RESOURCES CONNECTION, INC. - Quarter Report: 2019 November (Form 10-Q)

 

 

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 23, 2019

OR

 

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

For the transition period from                      to                     

Commission File Number: 0-32113

 

 

RESOURCES CONNECTION, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware		33-0832424
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

17101 Armstrong Avenue, Irvine, California 92614

(Address of principal executive offices) (Zip Code)

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

 

 

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

 

Title of Each Class		Trading Symbol(s)		Name of Exchange on Which Registered
Common stock, par value $0.01 per share		RECN		The Nasdaq Stock Market LLC (Nasdaq Global Select Market)

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 every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐

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

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐		Smaller reporting company		☐
				Emerging growth company		☐

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

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

As of December 30, 2019, there were approximately 32,139,918 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

 

 

 

RESOURCES CONNECTION, INC.

INDEX

 

				Page No.
PART I — FINANCIAL INFORMATION
ITEM 1.		Consolidated Financial Statements (Unaudited)			3
		Consolidated Balance Sheets as of November 23, 2019 and May 25, 2019			3
		Consolidated Statements of Operations for the Three and Six Months Ended November 23, 2019 and November 24, 2018			4
		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended November 23, 2019 and November 24, 2018			5
		Consolidated Statement of Stockholders’ Equity for the Three and Six Months Ended November 23, 2019 and November 24, 2018			6
		Consolidated Statements of Cash Flows for the Six Months Ended November 23, 2019 and November 24, 2018			7
		Notes to Consolidated Financial Statements			8
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk			27
ITEM 4.		Controls and Procedures			28
PART II — OTHER INFORMATION
ITEM 1.		Legal Proceedings			28
ITEM 1A.		Risk Factors			28
ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds			28
ITEM 5.		Other Information			28
ITEM 6.		Exhibits			28
Signatures.					30

 

2

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 23, 2019				May 25, 2019
						(Audited)
ASSETS
Current assets:
Cash and cash equivalents		$	43,033			$	43,045
Short-term investments			—				5,981
Trade accounts receivable, net of allowance for doubtful accounts of $2,701 and $2,520 as of November 23, 2019 and May 25, 2019, respectively			137,371				133,304
Prepaid expenses and other current assets			7,725				7,103
Income taxes receivable			1,313				2,224
Total current assets			189,442				191,657
Goodwill			213,332				190,815
Intangible assets, net			23,021				14,589
Property and equipment, net			25,162				26,632
Operating right-of-use assets			39,970				—
Deferred income taxes			1,613				1,497
Other assets			3,812				3,180
Total assets		$	496,352			$	428,370
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	20,057			$	21,634
Accrued salaries and related obligations			51,835				58,628
Operating lease liabilities, current			11,203				—
Other liabilities			14,828				11,154
Total current liabilities			97,923				91,416
Long-term debt			54,000				43,000
Operating lease liabilities, noncurrent			35,425				—
Deferred income taxes			4,925				5,146
Other long-term liabilities			3,814				6,412
Total liabilities			196,087				145,974
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; 63,604 and 63,054 shares issued, and 32,138 and 31,588 shares outstanding as of November 23, 2019 and May 25, 2019, respectively			636				631
Additional paid-in capital			470,427				460,226
Accumulated other comprehensive loss			(13,226	)			(12,588	)
Retained earnings			358,531				350,230
Treasury stock at cost, 31,466 shares as of November 23, 2019 and May 25, 2019			(516,103	)			(516,103	)
Total stockholders’ equity			300,265				282,396
Total liabilities and stockholders’ equity		$	496,352			$	428,370

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

 

3

RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share amounts)

 

		Three Months Ended								Six Months Ended
		November 23,				November 24,				November 23,				November 24,
		2019				2018				2019				2018
Revenue		$	184,507			$	188,799			$	356,732			$	367,357
Direct cost of services, primarily payroll and related taxes for professional services employees			110,130				115,378				214,852				225,785
Gross margin			74,377				73,421				141,880				141,572
Selling, general and administrative expenses			53,755				54,959				110,733				111,325
Amortization of intangible assets			1,510				952				2,604				1,907
Depreciation expense			1,424				1,197				2,793				2,266
Income from operations			17,688				16,313				25,750				26,074
Interest expense			551				608				1,033				1,134
Other (income)/expense			(537	)			—				(537	)			—
Income before provision for income taxes			17,674				15,705				25,254				24,940
Provision for income taxes			5,337				5,141				7,978				8,635
Net income		$	12,337			$	10,564			$	17,276			$	16,305
Net income per common share:
Basic		$	0.39			$	0.33			$	0.54			$	0.51
Diluted		$	0.38			$	0.33			$	0.54			$	0.50
Weighted average common shares outstanding:
Basic			31,984				31,721				31,852				31,731
Diluted			32,369				32,446				32,287				32,457
Cash dividends declared per common share		$	0.14			$	0.13			$	0.28			$	0.26

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

 

4

RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Amounts in thousands)

 

		Three Months Ended								Six Months Ended
		November 23,				November 24,				November 23,				November 24,
		2019				2018				2019				2018
COMPREHENSIVE INCOME:
Net income		$	12,337			$	10,564			$	17,276			$	16,305
Foreign currency translation adjustment, net of tax			48				(1,426	)			(638	)			(2,028	)
Total comprehensive income		$	12,385			$	9,138			$	16,638			$	14,277

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

 

5

RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(Amounts in thousands)

 

