RGP
RESOURCES CONNECTION INC (Form: 10-Q, Received: 01/05/2017 13:48:39)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended November 26, 2016

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

 

 

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 (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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  

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

As of December 27, 2016, there were approximately 29,723,522 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

 

 

 


Table of Contents

RESOURCES CONNECTION, INC.

INDEX

 

         Page
No.
 
PART I—FINANCIAL INFORMATION  

ITEM 1.

 

Consolidated Financial Statements (Unaudited)

     3   
 

Consolidated Balance Sheets as of November 26, 2016 and May  28, 2016

     3   
 

Consolidated Statements of Operations for the Three and Six Months Ended November 26, 2016 and November 28, 2015

     4   
 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended November 26, 2016 and November 28, 2015

     5   
 

Consolidated Statement of Stockholders’ Equity for the Six Months Ended November 26, 2016

     6   
 

Consolidated Statements of Cash Flows for the Six Months Ended November 26, 2016 and November 28, 2015

     7   
 

Notes to Consolidated Financial Statements

     8   

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     15   

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     24   

ITEM 4.

 

Controls and Procedures

     24   
PART II—OTHER INFORMATION  

ITEM 1.

 

Legal Proceedings

     25   

ITEM 1A.

 

Risk Factors

     25   

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     32   

ITEM 6.

 

Exhibits

     32   

Signatures.

     33   


Table of Contents

PART I—FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

RESOURCES CONNECTION, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in thousands, except par value per share)

 

     November 26,     May 28,  
     2016     2016  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 58,567      $ 91,089   

Short-term investments

     4,996        24,957   

Trade accounts receivable, net of allowance for doubtful accounts of $2,870 and $2,994 as of November 26, 2016 and May 28, 2016, respectively

     97,025        97,807   

Prepaid expenses and other current assets

     4,825        4,735   

Income taxes receivable

     2,657        —     
  

 

 

   

 

 

 

Total current assets

     168,070        218,588   

Goodwill

     170,035        171,183   

Property and equipment, net

     22,145        21,274   

Deferred income taxes

     4,609        4,237   

Other assets

     1,960        1,973   
  

 

 

   

 

 

 

Total assets

   $ 366,819      $ 417,255   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable and accrued expenses

   $ 14,944      $ 13,606   

Accrued salaries and related obligations

     44,574        50,155   

Other liabilities

     6,295        7,123   
  

 

 

   

 

 

 

Total current liabilities

     65,813        70,884   

Long-term debt

     58,000        —     

Other long-term liabilities

     4,315        3,722   
  

 

 

   

 

 

 

Total liabilities

     128,128        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; 58,603 and 58,237 shares issued, and 29,637 and 36,229 shares outstanding as of November 26, 2016 and May 28, 2016, respectively

     586        582   

Additional paid-in capital

     395,710        388,763   

Accumulated other comprehensive loss

     (13,838     (10,794

Retained earnings

     332,048        327,954   

Treasury stock at cost, 28,966 and 22,008 shares as of November 26, 2016 and May 28, 2016, respectively

     (475,815     (363,856
  

 

 

   

 

 

 

Total stockholders’ equity

     238,691        342,649   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 366,819      $ 417,255   
  

 

 

   

 

 

 

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

 

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RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share amounts)

 

     Three Months Ended     Six Months Ended  
     November 26,     November 28,     November 26,     November 28,  
     2016     2015     2016     2015  

Revenue

   $ 147,558      $ 150,887      $ 290,947      $ 299,227   

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

     91,048        92,011        179,910        182,888   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     56,510        58,876        111,037        116,339   

Selling, general and administrative expenses

     46,056        43,171        89,670        87,128   

Amortization of intangible assets

     —          30        —          60   

Depreciation expense

     808        881        1,602        1,739   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     9,646        14,794        19,765        27,412   

Interest expense

     64        —          64        —     

Interest income

     (40     (34     (110     (66
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     9,622        14,828        19,811        27,478   

Provision for income taxes

     3,930        6,152        8,481        11,669   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 5,692      $ 8,676      $ 11,330      $ 15,809   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 0.16      $ 0.23      $ 0.31      $ 0.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.16      $ 0.23      $ 0.31      $ 0.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic

     35,716        37,191        35,992        37,243   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     36,248        37,868        36,533        37,857   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.11      $ 0.10      $ 0.22      $ 0.20   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Amounts in thousands)

 

     Three Months Ended     Six Months Ended  
     November 26,     November 28,     November 26,     November 28,  
     2016     2015     2016     2015  

COMPREHENSIVE INCOME:

        

Net income

   $ 5,692      $ 8,676      $ 11,330      $ 15,809   

Foreign currency translation adjustment, net of tax

     (3,687     (1,643     (3,044     (1,672
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 2,005      $ 7,033      $ 8,286      $ 14,137   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(Amounts in thousands)

 

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

Balances as of May 28, 2016

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

Exercise of stock options

    176        2        2,131                2,133   

Stock-based compensation expense

        3,150                3,150   

Tax shortfall from stock-based compensation arrangements

        (516             (516

Issuance of common stock under Employee Stock Purchase Plan

    174        2        2,182                2,184   

Issuance of restricted stock

    16        —                    —     

Purchase of shares

          6,958        (111,959         (111,959

Cash dividends declared ($0.22 per share)

                (7,236     (7,236

Currency translation adjustment

              (3,044       (3,044

Net income for the six months ended November 26, 2016

                11,330        11,330   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of November 26, 2016

    58,603      $ 586      $ 395,710        28,966      $ (475,815   $ (13,838   $ 332,048      $ 238,691   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

 

     Six Months Ended  
     November 26,     November 28,  
     2016     2015  

Cash flows from operating activities:

    

Net income

   $ 11,330      $ 15,809   

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

    

Depreciation and amortization

     1,602        1,799   

Stock-based compensation expense

     3,150        3,545   

Excess tax benefits from stock-based compensation

     (6     (149

Loss (gain) on disposal of assets

     41        (7

Bad debt expense

     214        462   

Deferred income taxes

     (430     (403

Changes in operating assets and liabilities:

    

Trade accounts receivable

     (1,115     (2,736

Prepaid expenses and other current assets

     (53     (618

Income taxes

     (3,625     (1,281

Other assets

     138        93   

Accounts payable and accrued expenses

     1,748        451   

Accrued salaries and related obligations

     (5,191     (5,266

Other liabilities

     334        (1,001
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,137        10,698   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Redemption of short-term investments

     19,961        20,000   

Purchase of short-term investments

     —          (24,990

Proceeds from sale of fixed assets

     166        —     

Purchase of property and equipment

     (2,294     (1,528
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     17,833        (6,518
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from exercise of stock options

     2,133        4,853   

Proceeds from issuance of common stock under Employee Stock Purchase Plan

     2,184        2,186   

Purchase of common stock

     (111,959     (11,529

Proceeds from use of Revolving Credit Facility

     58,000        —     

Debt issuance costs

     (190     —     

Cash dividends paid

     (7,600     (6,697

Excess tax benefits from stock-based compensation

     6        149   
  

 

 

   

 

 

 

Net cash used in financing activities

     (57,426     (11,038
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (1,066     (271
  

 

 

   

 

 

 

Net decrease in cash

     (32,522     (7,129

Cash and cash equivalents at beginning of period

     91,089        87,250   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 58,567      $ 80,121   
  

 

 

   

 

 

 

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

 

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Table of Contents

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three and six months ended November 26, 2016 and November 28, 2015

1. Description of the Company and its Business

Resources Connection, Inc. (“Resources Connection”), a Delaware corporation, was incorporated on November 16, 1998. Resources Connection is a multinational professional services firm; its operating entities primarily provide services under the name Resources Global Professionals (“RGP” or the “Company”). The Company is organized around client service teams utilizing experienced professionals and provides consulting and business support services in the areas of accounting; finance; governance, risk and compliance management; corporate advisory, strategic communications and restructuring; information management; human capital; supply chain management; and legal and regulatory. The Company has offices in the United States (“U.S.”), Asia, Australia, Canada, Europe and Mexico.

The Company’s fiscal year consists of 52 or 53 weeks, ending on the last Saturday in May. The second quarters of fiscal 2017 and 2016 each consisted of 13 weeks.

2. Summary of Significant Accounting Policies

Interim Financial Information

The financial information as of and for the three and six months ended November 26, 2016 and November 28, 2015 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of its financial position at such dates and the operating results and cash flows for those periods. The fiscal 2016 year-end balance sheet data was derived from audited financial statements, and certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) have been condensed or omitted pursuant to Securities and Exchange Commission (“SEC”) rules or regulations; however, the Company believes the disclosures made are adequate to make the information presented not misleading.

The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for the fiscal year. These condensed interim financial statements should be read in conjunction with the audited financial statements for the year ended May 28, 2016, which are included in the Company’s Annual Report on Form 10-K for the year then ended (File No. 0-32113).

