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RECN > SEC Filings for RECN > Form 10-Q on 3-Oct-2013All Recent SEC Filings

Show all filings for RESOURCES CONNECTION INC

Form 10-Q for RESOURCES CONNECTION INC


3-Oct-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes. This discussion and analysis contains "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to expectations concerning matters that are not historical facts. Such forward-looking statements may be identified by words such as "anticipates," "believes," "can," "continue," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "remain," "should," or "will" or the negative of these terms or other comparable terminology. These statements, and all phases of our operations, are subject to known and unknown risks, uncertainties and other factors, some of which are identified in Part II Item 1A Risk Factors below and in our Annual Report on Form 10-K for the year ended May 25, 2013 (File No. 0-32113). Readers are cautioned not to place undue reliance on these forward-looking statements. Our actual results, levels of activity, performance or achievements and those of our industry may be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. We undertake no obligation to update the forward-looking statements in this filing. References in this filing to "Resources Connection," "RGP," "Resources Global Professionals," "Resources Global," the "Company," "we," "us," and "our" refer to Resources Connection, Inc. and its subsidiaries.

Overview

RGP is a multinational consulting firm that provides its global client base with experienced professionals specializing in accounting, finance, risk management and internal audit, corporate advisory, strategic communications and restructuring, information management, human capital, supply chain management, healthcare solutions, actuarial, and legal and regulatory services in support of client-led projects, interim needs and consulting initiatives. We assist our clients with projects requiring specialized expertise in numerous areas, including:

finance and accounting services, such as financial analyses (e.g., product costing and margin analyses), carve-outs and divestitures, merger and acquisition due diligence, budgeting and forecasting, audit preparation, public-entity reporting, tax-related projects, initial public offering assistance and assistance in the preparation or restatement of financial statements;

information management services, such as financial system/enterprise resource planning implementation and post implementation optimization;

corporate advisory, strategic communications and restructuring services;

corporate governance, risk management, internal audit co-sourcing and compliance efforts under the Sarbanes-Oxley Act of 2002 ("Sarbanes") or the Dodd-Frank Wall Street Reform and Consumer Protection Act;

supply chain management services, such as strategic sourcing efforts, contract negotiations, purchasing strategy and Conflict Minerals compliance;

actuarial services for pension and life insurance companies;

human capital services, such as change management and compensation program design and implementation; and

legal and regulatory services, such as providing attorneys, paralegals and contract managers to assist clients (including law firms) with project-based, secondment or peak period needs.

We were founded in June 1996 by a team at Deloitte, led by our executive 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 from our inception in June 1996 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. In January 2005, we announced the change of our operating entity name to Resources Global Professionals ("RGP") to better reflect the Company's multinational capabilities, and during fiscal 2013, we redesigned our logo and adopted the initials RGP for branding and marketing purposes.

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 professional services across the world. As of August 24, 2013, we served clients from offices in 21 countries, including 26 international offices and 47 offices in the United States.


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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 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. There have been no material changes in our critical accounting policies, or in the estimates and assumptions underlying those policies, from those described in our Annual Report on Form 10-K for the year ended May 25, 2013.

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 and certain other intangible assets are not subject to periodic amortization. These assets are considered to have an indefinite life and their carrying values are 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 these intangible assets 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 operations 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 2004 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 valuation option-pricing model which takes into account assumptions regarding a number of highly complex and subjective variables. These variables include the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Additional variables to be considered are the expected term, expected dividends and the risk-free interest rate over the expected term of our employee stock options. In addition, because stock-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures must be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If facts and circumstances change and we employ different assumptions in future periods, the compensation expense recorded may differ materially from the amount recorded in the current period.


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The Company uses its historical volatility over the expected life of the stock option award to estimate the expected volatility of the price of its common stock. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The impact of expected dividends ($0.07 per share for the first quarter of fiscal 2014 and $0.06 per share for fiscal 2013) 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 historical expected life of stock option grants is 5.3 years for non-officers and 7.5 years for officers. The Company reviews the underlying assumptions related to stock-based compensation at least annually.

