ITEM 1. BUSINESS.
Overview
Resources Connection is a multinational consulting firm; its operating entities primarily provide services under the name Resources Global Professionals (“RGP” or the “Company”). The Company provides consulting and business initiative support services to its global client base in the areas of accounting; finance; corporate governance, risk and compliance management; corporate advisory, strategic communications and restructuring; information management; human capital; supply chain management; and legal and regulatory.
We assist our clients by providing “intellectual capital on demand” to support projects requiring specialized expertise in areas such as:
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Finance and accounting services including process transformation and improvement; financial reporting and analysis; technical and operational accounting; merger and acquisition due diligence; audit response; implementation of new accounting standards such as the revenue recognition pronouncement; and remediation support
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Information management services including strategy development; program and project management; business and technology integration; data strategy including security and privacy; and business performance management (such as core planning and consolidation systems)
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Corporate advisory, strategic communications and restructuring services
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Corporate governance, risk and compliance management services including contract and regulatory compliance efforts under, for example, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes Oxley Act of 2002 (“Sarbanes”); Enterprise Risk Management; internal controls management; and operation and information technology (“IT”) audits
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Supply chain management services including supply chain strategy development; procurement and supplier management; logistics and materials management; supply chain planning and forecasting; and Unique Device Identification compliance
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Human capital services including change management; organization development and effectiveness; and optimization of human resources technology and operations
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Legal and regulatory services with projects, secondments or tactical needs including commercial transactions; compliance initiatives; law department operations; and business strategy and litigation support
We were founded in June 1996 by a team at Deloitte LLP (“Deloitte”), led by our chairman, Donald B. Murray, who was then a senior partner with Deloitte. Our founders created the Company to capitalize on the increasing demand for high quality outsourced professional services. We operated as a part of Deloitte until April 1999. In April 1999, we completed a management-led buyout. In December 2000, we completed our initial public offering of common stock and began trading on the NASDAQ Stock Market. We currently trade on the NASDAQ Global Select Market. We operate under the acronym RGP, the branding for our operating entity name of Resources Global Professionals.
Our business model combines the client service orientation and commitment to quality from our legacy as part of a Big Four accounting firm with the entrepreneurial culture of an innovative, dynamic company. We are positioned to take advantage of what we believe are two continuing trends in the outsourced professional services industry: global demand for flexible, outsourced professional services by corporate clients and highly-experienced professionals interested in working in a non-traditional professional services firm. We believe our business model allows us to simultaneously offer challenging yet flexible career opportunities to attract well qualified, experienced professionals and to attract clients with enterprise-wide, global consulting needs.
As of May 28, 2016, we employed or contracted with 2,511 consultants serving a diverse base of over 1,800 clients ranging from large multinational corporations to mid-sized companies to small entrepreneurial entities, in a broad range of industries. Our
consultants have professional experience in a wide range of industries and functional areas and tend to be in the latter third of their careers, many with advanced professional degrees or designations. We offer our consultants careers that combine the flexibility of project-based consulting work with many of the advantages of working for a traditional professional services firm.
Our offices serve our multinational clients throughout the world with a client focus rather than from a regional/office perspective. To enhance our ability to serve multinational clients, we served our clients from 45 offices in the United States and from 23 offices within 19 countries abroad as of May 28, 2016.
Revenue from the Company’s major geographic areas was as follows (in thousands):
See Note 14 - Segment Information and Enterprise Reporting - to the Consolidated Financial Statements for additional information concerning the Company’s domestic and international operations and Part I Item 1A.
ITEM 1A. RISK FACTORS.
You should carefully consider the risks described below before making a decision to buy shares of our common stock. The order of the risks is not an indication of their relative weight or importance. The risks and uncertainties described below are not the only ones facing us but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely impact and impair our business. If any of the following risks actually occur, our business could be harmed. In that case, the trading price of our common stock could decline, and you might lose all or part of your investment. When determining whether to buy our common stock, you should also refer to the other information in this Annual Report on Form 10-K, including our financial statements and the related notes.
A future economic downturn or change in the use of outsourced professional services consultants could adversely affect our business.
While we believe general economic conditions continue to improve in most parts of the world, there continues to be some uncertainty regarding general economic conditions within some regions and countries in which we operate, leading to reluctance on the part of some multinational companies to spend on discretionary projects. Deterioration of or increased uncertainty related to the global economy or tightening credit markets could result in a reduction in the demand for our services and adversely affect our business in the future. In addition, the use of professional services consultants on a project-by-project basis could decline for non-economic reasons. In the event of a reduction in the demand for our consultants, our financial results would suffer.
Economic deterioration at one or more of our clients may also affect our allowance for doubtful accounts. Our estimate of losses resulting from our clients’ failure to make required payments for services rendered has historically been within our expectations and the provisions established. However, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of our clients could cause unfavorable trends in receivable collections and cash flows and additional allowances may be required. These additional allowances could materially affect the Company’s future financial results.
In addition, we are required to periodically, but at least annually, assess the recoverability of certain assets, including deferred tax assets and goodwill. Softening of the United States economy and international economies could adversely affect our evaluation of the recoverability of deferred tax assets, requiring us to record additional tax valuation allowances. Our assessment of impairment of goodwill is currently based upon comparing our market capitalization to our net book value. Therefore, a significant downturn in the future market value of our stock could potentially result in impairment reductions of goodwill and such an adjustment could materially affect the Company’s future financial results and financial condition.
The market for professional services is highly competitive, and if we are unable to compete effectively against our competitors, our business and operating results could be adversely affected.
We operate in a competitive, fragmented market, and we compete for clients and consultants with a variety of organizations that offer similar services. The competition is likely to increase in the future due to the expected growth of the market and the relatively few barriers to entry. Our principal competitors include:
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consulting firms;
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local, regional, national and international accounting and other traditional professional services firms;
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independent contractors;
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traditional and Internet-based staffing firms; and
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the in-house or former in-house resources of our clients.
We cannot assure you that we will be able to compete effectively against existing or future competitors. Many of our competitors have significantly greater financial resources, greater revenues and greater name recognition, which may afford them an advantage in attracting and retaining clients and consultants and in offering pricing concessions. Some of our competitors in certain markets do not provide medical and other benefits to their consultants, thereby allowing them to potentially charge lower rates to clients. In addition, our competitors may be able to respond more quickly to changes in companies’ needs and developments in the professional services industry.
Our business depends upon our ability to secure new projects from clients and, therefore, we could be adversely affected if we fail to do so.
We do not have long-term agreements with our clients for the provision of services and our clients may terminate engagements with us at any time. The success of our business is dependent on our ability to secure new projects from clients. For example, if we are unable to secure new client projects because of improvements in our competitors’ service offerings, or because of a change in government regulatory requirements, or because of an economic downturn decreasing the demand for outsourced professional services, our business is likely to be materially adversely affected. New impediments to our ability to secure projects from clients may develop over time, such as the increasing use by large clients of in-house procurement groups that manage their relationship with service providers.
We may be legally liable for damages resulting from the performance of projects by our consultants or for our clients’ mistreatment of our personnel.
Many of our engagements with our clients involve projects or services that are critical to our clients’ businesses. If we fail to meet our contractual obligations, we could be subject to legal liability or damage to our reputation, which could adversely affect our business, operating results and financial condition. While we are not currently subject to any client-related legal claims which we believe are material, it remains possible, because of the nature of our business, that we may be involved in litigation in the future that could materially affect our future financial results. Claims brought against us could have a serious negative effect on our reputation and on our business, financial condition and results of operations.
Because we are in the business of placing our personnel in the workplaces of other companies, we are subject to possible claims by our personnel alleging discrimination, sexual harassment, negligence and other similar activities by our clients. We may also be subject to similar claims from our clients based on activities by our personnel. The cost of defending such claims, even if groundless, could be substantial and the associated negative publicity could adversely affect our ability to attract and retain personnel and clients.
We may not be able to grow our business, manage our growth or sustain our current business.
Historically, we have grown by opening new offices and by increasing the volume of services provided through existing offices. Since the first quarter of fiscal 2010, we have had difficulty sustaining consistent revenue growth either quarter-over-quarter or in sequential quarters. There can be no assurance that we will be able to maintain or expand our market presence in our current locations or to successfully enter other markets or locations. Our ability to continue to grow our business will depend upon an improving global economy and a number of factors, including our ability to:
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grow our client base;
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expand profitably into new geographies;
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provide additional professional services offerings;
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hire qualified and experienced consultants;
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maintain margins in the face of pricing pressures;
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manage costs; and
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maintain or grow revenues and increase other service offerings from existing clients.
Even if we are able to resume more rapid growth in our revenue, the growth will result in new and increased responsibilities for our management as well as increased demands on our internal systems, procedures and controls, and our administrative, financial, marketing and other resources. For instance, a limited number of clients are requesting that certain engagements be of a fixed fee nature rather than our traditional hourly time and materials approach, thus shifting a portion of the burden of financial risk and monitoring to us. Failure to adequately respond to these new responsibilities and demands may adversely affect our business, financial condition and results of operations.
Our ability to serve clients internationally is integral to our strategy and our international activities expose us to additional operational challenges that we might not otherwise face.
Our international activities require us to confront and manage a number of risks and expenses that we would not face if we conducted our operations solely in the United States. Any of these risks or expenses could cause a material negative effect on our operating results. These risks and expenses include:
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difficulties in staffing and managing foreign offices as a result of, among other things, distance, language and cultural differences;
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less flexible or future changes in labor laws and regulations in the U.S. and in foreign countries;
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expenses associated with customizing our professional services for clients in foreign countries;
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foreign currency exchange rate fluctuations when we sell our professional services in denominations other than United States’ dollars;
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protectionist laws and business practices that favor local companies;
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political and economic instability in some international markets;
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multiple, conflicting and changing government laws and regulations;
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trade barriers;
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reduced protection for intellectual property rights in some countries; and
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potentially adverse tax consequences.
We have acquired, and may continue to acquire, companies, and these acquisitions could disrupt our business.
We have acquired several companies and we may continue to acquire companies in the future. Entering into an acquisition entails many risks, any of which could harm our business, including:
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diversion of management’s attention from other business concerns;
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failure to integrate the acquired company with our existing business;
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failure to motivate, or loss of, key employees from either our existing business or the acquired business;
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potential impairment of relationships with our employees and clients;
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additional operating expenses not offset by additional revenue;
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incurrence of significant non-recurring charges;
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incurrence of additional debt with restrictive covenants or other limitations;
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addition of significant amounts of intangible assets, including goodwill, that are subject to periodic assessment of impairment, primarily through comparison of market value of our stock to our net book value, with such impairment potentially resulting in a material impact on our future financial results and financial condition;
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dilution of our stock as a result of issuing equity securities; and
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assumption of liabilities of the acquired company.
We must provide our clients with highly qualified and experienced consultants, and the loss of a significant number of our consultants, or an inability to attract and retain new consultants, could adversely affect our business and operating results.
Our business involves the delivery of professional services, and our success depends on our ability to provide our clients with highly qualified and experienced consultants who possess the skills and experience necessary to satisfy their needs. At various
times, such professionals can be in great demand, particularly in certain geographic areas or if they have specific skill sets. Our ability to attract and retain consultants with the requisite experience and skills depends on several factors including, but not limited to, our ability to:
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provide our consultants with either full-time or flexible-time employment;
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obtain the type of challenging and high-quality projects that our consultants seek;
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pay competitive compensation and provide competitive benefits; and
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provide our consultants with flexibility as to hours worked and assignment of client engagements.
There can be no assurance that we will be successful in accomplishing any of these factors and, even if we are, we cannot assure that we will be successful in attracting and retaining the number of highly qualified and experienced consultants necessary to maintain and grow our business.
Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees.
We have historically used stock options as a component of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention and provide competitive compensation packages. A significant portion of our options outstanding awarded prior to fiscal 2012 are priced at more than the current per share market value of our stock, limiting the grants from those years as a significant incentive to retain employees.
Our computer hardware and software and telecommunications systems are susceptible to damage, breach or interruption.