Cash, Cash Equivalents and Short-Term Investments

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

Client Reimbursements of “Out-of-Pocket” Expenses

The Company recognizes all reimbursements received from clients for “out-of-pocket” expenses as revenue and all such expenses as direct cost of services. Reimbursements received from clients were $2.4 million and $2.6 million for the three months ended November 26, 2016 and November 28, 2015, respectively, and $4.8 million and $5.5 million for the six months ended November 26, 2016 and November 28, 2015, respectively.

Foreign Currency Translation

The financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates effective at the end of the period, income and expense items are translated at average exchange rates prevailing during the period and the related translation adjustments are recorded as a component of accumulated other comprehensive income or loss within the Consolidated Balance Sheets. Gains and losses from foreign currency transactions are included in the Consolidated Statements of Operations.

Net Income Per Share Information

                The Company presents both basic and diluted earnings per common share (“EPS”). Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the period, calculated using the treasury stock method for stock options. Under the treasury stock method, assumed proceeds include the amount the employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price per common share over the period are anti-dilutive and are excluded from the calculation.

 

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The following table summarizes the calculation of net income per common share for the periods indicated (amounts in thousands, except per share amounts):

 

     Three Months Ended      Six Months Ended  
     November 26,
2016
     November 28,
2015
     November 26,
2016
     November 28,
2015
 

Net income

   $ 5,692       $ 8,676       $ 11,330       $ 15,809   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic:

           

Weighted average shares

     35,716         37,191         35,992         37,243   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Weighted average shares

     35,716         37,191         35,992         37,243   

Potentially dilutive shares

     532         677         541         614   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total dilutive shares

     36,248         37,868         36,533         37,857   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share:

           

Basic

   $ 0.16       $ 0.23       $ 0.31       $ 0.42   

Dilutive

   $ 0.16       $ 0.23       $ 0.31       $ 0.42   

Anti-dilutive shares not included above

     5,263         4,805         4,922         4,392   

Stock-Based Compensation

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

See Note 8 —  Stock-Based Compensation Plans for further information on the 2014 Plan and stock-based compensation.

Use of Estimates

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

3. Intangible Assets and Goodwill

Amortization of the Company’s intangible assets was completed during fiscal 2016 and there was no outstanding balance of intangibles as of November 26, 2016 or May 28, 2016. Amortization expense related to trade name and trademark intangibles was $30,000 and $60,000 for the three and six months ended November 28, 2015, respectively.

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

 

     For the Six Months Ended  
     November 26,
2016
     November 28,
2015
 

Goodwill, beginning of year

   $ 171,183       $ 170,878   

Impact of foreign currency exchange rate changes

     (1,148      (621
  

 

 

    

 

 

 

Goodwill, end of period

   $ 170,035       $ 170,257   
  

 

 

    

 

 

 

 

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4. Income Taxes

The Company’s provision for income taxes was $3.9 million (effective tax rate of approximately 41%) and $6.2 million (effective tax rate of approximately 42%) for the three months ended November 26, 2016 and November 28, 2015, respectively, and $8.5 million (effective tax rate of approximately 43%) and $11.7 million (effective tax rate of approximately 43%) for the six months ended November 26, 2016 and November 28, 2015, respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax rate because of the volatility in its international operations which span numerous tax jurisdictions.

The provision for income taxes in the three and six months of fiscal 2017 and 2016 results from taxes on income in the U.S. and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the U.S. statutory rates. The effective tax rate decreased for the three months ended November 26, 2016 due to improving overall profitability in the Company’s foreign operations, which have lower tax rates than the U.S. statutory rate.

The Company recognized a benefit of approximately $537,000 and $447,000 related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the second quarter of fiscal 2017 and 2016, respectively, and $1.0 million and $1.2 million for the six months ended November 26, 2016 and November 28, 2015, respectively.

See Note 12 —  Recent Accounting Pronouncements , for a discussion of the early adoption of Accounting Standards Update (“ASU”) 2015-17, related to the balance sheet classification of deferred income taxes.

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 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 LIBO 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 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 interest rate at November 26, 2016 was 2.57% based on a 1-month LIBOR plus 1.5%. 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 6 – Stockholders’ Equity , for additional information about the tender offer. As of November 26, 2016, the outstanding balance on the Facility is $59.2 million, including $1.2 million of outstanding letters of credit issued under the Facility. There is $30.8 million remaining to borrow under the Revolving Loan and $30.0 million remaining under the Reducing Revolving Loan.

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 disposition 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 November 26, 2016.

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.

6. Stockholders’ Equity

During the second quarter of fiscal 2017, the Company repurchased an aggregate of approximately 6.6 million shares of common stock, as described below.

 

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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

In July 2015, the Company’s board of directors approved a stock repurchase program (the “July 2015 program”), authorizing the repurchase, at the discretion of the Company’s senior executives, of the Company’s common stock for an aggregate dollar limit not to exceed $150 million. Repurchases under the program may take place in the open market or in privately negotiated transactions and may be made pursuant to a Rule 10b5-1 plan. During the three months ended November 26, 2016, the Company purchased 68,600 shares of its common stock on the open market at an average price of $13.17 per share, for approximately $900,000. As of November 26, 2016, approximately $132.0 million remains available for future repurchases of the Company’s common stock under the July 2015 program.

7. Supplemental Disclosure of Cash Flow Information

The following table presents information regarding income taxes paid and non-cash investing and financing activities (amounts in thousands):

 

     For the Six Months Ended  
     November 26,
2016
     November 28,
2015
 

Income taxes paid

   $ 12,499       $ 13,360   
  

 

 

    

 

 

 

Non-cash investing and financing activities:

     

Capitalized leasehold improvements paid directly by landlord

   $ 485       $ 33   
  

 

 

    

 

 

 

Dividends declared, not paid

   $ 3,259       $ 3,713   
  

 

 

    

 

 

 

8. Stock-Based Compensation Plans

Stock Options and Restricted Stock

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 Resources Connection, Inc. 2004 Performance Incentive Plan and the 1999 Long Term Incentive Plan (the “Prior Stock Plans”) and outstanding as of September 3, 2014 (the date at which the Prior Stock Plans terminated), which expire, or for any reason are cancelled or terminated, after that date without being exercised, plus (3) the number of shares subject to restricted stock, restricted stock unit and other full-value awards granted under the Prior Stock Plans that were outstanding and unvested as of September 3, 2014, which are forfeited, terminated, cancelled, or otherwise reacquired after that date without having become vested. As of November 26, 2016, 2,201,000 shares were available for award grant purposes under the 2014 Plan, subject to future increases as described in (2) and (3) above and subject to increase as then-outstanding awards expire or terminate without having become vested or exercised, as applicable.

Awards under the 2014 Plan may include, but are not limited to, stock options and restricted stock grants. Stock option grants generally vest in equal annual installments over four years and terminate ten years from the date of grant. Restricted stock award vesting is determined on an individual grant basis. Awards of restricted stock under the 2014 Plan will be counted against the available share limit as two and a half shares for every one share actually issued in connection with the award. The Company’s policy is to issue shares from its authorized shares upon the exercise of stock options.

 

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The following table summarizes the stock option activity for the six months ended November 26, 2016 (number of shares under option and aggregate intrinsic value in thousands):

 

     Number of Shares
Under Option
     Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Life

(in years)
     Aggregate
Intrinsic Value
 

Outstanding at May 28, 2016

     7,347       $ 16.08         5.41       $ 10,109   

Granted, at fair market value

     1,212       $ 14.52         

Exercised

     (176    $ 12.12         

Forfeited

     (108    $ 13.96         

Expired

     (140    $ 23.02         
  

 

 

          

Outstanding at November 26, 2016

     8,135       $ 16.39         5.63       $ 14,593   
  

 

 

       

 

 

    

 

 

 

Exercisable at November 26, 2016

     5,385       $ 17.52         4.03       $ 8,800   
  

 

 

       

 

 

    

 

 

 

Vested and expected to vest at November 26, 2016

     7,782       $ 16.47         5.46       $ 14,030   
  

 

 

       

 

 

    

 

 

 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, which is the difference between the Company’s closing stock price on the last trading day of the second quarter of fiscal 2017 and the exercise price multiplied by the number of shares that would have been received by the option holders if they had exercised their “in the money” options on November 26, 2016. This amount will change based on changes in the fair market value of the Company’s common stock. The aggregate intrinsic value of stock options exercised for the three months ended November 26, 2016 and November 28, 2015 was $150,000 and $1.3 million, respectively, and for the six months ended November 26, 2016 and November 28, 2015 was $519,000 and $1.8 million, respectively.

Stock-Based Compensation Expense

As of November 26, 2016, there was $9.4 million of total unrecognized compensation cost related to unvested employee stock options granted. That cost is expected to be recognized over a weighted-average period of 35 months. Stock-based compensation expense included in selling, general and administrative expenses for the three months ended November 26, 2016 and November 28, 2015 was $1.9 million and $1.4 million, respectively, and for the six months ended November 26, 2016 and November 28, 2015 was $3.2 million and $3.5 million, respectively; this consisted of stock-based compensation expense related to employee stock options, employee stock purchases made via the Company’s ESPP and restricted stock awards. Included in stock-based compensation expense for the three months ended November 26, 2016 was 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. Included in stock-based compensation expense for the six months ended November 28, 2015 was approximately $900,000 related to the accelerated vesting of options previously granted to Donald Murray in connection with his transition from Executive Chairman to Chairman. There were no capitalized share-based compensation costs during the six months ended November 26, 2016 and November 28, 2015.

