ITEM 1.
|
CONSOLIDATED FINANCIAL STATEMENTS
|
RESOURCES CONNECTION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in
thousands, except par value per share)
|
|
|
|
|
|
|
|
|
|
|
February 24,
2018
|
|
|
May 27,
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
43,217
|
|
|
$
|
62,329
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $2,082 and $2,517 as of
February 24, 2018 and May 27, 2017, respectively
|
|
|
125,795
|
|
|
|
98,222
|
|
Prepaid expenses and other current assets
|
|
|
6,895
|
|
|
|
4,395
|
|
Income taxes receivable
|
|
|
4,263
|
|
|
|
1,899
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
180,170
|
|
|
|
166,845
|
|
Goodwill
|
|
|
193,581
|
|
|
|
171,088
|
|
Intangible assets, net
|
|
|
19,758
|
|
|
|
|
|
Property and equipment, net
|
|
|
23,086
|
|
|
|
23,354
|
|
Deferred income taxes
|
|
|
1,609
|
|
|
|
973
|
|
Other assets
|
|
|
1,930
|
|
|
|
1,868
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
420,134
|
|
|
$
|
364,128
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
24,631
|
|
|
$
|
14,102
|
|
Accrued salaries and related obligations
|
|
|
43,081
|
|
|
|
49,241
|
|
Other liabilities
|
|
|
10,601
|
|
|
|
8,428
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
78,313
|
|
|
|
71,771
|
|
Long-term debt
|
|
|
63,000
|
|
|
|
48,000
|
|
Deferred income taxes
|
|
|
1,760
|
|
|
|
1,280
|
|
Other long-term liabilities
|
|
|
8,149
|
|
|
|
4,935
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
151,222
|
|
|
|
125,986
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 5,000 shares authorized; zero shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 70,000 shares authorized; 61,125 and 58,992 shares
issued, and 31,487 and 29,662 shares outstanding as of February 24, 2018 and May 27, 2017, respectively
|
|
|
611
|
|
|
|
590
|
|
Additional
paid-in
capital
|
|
|
426,501
|
|
|
|
398,828
|
|
Accumulated other comprehensive loss
|
|
|
(7,028
|
)
|
|
|
(11,396
|
)
|
Retained earnings
|
|
|
335,550
|
|
|
|
332,024
|
|
Treasury stock at cost, 29,638 and 29,330 shares as of February 24, 2018 and
May 27, 2017, respectively
|
|
|
(486,722
|
)
|
|
|
(481,904
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
268,912
|
|
|
|
238,142
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
420,134
|
|
|
$
|
364,128
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 24,
2018
|
|
|
February 25,
2017
|
|
|
February 24,
2018
|
|
|
February 25,
2017
|
|
Revenue
|
|
$
|
172,414
|
|
|
$
|
143,844
|
|
|
$
|
470,338
|
|
|
$
|
434,791
|
|
Direct cost of services, primarily payroll and related taxes for professional services
employees
|
|
|
109,904
|
|
|
|
91,597
|
|
|
|
294,711
|
|
|
|
271,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
62,510
|
|
|
|
52,247
|
|
|
|
175,627
|
|
|
|
163,284
|
|
Selling, general and administrative expenses
|
|
|
55,268
|
|
|
|
45,376
|
|
|
|
150,181
|
|
|
|
135,046
|
|
Amortization of intangible assets
|
|
|
1,004
|
|
|
|
|
|
|
|
1,326
|
|
|
|
|
|
Depreciation expense
|
|
|
1,089
|
|
|
|
909
|
|
|
|
2,976
|
|
|
|
2,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,149
|
|
|
|
5,962
|
|
|
|
21,144
|
|
|
|
25,727
|
|
Interest expense
|
|
|
542
|
|
|
|
351
|
|
|
|
1,276
|
|
|
|
415
|
|
Interest income
|
|
|
(34
|
)
|
|
|
(16
|
)
|
|
|
(94
|
)
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
4,641
|
|
|
|
5,627
|
|
|
|
19,962
|
|
|
|
25,438
|
|
Provision for income taxes
|
|
|
46
|
|
|
|
2,743
|
|
|
|
5,117
|
|
|
|
11,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,595
|
|
|
$
|
2,884
|
|
|
$
|
14,845
|
|
|
$
|
14,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
|
$
|
0.10
|
|
|
$
|
0.49
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.14
|
|
|
$
|
0.09
|
|
|
$
|
0.48
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,440
|
|
|
|
29,764
|
|
|
|
30,473
|
|
|
|
33,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
32,066
|
|
|
|
30,584
|
|
|
|
30,901
|
|
|
|
34,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.36
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Nine Months Ended
|
|
|
|
February 24,
2018
|
|
|
February 25,
2017
|
|
|
February 24,
2018
|
|
|
February 25,
2017
|
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,595
|
|
|
$
|
2,884
|
|
|
$
|
14,845
|
|
|
$
|
14,214
|
|
Foreign currency translation adjustment, net of tax
|
|
|
2,263
|
|
|
|
509
|
|
|
|
4,368
|
|
|
|
(2,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
6,858
|
|
|
$
|
3,393
|
|
|
$
|
19,213
|
|
|
$
|
11,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Treasury Stock
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Retained
|
|
|
Total
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Earnings
|
|
|
Equity
|
|
Balances as of May 27, 2017
|
|
|
58,992
|
|
|
$
|
590
|
|
|
$
|
398,828
|
|
|
|
29,330
|
|
|
$
|
(481,904
|
)
|
|
$
|
(11,396
|
)
|
|
$
|
332,024
|
|
|
$
|
238,142
|
|
Exercise of stock options
|
|
|
390
|
|
|
|
4
|
|
|
|
4,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,907
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,481
|
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
339
|
|
|
|
3
|
|
|
|
3,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,950
|
|
Issuance of restricted stock
|
|
|
105
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock out of treasury stock to board of director members
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
298
|
|
|
|
|
|
|
|
(298
|
)
|
|
|
|
|
Purchase of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321
|
|
|
|
(5,116
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,116
|
)
|
Cash dividends declared ($0.36 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,021
|
)
|
|
|
(11,021
|
)
|
Issuance of common stock for acquisition of Accretive
|
|
|
1,072
|
|
|
|
11
|
|
|
|
11,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,754
|
|
Issuance of common stock for acquisition of
taskforce
|
|
|
227
|
|
|
|
2
|
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,602
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,368
|
|
|
|
|
|
|
|
4,368
|
|
Net income for the nine months ended February 24, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,845
|
|
|
|
14,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of February 24, 2018
|
|
|
61,125
|
|
|
$
|
611
|
|
|
$
|
426,501
|
|
|
|
29,638
|
|
|
$
|
(486,722
|
)
|
|
$
|
(7,028
|
)
|
|
$
|
335,550
|
|
|
$
|
268,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
February 24,
|
|
|
February 25,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,845
|
|
|
$
|
14,214
|
|
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,302
|
|
|
|
2,511
|
|
Stock-based compensation expense
|
|
|
4,499
|
|
|
|
4,658
|
|
Loss on disposal of assets
|
|
|
12
|
|
|
|
20
|
|
Bad debt expense
|
|
|
709
|
|
|
|
214
|
|
Deferred income taxes
|
|
|
(156
|
)
|
|
|
3,462
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(13,040
|
)
|
|
|
(651
|
)
|
Prepaid expenses and other current assets
|
|
|
(1,209
|
)
|
|
|
(188
|
)
|
Income taxes
|
|
|
(2,094
|
)
|
|
|
(7,347
|
)
|
Other assets
|
|
|
(23
|
)
|
|
|
236
|
|
Accounts payable and accrued expenses
|
|
|
1,523
|
|
|
|
817
|
|
Accrued salaries and related obligations
|
|
|
(11,488
|
)
|
|
|
(12,968
|
)
|
Other liabilities
|
|
|
(134
|
)
|
|
|
1,948
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(2,254
|
)
|
|
|
6,926
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Redemption of short-term investments
|
|
|
|
|
|
|
24,957
|
|
Proceeds from sale of property and equipment
|
|
|
4
|
|
|
|
215
|
|
Acquisition of Accretive
|
|
|
(20,047
|
)
|
|
|
|
|
Acquisition of
taskforce
, net of cash acquired
|
|
|
(3,423
|
)
|
|
|
|
|
Purchase of property and equipment
|
|
|
(1,620
|
)
|
|
|
(4,039
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(25,086
|
)
|
|
|
21,133
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
4,907
|
|
|
|
3,653
|
|
Proceeds from issuance of common stock under Employee Stock Purchase Plan
|
|
|
3,951
|
|
|
|
4,497
|
|
Purchase of common stock
|
|
|
(5,116
|
)
|
|
|
(118,886
|
)
|
Proceeds from Revolving Credit Facility
|
|
|
15,000
|
|
|
|
58,000
|
|
Repayment on Revolving Credit Facility
|
|
|
|
|
|
|
(10,000
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
(190
|
)
|
Cash dividends paid
|
|
|
(10,509
|
)
|
|
|
(10,859
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in financing activities
|
|
|
8,233
|
|
|
|
(73,785
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(5
|
)
|
|
|
(756
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(19,112
|
)
|
|
|
(46,482
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
62,329
|
|
|
|
91,089
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
43,217
|
|
|
$
|
44,607
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three and
nine months ended February 24, 2018 and February 25, 2017
1. Description of the Company and its Business
Resources Connection, Inc. (Resources Connection), a Delaware corporation, was incorporated on November 16, 1998. Resources
Connection is a multinational professional services firm; its operating entities primarily provide services under the name Resources Global Professionals (RGP or the Company). The Company provides agile consulting services to
its global client base utilizing experienced professionals in the areas of accounting; finance; governance, risk and compliance management; corporate advisory, strategic communications and restructuring; information management; human capital; supply
chain management; and legal and regulatory. The Company has offices in the United States (U.S.), Asia, Australia, Canada, Europe and Mexico.
The Companys fiscal year consists of 52 or 53 weeks, ending on the last Saturday in May. The third quarters of fiscal 2018 and 2017
each consisted of 13 weeks.
2. Summary of Significant Accounting Policies
Interim Financial Information
The financial information as of and for the three and nine months ended February 24, 2018 and February 25, 2017 is unaudited but
includes all adjustments (consisting only of normal recurring adjustments) the Company considers necessary for a fair presentation of its financial position at such dates and the operating results and cash flows for those periods. The fiscal 2017
year-end
balance sheet data was derived from audited financial statements, and certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted
accounting principles in the U.S. (GAAP) have been condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules or regulations; however, the Company believes the disclosures made are adequate to make the
information presented not misleading.
The results of operations for the interim periods presented are not necessarily indicative of the
results of operations to be expected for the full fiscal year. These condensed interim financial statements should be read in conjunction with the audited financial statements for the year ended May 27, 2017, which are included in the
Companys Annual Report on Form
10-K
for the year then ended (File No.
0-32113).
Cash, Cash Equivalents and Short-Term Investments
The Company considers cash on hand, deposits in banks, and short-term investments purchased with an original maturity date of three months or
less to be cash and cash equivalents. The carrying amounts, if any, reflected in the consolidated balance sheets for cash, cash equivalents and short-term investments approximate their fair values due to the short maturities of these instruments.
