations between fiscal 2014 and 2013 in translating the intangible balances recorded on the Company’s international operations financial statements.subject to amortization have been fully amortized.
The following table summarizes the activity in the Company’s goodwill balance (in thousands):
| For the Years Ended | For the Years Ended | |||||||||||||||
| May 31, 2014 | May 25, 2013 | May 27, 2017 | May 28, 2016 | |||||||||||||
Goodwill, beginning of year | $ | 174,275 | $ | 173,576 | $ | 171,183 | $ | 170,878 | ||||||||
Impact of foreign currency exchange rate changes | 1,152 | 699 | (95 | ) | 305 | |||||||||||
|
|
|
| |||||||||||||
Goodwill, end of period | $ | 175,427 | $ | 174,275 | $ | 171,088 | $ | 171,183 | ||||||||
|
|
|
| |||||||||||||
5. Long-Term Debt
In October 2016, the Company entered into a $120 million secured revolving credit facility (“Facility”) with Bank of America, consisting of (i) a $90 million revolving loan facility, which includes a $5 million sublimit for the issuance of standby letters of credit (“Revolving Loan”), and (ii) a $30 million reducing revolving loan facility, any amounts of which may not be
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 Company’s domestic subsidiaries and secured by essentially all assets of the Company, Resources Connection LLC and their domestic subsidiaries, subject to certain customary exclusions. Borrowings under the Facility bear interest at a rate per annum of either, at the Company’s option, (i) a London Interbank Offered Rate (“LIBOR”) defined in the Facility plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus margin of 0.25% or 0.50% with the applicable margin depending on the Company’s consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of America’s prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company pays an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.15% to 0.25% depending upon on the Company’s consolidated leverage ratio. The Facility expires October 17, 2021.
In November 2016, the Company borrowed $58.0 million under the Facility to fund a portion of the purchase price of its modified Dutch auction tender offer. See Note 9 —Stockholders’ Equity, for additional information about the tender offer. During the third quarter of fiscal 2017, the Company reduced the amount borrowed by $10.0 million. As of May 27, 2017, the outstanding balance on the Facility is $49.0 million, including $1.0 million of outstanding letters of credit issued under the Facility. There is $41.0 million remaining to borrow under the Revolving Loan and $30.0 million remaining under the Reducing Revolving Loan. As of May 27, 2017, the interest rate on the Company’s borrowings was 2.5% on one tranche of $24.0 million based on a1-month LIBOR plus 1.5% and 2.65% on a second tranche of $24.0 million based on a3-month LIBOR plus 1.5%.
The Facility contains both affirmative and negative covenants. Covenants include, but are not limited to, limitations on the Company’s and its subsidiaries ability to incur liens, incur additional indebtedness, make certain restricted payments, merge or consolidate and make dispositions of assets. In addition, the Facility requires us to comply with financial covenants limiting the Company’s total funded debt, minimum interest coverage ratio and maximum leverage ratio. The Company was in compliance with all financial covenants under the Facility as of May 27, 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.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Income Taxes
The following table represents the current and deferred income tax provision for federal, state and stateforeign income taxes attributable to operations (in thousands):
| For the Years Ended | ||||||||||||||||||||||||
| May 31, | May 25, | May 26, | For the Years Ended | |||||||||||||||||||||
| 2014 | 2013 | 2012 | May 27, 2017 | May 28, 2016 | May 30, 2015 | |||||||||||||||||||
Current | ||||||||||||||||||||||||
Federal | $ | 13,722 | $ | 14,872 | $ | 13,877 | $ | 10,901 | $ | 18,320 | $ | 18,046 | ||||||||||||
State | 3,011 | 2,969 | 3,408 | 2,551 | 4,168 | 4,028 | ||||||||||||||||||
Foreign | 740 | 1,484 | 1,702 | 1,472 | 1,398 | 1,101 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
| 17,473 | 19,325 | 18,987 | 14,924 | 23,886 | 23,175 | |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Deferred | ||||||||||||||||||||||||
Federal | 1,057 | 167 | 11,056 | 259 | (178 | ) | (502 | ) | ||||||||||||||||
State | 166 | 29 | 2,594 | 62 | (27 | ) | (120 | ) | ||||||||||||||||
Foreign | (439 | ) | (148 | ) | (435 | ) | (123 | ) | (135 | ) | 345 | |||||||||||||
|
|
|
|
|
| |||||||||||||||||||
| 784 | 48 | 13,215 | 198 | (340 | ) | (277 | ) | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
| $ | 18,257 | $ | 19,373 | $ | 32,202 | $ | 15,122 | $ | 23,546 | $ | 22,898 | |||||||||||||
|
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|
|
|
| |||||||||||||||||||
Income before provision for income taxes is as follows (in thousands):
| For the Years Ended | ||||||||||||||||||||||||
| May 31, | May 25, | May 26, | For the Years Ended | |||||||||||||||||||||
| 2014 | 2013 | 2012 | May 27, 2017 | May 28, 2016 | May 30, 2015 | |||||||||||||||||||
Domestic | $ | 43,843 | $ | 43,828 | $ | 76,115 | $ | 32,390 | $ | 53,417 | $ | 51,997 | ||||||||||||
Foreign | (5,700 | ) | (3,951 | ) | (2,771 | ) | 1,383 | 572 | (1,591 | ) | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
| $ | 38,143 | $ | 39,877 | $ | 73,344 | $ | 33,773 | $ | 53,989 | $ | 50,406 | |||||||||||||
|
|
|
|
|
| |||||||||||||||||||
The provision for income taxes differs from the amount that would result from applying the federal statutory rate as follows:
| For the Years Ended | ||||||||||||||||||||||||
| May 31, | May 25, | May 26, | For the Years Ended | |||||||||||||||||||||
| 2014 | 2013 | 2012 | May 27, 2017 | May 28, 2016 | May 30, 2015 | |||||||||||||||||||
Statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||||||
State taxes, net of federal benefit | 5.3 | 4.8 | 5.3 | 5.0 | 4.9 | 5.0 | ||||||||||||||||||
Non-U.S. rate adjustments | 2.5 | 1.6 | 1.0 | 0.1 | 0.4 | 1.1 | ||||||||||||||||||
Stock options | 0.8 | 1.2 | 0.8 | |||||||||||||||||||||
Stock-based compensation | 0.7 | 0.6 | 0.5 | |||||||||||||||||||||
Valuation allowance | 3.6 | 4.1 | 1.9 | 1.2 | 1.3 | 2.8 | ||||||||||||||||||
Repatriation of foreign earnings | — | 18.8 | — | |||||||||||||||||||||
Foreign tax credits, net of valuation allowance | — | (19.4 | ) | — | ||||||||||||||||||||
Permanent items, primarily meals and entertainment | 1.4 | 1.5 | 0.8 | 2.2 | 1.5 | 1.3 | ||||||||||||||||||
FIN 48 adjustments | (1.8 | ) | (0.1 | ) | (0.4 | ) | ||||||||||||||||||
Other, net | 1.1 | 1.1 | (0.5 | ) | 0.6 | (0.1 | ) | (0.3 | ) | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Effective tax rate | 47.9 | % | 48.6 | % | 43.9 | % | 44.8 | % | 43.6 | % | 45.4 | % | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
The impact of state taxes, net of federal benefit, and foreign income taxed at other than U.S. rates fluctuates year over year due to the changes in the mix of operating income and losses amongst the various states and foreign jurisdictions in which the Company operates.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of the net deferred tax asset consist of the following (in thousands):
| May 31, | May 25, | |||||||||||||||
| 2014 | 2013 | As of May 27, 2017 | As of May 28, 2016 | |||||||||||||
Deferred tax assets: | ||||||||||||||||
Allowance for doubtful accounts | $ | 1,654 | $ | 1,672 | $ | 1,595 | $ | 1,685 | ||||||||
Accrued compensation | 3,567 | 3,386 | 4,235 | 4,337 | ||||||||||||
Accrued expenses | 3,858 | 3,572 | 3,755 | 3,163 | ||||||||||||
Stock options and restricted stock | 15,668 | 15,043 | 11,779 | 15,132 | ||||||||||||
Foreign tax credit | 354 | 291 | 397 | 557 | ||||||||||||
Net operating losses | 16,043 | 14,276 | 15,855 | 15,283 | ||||||||||||
Property and equipment | 1,222 | 2,060 | 1,222 | 1,550 | ||||||||||||
State taxes | 212 | 226 | 232 | 368 | ||||||||||||
|
|
|
| |||||||||||||
Gross deferred tax asset | 42,578 | 40,526 | 39,070 | 42,075 | ||||||||||||
Valuation allowance | (16,719 | ) | (14,779 | ) | (15,971 | ) | (15,714 | ) | ||||||||
|
|
|
| |||||||||||||
Gross deferred tax asset, net of valuation allowance | 25,859 | 25,747 | 23,099 | 26,361 | ||||||||||||
|
|
|
| |||||||||||||
Deferred tax liabilities: | ||||||||||||||||
Goodwill and intangibles | (19,554 | ) | (17,607 | ) | (23,406 | ) | (22,124 | ) | ||||||||
|
|
|
| |||||||||||||
Net deferred tax asset | $ | 6,305 | $ | 8,140 | $ | (307 | ) | $ | 4,237 | |||||||
|
|
|
| |||||||||||||
The Company had ana net income tax receivable of $1.4 million and a net income tax payable of $750,000 and income tax receivable of $1.2$0.4 million as of May 31, 201427, 2017 and May 25, 2013,28, 2016, respectively.
