ITEM 1.
|
CONSOLIDATED FINANCIAL STATEMENTS
|
RESOURCES CONNECTION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in
thousands, except par value per share)
|
|
|
|
|
|
|
|
|
|
|
August 27,
|
|
|
May 28,
|
|
|
|
2016
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
92,937
|
|
|
$
|
91,089
|
|
Short-term investments
|
|
|
9,984
|
|
|
|
24,957
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $2,756 and $2,994 as of
August 27, 2016 and May 28, 2016, respectively
|
|
|
96,236
|
|
|
|
97,807
|
|
Prepaid expenses and other current assets
|
|
|
4,710
|
|
|
|
4,735
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
203,867
|
|
|
|
218,588
|
|
Goodwill
|
|
|
171,259
|
|
|
|
171,183
|
|
Property and equipment, net
|
|
|
21,531
|
|
|
|
21,274
|
|
Deferred income taxes
|
|
|
4,298
|
|
|
|
4,237
|
|
Other assets
|
|
|
1,880
|
|
|
|
1,973
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
402,835
|
|
|
$
|
417,255
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
13,510
|
|
|
$
|
13,606
|
|
Accrued salaries and related obligations
|
|
|
31,937
|
|
|
|
50,155
|
|
Other liabilities
|
|
|
9,444
|
|
|
|
7,123
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
54,891
|
|
|
|
70,884
|
|
Other long-term liabilities
|
|
|
3,925
|
|
|
|
3,722
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
58,816
|
|
|
|
74,606
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 5,000 shares authorized; zero shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 70,000 shares authorized; 58,534 and 58,237 shares
issued, and 36,151 and 36,229 shares outstanding as of August 27, 2016 and May 28, 2016, respectively
|
|
|
585
|
|
|
|
582
|
|
Additional paid-in capital
|
|
|
393,480
|
|
|
|
388,763
|
|
Accumulated other comprehensive loss
|
|
|
(10,151
|
)
|
|
|
(10,794
|
)
|
Retained earnings
|
|
|
329,615
|
|
|
|
327,954
|
|
Treasury stock at cost, 22,383 and 22,008 shares as of August 27, 2016 and May 28,
2016, respectively
|
|
|
(369,510
|
)
|
|
|
(363,856
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
344,019
|
|
|
|
342,649
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
402,835
|
|
|
$
|
417,255
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 27,
|
|
|
August 29,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
143,389
|
|
|
$
|
148,340
|
|
Direct cost of services, primarily payroll and related taxes for professional services
employees
|
|
|
88,862
|
|
|
|
90,877
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
54,527
|
|
|
|
57,463
|
|
Selling, general and administrative expenses
|
|
|
43,614
|
|
|
|
43,957
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
30
|
|
Depreciation expense
|
|
|
794
|
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
10,119
|
|
|
|
12,618
|
|
Interest income
|
|
|
(70
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
10,189
|
|
|
|
12,650
|
|
Provision for income taxes
|
|
|
4,551
|
|
|
|
5,517
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,638
|
|
|
$
|
7,133
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.15
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
36,269
|
|
|
|
37,295
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
36,817
|
|
|
|
37,847
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
0.11
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 27,
|
|
|
August 29,
|
|
|
|
2016
|
|
|
2015
|
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,638
|
|
|
$
|
7,133
|
|
Foreign currency translation adjustment, net of tax
|
|
|
643
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
6,281
|
|
|
$
|
7,104
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
(Amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury Stock
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
(Loss) Income
|
|
|
Earnings
|
|
|
Equity
|
|
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
|
|
|
123
|
|
|
|
1
|
|
|
|
1,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,493
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,295
|
|
Tax shortfall from stock-based compensation arrangements
|
|
|
|
|
|
|
|
|
|
|
(252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(252
|
)
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
174
|
|
|
|
2
|
|
|
|
2,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,184
|
|
Purchase of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375
|
|
|
|
(5,654
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,654
|
)
|
Cash dividends declared ($0.11 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,977
|
)
|
|
|
(3,977
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
643
|
|
|
|
|
|
|
|
643
|
|
Net income for the quarter ended August 27, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,638
|
|
|
|
5,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of August 27, 2016
|
|
|
58,534
|
|
|
$
|
585
|
|
|
$
|
393,480
|
|
|
|
22,383
|
|
|
$
|
(369,510
|
)
|
|
$
|
(10,151
|
)
|
|
$
|
329,615
|
|
|
$
|
344,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,638
|
|
|
$
|
7,133
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
794
|
|
|
|
888
|
|
Stock-based compensation expense
|
|
|
1,295
|
|
|
|
2,155
|
|
Excess tax benefits from stock-based compensation
|
|
|
(5
|
)
|
|
|
(29
|
)
|
Loss (gain) on disposal of assets
|
|
|
1
|
|
|
|
(2
|
)
|
Bad debt expense
|
|
|
|
|
|
|
205
|
|
Deferred income taxes
|
|
|
(32
|
)
|
|
|
(268
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
1,511
|
|
|
|
1,682
|
|
Prepaid expenses and other current assets
|
|
|
53
|
|
|
|
(997
|
)
|
Income taxes
|
|
|
1,219
|
|
|
|
3,311
|
|
Other assets
|
|
|
120
|
|
|
|
105
|
|
Accounts payable and accrued expenses
|
|
|
(124
|
)
|
|
|
(591
|
)
|
Accrued salaries and related obligations
|
|
|
(18,244
|
)
|
|
|
(17,010
|
)
|
Other liabilities
|
|
|
719
|
|
|
|
(1,135
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(7,055
|
)
|
|
|
(4,553
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Redemption of short-term investments
|
|
|
14,973
|
|
|
|
10,000
|
|
Purchase of short-term investments
|
|
|
|
|
|
|
(9,997
|
)
|
Purchase of property and equipment
|
|
|
(1,075
|
)
|
|
|
(575
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
13,898
|
|
|
|
(572
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,493
|
|
|
|
1,290
|
|
Proceeds from issuance of common stock under Employee Stock Purchase Plan
|
|
|
2,184
|
|
|
|
2,186
|
|
Purchase of common stock
|
|
|
(5,654
|
)
|
|
|
(6,217
|
)
|
Cash dividends paid
|
|
|
(3,623
|
)
|
|
|
(2,982
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
5
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(5,595
|
)
|
|
|
(5,694
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
600
|
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
1,848
|
|
|
|
(11,015
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
91,089
|
|
|
|
87,250
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
92,937
|
|
|
$
|
76,235
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months
ended August 27, 2016 and August 29, 2015
1. Description of the Company and its Business
Resources Connection, Inc. (Resources Connection), a Delaware corporation, was incorporated on November 16,
1998. Resources Connection is a multinational professional services firm; its operating entities primarily provide services under the name Resources Global Professionals (RGP or the Company). The Company is
organized around client service teams utilizing experienced professionals and provides consulting and business support services in the areas of accounting; finance; governance, risk and compliance management; corporate advisory, strategic
communications and restructuring; information management; human capital; supply chain management; and legal and regulatory. The Company has offices in the United States (U.S.), Asia, Australia, Canada, Europe and Mexico.