																						Accumulated
										Additional												Other								Total
		Common Stock								Paid-in				Treasury Stock								Comprehensive				Retained				Stockholders’
		Shares				Amount				Capital				Shares				Amount				Loss				Earnings				Equity
Balances as of May 25, 2019			63,054			$	631			$	460,226				31,466			$	(516,103	)		$	(12,588	)		$	350,230			$	282,396
Exercise of stock options			172				1				2,250																				2,251
Stock-based compensation expense											1,408																				1,408
Issuance of common stock under Employee Stock Purchase Plan			215				2				2,597																				2,599
Cancellation of restricted stock			(5	)			—				—																				—
Cash dividends declared ($0.14 per share)																											(4,476	)			(4,476	)
Currency translation adjustment																							(686	)							(686	)
Net income for the three months ended August 24, 2019																											4,939				4,939
Balances as of August 24, 2019			63,436			$	634			$	466,481				31,466			$	(516,103	)		$	(13,274	)		$	350,693			$	288,431
Exercise of stock options			85				1				1,215																				1,216
Stock-based compensation expense											1,591																				1,591
Cash dividends declared ($0.14 per share)																											(4,499	)			(4,499	)
Issuance of common stock in connection with acquisition of Accretive			83				1				1,140																				1,141
Currency translation adjustment																							48								48
Net income for the three months ended November 23, 2019																											12,337				12,337
Balances as of November 23, 2019			63,604			$	636			$	470,427				31,466			$	(516,103	)		$	(13,226	)		$	358,531			$	300,265

 

																						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 26, 2018			61,252			$	613			$	429,578				29,638			$	(486,722	)		$	(10,385	)		$	335,741			$	268,825
Exercise of stock options			186				2				2,407																				2,409
Stock-based compensation expense											1,327																				1,327
Issuance of common stock under Employee Stock Purchase Plan			166				1				2,177																				2,178
Purchase of shares															468				(7,462	)											(7,462	)
Cash dividends declared ($0.13 per share)																											(4,095	)			(4,095	)
Currency translation adjustment																							(602	)							(602	)
Net income for the three months ended August 25, 2018																											5,741				5,741
Balances as of August 25, 2018			61,604			$	616			$	435,489				30,106			$	(494,184	)		$	(10,987	)		$	337,387			$	268,321
Exercise of stock options			565				6				7,998																				8,004
Stock-based compensation expense											1,611																				1,611
Purchase of shares															339				(5,540	)											(5,540	)
Cash dividends declared ($0.13 per share)																											(4,124	)			(4,124	)
Currency translation adjustment																							(1,426	)							(1,426	)
Net income for the three months ended November 24, 2018																											10,564				10,564
Balances as of November 24, 2018			62,169			$	622			$	445,098				30,445			$	(499,724	)		$	(12,413	)		$	343,827			$	277,410

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

 

6

RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

 

		Six Months Ended
		November 23,				November 24,
		2019				2018
Cash flows from operating activities:
Net income		$	17,276			$	16,305
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			5,397				4,173
Stock-based compensation expense			3,158				3,013
Contingent consideration adjustment			(262	)			(37	)
Loss on disposal of assets			66				64
Bad debt expense			616				477
Non-cash benefit			(46	)			—
Deferred income taxes			(337	)			4,620
Changes in operating assets and liabilities, net of effects of business combinations:
Trade accounts receivable			(1,383	)			(17,838	)
Prepaid expenses and other current assets			(499	)			205
Income taxes			2,070				(3,102	)
Other assets			(634	)			(1,042	)
Accounts payable and accrued expenses			(1,570	)			(458	)
Accrued salaries and related obligations			(7,380	)			(6,121	)
Other liabilities			746				1,406
Net cash provided by operating activities			17,218				1,665
Cash flows from investing activities:
Redemption of short-term investments			5,981				—
Proceeds from sale of assets			105				—
Acquisition of Veracity, net of cash acquired of $2.1 million			(30,293	)			—
Purchase of property and equipment			(1,264	)			(3,408	)
Net cash used in investing activities			(25,471	)			(3,408	)
Cash flows from financing activities:
Proceeds from exercise of stock options			3,467				10,413
Proceeds from issuance of common stock under Employee Stock Purchase Plan			2,599				2,178
Purchase of common stock			—				(13,002	)
Proceeds from Revolving Credit Facility			35,000				—
Repayment on Revolving Credit Facility			(24,000	)			(5,000	)
Cash dividends paid			(8,581	)			(7,887	)
Net cash provided by (used in) financing activities			8,485				(13,298	)
Effect of exchange rate changes on cash			(244	)			(606	)
Net decrease in cash			(12	)			(15,647	)
Cash and cash equivalents at beginning of period			43,045				56,470
Cash and cash equivalents at end of period		$	43,033			$	40,823

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

 

7

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three and six months ended November 23, 2019 and November 24, 2018

1. Description of the Company and its Business

Resources Connection, Inc. (“Resources Connection”), a Delaware corporation, was incorporated on November 16, 1998. The Company’s operating entities provide services primarily under the name Resources Global Professionals (“RGP” or the “Company”). RGP is a global consulting firm that enables rapid business outcomes by bringing together the right people to create transformative change. As a human capital partner for its clients, the Company specializes in solving today’s most pressing business problems across the enterprise in the areas of Business Strategy & Transformation, Finance & Accounting, Risk & Compliance and Technology & Digital Innovation. 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 2020 and 2019 each consisted of 13 weeks. The Company’s fiscal 2020 will consist of 53 weeks.