The tax benefit associated with the exercise of nonqualified stock options and the disqualifying dispositions by employees of incentive stock options, restricted stock awards and shares issued under the Company’s ESPP reduced income taxes payable by $512,000 and $540,000$1.1 million for both of the years ended May 31, 201427, 2017 and May 25, 2013,28, 2016, respectively.
The Company has foreign net operating loss carryforwards of $63.6$63.5 million and foreign tax credit carryforwards of $350,000.$0.4 million. The foreign tax credits will expire beginning in fiscal 2023. The following table summarizes the net operating loss expiration periods.
Expiration Periods | Amount of Net Operating Losses | Amount of Net Operating Losses | ||||||
| (in thousands) | (in thousands) | |||||||
Fiscal Years Ending: | ||||||||
2016 | $ | 1,100 | ||||||
2017 | 350 | |||||||
2018 | 750 | $ | 300 | |||||
2019 | 1,000 | 550 | ||||||
2020-2024 | 9,700 | |||||||
2020 | 1,600 | |||||||
2021 | 4,600 | |||||||
2022 | 350 | |||||||
2023-2027 | 3,500 | |||||||
Unlimited | 50,700 | 52,600 | ||||||
|
| |||||||
| $ | 63,600 | $ | 63,500 | |||||
|
| |||||||
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the activity in our valuation allowance accounts (in thousands):
| Currency | ||||||||||||||||
| Beginning | Charged to | Rate | Ending | |||||||||||||
| Balance | Operations | Changes | Balance | |||||||||||||
Years Ended: | ||||||||||||||||
May 26, 2012 | $ | 12,500 | $ | 1,549 | $ | (1,401 | ) | $ | 12,648 | |||||||
May 25, 2013 | $ | 12,648 | $ | 2,036 | $ | 95 | $ | 14,779 | ||||||||
May 31, 2014 | $ | 14,779 | $ | 1,396 | $ | 544 | $ | 16,719 | ||||||||
Years Ended: May 30, 2015 May 28, 2016 May 27, 2017 Beginning
Balance Charged to
Operations Currency
Rate
Changes Ending
Balance $ 16,719 $ 1,189 $ (2,852 ) $ 15,056 $ 15,056 $ 691 $ (33 ) $ 15,714 $ 15,714 $ 438 $ (181 ) $ 15,971
Realization of the deferred tax assets is dependent upon generating sufficient future taxable income. Management believes that it is more likely than not that all other remaining deferred tax assets will be realized through future taxable earnings or alternative tax strategies.
Deferred income taxes have not been provided on the undistributed earnings of approximately $12.7$18.4 million from the Company’s foreign subsidiaries as of May 31, 201427, 2017 since these amounts are intended to be indefinitely reinvested in foreign operations. If the earnings of the Company’s foreign subsidiaries earnings were to be distributed, management estimates that the income tax impact would be immaterial as the federal taxes would be offset with foreign tax credits.
Management determined during the fiscal year ended May 25, 2013 that it was a prudent time to make an exception to the indefinite reinvestment position and approved the payment of a one-time dividend from RGP Japan of $9.7 million and RGP Hong Kong of $3.9 million. The one-time exception is based upon opportunistic timing for a dividend distribution because of the favorable exchange rates between the U.S. and Japan for a tax beneficial result from both RGP Japan and RGP Hong Kong. After the one-time dividend, management’s intent and ability for indefinite reinvestment have and will continue for all entities, including RGP Japan and RGP Hong Kong.
The following table summarizes the activity related to the gross unrecognized tax benefits (in thousands):
| For the Years Ended | ||||||||||||||||
| May 31, | May 25, | For the Years Ended | ||||||||||||||
| 2014 | 2013 | May 27, 2017 | May 28, 2016 | |||||||||||||
Unrecognized tax benefits, beginning of year | $ | 722 | $ | 744 | $ | 42 | $ | 42 | ||||||||
Gross increases-tax positions in prior period | — | 10 | — | — | ||||||||||||
Gross decreases-tax positions in prior period | — | — | — | — | ||||||||||||
Gross increases-current period tax positions | — | — | — | — | ||||||||||||
Settlements | — | — | — | — | ||||||||||||
Lapse of statute of limitations | (690 | ) | (32 | ) | — | — | ||||||||||
|
|
|
| |||||||||||||
Unrecognized tax benefits, end of year | $ | 32 | $ | 722 | $ | 42 | $ | 42 | ||||||||
|
|
|
| |||||||||||||
As of May 31, 2014 and May 25, 2013, theThe Company’s total liability for unrecognized gross tax benefits was $32,000$42,000 as of both May 27, 2017 and $722,000, respectively,May 28, 2016, which, if ultimately recognized, would impact the effective tax rate in future periods. AsThe unrecognized tax benefits include long-term liabilities of $42,000 as of both May 31, 201427, 2017 and May 25, 2013,28, 2016; none of the unrecognized tax benefit includes $0 and $402,000, respectively, which are long-term liabilities and $32,000 and $320,000, respectively, whichbenefits are short-term liabilities due to the closing of the statute of limitations.
The Company’s major income tax jurisdiction is the U.S., with federal income taxes subject to examinationstatute of limitations remaining open for fiscal 20112014 and thereafter. For states within the U.S. in which the Company does significant business, the Company remains subject to examination for fiscal 20102013 and thereafter. Major foreign jurisdictions in Europe remain open for fiscal years ended 20092012 and thereafter.
The Company continues to recognize interest expense and penalties related to income tax as a part of its provision for income taxes. While the amount accrued during the current fiscal year is immaterial, as of May 31, 2014, the Company has provided $7,000$1,000 of accrued interest and penalties as a component of the liability for unrecognized tax benefits.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. Accrued Salaries and Related Obligations
Accrued salaries and related obligations consist of the following (in thousands):
| May 31, | May 25, | |||||||
| 2014 | 2013 | |||||||
Accrued salaries and related obligations | $ | 17,241 | $ | 13,018 | ||||
Accrued bonuses | 14,196 | 12,451 | ||||||
Accrued vacation | 14,130 | 13,811 | ||||||
|
|
|
| |||||
| $ | 45,567 | $ | 39,280 | |||||
|
|
|
| |||||
Accrued salaries and related obligations Accrued bonuses Accrued vacation As of
May 27,
2017 As of
May 28,
2016 $ 18,741 $ 18,166 15,600 17,092 14,900 14,897 $ 49,241 $ 50,155
8. Revolving Credit Agreement
The Company has a $3.0 million unsecured revolving credit facility with Bank of America (the “Credit Agreement”). The Credit Agreement allows the Company to choose the interest rate applicable to advances. The interest rate options are Bank of America’s prime rate and a London Inter-Bank Offered Rate plus 2.25%. Interest, if any, is payable monthly. The Credit Agreement expires November 30, 2014. As of May 31, 2014, the Company had approximately $1.5 million available under the terms of the Credit Agreement, as Bank of America has issued approximately $1.5 million of outstanding letters of credit in favor of third parties related to operating leases and guarantees. As of May 31, 2014, the Company was in compliance with all covenants included in the Credit Agreement.