The Companys fiscal year consists of 52 or 53 weeks, ending on the last Saturday in May. The first quarters of fiscal 2017 and
2016 each consisted of 13 weeks.
2. Summary of Significant Accounting Policies
Interim Financial Information
The financial information as of and for the three months ended August 27, 2016 and August 29, 2015 is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of its financial position at such dates and the operating results and cash flows for those periods. The fiscal 2016 year-end balance
sheet data was derived from audited financial statements, and certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the U.S.
(GAAP) have been condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules or regulations; however, the Company believes the disclosures made are adequate to make the information presented not
misleading.
The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be
expected for the fiscal year. These condensed interim financial statements should be read in conjunction with the audited financial statements for the year ended May 28, 2016, which are included in the Companys Annual Report on Form
10-K for the year then ended (File No. 0-32113).
Cash, Cash Equivalents and Short-Term Investments
The Company considers cash on hand, deposits in banks, and short-term investments purchased with an original maturity date of three months or
less to be cash and cash equivalents. The carrying amounts reflected in the consolidated balance sheets for cash, cash equivalents and short-term investments approximate their fair values due to the short maturities of these instruments.
Client Reimbursements of Out-of-Pocket Expenses
The Company recognizes all reimbursements received from clients for out-of-pocket expenses as revenue and all such expenses as
direct cost of services. Reimbursements received from clients were $2.4 million and $2.9 million for the three months ended August 27, 2016 and August 29, 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 the exchange rates effective at the end of the period, income and expense items are translated at average exchange rates prevailing during the period and the related translation adjustments are
recorded as a component of accumulated other comprehensive income or loss within the Consolidated Balance Sheets. Gains and losses from foreign currency transactions are included in the Consolidated Statements of Operations.
Net Income Per Share Information
The Company presents both basic and diluted earnings per common share (EPS). Basic EPS is calculated by dividing net income by
the weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the period, calculated using the treasury stock method
for stock options. Under the treasury stock method, assumed proceeds include the amount the employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized and the
amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options
for which the exercise price exceeds the average market price per common share over the period are anti-dilutive and are excluded from the calculation.
8
The following table summarizes the calculation of net income per common share for the periods
indicated (amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Net income
|
|
$
|
5,638
|
|
|
$
|
7,133
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
36,269
|
|
|
|
37,295
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
36,269
|
|
|
|
37,295
|
|
Potentially dilutive shares
|
|
|
548
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
Total dilutive shares
|
|
|
36,817
|
|
|
|
37,847
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
|
$
|
0.19
|
|
Dilutive
|
|
$
|
0.15
|
|
|
$
|
0.19
|
|
Anti-dilutive shares not included above
|
|
|
4,581
|
|
|
|
3,979
|
|
Stock-Based Compensation
The Company recognizes compensation expense for all share-based awards made to employees and directors, including employee stock options,
restricted stock grants and employee stock purchases made via the Companys Employee Stock Purchase Plan (the ESPP), based on estimated fair value at the date of grant.
The Company estimates the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion
of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods. Stock option awards vest over four years and restricted stock award vesting is determined on an individual grant basis under the
Companys 2014 Performance Incentive Plan (2014 Plan). The Company determines the estimated value of stock option awards using the Black-Scholes valuation model. The Company recognizes stock-based compensation expense on a
straight-line basis over the service period for options and restricted stock that are expected to vest and records adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.
See Note 7
Stock-Based Compensation Plans
for further information on the 2014 Plan and stock-based compensation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these
estimates and assumptions are adequate, actual results could differ from the estimates and assumptions used.
3. Intangible Assets and Goodwill
Amortization of the Companys intangible assets was completed during fiscal 2016 and there was no outstanding balance of
intangibles as of August 27, 2016 or May 28, 2016. Amortization expense related to trade name and trademark intangibles was $30,000 for the three months ended August 29, 2015.
The following table summarizes the activity in the Companys goodwill balance (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Goodwill, beginning of year
|
|
$
|
171,183
|
|
|
$
|
170,878
|
|
Impact of foreign currency exchange rate changes
|
|
|
76
|
|
|
|
439
|
|
|
|
|
|
|
|
|
|
|
Goodwill, end of period
|
|
$
|
171,259
|
|
|
$
|
171,317
|
|
|
|
|
|
|
|
|
|
|
9
4. Income Taxes
The Companys provision for income taxes was $4.6 million (effective tax rate of approximately 45%) and $5.5 million (effective tax rate
of approximately 44%) for the three months ended August 27, 2016 and August 29, 2015, respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax rate because of the volatility in its
international operations which span numerous tax jurisdictions.