The management of our business is aided by the uninterrupted operation of our computer and telecommunication systems. These systems are vulnerable to security breaches, natural disasters or other catastrophic events, computer viruses, or other interruptions or damage stemming from power outages, equipment failure or unintended usage by employees. In particular, our employees may have access or exposure to personally identifiable or otherwise confidential information and customer data and systems, the misuse of which could result in legal liability. In addition, we rely on information technology systems to process, transmit and store electronic information and to communicate among our locations around the world and with our clients, partners and consultants. The breadth and complexity of this infrastructure increases the potential risk of security breaches. Security breaches, including cyber-attacks or cyber-intrusions by computer hackers, foreign governments, cyber terrorists or others with grievances against the industry in which we operate or us in particular, may disable or damage the proper functioning of our networks and systems. It is possible that our security controls over personal and other data may not prevent unauthorized access to, or destruction, loss, theft, misappropriation or release of personally identifiable or other proprietary, confidential, sensitive or valuable information of ours or others; this access could lead to potential unauthorized disclosure of confidential Company or client information that others could use to compete against us or for other disruptive, destructive or harmful purposes and outcomes. Any such disclosure or damage to our networks and systems could subject us to third party claims against us and reputational harm. If these events occur, our ability to attract new clients may be impaired or we may be subjected to damages or penalties. In addition, system-wide or local failures of these information technology systems could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Our cash and short-term investments are subject to economic risk.
The Company invests its cash, cash equivalents and short-term investments in foreign and domestic bank deposits, money market funds, commercial paper and certificates of deposit. Certain of these investments are subject to general credit, liquidity, market and interest rate risks. In the event these risks caused a decline in value of any of the Company’s investments, it could adversely affect the Company’s financial condition.
Our business could suffer if we lose the services of one or more key members of our senior management.
Our future success depends upon the continued employment of our senior management team. The unforeseen departure of one or more key members of our senior management team could significantly disrupt our operations.
Our quarterly financial results may be subject to significant fluctuations that may increase the volatility of our stock price.
Our results of operations could vary significantly from quarter to quarter. Factors that could affect our quarterly operating results include:
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our ability to attract new clients and retain current clients;
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the mix of client projects;
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the announcement or introduction of new services by us or any of our competitors;
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the expansion of the professional services offered by us or any of our competitors into new locations both nationally and internationally;
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changes in the demand for our services by our clients;
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the entry of new competitors into any of our markets;
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the number of consultants eligible for our offered benefits as the average length of employment with the Company increases;
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the amount of vacation hours used by consultants or number of holidays in a quarter, particularly the day of the week on which they occur;
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availability of consultants with the requisite skills in demand by clients;
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changes in the pricing of our professional services or those of our competitors;
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variation in foreign exchange rates from one quarter to the next used to translate the financial results of our international operations;
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the amount and timing of operating costs and capital expenditures relating to management and expansion of our business;
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the timing of acquisitions and related costs, such as compensation charges that fluctuate based on the market price of our common stock; and
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the periodic fourth quarter consisting of 14 weeks, which occurred during the fiscal year ended May 31, 2014 and next occurs during the fiscal year ending May 30, 2020.
Due to these factors, we believe that quarter-to-quarter comparisons of our results of operations are not meaningful indicators of future performance. It is possible that in some future periods, our results of operations may be below the expectations of investors. If this occurs, the price of our common stock could decline.
If our internal control over financial reporting does not comply with the requirements of Sarbanes, our business and stock price could be adversely affected.
Section 404 of Sarbanes requires us to evaluate periodically the effectiveness of our internal control over financial reporting, and to include a management report assessing the effectiveness of our internal controls as of the end of each fiscal year. Our management report on internal controls is contained in this Annual Report on Form 10-K. Section 404 also requires our independent registered public accountant to report on our internal control over financial reporting.
Our management does not expect that our internal control over financial reporting will prevent all errors or acts of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, involving us have been, or will be, detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts of a person, or by collusion among two or more people, or by management override of controls. The design of any system of controls is based in
part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraudulent acts may occur and not be detected.
Although our management has determined, and our independent registered public accountant has attested, that our internal control over financial reporting was effective as of May 28, 2016, we cannot assure you that we or our independent registered public accountant will not identify a material weakness in our internal controls in the future. A material weakness in our internal control over financial reporting may require management and our independent registered public accountant to evaluate our internal controls as ineffective. If our internal control over financial reporting is not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and our stock price. Additionally, if our internal control over financial reporting otherwise fails to comply with the requirements of Sarbanes, our business and stock price could be adversely affected.
We may be subject to laws and regulations that impose difficult and costly compliance requirements and subject us to potential liability and the loss of clients.
In connection with providing services to clients in certain regulated industries, such as the gaming and energy industries, we are subject to industry-specific regulations, including licensing and reporting requirements. Complying with these requirements is costly and, if we fail to comply, we could be prevented from rendering services to clients in those industries in the future. Additionally, changes in these requirements, or in other laws applicable to us, in the future could increase our costs of compliance.
In addition, we may face challenges from certain state regulatory bodies governing the provision of certain professional services, like legal services or audit services. The imposition of such regulations could require additional financial and operational burdens on our business.
It may be difficult for a third party to acquire the Company, and this could depress our stock price.
Delaware corporate law and our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay, defer or prevent a change of control of the Company or our management. These provisions could also discourage proxy contests and make it difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that future investors are willing to pay for your shares. These provisions:
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authorize our board of directors to establish one or more series of undesignated preferred stock, the terms of which can be determined by the board of directors at the time of issuance;
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divide our board of directors into three classes of directors, with each class serving a staggered three-year term. Because the classification of the board of directors generally increases the difficulty of replacing a majority of the directors, it may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us and may make it difficult to change the composition of the board of directors;
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prohibit cumulative voting in the election of directors which, if not prohibited, could allow a minority stockholder holding a sufficient percentage of a class of shares to ensure the election of one or more directors;
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require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing;
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state that special meetings of our stockholders may be called only by the chairman of the board of directors, by our chief executive officer, by the board of directors after a resolution is adopted by a majority of the total number of authorized directors, or by the holders of not less than 10% of our outstanding voting stock;
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establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting;
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provide that certain provisions of our certificate of incorporation and bylaws can be amended only by supermajority vote (a 66 2⁄3 % majority) of the outstanding shares. In addition, our board of directors can amend our bylaws by majority vote of the members of our board of directors;
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allow our directors, not our stockholders, to fill vacancies on our board of directors; and
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provide that the authorized number of directors may be changed only by resolution of the board of directors.
We are required to recognize compensation expense related to employee stock options and our employee stock purchase plan. There is no assurance that the expense that we are required to recognize measures accurately the value of our share-based payment awards and the recognition of this expense could cause the trading price of our common stock to decline.
We measure and recognize compensation expense for all stock-based compensation based on estimated values. Thus, our operating results contain a non-cash charge for stock-based compensation expense related to employee stock options and our employee stock purchase plan. In general, accounting guidance requires the use of an option-pricing model to determine the value of share-based payment awards. This determination of value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion the existing valuation models may not provide an accurate measure of the value of our employee stock options. Although the value of employee stock options is determined using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
We may be unable to or elect not to pay our quarterly dividend payment.
The Company pays a regular quarterly dividend, subject to quarterly board of director approval. The payment of, or continuation of, the quarterly dividend is at the discretion of our board of directors and is dependent upon our financial condition, results of operations, capital requirements, general business conditions, tax treatment of dividends in the United States, potential future contractual restrictions contained in credit agreements and other agreements and other factors deemed relevant by our board of directors. We can give no assurance that dividends will be declared and paid in the future. The failure to pay the quarterly dividend or the discontinuance of the quarterly dividend could adversely affect the trading price of our common stock.
We may be unable to adequately protect our intellectual property rights, including our brand name. If we fail to adequately protect our intellectual property rights, the value of such rights may diminish and our results of operations and financial condition may be adversely affected.
We believe that establishing, maintaining and enhancing the RGP and Resources Global Professionals brand name is essential to our business. We have applied for United States and foreign registrations on these service marks. We have previously obtained United States registrations on our Resources Connection service mark and puzzle piece logo, Registration No. 2,516,522 registered December 11, 2001; No. 2,524,226 registered January 1, 2002; and No. 2,613,873, registered September 3, 2002, as well as certain foreign registrations. On March 29, 2013, we filed a United States trademark application for our RGP service mark and puzzle piece logo, Serial No. 85/890,836 as well as United States trademark applications on our RGP service mark, puzzle piece and tag line, Serial No. 85/890,838; our RGP Healthcare service mark and puzzle piece logo, Serial No. 85/890,839; our RGP Legal service mark and puzzle piece logo, Serial No. 85/890,843; and our RGP Search service mark and puzzle piece logo, Serial No. 85/890,845. We received approval of these applications and registration was granted as of December 2, 2014.
We had been aware from time to time of other companies using the name “Resources Connection” or some variation thereof and this contributed to our decision to adopt the operating company name of Resources Global Professionals. We obtained United States registration on our Resources Global Professionals service mark, Registration No. 3,298,841 registered September 25, 2007. However, our rights to this service mark are not currently protected in some of our foreign registrations, and there is no guarantee that any of our pending applications for such registration (or any appeals thereof or future applications) will be successful. Although we are not aware of other companies using the name “Resources Global Professionals” at this time, there could be potential trade name or service mark infringement claims brought against us by the users of these similar names and marks and those users may have service mark rights that are senior to ours. If these claims were successful, we could be forced to cease using
the service mark “Resources Global Professionals” even if an infringement claim is not brought against us. It is also possible that our competitors or others will adopt service names similar to ours or that our clients will be confused by another company using a name, service mark or trademark similar to ours, thereby impeding our ability to build brand identity. We cannot assure you that our business would not be adversely affected if confusion did occur or if we were required to change our name.
In 2014, we developed a software product for the healthcare industry to address enterprise-wide incident management and patient safety issues. We have applied for registration in the United States and in the appropriate jurisdictions on the service mark for this product. On February 13, 2014, we filed a Nonprovisional Application, App. No. H180290, with the United States Patent Office for patent protection for this invention. There is no guarantee that this pending patent application will be approved. In addition, if our patent application is approved, third parties may knowingly or unknowingly infringe our proprietary rights and third parties may challenge the proprietary rights held by us. In any or each of these cases, we may be required to expend significant time and expense in order to prevent infringement or to enforce our rights.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES.
As of May 28, 2016, we maintained 45 domestic offices, all under operating lease agreements (except for the Irvine, California location), in the following metropolitan areas:
Phoenix, Arizona
Honolulu, Hawaii
Cincinnati, Ohio
Irvine, California (2)
Chicago, Illinois
Cleveland, Ohio
Los Angeles, California (2)
Oakbrook Terrace, Illinois
Columbus, Ohio
Sacramento, California
Indianapolis, Indiana
Tulsa, Oklahoma
Santa Clara, California
Boston, Massachusetts
Portland, Oregon
San Diego, California
Detroit, Michigan
Philadelphia, Pennsylvania
San Francisco, California
Minneapolis, Minnesota
Pittsburgh, Pennsylvania
Walnut Creek, California
Kansas City, Missouri
Nashville, Tennessee
Woodland Hills, California
St. Louis, Missouri
Dallas, Texas
Denver, Colorado
Las Vegas, Nevada
Houston, Texas
Hartford, Connecticut
Parsippany, New Jersey
San Antonio, Texas
Stamford, Connecticut
Princeton, New Jersey
Seattle, Washington
Fort Lauderdale, Florida
New York, New York
Milwaukee, Wisconsin
Tampa, Florida
Charlotte, North Carolina
Washington, D.C. (McLean, Virginia)
Atlanta, Georgia
As of May 28, 2016, we maintained 23 international offices under operating lease agreements, located in the following cities and countries:
Sydney, Australia
Dublin, Ireland
Hong Kong, People’s Republic of China
Brussels, Belgium
Milan, Italy
Shanghai, People’s Republic of China
Calgary, Canada
Tokyo, Japan
Manila, Philippines
Toronto, Canada
Mexico City, Mexico
Singapore
Paris, France
Amsterdam (Utrecht), Netherlands
Seoul, South Korea
Frankfurt, Germany
Oslo, Norway
Stockholm, Sweden
Bangalore, India
Beijing, People’s Republic of China
Taipei, Taiwan
Mumbai, India
London, United Kingdom
Our corporate offices are located in Irvine, California. We own an approximately 56,200 square foot office building in Irvine, California, of which we occupied approximately 38,000 square feet as of May 28, 2016, including space occupied by our Orange County, California practice. Approximately 18,200 square feet is leased to independent third parties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently subject to any material legal proceedings; however, we are a party to various legal proceedings arising in the ordinary course of our business.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Price Range of Common Stock
Our common stock has traded on the NASDAQ Global Select Market under the symbol “RECN” since December 15, 2000. Prior to that time, there was no public market for our common stock. The approximate number of holders of record of our common stock as of July 11, 2016 was 40 (a holder of record is the name of an individual or entity that an issuer carries in its records as the registered holder (not necessarily the beneficial owner) of the issuer’s securities).
The following table sets forth the range of high and low closing sales prices reported on the NASDAQ Global Select Market for our common stock for the periods indicated.
