RESOURCES CONNECTION, INC. - Quarter Report: 2020 February (Form 10-Q)

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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 February  22, 2020 

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)

 

 



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:





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. 

 



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 March 27, 2020, there were approximately 32,144,373 shares of the registrant’s common stock, $0.01 par value per share, outstanding. 



  

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RESOURCES CONNECTION, INC.

INDEX

 



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PART I—FINANCIAL INFORMATION



ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS 



RESOURCES CONNECTION, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in thousands, except par value per share)











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)



 



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)

 





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)



 





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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)







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

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RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three and nine months ended February 22, 2020 and February 23, 2019



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”, the “Company,” “we,” “our” or “us”)). 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 third 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 nine months ended February 22, 2020 and February 23, 2019 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.





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 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

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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.



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



 

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 $7.8 million and $2.2 million as of February 22, 2020 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

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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.



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 nine months ended February 22, 2020.



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

 

3. Acquisitions and Dispositions



Acquisition of Expertence



On November 30, 2019, the Company acquired Expertforce Interim Projects GmBH, LLC (“Expertence”), a leading provider of professional interim management services, based in Munich Germany. With the acquisition of Expertence, the Company is able to offer a full range of project and management consulting services in the Germany market.  The Company paid initial cash consideration of $0.4 million. The initial consideration is subject to final adjustments for the impact of working capital as defined in the purchase agreement.

   

In addition, the purchase agreement requires earn-out payments to be made based on performance over an 18-month period ending on May 31, 2021. The Company is obligated to pay the former owners of Expertence contingent consideration if certain revenue targets are achieved, up to a maximum of $0.3 million.  In determining the fair value of the contingent consideration liability, the Company used an estimate based on a number of possible projections over the earnout period and applied a probability to each possible outcome.  Given the short duration of the earnout period, the fair value of contingent liability was measured on an undiscounted basis.  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 revenue results.  We do not expect future revisions to these assumptions to materially change the estimate of the fair value of contingent consideration and the Company’s future operating results.

Fair value of consideration transferred (in thousands):











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Results of operations of Expertence are included in the Consolidated Statements of Operations from the date of acquisition and were not material to the Company’s consolidated results.    During the third quarter of fiscal 2020, the Company incurred $0.1 million in acquisition costs which were recorded in selling, general and administrative expenses in the Consolidated Statement of Operations.



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 obtained during the quarter, which resulted in changes in expected future performance and cash flows as of the acquisition date. There were no additional adjustments to the provisional purchase price allocation during the three months ended February 22, 2020.

The following table provides a summary of the adjusted provisional purchase price allocation.

Fair value of consideration transferred (in thousands):







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







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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.



During the three and nine months ended February 22, 2020, the fair value of contingent consideration decreased by $0.8 million and $0.6 million, respectively.  Such amounts were recorded in selling, general and administrative expense in the Consolidated Statements of Operations.  As of February 22, 2020, the contingent consideration liability was $5.6 million of which $3.0 million was included in Other current liabilities and $2.6 million was included in Long-term liabilities in the Consolidated Balance Sheet. The change in fair value of contingent consideration from the remeasurement was recorded in selling, general and administrative expense in the Consolidated Statement of Operations for the three months ended February 22, 2020.



Results of operations of Veracity are included in the Consolidated Statements of Operations from the date of acquisition. Veracity contributed $5.4 million and $12.6 million to consolidated revenue and $1.1 million and $2.5 million to income from operations in the three and nine months ended February 22, 2020, respectively.  The Company incurred $0.6 million in acquisition costs which were recorded in selling, general and administrative expenses in the Consolidated Statement of Operations for the nine months ended February 22, 2020.



Prior Period Acquisitions



During fiscal 2018, the Company completed two acquisitions, the acquisition of 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 months ended February 22, 2020, the Company did not have any material adjustment to the contingent consideration liability relating to Taskforce.  A final contingent consideration payment of €1.6 million ($1.8 million) was paid to the sellers of Taskforce on March 30, 2020.



In addition, on October 14, 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 for the nine months ended February 22, 2020.



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 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 its employee consultants. As a result of the sale, the nearby Denmark and Norway markets also discontinued serving local Sweden customer contracts. The Company expects to continue to serve its global client base and to a lesser extent, its remaining local client contracts, in Sweden and Denmark.



In addition, during the quarter ended February 22, 2020, the Company continued to wind down business in the Belgium, (including its wholly owned subsidiary in Luxembourg) and Norway markets. The Company expects to fully dissolve all three entities by the end of fiscal 2020. In connection with the foregoing sale of assets and exit activities, the Company incurred costs of approximately $0.7 million primarily related to employee termination benefits.  Such expenses were included in selling, general and administrative expenses in the Consolidated Statements of Operations for the nine months ended February 22, 2020. None of the markets sold or exited are considered strategic components of the Company’s operations.



In connection with exiting the above-mentioned entities, the Company analyzed the facts and circumstances regarding its historical and current investments, along with its associated accounting and tax positions. Based on the analysis, the Company recorded a tax benefit related to the worthless stock loss in the investment in its wholly owned subsidiaries as well as worthless loans to these subsidiaries. See Note 6 – Income taxes.

 



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4. Intangible Assets and Goodwill



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







The Company recorded amortization expense of $1.5 million and $0.9 million for the three months ended February 22, 2020 and February 23, 2019, respectively, and $4.2 million and $2.9 million for the nine months ended February 22, 2020 and February 23, 2019, respectively.