The Company granted 16,733 shares of restricted stock during the three and six months ended November 26, 2016 and 6,079 shares of restricted stock during the three and six months ended November 28, 2015, respectively. Stock-based compensation expense for existing restricted stock awards for the three months ended November 26, 2016 and November 28, 2015 was $194,000 and $162,000, respectively, and $349,000 and $286,000 for the six months ended November 26, 2016 and November 28, 2015, respectively. There were 117,018 unvested restricted shares, with approximately $1.2 million of remaining unrecognized compensation cost, as of November 26, 2016.

The Company recognizes compensation expense for only the portion of stock options and restricted stock that is expected to vest, rather than recording forfeitures when they occur. If the actual number of forfeitures differs from that estimated by management, additional adjustments to compensation expense may be required in future periods.

The Company reflects, in its Consolidated Statements of Cash Flows, the tax impact resulting from tax deductions in excess of expense recognized in its Consolidated Statements of Operations as a financing cash flow, which will impact the Company’s future reported cash flows from operating activities. Gross excess tax benefits totaled $6,000 and $149,000 for the six months ended November 26, 2016 and November 28, 2015, respectively.

Employee Stock Purchase Plan

The Company’s ESPP allows qualified employees (as defined in the ESPP) to purchase designated shares of the Company’s common stock at a price equal to 85% of the lesser of the fair market value of common stock at the beginning or end of each semi-annual stock purchase period. The ESPP’s term expires October 16, 2024. A total of 5,900,000 shares of common stock may be

 

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issued under the ESPP. There were 1,103,000 shares of common stock available for issuance under the ESPP as of November 26, 2016. The Company issued 174,000 and 325,000 shares of common stock pursuant to the ESPP during the six months ended November 26, 2016 and the year ended May 28, 2016, respectively.

9. Segment Information and Enterprise Reporting

The Company discloses information regarding operations outside of the U.S. The Company operates as one segment. The accounting policies for the domestic and international operations are the same as those described in Note 2 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in the Company’s 2016 Annual Report on Form 10-K for the fiscal year ended May 28, 2016. Summarized information regarding the Company’s domestic and international operations is shown in the following table (amounts in thousands):

 

     Revenue for the
Three Months Ended
     Revenue for the
Six Months Ended
     Long-Lived Assets (1) as of  
     November 26,
2016
     November 28,
2015
     November 26,
2016
     November 28,
2015
     November 26,
2016
     May 28,
2016
 

United States

   $ 117,645       $ 122,540       $ 233,285       $ 243,643       $ 172,904       $ 172,155   

The Netherlands

     4,761         4,183         8,691         7,742         16,991         17,728   

Other

     25,152         24,164         48,971         47,842         2,285         2,574   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 147,558       $ 150,887       $ 290,947       $ 299,227       $ 192,180       $ 192,457   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Long-lived assets are comprised of goodwill and property and equipment.

10. Legal Proceedings

The Company is involved in certain legal matters arising in the ordinary course of business. In the opinion of management, all such matters, if disposed of unfavorably, would not have a material adverse effect on the Company’s financial position, cash flows or results of operations.

11. Subsequent Event

On December 20, 2016, the Company announced the appointment of Kate W. Duchene as President and Chief Executive Officer (“CEO”). Ms. Duchene had served as interim CEO since October 7, 2016, when the Company announced president and CEO Anthony Cherbak’s resignation due to health considerations. Ms. Duchene, who has been employed with the Company since 1999, most recently served as the Company’s Chief Legal Officer, Executive Vice President, Human Resources and Secretary. The Company’s employment agreement with Ms. Duchene has an initial term of three years ending on December 19, 2019 and renews each year thereafter unless the Company or Ms. Duchene provides the other party written notice within 60 days of the then-current expiration date that the agreement will not be extended. The employment agreement provides Ms. Duchene with specified severance benefits depending on, among other things, whether her separation from the Company is due to her death or disability, her termination by the Company without “cause” (as defined in the employment agreement) or her separation from the Company for “good reason” (as defined in the employment agreement).

12. 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.

 

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

Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. In August 2014, the FASB issued ASU 2014-15. This ASU provides new 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 new guidance requiring that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. The Company adopted this guidance as of the beginning of fiscal 2017. The Company does not currently have any performance based awards and thus the adoption has not had a material impact on its consolidated financial statements.

Accounting Pronouncements Pending 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 authoritative 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); early adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have on its consolidated financial statements.

Leases (Topic 842): Leases. In February 2016, the FASB issued ASU 2016-02, which amends the existing guidance to require lessees to recognize operating lease obligations on their balance sheets by recording the rights and obligations created by those leases. The requirements are effective for financial statements for annual periods and interim periods within those annual periods beginning after December 15, 2018 (for the Company, fiscal 2020), and early adoption is permitted. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and 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 most existing revenue recognition guidance and is intended to improve and converge revenue recognition and related financial reporting requirements. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a number of steps to apply to achieve that core principle and requires additional disclosures. In August 2015, the FASB issued ASU 2015-14, which delays the required implementation date for the Company until fiscal 2019, although the Company has the option to adopt this guidance beginning in fiscal 2018. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all periods presented, or “cumulative effect” adoption, meaning the standard is applied only to the most current period presented in the financial statements. In addition, in March 2016, the FASB issued ASU 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. The Company is currently evaluating the impact, if any, that these ASUs will have on its consolidated financial statements.

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

 

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ITEM 2. 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 consolidated financial statements and accompanying notes. This discussion and analysis contains “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to expectations concerning matters that are not historical facts. Such forward-looking statements may be identified by words such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “remain,” “should,” or “will” or the negative of these terms or other comparable terminology. These statements, and all phases of our operations, are subject to known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements and those of our industry to differ materially from those expressed or implied by these forward-looking statements. You are urged to carefully review the disclosures we make concerning risks, uncertainties and other factors that may affect our business or operating results, including those identified in Part II, Item 1A. Risk Factors below and in our Annual Report on Form 10-K for the year ended May 28, 2016 (File No. 0-32113). Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business or operating results. Readers are cautioned not to place undue reliance on the forward-looking statements included herein, which speak only as the date of this filing. We do not intend, and undertake no obligation, to update the forward-looking statements in this filing to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, unless required by law to do so. References in this filing to “Resources Connection,” “RGP,” “Resources Global Professionals,” “Resources Global,” the “Company,” “we,” “us,” and “our” refer to Resources Connection, Inc. and its subsidiaries.

Overview

Resources Global Professionals (“RGP”) is a multinational consulting firm that provides consulting and business initiative support services to its global client base in the areas of accounting; finance; governance, risk and compliance management; corporate advisory, strategic communications and restructuring; information management; human capital; supply chain management; and legal and regulatory. We assist our clients with projects requiring specialized expertise in:

 

    Finance and accounting services including process transformation and improvement; financial reporting and analysis; technical and operational accounting; merger and acquisition due diligence; audit response; implementation of new accounting standards such as the revenue recognition and lease pronouncements; and remediation support

 

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

 

    Corporate advisory, strategic communications and restructuring services

 

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

 

    Supply chain management services including supply chain strategy development; procurement and supplier management; logistics and materials management; supply chain planning and forecasting; and Unique Device Identification compliance

 

    Human capital services including change management; organization development and effectiveness; and optimization of human resources technology and operations

 

    Legal and regulatory services with projects, secondments or tactical needs including commercial transactions; compliance initiatives; law department operations and business strategy; and litigation support

We were founded in June 1996 by a team at Deloitte, led by our chairman, Donald B. Murray, who was then a senior partner with Deloitte. Our founders created Resources Connection to capitalize on the increasing demand for high quality outsourced professional services. We operated as a part of Deloitte until April 1999. In April 1999, we completed a management-led buyout in partnership with several investors. In December 2000, we completed our initial public offering of common stock and began trading on the NASDAQ Stock Market. We currently trade on the NASDAQ Global Select Market under the ticker symbol “RECN”. We operate under the acronym RGP, branding for our operating entity name of Resources Global Professionals.

 

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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 November 26, 2016, we served clients from offices in 20 countries, including 23 international offices and 44 offices in the United States. Our global footprint allows the Company to support the global initiatives of our multinational client base.

Critical Accounting Policies

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

The following represents a summary of our critical accounting policies, defined as those policies that we believe: (a) are the most important to the portrayal of our financial condition and results of operations and (b) involve inherently uncertain issues that require management’s most difficult, subjective or complex judgments. There have been no material changes in our critical accounting policies, or in the estimates and assumptions underlying those policies, from those described in our Annual Report on Form 10-K for the year ended May 28, 2016.