The provision for income taxes in the first quarter of fiscal 2017 and
2016 results from taxes on income in the U.S. and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a lower benefit for
losses in certain foreign jurisdictions with tax rates lower than the U.S. statutory rates. The effective tax rate increased for the three months ended August 27, 2016 due to decreasing overall profitability in the Companys foreign
operations.
The Company recognized a benefit of approximately $457,000 and $787,000 related to stock-based compensation for nonqualified
stock options expensed and for disqualifying dispositions under the ESPP during the first quarter of fiscal 2017 and 2016, respectively.
See Note 11
Recent Accounting Pronouncements
, for a discussion of the early adoption of Accounting Standards
Update (ASU) ,No. 2015-17, related to the balance sheet classification of deferred income taxes.
5. Stockholders Equity
In July 2015, the Companys board of directors approved a stock repurchase program (the July 2015 program),
authorizing the repurchase, at the discretion of the Companys senior executives, of the Companys common stock for an aggregate dollar limit not to exceed $150 million. Repurchases under the program may take place in the open market
or in privately negotiated transactions and may be made pursuant to a Rule 10b5-1 plan. During the three months ended August 27, 2016, the Company purchased approximately 375,000 shares of its common stock on the open market at an average price
of $15.09 per share, for approximately $5.7 million. As of August 27, 2016, approximately $132.9 million remains available for future repurchases of the Companys common stock under the July 2015 program.
6. Supplemental Disclosure of Cash Flow Information
The following table presents non-cash investing and financing activities (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Income taxes paid
|
|
$
|
3,441
|
|
|
$
|
2,528
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Dividends declared, not paid
|
|
$
|
3,977
|
|
|
$
|
3,715
|
|
|
|
|
|
|
|
|
|
|
Capitalized leasehold improvements paid directly by landlord
|
|
$
|
1
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
7. Stock-Based Compensation Plans
Stock Options and Restricted Stock
The maximum number of shares of the Companys common stock that may be issued or transferred pursuant to awards under the 2014 Plan equals
the sum of: (1) 2,400,000 shares, plus (2) the number of shares subject to stock options granted under the Resources Connection, Inc. 2004 Performance Incentive Plan and the 1999 Long Term Incentive Plan (the Prior Stock Plans) and
outstanding as of September 3, 2014 (the date at which the Prior Stock Plans terminated), which expire, or for any reason are cancelled or terminated, after that date without being exercised, plus (3) the number of shares subject to restricted
stock, restricted stock unit and other full-value awards granted under the Prior Stock Plans that were outstanding and unvested as of September 3, 2014, which are forfeited, terminated, cancelled, or otherwise reacquired after that date without
having become vested. As of August 27, 2016, 3,310,000 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.
10
Awards under the 2014 Plan may include, but are not limited to, stock options and restricted
stock grants. Stock option grants generally vest in equal annual installments over four years and terminate ten years from the date of grant. Restricted stock award vesting is determined on an individual grant basis. Awards of restricted
stock under the 2014 Plan will be counted against the available share limit as two and a half shares for every one share actually issued in connection with the award. The Companys policy is to issue shares from its authorized shares upon
the exercise of stock options.
The following table summarizes the stock option activity for the three months ended August 27, 2016 (number
of shares under option and aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
Under
Option
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at May 28, 2016
|
|
|
7,347
|
|
|
$
|
16.08
|
|
|
|
5.41
|
|
|
$
|
10,109
|
|
Exercised
|
|
|
(123
|
)
|
|
$
|
12.09
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(40
|
)
|
|
$
|
17.32
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(64
|
)
|
|
$
|
22.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 27, 2016
|
|
|
7,120
|
|
|
$
|
16.73
|
|
|
|
5.16
|
|
|
$
|
8,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at August 27, 2016
|
|
|
5,148
|
|
|
$
|
17.71
|
|
|
|
3.94
|
|
|
$
|
5,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at August 27, 2016
|
|
|
6,970
|
|
|
$
|
16.77
|
|
|
|
5.09
|
|
|
$
|
8,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, which is the
difference between the Companys closing stock price on the last trading day of the first quarter of fiscal 2017 and the exercise price multiplied by the number of shares that would have been received by the option holders if they had exercised
their in the money options on August 27, 2016. This amount will change based on changes in the fair market value of the Companys common stock. The aggregate intrinsic value of stock options exercised for the three months
ended August 27, 2016 and August 29, 2015 was $369,000 and $421,000, respectively.
Stock-Based Compensation Expense
As of August 27, 2016, there was $6.7 million of total unrecognized compensation cost related to unvested employee stock options
granted. That cost is expected to be recognized over a weighted-average period of 29 months. Stock-based compensation expense included in selling, general and administrative expenses for the three months ended August 27, 2016 and
August 29, 2015 was $1.3 million and $2.2 million, respectively; this consisted of stock-based compensation expense related to employee stock options, employee stock purchases made via the Companys ESPP and restricted stock
awards. Also included in the stock-based compensation expense for the three months ended August 29, 2015 was approximately $900,000 related to the accelerated vesting of options previously granted to Donald Murray in connection with his
transition from Executive Chairman to Chairman. There were no capitalized share-based compensation costs during the three months ended August 27, 2016 and August 29, 2015.
The Company granted no shares of restricted stock during either the three months ended August 27, 2016 or August 29, 2015. Stock-based
compensation expense for existing restricted stock awards for the three months ended August 27, 2016 and August 29, 2015 was $155,000 and $124,000, respectively. There were 105,639 unvested restricted shares, with approximately $1.2 million of
remaining unrecognized compensation cost, as of August 27, 2016.
The Company recognizes compensation expense for only the portion of
stock options and restricted stock that is expected to vest, rather than recording forfeitures when they occur. If the actual number of forfeitures differs from that estimated by management, additional adjustments to compensation expense may be
required in future periods.
The Company reflects, in its Consolidated Statements of Cash Flows, the tax impact resulting from tax
deductions in excess of expense recognized in its Consolidated Statements of Operations as a financing cash flow, which will impact the Companys future reported cash flows from operating activities. Gross excess tax benefits totaled
$5,000 and $29,000 for the three months ended August 27, 2016 and August 29, 2015, respectively.