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







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):





 



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

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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 sublease excess office space to third party tenants.  The Company does not recognize liabilities or right-of-use 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): 







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







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







The maturities of operating lease liabilities were as follows as of February 22, 2020 (in thousands):





 

6. Income Taxes



In general, the Company’s income tax provision primarily includes tax expense (benefit) on operating results of the Company’s U.S. and foreign entities, all taxed at different statutory rates applicable in the various tax jurisdictions, changes in valuation allowances related to tax benefits of certain foreign locations and tax expense (benefit) related to stock-based compensation for nonqualified stock options and for disqualifying dispositions under the Company’s Employee Stock Purchase Plan (“ESPP”). The Company records income tax expense (benefit) based upon actual results versus a forecasted tax rate because of the volatility in its international operations that span numerous tax jurisdictions.



Income tax (benefit) expense was ($4.0) million, an effective tax benefit rate of (135%),  and $3.8 million, an effective tax rate of 40%, for the three months ended February 22, 2020 and February 23, 2019, respectively. Income tax expense was $4.0 million,

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an effective tax rate of 14%, and $12.5 million,  an effective tax rate of 36%, for the nine months ended February 22, 2020 and February 23, 2019, respectively.



The income tax (benefit) for the three months ended February 22, 2020 compared to the income tax expense for the prior year quarter was primarily the result of a deduction related to a worthless stock loss in the Company’s investment in its wholly owned subsidiaries as well as lower operating results. The Company, after analyzing the facts and circumstances, determined to no longer invest in the Belgium, Luxembourg and the Nordics markets which includes Sweden and Norway. The Company has maintained a permanent investment position and, therefore, has not previously recorded a deferred tax asset for the basis differences of these entities. The financial results of these entities have created an excess of tax basis over the book basis in which the worthless stock that will be deducted for income tax purposes is approximately $25.8 million, resulting in an estimated net tax benefit of $6.6 million. Management has analyzed these transactions and determined that these worthless stock deductions qualify as ordinary losses. In addition, the Company took a deduction relating to worthless loans of approximately $4.5 million which is also treated as ordinary losses, resulting in a net tax benefit of $0.7 million after the offset of the estimated global intangible low-taxed income (“GILTI”)  tax. While management believes this is a proper income tax deduction, the deduction may be subject to examination by tax authorities and thus,  management has determined this tax benefit to be an uncertain tax position.  Accordingly, the Company fully reserved for the tax benefit associated with the worthless loan deduction.  The reserve includes offsetting the federal and state benefits, by the estimated GILTI tax increase. 



The income tax expense for the nine months ended February 22, 2020 compared to the income tax expense for the prior year nine months was primarily the result of a deduction discussed above as well as lower operating results.



The Company recognized a net tax expense of approximately of $0.7 million and $0.2 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the Company’s ESPP during the three months ended February 22, 2020 and February 23, 2019, respectively. The Company recognized a tax expense of approximately breakeven and $0.2 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the first nine months of fiscal 2020 and fiscal 2019, respectively.  The net tax expense results from expiring stock options during these periods.



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 U.S. statutory rate for losses in certain foreign jurisdictions, the limitation on the benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established, and the unpredictability of timing and the amount of eligible disqualifying incentive stock options exercises.

 



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 compliant with all financial covenants under the Facility as of February 22, 2020.



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.



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The Company’s borrowings on the Facility were $49.0 million as of February 22, 2020, 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 February 22, 2020.  The Company has $39.5 million remaining to borrow under the Revolving Loan and $30.0 million remaining under the Reducing Revolving Loan as of February 22, 2020.  As of February 22, 2020, the interest rate on the Company’s borrowings were as follows (amounts in thousands, except percentages):





 



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.  During the three months ended February 22, 2020, the Company purchased 318,430 shares of its common stock on the open market at an average price of $15.70 per share, for approximately $5.0 million.   As of February 22, 2020, approximately $85.1 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 January 23, 2020 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 March 19, 2020 to the holders on record on February 20, 2020 and is accrued in the Company’s Consolidated Balance Sheet as of February 22, 2020.



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):





 

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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 February 22, 2020, 1,197,000 shares were available for award grant purposes under the 2014 Plan, subject to future increases as described in the 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 nine months ended February 22, 2020 (number of shares under option and aggregate intrinsic value in thousands):











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 third 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 February 22, 2020.  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 February 22, 2020 and February 23, 2019 was $0.4 million and $1.9 million, respectively, and during the nine months ended February 22, 2020 and February 23, 2019 was $1.2 million and $5.0 million, respectively.  As of February 22, 2020, there was $11.7 million of total unrecognized compensation cost related to unvested employee stock options granted.  That cost is expected to be recognized over a weighted-average period of 1.9 years.



The Company granted 28,372 and 21,537 shares of restricted stock during the nine months ended February 22, 2020 and February 23, 2019, respectively. As of February 22, 2020, there were 177,002 unvested restricted shares, including restricted stock units under the Directors Deferred Compensation Plan, with approximately $2.5 million of remaining unrecognized compensation cost. 



Stock-Based Compensation Expense



Stock-based compensation expense included in selling, general and administrative expenses was $1.5 million and $1.9 million for the three months ended February 22, 2020 and February 23, 2019, respectively, and $4.6 million and $5.0 million for the nine months ended February 22, 2020 and February 23, 2019, 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 nine months ended February 22, 2020 or February 23, 2019.

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Employee Stock Purchase Plan



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



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 399,000 and 358,000 shares of common stock pursuant to the ESPP during the nine months ended February 22, 2020 and the year ended May 25, 2019, respectively. There were 1,641,000 shares of common stock available for issuance under the ESPP as of February 22, 2020.  