Dividend Policy
Our board of directors has established a quarterly dividend, subject to quarterly board of directors’ approval. Pursuant to declaration and approval by our board of directors, we declared a dividend of $0.10 per share of common stock during each quarter in fiscal 2016 and $0.08 per share of common stock during each quarter in fiscal 2015. On April 21, 2016, our board of directors declared a regular quarterly dividend of $0.10 per share of our common stock. The dividend was payable on June 16, 2016 to stockholders of record at the close of business on May 19, 2016. Continuation of the quarterly dividend will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, capital requirements, general business condition, contractual restrictions contained in our current or future credit agreements and other agreements, and other factors deemed relevant by our board of directors.
Issuances of Unregistered Securities
None.
Issuer Purchases of Equity Securities
In July 2015, our board of directors approved a stock repurchase program, authorizing the purchase, at the discretion of our senior executives, of our common stock for an aggregate dollar limit not to exceed $150.0 million. This program commenced in February 2016 upon the exhaustion of the previous stock repurchase program of $150 million approved by the Company’s board of directors in April 2011. Subject to the aggregate dollar limit, the currently authorized stock repurchase program does not have an expiration date. Repurchases under the program may take place in the open market or in privately negotiated transactions and may be made pursuant to a Rule 10b5-1 plan.
The table below provides information regarding our stock repurchases made during the fourth quarter of fiscal 2016 under our stock repurchase program.
Performance Graph
Set forth below is a line graph comparing the annual percentage change in the cumulative total return to the holders of our common stock with the cumulative total return of the Russell 3000 Index, a customized peer group consisting of eleven companies listed below the following table and a combined classification of companies under Standard Industry Codes as 8742-Management Consulting Services for the five years ended May 28, 2016. The graph assumes $100 was invested on May 28, 2011 in our common stock and in each index (based on prices from the close of trading on May 28, 2011), and that all dividends are reinvested. Stockholder returns over the indicated period may not be indicative of future stockholder returns.
The information contained in the performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference into such filing.
The Company’s customized peer group includes the following eleven professional services companies that we believe reflect the competitive landscape in which the Company operates and acquires talent: CRA International, Inc.; FTI Consulting, Inc.; Heidrick & Struggles International, Inc.; Hudson Global, Inc.; Huron Consulting Group Inc.; ICF International, Inc.; Kforce, Inc.; Korn/Ferry International; Navigant Consulting, Inc.; The Advisory Board Company; and The Corporate Executive Board Company. The Company’s compensation committee, a committee of our board of directors comprised of independent directors, reviews the composition of the peer group annually to ensure its alignment with the Company’s size, practice areas, business model delivery and geographic reach.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
You should read the following selected historical consolidated financial data in conjunction with our Consolidated Financial Statements and related notes beginning on page 48 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 33. The Consolidated Statements of Operations data for the years ended May 25, 2013 and May 26, 2012 and the Consolidated Balance Sheet data at May 31, 2014, May 25, 2013 and May 26, 2012 were derived from our audited Consolidated Financial Statements that are not included in this Annual Report on Form 10-K. The Consolidated Statements of Operations data for the years ended May 28, 2016, May 30, 2015 and May 31, 2014 and the Consolidated Balance Sheet data at May 28, 2016 and May 30, 2015 were derived from our audited Consolidated Financial Statements that are included elsewhere in this Annual Report on Form 10-K. Historical results are not necessarily indicative of results that may be expected for any future periods.
(1) The year ended May 31, 2014 consisted of 53 weeks. All other years presented consisted of 52 weeks.
(2) During the year ended May 26, 2012, the Company determined that the estimated contingent consideration accrued in a prior year and potentially payable to employees related to the Sitrick Brincko Group acquisition would not be payable and the accrual was reversed.
(3) The contingent consideration adjustment includes a net reduction of the contingent consideration liability related to the purchase of Sitrick Brincko Group of $33.4 million for the year ended May 26, 2012. The fiscal 2012 net adjustment is related to revised estimates of fair value of contingent consideration based upon updates to the probability weighted assessment of various projected average earnings before interest, taxes, depreciation and amortization (“EBITDA”) scenarios associated with the acquisition of Sitrick Brincko Group.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in Part I Item 1A. “Risk Factors.” and elsewhere in this Annual Report on Form 10-K.
Overview
RGP is a multinational consulting firm that provides consulting and business initiative support services to its global client base in the areas of accounting; finance; corporate governance, risk and compliance management; corporate advisory, strategic communications and restructuring; information management; human capital; supply chain management; and legal and regulatory. We assist our clients with projects requiring specialized expertise in:
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Finance and accounting services including process transformation and improvement; financial reporting and analysis; technical and operational accounting; merger and acquisition due diligence; audit response; implementation of new accounting standards such as the new requirements for revenue recognition; and remediation support
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Information management services including strategy development; program and project management; business and technology integration; data strategy, including data security and privacy; and Business Performance Management
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Corporate advisory, strategic communications and restructuring services
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Corporate governance, risk and compliance management services including contract and regulatory compliance efforts under, for example, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes Oxley Act of 2002 (“Sarbanes”); Enterprise Risk Management; internal controls management; and operation and IT audits
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Supply chain management services including supply chain strategy development; procurement and supplier management; logistics and materials management; supply chain planning and forecasting; and Unique Device Identification compliance
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Human capital services including change management; organization development and effectiveness; and optimization of human resources technology and operations
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Legal and regulatory services with projects, secondments or tactical needs including commercial transactions; compliance initiatives; law department operations and business strategy; and litigation support
We were founded in June 1996 by a team at Deloitte, led by our chairman, Donald B. Murray, who was then a senior partner with Deloitte. Our founders created Resources Connection to capitalize on the increasing demand for high quality outsourced professional services. We operated as a part of Deloitte until April 1999. In April 1999, we completed a management-led buyout in partnership with several investors. In December 2000, we completed our initial public offering of common stock and began trading on the NASDAQ Stock Market. We currently trade on the NASDAQ Global Select Market. We operate under the acronym RGP, branding for our operating entity name of Resources Global Professionals.
We operated solely in the United States until fiscal year 2000, when we opened our first three international offices and began to expand geographically to meet the demand for project consulting services across the world. As of May 28, 2016, we served clients from offices in 20 countries, including 23 international offices and 45 offices in the United States. Our global footprint allows the Company to support the global initiatives of our multinational client base.
We expect to continue opportunistic domestic and multinational expansion while also investing in complementary professional services lines that we believe will augment our service offerings.
We primarily charge our clients on an hourly basis for the professional services of our consultants. We recognize revenue once services have been rendered and invoice the majority of our clients in the United States on a weekly basis. Some of our clients
served by our international offices are billed on a monthly basis. Our clients are contractually obligated to pay us for all hours billed. To a much lesser extent, we also earn revenue if a client hires one of our consultants. This type of contractually non-refundable revenue is recognized at the time our client completes the hiring process and represented 0.5% of our revenue for each of the years ended May 28, 2016, May 30, 2015 and May 31, 2014. We periodically review our outstanding accounts receivable balance and determine an estimate of the amount of those receivables we believe may prove uncollectible. Our provision for bad debts, if any, is included in our selling, general and administrative expenses.
The costs to pay our professional consultants and all related benefit and incentive costs, including provisions for paid time off and other employee benefits, are included in direct cost of services. We pay most of our consultants on an hourly basis for all hours worked on client engagements and, therefore, direct cost of services tends to vary directly with the volume of revenue we earn. We expense the benefits we pay to our consultants as they are earned. These benefits include paid time off and holidays; a discretionary bonus plan; subsidized group health, dental and life insurance programs; a matching 401(k) retirement plan; the ability to participate in the Company’s Employee Stock Purchase Plan (“ESPP”); and professional development and career training. In addition, we pay the related costs of employment, including state and federal payroll taxes, workers’ compensation insurance, unemployment insurance and other costs. Typically, a consultant must work a threshold number of hours to be eligible for all of the benefits. We recognize direct cost of services when incurred.
Selling, general and administrative expenses include the payroll and related costs of our internal management as well as general and administrative, marketing and recruiting costs. Our sales and marketing efforts are led by our management team who are salaried employees and earn bonuses based on operating results for the Company as a whole and each individual’s performance.
The Company’s fiscal year consists of 52 or 53 weeks, ending on the Saturday in May closest to May 31. Fiscal years 2016 and 2015 consisted of four 13 week quarters and a total of 52 weeks of activity for the fiscal year. For fiscal years of 53 weeks, such as fiscal 2014, the first three quarters consisted of 13 weeks each and the fourth quarter consisted of 14 weeks.
Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The following represents a summary of our critical accounting policies, defined as those policies that we believe: (a) are the most important to the portrayal of our financial condition and results of operations and (b) involve inherently uncertain issues that require management’s most difficult, subjective or complex judgments.
Valuation of long-lived assets - We assess the potential impairment of long-lived tangible and intangible assets periodically or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our goodwill is not subject to periodic amortization. This asset is considered to have an indefinite life and its carrying value is required to be assessed by us for impairment at least annually. Depending on future market values of our stock, our operating performance and other factors, these assessments could potentially result in impairment reductions of this intangible asset in the future and this adjustment may materially affect the Company’s future financial results and financial condition.
Allowance for doubtful accounts - We maintain an allowance for doubtful accounts for estimated losses resulting from our clients failing to make required payments for services rendered. We estimate this allowance based upon our knowledge of the financial condition of our clients (which may not include knowledge of all significant events), review of historical receivable and reserve trends and other pertinent information. While such losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A
significant change in the liquidity or financial position of our clients could cause unfavorable trends in receivable collections and additional allowances may be required. These additional allowances could materially affect the Company’s future financial results.
Income taxes - In order to prepare our Consolidated Financial Statements, we are required to make estimates of income taxes, if applicable, in each jurisdiction in which we operate. The process incorporates an assessment of any current tax exposure together with temporary differences resulting from different treatment of transactions for tax and financial statement purposes. These differences result in deferred tax assets and liabilities that are included in our Consolidated Balance Sheets. The recovery of deferred tax assets from future taxable income must be assessed and, to the extent recovery is not likely, we will establish a valuation allowance. An increase in the valuation allowance results in recording additional tax expense and any such adjustment may materially affect the Company’s future financial result. If the ultimate tax liability differs from the amount of tax expense we have reflected in the Consolidated Statements of Operations, an adjustment of tax expense may need to be recorded and this adjustment may materially affect the Company’s future financial results and financial condition.
Revenue recognition - We primarily charge our clients on an hourly basis for the professional services of our consultants. We recognize revenue once services have been rendered and invoice the majority of our clients in the United States on a weekly basis. Some of our clients served by our international offices are billed on a monthly basis. Our clients are contractually obligated to pay us for all hours billed. To a much lesser extent, we also earn revenue if a client hires one of our consultants. This type of contractually non-refundable revenue is recognized at the time our client completes the hiring process.
Stock-based compensation - Under our 2014 Performance Incentive Plan, officers, employees, and outside directors have received or may receive grants of restricted stock, stock units, options to purchase common stock or other stock or stock-based awards. Under our ESPP, eligible officers and employees may purchase our common stock in accordance with the terms of the plan.
The Company estimates a value for employee stock options on the date of grant using an option-pricing model. We have elected to use the Black-Scholes option-pricing model which takes into account assumptions regarding a number of highly complex and subjective variables. These variables include the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Additional variables to be considered are the expected term, expected dividends and the risk-free interest rate over the expected term of our employee stock options. In addition, because stock-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures must be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If facts and circumstances change and we employ different assumptions in future periods, the compensation expense recorded may differ materially from the amount recorded in the current period.
The Company uses its historical volatility over the expected life of the stock option award to estimate the expected volatility of the price of its common stock. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The impact of expected dividends ($0.10 per share for each quarter during fiscal 2016 and $0.08 per share for each quarter of fiscal 2015) is also incorporated in determining the estimated value per share of employee stock option grants. Such dividends are subject to quarterly board of director approval. The Company’s expected life of stock option grants is 5.6 years for non-officers and 7.7 years for officers. The Company uses its historical volatility over the expected life of the stock option award to estimate the expected volatility of the price of its common stock. The Company reviews the underlying assumptions related to stock-based compensation at least annually.
We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Results of Operations
The following tables set forth, for the periods indicated, our Consolidated Statements of Operations data. These historical results are not necessarily indicative of future results.
Our operating results for the periods indicated are expressed as a percentage of revenue below.