Employee Stock Purchase Plan
The Companys ESPP allows qualified employees (as defined in the ESPP) to purchase designated shares of the Companys
common stock at a price equal to 85% of the lesser of the fair market value of common stock at the beginning or end of each semi-annual stock purchase period. The ESPPs term expires October 16, 2024. A total of 5,900,000 shares
of common stock may be issued under the ESPP. There were 1,103,000 shares of common stock available for issuance under the ESPP as of August 27, 2016.
11
The Company issued 174,000 and 325,000 shares of common stock pursuant to the ESPP for the three months ended August 27, 2016 and the year ended May 28, 2016, respectively.
8. Segment Information and Enterprise Reporting
The Company discloses information regarding operations outside of the U.S. The Company operates as one segment. The accounting
policies for the domestic and international operations are the same as those described in Note 2
Summary of Significant Accounting Policies
in the Notes to Consolidated Financial Statements included in the Companys 2016
Annual Report on Form 10-K for the fiscal year ended May 28, 2016. Summarized information regarding the Companys domestic and international operations is shown in the following table (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the Three
Months Ended
|
|
|
Long-Lived
Assets (1) as of
|
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
|
August 27,
2016
|
|
|
May 28,
2016
|
|
United States
|
|
$
|
115,640
|
|
|
$
|
121,103
|
|
|
$
|
172,461
|
|
|
$
|
172,155
|
|
The Netherlands
|
|
|
3,930
|
|
|
|
3,559
|
|
|
|
17,856
|
|
|
|
17,728
|
|
Other
|
|
|
23,819
|
|
|
|
23,678
|
|
|
|
2,473
|
|
|
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143,389
|
|
|
$
|
148,340
|
|
|
$
|
192,790
|
|
|
$
|
192,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Long-lived assets are comprised of goodwill and property and equipment.
|
9. Legal Proceedings
The Company is involved in certain legal matters arising in the ordinary course of business. In the opinion of management, all such
matters, if disposed of unfavorably, would not have a material adverse effect on the Companys financial position, cash flows or results of operations.
10. Subsequent Event
On October 5, 2016,
the Company announced president and Chief Executive Officer (CEO) Anthony Cherbaks resignation effective Friday, October 7, 2016 due to health considerations. Kate W. Duchene, the Companys Chief Legal Officer, Executive
Vice President, Human Resources and Secretary, will serve as interim CEO while the Companys Board of Directors oversees a search for a permanent CEO.
11. Recent Accounting Pronouncements
Accounting
Pronouncements Adopted During Current Fiscal Year
Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes.
In November 2015, the Financial Accounting Standards Board (FASB) issued ASU No. 2015-17. The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather
than being separated into current and noncurrent portions. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. As permitted, the Company early adopted ASU 2015-17 during the
first quarter of fiscal year 2017 on a retrospective basis. Accordingly, current deferred taxes have been reclassified as noncurrent on the May 28, 2016 Consolidated Balance Sheet. This reclassification decreased current deferred tax
assets by $8.4 million and increased noncurrent deferred tax assets by $8.4 million. The Company also netted noncurrent deferred tax liabilities of $5.0 million against noncurrent deferred tax assets.
12
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period
Adjustments.
In September 2015, the FASB issued ASU 2015-16. This ASU eliminates the requirement to retrospectively account for changes to provisional amounts initially recorded in a business combination. ASU 2015-16
requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined, including the effect of the change in provisional amount as if
the accounting had been completed at the acquisition date. The Company adopted this guidance as of the beginning of fiscal 2017 and will consider it during future business combinations.
Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to
Continue as a Going Concern.
In August 2014, the FASB issued ASU 2014-15. This ASU provides new guidance regarding managements responsibility in evaluating whether there is substantial doubt about a companys ability
to continue as a going concern and to provide related footnote disclosures. The Company adopted this guidance as of the beginning of fiscal 2017.
Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance
Target Could Be Achieved after the Requisite Service Period.
In June 2014, the FASB issued ASU 2014-12. This ASU provides new guidance requiring that a performance target that affects vesting and could be achieved after the requisite
service period be treated as a performance condition. The Company adopted this guidance as of the beginning of fiscal 2017. The Company does not currently have any performance based awards and thus the adoption of this guidance has not had
a material impact on its consolidated financial statements.
Accounting Pronouncements Pending Adoption
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
In March 2016, the FASB issued ASU
2016-09. The new standard modifies several aspects of the accounting and reporting for employee share-based payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax
benefits or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. The new standard is effective for fiscal years beginning after December 15, 2017 (for the Company, fiscal 2019),
and interim periods within annual periods beginning December 15, 2018; early adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have on its consolidated financial statements.
Leases (Topic 842): Leases.
In February 2016, the FASB issued ASU 2016-02, which amends the existing guidance to require lessees to
recognize operating lease obligations on their balance sheets by recording the rights and obligations created by those leases. The requirements are effective for financial statements for annual periods and interim periods within those annual periods
beginning after December 15, 2018 (for the Company, fiscal 2020), and early adoption is permitted. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and believe that it will have
a significant impact on its reported balance sheet assets and liabilities. Under current accounting guidelines, the Companys office leases are operating lease arrangements, in which rental payments are treated as operating expenses and there
is no recognition of the arrangement on the balance sheet as an asset with related obligation to the lessor.