Client Reimbursements of
Out-of-Pocket
Expenses
The Company recognizes all reimbursements received from clients for
out-of-pocket
expenses as revenue and all such expenses as direct cost of services. Reimbursements received from clients were $2.9 million and $2.5 million for the three months ended
February 24, 2018 and February 25, 2017, respectively, and $8.4 million and $7.3 million for the nine months ended February 24, 2018 and February 25, 2017, respectively.
Foreign Currency Translation
The financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the exchange rates effective at the end of the period, income and expense items are translated at average exchange rates prevailing during the period and the related translation adjustments are
recorded as a component of accumulated other comprehensive income or loss within the Consolidated Balance Sheets. Gains and losses from foreign currency transactions are included in the Consolidated Statements of Operations.
Net Income Per Share Information
The Company presents both basic and diluted earnings per common share (EPS). Basic EPS is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the period, calculated using the treasury stock method for stock
options. Under the treasury stock method, assumed proceeds include the amount the employee must pay for exercising stock options and the amount of compensation cost for future services the Company has not yet recognized. Common equivalent shares are
excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price per common share over the period are anti-dilutive and are excluded from the
calculation.
8
The following table summarizes the calculation of net income per common share for the periods
indicated (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 24,
|
|
|
February 25,
|
|
|
February 24,
|
|
|
February 25,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income
|
|
$
|
4,595
|
|
|
$
|
2,884
|
|
|
$
|
14,845
|
|
|
$
|
14,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
31,440
|
|
|
|
29,764
|
|
|
|
30,473
|
|
|
|
33,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
31,440
|
|
|
|
29,764
|
|
|
|
30,473
|
|
|
|
33,916
|
|
Potentially dilutive shares
|
|
|
626
|
|
|
|
820
|
|
|
|
428
|
|
|
|
634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dilutive shares
|
|
|
32,066
|
|
|
|
30,584
|
|
|
|
30,901
|
|
|
|
34,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
|
$
|
0.10
|
|
|
$
|
0.49
|
|
|
$
|
0.42
|
|
Dilutive
|
|
$
|
0.14
|
|
|
$
|
0.09
|
|
|
$
|
0.48
|
|
|
$
|
0.41
|
|
Anti-dilutive shares not included above
|
|
|
4,166
|
|
|
|
4,189
|
|
|
|
4,872
|
|
|
|
4,678
|
|
Stock-Based Compensation
The Company recognizes compensation expense for all share-based awards made to employees and directors, including employee stock options,
restricted stock grants, restricted stock units (RSUs) and employee stock purchases made via the Companys Employee Stock Purchase Plan (the ESPP), based on estimated fair value at the date of grant.
The Company estimates the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the
award ultimately expected to vest is recognized as an expense over the requisite service periods. Stock option awards vest over four years and restricted stock award vesting is determined on an individual grant basis under the Companys 2014
Performance Incentive Plan (the 2014 Plan). The Company determines the estimated value of stock option awards using the Black-Scholes valuation model. The Company recognizes stock-based compensation expense on a straight-line basis over
the service period for options and restricted stock that are expected to vest and records adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.
See Note 9
Stock-Based Compensation Plans
for further information on the 2014 Plan and stock-based compensation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates
and assumptions are adequate, actual results could differ from the estimates and assumptions used.
3. Acquisitions
On December 4, 2017, the Company announced the completion of its acquisition of substantially all of the assets and assumption of certain
liabilities of Accretive Solutions, Inc. (Accretive). Accretive is a professional services firm that provides expertise in accounting and finance, enterprise governance, business technology and business transformation solutions to a wide
variety of organizations in the U.S. and supports startups through its Countsy suite of back office services. The Company paid consideration of $20.0 million in cash and issued approximately 1,072,000 shares of Resources Connection, Inc. common
stock restricted for sale for four years; additional cash and shares of Company common stock will be paid or issued, subject to working capital adjustments. The amounts due upon working capital adjustments are estimated at $0.1 million in cash
and 108,000 additional shares of common stock and are accrued as a liability on the balance sheet as of February 24, 2018.
9
In accordance with the accounting requirements of Accounting Standard Codification 805,
Business Combinations, (ASC 805), the Company made an initial allocation of the purchase price of Accretive based on the fair value of the assets acquired and liabilities assumed, with the residual recorded as goodwill. The
Companys initial purchase price allocation considers a number of factors, including the valuation of identifiable intangible assets. In connection with this acquisition, the Company provisionally recorded intangible assets including
$12.7 million for customer relationships (amortized over eight years) and $2.5 million for tradenames (amortized over three years). The Company also provisionally recorded approximately $11.5 million of goodwill. The goodwill and
other intangibles recognized in this transaction are deductible for tax purposes.
The operations of Accretive contributed approximately
$17.3 million to revenue and approximately $1.1 million to earnings before amortization and depreciation for the quarter ended February 24, 2018.
The Company incurred approximately $0.2 million and $0.9 million of transaction costs related to the Accretive and
taskforce
acquisitions during the three and nine months ended February 24, 2018, respectively. These expenses are included in selling, general and administrative expenses in the Companys Consolidated Statement of Operations.
The following table summarizes the consideration paid for Accretive
and the amounts of the identified assets acquired and liabilities
assumed at the acquisition date:
Fair Value of Consideration Transferred (in thousands, except share and per share amounts):
|
|
|
|
|
Cash
|
|
$
|
20,047
|
|
Common stock1,072,474 shares @ $10.96 (closing price on acquisition date discounted for
restriction on sale)
|
|
|
11,754
|
|
|
|
|
|
|
Total
|
|
$
|
31,801
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
Accounts receivable
|
|
$
|
11,358
|
|
Prepaid expenses and other current assets
|
|
|
1,084
|
|
Intangible assets
|
|
|
15,200
|
|
Property and equipment, net
|
|
|
997
|
|
|
|
|
|
|
Total identifiable assets
|
|
|
28,639
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
3,635
|
|
Accrued salaries and related obligations
|
|
|
4,591
|
|
Other current liabilities
|
|
|
148
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
8,374
|
|
|
|
|
|
|
Net identifiable assets acquired
|
|
|
20,265
|
|
Goodwill
|
|
|
11,536
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
31,801
|
|
|
|
|
|
|
On August 31, 2017, the Company acquired
taskforce
Management on Demand AG
(taskforce),
a German professional services firm, founded in 2007, that provides clients with senior interim management and project management expertise. The Company paid initial consideration of 5.8 million (approximately
$6.9 million at the date of acquisition ), in a combination of cash and restricted stock. U.S. dollar equivalents related to the acquisition of
taskforce
are based on acquisition date exchange rates.
10
In addition, the purchase agreement of
taskforce
requires
earn-out
payments to be made based on performance in calendar 2017, 2018 and 2019. Under accounting rules for business combinations, obligations that are contingently payable to the sellers based upon the
occurrence of one or more future events are recorded as a discounted liability on the Companys balance sheet. The Company is obligated to pay the sellers in Euros as follows: for calendar year 2017, Adjusted EBITDA times 6.1 times 20%; and for
both calendar years 2018 and 2019, Adjusted EBITDA times 6.1 times 15%; (Adjusted EBITDA is calculated as defined in the purchase agreement). The Company estimated the fair value of the obligation to pay contingent consideration based on a number of
different projections of the estimated Adjusted EBITDA for each of the calendar years. The Company recorded this future obligation using a discount rate of approximately 11.0%, representing the Companys weighted average cost of capital. The
estimated fair value of the contractual obligation to pay the contingent consideration for calendar 2017, 2018 and 2019 is 5.7 million (approximately $7.0 million) as of February 24, 2018. Each reporting period, the Company will estimate
changes in the fair value of contingent consideration and any change in fair value will be recognized in the Companys Consolidated Statements of Operations. The estimate of fair value of contingent consideration requires very subjective
assumptions to be made of various potential Adjusted EBITDA results and discount rates. Future revisions to these assumptions could materially change the estimate of the fair value of contingent consideration and therefore could materially affect
the Companys future operating results. No adjustments were made to the estimated contingent consideration payable in the quarter ended February 24, 2018 except for accretion expense for the passage of time. The Company paid the portion
related to Adjusted EBITDA of calendar 2017 of 2.1 million (approximately $2.6 million) in March 2018.
In accordance with the
accounting requirements of ASC 805, the Company made an initial allocation of the purchase price of
taskforce
based on the fair value of the assets acquired and liabilities assumed, with the residual recorded as goodwill. As a result of the
contingent consideration obligation, the Company recorded a deferred tax asset on the temporary difference between the book and tax treatment of the contingent consideration. The Companys initial purchase price allocation considered a number
of factors, including the valuation of identifiable intangible assets. In connection with this acquisition, the Company provisionally recorded total intangible assets including approximately $1.9 million for customer relationships (amortized
over 3 years), $2.0 million for tradenames (amortized over 10 years), $0.8 million for the database of potential consultants (amortized over 3 years) and $1.0 million for
non-competition
agreements (amortized over 3 years). The Company also provisionally recorded approximately $8.8 million of goodwill. The goodwill and other intangibles recognized in this transaction are not deductible for tax purposes.
The following table summarizes the consideration for the acquisition of
taskforce
and the amounts of the identified assets acquired and
liabilities assumed at the acquisition date:
Fair Value of Consideration Transferred (in thousands, except share and per share amounts):
|
|
|
|
|
Cash
|
|
$
|
4,274
|
|
Common stock226,628 shares @ $11.48 (closing price on acquisition date discounted for
restriction on sale)
|
|
|
2,602
|
|
Estimated initial contingent consideration
|
|
|
6,514
|
|
|
|
|
|
|
Total
|
|
$
|
13,390
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
974
|
|
Accounts receivable
|
|
|
1,930
|
|
Prepaid expenses and other current assets
|
|
|
45
|
|
Intangible assets
|
|
|
5,727
|
|
Property and equipment, net
|
|
|
39
|
|
|
|
|
|
|
Total identifiable assets
|
|
|
8,715
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
2,116
|
|
Accrued salaries and related obligations
|
|
|
16
|
|
Other current liabilities
|
|
|
140
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
2,272
|
|
|
|
|
|
|
Net identifiable assets acquired
|
|
|
6,443
|
|
Deferred tax liability
|
|
|
(1,815
|
)
|
Goodwill
|
|
|
8,762
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
13,390
|
|
|
|
|
|
|
11
4. Intangible Assets and Goodwill
The following table summarizes details of the Companys intangible assets and related accumulated amortization as of February 24,
2018. The Company had no amortizable intangible assets as of May 27, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As February 24, 2018
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
Customer contracts & relationships
(3-8
years)
|
|
$
|
14,667
|
|
|
$
|
(722
|
)
|
|
$
|
13,945
|
|
Tradenames
(3-10
years)
|
|
|
4,590
|
|
|
|
(317
|
)
|
|
|
4,273
|
|
Consultant list (3 years)
|
|
|
862
|
|
|
|
(143
|
)
|
|
|
719
|
|
Non-compete
agreements (3 years)
|
|
|
984
|
|
|
|
(163
|
)
|
|
|
821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,103
|
|
|
$
|
(1,345
|
)
|
|
$
|
19,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intangible assets described above are based upon the provisional estimate of the allocation of the
purchase price of Accretive and
taskforce
discussed in Note 3
Acquisitions
.