 

 

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):



 



(1)Long-lived assets are comprised of goodwill, intangible assets and property and equipment.  Long-lived assets as of February 22, 2020 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. 



 

13. Subsequent Events



On February 27, 2020, the Company’s management and board of directors committed to a restructuring plan to reduce approximately 7.5% of our management and administrative workforce and consolidate its geographic presence to certain key markets. The restructuring plan was designed to streamline the Company’s organizational structure, reduce operating costs and more effectively align resources to business priorities. The majority of employees impacted by the reduction in force are expected to exit before the end of fiscal 2020, with the remainder exiting in the first quarter of fiscal 2021. Based on management’s rationalization of its real estate footprint, a plan was put in place to terminate or sublet 26% of its real estate leases by the end of the 2020 calendar year. The Company expect to incur $4 million to $5 million of restructuring charges relating to employee termination costs, of which approximately $3 million will be incurred in the fourth quarter of fiscal 2020. In connection with real estate restructuring, the Company expects to incur $1 million of lease termination costs, costs associated with existing real estate facilities and non-cash asset write-offs. Further charges are expected in fiscal 2021 as the Company completes the restructuring plan.



In March 2020, as events relating to COVID-19 continued to develop globally and impact the capital markets, in an abundance of caution the Company borrowed $39.0 million under the Facility to provide substantial liquidity in the event that COVID-19 persists. As of March 24, 2020, the Company has $0.5 million remaining to borrow under the Revolving Loan and $30.0 million remaining under the Reducing Revolving Loan.



On March 27, 2020, the President of the United States signed the Coronavirus Aid Relief, and Economic Security (CARES) Act into law.  The Act includes several significant provisions for corporations, including the usage of net operating losses, interest deductions

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and payroll benefits.  The Company is evaluating the impact, if any, this Act will have on the Company’s financials and required disclosures.



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 in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of 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: 







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Key Transformation Initiatives



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 and establishing a 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 optimize our sales organization, 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. In addition, we expanded our Strategic Client Program, which assigns dedicated account teams to 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.



In fiscal 2019, through an extensive brand refresh project led by an outside firm, we adopted a new brand identity focused on our human-centered approach to serving clients and engaging with our consultants. We believe the development of our new brand will support future revenue growth.



We view our digital innovation initiatives to be important drivers of growth as well. 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. The addition of Veracity to the RGP platform allows us to offer comprehensive end-to-end digital transformation solutions to clients by combining Veracity’s customer-facing offerings with our depth of experience in back-office solutions (see Note 3 —  Acquisitions and Dispositions).



Fiscal 2020 Strategic Focus Areas



Through the first nine months of fiscal 2020, we have continued to strengthen our core by further investing in digital innovation as we prepare to launch our digital engagement platform in fiscal 2021, as well as further refining our operating model and optimizing our systems and structure.



During the first quarter of fiscal 2020, we evaluated certain European markets and their client base. Through this review, we made the decision to divest our business in Resources Global Professionals Sweden AB (“RGP Sweden”) and initiated an exit from the Belgium market, including its wholly own subsidiary in Luxemburg, as well as Norway. We continued to wind down business in these markets during the third quarter of fiscal 2020. In connection with the sale and exit activities, we filed a U.S. tax election to disregard these entities, enabling us to claim a tax benefit on our U.S tax returns for the tax basis of our investment in such entities (see Note 6 – Income Taxes).



During the third quarter of fiscal 2020, we embarked on the latest phase of our transformation journey, performing a deep and strategic review of our global business, focused initially on North America and Asia Pacific. On February 27, 2020, management and the board of directors committed to a restructuring plan to reduce approximately 7.5% of our management and administrative workforce and consolidate our geographic presence to certain key markets, while shifting to a virtual operating model in most other markets. With this shift in our real estate strategy, we expect to terminate or sublet 26% of our existing real estate leases by the end of fiscal 2021 through both termination and subleasing.



We expect to take a restructuring charge of $4 million to $5 million relating to employee termination costs over the fourth quarter of fiscal 2020 and first quarter of fiscal 2021. Upon completion of the reduction in force, we expect annual pre-tax savings of $13 million to $15 million with respect to personnel costs. In fiscal 2021, after the impact of COVID-19 is clearer, we may reinvest a limited amount of those personnel savings in the business to drive forward certain growth initiatives in core markets and digital capabilities.



With respect to our plan to restructure real estate leases, we expect to incur approximately $1 million of lease termination costs and other costs associated with exiting the facilities in the fourth quarter of fiscal 2020. Additional restructuring charges are

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expected through fiscal 2021 as we continue to execute the plan to exit the real estate leases. Exact amount and timing of the restructuring charge will depend on a number of variables including market conditions.



We believe these actions we are taking to strengthen the business will enable us to operate with greater agility as we seek to ensure our organizational health and resilience in any macro-economic climate.

 

In January 2020, an outbreak of a novel coronavirus (COVID-19) surfaced in Wuhan, China. In an effort to contain the spread, the Chinese government mandated business closures and restricted certain travel within the country. As a result of the restrictions, many businesses in China extended their Chinese New Year holiday shut down by one to two weeks. Our practices based in China and other parts of Asia adopted virtual methods of working in order to ensure business continuity for both our clients and the Company. Nevertheless, the events relating to COVID-19 had an adverse impact on our business in Asia Pacific during the quarter ended February 22, 2020. As the COVID-19 pandemic continues to take shape globally, there is significant uncertainty as to the likely consequences of this pandemic which may, among other things, reduce demand for or delay client decisions to procure our services.  While not yet quantifiable, management expects this development to have an adverse impact on our operating results in the fourth quarter of fiscal 2020 and continues to assess the financial impact for the upcoming fiscal year.