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

Results of Operations

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



                                                         Three Months Ended
                                                    August 24,        August 25,
                                                       2013              2012
                                                       (Amounts in thousands)
    Revenue                                        $    131,704      $    136,933
    Direct cost of services                              81,994            83,544

    Gross margin                                         49,710            53,389
    Selling, general and administrative expenses         41,612            42,060
    Amortization of intangible assets                       417               426
    Depreciation expense                                    961             1,191

    Income from operations                                6,720             9,712
    Interest income                                         (39 )             (48 )

    Income before provision for income taxes              6,759             9,760
    Provision for income taxes                            3,106             4,928

    Net income                                     $      3,653      $      4,832

We also assess the results of our operations using EBITDA as well as Adjusted EBITDA. EBITDA is defined as our earnings before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus stock-based compensation expense and contingent consideration adjustments ("Adjusted EBITDA"). 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 and Adjusted EBITDA results for the periods indicated and includes a reconciliation of such measures to net income, the most directly comparable GAAP financial measure:

                                                   Three Months Ended
                                              August 24,        August 25,
                                                 2013              2012
                                                 (Amounts in thousands)
         Net income                          $      3,653      $      4,832
         Adjustments:
         Amortization of intangible assets            417               426
         Depreciation expense                         961             1,191
         Interest income                              (39 )             (48 )
         Provision for income taxes                 3,106             4,928

         EBITDA                              $      8,098      $     11,329
         Stock-based compensation expense           1,654             1,813

         Adjusted EBITDA                     $      9,752      $     13,142

         Revenue                             $    131,704      $    136,933

         Adjusted EBITDA Margin                       7.4 %             9.6 %


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The financial measures and key performance indicators we use to assess our financial and operating performance above are not defined by, or calculated in accordance with, GAAP. A non-GAAP financial measure is defined as a numerical measure of a company's financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the 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:

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

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

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

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.

Three Months Ended August 24, 2013 Compared to Three Months Ended August 25, 2012

Computations of percentage change period over period are based upon our results, as rounded and presented herein.

Revenue. Revenue decreased $5.2 million, or 3.8%, to $131.7 million for the three months ended August 24, 2013 from $136.9 million for the three months ended August 25, 2012. We deliver our services to clients in a similar fashion across the globe. In light of continuing global economic uncertainty, we believe that our global clients and prospects are initiating operational improvement projects cautiously, resulting in reduced levels of consulting spending, particularly in certain European markets. In the first quarter of fiscal 2014, revenue decreased in all of our practice areas around the globe over the same period in fiscal 2013. The number of hours worked in the first quarter of fiscal 2014 decreased about 3.4% compared with the prior year first quarter while average bill rates were flat. The number of consultants on assignment as of August 24, 2013 was 2,237 compared to 2,284 consultants engaged as of August 25, 2012.

We operated 73 (26 abroad) and 77 (27 abroad) offices as of August 24, 2013 and August 25, 2012, respectively; the decrease quarter-over-quarter is because we consolidated certain offices in contiguous areas. Our clients do not sign long-term contracts with us. As such, there can be no assurance as to future demand levels for the services that we provide or that future results can be reliably predicted by considering past trends.

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

                                          Revenue for the
                                         Three Months Ended                                        % of Total
                                    August 24,        August 25,                          August 24,         August 25,
                                       2013              2012           % Change             2013               2012
North America                      $    104,621      $    107,946            (3.1 )%             79.4 %             78.8 %
Europe                                   17,791            19,031            (6.5 )%             13.5               13.9
Asia Pacific                              9,292             9,956            (6.7 )%              7.1                7.3

Total                              $    131,704      $    136,933            (3.8 )%            100.0 %            100.0 %


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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 quarter. 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 2013 conversion rates, international revenues would have been higher than reported under GAAP by $171,000 in the first quarter of fiscal 2014.

Direct Cost of Services. Direct cost of services decreased $1.5 million, or 1.8%, to $82.0 million for the three months ended August 24, 2013 from $83.5 million for the three months ended August 25, 2012. The decrease in the amount of direct cost of services was attributable to a 3.4% decline in the number of hours worked in the first quarter of fiscal 2014 as compared to the same period of fiscal 2013, partially offset by an increase in pay rate per hour of approximately 1.6% over the same period. The direct cost of services percentage of revenue was 62.3% and 61.0% for the three months ended August 24, 2013 and August 25, 2012, respectively. The change in the direct cost of services percentage between the quarters resulted primarily from an unfavorable change in the bill rate/pay rate ratio and increases in healthcare expenses during the first quarter of fiscal 2014.

