RGP
RESOURCES CONNECTION INC (Form: 10-K, Received: 07/24/2017 14:59:05)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

Form 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 27, 2017

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                       

Commission File Number: 0-32113

 

 

RESOURCES CONNECTION, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   33-0832424

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

17101 Armstrong Avenue, Irvine, California 92614

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (714) 430-6400

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Exchange on Which Registered

Common Stock, par value $0.01 per share  

The NASDAQ Stock Market LLC

(Nasdaq Global Select Market)

Securities registered pursuant to Section 12(g) of the Act:

None (Title of Class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an “emerging growth company.” See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☐    Accelerated filer  ☒    Non-accelerated filer  ☐  (Do not check if a smaller reporting company)    Smaller reporting company  ☐
Emerging growth company  ☐         

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

As of November 25, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter), the approximate aggregate market value of common stock held by non-affiliates of the registrant was $456,774,000 (based upon the closing price for shares of the registrant’s common stock as reported by The Nasdaq Global Select Market). As of July 17, 2017, there were approximately 29,867,919 shares of common stock, $.01 par value, outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

The registrant’s definitive proxy statement for the 2017 Annual Meeting of Stockholders is incorporated by reference in Part III of this Form 10-K to the extent stated herein.

 

 

 


Table of Contents

RESOURCES CONNECTION, INC.

TABLE OF CONTENTS

 

         Page
No.
 
  PART I   

ITEM 1.

 

BUSINESS

     1  

ITEM 1A.

 

RISK FACTORS

     21  

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

     29  

ITEM 2.

 

PROPERTIES

     29  

ITEM 3.

 

LEGAL PROCEEDINGS

     30  

ITEM 4.

 

MINE SAFETY DISCLOSURES

     30  
  PART II   

ITEM 5.

  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES      31  

ITEM 6.

 

SELECTED FINANCIAL DATA

     34  

ITEM 7.

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      36  

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     51  

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     52  

ITEM 9.

  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE      77  

ITEM 9A.

 

CONTROLS AND PROCEDURES

     77  

ITEM 9B.

 

OTHER INFORMATION

     79  
  PART III   

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     79  

ITEM 11.

 

EXECUTIVE COMPENSATION

     79  

ITEM 12.

  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS      79  

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     80  

ITEM 14.

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

     80  
  PART IV   

ITEM 15.

 

EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES

     80  

ITEM 16.

 

FORM 10-K SUMMARY

     81  
 

SIGNATURES

     82  


Table of Contents

In this Annual Report on Form 10-K, “Resources,” “Resources Connection,” “Resources Global Professionals,” “RGP,” “Resources Global,” “Company,” “we,” “us” and “our” refer to the business of Resources Connection, Inc. and its subsidiaries. References in this Annual Report on Form 10-K to “fiscal,” “year” or “fiscal year” refer to our fiscal year that consists of the 52- or 53-week period ending on the Saturday in May closest to May 31. The fiscal years ended May 27, 2017, May 28, 2016 and May 30, 2015 consisted of 52 weeks.

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K, including information incorporated herein by reference, 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,” “should” or “will” or the negative of these terms or other comparable terminology.

Our actual results, levels of activity, performance or achievements and those of our industry may be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These statements and all phases of our operations are subject to known and unknown risks, uncertainties and other factors, including those made in Item 1A of this Annual Report on Form 10-K, as well as our other reports filed with the Securities and Exchange Commission (“SEC”). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. 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 Annual Report or to reflect the occurrence of unanticipated events.


Table of Contents

PART I

 

ITEM 1. BUSINESS.

Overview

Resources Connection is a multinational consulting firm; its operating entities provide services primarily under the name Resources Global Professionals (“RGP” or the “Company”). The Company provides agile consulting services to its global client base which are faced with disruption and business transformation 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 by providing “intellectual capital on demand” to support transformation and optimization projects requiring specialized expertise or capacity in areas such as:

 

    Finance and accounting process transformation and optimization; financial reporting and analysis; technical and operational accounting; merger and acquisition due diligence and integration; audit readiness, preparation and 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 (such as the European General Data Protection Regulation); and business performance management (such as core planning and consolidation systems)

 

    Corporate advisory, strategic communications and restructuring services

 

    Corporate governance, risk and compliance management services including contract and regulatory compliance efforts under, for example, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes Oxley Act of 2002 (“Sarbanes”); Enterprise Risk Management; internal controls management; and operation and information technology (“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; law department operations; and law department business strategy and analytics

We were founded in June 1996 by a team at Deloitte LLP (“Deloitte”), led by our chairman, Donald B. Murray, who was then a senior partner with Deloitte. Our founders created the Company 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 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. We operate under the acronym RGP, the branding for our operating entity name of Resources Global Professionals.

Our business model combines the client service orientation and commitment to quality from our legacy as part of a Big Four accounting firm with the entrepreneurial culture of an innovative, agile and dynamic company. We are positioned to take advantage of what we believe are two continuing trends in the marketplace: constant change driving the need for agile, specialized talent in our global client base and a growing innovative talent pool interested in working in a non-traditional professional environment. We believe our business model allows us to simultaneously offer challenging yet flexible career opportunities to attract well qualified, experienced professionals and to attract clients with enterprise-wide, global consulting needs.

As of May 27, 2017, we employed or contracted with 2,569 consultants serving a diverse base of over 1,800 clients ranging from large multinational corporations to mid-sized companies to small entrepreneurial entities, in a broad range of industries. Our

 

1


Table of Contents

consultants have professional experience in a wide range of industries and functional areas and most have advanced professional degrees or designations. We offer our consultants careers that combine the flexibility of project-based consulting work with many of the advantages of working for a traditional professional services firm.

Our offices serve our multinational clients throughout the world with a client focus rather than from just a regional/office perspective. To enhance our ability to serve multinational clients, we served our clients from 43 offices in the United States and from 24 offices within 21 countries abroad as of May 27, 2017.

Revenue from the Company’s major geographic areas was as follows (in thousands):

 

     Revenue for the
For the Years Ended
           % of Total  
     May 27,
        2017        
     May 28,
        2016        
     %
Change
    May 27,
2017
    May 28,
2016
 

North America

   $ 479,263      $ 499,229        (4.0 )%      82.1     83.4

Europe

     60,461        57,714        4.8     10.4       9.6  

Asia Pacific

     43,687        41,578        5.1     7.5       7.0  
  

 

 

    

 

 

      

 

 

   

 

 

 

Total

   $ 583,411      $ 598,521        (2.5 )%      100.0     100.0
  

 

 

    

 

 

      

 

 

   

 

 

 

See Note 14 — Segment Information and Enterprise Reporting — to the Consolidated Financial Statements for additional information concerning the Company’s domestic and international operations and Part I Item 1A, “Risk Factors — Our ability to serve clients internationally is integral to our strategy and our international activities expose us to additional operational challenges that we might not otherwise face” for information regarding the risks attendant to our international operations.

We believe our distinctive culture is a valuable asset and is, in large part, due to our management team, which has extensive experience in the professional services industry. Most of our senior management and office managing directors have Big Four, management consulting and/or Fortune 500 experience and an equity interest in the Company. This team has created a culture of professionalism and a client service orientation that we believe fosters in our consultants a feeling of personal responsibility for, and pride in, client projects and enables us to deliver high-quality service and results to our clients.

Industry Background

Changing Market for Project- or Initiative-Based Professional Services

RGP’s services respond to a growing marketplace trend: namely, corporate clients are increasingly choosing to plan for their workforce needs in more agile ways. Permanent headcount is being reduced as clients purposely engage agile talent for project initiatives and transformation work.

While the market for professional services is broad and fragmented and independent data on the size of the market is not readily available, we believe companies may be more willing to choose alternatives to permanent headcount and traditional professional service providers because of evolving economic competitive pressure and significant increases in government-led regulatory requirements, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act. We believe RGP is positioned as a viable alternative to traditional accounting, consulting and law firms in numerous instances because, by using project consultants, companies can:

 

    Strategically access specialized skills, expertise for projects of set duration

 

    Effectively supplement internal resources

 

    Increase labor flexibility

 

    Reduce their overall hiring, training and termination costs

Typically, companies use a variety of alternatives to fill their project needs. Companies outsource entire projects to consulting firms which provides them access to the expertise of the firm but often entails significant cost and less management control of the

 

2


Table of Contents

project. Companies also supplement their internal resources with employees from the Big Four accounting firms or other traditional professional services firms. Companies use temporary employees from traditional and Internet-based staffing firms, although these employees may be less experienced or less qualified than employees from professional services firms. Finally, some companies rely solely on their own employees who may lack the requisite time, experience or skills.

Supply of Project Consultants

Based on discussions with our consultants, we believe the number of professionals seeking to work on an agile basis has historically increased due to a desire for:

 

    More flexible hours and work arrangements, coupled with a professional culture that offers competitive wages and benefits

 

    Challenging engagements that advance their careers, develop their skills and add to their experience base

 

    A work environment that provides a diversity of, and more control over, client engagements

 

    Alternate employment opportunities in regions throughout the world

The employment alternatives available to professionals may fulfill some, but not all, of an individual’s career objectives. A professional working for a Big Four firm or a consulting firm may receive challenging assignments and training, but may encounter a career path with less choice and less flexible hours, extensive travel and limited control over work engagements. Alternatively, a professional who works as an independent contractor faces the ongoing task of sourcing assignments and significant administrative burdens.

Resources Global Professionals’ Solution

We believe RGP is positioned to capitalize on the confluence of the industry trends described above. We believe, based on discussions with our clients, that RGP provides the agility that companies desire in today’s competitive and quickly evolving environment. We are able to combine all of the following:

 

    A relationship-oriented and collaborative approach with our clients

 

    Client service teams with Big Four, consulting and/or industry backgrounds to assess our clients’ project needs and customize solutions to meet those needs

 

    Highly qualified consultants with the requisite expertise, experience and points of view

 

    Competitive rates on an hourly, rather than project, basis

 

    Significant client control of their projects with effective knowledge transfer and change management

Resources Global Professionals’ Strategy

Our Business Strategy

We are dedicated to serving our clients with highly qualified and experienced talent in support of projects and initiatives in a broad array of functional areas, including accounting; finance; corporate governance, risk and compliance management; corporate advisory, strategic communications and restructuring; information management; human capital; supply chain management; and legal and regulatory. Our objective is to be the leading provider of agile consulting services for companies facing transformation, change and compliance challenges. We have developed the following business strategies to achieve our objectives:

 

    Hire and retain highly qualified, experienced consultants. We believe our highly qualified, experienced consultants provide us with a distinct competitive advantage. Therefore, one of our priorities is to continue to attract and retain high-caliber consultants. We believe we have been successful in attracting and retaining qualified professionals by providing challenging work assignments, competitive compensation and benefits, and continuing education and training opportunities, while offering flexible work schedules and more control over choosing client engagements.

 

3


Table of Contents

Maintain our distinctive culture. Our corporate culture is the foundation of our business strategy and we believe it has been a significant component of our success. Our senior management, virtually all of whom are Big Four or other professional services firm alumni, has created a culture that combines the commitment to quality and the client service focus of a Big Four firm with the entrepreneurial energy of an innovative, high-growth company. We seek consultants and management with talent, integrity, enthusiasm and loyalty (“TIEL”, an acronym used frequently within the Company) to strengthen our team and support our ability to provide clients with high-quality services and solutions. We believe our culture has been instrumental to our success in hiring and retaining highly qualified employees and, in turn, attracting quality clients.

 

    Build consultative relationships with clients. We emphasize a relationship-oriented approach to business rather than a transaction-oriented or assignment-oriented approach. We believe the professional services experience of our management and consultants enables us to understand the needs of our clients and to deliver an integrated, relationship-oriented approach to meeting their professional services requirements. We regularly meet with our existing and prospective clients to understand their business issues and help them define their project needs. Once an initiative is defined, we identify consultants with the appropriate skills and experience to meet the client’s objectives. We believe that by establishing relationships with our clients to solve their professional services needs, we are more likely to generate new opportunities to serve them. The strength and depth of our client relationships is demonstrated by two key statistics: 1) during fiscal 2017, 49 of our 50 largest clients used more than one practice area and 40 of those top 50 clients used three or more practice areas; and 2) 45 of our largest 50 clients in fiscal 2012 remained clients in fiscal 2017 while 37 of our top 50 clients in 2008 were still clients in 2017. In addition, during fiscal 2017 our top 50 clients were served by an average of six RGP offices, demonstrating the breadth of our relationships with clients world-wide.

 

    Build the RGP brand. Our objective is to build RGP’s reputation as the premier provider of agile consulting services for companies facing transformation, change and compliance challenges. Our primary means of building our brand is by consistently providing high-quality, value-added services to our clients. We have also focused on building a significant referral network through our 2,569 consultants and 732 management and administrative employees working from offices in 21 countries as of May 27, 2017. In addition, we have global, regional and local marketing efforts that reinforce the RGP brand.

Our Growth Strategy

Since inception, our growth has been primarily organic rather than via acquisition. We believe we have significant opportunity for continued organic growth in our core business as the global economy strengthens and economic uncertainties decrease and, in addition that we can grow opportunistically through strategic acquisitions. In both our core and acquired businesses, key elements of our growth strategy include:

 

    Expanding work from existing clients. A principal component of our strategy is to secure additional work from the clients we have served. We believe, based on discussions with our clients, the amount of revenue we currently receive from many of our clients represents a relatively small percentage of the amount they spend on professional services, and, consistent with historic industry trends, they may continue to increase the amount they spend on these services as the global economy evolves. We believe that by continuing to deliver high-quality services and by further developing our relationships with our clients, we can capture a significantly larger share of our clients’ expenditures for professional services. Near the end of fiscal 2017, we launched our Strategic Client Program to serve a number of our largest clients with dedicated global account teams.

 

    Growing our client base. We will continue to focus on attracting new clients. We strive to develop new client relationships primarily by leveraging the significant contact networks of our management and consultants and through referrals from existing clients. We believe we can continue to attract new clients by building our brand name and reputation, supplemented by our global, regional and local marketing efforts. We anticipate our growth efforts this year will focus on identifying strategic target accounts especially in the large and middle market client segments.

 

   

Expanding geographically. We have expanded geographically to meet the demand for agile professional services around the world and currently have offices in 21 countries. We believe, based upon our clients’ requests, there are future opportunities to promote growth globally. Consequently, we intend to continue to expand our international presence on a

 

4


Table of Contents
 

strategic and opportunistic basis. We may also add to our existing domestic office network when our existing clients have a need or if there is a significant new client opportunity.

 

    Providing additional professional service offerings. We will continue to develop and consider entry into new professional service offerings. Since our founding, we have diversified our professional service offerings from a primary focus on accounting and finance to other areas in which our clients have significant needs such as human capital; information management; governance, risk and compliance; supply chain management; legal and regulatory services; and corporate advisory, strategic communications and restructuring services. In fiscal 2017, we formed our Integrated Solutions group to identify project opportunities that we can market at an enterprise level with talent, tools and methodologies. This group commercializes projects into solution offerings. Currently, our solutions practice is focused on M&A Integration Services, Data Solutions and Technical Accounting Services. Our considerations when evaluating new solutions offerings include cultural fit, growth potential, profitability, cross-marketing opportunities and competition.

Consultants

We believe an important component of our success has been our highly qualified and experienced consultants. As of May 27, 2017, we employed or contracted with 2,569 consultants engaged with clients. Our consultants have professional experience in a wide range of industries and functional areas. We provide our consultants with challenging work assignments, competitive compensation and benefits, and continuing education and training opportunities, while offering more choice concerning work schedules and more control over choosing client engagements.

Almost all of our consultants in the United States are employees of RGP. We typically pay each consultant an hourly rate for each consulting hour worked and for certain administrative time and overtime premiums, and offer benefits, including: paid time off and holidays; a discretionary bonus program; group medical and dental programs, each with an approximate 30-50% contribution by the consultant; a basic term life insurance program; a 401(k) retirement plan with a discretionary company match; and professional development and career training. Typically, a consultant must work a threshold number of hours to be eligible for all of these benefits. In addition, we offer our consultants the ability to participate in the Company’s Employee Stock Purchase Plan (“ESPP”), which enables them to purchase shares of the Company’s stock at a discount. We intend to maintain competitive compensation and benefit programs.

Internationally, our consultants are a blend of employees and independent contractors. Independent contractor arrangements are more common abroad than in the United States due to the labor laws, tax regulations and customs of the international markets we serve. A few international practices also utilize a partial “bench model”; that is, certain consultants are paid a weekly salary rather than for each consulting hour worked with bonus eligibility based upon utilization.

Clients

We provide our services and solutions to a diverse client base in a broad range of industries. In fiscal 2017, we served over 1,800 clients from offices located in 21 countries. Our revenues are not concentrated with any particular client or within any particular industry. No single customer accounted for more than 10% of revenue for the years ended May 27, 2017, May 28, 2016 and May 30, 2015, and in fiscal 2017, our 10 largest clients accounted for approximately 15% of our revenues.

The clients listed below represent the multinational and industry diversity of our client base:

 

Aetna Inc.    IBM Bluemix Infrastructure (SoftLayer)
AIG    Kaiser Permanente
American Express Company    MetLife, Inc.
BASF Corporation    Morgan Stanley
Bayer Corporation    Philips Lighting
Caesars Entertainment Corporation    Phillips 66 Company
Calumet Specialty Products Partners    Syngenta International AG
Chevron Corporation    Tesco
CIT Group Inc.    Unilever
Citigroup   

 

5


Table of Contents

Services and Products

RGP’s business model and operating philosophy are rooted in the support of client-led projects and consulting initiatives, extending to advisory-based services that leverage the deep experience and expertise of our internal team while partnering with our clients’ business leaders. Often, we deliver our services to clients across multiple functional areas of expertise with consultants from several disciplines working on the same project. Our areas of core competency include: finance and accounting; information management; human capital; corporate advisory, strategic communications and restructuring services; legal and regulatory; governance, risk and compliance; and supply chain management.

Finance & Accounting

RGP’s Finance and Accounting services encompass accounting operations, financial reporting, internal controls, financial analyses and business transactions. Clients utilize our services to bring accomplished talent to bear on internally driven change initiatives, such as M&A activities, or externally mandated change, such as required implementations of new accounting standards, as well as day-to-day operational issues. We provide specialized skills and then transfer knowledge to clients in order to help them leverage their own personnel. RGP specializes in providing customized solutions to our clients’ most pressing business problems, through project management and providing access to full project teams for a specific initiative. Our scalability and global reach also put us in the ideal position to help organizations manage peak workload periods or add specific skill sets to ongoing client projects.

Our Finance and Accounting core competencies include:

 

Process Transformation and Optimization

 

•    Business process improvement

 

•    Treasury operations

 

•    Skills development and training

 

Remediation and Audit Response Support

 

•    Internal control weakness remediation

 

•    Financial statement restatements

 

•    Audit response

 

Financial Reporting and Analysis

 

•    External financial reporting

 

•    Internal management reporting

 

•    Key performance indicators

 

•    Planning, budgeting and modeling

 

•    Account and transaction-level analysis

  

Transactional Support

 

•    Mergers and acquisitions

 

•    IPOs

 

•    Bankruptcies

 

•    Divestitures

 

Technical and Operational Accounting

 

•    Policies and procedures

 

•    New accounting standards implementation

Sample Engagement — Cross-practice area M&A Joint Venture Assessment and Integration Execution:  A large U.S. based manufacturing company engaged RGP to execute a 50/50 joint venture with another manufacturer. Using RGP’s proprietary M&A integration framework, our team of 22 consultants helped the client through integration planning, execution and transformation. RGP set up the Integration Management Office (“IMO”) to provide the client with program and project management, change management, synergy management, and reporting/metrics. Functioning as an extension of the company,

 

6


Table of Contents

RGP’s team provided the following services, which serve as a rigorous example of its cross-discipline functionality between our practice areas:

 

    Supported the integration execution across all functional areas of the company, including:

 

    IT — Integration Lead, Applications, Infrastructure

 

    Finance — Integration Lead, Analysts, Systems

 

    Supply Chain — Integration Lead, Plant Optimization, Freight, Procurement

 

    HR — Integration Lead, Change Management, Communications, Systems

 

    Engagement Lead, IMO Lead, Program Manager, Synergies

 

    Led both companies through successful cross-function planning , laying the foundation for creation of the integration plan. Instead of two disparate companies giving input, both groups began to think as one company

 

    Developed operating plans and go-to market strategy for the combined entity and a roadmap to coordinate major activities for all team work streams, established dependencies for critical project activities and created a mechanism for detailed tracking

 

    Led joint venture integration milestones, including:

 

    Announcement of new company name and organization

 

    Roll out of employee benefits

 

    Human resources and enterprise reporting go live

 

    Combined financial reporting

 

    Integrated branding

Sample Engagement — Revenue Recognition Assessment and Solution: RGP led the execution and solution design for a U.S. based provider of global customer-experience technology in order to comply with the requirements of the Financial Accounting Standards Board’s (“FASB”) revenue recognition guidance, Accounting Standards Update No.  2014-09, Revenue from Contracts with Customers and subsequently issued amendments (Accounting Standards Codification (“ASC”) 606). RGP led the client’s ASC 606 assessment by gathering data, analyzing contracts, identifying issues and documenting accounting conclusions. Subsequently, RGP led the effort to align stakeholders, define future-state processes to address gaps and develop the application and data roadmap.

RGP’s efforts consisted of two phases: Phase 1 — Impact Assessment and Phase 2 — Solution Design. Our consultants’ activities included:

 

    Project managing the initiative, including developing the project plan, establishing project governance, identifying key stakeholders and providing training to facilitate appropriate client employee engagement

 

    Cataloging of collected data to obtain a comprehensive view of revenue streams, contract data and other critical elements across the company, including identifying contract populations and determining grouping strategy for future analysis of representative contract samples

 

    Identifying and documenting an enterprise view of “Revenue Recognition” generated impacts across departments (accounting, sales, others), processes (order to cash, deal desk, invoicing) and systems (technical architecture, system selection)

By partnering with the client, RGP was able to help the client leadership team understand the extent of changes caused by the new revenue recognition standard and how current, manual processes wouldn’t be able to scale. The client was also able to identify process and technology integration challenges resulting from several previous acquisitions.