Valuation of long-lived assets — We assess the potential impairment of long-lived tangible and intangible assets periodically or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our goodwill is not subject to periodic amortization. This asset is considered to have an indefinite life and its carrying value is required to be assessed by us for impairment at least annually. Depending on future market values of our stock, our operating performance and other factors, these assessments could potentially result in impairment reductions of this intangible asset in the future and this adjustment may materially affect the 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 results. If the ultimate tax liability differs from the amount of tax expense we have reflected in the Consolidated Statements of Operations, an adjustment of tax expense may need to be recorded and this adjustment may materially affect the 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 Employee Stock Purchase Plan (“ESPP”), eligible officers and employees may purchase our common stock in accordance with the terms of the plan.

The Company estimates a value for employee stock options on the date of grant using an option-pricing model. We have elected to use the Black-Scholes option-pricing model which takes into account assumptions regarding a number of highly complex and subjective variables. These variables include the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Additional variables to be considered are the expected term, expected dividends and the risk-free interest rate over the expected term of our employee stock options. In addition, because stock-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures must be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If facts and circumstances change and we employ different assumptions in future periods, the compensation expense recorded may differ materially from the amount recorded in the current period.

 

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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 in each quarter of fiscal 2017 and $0.10 per share in each quarter of fiscal 2016) is also incorporated in determining the estimated value per share of employee stock option grants. Such dividends are subject to quarterly board of director approval. The 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.

 

     Three Months Ended      Six Months Ended  
     November 26,
2016
     November 28,
2015
     November 26,
2016
     November 28,
2015
 
     (Amounts in thousands)      (Amounts in thousands)  

Revenue

   $ 147,558       $ 150,887       $ 290,947       $ 299,227   

Direct cost of services

     91,048         92,011         179,910         182,888   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     56,510         58,876         111,037         116,339   

Selling, general and administrative expenses

     46,056         43,171         89,670         87,128   

Amortization of intangible assets

     —           30         —           60   

Depreciation expense

     808         881         1,602         1,739   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     9,646         14,794         19,765         27,412   

Interest expense

     64         —           64         —     

Interest income

     (40      (34      (110      (66
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before provision for income taxes

     9,622         14,828         19,811         27,478   

Provision for income taxes

     3,930         6,152         8,481         11,669   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 5,692       $ 8,676       $ 11,330       $ 15,809   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 and the Company believes they are also useful to investors as an alternative measure of our operating performance. The following table presents EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin for the periods indicated and includes a reconciliation of such measures to net income, the most directly comparable GAAP financial measure:

 

     Three Months Ended     Six Months Ended  
     November 26,
2016
    November 28,
2015
    November 26,
2016
    November 28,
2015
 
     (Amounts in thousands)     (Amounts in thousands)  

Net income

   $ 5,692      $ 8,676      $ 11,330      $ 15,809   

Adjustments:

        

Amortization of intangible assets

     —          30        —          60   

Depreciation expense

     808        881        1,602        1,739   

Interest expense

     64        —          64        —     

Interest income

     (40     (34     (110     (66

Provision for income taxes

     3,930        6,152        8,481        11,669   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     10,454        15,705        21,367        29,211   

Stock-based compensation expense

     1,855        1,390        3,150        3,545   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 12,309      $ 17,095      $ 24,517      $ 32,756   
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

   $ 147,558      $ 150,887      $ 290,947      $ 299,227   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA Margin

     8.3     11.3     8.4     10.9
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The financial measures and key performance indicators we use to assess our financial and operating performance above are not defined by, or calculated in accordance with, GAAP. A non-GAAP financial measure is defined as a numerical measure of a 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 Statements of Operations; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.

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

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

 

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

 

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

 

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

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

Three Months Ended November 26, 2016 Compared to Three Months Ended November 28, 2015

Percentage change computations are based upon amounts in thousands.

Revenue . Revenue decreased $3.3 million, or 2.2%, to $147.6 million for the three months ended November 26, 2016 from $150.9 million for the three months ended November 28, 2015. We deliver our services to clients, whether multi-national or locally based, in a similar fashion across the globe. Bill rates decreased 1.7% and hours worked decreased 0.6% between the two periods. The revenue decrease is partially attributable to reduced business consulting opportunities in the financial services and energy sectors. As presented in the table below, revenue increased in the second quarter of fiscal 2017 in Asia Pacific and Europe but declined in North America as compared to the second quarter of fiscal 2016.

Our financial results are subject to fluctuations in the exchange rates of foreign currencies in relation to the United States dollar (“U.S. dollar”). Revenues denominated in foreign currencies are translated into U.S. dollars at the monthly average exchange rates in effect during each period. Thus, as the value of the U.S. dollar strengthens relative to the currencies of our non-United States based operations, our translated revenue (and expenses) will be lower; conversely, if the value of the U.S. dollar weakens relative to the currencies of our non-United States based operations, our translated revenue (and expenses) will be higher. Using the comparable fiscal 2016 second quarter conversion rates, international revenues would have been higher than reported under GAAP by approximately $600,000 in the second quarter of fiscal 2017. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue increased in Europe by 8.9% and 5.5% in Asia Pacific, while decreasing in North America by 3.8%.

 

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The number of consultants on assignment as of November 26, 2016 was 2,649 compared to 2,645 consultants engaged as of November 28, 2015.

We operated 67 (23 abroad) offices as of November 26, 2016 and 68 (23 abroad) as of November 28, 2015. We consolidated one office that could be served from another location during the current quarter. 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 practice areas across the globe consisted of the following (dollars in thousands):

 

     Revenue for the
Three Months Ended
           % of Total  
     November 26,
2016
     November 28,
2015
     %
Change
    November 26,
2016
    November 28,
2015
 

North America

   $ 120,052       $ 124,958         (3.9 )%      81.4     82.8

Europe

     15,945         15,339         4.0     10.8        10.2   

Asia Pacific

     11,561         10,590         9.2     7.8        7.0   
  

 

 

    

 

 

      

 

 

   

 

 

 

Total

   $ 147,558       $ 150,887         (2.2 )%      100.0     100.0
  

 

 

    

 

 

      

 

 

   

 

 

 

Direct Cost of Services . Direct cost of services decreased $1.0 million, or 1.0%, to $91.0 million for the three months ended November 26, 2016 from $92.0 million for the three months ended November 28, 2015. The decrease in the amount of direct cost of services was primarily attributable to a decrease of 0.6% in the number of hours worked in the second quarter of fiscal 2017 as compared to the same period of fiscal 2016 and a decrease of 1.7% in the average pay rate per hour of our consultants.

Direct cost of services as a percentage of revenue was 61.7% and 61.0% for the three months ended November 26, 2016 and November 28, 2015, respectively. The direct cost of services percentage of revenue was higher in the second quarter of fiscal 2017 primarily because of an unfavorable change in the bill rate/pay rate ratio as well as higher medical coverage expenses in the fiscal 2017 quarter as compared to the prior year quarter.

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

Selling, General and Administrative Expenses . Selling, general and administrative expense (“S, G & A”) as a percentage of revenue was 31.2% and 28.6% for the quarters ended November 26, 2016 and November 28, 2015, respectively. The lower amount of revenue in the second quarter of fiscal 2017 reduced leverage, partially resulting in the higher current quarter percentage. S, G & A increased to $46.1 million for the second quarter of fiscal 2017 from $43.2 million for the same period in the prior year. S, G & A in the current year second quarter includes approximately $1.1 million in severance and additional 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. Absent these costs, S, G & A increased by $1.4 million in the second quarter of fiscal 2017 as compared to the prior year quarter; the primary cause of this increase was compensation and related benefit costs attributable to headcount additions in United States offices with high growth potential, including business development professionals and managing consultants with specific skill sets.

Management and administrative headcount increased from 762 at the end of the second quarter of fiscal 2016 to 782 at the end of the second quarter of fiscal 2017.

Sequential Operations . On a sequential quarter basis, fiscal 2017 second quarter revenues increased approximately 2.9%, from $143.4 million to $147.6 million. Comparing the two quarters, hours worked increased 3.8% while average bill rates decreased 0.8%. The Company’s sequential revenue increased in North America (1.8%), Europe (13.0%) and Asia Pacific (2.3%). On a constant currency basis, using the comparable first quarter fiscal 2017 conversion rates, sequential revenue increased in North America (1.8%), Europe (16.0%) and Asia Pacific (3.0%).

Direct cost of services as a percentage of revenue was 61.7% and 62.0% in the second and first quarters of fiscal 2017, respectively; the lower direct cost of services percentage in the second quarter is primarily the result of lower payroll related taxes as the calendar year progresses, offset by an increase in cost of medical coverage.

The ratio of S, G & A to revenue increased from 30.4% for the quarter ended August 27, 2016 to 31.2% for the quarter ended November 26, 2016. The change in the ratio is primarily the result of costs of approximately $1.1 million in severance and additional 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.