9. Concentrations of Credit Risk
The Company maintains cash and cash equivalent balances, short-term investments in commercial paper and U.S. government agency securities with high credit quality financial institutions. At times, such balances are in excess of federally insured limits.
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of trade receivables. However, concentrations of credit risk are limited due to the large number of customers comprising the Company’s customer base and their dispersion across different business and geographic areas. The Company monitors its exposure to credit losses and maintains an allowance for anticipated losses. A significant change in the liquidity or financial position of one or more of the Company’s customers could result in an increase in the allowance for anticipated losses. No single customer accounted for more than 2%, 4% and 3%10% of revenue for the years ended May 31, 2014,27, 2017, May 25, 201328, 2016 and May 26, 2012, respectively.30, 2015.
10.9. Stockholders’ Equity
The Company has 70,000,000 authorized shares of common stock with a $0.01 par value. At May 27, 2017 and May 28, 2016, there were 29,662,000 and 36,229,000 shares of common stock outstanding, respectively, all of which provide the holders with voting rights.
The Company has authorized for issuance 5,000,000 shares of preferred stock with a $0.01 par value per share. The board of directors has the authority to issue preferred stock in one or more series and to determine the related rights and preferences. No shares of preferred stock were outstanding as of May 27, 2017 and May 28, 2016.
Tender Offer for Common Stock
In October 2016, the Company commenced a modified Dutch auction tender offer to purchase up to 6,000,000 shares of common stock at a price not greater than $16.00 per share and not less than $13.50 per share. In November 2016, the Company exercised its right to increase the size of the tender offer by up to 2.0% of its outstanding common stock. The tender offer period expired on November 15, 2016 and on November 22, 2016, the Company purchased 6,515,264 shares of its common stock at a per share price of $16.00, excluding transaction costs, for approximately $104.2 million. These shares are currently held as treasury stock. The tender offer was funded through borrowings of $58.0 million under the Facility and the remainder with cash on hand.
Stock Repurchase Program
The Company’s board of directors has periodically approved a stock repurchase program authorizing the repurchase, at the discretion of the Company’s senior executives, of the Company’s common stock for a designated aggregate dollar limit. The current program was authorized in April 2011July 2015 (the “April 2011“July 2015 program”) and set an aggregate dollar limit not to exceed
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$150 million. Use of the funds authorized under the July 2015 program commenced in February 2016 upon the exhaustion of the previous stock repurchase program of $150 million.million approved by the Company’s board of directors in April 2011. Repurchases under the program may take place in the open market or in privately negotiated transactions and may be made pursuant to a Rule10b5-1 plan. During the years ended May 31, 201427, 2017 and May 25, 2013,28, 2016, the Company purchased on the open market approximately 2.20.8 million and 2.91.8 million shares of its common stock, respectively, at an average price of $13.19$15.99 and $11.75$15.32 per share, respectively, on the open market for approximately $29.6$13.5 million and $34.2$28.1 million, respectively. As of May 31, 2014,27, 2017, approximately $43.0$125.1 million remains available for future repurchases of our common stock under the April 2011July 2015 program.
Quarterly Dividend
The CompanyCompany’s board of directors has 70,000,000 authorized sharesestablished a quarterly dividend, subject to quarterly board of directors’ approval. On April 20, 2017, the board of directors declared a regular quarterly dividend of $0.11 per share of our common stock with a $0.01 par value. Atstock. The dividend, payable on June 15, 2017, was accrued in the Consolidated Balance Sheet as of May 31,27, 2017 for approximately $3.2 million. Continuation of the quarterly dividend will be at the discretion of the board of directors and will depend upon the Company’s financial condition, results of operations, capital requirements, general business condition, contractual restrictions contained in our current credit agreements and other agreements, and other factors deemed relevant by the board of directors.
10. Stock-Based Compensation Plans
2014 Performance Incentive Plan
On October 23, 2014, the Company’s stockholders approved the 2014 Plan. The 2014 Plan replaced the Resources Connection, Inc. 2004 Performance Incentive Plan and the 1999 Long Term Incentive Plan (the “Prior Stock Plans”). The effective date of the 2014 Plan is September 3, 2014 and, May 25, 2013, there were 38,158,000 and 39,705,000 sharesunless terminated earlier by the Board of common stock outstanding, respectively, allDirectors, will terminate on September 2, 2024. Under the terms of which provide the holders with voting rights.
The Company has authorized for issuance 5,000,000 shares2014 Plan, the Company’s board of preferred stock with a $0.01 par value.directors or one or more committees appointed by the board of directors will administer the 2014 Plan. The board of directors has delegated general administrative authority for the 2014 Plan to the Compensation Committee of the board of directors.
The administrator of the 2014 Plan has broad authority to, issue preferred stock in one or more seriesamong other things, select participants and to determine the related rightstype(s) of award(s) that they are to receive, and preferences. Nodetermine the number of shares that are to be subject to awards and the terms and conditions of awards, including the price (if any) to be paid for the shares or the award. Persons eligible to receive awards under the 2014 Plan include officers or employees of the Company or any of its subsidiaries, directors of the Company, and certain consultants and advisors to the Company or any of its subsidiaries.
The maximum number of shares of preferredthe Company’s common stock werethat 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 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 units 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 May 31,27, 2017, 2,767,000 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.
The types of awards that may be granted under the 2014 Plan include stock options, restricted stock, stock bonuses, performance stock, stock units, phantom stock and other forms of awards granted or denominated in the Company’s common stock or units of the Company’s common stock, as well as certain cash bonus awards. Under the terms of the 2014 Plan, the option price for the incentive stock options (“ISOs”) and nonqualified stock options (“NQSO”) may not be less than the fair market value of the shares of the Company’s stock on the date of the grant. For ISOs, the exercise price per share may not be less than 110% of the fair
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
market value of a share of common stock on the grant date for any individual possessing more than 10% of the total outstanding stock of the Company. Stock options granted under the 2014 Plan and the Prior Stock Plans generally become exercisable over periods of one to four years and expire not more than ten years from the date of grant. The Company predominantly grants NQSOs to employees in the U.S. The Company granted 127,720 and 50,354 shares of restricted stock during the fiscal years ended May 27, 2017 and May 25, 2013.28, 2016, respectively.
A summary of the share-based award activity under the 2014 Plan and the Prior Stock Plans follows (amounts in thousands, except weighted average exercise price):
| Share-Based Awards Available for Grant | Number of Shares Under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | ||||||||||||||||
Options outstanding at May 28, 2016 | 3,206 | 7,347 | $ | 16.08 | 5.41 | $ | 10,109 | |||||||||||||
Granted, at fair market value | (1,212 | ) | 1,212 | 14.52 | ||||||||||||||||
Restricted stock (1) | (319 | ) | — | — | ||||||||||||||||
Exercised | — | (305 | ) | 12.59 | ||||||||||||||||
Forfeited (2) | 267 | (265 | ) | 14.18 | ||||||||||||||||
Expired | 825 | (825 | ) | 29.77 | ||||||||||||||||
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Options outstanding at May 27, 2017 | 2,767 | 7,164 | $ | 15.08 | 5.56 | $ | 1,696 | |||||||||||||
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Exercisable at May 27, 2017 | 4,608 | $ | 15.59 | 4.04 | $ | 1,173 | ||||||||||||||
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Vested and expected to vest at May 27, 2017 (3) | 6,962 | $ | 15.09 | 5.46 | $ | 1,696 | ||||||||||||||
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| (1) | Amounts represent restricted shares granted. Share-based awards available for grant are reduced by 2.5 shares for each share awarded as stock grants from the 2014 Plan. |
| (2) | Amounts represent both stock options and restricted share awards forfeited. |
| (3) | The expected to vest options are the result of applying thepre-vesting forfeiture rate assumptions to options not yet vested. |
The aggregate intrinsic value in the preceding table represents the totalpre-tax intrinsic value, based on the Company’s closing stock price of $12.65 as of May 26, 2017 (the last actual trading day of fiscal 2017), which would have been received by the option holders had all option holders exercised their options as of that date.