Revenue from Contracts
with Customers (Topic 606)
: In May 2014, the FASB issued ASU 2014-09, a comprehensive new revenue recognition standard that will supersede most existing revenue recognition guidance and is intended to improve and converge revenue recognition and
related financial reporting requirements. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. The guidance provides a number of steps to apply to achieve that core principle and requires additional disclosures. In August 2015, the FASB issued ASU 2015-14, which delays the
required implementation date for the Company until fiscal 2019, although the Company has the option to adopt this guidance beginning in fiscal 2018. The standard allows for either full retrospective adoption, meaning the standard is
applied to all periods presented, or cumulative effect adoption, meaning the standard is applied only to the most current period presented in the financial statements. In addition, in March 2016, the FASB issued ASU No. 2016-12,
Narrow-Scope Improvements and Practical Expedients (Topic 606), which provides clarifying guidance in certain areas and adds some practical expedients. The effective date for this ASU is the same as the effective date for ASU No. 2014-09. The
Company is currently evaluating the impact, if any, that these ASUs will have 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 Companys results of
operations, financial position or cash flows.
13
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial statements and accompanying notes. This discussion and analysis contains forward-looking statements, within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to expectations concerning matters that are not historical facts. Such forward-looking statements may be identified
by words such as anticipates, believes, can, continue, could, estimates, expects, intends, may, plans, potential,
predicts, remain, should, or will or the negative of these terms or other comparable terminology. These statements, and all phases of our operations, are subject to known and unknown risks,
uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements and those of our industry to differ materially from those expressed or implied by these forward-looking statements. You are
urged to carefully review the disclosures we make concerning risks, uncertainties and other factors that may affect our business or operating results, including those identified in Part II, Item 1A. Risk Factors below and in our Annual Report
on Form 10-K for the year ended May 28, 2016 (File No. 0-32113). Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business or operating results. Readers are
cautioned not to place undue reliance on the forward-looking statements included herein, which speak only as the date of this filing. We do not intend, and undertake no obligation, to update the forward-looking statements in this filing to
reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, unless required by law to do so. References in this filing to Resources Connection, RGP, Resources
Global Professionals, Resources Global, the Company, we, us, and our refer to Resources Connection, Inc. and its subsidiaries.
Overview
Resources Global Professionals
(RGP) is a multinational consulting firm that provides consulting and business initiative support services to its global client base in the areas of accounting; finance; governance, risk and compliance management; corporate advisory,
strategic communications and restructuring; information management; human capital; supply chain management; and legal and regulatory. We assist our clients with projects requiring specialized expertise in:
|
|
|
Finance and accounting services including process transformation and improvement; financial reporting and analysis; technical and operational accounting; merger and acquisition due diligence; audit response;
implementation of new accounting standards such as the revenue recognition and lease pronouncements; and remediation support
|
|
|
|
Information management services including strategy development; program and project management; business and technology integration; data strategy, including data security and privacy; and business performance
management (such as core planning and consolidation systems)
|
|
|
|
Corporate advisory, strategic communications and restructuring services
|
|
|
|
Governance, risk and compliance management services including contract and regulatory compliance efforts under, for example, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes Oxley Act of
2002 (Sarbanes); Enterprise Risk Management; internal controls management; and operation and information technology audits
|
|
|
|
Supply chain management services including supply chain strategy development; procurement and supplier management; logistics and materials management; supply chain planning and forecasting; and Unique
Device Identification compliance
|
|
|
|
Human capital services including change management; organization development and effectiveness; and optimization of human resources technology and operations
|
|
|
|
Legal and regulatory services with project, secondments or tactical needs including commercial transactions; compliance initiatives; law department operations and business strategy; and litigation support
|
We were founded in June 1996 by a team at Deloitte, led by our chairman, Donald B. Murray, who was then a senior partner
with Deloitte. Our founders created Resources Connection to capitalize on the increasing demand for high quality outsourced professional services. We operated as a part of Deloitte until April 1999. In April 1999, we completed a
management-led buyout in partnership with several investors. In December 2000, we completed our initial public offering of common stock and began trading on the NASDAQ Stock Market. We currently trade on the NASDAQ Global Select Market
under the ticker symbol RECN. We operate under the acronym RGP, branding for our operating entity name of Resources Global Professionals.
We operated solely in the United States 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 August 27, 2016, we served clients from offices in 20 countries, including 23 international offices and 45 offices in the United States. Our global
footprint allows the Company to support the global initiatives of our multinational client base.
14
Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial
Statements, which have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The following represents a summary of our critical accounting policies, defined as those policies that we believe: (a) are the most
important to the portrayal of our financial condition and results of operations and (b) involve inherently uncertain issues that require managements most difficult, subjective or complex judgments. There have been no material changes
in our critical accounting policies, or in the estimates and assumptions underlying those policies, from those described in our Annual Report on Form 10-K for the year ended May 28, 2016.
Valuation of long-lived assets
We assess the potential impairment of long-lived tangible and intangible assets periodically or
whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our goodwill is not subject to periodic amortization. This asset is considered to have an indefinite life and its carrying value is required to
be assessed by us for impairment at least annually. Depending on future market values of our stock, our operating performance and other factors, these assessments could potentially result in impairment reductions of this intangible asset in the
future and this adjustment may materially affect the Companys future financial results and financial condition.
Allowance for
doubtful accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from our clients failing to make required payments for services rendered. We estimate this allowance based upon our knowledge of the
financial condition of our clients (which may not include knowledge of all significant events), review of historical receivable and reserve trends and other pertinent information. While such losses have historically been within our expectations
and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of our clients could cause unfavorable
trends in receivable collections and additional allowances may be required. These additional allowances could materially affect the Companys future financial results.
Income taxes
In order to prepare our Consolidated Financial Statements, we are required to make estimates of income taxes, if
applicable, in each jurisdiction in which we operate. The process incorporates an assessment of any current tax exposure together with temporary differences resulting from different treatment of transactions for tax and financial statement
purposes. These differences result in deferred tax assets and liabilities that are included in our Consolidated Balance Sheets. The recovery of deferred tax assets from future taxable income must be assessed and, to the extent recovery is
not likely, we will establish a valuation allowance. An increase in the valuation allowance results in recording additional tax expense and any such adjustment may materially affect the Companys future financial results. If the
ultimate tax liability differs from the amount of tax expense we have reflected in the Consolidated Statements of Operations, an adjustment of tax expense may need to be recorded and this adjustment may materially affect the Companys future
financial results and financial condition.