The Company recorded amortization expense
for the quarter ended February 24, 2018 of $1.0 million. Future estimated intangible asset amortization expense (based on existing intangible assets) is $2.3 million, $3.9 million, $3.9 million, $2.5 million and
$1.8 million for the years ending May 26, 2018, May 25, 2019, May 30, 2020, May 29, 2021 and May 28, 2022, respectively. The estimates of future intangible asset amortization expense do not incorporate the potential
impact of future currency fluctuations when translating the financial results of the Companys international operations that have amortizable intangible assets into U.S. dollars.
The following table summarizes the activity in the Companys goodwill balance (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
February 24,
|
|
|
February 25,
|
|
|
|
2018
|
|
|
2017
|
|
Goodwill, beginning of year
|
|
$
|
171,088
|
|
|
$
|
171,183
|
|
Acquisitions
taskforce
(see Note 3)
|
|
|
8,762
|
|
|
|
|
|
AcquisitionsAccretive
(see Note 3)
|
|
|
11,536
|
|
|
|
|
|
Impact of foreign currency exchange rate changes
|
|
|
2,195
|
|
|
|
(1,115
|
)
|
|
|
|
|
|
|
|
|
|
Goodwill, end of period
|
|
$
|
193,581
|
|
|
$
|
170,068
|
|
|
|
|
|
|
|
|
|
|
12
5. Income Taxes
On December 22, 2017, Congress enacted H.R.1, the Tax Cuts and Jobs Act (Tax Reform Act), which made significant
changes to U.S. federal income tax laws including reducing the corporate rate from 35% to 21% effective January 1, 2018. As the Companys fiscal year 2018 ends on May 26, 2018, the lower rate is phased in, resulting in a U.S.
statutory federal tax rate of approximately 29.4% for fiscal 2018 and a 21% U.S. statutory federal tax rate for fiscal years thereafter. In December 2017, the SEC issued Staff Accounting Bulletin No. 118 which allows the Company to record
provisional amounts related to the impact of the Tax Reform Act and adjust those amounts during a measurement period not to extend one year from date of enactment. For the three months ended February 24, 2018, the Company recorded a tax benefit
of $1.1 million due to
re-measurement
of U.S. deferred tax assets and liabilities at the rate the balances are expected to be realized (29.4% in fiscal 2018 and 21% thereafter). The estimated tax benefit
of the statutory federal rate reduction applied to the Companys U.S. earnings for the quarter is approximately $0.3 million. Additionally, applying the reduced statutory federal rate of 29.4% to the Companys U.S. earnings for the
six months ended November 25, 2017 resulted in a reduction to income tax expense of $0.8 million. These provisional estimates are subject to change upon release of further guidance from regulatory authorities, and the Companys final
determination of deferred tax balances is subject to
re-measurement
at the end of fiscal 2018. The Tax Reform Act also provides for a mandatory
one-time
transition
tax on certain accumulated earnings of foreign subsidiaries. It was determined that the transition tax does not impact the Companys provision for income taxes as its aggregate foreign deficits exceed its foreign profits.
The Companys provision for income taxes was $46,000 (effective tax rate of approximately 1%) and $2.7 million (effective tax rate
of approximately 49%) for the three months ended February 24, 2018 and February 25, 2017, respectively and $5.1 million (effective tax rate of approximately 26%) and $11.2 million (effective tax rate of approximately 44%) for the
nine months ended February 24, 2018 and February 25, 2017, respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax rate because of the volatility in its international operations that
span numerous tax jurisdictions.
The provision for income taxes in the three and nine months ended February 24, 2018 and
February 25, 2017 results from taxes on income in the U.S. and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a
lower benefit for losses in certain foreign jurisdictions with tax rates lower than the U.S. statutory rates. The effective tax rate decreased for the three months ended February 24, 2018 due to the reduction in the U.S. statutory federal tax
rate and
re-measurement
of U.S. deferred tax assets and liabilities as a result of the Tax Reform Act.
The Company recognized a benefit of approximately $0.2 million and $0.7 million related to stock-based compensation for nonqualified
stock options expensed and for disqualifying dispositions under the ESPP during the third quarter of fiscal 2018 and 2017, respectively, and approximately $0.8 million and $1.7 million related to stock-based compensation for nonqualified
stock options expensed and for disqualifying dispositions under the ESPP during the nine months ended February 24, 2018 and February 25, 2017, respectively.
13
6. Long-Term Debt
In October 2016, the Company entered into a $120 million secured revolving credit facility (Facility) with Bank of America,
consisting of (i) a $90 million revolving loan facility, which includes a $5 million sublimit for the issuance of standby letters of credit (Revolving Loan), and (ii) a $30 million reducing revolving loan
facility, any amounts of which may not be reborrowed after being repaid (Reducing Revolving Loan). The Facility is available for working capital and general corporate purposes, including potential acquisitions and stock repurchases. The
Companys obligations under the Facility are guaranteed by all of the Companys domestic subsidiaries and secured by essentially all assets of the Company, Resources Connection LLC and their domestic subsidiaries, subject to certain
customary exclusions. Borrowings under the Facility bear interest at a rate per annum of, at the Companys option, either (i) a London Interbank Offered Rate (LIBOR) defined in the Facility plus a margin of 1.25% or 1.50% or
(ii) an alternate base rate, plus a margin of 0.25% or 0.50%, with the applicable margin depending on the Companys consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of Americas prime rate,
(ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company pays an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.15% to 0.25% depending upon on the Companys
consolidated leverage ratio. The Facility expires October 17, 2021.
The Facility contains both affirmative and negative covenants.
Covenants include, but are not limited to, limitations on the Companys and its subsidiaries ability to incur liens, incur additional indebtedness, make certain restricted payments, merge or consolidate and make disposition of assets. In
addition, the Facility requires the Company to comply with financial covenants limiting the Companys total funded debt, minimum interest coverage ratio and maximum leverage ratio. The Company was in compliance with all financial covenants
under the Facility as of February 24, 2018.
Upon the occurrence of an event of default under the Facility, the lender may cease
making loans, terminate the Facility and declare all amounts outstanding to be immediately due and payable. The Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other
things,
non-payment
defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults.
The Companys borrowings on the Facility were $63.0 million as of February 24, 2018; in the third quarter of fiscal 2018, the
Company borrowed $15.0 million to fund the purchase of Accretive and in November 2016, the Company borrowed $58.0 million to fund a portion of the purchase price of its modified Dutch auction tender offer, repaying $10.0 million in the
third quarter of fiscal 2017. In addition, the Company has $1.0 million of outstanding letters of credit issued under the Facility. The Company has $26.0 million remaining to borrow under the Revolving Loan and $30.0 million remaining
under the Reducing Revolving Loan as of February 24, 2018. As of February 24, 2018, the interest rate on the Companys borrowings was 3.5% on a tranche of $24.0 million
(6-month
LIBOR plus
1.50%), 3.2% on a tranche of $24.0 million
(3-month
LIBOR plus 1.50%) and 3.2% on a tranche of $15.0 million
(3-month
LIBOR plus 1.5%).
7. Stockholders Equity
Stock Repurchase Program
In July 2015, the Companys board of directors approved a stock repurchase program (the July 2015 program), authorizing the
repurchase, at the discretion of the Companys senior executives, of the Companys common stock for an aggregate dollar limit not to exceed $150 million. Repurchases under the program may take place in the open market or in privately
negotiated transactions and may be made pursuant to a Rule
10b5-1
plan. During the three months ended February 24, 2018, the Company purchased 320,822 shares of its common stock on the open market at an
average price of $15.95 per share, for approximately $5.1 million. As of February 24, 2018, approximately $120.0 million remained available for future repurchases of the Companys common stock under the July 2015 program.
8. Supplemental Disclosure of Cash Flow Information
The following table presents information regarding income taxes paid, interest paid and
non-cash
investing and financing activities (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
February 24,
|
|
|
February 25,
|
|
|
|
2018
|
|
|
2017
|
|
Income taxes paid
|
|
$
|
9,189
|
|
|
$
|
15,116
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,202
|
|
|
$
|
292
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Capitalized leasehold improvements paid directly by landlord
|
|
$
|
|
|
|
$
|
1,026
|
|
Acquisition of
taskforce:
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
$
|
2,602
|
|
|
$
|
|
|
Liability for contingent consideration
|
|
$
|
6,952
|
|
|
$
|
|
|
Acquisition of
Accretive
:
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
$
|
11,754
|
|
|
$
|
|
|
Dividends declared, not paid
|
|
$
|
3,780
|
|
|
$
|
3,295
|
|
14
9. Stock-Based Compensation Plans
Stock Options and Restricted Stock
The maximum number of shares of the Companys common stock that may be issued or transferred pursuant to awards under the 2014 Plan equals
the sum of: (1) 2,400,000 shares, plus (2) the number of shares subject to stock options granted under the Resources Connection, Inc. 2004 Performance Incentive Plan and the 1999 Long Term Incentive Plan (the Prior Stock Plans) and
outstanding as of September 3, 2014 (the date at which the Prior Stock Plans terminated), which expire, or for any reason are cancelled or terminated, after that date without being exercised, plus (3) the number of shares subject to
restricted stock, RSUs and other full-value awards granted under the Prior Stock Plans that were outstanding and unvested as of September 3, 2014, which are forfeited, terminated, cancelled, or otherwise reacquired after that date without
having become vested. As of February 24, 2018, 1,857,000 shares were available for award grant purposes under the 2014 Plan, subject to future increases as described in (2) and (3) above and subject to increase as then-outstanding awards
expire or terminate without having become vested or exercised, as applicable.
Awards under the 2014 Plan may include, but are not limited
to, stock options, RSUs and restricted stock grants. Stock option grants generally vest in equal annual installments over four years and terminate ten years from the date of grant. Restricted stock award vesting is determined on an individual grant
basis. Awards of RSUs and restricted stock under the 2014 Plan will be counted against the available share limit as two and a half shares for every one share actually issued in connection with the award. The Companys policy is to issue shares
from its authorized shares upon the exercise of stock options.
On January 1, 2018, the Company adopted the Directors Deferred
Compensation Plan, which provides the members of our board of directors who are not officers or employees of the Company the opportunity to defer certain compensation and equity awards paid or granted for their service in the form of stock units
(Stock Units). The Stock Units are used solely as a device for determining the amount of cash benefit to eventually be paid to the director. Each has the same value as one share of Resources Connection, Inc. common stock. Stock Units
must be retained until the director leaves the board of directors, at which time the cash value of the Stock Units are paid out. Additional Stock Units are credited to reflect dividends paid on shares of Resources Connection, Inc. common stock.
Stock Units credited to a director pursuant to an election to defer compensation (and any dividend equivalents credited thereon) are fully vested at all times. Stock Units credited to a director pursuant to an election to defer an equity award are
subject to the vesting conditions applicable to the equity award, except that dividend equivalents credited to a director with respect to such Stock Units are vested at all times. These liability classified awards are
re-measured
at each reporting date and on settlement using the closing price of the Companys common stock on that date. Any change in fair value is recorded as stock-based compensation expense in the
period. We recognize stock-based compensation on these Stock Units using the straight-line method over the requisite service period.