RGP worked with the client to develop an integrated, cross-departmental and phased implementation plan to address the revenue recognition gaps while also solving inherited selected integration challenges from legacy systems.

 

7


Table of Contents

Sample Engagement — Reorganization, Bankruptcy Support and Human Capital: A U.S. clothing manufacturer and retailer was unable to meet its financial obligations in 2015 and filed for Chapter 11 protection in U.S. bankruptcy court. The client initially hired RGP for a three-week engagement to analyze and reconcile their critical vendor claims. It was important to complete this reconciliation quickly in order for the continued flow of goods from their vendors.

The client’s satisfaction with the initial project led to expansion of the engagement to include an analysis and reconciliation of required supplier claims just prior to the bankruptcy filing, plus administration claims and bankruptcy court reporting, including monthly financial reports.

Because of employee layoffs as well as employee attrition due to the Chapter 11 filing, the company was unable to perform certain critical functions. RGP provided consultants to serve as interim controller; AP Manager; Budgeting Manager and HR Manager, including the handling of WARN Act notices, layoffs and COBRA matters. With RGP’s support, the company successfully exited bankruptcy.

This client continued to have financial difficulty and filed chapter 11 again. RGP was hired to reconcile all of the claims and assist with the claims objections. In addition, during the second engagement RGP provided personnel to clean up and manage AP records, financial reporting, bankruptcy court reporting and prepare 1099 tax forms.

Sample Engagement — Transition of Accounting Cycle Processes Following Significant Acquisition:  A Fortune 500 retail company that recently completed a significant acquisition of a competitor embarked on a comprehensive program to recognize synergies from the overlap of certain back-office functions. Under a “lift & shift” scenario, the client engaged RGP to assess the current state of revenue, cash and payables processes for the acquired company and to develop and execute a plan to transition those functions to the client’s existing shared services centers around the world.

Information Management

RGP’s Information Management practice provides planning and execution services in four primary areas: program & project management; business & technology integration; data strategy & management; and IT strategy & advisory. By focusing on the initiative as defined by our clients, RGP can provide continuity of service from the creation or expansion of an overall IT strategy through post-implementation support. In addition to these services, we assist clients in implementation of a variety of technology solutions: enterprise resource planning (“ERP”) systems; strategic “front-of-the-house systems”; human resources (“HR”) information systems; supply chain management systems; core finance and accounting systems; audit compliance systems; and financial reporting, planning and consolidation systems.

 

8


Table of Contents

The following are examples of the core competencies of our Information Management practice:

 

Program & Project Management

 

•    Project management office (“PMO”) design & optimization

 

•    Project audit & assessments

 

•    Portfolio rationalization

 

•    Project management & recovery

 

  

Business & Technology Integration

 

•    Business analysis & process reengineering

 

•    System stabilization and optimization

 

•    System selection & implementation

 

•    Quality assurance & testing

 

Data Strategy & Management

 

•    Data analysis, conversion & integration

 

•    Business intelligence (“BI”) strategy & execution

 

•    Data governance, security & quality management

 

•    Business performance management solutions

  

IT Strategy & Advisory

 

•    IT assessments & strategic planning

 

•    Merger planning & integration

 

•    Outsourcing & shared service strategy

 

•    Infrastructure, architecture & design services

Sample Engagement — Identification of Significant Inefficiencies and Proposed Solutions: Our client, a large multinational consumer goods company, experienced significant monthly losses due to material waste. Our client’s challenge was to find a way to identify areas of cost savings swiftly and effectively, with better data analytics.

RGP finance and data specialists, working with the client’s IT team, analyzed operating conditions, and designed statistical models and dashboard reporting. As a result, the client now has a weekly view into its material inventory and can initiate stock transfers between factories so that excess material can be utilized where needed, avoiding potential costly write-offs. By identifying production costs across all factories, the client has quick insight into causes of variance and can take action in a timely manner. In addition, relevant factory teams can be held responsible and receive best practice training to improve efficiencies. Finally, the client can utilize the insights to make more efficient capital expenditure decisions for factories using outdated machinery.

Sample Engagement — Improvement in Data Analytics and Data Management Capabilities: A U.S. based public utility wanted to strengthen its advanced analytics capabilities: enterprise reporting, analytic competency and data management capabilities. RGP consultants were tasked to:

 

    Address data quality issues

 

    Improve operational efficiencies for better support, control and ownership of data

 

    Automate data integration across applications to improve operational effectiveness

Leading a multi-year data strategy project to deliver improved analytic and data value to departments in Finance, HR, Marketing, IT, Generation, Transmission & Distributio (“T&D”), RGP consultants initiated and operationalized data management to ensure accurate and reliable data to support company decisions and to fulfill the vision of managing data as a strategic asset. Tasks included:

 

    Mobilizing domain teams to define data terms and develop data warehouse requirements

 

    Orienting teams to data dictionary, data modeling, issue management, data warehouse requirements, testing, training and sustaining processes

 

9


Table of Contents

Other facets of the engagement included:

 

    Establishing an Analytic Center of Excellence to ensure operational effectiveness and efficiency in analytic and data processes, tools, technology and people

 

    Developing an enterprise-wide process and engaging 300 executives and managers and 450 analysts, project managers, process engineers and utility operations technicians to implement effectively 30 analytic and data projects on 2 year roadmap

 

    Developing 300 standardized enterprise reports in an enterprise report catalog

 

    Skill building with local teams on data warehouse concepts

 

    Building an Oracle warehouse for Finance, HR, Generation, T&D, IT, Supply Chain domains to support Data as a Service (DAAS)

Using the work of RGP consultants, the company improved workforce management and work scheduling for T&D through standardized generation, improved company profitability by reducing costs in finance, HR and IT, and improved supply chain vendor and contract management.

Sample Engagement — Project Leadership for Global Next Generation Program: A Fortune 50 automotive company is implementing a global program to create the next generation of connected vehicle technology and infotainment applications for all North American vehicle production. The RGP team leads the coordination and integration of a highly complex set of services that requires the seamless integration of six external suppliers and eight internal teams, to create a new customer facing registration portal, secure global network and real-time interfaces needed to enable the new services.

RGP consultants serve as technical program management across 13 defined work streams as well as a variety of internal systems integrations that span enterprise infrastructure. The project also includes systems implementation in the form of architecture support and complex systems integration across the 14 teams building the technology components. The RGP Program Manager has managed the transition from vendor selection to solutioning and engineering the services with the supplier and client teams. RGP continues to be the technical systems integrator for all program work streams and horizontal platforms.

Sample Engagement — Integration and Optimization of Significant Acquisition: A large publicly-traded entertainment conglomerate acquired a regional entity that provided home security and monitoring. Our client needed to integrate its existing ordering, billing, supply chain and installation systems with the acquired entity’s systems in order to sell and deliver these new capabilities across its current and prospective customer base. Working with the client’s implementation team, RGP’s activities included:

 

    Serving as interim program manager and senior project manager

 

    Linking and modifying the client’s existing sales programming to bundle the acquired home security/monitoring products

 

    Modifying the existing equipment delivery systems capability to reduce the number of days to final installation

Sample Engagement — BI Strategy/Implementation: A large state utility company required assistance in restarting and reenergizing a stalled enterprise-wide BI initiative focused on increasing overall data definition/management, analysis and reporting to support enterprise-wide business decision making. The RGP engagement consisted of:

 

    Partnering with the client’s corporate stakeholder team to define the current state of the stalled BI initiative and redevelop overall objectives and goals

 

    Providing the framework and approach of how to restart and move forward towards a successful implementation and adoption

 

    Leading the effort to gain stakeholder, management and end user buy-in for the initiative across the organization

 

10


Table of Contents
    Providing day to day Program Management oversight, focusing on partnering, advising and managing the redefined approach. Critical deliverables included requirements and process definition, data definition and management, report and dashboard definition and development, change management and training and adoption

Sitrick And Company

Sitrick And Company (“Sitrick”) offers a unique combination of strategic counsel, tactical execution, and organizational and logistical support critical to both public and private companies and high profile individuals, both in the United States and overseas. Its extensive experience in strategic, corporate, financial and transactional communications as well as general management, finance, strategic planning, manufacturing and distribution have made Sitrick a partner to boards of directors and management engaged in acquisitions, proxy fights, litigation, management changes, government inquisitions, corporate reorganizations or when repositioning, redirecting or unwinding a business.

Combined with RGP’s broad capabilities and global footprint, Sitrick offers a wide variety of services to clients, including:

 

    Strategic and crisis communications

 

    Repositioning a business or business segment

 

    Litigation support

 

    Bankruptcy administration and management

 

    Corporate and financial advisory

 

    Interim and crisis management

 

    Restructuring and reorganization

Sample Engagement — Financial Restructuring:  Sitrick, working with the board of directors, management and other advisors, developed and implemented the strategic communications for the successful restructuring and change in management of a large beverage distributor. This was a cross-border engagement, with the company based in Poland, new investors and management based in Russia and the restructuring in the United States.

Sample Engagement — Litigation Support:  Sitrick was retained by a technology company to provide litigation support for a patent infringement suit the company was about to file against a much larger and better known competitor. Sitrick developed a communications strategy that resulted in the case being settled within two days of its filing.

Sample Engagement — Proxy Contest:  Sitrick provided strategic communications counsel in a proxy contest launched against an Israeli company where a hedge fund was trying to take control of the board of directors. The company successfully maintained control of the board of directors.

 

11


Table of Contents

Human Capital

RGP’s Human Capital consultants apply project-management and business analysis skills to help solve the people aspects of business problems. The two primary areas of focus of our human capital practice are change management/business transformation and HR operations. To achieve the desired business outcome, our Human Capital professionals work with client teams to help drive their change management initiatives to successful completion. We help our clients with the people challenges of acquisitions, mergers, downsizing, reorganizations, system implementations or legislative requirements (such as Sarbanes, Basel II, HIPAA and the Patient Protection and Affordable Care Act). Our Human Capital professionals also have HR operations and technology skills that provide clients with the means to achieve their initiatives. Our Human Capital core competencies revolve around:

 

Organizational Development and Effectiveness

 

•    Process analysis development and redesign

 

•    Change management

 

•    Organizational alignment and structure

 

•    Fully integrated performance management and measurement programs

 

•    Succession and workforce planning

 

•    Training and skills development strategy

 

•    Employee retention programs, opinion surveys and communications programs

  

HR Operations

 

•    HR leadership

 

•    HR risk assessment

 

•    Labor/employee relations and compliance

 

•    Talent acquisition

 

•    Policies and procedures

 

HR Technology

 

•    System selection, implementation and optimization

 

•    Project management

 

•    Change management

 

•    Data conversion

 

•    Post-implementation and interim support

  

Sample Engagement — Financial Management Group Transformation’s Change Management and Program Management Strategy: A global Fortune 100 insurance company is transforming the way it works in order to maximize efficiency and ultimately reduce costs. Given the complexity, breadth and depth of the transformation; the client engaged a team of RGP consultants to create and deploy an end-to-end change management strategy, essential to achieving the program’s goal. The responsible client team is transforming as well, by investing in technology and automation, better data governance, optimizing processes and centralizing and streamlining organizations. They have designed a transformation change management and program management strategy to enhance the realization of the transformation initiative. Phase II of the engagement will include implementation of all change management activities in partnership with the transformation program office.

Sample Engagement — Organizational Capability Assessment and Improvement: A food industry leader was looking to transform business operations in order to maintain its competitive industry position and fuel growth. RGP utilized change management practices, to assess individual skill competencies and organizational capabilities currently in place. Our approach focused on enabling organizational learning and development as a catalyst for change and cultural improvement. We took a business driven approach by defining actions aligned to corporate business strategy. Collaborative workshops promoted a shared vision of the future desired state, while gaining buy-in and ownership for a three year roadmap of planned initiatives. Executive participation enabled sponsorship for the transformation program, helping to ensure the expected results.

Specific activities included:

 

    Defining a process to develop increased capabilities across the organization, to be executed annually in alignment with the strategic business planning cycle

 

12


Table of Contents
    Developing and executing an annual individual skill competency assessment tool and procedures

 

    Review and gap analysis of strategic departmental goals, identifying capability needs in areas of people, process and technology

 

    Providing assessment results, including organizational capabilities needed to accomplish strategic business objectives, as well as individual and team skill competency development needs

 

    Developing a three year transformation plan chartering business value work streams to achieve needed capabilities

 

    Providing HR functional consulting to help drive people and organizational development, as well as outlining an effective approach to organizational cultural improvement

Sample Engagement — HRIS Module Implementation and Standardization: A private, online media group recently implemented ADP Workforce Now and wanted to integrate other HR modules into their payroll platform including time tracking, leave management and a self-service portal. In addition to an aggressive timeframe, our client was in the middle of major organizational changes including divesting a company, a merger and two acquisitions. As project manager, our consultant was instrumental in delivering the project on-time, helping our client to fully utilize the system. We also created process standardization and streamlining, reduced transaction processing cost, increased the quality of HR data and produced more complex and comprehensive business metrics. Providing on-site project management and process optimization in this dynamic corporate environment was crucial to the success of the project.

Sample Engagement — Establishment of New Corporate Compensation Function: A fast-growing multi-national pharmaceutical company needed assistance in establishing a new corporate compensation function, addressing core infrastructure issues. Our consultant, working with client personnel, served as Project Manager and subject matter expert, assessing business priorities, developing a compensation philosophy and integrating processes with technology. Specific initiatives included:

 

    Establishing a benchmarking strategy for assessing competitive pay levels, coupled with integrating a pay for performance culture

 

    Evaluating the current HRIS system and identifying relevant issues for replacement

 

    Positioning the HR function as a valued and integral business partner

Sample Engagement — Organizational Design: A Fortune 500 life insurance company wanted to design a new organizational and operating model to provide more efficient, “silo-free” operations. Partnering with RGP, our consultants provided subject-matter expertise on organizational design and an operating model development approach, process and content. Specifically, RGP supported the initiative by:

 

    Conducting in-depth current state organizational reviews

 

    Developing a comprehensive culture and change impact assessment to identify benefits and challenges of the new operating model

 

    Evaluating the impact on human capital of a shared services center and off-shoring implementation

 

    Presenting key aspects of the operating model design approach to management and staff and assessing potential interdependencies with other work streams outside of the HR function

 

13


Table of Contents

Legal & Regulatory

RGP Legal helps clients execute their legal, risk management and regulatory initiatives. Our consultants (consisting of attorneys, compliance professionals, paralegals and contract managers) have significant experience working at the nation’s top law firms and companies. RGP Legal provides general counsel access to exceptional talent on an agile basis for the exact subject-matter knowledge and business perspective required for a particular task or workflow. Generally, RGP Legal is engaged to work directly with in-house counsel or with traditional outside counsel for projects or pieces of “unbundled” work. Examples of our core competencies include:

Project Services

 

    Commercial agreement review

 

    Compliance support (FCPA, Dodd-Frank, data privacy)

 

    Proxy and quarterly SEC support

 

    Corporate governance

Legal Operations and Business Strategy

 

    Legal project management, process improvement, change management

 

    Legal spend analysis

 

    Strategic sourcing and convergence

 

    Contract, knowledge, matter management

 

    Technology assessment, selection, implementation and optimization

 

    Organizational design

Unbundling Legal Services

 

    Litigation management and support, including document review and analysis, investigations and regulatory reviews

 

    M&A due diligence, closing, integration

 

    Real estate due diligence

Sample Engagement — Assistance with Critical Software Deployment:  Our client, a significant developer and distributor of entertainment projects, is implementing an online rights and contract management platform, to capture critical business and legal terms from contracts related to original production and development of new scripted and unscripted television and movie content.

RGP has been retained to provide advisory services to assist in putting together best practices, protocols, quality control, training, metrics and other tasks related to overall project management, as well as attorneys to provide substantive legal expertise by conducting the rights analysis of the contracts and capturing consistent and accurate data. The project is ‘business critical” — the new system must ultimately be an effective tool that helps drive revenue, enforce compliance and mitigate risk.

Sample Engagement — Assessment to Mitigate Reputational Harm, Regulatory Exposure and Litigation Risk:  The senior management of a global entity, which had grown rapidly via acquisition to over $2.5 billion in revenue and 100,000 employees, asked RGP to assist in the assessment of mitigation of potential reputational harm, regulatory exposure and litigation risk. In particular, management was concerned about their ability to ensure the security of sensitive financial and personal information for customers, tracking of its contractual commitments, and adherence to applicable laws and regulations. The goal was to assess risk, protect from reputational harm, mitigate against regulatory exposure and litigation and communicate to its clients that the company is a trusted business partner and world-class organization.

 

14


Table of Contents

RGP was selected to create and conduct a compliance risk assessment. Using the work of RGP consultants, the assessment will position our client to present the following information to the company’s Board of Directors:

 

    The company’s compliance-related obligations from both regulatory and contractual perspectives

 

    Compliance obligations from a people, process and technology perspective, including the company’s method for identifying risks and process to comply, report and resolve incidents

 

    Gaps between company obligations, its current compliance and recommendations to bridge the identified gaps

 

    The company’s current compliance infrastructure and the structure and skills needed for compliance on a global basis

Sample Engagement — Unbundling Support for M&A Activity:  Our client, a world leader in the in-flight entertainment and communication solutions business, turned to RGP for supplemental support and expertise in connection with a buy-side acquisition. The client’s general counsel engaged us to supplement the bandwidth of the in-house team. Our consultants drove the diligence process, collaborated extensively with internal business units and, working closely with lead outside counsel who focused on the strategy and structure of the deal, assisted in the drafting of deal documents. The client reduced its legal spend by multi-sourcing the work needed to support the transaction.

Sample Engagement — Law Department Organizational Design:  The new general counsel for a multi-billion dollar energy and specialty refining company asked RGP to redesign its legal department structure from the ground up. A series of acquisitions, coupled with a more complex business environment, increased the department’s work flows. Our consultants conducted extensive stakeholder interviews and an analysis of department operations to develop an organizational model stressing business continuity, best practices in organizational design, areas of process and resourcing improvement, and organizational development. RGP’s solution resulted in a leaner legal team that leverages effective and efficient legal services providers, while implementing in-house efficiencies and automation.

Sample Engagement — Development and Implementation of Knowledge Management Tool:  Our client, a multi-million dollar asset management firm, lacked an efficient tool for handling information related to its investment/private equity funds. As a result, in-house attorneys often started deals without the benefit of knowledge gleaned from previously negotiated agreements. Documents were difficult to locate, important deal information was lost, and providing information to regulators and third parties was often time consuming and inefficient.

RGP designed a knowledge management tool to increase efficiencies in the client’s deal flow and archiving process. RGP crafted a simple searchable database tool that provided an effective way to access, retrieve, archive and leverage important deal information. RGP also conducted a gap analysis on missing deal documents and developed training to ensure attorney buy-in and acceptance of the management tool.

Supply Chain Management

RGP’s Supply Chain Management practice assists clients in the planning, execution, maintenance and troubleshooting of complex supply chain systems and processes. Our consultants work as part of client teams to reduce the total cost of ownership, improve business performance and produce results. Specifically, our core competencies include:

 

Supply Chain Strategy and Advisory

  

Supply Chain Planning and Forecasting

 

•    Supply chain technology and strategic planning

 

•    Merger planning and integration

 

•    Organizational design, alignment, process, policies and procedures

  

 

•    Sales and operations planning

 

•    Demand and supply planning

 

•    Production planning

 

15


Table of Contents

Procurement and Supplier Management

  

Manufacturing and Operations

 

•    Strategic sourcing

 

•    Contract and supplier relationship management

 

•    Procure-to-pay

  

 

•    Manufacturing assessment and strategy

 

•    Production process

 

•    LEAN/Six Sigma

 

Logistics and Materials Management

  

Supply Chain Risk and Compliance

 

•    Inventory and transportation management

 

•    Distribution network analysis

 

•    Reverse logistics

  

 

•    Risk assessments

 

•    Regulatory compliance

 

•    Third party oversight

Sample Engagement Negotiation, Monitoring and Supervision of Construction Projects: Our client, a Fortune 1000 technology company, has multiple priorities in procurement and design of internal construction projects. Working with the client’s personnel, RGP consultants oversaw the negotiation and implementation of construction/redesign projects at the client’s corporate headquarters. The client’s primary concerns were: design consistency with the company’s culture, operating within a set budget, and on-time completion of the various projects.

RGP provided procurement personnel to work closely with our client’s counterparts to negotiate, monitor, and supervise construction projects. In addition, RGP consultants provided budget management for the client’s procurement department and an advisory/quality assurance lead. The client lacked procurement expertise and construction/real estate sourcing knowledge. RGP built a detailed timeline collaborating with the client and their commercial real estate company. Our consultants negotiated project costs leveraging future growth opportunities, especially with subcontractor firms, reviewed quotes, researched benchmarks and imposed cost structure across the client’s organization. In addition, RGP worked with the client’s legal department to negotiate and document contract parameters. Ultimately, the client estimates it was able to achieve a 6.5% cost savings.

Sample Engagement — Vendor Risk Management Software Selection and Monitoring:  A publicly-traded financial services company wanted to effectively and proactively identify and manage previously unaddressed significant vendor risks. Working collaboratively, a cross-functional team of client personnel and RGP consultants developed a comprehensive vendor performance monitoring function. The team identified three key project work streams: 1) establishment of solutions to support and maintain the client’s third party vendor management processes, systems, standards and metrics tracking; 2) development of user guides and materials and training on the selected software tool to support the function; 3) development and support of the day to day processes to ensure compliance with regulations, guidelines and firm requirements. Specifically, RGP was responsible for:

 

    Developing the framework and vendor scorecards

 

    Conducting certification and governance maturity assessments

 

    Conducting on-site vendor assessments, certification and governance

 

    Developing program processes, policies and procedures

 

    Assisting with management of the selected software implementation

Sample Engagement — Improvement in On-Line Checkout: A U.S. based product distributor initiated a major campaign to drive consumers to using an e-commerce platform. However, during checkout, customers realized that shipping and handling fees associated with the purchase were too high, resulting in an 80% cart abandonment rate and a significant loss in sales. In the current e-commerce environment, consumers have been trained to expect free shipping, free shipping over a specific order value or flat rate shipping.