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. 



We test for impairment, at a minimum, on an annual basis or earlier where certain events or changes in circumstances indicate that goodwill may more likely than not be impaired. As of February 22, 2020, our market capitalization based on its stock price was above our book value. We do not believe it is more likely than not that goodwill was impaired as of February 22, 2020. However, we have experienced declines in the market price of our stock subsequent to the end of the third quarter as a result of the impact from the COVID-19 pandemic on the global economy. Our market capitalization based upon our stock price has fluctuated above and below book value subsequent to the end of the quarter. If there are further decreases in our stock price for a sustained period or other unfavorable factors, we may be required to perform a goodwill impairment assessment, which may result in a recognition of goodwill impairment that could be material to the Consolidated Financial Statements.



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.







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:







 



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.



Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. We believe Adjusted EBITDA and Adjusted EBITDA Margin provide useful information to our investors because they are financial measures used by management to assess the core performance of the Company. 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.

 

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

 



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



Three Months Ended February 22, 2020 Compared to Three Months Ended February 23, 2019 



Percentage change computations are based upon amounts in thousands.



Revenue. Revenue decreased $11.4 million, or 6.4%, to $168.1 million for the three months ended February 22, 2020 from $179.5 million for the three months ended February 23, 2019.  On a constant currency basis, revenue decreased 6.2%.    The decrease in revenue reflects the impact of less hours worked and a slight decrease in average bill rate. Total hours worked during the three months ended February 22, 2020 decreased 6.4% compared to prior year quarter, while average bill rates for the three months ended February 22, 2020 decreased by 0.8% compared to prior year period. See discussion below for revenue trends in each geographic region.



As presented in the table below, revenue decreased in the first three months of fiscal 2020 compared to the same period of fiscal 2019 in North America, Europe and Asia Pacific (dollars in thousands): 





 North America revenue decreased $8.0 million, or 5.4% in the third quarter of fiscal 2020 compared to prior year quarter. The decrease primarily reflected the impact of additional holidays in the U.S. (third quarter of fiscal 2020 included Thanksgiving holidays and reflected the mid-week timing of Christmas and New Year’s Day), offset by $5.4 million of revenue attributable to Veracity. Europe revenue decreased $2.9 million, or 13.8% in the third quarter of fiscal 2020 compared to prior year quarter as a result of lost revenue of $2.4 million from the exit from the Nordics and Belgium markets. Asia Pacific revenue declined by $0.6 million or 4.8% in the third quarter compared to prior year, reflecting the impact of an extended Lunar New Year’s holiday coupled with the adverse impact from the COVID 19 outbreak in China at the beginning of 2020.



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-U.S. 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-U.S. based operations, our translated revenue (and expenses) will be higher.  Using the comparable fiscal 2019 third quarter conversion rates, international revenues would have been lower than reported under GAAP by approximately $5.0 million in the third quarter of fiscal 2020.  Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue decreased in North America, Europe and Asia Pacific by 5.5%, 12.4% and 4.6% respectively, during the third quarter of fiscal 2020.



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The number of consultants on assignment as of February 22, 2020 was 2,894 compared to 3,059 consultants engaged as of February 23, 2019.  We operated 72 (23 abroad) offices as of February 22, 2020 and 73 (26 abroad) as of February 23, 2019.     



Our clients do not sign long-term contracts with us.  As such, there can be no assurance as to future demand levels for the services we provide or that future results can be reliably predicted by considering past trends.



Direct Cost of Services. Direct cost of services decreased $5.0 million, or 4.4%, to $106.6 million for the three months ended February 22, 2020 from $111.6 million for the three months ended February 23, 2019. The decrease in the amount of direct cost of services between periods was primarily attributable to a decrease of 6.4% in the number of hours worked, partially offset by an increase of 1.6% in the average pay rate per hour between the two quarters.    



Direct cost of services as a percentage of revenue was 63.5% and 62.2% for the three months ended February 22, 2020 and February 23, 2019, respectively.  The direct cost of services as a percentage of revenue increased in the third quarter of fiscal 2020 compared to prior year quarter primarily due to an increase in holiday pay for consultants in the U.S. (third quarter of fiscal 2020 included Thanksgiving holidays as well as more holidays taken as a result of the mid-week timing of Christmas and New Year’s Day  holidays). The Company’s bill/pay ratio was slightly lower in the third quarter of fiscal 2020 compared to prior year quarter.



Our target direct cost of services percentage is 60% in all markets.



Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) as a percentage of revenue was 32.9% and 31.0% for the three months ended February 22, 2020 and February 23, 2019, respectively.  SG&A was $55.3 million for the third quarter of fiscal 2020 and $55.6 million for the comparable prior year period.  The year-over-year decrease is primarily attributable to: (1) a $0.8 million decrease in incentive compensation as a result of the lower revenue in third quarter of fiscal 2020, (2) a $0.5 million decrease in stock compensation, (3) a $0.5 decrease in expenses relating contingent consideration, and (4) a decrease of $0.8 million related to occupancy and office related expenses, partially offset by $2.2 million in additional payroll and benefit costs due to additional headcount related to project delivery and digital transformation efforts, including Veracity.



Management and administrative headcount was 992 at the end of the third quarter of fiscal 2020 and 915 at the end of the third quarter of fiscal 2019. 