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

Selling, General and Administrative Expenses. Selling, general and administrative expenses ("S, G & A") as a percentage of revenue was 31.6% and 30.7% for the quarters ended August 24, 2013 and August 25, 2012, respectively. S, G & A decreased $500,000, or 1.2%, to $41.6 million for the three months ended August 24, 2013 from $42.1 million for the three months ended August 25, 2012.

The decrease quarter-over-quarter is primarily related to reduced spending in a variety of categories, offset by increased salary and related benefit costs in the first quarter of fiscal 2014 as compared to the same period of fiscal 2013. Management and administrative headcount increased from 675 at the end of the first quarter of fiscal 2013 to 712 at the end of the first quarter of fiscal 2014.

Sequential Operations. On a sequential quarter basis, fiscal 2014 first quarter revenues decreased approximately 6.1%, from $140.2 million to $131.7 million, primarily attributable to a decrease in billable hours between the two periods as more vacation time was taken by our consultants in the first quarter of fiscal 2014 (which includes the summer holiday period) than during the fourth quarter of fiscal 2013. Billable hours worked decreased 4.5%, while bill rates were down 1.6%. The Company's sequential revenue decreased in North America (5.4%) and Europe (12.3%) but improved in Asia Pacific (1.1%). The direct cost of services percentage of revenue increased from 61.1% in the fourth quarter of fiscal 2013 to 62.3% in the first quarter of fiscal 2014. The increase was primarily the result of holiday pay in the United States for Memorial Day and July 4th, an unfavorable change in the bill rate/pay rate ratio, and higher healthcare costs. The ratio of S, G & A to revenue increased from 30.2% for the quarter ended May 25, 2013 to 31.6% for the quarter ended August 24, 2013, due to decreased leverage as a result of lower revenue in the first quarter of fiscal 2014.

Amortization and Depreciation Expense. Amortization of intangible assets decreased to $417,000 for the three months ended August 24, 2013 from $426,000 for the three months ended August 25, 2012. Based upon identified intangible assets recorded at August 24, 2013, the Company anticipates amortization expense related to identified intangible assets to approximate $1.7 million during the fiscal year ending May 31, 2014.

Depreciation expense was $1.0 million for the three months ended August 24, 2013 compared to $1.2 million for the three months ended August 25, 2012. Depreciation expense decreased as a number of assets were fully depreciated during fiscal 2013 and the Company slowed the amount invested in new property and equipment in recent years.

Interest Income. Interest income was $39,000 in the first quarter of fiscal 2014 compared to $48,000 in the first quarter of fiscal 2013. The decrease in interest income in the first quarter of fiscal 2014 is primarily the result of lower interest rates offset by higher average cash balances available for investment as compared to the prior year's first quarter.

The Company has invested available cash in certificates of deposit, money market investments and commercial paper that have been classified as cash equivalents due to the short maturities of these investments. As of August 24, 2013, the Company also has $25.0 million of investments in commercial paper and certificates of deposit with maturity dates between three months and one year from the balance sheet date classified as short-term investments and considered "held-to-maturity" securities.

Income Taxes. The Company's provision for income taxes was $3.1 million (effective tax rate of approximately 46%) and $4.9 million (effective tax rate of approximately 50%) for the three months ended August 24, 2013 and August 25, 2012, respectively. The Company records tax expense based upon an actual effective tax rate versus a forecasted tax rate because of the volatility in its international operations which span numerous tax jurisdictions.


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The provision for income taxes in the first quarter of fiscal 2014 and 2013 results from taxes on income in the United States and certain other foreign jurisdictions, no benefit for losses in jurisdictions in which a full valuation allowance on operating loss carryforwards had previously been established and a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the United States statutory rates. In addition, the inability to benefit from losses in jurisdictions with a full valuation allowance and the unpredictability of the timing and amount of eligible disqualifying incentive stock option ("ISO") exercises impact the Company's effective tax rate. The period to period decrease in the effective tax rate results primarily from the reversal of $350,000 of uncertain international tax position accruals for which the statute of limitations has expired.

Periodically, the Company reviews the components of both book and taxable income to analyze the adequacy of the tax provision. Due to 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, there can be no assurance that the Company's effective tax rate will remain constant in the future.

The Company cannot recognize a tax benefit for the stock compensation expense . . .

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