The client engaged RGP to identify short term solutions to reduce shipping and handling charges prior to the next selling season, as well as longer term ideas for future releases. After conducting a four week assessment of the recent sales cycle and associated data, RGP consultants provided specific recommendations to reduce shipping and handling costs, reduce the order cycle and transit time and reduce packaging waste. In addition, observations were made to improve the consumer experience, with the goal of increasing sales.

 

16


Table of Contents

Sample Engagement — Procure-to-Pay Assessment: A large multinational consumer electronic company needed assistance in conducting an assessment of its Procure-to-Pay process to review performance and to identify recommendations to fill gaps. The client had two primary goals: 1) to assess the current state; and 2) to provide insights on the future state, with comparison to leading practices and a high-level implementation roadmap. RGP, acting in project management and business analyst roles, was tasked with:

 

    Documenting the current process, controls and policies and procedures

 

    Outlining benefits of using the new Oracle system

 

    Providing analysis of current staff skills and appropriate staff size

 

    Providing recommendations on procure to pay strategy, priorities, organizational structure, risks and dependencies

 

    Assessing supplier selection, certification and performance monitoring

 

    Developing recommendations for future state, including ways to maximize effectiveness and efficiency, optimizing cost structures and mitigating risk exposures

Sample Engagement — Cost Recovery Review:  One of the world’s largest multinational energy companies engaged RGP to provide services to ensure contract compliance and to identify cost recovery opportunities with a supplier of significant services. Performing services at the supplier location, the RGP consultants developed the procedure plan, conducted supplier interviews, performed test work on selected transactions and issued a final report. The findings ultimately resulted in a recovery for the client and an enhanced understanding with the supplier.

Governance, Risk and Compliance (“GRC”): Corporate Governance, Risk Management, Internal Audit and Compliance Services

RGP’s GRC practice assists clients with a variety of governance, risk management, internal audit and compliance initiatives. The professionals in our GRC practice have experience in operations, controllership and internal and external audit and serve our clients in any number of roles required — from program manager to team member. In addition to helping clients worldwide in the areas of audit, risk and compliance, we are able to draw on RGP’s other practice areas to bring the required business expertise to the engagement. Our GRC core competencies include:

 

Enterprise Risk Management

  

Sarbanes and Internal Controls

 

•    Strategic and operational objectives and risk assessment

 

•    Risk management and monitoring process development

 

•    Implementation of comprehensive ERM programs

  

 

•    Documentation and testing of key controls

 

•    COSO framework documentation

 

•    Control rationalization and self-assessment

 

•    Remediation of control deficiencies

 

•    Internal audit co-sourcing

 

Contract and Regulatory Compliance Audits

  

Operational and IT Audits

 

•    Regulatory compliance assessments

 

•    Royalty, license and franchise partner audits

  

 

•    Specialized skill sets and subject matter expertise

 

•    Global geographic coverage

 

•    Audit plan development and periodic risk assessment

Sample Engagement — Global Internal Audit  & Internal Controls Delivery: A global technology leader decided to outsource its internal controls testing and co-source its internal audit needs, engaging RGP on a multi-year co-sourcing and advisory contract. During the transition phase, RGP created a core delivery team of experts and set up a dedicated, offshored testing/audit center.

 

17


Table of Contents

For internal audit, RGP carries out internal audits on behalf of the client, following the client’s specific audit methodology. Deploying consultants from our offices in cities where our client has operations, RGP adds local knowledge and skills to the client’s fieldwork. To fully integrate the methodology, RGP created customized onboarding and training.

For internal controls testing, the client leverages RGP in a cost-efficient manner versus developing its own larger internal audit team. In addition, by leveraging industry best practices in control and finance compliance audits, RGP provides our client with better insights into more efficient ways of working and control. The client further leverages cost control by having RGP consultants perform a large portion of independent (local) testing to reduce time and budget of the external auditor.

Sample Engagement — Creation of Corporate Compliance Function: A leading independent specialty chemical company needed an effective compliance program to meet federal regulations and all necessary standards, procedures and training to support it. RGP established the client’s first corporate compliance function with three major areas of significance: Foreign Corrupt Practices Act compliance (FCPA), Global trade compliance (OFAC) and Federal Acquisition Regulation compliance (FAR). RGP provided the client with the overall compliance framework, policies, procedures and tools necessary to support an effective compliance program.

Sample Engagement — Enterprise Risk Management: A Fortune 1000 U.S. based financial services company launched an initiative to significantly increase the risk governance and standardization of project management within their organization. Our enterprise risk management consultants focused on establishing more consistent, simplified processes to optimize the risk management process and create ways to identify and implement standardization of reporting, process and procedures across all lines of business. Our work will establish a comprehensive view of projects, enabling reporting and escalation to significantly mitigate their risk.

Sample Engagement — Documentation and Enhancement of Internal Controls in Preparation for IPO or Sale: A highly profitable and fast growing maker of electronic equipment had both inadequate IT general controls and poor documentation of its processes. As a result, highly detailed and expensive substantive audit procedures needed to be performed in order to prepare financial statements for a contemplated IPO or sale of the company. Serving as project manager and change management lead, RGP consultants performed an assessment of IT general controls, identified critical risk areas and prepared detailed action plans to remediate or implement controls.

Sample Engagement — Documentation and Enhancement of Internal Controls: A rapidly growing maker of automation software needed an assessment of current state business processes and internal controls at its U.S. and India operations for Sarbanes and general business purposes. Our consultants documented current state of internal controls, made recommendations for enhanced future state of controls and presented our findings to executive management. The assessments identified a significant number of high risk items that the client was unaware of, with actionable recommendations for improvement.

Sample Engagement — Banking Compliance Support: Our client, a Fortune 500 financial services company, wanted to develop and implement a more formal approach to the assessment of the company’s regulatory risk profile. Previously, decisions on assessment of regulatory risk were more of an intuitive exercise than a formalized methodology. To help the client evolve its process, RGP was responsible for the entire project, including:

 

    Identifying risk topics for each product type (real estate loans, consumer loans, credit cards, deposits, trusts and others)

 

    Determining gaps in regulation coverage

 

    Creating risk statements for each product

 

    Defining the inherent and control risk definitions

 

    Building and scoring the templates to be used to document the efforts

The final deliverable allowed bank management to better allocate limited resources to maximize coverage of critical compliance issues using the quantifiable basis of risk assessment. Ultimately, RGP consultants deployed the methodology through other facets of the company’s operation, including property/casualty and life insurance and investment management.

 

18


Table of Contents

Sample Engagement — Audit IT Security Controls: The CIO of a global healthcare company headquartered in Europe planned a series of global IT audits. Working as a part of a client team, RGP was responsible for an assessment of the strength and sophistication of the IT security organization, implementation of the IT security governance model, conducting a series of interviews with top management stakeholders in the IT organization, and transfer of knowledge on audit techniques.

policyIQ

RGP’s policyIQ is our proprietary cloud-based GRC software application, enabling the focused management of a wide range of GRC processes, including Risk Assessments, Sarbanes Compliance, Policy and Procedure Management, Internal Audit Programs, Anti-Corruption Compliance and Contract Administration. policyIQ can be implemented quickly to manage a specific aspect of an overall GRC program, or easily scaled to integrate multiple initiatives, allowing the organization to realize greater efficiency. In addition, our engagement teams often utilize policyIQ as a tool to assist in the efficient collection, storing and review of project workpapers, deliverables and other critical project content. Business problems that our clients have used policyIQ to resolve include:

 

    Sarbanes Compliance Management: Clients use policyIQ to manage their entire Sarbanes compliance program, from risk assessment through remediation tracking. Electronic forms automate quarterly certifications, and reporting allows all stakeholders insight into the status of Sarbanes compliance at any time.

 

    Policy and Procedure Management: With policyIQ as the central location for all organizational policies and procedures, all employees have access to the most current documentation — and using electronic forms, can easily document annual proof of compliance.

 

    Internal Audit Programs: Companies use policyIQ to capture workpapers electronically, gathering all evidence in a central location and assigning testing to the appropriate auditors. With robust reporting, audit managers have oversight into the process and with built-in workflow, audits can flow through appropriate channels of approval.

 

    Contract Management: policyIQ provides a central, secure location to house all contract documentation, allowing companies to index contracts for ease of searching and align view, edit and approve security appropriately. By utilizing custom fields to capture standard meta data, contracts can be categorized and communications established to alert all stakeholders of upcoming renewals or milestones.

Sample Engagement — Fresh Approach to Sarbanes Compliance: For a publicly traded manufacturing company with global operations, RGP was engaged to bring efficiency and consistency to its Sarbanes compliance and internal audit programs. Using policyIQ, our consulting team was able to:

 

    Implement the 2013 COSO Framework, with mapping to entity level controls, in order to meet expectations by external auditors and the Public Company Accounting Oversight Board

 

    Integrate workflow processes on all control reviews and audit testing to improve quality assurance over documentation and oversight on audit testing

 

    Establish consistent processes for Sarbanes documentation and testing across multiple business units

Operations

We generally provide our professional services to clients at a local level, with the oversight of our regional managing directors and consultation of our corporate management team. The managing director, client service director(s) and recruiting director(s) in each office are responsible for initiating client relationships, identifying consultants specifically skilled to perform client projects, ensuring client and consultant satisfaction throughout engagements and maintaining client relationships post-engagement. Throughout this process, the corporate management team and regional managing directors are available to consult with the managing director with respect to client services.

Our offices operate in an entrepreneurial manner. The managing directors of our offices are given significant autonomy in the daily operations of their respective offices, and are responsible for overall guidance and supervision, budgeting and forecasting,

 

19


Table of Contents

sales and marketing, pricing and hiring within their office. We believe a substantial portion of the buying decisions made by our clients are made on a local or regional basis and that our offices most often compete with other professional services providers on a local or regional basis. Because our managing directors are in the best position to understand the local and regional outsourced professional services market and because clients often prefer local relationships, we believe a decentralized operating environment maximizes operating performance and contributes to employee and client satisfaction.

We believe our ability to deliver professional services successfully to clients is dependent on our managing directors working together as a collegial and collaborative team, at times working jointly on client projects. To build a sense of team effort and increase camaraderie among our managing directors, we have an incentive program for our office management that awards annual bonuses based on both the performance of the Company and the performance of the individual. We also share across the Company the best and most effective practices of our highest achieving offices and use this as an introductory tool with new managing directors. New managing directors also spend time with another practice, partnering with experienced managing directors and other senior management personnel. This allows the veteran managing directors to share their success stories, foster the culture of the Company with new managing directors and review specific client and consultant development programs. We believe these team-based practices enable us to better serve clients who prefer a centrally organized service approach.

From our corporate headquarters in Irvine, California, we provide centralized administrative, marketing, finance, HR, IT, legal and real estate support. Our financial reporting is also centralized in our corporate service center. This center handles invoicing, accounts payable and collections, and administers HR services including employee compensation and benefits administration for North American offices. We also have a business support operations center in our Utrecht, Netherlands office to provide centralized finance, HR, IT, payroll and legal support to our European offices. In addition, in North America, we have a corporate networked IT platform with centralized financial reporting capabilities and a front office client management system. These centralized functions minimize the administrative burdens on our office management and allow them to spend more time focused on client and consultant development.

Business Development

Our business development initiatives are composed of:

 

    local and global initiatives focused on existing clients and target companies

 

    national and international targeting efforts focused on multinational companies

 

    brand marketing activities

 

    national and local advertising and direct mail programs

Our business development efforts are driven by the networking and sales efforts of our management. In addition, the local office managing directors are assisted by management professionals focused on business development efforts on a national basis based on firm-wide and industry-focused initiatives. These business development professionals, teamed with the managing director and client service teams, are responsible for initiating and fostering relationships with the senior management and decision makers of our targeted client companies. During fiscal 2017, we commenced implementation of software from SalesForce.com as a tool to enhance our local and worldwide business development efforts.

We believe that our national marketing efforts have been effective in generating incremental revenues from existing clients and developing new client relationships. Our brand marketing initiatives help develop RGP’s image in the markets we serve. Our brand is reinforced by our professionally designed website, print, and online advertising, direct marketing, seminars, initiative-oriented brochures, social media and public relations efforts. We believe our branding initiatives, coupled with our high-quality client service, help to differentiate us from our competitors and to establish RGP as a credible and reputable global professional services firm.

Competition

We operate in a competitive, fragmented market and compete for clients and consultants with a variety of organizations that offer similar services. Our principal competitors include:

 

    consulting firms

 

20


Table of Contents
    local, regional, national and international accounting and law firms

 

    independent contractors

 

    traditional and Internet-based staffing firms

 

    the in-house or former in-house resources of our clients

We compete for clients on the basis of the quality of professionals, the timely availability of professionals with requisite skills, the scope and price of services, and the geographic reach of services. We believe our attractive value proposition, consisting of our highly qualified consultants, relationship-oriented approach and professional culture, enables us to differentiate ourselves from our competitors. Although we believe we compete favorably with our competitors, many of our competitors have significantly greater financial resources, generate greater revenues and have greater name recognition than we do.

Employees

As of May 27, 2017, we had a total of 3,301 employees, including 732 corporate and local office employees and 2,569 consultants. Our employees are not covered by any collective bargaining agreements.

Available Information

The Company’s principal executive offices are located at 17101 Armstrong Avenue, Irvine, California 92614. The Company’s telephone number is (714) 430-6400 and its website address is http://www.rgp.com. The information set forth in the website does not constitute part of this Annual Report on Form 10-K. We file our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 with the SEC electronically. These reports are maintained on the SEC’s website at http://www.sec.gov.

A free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and amendments to those reports may be obtained on our website at http://www.rgp.com as soon as reasonably practicable after we file such reports with the SEC.

 

ITEM 1A. RISK FACTORS .

You should carefully consider the risks described below before making a decision to buy shares of our common stock. The order of the risks is not an indication of their relative weight or importance. The risks and uncertainties described below are not the only ones facing us but do represent those risks and uncertainties we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely impact and impair our business. If any of the following risks actually occur, our business could be harmed. In that case, the trading price of our common stock could decline, and you might lose all or part of your investment. When determining whether to buy our common stock, you should also refer to the other information in this Annual Report on Form 10-K, including our financial statements and the related notes.

A future economic downturn or change in the use of outsourced professional services consultants could adversely affect our business.

While we believe general economic conditions continue to improve in most parts of the world, there continues to be some uncertainty regarding general economic conditions within some regions and countries in which we operate, leading to reluctance on the part of some multinational companies to spend on discretionary projects. Deterioration of or increased uncertainty related to the global economy or tightening credit markets could result in a reduction in the demand for our services and adversely affect our business in the future. In addition, the use of professional services consultants on a project-by-project basis could decline for non-economic reasons. In the event of a reduction in the demand for our consultants, our financial results would suffer.

Economic deterioration at one or more of our clients may also affect our allowance for doubtful accounts. Our estimate of losses resulting from our clients’ failure to make required payments for services rendered has historically been within our

 

21


Table of Contents

expectations and the provisions established. However, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of our clients could cause unfavorable trends in receivable collections and cash flows and additional allowances may be required. These additional allowances could materially affect the Company’s future financial results.

In addition, we are required to periodically, but at least annually, assess the recoverability of certain assets, including deferred tax assets and goodwill. Softening of the United States economy and international economies could adversely affect our evaluation of the recoverability of deferred tax assets, requiring us to record additional tax valuation allowances. Our assessment of impairment of goodwill is currently based upon comparing our market capitalization to our net book value. Therefore, a significant downturn in the future market value of our stock could potentially result in impairment reductions of goodwill and such an adjustment could materially affect the Company’s future financial results and financial condition.

The market for professional services is highly competitive, and if we are unable to compete effectively against our competitors, our business and operating results could be adversely affected.

We operate in a competitive, fragmented market, and we compete for clients and consultants with a variety of organizations that offer similar services. The competition is likely to increase in the future due to the expected growth of the market and the relatively few barriers to entry. Our principal competitors include:

 

    consulting firms;

 

    local, regional, national and international accounting and other traditional professional services firms;

 

    independent contractors;

 

    traditional and Internet-based staffing firms; and

 

    the in-house or former in-house resources of our clients.

We cannot assure you that we will be able to compete effectively against existing or future competitors. Many of our competitors have significantly greater financial resources, greater revenues and greater name recognition, which may afford them an advantage in attracting and retaining clients and consultants and in offering pricing concessions. Some of our competitors in certain markets do not provide medical and other benefits to their consultants, thereby allowing them to potentially charge lower rates to clients. In addition, our competitors may be able to respond more quickly to changes in companies’ needs and developments in the professional services industry.

Our business depends upon our ability to secure new projects from clients and, therefore, we could be adversely affected if we fail to do so.

We do not have long-term agreements with our clients for the provision of services and our clients may terminate engagements with us at any time. The success of our business is dependent on our ability to secure new projects from clients. For example, if we are unable to secure new client projects because of improvements in our competitors’ service offerings, or because of a change in government regulatory requirements, or because of an economic downturn decreasing the demand for outsourced professional services, our business is likely to be materially adversely affected. New impediments to our ability to secure projects from clients may develop over time, such as the increasing use by large clients of in-house procurement groups that manage their relationship with service providers.

We may be legally liable for damages resulting from the performance of projects by our consultants or for our clients’ mistreatment of our personnel.

Many of our engagements with our clients involve projects or services that are critical to our clients’ businesses. If we fail to meet our contractual obligations, we could be subject to legal liability or damage to our reputation, which could adversely affect our business, operating results and financial condition. While we are not currently subject to any client-related legal claims which we believe are material, it remains possible, because of the nature of our business, that we may be involved in litigation in the future that could materially affect our future financial results. Claims brought against us could have a serious negative effect on our reputation and on our business, financial condition and results of operations.

 

22


Table of Contents

Because we are in the business of placing our personnel in the workplaces of other companies, we are subject to possible claims by our personnel alleging discrimination, sexual harassment, negligence and other similar activities by our clients. We may also be subject to similar claims from our clients based on activities by our personnel. The cost of defending such claims, even if groundless, could be substantial and the associated negative publicity could adversely affect our ability to attract and retain personnel and clients.

We may not be able to grow our business, manage our growth or sustain our current business.

Historically, we have grown by opening new offices and by increasing the volume of services provided through existing offices. Since the first quarter of fiscal 2010, we have had difficulty sustaining consistent revenue growth either quarter-over-quarter or in sequential quarters and, during fiscal 2017, we closed two offices, one in the U.S. and one in Europe. There can be no assurance that we will be able to maintain or expand our market presence in our current locations or to successfully enter other markets or locations. Our ability to continue to grow our business will depend upon an improving global economy and a number of factors, including our ability to:

 

    grow our client base;

 

    expand profitably into new geographies;

 

    provide additional professional services offerings;

 

    hire qualified and experienced consultants;

 

    maintain margins in the face of pricing pressures;

 

    manage costs; and

 

    maintain or grow revenues and increase other service offerings from existing clients.

Even if we are able to resume more rapid growth in our revenue, the growth will result in new and increased responsibilities for our management as well as increased demands on our internal systems, procedures and controls, and our administrative, financial, marketing and other resources. For instance, a limited number of clients are requesting that certain engagements be of a fixed fee nature rather than our traditional hourly time and materials approach, thus shifting a portion of the burden of financial risk and monitoring to us. Failure to adequately respond to these new responsibilities and demands may adversely affect our business, financial condition and results of operations.

Our ability to serve clients internationally is integral to our strategy and our international activities expose us to additional operational challenges that we might not otherwise face.

Our international activities require us to confront and manage a number of risks and expenses that we would not face if we conducted our operations solely in the United States. Any of these risks or expenses could cause a material negative effect on our operating results. These risks and expenses include:

 

    difficulties in staffing and managing foreign offices as a result of, among other things, distance, language and cultural differences;

 

    less flexible or future changes in labor laws and regulations in the U.S. and in foreign countries;

 

    expenses associated with customizing our professional services for clients in foreign countries;

 

    foreign currency exchange rate fluctuations when we sell our professional services in denominations other than United States’ dollars;

 

    protectionist laws and business practices that favor local companies;

 

    political and economic instability in some international markets;

 

    multiple, conflicting and changing government laws and regulations;

 

    trade barriers;

 

23


Table of Contents
    reduced protection for intellectual property rights in some countries; and

 

    potentially adverse tax consequences.

We have acquired, and may continue to acquire, companies, and these acquisitions could disrupt our business.

We have acquired several companies and we may continue to acquire companies in the future. Entering into an acquisition entails many risks, any of which could harm our business, including:

 

    diversion of management’s attention from other business concerns;

 

    failure to integrate the acquired company with our existing business;

 

    failure to motivate, or loss of, key employees from either our existing business or the acquired business;

 

    potential impairment of relationships with our employees and clients;

 

    additional operating expenses not offset by additional revenue;

 

    incurrence of significant non-recurring charges;

 

    incurrence of additional debt with restrictive covenants or other limitations;

 

    addition of significant amounts of intangible assets, including goodwill, that are subject to periodic assessment of impairment, primarily through comparison of market value of our stock to our net book value, with such impairment potentially resulting in a material impact on our future financial results and financial condition;

 

    dilution of our stock as a result of issuing equity securities; and

 

    assumption of liabilities of the acquired company.

We must provide our clients with highly qualified and experienced consultants, and the loss of a significant number of our consultants, or an inability to attract and retain new consultants, could adversely affect our business and operating results.

Our business involves the delivery of professional services, and our success depends on our ability to provide our clients with highly qualified and experienced consultants who possess the skills and experience necessary to satisfy their needs. At various times, such professionals can be in great demand, particularly in certain geographic areas or if they have specific skill sets. Our ability to attract and retain consultants with the requisite experience and skills depends on several factors including, but not limited to, our ability to:

 

    provide our consultants with either full-time or flexible-time employment;

 

    obtain the type of challenging and high-quality projects that our consultants seek;

 

    pay competitive compensation and provide competitive benefits; and

 

    provide our consultants with flexibility as to hours worked and assignment of client engagements.