Revenue recognition
We primarily charge our clients on an hourly basis for the
professional services of our consultants. We recognize revenue once services have been rendered and invoice the majority of our clients in the United States on a weekly basis. Some of our clients served by our international offices are
billed on a monthly basis. Our clients are contractually obligated to pay us for all hours billed. To a much lesser extent, we also earn revenue if a client hires one of our consultants. This type of contractually non-refundable
revenue is recognized at the time our client completes the hiring process.
Stock-based compensation
Under our 2014
Performance Incentive Plan, officers, employees, and outside directors have received or may receive grants of restricted stock, stock units, options to purchase common stock or other stock or stock-based awards. Under our Employee Stock
Purchase Plan (ESPP), eligible officers and employees may purchase our common stock in accordance with the terms of the plan.
The Company estimates a value for employee stock options on the date of grant using an option-pricing model. We have elected to use the
Black-Scholes option-pricing model which takes into account assumptions regarding a number of highly complex and subjective variables. These variables include the expected stock price volatility over the term of the awards and actual and
projected employee stock option exercise behaviors. Additional variables to be considered are the expected term, expected dividends and the risk-free interest rate over the expected term of our employee stock options. In addition, because
stock-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures must be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If facts and circumstances change and we employ different assumptions in future periods, the
compensation expense recorded may differ materially from the amount recorded in the current period.
15
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 ($0.10 per
share in each quarter of fiscal 2016) is also incorporated in determining the estimated value per share of employee stock option grants. Such dividends are subject to quarterly board of director approval. The Companys expected life of
stock option grants is 5.6 years for non-officers and 7.7 years for officers. The Company uses its historical volatility over the expected life of the stock option award to estimate the expected volatility of the price of its common
stock. The Company reviews the underlying assumptions related to stock-based compensation at least annually.
We base our estimates
on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results
may differ from these estimates under different assumptions or conditions.
Results of Operations
The following tables set forth, for the periods indicated, our Consolidated Statements of Operations data. These historical results are
not necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 27,
|
|
|
August 29,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Amounts in thousands)
|
|
Revenue
|
|
$
|
143,389
|
|
|
$
|
148,340
|
|
Direct cost of services
|
|
|
88,862
|
|
|
|
90,877
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
54,527
|
|
|
|
57,463
|
|
Selling, general and administrative expenses
|
|
|
43,614
|
|
|
|
43,957
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
30
|
|
Depreciation expense
|
|
|
794
|
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
10,119
|
|
|
|
12,618
|
|
Interest income
|
|
|
(70
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
10,189
|
|
|
|
12,650
|
|
Provision for income taxes
|
|
|
4,551
|
|
|
|
5,517
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,638
|
|
|
$
|
7,133
|
|
|
|
|
|
|
|
|
|
|
We also assess the results of our operations using EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin. EBITDA
is defined as our earnings before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus stock-based compensation expense. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by
revenue. These measures assist management in assessing our core operating performance. The following table presents EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin for the periods indicated and includes a reconciliation of such measures
to net income, the most directly comparable GAAP financial measure:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 27,
|
|
|
August 29,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Amounts in thousands)
|
|
Net income
|
|
$
|
5,638
|
|
|
$
|
7,133
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
30
|
|
Depreciation expense
|
|
|
794
|
|
|
|
858
|
|
Interest income
|
|
|
(70
|
)
|
|
|
(32
|
)
|
Provision for income taxes
|
|
|
4,551
|
|
|
|
5,517
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
10,913
|
|
|
|
13,506
|
|
Stock-based compensation expense
|
|
|
1,295
|
|
|
|
2,155
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
12,208
|
|
|
$
|
15,661
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
143,389
|
|
|
$
|
148,340
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA Margin
|
|
|
8.5
|
%
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
16
The financial measures and key performance indicators we use to assess our financial and
operating performance above are not defined by, or calculated in accordance with, GAAP. A non-GAAP financial measure is defined as a numerical measure of a companys financial performance that (i) excludes amounts, or is subject to
adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the Consolidated Statements of Operations; or (ii) includes amounts, or is subject to
adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.
EBITDA,
Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. We believe that EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin 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:
|
|
|
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA and Adjusted EBITDA do not reflect any cash requirements
for such replacements;
|
|
|
|
Stock based compensation is an element of our long-term incentive compensation program, although we exclude it as an expense from Adjusted EBITDA when evaluating our ongoing operating performance for a particular
period; and
|
|
|
|
Other companies in our industry may calculate Adjusted EBITDA and Adjusted EBITDA Margin differently than we do, limiting their usefulness as comparative measures.
|
Due to these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin should not be considered a substitute for performance measures
calculated in accordance with GAAP.
Three Months Ended August 27, 2016 Compared to Three Months Ended August 29, 2015
Percentage change computations are based upon amounts in thousands.
Revenue
.
Revenue decreased $4.9 million, or 3.3%, to $143.4 million for the three months ended August 27, 2016 from
$148.3 million for the three months ended August 29, 2015. We deliver our services to clients, whether multi-national or locally based, in a similar fashion across the globe. Bill rates remained the same while hours worked decreased 2.7%
between the two periods. The decrease in revenue is partially attributable to the Memorial Day holiday which occurred in the first quarter of fiscal 2017 while the same holiday in the prior calendar year fell in the fourth quarter of fiscal
2015. The estimated reduction in revenue attributable to the holiday was $1.4 million. The revenue decrease is also attributable to fewer business opportunities in the financial services and energy sectors. As presented in the table
below, revenue increased in the first quarter of fiscal 2017 in Asia Pacific and Europe but declined in North America as compared to the first quarter of fiscal 2016. Client reimbursement revenue also declined $520,000 between the quarters.