 

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Amortization and Depreciation Expense. The Company completed amortization of all remaining amortizable intangible assets as of the end of fiscal 2016 and thus there was no amortization expense during the second quarter of fiscal 2017. Amortization of intangible assets was $30,000 for the three months ended November 28, 2015.

Depreciation expense was $808,000 for the three months ended November 26, 2016 compared to $881,000 for the three months ended November 28, 2015.

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. Borrowings under the Facility bear interest at a rate per annum of either, at the Company’s option, (i) a LIBO 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, including commitment fees, for the period from October 17, 2016 to November 26, 2016 was approximately $64,000.

The Company’s interest income was $40,000 in the second quarter of fiscal 2017 compared to $34,000 in the second quarter of fiscal 2016. The improvement is from slightly higher returns on cash balances available for investment. The use of cash in the Dutch auction tender offer in November will reduce amounts available for investment for the remainder of the fiscal year, resulting in an expected reduction in interest income.

The Company has invested available cash in commercial paper that has been classified as cash equivalents due to the short maturities of these investments. As of November 26, 2016, the Company also has $5.0 million of investments in commercial paper with maturity dates between three months and one year from the balance sheet date which are classified as short-term investments and considered “held-to-maturity” securities.

Income Taxes. The Company’s provision for income taxes was $3.9 million (effective tax rate of approximately 41%) and $6.2 million (effective tax rate of approximately 42%) for the three months ended November 26, 2016 and November 28, 2015, respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax rate because of the volatility in its international operations which span numerous tax jurisdictions.

The provision for income taxes in the second quarter of fiscal 2017 and 2016 results from taxes on income in the United States and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the United States statutory rates. The effective tax rate decreased for the three months ended November 26, 2016 due to improved overall profitability in our foreign operations, which have lower tax rates than the United States statutory rate. 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 and the limitation on the benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established.

The Company cannot recognize a tax benefit for the stock compensation expense related to certain incentive stock options (“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. The Company recognized a benefit of approximately $537,000 and $447,000 related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the second quarter of fiscal 2017 and 2016, respectively. The proportion of expense related to non-qualified stock option grants (for which the Company may recognize a tax benefit in the same quarter as the related compensation expense in most instances) is significant as compared to expense related to ISOs (including ESPPs). However, the timing and amount of eligible disqualifying ISO exercises cannot be predicted. The Company predominantly grants nonqualified stock options to employees in the United States.

Six Months Ended November 26, 2016 Compared to Six Months Ended November 28, 2015

Percentage change computations are based upon amounts in thousands.

 

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Table of Contents

Revenue . Revenue decreased $8.3 million, or 2.8%, to $290.9 million for the six months ended November 26, 2016 from $299.2 million for the six months ended November 28, 2015. Bill rates were down 0.8% and hours worked decreased 1.6% between the two periods. The decrease in revenue is partially attributable to the Memorial Day holiday which occurred in the first half of fiscal 2017 while the same holiday in the prior calendar year fell in the fourth quarter of fiscal 2015. The estimated reduction in revenue attributable to the holiday was $1.4 million. The revenue decrease is also attributable to reduced business consulting opportunities in the financial services and energy sectors. As presented in the table below, revenue increased in the first half of fiscal 2017 in Asia Pacific and Europe but declined in North America as compared to the first half of fiscal 2016. Client reimbursement revenue also declined $700,000 between the quarters.

Our financial results are subject to fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar. Revenues denominated in foreign currencies are translated into U.S. dollars at the monthly average exchange rates in effect during each period. Thus, as the value of the U.S. dollar strengthens relative to the currencies of our non-United States based operations, our translated revenue (and expenses) will be lower; conversely, if the value of the U.S. dollar weakens relative to the currencies of our non-United States based operations, our translated revenue (and expenses) will be higher. Using the comparable fiscal 2016 first half conversion rates, international revenues would have been higher than reported under GAAP by approximately $900,000 in the first half of fiscal 2017. Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue increased in Europe by 9.3% and Asia Pacific by 2.1% while decreasing in North America by 4.2%.

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

 

     Revenue for the                     
     Six Months Ended            % of Total  
     November 26,      November 28,      %     November 26,     November 28,  
     2016      2015      Change     2016     2015  

North America

   $ 238,028       $ 248,982         (4.4 )%      81.8     83.2

Europe

     30,053         28,629         5.0     10.3        9.6   

Asia Pacific

     22,866         21,616         5.8     7.9        7.2   
  

 

 

    

 

 

      

 

 

   

 

 

 

Total

   $ 290,947       $ 299,227         (2.8 )%      100.0     100.0
  

 

 

    

 

 

      

 

 

   

 

 

 

Direct Cost of Services . Direct cost of services decreased $3.0 million, or 1.6%, to $179.9 million for the six months ended November 26, 2016 from $182.9 million for the six months ended November 28, 2015. The decrease in the amount of direct cost of services was attributable to a decrease of 1.6% in the number of hours worked in the first half of fiscal 2017 as compared to the same period of fiscal 2016. Average pay rate per hour remained the same between the two six month periods.

Direct cost of services as a percentage of revenue was 61.8% and 61.1% for the six months ended November 26, 2016 and November 28, 2015, respectively. The direct cost of services percentage of revenue was higher in the first half of fiscal 2017 primarily because of an unfavorable change in the bill rate/pay rate ratio and the Memorial Day holiday timing discussed above.

Selling, General and Administrative Expenses . S, G & A as a percentage of revenue was 30.8% and 29.1% for the six months ended November 26, 2016 and November 28, 2015, respectively. The unfavorable change in the percentage of revenue calculation in the first half of fiscal 2017 was partially attributable to reduced leverage from decreased revenue between the two periods. S, G & A increased to $89.7 million for the first half of fiscal 2017 from $87.1 million for the same period in the prior year. The current year six month period S, G & A 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 for the prior year period 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 $2.0 million in the first half of fiscal 2017 as compared to the prior year period; the primary cause of this increase was compensation and related benefit costs attributable to headcount additions in U.S. offices with high growth potential, including business development professionals and managing consultants with specific skill sets.

Amortization and Depreciation Expense. The Company completed amortization of all remaining amortizable intangible assets as of the end of fiscal 2016 and thus there was no amortization expense during the first half of fiscal 2017. Amortization of intangible assets was $60,000 for the six months ended November 28, 2015.

Depreciation expense was $1.6 million for the six months ended November 26, 2016 compared to $1.7 million for the six months ended November 28, 2015.

 

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Table of Contents

Interest Expense (Income) . As described further below under the caption Liquidity and Capital Resources , the Company entered into a $120 million Facility with Bank of America in October 2016. 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 for approximately $104.2 million, excluding transaction costs, funded partially by borrowing $58.0 million under the Facility. Interest expense under the Facility, including commitment fees, for the period from October 17, 2016 to November 26, 2016 was $64,000.

The Company’s interest income was $110,000 in the first half of fiscal 2017 compared to $66,000 in the first half of fiscal 2016. The improvement is from slightly higher returns on cash balances available for investment.

Income Taxes. The Company’s provision for income taxes was $8.5 million (effective tax rate of approximately 43%) and $11.7 million (effective tax rate of approximately 43%) for the six months ended November 26, 2016 and November 28, 2015, respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax rate because of the volatility in its international operations which span numerous tax jurisdictions.

The provision for income taxes in the first half of fiscal 2017 and 2016 results from taxes on income in the United States and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the United States statutory rates. The effective tax rate remained the same for the six months ended November 26, 2016 as the overall profitability in our foreign operations continued to stabilize; those foreign operations have a lower tax rate than the U.S. statutory rate. 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 and the limitation on the benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established.

The Company cannot recognize a tax benefit for the stock compensation expense related to certain incentive stock options (“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. The Company recognized a benefit of approximately $1.0 million and $1.2 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the first half of fiscal 2017 and 2016, respectively. The proportion of expense related to non-qualified stock option grants (for which the Company may recognize a tax benefit in the same quarter as the related compensation expense in most instances) is significant as compared to expense related to ISOs (including ESPPs). However, the timing and amount of eligible disqualifying ISO exercises cannot be predicted. The Company predominantly grants nonqualified stock options to employees in the United States.

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

Liquidity and Capital Resources

Our primary source of liquidity is cash provided by our operations and, historically, to a lesser extent, stock option exercises and ESPP purchases. On an annual basis, we have generated positive cash flows from operations since inception. Our ability to continue to increase cash flow from operations in the future will be, at least in part, dependent on continued improvement in global economic conditions. As of November 26, 2016, the Company had $63.6 million of cash, cash equivalents and short-term investments.

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. See Note 5 to the Consolidated Financial Statements for further information on the Facility. As of November 26, 2016, the Company had borrowed approximately $58.0 million under the Facility and has directed Bank of America to issue approximately $1.2 million of outstanding letters of credit for the benefit of third parties related to operating leases and guarantees. As of November 26, 2016, 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 the $58.0 million borrowed under the Facility and the remainder with cash on hand.