We also assess the results of our operations using EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin. EBITDA is defined as our earnings before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus stock-based compensation expense. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by revenue. These measures assist management in assessing our core operating performance. The following table presents EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin for the periods indicated and includes a reconciliation of such measures to net income, the most directly comparable GAAP financial measure:
The financial measures and key performance indicators we use to assess our financial and operating performance above are not defined by, or calculated in accordance with, GAAP. A non-GAAP financial measure is defined as a numerical measure of a company’s financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the consolidated statement of operations; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. We believe that EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin provide useful information to our investors because they are financial measures used by management to assess the core performance of the Company. EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not measurements of financial performance or liquidity under GAAP and should not be considered in isolation or construed as substitutes for net income or other cash flow data prepared in accordance with GAAP for purposes of analyzing our profitability or liquidity. These measures should be considered in addition to, and not as a substitute for, net income, earnings per share, cash flows or other measures of financial performance prepared in conformity with GAAP.
Further, EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin have the following limitations:
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Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
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Equity based compensation is an element of our long-term incentive compensation program, although we exclude it as an expense from Adjusted EBITDA when evaluating our ongoing operating performance for a particular period; and
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Other companies in our industry may calculate Adjusted EBITDA and Adjusted EBITDA Margin differently than we do, limiting their usefulness as a comparative measure.
Because of these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin should not be considered a substitute for performance measures calculated in accordance with GAAP.
Year Ended May 28, 2016 Compared to Year Ended May 30, 2015
Percentage change computations are based upon amounts in thousands.
Revenue. Revenue increased $7.9 million, or 1.3%, to $598.5 million for the year ended May 28, 2016 from $590.6 million for the year ended May 30, 2015. We deliver our services to clients, whether multi-national or locally based, in a similar fashion across the globe. In fiscal 2016, revenue increased in North America and Asia Pacific but declined in Europe as compared to fiscal 2015 as noted in the table below. Bill rates increased 0.8% on average in fiscal 2016 compared to fiscal 2015, while hours worked increased 1.4% over the same period. During fiscal 2016, revenue declined with certain clients in the energy services industries due to the on-going turmoil in the energy market, primarily in the U.S. The timing of stabilization with clients in this industry is uncertain.
The number of consultants on assignment at the end of fiscal 2016 was 2,511 compared to the 2,516 consultants engaged at the end of fiscal 2015 (the average number of consultants assigned was 2,503 in fiscal 2016 compared to 2,487 in fiscal 2015).
We operated 68 offices (23 abroad) at both May 28, 2016 and May 30, 2015. Our clients do not sign long-term contracts with us. As such, there can be no assurance as to future demand levels for the services that we provide or that future results can be reliably predicted by considering past trends.
Revenue for the Company’s major geographies across the globe consisted of the following (dollars in thousands):
Our financial results are subject to fluctuations in the exchange rates of foreign currencies in relation to the United States dollar. Revenues denominated in foreign currencies are translated into United States dollars at the monthly average exchange rates in effect during each period. Thus, if the value of the United States dollar strengthens relative to the currencies of our non-United States based operations, our translated revenue (and expenses) will be lower. Using the comparable fiscal 2015 conversion rates, international revenues would have been higher than reported under GAAP by $8.9 million for the year ended May 28, 2016. Using these constant currency rates, which we believe provides a more comprehensive view of our business, our revenue increased by 1.8% in North America, by 6.0% in Europe, by 11.4% in Asia Pacific and by 2.9% overall.
The stronger U.S. dollar against most of the currencies of the international countries in which we operate during fiscal 2016 affected our average bill rate. Using the comparable fiscal 2015 conversion rates, the average bill rate would have increased 1.7% in fiscal 2016 compared to fiscal 2015.
Direct Cost of Services. Direct cost of services increased $4.2 million, or 1.2%, to $366.4 million for the year ended May 28, 2016 from $362.2 million for the year ended May 30, 2015. Comparing fiscal 2016 to fiscal 2015, direct cost of services increased primarily because of a 1.4% increase in hours worked, while the average consultant pay rate per hour was the same in both years. The direct cost of services as a percentage of revenue (“direct cost of services percentage”) was 61.2% and 61.3% for the years ended May 28, 2016 and May 30, 2015, respectively. Comparing the two fiscal years, there were no significant differences in the components comprising the direct cost of services percentage. The stronger U.S. dollar against most of the currencies of the international countries in which we operate during fiscal 2016 affected our average pay rate. Using the comparable fiscal 2015 conversion rates, the average pay rate would have increased 1.7% in fiscal 2016 compared to fiscal 2015.
Our target direct cost of services percentage is 60% for all of our offices.
Selling, General and Administrative Expenses (“S, G & A”). S, G & A increased $1.0 million, or 0.6%, to $174.8 million for the year ended May 28, 2016 from $173.8 million for the year ended May 30, 2015. However, S, G & A decreased as a percentage of revenue from 29.4% in fiscal 2015 to 29.2% in fiscal 2016. Management and administrative head count was 772 at the end of fiscal 2016 and 742 at the end of fiscal 2015. S, G & A for the year ended May 28, 2016 includes additional non-cash stock-based compensation expense of approximately $900,000 related to the accelerated vesting of options previously granted to Donald Murray in connection with his transition from Executive Chairman to Chairman. During fiscal 2016, compensation and related benefit costs increased, attributable to headcount additions in U.S. and Asia Pacific in offices experiencing growth; and the Company increased its reserve for uncollectable accounts by $1.1 million. These costs were offset as compared to the prior year by a decrease in severance charges related to our European operations and decreases in other non-cash stock-based compensation expense. S, G & A in fiscal 2016 was favorably impacted by $3.0 million due to the strengthening of the U.S. dollar compared primarily to the Euro, Swedish Kronor and British Pound.
Sequential Operations. On a sequential quarter basis, fiscal 2016 fourth quarter revenue increased 3.9% to $152.5 million from $146.8 million, hours worked improved 2.8% and bill rates were up 0.8%. The Company’s sequential revenue increased in North America (3.1%), Europe (11.7%), and Asia Pacific (2.8%); using the comparable third quarter fiscal 2016 conversion rates, sequential revenue increased in North America (3.1%) and Europe (9.5%), but was down in Asia Pacific (-0.7%). Third quarter revenue was impacted by the Christmas, New Year’s and Chinese New Year’s holidays; there were no significant holidays in the fourth quarter.
The direct cost of services percentage improved from 62.6% in the third quarter to 60.1% in the fourth quarter. This improvement is primarily attributable to no compensated holidays in the United States during the fourth quarter compared to two in the third quarter, the declining impact of payroll taxes as the calendar year progresses and an improvement in the Company’s cost of its self-insured medical coverage of consultants.
S, G & A expenses increased $1.0 million from the quarter ended February 27, 2016 to the quarter ended May 28, 2016, primarily as a result of the increased spending for marketing programs, offset by the declining impact of payroll taxes as the calendar year progresses and improvement in the Company’s cost of self-insured medical coverage for employees. The leverage of S, G & A expenses improved to 29.1% in the fourth quarter of fiscal 2016 compared to 29.5% in the third quarter. This was attributable to the improved revenue in the fourth quarter, which provided leverage on certain fixed expenses, such as rent, in the fourth quarter.
Amortization and Depreciation Expense. Amortization of intangible assets decreased from $918,000 in fiscal 2015 to $90,000 in fiscal 2016. During fiscal 2016, the Company completed amortization of all of its intangible assets.
Depreciation expense increased from $3.4 million for the year ended May 30, 2015 to $3.5 million for the year ended May 28, 2016.
Interest Income. Interest income increased to $186,000 in fiscal 2016 compared to $148,000 in fiscal 2015. The increase in interest income is the result of improved rates on amounts available for investment in fiscal 2016. The Company has invested available cash in certificates of deposit and money market investments that have been classified as cash equivalents due to the short maturities of these investments. As of May 28, 2016, the Company had $25.0 million of investments in commercial paper and U.S. Government Agency securities with remaining maturity dates between three months and one year from the balance sheet date which are classified as short-term investments and considered “held-to-maturity” securities.
Income Taxes. The provision for income taxes increased from $22.9 million (effective rate of 45.4%) for the year ended May 30, 2015 to $23.5 million (effective rate of 43.6%) for the year ended May 28, 2016. The provision for taxes in both fiscal 2016 and fiscal 2015 resulted from taxes on income from operations in the United States and certain other foreign jurisdictions, a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the United States statutory rates, and no benefit for losses in jurisdictions in which a valuation allowance on operating loss carryforwards had previously been established. The increase in the provision for income taxes is because of higher pretax income. The effective tax rate decreased because of higher U.S. pretax income coupled with lower international pretax losses. Decreased losses from countries with valuation allowances allow the tax expense to be spread over a higher pretax base, which lowers the effective tax rate. The effective tax rate in both fiscal years disproportionately magnifies the effect of the components of the tax rate that differ from the standard federal rate,
including non-deductible permanent differences and incentive stock options (“ISOs”). Based upon current economic circumstances, management will continue to monitor the need to record additional or release existing valuation allowances in the future, primarily related to certain foreign jurisdictions. Realization of the currently reserved foreign deferred tax assets is dependent upon generating sufficient future taxable income in those foreign territories.
Periodically, the Company reviews the components of both book and taxable income to analyze the adequacy of the tax provision. There can be no assurance that the Company’s effective tax rate will remain constant in the future because of the lower benefit from the United States statutory rate for losses in certain foreign jurisdictions, the limitation on the benefit for losses in jurisdictions in which a valuation allowance for operating loss carryforwards has previously been established, and the unpredictability of timing and the amount of eligible disqualifying ISO exercises.
The Company cannot recognize a tax benefit for certain ISO grants unless and until the holder exercises his or her option and then sells the shares within a certain period of time. In addition, the Company can only recognize a potential tax benefit for employees’ acquisition and subsequent sale of shares purchased through the ESPP if the sale occurs within a certain defined period. As a result, the Company’s provision for income taxes is likely to fluctuate from these factors for the foreseeable future. Further, those tax benefits associated with ISO grants fully vested at the date of adoption of the current accounting rules governing stock awards will be recognized as additions to paid-in capital when and if those options are exercised and not as a reduction to the Company’s tax provision. The Company recognized a benefit of approximately $2.1 million and $2.2 million related to stock-based compensation for nonqualified stock options expensed and for eligible disqualifying ISO exercises during fiscal 2016 and 2015, respectively. The proportion of expense related to non-qualified stock option grants (for which the Company may recognize a tax benefit in the same quarter as the related compensation expense in most instances) is significant as compared to expense related to ISOs (including ESPPs). However, the timing and amount of eligible disqualifying ISO exercises cannot be predicted. The Company predominantly grants nonqualified stock options to employees in the United States.
The Company has maintained a position of being indefinitely reinvested in its foreign subsidiaries’ earnings by not expecting to remit foreign earnings in the foreseeable future. Being indefinitely reinvested does not require a deferred tax liability to be recognized on the foreign earnings. Management’s indefinite reinvestment position is supported by:
1) RGP in the United States has generated more than enough cash to fund operations and expansion, including acquisitions. RGP uses its excess cash to, at its discretion, return cash to shareholders through dividend payments and stock repurchases.
2) RGP in the United States has no debt or any other current or known obligations that require cash to be remitted from foreign subsidiaries.
3) Management’s growth objectives include allowing cash to accumulate in RGP’s profitable foreign subsidiaries with the expectation of finding strategic expansion plans to further penetrate RGP’s most successful locations.
4) The consequences of distributing foreign earnings have historically been deemed to be tax inefficient for RGP or not materially beneficial.
Year Ended May 30, 2015 Compared to Year Ended May 31, 2014
Computations of percentage change period over period are based upon our results, as rounded and presented herein.
Revenue. Revenue increased $23.4 million, or 4.1%, to $590.6 million for the year ended May 30, 2015 from $567.2 million for the year ended May 31, 2014. While we deliver our services to clients in a similar fashion across the globe, in fiscal 2015 revenue increased in North America and Asia Pacific but declined in Europe as compared to fiscal 2014. In light of continuing global economic uncertainty, we believe that certain geographic sectors of our global clients and prospects are initiating operational improvement projects cautiously, resulting in reduced levels of consulting spending, particularly in most European markets. Results in fiscal 2015 consisted of 52 weeks while fiscal 2014 consisted of 53 weeks. Revenue during the extra week of fiscal 2014 (which included the Memorial Day holiday in the United States) was $9.8 million. Excluding this extra week in fiscal 2014, revenue in fiscal 2015 increased $33.2 million (6.0%) over the fiscal 2014 amount. Comparing the 52-week period in fiscal 2015 to the 53-week period in fiscal 2014, the number of hours worked increased 8.1% compared to the prior year, offset by a 4.0% decrease in average bill rates from the prior year.
The number of consultants on assignment at the end of fiscal 2015 was 2,516 compared to the 2,401 consultants engaged at the end of fiscal 2014 (the average number of consultants assigned was 2,487 in fiscal 2015 compared to 2,254 in fiscal 2014).
We operated 68 offices (23 abroad) at both May 30, 2015 and May 31, 2014. Our clients do not sign long-term contracts with us. As such, there can be no assurance as to future demand levels for the services that we provide or that future results can be reliably predicted by considering past trends.