The
following table summarizes the stock option activity for the nine months ended February 24, 2018 (number of shares under option and aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
Under Option
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at May 27, 2017
|
|
|
7,164
|
|
|
$
|
15.08
|
|
|
|
5.56
|
|
|
$
|
1,696
|
|
Granted, at fair market value
|
|
|
996
|
|
|
$
|
15.80
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(390
|
)
|
|
$
|
12.57
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(146
|
)
|
|
$
|
14.75
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(233
|
)
|
|
$
|
19.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 24, 2018
|
|
|
7,391
|
|
|
$
|
15.19
|
|
|
|
5.49
|
|
|
$
|
9,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at February 24, 2018
|
|
|
4,986
|
|
|
$
|
15.26
|
|
|
|
3.99
|
|
|
$
|
8,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at February 24, 2018
|
|
|
7,121
|
|
|
$
|
15.18
|
|
|
|
5.34
|
|
|
$
|
9,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
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 third quarter of fiscal 2018 and the exercise price multiplied by the number of shares that would have been received by the option holders if they
had exercised their in the money options on February 24, 2018. This amount will change based on changes in the fair market value of the Companys common stock. The total
pre-tax
intrinsic
value related to stock options exercised during the three months ended February 24, 2018 and February 25, 2017 was $0.9 million and $0.5 million, respectively, and for the nine months ended February 24, 2018 and
February 25, 2017 was $1.3 million and $1.0 million, respectively.
Stock-Based Compensation Expense
As of February 24, 2018, there was $7.4 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 33 months. Stock-based compensation expense included in selling, general and administrative expenses was $1.4 million and $1.5 million for the three
months ended February 24, 2018 and February 25, 2017, respectively, and $4.5 million and $4.7 million for the nine months ended February 24, 2018 and February 25, 2017, respectively. These amounts consisted of
stock-based compensation expense related to employee stock options employee stock purchases made via the ESPP and restricted stock awards. In addition, commencing in the third quarter of fiscal 2018, stock-based compensation expense includes expense
related to Stock Units credited under the Directors Deferred Compensation Plan. For the three and nine months ended February 24, 2018, this expense was $18,000. As of February 24, 2018, there were 31,945 Stock Units not vested, with
approximately $0.5 million of remaining unrecognized compensation cost. There were no capitalized share-based compensation costs during the nine months ended February 24, 2018 or February 25, 2017.
The Company granted 37,778 shares and 117,588 shares of restricted stock during the three and nine months ended February 24, 2018,
respectively, and 110,987 shares and 127,720 shares of restricted stock during the three and nine months ended February 25, 2017, respectively. Stock-based compensation expense for existing restricted stock awards was $0.4 million and
$0.2 million for the three months ended February 24, 2018 and February 25, 2017, respectively, and $1.0 million and $0.6 million for the nine months ended February 24, 2018 and February 25, 2017, respectively. As
of February 24, 2018, there were 235,003 unvested restricted shares, with approximately $3.5 million of remaining unrecognized compensation cost.
The Company recognizes compensation expense for only the portion of stock options and restricted stock that is expected to vest, rather than
recording forfeitures when they occur. If the actual number of forfeitures differs from that estimated by management, additional adjustments to compensation expense may be required in future periods.
Employee Stock Purchase Plan
The ESPP allows qualified employees (as defined in the ESPP) to purchase designated shares of the Companys common stock at a price equal
to 85% of the lesser of the fair market value of common stock at the beginning or end of each semi-annual stock purchase period. The ESPPs term expires October 16, 2024. A total of 5,900,000 shares of common stock may be issued under
the ESPP. The Company issued 339,000 and 359,000 shares of common stock pursuant to the ESPP during the nine months ended February 24, 2018 and the year ended May 27, 2017, respectively. There were 579,000 shares of common stock
available for issuance under the ESPP as of February 24, 2018.
10. Segment Information and Enterprise Reporting
The Company discloses information regarding operations outside of the U.S. The Company operates as one segment. The accounting policies
for the domestic and international operations are the same as those described in Note 2
Summary of Significant Accounting Policies
in the Notes to Consolidated Financial Statements included in the Companys Annual Report on
Form
10-K
for the fiscal year ended May 27, 2017. Summarized information regarding the Companys domestic and international operations is shown in the following table (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the
Three Months Ended
|
|
|
Revenue for the
Nine Months Ended
|
|
|
Long-Lived Assets (1) as of
|
|
|
|
February 24,
2018
|
|
|
February 25,
2017
|
|
|
February 24,
2018
|
|
|
February 25,
2017
|
|
|
February 24,
2018
|
|
|
May 27,
2017
|
|
United States
|
|
$
|
134,334
|
|
|
$
|
116,920
|
|
|
$
|
366,902
|
|
|
$
|
350,205
|
|
|
$
|
199,446
|
|
|
$
|
173,781
|
|
The Netherlands
|
|
|
4,275
|
|
|
|
3,992
|
|
|
|
12,717
|
|
|
|
12,683
|
|
|
|
19,759
|
|
|
|
18,036
|
|
Other
|
|
|
33,805
|
|
|
|
22,932
|
|
|
|
90,719
|
|
|
|
71,903
|
|
|
|
17,220
|
|
|
|
2,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
172,414
|
|
|
$
|
143,844
|
|
|
$
|
470,338
|
|
|
$
|
434,791
|
|
|
$
|
236,425
|
|
|
$
|
194,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Long-lived assets are comprised of goodwill, intangible assets and property and equipment.
|
16
11. Legal Proceedings
The Company is involved in certain legal matters arising in the ordinary course of business. In the opinion of management, all such matters, if
disposed of unfavorably, would not have a material adverse effect on the Companys financial position, cash flows or results of operations.
12.
Recent Accounting Pronouncements
Accounting Pronouncements Adopted During Current Fiscal Year
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
In March 2016, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2016-09.
The new standard modifies several aspects of the accounting and reporting for employee share-based
payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the
vesting period (record forfeitures as they occur or estimate over the vesting period). The new standard is effective for financial statements for annual and interim periods within those annual periods beginning after December 15, 2016 and was
adopted by the Company on a prospective basis effective May 28, 2017. The Company has elected to account for forfeitures based on previous guidance and will make an estimate of the number of awards expected to vest with a subsequent true up to
actual forfeitures. As a result of the adoption, excess income tax benefits and deficiencies from stock-based compensation are now recognized as a discrete item within the provision for income taxes in the Consolidated Statement of Operations rather
than additional
paid-in
capital in the Consolidated Balance Sheets. In future quarters, when tranches of unexercised options expire, there could be a potentially significant impact on the Companys income
tax expense and income tax percentage.
Accounting Pronouncements Pending Adoption
Compensation Stock Compensation (Topic 718): Scope of Modification Accounting.
In May 2017, the FASB issued ASU
2017-09,
which clarifies when changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, modification accounting is only required if
the fair value, vesting conditions or classification (equity or liability) of the new award are different from the original award immediately before the original award is modified. The new standard is effective for financial statements for annual
periods beginning after December 15, 2017 (for the Company, fiscal 2019). Early adoption is permitted. The guidance must be applied prospectively to awards modified on or after the adoption date. The future impact of ASU
2017-09
will be dependent on the nature of future stock award modifications.
Intangibles
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
In January 2017, the FASB issued ASU
2017-04,
which provides guidance regarding the goodwill impairment testing process. The
new standard eliminates Step 2 of the goodwill impairment test. If a company determines in Step 1 of the goodwill impairment test that the carrying value of goodwill is greater than the fair value, an impairment for that difference must be recorded
in the income statement, rather than proceeding to Step 2. The new standard is effective for financial statements for annual periods beginning after December 15, 2019 (for the Company, fiscal 2021). Early adoption is permitted for interim or
annual goodwill impairments tests performed on testing dates after January 1, 2017. Based on the Companys most recent annual goodwill impairment test completed in fiscal 2017, the Company expects no initial impact on adoption.
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
In August 2016, the FASB issued ASU
2016-15,
which provides guidance designed to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Examples include cash payments for debt
prepayment or debt extinguishment; contingent consideration payments made after a business combination; and proceeds from the settlement of corporate-owned life insurance policies.
The new standard is effective for financial statements for
annual and interim periods within those annual periods beginning after December 15, 2017 (for the Company, fiscal 2019). Early adoption is permitted. The Company believes the adoption of this guidance will not have a material impact on its
consolidated financial statements.
Leases (Topic 842): Leases.
In February 2016, the FASB issued ASU
2016-02,
which amends the existing guidance to require lessees to recognize operating lease obligations on their balance sheets by recording the rights and obligations created by those leases. The requirements are
effective for financial statements for annual periods and interim periods within those annual periods beginning after December 15, 2018 (for the Company, fiscal 2020), and early adoption is permitted. The Company is currently evaluating the
impact ASU
2016-02
will have on its consolidated financial statements and believes it will have a significant impact on the Companys reported balance sheet assets and liabilities. Under current
accounting guidelines, the Companys office leases are operating lease arrangements, in which rental payments are treated as operating expenses and there is no recognition of the arrangement on the balance sheet as an asset with the related
obligation to the lessor as a liability.
17
Revenue from Contracts with Customers (Topic 606)
: In May 2014, the FASB issued ASU
2014-09,
a comprehensive new revenue recognition standard that will supersede current revenue recognition guidance and is intended to improve and converge revenue recognition and related financial reporting
requirements. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. The guidance provides a number of steps to apply to achieve that core principle and requires additional disclosures. The standard allows for either full retrospective adoption, meaning the standard
is applied to all periods presented, or modified retrospective approach/cumulative effect adoption, meaning the standard is applied only to the most current period presented in the financial statements. In addition, in March 2016, the
FASB issued
ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients (Topic 606), which provides clarifying guidance in certain areas and adds some practical expedients. The effective date for this
ASU is the same as the effective date for
ASU 2014-09,
(for the Company, the first day of fiscal 2019). The Company is in the process of completing its evaluation of how it currently recognizes revenue
compared to the accounting treatment required under the new guidance. During this process, the Company reviewed client contracts and types of revenue transactions to determine the impact of the accounting treatment under the new guidance. Based on
current information available, the Company believes adoption of the guidance will not have a material impact on its Consolidated Financial Statements or internal controls, other than required expanded disclosures. The Company will adopt the new
guidance beginning May 27, 2018, using the modified retrospective approach, which recognizes the cumulative effect (if any) of application on that date.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified
Public Accountants and the SEC did not, or are not expected to, have a material effect on the Companys results of operations, financial position or cash flows.
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with our consolidated financial statements and accompanying notes. This discussion and analysis contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to expectations concerning matters that are not historical facts. Such forward-looking statements may be identified by words such as
anticipates, believes, can, continue, could, estimates, expects, intends, may, plans, potential,
predicts, remain, should, or will or the negative of these terms or other comparable terminology. These statements, and all phases of our operations, are subject to known and unknown risks,
uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements and those of our industry to differ materially from those expressed or implied by these forward-looking statements. You are urged to
review carefully the disclosures we make concerning risks, uncertainties and other factors that may affect our business or operating results, including those identified in Part II, Item 1A, Risk Factors below and in our Annual Report on Form
10-K
for the year ended May 27, 2017 (File
No. 0-32113).
Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also
affect our business or operating results. Readers are cautioned not to place undue reliance on the forward-looking statements included herein, which speak only as the date of this filing. We do not intend, and undertake no obligation, to update the
forward-looking statements in this filing to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, unless required by law to do so. References in this filing to Resources
Connection, RGP, Resources Global Professionals, the Company, we, us, and our refer to Resources Connection, Inc. and its subsidiaries.
Overview
RGP is a multinational
professional services firm that provides agile consulting services to its global client base who are faced with disruption, business transformation and compliance issues. We bring functional competencies in the areas of accounting; finance;
governance, risk and compliance management; corporate advisory, strategic communications and restructuring; information management; human capital; supply chain management; and legal and regulatory. We assist our clients with projects requiring
specialized expertise in:
|
|
|
Finance and accounting process transformation and optimization; financial reporting and analysis; technical and operational accounting; merger and acquisition due diligence and integration; audit response;
implementation of new accounting standards such as the revenue recognition pronouncement and lease accounting standard; and remediation support
|
|
|
|
Information management services including program and project management; business and technology integration; data strategy, including governance, security and privacy; and business performance management (such as core
planning and consolidation systems)
|
|
|
|
Corporate advisory, strategic communications and restructuring services
|
18
|
|
|
Governance, risk and compliance management services including contract and regulatory compliance efforts under, for example, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes Oxley Act of
2002 (Sarbanes); Enterprise Risk Management; internal controls management; and operation and IT audits
|
|
|
|
Supply chain management services including strategy development; procurement and supplier management; logistics and materials management; supply chain planning and forecasting; and Unique Device Identification
compliance
|
|
|
|
Human capital services including change management; organization development and effectiveness; compensation and incentive plan strategies and design; and optimization of human resources technology and operations
|
|
|
|
Legal and regulatory services supporting commercial transactions; global compliance initiatives; and law department operations, business strategy and analytics
|
We were founded in June 1996 by a team at Deloitte, led by our chairman, Donald B. Murray, who was then a senior partner with Deloitte. Our
founders created Resources Connection to capitalize on the increasing demand for high quality outsourced professional services. We operated as a part of Deloitte until April 1999. In April 1999, we completed a
management-led
buyout in partnership with several investors. In December 2000, we completed our initial public offering of common stock and began trading on the NASDAQ Stock Market. We currently trade on the
NASDAQ Global Select Market under the ticker symbol RECN. We operate under the acronym RGP, branding for our operating entity name of Resources Global Professionals.
We operated solely in the United States (U.S.) until fiscal year 2000, when we opened our first three international offices and
began to expand geographically to meet the demand for project consulting services across the world. As of February 24, 2018, we served clients from offices in 21 countries, including 26 international offices and 48 offices in the United States.
During the third quarter of fiscal 2018, we added five offices in the U.S. as a result of our acquisition of substantially all of the assets and assumption of certain liabilities of Accretive Solutions, Inc. (Accretive) discussed below.
Our global footprint allows the Company to support the global initiatives of our multinational client base.
The Company continues to make
progress against its strategic initiatives announced in April 2017. During the third quarter of fiscal 2018, the Company further advanced its initiative to cultivate a more sophisticated and robust sales culture. RGP continued the initiative to roll
out enhanced training initiatives and new compensation programs to drive accountability and profitable growth. The Company has completed other facets of this initiative, including the alignment of the Companys sales process and the
establishment of an enterprise-wide Business Development function. Another initiative, the Companys Strategic Client Program, with a dedicated account team for certain high profile clients with world-wide operations, is performing well with
revenue of clients in this program up 9.0% year over year. RGP expects to substantially complete its sales culture transformation by the end of the fiscal year.
In addition, the Company believes it made good progress on further building its national business development function targeting the middle
market, where the Company sees significant growth opportunities. The Company has now completed deployment of Salesforce across all of its markets, and continues to leverage this platform to improve the organizations ability to drive and
coordinate business development globally. The acquisition of Accretive in December 2017 will also enhance the Companys capabilities in the middle market.
The Company is close to completing its second initiative to redesign the Companys business model to enhance its client offerings, with a
focus on building its integrated solutions capabilities and delivering multi-disciplinary offerings to its clients in three areas of focus Transaction Services, Technical Accounting Services, and Data & Analytics. In the second
quarter of fiscal 2018, the Company implemented the new operating model for sales, talent and integrated solutions within RGP for all of North America. We believe this effort has already delivered improved revenue growth and the Company expects this
upward performance trend to continue throughout fiscal year 2018.
With respect to the cost containment initiative, the Company remains
focused on improving leverage of its selling general and administrative expenses (S, G & A) as a percentage of revenue and cost synergies in the core business and with the Accretive acquisition. The impact of certain headcount
reductions made in fiscal 2017 have been masked by
one-time
expenses during the first nine months of the fiscal year incurred for severance, acquisition and sales transformation. RGP remains committed to
managing its cost structure to achieve improved S, G & A performance as measured against revenue.
On December 4, 2017, the
Company completed its acquisition of substantially all of the assets and assumption of certain liabilities of Accretive. Accretive is a professional services firm that provides expertise in accounting and finance, enterprise governance, business
technology and business transformation solutions to a wide variety of organizations in the U.S. and supports startups through its Countsy suite of back office services. The Company paid consideration of $20.0 million in cash and issued
1,072,000 shares of Resources Connection, Inc. common stock restricted for sale for four years; additional cash and shares of Company stock will be due, subject to working capital adjustments. As of February 24, 2018, the amounts due upon
working capital adjustments are estimated at $0.1 million in cash and 108,000 additional shares of common stock and are accrued as a liability on the balance sheet as of February 24, 2018. The Company expects EBITDA to increase after
9-12
months, driven by cost synergies that RGP expects to achieve from this acquisition by the end of calendar 2018, resulting from office consolidations, the elimination of redundant back-office functions and other
specific cost reductions. Results of operations of Accretive are included in the Companys consolidated statement of operations for the quarter ended February 24, 2018, including revenue of $17.3 million and income before amortization
and depreciation of $1.1 million. The Company intends to integrate all aspects of Accretive into its business model effective May 27, 2018, the beginning of fiscal 2019.
19
During the second quarter of fiscal 2018, the Company completed its acquisition of
taskforce
, a German based professional services firm founded in 2007 that provides clients with senior interim management and project management expertise. The Company paid initial consideration of 5.8 million (approximately
$6.9 million translated to U.S. dollars based on the exchange rates at the date of acquisition) for all of the outstanding shares of
taskforce
in a combination of cash and restricted stock. In addition, the purchase agreement requires
additional
earn-out
payments resulting from application of a formula based upon Adjusted EBITDA (as defined in the purchase agreement) for calendar years 2017, 2018 and 2019. The estimated fair value of these
additional
earn-out
payments are recorded as contingent consideration at a discounted liability in the Companys Consolidated Balance Sheet for 5.7 million (approximately $7.0 million
translated to U.S. dollars based on the exchange rates at the date of acquisition) as of February 24, 2018. The initial payment for calendar 2017 of 2.1 million was made March 28, 2018. The remaining contingent consideration is
subject to revision until ultimately settled and such adjustments are recorded through the Companys Statement of Operations.
Critical Accounting
Policies
The following discussion and analysis of our financial condition and results of operations are based upon our Consolidated
Financial Statements, which have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The following represents a summary of our critical accounting policies, defined as those policies we believe: (a) are the most important
to the portrayal of our financial condition and results of operations and (b) involve inherently uncertain issues that require managements most difficult, subjective or complex judgments. There have been no material changes in our
critical accounting policies, or in the estimates and assumptions underlying those policies, from those described in our Annual Report on Form
10-K
for the year ended May 27, 2017.
Valuation of long-lived assets
We assess the potential impairment of long-lived tangible and intangible assets periodically or
whenever events or changes in circumstances indicate the carrying value may not be recoverable. Our goodwill is not subject to periodic amortization. This asset is considered to have an indefinite life and its carrying value is required to be
assessed by us for impairment at least annually. Depending on future market values of our stock, our operating performance and other factors, these assessments could potentially result in impairment reductions of this intangible asset in the future
and this adjustment may materially affect the Companys future financial results and financial condition.
Allowance for doubtful
accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from our clients failing to make required payments for services rendered. We estimate this allowance based upon our knowledge of the financial
condition of our clients (which may not include knowledge of all significant events), review of historical receivable and reserve trends and other pertinent information. While such losses have historically been within our expectations and the
provisions established, we cannot guarantee we will continue to experience the same credit loss rates we have in the past. A significant change in the liquidity or financial position of our clients could cause unfavorable trends in receivable
collections and additional allowances may be required. These additional allowances could materially affect the Companys future financial results.
Income taxes
In order to prepare our Consolidated Financial Statements, we are required to make estimates of income taxes, if
applicable, in each jurisdiction in which we operate. The process incorporates an assessment of any current tax exposure together with temporary differences resulting from different treatment of transactions for tax and financial statement purposes.
These differences result in deferred tax assets and liabilities that are included in our Consolidated Balance Sheets. The recovery of deferred tax assets from future taxable income must be assessed and, to the extent recovery is not likely, we will
establish a valuation allowance. An increase in the valuation allowance results in recording additional tax expense and any such adjustment may materially affect the Companys future financial results. If the ultimate tax liability differs from
the amount of tax expense we have reflected in the Consolidated Statements of Operations, an adjustment of tax expense may need to be recorded and this adjustment may materially affect the Companys future financial results and financial
condition.
Revenue recognition
We primarily charge our clients on an hourly basis for the professional services of our
consultants. We recognize revenue once services have been rendered and invoice the majority of our clients in the United States on a weekly basis. Some of our clients served by our international offices are billed on a monthly basis. Our clients are
contractually obligated to pay us for all hours billed. To a much lesser extent, we also earn revenue if a client hires one of our consultants. This type of contractually
non-refundable
revenue is recognized
at the time our client completes the hiring process.
Stock-based compensation
Under our 2014 Performance Incentive Plan,
officers, employees, and outside directors have received or may receive grants of restricted stock, stock units, options to purchase common stock or other stock or stock-based awards. Under our Employee Stock Purchase Plan (the ESPP),
eligible officers and employees may purchase our common stock in accordance with the terms of the plan.
20
The Company estimates a value for employee stock options on the date of grant using an
option-pricing model. We have elected to use the Black-Scholes option-pricing model which takes into account assumptions regarding a number of highly complex and subjective variables. These variables include the expected stock price volatility over
the term of the awards and actual and projected employee stock option exercise behaviors. Additional variables to be considered are the expected term, expected dividends and the risk-free interest rate over the expected term of our employee stock
options. In addition, because stock-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures must be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If facts and circumstances change and we employ different assumptions in future
periods, the compensation expense recorded may differ materially from the amount recorded in the current period.
The Company uses its
historical volatility over the expected life of the stock option award to estimate the expected volatility of the price of its common stock. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our
employee stock options. The impact of expected dividends ($0.12 per share in the first and second quarter of fiscal 2018 and $0.11 per share in each quarter of fiscal 2017) is also incorporated in determining the estimated value per share of
employee stock option grants. Such dividends are subject to quarterly board of director approval. The Companys expected life of stock option grants is 5.7 years for
non-officers
and 8.2 years
for officers. The Company uses its historical volatility over the expected life of the stock option award to estimate the expected volatility of the price of its common stock. The Company reviews the underlying assumptions related to stock-based
compensation at least annually.