There can be no assurance that we will be successful in accomplishing any of these factors and, even if we are, we cannot assure we will be successful in attracting and retaining the number of highly qualified and experienced consultants necessary to maintain and grow our business.

Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees.

We have historically used stock options as a component of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention and provide competitive compensation packages. A significant portion of our options outstanding awarded prior to fiscal 2012 are priced at more than the current per share market value of our stock, limiting the grants from those years as a significant incentive to retain employees.

 

24


Table of Contents

Our computer hardware and software and telecommunications systems are susceptible to damage, breach or interruption.

The management of our business is aided by the uninterrupted operation of our computer and telecommunication systems. These systems are vulnerable to security breaches, natural disasters or other catastrophic events, computer viruses, or other interruptions or damage stemming from power outages, equipment failure or unintended usage by employees. In particular, our employees may have access or exposure to personally identifiable or otherwise confidential information and customer data and systems, the misuse of which could result in legal liability. In addition, we rely on information technology systems to process, transmit and store electronic information and to communicate among our locations around the world and with our clients, partners and consultants. The breadth and complexity of this infrastructure increases the potential risk of security breaches. Security breaches, including cyber-attacks or cyber-intrusions by computer hackers, foreign governments, cyber terrorists or others with grievances against the industry in which we operate or us in particular, may disable or damage the proper functioning of our networks and systems. It is possible that our security controls over personal and other data may not prevent unauthorized access to, or destruction, loss, theft, misappropriation or release of personally identifiable or other proprietary, confidential, sensitive or valuable information of ours or others; this access could lead to potential unauthorized disclosure of confidential personal, Company or client information that others could use to compete against us or for other disruptive, destructive or harmful purposes and outcomes. Any such disclosure or damage to our networks and systems could subject us to third party claims against us and reputational harm. If these events occur, our ability to attract new clients may be impaired or we may be subjected to damages or penalties. In addition, system-wide or local failures of these information technology systems could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our cash and short-term investments are subject to economic risk.

The Company invests its cash, cash equivalents and short-term investments in foreign and domestic bank deposits, money market funds, commercial paper and certificates of deposit. Certain of these investments are subject to general credit, liquidity, market and interest rate risks. In the event these risks caused a decline in value of any of the Company’s investments, it could adversely affect the Company’s financial condition.

Our business could suffer if we lose the services of one or more key members of our senior management.

Our future success depends upon the continued employment of our senior management team. The unforeseen departure of one or more key members of our senior management team could significantly disrupt our operations if we are unable to successfully manage the transition. The replacement of members of senior management can involve significant time and expense and create uncertainties that could delay, prevent the achievement of, or make it more difficult for us to pursue and execute on our business opportunities, which could have an adverse effect on our business, financial condition and operating results.

Further, we generally do not have non-compete agreements with our employees and, therefore, they could terminate their employment with us at any time. Our ability to retain the services of members of our senior management and other key employees could be impacted by a number of factors, including competitors’ hiring practices or the effectiveness of our compensation programs. If members of our senior management or other key employees leave our employ for any reason, they could pursue other employment opportunities with our competitors or otherwise compete with us. If we are unable to retain the services of these key personnel or attract and retain other qualified and experienced personnel on acceptable terms, our business, financial condition and operating results could be adversely affected.

Our quarterly financial results may be subject to significant fluctuations that may increase the volatility of our stock price.

Our results of operations could vary significantly from quarter to quarter. Factors that could affect our quarterly operating results include:

 

    our ability to attract new clients and retain current clients;

 

    the mix of client projects;

 

    the announcement or introduction of new services by us or any of our competitors;

 

25


Table of Contents
    the expansion of the professional services offered by us or any of our competitors into new locations both nationally and internationally;

 

    changes in the demand for our services by our clients;

 

    the entry of new competitors into any of our markets;

 

    the number of consultants eligible for our offered benefits as the average length of employment with the Company increases;

 

    the amount of vacation hours used by consultants or number of holidays in a quarter, particularly the day of the week on which they occur;

 

    availability of consultants with the requisite skills in demand by clients;

 

    changes in the pricing of our professional services or those of our competitors;

 

    variation in foreign exchange rates from one quarter to the next used to translate the financial results of our international operations;

 

    the amount and timing of operating costs and capital expenditures relating to management and expansion of our business;

 

    the timing of acquisitions and related costs, such as compensation charges that fluctuate based on the market price of our common stock; and

 

    the periodic fourth quarter consisting of 14 weeks, which occurred during the fiscal year ended May 31, 2014 and next occurs during the fiscal year ending May 30, 2020.

Due to these factors, we believe that quarter-to-quarter comparisons of our results of operations are not meaningful indicators of future performance. It is possible that in some future periods, our results of operations may be below the expectations of investors. If this occurs, the price of our common stock could decline.

If our internal control over financial reporting does not comply with the requirements of Sarbanes, our business and stock price could be adversely affected.

Section 404 of Sarbanes requires us to evaluate periodically the effectiveness of our internal control over financial reporting, and to include a management report assessing the effectiveness of our internal controls as of the end of each fiscal year. Our management report on internal controls is contained in this Annual Report on Form 10-K. Section 404 also requires our independent registered public accountant to report on our internal control over financial reporting.

Our management does not expect our internal control over financial reporting will prevent all errors or acts of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, involving us have been, or will be, detected. These inherent limitations include the realities that judgments in decision-making can be faulty and breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts of a person, or by collusion among two or more people, or by management override of controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraudulent acts may occur and not be detected.

Although our management has determined, and our independent registered public accountant has attested, that our internal control over financial reporting was effective as of May 27, 2017, we cannot assure you that we or our independent registered public accountant will not identify a material weakness in our internal controls in the future. A material weakness in our internal control over financial reporting may require management and our independent registered public accountant to evaluate our internal

 

26


Table of Contents

controls as ineffective. If our internal control over financial reporting is not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and our stock price. Additionally, if our internal control over financial reporting otherwise fails to comply with the requirements of Sarbanes, our business and stock price could be adversely affected.

We may be subject to laws and regulations that impose difficult and costly compliance requirements and subject us to potential liability and the loss of clients.

In connection with providing services to clients in certain regulated industries, such as the gaming, energy and healthcare industries, we are subject to industry-specific regulations, including licensing and reporting requirements. Complying with these requirements is costly and, if we fail to comply, we could be prevented from rendering services to clients in those industries in the future. Additionally, changes in these requirements, or in other laws applicable to us, in the future could increase our costs of compliance.

In addition, we may face challenges from certain state regulatory bodies governing the provision of certain professional services, such as legal services or audit services. The imposition of such regulations could require additional financial and operational burdens on our business.

It may be difficult for a third party to acquire the Company, and this could depress our stock price.

Delaware corporate law and our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay, defer or prevent a change of control of the Company or our management. These provisions could also discourage proxy contests and make it difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that future investors are willing to pay for your shares. These provisions:

 

    authorize our board of directors to establish one or more series of undesignated preferred stock, the terms of which can be determined by the board of directors at the time of issuance;

 

    divide our board of directors into three classes of directors, with each class serving a staggered three-year term. Because the classification of the board of directors generally increases the difficulty of replacing a majority of the directors, it may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us and may make it difficult to change the composition of the board of directors;

 

    prohibit cumulative voting in the election of directors which, if not prohibited, could allow a minority stockholder holding a sufficient percentage of a class of shares to ensure the election of one or more directors;

 

    require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing;

 

    state that special meetings of our stockholders may be called only by the chairman of the board of directors, by our chief executive officer, by the board of directors after a resolution is adopted by a majority of the total number of authorized directors, or by the holders of not less than 10% of our outstanding voting stock;

 

    establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting;

 

    provide that certain provisions of our certificate of incorporation and bylaws can be amended only by supermajority vote (a 66 2/3 % majority) of the outstanding shares. In addition, our board of directors can amend our bylaws by majority vote of the members of our board of directors;

 

    allow our directors, not our stockholders, to fill vacancies on our board of directors; and

 

    provide that the authorized number of directors may be changed only by resolution of the board of directors.

 

27


Table of Contents

We are required to recognize compensation expense related to employee stock options and our employee stock purchase plan. There is no assurance that the expense we are required to recognize measures accurately the value of our share-based payment awards and the recognition of this expense could cause the trading price of our common stock to decline.

We measure and recognize compensation expense for all stock-based compensation based on estimated values. Thus, our operating results contain a non-cash charge for stock-based compensation expense related to employee stock options and our employee stock purchase plan. In general, accounting guidance requires the use of an option-pricing model to determine the value of share-based payment awards. This determination of value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion the existing valuation models may not provide an accurate measure of the value of our employee stock options. Although the value of employee stock options is determined using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

The terms of our credit facility impose operating and financial restrictions on us, which may limit our ability to respond to changing business and economic conditions.

We currently have a $120.0 million secured revolving credit facility which is available through October 21, 2021. We are subject to various operating covenants under the credit facility which restrict our ability to, among other things, incur liens, incur additional indebtedness, make certain restricted payments, merge or consolidate and make dispositions of assets. The credit facility also requires us to comply with financial covenants limiting our total funded debt, minimum interest coverage ratio and maximum leverage ratio. Any failure to comply with these covenants may constitute a breach under the credit facility, which could result in the acceleration of all or a substantial portion of any outstanding indebtedness and termination of revolving credit commitments under the credit facility. Our inability to maintain our credit facility could materially and adversely affect our liquidity and our business.

We may be unable to or elect not to pay our quarterly dividend payment.

The Company pays a regular quarterly dividend, subject to quarterly board of director approval. The payment of, or continuation of, the quarterly dividend is at the discretion of our board of directors and is dependent upon our financial condition, results of operations, capital requirements, general business conditions, tax treatment of dividends in the United States, contractual restrictions contained in credit agreements and other agreements and other factors deemed relevant by our board of directors. We can give no assurance that dividends will be declared and paid in the future. The failure to pay the quarterly dividend, reduction of the quarterly dividend rate or the discontinuance of the quarterly dividend could adversely affect the trading price of our common stock.

We may be unable to adequately protect our intellectual property rights, including our brand name. If we fail to adequately protect our intellectual property rights, the value of such rights may diminish and our results of operations and financial condition may be adversely affected.

We believe establishing, maintaining and enhancing the RGP and Resources Global Professionals brand name is important to our business. We have applied for registration in the United States and some foreign jurisdictions on certain service marks. On March 29, 2013, we filed a United States trademark application for our RGP service mark and puzzle piece logo, Serial No. 85/890,836 as well as United States trademark applications on our RGP service mark, puzzle piece and tag line, Serial No. 85/890,838; our RGP Healthcare service mark and puzzle piece logo, Serial No. 85/890,839; our RGP Legal service mark and puzzle piece logo, Serial No. 85/890,843; and our RGP Search service mark and puzzle piece logo, Serial No. 85/890,845. We received approval of these applications and registration was granted as of December 2, 2014.

 

28


Table of Contents

We obtained a United States registration for our Resources Global Professionals service mark, Registration No. 3,298,841, which registered September 25, 2007. However, our rights to this service mark are not currently protected in some of our foreign jurisdictions, and there is no guarantee that any of our pending applications (or any appeals thereof or future applications) will be successful.

We had been aware from time to time of other companies using the name “Resources Connection” or some variation thereof and this contributed to our decision to adopt the operating company name of Resources Global Professionals. We obtained United States registration on our Resources Global Professionals service mark, Registration No. 3,298,841 registered September 25, 2007. However, our rights to this service mark are not currently protected in some of our foreign registrations, and there is no guarantee that any of our pending applications for such registration (or any appeals thereof or future applications) will be successful. Although we are not aware of other companies using the name “Resources Global Professionals” at this time, there could be potential trade name or service mark infringement claims brought against us by the users of these similar names and marks and those users may have service mark rights that are senior to ours. If these claims were successful, we could be forced to cease using the service mark “Resources Global Professionals” even if an infringement claim is not brought against us. It is also possible that our competitors or others will adopt service names similar to ours or that our clients will be confused by another company using a name, service mark or trademark similar to ours, thereby impeding our ability to build brand identity. We cannot assure you that our business would not be adversely affected if confusion did occur or if we were required to change our name.

In 2014, we developed a software product for the healthcare industry to address enterprise-wide incident management and patient safety issues. We have applied for registration in the United States on the service mark for this product. Registration was granted September 9, 2014. On February 13, 2014, we filed a Nonprovisional Application, App. No. H180290, with the United States Patent Office for patent protection for this invention, and we were notified on June 15, 2017 that our application has been approved to issue as a patent. There is no guarantee that third parties may not knowingly or unknowingly infringe our proprietary rights or challenge the proprietary rights held by us. In any or each of these cases, we may be required to expend significant time and expense in order to prevent infringement or to enforce our rights.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

 

ITEM 2. PROPERTIES.

As of May 27, 2017, we maintained 43 domestic offices, all under operating lease agreements (except for the Irvine, California location), in the following metropolitan areas:

 

Phoenix, Arizona    Atlanta, Georgia    Cincinnati, Ohio
Irvine, California    Honolulu, Hawaii    Cleveland, Ohio
Los Angeles, California (2)    Chicago, Illinois    Columbus, Ohio
Sacramento, California    Oakbrook Terrace, Illinois    Tulsa, Oklahoma
Santa Clara, California    Indianapolis, Indiana    Portland, Oregon
San Diego, California    Boston, Massachusetts    Cranberry Township, Pennsylvania
San Francisco, California    Detroit, Michigan    Philadelphia, Pennsylvania
Walnut Creek, California    Minneapolis, Minnesota    Pittsburgh, Pennsylvania
Woodland Hills, California    Kansas City, Missouri    Nashville, Tennessee
Denver, Colorado    Las Vegas, Nevada    Dallas, Texas
Hartford, Connecticut    Parsippany, New Jersey    Houston, Texas
Stamford, Connecticut    Princeton, New Jersey    San Antonio, Texas
Fort Lauderdale, Florida    New York, New York    Seattle, Washington
Tampa, Florida    Charlotte, North Carolina    Washington, D.C. (McLean, Virginia)

 

29


Table of Contents

As of May 27, 2017, we maintained 24 international offices under operating lease agreements, located in the following cities and countries:

 

Sydney, Australia    Milan, Italy    Shanghai, People’s Republic of China
Brussels, Belgium    Tokyo, Japan    Manila, Philippines
Toronto, Canada    Mexico City, Mexico    Singapore
Paris, France    Amsterdam (Utrecht), Netherlands    Seoul, South Korea
Frankfurt, Germany    Oslo, Norway    Stockholm, Sweden
Bangalore, India    Beijing, People’s Republic of China    Zurich, Switzerland
Mumbai, India    Hong Kong, People’s Republic of China    Taipei, Taiwan
Dublin, Ireland    Guangzhou, People’s Republic of China    London, United Kingdom

Our corporate offices are located in Irvine, California. We own an approximately 56,200 square foot office building in Irvine, California, of which we occupied approximately 38,000 square feet as of May 27, 2017, including space occupied by our Orange County, California practice. Approximately 18,200 square feet is leased to independent third parties.

 

ITEM 3. LEGAL PROCEEDINGS.

We are not currently subject to any material legal proceedings; however, we are a party to various legal proceedings arising in the ordinary course of our business.

 

ITEM 4. MINE SAFETY DISCLOSURES .

Not applicable.

 

30


Table of Contents

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES .

Price Range of Common Stock

Our common stock has traded on the NASDAQ Global Select Market under the symbol “RECN” since December 15, 2000. Prior to that time, there was no public market for our common stock. The approximate number of holders of record of our common stock as of July 13, 2017 was 43 (a holder of record is the name of an individual or entity that an issuer carries in its records as the registered holder (not necessarily the beneficial owner) of the issuer’s securities).

The following table sets forth, for the fiscal quarters indicated, the high and low intraday sales prices reported on the NASDAQ Global Select Market for our common stock for the periods indicated.

 

     Price Range of
Common Stock
 
     High      Low  

Fiscal 2017:

     

First Quarter

   $ 15.93      $ 13.79  

Second Quarter

   $ 17.00      $ 12.41  

Third Quarter

   $ 19.80      $ 15.85  

Fourth Quarter

   $ 17.40      $ 12.60  

Fiscal 2016:

     

First Quarter

   $ 17.12      $ 14.37  

Second Quarter

   $ 18.45      $ 14.65  

Third Quarter

   $ 18.71      $ 13.37  

Fourth Quarter

   $ 15.72      $ 12.30  

Dividend Policy

Our board of directors has established a quarterly dividend, subject to quarterly board of directors’ approval. Pursuant to declaration and approval by our board of directors, we declared a dividend of $0.11 per share of common stock during each quarter in fiscal 2017 and $0.10 per share of common stock during each quarter in fiscal 2016. On April 20, 2017, our board of directors declared a regular quarterly dividend of $0.11 per share of our common stock. The dividend was payable on June 15, 2017 to stockholders of record at the close of business on May 18, 2017. Continuation of the quarterly dividend will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, capital requirements, general business condition, contractual restrictions contained in our current or future credit agreements and other agreements, and other factors deemed relevant by our board of directors.

Issuances of Unregistered Securities

None.

Issuer Purchases of Equity Securities

In July 2015, our board of directors approved a stock repurchase program, authorizing the purchase, at the discretion of our senior executives, of our common stock for an aggregate dollar limit not to exceed $150.0 million. Subject to the aggregate dollar limit, the currently authorized stock repurchase program does not have an expiration date. Repurchases under the program may take place in the open market or in privately negotiated transactions and may be made pursuant to a Rule 10b5-1 plan.

 

31


Table of Contents

During the fourth quarter of fiscal 2017, we did not make any stock repurchases, as indicated in the table below.

 

Period

   Total
Number
of Shares
Purchased
     Average
Price
Paid
per
Share
     Total Number of
Shares
Purchased as
Part of
Announced
Programs
     Approximate Dollar
Value of Shares that
May Yet be
Purchased Under Announced
Program
 

February 26, 2017—March 25, 2017

     —        $ —          —        $ 125,103,123  

March 26, 2017—April 22, 2017

     —        $ —          —        $ 125,103,123  

April 23, 2017—May 27, 2017

     —        $ —          —        $ 125,103,123  
  

 

 

       

 

 

    

Total February 26, 2017—May 27, 2017

     —        $ —          —        $ 125,103,123  
  

 

 

       

 

 

    

Performance Graph

Set forth below is a line graph comparing the annual percentage change in the cumulative total return to the holders of our common stock with the cumulative total return of the Russell 3000 Index, a customized peer group consisting of ten companies listed below the following table and a combined classification of companies under Standard Industry Codes as 8742-Management Consulting Services for the five years ended May 27, 2017. The graph assumes $100 was invested on May 26, 2012 in our common stock and in each index (based on prices from the close of trading on May 26, 2012), and that all dividends are reinvested. Stockholder returns over the indicated period may not be indicative of future stockholder returns.

The information contained in the performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference into such filing.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Resources Connection, Inc., the Russell 3000 Index,

SIC Code 8742—Management Consulting and Peer Group

 

LOGO

*$100 invested on 5/26/12 in stock or index, including reinvestment of dividends.

 

     For the Fiscal Years Ended  
     May 26,
2012
     May 25,
2013
     May 31,
2014
     May 30,
2015
     May 28,
2016
     May 27,
2017
 

Resources Connection, Inc.

   $ 100.00      $ 92.73      $ 107.03      $ 138.15      $ 140.09      $ 117.61  

Russell 3000

   $ 100.00      $ 128.38      $ 153.30      $ 171.47      $ 171.90      $ 202.67  

SIC Code 8742—Management Consulting

   $ 100.00      $ 147.02      $ 165.58      $ 186.17      $ 205.89      $ 228.92  

Peer Group

   $ 100.00      $ 115.28      $ 141.66      $ 146.76      $ 131.97      $ 143.07  

 

32


Table of Contents

The Company’s customized peer group includes the following ten professional services companies that we believe reflect the competitive landscape in which the Company operates and acquires talent: CRA International, Inc.; FTI Consulting, Inc.; Heidrick & Struggles International, Inc.; Hudson Global, Inc.; Huron Consulting Group Inc.; ICF International, Inc.; Kforce, Inc.; Korn/Ferry International; Navigant Consulting, Inc.; and The Advisory Board Company. We have removed The Corporate Executive Board Company from our customized peer group due to its acquisition by Gartner, Inc. in 2017. The Company’s compensation committee, a committee of our board of directors comprised of independent directors, reviews the composition of the peer group annually to ensure its alignment with the Company’s size, practice areas, business model delivery and geographic reach.

 

33


Table of Contents
ITEM 6. SELECTED FINANCIAL DATA.

You should read the following selected historical consolidated financial data in conjunction with our Consolidated Financial Statements and related notes beginning on page 54 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 36. The Consolidated Statements of Operations data for the years ended May 31, 2014 and May 25, 2013 and the Consolidated Balance Sheet data at May 30, 2015, May 31, 2014 and May 25, 2013 were derived from our audited Consolidated Financial Statements that are not included in this Annual Report on Form 10-K. The Consolidated Statements of Operations data for the years ended May 27, 2017, May 28, 2016 and May 30, 2015 and the Consolidated Balance Sheet data at May 27, 2017 and May 28, 2016 were derived from our audited Consolidated Financial Statements that are included elsewhere in this Annual Report on Form 10-K. Historical results are not necessarily indicative of results that may be expected for any future periods.