Our financial results are subject to fluctuations in the exchange rates of foreign currencies in relation to the United States dollar
(U.S. dollar). Revenues denominated in foreign currencies are translated into U.S. dollars at the monthly average exchange rates in effect during each period. Thus, as the value of the U.S. dollar strengthens relative to the
currencies of our non-United States based operations, our translated revenue (and expenses) will be lower; conversely, if the value of the U.S. dollar weakens relative to the currencies of our non-United States based operations, our translated
revenue (and expenses) will be higher. Using the comparable fiscal 2016 first quarter conversion rates, international revenues would have been higher than reported under GAAP by $0.3 million in the first quarter of fiscal 2017. Using these
constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue increased in Europe by 9.8%, while decreasing in North America and Asia Pacific by 4.7% and 1.1%, respectively.
The number of consultants on assignment as of August 27, 2016 was 2,570 compared to 2,501 consultants engaged as of August 29, 2015.
We operated 68 (23 abroad) offices as of both August 27, 2016 and August 29, 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.
17
Revenue for the Companys practice areas across the globe consisted of the following
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
% of Total
|
|
|
|
August 27,
|
|
|
August 29,
|
|
|
%
|
|
|
August 27,
|
|
|
August 29,
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
North America
|
|
$
|
117,976
|
|
|
$
|
124,024
|
|
|
|
(4.9
|
)%
|
|
|
82.3
|
%
|
|
|
83.6
|
%
|
Europe
|
|
|
14,108
|
|
|
|
13,290
|
|
|
|
6.2
|
%
|
|
|
9.8
|
|
|
|
9.0
|
|
Asia Pacific
|
|
|
11,305
|
|
|
|
11,026
|
|
|
|
2.5
|
%
|
|
|
7.9
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143,389
|
|
|
$
|
148,340
|
|
|
|
(3.3
|
)%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Cost of Services
.
Direct cost of services decreased $2.0 million, or 2.2%, to
$88.9 million for the three months ended August 27, 2016 from $90.9 million for the three months ended August 29, 2015. The decrease in the amount of direct cost of services was attributable to a decrease of 2.7% in the number of hours worked
in the first quarter of fiscal 2017 as compared to the same period of fiscal 2016 and by a 1.7% increase in the average pay rate per hour of our consultants.
Direct cost of services as a percentage of revenue was 62.0% and 61.3% for the three months ended August 27, 2016 and August 29, 2015,
respectively. The direct cost of services percentage of revenue was higher in the first quarter of fiscal 2017 primarily because of an unfavorable change in the bill rate/pay rate ratio and the Memorial Day holiday timing discussed above; these
changes were partially offset by lower medical coverage expenses in the fiscal 2017 quarter as compared to the prior year quarter.
Our
target direct cost of services percentage is 60% for all of our offices.
Selling, General and Administrative
Expenses
.
Selling, general and administrative expense (S, G & A) as a percentage of revenue was 30.4% and 29.7% for the quarters ended August 27, 2016 and August 29, 2015, respectively. The unfavorable change in
the first quarter of fiscal 2017 was the result of reduced leverage from the decrease in revenue during the quarter. S, G & A decreased to $43.6 million for the first quarter of fiscal 2017 from $44.0 million for the same period in the
prior year. S, G & A for the prior year first quarter includes additional non-cash stock-based compensation expense of approximately $900,000 related to the accelerated vesting of options previously granted to Donald Murray in connection
with his transition from Executive Chairman to Chairman. Absent the cost of the acceleration, S, G & A increased by $500,000 in the first quarter of fiscal 2017; the primary cause of this increase was related to compensation and related
benefit costs attributable to headcount additions in U.S. offices with high growth potential.
Management and administrative headcount
increased from 744 at the end of the first quarter of fiscal 2016 to 770 at the end of the first quarter of fiscal 2017.
Sequential
Operations
.
On a sequential quarter basis, fiscal 2017 first quarter revenues decreased approximately 6.0%, from $152.5 million to $143.4 million. Billable hours worked and average bill rates decreased 3.1% and 2.5%,
respectively. The decrease in revenue is partially attributable to the Memorial Day and July Fourth holidays which occurred in the first quarter of fiscal 2017. There were no compensated holidays in the fourth quarter of fiscal
2016. The estimated lost revenue attributable to the holidays was $2.8 million. The Companys sequential revenue decreased in North America (7.1%) and Europe (8.1%) but increased in Asia Pacific (11.7%). On a constant currency
basis, using the comparable fourth quarter fiscal 2016 conversion rates, sequential revenue decreased in North America (7.1%) and Europe (6.2%) and increased in Asia Pacific (9.8%).
Direct cost of services as a percentage of revenue was 62.0% and 60.1% in the first quarter of fiscal 2017 and fourth quarter of fiscal 2016,
respectively; the higher direct cost of services percentage in the first quarter is primarily the result of two compensated holidays in the U.S., while the fourth quarter had no compensated holidays; and an unfavorable change in the bill rate/pay
rate ratio in the first quarter of fiscal 2017.
The ratio of S, G & A to revenue increased from 29.1% for the quarter ended May
28, 2016 to 30.4% for the quarter ended August 27, 2016. The change in the ratio is primarily the result of lower revenue in the August 27, 2016 quarter reducing leverage on the S, G & A spend. Total spend in the fourth quarter of
fiscal 2017 decreased over the preceding quarter primarily due to a reduction in marketing spend.
Amortization and Depreciation
Expense.
The Company completed amortization of all remaining amortizable intangible assets as of the end of fiscal 2016 and thus there is no amortization expense during the first quarter of fiscal 2017. Amortization of intangible assets
was $30,000 for the three months ended August 29, 2015.
18
Depreciation expense was $794,000 for the three months ended August 27, 2016 compared to $858,000
for the three months ended August 29, 2015.
Interest Income
.
Interest income was $70,000 in the first quarter of
fiscal 2017 compared to $32,000 in the first quarter of fiscal 2016. The improvement is from slightly higher returns on cash balances available for investment.