Revenue for the Company’s major geographies across the globe consisted of the following (dollars in thousands):
Our financial results are subject to fluctuations in the exchange rates of foreign currencies in relation to the United States dollar. Revenues denominated in foreign currencies are translated into United States dollars at the monthly average exchange rates in effect during each period. Thus, as the value of the United States dollar fluctuates relative to the currencies in our non-United States based operations, our revenue can be impacted. Using the comparable fiscal 2014 conversion rates, international revenues would have been higher than reported under GAAP by $8.8 million for the year ended May 30, 2015. Using these constant currency rates, the increase in revenue in North America and Asia Pacific would have been 8.8% and 12.1%, respectively, while the decline in Europe would have been 15.5%.
The strengthening of the U.S. dollar against most of the currencies of the international countries in which we operate was partially the cause of the average bill rate decline. Using the same exchange rates in fiscal 2015 as in fiscal 2014, the average bill rate would have decreased 2.4%. Average bill rates were also adversely impacted by a significant client engagement in the Philippines where bill rates are lower than most metropolitan areas.
Direct Cost of Services. Direct cost of services increased $10.8 million, or 3.1%, to $362.2 million for the year ended May 30, 2015 from $351.4 million for the year ended May 31, 2014. Comparing fiscal 2015 to fiscal 2014, direct cost of services increased primarily because of an 8.1% increase in hours worked, partially offset by a 4.8% decrease in the average consultant pay rate per hour. As noted above, fiscal 2015 consisted of 52 weeks while fiscal 2014 consisted of 53 weeks; we estimate that fiscal 2014 direct cost of services included an additional approximate $5.9 million because of this extra week. The direct cost of services as a percentage of revenue (“direct cost of services percentage”) was 61.3% and 61.9% for the years ended May 30, 2015 and May 31, 2014, respectively. The improvement in the direct cost of services percentage resulted primarily from a favorable change in the bill rate/pay rate relationship (bill rates were down 4.0% overall while the pay rate average decreased 4.8%). Average pay rates also decreased because of the strengthening U.S. dollar (similar to impact on average bill rates) and a significant client engagement in the Philippines where bill rates are lower than most metropolitan areas.
Our target direct cost of services percentage is 60% for all of our offices.
Selling, General and Administrative Expenses. S, G & A increased $1.3 million, or 0.8%, to $173.8 million for the year ended May 30, 2015 from $172.5 million for the year ended May 31, 2014. However, S, G & A decreased as a percentage of revenue from 30.4% in fiscal 2014 to 29.4% in fiscal 2015. Management and administrative head count was 742 at the end of fiscal 2015 and 712 at the end of fiscal 2014. The increase in S, G & A between the two fiscal periods was primarily attributable to headcount additions and related costs in U.S. offices experiencing growth. Comparing total S, G &A in fiscal 2015 to an adjusted 52-week fiscal 2014, S, G & A would have increased about 2.1%.
Sequential Operations. On a sequential quarter basis, fiscal 2015 fourth quarter revenue increased 1.4% to $148.8 million from $146.8 million, and hours worked improved 2.6% while bill rates were down 1.7%. The decrease in bill rates is attributable to
the strengthening of the U.S. dollar against currencies in most of our foreign operations. The Company’s sequential revenue increased in North America (0.3%) and Asia Pacific (17.4%), and was flat in Europe; on a constant currency basis, sequential revenue increased in North America (0.4%), Asia Pacific (18.5%) and Europe (5.9%). In addition, while the fourth quarter contained the Memorial Day holiday in the U.S., the third quarter included the Christmas, New Year’s and Chinese New Year’s holidays.
The direct cost of services percentage improved from 62.7% in the third quarter to 61.2% in the fourth quarter. This improvement is primarily attributable to only one compensated holiday in the United States during the fourth quarter compared to two in the third quarter and the declining impact of payroll taxes as the calendar year progresses.
S, G & A expenses decreased $1.0 million from the quarter ended February 28, 2015 to the quarter ended May 30, 2015, primarily as a result of the declining impact of payroll taxes as the calendar year progresses and reduced spending for marketing. The leverage of S, G & A expenses improved to 28.5% in the fourth quarter of fiscal 2015 compared to 29.6% in the third quarter. This was attributable to the improved revenue in the fourth quarter, which provided leverage on certain fixed expenses, such as rent, in the fourth quarter.
Amortization and Depreciation Expense. Amortization of intangible assets decreased from $1.7 million in fiscal 2014 to $918,000 in fiscal 2015. During fiscal 2015, virtually all of the Company’s intangible assets were fully amortized except for a $90,000 remaining balance as of May 30, 2015. The remaining balance will be amortized during the fiscal year ending May 28, 2016.
Depreciation expense decreased from $3.6 million for the year ended May 31, 2014 to $3.4 million for the year ended May 30, 2015. Depreciation decreased as a number of assets were fully depreciated during fiscal 2014 and fiscal 2015.
Interest Income. Interest income declined to $148,000 in fiscal 2015 compared to $168,000 in fiscal 2014. The decrease in interest income is the result of lower cash balances available for investment in fiscal 2015. The Company has invested available cash in certificates of deposit and money market investments that have been classified as cash equivalents due to the short maturities of these investments. As of May 30, 2015, the Company had $25.0 million of investments in commercial paper and U.S. Government Agency securities with remaining maturity dates between three months and one year from the balance sheet date which are classified as short-term investments and considered “held-to-maturity” securities.
Income Taxes. The provision for income taxes increased from $18.3 million (effective rate of 47.9%) for the year ended May 31, 2014 to $22.9 million (effective rate of 45.4%) for the year ended May 30, 2015. The provision for taxes in both fiscal 2015 and fiscal 2014 resulted from taxes on income from operations in the United States and certain other foreign jurisdictions, a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the United States statutory rates, and no benefit for losses in jurisdictions in which a valuation allowance on operating loss carryforwards had previously been established. The increase in the provision for income taxes is because of higher pretax income, primarily from the U.S. The effective tax rate decreased because of higher U.S. pretax income coupled with lower international pretax losses. Decreased losses from countries with valuation allowances allow the tax expense to be spread over a higher pretax base, which lowers the effective tax rate. The effective tax rate in both fiscal years disproportionately magnifies the effect of the components of the tax rate that differ from the standard federal rate, including non-deductible permanent differences and ISOs. Based upon current economic circumstances, management will continue to monitor the need to record additional or release existing valuation allowances in the future, primarily related to certain foreign jurisdictions. Realization of the currently reserved foreign deferred tax assets is dependent upon generating sufficient future taxable income in those foreign territories.
The Company cannot recognize a tax benefit for certain ISO grants unless and until the holder exercises his or her option and then sells the shares within a certain period of time. In addition, the Company can only recognize a potential tax benefit for employees’ acquisition and subsequent sale of shares purchased through the ESPP if the sale occurs within a certain defined period. As a result, the Company’s provision for income taxes is likely to fluctuate from these factors for the foreseeable future. Further, those tax benefits associated with ISO grants fully vested at the date of adoption of the current accounting rules governing stock awards will be recognized as additions to paid-in capital when and if those options are exercised and not as a reduction to the Company’s tax provision. The Company recognized a benefit of approximately $2.2 million and $2.1 million related to stock-
based compensation for nonqualified stock options expensed and for eligible disqualifying ISO exercises during fiscal 2015 and 2014, respectively. The proportion of expense related to non-qualified stock option grants (for which the Company may recognize a tax benefit in the same quarter as the related compensation expense in most instances) is significant as compared to expense related to ISOs (including ESPPs). However, the timing and amount of eligible disqualifying ISO exercises cannot be predicted. The Company predominantly grants nonqualified stock options to employees in the United States.
The Company has maintained a position of being indefinitely reinvested in its foreign subsidiaries’ earnings by not expecting to remit foreign earnings in the foreseeable future. Being indefinitely reinvested does not require a deferred tax liability to be recognized on the foreign earnings. Management’s indefinite reinvestment position is supported by:
1) RGP in the United States has generated more than enough cash to fund operations and expansion, including acquisitions. RGP uses its excess cash to, at its discretion, return cash to shareholders through dividend payments and stock repurchases.
2) RGP in the United States has no debt or any other current or known obligations that require cash to be remitted from foreign subsidiaries.
3) Management’s growth objectives include allowing cash to accumulate in RGP’s profitable foreign subsidiaries with the expectation of finding strategic expansion plans to further penetrate RGP’s most successful locations.
4) The consequences of distributing foreign earnings have historically been deemed to be tax inefficient for RGP or not materially beneficial.
Quarterly Results
The following table sets forth our unaudited quarterly Consolidated Statements of Operations data for each of the eight quarters in the two-year period ended May 28, 2016. In the opinion of management, this data has been prepared on a basis substantially consistent with our audited Consolidated Financial Statements appearing elsewhere in this document, and includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the data. The quarterly data should be read together with our Consolidated Financial Statements and related notes appearing elsewhere in this document. The operating results are not necessarily indicative of the results to be expected in any future period.
(1) Net income per common share calculations for each of the quarters were based upon the weighted average number of shares outstanding for each period, and the sum of the quarters may not necessarily be equal to the full year net income per common share amount.
Our quarterly results have fluctuated in the past and we believe they will continue to do so in the future. Certain factors that could affect our quarterly operating results are described in Part I Item 1A. “Risk Factors.” Due to these and other factors, we believe that quarter-to-quarter comparisons of our results of operations are not meaningful indicators of future performance.
Liquidity and Capital Resources
Our primary source of liquidity is cash provided by our operations and, historically, to a lesser extent, stock option exercises. We have generated positive cash flows annually from operations since inception, and we continued to do so during the year ended May 28, 2016. Our ability to continue to increase positive cash flow from operations in the future will be, at least in part, dependent on improvement in global economic conditions.
At May 28, 2016, the Company had operating leases, primarily for office premises, and purchase obligations, primarily for property and equipment, expiring at various dates through September 2025. At May 28, 2016, the Company had no capital leases. The following table summarizes our future minimum rental commitments under operating leases and our other known contractual obligations as of May 28, 2016:
The Company has a $3.0 million unsecured revolving credit facility with Bank of America (the “Credit Agreement”). The Credit Agreement allows the Company to choose the interest rate applicable to advances. The interest rate options are Bank of America’s prime rate and a London Inter-Bank Offered Rate plus 2.25%. Interest, if any, is payable monthly. The Credit Agreement expires November 30, 2016, unless extended by the parties. As of May 28, 2016, the Company had approximately $1.9 million available under the terms of the Credit Agreement, as Bank of America has issued approximately $1.1 million of outstanding letters of credit in favor of third parties related to operating leases. As of May 28, 2016, the Company was in compliance with all covenants included in the Credit Agreement.
Operating activities provided $38.3 million and $31.8 million in cash in fiscal 2016 and fiscal 2015, respectively. Cash provided by operations in fiscal 2016 resulted from net income of $30.4 million and net favorable non-cash reconciling adjustments of $12.0 million. Other balance sheet account changes in fiscal 2016, including working capital balances, were a net use of cash of $4.2 million; the primary driver of the use was the increase in the Company’s accounts receivable as of the end of the fiscal year because of higher weekly revenues as compared to the same period of the prior fiscal year. In fiscal 2015, cash provided by operations resulted from net income of $27.5 million and net favorable non-cash reconciling adjustments of $11.1 million. Other balance sheet account changes in fiscal 2015, including working capital balances, were a net use of cash of $6.9 million. Non-cash items in both years include depreciation and amortization (which decreased between the two periods by $0.8 million because certain intangible assets became fully amortized during fiscal 2015) and stock-based compensation expense which increased between the two periods by $0.3 million. Stock-based compensation expense does not reflect an actual cash outflow from the Company but is an estimate of the fair value of the services provided by employees and directors in exchange for share-based payments such as stock options, restricted stock and ESPP purchase rights. The increase in fiscal 2016 is attributable to the acceleration of vesting related to options previously granted to Donald Murray in connection with his transition from Executive Chairman to Chairman.
Net cash used in investing activities was $2.4 million for fiscal 2016 compared to net cash provided of $6.6 million for fiscal 2015. Cash received from the redemption and purchases of short-term investments (primarily commercial paper) was
approximately the same in fiscal 2016 but was a source of cash in fiscal 2015 of $9.0 million. The Company spent the same amount ($2.4 million) on property and equipment in fiscal 2016 as fiscal 2015.