 

     Years Ended  
     May 27,
2017
    May 28,
2016
    May 30,
2015
    May 31,
2014 (1)
    May 25,
2013
 
     (In thousands, except per common share and other data)  

Revenue

   $ 583,411     $ 598,521     $ 590,589     $ 567,181     $ 556,334  

Direct cost of services, primarily payroll and related taxes for professional services employees

     362,086       366,355       362,227       351,359       342,040  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     221,325       232,166       228,362       215,822       214,294  

Selling, general and administrative expenses

     183,471       174,806       173,797       172,531       168,318  

Amortization of intangible assets

     —         90       918       1,688       1,694  

Depreciation expense

     3,452       3,467       3,389       3,628       4,580  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     34,402       53,803       50,258       37,975       39,702  

Interest expense

     773       —         —         —         —    

Interest income

     (144     (186     (148     (168     (175
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     33,773       53,989       50,406       38,143       39,877  

Provision for income taxes

     15,122       23,546       22,898       18,257       19,373  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 18,651     $ 30,443     $ 27,508     $ 19,886     $ 20,504  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

          

Basic

   $ 0.57     $ 0.82     $ 0.73     $ 0.51     $ 0.50  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.56     $ 0.81     $ 0.72     $ 0.51     $ 0.50  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

          

Basic

     32,851       37,037       37,825       39,216       41,108  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     33,471       37,608       38,248       39,307       41,151  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.44     $ 0.40     $ 0.32     $ 0.28     $ 0.24  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Data:

          

Number of offices open at end of year

     67       68       68       68       73  

Total number of consultants on assignment at end of year

     2,569       2,511       2,516       2,401       2,208  

Cash dividends paid

   $ 14,157     $ 14,085     $ 11,748     $ 10,625     $ 9,497  

 

(1) The year ended May 31, 2014 consisted of 53 weeks. All other years presented consisted of 52 weeks.

 

34


Table of Contents
     May 27,
2017
     May 28,
2016
     May 30,
2015
     May 31,
2014
     May 25,
2013
 
     (Amounts in thousands)  

Cash, cash equivalents, short-term investments and U.S. government agency securities

   $ 62,329      $ 116,046      $ 112,238      $ 114,277      $ 119,012  

Working capital

     95,074        147,704        152,760        150,287        155,844  

Total assets

     364,128        417,255        416,981        420,078        417,640  

Long-term debt

     48,000        —          —          —          —    

Stockholders’ equity

     238,142        342,649        340,452        345,761        352,327  

 

35


Table of Contents
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in Part I Item 1A. “Risk Factors.” and elsewhere in this Annual Report on Form 10-K.

Overview

RGP is a multinational consulting firm that provides agile consulting services to its global client base who are faced with disruption and business transformation issues. We bring functional competencies in the areas of accounting; finance; governance, risk and compliance management; corporate advisory, strategic communications and restructuring; information management; human capital; supply chain management; and legal and regulatory. We assist our clients with projects requiring specialized expertise in:

 

    Finance and accounting process transformation and optimization; financial reporting and analysis; technical and operational accounting; merger and acquisition due diligence and integration; audit response; implementation of new accounting standards such as the revenue recognition pronouncement and lease accounting standard; and remediation support

 

    Information management services including program and project management; business and technology integration; data strategy, including governance, security and privacy; and business performance management (such as core planning and consolidation systems)

 

    Corporate advisory, strategic communications and restructuring services

 

    Governance, risk and compliance management services including contract and regulatory compliance efforts under, for example, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes Oxley Act of 2002 (“Sarbanes”); Enterprise Risk Management; internal controls management; and operation and IT audits

 

    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. We operate under the acronym RGP, branding for our operating entity name of Resources Global Professionals.

We operated solely in the United States until fiscal year 2000, when we opened our first three international offices and began to expand geographically to meet the demand for project consulting services across the world. As of May 27, 2017, we served clients from offices in 21 countries, including 24 international offices and 43 offices in the United States. Our global footprint allows the Company to support the global initiatives of our multinational client base.

We expect to continue opportunistic domestic and multinational expansion while also investing in complementary professional services lines that we believe will augment our service offerings.

 

36


Table of Contents

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 and represented 0.5% of our revenue for each of the years ended May 27, 2017, May 28, 2016 and May 30, 2015. We periodically review our outstanding accounts receivable balance and determine an estimate of the amount of those receivables we believe may prove uncollectible. Our provision for bad debts, if any, is included in our selling, general and administrative expenses.

The costs to pay our professional consultants and all related benefit and incentive costs, including provisions for paid time off and other employee benefits, are included in direct cost of services. We pay most of our consultants on an hourly basis for all hours worked on client engagements and, therefore, direct cost of services tends to vary directly with the volume of revenue we earn. We expense the benefits we pay to our consultants as they are earned. These benefits include paid time off and holidays; a discretionary bonus plan; subsidized group health, dental and life insurance programs; a matching 401(k) retirement plan; the ability to participate in the Company’s Employee Stock Purchase Plan (“ESPP”); and professional development and career training. In addition, we pay the related costs of employment, including state and federal payroll taxes, workers’ compensation insurance, unemployment insurance and other costs. Typically, a consultant must work a threshold number of hours to be eligible for all of the benefits. We recognize direct cost of services when incurred.

Selling, general and administrative expenses include the payroll and related costs of our internal management as well as general and administrative, marketing and recruiting costs. Our sales and marketing efforts are led by our management team who are salaried employees and earn bonuses based on operating results for the Company as a whole and each individual’s performance.

The Company’s fiscal year consists of 52 or 53 weeks, ending on the Saturday in May closest to May 31. Fiscal years 2017, 2016 and 2015 consisted of four 13 week quarters and a total of 52 weeks of activity for the fiscal year. For fiscal years of 53 weeks (the next of which occurs for fiscal 2020), the first three quarters consist of 13 weeks each and the fourth quarter consist of 14 weeks.

On April 5, 2017, the Company announced implementation of three strategic initiatives to help improve its performance in cost containment and revenue generation. The initiatives include (1) reducing selling, general and administrative expenses by approximately $7.0 million per year; related to this initiative, the Company took a charge of approximately $2.4 million in the fourth quarter of fiscal 2017, primarily for severance expenses; (2) improving the sales culture and business development process and practices; and (3) redesigning the business model to enhance client offerings.

The first initiative, which includes a clear and actionable plan for reducing costs in low growth markets, will streamline the Company’s field and back office operations to better match current and anticipated demand in certain geographies. The implementation of this plan will result in a reduction in overhead expenses and head count, and was completed at the end of the fiscal 2017 fourth quarter.

The second priority initiative focuses on driving the sales process on an enterprise level to advance the account development and account penetration and management activities in local markets, and will support a more sophisticated and robust sales culture. The initiative includes four major components: the implementation of Salesforce as a global Customer Relationship Management tool and the alignment of the Company’s sales process, the establishment of an enterprise-wide Business Development function, the creation of a Strategic Client Program dedicated to expanding service and revenue in the Company’s highest level clients and the evolution of the incentive compensation plans to prioritize growth. These transition activities will involve multi-step changes that are expected to take approximately 9-15 months to complete.

Finally, the Company’s decision to redesign its operating model is expected to enhance its client offerings, providing insightful business solutions as well as industry-leading project execution. For example, the Company will build deeper capabilities in project support for M&A transactions and data governance, security & analytics solutions. The shift will also enable stronger inter-office collaboration and allow the Company to deliver improved solutions, expertise and talent to all of its clients around the globe, regardless of their location.

 

37


Table of Contents

Critical Accounting Policies

The following discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The following represents a summary of our critical accounting policies, defined as those policies that we believe: (a) are the most important to the portrayal of our financial condition and results of operations and (b) involve inherently uncertain issues that require management’s most difficult, subjective or complex judgments.

Valuation of long-lived assets — We assess the potential impairment of long-lived tangible and intangible assets periodically or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our goodwill 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 Company’s future financial results and financial condition.

Allowance for doubtful accounts — We maintain an allowance for doubtful accounts for estimated losses resulting from our clients failing to make required payments for services rendered. We estimate this allowance based upon our knowledge of the financial condition of our clients (which may not include knowledge of all significant events), review of historical receivable and reserve trends and other pertinent information. While such losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of our clients could cause unfavorable trends in receivable collections and additional allowances may be required. These additional allowances could materially affect the Company’s future financial results.

Income taxes — In order to prepare our Consolidated Financial Statements, we are required to make estimates of income taxes, if applicable, in each jurisdiction in which we operate. The process incorporates an assessment of any current tax exposure together with temporary differences resulting from different treatment of transactions for tax and financial statement purposes. These differences result in deferred tax assets and liabilities that are included in our Consolidated Balance Sheets. The recovery of deferred tax assets from future taxable income must be assessed and, to the extent recovery is not likely, we will establish a valuation allowance. An increase in the valuation allowance results in recording additional tax expense and any such adjustment may materially affect the Company’s future financial result. If the ultimate tax liability differs from the amount of tax expense we have reflected in the Consolidated Statements of Operations, an adjustment of tax expense may need to be recorded and this adjustment may materially affect the Company’s future financial results and financial condition.

Revenue recognition — We primarily charge our clients on an hourly basis for the professional services of our consultants. We recognize revenue once services have been rendered and invoice the majority of our clients in the United States on a weekly basis. Some of our clients served by our international offices are billed on a monthly basis. Our clients are contractually obligated to pay us for all hours billed. To a much lesser extent, we also earn revenue if a client hires one of our consultants. This type of 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 ESPP, eligible officers and employees may purchase our common stock in accordance with the terms of the plan.

The Company estimates a value for employee stock options on the date of grant using an option-pricing model. We have elected to use the Black-Scholes option-pricing model which takes into account assumptions regarding a number of highly complex and subjective variables. These variables include the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Additional variables to be considered are the expected term, expected

 

38


Table of Contents

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 ($0.11 per share for each quarter during fiscal 2017 and $0.10 per share for each quarter of fiscal 2016) is also incorporated in determining the estimated value per share of employee stock option grants. Such dividends are subject to quarterly board of director approval. The Company’s expected life of stock option grants is 5.6 years for non-officers and 8.1 years for officers. The Company uses its historical volatility over the expected life of the stock option award to estimate the expected volatility of the price of its common stock. The Company reviews the underlying assumptions related to stock-based compensation at least annually.

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

Results of Operations

The following tables set forth, for the periods indicated, our Consolidated Statements of Operations data. These historical results are not necessarily indicative of future results.

 

     For the Years Ended  
     May 27,
2017
     May 28,
2016
     May 30,
2015
 
     (Amounts in thousands)  

Revenue

   $ 583,411      $ 598,521      $ 590,589  

Direct cost of services

     362,086        366,355        362,227  
  

 

 

    

 

 

    

 

 

 

Gross margin

     221,325        232,166        228,362  

Selling, general and administrative expenses

     183,471        174,806        173,797  

Amortization of intangible assets

     —          90        918  

Depreciation expense

     3,452        3,467        3,389  
  

 

 

    

 

 

    

 

 

 

Income from operations

     34,402        53,803        50,258  

Interest expense

     773        —          —    

Interest income

     (144      (186      (148
  

 

 

    

 

 

    

 

 

 

Income before provision for income taxes

     33,773        53,989        50,406  

Provision for income taxes

     15,122        23,546        22,898  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 18,651      $ 30,443      $ 27,508  
  

 

 

    

 

 

    

 

 

 

 

39


Table of Contents

Our operating results for the periods indicated are expressed as a percentage of revenue below.

 

     For the Years Ended  
     May 27,
2017
    May 28,
2016
    May 30,
2015
 

Revenue

     100.0     100.0     100.0

Direct cost of services

     62.1       61.2       61.3  
  

 

 

   

 

 

   

 

 

 

Gross margin

     37.9       38.8       38.7  

Selling, general and administrative expenses

     31.4       29.2       29.4  

Amortization of intangible assets

     —         —         0.2  

Depreciation expense

     0.6       0.6       0.5  
  

 

 

   

 

 

   

 

 

 

Income from operations

     5.9       9.0       8.6  

Interest expense

     0.1       —         —    

Interest income

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     5.8       9.0       8.6  

Provision for income taxes

     2.6       3.9       3.9  
  

 

 

   

 

 

   

 

 

 

Net income

     3.2     5.1     4.7
  

 

 

   

 

 

   

 

 

 

We also assess the results of our operations using EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin. EBITDA is defined as our earnings before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus stock-based compensation expense. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by revenue. These measures assist management in assessing our core operating performance. The following table presents EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin for the periods indicated and includes a reconciliation of such measures to net income, the most directly comparable GAAP financial measure:

 

     For the Years Ended  
     May 27,
2017
    May 28,
2016
    May 30,
2015
 
     (Amounts in thousands)  

Net income

   $ 18,651     $ 30,443     $ 27,508  

Adjustments:

      

Amortization of intangible assets

     —         90       918  

Depreciation expense

     3,452       3,467       3,389  

Interest expense

     773       —         —    

Interest income

     (144     (186     (148

Provision for income taxes

     15,122       23,546       22,898  
  

 

 

   

 

 

   

 

 

 

EBITDA

     37,854       57,360       54,565  

Stock-based compensation expense

     6,068       6,280       5,989  
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 43,922     $ 63,640     $ 60,554  
  

 

 

   

 

 

   

 

 

 

Revenue

   $ 583,411     $ 598,521     $ 590,589  
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA Margin

     7.5     10.6     10.3
  

 

 

   

 

 

   

 

 

 

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 company’s financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the consolidated statement of operations; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.

 

40


Table of Contents

EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. We believe that EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin provide useful information to our investors because they are financial measures used by management to assess the core performance of the Company. EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not measurements of financial performance or liquidity under GAAP and should not be considered in isolation or construed as substitutes for net income or other cash flow data prepared in accordance with GAAP for purposes of analyzing our profitability or liquidity. These measures should be considered in addition to, and not as a substitute for, net income, earnings per share, cash flows or other measures of financial performance prepared in conformity with GAAP.

Further, EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin have the following limitations:

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;

 

    Equity based compensation is an element of our long-term incentive compensation program, although we exclude it as an expense from Adjusted EBITDA when evaluating our ongoing operating performance for a particular period; and

 

    Other companies in our industry may calculate Adjusted EBITDA and Adjusted EBITDA Margin differently than we do, limiting their usefulness as a comparative measure.

Because of these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin should not be considered a substitute for performance measures calculated in accordance with GAAP.

Year Ended May 27, 2017 Compared to Year Ended May 28, 2016

Percentage change computations are based upon amounts in thousands.

Revenue. Revenue decreased $15.1 million, or 2.5%, to $583.4 million for the year ended May 27, 2017 from $598.5 million for the year ended May 28, 2016. We deliver our services to clients, whether multi-national or locally-based, in a similar fashion across the globe. Bill rates decreased 1.7% on average in fiscal 2017 compared to fiscal 2016 and hours worked decreased 0.9% between the two periods. The revenue decrease is partially attributable to reduced business consulting opportunities in fiscal 2017, including declines in services provided to clients in the economically challenged energy sector and inefficiencies in our client penetration efforts in financial services. The timing of efforts to stabilize our client penetration in this industry is uncertain. As presented in the table below, revenue increased in fiscal 2017 in Asia Pacific and Europe but declined in North America as compared to fiscal 2016.

The number of consultants on assignment at the end of fiscal 2017 was 2,569 compared to the 2,511 consultants engaged at the end of fiscal 2016 (the average number of consultants assigned was 2,487 in fiscal 2017 compared to 2,503 in fiscal 2016).

We operated 67 offices (24 abroad) as of May 27, 2017 and 68 offices (23 abroad) as of May 28, 2016. Our clients do not sign long-term contracts with us. As such, there can be no assurance as to future demand levels for the services that we provide or that future results can be reliably predicted by considering past trends.

Revenue for the Company’s major geographies across the globe consisted of the following (dollars in thousands):

 

     Revenue for the
For the Years Ended
           % of Total  
     May 27,
      2017      
     May 28,
      2016      
     %
Change
    May 27,
2017
    May 28,
2016
 

North America

   $ 479,263      $ 499,229        (4.0 )%      82.1     83.4

Europe

     60,461        57,714        4.8     10.4       9.6  

Asia Pacific

     43,687        41,578        5.1     7.5       7.0  
  

 

 

    

 

 

      

 

 

   

 

 

 

Total

   $ 583,411      $ 598,521        (2.5 )%      100.0     100.0
  

 

 

    

 

 

      

 

 

   

 

 

 

 

41


Table of Contents

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 United States 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 operations, our translated revenue (and expenses) will be higher. Using the comparable fiscal 2016 conversion rates, international revenues would have been higher than reported under GAAP by $3.5 million for the year ended May 27, 2017. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue increased by 3.8% in Asia Pacific and by 10.4% in Europe, but decreased by 3.8% in North America and by 1.9% overall. Average bill rates were about the same on a constant currency basis.

Direct Cost of Services. Direct cost of services decreased $4.3 million, or 1.2%, to $362.1 million for the year ended May 27, 2017 from $366.4 million for the year ended May 28, 2016. Comparing fiscal 2017 to fiscal 2016, direct cost of services decreased primarily because of a 0.9% decrease in hours worked and a 1.7% decrease in the average consultant pay rate per hour. The direct cost of services as a percentage of revenue (“direct cost of services percentage”) was 62.1% and 61.2% for the years ended May 27, 2017 and May 28, 2016, respectively. Comparing the two fiscal years, the direct cost of services percentage increased because of an unfavorable change in the bill rate to pay rate ratio. The stronger U.S. dollar against most of the currencies of the international countries in which we operate during fiscal 2017 affected our average pay rate. Average pay rates were about the same on a constant currency basis.

Our target direct cost of services percentage is 60% for all of our offices.

Selling, General and Administrative Expenses (“S, G  & A”). S, G & A increased $8.7 million, or 5.0%, to $183.5 million for the year ended May 27, 2017 from $174.8 million for the year ended May 28, 2016 and increased as a percentage of revenue to 31.4% in fiscal 2017 from 29.2% in fiscal 2016. Management and administrative head count was 732 and 772 at the end of fiscal 2017 and fiscal 2016, respectively. During the fourth quarter of fiscal 2017, the Company announced a restructuring program, reducing front and back office personnel by 49 and closing one U.S.-based location and one international location. The approximate cost of the program was $2.4 million, which is included in S, G & A for the fourth quarter of fiscal 2017. Fiscal 2017 S, G & A also includes severance of approximately $1.1 million and non-cash stock-based compensation expense of approximately $400,000 related to the accelerated vesting of options previously granted to a senior executive in connection with his departure from the Company. S, G & A in fiscal 2016 includes additional non-cash stock-based compensation expense of approximately $900,000 related to the accelerated vesting of options previously granted to Donald Murray in connection with his transition from Executive Chairman to Chairman. Absent these costs, S, G & A increased by $5.7 million in fiscal 2017 as compared to the same prior year period; the primary cause of this increase was investments in the Company’s managing consultant program to provide more specific skill sets to address evolving client needs and business development professionals in United States offices with high growth potential. In addition, the Company engaged external assistance on the transformation of its sales process and tools during the second half of fiscal of 2017, incurring consulting fees of approximately $1.3 million. These increased costs were partially offset as compared to the prior year by a decrease in marketing related costs and provision for uncollectable accounts. S, G & A in fiscal 2017 was favorably impacted by $1.1 million due to the strengthening of the U.S. dollar compared primarily to the Euro, Swedish Kronor and British Pound.

Sequential Operations. On a sequential quarter basis, fiscal 2017 fourth quarter revenue increased 3.3% to $148.6 million from $143.8 million, hours worked improved 1.4% and bill rates were up 1.7%. The Company’s sequential revenue increased in North America (2.5%), Europe (11.5%), and Asia Pacific (1.4%); using the comparable third quarter fiscal 2017 conversion rates, consolidated sequential revenue increased 3.0% and in North America (2.4%) and Europe (9.7%), but was down in Asia Pacific (-0.1%). Third quarter revenue was impacted by the Christmas, New Year’s and Chinese New Year’s holidays; there were no significant holidays in the fourth quarter.

The direct cost of services percentage improved from 63.7% in the third quarter to 61.0% in the fourth quarter. This improvement is primarily attributable to no compensated holidays in the United States during the fourth quarter compared to two in the third quarter, the declining impact of payroll taxes as the calendar year progresses and an improvement in the Company’s cost of its self-insured medical coverage of consultants.

 

42


Table of Contents

S, G & A expenses increased $3.0 million from the quarter ended February 25, 2017 to the quarter ended May 27, 2017. During the fourth quarter of fiscal 2017, the Company initiated and completed a restructuring program, reducing front and back office personnel by 49 and closing one U.S. based location and one international location. The approximate cost of the program was $2.4 million, which is included in S, G & A for the fourth quarter of fiscal 2017. Absent these costs, S, G & A increased by $0.6 million in the fourth quarter of fiscal 2017 as compared to the same prior year period. The increase was primarily a result of the consulting spend related to the Company’s transformation of its sales process and tools during the fourth quarter of fiscal 2017, incurring fees of approximately $1.0 million, offset by the declining impact of payroll taxes as the calendar year progresses. The leverage of S, G & A expenses improved to 30.9% (32.6% including severance costs) in the fourth quarter of fiscal 2017 compared to 31.5% in the third quarter. This was attributable to the improved revenue in the fourth quarter, providing leverage on certain fixed expenses, such as rent, in the fourth quarter.

Depreciation and Amortization Expense. Depreciation expense was $3.5 million for both fiscal 2017 and 2016. Depreciation on newly acquired property and equipment during fiscal 2017 was offset by the completion of depreciation on certain assets during the year.

Amortization of intangible assets was $90,000 in fiscal 2016. All of the Company’s intangible assets (other than goodwill) were fully amortized as of the end of fiscal 2016.

Interest Expense (Income). As described further below under the caption Liquidity and Capital Resources , the Company entered into a $120 million secured revolving credit facility (“Facility”) with Bank of America in October 2016. The Facility is available for working capital and general corporate purposes, including potential acquisitions and stock repurchases. On November 21, 2016, the Company completed its Dutch auction tender offer, purchasing approximately 6.5 million shares of the Company’s common stock for approximately $104.2 million, excluding transaction costs, funded partially by borrowing $58.0 million under the Facility and $46.2 million of cash on hand. Borrowings under the Facility bear interest at a rate per annum of either, at the Company’s option, (i) a LIBOR rate defined in the Facility plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus margin of 0.25% or 0.50% with the applicable margin depending on the Company’s consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of America’s prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company also pays an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.15% to 0.25%, depending upon our leverage ratio.

Total interest expense for fiscal 2017, including commitment fees, was approximately $773,000. The Company incurred no interest expense during fiscal 2016. During the third quarter of fiscal 2017, the Company repaid $10.0 million on the Facility and had outstanding borrowings of $49.0 million as of May 27, 2017, including outstanding letters of credit of $1.0 million. As of May 27, 2017, the interest rate on the Company’s borrowings was 2.5% on one tranche of $24.0 million based on a 1-month LIBOR plus 1.5% and 2.65% on a second tranche of $24.0 million based on a 3-month LIBOR plus 1.5%.