 

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Operating Activities

Operating activities provided $8.1 million in cash for the six months ended November 26, 2016 compared to $10.7 million for the six months ended November 28, 2015. Cash provided by operations in the first six months of fiscal 2017 resulted from net income of $11.3 million and non-cash items of $4.6 million, offset by net unfavorable changes in operating assets and liabilities of $7.8 million. In the first six months of fiscal 2016, cash provided by operations resulted from net income of $15.8 million and non-cash items of $5.2 million, offset by net unfavorable changes in operating assets and liabilities of $10.4 million. Non-cash items in the first half of both fiscal 2017 and fiscal 2016 include depreciation and amortization and stock-based compensation expense. These charges do not reflect an actual cash outflow from the Company.

Investing Activities

Net cash provided by investing activities was $17.8 million for the first six months of fiscal 2017, compared to a use of cash of $6.5 million in the comparable prior year period. In the first six months of fiscal 2017, redemptions of short-term investments were $20.0 million as the Company accumulated cash from maturing investments in preparation for the tender offer; in the prior year period, purchases of short-term investments exceeded redemptions by approximately $5.0 million. Purchases of property and equipment increased approximately $800,000 between the two periods.

Financing Activities

Net cash used in financing activities totaled $57.4 million and $11.0 million for the six months ended November 26, 2016 and November 28, 2015, respectively. Net cash used in financing activities for the six months ended November 26, 2016 included $104.2 million, excluding transaction costs, used to purchase shares of our common stock in the modified Dutch auction tender offer, with $58.0 million of this amount borrowed under the Facility and the remainder funded from the Company’s existing cash balances. The Company also used $6.6 million to purchase an additional 443,256 shares of common stock on the open market during the first six months of fiscal 2017. This compares to $11.5 million in the first six months of the prior fiscal year to purchase approximately 689,000 shares of its common stock on the open market.

Proceeds from the exercise of employee stock options and issuance of shares via the Company’s ESPP were approximately $2.7 million lower in the first half of fiscal 2017 as compared to the comparable period of fiscal 2016. The Company also paid dividends on its common stock of $7.6 million in the first six months of fiscal 2017, approximately $900,000 higher than in the comparable period of the prior year. The Company’s dividend rate for dividends declared each quarter of fiscal 2017 is $0.11 per common share, compared to $0.10 per common share in fiscal 2016. The Company’s board of directors declared a quarterly cash dividend of $0.11 per common share on October 20, 2016. The dividend of approximately $3.3 million, paid on December 15, 2016, is accrued in the Company’s Consolidated Balance Sheet as of November 26, 2016. With the reduction in number of common shares outstanding as a result of the modified Dutch auction tender offer, the Company anticipates that, if approved by the board of directors, the dividend payable will be approximately $3.3 million in both the third and fourth quarters of fiscal 2017.

Our ongoing operations and anticipated growth in the geographic markets we currently serve will require us to continue to make investments in office premises and capital equipment, primarily technology hardware and software. In addition, we may consider making strategic acquisitions. We currently believe that our current cash, short-term investments, 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 do additional share repurchases, we may fund these through existing cash balances or use of our Facility. The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders. We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future. In the event we are unable to obtain additional financing when needed, we may be compelled to delay or curtail our plans to develop our business or to pay dividends on our capital stock, which could have a material adverse effect on our operations, market position and competitiveness.

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is contained in Note 12 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

 

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ITEM 3. 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 equivalent short-term investments and our borrowings under our Facility that bear interest at a variable market rate. As of November 26, 2016, we had $63.6 million of cash and cash equivalents and short-term investments and $58.0 million of borrowings under our Facility. Securities that the Company has the ability and positive intent to hold to maturity are carried at amortized cost. These securities consist of commercial paper. Cost approximates market for these securities. The earnings on these investments are subject to changes in interest rates; however, assuming a constant balance available for investment, a 10% decline in interest rates would reduce our interest income but would not have a material impact on our consolidated financial position or results of operations.

Foreign Currency Exchange Rate Risk.  For the three months ended November 26, 2016, approximately 20% 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 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 reporting period. Approximately 65% of our balances of cash, cash equivalents and short-term investments as of November 26, 2016 were denominated in U.S. dollars. The remaining 35% was comprised primarily of cash balances translated from Japanese Yen, Canadian Dollars, Euros and Hong Kong Dollars. 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 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, and we cannot assure you that exchange rate fluctuations will not adversely affect our financial results in the future.

 

ITEM 4. CONTROLS AND PROCEDURES.

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of November 26, 2016. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of November 26, 2016. There was no change in the Company’s internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Exchange Act, during the Company’s quarter ended November 26, 2016 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

We are not a party to any material legal proceedings, although we are from time to time party to legal proceedings that arise in the ordinary course of our business.

 

ITEM 1A. RISK FACTORS .

There have been no material changes in our risk factors from those disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended May 28, 2016, which was filed with the Securities and Exchange Commission on August 11, 2016, except for risks associated with our new credit facility discussed below. For convenience, our updated risk factors are included below in this Item 1A. The order in which the risks appear is not intended as an indication of their relative weight or importance.

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 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.

 

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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.

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. 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;

 

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    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 U.S. 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;

 

    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 that we will be successful in attracting and retaining the number of highly qualified and experienced consultants necessary to maintain and grow our business.

 

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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.

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 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;

 

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

Although our management has determined, and our independent registered public accountant has attested, that our internal control over financial reporting was effective as of May 28, 2016, we cannot assure you that we or our independent registered public accountant will not identify a material weakness in our internal controls in the future. A material weakness in our internal control over financial reporting may require management and our independent registered public accountant to evaluate our internal controls as ineffective. If our internal control over financial reporting is not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and our stock price. Additionally, if our internal control over financial reporting otherwise fails to comply with the requirements of Sarbanes, our business and stock price could be adversely affected.

 

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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 and energy 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, like 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.

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

We measure and recognize compensation expense for all stock-based compensation based on estimated values. Thus, our operating results contain 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.

 

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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 or the discontinuance of the quarterly dividend could adversely affect the trading price of our common stock.

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

We believe that establishing, maintaining and enhancing the RGP and Resources Global Professionals brand name is essential to our business. We have applied for United States and foreign registrations on these service marks. We have previously obtained United States registrations on our Resources Connection service mark and puzzle piece logo, Registration No. 2,516,522 registered December 11, 2001; No. 2,524,226 registered January 1, 2002; and No. 2,613,873, registered September 3, 2002, as well as certain foreign registrations. On March 29, 2013, we filed a United States trademark application for our RGP service mark and puzzle piece logo, Serial No. 85/890,836 as well as United States trademark applications on our RGP service mark, puzzle piece and tag line, Serial No. 85/890,838; our RGP Healthcare service mark and puzzle piece logo, Serial No. 85/890,839; our RGP Legal service mark and puzzle piece logo, Serial No. 85/890,843; and our RGP Search service mark and puzzle piece logo, Serial No. 85/890,845. We received approval of these applications and registration was granted as of December 2, 2014.

We 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 and in the appropriate jurisdictions on the service mark for this product. On February 13, 2014, we filed a Nonprovisional Application, App. No. H180290, with the United States Patent Office for patent protection for this invention. There is no guarantee that this pending patent application will be approved. In addition, if our patent application is approved, third parties may knowingly or unknowingly infringe our proprietary rights and third parties may 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.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following table provides information about purchases by the Company of its common stock during the three months ended November 26, 2016.

 

Period

   Total
Number
of Shares
Purchased (1),(2)
     Average
Price
Paid
per
Share
     Total Number of
Shares
Purchased as
Part of
Announced
Programs  (1),(2)
     Approximate Dollar
Value of Shares
that May Yet be
Purchased  Under
Announced Program (1)
 

August 28, 2016— September 24, 2016

     —         $ —           —         $ 132,931,683   

September 25, 2016 — October 22, 2016

     68,600       $ 13.17         68,600       $ 132,028,263   

October 23, 2016 — November 26, 2016

     6,515,264       $ 16.18         6,515,264       $ 132,028,263   
  

 

 

       

 

 

    

Total August 28, 2016 — November 26, 2016

     6,583,864       $ 16.15         6,583,864       $ 132,028,263   
  

 

 

       

 

 

    

 

(1) In July 2015, our board of directors approved a stock repurchase program (the “July 2015 program”), authorizing the purchase, at the discretion of the Company’s senior executives, of our common stock for an aggregate dollar limit not to exceed $150 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. The shares purchased from September 25, 2016 – October 22, 2016 were made under the July 2015 program.
(2) In October 2016, we commenced a modified Dutch auction tender offer to purchase up to 6,000,000 shares at a price not greater than $16.00 per share and not less than $13.50 per share. In November 2016, we exercised our right to increase the size of the tender offer by up to 2.0% of our outstanding common stock. The tender offer period expired on November 15, 2016 and on November 22, 2016, we purchased 6,515,264 shares of our common stock at a per share price of $16.18, including transaction costs.

 

ITEM 6. EXHIBITS.