2. Summary of Significant Accounting Policies

Interim Financial Information

The financial information as of and for the three and six months ended November 23, 2019 and November 24, 2018 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) the Company considers necessary for a fair presentation of its financial position at such dates and the operating results and cash flows for those periods. The fiscal 2019 year-end balance sheet data was derived from audited financial statements, and certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) have been condensed or omitted pursuant to Securities and Exchange Commission (“SEC”) rules or regulations; however, the Company believes the disclosures made are adequate to make the information presented not misleading.

The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for the full fiscal year. These interim financial statements should be read in conjunction with the audited financial statements for the year ended May 25, 2019, which are included in the Company’s Annual Report on Form 10-K (“Fiscal Year 2019 Form 10-K”) which was filed with the SEC on July 19, 2019 (File No. 000-32113).

The Company’s significant accounting policies are described in Note 2 to the consolidated financial statements included in the Fiscal Year 2019 Form 10-K. The Company has reviewed its accounting policies, identifying those that it believes to be critical to the preparation and understanding of its consolidated financial statements in the list set forth below. See the disclosure under the heading “Critical Accounting Policies” in Item 7 of Part II of the Fiscal Year 2019 Form 10-K for a detailed description of these policies and their potential effects on the Company’s results of operations and financial condition.

 

•

Allowance for doubtful accounts

 

•

Income taxes

 

•

Revenue recognition

 

•

Stock-based compensation

 

•

Valuation of long-lived assets

 

•

Business combinations

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.

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

 

8

average number of common and common equivalent shares outstanding during the period, calculated using the treasury stock method for stock options and unvested restricted stock. Under the treasury stock method, assumed proceeds include the amount the employee must pay for exercising stock options and the amount of compensation cost for future services the Company has not yet recognized. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price per common share over the period are anti-dilutive and are excluded from the calculation.

 

9

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

 

		Three Months Ended								Six Months Ended
		November 23,				November 24,				November 23,				November 24,
		2019				2018				2019				2018
Net income		$	12,337			$	10,564			$	17,276			$	16,305
Basic:
Weighted average shares			31,984				31,721				31,852				31,731
Diluted:
Weighted average shares			31,984				31,721				31,852				31,731
Potentially dilutive shares			385				725				435				726
Total dilutive shares			32,369				32,446				32,287				32,457
Net income per common share:
Basic		$	0.39			$	0.33			$	0.54			$	0.51
Dilutive		$	0.38			$	0.33			$	0.54			$	0.50
Anti-dilutive shares not included above			4,809				3,248				3,684				3,112

Financial Instruments

The fair value of the Company’s financial instruments reflects the amounts that the Company estimates it will receive in connection with the sale of an asset in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the following three levels:

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

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

Level 3 – Unobservable inputs.

Contingent consideration liability is for estimated future contingent consideration payments related to the Company’s acquisitions. Total contingent consideration liabilities were $8.3 million and $2.2 million as of November 23, 2019 and May 25, 2019, respectively. The fair value measurement of the liability is based on significant inputs not observed in the market and thus represents a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the contingent consideration liability are the Company’s measures of the estimated payouts based on internally generated financial projections and discount rates. The fair value of contingent consideration liability is reassessed on a quarterly basis by the Company using additional information as it becomes available, and any change in the fair value estimates are recorded in selling, general and administrative expenses in the Company’s Consolidated Statements of Operations. See Note 3 – Acquisitions and Dispositions.

The Company’s short-term investments were $6.0 million as of May 25, 2019. The short-term investments represented commercial papers with original contractual maturities between three months and one year and were considered “held-to-maturity” securities. The investments were measured using quoted prices in markets that are not active (Level 2).

The Company’s financial instruments, including cash, accounts receivable, accounts payable, accrued expenses and long-term debt are carried at cost, which approximates their fair value because of the short-term maturity of these instruments or because their stated interest rates are indicative of market interest rates.

Recent Accounting Pronouncements Adopted

Effective as of the beginning of fiscal year 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases, ASU No. 2018-10, Codification Improvements to Topic 842 (Leases) and ASU No. 2018-11, Targeted Improvements to Topic 842 (Leases). The guidance is intended to increase transparency and comparability among companies for leasing transactions, including a requirement for companies that lease assets to recognize on their balance sheets the assets and liabilities for the rights and obligations created by those leases. The guidance also provides for disclosures that allow the users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

 

10

The Company adopted the guidance on May 26, 2019 using the modified retrospective method without restatement of comparative periods. As such, periods prior to the date of adoption are presented in accordance with ASC 840 - Leases. The Company utilized the available practical expedient that allowed the Company to not reassess whether existing contracts contain a lease under the new definition of a lease, the lease classification for existing leases, whether previously capitalized initial direct costs would qualify for capitalization under the new guidance and recognize leases with an initial term of 12 months or less on a straight-line basis without recognizing a right-of-use (“ROU”) asset or operating lease liability.

The adoption of this guidance had a material impact on the Consolidated Balance Sheet beginning May 26, 2019 due to the recognition of ROU assets and lease liabilities for the Company’s portfolio of operating leases. The adoption of the guidance had an immaterial impact on the Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows for the three and six months ended November 23, 2019.

Additional information and disclosures required by the new standard are contained in Note 5, Leases.