We base our estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Results of Operations
The following
tables set forth, for the periods indicated, our Consolidated Statements of Operations data. These historical results are not necessarily indicative of future results.
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Three Months Ended
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Nine Months Ended
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February 24,
2018
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February 25,
2017
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February 24,
2018
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February 25,
2017
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(Amounts in thousands)
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(Amounts in thousands)
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Revenue
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$
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172,414
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$
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143,844
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$
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470,338
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$
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434,791
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Direct cost of services
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109,904
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91,597
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294,711
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271,507
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Gross margin
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62,510
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52,247
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175,627
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163,284
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Selling, general and administrative expenses
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55,268
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45,376
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150,181
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135,046
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Amortization of intangible assets
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1,004
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1,326
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Depreciation expense
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1,089
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909
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2,976
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2,511
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Income from operations
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5,149
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5,962
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21,144
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25,727
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Interest expense
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542
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351
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1,276
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415
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Interest income
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(34
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)
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(16
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)
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(94
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)
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(126
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Income before provision for income taxes
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4,641
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5,627
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19,962
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25,438
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Provision for income taxes
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46
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2,743
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5,117
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11,224
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Net income
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$
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4,595
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$
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2,884
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$
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14,845
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$
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14,214
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21
We also assess the results of our operations using EBITDA, Adjusted EBITDA and Adjusted EBITDA
Margin. EBITDA is defined as earnings before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus stock-based compensation expense. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by revenue.
These measures assist management in assessing our core operating performance and the Company believes they are also useful to investors as an alternative measure of our operating performance. The following table presents EBITDA, Adjusted EBITDA and
Adjusted EBITDA Margin for the periods indicated and includes a reconciliation of such measures to net income, the most directly comparable GAAP financial measure:
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Three Months Ended
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Nine Months Ended
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February 24,
2018
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February 25,
2017
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February 24,
2018
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February 25,
2017
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(Amounts in thousands)
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(Amounts in thousands)
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Net income
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$
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4,595
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$
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2,884
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$
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14,845
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$
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14,214
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Adjustments:
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Amortization of intangible assets
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1,004
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1,326
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Depreciation expense
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1,089
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909
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2,976
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2,511
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Interest expense
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542
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351
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1,276
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415
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Interest income
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(34
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)
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(16
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)
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(94
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)
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(126
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)
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Provision for income taxes
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46
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2,743
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5,117
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11,224
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EBITDA
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7,242
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6,871
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25,446
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28,238
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Stock-based compensation expense
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1,437
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1,508
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4,499
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4,658
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Adjusted EBITDA
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$
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8,679
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$
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8,379
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$
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29,945
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$
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32,896
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Revenue
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$
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172,414
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$
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143,844
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$
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470,338
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$
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434,791
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Adjusted EBITDA Margin
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5.0
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%
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5.8
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%
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6.4
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%
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7.6
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%
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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. A
non-GAAP
financial measure is defined as a numerical measure of a companys financial performance that (i) excludes amounts, or is
subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the Consolidated Statements of Operations; or (ii) includes amounts, or is subject
to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are
non-GAAP
financial measures. We believe EBITDA,
Adjusted EBITDA and Adjusted EBITDA Margin, which are used by management to assess the core performance of our Company, provide useful information to our investors because they are alternative financial measures investors can also use to assess the
core performance of the Company and compare it to the Companys peers. EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not measurements of financial performance or liquidity under GAAP and should not be considered in isolation or
construed as substitutes for net income or other cash flow data prepared in accordance with GAAP for purposes of analyzing our profitability or liquidity. These measures should be considered in addition to, and not as a substitute for, net income,
earnings per share, cash flows or other measures of financial performance prepared in conformity with GAAP.
Further, EBITDA, Adjusted
EBITDA and Adjusted EBITDA Margin have the following limitations:
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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;
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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
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Other companies in our industry may calculate Adjusted EBITDA and Adjusted EBITDA Margin differently than we do, limiting their usefulness as comparative measures.
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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 February 24, 2018 Compared to Three Months Ended February 25, 2017
Percentage change computations are based upon amounts in thousands.
Revenue
.
Revenue increased $28.6 million, or 19.9%, to $172.4 million for the three months ended
February 24, 2018 from $143.8 million for the three months ended February 25, 2017. On a constant currency basis, revenue increased 17.6%. Revenue in the third quarter of fiscal 2018 includes $17.3 million in revenue resulting
from Accretive operations since the acquisition on December 4, 2017 and $3.8 million in revenue resulting from
taskforce,
acquired in the second quarter of fiscal 2018. Excluding the revenue of Accretive and
taskforce
(the
acquisitions), revenue increased $7.5 million, or 5.2%. We deliver our services to clients, whether multi-national or locally based, in a similar fashion across the globe. Excluding the acquisitions for comparison purposes, bill
rates improved
22
3.4% (1.7% on a constant currency basis) and hours worked increased 2.1% between the two periods. The Company experienced an upswing in revenue in certain industries and markets during the
quarter compared to the prior year quarter; however, consistent with recent trends, the Companys revenue in the financial services industry was down quarter-over-quarter. The timing of the result of efforts to improve our client penetration in
the financial services industry is uncertain.
As presented in the table below, revenue increased in the third quarter of fiscal 2018
compared to the same quarter of fiscal 2017 in North America, Europe and Asia Pacific (dollars in thousands):
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Revenue for the
Three Months Ended
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% of Total
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February 24,
2018
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February 25,
2017
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%
Change
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February 24,
2018
|
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February 25,
2017
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North America
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$
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137,953
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$
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119,126
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15.8
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%
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80.0
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%
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82.8
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%
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Europe
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23,149
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14,381
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61.0
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%
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13.4
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10.0
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Asia Pacific
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11,312
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10,337
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9.4
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%
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6.6
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7.2
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Total
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$
|
172,414
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$
|
143,844
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19.9
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%
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100.0
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%
|
|
|
100.0
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%
|
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As noted above, a portion of the North America increase is due to the acquisition of Accretive and a portion
of the European increase is due to the acquisition of
taskforce.
Without the acquisitions revenue in the third quarter of fiscal 2018, North America and Europe increased 1.3% and 34.4%, respectively.
Our financial results are subject to fluctuations in the exchange rates of foreign currencies in relation to the United States dollar
(U.S. dollar). Revenues denominated in foreign currencies are translated into U.S. dollars at the monthly average exchange rates in effect during each period. Thus, as the value of the U.S. dollar strengthens relative to the currencies
of our
non-United
States based operations, our translated revenue (and expenses) will be lower; conversely, if the value of the U.S. dollar weakens relative to the currencies of our
non-United
States based operations, our translated revenue (and expenses) will be higher. Using the comparable fiscal 2017 third quarter conversion rates, international revenues would have been lower than reported
under GAAP by approximately $3.2 million in the third quarter of fiscal 2018. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue increased in North America, Europe and
Asia Pacific by 15.6%, 43.6% and 5.2%, respectively.
The number of consultants on assignment as of February 24, 2018 was 3,143
compared to 2,611 consultants engaged as of February 25, 2017. The number of consultants on assignment as of February 24, 2018 includes 402 and 48 consultants from the Accretive and
taskforce
acquisitions, respectively.
We operated 74 (26 abroad) offices as of February 24, 2018 and 67 (23 abroad) as of February 25, 2017; the change between the two
years is the result of the addition of five offices acquired in the Accretive transaction, two offices acquired in the
taskforce
acquisition and the formal establishment of offices in Zurich, Switzerland and Guangzhou, China, offset by three
office closures.
Our clients do not sign long-term contracts with us. As such, there can be no assurance as to future demand levels for
the services we provide or that future results can be reliably predicted by considering past trends.
Direct Cost of
Services
.
Direct cost of services increased $18.3 million, or 20.0%, to $109.9 million for the three months ended February 24, 2018 from $91.6 million for the three months ended February 25, 2017. Currency
fluctuations between the quarters increased direct cost of services by $1.8 million. Direct cost of services includes consultant costs of $13.2 million related to the acquisitions. Excluding the impact of the acquisitions, direct cost of
services increased 5.6% between the periods, primarily attributable to an increase of 5.1% in the average pay rate per hour between the two quarters (3.4% increase on a constant currency basis), partially offset by a decrease in benefit costs of
2.6% (primarily driven by lower medical costs); hours worked increased 2.1% between the two quarters.
Direct cost of services as a
percentage of revenue was 63.7% for both the three months ended February 24, 2018 and February 25, 2017. The direct cost of services as a percentage of revenue remained the same between the two quarters with an unfavorable decrease in the
bill/pay ratio offset by lower medical costs for the three months ended February 24, 2018. The acquisitions did not affect this analysis.
Our target direct cost of services percentage is 60% in all of our markets.
Selling, General and Administrative Expenses
.
S, G & A as a percentage of revenue was 32.1% and 31.5% for the
quarters ended February 24, 2018 and February 25, 2017, respectively. S, G & A increased to $55.3 million for the third quarter of fiscal 2018 from $45.4 million for the same period in the prior year, partly attributable
to direct S, G & A of the acquisitions of $6.2 million. Absent those costs, S, G & A increased $3.7 million or 8.1% compared to the prior year quarter. Additional costs incurred in the third quarter
23
of fiscal 2018 as compared to the third quarter of fiscal 2017 include $3.6 million of expenses as follows: approximately $0.7 million related to severance expenses, $0.2 million
of acquisition-related costs and $2.7 million related to costs of the Companys
on-going
transformation and integration of the acquisitions in accordance with its strategic initiatives to drive
revenue growth and improve cost containment. There were no severance or other initiative-driven costs included in S, G & A for the comparable period of the prior year. Absent the fiscal 2018 third quarter additional costs and S, G & A
of the acquisitions, S, G & A spend was approximately the same for both quarters.
Management and administrative headcount was
890 at the end of the third quarter of fiscal 2018 (including 108 from the acquisitions) and 783 at the end of the third quarter of fiscal 2017.
Sequential Operations
.
On a sequential quarter basis, fiscal 2018 third quarter revenues increased approximately 10.0%
(9.6% constant currency), from $156.7 million to $172.4 million. Revenue for the third quarter of fiscal 2018 includes $21.1 million from the acquisitions. Absent revenue from the acquisitions, revenue decreased $1.8 million or
1.2%. Third quarter revenue declined primarily because of the Christmas, New Years and Chinese New Years holidays while the only significant holiday in the second quarter was Thanksgiving in the U.S. Excluding the acquisitions, hours
worked decreased 0.8% while average bill rates remained the same between the second and third quarter. The remaining decrease is attributable primarily to decreases in
non-hourly
revenue, primarily client
reimbursement revenue. Excluding Accretive, the Companys sequential revenue increased in Europe (0.8%) and decreased in North America (1.5%) and Asia Pacific (0.1%). On a constant currency basis, using the comparable second quarter fiscal 2018
conversion rates, sequential revenue decreased in North America (1.4%), Europe (1.4%) and Asia Pacific (1.2%).
Direct cost of services as
a percentage of revenue was 63.7% and 62.1% in the third and second quarters of fiscal 2018, respectively; the higher direct cost of services percentage in the third quarter is primarily the result of a 1.6% increase in average pay rate per hour and
an increase in the amount of Company payroll tax expense typically experienced with the beginning of a new calendar year.