The totalpre-tax intrinsic value related to stock options exercised during the years ended May 27, 2017, May 28, 2016 and May 30, 2015 was $1.1 million, $1.8 million and $1.2 million, respectively. The total estimated fair value of stock options that vested during the years ended May 27, 2017, May 28, 2016 and May 30, 2015 was $3.6 million, $4.0 million and $3.8 million, respectively.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Valuation and Expense Information for Stock Based Compensation Plans
The following table summarizes the impact of the Company’s stock-based compensation plans. Stock-based compensation expense is included in selling, general and administrative expenses and consists of stock-based compensation expense related to employee stock options, ESPP stock purchase rights and restricted stock (in thousands, except per share amounts):
| For the Years Ended | ||||||||||||
| May 27, 2017 | May 28, 2016 | May 30, 2015 | ||||||||||
Income before income taxes | $ | (6,068 | ) | $ | (6,280 | ) | $ | (5,989 | ) | |||
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Net income | $ | (3,962 | ) | $ | (4,159 | ) | $ | (3,823 | ) | |||
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Net income per share: | ||||||||||||
Basic | $ | (0.12 | ) | $ | (0.11 | ) | $ | (0.10 | ) | |||
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Diluted | $ | (0.12 | ) | $ | (0.11 | ) | $ | (0.10 | ) | |||
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The weighted average estimated fair value per share of employee stock options granted during the years ended May 27, 2017, May 28, 2016 and May 30, 2015 was $3.61, $4.54 and $3.93, respectively, using the Black-Scholes model with the following assumptions:
| For the Years Ended | ||||||
| May 27, 2017 | May 28, 2016 | May 30, 2015 | ||||
Expected volatility | 34.6% - 38.4% | 35% - 40.5% | 36.2% - 42.1% | |||
Risk-free interest rate | 1.3% - 1.6% | 1.7% - 2.0% | 1.7% - 2.2% | |||
Expected dividends | 3.0% | 2.2% | 1.9% - 2.1% | |||
Expected life | 5.6 - 8.1 years | 5.6 - 7.7 years | 5.5 - 7.5 years | |||
As of May 27, 2017, there was $7.0 million of total unrecognized compensation cost related tonon-vested employee stock options granted. That cost is expected to be recognized over a weighted-average period of 31 months. Stock-based compensation expense included in selling, general and administrative expenses for the years ended May 27, 2017, May 28, 2016 and May 30, 2015 was $6.1 million, $6.3 million and $6.0 million, respectively; this consisted of stock-based compensation expense related to employee stock options, employee stock purchases made via the Company’s ESPP and issuances of restricted stock. Also included in the stock-based compensation expense for the year ended May 28, 2016 was approximately $900,000 related to the accelerated vesting of options held by Donald Murray in connection with his transition from Executive Chairman to Chairman.
Stock-based compensation expense in the tables above includes compensation for restricted shares of $802,000, $598,000 and $515,000 for the years ended May 27, 2017, May 28, 2016 and May 30, 2015, respectively. The Company granted 127,720, 50,354 and 49,840 shares of restricted stock for the years ended May 27, 2017, May 28, 2016 and May 30, 2015, respectively. There were 43,261 and 41,796 restricted shares that vested in fiscal 2017 and 2016, respectively. There were 189,015, 105,925 and 97,938 unvested restricted shares as of May 27, 2017, May 28, 2016 and May 30, 2015, respectively. At May 27, 2017, there was approximately $2.7 million of total unrecognized compensation cost related to restricted shares, which is expected to be recognized over a weighted-average period of 32 months.
Excess tax benefits related to stock-based compensation expense are recognized as an increase to additionalpaid-in capital and tax shortfalls are recognized as income tax expense unless there are excess tax benefits from previous equity awards to which the shortfall can be offset. On the adoption date of the required accounting for stock-based compensation expense, the Company calculated the amount of eligible excess tax benefits available to offset future tax shortfalls in accordance with the long-form method.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company recognizes compensation expense for only the portion of stock options and restricted stock units that are 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
On October 23, 2014, the Company’s stockholders approved an amendment to the ESPP to extend the term of the ESPP through October 16, 2024, and to increase the maximum number of shares of the Company’s common stock authorized for issuance under the ESPP by an additional 1.5 million shares.
The Company’s ESPP allows qualified employees (as defined in the ESPP) to purchase designated shares of the Company’s common stock at a price equal to 85% of the lesser of the fair market value of common stock at the beginning or end of each semi-annual stock purchase period. After approval of the amendment, a total of 5.9 million shares of common stock may be issued under the ESPP. The Company issued 359,000, 325,000 and 337,000 shares of common stock pursuant to the ESPP for the years ended May 27, 2017, May 28, 2016 and May 30, 2015, respectively. There are 918,000 shares of common stock available for issuance under the ESPP as of May 27, 2017.
11. Benefit Plan
The Company has a defined contribution 401(k) plan (“the plan”) which covers all employees in the U.S. who have completed 90 days of service and are age 21 or older. Participants may contribute up to 50% of their annual salary up to the maximum amount allowed by statute. As defined in the plan agreement, the Company may make matching contributions in such amount, if any, up to a maximum of 6% of individual employees’ annual compensation. The Company, inat its sole discretion, determines the matching contribution made from quarter to quarter. To receive matching contributions, the employee must be employed on the last business day of the fiscal quarter. For the years ended May 31, 2014,27, 2017, May 25, 201328, 2016 and May 26, 2012,30, 2015, the Company contributed approximately $4.5$5.1 million, $4.2$5.0 million and $4.4$4.8 million, respectively, to the plan as Company matching contributions.
12. Supplemental Disclosure of Cash Flow Information
Additional information regarding cash flows is as follows (in thousands):
| For the Years Ended | ||||||||||||||||||||||||
| May 31, | May 25, | May 26, | For the Years Ended | |||||||||||||||||||||
| 2014 | 2013 | 2012 | May 27, 2017 | May 28, 2016 | May 30, 2015 | |||||||||||||||||||
Income taxes paid | $ | 16,187 | $ | 19,785 | $ | 17,505 | $ | 16,756 | $ | 23,135 | $ | 24,326 | ||||||||||||
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Interest paid | $ | 628 | $ | — | $ | — | ||||||||||||||||||
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Non-cash investing and financing activities: | ||||||||||||||||||||||||
Dividends declared, not paid | $ | 2,677 | $ | 2,391 | $ | 2,097 | ||||||||||||||||||
Capitalized leasehold improvements paid directly by landlord | 1,934 | — | — | $ | 1,026 | $ | 405 | $ | 144 | |||||||||||||||
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Dividends declared, not paid | $ | 3,253 | $ | 3,623 | $ | 2,982 | ||||||||||||||||||
| $ | 4,611 | $ | 2,391 | $ | 2,097 |
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RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. Commitments and Contingencies
Lease Commitments and Purchase Obligations
At May 31, 2014,27, 2017, the Company had operating leases, expiring at various dates through August, 2024March 2027, primarily for office premises, and purchase obligations, primarily for fixed assets.property and equipment. At May 31, 2014,27, 2017, the Company had no capital leases. Future minimum rental commitments under operating leases and other known purchase obligations are as follows (in thousands):
| Operating | Purchase | |||||||||||||||
Years Ending: | Leases | Obligations | Operating Leases | Purchase Obligations | ||||||||||||
May 30, 2015 | $ | 10,656 | $ | 777 | ||||||||||||
May 28, 2016 | 9,701 | 477 | ||||||||||||||
May 27, 2017 | 7,502 | 246 | ||||||||||||||
May 26, 2018 | 5,107 | 130 | $ | 10,537 | $ | 440 | ||||||||||
May 25, 2019 | 3,912 | 42 | 9,460 | 340 | ||||||||||||
May 30, 2020 | 6,837 | 235 | ||||||||||||||
May 29, 2021 | 6,085 | 105 | ||||||||||||||
May 28, 2022 | 5,097 | 9 | ||||||||||||||
Thereafter | 7,160 | — | 6,993 | — | ||||||||||||
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Total | $ | 44,038 | $ | 1,672 | $ | 45,009 | $ | 1,129 | ||||||||
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Rent expense for the years ended May 31, 2014,27, 2017, May 25, 201328, 2016 and May 26, 201230, 2015 totaled $13.3$12.9 million, $14.9$13.1 million and $15.1$13.1 million, respectively. Rent expense is recognized on a straight-line basis over the term of the lease, including during any rent holiday periods.