Net cash used in financing activities totaled $32.3 million for the year ended May 28, 2016, compared to $28.9 million for the year ended May 30, 2015. The Company received approximately $9.8 million in fiscal 2016 from the exercise of employee stock options and issuance of shares via the Company’s ESPP compared to $9.1 million in the prior fiscal year. However, the Company used more cash in fiscal 2016 ($28.1 million) to purchase approximately 1.8 million shares of our common stock as compared to $26.3 million to purchase 1.7 million shares of common stock in fiscal 2015. Payments for the Company’s dividend program increased from $11.7 million in fiscal 2015 to $14.1 million in fiscal 2016 as a result of the Company’s increase in fiscal 2016 of its quarterly dividend from $0.08 to $0.10 per common share.
The Company had $116.0 million in cash and cash equivalents and short-term investments at May 28, 2016. We anticipate that our current cash and the ongoing cash flows from operations will be adequate to meet our working capital and capital expenditure needs for at least the next 12 months.
Our ongoing operations and anticipated growth in the geographic markets we currently serve will require us to continue to make investments in capital equipment, primarily technology hardware and software. In addition, we may consider making strategic acquisitions. If we require additional capital resources to grow our business, either internally or through acquisition, we may seek to sell additional equity securities or to secure debt financing. 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 provided $31.8 million and $32.0 million in cash in fiscal 2015 and fiscal 2014, respectively. Cash provided by operations in fiscal 2015 resulted from net income of $27.5 million and net favorable non-cash reconciling adjustments of $11.1 million (principally depreciation and amortization and stock-based compensation expense). Other balance sheet account changes between the two periods, including working capital balances, were a net use of cash of $6.9 million; the primary driver of the use was the increase in the Company’s accounts receivable as of the end of the fiscal year because of higher weekly revenues as compared to the same period of the prior fiscal year. In fiscal 2014, cash provided by operations resulted from net income of $19.9 million and net favorable non-cash reconciling adjustments of $14.0 million (principally depreciation and amortization and stock-based compensation expense). Other balance sheet account changes between the two periods, including working capital balances, were a net use of cash of $1.9 million. Stock-based compensation expense, which does not reflect an actual cash outflow from the Company but is an estimate of the fair value of the services provided by employees and directors in exchange for share-based payments such as stock options, restricted stock and ESPP purchase rights, was relatively the same between fiscal 2015 and fiscal 2014. In addition, non-cash depreciation and amortization fell in fiscal 2015 as certain assets were fully amortized in fiscal 2014.
Net cash provided by investing activities was $6.6 million for fiscal 2015 compared to net cash used of $12.7 million for fiscal 2014. Cash received from the redemption of short-term investments (primarily commercial paper), net of cash used to purchase short-term investments, resulted in cash provided of $9.0 million in fiscal 2015 compared to a use of cash in fiscal 2014 of $9.0 million. The Company spent approximately $1.4 million less on property and equipment in fiscal 2015 compared to fiscal 2014.
Net cash used in financing activities totaled $28.9 million for the year ended May 30, 2015, compared to $32.9 million for the year ended May 31, 2014. The Company received approximately $9.1 million in fiscal 2015 from the exercise of employee stock options and issuance of shares via the Company’s ESPP compared to $7.3 million in the prior fiscal year. However, the Company used less cash in fiscal 2015 ($26.3 million) to purchase approximately 1.7 million shares of our common stock as compared to $29.6 million to purchase 2.2 million shares of common stock in fiscal 2014. Payments for the Company’s dividend program increased from $10.6 million in fiscal 2014 to $11.7 million in fiscal 2015 as a result of the Company’s increase in fiscal 2015 of its quarterly dividend from $0.07 to $0.08 per common share.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2 - Summary of Significant Accounting Policies - to the Consolidated Financial Statements for the year ended May 28, 2016.
Inflation
Inflation was not a material factor in either revenue or operating expenses during the fiscal years ended May 28, 2016, May 30, 2015 or May 31, 2014.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk. At the end of fiscal 2016, we had approximately $116.0 million of cash and cash equivalents and short-term investments. Securities that the Company has the ability and positive intent to hold to maturity are carried at amortized cost. These securities consist of commercial paper. Cost approximates market for these securities. The earnings on these investments are subject to changes in interest rates; however, assuming a constant balance available for investment, a 10% decline in interest rates would reduce our interest income but would not have a material impact on our consolidated financial position or results of operations.
Foreign Currency Exchange Rate Risk. For the year ended May 28, 2016, approximately 18.3% of the Company’s revenues were generated outside of the United States. As a result, our operating results are subject to fluctuations in the exchange rates of foreign currencies in relation to the United States dollar. Revenues and expenses denominated in foreign currencies are translated into United States dollars at the monthly average exchange rates prevailing during the period. Thus, as the value of the United States dollar fluctuates relative to the currencies in our non-United States based operations, our reported results may vary.
Assets and liabilities of our non-United States based operations are translated into United States dollars at the exchange rate effective at the end of each monthly reporting period. Approximately 80% of our fiscal year-end balances of cash, cash equivalents and short-term investments were denominated in United States dollars. The remaining amount of approximately 20% was comprised primarily of cash balances translated from Japanese Yen, Euros, Canadian Dollars and Hong Kong Dollars. The difference resulting from the translation each period of assets and liabilities of our non-United States based operations is recorded in stockholders’ equity as a component of other comprehensive income.
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 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
RESOURCES CONNECTION, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Resources Connection, Inc.
We have audited the accompanying consolidated balance sheets of Resources Connection, Inc. and subsidiaries as of May 28, 2016 and May 30, 2015, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended May 28, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Resources Connection, Inc. and subsidiaries as of May 28, 2016 and May 30, 2015, and the results of their operations and their cash flows for each of the three years in the period ended May 28, 2016, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Resources Connection, Inc.’s and subsidiaries’ internal control over financial reporting as of May 28, 2016, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated August 10, 2016 expressed an unqualified opinion on the effectiveness of Resources Connection, Inc.’s and subsidiaries’ internal control over financial reporting.
/s/ RSM US LLP
Irvine, California
August 10, 2016
RESOURCES CONNECTION, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
The accompanying notes are an integral part of these consolidated financial statements.
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Company and its Business
Resources Connection, Inc. (“Resources Connection”), a Delaware corporation, was incorporated on November 16, 1998. Resources Connection is a multinational professional services firm; its operating entities primarily provide services under the name Resources Global Professionals (“RGP” or the “Company”). The Company is organized around client service teams utilizing experienced professionals and provides consulting and business support services in the areas of accounting; finance; governance, risk and compliance; corporate advisory, strategic communications and restructuring; information management; human capital; supply chain management; and legal and regulatory. The Company has offices in the United States (“U.S.”), Asia, Australia, Canada, Europe and Mexico.
The Company’s fiscal year consists of 52 or 53 weeks, ending on the Saturday in May closest to May 31. Fiscal years 2016 and 2015 consisted of four 13 week quarters and a total of 52 weeks of activity for the fiscal year. For fiscal years of 53 weeks, such as fiscal 2014, the first three quarters consisted of 13 weeks each and the fourth quarter consisted of 14 weeks.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Consolidated Financial Statements of the Company (“financial statements”) have been prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”). The financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Revenues are recognized and billed when the Company’s professionals deliver services. Conversion fees are recognized when one of the Company’s professionals accepts an offer of permanent employment from a client. Conversion fees were 0.5% of revenue for each of the years ended May 28, 2016, May 30, 2015 and May 31, 2014. All costs of compensating the Company’s professionals are the responsibility of the Company and are included in direct cost of services.
Client Reimbursements of “Out-of-Pocket” Expenses
The Company recognizes all reimbursements received from clients for “out-of-pocket” expenses as revenue and all such expenses as direct cost of services. Reimbursements received from clients were $10.6 million, $10.6 million and $8.9 million for the years ended May 28, 2016, May 30, 2015 and May 31, 2014, respectively.
Foreign Currency Translation
The financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at current exchange rates, income and expense items are translated at average exchange rates prevailing during the period and the related translation adjustments are recorded as a component of comprehensive income or loss within stockholders’ equity. Gains and losses from foreign currency transactions are included in selling, general and administrative expenses in the Consolidated Statements of Operations.
Per Share Information
The Company presents both basic and diluted earnings per share (“EPS”). Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the period, calculated using the treasury stock method for stock options. Under the treasury stock method, exercise proceeds include the amount the employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized and the amount of tax
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
benefits that would be recorded in additional paid-in capital when the award becomes deductible. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period are anti-dilutive and are excluded from the calculation.
The following table summarizes the calculation of net income per share for the years ended May 28, 2016, May 30, 2015 and May 31, 2014 (in thousands, except per share amounts):
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks, and short-term investments purchased with an original maturity date of three months or less to be cash and cash equivalents. The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents approximate the fair values due to the short maturities of these instruments.
Short-Term Investments
The Company’s short-term investments were $25.0 million as of both May 28, 2016 and May 30, 2015, and had original contractual maturities of between three months and one year. The Company had no investments with a maturity in excess of one year as of the end of either fiscal year 2016 or 2015. The Company carries debt securities that it has the ability and positive intent to hold to maturity at amortized cost.
The fair value of the Company’s financial instruments reflects the amounts that the Company estimates it will receive in connection with the sale of an asset in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the following three levels:
Level 1 - Quoted prices in active markets for identical assets and liabilities.
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets.
Level 3 - Unobservable inputs.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company’s investments in commercial paper and U.S. Government Agency securities are measured using quoted prices in markets that are not active (Level 2). There were no unrealized holding gains or losses as of May 28, 2016 and May 30, 2015. Short-term investments consist of the following (in thousands):
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from its clients’ failure to make required payments for services rendered. Management estimates this allowance based upon knowledge of the financial condition of the Company’s clients (which may not include knowledge of all significant events), review of historical receivable and reserve trends and other pertinent information. If the financial condition of the Company’s clients deteriorates or there is an unfavorable trend in aggregate receivable collections, additional allowances may be required.
The following table summarizes the activity in our allowance for doubtful accounts (in thousands):
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the following estimated useful lives:
Building
30 years
Furniture
5 to 10 years
Leasehold improvements
Lesser of useful life of asset or term of lease
Computer, equipment and software
3 to 5 years
Costs for normal repairs and maintenance are expensed to operations as incurred, while renewals and major refurbishments are capitalized.
Assessments of whether there has been a permanent impairment in the value of property and equipment are periodically performed by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Management believes no permanent impairment has occurred.
Intangible Assets and Goodwill
Goodwill and other intangible assets with indefinite lives are not subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. The Company performed its annual goodwill impairment analysis as of May 28, 2016 and will continue to test for impairment at least annually. The Company
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
performs its impairment analysis by comparing its market capitalization to its book value throughout the fiscal year. For application of this methodology the Company determined that it operates as a single reporting unit resulting from the combination of its practice offices. No impairment was indicated as of May 28, 2016. The Company has no other intangible assets.
See Note 4 - Intangible Assets and Goodwill for a further description of the Company’s intangible assets.
Stock-Based Compensation
The Company recognizes compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases made via the Company’s Employee Stock Purchase Plan (the “ESPP”), based on estimated fair value at the date of grant.
The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods. Stock options vest over four years and restricted stock award vesting is determined on an individual grant basis under the Company’s 2014 Performance Incentive Plan (“2014 Plan”). The Company determines the estimated value of stock options using the Black-Scholes valuation model. The Company recognizes stock-based compensation expense on a straight-line basis over the service period for options that are expected to vest and records adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.
See Note 13 - Stock Based Compensation Plans for further information on the 2014 Plan and stock-based compensation.
Income Taxes
The Company recognizes deferred income taxes for the estimated tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when, in management’s opinion, it is more likely than not that some portion of the deferred tax assets will not be realized. The provision for income taxes represents current taxes payable net of the change during the period in deferred tax assets and liabilities.
Recent Accounting Pronouncements
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09. The new standard modifies several aspects of the accounting and reporting for employee share-based payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. The new standard is effective for fiscal years beginning after December 15, 2017, and interim periods within annual periods beginning December 15, 2018; early adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have on our consolidated financial statements.
Leases (Topic 842):Leases. In February 2016, the FASB issued ASU 2016-02, which amends the existing guidance to require lessees to recognize operating lease obligations on their balance sheets by recording the rights and obligations created by those leases. The requirements are effective for financial statements for annual periods and interim periods within those annual periods beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact that ASU 2016-02 will have on our consolidated financial statements and believe that it will have a significant impact on our reported balance sheet assets and liabilities. Under current accounting guidelines, our office leases are operating lease arrangements, in which rental payments are treated as operating expenses and there is no recognition of the arrangement on the balance sheet as an asset with related obligation to the lessor.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. In November 2015, the FASB issued ASU 2015-17. This ASU eliminates the current requirement for entities to present deferred tax liabilities and assets as current and noncurrent in a classified statement of financial position and instead requires that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company will elect an early adoption for fiscal 2017, and will present the net deferred tax assets as noncurrent and reclassify any current deferred tax assets in its consolidated financial position on a retrospective basis. The adoption of this standard will not have a significant impact on the Company’s consolidated balance sheet.