S, G &
A as a percentage of revenue was 32.1% for the third quarter of fiscal 2018 compared to 30.3% for the second quarter of fiscal 2018. The ratio changed because of higher spend in the third quarter. Spend in the third quarter increased
$7.8 million to $55.3 million from $47.5 million in the previous quarter, including approximately $5.2 million from operations of Accretive. The third quarter of fiscal 2018 S, G & A also includes approximately
$3.6 million of expenses as follows: approximately $0.7 million in severance expenses, approximately $0.2 million of acquisition-related costs and approximately $2.7 million related to costs of the Companys
on-going
transformation and integration in accordance with its strategic initiatives to drive revenue growth and improve cost containment. The second quarter of fiscal 2018 S, G & A includes
$2.9 million of expenses as follows: approximately $0.4 million related to severance expenses, $0.7 million of acquisition-related costs and $1.8 million related to costs of the Companys
on-going
transformation and integration in accordance with its strategic initiatives to drive revenue growth and improve cost containment. Absent these items and the S, G & A of Accretive, S,
G & A spend increased between the quarters primarily due to higher payroll related taxes with the reset of limit rates at the beginning of the new calendar year and an increase in the provision for uncollectable accounts.
Amortization and Depreciation Expense.
Amortization of intangible assets was $1.0 million in the third quarter of fiscal
2018 as a result of commencing amortization related to identifiable intangible assets acquired in the December 4, 2017 acquisition of Accretive as well as a full quarter of amortization related to identifiable intangible assets acquired in the
second quarter acquisition of
taskforce
. Those assets identified based upon the provisional estimate of purchase price of Accretive include: $12.7 million for customer relationships (amortized over eight years) and $2.5 million for
tradenames (amortized over three years). The Company had no amortization expense in the third quarter of fiscal 2017. Based upon identified intangible assets recorded at February 24, 2018, the Company anticipates amortization expense related to
identified intangible assets of approximately $2.3 million during the fiscal year ending May 26, 2018.
Depreciation expense was
$1.1 million and $0.9 million in the third quarter of fiscal 2018 and 2017, respectively. The increase is primarily the result of depreciation on fixed assets acquired in the purchase of Accretive.
Interest Expense (Income)
.
The Company entered into a $120 million secured revolving credit facility
(Facility) with Bank of America in October 2016. The Facility consists of (i) a $90 million revolving loan facility, which includes a $5 million sublimit for the issuance of standby letters of credit (Revolving
Loan), and (ii) a $30 million reducing revolving loan facility, any amounts of which may not be reborrowed after being repaid (Reducing Revolving Loan). The Facility is available for working capital and general corporate
purposes, including potential acquisitions and stock repurchases. Our obligations under the Facility are guaranteed by all of the Companys domestic subsidiaries and secured by essentially all assets of the Company, Resources Connection LLC and
their domestic subsidiaries, subject to certain customary exclusions. Borrowings under the Facility bear interest at a rate per annum of either, at the Companys option, (i) a LIBOR rate defined in the Facility plus a margin of 1.25% or
1.50% or (ii) an alternate base rate, plus a margin of 0.25% or 0.50%, with the applicable margin depending on the Companys consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of Americas prime rate,
(ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company pays an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.15% to 0.25% depending upon on the Companys
consolidated leverage ratio. The Facility expires October 17, 2021.
24
Total interest expense for the third quarter of fiscal 2018, including commitment fees, was
approximately $0.5 million compared to $0.4 million in the prior year third quarter. The increase in the third quarter of fiscal 2018 is the result of interest on incremental borrowings of $15.0 million to finance a portion of the
acquisition of Accretive and higher interest rates. As of February 24, 2018, the interest rate on the Companys borrowings was 3.5% on a tranche of $24.0 million
(6-month
LIBOR plus 1.50%), 3.2%
on a tranche of $24.0 million
(3-month
LIBOR plus 1.50%) and 3.2% on a tranche of $15.0 million
(3-month
LIBOR plus 1.5%). The Companys interest income
was $34,000 in the third quarter of fiscal 2018 compared to $16,000 for the same period of fiscal 2017.
Income Taxes.
The
Companys provision for income taxes was $46,000 (effective tax rate of approximately 1%) and $2.7 million (effective tax rate of approximately 49%) for the three months ended February 24, 2018 and February 25, 2017,
respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax rate because of the volatility in its international operations which span numerous tax jurisdictions.
On December 22, 2017, Congress enacted H.R.1, the Tax Cuts and Jobs Act (Tax Reform Act), which made significant
changes to U.S. federal income tax laws including reducing the corporate rate from 35% to 21% effective January 1, 2018. As the Companys fiscal year 2018 ends on May 26, 2018, the lower rate is phased in, resulting in a U.S.
statutory federal tax rate of approximately 29.4% for fiscal year 2018 and a 21% U.S. statutory federal tax rate for fiscal years thereafter. In December 2017, the SEC issued Staff Accounting Bulletin No. 118 which allows the Company to record
provisional amounts related to the impact of the Tax Reform Act and adjust those amounts during a measurement period not to extend one year from date of enactment. For the three months ended February 24, 2018, the Company recorded a tax benefit
of $1.1 million due to
re-measurement
of U.S. deferred tax assets and liabilities at the rate the balances are expected to be realized (29.4% in fiscal 2018 and 21% thereafter). The estimated tax benefit
of the statutory federal rate reduction applied to the Companys U.S. earnings for the quarter is approximately $0.3 million. Additionally, applying the reduced statutory federal rate of 29.4% to the Companys U.S. earnings for the
six months ended November 25, 2017 resulted in a reduction to income tax expense of $0.8 million. These provisional estimates are subject to change upon release of further guidance from regulatory authorities and the Companys final
determination of deferred tax balances is subject to
re-measurement
at the end of fiscal 2018. The Tax Reform Act also provides for a mandatory
one-time
transition
tax on certain accumulated earnings of foreign subsidiaries. It was determined that the transition tax does not impact the Companys provision for income taxes as its aggregate foreign deficits exceed its foreign profits.
The provision for income taxes in both the third quarter of fiscal 2018 and 2017 resulted from taxes on income in the United States and
certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a lower benefit for losses in certain foreign jurisdictions with tax
rates lower than the United States statutory rates. The effective tax rate decreased for the three months ended February 24, 2018 due to the reduction in the U.S. statutory federal tax rate and
re-measurement
of U.S. deferred tax assets and liabilities as a result of the Tax Reform Act. Periodically, the Company reviews the components of both book and taxable income to analyze the adequacy of the tax
provision. There can be no assurance the Companys effective tax rate will remain constant in the future because of the lower benefit from the United States statutory rate for losses in certain foreign jurisdictions and the limitation on the
benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established.
The
Company can only recognize a potential tax benefit for employees acquisition and subsequent sale of shares purchased through the ESPP if the sale occurs within a certain defined period. As a result, the Companys provision for income
taxes may fluctuate from these factors for the foreseeable future. The Company recognized a benefit of approximately $0.2 million and $0.7 million related to stock-based compensation for nonqualified stock options expensed and for
disqualifying dispositions under the ESPP during the third quarter of fiscal 2018 and 2017, respectively. The proportion of expense related to
non-qualified
stock option grants (for which the Company may
recognize a tax benefit in the same quarter as the related compensation expense in most instances) is significant as compared to expense related to disqualifying dispositions under the ESPP. However, the timing and amount of eligible disqualifying
transactions under the ESPP cannot be predicted. The Company predominantly grants nonqualified stock options to employees in the United States.
Nine
Months Ended February 24, 2018 Compared to Nine Months Ended February 25, 2017
Percentage change computations are based upon
amounts in thousands.
Revenue
.
Revenue increased $35.5 million, or 8.2%, to $470.3 million for the nine
months ended February 24, 2018 from $434.8 million for the nine months ended February 25, 2017. On a constant currency basis, revenue increased 7.2%. Revenue in the first nine months of fiscal 2018 includes $24.8 million in
revenue resulting from the acquisitions during fiscal 2018. Absent revenue from the acquisitions, revenue increased $10.7 million or 2.5%. Excluding the acquisitions
for comparison purposes, bill rates improved 2.5% (no difference in
constant currency) and hours worked decreased 0.4% between the two periods. During the first nine months of fiscal 2018, the Company experienced an upswing in revenue in certain industries and markets; however, consistent with recent trends, the
Companys revenue in the financial services industry was down year-over-year. The timing of the results of efforts to improve our client penetration in the financial services industry is uncertain.
25
As presented in the table below, revenue increased in the first nine months of fiscal 2018
compared to the first nine months of fiscal 2017 in Europe and North America but declined in Asia Pacific (dollars in thousands):
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|
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|
Revenue for the
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|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
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|
|
|
% of Total
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|
February 24,
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February 25,
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|
%
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|
|
February 24,
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|
February 25,
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2018
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|
|
2017
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|
|
Change
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2018
|
|
|
2017
|
|
North America
|
|
$
|
376,348
|
|
|
$
|
357,154
|
|
|
|
5.4
|
%
|
|
|
80.0
|
%
|
|
|
82.2
|
%
|
Europe
|
|
|
61,259
|
|
|
|
44,434
|
|
|
|
37.9
|
%
|
|
|
13.0
|
|
|
|
10.2
|
|
Asia Pacific
|
|
|
32,731
|
|
|
|
33,203
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|
|
|
(1.4
|
)%
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|
7.0
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|
|
7.6
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Total
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$
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470,338
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|
|
$
|
434,791
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|
|
|
8.2
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%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
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|
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Without the acquisitions revenue for the first nine months of fiscal 2018, North America and Europe
increased 0.5% and 21.0%, respectively.
Our financial results are subject to fluctuations in the exchange rates of foreign currencies in
relation to the U.S. dollar. Revenues denominated in foreign currencies are translated into U.S. dollars at the monthly average exchange rates in effect during each period. Thus, as the value of the U.S. dollar strengthens relative to the currencies
of our
non-United
States based operations, our translated revenue (and expenses) will be lower; conversely, if the value of the U.S. dollar weakens relative to the currencies of our
non-United
States based operations, our translated revenue (and expenses) will be higher. Using the conversion rates of the comparable fiscal 2017 period, international revenues would have been lower than reported
under GAAP by approximately $4.3 million in the first nine months of fiscal 2018. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue increased in North America and
Europe by 5.2% and 29.2%, respectively, while decreasing in Asia Pacific by 1.5%.
Direct Cost of Services
.
Direct
cost of services increased $23.2 million, or 8.5%, to $294.7 million for the nine months ended February 24, 2018 from $271.5 million for the nine months ended February 25, 2017. Direct cost of services includes consultant
costs of $15.8 million related to the acquisitions. Excluding the impact of the acquisitions, the increase in the amount of direct cost of services between the periods was primarily attributable to an increase in the average pay rate per hour
of 3.4% (no difference on a constant currency basis), and an increase in reimbursable expenses of 6.0%. These increases were offset by a decrease in hours worked of 0.4%.
Direct cost of services as a percentage of revenue was 62.7% and 62.4% for the nine months ended February 24, 2018 and February 25,
2017, respectively. The higher percentage in fiscal 2018 was primarily due to an unfavorable shift in the bill rate/pay rate ratio of 30 basis points.