The Company leases approximately 20,80018,200 square feet of the approximately 56,200 square foot Company owned building located in Irvine, California to independent third parties and has operating lease agreements forsub-let space with independent third parties expiring through fiscal 2018.2025. Under the terms of these operating lease agreements, rental income from such third party leases is expected to be $372,000, $150,000, $88,000, $38,000$245,000, $201,000, $207,000, $213,000 and $0$219,000 in fiscal 20152018 through 2019, respectively.
Employment Agreements
The Company entered into an employment agreement in April 2013 with its president and chief executive officer, Anthony Cherbak. This agreement is for three years and commenced on May 28, 2013. The agreement automatically renews for additional one-year periods commencing May 28, 2015 unless the Company or Mr. Cherbak provides the other party written notice within 60 days of the then-current expiration date that the agreement will not be extended. The employment agreement provides Mr. Cherbak with a specified severance amount depending on whether his separation from the Company is with or without good cause as defined in the agreement. The Company also has employment agreements with certain key members of management, including with its current executive chairman and former chief executive officer, Donald Murray, the respective terms of which extend through July 31, 2014 (with the exception of Chief Operating Officer Tracy Stephens’ employment agreement which extends through July 31, 2016) but automatically renew for additional one year periods unless the Company or the named executive provides the other party written notice no later than 60 days prior to the then-current expiration date that the agreement will not be extended. These agreements provide those employees with a specified severance amount depending on whether the employee is terminated with or without good cause as defined in the applicable agreement.
Legal Proceedings
The Company is involved in certain legal matters in the ordinary course of business. In the opinion of management, all such matters, if disposed of unfavorably, would not have a material adverse effect on the Company’s financial position, cash flows or results of operations.
14.Employee Stock Based Compensation Plans
2004 Performance IncentivePurchase Plan
On October 15, 2004,23, 2014, the Company’s stockholders approved an amendment to the Resources Connection, Inc. 2004 Performance Incentive Plan (the “Plan”). This Plan replacedESPP to extend the Company’s 1999 Long Term Incentive Plan (the “Prior Plan”). The Plan will terminate on September 3, 2014. After the termination, no additional awards may be granted under the Plan but previously granted awards will remain outstanding in accordance with their applicable terms and conditions and the terms and conditionsterm of the Plan. UnderESPP through October 16, 2024, and to increase the terms of the Plan, the Company’s board of directors or one or more committees appointed by the board of directors will administer the Plan. The board of directors has delegated general administrative authority for the Plan to the Compensation Committee of the board of directors.
The administrator of the Plan has broad authority under the Plan to, among other things, select participants and determine the type(s) of award(s) that they are to receive, and determine the number of shares that are to be subject to awards and the terms and conditions of awards, including the price (if any) to be paid for the shares or the award.
Persons eligible to receive awards under the Plan include officers or employees of the Company or any of its subsidiaries, directors of the Company, and certain consultants and advisors to the Company or any of its subsidiaries.
The maximum number of shares of the Company’s common stock that may be issued or transferred pursuant to awardsauthorized for issuance under the Plan equals the sum of: (1) 7,500,000 shares (after giving effect to the Company’s two-for-one stock split in March 2005 and the amendments to the Plan approvedESPP by stockholders at the Company’s 2008 and 2006 annual meetings of stockholders), plus (2) the number of shares available for award grant purposes under the Prior Plan as of October 15, 2004, plus (3) the number of any shares subject to stock options granted under the Prior Plan and outstanding as of October 15, 2004 which expire, or for any reason are cancelled or terminated, after that date without being exercised. As of May 31, 2014, 1,530,000 shares were available for award grant purposes under the Plan, subject to future increases as described in (3) above and subject to increase as then-outstanding awards expire or terminate without having become vested or exercised, as applicable.an additional 1.5 million shares.
The types of awards that may be granted under the Plan include stock options, restricted stock, stock bonuses, performance stock, stock units, phantom stock and other forms of awards granted or denominatedCompany’s ESPP allows qualified employees (as defined in the Company’s common stock or unitsESPP) to purchase designated shares of the Company’s common stock as well as certain cash bonus awards. Under the termsat a price equal to 85% of the Plan, the option price for the incentive stock options (“ISOs”) and nonqualified stock options (“NQSO”) may not be less than the fair market value of the shares of the Company’s stock on the date of the grant. For ISOs, the exercise price per share may not be less than 110%lesser of the fair market value of common stock at the beginning or end of each semi-annual stock purchase period. After approval of the amendment, a sharetotal of 5.9 million shares of common stock on the grant date for any individual possessing more than 10% of the total outstanding stock of the Company. Stock options grantedmay be issued under the Plan and the Prior Plan generally become exercisable over periods of one to four years and expire not more than ten years from the date of grant.ESPP. The Company predominantly grants NQSOs to employees in the U.S. The Company granted 34,632issued 359,000, 325,000 and 34,622337,000 shares of restrictedcommon stock duringpursuant to the fiscal years ended May 31, 2014 and May 25, 2013, respectively.
A summary of the share-based award activity under the Plan and the Prior Plan follows (amounts in thousands, except weighted average exercise price):
| Share-Based | Number of | Weighted | Weighted Average | |||||||||||||||||
| Awards | Shares | Average | Remaining | Aggregate | ||||||||||||||||
| Available for | Under | Exercise | Contractual Life | Intrinsic | ||||||||||||||||
| for Grant | Option | Price | (in years) | Value | ||||||||||||||||
Options outstanding at May 25, 2013 | 1,653 | 7,970 | $ | 19.60 | 4.91 | $ | 72 | |||||||||||||
Granted, at fair market value | (1,305 | ) | 1,305 | 11.41 | ||||||||||||||||
Restricted Stock (1) | (86 | ) | — | — | ||||||||||||||||
Exercised | — | (313 | ) | 12.18 | ||||||||||||||||
Forfeited (2) | 215 | (213 | ) | 13.12 | ||||||||||||||||
Expired | 1,053 | (1,053 | ) | 17.80 | ||||||||||||||||
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Options outstanding at May 31, 2014 | 1,530 | 7,696 | $ | 18.93 | 5.21 | $ | 1,611 | |||||||||||||
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Exercisable at May 31, 2014 | 5,986 | $ | 20.70 | 4.29 | $ | 440 | ||||||||||||||
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Vested and expected to vest at May 31, 2014 (3) | 7,496 | $ | 19.12 | 5.11 | $ | 1,433 | ||||||||||||||
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The weighted average grant date fair values of all stock options granted in the years ended May 31, 2014, May 25, 2013 and May 26, 2012 were $11.41, $12.53 and $12.38 per share, respectively.
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $12.40 as of May 30, 2014 (the last actual trading day of fiscal 2014), which would have been received by the option holders had all option holders exercised their options as of that date.
The total pre-tax intrinsic value related to stock options exercised during the years ended May 31, 2014, May 25, 2013 and May 26, 2012 was $347,000, $697,000 and $55,000, respectively. The total estimated fair value of stock options that vested during the years ended May 31, 2014, May 25, 2013 and May 26, 2012 was $5.5 million, $5.8 million and $6.5 million, respectively.