3. Acquisitions and Dispositions

Acquisition of Veracity

On July 31, 2019, the Company acquired Veracity Consulting Group, LLC (“Veracity”), a fast-growing, digital transformation firm based in Richmond, Virginia, that delivers innovative solutions to the Fortune 500 and leading healthcare organizations. The acquisition of Veracity is a step in accelerating the Company’s stated objective to enhance its digital capabilities and allows the Company to offer comprehensive end-to-end solutions to its clients by combining Veracity’s customer-facing offerings with the Company’s depth of experience in transforming the back office. The Company paid initial cash consideration of $30.3 million (net of $2.1 million cash acquired). The initial consideration is subject to final adjustments for the impact of the Internal Revenue Code Section 338(h)(10) joint election between the Company and former owners of Veracity and working capital as defined in the purchase agreement.

In addition, the purchase agreement requires earn-out payments to be made based on performance after each of the first and second anniversary of the acquisition date. The Company is obligated to pay the former owners of Veracity contingent consideration if certain earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirements are achieved. In determining the fair value of the contingent consideration liability, the Company used the Monte Carlo simulation modeling which included the application of an appropriate discount rate (Level 3 fair value). Each reporting period, the Company will estimate changes in the fair value of contingent consideration and any change in fair value will be recognized in the Company’s Consolidated Statements of Operations. The estimate of fair value of contingent consideration requires very subjective assumptions to be made of various potential EBITDA results and discount rates. Future revisions to these assumptions could materially change the estimate of the fair value of contingent consideration and therefore could materially affect the Company’s future operating results.

During the quarter ended August 24, 2019, the Company made an initial provisional allocation of the purchase price for Veracity based on the fair value of the assets acquired and liabilities assumed, with the residual amount recorded as goodwill, in accordance with Accounting Standards Codification (“ASC”) 805. The Company’s initial purchase price allocation considered a number of factors, including the valuation of identifiable intangible assets and contingent consideration. During the three months ended November 23, 2019, the Company adjusted the previously reported provisional allocation of the purchase price to reflect new information, which resulted in changes in expected future performance and cash flows as of the acquisition date.

The following table provides a summary of the provisional purchase price allocation previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended August 24, 2019 and the remeasured purchase price allocation as of the acquisition date:

Fair value of consideration transferred (in thousands):

 

		As Previously Reported				Adjustments				As Adjusted
Cash		$	32,349			$	(35	)		$	32,314
Estimated initial contingent consideration			10,400				(4,110	)			6,290
Total		$	42,749			$	(4,145	)		$	38,604

 

11

Recognized provisional amounts of identifiable assets acquired and liabilities assumed (in thousands):

 

Cash and cash equivalents		$	2,056			$	—			$	2,056
Accounts receivable			3,413				(114	)			3,299
Prepaid expenses and other current assets			116				—				116
Intangible assets:
Backlog (17 months useful life)			680				530				1,210
Customer relationships (7 years useful life)			11,050				(1,750	)			9,300
Trademarks (3 years useful life)			560				10				570
Property and equipment			121				(4	)			117
Total identifiable assets			17,996				(1,328	)			16,668
Accounts payable			316				(11	)			305
Accrued expenses and other current liabilities			712								712
Total liabilities assumed			1,028				(11	)			1,017
Net identifiable assets acquired			16,968				(1,317	)			15,651
Goodwill			25,781				(2,828	)			22,953
Net assets acquired		$	42,749			$	(4,145	)		$	38,604

The remeasured purchase price allocation above may be subject to further adjustments during the measurement period if new information is obtained about facts and circumstances that existed as of the acquisition date. A final determination of fair value of assets acquired and liabilities assumed relating to the acquisition could differ from the stated purchase price allocation. As of the acquisition date, the gross contractual amount of accounts receivable of $3.3 million was expected to be fully collected.

As of November 23, 2019, the Company further estimated the change in fair value of contingent consideration from the remeasured value included in the table above. The resulting increase in fair value was $0.2 million, bringing the contingent consideration liability to $6.4 million as of November 23, 2019, of which $3.1 million was included in Other current liabilities and $3.3 million was included in Long-term liabilities in the Consolidated Balance Sheets. The change in fair value of contingent consideration from the remeasurement was recorded in selling, general and administrative expenses in the Consolidated Statement of Operations for the three months ended November 23, 2019.

Results of operations of Veracity are included in the Consolidated Statements of Operations from the date of acquisition. Veracity contributed $5.8 million and $7.2 million to consolidated revenue and $1.2 million and $1.5 million to income from operations in the three and six months ended November 23, 2019, respectively. During the six months ended November 23, 2019, the Company incurred $0.6 million in acquisition costs which were recorded in selling, general and administrative expenses in the Consolidated Statement of Operations.

Prior Period Acquisitions

During fiscal 2018, the Company completed two acquisitions: Taskforce – Management on Demand AG (“Taskforce”) and Accretive Solutions, Inc. (“Accretive”). See Note 3 to the consolidated financial statements included in Part II, Item 8 in the Fiscal Year 2019 Form 10-K for additional detail.

During the three and six months ended November 23, 2019, the Company decreased the remaining estimated contingent consideration payment to the sellers of Taskforce by $0.3 million and $0.4 million, respectively. These amounts were included in selling, general and administrative expenses in the Consolidated Statements of Operations for the respective periods.

In addition, during the three months ended November 23, 2019, the Company reached a final settlement on a pre-acquisition claim with the seller of Accretive. As a part of the settlement, the Company issued 82,762 shares of common stock to the seller and received $0.6 million in cash from the escrow. The resulting gain of $0.5 million was included in Other (income) expense in the Consolidated Statements of Operations.