The Company’s interest income was $144,000 during fiscal 2017 compared to $186,000 for fiscal 2016. Although rates improved generally during fiscal 2017 compared to fiscal 2016, interest income declined 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 for the remainder of the fiscal year.

Income Taxes. The provision for income taxes decreased to $15.1 million (effective rate of approximately 45%) for the year ended May 27, 2017 from $23.5 million (effective rate of 44%) for the year ended May 28, 2016. The provision for taxes in both fiscal 2017 and fiscal 2016 resulted from taxes on income from operations in the United States and certain other foreign jurisdictions, a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the United States statutory rates, and no benefit for losses in jurisdictions in which a valuation allowance on operating loss carryforwards had previously been established. The decrease in the provision for income taxes is because of lower U.S. pretax income. The effective tax rate increased because of lower U.S. pretax income in fiscal 2017 partially offset by lower international pretax losses. The effective tax rate in both fiscal years disproportionately magnifies the effect of the components of the tax rate that differ from the standard federal rate, including non-deductible permanent differences and incentive stock options (“ISOs”). Based upon current economic circumstances, management will continue to monitor the need to record additional or release existing valuation allowances in the future, primarily related to certain foreign jurisdictions. Realization of the currently reserved foreign deferred tax assets is dependent upon generating sufficient future taxable income in those foreign territories.

 

43


Table of Contents

Periodically, the Company reviews the components of both book and taxable income to analyze the adequacy of the tax provision. There can be no assurance that the Company’s effective tax rate will remain constant in the future because of the lower benefit from the United States statutory rate for losses in certain foreign jurisdictions, the limitation on the benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established, and the unpredictability of timing and the amount of eligible disqualifying ISO exercises.

The Company cannot recognize a tax benefit for certain ISO grants unless and until the holder exercises his or her option and then sells the shares within a certain period of time. In addition, the Company can only recognize a potential tax benefit for employees’ acquisition and subsequent sale of shares purchased through the ESPP if the sale occurs within a certain defined period. As a result, the Company’s provision for income taxes is likely to fluctuate from these factors for the foreseeable future. Further, those tax benefits associated with ISO grants fully vested at the date of adoption of the current accounting rules governing stock awards will be recognized as additions to paid-in capital when and if those options are exercised and not as a reduction to the Company’s tax provision. The Company recognized a benefit of approximately $2.1 million related to stock-based compensation for nonqualified stock options expensed and for eligible disqualifying ISO exercises during both fiscal 2017 and 2016. The proportion of expense related to non-qualified stock option grants (for which the Company may recognize a tax benefit in the same quarter as the related compensation expense in most instances) is significant as compared to expense related to ISOs (including ESPPs). However, the timing and amount of eligible disqualifying ISO exercises cannot be predicted. The Company predominantly grants nonqualified stock options to employees in the United States.

The Company has maintained a position of being indefinitely reinvested in its foreign subsidiaries’ earnings by not expecting to remit foreign earnings in the foreseeable future. Being indefinitely reinvested does not require a deferred tax liability to be recognized on the foreign earnings. Management’s indefinite reinvestment position is supported by:

 

  1) RGP in the United States has generated more than enough cash to fund operations and expansion, including acquisitions. RGP uses its excess cash to, at its discretion, return cash to shareholders through dividend payments and stock repurchases.

 

  2) RGP in the United States has no debt or any other current or known obligations that require cash to be remitted from foreign subsidiaries.

 

  3) Management’s growth objectives include allowing cash to accumulate in RGP’s profitable foreign subsidiaries with the expectation of finding strategic expansion plans to further penetrate RGP’s most successful locations.

 

  4) The consequences of distributing foreign earnings have historically been deemed to be tax inefficient for RGP or not materially beneficial.

Year Ended May 28, 2016 Compared to Year Ended May 30, 2015

Percentage change computations are based upon amounts in thousands.

Revenue. Revenue increased $7.9 million, or 1.3%, to $598.5 million for the year ended May 28, 2016 from $590.6 million for the year ended May 30, 2015. We deliver our services to clients, whether multi-national or locally -ased, in a similar fashion across the globe. In fiscal 2016, revenue increased in North America and Asia Pacific but declined in Europe as compared to fiscal 2015 as noted in the table below. Bill rates increased 0.8% on average in fiscal 2016 compared to fiscal 2015, while hours worked increased 1.4% over the same period. During fiscal 2016, revenue declined with certain clients in the energy services industries due to the on-going turmoil in the energy market, primarily in the U.S. The timing of stabilization with clients in this industry is uncertain.

The number of consultants on assignment at the end of fiscal 2016 was 2,511 compared to the 2,516 consultants engaged at the end of fiscal 2015 (the average number of consultants assigned was 2,503 in fiscal 2016 compared to 2,487 in fiscal 2015).

We operated 68 offices (23 abroad) at both May 28, 2016 and May 30, 2015. Our clients do not sign long-term contracts with us. As such, there can be no assurance as to future demand levels for the services that we provide or that future results can be reliably predicted by considering past trends.

 

44


Table of Contents

Revenue for the Company’s major geographies across the globe consisted of the following (dollars in thousands):

 

     Revenue for the Years Ended            % of Total  
     May 28,
      2016      
     May 30,
      2015      
     %
Change
    May 28,
2016
    May 30,
2015
 

North America

   $ 499,229      $ 492,207        1.4     83.4     83.3

Europe

     57,714        59,350        (2.8 )%      9.6       10.1  

Asia Pacific

     41,578        39,032        6.5     7.0       6.6  
  

 

 

    

 

 

      

 

 

   

 

 

 

Total

   $ 598,521      $ 590,589        1.3     100.0     100.0
  

 

 

    

 

 

      

 

 

   

 

 

 

Our financial results are subject to fluctuations in the exchange rates of foreign currencies in relation to the United States dollar. Revenues denominated in foreign currencies are translated into United States dollars at the monthly average exchange rates in effect during each period. Thus, if the value of the United States dollar strengthens relative to the currencies of our non-United States based operations, our translated revenue (and expenses) will be lower. Using the comparable fiscal 2015 conversion rates, international revenues would have been higher than reported under GAAP by $8.9 million for the year ended May 28, 2016. Using these constant currency rates, which we believe provides a more comprehensive view of our business, our revenue increased by 1.8% in North America, by 6.0% in Europe, by 11.4% in Asia Pacific and by 2.9% overall.

The stronger U.S. dollar against most of the currencies of the international countries in which we operate during fiscal 2016 affected our average bill rate. Using the comparable fiscal 2015 conversion rates, the average bill rate would have increased 1.7% in fiscal 2016 compared to fiscal 2015.

Direct Cost of Services. Direct cost of services increased $4.2 million, or 1.2%, to $366.4 million for the year ended May 28, 2016 from $362.2 million for the year ended May 30, 2015. Comparing fiscal 2016 to fiscal 2015, direct cost of services increased primarily because of a 1.4% increase in hours worked, while the average consultant pay rate per hour was the same in both years. The direct cost of services percentage was 61.2% and 61.3% for the years ended May 28, 2016 and May 30, 2015, respectively. Comparing the two fiscal years, there were no significant differences in the components comprising the direct cost of services percentage. The stronger U.S. dollar against most of the currencies of the international countries in which we operate during fiscal 2016 affected our average pay rate. Using the comparable fiscal 2015 conversion rates, the average pay rate would have increased 1.7% in fiscal 2016 compared to fiscal 2015.

Our target direct cost of services percentage is 60% for all of our offices.

Selling, General and Administrative Expenses. S, G & A increased $1.0 million, or 0.6%, to $174.8 million for the year ended May 28, 2016 from $173.8 million for the year ended May 30, 2015. However, S, G & A decreased as a percentage of revenue from 29.4% in fiscal 2015 to 29.2% in fiscal 2016. Management and administrative head count was 772 at the end of fiscal 2016 and 742 at the end of fiscal 2015. S, G & A for the year ended May 28, 2016 includes additional non-cash stock-based compensation expense of approximately $900,000 related to the accelerated vesting of options previously granted to Donald Murray in connection with his transition from Executive Chairman to Chairman. During fiscal 2016, compensation and related benefit costs increased, attributable to headcount additions in U.S. and Asia Pacific in offices experiencing growth; and the Company increased its reserve for uncollectable accounts by $1.1 million. These costs were offset as compared to the prior year by a decrease in severance charges related to our European operations and decreases in other non-cash stock-based compensation expense. S, G & A in fiscal 2016 was favorably impacted by $3.0 million due to the strengthening of the U.S. dollar compared primarily to the Euro, Swedish Kronor and British Pound.

Sequential Operations. On a sequential quarter basis, fiscal 2016 fourth quarter revenue increased 3.9% to $152.5 million from $146.8 million, hours worked improved 2.8% and bill rates were up 0.8%. The Company’s sequential revenue increased in North America (3.1%), Europe (11.7%), and Asia Pacific (2.8%); using the comparable third quarter fiscal 2016 conversion rates, sequential revenue increased in North America (3.1%) and Europe (9.5%), but was down in Asia Pacific (-0.7%). Third quarter revenue was impacted by the Christmas, New Year’s and Chinese New Year’s holidays; there were no significant holidays in the fourth quarter.

 

45


Table of Contents

The direct cost of services percentage improved from 62.6% in the third quarter to 60.1% in the fourth quarter. This improvement is primarily attributable to no compensated holidays in the United States during the fourth quarter compared to two in the third quarter, the declining impact of payroll taxes as the calendar year progresses and an improvement in the Company’s cost of its self-insured medical coverage of consultants.

S, G & A expenses increased $1.0 million from the quarter ended February 27, 2016 to the quarter ended May 28, 2016, primarily as a result of the increased spending for marketing programs, offset by the declining impact of payroll taxes as the calendar year progresses and improvement in the Company’s cost of self-insured medical coverage for employees. The leverage of S, G & A expenses improved to 29.1% in the fourth quarter of fiscal 2016 compared to 29.5% in the third quarter. This was attributable to the improved revenue in the fourth quarter, which provided leverage on certain fixed expenses, such as rent, in the fourth quarter.

Amortization and Depreciation Expense. Amortization of intangible assets decreased from $918,000 in fiscal 2015 to $90,000 in fiscal 2016. During fiscal 2016, the Company completed amortization of all of its intangible assets.

Depreciation expense increased from $3.4 million for the year ended May 30, 2015 to $3.5 million for the year ended May 28, 2016.

Interest Income. Interest income increased to $186,000 in fiscal 2016 compared to $148,000 in fiscal 2015. The increase in interest income is the result of improved rates on amounts available for investment in fiscal 2016. The Company has invested available cash in certificates of deposit and money market investments that have been classified as cash equivalents due to the short maturities of these investments. As of May 28, 2016, the Company had $25.0 million of investments in commercial paper and U.S. Government Agency securities with remaining maturity dates between three months and one year from the balance sheet date which are classified as short-term investments and considered “held-to-maturity” securities.

Income Taxes. The provision for income taxes increased from $22.9 million (effective rate of 45.4%) for the year ended May 30, 2015 to $23.5 million (effective rate of 43.6%) for the year ended May 28, 2016. The provision for taxes in both fiscal 2016 and fiscal 2015 resulted from taxes on income from operations in the United States and certain other foreign jurisdictions, a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the United States statutory rates, and no benefit for losses in jurisdictions in which a valuation allowance on operating loss carryforwards had previously been established. The increase in the provision for income taxes is because of higher pretax income. The effective tax rate decreased because of higher U.S. pretax income coupled with lower international pretax losses. Decreased losses from countries with valuation allowances allow the tax expense to be spread over a higher pretax base, which lowers the effective tax rate.

 

46


Table of Contents

Quarterly Results

The following table sets forth our unaudited quarterly Consolidated Statements of Operations data for each of the eight quarters in the two-year period ended May 27, 2017. In the opinion of management, this data has been prepared on a basis substantially consistent with our audited Consolidated Financial Statements appearing elsewhere in this document, and includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the data. The quarterly data should be read together with our Consolidated Financial Statements and related notes appearing elsewhere in this document. The operating results are not necessarily indicative of the results to be expected in any future period.

 

    Quarters Ended  
    May 27,
2017
    Feb. 25,
2017
    Nov. 26,
2016
    Aug. 27,
2016
    May 28,
2016
    Feb. 27,
2016
    Nov. 28,
2015
    Aug. 29,
2015
 
    (In thousands, except net income per common share)  

Revenue

  $ 148,620     $ 143,844     $ 147,558     $ 143,389     $ 152,515     $ 146,779     $ 150,887     $ 148,340  

Direct cost of services, primarily payroll and related taxes for professional services employees

    90,579       91,597       91,048       88,862       91,616       91,851       92,011       90,877  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    58,041       52,247       56,510       54,527       60,899       54,928       58,876       57,463  

Selling, general and administrative expenses

    48,425       45,376       46,056       43,614       44,360       43,318       43,171       43,957  

Amortization of intangible assets

    —         —         —         —         —         30       30       30  

Depreciation expense

    941       909       808       794       861       867       881       858  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    8,675       5,962       9,646       10,119       15,678       10,713       14,794       12,618  

Interest expense

    358       351       64       —         —         —         —         —    

Interest income

    (18     (16     (40     (70     (68     (52     (34     (32
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

    8,335       5,627       9,622       10,189       15,746       10,765       14,828       12,650  

Provision for income taxes

    3,898       2,743       3,930       4,551       7,069       4,808       6,152       5,517  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 4,437     $ 2,884     $ 5,692     $ 5,638     $ 8,677     $ 5,957     $ 8,676     $ 7,133  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share (1):

               

Basic

  $ 0.15     $ 0.10     $ 0.16     $ 0.16     $ 0.24     $ 0.16     $ 0.23     $ 0.19  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.15     $ 0.09     $ 0.16     $ 0.15     $ 0.23     $ 0.16     $ 0.23     $ 0.19  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Net income per common share calculations for each of the quarters were based upon the weighted average number of shares outstanding for each period, and the sum of the quarters may not necessarily be equal to the full year net income per common share amount.

Our quarterly results have fluctuated in the past and we believe they will continue to do so in the future. Certain factors that could affect our quarterly operating results are described in Part I Item 1A. “Risk Factors.” Due to these and other factors, we believe that quarter-to-quarter comparisons of our results of operations are not meaningful indicators of future performance.

Liquidity and Capital Resources

Our primary source of liquidity is cash provided by our operations and ability to access our Facility and, historically, to a lesser extent, stock option exercises and ESPP purchases. On an annual basis, we have generated positive cash flows from operations since inception, and we continued to do so for the year ended May 27, 2017. Our ability to generate positive cash flow from operations in the future will be, at least in part, dependent on continued improvement in global economic conditions. As of May 27, 2017, the Company had $62.3 million of cash and cash equivalents.

In October 2016, we entered into a $120 million Facility with Bank of America. The Facility is available for working capital and general corporate purposes, including acquisitions and stock repurchases. The Facility allows the Company to choose the interest rate applicable to advances. Borrowings under the Facility bear interest at a rate per annum of either, at the Company’s

 

47


Table of Contents

option, (i) a London Interbank Offered Rate (“LIBOR”) defined in the Facility plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus margin of 0.25% or 0.50% with the applicable margin depending on the Company’s consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of America’s prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company pays an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.15% to 0.25% depending upon on the Company’s consolidated leverage ratio. The Facility expires October 17, 2021.

As of May 27, 2017, the Company had borrowings of approximately $48.0 million under the Facility and directed Bank of America to issue approximately $1.0 million of outstanding letters of credit for the benefit of third parties related to operating leases and guarantees. As of May 27, 2017, the Company was in compliance with the financial covenants in the Facility.

In October 2016, we commenced a modified Dutch auction tender offer to purchase up to 6 million shares of our common stock at a price not greater than $16.00 per share and not less than $13.50 per share. In November 2016, the Company exercised its right to increase the size of the tender offer by up to 2.0% of its outstanding common stock and, following expiration of the tender offer on November 15, 2016, we purchased 6,515,264 shares of our common stock at a per share price of $16.00 for approximately $104.2 million, excluding transaction costs. We funded the tender offer through $58.0 million borrowed under the Facility and the remainder with cash on hand.

Operating Activities, fiscal 2017 and 2016

Operating activities provided $28.3 million and $38.3 million in cash in fiscal 2017 and fiscal 2016, respectively. Cash provided by operations in fiscal 2017 resulted from net income of $18.7 million and net favorable non-cash reconciling adjustments of $14.5 million. Other balance sheet account changes in fiscal 2017, including working capital balances, were a net use of cash of $4.9 million; the primary driver of the use was the increase in the Company’s accounts receivable as of the end of the fiscal year and the unfavorable change in the balance of income taxes due. In fiscal 2016, cash provided by operations resulted from net income of $30.4 million and net favorable non-cash reconciling adjustments of $12.0 million. Other balance sheet account changes in fiscal 2016, including working capital balances, were a net use of cash of $4.2 million. Non-cash items in both years include depreciation and amortization (which decreased between the two periods by $0.1 million) and stock-based compensation expense which decreased between the two periods by $0.2 million. Stock-based compensation expense does not reflect an actual cash outflow from the Company but is an estimate of the fair value of the services provided by employees and directors in exchange for share-based payments such as stock options, restricted stock and ESPP purchase rights. The change between the two years is also influenced by the acceleration of vesting related to options granted to a senior executive who left the Company in fiscal 2017 (approximately $0.4 million) and the acceleration of vesting in fiscal 2016 of options previously granted to Donald Murray in connection with his transition from Executive Chairman to Chairman (approximately $0.9 million).

Investing Activities, fiscal 2017 and 2016

Net cash provided by investing activities was $20.4 million for fiscal 2017 compared to net cash used of $2.4 million for fiscal 2016. During fiscal 2017, redemptions of short-term investments were $25.0 million as the Company accumulated cash from maturing investments in preparation for the tender offer; in the prior year period, purchases and redemptions of short-term investments were about the same. Purchases of property and equipment increased approximately $2.4 million between the two periods as the Company completed several office relocations.

Financing Activities, fiscal 2017 and 2016

Net cash used in financing activities totaled $76.9 million and $32.3 million for the years ended May 27, 2017 and May 28, 2016, respectively. Net cash used in financing activities for fiscal 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 Company’s existing cash balances. Subsequent to the Dutch auction tender offer, the Company repaid $10.0 million borrowed under the Facility. The Company also used $13.5 million to purchase approximately 843,000 shares of common stock on the open market during fiscal 2017. This compares to $28.1 million used in fiscal 2016 to purchase approximately 1.8 million shares of its common stock on the open market. Payments for the Company’s dividend program increased slightly from $14.1 million in fiscal 2016 to $14.2 million in fiscal 2017. The increase in quarterly

 

48


Table of Contents

dividend from $0.10 per common share in fiscal 2016 to $0.11 per common share in fiscal 2017 was offset by the reduced number of shares eligible for dividend after the Company’s Dutch auction tender offer in November 2016. Finally, the Company received approximately $8.4 million in fiscal 2017 from the exercise of employee stock options and issuance of shares via the Company’ ESPP, compared to $9.8 million in the prior fiscal year.

Our ongoing operations and anticipated growth in the geographic markets we currently serve will require us to continue to make investments in office premises and capital equipment, primarily technology hardware and software. In addition, we may consider making strategic acquisitions. We currently believe that our current cash, ongoing cash flows from our operations and funding available under our Facility will be adequate to meet our working capital and capital expenditure needs for at least the next 12 months. If we require additional capital resources to grow our business, either internally or through acquisition, we may seek to sell additional equity securities or to increase our use of our Facility. In addition, if we decide to make additional share repurchases, we may fund these through existing cash balances or use of our Facility. The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders. We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future. In the event we are unable to obtain additional financing when needed, we may be compelled to delay or curtail our plans to develop our business or to pay dividends on our capital stock, which could have a material adverse effect on our operations, market position and competitiveness.

Operating Activities, fiscal 2016 and 2015

Operating activities provided $38.3 million and $31.8 million in cash in fiscal 2016 and fiscal 2015, respectively. Cash provided by operations in fiscal 2016 resulted from net income of $30.4 million and net favorable non-cash reconciling adjustments of $12.0 million. Other balance sheet account changes in fiscal 2016, including working capital balances, were a net use of cash of $4.2 million; the primary driver of the use was the increase in the Company’s accounts receivable as of the end of the fiscal year because of higher weekly revenues as compared to the same period of the prior fiscal year. In fiscal 2015, cash provided by operations resulted from net income of $27.5 million and net favorable non-cash reconciling adjustments of $11.1 million. Other balance sheet account changes in fiscal 2015, including working capital balances, were a net use of cash of $6.9 million. Non-cash items in both years include depreciation and amortization (which decreased between the two periods by $0.8 million because certain intangible assets became fully amortized during fiscal 2015) and stock-based compensation expense which increased between the two periods by $0.3 million. Stock-based compensation expense does not reflect an actual cash outflow from the Company but is an estimate of the fair value of the services provided by employees and directors in exchange for share-based payments such as stock options, restricted stock and ESPP purchase rights. The increase in fiscal 2016 is attributable to the acceleration of vesting related to options previously granted to Donald Murray in connection with his transition from Executive Chairman to Chairman.

Investing Activities, fiscal 2016 and 2015

Net cash used in investing activities was $2.4 million for fiscal 2016 compared to net cash provided of $6.6 million for fiscal 2015. Cash received from the redemption and purchases of short-term investments (primarily commercial paper) was approximately the same in fiscal 2016 but was a source of cash in fiscal 2015 of $9.0 million. The Company spent the same amount ($2.4 million) on property and equipment in fiscal 2016 as fiscal 2015.