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. In September 2015, the FASB issued ASU 2015-16. This ASU eliminates the requirement to retrospectively account for changes to provisional amounts initially recorded in a business combination. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined, including the effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The provisions of this ASU are effective for the Company for fiscal 2017 and should be applied prospectively to adjustments to provisional amounts that occur after the effective date. The Company does not believe adoption of this standard will have a material impact on the Company’s financial statements.
Business Combinations (Topic 805): Pushdown Accounting. In November 2014, the FASB issued ASU 2014-17. This ASU provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. If an acquired entity elects the option to apply pushdown accounting in its separate financial statements, it should disclose information that users need to evaluate the effects of pushdown accounting on its financial statements. This guidance was effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. However, if the financial statements for the period in which the most recent change-in-control event occurred already have been issued or made available for issuance, the application of this guidance would be a change in accounting principle. The Company will utilize this guidance for any future acquisitions.
Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. In August 2014, the FASB issued ASU 2014-15. This ASU provides new guidance regarding management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. The guidance is effective for the Company for fiscal 2017. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements and related disclosures.
Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. In June 2014, the FASB issued ASU 2014-12. This ASU provides new guidance requiring that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. The guidance is effective for the Company for fiscal 2017. The Company does not currently have performance based awards and thus does not believe adoption of this guidance will have a material impact on its consolidated financial statements.
Revenue from Contracts with Customers (Topic 606): In May 2014, the FASB issued ASU 2014-09, a comprehensive new revenue recognition standard that will supersede most existing revenue recognition guidance and is intended to improve and converge revenue recognition and related financial reporting requirements. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a number of steps to apply to achieve that core principle and requires additional disclosures. In August 2015, the FASB issued ASU 2015-14, which delays the required implementation date for the Company until fiscal 2019, although the Company has the option to adopt
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
this guidance beginning in fiscal 2018. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all periods presented, or “cumulative effect” adoption, meaning the standard is applied only to the most current period presented in the financial statements. In addition, in March 2016, the FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients (Topic 606), which provides clarifying guidance in certain areas and adds some practical expedients. The effective date for this ASU is the same as the effective date for ASU No. 2014-09. The Company is currently evaluating the impact, if any, that these ASUs will have on our consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not, or are not expected to, have a material effect on the Company’s results of operations, financial position or cash flows.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates and assumptions are adequate, actual results could differ from the estimates and assumptions used.
3. Property and Equipment
Property and equipment consist of the following (in thousands):
4. Intangible Assets and Goodwill
The following table presents details of our intangible assets, estimated lives and related accumulated amortization (in thousands):
The following table summarizes amortization expense for the years ended May 28, 2016, May 30, 2015 and May 31, 2014 (in thousands):
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of May 28, 2016, all of the Company’s intangible assets subject to amortization have been fully amortized.
The following table summarizes the activity in the Company’s goodwill balance (in thousands):
5. Income Taxes
The following table represents the current and deferred income tax provision for federal, state and foreign income taxes attributable to operations (in thousands):
Income before provision for income taxes is as follows (in thousands):
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The provision for income taxes differs from the amount that would result from applying the federal statutory rate as follows:
The impact of state taxes, net of federal benefit, and foreign income taxed at other than U.S. rates fluctuates year over year due to the changes in the mix of operating income and losses amongst the various states and foreign jurisdictions in which the Company operates.
The components of the net deferred tax asset consist of the following (in thousands):
The Company had an income tax payable of $428,000 and an income tax receivable of $257,000 as of May 28, 2016 and May 30, 2015, respectively.
The tax benefit associated with the exercise of nonqualified stock options and the disqualifying dispositions by employees of incentive stock options, restricted stock awards and shares issued under the Company’s ESPP reduced income taxes payable by $1,086,000 and $940,000 for the years ended May 28, 2016 and May 30, 2015, respectively.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company has foreign net operating loss carryforwards of $61.4 million and foreign tax credit carryforwards of $560,000. The foreign tax credits will expire beginning in fiscal 2023. The following table summarizes the net operating loss expiration periods.
The following table summarizes the activity in our valuation allowance accounts (in thousands):
Realization of the deferred tax assets is dependent upon generating sufficient future taxable income. Management believes that it is more likely than not that all other remaining deferred tax assets will be realized through future taxable earnings or alternative tax strategies.
Deferred income taxes have not been provided on the undistributed earnings of approximately $16.2 million from the Company’s foreign subsidiaries as of May 28, 2016 since these amounts are intended to be indefinitely reinvested in foreign operations. If the earnings of the Company’s foreign subsidiaries were to be distributed, management estimates that the income tax impact would be immaterial as the federal taxes would be offset with foreign tax credits.
The following table summarizes the activity related to the gross unrecognized tax benefits (in thousands):
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company’s total liability for unrecognized gross tax benefits was $42,000 as of both May 28, 2016 and May 30, 2015, which, if ultimately recognized would impact the effective tax rate in future periods. The unrecognized tax benefits include long-term liabilities of $42,000 as of both May 28, 2016 and May 30, 2015; none of the unrecognized tax benefits are short-term liabilities due to the closing of the statute of limitations.
The Company’s major income tax jurisdiction is the U.S., with federal statute of limitations remaining open for fiscal 2013 and thereafter. During the fiscal year ended May 30, 2015, the Company completed federal examinations of fiscal years 2012 and 2013 with an insignificant beneficial change. For states within the U.S. in which the Company does significant business, the Company remains subject to examination for fiscal 2012 and thereafter. Major foreign jurisdictions in Europe remain open for fiscal years ended 2011 and thereafter.
The Company continues to recognize interest expense and penalties related to income tax as a part of its provision for income taxes. While the amount accrued during the current fiscal year is immaterial, the Company has provided $1,000 of accrued interest and penalties as a component of the liability for unrecognized tax benefits.
6. Accrued Salaries and Related Obligations
Accrued salaries and related obligations consist of the following (in thousands):
7. Revolving Credit Agreement
The Company has a $3.0 million unsecured revolving credit facility with Bank of America (the “Credit Agreement”). The Credit Agreement allows the Company to choose the interest rate applicable to advances. The interest rate options are Bank of America’s prime rate and a London Inter-Bank Offered Rate plus 2.25%. Interest, if any, is payable monthly. The Credit Agreement expires November 30, 2016, unless extended by the parties. As of May 28, 2016, the Company had approximately $1.9 million available under the terms of the Credit Agreement, as Bank of America has issued approximately $1.1 million of outstanding letters of credit for the benefit of third parties related to operating leases and guarantees. As of May 28, 2016, the Company was in compliance with all covenants included in the Credit Agreement.
8. Concentrations of Credit Risk
The Company maintains cash and cash equivalent balances, short-term investments in commercial paper and U.S. government agency securities with high credit quality financial institutions. At times, such balances are in excess of federally insured limits.
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of trade receivables. However, concentrations of credit risk are limited due to the large number of customers comprising the Company’s customer base and their dispersion across different business and geographic areas. The Company monitors its exposure to credit losses and maintains an allowance for anticipated losses. A significant change in the liquidity or financial position of one or more of the Company’s customers could result in an increase in the allowance for anticipated losses. No single customer accounted for more than 10% of revenue for the years ended May 28, 2016, May 30, 2015 and May 31, 2014.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Stockholders’ Equity
The Company’s board of directors has periodically approved a stock repurchase program authorizing the repurchase, at the discretion of the Company’s senior executives, of the Company’s common stock for a designated aggregate dollar limit. The current program was authorized in July 2015 (the “July 2015 program”) and set an aggregate dollar limit not to exceed $150 million. Use of the funds authorized under the July 2015 program commenced in February 2016 upon the exhaustion of the previous stock repurchase program of $150 million approved by the Company’s board of directors in April 2011. Repurchases under the program may take place in the open market or in privately negotiated transactions and may be made pursuant to a Rule 10b5-1 plan. During the years ended May 28, 2016 and May 30, 2015, the Company purchased on the open market approximately 1.8 million and 1.7 million shares of its common stock, respectively, at an average price of $15.32 and $15.65 per share, respectively, for approximately $28.1 million and $26.3 million, respectively. As of May 28, 2016, approximately $138.6 million remains available for future repurchases of our common stock under the July 2015 program.
The Company has 70,000,000 authorized shares of common stock with a $0.01 par value. At May 28, 2016 and May 30, 2015, there were 36,229,000 and 37,273,000 shares of common stock outstanding, respectively, all of which provide the holders with voting rights.
The Company has authorized for issuance 5,000,000 shares of preferred stock with a $0.01 par value per share. The board of directors has the authority to issue preferred stock in one or more series and to determine the related rights and preferences. No shares of preferred stock were outstanding as of May 28, 2016 and May 30, 2015.
The Company’s board of directors has established a quarterly dividend, subject to quarterly board of directors’ approval. On April 21, 2016, the board of directors declared a regular quarterly dividend of $0.10 per share of our common stock. The dividend, payable on June 16, 2016, was accrued in the Consolidated Balance Sheet as of May 28, 2016 for approximately $3.6 million. On July 28, 2016, the board of directors announced approval of an increase of 10% to the regular quarterly dividend to $0.11 per share of common stock. The dividend of approximately $4.0 million is payable on September 21, 2016 to stockholders of record at the close of business on August 24, 2016. Continuation of the quarterly dividend will be at the discretion of the board of directors and will depend upon the Company’s financial condition, results of operations, capital requirements, general business condition, contractual restrictions contained in our current or future credit agreements and other agreements, and other factors deemed relevant by the board of directors.
10. Benefit Plan
The Company has a defined contribution 401(k) plan (“the plan”) which covers all employees in the U.S. who have completed 90 days of service and are age 21 or older. Participants may contribute up to 50% of their annual salary up to the maximum amount allowed by statute. As defined in the plan agreement, the Company may make matching contributions in such amount, if any, up to a maximum of 6% of individual employees’ annual compensation. The Company, at its sole discretion, determines the matching contribution made from quarter to quarter. To receive matching contributions, the employee must be employed on the last business day of the fiscal quarter. For the years ended May 28, 2016, May 30, 2015 and May 31, 2014, the Company contributed approximately $5.0 million, $4.8 million and $4.5 million, respectively, to the plan as Company matching contributions.
11. Supplemental Disclosure of Cash Flow Information
Additional information regarding cash flows is as follows (in thousands):
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Commitments and Contingencies
Lease Commitments and Purchase Obligations
At May 28, 2016, the Company had operating leases, expiring at various dates through September 2025, primarily for office premises, and purchase obligations, primarily for fixed assets. At May 28, 2016, the Company had no capital leases. Future minimum rental commitments under operating leases and other known purchase obligations are as follows (in thousands):
Rent expense for the years ended May 28, 2016, May 30, 2015 and May 31, 2014 totaled $13.1 million, $13.1 million and $13.3 million, respectively. Rent expense is recognized on a straight-line basis over the term of the lease, including during any rent holiday periods.
The Company leases approximately 18,200 square feet of the approximately 56,200 square foot Company owned building located in Irvine, California to independent third parties and has operating lease agreements for sub-let space with independent third parties expiring through fiscal 2024. Under the terms of these operating lease agreements, rental income from such third party leases is expected to be $356,000, $193,000, $187,000, $189,000 and $191,000 in fiscal 2017 through 2021, respectively and $650,000 thereafter.
Employment Agreements
The Company’s employment agreement with its president and chief executive officer, Anthony Cherbak, automatically renews for one-year periods commencing May 28, 2015 unless the Company or Mr. Cherbak provides the other party written notice within 60 days of the then-current expiration date that the agreement will not be extended. The employment agreement provides Mr. Cherbak with a specified severance amount depending on whether his separation from the Company is with or without good cause as defined in the agreement. The Company also has employment agreements with certain key members of management, the respective terms of which extended through July 31, 2014 (with the exception of EVP International Operations and Supply Chain Management Tracy Stephens’ employment agreement which extends through July 31, 2016) but automatically renew for additional one year periods unless the Company or the named executive provides the other party written notice no later than 60 days prior to the then-current expiration date that the agreement will not be extended. These agreements provide those employees with a specified severance amount depending on whether the employee is terminated with or without good cause as defined in the applicable agreement.
On July 16, 2015, Mr. Donald Murray announced that he voluntarily retired from the Company’s employ as its Executive Chairman, effective August 31, 2015. Thereafter, at the Board’s request, Mr. Murray continues to serve the Company in his capacity as Chairman of the Board of Directors. On April 6, 2016, the Company announced that Mr. Nathan Franke, Executive Vice President and Chief Financial Officer, intends to retire, and the transition date is expected to be during the first quarter of fiscal 2017.