Dispositions

On September 2, 2019, the Company completed the sale of certain assets and liabilities of its foreign subsidiary, Resources Global Professionals Sweden AB, to Capacent Holding AB (publ), a Swedish public company, for SEK1,016,862 (approximately $105,000) in cash, after the final purchase price adjustment, resulting in a loss on sale of assets of approximately $38,000. As a part the sale, the Company transferred the majority of its local customer contracts, the existing office lease as well as all of its employee consultants. The Company expects to continue to serve its global client base in the Sweden market. In addition, during the first quarter of fiscal 2020, the Company substantially exited the Belgium market. The Company expects to complete the remaining exit activities in Belgium during the third quarter of fiscal 2020, including an analysis of the potential tax benefits that may result from the exit activities.

 

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As a result of the foregoing sale of assets and exit activities, the Company incurred costs of approximately $0.7 million for the three and six months ended November 23, 2019, primarily related to employee termination benefits.

Neither the Sweden nor the Belgium markets were considered strategic components of the Company’s operations.

4. Intangible Assets and Goodwill

The following table summarizes details of the Company’s intangible assets and related accumulated amortization (amounts in thousands):

 

		As of November 23, 2019												As of May 25, 2019
						Accumulated												Accumulated
		Gross				Amortization				Net				Gross				Amortization				Net
Customer contracts and relationships (3-8 years)		$	23,765			$	(4,922	)		$	18,843			$	14,495			$	(3,439	)		$	11,056
Tradenames (3-10 years)			4,946				(2,116	)			2,830				4,407				(1,563	)			2,844
Backlog (17 months)			1,210				(258	)			952				—				—				—
Consultant list (3 years)			770				(585	)			185				783				(462	)			321
Non-compete agreements (3 years)			880				(669	)			211				896				(528	)			368
Total		$	31,571			$	(8,550	)		$	23,021			$	20,581			$	(5,992	)		$	14,589

The Company recorded amortization expense of $1.5 million and $1.0 million for the three months ended November 23, 2019 and November 24, 2018, respectively, and $2.6 million and $1.9 million for the six months ended November 23, 2019 and November 24, 2018, respectively.

The following table summarizes future estimated amortization expense related to intangible assets (in thousands):

 

		Fiscal Years Ending
		2020				2021				2022				2023				2024
Expected amortization expense		$	5,699			$	4,506			$	3,289			$	3,136			$	3,100

The estimates of future intangible asset amortization expense do not incorporate the potential impact of future currency fluctuations when translating the financial results of the Company’s international operations that have amortizable intangible assets into U.S. dollars.

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

 

		November 23,				November 24,
		2019				2018
Goodwill, beginning of year		$	190,815			$	191,950
Acquisitions- (see Note 3)			22,953				—
Impact of foreign currency exchange rate changes			(436	)			(778	)
Goodwill, end of period		$	213,332			$	191,172

 

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5. Leases

The Company currently leases office space, vehicles and certain equipment under operating leases expiring through 2028. Operating leases include fixed payments plus, in some cases, scheduled base rent increases over the term of the lease. Certain leases require variable payments of common area maintenance, operating expenses and real estate taxes applicable to the property. Variable payments are excluded from the measurements of lease liabilities and are expensed as incurred. Any tenant improvement allowances received from the lessor are recorded as a reduction to rent expense over the term of the lease. No lease agreements contain any residual value guarantees or material restrictive covenants.

Certain of the Company’s leases include one or more options to renew or terminate the lease at the Company’s discretion. Generally, the renewal and termination options are not included in the right-of-use assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates lease renewal and termination options and when they are reasonably certain of exercise, includes the renewal or termination option in the lease term.

The Company measures the lease liability for each leased asset at the present value of lease payments, as defined in ASC 842, discounted using an incremental borrowing rate. As most of the Company’s leases do not provide an implicit interest rate, the Company utilizes its incremental borrowing rate based on the information available at the commencement date of the lease in determining the present value of lease payments. The Company has a centrally managed treasury function; therefore, a portfolio approach is applied in determining the incremental borrowing rate. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a fully collateralized basis over a similar term in an amount equal to the total lease payments in a similar economic environment. The Company’s right-of-use assets are equal to the lease liabilities, adjusted for lease incentives received, including tenant improvement allowances, deferred rent, and prepayments made to the lessor.

In some instances, the Company subleases excess office space to third party tenants. The Company does not recognize liabilities or ROU assets for leases with an initial term of 12 months or less.

Lease cost components included within selling, general and administrative expenses in the Consolidated Statements of Operations were as follows (in thousands):

 

		Three Months Ended				Six Months Ended
		November 23, 2019				November 23, 2019
Operating lease cost		$	3,036			$	6,116
Short-term lease cost			120				198
Variable lease cost			596				1,200
Sublease income			(185	)			(306	)
Total lease cost		$	3,567			$	7,208

Supplemental cash flow information related to the Company’s operating leases were as follows (in thousands):

 

		Six Months Ended
		November 23, 2019
Cash paid for amounts included in the measurement of operating lease liabilities		$	6,559
Right-of-use assets obtained in exchange for lease obligations		$	4,384

The weighted average remaining lease term and weighted average discount rate for our operating leases were as follows:

 

		As of November 23, 2019
Weighted average remaining lease term			4.7 years
Weighted average discount rate			4.12	%

 

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The maturities of operating lease liabilities were as follows as of November 23, 2019 (in thousands):

 

Years Ending:		Operating Lease Maturity
May 30, 2020 (excluding the six months ended November 23, 2019)		$	6,492
May 29, 2021			12,412
May 28, 2022			10,711
May 27, 2023			8,378
May 25, 2024			6,913
Thereafter			6,432
Total operating lease payments		$	51,338
Less: Imputed interest			(4,710	)
Present value of operating lease liabilities		$	46,628

6. Income Taxes

The Company’s provision for income taxes was $5.3 million (effective tax rate of approximately 30%) and $5.1 million (effective tax rate of approximately 33%) for the three months ended November 23, 2019 and November 24, 2018, respectively and $8.0 million (effective tax rate of approximately 32%) and $8.6 million (effective tax rate of approximately 35%) for the six months ended November 23, 2019 and November 24, 2018, respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax rate because of the volatility in its international operations that span numerous tax jurisdictions.