The exhibits listed in the Exhibit Index (following the Signatures page of this Report) are filed with, or incorporated by reference in, this Report.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      RESOURCES CONNECTION, INC.
Date: January 5, 2017      

/s/ Kate W. Duchene

      Kate W. Duchene
     

Chief Executive Officer

(Principal Executive Officer)

Date: January 5, 2017      

/s/ Herbert M. Mueller

      Herbert M. Mueller
     

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)


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EXHIBIT INDEX

 

Exhibit

Number

  

Description of Document

  10.1+    Employment Agreement, dated October 20, 2016, by and between the Company and Anthony Cherbak (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed with the SEC on October 24, 2016).
  10.2+    Separation and General Release Agreement, effective November 16, 2016, between Tracy Stephens and Resources Connection, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed with the SEC on November 21, 2016).
  10.3+    Employment Agreement, effective December 19, 2016, between Kate W. Duchene and Resources Connection, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed with the SEC on December 21, 2016).
  10.4    Credit Agreement, dated as of October 17, 2016, by and among, Resources Connection, Inc., Resources Connection LLC, as borrowers, Resources Healthcare Solutions LLC, RGP Property LLC, and Sitrick Brincko Group LLC, as guarantors, and Bank of America, N.A., as lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed with the SEC on October 17, 2016).
  10.5*    Amendment No. 1 to Credit Agreement, dated November 27, 2016, between Bank of America N.A. and Resources Connection, Inc. and Resources Connection LLC.
  10.6    Security and Pledge Agreement, dated as of October 17, 2016, by and among Resources Connection, Inc., Resources Connection LLC, as borrowers, Resources Healthcare Solutions LLC, RGP Property LLC, and Sitrick Brincko Group LLC, as obligors, and Bank of America, N.A., as lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed with the SEC on October 17, 2016).
  31.1*    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2*    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32**    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*    XBRL Instance.
101.SCH*    XBRL Taxonomy Extension Schema.
101.CAL*    XBRL Taxonomy Extension Calculation.
101.DEF*    XBRL Taxonomy Extension Definition.
101.LAB*    XBRL Taxonomy Extension Labels.
101.PRE*    XBRL Taxonomy Extension Presentation.

 

* Filed herewith.
** Furnished herewith.
+ Indicates a management contract or compensatory plan or arrangement

Exhibit 10.5

EXECUTION VERSION

FIRST AMENDMENT TO CREDIT AGREEMENT

AND AMENDMENT TO SECURITY AND PLEDGE AGREEMENT

THIS FIRST AMENDMENT TO CREDIT AGREEMENT AND AMENDMENT TO SECURITY AND PLEDGE AGREEMENT dated as of November 27, 2016 (this “ Agreement ”) is entered into among RESOURCES CONNECTION, INC., a Delaware corporation (“ RCI ”), RESOURCES CONNECTION LLC, a Delaware limited liability company (“ RCL ” and together with RCI, the “ Borrowers ” and each a “ Borrower ”), the Guarantors party hereto, and BANK OF AMERICA, N.A., as Lender (the “ Lender ”). All capitalized terms used herein and not otherwise defined herein shall have the meanings given to such terms in the Credit Agreement (as defined below).

RECITALS

WHEREAS, the Borrowers, the Guarantors and the Lender have entered into that certain Credit Agreement dated as of October 17, 2016 (the “ Credit Agreement ”);

WHEREAS, the Borrowers, the Guarantors and the Lender have entered into that certain Security and Pledge Agreement dated as of October 17, 2016 (the “ Security Agreement ”);

WHEREAS, RCI has advised the Lender that it desires to pledge pursuant to the Security Agreement one hundred percent (100%) of the Equity Interests owned by RCI in Resources Global Professionals (Singapore) Pte. Ltd., a company organized under the laws of Singapore, to the Lender, for the benefit of the Secured Parties, to secure the Secured Obligations (the “ RGP Singapore Pledge ”); and

WHEREAS, in connection with, and to implement, the RGP Singapore Pledge, the Borrowers and the Guarantors have requested that the Lender amend the Credit Agreement and the Security Agreement, in each case, as set forth below.

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

  1. Amendments to Credit Agreement .

(a) The following definitions are hereby added in Section 1.01 of the Credit Agreement in the appropriate alphabetical order to read as follows:

Pledged Equity Request ” means a request duly executed and delivered by a Responsible Officer of RCI, in form and substance reasonably satisfactory to the Lender, pursuant to which RCI requests that the Equity Interests of RGP Singapore be required to be pledged pursuant to Section 6.14(a)(iii) . For the avoidance of doubt, it is hereby understood and agreed that the Pledged Equity Request may only be delivered one (1) time during the term of this Agreement.

Pledged Foreign Subsidiary ” means each Foreign Subsidiary of RCI other than RGP Singapore.

RGP Singapore ” means Resources Global Professionals (Singapore) Pte. Ltd., a company organized under the laws of Singapore.


(b) Section 6.14(a) of the Credit Agreement is hereby amended to read as follows:

(a) Equity Interests . Cause (i) one hundred percent (100%) of the issued and outstanding Equity Interests of each Domestic Subsidiary (other than a FSHCO) directly owned by a Loan Party, (ii) one hundred percent (100%) of the issued and outstanding Equity Interests of RGP Singapore, and (iii) sixty five percent (65%) (or such greater percentage that, due to a change in an applicable Law after the date hereof, (A) could not reasonably be expected to cause the undistributed earnings of such Pledged Foreign Subsidiary or such FSHCO as determined for United States federal income tax purposes to be treated as a deemed dividend to such Pledged Foreign Subsidiary’s or such FSHCO’s United States parent, and (B) could not reasonably be expected to cause any material adverse tax consequences) of the issued and outstanding Equity Interests entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) and one hundred percent (100%) of the issued and outstanding Equity Interests not entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) of each Pledged Foreign Subsidiary and each FSHCO, in each case, directly owned by a Loan Party, in each case, to be subject at all times to a first priority (subject only to nonconsensual Permitted Liens), perfected Lien in favor of the Lender, for the benefit of the Secured Parties, pursuant to the terms and conditions of the Collateral Documents, together with, to the extent requested by the Lender, opinions of counsel and any filings and deliveries necessary in connection therewith to perfect the security interests therein, all in form and substance reasonably satisfactory to the Lender (it being understood that this Section 6.14(a) shall only require perfection of the Lender’s security interest under the Laws of the jurisdiction of organization of a Foreign Subsidiary (including the execution and delivery of local law-governed pledge agreements) (x) within ninety (90) days (or such longer period as the Lender permits in its sole discretion) of the request of the Lender, and (y) if such Foreign Subsidiary is a Material Foreign Subsidiary); provided , that , upon delivery by RCI of the Pledged Equity Request and acceptance thereof by the Lender (such acceptance not to be unreasonably withheld, conditioned or delayed), Section 6.14(a) shall be deemed to be amended such that Section 6.14(a)(ii) is deleted and replaced with “[reserved]” and the Equity Interests of RGP Singapore shall be required to be pledged pursuant to Section 6.14(a)(iii) as if RGP Singapore was a Pledged Foreign Subsidiary.

 

  2. Amendments to Security Agreement .

(a) The definition of “Pledged Equity” in Section 1 of the Security Agreement is hereby amended to read as follows:

Pledged Equity ” means, with respect to each Obligor, (i) 100% of the issued and outstanding Equity Interests of each Domestic Subsidiary that is directly owned by such Obligor, (ii) one hundred percent (100%) of the issued and outstanding Equity Interests of RGP Singapore, and (iii) 65% (or such greater percentage that, due to a change in an applicable Law after the date hereof, (A) could not reasonably be expected to cause the undistributed earnings of such Pledged Foreign Subsidiary or such FSHCO as determined for United States federal income tax purposes to be treated as a deemed dividend to such Pledged Foreign Subsidiary’s or such FSHCO’s United States parent, and (B) could not reasonably be expected to cause any material adverse tax consequences) of the issued and outstanding Equity Interests entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) and 100% of the issued and outstanding Equity Interests not entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) in each Pledged Foreign Subsidiary and each FSHCO, in each case, that is directly owned by such Obligor, including the Equity Interests of the Subsidiaries owned by such Obligor as set forth on

 

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Schedule 1(b) hereto, in each case together with the certificates (or other agreements or instruments), if any, representing such shares, and all options and other rights, contractual or otherwise, with respect thereto, including, but not limited to, the following:

(1) all Equity Interests representing a dividend thereon, or representing a distribution or return of capital upon or in respect thereof, or resulting from a stock split, revision, reclassification or other exchange therefor, and any subscriptions, warrants, rights or options issued to the holder thereof, or otherwise in respect thereof; and

(2) in the event of any consolidation or merger involving the issuer thereof and in which such issuer is not the surviving Person, all shares of each class of the Equity Interests of the successor Person formed by or resulting from such consolidation or merger, to the extent that such successor Person is a direct Subsidiary of an Obligor;

provided , that , upon delivery by RCI of the Pledged Equity Request and acceptance thereof by the Lender (such acceptance not to be unreasonably withheld, conditioned or delayed), the definition of “Pledged Equity” shall be deemed to be amended such that clause (ii)  above is deleted and replaced with “[reserved]” and the Equity Interests of RGP Singapore shall be pledged in accordance with the requirements set forth in clause (iii)  above as if RGP Singapore was a Pledged Foreign Subsidiary.