Legal Proceedings
The Company is involved in certain legal matters 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.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Stock Based Compensation Plans
2014 Performance Incentive Plan
On October 23, 2014, the Company’s stockholders approved the 2014 Plan. The 2014 Plan replaced the Resources Connection, Inc. 2004 Performance Incentive Plan and the 1999 Long Term Incentive Plan (the “Prior Stock Plans”). The effective date of the 2014 Plan is September 3, 2014 and, unless terminated earlier by the Board of Directors, will terminate on September 2, 2024. Under the terms of the 2014 Plan, the Company’s board of directors or one or more committees appointed by the board of directors will administer the 2014 Plan. The board of directors has delegated general administrative authority for the 2014 Plan to the Compensation Committee of the board of directors.
The administrator of the 2014 Plan has broad authority to, among other things, select participants and determine the type(s) of award(s) that they are to receive, and determine the number of shares that are to be subject to awards and the terms and conditions of awards, including the price (if any) to be paid for the shares or the award. Persons eligible to receive awards under the 2014 Plan include officers or employees of the Company or any of its subsidiaries, directors of the Company, and certain consultants and advisors to the Company or any of its subsidiaries.
The maximum number of shares of the Company’s common stock that may be issued or transferred pursuant to awards under the 2014 Plan equals the sum of: (1) 2,400,000 shares, plus (2) the number of shares subject to stock options granted under the Prior Stock Plans and outstanding as of September 3, 2014 (the date at which the Prior Stock Plans terminated), which expire, or for any reason are cancelled or terminated, after that date without being exercised, plus (3) the number of shares subject to restricted stock, restricted stock units and other full-value awards granted under the Prior Stock Plans that were outstanding and unvested as of September 3, 2014, which are forfeited, terminated, cancelled, or otherwise reacquired after that date without having become vested. As of May 28, 2016, 3,206,000 shares were available for award grant purposes under the 2014 Plan, subject to future increases as described in (2) and (3) above and subject to increase as then-outstanding awards expire or terminate without having become vested or exercised, as applicable.
The types of awards that may be granted under the 2014 Plan include stock options, restricted stock, stock bonuses, performance stock, stock units, phantom stock and other forms of awards granted or denominated in the Company’s common stock or units of the Company’s common stock, as well as certain cash bonus awards. Under the terms of the 2014 Plan, the option price for the incentive stock options (“ISOs”) and nonqualified stock options (“NQSO”) may not be less than the fair market value of the shares of the Company’s stock on the date of the grant. For ISOs, the exercise price per share may not be less than 110% of the fair market value of a share of common stock on the grant date for any individual possessing more than 10% of the total outstanding stock of the Company. Stock options granted under the 2014 Plan and the Prior Stock Plans generally become exercisable over periods of one to four years and expire not more than ten years from the date of grant. The Company predominantly grants NQSOs to employees in the U.S. The Company granted 50,354 and 49,840 shares of restricted stock during the fiscal years ended May 28, 2016 and May 30, 2015, respectively.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the share-based award activity under the 2014 Plan and the Prior Stock Plans follows (amounts in thousands, except weighted average exercise price):
(1) Amounts represent restricted shares granted. Share-based awards available for grant are reduced by 2.5 shares for each share awarded as stock grants from the 2014 Plan.
(2) Amounts represent both stock options and restricted share awards forfeited.
(3) The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to options not yet vested.
The weighted average grant date fair values of all stock options granted in the years ended May 28, 2016, May 30, 2015 and May 31, 2014 were $15.69, $12.50 and $11.41 per share, respectively.
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $15.51 as of May 27, 2016 (the last actual trading day of fiscal 2016), which would have been received by the option holders had all option holders exercised their options as of that date.
The total pre-tax intrinsic value related to stock options exercised during the years ended May 28, 2016, May 30, 2015 and May 31, 2014 was $1.8 million, $1.2 million and $347,000, respectively. The total estimated fair value of stock options that vested during the years ended May 28, 2016, May 30, 2015 and May 31, 2014 was $4.0 million, $3.8 million and $5.5 million, respectively.
Valuation and Expense Information for Stock Based Compensation Plans
The following table summarizes the impact of the Company’s stock-based compensation plans. Stock-based compensation expense is included in selling, general and administrative expenses and consists of stock-based compensation expense related to employee stock options, ESPP stock purchase rights and restricted stock (in thousands, except per share amounts):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Also included in the stock-based compensation expense for the year ended May 28, 2016 was approximately $900,000 related to the accelerated vesting of options held by Donald Murray in connection with his transition from Executive Chairman to Chairman.
The weighted average estimated fair value per share of employee stock options granted during the years ended May 28, 2016, May 30, 2015 and May 31, 2014 was $4.54, $3.93 and $3.82, respectively, using the Black-Scholes model with the following assumptions:
As of May 28, 2016, there was $7.7 million of total unrecognized compensation cost related to non-vested employee stock options granted. That cost is expected to be recognized over a weighted-average period of 31 months. Stock-based compensation expense included in selling, general and administrative expenses for the years ended May 28, 2016, May 30, 2015 and May 31, 2014 was $6.3 million, $6.0 million and $6.5 million, respectively; this consisted of stock-based compensation expense related to employee stock options, employee stock purchases made via the Company’s ESPP and issuances of restricted stock.
Stock-based compensation expense in the tables above includes compensation for restricted shares of $598,000, $515,000 and $406,000 for the years ended May 28, 2016, May 30, 2015 and May 31, 2014, respectively. The Company granted 50,354, 49,840 and 34,632 shares of restricted stock for the years ended May 28, 2016, May 30, 2015 and May 31, 2014, respectively. There were 41,796 and 35,390 restricted shares that vested in fiscal 2016 and 2015, respectively. There were 105,925, 97,938 and 84,379 unvested restricted shares as of May 28, 2016, May 30, 2015 and May 31, 2014, respectively. At May 28, 2016, there was approximately $1.3 million of total unrecognized compensation cost related to restricted shares, which is expected to be recognized over a weighted-average period of 34 months.
Excess tax benefits related to stock-based compensation expense are recognized as an increase to additional paid-in capital and tax shortfalls are recognized as income tax expense unless there are excess tax benefits from previous equity awards to which the shortfall can be offset. On the adoption date of the required accounting for stock-based compensation expense, the Company calculated the amount of eligible excess tax benefits available to offset future tax shortfalls in accordance with the long-form method.
The Company recognizes compensation expense for only the portion of stock options and restricted stock units that are expected to vest, rather than recording forfeitures when they occur. If the actual number of forfeitures differs from that estimated by management, additional adjustments to compensation expense may be required in future periods.
Employee Stock Purchase Plan
On October 23, 2014, the Company’s stockholders approved an amendment to the ESPP to extend the term of the ESPP through October 16, 2024, and to increase the maximum number of shares of the Company’s common stock authorized for issuance under the ESPP by an additional 1.5 million shares.
The Company’s ESPP allows qualified employees (as defined in the ESPP) to purchase designated shares of the Company’s common stock at a price equal to 85% of the lesser of the fair market value of common stock at the beginning or end of each semi-annual stock purchase period. After approval of the amendment, a total of 5.9 million shares of common stock may be issued under the ESPP. The Company issued 325,000, 337,000 and 348,000 shares of common stock pursuant to the ESPP for the years ended May 28, 2016, May 30, 2015 and May 31, 2014, respectively. There are 1.3 million shares of common stock available for issuance under the ESPP as of May 28, 2016.
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. 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. Summarized information regarding the Company’s domestic and international operations is shown in the following table. Amounts are stated in thousands:
(1) Long-lived assets are comprised of goodwill, intangible assets and property and equipment.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As required by SEC 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 May 28, 2016. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of May 28, 2016.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). We maintain internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included an assessment of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of May 28, 2016.
The Company’s independent registered public accounting firm, RSM US LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of May 28, 2016, as stated in their report which is included in this Item under the heading “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the fiscal quarter ended May 28, 2016, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Resources Connection, Inc.
We have audited Resources Connection, Inc.’s and subsidiaries’ internal control over financial reporting as of May 28, 2016, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Resources Connection, Inc.’s and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Resources Connection, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of May 28, 2016, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows of Resources Connection, Inc. and subsidiaries as of and for the year ended May 28, 2016 and our report dated August 10, 2016 expressed an unqualified opinion.
/s/ RSM US LLP
Irvine, California
August 10, 2016
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Executive Officers and Directors
Our board of directors has adopted a code of business conduct and ethics that applies to our directors and employees, including our chief executive officer, chief financial officer and principal accounting officer and persons performing similar functions, as required by applicable rules of the SEC and NASDAQ Stock Market. The full text of our code of business conduct and ethics can be found on the investor relations page of our website at www.rgp.com. We intend to disclose any amendment to, or a waiver from, a provision of our code of business conduct and ethics that applies to our directors and executive officers, including our chief executive officer, chief financial officer and principal accounting officer, or persons performing similar functions, by posting such information on the investor relations page of our website at www.rgp.com to the extent required by applicable SEC and NASDAQ rules.
Reference is made to the information regarding directors appearing in Section II under the caption “PROPOSAL 1. ELECTION OF DIRECTORS,” and to the information under the captions “EXECUTIVE OFFICERS,” “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE,” “BOARD OF DIRECTORS” and “BOARD OF DIRECTORS - AUDIT COMMITTEE,” in each case in the Company’s proxy statement related to its 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended May 28, 2016, which information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the captions “COMPENSATION DISCUSSION AND ANALYSIS,” “COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION,” “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION,” “EXECUTIVE COMPENSATION TABLES FOR FISCAL 2016,” “POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL” and “BOARD OF DIRECTORS - DIRECTOR COMPENSATION -FISCAL 2016,” in each case, in the Company’s proxy statement related to its 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended May 28, 2016, is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information appearing under the caption “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” in the proxy statement related to the Company’s 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended May 28, 2016, is incorporated herein by reference.
There are no arrangements, known to the Company, which might at a subsequent date result in a change in control of the Company.
The following table sets forth, for the Company’s compensation plans under which equity securities of the Company are authorized for issuance, the number of shares of the Company’s common stock subject to outstanding options, warrants, and rights, the weighted-average exercise price of outstanding options, warrants, and rights, and the number of shares remaining available for future award grants as of May 28, 2016:
(1) This amount includes 7,346,825 shares of our common stock subject to stock options outstanding under our 2014 Performance Incentive Plan but does not include 105,925 shares of our common stock issued and outstanding pursuant to unvested restricted stock awards under our 2014 Performance Incentive Plan.
(2) This number reflects the weighted-average exercise price of outstanding options and has been calculated exclusive of outstanding restricted stock awards issued under our 2014 Performance Incentive Plan.
(3) Consists of 1,277,509 shares available for issuance under the Company’s ESPP and 3,205,918 shares available for issuance under the Company’s 2014 Performance Incentive Plan. Shares available under the 2014 Performance Incentive Plan generally may be used for any type of award authorized under that plan including stock options, restricted stock, stock bonuses, performance stock, stock units, phantom stock and other forms of awards granted or denominated in the Company’s common stock.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information appearing under the captions “BOARD OF DIRECTORS - DIRECTOR INDEPENDENCE” and “BOARD OF DIRECTORS - POLICY REGARDING TREATMENT OF RELATED PARTY TRANSACTIONS” in the proxy statement related to the Company’s 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended May 28, 2016, is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information appearing under the caption “PROPOSAL 2. RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL YEAR 2017” in the proxy statement related to the Company’s 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended May 28, 2016, is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) 1. Financial Statements.
The following consolidated financial statements of the Company and its subsidiaries are included in Item 8 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of May 28, 2016 and May 30, 2015
Consolidated Statements of Operations for each of the three years in the period ended May 28, 2016
Consolidated Statements of Comprehensive Income for each of the three years in the period ended May 28, 2016
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended May 28, 2016
Consolidated Statements of Cash Flows for each of the three years in the period ended May 28 2016
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
Schedule II-Valuation and Qualifying Accounts are included in Note 2 and 5 to the Registrant’s Notes to Consolidated Financial Statements.
Schedules I, III, IV and V have been omitted as they are not applicable.
3. Exhibits.
EXHIBITS TO FORM 10-K
* Filed herewith.
** Furnished herewith.
+ Indicates a management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
RESOURCES CONNECTION, INC.
By:
/ S / NATHAN W. FRANKE
Nathan W. Franke
Chief Financial Officer
Date: August 10, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
EXHIBIT INDEX
EXHIBITS TO FORM 10-K
* Filed herewith.
+ Indicates a management contract or compensatory plan or arrangement.