The provision for income taxes in the three and six months ended November 23, 2019 and November 24, 2018 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 provision for income taxes increased while the effective tax rate decreased for the three months ended November 23, 2019 compared to the prior year quarter because of improved global pre-tax income. In the six months ended November 23, 2019, the provision for income taxes decreased as compared to the six months ended November 24, 2018 because of lower international related taxes and fewer stock option expirations.

The Company recognized a tax benefit of approximately $0.3 million and $0.1 million during the second quarters of fiscal 2020 and fiscal 2019, respectively, and a tax benefit of $0.7 million and $0.1 million during the six months of fiscal 2020 and fiscal 2019, respectively, related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the Employee Stock Purchase Plan (“ESPP”).

7. Long-Term Debt

The Company has a $120 million secured revolving credit facility (“Facility”) with Bank of America, consisting of (i) a $90 million revolving loan facility (“Revolving Loan”), which includes a $5 million sublimit for the issuance of standby letters of credit, and (ii) a $30 million reducing revolving loan facility (“Reducing Revolving Loan”), any amounts of which may not be reborrowed after being repaid. The Facility is available for working capital and general corporate purposes, including potential acquisitions and stock repurchases. The Company’s 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 respective domestic subsidiaries, subject to certain customary exclusions. Borrowings under the Facility bear interest at a rate per annum of either, at the Company’s option, (i) a London Interbank Offered Rate (“LIBOR”) defined in the Facility plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus a margin of 0.25% or 0.50%, with the applicable margin depending on the Company’s consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of America’s prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. The Company pays an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.15% to 0.25% depending upon on the Company’s consolidated leverage ratio. The Facility expires October 17, 2021.

The Facility contains both affirmative and negative covenants. Covenants include, but are not limited to, limitations on the Company’s and its subsidiaries’ ability to incur liens, incur additional indebtedness, make certain restricted payments, merge or consolidate and make dispositions of assets. In addition, the Facility requires the Company 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 23, 2019.

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

The Company’s borrowings on the Facility were $54.0 million as of November 23, 2019, all of which were under the Revolving Loan. In addition, the Company had $1.5 million of outstanding letters of credit issued under the Revolving Loan as of November 23, 2019. The Company has $34.5 million remaining to borrow under the Revolving Loan and $30.0 million remaining

 

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under the Reducing Revolving Loan as of November 23, 2019. As of November 23, 2019, the interest rate on the Company’s borrowings were as follows (amounts in thousands, except percentages):

 

Principal Balance				Base Rate				Libor Rate								Interest Rate
$	5,000				1.25	%			3-month				1.90	%			3.15	%
	25,000				1.25	%			6-month				1.93	%			3.18	%
	24,000				1.50	%			6-month				2.21	%			3.71	%
$	54,000

8. Stockholders’ Equity

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. The Company did not repurchase shares during the three or six months ended November 23, 2019. As of November 23, 2019, approximately $90.1 million remained available for future repurchases of the Company’s common stock under the July 2015 program.

Quarterly Dividend

Subject to approval each quarter by its board of directors, the Company pays a regular quarterly cash dividend. On October 15, 2019 the Company’s board of directors declared a quarterly cash dividend of $0.14 per common share. The dividend of approximately $4.5 million was paid on December 10, 2019 to the holders of record on November 12, 2019 and is accrued in the Company’s Consolidated Balance Sheet as of November 23, 2019.

Continuation of the quarterly dividend is at the discretion of the board of directors and depends upon the Company’s financial condition, results of operations, capital requirements, general business condition, contractual restrictions contained in the Company’s current credit agreements and other agreements, and other factors deemed relevant by the board of directors.

9. Supplemental Disclosure of Cash Flow Information

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

 

		Six Months Ended
		November 23,				November 24,
		2019				2018
Income taxes paid		$	6,394			$	6,778
Interest paid		$	1,140			$	1,227
Non-cash investing and financing activities:
Capitalized leasehold improvements paid directly by landlord		$	59			$	255
Acquisition of Veracity:
Liability for contingent consideration		$	6,440			$	—
Acquisition of Accretive:
Issuance of common stock		$	1,141			$	—
Dividends declared, not paid		$	4,499			$	4,124

 

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10. Stock-Based Compensation Plans

General

Executive officers and employees, as well as non-employee directors of the Company and certain consultants and advisors to the Company, are eligible to participate in the Company’s 2014 Performance Incentive Plan (“2014 Plan”). The 2014 Plan was approved by stockholders on October 23, 2014 and replaced and succeeded in its entirety the Resources Connection, Inc. 2004 Performance Incentive Plan and the 1999 Long Term Incentive Plan. As of November 23, 2019, 719,000 shares were available for award grant purposes under the 2014 Plan, subject to future increases as described in 2014 Plan.

Awards under the 2014 Plan may include, but are not limited to, stock options, restricted stock units and restricted stock grants, including restricted stock units under the Company’s Directors Deferred Compensation Plan. 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.