Valuation and Expense Information for Stock Based Compensation Plans
The following table summarizes the impact of the Company’s stock-based compensation plans. Stock-based compensation expense is included in selling, general and administrative expenses and consists of stock-based compensation expense related to employee stock options, employee stock purchases made via the Company’s ESPP and issuances of restricted stock (in thousands, except per share amounts):
| For the Years Ended | ||||||||||||
| May 31, | May 25, | May 26, | ||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Income before income taxes | $ | (6,519 | ) | $ | (7,188 | ) | $ | (7,742 | ) | |||
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Net income | $ | (4,424 | ) | $ | (4,914 | ) | $ | (5,343 | ) | |||
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Net income per share: | ||||||||||||
Basic | $ | (0.11 | ) | $ | (0.12 | ) | $ | (0.12 | ) | |||
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Diluted | $ | (0.11 | ) | $ | (0.12 | ) | $ | (0.12 | ) | |||
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The weighted average estimated fair value per share of employee stock options granted during the years ended May 31, 2014, May 25, 2013 and May 26, 2012 was $3.82, $4.31 and $4.63, respectively, using the Black-Scholes model with the following assumptions:
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As of May 31, 2014, there was $7.0 million of total unrecognized compensation cost related to non-vested employee stock options granted. That cost is expected to be recognized over a weighted-average period of 28 months. Stock-based compensation expense included in selling, general and administrative expenses for the years ended May 31, 2014,27, 2017, May 25, 201328, 2016 and May 26, 2012 was $6.530, 2015, respectively. There are 918,000 shares of common stock available for issuance under the ESPP as of May 27, 2017.
11. Benefit Plan
The Company has a defined contribution 401(k) plan (“the plan”) which covers all employees in the U.S. who have completed 90 days of service and are age 21 or older. Participants may contribute up to 50% of their annual salary up to the maximum amount allowed by statute. As defined in the plan agreement, the Company may make matching contributions in such amount, if any, up to a maximum of 6% of individual employees’ annual compensation. The Company, at its sole discretion, determines the matching contribution made from quarter to quarter. To receive matching contributions, the employee must be employed on the last business day of the fiscal quarter. For the years ended May 27, 2017, May 28, 2016 and May 30, 2015, the Company contributed approximately $5.1 million, $7.2$5.0 million and $7.7$4.8 million, respectively; this consistedrespectively, to the plan as Company matching contributions.
12. Supplemental Disclosure of stock-based compensationCash Flow Information
Additional information regarding cash flows is as follows (in thousands):
| For the Years Ended | ||||||||||||
| May 27, 2017 | May 28, 2016 | May 30, 2015 | ||||||||||
Income taxes paid | $ | 16,756 | $ | 23,135 | $ | 24,326 | ||||||
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Interest paid | $ | 628 | $ | — | $ | — | ||||||
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Non-cash investing and financing activities: | ||||||||||||
Capitalized leasehold improvements paid directly by landlord | $ | 1,026 | $ | 405 | $ | 144 | ||||||
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Dividends declared, not paid | $ | 3,253 | $ | 3,623 | $ | 2,982 | ||||||
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RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. Commitments and Contingencies
Lease Commitments and Purchase Obligations
At May 27, 2017, the Company had operating leases, expiring at various dates through March 2027, primarily for office premises, and purchase obligations, primarily for property and equipment. At May 27, 2017, the Company had no capital leases. Future minimum rental commitments under operating leases and other known purchase obligations are as follows (in thousands):
Years Ending: | Operating Leases | Purchase Obligations | ||||||
May 26, 2018 | $ | 10,537 | $ | 440 | ||||
May 25, 2019 | 9,460 | 340 | ||||||
May 30, 2020 | 6,837 | 235 | ||||||
May 29, 2021 | 6,085 | 105 | ||||||
May 28, 2022 | 5,097 | 9 | ||||||
Thereafter | 6,993 | — | ||||||
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Total | $ | 45,009 | $ | 1,129 | ||||
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Rent expense related to employee stock options, employee stock purchases made via the Company’s ESPP and issuances of restricted stock.
Stock-based compensation expense in the tables above includes compensation for restricted shares of $406,000, $296,000 and $212,000 for the years ended May 31, 2014,27, 2017, May 25, 201328, 2016 and May 26, 2012,30, 2015 totaled $12.9 million, $13.1 million and $13.1 million, respectively. Rent expense is recognized on a straight-line basis over the term of the lease, including during any rent holiday periods.
The Company granted 34,632, 34,622leases approximately 18,200 square feet of the approximately 56,200 square foot Company owned building located in Irvine, California to independent third parties and 43,351 shareshas operating lease agreements forsub-let space with independent third parties expiring through fiscal 2025. Under the terms of restricted stock for the years ended May 31, 2014, May 25, 2013 and May 26, 2012, respectively. There were 23,441 and 19,349 restricted shares that vested in fiscal 2014 and 2013, respectively. There were 84,379, 73,708 and 58,923 unvested restricted shares as of May 31, 2014, May 25, 2013 and May 26, 2012, respectively. At May 31, 2014, there was approximately $908,000 of total unrecognized compensation cost related to restricted shares, whichthese operating lease agreements, rental income from such third party leases is expected to be recognized over a weighted-average period of 32 months.
Excess tax benefits related to stock-based compensation expense are recognized as an increase to additional paid-in capital$245,000, $201,000, $207,000, $213,000 and tax shortfalls are recognized as income tax expense unless there are excess tax benefits from previous equity awards to which it can be offset. On the adoption date of the required accounting for stock-based compensation expense, the Company calculated the amount of eligible excess tax benefits available to offset future tax shortfalls$219,000 in accordance with the long-form method.
The Company recognizes compensation expense for only the portion of stock optionsfiscal 2018 through 2022, respectively and restricted stock units that are expected to vest, rather than recording forfeitures when they occur. If the actual number of forfeitures differs from that estimated by management, additional adjustments to compensation expense may be required in future periods.
The Company reflects, in its Consolidated Statements of Cash Flows, the tax savings resulting from tax deductions in excess of expense recognized in its Consolidated Statements of Operations as a financing cash flow, which will impact the Company’s future reported cash flows from operating activities.$536,000 thereafter.
Employee Stock Purchase Plan
On October 23, 2014, the Company’s stockholders approved an amendment to the ESPP to extend the term of the ESPP through October 16, 2024, and to increase the maximum number of shares of the Company’s common stock authorized for issuance under the ESPP by an additional 1.5 million shares.
The Company’s ESPP allows qualified employees (as defined in the ESPP) to purchase designated shares of the Company’s common stock at a price equal to 85% of the lesser of the fair market value of common stock at the beginning or end of each semi-annual stock purchase period. AAfter approval of the amendment, a total of 4,400,0005.9 million shares of common stock may be issued under the ESPP. The Company issued 348,000, 411,000359,000, 325,000 and 430,000337,000 shares of common stock pursuant to the ESPP for the years ended May 31, 2014,27, 2017, May 25, 201328, 2016 and May 26, 2012,30, 2015, respectively. There are 439,000918,000 shares of common stock available for issuance under the ESPP as of May 31, 2014.27, 2017.
15.11. Benefit Plan
The Company has a defined contribution 401(k) plan (“the plan”) which covers all employees in the U.S. who have completed 90 days of service and are age 21 or older. Participants may contribute up to 50% of their annual salary up to the maximum amount allowed by statute. As defined in the plan agreement, the Company may make matching contributions in such amount, if any, up to a maximum of 6% of individual employees’ annual compensation. The Company, at its sole discretion, determines the matching contribution made from quarter to quarter. To receive matching contributions, the employee must be employed on the last business day of the fiscal quarter. For the years ended May 27, 2017, May 28, 2016 and May 30, 2015, the Company contributed approximately $5.1 million, $5.0 million and $4.8 million, respectively, to the plan as Company matching contributions.