Sequential Operations. On a sequential quarter basis, fiscal 2020 third quarter revenues decreased approximately 8.9% (9.1% constant currency), from $184.5 million to $168.1 million. The decrease in third quarter revenue primarily reflects the impact of additional holidays in the U.S. (third quarter of fiscal 2020 included Thanksgiving, Christmas and New Year’s Day while the second quarter of fiscal 2020 included only Labor Day) and Europe (Christmas and New Year’s Day in third quarter of fiscal 2020), and the impact of an extended Lunar New Year’s holiday and COVID 19 in Asia Pacific,  resulting in a 9.3% decrease in hours worked. The Company’s sequential revenue decreased in North America, Europe and Asia Pacific by 8.9%, 6.9% and 11.9%, respectively. On a constant currency basis, using the comparable second quarter fiscal 2020 conversion rates, sequential revenue decreased in North America (9.0%), Europe (7.9%) and Asia Pacific (12.0%).



Direct cost of services as a percentage of revenue was 63.5% and 59.7% in the third quarter of fiscal 2020 and the second quarter of fiscal 2020, respectively. The increase in the direct cost of services percentage in the third quarter of 2020 is primarily due to an increase in holiday pay for consultants in the U.S. (third quarter of fiscal 2020 included Thanksgiving, Christmas and New Year’s Day while the second quarter included only Labor Day) as well as higher payroll taxes during the early months of a new calendar year.



SG&A as a percentage of revenue was 32.9% for the third quarter of fiscal 2020 compared to 29.1% for the second quarter of fiscal 2020.  SG&A in the third quarter increased $1.5 million to $55.3 million from $53.8 million in the previous quarter.  The primary reasons for the increase were: (1) a $1.1 million increase in payroll taxes as we transition into a new calendar year in the third quarter (2) a $0.4 million increase in bad debt expense, (3) a $0.3 million increase in self medical insurance, and (4) a $0.4 million increase in software expense, partially offset by $0.7 million increase in a benefit relating to contingent consideration to Veracity.



Amortization and Depreciation Expense. Amortization of intangible assets was $1.5 million and $0.9 million in the third quarter of fiscal 2020 and fiscal 2019, respectively.  The increase in amortization expense is primarily due to the amortization of identifiable intangible assets acquired from Veracity during the first quarter of fiscal 2020.    



Depreciation expense was $1.1 million and $1.2 million in the third quarter of fiscal 2020 and fiscal 2019, respectively.

 

Interest Expense. Interest expense was approximately $0.5 million and $0.6 million in the third quarter of fiscal 2020 and fiscal 2019, respectively.   



Income Taxes. The Company’s provision for income taxes was a ($4.0) million benefit (effective tax rate of approximately (135%)) for the three months ended February 22, 2020 compared to an income tax expense of $3.8 million (effective tax rate of

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approximately 40%) for the three months ended February 23, 2019.  The Company records tax expense based upon actual results versus a forecasted tax rate because of the volatility in its international operations that span numerous tax jurisdictions.



The (benefit) provision for income taxes in the three months ended February 22, 2020 and February 23, 2019 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 income tax benefit for the third quarter of fiscal 2020 compared to the income tax expense for the prior year quarter was primarily due to a worthless stock deduction related to our investment in wholly owned subsidiaries as well as lower operating results compared to the prior year period. During the third quarter of fiscal 2020, after analyzing the facts and circumstances, we determined to no longer invest in the Belgium, Luxembourg and the Nordics markets (which includes Sweden and Norway). Based on this analysis, we recorded a tax benefit for the worthless stock loss of our investment in and worthless loans to these wholly owned entities.  We have maintained a permanent investment position and, therefore, have not previously recorded a deferred tax asset for the basis differences of these entities.  The financial results of these entities have created an excess of tax basis over the book basis in which the worthless stock that will be deducted for income tax purposes is approximately $25.8 million, resulting in an estimated net tax benefit of $6.6 million. We analyzed these transactions and determined that these worthless stock deductions qualify as ordinary losses.  In addition, we took a deduction relating to worthless loans of approximately $4.5 million which is also treated as an ordinary loss, resulting in a net tax benefit of $0.7 million after the offset of the estimated global intangible low-taxed income (“GILTI”) tax. While we believe this is a proper income tax deduction, the deduction may be subject to examination by tax authorities and thus, we determined that an uncertain tax position existed. Accordingly, we fully reserved for the net tax benefit associated with the worthless loan deduction.  The reserve includes the effect of offsetting the federal and state benefit, netted with the estimated GILTI tax increase. 



The Company recognized a net tax expense of approximately of $0.7 million and $0.2 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the Company’s Employee Stock Purchase Plan (“ESPP”) during the three months ended February 22, 2020 and February 23, 2019, respectively.  The net tax expense results from expiring stock options during these periods.





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 U.S. statutory rate for losses in certain foreign jurisdictions, the limitation on the benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established, and the unpredictability of timing and the amount of eligible disqualifying incentive stock options exercise.















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 of our Annual Report on Form 10-K for the year ended May 25, 2019.  Due to these and other factors, we believe quarter-to-quarter comparisons of our results of operations may not be meaningful indicators of future performance.



Nine Months Ended February 22, 2020 Compared to Nine Months Ended February 23, 2019 



Percentage change computations are based upon amounts in thousands.



Revenue. Revenue decreased $22.1 million, or 4.0%, to $524.8 million for the nine months ended February 22, 2020 from $546.9 million for the nine months ended February 23, 2019.  On a constant currency basis, revenue decreased 3.7%. See discussion below for revenue trends in each geographic region. 