Financing Activities, fiscal 2016 and 2015

Net cash used in financing activities totaled $32.3 million for the year ended May 28, 2016, compared to $28.9 million for the year ended May 30, 2015. The Company received approximately $9.8 million in fiscal 2016 from the exercise of employee stock options and issuance of shares via the Company’s ESPP compared to $9.1 million in the prior fiscal year. However, the Company used more cash in fiscal 2016 ($28.1 million) to purchase approximately 1.8 million shares of our common stock as compared to $26.3 million to purchase 1.7 million shares of common stock in fiscal 2015. Payments for the Company’s dividend program increased from $11.7 million in fiscal 2015 to $14.1 million in fiscal 2016 as a result of the Company’s increase in fiscal 2016 of its quarterly dividend from $0.08 to $0.10 per common share.

 

49


Table of Contents

Contractual Obligations

At May 27, 2017, the Company had operating leases, primarily for office premises, and purchase obligations, primarily for property and equipment, expiring at various dates through March 2027. At May 27, 2017, the Company had no capital leases (although, as described in “Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements, we will recognize as liabilities in our Balance Sheet the obligation for outstanding operating leases primarily related to office facilities commencing in fiscal 2020). The following table summarizes our future minimum rental commitments under operating leases and our other known contractual obligations as of May 27, 2017:

 

     Payments Due by Period  
     Total      Fiscal
2018
     Fiscal
2019-2020
     Fiscal
2021-2022
     Thereafter  
     (Amounts in thousands)  

Operating lease obligations

   $ 45,009      $ 10,537      $ 16,297      $ 11,182      $ 6,993  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchase obligations

   $ 1,129      $ 440      $ 575      $ 114      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt

   $ 48,000      $ —        $ —        $ 48,000      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is contained in Note 2 — Summary of Significant Accounting Policies — to the Consolidated Financial Statements for the year ended May 27, 2017.

Inflation

Inflation was not a material factor in either revenue or operating expenses during the fiscal years ended May 27, 2017, May 28, 2016 or May 30, 2015.

 

50


Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk. We are primarily exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on the market values of our cash and cash equivalents and our borrowings under our Facility that bear interest at a variable market rate.

At the end of fiscal 2017, we had approximately $62.3 million of cash and cash equivalents and $48.0 million of borrowings under our Facility. The earnings on investments are subject to changes in interest rates; however, assuming a constant balance available for investment, a 10% decline in interest rates would reduce our interest income but would not have a material impact on our consolidated financial position or results of operations.

Borrowings under the Facility bear interest at a rate per annum of either, at the Company’s option, (i) a London Interbank Offered Rate (“LIBOR”) rate defined in the Facility plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus margin of 0.25% or 0.50% with the applicable margin depending on the Company’s consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of America’s prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. We are exposed to rate risk related to fluctuations in the LIBOR rate primarily; at the current level of borrow as of May 27, 2017 of $48.0 million, a 10% change in interest rates would have resulted in approximately a $0.1 million change in annual interest expense.

Foreign Currency Exchange Rate Risk. For the year ended May 27, 2017, approximately 19.5% of the Company’s revenues were generated outside of the United States. As a result, our operating results are subject to fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at the monthly average exchange rates prevailing during the period. Thus, as the value of the U.S. dollar fluctuates relative to the currencies in our non-United States based operations, our reported results may vary.

Assets and liabilities of our non-United States based operations are translated into U.S. dollars at the exchange rate effective at the end of each monthly reporting period. Approximately 58% of our fiscal year-end balances of cash and cash equivalents were denominated in U.S. dollars. The remaining amount of approximately 42% was comprised primarily of cash balances translated from Japanese Yen, Euros, Canadian Dollars and Chinese Yuan. The difference resulting from the translation each period of assets and liabilities of our non-United States based operations is recorded as a component of stockholders’ equity in other accumulated other comprehensive income or loss.

Although we intend to monitor our exposure to foreign currency fluctuations, we do not currently use financial hedging techniques to mitigate risks associated with foreign currency fluctuations including in a limited number of circumstances when we may be asked to transact with our client in one currency but are obligated to pay our consultant in another currency. We cannot provide assurance that exchange rate fluctuations will not adversely affect our financial results in the future.

 

51


Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

RESOURCES CONNECTION, INC.

CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     53  

Consolidated Balance Sheets as of May 27, 2017 and May 28, 2016

     54  

Consolidated Statements of Operations for each of the three years in the period ended May 27, 2017

     55  

Consolidated Statements of Comprehensive Income for each of the three years in the period ended May 27, 2017

     56  

Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended May 27, 2017

     57  

Consolidated Statements of Cash Flows for each of the three years in the period ended May 27, 2017

     58  

Notes to Consolidated Financial Statements

     59  

See also “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Quarterly Results,” which is incorporated herein by reference.

 

52


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Resources Connection, Inc.

We have audited the accompanying consolidated balance sheets of Resources Connection, Inc. and subsidiaries as of May 27, 2017 and May 28, 2016, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended May 27, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Resources Connection, Inc. and subsidiaries as of May 27, 2017 and May 28, 2016, and the results of their operations and their cash flows for each of the three years in the period ended May 27, 2017, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Resources Connection, Inc.‘s and subsidiaries’ internal control over financial reporting as of May 27, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated July 24, 2017 expressed an unqualified opinion on the effectiveness of Resources Connection, Inc.’s and subsidiaries’ internal control over financial reporting.

/s/ RSM US LLP

Irvine, California

July 24, 2017

 

53


Table of Contents

RESOURCES CONNECTION, INC.

CONSOLIDATED BALANCE SHEETS

 

     May 27,
      2017      
    May 28,
      2016      
 
     (Amounts in thousands, except
par value per share)
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 62,329     $ 91,089  

Short-term investments

     —         24,957  

Trade accounts receivable, net of allowance for doubtful accounts of $2,517 and $2,994 as of May 27, 2017 and May 28, 2016, respectively

     98,222       97,807  

Prepaid expenses and other current assets

     4,395       4,735  

Income taxes receivable

     1,899       —    
  

 

 

   

 

 

 

Total current assets

     166,845       218,588  

Goodwill

     171,088       171,183  

Property and equipment, net

     23,354       21,274  

Deferred income taxes

     973       4,237  

Other assets

     1,868       1,973  
  

 

 

   

 

 

 

Total assets

   $ 364,128     $ 417,255  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable and accrued expenses

   $ 14,102     $ 13,606  

Accrued salaries and related obligations

     49,241       50,155  

Other liabilities

     8,428       7,123  
  

 

 

   

 

 

 

Total current liabilities

     71,771       70,884  

Long-term debt

     48,000       —    

Deferred income taxes

     1,280       —    

Other long-term liabilities

     4,935       3,722  
  

 

 

   

 

 

 

Total liabilities

     125,986       74,606  
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value, 5,000 shares authorized; zero shares issued and outstanding

     —         —    

Common stock, $0.01 par value, 70,000 shares authorized; 58,992 and 58,237 shares issued, and 29,662 and 36,229 shares outstanding as of May 27, 2017 and May 28, 2016, respectively

     590       582  

Additional paid-in capital

     398,828       388,763  

Accumulated other comprehensive loss

     (11,396     (10,794

Retained earnings

     332,024       327,954  

Treasury stock at cost, 29,330 and 22,008 shares as of May 27, 2017 and May 28, 2016, respectively

     (481,904     (363,856
  

 

 

   

 

 

 

Total stockholders’ equity

     238,142       342,649  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 364,128     $ 417,255  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

54


Table of Contents

RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     For the Years Ended  
     May 27,
2017
    May 28,
2016
    May 30,
2015
 
     (Amounts in thousands, except per  
     share amounts)  

Revenue

   $ 583,411     $ 598,521     $ 590,589  

Direct cost of services, primarily payroll and related taxes for professional services employees

     362,086       366,355       362,227  
  

 

 

   

 

 

   

 

 

 

Gross margin

     221,325       232,166       228,362  

Selling, general and administrative expenses

     183,471       174,806       173,797  

Amortization of intangible assets

     —         90       918  

Depreciation expense

     3,452       3,467       3,389  
  

 

 

   

 

 

   

 

 

 

Income from operations

     34,402       53,803       50,258  

Interest expense

     773       —      

Interest income

     (144     (186     (148
  

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     33,773       53,989       50,406  

Provision for income taxes

     15,122       23,546       22,898  
  

 

 

   

 

 

   

 

 

 

Net income

   $ 18,651     $ 30,443     $ 27,508  
  

 

 

   

 

 

   

 

 

 

Net income per common share:

      

Basic

   $ 0.57     $ 0.82     $ 0.73  
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.56     $ 0.81     $ 0.72  
  

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

      

Basic

     32,851       37,037       37,825  
  

 

 

   

 

 

   

 

 

 

Diluted

     33,471       37,608       38,248  
  

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.44     $ 0.40     $ 0.32  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

55


Table of Contents

RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     For the Years Ended  
     May 27,
2017
    May 28,
2016
     May 30,
2015
 
     (Amounts in thousands)  

COMPREHENSIVE INCOME:

       

Net income

   $ 18,651     $ 30,443      $ 27,508  

Foreign currency translation adjustment, net of tax

     (602     123        (8,344
  

 

 

   

 

 

    

 

 

 

Total comprehensive income

   $ 18,049     $ 30,566      $ 19,164  
  

 

 

   

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

56


Table of Contents

RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

     Common Stock      Additional
Paid-in
Capital
    Treasury Stock     Accumulated
Other
Comprehensive
(Loss) Income
    Retained
Earnings
    Total
Stockholders’
Equity
 
             
             
   Shares     Amount        Shares     Amount        
     (Amounts in thousands)  

Balances as of May 31, 2014

     56,738       567        360,445       18,580       (311,508     (2,573     298,830     $ 345,761  

Exercise of stock options

     408       4        5,299               5,303  

Stock-based compensation expense

          5,989               5,989  

Tax shortfall from stock-based compensation arrangements

          (1,216             (1,216

Issuance of common stock under Employee Stock Purchase Plan

     337       4        3,768               3,772  

Issuance of restricted stock

     6                    —    

Issuance of restricted stock out of treasury stock to board of director members

            (44     1,026         (1,026     —    

Forfeitures of restricted stock

     (1                  —    

Purchase of shares

            1,679       (26,277         (26,277

Cash dividends declared ($0.32 per share)

                  (12,044     (12,044

Currency translation adjustment

                (8,344       (8,344

Net income for the year ended May 30, 2015

                  27,508       27,508  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of May 30, 2015

     57,488       575        374,285       20,215       (336,759     (10,917     313,268       340,452  

Exercise of stock options

     418       4        5,304               5,308  

Stock-based compensation expense

          6,280               6,280  

Tax shortfall from stock-based compensation arrangements

          (1,565             (1,565

Issuance of common stock under Employee Stock Purchase Plan

     325       3        4,459               4,462  

Issuance of restricted stock

     6                    —    

Issuance of restricted stock out of treasury stock to board of director members

            (44     1,031         (1,031     —    

Purchase of shares

            1,837       (28,128         (28,128

Cash dividends declared ($0.40 per share)

                  (14,726     (14,726

Currency translation adjustment

                123         123  

Net income for the year ended May 28, 2016

                  30,443       30,443  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of May 28, 2016

     58,237       582        388,763       22,008       (363,856     (10,794     327,954       342,649  

Exercise of stock options

     305       3        3,853               3,856  

Stock-based compensation expense

          6,068               6,068  

Tax shortfall from stock-based compensation arrangements

          (4,344             (4,344

Issuance of common stock under Employee Stock Purchase Plan

     359       4        4,489               4,493  

Issuance of restricted stock

     92       1        (1             —    

Issuance of restricted stock out of treasury stock to board of director members

            (36     838         (838     —    

Forfeitures of restricted stock

     (1                  —    

Purchase of shares

            7,358       (118,886         (118,886

Cash dividends declared ($0.44 per share)

                  (13,743     (13,743

Currency translation adjustment

                (602       (602

Net income for the year ended May 27, 2017

                  18,651       18,651  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of May 27, 2017

     58,992     $ 590      $ 398,828       29,330     $ (481,904   $ (11,396   $ 332,024     $ 238,142  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

57


Table of Contents

RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the Years Ended  
     May 27,
2017
    May 28,
2016
    May 30,
2015
 
     (Amounts in thousands)  

Cash flows from operating activities:

      

Net income

   $ 18,651     $ 30,443     $ 27,508  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     3,452       3,557       4,307  

Stock-based compensation expense

     6,068       6,280       5,989  

Excess tax benefits from stock-based compensation

     (8     (185     (86

Loss on disposal of assets

     19       —         15  

Bad debt expense

     458       1,118       212  

Deferred income taxes

     4,538       1,243       692  

Changes in operating assets and liabilities:

      

Trade accounts receivable

     (1,494     (2,702     (10,052

Prepaid expenses and other current assets

     374       (651     547  

Income taxes

     (6,232     (949     (2,187

Other assets

     253       15       254  

Accounts payable and accrued expenses

     681       176       304  

Accrued salaries and related obligations

     (434     1,574       4,090  

Other liabilities

     1,939       (1,657     158  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     28,265       38,262       31,751  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Redemption of short-term investments

     24,957       45,000       49,000  

Purchase of short-term investments

     —         (44,969     (40,002

Proceeds from sale of property and equipment

     233       —         —    

Purchase of property and equipment

     (4,781     (2,381     (2,364
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     20,409       (2,350     6,634  
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Proceeds from exercise of stock options

     3,856       5,308       5,303  

Proceeds from issuance of common stock under Employee Stock Purchase Plan

     4,493       4,462       3,772  

Purchase of common stock

     (118,886     (28,128     (26,277

Proceeds from Revolving Credit Facility

     58,000       —         —    

Repayment on Revolving Credit Facility

     (10,000     —         —    

Debt issuance costs

     (190     —         —    

Cash dividends paid

     (14,157     (14,085     (11,748

Excess tax benefits from stock-based compensation

     8       185       86  
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (76,876     (32,258     (28,864
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (558     185       (2,562
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash

     (28,760     3,839       6,959  

Cash and cash equivalents at beginning of period

     91,089       87,250       80,291  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 62,329     $ 91,089     $ 87,250  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

58


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the Company and its Business

Resources Connection, Inc. (“Resources Connection”), a Delaware corporation, was incorporated on November 16, 1998. Resources Connection is a multinational professional services firm; its operating entities provide services primarily 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 Company’s fiscal year consists of 52 or 53 weeks, ending on the Saturday in May closest to May 31. Fiscal years 2017, 2016 and 2015 consisted of four 13 week quarters and a total of 52 weeks of activity for the fiscal year. For fiscal years of 53 weeks, (which next occurs for fiscal 2020), the first three quarters consist of 13 weeks each and the fourth quarter consists of 14 weeks.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The Consolidated Financial Statements of the Company (“financial statements”) have been prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”). The financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition

Revenues are recognized and billed when the Company’s professionals deliver services. Conversion fees are recognized when one of the Company’s professionals accepts an offer of permanent employment from a client. Conversion fees were 0.5% of revenue for each of the years ended May 27, 2017, May 28, 2016 and May 30, 2015. All costs of compensating the Company’s professionals are the responsibility of the Company and are included in direct cost of services.

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 $10.1 million, $10.6 million and $10.6 million for the years ended May 27, 2017, May 28, 2016 and May 30, 2015, respectively.

Foreign Currency Translation

The financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at current exchange rates, income and expense items are translated at average exchange rates prevailing during the period and the related translation adjustments are recorded as a component of comprehensive income or loss within stockholders’ equity. Gains and losses from foreign currency transactions are included in selling, general and administrative expenses in the Consolidated Statements of Operations.

Per Share Information

The Company presents both basic and diluted earnings per share (“EPS”). Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average

 

59


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

number of common and common equivalent shares outstanding during the period, calculated using the treasury stock method for stock options. Under the treasury stock method, exercise proceeds include the amount the employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period are anti-dilutive and are excluded from the calculation.

The following table summarizes the calculation of net income per share for the years ended May 27, 2017, May 28, 2016 and May 30, 2015 (in thousands, except per share amounts):

 

     For the Years Ended  
     May 27,
2017
     May 28,
2016
     May 30,
2015
 

Net income

   $ 18,651      $ 30,443      $ 27,508  
  

 

 

    

 

 

    

 

 

 

Basic:

        

Weighted average shares

     32,851        37,037        37,825  
  

 

 

    

 

 

    

 

 

 

Diluted:

        

Weighted average shares

     32,851        37,037        37,825  

Potentially dilutive shares

     620        571        423  
  

 

 

    

 

 

    

 

 

 

Total dilutive shares

     33,471        37,608        38,248  
  

 

 

    

 

 

    

 

 

 

Net income per common share:

        

Basic

   $ 0.57      $ 0.82      $ 0.73  

Dilutive

   $ 0.56      $ 0.81      $ 0.72  

Anti-dilutive shares not included above

     4,582        4,745        5,746  

Cash and Cash Equivalents

The Company considers cash on hand, deposits in banks, and short-term investments purchased with an original maturity date of three months or less to be cash and cash equivalents. The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents approximate the fair values due to the short maturities of these instruments.

Short-Term Investments

The Company’s short-term investments were $25.0 million as of May 28, 2016 with original contractual maturities of between three months and one year. The Company had no short-term investments as of May 27, 2017. The Company had no investments with a maturity in excess of one year as of the end of either fiscal year 2017 or 2016. The Company carries debt securities that it has the ability and positive intent to hold to maturity at amortized cost.

The fair value of the Company’s financial instruments reflects the amounts that the Company estimates it will receive in

connection with the sale of an asset in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the following three levels:

Level 1 — Quoted prices in active markets for identical assets and liabilities.

Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets.

Level 3 — Unobservable inputs.

 

60


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company’s investments in commercial paper and U.S. Government Agency securities are measured using quoted prices in markets that are not active (Level 2). There were no unrealized holding gains or losses as of May 27, 2017 and May 28, 2016. Short-term investments consist of the following (in thousands):

 

     As of May 27, 2017      As of May 28, 2016  
     Cost      Fair Value      Cost      Fair Value  

Commercial paper

   $ —        $ —        $ 19,959      $ 19,959  

U.S. Government Agency securities

     —          —          4,998        4,998  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ —        $ 24,957      $ 24,957  
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from its clients’ failure to make required payments for services rendered. Management estimates this allowance based upon knowledge of the financial condition of the Company’s clients (which may not include knowledge of all significant events), review of historical receivable and reserve trends and other pertinent information. If the financial condition of the Company’s clients deteriorates or there is an unfavorable trend in aggregate receivable collections, additional allowances may be required.

The following table summarizes the activity in our allowance for doubtful accounts (in thousands):

 

     Beginning
Balance
     Charged to
Operations
     Currency
Rate
Changes
    (Write-offs)/
Recoveries
    Ending
Balance
 

Years Ended:

            

May 30, 2015

   $ 3,139      $ 212      $ (78   $ 18     $ 3,291  

May 28, 2016

   $ 3,291      $ 1,118      $ (16   $ (1,399   $ 2,994  

May 27, 2017

   $ 2,994      $ 458      $ (20   $ (915   $ 2,517  

Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the following estimated useful lives:

 

Building   30 years
Furniture   5 to 10 years
Leasehold improvements   Lesser of useful life of asset or term of lease
Computer, equipment and software   3 to 5 years

Costs for normal repairs and maintenance are expensed to operations as incurred, while renewals and major refurbishments are capitalized.

Assessments of whether there has been a permanent impairment in the value of property and equipment are periodically performed by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Management believes no permanent impairment has occurred.

Goodwill

Goodwill is not subject to amortization but is tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. The Company performed its annual goodwill impairment analysis as of May 27, 2017

 

61


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

and will continue to test for impairment at least annually. The Company performs its impairment analysis by comparing its market capitalization to its book value throughout the fiscal year. For application of this methodology the Company determined that it operates as a single reporting unit resulting from the combination of its practice offices. No impairment was indicated as of May 27, 2017. The Company has no other intangible assets.

See Note 4 — Intangible Assets and Goodwill for a further description of the Company’s intangible assets.

Stock-Based Compensation

The Company recognizes compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases made via the Company’s Employee Stock Purchase Plan (the “ESPP”), based on estimated fair value at the date of grant.

The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods. Stock options vest over four years and restricted stock award vesting is determined on an individual grant basis under the Company’s 2014 Performance Incentive Plan (“2014 Plan”). The Company determines the estimated value of stock options using the Black-Scholes valuation model. The Company recognizes stock-based compensation expense on a straight-line basis over the service period for options that are expected to vest and records adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.

See Note 10 — Stock Based Compensation Plans for further information on the 2014 Plan and stock-based compensation.

Income Taxes

The Company recognizes deferred income taxes for the estimated tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when, in management’s opinion, it is more likely than not that some portion of the deferred tax assets will not be realized. The provision for income taxes represents current taxes payable net of the change during the period in deferred tax assets and liabilities.

Recent Accounting Pronouncements

Accounting Pronouncements Adopted During Current Fiscal Year

Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. In November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-17. The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent portions. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. As permitted, the Company early adopted ASU 2015-17 during the first quarter of fiscal year 2017 on a retrospective basis. Accordingly, current deferred taxes have been reclassified as noncurrent on the May 28, 2016 Consolidated Balance Sheet. This reclassification decreased current deferred tax assets by $8.4 million and increased noncurrent deferred tax assets by $8.4 million. The Company also netted noncurrent deferred tax liabilities of $5.0 million against noncurrent deferred tax assets.

Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. In September 2015, the FASB issued ASU 2015-16. This ASU eliminates the requirement to retrospectively account for changes to provisional amounts initially recorded in a business combination. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined, including the effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The Company adopted this guidance as of the beginning of fiscal 2017 and will consider it during future business combinations.

 

62


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. In August 2014, the FASB issued ASU 2014-15.This ASU provides guidance regarding management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. The Company adopted this guidance as of the beginning of fiscal 2017.

Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. In June 2014, the FASB issued ASU 2014-12. This ASU provides guidance requiring that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. The Company adopted this guidance as of the beginning of fiscal 2017. The Company does not currently have any performance based awards and thus the adoption has not had a material impact on its consolidated financial statements.

Accounting Pronouncements Pending Adoption

Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting. In May 2017, the FASB issued 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 Company’s most recent annual goodwill impairment test completed in fiscal 2017, the Company expects no initial impact on adoption.

Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued 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.

Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. In March 2016, the FASB issued ASU 2016-09. The new standard modifies several aspects of the accounting and reporting for employee share-based payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. The new standard is effective for financial statements for annual and interim periods within those annual periods beginning after December 15, 2016 (for the Company, fiscal 2018). The Company is currently evaluating the impact the adoption of this new standard will have on its consolidated financial statements but anticipates three potential impacts: a) added volatility to the Company’s effective tax rate from the change in accounting for income taxes; b) changes to its classification of excess tax benefits on the Consolidated Statement of Cash Flows; and c) change in the accounting for forfeitures, as the guidance allows the

 

63


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Company to account for forfeitures as they occur, rather than estimating the expected forfeitures over the course of the vesting period. The Company will continue to evaluate the impact of adoption of this guidance and its preliminary assessments are subject to change.

Leases (Topic 842): Leases. In February 2016, the FASB issued ASU 2016-02, which amends the existing guidance to require lessees to recognize operating lease obligations on their balance sheets by recording the rights and obligations created by those leases. The requirements are effective for financial statements for annual periods and interim periods within those annual periods beginning after December 15, 2018 (for the Company, fiscal 2020), and early adoption is permitted. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and believes that it will have a significant impact on the Company’s reported balance sheet assets and liabilities. Under current accounting guidelines, the Company’s office leases are operating lease arrangements, in which rental payments are treated as operating expenses and there is no recognition of the arrangement on the balance sheet as an asset with related obligation to the lessor.

Revenue from Contracts with Customers (Topic 606) : In May 2014, the FASB issued ASU 2014-09, a comprehensive new revenue recognition standard that will supersede current revenue recognition guidance and is intended to improve and converge revenue recognition and related financial reporting requirements. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a number of steps to apply to achieve that core principle and requires additional disclosures. In August 2015, the FASB issued ASU 2015-14, which delays the required implementation date for the Company until fiscal 2019, with early adoption permitted for fiscal 2018. The Company has elected to adopt the guidance beginning in fiscal 2019. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all periods presented, or “cumulative effect” adoption, meaning the standard is applied only to the most current period presented in the financial statements. In addition, in March 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients (Topic 606), which provides clarifying guidance in certain areas and adds some practical expedients. The effective date for this ASU is the same as the effective date for ASU 2014-09. We intend to implement the standard using the modified retrospective approach, which recognizes the cumulative effect (if any) of application recognized on that date. The Company is currently evaluating the impact of adoption of this guidance, including required disclosures, and based upon our current analysis, does not expect a significant impact on processes, systems or controls. The Company will continue to evaluate the impact of adoption of this guidance and its preliminary assessments are subject to change.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not, or are not expected to, have a material effect on the Company’s results of operations, financial position or cash flows.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates and assumptions are adequate, actual results could differ from the estimates and assumptions used.

 

64


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

3. Property and Equipment

Property and equipment consist of the following (in thousands):

 

     As of
May 27, 2017
     As of
May 28, 2016
 

Building and land

   $ 14,198      $ 14,172  

Computers, equipment and software

     17,811        16,568  

Leasehold improvements

     19,403        21,170  

Furniture

     9,653        10,306  
  

 

 

    

 

 

 
     61,065        62,216  

Less accumulated depreciation and amortization

     (37,711      (40,942
  

 

 

    

 

 

 
   $ 23,354      $ 21,274  
  

 

 

    

 

 

 

4. Intangible Assets and Goodwill

The following table presents details of our intangible assets, estimated lives and related accumulated amortization (in thousands):

 

     As of May 27, 2017      As of May 28, 2016  
     Gross      Accumulated
Amortization
     Net      Gross      Accumulated
Amortization
    Net  

Trade name and trademark (5 years)

   $ —        $ —        $ —        $ 1,341      $ (1,341   $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The following table summarizes amortization expense for the years ended May 27, 2017, May 28, 2016 and May 30, 2015 (in thousands):

 

     For the Years Ended  
     May 27,
2017
     May 28,
2016
     May 30,
2015
 

Amortization expense

   $ —        $ 90      $ 918  

As of May 27, 2017, all of the Company’s intangible assets subject to amortization have been fully amortized.

The following table summarizes the activity in the Company’s goodwill balance (in thousands):

 

     For the Years Ended  
         May 27,    
2017
         May 28,    
2016
 

Goodwill, beginning of year

   $ 171,183      $ 170,878  

Impact of foreign currency exchange rate changes

     (95      305  
  

 

 

    

 

 

 

Goodwill, end of period

   $ 171,088      $ 171,183  
  

 

 

    

 

 

 

5. Long-Term Debt

In October 2016, the Company entered into a $120 million secured revolving credit facility (“Facility”) with Bank of America, consisting of (i) a $90 million revolving loan facility, which includes a $5 million sublimit for the issuance of standby letters of credit (“Revolving Loan”), and (ii) a $30 million reducing revolving loan facility, any amounts of which may not be

 

65


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

reborrowed after being repaid (“Reducing Revolving Loan”). The Facility is available for working capital and general corporate purposes, including potential acquisitions and stock repurchases. Our obligations under the Facility are guaranteed by all of the Company’s domestic subsidiaries and secured by essentially all assets of the Company, Resources Connection LLC and their domestic subsidiaries, subject to certain customary exclusions. Borrowings under the Facility bear interest at a rate per annum of either, at the Company’s option, (i) a London Interbank Offered Rate (“LIBOR”) defined in the Facility plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus margin of 0.25% or 0.50% with the applicable margin depending on the Company’s consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of America’s prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company pays an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.15% to 0.25% depending upon on the Company’s consolidated leverage ratio. The Facility expires October 17, 2021.

In November 2016, the Company borrowed $58.0 million under the Facility to fund a portion of the purchase price of its modified Dutch auction tender offer. See Note 9 — Stockholders’ Equity , for additional information about the tender offer. During the third quarter of fiscal 2017, the Company reduced the amount borrowed by $10.0 million. As of May 27, 2017, the outstanding balance on the Facility is $49.0 million, including $1.0 million of outstanding letters of credit issued under the Facility. There is $41.0 million remaining to borrow under the Revolving Loan and $30.0 million remaining under the Reducing Revolving Loan. As of May 27, 2017, the interest rate on the Company’s borrowings was 2.5% on one tranche of $24.0 million based on a 1-month LIBOR plus 1.5% and 2.65% on a second tranche of $24.0 million based on a 3-month LIBOR plus 1.5%.

The Facility contains both affirmative and negative covenants. Covenants include, but are not limited to, limitations on the Company’s and its subsidiaries ability to incur liens, incur additional indebtedness, make certain restricted payments, merge or consolidate and make dispositions of assets. In addition, the Facility requires us to comply with financial covenants limiting the Company’s total funded debt, minimum interest coverage ratio and maximum leverage ratio. The Company was in compliance with all financial covenants under the Facility as of May 27, 2017.

Upon the occurrence of an event of default under the Facility, the lender may cease making loans, terminate the Facility and declare all amounts outstanding to be immediately due and payable. The Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults.

 

66


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

6. Income Taxes

The following table represents the current and deferred income tax provision for federal, state and foreign income taxes attributable to operations (in thousands):

 

     For the Years Ended  
     May 27,
2017
     May 28,
2016
     May 30,
2015
 

Current

        

Federal

   $ 10,901      $ 18,320      $ 18,046  

State

     2,551        4,168        4,028  

Foreign

     1,472        1,398        1,101  
  

 

 

    

 

 

    

 

 

 
     14,924        23,886        23,175  
  

 

 

    

 

 

    

 

 

 

Deferred

        

Federal

     259        (178      (502

State

     62        (27      (120

Foreign

     (123      (135      345  
  

 

 

    

 

 

    

 

 

 
     198        (340      (277
  

 

 

    

 

 

    

 

 

 
   $ 15,122      $ 23,546      $ 22,898  
  

 

 

    

 

 

    

 

 

 

Income before provision for income taxes is as follows (in thousands):

 

     For the Years Ended  
     May 27,
2017
     May 28,
2016
     May 30,
2015
 

Domestic

   $ 32,390      $ 53,417      $ 51,997  

Foreign

     1,383        572        (1,591
  

 

 

    

 

 

    

 

 

 
   $ 33,773      $ 53,989      $ 50,406  
  

 

 

    

 

 

    

 

 

 

The provision for income taxes differs from the amount that would result from applying the federal statutory rate as follows:

 

     For the Years Ended  
     May 27,
2017
    May 28,
2016
    May 30,
2015
 

Statutory tax rate

     35.0     35.0     35.0

State taxes, net of federal benefit

     5.0       4.9       5.0  

Non-U.S. rate adjustments

     0.1       0.4       1.1  

Stock-based compensation

     0.7       0.6       0.5  

Valuation allowance

     1.2       1.3       2.8  

Permanent items, primarily meals and entertainment

     2.2       1.5       1.3  

Other, net

     0.6       (0.1     (0.3
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     44.8     43.6     45.4
  

 

 

   

 

 

   

 

 

 

The impact of state taxes, net of federal benefit, and foreign income taxed at other than U.S. rates fluctuates year over year due to the changes in the mix of operating income and losses amongst the various states and foreign jurisdictions in which the Company operates.

 

67


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The components of the net deferred tax asset consist of the following (in thousands):

 

     As of
May 27,
2017
     As of
May 28,
2016
 

Deferred tax assets:

     

Allowance for doubtful accounts

   $ 1,595      $ 1,685  

Accrued compensation

     4,235        4,337  

Accrued expenses

     3,755        3,163  

Stock options and restricted stock

     11,779        15,132  

Foreign tax credit

     397        557  

Net operating losses

     15,855        15,283  

Property and equipment

     1,222        1,550  

State taxes

     232        368  
  

 

 

    

 

 

 

Gross deferred tax asset

     39,070        42,075  

Valuation allowance

     (15,971      (15,714
  

 

 

    

 

 

 

Gross deferred tax asset, net of valuation allowance

     23,099        26,361  
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Goodwill and intangibles

     (23,406      (22,124
  

 

 

    

 

 

 

Net deferred tax asset

   $ (307    $ 4,237  
  

 

 

    

 

 

 

The Company had a net income tax receivable of $1.4 million and a net income tax payable of $0.4 million as of May 27, 2017 and May 28, 2016, respectively.

The tax benefit associated with the exercise of nonqualified stock options and the disqualifying dispositions by employees of incentive stock options, restricted stock awards and shares issued under the Company’s ESPP reduced income taxes payable by $1.1 million for both of the years ended May 27, 2017 and May 28, 2016, respectively.

The Company has foreign net operating loss carryforwards of $63.5 million and foreign tax credit carryforwards of $0.4 million. The foreign tax credits will expire beginning in fiscal 2023. The following table summarizes the net operating loss expiration periods.

 

Expiration Periods

   Amount of Net Operating Losses  
     (in thousands)  

Fiscal Years Ending:

  

2018

   $ 300  

2019

     550  

2020

     1,600  

2021

     4,600  

2022

     350  

2023-2027

     3,500  

Unlimited

     52,600  
  

 

 

 
   $ 63,500  
  

 

 

 

 

68


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the activity in our valuation allowance accounts (in thousands):

 

     Beginning
Balance
     Charged to
Operations
     Currency
Rate
Changes
     Ending
Balance
 

Years Ended:

           

May 30, 2015

   $ 16,719      $ 1,189      $ (2,852    $ 15,056  

May 28, 2016

   $ 15,056      $ 691      $ (33    $ 15,714  

May 27, 2017

   $ 15,714      $ 438      $ (181    $ 15,971  

Realization of the deferred tax assets is dependent upon generating sufficient future taxable income. Management believes that it is more likely than not that all other remaining deferred tax assets will be realized through future taxable earnings or alternative tax strategies.

Deferred income taxes have not been provided on the undistributed earnings of approximately $18.4 million from the Company’s foreign subsidiaries as of May 27, 2017 since these amounts are intended to be indefinitely reinvested in foreign operations. If the earnings of the Company’s foreign subsidiaries were to be distributed, management estimates that the income tax impact would be immaterial as the federal taxes would be offset with foreign tax credits.

The following table summarizes the activity related to the gross unrecognized tax benefits (in thousands):

 

     For the Years Ended  
     May 27,
2017
     May 28,
2016
 

Unrecognized tax benefits, beginning of year

   $ 42      $ 42  

Gross increases-tax positions in prior period

     —          —    

Gross decreases-tax positions in prior period

     —          —    

Gross increases-current period tax positions

     —          —    

Settlements

     —          —    

Lapse of statute of limitations

     —          —    
  

 

 

    

 

 

 

Unrecognized tax benefits, end of year

   $ 42      $ 42  
  

 

 

    

 

 

 

The Company’s total liability for unrecognized gross tax benefits was $42,000 as of both May 27, 2017 and May 28, 2016, which, if ultimately recognized, would impact the effective tax rate in future periods. The unrecognized tax benefits include long-term liabilities of $42,000 as of both May 27, 2017 and May 28, 2016; none of the unrecognized tax benefits are short-term liabilities due to the closing of the statute of limitations.

The Company’s major income tax jurisdiction is the U.S., with federal statute of limitations remaining open for fiscal 2014 and thereafter. For states within the U.S. in which the Company does significant business, the Company remains subject to examination for fiscal 2013 and thereafter. Major foreign jurisdictions in Europe remain open for fiscal years ended 2012 and thereafter.

The Company continues to recognize interest expense and penalties related to income tax as a part of its provision for income taxes. While the amount accrued during the current fiscal year is immaterial, the Company has provided $1,000 of accrued interest and penalties as a component of the liability for unrecognized tax benefits.

 

69


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

7. Accrued Salaries and Related Obligations

Accrued salaries and related obligations consist of the following (in thousands):

 

     As of
May 27,
2017
     As of
May 28,
2016
 

Accrued salaries and related obligations

   $ 18,741      $ 18,166  

Accrued bonuses

     15,600        17,092  

Accrued vacation

     14,900        14,897  
  

 

 

    

 

 

 
   $ 49,241      $ 50,155  
  

 

 

    

 

 

 

8. Concentrations of Credit Risk

The Company maintains cash and cash equivalent balances, short-term investments in commercial paper and U.S. government agency securities with high credit quality financial institutions. At times, such balances are in excess of federally insured limits.

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of trade receivables. However, concentrations of credit risk are limited due to the large number of customers comprising the Company’s customer base and their dispersion across different business and geographic areas. The Company monitors its exposure to credit losses and maintains an allowance for anticipated losses. A significant change in the liquidity or financial position of one or more of the Company’s customers could result in an increase in the allowance for anticipated losses. No single customer accounted for more than 10% of revenue for the years ended May 27, 2017, May 28, 2016 and May 30, 2015.

9. Stockholders’ Equity

The Company has 70,000,000 authorized shares of common stock with a $0.01 par value. At May 27, 2017 and May 28, 2016, there were 29,662,000 and 36,229,000 shares of common stock outstanding, respectively, all of which provide the holders with voting rights.

The Company has authorized for issuance 5,000,000 shares of preferred stock with a $0.01 par value per share. The board of directors has the authority to issue preferred stock in one or more series and to determine the related rights and preferences. No shares of preferred stock were outstanding as of May 27, 2017 and May 28, 2016.

Tender Offer for Common Stock

In October 2016, the Company commenced a modified Dutch auction tender offer to purchase up to 6,000,000 shares of common stock at a price not greater than $16.00 per share and not less than $13.50 per share. In November 2016, the Company exercised its right to increase the size of the tender offer by up to 2.0% of its outstanding common stock. The tender offer period expired on November 15, 2016 and on November 22, 2016, the Company purchased 6,515,264 shares of its common stock at a per share price of $16.00, excluding transaction costs, for approximately $104.2 million. These shares are currently held as treasury stock. The tender offer was funded through borrowings of $58.0 million under the Facility and the remainder with cash on hand.

Stock Repurchase Program

The Company’s board of directors has periodically approved a stock repurchase program authorizing the repurchase, at the discretion of the Company’s senior executives, of the Company’s common stock for a designated aggregate dollar limit. The current program was authorized in July 2015 (the “July 2015 program”) and set an aggregate dollar limit not to exceed

 

70


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

$150 million. Use of the funds authorized under the July 2015 program commenced in February 2016 upon the exhaustion of the previous stock repurchase program of $150 million approved by the Company’s board of directors in April 2011. Repurchases under the program may take place in the open market or in privately negotiated transactions and may be made pursuant to a Rule 10b5-1 plan. During the years ended May 27, 2017 and May 28, 2016, the Company purchased on the open market approximately 0.8 million and 1.8 million shares of its common stock, respectively, at an average price of $15.99 and $15.32 per share, respectively, for approximately $13.5 million and $28.1 million, respectively. As of May 27, 2017, approximately $125.1 million remains available for future repurchases of our common stock under the July 2015 program.

Quarterly Dividend

The Company’s board of directors has established a quarterly dividend, subject to quarterly board of directors’ approval. On April 20, 2017, the board of directors declared a regular quarterly dividend of $0.11 per share of our common stock. The dividend, payable on June 15, 2017, was accrued in the Consolidated Balance Sheet as of May 27, 2017 for approximately $3.2 million. Continuation of the quarterly dividend will be at the discretion of the board of directors and will depend upon the Company’s financial condition, results of operations, capital requirements, general business condition, contractual restrictions contained in our current credit agreements and other agreements, and other factors deemed relevant by the board of directors.

10. Stock-Based Compensation Plans

2014 Performance Incentive Plan

On October 23, 2014, the Company’s stockholders approved the 2014 Plan. The 2014 Plan replaced the Resources Connection, Inc. 2004 Performance Incentive Plan and the 1999 Long Term Incentive Plan (the “Prior Stock Plans”). The effective date of the 2014 Plan is September 3, 2014 and, unless terminated earlier by the Board of Directors, will terminate on September 2, 2024. Under the terms of the 2014 Plan, the Company’s board of directors or one or more committees appointed by the board of directors will administer the 2014 Plan. The board of directors has delegated general administrative authority for the 2014 Plan to the Compensation Committee of the board of directors.

The administrator of the 2014 Plan has broad authority to, among other things, select participants and determine the type(s) of award(s) that they are to receive, and determine the number of shares that are to be subject to awards and the terms and conditions of awards, including the price (if any) to be paid for the shares or the award. Persons eligible to receive awards under the 2014 Plan include officers or employees of the Company or any of its subsidiaries, directors of the Company, and certain consultants and advisors to the Company or any of its subsidiaries.

The maximum number of shares of the Company’s 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 Prior Stock Plans and outstanding as of September 3, 2014 (the date at which the Prior Stock Plans terminated), which expire, or for any reason are cancelled or terminated, after that date without being exercised, plus (3) the number of shares subject to restricted stock, restricted stock units and other full-value awards granted under the Prior Stock Plans that were outstanding and unvested as of September 3, 2014, which are forfeited, terminated, cancelled, or otherwise reacquired after that date without having become vested. As of May 27, 2017, 2,767,000 shares were available for award grant purposes under the 2014 Plan, subject to future increases as described in (2) and (3) above and subject to increase as then-outstanding awards expire or terminate without having become vested or exercised, as applicable.

The types of awards that may be granted under the 2014 Plan include stock options, restricted stock, stock bonuses, performance stock, stock units, phantom stock and other forms of awards granted or denominated in the Company’s common stock or units of the Company’s common stock, as well as certain cash bonus awards. Under the terms of the 2014 Plan, the option price for the incentive stock options (“ISOs”) and nonqualified stock options (“NQSO”) may not be less than the fair market value of the shares of the Company’s stock on the date of the grant. For ISOs, the exercise price per share may not be less than 110% of the fair

 

71


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

market value of a share of common stock on the grant date for any individual possessing more than 10% of the total outstanding stock of the Company. Stock options granted under the 2014 Plan and the Prior Stock Plans generally become exercisable over periods of one to four years and expire not more than ten years from the date of grant. The Company predominantly grants NQSOs to employees in the U.S. The Company granted 127,720 and 50,354 shares of restricted stock during the fiscal years ended May 27, 2017 and May 28, 2016, respectively.

A summary of the share-based award activity under the 2014 Plan and the Prior Stock Plans follows (amounts in thousands, except weighted average exercise price):

 

     Share-Based
Awards
Available for
Grant
    Number of
Shares
Under
Option
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Life

(in years)
     Aggregate
Intrinsic
Value
 

Options outstanding at May 28, 2016

     3,206       7,347     $ 16.08        5.41      $ 10,109  

Granted, at fair market value

     (1,212     1,212       14.52        

Restricted stock (1)

     (319     —         —          

Exercised

     —         (305     12.59        

Forfeited (2)

     267       (265     14.18        

Expired

     825       (825     29.77        
  

 

 

   

 

 

         

Options outstanding at May 27, 2017

     2,767       7,164     $ 15.08        5.56      $ 1,696  
  

 

 

   

 

 

      

 

 

    

 

 

 

Exercisable at May 27, 2017

       4,608     $ 15.59        4.04      $ 1,173  
    

 

 

      

 

 

    

 

 

 

Vested and expected to vest at May 27, 2017 (3)

       6,962     $ 15.09        5.46      $ 1,696  
    

 

 

      

 

 

    

 

 

 

 

(1) Amounts represent restricted shares granted. Share-based awards available for grant are reduced by 2.5 shares for each share awarded as stock grants from the 2014 Plan.
(2) Amounts represent both stock options and restricted share awards forfeited.
(3) The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to options not yet vested.

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $12.65 as of May 26, 2017 (the last actual trading day of fiscal 2017), which would have been received by the option holders had all option holders exercised their options as of that date.

The total pre-tax intrinsic value related to stock options exercised during the years ended May 27, 2017, May 28, 2016 and May 30, 2015 was $1.1 million, $1.8 million and $1.2 million, respectively. The total estimated fair value of stock options that vested during the years ended May 27, 2017, May 28, 2016 and May 30, 2015 was $3.6 million, $4.0 million and $3.8 million, respectively.

 

72


Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Valuation and Expense Information for Stock Based Compensation Plans

The following table summarizes the impact of the Company’s stock-based compensation plans. Stock-based compensation expense is included in selling, general and administrative expenses and consists of stock-based compensation expense related to employee stock options, ESPP stock