12. Supplemental Disclosure of Cash Flow Information
Additional information regarding cash flows is as follows (in thousands):
| For the Years Ended | ||||||||||||
| May 27, 2017 | May 28, 2016 | May 30, 2015 | ||||||||||
Income taxes paid | $ | 16,756 | $ | 23,135 | $ | 24,326 | ||||||
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Interest paid | $ | 628 | $ | — | $ | — | ||||||
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Non-cash investing and financing activities: | ||||||||||||
Capitalized leasehold improvements paid directly by landlord | $ | 1,026 | $ | 405 | $ | 144 | ||||||
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Dividends declared, not paid | $ | 3,253 | $ | 3,623 | $ | 2,982 | ||||||
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RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. Commitments and Contingencies
Lease Commitments and Purchase Obligations
At May 27, 2017, the Company had operating leases, expiring at various dates through March 2027, primarily for office premises, and purchase obligations, primarily for property and equipment. At May 27, 2017, the Company had no capital leases. Future minimum rental commitments under operating leases and other known purchase obligations are as follows (in thousands):
Years Ending: | Operating Leases | Purchase Obligations | ||||||
May 26, 2018 | $ | 10,537 | $ | 440 | ||||
May 25, 2019 | 9,460 | 340 | ||||||
May 30, 2020 | 6,837 | 235 | ||||||
May 29, 2021 | 6,085 | 105 | ||||||
May 28, 2022 | 5,097 | 9 | ||||||
Thereafter | 6,993 | — | ||||||
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Total | $ | 45,009 | $ | 1,129 | ||||
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Rent expense for the years ended May 27, 2017, May 28, 2016 and May 30, 2015 totaled $12.9 million, $13.1 million and $13.1 million, respectively. Rent expense is recognized on a straight-line basis over the term of the lease, including during any rent holiday periods.
The Company leases approximately 18,200 square feet of the approximately 56,200 square foot Company owned building located in Irvine, California to independent third parties and has operating lease agreements forsub-let space with independent third parties expiring through fiscal 2025. Under the terms of these operating lease agreements, rental income from such third party leases is expected to be $245,000, $201,000, $207,000, $213,000 and $219,000 in fiscal 2018 through 2022, respectively and $536,000 thereafter.
Employment Agreements
The Company’s employment agreement with its president and chief executive officer, Kate W. Duchene, has an initial term of three years ending on December 19, 2019 and renews forone-year periods commencing thereafter unless the Company or Ms. Duchene provides the other party written notice within 60 days of the then-current expiration date that the agreement will not be extended. The employment agreement provides Ms. Duchene with a specified severance amount depending on whether her separation from the Company is with or without good cause as defined in the agreement. The Company also has employment agreements with certain key members of management; these agreements automatically renew for additional one year periods unless the Company or the named executive provides the other party written notice no later than 60 days prior to the then-current expiration date that the agreement will not be extended. These agreements provide those employees with a specified severance amount depending on whether the employee is terminated with or without good cause as defined in the applicable agreement.
Legal Proceedings
The Company is involved in certain legal matters in the ordinary course of business. In the opinion of management, all such matters, if disposed of unfavorably, would not have a material adverse effect on the Company’s financial position, cash flows or results of operations.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. 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 ofSignificant Accounting Policies. Summarized information regarding the Company’s domestic and international operations is shown in the following table. Amounts are stated in thousands:
| Revenue for the Years Ended | Long-Lived Assets (1) as of | |||||||||||||||||||||||||||||||||||||||
| May 31, | May 25, | May 26, | May 31, | May 25, | Revenue for the For the Years Ended | Long-Lived Assets (1) as of | ||||||||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2014 | 2013 | May 27, 2017 | May 28, 2016 | May 30, 2015 | May 27, 2017 | May 28, 2016 | |||||||||||||||||||||||||||||||
United States | $ | 442,784 | $ | 424,862 | $ | 416,489 | $ | 173,656 | $ | 171,939 | $ | 469,846 | $ | 489,035 | $ | 479,972 | $ | 173,781 | $ | 172,155 | ||||||||||||||||||||
The Netherlands | 22,304 | 24,395 | 30,332 | 22,541 | 22,457 | 16,569 | 15,859 | 15,777 | 18,036 | 17,728 | ||||||||||||||||||||||||||||||
Other | 102,093 | 107,077 | 124,942 | 3,419 | 3,625 | 96,996 | 93,627 | 94,840 | 2,625 | 2,574 | ||||||||||||||||||||||||||||||
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Total | $ | 567,181 | $ | 556,334 | $ | 571,763 | $ | 199,616 | $ | 198,021 | $ | 583,411 | $ | 598,521 | $ | 590,589 | $ | 194,442 | $ | 192,457 | ||||||||||||||||||||
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| (1) | Long-lived assets are comprised of goodwill, intangible assets and property and equipment. |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
As required by SECRule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined inRule 13a-15(e) under the Exchange Act) as of May 31, 2014.27, 2017. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of May 31, 2014.27, 2017.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRule 13a-15(f). We maintain internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the frameworkcriteria established in the 2013Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included an assessment of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of May 31, 2014.27, 2017.
The Company’s independent registered public accounting firm, McGladreyRSM US LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of May 31, 2014,27, 2017, as stated in their report which is included in this Item under the heading “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the fiscal quarter ended May 31, 2014,27, 2017, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Resources Connection, Inc.
We have audited Resources Connection, Inc.’s‘s and subsidiaries’ internal control over financial reporting as of May 31, 2014,27, 2017, based on criteria established inInternal Control — Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992.2013. Resources Connection, Inc.’s and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that(a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;(b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and(c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Resources Connection, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of May 31, 2014,27, 2017, based on criteria established inInternal Control — Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992.2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows of Resources Connection, Inc. and subsidiaries as of and for the year ended May 31, 201427, 2017 and our report dated July 28, 201424, 2017 expressed an unqualified opinion.
/s/ McGladreyRSM US LLP
Irvine, California
July 28, 201424, 2017
| ITEM 9B. | OTHER INFORMATION. |
None.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Executive Officers and Directors
Our board of directors has adopted a code of business conduct and ethics that applies to our directors and employees, including our chief executive officer, chief financial officer and principal accounting officer and persons performing similar functions, as required by applicable rules of the SEC and NASDAQ Stock Market. The full text of our code of business conduct and ethics can be found on the investor relations page of our website atwww.rgp.com. We intend to disclose any amendment to, or a waiver from, a provision of our code of business conduct and ethics that applies to our directors and executive officers, including our chief executive officer, chief financial officer and principal accounting officer, or persons performing similar functions, by posting such information on the investor relations page of our website atwww.rgp.com to the extent required by applicable SEC and NASDAQ rules.
Reference is made to the information regarding directors appearing in Section II under the caption “PROPOSAL 1. ELECTION OF DIRECTORS,” and to the information under the captions “EXECUTIVE OFFICERS,” “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE,” “BOARD OF DIRECTORS” and “BOARD OF DIRECTORS — AUDIT COMMITTEE,” in each case in the Company’s proxy statement related to its 20142017 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended May 31, 2014,27, 2017, which information is incorporated herein by reference.
| ITEM 11. | EXECUTIVE COMPENSATION. |
The information appearing under the captions “COMPENSATION DISCUSSION AND ANALYSIS,” “COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION,” “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION,” “EXECUTIVE COMPENSATION TABLES FOR FISCAL 2014,2017,” “POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL” and “BOARD OF DIRECTORS — DIRECTOR COMPENSATION — FISCAL 2014,2017,” in each case, in the Company’s proxy statement related to its 20142017 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended May 31, 2014,27, 2017, is incorporated herein by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The information appearing under the caption “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” in the proxy statement related to the Company’s 20142017 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended May 31, 2014,27, 2017, is incorporated herein by reference.
There are no arrangements, known to the Company, which might at a subsequent date result in a change in control of the Company.
The following table sets forth, for the Company’s compensation plans under which equity securities of the Company are authorized for issuance, the number of shares of the Company’s common stock subject to outstanding options, warrants, and rights, the weighted-average exercise price of outstanding options, warrants, and rights, and the number of shares remaining available for future award grants as of May 31, 2014:27, 2017:
| Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | ||||||||||
Equity compensation plans approved by security holders | 7,696,472 | (1) | $ | 18.93 | (2) | 1,968,926 | (3) | |||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||
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Total | 7,696,472 | $ | 18.93 | 1,968,926 | ||||||||
| Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | ||||||||||
Equity compensation plans approved by security holders | 7,163,975 | (1) | $ | 15.08 | (2) | 3,685,437 | (3) | |||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||
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Total | 7,163,975 | $ | 15.08 | 3,685,437 | ||||||||
| (1) | This amount includes |
| (2) | This number reflects the weighted-average exercise price of outstanding options and has been calculated exclusive of outstanding restricted stock awards issued under our |
| (3) | Consists of |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The information appearing under the captions “BOARD OF DIRECTORS — DIRECTOR INDEPENDENCE” and “BOARD OF DIRECTORS — POLICY REGARDING TREATMENT OF RELATED PARTY TRANSACTIONS” in the proxy statement related to the Company’s 20142017 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended May 31, 2014,27, 2017, is incorporated herein by reference.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES. |
The information appearing under the caption “PROPOSAL 2. RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL YEAR 2014 — FEES”2018” in the proxy statement related to the Company’s 20142017 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended May 31, 2014,27, 2017, is incorporated herein by reference.
| ITEM 15. | EXHIBITS |
(a)1. 1. Financial Statements.