Our target direct cost of services percentage is 60% for all of our offices.
Selling, General and Administrative Expenses
.
S, G & A as a percentage of revenue was 31.9% and 31.1% for the
nine months ended February 24, 2018 and February 25, 2017, respectively. The higher percentage for the nine months in fiscal 2018 is the result of increased spend in the first nine months of fiscal 2018 compared to the prior year. S,
G & A increased to $150.2 million for fiscal 2018 from $135.0 million for the same period in the prior year. The first nine months of fiscal 2018 S, G & A includes $10.3 million of expenses as follows: approximately
$2.5 million related to severance expenses, $1.6 million of acquisition related costs and $6.2 million related to costs of the Companys
on-going
transformation and integration in
accordance with its strategic initiatives to drive revenue growth and improve cost containment. The first nine months of fiscal 2017 S, G & A includes approximately $1.5 million of severance related expenses. The fiscal 2018 period
also includes S, G & A associated with the operations of the acquisitions of approximately $7.0 million. Absent these costs in each period, S, G & A spend was approximately the same for each period.
Amortization and Depreciation Expense.
Amortization of intangible assets was $1.3 million in the first nine months of
fiscal 2018 as a result of commencing amortization related to identifiable intangible assets of the acquisitions. The Company had no amortization expense in the first nine months of fiscal 2017. Depreciation expense was $3.0 million for the
nine months ended February 24, 2018 compared to $2.5 million for the nine months ended February 25, 2017.
Interest
Expense (Income)
.
As described further below under the caption Liquidity and Capital Resources, the Company entered into a $120 million Facility with Bank of America in October 2016.
Total interest expense for the first
nine months of fiscal 2018 was approximately $1.3 million, compared to $0.4 million in the first nine months of fiscal 2017. The increase is attributable to the Facility being used for a shorter period of time in fiscal 2017, interest on
incremental borrowings of $15.0 million to finance a portion of the acquisition of Accretive and increasing interest rates during fiscal 2018. The Companys interest income was $94,000 in the first nine months of fiscal 2018 compared to
$126,000 for the same period of fiscal 2017. Although rates have generally improved during fiscal 2018 compared to the same period in the prior year, interest income declined between the two periods as a result of the use of cash in the Dutch
auction tender offer in November 2016, reducing amounts available for investment.
26
Income Taxes.
The Companys provision for income taxes was $5.1 million
(effective tax rate of approximately 26%) and $11.2 million (effective tax rate of approximately 44%) for the nine months ended February 24, 2018 and February 25, 2017, respectively. The Company records tax expense based upon an
actual effective tax rate versus a forecasted tax rate because of the volatility in its international operations which span numerous tax jurisdictions.
The provision for income taxes for the nine months ended February 24, 2018 and February 25, 2017 resulted from taxes on income in
the United States and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a lower benefit for losses in certain foreign
jurisdictions with tax rates lower than the United States statutory rates. The effective tax rate decreased for the nine months ended February 24, 2018 due to the reversal of approximately $2.4 million of valuation allowances on the deferred
tax assets of certain foreign entities along with the reduction in the U.S. statutory federal tax rate and
re-measurement
of U.S. deferred tax assets and liabilities as a result of the Tax Reform Act (refer to
the discussion above on Income Taxes comparing the three months ended February 24, 2018 to February 25, 2017 for additional detail on the impact of the Tax Reform Act on the Company). There can be no assurance the Companys effective
tax rate will remain constant in the future because of the lower benefit from the United States statutory rate for losses in certain foreign jurisdictions and the limitation on the benefit for losses in jurisdictions in which a valuation allowance
for operating loss carryforwards has previously been established.
The Company can only recognize a potential tax benefit for
employees acquisition and subsequent sale of shares purchased through the ESPP if the sale occurs within a certain defined period. As a result, the Companys provision for income taxes may fluctuate from these factors for the foreseeable
future. The Company recognized a benefit of approximately $0.8 million and $1.7 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the first three
quarters of fiscal 2018 and 2017, respectively. The proportion of expense related to
non-qualified
stock option grants (for which the Company may recognize a tax benefit in the same quarter as the related
compensation expense in most instances) is significant as compared to expense related to disqualifying dispositions under the ESPP. However, the timing and amount of eligible disqualifying transactions under the ESPP cannot be predicted. The Company
predominantly grants nonqualified stock options to employees in the United States.
Comparability of Quarterly
Results
.
Our quarterly results have fluctuated in the past and we believe they will continue to do so in the future. Certain factors that could affect our quarterly operating results are described in Part II, Item 1A.Risk
Factors. Due to these and other factors, we believe
quarter-to-quarter
comparisons of our results of operations may not be meaningful indicators of future performance.
Liquidity and Capital Resources
Our
primary source of liquidity is cash provided by our operations and, historically, to a lesser extent, stock option exercises and ESPP purchases. On an annual basis, we have generated positive cash flows from operations since inception. Our ability
to continue to increase cash flow from operations in the future will be, at least in part, dependent on continued improvement in global economic conditions. As of February 24, 2018, the Company had $43.2 million of cash and cash
equivalents.
In October 2016, we entered into a $120 million Facility with Bank of America. The Facility is available for working
capital and general corporate purposes, including potential acquisitions and stock repurchases. The Facility allows the Company to choose the interest rate applicable to advances. See Note 6
Long-Term Debt
in the Notes to the
Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q
for further information on the Facility. As of February 24, 2018, the Company had borrowings of
approximately $63.0 million under the Facility and approximately $1.0 million of outstanding letters of credit for the benefit of third parties related to operating leases and guarantees. As of February 24, 2018, the Company was in
compliance with the financial covenants in the Facility.
Operating Activities
Operating activities for the nine months ended February 24, 2018 used cash of $2.3 million compared to a source of cash of
$6.9 million for the nine months ended February 25, 2017. Cash used in operations in the first nine months of fiscal 2018 resulted from net income of $14.8 million and
non-cash
items of
$9.4 million. These amounts were offset by net unfavorable changes in operating assets and liabilities of $26.5 million due primarily to the increase in the balance of accounts receivable as of the end of the third quarter of fiscal 2018
driven by the increase in revenue at the end of the quarter; the Company also paid a portion of its fiscal 2018 incentive compensation during the third quarter, reducing accrued salaries and related obligations. In the first nine months of fiscal
2017, cash provided by operations resulted from net income of $14.2 million and
non-cash
items of $10.9 million, partially offset by net unfavorable changes in operating assets and liabilities of
$18.2 million. The primary driver of the change in cash provided by operations between the two periods was the increase in accounts receivable during fiscal 2018, and to a lesser extent unfavorable changes in income taxes and deferred income
taxes.
Non-cash
items in both fiscal 2018 and fiscal 2017 include depreciation, amortization and stock-based compensation expense. These charges do not reflect an actual cash outflow from the Company.
27
Investing Activities
Net cash used in investing activities was $25.1 million for the first nine months of fiscal 2018, compared to a source of cash of
$21.1 million in the comparable prior year period. The primary use of cash in fiscal 2018 was cash used to acquire Accretive and
taskforce
of approximately $23.5 million, net of cash acquired. In the first nine months of fiscal
2017, redemptions of short-term investments were $25.0 million as the Company accumulated cash from maturing investments in preparation for its November 2016 tender offer. The Company did not have money invested short-term during fiscal 2018.
Purchases of property and equipment decreased approximately $2.4 million between the two periods as the Company had limited office relocation/refurbishment activities in the current year.
Financing Activities
Net
cash provided by financing activities totaled $8.2 million compared to net cash used of $73.8 million for the nine months ended February 24, 2018 and February 25, 2017, respectively. Net cash provided by financing activities for
the nine months ended February 24, 2018 included dividends paid on the Companys common stock of $10.5 million, approximately $0.4 million lower than in the comparable period of the prior year. The Companys dividend rate
was $0.12 per common share in fiscal 2018, compared to $0.11 per common share in fiscal 2017. The Companys board of directors declared a quarterly cash dividend of $0.12 per common share on January 18, 2018. The dividend of approximately
$3.8 million, paid on March 15, 2018, is accrued in the Companys Consolidated Balance Sheet as of February 24, 2018. The dividend paid in fiscal 2018 was slightly lower because of the reduced number of outstanding shares of
common stock after the Companys modified Dutch auction tender offer in November 2016, which offset the increase in the dividend rate per common share of $0.01.
Net cash used in financing activities for the nine months ended February 25, 2017 included $104.2 million, excluding transaction
costs, used to purchase shares of our common stock in the modified Dutch auction tender offer, with $58.0 million of this amount borrowed under the Facility and the remainder funded from the Companys existing cash balances. In fiscal
2018, the Company borrowed $15.0 million under the Facility as part of the Accretive acquisition.
The Company used $5.1 million
to purchase approximately 321,000 shares of common stock on the open market during the first nine months of fiscal 2018. In the prior year period, the Company used $13.5 million to purchase 843,000 shares of common stock on the open market (in
addition to the shares acquired in the modified Dutch auction). Proceeds from the exercise of employee stock options and issuance of shares via the ESPP were approximately $0.7 million higher in fiscal 2018 as compared to the comparable period
of fiscal 2017.
As described in Note 3 to the financial statements
Acquisitions,
- the purchase agreement for
taskforce
requires
earn-out
payments to be made. Under accounting rules for business combinations, obligations that are contingently payable to the sellers based upon the occurrence of one or more
future events are recorded as a discounted liability on the Companys balance sheet. The Company is obligated to pay the sellers in Euros as follows: for calendar year 2017, Adjusted EBITDA times 6.1 times 20%; and for calendar years 2018 and
2019, Adjusted EBITDA times 6.1 times 15% (Adjusted EBITDA as defined in the purchase agreement). The Company estimated the fair value of the obligation to pay contingent consideration based on a number of different projections of the estimated
Adjusted EBITDA for each of the calendar years. The Company recorded this future obligation using a discount rate of approximately 11.0%, representing the Companys weighted average cost of capital. The estimated fair value of the contractual
obligation to the contingent consideration recognized at the date of acquisition was 5.5 million (approximately $6.5 million). The Company paid the portion related to Adjusted EBITDA of calendar 2017 of 2.1 million
(approximately $2.6 million) in March 2018.
Our ongoing operations and anticipated growth in the geographic markets we currently serve
will require us to continue to make investments in office premises and capital equipment, primarily technology hardware and software. In addition, we may consider making strategic acquisitions. We currently believe our current cash, ongoing cash
flows from our operations and funding available under our Facility will be adequate to meet our working capital and capital expenditure needs for at least the next 12 months. If we require additional capital resources to grow our business, either
internally or through acquisition, we may seek to sell additional equity securities or to increase our use of our Facility. In addition, if we decide to make additional share repurchases, we may fund these through existing cash balances or use of
our Facility. The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders. We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the
future. In the event we are unable to obtain additional financing when needed, we may be compelled to delay or curtail our plans to develop our business or to pay dividends on our capital stock, which could have a material adverse effect on our
operations, market position and competitiveness.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note
12-
Recent Accounting
Pronouncements
in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q.
Off-Balance
Sheet Arrangements
The Company has no
off-balance
sheet arrangements.
28