(b) Schedule 1(b) of the Security Agreement is hereby amended to read as set forth on Schedule 1(b) attached hereto.

3.     Condition Precedent . This Agreement shall be effective upon receipt by the Lender of counterparts of this Agreement duly executed by the Borrowers, the Guarantors, and the Lender.

 

  4. Miscellaneous .

(a) The Credit Agreement, and the obligations of the Loan Parties thereunder and under the other Loan Documents, are hereby ratified and confirmed and shall remain in full force and effect according to their terms. This Agreement shall constitute a Loan Document.

(b) Each Guarantor (i) acknowledges and consents to all of the terms and conditions of this Agreement, (ii) affirms all of its obligations under the Loan Documents, and (iii) agrees that this Agreement and all documents executed in connection herewith do not operate to reduce or discharge its obligations under the Credit Agreement or the other Loan Documents.

(c) Each Loan Party hereby represent and warrant as follows: (i) such Loan Party has taken all necessary corporate or other organizational action to authorize the execution, delivery and performance of this Agreement; (ii) this Agreement has been duly executed and delivered by such Loan Party and constitutes a legal, valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity; and (iii) no approval, consent, exemption, authorization or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or performance by, or enforcement against, such Loan Party of this Agreement.

 

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(d) The Loan Parties represent and warrant to the Lenders that (i) after giving effect to this Agreement, the representations and warranties of each Loan Party contained in the Credit Agreement or any other Loan Document, or which are contained in any document furnished at any time under or in connection therewith, are true and correct in all material respects (and in all respects if any such representation or warranty is already qualified by materiality or reference to Material Adverse Effect) on and as of the date hereof, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct in all material respects (and in all respects if any such representation or warranty is already qualified by materiality or reference to Material Adverse Effect) as of such earlier date, and (ii) after giving effect to this Agreement, no event has occurred and is continuing which constitutes a Default or an Event of Default.

(e) This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page of this Agreement by facsimile or other electronic imaging means (e.g. “pdf” or “tif”) shall be effective as delivery of a manually executed counterpart of this Agreement.

(f) THIS AGREEMENT AND ANY CLAIMS, CONTROVERSY, DISPUTE OR CAUSE OF ACTION (WHETHER IN CONTRACT OR TORT OR OTHERWISE) BASED UPON, ARISING OUT OF OR RELATING TO HERETO, AND THE TRANSACTIONS CONTEMPLATED HEREBY, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

[SIGNATURE PAGES FOLLOW]

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.

 

BORROWERS :    

RESOURCES CONNECTION, INC.,

a Delaware corporation

    By:   /s/ Kate W. Duchene
    Name: Kate W. Duchene
    Title: Interim Chief Executive Officer
   

RESOURCES CONNECTION LLC,

a Delaware limited liability company

    By:   Resources Connection, Inc., its sole member
    By:   /s/ Kate W. Duchene
    Name: Kate W. Duchene
    Title: Interim Chief Executive Officer
GUARANTORS :    

RESOURCES HEALTHCARE SOLUTIONS LLC,

a Delaware limited liability company

    By:   /s/ Kate W. Duchene
    Name: Kate W. Duchene
    Title: Interim Chief Executive Officer
   

RGP PROPERTY LLC,

a Delaware limited liability company

    By:   Resources Connection, Inc., its sole member
    By:   /s/ Kate W. Duchene
    Name: Kate W. Duchene
    Title: Interim Chief Executive Officer
   

SITRICK BRINCKO GROUP, LLC,

a Delaware limited liability company

    By:   Resources Connection, Inc., its manager
    By:   /s/ Kate W. Duchene
    Name: Kate W. Duchene
    Title: Interim Chief Executive Officer

RESOURCES CONNECTION, INC.

FIRST AMENDMENT TO CREDIT AGREEMENT AND AMENDMENT

TO SECURITY AND PLEDGE AGREEMENT


LENDER :    

BANK OF AMERICA, N.A.,

as Lender

    By:   /s/ Angel Sutoyo
    Name: Angel Sutoyo
    Title: Senior Vice President

RESOURCES CONNECTION, INC.

FIRST AMENDMENT TO CREDIT AGREEMENT AND AMENDMENT

TO SECURITY AND PLEDGE AGREEMENT


SCHEDULE 1(b)

PLEDGED EQUITY

 

Name of Subsidiary

  

Name of

Owner / Obligor

   Number of
Shares
   Certificate
Number
   Percentage
Ownership
   Percentage
Pledged

Resources Connection LLC

   Resources Connection, Inc.    N/A    N/A    100%    100%

Resources Healthcare Solutions LLC

   Resources Connection, Inc.    N/A    N/A    100%    100%

RGP Property LLC

   Resources Connection, Inc.    N/A    N/A    100%    100%

Sitrick Brincko Group, LLC

   Resources Connection, Inc.    N/A    N/A    100%    100%

Resources Global Professionals, Inc.

   Resources Connection, Inc.    100    N/A    100%    65%

Resources Global Professionals (Belgium) NV

   Resources Connection, Inc.    23,628    N/A    99.99576%    65%

Resources Global Professionals (Denmark) AS

   Resources Connection, Inc.    5,000    N/A    100%    65%

Resources Global Professionals (Germany) GmbH

   Resources Connection, Inc.    1    N/A    100%    65%

Resources Global Professionals (Ireland) Ltd.

   Resources Connection, Inc.    250    N/A    100%    65%

Resources Global Professionals Holdings B.V.

   Resources Connection, Inc.    18,000    N/A    100%    65%

Resources Global Professionals (Norway) AS

   Resources Connection, Inc.    59    N/A    100%    65%

M&D Selection AB

   Resources Connection, Inc.    N/A    N/A    100%    65%

Resources Global Professionals Sweden AB

   Resources Connection, Inc.    547    N/A    100%    65%

Compliance.co.uk Ltd

   Resources Connection, Inc.    67,136    N/A    100%    65%

Resources Connection Australia Pty Ltd.

   Resources Connection, Inc.    12,886    N/A    100%    65%

Resources Global Enterprise Consulting (Beijing) Co.

   Resources Connection, Inc.    N/A    N/A    100%    65%


Resources Global Professionals (HK) Limited

   Resources Connection, Inc.    14,570,090    N/A    99.97%    65%

Resources Global Professionals (HK) Limited

   Resources Connection LLC    4,372    N/A    0.03%    65%

Resources Global Professionals (India) Private Ltd.

   Resources Connection, Inc.    9,999    N/A    99.99%    65%

Resources Global Professionals Japan K.K.

   Resources Connection, Inc.    200    N/A    100%    65%

Resources Global Professionals (Korea) Ltd.

   Resources Connection, Inc.    94,210    N/A    100%    65%

Resources Global Professionals (Singapore) Pte. Ltd.

   Resources Connection, Inc.    100,000    N/A    100%    100%

Resources Connection Taiwan, Ltd.

   Resources Connection, Inc.    16,898    N/A    70.5%    65%

Resources Connection Taiwan, Ltd.

   Resources Connection LLC    7,071    N/A    29.5%    65%

Resources Connection Mexico S de RL de CV

   Resources Connection, Inc.    N/A    N/A    39.4%    65%

Resources Connection Mexico S de RL de CV

   Resources Connection LLC    N/A    N/A    60.6%    65%

Resources Management Mexico S de RL de CV

   Resources Connection, Inc.    N/A    N/A    8.4%    65%

Resources Management Mexico S de RL de CV

   Resources Connection LLC    N/A    N/A    91.6%    65%

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934

I, Kate W. Duchene, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Resources Connection, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 5, 2017

 

/s/ Kate W. Duchene

Kate W. Duchene
Chief Executive Officer

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934

I, Herbert M. Mueller, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Resources Connection, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 5, 2017

 

/s/ Herbert M. Mueller

Herbert M. Mueller

Executive Vice President

and Chief Financial Officer

Exhibit 32

WRITTEN STATEMENT

PURSUANT TO

18 U.S.C. SECTION 1350

The undersigned, Kate W. Duchene, the Chief Executive Officer of Resources Connection, Inc., and Herbert M. Mueller, Chief Financial Officer of Resources Connection, Inc. (the “Company”), pursuant to 18 U.S.C. §1350, hereby certify that, to the best of their knowledge:

 

  (i) the Report on Form 10-Q of the Company for the quarter ended November 26, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

 

  (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: January 5, 2017      

/s/ KATE W. DUCHENE

      Kate W. Duchene
      Chief Executive Officer
     

/s/ HERBERT M. MUELLER

      Herbert M. Mueller
      Executive Vice President and Chief Financial Officer

The foregoing certification accompanies the Report on Form 10-Q pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and it is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.