The following consolidated financial statements of the Company and its subsidiaries are included in Item 8 of this report:
Report of Independent Registered Public Accounting Firm – McGladrey LLP
Report of Independent Registered Public Accounting Firm – PricewaterhouseCoopers LLP
Consolidated Balance Sheets as of May 31, 201427, 2017 and May 25, 201328, 2016
Consolidated Statements of Operations for each of the three years in the period ended May 31, 201427, 2017
Consolidated Statements of Comprehensive Income for each of the three years in the period ended May 31, 201427, 2017
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended May 31, 201427, 2017
Consolidated Statements of Cash Flows for each of the three years in the period ended May 31, 201427 2017
Notes to Consolidated Financial Statements
2.2. Financial Statement Schedules.
Schedule II-Valuation and Qualifying Accounts are included in NoteNotes 2 and 6 to the Registrant’s Notes to Consolidated Financial Statements.
Schedules I, III, IV and V have been omitted as they are not applicable.
3.3. Exhibits.
The exhibits listed in the Exhibit Index (following the signatures page of this report) are filed with, or incorporated by reference in, this report.
| ITEM 16. | FORM10-K SUMMARY. |
Not applicable.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report onForm 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
RESOURCES CONNECTION, INC. | ||
By: | /S / HERBERT M. MUELLER | |
| Herbert M. Mueller | ||
| Chief Financial Officer | ||
Date: July 24, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report onForm 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature | Title | Date | ||
/S / KATE W. DUCHENE Kate Duchene | President and Chief Executive Officer (Principal Executive Officer) | July 24, 2017 | ||
/S / HERBERT M. MUELLER Herbert M. Mueller | Chief Financial Officer and Executive Vice President (Principal Financial Officer) | July 24, 2017 | ||
/S / JOHN D. BOWER John D. Bower | Chief Accounting Officer (Principal Accounting Officer) | July 24, 2017 | ||
/S / ANTHONY CHERBAK Anthony Cherbak | Director and Executive Advisor | July 24, 2017 | ||
/S / SUSAN J. CRAWFORD Susan J. Crawford | Director | July 24, 2017 | ||
/S / NEIL DIMICK Neil Dimick | Director | July 24, 2017 | ||
/S / ROBERT KISTINGER Robert Kistinger | Director | July 24, 2017 | ||
/S / DONALD B. MURRAY Donald B. Murray | Executive Chairman and Director | July 24, 2017 | ||
/S / A. ROBERT PISANO A. Robert Pisano | Director | July 24, 2017 | ||
/S / ANNE SHIH Anne Shih | Director | July 24, 2017 | ||
/S / JOLENE SYKES SARKIS Jolene Sykes Sarkis | Director | July 24, 2017 | ||
/S / MICHAEL H. WARGOTZ Michael H. Wargotz | Director | July 24, 2017 | ||
EXHIBIT INDEX
EXHIBITS TOFORM 10-K
Exhibit Number | Description of Document | |
| 3.1 | Amended and Restated Certificate of Incorporation of Resources Connection, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form10-Q for the quarter ended November 30, 2004). | |
| 3.2 | ||
| 4.1 | Stockholders Agreement, dated December 11, 2000, between Resources Connection, Inc. and certain stockholders of Resources Connection, Inc. (incorporated by reference to Exhibit 4.2 to the Registrant’s Amendment No. 7 to the Registrant’s Registration Statement on FormS-1 filed on December 12, 2000 (FileNo. 333-45000)). | |
| 4.2 | Specimen Stock Certificate (incorporated by reference to Exhibit 4.3 to the Registrant’s Amendment No. 7 to the Registrant’s Registration Statement on FormS-1 filed on December 12, 2000 | |
| 10.1+ | Resources Connection, Inc. | |
| | ||
| | Sublease Agreement, dated January 21, 2010, between O’Melveny & Myers LLP and Resources Connection Inc. DBA Resources Global Professionals (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form10-K for the year ended May 29, 2010). | |
| 10.4+ | Resources Connection, Inc. 2004 Performance Incentive Plan (incorporated by reference to Annex A to the Company’s Proxy Statement filed with the SEC pursuant to Section 14(a) of the Exchange Act on September 11, 2008). | |
| | Resources Connection, Inc. 2004 Performance Incentive Plan Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.22 to the Registrant’s Quarterly Report on Form10-Q for the quarter ended February 28, 2005). | |
| | Resources Connection, Inc. 2004 Performance Incentive Plan Nonqualified Stock Option Agreement (Netherlands) (incorporated by reference to Exhibit 10.23 to the Registrant’s Quarterly Report on Form10-Q | |
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| Form of Indemnification Agreement between the Registrant and each of its directors and executive officers (incorporated by reference to Exhibit 10.26 to the Registrant’s Form10-K for the year ended May 31, 2008). | ||
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| 10.11+ | Employment Agreement, effective August 29, 2016, between Herb Mueller and Resources Connection, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Form8-K filed with the SEC on August 17, 2016). | |
| 10.12+ | Employment Letter, effective August 29, 2016, between John Bower and Resources Connection, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Form8-K filed with the SEC on August 17, 2016). | |
Exhibit Number | Description of Document | |
| 10.13+ | Separation and General Release Agreement, effective November 16, 2016, between Tracy Stephens and Resources Connection, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form8-K filed with the SEC on November 21, 2016). | |
| 10.14+ | Employment Agreement, effective December 19, 2016, between Kate W. Duchene and Resources Connection, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form8-K filed with the SEC on December 21, 2016). | |
| 10.15 | Credit Agreement, dated as of October 17, 2016, by and among, Resources Connection, Inc., Resources Connection LLC, as borrowers, Resources Healthcare Solutions LLC, RGP Property LLC, and Sitrick Brincko Group LLC, as guarantors, and Bank of America, N.A., as lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Form8-K filed with the SEC on October 17, 2016). | |
| 10.16 | Security and Pledge Agreement, dated as of October 17, 2016, by and among Resources Connection, Inc., Resources Connection LLC, as borrowers, Resources Healthcare Solutions LLC, RGP Property LLC, and Sitrick Brincko Group LLC, as guarantors, and Bank of America, N.A., as lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Form8-K filed with the SEC on October 17, 2016). | |
| 10.17 | Amendment No. 1 to Credit Agreement, dated November 27, 2016, between Bank of America N.A. and Resources Connection, Inc. and Resources Connection LLC (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form10-Q for the quarter ended November 26, 2016). | |
| 10.18 | Amendment No. 2 to Credit Agreement, dated February 21, 2017, between Bank of America N.A. and Resources Connection, Inc. and Resources Connection LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form10-Q for the quarter ended February | |
| 21.1* | List of Subsidiaries. | |
| 23.1* | Consent of Independent Registered Public Accounting | |
| 31.1* | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1* | Rule 1350 Certification of Chief Executive Officer. | |
| 32.2* | Rule 1350 Certification of Chief Financial Officer. | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: July 28, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
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EXHIBIT INDEX
EXHIBITS TO FORM 10-K
|
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| 101.INS* | XBRL Instance. | |
| 101.SCH* | XBRL Taxonomy Extension Schema. | |
| 101.CAL* | XBRL Taxonomy Extension Calculation. | |
| 101.DEF* | XBRL Taxonomy Extension Definition. | |
| 101.LAB* | XBRL Taxonomy Extension Labels. | |
| 101.PRE* | XBRL Taxonomy Extension Presentation. | |
| * | Filed herewith. |
| + | Indicates a management contract or compensatory plan or arrangement. |
7884