As presented in the table below, revenue decreased in the first nine months of fiscal 2020 compared to the same period of fiscal 2019 in North America and Europe while revenue increased in Asia Pacific (dollars in thousands): 













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North America revenue decreased $15.2 million, or 3.4% in the nine months ended February 22, 2020 compared to prior year. The decrease primarily reflected the wind-down of technical accounting implementation projects, partially offset by $12.6 million of revenue attributable to Veracity. Europe revenue decreased $8.6 million, or 13.3% in the nine months ended February 22, 2020 compared to prior year as a result of lost revenue of $7.3 million from the exit from the Nordics and Belgium markets. Asia Pacific revenue increased by $1.7 million, or 4.9% in the nine months ended February 22, 2020 compared to prior year, reflecting growth in markets such as Japan and India due to the large multi-national client base, partially offset by the adverse impact from the COVID 19 outbreak in China at the beginning of 2020 as well as the political protests in Hong Kong.



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-U.S. 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-U.S. based operations, our translated revenue (and expenses) will be higher.  Using the comparable fiscal 2019 conversion rates, international revenues would have been lower than reported under GAAP by approximately $9.9 million in the first nine months of fiscal 2020.  Using these constant currency rates, which we believe provides a more comprehensive view of trends in our business, our revenue decreased in North America and Europe by 3.4% and 10.5%, respectively, and increased in Asia Pacific by 5.2% during the first nine months of fiscal 2020. 



Direct Cost of Services. Direct cost of services decreased $15.9 million, or 4.7%, to $321.5 million for the nine months ended February 22, 2020 from $337.4 million for the nine months ended February 23, 2019. The decrease in the amount of direct cost of services between periods was primarily attributable to a decrease of 3.5% in the number of hours worked as well as a decrease of 1.1% in the average pay rate per hour between the two periods.    



Direct cost of services as a percentage of revenue was 61.3% and 61.7% for the nine months ended February 22, 2020 and February 23, 2019, respectively. 



Our target direct cost of services percentage is 60% in all our markets.



Selling, General and Administrative Expenses. SG&A as a percentage of revenue was 31.6% and 30.5% for the nine months ended February 22, 2020 and February 23, 2019, respectively.  SG&A was $166.0 million for the first nine months of fiscal 2020 and $166.9 million for the comparable prior year period.  The year-over-year decrease is primarily attributable to: (1) a decrease of $4.1 million in incentive compensation expense as a result of the decrease in revenue during the first nine months of fiscal 2020, (2) a decrease of $1.6 million in transformation and system implementation costs, (3) a decrease of $1.4 million in business expenses as management continues to closely manage discretionary spend, and (4) a decrease of $1.1 million in rent expense, partially offset by an increase of $6.5 million in payroll and benefits due to additional headcount related to project delivery and digital transformation efforts, including Veracity and $0.6 million of acquisition costs in the first half of fiscal 2020.



Amortization and Depreciation Expense. Amortization of intangible assets was $4.2 million and $2.9 million in the first nine months of fiscal 2020 and fiscal 2019, respectively.  The increase in amortization expense is primarily due to the amortization of identifiable intangible assets acquired during the first quarter of fiscal 2020 from Veracity.    



Depreciation expense was $3.9 million and $3.4 million in the first nine months of fiscal 2020 and fiscal 2019, respectively.



Interest Expense. Interest expense for the first nine months of fiscal 2020 was approximately $1.5 million compared to $1.7 million in the same period of fiscal 2019.   



Income Taxes.  Our provision for income taxes was $4.0 million (effective tax rate of approximately 14%) and $12.5 million (effective tax rate of approximately 36%) for the nine months ended February 22, 2020 and February 23, 2019, respectively.  We record tax expense based upon actual results 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 nine months ended February 22, 2020 and February 23, 2019 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 decreased for the nine months ended February 22, 2020 compared to the prior year quarter primarily because of the worthless stock deduction and lower operating results. See discussion on worthless stock deduction under the “Three Months Ended February 22, 2020 Compared to Three Months Ended February 23, 2019” section. 

 

The Company recognized a tax expense of approximately breakeven and $0.2 million related to stock-based compensation for nonqualified stock options expensed and for disqualifying dispositions under the ESPP during the first nine months of fiscal 2020 and fiscal 2019, respectively.  The net tax expense results from expiring stock option during these periods.

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Periodically, we review the components of both book and taxable income to analyze the adequacy of the tax provision. There can be no assurance that our effective tax rate will remain constant in the future because of the lower benefit from the U.S. statutory rate for losses in certain foreign jurisdictions, the limitation on the benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established, and the unpredictability of timing and the amount of eligible disqualifying incentive stock options exercises.



Liquidity and Capital Resources



Our primary sources of liquidity are cash provided by our operations, our $120 million secured revolving credit facility (“Facility”) with Bank of America and, historically, to a lesser extent, stock option exercises and ESPP purchases.  We have generated annual positive cash flows from operations since inception.  Our ability to generate positive cash flow from operations in the future will be, at least in part, dependent on continued stable global economic conditions. In March 2020, the World Health Organization characterized the novel COVID-19 virus as a global pandemic. There is significant uncertainty as to the likely effects of this pandemic on the global economy which in turn may, among other things, impact our ability to generate positive cash flows from operations and our ability to successfully execute and fund key initiatives such as the restructuring plan (see Note 13 – Subsequent Events in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q). As of February 22, 2020, the Company had $35.9 million of cash and cash equivalents including $28.3 million held in international operations.