Stock Options and Restricted Stock

The following table summarizes the stock option activity for the six months ended November 23, 2019 (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 25, 2019			6,029			$	15.95				6.06			$	5,482
Granted, at fair market value			1,278				17.43
Exercised			(257	)			13.51
Forfeited			(335	)			17.33
Expired			(54	)			17.11
Outstanding at November 23, 2019			6,661			$	16.25				6.30			$	3,841
Exercisable at November 23, 2019			4,067			$	15.46				4.44			$	3,747
Vested and expected to vest at November 23, 2019			6,311			$	16.16				6.06			$	3,838

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 2020 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 23, 2019. This amount will change based on changes in the fair market value of the Company’s common stock. The total pre-tax intrinsic value related to stock options exercised during the three months ended November 23, 2019 and November 24, 2018 was $0.2 million and $2.3 million, respectively, and during the six months ended November 23, 2019 and November 24, 2018 was $0.8 million and $3.1 million, respectively. As of November 23, 2019, there was $10.3 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 2.0 years.

The Company did not grant any shares of restricted stock during either the six months ended November 23, 2019 or November 24, 2018. As of November 23, 2019, there were 198,032 unvested restricted shares, including stock units under the Directors Deferred Compensation Plan, with approximately $1.9 million of remaining unrecognized compensation cost.

Stock-Based Compensation Expense

Stock-based compensation expense included in selling, general and administrative expenses was $1.6 million and $1.7 million for the three months ended November 23, 2019 and November 24, 2018, respectively, and $3.2 million and $3.0 million for the six months ended November 23, 2019 and November 24, 2018, respectively. These amounts consisted of stock-based compensation expense related to employee stock options, employee stock purchases made via the ESPP, restricted stock awards and stock units credited under the Directors Deferred Compensation Plan. 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. There were no capitalized share-based compensation costs during the six months ended November 23, 2019 or November 24, 2018.

 

17

Employee Stock Purchase Plan

On October 15, 2019, the Company’s stockholders approved the 2019 ESPP. The maximum number of shares of the Company’s common stock authorized for issuance under the plan is 1,825,000. The remaining 6,000 unissued shares under the 2014 ESPP are no longer available for issuance.

The 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 July 16, 2029. The Company issued 215,000 and 358,000 shares of common stock pursuant to the ESPP during the six months ended November 23, 2019 and the year ended May 25, 2019, respectively. There were 1,825,000 shares of common stock available for issuance under the ESPP as of November 23, 2019.

11. 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 Fiscal Year 2019 Form 10-K. 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 23,				November 24,				November 23,				November 24,				November 23,				May 25,
		2019				2018				2019				2018				2019				2019
United States		$	149,051			$	148,901			$	286,048			$	290,130			$	262,922			$	200,385
International			35,456				39,898				70,684				77,227				38,563				31,651
Total		$	184,507			$	188,799			$	356,732			$	367,357			$	301,485			$	232,036

 

(1)	Long-lived assets are comprised of goodwill, intangible assets and property and equipment. Long-lived assets as of November 23, 2019 included the Company’s operating right-of-use assets which were added as a result of the Company’s adoption of ASC 842 Leases. See Note 5 — Leases.

12. 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.

 

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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” (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to expectations concerning matters that are not historical facts. Such forward-looking statements may be identified by words such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “remain,” “should,” or “will” or the negative of these terms or other comparable terminology. These statements, and all phases of our operations, are subject to known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements and those of our industry to differ materially from those expressed or implied by these forward-looking statements. You are urged to review carefully the disclosures we make concerning risks, uncertainties and other factors that may affect our business or operating results included our Annual Report on Form 10-K for the year ended May 25, 2019 (File No. 000-32113) and our other public filings made with the Securities and Exchange Commission (“SEC”). Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business or operating results. Readers are cautioned not to place undue reliance on the forward-looking statements included herein, which speak only as the date of this filing. We do not intend, and undertake no obligation, to update the forward-looking statements in this filing to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, unless required by law to do so. References in this filing to “Resources Connection,” “RGP,” “Resources Global Professionals,” the “Company,” “we,” “us,” and “our” refer to Resources Connection, Inc. and its subsidiaries.

Overview

RGP is a global consulting firm that enables rapid business outcomes by bringing together the right people to create transformative change. As a human capital partner for our clients, we specialize in solving today’s most pressing business problems across the enterprise in the areas of Business Strategy & Transformation, Finance & Accounting, Risk & Compliance and Technology & Digital Innovation. Our engagements are designed to leverage human connection and collaboration to deliver practical solutions and more impactful results that power our clients, consultants and partners’ success.

RGP was founded in 1996 to help finance executives with operational and special project needs. Our first-to-market, agile human capital model quickly aligns the right resources for the work at hand with speed and efficiency. Our pioneering approach to workforce strategy uniquely positions us to support our clients on their transformation journeys. With more than 4,000 professionals, we annually engage with over 2,400 clients around the world from more than 70 practice offices.

To achieve our objective of being the premier provider of agile consulting services for companies facing transformation, change and compliance challenges, we have developed the following business strategies:

 

•

Hire and retain highly qualified, experienced consultants. We believe our highly qualified, experienced consultants provide us with a distinct competitive advantage. Therefore, one of our priorities is to continue to attract and retain high-caliber consultants who are committed to solving problems.