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 August 27, 2016, the Company also has $10.0 million of investments in commercial paper with 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 securities.
Income Taxes.
The
Companys provision for income taxes was $4.6 million (effective tax rate of approximately 45%) and $5.5 million (effective tax rate of approximately 44%) for the three months ended August 27, 2016 and August 29, 2015, respectively. The
Company records tax expense based upon an actual effective tax rate versus a forecasted tax rate because of the volatility in its international operations which span numerous tax jurisdictions.
The provision for income taxes in the first quarter of fiscal 2017 and 2016 results from taxes on income in the United States and certain
other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a lower benefit for losses in certain foreign jurisdictions with tax rates
lower than the United States statutory rates. The effective tax rate increased for the three months ended August 27, 2016 due to decreased overall profitability in our foreign operations. Periodically, the Company reviews the components of
both book and taxable income to analyze the adequacy of the tax provision. There can be no assurance that the Companys effective tax rate will remain constant in the future because of the lower benefit from the United States statutory
rate for losses in certain foreign jurisdictions and the limitation on the benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established.
The Company cannot recognize a tax benefit for the stock compensation expense related to certain incentive stock option (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 Companys provision for income taxes is likely to fluctuate from these factors for the foreseeable future. The Company
recognized a benefit of approximately $457,000 and $787,000 related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the first quarter of fiscal 2017 and 2016,
respectively. The proportion of expense related to non-qualified stock option grants (for which the Company may recognize a tax benefit in the same quarter as the related compensation expense in most instances) is significant as compared to
expense related to 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.
Comparability of Quarterly Results
.
Our quarterly results have fluctuated in the past and we believe they will continue
to do so in the future. Certain factors that could affect our quarterly operating results are described in Part II, Item 1A.Risk Factors. Due to these and other factors, we believe that quarter-to-quarter comparisons of our results
of operations may not be meaningful indicators of future performance.
Liquidity and Capital Resources
Our primary source of liquidity is cash provided by our operations and, historically, to a lesser extent, stock option exercises and ESPP
purchases. On an annual basis, we have generated positive cash flows from operations since inception. Our ability to continue to increase cash flow from operations in the future will be, at least in part, dependent on continued improvement
in global economic conditions.
As of August 27, 2016, the Company had $102.9 million of cash, cash equivalents and short-term
investments. 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 Americas prime rate and a London Inter-Bank Offered Rate plus 2.25%. Interest, if any, is payable monthly. The Credit Agreement expires November 30, 2016, unless extended by the
parties. The Company currently expects that the term of the Credit Agreement will be extended. As of August 27, 2016, the Company had approximately $1.8 million available for borrowing under the terms of the Credit Agreement as we have
directed Bank of America to issue approximately $1.2 million of outstanding letters of credit for the benefit of third parties related to operating leases and guarantees. As of August 27, 2016, the Company was in compliance with the financial
covenants in the Credit Agreement.
19
Operating activities used $7.1 million in cash for the three months ended August 27, 2016
compared to $4.6 million for the three months ended August 29, 2015. Cash used in operations in the first three months of fiscal 2017 resulted from net income of $5.6 million and non-cash items of $2.1 million, offset by net unfavorable changes
in operating assets and liabilities of $14.7 million. In the first three months of fiscal 2016, cash used in operations resulted from net income of $7.1 million and non-cash items of $2.9 million, offset by net unfavorable changes in operating
assets and liabilities of $14.6 million. The primary driver of the increase in cash used in operations in the first quarter of fiscal 2017 was the decrease in net income in such quarter. Non-cash items in both the first quarter of fiscal
2017 and fiscal 2016 include depreciation and amortization (which decreased between the two periods because our intangible assets were fully amortized during fiscal 2016) and stock-based compensation expense (which decreased between the two periods
primarily due to a one-time acceleration of vesting related to options previously granted to Donald Murray in connection with his transition from Executive Chairman to Chairman). These charges do not reflect an actual cash outflow from the
Company.
Net cash provided by investing activities was $13.9 million for the first three months of fiscal 2017, compared to a use of cash
of $0.6 million in the comparable prior year period. In the first three months of fiscal 2017, redemptions of short-term investments were $15.0 million; in the prior year period, redemptions and purchases were approximately the
same. Purchases of property and equipment increased approximately $0.5 million between the two periods.
Net cash used in financing
activities totaled $5.6 million and $5.7 million for the three months ended August 27, 2016 and August 29, 2015, respectively. Proceeds from the exercise of employee stock options and issuance of shares via the Companys ESPP were approximately
$0.2 million higher in the first quarter of fiscal 2017 as compared to the comparable period of fiscal 2016. The Companys stock purchases were approximately $0.5 million less in the first three months of fiscal 2017 than in fiscal
2016. The Company used $5.7 million in the first three months of fiscal 2017 to purchase approximately 375,000 shares of its common stock on the open market versus $6.2 million in the first three months of the prior fiscal year to purchase
approximately 395,000 shares of its common stock. The Company also paid dividends on its common stock of $3.6 million in the first three months of fiscal 2017, approximately $0.6 million higher than in the comparable period of the prior year;
the Companys dividend rate for dividends declared each quarter of fiscal 2016 was $0.10 per common share as compared to $0.08 per common share in fiscal 2015. The Companys board of directors increased the dividend rate for fiscal
2017 and declared a quarterly cash dividend of $0.11 per common share on July 28, 2016. The dividend of approximately $4.0 million, paid on September 21, 2016, is accrued in the Companys Consolidated Balance Sheet as of August 27, 2016.
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 anticipate that our current cash and the ongoing cash flows from our operations
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. The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders. We may not be able to obtain financing
arrangements in amounts or on terms acceptable to us in the future. In the event we are unable to obtain additional financing when needed, we may be compelled to delay or curtail our plans to develop our business or to pay dividends on our
capital stock, which could have a material adverse effect on our operations, market position and competitiveness.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 11 to the Consolidated Financial Statements included in
Part I, Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
20