In October 2016, we entered into the Facility which is available for working capital and general corporate purposes, including potential acquisitions and stock repurchases.  The Facility allows us to choose the interest rate applicable to advances.  Borrowings under the Facility bear interest at a rate per annum of either, at the Company’s option, (i) LIBOR 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 our 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. Additional information regarding the Facility is included in Note 7 — Long Term Debt in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.



As of February 22, 2020, we had borrowings of $49.0 million under the Facility and directed Bank of America to issue approximately $1.5 million of outstanding letters of credit for the benefit of third parties related to operating leases and guarantees.  We had $39.5 million remaining to borrow under the Revolving Loan and $30.0 million remaining under the Reducing Revolving Loan as of February 22, 2020.  As of February 22, 2020, the Company was compliant with the financial covenants in the Facility.  



Subsequent to the third quarter of fiscal 2020, as events relating to COVID-19 continued to develop globally and impact the capital markets, our liquidity could be adversely impacted due to possible deterioration in our clients’ financial condition and their ability to timely pay outstanding receivables owed to us. In March 2020, in an abundance of caution, we borrowed $39.0 million on the Facility to provide substantial additional liquidity to manage our business in light of the impact of COVID-19 on the global economy and our business.



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



Operating Activities



Operating activities for the nine months ended February 22, 2020 provided cash of $21.6 million compared to $13.5 million for the nine months ended February 23, 2019.  Cash provided by operations in the first nine months of fiscal 2020 resulted from net income of $24.2 million and non-cash items of $13.5 million.  These amounts were partially offset by a net decrease in operating assets and liabilities of $16.1 million primarily due to a decrease in accrued salaries and related obligations. In the first nine months of fiscal 2019, cash provided by operations resulted from net income of $22.1 million and non-cash items of $17.4 million, partially offset by an net unfavorable changes in operating assets and liabilities of $26.0 million primarily  related to an increase in accounts

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receivable and accrued salaries and related obligations.



Investing Activities



Net cash used in investing activities was $26.5 million for the first nine months of fiscal 2020, compared to $5.9 million in the comparable prior year period. The Company used $30.3 million of cash (net of cash acquired) to acquire Veracity. There were no acquisitions in the first nine months of fiscal 2019. In the first nine months of fiscal 2020, we redeemed short-term investments of $6.0 million and purchased  $3.9 million less property and equipment compared to the first nine months of fiscal 2019.



Financing Activities



The primary sources of cash in financing activities are borrowings under the Company’s revolving credit facility, cash proceeds from the exercise of employee stock options and proceeds from issuance of the ESPP. The primary uses of cash in financing activities are repayments under the Facility, repurchases of the Company’s common stocks and cash dividend payments to the shareholders. 



Net cash used in financing activities totaled $1.8 million for the nine months ended February 22, 2020 compared to a use of cash of $15.6 million during the nine months ended February 23, 2019. Net cash used in financing activities during the nine months ended February 22, 2020 consisted of $10.3 million of proceeds from employee stock option exercises and purchases of shares under ESPP, $35.0 million of borrowings to finance the acquisition of Veracity, partially offset by principal repayments of $29.0 million under the revolving credit facility, $5.0 million to purchase approximately 318,000 shares of common stock on the open market and $13.1 million of cash dividend payments.



Net cash used in financing activities during the nine months ended February 23, 2019 consisted of $22.3 million of cash paid to repurchase the Company’s own common stock, principal repayment of $5.0 million under the revolving credit facility and $12.0 million of cash dividend payments, partially offset by $23.6 million of proceeds from employee stock option exercises and purchases of shares under ESPP.



The increase in dividends paid was due to an increase in dividends declared per share from $0.13 per share to $0.14 per share beginning in fiscal 2020.



As described in Note 3 — Acquisitions and Dispositions, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, the purchase agreements for Veracity and Expertence require earn-out payments to be made. The Company estimated the fair value of the obligation to pay contingent consideration based on a number of different projections of the estimated EBITDA and estimated revenue.  The estimated fair value of the contingent consideration as of February 22, 2020 was $5.9 million.



 

Recent Accounting Pronouncements



Information regarding recent accounting pronouncements is contained in 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.



Off-Balance Sheet Arrangements



The Company has no off-balance sheet arrangements. 

 

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 and cash equivalents and our borrowings under our Facility that bear interest at a variable market rate.  



As of February 22, 2020,  we had approximately $35.9 million of cash and cash equivalents and $49.0 million of borrowings under our Facility. The earnings on investments are subject to changes in interest rates; however, assuming a constant balance available for investment, a 10% decline in interest rates would reduce our interest income but would not have a material impact on our consolidated financial position or results of operations.



Borrowings under the Facility bear interest at a rate per annum of either, at the Company’s option, (i) LIBOR plus a margin of 1.25% or 1.50% or (ii) an alternate base rate, plus margin of 0.25% or 0.50% with the applicable margin depending on the Company’s consolidated leverage ratio. The alternate base rate is the highest of (i) Bank of America’s prime rate, (ii) the federal funds rate plus 0.50% and (iii) the Eurodollar rate plus 1.0%. We are exposed to rate risk related to fluctuations in the LIBOR rate primarily;

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at the current level of borrowing as of February 22, 2020 of $49.0 million, a 10% change in interest rates would have resulted in approximately a $0.2 million change in annual interest expense. 