 

•

Maintain our distinctive culture. Our corporate culture is the foundation of our business strategy and we believe it has been a significant component of our success. We believe our culture, “LIFE AT RGP”, representing Loyalty, Integrity, Focus, Enthusiasm, Accountability and Talent, has created a circle of quality; our culture is instrumental to our success in hiring and retaining highly qualified employees who, in turn, attract quality clients.

 

•

Build consultative relationships with clients. We emphasize a relationship-oriented approach to business rather than a transaction-oriented or assignment-oriented approach. We believe the professional services experience of our management and consultants enables us to understand the needs of our clients and deliver an integrated, relationship-based approach to meeting those needs. Client relationships and needs are addressed from a client, not office, perspective. We regularly meet with our existing and prospective clients to understand their business issues and help them define their project needs.

 

•

Build the RGP brand. We want to be the preferred provider in the future of work. Our primary means of building our brand is by consistently providing high-quality, value-added services to our clients. We have also focused on building a significant referral network. In addition, we have global, regional and local marketing efforts that reinforce the RGP brand.

 

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Through fiscal 2019, we completed various initiatives including cultivating a more robust sales culture, adopting a new operating model for sales, talent and delivery in North America, refreshing the RGP brand, establishing digital innovation functions focused on building and commercializing our digital engagement platform, enhancing our consulting capabilities in the digital transformation space, and building and commercializing digital product offerings.

To achieve a more robust sales culture, we aligned our sales process using tools such as Salesforce.com, established an enterprise-wide business development function, and implemented a new incentive compensation program for individuals focused on profitable revenue generation and gross margin. Finally, to complete this initiative, we expanded our Strategic Client Program, which involves dedicated account teams for certain high-profile clients with global operations.

Under the new operating model in North America, we realigned reporting relationships, largely defined by functional area rather than on an office location basis. We reorganized our Advisory and Project Services function, a team of seller-doer professionals whose primary responsibility is to shepherd sales pursuits and engagement delivery on our more complex projects. We believe this team deepens the scoping conversation, achieves value-oriented pricing and improves delivery management through greater accountability and a more seamless customer experience. While we believe these efforts have already delivered improved revenue growth and improved customer experience throughout fiscal 2019, we are focused on continued improvement from this initiative into fiscal 2020.

In fiscal 2019, we launched a brand refresh which emphasizes a human centered approach in how we serve our clients and engage with our consultants. We believe the development of our new brand will support future revenue growth.

Our digital innovation initiatives are additional strategic components of our growth. In July 2019, we acquired Veracity Consulting Group, LLC (“Veracity”), a full-service digital transformation firm based in Richmond, Virginia. Veracity delivers innovative solutions to the Fortune 500 and leading healthcare organizations. We believe this acquisition will further our growth objective by allowing us to offer comprehensive end-to-end solutions to clients by combining Veracity’s customer-facing offerings with our depth of experience in implementation (see Note 3 — Acquisitions and Dispositions).

In fiscal 2020, we will continue to focus on our growth strategy by further investing in our brand and digital innovation, as well as further refining our operating model and optimizing our systems and structure. After a thorough review of our European operations, we divested our business in Resources Global Professionals Sweden AB (“RGP Sweden”) and substantially exited the Belgium market during the first quarter of fiscal 2020, The Company expects to complete the remaining exit activities in Belgium during the third quarter of fiscal 2020, including an analysis of the potential tax benefits that may result from the exit activities (see Note 3 — Acquisitions and Dispositions).

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 U.S. (“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.

Except for the adoption of Accounting Standards Codification (“ASC”) 842 as described in Item 1, Note 2 — Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, 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 25, 2019.

 

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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 23,				November 24,				November 23,				November 24,
		2019				2018				2019				2018
		(Amounts in thousands)
Revenue		$	184,507			$	188,799			$	356,732			$	367,357
Direct cost of services			110,130				115,378				214,852				225,785
Gross margin			74,377				73,421				141,880				141,572
Selling, general and administrative expenses			53,755				54,959				110,733				111,325
Amortization of intangible assets			1,510				952				2,604				1,907
Depreciation expense			1,424				1,197				2,793				2,266
Income from operations			17,688				16,313				25,750				26,074
Interest expense			551				608				1,033				1,134
Other (income)/expense			(537	)			—				(537	)			—
Income before provision for income taxes			17,674				15,705				25,254				24,940
Provision for income taxes			5,337				5,141				7,978				8,635
Net income		$	12,337			$	10,564			$	17,276			$	16,305

We also assess the results of our operations using Adjusted EBITDA and Adjusted EBITDA Margin. We define Adjusted EBITDA as net income before amortization of intangible assets, depreciation expense, interest and income taxes plus stock-based compensation expense and plus or minus contingent consideration adjustments. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by revenue. These measures assist management in assessing our core operating performance. The following table presents 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 23,				November 24,				November 23,				November 24,
		2019				2018				2019				2018
		(Amounts in thousands, except percentages)
Net income		$	12,337			$	10,564			$	17,276			$	16,305
Adjustments:
Amortization of intangible assets			1,510				952				2,604				1,907
Depreciation expense			1,424				1,197				2,793				2,266
Interest expense			551				608				1,033				1,134
Provision for income taxes			5,337				5,141				7,978				8,635
Stock-based compensation expense			1,643				1,652				3,158				3,013
Contingent consideration adjustment			(131	)			(130	)			(262	)			(33	)
Adjusted EBITDA		$	22,671			$	19,984			$	34,580			$	33,227
Revenue		$	184,507			$	188,799			$	356,732			$	367,357
Adjusted EBITDA Margin			12.3	%			10.6	%			9.7	%			9.0	%

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.

 

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