Foreign Currency Exchange Rate Risk. For the three months ended February 22, 2020, approximately 19.0% of the Company’s revenues were generated outside of the U.S. As a result, our operating results are subject to fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at the monthly average exchange rates prevailing during the period. Thus, as the value of the U.S. dollar fluctuates relative to the currencies in our non-U.S. based operations, our reported results may vary.



Assets and liabilities of our non-U.S. based operations are translated into U.S. dollars at the exchange rate effective at the end of each monthly reporting period. Approximately 21% of our balances of cash and cash equivalents as of February 22, 2020 were denominated in U.S. dollars. The remaining amount of approximately 79% was comprised primarily of cash balances translated from Euros, Mexican Pesos, British Pound Sterling, Japanese Yen, Canadian Dollar and Chinese Yuan. The difference resulting from the translation each period of assets and liabilities of our non-U.S. based operations is recorded as a component of stockholders’ equity in other accumulated other comprehensive income or loss.



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

 

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 February 22, 2020.  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 February 22, 2020.   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 February 22, 2020 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.



 

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.  



Our business is subject to risks arising from epidemic diseases, such as the recent outbreak of the COVID-19 illness.



The recent outbreak of COVID-19, which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemic poses the risk that we or our employees and other partners may be prevented from conducting business activities at full capacity for an indefinite period of time, including due to spread of the disease within these groups or due to shutdowns that are requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that COVID-19 could have on our business, the continued spread of COVID-19 and the measures taken by the governments of countries affected and in which we operate may, among other things, reduce demand for or delay client decisions to procure our services and, as a result, could adversely affect our operating results and financial condition. For example, after the January 2020 outbreak of the virus in China, many businesses in China extended their Chinese New Year holiday shut down by approximately one to two weeks due to government restrictions to close and to restrict certain travel within the country. Our practices based in China and other parts of Asia adopted virtual methods of working in order to ensure business continuity for both our clients and the Company. Nevertheless, the events relating to COVID-19 had an adverse impact on our business in Asia Pacific during the quarter ended February 22, 2020.  Subsequent to the third quarter of fiscal 2020, as events relating to COVID-19 continue to develop globally, including in the U.S., and impact the capital markets, the Company’s results of operations, cash flows and financial condition could be adversely impacted due to a reduction in demand, delay of client decisions to procure our services or possible deterioration in our clients’ financial condition and their ability to timely pay outstanding receivables owed to us. Furthermore, we have experienced declines in the market price of our stock subsequent to the end of the third quarter. If there are further decreases in our stock price for a sustained period or other

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unfavorable factors, we may be required to perform a goodwill impairment assessment, which may result in a recognition of goodwill impairment that could be material to the Consolidated Financial Statements.



In addition, we have taken temporary precautionary measures intended to help minimize the risk of the virus to our employees, including temporarily requiring all employees to work remotely, suspending all non-essential travel worldwide for our employees, and discouraging employee attendance at in-person work-related meetings, which could negatively affect our business. The extent to which the COVID-19 outbreak impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact. While not yet quantifiable, management expects this situation will have an adverse impact to our operating results in the fourth quarter of fiscal 2020 and continues to assess the financial impact for the upcoming fiscal year.



Other than the above risk factor relating to COVID-19, 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 25, 2019, which was filed with the Securities and Exchange Commission on July 19, 2019.   See “Risk Factors” in such Annual Report on Form 10-K for a complete description of the material risks we face.



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 for the three months ended February 22, 2020. All shares were repurchased pursuant to the July 2015 program.







 

ITEM 5. OTHER INFORMATION.



Restructuring Initiative



On February 27, 2020, management and our board of directors committed to a restructuring plan to reduce approximately 7.5% of our management and administrative workforce and consolidate our geographic presence to certain key markets. The restructuring plan was designed to streamline the Company’s organizational structure, reduce operating costs and more effectively align resources to business priorities. The majority of employees impacted by the reduction in force are expected to exit before the end of fiscal 2020, with the remainder exiting in the first quarter of fiscal 2021. Based on management’s rationalization of its real estate footprint, a plan was put in place to terminate or sublet 26% of its real estate leases by the end of fiscal 2021.



We carried out a reduction in force in early March, whereby we eliminated 73 positions in North America and Asia Pacific. We expect to take a restructuring charge of $4 million to $5 million relating to employee termination costs over the fourth quarter of fiscal 2020 and first quarter of fiscal 2021. Upon completion of the reduction in force, we expect annual pre-tax savings of $13 million to $15 million with respect to personnel costs. In fiscal 2021, after the impact of COVID-19 is clearer, we may reinvest a limited amount of those personnel savings in the business to drive forward certain growth initiatives in core markets and digital capabilities



With respect to our plan to restructure real estate leases, we expect to incur approximately $1 million of lease termination costs and other costs associated with exiting the facilities in the fourth quarter of fiscal 2020. Additional restructuring charges are expected through fiscal 2021 as we continue to execute the plan to exit the real estate leases. Exact amount and timing of the restructuring charge will depend on a number of variables including market conditions.



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Borrowings under Credit Facility



From time to time, we will use available credit lines to meet our financial obligations and to satisfy working capital requirements for our business.  Due to the uncertainty caused by the COVID-19 pandemic, in March 2020, in an abundance of caution, we borrowed $39.0 million under the Credit Facility to provide substantial additional liquidity to manage our business in light of the impact of COVID-19 on the global economy and our business.

 



ITEM 6. EXHIBITS. 



The exhibits listed in the Exhibit Index are filed with, or incorporated by reference in, this Report.

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EXHIBIT INDEX











_________

*        Filed herewith.

**      Furnished herewith.

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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.

 

 



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